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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995
OR
() Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number 1-4125
NORTHERN INDIANA PUBLIC SERVICE COMPANY
(Exact name of registrant as specified in its charter)
Indiana 35-0552990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5265 Hohman Avenue, Hammond, Indiana 46320-1775
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 853-5200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
--------------------- ---------------------
Series A Cumulative Preferred - No Par Value New York
4 1/4% Cumulative Preferred - $100 Par Value American
Securities registered pursuant to Section 12(g) of the Act:
Cumulative Preferred Stock - $100 Par Value
(4 1/2%, 4.22%, 4.88%, 7.44% and 7.50% Series)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
-------- --------
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (X)
As of February 29, 1996, 73,282,258 shares of the registrant's
Common Shares, no par value, were issued and outstanding, all held
beneficially and of record by NIPSCO Industries, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
None
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Form 10-K
Table of Contents
Page
====
PART I
Item 1 Business 1
2 Properties 8
3 Legal Proceedings 9
4 Submission of Matters to a Vote
of Security Holders 10
PART II
Item 5 Market for the Registrant's Common
Equity and Related Shareholder Matters 10
6 Selected Financial Data 11
7 Management's Discussion and Analysis of
Financial Condition and Results of Operation 11
8 Financial Statements and Supplementary Data 18
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 45
PART III
Item 10 Directors and Executive Officers of
the Registrant 46
11 Executive Compensation 49
12 Security Ownership of Certain Beneficial
Owners and Management 55
13 Certain Relationships and Related Transactions 55
PART IV
Item 14 Exhibits, Financial Statement Schedules 55
and Reports on Form 8-K
SIGNATURES
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Part I
ITEM 1. BUSINESS.
Northern Indiana Public Service Company (Northern Indiana) is a
public utility operating company, incorporated in Indiana on August 2,
1912, engaged in supplying natural gas and electric energy to the public.
It operates in 30 counties in the northern part of Indiana, serving an area
of about 12,000 square miles with a population of approximately 2,188,000.
At December 31, 1995, Northern Indiana served approximately 636,600
customers with gas and approximately 403,900 with electricity.
See "Segments of Business" in the Notes to Consolidated Financial
Statements regarding financial information about industry segments.
HOLDING COMPANY STRUCTURE. Effective March 3, 1988, Northern
Indiana became a subsidiary of NIPSCO Industries, Inc., an Indiana
corporation (Industries).
ELECTRIC OPERATIONS. Northern Indiana owns and operates four coal
fired electric generating stations with net capabilities of 3,179,000
kilowatts (kw), two hydroelectric generating plants with net capabilities
of 10,000 kw, and four gas fired combustion turbine generating units with
net capabilities of 203,000 kw, for a total system net capability of
3,392,000 kw. During the year ended December 31, 1995, Northern
Indiana generated 85.8% and purchased 14.2% of its electric requirements.
Northern Indiana's 1995 electric control area peak of 3,161,200
kw, which includes Wabash Valley Power Association, Inc. (WVPA) and
Indiana Municipal Power Agency (IMPA) for which Northern Indiana
controls interchange operations, was set on July 14, 1995. The 1995
peak established a new all-time peak exceeding the old peak of 2,953,600
kw established on August 27, 1993. Northern Indiana's 1995 internal peak
load, which excludes WVPA and IMPA, was 2,882,200 kw set on July 14, 1995.
This also established a new all-time internal peak load exceeding the old
peak of 2,736,100 kw established on August 27, 1993.
Northern Indiana's electric system is interconnected with that
of American Electric Power (formerly Indiana Michigan Power Company),
Commonwealth Edison Company, CINergy Services, Inc. (formerly PSI
Energy, Inc.), Consumers Power Company, WVPA, IMPA, and Central Illinois
Public Service Company. Electric energy is purchased from, sold to,
or exchanged with various other utilities and power marketers.
Northern Indiana provides WVPA with transmission and distribution
service, operating reserve requirements and capacity deficiency service,
and provides IMPA with transmission service, operating reserve
requirements and capacity deficiency service, in Northern Indiana's control
area. Northern Indiana also engages in sales and services under
interconnection agreements with WVPA and IMPA.
WVPA provides service to twelve Rural Electric Membership Corporations
(REMC's) located in Northern Indiana's control area. IMPA provides service
to the municipal electric system of the city of Rensselaer located in
Northern Indiana's control area.
Northern Indiana and WVPA have executed a supplemental agreement for
unit peaking capacity and energy. Pursuant to this agreement, which runs
through December, 2001, WVPA purchases 90,000 kw of capacity per month.
Northern Indiana has full requirement agreements with each of its
eight municipal wholesale customers. These full requirement contracts
became effective October 1, 1987, and extend through January 31, 1998.
Northern Indiana is a member of the East Central Area Reliability
Coordination Agreement (ECAR). ECAR is one of nine regional electric
reliability councils established to coordinate planning and operations of
member companies regionally and nationally.
FUEL SUPPLY. The generating units of Northern Indiana are located at
Bailly, Mitchell, Michigan City and Schahfer Generating Stations. Northern
Indiana's thirteen steam generating units have a net capability of 3,179,000
kw. Coal is the primary source of fuel for all units, except for three,
which utilize natural gas. In addition, Northern Indiana's four combustion
turbine generating units with a net capability to 203,000 kw are fired by
gas. Fuel requirements for Northern Indiana's generation for 1995 were
supplied as follows:
Coal 96.4%
Natural gas 3.6%
In 1995, Northern Indiana used approximately 8.0 million tons of coal
at its generating stations. Northern Indiana has established a normal level
of coal stock which provides adequate fuel supply during the year under all
conditions.
Annual coal requirements for Northern Indiana's electric generating
units through 2000 are estimated to range from 8.1 million tons to 8.5
million tons, depending from year to year upon anticipated sales levels,
scheduled maintenance and other variables. These requirements are being or
will be met in part under long-term contracts as follows:
MILLION TONS/YEAR SULFUR CONTENT EXPIRATION
================= ============== ==========
1.0 High 1998
Up to 1.0(a) High 1998
1.3(b) Low 2001
1.5(c) Low 1998
1.0(c) Low 1997
1.0(c) Low 1997
.5 High 1998
(a) Contract calls for requirements up to 1.0 million tons/contract year.
(b) 1.5 million tons in 1996.
(c) Plus or minus 10%/contract year.
The average cost of coal consumed in 1995 was $28.28 per ton or 15.89
mills per kilowatt-hour (kwh) generated as compared to $32.04 per ton or
16.85 mills per kwh generated in 1994. Northern Indiana's forecasts
indicate that its coal costs will remain at the current level or be slightly
lower over the next two years.
COAL RESERVES. Included in the previous table of coal contracts is a
coal mining contract with Cyprus Shoshone Coal Corporation (Cyprus) under
which Cyprus is mining Northern Indiana's coal reserves in the Cyprus mine
through the year 2001. The costs of the reserves are being recovered
through the rate making process as such coal reserves are used to produce
electricity.
FUEL ADJUSTMENT CLAUSE. See "Fuel Adjustment Clause" in the Notes to
Consolidated Financial Statements.
GAS OPERATIONS. Northern Indiana supplies natural gas of about 1,000
British thermal units (Btu) per cubic foot. In a 24-hour period ended
January 5, 1995, Northern Indiana's 1995 maximum day sendout was 1,545,616
dekatherms (dth).
In 1995, all of the gas supplied by Northern Indiana was transported
by ANR Pipeline Company (ANR), Crossroads Pipeline Company (Crossroads),
Midwestern Gas Transmission Company (Midwestern), Natural Gas Pipeline
Company of America (Natural), Panhandle Eastern Pipe Line Company
(Panhandle), Tennessee Gas Pipeline Company (Tennessee) and Trunkline Gas
Company (Trunkline). Approximately 32% of Northern Indiana's 1995 gas
supply was purchased on the spot market, generally on 30-day agreements.
The average price per dth (including take-or-pay and transition
charges) in 1995 was $2.98, compared to $2.99 in 1994, and the average cost
of purchased gas, after adjustment for take-or-pay and transition charges
billed to transport customers was $2.63 per dth as compared to $2.90 per dth
in 1994.
The transportation rates of Crossroads, and the transportation and
storage rates of ANR, Midwestern, Natural, Panhandle, Tennessee and
Trunkline to Northern Indiana, are subject to change in accordance with rate
proceedings filed with the Federal Energy Regulatory Commission (FERC).
Agreements have been negotiated with natural gas suppliers to replace
former pipeline supplier contracts pursuant to the requirements of FERC
Order No. 636 (See "Rate Matters - FERC Order No. 636" in the Notes to
Consolidated Financial Statements.) Northern Indiana also has firm
transportation agreements with the pipelines, which allow Northern Indiana
to move its gas through the pipelines' transmission systems. Northern
Indiana also has producer agreements which allow for the purchase of gas
either from gas marketers or producers.
Northern Indiana has a curtailment plan approved by the Indiana
Utility Regulatory Commission (Commission). Effective on August 11, 1981,
the plan allows unrestricted gas sales by Northern Indiana. There were no
firm sales curtailments in 1995 and none are expected during 1996.
Northern Indiana operates an underground gas storage field at Royal
Center, Indiana, which currently has a storage capacity of 6.75 million dth.
Withdrawals have been made in the 1995-1996 winter of up to 117,074 dth per
day.
In addition, Northern Indiana has several gas storage service
agreements which make possible the withdrawal of substantial quantities of
gas from other storage facilities. All of the storage agreements have
limitations on the volume and timing of daily withdrawals. These contracts
provide in the aggregate for approximately 28,559,180 dth of annual stored
volume, and allow for approximately 573,863 dth of maximum daily withdrawal.
Northern Indiana has a liquefied natural gas plant in LaPorte County
which is designed for peak shaving and has the following capacities:
maximum storage of 4,000,000 dth; maximum liquefaction rate (gas to liquid),
20,000 dth per day; maximum vaporization rate (output to distribution
system), 300,000 dth per day.
GAS COST ADJUSTMENT CLAUSE. See "Gas Cost Adjustment Clause" in the
Notes to Consolidated Financial Statements.
TAKE-OR-PAY PIPELINE GAS COSTS. See "Take-or-Pay Pipeline Gas Costs"
in the Notes to Consolidated Financial Statements.
FERC ORDER 636. See "FERC Order No. 636" in the Notes to Consolidated
Financial Statements.
REGULATION. Northern Indiana is subject to regulation by the
Commission as to rates, service, accounts, issuance of securities, and in
other respects. See "Rate Matters" in the Notes to Consolidated Financial
Statements. It is also subject to limited regulation by local public
authorities.
In 1995, about 4% of Northern Indiana's electric revenues were derived
from electric service it furnished at wholesale in interstate commerce to
other utility companies, municipalities and WVPA (see "Item 1. Business-
Electric Operations" regarding WVPA). Northern Indiana's wholesale rates
and operations are subject to the jurisdiction of the FERC. The
jurisdiction of the FERC does not extend to the issuance of securities by
Northern Indiana since it is a public utility organized and operating in the
State of Indiana, under the laws of which its security issues are regulated
by the Commission. The FERC on October 21, 1954, declared Northern
Indiana exempt from the provisions of the Natural Gas Act.
RATE MATTERS. For information regarding Northern Indiana's gas rates,
take-or-pay pipeline gas costs and gas transition costs, see "Take-or-Pay
Pipeline Gas Costs" and "FERC Order No. 636" in the Notes to Consolidated
Financial Statements.
Northern Indiana filed an Alternative Regulatory Plan (ARP) with
the Commission on November 29, 1995. The purpose of the ARP is to create a
business and regulatory environment and structure which will permit
increased choice for gas customers, competition among suppliers and improved
natural gas service. In its petition, Northern Indiana stated it would
propose to implement new rates and services that would include, but not be
limited to, further unbundling of services for additional customer classes
which would include increased customer choice for sources of natural gas
supply, negotiated services and prices, and incentive gas and storage cost
mechanisms.
CONSTRUCTION BUDGET. Northern Indiana's 1996-2000 construction budget
(including allowance for funds used during construction) is estimated at
approximately $764 million, including $205 million in 1996, $177 million in
1997, $156 million in 1998, $117 million in 1999 and $109 million in 2000.
Northern Indiana's construction estimates include adjustments for
anticipated inflation. No new electric generating units are planned in the
1996-2000 budget. Northern Indiana does not have, and has no plans to
construct, a nuclear generating unit.
COMPETITION. In municipalities where Northern Indiana renders
electric service to the general public as a public utility, no other utility
renders electric or gas service, except in Angola, DeMotte, Rome City,
Wanatah and Waterloo. In localities where Northern Indiana renders gas
service only, it competes with electric utilities, municipal or private, for
the business for which they render alternative electric service.
All electric service territories within the State of Indiana are
assigned to the existing suppliers, and boundaries of new territories
outside existing municipalities are assigned to the utility having the
nearest existing electric distribution lines. Only existing municipal
electric utilities may expand their service areas and then only into areas
that have been annexed by the municipality, subject to the approval of the
Commission and certain other conditions. Northern Indiana makes no
representation as to the possible effect upon its business of present or
future competition by private or municipal utilities or governmental
agencies, instrumentalities or authorities within the territory now served.
Northern Indiana is also subject to competition for gas sales to
industrial customers through the ability of these customers, under Northern
Indiana's rate provisions, to make their own purchases of gas and have
Northern Indiana transport the gas to them. During 1995, gas transportation
represented 59% of Northern Indiana's total gas sendout.
Indiana law requires Commission approval before a gas customer of a
utility may bypass the utility and make other arrangements for gas service.
Any entity which transports gas from outside Indiana for direct sale or
delivery to itself or other end-users within the state will be considered a
public utility and must obtain a necessity certificate from the Commission
in order to engage in such activities.
EMPLOYEE RELATIONS. Northern Indiana had 4,111 employees at
December 31, 1995. Approximately 64% of Northern Indiana's employees
(physical and clerical workers) are represented by two local unions of the
United Steelworkers of America, AFL-CIO-CLC. Effective June 1, 1993, the
bargaining unit employees ratified four-year agreements which continue until
June 1, 1997. These agreements provide for base wage increases of two
percent in 1993, three percent in 1994 and 1995, and three and one-half
percent in 1996. Additional economic provisions include a variable
compensation plan linked to improvements in productivity.
ENVIRONMENTAL MATTERS. Northern Indiana has an ongoing program to
remain aware of laws and regulations involved with hazardous waste and other
environmental matters. It is Northern Indiana's intent to continue to
evaluate its facilities and properties with respect to these rules and
identify any sites that would require corrective action. Northern Indiana
has recorded a reserve of $4.8 million to cover probable corrective actions
as of December 31, 1995. However, environmental regulations and remediation
techniques are subject to future change. Based upon management's
understanding of current laws and regulations, Northern Indiana believes
that any corrective actions required, after consideration of insurance
coverages, will not have a significant impact on the financial position or
results of operations of Northern Indiana.
Northern Indiana is subject to regulation with regard to environmental
matters by various federal, state and local authorities. Northern Indiana
cannot forecast the effect of all such regulation upon its generating,
transmission and other facilities, or its operations. Northern Indiana
intends to comply with all applicable governmental requirements, and has
adopted an environmental policy that fosters the pursuit of proactive sound
environmental programs and management.
The application of federal and state restrictions to protect the
environment, including but not limited to those hereinafter described,
involves or may involve review, certification or issuance of permits by
various federal, state and local authorities. Such restrictions,
particularly in regard to emissions into the air and water, and disposal of
solid wastes, may impact the operation of Northern Indiana's facilities, and
may also require substantial investments.
Northern Indiana's total capital expenditures from January 1, 1991,
through December 31, 1995 for pollution control facilities were
approximately $109 million and were financed in part by the sale of
Pollution Control Notes and Bonds-Jasper County. Northern Indiana
anticipates expenditures of approximately $162 million for pollution control
equipment in the 1996-2000 period which includes anticipated expenditures of
$78 million in 1996 and $32 million in 1997.
AIR. The Indiana Department of Environmental Management (IDEM) Office
of Air Management has submitted to the U.S. Environmental Protection Agency
(EPA) a State Implementation Plan (SIP) in accordance with the requirements
of the Clean Air Act Amendments of 1977.
ATTAINMENT-NONATTAINMENT. Under the Clean Air Act Amendments of 1977,
the State has identified areas which are in compliance with the
National Ambient Air Quality Standards (NAAQS) (attainment areas) and areas
that are not in compliance with respect to the sulfur dioxide, particulate
matter and other pollutant standards established by NAAQS (nonattainment
areas). Portions of Lake and LaPorte Counties in which Northern Indiana
operates electric generating facilities remain designated as nonattainment
areas for sulfur dioxide. Control plans for each county are being
implemented. Any reductions in emissions of sulfur dioxide required to be
made by Northern Indiana have been made, and Northern Indiana anticipates
no increased costs as a result of the implementation of the control plans
for Lake and LaPorte Counties. IDEM initiated the process for redesignating
LaPorte County to attainment for sulfur dioxide. IDEM discussed this
process at a public hearing in Michigan City on November 16, 1995.
Lake County, Indiana, is designated as a nonattainment area for
particulate matter or PM-10. The State of Indiana promulgated a PM-10 SIP
rule, which became effective on June 11, 1993. The rule requires reduced
opacity and mass emissions limits at Dean H. Mitchell Station as well as the
establishment of a fugitive dust control and continuous compliance plans.
Northern Indiana invested $2.8 million to rebuild the Unit 5 electrostatic
precipitator during 1993 to help meet the PM-10 emission limits. In order
to improve fugitive dust control, during 1994 Mitchell Station installed a
water spray dust suppression system to minimize emissions from the coal pile
and coal unloading areas. Porter County has been determined to have an
unclassified status for PM-10. According to state requirements, the area
will be monitored for PM-10 impacts to determine the appropriate
classifications with respect to the NAAQS. All other counties where
Northern Indiana operates electric production facilities have an
unclassified status for PM-10.
Under Title I of the Clean Air Act Amendments of 1990 (CAAA), Lake and
Porter Counties are classified as severe nonattainment areas for ozone.
Passage of the CAAA results in new provisions applicable to mobile and
stationary sources in Lake and Porter Counties. Control measures requiring
reduction of emissions of nitrogen oxides from the Mitchell and Bailly
Generating Stations as a consequence of the Lake Michigan Ozone Control
Program have yet to be determined. Northern Indiana is evaluating potential
least-cost methods to reduce emissions of nitrogen oxides from the
generating stations. The EPA has approved a conditional waiver from present
reduction of nitrogen oxides from Title I. Northern Indiana cannot determine
the cost impact of the future provisions.
ACID RAIN. Title IV of the CAAA addresses the acid rain issue by
targeting large sources of sulfur dioxide and nitrogen oxides for
significant reductions. The core acid rain rules for sulfur dioxide were
promulgated by the EPA January 11, 1993. As required by the regulations,
Bailly Units 7 and 8 and Michigan City Unit 12 reduced their sulfur dioxide
emissions below 2.5 pounds per million British thermal units (lbs/mm Btu) by
January 1, 1995. These units, along with the remainder of Northern Indiana's
coal-fired units, are required to reduce their sulfur dioxide emissions
below 1.2 lbs/mm Btu by January 1, 2000 (Phase II).
Presently, all of Northern Indiana's eleven coal fired generating
units utilize low sulfur fuel or flue gas desulfurization units to control
sulfur dioxide emissions below the 1.2 lbs/mm Btu level. That places
Northern Indiana in compliance with the Phase II sulfur dioxide standards.
The EPA approved Northern Indiana's Acid Rain permits for the Bailly
and Michigan City Generating Stations on August 31, 1993. The Phase I Acid
Rain permits for the stations are effective from January 1, 1995 through
December 31, 1999. One component of the permit is the Phase I extension
plan for Bailly. Northern Indiana was eligible for and received the
extension because of the construction and operation of the Bailly scrubber.
This extension plan allocates additional allowances, above the basic
allowances, applicable to Bailly and Michigan City Generating Stations.
Northern Indiana estimates that total costs of compliance with the
CAAA sulfur dioxide regulations will impact electric rates by less than 5%
in the future.
Northern Indiana is pursuing nitrogen oxide reduction measures to meet
future acid rain requirements. The EPA has proposed Phase II nitrogen oxide
limits. The regulations when finalized could establish nitrogen oxide
limits for all of Northern Indiana's coal fired boilers.
ADDITIONAL AIR ISSUES. The CAAA contain provisions that could lead to
limitations on emissions of nitrogen oxides, as mentioned above, and
hazardous air pollutants which may require significant capital expenditures
for control of these emissions. Northern Indiana is pursuing a nitrogen
oxide control program to meet future requirements. Northern Indiana
cannot predict the costs of complying with CAAA requirements, but it believes
that any such mandated costs would be recoverable through the rate making
process.
The EPA has promulgated a permit program to meet the requirements of
Title V of the CAAA. The IDEM, on November 3, 1993, proposed an Air
Operating permit program to meet the requirements of Title V to Indiana's
Air Pollution Control Board. The Air Pollution Control Board adopted rules
to implement the Title V permit program on March 10, 1994. These operating
permit rules, including a new fee schedule, became effective in Indiana on
June 24, 1994. Indiana submitted the Title V rules to the EPA for approval
in August of 1994. The EPA has approved the submittal and the rules became
effective December 14, 1995.
WATER. The Clean Water Act, as amended, subjects point source
dischargers to technology and water quality based controls through the
National Pollution Discharge Elimination System (NPDES) permit program.
Northern Indiana is required to have NPDES permits for discharges from its
generating stations into the waters of the United States. The IDEM Office
of Water Management has issued renewal NPDES permits for Schahfer, Mitchell
and Michigan City Generating Stations, effective November 1, 1993. The
renewed Bailly Station NPDES permit is expected to be issued in 1996.
Northern Indiana received NPDES permit modifications for intermittent
chemical treatment of the main discharge at the Mitchell and Michigan City
Stations for zebra mussel control. Bailly Station utilizes thermal
treatment in its water systems to control zebra mussels. Schahfer Station
has not presently experienced operational impacts due to zebra mussels.
Rather, Schahfer Station has experienced equipment problems due to an
Asiatic clam infestation. Alternate forms of control are being investigated
by Northern Indiana in an effort to prevent any impact on plant operations
relating to these infestations, while also minimizing the environmental
impact of the controls.
SUPERFUND SITES. The EPA has notified Northern Indiana that it is a
"potentially responsible party" (PRP) under the Comprehensive Environmental
Response Compensation and Liability Act (CERCLA) and may be required to
share in the cost of cleanup of several waste disposal sites identified by
the EPA. The sites are in various stages of investigation and analysis
and remediation. At each of the sites Northern Indiana is one of several
PRPs, and it is expected that remedial costs, as provided under CERCLA,
will be shared among them. At some sites Northern Indiana and/or the other
named PRPs are presently working with the EPA to clean up the sites and
avoid the imposition of fines or added costs.
MANUFACTURED GAS PLANT SITES. Northern Indiana has instituted a
program to investigate former manufactured gas plants where it is the
current or former owner. Northern Indiana has identified twenty-three of
these sites and made visual inspections of these sites. Northern Indiana
has conducted initial samplings at ten sites. Follow-up investigations have
been conducted at five sites and potential remedial measures are being
evaluated. Northern Indiana will continue its program to assess sites.
During the follow-up investigation of the former manufactured gas plant in
Elkhart, Indiana, Northern Indiana noted the presence of hydrocarbons in
the Elkhart River. Northern Indiana reported this finding to IDEM and the
EPA. Northern Indiana has placed the Elkhart site in the IDEM Voluntary
Remediation Program (VRP). The goal of placing the site in the VRP is to
obtain IDEM approval of the determination and subsequent implementation of
what remedial measures, if any, may be needed.
Northern Indiana was notified by IDEM of the release of a petroleum
substance into the St. Mary's River in Fort Wayne, Indiana, from the site of
a former manufactured gas plant formerly owned by Northern Indiana. In
cooperation with IDEM, Northern Indiana has taken steps to investigate and
contain the substance. Northern Indiana has remediated part of the Fort
Wayne site. The remainder of the site is being evaluated to determine what
future remedial measures, if any, may be needed.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured gas plant
sites at which both companies or their predecessors were former operators or
owners. One of these sites is the Lafayette site which Indiana Gas had
previously notified Northern Indiana is being investigated and remediated
pursuant to an administrative order with IDEM. Northern Indiana also
notified PSI Energy, Inc. that it was a former owner or operator of seven
former manufactured gas plants at which Northern Indiana had conducted or
was planning investigation or remediation activities.
Northern Indiana has met with various companies that provided
insurance coverage which Northern Indiana believes covers costs related to
actions taken at former manufactured gas plants. In September 1995, certain
insurance companies initiated a suit in Indiana state court against Northern
Indiana to deny coverage. Later in September 1995, Northern Indiana filed a
more comprehensive suit in Federal Court in Indiana against those insurers
and several other insurance companies, seeking coverage for costs associated
with several former manufactured gas plant sites. The state court action is
stayed pending resolution of the Northern Indiana suit in Federal Court.
ELECTRIC AND MAGNETIC FIELDS. The possibility that exposure to
electric and magnetic fields emanating from power lines, household
appliances and other electric sources may result in adverse health effects
has been the subject of public, governmental and media attention. A
considerable amount of scientific research has been conducted on this
topic without definitive results. Research is continuing to resolve
scientific uncertainties.
---------------------------
It is not possible to predict the scope, enforceability or financial
impact of other environmental regulations or standards which may be
established in the future.
ITEM 2. PROPERTIES.
The physical properties of Northern Indiana are located in the State
of Indiana.
ELECTRIC. Northern Indiana owns and operates four coal fired electric
generating stations with net capabilities of 3,179,000 kw, two hydroelectric
generating plants with net capabilities of 10,000 kw, and four gas fired
combustion turbine generating units with net capabilities of 203,000 kw, for
a total system net capability of 3,392,000 kw. During the year ended
December 31, 1995, Northern Indiana generated 85.8% and purchased 14.2% of
its electric requirements.
Northern Indiana has 292 substations with an aggregate transformer
capacity of 22,839,200 kva. Its transmission system with voltages from
34,500 to 345,000 consists of 3,047 circuit miles of line. The electric
distribution system extends into 21 counties and consists of 7,682 circuit
miles of overhead and 1,265 cable miles of underground primary distribution
lines operating at various voltages from 2,400 to 12,500 volts. Northern
Indiana has distribution transformers having an aggregate capacity of
10,661,892 kva and 437,264 electric watt-hour meters.
GAS. Northern Indiana has an underground storage field at Royal
Center and a liquefied natural gas plant in LaPorte County, both of which
are described under "Item 1. Business-Gas Operations." Northern Indiana has
12,976 miles of gas mains.
OTHER PROPERTIES. Northern Indiana owns offices and service
buildings, salesrooms, garages, repair shops, motor vehicles, construction
equipment and tools, and office furniture and equipment, and also leases
offices in various localities. It also owns miscellaneous parcels of real
estate not now used in utility operations.
DONATION OF PROPERTY. On January 5, 1995, Northern Indiana completed
the planned donation of approximately 2,150 acres of land, including 60
miles of lake and river frontage, to the Shafer and Freeman Lakes
Environmental Conservation Corporation (a not-for-profit organization), the
State of Indiana Department of Natural Resources and the Indiana Natural
Resources Foundation. The property frames and includes the resort areas of
Lake Shafer and Lake Freeman in White and Carroll Counties, near the cities
of Monticello and Delphi in central Indiana. Northern Indiana acquired the
property in 1944 as part of the purchase of dams and two small hydroelectric
plants and has maintained the area since that time. Northern Indiana
donated this property to ensure the land is managed to enhance its
preservation and recreational value. The dams and hydroelectric plants are
being retained for Northern Indiana operations.
CHARACTER OF OWNERSHIP. The properties of Northern Indiana are
subject to the lien of its First Mortgage Indenture. The principal offices
and properties are held in fee and are free from other encumbrances, subject
to minor exceptions, none of which is of such a nature as substantially to
impair the usefulness to Northern Indiana of such properties. Many of the
offices in the various communities served are occupied by Northern Indiana
under leases. All properties are subject to liens for taxes, assessments and
undetermined charges (if any) incidental to construction, which it is
Northern Indiana's practice regularly to pay, as and when due, unless
contested in good faith. In general, the electric and gas lines and mains
are located on land not owned in fee but are covered by necessary consents
of various governmental authorities or by appropriate rights obtained from
owners of private property. These consents and rights are deemed adequate
for the purposes for which they are being used. Northern Indiana does not,
however, generally have specific easements from the owners of the property
adjacent to public highways over, upon, or under which its electric and gas
lines are located. At the time each of the principal properties was
purchased a title search was made. In general, no examination of titles as
to rights-of-way for electric and gas lines and mains was made, other than
examination, in certain cases, to verify the grantors' ownership and the
lien status thereof.
ITEM 3. LEGAL PROCEEDINGS.
Northern Indiana is a party to various pending proceedings, including
suits and claims against it for personal injury, death and property damage,
but in the opinion of counsel for Northern Indiana, the nature of such
proceedings and suits, and the amounts involved, do not depart from the
ordinary routine litigation and proceedings incidental to the kind of
business conducted by Northern Indiana, except as set forth above under
"Item 1. Business-Environmental Matters," and as described under the
captions "Pending Tax Matter" and "Environmental Matters," in the Notes to
Consolidated Financial Statements.
On March 13, 1996, the Internal Revenue Service appealed to the U.S.
Court of Appeals for the Seventh Circuit, the November 6, 1995 decision of
the United States Tax Court (Tax Court) in favor of Northern Indiana. See
"Pending Tax Matter" in the Notes to Consolidated Financial Statements.
Northern Indiana's management and its general counsel believe the decision
of the Tax Court will prevail.
To the knowledge of Northern Indiana no other material legal
proceedings against Northern Indiana or its subsidiaries are contemplated
by governmental authorities and other parties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
Northern Indiana's common shares are wholly-owned by Industries.
The following limitations on payment of dividends and issuance of
preferred stock apply to Northern Indiana:
When any bonds are outstanding under its First Mortgage Indenture,
Northern Indiana may not pay cash dividends on its stock (other than
preferred or preference stock) or purchase or retire common shares, except
out of earned surplus or net profits computed as required under the
provisions of the maintenance and renewal fund. At December 31, 1995,
Northern Indiana had approximately $144.8 million of retained earnings
(earned surplus) available for the payment of dividends. Future common
share dividends by Northern Indiana will depend upon adequate retained
earnings, adequate future earnings and the absence of adverse developments.
So long as any shares of Northern Indiana's cumulative preferred stock
are outstanding, no cash dividends shall be paid on its common shares in
excess of 75% of the net income available therefor for the preceding
calendar year unless the aggregate of the capital applicable to stocks
subordinate as to assets and dividends to the cumulative preferred stock
plus the surplus, after giving effect to such dividends, would equal or
exceed 25% of the sum of all obligations evidenced by bonds, notes,
debentures or other securities, plus the total capital and surplus. At
December 31, 1995, the sum of the capital applicable to stocks subordinate
to the cumulative preferred stock plus the surplus was equal to 41% of the
total capitalization including surplus.
In connection with the foregoing discussion, see "Common Share
Dividend" in the Notes to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA.
Year Ended December 31,
(Dollars in thousands)
1995 1994 1993 1992 1991
========== ========== ========== ========== ==========
Operating revenues $1,664,278 $1,613,995 $1,619,623 $1,552,285 $1,535,161
Net income $ 194,321 $ 179,903 $ 172,104 $ 149,454 $ 149,810
Total assets $3,606,199 $3,624,311 $3,613,235 $3,595,345 $3,574,277
Long-term
obligations and
redeemable
preferred stock $1,122,392 $1,131,408 $1,147,546 $1,035,128 $1,100,257
Cash dividends
declared on
common shares $ 185,725 $ 168,815 $ 165,299 $ 134,916 $ 139,947
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
NET INCOME. For 1995, net income of Northern Indiana increased to
$194.3 million, compared to $179.9 million for 1994. In 1993, net income
was $172.1 million.
See Notes to Consolidated Financial Statements for Segments of
Business regarding the revenue and utility operating income derived from
the delivery of gas and electricity.
REVENUES. Operating revenues increased $50.2 million, or 3.1%, from
1994. Operating revenues in 1994 decreased $5.6 million, or 0.3%, from
1993.
During 1995, gas deliveries in dekatherms (dth), which include
transportation services, increased 0.9%. Gas sales in 1995 increased 5.0%
due to higher sales to residential and commercial customers as a result of
colder weather during the fourth quarter of 1995. Gas transportation
services decreased 1.7% mainly due to decreased deliveries to industrial
customers. Northern Indiana had approximately 636,600 gas customers at
December 31, 1995. During 1994, gas deliveries decreased 0.7%. Gas sales in
1994 decreased 3.2% due to lower sales to residential and commercial
customers due to warmer weather during the fourth quarter of 1994, compared
to the fourth quarter of 1993. Gas transportation services increased 1.0%
mainly due to increased deliveries to industrial customers.
Gas revenues were $633.4 million in 1995, an increase of $13.8 million
from 1994. The increase in gas revenues was mainly due to increased sales
to residential and commercial customers as a result of colder weather during
the fourth quarter of 1995 and increased gas transition charges partially
offset by decreased gas costs. Gas revenues were $619.5 million in 1994, a
decrease of $36.4 million from 1993. The decrease in gas revenues was
mainly due to decreased sales to residential and commercial customers due to
the warmer weather in 1994, and reduced gas costs. The large commercial and
industrial customers continued to utilize transportation services provided
by Northern Indiana. Gas transportation customers purchase much of their
gas directly from producers and marketers and then pay a transportation fee
to have their gas delivered over Northern Indiana's system. Northern
Indiana transported 161.7, 164.6 and 147.8 million dth in 1995, 1994 and
1993, respectively.
In 1995, sales of electricity in kilowatt-hours (kwh) increased 8.9%
over 1994, mainly due to higher sales to residential and commercial
customers as a result of warmer weather in the third quarter of 1995 and
increased sales to wholesale customers. Northern Indiana had approximately
403,900 electric customers at December 31, 1995. In 1994, sales of
electricity in kwh increased 2.4% over 1993 mainly due to higher sales to
commercial and industrial customers due to increased demands of steel-
related customers.
In 1995, electric revenues were $1.031 billion, an increase of $36.4
million from 1994. The increase in electric revenue was mainly due to
higher sales to residential and commercial customers as a result of warmer
weather in the third quarter of 1995, and increased sales to wholesale
customers, and was partially offset by lower fuel costs per kwh and to
transitional rate adjustments to industrial customers signing new five-year
contracts early in 1995. In 1994, electric revenues were $994.5 million, an
increase of $30.8 million from 1993. The increase in electric revenue was
mainly due to higher sales to commercial and industrial customers due to
increased demands of steel-related customers and higher fuel costs per kwh,
which were partially offset by decreased sales to wholesale customers.
The components of the changes in gas and electric revenues are shown
in the following tables:
Year 1995 Year 1994
Compared To Compared To
Year 1994 Year 1993
============ ============
(Dollars in millions)
Gas Revenue
Pass through of net changes in
purchased gas costs, gas storage
and storage transportation costs $ (61.6) $ (26.0)
Take-or-pay costs and transition costs 48.3 10.8
Changes in sales levels 28.2 (21.1)
Gas transported (1.1) (0.1)
------------ ------------
Gas Revenue Change $ 13.8 $ (36.4)
------------ ------------
Electric Revenue
Pass through of net changes
in fuel costs $ (14.6) $ 7.6
Changes in sales levels 51.0 23.2
------------ ------------
Electric Revenue Change $ 36.4 $ 30.8
------------ ------------
Total Revenue Change $ 50.2 $ (5.6)
============ ============
See Rate Matters in Notes to Consolidated Financial Statements
regarding changes in gas take-or-pay and FERC Order No. 636 transition
costs.
The basic steel industry accounted for 38% of natural gas delivered
(including volumes transported) and 36% of electric sales during 1995.
Northern Indiana's rate schedules for gas and electric service to its
customers contain electric rate adjustment clauses for changes in the cost
of fuel and firm purchases of electric energy and gas rate adjustment
clauses to reflect changes in the cost of gas purchased and contracted gas
storage and storage transportation costs. (See Fuel Adjustment Clause and
Gas Cost Adjustment Clause under Summary of Significant Accounting Policies
in Notes to Consolidated Financial Statements.)
GAS COSTS. Gas costs increased $0.7 million (0.2%) in 1995 due to
increased purchases partially offset by lower gas costs per dth. The
average cost of purchased gas in 1995, after adjustment for take-or-pay and
transition charges billed to transport customers, was $2.63 per dth as
compared to $2.90 per dth in 1994. Gas costs decreased $26.7 million (6.8%)
in 1994, due to decreased volumes purchased and lower gas costs per dth.
The average cost of purchased gas in 1994, after adjustment for take-or-pay
and transition charges billed to transport customers, was $2.90 per dth as
compared to $3.21 per dth in 1993.
FUEL AND PURCHASED POWER. Cost of fuel for electric generation in
1995 decreased mainly as a result of lower cost for coal and was partially
offset by increased production. The average cost per kwh generated
decreased 5.7% from 1994 to 15.89 mills. The cost of fuel for electric
generation increased in 1994 from 1993 mainly as a result of increased coal
costs per kwh generated. The average cost per kwh generated increased 1.2%
from 1993 to 16.85 mills.
Power purchased increased $11.1 million in 1995, as a result of
increased bulk power purchases from other utilities due to increased sales.
Power purchased increased $14.3 million in 1994 mainly due to purchases
required to replace R. M. Schahfer Generating Station Unit 15 generation
from February 1 to July 5, 1994, while this unit was down on an extended
outage as part of the Powder River Basin coal conversion project.
OPERATING MARGINS. Operating margins increased $43.2 million in 1995
to $1.012 billion. The operating margin from gas deliveries increased $13.1
million in 1995, mainly due to the increased sales to residential and
commercial customers, due to colder weather during the fourth quarter of
1995. Operating margins from electric sales increased $30.1 million
reflecting increased sales to residential and commercial customers as a
result of warmer weather in the third quarter of 1995, and increased sales
to wholesale customers, partially offset by transitional rate adjustments to
industrial customers. Operating margins increased $4.2 million in 1994 to
$968.5 million. The operating margin from gas deliveries decreased $9.8
million in 1994, mainly due to the decreased sales to residential and
commercial customers due to warmer weather during the fourth quarter of
1994, partially offset by increased transportation services. Operating
margins from electric sales increased $14.0 million reflecting increased
sales to commercial and industrial customers due to increased demand
partially offset by decreased sales to wholesale customers.
OPERATING EXPENSES AND TAXES. Operating expenses and taxes (except
income) in 1995 increased 1.5% from 1994 to $625.7 million and in 1994
increased 0.7% from 1993 to $616.2 million.
Operation expenses increased $3.2 million in 1995 from 1994 reflecting
a December 1995 Indiana Utility Regulatory Commission (Commission) order to
refund $3.4 million to electric customers related to a 1992 insurance
settlement previously credited to operating and maintenance expenses.
Operation expenses increased $0.7 million in 1994 over 1993 mainly due to
increased costs of pollution control facilities and environmental costs.
Maintenance expenses decreased $1.9 million and $3.5 million in 1995
and 1994, respectively, due to reduced maintenance activities.
Depreciation and amortization expenses increased $6.8 million and $6.7
million in 1995 and 1994, respectively, mainly due to net plant additions.
Utility income taxes increased $10.3 million in 1995 mainly due to
higher pre-tax operating income. Utility income taxes remained relatively
unchanged from 1993 to 1994 consistent with the level of pre-tax income.
Other Income (Deductions) decreased $7.3 million in 1995 from 1994
reflecting the inclusion in 1994 of a $5.6 million after-tax benefit for the
Northern Indiana land donation to the Shafer and Freeman Lakes Environmental
Conservation Corporation.
Interest charges increased $1.6 million and decreased $5.3 million in
1995 and 1994, respectively. The 1995 increase reflects increases in short-
term borrowing rates and long-term debt outstanding.
See Notes to Consolidated Financial Statements for a discussion of
Regulatory Assets, Carrying Charges and Deferred Depreciation, Allowance for
Funds Used During Construction, FERC Order No. 636, Income Taxes,
Postretirement Benefits and Postemployment Benefits.
ENVIRONMENTAL MATTERS: Northern Indiana has an ongoing program to
remain aware of laws and regulations involved with hazardous waste and other
environmental matters. It is Northern Indiana's intent to continue to
evaluate its facilities and properties with respect to these rules and
identify any sites that would require corrective action. Northern Indiana
has recorded a reserve of $4.8 million to cover probable corrective actions
as of December 31, 1995. However, environmental regulations and remediation
techniques are subject to future change. Based upon management's
understanding of current laws and regulations, Northern Indiana believes
that any corrective actions required, after consideration of insurance
coverages, will not have a significant impact on the financial position or
results of operations of Northern Indiana.
Because of major investments made in modern environmental control
facilities and the use of low sulfur coal, all of Northern Indiana's
electric production facilities now comply with the sulfur dioxide
limitations contained in the acid deposition provisions of the Clean Air Act
Amendments of 1990 (CAAA). Northern Indiana estimates that total costs of
compliance with the CAAA sulfur dioxide regulations will impact electric
rates by less than 5% in the future.
The CAAA contain provisions that could lead to limitations on
emissions of nitrogen oxides and hazardous air pollutants, which may require
significant capital expenditures for control of these emissions. Northern
Indiana is pursuing a nitrogen oxide control program to meet future
requirements. Northern Indiana cannot predict the costs of complying with
CAAA requirements, but believes that any such mandated costs would be
recoverable through the rate making process.
The Environmental Protection Agency (EPA) has notified Northern
Indiana that it is a "potentially responsible party" (PRP) under the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA)
and may be required to share in the cost of cleanup of several waste
disposal sites identified by the EPA. The sites are in various stages of
investigation, analysis and remediation. At each of the sites, Northern
Indiana is one of several PRPs, and it is expected that remedial costs,
as provided under CERCLA, will be shared among them. At some sites Northern
Indiana and/or the other named PRPs are presently working with the EPA to
clean up the sites and avoid the imposition of fines or added costs.
Northern Indiana has instituted a program to investigate former
manufactured gas plants where it is the current or former owner. Northern
Indiana has identified twenty-three of these sites and made visual
inspections of these sites. Northern Indiana has conducted initial
samplings at ten sites. Follow-up investigations have been conducted at five
sites and potential remedial measures are being evaluated. Northern Indiana
will continue its program to assess sites. During the follow-up
investigation of the former manufactured gas plant in Elkhart, Indiana,
Northern Indiana noted the presence of hydrocarbons in the Elkhart River.
Northern Indiana reported this finding to the Indiana Department of
Environmental Management (IDEM) and the EPA. Northern Indiana has placed
the Elkhart site in the IDEM Voluntary Remediation Program (VRP). The goal
of placing the site in the VRP is to obtain IDEM approval of the
determination and subsequent implementation of what remedial measures, if
any, may be needed.
Northern Indiana was notified by IDEM of the release of a petroleum
substance into the St. Mary's River in Fort Wayne, Indiana, from the site of
a former manufactured gas plant formerly owned by Northern Indiana. In
cooperation with IDEM, Northern Indiana has taken steps to investigate and
contain the substance. Northern Indiana has remediated part of the Fort
Wayne site. The remainder of the site is being evaluated to determine what
further remedial measures, if any, may be needed.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured gas plant
sites at which both companies or their predecessors were former operators or
owners. One of these sites was the Lafayette site which Indiana Gas had
previously notified Northern Indiana is being investigated and remediated
pursuant to an administrative order with IDEM. Northern Indiana also
notified PSI Energy, Inc. that it was a former owner or operator of seven
former manufactured gas plants at which Northern Indiana had conducted or
was planning investigation or remediation activities.
Northern Indiana has met with various companies that provided
insurance coverage which Northern Indiana believes covers costs related to
actions taken at former manufactured gas plants. In September 1995, certain
insurance companies initiated a suit in Indiana state court against Northern
Indiana to deny coverage. Later in September 1995, Northern Indiana filed a
more comprehensive suit in Federal Court in Indiana against those insurers
and several other insurance companies, seeking coverage for costs associated
with several former manufactured gas plant sites. The state court action is
stayed pending resolution of the Northern Indiana suit in Federal Court.
The possibility that exposure to electric and magnetic fields
emanating from power lines, household appliances and other electric sources
may result in adverse health effects has been the subject of public,
governmental and media attention. A considerable amount of scientific
research has been conducted on this topic without definitive results.
Research is continuing to resolve scientific uncertainties.
LIQUIDITY AND CAPITAL RESOURCES. Construction expenditures by
Northern Indiana for 1995, 1994 and 1993 were approximately $183 million,
$197 million and $176 million, respectively. Northern Indiana's total
utility plant investment on December 31, 1995, was $5.4 billion.
On March 4, 1994, the Commission authorized Northern Indiana to issue
up to $289,275,000 of its Medium-Term Notes, Series D, due from 1 year to 30
years, for purposes of refinancing certain first mortgage bonds and paying
short-term debt used to pay at maturity medium-term notes due in January and
April, 1994. On May 23, 1994, Northern Indiana exercised its option to
redeem all the outstanding First Mortgage Bonds, Series S, Y and AA,
aggregating $125.5 million, through the use of working capital and the
proceeds of short-term debt. During 1994, $120.0 million of the Medium-Term
Notes, Series D, were issued to complete the permanent refinancing of those
first mortgage bonds. On June 12, 1995, the remaining $169,275,000 of
Medium-Term Notes, Series D, were issued, and part of the proceeds were used
to redeem all of the outstanding First Mortgage Bonds, Series U and Z,
aggregating $94.8 million on July 3, 1995.
On August 25, 1994, Jasper County, Indiana issued Pollution Control
Refunding Revenue Bonds, Series 1994 (Northern Indiana Public Service
Company Project) (the Series 1994 Bonds), including $10 million of Series
1994A Bonds, due August 1, 2010; $18 million of Series 1994B Bonds, due
June 1, 2013; and $41 million of Series 1994C Bonds, due April 1, 2019. The
proceeds of these issuances were loaned to Northern Indiana under similar
terms. The initial interest rate on Series 1994 Bonds was 3.10%, which
resets daily. The proceeds of the Series 1994A and Series 1994C were used
to retire on October 15, 1994, $10 million of Series MM First Mortgage
Bonds, 7-1/2%, due October 15, 2004, and $41 million of Series LL First
Mortgage Bonds, 7-1/2%, due October 15, 2014. The proceeds on the Series
1994B Bonds were used to retire the $18 million Series 1978 Note, 6.70%, due
November 1, 2008, on August 25, 1994. The Series 1994 Bonds are secured by
Letters of Credit from Union Bank of Switzerland.
Cash flow from operations has provided sufficient liquidity to meet
current operating requirements. Because of the seasonal nature of the
utility business and the construction program, Northern Indiana makes use of
commercial paper intermittently as short-term financing. As of December 31,
1995, Northern Indiana had $44.8 million in commercial paper outstanding,
having a weighted average interest rate of 6.01%.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1998, unless extended by its
terms. As of December 31, 1995, there were no borrowings outstanding under
this agreement. In addition, Northern Indiana has $14.2 million in lines of
credit which run to May 31, 1996. The credit pricing of each of the lines
varies from either the lending banks' commercial prime or market rates.
Northern Indiana has agreed to compensate the participating banks with
arrangements that vary from no commitment fee to a combination of fees which
are mutually satisfactory to both parties. As of December 31, 1995, there
were no borrowings under these lines of credit. The Credit Agreement and
lines of credit are also available to support the issuances of commercial
paper.
Northern Indiana also has $268.5 million of money market lines of
credit. As of December 31, 1995, $118.8 million of borrowings were
outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
December 31, 1995, there were no borrowings outstanding under this facility.
During recent years, Northern Indiana has been able to finance its
construction program with internally generated funds and expects to be able
to meet future commitments through such funds.
Northern Indiana does not expect the effects of inflation at current
levels to have a significant impact on its results of operations, ability to
contain cost increases or need to seek timely and adequate rate relief.
Northern Indiana does not anticipate the need to file for gas and electric
base rate increases in the near future.
COMPETITION. The Energy Policy Act of 1992 (Energy Act) allows FERC
to order electric utilities to grant access to transmission systems by third
party power producers. The Energy Act specifically prohibits federally
mandated wheeling of power for retail customers. That authority lies with
the individual states, several of which are considering opening the
transmission network to retail customers. The Energy Act will stimulate
greater competition in the wholesale electric markets. This competition
will create opportunities to compete for new customers and revenues, as well
as increase the risk of the loss of customers. Although wholesale customers
represent a relatively small portion of Northern Indiana's sales, Northern
Indiana will continue its efforts to retain and add customers by offering
competitive rates. Competitive forces have also begun to influence retail
pricing in the industry. In some instances, industrial customers,
threatening to pursue cogeneration, self-generation, retail wheeling or
relocation to other service territories, have obtained price concessions
from utilities.
Operating in a competitive environment will place added pressures on
utility profit margins and credit quality. Increasing competition in the
electric utility industry has already led the credit rating agencies to
apply more stringent guidelines in making credit rating determinations.
Northern Indiana's management has taken steps to make the company more
competitive and profitable in the changing utility environment, including
utilizing new rate and contract flexibility to retain and attract customers
as well as conversions of some of its generating units to allow use of lower
cost low sulfur coal.
FERC Order No. 636, effective in late 1993, shifted primary
responsibility for gas acquisition, transportation and peak days' supply
from pipelines to local gas distribution companies, such as Northern
Indiana. Although pipelines continue to transport gas, they no longer
provide sales service. Northern Indiana believes it has taken appropriate
steps to ensure the continued acquisition of adequate gas supplies at
reasonable prices.
The mix of gas revenues from retail sales, interruptible retail sales,
firm transportation service and interruptible transportation services has
changed significantly over the past several years. The deregulation of the
gas industry, since the mid-1980's, allows large industrial and commercial
customers to purchase their gas supplies directly from producers and use
Northern Indiana's facilities to transport the gas. Transportation
customers pay Northern Indiana only for transporting their gas from the
pipeline to the customers' premises.
Northern Indiana filed an Alternative Regulatory Plan (ARP) with the
Commission on November 29, 1995. The purpose of the ARP is to create a
business and regulatory environment and structure which will permit
increased choice for gas customers, competition among suppliers and improved
natural gas service. In its petition, Northern Indiana stated it would
propose to implement new rates and services that would include, but not be
limited to, further unbundling of services for additional customer classes
which would include increased customer choice for sources of natural gas
supply, negotiated services and prices, and incentive gas and storage cost
mechanisms.
To date, Northern Indiana's system has not been materially affected by
competition, and management does not foresee substantial adverse effects in
the near future, unless the current regulatory structure is substantially
altered. Northern Indiana believes the steps it is taking to deal with
increased competition will have significant, positive effects in the next
few years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages
=========
Report of Independent Public Accountants 19
Consolidated Statement of Income for the years
ended December 31, 1995, 1994 and 1993 20
Consolidated Balance Sheet - December 31, 1995
and 1994 21-22
Consolidated Statement of Capitalization -
December 31, 1995 and 1994 23
Consolidated Statement of Long-term Debt -
December 31, 1995 and 1994 24
Consolidated Statement of Cash Flows for the
years ended December 31, 1995, 1994 and 1993 25
Consolidated Statement of Retained Earnings for
the years ended December 31, 1995, 1994 and 1993 26
Notes to Consolidated Financial Statements 27-45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
We have audited the accompanying consolidated balance sheet and
consolidated statements of capitalization and long-term debt of Northern
Indiana Public Service Company (an Indiana corporation and a wholly owned
subsidiary of NIPSCO Industries, Inc.) and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income, retained
earnings and cash flows for each of the three years in the period ended
December 31, 1995. These consolidated financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Northern Indiana Public Service Company and subsidiaries as of December 31,
1995 and 1994, and the results of their operations and their cash flows for
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Notes 6 and 8 to the consolidated financial
statements, effective January 1, 1993, Northern Indiana Public Service
Company and subsidiaries changed their methods of accounting for income
taxes and postretirement benefits other than pensions.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed on Page
55, Item 14(a)(2) is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken
as a whole.
/S/ Arthur Andersen LLP
Chicago, Illinois
January 26, 1996
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995 1994 1993
========== ========== ==========
(Dollars in thousands)
Operating Revenues:
(Notes 2, 4 and 20)
Gas $ 633,355 $ 619,503 $ 655,980
Electric 1,030,923 994,492 963,643
---------- ---------- ----------
1,664,278 1,613,995 1,619,623
---------- ---------- ----------
Cost of Energy: (Note 2)
Gas costs 366,487 365,811 392,515
Fuel for electric generation 242,337 247,134 244,552
Power purchased 43,681 32,503 18,225
---------- ---------- ----------
652,505 645,448 655,292
---------- ---------- ----------
Operating Margin 1,011,773 968,547 964,331
---------- ---------- ----------
Operating Expenses and
Taxes (except income):
Operation 278,683 275,514 274,829
Maintenance (Note 2) 76,953 78,872 82,394
Depreciation and
amortization (Note 2) 198,259 191,426 184,741
Taxes (except income) 71,831 70,417 70,036
---------- ---------- ----------
625,726 616,229 612,000
---------- ---------- ----------
Operating Income Before
Utility Income Taxes 386,047 352,318 352,331
---------- ---------- ----------
Utility Income Taxes (Note 6) 106,574 96,257 94,926
---------- ---------- ----------
Operating Income 279,473 256,061 257,405
---------- ---------- ----------
Other Income (Deductions) (3,619) 3,726 (72)
---------- ---------- ----------
Interest Charges:
Interest on long-term debt 72,339 70,771 75,344
Other interest 8,395 9,550 7,212
Allowance for borrowed funds used
during construction and carrying
charges (Note 2) (3,320) (4,034) (622)
Amortization of premium, reacquisition
premium, discount and expense on
debt, net 4,119 3,597 3,295
---------- ---------- ----------
81,533 79,884 85,229
---------- ---------- ----------
Net Income 194,321 179,903 172,104
Dividend requirements on
preferred stocks 9,046 9,913 10,341
---------- ---------- ----------
Balance available
for common shares $ 185,275 $ 169,990 $ 161,763
========== ========== ==========
Common dividends declared $ 185,725 $ 168,815 $ 165,299
========== ========== ==========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995 1994
============ ===========
(Dollars in thousands)
ASSETS
UTILITY PLANT, at original cost (including
construction work in progress of
$145,078 and $215,395, respectively)
(Note 2):
Electric $ 3,935,103 $ 3,858,118
Gas 1,143,021 1,107,075
Common 350,168 316,120
----------- -----------
5,428,292 5,281,313
Less - Accumulated provision for
depreciation and amortization 2,330,879 2,162,828
----------- -----------
Total Utility Plant 3,097,413 3,118,485
----------- -----------
OTHER PROPERTY AND INVESTMENTS 8,787 10,155
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents 11,478 20,994
Accounts receivable, less reserve of
$6,418 and $3,955, respectively (Note 2) 96,076 80,977
Fuel adjustment clause (Note 2) 10,301 1,614
Gas cost adjustment clause (Note 2) 4,113 27,844
Materials and supplies, at average cost 63,824 63,835
Electric production fuel, at average cost 14,258 18,347
Natural gas in storage, at last-in,
first-out cost (Note 2) 53,413 72,462
Prepayments and other 13,050 10,169
----------- -----------
Total Current Assets 266,513 296,242
----------- -----------
OTHER ASSETS:
Regulatory assets (Note 2) 211,859 194,809
Deferred charges and other noncurrent
assets 21,627 4,620
----------- -----------
Total Other Assets 233,486 199,429
----------- -----------
$ 3,606,199 $ 3,624,311
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995 1994
=========== ===========
(Dollars in thousands)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's equity $ 1,016,827 $ 1,016,680
Preferred stocks (Note 10) -
Series without mandatory
redemption provisions (Note 11) 81,325 86,389
Series with mandatory
redemption provisions (Note 12) 63,651 66,057
Long-term debt, excluding amounts due
within one year (Note 15) 1,058,741 1,065,351
----------- -----------
Total capitalization 2,220,544 2,234,477
----------- -----------
CURRENT LIABILITIES:
Obligations due within one year -
Commercial paper 44,800 156,500
First mortgage bonds -
Series N, 4-5/8% - due May 15, 1995 0 22,436
Medium-term notes -
Issued at interest rates of 6.14%
and 6.19% with a weighted average
interest rate of 6.17% and maturities
of July 25, 1996 and July 26, 1996 80,000 0
Notes payable -
Issued at interest rates between 5.91%
and 6.15% with a weighted average
interest rate of 5.99% and various
maturities between January 2, 1996 and
February 9, 1996 118,800 92,700
----------- -----------
243,600 271,636
----------- -----------
OTHER CURRENT LIABILITIES -
Accounts payable 135,639 142,018
Sinking funds due within one year
(Notes 12 and 15) 2,621 2,578
Dividends declared on common and
preferred stocks 49,851 44,758
Customer deposits 10,230 8,678
Taxes accrued 31,247 48,806
Interest accrued 7,170 10,043
Accrued employment costs 45,771 43,260
Other 30,790 9,674
----------- -----------
313,319 309,815
----------- -----------
Total current liabilities 556,919 581,451
----------- -----------
OTHER:
Deferred income taxes (Note 6) 587,809 575,841
Deferred investment tax credits, being
amortized over life of related property
(Note 6) 114,386 121,822
Deferred credits 41,038 41,758
Accrued liability for postretirement
benefits (Note 8) 73,682 47,718
Regulatory income tax liability (Note 6) 5,783 14,625
Other noncurrent liabilities 6,038 6,619
----------- -----------
Total other 828,736 808,383
----------- -----------
COMMITMENTS AND CONTINGENCIES:
(Notes 3, 4, 5, 17 and 18)
$ 3,606,199 $ 3,624,311
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF CAPITALIZATION
DECEMBER 31, 1995 1994
=========== ===========
(Dollars in thousands)
COMMON SHAREHOLDER'S EQUITY:
Common shares - without par
value - authorized 75,000,000
shares - issued and outstanding
73,282,258 shares $ 859,488 $ 859,488
Additional paid-in capital 12,500 11,903
Retained earnings 144,839 145,289
----------- -----------
Total common shareholder's
equity 1,016,827 45.8% 1,016,680 45.5%
----------- -----------
PREFERRED STOCKS, WHICH ARE
REDEEMABLE SOLELY AT OPTION
OF NORTHERN INDIANA:
Cumulative preferred stock -
$100 par value -
4-1/4% series - 209,190 and
211,266 shares outstanding,
respectively 20,919 21,127
4-1/2% series - 79,996
shares outstanding 8,000 8,000
4.22% series - 106,198 and
106,200 shares
outstanding, respectively 10,620 10,620
4.88% series - 100,000
shares outstanding 10,000 10,000
7.44% series - 41,890 and
41,900 shares outstanding,
respectively 4,189 4,190
7.50% series - 34,842
shares outstanding 3,484 3,484
Premium on preferred stock 254 254
Cumulative preferred stock -
no par value -
Adjustable Rate (6.00% at
December 31, 1995) -
Series A (stated value -
$50 per share), 477,185 and
574,285 shares outstanding,
respectively 23,859 28,714
----------- -----------
81,325 3.6% 86,389 3.9%
----------- -----------
REDEEMABLE PREFERRED STOCKS,
SUBJECT TO MANDATORY REDEMPTION
REQUIREMENTS OR WHOSE
REDEMPTION IS OUTSIDE THE
CONTROL OF NORTHERN INDIANA:
Cumulative preferred stock -
$100 par value -
8.85% series - 87,500 and
100,000 shares outstanding,
respectively 8,750 10,000
7-3/4% series - 50,014 and
55,568 shares outstanding,
respectively 5,001 5,557
8.35% series - 69,000 and
75,000 shares outstanding,
respectively 6,900 7,500
Cumulative preferred stock -
no par value -
6.50% series - 430,000
shares outstanding 43,000 43,000
----------- -----------
63,651 2.9% 66,057 2.9%
----------- -----------
LONG-TERM DEBT 1,058,741 47.7% 1,065,351 47.7%
___________ ______ ___________ ______
Total capitalization $ 2,220,544 100.0% $ 2,234,477 100.0%
=========== ====== =========== ======
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF LONG-TERM DEBT
DECEMBER 31, 1995 1994
=========== ==========
(Dollars in thousands)
FIRST MORTGAGE BONDS -
Series O, 6-3/8%, due September 1, 1997 $ 25,747 $ 25,747
Series P, 6-7/8%, due October 1, 1998 14,509 14,509
Series T, 7-1/2%, due April 1, 2002 40,500 40,543
Series U, 8-1/8%, due July 15, 2003 0 55,239
Series Z, 8-1/8%, due August 15, 2007 0 39,569
Series NN, 7.10%, due July 1, 2017 55,000 55,000
----------- -----------
Total 135,756 230,607
----------- -----------
POLLUTION CONTROL NOTES AND BONDS -
Series A Note -
City of Michigan City, 5.70% due
October 1, 2003 20,000 20,750
Series 1988 Bonds - Jasper County -
Series A, B and C 3.70% weighted
average at December 31, 1995, due
November 1, 2016 130,000 130,000
Series 1988 Bonds - Jasper County -
Series D 3.76% weighted average at
December 31, 1995, due November 1, 2007 24,000 24,000
Series 1994 Bonds - Jasper County -
Series A - 5.90% at December 31, 1995,
due August 1, 2010 10,000 10,000
Series 1994 Bonds - Jasper County -
Series B - 5.90% at December 31, 1995,
due June 1, 2013 18,000 18,000
Series 1994 Bonds - Jasper County -
Series C - 5.90% at December 31, 1995,
due April 1, 2019 41,000 41,000
----------- -----------
Total 243,000 243,750
----------- -----------
MEDIUM-TERM NOTES -
Issued at interest rates between 5.83%
and 7.64% with a weighted average interest
rate of 6.82% and various maturities between
July 25, 1997 and January 19, 2024 684,025 594,750
----------- -----------
UNAMORTIZED PREMIUM AND DISCOUNT
ON LONG-TERM DEBT, NET (4,040) (3,756)
----------- -----------
Total long-term debt, excluding
amounts due in one year $ 1,058,741 $ 1,065,351
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995 1994 1993
=========== =========== ===========
(Dollars in thousands)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 194,321 $ 179,903 $ 172,104
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 198,259 191,426 184,741
Deferred federal and state
operating income taxes, net (3,247) (11,468) 1,689
Deferred investment tax
credits, net (7,436) (6,416) (7,364)
Change in certain assets and
liabilities -
Accounts receivable, net (15,099) 18,246 (10,684)
Electric production fuel 4,089 3,186 20,412
Materials and supplies 11 1,309 6,993
Natural gas in storage 19,049 (15,659) (21,263)
Accounts payable (6,379) (29,116) 25,968
Taxes accrued (11,156) (16,745) (718)
Fuel adjustment clause (8,687) 4,826 (2,105)
Gas cost adjustment clause 23,731 7,721 11,330
Accrued employment costs 2,511 3,182 10,076
Other, net 22,004 24,015 (6,493)
----------- ----------- -----------
Net cash provided by
operating activities 411,971 354,410 384,686
----------- ----------- -----------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Construction expenditures (185,560) (196,854) (176,226)
Other, net (750) 5,700 59
----------- ----------- -----------
Net cash used in investing
activities (186,310) (191,154) (176,167)
----------- ----------- -----------
CASH FLOWS PROVIDED BY
(USED IN) FINANCING
ACTIVITIES:
Issuance of long-term debt 168,386 208,884 451,218
Issuance of short-term debt 943,200 982,927 787,357
Net change in commercial paper (111,700) 128,605 (48,605)
Retirement of long-term debt (120,868) (210,246) (362,672)
Retirement of short-term debt (917,100) (1,065,227) (886,058)
Retirement of preferred stock (7,095) (10,354) (2,170)
Cash dividends paid on
common shares (180,475) (171,845) (152,825)
Cash dividends paid on
preferred shares (9,241) (10,185) (10,387)
Other, net (284) 0 0
----------- ----------- -----------
Net cash used in
financing activities (235,177) (147,441) (224,142)
----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (9,516) 15,815 (15,623)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 20,994 5,179 20,802
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 11,478 $ 20,994 $ 5,179
=========== =========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1995 1994 1993
========= ========= =========
(Dollars in thousands)
BALANCE AT BEGINNING OF PERIOD $ 145,289 $ 144,114 $ 147,581
ADD:
NET INCOME 194,321 179,903 172,104
--------- --------- ---------
339,610 324,017 319,685
--------- --------- ---------
LESS:
DIVIDENDS:
Cumulative Preferred stock -
4-1/4% series 891 898 898
4-1/2% series 360 360 360
4.22% series 448 448 448
4.88% series 488 488 488
7.44% series 312 312 312
7.50% series 261 261 261
8.85% series 903 1,014 1,125
7-3/4% series 449 492 534
8.35% series 622 672 708
6.50% series 2,795 2,795 2,803
Adjustable Rate, series A 1,517 2,173 2,404
Common shares 185,725 168,815 165,299
Capital stock expense 0 0 (69)
---------- --------- ---------
194,771 178,728 175,571
---------- --------- ---------
BALANCE AT END OF PERIOD $ 144,839 $ 145,289 $ 144,114
========== ========= =========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) HOLDING COMPANY STRUCTURE: NIPSCO Industries, Inc. (Industries) was
incorporated in Indiana on September 22, 1987, and became the parent of
Northern Indiana Public Service Company (Northern Indiana) on March 3, 1988.
Northern Indiana is a public utility operating company supplying electricity
and gas to the public in the northern third of Indiana.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION. The consolidated financial statements
include the accounts of Northern Indiana and its two subsidiaries, Shore Line
Shops, Inc. and NIPSCO Exploration Company, Inc. All significant intercompany
items have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Certain reclassifications were made to conform the prior years'
financial statements to the current presentation.
OPERATING REVENUES. Revenues are recorded based on estimated service
rendered, but are billed to customers monthly on a cycle basis.
DEPRECIATION AND MAINTENANCE. Northern Indiana provides depreciation
on a straight-line method over the remaining service lives of the electric,
gas, and common properties. The provisions as a percentage of the cost of
depreciable utility plant were approximately 4.1% for the year 1995, and 4.0%
for years 1994 and 1993. The depreciation rates for electric and gas
properties were 3.55% and 4.92%, respectively.
Northern Indiana follows the practice of charging maintenance and
repairs, including the cost of renewals of minor items of property, to
maintenance expense accounts, except for repairs of transportation and service
equipment which are charged to clearing accounts and redistributed to
operating expense and other accounts. When property which represents a
retirement unit is replaced or removed, the cost of such property is credited
to utility plant, and such cost, together with the cost of removal less
salvage, is charged to the accumulated provision for depreciation.
COAL RESERVES. Northern Indiana has a long-term mining contract to
mine its coal reserves through the year 2001. The costs of these reserves
are being recovered through the rate making process as such coal reserves are
used to produce electricity.
POWER PURCHASED. Power purchases and net interchange power with other
electric utilities under interconnection agreements are included in Cost of
Energy under the caption "Power purchased."
ACCOUNTS RECEIVABLE. At December 31, 1995, Northern Indiana had sold
$100 million of certain of its accounts receivable under a sales agreement
which expires May 31, 1997. The December 31, 1995, and 1994 accounts
receivable balances include approximately $6.1 million and $8.6 million
respectively, due from Industries.
STATEMENT OF CASH FLOWS. For the purposes of the Consolidated Statement
of Cash Flows, Northern Indiana considers temporary cash investments with an
original maturity of three months or less to be cash equivalents.
Cash paid during the periods reported for income taxes and interest
was as follows:
1995 1994 1993
======== ======== ========
(Dollars in thousands)
Income taxes $128,487 $116,790 $ 96,223
Interest, net of amounts capitalized $ 80,635 $ 76,983 $ 83,346
FUEL ADJUSTMENT CLAUSE. All metered electric rates contain a provision
for adjustment in charges for electric energy to reflect increases and
decreases in the cost of fuel and the fuel cost of purchased power through
operation of a fuel adjustment clause. As prescribed by order of the Indiana
Utility Regulatory Commission (Commission) applicable to metered retail rates,
the adjustment factor has been calculated based on the estimated cost of fuel
and the fuel cost of purchased power in a future three-month period. If two
statutory requirements relating to expense and return levels are satisfied,
any under or overrecovery caused by variances between estimated and actual
cost in a given three-month period will be included in a future filing.
Northern Indiana records any under or overrecovery as a current asset or
current liability until such time as it is billed or refunded to its
customers. The fuel adjustment factor is subject to a quarterly hearing by
the Commission and remains in effect for a three-month period.
GAS COST ADJUSTMENT CLAUSE. All metered gas rates contain an adjustment
factor which reflects the cost of purchased gas, contracted gas storage and
storage transportation charges. Northern Indiana records any under or
overrecovery as a current asset or current liability until such time as it is
billed or refunded to its customers. The gas cost adjustment factor is
subject to a quarterly hearing by the Commission and remains in effect for a
three-month period. If the statutory requirement relating to the level of
return is satisfied, any under or overrecovery caused by variances between
estimated and actual cost in a given three or six month period will be
included in a future filing. See Note 4, Rate Matters (Take-or-Pay Pipeline
Gas Costs) and (FERC Order No. 636) for a discussion of take-or-pay charges
and gas transition cost charges.
NATURAL GAS IN STORAGE. Natural gas in storage is valued using the
last-in, first-out (LIFO) inventory methodology. Based on the average cost of
gas purchased in December, 1995, and 1994, the estimated replacement cost of
gas in storage (current and non-current) at December 31, 1995, and 1994,
exceeded the stated LIFO cost by approximately $30 million and $38 million,
respectively.
REGULATORY ASSETS. Northern Indiana's operations are subject to the
regulation of the Commission and the Federal Energy Regulatory Commission
(FERC). Accordingly, Northern Indiana's accounting policies are subject to
the provisions of Statement of Financial Accounting Standards (SFAS) No. 71
"Accounting for the Effects of Certain Types of Regulation." The regulatory
assets below represent probable future revenue to Northern Indiana associated
with certain incurred costs as these costs are recovered through the rate
making process. Regulatory assets were comprised of the following items, and
were reflected in the Consolidated Balance Sheet as follows:
December 31, December 31,
1995 1994
============= =============
(Dollars in thousands)
Unamortized reacquisition premium on
debt (Note 15) $ 53,354 $ 53,792
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges
and deferred depreciation (See below) 74,981 79,198
Bailly scrubber carrying charges and
deferred depreciation (See below) 11,517 7,864
Deferral of SFAS No. 106 expense not
recovered (Note 8) 64,624 43,772
FERC Order No. 636
transition costs (Note 4) 25,038 56,153
------------- -------------
229,514 240,779
------------- -------------
Less: Current portion of regulatory assets 17,655 45,970
------------- -------------
$ 211,859 $ 194,809
============= =============
In March, 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This statement imposes stricter criteria for
retention of regulatory assets by requiring that such assets be probable of
future recovery at each balance sheet date. Northern Indiana will adopt this
standard on January 1, 1996, and adoption will not have a material impact on
its financial position or results of operations based on the current
regulatory structure in which Northern Indiana operates.
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 began capitalizing carrying charges and deferring
depreciation and certain operating expenses relating to its scrubber service
agreement upon completion of the flue gas desulfurization plant in June, 1992,
at Northern Indiana's Bailly Generating Station in accordance with an order of
the Commission. Pursuant to such order, capitalization of carrying charges and
deferral of depreciation and certain operating expenses ceased on December 31,
1995. The accumulated balance of the deferred costs and related carrying
charges will be amortized over the remaining life of the scrubber service
agreement.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. Allowance for funds
used during construction (AFUDC) is charged to construction work in progress
during the period of construction and represents the net cost of borrowed
funds used for construction purposes and a reasonable rate upon other (equity)
funds. Under established regulatory rate practices, after the construction
project is placed in service, Northern Indiana is permitted to include in the
rates charged for utility services (a) a fair return on and (b) depreciation
of such AFUDC included in plant in service.
At January 1, 1993, a pretax rate of 3.7% for all construction was
being used; effective January 1, 1994, the rate increased to 5.0% and
effective January 1, 1995, the rate increased to 6.0%.
INCOME TAXES. Deferred income taxes are recognized as costs in the
rate making process by the commissions having jurisdiction over the rates
charged by Northern Indiana. Deferred income taxes are provided as a result
of provisions in the income tax law that either require or permit certain
items to be reported on the income tax return in a different period than they
are reported in the financial statements. These taxes are reversed by a debit
or credit to deferred income tax expense as the temporary differences reverse.
Investment tax credits have been deferred and are being amortized to income
over the life of the related property.
(3) PENDING TAX MATTER: On August 1, 1991, the Internal Revenue Service
(IRS) issued a notice of deficiency for Northern Indiana's taxes for the years
1982 through 1985 ($3,785,250 per year plus interest) relating to interest
payments on $70 million of 17-1/4% Notes issued in 1981 by Northern Indiana's
former foreign subsidiary, Northern Indiana Public Service Finance N.V.
(Finance). The IRS believes that interest paid on the Notes should have been
subject to United States tax withholding. The Notes were redeemed in 1985 and
Finance was subsequently liquidated. On October 25, 1991, Northern Indiana
challenged the assessment in the United States Tax Court (Tax Court) and the
matter was tried in 1994. On November 6, 1995, the Tax Court ruled in favor
of Northern Indiana, finding that the interest paid on the Notes was not
subject to United States tax withholding. While it is uncertain whether the
IRS will appeal the Tax Court's decision, Northern Indiana's management and
general counsel believe the ruling of the Tax Court will prevail.
(4) RATE MATTERS:
TAKE-OR-PAY PIPELINE GAS COSTS. The FERC has allowed certain interstate
pipeline suppliers to pass on to their customers a portion of costs for
contracted gas not purchased (take-or-pay), contract reformation and
associated interest charges through direct billing to their customers,
including Northern Indiana.
Northern Indiana records take-or-pay costs as they are billed by the
respective pipeline, and in an order dated September 28, 1988, the Commission
allowed Northern Indiana to recover these additional gas costs on a volumetric
basis from all customers, including transport customers. Northern Indiana has
recovered approximately $187.8 million of take-or-pay costs and interest from
its customers through December 31, 1995. As of December 31, 1995, an
additional $3.6 million was scheduled to be billed to Northern Indiana and
recovered from customers over a period of one to four years.
FERC ORDER NO. 636. On April 8, 1992, the FERC issued Order No. 636
which required interstate pipelines to restructure their services. Under the
Order, existing pipeline sales services have been "unbundled" such that gas
supplies are being sold separately from interstate transportation services.
Northern Indiana's interstate pipeline suppliers have filed new tariffs with
the FERC to implement Order No. 636, and Northern Indiana has contracted for a
mix of transportation and storage services which will allow Northern Indiana
to meet the needs of its customers. Customers of the pipelines, such as
Northern Indiana, are expected to benefit from enhanced access to
competitively priced gas supplies, as well as from more flexible
transportation services. Pipelines are seeking to recover from their customers
certain transition costs associated with restructuring under the Order No. 636
regulation. Any such recovery is subject to established review procedures at
the FERC. Also, mandated changes in pipeline rate design could increase the
cost of firm transportation service on interstate pipelines. All interstate
pipelines are now operating under Order No. 636 regulation.
Northern Indiana's pipeline suppliers have made certain filings with the
FERC to begin collecting its respective transition costs. Northern Indiana
expects that the total transition costs from all suppliers will approximate
$137 million. However, the ultimate level of costs will depend on future
events, including the market price of natural gas. Approximately $86 million
of such costs have been recorded, a portion of which has been paid to the
pipeline suppliers, subject to refund. On November 2, 1994, the Commission
issued an order which approved the recovery of these FERC-allowed transition
costs on a volumetric basis from Northern Indiana's sales and transportation
customers (which is consistent with what the Commission authorized for the
recovery of take-or-pay pipeline gas costs). Certain industrial customers
appealed the November 2, 1994, order to the Indiana Court of Appeals. The
Court granted Northern Indiana's motion to dismiss the appeal for want of
subject matter jurisdiction. Subsequently the transportation customers filed a
Petition for Transfer with the Indiana Supreme Court seeking review of the
Indiana Court of Appeals' decision. On December 15, 1995, the Indiana Supreme
Court denied the Petition for Transfer which terminated the transportation
customers' appeal. Regulatory assets, in amounts corresponding to the costs
recorded, have been recorded to reflect the ultimate recovery of these costs.
(5) ENVIRONMENTAL MATTERS: Northern Indiana has an ongoing program to remain
aware of laws and regulations involved with hazardous waste and other
environmental matters. It is Northern Indiana's intent to continue to
evaluate its facilities and properties with respect to these rules and
identify any sites that would require corrective action. Northern Indiana has
recorded a reserve of $4.8 million to cover probable corrective actions as of
December 31, 1995. However, environmental regulations and remediation
techniques are subject to future change. Based upon management's
understanding of current laws and regulations, Northern Indiana believes that
any corrective actions required, after consideration of insurance coverages,
will not have a significant impact on the financial position or results of
operations of Northern Indiana.
Because of major investments made in modern environmental control
facilities and the use of low sulfur coal, all of Northern Indiana's electric
production facilities now comply with the sulfur dioxide limitations contained
in the acid deposition provisions of the Clean Air Act Amendments of 1990
(CAAA). Northern Indiana estimates that total costs of compliance with the
CAAA sulfur dioxide regulations will impact electric rates by less than 5% in
the future.
The CAAA contain provisions that could lead to limitations on emissions
of nitrogen oxides and hazardous air pollutants, which may require significant
capital expenditures for control of these emissions. Northern Indiana is
pursuing a nitrogen oxide control program to meet future requirements.
Northern Indiana cannot predict the costs of complying with CAAA requirements,
but believes that any such mandated costs would be recoverable through the
rate making process.
The Environmental Protection Agency (EPA) has notified Northern Indiana
that it is a "potentially responsible party" (PRP) under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) and may be
required to share in the cost of cleanup of several waste disposal sites
identified by the EPA. The sites are in various stages of investigation,
analysis and remediation. At each of the sites, Northern Indiana is one of
several PRPs, and it is expected that remedial costs, as provided under
CERCLA, will be shared among them. At some sites Northern Indiana and/or the
other named PRPs are presently working with the EPA to clean up the sites and
avoid the imposition of fines or added costs.
Northern Indiana has instituted a program to investigate former
manufactured gas plants where it is the current or former owner. Northern
Indiana has identified twenty-three of these sites and made visual
inspections of these sites. Northern Indiana has conducted initial samplings
at ten sites. Follow-up investigations have been conducted at five sites and
potential remedial measures are being evaluated. Northern Indiana will
continue its program to assess sites. During the follow-up investigation of
the former manufactured gas plant in Elkhart, Indiana, Northern Indiana noted
the presence of hydrocarbons in the Elkhart River. Northern Indiana reported
this finding to the Indiana Department of Environmental Management (IDEM) and
the EPA. Northern Indiana has placed the Elkhart site in the IDEM Voluntary
Remediation Program (VRP). The goal of placing the site in the VRP is to
obtain IDEM approval of the determination and subsequent implementation of
what remedial measures, if any, may be needed.
Northern Indiana was notified by IDEM of the release of a petroleum
substance into the St. Mary's River in Fort Wayne, Indiana, from the site of a
former manufactured gas plant formerly owned by Northern Indiana. In
cooperation with IDEM, Northern Indiana has taken steps to investigate and
contain the substance. Northern Indiana has remediated part of the Fort Wayne
site. The remainder of the site is being evaluated to determine what further
remedial measures, if any, may be needed.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured gas plant
sites at which both companies or their predecessors were former operators or
owners. One of these sites was the Lafayette site which Indiana Gas had
previously notified Northern Indiana is being investigated and remediated
pursuant to an administrative order with IDEM. Northern Indiana also notified
PSI Energy, Inc. that it was a former owner or operator of seven former
manufactured gas plants at which Northern Indiana had conducted or was
planning investigation or remediation activities.
Northern Indiana has met with various companies that provided insurance
coverage which Northern Indiana believes covers costs related to actions taken
at former manufactured gas plants. In September 1995, certain insurance
companies initiated a suit in Indiana state court against Northern Indiana to
deny coverage. Later in September 1995, Northern Indiana filed a more
comprehensive suit in Federal Court in Indiana against those insurers and
several other insurance companies, seeking coverage for costs associated with
several former manufactured gas plant sites. The state court action is stayed
pending resolution of the Northern Indiana suit in Federal Court.
The possibility that exposure to electric and magnetic fields emanating
from power lines, household appliances and other electric sources may result
in adverse health effects has been the subject of public, governmental and
media attention. A considerable amount of scientific research has been
conducted on this topic without definitive results. Research is continuing to
resolve scientific uncertainties.
(6) INCOME TAXES: Effective January 1, 1993, Northern Indiana adopted SFAS
No. 109, "Accounting for Income Taxes," which requires the use of the
liability method of accounting for income taxes. Under the liability method,
deferred income taxes are recognized, at currently enacted income tax rates,
to reflect the tax effect of temporary differences between the financial
statement and tax bases of assets and liabilities.
To implement SFAS No. 109, certain adjustments were made to deferred
income taxes. To the extent such income taxes are recoverable or payable
through future rates, regulatory assets and liabilities have been recorded in
the Consolidated Balance Sheet. These adjustments include the amounts
reflecting Northern Indiana's obligation to credit to ratepayers deferred
income taxes provided at rates higher than the current federal tax rate which
are currently being credited to ratepayers using the average rate assumption
method required by the Tax Reform Act of 1986 and the Commission. The
Consolidated Balance Sheet at December 31, 1995 and 1994 reflects a net
regulatory income tax liability of $5.8 million and $14.6 million,
respectively. The net regulatory income tax liability is derived from
regulatory assets primarily attributable to undepreciated AFUDC-equity and the
cumulative net amount of other income tax timing differences for which
deferred taxes had not been provided in the past, when regulators did not
recognize such taxes as costs in the rate making process, and regulatory
liabilities primarily attributable to deferred taxes provided at rates in
excess of the current statutory rate, as discussed above, and unamortized
deferred investment tax credits.
Northern Indiana joins in the filing of consolidated tax returns with
Industries and currently pays to Industries its separate return tax liability
as defined in the Tax Sharing Agreement between Industries and its
subsidiaries.
The components of the net deferred income tax liability at December 31,
1995 and 1994, are as follows:
1995 1994
=========== ===========
(Dollars in thousands)
Deferred tax liabilities -
Accelerated depreciation
and other property differences $ 700,137 $ 684,887
AFUDC-equity 40,083 42,447
Adjustment clauses 5,467 11,173
Take-or-pay gas costs 1,192 1,687
Other regulatory assets 28,912 22,062
Reacquisition premium on debt 20,237 20,401
Deferred tax assets -
Deferred investment tax credits (43,381) (46,201)
Removal costs (118,064) (105,671)
FERC Order No. 636 transition costs (4,400) (5,461)
Other postretirement/postemployment
benefits (31,633) (22,253)
Regulatory income ta