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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995
OR
() Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number 1-4125
NORTHERN INDIANA PUBLIC SERVICE COMPANY
(Exact name of registrant as specified in its charter)
Indiana 35-0552990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5265 Hohman Avenue, Hammond, Indiana 46320-1775
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 853-5200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
--------------------- ---------------------
Series A Cumulative Preferred - No Par Value New York
4 1/4% Cumulative Preferred - $100 Par Value American
Securities registered pursuant to Section 12(g) of the Act:
Cumulative Preferred Stock - $100 Par Value
(4 1/2%, 4.22%, 4.88%, 7.44% and 7.50% Series)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
-------- --------
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (X)
As of February 29, 1996, 73,282,258 shares of the registrant's
Common Shares, no par value, were issued and outstanding, all held
beneficially and of record by NIPSCO Industries, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
None
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Form 10-K
Table of Contents
Page
====
PART I
Item 1 Business 1
2 Properties 8
3 Legal Proceedings 9
4 Submission of Matters to a Vote
of Security Holders 10
PART II
Item 5 Market for the Registrant's Common
Equity and Related Shareholder Matters 10
6 Selected Financial Data 11
7 Management's Discussion and Analysis of
Financial Condition and Results of Operation 11
8 Financial Statements and Supplementary Data 18
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 45
PART III
Item 10 Directors and Executive Officers of
the Registrant 46
11 Executive Compensation 49
12 Security Ownership of Certain Beneficial
Owners and Management 55
13 Certain Relationships and Related Transactions 55
PART IV
Item 14 Exhibits, Financial Statement Schedules 55
and Reports on Form 8-K
SIGNATURES
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Part I
ITEM 1. BUSINESS.
Northern Indiana Public Service Company (Northern Indiana) is a
public utility operating company, incorporated in Indiana on August 2,
1912, engaged in supplying natural gas and electric energy to the public.
It operates in 30 counties in the northern part of Indiana, serving an area
of about 12,000 square miles with a population of approximately 2,188,000.
At December 31, 1995, Northern Indiana served approximately 636,600
customers with gas and approximately 403,900 with electricity.
See "Segments of Business" in the Notes to Consolidated Financial
Statements regarding financial information about industry segments.
HOLDING COMPANY STRUCTURE. Effective March 3, 1988, Northern
Indiana became a subsidiary of NIPSCO Industries, Inc., an Indiana
corporation (Industries).
ELECTRIC OPERATIONS. Northern Indiana owns and operates four coal
fired electric generating stations with net capabilities of 3,179,000
kilowatts (kw), two hydroelectric generating plants with net capabilities
of 10,000 kw, and four gas fired combustion turbine generating units with
net capabilities of 203,000 kw, for a total system net capability of
3,392,000 kw. During the year ended December 31, 1995, Northern
Indiana generated 85.8% and purchased 14.2% of its electric requirements.
Northern Indiana's 1995 electric control area peak of 3,161,200
kw, which includes Wabash Valley Power Association, Inc. (WVPA) and
Indiana Municipal Power Agency (IMPA) for which Northern Indiana
controls interchange operations, was set on July 14, 1995. The 1995
peak established a new all-time peak exceeding the old peak of 2,953,600
kw established on August 27, 1993. Northern Indiana's 1995 internal peak
load, which excludes WVPA and IMPA, was 2,882,200 kw set on July 14, 1995.
This also established a new all-time internal peak load exceeding the old
peak of 2,736,100 kw established on August 27, 1993.
Northern Indiana's electric system is interconnected with that
of American Electric Power (formerly Indiana Michigan Power Company),
Commonwealth Edison Company, CINergy Services, Inc. (formerly PSI
Energy, Inc.), Consumers Power Company, WVPA, IMPA, and Central Illinois
Public Service Company. Electric energy is purchased from, sold to,
or exchanged with various other utilities and power marketers.
Northern Indiana provides WVPA with transmission and distribution
service, operating reserve requirements and capacity deficiency service,
and provides IMPA with transmission service, operating reserve
requirements and capacity deficiency service, in Northern Indiana's control
area. Northern Indiana also engages in sales and services under
interconnection agreements with WVPA and IMPA.
WVPA provides service to twelve Rural Electric Membership Corporations
(REMC's) located in Northern Indiana's control area. IMPA provides service
to the municipal electric system of the city of Rensselaer located in
Northern Indiana's control area.
Northern Indiana and WVPA have executed a supplemental agreement for
unit peaking capacity and energy. Pursuant to this agreement, which runs
through December, 2001, WVPA purchases 90,000 kw of capacity per month.
Northern Indiana has full requirement agreements with each of its
eight municipal wholesale customers. These full requirement contracts
became effective October 1, 1987, and extend through January 31, 1998.
Northern Indiana is a member of the East Central Area Reliability
Coordination Agreement (ECAR). ECAR is one of nine regional electric
reliability councils established to coordinate planning and operations of
member companies regionally and nationally.
FUEL SUPPLY. The generating units of Northern Indiana are located at
Bailly, Mitchell, Michigan City and Schahfer Generating Stations. Northern
Indiana's thirteen steam generating units have a net capability of 3,179,000
kw. Coal is the primary source of fuel for all units, except for three,
which utilize natural gas. In addition, Northern Indiana's four combustion
turbine generating units with a net capability to 203,000 kw are fired by
gas. Fuel requirements for Northern Indiana's generation for 1995 were
supplied as follows:
Coal 96.4%
Natural gas 3.6%
In 1995, Northern Indiana used approximately 8.0 million tons of coal
at its generating stations. Northern Indiana has established a normal level
of coal stock which provides adequate fuel supply during the year under all
conditions.
Annual coal requirements for Northern Indiana's electric generating
units through 2000 are estimated to range from 8.1 million tons to 8.5
million tons, depending from year to year upon anticipated sales levels,
scheduled maintenance and other variables. These requirements are being or
will be met in part under long-term contracts as follows:
MILLION TONS/YEAR SULFUR CONTENT EXPIRATION
================= ============== ==========
1.0 High 1998
Up to 1.0(a) High 1998
1.3(b) Low 2001
1.5(c) Low 1998
1.0(c) Low 1997
1.0(c) Low 1997
.5 High 1998
(a) Contract calls for requirements up to 1.0 million tons/contract year.
(b) 1.5 million tons in 1996.
(c) Plus or minus 10%/contract year.
The average cost of coal consumed in 1995 was $28.28 per ton or 15.89
mills per kilowatt-hour (kwh) generated as compared to $32.04 per ton or
16.85 mills per kwh generated in 1994. Northern Indiana's forecasts
indicate that its coal costs will remain at the current level or be slightly
lower over the next two years.
COAL RESERVES. Included in the previous table of coal contracts is a
coal mining contract with Cyprus Shoshone Coal Corporation (Cyprus) under
which Cyprus is mining Northern Indiana's coal reserves in the Cyprus mine
through the year 2001. The costs of the reserves are being recovered
through the rate making process as such coal reserves are used to produce
electricity.
FUEL ADJUSTMENT CLAUSE. See "Fuel Adjustment Clause" in the Notes to
Consolidated Financial Statements.
GAS OPERATIONS. Northern Indiana supplies natural gas of about 1,000
British thermal units (Btu) per cubic foot. In a 24-hour period ended
January 5, 1995, Northern Indiana's 1995 maximum day sendout was 1,545,616
dekatherms (dth).
In 1995, all of the gas supplied by Northern Indiana was transported
by ANR Pipeline Company (ANR), Crossroads Pipeline Company (Crossroads),
Midwestern Gas Transmission Company (Midwestern), Natural Gas Pipeline
Company of America (Natural), Panhandle Eastern Pipe Line Company
(Panhandle), Tennessee Gas Pipeline Company (Tennessee) and Trunkline Gas
Company (Trunkline). Approximately 32% of Northern Indiana's 1995 gas
supply was purchased on the spot market, generally on 30-day agreements.
The average price per dth (including take-or-pay and transition
charges) in 1995 was $2.98, compared to $2.99 in 1994, and the average cost
of purchased gas, after adjustment for take-or-pay and transition charges
billed to transport customers was $2.63 per dth as compared to $2.90 per dth
in 1994.
The transportation rates of Crossroads, and the transportation and
storage rates of ANR, Midwestern, Natural, Panhandle, Tennessee and
Trunkline to Northern Indiana, are subject to change in accordance with rate
proceedings filed with the Federal Energy Regulatory Commission (FERC).
Agreements have been negotiated with natural gas suppliers to replace
former pipeline supplier contracts pursuant to the requirements of FERC
Order No. 636 (See "Rate Matters - FERC Order No. 636" in the Notes to
Consolidated Financial Statements.) Northern Indiana also has firm
transportation agreements with the pipelines, which allow Northern Indiana
to move its gas through the pipelines' transmission systems. Northern
Indiana also has producer agreements which allow for the purchase of gas
either from gas marketers or producers.
Northern Indiana has a curtailment plan approved by the Indiana
Utility Regulatory Commission (Commission). Effective on August 11, 1981,
the plan allows unrestricted gas sales by Northern Indiana. There were no
firm sales curtailments in 1995 and none are expected during 1996.
Northern Indiana operates an underground gas storage field at Royal
Center, Indiana, which currently has a storage capacity of 6.75 million dth.
Withdrawals have been made in the 1995-1996 winter of up to 117,074 dth per
day.
In addition, Northern Indiana has several gas storage service
agreements which make possible the withdrawal of substantial quantities of
gas from other storage facilities. All of the storage agreements have
limitations on the volume and timing of daily withdrawals. These contracts
provide in the aggregate for approximately 28,559,180 dth of annual stored
volume, and allow for approximately 573,863 dth of maximum daily withdrawal.
Northern Indiana has a liquefied natural gas plant in LaPorte County
which is designed for peak shaving and has the following capacities:
maximum storage of 4,000,000 dth; maximum liquefaction rate (gas to liquid),
20,000 dth per day; maximum vaporization rate (output to distribution
system), 300,000 dth per day.
GAS COST ADJUSTMENT CLAUSE. See "Gas Cost Adjustment Clause" in the
Notes to Consolidated Financial Statements.
TAKE-OR-PAY PIPELINE GAS COSTS. See "Take-or-Pay Pipeline Gas Costs"
in the Notes to Consolidated Financial Statements.
FERC ORDER 636. See "FERC Order No. 636" in the Notes to Consolidated
Financial Statements.
REGULATION. Northern Indiana is subject to regulation by the
Commission as to rates, service, accounts, issuance of securities, and in
other respects. See "Rate Matters" in the Notes to Consolidated Financial
Statements. It is also subject to limited regulation by local public
authorities.
In 1995, about 4% of Northern Indiana's electric revenues were derived
from electric service it furnished at wholesale in interstate commerce to
other utility companies, municipalities and WVPA (see "Item 1. Business-
Electric Operations" regarding WVPA). Northern Indiana's wholesale rates
and operations are subject to the jurisdiction of the FERC. The
jurisdiction of the FERC does not extend to the issuance of securities by
Northern Indiana since it is a public utility organized and operating in the
State of Indiana, under the laws of which its security issues are regulated
by the Commission. The FERC on October 21, 1954, declared Northern
Indiana exempt from the provisions of the Natural Gas Act.
RATE MATTERS. For information regarding Northern Indiana's gas rates,
take-or-pay pipeline gas costs and gas transition costs, see "Take-or-Pay
Pipeline Gas Costs" and "FERC Order No. 636" in the Notes to Consolidated
Financial Statements.
Northern Indiana filed an Alternative Regulatory Plan (ARP) with
the Commission on November 29, 1995. The purpose of the ARP is to create a
business and regulatory environment and structure which will permit
increased choice for gas customers, competition among suppliers and improved
natural gas service. In its petition, Northern Indiana stated it would
propose to implement new rates and services that would include, but not be
limited to, further unbundling of services for additional customer classes
which would include increased customer choice for sources of natural gas
supply, negotiated services and prices, and incentive gas and storage cost
mechanisms.
CONSTRUCTION BUDGET. Northern Indiana's 1996-2000 construction budget
(including allowance for funds used during construction) is estimated at
approximately $764 million, including $205 million in 1996, $177 million in
1997, $156 million in 1998, $117 million in 1999 and $109 million in 2000.
Northern Indiana's construction estimates include adjustments for
anticipated inflation. No new electric generating units are planned in the
1996-2000 budget. Northern Indiana does not have, and has no plans to
construct, a nuclear generating unit.
COMPETITION. In municipalities where Northern Indiana renders
electric service to the general public as a public utility, no other utility
renders electric or gas service, except in Angola, DeMotte, Rome City,
Wanatah and Waterloo. In localities where Northern Indiana renders gas
service only, it competes with electric utilities, municipal or private, for
the business for which they render alternative electric service.
All electric service territories within the State of Indiana are
assigned to the existing suppliers, and boundaries of new territories
outside existing municipalities are assigned to the utility having the
nearest existing electric distribution lines. Only existing municipal
electric utilities may expand their service areas and then only into areas
that have been annexed by the municipality, subject to the approval of the
Commission and certain other conditions. Northern Indiana makes no
representation as to the possible effect upon its business of present or
future competition by private or municipal utilities or governmental
agencies, instrumentalities or authorities within the territory now served.
Northern Indiana is also subject to competition for gas sales to
industrial customers through the ability of these customers, under Northern
Indiana's rate provisions, to make their own purchases of gas and have
Northern Indiana transport the gas to them. During 1995, gas transportation
represented 59% of Northern Indiana's total gas sendout.
Indiana law requires Commission approval before a gas customer of a
utility may bypass the utility and make other arrangements for gas service.
Any entity which transports gas from outside Indiana for direct sale or
delivery to itself or other end-users within the state will be considered a
public utility and must obtain a necessity certificate from the Commission
in order to engage in such activities.
EMPLOYEE RELATIONS. Northern Indiana had 4,111 employees at
December 31, 1995. Approximately 64% of Northern Indiana's employees
(physical and clerical workers) are represented by two local unions of the
United Steelworkers of America, AFL-CIO-CLC. Effective June 1, 1993, the
bargaining unit employees ratified four-year agreements which continue until
June 1, 1997. These agreements provide for base wage increases of two
percent in 1993, three percent in 1994 and 1995, and three and one-half
percent in 1996. Additional economic provisions include a variable
compensation plan linked to improvements in productivity.
ENVIRONMENTAL MATTERS. Northern Indiana has an ongoing program to
remain aware of laws and regulations involved with hazardous waste and other
environmental matters. It is Northern Indiana's intent to continue to
evaluate its facilities and properties with respect to these rules and
identify any sites that would require corrective action. Northern Indiana
has recorded a reserve of $4.8 million to cover probable corrective actions
as of December 31, 1995. However, environmental regulations and remediation
techniques are subject to future change. Based upon management's
understanding of current laws and regulations, Northern Indiana believes
that any corrective actions required, after consideration of insurance
coverages, will not have a significant impact on the financial position or
results of operations of Northern Indiana.
Northern Indiana is subject to regulation with regard to environmental
matters by various federal, state and local authorities. Northern Indiana
cannot forecast the effect of all such regulation upon its generating,
transmission and other facilities, or its operations. Northern Indiana
intends to comply with all applicable governmental requirements, and has
adopted an environmental policy that fosters the pursuit of proactive sound
environmental programs and management.
The application of federal and state restrictions to protect the
environment, including but not limited to those hereinafter described,
involves or may involve review, certification or issuance of permits by
various federal, state and local authorities. Such restrictions,
particularly in regard to emissions into the air and water, and disposal of
solid wastes, may impact the operation of Northern Indiana's facilities, and
may also require substantial investments.
Northern Indiana's total capital expenditures from January 1, 1991,
through December 31, 1995 for pollution control facilities were
approximately $109 million and were financed in part by the sale of
Pollution Control Notes and Bonds-Jasper County. Northern Indiana
anticipates expenditures of approximately $162 million for pollution control
equipment in the 1996-2000 period which includes anticipated expenditures of
$78 million in 1996 and $32 million in 1997.
AIR. The Indiana Department of Environmental Management (IDEM) Office
of Air Management has submitted to the U.S. Environmental Protection Agency
(EPA) a State Implementation Plan (SIP) in accordance with the requirements
of the Clean Air Act Amendments of 1977.
ATTAINMENT-NONATTAINMENT. Under the Clean Air Act Amendments of 1977,
the State has identified areas which are in compliance with the
National Ambient Air Quality Standards (NAAQS) (attainment areas) and areas
that are not in compliance with respect to the sulfur dioxide, particulate
matter and other pollutant standards established by NAAQS (nonattainment
areas). Portions of Lake and LaPorte Counties in which Northern Indiana
operates electric generating facilities remain designated as nonattainment
areas for sulfur dioxide. Control plans for each county are being
implemented. Any reductions in emissions of sulfur dioxide required to be
made by Northern Indiana have been made, and Northern Indiana anticipates
no increased costs as a result of the implementation of the control plans
for Lake and LaPorte Counties. IDEM initiated the process for redesignating
LaPorte County to attainment for sulfur dioxide. IDEM discussed this
process at a public hearing in Michigan City on November 16, 1995.
Lake County, Indiana, is designated as a nonattainment area for
particulate matter or PM-10. The State of Indiana promulgated a PM-10 SIP
rule, which became effective on June 11, 1993. The rule requires reduced
opacity and mass emissions limits at Dean H. Mitchell Station as well as the
establishment of a fugitive dust control and continuous compliance plans.
Northern Indiana invested $2.8 million to rebuild the Unit 5 electrostatic
precipitator during 1993 to help meet the PM-10 emission limits. In order
to improve fugitive dust control, during 1994 Mitchell Station installed a
water spray dust suppression system to minimize emissions from the coal pile
and coal unloading areas. Porter County has been determined to have an
unclassified status for PM-10. According to state requirements, the area
will be monitored for PM-10 impacts to determine the appropriate
classifications with respect to the NAAQS. All other counties where
Northern Indiana operates electric production facilities have an
unclassified status for PM-10.
Under Title I of the Clean Air Act Amendments of 1990 (CAAA), Lake and
Porter Counties are classified as severe nonattainment areas for ozone.
Passage of the CAAA results in new provisions applicable to mobile and
stationary sources in Lake and Porter Counties. Control measures requiring
reduction of emissions of nitrogen oxides from the Mitchell and Bailly
Generating Stations as a consequence of the Lake Michigan Ozone Control
Program have yet to be determined. Northern Indiana is evaluating potential
least-cost methods to reduce emissions of nitrogen oxides from the
generating stations. The EPA has approved a conditional waiver from present
reduction of nitrogen oxides from Title I. Northern Indiana cannot determine
the cost impact of the future provisions.
ACID RAIN. Title IV of the CAAA addresses the acid rain issue by
targeting large sources of sulfur dioxide and nitrogen oxides for
significant reductions. The core acid rain rules for sulfur dioxide were
promulgated by the EPA January 11, 1993. As required by the regulations,
Bailly Units 7 and 8 and Michigan City Unit 12 reduced their sulfur dioxide
emissions below 2.5 pounds per million British thermal units (lbs/mm Btu) by
January 1, 1995. These units, along with the remainder of Northern Indiana's
coal-fired units, are required to reduce their sulfur dioxide emissions
below 1.2 lbs/mm Btu by January 1, 2000 (Phase II).
Presently, all of Northern Indiana's eleven coal fired generating
units utilize low sulfur fuel or flue gas desulfurization units to control
sulfur dioxide emissions below the 1.2 lbs/mm Btu level. That places
Northern Indiana in compliance with the Phase II sulfur dioxide standards.
The EPA approved Northern Indiana's Acid Rain permits for the Bailly
and Michigan City Generating Stations on August 31, 1993. The Phase I Acid
Rain permits for the stations are effective from January 1, 1995 through
December 31, 1999. One component of the permit is the Phase I extension
plan for Bailly. Northern Indiana was eligible for and received the
extension because of the construction and operation of the Bailly scrubber.
This extension plan allocates additional allowances, above the basic
allowances, applicable to Bailly and Michigan City Generating Stations.
Northern Indiana estimates that total costs of compliance with the
CAAA sulfur dioxide regulations will impact electric rates by less than 5%
in the future.
Northern Indiana is pursuing nitrogen oxide reduction measures to meet
future acid rain requirements. The EPA has proposed Phase II nitrogen oxide
limits. The regulations when finalized could establish nitrogen oxide
limits for all of Northern Indiana's coal fired boilers.
ADDITIONAL AIR ISSUES. The CAAA contain provisions that could lead to
limitations on emissions of nitrogen oxides, as mentioned above, and
hazardous air pollutants which may require significant capital expenditures
for control of these emissions. Northern Indiana is pursuing a nitrogen
oxide control program to meet future requirements. Northern Indiana
cannot predict the costs of complying with CAAA requirements, but it believes
that any such mandated costs would be recoverable through the rate making
process.
The EPA has promulgated a permit program to meet the requirements of
Title V of the CAAA. The IDEM, on November 3, 1993, proposed an Air
Operating permit program to meet the requirements of Title V to Indiana's
Air Pollution Control Board. The Air Pollution Control Board adopted rules
to implement the Title V permit program on March 10, 1994. These operating
permit rules, including a new fee schedule, became effective in Indiana on
June 24, 1994. Indiana submitted the Title V rules to the EPA for approval
in August of 1994. The EPA has approved the submittal and the rules became
effective December 14, 1995.
WATER. The Clean Water Act, as amended, subjects point source
dischargers to technology and water quality based controls through the
National Pollution Discharge Elimination System (NPDES) permit program.
Northern Indiana is required to have NPDES permits for discharges from its
generating stations into the waters of the United States. The IDEM Office
of Water Management has issued renewal NPDES permits for Schahfer, Mitchell
and Michigan City Generating Stations, effective November 1, 1993. The
renewed Bailly Station NPDES permit is expected to be issued in 1996.
Northern Indiana received NPDES permit modifications for intermittent
chemical treatment of the main discharge at the Mitchell and Michigan City
Stations for zebra mussel control. Bailly Station utilizes thermal
treatment in its water systems to control zebra mussels. Schahfer Station
has not presently experienced operational impacts due to zebra mussels.
Rather, Schahfer Station has experienced equipment problems due to an
Asiatic clam infestation. Alternate forms of control are being investigated
by Northern Indiana in an effort to prevent any impact on plant operations
relating to these infestations, while also minimizing the environmental
impact of the controls.
SUPERFUND SITES. The EPA has notified Northern Indiana that it is a
"potentially responsible party" (PRP) under the Comprehensive Environmental
Response Compensation and Liability Act (CERCLA) and may be required to
share in the cost of cleanup of several waste disposal sites identified by
the EPA. The sites are in various stages of investigation and analysis
and remediation. At each of the sites Northern Indiana is one of several
PRPs, and it is expected that remedial costs, as provided under CERCLA,
will be shared among them. At some sites Northern Indiana and/or the other
named PRPs are presently working with the EPA to clean up the sites and
avoid the imposition of fines or added costs.
MANUFACTURED GAS PLANT SITES. Northern Indiana has instituted a
program to investigate former manufactured gas plants where it is the
current or former owner. Northern Indiana has identified twenty-three of
these sites and made visual inspections of these sites. Northern Indiana
has conducted initial samplings at ten sites. Follow-up investigations have
been conducted at five sites and potential remedial measures are being
evaluated. Northern Indiana will continue its program to assess sites.
During the follow-up investigation of the former manufactured gas plant in
Elkhart, Indiana, Northern Indiana noted the presence of hydrocarbons in
the Elkhart River. Northern Indiana reported this finding to IDEM and the
EPA. Northern Indiana has placed the Elkhart site in the IDEM Voluntary
Remediation Program (VRP). The goal of placing the site in the VRP is to
obtain IDEM approval of the determination and subsequent implementation of
what remedial measures, if any, may be needed.
Northern Indiana was notified by IDEM of the release of a petroleum
substance into the St. Mary's River in Fort Wayne, Indiana, from the site of
a former manufactured gas plant formerly owned by Northern Indiana. In
cooperation with IDEM, Northern Indiana has taken steps to investigate and
contain the substance. Northern Indiana has remediated part of the Fort
Wayne site. The remainder of the site is being evaluated to determine what
future remedial measures, if any, may be needed.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured gas plant
sites at which both companies or their predecessors were former operators or
owners. One of these sites is the Lafayette site which Indiana Gas had
previously notified Northern Indiana is being investigated and remediated
pursuant to an administrative order with IDEM. Northern Indiana also
notified PSI Energy, Inc. that it was a former owner or operator of seven
former manufactured gas plants at which Northern Indiana had conducted or
was planning investigation or remediation activities.
Northern Indiana has met with various companies that provided
insurance coverage which Northern Indiana believes covers costs related to
actions taken at former manufactured gas plants. In September 1995, certain
insurance companies initiated a suit in Indiana state court against Northern
Indiana to deny coverage. Later in September 1995, Northern Indiana filed a
more comprehensive suit in Federal Court in Indiana against those insurers
and several other insurance companies, seeking coverage for costs associated
with several former manufactured gas plant sites. The state court action is
stayed pending resolution of the Northern Indiana suit in Federal Court.
ELECTRIC AND MAGNETIC FIELDS. The possibility that exposure to
electric and magnetic fields emanating from power lines, household
appliances and other electric sources may result in adverse health effects
has been the subject of public, governmental and media attention. A
considerable amount of scientific research has been conducted on this
topic without definitive results. Research is continuing to resolve
scientific uncertainties.
---------------------------
It is not possible to predict the scope, enforceability or financial
impact of other environmental regulations or standards which may be
established in the future.
ITEM 2. PROPERTIES.
The physical properties of Northern Indiana are located in the State
of Indiana.
ELECTRIC. Northern Indiana owns and operates four coal fired electric
generating stations with net capabilities of 3,179,000 kw, two hydroelectric
generating plants with net capabilities of 10,000 kw, and four gas fired
combustion turbine generating units with net capabilities of 203,000 kw, for
a total system net capability of 3,392,000 kw. During the year ended
December 31, 1995, Northern Indiana generated 85.8% and purchased 14.2% of
its electric requirements.
Northern Indiana has 292 substations with an aggregate transformer
capacity of 22,839,200 kva. Its transmission system with voltages from
34,500 to 345,000 consists of 3,047 circuit miles of line. The electric
distribution system extends into 21 counties and consists of 7,682 circuit
miles of overhead and 1,265 cable miles of underground primary distribution
lines operating at various voltages from 2,400 to 12,500 volts. Northern
Indiana has distribution transformers having an aggregate capacity of
10,661,892 kva and 437,264 electric watt-hour meters.
GAS. Northern Indiana has an underground storage field at Royal
Center and a liquefied natural gas plant in LaPorte County, both of which
are described under "Item 1. Business-Gas Operations." Northern Indiana has
12,976 miles of gas mains.
OTHER PROPERTIES. Northern Indiana owns offices and service
buildings, salesrooms, garages, repair shops, motor vehicles, construction
equipment and tools, and office furniture and equipment, and also leases
offices in various localities. It also owns miscellaneous parcels of real
estate not now used in utility operations.
DONATION OF PROPERTY. On January 5, 1995, Northern Indiana completed
the planned donation of approximately 2,150 acres of land, including 60
miles of lake and river frontage, to the Shafer and Freeman Lakes
Environmental Conservation Corporation (a not-for-profit organization), the
State of Indiana Department of Natural Resources and the Indiana Natural
Resources Foundation. The property frames and includes the resort areas of
Lake Shafer and Lake Freeman in White and Carroll Counties, near the cities
of Monticello and Delphi in central Indiana. Northern Indiana acquired the
property in 1944 as part of the purchase of dams and two small hydroelectric
plants and has maintained the area since that time. Northern Indiana
donated this property to ensure the land is managed to enhance its
preservation and recreational value. The dams and hydroelectric plants are
being retained for Northern Indiana operations.
CHARACTER OF OWNERSHIP. The properties of Northern Indiana are
subject to the lien of its First Mortgage Indenture. The principal offices
and properties are held in fee and are free from other encumbrances, subject
to minor exceptions, none of which is of such a nature as substantially to
impair the usefulness to Northern Indiana of such properties. Many of the
offices in the various communities served are occupied by Northern Indiana
under leases. All properties are subject to liens for taxes, assessments and
undetermined charges (if any) incidental to construction, which it is
Northern Indiana's practice regularly to pay, as and when due, unless
contested in good faith. In general, the electric and gas lines and mains
are located on land not owned in fee but are covered by necessary consents
of various governmental authorities or by appropriate rights obtained from
owners of private property. These consents and rights are deemed adequate
for the purposes for which they are being used. Northern Indiana does not,
however, generally have specific easements from the owners of the property
adjacent to public highways over, upon, or under which its electric and gas
lines are located. At the time each of the principal properties was
purchased a title search was made. In general, no examination of titles as
to rights-of-way for electric and gas lines and mains was made, other than
examination, in certain cases, to verify the grantors' ownership and the
lien status thereof.
ITEM 3. LEGAL PROCEEDINGS.
Northern Indiana is a party to various pending proceedings, including
suits and claims against it for personal injury, death and property damage,
but in the opinion of counsel for Northern Indiana, the nature of such
proceedings and suits, and the amounts involved, do not depart from the
ordinary routine litigation and proceedings incidental to the kind of
business conducted by Northern Indiana, except as set forth above under
"Item 1. Business-Environmental Matters," and as described under the
captions "Pending Tax Matter" and "Environmental Matters," in the Notes to
Consolidated Financial Statements.
On March 13, 1996, the Internal Revenue Service appealed to the U.S.
Court of Appeals for the Seventh Circuit, the November 6, 1995 decision of
the United States Tax Court (Tax Court) in favor of Northern Indiana. See
"Pending Tax Matter" in the Notes to Consolidated Financial Statements.
Northern Indiana's management and its general counsel believe the decision
of the Tax Court will prevail.
To the knowledge of Northern Indiana no other material legal
proceedings against Northern Indiana or its subsidiaries are contemplated
by governmental authorities and other parties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
Northern Indiana's common shares are wholly-owned by Industries.
The following limitations on payment of dividends and issuance of
preferred stock apply to Northern Indiana:
When any bonds are outstanding under its First Mortgage Indenture,
Northern Indiana may not pay cash dividends on its stock (other than
preferred or preference stock) or purchase or retire common shares, except
out of earned surplus or net profits computed as required under the
provisions of the maintenance and renewal fund. At December 31, 1995,
Northern Indiana had approximately $144.8 million of retained earnings
(earned surplus) available for the payment of dividends. Future common
share dividends by Northern Indiana will depend upon adequate retained
earnings, adequate future earnings and the absence of adverse developments.
So long as any shares of Northern Indiana's cumulative preferred stock
are outstanding, no cash dividends shall be paid on its common shares in
excess of 75% of the net income available therefor for the preceding
calendar year unless the aggregate of the capital applicable to stocks
subordinate as to assets and dividends to the cumulative preferred stock
plus the surplus, after giving effect to such dividends, would equal or
exceed 25% of the sum of all obligations evidenced by bonds, notes,
debentures or other securities, plus the total capital and surplus. At
December 31, 1995, the sum of the capital applicable to stocks subordinate
to the cumulative preferred stock plus the surplus was equal to 41% of the
total capitalization including surplus.
In connection with the foregoing discussion, see "Common Share
Dividend" in the Notes to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA.
Year Ended December 31,
(Dollars in thousands)
1995 1994 1993 1992 1991
========== ========== ========== ========== ==========
Operating revenues $1,664,278 $1,613,995 $1,619,623 $1,552,285 $1,535,161
Net income $ 194,321 $ 179,903 $ 172,104 $ 149,454 $ 149,810
Total assets $3,606,199 $3,624,311 $3,613,235 $3,595,345 $3,574,277
Long-term
obligations and
redeemable
preferred stock $1,122,392 $1,131,408 $1,147,546 $1,035,128 $1,100,257
Cash dividends
declared on
common shares $ 185,725 $ 168,815 $ 165,299 $ 134,916 $ 139,947
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
NET INCOME. For 1995, net income of Northern Indiana increased to
$194.3 million, compared to $179.9 million for 1994. In 1993, net income
was $172.1 million.
See Notes to Consolidated Financial Statements for Segments of
Business regarding the revenue and utility operating income derived from
the delivery of gas and electricity.
REVENUES. Operating revenues increased $50.2 million, or 3.1%, from
1994. Operating revenues in 1994 decreased $5.6 million, or 0.3%, from
1993.
During 1995, gas deliveries in dekatherms (dth), which include
transportation services, increased 0.9%. Gas sales in 1995 increased 5.0%
due to higher sales to residential and commercial customers as a result of
colder weather during the fourth quarter of 1995. Gas transportation
services decreased 1.7% mainly due to decreased deliveries to industrial
customers. Northern Indiana had approximately 636,600 gas customers at
December 31, 1995. During 1994, gas deliveries decreased 0.7%. Gas sales in
1994 decreased 3.2% due to lower sales to residential and commercial
customers due to warmer weather during the fourth quarter of 1994, compared
to the fourth quarter of 1993. Gas transportation services increased 1.0%
mainly due to increased deliveries to industrial customers.
Gas revenues were $633.4 million in 1995, an increase of $13.8 million
from 1994. The increase in gas revenues was mainly due to increased sales
to residential and commercial customers as a result of colder weather during
the fourth quarter of 1995 and increased gas transition charges partially
offset by decreased gas costs. Gas revenues were $619.5 million in 1994, a
decrease of $36.4 million from 1993. The decrease in gas revenues was
mainly due to decreased sales to residential and commercial customers due to
the warmer weather in 1994, and reduced gas costs. The large commercial and
industrial customers continued to utilize transportation services provided
by Northern Indiana. Gas transportation customers purchase much of their
gas directly from producers and marketers and then pay a transportation fee
to have their gas delivered over Northern Indiana's system. Northern
Indiana transported 161.7, 164.6 and 147.8 million dth in 1995, 1994 and
1993, respectively.
In 1995, sales of electricity in kilowatt-hours (kwh) increased 8.9%
over 1994, mainly due to higher sales to residential and commercial
customers as a result of warmer weather in the third quarter of 1995 and
increased sales to wholesale customers. Northern Indiana had approximately
403,900 electric customers at December 31, 1995. In 1994, sales of
electricity in kwh increased 2.4% over 1993 mainly due to higher sales to
commercial and industrial customers due to increased demands of steel-
related customers.
In 1995, electric revenues were $1.031 billion, an increase of $36.4
million from 1994. The increase in electric revenue was mainly due to
higher sales to residential and commercial customers as a result of warmer
weather in the third quarter of 1995, and increased sales to wholesale
customers, and was partially offset by lower fuel costs per kwh and to
transitional rate adjustments to industrial customers signing new five-year
contracts early in 1995. In 1994, electric revenues were $994.5 million, an
increase of $30.8 million from 1993. The increase in electric revenue was
mainly due to higher sales to commercial and industrial customers due to
increased demands of steel-related customers and higher fuel costs per kwh,
which were partially offset by decreased sales to wholesale customers.
The components of the changes in gas and electric revenues are shown
in the following tables:
Year 1995 Year 1994
Compared To Compared To
Year 1994 Year 1993
============ ============
(Dollars in millions)
Gas Revenue
Pass through of net changes in
purchased gas costs, gas storage
and storage transportation costs $ (61.6) $ (26.0)
Take-or-pay costs and transition costs 48.3 10.8
Changes in sales levels 28.2 (21.1)
Gas transported (1.1) (0.1)
------------ ------------
Gas Revenue Change $ 13.8 $ (36.4)
------------ ------------
Electric Revenue
Pass through of net changes
in fuel costs $ (14.6) $ 7.6
Changes in sales levels 51.0 23.2
------------ ------------
Electric Revenue Change $ 36.4 $ 30.8
------------ ------------
Total Revenue Change $ 50.2 $ (5.6)
============ ============
See Rate Matters in Notes to Consolidated Financial Statements
regarding changes in gas take-or-pay and FERC Order No. 636 transition
costs.
The basic steel industry accounted for 38% of natural gas delivered
(including volumes transported) and 36% of electric sales during 1995.
Northern Indiana's rate schedules for gas and electric service to its
customers contain electric rate adjustment clauses for changes in the cost
of fuel and firm purchases of electric energy and gas rate adjustment
clauses to reflect changes in the cost of gas purchased and contracted gas
storage and storage transportation costs. (See Fuel Adjustment Clause and
Gas Cost Adjustment Clause under Summary of Significant Accounting Policies
in Notes to Consolidated Financial Statements.)
GAS COSTS. Gas costs increased $0.7 million (0.2%) in 1995 due to
increased purchases partially offset by lower gas costs per dth. The
average cost of purchased gas in 1995, after adjustment for take-or-pay and
transition charges billed to transport customers, was $2.63 per dth as
compared to $2.90 per dth in 1994. Gas costs decreased $26.7 million (6.8%)
in 1994, due to decreased volumes purchased and lower gas costs per dth.
The average cost of purchased gas in 1994, after adjustment for take-or-pay
and transition charges billed to transport customers, was $2.90 per dth as
compared to $3.21 per dth in 1993.
FUEL AND PURCHASED POWER. Cost of fuel for electric generation in
1995 decreased mainly as a result of lower cost for coal and was partially
offset by increased production. The average cost per kwh generated
decreased 5.7% from 1994 to 15.89 mills. The cost of fuel for electric
generation increased in 1994 from 1993 mainly as a result of increased coal
costs per kwh generated. The average cost per kwh generated increased 1.2%
from 1993 to 16.85 mills.
Power purchased increased $11.1 million in 1995, as a result of
increased bulk power purchases from other utilities due to increased sales.
Power purchased increased $14.3 million in 1994 mainly due to purchases
required to replace R. M. Schahfer Generating Station Unit 15 generation
from February 1 to July 5, 1994, while this unit was down on an extended
outage as part of the Powder River Basin coal conversion project.
OPERATING MARGINS. Operating margins increased $43.2 million in 1995
to $1.012 billion. The operating margin from gas deliveries increased $13.1
million in 1995, mainly due to the increased sales to residential and
commercial customers, due to colder weather during the fourth quarter of
1995. Operating margins from electric sales increased $30.1 million
reflecting increased sales to residential and commercial customers as a
result of warmer weather in the third quarter of 1995, and increased sales
to wholesale customers, partially offset by transitional rate adjustments to
industrial customers. Operating margins increased $4.2 million in 1994 to
$968.5 million. The operating margin from gas deliveries decreased $9.8
million in 1994, mainly due to the decreased sales to residential and
commercial customers due to warmer weather during the fourth quarter of
1994, partially offset by increased transportation services. Operating
margins from electric sales increased $14.0 million reflecting increased
sales to commercial and industrial customers due to increased demand
partially offset by decreased sales to wholesale customers.
OPERATING EXPENSES AND TAXES. Operating expenses and taxes (except
income) in 1995 increased 1.5% from 1994 to $625.7 million and in 1994
increased 0.7% from 1993 to $616.2 million.
Operation expenses increased $3.2 million in 1995 from 1994 reflecting
a December 1995 Indiana Utility Regulatory Commission (Commission) order to
refund $3.4 million to electric customers related to a 1992 insurance
settlement previously credited to operating and maintenance expenses.
Operation expenses increased $0.7 million in 1994 over 1993 mainly due to
increased costs of pollution control facilities and environmental costs.
Maintenance expenses decreased $1.9 million and $3.5 million in 1995
and 1994, respectively, due to reduced maintenance activities.
Depreciation and amortization expenses increased $6.8 million and $6.7
million in 1995 and 1994, respectively, mainly due to net plant additions.
Utility income taxes increased $10.3 million in 1995 mainly due to
higher pre-tax operating income. Utility income taxes remained relatively
unchanged from 1993 to 1994 consistent with the level of pre-tax income.
Other Income (Deductions) decreased $7.3 million in 1995 from 1994
reflecting the inclusion in 1994 of a $5.6 million after-tax benefit for the
Northern Indiana land donation to the Shafer and Freeman Lakes Environmental
Conservation Corporation.
Interest charges increased $1.6 million and decreased $5.3 million in
1995 and 1994, respectively. The 1995 increase reflects increases in short-
term borrowing rates and long-term debt outstanding.
See Notes to Consolidated Financial Statements for a discussion of
Regulatory Assets, Carrying Charges and Deferred Depreciation, Allowance for
Funds Used During Construction, FERC Order No. 636, Income Taxes,
Postretirement Benefits and Postemployment Benefits.
ENVIRONMENTAL MATTERS: Northern Indiana has an ongoing program to
remain aware of laws and regulations involved with hazardous waste and other
environmental matters. It is Northern Indiana's intent to continue to
evaluate its facilities and properties with respect to these rules and
identify any sites that would require corrective action. Northern Indiana
has recorded a reserve of $4.8 million to cover probable corrective actions
as of December 31, 1995. However, environmental regulations and remediation
techniques are subject to future change. Based upon management's
understanding of current laws and regulations, Northern Indiana believes
that any corrective actions required, after consideration of insurance
coverages, will not have a significant impact on the financial position or
results of operations of Northern Indiana.
Because of major investments made in modern environmental control
facilities and the use of low sulfur coal, all of Northern Indiana's
electric production facilities now comply with the sulfur dioxide
limitations contained in the acid deposition provisions of the Clean Air Act
Amendments of 1990 (CAAA). Northern Indiana estimates that total costs of
compliance with the CAAA sulfur dioxide regulations will impact electric
rates by less than 5% in the future.
The CAAA contain provisions that could lead to limitations on
emissions of nitrogen oxides and hazardous air pollutants, which may require
significant capital expenditures for control of these emissions. Northern
Indiana is pursuing a nitrogen oxide control program to meet future
requirements. Northern Indiana cannot predict the costs of complying with
CAAA requirements, but believes that any such mandated costs would be
recoverable through the rate making process.
The Environmental Protection Agency (EPA) has notified Northern
Indiana that it is a "potentially responsible party" (PRP) under the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA)
and may be required to share in the cost of cleanup of several waste
disposal sites identified by the EPA. The sites are in various stages of
investigation, analysis and remediation. At each of the sites, Northern
Indiana is one of several PRPs, and it is expected that remedial costs,
as provided under CERCLA, will be shared among them. At some sites Northern
Indiana and/or the other named PRPs are presently working with the EPA to
clean up the sites and avoid the imposition of fines or added costs.
Northern Indiana has instituted a program to investigate former
manufactured gas plants where it is the current or former owner. Northern
Indiana has identified twenty-three of these sites and made visual
inspections of these sites. Northern Indiana has conducted initial
samplings at ten sites. Follow-up investigations have been conducted at five
sites and potential remedial measures are being evaluated. Northern Indiana
will continue its program to assess sites. During the follow-up
investigation of the former manufactured gas plant in Elkhart, Indiana,
Northern Indiana noted the presence of hydrocarbons in the Elkhart River.
Northern Indiana reported this finding to the Indiana Department of
Environmental Management (IDEM) and the EPA. Northern Indiana has placed
the Elkhart site in the IDEM Voluntary Remediation Program (VRP). The goal
of placing the site in the VRP is to obtain IDEM approval of the
determination and subsequent implementation of what remedial measures, if
any, may be needed.
Northern Indiana was notified by IDEM of the release of a petroleum
substance into the St. Mary's River in Fort Wayne, Indiana, from the site of
a former manufactured gas plant formerly owned by Northern Indiana. In
cooperation with IDEM, Northern Indiana has taken steps to investigate and
contain the substance. Northern Indiana has remediated part of the Fort
Wayne site. The remainder of the site is being evaluated to determine what
further remedial measures, if any, may be needed.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured gas plant
sites at which both companies or their predecessors were former operators or
owners. One of these sites was the Lafayette site which Indiana Gas had
previously notified Northern Indiana is being investigated and remediated
pursuant to an administrative order with IDEM. Northern Indiana also
notified PSI Energy, Inc. that it was a former owner or operator of seven
former manufactured gas plants at which Northern Indiana had conducted or
was planning investigation or remediation activities.
Northern Indiana has met with various companies that provided
insurance coverage which Northern Indiana believes covers costs related to
actions taken at former manufactured gas plants. In September 1995, certain
insurance companies initiated a suit in Indiana state court against Northern
Indiana to deny coverage. Later in September 1995, Northern Indiana filed a
more comprehensive suit in Federal Court in Indiana against those insurers
and several other insurance companies, seeking coverage for costs associated
with several former manufactured gas plant sites. The state court action is
stayed pending resolution of the Northern Indiana suit in Federal Court.
The possibility that exposure to electric and magnetic fields
emanating from power lines, household appliances and other electric sources
may result in adverse health effects has been the subject of public,
governmental and media attention. A considerable amount of scientific
research has been conducted on this topic without definitive results.
Research is continuing to resolve scientific uncertainties.
LIQUIDITY AND CAPITAL RESOURCES. Construction expenditures by
Northern Indiana for 1995, 1994 and 1993 were approximately $183 million,
$197 million and $176 million, respectively. Northern Indiana's total
utility plant investment on December 31, 1995, was $5.4 billion.
On March 4, 1994, the Commission authorized Northern Indiana to issue
up to $289,275,000 of its Medium-Term Notes, Series D, due from 1 year to 30
years, for purposes of refinancing certain first mortgage bonds and paying
short-term debt used to pay at maturity medium-term notes due in January and
April, 1994. On May 23, 1994, Northern Indiana exercised its option to
redeem all the outstanding First Mortgage Bonds, Series S, Y and AA,
aggregating $125.5 million, through the use of working capital and the
proceeds of short-term debt. During 1994, $120.0 million of the Medium-Term
Notes, Series D, were issued to complete the permanent refinancing of those
first mortgage bonds. On June 12, 1995, the remaining $169,275,000 of
Medium-Term Notes, Series D, were issued, and part of the proceeds were used
to redeem all of the outstanding First Mortgage Bonds, Series U and Z,
aggregating $94.8 million on July 3, 1995.
On August 25, 1994, Jasper County, Indiana issued Pollution Control
Refunding Revenue Bonds, Series 1994 (Northern Indiana Public Service
Company Project) (the Series 1994 Bonds), including $10 million of Series
1994A Bonds, due August 1, 2010; $18 million of Series 1994B Bonds, due
June 1, 2013; and $41 million of Series 1994C Bonds, due April 1, 2019. The
proceeds of these issuances were loaned to Northern Indiana under similar
terms. The initial interest rate on Series 1994 Bonds was 3.10%, which
resets daily. The proceeds of the Series 1994A and Series 1994C were used
to retire on October 15, 1994, $10 million of Series MM First Mortgage
Bonds, 7-1/2%, due October 15, 2004, and $41 million of Series LL First
Mortgage Bonds, 7-1/2%, due October 15, 2014. The proceeds on the Series
1994B Bonds were used to retire the $18 million Series 1978 Note, 6.70%, due
November 1, 2008, on August 25, 1994. The Series 1994 Bonds are secured by
Letters of Credit from Union Bank of Switzerland.
Cash flow from operations has provided sufficient liquidity to meet
current operating requirements. Because of the seasonal nature of the
utility business and the construction program, Northern Indiana makes use of
commercial paper intermittently as short-term financing. As of December 31,
1995, Northern Indiana had $44.8 million in commercial paper outstanding,
having a weighted average interest rate of 6.01%.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1998, unless extended by its
terms. As of December 31, 1995, there were no borrowings outstanding under
this agreement. In addition, Northern Indiana has $14.2 million in lines of
credit which run to May 31, 1996. The credit pricing of each of the lines
varies from either the lending banks' commercial prime or market rates.
Northern Indiana has agreed to compensate the participating banks with
arrangements that vary from no commitment fee to a combination of fees which
are mutually satisfactory to both parties. As of December 31, 1995, there
were no borrowings under these lines of credit. The Credit Agreement and
lines of credit are also available to support the issuances of commercial
paper.
Northern Indiana also has $268.5 million of money market lines of
credit. As of December 31, 1995, $118.8 million of borrowings were
outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
December 31, 1995, there were no borrowings outstanding under this facility.
During recent years, Northern Indiana has been able to finance its
construction program with internally generated funds and expects to be able
to meet future commitments through such funds.
Northern Indiana does not expect the effects of inflation at current
levels to have a significant impact on its results of operations, ability to
contain cost increases or need to seek timely and adequate rate relief.
Northern Indiana does not anticipate the need to file for gas and electric
base rate increases in the near future.
COMPETITION. The Energy Policy Act of 1992 (Energy Act) allows FERC
to order electric utilities to grant access to transmission systems by third
party power producers. The Energy Act specifically prohibits federally
mandated wheeling of power for retail customers. That authority lies with
the individual states, several of which are considering opening the
transmission network to retail customers. The Energy Act will stimulate
greater competition in the wholesale electric markets. This competition
will create opportunities to compete for new customers and revenues, as well
as increase the risk of the loss of customers. Although wholesale customers
represent a relatively small portion of Northern Indiana's sales, Northern
Indiana will continue its efforts to retain and add customers by offering
competitive rates. Competitive forces have also begun to influence retail
pricing in the industry. In some instances, industrial customers,
threatening to pursue cogeneration, self-generation, retail wheeling or
relocation to other service territories, have obtained price concessions
from utilities.
Operating in a competitive environment will place added pressures on
utility profit margins and credit quality. Increasing competition in the
electric utility industry has already led the credit rating agencies to
apply more stringent guidelines in making credit rating determinations.
Northern Indiana's management has taken steps to make the company more
competitive and profitable in the changing utility environment, including
utilizing new rate and contract flexibility to retain and attract customers
as well as conversions of some of its generating units to allow use of lower
cost low sulfur coal.
FERC Order No. 636, effective in late 1993, shifted primary
responsibility for gas acquisition, transportation and peak days' supply
from pipelines to local gas distribution companies, such as Northern
Indiana. Although pipelines continue to transport gas, they no longer
provide sales service. Northern Indiana believes it has taken appropriate
steps to ensure the continued acquisition of adequate gas supplies at
reasonable prices.
The mix of gas revenues from retail sales, interruptible retail sales,
firm transportation service and interruptible transportation services has
changed significantly over the past several years. The deregulation of the
gas industry, since the mid-1980's, allows large industrial and commercial
customers to purchase their gas supplies directly from producers and use
Northern Indiana's facilities to transport the gas. Transportation
customers pay Northern Indiana only for transporting their gas from the
pipeline to the customers' premises.
Northern Indiana filed an Alternative Regulatory Plan (ARP) with the
Commission on November 29, 1995. The purpose of the ARP is to create a
business and regulatory environment and structure which will permit
increased choice for gas customers, competition among suppliers and improved
natural gas service. In its petition, Northern Indiana stated it would
propose to implement new rates and services that would include, but not be
limited to, further unbundling of services for additional customer classes
which would include increased customer choice for sources of natural gas
supply, negotiated services and prices, and incentive gas and storage cost
mechanisms.
To date, Northern Indiana's system has not been materially affected by
competition, and management does not foresee substantial adverse effects in
the near future, unless the current regulatory structure is substantially
altered. Northern Indiana believes the steps it is taking to deal with
increased competition will have significant, positive effects in the next
few years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages
=========
Report of Independent Public Accountants 19
Consolidated Statement of Income for the years
ended December 31, 1995, 1994 and 1993 20
Consolidated Balance Sheet - December 31, 1995
and 1994 21-22
Consolidated Statement of Capitalization -
December 31, 1995 and 1994 23
Consolidated Statement of Long-term Debt -
December 31, 1995 and 1994 24
Consolidated Statement of Cash Flows for the
years ended December 31, 1995, 1994 and 1993 25
Consolidated Statement of Retained Earnings for
the years ended December 31, 1995, 1994 and 1993 26
Notes to Consolidated Financial Statements 27-45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
We have audited the accompanying consolidated balance sheet and
consolidated statements of capitalization and long-term debt of Northern
Indiana Public Service Company (an Indiana corporation and a wholly owned
subsidiary of NIPSCO Industries, Inc.) and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income, retained
earnings and cash flows for each of the three years in the period ended
December 31, 1995. These consolidated financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Northern Indiana Public Service Company and subsidiaries as of December 31,
1995 and 1994, and the results of their operations and their cash flows for
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Notes 6 and 8 to the consolidated financial
statements, effective January 1, 1993, Northern Indiana Public Service
Company and subsidiaries changed their methods of accounting for income
taxes and postretirement benefits other than pensions.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed on Page
55, Item 14(a)(2) is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken
as a whole.
/S/ Arthur Andersen LLP
Chicago, Illinois
January 26, 1996
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995 1994 1993
========== ========== ==========
(Dollars in thousands)
Operating Revenues:
(Notes 2, 4 and 20)
Gas $ 633,355 $ 619,503 $ 655,980
Electric 1,030,923 994,492 963,643
---------- ---------- ----------
1,664,278 1,613,995 1,619,623
---------- ---------- ----------
Cost of Energy: (Note 2)
Gas costs 366,487 365,811 392,515
Fuel for electric generation 242,337 247,134 244,552
Power purchased 43,681 32,503 18,225
---------- ---------- ----------
652,505 645,448 655,292
---------- ---------- ----------
Operating Margin 1,011,773 968,547 964,331
---------- ---------- ----------
Operating Expenses and
Taxes (except income):
Operation 278,683 275,514 274,829
Maintenance (Note 2) 76,953 78,872 82,394
Depreciation and
amortization (Note 2) 198,259 191,426 184,741
Taxes (except income) 71,831 70,417 70,036
---------- ---------- ----------
625,726 616,229 612,000
---------- ---------- ----------
Operating Income Before
Utility Income Taxes 386,047 352,318 352,331
---------- ---------- ----------
Utility Income Taxes (Note 6) 106,574 96,257 94,926
---------- ---------- ----------
Operating Income 279,473 256,061 257,405
---------- ---------- ----------
Other Income (Deductions) (3,619) 3,726 (72)
---------- ---------- ----------
Interest Charges:
Interest on long-term debt 72,339 70,771 75,344
Other interest 8,395 9,550 7,212
Allowance for borrowed funds used
during construction and carrying
charges (Note 2) (3,320) (4,034) (622)
Amortization of premium, reacquisition
premium, discount and expense on
debt, net 4,119 3,597 3,295
---------- ---------- ----------
81,533 79,884 85,229
---------- ---------- ----------
Net Income 194,321 179,903 172,104
Dividend requirements on
preferred stocks 9,046 9,913 10,341
---------- ---------- ----------
Balance available
for common shares $ 185,275 $ 169,990 $ 161,763
========== ========== ==========
Common dividends declared $ 185,725 $ 168,815 $ 165,299
========== ========== ==========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995 1994
============ ===========
(Dollars in thousands)
ASSETS
UTILITY PLANT, at original cost (including
construction work in progress of
$145,078 and $215,395, respectively)
(Note 2):
Electric $ 3,935,103 $ 3,858,118
Gas 1,143,021 1,107,075
Common 350,168 316,120
----------- -----------
5,428,292 5,281,313
Less - Accumulated provision for
depreciation and amortization 2,330,879 2,162,828
----------- -----------
Total Utility Plant 3,097,413 3,118,485
----------- -----------
OTHER PROPERTY AND INVESTMENTS 8,787 10,155
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents 11,478 20,994
Accounts receivable, less reserve of
$6,418 and $3,955, respectively (Note 2) 96,076 80,977
Fuel adjustment clause (Note 2) 10,301 1,614
Gas cost adjustment clause (Note 2) 4,113 27,844
Materials and supplies, at average cost 63,824 63,835
Electric production fuel, at average cost 14,258 18,347
Natural gas in storage, at last-in,
first-out cost (Note 2) 53,413 72,462
Prepayments and other 13,050 10,169
----------- -----------
Total Current Assets 266,513 296,242
----------- -----------
OTHER ASSETS:
Regulatory assets (Note 2) 211,859 194,809
Deferred charges and other noncurrent
assets 21,627 4,620
----------- -----------
Total Other Assets 233,486 199,429
----------- -----------
$ 3,606,199 $ 3,624,311
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995 1994
=========== ===========
(Dollars in thousands)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's equity $ 1,016,827 $ 1,016,680
Preferred stocks (Note 10) -
Series without mandatory
redemption provisions (Note 11) 81,325 86,389
Series with mandatory
redemption provisions (Note 12) 63,651 66,057
Long-term debt, excluding amounts due
within one year (Note 15) 1,058,741 1,065,351
----------- -----------
Total capitalization 2,220,544 2,234,477
----------- -----------
CURRENT LIABILITIES:
Obligations due within one year -
Commercial paper 44,800 156,500
First mortgage bonds -
Series N, 4-5/8% - due May 15, 1995 0 22,436
Medium-term notes -
Issued at interest rates of 6.14%
and 6.19% with a weighted average
interest rate of 6.17% and maturities
of July 25, 1996 and July 26, 1996 80,000 0
Notes payable -
Issued at interest rates between 5.91%
and 6.15% with a weighted average
interest rate of 5.99% and various
maturities between January 2, 1996 and
February 9, 1996 118,800 92,700
----------- -----------
243,600 271,636
----------- -----------
OTHER CURRENT LIABILITIES -
Accounts payable 135,639 142,018
Sinking funds due within one year
(Notes 12 and 15) 2,621 2,578
Dividends declared on common and
preferred stocks 49,851 44,758
Customer deposits 10,230 8,678
Taxes accrued 31,247 48,806
Interest accrued 7,170 10,043
Accrued employment costs 45,771 43,260
Other 30,790 9,674
----------- -----------
313,319 309,815
----------- -----------
Total current liabilities 556,919 581,451
----------- -----------
OTHER:
Deferred income taxes (Note 6) 587,809 575,841
Deferred investment tax credits, being
amortized over life of related property
(Note 6) 114,386 121,822
Deferred credits 41,038 41,758
Accrued liability for postretirement
benefits (Note 8) 73,682 47,718
Regulatory income tax liability (Note 6) 5,783 14,625
Other noncurrent liabilities 6,038 6,619
----------- -----------
Total other 828,736 808,383
----------- -----------
COMMITMENTS AND CONTINGENCIES:
(Notes 3, 4, 5, 17 and 18)
$ 3,606,199 $ 3,624,311
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF CAPITALIZATION
DECEMBER 31, 1995 1994
=========== ===========
(Dollars in thousands)
COMMON SHAREHOLDER'S EQUITY:
Common shares - without par
value - authorized 75,000,000
shares - issued and outstanding
73,282,258 shares $ 859,488 $ 859,488
Additional paid-in capital 12,500 11,903
Retained earnings 144,839 145,289
----------- -----------
Total common shareholder's
equity 1,016,827 45.8% 1,016,680 45.5%
----------- -----------
PREFERRED STOCKS, WHICH ARE
REDEEMABLE SOLELY AT OPTION
OF NORTHERN INDIANA:
Cumulative preferred stock -
$100 par value -
4-1/4% series - 209,190 and
211,266 shares outstanding,
respectively 20,919 21,127
4-1/2% series - 79,996
shares outstanding 8,000 8,000
4.22% series - 106,198 and
106,200 shares
outstanding, respectively 10,620 10,620
4.88% series - 100,000
shares outstanding 10,000 10,000
7.44% series - 41,890 and
41,900 shares outstanding,
respectively 4,189 4,190
7.50% series - 34,842
shares outstanding 3,484 3,484
Premium on preferred stock 254 254
Cumulative preferred stock -
no par value -
Adjustable Rate (6.00% at
December 31, 1995) -
Series A (stated value -
$50 per share), 477,185 and
574,285 shares outstanding,
respectively 23,859 28,714
----------- -----------
81,325 3.6% 86,389 3.9%
----------- -----------
REDEEMABLE PREFERRED STOCKS,
SUBJECT TO MANDATORY REDEMPTION
REQUIREMENTS OR WHOSE
REDEMPTION IS OUTSIDE THE
CONTROL OF NORTHERN INDIANA:
Cumulative preferred stock -
$100 par value -
8.85% series - 87,500 and
100,000 shares outstanding,
respectively 8,750 10,000
7-3/4% series - 50,014 and
55,568 shares outstanding,
respectively 5,001 5,557
8.35% series - 69,000 and
75,000 shares outstanding,
respectively 6,900 7,500
Cumulative preferred stock -
no par value -
6.50% series - 430,000
shares outstanding 43,000 43,000
----------- -----------
63,651 2.9% 66,057 2.9%
----------- -----------
LONG-TERM DEBT 1,058,741 47.7% 1,065,351 47.7%
___________ ______ ___________ ______
Total capitalization $ 2,220,544 100.0% $ 2,234,477 100.0%
=========== ====== =========== ======
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF LONG-TERM DEBT
DECEMBER 31, 1995 1994
=========== ==========
(Dollars in thousands)
FIRST MORTGAGE BONDS -
Series O, 6-3/8%, due September 1, 1997 $ 25,747 $ 25,747
Series P, 6-7/8%, due October 1, 1998 14,509 14,509
Series T, 7-1/2%, due April 1, 2002 40,500 40,543
Series U, 8-1/8%, due July 15, 2003 0 55,239
Series Z, 8-1/8%, due August 15, 2007 0 39,569
Series NN, 7.10%, due July 1, 2017 55,000 55,000
----------- -----------
Total 135,756 230,607
----------- -----------
POLLUTION CONTROL NOTES AND BONDS -
Series A Note -
City of Michigan City, 5.70% due
October 1, 2003 20,000 20,750
Series 1988 Bonds - Jasper County -
Series A, B and C 3.70% weighted
average at December 31, 1995, due
November 1, 2016 130,000 130,000
Series 1988 Bonds - Jasper County -
Series D 3.76% weighted average at
December 31, 1995, due November 1, 2007 24,000 24,000
Series 1994 Bonds - Jasper County -
Series A - 5.90% at December 31, 1995,
due August 1, 2010 10,000 10,000
Series 1994 Bonds - Jasper County -
Series B - 5.90% at December 31, 1995,
due June 1, 2013 18,000 18,000
Series 1994 Bonds - Jasper County -
Series C - 5.90% at December 31, 1995,
due April 1, 2019 41,000 41,000
----------- -----------
Total 243,000 243,750
----------- -----------
MEDIUM-TERM NOTES -
Issued at interest rates between 5.83%
and 7.64% with a weighted average interest
rate of 6.82% and various maturities between
July 25, 1997 and January 19, 2024 684,025 594,750
----------- -----------
UNAMORTIZED PREMIUM AND DISCOUNT
ON LONG-TERM DEBT, NET (4,040) (3,756)
----------- -----------
Total long-term debt, excluding
amounts due in one year $ 1,058,741 $ 1,065,351
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995 1994 1993
=========== =========== ===========
(Dollars in thousands)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 194,321 $ 179,903 $ 172,104
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 198,259 191,426 184,741
Deferred federal and state
operating income taxes, net (3,247) (11,468) 1,689
Deferred investment tax
credits, net (7,436) (6,416) (7,364)
Change in certain assets and
liabilities -
Accounts receivable, net (15,099) 18,246 (10,684)
Electric production fuel 4,089 3,186 20,412
Materials and supplies 11 1,309 6,993
Natural gas in storage 19,049 (15,659) (21,263)
Accounts payable (6,379) (29,116) 25,968
Taxes accrued (11,156) (16,745) (718)
Fuel adjustment clause (8,687) 4,826 (2,105)
Gas cost adjustment clause 23,731 7,721 11,330
Accrued employment costs 2,511 3,182 10,076
Other, net 22,004 24,015 (6,493)
----------- ----------- -----------
Net cash provided by
operating activities 411,971 354,410 384,686
----------- ----------- -----------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Construction expenditures (185,560) (196,854) (176,226)
Other, net (750) 5,700 59
----------- ----------- -----------
Net cash used in investing
activities (186,310) (191,154) (176,167)
----------- ----------- -----------
CASH FLOWS PROVIDED BY
(USED IN) FINANCING
ACTIVITIES:
Issuance of long-term debt 168,386 208,884 451,218
Issuance of short-term debt 943,200 982,927 787,357
Net change in commercial paper (111,700) 128,605 (48,605)
Retirement of long-term debt (120,868) (210,246) (362,672)
Retirement of short-term debt (917,100) (1,065,227) (886,058)
Retirement of preferred stock (7,095) (10,354) (2,170)
Cash dividends paid on
common shares (180,475) (171,845) (152,825)
Cash dividends paid on
preferred shares (9,241) (10,185) (10,387)
Other, net (284) 0 0
----------- ----------- -----------
Net cash used in
financing activities (235,177) (147,441) (224,142)
----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (9,516) 15,815 (15,623)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 20,994 5,179 20,802
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 11,478 $ 20,994 $ 5,179
=========== =========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1995 1994 1993
========= ========= =========
(Dollars in thousands)
BALANCE AT BEGINNING OF PERIOD $ 145,289 $ 144,114 $ 147,581
ADD:
NET INCOME 194,321 179,903 172,104
--------- --------- ---------
339,610 324,017 319,685
--------- --------- ---------
LESS:
DIVIDENDS:
Cumulative Preferred stock -
4-1/4% series 891 898 898
4-1/2% series 360 360 360
4.22% series 448 448 448
4.88% series 488 488 488
7.44% series 312 312 312
7.50% series 261 261 261
8.85% series 903 1,014 1,125
7-3/4% series 449 492 534
8.35% series 622 672 708
6.50% series 2,795 2,795 2,803
Adjustable Rate, series A 1,517 2,173 2,404
Common shares 185,725 168,815 165,299
Capital stock expense 0 0 (69)
---------- --------- ---------
194,771 178,728 175,571
---------- --------- ---------
BALANCE AT END OF PERIOD $ 144,839 $ 145,289 $ 144,114
========== ========= =========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) HOLDING COMPANY STRUCTURE: NIPSCO Industries, Inc. (Industries) was
incorporated in Indiana on September 22, 1987, and became the parent of
Northern Indiana Public Service Company (Northern Indiana) on March 3, 1988.
Northern Indiana is a public utility operating company supplying electricity
and gas to the public in the northern third of Indiana.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION. The consolidated financial statements
include the accounts of Northern Indiana and its two subsidiaries, Shore Line
Shops, Inc. and NIPSCO Exploration Company, Inc. All significant intercompany
items have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Certain reclassifications were made to conform the prior years'
financial statements to the current presentation.
OPERATING REVENUES. Revenues are recorded based on estimated service
rendered, but are billed to customers monthly on a cycle basis.
DEPRECIATION AND MAINTENANCE. Northern Indiana provides depreciation
on a straight-line method over the remaining service lives of the electric,
gas, and common properties. The provisions as a percentage of the cost of
depreciable utility plant were approximately 4.1% for the year 1995, and 4.0%
for years 1994 and 1993. The depreciation rates for electric and gas
properties were 3.55% and 4.92%, respectively.
Northern Indiana follows the practice of charging maintenance and
repairs, including the cost of renewals of minor items of property, to
maintenance expense accounts, except for repairs of transportation and service
equipment which are charged to clearing accounts and redistributed to
operating expense and other accounts. When property which represents a
retirement unit is replaced or removed, the cost of such property is credited
to utility plant, and such cost, together with the cost of removal less
salvage, is charged to the accumulated provision for depreciation.
COAL RESERVES. Northern Indiana has a long-term mining contract to
mine its coal reserves through the year 2001. The costs of these reserves
are being recovered through the rate making process as such coal reserves are
used to produce electricity.
POWER PURCHASED. Power purchases and net interchange power with other
electric utilities under interconnection agreements are included in Cost of
Energy under the caption "Power purchased."
ACCOUNTS RECEIVABLE. At December 31, 1995, Northern Indiana had sold
$100 million of certain of its accounts receivable under a sales agreement
which expires May 31, 1997. The December 31, 1995, and 1994 accounts
receivable balances include approximately $6.1 million and $8.6 million
respectively, due from Industries.
STATEMENT OF CASH FLOWS. For the purposes of the Consolidated Statement
of Cash Flows, Northern Indiana considers temporary cash investments with an
original maturity of three months or less to be cash equivalents.
Cash paid during the periods reported for income taxes and interest
was as follows:
1995 1994 1993
======== ======== ========
(Dollars in thousands)
Income taxes $128,487 $116,790 $ 96,223
Interest, net of amounts capitalized $ 80,635 $ 76,983 $ 83,346
FUEL ADJUSTMENT CLAUSE. All metered electric rates contain a provision
for adjustment in charges for electric energy to reflect increases and
decreases in the cost of fuel and the fuel cost of purchased power through
operation of a fuel adjustment clause. As prescribed by order of the Indiana
Utility Regulatory Commission (Commission) applicable to metered retail rates,
the adjustment factor has been calculated based on the estimated cost of fuel
and the fuel cost of purchased power in a future three-month period. If two
statutory requirements relating to expense and return levels are satisfied,
any under or overrecovery caused by variances between estimated and actual
cost in a given three-month period will be included in a future filing.
Northern Indiana records any under or overrecovery as a current asset or
current liability until such time as it is billed or refunded to its
customers. The fuel adjustment factor is subject to a quarterly hearing by
the Commission and remains in effect for a three-month period.
GAS COST ADJUSTMENT CLAUSE. All metered gas rates contain an adjustment
factor which reflects the cost of purchased gas, contracted gas storage and
storage transportation charges. Northern Indiana records any under or
overrecovery as a current asset or current liability until such time as it is
billed or refunded to its customers. The gas cost adjustment factor is
subject to a quarterly hearing by the Commission and remains in effect for a
three-month period. If the statutory requirement relating to the level of
return is satisfied, any under or overrecovery caused by variances between
estimated and actual cost in a given three or six month period will be
included in a future filing. See Note 4, Rate Matters (Take-or-Pay Pipeline
Gas Costs) and (FERC Order No. 636) for a discussion of take-or-pay charges
and gas transition cost charges.
NATURAL GAS IN STORAGE. Natural gas in storage is valued using the
last-in, first-out (LIFO) inventory methodology. Based on the average cost of
gas purchased in December, 1995, and 1994, the estimated replacement cost of
gas in storage (current and non-current) at December 31, 1995, and 1994,
exceeded the stated LIFO cost by approximately $30 million and $38 million,
respectively.
REGULATORY ASSETS. Northern Indiana's operations are subject to the
regulation of the Commission and the Federal Energy Regulatory Commission
(FERC). Accordingly, Northern Indiana's accounting policies are subject to
the provisions of Statement of Financial Accounting Standards (SFAS) No. 71
"Accounting for the Effects of Certain Types of Regulation." The regulatory
assets below represent probable future revenue to Northern Indiana associated
with certain incurred costs as these costs are recovered through the rate
making process. Regulatory assets were comprised of the following items, and
were reflected in the Consolidated Balance Sheet as follows:
December 31, December 31,
1995 1994
============= =============
(Dollars in thousands)
Unamortized reacquisition premium on
debt (Note 15) $ 53,354 $ 53,792
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges
and deferred depreciation (See below) 74,981 79,198
Bailly scrubber carrying charges and
deferred depreciation (See below) 11,517 7,864
Deferral of SFAS No. 106 expense not
recovered (Note 8) 64,624 43,772
FERC Order No. 636
transition costs (Note 4) 25,038 56,153
------------- -------------
229,514 240,779
------------- -------------
Less: Current portion of regulatory assets 17,655 45,970
------------- -------------
$ 211,859 $ 194,809
============= =============
In March, 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This statement imposes stricter criteria for
retention of regulatory assets by requiring that such assets be probable of
future recovery at each balance sheet date. Northern Indiana will adopt this
standard on January 1, 1996, and adoption will not have a material impact on
its financial position or results of operations based on the current
regulatory structure in which Northern Indiana operates.
CARRYING CHARGES AND DEFERRED DEPRECIATION. Upon completion of R. M.
Schahfer Units 17 and 18, Northern Indiana capitalized the carrying charges
and deferred depreciation in accordance with orders of the Commission until
the cost of each unit was allowed in rates. Such carrying charges and
deferred depreciation are being amortized over the remaining life of each
unit.
Northern Indiana began capitalizing carrying charges and deferring
depreciation and certain operating expenses relating to its scrubber service
agreement upon completion of the flue gas desulfurization plant in June, 1992,
at Northern Indiana's Bailly Generating Station in accordance with an order of
the Commission. Pursuant to such order, capitalization of carrying charges and
deferral of depreciation and certain operating expenses ceased on December 31,
1995. The accumulated balance of the deferred costs and related carrying
charges will be amortized over the remaining life of the scrubber service
agreement.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. Allowance for funds
used during construction (AFUDC) is charged to construction work in progress
during the period of construction and represents the net cost of borrowed
funds used for construction purposes and a reasonable rate upon other (equity)
funds. Under established regulatory rate practices, after the construction
project is placed in service, Northern Indiana is permitted to include in the
rates charged for utility services (a) a fair return on and (b) depreciation
of such AFUDC included in plant in service.
At January 1, 1993, a pretax rate of 3.7% for all construction was
being used; effective January 1, 1994, the rate increased to 5.0% and
effective January 1, 1995, the rate increased to 6.0%.
INCOME TAXES. Deferred income taxes are recognized as costs in the
rate making process by the commissions having jurisdiction over the rates
charged by Northern Indiana. Deferred income taxes are provided as a result
of provisions in the income tax law that either require or permit certain
items to be reported on the income tax return in a different period than they
are reported in the financial statements. These taxes are reversed by a debit
or credit to deferred income tax expense as the temporary differences reverse.
Investment tax credits have been deferred and are being amortized to income
over the life of the related property.
(3) PENDING TAX MATTER: On August 1, 1991, the Internal Revenue Service
(IRS) issued a notice of deficiency for Northern Indiana's taxes for the years
1982 through 1985 ($3,785,250 per year plus interest) relating to interest
payments on $70 million of 17-1/4% Notes issued in 1981 by Northern Indiana's
former foreign subsidiary, Northern Indiana Public Service Finance N.V.
(Finance). The IRS believes that interest paid on the Notes should have been
subject to United States tax withholding. The Notes were redeemed in 1985 and
Finance was subsequently liquidated. On October 25, 1991, Northern Indiana
challenged the assessment in the United States Tax Court (Tax Court) and the
matter was tried in 1994. On November 6, 1995, the Tax Court ruled in favor
of Northern Indiana, finding that the interest paid on the Notes was not
subject to United States tax withholding. While it is uncertain whether the
IRS will appeal the Tax Court's decision, Northern Indiana's management and
general counsel believe the ruling of the Tax Court will prevail.
(4) RATE MATTERS:
TAKE-OR-PAY PIPELINE GAS COSTS. The FERC has allowed certain interstate
pipeline suppliers to pass on to their customers a portion of costs for
contracted gas not purchased (take-or-pay), contract reformation and
associated interest charges through direct billing to their customers,
including Northern Indiana.
Northern Indiana records take-or-pay costs as they are billed by the
respective pipeline, and in an order dated September 28, 1988, the Commission
allowed Northern Indiana to recover these additional gas costs on a volumetric
basis from all customers, including transport customers. Northern Indiana has
recovered approximately $187.8 million of take-or-pay costs and interest from
its customers through December 31, 1995. As of December 31, 1995, an
additional $3.6 million was scheduled to be billed to Northern Indiana and
recovered from customers over a period of one to four years.
FERC ORDER NO. 636. On April 8, 1992, the FERC issued Order No. 636
which required interstate pipelines to restructure their services. Under the
Order, existing pipeline sales services have been "unbundled" such that gas
supplies are being sold separately from interstate transportation services.
Northern Indiana's interstate pipeline suppliers have filed new tariffs with
the FERC to implement Order No. 636, and Northern Indiana has contracted for a
mix of transportation and storage services which will allow Northern Indiana
to meet the needs of its customers. Customers of the pipelines, such as
Northern Indiana, are expected to benefit from enhanced access to
competitively priced gas supplies, as well as from more flexible
transportation services. Pipelines are seeking to recover from their customers
certain transition costs associated with restructuring under the Order No. 636
regulation. Any such recovery is subject to established review procedures at
the FERC. Also, mandated changes in pipeline rate design could increase the
cost of firm transportation service on interstate pipelines. All interstate
pipelines are now operating under Order No. 636 regulation.
Northern Indiana's pipeline suppliers have made certain filings with the
FERC to begin collecting its respective transition costs. Northern Indiana
expects that the total transition costs from all suppliers will approximate
$137 million. However, the ultimate level of costs will depend on future
events, including the market price of natural gas. Approximately $86 million
of such costs have been recorded, a portion of which has been paid to the
pipeline suppliers, subject to refund. On November 2, 1994, the Commission
issued an order which approved the recovery of these FERC-allowed transition
costs on a volumetric basis from Northern Indiana's sales and transportation
customers (which is consistent with what the Commission authorized for the
recovery of take-or-pay pipeline gas costs). Certain industrial customers
appealed the November 2, 1994, order to the Indiana Court of Appeals. The
Court granted Northern Indiana's motion to dismiss the appeal for want of
subject matter jurisdiction. Subsequently the transportation customers filed a
Petition for Transfer with the Indiana Supreme Court seeking review of the
Indiana Court of Appeals' decision. On December 15, 1995, the Indiana Supreme
Court denied the Petition for Transfer which terminated the transportation
customers' appeal. Regulatory assets, in amounts corresponding to the costs
recorded, have been recorded to reflect the ultimate recovery of these costs.
(5) ENVIRONMENTAL MATTERS: Northern Indiana has an ongoing program to remain
aware of laws and regulations involved with hazardous waste and other
environmental matters. It is Northern Indiana's intent to continue to
evaluate its facilities and properties with respect to these rules and
identify any sites that would require corrective action. Northern Indiana has
recorded a reserve of $4.8 million to cover probable corrective actions as of
December 31, 1995. However, environmental regulations and remediation
techniques are subject to future change. Based upon management's
understanding of current laws and regulations, Northern Indiana believes that
any corrective actions required, after consideration of insurance coverages,
will not have a significant impact on the financial position or results of
operations of Northern Indiana.
Because of major investments made in modern environmental control
facilities and the use of low sulfur coal, all of Northern Indiana's electric
production facilities now comply with the sulfur dioxide limitations contained
in the acid deposition provisions of the Clean Air Act Amendments of 1990
(CAAA). Northern Indiana estimates that total costs of compliance with the
CAAA sulfur dioxide regulations will impact electric rates by less than 5% in
the future.
The CAAA contain provisions that could lead to limitations on emissions
of nitrogen oxides and hazardous air pollutants, which may require significant
capital expenditures for control of these emissions. Northern Indiana is
pursuing a nitrogen oxide control program to meet future requirements.
Northern Indiana cannot predict the costs of complying with CAAA requirements,
but believes that any such mandated costs would be recoverable through the
rate making process.
The Environmental Protection Agency (EPA) has notified Northern Indiana
that it is a "potentially responsible party" (PRP) under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) and may be
required to share in the cost of cleanup of several waste disposal sites
identified by the EPA. The sites are in various stages of investigation,
analysis and remediation. At each of the sites, Northern Indiana is one of
several PRPs, and it is expected that remedial costs, as provided under
CERCLA, will be shared among them. At some sites Northern Indiana and/or the
other named PRPs are presently working with the EPA to clean up the sites and
avoid the imposition of fines or added costs.
Northern Indiana has instituted a program to investigate former
manufactured gas plants where it is the current or former owner. Northern
Indiana has identified twenty-three of these sites and made visual
inspections of these sites. Northern Indiana has conducted initial samplings
at ten sites. Follow-up investigations have been conducted at five sites and
potential remedial measures are being evaluated. Northern Indiana will
continue its program to assess sites. During the follow-up investigation of
the former manufactured gas plant in Elkhart, Indiana, Northern Indiana noted
the presence of hydrocarbons in the Elkhart River. Northern Indiana reported
this finding to the Indiana Department of Environmental Management (IDEM) and
the EPA. Northern Indiana has placed the Elkhart site in the IDEM Voluntary
Remediation Program (VRP). The goal of placing the site in the VRP is to
obtain IDEM approval of the determination and subsequent implementation of
what remedial measures, if any, may be needed.
Northern Indiana was notified by IDEM of the release of a petroleum
substance into the St. Mary's River in Fort Wayne, Indiana, from the site of a
former manufactured gas plant formerly owned by Northern Indiana. In
cooperation with IDEM, Northern Indiana has taken steps to investigate and
contain the substance. Northern Indiana has remediated part of the Fort Wayne
site. The remainder of the site is being evaluated to determine what further
remedial measures, if any, may be needed.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured gas plant
sites at which both companies or their predecessors were former operators or
owners. One of these sites was the Lafayette site which Indiana Gas had
previously notified Northern Indiana is being investigated and remediated
pursuant to an administrative order with IDEM. Northern Indiana also notified
PSI Energy, Inc. that it was a former owner or operator of seven former
manufactured gas plants at which Northern Indiana had conducted or was
planning investigation or remediation activities.
Northern Indiana has met with various companies that provided insurance
coverage which Northern Indiana believes covers costs related to actions taken
at former manufactured gas plants. In September 1995, certain insurance
companies initiated a suit in Indiana state court against Northern Indiana to
deny coverage. Later in September 1995, Northern Indiana filed a more
comprehensive suit in Federal Court in Indiana against those insurers and
several other insurance companies, seeking coverage for costs associated with
several former manufactured gas plant sites. The state court action is stayed
pending resolution of the Northern Indiana suit in Federal Court.
The possibility that exposure to electric and magnetic fields emanating
from power lines, household appliances and other electric sources may result
in adverse health effects has been the subject of public, governmental and
media attention. A considerable amount of scientific research has been
conducted on this topic without definitive results. Research is continuing to
resolve scientific uncertainties.
(6) INCOME TAXES: Effective January 1, 1993, Northern Indiana adopted SFAS
No. 109, "Accounting for Income Taxes," which requires the use of the
liability method of accounting for income taxes. Under the liability method,
deferred income taxes are recognized, at currently enacted income tax rates,
to reflect the tax effect of temporary differences between the financial
statement and tax bases of assets and liabilities.
To implement SFAS No. 109, certain adjustments were made to deferred
income taxes. To the extent such income taxes are recoverable or payable
through future rates, regulatory assets and liabilities have been recorded in
the Consolidated Balance Sheet. These adjustments include the amounts
reflecting Northern Indiana's obligation to credit to ratepayers deferred
income taxes provided at rates higher than the current federal tax rate which
are currently being credited to ratepayers using the average rate assumption
method required by the Tax Reform Act of 1986 and the Commission. The
Consolidated Balance Sheet at December 31, 1995 and 1994 reflects a net
regulatory income tax liability of $5.8 million and $14.6 million,
respectively. The net regulatory income tax liability is derived from
regulatory assets primarily attributable to undepreciated AFUDC-equity and the
cumulative net amount of other income tax timing differences for which
deferred taxes had not been provided in the past, when regulators did not
recognize such taxes as costs in the rate making process, and regulatory
liabilities primarily attributable to deferred taxes provided at rates in
excess of the current statutory rate, as discussed above, and unamortized
deferred investment tax credits.
Northern Indiana joins in the filing of consolidated tax returns with
Industries and currently pays to Industries its separate return tax liability
as defined in the Tax Sharing Agreement between Industries and its
subsidiaries.
The components of the net deferred income tax liability at December 31,
1995 and 1994, are as follows:
1995 1994
=========== ===========
(Dollars in thousands)
Deferred tax liabilities -
Accelerated depreciation
and other property differences $ 700,137 $ 684,887
AFUDC-equity 40,083 42,447
Adjustment clauses 5,467 11,173
Take-or-pay gas costs 1,192 1,687
Other regulatory assets 28,912 22,062
Reacquisition premium on debt 20,237 20,401
Deferred tax assets -
Deferred investment tax credits (43,381) (46,201)
Removal costs (118,064) (105,671)
FERC Order No. 636 transition costs (4,400) (5,461)
Other postretirement/postemployment
benefits (31,633) (22,253)
Regulatory income tax liability (2,193) (5,547)
Other, net (15,179) (21,911)
----------- -----------
581,178 575,613
Less: Deferred income taxes related to
current assets and liabilities (6,631) (228)
----------- -----------
Deferred income taxes - noncurrent $ 587,809 $ 575,841
=========== ===========
Federal and state income taxes as set forth in the Consolidated
Statement of Income are comprised of the following:
1995 1994 1993
========= ========= =========
(Dollars in thousands)
Current income taxes -
Federal $ 102,047 $ 99,002 $ 87,723
State 15,210 15,139 12,878
--------- --------- ---------
117,257 114,141 100,601
--------- --------- ---------
Deferred income taxes, net -
Federal and state -
Accelerated depreciation and other
property differences 9,516 8,281 12,889
Removal costs (12,081) (12,093) (8,760)
Adjustment clauses 7,899 (18,793) (2,466)
FERC Order No. 636 transition costs
and cost recovery (12,875) 11,393 0
Take-or-pay gas costs (495) (1,664) (6,680)
Reacquisition premium on debt (1,279) 2,612 2,824
Other 6,068 (1,204) 3,882
--------- --------- ---------
(3,247) (11,468) 1,689
--------- --------- ---------
Deferred investment tax credits, net (7,436) (6,416) (7,364)
--------- --------- ---------
Total utility income taxes 106,574 96,257 94,926
Income tax applicable to non-operating
activities and income of subsidiaries (3,216) (10,291) (405)
--------- --------- ---------
Total income taxes $ 103,358 $ 85,966 $ 94,521
========= ========= =========
A reconciliation of total tax expense to an amount computed by applying
the statutory federal income tax rate to pretax income is as follows:
1995 1994 1993
========= ========= =========
(Dollars in thousands)
Net income $ 194,321 $ 179,903 $ 172,104
Add - Income taxes 103,358 85,966 94,521
--------- --------- ---------
Net Income before income taxes $ 297,679 $ 265,869 $ 266,625
========= ========= =========
Amount derived by multiplying pretax
income by statutory rate $ 104,188 $ 93,054 $ 93,319
Reconciling items multiplied by the
statutory rate:
Book depreciation over related tax
depreciation 4,018 4,044 3,893
Amortization of deferred investment tax
credits (7,436) (7,383) (7,364)
State income taxes, net of federal income
tax benefit 9,577 9,015 8,644
Fair market value of property donated in
excess of book value 0 (7,753) 0
Reversal of deferred taxes provided at
rates in excess of the current federal
income tax rate (5,665) (5,807) (5,080)
Other, net (1,324) 796 1,109
--------- --------- ---------
Total income taxes $ 103,358 $ 85,966 $ 94,521
========= ========= =========
(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, 1995 and 1994 are as
follows:
1995 1994
========= =========
(Dollars in thousands)
Vested benefit obligation $ 542,516 $ 444,096
Nonvested benefit 104,054 96,425
--------- ---------
Accumulated benefit obligation $ 646,570 $ 540,521
========= =========
Projected benefit obligation for service
rendered to date $ 749,204 $ 605,495
Plan assets at fair market value 698,698 565,507
--------- ---------
Projected benefit obligation in excess of plan assets 50,506 39,988
Unrecognized transition obligation at
December 31, being recognized over 17 years (43,907) (49,395)
Unrecognized prior service cost (25,656) (28,111)
Unrecognized gains 4,808 47,147
--------- ---------
Accrued (prepaid) pension costs $ (14,249) $ 9,629
========= =========
The accumulated benefit obligation is the present value of future
pension benefit payments and is based on the plan benefit formula without
considering expected future salary increases. The projected benefit
obligation considers estimated future salary increases. Discount rates of
7.25% and 8.75% and rates of increase in compensation levels of 5.5% were used
to determine the accumulated benefit obligation and projected benefit
obligation at December 31, 1995 and 1994, respectively. The increase in the
accumulated benefit obligations as of December 31, 1995, is mainly caused by
the decrease in the discount rate from 8.75% to 7.25%.
The following items are the components of provisions for pensions for
the years ended December 31, 1995, 1994 and 1993:
1995 1994 1993
========= ========= =========
(Dollars in thousands)
Service costs $ 11,865 $ 13,611 $ 12,672
Interest costs 51,834 47,453 45,312
Actual (return) loss on plan assets (133,793) 15,570 (80,457)
Amortization of transition obligation 5,488 5,488 5,488
Other net amortization and deferral 85,124 (61,601) 39,538
--------- --------- ---------
$ 20,518 $ 20,521 $ 22,553
========= ========= =========
Assumptions used in the valuation and determination of 1995, 1994 and
1993 pension expenses were as follows:
1995 1994 1993
====== ====== ======
Discount rate 8.75% 7.50% 7.75%
Rate of increase in compensation levels 5.50% 5.50% 5.50%
Expected long-term rate of return on assets 9.00% 8.25% 8.25%
Plan assets are invested primarily in common stocks, bonds and notes.
(8) POSTRETIREMENT BENEFITS. Northern Indiana provides certain health care
and life insurance benefits for retired employees. Substantially all of
Northern Indiana's employees may become eligible for those benefits if they
reach retirement age while working for Northern Indiana. Those and similar
benefits for active employees are provided through insurance plans whose
premiums are based on the benefits to active employees and retirees paid
during the year. Prior to January 1, 1993, Northern Indiana recognized the
cost of providing those benefits by expensing insurance premiums, which is
consistent with current rate making practices.
Effective January 1, 1993, Northern Indiana adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
which establishes accounting and reporting standards for such postretirement
benefits. This standard requires the accrual of the expected cost of such
benefits during the employee's years of service.
The following table sets forth the plans' accumulated postretirement
benefit obligation as of December 31, 1995 and December 31, 1994:
December 31, December 31,
1995 1994
============ ============
(Dollars in thousands)
Retirees $ 97,693 $ 94,913
Fully eligible active plan participants 21,760 18,796
Other active plan participants 133,205 103,559
------------ ------------
Accumulated postretirement benefit obligation 252,658 217,268
Unrecognized transition obligation (at
December 31, being recognized over 20 years) (192,917) (204,265)
Unrecognized actuarial gain 23,168 44,905
------------ ------------
Accrued liability for postretirement benefits $ 82,909 $ 57,908
============ ============
A discount rate of 7.25% and a pre-Medicare medical trend rate of 10%
declining to a long-term rate of 6% and a discount rate of 8.75% and a pre-
Medicare medical trend rate of 11% declining to a long-term rate of 7% were
used to determine the accumulated postretirement benefit obligation at
December 31, 1995 and 1994, respectively.
The transition obligation at January 1, 1993, for accumulated
postretirement benefits earned and not recognized is being amortized over
twenty years as allowed by SFAS No. 106.
Net periodic postretirement benefit costs for the years ended
December 31, 1995 and 1994, include the following components:
December 31, December 31,
1995 1994
============ ============
(Dollars in thousands)
Service costs $ 5,383 $ 7,621
Interest costs 18,606 19,570
Amortization of transition obligation over
20 years 11,348 11,348
Amortization of unrecognized actuarial (gain) (2,164) 0
------------ ------------
$ 33,173 $ 38,539
============ ============
The net periodic postretirement benefit costs for 1995 were determined
assuming an 8.75% discount rate, a 5% rate of compensation increase and a pre-
Medicare medical trend rate of 11% declining to a long-term rate of 7%. The
net periodic postretirement benefit costs for 1994 were determined assuming a
7.5% discount rate, a 5% rate of compensation increase and a pre-Medicare
medical trend rate of 12% declining to a long-term rate of 7%. The effect of
a 1% increase in the assumed health care cost trend rates for each future year
would increase the accumulated postretirement benefit obligation at
December 31, 1995, by approximately $40.6 million and increase the aggregate
of the service and interest cost components of plan costs by approximately
$4.4 million for the year ended December 31, 1995. Amounts disclosed above
could be changed significantly in the future by changes in health care costs,
work force demographics, interest rate or plan changes.
On December 30, 1992, the Commission authorized the accrual method of
accounting for postretirement benefits for rate making purposes and authorized
the deferral, as a regulatory asset to be recovered through future revenues,
of the net increase in cost until such time as the new accrual cost method may
be reflected in the rate making process. The Commission stated that a deferral
period of four years or less would be rebuttably presumed to be reasonable and
also indicated each utility would have to demonstrate its postretirement
benefit costs were prudent and reasonably incurred at the time such costs were
proposed to be recovered in the rate making process. Northern Indiana will
request the recovery of such costs within that period and, accordingly, is
deferring as a regulatory asset the difference between the amount that would
have been charged to expense under pay-as-you-go accounting and the amount
accrued in accordance with the new standard. This conclusion could change as
competitive factors influence pricing decisions.
(9) POSTEMPLOYMENT BENEFITS. Effective January 1, 1994, Northern Indiana
adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits,"
which requires Northern Indiana to accrue the estimated cost of benefits
provided to former or inactive employees after employment but before
retirement. Adoption of SFAS No. 112 did not have a material impact on
Northern Indiana's financial position or results of operations.
(10) AUTHORIZED CLASSES OF CUMULATIVE PREFERRED AND PREFERENCE STOCKS OF
NORTHERN INDIANA.
2,400,000 shares - Cumulative Preferred - $100 par value
3,000,000 shares - Cumulative Preferred - no par value
2,000,000 shares - Cumulative Preference - $50 par value
(none outstanding)
3,000,000 shares - Cumulative Preference - no par value
(none issued)
Note 11 sets forth the preferred stocks which are redeemable solely at
the option of Northern Indiana, and Note 12 sets forth the preferred stocks
which are subject to mandatory redemption requirements, or whose redemption is
outside the control of Northern Indiana.
The Preferred shareholders of Northern Indiana have no voting rights
except in the event of default on the payment of four consecutive quarterly
dividends, or as required by Indiana law to authorize additional preferred
shares, or by the Articles of Incorporation in the event of certain merger
transactions.
(11) PREFERRED STOCKS, REDEEMABLE SOLELY AT OPTION OF NORTHERN INDIANA (SEE
NOTE 10).
The redemption prices at December 31, 1995, for the cumulative preferred
stock of Northern Indiana, which is redeemable solely at the option of
Northern Indiana, in whole or in part, at any time upon 30 days' notice, are
as follows:
Redemption
Price
Series Per Share
============================================= ==========
Cumulative preferred stock - $100 par value -
4-1/4% $ 101.20
4-1/2% $ 100.00
4.22% $ 101.60
4.88% $ 102.00
7.44% $ 101.00
7.50% $ 101.00
Cumulative preferred stock - no par value -
Adjustable rate (6.00% at December 31, 1995),
Series A (stated value $50 per share) $ 50.00
(12) REDEEMABLE PREFERRED STOCKS (SEE NOTE 10).
The redemption prices at December 31, 1995, as well as sinking fund
provisions for the cumulative preferred stock of Northern Indiana subject to
mandatory redemption requirements, or whose redemption is outside the control
of Northern Indiana, are as follows:
Sinking Fund Or Mandatory
Series Redemption Price Per Share Redemption Provisions
====== ============================ ==============================
Cumulative preferred stock - $100 par value -
8.85% $101.85, reduced periodically 12,500 shares on or before
April 1.
8.35% $104.18, reduced periodically 3,000 shares on or before
July 1; increasing to 6,000
shares beginning in 2004;
noncumulative option to
double amount each year.
7-3/4% $104.58, reduced periodically 2,777 shares on or before
December 1; noncumulative
option to double amount
each year.
Cumulative preferred stock - no par value -
6.50% $100.00 on October 14, 2002 430,000 shares on
October 14, 2002.
Sinking fund requirements with respect to redeemable preferred stocks
outstanding at December 31, 1995, for each of the four years subsequent to
December 31, 1996, are as follows:
Year Ending December 31,
========================
1997 $ 1,827,700
1998 $ 1,827,700
1999 $ 1,827,700
2000 $ 1,827,700
(13) COMMON SHARE DIVIDEND. Northern Indiana's Indenture provides that it
will not declare or pay any dividends on any capital stock (other than
preferred or preference stock) except out of earned surplus or net profits of
Northern Indiana. At December 31, 1995, Northern Indiana had approximately
$144.8 million of retained earnings (earned surplus) available for the payment
of dividends. Future dividends will depend upon adequate retained earnings,
adequate future earnings and the absence of adverse developments.
(14) COMMON SHARES. Effective with the exchange of common shares on March 3,
1988, Northern Indiana's common shares are wholly-owned by Industries.
(15) LONG-TERM DEBT. The sinking fund requirements of long-term debt
outstanding at December 31, 1995 (including the maturity of first mortgage
bonds: Series O, 6-3/8%, due September 1, 1997; Series P, 6-7/8%, due
October 1, 1998; and the medium-term notes due from April 6, 1998, to June 1,
2000), for each of the four years subsequent to December 31, 1996, are as
follows:
Year Ending December 31,
========================
1997 $ 67,247,000
1998 $ 51,009,000
1999 $ 2,000,000
2000 $158,000,000
Unamortized debt expense, premium and discount on long-term debt,
applicable to outstanding bonds are being amortized over the lives of such
bonds. Reacquisition premiums are being deferred and amortized.
Northern Indiana's Indenture, dated August 1, 1939, as amended and
supplemented, securing the first mortgage bonds issued by Northern Indiana,
constitutes a direct first mortgage lien upon substantially all property and
franchises, other than expressly excepted property, owned by Northern Indiana.
On March 4, 1994, the Commission authorized Northern Indiana to issue up
to $289,275,000 of its Medium-Term Notes, Series D, due from 1 year to 30
years, for purposes of refinancing certain first mortgage bonds and paying
short-term debt used to pay at maturity medium-term notes due in January and
April, 1994. On May 23, 1994, Northern Indiana exercised its option to redeem
all the outstanding First Mortgage Bonds, Series S, Y and AA, aggregating
$125.5 million, through the use of working capital and the proceeds of short-
term debt. During 1994, $120.0 million of the Medium-Term Notes, Series D,
were issued to complete the permanent refinancing of those first mortgage
bonds. On June 12, 1995, the remaining $169,275,000 of Medium-Term Notes,
Series D, were issued, and part of the proceeds were used to redeem all of the
outstanding First Mortgage Bonds, Series U and Z, aggregating $94.8 million on
July 3, 1995.
On August 25, 1994, Jasper County, Indiana issued Pollution Control
Refunding Revenue Bonds, Series 1994 (Northern Indiana Public Service Company
Project) (the Series 1994 Bonds), including $10 million of Series 1994A Bonds,
due August 1, 2010; $18 million of Series 1994B Bonds, due June 1, 2013; and
$41 million of Series 1994C Bonds, due April 1, 2019. The proceeds of these
issuances were loaned to Northern Indiana under similar terms. The initial
interest rate on Series 1994 Bonds was 3.10%, which resets daily. The
proceeds of the Series 1994A and Series 1994C were used to retire on
October 15, 1994, $10 million of Series MM First Mortgage Bonds, 7-1/2%, due
October 15, 2004, and $41 million of Series LL First Mortgage Bonds, 7-1/2%,
due October 15, 2014. The proceeds of the Series 1994B Bonds were used to
retire the $18 million Series 1978 Note, 6.70%, due November 1, 2008, on
August 25, 1994. The Series 1994 Bonds are secured by Letters of Credit from
Union Bank of Switzerland.
(16) SHORT-TERM BORROWINGS. Northern Indiana has a $250 million revolving
Credit Agreement with several banks which terminates August 19, 1998, unless
extended by its terms. As of December 31, 1995, there were no borrowings
outstanding under this agreement. In addition, Northern Indiana has $14.2
million in lines of credit which run to May 31, 1996. The credit pricing of
each of the lines varies from either the lending banks' commercial prime or
market rates. Northern Indiana has agreed to compensate the participating
banks with arrangements that vary from no commitment fee to a combination of
fees which are mutually satisfactory to both parties. As of December 31,
1995, there were no borrowings under these lines of credit. The Credit
Agreement and lines of credit are also available to support the issuance of
commercial paper.
Northern Indiana also has $268.5 million of money market lines of
credit. As of December 31, 1995, $118.8 million of borrowings were
outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
December 31, 1995, there were no borrowings outstanding under this facility.
Northern Indiana uses commercial paper to fund short-term working
capital requirements. As of December 31, 1995, Northern Indiana had $44.8
million in commercial paper outstanding, having a weighted average interest
rate of 6.01%.
(17) OPERATING LEASES. On April 1, 1990, Northern Indiana entered into a 20-
year agreement for the rental of office facilities from NIPSCO Development
Company, Inc., a subsidiary of Industries, at a current annual rental payment
of approximately $3.2 million.
The following is a schedule, by years, of future minimum rental
payments, excluding those to associated companies, required under operating
leases that have initial or remaining noncancelable lease terms in excess of
one year as of December 31, 1995.
Year Ending December 31, (Dollars in thousands)
======================== ======================
1996 $ 7,473
1997 5,146
1998 3,880
1999 3,092
2000 3,055
Later years 39,253
_________
Total minimum payments required $ 61,899
=========
The consolidated financial statements include rental expense for all
operating leases as follows:
Year Ending December 31, (Dollars in thousands)
======================== ======================
1995 $ 10,824
1994 $ 10,210
1993 $ 9,573
(18) COMMITMENTS. Northern Indiana estimates that approximately $764 million
will be expended for construction purposes for the period from January 1,
1996, to December 31, 2000. Substantial commitments have been made by
Northern Indiana in connection with this program.
Northern Indiana has entered into a service agreement with Pure Air, a
general partnership between Air Products and Chemicals, Inc. and Mitsubishi
Heavy Industries America, Inc., under which Pure Air provides scrubber
services to reduce sulfur dioxide emissions for Units 7 and 8 at Bailly
Generating Station. Services under this contract commenced on June 15, 1992,
with annual charges of approximately $20 million. The agreement provides
that, assuming various performance standards are met by Pure Air, a
termination payment would be due if Northern Indiana terminates the agreement
prior to the end of the 20-year contract period.
Northern Indiana has entered into an agreement with Integrated Systems
Solutions Corporation (ISSC), a wholly-owned subsidiary of IBM, to out source
its information technology function to ISSC. ISSC will perform all data
center, application development and maintenance and desktop management.
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS. The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Cash and cash equivalents: The carrying amount approximates fair value
because of the short maturity of those instruments.
Investments: The fair value of some investments is estimated based on
market prices for those or similar investments.
Long-term debt/Preferred stock: The fair value of long-term debt and
preferred stock is estimated based on the quoted market prices for the same or
similar issues or on the rates offered to Northern Indiana for securities of
the same remaining maturities. Certain premium costs associated with the
early settlement of long-term debt are not taken into consideration in
determining fair value.
The carrying values and estimated fair values of Northern Indiana's
financial instruments are as follows:
December 31, 1995 December 31, 1994
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
========== ========== ========== ==========
(Dollars in thousands)
Cash and cash
equivalents $ 11,478 $ 11,478 $ 20,994 $ 20,994
Investments $ 256 $ 256 $ 256 $ 256
Long-term debt
(including current
portion) $1,139,534 $1,151,471 $1,088,537 $ 998,393
Preferred stock $ 146,804 $ 128,518 $ 154,274 $ 120,891
Northern Indiana is subject to regulation and gain or losses may be
included in rates over a prescribed amortization period, if in fact settled at
amounts approximating those above.
(20) CUSTOMER CONCENTRATIONS. Northern Indiana is a public utility operating
company supplying natural gas and electrical energy in the northern third of
Indiana. Although Northern Indiana has a diversified base of residential and
commercial customers, a substantial portion of its electric and gas industrial
deliveries are dependent upon the basic steel industry. The following table
shows the basic steel industry percentage of gas revenue (including
transportation services) and electric revenue for 1995, 1994 and 1993.
Basic Steel Industry 1995 1994 1993
==================== ====== ====== ======
Gas revenue percent 6 % 3 % 2 %
Electric revenue percent 22 % 26 % 24 %
(21) QUARTERLY FINANCIAL DATA.
The following data summarize certain operating results for each of the
quarters of 1995 and 1994:
1995 Quarters Ended March 31 June 30 Sept. 30 Dec. 31
========== ========== ========== ==========
(Dollars in thousands)
Operating revenues $ 500,180 $ 350,052 $ 363,142 $ 450,904
Operating expenses and taxes 416,458 297,200 299,313 371,834
---------- ---------- ---------- ----------
Operating income 83,722 52,852 63,829 79,070
Other income (deductions) (778) (800) (956) (1,085)
Interest charges 19,414 19,932 20,232 21,955
---------- ---------- ---------- ----------
Net income 63,530 32,120 42,641 56,030
Dividend requirements on
preferred stock 2,325 2,265 2,231 2,225
---------- ---------- ---------- ----------
Balance available for
common shares $ 61,205 $ 29,855 $ 40,410 $ 53,805
========== ========== ========== ==========
1994 Quarters Ended March 31 June 30 Sept. 30 Dec. 31
========== ========== ========== ==========
(Dollars in thousands)
Operating revenues $ 538,057 $ 335,895 $ 327,235 $ 412,808
Operating expenses and taxes 448,280 288,420 274,570 346,664
---------- ---------- ---------- ----------
Operating income 89,777 47,475 52,665 66,144
Other income (deductions) 2 (603) (495) 4,822
Interest charges 21,385 19,723 19,215 19,561
---------- ---------- ---------- ----------
Net income 68,394 27,149 32,955 51,405
Dividend requirements on
preferred stock 2,569 2,527 2,520 2,297
---------- ---------- ---------- ----------
Balance available for
common shares $ 65,825 $ 24,622 $ 30,435 $ 49,108
========== ========== ========== ==========
(22) SEGMENTS OF BUSINESS.
Northern Indiana is a public utility operating engaged in distributing natural
gas and electrical energy. The reportable items for gas and electric segments
for the years 1995, 1994 and 1993 are as follows:
1995 1994 1993
========== ========== ==========
(Dollars in thousands)
Operating information -
Gas operations:
Operating revenues $ 633,355 $ 619,503 $ 655,980
Operating expenses, excluding
provision for utility income taxes 555,072 557,855 583,037
---------- ---------- ----------
Operating income before utility
income taxes 78,283 61,648 72,943
Allowance for funds used during
construction (AFUDC) and carrying
charges (CC) 1,248 1,727 50
---------- ---------- ----------
Operating income before utility
income taxes and including AFUDC
and CC 79,531 63,375 72,993
---------- ---------- ----------
Electric operations:
Operating revenues 1,030,923 994,492 963,643
Operating expenses, excluding
provision for utility income taxes 723,159 703,822 684,255
---------- ---------- ----------
Operating income before utility
income taxes 307,764 290,670 279,388
Allowance for funds used during
construction AFUDC and CC 2,072 2,307 573
---------- ---------- ----------
Operating income before utility
income taxes and including AFUDC
and CC 309,836 292,977 279,961
---------- ---------- ----------
Total 389,367 356,352 352,954
Other income (deductions) (3,619) 3,726 (73)
Less-interest charges 84,853 83,918 85,851
Less-provision for utility income taxes 106,574 96,257 94,926
---------- ---------- ----------
Net income per Consolidated
Statement of Income 194,321 179,903 172,104
Dividend requirements on
preferred stocks 9,046 9,913 10,341
---------- ---------- ----------
Balance available for common shares $ 185,275 $ 169,990 $ 161,763
========== ========== ==========
Other information-
Depreciation and amortization expense:
Electric $ 139,432 $ 135,203 $ 131,993
Gas 58,827 56,223 52,748
---------- ---------- ----------
Total $ 198,259 $ 191,426 $ 184,741
========== ========== ==========
Construction expenditures:
Electric $ 132,273 $ 145,095 $ 125,449
Gas 53,287 51,759 50,777
---------- ---------- ----------
Total $ 185,560 $ 196,854 $ 176,226
========== ========== ==========
Investment information-
Identifiable assets (a):
Electric $2,586,121 $2,594,976 $2,602,826
Gas 768,736 804,856 782,860
---------- ---------- ----------
Total $3,354,857 $3,399,832 $3,385,686
Other corporate assets 251,342 224,479 227,549
---------- ---------- ----------
Total assets $3,606,199 $3,624,311 $3,613,235
========== ========== ==========
(a) Utility plant less accumulated provision for depreciation and
amortization, material and supplies, electric production fuel, natural gas in
storage, fuel and gas cost adjustment clauses, unamortized R. M. Schahfer Unit
17 and 18 carrying charges and deferred depreciation, Bailly scrubber carrying
charges and deferred depreciation and FERC Order No. 636 transition costs.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
Date of assuming
Name Age Office present position
===================== ==== ========================= =================
Gary L. Neale 56 Chairman, President and March 1, 1993
Chief Executive Officer
and Director
Stephen P. Adik 52 Executive Vice President January 1, 1996
and Chief Financial
Officer Finance and
Administration
Patrick J. Mulchay 54 Executive Vice President January 1, 1994
and Chief Operating
Officer, Electric
Jeffrey W. Yundt 50 Executive Vice President January 1, 1994
and Chief Operating
Officer, Gas
John W. Dunn 51 Group Vice President, January 1, 1996
Corporate Services and
Chief Technology Officer
Barbara D. Haas 55 Group Vice President, January 1, 1996
Marketing and Community
Relations
Joseph L. Turner, Jr. 59 Group Vice President, January 1, 1996
Major Accounts
James K. Abcouwer 42 Vice President, Gas Supply June 27, 1994
Jerry L. Godwin 53 Vice President, Electric October 31, 1994
Supply
Owen C. Johnson, Jr. 49 Vice President, Human January 1, 1994
Resources
David A. Kelly 57 Vice President, Real January 1, 1994
Estate and Taxes
Mark T. Maassel 41 Vice President, Electric January 1, 1994
Service and Sales
Robert W. Schacht 45 Vice President, Gas January 1, 1994
Service and Sales
Jerry M. Springer 63 Vice President, Finance January 1, 1994
and Accounting
Francis P. Girot, Jr. 51 Treasurer March 1, 1990
Arthur A. Paquin 48 Controller April 1, 1986
Nina M. Rausch 52 Secretary July 1, 1992
Gail W. Harowski 41 Auditor January 1, 1996
Richard M. Schumacher 47 Assistant Secretary April 13, 1994
Throughout the past five years, each of the executive officers has been
continuously active in the business of Northern Indiana except as follows:
Prior to May 18, 1992, Barbara D. Haas was Senior Vice President, Director of
Marketing of Gainer Bank; prior to June 27, 1994, James K. Abcouwer was Vice
President of Natural Gas of GSC - Energy Corporation; prior to October 31,
1994, Jerry L. Godwin was Senior Vice President, Wholesale Marketing and Power
Supply of Public Service Company of New Mexico; prior to December 31, 1991,
David A. Kelly was Partner, Tax Division of Arthur Andersen LLP, and prior to
January 1, 1993, Richard M. Schumacher was a partner of Eichhorn, Eichhorn, &
Link.
The following chart gives information about incumbent directors of
Northern Indiana. All of Northern Indiana's directors are also directors of
Industries. Upon recommendation of the Nominating and Compensation Committee,
the Board of Directors has nominated for reelection as directors Ian M.
Rolland, Edmund A. Schroer and John W. Thompson, each for a term of three
years to be voted upon at the annual meeting of common shareholders of
Industries to be held April 10, 1996.
Has Been
Name, Age and Principal Occupations for Past Director
Five Years and Present Directorships Held Since
============================================ ==========
DIRECTORS WHOSE TERMS EXPIRE IN 1996
Ian M. Rolland, 62-Chairman and Chief Executive Officer 1978
of Lincoln National Corporation, Fort Wayne, Indiana,
an insurance and financial services firm, since
January 1, 1992, previously President and Chief
Executive Officer of the Lincoln National Life
Insurance Company. Mr. Rolland is also a director of
Lincoln National Corporation, Tokheim Corporation,
Norwest Corporation and Norwest Bank Indiana, N.A.
Edmund A. Schroer, 68-Retired March 1, 1993 as 1977
Chairman, President and Chief Executive Officer
of Industries and Chairman and Chief Executive
Officer of Northern Indiana.
John W. Thompson, 46-General Manager - Personal
Software Products,IBM Corporation, Somers, 1993
New York. IBM is a worldwide corporation, whose
offerings include services, software systems,
products and technologies.
DIRECTORS WHOSE TERMS EXPIRE IN 1997
Arthur J. Decio, 65-Chairman of the Board and Chief 1991
Executive Officer and Director of Skyline Corporation,
Elkhart, Indiana, a manufacturer of manufactured
housing and recreational vehicles. Mr. Decio is also a
director of Quality Dining, Inc.
Gary L. Neale, 56-Chairman, President and Chief Executive 1991
Officer of Industries and of Northern Indiana since
March 1, 1993; prior thereto, Executive Vice President
of Industries, and President and Chief Operating Officer
of Northern Indiana. Mr. Neale is also a director of
Modine Manufacturing Company.
Robert J. Welsh, 60-President and Chief Executive 1988
Officer of Welsh, Inc., Merrillville, Indiana, a
marketer of petroleum products through convenience
stores and travel centers. Mr. Welsh is also a director
of NBD Indiana, Inc.
DIRECTORS WHOSE TERMS EXPIRE IN 1998
Steven C. Beering, 63-President of Purdue University, 1986
West Lafayette, Indiana. Dr. Beering is also a
director of Arvin Industries, Inc., American United
Life Insurance Company and Eli Lilly and Company.
Ernestine M. Raclin, 68-Chairman of the Board, 1983
1st Source Corporation, a bank holding company,
and 1st Source Bank, South Bend, Indiana.
Denis E. Ribordy, 66-Chairman and Chief Executive 1981
Officer of the Chicago Motor Club, Chicago, Illinois;
retired President of Ribordy Drugs, Inc., Merrillville,
Indiana, a retail drugstore chain. Mr. Ribordy is
also a director of Mercantile National Bank of Indiana.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY. The following table summarizes all annual and long-term
compensation for services to Industries and its subsidiaries, including
Northern Indiana, for the years 1995, 1994 and 1993 awarded to, earned by or
paid to the Chief Executive Officer of Industries during 1995 and the four
other most highly compensated officers of Industries (named officer).
SUMMARY COMPENSATION TABLE
Annual Compensation (1)
-----------------------------------
Other
annual
compen-
Salary Bonus sation
Name and principal position Year ($) ($)(2) ($)(3)
=========================== ==== ======== ========= ========
Gary L. Neale, Chairman, 1995 $460,000 $286,120 $ 2,746
President and Chief 1994 460,000 230,000 1,903
Executive Officer (6) 1993 400,000 206,000 1,475
Stephen P. Adik, Executive Vice 1995 205,000 107,010 2,400
President, Chief Financial 1994 205,000 82,000 1,118
Officer and Treasurer 1993 185,000 87,875 476
Patrick J. Mulchay, Executive 1995 175,000 91,350 756
Vice President and Chief 1994 175,000 70,000 852
Operating Officer - Electric 1993 140,000 66,500 1,057
Jeffrey W. Yundt, Executive 1995 175,000 91,350 1,217
Vice President and Chief 1994 175,000 70,000 1,174
Operating Officer - Gas 1993 157,000 74,575 1,028
John W. Dunn, Group Vice 1995 165,000 68,904 450
President and Chief 1994 165,000 66,000 811
Technology Officer 1993 157,000 74,575 834
Long Term Compensation
-----------------------
Awards Payouts
--------------------- ---------
Secur- Long-Term
Re- ities Stock In- All
stricted Under- centive other
stock lying Plan compen-
awards Options/ Payouts sation
Name and principal position Year ($) SARs(#) ($)(4) ($)(5)
=========================== ==== ======== ======== ======== =======
Gary L. Neale, Chairman, 1995 0 20,000 $527,812 $10,168
President and Chief 1994 0 25,000 0 11,190
Executive Officer (6) 1993 0 25,000 0 10,479
Stephen P. Adik, Executive Vice 1995 0 10,000 263,906 1,992
President, Chief Financial 1994 0 8,000 0 1,927
Officer and Treasurer 1993 0 8,000 32,563 2,877
Patrick J. Mulchay, Executive 1995 0 10,000 87,968 3,344
Vice President and Chief 1994 0 8,000 0 3,078
Operating Officer - Electric 1993 0 8,000 0 4,332
Jeffrey W. Yundt, Executive 1995 0 10,000 263,906 800
Vice President and Chief 1994 0 8,000 0 739
Operating Officer - Gas 1993 0 8,000 32,563 1,134
John W. Dunn, Group Vice 1995 0 5,000 263,906 2,506
President and Chief 1994 0 6,500 0 2,275
Technology Officer 1993 0 8,000 32,563 951
(1) Compensation deferred at the election of Named Officer is reported
in the category and year in which such compensation was earned.
(2) All bonuses are paid pursuant to the Senior Management Incentive Plan
(Bonus Plan). The Bonus Plan is designed to supplement a conservative
base salary with incentive bonus payments if targeted financial
performance is attained. The 1995 target aggregate payout for the
Bonus Plan for the Named Officers was $619,500, which was slightly
less than the actual aggregate payout for the Named Officers.
(3) In accordance with applicable Securities and Exchange Commission
rules, the amounts shown for each of the Named Officers do not
include perquisites and other personal benefits, as the aggregate
amount of such benefits is less than the lesser of $50,000 and
10% of the total salary and bonus of such Named Officer.
(4) The payouts shown are based on the value, at date of vesting, of
restricted shares awarded under Industries' 1988 Long-Term
Incentive Plan (Incentive Plan) which vested during the years shown.
Vesting was based on meeting certain performance requirements. Total
restricted shares held (assuming 100% vesting) and aggregate market
value at December 29, 1995 (based on the average of the high and low
prices for that date as reported in "The Wall Street Journal") for
the Named Officers from awards in 1991 and 1995 were as follows:
Mr. Neale, 60,000 shares valued at $2,295,000; Messrs. Adik, Mulchay
and Yundt, 27,500 shares each valued at $1,051,875; and Mr. Dunn,
19,500 shares valued at $745,875. Dividends on the restricted shares
are paid to the Named Officers.
(5) The Chairman, President, and Chief Executive Officer, the
Executive Vice Presidents and certain Vice Presidents of Industries
and Northern Indiana have available to them a supplemental life
insurance plan which provides split-dollar coverage of up to 3.5
times base compensation as of commencement of the plan in 1991 and
could provide life insurance coverage after retirement if there is
adequate cash value in the respective policy. "All other compensation"
represents Industries contributions to the 401(k) Plan and the dollar
value of the benefit to the Named Officers of the remainder of the
premiums paid by Industries during 1995 on behalf of the Named
Officers under the supplemental life insurance plan, as follows:
Mr. Neale-$9,195 premium value and $973 term insurance cost;
Mr. Adik-$940 401(k) Plan, $647 premium value and $405 term insurance
cost; Mr. Mulchay, $349 401(k) Plan, $2,634 premium value and
$361 term insurance cost; Mr. Yundt, $474 premium value and $326
term insurance cost and Mr. Dunn-$193 401(k) Plan, $1,954 premium
value and $359 term insurance cost.
(6) Prior to March 1, 1993, Mr. Neale served as Executive Vice President
of Industries and President and Chief Operating Officer of Northern
Indiana.
OPTION GRANTS IN 1995. The following table sets forth grants of options
to purchase Common Shares made during 1995 to the Named Officers. No stock
appreciation rights were awarded during 1995.
OPTION/SAR/GRANTS IN LAST FISCAL YEAR
Individual Grants
Number
of
Secu- Percent of
rities Total
Under- Options/
lying SARs Grant
Options/ granted to Exercise Date
SARs Employees or Base Present
Granted in Fiscal Price Expiration Value
Name (#)(1) Year (2) ($/Sh)(3) Date ($) (4)
=================== ======== ========== ========= ========== ========
Gary L. Neale 20,000 7.1% $ 32.44 08/22/05 $ 74,200
Stephen P. Adik 10,000 3.5% 32.44 08/22/05 37,100
Patrick J. Mulchay 10,000 3.5% 32.44 08/22/05 37,100
Jeffrey W. Yundt 10,000 3.5% 32.44 08/22/05 37,100
John W. Dunn 5,000 1.8% 32.44 08/22/05 18,550
(1) All options granted in 1995 are fully exercisable commencing one year
from the date of grant. Vesting may be accelerated as a result of
certain events relating to a change in control of Industries. The
exercise price and tax withholding obligation related to exercise may
be paid by delivery of already owned Common Shares or by reducing
the number of Common Shares received on exercise, subject to certain
conditions.
(2) Based on an aggregate of 282,450 options granted to all employees in
1995.
(3) All options were granted at the average of high and low prices as
reported in "The Wall Street Journal" on the date of grant.
(4) Grant date present value is determined using the Black-Scholes option
pricing model. The assumptions used in the Black-Scholes option pricing
model were as follows: volatility: 13% (calculated using daily Common
Shares prices for the twelve-month period preceding the date of grant);
risk-free rate of return-6.49% (the rate for a ten-year U.S. treasury);
dividend yield-$1.50; option term-ten years; vesting-100% one year
after date of grant; and turnover-9% (to reflect the probability
of forfeiture due to termination of employment prior to vesting) and
18% (to reflect the probability of a shortened option term due to
termination of employment prior to the option expiration date). No
assumptions relating to non-transferability or risk of forfeiture were
made. Actual gains, if any, on option exercises and Common Shares are
dependent on the future performance of the Common Shares and overall
market condition. There can be no assurance that the amounts
reflected in this table will be achieved.
OPTION EXERCISE IN 1995. The following table sets forth certain
information concerning the exercise of options or stock appreciation rights
("SARs") during 1995 by each of the Named Officers and the number and value
of unexercised options and SARs at December 31, 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
Number of Securities
Shares Underlying Unexercised
Acquired Options/SARs at Fiscal
on Value Year-End (#) (1)
Exercise Realized -----------------------------
Name (#) ($) Exercisable Unexercisable
================== ======== ======== =========== =============
Gary L. Neale 0 $ 0 100,000 20,000
Stephen P. Adik 0 0 51,600 10,000
Patrick J. Mulchay 2,000 43,000 37,200 10,000
Jeffrey W. Yundt 4,300 92,987 46,000 10,000
John W. Dunn 2,500 44,375 36,500 5,000
Value of Unexercised
In-the-money Options/SARs
at Fiscal Year-End($) (2)
-------------------------------
Name Exercisable Unexercisable
================ ============= ===============
Gary L. Neale $1,242,812 $ 116,250
Stephen P. Adik 796,700 58,125
Patrick J. Mulchay 456,875 58,125
Jeffrey W. Yundt 643,750 58,125
John W. Dunn 460,875 29,052
(1) Includes some SARs granted in tandem with options.
(2) Represents the difference between the option exercise price and
$38.25, the average of high and low prices of Industries'
Common Shares on December 29, 1995, as reported in "The Wall Street
Journal."
LONG-TERM INCENTIVE PLAN AWARDS IN 1995. The following table sets forth
restricted shares awarded pursuant to the Incentive Plan during 1995 to each
of the Named Officers.
LONG-TERM STOCK INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR
Number of Performance Estimated Future Payouts
Shares or Other Under Non-Stock
Units Period Price-Based Plans
or Other Until ----------------------------
Rights Maturation Threshold Target Maximum
Name (#) or Payout (#) (#) (#)
================== ========== =========== ========= ====== =======
Gary L. Neale 45,000 5 years 0 45,000 90,000
Stephen P. Adik 20,000 5 years 0 20,000 40,000
Patrick J. Mulchay 20,000 5 years 0 20,000 40,000
Jeffrey W. Yundt 20,000 5 years 0 20,000 40,000
John W. Dunn 12,000 5 years 0 12,000 24,000
The restrictions on shares awarded during 1995 lapse five years from the
date of grant. The vesting of the restricted shares is variable from 0% to
200% of the number awarded, based upon a combination of meeting target
earnings per share goals and having a favorable stock price-to-earnings ratio
relative to other comparable energy companies over the five-year period.
There is a two-year holding period of the shares after the restrictions lapse.
PENSION PLAN AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The following
table shows estimated annual benefits, giving effect to Industries'
Supplemental Executive Retirement Plan (as described below), payable upon
retirement to persons in the specified remuneration and years-of-service
classifications.
PENSION PLAN TABLE
Years of service
-----------------------------------------------------
Remuneration 15 20 25 30 35
============ ========= ========= ========= ========= =========
$ 200,000 $ 79,500 $ 106,000 $ 111,000 $ 116,000 $ 116,000
250,000 102,000 136,000 142,250 148,500 148,500
300,000 124,500 166,000 173,500 181,000 181,000
350,000 147,000 196,000 204,750 213,500 213,500
400,000 169,500 226,000 236,000 246,000 246,000
450,000 192,000 256,000 267,250 278,500 278,500
500,000 214,500 286,000 298,500 311,000 311,000
550,000 237,000 316,000 329,750 343,500 343,500
600,000 259,500 346,000 361,000 376,000 376,000
650,000 282,000 376,000 392,250 408,500 408,500
700,000 304,500 406,000 423,500 441,000 441,000
750,000 327,000 436,000 454,750 473,500 473,500
800,000 349,500 466,000 486,000 506,000 506,000
850,000 372,000 496,000 517,250 538,500 538,500
900,000 394,500 526,000 548,500 571,000 571,000
The credited years of service for the officers shown in the Summary
Compensation table, pursuant to the Supplemental Plan, are as follows: Gary L.
Neale - 21 years; Stephen P. Adik - 17 years; Patrick J. Mulchay - 33 years;
Jeffrey W. Yundt - 16 years; and John W. Dunn - 24 years.
Upon their retirement, regular employees and officers of Industries and
its subsidiaries which adopt the plan (including directors who are also full-
time officers) will be entitled to a monthly pension in accordance with the
provisions of Industries' pension plan, effective as of January 1, 1945. The
directors who are not and have not been officers of Industries are not
included in the pension plan. The pensions are payable out of a trust fund
established under the pension plan with The Northern Trust Company, trustee.
The trust fund consists of contributions made by Industries and the earnings
of the fund. Over a period of years the contributions are intended to result
in over-all actuarial solvency of the trust fund. The pension plan of
Industries has been qualified as non-discriminatory under Sections 401 and 404
of the Internal Revenue Code of 1986 (the "Code").
Pension benefits are determined separately for each participant. The
formula for a monthly payment for retirement at age 65 is 1.7% of average
monthly compensation multiplied by years of service (to a maximum of 30 years)
plus 0.6% of average monthly compensation multiplied by years of service over
30. Average monthly compensation is the average for the 60 consecutive
highest paid months in the employee's last 120 months of service. Covered
compensation is defined as wages reported as W-2 earnings plus any salary
reduction contributions made under the 401(k) Plan and an amount equivalent
to base pay for certain non-compensated periods of authorized leave of
absence, minus any amounts paid for unused vacations accrued.
Industries also has a Supplemental Executive Retirement Plan for
officers. Participants in the Plan are selected by the Board of Directors.
Benefits from the Plan are to be paid from the general assets of Industries.
The Supplemental Plan provides the larger of (i) 60% of five-year
average pay less Primary Social Security Benefits (prorated for less than 20
years of service) and an additional 0.5% of 5-year average pay less Primary
Social Security Benefits per year for participants with between 20 and 30
years of service, or (ii) the benefit formula under the Industries' Pension
Plan. In either case, the benefit is reduced by the actual pension payable
from Industries' Pension Plan. In addition, the Supplemental Plan provides
certain disability and pre-retirement death benefits for the spouse of a
participant.
CHANGE IN CONTROL AND TERMINATION AGREEMENTS. The Board of Directors of
Industries has authorized Change in Control and Termination Agreements ("the
Agreements") with Mr. Neale and the Vice Presidents of Industries (including
each of the Named Officers) (each such person being an "executive").
Industries believes that these Agreements and related shareholder rights
protections are in the best interest of the shareholders, to insure that in
the event of extraordinary events, totally independent judgment is enhanced to
maximize shareholder value. The Agreements, which are terminable upon three
years' notice, provide for the payment of three times then current annual base
salary and the continuation of certain employee benefits for a period of 36
months ("the Severance Period"), if the executive's employment is terminated
within 24 months in the event of certain changes in control of Industries.
Based on their 1995 base salaries, the amounts that would be payable to the
Named Officers would be as follows: Gary L. Neale - $1,380,000; Stephen P.
Adik - $615,000; Patrick J. Mulchay - $525,000; Jeffrey W. Yundt - $525,000;
and John W. Dunn- $495,000.
The executive would receive full benefits under any supplemental
retirement plan of Industries, offset by amounts paid to the executive from
any qualified retirement plans of Industries. All stock options held by the
executive would become immediately exercisable upon the date of termination of
employment, and the restrictions would lapse on all restricted shares awarded
to the executive. If any penalty tax under the Code is imposed on the payment
of three times base salary, Industries would increase the payment to the
extent necessary to compensate the executive for the imposition of such tax.
During the Severance Period, the executive and spouse would continue to
be covered by applicable health or welfare plans of Industries. If the
executive died during the Severance Period, all amounts payable to the
executive would be paid to a named beneficiary. No amounts would be payable
under the Agreement if the executive's employment were terminated by
Industries for Good Cause (as defined in the Agreements).
The Agreement with Mr. Neale also provides for the same severance
payments as above described in the event his employment is terminated at any
time by Industries (other than for Good Cause) or due to death or disability,
or if he voluntarily terminates employment with Good Reason (as defined in the
Agreements).
COMPENSATION OF DIRECTORS. Each director who is not receiving a salary
from Industries is paid $15,000 per year, $3,000 annually per standing
committee on which the director sits, $1,000 annually for each committee
chairmanship, $750 for each Board meeting attended and $750 per committee
meeting attended. Directors of Industries do not receive any additional
compensation for services as a director of any Industries subsidiary,
including Northern Indiana. Under a deferred compensation
arrangement, directors may have their fees deferred in the current year
and credited to an interest-bearing account or to a phantom stock account
for payment in the future.
Industries' Nonemployee Director Retirement Plan provides a retirement
benefit for each nonemployee director of Industries who has completed at least
five years of service on the Board. The benefit will be an amount equal to
the annual retainer for Board service in effect at the time of the director's
retirement from the Board, to be paid for the lesser of ten years or the
number of years of service as a nonemployee director of Industries.
Industries' Nonemployee Director Stock Incentive Plan provides for
grants of restricted Common Shares to nonemployee directors of Industries.
Initial grants were made in 1992, following shareholder approval of the plan,
at the level of 250 shares for each year of service as a director, and 1,000
restricted Common Shares have been granted to each nonemployee director
elected or reelected since that date. A grant of 1,000 shares will be made in
the future to each person, other than an employee of Industries, who is
elected or reelected as a director of Industries. The grants of restricted
shares vest in 20% annual increments, with full vesting five years after the
date of award.
Industries has adopted a Directors' Charitable Gift Program for
nonemployee directors. Under the program, Industries makes a donation to one
or more eligible tax-exempt organizations as designated by each eligible
director. Industries contributes up to an aggregate of $125,000 as designated
by nonemployee directors having served as a director of Industries for at
least five years and up to $250,000 as designated by those having served ten
years or more. Organizations eligible to receive a gift under the program
include charitable organizations and educational institutions located in
Indiana and educational institutions that the director attended or for which
he or she serves on its governing board. Individual directors will derive no
financial benefit from the program, as all deductions relating to the
charitable donations will accrue solely to Industries. All current
nonemployee directors are eligible to participate in the program.
An agreement between Industries and Mr. Schroer, retired Chairman,
President and Chief Executive Officer of Industries, provided that, for a
period of three years ended March 1, 1996, he was engaged by Industries as a
independent consultant for an annual fee of $200,000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) The Financial Statements filed herewith as part of this
report on Form 10-K are listed on the Index to Financial
Statements under Item 8 on page 18.
(2) The following is a list of the Financial Statement
Schedule filed herewith as part of this report on Form 10-K:
Schedule Page of
Number Description 1995 10-K
========= ================================= ===========
II Valuation and Qualifying Accounts 56, 57 & 58
(3) Exhibit - The exhibits filed herewith as a part of this
report on Form 10-K are listed on the Exhibit Index
included on pages 60 - 61.
(b) Reports on Form 8-K: None
PART IV
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
Twelve Months Ended December 31, 1995
(Dollars in thousands)
COL.A COL.B COL.C COL.D COL.E
- -------------------- ------- -------------------- ------------ --------
Additions Deductions
-------------------- for Purposes
Balance Charged to Charged for which Balance
Jan. 1, Costs and to Other Reserves Dec. 31,
Description 1995 Expenses Accounts were Created 1995
==================== ======= ========== ======== ============ ========
Reserves Deducted
In Consolidated
Balance Sheet From
Assets To Which
They Apply:
Reserve for
accounts
receivables $ 3,955 $ 6,555 $ 0 $ 4,092 $ 6,418
Reserves Classified
Under Reserve
Section of
Consolidated
Balance Sheet:
Injuries and
damages reserve $ 2,538 $ 2,800 $ 0 $ 3,501 $ 1,837
Miscellaneous
operating
reserves $ 7,331 $ 2,885 $ 0 $ 1,635 $ 8,581
PART IV
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
Twelve Months Ended December 31, 1994
(Dollars in thousands)
COL.A COL.B COL.C COL.D COL.E
- -------------------- ------- -------------------- ------------ --------
Additions Deductions
-------------------- for Purposes
Balance Charged to Charged for which Balance
Jan. 1, Costs and to Other Reserves Dec. 31,
Description 1994 Expenses Accounts were Created 1994
==================== ======= ========== ======== ============ ========
Reserves Deducted
In Consolidated
Balance Sheet From
Assets To Which
They Apply:
Reserve for
accounts
receivables $ 3,614 $ 6,510 $ 0 $ 6,169 $ 3,955
Reserves Classified
Under Reserve
Section of
Consolidated
Balance Sheet:
Injuries and
damages reserve $ 3,994 $ 3,350 $ 0 $ 4,806 $ 2,538
Miscellaneous
operating
reserves $ 5,852 $ 2,530 $ 0 $ 1,051 $ 7,331
PART IV
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
Twelve Months Ended December 31, 1993
(Dollars in thousands)
COL.A COL.B COL.C COL.D COL.E
- -------------------- ------- -------------------- ------------ --------
Additions Deductions
-------------------- for Purposes
Balance Charged to Charged for which Balance
Jan. 1, Costs and to Other Reserves Dec. 31,
Description 1993 Expenses Accounts were Created 1993
==================== ======= ========== ======== ============ ========
Reserves Deducted
In Consolidated
Balance Sheet From
Assets To Which
They Apply:
Reserve for
accounts
receivables $ 4,032 $ 4,780 $ 0 $ 5,198 $ 3,614
Reserves Classified
Under Reserve
Section of
Consolidated
Balance Sheet:
Injuries and
damages reserve $ 4,367 $ 4,450 $ 0 $ 4,823 $ 3,994
Miscellaneous
operating
reserves $ 3,925 $ 2,036 $ 0 $ 109 $ 5,852
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Northern Indiana Public Service Company
(Registrant)
Date March 28, 1996 By /s/ Gary L. Neale
------------------------ --------------------------------------------
Gary L. Neale, Its Chairman and President
Pursuant to the requirements of the Securities exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
=========================== =============================== ==============
/s/ Gary L. Neale Chairman, President, Principal
- --------------------------- Executive Officer and Director
/s/ Stephen P. Adik Executive Vice President and
- --------------------------- Principal Financial Officer
/s/ Arthur A. Paquin Controller and Principal
- --------------------------- Accounting Officer
/s/ Steven C. Beering Director
- ---------------------------
/s/ Arthur J. Decio Director March 28, 1996
- ---------------------------
/s/ Ernestine M. Raclin Director
- ---------------------------
/s/ Denis E. Ribordy Director
- ---------------------------
/s/ Ian M. Rolland Director
- ---------------------------
/s/ Edmund A. Schroer Director
- ---------------------------
/s/ John W. Thompson Director
- ---------------------------
/s/ Robert J. Welsh, Director
- ---------------------------
EXHIBIT INDEX
Exhibit
Number Description of Item
======== ===============================================================
(3.(i)) Amended Articles of Incorporation of April 14, 1982
(incorporated by reference to Exhibit 1 to Northern Indiana
Public Service Company (Northern Indiana) Current Report on
Form 8-K dated May 5, 1982).
(3.(ii)) By-laws effective May 25, 1993.
(4.1) Indenture dated August 1, 1939 between Northern Indiana and
Trustees (incorporated by reference to Exhibit 7 to Northern
Indiana Registration Statement (Registration No. 2-5178)).
(4.2) Third Supplemental Indenture dated August 1, 1943
(incorporated by reference to Exhibit 7-C to Northern Indiana
Registration Statement (Registration No. 2-5178)).
(4.3) Eighteenth Supplemental Indenture dated September 1, 1967
(incorporated by reference to Exhibit 1 to Northern Indiana
Current Report on Form 8-K dated October 9, 1967).
(4.4) Nineteenth Supplemental Indenture dated October 1, 1968
(incorporated by reference to Exhibit 1 to Northern Indiana
Current Report on Form 8-K dated November 8, 1968).
(4.5) Twenty-third Supplemental Indenture dated March 31, 1972
(incorporated by reference to Exhibit 2 to Northern Indiana
Current Report on Form 8-K dated May 5, 1972).
(4.6) Thirty-third Supplemental Indenture dated June 1, 1980
(incorporated by reference to Exhibit 1 to Northern Indiana
Quarterly Report on Form 10-Q for the quarter ended June 30,
1980).
(4.7) Forty-first Supplemental Indenture dated July 1, 1991
(incorporated by reference to Exhibit 1 to Northern Indiana
Current Report on Form 8-K dated March 25, 1992).
(4.8) Indenture, dated as of March 1, 1988, between Northern Indiana
and Manufacturers Hanover Trust Company, as Trustee
(incorporated by reference to Exhibit 4 to Northern Indiana
Registration Statement (Registration No. 33-44193)).
(4.9) First Supplemental Indenture between Northern Indiana and
Manufacturers Hanover Trust Company, as Trustee
(incorporated by reference to Exhibit 4.1 to Northern Indiana
Registration Statement (Registration No. 33-63870)).
(4.10) Memorandum of Agreement with City of Michigan City, Indiana
(incorporated by reference to Exhibit 7 to Northern Indiana
Registration Statement (Registration No. 2-48531)).
(4.11) Financing Agreement No. 1 dated November 1, 1988 with Jasper
County, Indiana regarding $37,000,000 Series 1988A Pollution
Control Refunding Revenue Bonds. Identical financing
agreements between Registrant and Jasper County provide for
the issuance of $47,000,000 Series 1988B, $46,000,000 Series
1988C and $24,000,000 Series 1988D Pollution Control Refunding
Revenue Bonds (incorporated by reference to Exhibit 8 to
Northern Indiana Current Report on Form 8-K dated March 16,
1989).
(4.12) Financing Agreement dated July 1, 1991, with Jasper County
Indiana regarding $55,000,000 Series 1991 Collateralized
Pollution Control Refunding Revenue Bonds (incorporated by
reference to Exhibit 3 to Northern Indiana Current Report of
Form 8-K dated March 25, 1992).
(4.13) Financing Agreement dated August 1, 1994, with Jasper County,
Indiana regarding $10,000,000 Series 1994A, $18,000,000
Series 1994B and $41,000,000 Series 1994C Pollution Control
Refunding Revenue Bonds.
(10) Amended and Restated Pension Plan Provisions effective
January 1, 1989 (incorporated by reference to Exhibit 17 to
Northern Indiana Current Report of Form 8-K dated March 25,
1992).*
(27) Financial Data Schedule.
*Management contract or compensatory plan arrangement of Northern Indiana
Public Service Company.