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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
OR
() Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number 1-4125
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 28, 1997, 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 2
2 Properties 12
3 Legal Proceedings 13
4 Submission of Matters to a Vote
of Security Holders 14
PART II
Item 5 Market for the Registrant's Common
Equity and Related Shareholder Matters 14
6 Selected Financial Data 14
7 Management's Discussion and Analysis of
Financial Condition and Results of Operation 15
8 Financial Statements and Supplementary Data 24
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 60
PART III
Item 10 Directors and Executive Officers of
the Registrant 60
11 Executive Compensation 63
12 Security Ownership of Certain Beneficial
Owners and Management 71
13 Certain Relationships and Related Transactions 71
PART IV
Item 14 Exhibits, Financial Statement Schedules 71
and Reports on Form 8-K
SIGNATURES 74
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, 1996, Northern Indiana served approximately 653,100
customers with gas and approximately 411,500 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, 1996, Northern
Indiana generated 83.8% and purchased 16.2% of its electric requirements.
Northern Indiana's 1996 electric control area peak of 3,134,400
kw, which includes Wabash Valley Power Association, Inc. (WVPA) and
Indiana Municipal Power Agency (IMPA) for which Northern Indiana
controls interchange operations, was set on August 6, 1996. Northern
Indiana's all-time control area of 3,161,200 kw was set on July 14, 1995.
Northern Indiana's 1996 internal peak load, which excludes WVPA and IMPA,
was 2,888,450 kw set on August 6, 1996. This also established a new
all-time internal peak load exceeding the old peak of 2,882,200 kw
established on July 14, 1995.
Northern Indiana's electric system is interconnected with that of
American Electric Power (formerly Indiana Michigan Power Company), ComEd
(formerly Commonwealth Edison Company), Cinergy Services, Inc. (formerly
PSI Energy, Inc.), Consumers Energy (formerly Consumers Power Company),
and Central Illinois Public Service Company. Electric energy is purchased
from, sold to, or exchanged with various other utilities and power
marketers under Northern Indiana's power sales and open access
transmission tariffs.
Northern Indiana provides WVPA with transmission and distribution
service, operating reserve requirements and capacity deficiency service,
and provides IMPA with transmission service, operating reserve
requirements and capacity deficiency service, in Northern Indiana's control
area. Northern Indiana also engages in sales and services under
interconnection agreements with WVPA and IMPA.
WVPA provides service to twelve Rural Electric Membership Corporations
(REMC's) located in Northern Indiana's control area. IMPA provides service
to the municipal electric system of the city of Rensselaer located in
Northern Indiana's control area.
Northern Indiana and WVPA have executed a supplemental agreement for
unit peaking capacity and energy. Pursuant to this agreement, which runs
through December, 2001, WVPA purchases 90,000 kw of capacity per month.
Northern Indiana has full requirement agreements with each of its
eight municipal wholesale customers. These full requirement contracts
became effective October 1, 1987, and extend through January 31, 1998.
Northern Indiana intends to negotiate for extension of contracts, but there
is no assurance they will be extended.
Northern Indiana is a member of the East Central Area Reliability
Coordination Agreement (ECAR). ECAR is one of nine regional electric
reliability councils established to coordinate planning and operations of
member companies regionally and nationally.
FUEL SUPPLY. The generating units of Northern Indiana are located at
Bailly, Mitchell, Michigan City, and Schahfer Generating Stations. Northern
Indiana's thirteen steam generating units have a net capability of 3,179,000
kw. Coal is the primary source of fuel for all units, except 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 1996 were
supplied as follows:
Coal 98.4%
Natural gas 1.6%
In 1996, Northern Indiana used approximately 8.1 million tons of coal
at its generating stations. Northern Indiana has established a normal level
of coal stock which provides adequate fuel supply during the year under all
conditions.
Annual coal requirements for Northern Indiana's electric generating
units through 2001 are estimated to range from 8.7 million tons to 8.9
million tons, depending from year to year upon anticipated sales levels,
scheduled maintenance, and other variables. These requirements are being or
will be met in part under long-term contracts as follows:
MILLION TONS/YEAR SULFUR CONTENT EXPIRATION
================= ============== ==========
1.0 High 1998
Up to 1.0(a) High 1998
1.3(b) Low 2001
1.8(c) Low 1999
1.0(d) Low 1998
.5(e) High 1998
(a) Contract calls for requirements up to 1.0 million tons/contract year.
(b) 1.8 million tons in 1997.
(c) Plus or minus 10%/contract year (1.225 million tons in 1999).
(d) Plus or minus 10%/contract year (.5 million tons in 1998).
(e) .250 million tons in 1998.
The average cost of coal consumed in 1996 was $27.50 per ton or 15.79
mills per kilowatt-hour (kwh) generated as compared to $28.28 per ton or
15.89 mills per kwh generated in 1995. Northern Indiana's forecasts
indicate that its coal costs will be slightly lower over the next two years.
COAL RESERVES. Included in the previous table of coal contracts is a
coal mining contract with Cyprus Shoshone Coal Corporation (Cyprus) under
which Cyprus is mining Northern Indiana's coal reserves in the Cyprus mine
through the year 2001. The costs of the reserves are being recovered
through the rate-making process as such coal reserves are used to produce
electricity.
FUEL ADJUSTMENT CLAUSE. See "Fuel Adjustment Clause" in the Notes to
Consolidated Financial Statements.
GAS OPERATIONS. Northern Indiana supplies natural gas of about 1,000
British thermal units (Btu) per cubic foot. In a 24-hour period ended
February 3, 1996, Northern Indiana's 1996 maximum day sendout was 1,553,977
dekatherms (dth).
In 1996, all of the gas supplied by Northern Indiana was transported
by ANR Pipeline Company (ANR), Crossroads Pipeline Company (Crossroads)
- - a subsidiary of Industries, Midwestern Gas Transmission Company
(Midwestern), Natural Gas Pipeline Company of America (Natural),
Panhandle Eastern Pipe Line Company (Panhandle), Tennessee Gas Pipeline
Company (Tennessee), and Trunkline Gas Company (Trunkline). Approximately
57% of Northern Indiana's 1996 gas supply was purchased on the spot
market, generally less than 30-day agreements.
The average price per dth (including FERC Order No. 636 transition
charges) in 1996 was $3.13, compared to $2.98 in 1995, and the average cost
of purchased gas, after adjustment for transition charges billed to
transport customers, was $3.03 per dth as compared to $2.63 per dth in 1995.
The transportation rates of Crossroads, and the transportation and
storage rates of ANR, Midwestern, Natural, Panhandle, Tennessee, and
Trunkline to Northern Indiana, are subject to change in accordance with rate
proceedings filed with the 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 "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 1996 and none are expected during 1997.
Northern Indiana operates an underground gas storage field at Royal
Center, Indiana, which currently has a storage capacity of 6.75 million dth.
Withdrawals have been made in the 1996-1997 winter of up to 108,402 dth per
day.
In addition, Northern Indiana 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 26,571,007 dth of annual stored
volume, and allow for approximately 551,446 dth of maximum daily withdrawal.
Northern Indiana has a liquefied natural gas plant in LaPorte County
which is designed for peak shaving and has the following capacities:
maximum storage of 4,000,000 dth; maximum liquefaction rate (gas to liquid),
20,000 dth per day; maximum vaporization rate (output to distribution
system), 300,000 dth per day.
GAS COST ADJUSTMENT CLAUSE. See "Gas Cost Adjustment Clause" 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
in other respects. See "FERC Order No. 636" in the Notes to Consolidated
Financial Statements. It is also subject to limited regulation by local
public authorities.
In 1996, about 4% of Northern Indiana's electric revenues were derived
from electric service it furnished at wholesale in interstate commerce to
other utility companies, municipalities and WVPA (see "Item 1. Business-
Electric Operations" regarding WVPA). Northern Indiana's wholesale rates
and operations are subject to the jurisdiction of the FERC. The
jurisdiction of the FERC does not extend to the issuance of securities by
Northern Indiana since it is a public utility organized and operating in the
State of Indiana, under the laws of which its security issues are regulated
by the Commission. The FERC on October 21, 1954, declared Northern
Indiana exempt from the provisions of the Natural Gas Act.
RATE MATTERS. For information regarding Northern Indiana's gas rates
and gas transition costs, see "FERC Order No. 636" in the Notes to
Consolidated Financial Statements.
Northern Indiana filed a petition for an Alternative Regulatory Plan
(ARP) with the Commission on November 29, 1995. The purpose of the ARP is
to create a business and regulatory environment and structure which will
permit increased choice for gas customers, competition among suppliers, and
improved natural gas service. In its ARP, Northern Indiana proposes to
implement new rates and services that would include, but not be limited to,
further unbundling of services for additional customer classes which would
include increased customer choice for sources of natural gas supply,
negotiated services and prices, and incentive gas and storage cost
mechanisms. The Commission will hold hearings on the ARP during first
half of 1997.
CONSTRUCTION BUDGET. Northern Indiana's 1997-2001 construction budget
(including allowance for funds used during construction) is estimated at
approximately $750 million, including $156 million in 1997, $161 million in
1998, $146 million in 1999, $142 million in 2000 and $145 million in 2001.
Northern Indiana's construction estimates include adjustments for
anticipated inflation. No new electric generating units are planned in the
1997-2001 budget. Northern Indiana does not have, and has no plans to
construct, a nuclear generating unit.
COMPETITION. In municipalities where Northern Indiana renders
electric service to the general public as a public utility, no other utility
renders electric or gas service, except in Angola, DeMotte, Rome City,
Wanatah, and Waterloo. In 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 1996, gas transportation
represented 54% of Northern Indiana's total gas sendout.
Indiana law requires Commission approval before a gas customer of a
utility may bypass the utility and make other arrangements for gas service.
Any entity which transports gas from outside Indiana for direct sale or
delivery to itself or other end-users within the state will be considered a
public utility and must obtain a necessity certificate from the Commission
in order to engage in such activities. See "Competition" in the
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
EMPLOYEE RELATIONS. Northern Indiana had 3,562 employees at
December 31, 1996. Approximately 72% of Northern Indiana's employees
(physical and clerical workers) are represented by two local unions of the
United Steelworkers of America, AFL-CIO-CLC. Effective June 1, 1993, the
bargaining unit employees ratified four-year agreements which continue until
June 1, 1997. Northern Indiana intends to negotiate new agreements with the
two local unions, but can not predict the timing or terms of new agreements.
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 $16.6 million to cover probable corrective actions
as of December 31, 1996; however, environmental regulations and remediation
techniques are subject to future change. The ultimate cost could be
significant, depending on the extent of corrective actions required. Based
upon investigations and management's understanding of current laws and
regulations, Northern Indiana believes that any corrective actions required,
after consideration of insurance coverages and contributions from other
potentially responsible parties, will not have a significant impact on the
financial position or results of operations of 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, 1992,
through December 31, 1996 for pollution control facilities were
approximately $141 million and were financed in part by the sale of
Pollution Control Notes and Bonds-Jasper County. Northern Indiana
anticipates expenditures of approximately $50 million for pollution control
equipment in the 1997-2001 period which includes anticipated expenditures of
$29 million in 1997 and $6 million in 1998.
AIR. The Indiana Department of Environmental Management (IDEM) Office
of Air Management has submitted to the U.S. Environmental Protection Agency
(EPA) a State Implementation Plan (SIP) in accordance with the requirements
of the Clean Air Act Amendments of 1977.
ATTAINMENT-NONATTAINMENT. Under the Clean Air Act Amendments of 1977,
the State has identified areas which are in compliance with the National
Ambient Air Quality Standards (NAAQS) (attainment areas) and areas that are
not in compliance with respect to the sulfur dioxide, particulate matter
and other pollutant standards established by NAAQS (nonattainment areas).
Portions of Lake County in which Northern Indiana operates an electric
generating facility remain designated a nonattainment area for sulfur
dioxide. Control plans for this county have been implemented. Reductions
in emissions of sulfur dioxide have been made, and Northern Indiana
anticipates no increased costs as a result of the implementation of the
control plans for Lake County. On January 14, 1997, the EPA redesignated
LaPorte County to attainment for sulfur dioxide.
Lake County, Indiana, is designated as a nonattainment area for
particulate matter or PM-10. The State of Indiana promulgated a PM-10 SIP
rule, which became effective on June 11, 1993. The rule requires reduced
opacity and mass emissions limits at Dean H. Mitchell Station as well as the
establishment of fugitive dust control and continuous compliance plans.
Northern Indiana has made investments in equipment and is currently in
compliance with the PM-10 SIP rules. Porter County has been determined to
have an unclassified status for PM-10. According to state requirements, the
area will be monitored for PM-10 impacts to determine the appropriate
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 resulted in new provisions applicable to mobile and
stationary sources in Lake and Porter Counties. Control measures requiring
reduction of emissions of nitrogen oxides from the Mitchell and Bailly
Generating Stations as a consequence of the Lake Michigan Ozone Control
Program have yet to be determined. Northern Indiana is evaluating potential
least-cost methods to reduce emissions of nitrogen oxides from the
generating stations. The EPA has approved a conditional waiver from present
reduction of nitrogen oxides under Title I. Northern Indiana cannot determine
the cost impact of the future provisions.
ACID RAIN. Title IV of the CAAA addresses the acid rain issue by
targeting large sources of sulfur dioxide and nitrogen oxides for
significant reductions. The core acid rain rules for sulfur dioxide were
promulgated by the EPA on January 11, 1993. As required by the regulations,
Bailly Units 7 and 8 and Michigan City Unit 12 reduced their sulfur dioxide
emissions below 2.5 pounds per million British thermal units (lbs/mm Btu) by
January 1, 1995. These units, along with the remainder of Northern Indiana's
coal-fired units, are required to reduce their sulfur dioxide emissions
below 1.2 lbs/mm Btu by January 1, 2000 (Phase II).
Presently, all of Northern Indiana's eleven coal fired generating
units utilize low sulfur fuel or flue gas desulfurization units to control
sulfur dioxide emissions below the 1.2 lbs/mm Btu level. That places
Northern Indiana in compliance with the Phase II sulfur dioxide standards.
The EPA approved Northern Indiana's acid rain permits for the Bailly
and Michigan City Generating Stations on August 31, 1993. The Phase I acid
rain permits for the stations are effective from January 1, 1995 through
December 31, 1999. One component of the permit is the Phase I extension
plan for Bailly. Northern Indiana was eligible for and received the
extension because of the construction and operation of the Bailly scrubber.
This extension plan allocates additional allowances, above the basic
allowances, applicable to Bailly and Michigan City Generating Stations.
Northern Indiana estimates that total costs of compliance with the
CAAA sulfur dioxide regulations will impact electric rates by less than 5%
in the future.
Northern Indiana is pursuing nitrogen oxide reduction measures to meet
future acid rain requirements. The EPA proposed Phase II nitrogen oxide
limits in January of 1996. The final rules were signed by the EPA
Administrator on December 10, 1996. The nitrogen oxides emission limits in
the final rules potentially apply to all of Northern Indiana's electric
generating facilities. Although there is a legal challenge to the final
rule, plans will be prepared to meet compliance with the final rules. On
December 30, 1996, Northern Indiana filed permit applications requesting
early election of Northern Indiana's Phase II pulverized coal boilers. The
permits when approved by the EPA will establish limits based on the Phase I
nitrogen oxides emission standards for the seven boilers during the
following ten year period.
ADDITIONAL AIR ISSUES. The CAAA contains provisions that could lead
to limitations on emissions of nitrogen oxides and hazardous air
pollutants, which may require significant capital expenditures for control
of these emissions. Northern Indiana is pursuing a nitrogen oxide control
program to meet future requirements. Northern Indiana cannot predict the
costs of complying with CAAA requirements.
The EPA has promulgated a permit program to meet the requirements of
Title V of the CAAA. The IDEM, on November 3, 1993, proposed an air
operating permit program to meet the requirements of Title V to Indiana's
Air Pollution Control Board. The Air Pollution Control Board adopted rules
to implement the Title V permit program on March 10, 1994. These operating
permit rules, including a new fee schedule, became effective in Indiana on
June 24, 1994. Indiana submitted the Title V rules to the EPA for approval
in August of 1994. The EPA has approved the submittal and the rules became
effective December 14, 1995. Northern Indiana submitted Title V permit
applications for each of the four electric generating stations during
September 1996.
WATER. The Clean Water Act, as amended, subjects point source
dischargers to technology and water quality based controls through the
National Pollution Discharge Elimination System (NPDES) permit program.
Northern Indiana is required to have NPDES permits for discharges from its
generating stations into the waters of the United States. The Great Lakes
Water Quality Initiative (GLI) is a complex set of water quality
regulations governing discharges in the Great Lakes drainage basin. This
regulation became effective February 13, 1997 and will affect the NPDES
permits for Northern Indiana's three lakeside stations. As of this date,
the Bailly Station NPDES permit has not been renewed by IDEM. Northern
Indiana anticipates that IDEM will issue the new Bailly permit under the
GLI regulations. The Mitchell, Michigan City, and R. M. Schahfer Stations
NPDS permits expire in August 1998. Northern Indiana received NPDES permit
modifications for intermittent chemical treatment of the main discharge at
the Mitchell and Michigan City Stations for zebra mussel control. Bailly
Station utilizes thermal treatment in its water systems to control zebra
mussels. Schahfer Station has not presently experienced operational
impacts due to zebra mussels. Rather, Schahfer Station has experienced
equipment problems due to an Asiatic clam infestation. Alternate forms of
control are being investigated by Northern Indiana in an effort to prevent
any impact on plant operations relating to these infestations, while also
minimizing the environmental impact of the controls.
SUPERFUND SITES. The EPA has notified Northern Indiana that it is a
"potentially responsible party" (PRP) under the Comprehensive Environmental
Response Compensation and Liability Act (CERCLA) and may be required to
share in the cost of cleanup of several waste disposal sites identified by
the EPA. The sites are in various stages of investigation, analysis,
and remediation. At each of the sites Northern Indiana is one of several
PRPs, and it is expected that remedial costs, as provided under CERCLA,
will be shared among them. At some sites, Northern Indiana and/or the other
named PRPs are presently working with the EPA to clean up the sites and
avoid the imposition of fines or added costs.
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. Initial samplings
have been conducted at fourteen 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 in 1992 of the release of a
petroleum substance into the St. Mary's River in Fort Wayne, Indiana, from
the site of a former manufactured-gas plant formerly owned by Northern
Indiana. In cooperation with IDEM, Northern Indiana has taken steps to
investigate and contain the substance. Northern Indiana has remediated part
of the Fort Wayne site. The remainder of the site is being evaluated to
determine what future remedial measures, if any, may be needed.
During the course of investigation activities, Northern Indiana noted
the presence of manufactured-gas plant residuals in the St. Mary's River in
Fort Wayne, Indiana and the Wabash River in Peru, Indiana. Northern Indiana
notified IDEM and the EPA and immediately took steps to contain the material
at both sites.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured gas plant
sites at which both companies or their predecessors were former operators or
owners. One of these sites is the Lafayette site which Indiana Gas had
previously notified Northern Indiana is being investigated and remediated
pursuant to an administrative order with IDEM. Northern Indiana also
notified Cinergy Services, Inc. (Cinergy) (formerly PSI Energy, Inc.) that
it was a former owner or operator of seven former manufactured-gas plants at
which Northern Indiana had conducted or was planning investigation or
remediation activities. In December 1996, Northern Indiana sent a written
demand to Cinergy related to one of these sites, Goshen. Northern Indiana
demanded that Cinergy pay Northern Indiana for costs Northern Indiana has
already incurred and to be incurred to implement the needed remedy at the
Goshen site.
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.
Both sides have motions pending in the Federal Court lawsuit that would be
dispositive of the case. Northern Indiana has obtained cash settlements
with some of its insurers.
In October 1996, the American Institute of Certified Public
Accountants issued Statement of Position 96-1, "Environmental Remediation
Liabilities." This statement provides authoritative guidance for
recognition, measurement, display, and disclosure of environmental
remediation liabilities in financial statements. Northern Indiana will
adopt this standard on January 1, 1997 and adoption will not have a
material impact on Northern Indiana financial position or results of
operations.
ELECTRIC AND MAGNETIC FIELDS. The possibility that exposure to
electric and magnetic fields (EMF) emanating from power lines, household
appliances, and other electric sources may result in adverse health effects
has been the subject of public, governmental, and media attention.
Recently, The U.S. National Research Council of the National Academy of
Sciences concluded in a report, after examining more than 500 EMF studies
spanning seventeen years, that among other things, there is insufficient
evidence to consider EMF a threat to human health. Despite the report'
findings, future research appropriations are continuing to be dedicated to
explore the issue.
---------------------------
It is not possible to predict the scope, enforceability or financial
impact of other environmental regulations or standards which may be
established in the future.
ITEM 2. PROPERTIES.
The physical properties of 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, 1996, Northern Indiana generated 83.8% and purchased 16.2% of
its electric requirements.
Northern Indiana has 292 substations with an aggregate transformer
capacity of 22,877,400 kva. Its transmission system with voltages from
34,500 to 345,000 consists of 3,052 circuit miles of line. The electric
distribution system extends into 21 counties and consists of 7,692 circuit
miles of overhead and 1,338 cable miles of underground primary distribution
lines operating at various voltages from 2,400 to 12,500 volts. Northern
Indiana has distribution transformers having an aggregate capacity of
11,050,855 kva and 434,851 electric watt-hour meters.
GAS. Northern Indiana has an underground storage field at Royal
Center and a liquefied natural gas plant in LaPorte County, both of which
are described under "Item 1. Business-Gas Operations." Northern Indiana has
13,195 miles of gas mains.
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.
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. 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, 1996,
Northern Indiana had approximately $146.0 million of retained earnings
(earned surplus) available for the payment of dividends. Future common
share dividends by Northern Indiana will depend upon adequate retained
earnings, adequate future earnings and the absence of adverse developments.
So long as any shares of Northern Indiana's cumulative preferred stock
are outstanding, no cash dividends shall be paid on its common shares in
excess of 75% of the net income available therefor for the preceding
calendar year unless the aggregate of the capital applicable to stocks
subordinate as to assets and dividends to the cumulative preferred stock
plus the surplus, after giving effect to such dividends, would equal or
exceed 25% of the sum of all obligations evidenced by bonds, notes,
debentures or other securities, plus the total capital and surplus. At
December 31, 1996, the sum of the capital applicable to stocks subordinate
to the cumulative preferred stock plus the surplus was equal to 40% of the
total capitalization including surplus.
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)
1996 1995 1994 1993 1992
========== ========== ========== ========== ==========
Operating revenues $1,754.105 $1,664,278 $1,613,995 $1,619,623 $1,552,285
Net income $ 197,310 $ 194,321 $ 179,903 $ 172,104 $ 149,454
Total assets $3,755,474 $3,606,199 $3,624,311 $3,613,235 $3,595,345
Long-term
obligations and
redeemable
preferred stock $1,053,254 $1,122,392 $1,131,408 $1,147,536 $1,035,128
Cash dividends
declared on
common shares $ 187,450 $ 185,725 $ 168,815 $ 165,299 $ 134,916
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
NET INCOME. For 1996, net income of Northern Indiana increased to
$197.3 million, compared to $194.3 million for 1995. In 1994, net income
was $179.9 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 $89.8 million, or 5.4%, from
1995. Operating revenues in 1995 increased $50.2 million, or 3.1%, from
1994.
During 1996, gas deliveries in dekatherms (dth), which include
transportation services, increased 3.6%. Gas sales in 1996 increased 14.7%
due to higher sales to residential and commercial customers as a result of
colder weather during the first quarter of 1996, and increased sales to
industrial and wholesale customers. Gas transportation services decreased
4.0% mainly due to decreased deliveries to industrial customers. Northern
Indiana had approximately 653,100 gas customers at December 31, 1996. During
1995, gas deliveries increased 0.9% over 1994. Gas sales in 1995 increased
5.0% due to higher sales to residential and commercial customers as result
of colder weather during the fourth quarter of 1995. Gas transportation
services decreased 1.7% mainly due to decreased deliveries to industrial
customers.
Gas revenues were $731.9 million in 1996, an increase of $98.5 million
from 1995. The increase in gas revenues was mainly due to increased sales
to residential and commercial customers as a result of colder weather during
the first quarter of 1996, increased sales to industrial and wholesale
customers, and increased gas costs per dth, which were partially offset by
decreased gas transition costs. Gas revenues were $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. 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 155.2, 161.7 and 164.6 million dth in 1996, 1995,
and 1994, respectively.
In 1996, sales of electricity in kilowatt-hours (kwh) decreased 1.1%
from 1995 mainly due to decreased sales to residential customers due to
cooler summer weather in 1996, and decreased sales to industrial customers
due to operational difficulties at several major industrial customers, which
were partially offset by increased sales to commercial and wholesale
customers. Northern Indiana had approximately 411,500 electric customers at
December 31, 1996. In 1995, sales of electricity in kwh increased 8.9% over
1994 mainly due to higher sales to residential and commercial customers as a
result of warmer weather in the third quarter of 1995, and increased sales to
wholesale customers.
In 1996, electric revenues were $1.022 billion, a decrease of $8.7
million from 1995. The decrease in electric revenue was mainly due to
decreased sales to residential customers due to cooler summer weather in 1996,
and decreased sales to industrial customers due to operational difficulties
at several major industrial customers, which were partially offset by
increased sales to commercial and wholesale customers. In 1995, electric
revenues were $1.031 billion, an increase of $36.4 million from 1994. The
increase in electric 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 partially offset by
lower fuel costs per kwh and to transitional rate adjustments to industrial
customers signing new five-year contracts in 1995.
The components of the changes in gas and electric revenues are shown
in the following tables:
Year 1996 Year 1995
Compared To Compared To
Year 1995 Year 1994
============ ============
(Dollars in millions)
Gas Revenue
Pass through of net changes in
purchased gas costs, gas storage
and storage transportation costs $ 55.6 $ (61.6)
Gas transition costs (33.5) 48.3
Changes in sales levels 77.5 28.2
Gas transported (1.1) (1.1)
------------ ------------
Gas Revenue Change $ 98.5 $ 13.8
------------ ------------
Electric Revenue
Pass through of net changes
in fuel costs $ 3.2 $ (14.6)
Changes in sales levels (11.9) 51.0
------------ ------------
Electric Revenue Change $ (8.7) $ 36.4
------------ ------------
Total Revenue Change $ 89.8 $ 50.2
============ ============
See Rate Matters in Notes to Consolidated Financial Statements
regarding FERC Order No. 636 transition costs.
The basic steel industry accounted for 34% of natural gas delivered
(including volumes transported) and 35% of electric sales during 1996.
Northern Indiana's rate schedules for gas and electric service to its
customers contain an electric rate adjustment clause for changes in the cost
of fuel and firm purchases of electric energy; and gas rate adjustment
clauses to reflect changes in the cost of gas purchased, contracted gas
storage and storage transportation costs. (See Fuel Adjustment Clause and
Gas Cost Adjustment Clause under Summary of Significant Accounting Policies
in Notes to Consolidated Financial Statements.)
GAS COSTS. Gas costs increased $77.6 million (21.2%) in 1996 due to
increased purchases and increased gas costs per dth, which were partially
offset by decreased gas transition costs. The average cost for purchased gas
in 1996, after adjustment for transition costs billed to transport customers,
was $3.03 per dth as compared to $2.63 per dth in 1995. 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 for purchased gas in 1995, after
adjustment for transition charges billed to transport customers, was $2.63
per dth as compared to $2.90 per dth in 1994.
FUEL AND PURCHASED POWER. Cost of fuel for electric generation in
1996 decreased mainly as a result of decreased production. The average cost
per kwh generated decreased 0.6% from 1995 to 15.79 mills. The cost of fuel
for electric generation decreased in 1995 from 1994 mainly as a result of
lower costs for coal and was partially offset by increased production. The
average cost per kwh generated decreased 5.7% from 1994 to 15.89 mills.
Power purchased increased $10.1 million in 1996 as a result of
increased bulk power purchases and increased cost per megawatt purchased.
Power purchased increased $11.1 million in 1995 mainly as a result of
increased bulk power purchases from other utilities due to increased sales.
OPERATING MARGINS. Operating margins increased $11.2 million in 1996
to $1.023 billion. The gas operating margin increased $20.9 million in 1996,
due to the increased sales to residential and commercial customers
reflecting colder weather during the first quarter of 1996, increased sales
to industrial and wholesale customers, and increased deliveries of gas
transported for others. Operating margins from electric sales decreased
$9.7 million due to decreased sales to residential customers reflecting
cooler summer weather in 1996, and decreased sales to industrial customers
due to plant operational difficulties at several major customers, which
were partially offset by increased sales to commercial and wholesale
customers. Operating margins increased $43.2 million in 1995 to $1.012
billion. The gas operating margin 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 EXPENSES AND TAXES. Operating expenses and taxes (except
income) in 1996 increased 1.2% from 1995 to $633.4 million and in 1995
increased 1.5% from 1994 to $625.7 million.
Operation expenses increased $2.4 million in 1996 over 1995 due to
increased pollution control facility costs, environmental costs of $5.4
million, and other various increased operating costs partially offset by
reduced pension costs. Operation expenses increased $3.2 million in 1995
from 1994 reflecting a December 1995 Indiana Utility Regulatory Commission
(Commission) order to refund $3.4 million to electric customers related to
a 1992 insurance settlement previously credited to operating and
maintenance expenses.
Maintenance expenses decreased $8.2 million in 1996 from 1995 mainly
reflecting decreased maintenance activity at electric production facilities
and gas underground storage facilities. Maintenance expense decreased $1.9
million in 1995 from 1994 due to reduced maintenance activities.
Depreciation and amortization expenses increased $13.3 million in 1996
from 1995 resulting from plant additions, increased amortization of computer
software, and the amortization of deferred costs related to scrubber services
provided by Pure Air at the Bailly Generating Station. Depreciation and
amortization expenses increased $6.8 million in 1995 from 1994 mainly due
to net plant additions.
Utility income taxes increased $2.5 million in 1996 from 1995 mainly
as a result of increased pre-tax income and increased $10.3 million in 1995
from 1994 mainly due to higher pre-tax operating income.
Other Income (Deductions) increased $3.9 million in 1996 from 1995
mainly reflecting the sale of Crescent Dunes Lakeshore property to the
National Park Service. 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 $1.9 million and $1.6 million in 1996 and
1995, respectively. The 1996 increase reflects the issuance of $169,275,000
of Northern Indiana's Medium-Term Notes, Series D and the discontinuance of
carrying charges related to the Bailly Generating Station scrubber service
agreement. The 1995 increase reflects increases in short-term borrowing
rates and long-term debt outstanding.
See Notes to Consolidated Financial Statements for a discussion of
Regulatory Assets, Carrying Charges and Deferred Depreciation, Allowance for
Funds Used During Construction, FERC Order No. 636, Income Taxes, and
Postretirement Benefits.
ENVIRONMENTAL MATTERS: 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 $16.6 million to cover probable corrective actions
as of December 31, 1996; however, environmental regulations and remediation
techniques are subject to future change. The ultimate cost could be
significant, depending on the extent of corrective actions required. Based
upon investigations and management's understanding of current laws and
regulations, Northern Indiana believes that any corrective actions required,
after consideration of insurance coverages and contributions from other
potentially responsible parties, will not have a significant impact on the
financial position or results of operations of 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 acid deposition provisions of the Clean Air Act
Amendments of 1990 (CAAA). Northern Indiana estimates that total costs of
compliance with the CAAA sulfur dioxide regulations will impact electric
rates by less than 5% in the future.
The CAAA contain provisions that could lead to limitations on
emissions of nitrogen oxides and hazardous air pollutants, which may require
significant capital expenditures for control of these emissions. Northern
Indiana is pursuing a nitrogen oxide control program to meet future
requirements. Northern Indiana cannot predict the costs of complying with
CAAA requirements.
The Environmental Protection Agency (EPA) has notified Northern
Indiana that it is a "potentially responsible party" (PRP) under the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA)
and may be required to share in the cost of cleanup of several waste
disposal sites identified by the EPA. The sites are in various stages of
investigation, analysis, and remediation. At each of the sites, Northern
Indiana is one of several PRPs, and it is expected that remedial costs,
as provided under CERCLA, will be shared among them. At some sites, Northern
Indiana and/or the other named PRPs are presently working with the EPA to
clean up the sites and avoid the imposition of fines or added costs.
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. Initial samplings have been conducted at
fourteen 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 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 in 1992 of the release of a
petroleum substance into the St. Mary's River in Fort Wayne, Indiana, from
the site of a former manufactured-gas plant formerly owned by Northern
Indiana. In cooperation with IDEM, Northern Indiana has taken steps to
investigate and contain the substance. Northern Indiana has remediated part
of the Fort Wayne site. The remainder of the site is being evaluated to
determine what further remedial measures, if any, may be needed.
During the course of investigation activities, Northern Indiana noted
the presence of manufactured-gas plant residuals in the St. Mary's River in
Fort Wayne, Indiana and the Wabash River in Peru, Indiana. Northern
Indiana notified IDEM and the EPA and immediately took steps to contain
the material at both sites.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured-gas plant
sites at which both companies or their predecessors were former operators or
owners. One of these sites is the Lafayette site which Indiana Gas had
previously notified Northern Indiana is being investigated and remediated
pursuant to an administrative order with IDEM. Northern Indiana also
notified Cinergy Services, Inc. (Cinergy) (formerly PSI Energy, Inc.) that
it was a former owner or operator of seven former manufactured-gas plants at
which Northern Indiana had conducted or was planning investigation or
remediation activities. In December 1996, Northern Indiana sent a written
demand to Cinergy related to one of these sites, Goshen. Northern Indiana
demanded that Cinergy pay Northern Indiana for costs Northern Indiana has
already incurred and to be incurred to implement the needed remedy at the
Goshen site.
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.
Both sides have motions pending in the Federal Court lawsuit that would be
dispositive of the case. Northern Indiana has obtained cash settlements
from some of its insurers.
In October 1996, the American Institute of Certified Public
Accountants issued Statement of Position 96-1, "Enironmental Remediation
Liabilities." This statement provides authoritative guidance for
recognition, measurement, display, and disclosure of environmental
remediation liabilities in financial statements. Northern Indiana will
adopt this standard on January 1, 1997 and adoption will not have a
material impact on Northern Indiana's financial position or results of
operations.
The possibility that exposure to electric and magnetic fields (EMF)
emanating from power lines, household appliances and other electric sources
may result in adverse health effects has been the subject of public,
governmental, and media attention. Recently, the U.S. National Research
Council of the National Academy of Sciences concluded in a report, after
examining more than 500 EMF studies spanning seventeen years, that among
other things, there is insufficient evidence to consider EMF a threat
to human health. Despite the report's findings, future research
appropriations are continuing to be dedicated to explore the issue.
LIQUIDITY AND CAPITAL RESOURCES. Construction expenditures by
Northern Indiana for 1996, 1995, and 1994 were approximately $198 million,
$186 million, and $197 million, respectively. Northern Indiana's total
utility plant investment on December 31, 1996, was $5.6 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 one year to
thirty years, for purposes of refinancing certain first mortgage bonds and
medium-term notes. During 1994, $120.0 million of the Medium-Term Notes,
Series D, were issued to refinance certain first mortgage bonds. On
June 12, 1995, the remaining $169,275,000 of Medium-Term Notes, Series D,
were issued and part of the proceeds were used to redeem all of the
outstanding First Mortgage Bonds, Series U and Z, aggregating $94.8 million,
on July 3, 1995.
Cash flow from operations has provided sufficient liquidity to meet
current operating requirements. Because of the seasonal nature of the
utility business and the construction program, Northern Indiana makes use of
commercial paper intermittently as short-term financing. As of December 31,
1996, Northern Indiana had $193.9 million in commercial paper outstanding,
having a weighted average interest rate of 5.43%.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1999, unless extended by its
terms. As of December 31, 1996, there were no borrowings outstanding under
this agreement. In addition, Northern Indiana has $14.2 million in lines of
credit which run to May 31, 1997 which are expected to be renewed for the
subsequent twelve-month period. The credit pricing of each of the lines
varies from either the lending banks' commercial prime or market rates.
Northern Indiana has agreed to compensate the participating banks with
arrangements that vary from no commitment fee to a combination of fees which
are mutually satisfactory to both parties. As of December 31, 1996, there
were no borrowings under these lines of credit. The Credit Agreement and
lines of credit are also available to support the issuances of commercial
paper.
Northern Indiana also has $273.5 million of money market lines of
credit. As of December 31, 1996, $79.0 million of borrowings were
outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
December 31, 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. On April 24, 1996, the FERC
issued its Order No. 888 which opens wholesale power sales to competition
and requires public utilities owning, controlling, or operating transmission
lines to file non-discriminatory open access tariffs that offer others the
same transmission service they provide themselves. Order No. 888 also
provides for the full recovery of stranded costs - that is, costs that were
prudently incurred to serve power customers and that could go unrecovered
if these customers use open access to move to another supplier. FERC
expects this rule will accelerate competition and bring lower prices and
more choices to wholesale energy customers. Although wholesale customers
represent a relatively small portion of Northern Indiana's sales, Northern
Indiana will continue its efforts to retain and add customers by offering
competitive rates.
In January 1997, legislation was introduced to the Indiana General
Assembly addressing electric utility competition and deregulation. Under
the proposed legislation, an electric utility would be required to separate
its production and marketing functions from the transmission and distribution
functions to eliminate a competitive market advantage related to
organizational structure. There would be a transition period from
October 1, 1999 through June 30, 2004, during which an electric utility's
cost of service in rates would transition to a target price based upon
Indiana utility averages. Amounts collected by an electric utility above
the target price during the transition period would provide for recovery of
transition costs. Under the proposed legislation, each electric utility
company would be required to file a proposed distribution comparability
tariff for unbundled electric service. Customers would have the right to
chose their electricity supplier effective with the transition period.
During the transition period, access charges would be billed to those
customers choosing a new supplier. Regulatory assets not recovered during
the transition period and not included as part of the cost-based
transmission and distribution function would not be recoverable from
customers. After the transition period, customers would be required to
make an affirmative election as to their electricity supplier; if no
election is made, the Commission would assign a supplier. Management
believes that the likelihood of passage of this proposed legislation, in
its current form, is remote.
Operating in a competitive environment will place added pressures on
utility profit margins and credit ratings. Increasing competition in the
electric utility industry has already led the credit rating agencies to
apply more stringent guidelines in making credit rating determinations.
Competition within the electric utility industry will create
opportunities to compete for new customers and revenues, as well as increase
the risk of the loss of customers. Northern Indiana's management has taken
steps to make the company more competitive and profitable in the changing
utility environment, including conversions of some of its generating units
to allow use of lower cost, low sulfur coal.
FERC Order No. 636, shifted primary responsibility for gas
acquisition, transportation, and peak days' supply from pipelines to local
gas distribution companies, such as 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 a petition for an Alternative Regulatory Plan
(ARP) with the Commission on November 29, 1995. The purpose of the ARP is
to create a business and regulatory environment and structure which will
permit increased choice for gas customers, competition among suppliers, and
improved natural gas service. In its ARP, Northern Indiana proposes to
implement new rates and services that would include, but not be limited to,
further unbundling of services for additional customer classes which would
include increased customer choice for sources of natural gas supply,
negotiated services and prices, and incentive gas and storage cost
mechanisms. The Commission will hold hearings on the ARP during first
half of 1997.
To date, Northern Indiana's system has not been materially adversely
affected by competition, and management does not foresee substantial adverse
effects in the near future, unless the current regulatory structure is
adversely altered. 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 25
Consolidated Statement of Income for the years
ended December 31, 1996, 1995, and 1994 26-27
Consolidated Balance Sheet - December 31, 1996
and 1995 27-29
Consolidated Statement of Capitalization -
December 31, 1996 and 1995 30-31
Consolidated Statement of Long-term Debt -
December 31, 1996 and 1995 31-32
Consolidated Statement of Cash Flows for the
years ended December 31, 1996, 1995, and 1994 32-34
Consolidated Statement of Retained Earnings for
the years ended December 31, 1996, 1995, and 1994 34-35
Notes to Consolidated Financial Statements 35-60
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,
1996 and 1995, and the related consolidated statements of income, retained
earnings and cash flows for each of the three years in the period ended
December 31, 1996. 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,
1996 and 1995, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed on Page
72, 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 28, 1997
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996 1995 1994
========== ========== ==========
(Dollars in thousands)
Operating Revenues:
(Notes 2, 4 and 21)
Gas $ 731,874 $ 633,355 $ 619,503
Electric 1,022,231 1,030,923 994,492
---------- ---------- ----------
1,754,105 1,664,278 1,613,995
---------- ---------- ----------
Cost of Energy: (Note 2)
Gas costs 444,141 366,487 365,811
Fuel for electric generation 233,215 242,337 247,134
Power purchased 53,751 43,681 32,503
---------- ---------- ----------
731,107 652,505 645,448
---------- ---------- ----------
Operating Margin 1,022,998 1,011,773 968,547
---------- ---------- ----------
Operating Expenses and
Taxes (except income):
Operation 281,066 278,683 275,514
Maintenance (Note 2) 68,729 76,953 78,872
Depreciation and
amortization (Note 2) 211,545 198,259 191,426
Taxes (except income) 72,069 71,831 70,417
---------- ---------- ----------
633,409 625,726 616,229
---------- ---------- ----------
Operating Income Before
Utility Income Taxes 389,589 386,047 352,318
---------- ---------- ----------
Utility Income Taxes (Note 6) 109,051 106,574 96,257
---------- ---------- ----------
Operating Income 280,538 279,473 256,061
---------- ---------- ----------
Other Income (Deductions) 240 (3,619) 3,726
---------- ---------- ----------
Interest Charges:
Interest on long-term debt 68,798 72,339 70,771
Other interest 11,225 8,395 9,550
Allowance for borrowed funds used
during construction and carrying
charges (Note 2) (805) (3,320) (4,034)
Amortization of premium, reacquisition
premium, discount and expense on
debt, net 4,250 4,119 3,597
---------- ---------- ----------
83,468 81,533 79,884
---------- ---------- ----------
Net Income 197,310 194,321 179,903
Dividend requirements on
preferred stocks 8,712 9,046 9,913
---------- ---------- ----------
Balance available
for common shares $ 188,598 $ 185,275 $ 169,990
========== ========== ==========
Common dividends declared $ 187,450 $ 185,725 $ 168,815
========== =========== ==========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 1995
=========== ===========
(Dollars in thousands)
ASSETS
UTILITY PLANT, at original cost (including
construction work in progress of
$162,123 and $145,078, respectively)
(Note 2):
Electric $ 4,050,084 $ 3,935,103
Gas 1,176,871 1,143,021
Common 346,636 350,168
----------- -----------
5,573,591 5,428,292
Less - Accumulated provision for
depreciation and amortization 2,499,687 2,330,879
----------- -----------
Total Utility Plant 3,073,904 3,097,413
----------- -----------
OTHER PROPERTY AND INVESTMENTS 8,971 8,787
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents 8,279 11,478
Accounts receivable, less reserve of
$4,568 and $6,418, respectively (Note 2) 111,866 96,076
Fuel adjustment clause (Note 2) 9,149 10,301
Gas cost adjustment clause (Note 2) 98,167 4,113
Materials and supplies, at average cost 56,796 63,824
Electric production fuel, at average cost 26,483 14,258
Natural gas in storage, at last-in,
first-out cost (Note 2) 50,409 53,413
Prepayments and other 13,658 13,050
----------- -----------
Total Current Assets 374,807 266,513
----------- -----------
OTHER ASSETS:
Regulatory assets (Note 2) 230,545 211,859
Prepayments and other (Note 7) 67,247 21,627
----------- -----------
Total Other Assets 297,792 233,486
----------- -----------
$ 3,755,474 $ 3,606,199
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 1995
=========== ===========
(Dollars in thousands)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's equity $ 1,017,996 $ 1,016,827
Preferred stocks (Note 9) -
Series without mandatory
redemption provisions (Note 10) 81,126 81,325
Series with mandatory
redemption provisions (Note 11) 61,246 63,651
Long-term debt, excluding amounts due
within one year (Note 15) 992,008 1,058,741
----------- -----------
Total capitalization 2,152,376 2,220,544
----------- -----------
CURRENT LIABILITIES:
Current portion of long-term debt 65,747 80,000
(Note 16)
Short-term borrowings (Note 17) 272,905 163,600
Accounts payable 190,182 135,639
Sinking funds due within one year
(Notes 11 and 15) 3,328 2,621
Dividends declared on common and
preferred stocks 54,255 49,851
Customer deposits 16,768 10,230
Taxes accrued 78,806 31,247
Interest accrued 5,851 7,170
Accrued employment costs 40,915 45,771
Other 16,302 30,790
----------- -----------
Total current liabilities 745,059 556,919
----------- -----------
OTHER:
Deferred income taxes (Note 6) 597,105 587,809
Deferred investment tax credits, being
amortized over life of related property
(Note 6) 107,058 114,386
Deferred credits 41,056 41,038
Accrued liability for postretirement
benefits (Note 8) 104,123 73,682
Other noncurrent liabilities 8,697 11,821
----------- -----------
Total other 858,039 828,736
----------- -----------
COMMITMENTS AND CONTINGENCIES:
(Notes 3, 4, 5, 18 and 19)
$ 3,755,474 $ 3,606,199
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF CAPITALIZATION
DECEMBER 31, 1996 1995
=========== ===========
(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 12,521 12,500
Retained earnings 145,987 144,839
----------- -----------
Total common shareholder's
equity 1,017,996 47.3% 1,016,827 45.8%
----------- -----------
PREFERRED STOCKS, WHICH ARE
REDEEMABLE SOLELY AT OPTION
OF NORTHERN INDIANA:
Cumulative preferred stock -
$100 par value -
4-1/4% series - 209,145 and
209,190 shares outstanding,
respectively 20,915 20,919
4-1/2% series - 79,996
shares outstanding 8,000 8,000
4.22% series - 106,198
shares outstanding 10,620 10,620
4.88% series - 100,000
shares outstanding 10,000 10,000
7.44% series - 41,890
shares outstanding 4,189 4,189
7.50% series - 34,842
shares outstanding 3,484 3,484
Premium on preferred stock 254 254
Cumulative preferred stock -
no par value -
Adjustable Rate (6.00% at
December 31, 1996) -
Series A (stated value -
$50 per share), 473,285 and
477,185 shares outstanding,
respectively 23,664 23,859
----------- -----------
81,126 3.8% 81,325 3.6%
----------- -----------
REDEEMABLE PREFERRED STOCKS,
SUBJECT TO MANDATORY REDEMPTION
REQUIREMENTS OR WHOSE
REDEMPTION IS OUTSIDE THE
CONTROL OF NORTHERN INDIANA:
Cumulative preferred stock -
$100 par value -
8.85% series - 75,000 and
87,500 shares outstanding,
respectively 7,500 8,750
7-3/4% series - 44,460 and
50,014 shares outstanding,
respectively 4,446 5,001
8.35% series - 63,000 and
69,000 shares outstanding,
respectively 6,300 6,900
Cumulative preferred stock -
no par value -
6.50% series - 430,000
shares outstanding 43,000 43,000
----------- -----------
61,246 2.8% 63,651 2.9%
----------- -----------
LONG-TERM DEBT 992,008 46.1% 1,058,741 47.7%
___________ ______ ___________ ______
Total capitalization $ 2,152,376 100.0% $ 2,220,544 100.0%
=========== ====== =========== ======
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF LONG-TERM DEBT
DECEMBER 31, 1996 1995
=========== ===========
(Dollars in thousands)
FIRST MORTGAGE BONDS -
Series O, 6-3/8%, due September 1, 1997 $ 0 $ 25,747
Series P, 6-7/8%, due October 1, 1998 14,509 14,509
Series T, 7-1/2%, due April 1, 2002 40,000 40,500
Series NN, 7.10%, due July 1, 2017 55,000 55,000
----------- -----------
Total 109,509 135,756
----------- -----------
POLLUTION CONTROL NOTES AND BONDS -
Series A Note -
City of Michigan City, 5.70% due
October 1, 2003 19,000 20,000
Series 1988 Bonds - Jasper County -
Series A, B and C - 3.58% weighted
average at December 31, 1996, due
November 1, 2016 130,000 130,000
Series 1988 Bonds - Jasper County -
Series D - 3.55% weighted average at
December 31, 1996, due November 1, 2007 24,000 24,000
Series 1994 Bonds - Jasper County -
Series A - 5.10% at December 31, 1996
due August 1, 2010 10,000 10,000
Series 1994 Bonds - Jasper County -
Series B - 5.10% at December 31, 1996,
due June 1, 2013 18,000 18,000
Series 1994 Bonds - Jasper County -
Series C - 5.10% at December 31, 1996,
due April 1, 2019 41,000 41,000
----------- -----------
Total 242,000 243,000
----------- -----------
MEDIUM-TERM NOTES -
Issued at interest rates between 5.83%
and 7.64% with a weighted average interest
rate of 6.85% and various maturities between
April 6,1998 and January 19, 2024 644,025 684,025
----------- -----------
UNAMORTIZED PREMIUM AND DISCOUNT
ON LONG-TERM DEBT, NET (3,526) (4,040)
----------- -----------
Total long-term debt, excluding
amounts due in one year $ 992,008 $ 1,058,741
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 1995 1994
=========== =========== ===========
(Dollars in thousands)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 197,310 $ 194,321 $ 179,903
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 211,545 198,259 191,426
Deferred federal and state
operating income taxes, net 26,117 (3,247) (11,468)
Deferred investment tax
credits, net (7,327) (7,436) (6,416)
Advance contract payment (17,100) 0 0
Change in certain assets and
liabilities -
Accounts receivable, net (15,790) (15,099) 18,246
Electric production fuel (12,225) 4,089 3,186
Materials and supplies 7,028 11 1,309
Natural gas in storage 3,004 19,049 (15,659)
Accounts payable 54,543 (6,379) (29,116)
Taxes accrued 14,628 (11,156) (16,745,
Fuel adjustment clause 1,152 (8,687) 4,826
Gas cost adjustment clause (94,054) 23,731 7,721
Accrued employment costs (4,856) 2,511 3,182
Other accruals (14,488) 21,116 1,046
Other, net 6,962 888 22,969
----------- ----------- -----------
Net cash provided by
operating activities 356,449 411,971 354,410
----------- ----------- -----------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Construction expenditures (198,223) (185,560) (196,854)
Other, net 3,076 (750) 5,700
----------- ----------- -----------
Net cash used in investing
activities (195,147) (186,310) (191,154)
----------- ----------- -----------
CASH FLOWS PROVIDED BY
(USED IN) FINANCING
ACTIVITIES:
Issuance of long-term debt 0 168,386 208,884
Issuance of short-term debt 1,172,150 943,200 982,927
Net change in commercial paper 149,105 (111,700) 128,605
Retirement of long-term debt (80,000) (120,868) (210,246)
Retirement of short-term debt (1,211,950) (917,100) (1,065,227)
Retirement of preferred stock (2,604) (7,095) (10,354)
Cash dividends paid on
common shares (182,950) (180,475) (171,845)
Cash dividends paid on
preferred shares (8,766) (9,241) (10,185)
Other, net 514 (284) 0
----------- ----------- -----------
Net cash used in
financing activities (164,501) (235,177) (147,441)
----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (3,199) (9,516) 15,815
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 11,478 20,994 5,179
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 8,279 $ 11,478 $ 20,994
=========== =========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1996 1995 1994
========= ========= =========
(Dollars in thousands)
BALANCE AT BEGINNING OF PERIOD $ 144,839 $ 145,289 $ 144,114
ADD:
NET INCOME 197,310 194,321 179,903
--------- --------- ---------
342,149 339,610 324,017
--------- --------- ---------
LESS:
DIVIDENDS:
Cumulative Preferred stock -
4-1/4% series 889 891 898
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 793 903 1,014
7-3/4% series 395 449 492
8.35% series 572 622 672
6.50% series 2,795 2,795 2,795
Adjustable Rate, series A 1,399 1,517 2,173
Common shares 187,450 185,725 168,815
---------- --------- ---------
196,162 194,771 178,728
---------- --------- ---------
BALANCE AT END OF PERIOD $ 145,987 $ 144,839 $ 145,289
========== ========= =========
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. Certain reclassifications were
made to conform the prior years' financial statements to the current
presentation.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
OPERATING REVENUES. Revenues are recorded based on estimated service
rendered, but are billed to customers monthly on a cycle basis.
DEPRECIATION AND MAINTENANCE. Northern Indiana provides depreciation
on a straight-line method over the remaining service lives of the electric,
gas, and common properties. The provisions, as a percentage of the cost of
depreciable utility plant, were approximately 4.2% for the year 1996, 4.1%
for year 1995, and 4.0% for year 1994. The depreciation rates for electric
and gas properties were 3.55% and 4.92%, respectively.
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.
AMORTIZATION OF SOFTWARE COSTS. Northern Indiana amortizes capitalized
software costs using the straight-line method based on estimated economic
lives.
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, 1996, Northern Indiana had sold
$100 million of its accounts receivable under a sales agreement which expires
May 31, 1997 and is expected to be renewed in the future. The December 31,
1996 and 1995 accounts receivable balances include approximately $7.1 million
and $6.9 million respectively, due from associated companies.
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:
1996 1995 1994
======== ======== ========
(Dollars in thousands)
Income taxes $ 73,631 $128,487 $116,790
Interest, net of amounts capitalized $ 78,268 $ 80,635 $ 76,983
FUEL ADJUSTMENT CLAUSE. All metered electric rates contain a provision
for adjustment in charges for electric energy to reflect increases and
decreases in the cost of fuel and the fuel cost of purchased power through
operation of a fuel adjustment clause. As prescribed by order of the Indiana
Utility Regulatory Commission (Commission) applicable to metered retail rates,
the adjustment factor has been calculated based on the estimated cost of fuel
and the fuel cost of purchased power in a future three-month period. If two
statutory requirements relating to expense and return levels are satisfied,
any under-recovery or over-recovery caused by variances between estimated and
actual cost in a given three-month period will be included in a future filing.
Northern Indiana records any under-recovery or over-recovery as a current
asset or current liability until such time as it is billed or refunded to its
customers. The fuel adjustment factor is subject to a quarterly hearing by
the Commission and remains in effect for a three-month period.
GAS COST ADJUSTMENT CLAUSE. All metered gas rates contain an adjustment
factor which reflects the cost of purchased gas, contracted gas storage, and
storage transportation charges. Northern Indiana records any under-recovery
or over-recovery as a current asset or current liability until such time as it
is billed or refunded to its customers. The 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-recovery or over-recovery caused by variances
between estimated and actual cost in a given three month period will be
included in a future filing. See Note 4, FERC Order No. 636 for a discussion
of 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 1996 and 1995 the estimated replacement cost of
gas in storage (current and non-current) at December 31, 1996 and 1995
exceeded the stated LIFO cost by approximately $96 million and $30 million,
respectively.
AFFILIATED COMPANY TRANSACTIONS. Pursuant to agreement, effective
July 1, 1996, Northern Indiana receives executive, financial, gas supply,
sales and marketing, and administrative and general services from an
affiliate, NIPSCO Industries Management Services Company (Services), a
wholly-owned subsidiary of Industries.
The costs of these services are charged to Northern Indiana based on
payroll and expenses incurred by Services' employees for the benefit of
Northern Indiana. These costs which totalled $17.4 million for the six-month
period ended December 31, 1996 consist primarily of employee compensation
and benefits.
Northern Indiana purchased natural gas and transportation services
from affiliated companies in the amount of $17.3 million representing 4.1%
of Northern Indiana's total gas costs for year 1996.
Northern Indiana subleases a portion of office facilities to affiliated
companies for a monthly fee, which includes operating expenses, based on
space utilization.
HEDGING ACTIVITIES. Northern Indiana uses commodity futures contracts
to hedge the impact of natural gas price fluctuations related to its
business activities. Gains and losses on these futures contracts are
deferred and recognized in income concurrent with the related purchases and
sales of natural gas.
As of December 31, 1996 Northern Indiana had open futures contracts
representing hedges of natural gas sales of 1.2 billion cubic feet (Bcf).
The deferred (losses) on those futures contracts at December 31, 1996
totalled $(0.1) million.
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 identified 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,
1996 1995
============= =============
(Dollars in thousands)
Unamortized reacquisition premium on
debt (Note 15) $ 49,890 $ 53,354
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges
and deferred depreciation (See below) 70,763 74,981
Bailly scrubber carrying charges and
deferred depreciation (See below) 10,816 11,517
Deferral of SFAS No. 106 expense not
recovered (Note 8) 87,005 64,624
FERC Order No. 636
transition costs (Note 4) 47,399 25,038
------------- -------------
265,873 229,514
------------- -------------
Less: Current portion of regulatory assets 35,328 17,655
------------- -------------
$ 230,545 $ 211,859
============= =============
If all or a separable portion of Northern Indiana's operations become
no longer subject to the provisions of SFAS No. 71, a write off of related
regulatory assets would be required, unless some form of transition cost
recovery continues through rates established and collected for Northern
Indiana's remaining regulated operations. In addition, Northern Indiana
would be required to determine any impairment to the carrying costs of
deregulated plant and inventory assets.
In March, 1995, the Financial Accounting Standards Board issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." This statement imposes stricter
criteria for retention of regulatory assets by requiring that such assets be
probable of future recovery at each balance sheet date. Northern Indiana
adopted this standard on January 1, 1996, and adoption did not impact its
financial position or results of operations.
CARRYING CHARGES AND DEFERRED DEPRECIATION. Upon completion of R. M.
Schahfer Units 17 and 18, Northern Indiana capitalized the carrying charges
and deferred depreciation in accordance with orders of the Commission until
the cost of each unit was allowed in rates. Such carrying charges and
deferred depreciation are being amortized over the remaining life of each
unit.
Northern Indiana has capitalized carrying charges and deferred
depreciation and certain operating expenses relating to its scrubber service
agreement for its Bailly Generating Station in accordance with an order of
the Commission. Pursuant to such order, capitalization of carrying charges
and deferral of depreciation and certain operating expenses ceased on
December 31, 1995. The accumulated balance of the deferred costs and related
carrying charges is being amortized over the remaining life of the scrubber
service agreement.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. Allowance for funds
used during construction (AFUDC) is charged to construction work in progress
during the period of construction and represents the net cost of borrowed
funds used for construction purposes and a reasonable rate upon other (equity)
funds. Under established regulatory rate practices, after the construction
project is placed in service, Northern Indiana is permitted to include in the
rates charged for utility services (a) a fair return on and (b) depreciation
of such AFUDC included in plant in service.
At January 1, 1994, a pretax rate of 5.0% for all construction was
being used; effective January 1, 1995, the rate increased to 6.0% and
effective January 1, 1996, the rate decreased to 5.5%.
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
to interest payments on $70 million of 17-1/4% Notes issued in 1981 by
Northern Indiana's former foreign subsidiary, Northern Indiana Public Service
Finance N.V. (Finance). The IRS believes that interest paid on the Notes
should have been subject to United States tax withholding. The Notes were
redeemed in 1985 and Finance was subsequently liquidated. On October 25, 1991,
Northern Indiana challenged the assessment in the United States Tax Court
(Tax Court) and the matter was tried in 1994. On November 6, 1995, the Tax
Court ruled in favor of Northern Indiana, finding that the interest paid on
the Notes was not subject to United States tax withholding. On March 13,
1996, the IRS appealed the Tax Court's decision to the U.S. Court of Appeals
for the Seventh Circuit, and on March 25, 1996 Northern Indiana filed its
cross appeal. Northern Indiana's management and general counsel believe the
ruling of the Tax Court will prevail.
(4) FERC ORDER NO. 636: Pursuant to FERC Order No. 636, interstate pipeline
sales services have been "unbundled" such that gas supplies are being sold
separately from interstate transportation services. Northern Indiana has
contracted for a mix of transportation and storage services from their
pipeline suppliers which allows Northern Indiana to meet the need of its
customers. Pipelines are recovering, from their customers, certain transition
costs associated with restructuring under the Order No. 636 regulation. Any
such recovery is subject to established review procedures at the FERC.
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 $127 million of such costs have been recorded, a portion of
which has been paid to the pipeline suppliers, subject to refund. The
Commission has approved the recovery of these FERC-allowed transition costs
on a volumetric basis from sales and transportation customers. Regulatory
assets, in amounts corresponding to the costs recorded but not yet collected,
have been recorded to reflect the ultimate recovery of these costs.
(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 $16.6 million to cover probable corrective actions
as of December 31, 1996; however, environmental regulations and remediation
techniques are subject to future change. The ultimate cost could be
significant, depending on the extent of corrective actions required. Based
upon investigations and management's understanding of current laws and
regulations, Northern Indiana believes that any corrective actions required,
after consideration of insurance coverages and contributions from other
potentially responsible parties, will not have a significant impact on the
financial position or results of operations of 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 acid deposition provisions of the Clean Air Act Amendments of 1990
(CAAA). Northern Indiana estimates that total costs of compliance with the
CAAA sulfur dioxide regulations will impact electric rates by less than 5% in
the future.
The CAAA contain provisions that could lead to limitations on emissions
of nitrogen oxides and hazardous air pollutants, which may require significant
capital expenditures for control of these emissions. Northern Indiana is
pursuing a nitrogen oxide control program to meet future requirements.
Northern Indiana cannot predict the costs of complying with CAAA requirements.
The Environmental Protection Agency (EPA) has notified Northern Indiana
that it is a "potentially responsible party" (PRP) under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) and may be
required to share in the cost of cleanup of several waste disposal sites
identified by the EPA. The sites are in various stages of investigation,
analysis and remediation. At each of the sites, Northern Indiana is one of
several PRPs, and it is expected that remedial costs, as provided under
CERCLA, will be shared among them. At some sites, Northern Indiana and/or the
other named PRPs are presently working with the EPA to clean up the sites and
avoid the imposition of fines or added costs.
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. Initial samplings have been conducted at
fourteen 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 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 in 1992 of the release of a
petroleum substance into the St. Mary's River in Fort Wayne, Indiana, from
the site of a former manufactured-gas plant formerly owned by Northern
Indiana. In cooperation with IDEM, Northern Indiana has taken steps to
investigate and contain the substance. Northern Indiana has remediated part
of the Fort Wayne site. The remainder of the site is being evaluated to
determine what further remedial measures, if any, may be needed.
During the course of investigation