<PAGE>
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
December 31, 1996
DATE OF REPORT (DATE OF EARLIEST EVENT
REPORTED)
----------------------------------
NIPSCO Industries, Inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INDIANA
(STATE OR OTHER JURISDICTION OF INCORPORATION)
1-9779 35-1719974
(COMMISSION FILE NUMBER) (IRS EMPLOYER
IDENTIFICATION NO.)
5265 HOHMAN AVENUE, HAMMOND, INDIANA 46320
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(219) 853-5200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
- --------------------------------------------------------------------------------
<PAGE>
Item 5. Other Events
- ------ ------------
The purpose of this Current Report is to file certain financial information
regarding the Registrant (NIPSCO Industries, Inc.) and its subsidiaries. Such
financial information is set forth in the exhibits to this Current Report.
Exhibits
--------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF ITEM
------- -------------------
<S> <C>
(23) Consent of Arthur Andersen LLP.
(27) Financial Data Schedule.
(99.1) 1996 Annual Report to Shareholders.
- Management's Discussion and Analysis of Financial Condition
and Results of Operations.
- Consolidated Statement of Income.
- Consolidated Balance Sheet.
- Consolidated Statement of Capitalization.
- Consolidated Statement of Long-Term Debt.
- Consolidated Statement of Cash Flows.
- Consolidated Statement of Common Shareholders' Equity.
- Notes to Consolidated Financial Statements.
- Report of Independent Public Accountants.
- Selected Supplemental Information.
(99.2) Condensed Financial Information of NIPSCO Industries, Inc. and
Subsidiaries.
- Schedule I - Condensed Balance Sheet.
- Schedule I - Condensed Statement of Income.
- Schedule I - Condensed Statement of Cash Flows.
- Notes to Condensed Financial Statements.
(99.3) NIPSCO Industries, Inc. Schedule of Valuation and Qualifying
Accounts.
(99.4) Computation of Per Share Earnings.
</TABLE>
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
NIPSCO Industries, Inc.
(Registrant)
Date February 14, 1997 By /s/ Nina M. Rausch
----------------------------- --------------------------------
Nina M. Rausch
Secretary
February 14, 1997
2
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------
(23) Consent of Arthur Andersen LLP.
(27) Financial Data Schedule.
(99.1) 1996 Annual Report to Shareholders.
- Management's Discussion and Analysis of Financial Condition
and Results of Operations.
- Consolidated Statement of Income.
- Consolidated Balance Sheet.
- Consolidated Statement of Capitalization.
- Consolidated Statement of Long-Term Debt.
- Consolidated Statement of Cash Flows.
- Consolidated Statement of Common Shareholders' Equity.
- Notes to Consolidated Financial Statements.
- Report of Independent Public Accountants.
- Selected Supplemental Information.
(99.2) Condensed Financial Information of NIPSCO Industries, Inc. and
Subsidiaries.
- Schedule I - Condensed Balance Sheet.
- Schedule I - Condensed Statement of Income.
- Schedule I - Condensed Statement of Cash Flows.
- Notes to Condensed Financial Statements.
(99.3) NIPSCO Industries, Inc. Schedule of Valuation and Qualifying
Accounts.
(99.4) Computation of Per Share Earnings.
3
<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 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated January 28, 1997, on NIPSCO Industries, Inc.'s consolidated
financial statements and related schedules as of and for the year ended December
31, 1996, included in this Form 8-K, into NIPSCO Industries, Inc.'s previously
filed Form S-8 Registration Statement No. 33-30619; Form S-8 Registration
Statement No. 33-30621; Form S-8 Registration Statement No. 333-08263; Form S-8
Registration Statement No. 333-19981; Form S-8 Registration Statement No. 333-
19983; and Form S-8 Registration Statement No. 333-19985.
Arthur Andersen LLP
Chicago, Illinois
February 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of NIPSCO Industries, Inc. for twelve months ended
December 31, 1996, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,194,788
<OTHER-PROPERTY-AND-INVEST> 250,144
<TOTAL-CURRENT-ASSETS> 511,079
<TOTAL-DEFERRED-CHARGES> 86,863
<OTHER-ASSETS> 231,469
<TOTAL-ASSETS> 4,274,343
<COMMON> 477,935
<CAPITAL-SURPLUS-PAID-IN> 31,336
<RETAINED-EARNINGS> 591,230
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,100,501
61,246
81,126
<LONG-TERM-DEBT-NET> 403,983
<SHORT-TERM-NOTES> 112,780
<LONG-TERM-NOTES-PAYABLE> 723,123
<COMMERCIAL-PAPER-OBLIGATIONS> 313,205
<LONG-TERM-DEBT-CURRENT-PORT> 146,052
1,828
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,330,499
<TOT-CAPITALIZATION-AND-LIAB> 4,274,343
<GROSS-OPERATING-REVENUE> 1,821,626
<INCOME-TAX-EXPENSE> 110,995
<OTHER-OPERATING-EXPENSES> 1,424,338
<TOTAL-OPERATING-EXPENSES> 1,535,333
<OPERATING-INCOME-LOSS> 286,293
<OTHER-INCOME-NET> 5,693
<INCOME-BEFORE-INTEREST-EXPEN> 291,986
<TOTAL-INTEREST-EXPENSE> 115,252
<NET-INCOME> 176,734
119
<EARNINGS-AVAILABLE-FOR-COMM> 176,615
<COMMON-STOCK-DIVIDENDS> 103,981
<TOTAL-INTEREST-ON-BONDS> 31,847
<CASH-FLOW-OPERATIONS> 321,011
<EPS-PRIMARY> 2.88
<EPS-DILUTED> 2.87
</TABLE>
<PAGE>
EXHIBIT 99.1
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 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.
- -------------------------------------------------------------------------------
23
<PAGE>
<TABLE>
<CAPTION>
1996 Financial Review
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
The components of the changes in gas and electric revenues are shown in
the following tables:
Year 1996 Year 1995
Compared to Compared to
Year 1995 Year 1994
- ------------------------------------------------------------------
<S> <C> <C>
(Dollars in millions)
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.)
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
- --------------------------------------------------------------------------------
24
<PAGE>
1996 Financial Review
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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.
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 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
- --------------------------------------------------------------------------------
25
<PAGE>
1996 Financial Review
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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.
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
- --------------------------------------------------------------------------------
26
<PAGE>
1996 Financial Review
- ------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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.
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
- ------------------------------------------------------------------------------
27
<PAGE>
1996 Financial Review
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Concluded)
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.
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>
<TABLE>
<CAPTION>
Cost of Fuel for Electric Generation
(Mills per Kwh)
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>
<TABLE>
<CAPTION>
Cost of Gas Purchased for Resale Chart
(Dollars per dekatherm)
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>
- --------------------------------------------------------------------------------
28
<PAGE>
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
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of this statement.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
----------------------------------------------------------------------------------------------------------- ----------
(Dollars in thousands)
<S> <C> <C>
Assets
Utility Plant, at original cost (including construction work
in progress of $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
========== ==========
The accompanying notes to consolidated financial statements are an integral part of this statement.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- --------------------------------------------------------------------------------------------------------------- ----------
<S> <C> <C>
Capitalization and Liabilities (Dollars in thousands)
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>
31
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Capitalization
- ------------------------------------------------------------------------------------------------------------------------------------
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%
========== ===== ========== =====
The accompanying notes to consolidated financial statements are an integral part of this statement.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Long-Term Debt
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- ---------------------------------------------------------------------------------------------------------- -----------
<S> <C> <C>
Northern Indiana Public Service Company: (Dollars in thousands)
First mortgage bonds--
Series O, 6-3/8%--due September 1, 1997............................................... $ -- $ 25,747
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
========== ==========
The accompanying notes to consolidated financial statements are an integral part of this statement.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------- ---------------- ----------
<S> <C> <C> <C>
Cash flows from operating activities: (Dollars in thousands)
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
========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of this statement.
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
Consolidated Statement of Common Shareholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Dollars in Thousands Shares
---------------------------------------------------------------------------- ---------------------
Additional Currency
Common Paid-In Retained Treasury Translation Common Treasury
Total Shares Capital Earnings Shares Adjustment Other Shares Shares
========== ======== ======== ========= ========= ========== ======= ========= =========
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 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>
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
35
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
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.
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
- --------------------------------------------------------------------------------
36
<PAGE>
Notes to Consolidated Financial Statements(Concluded)
- -------------------------------------------------------------------------------
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.
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.
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
37
<PAGE>
Notes to Consolidated Financial Statement (Continued)
- --------------------------------------------------------------------------------
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.
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.
- --------------------------------------------------------------------------------
38
<PAGE>
Notes to Consolidated Financial Statement (Continued)
- --------------------------------------------------------------------------------
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.
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.
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
- --------------------------------------------------------------------------------
39
<PAGE>
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
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.
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>
- --------------------------------------------------------------------------------
40
<PAGE>
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>
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.
- --------------------------------------------------------------------------------
41
<PAGE>
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
Northern Indiana's current rate-making includes the cost of providing these
benefits based on the related insurance premiums. On December 30, 1992, the
Commission authorized the accrual method of accounting for postretirement
benefits for rate-making purposes consistent with SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions," and authorized the
deferral of the differences between the net periodic postretirement benefits
costs and the insurance premiums paid for such benefits as a regulatory asset
until such time as the accrual cost method may be reflected in the rate-making
process. The Commission stated that a deferral period of four years or less
would be rebuttably presumed to be reasonable and also indicated each utility
would have to demonstrate its postretirement benefit costs were prudent and
reasonably incurred at the time such costs were proposed to be recovered in the
rate-making process. Northern Indiana has been deferring as a regulatory asset
the difference between the amount that would have been charged to expense under
pay-as-you-go accounting and the amount accrued in accordance with the standard
in anticipation of approval for these costs in the rate-making process.
On November 20, 1996, Northern Indiana filed with the IURC for inclusion of
accrual-based postretirement benefit costs in the rate-making process. These
costs include an amortization of the existing regulatory asset consistent with
the remaining amortization period for the transition obligation. Hearings are
scheduled during March 1997 and Northern Indiana expects a decision during the
second quarter of 1997. Management believes that Northern Indiana will
ultimately be successful in obtaining such approval.
The following table sets forth the plans accumulated postretirement benefit
obligation as of December 31, 1996 and 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 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
- --------------------------------------------------------------------------------
42
<PAGE>
<TABLE>
<CAPTION>
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
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:
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
</TABLE>
Cumulative preferred stock--no par value--
adjustable rate (6.00% at December 31, 1996),
Series A (stated value $50 per share) $ 50.00
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:
Series Redemption Price Per Share Sinking Fund Or Mandatory
Redemption
- --------------------------------------------------------------------------------
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.
-------------------------------------------
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:
Year Ending December 31,
- ---------------------------------------
1998........................ $1,827,700
1999........................ $1,827,700
2000........................ $1,827,700
2001........................ $1,827,700
- ---------------------------------------
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
- --------------------------------------------------------------------------------
43
<PAGE>
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
Plan and 1994 Plan permit the following types of grants, separately or in
combination: nonqualified stock options, incentive stock options, restricted
stock awards, stock appreciation rights, and performance units. No incentive
stock options or performance units were outstanding at December 31, 1996. Under
both Plans, the exercise price of each option equals the market price of
Industries' common shares on the date of grant. Each option's maximum term is
ten years and vests one year from the date of grant.
The stock appreciation rights (SARs) may be exercised only in tandem with
stock options on a one-for-one basis and are payable in cash, Industries common
shares, or a combination thereof. Restricted stock awards are restricted as to
transfer and are subject to forfeiture for specific periods from the date of
grant. Restrictions on shares awarded in 1995 lapse five years from date of
grant and vesting is variable from 0% to 200% of the number awarded, subject to
specific earnings per share and stock appreciation goals. Restrictions on shares
awarded in 1996 lapse two years from date of grant and vesting is variable from
0% to 100% of the number awarded, subject to specific performance goals. If a
participant's employment is terminated prior to vesting other than by reason of
death, disability or retirement, restricted shares are forfeited. There were
262,000, 330,500, and 150,500 restricted shares outstanding at December 31,
1996, 1995, and 1994, respectively.
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 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 Nonqualified Stock
Stock Options Options With SARs
- ------------------------------------------------------------------------------------
Weighted Average Option
Year Ended December 31, 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
========= ======
<PAGE>
Weighted Average Option
Year Ended December 31, 1995 Options Option Price Options Price
- ------------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
44
<PAGE>
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
<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>
The following table summarizes information about non-qualified stock
options at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ------------------------------------------------------------------------------------------------------
Range of Number Outstanding Weighted Average Weighted Average
Option Price at December 31, 1996 Remaining Contractual life Option 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
=========
OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------
Range of Number Exercisable Weighted Average
Option Price at December 31, 1996 Option Price
- ------------------------------------------------------------------------------------------------------
$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:
Year Ending December 31,
- ----------------------------------------
1998.................... $ 61,312,109
1999.................... $ 11,842,160
2000.................... $167,126,920
2001.................... $ 28,109,170
- ----------------------------------------
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.
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
- --------------------------------------------------------------------------------
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
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% due 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 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>
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>
- --------------------------------------------------------------------------------
46
<PAGE>
NOTES TO CONSOLIDATED FINANICAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
The consolidated financial statements include rental expense for all
operating leases as follows:
<TABLE>
<CAPTION>
Year Ending December 31, (Dollars in thousands)
- --------------------------------------------------------------------------------
<S> <C>
1996...................................................... $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.
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.
- --------------------------------------------------------------------------------
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
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.
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>
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
======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 Quarters Ended March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------------- -------- -------- --------
<S> <C> <C> <C> <C>
(Dollars in thousands, except per share amounts)
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.
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
- ---------------------------------------------------------------------------------------------------------- ---------- ----------
<S> <C> <C> <C>
(Dollars in thousands)
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 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
========== ========== ==========
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.
- --------------------------------------------------------------------------------
49
<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.
Chicago, Illinois
January 28, 1997 Arthur Andersen LLP
- --------------------------------------------------------------------------------
50
<PAGE>
<TABLE>
<CAPTION>
Selected Supplemental Information
- ----------------------------------------------------------------------------------------------------------------------------------
GAS STATISTICS
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------- ----------- ------------
<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>
==================================================================================================================================
ELECTRIC STATISTICS
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------- ----------- -----------
<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
=========== ========== ===========
**Includes deferred fuel cost revenue of $1,980, $8,688 and $(4,826), respectively.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Selected Supplemental Information (Concluded)
- -----------------------------------------------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
52
<PAGE>
<TABLE>
<CAPTION>
Selected Supplemental Information (Concluded)
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
Selected Supplemental Information (Concluded)
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.
/e/ Earnings per share were reduced by $0.72 due to the $82.0 million
refund, less associated tax benefits of $30.3 million, related to
the Bailly N1 generating unit.
- -------------------------------------------------------------------------
53
<PAGE>
EXHIBIT 99.2
NIPSCO Industries, Inc. and Subsidiaries
INDEX
-----
PAGE
----
Condensed Financial Information of NIPSCO Industries, Inc. and
Subsidiaries.
- - Schedule I - Condensed Balance Sheet. 1
- - Schedule I - Condensed Statement of Income. 2
- - Schedule I - Condensed Statement of Cash Flows. 3
- - Notes to Condensed Financial Statements. 4
<PAGE>
EXHIBIT 99.2
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
=========== ==========
CAPITALIZATION AND LIABILITIES
- ------------------------------
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.
4
<PAGE>
EXHIBIT 99.2
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.
2
<PAGE>
EXHIBIT 99.2
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 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.
3
<PAGE>
EXHIBIT 99.2
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.
4
<PAGE>
EXHIBIT 99.3
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
Consolidated Balance Sheet
from Assets to Which They
Apply:
Reserve for accounts
receivables............... $7,264 $ 6,912 $-- $8,607 $ 5,569
Reserve for investments, at
equity.................... $ 850 $ 1,103 $-- $-- $ 1,953
Reserves Classified Under
Reserve Section of
Consolidated Balance Sheet:
Injuries and damages
reserve................... $1,837 $ 4,875 $-- $2,336 $ 4,376
Environmental reserves..... $5,006 $15,862 $-- $4,079 $16,789
Miscellaneous operating
reserves.................. $4,091 $ 380 $-- $-- $ 4,471
</TABLE>
===============================================================================
<PAGE>
EXHIBIT 99.4
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
(DOLLARS IN THOUSANDS)
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%.
===============================================================================
1
<PAGE>
EXHIBIT 99.4
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
(DOLLARS IN THOUSANDS)
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%.
===============================================================================
2
<PAGE>
EXHIBIT 99.4
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
(DOLLARS IN THOUSANDS)
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%.
===============================================================================
3
