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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, 1995
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 1-9779
NIPSCO INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INDIANA 35-1719974
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
46320
5265 HOHMAN AVENUE (ZIP CODE)
HAMMOND, INDIANA
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 219-853-5200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON SHARES NEW YORK, CHICAGO AND PACIFIC
PREFERRED SHARE PURCHASE RIGHTS NEW YORK, CHICAGO AND PACIFIC
OBLIGATIONS PURSUANT TO SUPPORT NEW YORK
AGREEMENT WITH NIPSCO CAPITAL
MARKETS, INC.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [X]
AS OF FEBRUARY 29, 1996 61,887,824 COMMON SHARES (NOT INCLUDING 12,004,285
SHARES HELD IN TREASURY), WERE OUTSTANDING. THE AGGREGATE MARKET VALUE OF THE
COMMON SHARES (BASED UPON THE FEBRUARY 29, 1996 CLOSING PRICE OF $37 3/4 ON THE
NEW YORK STOCK EXCHANGE) HELD BY NONAFFILIATES WAS APPROXIMATELY
$2,317,413,000.
DOCUMENTS INCORPORATED BY REFERENCE
1995 NIPSCO INDUSTRIES, INC. ANNUAL REPORT TO SHAREHOLDERS--PARTS I, II AND
IV.
NOTICE OF ANNUAL MEETING AND PROXY STATEMENT DATED MARCH 8, 1996 FOR ANNUAL
MEETING TO BE HELD APRIL 10, 1996--PART III.
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PART 1
ITEM 1. BUSINESS
NIPSCO INDUSTRIES, INC. AND ITS SUBSIDIARIES. NIPSCO Industries, Inc.
(Industries) is an Indiana corporation, incorporated on September 22, 1987,
which serves as the holding company for a number of subsidiaries, including
four regulated companies: Northern Indiana Public Service Company (Northern
Indiana), Kokomo Gas and Fuel Company (Kokomo Gas), Northern Indiana Fuel and
Light Company, Inc. (NIFL) and Crossroads Pipeline Company (Crossroads).
Industries' major non-utility subsidiaries include NIPSCO Development
Company, Inc. (Development), NIPSCO Energy Services, Inc. (Services), Primary
Energy, Inc. (Primary) and NIPSCO Capital Markets, Inc. (Capital Markets).
Northern Indiana, Industries' largest and dominant subsidiary, is a public
utility operating company, incorporated in Indiana on August 2, 1912, engaged
in supplying natural gas and electric energy to the public. It operates in 30
counties in the northern part of Indiana, serving an area of about 12,000
square miles with a population of approximately 2,188,000. At December 31,
1995, Northern Indiana served approximately 636,600 customers with gas and
approximately 403,900 with electricity.
Kokomo Gas is a public utility operating company incorporated in Indiana in
1917, engaged in supplying natural gas to the public. It operates in the city
of Kokomo, Indiana and the surrounding area in 6 counties having a population
of approximately 100,000, and served approximately 32,200 customers at December
31, 1995. The Kokomo Gas service territory is contiguous to Northern Indiana's
gas service territory.
NIFL is a public utility operating company incorporated in Indiana in 1906,
engaged in supplying natural gas to the public. Headquartered in Auburn,
Indiana, it operates in 5 counties in the northeast corner of the state having
a population of approximately 66,700, and served approximately 31,100 customers
at December 31, 1995. The NIFL service territory is contiguous to Northern
Indiana's gas service territory.
Crossroads is a natural gas pipeline which was approved by the Federal Energy
Regulatory Commission (FERC) as an interstate pipeline in May 1995. Crossroads
had $1.8 million in operating revenues for year 1995.
Development makes various investments, including real estate and venture
capital investments. Services coordinates the energy-related diversification
ventures of Industries. Primary arranges energy-related projects with large
industrial customers. Capital Markets handles financing for ventures of
Industries and its subsidiaries other than Northern Indiana.
The majority of the "Business" discussion of this report relates to Northern
Indiana, Kokomo Gas, NIFL and Crossroads (Utilities). See "Segments of
Business" in the Notes to Consolidated Financial Statements and "Selected
Supplemental Information--Gas Statistics and Electric Statistics" in the 1995
Annual Report to Shareholders, which notes and information are incorporated by
reference (see Exhibit 13), regarding financial information about industry
segments and classes of customers served.
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BUSINESS OF NORTHERN INDIANA, KOKOMO GAS AND NIFL.
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, 1995, Northern Indiana generated 85.8% and purchased 14.2%
of its electric requirements.
Northern Indiana's 1995 electric control area peak of 3,161,200 kw, which
includes Wabash Valley Power Association, Inc. (WVPA) and Indiana Municipal
Power Agency (IMPA) for which Northern Indiana controls interchange operations,
was set on July 14, 1995. The 1995 peak established a new all-time peak
exceeding the old peak of 2,953,600 kw established on August 27, 1993. Northern
Indiana's 1995 internal peak load, which excludes WVPA and IMPA, was 2,882,200
kw set on July 14, 1995. This also established a new all-time internal peak
load exceeding the old peak of 2,736,100 kw established on August 27, 1993.
Northern Indiana's electric system is interconnected with that of American
Electric Power (formerly Indiana Michigan Power Company), Commonwealth Edison
Company, CINergy Services, Inc. (formerly PSI Energy, Inc.), Consumers Power
Company, WVPA, IMPA, and Central Illinois Public Service Company. Electric
energy is purchased from, sold to, or exchanged with various other utilities
and other power marketers.
Northern Indiana provides WVPA with transmission and distribution service,
operating reserve requirements and capacity deficiency service, and provides
IMPA with transmission service, operating reserve requirements and capacity
deficiency service, in Northern Indiana's control area. Northern Indiana also
engages in sales and services under interconnection agreements with WVPA and
IMPA.
WVPA provides service to twelve Rural Electric Membership Corporations
(REMC's) located in Northern Indiana's control area. IMPA provides service to
the municipal electric system of the city of Rensselaer located in Northern
Indiana's control area.
Northern Indiana and WVPA have executed a supplemental agreement for unit
peaking capacity and energy. Pursuant to this agreement, which runs through
December, 2001, WVPA purchases 90,000 kw of capacity per month.
Northern Indiana has full requirement agreements with each of its eight
municipal wholesale customers. These full requirement contracts became
effective October 1, 1987 and extend through January 31, 1998.
Northern Indiana is a member of the East Central Area Reliability
Coordination Agreement (ECAR). ECAR is one of nine regional electric
reliability councils established to coordinate planning and operations of
member companies regionally and nationally.
FUEL SUPPLY. The generating units of Northern Indiana are located at Bailly,
Mitchell, Michigan City and Schahfer Generating Stations. Northern Indiana's
thirteen steam generating units have a net capability of 3,179,000 kw. Coal is
the primary source of fuel for all units, except
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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 1995 were
supplied as follows:
<TABLE>
<S> <C>
Coal................................................................ 96.4%
Natural Gas......................................................... 3.6%
</TABLE>
In 1995, Northern Indiana used approximately 8.0 million tons of coal at its
generating stations. Northern Indiana has established a normal level of coal
stock which provides adequate fuel supply during the year under all conditions.
Annual coal requirements for Northern Indiana's electric generating units
through 2000 are estimated to range from 8.1 million tons to 8.5 million tons,
depending from year to year upon anticipated sales levels, scheduled
maintenance and other variables. These requirements are being or will be met in
part under long-term contracts as follows:
<TABLE>
<CAPTION>
MILLION
TONS/YEAR SULFUR CONTENT EXPIRATION
--------- -------------- ----------
<S> <C> <C>
1.0 High 1998
Up to 1.0(a) High 1998
1.3(b) Low 2001
1.5(c) Low 1998
1.0(c) Low 1997
1.0(c) Low 1997
.5 High 1998
</TABLE>
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(a) Contract calls for requirements up to 1.0 million tons/contract year.
(b) 1.5 million tons in 1996.
(c) Plus or minus 10%/contract year.
The average cost of coal consumed in 1995 was $28.28 per ton or 15.89 mills
per kilowatt-hour (kwh) generated as compared to $32.04 per ton or 16.85 mills
per kwh generated in 1994. Northern Indiana's forecasts indicate that its coal
costs will remain at the current level or be slightly lower over the next two
years.
COAL RESERVES. Included in the previous table of coal contracts is a coal
mining contract with Cyprus Shoshone Coal Corporation (Cyprus) under which
Cyprus is mining Northern Indiana's coal reserves in the Cyprus mine through
the year 2001. The costs of the reserves are being recovered through the rate
making process as such coal reserves are used to produce electricity.
FUEL ADJUSTMENT CLAUSE. See "Fuel Adjustment Clause" in the Notes to
Consolidated Financial Statements in the 1995 Annual Report to Shareholders,
which note is incorporated herein by reference (see Exhibit 13).
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, 1995,
Northern Indiana's 1995 maximum day sendout was 1,545,616 dekatherms (dth).
In 1995, all of the gas supplied by Northern Indiana was transported by ANR
Pipeline Company (ANR), Crossroads Pipeline Company (Crossroads), Midwestern
Gas Transmission Company (Midwestern), Natural Gas Pipeline Company of America
(Natural), Panhandle Eastern Pipe Line Company (Panhandle), Tennessee Gas
Pipeline Company (Tennessee) and Trunkline Gas Company (Trunkline).
Approximately 32% of Northern Indiana's 1995 gas supply was purchased on the
spot market, generally on 30-day agreements.
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The average price per dth (including take-or-pay and transition charges) in
1995 was $2.98 compared to $2.99 in 1994, and the average cost of purchased
gas, after adjustment for take-or-pay and transition charges billed to
transport customers, was $2.63 per dth as compared to $2.90 per dth in 1994.
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.
Agreements have been negotiated with natural gas suppliers to replace former
pipeline supplier contracts pursuant to the requirements of FERC Order No. 636
(See "Rate Matters--FERC Order No. 636" in the Notes to Consolidated Financial
Statements in the 1995 Annual Report to Shareholders, which note is
incorporated herein by reference (see Exhibit 13)). Northern Indiana also has
firm transportation agreements with the pipelines, which allow Northern Indiana
to move its gas through the pipelines' transmission systems. Northern Indiana
also has producer agreements which allow for the purchase of gas either from
gas marketers or producers.
Northern Indiana has a curtailment plan approved by the Indiana Utility
Regulatory Commission (Commission). Effective on August 11, 1981, the plan
allows unrestricted gas sales by Northern Indiana. There were no firm sales
curtailments in 1995 and none are expected during 1996.
Northern Indiana operates an underground gas storage field at Royal Center,
Indiana, which currently has a storage capacity of 6.75 million dth.
Withdrawals have been made in the 1995-96 winter of up to 117,074 dth per day.
In addition, Northern Indiana and NI-TEX have 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 28,859,880 dth of annual stored volume, and allow
for approximately 573,863 dth of maximum daily withdrawal.
Northern Indiana has a liquefied natural gas plant in LaPorte County which is
designed for peak shaving and has the following capacities: maximum storage of
4,000,000 dth; maximum liquefaction rate (gas to liquid), 20,000 dth per day;
maximum vaporization rate (output to distribution system), 300,000 dth per day.
KOKOMO GAS. Kokomo Gas' total gas send-out for 1995 was 8,232,810 dth,
compared to 8,057,901 dth for 1994. Total transportation volumes for industrial
customers in 1995 were 3,273,562 dth, compared to 2,998,832 dth in 1994. Kokomo
Gas purchased gas under term agreements from NI-TEX to satisfy all of its
system requirements in 1995.
NIFL. NIFL's total gas send-out for 1995 was 9,517,483 dth compared to
8,626,056 dth for 1994. Total transportation volumes for industrial customers
in 1995 were 4,251,519 dth, compared to 3,745,963 dth in 1994. NIFL purchased
gas on the spot market from a number of suppliers and also under term
agreements from NI-TEX to satisfy all of its system requirements in 1995.
GAS COST ADJUSTMENT CLAUSE. See "Gas Cost Adjustment Clause" in the Notes to
Consolidated Financial Statements in the 1995 Annual Report to Shareholders,
which note is incorporated herein by reference (see Exhibit 13).
TAKE-OR-PAY PIPELINE GAS COSTS. See "Take-or-Pay Pipeline Gas Costs" in the
Notes to Consolidated Financial Statements in the 1995 Annual Report to
Shareholders, which note is incorporated herein by reference (see Exhibit 13).
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FERC ORDER NO. 636. See "FERC Order No. 636" in the Notes to Consolidated
Financial Statements in the 1995 Annual Report to Shareholders, which note is
incorporated herein by reference (see Exhibit 13).
BUSINESS OF OTHER SUBSIDIARIES
CAPITAL MARKETS. Capital Markets serves as the funding agent for ventures of
Industries and its subsidiaries other than Northern Indiana. Capital Markets
has a $150 million revolving Credit Agreement, which provides short-term
financing flexibility to Industries and also serves as the back up instrument
for a commercial paper program. As of December 31, 1995, there were no
borrowings outstanding under this agreement. Capital Markets also has $105
million of money market lines of credit. As of December 31, 1995, $17.4 million
of borrowings were outstanding under these lines of credit. As of December 31,
1995, Capital Markets had $76.7 million in commercial paper outstanding, having
a weighted average interest rate of 6.08%.
The obligations of Capital Markets are subject to a Support Agreement between
Industries and Capital Markets, under which Industries has committed to make
payments of interest and principal on Capital Markets' securities in the event
of a failure to pay by Capital Markets. Restrictions in the Support Agreement
prohibit recourse on the part of Capital Markets' investors against the stock
and assets of Northern Indiana which are owned by Industries. Under the terms
of the Support Agreement, in addition to the cash flow of cash dividends paid
to Industries by any of its consolidated subsidiaries, the assets of
Industries, other than the stock and assets of Northern Indiana, are available
as recourse to holders of Capital Markets' securities. The carrying value of
those assets, other than Northern Indiana, reflected in the consolidated
financial statements of Industries, was approximately $393.3 million at
December 31, 1995.
DEVELOPMENT. Development looks for partnerships with customers on energy
projects, seeks environmental project opportunities and coordinates the real
estate diversification of Industries.
Development is a 95% shareholder in Elm Energy and Recycling (UK) Ltd. (Elm
Energy), which owns and operates a tire-fueled electric generating plant in
Wolverhampton, England, that began operating in late 1993. See "Elm Energy and
Recycling (UK) Ltd." in the Notes to Consolidated Financial Statements in the
1995 Annual Report to Shareholders, which note is incorporated herein by
reference (see Exhibit 13).
In 1995, Development invested in multiple-family residential housing
developments in Michigan City, South Bend, and Rensselaer, as well as a
multiple-family housing fund. Development has similar projects in Hammond, Fort
Wayne and Mishawaka. Additional projects are being considered in Hebron, South
Bend and other communities in Northern Indiana's service territories. These
projects are part of the continued commitment by Development to provide high
quality, energy efficient, affordable housing to the residents of a variety of
geographic and economic regions served by Northern Indiana.
SERVICES. Services coordinates energy-related diversification and has three
wholly-owned subsidiaries: NIPSCO Energy Trading Corp. (NETCO), NI-TEX, Inc.
(NI-TEX) and NIPSCO Fuel Company, Inc. (Fuel).
NETCO. As of August 1, 1995, NETCO's natural gas brokering and management
services were assigned to and administered by NESI Energy Marketing Company
L.L.C. NETCO is no longer an active company.
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Fuel. Fuel is an oil and gas exploration and production company with
activities concentrated in the mid-continent region of the United States and
offshore in the Gulf of Mexico. As of December 31, 1995. $57.5 million had been
invested in U.S. exploration and development projects. Fuel's estimated U.S.
proved reserves at year-end totaled 1.4 million barrels of oil and 28.3 billion
cubic feet of natural gas. In 1995, Fuel formed Southlake Energy Inc., a
wholly-owned Canadian subsidiary, which acquired the properties of Gentra One
Resources Inc. for $12.75 million. Reserves attributable to the acquired
Canadian properties are 696,000 barrels of oil, 17.5 billion cubic feet of
natural gas, and 118,000 barrels of natural gas liquids.
NI-TEX. NI-TEX is an intrastate natural gas transmission and supply company
providing gas sales, transportation and storage services. NI-TEX provides
flexible city gate gas supply to Northern Indiana, Kokomo Gas and NIFL under
term contracts. NI-TEX, through joint ventures with industry partners, also
owns natural gas transmission and storage facilities located in Texas. Its
Laredo-Nueces pipeline affiliate transported 18.3 billion cubic feet of natural
gas in 1995. Its Mid-Tex Gas Storage Company affiliate operates a salt dome gas
storage facility with an operating capacity of 5.7 billion cubic feet due to
the expansion of the second cavern completed in December, 1995. Operating
income from NI-TEX sales arrangements, combined with joint venture earnings,
totaled $6.5 million for the year.
NESI ENERGY MARKETING COMPANY L.L.C. (NEM). In August, 1995, Services formed
a limited liability company with Enco Energy Inc. Services currently holds a
sixty percent interest in NEM. NEM provides natural gas sales and on-system
transportation management services to customers within Northern Indiana's
service territory. NEM is engaged in energy trading activities to manage risk.
NEM opened a Detroit, Michigan office in early 1996 for expansion into the
Michigan market. During 1995, operating income for both NETCO and NEM totaled
$500,000.
TRIUMPH NATURAL GAS, INC. (TRIUMPH). Services owns 51% in Triumph. In April,
1995 Triumph completed the sale of the primary natural gas sales and supply
contracts to Resource Energy Services. All continuing operations of the company
were eliminated. The only remaining physical asset of Triumph to be liquidated
is the investment in Arkoma Limited Partnership, which owns an interest in the
Triark Gas Gathering Company. Services, as well as certain affiliates and
officers, are defendants in a lawsuit brought by certain shareholders and
former members of the Board of Directors of Triumph. The lawsuit alleges that
the Services defendants' actions caused Triumph to fail and subsequently
liquidate. Services is of the opinion that the suit has no merit and will
continue to aggressively defend itself. Services is in the process of filing a
counterclaim seeking recovery of Services' original investment.
PRIMARY. Primary will develop and manage cogeneration and other energy
projects for large industrial energy customers. Primary offers large industrial
energy customers, nationwide, expertise in managing the engineering,
construction, operation and maintenance of these energy-related projects.
Effective on January 1, 1996, Primary became the parent of certain other
subsidiaries, including Harbor Coal Company (Harbor Coal), North Lake Energy
Corporation (North Lake), Portside Energy Corporation (Portside) and Lakeside
Energy Corporation (LEC).
Harbor Coal has invested in a partnership to finance, construct, own and
operate a $65 million pulverized coal injection facility which began commercial
operation in August, 1993. The facility receives raw coal, pulverizes it and
delivers it to Inland Steel Company for use in the operation of its blast
furnaces. Harbor Coal is a 50% partner in the project with an Inland Steel
affiliate. Industries has guaranteed the payment and performance of the
partnership's obligations under a sale and leaseback of a 50% undivided
interest in the facility.
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North Lake has entered into a lease for the use of a 75 megawatt energy
facility to be located at Inland Steel Company. The facility will use steam
generated by Inland Steel to produce electricity to be delivered to Inland
Steel. The facility is expected to be operational in June, 1996. Industries has
guaranteed North Lake's obligations relative to the lease and certain
obligations to Inland Steel relative to the project.
LEC has entered into an agreement with USX Corporation--US Steel Group to
utilize a new 161 megawatt energy facility at USS' Gary Works to process high
pressure steam into electricity and low pressure process steam for a 15 year
period. LEC will lease this facility, once constructed, from a third party.
Additionally, LEC has entered into an interim agreement, which expires when the
lease is established with the third party lessor, under which LEC is acting as
the agent for the lessor to design, construct and start up the energy facility.
Industries anticipates guaranteeing LEC's security deposit obligations relative
to the anticipated lease. Construction of the project began in January, 1996
and is scheduled to be operational in May, 1997.
Primary is evaluating other potential partnerships with Northern Indiana
customers for using waste gases from steelmaking and other processes for power
generation. Low btu blast furnace gases and other fuels, which could fuel new
generation, are produced at companies served by Northern Indiana.
REGULATION
Holding Company Act. Industries is exempt from registration with the
Securities and Exchange Commission (SEC) as a "registered holding company"
under the Public Utility Holding Company Act of 1935, as amended (Holding
Company Act). However, prior approval of the SEC is required under the Holding
Company Act if Industries proposes to acquire, directly or indirectly, any
securities of other public utility companies. There may also be limits on the
extent to which Industries and its non-utility subsidiaries can enter into
businesses which are not "functionally related" to the electric and gas
businesses without raising questions about Industries' exempt status under the
Holding Company Act. SEC guidelines established in prior decisions of the SEC
require Industries to remain engaged primarily and predominantly in the
electric and gas businesses and to limit the size of its activities outside of
such businesses relative to Industries as a whole.
Industries has no present intention of becoming a registered holding company
subject to regulation by the SEC under the Holding Company Act.
Indiana Utility Regulatory Commission. Northern Indiana and Industries have
been advised by their counsel that Industries will not be subject to regulation
by the Commission as long as it is not a public utility. Under existing law,
Industries and its non-utility subsidiaries are subject to certain reporting
and information access requirements under Indiana law. Furthermore certain
contracts between Industries or its non-utility subsidiaries and Northern
Indiana, Kokomo Gas and NIFL (regulated utilities) must be filed with the
Commission.
The regulated utilities are subject to regulation by the Commission as to
rates, service, accounts, issuance of securities, and in other respects. See
"Rate Matters" in the Notes to Consolidated Financial Statements in the 1995
Annual Report to Shareholders, which note is incorporated herein by reference
(see Exhibit 13). The regulated utilities are also subject to limited
regulation by local public authorities.
Federal Energy Regulatory Commission. Industries is not regulated by the
FERC, but any subsidiary, including Northern Indiana, that engages in FERC
jurisdictional sales or activities will continue to be subject to such
regulation.
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Northern Indiana's restructuring under Industries was approved by a February
29, 1988 order of the FERC. The FERC's February 29, 1988 order is conditioned
upon the FERC's continuing authority to examine the books and records of
Industries and its subsidiaries, upon further order of the FERC, and to make
such supplemental orders, for good cause, as it may find necessary or
appropriate regarding the restructuring.
In 1995, about 4% of Northern Indiana's electric revenues were derived from
electric service it furnished at wholesale in interstate commerce to other
utility companies, municipalities and WVPA (see "Item 1. Business--Electric
Operations" regarding WVPA). Northern Indiana's wholesale rates and operations
are subject to the jurisdiction of the FERC. The jurisdiction of the FERC does
not extend to the issuance of securities by Northern Indiana since it is a
public utility organized and operating in the State of Indiana, under the laws
of which its security issues are regulated by the Commission. The FERC on
October 21, 1954, declared Northern Indiana exempt from the provisions of the
Natural Gas Act. Kokomo Gas and NIFL are also exempt from the provisions of the
Natural Gas Act.
RATE MATTERS. For information regarding the regulated utilities' gas rates,
take-or-pay pipeline gas costs and gas transition costs, see "Take-or-Pay
Pipeline Gas Costs" and "FERC Order No. 636" in the Notes to Consolidated
Financial Statements in the 1995 Annual Report to Shareholders, which notes are
incorporated herein by reference (see Exhibit 13).
Northern Indiana filed an Alternative Regulatory Plan (ARP) with the
Commission on November 29, 1995. The purpose of the ARP is to create a business
and regulatory environment and structure which will permit increased choice for
gas customers, competition among suppliers and improved natural gas service. In
its petition, Northern Indiana stated it would propose to implement new rates
and services that would include, but not be limited to, further unbundling of
services for additional customer classes which would include increased customer
choice for sources of natural gas supply, negotiated services and prices, and
incentive gas and storage cost mechanisms.
CONSTRUCTION BUDGET. Northern Indiana's 1996-2000 construction budget
(including allowance for funds used during construction) is estimated at
approximately $764 million, including $205 million in 1996, $177 million in
1997, $156 million in 1998, $117 million in 1999 and $109 million in 2000.
Northern Indiana's construction estimates include adjustments for anticipated
inflation. No new electric generating units are planned in the 1996-2000
budget. Northern Indiana does not have, and has no plans to construct, a
nuclear generating unit.
COMPETITION. In municipalities where Northern Indiana renders electric
service to the general public as a public utility, no other utility renders
electric or gas service, except in Angola, DeMotte, Rome City, Wanatah and
Waterloo. In certain municipalities where electric service is supplied by
Northern Indiana, NIFL provides competing gas utility service. In localities
where Northern Indiana renders gas service only, it competes with electric
utilities, municipal or private, for the business for which they render
alternative electric service.
Kokomo Gas and NIFL service territories are contiguous to Northern Indiana's
gas service territory, but Northern Indiana, Kokomo Gas and NIFL do not compete
for any of the same gas customers. Kokomo Gas and NIFL compete with other
electric utilities serving customers in their respective service territories.
All electric service territories within the State of Indiana are assigned to
the existing suppliers, and boundaries of new territories outside existing
municipalities are assigned to the utility having the nearest existing electric
distribution lines. Only existing municipal electric utilities may expand their
service areas and then only into areas that have been annexed by the
municipality, subject to the approval of the Commission and certain other
conditions. Northern Indiana makes
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no representation as to the possible effect upon its business of present or
future competition by private or municipal utilities or governmental agencies,
instrumentalities or authorities within the territory now served.
Northern Indiana is also subject to competition for gas sales to industrial
customers through the ability of these customers, under Northern Indiana's rate
provisions, to make their own purchases of gas and have Northern Indiana
transport the gas to them. During 1995, gas transportation represented 59% of
Northern Indiana's total gas sendout.
Indiana law requires Commission approval before a gas customer of a utility
may bypass the utility and make other arrangements for gas service. Any entity
which transports gas from outside Indiana for direct sale or delivery to itself
or other end-users within the state will be considered a public utility and
must obtain a necessity certificate from the Commission in order to engage in
such activities.
See "Competition" in the Management's Discussion and Analysis of Financial
Condition and Results of Operations in the 1995 Annual Report to Shareholders,
which is incorporated herein by reference (see Exhibit 13).
EMPLOYEE RELATIONS. Northern Indiana had 4,111 employees at December 31,
1995. Approximately 64% of Northern Indiana's employees (physical and clerical
workers) are represented by two local unions of the United Steelworkers of
America, AFL-CIO-CLC. Effective June 1, 1993, the bargaining unit employees
ratified four-year agreements which continue until June 1, 1997. These
agreements provide for base wage increases of two percent in 1993, three
percent in 1994 and 1995, and three and one-half percent in 1996. Additional
economic provisions include a variable compensation plan linked to improvements
in productivity. Certain officers of Northern Indiana are also officers of
Industries. Industries currently has 95 employees in its diversified
operations.
Kokomo Gas had 72 full-time employees at December 31, 1995. Of these, 51
employees are represented by the Oil, Chemical and Atomic Workers International
Union, AFL-CIO. New collective bargaining agreements covering these employees
were negotiated in early 1995 and will expire February 15, 1998.
NIFL had 78 full-time employees at December 31, 1995, none of whom is
represented by a union.
ENVIRONMENTAL MATTERS. The Utilities have an ongoing program to remain aware
of laws and regulations involved with hazardous waste and other environmental
matters. It is the Utilities' intent to continue to evaluate their facilities
and properties with respect to these rules and identify any sites that would
require corrective action. The Utilities have recorded a reserve of $5.0
million to cover probable corrective actions as of December 31, 1995. However,
environmental regulations and remediation techniques are subject to future
change. Based upon management's understanding of current laws and regulations,
the Utilities believe that any corrective actions required, after consideration
of insurance coverages, will not have a significant impact on the financial
position or results of operations of Industries.
The Utilities are subject to regulation with regard to environmental matters
by various federal, state and local authorities. The Utilities cannot forecast
the effect of all such regulation upon their generating, transmission or other
facilities, or their operations. The Utilities intend to comply with all
applicable governmental requirements and have adopted an environmental policy
that fosters the pursuit of proactive sound environmental programs and
management.
The application of federal and state restrictions to protect the environment,
including but not limited to those hereinafter described, involves or may
involve review, certification or issuance of permits by various federal, state
and local authorities. Such restrictions, particularly in regard to emissions
into the air and water, and disposal of solid wastes, may impact the operation
of Northern Indiana's facilities, and may also require substantial investments.
9
<PAGE>
Northern Indiana's total capital expenditures from January 1, 1991, through
December 31, 1995, for pollution control facilities were approximately $109
million and were financed in part by the sale of Pollution Control Notes and
Bonds--Jasper County. Northern Indiana anticipates expenditures of
approximately $162 million for pollution control equipment in the 1996-2000
period which includes anticipated expenditures of $78 million in 1996 and $32
million in 1997.
Air. The Indiana Department of Environmental Management (IDEM) Office of Air
Management has submitted to the U.S. Environmental Protection Agency (EPA) a
State Implementation Plan (SIP) in accordance with the requirements of the
Clean Air Act Amendments of 1977.
Attainment-Nonattainment. Under the Clean Air Act Amendments of 1977, the
State has identified areas which are in compliance with the National Ambient
Air Quality Standards (NAAQS) (attainment areas) and areas that are not in
compliance with respect to the sulfur dioxide, particulate matter and other
pollutant standards established by NAAQS (nonattainment areas). Portions of
Lake and LaPorte Counties in which Northern Indiana operates electric
generating facilities remain designated as nonattainment areas for sulfur
dioxide. Control plans for each county are being implemented. Any reductions in
emissions of sulfur dioxide required to be made by Northern Indiana have been
made, and Northern Indiana anticipates no increased costs as a result of the
implementation of the control plans for Lake and LaPorte Counties. IDEM
initiated the process for redesignating LaPorte County to attainment for sulfur
dioxide. IDEM discussed this process at a public hearing in Michigan City on
November 16, 1995.
Lake County, Indiana, is designated as a nonattainment area for particulate
matter or PM-10. The State of Indiana promulgated a PM-10 SIP rule, which
became effective on June 11, 1993. The rule requires reduced opacity and mass
emissions limits at Dean H. Mitchell Station as well as the establishment of a
fugitive dust control and continuous compliance plans. Northern Indiana
invested $2.8 million to rebuild the Unit 5 electrostatic precipitator during
1993 to help meet the PM-10 emission limits. In order to improve fugitive dust
control, during 1994 Mitchell Station installed a water spray dust suppression
system to minimize emissions from the coal pile and coal unloading areas.
Porter County has been determined to have an unclassified status for PM-10.
According to state requirements, the area will be monitored for PM-10 impacts
to determine the appropriate classification with respect to the NAAQS. All
other counties where Northern Indiana operates electric production facilities
have an unclassified status for PM-10.
Under Title I of the Clean Air Act Amendments of 1990 (CAAA), Lake and Porter
Counties are classified as severe nonattainment areas for ozone. Passage of the
CAAA results in new provisions applicable to mobile and stationary sources in
Lake and Porter Counties. Control measures requiring reduction of emissions of
nitrogen oxides from the Mitchell and Bailly Generating Stations as a
consequence of the Lake Michigan Ozone Control Program have yet to be
determined. Northern Indiana is evaluating potential least-cost methods to
reduce emissions of nitrogen oxides from the generating stations. The EPA has
approved a conditional waiver from present reduction of nitrogen oxides under
Title I. Northern Indiana cannot determine the cost impact of the future
provisions.
Acid Rain. Title IV of the CAAA addresses the acid rain issue by targeting
large sources of sulfur dioxide and nitrogen oxides for significant reductions.
The core acid rain rules for sulfur dioxide were promulgated by the EPA January
11, 1993. As required by the regulations, Bailly Units 7 and 8 and Michigan
City Unit 12 reduced their sulfur dioxide emissions below 2.5 pounds per
million British thermal units (lbs/mm btu) by January 1, 1995. These units,
along with the remainder of Northern Indiana's coal-fired units, are required
to reduce their sulfur dioxide emissions below 1.2 lbs/mm btu by January 1,
2000 (Phase II).
10
<PAGE>
Presently, all of Northern Indiana's eleven coal fired generating units
utilize low sulfur fuel or flue gas desulfurization units to control sulfur
dioxide emissions below the 1.2 lbs/mm btu level. That places Northern Indiana
in compliance with the Phase II sulfur dioxide standards.
The EPA approved Northern Indiana's Acid Rain permits for the Bailly and
Michigan City Generating Stations on August 31, 1993. The Phase I Acid Rain
permits for the stations are effective from January 1, 1995 through December
31, 1999. One component of the permit is the Phase I extension plan for Bailly.
Northern Indiana was eligible for and received the extension because of the
construction and operation of the Bailly scrubber. This extension plan
allocates additional allowances, above the basic allowances, applicable to
Bailly and Michigan City Generating Stations.
Northern Indiana estimates that total costs of compliance with the CAAA
sulfur dioxide regulations will impact electric rates by less than 5% in the
future.
Northern Indiana is pursuing nitrogen oxide reduction measures to meet future
acid rain requirements. The EPA has proposed Phase II nitrogen oxide limits.
The regulations when finalized could establish nitrogen oxide limits for all of
Northern Indiana's coal fired boilers.
Additional Air Issues. The CAAA contain provisions that could lead to
limitations on emissions of nitrogen oxides, as mentioned above, and hazardous
air pollutants, which may require significant capital expenditures for control
of these emissions. Northern Indiana is pursuing a nitrogen oxide control
program to meet future requirements. Northern Indiana cannot predict the costs
of complying with CAAA requirements, but it believes that any such mandated
costs would be recoverable through the rate making process.
The EPA has promulgated a permit program to meet the requirements of Title V
of the CAAA. The IDEM, on November 3, 1993, proposed an Air Operating permit
program to meet the requirements of Title V to Indiana's Air Pollution Control
Board. The Air Pollution Control Board adopted rules to implement the Title V
permit program on March 10, 1994. These operating permit rules, including a new
fee schedule, became effective in Indiana on June 24, 1994. Indiana submitted
the Title V rules to the EPA for approval in August of 1994. The EPA has
approved the submittal and the rules became effective December 14, 1995.
Water. The Clean Water Act, as amended, subjects point source dischargers to
technology and water quality based controls through the National Pollution
Discharge Elimination System (NPDES) permit program. Northern Indiana is
required to have NPDES permits for discharges from its generating stations into
the waters of the United States. The IDEM Office of Water Management has issued
renewal NPDES permits for Schahfer, Mitchell, and Michigan City Generating
Stations, effective November 1, 1993. The renewed Bailly Station NPDES permit
is expected to be issued in 1996. Northern Indiana received NPDES permit
modifications for intermittent chemical treatment of the main discharge at the
Mitchell and Michigan City Stations for zebra mussel control. Bailly Station
utilizes thermal treatment in its water systems to control zebra mussels.
Schahfer Station has not presently experienced operational impacts due to zebra
mussels. Rather, Schahfer Station has experienced equipment problems due to an
Asiatic clam infestation. Alternate forms of control are being investigated by
Northern Indiana in an effort to prevent any impact on plant operations
relating to these infestations, while also minimizing the environmental impact
of the controls.
Superfund Sites. The EPA has notified Northern Indiana that it is a
"potentially responsible party" (PRP) under the Comprehensive Environmental
Response Compensation and Liability Act (CERCLA) and may be required to share
in the cost of cleanup of several waste disposal sites identified by the EPA.
The sites are in various stages of investigation and analysis and remediation.
At each of the sites Northern Indiana is one of several PRPs, and it is
expected that remedial costs,
11
<PAGE>
as provided under CERCLA, will be shared among them. At some sites Northern
Indiana and/or the other named PRPs are presently working with the EPA to clean
up the site and avoid the imposition of fines or added costs.
Manufactured Gas Plant Sites. The Utilities have instituted a program to
investigate former manufactured gas plants where one of them is the current or
former owner. The Utilities have identified twenty-seven of these sites and
made visual inspections of these sites. The Utilities have conducted initial
samplings at thirteen sites. Follow-up investigations have been conducted at
five sites and potential remedial measures are being evaluated. The Utilities
will continue their program to assess sites. During the follow-up investigation
of the former manufactured gas plant in Elkhart, Indiana, Northern Indiana
noted the presence of hydrocarbons in the Elkhart River. Northern Indiana
reported this finding to IDEM and the EPA. Northern Indiana has placed the
Elkhart site in the IDEM Voluntary Remediation Program (VRP). The goal of
placing the site in the VRP is to obtain IDEM approval of the determination and
subsequent implementation of what remedial measures, if any, may be needed.
Northern Indiana was notified by IDEM of the release of a petroleum substance
into the St. Mary's River in Fort Wayne, Indiana, from the site of a former
manufactured gas plant formerly owned by Northern Indiana. In cooperation with
IDEM, Northern Indiana has taken steps to investigate and contain the
substance. Northern Indiana has remediated part of the Fort Wayne site. The
remainder of the site is being evaluated to determine what future remedial
measures, if any, may be needed.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have entered
into an agreement covering cost sharing and management of investigation and
remediation programs at five former manufactured gas plant sites at which both
companies or their predecessors were former operators or owners. One of these
sites is the Lafayette site which Indiana Gas had previously notified Northern
Indiana is being investigated and remediated pursuant to an administrative
order with IDEM. Northern Indiana also notified PSI Energy, Inc. that it was a
former owner or operator of seven former manufactured gas plants at which
Northern Indiana had conducted or was planning investigation or remediation
activities.
The Utilities have met with various companies that provided insurance
coverage which the Utilities believe covers costs related to actions taken at
former manufactured gas plants. In September 1995, certain insurance companies
initiated a suit in Indiana state court against Northern Indiana to deny
coverage. Later in September 1995, Northern Indiana filed a more comprehensive
suit in Federal Court in Indiana against those insurers and several other
insurance companies, seeking coverage for costs associated with several former
manufactured gas plant sites. The state court action is stayed pending
resolution of the Northern Indiana suit in Federal Court.
Electric And Magnetic Fields. The possibility that exposure to electric and
magnetic fields emanating from power lines, household appliances and other
electric sources may result in adverse health effects has been the subject of
public, governmental and media attention. A considerable amount of scientific
research has been conducted on this topic without definitive results. Research
is continuing to resolve scientific uncertainties.
----------------
It is not possible to predict the scope, enforceability or financial impact
of other environmental regulations or standards which may be established in the
future.
12
<PAGE>
ITEM 2. PROPERTIES.
The physical properties of the Utilities are located in the State of Indiana,
except for Crossroads which owns a 202-mile interstate natural gas pipeline
running from northwest Indiana to Cygnet, Ohio.
The only significant properties owned by other subsidiaries of Industries
are: the Southlake Complex, a 325,000 square foot office building in
Merrillville, Indiana, leased to Northern Indiana and owned by Development; a
36-mile intrastate natural gas pipeline, located in southern Texas and half-
owned by NI-TEX, Inc.; a golf course and surrounding residential development in
Chesterton, Indiana, owned by Lake Erie Land Company (a subsidiary of
Development); a waste-to-energy generating plant in Wolverhampton, England
owned by Elm Energy; commercial real estate joint ventures, half-owned by KOGAF
Enterprises (a subsidiary of Development) located in Kokomo, Indiana; and
interests in oil and gas producing properties in the United States and Canada
owned by Fuel.
ELECTRIC. Northern Indiana owns and operates four coal fired electric
generating stations with net capabilities of 3,179,000 kw, two hydroelectric
generating plants with net capabilities of 10,000 kw and four gas fired
combustion turbine generating units with net capabilities of 203,000 kw, for a
total system net capability of 3,392,000 kw. During the year ended December 31,
1995, Northern Indiana generated 85.8% and purchased 14.2% of its electric
requirements.
Northern Indiana has 292 substations with an aggregate transformer capacity
of 22,839,200 kva. Its transmission system with voltages from 34,500 to 345,000
consists of 3,047 circuit miles of line. The electric distribution system
extends into 21 counties and consists of 7,682 circuit miles of overhead and
1,265 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 10,661,892 kva and 437,264
electric watt-hour meters.
GAS. Northern Indiana has an underground storage field at Royal Center and a
liquefied natural gas plant in LaPorte County, both of which are described
under "Item 1. Business--Gas Operations." Northern Indiana has 12,976 miles of
gas mains.
Kokomo Gas has a liquified natural gas plant in Howard County which has the
following capacities: maximum storage of 400,000 mcf; maximum liquefaction rate
(gas to liquid), 2,850 mcf per day; maximum vaporization rate (output to
distribution system), 30,000 mcf per day. Kokomo Gas also has a gas holder with
a storage capacity of 12,000 mcf. Kokomo Gas has 727 miles of gas mains.
NIFL has 765 miles of gas mains.
OTHER PROPERTIES. Northern Indiana owns offices and service buildings,
salesrooms, garages, repair shops, motor vehicles, construction equipment and
tools, and office furniture and equipment, and also leases offices in various
localities. It also owns miscellaneous parcels of real estate not now used in
utility operations.
DONATION OF PROPERTY. On January 5, 1995, Northern Indiana completed the
planneddonation of approximately 2,150 acres of land, including 60 miles of
lake and river frontage, to the Shafer and Freeman Lakes Environmental
Conservation Corporation (a not-for-profit organization), the State of Indiana
Department of Natural Resources and the Indiana Natural Resources Foundation.
The property frames and includes the resort areas of Lake Shafer and Lake
Freeman in White and Carroll Counties, near the cities of Monticello and Delphi
in central Indiana.
13
<PAGE>
Northern Indiana acquired the property in 1944 as part of the purchase of dams
and two small hydroelectric plants and has maintained the area since that time.
Northern Indiana donated this property to ensure the land is managed to enhance
its preservation and recreational value. The dams and hydroelectric plants are
being retained for Northern Indiana operations.
CHARACTER OF OWNERSHIP. The properties of Northern Indiana are subject to the
lien of its First Mortgage Indenture. The principal offices and properties are
held in fee and are free from other encumbrances, subject to minor exceptions,
none of which is of such a nature as substantially to impair the usefulness to
Northern Indiana of such properties. Many of the offices in the various
communities served are occupied by Northern Indiana under leases. All
properties are subject to liens for taxes, assessments and undetermined charges
(if any) incidental to construction, which it is Northern Indiana's practice
regularly to pay, as and when due, unless contested in good faith. In general,
the electric and gas lines and mains are located on land not owned in fee but
are covered by necessary consents of various governmental authorities or by
appropriate rights obtained from owners of private property. These consents and
rights are deemed adequate for the purposes for which they are being used.
Northern Indiana does not, however, generally have specific easements from the
owners of the property adjacent to public highways over, upon, or under which
its electric and gas lines are located. At the time each of the principal
properties was purchased a title search was made. In general, no examination
of titles as to rights-of-way for electric and gas lines and mains was made,
other than examination, in certain cases, to verify the grantors' ownership and
the lien status thereof.
ITEM 3. LEGAL PROCEEDINGS.
Industries and Northern Indiana are parties to various pending proceedings,
including suits and claims against them for personal injury, death and property
damage, but, in the opinion of their counsel, the nature of such proceedings
and suits, and the amounts involved, do not depart from the ordinary routine
litigation and proceedings incidental to the kind of businesses conducted by
Industries and Northern Indiana, except as set forth above under "Item 1.
Business--Environmental Matters," and as described under the captions "Pending
Tax Matter," "Elm Energy and Recycling (UK) Ltd." and "Environmental Matters"
in the Notes to Consolidated Financial Statements in the 1995 Annual Report to
Shareholders, which notes are incorporated herein by reference (see Exhibit
13).
On March 13, 1996 the Internal Revenue Service appealed to the U.S. Court of
Appeals for the Seventh Circuit, the November 6, 1995 decision of the United
States Tax Court (Tax Court) in favor of Northern Indiana. See "Pending Tax
Matter" in the Notes to Consolidated Financial Statements in the 1995 Annual
Report to Shareholders, which note is incorporated herein by reference (see
Exhibit 13). Northern Indiana's management and its general counsel believe the
decision of the Tax Court will prevail.
To the knowledge of Industries no other material legal proceedings against
Industries, Northern Indiana or their subsidiaries are contemplated by
governmental authorities and other parties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
14
<PAGE>
SUPPLEMENTAL ITEM--EXECUTIVE OFFICERS OF THE REGISTRANT.
<TABLE>
<CAPTION>
DATE OF ASSUM-
ING
PRESENT POSI-
NAME AGE OFFICE TION
---- --- ------ --------------
<S> <C> <C> <C>
Gary L. Neale 56 Chairman, President, Chief March 1, 1993
Executive Officer and Director
Stephen P. Adik 52 Executive Vice President, Chief January 1, 1994
Financial Officer and
Treasurer
Patrick J. Mulchay 54 Executive Vice President, Chief January 1, 1994
Operating Officer, Electric
Jeffrey W. Yundt 50 Executive Vice President, Chief January 1, 1994
Operating Officer, Gas
Owen C. Johnson, Jr. 49 Vice President, Human January 1, 1994
Resources
David A. Kelly 57 Vice President, Real January 1, 1994
Estate and Taxes
Jerry M. Springer 63 Controller and Assistant Secretary April 13, 1994
Dennis E. Senchak 50 Assistant Treasurer January 1, 1994
Nina M. Rausch 52 Secretary July 1, 1992
</TABLE>
Throughout the past five years, each of the executive officers of Industries
has been continuously active in the business of Industries or Northern Indiana
except as follows: Prior to December 31, 1991, David A. Kelly was Partner, Tax
Division of Arthur Andersen LLP.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Industries' common shares are listed and traded on the New York, Chicago and
Pacific stock exchanges. The table below indicates the high and low sales
price of Industries' common shares, on the composite tape, during the periods
indicated.
<TABLE>
<CAPTION>
1995 1994
------------- -------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter...... 32 1/4 29 1/4 33 29 1/8
Second Quarter..... 35 1/4 30 3/4 32 7/8 28 3/4
Third Quarter...... 34 7/8 32 1/8 30 1/4 26 1/8
Fourth Quarter..... 38 1/2 34 1/2 29 7/8 26 3/8
</TABLE>
As of February 29, 1996, Industries had 37,022 common shareholders of record.
The policy of the Board of Directors has been to declare dividends on a
quarterly basis payable on or about the 20th day of February, May, August and
November. Industries paid quarterly common dividends of $0.36 per share during
1994 and quarterly common dividends of $0.39 per share during 1995. At its
December 19, 1995 meeting Industries' Board of Directors increased the
quarterly common dividend to $0.42 per share, payable February 20, 1996.
15
<PAGE>
Holders of Industries' common shares will be entitled to receive dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor. Although the Board of Directors of Industries currently
intends to consider the payment of regular quarterly cash dividends on common
shares, the timing and amount of future dividends will depend on the earnings
of Northern Indiana and other subsidiaries, their financial condition, cash
requirements, any restrictions in financing agreements and other factors deemed
relevant by the Board of Directors. During the next few years, it is expected
that the great majority of earnings available for distribution of dividends
will depend upon dividends paid to Industries by Northern Indiana.
The following limitations on payment of dividends and issuance of preferred
stock apply to Northern Indiana:
When any bonds are outstanding under its First Mortgage Indenture, Northern
Indiana may not pay cash dividends on its stock (other than preferred or
preference stock) or purchase or retire common shares, except out of earned
surplus or net profits computed as required under the provisions of the
maintenance and renewal fund. At December 31, 1995, Northern Indiana had
approximately $144.8 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, 1995, the sum of the capital
applicable to stocks subordinate to the cumulative preferred stock plus the
surplus was equal to 41% of the total capitalization including surplus.
In connection with the foregoing discussion, see "Common Share Dividend" in
the Notes to Consolidated Financial Statements in the 1995 Annual Report to
Shareholders, which note is incorporated herein by reference (see Exhibit 13).
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues
(000's)................ $1,722,325 $1,676,401 $1,677,872 $1,582,356 $1,535,161
Net income (000's)...... $ 175,465 $ 163,987 $ 156,140 $ 136,648 $ 133,388
Earnings per average
common share .......... $2.72 $2.48 $2.31 $2.00 $1.94
Total assets (000's).... $3,999,520 $3,947,138 $3,912,324 $3,807,941 $3,647,557
Long-term obligations
and redeemable pre-
ferred stock (000's)... $1,274,379 $1,281,395 $1,295,962 $1,160,122 $1,157,686
Cash dividends declared
per common share....... $1.59 $1.47 $1.35 $1.26 $1.18
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Information regarding results of operations, liquidity and capital resources,
environmental matters and competition is reported in the 1995 Annual Report to
Shareholders under "Management's Discussion and Analysis of Financial Condition
and Results of Operations," which information is incorporated herein by
reference (see Exhibit 13).
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following Consolidated Financial Statements and Supplementary Data are
included in the 1995 Annual Report to Shareholders and are hereby incorporated
by reference and made a part of this report (see Exhibit 13).
<TABLE>
<CAPTION>
<S> <C>
(1) Consolidated Financial Statements--
Consolidated Statement of Income for the years ended December 31,
1995, 1994 and 1993
Consolidated Balance Sheet at December 31, 1995 and 1994
Consolidated Statement of Capitalization at December 31, 1995 and
1994
Consolidated Statement of Long-term Debt at December 31, 1995 and
1994
Consolidated Statement of Cash Flows for the years ended December
31, 1995, 1994 and 1993
Consolidated Statement of Common Shareholders' Equity for the
years ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Report of Independent Public Accountants (includes an explanatory
paragraph referring to changes in the methods of accounting for
income taxes and postretirement benefits other than pensions).
(2) Supplementary Data--
Selected Supplemental Information
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding executive officers is included as a supplemental item
at the end of Item 4 of Part I of this Form 10-K.
Information regarding directors is included at pages 2-5 in the Notice of
Annual Meeting and Proxy Statement dated March 8, 1996, for Annual Meeting to
be held April 10, 1996, which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation is included at pages 7-9 and 11-
17 in the Notice of Annual Meeting and Proxy Statement dated March 8, 1996, for
Annual Meeting to be held April 10, 1996, which information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners and
management is included at page 6 in the Notice of Annual Meeting and Proxy
Statement dated March 8, 1996, for Annual Meeting to be held April 10, 1996,
which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) The Financial Statements filed herewith as a part of this report on
Form 10-K are listed on the Index to Financial Statements under Item 8 on page
17.
(2) The following is a list of the Financial Statement Schedules filed
herewith as part of this report on Form 10-K:
<TABLE>
<CAPTION>
SCHEDULE PAGE OF
NUMBER DESCRIPTION 1995 10-K
-------- ----------- ---------
<C> <S> <C>
I Condensed Financial
Information of
Registrant.............. 19, 20, 21 & 22
Valuation and Qualifying
II Accounts................ 23, 24 & 25
</TABLE>
(3)
Exhibits--
The exhibits filed herewith as a part of this report on Form 10-K
are listed on the Exhibit Index included on pages 28--29. Each
management contract or compensatory plan or arrangement of
Industries listed on the Exhibit Index is separately identified by
an asterisk.
(b) Reports on Form 8-K: None.
18
<PAGE>
NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------- ----------
(DOLLARS IN
THOUSANDS)
ASSETS
- ------
<S> <C> <C>
Property:
Property in service.......................................... $ 2,681 $ 3,495
Construction work in progress................................ 12 20
Less: accumulated depreciation............................... 466 399
---------- ----------
Total property........................................... 2,227 3,116
---------- ----------
Investments (principally investments in wholly-owned
subsidiaries)................................................. 1,097,621 1,087,684
---------- ----------
Current Assets:
Cash and cash equivalents.................................... 4,707 740
Amounts receivable from subsidiaries......................... 70,721 60,485
Prepayments.................................................. 4,818 7,557
---------- ----------
Total current assets..................................... 80,246 68,782
---------- ----------
Other (principally notes receivable from associated companies). 220,682 172,935
---------- ----------
$1,400,776 $1,332,517
========== ==========
<CAPTION>
CAPITALIZATION AND LIABILITIES
- ------------------------------
<S> <C> <C>
Capitalization:
Common shares................................................ $ 870,930 $ 870,930
Cumulative preferred shares with mandatory redemption
provisions (Note 5)......................................... 35,000 35,000
Additional paid-in capital................................... 32,210 29,657
Retained earnings............................................ 518,837 446,928
Less: Treasury shares........................................ 293,223 237,193
Unearned compensation...................................... 4,609 970
Currency translation adjustment............................ 1,930 1,504
---------- ----------
Total capitalization..................................... 1,157,215 1,142,848
---------- ----------
Current Liabilities:
Dividends declared on common and preferred stock............. 26,829 25,570
Amounts payable to subsidiaries.............................. 31,431 26,304
Other........................................................ 1,176 1,290
---------- ----------
Total current liabilities................................ 59,436 53,164
---------- ----------
Other (principally notes payable to associated companies)...... 184,125 136,505
---------- ----------
Commitments and Contingencies (Note 3):
$1,400,776 $1,332,517
========== ==========
</TABLE>
The accompanying notes to condensed financial statements are an integral part
of this statement.
19
<PAGE>
NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Equity in net earnings of subsidiaries...... $ 180,827 $ 167,780 $ 158,222
---------- ---------- ----------
Other income (deductions):
Administrative and general expense........ (9,854) (5,560) (6,031)
Interest income........................... 15,575 11,289 9,576
Interest expense.......................... (12,274) (8,741) (9,339)
Other, net................................ (663) (1,727) 203
---------- ---------- ----------
(7,216) (4,739) (5,591)
---------- ---------- ----------
Net income before income taxes.............. 173,611 163,041 152,631
Income taxes................................ (1,854) (946) (3,509)
---------- ---------- ----------
Net income.................................. 175,465 163,987 156,140
Dividend requirements on preferred shares... 3,063 3,063 3,063
---------- ---------- ----------
Balance available for common shareholders... $ 172,402 $ 160,924 $ 153,077
========== ========== ==========
Average common shares outstanding........... 63,281,177 64,820,039 66,136,396
Earnings per average common share........... $ 2.72 $ 2.48 $ 2.31
========== ========== ==========
</TABLE>
The accompanying notes to condensed financial statements are an integral part
of this statement.
20
<PAGE>
NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by operating activities........ $184,300 $157,613 $153,788
-------- -------- --------
Cash flows provided by (used in) investing
activities:
Purchase of Northern Indiana Fuel and Light
Company, Inc., net of cash acquired........... -- -- (30,137)
Capital expenditures........................... (100) (954) (103)
Sale of property............................... 935 -- --
-------- -------- --------
Net cash provided by (used in) investing
activities.................................. 835 (954) (30,240)
-------- -------- --------
Cash flows provided by (used in) financing
activities:
Issuance of common shares...................... 7,389 2,060 36,364
Increase (decrease) in notes payable to
subsidiaries.................................. 41,211 21,262 (703)
Increase in notes receivable from subsidiaries. (58,479) (26,254) (26,412)
Cash dividends paid on common shares........... (99,043) (93,578) (88,214)
Cash dividends paid on preferred shares........ (3,063) (3,063) (3,063)
Acquisition of treasury shares................. (69,183) (58,717) (40,730)
-------- -------- --------
Net cash used in financing activities........ (181,168) (158,290) (122,758)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 3,967 (1,631) 790
Cash and cash equivalents at beginning of year... 740 2,371 1,581
-------- -------- --------
Cash and cash equivalents at end of year......... $ 4,707 $ 740 $ 2,371
======== ======== ========
</TABLE>
The accompanying notes to condensed financial statements are an integral part
of this statement.
21
<PAGE>
NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. DIVIDENDS FROM SUBSIDIARIES
Cash dividends paid to NIPSCO Industries, Inc. (Industries) by its
consolidated subsidiaries were (in thousands of dollars): $183,475, $174,245
and $155,224 in 1995, 1994 and 1993, respectively.
2. SUPPORT AGREEMENT
The obligations of NIPSCO Capital Markets, Inc. (Capital Markets) are subject
to a Support Agreement between Industries and Capital Markets, under which
Industries has committed to make payments of interest and principal on Capital
Markets' securities in the event of a failure to pay by Capital Markets.
Restrictions in the Support Agreement prohibit recourse on the part of Capital
Markets' investors against the stock and assets of Northern Indiana Public
Service Company (Northern Indiana) which are owned by Industries. Under the
terms of the Support Agreement, in addition to the cash flow of cash dividends
paid to Industries by any of its consolidated subsidiaries, the assets of
Industries, other than the stock and assets of Northern Indiana, are available
as recourse to holders of Capital Markets' securities. The carrying value of
those assets other than Northern Indiana, reflected in the consolidated
financial statements of Industries, was approximately $393.3 million at
December 31, 1995.
3. CONTINGENCIES
Industries and its subsidiaries are parties to various pending proceedings,
including suits and claims against them for personal injury, death and property
damage. The nature of such proceedings and suits, and the amounts involved, do
not depart from the routine litigation and proceedings incident to the kind of
businesses conducted by Industries and its subsidiaries.
4. CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1993, Industries adopted Statement of Financial
Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits
Other Than Pensions," and Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes". The adoption of these standards did not have a
significant impact on the condensed financial statements.
5. SUBSEQUENT EVENT
On January 12, 1996, Industries redeemed all 350,000 shares of its 8.75%
Preferred Shares, pursuant to mandatory redemption provisions, for $100 per
share plus accrued dividends. The redemption will be refinanced through the
issuance of long-term debt by Capital Markets in February, 1996.
- --------
See also Notes to Consolidated Financial Statements in the 1995 Annual Report
to Shareholders, which are incorporated herein by reference. (See Exhibit 13).
22
<PAGE>
NIPSCO INDUSTRIES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
TWELVE MONTHS ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ------- ------------------ ------------ --------
ADDITIONS
------------------ DEDUCTIONS
CHARGED FOR PURPOSES
BALANCE TO CHARGED FOR WHICH BALANCE
JAN. 1, COSTS AND TO OTHER RESERVES DEC. 31,
DESCRIPTION 1995 EXPENSES ACCOUNTS WERE CREATED 1995
----------- ------- --------- -------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Reserves Deducted in Consoli-
dated Balance Sheet from As-
sets to Which They Apply:
Reserve for accounts receiv-
ables...................... $4,899 $6,759 $-- $4,394 $7,264
Reserve for investments, at
equity..................... $2,850 $ -- $-- $2,000 $ 850
Reserves Classified Under Re-
serve Section of Consoli-
dated Balance Sheet:
Injuries and damages re-
serve...................... $2,538 $2,800 $-- $3,501 $1,837
Miscellaneous operating re-
serves..................... $7,671 $3,219 $-- $1,792 $9,098
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
23
<PAGE>
NIPSCO INDUSTRIES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
TWELVE MONTHS ENDED DECEMBER 31, 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ------- ------------------ ------------ --------
ADDITIONS
------------------ DEDUCTIONS
CHARGED FOR PURPOSES
BALANCE TO CHARGED FOR WHICH BALANCE
JAN. 1, COSTS AND TO OTHER RESERVES DEC. 31,
DESCRIPTION 1994 EXPENSES ACCOUNTS WERE CREATED 1994
----------- ------- --------- -------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Reserves Deducted in Consoli-
dated Balance Sheet from As-
sets to Which They Apply:
Reserve for accounts receiv-
ables...................... $4,855 $6,918 $-- $6,874 $4,899
Reserve for investments, at
equity..................... $2,500 $ 350 $-- $ -- $2,850
Reserve for investments, at
cost....................... $2,500 $ -- $-- $2,500 $ --
Reserves Classified Under Re-
serve Section of Consoli-
dated Balance Sheet:
Injuries and damages re-
serve...................... $3,994 $3,350 $-- $4,806 $2,538
Miscellaneous operating re-
serves..................... $6,102 $2,620 $-- $1,051 $7,671
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
24
<PAGE>
NIPSCO INDUSTRIES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
TWELVE MONTHS ENDED DECEMBER 31, 1993
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ------- --------------------------- ------------ --------
ADDITIONS
---------------------------
NORTHERN
INDIANA DEDUCTIONS
FUEL AND CHARGED FOR PURPOSES
BALANCE LIGHT TO CHARGED FOR WHICH BALANCE
JAN. 1, COMPANY, COSTS AND TO OTHER RESERVES DEC. 31,
DESCRIPTION 1993 INC.(A) EXPENSES ACCOUNTS WERE CREATED 1993
----------- ------- -------- --------- -------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Reserves Deducted in
Consolidated Balance
Sheet from Assets to
Which They Apply:
Reserve for accounts
receivables........... $5,121 $ 93 $5,254 $-- $5,613 $4,855
Reserve for invest-
ments, at equity...... $1,200 $-- $2,300 $-- $1,000 $2,500
Reserve for invest-
ments, at cost........ $ -- $-- $2,500 $-- $ -- $2,500
Reserves Classified Un-
der Reserve Section of
Consolidated Balance
Sheet:
Injuries and damages
reserve............... $4,367 $-- $4,450 $-- $4,823 $3,994
Miscellaneous operating
reserves.............. $4,160 $-- $2,066 $-- $ 124 $6,102
</TABLE>
(a) Northern Indiana Fuel and Light Company, Inc. purchased on March 31, 1993.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
NIPSCO Industries, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in NIPSCO Industries, Inc.'s
annual report to shareholders for the year ended December 31, 1995,
incorporated by reference in this Form 10-K, and have issued our report thereon
dated January 26, 1996. Our audits were made for the purpose of forming an
opinion on those consolidated financial statements taken as a whole. The
schedules listed on Page 18, Item 14(a)(2) are the responsibility of NIPSCO
Industries, Inc.'s management and are presented for purposes of complying with
the Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
As discussed in the notes to consolidated financial statements, effective
January 1, 1993, NIPSCO Industries, Inc. and subsidiaries changed their methods
of accounting for income taxes and postretirement benefits other than pensions.
Arthur Andersen LLP
Chicago, Illinois
January 26, 1996
26
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
NIPSCO Industries, Inc.
(Registrant)
March 28, 1996 /s/ Gary L. Neale
Date_______________________________ By_________________________________
Gary L. Neale, Its Chairman and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Gary L. Neale
- ------------------------------------
Gary L. Neale Chairman, President, Principal
Executive Officer and
Director
/s/ Stephen P. Adik
- ------------------------------------
Stephen P. Adik Executive Vice President and
Principal Financial Officer
/s/ Jerry M. Springer
- ------------------------------------
Jerry M. Springer Controller and Principal
Accounting Officer
/s/ Steven C. Beering
- ------------------------------------
Steven C. Beering Director
/s/ Arthur J. Decio
- ------------------------------------
Arthur J. Decio Director
/s/ Ernestine M. Raclin
- ------------------------------------
Ernestine M. Raclin Director March 28, 1996
/s/ Denis E. Ribordy
- ------------------------------------
Denis E. Ribordy Director
/s/ Ian M. Rolland
- ------------------------------------
Ian M. Rolland Director
/s/ Edmund A. Schroer
- ------------------------------------
Edmund A. Schroer Director
/s/ John W. Thompson
- ------------------------------------
John W. Thompson Director
/s/ Robert J. Welsh
- ------------------------------------
Robert J. Welsh Director
</TABLE>
27
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF ITEM
------- -------------------
<C> <S>
(3.1) Articles of Incorporation of September 22, 1987, and all Articles of Amendment
thereto (incorporated by reference to Exhibit 1 to the NIPSCO Industries, Inc.
Current Report on Form 8-K dated March 25, 1992).
(3.2) Amended By-laws effective May 25, 1993 (incorporated by reference to Exhibit
(3)(ii) to the NIPSCO Industries, Inc. Form 8-K dated July 13, 1993).
(4.1) Indenture dated August 1, 1939 between Northern Indiana Public Service Company
("Northern Indiana") and Trustees (incorporated by reference to Exhibit 7 to
Northern Indiana Registration Statement (Registration No. 2-5178)).
(4.2) Third Supplemental Indenture dated August 1, 1943 (incorporated by reference to
Exhibit 7-C to Northern Indiana Registration Statement (Registration No. 2-
5178)).
(4.3) Eighteenth Supplemental Indenture dated September 1, 1967 (incorporated by refer-
ence to Exhibit 1 to Northern Indiana Current Report on Form 8-K dated October 9,
1967).
(4.4) Nineteenth Supplemental Indenture dated October 1, 1968 (incorporated by reference
to Exhibit 1 to Northern Indiana Current Report on Form 8-K dated November 8,
1968).
(4.5) Twenty-third Supplemental Indenture dated March 31, 1972 (incorporated by refer-
ence to Exhibit 2 to Northern Indiana Current Report on Form 8-K dated May 5,
1972).
(4.6) Thirty-third Supplemental Indenture dated June 1, 1980 (incorporated by reference
to Exhibit 1 to Northern Indiana Quarterly Report on Form 10-Q for the quarter
ended June 30, 1980).
(4.7) Forty-first Supplemental Indenture dated July 1, 1991 (incorporated by reference
to Exhibit 1 to Northern Indiana Current Report on Form 8-K dated March 25,
1992).
(4.8) Indenture, dated as of March 1, 1988, between Northern Indiana and Manufacturers
Hanover Trust Company, as Trustee (incorporated by reference to Exhibit 4 to
Northern Indiana Registration Statement (Registration No. 33-44193)).
(4.9) First Supplemental Indenture dated December 1, 1991, between Northern Indiana and
Manufacturers Hanover Trust Company, as Trustee (incorporated by reference to Ex-
hibit 4.1 to Northern Indiana Registration Statement (Registration No.
33-63870)).
(4.10) Memorandum of Agreement with City of Michigan City, Indiana (incorporated by ref-
erence to Exhibit 7 to Northern Indiana Registration Statement (Registration No.
2-48531)).
(4.11) Financing Agreement No. 1 dated November 1, 1988 with Jasper County, Indiana re-
garding $37,000,000 Series 1988A Pollution Control Refunding Revenue Bonds. Iden-
tical financing agreements between Registrant and Jasper County provide for the
issuance of $47,000,000 Series 1988B, $46,000,000 Series 1988C and $24,000,000
Series 1988D Pollution Control Refunding Revenue Bonds (incorporated by reference
to Exhibit 8 to Northern Indiana Current Report on Form 8-K dated March 16,
1989).
(4.12) Financing Agreement dated July 1, 1991, with Jasper County, Indiana regarding
$55,000,000 Series 1991 Collateralized Pollution Control Refunding Revenue Bonds
(incorporated by reference to Exhibit 3 to Northern Indiana Current Report on
Form 8-K dated March 25, 1992).
(4.13) Financing Agreement dated August 1, 1994, with Jasper County, Indiana regarding
$10,000,000 Series 1994A, $18,000,000 Series 1994B and $41,000,000 Series 1994C
Pollution Control Refunding Revenue Bonds (incorporated by reference to Exhibit
4.16 to Northern Indiana Annual Report on Form 10-K for year ended December 31,
1994).
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF ITEM
------- -------------------
<S> <C>
(4.14) Indenture between Registrant, NIPSCO Capital Markets, Inc. and Chemical Bank as
Trustee dated February 1, 1996 (incorporated by reference to Exhibit 1 to NIPSCO
Industries, Inc. Registration Statement (Registration No. 33-65285)).
(4.15) Rights Agreement between Registrant and Harris Trust and Savings Bank, dated Feb-
ruary 27, 1990 (incorporated by reference to Exhibit 4.1 to the NIPSCO Indus-
tries, Inc. Current Report on Form 8-K dated March 7, 1990).
(10.1) Supplemental Life Insurance Plan effective January 1, 1991 (incorporated by refer-
ence to Exhibit 2 to the NIPSCO Industries, Inc. Current Report on Form 8-K dated
March 25, 1992).*
(10.2) Executive Deferred Compensation Plan effective December 1, 1990 (incorporated by
reference to Exhibit 3 to the NIPSCO Industries, Inc. Current Report on Form 8-K
dated March 25, 1992).*
(10.3) Form of Change in Control and Termination Agreements (incorporated by reference to
Exhibit 4 to the NIPSCO Industries, Inc. Current Report on Form 8-K dated March
25, 1992).*
(10.4) Nonemployee Director Stock Incentive Plan effective February 1, 1992 (incorporated
by reference to Exhibit 5 to the NIPSCO Industries, Inc. Current Report on Form
8-K dated March 25, 1992).*
(10.5) NIPSCO Industries, Inc. Long-Term Incentive Plan (incorporated by reference to Ex-
hibit 6 to the NIPSCO Industries, Inc. Current Report on Form 8-K dated March 25,
1992).*
(10.6) Amended and Restated Pension Plan Provisions effective January 1, 1989 (incorpo-
rated by reference to Exhibit 17 to Northern Indiana Current Report on Form 8-K
dated March 25, 1992).*
(10.7) NIPSCO Industries, Inc. 1994 Long-Term Incentive Plan.*
(10.8) NIPSCO Industries, Inc. Directors' Charitable Gift Program.*
(11) Computation of Per Share Earnings.
(13) 1995 Annual Report to Shareholders for pages 31-61.
(21) List of Subsidiaries.
(23) Consent of Arthur Andersen LLP.
(27) Financial Data Schedule.
(99) Amended Articles of Incorporation of Northern Indiana Public Service Company (in-
corporated by reference to Exhibit 1 to the Northern Indiana Current Report on
Form 8-K dated May 5, 1982).
</TABLE>
- --------
* Management contract or compensatory plan arrangement of NIPSCO Industries,
Inc.
29
<PAGE>
EXHIBIT 11
NIPSCO INDUSTRIES, INC.
COMPUTATION OF PER SHARE EARNINGS
TWELVE MONTHS ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FULLY
PRIMARY DILUTED
---------- ----------
<S> <C> <C>
Weighted Average Number of Shares
Average Common Shares Outstanding at 12/31/95.... 63,281,177 63,281,177
Dilutive Effect for Nonqualified Stock Options at
12/31/95........................................ 217,756 389,346
---------- ----------
Weighted Average Shares at 12/31/95.............. 63,498,933 63,670,523
========== ==========
Net Income to be Used to Compute
Earnings Per Average Common Share
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Net Income....................................... $ 175,465 $ 175,465
Dividend Requirements on Preferred Shares........ 3,063 3,063
---------- ----------
Balance Available for Common Shareholders........ $ 172,402 $ 172,402
========== ==========
Earnings Per Average Common Share.................. $ 2.72(a) $ 2.71(a)
========== ==========
</TABLE>
- --------
Note:
(a) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
30
<PAGE>
EXHIBIT 11
NIPSCO INDUSTRIES, INC.
COMPUTATION OF PER SHARE EARNINGS
TWELVE MONTHS ENDED DECEMBER 31, 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FULLY
PRIMARY DILUTED
---------- ----------
<S> <C> <C>
Weighted Average Number of Shares
Average Common Shares Outstanding at 12/31/94.... 64,820,039 64,820,039
Dilutive Effect for Nonqualified Stock Options at
12/31/94........................................ 134,775 136,688
---------- ----------
Weighted Average Shares at 12/31/94.............. 64,954,814 64,956,727
========== ==========
Net Income to be Used to Compute
Earnings Per Average Common Share
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Net Income....................................... $ 163,987 $ 163,987
Dividend Requirements on Preferred Shares........ 3,063 3,063
---------- ----------
Balance Available for Common Shareholders........ $ 160,924 $ 160,924
========== ==========
Earnings Per Average Common Share.................. $ 2.48(a) $ 2.48(a)
========== ==========
</TABLE>
- --------
Note:
(a) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
31
<PAGE>
EXHIBIT 11
NIPSCO INDUSTRIES, INC.
COMPUTATION OF PER SHARE EARNINGS
TWELVE MONTHS ENDED DECEMBER 31, 1993
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FULLY
PRIMARY DILUTED
---------- ----------
<S> <C> <C>
Weighted Average Number of Shares
Average Common Shares Outstanding at 12/31/93.... 66,136,396 66,136,396
Dilutive Effect for Nonqualified Stock Options at
12/31/93........................................ 173,417 193,693
---------- ----------
Weighted Average Shares at 12/31/93.............. 66,309,813 66,330,089
========== ==========
Net Income to be Used to Compute
Earnings Per Average Common Share
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Net Income....................................... $ 156,140 $ 156,140
Dividend Requirements on Preferred Shares........ 3,063 3,063
---------- ----------
Balance Available for Common Shareholders........ $ 153,077 $ 153,077
========== ==========
Earnings Per Average Common Share.................. $ 2.31(a) $ 2.31(a)
========== ==========
</TABLE>
- --------
Note:
(a) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
32
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included or incorporated by reference in this Form 10-K, into
Industries' previously filed Form S-8 Registration Statement No. 33-30619; and
Form S-8 Registration Statement No. 33-30621.
Arthur Andersen LLP
Chicago, Illinois
March 28, 1996
33
<PAGE>
GRAPHIC MATERIAL CROSS-REFERENCE PAGE
CAPITALIZATION RATIO CHART SHOWS PERCENT OF LONG-TERM DEBT, COMMON SHARE EQUITY
AND PREFERRED AND PREFERENCE STOCK FOR YEARS 1986-1995.
COST OF FUEL FOR ELECTRIC GENERATION CHART SHOWS IN MILLS PER KWH THE COST OF
FUEL FOR ELECTRIC GENERATION FOR YEARS 1986-1995.
COST OF GAS PURCHASED FOR RESALE CHART SHOWS IN DOLLARS PER DEKATHERM THE COST
OF GAS PURCHASED FOR RESALE FOR YEARS 1986-1995.
<PAGE>
1995 FINANCIAL REVIEW
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
HOLDING COMPANY
NIPSCO Industries, Inc. (Industries) is an Indiana corporation serving as the
holding company for a number of subsidiaries, including four regulated
companies: Northern Indiana Public Service Company (Northern Indiana), Kokomo
Gas and Fuel Company (Kokomo Gas), Northern Indiana Fuel and Light Company, Inc.
(NIFL) and Crossroads Pipeline Company (Crossroads). Northern Indiana is a
public utility operating company supplying natural gas and electric energy to
the public. Kokomo Gas and NIFL are public utility operating companies supplying
natural gas to the public, and Crossroads is an interstate natural gas
transmission company.
Industries' major non-utility subsidiaries include NIPSCO Development
Company, Inc. (Development), NIPSCO Energy Services, Inc. (Services), Primary
Energy, Inc. (Primary) and NIPSCO Capital Markets, Inc. (Capital Markets).
Development makes various investments, including real estate and venture
capital investments. Services coordinates the energy-related diversification
ventures of Industries. Primary arranges energy-related projects with large
industrial customers. Capital Markets handles financing for Industries and its
subsidiaries other than Northern Indiana.
The following discussion, except where noted, is attributable to the
operations of Northern Indiana, Kokomo Gas, NIFL and Crossroads (Utilities).
NET INCOME
For 1995, net income of Industries increased to $175.5 million, or earnings of
$2.72 per average common share, compared to $164.0 million, or earnings of $2.48
per average common share, for 1994. There were approximately 1.5 million fewer
average common shares outstanding in 1995 than 1994. In 1993, net income was
$156.1 million, or earnings of $2.31 per average common share. See Notes to
Consolidated Financial Statements for Segments of Business regarding the revenue
and utility operating income derived from the delivery of gas and electricity.
REVENUES
Operating revenues increased $45.9 million, or 2.7%, from 1994. Operating
revenues in 1994 decreased $1.5 million, or 0.1%, from 1993.
During 1995, gas deliveries in dekatherms (dth), which include
transportation services, increased 2.9%. Gas sales in 1995 increased 4.2% due to
higher sales to residential and commercial customers as a result of colder
weather during the fourth quarter of 1995. Gas transportation services increased
2.1% mainly due to increased deliveries by Crossroads. The Utilities had
approximately 699,900 gas customers at December 31, 1995. During 1994, gas
deliveries increased 5.5% over 1993. Gas sales in 1994 decreased 3.3% due to
lower sales to residential and commercial customers due to warmer weather during
the fourth quarter of 1994, compared to the fourth quarter of 1993. Gas
transportation services increased 11.9% mainly due to increased deliveries to
industrial customers and gas volumes transported through Crossroads, which began
operations in 1994.
Gas revenues were $691.4 million in 1995, an increase of $9.5 million from
1994. The increase in gas revenues was mainly due to increased sales to
residential and commercial customers as a result of colder weather during the
fourth quarter of 1995 and increased gas transition charges partially offset by
decreased gas costs. Gas revenues were $681.9 million in 1994, a decrease of
$32.3 million from 1993. The decrease in gas revenues was mainly due to
decreased sales to residential and commercial customers due to the warmer
weather in 1994, and reduced gas costs. The large commercial and industrial
customers continued to utilize transportation services provided by the
Utilities. Gas transportation customers purchase much of their gas directly from
producers and marketers and then pay a transportation fee to have their gas
delivered over the Utilities' systems. The Utilities transported 191.6, 188.6
and 167.9 million dth in 1995, 1994 and 1993, respectively.
In 1995, sales of electricity in kilowatt-hours (kwh) increased 8.9% over
1994, mainly due to higher sales to residential and commercial customers as a
result of warmer weather in the third quarter of 1995 and increased sales to
wholesale customers. Northern Indiana had approximately 403,900 electric
customers at December 31, 1995. In 1994, sales of electricity in kwh increased
2.4% over 1993 mainly due to higher sales to commercial and industrial customers
due to increased demands of steel-related customers.
In 1995, electric revenues were $1.031 billion, an increase of
$36.4 million from 1994. The increase in electric revenue was mainly due to
higher sales to residential and commercial customers as a result of warmer
weather in the third quarter of 1995, and increased sales to wholesale
customers, and was
- --------------------------------------------------------------------------------
31
<PAGE>
1995 FINANCIAL REVIEW
==============================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
- ------------------------------------------------------------------------------
partially offset by lower fuel costs per kwh and to transitional rate
adjustments to industrial customers signing new five-year contracts early in
1995. In 1994, electric revenues were $994.5 million, an increase of $30.8
million from 1993. The increase in electric revenue was mainly due to higher
sales to commercial and industrial customers due to increased demands of steel-
related customers and higher fuel costs per kwh, which were partially offset by
decreased sales to wholesale customers.
The components of the changes in gas and electric revenues are shown in the
following tables:
<TABLE>
<CAPTION>
Year 1995 Year 1994
Compared to Compared to
Year 1994 Year 1993
----------- -----------
<S> <C> <C>
(Dollars in millions)
Gas Revenue
Pass through of net changes
in purchased gas costs,
gas storage and storage
transportation costs $(59.2) $(25.9)
Take-or-pay costs and
transition costs 47.4 12.0
Changes in sales levels 22.4 (21.5)
Gas transported (1.1) 3.1
------ ------
Gas Revenue Change $ 9.5 $(32.3)
------ ------
Electric Revenue
Pass through of net
changes in fuel costs $(14.6) $ 7.6
Changes in sales levels 51.0 23.2
------ ------
Electric Revenue Change $ 36.4 $ 30.8
------ ------
Total Revenue Change $ 45.9 $ (1.5)
====== ======
</TABLE>
See Rate Matters in Notes to Consolidated Financial Statements
regarding changes in gas take-or-pay and FERC Order No. 636 transition costs.
The basic steel industry accounted for 33% of natural gas delivered
(including volumes transported) and 36% of electric sales during 1995.
The Utilities' rate schedules for gas and electric service to their
customers contain electric rate adjustment clauses for changes in the cost of
fuel and firm purchases of electric energy and gas rate adjustment clauses to
reflect changes in the cost of gas purchased and contracted gas storage and
storage transportation costs. (See Fuel Adjustment Clause and Gas Cost
Adjustment Clause under Summary of Significant Accounting Policies in Notes to
Consolidated Financial Statements.)
GAS COSTS
The Utilities' gas costs decreased $4.3 million (1.0%) in 1995 due to lower gas
costs per dth partially offset by increased purchases. The average cost for the
Utilities purchased gas in 1995, after adjustment for take-or-pay and transition
charges billed to transport customers, was $2.68 per dth as compared to $2.95
per dth in 1994. Gas costs decreased $26.2 million (6.1%) in 1994, due to
decreased volumes purchased and lower gas costs per dth. The average cost for
the Utilities purchased gas in 1994, after adjustment for take-or-pay and
transition charges billed to transport customers, was $2.95 per dth as compared
to $3.23 per dth in 1993.
FUEL AND PURCHASED POWER
Cost of fuel for electric generation in 1995 decreased mainly as a result of
lower cost for coal and was partially offset by increased production. The
average cost per kwh generated decreased 5.7% from 1994 to 15.89 mills. The cost
of fuel for electric generation increased in 1994 from 1993 mainly as a result
of increased coal costs per kwh generated. The average cost per kwh generated
increased 1.2% from 1993 to 16.85 mills.
Power purchased increased $11.1 million in 1995 as a result of
increased bulk power purchases from other utilities due to increased sales.
Power purchased increased $14.3 million in 1994 mainly due to purchases required
to replace R. M. Schahfer Generating Station Unit 15 generation from February 1
to July 5, 1994, while this unit was down on an extended outage as part of the
Powder River Basin coal conversion project.
OPERATING MARGINS
Operating margins increased $43.9 million in 1995 to $1.037 billion. The
operating margin from gas deliveries increased $13.8 million in 1995, mainly due
to the increased sales to residential and commercial customers, due to colder
weather during the fourth quarter of 1995. Operating margins from electric sales
increased $30.1 million reflecting increased sales to residential and commercial
customers as a result of warmer weather in the third quarter of 1995, and
increased sales to wholesale customers, partially offset by transitional rate
adjustments to industrial customers. Operating margins increased $7.9 million in
1994 to $993.3 million. The operating margin from gas deliveries decreased $6.1
million in 1994, mainly due to the decreased sales to residential and commercial
customers due to warmer weather during the fourth quarter of 1994, partially
offset by increased transportation services. Operating margins from electric
sales increased $14.0 million reflecting increased sales to commercial and
industrial customers due to increased demand partially offset by decreased sales
to wholesale customers.
- ------------------------------------------------------------------------------
32
<PAGE>
1995 FINANCIAL REVIEW
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
OPERATING EXPENSES AND TAXES
Operating expenses and taxes (except income) in 1995 increased 1.5% from 1994 to
$643.8 million and in 1994 increased 1.3% from 1993 to $634.4 million.
Operation expenses increased $3.2 million in 1995 from 1994 reflecting
a December 1995 Indiana Utility Regulatory Commission (Commission) order to
refund $3.4 million to electric customers related to a 1992 insurance settlement
previously credited to operating and maintenance expenses. Operation expenses
increased $3.4 million in 1994 over 1993 mainly due to increased costs of
pollution control facilities, environmental costs, and operating costs related
to Crossroads.
Maintenance expenses decreased $1.9 million and $3.4 million in 1995
and 1994, respectively, due to reduced maintenance activities.
Depreciation and amortization expenses increased $6.9 million and $7.3
million in 1995 and 1994, respectively, mainly due to net plant additions.
Utility income taxes increased $10.7 million in 1995 mainly due to
higher pre-tax operating income. Utility income taxes remained relatively
unchanged from 1993 to 1994 consistent with the level of pre-tax income.
Other Income (Deductions) decreased $6.4 million in 1995 from 1994
reflecting the inclusion in 1994 of a $5.6 million after-tax benefit for the
Northern Indiana land donation to the Shafer and Freeman Lakes Environmental
Conservation Corporation. The operating results of all non-utility subsidiaries
are also included in Other Income (Deductions).
Interest and other charges increased $5.8 million and decreased $4.5
million in 1995 and 1994, respectively. The 1995 increase reflects increases in
short-term borrowing rates and long-term debt outstanding partially offset by
reduced dividend requirements on Northern Indiana preferred stock. The 1994
decrease reflects Northern Indiana's continued refinancing to reduce interest
rates on long-term debt outstanding.
See Notes to Consolidated Financial Statements for a discussion of
Regulatory Assets, Carrying Charges and Deferred Depreciation, Allowance for
Funds Used During Construction, FERC Order No. 636, Income Taxes,
Postretirement Benefits, Postemployment Benefits and Long-Term Incentive Plan.
ENVIRONMENTAL MATTERS
The Utilities have an ongoing program to remain aware of laws and
regulations involved with hazardous waste and other environmental matters. It is
the Utilities' intent to continue to evaluate their facilities and properties
with respect to these rules and identify any sites that would require corrective
action. The Utilities have recorded a reserve of $5.0 million to cover probable
corrective actions as of December 31, 1995. However, environmental regulations
and remediation techniques are subject to future change. Based upon management's
understanding of current laws and regulations, the Utilities believe that any
corrective actions required, after consideration of insurance coverages, will
not have a significant impact on the financial position or results of operations
of Industries.
Because of major investments made in modern environmental control
facilities and the use of low sulfur coal, all of Northern Indiana's electric
production facilities now comply with the sulfur dioxide limitations contained
in the acid deposition provisions of the Clean Air Act Amendments of 1990
(CAAA). Northern Indiana estimates that total costs of compliance with the CAAA
sulfur dioxide regulations will impact electric rates by less than 5% in the
future.
The CAAA contain provisions that could lead to limitations on
emissions of nitrogen oxides and hazardous air pollutants, which may require
significant capital expenditures for control of these emissions. Northern
Indiana is pursuing a nitrogen oxide control program to meet future
requirements. Northern Indiana cannot predict the costs of complying with CAAA
requirements, but Northern Indiana believes that any such mandated costs would
be recoverable through the rate making process.
The Environmental Protection Agency (EPA) has notified Northern
Indiana that it is a "potentially responsible party" (PRP) under the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and
may be required to share in the cost of cleanup of several waste disposal sites
identified by the EPA. The sites are in various stages of investigation,
analysis and remediation. At each of the sites, Northern Indiana is one of
several PRPs, and it is expected that remedial costs, as provided under CERCLA,
will be shared among them. At some sites Northern Indiana and/or the other named
PRPs are presently working with the EPA to clean up the sites and avoid the
imposition of fines or added costs.
The Utilities have instituted a program to investigate former
manufactured gas plants where one of them is the current or former owner. The
Utilities have identified twenty-seven of these sites and made visual
inspections of these sites. The Utilities have conducted initial samplings at
thirteen sites. Follow-up investigations have been conducted at five sites and
potential remedial measures are being evaluated. The Utilities will continue
their program to assess sites. During the follow-up investigation of the former
manufactured gas plant in Elkhart, Indiana, Northern Indiana noted the presence
of hydrocarbons in the Elkhart River. Northern Indiana reported this finding to
the Indiana Department of
- --------------------------------------------------------------------------------
33
<PAGE>
1995 FINANCIAL REVIEW
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Environmental Management (IDEM) and the EPA. Northern
Indiana has placed the Elkhart site in the IDEM Voluntary Remediation Program
(VRP). The goal of placing the site in the VRP is to obtain IDEM approval of the
determination and subsequent implementation of what remedial measures, if any,
may be needed.
Northern Indiana was notified by IDEM of the release of a petroleum
substance into the St. Mary's River in Fort Wayne, Indiana, from the site of a
former manufactured gas plant formerly owned by Northern Indiana. In cooperation
with IDEM, Northern Indiana has taken steps to investigate and contain the
substance. Northern Indiana has remediated part of the Fort Wayne site. The
remainder of the site is being evaluated to determine what further remedial
measures, if any, may be needed.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of investigation
and remediation programs at five former manufactured gas plant sites at which
both companies or their predecessors were former operators or owners. One of
these sites is the Lafayette site which Indiana Gas had previously notified
Northern Indiana is being investigated and remediated pursuant to an
administrative order with IDEM. Northern Indiana also notified PSI Energy, Inc.
that it was a former owner or operator of seven former manufactured gas plants
at which Northern Indiana had conducted or was planning investigation or
remediation activities.
The Utilities have met with various companies that provided insurance
coverage which the Utilities believe covers costs related to actions taken at
former manufactured gas plants. In September 1995, certain insurance companies
initiated a suit in Indiana state court against Northern Indiana to deny
coverage. Later in September 1995, Northern Indiana filed a more comprehensive
suit in Federal Court in Indiana against those insurers and several other
insurance companies, seeking coverage for costs associated with several former
manufactured gas plant sites. The state court action is stayed pending
resolution of the Northern Indiana suit in Federal Court.
The possibility that exposure to electric and magnetic fields
emanating from power lines, household appliances and other electric sources may
result in adverse health effects has been the subject of public, governmental
and media attention. A considerable amount of scientific research has been
conducted on this topic without definitive results. Research is continuing to
resolve scientific uncertainties.
LIQUIDITY AND CAPITAL RESOURCES
During the next few years, it is anticipated that the great majority of earnings
available for distribution of dividends will depend upon dividends paid to
Industries by Northern Indiana. See Notes to Consolidated Financial Statements
for a discussion of the Common Share Dividend.
Construction expenditures by Industries for 1995, 1994 and 1993 were
approximately $193 million, $203 million and $181 million, respectively.
Industries' total utility plant investment on December 31, 1995, was $5.6
billion.
During 1995, Industries' non-utility subsidiaries acquired interests
in other properties and investments totaling approximately $57 million.
On March 4, 1994, the Commission authorized Northern Indiana to issue
up to $289,275,000 of its Medium-Term Notes, Series D, due from 1 year to 30
years, for purposes of refinancing certain first mortgage bonds and paying
short-term debt used to pay at maturity medium-term notes due in January and
April, 1994. On May 23, 1994, Northern Indiana exercised its option to redeem
all the outstanding First Mortgage Bonds, Series S, Y and AA, aggregating $125.5
million, through the use of working capital and the proceeds of short-term debt.
During 1994, $120.0 million of the Medium-Term Notes, Series D, were issued to
complete the permanent refinancing of those first mortgage bonds. On June 12,
1995, the remaining $169,275,000 of Medium-Term Notes, Series D, were issued,
and part of the proceeds were used to redeem all of the outstanding First
Mortgage Bonds, Series U and Z, aggregating $94.8 million on July 3, 1995.
On August 25, 1994, Jasper County, Indiana issued Pollution Control
Refunding Revenue Bonds, Series 1994 (Northern Indiana Public Service Company
Project) (the Series 1994 Bonds), including $10 million of Series 1994A Bonds,
due August 1, 2010; $18 million of Series 1994B Bonds, due June 1, 2013; and $41
million of Series 1994C Bonds, due April 1, 2019. The proceeds of these
issuances were loaned to Northern Indiana under similar terms. The initial
interest rate on Series 1994 Bonds was 3.10%, which resets daily. The proceeds
of the Series 1994A and Series 1994C were used to retire on October 15, 1994,
$10 million of Series MM First Mortgage Bonds, 7-1/2%, due October 15, 2004, and
$41 million of Series LL First Mortgage Bonds, 7-1/2%, due October 15, 2014.
The proceeds of the Series 1994B Bonds were used to retire the $18 million
Series 1978 Note, 6.70%, due November 1, 2008, on August 25, 1994. The Series
1994 Bonds are secured by Letters of Credit from Union Bank of Switzerland.
Capital Markets has a $150 million revolving Credit Agreement which
terminates August 19, 1998, unless extended by its terms. This facility provides
short-term financing flexibility to Industries and also serves as the back-up
instrument for a commercial paper program. As of
- --------------------------------------------------------------------------------
34
<PAGE>
1995 FINANCIAL REVIEW
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
December 31, 1995, there were no borrowings outstanding under this agreement.
Capital Markets also has $105 million of money market lines of credit.
As of December 31, 1995, $17.4 million of borrowings were outstanding under
these lines of credit.
As of December 31, 1995, Capital Markets had $76.7 million in
commercial paper outstanding, having a weighted average interest rate of 6.08%.
On January 12, 1996, Industries redeemed all 350,000 shares of its
8.75% Preferred Shares, pursuant to mandatory redemption provisions, for $100
per share plus accrued dividends. The redemption was accomplished through the
use of short-term debt issued by Capital Markets. Capital Markets expects to
refinance the short-term debt through an issue of long-term debt during the
first quarter of 1996.
The obligations of Capital Markets are subject to a Support Agreement
between Industries and Capital Markets, under which Industries has committed to
make payments of interest and principal on Capital Markets' securities in the
event of a failure to pay by Capital Markets. Restrictions in the Support
Agreement prohibit recourse on the part of Capital Markets' investors against
the stock and assets of Northern Indiana. Under the terms of the Support
Agreement, in addition to the cash flow of cash dividends paid to Industries by
any of its consolidated subsidiaries, the assets of Industries, other than the
stock and assets of Northern Indiana, are available as recourse to holders of
Capital Markets' securities. The carrying value of those assets other than
Northern Indiana, reflected in the consolidated financial statements of
Industries, is approximately $393.3 million at December 31, 1995.
Cash flow from operations has provided sufficient liquidity to meet
current operating requirements. Because of the seasonal nature of the utility
business and the construction program, Northern Indiana makes use of commercial
paper intermittently as short-term financing. As of December 31, 1995, Northern
Indiana had $44.8 million in commercial paper outstanding, having a weighted
average interest rate of 6.01%.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1998, unless extended by its terms. As
of December 31, 1995, there were no borrowings outstanding under this agreement.
In addition, Northern Indiana has $14.2 million in lines of credit which run to
May 31, 1996. The credit pricing of each of the lines varies from either the
lending banks' commercial prime or market rates. Northern Indiana has agreed to
compensate the participating banks with arrangements that vary from no
commitment fee to a combination of fees which are mutually satisfactory to both
parties. As of December 31, 1995, there were no borrowings under these lines of
credit. The Credit Agreement and lines of credit are also available to support
the issuances of commercial paper.
Northern Indiana also has $268.5 million of money market lines of
credit. As of December 31, 1995, $118.8 million of borrowings were outstanding
under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
December 31, 1995, there were no borrowings outstanding under this facility.
During recent years, Northern Indiana has been able to finance its
construction program with internally generated funds and expects to be able to
meet future commitments through such funds.
The Utilities do not expect the effects of inflation at current levels
to have a significant impact on their results of operations, ability to contain
cost increases or need to seek timely and adequate rate relief. The Utilities do
not anticipate the need to file for gas and electric base rate increases in the
near future.
COMPETITION
The Energy Policy Act of 1992 (Energy Act) allows FERC to order electric
utilities to grant access to transmission systems by third party power
producers. The Energy Act specifically prohibits federally mandated wheeling of
power for retail customers. That authority lies with the individual states,
several of which are considering opening the transmission network to retail
customers. The Energy Act will stimulate greater competition in the wholesale
electric markets. This competition will create opportunities to compete for new
customers and revenues, as well as increase the risk of the loss of customers.
Although wholesale customers represent a relatively small portion of Northern
Indiana's sales, Northern Indiana will continue its efforts to retain and add
customers by offering competitive rates. Competitive forces have also begun to
influence retail pricing in the industry. In some instances, industrial
customers, threatening to pursue cogeneration, self-generation, retail wheeling
or relocation to other service territories, have obtained price concessions from
utilities.
Operating in a competitive environment will place added pressures on
utility profit margins and credit quality. Increasing competition in the
electric utility industry has already led the credit rating agencies to apply
more stringent guidelines in making credit rating determinations.
Industries' management has taken steps to make the company more
competitive and profitable in the changing utility environment, including
partnering on energy projects with major industrial customers and conversions of
some of its generating units to allow use of lower cost low sulfur coal.
- --------------------------------------------------------------------------------
35
<PAGE>
1995 FINANCIAL REVIEW
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONCLUDED)
- --------------------------------------------------------------------------------
FERC Order No. 636, effective in late 1993, shifted primary
responsibility for gas acquisition, transportation and peak days' supply from
pipelines to local gas distribution companies, such as the Utilities. Although
pipelines continue to transport gas, they no longer provide sales service. The
Utilities believe they have taken appropriate steps to ensure the continued
acquisition of adequate gas supplies at reasonable prices.
The mix of gas revenues from retail sales, interruptible retail sales,
firm transportation service and interruptible transportation services has
changed significantly over the past several years. The deregulation of the gas
industry, since the mid-1980s, allows large industrial and commercial customers
to purchase their gas supplies directly from producers and use the Utilities'
facilities to transport the gas. Transportation customers pay the Utilities only
for transporting their gas from the pipeline to the customers' premises.
Northern Indiana filed an Alternative Regulatory Plan (ARP) with the
Commission on November 29, 1995. The purpose of the ARP is to create a business
and regulatory environment and structure which will permit increased choice for
gas customers, competition among suppliers and improved natural gas service. In
its petition, Northern Indiana stated it would propose to implement new rates
and services that would include, but not be limited to, further unbundling of
services for additional customer classes which would include increased customer
choice for sources of natural gas supply, negotiated services and prices, and
incentive gas storage cost mechanisms.
To date, the Utilities' system has not been materially affected by
competition, and management does not foresee substantial adverse effects in the
near future, unless the current regulatory structure is substantially altered.
The Utilities believe the steps they are taking to deal with increased
competition will have significant, positive effects in the next few years.
(Selected Statistical Charts)
(Capitalization Ratios Chart)
<TABLE>
<CAPTION>
COMMON PREFERRED AND
LONG-TERM SHARE PREFERENCE
YEAR DEBT EQUITY STOCK TOTAL
- ---- --------- ------ ------------- -------
<S> <C> <C> <C> <C>
1986 55.3% 33.6% 11.1% 100.0%
1987 52.7% 36.1% 11.2% 100.0%
1988 52.0% 41.0% 7.0% 100.0%
1989 52.3% 40.8% 6.9% 100.0%
1990 49.2% 42.6% 8.2% 100.0%
1991 47.1% 44.6% 8.3% 100.0%
1992 46.0% 45.1% 8.9% 100.0%
1993 47.9% 44.0% 8.1% 100.0%
1994 47.7% 44.7% 7.6% 100.0%
1995 47.4% 45.3% 7.3% 100.0%
</TABLE>
Cost of Fuel for Electric Generation Chart
(Mills per Kwh)
<TABLE>
<CAPTION>
YEAR (MILLS PER KWH)
---- ---------------
<S> <C>
1986 23.92
1987 21.02
1988 19.09
1989 18.01
1990 18.13
1991 17.86
1992 16.82
1993 16.65
1994 16.85
1995 15.89
</TABLE>
Cost of Gas Purchased for Resale Chart
(Dollars per dekatherm)
<TABLE>
<CAPTION>
DOLLARS
YEAR PER DEKATHERM
---- -------------
<S> <C>
1986 3.20
1987 2.94
1988 3.03
1989 3.21
1990 3.40
1991 3.16
1992 3.31
1993 3.27
1994 3.03
1995 3.00
</TABLE>
36
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- ------------------------------------------------------------ ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Operating Revenues:
Gas........................................... $ 691,402 $ 681,909 $ 714,229
Electric...................................... 1,030,923 994,492 963,643
----------- ----------- -----------
1,722,325 1,676,401 1,677,872
----------- ----------- -----------
Cost of Energy:
Gas costs..................................... 399,113 403,437 429,645
Fuel for electric generation.................. 242,337 247,134 244,552
Power purchased............................... 43,681 32,503 18,225
----------- ----------- -----------
685,131 683,074 692,422
----------- ----------- -----------
Operating Margin................................ 1,037,194 993,327 985,450
----------- ----------- -----------
Operating Expenses and Taxes (except income):
Operation..................................... 290,951 287,766 284,406
Maintenance................................... 78,293 80,170 83,548
Depreciation and amortization................. 201,137 194,283 187,000
Taxes (except income)......................... 73,452 72,227 71,621
----------- ----------- -----------
643,833 634,446 626,575
----------- ----------- -----------
Operating Income Before Utility Income Taxes.... 393,361 358,881 358,875
----------- ----------- -----------
Utility Income Taxes............................ 108,449 97,732 96,830
----------- ----------- -----------
Operating Income................................ 284,912 261,149 262,045
----------- ----------- -----------
Other Income (Deductions)....................... (4,241) 2,216 (2,070)
----------- ----------- -----------
Interest and Other Charges:
Interest on long-term debt.................... 82,655 78,292 82,121
Other interest................................ 12,781 11,650 9,238
Allowance for borrowed funds used during
construction and carrying charges........... (3,678) (4,374) (1,447)
Amortization of premium, reacquisition
premium, discount and expense on debt, net.. 4,402 3,897 3,582
Dividend requirements on preferred stocks of
subsidiary.................................. 9,046 9,913 10,341
----------- ----------- -----------
105,206 99,378 103,835
----------- ----------- -----------
Net Income...................................... 175,465 163,987 156,140
Dividend requirements on preferred shares....... 3,063 3,063 3,063
----------- ----------- -----------
Balance available for common shareholders....... $ 172,402 $ 160,924 $ 153,077
=========== =========== ===========
Average common shares outstanding............... 63,281,177 64,820,039 66,136,396
Earnings per average common share............... $2.72 $2.48 $2.31
=========== =========== ===========
Dividends declared per common share............. $1.59 $1.47 $1.35
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
- --------------------------------------------------------------------------------
37
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
=======================================================================================================
December 31, 1995 1994
- ------------------------------------------------------------------------------------------ ----------
ASSETS (Dollars in thousands)
<S> <C> <C>
Utility Plant, at original cost (including construction work
in progress of $145,129 and $221,830, respectively):
Electric................................................................. $3,935,103 $3,858,118
Gas...................................................................... 1,301,687 1,258,801
Common................................................................... 350,168 316,120
---------- ----------
5,586,958 5,433,039
Less--Accumulated provision for depreciation and amortization............ 2,373,694 2,202,082
---------- ----------
Total utility plant..................................................... 3,213,264 3,230,957
---------- ----------
Other Property and Investments:
Other property, at cost, less accumulated provision for depreciation....... 136,006 126,632
Investments, at equity..................................................... 47,565 27,023
Investments, at cost....................................................... 22,899 11,322
Other investments.......................................................... 17,315 13,328
---------- ----------
Total other property and investments.................................... 223,785 178,305
---------- ----------
Current Assets:
Cash and cash equivalents.................................................. 28,496 40,441
Accounts receivable, less reserve of $7,264 and $4,899, respectively....... 120,404 86,299
Fuel adjustment clause..................................................... 10,301 1,614
Gas cost adjustment clause................................................. 1,423 25,972
Materials and supplies, at average cost.................................... 65,044 65,430
Electric production fuel, at average cost.................................. 14,258 18,347
Natural gas in storage..................................................... 60,884 77,794
Prepayments and other...................................................... 15,771 11,081
---------- ----------
Total current assets.................................................... 316,581 326,978
---------- ----------
Other Assets:
Regulatory assets.......................................................... 212,491 195,449
Deferred charges and other non-current assets.............................. 33,399 15,449
---------- ----------
Total other assets...................................................... 245,890 210,898
---------- ----------
$3,999,520 $3,947,138
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
- --------------------------------------------------------------------------------
38
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET
============================================================================================
<CAPTION>
December 31, 1995 1994
- ------------------------------------------------------------------------------ ---------
<S> <C> <C>
CAPITALIZATION AND LIABILITIES (Dollars in thousands)
Capitalization (see page 40):
Common shareholders' equity (see page 43)................ $1,122,215 $1,107,848
Preferred stocks--
Northern Indiana Public Service Company:
Series without mandatory redemption provisions....... 81,325 86,389
Series with mandatory redemption provisions.......... 63,651 66,057
NIPSCO Industries, Inc.:
Series with mandatory redemption provisions.......... 35,000 35,000
Long-term debt, excluding amounts due within one year.... 1,175,728 1,180,338
----------- -----------
Total capitalization................................ 2,477,919 2,475,632
----------- -----------
Current Liabilities:
Obligations due within one year--
Northern Indiana Public Service Company:
Commercial paper..................................... 44,800 156,500
First Mortgage Bonds--
Series N, 4-5/8% due May 15, 1995.................. -- 22,436
Medium-term notes--
Issued at interest rates of 6.14% and
6.19% with a weighted average interest
rate of 6.17% and maturities of July 25,
1996 and July 26, 1996........................... 80,000 --
Notes payable--
Issued at interest rates between 5.91% and
6.15% with a weighted average interest
rate of 5.99% and various maturities between
January 2, 1996 and February 9, 1996.............. 118,800 92,700
NIPSCO Capital Markets, Inc.:
Commercial paper..................................... 76,700 49,600
Notes payable--5.98%--due January 19, 1996........... 17,400 12,700
Medium-term notes--9.95%--due June 10, 1996.......... 7,500 --
Lake Erie Land Company:
Notes payable........................................ 4,200 128
Elm Energy and Recycling (UK), Ltd.:
Term loan facility................................... 4,554 3,262
Standby loan facility................................ 1,732 --
NDC Douglas Properties, Inc.:
Notes payable........................................ 1,840 1,013
----------- -----------
357,526 338,339
----------- -----------
Other current liabilities--
Accounts payable..................................... 151,691 158,712
Sinking funds due within one year.................... 2,621 2,578
Dividends declared on common and preferred stocks.... 28,179 27,077
Customer deposits.................................... 11,361 9,291
Taxes accrued........................................ 28,952 43,625
Interest accrued..................................... 8,439 10,561
Accrued employment costs............................. 46,695 43,811
Other................................................ 33,753 11,030
----------- -----------
311,691 306,685
----------- -----------
Total current liabilities........................... 669,217 645,024
----------- -----------
Other:
Deferred income taxes.................................. 596,940 581,866
Deferred investment tax credits, being amortized
over life of related property......................... 115,666 123,181
Deferred credits....................................... 45,126 43,621
Accrued liability for postretirement benefits.......... 75,012 48,548
Regulatory income tax liability........................ 9,845 18,599
Other noncurrent liabilities........................... 9,795 10,667
----------- -----------
Total other......................................... 852,384 826,482
----------- -----------
Commitments and Contingencies (see notes)
$3,999,520 $3,947,138
========== ==========
- --------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
CONSOLIDATED STATEMENT OF CAPITALIZATION
================================================================================
<TABLE>
<CAPTION>
December 31, 1995 1994
- ----------------------------------------------------------------------- ---------- ----------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Common shareholders' equity (see page 43)............................... $1,122,215 45.3% $1,107,848 44.7%
---------- ----------
Preferred Stocks, which are redeemable solely at
option of issuer:
Northern Indiana Public Service Company--
Cumulative preferred stock--$100 par value--
4-1/4% series--209,190 and 211,266
shares outstanding, respectively........................... 20,919 21,127
4-1/2% series--79,996 shares outstanding..................... 8,000 8,000
4.22% series--106,198 and 106,200
shares outstanding, respectively........................... 10,620 10,620
4.88% series--100,000 shares outstanding..................... 10,000 10,000
7.44% series--41,890 and 41,900
shares outstanding, respectively........................... 4,189 4,190
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, 1995)--
Series A (stated value--$50 per share), 477,185
and 574,285 shares outstanding, respectively............... 23,859 28,714
---------- ----------
81,325 3.3% 86,389 3.5%
---------- ----------
Redeemable Preferred Stocks, subject to mandatory redemption
requirements or whose redemption is outside the control of issuer:
Northern Indiana Public Service Company--
Cumulative preferred stock--$100 par value--
8.85% series--87,500 and 100,000 shares
outstanding, respectively.................................. 8,750 10,000
7-3/4% series--50,014 and 55,568 shares
outstanding, respectively.................................. 5,001 5,557
8.35% series--69,000 and 75,000 shares
outstanding, respectively.................................. 6,900 7,500
Cumulative preferred stock--no par value--
6.50% series--430,000 shares outstanding................... 43,000 43,000
---------- ----------
63,651 2.6% 66,057 2.7%
---------- ----------
NIPSCO Industries, Inc.--
Cumulative preferred shares--without par value--
8.75% series (stated value--$100 per share),
350,000 shares outstanding................................. 35,000 1.4% 35,000 1.4%
---------- ----------
Long-term debt (see page 41)........................................... 1,175,728 47.4% 1,180,338 47.7%
---------- ------ ---------- -----
Total capitalization....................................... $2,477,919 100.0% $2,475,632 100.0%
========== ====== ========== =====
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
- --------------------------------------------------------------------------------
40
<PAGE>
CONSOLIDATED STATEMENT OF LONG-TERM DEBT
================================================================================
<TABLE>
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------------------------------------------------- ----------
<S> <C> <C>
Northern Indiana Public Service Company (Dollars in thousands)
First mortgage bonds--
Series O, 6-3/8% due September 1, 1997.................................... $ 25,747 $ 25,747
Series P, 6-7/8% due October 1, 1998...................................... 14,509 14,509
Series T, 7-1/2% due April 1, 2002........................................ 40,500 40,543
Series U, 8-1/8% due July 15, 2003........................................ -- 55,239
Series Z, 8-1/8% due August 15, 2007...................................... -- 39,569
Series NN, 7.10% due July 1, 2017.......................................... 55,000 55,000
---------- ----------
Total................................................................... 135,756 230,607
---------- ----------
Pollution control notes and bonds--
Series A note--City of Michigan City--5.70% due October 1, 2003............... 20,000 20,750
Series 1988 bonds--Jasper County--Series A, B and C
3.70% weighted average at December 31, 1995, due November 1, 2016.......... 130,000 130,000
Series 1988 bonds--Jasper County--Series D
3.76% weighted average at December 31, 1995, due November 1, 2007........... 24,000 24,000
Series 1994 Bonds--Jasper County--Series A
5.90% at December 31, 1995, due August 1, 2010.............................. 10,000 10,000
Series 1994 bonds--Jasper County--Series B
5.90% at December 31, 1995, due June 1, 2013................................ 18,000 18,000
Series 1994 bonds--Jasper County--Series C
5.90% at December 31, 1995, due April 1, 2019............................... 41,000 41,000
---------- ----------
Total................................................................... 243,000 243,750
---------- ----------
Medium-term notes--
Issued at interest rates between 5.83% and 7.64%, with a weighted average
interest rate of 6.82% and various maturities between July 25, 1997
and January 19, 2024........................................................ 684,025 594,750
---------- ----------
Unamortized premium and discount on long-term debt, net......................... (4,040) (3,756)
---------- ----------
Total long-term debt of Northern Indiana Public Service Company......... 1,058,741 1,065,351
---------- ----------
NIPSCO Capital Markets, Inc.:
Medium-term note--9.95%--due June 10, 1996.................................... -- 7,500
Unamortized discount.......................................................... -- (9)
Zero Coupon Notes--7.57%, $72,500 at maturity, due December 1, 1997........... 62,875 58,373
---------- ----------
Total long-term debt of NIPSCO Capital Markets, Inc..................... 62,875 65,864
---------- ----------
NIPSCO Development Company, Inc.:
Lake Erie Land Company--Notes Payable--
Interest rates between 8.00% and 8.50% with a weighted average
interest rate of 8.39% and various maturities between May 23, 1997
and June 30, 1998......................................................... 389 3,155
Elm Energy and Recycling (UK), Ltd. Term Loan Facility--
Weighted average interest rate of 8.21% at December 31, 1995,
due December 31, 2004..................................................... 34,516 34,606
Metals Technology Corporation--Notes Payable--
Mortgage note, 9.00%--due September 25, 2005................................ -- 98
NDC Douglas Properties, Inc.--Notes Payable--
Interest rates of 6.72% and 7.94% with a weighted average interest rate of
7.72% and maturities through January 1, 2006.............................. 19,207 11,264
---------- ----------
Total long-term debt of NIPSCO Development Company, Inc................. 54,112 49,123
---------- ----------
Total long-term debt, excluding amounts due in one year................. $1,175,728 $1,180,338
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
- --------------------------------------------------------------------------------
41
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................................... $ 175,465 $ 163,987 $ 156,140
Adjustments to reconcile net income to net cash:
Depreciation and amortization.................................. 201,137 194,283 187,000
Deferred federal and state operating income taxes, net......... (2,681) (11,488) 2,122
Deferred investment tax credits, net........................... (7,515) (6,499) (7,446)
Change in certain assets and liabilities*--
Accounts receivable, net................................... (34,105) 28,830 (12,255)
Electric production fuel................................... 4,089 3,186 20,412
Materials and supplies..................................... 386 723 7,344
Natural gas in storage..................................... 16,910 (14,924) (24,685)
Accounts payable........................................... (7,021) (34,080) 23,507
Taxes accrued.............................................. (9,202) (18,904) 541
Fuel adjustment clause..................................... (8,687) 4,826 (2,105)
Gas cost adjustment clause................................. 24,549 9,687 10,641
Accrued employment costs................................... 2,884 3,433 10,256
Other, net..................................................... 35,283 13,332 1,206
----------- ----------- -----------
Net cash provided by operating activities................ 391,492 336,392 372,678
----------- ----------- -----------
Cash flows provided by (used in) investing activities:
Utility construction expenditures.............................. (189,754) (200,586) (180,852)
Acquisition and construction expenditures related to
Crossroads Pipeline Company.................................. (3,212) (1,959) (24,361)
Purchase of Northern Indiana Fuel and Light Company, Inc.,
net of cash acquired......................................... -- -- (30,137)
Return of capital from equity investments...................... -- 8,000 32,435
Other, net..................................................... (51,749) (19,567) (53,061)
----------- ----------- -----------
Net cash used in investing activities.................... (244,715) (214,112) (255,976)
----------- ----------- -----------
Cash flows provided by (used in) financing activities:
Issuance of long-term debt..................................... 179,555 222,575 468,269
Issuance of short-term debt.................................... 1,290,973 1,020,777 1,254,507
Net change in commercial paper................................. (84,600) 131,205 (1,605)
Retirement of long-term debt................................... (122,105) (218,572) (377,069)
Retirement of short-term debt.................................. (1,252,250) (1,090,390) (1,388,208)
Retirement of preferred stock.................................. (7,095) (10,195) (2,170)
Issuance of common shares...................................... 7,389 2,060 36,364
Acquisition of treasury shares................................. (69,183) (58,717) (40,730)
Cash dividends paid on common shares........................... (99,043) (93,578) (88,214)
Cash dividends paid on preferred shares........................ (3,063) (3,063) (3,063)
Other, net..................................................... 700 (81) -
----------- ----------- -----------
Net cash used in financing activities........................ (158,722) (97,979) (141,919)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.............. (11,945) 24,301 (25,217)
Cash and cash equivalents at beginning of period.................. 40,441 16,140 41,357
----------- ----------- -----------
Cash and cash equivalents at end of period........................ $ 28,496 $ 40,441 $ 16,140
=========== =========== ===========
</TABLE>
*Net of effects from purchase of Northern Indiana Fuel and Light Company, Inc.
The accompanying notes to consolidated financial statements are an integral
part of this statement.
- --------------------------------------------------------------------------------
42
<PAGE>
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
Dollars in Thousands Shares
-------------------------------------------------------------------- ----------------------
Additional Currency
Common Paid-In Retained Treasury Translation Common Treasury
Total Shares Capital Earnings Shares Adjustment Other Shares Shares
========== ======== ======= ========= ========= ======= ======= ========== ===========
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993............. $1,034,530 $870,930 $20,775 $ 317,195 $(168,990) $(2,346) $(3,034) 73,892,109 (8,133,759)
---------- -------- ------- --------- --------- ------- ------- ---------- -----------
Net income........................... 156,140 156,140
Dividends:
Preferred shares................... (3,063) (3,063)
Common shares...................... (89,384) (89,384)
Treasury shares acquired............. (40,730) (40,730) (1,325,085)
Issued:
Employee stock purchase plan....... 433 138 295 18,561
Long-term incentive plan........... 5,666 63 5,696 (93) 264,150
NIFL acquisition................... 30,172 6,655 23,517 1,112,862
Amortization of unearned
compensation........................ 1,443 1,443
Other................................ (535) (535)
---------- -------- ------- --------- --------- ------- ------- ---------- -----------
Balance, December 31, 1993........... $1,094,672 $870,930 $27,631 $ 380,888 $(180,212) $(2,881) $(1,684) 73,892,109 (8,063,271)
---------- -------- ------- --------- --------- ------- ------- ---------- -----------
Net income........................... 163,987 163,987
Dividends:
Preferred shares................... (3,063) (3,063)
Common shares...................... (94,803) (94,803)
Treasury shares acquired............. (58,717) (58,717) (2,002,586)
Issued:
Employee stock purchase plan....... 598 293 305 19,248
Long-term incentive plan........... 1,449 31 1,431 (13) 59,889
Amortization of unearned
compensation........................ 727 727
Other................................ 2,998 1,702 (81) 1,377
---------- -------- ------- --------- --------- ------- ------- ---------- -----------
Balance, December 31, 1994........... $1,107,848 $870,930 $29,657 $ 446,928 $(237,193) $(1,504) $ (970) 73,892,109 (9,986,720)
---------- -------- ------- --------- --------- ------- ------- ---------- -----------
Net income........................... 175,465 175,465
Dividends:
Preferred shares................... (3,063) (3,063)
Common shares...................... (100,232) (100,232)
Treasury shares acquired............. (69,183) (69,183) (2,057,665)
Issued:
Employee stock purchase plan....... 604 301 303 19,022
Long-term incentive plan........... 6,785 1,656 12,850 (7,721) 512,850
Unrealized gain on available
for sale securities................ 1,669 1,669
Amortization of unearned
compensation........................ 2,413 2,413
Other................................ (91) 596 (261) (426)
---------- -------- ------- --------- --------- ------- ------- ---------- -----------
Balance, December 31, 1995........... $1,122,215 $870,930 $32,210 $ 518,837 $(293,223) $(1,930) $(4,609) 73,892,109 (11,512,513)
========== ======== ======= ========= ========= ======= ======= ========== ===========
</TABLE>
- --------------------------------------------------------------------------------
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
HOLDING COMPANY STRUCTURE
NIPSCO Industries, Inc. (Industries) is an Indiana corporation serving as the
holding company for a number of subsidiaries, including four regulated
companies: Northern Indiana Public Service Company (Northern Indiana), Kokomo
Gas and Fuel Company (Kokomo Gas), Northern Indiana Fuel and Light Company, Inc.
(NIFL) and Crossroads Pipeline Company (Crossroads). Northern Indiana is a
public utility operating company supplying natural gas and electric energy to
the public. Kokomo Gas and NIFL are public utility operating companies supplying
natural gas to the public, and Crossroads is an interstate natural gas
transmission company.
Industries' major non-utility subsidiaries include NIPSCO Development
Company, Inc. (Development), NIPSCO Energy Services, Inc. (Services), Primary
Energy, Inc. (Primary) and NIPSCO Capital Markets, Inc. (Capital Markets).
Development makes various investments, including real estate and
venture capital investments. Services coordinates the energy-related
diversification ventures of Industries. Primary arranges energy-related projects
with large industrial customers. Capital Markets handles financing for
Industries and its subsidiaries other than Northern Indiana.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Industries, its
regulated subsidiaries Northern Indiana, Kokomo Gas, NIFL and Crossroads
(Utilities), and all non-utility subsidiaries. Investments for which Industries
has at least a 20% interest and certain joint ventures are accounted for under
the equity method of accounting. Investments with less than a 20% interest are
accounted for under the cost method of accounting. The operating results of the
non-utility subsidiaries are included under the caption "Other Income
(Deductions)" in the Consolidated Statement of Income. Interest on long-term
debt, other interest, and amortization of debt discount and expense are
reflected as a component of "Interest and Other Charges." All significant
intercompany items have been eliminated in consolidation.
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. Certain reclassifications were made to conform the prior years'
financial statements to the current presentation.
OPERATING REVENUES
Revenues are recorded based on estimated service rendered but are billed to
customers monthly on a cycle basis.
DEPRECIATION AND MAINTENANCE
Northern Indiana provides depreciation on a straight-line method over the
remaining service lives of the electric, gas and common properties. The
provisions as a percentage of the cost of depreciable utility plant were
approximately 4.1% for year 1995, and 4.0% for years 1994 and 1993. The
depreciation rates for electric and gas properties were 3.55% and 4.92%,
respectively.
Kokomo Gas provides depreciation on the original cost of utility plant
in service using straight-line rates that averaged approximately 3.0% for the
years 1995, 1994 and 1993.
NIFL provides depreciation on the original cost of utility plant in
service using straight-line rates that averaged approximately 2.75% for the
years 1995, 1994 and 1993.
Crossroads provides depreciation on the original cost of utility plant
in service using straight-line rates that averaged approximately 2.5% for the
years 1995 and 1994.
The Utilities follow the practice of charging maintenance and repairs,
including the cost of renewals of minor items of property, to maintenance
expense accounts, except for repairs of transportation and service equipment
which are charged to clearing accounts and redistributed to operating expense
and other accounts. When property which represents a 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.
PLANT ACQUISITION ADJUSTMENTS
Industries' cost in excess of the underlying book values of the acquired NIFL
and Kokomo Gas subsidiaries have been recorded as plant acquisition adjustments,
which are being amortized over 40-year periods from their respective dates of
acquisition.
COAL RESERVES
Northern Indiana has a long-term mining contract to mine its coal reserves
through the year 2001. The costs of these reserves are being recovered through
the rate making process as such coal reserves are used to produce electricity.
OIL AND NATURAL GAS ACCOUNTING
NIPSCO Fuel Company, Inc., a wholly-owned subsidiary of Services, uses the full-
cost method of accounting for its oil and natural gas production activities.
Under this method all costs incurred in the acquisition, exploration and
development of oil and natural gas properties are capitalized and amortized on
the units-of-production basis.
POWER PURCHASED
Power purchases and net interchange power with other electric utilities under
interconnection agreements are included in Cost of Energy under the caption
"Power purchased."
- --------------------------------------------------------------------------------
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Continued
- --------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE
At December 31, 1995, Northern Indiana had sold $100 million of its accounts
receivable under a sales agreement which expires May 31, 1997.
STATEMENT OF CASH FLOWS
For the purposes of the Consolidated Statement of Cash Flows, Industries
considers temporary cash investments with an original maturity of three months
or less to be cash equivalents.
Cash paid during the periods reported for income taxes and interest
was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Income taxes............................ $117,940 $121,485 $93,155
Interest, net of amounts capitalized.... $ 89,321 $ 82,738 $88,353
</TABLE>
FUEL ADJUSTMENT CLAUSE
All metered electric rates contain a provision for adjustment in charges for
electric energy to reflect increases and decreases in the cost of fuel and the
fuel cost of purchased power through operation of a fuel adjustment clause. As
prescribed by order of the Indiana Utility Regulatory Commission (Commission)
applicable to metered retail rates, the adjustment factor has been calculated
based on the estimated cost of fuel and the fuel cost of purchased power in a
future three-month period. If two statutory requirements relating to expense and
return levels are satisfied, any under or overrecovery 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 or overrecovery as a
current asset or current liability until such time as it is billed or refunded
to its customers. The fuel adjustment factor is subject to a quarterly hearing
by the Commission and remains in effect for a three-month period.
GAS COST ADJUSTMENT CLAUSE
All metered gas rates contain an adjustment factor which reflects the cost of
purchased gas, contracted gas storage and storage transportation charges. The
Utilities record any under or overrecovery as a current asset or current
liability until such time as it is billed or refunded to their customers. The
gas cost adjustment factor for Northern Indiana is subject to a quarterly
hearing by the Commission and remains in effect for a three-month period. The
gas cost adjustment factors for Kokomo Gas and NIFL are subject to semi-annual
hearings by the Commission and remain in effect for a six-month period. If the
statutory requirement relating to the level of return is satisfied, any under or
overrecovery caused by variances between estimated and actual cost in a given
three or six month period will be included in a future filing. See Rate Matters
(Take-or-Pay Pipeline Gas Costs) and (FERC Order No. 636) for a discussion of
take-or-pay charges and gas transition cost charges.
NATURAL GAS IN STORAGE
Northern Indiana's natural gas in storage is valued using the last-in, first-out
(LIFO) inventory methodology. Based on the average cost of gas purchased in
December, 1995, and 1994, the estimated replacement cost of gas in storage
(current and non-current) at December 31, 1995, and 1994, exceeded the stated
LIFO cost by approximately $30 million and $38 million, respectively. Certain
other subsidiaries of Industries have natural gas in storage valued at average
cost.
HEDGING ACTIVITIES
Industries' non-regulated gas subsidiaries use commodity futures contracts to
hedge the impact of natural gas price fluctuations related to its business
activities. Gains and losses on futures contracts are deferred and recognized in
income as an adjustment to purchased gas cost, concurrent with the related
physical volumes.
REGULATORY ASSETS
The Utilities' operations are subject to the regulation of the Commission and
the Federal Energy Regulatory Commission (FERC). Accordingly, the Utilities'
accounting policies are subject to the provisions of Statement of Financial
Accounting Standards (SFAS) No. 71 "Accounting for the Effects of Certain Types
of Regulation." The regulatory assets below represent probable future revenue to
the Utilities associated with certain incurred costs as these costs are
recovered through the rate making process. Regulatory assets were comprised of
the following items, and were reflected in the Consolidated Balance Sheet as
follows:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
- ------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Unamortized reacquisition
premium on debt
(See Long-Term Debt note)..................... $ 53,776 $ 54,265
Unamortized R. M. Schahfer Unit 17
and Unit 18 carrying charges and
deferred depreciation (See below)............. 74,981 79,198
Bailly scrubber carrying charges and
deferred depreciation (See below)............. 11,517 7,864
Deferral of SFAS No. 106 expense
not recovered (See Postretirement
Benefits note)................................ 64,834 43,939
FERC Order No. 636 transition costs
(See Rate Matters--FERC Order
No. 636 note)................................. 25,038 56,153
-------- --------
230,146 241,419
-------- --------
Less: Current portion of regulatory assets..... 17,655 45,970
-------- --------
$212,491 $195,449
======== ========
</TABLE>
In March, 1995, the Financial Accounting Standards Board issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This statement imposes stricter criteria for
retention of regulatory assets by requiring that such assets be probable of
future recovery at each balance sheet date. The Utilities will adopt this
standard on January 1, 1996, and adoption will not have a material impact on its
financial position or results of operations based on the current regulatory
structure in which the Utilities operate.
CARRYING CHARGES AND DEFERRED DEPRECIATION
Upon completion of R. M. Schahfer Units 17 and 18, Northern Indiana capitalized
the carrying charges and deferred depreciation
- --------------------------------------------------------------------------------
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Continued
- --------------------------------------------------------------------------------
in accordance with orders of the Commission until the cost of each unit was
allowed in rates. Such carrying charges and deferred depreciation are being
amortized over the remaining life of each unit.
Northern Indiana began capitalizing carrying charges and deferring
depreciation and certain operating expenses relating to its scrubber service
agreement upon completion of the flue gas desulfurization plant in June, 1992,
at Northern Indiana's Bailly Generating Station in accordance with an order of
the Commission. Pursuant to such order, capitalization of carrying charges and
deferral of depreciation and certain operating expenses ceased on December 31,
1995. The accumulated balance of the deferred costs and related carrying charges
will be amortized over the remaining life of the scrubber service agreement.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
Allowance for funds used during construction (AFUDC) is charged to construction
work in progress during the period of construction and represents the net cost
of borrowed funds used for construction purposes and a reasonable rate upon
other (equity) funds. Under established regulatory rate practices, after the
construction project is placed in service, Northern Indiana is permitted to
include in the rates charged for utility services (a) a fair return on and (b)
depreciation of such AFUDC included in plant in service.
At January 1, 1993, a pretax rate of 3.7% for all construction was
being used; effective January 1, 1994, the rate increased to 5.0% and effective
January 1, 1995, the rate increased to 6.0%.
FOREIGN CURRENCY TRANSLATION
Translation gains or losses are based upon the end-of-period exchange rate and
are recorded as a separate component of shareholders' equity.
INVESTMENTS IN REAL ESTATE
Development has invested in a series of affordable housing projects in
the Utilities' service territory. These investments include certain tax
benefits, including low-income housing tax credits and tax deductions for
operating losses of the housing projects. Development accounts for these
investments using the equity method. Investments, at equity, include $21.9
million and $12.8 million relating to affordable housing projects at December
31, 1995, and December 31, 1994, respectively.
INCOME TAXES
Deferred income taxes are recognized as costs in the rate making
process by the commissions having jurisdiction over the rates charged by the
Utilities. Deferred income taxes are provided as a result of provisions in the
income tax law that either require or permit certain items to be reported on the
income tax return in a different period than they are reported in the financial
statements. These taxes are reversed by a debit or credit to deferred income tax
expense as the temporary differences reverse. Investment tax credits have been
deferred and are being amortized to income over the life of the related
property.
PENDING TAX MATTER
On August 1, 1991, the Internal Revenue Service (IRS) issued a notice
of deficiency for Northern Indiana's taxes for the years 1982 through 1985
($3,785,250 per year plus interest) relating to interest payments on $70 million
of 17-1/4% Notes issued in 1981 by Northern Indiana's former foreign subsidiary,
Northern Indiana Public Service Finance N.V. (Finance). The IRS believes that
interest paid on the Notes should have been subject to United States tax
withholding. The Notes were redeemed in 1985 and Finance was subsequently
liquidated. On October 25, 1991, Northern Indiana challenged the assessment in
the United States Tax Court (Tax Court) and the matter was tried in 1994. On
November 6, 1995, the Tax Court ruled in favor of Northern Indiana, finding that
the interest paid on the Notes was not subject to United States tax withholding.
While it is uncertain whether the IRS will appeal the Tax Court's decision,
Northern Indiana's management and general counsel believe the ruling of the Tax
Court will prevail.
ELM ENERGY AND RECYCLING (UK) LTD.
Development, a wholly-owned subsidiary of Industries, is a 95% shareholder in
Elm Energy and Recycling (UK) Ltd. (Elm), which owns and operates a tire-fueled
electric generating plant in Wolverhampton, England (Project), that began
operating in late 1993. In 1992, Elm entered into a contract with TBV Power
Limited (TBV), a company jointly owned by affiliates of the Tarmac PLC Group and
Black & Veatch, for the design, construction and commissioning of the Project.
Pursuant to that contract and other agreements between Elm and TBV, TBV
committed to complete certain work and pass certain performance and reliability
tests for the Project no later than June 30, 1995, which would have allowed the
independent Project engineer to issue an Acceptance and Completion Certificate
by that date.
On July 3, 1995, the Project engineer notified TBV that an Acceptance
and Completion Certificate had not been issued as of June 30, 1995. Elm then
notified TBV that it was rejecting the Project in accordance with the terms of
the contract between it and TBV. As a result, on July 3, 1995, Barclays Bank, as
agent for the banks which had provided financing for the Project, issued a
notice of an event of default to Elm. On July 4, 1995, the Project engineer
notified TBV that, in accordance with the contract between Elm and TBV, all
monies previously paid by Elm to TBV ((Pounds)29.6 million) were to be
reimbursed by TBV to Elm. The certificate issued by the Project engineer was
adjudicated under a procedure provided in the construction contract, and the
adjudicator confirmed the full (Pounds)29.6 million as owing to Elm. TBV has
filed suit in the English courts to enjoin enforcement of the adjudicator's
decision, to challenge again the Project engineer's decision and to allege
breaches of the underlying construction contract by Elm. Elm has counterclaimed
and is aggressively pursuing its remedies.
Elm and Development are also seeking additional remedies at law, in
both the United States and the United Kingdom, for further damages and/or
sanctions against TBV and/or Tarmac PLC Group and Black & Veatch. Development
believes that these additional remedies, in conjunction with Elm's rights under
the construction
- --------------------------------------------------------------------------------
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Continued
- --------------------------------------------------------------------------------
contract, will be sufficient to mitigate any losses which Elm and/or Development
may otherwise incur as a result of TBV's failure to complete the Project in
accordance with the contract.
Development believes that it and Elm have sustainable and adequate
remedies under the construction contract such that rejection will not have a
material adverse effect on Industries. Elm is continuing to operate the plant.
The banks which provided the financing for the plant are continuing to support
its operations, but have the right to ask that the operation of the plant be
terminated and the assets sold. In that event, some or all of Industries'
investments in Elm may be at risk. Industries' investments in Elm were
approximately $18 million at December 31, 1995.
RATE MATTERS
TAKE-OR-PAY PIPELINE GAS COSTS
The FERC has allowed certain interstate pipeline suppliers to pass on to their
customers a portion of costs for contracted gas not purchased (take-or-pay),
contract reformation and associated interest charges through direct billing to
their customers, including the Utilities.
Northern Indiana records take-or-pay costs as they are billed by the
respective pipeline, and in an order dated September 28, 1988, the Commission
allowed Northern Indiana to recover these additional gas costs on a volumetric
basis from all customers, including transport customers. The Utilities have
recovered approximately $196.9 million of take-or-pay costs and interest from
their customers through December 31, 1995. As of December 31, 1995, an
additional $4.5 million was scheduled to be billed to the Utilities and
recovered from customers over a period of one to four years.
FERC ORDER NO. 636
On April 8, 1992, the FERC issued its Order No. 636 which required interstate
pipelines to restructure their services. Under the Order, existing pipeline
sales services have been "unbundled" such that gas supplies are being sold
separately from interstate transportation services. The Utilities' interstate
pipeline suppliers have filed new tariffs with the FERC to implement Order No.
636, and the Utilities have contracted for a mix of transportation and storage
services which will allow them to meet the needs of their customers. Customers,
such as the Utilities, are expected to benefit from enhanced access to
competitively priced gas supplies, as well as from more flexible transportation
services. Pipelines are seeking to recover from their customers certain
transition costs associated with restructuring under the Order No. 636
regulation. Any such recovery is subject to established review procedures at the
FERC. Also, mandated changes in pipeline rate design could increase the cost of
firm transportation service on interstate pipelines. All interstate pipelines
are now operating under Order No. 636 regulation.
The Utilities' pipeline suppliers have made certain filings with the
FERC to begin collecting their respective transition costs. The Utilities expect
that the total transition costs from all suppliers will approximate $139
million. However, the ultimate level of costs will depend on future events,
including the market price of natural gas. Approximately $89 million of such
costs have been recorded, a portion of which has been paid to the pipeline
suppliers, subject to refund. On November 2, 1994, the Commission issued an
order which approved the recovery of these FERC-allowed transition costs on a
volumetric basis from Northern Indiana's sales and transportation customers
(which is consistent with what the Commission authorized for the recovery of
take-or-pay pipeline gas costs). Certain industrial customers appealed the
November 2, 1994 order to the Indiana Court of Appeals. The Court granted
Northern Indiana's motion to dismiss the appeal for want of subject matter
jurisdiction. Subsequently the transportation customers filed a Petition for
Transfer with the Indiana Supreme Court seeking review of the Indiana Court of
Appeals' decision. On December 15, 1995, the Indiana Supreme Court denied the
Petition for Transfer which terminated the transportation customers' appeal.
Regulatory assets, in amounts corresponding to the costs recorded, have been
recorded to reflect the ultimate recovery of these costs.
ENVIRONMENTAL MATTERS
The Utilities have an ongoing program to remain aware of laws and regulations
involved with hazardous waste and other environmental matters. It is the
Utilities' intent to continue to evaluate their facilities and properties with
respect to these rules and identify any sites that would require corrective
action. The Utilities have recorded a reserve of $5.0 million to cover probable
corrective actions as of December 31, 1995. However, environmental regulations
and remediation techniques are subject to future change. Based upon management's
understanding of current laws and regulations, the Utilities believe that any
corrective actions required, after consideration of insurance coverages, will
not have a significant impact on the financial position or results of operations
of Industries.
Because of major investments made in modern environmental control
facilities and the use of low sulfur coal, all of Northern Indiana's electric
production facilities now comply with the sulfur dioxide limitations contained
in the acid deposition provisions of the Clean Air Act Amendments of 1990
(CAAA). Northern Indiana estimates that total costs of compliance with the CAAA
sulfur dioxide regulations will impact electric rates by less than 5% in the
future.
The CAAA contain provisions that could lead to limitations on
emissions of nitrogen oxides and hazardous air pollutants, which may require
significant capital expenditures for control of these emissions. Northern
Indiana is pursing a nitrogen oxide control program to meet future requirements.
Northern Indiana cannot predict the costs of complying with CAAA requirements,
but Northern Indiana believes that any such mandated costs would be recoverable
through the rate making process.
The Environmental Protection Agency (EPA) has notified Northern
Indiana that it is a "potentially responsible party" (PRP) under the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and
may be required to share in the cost of cleanup of several waste disposal sites
identified by the EPA. The sites are in various stages of investigation,
analysis and remediation. At each of the sites, Northern Indiana is one of
several PRPs, and it is expected that remedial costs, as provided under CERCLA,
will be shared among them. At some sites Northern Indiana and/or
- --------------------------------------------------------------------------------
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Continued
- --------------------------------------------------------------------------------
the other named PRPs are presently working with the EPA to clean up the sites
and avoid the imposition of fines or added costs.
The Utilities have instituted a program to investigate former
manufactured gas plants where one of them is the current or former owner. The
Utilities have identified twenty-seven of these sites and made visual
inspections of these sites. The Utilities have conducted initial samplings at
thirteen sites. Follow-up investigations have been conducted at five sites and
potential remedial measures are being evaluated. The Utilities will continue
their program to assess sites. During the follow-up investigation of the former
manufactured gas plant in Elkhart, Indiana, Northern Indiana noted the presence
of hydrocarbons in the Elkhart River. Northern Indiana reported this finding to
the Indiana Department of Environmental Management (IDEM) and the EPA. Northern
Indiana has placed the Elkhart site in the IDEM Voluntary Remediation Program
(VRP). The goal of placing the site in the VRP is to obtain IDEM approval of the
determination and subsequent implementation of what remedial measures, if any,
may be needed.
Northern Indiana was notified by IDEM of the release of a petroleum
substance into the St. Mary's River in Fort Wayne, Indiana, from the site of a
former manufactured gas plant formerly owned by Northern Indiana. In cooperation
with IDEM, Northern Indiana has taken steps to investigate and contain the
substance. Northern Indiana has remediated part of the Fort Wayne site. The
remainder of the site is being evaluated to determine what further remedial
measures, if any, may be needed.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of investigation
and remediation programs at five former manufactured gas plant sites at which
both companies or their predecessors were former operators or owners. One of
these sites is the Lafayette site which Indiana Gas had previously notified
Northern Indiana is being investigated and remediated pursuant to an
administrative order with IDEM. Northern Indiana also notified PSI Energy, Inc.
that it was a former owner or operator of seven former manufactured gas plants
at which Northern Indiana had conducted or was planning investigation or
remediation activities.
The Utilities have met with various companies that provided insurance
coverage which the Utilities believe covers costs related to actions taken at
former manufactured gas plants. In September 1995, certain insurance companies
initiated a suit in Indiana state court against Northern Indiana to deny
coverage. Later in September 1995, Northern Indiana filed a more comprehensive
suit in Federal Court in Indiana against those insurers and several other
insurance companies, seeking coverage for costs associated with several former
manufactured gas plant sites. The state court action is stayed pending
resolution of the Northern Indiana suit in Federal Court.
The possibility that exposure to electric and magnetic fields
emanating from power lines, household appliances and other electric sources may
result in adverse health effects has been the subject of public, governmental
and media attention. A considerable amount of scientific research has been
conducted on this topic without definitive results. Research is continuing to
resolve scientific uncertainties.
INCOME TAXES
Effective January 1, 1993, Industries adopted SFAS No. 109, "Accounting for
Income Taxes," which requires the use of the liability method of accounting for
income taxes. Under the liability method, deferred income taxes are recognized,
at currently enacted income tax rates, to reflect the tax effect of temporary
differences between the financial statement and tax bases of assets and
liabilities.
To implement SFAS No. 109, certain adjustments were made to deferred
income taxes. To the extent such income taxes are recoverable or payable through
future rates, regulatory assets and liabilities have been recorded in the
Consolidated Balance Sheet. These adjustments include the amounts reflecting
the Utilities' obligation to credit to ratepayers deferred income taxes provided
at rates higher than the current federal tax rate which are currently being
credited to ratepayers using the average rate assumption method required by the
Tax Reform Act of 1986 and the Commission. The Consolidated Balance Sheet at
December 31, 1995 and 1994 reflects a net regulatory income tax liability of
$9.8 million and $18.6 million, respectively. The net regulatory income tax
liability is derived from regulatory assets primarily attributable to
undepreciated AFUDC-equity and the cumulative net amount of other income tax
timing differences for which deferred taxes had not been provided in the past,
when regulators did not recognize such taxes as costs in the rate making
process, and regulatory liabilities primarily attributable to deferred taxes
provided at rates in excess of the current statutory rate, as discussed above,
and unamortized deferred investment tax credits.
- --------------------------------------------------------------------------------
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Continued
- --------------------------------------------------------------------------------
The components of the net deferred income tax liability at December
31, 1995, and 1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
- ------------------------------------------------------------------------------------ -----------
(Dollars in thousands)
<S> <C> <C>
Deferred tax liabilities--
Accelerated depreciation and other property differences............... $ 706,715 $ 691,319
AFUDC-equity.......................................................... 40,083 42,447
Adjustment clauses.................................................... 4,613 10,596
Take-or-pay gas costs................................................. 1,550 2,045
Other regulatory assets............................................... 28,930 22,125
Reacquisition premium on debt......................................... 20,397 20,580
Deferred tax assets--
Deferred investment tax credits....................................... (43,854) (46,703)
Removal costs......................................................... (118,064) (105,671)
FERC Order No. 636 transition costs................................... (4,400) (5,461)
Other postretirement/postemployment benefits.......................... (32,512) (22,712)
Regulatory income tax liability....................................... (3,734) (7,054)
Other, net............................................................ (8,841) (20,231)
--------- ---------
590,883 581,280
--------- ---------
Less: Deferred income taxes related to current assets and liabilities... (6,057) (586)
--------- ---------
Deferred income taxes--noncurrent....................................... $ 596,940 $ 581,866
========= =========
</TABLE>
Federal and state income taxes as set forth in the Consolidated
Statement of Income are comprised of the following:
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Current income taxes--
Federal........................................................ $103,224 $100,321 $ 89,022
State.......................................................... 15,421 15,398 13,132
-------- -------- --------
118,645 115,719 102,154
-------- -------- --------
Deferred income taxes, net--Federal and state--
Accelerated depreciation and other property differences........ 9,516 8,328 13,211
Removal costs.................................................. (12,081) (12,093) (8,760)
Adjustment clauses............................................. 7,899 (17,025) (2,466)
FERC Order No. 636 transition costs and cost recovery.......... (12,875) 11,393 -
Take-or-pay gas costs.......................................... (495) (2,189) (5,799)
Reacquisition premium on debt.................................. (1,279) 2,787 2,824
Other.......................................................... 6,634 (2,689) 3,112
-------- -------- --------
(2,681) (11,488) 2,122
-------- -------- --------
Deferred investment tax credits, net............................. (7,515) (6,499) (7,446)
-------- -------- --------
Total utility operating income taxes......................... 108,449 97,732 96,830
Income tax applicable to non-operating activities and income of
non-utility subsidiaries....................................... (9,250) (16,333) (5,537)
-------- -------- --------
Total income taxes........................................... $ 99,199 $ 81,399 $ 91,293
======== ======== ========
</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>
1995 1994 1993
- ---------------------------------------------------------------------------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Net income....................................................... $175,465 $163,987 $156,140
Add--Income taxes................................................ 99,199 81,399 91,293
Dividend requirements on preferred stocks of subsidiary.......... 9,046 9,913 10,341
-------- -------- --------
Income before preferred dividend
requirements of subsidiary and income taxes.................... $283,710 $255,299 $257,774
======== ======== ========
Amount derived by multiplying pretax income by statutory rate.... $ 99,299 $ 89,355 $ 90,221
Reconciling items multiplied by the statutory rate:
Book depreciation over related tax depreciation................ 4,018 4,044 3,893
Amortization of deferred investment tax credits................ (7,515) (7,466) (7,446)
State income taxes, net of federal income tax benefit.......... 9,479 8,835 8,568
Fair market value of property donated in excess of book value.. -- (7,753) --
Reversal of deferred taxes provided at rates in excess of the
current federal income tax rate............................. (5,665) (5,807) (5,080)
Other, net..................................................... (417) 191 1,137
-------- -------- --------
Total income taxes.......................................... $ 99,199 $ 81,399 $ 91,293
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Continued
- --------------------------------------------------------------------------------
PENSION PLANS
Industries and its subsidiaries have three noncontributory, defined benefit
retirement plans covering substantially all employees. Benefits under the plans
reflect the employees' compensation, years of service and age at retirement.
The plans' funded status as of December 31, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------- ----------
(Dollars in thousands)
<S> <C> <C>
Vested benefit obligation.................... $549,234 $449,043
Nonvested benefit............................ 104,814 97,138
-------- --------
Accumulated benefit obligation............... $654,048 $546,181
======== ========
Projected benefit obligation for service
rendered to date........................... $759,681 $613,094
Plan assets at fair market value............. 706,320 571,624
-------- --------
Projected benefit obligation in excess
of plan assets............................. 53,361 41,470
Unrecognized transition obligation at
December 31, being recognized
over 17 years.............................. (43,484) (48,906)
Unrecognized prior service cost.............. (27,242) (29,847)
Unrecognized gains........................... 4,217 47,788
-------- --------
Accrued (prepaid) pension costs.............. $(13,148) $ 10,505
======== ========
</TABLE>
The accumulated benefit obligation is the present value of future
pension benefit payments and is based on the plan benefit formula without
considering expected future salary increases. The projected benefit obligation
considers estimated future salary increases. Discount rates of 7.25% and 8.75%
and rates of increase in compensation levels of 5.5% were used to determine the
accumulated benefit obligation and projected benefit obligation at December 31,
1995 and 1994, respectively. The increase in the accumulated benefit obligation
as of December 31, 1995, is mainly caused by the decrease in the discount rate
from 8.75% to 7.25%.
The following items are the components of provisions for pensions for
the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
- -------------------------------------------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Service costs................... $ 12,231 $ 14,099 $ 13,086
Interest costs.................. 52,511 48,058 46,019
Actual (return) loss on
plan assets................... (135,243) 15,077 (81,150)
Amortization of transition
obligation.................... 5,422 5,422 5,387
Other net amortization and
deferral...................... 86,165 (61,422) 39,567
--------- -------- --------
$ 21,086 $ 21,234 $ 22,909
========= ======== ========
</TABLE>
Assumptions used in the valuation and determination of 1995, 1994 and
1993 pension expenses were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------- ----- -----
<S> <C> <C> <C>
Discount rate................................ 8.75% 7.50% 7.75%
Rate of increase in compensation levels...... 5.50% 5.50% 5.50%
Expected long-term rate of return on assets.. 9.00% 8.25% 8.25%
</TABLE>
The plans' assets are invested primarily in common stocks, bonds and notes.
POSTRETIREMENT BENEFITS
Industries provides certain health care and life insurance benefits for retired
employees. Substantially all of Industries' employees may become eligible for
those benefits if they reach retirement age while working for Industries. Those
and similar benefits for active employees are provided through insurance plans
whose premiums are based on the benefits to active employees and retirees paid
during the year. Prior to January 1, 1993, the Utilities recognized the cost of
providing those benefits by expensing insurance premiums, which is consistent
with current rate making practices.
Effective January 1, 1993, Industries adopted Statement of Financial
Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," which establishes accounting and reporting
standards for such postretirement benefits. This standard requires the accrual
of the expected cost of such benefits during the employee's years of service.
The following table sets forth the plans' accumulated postretirement
benefit obligation as of December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
- ------------------------------------------------------------ ----------
(Dollars in thousands)
<S> <C> <C>
Retirees......................................... $ 99,453 $ 96,676
Fully eligible active plan participants.......... 23,084 20,008
Other active plan participants................... 136,322 105,991
--------- ---------
Accumulated postretirement benefit obligation.... 258,859 222,675
Unrecognized transition obligation at
December 31, being recognized over 20 years.... (197,088) (208,681)
Unrecognized actuarial gain...................... 23,439 45,496
--------- ---------
Accrued liability for postretirement benefits.... $ 85,210 $ 59,490
========= =========
</TABLE>
A discount rate of 7.25% and a pre-Medicare medical trend rate of 10%
declining to a long-term rate of 6% and a discount rate of 8.75% and a pre-
Medicare medical trend rate of 11% declining to a long-term rate of 7% were used
to determine the accumulated postretirement benefit obligation at December 31,
1995 and 1994, respectively.
The transition obligation at January 1, 1993, for accumulated
postretirement benefits earned and not recognized is being amortized over twenty
years as allowed by SFAS No. 106.
Net periodic postretirement benefit costs for the year ended December
31, 1995 and 1994, include the following components:
<TABLE>
<CAPTION>
1995 1994
- ------------------------------------------------------------ ----------
(Dollars in thousands)
<S> <C> <C>
Service costs.................................... $ 6,076 $ 8,272
Interest costs................................... 19,031 19,945
Amortization of transition obligation over
20 years....................................... 11,593 11,593
Amortization of unrecognized actuarial (gain).... (2,179) 0
------- -------
$34,521 $39,810
======= =======
</TABLE>
- --------------------------------------------------------------------------------
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Continued
- --------------------------------------------------------------------------------
The net periodic postretirement benefit costs for 1995 were determined
assuming an 8.75% discount rate, a 5% rate of compensation increase and a pre-
Medicare medical trend rate of 11% declining to a long-term rate of 7%. The net
periodic postretirement benefit costs for 1994 were determined by assuming a
7.5% discount rate, a 5% rate of compensation increase and a pre-Medicare
medical trend rate of 12% declining to a long-term rate of 7%. The effect of a
1% increase in the assumed health care cost trend rates for each future year
would increase the accumulated postretirement benefit obligation at December 31,
1995, by approximately $40.9 million and increase the aggregate of the service
and interest cost components of plan costs by approximately $5.0 million for the
year ended December 31, 1995. Amounts disclosed above could be changed
significantly in the future by changes in health care costs, work force
demographics, interest rates or plan changes.
On December 30, 1992, the Commission authorized the accrual method of
accounting for postretirement benefits for rate making purposes and authorized
the deferral, as a regulatory asset to be recovered through future revenues, of
the net increase in cost until such time as the new accrual cost method may be
reflected in the rate making process. The Commission stated that a deferral
period of four years or less would be rebuttably presumed to be reasonable and
also indicated each utility would have to demonstrate its postretirement benefit
costs were prudent and reasonably incurred at the time such costs were proposed
to be recovered in the rate making process. Northern Indiana will request the
recovery of such costs within that period and, accordingly, is deferring as a
regulatory asset the difference between the amount that would have been charged
to expense under pay-as-you-go accounting and the amount accrued in accordance
with the new standard. This conclusion could change as competitive factors
influence pricing decisions.
POSTEMPLOYMENT BENEFITS
Effective January 1, 1994, Industries adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," which requires Industries to accrue the
estimated cost of benefits provided to former or inactive employees after
employment but before retirement. Adoption of SFAS No. 112 did not have a
material impact on Industries' financial position or results of operations.
PREFERRED AND PREFERENCE STOCKS
Industries is authorized to issue 20,000,000 shares of Preferred Stock, without
par value. Effective March 2, 1990, 2,000,000 shares of the Industries' Series A
Junior Participating Preferred Shares were reserved for issuance pursuant to the
Share Purchase Rights Plan described in Common Shares. In November, 1990,
Industries issued and sold 350,000 shares of 8.75% Series Cumulative Preferred
Shares through a private placement for $35 million. Pursuant to mandatory
redemption provisions, the shares were redeemed in whole by Industries on
January 12, 1996, for $100 per share plus accrued dividends.
The authorized classes of par value and no par value cumulative
preferred and preference stocks of Northern Indiana are as follows: Cumulative
Preferred--$100 par value--2,400,000 shares; Cumulative Preferred--no par
value--3,000,000 shares; Cumulative Preference--$50 par value--2,000,000 shares
(none outstanding); and Cumulative Preference--no par value--3,000,000 shares
(none issued).
The Preferred shareholders of Industries and 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.
The redemption prices at December 31, 1995, for the cumulative
preferred stock, which is redeemable solely at the option of Northern Indiana,
in whole or in part, at any time upon 30 days' notice, are as follows:
<TABLE>
<CAPTION>
Redemption
Series Price Per Share
- --------------------------------------------------------------------
<S> <C> <C>
Cumulative preferred stock--
$100 par value-- 4-1/4% $101.20
4-1/2% $100.00
4.22% $101.60
4.88% $102.00
7.44% $101.00
7.50% $101.00
Cumulative preferred stock--
no par value--adjustable rate
(6.00% at December 31, 1995), Series A
(stated value $50 per share) $ 50.00
</TABLE>
- --------------------------------------------------------------------------------
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Continued
- --------------------------------------------------------------------------------
The redemption prices at December 31, 1995, as well as sinking fund
provisions for the cumulative preferred stock subject to mandatory redemption
requirements, or whose redemption is outside the control of Northern Indiana are
as follows:
<TABLE>
<CAPTION>
Series Redemption Price Per Share Sinking Fund Or Mandatory Redemption
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cumulative preferred stock--$100 par value--
8.85% $101.85, reduced periodically 12,500 shares on or before April 1.
8.35% $104.18, reduced periodically 3,000 shares on or before July 1; increasing to 6,000 shares
beginning in 2004; noncumulative option to double amount each year.
7 3/4% $104.58, reduced periodically 2,777 shares on or before December 1;
noncumulative option to double amount each year.
Cumulative preferred stock--no par value--
6.50% $100.00 on October 14, 2002 430,000 shares on October 14, 2002.
</TABLE>
Sinking fund requirements with respect to redeemable preferred stocks
outstanding at December 31, 1995, for each of the four years subsequent to
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
- --------------------------------------------------------------------------------
<S> <C>
1997...............................................................$1,827,700
1998...............................................................$1,827,700
1999...............................................................$1,827,700
2000...............................................................$1,827,700
- --------------------------------------------------------------------------------
</TABLE>
COMMON SHARE DIVIDEND
During the next few years, Industries expects that the great majority of
earnings available for distribution of dividends will depend upon dividends paid
to Industries by Northern Indiana. Northern Indiana's Indenture provides that it
will not declare or pay any dividends on any class of capital stock (other than
preferred or preference stock) except out of earned surplus or net profits of
Northern Indiana. At December 31, 1995, Northern Indiana had approximately
$144.8 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.
COMMON SHARES
Industries has authorized 200,000,000 common shares without par value.
SHARE PURCHASE RIGHTS PLAN
On February 27, 1990, the Board of Directors of Industries declared a dividend
distribution of one Right for each outstanding common share of Industries to
shareholders of record on March 12, 1990. The Rights are not currently
exercisable. Each Right, when exercisable, would initially entitle the holder to
purchase from Industries one one-hundredth of a Series A Junior Participating
Preferred Share, without par value, of Industries at a price of $60 per one one-
hundredth of a share. In certain circumstances, if an acquirer obtained 25% of
Industries' outstanding shares, or merged into Industries or merged Industries
into the acquirer, the Rights would entitle the holders to purchase Industries'
or the acquirer's common shares for one-half of the market price. The Rights
will not dilute Industries' common shares nor affect earnings per share unless
they become exercisable for common shares. The Plan was not adopted in response
to any specific attempt to acquire control of Industries.
COMMON SHARE REPURCHASES
The Board of Directors of Industries has authorized the repurchase of
Industries' common shares. At December 31, 1995, Industries had purchased
approximately 16.0 million shares at an average price of $24.16 per share.
Approximately 1.6 million additional common shares may be repurchased under the
Board's authorization.
LONG-TERM INCENTIVE PLAN
Industries' Long-Term Incentive Plan (1988 Plan) for key management employees,
which was approved by shareholders on April 13, 1988, provides for the issuance
of up to 2.5 million of Industries' common shares to key employees through 1998.
On April 13, 1994, shareholders adopted Industries' 1994 Long-Term Incentive
Plan (1994 Plan). It is similar to the 1988 Plan and provides an additional 2.5
million common shares available for issuance to key employees through 2004. At
December 31, 1995, there were 152,461 shares and 2,331,550 shares reserved for
future awards under the 1988 Plan and 1994 Plan, respectively. The 1988 Plan and
1994 Plan permit the following types of grants, separately or in combination:
nonqualified stock options, incentive stock options, restricted stock awards,
stock appreciation rights and performance units. No incentive stock options or
performance units were outstanding at December 31, 1995.
The stock appreciation rights (SARs) may be exercised only in tandem
with stock options on a one-for-one basis and are payable in cash, Industries
stock or a combination thereof. Restricted stock awards are restricted as to
transfer and subject to forfeiture for specific periods from the date of grant.
Restrictions on the shares awarded during 1990 and 1991 lapse five years from
date of grant and vest subject to specific share price appreciation conditions.
Restrictions on shares awarded in 1995 vest five years from date of grant and
vest subject to
- -------------------------------------------------------------------------------
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Continued
- --------------------------------------------------------------------------------
specific earnings per share and stock appreciation goals. If a participant's
employment is terminated other than by reason of death, disability or
retirement, restricted shares are forfeited. There were 157,500, 150,500 and
330,500 restricted shares outstanding at December 31, 1993, 1994 and 1995,
respectively.
Changes in outstanding shares under option and SARs for 1993, 1994 and
1995, are as follows:
<TABLE>
<CAPTION>
Nonqualified Nonqualified Stock
Stock Options Options With SARs
- ----------------------------------------------------------------------------------------
Option Option
Year Ended December 31, 1993 Options Price Options Price
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year............ 869,150 $10.94-$26.06 11,500 $10.94
Granted............................... 288,500 $33.19 --
Exercised............................. (261,150) $10.94-$26.06 --
Cancelled............................. (5,700) $26.06 (1,600) $10.94
--------- ------
Balance at end of year.................. 890,800 $10.94-$33.19 9,900 $10.94
========= ======
Shares exercisable...................... 602,300 $10.94-$26.06 9,900 $10.94
Option Option
Year Ended December 31, 1994 Options Price Options Price
- ----------------------------------------------------------------------------------------
Balance at beginning of year............ 890,800 $10.94-$33.19 9,900 $10.94
Granted............................... 294,650 $28.75 --
Exercised............................. (61,850) $10.94-$26.06 --
Cancelled............................. (26,050) $28.75-$33.19 --
--------- ------
Balance at end of year.................. 1,097,550 $10.94-$33.19 9,900 $10.94
========= ======
Shares exercisable...................... 807,150 $10.94-$33.19 9,900 $10.94
Option Option
Year Ended December 31, 1995 Options Price Options Price
- ----------------------------------------------------------------------------------------
Balance at beginning of year............ 1,097,550 $10.94-$33.19 9,900 $10.94
Granted............................... 282,450 $30.31-$32.44 --
Exercised............................. (259,850) $10.94-$33.19 (4,300) $10.94
Cancelled............................. (12,400) $10.94-$33.19 --
--------- ------
Balance at end of year.................. 1,107,750 $10.94-$33.19 5,600 $10.94
========= ======
Shares exercisable...................... 830,300 $10.94-$33.19 5,600 $10.94
</TABLE>
The Industries Nonemployee Director Stock Incentive Plan, which was
approved by shareholders, provides for the issuance of up to 100,000 of
Industries' common shares to nonemployee directors of Industries. The Plan
provides for awards of common shares which vest in 20% per year increments, with
full vesting after five years. The Plan also allows the award of nonqualified
stock options in the future. If a director's service on the Board is terminated
for any reason other than death or disability, any common shares not vested as
of the date of termination are forfeited. As of December 31, 1995, 27,750 shares
were issued under the Plan.
LONG-TERM DEBT
The sinking fund requirements of long-term debt outstanding at December 31, 1995
(including the maturity of Northern Indiana's first mortgage bonds: Series O,
6-3/8%, due September 1, 1997; and Series P, 6-7/8%, due October 1, 1998;
Northern Indiana's medium-term notes due from April 6, 1998, to June 1, 2000;
Capital Markets' Zero Coupon Notes due December 1, 1997; Lake Erie Land
Company's notes payable due May 23, 1997, to June 30, 1998; and NDC Douglas
Properties, Inc. notes payable due December 22, 1999), for each of the four
years subsequent to December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
- ------------------------------------------------------------------------------
<S> <C>
1997..............................................................$ 76,705,830
1998..............................................................$132,772,940
1999..............................................................$ 10,848,427
2000..............................................................$166,170,510
</TABLE>
Unamortized debt expense, premium and discount on long-term debt,
applicable to outstanding bonds are being amortized over the lives of such
bonds. Reacquisition premiums are being deferred and amortized.
Northern Indiana's Indenture dated August 1, 1939, as amended and
supplemented, securing the first mortgage bonds issued by Northern Indiana,
constitutes a direct first mortgage lien upon substantially all property and
franchises, other than expressly excepted property, owned by Northern Indiana.
On March 4, 1994, the Commission authorized Northern Indiana to issue
up to $289,275,000 of its Medium-Term Notes, Series D, due from 1 year to 30
years, for purposes of refinancing certain first mortgage bonds and paying
short-term debt used to pay at maturity
- --------------------------------------------------------------------------------
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Continued
- --------------------------------------------------------------------------------
medium-term notes due in January and April, 1994. On May 23, 1994, Northern
Indiana exercised its option to redeem all the outstanding First Mortgage Bonds,
Series S, Y and AA, aggregating $125.5 million, through the use of working
capital and the proceeds of short-term debt. During 1994, $120.0 million of the
Medium-Term Notes, Series D, were issued to complete the permanent refinancing
of those first mortgage bonds. On June 12, 1995, the remaining $169,275,000 of
Medium-Term Notes, Series D, were issued, and part of the proceeds were used to
redeem all of the outstanding First Mortgage Bonds, Series U and Z, aggregating
$94.8 million on July 3, 1995.
On August 25, 1994, Jasper County, Indiana issued Pollution Control
Refunding Revenue Bonds, Series 1994 (Northern Indiana Public Service Company
Project) (the Series 1994 Bonds), including $10 million of Series 1994A Bonds,
due August 1, 2010; $18 million of Series 1994B Bonds, due June 1, 2013; and $41
million of Series 1994C Bonds, due April 1, 2019. The proceeds of these
issuances were loaned to Northern Indiana under similar terms. The initial
interest rate on Series 1994 Bonds was 3.10%, which resets daily. The proceeds
of the Series 1994A and Series 1994C were used to retire on October 15, 1994,
$10 million of Series MM First Mortgage Bonds, 7-1/2%, due October 15, 2004, and
$41 million of Series LL First Mortgage Bonds, 7-1/2%, due October 15, 2014. The
proceeds of the Series 1994B Bonds were used to retire the $18 million Series
1978 Note, 6.70%, due November 1, 2008, on August 25, 1994. The Series 1994
Bonds are secured by Letters of Credit from Union Bank of Switzerland.
On January 12, 1996, Industries redeemed all 350,000 shares of its
8.75% Preferred Shares, pursuant to mandatory redemption provisions, for $100
per share plus accrued dividends. The redemption was accomplished through the
use of short-term debt issued by Capital Markets. Capital Markets expects to
refinance the short-term debt through an issue of long-term debt during the
first quarter of 1996.
The obligations of Capital Markets are subject to a Support Agreement
between Industries and Capital Markets, under which Industries has committed to
make payments of interest and principal on Capital Markets' securities in the
event of a failure to pay by Capital Markets. Restrictions in the Support
Agreement prohibit recourse on the part of Capital Markets' investors against
the stock and assets of Northern Indiana. Under the terms of the Support
Agreement, in addition to the cash flow of cash dividends paid to Industries by
any of its consolidated subsidiaries, the assets of Industries, other than the
stock and assets of Northern Indiana, are available as recourse to holders of
Capital Markets' securities. The carrying value of those assets other than
Northern Indiana, reflected in the consolidated financial statements of
Industries, is approximately $393.3 million at December 31, 1995.
SHORT-TERM BORROWINGS
Northern Indiana has a $250 million revolving Credit Agreement with several
banks which terminates August 19, 1998, unless extended by its terms. As of
December 31, 1995, there were no borrowings outstanding under this agreement. In
addition, Northern Indiana has $14.2 million in lines of credit which run to
May 31, 1996. The credit pricing of each of the lines varies from either the
lending banks' commercial prime or market rates. Northern Indiana has agreed to
compensate the participating banks with arrangements that vary from no
commitment fee to a combination of fees which are mutually satisfactory to both
parties. As of December 31, 1995, there were no borrowings under these lines of
credit. The Credit Agreement and lines of credit are also available to support
the issuances of commercial paper.
Northern Indiana also has $268.5 million of money market lines of
credit. As of December 31, 1995, $118.8 million of borrowings were outstanding
under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
December 31, 1995, there were no borrowings outstanding under this facility.
Northern Indiana uses commercial paper to fund short-term working
capital requirements. As of December 31, 1995, Northern Indiana had $44.8
million in commercial paper outstanding, having a weighted average interest rate
of 6.01%.
Capital Markets has a $150 million revolving Credit Agreement which
will terminate August 19, 1998, unless extended by its terms. This facility
provides short-term financing flexibility to Industries and also serves as the
back-up instrument for a commercial paper program. As of December 31, 1995,
there were no borrowings outstanding under this agreement.
Capital Markets also has $105 million of money market lines of credit.
As of December 31, 1995, $17.4 million of borrowings were outstanding under
these lines of credit.
As of December 31, 1995, Capital Markets had $76.7 million in
commercial paper outstanding, having a weighted average interest rate of 6.08%.
OPERATING LEASES
On April 1, 1990, Northern Indiana entered into a 20-year agreement for the
rental of office facilities from Development at a current annual rental payment
of approximately $3.2 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, 1995:
<TABLE>
<CAPTION>
Year Ending December 31, (Dollars in thousands)
- -------------------------------------------------------------------------------
<S> <C>
1996................................................................ $ 8,576
1997................................................................ 7,960
1998................................................................ 6,657
1999................................................................ 5,825
2000................................................................ 5,729
Later years......................................................... 76,785
--------
Total minimum payments required..................................... $111,532
========
</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>
1995................................................................ $8,450
1994................................................................ $7,890
1993................................................................ $7,251
</TABLE>
- --------------------------------------------------------------------------------
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Continued
- --------------------------------------------------------------------------------
COMMITMENTS
Northern Indiana estimates that approximately $764 million will be expended for
construction purposes for the period from January 1, 1996, to December 31, 2000.
Substantial commitments have been made by Northern Indiana in connection with
this program.
Northern Indiana has entered into a service agreement with Pure Air, a
general partnership between Air Products and Chemicals, Inc. and Mitsubishi
Heavy Industries America, Inc., under which Pure Air provides scrubber services
to reduce sulfur dioxide emissions for Units 7 and 8 at Bailly Generating
Station. Services under this contract commenced on June 15, 1992, with annual
charges of approximately $20 million. The agreement provides that, assuming
various performance standards are met by Pure Air, a termination payment would
be due if Northern Indiana terminates the agreement prior to the end of the 20-
year contract period.
Northern Indiana has entered into an agreement with Integrated Systems
Solutions Corporation (ISSC), a wholly-owned subsidiary of IBM, to out source
its information technology function to ISSC. ISSC will perform all data center,
application development and maintenance and desktop management.
Effective on January 1, 1996, Primary, a recently formed direct
subsidiary of Industries, became the parent of certain other subsidiaries,
including Harbor Coal Company (Harbor Coal), North Lake Energy Corporation
(North Lake) and Lakeside Energy Corporation (LEC).
Harbor Coal has invested in a partnership to finance, construct, own
and operate a $65 million pulverized coal injection facility which began
commercial operation in August, 1993. The facility receives raw coal, pulverizes
it and delivers it to Inland Steel Company for use in the operation of its blast
furnaces. Harbor Coal is a 50% partner in the project with an Inland Steel
affiliate. Industries has guaranteed the payment and performance of the
partnership's obligations under a sale and leaseback of a 50% undivided interest
in the facility.
North Lake has entered into a lease for the use of a 75 megawatt
energy facility to be located at Inland Steel Company. The facility will use
steam generated by Inland Steel to produce electricity to be delivered to Inland
Steel. The facility is expected to begin operations in late summer of 1996.
Industries has guaranteed North Lake's obligations relative to the lease and
certain obligations to Inland Steel relative to the project.
LEC has entered into an agreement with USX Corporation--US Steel Group
to utilize a new 161 megawatt energy facility to process high pressure steam
into electricity and low pressure process steam for a 15 year period. LEC will
lease this facility, once constructed, from a third party. Additionally, LEC has
entered into an interim agreement, which expires when the lease is established
with the third party lessor, under which LEC is acting as the agent for the
lessor to design, construct and start-up the energy facility. Industries
anticipates guaranteeing LEC's security deposit obligations relative to the
anticipated lease.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents: The carrying amount approximates fair value
because of the short maturity of those instruments.
Investments: The fair value of some investments is estimated based on
market prices for those or similar investments.
Long-term debt/Preferred stock: The fair value of long-term debt and
preferred stock is estimated based on the quoted market prices for the same or
similar issues or on the rates offered to Industries for securities of the same
remaining maturities. Certain premium costs associated with the early settlement
of long-term debt are not taken into consideration in determining fair value.
The carrying values and estimated fair values of Industries' financial
instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
- -------------------------------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents...................... $ 28,496 $ 28,496 $ 40,441 $ 40,441
Investments.................................... $ 25,893 $ 27,045 $ 19,689 $ 20,619
Long-term debt (including current portion)..... $1,273,376 $1,274,079 $1,207,936 $1,102,019
Preferred stock................................ $ 181,804 $ 164,306 $ 189,274 $ 156,591
</TABLE>
The majority of the long-term debt relates to utility operations. The
Utilities are subject to regulation and gains or losses may be included in rates
over a prescribed amortization period, if in fact settled at amounts
approximating those above.
CUSTOMER CONCENTRATIONS
Industries' public utility subsidiaries supply natural gas and electrical energy
within the northern third of Indiana. Although these public utilities have a
diversified base of residential and commercial customers, a substantial portion
of their electric and gas industrial deliveries are dependent upon the basic
steel industry. The following table shows the basic steel industry percentage of
gas revenue (including transportation services) and electric revenue for 1995,
1994 and 1993.
<TABLE>
<CAPTION>
Basic Steel Industry 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gas revenue percent............................................ 5% 2% 2%
Electric revenue percent....................................... 22% 26% 24%
</TABLE>
- --------------------------------------------------------------------------------
55
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================================================
Continued
- ---------------------------------------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA
The following data summarize certain operating results for each of the quarters of 1995 and 1994:
1995 Quarters Ended March 31 June 30 Sept. 30 Dec. 31
- -------------------------------------------------------------------------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating revenues............................................. $522,498 $360,462 $370,379 $468,986
Operating expenses and taxes................................... 436,425 307,272 306,456 387,260
-------- -------- -------- --------
Operating income............................................... 86,073 53,190 63,923 81,726
Other income (deductions)...................................... (831) (143) (1,246) (2,021)
Interest and other charges..................................... 24,911 26,099 26,319 27,877
-------- -------- -------- --------
Net income..................................................... 60,331 26,948 36,358 51,828
Dividend requirements on preferred shares...................... 766 765 766 766
-------- -------- -------- --------
Balance available for common shareholders...................... $ 59,565 $ 26,183 $ 35,592 $ 51,062
======== ======== ======== ========
Earnings per average common share/(a)/......................... $ 0.92 $ 0.41 $ 0.56 $ 0.81
======== ======== ======== ========
1994 Quarters Ended March 31 June 30 Sept. 30 Dec. 31
- -------------------------------------------------------------------------- -------- -------- --------
(Dollars in thousands)
Operating revenues............................................. $565,551 $348,009 $334,598 $428,243
Operating expenses and taxes................................... 473,595 300,512 281,548 359,597
-------- -------- -------- --------
Operating income............................................... 91,956 47,497 53,050 68,646
Other income (deductions)...................................... (1,066) (1,855) (7) 5,144
Interest and other charges..................................... 25,849 24,164 24,508 24,857
-------- -------- -------- --------
Net income..................................................... 65,041 21,478 28,535 48,933
Dividend requirements on preferred shares...................... 766 765 766 766
-------- -------- -------- --------
Balance available for common shareholders...................... $ 64,275 $ 20,713 $ 27,769 $ 48,167
======== ======== ======== ========
Earnings per average common share/(a)/......................... $ 0.97 $ 0.31 $ 0.43 $ 0.75
======== ======== ======== ========
</TABLE>
/(a)/ Because of the combined mathematical effect of common shares repurchased
and issued and the cyclical nature of net income during the year, the
sum of earnings per share for any four quarterly periods may vary
slightly from the earnings per share for the equivalent twelve-month
period.
- -----------------------------------------------------------------------------
56
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
========================================================================================================================
Concluded
- ------------------------------------------------------------------------------------------------------------------------
SEGMENTS OF BUSINESS
Industries' primary business is the distribution of natural gas and electrical energy. The reportable items for
the gas and electric segments for the years 1995, 1994 and 1993 are as follows:
1995 1994 1993
- ----------------------------------------------------------------------------------------------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Operating information--
Gas operations:
Operating revenues............................................................ $ 691,402 $ 681,909 $ 714,229
Operating expenses, excluding provision for utility income taxes.............. 605,805 613,698 634,742
---------- ---------- ----------
Operating income before utility income taxes.................................. 85,597 68,211 79,487
Allowance for funds used during construction (AFUDC) and carrying charges (CC) 1,606 2,067 875
---------- ---------- ----------
Operating income before utility income taxes and including AFUDC and CC....... 87,203 70,278 80,362
---------- ---------- ----------
Electric operations:
Operating revenues............................................................ 1,030,923 994,492 963,643
Operating expenses, excluding provision for utility income taxes.............. 723,159 703,822 684,255
---------- ---------- ----------
Operating income before utility income taxes.................................. 307,764 290,670 279,388
Allowance for funds used during construction (AFUDC) and carrying charges (CC) 2,072 2,307 573
---------- ---------- ----------
Operating income before utility income taxes and including AFUDC and CC....... 309,836 292,977 279,961
---------- ---------- ----------
Total......................................................................... 397,039 363,255 360,323
Other income, net................................................................ (4,241) 2,216 (2,071)
Less--interest and other charges................................................. 108,884 103,752 105,282
Less--provision for utility income taxes......................................... 108,449 97,732 96,830
---------- ---------- ----------
Net income per Consolidated Statement of Income.................................... 175,465 163,987 156,140
Dividend requirements on preferred shares.......................................... 3,063 3,063 3,063
---------- ---------- ----------
Balance available for common shareholders.......................................... $ 172,402 $ 160,924 $ 153,077
========== ========== ==========
Other information--
Depreciation and amortization expense:
Electric...................................................................... $ 139,432 $ 135,203 $ 131,993
Gas........................................................................... 61,705 59,080 55,007
---------- ---------- ----------
Total...................................................................... $ 201,137 $ 194,283 $ 187,000
========== ========== ==========
Construction expenditures:
Electric...................................................................... $ 132,273 $ 145,095 $ 125,449
Gas........................................................................... 60,693 57,450 55,403
---------- ---------- ----------
Total...................................................................... $ 192,966 $ 202,545 $ 180,852
========== ========== ==========
Investment information--
Identifiable assets/(a)/:
Electric...................................................................... $2,586,122 $2,594,976 $2,602,826
Gas........................................................................... 890,192 921,693 900,146
---------- ---------- ----------
Total...................................................................... 3,476,314 3,516,669 3,502,972
Other corporate assets........................................................... 523,206 430,469 409,352
---------- ---------- ----------
Total assets.................................................................. $3,999,520 $3,947,138 $3,912,324
========== ========== ==========
</TABLE>
/(a)/ Utility plant less accumulated provision for depreciation and
amortization, materials and supplies, electric production fuel, natural
gas in storage, fuel and gas cost adjustment clauses, unamortized R. M.
Schahfer Units 17 and 18 carrying charges and deferred depreciation,
Bailly scrubber carrying charges and deferred depreciation and FERC
Order No. 636 transition costs.
- -----------------------------------------------------------------------------
57
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
==============================================================================
- ------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS OF NIPSCO INDUSTRIES, INC.:
We have audited the accompanying consolidated balance sheet and consolidated
statements of capitalization and long-term debt of NIPSCO Industries, Inc. (an
Indiana corporation) and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, common shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
consolidated financial statements are the responsibility of Industries'
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NIPSCO
Industries, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in the notes to consolidated financial statements, effective
January 1, 1993, NIPSCO Industries, Inc. and subsidiaries changed their methods
of accounting for income taxes and postretirement benefits other than pensions.
Chicago, Illinois
January 26, 1996 Arthur Andersen LLP
- ------------------------------------------------------------------------------
58
<PAGE>
<TABLE>
<CAPTION>
SELECTED SUPPLEMENTAL INFORMATION
======================================================================================================
- ------------------------------------------------------------------------------------------------------
GAS STATISTICS
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------- ----------- -----------
<S> <C> <C> <C>
Operating Revenues ($000's)
Residential (including home heating)................... $ 407,233 $ 449,391 $ 452,176
Commercial............................................. 132,647 152,400 157,235
Industrial............................................. 63,355 76,321 73,815
Gas transported for others............................. 64,255 33,977 32,503
Other*................................................. 23,912 (30,180) (1,500)
----------- ----------- -----------
Total............................................ $ 691,402 $ 681,909 $ 714,229
=========== =========== ===========
Deliveries in dth (000's):
Residential (including home heating)................... 77,536 73,749 76,761
Commercial............................................. 29,268 28,324 29,754
Industrial............................................. 16,260 15,812 15,872
Gas transported for others............................. 191,571 188,583 167,867
Other.................................................. 1,301 707 793
----------- ----------- -----------
Total............................................ 315,936 307,175 291,047
=========== =========== ===========
Customers Served--End of Year:
Residential (including home heating)................... 643,486 636,601 626,492
Commercial............................................. 52,471 52,245 51,386
Industrial............................................. 3,904 4,218 4,270
Other.................................................. 71 68 67
----------- ----------- -----------
Total............................................ 699,932 693,132 682,215
=========== =========== ===========
*Includes deferred gas cost revenue of $11,351, $(43,460) and $(10,375), respectively.
======================================================================================================
ELECTRIC STATISTICS
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------- ----------- -----------
Operating Revenues ($000's)
Residential............................................ $ 276,575 $ 259,708 $ 257,033
Commercial............................................. 244,776 238,402 232,609
Industrial............................................. 430,579 449,623 413,485
Street lighting........................................ 8,428 8,363 8,254
Sales for resale....................................... 40,425 22,522 27,730
Other**................................................ 30,140 15,874 24,532
----------- ----------- -----------
Total............................................ $ 1,030,923 $ 994,492 $ 963,643
=========== =========== ===========
Sales in kilowatt-hours (000's)
Residential............................................ 2,797,247 2,552,430 2,552,837
Commercial............................................. 2,863,879 2,736,683 2,705,751
Industrial............................................. 9,552,777 9,542,109 8,855,106
Street lighting........................................ 55,515 55,438 54,741
Sales for resale....................................... 1,574,041 564,166 912,773
Other.................................................. 80,894 85,568 83,959
----------- ----------- -----------
Total............................................ 16,924,353 15,536,394 15,165,167
=========== =========== ===========
Customers Served--End of Year:
Residential............................................ 359,260 355,658 350,964
Commercial............................................. 41,275 41,308 40,634
Industrial............................................. 2,579 2,672 2,686
Other.................................................. 829 831 828
----------- ----------- -----------
Total............................................ 403,943 400,469 395,112
=========== =========== ===========
</TABLE>
**Includes deferred fuel cost revenue of $8,688, $(4,826) and $4,813,
respectively.
- ------------------------------------------------------------------------------
59
<PAGE>
<TABLE>
<CAPTION>
SELECTED SUPPLEMENTAL INFORMATION
====================================================================================================
Concluded
- ----------------------------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993
- ----------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Operating Revenues
Gas ($000's).............................................. $ 691,402 $ 681,909 $ 714,229
Electric ($000's)......................................... $ 1,030,923 $ 994,492 $ 963,643
----------- ----------- -----------
Total Operating Revenues ($000's)........................ $ 1,722,325 $ 1,676,401 $ 1,677,872
Operating Margin ($000's).................................. $ 1,037,194 $ 993,327 $ 985,450
Operating Income ($000's).................................. $ 284,912 $ 261,149 $ 262,045
Income Before Extraordinary Items ($000's)................. $ 175,465 $ 163,987 $ 156,140
Net Income ($000's)........................................ $ 175,465 $ 163,987 $ 156,140
Shares outstanding at year end............................. 62,379,596 63,905,389 65,828,838
Number of common shareholders.............................. 37,299 39,172 41,038
Earnings (loss) per average common share................... $ 2.72 $ 2.48 $ 2.31
Return on average common equity............................ 15.5% 14.6% 14.4%
Times interest earned (pre-tax)............................ 3.75 3.56 3.47
Dividends paid per share................................... $ 1.56 $ 1.44 $ 1.32
Dividend payout ratio...................................... 57.4% 58.1% 57.1%
Market values during the year:
High...................................................... $ 38.500 $ 33.000 $ 34.875
Low....................................................... $ 29.250 $ 26.125 $ 26.125
Close..................................................... $ 38.250 $ 29.750 $ 32.875
Book value of common shares................................ $ 17.99 $ 17.34 $ 16.63
Market-to-book ratio at year end........................... 212.6% 171.6% 197.7%
Total Assets ($000's)...................................... $ 3,999,520 $ 3,947,138 $ 3,912,324
Construction expenditures ($000's)/a/...................... $ 192,966 $ 202,545 $ 180,852
Capitalization:
Common shareholders' equity ($000's)...................... $ 1,122,215 $ 1,107,848 $ 1,094,672
Preferred and preference stock--
Northern Indiana Public Service Company:
Series without mandatory redemption provision ($000's).. $ 81,325 $ 86,389 $ 97,753
Series with mandatory redemption provisions ($000's).... $ 63,651 $ 66,057 $ 68,462
NIPSCO Industries, Inc.:
Series with mandatory redemption provision ($000's)..... $ 35,000 $ 35,000 $ 35,000
Long-Term debt ($000's)................................... $ 1,175,728 $ 1,180,338 $ 1,192,500
----------- ----------- -----------
Total Capitalization ($000's)............................ $ 2,477,919 $ 2,475,632 $ 2,488,387
Number of employees........................................ 4,356 4,441 4,602
</TABLE>
Notes: /a/Including AFUDC.
/b/Excluding Extraordinary Loss related to Bailly N1 Plant
Abandonment in 1985.
/c/Excluding Carbon County, return would have been 6.1%.
/d/Excluding Carbon County Coal Settlement and related income taxes.
- -------------------------------------------------------------------------------
60
<PAGE>
<TABLE>
<CAPTION>
=========================================================================================================================
Concluded
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1992 1991 1990 1989
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Revenues
Gas ($000's).............................................. $ 666,221 $ 601,920 $ 625,159 $ 677,262
Electric ($000's)......................................... $ 916,135 $ 933,241 $ 895,836 $ 882,303
----------- ----------- ----------- -----------
Total Operating Revenues ($000's)........................ $ 1,582,356 $ 1,535,161 $ 1,520,995 $ 1,559,565
Operating Margin ($000's).................................. $ 927,089 $ 919,951 $ 885,262 $ 900,035
Operating Income ($000's).................................. $ 246,217 $ 254,354 $ 247,777 $ 252,807
Income Before Extraordinary Items ($000's)................. $ 136,648 $ 133,388 $ 125,361 $ 72,112/f/
Net Income ($000's)........................................ $ 136,648 $ 133,388 $ 125,361 $ 72,112/f/
Shares outstanding at year end............................. 65,758,350 66,671,615 68,874,229 69,369,492
Number of common shareholders.............................. 38,097 39,346 41,285 43,763
Earnings (loss) per average common share................... $ 2.00 $ 1.94 $ 1.81 $ 1.00/f/
Return on average common equity............................ 13.1% 12.9% 12.7% 7.2%/f/
Times interest earned (pre-tax)............................ 3.17 2.93 2.81 2.02/f/
Dividends paid per share................................... $ 1.24 $ 1.16 $ 1.04 $ 0.84
Dividend payout ratio...................................... 62.0% 59.8% 57.5% 84.0%/f/
Market values during the year:
High...................................................... $ 26.625 $ 27.000 $ 19.250 $ 19.625
Low....................................................... $ 22.500 $ 18.500 $ 15.750 $ 13.125
Close..................................................... $ 26.500 $ 25.750 $ 18.875 $ 19.375
Book value of common shares................................ $ 15.73 $ 15.17 $ 14.61 $ 13.92
Market-to-book ratio at year end........................... 168.5% 169.7% 129.2% 139.2%
Total Assets ($000's)...................................... $ 3,807,941 $ 3,647,557 $ 3,625,181 $ 3,657,718
Construction expenditures ($000's)/a/...................... $ 172,329 $ 168,958 $ 152,280 $ 150,786
Capitalization:
Common shareholders' equity ($000's)...................... $ 1,034,530 $ 1,011,666 $ 1,005,982 $ 965,437
Preferred and preference stock--
Northern Indiana Public Service Company:
Series without mandatory redemption provision ($000's).. $ 97,917 $ 98,710 $ 99,374 $ 99,874
Series with mandatory redemption provisions ($000's).... $ 70,668 $ 53,978 $ 59,358 $ 66,309
NIPSCO Industries, Inc.:
Series with mandatory redemption provision ($000's)..... $ 35,000 $ 35,000 $ 35,000 $ --
Long-Term debt ($000's)................................... $ 1,054,454 $ 1,068,708 $ 1,165,682 $ 1,261,760
------------ ----------- ----------- -----------
Total Capitalization ($000's)............................ $ 2,292,569 $ 2,268,062 $ 2,365,396 $ 2,393,380
Number of employees........................................ 4,648 4,600 4,547 4,825
</TABLE>
<TABLE>
<CAPTION>
=======================================================================================================================
Concluded
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1988 1987 1986 1985
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Revenues
Gas ($000's).............................................. $ 620,723 $ 581,130 $ 741,021 $ 943,855
Electric ($000's)......................................... $ 903,461 $ 870,499 $ 885,106 $ 964,648
----------- ----------- ----------- -----------
Total Operating Revenues ($000's)........................ $ 1,524,184 $ 1,451,629 $ 1,626,127 $ 1,908,503
Operating Margin ($000's).................................. $ 863,213 $ 777,573 $ 756,712 $ 803,864
Operating Income ($000's).................................. $ 257,923 $ 192,415 $ 179,896 $ 198,098
Income Before Extraordinary Items ($000's)................. $ 103,449 $ 38,876 $ (40,477) $ 79,085
Net Income ($000's)........................................ $ 103,449 $ 38,876 $ (40,477) $ (15,758)
Shares outstanding at year end............................. 73,310,210 73,243,100 73,170,788 73,045,160
Number of common shareholders.............................. 47,324 50,074 56,466 74,303
Earnings (loss) per average common share................... $ 1.41 $ 0.53 $ (0.55)/e/ $ 1.11/b/
Return on average common equity............................ 10.4% 4.1% (4.2%)/c/ 7.5%/b/
Times interest earned (pre-tax)............................ 2.38 1.65 1.96/d/ 2.24
Dividends paid per share................................... $ 0.60 $ 0.15 none $ 1.56
Dividend payout ratio...................................... 42.6% 28.3% -- 140.5%/b/
Market values during the year:
High...................................................... $ 14.125 $ 13.00 $ 13.50 $ 12.875
Low....................................................... $ 8.625 $ 8.00 $ 9.375 $ 8.375
Close..................................................... $ 13.875 $ 8.50 $ 11.75 $ 9.875
Book value of common shares................................ $ 14.03 $ 13.13 $ 12.90 $ 13.46
Market-to-book ratio at year end........................... 98.9% 64.7% 91.1% 73.4%
Total Assets ($000's)...................................... $ 3,684,721 $ 3,821,690 $ 3,944,637 $ 3,833,302
Construction expenditures ($000's)/a/...................... $ 116,874 $ 156,750 $ 197,324 $ 279,175
Capitalization:
Common shareholders' equity ($000's)...................... $ 1,028,554 $ 961,562 $ 943,933 $ 983,127
Preferred and preference stock--
Northern Indiana Public Service Company:
Series without mandatory redemption provision ($000's).. $ 99,937 $ 191,392 $ 191,392 $ 191,392
Series with mandatory redemption provisions ($000's).... $ 75,189 $ 105,395 $ 122,122 $ 135,350
NIPSCO Industries, Inc.:
Series with mandatory redemption provision ($000's)..... $ -- $ -- $ -- $ --
Long-Term debt ($000's)................................... $ 1,308,303 $ 1,401,326 $ 1,552,324 $ 1,511,215
----------- ----------- ----------- -----------
Total Capitalization ($000's)............................ $ 2,511,983 $ 2,659,675 $ 2,809,771 $ 2,821,084
Number of employees........................................ 4,946 5,172 5,695 5,774
</TABLE>
/e/Earnings per share were reduced by $1.39 due to the payment in satisfaction
of the Carbon County Coal Company contract litigation.
/f/Earnings per share were reduced by $0.72 due to the $82.0 million refund,
less associated tax benefits of $30.3 million, related to the Bailly N1
generating unit.
- -------------------------------------------------------------------------------
61
<PAGE>
EXHIBIT 21
NIPSCO INDUSTRIES, INC.
LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1995
All subsidiaries are incorporated in Indiana, except for Elm Energy and
Recycling (UK) Ltd., which is incorporated in United Kingdom; FuelMaker
Corporation, which is incorporated in Canada; Inventory Management and
Distribution Company, L.L.C. and NFC Acquisition Company, which are incorporated
in Texas; N Squared Aviation L.L.C. and Triumph Natural Gas, Inc., which is
incorporated in Delaware; and Southlake Energy, Inc., which is incorporated in
Alberta. All subsidiaries are wholly-owned unless otherwise indicated.
801 East Corp.
Crossroads Pipeline Company
Hamilton Harbour Insurance Services, Ltd.
Kokomo Gas and Fuel Company
Lakeside Energy Corporation
NIPSCO Capital Markets, Inc.
NIPSCO Development Company, Inc.
Its subsidiaries are:
Analytic Systems Laboratories, Inc.(1)
Elm Energy and Recycling (UK) Ltd.(1)
FuelMaker Corporation(4)
G. R. Clark Corporation
Green Fuels, Inc.
Harbor Coal Company
International Polymer Corp.
JOF Transportation Company
KOGAF Enterprise, Inc.
Lake Erie Land Company
Its subsidiary is:
SCC Services, Inc.
N Squared Aviation, L.L.C.(5)
NDC Douglas Properties, Inc.
NIPSCO International Power Systems Company
NIPSCO Security Services, Inc.
Portside Energy Corporation
Process and Control Technology Corporation
RIC, Inc.
Its subsidiary is:
Cardinal Property Management, Inc.
Riverside Caloric Company
NIPSCO Energy Services, Inc.
Its subsidiaries are:
Inventory Management and Distribution Company, L.L.C.(6)
NESI Energy Marketing, L.L.C.(3)
NIPSCO Energy Trading Corp.
NIPSCO Fuel Company, Inc.
NFCO Acquisition Company
Southlake Energy, Inc.
NI-TEX, Inc.
Triumph Natural Gas, Inc.(3)
<PAGE>
EXHIBIT 21
NIPSCO INDUSTRIES, INC.
LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1995
North Lake Energy Corporation
Northern Indiana Fuel and Light Company, Inc.
Its subsidiary is:
Northern Indiana Trading Company
Northern Indiana Public Service Company
Its subsidiaries are:
NIPSCO Exploration Company, Inc.
NIPSCO ESP Services Corporation
Shore Line Shops, Incorporated
Primary Energy, Inc.
- -------------
(1) Majority-owned subsidiary of NIPSCO Development Company, Inc.
(2) Majority-owned subsidiary of KOGAF Enterprises, Inc.
(3) Majority-owned subsidiary of NIPSCO Energy Services, Inc.
(4) 50% owned subsidiary of NIPSCO Development Company, Inc.
(5) Minority-owned subsidiary of NIPSCO Development Company, Inc.
(6) Minority-owned interest of NIPSCO Energy Service, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF NIPSCO INDUSTRIES, INC. FOR TWELVE MONTHS ENDED DECEMBER
31, 1995, 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-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,213,264
<OTHER-PROPERTY-AND-INVEST> 223,785
<TOTAL-CURRENT-ASSETS> 316,581
<TOTAL-DEFERRED-CHARGES> 33,399
<OTHER-ASSETS> 212,491
<TOTAL-ASSETS> 3,999,520
<COMMON> 577,707
<CAPITAL-SURPLUS-PAID-IN> 27,601
<RETAINED-EARNINGS> 516,907
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,122,215
98,651
81,325
<LONG-TERM-DEBT-NET> 354,716
<SHORT-TERM-NOTES> 139,170
<LONG-TERM-NOTES-PAYABLE> 821,012
<COMMERCIAL-PAPER-OBLIGATIONS> 121,500
<LONG-TERM-DEBT-CURRENT-PORT> 97,649
1,828
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,161,454
<TOT-CAPITALIZATION-AND-LIAB> 3,999,520
<GROSS-OPERATING-REVENUE> 1,722,325
<INCOME-TAX-EXPENSE> 108,449
<OTHER-OPERATING-EXPENSES> 1,328,964
<TOTAL-OPERATING-EXPENSES> 1,437,413
<OPERATING-INCOME-LOSS> 284,912
<OTHER-INCOME-NET> (4,241)
<INCOME-BEFORE-INTEREST-EXPEN> 280,671
<TOTAL-INTEREST-EXPENSE> 105,206
<NET-INCOME> 175,465
3,063
<EARNINGS-AVAILABLE-FOR-COMM> 172,402
<COMMON-STOCK-DIVIDENDS> 100,232
<TOTAL-INTEREST-ON-BONDS> 22,473
<CASH-FLOW-OPERATIONS> 391,492
<EPS-PRIMARY> 2.72
<EPS-DILUTED> 2.71
</TABLE>
