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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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9776
NIPSCO INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INDIANA 35-1719974
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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 28, 1997 58,968,253 COMMON SHARES (NOT INCLUDING 14,923,856
SHARES HELD IN TREASURY), WERE OUTSTANDING. THE AGGREGATE MARKET VALUE OF THE
COMMON SHARES (BASED UPON THE FEBRUARY 28, 1997 CLOSING PRICE OF $39 7/8 ON THE
NEW YORK STOCK EXCHANGE) HELD BY NONAFFILIATES WAS APPROXIMATELY
$2,332,755,000.
DOCUMENTS INCORPORATED BY REFERENCE
1996 NIPSCO INDUSTRIES, INC. ANNUAL REPORT TO SHAREHOLDERS--PARTS I, II AND
IV.
NOTICE OF ANNUAL MEETING AND PROXY STATEMENT DATED MARCH 7, 1997 FOR ANNUAL
MEETING TO BE HELD APRIL 9, 1997--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).
NIPSCO Industries Management Services Company, a subsidiary of Industries,
provides executive, financial, gas supply, sales and marketing, and
administrative and general services to Northern Indiana and other subsidiaries
of Industries.
On December 19, 1996, Industries and IWC Resources Corporation (IWCR) signed
a definitive agreement for Industries to acquire IWCR for approximately $290
million, in Industries common shares and cash. Each share of IWCR stock will be
exchanged for $32 of Industries common shares or, at the election of the
shareholder, cash. The acquisition was completed on March 25, 1997.
IWCR's largest subsidiary, Indianapolis Water Company, provides water service
to approximately 235,000 customers in Indianapolis and adjacent counties. In
addition, IWCR owns an underground utility locating and marking service
business and one of the nation's major gas pipeline construction companies.
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,
1996, Northern Indiana served approximately 653,100 customers with gas and
approximately 411,500 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 32,900 customers at December
31, 1996. 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 32,400 customers
at December 31, 1996. The NIFL service territory is contiguous to Northern
Indiana's gas service territory.
Crossroads is a natural gas pipeline company which was approved by the
Federal Energy Regulatory Commission (FERC) to operate as an interstate
pipeline in May 1995. Crossroads had $2.8 million in operating revenues for
year 1996.
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
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Financial Statements and "Selected Supplemental Information--Gas Statistics and
Electric Statistics" in the 1996 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.
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, 1996, Northern Indiana generated 83.8% and purchased 16.2%
of its electric requirements.
Northern Indiana's 1996 electric control area peak of 3,134,400 kw, which
includes Wabash Valley Power Association, Inc. (WVPA) and Indiana Municipal
Power Agency (IMPA) for which Northern Indiana controls interchange operations,
was set on August 6, 1996. Northern Indiana's all-time control area peak of
3,161,200 kw was set on July 14, 1995. Northern Indiana's 1996 internal peak
load, which excludes WVPA and IMPA, was 2,888,450 kw set on August 6, 1996.
This also established a new all-time internal peak load exceeding the old peak
of 2,882,200 kw established on July 14, 1995.
Northern Indiana's electric system is interconnected with that of American
Electric Power (formerly Indiana Michigan Power Company), ComEd (formerly
Commonwealth Edison Company), Cinergy Services, Inc. (formerly PSI Energy,
Inc.), Consumers Energy (formerly Consumers Power Company), and Central
Illinois Public Service Company. Electric energy is purchased from, sold to, or
exchanged with various other utilities and power marketers under Northern
Indiana's power sales and open access transmission tariffs.
Northern Indiana provides WVPA with transmission and distribution service,
operating reserve requirements and capacity deficiency service, and provides
IMPA with transmission service, operating reserve requirements and capacity
deficiency service, in Northern Indiana's control area. Northern Indiana also
engages in sales and services under interconnection agreements with WVPA and
IMPA.
WVPA provides service to twelve Rural Electric Membership Corporations
(REMC's) located in Northern Indiana's control area. IMPA provides service to
the municipal electric system of the city of Rensselaer located in Northern
Indiana's control area.
Northern Indiana and WVPA have executed a supplemental agreement for unit
peaking capacity and energy. Pursuant to this agreement, which runs through
December, 2001, WVPA purchases 90,000 kw of capacity per month.
Northern Indiana has full requirement agreements with each of its eight
municipal wholesale customers. These full requirement contracts became
effective October 1, 1987 and extend through January 31, 1998. Northern Indiana
intends to negotiate for extension of the contracts but there is no assurance
that they will be extended.
Northern Indiana is a member of the East Central Area Reliability
Coordination Agreement (ECAR). ECAR is one of nine regional electric
reliability councils established to coordinate planning and operations of
member companies regionally and nationally.
FUEL SUPPLY. The generating units of Northern Indiana are located at Bailly,
Mitchell, Michigan City, and Schahfer Generating Stations. Northern Indiana's
thirteen steam generating units have a net capability of 3,179,000 kw. Coal is
the primary source of fuel for all units, except
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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 1996 were
supplied as follows:
<TABLE>
<S> <C>
Coal................................................................ 98.4%
Natural Gas......................................................... 1.6%
</TABLE>
In 1996, Northern Indiana used approximately 8.1 million tons of coal at its
generating stations. Northern Indiana has established a normal level of coal
stock which provides adequate fuel supply during the year under all conditions.
Annual coal requirements for Northern Indiana's electric generating units
through 2001 are estimated to range from 8.7 million tons to 8.9 million tons,
depending from year to year upon anticipated sales levels, scheduled
maintenance, and other variables. These requirements are being or will be met
in part under long-term contracts as follows:
<TABLE>
<CAPTION>
MILLION
TONS/YEAR SULFUR CONTENT EXPIRATION
--------- -------------- ----------
<S> <C> <C>
1.0 High 1998
Up to 1.0(a) High 1998
1.3(b) Low 2001
1.8(c) Low 1999
1.0(d) Low 1998
.5(e) High 1998
</TABLE>
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(a) Contract calls for requirements up to 1.0 million tons/contract year.
(b) 1.8 million tons in 1997.
(c) Plus or minus 10%/contract year (1.225 million tons in 1999).
(d) Plus or minus 10%/contract year (.5 million tons in 1998).
(e) .250 million tons in 1998.
The average cost of coal consumed in 1996 was $27.50 per ton or 15.79 mills
per kilowatt-hour (kwh) generated as compared to $28.28 per ton or 15.89 mills
per kwh generated in 1995. Northern Indiana's forecasts indicate that its coal
costs will be slightly lower over the next two years.
COAL RESERVES. Included in the previous table of coal contracts is a coal
mining contract with Cyprus Shoshone Coal Corporation (Cyprus) under which
Cyprus is mining Northern Indiana's coal reserves in the Cyprus mine through
the year 2001. The costs of the reserves are being recovered through the rate-
making process as such coal reserves are used to produce electricity.
FUEL ADJUSTMENT CLAUSE. See "Fuel Adjustment Clause" in the Notes to
Consolidated Financial Statements in the 1996 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 February 3, 1996,
Northern Indiana's 1996 maximum day sendout was 1,553,977 dekatherms (dth).
In 1996, all of the gas supplied by Northern Indiana was transported by ANR
Pipeline Company (ANR), Crossroads Pipeline Company (Crossroads), Midwestern
Gas Transmission Company (Midwestern), Natural Gas Pipeline Company of America
(Natural), Panhandle Eastern Pipe Line Company (Panhandle), Tennessee Gas
Pipeline Company (Tennessee), and Trunkline Gas Company (Trunkline).
Approximately 57% of Northern Indiana's 1996 gas supply was purchased on the
spot market, generally on less than 30-day agreements.
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The average price per dth (including FERC Order No. 636 transition charges)
in 1996 was $3.13 compared to $2.98 in 1995, and the average cost of purchased
gas, after adjustment for transition charges billed to transport customers, was
$3.03 per dth as compared to $2.63 per dth in 1995.
The transportation rates of Crossroads, and the transportation and storage
rates of ANR, Midwestern, Natural, Panhandle, Tennessee, and Trunkline to
Northern Indiana, are subject to change in accordance with rate proceedings
filed with the FERC.
Agreements have been negotiated with natural gas suppliers to replace former
pipeline supplier contracts pursuant to the requirements of FERC Order No. 636
(See "FERC Order No. 636" in the Notes to Consolidated Financial Statements in
the 1996 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 1996 and none are expected during 1997.
Northern Indiana operates an underground gas storage field at Royal Center,
Indiana, which currently has a storage capacity of 6.75 million dth.
Withdrawals have been made in the 1996-1997 winter of up to 108,402 dth per
day.
In addition, Northern Indiana and NI-TEX, Inc. (NI-TEX), a subsidiary of
Services, 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
26,871,707 dth of annual stored volume, and allow for approximately 551,446 dth
of maximum daily withdrawal.
Northern Indiana has a liquefied natural gas plant in LaPorte County which is
designed for peak shaving and has the following capacities: maximum storage of
4,000,000 dth; maximum liquefaction rate (gas to liquid), 20,000 dth per day;
maximum vaporization rate (output to distribution system), 300,000 dth per day.
KOKOMO GAS. Kokomo Gas' total gas send-out for 1996 was 8,876,848 dth,
compared to 8,232,810 dth for 1995. Total transportation volumes for industrial
customers in 1996 were 3,444,329 dth, compared to 3,273,562 dth in 1995. Kokomo
Gas purchased gas under term agreements from NI-TEX and NESI Energy Marketing,
L.L.C., (NEM), both subsidiaries of Services, to satisfy all of its system
requirements in 1996.
NIFL. NIFL's total gas send-out for 1996 was 10,855,132 dth compared to
9,517,483 dth for 1995. Total transportation volumes for industrial customers
in 1996 were 4,883,677 dth, compared to 4,251,519 dth in 1995. NIFL purchased
gas on the spot market from a number of suppliers and also under term
agreements from NI-TEX and NEM to satisfy all of its system requirements in
1996.
GAS COST ADJUSTMENT CLAUSE. See "Gas Cost Adjustment Clause" in the Notes to
Consolidated Financial Statements in the 1996 Annual Report to Shareholders,
which note is incorporated herein by reference (see Exhibit 13).
FERC ORDER NO. 636. See "FERC Order No. 636" in the Notes to Consolidated
Financial Statements in the 1996 Annual Report to Shareholders, which note is
incorporated herein by reference (see Exhibit 13).
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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, 1996, there were no
borrowings outstanding under this agreement. Capital Markets also has $95
million of money market lines of credit. As of December 31, 1996, $27.0 million
of borrowings were outstanding under these lines of credit. As of December 31,
1996, Capital Markets had $119.3 million in commercial paper outstanding,
having a weighted average interest rate of 5.78%.
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, was
approximately $518.9 million at December 31, 1996.
DEVELOPMENT. Development makes various investments, including real estate
and venture capital investments.
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
1996 Annual Report to Shareholders, which note is incorporated herein by
reference (see Exhibit 13).
Developments subsidiary, Lake Erie Land Company is a real estate development
firm whose projects include Sand Creek Country Club, a golf course and
residential development in Chesterton, Indiana and Sand Creek Center, a mixed
use sustainable development also in Chesterton.
In 1996, Development invested in multiple-family residential housing
developments in Hammond, Hebron, Plymouth, and South Bend. Development has
similar projects in Michigan City, South Bend, Rensselaer, Hammond, Fort Wayne,
and Mishawaka. Additional projects are being considered in 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
optimization of fixed assets. Services has five wholly-owned subsidiaries, a
majority interest in one limited liability company, and minority interests in a
limited liability company and a limited partnership. The five wholly-owned
subsidiaries are NIPSCO Fuel Company, Inc. (Fuel), NI-TEX, Inc. (NI-TEX),
NIPSCO Energy Services Canada Ltd. (NESCL), Parkway Engineering and
Distribution Company, Inc. (PEDCO), and Green Fuels, Inc. (Greenfuels). The
limited liability companies are NESI Energy Marketing L.L.C. (NEM) and
Inventory Management and Distribution Company, L.L.C. The limited partnership
is Market Hub Partners, L.P.
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
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December 31, 1996, $41.8 million had been invested in U.S. exploration and
development projects. Fuel's estimated proved reserves at year-end totaled 1.74
million barrels of oil and 29.7 billion cubic feet of natural gas. In January
1997, Fuel sold its partnership interest in the offshore properties to SOCO
Offshore, Inc. The partnership interest represented approximately $16.0 million
of Fuel's investment. Proved reserves related to the sale were estimated to be
289,600 barrels of oil and 13.7 billion cubic feet of natural gas.
NI-TEX. NI-TEX is an intrastate natural gas transmission and supply company
in Texas providing gas sales, transportation and storage services. NI-TEX
provides flexible city gate gas supply to Northern Indiana, Kokomo Gas, and
NIFL under spot and/or 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 13.9 billion
cubic feet of natural gas in 1996. 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 $6.4 million for the year.
NEM. In August 1995, Services formed a limited liability company with Enco
Energy Inc. Services 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 1996, operating income for NEM
totaled $3.5 million.
NESCL. NESCL is a Canadian subsidiary formed to hold NESI Canadian
investments and companies. NESCL owns a 50% interest in FuelMaker Corporation,
a manufacturer of vehicle fueling equipment, and a 100% interest in Southlake
Energy, Inc., (SLAKE) a Canadian oil and gas exploration and production
company. NESCL also owns 70% in NESI Energy Marketing Canada Ltd., (NEMC). On
November 27, 1996 NEMC ceased doing business. See "NESI Energy Marketing Canada
Ltd. Litigation" in the Notes to Consolidated Financial Statements in the 1996
Annual Report to Shareholders, which note is incorporated herein by reference
(see Exhibit 13). As of December 31, 1996, SLAKE had invested $17.1 million in
Canadian exploration and development projects. Estimated proved reserves
attributable to said projects were 812,000 barrels of oil and 22.6 billion
cubic feet of natural gas.
PEDCO. NESI acquired PEDCO in January 1996 to develop and expand the market
for energy efficient lighting.
Greenfuels. Greenfuels sells compressed natural gas (CNG) and liquefied
natural gas (LNG) for vehicular fuel. Greenfuels provides conversion kits and
assists in or performs the conversion of gasoline driven vehicles to CNG in
order to expand the market base.
TRIUMPH NATURAL GAS, INC. (TRIUMPH). Services owns 51% in Triumph. Triumph
is in the process of liquidation. The main issues to be resolved are the sale
of the Triark gas gathering assets and liquidation of the Arkoma Limited
Partnership. Proceeds from the liquidation of Arkoma are expected to be
sufficient to repay all indebtedness of Triumph and is expected in the second
quarter of 1997. 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 has filed a counterclaim seeking recovery of Services'
original investment. Trial is set for mid-June 1997.
PRIMARY. Primary arranges energy-related projects with large industrial
customers and has entered into certain commitments in connection with these
projects. Primary offers large industrial energy customers, nationwide,
expertise in managing the engineering, construction, operation and
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maintenance of these energy-related projects. Primary is the parent of certain
other subsidiaries, including Harbor Coal Company (Harbor Coal), North Lake
Energy Corporation (North Lake), Portside Energy Corporation (Portside),
Lakeside Energy Corporation (LEC), and Cokenergy, Inc. (CE).
Harbor Coal has invested in a partnership to finance, construct, own, and
operate a $65 million pulverized coal injection facility which began commercial
operation in August, 1993. The facility receives raw coal, pulverizes it and
delivers it to 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 located at Inland Steel Company. The facility uses steam generated by
Inland Steel to produce electricity to be delivered to Inland Steel. The
facility began commercial operations in May 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 a lease for the use of a 161-megawatt energy facility to
be located at USS Gary Works. The facility will process high pressure steam
into electricity and low pressure steam to be delivered to USX Corporation--US
Steel Group. The fifteen-year lease with a third-party lessor will commence
once the facility is fully constructed. LEC is currently acting as the agent
for the lessor to design, construct, and start up the energy facility. Capital
Markets has guaranteed LEC obligations to the lessor during the construction
period. Capital Markets also guarantees LEC's security deposit obligations
relative to the lease and certain limited LEC obligations to the lessor.
Construction of the project began in January 1996. The facility is scheduled to
be operational in May 1997.
Portside has entered into an agreement with National Steel Corporation
(National) to utilize a new 63-megawatt energy facility at National's Midwest
Division to process natural gas into electricity, process steam and heated
water for a fifteen-year period. Portside intends to lease this facility, once
constructed, from a third party. Additionally, Portside has entered into an
interim agreement, which expires when the lease is established with the third-
party lessor, under which Portside is acting as agent for the lessor to design,
construct, and start up the energy facility. Industries has guaranteed certain
Portside obligations to the lessor during construction. Capital Markets
anticipates guaranteeing certain Portside obligations relative to the
anticipated lease. Construction of the project began in June 1996. The facility
is scheduled to be operational in August 1997.
CE has entered into a fifteen-year service agreement with Inland Steel
Company and the Indiana Harbor Coke Company, LP (Harbor Coke), a subsidiary of
the Sun Company, Inc. This agreement provides that CE will utilize a new energy
facility at Inland's Indiana Harbor Works to scrub flue gases and recover waste
heat from the coke facility being constructed by Harbor Coke and produce
process steam and electricity from the recovered heat which will be delivered
to Inland. CE intends to lease these facilities, once constructed, from a third
party. Additionally, CE has entered into an interim agreement, which expires
when the lease is established with the third party lessor, under which CE is
acting as agent to design, construct and start up the facilities. Capital
Markets has guaranteed certain CE obligations during construction. Capital
Markets anticipates guaranteeing certain CE obligations relative to the
anticipated lease. Construction of the project began in January of 1997. The
facility is scheduled to be operational in July of 1998.
Primary has advanced approximately $42 million and $11 million, at December
31, 1996 and 1995, respectively, to the lessors of the energy related projects
discussed above. These net advances are included in "Current Assets--
Prepayments and other" in the Consolidated Balance Sheet and "Other, net" as a
component of operating activities in the Consolidated Statement of Cash Flows.
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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 electric or gas public utility companies. There may also be
limits on the extent to which Industries and its non-utility subsidiaries can
enter into businesses which are not "functionally related" to the electric and
gas businesses without raising questions about Industries' exempt status under
the Holding Company Act. SEC guidelines established in prior decisions of the
SEC require Industries to remain engaged primarily and 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. 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.
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 1996, about 4% of Northern Indiana's electric revenues were derived from
electric service it furnished at wholesale in interstate commerce to other
utility companies, municipalities and WVPA (see "Item 1. Business--Electric
Operations" regarding WVPA). Northern Indiana's wholesale rates and operations
are subject to the jurisdiction of the FERC. The jurisdiction of the FERC does
not extend to the issuance of securities by Northern Indiana since it is a
public utility organized and operating in the State of Indiana, under the laws
of which its security issues are regulated by the Commission. The FERC on
October 21, 1954, declared Northern Indiana exempt from the provisions of the
Natural Gas Act. Kokomo Gas and NIFL are also exempt from the provisions of the
Natural Gas Act.
8
<PAGE>
RATE MATTERS. For information regarding the regulated utilities' gas rates
and gas transition costs, see "FERC Order No. 636" in the Notes to Consolidated
Financial Statements in the 1996 Annual Report to Shareholders, which note is
incorporated herein by reference (see Exhibit 13).
Northern Indiana filed a petition for an Alternative Regulatory Plan (ARP)
with the Commission on November 29, 1995. The purpose of the ARP is to create a
business and regulatory environment and structure which will permit increased
choice for gas customers, competition among suppliers, and improved natural gas
service. In its ARP, Northern Indiana proposes to implement new rates and
services that would include, but not be limited to, further unbundling of
services for additional customer classes which would include increased customer
choice for sources of natural gas supply, negotiated services and prices, and
incentive gas and storage cost mechanisms. The Commission will hold hearings on
the ARP during the first half of 1997.
CONSTRUCTION BUDGET. The Utilities' 1997-2001 construction budget (including
allowance for funds used during construction) is estimated at approximately
$774 million, including $161 million in 1997, $166 million in 1998, $151
million in 1999, $146 million in 2000 and $150 million in 2001. The Utilities'
construction estimates include adjustments for anticipated inflation. No new
electric generating units are planned in the 1997-2001 budget. Northern Indiana
does not have, and has no plans to construct, a nuclear generating unit.
COMPETITION. In municipalities where Northern Indiana renders electric
service to the general public as a public utility, no other utility renders
electric or gas service, except in Angola, DeMotte, Rome City, Wanatah, and
Waterloo. In 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 no representation as to the possible effect
upon its business of present or future competition by private or municipal
utilities or governmental agencies, instrumentalities or authorities within the
territory now served.
Northern Indiana is also subject to competition for gas sales to industrial
customers through the ability of these customers, under Northern Indiana's rate
provisions, to make their own purchases of gas and have Northern Indiana
transport the gas to them. During 1996, gas transportation represented 54% of
Northern Indiana's total gas sendout.
Indiana law requires Commission approval before a gas customer of a utility
may bypass the utility and make other arrangements for gas service. Any entity
which transports gas from outside Indiana for direct sale or delivery to itself
or other end-users within the state will be considered a public utility and
must obtain a necessity certificate from the Commission in order to engage in
such activities.
See "Competition" in the Management's Discussion and Analysis of Financial
Condition and Results of Operations in the 1996 Annual Report to Shareholders,
which is incorporated herein by reference (see Exhibit 13).
9
<PAGE>
EMPLOYEE RELATIONS. Northern Indiana had 3,562 employees at December 31,
1996. Approximately 72% of Northern Indiana's employees (physical and clerical
workers) are represented by two local unions of the United Steelworkers of
America, AFL-CIO-CLC. Effective June 1, 1993, the bargaining unit employees
ratified four-year agreements which continue until June 1, 1997. Northern
Indiana intends to negotiate new agreements with the two local unions, but can
not predict the timing or terms of new agreements.
Certain officers of Northern Indiana are also officers of Industries.
Industries currently has 457 employees in its diversified operations.
Kokomo Gas had 72 full-time employees at December 31, 1996. 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 77 full-time employees at December 31, 1996, 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 $16.8
million to cover probable corrective actions as of December 31, 1996; however,
environmental regulations and remediation techniques are subject to future
change. The ultimate cost could be significant, depending on the extent of
corrective actions required. Based upon investigations and management's
understanding of current laws and regulations, the Utilities believe that any
corrective actions required, after consideration of insurance coverages and
contributions from other potentially responsible parties, will not have a
significant impact on the financial position or results of operations of
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.
Northern Indiana's total capital expenditures from January 1, 1992, through
December 31, 1996 for pollution control facilities were approximately $141
million and were financed in part by the sale of Pollution Control Notes and
Bonds--Jasper County. Northern Indiana anticipates expenditures of
approximately $50 million for pollution control equipment in the 1997-2001
period which includes anticipated expenditures of $29 million in 1997 and $6
million in 1998.
Air. The Indiana Department of Environmental Management (IDEM) Office of Air
Management has submitted to the U.S. Environmental Protection Agency (EPA) a
State Implementation Plan (SIP) in accordance with the requirements of the
Clean Air Act Amendments of 1977.
Attainment-Nonattainment. Under the Clean Air Act Amendments of 1977, the
State has identified areas which are in compliance with the National Ambient
Air Quality Standards
10
<PAGE>
(NAAQS) (attainment areas) and areas that are not in compliance with respect to
the sulfur dioxide, particulate matter and other pollutant standards
established by NAAQS (nonattainment areas). Portions of Lake County in which
Northern Indiana operates an electric generating facility remain designated a
nonattainment area for sulfur dioxide. Control plans for this county have been
implemented. Reductions in emissions of sulfur dioxide have been made, and
Northern Indiana anticipates no increased costs as a result of the
implementation of the control plans for Lake County. On January 14, 1997, the
EPA designated LaPorte County to attainment for sulfur dioxide.
Lake County, Indiana, is designated as a nonattainment area for particulate
matter or PM-10. The State of Indiana promulgated a PM-10 SIP rule, which
became effective on June 11, 1993. The rule requires reduced opacity and mass
emissions limits at Dean H. Mitchell Station as well as the establishment of
fugitive dust control and continuous compliance plans. Northern Indiana has
made investments in equipment and is currently in compliance with the PM-10 SIP
rules. Porter County has been determined to have an unclassified status for PM-
10. According to state requirements, the area will be monitored for PM-10
impacts to determine the appropriate 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 resulted in new provisions applicable to mobile and stationary sources in
Lake and Porter Counties. Control measures requiring reduction of emissions of
nitrogen oxides from the Mitchell and Bailly Generating Stations as a
consequence of the Lake Michigan Ozone Control Program have yet to be
determined. Northern Indiana is evaluating potential least-cost methods to
reduce emissions of nitrogen oxides from the generating stations. The EPA has
approved a conditional waiver from present reduction of nitrogen oxides under
Title I. Northern Indiana cannot determine the cost impact of the future
provisions.
Acid Rain. Title IV of the CAAA addresses the acid rain issue by targeting
large sources of sulfur dioxide and nitrogen oxides for significant reductions.
The core acid rain rules for sulfur dioxide were promulgated by the EPA on
January 11, 1993. As required by the regulations, Bailly Units 7 and 8 and
Michigan City Unit 12 reduced their sulfur dioxide emissions below 2.5 pounds
per million British thermal units (lbs/mm Btu) by January 1, 1995. These units,
along with the remainder of Northern Indiana's coal-fired units, are required
to reduce their sulfur dioxide emissions below 1.2 lbs/mm Btu by January 1,
2000 (Phase II).
Presently, all of Northern Indiana's eleven coal fired generating units
utilize low sulfur fuel or flue gas desulfurization units to control sulfur
dioxide emissions below the 1.2 lbs/mm Btu level. That places Northern Indiana
in compliance with the Phase II sulfur dioxide standards.
The EPA approved Northern Indiana's acid rain permits for the Bailly and
Michigan City Generating Stations on August 31, 1993. The Phase I acid rain
permits for the stations are effective from January 1, 1995 through December
31, 1999. One component of the permit is the Phase I extension plan for Bailly.
Northern Indiana was eligible for and received the extension because of the
construction and operation of the Bailly scrubber. This extension plan
allocates additional allowances, above the basic allowances, applicable to
Bailly and Michigan City Generating Stations.
Northern Indiana estimates that total costs of compliance with the CAAA
sulfur dioxide regulations will impact electric rates by less than 5% in the
future.
11
<PAGE>
Northern Indiana is pursuing nitrogen oxide reduction measures to meet future
acid rain requirements. The EPA proposed Phase II nitrogen oxide limits in
January of 1996. The final rules were signed by the EPA Administrator on
December 10, 1996. The nitrogen oxides emission limits in the final rules
potentially apply to all of Northern Indiana's electric generating facilities.
Although there is a legal challenge to the final rule, plans will be prepared
to meet compliance with the final rules. On December 30, 1996, Northern Indiana
filed permit applications requesting early election of Northern Indiana's Phase
II pulverized coal boilers. The permits when approved by the EPA will establish
limits based on the Phase I nitrogen oxides emission standards for the seven
boilers during the following ten year period.
Additional Air Issues. The CAAA contain provisions that could lead to
limitations on emissions of nitrogen oxides and hazardous air pollutants, which
may require significant capital expenditures for control of these emissions.
Northern Indiana is pursuing a nitrogen oxide control program to meet future
requirements. Northern Indiana cannot predict the costs of complying with CAAA
requirements.
The EPA has promulgated a permit program to meet the requirements of Title V
of the CAAA. The IDEM, on November 3, 1993, proposed an air operating permit
program to meet the requirements of Title V to Indiana's Air Pollution Control
Board. The Air Pollution Control Board adopted rules to implement the Title V
permit program on March 10, 1994. These operating permit rules, including a new
fee schedule, became effective in Indiana on June 24, 1994. Indiana submitted
the Title V rules to the EPA for approval in August of 1994. The EPA has
approved the submittal and the rules became effective December 14, 1995.
Northern Indiana submitted Title V permit applications for each of the four
electric generating stations during September 1996.
Water. The Clean Water Act, as amended, subjects point source dischargers to
technology and water quality based controls through the National Pollution
Discharge Elimination System (NPDES) permit program. Northern Indiana is
required to have NPDES permits for discharges from its generating stations into
the waters of the United States. The Great Lakes Water Quality Initiative (GLI)
is a complex set of water quality regulations governing dischargers in the
Great Lakes drainage basin. This regulation became effective February 13, 1997
and will affect the NPDES permits for Northern Indiana's three lakeside
stations. As of this date, the Bailly Station NPDES permit has not been renewed
by IDEM. Northern Indiana anticipates that IDEM will issue the new Bailly
permit under the GLI regulations. The Mitchell, Michigan City, and R. M.
Schahfer Stations' NPDES permits expire in August 1998. Northern Indiana
received NPDES permit modifications for intermittent chemical treatment of the
main discharge at the Mitchell and Michigan City Stations for zebra mussel
control. Bailly Station utilizes thermal treatment in its water systems to
control zebra mussels. Schahfer Station has not presently experienced
operational impacts due to zebra mussels. Rather, Schahfer Station has
experienced equipment problems due to an Asiatic clam infestation. Alternate
forms of control are being investigated by Northern Indiana in an effort to
prevent any impact on plant operations relating to these infestations, while
also minimizing the environmental impact of the controls.
Superfund Sites. The EPA has notified Northern Indiana that it is a
"potentially responsible party" (PRP) under the Comprehensive Environmental
Response Compensation and Liability Act (CERCLA) and may be required to share
in the cost of cleanup of several waste disposal sites identified by the EPA.
The sites are in various stages of investigation, analysis, and remediation. At
each of the sites, Northern Indiana is one of several PRPs, and it is expected
that remedial costs, as provided under CERCLA, will be shared among them. At
some sites, Northern Indiana and/or the other named PRPs are presently working
with the EPA to clean up the sites and avoid the imposition of fines or added
costs.
12
<PAGE>
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. Initial samplings have been conducted
at seventeen sites. Follow-up investigations have been conducted at seven 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 in 1992 of the release of a petroleum
substance into the St. Mary's River in Fort Wayne, Indiana, from the site of a
former manufactured-gas plant formerly owned by Northern Indiana. In
cooperation with IDEM, Northern Indiana has taken steps to investigate and
contain the substance. Northern Indiana has remediated part of the Fort Wayne
site. The remainder of the site is being evaluated to determine what future
remedial measures, if any, may be needed.
During the course of investigation activities, Northern Indiana noted the
presence of manufactured-gas plant residuals in the St. Mary's River in Fort
Wayne, Indiana and the Wabash River in Peru, Indiana. Northern Indiana notified
IDEM and the EPA and immediately took steps to contain the material at both
sites.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have entered
into an agreement covering cost sharing and management of investigation and
remediation programs at five former manufactured-gas plant sites at which both
companies or their predecessors were former operators or owners. One of these
sites is the Lafayette site which Indiana Gas had previously notified Northern
Indiana is being investigated and remediated pursuant to an administrative
order with IDEM. Northern Indiana also notified Cinergy Services, Inc.
(Cinergy) (formerly PSI Energy, Inc.) that it was a former owner or operator of
seven former manufactured-gas plants at which Northern Indiana had conducted or
was planning investigation or remediation activities. In December 1996,
Northern Indiana sent a written demand to Cinergy related to one of these
sites, Goshen. Northern Indiana demanded that Cinergy pay Northern Indiana for
costs Northern Indiana has already incurred and to be incurred to implement the
needed remedy at the Goshen site.
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. Both sides have
motions pending in the Federal Court lawsuit that would be dispositive of the
case. Northern Indiana has obtained cash settlements with some of its insurers.
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, "Environmental Remediation Liabilities."
This statement provides authoritative guidance for recognition, measurement,
display, and disclosure of environmental remediation liabilities in financial
statements. The Utilities will adopt this standard on January 1, 1997 and
adoption will not have a material impact on Industries' financial position or
results of operations.
13
<PAGE>
Electric And Magnetic Fields. The possibility that exposure to electric and
magnetic fields (EMF) emanating from power lines, household appliances and
other electric sources may result in adverse health effects has been the
subject of public, governmental, and media attention. Recently, the U.S.
National Research Council of the National Academy of Sciences concluded in a
report, after examining more than 500 EMF studies spanning seventeen years,
that among other things, there is insufficient evidence to consider EMF a
threat to human health. Despite the report's findings, future research
appropriations are continuing to be dedicated to explore the issue.
----------------
It is not possible to predict the scope, enforceability or financial impact
of other environmental regulations or standards which may be established in the
future.
ITEM 2. PROPERTIES.
The physical properties of 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,
1996, Northern Indiana generated 83.8% and purchased 16.2% of its electric
requirements.
Northern Indiana has 292 substations with an aggregate transformer capacity
of 22,877,400 kva. Its transmission system with voltages from 34,500 to 345,000
consists of 3,052 circuit miles of line. The electric distribution system
extends into 21 counties and consists of 7,692 circuit miles of overhead and
1,338 cable miles of underground primary distribution lines operating at
various voltages from 2,400 to 12,500 volts. Northern Indiana has distribution
transformers having an aggregate capacity of 11,050,855 kva and 434,851
electric watt-hour meters.
GAS. Northern Indiana has an underground storage field at Royal Center and a
liquefied natural gas plant in LaPorte County, both of which are described
under "Item 1. Business--Gas Operations." Northern Indiana has 13,195 miles of
gas mains.
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 738 miles of gas mains.
NIFL has 789 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.
14
<PAGE>
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 Triumph Natural Gas, Inc." and as described
under the captions "Pending Tax Matter," "Elm Energy and Recycling (UK) Ltd.,"
"NESI Energy Marketing Canada Ltd. Litigation," and "Environmental Matters" in
the Notes to Consolidated Financial Statements in the 1996 Annual Report to
Shareholders, which notes are incorporated herein by reference (see Exhibit
13). 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.
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 57 Chairman, President, Chief March 1, 1993
Executive Officer and Director
Stephen P. Adik 53 Executive Vice President and Chief January 1, 1994
Financial Officer, and
Treasurer
Patrick J. 55 Executive Vice President and Chief July 1, 1996
Mulchay Operating Officer, Northern Indiana
Public Service Company
Jeffrey W. Yundt 51 Executive Vice President and Chief July 1, 1996
Operating Officer, Energy Services
Joseph L. Turner, 60 Executive Vice President, Major Accounts July 1, 1996
Jr.
Jerry M. Springer 64 Controller and Assistant Secretary April 13, 1994
Dennis E. Senchak 51 Assistant Treasurer January 1, 1994
Nina M. Rausch 53 Secretary July 1, 1992
</TABLE>
15
<PAGE>
Throughout the past five years, each of the executive officers of Industries
has been continuously active in the business of Industries or Northern Indiana.
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>
1996 1995
------------- -------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter...... 39 1/8 35 7/8 32 1/4 29 1/4
Second Quarter..... 40 1/4 35 1/4 35 1/4 30 3/4
Third Quarter...... 40 1/4 35 3/4 34 7/8 32 1/8
Fourth Quarter..... 39 7/8 35 7/8 38 1/2 34 1/2
</TABLE>
As of February 28, 1997, Industries had 34,974 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 $0.39 per share during
1995 and quarterly common dividends of $0.42 per share during 1996. At its
December 17, 1996 meeting Industries' Board of Directors increased the
quarterly common dividend to $0.45 per share, payable February 20, 1997.
Holders of Industries' common shares are 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, 1996, Northern Indiana had
approximately $146.0 million of retained earnings (earned surplus) available
for the payment of dividends. Future common share dividends by Northern Indiana
will depend upon adequate retained earnings, adequate future earnings and the
absence of adverse developments.
So long as any shares of Northern Indiana's cumulative preferred stock are
outstanding, no cash dividends shall be paid on its common shares in excess of
75% of the net income available therefor for the preceding calendar year unless
the aggregate of the capital applicable to stocks subordinate as to assets and
dividends to the cumulative preferred stock plus the surplus, after giving
effect to such dividends, would equal or exceed 25% of the sum of all
obligations evidenced by bonds, notes, debentures or other securities, plus the
total capital and surplus. At December 31, 1996, the sum of the capital
applicable to stocks subordinate to the cumulative preferred stock plus the
surplus was equal to 40% of the total capitalization including surplus.
16
<PAGE>
In connection with the foregoing discussion, see "Common Share Dividend" in
the Notes to Consolidated Financial Statements in the 1996 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,
------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues
(000's)................ $1,821,625 $1,722,325 $1,676,401 $1,677,872 $1,582,356
Net income (000's)...... $ 176,734 $ 175,465 $ 163,987 $ 156,140 $ 136,648
Earnings per average
common share .......... $2.88 $2.72 $2.48 $2.31 $2.00
Total assets (000's).... $4,274,343 $3,999,520 $3,947,138 $3,912,324 $3,807,941
Long-term obligations
and redeemable pre-
ferred stock (000's)... $1,188,352 $1,274,379 $1,281,395 $1,295,962 $1,160,122
Cash dividends declared
per common share....... $1.71 $1.59 $1.47 $1.35 $1.26
</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 1996 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).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following Consolidated Financial Statements and Supplementary Data are
included in the 1996 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,
1996, 1995 and 1994
Consolidated Balance Sheet at December 31, 1996 and 1995
Consolidated Statement of Capitalization at December 31, 1996 and
1995
Consolidated Statement of Long-term Debt at December 31, 1996 and
1995
Consolidated Statement of Cash Flows for the years ended December
31, 1996, 1995 and 1994
Consolidated Statement of Common Shareholders' Equity for the
years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
(2) Supplementary Data--
Selected Supplemental Information
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
17
<PAGE>
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 2-6 in the Notice of
Annual Meeting and Proxy Statement dated March 7, 1997, for Annual Meeting to
be held April 9, 1997, which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation is included at pages 8-10 and
12-19 in the Notice of Annual Meeting and Proxy Statement dated March 7, 1997,
for Annual Meeting to be held April 9, 1997, 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 7 in the Notice of Annual Meeting and Proxy
Statement dated March 7, 1997, for Annual Meeting to be held April 9, 1997,
which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
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 1996 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,
---------------------
1996 1995
---------- ----------
(DOLLARS IN
THOUSANDS)
ASSETS
- ------
<S> <C> <C>
Property:
Property in service.......................................... $ 2,620 $ 2,681
Construction work in progress................................ 76 12
Less: accumulated depreciation............................... 541 466
---------- ----------
Total property........................................... 2,155 2,227
---------- ----------
Investments (principally investments in wholly-owned
subsidiaries)................................................. 1,097,173 1,097,621
---------- ----------
Current Assets:
Cash and cash equivalents.................................... 455 4,707
Amounts receivable from subsidiaries......................... 75,508 70,721
Prepayments.................................................. 3,647 4,818
---------- ----------
Total current assets..................................... 79,610 80,246
---------- ----------
Other (principally notes receivable from associated companies). 303,373 220,682
---------- ----------
$1,482,311 $1,400,776
========== ==========
<CAPTION>
CAPITALIZATION AND LIABILITIES
- ------------------------------
<S> <C> <C>
Capitalization:
Common shares................................................ $ 870,930 $ 870,930
Cumulative preferred shares with mandatory redemption
provisions.................................................. -- 35,000
Additional paid-in capital................................... 32,868 32,210
Retained earnings............................................ 591,370 518,837
Less: Treasury shares........................................ 392,995 293,223
Unearned compensation...................................... 1,532 4,609
Currency translation adjustment............................ 140 1,930
---------- ----------
Total capitalization..................................... 1,100,501 1,157,215
---------- ----------
Current Liabilities:
Dividends declared on common and preferred stock............. 27,053 26,829
Amounts payable to subsidiaries.............................. 30,340 31,431
Other........................................................ 5,085 1,176
---------- ----------
Total current liabilities................................ 62,478 59,436
---------- ----------
Other (principally notes payable to associated companies)...... 319,332 184,125
---------- ----------
Commitments and Contingencies (Note 3):
$1,482,311 $1,400,776
========== ==========
</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,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Equity in net earnings of subsidiaries...... $ 185,106 $ 180,827 $ 167,780
---------- ---------- ----------
Other income (deductions):
Administrative and general expense........ (10,167) (9,854) (5,560)
Interest income........................... 21,443 15,575 11,289
Interest expense.......................... (20,604) (12,274) (8,741)
Other, net................................ 1,543 (663) (1,727)
---------- ---------- ----------
(7,785) (7,216) (4,739)
---------- ---------- ----------
Net income before income taxes.............. 177,321 173,611 163,041
Income taxes................................ 587 (1,854) (946)
---------- ---------- ----------
Net income.................................. 176,734 175,465 163,987
Dividend requirements on preferred shares... 119 3,063 3,063
---------- ---------- ----------
Balance available for common shareholders... $ 176,615 $ 172,402 $ 160,924
========== ========== ==========
Average common shares outstanding........... 61,190,750 63,281,177 64,820,039
Earnings per average common share........... $ 2.88 $ 2.72 $ 2.48
========== ========== ==========
</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,
-----------------------------
1996 1995 1994
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by operating activities....... $ 183,867 $184,300 $157,613
--------- -------- --------
Cash flows provided by (used in) investing
activities:
Capital expenditures.......................... (22) (100) (954)
Sale of property.............................. 83 935 --
--------- -------- --------
Net cash provided by (used in) investing
activities................................. 61 835 (954)
--------- -------- --------
Cash flows provided by (used in) financing
activities:
Issuance of common shares..................... 5,716 7,389 2,060
Increase (decrease) in notes payable to
subsidiaries................................. 133,298 41,211 21,262
Increase in notes receivable from
subsidiaries................................. (82,740) (58,479) (26,254)
Redemption of cumulative preferred shares with
mandatory redemption provisions.............. (35,000) -- --
Cash dividends paid on common shares.......... (103,190) (99,043) (93,578)
Cash dividends paid on preferred shares....... (766) (3,063) (3,063)
Acquisition of treasury shares................ (105,498) (69,183) (58,717)
--------- -------- --------
Net cash used in financing activities....... (188,180) (181,168) (158,290)
--------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... (4,252) 3,967 (1,631)
Cash and cash equivalents at beginning of year.. 4,707 740 2,371
--------- -------- --------
Cash and cash equivalents at end of year........ $ 455 $ 4,707 $ 740
========= ======== ========
</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): $184,750, $183,475
and $174,245 in 1996, 1995, and 1994, 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 $518.9 million at
December 31, 1996.
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.
- --------
See also Notes to Consolidated Financial Statements in the 1996 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, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 1996 EXPENSES ACCOUNTS WERE CREATED 1996
----------- ------- --------- -------- ------------ --------
(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...................... $7,264 $ 6,912 $-- $8,607 $ 5,569
Reserve for investments, at
equity..................... $ 850 $ 1,103 $-- $ -- $ 1,953
Reserves Classified Under Re-
serve Section of Consoli-
dated Balance Sheet:
Injuries and damages re-
serve...................... $1,837 $ 4,875 $-- $2,336 $ 4,376
Environmental reserves...... $5,006 $15,862 $-- $4,079 $16,789
Miscellaneous operating re-
serves..................... $4,091 $ 380 $-- $ -- $ 4,471
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
23
<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
Environmental reserves...... $3,610 $3,188 $-- $1,792 $5,006
Miscellaneous operating re-
serves..................... $4,061 $ 30 $-- $ -- $4,091
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
24
<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
Environmental reserves...... $2,371 $3,381 $-- $2,142 $3,610
Miscellaneous operating re-
serves..................... $3,731 $ 330 $-- $ -- $4,061
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1996,
incorporated by reference in this Form 10-K, and have issued our report thereon
dated January 28, 1997. 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.
Arthur Andersen LLP
Chicago, Illinois
January 28, 1997
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 26, 1997 /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
- ------------------------------------
Steven C. Beering Director
- ------------------------------------
Arthur J. Decio Director
/s/ Ernestine M. Raclin
- ------------------------------------
Ernestine M. Raclin Director March 26, 1997
/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) By-laws effective August 27, 1996 (incorporated by reference to Exhibit 3 to the
NIPSCO Industries, Inc. Quarterly Report on Form 10-Q for the quarter ended Sep-
tember 30, 1996).
(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) 1996 Annual Report to Shareholders for pages 23-53.
(21) List of Subsidiaries.
(23) Consent of Arthur Andersen LLP.
(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>
GRAPHIC MATERIAL CROSS-REFERENCE PAGE
CAPITALIZATION RATIO CHART SHOWS PERCENT OF LONG-TERM DEBT, COMMON SHARE
EQUITY AND PREFERRED AND PREFERENCE STOCK FOR YEARS 1987-1996.
COST OF FUEL FOR ELECTRIC GENERATION CHART SHOWS IN MILLS PER KWH THE COST OF
FUEL FOR ELECTRIC GENERATION FOR YEARS 1987-1996.
COST OF GAS PURCHASED FOR RESALE CHART SHOWS IN DOLLARS PER DEKATHERM THE COST
OF GAS PURCHASED FOR RESALE FOR YEARS 1987-1996.
<PAGE>
EXHIBIT 11
NIPSCO INDUSTRIES, INC.
COMPUTATION OF PER SHARE EARNINGS
TWELVE MONTHS ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FULLY
PRIMARY DILUTED
---------- ----------
<S> <C> <C>
Weighted Average Number of Shares
Average Common Shares Outstanding at 12/31/96.... 61,190,750 61,190,750
Dilutive Effect for Nonqualified Stock Options at
12/31/96........................................ 238,218 273,299
---------- ----------
Weighted Average Shares at 12/31/96.............. 61,428,968 61,464,049
========== ==========
Net Income to be Used to Compute
Earnings Per Average Common Share
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Net Income....................................... $ 176,734 $ 176,734
Dividend Requirements on Preferred Shares........ 119 119
---------- ----------
Balance Available for Common Shareholders........ $ 176,615 $ 176,615
========== ==========
Earnings Per Average Common Share.................. $ 2.88(a) $ 2.87(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, 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%.
31
<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%.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
32
<PAGE>
EXHIBIT 13
NIPSCO Industries, Inc.
INDEX
-----
PAGE
----
1996 Annual Report to Shareholders.
- - Management's Discussion and Analysis of Financial Condition
and Results of Operations. 23
- - Consolidated Statement of Income. 29
- - Consolidated Balance Sheet. 30
- - Consolidated Statement of Capitalization. 32
- - Consolidated Statement of Long-Term Debt. 33
- - Consolidated Statement of Cash Flows. 34
- - Consolidated Statement of Common Shareholders' Equity. 35
- - Notes to Consolidated Financial Statements. 35
- - Report of Independent Public Accountants. 50
- - Selected Supplemental Information. 51
<PAGE>
1996 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 1996, net income of Industries increased to $176.7 million, or earnings
of $2.88 per average common share, compared to $175.5 million, or earnings of
$2.72 per average common share, for 1995. There were approximately 2.1 million
fewer average common shares outstanding in 1996 than 1995. In 1994, net income
was $164.0 million, or earnings of $2.48 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 $99.3 million, or 5.8%, over 1995. Operating
revenues in 1995 increased $45.9 million, or 2.7%, from 1994.
During 1996, gas deliveries in dekatherms (dth), which include
transportation services, increased 6.6%. Gas sales in 1996 increased 14.5% due
to higher sales to residential and commercial customers as a result of colder
weather during the first quarter of 1996, and increased sales to industrial
and wholesale customers. Gas transportation services increased 1.6% mainly due
to increased deliveries by Crossroads, which were partially offset by
decreased deliveries to Northern Indiana's industrial customers. The Utilities
had approximately 718,400 gas customers at December 31, 1996. During 1995, gas
deliveries increased 2.9% over 1994. 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.
Gas revenues were $799.4 million in 1996, an increase of $108.0 million from
1995. The increase in gas revenues was mainly due to increased sales to
residential and commercial customers as a result of colder weather during the
first quarter of 1996, increased sales to industrial and wholesale customers,
and increased gas costs per dth, which were partially offset by decreased gas
transition costs. Gas revenues were $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 the result of
colder weather during the fourth quarter of 1995, and increased gas transition
charges partially offset by decreased gas costs. The large commercial and
industrial customers continued to utilize transportation services provided by
the Utilities. Gas transportation customers
23
<PAGE>
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 194.4, 191.6, and 188.6 million dth in 1996, 1995,
and 1994, respectively.
In 1996, sales of electricity in kilowatt-hours (kwh) decreased 1.1% from
1995 mainly due to decreased sales to residential customers due to cooler
summer weather in 1996, and decreased sales to industrial customers due to
operational difficulties at several major industrial customers, which were
partially offset by increased sales to commercial and wholesale customers.
Northern Indiana had approximately 411,500 electric customers at December 31,
1996. In 1995, sales of electricity in kwh increased 8.9% over 1994 mainly due
to higher sales to residential and commercial customers as a result of warmer
weather in the third quarter of 1995, and increased sales to wholesale
customers.
In 1996, electric revenues were $1.022 billion, a decrease of $8.7 million
from 1995. The decrease in electric revenues was mainly due to decreased sales
to residential customers due to cooler summer weather in 1996, and decreased
sales to industrial customers due to operational difficulties at several major
industrial customers, which were partially offset by increased sales to
commercial and wholesale customers. In 1995, electric revenues were $1.031
billion, an increase of $36.4 million from 1994. The increase in electric
revenues 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 partially offset by lower fuel
costs per kwh and to transitional rate adjustments to industrial customers
signing new five-year contracts early in 1995.
The components of the changes in gas and electric revenues are shown in the
following tables:
<TABLE>
<CAPTION>
YEAR 1996 YEAR 1995
COMPARED TO COMPARED TO
YEAR 1995 YEAR 1994
----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Gas Revenue
Pass through of net changes in purchased gas
costs, gas storage and storage transportation
costs........................................... $ 55.3 $(59.2)
Gas transition costs............................. (33.5) 47.4
Changes in sales levels.......................... 85.6 22.4
Gas transported.................................. 0.6 (1.1)
------ ------
Gas Revenue Change................................. $108.0 $ 9.5
------ ------
Electric Revenue
Pass through of net changes in fuel costs........ $ 3.2 $(14.6)
Changes in sales levels.......................... (11.9) 51.0
------ ------
$ (8.7) $ 36.4
------ ------
Total Revenue Change........................... $ 99.3 $ 45.9
====== ======
</TABLE>
See Rate Matters in Notes to Consolidated Financial Statements regarding
FERC Order No. 636 transition costs.
The basic steel industry accounted for 29% of natural gas delivered
(including volumes transported) and 35% of electric sales during 1996.
The Utilities' rate schedules for electric and gas service to their
customers contain an electric rate adjustment clause for changes in the cost
of fuel and firm purchases of electric energy; and gas rate adjustment clauses
to reflect changes in the cost of gas purchased, contracted gas storage and
storage transportation costs. (See Fuel Adjustment Clause and Gas Cost
Adjustment Clause under Summary of Significant Accounting Policies in Notes to
Consolidated Financial Statements.)
24
<PAGE>
GAS COSTS
The Utilities' gas costs increased $84.6 million (21.2%) in 1996 due to
increased purchases and increased gas costs per dth, which were partially
offset by decreased gas transition costs. The average cost for the Utilities
purchased gas in 1996, after adjustment for gas transition costs billed to
transport customers, was $3.07 per dth as compared to $2.68 per dth in 1995.
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 transition charges billed to
transport customers, was $2.68 per dth as compared to $2.95 per dth in 1994.
FUEL AND PURCHASED POWER
Cost of fuel for electric generation in 1996 decreased mainly as a result of
decreased production. The average cost per kwh generated decreased 0.6% from
1995 to 15.79 mills. The cost of fuel for electric generation decreased in
1995 from 1994 mainly as a result of lower costs for coal and was partially
offset by increased production. The average cost per kwh generated decreased
5.7% from 1994 to 15.89 mills.
Power purchased increased $10.1 million in 1996 as a result of increased
bulk power purchases and increased cost per megawatt purchased. Power
purchased increased $11.1 million in 1995 mainly as a result of increased bulk
power purchases from other utilities due to increased sales.
OPERATION MARGINS
Operating margins increased $13.7 million in 1996 to $1.051 billion. The gas
operating margin increased $23.4 million in 1996 due to increased sales to
residential and commercial customers reflecting colder weather during the
first quarter of 1996, increased sales to industrial and wholesale customers,
and increased deliveries of gas transported for others. Operating margin from
electric sales decreased $9.7 million due to decreased sales to residential
customers reflecting cooler summer weather in 1996, and decreased sales to
industrial customers due to plant operational difficulties at several major
customers, which were partially offset by increased sales to commercial and
wholesale customers. Operating margins increased $43.9 million in 1995 to
$1.037 billion. The gas operating margin 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 EXPENSES AND TAXES
Operating expenses and taxes (except income) in 1996 increased 1.5% from
1995 to $653.6 million and in 1995 increased 1.5% from 1994 to $643.8 million.
Operation expenses increased $3.3 million in 1996 over 1995 due to increased
pollution control facility costs, environmental costs of $5.9 million, and
other various increased operating costs partially offset by reduced pension
costs. Operation expenses increased $3.2 million in 1995 from 1994 reflecting
a December 1995 Indiana Utility Regulatory Commission (Commission) order to
refund $3.4 million to electric customers related to a 1992 insurance
settlement previously credited to operating and maintenance expenses.
Maintenance expenses decreased $8.3 million in 1996 from 1995 mainly
reflecting decreased maintenance activity at electric production facilities
and gas underground storage facilities. Maintenance expenses decreased $1.9
million in 1995 from 1994 due to reduced maintenance activities.
Depreciation and amortization expense increased $13.9 million in 1996 from
1995 resulting from plant additions, increased amortization of computer
software, and the amortization of deferred costs related to scrubber services
provided by Pure Air at the Bailly Generating Station. Depreciation and
amortization expenses increased $6.9 million in 1995 from 1994 mainly due to
net plant additions.
25
<PAGE>
Utility income taxes increased $2.5 million in 1996 from 1995 mainly as a
result of increased pre-tax income and increased $10.7 million in 1995 from
1994 mainly due to higher pre-tax operating income.
Other Income (Deductions) increased $9.9 million in 1996 from 1995 mainly
reflecting improved results from non-regulated operations and the sale of
Crescent Dunes Lakeshore property to the National Park Service. 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.
Interest and other charges increased $10.0 million and $5.8 million in 1996
and 1995, respectively. The 1996 increase reflects the issuance of
$169,275,000 of Northern Indiana's Medium-Term Notes, Series D, and $75
million of Capital Markets' Junior Subordinated Deferrable Interest
Debentures, Series A, and the discontinuance of carrying charges on deferred
charges related to the Bailly Generating Station scrubber service agreement.
The 1995 increase reflects increases in short-term borrowing rates and long-
term debt outstanding partially offset by reduced dividend requirements on
Northern Indiana preferred stock.
See Notes to Consolidated Financial Statements for a discussion of
Regulatory Assets, Carrying Charges and Deferred Depreciation, Allowance for
Funds Used During Construction, FERC Order No. 636, Income Taxes, and
Postretirement Benefits.
ENVIRONMENTAL MATTERS
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 $16.8
million to cover probable corrective actions as of December 31, 1996; however,
environmental regulations and remediation techniques are subject to future
change. The ultimate cost could be significant, depending on the extent of
corrective actions required. Based upon investigations and management's
understanding of current laws and regulations, the Utilities believe that any
corrective actions required, after consideration of insurance coverages and
contributions from other potentially responsible parties, will not have a
significant impact on the financial position or results of operations of
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 acid
deposition provisions of the Clean Air Act Amendments of 1990 (CAAA). Northern
Indiana estimates that total costs of compliance with the CAAA sulfur dioxide
regulations will impact electric rates by less than 5% in the future.
The CAAA contain provisions that could lead to limitations on emissions of
nitrogen oxides and hazardous air pollutants which may require significant
capital expenditures for control of these emissions. Northern Indiana is
pursuing a nitrogen oxide control program to meet future requirements.
Northern Indiana cannot predict the costs of complying with CAAA requirements.
The Environmental Protection Agency (EPA) has notified Northern Indiana that
it is a "potentially responsible party" (PRP) under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) and may be
required to share in the cost of cleanup of several waste disposal sites
identified by the EPA. The sites are in various stages of investigation,
analysis, and remediation. At each of the sites, Northern Indiana is one of
several PRPs, and it is expected that remedial costs, as provided under
CERCLA, will be shared among them. At some sites, Northern Indiana and/or the
other named PRPs are presently working with the EPA to clean up the sites and
avoid the imposition of fines or added costs.
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. Initial samplings have been conducted at seventeen sites. Follow-
up investigations have been
26
<PAGE>
conducted at seven 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 will be to obtain IDEM approval of the
determination and subsequent implementation of what remedial measures, if any,
may be needed.
Northern Indiana was notified by IDEM in 1992 of the release of a petroleum
substance into the St. Mary's River in Fort Wayne, Indiana, from the site of a
former manufactured-gas plant formerly owned by Northern Indiana. In
cooperation with IDEM, Northern Indiana has taken steps to investigate and
contain the substance. Northern Indiana has remediated part of the Fort Wayne
site. The remainder of the site is being evaluated to determine what further
remedial measures, if any, may be needed.
During the course of investigation activities, Northern Indiana noted the
presence of manufactured-gas plant residuals in the St. Mary's River in Fort
Wayne, Indiana and the Wabash River in Peru, Indiana. Northern Indiana
notified IDEM and the EPA and immediately took steps to contain the material
at both sites.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have entered
into an agreement covering cost sharing and management of investigation and
remediation programs at five former manufactured-gas plant sites at which both
companies or their predecessors were former operators or owners. One of these
sites is the Lafayette site which Indiana Gas had previously notified Northern
Indiana is being investigated and remediated pursuant to an administrative
order with IDEM. Northern Indiana also notified Cinergy Services, Inc.
(Cinergy) (formerly PSI Energy, Inc.) that it was a former owner or operator
of seven former manufactured-gas plants at which Northern Indiana had
conducted or was planning investigation or remediation activities. In December
1996, Northern Indiana sent a written demand to Cinergy related to one of
these sites, Goshen. Northern Indiana demanded that Cinergy pay Northern
Indiana for costs Northern Indiana has already incurred and to be incurred to
implement the needed remedy at the Goshen site.
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. Both sides
have motions pending in the Federal Court lawsuit that would be dispositive of
the case. Northern Indiana has obtained cash settlements from some of its
insurers.
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, "Environmental Remediation Liabilities."
This statement provides authoritative guidance for recognition, measurement,
display, and disclosure of environmental remediation liabilities in financial
statements. The Utilities will adopt this standard on January 1, 1997 and
adoption will not have a material impact on Industries' financial position or
results of operations.
The possibility that exposure to electric and magnetic fields (EMF)
emanating from power lines, household appliances and other electric sources
may result in adverse health effects has been the subject of public,
governmental, and media attention. Recently, the U.S. National Research
Council of the National Academy of Sciences concluded in a report, after
examining more than 500 EMF studies spanning seventeen years, that among other
things, there is insufficient evidence to consider EMF a threat to human
health. Despite the report's findings, future research appropriations are
continuing to be dedicated to explore the issue.
LIQUIDITY AND CAPITAL RESOURCES
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.
27
<PAGE>
Construction expenditures by Industries for 1996, 1995, and 1994 were
approximately $208 million, $193 million, and $203 million, respectively.
Industries' total utility plant investment on December 31, 1996, was $5.7
billion.
During 1996, Industries' non-utility subsidiaries acquired interests in
other properties and investments totaling approximately $36 million.
In 1994, the Commission authorized Northern Indiana to issue up to
$289,275,000 of its Medium-Term Notes, Series D, due from one year to thirty
years, for purposes of refinancing certain first mortgage bonds and medium-
term notes. During 1994, $120.0 million of the Medium-Term Notes, Series D,
were issued to refinance certain first mortgage bonds. On June 12, 1995, the
remaining $169,275,000 of Medium-Term Notes, Series D, were issued and part of
the proceeds were used to redeem all of the outstanding First Mortgage Bonds,
Series U and Z, aggregating $94.8 million, on July 3, 1995.
On February 13, 1996, Capital Markets issued $75 million of 7 3/4% Junior
Subordinated Deferrable Interest Debentures, Series A, due March 31, 2026
(Debentures) pursuant to an underwritten public offering. Proceeds from the
sale of the Debentures were used to pay short-term debt incurred to redeem on
January 12, 1996 Industries' $35 million of 8.75% Preferred Shares, pursuant
to mandatory redemption, and to pay other short-term debt of Capital Markets.
Capital Markets expects to refinance its 7.57% Zero Coupon Notes maturing in
the amount of $72.5 million on December 1, 1997.
Capital Markets has a $150 million revolving Credit Agreement which
terminates August 19, 1999, 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, 1996,
there were no borrowings outstanding under this agreement.
Capital Markets also has $95 million of money market lines of credit. As of
December 31, 1996, $27.0 million of borrowings were outstanding under these
lines of credit.
As of December 31, 1996, Capital Markets had $119.3 million in commercial
paper outstanding, having a weighted average interest rate of 5.78%.
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 $518.9 million at December 31, 1996.
Cash flow from operations has provided sufficient liquidity to meet current
operating requirements. Because of the seasonal nature of the utility business
and the construction program, Northern Indiana makes use of commercial paper
intermittently as short-term financing. As of December 31, 1996, Northern
Indiana had $193.9 million in commercial paper outstanding, having a weighted
average interest rate of 5.43%.
Northern Indiana has a $250 million revolving Credit Agreement with several
banks which terminates August 19, 1999, unless extended by its terms. As of
December 31, 1996, there were no borrowings outstanding under this agreement.
In addition, Northern Indiana has $14.2 million in lines of credit which run
to May 31, 1997 which are expected to be renewed for the subsequent twelve-
month period. The credit pricing of each of the lines varies from either the
lending banks' commercial prime or market rates. Northern Indiana has agreed
to compensate the participating banks with arrangements that vary from no
commitment fees to a combination of fees which are mutually satisfactory to
both parties. As of December 31, 1996, there were no borrowings under these
lines of credit. The Credit Agreement and lines of credit are also available
to support the issuances of commercial paper.
28
<PAGE>
Northern Indiana also has $273.5 million of money market lines of credit. As
of December 31, 1996, $79.0 million of borrowings were outstanding under these
lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At December
31, 1996, 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. On April 24, 1996, the FERC issued its Order
No. 888 which opens wholesale power sales to competition and requires public
utilities owning, controlling, or operating transmission lines to file non-
discriminatory open access tariffs that offer others the same transmission
service they provide themselves. Order No. 888 also provides for the full
recovery of stranded costs--that is, costs that were prudently incurred to
serve power customers and that could go unrecovered if these customers use
open access to move to another supplier. FERC expects this rule will
accelerate competition and bring lower prices and more choices to wholesale
energy customers. Although wholesale customers represent a relatively small
portion of Northern Indiana's sales, Northern Indiana will continue its
efforts to retain and add customers by offering competitive rates.
In January 1997, legislation was introduced to the Indiana General Assembly
addressing electric utility competition and deregulation. Under the proposed
legislation, an electric utility would be required to separate its production
and marketing functions from the transmission and distribution functions to
eliminate a competitive market advantage related to organizational structure.
There would be a transition period from October 1, 1999 through June 30, 2004,
during which an electric utility's cost of service in rates would transition
to a target price based upon Indiana utility averages. Amounts collected by an
electric utility above the target price during the transition period would
provide for recovery of transition costs. Under the proposed legislation, each
electric utility company would be required to file a proposed distribution
comparability tariff for unbundled electric service. Customers would have the
right to choose their electricity supplier effective with the transition
period. During the transition period, access charges would be billed to those
customers choosing a new supplier. Regulatory assets not recovered during the
transition period and not included as part of the cost-based transmission and
distribution function would not be recoverable from customers. After the
transition period, customers would be required to make an affirmative election
as to their electricity supplier; if no election is made, the Commission would
assign a supplier. Management believes that the likelihood of passage of this
proposed legislation, in its current form, is remote.
Operating in a competitive environment will place added pressures on utility
profit margins and credit ratings. Increasing competition in the electric
utility industry has already led the credit rating agencies to apply more
stringent guidelines in making credit rating determinations.
Competition within the electric utility industry will create opportunities
to compete for new customers and revenues, as well as increase the risk of the
loss of customers. 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.
29
<PAGE>
FERC Order No. 636 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 a petition for an Alternative Regulatory Plan (ARP)
with the Commission on November 29, 1995. The purpose of the ARP is to create
a business and regulatory environment and structure which will permit
increased choice for gas customers, competition among suppliers, and improved
natural gas service. In its ARP, Northern Indiana proposes to implement new
rates and services that would include, but not be limited to, further
unbundling of services for additional customer classes which would include
increased customer choice for sources of natural gas supply, negotiated
services and prices, and incentive gas and storage cost mechanisms. The
Commission will hold hearings on the ARP during the first quarter of 1997.
To date, the Utilities have not been materially adversely affected by
competition, and management does not foresee substantial adverse effects in
the near future, unless the current regulatory structure is adversely altered.
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>
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%
1996.............................. 47.6% 46.4% 6.0% 100.0%
</TABLE>
COST OF FUEL FOR ELECTRIC GENERATION
(MILLS PER KWH)
<TABLE>
<CAPTION>
YEAR (MILLD PRT KWH)
---- ---------------
<S> <C>
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
1996..................... 15.79
</TABLE>
30
<PAGE>
COST OF GAS PURCHASED FOR RESALE CHART
(DOLLARS PER DEKATHERM)
<TABLE>
<CAPTION>
DOLLARS
YEAR PER DEKATHERM
---- -------------
<S> <C>
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
1996....................... 3.16
</TABLE>
31
<PAGE>
NIPSCO INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Operating Revenues:
Gas...................................... $ 799,395 $ 691,402 $ 681,909
Electric................................. 1,022,231 1,030,923 994,492
---------- ---------- ----------
1,821,626 1,722,325 1,676,401
---------- ---------- ----------
Cost of Energy:
Gas costs................................ 483,777 399,113 403,437
Fuel for electric generation............. 233,215 242,337 247,134
Power purchased.......................... 53,751 43,681 32,503
---------- ---------- ----------
770,743 685,131 683,074
---------- ---------- ----------
Operating Margin........................... 1,050,883 1,037,194 993,327
---------- ---------- ----------
Operating Expenses and Taxes (except
income):
Operation................................ 294,240 290,951 287,766
Maintenance.............................. 70,023 78,293 80,170
Depreciation and amortization............ 215,028 201,137 194,283
Taxes (except income).................... 74,304 73,452 72,227
---------- ---------- ----------
653,595 643,833 634,446
---------- ---------- ----------
Operating Income Before Utility Income
Taxes..................................... 397,288 393,361 358,881
---------- ---------- ----------
Utility Income Taxes....................... 110,995 108,449 97,732
---------- ---------- ----------
Operating Income........................... 286,293 284,912 261,149
---------- ---------- ----------
Other Income (Deductions).................. 5,693 (4,241) 2,216
---------- ---------- ----------
Interest and Other Charges:
Interest on long-term debt............... 85,382 82,655 78,292
Other interest........................... 17,449 12,781 11,650
Allowance for borrowed funds used during
construction and carrying charges....... (896) (3,678) (4,374)
Amortization of premium, reacquisition
premium, discount and expense on debt,
net..................................... 4,605 4,402 3,897
Dividend requirements on preferred stocks
of subsidiary........................... 8,712 9,046 9,913
---------- ---------- ----------
115,252 105,206 99,378
---------- ---------- ----------
Net Income................................. 176,734 175,465 163,987
Dividend requirements on preferred shares.. 119 3,063 3,063
---------- ---------- ----------
Balance available for common shareholders.. $ 176,615 $ 172,402 $ 160,924
========== ========== ==========
Average common shares outstanding.......... 61,190,750 63,281,177 64,820,039
Earnings per average common share.......... $ 2.88 $ 2.72 $ 2.48
========== ========== ==========
Dividends declared per common share........ $ 1.71 $ 1.59 $ 1.47
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
32
<PAGE>
NIPSCO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
Utility Plant, at original cost (including construction
work in progress of $166,812 and $145,129,
respectively):
Electric................................................ $4,050,084 $3,935,103
Gas..................................................... 1,344,230 1,301,687
Common.................................................. 346,636 350,168
---------- ----------
5,740,950 5,586,958
Less--Accumulated provision for depreciation and
amortization........................................... 2,546,162 2,373,694
---------- ----------
Total utility plant................................... 3,194,788 3,213,264
---------- ----------
Other Property and Investments:
Other property, at cost, less accumulated provision for
depreciation........................................... 147,370 136,006
Investments, at equity.................................. 52,260 47,565
Investments, at cost.................................... 30,424 22,899
Other investments....................................... 20,090 17,315
---------- ----------
Total other property and investments.................. 250,144 223,785
---------- ----------
Current Assets:
Cash and cash equivalents............................... 26,333 28,496
Accounts receivable, less reserve of $5,569 and $7,264,
respectively........................................... 165,441 108,998
Fuel adjustment clause.................................. 9,149 10,301
Gas cost adjustment clause.............................. 100,214 1,423
Materials and supplies, at average cost................. 59,859 65,044
Electric production fuel, at average cost............... 26,483 14,258
Natural gas in storage.................................. 65,093 60,884
Prepayments and other................................... 58,507 27,177
---------- ----------
Total current assets.................................. 511,079 316,581
---------- ----------
Other Assets:
Regulatory assets....................................... 231,469 212,491
Prepayments and other................................... 86,863 33,399
---------- ----------
Total other assets.................................... 318,332 245,890
---------- ----------
$4,274,343 $3,999,520
========== ==========
CAPITALIZATION AND LIABILITIES
Capitalization (see page 32):
Common shareholders' equity (see page 35)............... $1,100,501 $1,122,215
Preferred stocks--
Northern Indiana Public Service Company:
Series without mandatory redemption provisions...... 81,126 81,325
Series with mandatory redemption provisions......... 61,246 63,651
NIPSCO Industries, Inc.:
Series with mandatory redemption provisions......... -- 35,000
Long-term debt, excluding amounts due within one year... 1,127,106 1,175,728
---------- ----------
Total capitalization............................... 2,369,979 2,477,919
---------- ----------
Current Liabilities:
Current portion of long-term debt....................... 144,552 96,855
Short-term borrowings................................... 425,985 260,671
Accounts payable........................................ 251,730 151,691
Sinking funds due within one year....................... 3,328 2,621
Dividends declared on common and preferred stocks....... 28,308 28,179
Customer deposits....................................... 17,580 11,361
Taxes accrued........................................... 78,723 28,952
Interest accrued........................................ 7,557 8,439
Accrued employment costs................................ 44,186 46,695
Other accruals.......................................... 20,250 33,753
---------- ----------
Total current liabilities.......................... 1,022,199 669,217
---------- ----------
Other:
Deferred income taxes................................... 602,745 596,940
Deferred investment tax credits, being amortized over
life of related property............................... 108,258 115,666
Deferred credits........................................ 48,432 53,641
Accrued liability for postretirement benefits........... 109,429 76,342
Other noncurrent liabilities............................ 13,301 9,795
---------- ----------
Total other.............................................. 882,165 852,384
---------- ----------
Commitments and Contingencies (see notes)
$4,274,343 $3,999,520
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
33
<PAGE>
NIPSCO INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CAPITALIZATION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1995
----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Common shareholders' equity (see page 35).. $1,100,501 46.4% $1,122,215 45.3%
---------- ----------
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--209,145 and 209,190
shares outstanding, respectively.... 20,915 20,919
4 1/2% series--79,996 shares
outstanding......................... 8,000 8,000
4.22% series--106,198 shares
outstanding......................... 10,620 10,620
4.88% series--100,000 shares
outstanding......................... 10,000 10,000
7.44% series--41,890 shares
outstanding......................... 4,189 4,189
7.50% series--34,842 shares
outstanding......................... 3,484 3,484
Premium on preferred stock........... 254 254
Cumulative preferred stock--no par
value--
Adjustable Rate (6.00% at December
31, 1996)
--Series A (stated value--$50 per
share), 473,285 and 477,185 shares
outstanding, respectively........... 23,664 23,859
---------- ----------
81,126 3.4% 81,325 3.3%
---------- ----------
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--75,000 and 87,500
shares outstanding, respectively.... 7,500 8,750
7 3/4% series--44,460 and 50,014
shares outstanding, respectively.... 4,446 5,001
8.35% series--63,000 and 69,000
shares outstanding, respectively.... 6,300 6,900
Cumulative preferred stock--no par
value--6.50% series--430,000 shares
outstanding......................... 43,000 43,000
---------- ----------
61,246 2.6% 63,651 2.6%
---------- ----------
NIPSCO Industries, Inc.
Cumulative preferred shares--without
par value--8.75% series (stated
value--$100 per share), 0 and 350,000
shares outstanding, respectively...... -- 0.0% 35,000 1.4%
---------- ----------
Long-term debt (see page 33)............... 1,127,106 47.6% 1,175,728 47.4%
---------- ------ ---------- ------
Total capitalization................. $2,369,979 100.0% $2,477,919 100.0%
========== ====== ========== ======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
34
<PAGE>
NIPSCO INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Northern Indiana Public Service Company:
First mortgage bonds--
Series O, 6 3/8%--due September 1, 1997............ $ -- $ 25,747
Series P, 6 7/8%--due October 1, 1998.............. 14,509 14,509
Series T, 7 1/2%--due April 1, 2002................ 40,000 40,500
Series NN, 7.10%--due July 1, 2017................. 55,000 55,000
---------- ----------
Total............................................ 109,509 135,756
---------- ----------
Pollution control notes and bonds--
Series A note--City of Michigan City--5.70% due
October 1, 2003................................... 19,000 20,000
Series 1988 Bonds--Jasper County--Series A, B and C
3.58% weighted average at December 31, 1996, due
November 1, 2016.................................. 130,000 130,000
Series 1988 Bonds--Jasper County--Series D
3.55% weighted average at December 31, 1996, due
November 1, 2007.................................. 24,000 24,000
Series 1994 Bonds--Jasper County--Series A
5.10% at December 31, 1996, due August 1, 2010.... 10,000 10,000
Series 1994 Bonds--Jasper County--Series B
5.10% at December 31, 1996, due June 1, 2013...... 18,000 18,000
Series 1994 Bonds--Jasper County--Series C
5.10% at December 31, 1996, due April 1, 2019..... 41,000 41,000
---------- ----------
Total............................................ 242,000 243,000
---------- ----------
Medium-term notes--
Issued at interest rates between 5.83% and 7.64%,
with a weighted average interest rate of 6.85% and
various maturities between April 6, 1998 and
January 19, 2024.................................. 644,025 684,025
---------- ----------
Unamortized premium and discount on long-term debt,
net................................................. (3,526) (4,040)
---------- ----------
Total long-term debt of Northern Indiana Public
Service Company................................. 992,008 1,058,741
---------- ----------
NIPSCO Capital Markets, Inc.:
Subordinated Debentures--Series A, 7 3/4%, due March
31, 2026............................................ 75,000 --
Zero Coupon Notes--7.57%, $72,500 at maturity, due
December 1, 1997.................................... -- 62,875
---------- ----------
Total long-term debt of NIPSCO Capital Markets,
Inc............................................. 75,000 62,875
---------- ----------
NIPSCO Development Company, Inc.:
Lake Erie Land Company--Notes Payable--8.25%--due
June 30, 1998....................................... 100 389
Elm Energy and Recycling (UK), Ltd. Term Loan
Facility--
Weighted average interest rate of 8.22% at December
31, 1996, due December 31, 2004................... 40,576 34,516
NDC Douglas Properties, Inc.--Notes Payable--
Interest rates of 6.72% and 8.15% with a weighted
average interest rate of 7.76% and maturities
through April 1, 2006............................. 19,422 19,207
---------- ----------
Total long-term debt of NIPSCO Development
Company, Inc.................................... 60,098 54,112
---------- ----------
Total long-term debt, excluding amounts due in
one year........................................ $1,127,106 $1,175,728
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
35
<PAGE>
NIPSCO INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 176,734 $ 175,465 $ 163,987
Adjustments to reconcile net income to net
cash:
Depreciation and amortization............ 215,028 201,137 194,283
Deferred federal and state operating
income taxes, net....................... 27,419 (2,681) (11,488)
Deferred investment tax credits, net..... (7,408) (7,515) (6,499)
Advance contract payment................. (17,100) -- --
Change in certain assets and
liabilities--
Accounts receivable, net............... (56,443) (34,105) 28,830
Electric production fuel............... (12,225) 4,089 3,186
Materials and supplies................. 5,185 386 723
Natural gas in storage................. (4,209) 16,910 (14,924)
Accounts payable....................... 100,039 (7,021) (34,080)
Taxes accrued.......................... 17,002 (9,202) (18,904)
Fuel adjustment clause................. 1,152 (8,687) 4,826
Gas cost adjustment clause............. (98,791) 24,549 9,687
Accrued employment costs............... (2,509) 2,884 3,433
Other accruals......................... (13,503) 22,723 (1,403)
Other, net............................... (9,360) 12,560 14,735
---------- ---------- ----------
Net cash provided by operating
activities.......................... 321,011 391,492 336,392
---------- ---------- ----------
Cash flows provided by (used in) investing
activities:
Utility construction expenditures........ (203,125) (189,754) (200,586)
Construction expenditures related to
Crossroads Pipeline Company............. (4,756) (3,212) (1,959)
Return of capital from equity
investments............................. -- -- 8,000
Other, net............................... (27,220) (51,749) (19,567)
---------- ---------- ----------
Net cash used in investing
activities.......................... (235,101) (244,715) (214,112)
---------- ---------- ----------
Cash flows provided by (used in) financing
activities:
Issuance of long-term debt............... 78,366 179,555 222,575
Issuance of short-term debt.............. 1,582,210 1,290,973 1,020,777
Net change in commercial paper........... 191,705 (84,600) 131,205
Retirement of long-term debt............. (89,792) (122,105) (218,572)
Retirement of short-term debt............ (1,609,734) (1,252,250) (1,090,390)
Retirement of preferred shares........... (37,604) (7,095) (10,195)
Issuance of common shares................ 5,716 7,389 2,060
Acquisition of treasury shares........... (105,498) (69,183) (58,717)
Cash dividends paid on common shares..... (103,190) (99,043) (93,578)
Cash dividends paid on preferred shares.. (766) (3,063) (3,063)
Other, net............................... 514 700 (81)
---------- ---------- ----------
Net cash used in financing
activities.......................... (88,073) (158,722) (97,979)
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents............................... (2,163) (11,945) 24,301
Cash and cash equivalents at beginning of
period.................................... 28,496 40,441 16,140
---------- ---------- ----------
Cash and cash equivalents at end of period. $ 26,333 $ 28,496 $ 40,441
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
36
<PAGE>
NIPSCO INDUSTRIES, INC.
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,
1994................. $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)
---------- -------- ------- -------- --------- ------- ------- ---------- -----------
Net income............ 176,734 176,734
Dividends:
Preferred shares..... (119) (119)
Common shares........ (103,981) (103,981)
Treasury shares
acquired............. (105,498) (105,498) (2,793,604)
Issued:
Employee stock
purchase plan....... 783 454 329 20,669
Long-term incentive
plan................ 5,011 186 5,397 (572) 199,000
Unrealized gain on
available for sale
securities........... 1,079 1,079
Amortization of
unearned
compensation......... 2,570 2,570
Other................. 1,707 18 (101) 1,790
---------- -------- ------- -------- --------- ------- ------- ---------- -----------
Balance, December 31,
1996................. $1,100,501 $870,930 $32,868 $591,370 $(392,995) $ (140) $(1,532) 73,892,109 (14,086,448)
========== ======== ======= ======== ========= ======= ======= ========== ===========
</TABLE>
37
<PAGE>
NIPSCO INDUSTRIES, INC.
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, as well as the non-
operating results of the Utilities, 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. Certain
reclassifications were made to conform the prior years' financial statements
to the current presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Operating Revenues
Revenues are recorded based on estimated service rendered, but are billed to
customers monthly on a cycle basis.
Depreciation and Maintenance
Northern Indiana provides depreciation on a straight-line method over the
remaining service lives of the electric, gas, and common properties. The
provisions, as a percentage of the cost of depreciable utility plant, were
approximately 4.2% for year 1996, 4.1% for year 1995, and 4.0% for year 1994.
The depreciation rates for electric and gas properties were 3.55% and 4.92%,
respectively.
38
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Kokomo Gas provides depreciation on the original cost of utility plant in
service using straight-line rates that averaged approximately 3.00% for the
years 1996, 1995, and 1994.
NIFL provides depreciation on the original cost of utility plant in service
using straight-line rates that averaged approximately 2.75% for the years
1996, 1995, and 1994.
Crossroads provides depreciation on the original cost of utility plant in
service using straight-line rates that averaged approximately 2.5% for the
years 1996, 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.
Amortization of Software Costs
Northern Indiana amortizes capitalized software costs using the straight-
line method based on estimated economic lives.
Plant Acquisition Adjustments
Industries' costs 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 forty-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."
Accounts Receivable
At December 31, 1996, Northern Indiana had sold $100 million of its accounts
receivable under a sales agreement which expires May 31, 1997 and is expected
to be renewed in the future.
39
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Statement of Cash Flows
For purposes of the Consolidated Statement of Cash Flows, Industries
considers temporary cash investments with an original maturity of three months
or less to be cash equivalents.
Cash paid during the periods reported for income taxes and interest was as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income taxes................................... $75,795 $117,940 $121,485
Interest, net of amounts capitalized........... $86,126 $ 89,321 $ 82,738
</TABLE>
Fuel Adjustment Clause
All metered electric rates contain a provision for adjustment in charges for
electric energy to reflect increases and decreases in the cost of fuel and the
fuel cost of purchased power through operation of a fuel adjustment clause. As
prescribed by order of the Indiana Utility Regulatory Commission (Commission)
applicable to metered retail rates, the adjustment factor has been calculated
based on the estimated cost of fuel and the fuel cost of purchased power in a
future three-month period. If two statutory requirements relating to expense
and return levels are satisfied, any under-recovery or over-recovery caused by
variances between estimated and actual cost in a given three-month period will
be included in a future filing. Northern Indiana records any under-recovery or
over-recovery as a current asset or current liability until such time as it is
billed or refunded to its customers. The fuel adjustment factor is subject to
a quarterly hearing by the Commission and remains in effect for a three-month
period.
Gas Cost Adjustment Clause
All metered gas rates contain an adjustment factor which reflects the cost
of purchased gas, contracted gas storage, and storage transportation charges.
The Utilities record any under-recovery or over-recovery 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-recovery or over-recovery caused by variances between
estimated and actual cost in a given three or six month period will be
included in a future filing. See FERC Order No. 636 for a discussion of gas
transition cost charges.
Natural Gas in Storage
Northern Indiana's natural gas in storage is valued using the last-in,
first-out (LIFO) inventory methodology. Based on the average cost of gas
purchased in December 1996 and 1995 the estimated replacement cost of gas in
storage (current and non-current) at December 31, 1996 and 1995 exceeded the
stated LIFO cost by approximately $96 million and $30 million, respectively.
Certain other subsidiaries of Industries have natural gas in storage valued at
average cost.
Hedging Activities
Industries' gas subsidiaries use commodity futures contracts, options, and
swaps (derivative financial instruments) to hedge the impact of natural gas
price fluctuations related to their business activities. Gains and losses on
these derivative financial instruments are deferred and recognized in income
concurrent with the related purchases and sales of natural gas.
40
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1996 and 1995, Industries had open derivative financial
instruments representing hedges of natural gas sales of 7.0 and 0.6 billion
cubic feet (Bcf), respectively, and natural gas purchases of 4.4 and 0.1 Bcf,
respectively. The deferred gains (losses) on those derivative financial
instruments at December 31, 1996 and 1995 totalled $0.3 million and ($0.9)
million, respectively. Such gains (losses) will be included in the margin on
the related natural gas transactions.
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 identified 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,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Unamortized reacquisition premium on debt (See
Long-Term Debt note).......................... $ 50,262 $ 53,776
Unamortized R. M. Schahfer Unit 17 and Unit 18
carrying charges and deferred depreciation
(See below)................................... 70,763 74,981
Bailly scrubber carrying charges and deferred
depreciation (See below)...................... 10,816 11,517
Deferral of SFAS No. 106 expense not recovered
(See Postretirement Benefits note)............ 87,557 64,834
FERC Order No. 636 transition costs (See FERC
Order No. 636 note)........................... 47,399 25,038
-------- --------
266,797 230,146
-------- --------
Less: Current portion of regulatory assets..... 35,328 17,655
-------- --------
$231,469 $212,491
======== ========
</TABLE>
If all or a separable portion of the Utilities' operations become no longer
subject to the provisions of SFAS No. 71, a write off of related regulatory
assets would be required, unless some form of transition cost recovery
continues through rates established and collected for the Utilities' remaining
regulated operations. In addition, the Utilities would be required to
determine any impairment to the carrying costs of deregulated plant and
inventory assets.
In March, 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This statement imposes stricter criteria for
retention of regulatory assets by requiring that such assets be probable of
future recovery at each balance sheet date. The Utilities adopted this
standard on January 1, 1996, and adoption did not impact their financial
position or results of operations.
Carrying Charges and Deferred Depreciation
Upon completion of R. M. Schahfer Units 17 and 18, Northern Indiana
capitalized the carrying charges and deferred depreciation in accordance with
orders of the Commission until the cost of each unit was allowed in rates.
Such carrying charges and deferred depreciation are being amortized over the
remaining life of each unit.
41
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Northern Indiana has capitalized carrying charges and deferred depreciation
and certain operating expenses relating to its scrubber service agreement for
its Bailly Generating Station in accordance with an order of the Commission.
Pursuant to such order, capitalization of carrying charges and deferral of
depreciation and certain operating expenses ceased on December 31, 1995. The
accumulated balance of the deferred costs and related carrying charges is
being amortized over the remaining life of the scrubber service agreement.
Allowance for Funds Used During Construction
Allowance for funds used during construction (AFUDC) is charged to
construction work in progress during the period of construction and represents
the net cost of borrowed funds used for construction purposes and a reasonable
rate upon other (equity) funds. Under established regulatory rate practices,
after the construction project is placed in service, Northern Indiana is
permitted to include in the rates charged for utility services (a) a fair
return on and (b) depreciation of such AFUDC included in plant in service.
At January 1, 1994, a pretax rate of 5.0% for all construction was being
used; effective January 1, 1995, the rate increased to 6.0% and effective
January 1, 1996, the rate decreased to 5.5%.
Foreign Currency Translation
Translation gains or losses are based upon the end-of-period exchange rate
and are recorded as a separate component of common 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 $24.1 million and
$21.9 million relating to affordable housing projects at December 31, 1996 and
December 31, 1995, 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. On March 13, 1996, the IRS appealed the Tax Court's
decision to the U.S. Court of Appeals for the Seventh Circuit, and on March
25, 1996 Northern Indiana filed its cross appeal. Northern Indiana's
management and general counsel believe the favorable ruling of the Tax Court
will prevail.
42
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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). In 1995,
the Project failed certain performance and reliability tests which had been
established under a contract between Elm and TBV Power Limited (TBV), a
company jointly owned by subsidiaries of the Tarmac PLC Group and Black &
Veatch. Elm "rejected" the Project in accordance with the contract, and the
independent Project engineer then certified that 29.6 million British Pounds
Sterling (approximately $50.7 million at December 31, 1996) were to be
reimbursed by TBV to Elm. TBV filed suit in the English courts to enjoin
enforcement of the decision and to allege certain breaches of the underlying
construction contract.
Elm has counterclaimed, and Elm and Development are also seeking additional
remedies at law, in both the United States and the United Kingdom, for damages
and/or sanctions against TBV, Tarmac PLC Group, Black & Veatch and its
chairman. Black & Veatch has counterclaimed against Elm and Development.
Development believes that the claims made against it and Elm are meritless and
that its remedies, in conjunction with Elm's rights under the construction
contract, will be sufficient to mitigate any losses which Elm and/or
Development may otherwise incur.
Elm is continuing to operate the Project, and the banks which provided the
non-recourse financing for the Project are continuing to support its
operations. However, because of ongoing defaults under the Project financing
(resulting from the Project's poor performance and the pending litigation),
and the uncommitted nature of a working capital facility provided by the
banks, the banks have the right to ask that the operation of the Project be
terminated at any time. In that event, some or all of Industries' investment
in Elm may be at risk. Industries' investment in Elm, however, was not
material at December 31, 1996.
NESI ENERGY MARKETING CANADA LTD. LITIGATION
On October 31, 1996, Services' wholly-owned subsidiary NIPSCO Energy
Services Canada Ltd. (NESI Canada) acquired 70% of the outstanding shares of
Chandler Energy Inc., a gas marketing and trading company located in Calgary,
Alberta, and subsequently renamed it NESI Energy Marketing Canada Ltd. (NEMC).
Between November 1 and November 27, 1996, gas prices in the Calgary market
increased dramatically. As a result, NEMC was selling gas, pursuant to
contracts entered into prior to the acquisition date, at prices substantially
below its costs to acquire such gas. On November 27, 1996, NEMC ceased doing
business and sought protection from its creditors under the Companies'
Creditors Arrangement Act, a Canadian corporate reorganization statute.
In December 1996 and January 1997, certain creditors of NEMC filed claims
against Industries, Services, Capital Markets and NESI Canada, alleging
certain misrepresentations relating to NEMC's financial condition and claiming
damages. Industries and its affiliates intend to vigorously defend against
such claims and any other claims seeking to assert that any party other than
NEMC is responsible for NEMC's liabilities. Industries has fully reserved its
equity investment in NEMC. Management believes that any additional loss
relating to NEMC would not be material to the results of operations or
financial position of Industries.
FERC ORDER NO. 636
Pursuant to FERC Order No. 636, interstate pipeline sales services have been
"unbundled" such that gas supplies are being sold separately from interstate
transportation services. The Utilities have contracted for a mix of
transportation and storage services from their pipeline suppliers which allows
them to meet the needs of their customers. Pipelines are recovering, from
their customers, certain transition costs associated with restructuring under
the Order No. 636 regulation. Any such recovery is subject to established
review procedures at the FERC.
43
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $129
million of such costs have been recorded, a portion of which has been paid to
the pipeline suppliers, subject to refund. The Commission has approved the
recovery of these FERC-allowed transition costs on a volumetric basis from
sales and transportation customers. Regulatory assets, in amounts
corresponding to the costs recorded but not yet collected, have been recorded
to reflect the ultimate recovery of these costs.
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 $16.8
million to cover probable corrective actions as of December 31, 1996; however,
environmental regulations and remediation techniques are subject to future
change. The ultimate cost could be significant, depending on the extent of
corrective actions required. Based upon investigations and management's
understanding of current laws and regulations, the Utilities believe that any
corrective actions required, after consideration of insurance coverages and
contributions from other potentially responsible parties, will not have a
significant impact on the financial position or results of operations of
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 acid
deposition provisions of the Clean Air Act Amendments of 1990 (CAAA). Northern
Indiana estimates that total costs of compliance with the CAAA sulfur dioxide
regulations will impact electric rates by less than 5% in the future.
The CAAA contain provisions that could lead to limitations on emissions of
nitrogen oxides and hazardous air pollutants which may require significant
capital expenditures for control of these emissions. Northern Indiana is
pursuing a nitrogen oxide control program to meet future requirements.
Northern Indiana cannot predict the costs of complying with CAAA requirements.
The Environmental Protection Agency (EPA) has notified Northern Indiana that
it is a "potentially responsible party" (PRP) under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) and may be
required to share in the cost of cleanup of several waste disposal sites
identified by the EPA. The sites are in various stages of investigation,
analysis and remediation. At each of the sites, Northern Indiana is one of
several PRPs, and it is expected that remedial costs, as provided under
CERCLA, will be shared among them. At some sites, Northern Indiana and/or the
other named PRPs are presently working with the EPA to clean up the sites and
avoid the imposition of fines or added costs.
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. Initial samplings have been conducted at seventeen sites. Follow-
up investigations have been conducted at seven 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.
44
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Northern Indiana was notified by the IDEM in 1992 of the release of a
petroleum substance into the St. Mary's River in Fort Wayne, Indiana, from the
site of a former manufactured-gas plant formerly owned by Northern Indiana. In
cooperation with IDEM, Northern Indiana has taken steps to investigate and
contain the substance. Northern Indiana has remediated part of the Fort Wayne
site. The remainder of the site is being evaluated to determine what further
remedial measures, if any, may be needed.
During the course of investigation activities, Northern Indiana noted the
presence of manufactured-gas plant residuals in the St. Mary's River in Fort
Wayne, Indiana and the Wabash River in Peru, Indiana. Northern Indiana
notified the IDEM and the EPA and immediately took steps to contain the
material at both sites.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have entered
into an agreement covering cost sharing and management of investigation and
remediation programs at five former manufactured-gas plant sites at which both
companies or their predecessors were former operators or owners. One of these
sites is the Lafayette site which Indiana Gas had previously notified Northern
Indiana is being investigated and remediated pursuant to an administrative
order with IDEM. Northern Indiana also notified Cinergy Services, Inc.
(Cinergy) (formerly PSI Energy, Inc.) that it was a former owner or operator
of seven former manufactured-gas plants at which Northern Indiana had
conducted or was planning investigation or remediation activities. In December
1996, Northern Indiana sent a written demand to Cinergy related to one of
these sites, Goshen. Northern Indiana demanded that Cinergy pay Northern
Indiana for costs Northern Indiana has already incurred and to be incurred to
implement the needed remedy at the Goshen site.
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. Both sides
have motions pending in the Federal Court lawsuit that would be dispositive of
the case. Northern Indiana has obtained cash settlements from some of its
insurers.
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, "Environmental Remediation Liabilities."
This statement provides authoritative guidance for recognition, measurement,
display, and disclosure of environmental remediation liabilities in financial
statements. The Utilities will adopt this standard on January 1, 1997 and
adoption will not have a material impact on Industries' financial position or
results of operations.
The possibility that exposure to electric and magnetic fields (EMF)
emanating from power lines, household appliances and other electric sources
may result in adverse health effects has been the subject of public,
governmental, and media attention. Recently, the U.S. National Research
Council of the National Academy of Sciences concluded in a report, after
examining more than 500 EMF studies spanning seventeen years, that among other
things, there is insufficient evidence to consider EMF a threat to human
health. Despite the report's findings, future research appropriations are
continuing to be dedicated to explore the issue.
Income Taxes
Industries uses the liability method of accounting for income taxes under
which deferred income taxes are recognized, at currently enacted income tax
rates, to reflect the tax effect of temporary differences between the
financial statement and tax bases of assets and liabilities.
45
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
To the extent certain deferred income taxes of the Utilities are recoverable
or payable through future rates, regulatory assets and liabilities have been
established. Regulatory assets are primarily attributable to undepreciated
AFUDC-equity and the cumulative net amount of other income tax timing
differences for which deferred taxes had not been provided in the past, when
regulators did not recognize such taxes as costs in the rate-making process.
Regulatory liabilities are primarily attributable to the Utilities' obligation
to credit to ratepayers deferred income taxes provided at rates higher than
the current federal tax rate currently being credited to ratepayers using the
average rate assumption method and unamortized deferred investment tax
credits.
The components of the net deferred income tax liability at December 31,
1996, and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred tax liabilities--
Accelerated depreciation and other property
differences....................................... $727,528 $706,715
AFUDC-equity....................................... 37,713 40,083
Adjustment clauses................................. 41,181 4,613
Take-or-pay gas costs.............................. 877 1,550
Other regulatory assets............................ 39,458 28,930
Reacquisition premium on debt...................... 19,041 20,397
Deferred tax assets--
Deferred investment tax credits.................... (41,046) (43,854)
Removal costs...................................... (131,718) (118,064)
FERC Order No. 636 transition costs................ (8,144) (4,400)
Other postretirement/postemployment benefits....... (43,446) (32,512)
Other, net......................................... (11,987) (12,575)
-------- --------
629,457 590,883
-------- --------
Less: Deferred income taxes related to current assets
and liabilities..................................... 26,712 (6,057)
-------- --------
Deferred income taxes noncurrent..................... $602,745 $596,940
======== ========
</TABLE>
Federal and state income taxes as set forth in the Consolidated Statement of
Income are comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current income taxes--
Federal.................................. $ 78,533 $103,224 $100,321
State.................................... 12,451 15,421 15,398
-------- -------- --------
90,984 118,645 115,719
-------- -------- --------
Deferred income taxes, net--
Federal.................................. 25,015 (2,644) (10,765)
State.................................... 2,404 (37) (723)
-------- -------- --------
27,419 (2,681) (11,488)
-------- -------- --------
Deferred investment tax credits, net....... (7,408) (7,515) (6,499)
-------- -------- --------
Total utility operating income taxes... 110,995 108,449 97,732
Income tax applicable to non-operating
activities and income of non-utility
subsidiaries.............................. (4,077) (9,250) (16,333)
-------- -------- --------
Total income taxes..................... $106,918 $ 99,199 $ 81,399
======== ======== ========
</TABLE>
46
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of total tax expense to an amount computed by applying the
statutory federal income tax rate to pretax income is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income ............................... $176,734 $175,465 $163,987
Add--Income taxes ........................ 106,918 99,199 81,399
Dividend requirements on preferred stocks
of subsidiary ........................... 8,712 9,046 9,913
-------- -------- --------
Income before preferred dividend
requirements of subsidiary and income
taxes ................................... $292,364 $283,710 $255,299
======== ======== ========
Amount derived by multiplying pretax
income by statutory rate ................ $102,327 $ 99,299 $ 89,355
Reconciling items multiplied by the
statutory rate:
Book depreciation over related tax
depreciation .......................... 4,621 4,018 4,044
Amortization of deferred investment tax
credits ............................... (7,408) (7,515) (7,466)
State income taxes, net of federal
income tax benefit .................... 10,540 9,479 8,835
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. (6,644) (5,665) (5,807)
Other, net ............................. 3,482 (417) 191
-------- -------- --------
Total income taxes ................... $106,918 $ 99,199 $ 81,399
======== ======== ========
</TABLE>
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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Vested benefit obligation ...................... $(541,611) $(549,234)
Nonvested benefit .............................. (104,338) (104,814)
---------- -----------
Accumulated benefit obligation ................. $(645,949) $(654,048)
========== ===========
Projected benefit obligation for service
rendered to date .............................. $(743,634) $(759,681)
Plan assets at fair market value ............... 790,978 706,320
---------- -----------
Plan assets in excess of (or less than)
projected benefit obligation .................. 47,344 (53,361)
Unrecognized transition obligation at December
31, being recognized over seventeen years ..... 38,062 43,484
Unrecognized prior service cost ................ 25,172 27,242
Unrecognized gains ............................. (66,976) (4,217)
---------- -----------
Prepaid pension costs .......................... $ 43,602 $ 13,148
========== ===========
</TABLE>
47
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The accumulated benefit obligation is the present value of future pension
benefit payments and is based on the plan benefit formula without considering
expected future salary increases. The projected benefit obligation considers
estimated future salary increases. Discount rates of 7.75% and 7.25% and rates
of increase in compensation levels of 5.5% were used to determine the
accumulated benefit obligation and projected benefit obligation at December
31, 1996 and 1995, respectively.
The following items are the components of provisions for pensions for the
years ended December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service costs ............................. $ 16,300 $ 12,231 $ 14,099
Interest costs ............................ 53,477 52,511 48,058
Actual (return) loss on plan assets ....... (87,407) (135,243) 15,077
Amortization of transition obligation ..... 5,422 5,422 5,422
Other net amortization and deferral ....... 26,460 86,165 (61,422)
-------- --------- --------
$ 14,252 $ 21,086 $ 21,234
======== ========= ========
</TABLE>
Assumptions used in the valuation and determination of 1996, 1995, and 1994
pension expenses were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Discount rate ................................. 7.25% 8.75% 7.50%
Rate of increase in compensation levels ....... 5.50% 5.50% 5.50%
Expected long-term rate of return on assets ... 9.00% 9.00% 8.25%
</TABLE>
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. The expected cost of such benefits is accrued during the
employees' years of service.
Northern Indiana's current rate-making includes the cost of providing these
benefits based on the related insurance premiums. On December 30, 1992, the
Commission authorized the accrual method of accounting for postretirement
benefits for rate-making purposes consistent with SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions," and authorized
the deferral of the differences between the net periodic postretirement
benefits costs and the insurance premiums paid for such benefits as a
regulatory asset until such time as the accrual cost method may be reflected
in the rate-making process. The Commission stated that a deferral period of
four years or less would be rebuttably presumed to be reasonable and also
indicated each utility would have to demonstrate its postretirement benefit
costs were prudent and reasonably incurred at the time such costs were
proposed to be recovered in the rate-making process. Northern Indiana has been
deferring as a regulatory asset the difference between the amount that would
have been charged to expense under pay-as-you-go accounting and the amount
accrued in accordance with the standard in anticipation of approval for these
costs in the rate-making process.
48
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On November 20, 1996, Northern Indiana filed with the IURC for inclusion of
accrual-based postretirement benefit costs in the rate-making process. These
costs include an amortization of the existing regulatory asset consistent with
the remaining amortization period for the transition obligation. Hearings are
scheduled during March 1997 and Northern Indiana expects a decision during the
second quarter of 1997. Management believes that Northern Indiana will
ultimately be successful in obtaining such approval.
The following table sets forth the plans accumulated postretirement benefit
obligation as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Retirees....................................... $ (76,710) $ (99,453)
Fully eligible active plan participants........ (19,448) (23,084)
Other active plan participants................. (104,632) (136,322)
----------- -----------
Accumulated postretirement benefit obligation.. (200,790) (258,859)
Unrecognized transition obligation at December
31, being recognized over twenty years........ 175,012 197,088
Unrecognized actuarial gain.................... (89,547) (23,439)
----------- -----------
Accrued liability for postretirement benefits.. $(115,325) $ (85,210)
=========== ===========
</TABLE>
A discount rate of 7.75% and a pre-Medicare medical trend rate of 9%
declining to a long-term rate of 6% and a discount rate of 7.25% and a pre-
Medicare medical trend rate of 10% declining to a long-term rate of 6% were
used to determine the accumulated postretirement benefit obligation at
December 31, 1996 and 1995, respectively.
The decrease in the accumulated postretirement benefit obligation (APBO) and
the related increase in unrecognized actuarial gain at December 31, 1996 were
primarily attributable to favorable claim experience and the increase in the
discount rate to 7.75%. Additionally, Industries implemented a 3% cap on its
share of retiree cost increases for pre-Medicare benefits for certain non-
bargaining retirees who retire after February 1, 1997. This plan amendment
reduced the APBO and the unrecognized transition obligation by $9.6 million at
December 31, 1996.
Net periodic postretirement benefit costs for the year ended December 31,
1996 and 1995 include the following components:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Service costs.................................. $ 7,352 $ 6,076
Interest costs................................. 18,311 19,031
Amortization of transition obligation over
twenty years.................................. 11,593 11,593
Amortization of unrecognized actuarial gain.... (554) (2,179)
----------- -----------
$ 36,702 $ 34,521
=========== ===========
</TABLE>
The net periodic postretirement benefit costs for 1996 were determined
assuming a 7.25% discount rate, a 5% rate of compensation increase, and a pre-
Medicare medical trend rate of 9% declining to a long-term rate of 6%. The net
periodic postretirement benefit costs for 1995 were determined assuming an
8.75% discount rate, a 5% rate of compensation increase and a pre-Medicare
medical trend rate of 11% declining to a long-term rate of
49
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7%. The effect of a 1% increase in the assumed health care cost trend rates
for each future year would increase the accumulated postretirement benefit
obligation at December 31, 1996, by approximately $28.9 million and increase
the aggregate of the service and interest cost components of plan costs by
approximately $4.6 million for the year ended December 31, 1996. Amounts
disclosed above could be changed significantly in the future by changes in
health care costs, work force demographics, interest rates, or plan changes.
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, all the shares were
redeemed 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, 1996, for the cumulative preferred
stock, which is redeemable solely at the option of Northern Indiana, in whole
or in part, at any time upon thirty days' notice, are as follows:
<TABLE>
<CAPTION>
SERIES REDEMPTION 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, 1996), Series A (stated
value $50 per share)................. $ 50.00
</TABLE>
The redemption prices at December 31, 1996, as well as sinking fund
provisions, for the cumulative preferred stock subject to mandatory redemption
requirements, or whose redemption is outside the control of Northern Indiana,
are as follows:
<TABLE>
<CAPTION>
SINKING FUND OR MANDATORY
SERIES REDEMPTION PRICE PER SHARE REDEMPTION
------ -------------------------- -------------------------
<C> <C> <S>
Cumulative preferred stock--$100 par value--
8.85% $101.48, reduced periodically 12,500 shares on or before April
1.
8.35% $103.93, reduced periodically 3,000 shares on or before July 1;
increasing to 6,000 shares
beginning in 2004; noncumulative
option to double amount each
year.
7 3/4% $104.41, reduced periodically 2,777 shares on or before
December 1; noncumulative option
to double amount each year.
Cumulative preferred stock--no par value--
6.50% $100.00 on October 14, 2002 430,000 shares on October 14,
2002.
</TABLE>
50
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Sinking fund requirements with respect to redeemable preferred stocks
outstanding at December 31, 1996 for each of the four years subsequent to
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998....................................................... $1,827,700
1999....................................................... $1,827,700
2000....................................................... $1,827,700
2001....................................................... $1,827,700
</TABLE>
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, 1996, Northern Indiana had
approximately $146.0 million of retained earnings (earned surplus) available
for the payment of dividends. Future dividends will depend upon adequate
retained earnings, adequate future earnings, and the absence of adverse
developments.
COMMON SHARES
Industries has 200,000,000 common shares authorized without par value.
Share Purchase Rights Plan
On February 27, 1990, the Board of Directors of Industries (Board) declared
a dividend distribution of one Right for each outstanding common share of
Industries to shareholders of record on March 12, 1990. The Rights are not
currently exercisable. Each Right, when exercisable, would initially entitle
the holder to purchase from Industries one one-hundredth of a share of 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 Industries into the acquirer, the Rights would entitle the
holders to purchase Industries' or the acquirer's common shares for one-half
of the market price. The Rights will not dilute Industries' common shares nor
affect earnings per share unless they become exercisable for common shares.
The Plan was not adopted in response to any specific attempt to acquire
control of Industries.
COMMON SHARE REPURCHASES
The Board has authorized the repurchase of Industries' common shares. At
December 31, 1996, Industries had purchased approximately 18.8 million shares
at an average price of $26.19 per share since 1989. Including 3.5 million
shares authorized on March 26, 1996, approximately 2.3 million additional
common shares may be repurchased under the Board's authorization.
LONG-TERM INCENTIVE PLAN
Industries has two Long-Term Incentive Plans for key management employees
that were approved by shareholders on April 13, 1988 (1988 Plan) and April 13,
1994 (1994 Plan), each of which provides for the issuance of up to 2.5 million
of Industries' common shares to key employees through 1998 and 2004,
respectively. At December 31, 1996, there were 12,011 shares and 2,191,200
shares reserved for future awards under the 1988 Plan and 1994 Plan,
respectively. The 1988 Plan and 1994 Plan permit the following types of
51
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
grants, separately or in combination: nonqualified stock options, incentive
stock options, restricted stock awards, stock appreciation rights, and
performance units. No incentive stock options or performance units were
outstanding at December 31, 1996. Under both Plans, the exercise price of each
option equals the market price of Industries' common shares on the date of
grant. Each option's maximum term is ten years and vests one year from the
date of grant.
The stock appreciation rights (SARs) may be exercised only in tandem with
stock options on a one-for-one basis and are payable in cash, Industries
common shares, or a combination thereof. Restricted stock awards are
restricted as to transfer and are subject to forfeiture for specific periods
from the date of grant. Restrictions on shares awarded in 1995 lapse five
years from date of grant and vesting is variable from 0% to 200% of the number
awarded, subject to specific earnings per share and stock appreciation goals.
Restrictions on shares awarded in 1996 lapse two years from date of grant and
vesting is variable from 0% to 100% of the number awarded, subject to specific
performance goals. If a participant's employment is terminated prior to
vesting other than by reason of death, disability or retirement, restricted
shares are forfeited. There were 262,000, 330,500, and 150,500 restricted
shares outstanding at December 31, 1996, 1995, and 1994, respectively.
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, 1996, 30,750 shares
were issued under the Plan.
Industries accounts for these plans under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized for
nonqualified stock options. The compensation cost that has been charged
against net income for restricted stock awards was $2.1 million and $2.2
million for the year ending December 31, 1996 and 1995, respectively. Had
compensation cost for stock options been determined consistent with SFAS No.
123 "Accounting for Stock-Based Compensation," Industries' net income and
earnings per average common share would have been reduced to the following pro
forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Net Income:
As reported.................................... $ 176,734 $ 175,465
Pro forma...................................... $ 176,087 $ 175,219
Earnings Per Average Common Share:
As reported.................................... $2.88 $2.72
Pro forma...................................... $2.87 $2.72
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
costs may not be representative of that to be expected in future years.
The fair value of each option granted used to determine pro forma net income
is estimated as of the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for
52
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
grants in the years ended December 31, 1996 and 1995, respectively: risk-free
interest rate of 6.39% and 6.24%, expected dividend yield of $1.68 and $1.56
per share, expected option term of five years, and expected volatility of
13.2% and 13.1%.
----------------
Changes in outstanding shares under option and SARs for 1994, 1995, and
1996, are as follows:
<TABLE>
<CAPTION>
NONQUALIFIED STOCK
NONQUALIFIED STOCK OPTIONS OPTIONS WITH SARS
--------------------------- ---------------------
YEAR ENDED DECEMBER 31, WEIGHTED AVERAGE OPTION
1994 OPTIONS OPTION PRICE OPTIONS PRICE
----------------------- --------- ---------------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of
year................... 890,800 $25.77 9,900 $ 10.94
Granted............... 294,650 $28.75 --
Exercised............. (61,850) $22.56 --
Cancelled............. (26,050) $32.46 --
--------- ---------
Balance at end of year.. 1,097,550 $26.59 9,900 $ 10.94
========= =========
Shares exercisable...... 807,150 $25.82 9,900 $ 10.94
========= =========
<CAPTION>
YEAR ENDED DECEMBER 31, WEIGHTED AVERAGE OPTION
1995 OPTIONS OPTION PRICE OPTIONS PRICE
----------------------- --------- ---------------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of
year................... 1,097,550 $26.59 9,900 $ 10.94
Granted............... 282,450 $32.40 --
Exercised............. (259,850) $24.67 (4,300) $ 10.94
Cancelled............. (12,400) $24.42 --
--------- ---------
Balance at end of year.. 1,107,750 $28.55 5,600 $ 10.94
========= =========
Shares exercisable...... 830,300 $27.26 5,600 $ 10.94
========= =========
Weighted average fair
value of options
granted................ $ 3.89
=========
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE OPTION
YEAR ENDED DECEMBER 31, 1996 OPTIONS OPTION PRICE OPTIONS PRICE
---------------------------- --------- ---------------- ------- ------
<S> <C> <C> <C> <C>
Balance at beginning of year.. 1,107,750 $28.55 5,600 $10.94
Granted..................... 278,300 $37.81 --
Exercised................... (184,000) $29.03 --
Cancelled................... (8,500) $33.39 --
--------- -----
Balance at end of year........ 1,193,550 $30.60 5,600 $10.94
========= =====
Shares exercisable............ 916,750 $28.42 5,600 $10.94
========= =====
Weighted average fair value of
options granted.............. $ 5.00
=========
</TABLE>
53
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about non-qualified stock options
at December 31, 1996:
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
WEIGHTED
NUMBER WEIGHTED AVERAGE AVERAGE
RANGE OF OPTION OUTSTANDING AT REMAINING OPTION
PRICE DECEMBER 31, 1996 CONTRACTUAL LIFE PRICE
--------------- ----------------- ---------------- --------
<S> <C> <C> <C>
$10.94 to $17.94 94,400 3.06 years $16.65
$22.94 to $28.75 395,600 6.32 years $26.55
$30.31 to $37.81 703,550 8.47 years $34.75
---------------- --------- ---------- ------
$10.94 to $37.81 1,193,550 7.33 years $30.60
=========
</TABLE>
OPTIONS EXERCISABLE
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
RANGE OF OPTION EXERCISABLE AT OPTION
PRICE DECEMBER 31, 1996 PRICE
--------------- ----------------- --------
<S> <C> <C> <C>
$10.94 to $17.94 94,400 $16.65
$22.94 to $28.75 395,600 $26.55
$30.31 to $33.19 426,750 $32.77
---------------- ------- ------
$10.94 to $33.19 916,750 $28.42
=======
</TABLE>
LONG-TERM DEBT
The sinking fund requirements of long-term debt outstanding at December 31,
1996 (including the maturity of Northern Indiana's first mortgage bonds:
Series P, 6 7/8%, due October 1, 1998; Northern Indiana's medium-term notes
due from April 6, 1998 to August 15, 2001; Lake Erie Land Company's notes
payable due June 30, 1998; and NDC Douglas Properties, Inc.'s notes payable
due December 22, 1999), for each of the four years subsequent to December 31,
1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER
31,
--------------------
<S> <C>
1998............... $ 61,312,109
1999............... $ 11,842,160
2000............... $167,126,920
2001............... $ 28,109,170
</TABLE>
Unamortized debt expense, premium and discount on long-term debt applicable
to outstanding bonds are being amortized over the lives of such bonds.
Reacquisition premiums are being deferred and amortized.
Northern Indiana's Indenture dated August 1, 1939, as amended and
supplemented, securing the first mortgage bonds issued by Northern Indiana,
constitutes a direct first mortgage lien upon substantially all property and
franchises, other than expressly excepted property, owned by Northern Indiana.
In 1994, the Commission authorized Northern Indiana to issue up to
$289,275,000 of its Medium-Term Notes, Series D, due from one year to thirty
years, for purposes of refinancing certain first mortgage bonds and medium-
term notes. During 1994, $120.0 million of the Medium-Term Notes, Series D,
were issued to refinance certain first mortgage bonds. On June 12, 1995, the
remaining $169,275,000 of Medium-Term Notes, Series D, were issued and part of
the proceeds were used to redeem all of the outstanding First Mortgage Bonds,
Series U and Z aggregating $94.8 million, on July 3, 1995.
54
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On February 13, 1996, Capital Markets issued $75 million of 7 3/4% Junior
Subordinated Deferrable Interest Debentures, Series A, due March 31, 2026
(Debentures) pursuant to an underwritten public offering. Proceeds from the
sale of the Debentures were used to pay short-term debt incurred to redeem on
January 12, 1996 Industries' $35 million of 8.75% Preferred Shares, pursuant
to mandatory redemption, and to pay other short-term debt of Capital Markets.
Capital Markets expects to refinance 7.57% Zero Coupon Notes maturing in the
amount of $72.5 million on December 1, 1997.
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 $518.9 million at December 31, 1996.
CURRENT PORTION OF LONG-TERM DEBT
At December 31, 1996 and 1995, Industries' current portion of long-term debt
due within one year was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Northern Indiana Public Service Company:
First mortgage bonds--Series O, 6 3/8%
September 1, 1997........................... $ 25,747 $ --
Medium-term notes--
Interest rates of 5.96% and 5.98% with a
weighted average interest rate of 5.97%
and maturities of July 25, 1997 and July
28, 1997.................................. 40,000 80,000
NIPSCO Capital Markets, Inc.:
Medium-term notes--
9.95%--due June 10, 1996................... -- 7,500
Zero Coupon Notes--
7.57%, $72,500 at maturity, due December 1,
1997...................................... 67,731 --
Lake Erie Land Company:
Notes payable................................ 2,822 2,961
Elm Energy and Recycling (UK), Ltd.:
Term loan facility........................... 6,041 4,554
NDC Douglas Properties, Inc.:
Notes Payable................................ 2,211 1,840
-------- -------
Total current portion of long-term debt.... $144,552 $96,855
======== =======
</TABLE>
SHORT-TERM BORROWINGS
Northern Indiana has a $250 million revolving Credit Agreement with several
banks which terminates August 19, 1999 unless extended by its terms. As of
December 31, 1996, there were no borrowings outstanding
55
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
under this agreement. In addition, Northern Indiana has $14.2 million in lines
of credit which run to May 31, 1997 which are expected to be renewed for the
subsequent twelve-month period. The credit pricing of each of the lines varies
from either the lending banks' commercial prime or market rates. Northern
Indiana has agreed to compensate the participating banks with arrangements
that vary from no commitment fees to a combination of fees which are mutually
satisfactory to both parties. As of December 31, 1996, there were no
borrowings under these lines of credit. The Credit Agreement and lines of
credit are also available to support the issuance of commercial paper.
Northern Indiana also has $273.5 million of money market lines of credit. As
of December 31, 1996 and 1995, $79.0 million and $118.8 million of borrowings
were outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At December
31, 1996, there were no borrowings outstanding under this facility.
Northern Indiana and Capital Markets make use of commercial paper to fund
short-term working capital requirements.
Capital Markets has a $150 million revolving Credit Agreement which will
terminate August 19, 1999, 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, 1996,
there were no borrowings outstanding under this agreement.
Capital Markets also has $95 million of money market lines of credit. As of
December 31, 1996 and 1995, $27.0 million and $17.4 million, respectively, of
borrowings were outstanding under these lines of credit.
At December 31, 1996 and 1995, Industries' short-term borrowings were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Northern Indiana Public Service Company:
Commercial paper
Weighted average interest rate of 5.43% at
December 31, 1996......................... $193,905 $ 44,800
Notes payable--
Issued at interest rates between 5.42% and
5.70% with a weighted average interest
rate of 5.52% and various maturities
between January 10, 1997 and February 27,
1997...................................... 79,000 118,800
NIPSCO Capital Markets, Inc.:
Commercial paper--
Weighted average interest rate of 5.78% at
December 31, 1996......................... 119,300 76,700
Notes payable--
5.60%--due January 13, 1997................ 27,000 17,400
Lake Erie Land Company:
Notes payable................................ -- 1,239
Elm Energy and Recycling (UK), Ltd.:
Standby loan facility........................ 4,949 1,732
Southlake Energy, Inc.:
Revolving loan facility...................... 1,831 --
-------- --------
Total short-term borrowings................ $425,985 $260,671
======== ========
</TABLE>
56
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OPERATING LEASES
On April 1, 1990, Northern Indiana entered into a twenty-year agreement for
the rental of office facilities from Development at a current annual rental
payment of approximately $3.3 million.
The following is a schedule, by years, of future minimum rental payments,
excluding those to associated companies, required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year as
of December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, (DOLLARS IN THOUSANDS)
------------------------ ----------------------
<S> <C>
1997............................................... $ 7,932
1998............................................... 7,501
1999............................................... 6,104
2000............................................... 5,592
2001............................................... 5,513
Later years........................................ 76,067
--------
Total minimum payments required.................... $108,709
========
</TABLE>
The consolidated financial statements include rental expense for all
operating leases as follows:
<TABLE>
<CAPTION>
(DOLLARS
IN
YEAR ENDING DECEMBER 31, THOUSANDS)
------------------------ ----------
<S> <C>
1996....................................................... $8,121
1995....................................................... $8,450
1994....................................................... $7,890
</TABLE>
COMMITMENTS
The Utilities estimate that approximately $774 million will be expended for
construction purposes for the period from January 1, 1997 to December 31,
2001. Substantial commitments have been made by the Utilities in connection
with their programs.
Northern Indiana has entered into a service agreement with Pure Air, a
general partnership between Air Products and Chemicals, Inc. and Mitsubishi
Heavy Industries America, Inc., under which Pure Air provides scrubber
services to reduce sulfur dioxide emissions for Units 7 and 8 at Bailly
Generating Station. Services under this contract commenced on June 15, 1992,
with annual charges of approximately $20 million. The agreement provides that,
assuming various performance standards are met by Pure Air, a termination
payment would be due if Northern Indiana terminates the agreement prior to the
end of the twenty-year contract period.
Northern Indiana has entered into an agreement with Integrated Systems
Solutions Corporation (ISSC), a wholly-owned subsidiary of IBM, for ISSC to
perform all data center, application development and maintenance and desktop
management of Northern Indiana.
Primary is the parent of subsidiaries including Harbor Coal Company (Harbor
Coal), North Lake Energy Corporation (North Lake), Lakeside Energy Corporation
(LEC), Portside Energy Corporation (Portside), and Cokenergy, Inc. (CE).
Primary arranges energy-related projects with large industrial customers and
has entered into certain commitments in connection with these projects.
Harbor Coal Company 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.
57
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
North Lake has entered into a lease for the use of a 75-megawatt energy
facility located at Inland Steel Company. The facility uses steam generated by
Inland Steel to produce electricity which is delivered to Inland Steel. The
facility began commercial operation in May 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 a lease for the use of a 161-megawatt energy facility
to be located at USS Gary Works. The facility will process high pressure steam
into electricity and low pressure steam to be delivered to USX Corporation--US
Steel Group. The fifteen-year lease with a third-party lessor will commence
once the facility is fully constructed. LEC is currently acting as the agent
for the lessor to design, construct, and start up the energy facility. Capital
Markets has guaranteed LEC obligations to the lessor during the construction
period. Capital Markets also guarantees LEC's security deposit obligations
relative to the lease and certain limited LEC obligations to the lessor.
Construction of the project began in January 1996. The facility is scheduled
to be operational in May 1997.
Portside has entered into an agreement with National Steel Corporation
(National) to utilize a new 63-megawatt energy facility at National's Midwest
Division to process natural gas into electricity, process steam and heated
water for a fifteen-year period. Portside intends to lease this facility, once
constructed, from a third party. Additionally, Portside has entered into an
interim agreement, which expires when the lease is established with the third-
party lessor, under which Portside is acting as agent for the lessor to
design, construct, and start up the energy facility. Industries has guaranteed
certain Portside obligations to the lessor during construction. Capital
Markets anticipates guaranteeing certain Portside obligations relative to the
anticipated lease. Construction of the project began in June 1996. The
facility is scheduled to be operational in August 1997.
CE has entered into a fifteen-year service agreement with Inland Steel
Company and the Indiana Harbor Coke Company, LP (Harbor Coke), a subsidiary of
the Sun Company, Inc. This agreement provides that CE will utilize a new
energy facility at Inland's Indiana Harbor Works to scrub flue gases and
recover waste heat from the coke facility being constructed by Harbor Coke and
produce process steam and electricity from the recovered heat which will be
delivered to Inland. CE intends to lease these facilities, once constructed,
from a third party. Additionally, CE has entered into an interim agreement,
which expires when the lease is established with the third party lessor, under
which CE is acting as agent to design, construct and start up the facilities.
Capital Markets has guaranteed certain CE obligations during construction.
Capital Markets anticipates guaranteeing certain CE obligations relative to
the anticipated lease. Construction of the project began in January of 1997.
The facility is scheduled to be operational in July of 1998.
Primary has advanced approximately $42 million and $11 million, at December
31, 1996 and 1995, respectively, to the lessors of the energy related projects
discussed above. These net advances are included in "Current Assets--
Prepayments and other" in the Consolidated Balance Sheet and "Other, net" as a
component of operating activities in the Consolidated Statement of Cash Flows.
PURCHASE OF IWC RESOURCES CORPORATION
On December 19, 1996, Industries and IWC Resources Corporation (IWCR) signed
a definitive agreement under which Industries will acquire IWCR for
approximately $290 million, payable primarily in Industries common shares and
cash. Each share of IWCR stock will be exchanged for $32 of Industries common
shares or cash. Shareholders in total will have the option of taking up to 55
percent of the total purchase price in cash.
IWCR's largest subsidiary, Indianapolis Water Co., provides water service to
approximately 235,000 customers in Indianapolis and adjacent counties. In
addition, IWCR owns an underground utility locating and marking service
business and one of the nation's major gas pipeline construction companies.
58
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1996 DECEMBER 31, 1995
--------------------- ---------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.... $ 26,333 $ 26,333 $ 28,496 $ 28,496
Investments.................. $ 30,003 $ 33,019 $ 25,893 $ 27,045
Long-term debt (including
current portion)............ $1,273,158 $1,220,492 $1,273,376 $1,274,079
Preferred stock.............. $ 144,200 $ 126,379 $ 181,804 $ 164,306
</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 electric
energy in 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 1996, 1995, and 1994:
<TABLE>
<CAPTION>
BASIC STEEL INDUSTRY 1996 1995 1994
-------------------- ---- ---- ----
<S> <C> <C> <C>
Gas revenue percent........................................ 1% 5% 2%
Electric revenue percent................................... 22% 22% 26%
</TABLE>
59
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
QUARTERLY FINANCIAL DATA
The following data summarize certain operating results for each of the
quarters of 1996 and 1995:
<TABLE>
<CAPTION>
1996 QUARTERS ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues...... $ 576,028 $ 364,970 $ 356,274 $ 524,354
Operating expenses and
taxes.................. 481,033 314,461 299,375 440,464
------------ ------------ ------------ ------------
Operating income........ 94,995 50,509 56,899 83,890
Other income
(deductions)........... 461 1,492 6,741 (3,001)
Interest and other
charges................ 27,970 28,572 29,230 29,480
------------ ------------ ------------ ------------
Net income.............. 67,486 23,429 34,410 51,409
Dividend requirements on
preferred shares....... 119 -- -- --
------------ ------------ ------------ ------------
Balance available for
common shareholders.... $ 67,367 $ 23,429 $ 34,410 $ 51,409
============ ============ ============ ============
Earnings per average
common share(a)........ $ 1.08 $ 0.38 $ 0.56 $ 0.85
============ ============ ============ ============
<CAPTION>
1995 QUARTERS ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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
============ ============ ============ ============
</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.
60
<PAGE>
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
SEGMENTS OF BUSINESS
Industries' primary businesses are the distribution and transmission of
natural gas and electric energy. The reportable items for the gas and electric
segments for the years 1996, 1995, and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating information--
Gas operations:
Operating revenues....................... $ 799,395 $ 691,402 $ 681,909
Operating expenses, excluding provision
for utility income taxes................ 702,735 605,805 613,698
---------- ---------- ----------
Operating income before utility income
taxes................................... 96,660 85,597 68,211
Allowance for borrowed funds used during
construction (AFUDC) and carrying
charges (CC)............................ 118 1,606 2,067
---------- ---------- ----------
Operating income before utility income
taxes and including AFUDC and CC........ 96,778 87,203 70,278
---------- ---------- ----------
Electric operations:
Operating revenues....................... 1,022,231 1,030,923 994,492
Operating expenses, excluding provision
for utility income taxes................ 721,603 723,159 703,822
---------- ---------- ----------
Operating income before utility income
taxes................................... 300,628 307,764 290,670
Allowance for borrowed funds used during
construction (AFUDC) and carrying
charges (CC)............................ 778 2,072 2,307
---------- ---------- ----------
Operating income before utility income
taxes and including AFUDC and CC........ 301,406 309,836 292,977
---------- ---------- ----------
Total.................................... 398,184 397,039 363,255
Other income, net.......................... 5,693 (4,241) 2,216
Less--interest and other charges........... 116,148 108,884 103,752
Less--provision for utility income taxes... 110,995 108,449 97,732
---------- ---------- ----------
Net income per Consolidated Statement of In-
come........................................ 176,734 175,465 163,987
Dividend requirements on preferred shares.... 119 3,063 3,063
---------- ---------- ----------
Balance available for common shareholders.... $ 176,615 $ 172,402 $ 160,924
========== ========== ==========
Other information--
Depreciation and amortization expense:
Electric................................. $ 146,444 $ 139,432 $ 135,203
Gas...................................... 68,584 61,705 59,080
---------- ---------- ----------
Total.................................. $ 215,028 $ 201,137 $ 194,283
========== ========== ==========
Construction expenditures:
Electric................................. $ 146,660 $ 132,273 $ 145,095
Gas...................................... 61,221 60,693 57,450
---------- ---------- ----------
Total.................................. $ 207,881 $ 192,966 $ 202,545
========== ========== ==========
Investment information--
Identifiable assets(a):
Electric................................. $2,575,995 $2,586,122 $2,594,976
Gas...................................... 1,006,270 890,192 921,693
---------- ---------- ----------
Total.................................. 3,582,265 3,476,314 3,516,669
Other corporate assets..................... 692,078 523,206 430,469
---------- ---------- ----------
Total assets........................... $4,274,343 $3,999,520 $3,947,138
========== ========== ==========
</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.
61
<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, 1996 and 1995, 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, 1996.
These consolidated financial statements and the schedules referred to below
are the responsibility of Industries' management. Our responsibility is to
express an opinion on these consolidated financial statements and schedules
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NIPSCO
Industries, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules appearing in Exhibit 99.2
and Exhibit 99.3 are presented for purposes of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
January 28, 1997
62
<PAGE>
NIPSCO INDUSTRIES, INC.
SELECTED SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
GAS STATISTICS 1995 1994
- -------------- 1996 -------- --------
<S> <C> <C> <C>
Operating Revenues ($000's)
Residential (including home heating).............. $422,646 $407,233 $449,391
Commercial........................................ 141,193 132,647 152,400
Industrial........................................ 70,062 63,355 76,321
Gas transported for others........................ 33,536 64,255 33,977
Other*............................................ 131,958 23,912 (30,180)
-------- -------- --------
Total........................................... $799,395 $691,402 $681,909
======== ======== ========
Deliveries in dth (000's):
Residential (including home heating).............. 84,146 77,536 73,749
Commercial........................................ 32,164 29,268 28,324
Industrial........................................ 17,732 16,260 15,812
Gas transported for others........................ 194,397 191,571 188,583
Other............................................. 8,263 1,301 707
-------- -------- --------
Total........................................... 336,702 315,936 307,175
======== ======== ========
Customers Served--End of Year:
Residential (including home heating).............. 659,742 648,207 636,601
Commercial........................................ 54,300 53,254 52,245
Industrial........................................ 4,234 4,185 4,218
Other............................................. 80 75 68
-------- -------- --------
Total........................................... 718,356 705,721 693,132
======== ======== ========
</TABLE>
- --------
*Includes deferred gas cost revenue of $95,843, $11,351 and $(43,460),
respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
ELECTRIC STATISTICS 1995 1994
- ------------------- 1996 ---------- ----------
<S> <C> <C> <C>
Operating Revenues ($000's)
Residential................................. $ 269,906 $ 276,575 $ 259,708
Commercial.................................. 247,808 244,776 238,402
Industrial.................................. 428,273 430,579 449,623
Street lighting............................. 8,549 8,428 8,363
Sales for resale............................ 43,272 40,425 22,522
Other**..................................... 24,423 30,140 15,874
---------- ---------- ----------
Total..................................... $1,022,231 $1,030,923 $ 994,492
========== ========== ==========
Sales in kilowatt-hours (000's)
Residential................................. 2,700,234 2,797,247 2,552,430
Commercial.................................. 2,886,940 2,863,879 2,736,683
Industrial.................................. 9,318,353 9,552,777 9,542,109
Street lighting............................. 56,413 55,515 55,438
Sales for resale............................ 1,678,346 1,574,041 564,166
Other....................................... 100,265 80,894 85,568
---------- ---------- ----------
Total..................................... 16,740,551 16,924,353 15,536,394
========== ========== ==========
Customers Served--End of Year:
Residential................................. 365,011 360,425 355,658
Commercial.................................. 42,911 42,228 41,308
Industrial.................................. 2,725 2,697 2,672
Other....................................... 874 873 831
---------- ---------- ----------
Total..................................... 411,521 406,223 400,469
========== ========== ==========
</TABLE>
- --------
**Includes deferred fuel cost revenue of $1,980, $8,688 and $(4,826),
respectively.
63
<PAGE>
NIPSCO INDUSTRIES, INC.
SELECTED SUPPLEMENTAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Operating Revenues
Gas ($000's)............................. $ 799,395 $ 691,402 $ 681,909
Electric ($000's)........................ $1,022,231 $1,030,923 $ 994,492
---------- ---------- ----------
Total Operating Revenues ($000's)...... $1,821,626 $1,722,325 $1,676,401
Operating Margin ($000's).................. $1,050,883 $1,037,194 $ 993,327
Operating Income ($000's).................. $ 286,293 $ 284,912 $ 261,149
Net Income ($000's)........................ $ 176,734 $ 175,465 $ 163,987
Shares outstanding at year end............. 59,805,661 62,379,596 63,905,389
Number of common shareholders.............. 35,339 37,299 39,172
Earnings (loss) per average common share... $ 2.88 $ 2.72 $ 2.48
Return on average common equity............ 15.9% 15.5% 14.6%
Times interest earned (pre-tax)............ 3.55 3.75 3.56
Dividends paid per share................... $ 1.68 $ 1.56 $ 1.44
Dividend payout ratio...................... 58.3% 57.4% 58.1%
Market values during the year:
High..................................... $ 40.250 $ 38.500 $ 33.000
Low...................................... $ 35.250 $ 29.250 $ 26.125
Close.................................... $ 39.625 $ 38.250 $ 29.750
Book value of common shares................ $ 18.40 $ 17.99 $ 17.34
Market-to-book ratio at year end........... 215.4% 212.6% 171.6%
Total Assets ($000's)...................... $4,274,343 $3,999,520 $3,947,138
Construction expenditures ($000's)(a)...... $ 207,881 $ 192,966 $ 202,545
Capitalization:
Common shareholders' equity ($000's)..... $1,100,501 $1,122,215 $1,107,848
Preferred and preference stock--
Northern Indiana Public Service
Company:
Series without mandatory redemption
provision ($000's).................. $ 81,126 $ 81,325 $ 86,389
Series with mandatory redemption
provisions ($000's)................. $ 61,246 $ 63,651 $ 66,057
NIPSCO Industries, Inc.:
Series with mandatory redemption
provision ($000's).................. $ -- $ 35,000 $ 35,000
Long-Term debt ($000's).................. $1,127,106 $1,175,728 $1,180,338
---------- ---------- ----------
Total Capitalization ($000's).......... $2,369,979 $2,477,919 $2,475,632
Number of employees........................ 4,168 4,356 4,441
</TABLE>
Notes: (a) Including AFUDC.
(b)Excluding Carbon County, return would have been 6.1%.
(c)Excluding Carbon County Coal Settlement and related income taxes.
64
<PAGE>
NIPSCO INDUSTRIES, INC.
SELECTED SUPPLEMENTAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1992 1991 1990
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating Revenues
Gas ($000's)................ $ 714,229 $ 666,221 $ 601,920 $ 625,159
Electric ($000's)........... $ 963,643 $ 916,135 $ 933,241 $ 895,836
---------- ---------- ---------- ----------
Total Operating Revenues
($000's)................. $1,677,872 $1,582,356 $1,535,161 $1,520,995
Operating Margin ($000's)..... $ 985,450 $ 927,089 $ 919,951 $ 885,262
Operating Income ($000's)..... $ 262,045 $ 246,217 $ 254,354 $ 247,777
Net Income ($000's)........... $ 156,140 $ 136,648 $ 133,388 $ 125,361
Shares outstanding at year
end.......................... 65,828,838 65,758,350 66,671,615 68,874,229
Number of common shareholders. 41,038 38,097 39,346 41,285
Earnings (loss) per average
common share................. $ 2.31 $ 2.00 $ 1.94 $ 1.81
Return on average common
equity....................... 14.4% 13.1% 12.9% 12.7%
Times interest earned (pre-
tax)......................... 3.47 3.17 2.93 2.81
Dividends paid per share...... $ 1.32 $ 1.24 $ 1.16 $ 1.04
Dividend payout ratio......... 57.1% 62.0% 59.8% 57.5%
Market values during the year:
High........................ $ 34.875 $ 26.625 $ 27.000 $ 19.250
Low......................... $ 26.125 $ 22.500 $ 18.500 $ 15.750
Close....................... $ 32.875 $ 26.500 $ 25.750 $ 18.875
Book value of common shares... $ 16.63 $ 15.73 $ 15.17 $ 14.61
Market-to-book ratio at year
end.......................... 197.7% 168.5% 169.7% 129.2%
Total Assets ($000's)......... $3,912,324 $3,807,941 $3,647,557 $3,625,181
Construction expenditures
($000's)(a).................. $ 180,852 $ 172,329 $ 168,958 $ 152,280
Capitalization:
Common shareholders' equity
($000's)................... $1,094,672 $1,034,530 $1,011,666 $1,005,982
Preferred and preference
stock--
Northern Indiana Public
Service Company:
Series without mandatory
redemption provision
($000's)............... $ 97,753 $ 97,917 $ 98,710 $ 99,374
Series with mandatory
redemption provisions
($000's)............... $ 68,462 $ 70,668 $ 53,978 $ 59,358
NIPSCO Industries, Inc.:
Series with mandatory
redemption provision
($000's)............... $ 35,000 $ 35,000 $ 35,000 $ 35,000
Long-Term debt ($000's)..... $1,192,500 $1,054,454 $1,068,708 $1,165,682
---------- ---------- ---------- ----------
Total Capitalization
($000's)................. $2,488,387 $2,292,569 $2,268,062 $2,365,396
Number of employees........... 4,602 4,648 4,600 4,547
</TABLE>
65
<PAGE>
NIPSCO INDUSTRIES, INC.
SELECTED SUPPLEMENTAL INFORMATION (CONCLUDED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1989 1988 1987 1986
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating Revenues
Gas ($000's)......... $ 677,262 $ 620,723 $ 581,130 $ 741,021
Electric ($000's).... $ 882,303 $ 903,461 $ 870,499 $ 885,106
---------- ---------- ---------- ----------
Total Operating
Revenues ($000's). $1,559,565 $1,524,184 $1,451,629 $1,626,127
Operating Margin
($000's).............. $ 900,035 $ 863,213 $ 777,573 $ 756,712
Operating Income
($000's).............. $ 252,807 $ 257,923 $ 192,415 $ 179,896
Net Income ($000's).... $ 72,112(e) $ 103,449 $ 38,876 $ (40,477)
Shares outstanding at
year end.............. 69,369,492 73,310,210 73,243,100 73,170,788
Number of common
shareholders.......... 43,763 47,324 50,074 56,466
Earnings (loss) per
average common share.. $ 1.00(e) $ 1.41 $ 0.53 (0.55)(d)
Return on average
common equity......... 7.2%(e) 10.4% 4.1% (4.2%)(b)
Times interest earned
(pre-tax)............. 2.02(e) 2.38 1.65 1.96(c)
Dividends paid per
share................. $ 0.84 $ 0.60 $ 0.15 none
Dividend payout ratio.. 84.0%(e) 42.6% 28.3% --
Market values during
the year:
High................. $ 19.625 $ 14.125 $ 13.00 $ 13.50
Low.................. $ 13.125 $ 8.625 $ 8.00 $ 9.375
Close................ $ 19.375 $ 13.875 $ 8.50 $ 11.75
Book value of common
shares ............... $ 13.92 $ 14.03 $ 13.13 $ 12.90
Market-to-book ratio at
year end.............. 139.2% 98.9% 64.7% 91.1%
Total Assets ($000's).. $3,657,718 $3,684,721 $3,821,690 $3,944,637
Construction
expenditures
($000's)(a)........... $ 150,786 $ 116,874 $ 156,750 $ 197,324
Capitalization:
Common shareholders'
equity ($000's)..... $ 965,437 $1,028,554 $ 961,562 $ 943,933
Preferred and
preference stock--
Northern Indiana
Public Service
Company:
Series without
mandatory
redemption
provision
($000's)........ $ 99,874 $ 99,937 $ 191,392 $ 191,392
Series with
mandatory
redemption
provisions
($000's)........ $ 66,309 $ 75,189 $ 105,395 $ 122,122
NIPSCO Industries,
Inc.:
Series with
mandatory
redemption
provision
($000's)........ $ -- $ -- $ -- $ --
Long-Term debt
($000's)............ $1,261,760 $1,308,303 $1,401,326 $1,552,324
---------- ---------- ---------- ----------
Total
Capitalization
($000's).......... $2,393,380 $2,511,983 $2,659,675 $2,809,771
Number of employees.... 4,825 4,946 5,172 5,695
</TABLE>
- --------
(d) Earnings per share were reduced by $1.39 due to the payment in
satisfaction of the Carbon County Coal Company contract litigation.
refund, less associated tax benefits of $30.3 million, related to the
Bailly N1 generating unit.
(e) Earnings per share were reduced by $0.72 due to the $82.0 million
66
<PAGE>
EXHIBIT 21
NIPSCO INDUSTRIES, INC.
LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1996
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 are incorporated in Delaware; and NESI Energy Marketing Canada Ltd.,
NIPSCO Energy Services Canada Ltd. and Southlake Energy, Inc., which are
incorporated in Alberta, Canada. All subsidiaries are wholly-owned unless
otherwise indicated.
Crossroads Pipeline Company
Hamilton Harbour Insurance Services, Ltd.
Kokomo Gas and Fuel Company
NI Telecomm, Inc.
NIPSCO Capital Markets, Inc.
NIPSCO Development Company, Inc.
Its subsidiaries are:
Analytic Systems Laboratories, Inc. (1)
Elm Energy and Recycling (UK) Ltd. (1)
G. R. Clark Corporation
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. (4)
NDC Douglas Properties, Inc.
NIPSCO International Power Systems Company
NIPSCO Security Services, Inc.
Process and Control Technology Corporation
RIC, Inc.
Its subsidiary is:
Cardinal Property Management, Inc.
Riverside Caloric Company
NIPSCO Energy Services, Inc.
Its subsidiaries are:
Green Fuels, Inc.
Inventory Management and Distribution Company, L.L.C. (5)
NESI Energy Marketing, L.L.C. (2)
NESI Power Marketing, Inc.
NIPSCO Energy Services Canada Ltd.
Its subsidiaries are:
FuelMaker Corporation (3)
Southlake Energy, Inc.
NESI Energy Marketing Canada Ltd. (6)
<PAGE>
EXHIBIT 21
NIPSCO INDUSTRIES, INC.
LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1996
(CONTINUED)
NIPSCO Energy Trading Corp.
NIPSCO Fuel Company, Inc.
Its subsidiary is:
NFCO Acquisition Company
NI-TEX, Inc.
Parkway Engineering and Distribution Company, Inc.
Triumph Natural Gas, Inc. (2)
NIPSCO Industries Management Services Company
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.
Shore Line Shops, Incorporated
Primary Energy, Inc.
Its subsidiaries are:
Cokenergy, Inc.
Harbor Coal Company
Lakeside Energy Corporation
Northlake Energy Corporation
Portside Energy Corporation
Speedway Acquisition Corp.
- --------
(1) Majority-owned subsidiary of NIPSCO Development Company, Inc.
(2) Majority-owned subsidiary of NIPSCO Energy Services, Inc.
(3) 50% owned subsidiary of NIPSCO Energy Services Canada Ltd.
(4) Minority-owned subsidiary of NIPSCO Development Company, Inc.
(5) Minority-owned interest of NIPSCO Energy Service, Inc.
(6) 70% owned by NIPSCO Energy Services Canada Ltd.
<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; Form
S-8 Registration Statement No. 33-30621; Form S-8 Registration Statement No.
333-08263; Form S-8 Registration Statement No. 333-19981; Form S-8 Registration
Statement No. 333-19983; Form S-8 Registration Statement No. 333-19985; and
Form S-3 Registration Statement No. 333-22347.
Arthur Andersen LLP
Chicago, Illinois
March 26, 1997
33
