<PAGE>
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, 1996
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 1-4125
NORTHERN INDIANA PUBLIC SERVICE COMPANY
(Exact name of registrant as specified in its charter)
Indiana 35-0552990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5265 Hohman Avenue, Hammond, Indiana 46320-1775
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 853-5200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
--------------------- ---------------------
Series A Cumulative Preferred - No Par Value New York
4 1/4% Cumulative Preferred - $100 Par Value American
Securities registered pursuant to Section 12(g) of the Act:
Cumulative Preferred Stock - $100 Par Value
(4 1/2%, 4.22%, 4.88%, 7.44% and 7.50% Series)
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, (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. (X)
As of February 28, 1997, 73,282,258 shares of the registrant's
Common Shares, no par value, were issued and outstanding, all held
beneficially and of record by NIPSCO Industries, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Form 10-K
<TABLE>
<CAPTION>
Table of Contents
Page
====
<S> <C> <C>
PART I
Item 1 Business 2
2 Properties 12
3 Legal Proceedings 13
4 Submission of Matters to a Vote
of Security Holders 14
PART II
Item 5 Market for the Registrant's Common
Equity and Related Shareholder Matters 14
6 Selected Financial Data 14
7 Management's Discussion and Analysis of
Financial Condition and Results of Operation 15
8 Financial Statements and Supplementary Data 24
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 60
PART III
Item 10 Directors and Executive Officers of
the Registrant 60
11 Executive Compensation 63
12 Security Ownership of Certain Beneficial
Owners and Management 71
13 Certain Relationships and Related Transactions 71
PART IV
Item 14 Exhibits, Financial Statement Schedules 71
and Reports on Form 8-K
SIGNATURES 74
</TABLE>
<PAGE>
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Part I
ITEM 1. BUSINESS.
Northern Indiana Public Service Company (Northern Indiana) is a
public utility operating company, incorporated in Indiana on August 2,
1912, engaged in supplying natural gas 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 2,188,000.
At December 31, 1996, Northern Indiana served approximately 653,100
customers with gas and approximately 411,500 with electricity.
See "Segments of Business" in the Notes to Consolidated Financial
Statements regarding financial information about industry segments.
HOLDING COMPANY STRUCTURE. Effective March 3, 1988, Northern
Indiana became a subsidiary of NIPSCO Industries, Inc., an Indiana
corporation (Industries).
ELECTRIC OPERATIONS. 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, 1996, Northern
Indiana generated 83.8% and purchased 16.2% of its electric requirements.
Northern Indiana's 1996 electric control area peak of 3,134,400
kw, which includes Wabash Valley Power Association, Inc. (WVPA) and
Indiana Municipal Power Agency (IMPA) for which Northern Indiana
controls interchange operations, was set on August 6, 1996. Northern
Indiana's all-time control area of 3,161,200 kw was set on July 14, 1995.
Northern Indiana's 1996 internal peak load, which excludes WVPA and IMPA,
was 2,888,450 kw set on August 6, 1996. This also established a new
all-time internal peak load exceeding the old peak of 2,882,200 kw
established on July 14, 1995.
Northern Indiana's electric system is interconnected with that of
American Electric Power (formerly Indiana Michigan Power Company), ComEd
(formerly Commonwealth Edison Company), Cinergy Services, Inc. (formerly
PSI Energy, Inc.), Consumers Energy (formerly Consumers Power Company),
and 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 twelve 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. Pursuant to this agreement, which runs
through December, 2001, WVPA purchases 90,000 kw of capacity per month.
Northern Indiana has full requirement agreements with each of its
eight municipal wholesale customers. These full requirement contracts
became effective October 1, 1987, and extend through January 31, 1998.
Northern Indiana intends to negotiate for extension of contracts, but there
is no assurance they will be extended.
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 companies 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 thirteen 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 generating units with a net capability to 203,000 kw are fired by
gas. Fuel requirements for Northern Indiana's generation for 1996 were
supplied as follows:
<TABLE>
<S> <C>
Coal 98.4%
Natural gas 1.6%
</TABLE>
In 1996, Northern Indiana used approximately 8.1 million tons of coal
at its generating stations. Northern Indiana has established a normal level
of coal stock which provides adequate fuel supply during the year under all
conditions.
Annual coal requirements for Northern Indiana's electric generating
units through 2001 are estimated to range from 8.7 million tons to 8.9
million tons, depending from year to year upon anticipated sales levels,
scheduled maintenance, and other variables. These requirements are being or
will be met in part under long-term contracts as follows:
<TABLE>
<CAPTION>
MILLION TONS/YEAR SULFUR CONTENT EXPIRATION
================= ============== ==========
<S> <C> <C>
1.0 High 1998
Up to 1.0(a) High 1998
1.3(b) Low 2001
1.8(c) Low 1999
1.0(d) Low 1998
.5(e) High 1998
<FN>
(a) Contract calls for requirements up to 1.0 million tons/contract year.
(b) 1.8 million tons in 1997.
(c) Plus or minus 10%/contract year (1.225 million tons in 1999).
(d) Plus or minus 10%/contract year (.5 million tons in 1998).
(e) .250 million tons in 1998.
</FN>
</TABLE>
The average cost of coal consumed in 1996 was $27.50 per ton or 15.79
mills per kilowatt-hour (kwh) generated as compared to $28.28 per ton or
15.89 mills per kwh generated in 1995. Northern Indiana's forecasts
indicate that its coal costs will be slightly lower over the next two years.
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 the reserves are being recovered
through the rate-making process as such coal reserves are used to produce
electricity.
FUEL ADJUSTMENT CLAUSE. See "Fuel Adjustment Clause" in the Notes to
Consolidated Financial Statements.
GAS OPERATIONS. Northern Indiana supplies natural gas of about 1,000
British thermal units (Btu) per cubic foot. In a 24-hour period ended
February 3, 1996, Northern Indiana's 1996 maximum day sendout was 1,553,977
dekatherms (dth).
In 1996, all of the gas supplied by Northern Indiana was transported
by ANR Pipeline Company (ANR), Crossroads Pipeline Company (Crossroads)
- - a subsidiary of Industries, 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). Approximately
57% of Northern Indiana's 1996 gas supply was purchased on the spot
market, generally less than 30-day agreements.
The average price per dth (including FERC Order No. 636 transition
charges) in 1996 was $3.13, compared to $2.98 in 1995, and the average cost
of purchased gas, after adjustment for transition charges billed to
transport customers, was $3.03 per dth as compared to $2.63 per dth in 1995.
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 Federal Energy Regulatory Commission (FERC).
Agreements have been negotiated with natural gas suppliers to replace
former pipeline supplier contracts pursuant to the requirements of FERC
Order No. 636 (See "FERC Order No. 636" in the Notes to Consolidated
Financial Statements.) Northern Indiana also has firm transportation
agreements with the pipelines, which allow Northern Indiana to move its gas
through the pipelines' transmission systems. Northern Indiana also has
producer agreements which allow for the purchase of gas either from gas
marketers or producers.
Northern Indiana has a curtailment plan approved by the Indiana
Utility Regulatory Commission (Commission). Effective on August 11, 1981,
the plan allows unrestricted gas sales by Northern Indiana. There were no
firm sales curtailments in 1996 and none are expected during 1997.
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 1996-1997 winter of up to 108,402 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 26,571,007 dth of annual stored
volume, and allow for approximately 551,446 dth of maximum daily withdrawal.
Northern Indiana has a liquefied natural gas plant in LaPorte County
which is designed for peak shaving and has the following capacities:
maximum storage of 4,000,000 dth; maximum liquefaction rate (gas to liquid),
20,000 dth per day; maximum vaporization rate (output to distribution
system), 300,000 dth per day.
GAS COST ADJUSTMENT CLAUSE. See "Gas Cost Adjustment Clause" in the
Notes to Consolidated Financial Statements.
FERC ORDER 636. See "FERC Order No. 636" in the Notes to Consolidated
Financial Statements.
REGULATION. Northern Indiana is subject to regulation by the
Commission as to rates, service, accounts, issuance of securities, and in
in other respects. See "FERC Order No. 636" in the Notes to Consolidated
Financial Statements. It is also subject to limited regulation by local
public authorities.
In 1996, about 4% of Northern Indiana's electric revenues were derived
from electric service it furnished at wholesale in interstate commerce to
other utility companies, 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. The
jurisdiction of the FERC does not extend to the issuance of securities by
Northern Indiana since it is a public utility organized and operating in the
State of Indiana, under the laws of which its security issues are regulated
by the Commission. The FERC on October 21, 1954, declared Northern
Indiana exempt from the provisions of the Natural Gas Act.
RATE MATTERS. For information regarding Northern Indiana's gas rates
and gas transition costs, see "FERC Order No. 636" in the Notes to
Consolidated Financial Statements.
Northern Indiana filed a petition for an Alternative Regulatory Plan
(ARP) with the Commission on November 29, 1995. The purpose of the ARP is
to create a business and regulatory environment and structure which will
permit increased choice for gas customers, competition among suppliers, and
improved natural gas service. In its ARP, Northern Indiana proposes to
implement new rates and services that would include, but not be limited to,
further unbundling of services for additional customer classes which would
include increased customer choice for sources of natural gas supply,
negotiated services and prices, and incentive gas and storage cost
mechanisms. The Commission will hold hearings on the ARP during first
half of 1997.
CONSTRUCTION BUDGET. Northern Indiana's 1997-2001 construction budget
(including allowance for funds used during construction) is estimated at
approximately $750 million, including $156 million in 1997, $161 million in
1998, $146 million in 1999, $142 million in 2000 and $145 million in 2001.
Northern Indiana's construction estimates include adjustments for
anticipated inflation. No new electric generating units are planned in the
1997-2001 budget. Northern Indiana does not have, and has no plans to
construct, a nuclear generating unit.
COMPETITION. In municipalities where Northern Indiana renders
electric service to the general public as a public utility, no other utility
renders electric or gas service, except in Angola, DeMotte, Rome City,
Wanatah, and Waterloo. In localities where Northern Indiana renders gas
service only, it competes with electric utilities, municipal or private, for
the business for which they render alternative electric service.
All electric service territories within the State of Indiana are
assigned to the existing suppliers, and boundaries of new territories
outside existing municipalities are assigned to the utility having the
nearest existing electric distribution lines. Only existing municipal
electric utilities may expand their service areas and then only into areas
that have been annexed by the municipality, subject to the approval of the
Commission and certain other conditions. Northern Indiana makes no
representation as to the possible effect upon its business of present or
future competition by private or municipal utilities or governmental
agencies, instrumentalities or authorities within the territory now served.
Northern Indiana is also subject to competition for gas sales to
industrial customers through the ability of these customers, under Northern
Indiana's rate provisions, to make their own purchases of gas and have
Northern Indiana transport the gas to them. During 1996, gas transportation
represented 54% of Northern Indiana's total gas sendout.
Indiana law requires Commission approval before a gas customer of a
utility may bypass the utility and make other arrangements for gas service.
Any entity which transports gas from outside Indiana for direct sale or
delivery to itself or other end-users within the state will be considered a
public utility and must obtain a necessity certificate from the Commission
in order to engage in such activities. See "Competition" in the
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
EMPLOYEE RELATIONS. Northern Indiana had 3,562 employees at
December 31, 1996. Approximately 72% of Northern Indiana's employees
(physical and clerical workers) are represented by two local unions of the
United Steelworkers of America, AFL-CIO-CLC. Effective June 1, 1993, the
bargaining unit employees ratified four-year agreements which continue until
June 1, 1997. Northern Indiana intends to negotiate new agreements with the
two local unions, but can not predict the timing or terms of new agreements.
ENVIRONMENTAL MATTERS. Northern Indiana has an ongoing program to
remain aware of laws and regulations involved with hazardous waste and other
environmental matters. It is Northern Indiana's intent to continue to
evaluate its facilities and properties with respect to these rules and
identify any sites that would require corrective action. Northern Indiana
has recorded a reserve of $16.6 million to cover probable corrective actions
as of December 31, 1996; however, environmental regulations and remediation
techniques are subject to future change. The ultimate cost could be
significant, depending on the extent of corrective actions required. Based
upon investigations and management's understanding of current laws and
regulations, Northern Indiana believes that any corrective actions required,
after consideration of insurance coverages and contributions from other
potentially responsible parties, will not have a significant impact on the
financial position or results of operations of Northern Indiana.
Northern Indiana is subject to regulation with regard to environmental
matters by various federal, state and local authorities. Northern Indiana
cannot forecast the effect of all such regulation upon its generating,
transmission and other facilities, or its operations. Northern Indiana
intends to comply with all applicable governmental requirements and has
adopted an environmental policy that fosters the pursuit of proactive sound
environmental programs and management.
The application of federal and state restrictions to protect the
environment, including but not limited to those hereinafter described,
involves or may involve review, certification or issuance of permits by
various federal, state, and local authorities. Such restrictions,
particularly in regard to emissions into the air and water, and disposal of
solid wastes, may impact the operation of Northern Indiana's facilities, and
may also require substantial investments.
Northern Indiana's total capital expenditures from January 1, 1992,
through December 31, 1996 for pollution control facilities were
approximately $141 million and were financed in part by the sale of
Pollution Control Notes and Bonds-Jasper County. Northern Indiana
anticipates expenditures of approximately $50 million for pollution control
equipment in the 1997-2001 period which includes anticipated expenditures of
$29 million in 1997 and $6 million in 1998.
AIR. The Indiana Department of Environmental Management (IDEM) Office
of Air Management has submitted to the U.S. Environmental Protection Agency
(EPA) a State Implementation Plan (SIP) in accordance with the requirements
of the Clean Air Act Amendments of 1977.
ATTAINMENT-NONATTAINMENT. Under the Clean Air Act Amendments of 1977,
the State has identified areas which are in compliance with the National
Ambient Air Quality Standards (NAAQS) (attainment areas) and areas that are
not in compliance with respect to the sulfur dioxide, particulate matter
and other pollutant standards established by NAAQS (nonattainment areas).
Portions of Lake County in which Northern Indiana operates an electric
generating facility remain designated a nonattainment area for sulfur
dioxide. Control plans for this county have been implemented. Reductions
in emissions of sulfur dioxide have been made, and Northern Indiana
anticipates no increased costs as a result of the implementation of the
control plans for Lake County. On January 14, 1997, the EPA redesignated
LaPorte County to attainment for sulfur dioxide.
Lake County, Indiana, is designated as a nonattainment area for
particulate matter or PM-10. The State of Indiana promulgated a PM-10 SIP
rule, which became effective on June 11, 1993. The rule requires reduced
opacity and mass emissions limits at Dean H. Mitchell Station as well as the
establishment of fugitive dust control and continuous compliance plans.
Northern Indiana has made investments in equipment and is currently in
compliance with the PM-10 SIP rules. Porter County has been determined to
have an unclassified status for PM-10. According to state requirements, the
area will be monitored for PM-10 impacts to determine the appropriate
classifications with respect to the NAAQS. All other counties where
Northern Indiana operates electric production facilities have an
unclassified status for PM-10.
Under Title I of the Clean Air Act Amendments of 1990 (CAAA), Lake and
Porter Counties are classified as severe nonattainment areas for ozone.
Passage of the CAAA resulted in new provisions applicable to mobile and
stationary sources in Lake and Porter Counties. Control measures requiring
reduction of emissions of nitrogen oxides from the Mitchell and Bailly
Generating Stations as a consequence of the Lake Michigan Ozone Control
Program have yet to be determined. Northern Indiana is evaluating potential
least-cost methods to reduce emissions of nitrogen oxides from the
generating stations. The EPA has approved a conditional waiver from present
reduction of nitrogen oxides under Title I. Northern Indiana cannot determine
the cost impact of the future provisions.
ACID RAIN. Title IV of the CAAA addresses the acid rain issue by
targeting large sources of sulfur dioxide and nitrogen oxides for
significant reductions. The core acid rain rules for sulfur dioxide were
promulgated by the EPA on January 11, 1993. As required by the regulations,
Bailly Units 7 and 8 and Michigan City Unit 12 reduced their sulfur dioxide
emissions below 2.5 pounds per million British thermal units (lbs/mm Btu) by
January 1, 1995. These units, along with the remainder of Northern Indiana's
coal-fired units, are required to reduce their sulfur dioxide emissions
below 1.2 lbs/mm Btu by January 1, 2000 (Phase II).
Presently, all of Northern Indiana's eleven coal fired generating
units utilize low sulfur fuel or flue gas desulfurization units to control
sulfur dioxide emissions below the 1.2 lbs/mm Btu level. That places
Northern Indiana in compliance with the Phase II sulfur dioxide standards.
The EPA approved Northern Indiana's acid rain permits for the Bailly
and Michigan City Generating Stations on August 31, 1993. The Phase I acid
rain permits for the stations are effective from January 1, 1995 through
December 31, 1999. One component of the permit is the Phase I extension
plan for Bailly. Northern Indiana was eligible for and received the
extension because of the construction and operation of the Bailly scrubber.
This extension plan allocates additional allowances, above the basic
allowances, applicable to Bailly and Michigan City Generating Stations.
Northern Indiana estimates that total costs of compliance with the
CAAA sulfur dioxide regulations will impact electric rates by less than 5%
in the future.
Northern Indiana is pursuing nitrogen oxide reduction measures to meet
future acid rain requirements. The EPA proposed Phase II nitrogen oxide
limits in January of 1996. The final rules were signed by the EPA
Administrator on December 10, 1996. The nitrogen oxides emission limits in
the final rules potentially apply to all of Northern Indiana's electric
generating facilities. Although there is a legal challenge to the final
rule, plans will be prepared to meet compliance with the final rules. On
December 30, 1996, Northern Indiana filed permit applications requesting
early election of Northern Indiana's Phase II pulverized coal boilers. The
permits when approved by the EPA will establish limits based on the Phase I
nitrogen oxides emission standards for the seven boilers during the
following ten year period.
ADDITIONAL AIR ISSUES. The CAAA contains provisions that could lead
to limitations on emissions of nitrogen oxides and hazardous air
pollutants, which may require significant capital expenditures for control
of these emissions. Northern Indiana is pursuing a nitrogen oxide control
program to meet future requirements. Northern Indiana cannot predict the
costs of complying with CAAA requirements.
The EPA has promulgated a permit program to meet the requirements of
Title V of the CAAA. The IDEM, on November 3, 1993, proposed an air
operating permit program to meet the requirements of Title V to Indiana's
Air Pollution Control Board. The Air Pollution Control Board adopted rules
to implement the Title V permit program on March 10, 1994. These operating
permit rules, including a new fee schedule, became effective in Indiana on
June 24, 1994. Indiana submitted the Title V rules to the EPA for approval
in August of 1994. The EPA has approved the submittal and the rules became
effective December 14, 1995. Northern Indiana submitted Title V permit
applications for each of the four electric generating stations during
September 1996.
WATER. The Clean Water Act, as amended, subjects point source
dischargers to technology and water quality based controls through the
National Pollution Discharge Elimination System (NPDES) permit program.
Northern Indiana is required to have NPDES permits for discharges from its
generating stations into the waters of the United States. The Great Lakes
Water Quality Initiative (GLI) is a complex set of water quality
regulations governing discharges in the Great Lakes drainage basin. This
regulation became effective February 13, 1997 and will affect the NPDES
permits for Northern Indiana's three lakeside stations. As of this date,
the Bailly Station NPDES permit has not been renewed by IDEM. Northern
Indiana anticipates that IDEM will issue the new Bailly permit under the
GLI regulations. The Mitchell, Michigan City, and R. M. Schahfer Stations
NPDS permits expire in August 1998. Northern Indiana received NPDES permit
modifications for intermittent chemical treatment of the main discharge at
the Mitchell and Michigan City Stations for zebra mussel control. Bailly
Station utilizes thermal treatment in its water systems to control zebra
mussels. Schahfer Station has not presently experienced operational
impacts due to zebra mussels. Rather, Schahfer Station has experienced
equipment problems due to an Asiatic clam infestation. Alternate forms of
control are being investigated by Northern Indiana in an effort to prevent
any impact on plant operations relating to these infestations, while also
minimizing the environmental impact of the controls.
SUPERFUND SITES. The EPA has notified Northern Indiana that it is a
"potentially responsible party" (PRP) under the Comprehensive Environmental
Response Compensation and Liability Act (CERCLA) and may be required to
share in the cost of cleanup of several waste disposal sites identified by
the EPA. The sites are in various stages of investigation, analysis,
and remediation. At each of the sites Northern Indiana is one of several
PRPs, and it is expected that remedial costs, as provided under CERCLA,
will be shared among them. At some sites, Northern Indiana and/or the other
named PRPs are presently working with the EPA to clean up the sites and
avoid the imposition of fines or added costs.
MANUFACTURED GAS PLANT SITES. Northern Indiana has instituted a
program to investigate former manufactured-gas plants where it is the
current or former owner. Northern Indiana has identified twenty-three of
these sites and made visual inspections of these sites. Initial samplings
have been conducted at fourteen sites. Follow-up investigations have
been conducted at five sites and potential remedial measures are being
evaluated. Northern Indiana will continue its program to assess sites.
During the follow-up investigation of the former manufactured-gas plant in
Elkhart, Indiana, Northern Indiana noted the presence of hydrocarbons in
the Elkhart River. Northern Indiana reported this finding to IDEM and the
EPA. Northern Indiana has placed the Elkhart site in the IDEM Voluntary
Remediation Program (VRP). The goal of placing the site in the VRP is to
obtain IDEM approval of the determination and subsequent implementation of
what remedial measures, if any, may be needed.
Northern Indiana was notified by IDEM in 1992 of the release of a
petroleum substance into the St. Mary's River in Fort Wayne, Indiana, from
the site of a former manufactured-gas plant formerly owned by Northern
Indiana. In cooperation with IDEM, Northern Indiana has taken steps to
investigate and contain the substance. Northern Indiana has remediated part
of the Fort Wayne site. The remainder of the site is being evaluated to
determine what future remedial measures, if any, may be needed.
During the course of investigation activities, Northern Indiana noted
the presence of manufactured-gas plant residuals in the St. Mary's River in
Fort Wayne, Indiana and the Wabash River in Peru, Indiana. Northern Indiana
notified IDEM and the EPA and immediately took steps to contain the material
at both sites.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured gas plant
sites at which both companies or their predecessors were former operators or
owners. One of these sites is the Lafayette site which Indiana Gas had
previously notified Northern Indiana is being investigated and remediated
pursuant to an administrative order with IDEM. Northern Indiana also
notified Cinergy Services, Inc. (Cinergy) (formerly PSI Energy, Inc.) that
it was a former owner or operator of seven former manufactured-gas plants at
which Northern Indiana had conducted or was planning investigation or
remediation activities. In December 1996, Northern Indiana sent a written
demand to Cinergy related to one of these sites, Goshen. Northern Indiana
demanded that Cinergy pay Northern Indiana for costs Northern Indiana has
already incurred and to be incurred to implement the needed remedy at the
Goshen site.
Northern Indiana has met with various companies that provided
insurance coverage which Northern Indiana believes covers costs related to
actions taken at former manufactured-gas plants. In September 1995, certain
insurance companies initiated a suit in Indiana state court against Northern
Indiana to deny coverage. Later, in September 1995, Northern Indiana filed
a more comprehensive suit in Federal Court in Indiana against those insurers
and several other insurance companies, seeking coverage for costs associated
with several former manufactured-gas plant sites. The state court action is
stayed pending resolution of the Northern Indiana suit in Federal Court.
Both sides have motions pending in the Federal Court lawsuit that would be
dispositive of the case. Northern Indiana has obtained cash settlements
with some of its insurers.
In October 1996, the American Institute of Certified Public
Accountants issued Statement of Position 96-1, "Environmental Remediation
Liabilities." This statement provides authoritative guidance for
recognition, measurement, display, and disclosure of environmental
remediation liabilities in financial statements. Northern Indiana will
adopt this standard on January 1, 1997 and adoption will not have a
material impact on Northern Indiana financial position or results of
operations.
ELECTRIC AND MAGNETIC FIELDS. The possibility that exposure to
electric and magnetic fields (EMF) emanating from power lines, household
appliances, and other electric sources may result in adverse health effects
has been the subject of public, governmental, and media attention.
Recently, The U.S. National Research Council of the National Academy of
Sciences concluded in a report, after examining more than 500 EMF studies
spanning seventeen years, that among other things, there is insufficient
evidence to consider EMF a threat to human health. Despite the report'
findings, future research appropriations are continuing to be dedicated to
explore the issue.
---------------------------
It is not possible to predict the scope, enforceability or financial
impact of other environmental regulations or standards which may be
established in the future.
ITEM 2. PROPERTIES.
The physical properties of Northern Indiana are located in the State
of Indiana.
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. During the year ended
December 31, 1996, Northern Indiana generated 83.8% and purchased 16.2% of
its electric requirements.
Northern Indiana has 292 substations with an aggregate transformer
capacity of 22,877,400 kva. Its transmission system with voltages from
34,500 to 345,000 consists of 3,052 circuit miles of line. The electric
distribution system extends into 21 counties and consists of 7,692 circuit
miles of overhead and 1,338 cable miles of underground primary distribution
lines operating at various voltages from 2,400 to 12,500 volts. Northern
Indiana has distribution transformers having an aggregate capacity of
11,050,855 kva and 434,851 electric watt-hour meters.
GAS. Northern Indiana has an underground storage field at Royal
Center and a liquefied natural gas plant in LaPorte County, both of which
are described under "Item 1. Business-Gas Operations." Northern Indiana has
13,195 miles of gas mains.
OTHER PROPERTIES. Northern Indiana owns offices and service
buildings, salesrooms, garages, repair shops, motor vehicles, construction
equipment and tools, and office furniture and equipment, and also leases
offices in various localities. It also owns miscellaneous parcels of real
estate not now used in utility operations.
CHARACTER OF OWNERSHIP. The properties of Northern Indiana are
subject to the lien of its First Mortgage Indenture. The principal offices
and properties are held in fee and are free from other encumbrances, subject
to minor exceptions, none of which is of such a nature as substantially to
impair the usefulness to Northern Indiana of such properties. Many of the
offices in the various communities served are occupied by Northern Indiana
under leases. All properties are subject to liens for taxes, assessments and
undetermined charges (if any) incidental to construction, which it is
Northern Indiana's practice regularly to pay, as and when due, unless
contested in good faith. In general, the electric and gas 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. These consents and rights are deemed adequate
for the purposes for which they are being used. Northern Indiana does not,
however, generally have specific easements from the owners of the property
adjacent to public highways over, upon, or under which its electric and gas
lines 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 and gas 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.
Northern Indiana is a party to various pending proceedings, including
suits and claims against it for personal injury, death and property damage,
but in the opinion of counsel for Northern Indiana, the nature of such
proceedings and suits, and the amounts involved, do not depart from the
ordinary routine litigation and proceedings incidental to the kind of
business conducted by Northern Indiana, except as set forth above under
"Item 1. Business-Environmental Matters," and as described under the
captions "Pending Tax Matter" and "Environmental Matters," in the Notes to
Consolidated Financial Statements. To the knowledge of Northern Indiana
no other material legal proceedings against Northern Indiana or its
subsidiaries are contemplated by governmental authorities and other parties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
Northern Indiana's common shares are wholly-owned by Industries.
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, 1996,
Northern Indiana had approximately $146.0 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 to the cumulative preferred stock
plus the surplus, after giving effect to such 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, 1996, the sum of the capital applicable to stocks subordinate
to the cumulative preferred stock plus the surplus was equal to 40% of the
total capitalization including surplus.
In connection with the foregoing discussion, see "Common Share
Dividend" in the Notes to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands)
1996 1995 1994 1993 1992
========== ========== ========== ========== ==========
<S> <C> <C> <C> <C> <C>
Operating revenues $1,754.105 $1,664,278 $1,613,995 $1,619,623 $1,552,285
Net income $ 197,310 $ 194,321 $ 179,903 $ 172,104 $ 149,454
Total assets $3,755,474 $3,606,199 $3,624,311 $3,613,235 $3,595,345
Long-term
obligations and
redeemable
preferred stock $1,053,254 $1,122,392 $1,131,408 $1,147,536 $1,035,128
Cash dividends
declared on
common shares $ 187,450 $ 185,725 $ 168,815 $ 165,299 $ 134,916
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
NET INCOME. For 1996, net income of Northern Indiana increased to
$197.3 million, compared to $194.3 million for 1995. In 1994, net income
was $179.9 million.
See Notes to Consolidated Financial Statements for Segments of
Business regarding the revenue and utility operating income derived from
the delivery of gas and electricity.
REVENUES. Operating revenues increased $89.8 million, or 5.4%, from
1995. Operating revenues in 1995 increased $50.2 million, or 3.1%, from
1994.
During 1996, gas deliveries in dekatherms (dth), which include
transportation services, increased 3.6%. Gas sales in 1996 increased 14.7%
due to higher sales to residential and commercial customers as a result of
colder weather during the first quarter of 1996, and increased sales to
industrial and wholesale customers. Gas transportation services decreased
4.0% mainly due to decreased deliveries to industrial customers. Northern
Indiana had approximately 653,100 gas customers at December 31, 1996. During
1995, gas deliveries increased 0.9% over 1994. Gas sales in 1995 increased
5.0% due to higher sales to residential and commercial customers as result
of colder weather during the fourth quarter of 1995. Gas transportation
services decreased 1.7% mainly due to decreased deliveries to industrial
customers.
Gas revenues were $731.9 million in 1996, an increase of $98.5 million
from 1995. The increase in gas revenues was mainly due to increased sales
to residential and commercial customers as a result of colder weather during
the first quarter of 1996, increased sales to industrial and wholesale
customers, and increased gas costs per dth, which were partially offset by
decreased gas transition costs. Gas revenues were $633.4 million in 1995, an
increase of $13.8 million from 1994. The increase in gas revenues was
mainly due to increased sales to residential and commercial customers as a
result of colder weather during the fourth quarter of 1995, and increased
gas transition charges partially offset by decreased gas costs. The large
commercial and industrial customers continued to utilize transportation
services provided by Northern Indiana. 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 Northern Indiana's system.
Northern Indiana transported 155.2, 161.7 and 164.6 million dth in 1996, 1995,
and 1994, respectively.
In 1996, sales of electricity in kilowatt-hours (kwh) decreased 1.1%
from 1995 mainly due to decreased sales to residential customers due to
cooler summer weather in 1996, and decreased sales to industrial customers
due to operational difficulties at several major industrial customers, which
were partially offset by increased sales to commercial and wholesale
customers. Northern Indiana had approximately 411,500 electric customers at
December 31, 1996. In 1995, sales of electricity in kwh increased 8.9% over
1994 mainly due to higher sales to residential and commercial customers as a
result of warmer weather in the third quarter of 1995, and increased sales to
wholesale customers.
In 1996, electric revenues were $1.022 billion, a decrease of $8.7
million from 1995. The decrease in electric revenue was mainly due to
decreased sales to residential customers due to cooler summer weather in 1996,
and decreased sales to industrial customers due to operational difficulties
at several major industrial customers, which were partially offset by
increased sales to commercial and wholesale customers. In 1995, electric
revenues were $1.031 billion, an increase of $36.4 million from 1994. The
increase in electric revenue was mainly due to higher sales to residential
and commercial customers as a result of warmer weather in the third quarter
of 1995, and increased sales to wholesale customers, and partially offset by
lower fuel costs per kwh and to transitional rate adjustments to industrial
customers signing new five-year contracts in 1995.
The components of the changes in gas and electric revenues are shown
in the following tables:
<TABLE>
<CAPTION>
Year 1996 Year 1995
Compared To Compared To
Year 1995 Year 1994
============ ============
(Dollars in millions)
<S> <C> <C>
Gas Revenue
Pass through of net changes in
purchased gas costs, gas storage
and storage transportation costs $ 55.6 $ (61.6)
Gas transition costs (33.5) 48.3
Changes in sales levels 77.5 28.2
Gas transported (1.1) (1.1)
------------ ------------
Gas Revenue Change $ 98.5 $ 13.8
------------ ------------
Electric Revenue
Pass through of net changes
in fuel costs $ 3.2 $ (14.6)
Changes in sales levels (11.9) 51.0
------------ ------------
Electric Revenue Change $ (8.7) $ 36.4
------------ ------------
Total Revenue Change $ 89.8 $ 50.2
============ ============
</TABLE>
See Rate Matters in Notes to Consolidated Financial Statements
regarding FERC Order No. 636 transition costs.
The basic steel industry accounted for 34% of natural gas delivered
(including volumes transported) and 35% of electric sales during 1996.
Northern Indiana's rate schedules for gas and electric service to its
customers contain an electric rate adjustment clause for changes in the cost
of fuel and firm purchases of electric energy; and gas rate adjustment
clauses to reflect changes in the cost of gas purchased, contracted gas
storage and storage transportation costs. (See Fuel Adjustment Clause and
Gas Cost Adjustment Clause under Summary of Significant Accounting Policies
in Notes to Consolidated Financial Statements.)
GAS COSTS. Gas costs increased $77.6 million (21.2%) in 1996 due to
increased purchases and increased gas costs per dth, which were partially
offset by decreased gas transition costs. The average cost for purchased gas
in 1996, after adjustment for transition costs billed to transport customers,
was $3.03 per dth as compared to $2.63 per dth in 1995. Gas costs increased
$0.7 million (0.2%) in 1995 due to increased purchases partially offset by
lower gas costs per dth. The average cost for purchased gas in 1995, after
adjustment for transition charges billed to transport customers, was $2.63
per dth as compared to $2.90 per dth in 1994.
FUEL AND PURCHASED POWER. Cost of fuel for electric generation in
1996 decreased mainly as a result of decreased production. The average cost
per kwh generated decreased 0.6% from 1995 to 15.79 mills. The cost of fuel
for electric generation decreased in 1995 from 1994 mainly as a result of
lower costs for coal and was partially offset by increased production. The
average cost per kwh generated decreased 5.7% from 1994 to 15.89 mills.
Power purchased increased $10.1 million in 1996 as a result of
increased bulk power purchases and increased cost per megawatt purchased.
Power purchased increased $11.1 million in 1995 mainly as a result of
increased bulk power purchases from other utilities due to increased sales.
OPERATING MARGINS. Operating margins increased $11.2 million in 1996
to $1.023 billion. The gas operating margin increased $20.9 million in 1996,
due to the increased sales to residential and commercial customers
reflecting colder weather during the first quarter of 1996, increased sales
to industrial and wholesale customers, and increased deliveries of gas
transported for others. Operating margins from electric sales decreased
$9.7 million due to decreased sales to residential customers reflecting
cooler summer weather in 1996, and decreased sales to industrial customers
due to plant operational difficulties at several major customers, which
were partially offset by increased sales to commercial and wholesale
customers. Operating margins increased $43.2 million in 1995 to $1.012
billion. The gas operating margin increased $13.1 million in 1995 mainly
due to the increased sales to residential and commercial customers due to
colder weather during the fourth quarter of 1995. Operating margins from
electric sales increased $30.1 million reflecting increased sales to
residential and commercial customers as a result of warmer weather in the
third quarter of 1995, and increased sales to wholesale customers,
partially offset by transitional rate adjustments to industrial customers.
OPERATING EXPENSES AND TAXES. Operating expenses and taxes (except
income) in 1996 increased 1.2% from 1995 to $633.4 million and in 1995
increased 1.5% from 1994 to $625.7 million.
Operation expenses increased $2.4 million in 1996 over 1995 due to
increased pollution control facility costs, environmental costs of $5.4
million, and other various increased operating costs partially offset by
reduced pension costs. Operation expenses increased $3.2 million in 1995
from 1994 reflecting a December 1995 Indiana Utility Regulatory Commission
(Commission) order to refund $3.4 million to electric customers related to
a 1992 insurance settlement previously credited to operating and
maintenance expenses.
Maintenance expenses decreased $8.2 million in 1996 from 1995 mainly
reflecting decreased maintenance activity at electric production facilities
and gas underground storage facilities. Maintenance expense decreased $1.9
million in 1995 from 1994 due to reduced maintenance activities.
Depreciation and amortization expenses increased $13.3 million in 1996
from 1995 resulting from plant additions, increased amortization of computer
software, and the amortization of deferred costs related to scrubber services
provided by Pure Air at the Bailly Generating Station. Depreciation and
amortization expenses increased $6.8 million in 1995 from 1994 mainly due
to net plant additions.
Utility income taxes increased $2.5 million in 1996 from 1995 mainly
as a result of increased pre-tax income and increased $10.3 million in 1995
from 1994 mainly due to higher pre-tax operating income.
Other Income (Deductions) increased $3.9 million in 1996 from 1995
mainly reflecting the sale of Crescent Dunes Lakeshore property to the
National Park Service. Other Income (Deductions) decreased $7.3 million in
1995 from 1994 reflecting the inclusion in 1994 of a $5.6 million after-tax
benefit for the Northern Indiana land donation to the Shafer and Freeman
Lakes Environmental Conservation Corporation.
Interest charges increased $1.9 million and $1.6 million in 1996 and
1995, respectively. The 1996 increase reflects the issuance of $169,275,000
of Northern Indiana's Medium-Term Notes, Series D and the discontinuance of
carrying charges related to the Bailly Generating Station scrubber service
agreement. The 1995 increase reflects increases in short-term borrowing
rates and long-term debt outstanding.
See Notes to Consolidated Financial Statements for a discussion of
Regulatory Assets, Carrying Charges and Deferred Depreciation, Allowance for
Funds Used During Construction, FERC Order No. 636, Income Taxes, and
Postretirement Benefits.
ENVIRONMENTAL MATTERS: Northern Indiana has an ongoing program to
remain aware of laws and regulations involved with hazardous waste and other
environmental matters. It is Northern Indiana's intent to continue to
evaluate its facilities and properties with respect to these rules and
identify any sites that would require corrective action. Northern Indiana
has recorded a reserve of $16.6 million to cover probable corrective actions
as of December 31, 1996; however, environmental regulations and remediation
techniques are subject to future change. The ultimate cost could be
significant, depending on the extent of corrective actions required. Based
upon investigations and management's understanding of current laws and
regulations, Northern Indiana believes that any corrective actions required,
after consideration of insurance coverages and contributions from other
potentially responsible parties, will not have a significant impact on the
financial position or results of operations of Northern Indiana.
Because of major investments made in modern environmental control
facilities and the use of low sulfur coal, all of Northern Indiana's
electric production facilities now comply with the sulfur dioxide
limitations contained in acid deposition provisions of the Clean Air Act
Amendments of 1990 (CAAA). Northern Indiana estimates that total costs of
compliance with the CAAA sulfur dioxide regulations will impact electric
rates by less than 5% in the future.
The CAAA contain provisions that could lead to limitations on
emissions of nitrogen oxides and hazardous air pollutants, which may require
significant capital expenditures for control of these emissions. Northern
Indiana is pursuing a nitrogen oxide control program to meet future
requirements. Northern Indiana cannot predict the costs of complying with
CAAA requirements.
The Environmental Protection Agency (EPA) has notified Northern
Indiana that it is a "potentially responsible party" (PRP) under the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA)
and may be required to share in the cost of cleanup of several waste
disposal sites identified by the EPA. The sites are in various stages of
investigation, analysis, and remediation. At each of the sites, Northern
Indiana is one of several PRPs, and it is expected that remedial costs,
as provided under CERCLA, will be shared among them. At some sites, Northern
Indiana and/or the other named PRPs are presently working with the EPA to
clean up the sites and avoid the imposition of fines or added costs.
Northern Indiana has instituted a program to investigate former
manufactured-gas plants where it is the current or former owner. Northern
Indiana has identified twenty-three of these sites and made visual
inspections of these sites. Initial samplings have been conducted at
fourteen sites. Follow-up investigations have been conducted at five sites
and potential remedial measures are being evaluated. Northern Indiana will
continue its program to assess sites. During the follow-up investigation
of the former manufactured-gas plant in Elkhart, Indiana, Northern Indiana
noted the presence of hydrocarbons in the Elkhart River. Northern Indiana
reported this finding to Indiana Department of Environmental Management
(IDEM) and the EPA. Northern Indiana has placed the Elkhart site in the
IDEM Voluntary Remediation Program (VRP). The goal of placing the site in
the VRP is to obtain IDEM approval of the determination and subsequent
implementation of what remedial measures, if any, may be needed.
Northern Indiana was notified by IDEM in 1992 of the release of a
petroleum substance into the St. Mary's River in Fort Wayne, Indiana, from
the site of a former manufactured-gas plant formerly owned by Northern
Indiana. In cooperation with IDEM, Northern Indiana has taken steps to
investigate and contain the substance. Northern Indiana has remediated part
of the Fort Wayne site. The remainder of the site is being evaluated to
determine what further remedial measures, if any, may be needed.
During the course of investigation activities, Northern Indiana noted
the presence of manufactured-gas plant residuals in the St. Mary's River in
Fort Wayne, Indiana and the Wabash River in Peru, Indiana. Northern
Indiana notified IDEM and the EPA and immediately took steps to contain
the material at both sites.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured-gas plant
sites at which both companies or their predecessors were former operators or
owners. One of these sites is the Lafayette site which Indiana Gas had
previously notified Northern Indiana is being investigated and remediated
pursuant to an administrative order with IDEM. Northern Indiana also
notified Cinergy Services, Inc. (Cinergy) (formerly PSI Energy, Inc.) that
it was a former owner or operator of seven former manufactured-gas plants at
which Northern Indiana had conducted or was planning investigation or
remediation activities. In December 1996, Northern Indiana sent a written
demand to Cinergy related to one of these sites, Goshen. Northern Indiana
demanded that Cinergy pay Northern Indiana for costs Northern Indiana has
already incurred and to be incurred to implement the needed remedy at the
Goshen site.
Northern Indiana has met with various companies that provided
insurance coverage which Northern Indiana believes covers costs related to
actions taken at former manufactured gas plants. In September 1995, certain
insurance companies initiated a suit in Indiana state court against Northern
Indiana to deny coverage. Later, in September 1995, Northern Indiana filed
a more comprehensive suit in Federal Court in Indiana against those insurers
and several other insurance companies, seeking coverage for costs associated
with several former manufactured-gas plant sites. The state court action is
stayed pending resolution of the Northern Indiana suit in Federal Court.
Both sides have motions pending in the Federal Court lawsuit that would be
dispositive of the case. Northern Indiana has obtained cash settlements
from some of its insurers.
In October 1996, the American Institute of Certified Public
Accountants issued Statement of Position 96-1, "Enironmental Remediation
Liabilities." This statement provides authoritative guidance for
recognition, measurement, display, and disclosure of environmental
remediation liabilities in financial statements. Northern Indiana will
adopt this standard on January 1, 1997 and adoption will not have a
material impact on Northern Indiana's financial position or results of
operations.
The possibility that exposure to electric and magnetic fields (EMF)
emanating from power lines, household appliances and other electric sources
may result in adverse health effects has been the subject of public,
governmental, and media attention. Recently, the U.S. National Research
Council of the National Academy of Sciences concluded in a report, after
examining more than 500 EMF studies spanning seventeen years, that among
other things, there is insufficient evidence to consider EMF a threat
to human health. Despite the report's findings, future research
appropriations are continuing to be dedicated to explore the issue.
LIQUIDITY AND CAPITAL RESOURCES. Construction expenditures by
Northern Indiana for 1996, 1995, and 1994 were approximately $198 million,
$186 million, and $197 million, respectively. Northern Indiana's total
utility plant investment on December 31, 1996, was $5.6 billion.
On March 4, 1994, the Commission authorized Northern Indiana to issue
up to $289,275,000 of its Medium-Term Notes, Series D, due from one year to
thirty years, for purposes of refinancing certain first mortgage bonds and
medium-term notes. During 1994, $120.0 million of the Medium-Term Notes,
Series D, were issued to refinance certain first mortgage bonds. On
June 12, 1995, the remaining $169,275,000 of Medium-Term Notes, Series D,
were issued and part of the proceeds were used to redeem all of the
outstanding First Mortgage Bonds, Series U and Z, aggregating $94.8 million,
on July 3, 1995.
Cash flow from operations has provided sufficient liquidity to meet
current operating requirements. Because of the seasonal nature of the
utility business and the construction program, Northern Indiana makes use of
commercial paper intermittently as short-term financing. As of December 31,
1996, Northern Indiana had $193.9 million in commercial paper outstanding,
having a weighted average interest rate of 5.43%.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1999, unless extended by its
terms. As of December 31, 1996, there were no borrowings outstanding under
this agreement. In addition, Northern Indiana has $14.2 million in lines of
credit which run to May 31, 1997 which are expected to be renewed for the
subsequent twelve-month period. The credit pricing of each of the lines
varies from either the lending banks' commercial prime or market rates.
Northern Indiana has agreed to compensate the participating banks with
arrangements that vary from no commitment fee to a combination of fees which
are mutually satisfactory to both parties. As of December 31, 1996, there
were no borrowings under these lines of credit. The Credit Agreement and
lines of credit are also available to support the issuances of commercial
paper.
Northern Indiana also has $273.5 million of money market lines of
credit. As of December 31, 1996, $79.0 million of borrowings were
outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
December 31, 1995, there were no borrowings outstanding under this facility.
During recent years, Northern Indiana has been able to finance its
construction program with internally generated funds and expects to be able
to meet future commitments through such funds.
Northern Indiana does not expect the effects of inflation at current
levels to have a significant impact on its results of operations, ability to
contain cost increases, or need to seek timely and adequate rate relief.
Northern Indiana does not anticipate the need to file for gas and electric
base rate increases in the near future.
COMPETITION. The Energy Policy Act of 1992 (Energy Act) allows FERC
to order electric utilities to grant access to transmission systems by third
party power producers. The Energy Act specifically prohibits federally
mandated wheeling of power for retail customers. On April 24, 1996, the FERC
issued its Order No. 888 which opens wholesale power sales to competition
and requires public utilities owning, controlling, or operating transmission
lines to file non-discriminatory open access tariffs that offer others the
same transmission service they provide themselves. Order No. 888 also
provides for the full recovery of stranded costs - that is, costs that were
prudently incurred to serve power customers and that could go unrecovered
if these customers use open access to move to another supplier. FERC
expects this rule will accelerate competition and bring lower prices and
more choices to wholesale energy customers. Although wholesale customers
represent a relatively small portion of Northern Indiana's sales, Northern
Indiana will continue its efforts to retain and add customers by offering
competitive rates.
In January 1997, legislation was introduced to the Indiana General
Assembly addressing electric utility competition and deregulation. Under
the proposed legislation, an electric utility would be required to separate
its production and marketing functions from the transmission and distribution
functions to eliminate a competitive market advantage related to
organizational structure. There would be a transition period from
October 1, 1999 through June 30, 2004, during which an electric utility's
cost of service in rates would transition to a target price based upon
Indiana utility averages. Amounts collected by an electric utility above
the target price during the transition period would provide for recovery of
transition costs. Under the proposed legislation, each electric utility
company would be required to file a proposed distribution comparability
tariff for unbundled electric service. Customers would have the right to
chose their electricity supplier effective with the transition period.
During the transition period, access charges would be billed to those
customers choosing a new supplier. Regulatory assets not recovered during
the transition period and not included as part of the cost-based
transmission and distribution function would not be recoverable from
customers. After the transition period, customers would be required to
make an affirmative election as to their electricity supplier; if no
election is made, the Commission would assign a supplier. Management
believes that the likelihood of passage of this proposed legislation, in
its current form, is remote.
Operating in a competitive environment will place added pressures on
utility profit margins and credit ratings. Increasing competition in the
electric utility industry has already led the credit rating agencies to
apply more stringent guidelines in making credit rating determinations.
Competition within the electric utility industry will create
opportunities to compete for new customers and revenues, as well as increase
the risk of the loss of customers. Northern Indiana's management has taken
steps to make the company more competitive and profitable in the changing
utility environment, including conversions of some of its generating units
to allow use of lower cost, low sulfur coal.
FERC Order No. 636, shifted primary responsibility for gas
acquisition, transportation, and peak days' supply from pipelines to local
gas distribution companies, such as Northern Indiana. Although pipelines
continue to transport gas, they no longer provide sales service. Northern
Indiana believes it has taken appropriate steps to ensure the continued
acquisition of adequate gas supplies at reasonable prices.
The mix of gas revenues from retail sales, interruptible retail sales,
firm transportation service, and interruptible transportation services has
changed significantly over the past several years. The deregulation of the
gas industry, since the mid-1980's, allows large industrial and commercial
customers to purchase their gas supplies directly from producers and use
Northern Indiana's facilities to transport the gas. Transportation
customers pay Northern Indiana only for transporting their gas from the
pipeline to the customers' premises.
Northern Indiana filed a petition for an Alternative Regulatory Plan
(ARP) with the Commission on November 29, 1995. The purpose of the ARP is
to create a business and regulatory environment and structure which will
permit increased choice for gas customers, competition among suppliers, and
improved natural gas service. In its ARP, Northern Indiana proposes to
implement new rates and services that would include, but not be limited to,
further unbundling of services for additional customer classes which would
include increased customer choice for sources of natural gas supply,
negotiated services and prices, and incentive gas and storage cost
mechanisms. The Commission will hold hearings on the ARP during first
half of 1997.
To date, Northern Indiana's system has not been materially adversely
affected by competition, and management does not foresee substantial adverse
effects in the near future, unless the current regulatory structure is
adversely altered. Northern Indiana believes the steps it is taking to deal
with increased competition will have significant, positive effects in the
next few years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages
=========
<S> <C>
Report of Independent Public Accountants 25
Consolidated Statement of Income for the years
ended December 31, 1996, 1995, and 1994 26-27
Consolidated Balance Sheet - December 31, 1996
and 1995 27-29
Consolidated Statement of Capitalization -
December 31, 1996 and 1995 30-31
Consolidated Statement of Long-term Debt -
December 31, 1996 and 1995 31-32
Consolidated Statement of Cash Flows for the
years ended December 31, 1996, 1995, and 1994 32-34
Consolidated Statement of Retained Earnings for
the years ended December 31, 1996, 1995, and 1994 34-35
Notes to Consolidated Financial Statements 35-60
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
We have audited the accompanying consolidated balance sheet and
consolidated statements of capitalization and long-term debt of Northern
Indiana Public Service Company (an Indiana corporation and a wholly owned
subsidiary of NIPSCO Industries, Inc.) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income, retained
earnings and cash flows for each of the three years in the period ended
December 31, 1996. These consolidated financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule 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
Northern Indiana Public Service Company and subsidiaries as of December 31,
1996 and 1995, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed on Page
72, Item 14(a)(2) is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken
as a whole.
/S/ Arthur Andersen LLP
Chicago, Illinois
January 28, 1997
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996 1995 1994
========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C>
Operating Revenues:
(Notes 2, 4 and 21)
Gas $ 731,874 $ 633,355 $ 619,503
Electric 1,022,231 1,030,923 994,492
---------- ---------- ----------
1,754,105 1,664,278 1,613,995
---------- ---------- ----------
Cost of Energy: (Note 2)
Gas costs 444,141 366,487 365,811
Fuel for electric generation 233,215 242,337 247,134
Power purchased 53,751 43,681 32,503
---------- ---------- ----------
731,107 652,505 645,448
---------- ---------- ----------
Operating Margin 1,022,998 1,011,773 968,547
---------- ---------- ----------
Operating Expenses and
Taxes (except income):
Operation 281,066 278,683 275,514
Maintenance (Note 2) 68,729 76,953 78,872
Depreciation and
amortization (Note 2) 211,545 198,259 191,426
Taxes (except income) 72,069 71,831 70,417
---------- ---------- ----------
633,409 625,726 616,229
---------- ---------- ----------
Operating Income Before
Utility Income Taxes 389,589 386,047 352,318
---------- ---------- ----------
Utility Income Taxes (Note 6) 109,051 106,574 96,257
---------- ---------- ----------
Operating Income 280,538 279,473 256,061
---------- ---------- ----------
Other Income (Deductions) 240 (3,619) 3,726
---------- ---------- ----------
Interest Charges:
Interest on long-term debt 68,798 72,339 70,771
Other interest 11,225 8,395 9,550
Allowance for borrowed funds used
during construction and carrying
charges (Note 2) (805) (3,320) (4,034)
Amortization of premium, reacquisition
premium, discount and expense on
debt, net 4,250 4,119 3,597
---------- ---------- ----------
83,468 81,533 79,884
---------- ---------- ----------
Net Income 197,310 194,321 179,903
Dividend requirements on
preferred stocks 8,712 9,046 9,913
---------- ---------- ----------
Balance available
for common shares $ 188,598 $ 185,275 $ 169,990
========== ========== ==========
Common dividends declared $ 187,450 $ 185,725 $ 168,815
========== =========== ==========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 1995
=========== ===========
(Dollars in thousands)
<S> <C> <C>
ASSETS
UTILITY PLANT, at original cost (including
construction work in progress of
$162,123 and $145,078, respectively)
(Note 2):
Electric $ 4,050,084 $ 3,935,103
Gas 1,176,871 1,143,021
Common 346,636 350,168
----------- -----------
5,573,591 5,428,292
Less - Accumulated provision for
depreciation and amortization 2,499,687 2,330,879
----------- -----------
Total Utility Plant 3,073,904 3,097,413
----------- -----------
OTHER PROPERTY AND INVESTMENTS 8,971 8,787
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents 8,279 11,478
Accounts receivable, less reserve of
$4,568 and $6,418, respectively (Note 2) 111,866 96,076
Fuel adjustment clause (Note 2) 9,149 10,301
Gas cost adjustment clause (Note 2) 98,167 4,113
Materials and supplies, at average cost 56,796 63,824
Electric production fuel, at average cost 26,483 14,258
Natural gas in storage, at last-in,
first-out cost (Note 2) 50,409 53,413
Prepayments and other 13,658 13,050
----------- -----------
Total Current Assets 374,807 266,513
----------- -----------
OTHER ASSETS:
Regulatory assets (Note 2) 230,545 211,859
Prepayments and other (Note 7) 67,247 21,627
----------- -----------
Total Other Assets 297,792 233,486
----------- -----------
$ 3,755,474 $ 3,606,199
=========== ===========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 1995
=========== ===========
(Dollars in thousands)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's equity $ 1,017,996 $ 1,016,827
Preferred stocks (Note 9) -
Series without mandatory
redemption provisions (Note 10) 81,126 81,325
Series with mandatory
redemption provisions (Note 11) 61,246 63,651
Long-term debt, excluding amounts due
within one year (Note 15) 992,008 1,058,741
----------- -----------
Total capitalization 2,152,376 2,220,544
----------- -----------
CURRENT LIABILITIES:
Current portion of long-term debt 65,747 80,000
(Note 16)
Short-term borrowings (Note 17) 272,905 163,600
Accounts payable 190,182 135,639
Sinking funds due within one year
(Notes 11 and 15) 3,328 2,621
Dividends declared on common and
preferred stocks 54,255 49,851
Customer deposits 16,768 10,230
Taxes accrued 78,806 31,247
Interest accrued 5,851 7,170
Accrued employment costs 40,915 45,771
Other 16,302 30,790
----------- -----------
Total current liabilities 745,059 556,919
----------- -----------
OTHER:
Deferred income taxes (Note 6) 597,105 587,809
Deferred investment tax credits, being
amortized over life of related property
(Note 6) 107,058 114,386
Deferred credits 41,056 41,038
Accrued liability for postretirement
benefits (Note 8) 104,123 73,682
Other noncurrent liabilities 8,697 11,821
----------- -----------
Total other 858,039 828,736
----------- -----------
COMMITMENTS AND CONTINGENCIES:
(Notes 3, 4, 5, 18 and 19)
$ 3,755,474 $ 3,606,199
=========== ===========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CAPITALIZATION
DECEMBER 31, 1996 1995
=========== ===========
(Dollars in thousands)
<S> <C> <C>
COMMON SHAREHOLDER'S EQUITY:
Common shares - without par
value - authorized 75,000,000
shares - issued and outstanding
73,282,258 shares $ 859,488 $ 859,488
Additional paid-in capital 12,521 12,500
Retained earnings 145,987 144,839
----------- -----------
Total common shareholder's
equity 1,017,996 47.3% 1,016,827 45.8%
----------- -----------
PREFERRED STOCKS, WHICH ARE
REDEEMABLE SOLELY AT OPTION
OF NORTHERN INDIANA:
Cumulative preferred stock -
$100 par value -
4-1/4% series - 209,145 and
209,190 shares outstanding,
respectively 20,915 20,919
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 (6.00% at
December 31, 1996) -
Series A (stated value -
$50 per share), 473,285 and
477,185 shares outstanding,
respectively 23,664 23,859
----------- -----------
81,126 3.8% 81,325 3.6%
----------- -----------
REDEEMABLE PREFERRED STOCKS,
SUBJECT TO MANDATORY REDEMPTION
REQUIREMENTS OR WHOSE
REDEMPTION IS OUTSIDE THE
CONTROL OF NORTHERN INDIANA:
Cumulative preferred stock -
$100 par value -
8.85% series - 75,000 and
87,500 shares outstanding,
respectively 7,500 8,750
7-3/4% series - 44,460 and
50,014 shares outstanding,
respectively 4,446 5,001
8.35% series - 63,000 and
69,000 shares outstanding,
respectively 6,300 6,900
Cumulative preferred stock -
no par value -
6.50% series - 430,000
shares outstanding 43,000 43,000
----------- -----------
61,246 2.8% 63,651 2.9%
----------- -----------
LONG-TERM DEBT 992,008 46.1% 1,058,741 47.7%
___________ ______ ___________ ______
Total capitalization $ 2,152,376 100.0% $ 2,220,544 100.0%
=========== ====== =========== ======
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF LONG-TERM DEBT
DECEMBER 31, 1996 1995
=========== ===========
(Dollars in thousands)
<S> <C> <C>
FIRST MORTGAGE BONDS -
Series O, 6-3/8%, due September 1, 1997 $ 0 $ 25,747
Series P, 6-7/8%, due October 1, 1998 14,509 14,509
Series T, 7-1/2%, due April 1, 2002 40,000 40,500
Series NN, 7.10%, due July 1, 2017 55,000 55,000
----------- -----------
Total 109,509 135,756
----------- -----------
POLLUTION CONTROL NOTES AND BONDS -
Series A Note -
City of Michigan City, 5.70% due
October 1, 2003 19,000 20,000
Series 1988 Bonds - Jasper County -
Series A, B and C - 3.58% weighted
average at December 31, 1996, due
November 1, 2016 130,000 130,000
Series 1988 Bonds - Jasper County -
Series D - 3.55% weighted average at
December 31, 1996, due November 1, 2007 24,000 24,000
Series 1994 Bonds - Jasper County -
Series A - 5.10% at December 31, 1996
due August 1, 2010 10,000 10,000
Series 1994 Bonds - Jasper County -
Series B - 5.10% at December 31, 1996,
due June 1, 2013 18,000 18,000
Series 1994 Bonds - Jasper County -
Series C - 5.10% at December 31, 1996,
due April 1, 2019 41,000 41,000
----------- -----------
Total 242,000 243,000
----------- -----------
MEDIUM-TERM NOTES -
Issued at interest rates between 5.83%
and 7.64% with a weighted average interest
rate of 6.85% and various maturities between
April 6,1998 and January 19, 2024 644,025 684,025
----------- -----------
UNAMORTIZED PREMIUM AND DISCOUNT
ON LONG-TERM DEBT, NET (3,526) (4,040)
----------- -----------
Total long-term debt, excluding
amounts due in one year $ 992,008 $ 1,058,741
=========== ===========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 1995 1994
=========== =========== ===========
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 197,310 $ 194,321 $ 179,903
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 211,545 198,259 191,426
Deferred federal and state
operating income taxes, net 26,117 (3,247) (11,468)
Deferred investment tax
credits, net (7,327) (7,436) (6,416)
Advance contract payment (17,100) 0 0
Change in certain assets and
liabilities -
Accounts receivable, net (15,790) (15,099) 18,246
Electric production fuel (12,225) 4,089 3,186
Materials and supplies 7,028 11 1,309
Natural gas in storage 3,004 19,049 (15,659)
Accounts payable 54,543 (6,379) (29,116)
Taxes accrued 14,628 (11,156) (16,745,
Fuel adjustment clause 1,152 (8,687) 4,826
Gas cost adjustment clause (94,054) 23,731 7,721
Accrued employment costs (4,856) 2,511 3,182
Other accruals (14,488) 21,116 1,046
Other, net 6,962 888 22,969
----------- ----------- -----------
Net cash provided by
operating activities 356,449 411,971 354,410
----------- ----------- -----------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Construction expenditures (198,223) (185,560) (196,854)
Other, net 3,076 (750) 5,700
----------- ----------- -----------
Net cash used in investing
activities (195,147) (186,310) (191,154)
----------- ----------- -----------
CASH FLOWS PROVIDED BY
(USED IN) FINANCING
ACTIVITIES:
Issuance of long-term debt 0 168,386 208,884
Issuance of short-term debt 1,172,150 943,200 982,927
Net change in commercial paper 149,105 (111,700) 128,605
Retirement of long-term debt (80,000) (120,868) (210,246)
Retirement of short-term debt (1,211,950) (917,100) (1,065,227)
Retirement of preferred stock (2,604) (7,095) (10,354)
Cash dividends paid on
common shares (182,950) (180,475) (171,845)
Cash dividends paid on
preferred shares (8,766) (9,241) (10,185)
Other, net 514 (284) 0
----------- ----------- -----------
Net cash used in
financing activities (164,501) (235,177) (147,441)
----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (3,199) (9,516) 15,815
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 11,478 20,994 5,179
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 8,279 $ 11,478 $ 20,994
=========== =========== ===========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1996 1995 1994
========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $ 144,839 $ 145,289 $ 144,114
ADD:
NET INCOME 197,310 194,321 179,903
--------- --------- ---------
342,149 339,610 324,017
--------- --------- ---------
LESS:
DIVIDENDS:
Cumulative Preferred stock -
4-1/4% series 889 891 898
4-1/2% series 360 360 360
4.22% series 448 448 448
4.88% series 488 488 488
7.44% series 312 312 312
7.50% series 261 261 261
8.85% series 793 903 1,014
7-3/4% series 395 449 492
8.35% series 572 622 672
6.50% series 2,795 2,795 2,795
Adjustable Rate, series A 1,399 1,517 2,173
Common shares 187,450 185,725 168,815
---------- --------- ---------
196,162 194,771 178,728
---------- --------- ---------
BALANCE AT END OF PERIOD $ 145,987 $ 144,839 $ 145,289
========== ========= =========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</FN>
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) HOLDING COMPANY STRUCTURE: NIPSCO Industries, Inc. (Industries) was
incorporated in Indiana on September 22, 1987 and became the parent of
Northern Indiana Public Service Company (Northern Indiana) on March 3, 1988.
Northern Indiana is a public utility operating company supplying electricity
and gas to the public in the northern third of Indiana.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION. The consolidated financial statements
include the accounts of Northern Indiana and its two subsidiaries, Shore Line
Shops, Inc. and NIPSCO Exploration Company, Inc. All significant intercompany
items have been eliminated in consolidation. 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. Revenues are recorded based on estimated service
rendered, but are billed to customers monthly on a cycle basis.
DEPRECIATION AND MAINTENANCE. Northern Indiana provides depreciation
on a straight-line method over the remaining service lives of the electric,
gas, and common properties. The provisions, as a percentage of the cost of
depreciable utility plant, were approximately 4.2% for the year 1996, 4.1%
for year 1995, and 4.0% for year 1994. The depreciation rates for electric
and gas properties were 3.55% and 4.92%, respectively.
Northern Indiana follows the practice of charging maintenance and
repairs, including the cost of renewals of minor items of property, to
maintenance expense accounts, except for repairs of transportation and service
equipment which are charged to clearing accounts and redistributed to
operating expense and other accounts. When property which represents a
retirement unit is replaced or removed, the cost of such property is credited
to utility plant, and such cost, together with the cost of removal less
salvage, is charged to the accumulated provision for depreciation.
AMORTIZATION OF SOFTWARE COSTS. Northern Indiana amortizes capitalized
software costs using the straight-line method based on estimated economic
lives.
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 are included in Cost of
Energy under the caption "Power purchased."
ACCOUNTS RECEIVABLE. At December 31, 1996, Northern Indiana had sold
$100 million of its accounts receivable under a sales agreement which expires
May 31, 1997 and is expected to be renewed in the future. The December 31,
1996 and 1995 accounts receivable balances include approximately $7.1 million
and $6.9 million respectively, due from associated companies.
STATEMENT OF CASH FLOWS. For the purposes of the Consolidated Statement
of Cash Flows, Northern Indiana considers temporary cash investments with an
original maturity of three months or less to be cash equivalents.
Cash paid during the periods reported for income taxes and interest
was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C>
Income taxes $ 73,631 $128,487 $116,790
Interest, net of amounts capitalized $ 78,268 $ 80,635 $ 76,983
</TABLE>
FUEL ADJUSTMENT CLAUSE. All metered electric rates contain a provision
for adjustment in charges for electric energy to reflect increases and
decreases in the cost of fuel and the fuel cost of purchased power through
operation of a fuel adjustment clause. As prescribed by order of the Indiana
Utility Regulatory Commission (Commission) applicable to metered retail rates,
the adjustment factor has been calculated based on the estimated cost of fuel
and the fuel cost of purchased power in a future three-month period. If two
statutory requirements relating to expense and return levels are satisfied,
any under-recovery or over-recovery caused by variances between estimated and
actual cost in a given three-month period will be included in a future filing.
Northern Indiana records any under-recovery or over-recovery as a current
asset or current liability until such time as it is billed or refunded to its
customers. The fuel adjustment factor is subject to a quarterly hearing by
the Commission and remains in effect for a three-month period.
GAS COST ADJUSTMENT CLAUSE. All metered gas rates contain an adjustment
factor which reflects the cost of purchased gas, contracted gas storage, and
storage transportation charges. 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 gas cost adjustment factor is
subject to a quarterly hearing by the Commission and remains in effect for a
three-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 period will be
included in a future filing. See Note 4, FERC Order No. 636 for a discussion
of gas transition cost charges.
NATURAL GAS IN STORAGE. 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 1996 and 1995 the estimated replacement cost of
gas in storage (current and non-current) at December 31, 1996 and 1995
exceeded the stated LIFO cost by approximately $96 million and $30 million,
respectively.
AFFILIATED COMPANY TRANSACTIONS. Pursuant to agreement, effective
July 1, 1996, Northern Indiana receives executive, financial, gas supply,
sales and marketing, and administrative and general services from an
affiliate, NIPSCO Industries Management Services Company (Services), a
wholly-owned subsidiary of Industries.
The costs of these services are charged to Northern Indiana based on
payroll and expenses incurred by Services' employees for the benefit of
Northern Indiana. These costs which totalled $17.4 million for the six-month
period ended December 31, 1996 consist primarily of employee compensation
and benefits.
Northern Indiana purchased natural gas and transportation services
from affiliated companies in the amount of $17.3 million representing 4.1%
of Northern Indiana's total gas costs for year 1996.
Northern Indiana subleases a portion of office facilities to affiliated
companies for a monthly fee, which includes operating expenses, based on
space utilization.
HEDGING ACTIVITIES. Northern Indiana uses commodity futures contracts
to hedge the impact of natural gas price fluctuations related to its
business activities. Gains and losses on these futures contracts are
deferred and recognized in income concurrent with the related purchases and
sales of natural gas.
As of December 31, 1996 Northern Indiana had open futures contracts
representing hedges of natural gas sales of 1.2 billion cubic feet (Bcf).
The deferred (losses) on those futures contracts at December 31, 1996
totalled $(0.1) million.
REGULATORY ASSETS. Northern Indiana's operations are subject to the
regulation of the Commission and the Federal Energy Regulatory Commission
(FERC). Accordingly, Northern Indiana's accounting policies are subject to
the provisions of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." The regulatory
assets identified below represent probable future revenue to Northern
Indiana associated with certain incurred costs as these costs are recovered
through the rate-making process. Regulatory assets were comprised of the
following items and were reflected in the Consolidated Balance Sheet as
follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
============= =============
(Dollars in thousands)
<S> <C> <C>
Unamortized reacquisition premium on
debt (Note 15) $ 49,890 $ 53,354
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges
and deferred depreciation (See below) 70,763 74,981
Bailly scrubber carrying charges and
deferred depreciation (See below) 10,816 11,517
Deferral of SFAS No. 106 expense not
recovered (Note 8) 87,005 64,624
FERC Order No. 636
transition costs (Note 4) 47,399 25,038
------------- -------------
265,873 229,514
------------- -------------
Less: Current portion of regulatory assets 35,328 17,655
------------- -------------
$ 230,545 $ 211,859
============= =============
</TABLE>
If all or a separable portion of Northern Indiana's operations become
no longer subject to the provisions of SFAS No. 71, a write off of related
regulatory assets would be required, unless some form of transition cost
recovery continues through rates established and collected for Northern
Indiana's remaining regulated operations. In addition, Northern Indiana
would be required to determine any impairment to the carrying costs of
deregulated plant and inventory assets.
In March, 1995, the Financial Accounting Standards Board issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." This statement imposes stricter
criteria for retention of regulatory assets by requiring that such assets be
probable of future recovery at each balance sheet date. Northern Indiana
adopted this standard on January 1, 1996, and adoption did not impact its
financial position or results of operations.
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. Pursuant to such order, capitalization of carrying charges
and deferral of depreciation and certain operating expenses ceased on
December 31, 1995. The accumulated balance of the deferred costs and related
carrying charges is being amortized over the remaining life of the scrubber
service agreement.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. Allowance for funds
used during construction (AFUDC) is charged to construction work in progress
during the period of construction and represents the net cost of borrowed
funds used for construction purposes and a reasonable rate upon other (equity)
funds. Under established regulatory rate practices, after the construction
project is placed in service, Northern Indiana is permitted to include in the
rates charged for utility services (a) a fair return on and (b) depreciation
of such AFUDC included in plant in service.
At January 1, 1994, a pretax rate of 5.0% for all construction was
being used; effective January 1, 1995, the rate increased to 6.0% and
effective January 1, 1996, the rate decreased to 5.5%.
INCOME TAXES. Deferred income taxes are recognized as costs in the
rate-making process by the commissions having jurisdiction over the rates
charged by Northern Indiana. Deferred income taxes are provided as a result
of provisions in the income tax law that either require or permit certain
items to be reported on the income tax return in a different period than they
are reported in the financial statements. These taxes are reversed by a debit
or credit to deferred income tax expense as the temporary differences reverse.
Investment tax credits have been deferred and are being amortized to income
over the life of the related property.
(3) PENDING TAX MATTER: On August 1, 1991, the Internal Revenue Service
(IRS) issued a notice of deficiency for Northern Indiana's taxes for the
years 1982 through 1985 ($3,785,250 per year plus interest) relating to
to interest payments on $70 million of 17-1/4% Notes issued in 1981 by
Northern Indiana's former foreign subsidiary, Northern Indiana Public Service
Finance N.V. (Finance). The IRS believes that interest paid on the Notes
should have been subject to United States tax withholding. The Notes were
redeemed in 1985 and Finance was subsequently liquidated. On October 25, 1991,
Northern Indiana challenged the assessment in the United States Tax Court
(Tax Court) and the matter was tried in 1994. On November 6, 1995, the Tax
Court ruled in favor of Northern Indiana, finding that the interest paid on
the Notes was not subject to United States tax withholding. On March 13,
1996, the IRS appealed the Tax Court's decision to the U.S. Court of Appeals
for the Seventh Circuit, and on March 25, 1996 Northern Indiana filed its
cross appeal. Northern Indiana's management and general counsel believe the
ruling of the Tax Court will prevail.
(4) FERC ORDER NO. 636: Pursuant to FERC Order No. 636, interstate pipeline
sales services have been "unbundled" such that gas supplies are being sold
separately from interstate transportation services. Northern Indiana has
contracted for a mix of transportation and storage services from their
pipeline suppliers which allows Northern Indiana to meet the need of its
customers. Pipelines are recovering, from their customers, certain transition
costs associated with restructuring under the Order No. 636 regulation. Any
such recovery is subject to established review procedures at the FERC.
Northern Indiana expects that the total transition costs from all
suppliers will approximate $137 million; however, the ultimate level of costs
will depend on future events, including the market price of natural gas.
Approximately $127 million of such costs have been recorded, a portion of
which has been paid to the pipeline suppliers, subject to refund. 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.
(5) ENVIRONMENTAL MATTERS: Northern Indiana has an ongoing program to
remain aware of laws and regulations involved with hazardous waste and other
environmental matters. It is Northern Indiana's intent to continue to
evaluate its facilities and properties with respect to these rules and
identify any sites that would require corrective action. Northern Indiana
has recorded a reserve of $16.6 million to cover probable corrective actions
as of December 31, 1996; however, environmental regulations and remediation
techniques are subject to future change. The ultimate cost could be
significant, depending on the extent of corrective actions required. Based
upon investigations and management's understanding of current laws and
regulations, Northern Indiana believes that any corrective actions required,
after consideration of insurance coverages and contributions from other
potentially responsible parties, will not have a significant impact on the
financial position or results of operations of Northern Indiana.
Because of major investments made in modern environmental control
facilities and the use of low sulfur coal, all of Northern Indiana's electric
production facilities now comply with the sulfur dioxide limitations contained
in acid deposition provisions of the Clean Air Act Amendments of 1990
(CAAA). Northern Indiana estimates that total costs of compliance with the
CAAA sulfur dioxide regulations will impact electric rates by less than 5% in
the future.
The CAAA contain provisions that could lead to limitations on emissions
of nitrogen oxides and hazardous air pollutants, which may require significant
capital expenditures for control of these emissions. Northern Indiana is
pursuing a nitrogen oxide control program to meet future requirements.
Northern Indiana cannot predict the costs of complying with CAAA requirements.
The Environmental Protection Agency (EPA) has notified Northern Indiana
that it is a "potentially responsible party" (PRP) under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) and may be
required to share in the cost of cleanup of several waste disposal sites
identified by the EPA. The sites are in various stages of investigation,
analysis and remediation. At each of the sites, Northern Indiana is one of
several PRPs, and it is expected that remedial costs, as provided under
CERCLA, will be shared among them. At some sites, Northern Indiana and/or the
other named PRPs are presently working with the EPA to clean up the sites and
avoid the imposition of fines or added costs.
Northern Indiana has instituted a program to investigate former
manufactured-gas plants where it is the current or former owner. Northern
Indiana has identified twenty-three of these sites and made visual
inspections of these sites. Initial samplings have been conducted at
fourteen sites. Follow-up investigations have been conducted at five sites
and potential remedial measures are being evaluated. Northern Indiana will
continue its program to assess sites. During the follow-up investigation
of the former manufactured-gas plant in Elkhart, Indiana, Northern Indiana
noted the presence of hydrocarbons in the Elkhart River. Northern Indiana
reported this finding to Indiana Department of Environmental Management
(IDEM) and the EPA. Northern Indiana has placed the Elkhart site in the
IDEM Voluntary Remediation Program (VRP). The goal of placing the site in
the VRP is to obtain IDEM approval of the determination and subsequent
implementation of what remedial measures, if any, may be needed.
Northern Indiana was notified by IDEM in 1992 of the release of a
petroleum substance into the St. Mary's River in Fort Wayne, Indiana, from
the site of a former manufactured-gas plant formerly owned by Northern
Indiana. In cooperation with IDEM, Northern Indiana has taken steps to
investigate and contain the substance. Northern Indiana has remediated part
of the Fort Wayne site. The remainder of the site is being evaluated to
determine what further remedial measures, if any, may be needed.
During the course of investigation activities, Northern Indiana noted
the presence of manufactured-gas plant residuals in the St. Mary's River in
Fort Wayne, Indiana and the Wabash River in Peru, Indiana. Northern
Indiana notified IDEM and the EPA and immediately took steps to contain
the material at both sites.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured-gas plant
sites at which both companies or their predecessors were former operators or
owners. One of these sites is the Lafayette site which Indiana Gas had
previously notified Northern Indiana is being investigated and remediated
pursuant to an administrative order with IDEM. Northern Indiana also
notified Cinergy Services, Inc. (Cinergy) (formerly PSI Energy, Inc.) that
it was a former owner or operator of seven former manufactured-gas plants at
which Northern Indiana had conducted or was planning investigation or
remediation activities. In December 1996, Northern Indiana sent a written
demand to Cinergy related to one of these sites, Goshen. Northern Indiana
demanded that Cinergy pay for costs Northern Indiana has already incurred
and to be incurred to implement the needed remedy at the Goshen site.
Northern Indiana has met with various companies that provided
insurance coverage which Northern Indiana believes covers costs related to
actions taken at former manufactured-gas plants. In September 1995, certain
insurance companies initiated a suit in Indiana state court against Northern
Indiana to deny coverage. Later, in September 1995, Northern Indiana filed
a more comprehensive suit in Federal Court in Indiana against those insurers
and several other insurance companies, seeking coverage for costs associated
with several former manufactured-gas plant sites. The state court action is
stayed pending resolution of the Northern Indiana suit in Federal Court.
Both sides have motions pending in the Federal Court lawsuit that would be
dispositive of the case. Northern Indiana has obtained cash settlements from
some of its insurers.
In October 1996, the American Institute of Certified Public
Accountants issued Statement of Position 96-1, "Environmental Remediation
Liabilities." This statement provides authoritative guidance for
recognition, measurement, display, and disclosure of environmental
remediation liabilities in financial statements. Northern Indiana will
adopt this standard on January 1, 1997 and adoption will not have a
material impact on Northern Indiana's financial position or results of
operations.
The possibility that exposure to electric and magnetic fields (EMF)
emanating from power lines, household appliances and other electric sources
may result in adverse health effects has been the subject of public,
governmental, and media attention. Recently, the U.S. National Research
Council of the National Academy of Sciences concluded in a report, after
examining more than 500 EMF studies spanning seventeen years, that among
other things, there is insufficient evidence to consider EMF a threat
to human health. Despite the report's findings, future research
appropriations are continuing to be dedicated to explore the issue.
(6) INCOME TAXES: Northern Indiana 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 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 Northern Indiana's obligation to
credit to ratepayers deferred income taxes provided at rates higher than the
current federal tax rate currently being credited to ratepayers using the
average rate assumption method and unamortized deferred investment tax
credits.
Northern Indiana joins in the filing of consolidated tax returns with
Industries and currently pays to Industries its separate return tax liability
as defined in the Tax Sharing Agreement between Industries and its
subsidiaries.
The components of the net deferred income tax liability at December 31,
1996, and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
=========== ===========
(Dollars in thousands)
<S> <C> <C>
Deferred tax liabilities -
Accelerated depreciation
and other property differences $ 719,197 $ 700,137
AFUDC-equity 37,713 40,083
Adjustment clauses 40,700 5,467
Take-or-pay gas costs 765 1,192
Other regulatory assets 39,440 28,912
Reacquisition premium on debt 18,921 20,237
Deferred tax assets -
Deferred investment tax credits (40,602) (43,381)
Removal costs (131,718) (118,064)
FERC Order No. 636 transition costs (8,144) (4,400)
Other postretirement/postemployment
benefits (42,434) (31,633)
Other, net (10,433) (17,372)
----------- -----------
623,405 581,178
Less: Deferred income taxes related to
current assets and liabilities 26,300 (6,631)
----------- -----------
Deferred income taxes - noncurrent $ 597,105 $ 587,809
=========== ===========
</TABLE>
Federal and state income taxes as set forth in the Consolidated
Statement of Income are comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C>
Current income taxes -
Federal $ 77,947 $ 102,047 $ 99,002
State 12,314 15,210 15,139
--------- --------- ---------
90,261 117,257 114,141
--------- --------- ---------
Deferred income taxes, net -
Federal 23,817 (3,190) (10,739)
State 2,300 (57) (729)
--------- --------- ---------
26,117 (3,247) (11,468)
--------- --------- ---------
Deferred investment tax credits, net (7,327) (7,436) (6,416)
--------- --------- ---------
Total utility operating income taxes 109,051 106,574 96,257
Income tax applicable to non-operating
activities and income of subsidiaries (936) (3,216) (10,291)
--------- --------- ---------
Total income taxes $ 108,115 $ 103,358 $ 85,966
========= ========= =========
</TABLE>
A reconciliation of total tax expense to an amount computed by applying
the statutory federal income tax rate to pretax income is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C>
Net income $ 197,310 $ 194,321 $ 179,903
Add - Income taxes 108,115 103,358 85,966
--------- --------- ---------
Net Income before income taxes $ 305,425 $ 297,679 $ 265,869
========= ========= =========
Amount derived by multiplying pretax
income by statutory rate $ 106,899 $ 104,188 $ 93,054
Reconciling items multiplied by the
statutory rate:
Book depreciation over related tax
depreciation 4,621 4,018 4,044
Amortization of deferred investment tax
credits (7,327) (7,436) (7,383)
State income taxes, net of federal income
tax benefit 10,240 9,577 9,015
Fair market value of property donated in
excess of book value 0 0 (7,753)
Reversal of deferred taxes provided at
rates in excess of the current federal
income tax rate (6,644) (5,665) (5,807)
Other, net 326 (1,324) 796
--------- --------- ---------
Total income taxes $ 108,115 $ 103,358 $ 85,966
========= ========= =========
</TABLE>
(7) PENSION PLAN: Industries has a noncontributory, defined benefit
retirement plan covering substantially all employees of Northern Indiana.
Benefits under the plan reflect the employees' compensation, years of service
and age at retirement.
The plan's funded status as of December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
========= =========
(Dollars in thousands)
<S> <C> <C>
Vested benefit obligation $(534,416) $(542,516)
Nonvested benefit (103,284) (104,054)
--------- ---------
Accumulated benefit obligation $(637,700) $(646,570)
========= =========
Projected benefit obligation for service
rendered to date $(732,870) $(749,204)
Plan assets at fair market value 782,162 698,698
--------- ---------
Projected benefit obligation in excess of
(or less than) projected benefit obligation 49,292 (50,506)
Unrecognized transition obligation at December 31,
being recognized over seventeen years 38,418 43,907
Unrecognized prior service cost 23,736 25,656
Unrecognized gains (67,111) (4,808)
--------- ---------
Prepaid pension costs $ 44,335 $ 14,249
========= =========
</TABLE>
The accumulated benefit obligation is the present value of future
pension benefit payments and is based on the plan benefit formula without
considering expected future salary increases. The projected benefit
obligation considers estimated future salary increases. Discount rates of
7.75% and 7.25% and rates of increase in compensation levels of 5.5% were used
to determine the accumulated benefit obligation and projected benefit
obligation at December 31, 1996 and 1995, respectively.
The following items are the components of provisions for pensions for
the years ended December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C>
Service costs $ 15,877 $ 11,865 $ 13,611
Interest costs 52,788 51,834 47,453
Actual (return) loss on plan assets (86,622) (133,793) 15,570
Amortization of transition obligation 5,488 5,488 5,488
Other net amortization and deferral 26,233 85,124 (61,601)
--------- --------- ---------
$ 13,764 $ 20,518 $ 20,521
========= ========= =========
</TABLE>
Assumptions used in the valuation and determination of 1996, 1995, and
1994 pension expenses were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
====== ====== ======
<S> <C> <C> <C>
Discount rate 7.25% 8.75% 7.50%
Rate of increase in compensation levels 5.50% 5.50% 5.50%
Expected long-term rate of return on assets 9.00% 9.00% 8.25%
</TABLE>
Plan assets are invested primarily in common stocks, bonds, and notes.
(8) POSTRETIREMENT BENEFITS: Northern Indiana provides certain health care
and life insurance benefits for retired employees. Substantially all of
Northern Indiana's employees may become eligible for those benefits if they
reach retirement age while working for Northern Indiana. The expected cost of
such benefits is accrued during the employees' years of service.
Northern Indiana's current rate-making includes 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
benefits costs and the insurance premiums paid for such benefits as a
regulatory asset until such time as the accrual cost method may be reflected
in the rate-making process. The Commission stated that a deferral period of
four years or less would be rebuttably presumed to be reasonable and also
indicated each utility would have to demonstrate its postretirement benefit
costs were prudent and reasonably incurred at the time such costs were
proposed to be recovered in the rate-making process. Northern Indiana has
been deferring as a regulatory asset the difference between the amount that
would have been charged to expense under pay-as-you-go accounting and the
amount accrued in accordance with the standard in anticipation of approval
for these costs in the rate-making process.
On November 20, 1996, Northern Indiana filed with the IURC for inclusion
of accrual-based postretirement benefit costs in the rate-making process.
These costs include an amortization of the existing regulatory asset
consistent with the remaining amortization period for the transition
obligation. Hearings are scheduled during March 1997 and Northern Indiana
expects a decision during the second quarter of 1997. Management believes
that Northern Indiana will ultimately be successful in obtaining such
approval.
The following table sets forth the plans' accumulated postretirement
benefit obligation as of December 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
============ ============
(Dollars in thousands)
<S> <C> <C>
Retirees $ (74,786) $ (97,693)
Fully eligible active plan participants (18,441) (21,760)
Other active plan participants (101,710) (133,205)
------------ ------------
Accumulated postretirement benefit obligation (194,937) (252,658)
Unrecognized transition obligation at
December 31, being recognized over twenty years 171,962 192,917
Unrecognized actuarial gain (88,784) (23,168)
------------ ------------
Accrued liability for postretirement benefits $ (111,759) $ (82,909)
============ ============
</TABLE>
A discount rate of 7.75% and a pre-Medicare medical trend rate of 9%
declining to a long-term rate of 6% and a discount rate of 7.25% and a pre-
Medicare medical trend rate of 10% declining to a long-term rate of 6% were
used to determine the accumulated postretirement benefit obligation at
December 31, 1996 and 1995, respectively.
The decrease in the accumulated postretirement benefit obligation
(APBO) and the related increase in unrecognized actuarial gain at
December 31, 1996 were primarily attributable to favorable claim experience
and the increase in the discount rate to 7.75%. Additionally, Northern
Indiana implemented a 3% cap on its share of retiree cost increases for
pre-Medicare benefits for certain non-bargaining retirees who retire after
February 1, 1997. This plan amendment reduced the APBO and the unrecognized
transition obligation by $9.6 million at December 31, 1996.
Net periodic postretirement benefit costs for the years ended
December 31, 1996 and 1995 include the following components:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
============ ============
(Dollars in thousands)
<S> <C> <C>
Service costs $ 5,853 $ 5,383
Interest costs 17,973 18,606
Amortization of transition obligation over
twenty years 11,348 11,348
Amortization of unrecognized actuarial gain (497) (2,164)
------------ ------------
$ 34,677 $ 33,173
============ ============
</TABLE>
The net periodic postretirement benefit costs for 1996 were determined
assuming a 7.25% discount rate, a 5% rate of compensation increase, and a
pre-Medicare medical trend rate of 9% declining to a long-term rate of 6%.
The net periodic postretirement benefit costs for 1995 were determined
assuming an 8.75% discount rate, a 5% rate of compensation increase and a
pre-Medicare medical trend rate of 11% declining to a long-term rate of 7%.
The effect of a 1% increase in the assumed health care cost trend rates for
each future year would increase the accumulated postretirement benefit
obligation at December 31, 1996, by approximately $28.5 million and increase
the aggregate of the service and interest cost components of plan costs by
approximately $4.5 million for the year ended December 31, 1996. Amounts
disclosed above could be changed significantly in the future by changes in
health care costs, work force demographics, interest rates, or plan changes.
(9) AUTHORIZED CLASSES OF CUMULATIVE PREFERRED AND PREFERENCE STOCKS OF
NORTHERN INDIANA:
2,400,000 shares - Cumulative Preferred - $100 par value
3,000,000 shares - Cumulative Preferred - no par value
2,000,000 shares - Cumulative Preference - $50 par value
(none outstanding)
3,000,000 shares - Cumulative Preference - no par value
(none issued)
Note 10 sets forth the preferred stocks which are redeemable solely at
the option of Northern Indiana, and Note 11 sets forth the preferred stocks
which are subject to mandatory redemption requirements or whose redemption is
outside the control of Northern Indiana.
The Preferred shareholders of Northern Indiana have no voting rights,
except in the event of default on the payment of four consecutive quarterly
dividends, or as required by Indiana law to authorize additional preferred
shares, or by the Articles of Incorporation in the event of certain merger
transactions.
(10) PREFERRED STOCKS, REDEEMABLE SOLELY AT OPTION OF NORTHERN INDIANA (SEE
NOTE 9):
The redemption prices at December 31, 1996 for the cumulative preferred
stock of Northern Indiana, which is redeemable solely at the option of
Northern Indiana, in whole or in part, at any time upon thirty days' notice,
are as follows:
<TABLE>
<CAPTION>
Redemption
Price
Series Per Share
============================================= ==========
Cumulative preferred stock - $100 par value -
<S> <C>
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
<CAPTION>
Cumulative preferred stock - no par value -
<S> <C>
Adjustable rate (6.00% at December 31, 1996),
Series A (stated value $50 per share) $ 50.00
</TABLE>
(11) REDEEMABLE PREFERRED STOCKS (SEE NOTE 9):
The redemption prices at December 31, 1996, 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:
<TABLE>
<CAPTION>
Sinking Fund Or Mandatory
Series Redemption Price Per Share Redemption Provisions
====== ============================ ==============================
Cumulative preferred stock - $100 par value -
<S> <C> <C>
8.85% $101.48, reduced periodically 12,500 shares on or before
April 1.
8.35% $103.93, reduced periodically 3,000 shares on or before
July 1; increasing to 6,000
shares beginning in 2004;
noncumulative option to
double amount each year.
7-3/4% $104.41, reduced periodically 2,777 shares on or before
December 1; noncumulative
option to double amount
each year.
<CAPTION>
Cumulative preferred stock - no par value -
<S> <C> <C>
6.50% $100.00 on October 14, 2002 430,000 shares on
October 14, 2002.
</TABLE>
Sinking fund requirements with respect to redeemable preferred stocks
outstanding at December 31, 1996 for each of the four years subsequent to
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
========================
<S> <C>
1998 $ 1,827,700
1999 $ 1,827,700
2000 $ 1,827,700
2001 $ 1,827,700
</TABLE>
(12) COMMON SHARE DIVIDEND: Northern Indiana's Indenture provides that it
will not declare or pay any dividends on any class of capital stock (other
than preferred or preference stock) except out of earned surplus or net
profits of Northern Indiana. At December 31, 1996 Northern Indiana had
approximately $146.0 million of retained earnings (earned surplus) available
for the payment of dividends. Future dividends will depend upon adequate
retained earnings, adequate future earnings, and the absence of adverse
developments.
(13) COMMON SHARES: Effective with the exchange of common shares on March 3,
1988, Northern Indiana's common shares are wholly-owned by Industries.
(14) LONG-TERM INCENTIVE PLAN: Industries has two Long-Term Incentive Plans
for key management employees, including management of Northern Indiana,
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 2.5 million
of Industries common shares to key employees through 1998 and 2004,
respectively. At December 31, 1996, there were 12,011 shares and 2,191,200
shares reserved for future awards under the 1988 Plan and 1994 Plan,
respectively. The 1988 Plan and 1994 Plan permit the following types of
grants, separately or in combination: nonqualified stock options, incentive
stock options, restricted stock awards, stock appreciation rights, and
performance units. No incentive stock options or performance units were
outstanding at December 31, 1996. Under both Plans, the exercise price of
each option equals the market price of Industries' common shares on the date
of grant. Each option's maximum term is ten years and vests one year from
the date of grant.
The stock appreciation rights (SARs) may be exercised only in tandem
with stock options on a one-for-one basis and are payable in cash, Industries
common shares, or a combination thereof. Restricted stock awards are
restricted as to transfer and are subject to forfeiture for specific periods
from the date of grant. Restrictions on shares awarded in 1995 lapse five
years from date of grant and vesting is variable from 0% to 200% of the
number awarded, subject to specific earnings per share and stock appreciation
goals. Restrictions on shares awarded in 1996 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 262,000, 330,500, and 150,500
restricted shares outstanding at December 31, 1996, 1995, and 1994,
respectively.
Northern Indiana accounts for its allocable portion of these plans
under Accounting Principles Board Opinion No. 25, under which no compensation
cost has been recognized for non-qualified stock options. The compensation
cost that has been recognized in the Consolidated Statement of Income for
restricted stock awards was $0.9 million and $1.3 million for the years ended
December 31, 1996 and 1995, respectively. Had compensation cost for stock
options been determined consistent with SFAS No. 123 "Accounting for
Stock-Based Compensation," Northern Indiana's net income would have been
reduced to the following pro forma amounts.
<TABLE>
<CAPTION>
Year Year
Ended Ended
December 31, December 31,
1996 1996
============ ============
(Dollars in thousands)
<S> (C) <C>
Net Income:
As reported $ 197,310 $ 194,321
Pro forma $ 196,663 $ 194,075
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
costs may not be representative of that to be expected in future years.
The fair value of each option granted used to determine pro forma net
income is estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants
in the years ended December 31, 1996 and 1995, respectively: risk-free
interest rate of 6.39% and 6.24%, expected dividend yield of $1.68 and $1.56
per share, expected option term of five years, and expected volatility of
13.2% and 13.1%. The weighted average fair value of options granted to all
plan participants was $5.00 and $3.89 for the years ended December 31,1996
and 1995, respectively. There were 278,300 and 282,450 non-qualified stock
options granted to all plan participants for the years ended December 31,
1996 and 1995, respectively.
(15) LONG-TERM DEBT: The sinking fund requirements of long-term debt
outstanding at December 31, 1996 (including the maturity of first mortgage
bonds: Series P, 6-7/8%, due October 1, 1998; and the medium-term notes due
from April 6, 1998 to August 15, 2001), for each of the four years subsequent
to December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
========================
<S> <C>
1998 $ 51,009,000
1999 $ 2,000,000
2000 $158,000,000
2001 $ 19,000,000
</TABLE>
Unamortized debt expense, premium and discount on long-term debt
applicable to outstanding bonds are being amortized over the lives of such
bonds. Reacquisition premiums are being deferred and amortized.
Northern Indiana's Indenture dated August 1, 1939, as amended and
supplemented, securing the first mortgage bonds issued by Northern Indiana,
constitutes a direct first mortgage lien upon substantially all property and
franchises, other than expressly excepted property, owned by Northern
Indiana.
In 1994, the Commission authorized Northern Indiana to issue up to
$289,275,000 of its Medium-Term Notes, Series D, due from one year to
thirty years, for purposes of refinancing certain first mortgage bonds and
medium-term notes. During 1994, $120.0 million of the Medium-Term Notes,
Series D, were issued to refinance certain first mortgage bonds. On June 12,
1995, the remaining $169,275,000 of Medium-Term Notes, Series D, were issued
and part of the proceeds were used to redeem all of the outstanding First
Mortgage Bonds, Series U and Z aggregating $94.8 million, on July 3, 1995.
(16) CURRENT PORTION OF LONG-TERM DEBT: At December 31, 1996 and 1995,
Northern Indiana's current portion of long-term debt due within one year was
as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
============ ============
(Dollars in thousands)
<S> <C> <C>
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
First mortgage bonds -
Series O, 6-3/8% - due September 1, 1997 $ 25,747 $ 0
Medium-term notes -
Interest rates of 5.96% and 5.98% with a
weighted average interest rate of 5.97%
and maturities of July 25, 1997 and
July 28, 1997 40,000 80,000
------------ ------------
Total current portion of long-term debt $ 65,747 $ 80,000
============ ============
</TABLE>
(17) SHORT-TERM BORROWINGS: Northern Indiana has a $250 million revolving
Credit Agreement with several banks which terminates August 19, 1999 unless
extended by its terms. As of December 31, 1996, there were no borrowings
outstanding under this agreement. In addition, Northern Indiana has $14.2
million in lines of credit which run to May 31, 1997 which are expected to
be renewed for the subsequent twelve-month period. The credit pricing of
each of the lines varies from either the lending banks' commercial prime or
market rates. Northern Indiana has agreed to compensate the participating
banks with arrangements that vary from no commitment fee to a combination of
fees which are mutually satisfactory to both parties. As of December 31,
1996, there were no borrowings under these lines of credit. The Credit
Agreement and lines of credit are also available to support the issuance of
commercial paper.
Northern Indiana also has $273.5 million of money market lines of
credit. As of December 31, 1996 and 1995, $79.0 million and $118.8 million
of borrowings, respectively, were outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
December 31, 1996, there were no borrowings outstanding under this facility.
Northern Indiana uses commercial paper to fund short-term working
capital requirements.
At December 31, 1996 and 1995, Northern Indiana's short-term borrowings
were as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
============ ============
(Dollars in thousands)
<S> <C> <C>
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
Commercial paper -
Weighted average interest rate of 5.43%
at December 31, 1996 $ 193,905 $ 44,800
Notes payable -
Issued at interest rates between 5.42%
and 5.70% with a weighted average
interest rate of 5.52% and various
maturities between January 10, 1997 and
February 27, 1997 79,000 118,800
------------ ------------
Total short-term borrowings $ 272,905 $ 163,600
============ ============
</TABLE>
(18) OPERATING LEASES: On April 1, 1990, Northern Indiana entered into a
twenty-year agreement for the rental of office facilities from NIPSCO
Development Company, Inc., a subsidiary of Industries, at a current annual
rental payment of approximately $3.3 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, 1996:
<TABLE>
<CAPTION>
Year Ending December 31, (Dollars in thousands)
======================== ======================
<S> <C>
1997 $ 5,248
1998 4,860
1999 3,506
2000 3,055
2001 3,055
Later years 36,198
---------
Total minimum payments required $ 55,922
=========
</TABLE>
The consolidated financial statements include rental expense for all
operating leases as follows:
<TABLE>
<CAPTION>
Year Ending December 31, (Dollars in thousands)
======================== ======================
<S> <C>
1996 $ 9,249
1995 $ 10,824
1994 $ 10,210
</TABLE>
(19) COMMITMENTS: Northern Indiana estimates that approximately $750
million will be expended for construction purposes for the period from
January 1, 1997 to December 31, 2001. Substantial commitments have been
made by Northern Indiana in connection with this program.
Northern Indiana has entered into a service agreement with Pure Air, a
general partnership between Air Products and Chemicals, Inc. and Mitsubishi
Heavy Industries America, Inc., under which Pure Air 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 of approximately $20 million. The agreement
provides that, assuming various performance standards are met by Pure Air,
a termination payment would be due if Northern Indiana terminates the
agreement prior to the end of the twenty-year contract period.
Northern Indiana has entered into an agreement with Integrated Systems
Solutions Corporation (ISSC), a wholly-owned subsidiary of IBM, for ISSC
to perform all data center, application development and maintenance, and
desktop management.
(20) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Cash and cash equivalents: The carrying amount approximates fair value
because of the short maturity of those instruments.
Investments: The fair value of 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 Northern Indiana 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 Northern Indiana's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
========== ========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash
equivalents $ 8,279 $ 8,279 $ 11,478 $ 11,478
Investments $ 256 $ 256 $ 256 $ 256
Long-term debt
(including current
portion) $1,059,255 $1,026,743 $1,139,534 $1,151,471
Preferred stock $ 144,200 $ 126,379 $ 146,804 $ 128,518
</TABLE>
Northern Indiana is subject to regulation and gain or losses may be
included in rates over a prescribed amortization period, if in fact settled at
amounts approximating those above.
(21) CUSTOMER CONCENTRATIONS: Northern Indiana is a public utility operating
company supplying natural gas and electrical energy in the northern third of
Indiana. Although Northern Indiana has a diversified base of residential and
commercial customers, a substantial portion of its electric and gas industrial
deliveries are dependent upon the basic steel industry. The following table
shows the basic steel industry percentage of gas revenue (including
transportation services) and electric revenue for 1996, 1995, and 1994.
<TABLE>
<CAPTION>
Basic Steel Industry 1996 1995 1994
==================== ====== ====== ======
<S> <C> <C> <C>
Gas revenue percent 2 % 6 % 3 %
Electric revenue percent 22 % 22 % 26 %
</TABLE>
(22) QUARTERLY FINANCIAL DATA:
The following data summarize certain operating results for each of the
quarters of 1996 and 1995:
<TABLE>
<CAPTION>
1996 Quarters Ended March 31 June 30 Sept. 30 Dec. 31
========== ========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating revenues $ 550,309 $ 352,729 $ 348,622 $ 502,445
Operating expenses and taxes 458,308 303,022 291,608 420,629
---------- ---------- ---------- ----------
Operating income 92,001 49,707 57,014 81,816
Other income (deductions) (994) (953) 2,196 (9)
Interest charges 20,779 20,630 21,013 21,046
---------- ---------- ---------- ----------
Net income 70,228 28,124 38,197 60,761
Dividend requirements on
preferred stock 2,199 2,178 2,174 2,161
---------- ---------- ---------- ----------
Balance available for
common shares $ 68,029 $ 25,946 $ 36,023 $ 58,600
========== ========== ========== ==========
<CAPTION>
1995 Quarters Ended March 31 June 30 Sept. 30 Dec. 31
========== ========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating revenues $ 500,180 $ 350,052 $ 363,142 $ 450,904
Operating expenses and taxes 416,458 297,200 299,313 371,834
---------- ---------- ---------- ----------
Operating income 83,722 52,852 63,829 79,070
Other income (deductions) (778) (800) (956) (1,085)
Interest charges 19,414 19,932 20,232 21,955
---------- ---------- ---------- ----------
Net income 63,530 32,120 42,641 56,030
Dividend requirements on
preferred stock 2,325 2,265 2,231 2,225
---------- ---------- ---------- ----------
Balance available for
common shares $ 61,205 $ 29,855 $ 40,410 $ 53,805
========== ========== ========== ==========
</TABLE>
(23) SEGMENTS OF BUSINESS: Northern Indiana is a public utility operating
engaged in distributing natural gas and electric energy. The reportable
items for gas and electric segments for the years 1996, 1995, and 1994 are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C>
Operating information -
Gas operations:
Operating revenues $ 731,874 $ 633,355 $ 619,503
Operating expenses, excluding
provision for utility income taxes 642,913 555,072 557,855
---------- ---------- ----------
Operating income before utility
income taxes 88,961 78,283 61,648
Allowance for borrowed funds used
during construction (AFUDC) and
carrying charges (CC) 27 1,248 1,727
---------- ---------- ----------
Operating income before utility
income taxes and including AFUDC
and CC 88,988 79,531 63,375
---------- ---------- ----------
Electric operations:
Operating revenues 1,022,231 1,030,923 994,492
Operating expenses, excluding
provision for utility income taxes 721,603 723,159 703,822
---------- ---------- ----------
Operating income before utility
income taxes 300,628 307,764 290,670
Allowance for borrowed funds used
during construction AFUDC and CC 778 2,072 2,307
---------- ---------- ----------
Operating income before utility
income taxes and including AFUDC
and CC 301,406 309,836 292,977
---------- ---------- ----------
Total 390,394 389,367 356,352
Other income (deductions) 240 (3,619) 3,726
Less-interest charges 84,273 84,853 83,918
Less-provision for utility income taxes 109,051 106,574 96,257
---------- ---------- ----------
Net income per Consolidated
Statement of Income 197,310 194,321 179,903
Dividend requirements on
preferred stocks 8,712 9,046 9,913
---------- ---------- ----------
Balance available for common shares $ 188,598 $ 185,275 $ 169,990
========== ========== ==========
Other information-
Depreciation and amortization expense:
Electric $ 146,444 $ 139,432 $ 135,203
Gas 65,101 58,827 56,223
---------- ---------- ----------
Total $ 211,545 $ 198,259 $ 191,426
========== ========== ==========
Construction expenditures:
Electric $ 146,660 $ 132,273 $ 145,095
Gas 51,563 53,287 51,759
---------- ---------- ----------
Total $ 198,223 $ 185,560 $ 196,854
========== ========== ==========
Investment information-
Identifiable assets (a):
Electric $2,575,995 $2,586,121 $2,594,976
Gas 867,891 768,736 804,856
---------- ---------- ----------
Total 3,443,886 3,354,857 3,399,832
Other corporate assets 311,588 251,342 224,479
---------- ---------- ----------
Total assets $3,755,474 $3,606,199 $3,624,311
========== ========== ==========
<FN>
(a) Utility plant less accumulated provision for depreciation and
amortization, material and supplies, electric production fuel, natural gas in
storage, fuel and gas cost adjustment clauses, unamortized R. M. Schahfer Unit
17 and 18 carrying charges and deferred depreciation, Bailly scrubber carrying
charges and deferred depreciation, and FERC Order No. 636 transition costs.
</FN>
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
Date of assuming
Name Age Office present position
===================== ==== ========================= =================
<S> <C> <C> <C>
Gary L. Neale 57 Chairman, President and March 1, 1993
Chief Executive Officer
and Director
Stephen P. Adik 53 Executive Vice President July 1,1996
and Chief Financial
Officer
Patrick J. Mulchay 55 Executive Vice President July 1,1996
Jeffrey W. Yundt 51 Executive Vice President January 1, 1994
and Chief Operating
Officer, Gas
Joseph L. Turner, Jr. 60 Senior Vice President, July 1, 1996
Major Accounts
James K. Abcouwer 43 Vice President and General July 1,1996
Manager, Customer
Services and Distribution
Jerry L. Godwin 54 Vice President and General July 1, 1996
Manager Supply
Robert W. Schacht 46 Vice President, July 1, 1996
Distribution Operations
Jerry M. Springer 64 Vice President, Finance January 1, 1994
and Accounting
Francis P. Girot, Jr. 52 Treasurer March 1, 1990
David J. Vajda 41 Controller July 1, 1996
Nina M. Rausch 53 Secretary July 1, 1992
Richard M. Schumacher 48 Assistant Secretary April 13, 1994
</TABLE>
Throughout the past five years, each of the executive officers has been
continuously active in the business of Northern Indiana except as follows:
Prior to June 27, 1994, James K. Abcouwer was Vice President of Natural Gas
of GSC - Energy Corporation; prior to October 31, 1994, Jerry L. Godwin was
Senior Vice President, Wholesale Marketing and Power Supply of Public Service
Company of New Mexico; prior to December 31, 1991, and prior to January 1,
1993, Richard M. Schumacher was a partner of Eichhorn, Eichhorn, & Link.
The following chart gives information about incumbent directors of
Northern Indiana. All of Northern Indiana's directors are also directors of
Industries. Upon recommendation of the Nominating and Compensation Committee,
the Board of Directors has nominated for reelection as directors Arthur J.
Decio, Gary L. Neale and Robert J. Welsh, each for a term of three years to
be voted upon at the annual meeting of common shareholders of Industries to
be held April 9, 1997.
<TABLE>
<CAPTION>
Has Been
Name, Age and Principal Occupations for Past Director
Five Years and Present Directorships Held Since
============================================ ==========
DIRECTORS WHOSE TERMS EXPIRE IN 1997
<S> <C>
Arthur J. Decio, 66-Chairman of the Board and Chief 1991
Executive Officer and Director of Skyline Corporation,
Elkhart, Indiana, a manufacturer of manufactured
housing and recreational vehicles. Mr. Decio is also a
director of Quality Dining, Inc. and St. Joseph
Capital Corporation
Gary L. Neale, 57-Chairman, President and Chief Executive 1991
Officer of Industries and of Northern Indiana since
March 1, 1993; prior thereto, Executive Vice President
of Industries, and President and Chief Operating Officer
of Northern Indiana. Mr. Neale is also a director of
Modine Manufacturing Company.
Robert J. Welsh, 61-President and Chief Executive 1988
Officer of Welsh, Inc., Merrillville, Indiana, a
marketer of petroleum products through convenience
stores and travel centers. Mr. Welsh is also a director
of NBD Indiana, Inc.
<CAPTION>
DIRECTORS WHOSE TERMS EXPIRE IN 1998
<S> <C>
Steven C. Beering, 64-President of Purdue University, 1986
West Lafayette, Indiana. Dr. Beering is also a
director of Arvin Industries, Inc., American United
Life Insurance Company and Eli Lilly and Company.
Ernestine M. Raclin, 69-Chairman of the Board, 1983
1st Source Corporation, a bank holding company,
and 1st Source Bank, South Bend, Indiana.
Denis E. Ribordy, 67-Chairman of the Chicago Motor Club, 1981
Chicago, Illinois; retired President of Ribordy
Drugs, Inc., Merrillville, Indiana, a retail drugstore
chain. Mr. Ribordy is also a director of Mercantile
National Bank of Indiana.
<CAPTION>
DIRECTORS WHOSE TERMS EXPIRE IN 1999
<S> <C>
Ian M. Rolland, 63-Chairman and Chief Executive Officer 1978
of Lincoln National Corporation, Fort Wayne, Indiana,
an insurance and financial services firm. Mr.
Rolland is also a director of Lincoln National
Corporation, Tokheim Corporation, Norwest
Corporation and Norwest Bank Indiana, N.A.
Edmund A. Schroer, 69-Retired March 1, 1993 as 1977
Chairman, President and Chief Executive Officer
of Industries and Chairman and Chief Executive
Officer of Northern Indiana.
John W. Thompson, 47-General Manager-IBM North
America of IBM Corporation, White Plains, New 1993
York. IBM is a worldwide corporation, whose
offerings include services, software systems,
products and technologies. Mr. Thompson is also
a director of American Brands Inc.
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY. The following table summarizes all annual and long-term
compensation for services to Industries and its subsidiaries, including
Northern Indiana, for the years 1996, 1995 and 1994 awarded to, earned by or
paid to the Chief Executive Officer of Industries during 1996 and the four
other most highly compensated officers of Industries (Named Officers).
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation (1)
-----------------------------------
Other
annual
compen-
Salary Bonus sation
Name and principal position Year ($) ($)(2) ($)(3)
=========================== ==== ======== ========= ========
<S> <C> <C> <C> <C>
Gary L. Neale, Chairman, 1996 $460,000 $236,624 $ 5,161
President and Chief 1995 460,000 286,120 2,746
Executive Officer 1994 460,000 230,000 1,903
Stephen P. Adik, Executive Vice 1996 205,000 84,952 9,103
President, Chief Financial 1995 205,000 107,010 2,400
Officer and Treasurer 1994 205,000 82,000 1,118
Patrick J. Mulchay, Executive 1996 175,000 72,520 1,614
Vice President and Chief 1995 175,000 91,350 756
Operating Officer 1994 175,000 70,000 852
Jeffrey W. Yundt, Executive 1996 175,000 72,520 1,671
Vice President and Chief 1995 175,000 91,350 1,217
Operating Officer - Energy 1994 175,000 70,000 1,174
Services
Joseph L. Turner, Senior Vice 1996 160,000 182,958(6) 5,144
President 1995 160,000 66,816 1,302
1994 160,000 64,000 1,090
<CAPTION>
Long Term Compensation
----------------------
Awards Payouts
-------------------- --------
Secur- Long-Term
Re- ities In- All
stricted Under- centive other
stock lying Plan compen-
awards Options/ Payouts sation
Name and principal position Year ($) SARs(#) ($)(4) ($)(5)
=========================== ==== ======== ======== ======== =======
<S> <C> <C> <C> <C> <C>
Gary L. Neale, Chairman, 1996 0 25,000 $567,188 $10,775
President and Chief 1995 0 20,000 527,812 10,168
Executive Officer 1994 0 25,000 0 11,190
Stephen P. Adik, Executive Vice 1996 0 10,000 283,594 2,268
President, Chief Financial 1995 0 8,000 263,906 1,992
Officer and Treasurer 1994 0 8,000 0 1,927
Patrick J. Mulchay, Executive 1996 0 10,000 283,594 3,199
Vice President and Chief 1995 0 10,000 87,968 3,344
Operating Officer 1994 0 8,000 0 3,078
Jeffrey W. Yundt, Executive 1996 0 10,000 283,594 809
Vice President and Chief 1995 0 10,000 263,906 800
Operating Officer-Energy 1994 0 8,000 0 739
Services
Joseph L. Turner, Senior 1996 0 5,000 283,594 2,055
Vice President 1995 0 5,000 263,906 2,211
1994 0 6,500 0 2,109
<FN>
(1) Compensation deferred at the election of Named Officer is reported
in the category and year in which such compensation was earned.
(2) All bonuses are paid pursuant to the Senior Management Incentive Plan
(Bonus Plan), except for a portion of the Bonus Plan paid to Joseph
L. Turner, which is described in Note 6. The Bonus Plan is designed
to supplement a conservative base salary with incentive bonus payments
if targeted financial performance is attained. The 1996 target
aggregate payout for the Bonus Plan for the Named Officers was
$549,340, which was greater than the actual actual aggregate payout
for the Named Officers.
(3) In accordance with applicable Securities and Exchange Commission
rules, the amounts shown for each of the Named Officers do not
include perquisites and other personal benefits, as the aggregate
amount of such benefits is less than the lesser of $50,000 and
10% of the total salary and bonus of such Named Officer.
(4) The payouts shown are based on the value, at date of vesting, of
restricted shares awarded under Industries' 1988 Long-Term
Incentive Plan (Incentive Plan) which vested during the years shown.
Vesting was based on meeting certain performance requirements. Total
restricted shares held (assuming 100% vesting) and aggregate market
value at December 31, 1996 (based on the average of the high and low
sale prices of the Common Shares on that date as reported in "The
Wall Street Journal") for the Named Officers were as follows: Mr.
Neale, 53,000 shares valued at $2,103,438; Mr. Adik 24,000 shares
valued at $952,500: Messrs. Mulchay and Yundt, 20,000 shares each
valued at $793,750; and Mr. Turner, 12,000 shares valued at $476,250.
Dividends on the restricted shares are paid to the Named Officers.
(5) The Chairman, President, and Chief Executive Officer, the
Executive Vice Presidents and certain Vice Presidents of Industries
and Northern Indiana have available to them a supplemental life
insurance plan which provides split-dollar coverage of up to 3.5
times base compensation as of commencement of the plan in 1991 and
could provide life insurance coverage after retirement if there is
adequate cash value in the respective policy; none is projected at
this time. "All other compensation" represents Industries
contributions to the 401(k) Plan and the dollar value of the benefit
to the Named Officers of the remainder of the premiums paid by
Industries during 1996 on behalf of the Named Officers under the
supplemental life insurance plan, as follows: Mr. Neale-$1,055
401(k) Plan, $8,748 premium value and $973 term insurance cost; Mr.
Adik - $1,055 401(k) Plan, $809 premium value and $405 term
insurance cost; Mr. Mulchay, $136 401(k) Plan, $2,702 premium value
and $361 term insurance cost; Mr. Yundt, $809 premium value and $326
term insurance cost and Mr. Turner - $1,306 premium value and $749
term insurance cost.
(6) Joseph L. Turner is also President of Primary Energy, Inc., a
subsidiary of Industries, and participates in the Primary Energy
Incentive Plan ("PE Plan"). The PE Plan provides for a bonus based
on meeting certain financial performance criteria of Primary Energy.
Under the PE Plan, $80,871 of Mr. Turner's bonus for 1996 was used
to purchase Common Shares of Industries on or about February 28,
1997, the date of payment of the bonus. The PE Plan requires that
the Common Shares are restricted for a period of five years, subject
to continued employment, except they vest earlier in the event of the
employee's retirement, death or disability.
</FN>
</TABLE>
OPTION GRANTS IN 1996. The following table sets forth grants of options
to purchase Common Shares made during 1996 to the Named Officers. No stock
appreciation rights were awarded during 1996.
<TABLE>
<CAPTION>
OPTION/SAR/GRANTS IN LAST FISCAL YEAR
Individual Grants
Number
of
Secu- Percent of
rities Total
Under- Options/
lying SARs Grant
Options/ granted to Exercise Date
SARs Employees or Base Present
Granted in Fiscal Price Expiration Value
Name (#)(1) Year (2) ($/Sh)(3) Date ($) (4)
=================== ======== ========== ========= ========== ========
<S> <C> <C> <C> <C> <C>
Gary L. Neale 25,000 9.0% $ 37.81 08/27/06 $122,500
Stephen P. Adik 10,000 3.6% 37.81 08/27/06 49,000
Patrick J. Mulchay 10,000 3.6% 37.81 08/27/06 49,000
Jeffrey W. Yundt 10,000 3.6% 37.81 08/27/06 49,000
Joseph L. Turner 5,000 1.8% 37.81 08/27/06 24,500
<FN>
(1) All options granted in 1996 are fully exercisable commencing one year
from the date of grant. Vesting may be accelerated as a result of
certain events relating to a change in control of Industries. The
exercise price and tax withholding obligation related to exercise may
be paid by delivery of already owned Common Shares or by reducing
the number of Common Shares received on exercise, subject to certain
conditions.
(2) Based on an aggregate of 278,300 options granted to all employees in
1996.
(3) All options were granted at the average of high and low sale prices
of the Common Shares as reported in "The Wall Street Journal" on the
date of grant.
(4) Grant date present value is determined using the Black-Scholes option
pricing model. The assumptions used in the Black-Scholes option pricing
model were as follows: volatility-12.796% (calculated using daily Common
Shares prices for the twelve-month period preceding the date of grant);
risk-free rate of return-6.64% (the rate for a ten-year U.S. treasury);
dividend yield-$1.68; option term-ten years; vesting-100% one year
after date of grant; and turnover-9.00% (to reflect the probability
of forfeiture due to termination of employment prior to vesting) and
14.84% (to reflect the probability of a shortened option term due to
termination of employment prior to the option expiration date). No
assumptions relating to non-transferability or risk of forfeiture were
made. Actual gains, if any, on option exercises and Common Shares are
dependent on the future performance of the Common Shares and overall
market condition. There can be no assurance that the amounts reflected
in this table will be achieved.
</FN>
</TABLE>
OPTION EXERCISE IN 1996. The following table sets forth certain
information concerning the exercise of options or stock appreciation rights
("SARs") during 1996 by each of the Named Officers and the number and value
of unexercised options and SARs at December 31, 1996.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
Number of Securities
Shares Underlying Unexercised
Acquired Options/SARs at Fiscal
on Value Year-End (#) (1)
Exercise Realized -----------------------------
Name (#) ($) Exercisable Unexercisable
================== ======== ======== =========== =============
<S> <C> <C> <C> <C>
Gary L. Neale 0 $ 0 120,000 25,000
Stephen P. Adik 0 0 61,600 10,000
Patrick J. Mulchay 0 0 47,200 10,000
Jeffrey W. Yundt 0 0 56,000 10,000
Joseph L. Turner 0 0 34,500 5,000
<CAPTION>
Value of Unexercised
In-the-money Options/SARs
at Fiscal Year-End($) (2)
-------------------------------
Name Exercisable Unexercisable
================ ============= ===============
<S> <C> <C>
Gary L. Neale $1,531,562 $ 46,875
Stephen P. Adik 943,375 18,750
Patrick J. Mulchay 582,850 18,750
Jeffrey W. Yundt 782,375 18,750
Joseph L. Turner 391,843 9,375
<FN>
(1) Includes some SARs granted in tandem with options.
(2) Represents the difference between the option exercise price and
$39.69, the average of high and low sale prices of the Common Shares
on December 31, 1996, as reported in "The Wall Street Journal."
</FN>
</TABLE>
LONG-TERM INCENTIVE PLAN AWARDS IN 1996. The following table sets forth
restricted shares awarded pursuant to the Long-Term Incentive Plan during
1996 to each of the Named Officers.
<TABLE>
<CAPTION>
LONG-TERM STOCK INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR
Number of Performance Estimated Future Payouts
Shares or Other Under Non-Stock
Units Period Price-Based Plans
or Other Until ----------------------------
Rights Maturation Threshold Target Maximum
Name (#) or Payout (#) (#) (#)
================== ========== =========== ========= ====== =======
<S> <C> <C> <C> <C> <C>
Gary L. Neale 8,000 2 years 0 8,000 8,000
Stephen P. Adik 4,000 2 years 0 4,000 4,000
Patrick J. Mulchay 0 0 0 0
Jeffrey W. Yundt 0 0 0 0
Joseph L. Turner 0 0 0 0
</TABLE>
The restrictions on shares awarded during 1996 lapse two years from the
date of grant. The vesting of the restricted shares is variable from 0% to
100% of the number awarded, based upon meeting certain specific non-financial
performance objectives. There is a two-year holding period for the shares
after the restrictions lapse.
PENSION PLAN AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The following
table shows estimated annual benefits, giving effect to Industries'
Supplemental Executive Retirement Plan (as described below), payable upon
retirement to persons in the specified remuneration and years-of-service
classifications.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
Years of service
-----------------------------------------------------
Remuneration 15 20 25 30 35
============ ========= ========= ========= ========= =========
<S> <C> <C> <C> <C> <C>
$ 200,000 $ 79,500 $ 106,000 $ 111,000 $ 116,000 $ 116,000
250,000 102,000 136,000 142,250 148,500 148,500
300,000 124,500 166,000 173,500 181,000 181,000
350,000 147,000 196,000 204,750 213,500 213,500
400,000 169,500 226,000 236,000 246,000 246,000
450,000 192,000 256,000 267,250 278,500 278,500
500,000 214,500 286,000 298,500 311,000 311,000
550,000 237,000 316,000 329,750 343,500 343,500
600,000 259,500 346,000 361,000 376,000 376,000
650,000 282,000 376,000 392,250 408,500 408,500
700,000 304,500 406,000 423,500 441,000 441,000
750,000 327,000 436,000 454,750 473,500 473,500
800,000 349,500 466,000 486,000 506,000 506,000
850,000 372,000 496,000 517,250 538,500 538,500
900,000 394,500 526,000 548,500 571,000 571,000
</TABLE>
The credited years of service for each of the Named Officers shown in
the Summary Compensation table, pursuant to the Supplemental Plan, are as
follows: Gary L. Neale - 22 years; Stephen P. Adik - 18 years; Patrick J.
Mulchay - 34 years; Jeffrey W. Yundt - 17 years; and Joseph L. Turner - 25
years. Upon their retirement, regular employees and officers of Industries
and its subsidiaries which adopt the plan (including directors who are also
full-time officers) will be entitled to a monthly pension in accordance with
the provisions of Industries' pension plan, effective as of January 1, 1945.
The directors who are not and have not been officers of Industries are not
included in the pension plan. The pensions are payable out of a trust fund
established under the pension plan with The Northern Trust Company, trustee.
The trust fund consists of contributions made by Industries and the earnings
of the fund. Over a period of years the contributions are intended to result
in over-all actuarial solvency of the trust fund. The pension plan of
Industries has been qualified as non-discriminatory under Sections 401 and
404 of the Internal Revenue Code of 1986 (the "Code").
Pension benefits are determined separately for each participant. The
formula for a monthly payment for retirement at age 65 is 1.7% of average
monthly compensation multiplied by years of service (to a maximum of 30 years)
plus 0.6% of average monthly compensation multiplied by years of service over
30. Average monthly compensation is the average for the 60 consecutive
highest paid months in the employee's last 120 months of service. Covered
compensation is defined as wages reported as W-2 earnings plus any salary
reduction contributions made under the 401(k) Plan and an amount equivalent
to base pay for certain non-compensated periods of authorized leave of
absence, minus any amounts paid for unused vacations accrued.
Industries also has a Supplemental Executive Retirement Plan for
officers. Participants in the Plan are selected by the Board of Directors.
Benefits from the Plan are to be paid from the general assets of Industries.
The Supplemental Plan provides the larger of (i) 60% of five-year
average pay less Primary Social Security Benefits (prorated for less than 20
years of service) and an additional 0.5% of 5-year average pay less Primary
Social Security Benefits per year for participants with between 20 and 30
years of service, or (ii) the benefit formula under the Industries' Pension
Plan. In either case, the benefit is reduced by the actual pension payable
from Industries' Pension Plan. In addition, the Supplemental Plan provides
certain disability and pre-retirement death benefits for the spouse of a
participant.
CHANGE IN CONTROL AND TERMINATION AGREEMENTS. The Board of Directors of
Industries has authorized Change in Control and Termination Agreements ("the
Agreements") with Mr. Neale and the Vice Presidents of Industries (including
each of the Named Officers) (each such person being an "executive").
Industries believes that these Agreements and related shareholder rights
protections are in the best interest of the shareholders, to insure that in
the event of extraordinary events, totally independent judgment is enhanced to
maximize shareholder value. The Agreements, which are terminable upon three
years' notice, provide for the payment of three times then current annual base
salary and the continuation of certain employee benefits for a period of 36
months ("the Severance Period"), if the executive's employment is terminated
within 24 months of certain changes in control of Industries. Based on their
1996 base salaries, the amounts that would be payable to the Named Officers
would be as follows: Gary L. Neale - $1,380,000; Stephen P. Adik - $615,000;
Patrick J. Mulchay - $525,000; Jeffrey W. Yundt - $525,000; and Joseph L.
Turner - $480,000.
The executive would receive full benefits under any supplemental
retirement plan of Industries, offset by amounts paid to the executive from
any qualified retirement plans of Industries. All stock options held by the
executive would become immediately exercisable upon the date of termination of
employment, and the restrictions would lapse on all restricted shares awarded
to the executive. If any penalty tax under the Code is imposed on the payment
of three times base salary, Industries would increase the payment to the
extent necessary to compensate the executive for the imposition of such tax.
During the Severance Period, the executive and spouse would continue to
be covered by applicable health or welfare plans of Industries. If the
executive died during the Severance Period, all amounts payable to the
executive would be paid to a named beneficiary. No amounts would be payable
under the Agreement if the executive's employment were terminated by
Industries for Good Cause (as defined in the Agreements).
The Agreement with Mr. Neale also provides for the same severance
payments as above described in the event his employment is terminated at any
time by Industries (other than for Good Cause) or due to death or disability,
or if he voluntarily terminates employment with Good Reason (as defined in the
Agreements).
COMPENSATION OF DIRECTORS. Each director who is not receiving a salary
from Industries is paid $15,000 per year, $3,000 annually per standing
committee on which the director sits, $1,000 annually for each committee
chairmanship, $750 for each Board meeting attended and $750 per committee
meeting attended. Directors of Industries do not receive any additional
compensation for services as a director of any Industries subsidiary,
including Northern Indiana. Under a deferred compensation arrangement,
directors may have their fees deferred in the current year and credited to an
interest-bearing account or to a phantom stock account for payment in the
future.
Industries' Nonemployee Director Retirement Plan provides a retirement
benefit for each nonemployee director of Industries who has completed at least
five years of service on the Board. The benefit will be an amount equal to
the annual retainer for Board service in effect at the time of the director's
retirement from the Board, to be paid for the lesser of ten years or the
number of years of service as a nonemployee director of Industries.
Industries' Nonemployee Director Stock Incentive Plan provides for
grants of restricted Common Shares to nonemployee directors of Industries.
Initial grants were made in 1992, following shareholder approval of the plan,
at the level of 250 shares for each year of service as a director, and 1,000
restricted Common Shares have been granted to each nonemployee director
elected or reelected since that date. A grant of 1,000 shares will be made in
the future to each person, other than an employee of Industries, who is
elected or reelected as a director of Industries. The grants of restricted
shares vest in 20% annual increments, with full vesting five years after the
date of award.
Industries has adopted a Directors' Charitable Gift Program for
nonemployee directors. Under the program, Industries makes a donation to one
or more eligible tax-exempt organizations as designated by each eligible
director. Industries contributes up to an aggregate of $125,000 as designated
by nonemployee directors having served as a director of Industries for at
least five years and up to $250,000 as designated by those having served ten
years or more. Organizations eligible to receive a gift under the program
include charitable organizations and educational institutions located in
Indiana and educational institutions that the director attended or for which
he or she serves on its governing board. Individual directors will derive no
financial benefit from the program, as all deductions relating to the
charitable donations accrue solely to Industries. All current nonemployee
directors are eligible to participate in the program.
An agreement between Industries and Mr. Schroer, retired Chairman,
President and Chief Executive Officer of Industries, provided that, for a
period of three years ended March 1, 1996, he was engaged by Industries as an
independent consultant for an annual fee of $200,000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) The Financial Statements filed herewith as part of this
report on Form 10-K are listed on the Index to Financial
Statements under Item 8 on page 24.
(2) The following is a list of the Financial Statements
Schedule filed herewith as part of this report on Form 10-K:
<TABLE>
<CAPTION>
Schedule Page of
Number Description 1996 10-K
========= ================================= ===========
<S> <C> <C>
II Valuation and Qualifying Accounts 72, 73 & 74
</TABLE>
(3) Exhibit - The exhibits filed herewith as a part of this
report on Form 10-K are listed on the Exhibit Index
included on pages 76 - 78.
(b) Reports on Form 8-K: None
<PAGE>
PART IV
<TABLE>
<CAPTION>
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
Twelve Months Ended December 31, 1996
(Dollars in thousands)
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 1996 Expenses Accounts were Created 1996
==================== ======= ========== ======== ============ ========
<S> <C> <C> <C> <C> <C>
Reserves Deducted
In Consolidated
Balance Sheet From
Assets To Which
They Apply:
Reserve for
accounts
receivables $ 6,418 $ 6,580 $ 0 $ 8,430 $ 4,568
Reserves Classified
Under Reserve
Section of
Consolidated
Balance Sheet:
Injuries and
damages reserve $ 1,837 $ 4,875 $ 0 $ 2,336 $ 4,376
Environmental
reserves $ 4,800 $ 15,272 $ 0 $ 3,497 $16,575
Miscellaneous
operating
reserves $ 3,781 $ 350 $ 0 $ 0 $ 4,131
</TABLE>
<PAGE>
PART IV
<TABLE>
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
Twelve Months Ended December 31, 1995
(Dollars in thousands)
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 1995 Expenses Accounts were Created 1995
==================== ======= ========== ======== ============ ========
<S> <C> <C> <C> <C> <C>
Reserves Deducted
In Consolidated
Balance Sheet From
Assets To Which
They Apply:
Reserve for
accounts
receivables $ 3,955 $ 6,555 $ 0 $ 4,092 $ 6,418
Reserves Classified
Under Reserve
Section of
Consolidated
Balance Sheet:
Injuries and
damages reserve $ 2,538 $ 2,800 $ 0 $ 3,501 $ 1,837
Environmental
reserves $ 3,550 $ 2,884 $ 0 $ 1,634 $ 4,800
Miscellaneous
operating
reserves $ 3,781 $ 0 $ 0 $ 0 $ 3,781
</TABLE>
<PAGE>
PART IV
<TABLE>
<CAPTION>
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
Twelve Months Ended December 31, 1994
(Dollars in thousands)
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 1994 Expenses Accounts were Created 1994
==================== ======= ========== ======== ============ ========
<S> <C> <C> <C> <C> <C>
Reserves Deducted
In Consolidated
Balance Sheet From
Assets To Which
They Apply:
Reserve for
accounts
receivables $ 3,614 $ 6,510 $ 0 $ 6,169 $ 3,955
Reserves Classified
Under Reserve
Section of
Consolidated
Balance Sheet:
Injuries and
damages reserve $ 3,994 $ 3,350 $ 0 $ 4,806 $ 2,538
Enironmental
reserves $ 2,371 $ 3,321 $ 0 $ 2,142 $ 3,550
Miscellaneous
operating
reserves $ 3,481 $ 300 $ 0 $ 0 $ 3,781
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Northern Indiana Public Service Company
(Registrant)
Date March 26, 1997 By /s/ Gary L. Neale
------------------------ --------------------------------------------
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.
<TABLE>
<CAPTION>
Signature Title Date
=========================== =============================== ==============
<S> <C> <C>
/s/ Gary L. Neale Chairman, President, Principal
- --------------------------- Executive Officer and Director
Gary L. Neale
/s/ Stephen P. Adik Executive Vice President and
- --------------------------- Principal Financial Officer
Stephen P. Adik
/s/ David J. Vajda Controller and Principal
- --------------------------- Accounting Officer
David J. Vajda
Director
- ---------------------------
Steven C. Beering
Director March 26, 1997
- ---------------------------
Arthur J. Decio
/s/ Ernestine M. Raclin Director
- ---------------------------
Ernestine M. Raclin
/s/ Denis E. Ribordy 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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number Description of Item
======== ===============================================================
<S> <C>
(3.(i)) Amended Articles of Incorporation of April 14, 1982
(incorporated by reference to Exhibit 1 to Northern Indiana
Public Service Company (Northern Indiana) Current Report on
Form 8-K dated May 5, 1982).
(3.(ii)) By-laws effective August 27, 1996 (incorporated by reference
to Exhibit 3 to Northern Indiana Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996).
(4.1) Indenture dated August 1, 1939 between Northern Indiana and
Trustees (incorporated by reference to Exhibit 7 to 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 Northern Indiana
Registration Statement (Registration No. 2-5178)).
(4.3) Eighteenth Supplemental Indenture dated September 1, 1967
(incorporated by reference to Exhibit 1 to 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 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 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 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 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 Northern Indiana
Registration Statement (Registration No. 33-44193)).
(4.9) First Supplemental Indenture between Northern Indiana and
Manufacturers Hanover Trust Company, as Trustee
(incorporated by reference to Exhibit 4.1 to 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 Northern Indiana
Registration Statement (Registration No. 2-48531)).
(4.11) Financing Agreement No. 1 dated November 1, 1988 with Jasper
County, Indiana regarding $37,000,000 Series 1988A Pollution
Control Refunding Revenue Bonds. Identical financing
agreements between Registrant and Jasper County 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
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 Northern Indiana Current Report of
Form 8-K dated March 25, 1992).
(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.
(10) Amended and Restated Pension Plan Provisions effective
January 1, 1989 (incorporated by reference to Exhibit 17 to
Northern Indiana Current Report of Form 8-K dated March 25,
1992).*
(27) Financial Data Schedule.
<FN>
*Management contract or compensatory plan arrangement of Northern Indiana
Public Service Company.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Northern Indiana Public Service Company for
twelve months ended December 31, 1996 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,073,904
<OTHER-PROPERTY-AND-INVEST> 8,971
<TOTAL-CURRENT-ASSETS> 374,807
<TOTAL-DEFERRED-CHARGES> 67,247
<OTHER-ASSETS> 230,545
<TOTAL-ASSETS> 3,755,474
<COMMON> 859,488
<CAPITAL-SURPLUS-PAID-IN> 12,521
<RETAINED-EARNINGS> 145,987
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,017,996
61,246
81,126
<LONG-TERM-DEBT-NET> 328,983
<SHORT-TERM-NOTES> 79,000
<LONG-TERM-NOTES-PAYABLE> 663,025
<COMMERCIAL-PAPER-OBLIGATIONS> 193,905
<LONG-TERM-DEBT-CURRENT-PORT> 67,247
1,828
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,261,118
<TOT-CAPITALIZATION-AND-LIAB> 3,755,474
<GROSS-OPERATING-REVENUE> 1,754,105
<INCOME-TAX-EXPENSE> 109,051
<OTHER-OPERATING-EXPENSES> 1,364,516
<TOTAL-OPERATING-EXPENSES> 1,473,567
<OPERATING-INCOME-LOSS> 280,538
<OTHER-INCOME-NET> 240
<INCOME-BEFORE-INTEREST-EXPEN> 280,778
<TOTAL-INTEREST-EXPENSE> 83,468
<NET-INCOME> 197,310
8,712
<EARNINGS-AVAILABLE-FOR-COMM> 188,598
<COMMON-STOCK-DIVIDENDS> 187,450
<TOTAL-INTEREST-ON-BONDS> 26,971
<CASH-FLOW-OPERATIONS> 356,449
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
