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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, 1997
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 27, 1998, 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 8
3 Legal Proceedings 9
4 Submission of Matters to a Vote
of Security Holders 9
PART II
Item 5 Market for the Registrant's Common
Equity and Related Shareholder Matters 9
6 Selected Financial Data 9
7 Management's Discussion and Analysis of
Financial Condition and Results of Operation 9
7A Quantitative and Qualitative Disclosures
About Market Risk 17
8 Financial Statements and Supplementary Data 17
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 49
PART III
Item 10 Directors and Executive Officers of
the Registrant 49
11 Executive Compensation 52
12 Security Ownership of Certain Beneficial
Owners and Management 60
13 Certain Relationships and Related Transactions 60
PART IV
Item 14 Exhibits, Financial Statement Schedules 60
and Reports on Form 8-K
SIGNATURES 63
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 2,200,000. At December 31, 1997,
Northern Indiana served approximately 662,500 customers with gas and
approximately 416,300 customers 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 Industries, Inc., an Indiana corporation
(Industries).
The parent company of Northern Indiana, Industries, Inc. is party to an
Agreement and Plan of Merger with Bay State Gas Company (Bay State), dated as
of December 18, 1997 and amended and restated as of March 4, 1998 (the Merger
Agreement). The Merger Agreement provides for the acquisition by Industries
of Bay State, subject to approval by the common shareholders of Bay State,
various regulatory approvals and the waiver or satisfaction of certain other
conditions. The Merger Agreement provides for the merger of Bay State with
and into a new wholly-owned subsidiary of Industries (the Preferred Merger).
However, the Merger Agreement also provides that an alternative merger structure
(the Alternative Merger) may be used instead of the Preferred Merger. Under
the Alternative Merger, Bay State would be merged with and into Northern Indiana
followed immediately by the merger of Bay State's wholly-owned utility
subsidiary, Northern Utilities, Inc. into Northern Indiana. For further
information regarding the Merger Agreement, see Exhibit 2.1 to Industries'
Annual Report on Form 10-K for the year ended December 31, 1997.
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, 1997, Northern Indiana generated 91.8% and purchased 8.2% of its
electric requirements.
Northern Indiana's 1997 electric control area peak load (the highest
level of electrical utility usage in the control area) of 3,020,920 kw, which
includes Northern Indiana, Wabash Valley Power Association, Inc. (WVPA) and
Indiana Municipal Power Agency (IMPA) for which Northern Indiana controls
interchange operations, was set on July 14, 1997. Northern Indiana's all-time
electric control area peak load of 3,161,200 kw was set on July 14, 1995.
Northern Indiana's 1997 internal peak load, which excludes WVPA and IMPA, was
2,758,920 kw set on July 14, 1997. Northern Indiana's all-time internal peak
load of 2,888,450 kw was set on August 6, 1996.
Northern Indiana's electric system is interconnected with that of American
Electric Power, ComEd, Cinergy Services, Inc., Consumers Energy 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 12 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. Unit peaking capacity is the capacity used to
serve peak demand from a specific peaking generating unit. Pursuant to this
agreement, which runs through December, 2001, WVPA purchases 90,000 kw of
capacity per month.
Northern Indiana has the Town of Argos as a full requirement customer and
provides network integration service to seven other municipal wholesale
customers. Prior to January 31, 1998, Northern Indiana had full requirement
contracts with eight municipal wholesale customers.
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 13 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 1997 were supplied as
follows:
Coal 98.7%
Natural gas 1.3%
In 1997, Northern Indiana used approximately 8.4 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 2002 are estimated to range from 8.5 million tons to 9.3
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
================= ============== ==========
1.3 (a) Low 2001
1.8 (b) Low 1999
1.0 (c) Low 2001
0.3 Low 2001
0.3 (d) Low 2000
0.75(e) High 2003
1.0 (f) High 2002
0.75 High 1999
(a) 1.8 million tons in 1998.
(b) 1.225 million tons in 1999. Plus or minus 10% per contract year.
(c) Plus or minus 20% per contract year.
(d) 2000 - option year, can terminate 12/31/1999.
(e) Tentative new contract, 0.25 million in 1998. Plus or minus 10% per
contract year.
(f) Tentative new contract, 1.5 million in 1998. Plus 20% per contract year.
Option years in 2001 and 2002 can terminate 12/31/2000.
The average cost of coal consumed in 1997 was $27.42 per ton or 15.43
mills per kilowatt-hour (kwh) generated as compared to $27.50 per ton or
15.79 mills per kwh generated in 1996. 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. Northern Indiana adjusts metered electric rates
through operation of a fuel adjustment clause to reflect changes in fuel costs.
See "Summary of Significant Accounting Policies-Fuel Adjustment Clause" in the
Notes to Consolidated Financial Statements.
GAS OPERATIONS. Northern Indiana supplies natural gas of about 1,000
British thermal units (Btu) per cubic foot. In a 24-hour period ended
January 17, 1997, Northern Indiana's 1997 maximum day sendout (the maximum
amount of gas delivered through Northern Indiana's distribution system to its
end customers) was 1.6 million dekatherms (dth). Northern Indiana's total
gas send-out for 1997 was 292.6 million dth, compared to 286.1 million dth in
1996.
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 producer agreements which allow for the
purchase of gas either from gas marketers or producers.
Northern Indiana has firm transportation agreements with pipelines, which
allow Northern Indiana to move its gas through the pipelines' transmission
systems. In 1997, 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). 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).
Approximately 69% of Northern Indiana's 1997 gas supply was purchased on
the spot market, generally on less than 30-day agreements. The average price
per dth (including FERC Order No. 636 transition charges) in 1997 was $3.18,
compared to $3.12 in 1996, and the average cost of purchased gas, after
adjustment for transition charges billed to transport customers, was $3.08 per
dth as compared to $3.02 per dth in 1996.
Northern Indiana has a curtailment plan (a plan which outlines service
to be curtailed in the event of limited gas supply) 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 1997 and none are expected during 1998.
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 1997-1998 winter of up to 109,036 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 26.6 million dth of annual stored
volume and allow for approximately 551,000 dth of maximum daily withdrawal.
Northern Indiana has a liquefied natural gas plant in LaPorte County
which is designed for peak shaving (the process of supplementing gas supply
during periods of high demand) and has the following capacities: maximum storage
of 4 million 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. Metered gas sales are adjusted to reflect
the cost of purchased gas, contracted gas storage and storage transportation
charges. See "Summary of Significant Accounting Policies-Gas Cost Adjustment
Clause" in the Notes to Consolidated Financial Statements.
REGULATION. Northern Indiana is subject to regulation by the Commission
as to rates, service, accounts, issuance of securities, and in other respects.
See "FERC Order No. 636" in the Notes to Consolidated Financial Statements. It
is also subject to limited regulation by local public authorities.
In 1997, 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. FERC jurisdiction
does not extend to the issuance of securities by Northern Indiana, which 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. Following negotiation and
settlement with major intervenors, Northern Indiana submitted a modified ARP
to the Commission on May 9, 1997. In its modified ARP, Northern Indiana
proposed to implement new rates and services that would include, among other
things, further unbundling of services for additional customer classes,
increased customer choice for sources of natural gas supply, negotiated
services and prices, an incentive gas cost mechanism and a price protection
program. On October 8, 1997, the Commission issued an order approving, in
all respects, the modified ARP which became effective November 1, 1997. The
first pilot program was launched in January 1998 and the first gas volumes
will flow under this program by April 1, 1998. ERI Services, Inc. and Enron
Capital and Trade Resources Corp. filed Petitions for Rehearing of the
Commission Order, and during the first quarter of 1998 the Commission denied
such petition.
COMPETITION.
ELECTRIC. The electric energy generation, transmission and distribution
business is in a period of fundamental change in the manner in which customers
obtain, and energy suppliers provide, energy services. These changes are
attributable to changes in technology, the relaxation of regulatory barriers to
utilities' respective service territories and efforts to change the manner in
which electric utilities are regulated. Federal law and regulations have been
amended to provide for open transmission system access, and various states are
considering, or have adopted, new regulatory structures to allow access by some
or all customers to electric suppliers in addition to their local electric
utility.
Currently, 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. 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.
In both January 1997 and 1998, legislation was introduced in the Indiana
General Assembly addressing electric utility competition and deregulation. The
proposed legislation was not adopted but similar legislation may be reintroduced
in the future. It is not possible to predict the ultimate effect which
competition, subsequent to the passage of such legislation would have on
Northern Indiana's future earnings. See "Competition" in the Management's
Discussion and Analysis of Financial Condition and Results of Operations.
GAS. As a result of FERC Order No. 636, 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 purchase gas
directly from suppliers other than Northern Indiana, and have Northern Indiana
transport the gas to them. During 1997, gas transportation represented 55% 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 3,267 employees at
December 31, 1997. 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.
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 approximately $19 million to cover probable corrective actions as
of December 31, 1997; 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
results of operations or financial position of Northern Indiana. It is not
possible for Northern Indiana to predict the scope, enforceability or financial
impact of other environmental regulations or standards which may be established
in the future.
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 generation,
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 environmental
programs and management.
The application of federal and state restrictions to protect the
environment, including but not limited to those described below, 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, 1993,
through December 31, 1997 for pollution control facilities were approximately
$149 million and were financed in part by the sale of Northern Indiana's
Pollution Control Notes and Bonds-Jasper County. Northern Indiana anticipates
expenditures of approximately $15 million for pollution control equipment in
the 1998-2002 period which includes anticipated expenditures of $6 million in
1998 and $9 million in 1999. See "Environmental Matters" in the Notes to
Consolidated Financial Statements.
YEAR 2000 COSTS. For a discussion of year 2000 costs see Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Year 2000 Cost.
FORWARD LOOKING STATEMENTS. This report contains forward looking
statements within the meaning of the securities laws. See Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Forward Looking Statements.
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.
Northern Indiana has 292 substations with an aggregate transformer
capacity of 23,030,500 kva. Its transmission system with voltages from
34,500 to 345,000 consists of 3,053 circuit miles of line. The electric
distribution system extends into 21 counties and consists of 7,835 circuit
miles of overhead and 1,423 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
11,422,999 kva and 438,590 electric watt-hour meters.
GAS. Northern Indiana has an underground storage field at Royal Center
and a liquefied natural gas plant in LaPorte County all of which are described
under "Item 1. Business-Gas Operations." Northern Indiana has 13,368 miles of
gas mains.
CHARACTER OF OWNERSHIP. The properties of Northern Indiana are subject to
the lien of its First Mortgage Indenture. The principal properties are held in
fee and are free from other encumbrances, subject to minor exceptions, none of
which is of such a nature as to substantially impair the usefulness of such
properties. 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.
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.
Such proceedings and suits, and the amounts involved are routine litigation and
proceedings for the kind of business conducted by Northern Indiana, except as
set forth above under "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 or 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, 1997,
Northern Indiana had approximately $146.3 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 therefore 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, 1997, the sum of the capital applicable to stocks subordinate
to the cumulative preferred stock plus the surplus was equal to 42% 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)
1997 1996 1995 1994 1993
========== ========== ========== ========== ==========
Operating revenues $1,752,382 $1,754,105 $1,664,278 $1,613,995 $1,619,623
Net income $ 196,620 $ 197,310 $ 194,321 $ 179,903 $ 172,104
Total assets $3,674,914 $3,774,280 $3,606,199 $3,624,311 $3,613,235
Long-term
obligations and
redeemable
preferred stock $1,138,337 $1,053,254 $1,122,392 $1,131,408 $1,147,536
Cash dividends
declared on
common shares $ 187,775 $ 187,450 $ 185,725 $ 168,815 $ 165,299
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
NET INCOME. In 1997, net income of Northern Indiana decreased to
$196.6 million, compared to $197.3 million for 1996. In 1995, net income
was $194.3 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 in 1997 decreased $1.7 million, or 0.1%,
from 1996. Operating revenues in 1996 increased $89.8 million, or 5.4%, from
1995.
During 1997, gas deliveries in dekatherms (dth), which include
transportation services, increased 2.3%. Gas sales levels in 1997 remained
relatively unchanged from 1996. Gas transportation services increased
3.4% mainly due to increased deliveries of gas transported for others.
Northern Indiana had approximately 662,500 gas customers at December 31, 1997.
During 1996, gas deliveries increased 3.6% over 1995. Gas sales in 1996
increased 14.7% due to higher sales to residential and commercial customers as
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.
Gas revenues were $735.3 million in 1997, an increase of $3.4 million
from 1996. The increase in gas revenues was mainly due to increased sales
to wholesale customers, increased gas costs per dth and increased deliveries
of gas transported for others, partially offset by decreased sales to
residential and commercial customers and decreased gas transition costs. 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. 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 160.4, 155.2 and
161.7 million dth in 1997, 1996 and 1995, respectively.
In 1997, sales of electricity in kilowatt-hours (kwh) decreased 4.5%
from 1996 mainly due to decreased sales to wholesale and industrial customers
partially offset by increased sales to residential and commercial customers.
Industrial sales decreased during the period as a result of cogeneration
projects at two of Northern Indiana's major industrial customers coming
online during the period. Northern Indiana had approximately 416,300 electric
customers at December 31, 1997. 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.
In 1997, electric revenues were $1.017 billion, a decrease of $5.1
million from 1996. The decrease in electric revenues was mainly due to
decreased sales to industrial customers, partially offset by increased sales
to residential and commercial customers and increased revenues related to
wholesale transactions. Industrial sales decreased during the period as a
result of cogeneration projects with two of Northern Indiana's major
industrial customers coming online during the period. In 1996, electric
revenues were $1.022 billion, a decrease of $8.7 million from 1995. The
decrease in electric revenues was mainly due to decreased sales to residential
customers due to cooler summer weather in 1996, and decreased sales to
industrial customers due to operational difficulties at several major
industrial customers, which were partially offset by increased sales to
commercial and wholesale customers.
The components of the changes in gas and electric revenues are shown
in the following tables:
Year 1997 Year 1996
Compared To Compared To
Year 1996 Year 1995
============ ============
(Dollars in millions)
Gas Revenue
Pass through of net changes in
purchased gas costs, gas storage
and storage transportation costs $ 8.7 $ 55.6
Gas transition costs (4.4) (33.5)
Changes in sales levels (2.8) 77.5
Gas transported 1.9 (1.1)
------------ ------------
Gas Revenue Change $ 3.4 $ 98.5
------------ ------------
Electric Revenue
Pass through of net changes
in fuel costs $ 4.0 $ 3.2
Changes in sales levels (9.1) (11.9)
------------ ------------
Electric Revenue Change $ (5.1) $ (8.7)
------------ ------------
Total Revenue Change $ (1.7) $ 89.8
============ ============
See Rate Matters in Notes to Consolidated Financial Statements
regarding FERC Order No. 636 transition costs.
The basic steel industry accounted for 36% of natural gas delivered
(including volumes transported) and 33% of electric sales during 1997.
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 a gas rate adjustment
clause 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 $8.3 million (1.9%) in 1997 due to
increased gas costs per dth, which were partially offset by decreased gas
transition costs. The average cost for purchased gas in 1997, after
adjustment for gas transition costs billed to transport customers, was $3.08
per dth as compared to $3.02 per dth in 1996. 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 gas transition
costs billed to transport customers, was $3.02 per dth as compared to $2.63
per dth in 1995.
FUEL AND PURCHASED POWER. Cost of fuel for electric generation in
1997 increased mainly as a result of increased production. The average cost
per kwh generated decreased 2.3% from 1996 to 15.43 mills. The 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.
Power purchased decreased $16.5 million in 1997 as a result of
decreased bulk power purchases. Power purchased increased $10.1 million in
1996 as a result of increased bulk power purchases and increased cost per
megawatt purchased.
OPERATING MARGINS. Operating margins increased $1.1 million in 1997
to $1.024 billion. The gas operating margin decreased $4.9 million in 1997
due to decreased sales to residential and commercial customers reflecting
milder weather, partially offset by increased sales to wholesale customers
and increased deliveries of gas transported for others. Operating margin
from electric sales increased $6.0 million due to increased sales to
residential and commercial customers, and increased wholesale transactions,
partially offset by decreased sales to industrial customers. 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 in 1996 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 EXPENSES AND TAXES. Operating expenses and taxes (except
income) in 1997 decreased 0.1% from 1996 to $632.9 million and in 1996
increased 1.2% from 1995 to $633.4 million.
Operation expenses decreased $11.8 million in 1997 over 1996 due to
reduced pension costs, reduced environmental costs of $4.2 million and reduced
pollution control facility costs of $4.1 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.
Maintenance expenses remained relatively unchanged in 1997 from 1996.
Maintenance expense decreased $8.2 million in 1996 from 1995 mainly reflecting
decreased maintenance activity at electric production facilities and gas
underground storage facilities.
Depreciation and amortization expenses increased $11.5 million in 1997
from 1996 resulting from plant additions. 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.
Utility income taxes increased $1.0 million in 1997 from 1996, increased
$2.5 million in 1996 from 1995, in each period mainly as a result of increased
pre-tax income.
Other Income (Deductions) decreased $3.9 million in 1997 from 1996
mainly as a result of the sale of Cresent Dunes Lakeshore property to the
National Park Service in 1996. 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.
Interest charges decreased $2.6 million and increased $1.9 million in
1997 and 1996, respectively. The 1997 decrease reflects decreased short-term
borrowing during the year. 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 on deferred charges related to the Bailly
Generating Station scrubber service agreement.
See Notes to Consolidated Financial Statements for a discussion of
accounting policies and transactions impacting this analysis.
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 approximately $19 million to cover probable corrective actions as
of December 31, 1997; 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
results of operations or financial position of Northern Indiana.
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.
Refer to Environmental Matters in Notes to Consolidated Financial
Statements for a more detailed discussion of the status of certain
environmental issues.
LIQUIDITY AND CAPITAL RESOURCES. Construction expenditures by
Northern Indiana for 1997, 1996 and 1995 were approximately $174 million,
$198 million, and $186 million, respectively. Northern Indiana's total
utility plant investment on December 31, 1997, was $5.6 billion.
On May 28, 1997, Northern Indiana was authorized to issue and sell up to
$217,692,000 of its Medium-Term Notes, Series E, with various maturities, for
purposes of refinancing certain first mortgage bonds and medium-term notes.
As of December 31, 1997, $139.0 million of the medium-term notes had been
issued with various interest rates and maturities. The proceeds from these
issuances were used to pay short-term debt incurred to redeem its First
Mortgage Bonds, Series N, and to pay at maturity various issues of Medium-Term
Notes, Series D.
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, 1997, Northern
Indiana had $71.5 million in commercial paper outstanding, having a weighted
average interest rate of 6.16%.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1999. As of December 31, 1997,
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,
1998. 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, 1997, 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, 1997, $47.5 million of borrowings were
outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
December 31, 1997, 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.
YEAR 2000 COSTS. Northern Indiana has several major projects underway
to modify portions of its systems for proper functioning in the year 2000.
These include a project to evaluate Northern Indiana's proprietary software and
to work with each of Northern Indiana's software vendors to assure that
appropriate steps are being taken to mitigate the problem in each vendor's
software or, in some cases, to replace software with year 2000 compliant
software; a project to identify and mitigate problems wherever they exist in
Northern Indiana's systems (ranging from equipment used in Northern Indiana's
generating stations to Northern Indiana's phone system that have date
information within them); and an initiative to assure that each entity that
electronically receives information from Northern Indiana or sends information
to Northern Indiana is aware of the steps that Northern Indiana is taking and
is taking appropriate steps of its own to address the problem. Consistent
with its plan, Northern Indiana expects to be year 2000 compliant with some
systems as early as third quarter 1998 and other systems no later than the
third quarter of 1999.
Northern Indiana estimates that costs to become year 2000 compliant will
be approximately $6-$9 million, including acquisition costs of new systems
which will be capitalized consistent with Northern Indiana's accounting
policies. Costs related to maintenance or modification of Northern Indiana's
systems have been and will be expensed as incurred. Northern Indiana does not
anticipate the related costs to have a material impact on its results of
operations, nor does Northern Indiana currently anticipate any disruption of its
ability to deliver service as a result of the year 2000 issue.
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, FERC
issued its Order No. 888-A 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. Northern Indiana filed
its tariff as did virtually all other transmission owners subject to FERC
jurisdiction. Order No. 888-A 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. On
November 25, 1997, FERC issued Order No. 888-B on rehearing, affirming in all
important respects its earlier Order No. 888-A. 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 both January 1997 and January 1998, legislation was introduced in the
Indiana General Assembly addressing electric utility competition and
deregulation. The proposed legislation was not adopted, but similiar
legislation may be reintroduced in the future. Northern Indiana has begun
discussions with other utilities and its largest customers on the technical and
economic aspects of possible legislation to allow customer choice.
Operating in a competitive environment will place added pressures on
utility profit margins and credit quality. Increasing competition in the
electric utility industry has already led the credit rating agencies to
apply more stringent guidelines in making credit rating determinations.
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. Following negotation and
settlement with major intervenors, Northern Indiana submitted a modified ARP
to the Commission on May 9, 1997. In its modified ARP, Northern Indiana
proposed to implement new rates and services that would include, among other
things, further unbundling of services for additional customer classes,
increased customer choice for sources of natural gas supply, negotiated
services and prices, an incentive gas cost mechanism and a price protection
program. On October 8, 1997, the Commission issued an order approving, in
all respects, the modified ARP which became effective November 1, 1997. The
first pilot program was launched in January 1998 and the first gas volumes
will flow under this program by April 1, 1998. ERI Services, Inc. and Enron
Capital and Trade Resources Corp. filed Petitions for Rehearing of the
Commission Order, and during the first quarter of 1998 the Commission denied
such petition.
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
substantially altered. Northern Indiana believes the steps it is taking to
deal with increased competition will have significant, positive effects in the
next few years.
FORWARD LOOKING STATEMENTS. This report contains forward looking
statements within the meaning of the securities laws. Northern Indiana
cautions that, while it believes such statements to be based on reasonable
assumptions and makes such statements in good faith, there can be no assurance
that the actual results will not differ materially from such assumptions or
that the expectations set forth in the forward looking statements derived from
such assumptions will be realized. Investors should be aware of important
factors that could have a material impact on future results. These factors
include, but are not limited to, weather, the federal and state regulatory
environment, the economic climate, regional, commercial, industrial and
residential growth in the service territories served by Northern Indiana,
customer's usage patterns and preferences, the speed and degree to which
competition enters the utility industries, the timing and extent of changes
in commodity prices, changing conditions in the capital and equity markets
and other uncertainties, all of which are difficult to predict, and many of
which are beyond the control of Northern Indiana.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risks to which Northern Indiana is exposed and in
connection with which Northern Indiana uses market risk sensitive instruments
are commodity risk and interest rate risk.
Although Northern Indiana is subject to commodity price risk as part of
its traditional operations, the current regulatory framework within which
Northern Indiana operates allows for full collection of fuel and gas costs in
rate-making. Consequently, there is limited commodity price risk after
consideration of the related rate-making. However, as the utility industry
deregulates, Northern Indiana will be providing services without the benefit
of the traditional rate-making allowances and will therefore be more exposed
to commodity price risk.
Northern Indiana utilizes commodity futures and option contracts to
minimize the impact of price changes to a small portion of its supply portfolio.
The Commission issued an order approving the inclusion of any gains or
losses associated with the use of derivative financial and commodity instruments
into Northern Indiana's gas cost adjustment clause.
Because the commodities covered by Northern Indiana's derivative financial
and commodity instruments are substantially the same commodities that Northern
Indiana buys and sells in the physical market, no special correlation studies
other than monitoring the degree of convergence between the derivative and cash
market are deemed necessary.
Due to the provisions of the gas cost adjustment clause and the
fuel adjustment clause, movements in the natural gas and electric market prices
would not impact net income.
Northern Indiana utilizes long-term debt as a primary source of capital
in its business. A significant portion of Northern Indiana's long-term debt
consists of fixed price debt instruments which have been and will be refinanced
at lower interest rates if Northern Indiana deems it to be economical. Refer to
Consolidated Statement of Long-Term Debt for detailed information related to
Northern Indiana's long-term debt outstanding and Fair Value of Financial
Instruments in Notes to Consolidated Financial Statements for current market
valuation of long-term debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages
=========
Report of Independent Public Accountants 18-19
Consolidated Statement of Income for the years
ended December 31, 1997, 1996, and 1995 19-20
Consolidated Balance Sheet - December 31, 1997
and 1996 20-22
Consolidated Statement of Capitalization -
December 31, 1997 and 1996 22-24
Consolidated Statement of Long-term Debt -
December 31, 1997 and 1996 24-25
Consolidated Statement of Cash Flows for the
years ended December 31, 1997, 1996, and 1995 25-26
Consolidated Statement of Retained Earnings for
the years ended December 31, 1997, 1996, and 1995 26-27
Notes to Consolidated Financial Statements 27-49
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,
1997 and 1996, and the related consolidated statements of income, retained
earnings and cash flows for each of the three years in the period ended
December 31, 1997. 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,
1997 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, 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 appearing in Item
14(a)(2)listed on Page 60 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 30, 1998
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997 1996 1995
========== ========== ==========
(Dollars in thousands)
Operating Revenues:
(Notes 2, 4 and 21)
Gas $ 735,299 $ 731,874 $ 633,355
Electric 1,017,083 1,022,231 1,030,923
---------- ---------- ----------
1,752,382 1,754,105 1,664,278
---------- ---------- ----------
Cost of Energy: (Note 2)
Gas costs 452,436 444,141 366,487
Fuel for electric generation 238,548 233,215 242,337
Power purchased 37,274 53,751 43,681
---------- ---------- ----------
728,258 731,107 652,505
---------- ---------- ----------
Operating Margin 1,024,124 1,022,998 1,011,773
---------- ---------- ----------
Operating Expenses and
Taxes (except income):
Operation 269,275 281,066 278,683
Maintenance (Note 2) 68,853 68,729 76,953
Depreciation and
amortization (Note 2) 223,025 211,545 198,259
Taxes (except income) 71,752 72,069 71,831
---------- ---------- ----------
632,905 633,409 625,726
---------- ---------- ----------
Operating Income Before
Utility Income Taxes 391,219 389,589 386,047
---------- ---------- ----------
Utility Income Taxes (Note 6) 110,099 109,051 106,574
---------- ---------- ----------
Operating Income 281,120 280,538 279,473
---------- ---------- ----------
Other Income (Deductions) (3,659) 240 (3,619)
---------- ---------- ----------
Interest Charges:
Interest on long-term debt 69,427 68,798 72,339
Other interest 7,574 11,225 8,395
Allowance for borrowed funds used
during construction and carrying
charges (Note 2) (354) (805) (3,320)
Amortization of premium, reacquisition
premium, discount and expense on
debt, net 4,194 4,250 4,119
---------- ---------- ----------
80,841 83,468 81,533
---------- ---------- ----------
Net Income 196,620 197,310 194,321
Dividend requirements on
preferred stocks 8,539 8,712 9,046
---------- ---------- ----------
Balance available
for common shares $ 188,081 $ 188,598 $ 185,275
========== ========== ==========
Common dividends declared $ 187,775 $ 187,450 $ 185,725
========== =========== ==========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 1996
=========== ===========
(Dollars in thousands)
ASSETS
UTILITY PLANT, at original cost (including
construction work in progress of
$140,534 and $162,123, respectively)
(Note 2):
Electric $ 4,066,568 $ 4,050,084
Gas 1,223,693 1,176,871
Common 351,350 346,636
----------- -----------
5,641,611 5,573,591
Less - Accumulated provision for
depreciation and amortization 2,613,352 2,499,687
----------- -----------
Total Utility Plant 3,028,259 3,073,904
----------- -----------
OTHER PROPERTY AND INVESTMENTS 1,215 8,971
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents 9,800 8,279
Accounts receivable, less reserve of
$4,524 and $4,568, respectively (Note 2) 101,188 111,866
Fuel adjustment clause (Note 2) 2,679 9,149
Gas cost adjustment clause (Note 2) 86,520 98,167
Materials and supplies, at average cost 53,666 56,796
Electric production fuel, at average cost 18,837 26,483
Natural gas in storage, at last-in,
first-out cost (Note 2) 45,880 50,409
Prepayments and other 23,128 25,826
----------- -----------
Total Current Assets 341,698 386,975
----------- -----------
OTHER ASSETS:
Regulatory assets (Note 2) 205,965 239,547
Prepayments and other (Note 7) 97,777 64,883
----------- -----------
Total Other Assets 303,742 304,430
----------- -----------
$ 3,674,914 $ 3,774,280
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 1996
=========== ===========
(Dollars in thousands)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's equity $ 1,018,303 $ 1,017,996
Preferred stocks (Note 9) -
Series without mandatory
redemption provisions (Note 10) 81,123 81,126
Series with mandatory
redemption provisions (Note 11) 58,841 61,246
Long-term debt, excluding amounts due
within one year (Note 15) 1,079,496 992,008
----------- -----------
Total capitalization 2,237,763 2,152,376
----------- -----------
CURRENT LIABILITIES:
Current portion of long-term debt 51,009 67,247
(Note 16)
Short-term borrowings (Note 17) 119,000 272,905
Accounts payable 127,742 190,182
Dividends declared on common and
preferred stocks 56,198 54,255
Customer deposits 20,236 16,768
Taxes accrued 88,852 78,806
Interest accrued 7,646 5,851
Accrued employment costs 51,095 40,915
Other 34,051 27,934
----------- -----------
Total current liabilities 555,829 754,863
----------- -----------
OTHER:
Deferred income taxes (Note 6) 602,936 597,105
Deferred investment tax credits, being
amortized over life of related property
(Note 6) 99,853 107,058
Deferred credits 53,323 50,058
Accrued liability for postretirement
benefits (Note 8) 115,177 104,123
Other noncurrent liabilities 10,033 8,697
----------- -----------
Total other 881,322 867,041
----------- -----------
COMMITMENTS AND CONTINGENCIES:
(Notes 3, 4, 5, 18 and 19)
$ 3,674,914 $ 3,774,280
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF CAPITALIZATION
DECEMBER 31, 1997 1996
=========== ===========
(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 12,522 12,521
Retained earnings 146,293 145,987
----------- -----------
Total common shareholder's
equity 1,018,303 45.5% 1,017,996 47.3%
----------- -----------
PREFERRED STOCKS, WHICH ARE
REDEEMABLE SOLELY AT OPTION
OF NORTHERN INDIANA:
Cumulative preferred stock -
$100 par value -
4-1/4% series - 209,118 and
209,145 shares outstanding,
respectively 20,912 20,915
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, 1997) -
Series A (stated value -
$50 per share), 473,285
shares outstanding 23,664 23,664
----------- -----------
81,123 3.6% 81,126 3.8%
----------- -----------
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 - 62,500 and
75,000 shares outstanding,
respectively 6,250 7,500
7-3/4% series - 38,906 and
44,460 shares outstanding,
respectively 3,891 4,446
8.35% series - 57,000 and
63,000 shares outstanding,
respectively 5,700 6,300
Cumulative preferred stock -
no par value -
6.50% series - 430,000
shares outstanding 43,000 43,000
----------- -----------
58,841 2.7% 61,246 2.8%
----------- -----------
LONG-TERM DEBT 1,079,496 48.2% 992,008 46.1%
___________ ______ ___________ ______
Total capitalization $ 2,237,763 100.0% $ 2,152,376 100.0%
=========== ====== =========== ======
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF LONG-TERM DEBT
DECEMBER 31, 1997 1996
=========== ===========
(Dollars in thousands)
FIRST MORTGAGE BONDS -
Series P, 6-7/8%, due October 1, 1998 $ 0 $ 14,509
Series T, 7-1/2%, due April 1, 2002 39,500 40,000
Series NN, 7.10%, due July 1, 2017 55,000 55,000
----------- -----------
Total 94,500 109,509
----------- -----------
POLLUTION CONTROL NOTES AND BONDS -
Series A Note -
City of Michigan City, 5.70% due
October 1, 2003 18,000 19,000
Series 1988 Bonds - Jasper County -
Series A, B and C - 3.81% weighted
average at December 31, 1997, due
November 1, 2016 130,000 130,000
Series 1988 Bonds - Jasper County -
Series D - 3.78 weighted average at
December 31, 1997, due November 1, 2007 24,000 24,000
Series 1994 Bonds - Jasper County -
Series A - 4.25% at December 31, 1997
due August 1, 2010 10,000 10,000
Series 1994 Bonds - Jasper County -
Series B - 4.25% at December 31, 1997,
due June 1, 2013 18,000 18,000
Series 1994 Bonds - Jasper County -
Series C - 4.25% at December 31, 1997,
due April 1, 2019 41,000 41,000
----------- -----------
Total 241,000 242,000
----------- -----------
MEDIUM-TERM NOTES -
Issued at interest rates between 6.10%
and 7.69% with a weighted average interest
rate of 7.00% and various maturities between
April 5, 2000 and August 4, 2027 748,025 644,025
----------- -----------
UNAMORTIZED PREMIUM AND DISCOUNT
ON LONG-TERM DEBT, NET (4,029) (3,526)
----------- -----------
Total long-term debt, excluding
amounts due in one year $ 1,079,496 $ 992,008
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 1996 1995
=========== =========== ===========
(Dollars in thousands)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 196,620 $ 197,310 $ 194,321
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 223,025 211,545 198,259
Deferred federal and state
operating income taxes, net (8,414) 26,117 (3,247)
Deferred investment tax
credits, net (7,205) (7,327) (7,436)
Advance contract payment 1,900 (17,100) 0
Change in certain assets and
liabilities -
Accounts receivable, net 10,678 (15,790) (15,099)
Electric production fuel 7,646 (12,225) 4,089
Materials and supplies 3,130 7,028 11
Natural gas in storage 4,529 3,004 19,049
Accounts payable (51,273) 35,517 (7,839)
Taxes accrued 21,488 14,628 (11,156)
Fuel adjustment clause 6,470 1,152 (8,687)
Gas cost adjustment clause 11,647 (94,054) 23,731
Accrued employment costs 10,180 (4,856) 2,511
Other accruals 6,117 (14,488) 21,116
Other, net 21,799 6,962 888
----------- ----------- -----------
Net cash provided by
operating activities 458,337 337,423 410,511
----------- ----------- -----------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Construction expenditures (174,231) (198,223) (185,560)
Other, net (3,191) 22,102 710
----------- ----------- -----------
Net cash used in investing
activities (177,422) (176,121) (184,850)
----------- ----------- -----------
CASH FLOWS PROVIDED BY
(USED IN) FINANCING
ACTIVITIES:
Issuance of long-term debt 139,000 0 168,386
Issuance of short-term debt 534,430 1,172,150 943,200
Net change in commercial paper (122,405) 149,105 (111,700)
Retirement of long-term debt (67,247) (80,000) (120,868)
Retirement of short-term debt (565,930) (1,211,950) (917,100)
Retirement of preferred stock (2,408) (2,604) (7,095)
Cash dividends paid on
common shares (185,775) (182,950) (180,475)
Cash dividends paid on
preferred shares (8,556) (8,766) (9,241)
Other, net (503) 514 (284)
----------- ----------- -----------
Net cash used in
financing activities (279,394) (164,501) (235,177)
----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 1,521 (3,199) (9,516)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 8,279 11,478 20,994
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 9,800 $ 8,279 $ 11,478
=========== =========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1997 1996 1995
========= ========= =========
(Dollars in thousands)
BALANCE AT BEGINNING OF PERIOD $ 145,987 $ 144,839 $ 145,289
ADD:
NET INCOME 196,620 197,310 194,321
--------- --------- ---------
342,607 342,149 339,610
--------- --------- ---------
LESS:
DIVIDENDS:
Cumulative Preferred stock -
4-1/4% series 889 889 891
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 682 793 903
7-3/4% series 362 395 449
8.35% series 522 572 622
6.50% series 2,795 2,795 2,795
Adjustable Rate, series A 1,420 1,399 1,517
Common shares 187,775 187,450 185,725
---------- --------- ---------
196,314 196,162 194,771
---------- --------- ---------
BALANCE AT END OF PERIOD $ 146,293 $ 145,987 $ 144,839
========== ========= =========
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 4.3% for the year 1997, 4.2% for year 1996,
and 4.1% for year 1995. 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 has capitalized software
relating to various technology functions. At the date of installation, Northern
Indiana estimates that the specific software will have a useful life between
five and ten years. The FERC prescribes certain amortization periods, and
Northern Indiana's management has determined that, on average, these are
reasonable useful life estimates for the portfolio of capitalized software.
Northern Indiana includes these amortization estimates, based on useful life,
in its quarterly filings with the Indiana state regulatory commission.
COAL RESERVES. Northern Indiana has a long-term mining contract to
mine its coal reserves 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.
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, 1997, Northern Indiana had sold
$100 million of its accounts receivable under a sales agreement which expires
May 31, 2002. The December 31, 1997 and 1996 accounts receivable balances
include approximately $5.4 million and $7.1 million respectively, due from
associated companies.
STATEMENT OF CASH FLOWS. For 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:
1997 1996 1995
======== ======== ========
(Dollars in thousands)
Income taxes $104,809 $ 73,631 $128,487
Interest, net of amounts capitalized $ 75,085 $ 78,268 $ 80,635
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 1997 and 1996 the estimated replacement cost of
gas in storage (current and non-current) at December 31, 1997 and 1996
exceeded the stated LIFO cost by approximately $42 million and $96 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 (NIMSC), a
wholly-owned subsidiary of Industries.
The costs of these services are charged to Northern Indiana based on
payroll and expenses incurred by NIMSC's employees for the benefit of
Northern Indiana. These costs which totaled $28.8 million for the year
1997 and $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 $10.2 million and $17.3 million,
representing 2.2% and 4.1% of Northern Indiana's total gas costs for years 1997
and 1996, respectively.
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 and option
contracts to hedge the impact of natural gas price fluctuations related to its
business activities. Gains and losses on these commodity-based derivative
financial instruments are deferred and recognized in income concurrent with
the related purchases and sales of natural gas.
As of December 31, 1997, Northern Indiana executed options to hedge price
risk associated with 3.0 billion cubic feet of natural gas stored in inventory.
The deferred premiums paid for these options were not material.
REGULATORY ASSETS. Northern Indiana's operations are subject to the
regulation of 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." Northern Indiana monitors changes in
market and regulatory conditions and the resulting impact of such changes in
order to continue to apply the provisions of SFAS No. 71 to some or all of its
operations. As of December 31, 1997 and December 31, 1996, 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. If a portion of Northern Indiana's operations
becomes no longer subject to the provisions of SFAS No. 71, a write-off of
certain regulatory assets might be required, unless some form of transition
cost recovery is established by the appropriate regulatory body which would
meet the requirements under generally accepted accounting principles for
continued accounting as regulatory assets during such recovery period.
Regulatory assets were comprised of the following items:
December 31, December 31,
1997 1996
============= =============
(Dollars in thousands)
Unamortized reacquisition premium on
debt (Note 15) $ 46,426 $ 49,890
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges
and deferred depreciation (See below) 66,546 70,763
Bailly scrubber carrying charges and
deferred depreciation (See below) 9,880 10,816
Deferral of SFAS No. 106 expense not
recovered (Note 8) 83,965 87,005
FERC Order No. 636 transition costs (Note 4) 28,744 47,399
Regulatory income tax asset, net (Note 6) 9,664 9,002
------------- -------------
245,225 274,875
------------- -------------
Less: Current portion of regulatory assets 39,260 35,328
------------- -------------
$ 205,965 $ 239,547
============= =============
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, 1995 a pretax rate of 6.0% for all construction was
being used; effective January 1, 1996, the rate decreased to 5.5% and
effective January 1, 1997, the rate remained at 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) RESOLUTION OF TAX MATTER: In 1991, the Internal Revenue Service (IRS)
issued a notice of deficiency for Northern Indiana's taxes for the years 1982
through 1985 ($3,785,250 per year plus interest) relating to interest
payments on $70 million of 17-1/4% Notes issued in 1981 by Northern Indiana's
former foreign subsidiary, Northern Indiana Public Service Finance N.V.
(Finance). The IRS maintained that interest paid on the Notes should have
been subject to United States tax withholding. Northern Indiana challenged
the assessment in the United States Tax Court (Tax Court) and 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. The IRS appealed
the Tax Court's decision to the U.S. Court of Appeals for the Seventh Circuit
(Court of Appeals) and Northern Indiana filed a cross appeal. On June 6,
1997, the Court of Appeals issued an order affirming in full the favorable
Tax Court order. The IRS did not appeal the decision of the Court of Appeals.
(4) FERC ORDER NO. 636. Northern Indiana has recorded approximately $136
million of interstate pipeline transition costs since December 31, 1993 to
reflect the impact of FERC Order No. 636, a majority of which costs have been
paid to the pipeline suppliers. Northern Indiana expects that additional
transition costs will not be significant. 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 approximately $19 million to cover probable corrective
actions as of December 31, 1997; 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
results of operations or financial position 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 specific sulfur dioxide limitations
contained in the acid deposition provisions of the Clean Air Act Amendments of
1990 (CAAA). Reflecting this compliance, on December 31, 1997, Indiana
Department of Environmental Management (IDEM) issued the Phase II Acid
Rain permits for all four of Northern Indiana's electric generating stations.
As discussed below, however, other provisions of the CAAA impose additional
requirements on Northern Indiana.
On December 19, 1996, the Environmental Protection Agency (EPA)
promulgated rules for Phase II of the Acid Rain nitrogen oxides (NOx)reduction
program. For Phase I, during the summer of 1997, the EPA formally approved
the Acid Rain Early Election permits for the pulverized coal units at D. H.
Mitchell and R. M. Schahfer stations. The permits establish the Phase I
limits for the NOx emissions on these units until 2007. On December 23, 1997,
Northern Indiana submitted an Acid Rain Phase II NOx Compliance Plan to IDEM
which included additional controls for two cyclone fired boilers and a plan
for emission averaging to achieve the NOx limits for the system by 2000.
Northern Indiana plans a project to demonstrate a cost effective combustion
control technique on the Unit 12 cyclone fired boiler at Michigan City during
1998. The CAAA also contain other provisions that could lead to limitations
on emissions of hazardous air pollutants which may require significant capital
expenditures for control of these emissions. Northern Indiana cannot predict
what these requirements will be or the costs of complying with these potential
requirements.
On October 10, 1997, the EPA proposed a rule under the nonattainment
provisions of the CAAA to reduce emissions transported across state boundaries
that allegedly are contributing to nonattainment of the one hour ozone standard
in downwind states. Because NOx is considered a precursor or cause of ozone
formation, the EPA proposed significant NOx reductions for 22 states,
including Indiana, to address the ozone transport issue. These proposals, and
any resulting NOx emission limitations arise under different provisions of the
CAAA than the Acid Rain NOx program and can result in additional, more
restrictive emissions limitations than are imposed under the Acid Rain
Program. The EPA has encouraged states to achieve the reductions by requiring
controls on electric utilities and large boilers. Northern Indiana is
evaluating the EPA's proposal and evaluating potential requirements that could
result from any final rule.
The EPA issued final rules on July 18, 1997 revising the National
Ambient Air Quality Standards for ozone and particulate matter. The revised
standards begin a regulatory process that may lead to reductions in
particulate, NOx and possibly sulfur dioxide emissions from coal-fired boilers
(including Northern Indiana's generating stations) beyond reductions required in
the Acid Rain nonattainment provisions of the CAAA. Northern Indiana cannot
predict the costs of complying with future control requirements to meet these
new standards. Northern Indiana will continue to closely monitor developments
in this area and anticipates that the exact nature of the impact of the new
standards on its operations will not be known for some time.
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.
In December 1997, at the Summit on Climate Change in Kyoto, Japan, 159
nations formally agreed to targets reducing worldwide levels of greenhouse
gases. If the U.S. Senate ratifies the agreement, the Kyoto Protocol would
impose an obligation on the United States to reduce its emissions of
greenhouse gas to a level seven percent below 1990 levels during the period
2008 to 2012. The impact of this agreement on Northern Indiana is uncertain.
Northern Indiana, as a charter member of the Department of Energy's Climate
Challenge Program, the electric industries' voluntary reduction effort, has
already implemented over 21 projects to voluntarily reduce greenhouse gas
emissions. Northern Indiana continues to investigate methods to address
reduction in carbon dioxide emissions and will monitor the development of U.S.
climate change policy.
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-four of these sites and made visual inspections
of these sites. Initial samplings have been conducted at fifteen sites.
Follow-up investigations have been conducted at seven sites and remedial
measures have been selected at four sites. Northern Indiana will continue its
program to assess and cleanup sites.
During the course of various investigations, Northern Indiana has
identified impacts to soil, groundwater, sediment and surface water from
former manufactured-gas plants. At three sites where residues were noted
seeping into rivers, Northern Indiana notified the IDEM and the EPA and
immediately took steps to contain the material. Northern Indiana has worked
with IDEM or the EPA on investigation or remedial activities at several sites.
Three of the sites have been enrolled in the IDEM Voluntary Remediation
Program (VRP). The goal of placing these sites in the VRP is to obtain IDEM
approval of the selection and implementation of whatever remedial measures, if
any, may be required. Northern Indiana anticipates placing additional sites
in the VRP after remedial measures have been selected.
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. In August 1997, Northern Indiana filed suit in federal court
against Cinergy seeking recovery of those costs.
In 1994, Northern Indiana approached various companies that provided
insurance coverage which Northern Indiana believes covers costs related to
actions taken at former manufactured-gas plants. There has been litigation
between Northern Indiana and various insurance companies over covered costs.
Northern Indiana has filed claims in state court against various insurance
companies, seeking coverage for costs associated with several former
manufactured-gas plants and damages for alleged misconduct by some of the
insurance companies. The state court action is now proceeding. Northern
Indiana has received cash settlements from several of the insurance companies.
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, researchers from the National
Cancer Institute and the Childhood Cancer Group reported they found no
evidence magnetic fields in homes increase the risk of childhood leukemia.
This study follows an EMF report previously released by the U.S. National
Research Council of the National Academy of Sciences, which concluded, after
examining more than 500 EMF studies spanning seventeen years, that among other
things, there was 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 this issue.
(6) INCOME TAXES: Northern Indiana uses the liability method of accounting
for income taxes under which deferred income taxes are recognized, at
currently enacted income tax rates, to reflect the tax effect of temporary
differences between the financial statement and tax bases of assets and
liabilities.
To the extent certain deferred income taxes are recoverable or payable
through future rates, regulatory assets and liabilities have been established.
Regulatory assets are primarily attributable to undepreciated AFUDC-equity and
the cumulative net amount of other income tax timing differences for which
deferred taxes had not been provided in the past, when regulators did not
recognize such taxes as costs in the rate-making process. Regulatory
liabilities are primarily attributable to Northern Indiana's obligation to
credit to ratepayers deferred income taxes provided at rates higher than the
current federal tax rate currently being credited to ratepayers using the
average rate assumption method and unamortized deferred investment tax
credits.
Northern Indiana joins in the filing of consolidated tax returns with
Industries and currently pays to Industries its separate return tax liability
as defined in the Tax Sharing Agreement between Industries and its
subsidiaries.
The components of the net deferred income tax liability at December 31,
1997 and 1996 are as follows:
1997 1996
=========== ===========
(Dollars in thousands)
Deferred tax liabilities -
Accelerated depreciation
and other property differences $ 729,153 $ 719,197
AFUDC-equity 35,282 37,713
Adjustment clauses 33,829 40,700
Take-or-pay gas costs 384 765
Other regulatory assets 31,844 39,440
Reacquisition premium on debt 17,607 18,921
Deferred tax assets -
Deferred investment tax credits (37,869) (40,602)
Removal costs (144,111) (131,718)
FERC Order No. 636 transition costs 0 (8,144)
Other postretirement/postemployment
benefits (43,680) (42,434)
Other, net (5,516) (10,433)
----------- -----------
616,923 623,405
Less: Deferred income taxes related to
current assets and liabilities 13,987 26,300
----------- -----------
Deferred income taxes - noncurrent $ 602,936 $ 597,105
=========== ===========
Federal and state income taxes as set forth in the Consolidated
Statement of Income are comprised of the following:
1997 1996 1995
========= ========= =========
(Dollars in thousands)
Current income taxes -
Federal $ 108,902 $ 77,947 $ 102,047
State 16,816 12,314 15,210
--------- --------- ---------
125,718 90,261 117,257
--------- --------- ---------
Deferred income taxes, net -
Federal (7,998) 23,817 (3,190)
State (416) 2,300 (57)
--------- --------- ---------
(8,414) 26,117 (3,247)
--------- --------- ---------
Deferred investment tax credits, net (7,205) (7,327) (7,436)
--------- --------- ---------
Total utility operating income taxes 110,099 109,051 106,574
Income tax applicable to non-operating
activities and income of subsidiaries (3,536) (936) (3,216)
--------- --------- ---------
Total income taxes $ 106,563 $ 108,115 $ 103,358
========= ========= =========
A reconciliation of total tax expense to an amount computed by applying
the statutory federal income tax rate to pretax income is as follows:
1997 1996 1995
========= ========= =========
(Dollars in thousands)
Net income $ 196,620 $ 197,310 $ 194,321
Add - Income taxes 106,563 108,115 103,358
--------- --------- ---------
Net Income before income taxes $ 303,183 $ 305,425 $ 297,679
========= ========= =========
Amount derived by multiplying pretax
income by statutory rate $ 106,114 $ 106,899 $ 104,188
Reconciling items multiplied by the
statutory rate:
Book depreciation over related tax
depreciation 4,072 4,621 4,018
Amortization of deferred investment tax
credits (7,205) (7,327) (7,436)
State income taxes, net of federal income
tax benefit 10,247 10,240 9,577
Reversal of deferred taxes provided at
rates in excess of the current federal
income tax rate (4,063) (6,644) (5,665)
Other, net (2,602) 326 (1,324)
--------- --------- ---------
Total income taxes $ 106,563 $ 108,115 $ 103,358
========= ========= =========
(7) PENSION PLAN: Industries has a noncontributory, defined benefit
retirement plan covering substantially all employees of Northern Indiana.
Benefits under the plan reflect the employees' compensation, years of service
and age at retirement.
The plan's funded status as of December 31, 1997 and 1996 are as
follows:
1997 1996
========= =========
(Dollars in thousands)
Vested benefit obligation $(643,193) $(534,416)
Nonvested benefit (114,262) (103,284)
--------- ---------
Accumulated benefit obligation $(757,455) $(637,700)
========= =========
Projected benefit obligation for service
rendered to date $(843,049) $(732,870)
Plan assets at fair market value 896,950 782,162
--------- ---------
Plan assets in excess of projected
benefit obligation