<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, 1999
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 29, 2000, 73,282,258 shares of the registrant's
Common Shares, no par value, were issued and outstanding, all held
beneficially and of record by NiSource 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 8
3 Legal Proceedings 8
4 Submission of Matters to a Vote
of Security Holders 9
PART II
Item 5 Market for the Registrant's Common
Equity and Related Shareholder Matters 9
6 Selected Financial Data 9
7 Management's Discussion and Analysis of
Financial Condition and Results of Operation 10
7a Quantitative and Qualitative Disclosures About
Market Risk 18
8 Financial Statements and Supplementary Data 18
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 53
PART III
Item 10 Directors and Executive Officers of
the Registrant 54
11 Executive Compensation 56
12 Security Ownership of Certain Beneficial
Owners and Management 64
13 Certain Relationships and Related Transactions 64
PART IV
Item 14 Exhibits, Financial Statement Schedules 64
and Reports on Form 8-K
SIGNATURES 67
</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, that
supplies 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 2.2 million. At December 31,
1999, Northern Indiana served approximately 681,100 customers with gas and
approximately 425,800 customers 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 NiSource Inc. (NiSource), formerly NIPSCO Industries,
Inc., an Indiana corporation. NIPSCO Industries, Inc. changed its name to
NiSource Inc. on April 14, 1999 to reflect its new direction as a multi-state
supplier of energy and water resources and related services.
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, 1999, Northern Indiana generated 89.9% and
purchased 10.1% its electric requirements.
Northern Indiana's 1999 electric control area peak load (the highest
level of electrical utility usage in the control area) of 3,307,340 kw was
set on July 30, 1999. Northern Indiana's electric control area includes
Northern Indiana, Wabash Valley Power Association, Inc. (WVPA) and Indiana
Municipal Power Agency (IMPA). The 1999 peak established a new all time peak
exceeding the old peak of 3,161,200 kw previously set on July 14, 1995.
Northern Indiana's 1999 internal peak load, which excludes WVPA and IMPA, of
2,962,340 kw was also set on July 30, 1999. This also established a new
all-time internal peak load exceeding the old peak of 2,888,450 kw previously
set on August 6, 1996.
Northern Indiana's electric system is interconnected with the systems
of Ameren Services Corporation (formerly Central Illinois Public Service
Company), American Electric Power, Commonwealth Edison Company (ComEd),
Cinergy Services, Inc. and Consumers Energy. Electric energy is purchased from,
sold to, or exchanged with various other utilities and power marketers under
Northern Indiana's power sales and open access transmission tariffs.
Northern Indiana provides WVPA with transmission and distribution service,
operating reserve requirements and capacity deficiency service and provides
IMPA with transmission service, operating reserve requirements and capacity
deficiency service, in Northern Indiana's control area. Northern Indiana also
engages in sales and services under interconnection agreements with WVPA and
IMPA.
WVPA provides service to 12 Rural Electric Membership Corporations
(REMC's) located in Northern Indiana's control area. IMPA provides service to
the municipal electric system of the city of Rensselaer located in Northern
Indiana's control area.
Northern Indiana and WVPA have executed a supplemental agreement for unit
peaking capacity and energy. Unit peaking capacity is the capacity used to
serve peak demand from a specific peaking generating unit. Pursuant to this
agreement, which runs through December 2001, WVPA purchases 90,000 kw of
capacity per month.
Northern Indiana serves the Town of Argos as a full requirement customer
and provides network integration service to seven other municipal wholesale
customers.
Northern Indiana is a member of the East Central Area Reliability
Coordination Agreement (ECAR). ECAR is one of nine regional electric
reliability councils established to coordinate planning and operations of
member electric utilities regionally and nationally.
FUEL SUPPLY. The generating units of Northern Indiana are located at
Bailly, Mitchell, Michigan City and Schahfer Generating Stations. Northern
Indiana's 13 steam generating units have a net capability of 3,179,000 kw.
Coal is the primary source of fuel for all units, except for three, which
utilize natural gas. In addition, Northern Indiana's four combustion turbine
generating units with a net capability of 203,000 kw are fired by gas. Fuel
requirements for Northern Indiana's generation for 1999 was supplied as
follows:
<TABLE>
<S> <C>
Coal 97.9%.
Natural gas 2.1%
</TABLE>
In 1999, Northern Indiana used approximately 9.0 million tons of coal
at its generating stations. Northern Indiana has established a normal level
of coal stock that is expected to provide adequate fuel supply during the year.
Annual coal requirements for Northern Indiana's electric generating
units through 2003 are estimated to range from 9.4 million tons to 9.7
million tons, depending from year to year upon anticipated sales levels,
scheduled maintenance and other variables. These requirements are being met
or will be met in part under long-term contracts as follows:
<TABLE>
<CAPTION>
MILLION TONS/YEAR SULFUR CONTENT EXPIRATION
================= ============== ==========
<S> <C> <C>
1.300(a) Low 2001
1.600(b) Low 2002
1.000(c) Low 2001
0.500(d) Low 2000
0.432(e) Low 2002
1.000(f) High 2000
0.600 High 2004
0.500(g) High 2001
<FN>
(a) 1.3 million tons in 2000; 0.25 million tons in 2001.
(b) 1.6 million tons in 2000; plus or minus 10% option years in 2001 and 2002.
Northern Indiana can terminate 12/31/2000 or 12/31/2001.
(c) 0.8 million to 1.2 million tons in 2000 and 2001.
(d) Option year in 2000.
(e) Option to purchase an additional 0.432 million tons in 2000 and 2001; 0.864
million tons in 2002.
(f) 1.0 million tons in 2000.
(g) 0.75 million tons in 2000 and 2001.
</FN>
</TABLE>
The average cost of coal consumed in 1999 was $26.13 per ton, or 1.47
cents per kilowatt-hour (kwh) generated as compared to $26.83 per ton, or
1.52 cents per kwh generated in 1998.
COAL RESERVES. Included in the previous table of coal contracts is a
coal mining contract with Cyprus Shoshone Coal Corporation (Cyprus) under
which Cyprus is mining Northern Indiana's coal reserves in the Cyprus mine
through the year 2001. The costs of such reserves are being recovered through
the rate-making process as such coal reserves are used to produce electricity.
FUEL ADJUSTMENT CLAUSE. Northern Indiana adjusts metered electric rates
through operation of a fuel adjustment clause to reflect changes in fuel costs.
See "Summary of Significant Accounting Policies-Fuel Adjustment Clause" in the
Notes to Consolidated Financial Statements.
GAS OPERATIONS. Northern Indiana supplies natural gas of about 1,000
British thermal units (Btu) per cubic foot. In a 24-hour period ended
January 5, 1999, Northern Indiana's 1999 maximum day send-out (the maximum
amount of gas delivered through Northern Indiana's distribution system to its
end customers) was 1.7 million dekatherms (dth). Northern Indiana's total
gas send-out for 1999 was 282.5 million dth, compared to 266.0 million dth in
1998.
Agreements have been negotiated with natural gas suppliers to replace
former pipeline supplier contracts pursuant to the requirements of Federal
Energy Regulatory Commission (FERC) Order No. 636. Northern Indiana also has
agreements which allow for the purchase of gas either from gas marketers or
producers.
Northern Indiana has firm transportation agreements with pipelines, which
allow Northern Indiana to move its gas through the pipelines' transmission
systems. In 1999, all of the gas supplied by Northern Indiana was transported
by ANR Pipeline Company (ANR), Crossroads Pipeline Company (Crossroads), a
subsidiary of NiSource, Midwestern Gas Transmission Company (Midwestern),
Natural Gas Pipeline Company of America (Natural), Panhandle Eastern Pipe Line
Company (Panhandle), Tennessee Gas Pipeline Company (Tennessee) and Trunkline
Gas Company (Trunkline). The transportation rates of Crossroads and the
transportation and storage rates of ANR, Midwestern, Natural, Panhandle,
Tennessee and Trunkline to Northern Indiana are subject to change in
accordance with rate proceedings filed with the FERC.
Approximately 77% of Northern Indiana's 1999 gas supply was purchased on
the spot market, generally on less than 30-day agreements. The average price
per dth (including FERC Order No. 636 transition charges) in 1999 was $2.56,
compared to $2.49 in 1998, and the average cost of purchased gas, after
adjustment for transition charges billed to transport customers, was $2.58 per
dth, as compared to $2.48 per dth in 1998.
Northern Indiana has a curtailment plan (a plan which outlines service
to be curtailed in the event of limited gas supply) that has been approved by
the Indiana Utility Regulatory Commission (IURC). There were no firm sales
curtailments in 1999 and none are expected during 2000.
Northern Indiana operates an underground gas storage field at Royal
Center, Indiana, which currently has a storage capacity of 6.75 million dth.
Withdrawals were made in the 1999-2000 winter of up to 103,126 dth per day.
In addition, Northern Indiana has several gas storage service agreements
which make possible the withdrawal of substantial quantities of gas from
other storage facilities. All of the storage agreements have limitations on
the volume and timing of daily withdrawals. These contracts provide in the
aggregate for approximately 29.6 million dth of annual stored volume and
allow for approximately 661,000 dth of maximum daily withdrawal.
Northern Indiana has a liquefied natural gas plant in LaPorte County
which is designed for peak shaving (the process of supplementing gas supply
during periods of high demand) and has the following capacities: maximum
storage of 4 million 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. Metered gas sales are adjusted to reflect
the cost of purchased gas, contracted gas storage and storage transportation
charges. See "Summary of Significant Accounting Policies-Gas Cost Adjustment
Clause" in the Notes to Consolidated Financial Statements.
REGULATION. Northern Indiana is subject to regulation by the Commission
as to rates, service, accounts, issuance of securities, and in other respects.
It is also subject to limited regulation by local public authorities.
In 1999, about 7% of Northern Indiana's electric revenues were derived
from electric service it furnished at wholesale in interstate commerce to
other utility companies, power marketers, municipalities and WVPA (see "Item 1.
Business-Electric Operations" regarding WVPA). Northern Indiana's wholesale
rates and operations are subject to the jurisdiction of the FERC. FERC
jurisdiction does not extend to the issuance of securities by Northern Indiana,
which are regulated by the IURC. The FERC on October 21, 1954, declared
Northern Indiana exempt from the provisions of the Natural Gas Act.
RATE MATTERS. For a description of Northern Indiana's Alternative
Regulatory Plan (ARP) see "Competition and Regulatory Changes" below.
On January 27, 2000, the Citizens Action Coalition (CAC), a private
consumer organization, filed a petition before the Indiana Utility Regulatory
Commission (IURC). The petition does not seek a specified amount of rate
reduction, but rather alleges that the existing electric rates are "unreasonable
and unsafe," and seeks to have the IURC force Northern Indiana to produce
detailed financial calculations that would justify its electric rates. Northern
Indiana intends to oppose the petition on both legal and factual grounds, and
believes that its current rates are just and reasonable as required by statue.
COMPETITION AND REGULATORY CHANGES -
The regulatory frameworks applicable to Northern Indiana, at both state
and federal levels, are undergoing fundamental changes. These changes have
impacted and will continue to have an impact on Northern Indiana's operations,
structure and profitability. At the same time, competition within the electric
and gas industries will create opportunities to compete for new customers and
revenues. Management has taken steps to become more competitive and profitable
in this changing environment, including converting some of its generating units
to allow use of lower cost, low sulfur coal, providing its gas customers with
increased customer choice for new products and services throughout the service
territory.
THE ELECTRIC INDUSTRY. At the Federal level, the FERC issued Order No.
888-A in 1996 which required all public utilities owning, controlling, or
operating transmission lines to file non-discriminatory open-access tariffs and
offer wholesale electricity suppliers and marketers the same transmission
service they provide themselves. In 1997, FERC approved Northern Indiana's
open-access transmission tariff. On December 20, 1999, FERC issued a final rule
addressing the formation and operation of Regional Transmission Organizations
(RTOs). The rule is intended to eliminate pricing inequities in the provision
of wholesale transmission service. Northern Indiana does not believe that
compliance with the new rules will be material to future earnings. Although
wholesale customers currently represent a small portion of Northern Indiana's
electricity sales, it intends to continue its efforts to retain and add
wholesale customers by offering competitive rates and also intends to expand the
customer base for which it provides transmission services.
At the state level, Northern Indiana announced in 1997 and 1998 that if a
consensus could be reached regarding electric utility restructuring legislation,
Northern Indiana would support a restructuring bill before the Indiana General
Assembly. During 1999, discussions were held with other investor-owned
utilities in Indiana regarding the technical and economic aspects of possible
legislation leading to greater customer choice. A consensus was not reached.
Therefore, Northern Indiana did not support legislation regarding electric
restructuring during the 2000 session of the Indiana General Assembly. During
2000, discussions will continue with all segments of the Indiana electric
industry in an attempt to reach a consensus on electric restructuring
legislation for introduction during the 2001 session of the Indiana General
Assembly.
THE GAS INDUSTRY. At the Federal level, gas industry deregulation began
in the mid-1980's when FERC required interstate pipelines to provide
nondiscriminatory transportation services pursuant to unbundled rates. This
regulatory change permitted large industrial and commercial customers to
purchase their gas supplies either from Northern Indiana or directly from
competing producers and marketers, which would then use Northern Indiana's
facilities to transport the gas. More recently, the focus of deregulation in
the gas industry has shifted to the states.
At the state level, the IURC approved in 1997 Northern Indiana's
Alternative Regulatory Plan (ARP), which implemented new rates and services that
included, among other things, unbundling of services for additional customer
classes (primarily residential and commercial users), negotiated services and
prices, a gas cost incentive mechanism, and a price protection program. The gas
cost incentive mechanism allows Northern Indiana to share any cost savings or
cost increases with its customers based upon a comparison of Northern Indiana's
actual gas supply portfolio cost to a market-based benchmark price. Phase I of
Northern Indiana's Customer Choice Pilot Program ended on March 31, 1999. This
pilot program offered 82,000 residential customers within St. Joseph County
and 10,000 commercial customers throughout the Northern Indiana service area the
right to choose alternative gas suppliers. Phase II of Northern Indiana's
Customer Choice Pilot Program commenced on April 1, 1999 and will continue for
a one-year period. During this phase, Northern Indiana is offering customer
choice to all 660,000 residential and 50,000 commercial customers throughout its
gas service territory. A limit of 150,000 residential and 20,000 commercial
customers are eligible to enroll in Phase II of the program. The IURC order
allows a specific NiSource natural gas marketing subsidiary to participate as a
supplier of choice to Northern Indiana customers. In addition, as Northern
Indiana has allowed residential and commercial customers to designate
alternative gas suppliers, it has also offered new services to all classes of
customers including, price protection, negotiated sales and services, gas
lending and parking, and new storage services.
To date, Northern Indiana has not been materially affected by competition,
and management does not foresee substantial adverse effects in the near future
unless the current regulatory structure is substantially altered. Northern
Indiana believes the steps that it has taken to deal with increased competition
have had and will continue to have significant positive effects in the next few
years.
EMPLOYEES. Northern Indiana had 3,077 employees at December 31, 1999.
Approximately 70% of Northern Indiana's employees (physical and clerical
workers) are represented by two local unions of the United Steelworkers of
America, AFL-CIO-CLC.
ENVIRONMENTAL MATTERS. The operations of Northern Indiana are subject
to extensive and evolving federal, state and local environmental laws and
regulations intended to protect the public health and the environment. Such
environmental laws and regulations affect Northern Indiana's operations as
they relate to impacts on air, water and land.
Refer to "Environmental Matters" in Notes to Consolidated Financial
Statements for more information regarding certain environmental issues.
In a March 3, 2000 decision, the United States Court of Appeals for the
D. C. Circuit ruled largely in favor of Environmental Protection Agency's
regional nitrogen oxides (NOx) plan. An appeal of this decision is expected.
The State of Indiana in February 2000 proposed a moderate NOx control plan
designed to address Indiana's ozone nonattainment areas and regional ozone
transport.
Northern Indiana's total capital expenditures from January 1, 1995,
through December 31, 1999 for pollution control facilities were approximately
$116 million and were financed in part by the sale of Northern Indiana's
Pollution Control Notes and Bonds-Jasper County. Northern Indiana anticipates
expenditures of approximately $244 million for pollution control equipment in
the 2000-2004 period which includes anticipated expenditures of $6 million in
2000 and $65 million in 2001.
YEAR 2000 COSTS. For a discussion of year 2000 costs see Management's
Discussion and Analysis of Financial Condition and Results of Operations-Year
2000 Costs.
FORWARD LOOKING STATEMENTS. This report contains forward looking
statements within the meaning of the securities laws. See Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Forward Looking Statements.
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.
Northern Indiana has 291 substations with an aggregate transformer
capacity of 23,036,200 kilovolts (kva). Its transmission system with
voltages from 34,500 to 345,000 consists of 3,068 circuit miles of line. The
electric distribution system extends into 21 counties and consists of 7,800
circuit miles of overhead and 1,571 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
11,367,093 kva and 445,377 electric watt-hour meters.
GAS. Northern Indiana has an underground storage field at Royal Center
and a liquefied natural gas plant in LaPorte County all of which are described
under "Item 1. Business-Gas Operations". Northern Indiana has 13,924 miles of
gas mains.
CHARACTER OF OWNERSHIP. Substantially all of the properties of Northern
Indiana are subject to the lien of its First Mortgage Indenture. The principal
properties are held in fee and are free from other encumbrances, subject to
minor exceptions, none of which are of such a nature as to impair substantially
the usefulness of such properties. All properties are subject to liens for
taxes, assessments and undetermined charges (if any) incidental to construction.
It is Northern Indiana's practice regularly to pay such amounts, 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. 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.
Such proceedings and suits, and the amounts involved are routine for the kind
of business conducted by Northern Indiana, except as set forth above and under
"Environmental Matters," in the Notes to Consolidated Financial Statements.
No other material legal proceedings against Northern Indiana or its subsidiaries
are pending or, to the knowledge of Northern Indiana contemplated by
governmental authorities or 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 NiSource.
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, 1999,
Northern Indiana had approximately $136.1 million of retained earnings
(earned surplus) available for the payment of dividends. Future common
share dividends by Northern Indiana will depend upon adequate retained
earnings, adequate future earnings and the absence of adverse developments.
So long as any shares of Northern Indiana's cumulative preferred stock
are outstanding, no cash dividends shall be paid on its common shares in
excess of 75% of the net income available therefor for the preceding
calendar year unless the aggregate of the capital applicable to stocks
subordinate as to assets and dividends 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, 1999, the sum of the capital applicable to stocks subordinate
to the cumulative preferred stock plus the surplus was equal to 43% of the
total capitalization including surplus.
In connection with the foregoing discussion, see "Common Share
Dividend" in the Notes to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands)
1999 1998 1997 1996 1995
========== ========== ========== ========== ==========
<S> <C> <C> <C> <C> <C>
Operating revenues $1,752,219 $1,648,603 $1,752,382 $1,754,105 $1,664,278
Net income $ 222,111 $ 220,180 $ 196,620 $ 197,310 $ 194,321
Total assets $3,655,454 $3,651,949 $3,674,914 $3,774,280 $3,606,199
Long-term
obligations and
redeemable
preferred stock $ 974,443 $1,134,394 $1,138,337 $1,053,254 $1,122,392
Cash dividends
declared on
common shares $ 224,000 $ 212,000 $ 187,775 $ 187,450 $ 185,725
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
NET INCOME. For 1999, net income of Northern Indiana increased to
$222.1 million, compared to $220.2 million for 1998. In 1997, net income
was $196.6 million.
GAS REVENUES. Gas revenues were $644.7 million in 1999, an increase of
$72.2 million from 1998. This increase in gas revenues was mainly due to
increased deliveries to residential customers as a result of colder weather
during 1999, increased wholesale sales and increased gas costs per dekatherms
(dth), partially offset by decreased deliveries to commercial and industrial
customers and decreased gas transition costs. During 1999, gas deliveries in
dth, which include transportation services, increased 10%. Gas deliveries to
residential customers increased 13% reflecting 12% higher heating degree-days
than 1998. Gas deliveries to commercial and industrial customers increased 6%
and 4%, respectively, reflecting increased gas transportation services.
Northern Indiana had 681,120 gas customers at December 31, 1999.
Gas revenues were $572.5 million in 1998, a decrease of $162.8 million
from 1997. The decrease in gas revenues was mainly due to decreased gas sales
to residential and commercial customers, decreased gas costs per dth and
decreased gas transition costs. During 1998, gas deliveries in dth, which
include transportation services, decreased 1%. Gas deliveries to residential
and commercial customers decreased 20% and 16%, respectively, reflecting
heating degree-days 21% lower than 1997, partially offset by increased
deliveries to industrial customers of 4% and increased wholesale gas sales.
Large commercial and industrial customers continue 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 184.9, 173.2 and 160.4 million
dth for others in 1999, 1998 and 1997, respectively. The basic steel industry
accounted for 39% of natural gas delivered (including volumes transported)
during 1999.
The components of the changes in gas operating revenues are shown in the
following table:
<TABLE>
<CAPTION>
Year 1999 Year 1998
Compared To Compared To
Year 1998 Year 1997
============ ============
(Dollars in millions)
<S> <C> <C>
Gas Revenue Changes -
Pass through of net changes in
purchased gas costs, gas storage
and storage transportation costs $ 15.6 $ (63.0)
Gas transition costs (4.5) (21.7)
Changes in sales levels 21.7 (91.6)
Gas transported 6.2 6.8
Wholesale gas 33.2 6.7
------------ ------------
Total Gas Revenue Change $ 72.2 $ (162.8)
============ ============
</TABLE>
GAS COSTS OF ENERGY. Gas costs increased $58.6 million (18%) in 1999 due
to increased gas purchases and increased purchased gas costs per dth, partially
offset by decreased gas transition costs. The average cost for purchased gas in
1999, after adjustment for gas transition costs billed to transport customers,
was $2.58 per dth as compared to $2.48 per dth in 1998. Gas costs decreased
$131.4 million (29%) in 1998 due to decreased gas purchases, decreased gas
transition costs and decreased gas costs per dth. The average cost for
purchased gas in 1998, after adjustment for gas transition costs billed to
transport customers, was $2.48 per dth as compared to $3.08 per dth in 1997.
GAS OPERATING MARGINS. The gas operating margin increased $13.7 million
in 1999 due to increased deliveries to residential customers reflecting colder
weather during 1999, increased wholesale sales and increased deliveries of
gas transported for others, partially offset by decreased deliveries to
commercial customers. The gas operating margin decreased $31.4 million in 1998
due to decreased deliveries to residential and commercial customers reflecting
the warmer heating season, partially offset by increased sales to wholesale
customers and increased deliveries of gas transported for others.
ELECTRIC REVENUES. Electric revenues were $1.107 billion, an increase of
$31.4 million from 1998. Sales of electricity in kilowatt-hours (kwh) increased
7% from 1998. The increase in electric revenues was mainly due to increased
sales to residential and commercial customers due to warmer weather during the
third quarter of 1999, increased industrial sales and increased wholesale
transactions. Sales to residential and commercial customers increased 2% and 4%
in kwh, respectively, reflecting the warmer summer in 1999. At December 31,
1999, Northern Indiana had 425,835 electric customers.
In 1998, electric revenues were $1.076 billion, an increase of $59.0
million from 1997. Sales of electricity in kwh increased 7% from 1997. The
increase in electric revenues was mainly due to increased sales to residential
and commercial customers (increases of 8% and 6% in kwh, respectively),
reflecting a significantly warmer summer in 1998. Wholesale power transactions
also increased significantly in a rapidly developing market. The increases were
partially offset by a 2% kwh reduction in sales to industrial customers,
reflecting a full year of operations at two cogeneration projects located at
major industrial customers' facilities. The basic steel industry accounted for
29% of electric sales during 1999.
The components of the changes in electric operating revenues are shown in
the following table:
<TABLE>
<CAPTION>
Year 1999 Year 1998
Compared To Compared To
Year 1998 Year 1997
============ ============
(Dollars in millions)
<S> <C> <C>
Electric Revenue Changes -
Pass through of net changes
in fuel costs $ 5.6 $ (9.3)
Changes in sales levels 38.3 17.0
Wholesale electric (12.5) 51.3
------------ ------------
Total Electric Revenue Change $ 31.4 $ 59.0
============ ============
</TABLE>
ELECTRIC COST OF ENERGY. Cost of fuel for electric generation in
1999 decreased $1.5 million compared to 1998 primarily due to decreased fuel
costs per kwh generated. The average cost per kwh generated decreased 3% from
1998 to 1.47 cents per kwh. Cost of fuel for electric generation in 1998
increased mainly as a result of increased production. The average cost per kwh
generated decreased 3% from 1997 to 1.50 cents per kwh.
POWER PURCHASED. Power purchased increased $25.0 million in 1999 as a
result of increased bulk power purchases. Power purchased decreased $4.7
million in 1998 as a result of decreased bulk power purchases.
ELECTRIC OPERATING MARGINS. Operating margin from electric sales
increased $7.9 million in 1999. This increase occurred mainly due to increased
sales to residential and commercial as a result of warmer weather during the
third quarter of 1999, increased industrial sales and increased wholesale
transactions. Operating margin from electric sales in 1998 increased $42.2
million due to increased sales to residential and commercial customers,
reflecting a significantly warmer summer in 1998 than in 1997, and increased
wholesale transactions, partially offset by decreased sales to industrial
customers.
OPERATING EXPENSES AND TAXES (EXCEPT INCOME). Operating expenses and
taxes (except income) in 1999 increased $17.6 million from 1998 and in 1998
decreased $20.9 million from 1997.
Operation expenses increased $10.6 million in 1999 over 1998 due to
increased employee related costs of $15.6 million, increased expenses for
distributed generation and fuel cell research and development of $1.9 million
and other increased operating costs partially offset by a $13 million insurance
settlement related to manufactured gas plants site cleanup costs. Operation
expenses decreased $23.4 million in 1998 over 1997 due to decreased employee
related costs of $11.7 million, decreased sales and marketing activities of $5.7
million and decreased electric production operating costs of $4.3 million.
Maintenance expenses remained relatively unchanged in 1999 from 1998.
Maintenance expenses decreased $3.6 million in 1998 from 1997 mainly reflecting
decreased maintenance activity for electric production and distribution
facilities.
Depreciation and amortization expenses increased $5.0 million in 1999
from 1998 resulting from plant additions. Depreciation and amortization
expenses increased $5.5 million in 1998 from 1997 resulting from plant
additions.
Utility income taxes increased $6.5 million and $10.7 million in 1999 and
1998, respectively, when compared to the prior period mainly as a result of
increased pre-tax income.
Other Income (Deductions) increased $1.3 million in 1999 from 1998 mainly
as a result of increased power trading activities, partially offset by Northern
Indiana deciding to abandon certain business facilities that were not consistent
with its strategic direction. Other Income (Deductions) remained relatively
unchanged in 1998 from 1997.
Interest charges decreased $3.2 million and $2.5 million in 1999 and 1998,
respectively. The 1999 and 1998 decreases reflect decreased short-term
borrowing during the year.
LIQUIDITY AND CAPITAL RESOURCES. Generally, cash flow from operations
has provided sufficient liquidity to meet current operating requirements.
Because the utility and utility construction business is seasonal in nature,
commercial paper is issued for short-term financing. As of December 31, 1999
and December 31, 1998, $62.6 million and $85.6 million in commercial paper was
outstanding, respectively. The weighted average interest rate on commercial
paper outstanding as of December 31, 1999 was 6.53%.
Northern Indiana entered into a five-year $100 million credit agreement
and a 364-day $100 million revolving credit agreement with several banks.
These agreements terminate on September 23, 2003 and September 23, 2000,
respectively. The 364-day agreement may be extended at expiration for
additional periods of 364-days. Under these agreements, funds are borrowed at
a floating rate of interest or, under certain circumstances, at a fixed rate
of interest for short-term periods. These agreements provide financing
flexibility and may be used to support the issuance of commercial paper. At
December 31, 1999 and 1998, there were no borrowings outstanding under these
agreements.
In addition, Northern Indiana has $11.4 million in lines of credit which
run until May 31, 2000. The credit pricing of each of the lines varies from
either the lending banks' commercial prime or market rates. As of
December 31, 1999, there were no borrowings under these lines of credit. The
credit agreements and lines of credit are also available to support the
issuance of commercial paper.
Northern Indiana also has $220 million of money market lines of credit.
As of December 31, 1999 and December 31, 1998, $33.7 million and $40.5
million of borrowings were outstanding, respectively, under these lines of
credit.
Construction expenditures by Northern Indiana for 1999, 1998 and 1997
were approximately $193 million, $182 million and $174 million, respectively.
Northern Indiana's total utility plant investment on December 31, 1999, was
$5.9 billion. 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.
On January 27, 2000, the Citizens Action Coalition (CAC), a private
consumer organization, filed a petition before the Indiana Utility Regulatory
Commission (IURC). The petition does not seek a specified amount of rate
reduction, but rather alleges that the existing electric rates are "unreasonable
and unsafe," and seeks to have the IURC force Northern Indiana to produce
detailed financial calculations that would justify its electric rates. Northern
Indiana is opposing the petition on both legal and factual grounds, and believes
that its current rates are just and reasonable as required by statue.
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS -
RISK MANAGEMENT
Risk is an inherent part of Northern Indiana's energy businesses and
activities. The extent to which Northern Indiana properly and effectively
identifies, assesses, monitors and manages each of the various types of risk
involved in its businesses is critical to its profitability. Northern Indiana
seeks to identify, assess, monitor and manage, in accordance with defined
policies and procedures, the following principal risks involved in Northern
Indiana's energy businesses: commodity market risk, interest rate risk and
credit risk. Risk management at Northern Indiana is a multi-faceted process
with independent oversight that requires constant communication, judgment and
knowledge of specialized products and markets. Northern Indiana's senior
management takes an active role in the risk management process and has
developed policies and procedures that require specific administrative and
business functions to assist in the identification, assessment and control of
various risks. In recognition of the increasingly varied and complex nature
of the energy business, Northern Indiana's risk management policies and
procedures are evolving and subject to ongoing review and modification.
Northern Indiana is exposed to risk through various daily business
activities, including specific trading risks and non-trading risks. The non-
trading risks to which Northern Indiana is exposed include interest rate risk
and commodity price risk. The market risk resulting from trading activities
consists primarily of commodity price risk. Northern Indiana's risk
management policy permits the use of certain financial instruments to manage
its market risk, including futures, forwards, options and swaps. Risk
management at Northern Indiana is defined as the process by which the
organization ensures that the risks to which it is exposed are the risks to
which it desires to be exposed to achieve its primary business objectives.
Northern Indiana employs various analytic techniques to measure and monitor
its market risks, including value-at-risk (VaR) and instrument sensitivity to
market factors. VaR represents the potential loss for an instrument or
portfolio from adverse changes in market factors, for a specified time period
and at a specified confidence level.
TRADING RISKS
COMMODITY MARKET RISK. Market risk refers to the risk that a change in
the level of one or more market prices, rates, indices, volatilities,
correlations or other market factors, such as liquidity, will result in losses
for a specified position or portfolio. Northern Indiana employs a VaR model
to assess the market risk of all open derivative financial instruments.
Northern Indiana estimates the one-day VaR across all trading groups which
utilize derivatives using either Monte Carlo simulation or variance/covariance
at a 95 percent confidence level. Based on the results of the VaR analysis,
the daily market risk exposure for power trading on an average, high, and low
basis was $0.4, $1.2 and $0.014 million during 1999, respectively.
Northern Indiana implemented a VaR methodology in 1999 to introduce
additional market sophistication and to recognize the developing complexity of
its businesses.
NON-TRADING RISKS
COMMODITY MARKET RISK. Currently, commodity price risk resulting from
non-trading activities is relatively limited, since current regulations allow
Northern Indiana to recoup any prudently incurred fuel and gas costs through
rate-making. As the utility industry undergoes deregulation, however,
Northern Indiana will be providing services without the benefit of the
traditional rate-making and, therefore, will be more exposed to commodity
price risk. Additionally, Northern Indiana enters into certain sales
contracts with customers based upon a fixed sales price and varying volumes
which are ultimately dependent upon the customer's supply requirements.
Northern Indiana utilizes derivative financial instruments to reduce the
commodity price risk based on modeling techniques to anticipate these future
supply requirements.
INTEREST RATE RISK. Long-term debt is utilized as a primary source of
capital. A significant portion of this long-term debt consists of medium-term
notes. In addition, longer term fixed-price debt instruments have been used
that in the past have been refinanced when interest rates decreased. To the
extent that such refinancing is economical, refinancing these fixed-price
instruments will continue.
CREDIT RISK. Credit risk arises in many of Northern Indiana's business
activities. In sales and trading activities, credit risk arises because of
the possibility that a counterparty will not be able or willing to fulfill
its obligations on a transaction on or before settlement date. In derivative
activities, credit risk arises when counterparties to derivative contracts,
such as interest rate swaps, are obligated to pay Northern Indiana the
positive fair value or receivable resulting from the execution of contract
terms. Exposure to credit risk is measured in terms of both current and
potential exposure. Current credit exposure is generally measured by the
notional or principal value of financial instruments and direct credit
substitutes, such as commitments and standby letters of credit and guarantees.
Current credit exposure includes the positive fair value of derivative
instruments. Because many of Northern Indiana's exposures vary with changes in
market prices, Northern Indiana also estimates the potential credit exposure
over the remaining term of transactions through statistical analyses of market
prices. In determining exposure, Northern Indiana considers collateral and
master netting agreements, which are used to reduce individual counterparty
risk, primarily in connection with derivative products.
Refer to Consolidated Statement of Long-Term Debt for detailed information
related to Northern Indiana's long-term debt outstanding and "Fair Value of
Financial Instruments" in Notes to Consolidated Financial Statements for current
market valuation of long-term debt. Refer to "Summary of Significant Accounting
Policies-Accounting for Price Risk Management Activities" for further discussion
of Northern Indiana's risk management.
YEAR 2000 COSTS -
RISKS. "Year 2000 issues" were concerned with the ability of electronic
processing equipment to process date sensitive information and recognize the
last two digits of a date as occurring in or after the year 2000. Any failure
in any system could have resulted in material operational and financial risks.
Possible scenarios included a system failure in a generating plant, an operating
disruption or delay in transmission or distribution of gas, electricity, or an
inability to interconnect with the systems of other utilities. Failure to
achieve year 2000 readiness could have had a material adverse effect on results
of operations, financial position and cash flow.
The program to address risks associated with the year 2000 on both
information technology (IT) and non-IT systems was completed in a timely manner.
STATE OF READINESS. The Northern Indiana year 2000 program consisted of
four phases: inventory (identifying systems potentially affected by the year
2000),assessment(testing identified systems), remediation (correcting or
replacing non-compliant systems) and validation (evaluating and testing
remediated systems to confirm compliance). All phases were completed in a
timely manner.
Because Northern Indiana depends on outside suppliers and vendors with
similar year 2000 issues, the ability of those suppliers and vendors to provide
an uninterrupted supply of goods and services was assessed. Critical vendors and
suppliers were contacted in order to investigate their year 2000 efforts. In
addition, electricity and gas industry groups such as the North American
Electric Reliability Council, the Electric Power Research Institute and the
American Gas Association were helpful in evaluating the potential impact of year
2000 problems upon the electric grid systems and pipeline networks.
COSTS. The total cost of the Northern Indiana year 2000 program was
approximately $19 million. These costs were funded from operations. Costs
related to the maintenance or modification of existing systems were expensed as
incurred. Costs related to the acquisition of replacement systems were
capitalized. These costs did not have a material impact on results of
operations.
CONTINGENCY PLANS. Northern Indiana developed its contingency plans to
address the possibility that any mission-critical system would be non-compliant.
This includes identifying alternative suppliers and vendors, conducting staff
training and developing communication plans. In addition, Northern Indiana
evaluated the ability to maintain or restore service in the event of a power
failure or operating disruption or delay, along with the limited ability to
mitigate the effects of a network failure by isolating its own network from the
non-compliant segments of the greater network. These contingency plans were
completed during the second quarter 1999. They were not needed for the century
rollover.
RESULTS. Northern Indiana did not experience any system failures a result
of the year 2000 issue.
COMPETITION AND REGULATORY CHANGES -
The regulatory frameworks applicable to Northern Indiana, at both state
and federal levels, are undergoing fundamental changes. These changes have
impacted and will continue to have an impact on Northern Indiana's operations,
structure and profitability. At the same time, competition within the electric
and gas industries will create opportunities to compete for new customers and
revenues. Management has taken steps to become more competitive and profitable
in this changing environment, including converting some of its generating units
to allow use of lower cost, low sulfur coal and providing its gas customers
with increased customer choice for new products and services throughout the
service territory.
THE ELECTRIC INDUSTRY. At the Federal level, the FERC issued Order No.
888-A in 1996 which required all public utilities owning, controlling, or
operating transmission lines to file non-discriminatory open-access tariffs and
offer wholesale electricity suppliers and marketers the same transmission
service they provide themselves. In 1997, FERC approved Northern Indiana's
open-access transmission tariff. On December 20, 1999, FERC issued a final rule
addressing the formation and operation of Regional Transmission Organizations
(RTOs). The rule is intended to eliminate pricing inequities in the provision
of wholesale transmission service. Northern Indiana does not believe that
compliance with the new rules will be material to future earnings. Although
wholesale customers currently represent a small portion of Northern Indiana's
electricity sales, it intends to continue its efforts to retain and add
wholesale customers by offering competitive rates and also intends to expand
the customer base for which it provides transmission services.
At the state level, Northern Indiana announced in 1997 and 1998 that if a
consensus could be reached regarding electric utility restructuring legislation,
Northern Indiana would support a restructuring bill before the Indiana General
Assembly. During 1999, discussions were held with other investor-owned
utilities in Indiana regarding the technical and economic aspects of possible
legislation leading to greater customer choice. A consensus was not reached.
Therefore, Northern Indiana did not support legislation regarding electric
restructuring during the 2000 session of the Indiana General Assembly. During
2000, discussions will continue with all segments of the Indiana electric
industry in an attempt to reach a consensus on electric restructuring
legislation for introduction during the 2001 session of the Indiana General
Assembly.
THE GAS INDUSTRY. At the Federal level, gas industry deregulation began
in the mid-1980's when FERC required interstate pipelines to provide
nondiscriminatory transportation services pursuant to unbundled rates. This
regulatory change permitted large industrial and commercial customers to
purchase their gas supplies either from Northern Indiana or directly from
competing producers and marketers, which would then use Northern Indiana's
facilities to transport the gas. More recently, the focus of deregulation in
the gas industry has shifted to the states.
At the state level, the IURC approved in 1997 Northern Indiana's
Alternative Regulatory Plan (ARP), which implemented new rates and services that
included, among other things, unbundling of services for additional customer
classes (primarily residential and commercial users), negotiated services and
prices, a gas cost incentive mechanism, and a price protection program. The gas
cost incentive mechanism allows Northern Indiana to share any cost savings or
cost increases with its customers based upon a comparison of Northern Indiana's
actual gas supply portfolio cost to a market-based benchmark price. Phase I of
Northern Indiana's Customer Choice Pilot Program ended on March 31, 1999. This
pilot program offered 82,000 residential customers within St. Joseph County
and 10,000 commercial customers throughout the Northern Indiana service area the
right to choose alternative gas suppliers. Phase II of Northern Indiana's
Customer Choice Pilot Program commenced on April 1, 1999 and will continue for
a one-year period. During this phase, Northern Indiana is offering customer
choice to all 660,000 residential and 50,000 commercial customers throughout its
gas service territory. A limit of 150,000 residential and 20,000 commercial
customers are eligible to enroll in Phase II of the program. The IURC order
allows a specific NiSource natural gas marketing subsidiary to participate as a
supplier of choice to Northern Indiana customers. In addition, as Northern
Indiana has allowed residential and commercial customers to designate
alternative gas suppliers, it has also offered new services to all classes of
customers including, price protection, negotiated sales and services, gas
lending and parking, and new storage services.
To date, Northern Indiana has not been materially affected by competition,
and management does not foresee substantial adverse effects in the near future
unless the current regulatory structure is substantially altered. Northern
Indiana believes the steps that it has taken to deal with increased competition
have had and will continue to have significant positive effects in the next few
years.
IMPACT OF ACCOUNTING STANDARDS. Refer to "Summary of Significant
Accounting Policies-Impact of Accounting Standards" in the Notes to the
Consolidated Financial Statements for information regarding impact of accounting
standards not yet adopted.
FORWARD LOOKING STATEMENTS. This report contains forward looking
statements within the meaning of the securities laws. Forward looking
statements include terms such as "may," "will," "expect," "believe," "plan"
and other similar terms. Northern Indiana cautions that, while it believes
such statements to be based on reasonable assumptions and makes such statements
in good faith, you cannot be assured that the actual results will not differ
materially from such assumptions or that the expectations set forth in the
forward looking statements derived from such assumptions will be realized.
You should be aware of important factors that could have a material impact on
future results. These factors include, weather, the federal and state
regulatory environment, the economic climate, regional, commercial, industrial
and residential growth in the service territories served by Northern Indiana,
customers' usage patterns and preferences, the speed and degree to which
competition enters the utility industry, the timing and extent of changes in
commodity prices, changing conditions in the capital and equity markets and
other uncertainties, all of which are difficult to predict, and many of which
are beyond Northern Indian's control.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For a discussion of primary market risks and risk management policy,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations-Market Risk Sensitive Instruments and Positions."
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 19-20
Consolidated Statement of Income for the years
ended December 31, 1999, 1998, and 1997 20-21
Consolidated Balance Sheet - December 31, 1999
and 1998 21-23
Consolidated Statement of Capitalization -
December 31, 1999 and 1998 23-25
Consolidated Statement of Long-term Debt -
December 31, 1999 and 1998 25-26
Consolidated Statement of Cash Flows for the
years ended December 31, 1999, 1998, and 1997 26-27
Consolidated Statement of Retained Earnings for
the years ended December 31, 1999, 1998, and 1997 27-28
Notes to Consolidated Financial Statements 28-53
</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 NiSource Inc.) and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of income, retained earnings and cash
flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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,
1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
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 64,
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
February 19, 2000
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1999 1998 1997
========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C>
Operating Revenues:
(Notes 2 and 20)
Gas $ 644,687 $ 572,485 $ 735,299
Electric 1,107,532 1,076,118 1,017,083
---------- ---------- ----------
1,752,219 1,648,603 1,752,382
---------- ---------- ----------
Cost of Energy: (Note 2)
Gas costs 379,609 321,033 452,436
Fuel for electric generation 249,164 250,649 238,548
Power purchased 66,964 41,990 37,274
---------- ---------- ----------
695,737 613,672 728,258
---------- ---------- ----------
Operating Margin 1,056,482 1,034,931 1,024,124
---------- ---------- ----------
Operating Expenses and
Taxes (except income):
Operation 256,474 245,920 269,275
Maintenance (Note 2) 65,462 65,302 68,853
Depreciation and
amortization (Note 2) 233,555 228,547 223,025
Taxes (except income) 74,163 72,227 71,752
---------- ---------- ----------
629,654 611,996 632,905
---------- ---------- ----------
Operating Income Before
Utility Income Taxes 426,828 422,935 391,219
---------- ---------- ----------
Utility Income Taxes (Note 4) 127,267 120,786 110,099
---------- ---------- ----------
Operating Income 299,561 302,149 281,120
---------- ---------- ----------
Other Income (Deductions)(Note 2) (2,248) (3,589) (3,659)
---------- ---------- ----------
Interest:
Interest on long-term debt 67,695 69,672 69,427
Other interest 3,352 4,524 7,220
Amortization of premium, reacquisition
premium, discount and expense on
debt, net 4,155 4,184 4,194
---------- ---------- ----------
75,202 78,380 80,841
---------- ---------- ----------
Net Income 222,111 220,180 196,620
Dividend requirements on
preferred stocks 8,131 8,335 8,539
---------- ---------- ----------
Balance available
for common shares $ 213,980 $ 211,845 $ 188,081
========== ========== ==========
Common dividends declared $ 224,000 $ 212,000 $ 187,775
========== ========== ==========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 1998
=========== ===========
(Dollars in thousands)
<S> <C> <C>
ASSETS
UTILITY PLANT, at original cost (including
construction work in progress of
$200,011 and $149,426, respectively)
(Note 2):
Electric $ 4,237,427 $ 4,154,060
Gas 1,323,528 1,272,483
Common 381,486 364,822
----------- -----------
5,942,441 5,791,365
Less - Accumulated provision for
depreciation and amortization 2,993,412 2,804,720
----------- -----------
Total Utility Plant 2,949,029 2,986,645
----------- -----------
OTHER PROPERTY AND INVESTMENTS 2,668 519
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents 6,145 19,541
Accounts receivable, less reserve of
$7,804 and $4,458, respectively (Note 2) 141,537 104,445
Fuel adjustment clause (Note 2) 4,201 0
Gas cost adjustment clause (Note 2) 36,787 44,044
Materials and supplies, at average cost 52,735 51,554
Electric production fuel, at average cost 31,968 32,402
Natural gas in storage, at last-in,
first-out cost (Note 2) 22,966 50,859
Prepayments and other 60,285 31,056
----------- -----------
Total Current Assets 356,624 333,901
----------- -----------
OTHER ASSETS:
Regulatory assets (Note 2) 186,080 203,722
Prepayments and other (Note 6) 161,053 127,162
----------- -----------
Total Other Assets 347,133 330,884
----------- -----------
$ 3,655,454 $ 3,651,949
=========== ===========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 1998
=========== ===========
(Dollars in thousands)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's equity $ 1,008,131 $ 1,018,150
Preferred stocks (Note 7) -
Series without mandatory
redemption provisions (Note 8) 81,114 81,116
Series with mandatory
redemption provisions (Note 9) 54,030 56,435
Long-term debt, excluding amounts due
within one year (Note 13) 920,413 1,077,959
----------- -----------
Total capitalization 2,063,688 2,233,660
----------- -----------
CURRENT LIABILITIES:
Current portion of long-term debt 158,000 2,000
(Note 14)
Short-term borrowings (Note 15) 96,290 126,100
Accounts payable 129,532 142,414
Dividends declared on common and
preferred stocks 59,017 63,101
Customer deposits 24,264 20,178
Taxes accrued 115,761 88,401
Interest accrued 7,392 9,118
Fuel adjustment clause 0 6,279
Accrued employment costs 51,393 44,223
Other accruals 76,163 28,546
----------- -----------
Total current liabilities 717,812 530,360
----------- -----------
OTHER:
Deferred income taxes (Note 4) 592,022 608,935
Deferred investment tax credits, being
amortized over life of related property
(Note 4) 85,566 92,693
Deferred credits 47,105 48,084
Accrued liability for postretirement
benefits (Note 6) 137,211 127,115
Other noncurrent liabilities 12,050 11,102
----------- -----------
Total other 873,954 887,929
----------- -----------
COMMITMENTS AND CONTINGENCIES:
(Notes 3, 16 and 17)
$ 3,655,454 $ 3,651,949
=========== ===========
<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, 1999 1998
=========== ===========
(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 12,525 12,524
Retained earnings 136,118 146,138
----------- -----------
Total common shareholder's
equity 1,008,131 48.9% 1,018,150 45.6%
----------- -----------
PREFERRED STOCKS, WHICH ARE
REDEEMABLE SOLELY AT OPTION
OF NORTHERN INDIANA:
Cumulative preferred stock -
$100 par value -
4-1/4% series - 209,035 and
209,051 shares outstanding,
respectively 20,903 20,905
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, 1999) -
Series A (stated value -
$50 per share), 473,285
shares outstanding 23,664 23,664
----------- -----------
81,114 3.9% 81,116 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 - 37,500 and
50,000 shares outstanding,
respectively 3,750 5,000
7-3/4% series - 27,798 and
33,352 shares outstanding,
respectively 2,780 3,335
8.35% series - 45,000 and
51,000 shares outstanding,
respectively 4,500 5,100
Cumulative preferred stock -
no par value -
6.50% series - 430,000
shares outstanding 43,000 43,000
----------- -----------
54,030 2.6% 56,435 2.5%
----------- -----------
LONG-TERM DEBT 920,413 44.6% 1,077,959 48.3%
----------- ------ ----------- ------
Total capitalization $ 2,063,688 100.0% $ 2,233,660 100.0%
=========== ====== =========== ======
<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, 1999 1998
=========== ===========
(Dollars in thousands)
<S> <C> <C>
FIRST MORTGAGE BONDS -
Series T, 7-1/2%, due April 1, 2002 $ 38,500 $ 39,000
Series NN, 7.10%, due July 1, 2017 55,000 55,000
----------- -----------
Total 93,500 94,000
----------- -----------
POLLUTION CONTROL NOTES AND BONDS -
Series A Note -
City of Michigan City, 5.70% due
October 1, 2003 14,000 16,500
Series 1988 Bonds - Jasper County -
Series A, B and C - 4.06% weighted
average at December 31, 1999, due
November 1, 2016 130,000 130,000
Series 1988 Bonds - Jasper County -
Series D - 4.04% weighted average at
December 31, 1999, due November 1, 2007 24,000 24,000
Series 1994 Bonds - Jasper County -
Series A - 4.80% at December 31, 1999
due August 1, 2010 10,000 10,000
Series 1994 Bonds - Jasper County -
Series B - 4.80% at December 31, 1999,
due June 1, 2013 18,000 18,000
Series 1994 Bonds - Jasper County -
Series C - 4.80% at December 31, 1999,
due April 1, 2019 41,000 41,000
----------- -----------
Total 237,000 239,500
----------- -----------
MEDIUM-TERM NOTES -
Interest rates between 6.50% and 7.69%
with a weighted average interest rate of
7.05% and various maturities between
August 15, 2001 and August 4, 2027 593,025 748,025
----------- -----------
UNAMORTIZED PREMIUM AND DISCOUNT
ON LONG-TERM DEBT, NET (3,112) (3,566)
----------- -----------
Total long-term debt, excluding
amounts due in one year $ 920,413 $ 1,077,959
=========== ===========
<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, 1999 1998 1997
=========== =========== ===========
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 222,111 $ 220,180 $ 196,620
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 233,555 228,547 223,025
Deferred federal and state
operating income taxes, net (19,496) (32,574) (8,414)
Deferred investment tax
credits, net (7,126) (7,160) (7,205)
Other, net (4,905) 1,900 1,900
Change in certain assets and
liabilities -
Accounts receivable, net (31,165) (4,194) 10,678
Electric production fuel 434 (13,565) 7,646
Materials and supplies (1,181) 2,112 3,130
Natural gas in storage 27,893 (4,979) 4,529
Accounts payable (10,240) 16,247 (51,273)
Taxes accrued 36,540 24,119 21,488
Fuel adjustment clause (10,480) 8,958 6,470
Gas cost adjustment clause 7,257 42,476 11,647
Accrued employment costs 7,170 (6,872) 10,180
Other accruals 19,593 (5,505) 6,117
Other, net (13,424) (11,380) 21,799
----------- ----------- -----------
Net cash provided by
operating activities 456,536 458,310 458,337
----------- ----------- -----------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Construction expenditures (192,838) (182,123) (174,231)
Other, net (6,155) (7,195) (3,191)
----------- ----------- -----------
Net cash used in investing
activities (198,993) (189,318) (177,422)
----------- ----------- -----------
CASH FLOWS PROVIDED BY
(USED IN) FINANCING
ACTIVITIES:
Issuance of long-term debt 0 500 139,000
Issuance of short-term debt 657,047 622,200 534,430
Net change in commercial paper (23,035) 14,100 (122,405)
Retirement of long-term debt (3,000) (51,509) (67,247)
Retirement of short-term debt (663,822) (629,200) (565,930)
Retirement of preferred stock (2,407) (2,413) (2,408)
Cash dividends paid on
common shares (228,000) (205,000) (185,775)
Cash dividends paid on
preferred shares (8,176) (8,392) (8,556)
Other, net 454 463 (503)
----------- ----------- -----------
Net cash used in
financing activities (270,939) (259,251) (279,394)
----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (13,396) 9,741 1,521
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 19,541 9,800 8,279
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 6,145 $ 19,541 $ 9,800
=========== =========== ===========
<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, 1999 1998 1997
========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $ 146,138 $ 146,293 $ 145,987
ADD:
NET INCOME 222,111 220,180 196,620
--------- --------- ---------
368,249 366,473 342,607
--------- --------- ---------
LESS:
DIVIDENDS:
Cumulative Preferred stock -
4-1/4% series 888 889 889
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 461 571 682
7-3/4% series 276 319 362
8.35% series 422 472 522
6.50% series 2,795 2,795 2,795
Adjustable Rate, series A 1,420 1,420 1,420
Common shares 224,000 212,000 187,775
--------- --------- ---------
232,131 220,335 196,314
--------- --------- ---------
BALANCE AT END OF PERIOD $ 136,118 $ 146,138 $ 146,293
========= ========= =========
<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: NiSource Inc.(NiSource), formerly NIPSCO
Industries, Inc., was incorporated in Indiana on September 22, 1987 and became
the parent of Northern Indiana Public Service Company (Northern Indiana) on
March 3, 1988. NIPSCO Industries, Inc. changed its name to NiSource Inc.
on April 14, 1999 to reflect its new direction as a multi-state supplier
of energy and water resources and related services. Northern Indiana is a
public utility operating company supplying electricity and gas to the public
in the northern third of Indiana.
Northern Indiana is subject to regulation with respect to rates,
accounting and certain other matters which are governed by the Indiana
Utility Regulatory Commission (IURC) and the Federal Energy Regulatory
Commission (FERC), collectively called the "Commissions."
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION. The Consolidated Financial Statements include
the accounts of Northern Indiana and subsidiaries, after the elimination of all
significant intercompany items. 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 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 approximate weighted average remaining lives
for major components of electric and gas plant are as follows:
<TABLE>
<CAPTION>
<S> <C>
Electric:
--------
Electric generation plant 24 years
Transmission plant 26 years
Distribution plant 25 years
Other electric plant 24 years
Gas:
----
Gas storage plant 18 years
Transmission plant 34 years
Distribution plant 27 years
Other gas plant 24 years
</TABLE>
The depreciation provision for electric utility plant, as a percentage
of the original cost, was 3.7% for 1999 and 3.6% for 1998 and 1997.
The depreciation provision for gas utility plant, as a percentage
of the original cost, was 5.4% for 1999, 1998 and 1997.
Northern Indiana follows the practice of charging maintenance and
repairs, including the cost of removal of minor items of property, to expense
as incurred. When property that 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. External and incremental internal costs
associated with computer software developed for internal use are capitalized.
Capitalization of such costs commences upon the completion of the preliminary
stage of the project. Once the installed software is ready for its intended
use, such capitalized costs are amortized on a straight-line basis over a
period of five to ten years which the FERC prescribes as reasonable useful
life estimates for capitalized software.
COAL RESERVES. The costs of reserves under a long-term mining contract
to mine coal reserves through the year 2001 are being recovered through the
rate-making process as such coal reserves are used to produce electricity.
ACCOUNTS RECEIVABLE. At December 31, 1999, $100 million of accounts
receivable had been sold under a sales agreement, which expires May 31, 2002.
The December 31, 1999 and 1998 accounts receivable balance include approximately
$14.0 million and $11.6 million respectively, due from associated companies.
COMPREHENSIVE INCOME. Northern Indiana adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income"
effective January 1, 1998. This statement established standards for reporting
and display of comprehensive income and its components in a financial
statement that is displayed with the same prominence as other financial
statements. The adoption of this statement did not impact Northern
Indiana's consolidated financial statements for the periods presented.
STATEMENT OF CASH FLOWS. Temporary cash investments with an original
maturity of three months or less are considered to be cash equivalents.
Cash paid during the periods reported for income taxes and interest
was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C>
Income taxes $125,580 $135,145 $104,809
Interest, net of amounts capitalized $ 71,735 $ 71,645 $ 75,085
</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 cost of purchased power through operation
of a fuel adjustment clause. As prescribed by order of the IURC 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 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 IURC and remains in effect for a three-month period.
On August 18, 1999, the IURC issued a generic order which established
new guidelines for the recovery of purchased power costs through fuel
adjustment clauses. The IURC ruled that each utility had to establish a
"benchmark" which is the utility's highest on-system fuel cost per kilowatt-
hour (kwh) during the most recent annual period. The IURC stated that if the
weekly average of a utility's purchased power costs were less than the
"benchmark," these costs per kwh should be considered net energy costs which
are presumed "fuel costs included in purchased power." If the weekly average
of a utility's purchased power costs exceeded the "benchmark," the utility
would need to submit additional evidence demonstrating the reasonableness of
these costs. The Office of Utility Consumer Counselor has appealed the
August 18 order to the Indiana Court of Appeals.
GAS COST ADJUSTMENT CLAUSE. All metered gas sales rates contain an
adjustment factor, which reflects the increases and decreases in the cost of
purchased gas, contracted gas storage and storage transportation charges. The
gas cost adjustment factor is subject to a quarterly hearing by the IURC and
remains in effect for a three-month period. On August 11, 1999, the IURC
approved a flexible gas cost adjustment mechanism for Northern Indiana. Under
the new procedure, the demand component of the adjustment factor will be
determined, after hearings and IURC approval, and made effective on November 1
of each year. The demand component will remain in effect for one year until a
new demand component is approved by the IURC. The commodity component of the
adjustment factor will be determined by monthly filings, which will become
effective on the first day of each calendar month, subject to refund. The
monthly filings do not require IURC approval but will be reviewed by the IURC
during the annual hearing that will take place regarding the demand component
filing.
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 monthly period will be allocated over a twelve-month
period beginning with the next monthly filing. Any under-recovery or over-
recovery is recorded as a current asset or current liability until such time it
is billed or refunded to its customers.
Northern Indiana's gas cost adjustment factor includes a gas cost
incentive mechanism (GCI) which allows for the sharing of any cost savings or
cost increases with customers based upon a comparison of actual gas supply
portfolio cost to a market-based benchmark price.
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 under the LIFO method in December 1999 and 1998, the estimated
replacement cost of gas in storage (current and non-current) at December 31,
1999 and 1998 exceeded the stated LIFO cost by approximately $48.9 million and
$33.7 million, respectively.
AFFILIATED COMPANY TRANSACTIONS. Northern Indiana receives executive,
financial, gas supply, sales and marketing, and administrative and general
services from an affiliate, NiSource Management Services Company (NSC), a
wholly-owned subsidiary of NiSource.
The costs of these services are charged to Northern Indiana based on
payroll costs and expenses incurred by NSC employees for the benefit of
Northern Indiana. These costs, which totaled $17.8 million for the year 1999,
$21.4 million for the year 1998 and $28.8 million for the year 1997, consist
primarily of employee compensation and benefits.
Northern Indiana purchased natural gas and transportation services
from affiliated companies in the amount of $16.3 million, $20.8 million and
$10.2 million, representing 4.8%, 6.8% and 2.2% of Northern Indiana's total gas
costs for years 1999, 1998 and 1997, respectively.
Northern Indiana subleases a portion of its office facilities to
affiliated companies for a monthly fee, which includes operating expenses, based
on space utilization.
ACCOUNTING FOR PRICE RISK MANAGEMENT. Northern Indiana is exposed to
commodity price risk in its natural gas and electric operations. A variety of
commodity-based derivative financial instruments are utilized to reduce this
price risk. When these derivatives are used to reduce price risk in non-trading
operations such as activities in gas supply for regulated gas utilities and
certain customer choice programs, gains and losses on these derivative financial
instruments are deferred as assets or liabilities and are recognized in earnings
concurrent with the disposition of the underlying physical commodity. In
certain circumstances, a derivative financial instrument will serve to hedge the
acquisition cost of natural gas injected into storage. In this situation, the
gain or loss on the derivative financial instrument is deferred as part of the
cost basis of gas in storage and recognized upon the ultimate disposition of the
gas. If a derivative financial instrument contract is terminated early because
it is probable that a transaction or forecasted transaction will not occur, any
gain or loss as of such date is immediately recognized in earnings. If a
derivative financial instrument is terminated for other economic reasons, any
gain or losses as of the termination date is deferred and recorded when the
associated transaction or forecasted transaction affects earnings.
Northern Indiana also uses derivative financial instruments in connection
with trading activities at its power trading operations. These derivatives,
along with the related physical contracts, are recorded at fair value pursuant
to Emerging Issues Task Force (EITF) Issue No. 98-10, "Accounting for Energy
Trading and Risk Management Activities." Because the majority of our trading
activities started in 1999, the impact of adopting EITF Issue No. 98-10 on
January 1, 1999, was insignificant. Transactions related to utility system load
management do not qualify as a trading activity under EITF Issue No. 98-10 and
are accounted for on an accrual basis. Northern refers to this activity as
Power Marketing.
IMPACT OF ACCOUNTING STANDARDS. The Financial Accounting Standards
Board (FASB) has issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," in June 1998 and SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date
of FASB Statement No. 133" in June 1999." Statement No. 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring that a company recognize those items
as assets or liabilities in the balance sheet and measure them at fair value.
Special accounting within this Statement generally provides for matching of the
timing of gain or loss recognition of derivative instruments qualifying as a
hedge with the recognition of changes in the fair value of the hedged asset or
liability through earnings, and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting treatment. The Statement also provide that the effective portion of
hedging instrument's gain or loss on a forecasted transaction be initially
reported in other comprehensive income and subsequently reclassified into
earnings when the hedged forecasted transaction affects earnings. Unless those
specific hedge accounting criteria are met, SFAS No. 133 requires that changes
in derivatives' fair value be recognized currently in earnings.
SFAS No. 133, as amended by SFAS No. 137, is not effective for Northern
Indiana until January 1, 2001. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid
contracts. With respect to hybrid instruments, a company may elect to apply
SFAS No. No. 133, as amended, to (1) all hybrid instruments, (2) only those
hybrid instruments that were issued, acquired or substantively modified after
December 31, 1997, or (3) only those hybrid instruments that were issued,
acquired or substantively modified after December 31, 1998.
Northern Indiana anticipates adopting SFAS No. 133 on January 1, 2001,
but has not determined the impact or method of adoption. The fair value of
derivatives used in price risk management are described in "Risk Management
Activities."
The fair value of these derivatives would be recognized as assets or
liabilities on the balance sheet consistent with the current accounting
treatment for certain freestanding derivatives. Northern Indiana has not yet
quantified the other effects of adopting SFAS No. 133 on its financial
statements. However, the Statement could increase volatility in earnings and
other comprehensive income.
REGULATORY ASSETS. Northern Indiana's operations are subject to the
regulation of the Commissions. Accordingly, Northern Indiana's accounting
policies are subject to the provisions of SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation." Northern Indiana monitors changes in
market and regulatory conditions and the resulting impact of such changes in
order to continue to apply the provisions of SFAS No. 71 to some or all of its
operations. As of December 31, 1999 and December 31, 1998, the regulatory
assets identified below represent probable future revenue to Northern Indiana
as these costs are recovered through the rate-making process. If a portion of
Northern Indiana's operations becomes no longer subject to the provisions of
SFAS No. 71, a write-off of certain regulatory assets might be required, unless
some form of transition cost recovery is established by the appropriate
regulatory body which would meet the requirements under generally accepted
accounting principles for continued accounting as regulatory assets during such
recovery period. Regulatory assets were comprised of the following items:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
============= =============
(Dollars in thousands)
<S> <C> <C>
Unamortized reacquisition premium on
debt (Note 13) $ 39,499 $ 42,962
Unamortized R. M. Schahfer Unit 17 and
Unit 18 carrying charges
and deferred depreciation (See below) 58,111 62,329
Bailly scrubber carrying charges and
deferred depreciation (See below) 8,010 8,945
Deferral of SFAS No. 106 expense not
recovered (Note 6) 72,769 78,367
FERC Order No. 636 transition costs 13,728 22,093
Regulatory income tax asset, net (Note 4) 18,208 21,635
------------- -------------
210,325 236,331
------------- -------------
Less: Current portion of regulatory assets 24,245 32,609
------------- -------------
$ 186,080 $ 203,722
============= =============
</TABLE>
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 IURC 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 IURC. The accumulated balance of the deferred costs and related carrying
charges is being amortized over the remaining life of the scrubber service
agreement.
INCOME TAXES. The liability method of accounting is used 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
book and tax bases of assets and liabilities. Deferred investment tax credits
are being amortized over the life of the related property.
(3) ENVIRONMENTAL MATTERS:
GENERAL. The operations of Northern Indiana are subject to extensive and
evolving federal, state and local environmental laws and regulations intended
to protect the public health and the environment. Such environmental laws
and regulations affect Northern Indiana's operations as they relate to impacts
on air, water and land.
SUPERFUND. Because Northern Indiana is a "potentially responsible
party" (PRP), under Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA), at several waste disposal sites, as well as at former
manufactured-gas plant sites which it, or its corporate predecessors, own or
owned or operated, it may be required to share in the costs of clean up of
such sites. A program was instituted to investigate former manufactured-gas
plant sites where it is the current or former owner, which investigation has
identified twenty-four of such sites. Initial sampling has been conducted at
nineteen sites. Investigation activities have been completed at fourteen sites
and remedial measures have been selected or implemented at nine sites. Northern
Indiana intends to continue to evaluate its facilities and properties with
respect to environmental laws and regulations and take any required corrective
action.
In an effort to recover a portion of the costs related to the former
manufactured gas plants, various companies that provided insurance coverage
which Northern Indiana believed covered costs related to former
manufactured-gas plant sites were approached. Northern Indiana filed claims
in Indiana state court against various insurance companies, seeking coverage
for costs associated with several manufactured-gas plant sites and damages
for alleged misconduct by some of the insurance companies. Settlements have
been reached with all insurance companies. Additionally, agreements have been
reached with other Indiana utilities relating to cost sharing and management of
the investigation and remediation of several former manufactured-gas plant sites
at which Northern Indiana and such utilities or their predecessors were
operators or owners.
As of December 31, 1999, a reserve of approximately $17.3 million has
been recorded to cover probable corrective actions. The ultimate liability in
connection with these sites will depend upon many factors, including the
volume of material contributed to the site, the number of other PRP's and
their financial viability, the extent of corrective actions required and rate
recovery. Based upon investigations and management's understanding of current
environmental laws and regulations, Northern Indiana believes that any
corrective actions required, after consideration of insurance coverages
and contributions from other PRP's and rate recovery will not have a material
effect on its financial position or results of operations.
CLEAN AIR ACT. The Clean Air Act Amendments of 1990 (CAAA) impose
limits to control acid rain on the emission of sulfur dioxide and nitrogen
oxides (NOx) which become fully effective in 2000. All of Northern Indiana's
facilities are already in compliance with sulfur dioxide limits. Northern
Indiana has already taken most of the steps necessary to meet the NOx limits.
The CAAA also contain other provisions that could lead to limitations
on emissions of hazardous air pollutants and other air pollutants (including
NOx as discussed below), which may require significant capital expenditures
for control of these emissions. Until specific rules have been issued that
affect Northern Indiana's facilities, what these requirements will be or the
costs of complying with these potential requirements cannot be predicted.
NITROGEN OXIDES. During 1998, the Environmental Protection Agency (EPA)
issued a final rule, the NOx State Implementation Plan (SIP) call, requiring
certain states, including Indiana, to reduce NOx levels from several sources,
including industrial and utility boilers. The EPA stated that the intent of
the rule is to lower regional transport of ozone impacting other states'
ability to attain the federal ozone standard. According to the rule, the
State of Indiana must issue regulations implementing the control program. The
State of Indiana, as well as some other states, filed a legal challenge in
December 1998 to the EPA NOx SIP call rule. Lawsuits have also been filed
against the rule by various groups, including utilities. On May 25, 1999, the
United States Circuit Court of Appeals for the D. C. Circuit issued an order
staying the NOx SIP call rule's September 30, 1999 deadline for the state
submittals until further order of the court. Any resulting NOx emissions
limitations could be more restrictive than those imposed on electric utilities
under the CAAA's acid rain NOx reduction program described above. Northern
Indiana is evaluating the EPA's final rule and any potential requirements that
could result from the final rule as implemented by the State of Indiana.
Northern Indiana believes that the costs relating to compliance with the new
standards may be substantial, but such costs depend upon the outcome of the
current litigation and the ultimate control program agreed to by the targeted
states and the EPA. Northern Indiana is continuing its programs to reduce NOx
emissions and will continue to closely monitor developments in this area.
In a related matter to EPA's NOx SIP call, several Northeastern states
have filed petitions with the EPA under Section 126 of the Clean Air Act. The
petitions allege harm and request relief from sources of emissions in the
Midwest that allegedly cause or contribute to ozone nonattainment in their
states. Northern Indiana is monitoring EPA's decisions on these petitions and
existing litigation to determine the impact of these developments on Northern
Indiana's programs to reduce NOx emissions.
The EPA issued final rules revising the National Ambient Air Quality
Standards for ozone and particulate matter in July 1997. On May 14, 1999,
the United States Court of Appeals for the D.C. Circuit remanded the new rules
for both ozone and particulate matter standards to the EPA. Once rectified,
the revised standards could require additional reductions in sulfur dioxide,
particulate matter and NOx emissions from coal-fired boilers (including
Northern Indiana's generating stations) beyond measures discussed above.
Final implementation methods will be set by the EPA as well as state
regulatory authorities. Northern Indiana believes that the costs relating to
compliance with any new limits may be substantial but are dependent upon the
ultimate control program agreed to by the targeted states and the EPA.
Northern Indiana will continue to closely monitor developments in this area
and anticipates the exact nature of the impact of the new limits on its
operations will not be known for some time.
In a letter dated September 15, 1999, the Attorney General of the State
of New York alleged that Northern Indiana violated the Clean Air Act by
constructing a major modification of one of its electric generating stations
without obtaining pre-construction permits required by the Prevention of
Significant Deterioration (PSD) program. The major modification allegedly
took place at the R. M. Schahfer Station when, "in approximately 1995-1997,
Northern Indiana upgraded the coal handling system at Unit 14 at the plant."
While Northern Indiana is investigating the allegations, Northern Indiana does
not believe that the modifications required pre-construction review under the
PSD program and believes that all appropriate permits were acquired.
CARBON DIOXIDE. Initiatives are being discussed both in the United
States and worldwide to reduce so-called "greenhouse gases" such as carbon
dioxide, and other by-products of burning fossil fuels. Reduction of such
emissions could result in significant capital outlays or operating expenses
to Northern Indiana.
CLEAN WATER ACT AND RELATED MATTERS. Northern Indiana's wastewater and
water operations are subject to pollution control and water quality control
regulations, including those issued by the EPA and the State of Indiana.
Under the Federal Clean Water Act and Indiana's regulations, Northern
Indiana must obtain National Pollutant Discharge Elimination System permits for
water discharges from various facilities, including electric generating and
water treatment stations. These facilities either have permits for their water
discharge or they have applied for a permit renewal of any expiring permits.
These permits continue in effect pending review of the current applications.
(4) INCOME TAXES: Deferred income taxes are recognized as costs in the
rate-making process by the Commissions having jurisdiction over 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 consolidated 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.
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 allowance for
funds used during construction-equity (AFUDC) 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 income 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
NiSource and currently pays to NiSource its separate return tax liability
as defined in the Tax Sharing Agreement between NiSource and its subsidiaries.
The components of the net deferred income tax liability at December 31,
1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
=========== ===========
(Dollars in thousands)
<S> <C> <C>
Deferred tax liabilities -
Accelerated depreciation
and other property differences $ 714,246 $ 735,589
AFUDC-equity 30,748 33,029
Adjustment clauses 15,545 14,322
Other regulatory assets 27,598 29,721
Prepaid pension and other benefits 56,227 34,170
Reacquisition premium on debt 14,980 16,293
Deferred tax assets -
Deferred investment tax credits (32,451) (35,154)
Removal costs (171,645) (157,728)
Other postretirement/postemployment
benefits (53,061) (48,208)
Other, net (27,928) (23,682)
----------- -----------
574,259 598,352
Less: Deferred income taxes related to
current assets and liabilities (17,763) (10,583)
----------- -----------
Deferred income taxes - noncurrent $ 592,022 $ 608,935
=========== ===========
</TABLE>
Federal and state income taxes as set forth in the Consolidated
Statement of Income are comprised of the following:
<TABLE>
<CAPTION>
1999 1998 1997
========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C>
Current income taxes -
Federal $ 135,787 $ 140,364 $ 108,902
State 18,102 20,156 16,816
--------- --------- ---------
153,889 160,520 125,718
--------- --------- ---------
Deferred income taxes, net -
Federal (18,191) (30,290) (7,998)
State (1,305) (2,284) (416)
--------- --------- ---------
(19,496) (32,574) (8,414)
--------- --------- ---------
Deferred investment tax credits, net (7,126) (7,160) (7,205)
--------- --------- ---------
Total utility income taxes 127,267 120,786 110,099
Income tax applicable to non-operating
activities and income of subsidiaries (1,585) (1,937) (3,536)
--------- --------- ---------
Total income taxes $ 125,682 $ 118,849 $ 106,563
========= ========= =========
</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>
1999 1998 1997
========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C>
Net income $ 222,111 $ 220,180 $ 196,620
Add - Income taxes 125,682 118,849 106,563
--------- --------- ---------
Net Income before income taxes $ 347,793 $ 339,029 $ 303,183
========= ========= =========
Amount derived by multiplying pretax
income by statutory rate $ 121,728 $ 118,660 $ 106,114
Reconciling items multiplied by the
statutory rate:
Book depreciation over related tax
depreciation 3,934 3,992 4,072
Amortization of deferred investment tax
credits (7,126) (7,160) (7,205)
State income taxes, net of federal income
tax benefit 10,461 10,817 10,514
Reversal of deferred taxes provided at
rates in excess of the current federal
income tax rate (5,457) (6,472) (6,151)
Other, net 2,142 (988) (781)
--------- --------- ---------
Total income taxes $ 125,682 $ 118,849 $ 106,563
========= ========= =========
</TABLE>
(5) PENSION PLAN: NiSource 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 change in the benefit obligation for 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
========== ==========
(Dollars in thousands)
<S> <C> <C>
Benefit obligation at beginning $ 914,273 $ 843,049
of year (January 1,)
Service cost 15,858 15,347
Interest cost 61,613 58,337
Plan amendments 0 14,655
Actuarial (gain) loss (50,217) 37,247
Benefits paid (54,823) (54,362)
---------- ----------
Benefit obligation at end of
the year (December 31,) $ 886,704 $ 914,273
========== ==========
</TABLE>
The change in the fair value of the plan's assets for years 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
========== ==========
(Dollars in thousands)
<S> <C> <C>
Fair value of plan assets at $ 958,435 $ 896,950
beginning of year January 1,)
Actual return on plan's assets 158,775 82,547
Employer contributions 35,000 33,300
Benefits paid (54,823) (54,362)
---------- ----------
Plan assets at fair value at
end of the year (December 31,) $1,097,387 $ 958,435
========== ==========
</TABLE>
The plan's assets are invested primarily in common stocks, bonds and
notes.
The plan's funded status as of December 31, 1999 and December 31, 1998 is
as follows:
<TABLE>
<CAPTION>
1999 1998
========= =========
(Dollars in thousands)
<S> <C> <C>
Plan assets in excess of $ 210,683 $ 44,162
benefit obligation
Unrecognized net actuarial (gain) (140,665) (16,162)
Unrecognized prior service cost 50,165 55,761
Unrecognized transition amount
being recognized over
seventeen years 21,953 27,442
--------- ---------
Prepaid pension costs $ 142,136 $ 111,203
========= =========
</TABLE>
The benefit obligation is the present value of future pension benefit
payments and is based on the plan benefit formula which considers expected
future salary increases. Discount rates of 7.75% and 7.00% and rates of
increase in compensation levels of 4.5% and 4.5% were used to determine the
benefit obligations at December 31, 1999 and 1998, respectively.
The long-term portion of prepaid pension cost amounts for 1999 and 1998
are reported under the caption "Prepayments and Other" in the Consolidated
Balance Sheet.
The following items are the components of provisions for pensions for
the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C>
Service costs $ 15,858 $ 15,347 $ 13,325
Interest costs 61,613 58,337 55,921
Expected return on plan assets (84,488) (80,329) (70,482)
Amortization of transition obligation 5,488 5,488 5,488
Amortization of prior service cost 5,596 4,397 3,329
--------- --------- ---------
$ 4,067 $ 3,240 $ 7,581
========= ========= =========
</TABLE>
Assumptions used in the valuation and determination of 1999, 1998 and
1997 pension expense were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
====== ====== ======
<S> <C> <C> <C>
Discount rate 7.00% 7.00% 7.75%
Rate of increase in compensation levels 4.50% 4.50% 5.50%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
</TABLE>
(6) POSTRETIREMENT BENEFITS: Northern Indiana provides certain health care
and life insurance benefits for retired employees are provided. Substantially
all 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. Current rates include postretirement benefit costs on an accrual
basis, including amortization of the regulatory assets that arose prior to
inclusion of these costs in rates.
The following table sets forth the change in the plan's accumulated
postretirement benefit obligation (APBO) as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
========= =========
(Dollars in thousands)
<S> <C> <C>
Accumulated postretirement $ 207,079 $ 195,003
benefit obligation at
beginning of year (January 1,)
Service cost 3,010 3,314
Interest cost 14,217 13,685
Participant contributions 1,191 0
Actuarial (gain)loss (15,959) 6,260
Benefits paid (13,883) (11,183)
--------- ---------
Accumulated postretirement
benefit obligation at
end of the year (December 31,) $ 195,655 $ 207,079
========= =========
</TABLE>
The change in the fair value of the plan assets for the years 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
========= =========
(Dollars in thousands)
<S> <C> <C>
Fair value of plan assets at $ 2,903 $ 2,400
beginning of year (January 1,)
Actual return on plan assets 704 1,103
Employer contributions 12,477 9,301
Participant contributions 1,191 1,282
Benefits paid (13,883) (11,183)
--------- ---------
Plan assets at fair value at
end of the year (December 31,) $ 3,392 $ 2,903
========= =========
</TABLE>
Following is the funded status for postretirement benefits as of
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
========= =========
(Dollars in thousands)
<S> <C> <C>
Funded status $(192,262) $(204,176)
Unrecognized net actuarial(gain) (103,623) (90,700)
Unrecognized prior service cost 3,178 3,458
Unrecognized transition amount
being recognized over
twenty years 139,719 150,466
--------- ---------
Accrued liability for
postretirement benefits $(152,988) $(140,952)
========= =========
</TABLE>
In order to determine the APBO at December 31, 1999, a discount rate of
7.75% and a pre-Medicare medical trend rate of 6% declining to a long-term rate
of 5% was used, and at December 31, 1998, a discount rate of 7% and a
pre-Medicare medical trend rate of 7% declining to a long-term rate of 5% was
used.
Net periodic postretirement benefit costs, before consideration of the
rate-making discussed previously, for the years ended December 31, 1999, 1998
and 1997 include the following components:
<TABLE>
<CAPTION>
1999 1998 1997
========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C>
Service costs $ 3,010 $ 3,314 $ 3,068
Interest costs 14,217 13,685 14,523
Expected return on plan assets (261) (216) 0
Amortization of transition obligation
over twenty years 10,748 10,748 10,747
Amortization of prior service cost 279 279 279
Amortization of actuarial (gain) (5,556) (5,786) (5,778)
--------- --------- ---------
$ 22,437 $ 22,024 $ 22,839
========= ========= =========
</TABLE>
Assumptions used in the determination of 1999, 1998 and 1997 net periodic
postretirement costs were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
====== ====== ======
<S> <C> <C> <C>
Discount rate 7.00% 7.00% 7.75%
Rate of increase in compensation increase 4.50% 4.50% 5.50%
Assumed annual rate of increase in health
care benefits 7.00% 8.00% 8.00%
Assumed ultimate trend rate 5.00% 5.00% 6.00%
</TABLE>
The effect of a 1% increase in the assumed health care cost trend
rates for each future year would increase the APBO at December 31, 1999 by
approximately $21.9 million, and increase the aggregate of the service and
interest cost components of plan costs by approximately $2.4 million for the
year ended December 31, 1999. The effect of a 1% decrease in the assumed
health care cost trend rates for each future year would decrease the APBO at
December 31, 1999, by approximately $18.1 million, and decrease the aggregate
of the service and interest cost components of plan costs by approximately $1.9
million for the year ended December 31, 1999. Amounts disclosed above could be
changed significantly in the future by changes in health care costs, work force
demographics, interest rates, or plan changes.
(7) 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 8 sets forth the preferred stocks which are redeemable solely at
the option of Northern Indiana and Note 9 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.
(8) PREFERRED STOCKS, REDEEMABLE SOLELY AT OPTION OF NORTHERN INDIANA (SEE
NOTE 7):
The redemption prices at December 31, 1999 for the cumulative preferred
stock, which is redeemable solely at the option of Northern Indiana, in whole
or in part, at any time upon thirty days' notice, were 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, 1999),
Series A (stated value $50 per share) $ 50.00
</TABLE>
(9) REDEEMABLE PREFERRED STOCKS (SEE NOTE 8):
The redemption prices at December 31, 1999, 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, were 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% $100.37, reduced periodically 12,500 shares on or before
April 1.
8.35% $103.20, 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% $103.88, 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, 1999 for each of the four years subsequent to
December 31, 2000 were as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
========================
(Dollars in thousands)
<S> <C>
2001 $ 1,828
2002 $44,828
2003 $ 1,828
2004 $ 878
</TABLE>
Sinking fund payments due within one year are reported under the caption
"Other" in the Consolidated Balance Sheets.
(10) COMMON SHARE DIVIDEND: Northern Indiana's Indenture dated August 1,
1939, as amended and supplemented (Indenture), provides that it will not
declare or pay any dividends on any class of capital stock (other than
preferred or preference stock) except out of earned surplus or net profits
of Northern Indiana. At December 31, 1999, Northern Indiana had
approximately $136.1 million of retained earnings (earned surplus) available
for the payment of dividends. Future dividends will depend upon adequate
retained earnings, adequate future earnings and the absence of adverse
developments.
(11) COMMON SHARES: Effective with the exchange of common shares on March 3,
1988, all of Northern Indiana's common shares are owned by NiSource.
(12) LONG-TERM INCENTIVE PLAN: NiSource 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 5.0 million
of NiSource common shares to key employees through April 1998 and April 2004,
respectively. The 1988 Plan, as amended and restated, and the 1994 Plan, as
amended and restated, were re-approved by shareholders at NiSource's 1999 Annual
Meeting of Shareholders, held April 14, 1999.
At December 31, 1999, there were 1.8 million shares reserved for future
awards under the 1994 Plan. The Plans permit the following types of grants,
separately or in combination: nonqualified stock options, incentive stock
options, restricted stock awards, stock appreciation rights and performance
units. No incentive stock options or performance units were outstanding at
December 31, 1999. Under the Plans, the exercise price of each option equals
the market price of NiSource's common stock on the date of grant. Each option
has a maximum term of ten years and vests one year from the date of grant.
Stock appreciation rights (SARs) may be granted only in tandem with stock
options on a one-for-one basis and are payable in cash, NiSource's common
shares, or a combination thereof. There were no SARs outstanding at
December 31, 1999. 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 1998 and 1999 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
513,500, 534,666 and 542,666 restricted shares outstanding at December 31, 1999,
1998 and 1997, 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 charged against net income for restricted stock awards was
$1.2 million $0.8 million and $0.7 million for the years ended December 31,
1999, 1998 and 1997, respectively. Had compensation cost for non-qualified
stock options been determined consistent with SFAS No. 123 "Accounting for
Stock-Based Compensation," net income would have been reduced to the following
pro forma amounts.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998 1997
======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C>
Net Income:
As reported $222,111 $220,180 $196,620
Pro forma $220,461 $219,058 $195,770
</TABLE>
The fair value of each option granted as used to determine pro forma net
income is estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants
in the years ended December 31, 1999, 1998 and 1997, respectively: risk-free
interest rate of 5.87%, 5.29% and 6.19%; expected dividend yield of $1.02, $0.96
and $0.90 per share; expected option term of five and one-quarter years for 1999
and 1998 and five years for 1997; and expected volatility of 15.72% for 1999,
13.09% for 1998 and 12.2% for 1997. The weighted average fair value of options
granted to all plan participants was $3.66, $4.28 and $2.66 for the years ended
December 31, 1999, 1998 and 1997, respectively. There were 744,750, 607,000
and 553,600 nonqualified stock options granted to all plan participants for the
years ended December 31, 1999, 1998 and 1997, respectively.
(13) LONG-TERM DEBT: The sinking fund requirements and maturities of long-term
debt outstanding at December 31, 1999 for each of the four years subsequent to
December 31, 2000 were as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
========================
(Dollars in thousands)
<S> <C>
2001 $ 19,000
2002 $ 59,000
2003 $130,000
2004 $ 32,000
</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 have been deferred and are being amortized.
These premiums are not earning a return during the recovery period.
Northern Indiana's Indenture, pursuant to which first mortgage bonds
have been issued, constitutes a direct first mortgage lien upon substantially
all of Northern Indiana's property and franchises, other than expressly excepted
property.
Northern Indiana is authorized to issue and sell up to $217,692,000
Medium-Term Notes, Series E, with various maturities, for purposes of
refinancing certain first mortgage bonds and medium-term notes. As of
December 31, 1999, $139.0 million of the medium-term notes had been issued
with various interest rates and maturities.
(14) CURRENT PORTION OF LONG-TERM DEBT: At December 31, 1999 and 1998,
Northern Indiana's current portion of long-term debt due within one year was
as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
============ ============
(Dollars in thousands)
<S> <C> <C>
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
Medium-term notes -
Interest rates of 6.10% and 6.90% with a
weighted average interest rate of 6.80%
and maturities between March 20, 2000
and June 1, 2000 $ 155,000 $ 155,000
Sinking funds due within one year 3,000 2,000
------------ ------------
Total current portion of long-term debt $ 158,000 $ 157,000
============ ============
</TABLE>
(15) SHORT-TERM BORROWINGS: Northern Indiana entered into a five-year $100
million credit agreement and a 364-day $100 million revolving credit agreement
with several banks. These agreements terminate on September 23, 2003 and
September 23, 2000, respectively. The 364-day agreement may be extended at
expiration for additional periods of 364-days. Under these agreements, funds
are borrowed at a floating rate of interest or, under certain circumstances,
at a fixed rate of interest for short-term periods. These agreements provide
financing flexibility and may be used to support the issuance of commercial
paper. At December 31, 1999 and 1998, there were no borrowings outstanding
under these agreements.
In addition, Northern Indiana has $11.4 million in lines of credit which
run until May 31, 2000. The credit pricing of each of the lines varies from
either the lending banks' commercial prime or market rates. As of December 31,
1999, there were no borrowings under these lines of credit. The credit
agreements and lines of credit are also available to support the issuance of
commercial paper.
Northern Indiana also has $220 million of money market lines of credit.
As of December 31, 1999 and December 31, 1998, $33.7 million and $40.5
million of borrowings were outstanding, respectively, under these lines of
credit.
At December 31, 1999 and 1998, Northern Indiana's short-term borrowings
were as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
============ ============
(Dollars in thousands)
<S> <C> <C>
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
Commercial paper -
Weighted average interest rate of 6.53%
at December 31, 1999 $ 62,565 $ 85,600
Notes payable -
Interest rates between 6.50%
and 7.45% with a weighted average
interest rate of 7.06% and maturities
of January 18, 2000 and January 28, 2000 33,725 40,500
------------ ------------
Total short-term borrowings $ 96,290 $ 126,100
============ ============
</TABLE>
(16) OPERATING LEASES: On April 1, 1990, Northern Indiana entered into a
twenty-year agreement for the rental of office facilities from NiSource
Development Company, Inc., a subsidiary of NiSource, at a current annual
rental payment of approximately $3.5 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, 1999:
<TABLE>
<CAPTION>
Year Ending December 31, (Dollars in thousands)
======================== ======================
<S> <C>
2000 $ 7,170
2001 7,107
2002 7,107
2003 7,107
2004 4,969
Later years 32,033
---------
Total minimum payments required $ 65,493
=========
</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>
1999 $ 11,138
1998 $ 9,391
1997 $ 7,675
</TABLE>
(17) COMMITMENTS: Northern Indiana estimates that approximately $1,051
million will be expended for construction purposes for the period from
January 1, 2000 to December 31, 2004. 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 its Bailly
Generating Station. Services under this contract commenced on June 15, 1992
with annual charges approximating $20 million. The agreement provides that,
assuming various performance standards are met by Pure Air, a termination
payment would be due if Northern Indiana terminates the agreement prior to the
end of the twenty-year contract period.
A ten-year agreement to outsource all data center, application
development and maintenance, and desktop management expires in 2005. Annual
fees under this agreement are approximately $20 million.
(18) RISK MANAGEMENT ACTIVITIES: Northern Indiana uses certain commodity-
base derivatives financial instruments to manage certain risks inherent in its
business. Northern Indiana's senior management takes an active role in the risk
management process and has developed policies and procedures that require
specific administrative and business functions to assist in the identification,
assessment and control of various risks. The open positions resulting from risk
management activities are managed in accordance with strict policies which limit
exposure to market risk and require daily reporting to management of potential
financial exposure.
Northern Indiana uses futures contracts, options and swaps to hedge a
portion of its price risk associated with its non-trading activities in gas
supply for its regulated gas utility, certain customer choice programs. At
December 31, 1999, Northern Indiana had futures contracts representing the hedge
of natural gas sales in the notional amount of 0.6 billion cubic feet (BCF) and
the resulting deferred gain was not material.
Northern Indiana trading operation includes the activities of its power
trading business. Northern Indiana employes a value-at-risk (VaR) model to
assess the market risk of its energy trading portfolios. Northern Indiana
estimates the one - day VaR for its trading group which utilizes derivatives
using either a Monte Carlo simulation or variance/covariance at 95 percent
confidence level. Based on the results of the VaR analysis, the daily market
exposure for power trading on an average, high and low basis was $0.4, $1.2 and
$0.014 million during 1999, respectively.
Unrealized gains and losses on Northern Indiana's portfolio are recorded
as price risk management assets and liabilities. The market prices used to
value price risk management activities reflect the best estimate of market
prices considering various factors, including closing exchange and over-the-
counter quotations and price volatility factors underlying the commitments. The
accompanying financial statements reflect price risk management assets and
liabilities (including net option premiums) of $32 million and $54 million at
December 31, 1999. Power trading results are reflected on a net basis in the
accompanying statement of income, consistent with the guidance in EITF Issue No.
98-10 with respect to the use of written options. Northern Indiana has recorded
a net profit of $11 million as a component of Other Income (deductions) for
the year ended December 31, 1999.
(19) 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
due to the short maturity of those instruments.
INVESTMENTS: Investments are carried at cost, which approximates
market value.
LONG-TERM DEBT AND PREFERRED STOCK: The fair value of these securities
are estimated based on the quoted market prices for the same or similar
issues or on the rates offered 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 financial instruments
were as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
========== ========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash
equivalents $ 6,145 $ 6,145 $ 19,541 $ 19,541
Investments $ 251 $ 251 $ 251 $ 251
Long-term debt
(including current
portion) $1,078,413 $ 997,196 $1,079,959 $1,137,657
Preferred stock
(including current
portion $ 136,972 $ 116,464 $ 139,379 $ 136,316
</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.
(20) 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 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Basic Steel Industry 1999 1998 1997
==================== ====== ====== ======
<S> <C> <C> <C>
Gas revenue percent 3 % 4 % 5 %
Electric revenue percent 18 % 17 % 20 %
</TABLE>
(21) QUARTERLY FINANCIAL DATA:
The following data summarize certain operating results for each of the
quarters of 1999 and 1998:
<TABLE>
<CAPTION>
1999 Quarters Ended March 31 June 30 Sept. 30 Dec. 31
========== ========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating revenues $ 506,586 $ 372,849 $ 409,096 $ 454,779
Operating expenses and taxes 417,511 315,198 329,966 381,049
---------- ---------- ---------- ----------
Operating income 89,075 57,651 79,130 73,730
Other income (deductions) (1,071) 1,091 1,681 (3,974)
Interest charges 18,612 17,986 18,696 19,908
---------- ---------- ---------- ----------
Net income 69,392 40,756 62,115 49,848
Dividend requirements on
preferred stock 2,065 2,026 2,021 2,019
---------- ---------- ---------- ----------
Balance available for
common shares $ 67,327 $ 38,730 $ 60,094 $ 47,829
========== ========== ========== ==========
<CAPTION>
1998 Quarters Ended March 31 June 30 Sept. 30 Dec. 31
========== ========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating revenues $ 458,916 $ 370,470 $ 383,285 $ 435,932
Operating expenses and taxes 372,782 310,164 311,247 352,261
---------- ---------- ---------- ----------
Operating income 86,134 60,306 72,038 83,671
Other income (deductions) (608) (1,268) (1,061) (652)
Interest charges 19,752 19,236 19,748 19,644
---------- ---------- ---------- ----------
Net income 65,774 39,802 51,229 63,375
Dividend requirements on
preferred stock 2,116 2,077 2,072 2,070
---------- ---------- ---------- ----------
Balance available for
common shares $ 63,658 $ 37,725 $ 49,157 $ 61,305
========== ========== ========== ==========
</TABLE>
(22) SEGMENTS OF BUSINESS: Operating segments are defined as components of
an enterprise for which separate financial information is available and is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Northern Indiana makes all
decisions on finance, dividends and taxes at the corporate level.
Northern Indiana's reportable operating segments include regulated gas
and electric services. Northern Indiana supplies gas and electric services to
residential, commercial and industrial customers. In addition, the electric
segment includes Northern Indiana's wholesale power marketing operation which
markets wholesale power to other utilities and electric power marketers. The
other category includes gas exploration, real estate transactions, and non-
utility revenues and expenses.
Reportable segments are operations that are managed separately and meet
the quantitative thresholds.
Revenues for each segments are attributable to customers in the United
States.
The following tables provide information about business segments. In
addition, adjustments have been made to the segment information to arrive at
information included in the results of operations and financial position.
These adjustments include unallocated corporate assets, revenues and expenses.
The accounting policies of the operating segments are the same as those
described in Note 2, "Summary of Significant Accounting Policies."
<TABLE>
<CAPTION>
Adjust-
1999 Gas Electric Other ments Total
- ---- -------- ---------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $644,687 $1,107,532 $ 0 $ 0 $1,752,219
Other income (deductions)$ 1,872 $ 733 $ (4,806) $ (47) $ (2,248)
Depreciation and
amortization $ 75,016 $ 158,539 $ 0 $ 0 $ 233,555
Income before interest
and utility income
taxes $ 74,102 $ 355,331 $ (4,891) $ 38 $ 424,580
Assets $897,879 $2,757,575 $ 0 $ 0 $3,655,454
Capital expenditures $ 61,347 $ 131,491 $ 0 $ 0 $ 192,838
<CAPTION>
Adjust-
1998 Gas Electric Other ments Total
- ---- -------- ---------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $572,485 $1,076,118 $ 0 $ 0 $1,648,603
Other income (deductions)$ 1,396 $ 549 $ (5,383) $ (151) $ (3,589)
Depreciation and
amortization $ 71,707 $ 156,840 $ 0 $ 0 $ 228,547
Income before interest
and utility income
taxes $ 59,364 $ 365,516 $ (5,554) $ 20 $ 419,346
Assets $908,692 $2,743,257 $ 0 $ 0 $3,651,949
Capital expenditures $ 58,544 $ 123,579 $ 0 $ 0 $ 182,123
<CAPTION>
Adjust-
1997 Gas Electric Other ments Total
- ---- -------- ---------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $735,299 $1,017,083 $ 0 $ 0 $1,752,382
Other income (deductions)$ 823 $ 618 $ (4,695) $ (405) $ (3,659)
Depreciation and
amortization $ 69,182 $ 153,843 $ 0 $ 0 $ 223,025
Income before interest
and utility income
taxes $ 80,255 $ 312,405 $ (4,838) $ (262) $ 387,560
Assets $954,993 $2,719,921 $ 0 $ 0 $3,674,914
Capital expenditures $ 59,219 $ 115,012 $ 0 $ 0 $ 174,231
</TABLE>
The following table reconciles total reportable segment income before
interest and utility income taxes to net income for each of the years ending
1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
========= ========= =========
(Dollars in thousands)
<S> <C) <C> <C>
Income before interest and utility income taxes $ 424,580 $ 419,346 $ 387,560
Interest 75,202 78,380 80,841
Utility income taxes 127,267 120,786 110,099
--------- --------- ---------
Net Income $ 222,111 $ 220,180 $ 196,620
========= ========= =========
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of executive officers of Northern Indiana,
including their names, ages and offices held, as of March 25, 2000.
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
Years with
Northern
Name Age Indiana Offices Held in Past 5 Years
===================== ==== ========== ==================================
<S> <C> <C> <C>
Gary L. Neale 60 10 Chairman and Chief Executive Officer
since February 1999. Chairman,
President and Chief Executive
Officer from March 1993 to February
1999.
Stephen P. Adik 56 13 Executive Vice President and Chief
Financial Officer since April 1997.
Executive Vice President and Chief
Financial Officer, Finance and
Administration from April 1996 to
March 1997. Executive Vice
President and Chief Financial
Officer from April 1994 to March
1996.
Patrick J. Mulchay 58 37 President and Chief Operating
Officer since February 1999.
Executive Vice President and Chief
Operating Officer from July 1996 to
January 1999. Executive Vice
President and Chief Operating
Officer, Electric from January
1994 to June 1996.
Jeffrey W. Yundt 54 20 Executive Vice President since July
1996. Executive Vice President
and Chief Operating Officer, Gas
from January 1994 to June 1996.
Jerry L. Godwin 57 5 Vice President and General Manager,
Electric Supply since July 1996.
Vice President, Electric Supply
from November 1994 to June 1996.
Peggy H. Landini 47 2 Vice President, Commercial
Operations since August 1998. Vice
President, Sales and Customer
Service from April 1998 to August
1998.
Robert W. Schacht 49 27 Vice President, Distribution
Operations since July 1996. Vice
President, Gas Service and Sales
from January 1994 to June 1996.
Director, West Region prior
thereto.
Francis P. Girot, Jr. 55 22 Treasurer since March 1990.
David J. Vajda 44 22 Vice President, Finance since
February 2000. Controller July
1996 to February 2000. Director,
Strategic and Business Planning
from January 1996 to June 1996.
Auditor prior thereto.
Nina M. Rausch 56 22 Secretary since July 1992.
Mark D. Wyckoff 37 2 Assistant Secretary since April
1998.
</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 April 1, 1998, Peggy H. Landini was Director, Customer Service of
Louisville Gas & Electric Company; and prior to April 8, 1998, Mark D. Wyckoff
was an officer of NiSource (he continues to service that company as Vice
President, Human Resources and Assistant Secretary) and of various subsidiaries
of NiSource.
The following chart gives information about incumbent directors of
Northern Indiana. All of Northern Indiana's directors are also directors of
NiSource. Upon recommendation of the Nominating and Compensation Committee
of NiSource Board of Directors (Board), the Board of Directors of Northern
Indiana has nominated for re-election as directors Arthur J. Decio, Gary L.
Neale and Robert J. Welsh, each for a term of three years, to be elected by
written consent of NiSource in lieu of an Annual Meeting of the Shareholders.
<TABLE>
<CAPTION>
Has Been
Name, Age and Principal Occupations for Past Director
Five Years and Present Directorships Held Since
============================================ ==========
DIRECTORS WHOSE TERMS EXPIRE IN 2000
<S> <C>
Arthur J. Decio, 69-Chairman of the Board and Director 1991
of Skyline Corporation, Elkhart, Indiana, a manufacturer
of manufactured housing and recreational vehicles.
Gary L. Neale, 60-Chairman, President and Chief Executive 1991
Officer of NiSource since March 1, 1993; prior thereto,
Executive Vice President of NiSource, and President and
Chief Operating Officer of Northern Indiana. Mr. Neale
is also a director of Modine Manufacturing Company,
Chicago Bridge and Iron Company, and Mercantile National
Bank of Indiana.
Robert J. Welsh, 64-Chairman and Chief Executive Officer 1988
of Welsh, Inc., Merrillville, Indiana, a marketer of
petroleum products through convenience stores and travel
centers. Mr. Welsh is also the Chairman of the Board of
Aspen, Inc.
<CAPTION>
DIRECTORS WHOSE TERMS EXPIRE IN 2001
<S> <C>
Steven C. Beering, 67-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.
Carolyn Y. Woo, 45-Gillen Dean and Siegfried Professor, 1997
College of Business Administration, University of Notre
Dame, South Bend, Indiana. Dr. Woo is also a director
of Bindley Western Industries, Inc. and AON Corporation.
DIRECTORS WHOSE TERMS EXPIRE IN 2002
<S> <C>
Ian M. Rolland, 66-Director of Wells Fargo & Co.,............1978
Tokheim Corporation and Bright Horizons Family
Solutions. Prior to his retirement as an executive
officer of Lincoln National, Mr. Rolland served as
Chairman and Chief Executive Officer.
John W. Thompson, 50-Chairman, President and Chief...........1993
Executive Officer of Symantec Corp. Symantec produces
software and provides internet security technology.
Prior to joining Symantec in 1999, Mr. Thompson
was General Manager of IBM Americas. Mr. Thompson is
also a director of Fortune Brands Inc.
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY. The following table summarizes all annual and long-term
compensation for services to NiSource and its subsidiaries, including
Northern Indiana, for the years 1999, 1998 and 1997 awarded to, earned by or
paid to the Chief Executive Officer of NiSource during 1999 and the four
other most highly compensated officers of NiSource (Named Officers).
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation (1)
-----------------------------------
Other
annual
compen-
Salary Bonus sation
Name and principal position Year ($) ($)(2) ($)(3)
=========================== ==== ======== ======== ========
<S> <C> <C> <C> <C>
Gary L. Neale, Chairman, 1999 689,583 0 6,436
President and Chief 1998 561,250 345,000 7,073
Executive Officer 1997 520,000 390,000 6,711
Stephen P. Adik, Senior 1999 343,749 0 2,980
Executive Vice President, Chief 1998 268,750 148,500 2,202
Financial Officer and Treasurer 1997 250,000 171,250 2,575
Patrick J. Mulchay, President (6) 1999 294,166 104,670 2,800
and Chief Operating Officer - 1998 225,000 148,350 1,412
Northern Indiana Public Service 1997 210,000 150,675 851
Company
Jeffrey W. Yundt, Executive (6) 1999 294,166 62,130 149,415
Vice President, President and 1998 225,000 124,200 6,348
Chief Executive Officer - Bay State 1997 210,000 143,850 8,905
Gas Company
Joseph L. Turner, Senior Vice (7) 1999 208,750 69,968 3,791
President 1998 195,000 205,838 2,203
1997 180,000 113,675 1,175
<CAPTION>
Long Term Compensation
----------------------
Awards Payouts
------ -------
Secur- Long-Term
ities In- All
Under- centive other
lying Plan compen-
Options/ Payouts sation
Name and principal position Year SARs(#) ($)(4) ($)(5)
=========================== ==== ======== ======== =======
<S> <C> <C> <C> <C>
Gary L. Neale, Chairman, 1999 50,000 484,313 33,465
President and Chief 1998 50,000 415,251 31,704
Executive Officer 1997 50,000 0 42,993
Stephen P. Adik, Senior 1999 30,000 0 5,645
Executive Vice President, Chief 1998 20,000 207,626 5,324
Financial Officer and Treasurer 1997 20,000 0 5,673
Patrick J. Mulchay, President 1999 25,000 0 7,163
and Chief Operating Officer - 1998 20,000 0 6,666
Northern Indiana Public Service 1997 20,000 0 7,506
Company
Jeffrey W. Yundt, Executive 1999 25,000 0 3,776
Vice President, President and 1998 20,000 0 3,485
Chief Executive Officer-Bay State 1997 20,000 0 3,693
Gas Company
Joseph L. Turner, Senior 1998 10,000 0 7,396
Vice President 1998 10,000 0 6,948
1997 8,000 0 7,599
<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 portions of the bonuses paid to Messrs. Mulchay,
Yundt and Turner, which are described in Notes 6 and 7. The Bonus Plan is
designed to supplement a conservative base salary with incentive bonus
payments if targeted financial performance is attained. The 1999
target aggregate payout for the Bonus Plan for the Named Officers was
$1,212,500, which was more than the 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. In 1999, this
amount includes a one-time relocation allowance of $85,305 and a related
tax allowance of $60,412 for Mr. Yundt.
(4) The payouts shown are based on the value, at date of vesting, of
restricted shares awarded under NiSource's 1988 and 1994 Long-Term
Incentive Plans (Incentive Plans) 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, 1999 (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, 120,000 shares valued at $2,148,744; Messrs. Adik, Mulchay
and Yundt, 50,000 shares, each valued at $895,310; and Mr. Turner,
33,200 shares (includes 9,201 shares purchased pursuant to the PE
Plan described in footnote 6) valued at $594,504. Dividends on the
restricted shares were paid to the Named Officers. In 1999, this
amount includes a one-time relocation allowance for Mr. Yundt
(5) The Chairman, President, and Chief Executive Officer, the
Executive Vice Presidents and certain Vice Presidents of NiSource
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. "All other
Compensation" represents NiSource contributions to the 401(k) Plan
and the dollar value of the benefit to the Named Officers under
the supplemental life insurance plan, as follows: Mr. Neale-$1,066
401(k) Plan, $28,856 premium value and $3,543 term insurance cost; Mr.
Adik-$1,110 401(k) Plan, $3,474 premium value and $1,001 term insurance
cost; Mr. Mulchay - $362 401(k) Plan, $5,671 premium value and $1,130
term insurance cost; Mr. Yundt $2,976 premium value and $800 term
insurance cost and Mr. Yundt, $5,512 premium value and $1,884 term
insurance cost. The value of the life insurance premiums paid by NiSource
in excess of term insurance cost on behalf of the Named Officers under the
supplemental life insurance plan has been restated for all periods in
accordance with the present value interest-free loan method.
(6) Messrs. Mulchay and Yundt are also Presidents of Northern Indiana and
Bay State Gas Company, respectively, and 50% percent of their annual
increase compensation is determined based on the financial performance
of the business unit for which they are responsible
(7) Mr. Turner is also President of Primary Energy, Inc., a subsidiary of
subsidiary of NiSource, 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, $39,982 of Mr. Turner's bonus for 1999 was used
to purchase Common Shares of NiSource on or about February 29, 2000,
the date of payment of the bonus. In 1998, $93,023 of Mr. Turner's bonus
under the PE Plan was used to purchase Common shares of NiSource on or
about February 26, 1999, the date of payment of the bonus. The PE Plan
provides that the Common Shares are restricted for a period of five years,
and are subject to continued employment, except that they vest earlier in
the event of the employee's retirement, death or disability.
</FN>
</TABLE>
OPTION GRANTS IN 1999. The following table sets forth grants of options
to purchase Common Shares made during 1999 to the Named Officers. No stock
appreciation rights were awarded during 1999.
<TABLE>
<CAPTION>
OPTION/SAR/GRANTS IN LAST FISCAL YEAR
Individual Grants
Number
of
Secu- Percent of
rities Total
Under- Options/
lying SARs Grant
Options/ granted to Exercise Date
SARs Employees or Base Present
Granted in Fiscal Price Expiration Value
Name (#)(1) Year (2) ($/Sh)(3) Date ($) (4)
=================== ======== ========== ========= ========== ========
<S> <C> <C> <C> <C> <C>
Gary L. Neale 50,000 6.71% $ 24.59 08/24/09 $214,000
Stephen P. Adik 30,000 4.03% 24.59 08/24/09 128,400
Patrick J. Mulchay 25,000 3.36% 24.59 08/24/09 107,000
Jeffrey W. Yundt 25,000 3.36% 24.59 08/24/09 107,000
Joseph L. Turner 10,000 1.34% 24.59 08/24/09 42,800
<FN>
(1) All options granted in 1999 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 NiSource. 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 744,750 options granted to all employees in
1999.
(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-15.72% (calculated using daily Common
Share prices for the twelve-month period preceding the date of grant);
risk-free rate of return-5.87% (the rate for a ten-year U.S. treasury);
dividend yield-$1.02 option term-ten years; vesting-100% one year
after date of grant; and an expected option term of 5.4 years. No
assumptions relating to non-transferability or risk of forfeiture were
made. Actual gains, if any, on option exercises and Common Shares are
dependent on the future performance of the Common Shares and overall
market conditions. There can be no assurance that the amounts reflected
in this table will be achieved.
</FN>
</TABLE>
OPTION EXERCISE IN 1999. The following table sets forth certain
information concerning the exercise of options or stock appreciation rights
("SARs") during 1999 by each of the Named Officers and the number and value
of unexercised options and SARs at December 31, 1999.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
Number of Securities
Shares Underlying Unexercised
Acquired Options/SARs at Fiscal
on Value Year-End (#)
Exercise Realized ----------------------------
Name (#) ($) Exercisable Unexercisable
================== ======== ========== =========== =============
<S> <C> <C> <C> <C>
Gary L. Neale 0 $ 0 310,000 50,000
Stephen P. Adik 12,000 220,499 160,000 30,000
Patrick J. Mulchay 4,400 76,862 150,000 25,000
Jeffrey W. Yundt 12,000 220,499 160,000 25,000
Joseph L. Turner 0 0 75,000 10,000
<CAPTION>
Value of Unexercised
In-the-money Options/SARs
at Fiscal Year-End($) (1)
----------------------------
Name Exercisable Unexercisable
================ =========== =============
<S> <C> <C>
Gary L. Neale $407,190 $ 0
Stephen P. Adik 454,376 0
Patrick J. Mulchay 380,626 0
Jeffrey W. Yundt 454,376 0
Joseph L. Turner 122,782 0
<FN>
(1) Represents the difference between the option exercise price and
$17.9063, the average of high and low sale prices of the Common Shares
on December 31, 1999, as reported in "The Wall Street Journal."
</FN>
</TABLE>
LONG-TERM INCENTIVE PLAN AWARDS IN 1999. The following table sets forth
restricted shares awarded pursuant to the Long-Term Incentive Plan during
1999 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(1) (#) (#) (#)
================== ========== =========== ========= ====== =======
<S> <C> <C> <C> <C> <C>
Gary L. Neale 10,000 2 0 0 0
Stephen P. Adik 0 0 0 0 0
Patrick J. Mulchay 0 0 0 0 0
Jeffrey W. Yundt 0 0 0 0 0
Joseph L. Turner 0 0 0 0 0
</TABLE>
(1) Amounts stated in years.
The restrictions on shares awarded during 1999 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 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 NiSource's Pension Plan
and Supplemental Retirement Plan (the "Supplemental 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>
$ 350,000 144,750 193,000 201,750 210,500 210,500
400,000 167,250 223,000 233,000 243,000 243,000
450,000 189,750 253,000 264,250 275,500 275,500
500,000 212,250 283,000 295,500 308,000 308,000
550,000 234,750 313,000 326,750 340,500 340,500
600,000 257,250 343,000 358,000 373,000 373,000
650,000 279,750 373,000 389,250 405,500 405,500
700,000 302,250 403,000 420,500 438,000 438,000
750,000 324,750 433,000 451,750 470,500 470,500
800,000 347,250 463,000 483,000 503,000 503,000
850,000 369,750 493,000 514,250 535,500 535,500
900,000 392,250 523,000 545,500 568,000 568,000
950,000 414,750 553,000 576,750 600,500 600,500
1,000,000 437,250 583,000 608,000 633,000 633,000
1,050,000 459,750 613,000 639,250 665,500 665,500
1,100,000 482,250 643,000 670,500 698,000 698,000
</TABLE>
The credited years of service for each of the Named Officers, pursuant
to the Supplemental Plan, are as follows: Gary L. Neale - 25 years; Stephen
P. Adik - 21 years; Patrick J. Mulchay - 37 years; Jeffrey W. Yundt - 20
years; and Joseph L. Turner - 28 years.
Upon their retirement, regular employees and officers of NiSource
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 NiSource's pension plan, originally effective as of
January 1, 1945. The directors who are not and have not been officers of
NiSource 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 NiSource
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 NiSource has been determined by the Internal Revenue Service
to be qualified under Sections 401 of the Internal Revenue Code of 1986, as
amended (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 (up to a limit set
forth in the Code and adjusted periodically) plus any salary reduction
contributions made under the 401(k) Plan, minus any portion of a bonus in
excess of 50% of base pay, and any amounts paid for unused vacation time and
vacation days carried forward from prior years. The benefits listed in the
Pension Plan table are not subject to any deduction for Social Security or
other offset amounts.
NiSource also has a Supplemental Plan for officers. Participants in the
Plan are selected by the Board. Benefits from the Plan are to be paid from the
general assets of NiSource. 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 NiSource's Pension
Plan. In either case, the benefit is reduced by the actual pension payable
from NiSource' 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 NiSource has
authorized Change in Control and Termination Agreements ("the Agreements") with
Mr. Neale and the Vice Presidents of NiSource (including each of the Named
Officers) (each such person being an "executive"). NiSource believes that these
Agreements and related shareholder rights protections are in the best interests
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 target incentive
bonus compensation and the continuation of certain employee benefits for a
period of 36 months ("the Severance Period"), and a pro rata portion of the
executive's targeted incentive bonus for the year of termination. These
benefits are payable if the executive terminates employment for "Good Reason"
or is terminated by the company for any reason other than "Good Cause" within
twenty-four months following certain changes in control. Each of these
Agreements also provides for payment of these benefits if the executive
voluntarily terminates employment during a specified period within the
twenty-four months following the change in control.
The executive would receive benefits from NiSource that would otherwise
be earned during the Severance Period under NiSource' Supplemental Plan
and qualified retirement plans. 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 amounts under the
contracts, NiSource 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 NiSource. 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 Agreements if the executive's employment were terminated by
NiSource 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 NiSource (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 NiSource is paid $20,000 per year, $3,000 annually per standing committee
on which the director sits, $1,000 annually for each committee chairmanship,
$1,000 for each Board meeting attended and $750 per committee meeting attended.
Directors of NiSource do not receive any additional compensation for services as
a director of any NiSource 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.
NiSource's Nonemployee Director Retirement Plan provides a retirement
benefit for each nonemployee director of NiSource 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 NiSource.
NiSource's Nonemployee Director Stock Incentive Plan provides for grants
of restricted Common Shares to nonemployee directors of NiSource. The Plan
provides for a grant of 2,000 shares to each person, other 2,000 shares to
each person, other than an employee of NiSource, who is elected or reelected
as a director of NiSource at the time or election or reelection. The grants of
restricted shares vest in 20% annual increments, with full vesting five years
after the date of award. In 1999, 2,000 restricted Common Shares were
granted to each of Messrs. Roland, Thompson and Foster under the plan.
NiSource's Nonemployee Director Restricted Stock Unit Plan, which was
adopted by the Board in December 1998 and made effective as of January 1, 1999,
is a phantom stock plan that provides for grants to nonemployee directors of
restricted stock units that have a value related to NiSource's Common Shares.
Each nonemployee director received an initial grant of 500 units in April 1999.
Subsequent grants of 500 units will be made annually to nonemployee directors
upon election or re-election to the Board. The grants of units vest in 20%
annual increments, with full vesting five years after the date of award, and the
units have no voting or stock ownership rights.
NiSource has adopted a Directors' Charitable Gift Program for
nonemployee directors. Under the program, NiSource makes a donation to one
or more eligible tax-exempt organizations as designated by each eligible
director. NiSource contributes up to an aggregate of $125,000 for each
nonemployee directors who has served as a director of NiSource for at least
five years and up to an additional $125,000 (for an overall aggregate of
$250,000) for each nonemployee director who has 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 derive no financial benefit from the
program, as all deductions relating to the charitable donations accrue solely
to NiSource. All current nonemployee directors are eligible to participate
in the program.
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 pages 18 and 19.
(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 1999 10-K
========= ================================= ===========
<S> <C> <C>
II Valuation and Qualifying Accounts 65-67
</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 69-70.
(b) Reports on Form 8-K: None
<PAGE>
PART IV
<TABLE>
<CAPTION>
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
Twelve Months Ended December 31, 1999
(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 1999 Expenses Accounts were Created 1999
==================== ======= ========== ======== ============ ========
<S> <C> <C> <C> <C> <C>
Reserves Deducted
In Consolidated
Balance Sheet From
Assets To Which
They Apply:
Reserve for
accounts
receivables $ 4,458 $ 13,322 $ 0 $ 9,976 $ 7,804
Reserves Classified
Under Reserve
Section of
Consolidated
Balance Sheet:
Injuries and
damages reserve $ 6,540 $ 5,100 $ 0 $ 4,271 $ 7,369
Environmental
reserves $18,778 $ 3,710 $ 0 $ 5,159 $17,329
Miscellaneous
operating
reserves $ 3,515 $ 0 $ 0 $ 00 $ 3,515
</TABLE>
<PAGE>
PART IV
<TABLE>
<CAPTION>
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
Twelve Months Ended December 31, 1998
(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 1998 Expenses Accounts were Created 1998
==================== ======= ========== ======== ============ ========
<S> <C> <C> <C> <C> <C>
Reserves Deducted
In Consolidated
Balance Sheet From
Assets To Which
They Apply:
Reserve for
accounts
receivables $ 4,524 $ 9,060 $ 0 $ 9,126 $ 4,458
Reserves Classified
Under Reserve
Section of
Consolidated
Balance Sheet:
Injuries and
damages reserve $ 5,592 $ 4,000 $ 0 $ 3,052 $ 6,540
Environmental
reserves $18,764 $ 5,203 $ 0 $ 5,189 $18,778
Miscellaneous
operating
reserves $ 3,558 $ 0 $ 0 $ 43 $ 3,515
</TABLE>
<PAGE>
PART IV
<TABLE>
<CAPTION>
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
Twelve Months Ended December 31, 1997
(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 1997 Expenses Accounts were Created 1997
==================== ======= ========== ======== ============ ========
<S> <C> <C> <C> <C> <C>
Reserves Deducted
In Consolidated
Balance Sheet From
Assets To Which
They Apply:
Reserve for
accounts
receivables $ 4,568 $ 5,305 $ 0 $ 5,349 $ 4,524
Reserves Classified
Under Reserve
Section of
Consolidated
Balance Sheet:
Injuries and
damages reserve $ 4,376 $ 4,875 $ 0 $ 3,659 $ 5,592
Environmental
reserves $16,575 $ 9,064 $ 0 $ 6,875 $18,764
Miscellaneous
operating
reserves $ 4,131 $ 0 $ 0 $ 573 $ 3,558
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
Northern Indiana Public Service Company
(Registrant)
Date March 28, 2000 By /s/ Gary L. Neale
------------------------ --------------------------------------------
Gary L. Neale, Its Chairman
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, 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 Vice President Finance and
- --------------------------- Principal Accounting Officer
David J. Vajda
/s/ Steven C. Beering Director
- ---------------------------
Steven C. Beering
/s/ Arthur J. Decio Director March 28, 2000
- ---------------------------
Arthur J. Decio
/s/ Ian M. Rolland Director
- ---------------------------
Ian M. Rolland
/s/ John W. Thompson Director
- ---------------------------
John W. Thompson
/s/ Robert J. Welsh Director
- ---------------------------
Robert J. Welsh
Director
- ---------------------------
Carolyn Y. Woo
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number Description of Item
======== ===============================================================
<S> <C>
(3.1) 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).
(3.2) 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) 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).
(4.4) 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).
(4.5) 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).
(4.6) 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).
(4.7) 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)).
(4.8) First Supplemental Indenture, dated as of December 1, 1991,
between Northern Indiana and Manufacturers Hanover Trust Company,
as Trustee (incorporated by reference to Exhibit 4.1 to Northern
Indiana Registration Statement (Registration No. 33-63870)).
(4.9) Memorandum of Agreement with City of Michigan City, Indiana
(incorporated by reference to Exhibit 7 to Northern Indiana
Registration Statement (Registration No. 2-48531)).
(4.10) 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).
(4.11) 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).
(4.12) 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).*
(23) Consent of Arthur Andersen LLP.
(27) Financial Data Schedule.
<FN>
*Management contract or compensatory plan arrangement of Northern Indiana
Public Service Company.
</FN>
</TABLE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K into Northern Indiana
Public Service Company's previously filed Form S-3 Registration Statement
No. 333-26847.
/s/ Arthur Andersen LLP
Chicago, Illinois
March 28, 2000
<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, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,949,029
<OTHER-PROPERTY-AND-INVEST> 2,668
<TOTAL-CURRENT-ASSETS> 356,624
<TOTAL-DEFERRED-CHARGES> 161,053
<OTHER-ASSETS> 186,080
<TOTAL-ASSETS> 3,655,454
<COMMON> 859,488
<CAPITAL-SURPLUS-PAID-IN> 12,525
<RETAINED-EARNINGS> 136,118
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,008,131
54,030
81,114
<LONG-TERM-DEBT-NET> 326,500
<SHORT-TERM-NOTES> 33,725
<LONG-TERM-NOTES-PAYABLE> 30,500
<COMMERCIAL-PAPER-OBLIGATIONS> 62,565
<LONG-TERM-DEBT-CURRENT-PORT> 155,000
1,828
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,902,061
<TOT-CAPITALIZATION-AND-LIAB> 3,655,454
<GROSS-OPERATING-REVENUE> 1,752,219
<INCOME-TAX-EXPENSE> 127,267
<OTHER-OPERATING-EXPENSES> 1,325,391
<TOTAL-OPERATING-EXPENSES> 1,452,658
<OPERATING-INCOME-LOSS> 299,561
<OTHER-INCOME-NET> (2,248)
<INCOME-BEFORE-INTEREST-EXPEN> 297,313
<TOTAL-INTEREST-EXPENSE> 75,202
<NET-INCOME> 222,111
8,131
<EARNINGS-AVAILABLE-FOR-COMM> 213,980
<COMMON-STOCK-DIVIDENDS> 212,000
<TOTAL-INTEREST-ON-BONDS> 7,303
<CASH-FLOW-OPERATIONS> 456,536
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
