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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
OR
() Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number 1-4125
NORTHERN INDIANA PUBLIC SERVICE COMPANY
(Exact name of registrant as specified in its charter)
Indiana 35-0552990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5265 Hohman Avenue, Hammond, Indiana 46320-1775
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 853-5200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
--------------------- ---------------------
Series A Cumulative Preferred - No Par Value New York
4-1/4% Cumulative Preferred - $100 Par Value American
Securities registered pursuant to Section 12(g) of the Act:
Cumulative Preferred Stock - $100 Par Value
(4-1/2%, 4.22%, 4.88%, 7.44% and 7.50% Series)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
-------- --------
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (X)
As of February 27, 1998, 73,282,258 shares of the registrant's
Common Shares, no par value, were issued and outstanding, all held
beneficially and of record by NIPSCO Industries, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
None
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Form 10-K
Table of Contents
Page
====
PART I
Item 1 Business 2
2 Properties 8
3 Legal Proceedings 9
4 Submission of Matters to a Vote
of Security Holders 9
PART II
Item 5 Market for the Registrant's Common
Equity and Related Shareholder Matters 9
6 Selected Financial Data 9
7 Management's Discussion and Analysis of
Financial Condition and Results of Operation 9
7A Quantitative and Qualitative Disclosures
About Market Risk 17
8 Financial Statements and Supplementary Data 17
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 49
PART III
Item 10 Directors and Executive Officers of
the Registrant 49
11 Executive Compensation 52
12 Security Ownership of Certain Beneficial
Owners and Management 60
13 Certain Relationships and Related Transactions 60
PART IV
Item 14 Exhibits, Financial Statement Schedules 60
and Reports on Form 8-K
SIGNATURES 63
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Part I
ITEM 1. BUSINESS.
Northern Indiana Public Service Company (Northern Indiana) is a public
utility operating company, incorporated in Indiana on August 2, 1912, engaged in
supplying natural gas and electric energy to the public. It operates in 30
counties in the northern part of Indiana, serving an area of about 12,000 square
miles with a population of approximately 2,200,000. At December 31, 1997,
Northern Indiana served approximately 662,500 customers with gas and
approximately 416,300 customers with electricity.
See "Segments of Business" in the Notes to Consolidated Financial
Statements regarding financial information about industry segments.
HOLDING COMPANY STRUCTURE. Effective March 3, 1988, Northern Indiana
became a subsidiary of Industries, Inc., an Indiana corporation
(Industries).
The parent company of Northern Indiana, Industries, Inc. is party to an
Agreement and Plan of Merger with Bay State Gas Company (Bay State), dated as
of December 18, 1997 and amended and restated as of March 4, 1998 (the Merger
Agreement). The Merger Agreement provides for the acquisition by Industries
of Bay State, subject to approval by the common shareholders of Bay State,
various regulatory approvals and the waiver or satisfaction of certain other
conditions. The Merger Agreement provides for the merger of Bay State with
and into a new wholly-owned subsidiary of Industries (the Preferred Merger).
However, the Merger Agreement also provides that an alternative merger structure
(the Alternative Merger) may be used instead of the Preferred Merger. Under
the Alternative Merger, Bay State would be merged with and into Northern Indiana
followed immediately by the merger of Bay State's wholly-owned utility
subsidiary, Northern Utilities, Inc. into Northern Indiana. For further
information regarding the Merger Agreement, see Exhibit 2.1 to Industries'
Annual Report on Form 10-K for the year ended December 31, 1997.
ELECTRIC OPERATIONS. Northern Indiana owns and operates four coal fired
electric generating stations with net capabilities of 3,179,000 kilowatts (kw),
two hydroelectric generating plants with net capabilities of 10,000 kw, and four
gas fired combustion turbine generating units with net capabilities of 203,000
kw, for a total system net capability of 3,392,000 kw. During the year ended
December 31, 1997, Northern Indiana generated 91.8% and purchased 8.2% of its
electric requirements.
Northern Indiana's 1997 electric control area peak load (the highest
level of electrical utility usage in the control area) of 3,020,920 kw, which
includes Northern Indiana, Wabash Valley Power Association, Inc. (WVPA) and
Indiana Municipal Power Agency (IMPA) for which Northern Indiana controls
interchange operations, was set on July 14, 1997. Northern Indiana's all-time
electric control area peak load of 3,161,200 kw was set on July 14, 1995.
Northern Indiana's 1997 internal peak load, which excludes WVPA and IMPA, was
2,758,920 kw set on July 14, 1997. Northern Indiana's all-time internal peak
load of 2,888,450 kw was set on August 6, 1996.
Northern Indiana's electric system is interconnected with that of American
Electric Power, ComEd, Cinergy Services, Inc., Consumers Energy and Central
Illinois Public Service Company. Electric energy is purchased from, sold to, or
exchanged with various other utilities and power marketers under Northern
Indiana's power sales and open access transmission tariffs.
Northern Indiana provides WVPA with transmission and distribution service,
operating reserve requirements and capacity deficiency service, and provides
IMPA with transmission service, operating reserve requirements and capacity
deficiency service, in Northern Indiana's control area. Northern Indiana also
engages in sales and services under interconnection agreements with WVPA and
IMPA.
WVPA provides service to 12 Rural Electric Membership Corporations
(REMC's) located in Northern Indiana's control area. IMPA provides service to
the municipal electric system of the city of Rensselaer located in Northern
Indiana's control area.
Northern Indiana and WVPA have executed a supplemental agreement for unit
peaking capacity and energy. Unit peaking capacity is the capacity used to
serve peak demand from a specific peaking generating unit. Pursuant to this
agreement, which runs through December, 2001, WVPA purchases 90,000 kw of
capacity per month.
Northern Indiana has the Town of Argos as a full requirement customer and
provides network integration service to seven other municipal wholesale
customers. Prior to January 31, 1998, Northern Indiana had full requirement
contracts with eight municipal wholesale customers.
Northern Indiana is a member of the East Central Area Reliability
Coordination Agreement (ECAR). ECAR is one of nine regional electric
reliability councils established to coordinate planning and operations of
member companies regionally and nationally.
FUEL SUPPLY. The generating units of Northern Indiana are located at
Bailly, Mitchell, Michigan City and Schahfer Generating Stations. Northern
Indiana's 13 steam generating units have a net capability of 3,179,000 kw.
Coal is the primary source of fuel for all units, except for three, which
utilize natural gas. In addition, Northern Indiana's four combustion turbine
generating units with a net capability to 203,000 kw are fired by gas. Fuel
requirements for Northern Indiana's generation for 1997 were supplied as
follows:
Coal 98.7%
Natural gas 1.3%
In 1997, Northern Indiana used approximately 8.4 million tons of coal
at its generating stations. Northern Indiana has established a normal level
of coal stock which provides adequate fuel supply during the year under all
conditions.
Annual coal requirements for Northern Indiana's electric generating
units through 2002 are estimated to range from 8.5 million tons to 9.3
million tons, depending from year to year upon anticipated sales levels,
scheduled maintenance and other variables. These requirements are being or
will be met in part under long-term contracts as follows:
MILLION TONS/YEAR SULFUR CONTENT EXPIRATION
================= ============== ==========
1.3 (a) Low 2001
1.8 (b) Low 1999
1.0 (c) Low 2001
0.3 Low 2001
0.3 (d) Low 2000
0.75(e) High 2003
1.0 (f) High 2002
0.75 High 1999
(a) 1.8 million tons in 1998.
(b) 1.225 million tons in 1999. Plus or minus 10% per contract year.
(c) Plus or minus 20% per contract year.
(d) 2000 - option year, can terminate 12/31/1999.
(e) Tentative new contract, 0.25 million in 1998. Plus or minus 10% per
contract year.
(f) Tentative new contract, 1.5 million in 1998. Plus 20% per contract year.
Option years in 2001 and 2002 can terminate 12/31/2000.
The average cost of coal consumed in 1997 was $27.42 per ton or 15.43
mills per kilowatt-hour (kwh) generated as compared to $27.50 per ton or
15.79 mills per kwh generated in 1996. Northern Indiana's forecasts indicate
that its coal costs will be slightly lower over the next two years.
COAL RESERVES. Included in the previous table of coal contracts is a
coal mining contract with Cyprus Shoshone Coal Corporation (Cyprus) under
which Cyprus is mining Northern Indiana's coal reserves in the Cyprus mine
through the year 2001. The costs of the reserves are being recovered through
the rate-making process as such coal reserves are used to produce electricity.
FUEL ADJUSTMENT CLAUSE. Northern Indiana adjusts metered electric rates
through operation of a fuel adjustment clause to reflect changes in fuel costs.
See "Summary of Significant Accounting Policies-Fuel Adjustment Clause" in the
Notes to Consolidated Financial Statements.
GAS OPERATIONS. Northern Indiana supplies natural gas of about 1,000
British thermal units (Btu) per cubic foot. In a 24-hour period ended
January 17, 1997, Northern Indiana's 1997 maximum day sendout (the maximum
amount of gas delivered through Northern Indiana's distribution system to its
end customers) was 1.6 million dekatherms (dth). Northern Indiana's total
gas send-out for 1997 was 292.6 million dth, compared to 286.1 million dth in
1996.
Agreements have been negotiated with natural gas suppliers to replace
former pipeline supplier contracts pursuant to the requirements of FERC
Order No. 636 (See "FERC Order No. 636" in the Notes to Consolidated Financial
Statements). Northern Indiana also has producer agreements which allow for the
purchase of gas either from gas marketers or producers.
Northern Indiana has firm transportation agreements with pipelines, which
allow Northern Indiana to move its gas through the pipelines' transmission
systems. In 1997, all of the gas supplied by Northern Indiana was transported
by ANR Pipeline Company (ANR), Crossroads Pipeline Company (Crossroads) - a
subsidiary of Industries, Midwestern Gas Transmission Company (Midwestern),
Natural Gas Pipeline Company of America (Natural), Panhandle Eastern Pipe Line
Company (Panhandle), Tennessee Gas Pipeline Company (Tennessee) and Trunkline
Gas Company (Trunkline). The transportation rates of Crossroads, and the
transportation and storage rates of ANR, Midwestern, Natural, Panhandle,
Tennessee and Trunkline to Northern Indiana, are subject to change in accordance
with rate proceedings filed with the Federal Energy Regulatory Commission
(FERC).
Approximately 69% of Northern Indiana's 1997 gas supply was purchased on
the spot market, generally on less than 30-day agreements. The average price
per dth (including FERC Order No. 636 transition charges) in 1997 was $3.18,
compared to $3.12 in 1996, and the average cost of purchased gas, after
adjustment for transition charges billed to transport customers, was $3.08 per
dth as compared to $3.02 per dth in 1996.
Northern Indiana has a curtailment plan (a plan which outlines service
to be curtailed in the event of limited gas supply) approved by the Indiana
Utility Regulatory Commission (Commission). Effective on August 11, 1981,
the plan allows unrestricted gas sales by Northern Indiana. There were no
firm sales curtailments in 1997 and none are expected during 1998.
Northern Indiana operates an underground gas storage field at Royal
Center, Indiana, which currently has a storage capacity of 6.75 million dth.
Withdrawals have been made in the 1997-1998 winter of up to 109,036 dth per
day. In addition, Northern Indiana has several gas storage service
agreements which make possible the withdrawal of substantial quantities of
gas from other storage facilities. All of the storage agreements have
limitations on the volume and timing of daily withdrawals. These contracts
provide in the aggregate for approximately 26.6 million dth of annual stored
volume and allow for approximately 551,000 dth of maximum daily withdrawal.
Northern Indiana has a liquefied natural gas plant in LaPorte County
which is designed for peak shaving (the process of supplementing gas supply
during periods of high demand) and has the following capacities: maximum storage
of 4 million dth; maximum liquefaction rate (gas to liquid), 20,000 dth per day;
maximum vaporization rate (output to distribution system), 300,000 dth per day.
GAS COST ADJUSTMENT CLAUSE. Metered gas sales are adjusted to reflect
the cost of purchased gas, contracted gas storage and storage transportation
charges. See "Summary of Significant Accounting Policies-Gas Cost Adjustment
Clause" in the Notes to Consolidated Financial Statements.
REGULATION. Northern Indiana is subject to regulation by the Commission
as to rates, service, accounts, issuance of securities, and in other respects.
See "FERC Order No. 636" in the Notes to Consolidated Financial Statements. It
is also subject to limited regulation by local public authorities.
In 1997, about 4% of Northern Indiana's electric revenues were derived
from electric service it furnished at wholesale in interstate commerce to
other utility companies, municipalities and WVPA (see "Item 1. Business-
Electric Operations" regarding WVPA). Northern Indiana's wholesale rates
and operations are subject to the jurisdiction of the FERC. FERC jurisdiction
does not extend to the issuance of securities by Northern Indiana, which are
regulated by the Commission. The FERC on October 21, 1954, declared Northern
Indiana exempt from the provisions of the Natural Gas Act.
RATE MATTERS. For information regarding Northern Indiana's gas rates
and gas transition costs, see "FERC Order No. 636" in the Notes to
Consolidated Financial Statements.
Northern Indiana filed a petition for an Alternative Regulatory Plan
(ARP) with the Commission on November 29, 1995. Following negotiation and
settlement with major intervenors, Northern Indiana submitted a modified ARP
to the Commission on May 9, 1997. In its modified ARP, Northern Indiana
proposed to implement new rates and services that would include, among other
things, further unbundling of services for additional customer classes,
increased customer choice for sources of natural gas supply, negotiated
services and prices, an incentive gas cost mechanism and a price protection
program. On October 8, 1997, the Commission issued an order approving, in
all respects, the modified ARP which became effective November 1, 1997. The
first pilot program was launched in January 1998 and the first gas volumes
will flow under this program by April 1, 1998. ERI Services, Inc. and Enron
Capital and Trade Resources Corp. filed Petitions for Rehearing of the
Commission Order, and during the first quarter of 1998 the Commission denied
such petition.
COMPETITION.
ELECTRIC. The electric energy generation, transmission and distribution
business is in a period of fundamental change in the manner in which customers
obtain, and energy suppliers provide, energy services. These changes are
attributable to changes in technology, the relaxation of regulatory barriers to
utilities' respective service territories and efforts to change the manner in
which electric utilities are regulated. Federal law and regulations have been
amended to provide for open transmission system access, and various states are
considering, or have adopted, new regulatory structures to allow access by some
or all customers to electric suppliers in addition to their local electric
utility.
Currently, electric service territories within the State of Indiana are
assigned to the existing suppliers, and boundaries of new territories outside
existing municipalities are assigned to the utility having the nearest existing
electric distribution lines. Only existing municipal electric utilities may
expand their service areas and then only into areas that have been annexed by
the municipality, subject to the approval of the Commission and certain other
conditions. In municipalities where Northern Indiana renders electric service
to the general public as a public utility, no other utility renders electric or
gas service, except in Angola, DeMotte, Rome City, Wanatah and Waterloo. In
localities where Northern Indiana renders gas service only, it competes with
electric utilities, municipal or private, for the business for which they render
alternative electric service.
In both January 1997 and 1998, legislation was introduced in the Indiana
General Assembly addressing electric utility competition and deregulation. The
proposed legislation was not adopted but similar legislation may be reintroduced
in the future. It is not possible to predict the ultimate effect which
competition, subsequent to the passage of such legislation would have on
Northern Indiana's future earnings. See "Competition" in the Management's
Discussion and Analysis of Financial Condition and Results of Operations.
GAS. As a result of FERC Order No. 636, Northern Indiana is also subject
to competition for gas sales to industrial customers through the ability of
these customers, under Northern Indiana's rate provisions, to purchase gas
directly from suppliers other than Northern Indiana, and have Northern Indiana
transport the gas to them. During 1997, gas transportation represented 55% of
Northern Indiana's total gas sendout.
Indiana law requires Commission approval before a gas customer of a
utility may bypass the utility and make other arrangements for gas service.
Any entity which transports gas from outside Indiana for direct sale or
delivery to itself or other end-users within the state will be considered a
public utility and must obtain a necessity certificate from the Commission
in order to engage in such activities. See "Competition" in the
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
EMPLOYEE RELATIONS. Northern Indiana had 3,267 employees at
December 31, 1997. Approximately 72% of Northern Indiana's employees
(physical and clerical workers) are represented by two local unions of the
United Steelworkers of America, AFL-CIO-CLC.
ENVIRONMENTAL MATTERS. Northern Indiana has an ongoing program to
remain aware of laws and regulations involved with hazardous waste and other
environmental matters. It is Northern Indiana's intent to continue to evaluate
its facilities and properties with respect to these rules and identify any
sites that would require corrective action. Northern Indiana has recorded a
reserve of approximately $19 million to cover probable corrective actions as
of December 31, 1997; however, environmental regulations and remediation
techniques are subject to future change. The ultimate cost could be
significant, depending on the extent of corrective actions required. Based
upon investigations and management's understanding of current laws and
regulations, Northern Indiana believes that any corrective actions required,
after consideration of insurance coverages and contributions from other
potentially responsible parties, will not have a significant impact on the
results of operations or financial position of Northern Indiana. It is not
possible for Northern Indiana to predict the scope, enforceability or financial
impact of other environmental regulations or standards which may be established
in the future.
Northern Indiana is subject to regulation with regard to environmental
matters by various federal, state and local authorities. Northern Indiana
cannot forecast the effect of all such regulation upon its generation,
transmission and other facilities, or its operations. Northern Indiana intends
to comply with all applicable governmental requirements and has adopted an
environmental policy that fosters the pursuit of proactive environmental
programs and management.
The application of federal and state restrictions to protect the
environment, including but not limited to those described below, involves
or may involve review, certification or issuance of permits by various federal,
state, and local authorities. Such restrictions, particularly in regard to
emissions into the air and water, and disposal of solid wastes, may impact the
operation of Northern Indiana's facilities, and may also require substantial
investments.
Northern Indiana's total capital expenditures from January 1, 1993,
through December 31, 1997 for pollution control facilities were approximately
$149 million and were financed in part by the sale of Northern Indiana's
Pollution Control Notes and Bonds-Jasper County. Northern Indiana anticipates
expenditures of approximately $15 million for pollution control equipment in
the 1998-2002 period which includes anticipated expenditures of $6 million in
1998 and $9 million in 1999. See "Environmental Matters" in the Notes to
Consolidated Financial Statements.
YEAR 2000 COSTS. For a discussion of year 2000 costs see Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Year 2000 Cost.
FORWARD LOOKING STATEMENTS. This report contains forward looking
statements within the meaning of the securities laws. See Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Forward Looking Statements.
ITEM 2. PROPERTIES.
The physical properties of Northern Indiana are located in the State
of Indiana.
ELECTRIC. Northern Indiana owns and operates four coal fired electric
generating stations with net capabilities of 3,179,000 kw, two hydroelectric
generating plants with net capabilities of 10,000 kw, and four gas fired
combustion turbine generating units with net capabilities of 203,000 kw, for
a total system net capability of 3,392,000 kw.
Northern Indiana has 292 substations with an aggregate transformer
capacity of 23,030,500 kva. Its transmission system with voltages from
34,500 to 345,000 consists of 3,053 circuit miles of line. The electric
distribution system extends into 21 counties and consists of 7,835 circuit
miles of overhead and 1,423 cable miles of underground primary distribution
lines operating at various voltages from 2,400 to 12,500 volts. Northern
Indiana has distribution transformers having an aggregate capacity of
11,422,999 kva and 438,590 electric watt-hour meters.
GAS. Northern Indiana has an underground storage field at Royal Center
and a liquefied natural gas plant in LaPorte County all of which are described
under "Item 1. Business-Gas Operations." Northern Indiana has 13,368 miles of
gas mains.
CHARACTER OF OWNERSHIP. The properties of Northern Indiana are subject to
the lien of its First Mortgage Indenture. The principal properties are held in
fee and are free from other encumbrances, subject to minor exceptions, none of
which is of such a nature as to substantially impair the usefulness of such
properties. All properties are subject to liens for taxes, assessments and
undetermined charges (if any) incidental to construction, which it is Northern
Indiana's practice regularly to pay, as and when due, unless contested in good
faith. In general, the electric and gas lines and mains are located on land not
owned in fee but are covered by necessary consents of various governmental
authorities or by appropriate rights obtained from owners of private property.
Northern Indiana does not, however, generally have specific easements from the
owners of the property adjacent to public highways over, upon, or under which
its electric and gas lines are located. At the time each of the principal
properties was purchased a title search was made. In general, no examination of
titles as to rights-of-way for electric and gas lines and mains was made, other
than examination, in certain cases, to verify the grantors' ownership and the
lien status thereof.
ITEM 3. LEGAL PROCEEDINGS.
Northern Indiana is a party to various pending proceedings, including
suits and claims against it for personal injury, death and property damage.
Such proceedings and suits, and the amounts involved are routine litigation and
proceedings for the kind of business conducted by Northern Indiana, except as
set forth above under "Environmental Matters," in the Notes to Consolidated
Financial Statements. To the knowledge of Northern Indiana no other material
legal proceedings against Northern Indiana or its subsidiaries are contemplated
by governmental authorities or other parties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
Northern Indiana's common shares are wholly-owned by Industries.
The following limitations on payment of dividends and issuance of
preferred stock apply to Northern Indiana:
When any bonds are outstanding under its First Mortgage Indenture,
Northern Indiana may not pay cash dividends on its stock (other than
preferred or preference stock) or purchase or retire common shares, except
out of earned surplus or net profits computed as required under the
provisions of the maintenance and renewal fund. At December 31, 1997,
Northern Indiana had approximately $146.3 million of retained earnings
(earned surplus) available for the payment of dividends. Future common
share dividends by Northern Indiana will depend upon adequate retained
earnings, adequate future earnings and the absence of adverse developments.
So long as any shares of Northern Indiana's cumulative preferred stock
are outstanding, no cash dividends shall be paid on its common shares in
excess of 75% of the net income available therefore for the preceding
calendar year unless the aggregate of the capital applicable to stocks
subordinate as to assets and dividends to the cumulative preferred stock
plus the surplus, after giving effect to such dividends, would equal or
exceed 25% of the sum of all obligations evidenced by bonds, notes,
debentures or other securities, plus the total capital and surplus. At
December 31, 1997, the sum of the capital applicable to stocks subordinate
to the cumulative preferred stock plus the surplus was equal to 42% of the
total capitalization including surplus.
In connection with the foregoing discussion, see "Common Share
Dividend" in the Notes to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA.
Year Ended December 31,
(Dollars in thousands)
1997 1996 1995 1994 1993
========== ========== ========== ========== ==========
Operating revenues $1,752,382 $1,754,105 $1,664,278 $1,613,995 $1,619,623
Net income $ 196,620 $ 197,310 $ 194,321 $ 179,903 $ 172,104
Total assets $3,674,914 $3,774,280 $3,606,199 $3,624,311 $3,613,235
Long-term
obligations and
redeemable
preferred stock $1,138,337 $1,053,254 $1,122,392 $1,131,408 $1,147,536
Cash dividends
declared on
common shares $ 187,775 $ 187,450 $ 185,725 $ 168,815 $ 165,299
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
NET INCOME. In 1997, net income of Northern Indiana decreased to
$196.6 million, compared to $197.3 million for 1996. In 1995, net income
was $194.3 million.
See Notes to Consolidated Financial Statements for Segments of
Business regarding the revenue and utility operating income derived from
the delivery of gas and electricity.
REVENUES. Operating revenues in 1997 decreased $1.7 million, or 0.1%,
from 1996. Operating revenues in 1996 increased $89.8 million, or 5.4%, from
1995.
During 1997, gas deliveries in dekatherms (dth), which include
transportation services, increased 2.3%. Gas sales levels in 1997 remained
relatively unchanged from 1996. Gas transportation services increased
3.4% mainly due to increased deliveries of gas transported for others.
Northern Indiana had approximately 662,500 gas customers at December 31, 1997.
During 1996, gas deliveries increased 3.6% over 1995. Gas sales in 1996
increased 14.7% due to higher sales to residential and commercial customers as
result of colder weather during the first quarter of 1996, and increased sales
to industrial and wholesale customers. Gas transportation services decreased
4.0% mainly due to decreased deliveries to industrial customers.
Gas revenues were $735.3 million in 1997, an increase of $3.4 million
from 1996. The increase in gas revenues was mainly due to increased sales
to wholesale customers, increased gas costs per dth and increased deliveries
of gas transported for others, partially offset by decreased sales to
residential and commercial customers and decreased gas transition costs. Gas
revenues were $731.9 million in 1996, an increase of $98.5 million from 1995.
The increase in gas revenues was mainly due to increased sales to residential
and commercial customers as a result of colder weather during the first
quarter of 1996, increased sales to industrial and wholesale customers, and
increased gas costs per dth, which were partially offset by decreased gas
transition costs. The large commercial and industrial customers continued to
utilize transportation services provided by Northern Indiana. Gas
transportation customers purchase much of their gas directly from producers
and marketers and then pay a transportation fee to have their gas delivered
over Northern Indiana's system. Northern Indiana transported 160.4, 155.2 and
161.7 million dth in 1997, 1996 and 1995, respectively.
In 1997, sales of electricity in kilowatt-hours (kwh) decreased 4.5%
from 1996 mainly due to decreased sales to wholesale and industrial customers
partially offset by increased sales to residential and commercial customers.
Industrial sales decreased during the period as a result of cogeneration
projects at two of Northern Indiana's major industrial customers coming
online during the period. Northern Indiana had approximately 416,300 electric
customers at December 31, 1997. In 1996, sales of electricity in kilowatt-
hours (kwh) decreased 1.1% from 1995 mainly due to decreased sales to
residential customers due to cooler summer weather in 1996 and decreased sales
to industrial customers due to operational difficulties at several major
industrial customers, which were partially offset by increased sales to
commercial and wholesale customers.
In 1997, electric revenues were $1.017 billion, a decrease of $5.1
million from 1996. The decrease in electric revenues was mainly due to
decreased sales to industrial customers, partially offset by increased sales
to residential and commercial customers and increased revenues related to
wholesale transactions. Industrial sales decreased during the period as a
result of cogeneration projects with two of Northern Indiana's major
industrial customers coming online during the period. In 1996, electric
revenues were $1.022 billion, a decrease of $8.7 million from 1995. The
decrease in electric revenues was mainly due to decreased sales to residential
customers due to cooler summer weather in 1996, and decreased sales to
industrial customers due to operational difficulties at several major
industrial customers, which were partially offset by increased sales to
commercial and wholesale customers.
The components of the changes in gas and electric revenues are shown
in the following tables:
Year 1997 Year 1996
Compared To Compared To
Year 1996 Year 1995
============ ============
(Dollars in millions)
Gas Revenue
Pass through of net changes in
purchased gas costs, gas storage
and storage transportation costs $ 8.7 $ 55.6
Gas transition costs (4.4) (33.5)
Changes in sales levels (2.8) 77.5
Gas transported 1.9 (1.1)
------------ ------------
Gas Revenue Change $ 3.4 $ 98.5
------------ ------------
Electric Revenue
Pass through of net changes
in fuel costs $ 4.0 $ 3.2
Changes in sales levels (9.1) (11.9)
------------ ------------
Electric Revenue Change $ (5.1) $ (8.7)
------------ ------------
Total Revenue Change $ (1.7) $ 89.8
============ ============
See Rate Matters in Notes to Consolidated Financial Statements
regarding FERC Order No. 636 transition costs.
The basic steel industry accounted for 36% of natural gas delivered
(including volumes transported) and 33% of electric sales during 1997.
Northern Indiana's rate schedules for gas and electric service to its
customers contain an electric rate adjustment clause for changes in the cost
of fuel and firm purchases of electric energy; and a gas rate adjustment
clause to reflect changes in the cost of gas purchased, contracted gas
storage and storage transportation costs. (See Fuel Adjustment Clause and
Gas Cost Adjustment Clause under Summary of Significant Accounting Policies
in Notes to Consolidated Financial Statements.)
GAS COSTS. Gas costs increased $8.3 million (1.9%) in 1997 due to
increased gas costs per dth, which were partially offset by decreased gas
transition costs. The average cost for purchased gas in 1997, after
adjustment for gas transition costs billed to transport customers, was $3.08
per dth as compared to $3.02 per dth in 1996. Gas costs increased $77.6
million (21.2%) in 1996 due to increased purchases and increased gas costs per
dth, which were partially offset by decreased gas transition costs. The
average cost for purchased gas in 1996, after adjustment for gas transition
costs billed to transport customers, was $3.02 per dth as compared to $2.63
per dth in 1995.
FUEL AND PURCHASED POWER. Cost of fuel for electric generation in
1997 increased mainly as a result of increased production. The average cost
per kwh generated decreased 2.3% from 1996 to 15.43 mills. The cost of fuel
for electric generation in 1996 decreased mainly as a result of decreased
production. The average cost per kwh generated decreased 0.6% from 1995 to
15.79 mills.
Power purchased decreased $16.5 million in 1997 as a result of
decreased bulk power purchases. Power purchased increased $10.1 million in
1996 as a result of increased bulk power purchases and increased cost per
megawatt purchased.
OPERATING MARGINS. Operating margins increased $1.1 million in 1997
to $1.024 billion. The gas operating margin decreased $4.9 million in 1997
due to decreased sales to residential and commercial customers reflecting
milder weather, partially offset by increased sales to wholesale customers
and increased deliveries of gas transported for others. Operating margin
from electric sales increased $6.0 million due to increased sales to
residential and commercial customers, and increased wholesale transactions,
partially offset by decreased sales to industrial customers. Operating
margins increased $11.2 million in 1996 to $1.023 billion. The gas operating
margin increased $20.9 million in 1996, due to the increased sales to
residential and commercial customers reflecting colder weather during the
first quarter of 1996, increased sales to industrial and wholesale customers,
and increased deliveries of gas transported for others. Operating margins
from electric sales decreased $9.7 million in 1996 due to decreased sales to
residential customers reflecting cooler summer weather in 1996, and decreased
sales to industrial customers due to plant operational difficulties at several
major customers, which were partially offset by increased sales to commercial
and wholesale customers.
OPERATING EXPENSES AND TAXES. Operating expenses and taxes (except
income) in 1997 decreased 0.1% from 1996 to $632.9 million and in 1996
increased 1.2% from 1995 to $633.4 million.
Operation expenses decreased $11.8 million in 1997 over 1996 due to
reduced pension costs, reduced environmental costs of $4.2 million and reduced
pollution control facility costs of $4.1 million. Operation expenses increased
$2.4 million in 1996 over 1995 due to increased pollution control facility
costs, environmental costs of $5.4 million, and other various increased
operating costs partially offset by reduced pension costs.
Maintenance expenses remained relatively unchanged in 1997 from 1996.
Maintenance expense decreased $8.2 million in 1996 from 1995 mainly reflecting
decreased maintenance activity at electric production facilities and gas
underground storage facilities.
Depreciation and amortization expenses increased $11.5 million in 1997
from 1996 resulting from plant additions. Depreciation and amortization
expenses increased $13.3 million in 1996 from 1995 resulting from plant
additions, increased amortization of computer software and the amortization of
deferred costs related to scrubber services provided by Pure Air at the Bailly
Generating Station.
Utility income taxes increased $1.0 million in 1997 from 1996, increased
$2.5 million in 1996 from 1995, in each period mainly as a result of increased
pre-tax income.
Other Income (Deductions) decreased $3.9 million in 1997 from 1996
mainly as a result of the sale of Cresent Dunes Lakeshore property to the
National Park Service in 1996. Other Income (Deductions) increased $3.9
million in 1996 from 1995 mainly reflecting the sale of Crescent Dunes
Lakeshore property to the National Park Service.
Interest charges decreased $2.6 million and increased $1.9 million in
1997 and 1996, respectively. The 1997 decrease reflects decreased short-term
borrowing during the year. The 1996 increase reflects the issuance of
$169,275,000 of Northern Indiana's Medium-Term Notes, Series D and the
discontinuance of carrying charges on deferred charges related to the Bailly
Generating Station scrubber service agreement.
See Notes to Consolidated Financial Statements for a discussion of
accounting policies and transactions impacting this analysis.
ENVIRONMENTAL MATTERS. Northern Indiana has an ongoing program to
remain aware of laws and regulations involved with hazardous waste and other
environmental matters. It is Northern Indiana's intent to continue to evaluate
its facilities and properties with respect to these rules and identify any
sites that would require corrective action. Northern Indiana has recorded a
reserve of approximately $19 million to cover probable corrective actions as
of December 31, 1997; however, environmental regulations and remediation
techniques are subject to future change. The ultimate cost could be
significant, depending on the extent of corrective actions required. Based
upon investigations and management's understanding of current laws and
regulations, Northern Indiana believes that any corrective actions required,
after consideration of insurance coverages and contributions from other
potentially responsible parties, will not have a significant impact on the
results of operations or financial position of Northern Indiana.
The Environmental Protection Agency (EPA) has notified Northern
Indiana that it is a "potentially responsible party" (PRP) under the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA)
and may be required to share in the cost of cleanup of several waste
disposal sites identified by the EPA. The sites are in various stages of
investigation, analysis and remediation. At each of the sites, Northern
Indiana is one of several PRPs, and it is expected that remedial costs,
as provided under CERCLA, will be shared among them. At some sites, Northern
Indiana and/or the other named PRPs are presently working with the EPA to
clean up the sites and avoid the imposition of fines or added costs.
Refer to Environmental Matters in Notes to Consolidated Financial
Statements for a more detailed discussion of the status of certain
environmental issues.
LIQUIDITY AND CAPITAL RESOURCES. Construction expenditures by
Northern Indiana for 1997, 1996 and 1995 were approximately $174 million,
$198 million, and $186 million, respectively. Northern Indiana's total
utility plant investment on December 31, 1997, was $5.6 billion.
On May 28, 1997, Northern Indiana was authorized to issue and sell up to
$217,692,000 of its Medium-Term Notes, Series E, with various maturities, for
purposes of refinancing certain first mortgage bonds and medium-term notes.
As of December 31, 1997, $139.0 million of the medium-term notes had been
issued with various interest rates and maturities. The proceeds from these
issuances were used to pay short-term debt incurred to redeem its First
Mortgage Bonds, Series N, and to pay at maturity various issues of Medium-Term
Notes, Series D.
Cash flow from operations has provided sufficient liquidity to meet
current operating requirements. Because of the seasonal nature of the utility
business and the construction program, Northern Indiana makes use of commercial
paper intermittently as short-term financing. As of December 31, 1997, Northern
Indiana had $71.5 million in commercial paper outstanding, having a weighted
average interest rate of 6.16%.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1999. As of December 31, 1997,
there were no borrowings outstanding under this agreement. In addition,
Northern Indiana has $14.2 million in lines of credit which run to May 31,
1998. The credit pricing of each of the lines varies from either the lending
banks' commercial prime or market rates. Northern Indiana has agreed to
compensate the participating banks with arrangements that vary from no
commitment fee to a combination of fees which are mutually satisfactory to
both parties. As of December 31, 1997, there were no borrowings under these
lines of credit. The Credit Agreement and lines of credit are also available
to support the issuances of commercial paper.
Northern Indiana also has $273.5 million of money market lines of
credit. As of December 31, 1997, $47.5 million of borrowings were
outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
December 31, 1997, there were no borrowings outstanding under this facility.
During recent years, Northern Indiana has been able to finance its
construction program with internally generated funds and expects to be able
to meet future commitments through such funds.
Northern Indiana does not expect the effects of inflation at current
levels to have a significant impact on its results of operations, ability to
contain cost increases, or need to seek timely and adequate rate relief.
Northern Indiana does not anticipate the need to file for gas and electric
base rate increases in the near future.
YEAR 2000 COSTS. Northern Indiana has several major projects underway
to modify portions of its systems for proper functioning in the year 2000.
These include a project to evaluate Northern Indiana's proprietary software and
to work with each of Northern Indiana's software vendors to assure that
appropriate steps are being taken to mitigate the problem in each vendor's
software or, in some cases, to replace software with year 2000 compliant
software; a project to identify and mitigate problems wherever they exist in
Northern Indiana's systems (ranging from equipment used in Northern Indiana's
generating stations to Northern Indiana's phone system that have date
information within them); and an initiative to assure that each entity that
electronically receives information from Northern Indiana or sends information
to Northern Indiana is aware of the steps that Northern Indiana is taking and
is taking appropriate steps of its own to address the problem. Consistent
with its plan, Northern Indiana expects to be year 2000 compliant with some
systems as early as third quarter 1998 and other systems no later than the
third quarter of 1999.
Northern Indiana estimates that costs to become year 2000 compliant will
be approximately $6-$9 million, including acquisition costs of new systems
which will be capitalized consistent with Northern Indiana's accounting
policies. Costs related to maintenance or modification of Northern Indiana's
systems have been and will be expensed as incurred. Northern Indiana does not
anticipate the related costs to have a material impact on its results of
operations, nor does Northern Indiana currently anticipate any disruption of its
ability to deliver service as a result of the year 2000 issue.
COMPETITION. The Energy Policy Act of 1992 (Energy Act) allows FERC
to order electric utilities to grant access to transmission systems by third
party power producers. The Energy Act specifically prohibits federally
mandated wheeling of power for retail customers. On April 24, 1996, FERC
issued its Order No. 888-A which opens wholesale power sales to competition
and requires public utilities owning, controlling, or operating transmission
lines to file non-discriminatory open access tariffs that offer others the
same transmission service they provide themselves. Northern Indiana filed
its tariff as did virtually all other transmission owners subject to FERC
jurisdiction. Order No. 888-A also provides for the full recovery of stranded
costs - that is, costs that were prudently incurred to serve power customers
and that could go unrecovered if these customers use open access to move to
another supplier. FERC expects this rule will accelerate competition and
bring lower prices and more choices to wholesale energy customers. On
November 25, 1997, FERC issued Order No. 888-B on rehearing, affirming in all
important respects its earlier Order No. 888-A. Although wholesale customers
represent a relatively small portion of Northern Indiana's sales, Northern
Indiana will continue its efforts to retain and add customers by offering
competitive rates.
In both January 1997 and January 1998, legislation was introduced in the
Indiana General Assembly addressing electric utility competition and
deregulation. The proposed legislation was not adopted, but similiar
legislation may be reintroduced in the future. Northern Indiana has begun
discussions with other utilities and its largest customers on the technical and
economic aspects of possible legislation to allow customer choice.
Operating in a competitive environment will place added pressures on
utility profit margins and credit quality. Increasing competition in the
electric utility industry has already led the credit rating agencies to
apply more stringent guidelines in making credit rating determinations.
Competition within the electric utility industry will create
opportunities to compete for new customers and revenues, as well as increase
the risk of the loss of customers. Northern Indiana's management has taken
steps to make the company more competitive and profitable in the changing
utility environment, including conversions of some of its generating units
to allow use of lower cost, low sulfur coal.
FERC Order No. 636 shifted primary responsibility for gas
acquisition, transportation, and peak days' supply from pipelines to local
gas distribution companies, such as Northern Indiana. Although pipelines
continue to transport gas, they no longer provide sales service. Northern
Indiana believes it has taken appropriate steps to ensure the continued
acquisition of adequate gas supplies at reasonable prices.
The mix of gas revenues from retail sales, interruptible retail sales,
firm transportation service, and interruptible transportation services has
changed significantly over the past several years. The deregulation of the
gas industry, since the mid-1980's, allows large industrial and commercial
customers to purchase their gas supplies directly from producers and use
Northern Indiana's facilities to transport the gas. Transportation
customers pay Northern Indiana only for transporting their gas from the
pipeline to the customers' premises.
Northern Indiana filed a petition for an Alternative Regulatory Plan
(ARP) with the Commission on November 29, 1995. Following negotation and
settlement with major intervenors, Northern Indiana submitted a modified ARP
to the Commission on May 9, 1997. In its modified ARP, Northern Indiana
proposed to implement new rates and services that would include, among other
things, further unbundling of services for additional customer classes,
increased customer choice for sources of natural gas supply, negotiated
services and prices, an incentive gas cost mechanism and a price protection
program. On October 8, 1997, the Commission issued an order approving, in
all respects, the modified ARP which became effective November 1, 1997. The
first pilot program was launched in January 1998 and the first gas volumes
will flow under this program by April 1, 1998. ERI Services, Inc. and Enron
Capital and Trade Resources Corp. filed Petitions for Rehearing of the
Commission Order, and during the first quarter of 1998 the Commission denied
such petition.
To date, Northern Indiana's system has not been materially adversely
affected by competition, and management does not foresee substantial adverse
effects in the near future, unless the current regulatory structure is
substantially altered. Northern Indiana believes the steps it is taking to
deal with increased competition will have significant, positive effects in the
next few years.
FORWARD LOOKING STATEMENTS. This report contains forward looking
statements within the meaning of the securities laws. Northern Indiana
cautions that, while it believes such statements to be based on reasonable
assumptions and makes such statements in good faith, there can be no assurance
that the actual results will not differ materially from such assumptions or
that the expectations set forth in the forward looking statements derived from
such assumptions will be realized. Investors should be aware of important
factors that could have a material impact on future results. These factors
include, but are not limited to, weather, the federal and state regulatory
environment, the economic climate, regional, commercial, industrial and
residential growth in the service territories served by Northern Indiana,
customer's usage patterns and preferences, the speed and degree to which
competition enters the utility industries, the timing and extent of changes
in commodity prices, changing conditions in the capital and equity markets
and other uncertainties, all of which are difficult to predict, and many of
which are beyond the control of Northern Indiana.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risks to which Northern Indiana is exposed and in
connection with which Northern Indiana uses market risk sensitive instruments
are commodity risk and interest rate risk.
Although Northern Indiana is subject to commodity price risk as part of
its traditional operations, the current regulatory framework within which
Northern Indiana operates allows for full collection of fuel and gas costs in
rate-making. Consequently, there is limited commodity price risk after
consideration of the related rate-making. However, as the utility industry
deregulates, Northern Indiana will be providing services without the benefit
of the traditional rate-making allowances and will therefore be more exposed
to commodity price risk.
Northern Indiana utilizes commodity futures and option contracts to
minimize the impact of price changes to a small portion of its supply portfolio.
The Commission issued an order approving the inclusion of any gains or
losses associated with the use of derivative financial and commodity instruments
into Northern Indiana's gas cost adjustment clause.
Because the commodities covered by Northern Indiana's derivative financial
and commodity instruments are substantially the same commodities that Northern
Indiana buys and sells in the physical market, no special correlation studies
other than monitoring the degree of convergence between the derivative and cash
market are deemed necessary.
Due to the provisions of the gas cost adjustment clause and the
fuel adjustment clause, movements in the natural gas and electric market prices
would not impact net income.
Northern Indiana utilizes long-term debt as a primary source of capital
in its business. A significant portion of Northern Indiana's long-term debt
consists of fixed price debt instruments which have been and will be refinanced
at lower interest rates if Northern Indiana deems it to be economical. Refer to
Consolidated Statement of Long-Term Debt for detailed information related to
Northern Indiana's long-term debt outstanding and Fair Value of Financial
Instruments in Notes to Consolidated Financial Statements for current market
valuation of long-term debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages
=========
Report of Independent Public Accountants 18-19
Consolidated Statement of Income for the years
ended December 31, 1997, 1996, and 1995 19-20
Consolidated Balance Sheet - December 31, 1997
and 1996 20-22
Consolidated Statement of Capitalization -
December 31, 1997 and 1996 22-24
Consolidated Statement of Long-term Debt -
December 31, 1997 and 1996 24-25
Consolidated Statement of Cash Flows for the
years ended December 31, 1997, 1996, and 1995 25-26
Consolidated Statement of Retained Earnings for
the years ended December 31, 1997, 1996, and 1995 26-27
Notes to Consolidated Financial Statements 27-49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
We have audited the accompanying consolidated balance sheet and
consolidated statements of capitalization and long-term debt of Northern
Indiana Public Service Company (an Indiana corporation and a wholly-owned
subsidiary of NIPSCO Industries, Inc.) and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of income, retained
earnings and cash flows for each of the three years in the period ended
December 31, 1997. These consolidated financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Northern Indiana Public Service Company and subsidiaries as of December 31,
1997 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule appearing in Item
14(a)(2)listed on Page 60 is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in
our opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken
as a whole.
/s/ Arthur Andersen LLP
Chicago, Illinois
January 30, 1998
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997 1996 1995
========== ========== ==========
(Dollars in thousands)
Operating Revenues:
(Notes 2, 4 and 21)
Gas $ 735,299 $ 731,874 $ 633,355
Electric 1,017,083 1,022,231 1,030,923
---------- ---------- ----------
1,752,382 1,754,105 1,664,278
---------- ---------- ----------
Cost of Energy: (Note 2)
Gas costs 452,436 444,141 366,487
Fuel for electric generation 238,548 233,215 242,337
Power purchased 37,274 53,751 43,681
---------- ---------- ----------
728,258 731,107 652,505
---------- ---------- ----------
Operating Margin 1,024,124 1,022,998 1,011,773
---------- ---------- ----------
Operating Expenses and
Taxes (except income):
Operation 269,275 281,066 278,683
Maintenance (Note 2) 68,853 68,729 76,953
Depreciation and
amortization (Note 2) 223,025 211,545 198,259
Taxes (except income) 71,752 72,069 71,831
---------- ---------- ----------
632,905 633,409 625,726
---------- ---------- ----------
Operating Income Before
Utility Income Taxes 391,219 389,589 386,047
---------- ---------- ----------
Utility Income Taxes (Note 6) 110,099 109,051 106,574
---------- ---------- ----------
Operating Income 281,120 280,538 279,473
---------- ---------- ----------
Other Income (Deductions) (3,659) 240 (3,619)
---------- ---------- ----------
Interest Charges:
Interest on long-term debt 69,427 68,798 72,339
Other interest 7,574 11,225 8,395
Allowance for borrowed funds used
during construction and carrying
charges (Note 2) (354) (805) (3,320)
Amortization of premium, reacquisition
premium, discount and expense on
debt, net 4,194 4,250 4,119
---------- ---------- ----------
80,841 83,468 81,533
---------- ---------- ----------
Net Income 196,620 197,310 194,321
Dividend requirements on
preferred stocks 8,539 8,712 9,046
---------- ---------- ----------
Balance available
for common shares $ 188,081 $ 188,598 $ 185,275
========== ========== ==========
Common dividends declared $ 187,775 $ 187,450 $ 185,725
========== =========== ==========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 1996
=========== ===========
(Dollars in thousands)
ASSETS
UTILITY PLANT, at original cost (including
construction work in progress of
$140,534 and $162,123, respectively)
(Note 2):
Electric $ 4,066,568 $ 4,050,084
Gas 1,223,693 1,176,871
Common 351,350 346,636
----------- -----------
5,641,611 5,573,591
Less - Accumulated provision for
depreciation and amortization 2,613,352 2,499,687
----------- -----------
Total Utility Plant 3,028,259 3,073,904
----------- -----------
OTHER PROPERTY AND INVESTMENTS 1,215 8,971
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents 9,800 8,279
Accounts receivable, less reserve of
$4,524 and $4,568, respectively (Note 2) 101,188 111,866
Fuel adjustment clause (Note 2) 2,679 9,149
Gas cost adjustment clause (Note 2) 86,520 98,167
Materials and supplies, at average cost 53,666 56,796
Electric production fuel, at average cost 18,837 26,483
Natural gas in storage, at last-in,
first-out cost (Note 2) 45,880 50,409
Prepayments and other 23,128 25,826
----------- -----------
Total Current Assets 341,698 386,975
----------- -----------
OTHER ASSETS:
Regulatory assets (Note 2) 205,965 239,547
Prepayments and other (Note 7) 97,777 64,883
----------- -----------
Total Other Assets 303,742 304,430
----------- -----------
$ 3,674,914 $ 3,774,280
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 1996
=========== ===========
(Dollars in thousands)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's equity $ 1,018,303 $ 1,017,996
Preferred stocks (Note 9) -
Series without mandatory
redemption provisions (Note 10) 81,123 81,126
Series with mandatory
redemption provisions (Note 11) 58,841 61,246
Long-term debt, excluding amounts due
within one year (Note 15) 1,079,496 992,008
----------- -----------
Total capitalization 2,237,763 2,152,376
----------- -----------
CURRENT LIABILITIES:
Current portion of long-term debt 51,009 67,247
(Note 16)
Short-term borrowings (Note 17) 119,000 272,905
Accounts payable 127,742 190,182
Dividends declared on common and
preferred stocks 56,198 54,255
Customer deposits 20,236 16,768
Taxes accrued 88,852 78,806
Interest accrued 7,646 5,851
Accrued employment costs 51,095 40,915
Other 34,051 27,934
----------- -----------
Total current liabilities 555,829 754,863
----------- -----------
OTHER:
Deferred income taxes (Note 6) 602,936 597,105
Deferred investment tax credits, being
amortized over life of related property
(Note 6) 99,853 107,058
Deferred credits 53,323 50,058
Accrued liability for postretirement
benefits (Note 8) 115,177 104,123
Other noncurrent liabilities 10,033 8,697
----------- -----------
Total other 881,322 867,041
----------- -----------
COMMITMENTS AND CONTINGENCIES:
(Notes 3, 4, 5, 18 and 19)
$ 3,674,914 $ 3,774,280
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF CAPITALIZATION
DECEMBER 31, 1997 1996
=========== ===========
(Dollars in thousands)
COMMON SHAREHOLDER'S EQUITY:
Common shares - without par
value - authorized 75,000,000
shares - issued and outstanding
73,282,258 shares $ 859,488 $ 859,488
Additional paid-in capital 12,522 12,521
Retained earnings 146,293 145,987
----------- -----------
Total common shareholder's
equity 1,018,303 45.5% 1,017,996 47.3%
----------- -----------
PREFERRED STOCKS, WHICH ARE
REDEEMABLE SOLELY AT OPTION
OF NORTHERN INDIANA:
Cumulative preferred stock -
$100 par value -
4-1/4% series - 209,118 and
209,145 shares outstanding,
respectively 20,912 20,915
4-1/2% series - 79,996
shares outstanding 8,000 8,000
4.22% series - 106,198
shares outstanding 10,620 10,620
4.88% series - 100,000
shares outstanding 10,000 10,000
7.44% series - 41,890
shares outstanding 4,189 4,189
7.50% series - 34,842
shares outstanding 3,484 3,484
Premium on preferred stock 254 254
Cumulative preferred stock -
no par value -
Adjustable Rate (6.00% at
December 31, 1997) -
Series A (stated value -
$50 per share), 473,285
shares outstanding 23,664 23,664
----------- -----------
81,123 3.6% 81,126 3.8%
----------- -----------
REDEEMABLE PREFERRED STOCKS,
SUBJECT TO MANDATORY REDEMPTION
REQUIREMENTS OR WHOSE
REDEMPTION IS OUTSIDE THE
CONTROL OF NORTHERN INDIANA:
Cumulative preferred stock -
$100 par value -
8.85% series - 62,500 and
75,000 shares outstanding,
respectively 6,250 7,500
7-3/4% series - 38,906 and
44,460 shares outstanding,
respectively 3,891 4,446
8.35% series - 57,000 and
63,000 shares outstanding,
respectively 5,700 6,300
Cumulative preferred stock -
no par value -
6.50% series - 430,000
shares outstanding 43,000 43,000
----------- -----------
58,841 2.7% 61,246 2.8%
----------- -----------
LONG-TERM DEBT 1,079,496 48.2% 992,008 46.1%
___________ ______ ___________ ______
Total capitalization $ 2,237,763 100.0% $ 2,152,376 100.0%
=========== ====== =========== ======
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF LONG-TERM DEBT
DECEMBER 31, 1997 1996
=========== ===========
(Dollars in thousands)
FIRST MORTGAGE BONDS -
Series P, 6-7/8%, due October 1, 1998 $ 0 $ 14,509
Series T, 7-1/2%, due April 1, 2002 39,500 40,000
Series NN, 7.10%, due July 1, 2017 55,000 55,000
----------- -----------
Total 94,500 109,509
----------- -----------
POLLUTION CONTROL NOTES AND BONDS -
Series A Note -
City of Michigan City, 5.70% due
October 1, 2003 18,000 19,000
Series 1988 Bonds - Jasper County -
Series A, B and C - 3.81% weighted
average at December 31, 1997, due
November 1, 2016 130,000 130,000
Series 1988 Bonds - Jasper County -
Series D - 3.78 weighted average at
December 31, 1997, due November 1, 2007 24,000 24,000
Series 1994 Bonds - Jasper County -
Series A - 4.25% at December 31, 1997
due August 1, 2010 10,000 10,000
Series 1994 Bonds - Jasper County -
Series B - 4.25% at December 31, 1997,
due June 1, 2013 18,000 18,000
Series 1994 Bonds - Jasper County -
Series C - 4.25% at December 31, 1997,
due April 1, 2019 41,000 41,000
----------- -----------
Total 241,000 242,000
----------- -----------
MEDIUM-TERM NOTES -
Issued at interest rates between 6.10%
and 7.69% with a weighted average interest
rate of 7.00% and various maturities between
April 5, 2000 and August 4, 2027 748,025 644,025
----------- -----------
UNAMORTIZED PREMIUM AND DISCOUNT
ON LONG-TERM DEBT, NET (4,029) (3,526)
----------- -----------
Total long-term debt, excluding
amounts due in one year $ 1,079,496 $ 992,008
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 1996 1995
=========== =========== ===========
(Dollars in thousands)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 196,620 $ 197,310 $ 194,321
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 223,025 211,545 198,259
Deferred federal and state
operating income taxes, net (8,414) 26,117 (3,247)
Deferred investment tax
credits, net (7,205) (7,327) (7,436)
Advance contract payment 1,900 (17,100) 0
Change in certain assets and
liabilities -
Accounts receivable, net 10,678 (15,790) (15,099)
Electric production fuel 7,646 (12,225) 4,089
Materials and supplies 3,130 7,028 11
Natural gas in storage 4,529 3,004 19,049
Accounts payable (51,273) 35,517 (7,839)
Taxes accrued 21,488 14,628 (11,156)
Fuel adjustment clause 6,470 1,152 (8,687)
Gas cost adjustment clause 11,647 (94,054) 23,731
Accrued employment costs 10,180 (4,856) 2,511
Other accruals 6,117 (14,488) 21,116
Other, net 21,799 6,962 888
----------- ----------- -----------
Net cash provided by
operating activities 458,337 337,423 410,511
----------- ----------- -----------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Construction expenditures (174,231) (198,223) (185,560)
Other, net (3,191) 22,102 710
----------- ----------- -----------
Net cash used in investing
activities (177,422) (176,121) (184,850)
----------- ----------- -----------
CASH FLOWS PROVIDED BY
(USED IN) FINANCING
ACTIVITIES:
Issuance of long-term debt 139,000 0 168,386
Issuance of short-term debt 534,430 1,172,150 943,200
Net change in commercial paper (122,405) 149,105 (111,700)
Retirement of long-term debt (67,247) (80,000) (120,868)
Retirement of short-term debt (565,930) (1,211,950) (917,100)
Retirement of preferred stock (2,408) (2,604) (7,095)
Cash dividends paid on
common shares (185,775) (182,950) (180,475)
Cash dividends paid on
preferred shares (8,556) (8,766) (9,241)
Other, net (503) 514 (284)
----------- ----------- -----------
Net cash used in
financing activities (279,394) (164,501) (235,177)
----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 1,521 (3,199) (9,516)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 8,279 11,478 20,994
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 9,800 $ 8,279 $ 11,478
=========== =========== ===========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1997 1996 1995
========= ========= =========
(Dollars in thousands)
BALANCE AT BEGINNING OF PERIOD $ 145,987 $ 144,839 $ 145,289
ADD:
NET INCOME 196,620 197,310 194,321
--------- --------- ---------
342,607 342,149 339,610
--------- --------- ---------
LESS:
DIVIDENDS:
Cumulative Preferred stock -
4-1/4% series 889 889 891
4-1/2% series 360 360 360
4.22% series 448 448 448
4.88% series 488 488 488
7.44% series 312 312 312
7.50% series 261 261 261
8.85% series 682 793 903
7-3/4% series 362 395 449
8.35% series 522 572 622
6.50% series 2,795 2,795 2,795
Adjustable Rate, series A 1,420 1,399 1,517
Common shares 187,775 187,450 185,725
---------- --------- ---------
196,314 196,162 194,771
---------- --------- ---------
BALANCE AT END OF PERIOD $ 146,293 $ 145,987 $ 144,839
========== ========= =========
The accompanying notes to consolidated financial statements are an
integral part of this statement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) HOLDING COMPANY STRUCTURE: NIPSCO Industries, Inc. (Industries) was
incorporated in Indiana on September 22, 1987 and became the parent of
Northern Indiana Public Service Company (Northern Indiana) on March 3, 1988.
Northern Indiana is a public utility operating company supplying electricity
and gas to the public in the northern third of Indiana.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION. The consolidated financial statements include
the accounts of Northern Indiana and its two subsidiaries, Shore Line Shops,
Inc. and NIPSCO Exploration Company, Inc. All significant intercompany
items have been eliminated in consolidation. Certain reclassifications were
made to conform the prior years' financial statements to the current
presentation.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
OPERATING REVENUES. Revenues are recorded based on estimated service
rendered, but are billed to customers monthly on a cycle basis.
DEPRECIATION AND MAINTENANCE. Northern Indiana provides depreciation on
a straight-line method over the remaining service lives of the electric, gas and
common properties. The provisions, as a percentage of the cost of depreciable
utility plant, were approximately 4.3% for the year 1997, 4.2% for year 1996,
and 4.1% for year 1995. The depreciation rates for electric and gas properties
were 3.55% and 4.92%, respectively.
Northern Indiana follows the practice of charging maintenance and
repairs, including the cost of renewals of minor items of property, to
maintenance expense accounts, except for repairs of transportation and service
equipment which are charged to clearing accounts and redistributed to
operating expense and other accounts. When property which represents a
retirement unit is replaced or removed, the cost of such property is credited
to utility plant, and such cost, together with the cost of removal less salvage,
is charged to the accumulated provision for depreciation.
AMORTIZATION OF SOFTWARE COSTS. Northern Indiana has capitalized software
relating to various technology functions. At the date of installation, Northern
Indiana estimates that the specific software will have a useful life between
five and ten years. The FERC prescribes certain amortization periods, and
Northern Indiana's management has determined that, on average, these are
reasonable useful life estimates for the portfolio of capitalized software.
Northern Indiana includes these amortization estimates, based on useful life,
in its quarterly filings with the Indiana state regulatory commission.
COAL RESERVES. Northern Indiana has a long-term mining contract to
mine its coal reserves through the year 2001. The costs of the reserves are
being recovered through the rate-making process as such coal reserves are used
to produce electricity.
POWER PURCHASED. Power purchases and net interchange power with other
electric utilities under interconnection agreements are included in Cost of
Energy under the caption "Power purchased."
ACCOUNTS RECEIVABLE. At December 31, 1997, Northern Indiana had sold
$100 million of its accounts receivable under a sales agreement which expires
May 31, 2002. The December 31, 1997 and 1996 accounts receivable balances
include approximately $5.4 million and $7.1 million respectively, due from
associated companies.
STATEMENT OF CASH FLOWS. For purposes of the Consolidated Statement
of Cash Flows, Northern Indiana considers temporary cash investments with an
original maturity of three months or less to be cash equivalents.
Cash paid during the periods reported for income taxes and interest
was as follows:
1997 1996 1995
======== ======== ========
(Dollars in thousands)
Income taxes $104,809 $ 73,631 $128,487
Interest, net of amounts capitalized $ 75,085 $ 78,268 $ 80,635
FUEL ADJUSTMENT CLAUSE. All metered electric rates contain a provision
for adjustment in charges for electric energy to reflect increases and
decreases in the cost of fuel and the fuel cost of purchased power through
operation of a fuel adjustment clause. As prescribed by order of the Indiana
Utility Regulatory Commission (Commission) applicable to metered retail rates,
the adjustment factor has been calculated based on the estimated cost of fuel
and the fuel cost of purchased power in a future three-month period. If two
statutory requirements relating to expense and return levels are satisfied,
any under-recovery or over-recovery caused by variances between estimated and
actual cost in a given three-month period will be included in a future filing.
Northern Indiana records any under-recovery or over-recovery as a current
asset or current liability until such time as it is billed or refunded to its
customers. The fuel adjustment factor is subject to a quarterly hearing by
the Commission and remains in effect for a three-month period.
GAS COST ADJUSTMENT CLAUSE. All metered gas rates contain an adjustment
factor which reflects the cost of purchased gas, contracted gas storage, and
storage transportation charges. Northern Indiana records any under-recovery
or over-recovery as a current asset or current liability until such time as it
is billed or refunded to its customers. The gas cost adjustment factor is
subject to a quarterly hearing by the Commission and remains in effect for a
three-month period. If the statutory requirement relating to the level of
return is satisfied, any under-recovery or over-recovery caused by variances
between estimated and actual cost in a given three month period will be
included in a future filing. See Note 4, FERC Order No. 636 for a discussion
of gas transition cost charges.
NATURAL GAS IN STORAGE. Natural gas in storage is valued using the
last-in, first-out (LIFO) inventory methodology. Based on the average cost of
gas purchased in December 1997 and 1996 the estimated replacement cost of
gas in storage (current and non-current) at December 31, 1997 and 1996
exceeded the stated LIFO cost by approximately $42 million and $96 million,
respectively.
AFFILIATED COMPANY TRANSACTIONS. Pursuant to agreement, effective
July 1, 1996, Northern Indiana receives executive, financial, gas supply,
sales and marketing, and administrative and general services from an
affiliate, NIPSCO Industries Management Services Company (NIMSC), a
wholly-owned subsidiary of Industries.
The costs of these services are charged to Northern Indiana based on
payroll and expenses incurred by NIMSC's employees for the benefit of
Northern Indiana. These costs which totaled $28.8 million for the year
1997 and $17.4 million for the six-month period ended December 31, 1996,
consist primarily of employee compensation and benefits.
Northern Indiana purchased natural gas and transportation services
from affiliated companies in the amount of $10.2 million and $17.3 million,
representing 2.2% and 4.1% of Northern Indiana's total gas costs for years 1997
and 1996, respectively.
Northern Indiana subleases a portion of office facilities to affiliated
companies for a monthly fee, which includes operating expenses, based on
space utilization.
HEDGING ACTIVITIES. Northern Indiana uses commodity futures and option
contracts to hedge the impact of natural gas price fluctuations related to its
business activities. Gains and losses on these commodity-based derivative
financial instruments are deferred and recognized in income concurrent with
the related purchases and sales of natural gas.
As of December 31, 1997, Northern Indiana executed options to hedge price
risk associated with 3.0 billion cubic feet of natural gas stored in inventory.
The deferred premiums paid for these options were not material.
REGULATORY ASSETS. Northern Indiana's operations are subject to the
regulation of the Federal Energy Regulatory Commission (FERC). Accordingly,
Northern Indiana's accounting policies are subject to the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the
Effects of Certain Types of Regulation." Northern Indiana monitors changes in
market and regulatory conditions and the resulting impact of such changes in
order to continue to apply the provisions of SFAS No. 71 to some or all of its
operations. As of December 31, 1997 and December 31, 1996, the regulatory
assets identified below represent probable future revenue to Northern Indiana
associated with certain incurred costs as these costs are recovered through
the rate-making process. If a portion of Northern Indiana's operations
becomes no longer subject to the provisions of SFAS No. 71, a write-off of
certain regulatory assets might be required, unless some form of transition
cost recovery is established by the appropriate regulatory body which would
meet the requirements under generally accepted accounting principles for
continued accounting as regulatory assets during such recovery period.
Regulatory assets were comprised of the following items:
December 31, December 31,
1997 1996
============= =============
(Dollars in thousands)
Unamortized reacquisition premium on
debt (Note 15) $ 46,426 $ 49,890
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges
and deferred depreciation (See below) 66,546 70,763
Bailly scrubber carrying charges and
deferred depreciation (See below) 9,880 10,816
Deferral of SFAS No. 106 expense not
recovered (Note 8) 83,965 87,005
FERC Order No. 636 transition costs (Note 4) 28,744 47,399
Regulatory income tax asset, net (Note 6) 9,664 9,002
------------- -------------
245,225 274,875
------------- -------------
Less: Current portion of regulatory assets 39,260 35,328
------------- -------------
$ 205,965 $ 239,547
============= =============
CARRYING CHARGES AND DEFERRED DEPRECIATION. Upon completion of R. M.
Schahfer Units 17 and 18, Northern Indiana capitalized the carrying charges
and deferred depreciation in accordance with orders of the Commission until
the cost of each unit was allowed in rates. Such carrying charges and
deferred depreciation are being amortized over the remaining life of each
unit.
Northern Indiana has capitalized carrying charges and deferred
depreciation and certain operating expenses relating to its scrubber service
agreement for its Bailly Generating Station in accordance with an order of
the Commission. Pursuant to such order, capitalization of carrying charges
and deferral of depreciation and certain operating expenses ceased on
December 31, 1995. The accumulated balance of the deferred costs and related
carrying charges is being amortized over the remaining life of the scrubber
service agreement.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. Allowance for funds
used during construction (AFUDC) is charged to construction work in progress
during the period of construction and represents the net cost of borrowed
funds used for construction purposes and a reasonable rate upon other (equity)
funds. Under established regulatory rate practices, after the construction
project is placed in service, Northern Indiana is permitted to include in the
rates charged for utility services (a) a fair return on and (b) depreciation
of such AFUDC included in plant in service.
At January 1, 1995 a pretax rate of 6.0% for all construction was
being used; effective January 1, 1996, the rate decreased to 5.5% and
effective January 1, 1997, the rate remained at 5.5%.
INCOME TAXES. Deferred income taxes are recognized as costs in the
rate-making process by the commissions having jurisdiction over the rates
charged by Northern Indiana. Deferred income taxes are provided as a result
of provisions in the income tax law that either require or permit certain
items to be reported on the income tax return in a different period than they
are reported in the financial statements. These taxes are reversed by a debit
or credit to deferred income tax expense as the temporary differences reverse.
Investment tax credits have been deferred and are being amortized to income
over the life of the related property.
(3) RESOLUTION OF TAX MATTER: In 1991, the Internal Revenue Service (IRS)
issued a notice of deficiency for Northern Indiana's taxes for the years 1982
through 1985 ($3,785,250 per year plus interest) relating to interest
payments on $70 million of 17-1/4% Notes issued in 1981 by Northern Indiana's
former foreign subsidiary, Northern Indiana Public Service Finance N.V.
(Finance). The IRS maintained that interest paid on the Notes should have
been subject to United States tax withholding. Northern Indiana challenged
the assessment in the United States Tax Court (Tax Court) and the Tax Court
ruled in favor of Northern Indiana, finding that the interest paid on the
Notes was not subject to United States tax withholding. The IRS appealed
the Tax Court's decision to the U.S. Court of Appeals for the Seventh Circuit
(Court of Appeals) and Northern Indiana filed a cross appeal. On June 6,
1997, the Court of Appeals issued an order affirming in full the favorable
Tax Court order. The IRS did not appeal the decision of the Court of Appeals.
(4) FERC ORDER NO. 636. Northern Indiana has recorded approximately $136
million of interstate pipeline transition costs since December 31, 1993 to
reflect the impact of FERC Order No. 636, a majority of which costs have been
paid to the pipeline suppliers. Northern Indiana expects that additional
transition costs will not be significant. The Commission has approved the
recovery of these FERC-allowed transition costs on a volumetric basis from
sales and transportation customers. Regulatory assets, in amounts
corresponding to the costs recorded but not yet collected, have been recorded
to reflect the ultimate recovery of these costs.
(5) ENVIRONMENTAL MATTERS: Northern Indiana has an ongoing program to
remain aware of laws and regulations involved with hazardous waste and other
environmental matters. It is Northern Indiana's intent to continue to
evaluate its facilities and properties with respect to these rules and
identify any sites that would require corrective action. Northern Indiana has
recorded a reserve of approximately $19 million to cover probable corrective
actions as of December 31, 1997; however, environmental regulations and
remediation techniques are subject to future change. The ultimate cost could
be significant, depending on the extent of corrective actions required. Based
upon investigations and management's understanding of current laws and
regulations, Northern Indiana believes that any corrective actions required,
after consideration of insurance coverages and contributions from other
potentially responsible parties, will not have a significant impact on the
results of operations or financial position of Northern Indiana.
Because of major investments made in modern environmental control
facilities and the use of low-sulfur coal, all of Northern Indiana's electric
production facilities now comply with the specific sulfur dioxide limitations
contained in the acid deposition provisions of the Clean Air Act Amendments of
1990 (CAAA). Reflecting this compliance, on December 31, 1997, Indiana
Department of Environmental Management (IDEM) issued the Phase II Acid
Rain permits for all four of Northern Indiana's electric generating stations.
As discussed below, however, other provisions of the CAAA impose additional
requirements on Northern Indiana.
On December 19, 1996, the Environmental Protection Agency (EPA)
promulgated rules for Phase II of the Acid Rain nitrogen oxides (NOx)reduction
program. For Phase I, during the summer of 1997, the EPA formally approved
the Acid Rain Early Election permits for the pulverized coal units at D. H.
Mitchell and R. M. Schahfer stations. The permits establish the Phase I
limits for the NOx emissions on these units until 2007. On December 23, 1997,
Northern Indiana submitted an Acid Rain Phase II NOx Compliance Plan to IDEM
which included additional controls for two cyclone fired boilers and a plan
for emission averaging to achieve the NOx limits for the system by 2000.
Northern Indiana plans a project to demonstrate a cost effective combustion
control technique on the Unit 12 cyclone fired boiler at Michigan City during
1998. The CAAA also contain other provisions that could lead to limitations
on emissions of hazardous air pollutants which may require significant capital
expenditures for control of these emissions. Northern Indiana cannot predict
what these requirements will be or the costs of complying with these potential
requirements.
On October 10, 1997, the EPA proposed a rule under the nonattainment
provisions of the CAAA to reduce emissions transported across state boundaries
that allegedly are contributing to nonattainment of the one hour ozone standard
in downwind states. Because NOx is considered a precursor or cause of ozone
formation, the EPA proposed significant NOx reductions for 22 states,
including Indiana, to address the ozone transport issue. These proposals, and
any resulting NOx emission limitations arise under different provisions of the
CAAA than the Acid Rain NOx program and can result in additional, more
restrictive emissions limitations than are imposed under the Acid Rain
Program. The EPA has encouraged states to achieve the reductions by requiring
controls on electric utilities and large boilers. Northern Indiana is
evaluating the EPA's proposal and evaluating potential requirements that could
result from any final rule.
The EPA issued final rules on July 18, 1997 revising the National
Ambient Air Quality Standards for ozone and particulate matter. The revised
standards begin a regulatory process that may lead to reductions in
particulate, NOx and possibly sulfur dioxide emissions from coal-fired boilers
(including Northern Indiana's generating stations) beyond reductions required in
the Acid Rain nonattainment provisions of the CAAA. Northern Indiana cannot
predict the costs of complying with future control requirements to meet these
new standards. Northern Indiana will continue to closely monitor developments
in this area and anticipates that the exact nature of the impact of the new
standards on its operations will not be known for some time.
The EPA has notified Northern Indiana that it is a "potentially
responsible party" (PRP) under the Comprehensive Environmental Response
Compensation and Liability Act (CERCLA) and may be required to share in the
cost of cleanup of several waste disposal sites identified by the EPA. The
sites are in various stages of investigation, analysis and remediation. At
each of the sites, Northern Indiana is one of several PRPs, and it is
expected that remedial costs, as provided under CERCLA, will be shared among
them. At some sites Northern Indiana and/or the other named PRPs are
presently working with the EPA to clean up the sites and avoid the imposition
of fines or added costs.
In December 1997, at the Summit on Climate Change in Kyoto, Japan, 159
nations formally agreed to targets reducing worldwide levels of greenhouse
gases. If the U.S. Senate ratifies the agreement, the Kyoto Protocol would
impose an obligation on the United States to reduce its emissions of
greenhouse gas to a level seven percent below 1990 levels during the period
2008 to 2012. The impact of this agreement on Northern Indiana is uncertain.
Northern Indiana, as a charter member of the Department of Energy's Climate
Challenge Program, the electric industries' voluntary reduction effort, has
already implemented over 21 projects to voluntarily reduce greenhouse gas
emissions. Northern Indiana continues to investigate methods to address
reduction in carbon dioxide emissions and will monitor the development of U.S.
climate change policy.
Northern Indiana has instituted a program to investigate former
manufactured-gas plants where it is the current or former owner. Northern
Indiana has identified twenty-four of these sites and made visual inspections
of these sites. Initial samplings have been conducted at fifteen sites.
Follow-up investigations have been conducted at seven sites and remedial
measures have been selected at four sites. Northern Indiana will continue its
program to assess and cleanup sites.
During the course of various investigations, Northern Indiana has
identified impacts to soil, groundwater, sediment and surface water from
former manufactured-gas plants. At three sites where residues were noted
seeping into rivers, Northern Indiana notified the IDEM and the EPA and
immediately took steps to contain the material. Northern Indiana has worked
with IDEM or the EPA on investigation or remedial activities at several sites.
Three of the sites have been enrolled in the IDEM Voluntary Remediation
Program (VRP). The goal of placing these sites in the VRP is to obtain IDEM
approval of the selection and implementation of whatever remedial measures, if
any, may be required. Northern Indiana anticipates placing additional sites
in the VRP after remedial measures have been selected.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured-gas
plant sites at which both companies or their predecessors were former
operators or owners. One of these sites is the Lafayette site which Indiana
Gas had previously notified Northern Indiana is being investigated and
remediated pursuant to an administrative order with IDEM. Northern Indiana
also notified Cinergy Services, Inc. (Cinergy) (formerly PSI Energy, Inc.)
that it was a former owner or operator of seven former manufactured-gas plants
at which Northern Indiana had conducted or was planning investigation or
remediation activities. In December 1996, Northern Indiana sent a written
demand to Cinergy related to one of these sites, Goshen. Northern Indiana
demanded that Cinergy pay Northern Indiana for costs Northern Indiana has
already incurred and to be incurred to implement the needed remedy at the
Goshen site. In August 1997, Northern Indiana filed suit in federal court
against Cinergy seeking recovery of those costs.
In 1994, Northern Indiana approached various companies that provided
insurance coverage which Northern Indiana believes covers costs related to
actions taken at former manufactured-gas plants. There has been litigation
between Northern Indiana and various insurance companies over covered costs.
Northern Indiana has filed claims in state court against various insurance
companies, seeking coverage for costs associated with several former
manufactured-gas plants and damages for alleged misconduct by some of the
insurance companies. The state court action is now proceeding. Northern
Indiana has received cash settlements from several of the insurance companies.
The possibility that exposure to electric and magnetic fields (EMF)
emanating from power lines, household appliances and other electric sources
may result in adverse health effects has been the subject of public,
governmental and media attention. Recently, researchers from the National
Cancer Institute and the Childhood Cancer Group reported they found no
evidence magnetic fields in homes increase the risk of childhood leukemia.
This study follows an EMF report previously released by the U.S. National
Research Council of the National Academy of Sciences, which concluded, after
examining more than 500 EMF studies spanning seventeen years, that among other
things, there was insufficient evidence to consider EMF a threat to human
health. Despite the report's findings, future research appropriations are
continuing to be dedicated to explore this issue.
(6) INCOME TAXES: Northern Indiana uses the liability method of accounting
for income taxes under which deferred income taxes are recognized, at
currently enacted income tax rates, to reflect the tax effect of temporary
differences between the financial statement and tax bases of assets and
liabilities.
To the extent certain deferred income taxes are recoverable or payable
through future rates, regulatory assets and liabilities have been established.
Regulatory assets are primarily attributable to undepreciated AFUDC-equity and
the cumulative net amount of other income tax timing differences for which
deferred taxes had not been provided in the past, when regulators did not
recognize such taxes as costs in the rate-making process. Regulatory
liabilities are primarily attributable to Northern Indiana's obligation to
credit to ratepayers deferred income taxes provided at rates higher than the
current federal tax rate currently being credited to ratepayers using the
average rate assumption method and unamortized deferred investment tax
credits.
Northern Indiana joins in the filing of consolidated tax returns with
Industries and currently pays to Industries its separate return tax liability
as defined in the Tax Sharing Agreement between Industries and its
subsidiaries.
The components of the net deferred income tax liability at December 31,
1997 and 1996 are as follows:
1997 1996
=========== ===========
(Dollars in thousands)
Deferred tax liabilities -
Accelerated depreciation
and other property differences $ 729,153 $ 719,197
AFUDC-equity 35,282 37,713
Adjustment clauses 33,829 40,700
Take-or-pay gas costs 384 765
Other regulatory assets 31,844 39,440
Reacquisition premium on debt 17,607 18,921
Deferred tax assets -
Deferred investment tax credits (37,869) (40,602)
Removal costs (144,111) (131,718)
FERC Order No. 636 transition costs 0 (8,144)
Other postretirement/postemployment
benefits (43,680) (42,434)
Other, net (5,516) (10,433)
----------- -----------
616,923 623,405
Less: Deferred income taxes related to
current assets and liabilities 13,987 26,300
----------- -----------
Deferred income taxes - noncurrent $ 602,936 $ 597,105
=========== ===========
Federal and state income taxes as set forth in the Consolidated
Statement of Income are comprised of the following:
1997 1996 1995
========= ========= =========
(Dollars in thousands)
Current income taxes -
Federal $ 108,902 $ 77,947 $ 102,047
State 16,816 12,314 15,210
--------- --------- ---------
125,718 90,261 117,257
--------- --------- ---------
Deferred income taxes, net -
Federal (7,998) 23,817 (3,190)
State (416) 2,300 (57)
--------- --------- ---------
(8,414) 26,117 (3,247)
--------- --------- ---------
Deferred investment tax credits, net (7,205) (7,327) (7,436)
--------- --------- ---------
Total utility operating income taxes 110,099 109,051 106,574
Income tax applicable to non-operating
activities and income of subsidiaries (3,536) (936) (3,216)
--------- --------- ---------
Total income taxes $ 106,563 $ 108,115 $ 103,358
========= ========= =========
A reconciliation of total tax expense to an amount computed by applying
the statutory federal income tax rate to pretax income is as follows:
1997 1996 1995
========= ========= =========
(Dollars in thousands)
Net income $ 196,620 $ 197,310 $ 194,321
Add - Income taxes 106,563 108,115 103,358
--------- --------- ---------
Net Income before income taxes $ 303,183 $ 305,425 $ 297,679
========= ========= =========
Amount derived by multiplying pretax
income by statutory rate $ 106,114 $ 106,899 $ 104,188
Reconciling items multiplied by the
statutory rate:
Book depreciation over related tax
depreciation 4,072 4,621 4,018
Amortization of deferred investment tax
credits (7,205) (7,327) (7,436)
State income taxes, net of federal income
tax benefit 10,247 10,240 9,577
Reversal of deferred taxes provided at
rates in excess of the current federal
income tax rate (4,063) (6,644) (5,665)
Other, net (2,602) 326 (1,324)
--------- --------- ---------
Total income taxes $ 106,563 $ 108,115 $ 103,358
========= ========= =========
(7) PENSION PLAN: Industries has a noncontributory, defined benefit
retirement plan covering substantially all employees of Northern Indiana.
Benefits under the plan reflect the employees' compensation, years of service
and age at retirement.
The plan's funded status as of December 31, 1997 and 1996 are as
follows:
1997 1996
========= =========
(Dollars in thousands)
Vested benefit obligation $(643,193) $(534,416)
Nonvested benefit (114,262) (103,284)
--------- ---------
Accumulated benefit obligation $(757,455) $(637,700)
========= =========
Projected benefit obligation for service
rendered to date $(843,049) $(732,870)
Plan assets at fair market value 896,950 782,162
--------- ---------
Plan assets in excess of projected
benefit obligation 53,901 49,292
Unrecognized transition obligation at December 31,
being recognized over seventeen years 32,930 38,418
Unrecognized prior service cost 45,502 23,736
Unrecognized gains (51,191) (67,111)
--------- ---------
Prepaid pension costs $ 81,142 $ 44,335
========= =========
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
7.00% and 7.75% and rates of increase in compensation levels of 4.50% and
5.50% were used to determine the accumulated benefit obligation and projected
benefit obligation at December 31, 1997 and 1996, respectively. The increase
in the accumulated benefit obligation at December 31, 1997 is mainly caused by
the decrease in the discount rate from 7.75% to 7.00%.
The following items are the components of provisions for pensions for
the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
========= ========= =========
(Dollars in thousands)
Service costs $ 13,325 $ 15,877 $ 11,865
Interest costs 55,921 52,788 51,834
Actual return on plan assets (122,537) (86,622) (133,793)
Amortization of transition obligation 5,488 5,488 5,488
Other net amortization and deferral 55,384 26,233 85,124
--------- --------- ---------
$ 7,581 $ 13,764 $ 20,518
========= ========= =========
Assumptions used in the valuation and determination of 1997, 1996 and
1995 pension expense were as follows:
1997 1996 1995
====== ====== ======
Discount rate 7.75% 7.25% 8.75%
Rate of increase in compensation levels 5.50% 5.50% 5.50%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
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. The expected cost of
such benefits is accrued during the employees' years of service.
Northern Indiana's rate-making has historically included the cost of
providing these benefits based on the related insurance premiums. On
December 30, 1992, the Commission authorized the accrual method of accounting
for postretirement benefits for rate-making purposes consistent with SFAS No.
106 "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
and authorized the deferral of the differences between the net periodic
postretirement benefit costs and the insurance premiums paid for such benefits
as a regulatory asset until such time as the accrual cost method could be
reflected in the rate-making process.
On June 11, 1997, the Commission issued an order approving the inclusion
of accrual-based postretirement benefit costs in the rate-making process to
be effective February 1, 1997 for electric rates and March 1, 1997 for gas
rates. These costs include an amortization of the existing regulatory asset
consistent with the remaining amortization period for the transition
obligation. Northern Indiana discontinued its cost deferral and began
amortizing its regulatory asset concurrent with these dates.
The following table sets forth the plans' accumulated postretirement
benefit obligation as of December 31, 1997 and December 31, 1996:
December 31, December 31,
1997 1996
============ ============
(Dollars in thousands)
Retirees $ (85,356) $ (74,786)
Fully eligible active plan participants (24,614) (18,441)
Other active plan participants (85,033) (101,710)
------------ ------------
Accumulated postretirement benefit obligation (195,003) (194,937)
Plan assets at fair value 2,400 0
------------ ------------
Funded status (192,603) (194,937)
Unrecognized transition obligation at
December 31, being recognized over twenty years 161,214 171,962
Amortization of prior service cost 3,737 0
Unrecognized actuarial gain (99,262) (88,784)
------------ ------------
Accrued liability for postretirement benefits $ (126,914) $ (111,759)
============ ============
A discount rate of 7% and a pre-Medicare medical trend rate of 8%
declining to a long-term rate of 5% and a discount rate of 7.75% and a pre-
Medicare medical trend rate of 9% declining to a long-term rate of 6% were
used to determine the accumulated postretirement benefit obligation at
December 31, 1997 and 1996, respectively.
The change in the accumulated postretirement benefit obligation
reflects the decrease in the discount rate from 7.75% to 7.00%, substantially
offset by favorable claim experience and reduction in the medical trend
rate assumption.
Net periodic postretirement benefit costs before consideration of the
rate-making discussed above, for the years ended December 31, 1997, 1996 and
1995 include the following components:
1997 1996 1995
========= ========= =========
(Dollars in thousands)
Service costs $ 3,068 $ 5,853 $ 5,383
Interest costs 14,523 17,973 18,606
Amortization of transition obligation
over twenty years 10,747 11,348 11,348
Amortization of prior service cost 279 0 0
Amortization of unrecognized actuarial gain (5,778) (497) (2,164)
--------- --------- ---------
$ 22,839 $ 34,677 $ 33,173
========= ========= =========
Assumptions used to determine net periodic postretirement costs were
as follows:
1997 1996 1995
====== ====== ======
Discount rate 7.75% 7.25% 8.75%
Rate of compensation increase 5.50% 5.00% 5.00%
The pre-Medicare medical trend rates used for 1997, 1996 and 1995 were
8% declining to a long-term rate of 6%, 9% declining to a long-term rate of 6%
and 11% declining to a long-term rate of 7%, respectively. 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, 1997,
by approximately $23.2 million and increase the aggregate of the service and
interest cost components of plan costs by approximately $2.6 million for the
year ended December 31, 1997. Amounts disclosed above could be changed
significantly in the future by changes in health care costs, work force
demographics, interest rates, or plan changes.
(9) 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 10 sets forth the preferred stocks which are redeemable solely at
the option of Northern Indiana and Note 11 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.
(10) PREFERRED STOCKS, REDEEMABLE SOLELY AT OPTION OF NORTHERN INDIANA (SEE
NOTE 9):
The redemption prices at December 31, 1997 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 thirty 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, 1997),
Series A (stated value $50 per share) $ 50.00
(11) REDEEMABLE PREFERRED STOCKS (SEE NOTE 9):
The redemption prices at December 31, 1997, as well as sinking fund
provisions, for the cumulative preferred stock subject to mandatory
redemption requirements, or whose redemption is outside the control
of Northern Indiana, are as follows:
Sinking Fund Or Mandatory
Series Redemption Price Per Share Redemption Provisions
====== ============================ ==============================
Cumulative preferred stock - $100 par value -
8.85% $101.11, reduced periodically 12,500 shares on or before
April 1.
8.35% $103.69, 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% $104.23, 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, 1997 for each of the four years subsequent to
December 31, 1998, are as follows:
Year Ending December 31,
========================
1999 $ 1,827,700
2000 $ 1,827,700
2001 $ 1,827,700
2002 $ 1,827,700
(12) COMMON SHARE DIVIDEND: Northern Indiana's Indenture provides that it
will not declare or pay any dividends on any class of capital stock (other
than preferred or preference stock) except out of earned surplus or net
profits of Northern Indiana. At December 31, 1997 Northern Indiana had
approximately $146.3 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.
(13) COMMON SHARES: Effective with the exchange of common shares on March 3,
1988, Northern Indiana's common shares are wholly-owned by Industries. On
December 16, 1997, the Industries Board of Directors authorized a two-for-one
stock split of Industries' common stock. Industries' shareholders received
one additional common share for each common share held. The stock split was
paid February 20, 1998, to shareholders of record at the close of business on
January 30, 1998. Accordingly, references in the Annual Report to Industries'
common shares reported for the period including per share amounts and stock
option data of Industries' common stock have been restated to reflect the
two-for-one stock split as if it had occured at the beginning of the earliest
period.
(14) LONG-TERM INCENTIVE PLAN: Industries has two long-term incentive plans
for key management employees, including management of Northern Indiana,
that were approved by shareholders on April 13, 1988 (1988 Plan) and April 13,
1994 (1994 Plan), each of which provides for the issuance of up to 5.0 million
of Industries common shares to key employees through 1998 and 2004,
respectively. At December 31, 1997, there were 9,156 shares and 3,879,500
shares reserved for future awards under the 1988 Plan and 1994 Plan,
respectively. The 1988 Plan and 1994 Plan permit the following types of
grants, separately or in combination: nonqualified stock options, incentive
stock options, restricted stock awards, stock appreciation rights, and
performance units. No incentive stock options or performance units were
outstanding at December 31, 1997. Under both Plans, the exercise price of
each option equals the market price of Industries' common shares on the date
of grant. Each option's maximum term is ten years and vests one year from
the date of grant.
The stock appreciation rights (SARs) may be exercised only in tandem
with stock options on a one-for-one basis and are payable in cash, Industries'
common shares, or a combination thereof. Restricted stock awards are
restricted as to transfer and are subject to forfeiture for specific periods
from the date of grant. Restrictions on shares awarded in 1995 lapse five
years from date of grant and vesting is variable from 0% to 200% of the
number awarded, subject to specific earnings per share and stock appreciation
goals. Restrictions on shares awarded in 1997 and 1996 lapse two years from
date of grant and vesting is variable from 0% to 100% of the number awarded,
subject to specific performance goals. If a participant's employment is
terminated prior to vesting other than by reason of death, disability or
retirement, restricted shares are forfeited. There were 542,666, 524,000 and
661,000 restricted shares outstanding at December 31, 1997, 1996 and 1995,
respectively.
Northern Indiana accounts for its allocable portion of these plans
under Accounting Principles Board Opinion No. 25, under which no compensation
cost has been recognized for non-qualified stock options. The compensation
cost that has been recognized in the Consolidated Statement of Income for
restricted stock awards was $0.7 million and $0.9 million for the years ended
December 31, 1997 and 1996, respectively. Had compensation cost for stock
options been determined consistent with SFAS No. 123 "Accounting for
Stock-Based Compensation," Northern Indiana's net income would have been
reduced to the following pro forma amounts.
Year Year
Ended Ended
December 31, December 31,
1997 1996
============ ============
(Dollars in thousands)
Net Income:
As reported $ 196,620 $ 197,310
Pro forma $ 195,770 $ 196,663
The fair value of each option granted used to determine pro forma net
income is estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants
in the years ended December 31, 1997 and 1996, respectively: risk-free
interest rate of 6.29% and 6.39%, expected dividend yield of $0.87 and $0.84
per share, expected option term of five and one-quarter years and five years,
respectively, and expected volatility of 12.7% and 13.2%. The weighted
average fair value of options granted to all plan participants was $2.66 and
$2.50 for the years ended December 31,1997 and 1996, respectively. There were
533,600 and 556,600 non-qualified stock options granted to all plan
participants for the years ended December 31, 1997 and 1996, respectively.
(15) LONG-TERM DEBT: The sinking fund requirements of long-term debt
outstanding at December 31, 1997 (including the maturity of first mortgage
bonds: Series T, 7-1/2%, due April 1, 2002; and the medium-term notes due
from March 20, 2000 to June 12, 2002), for each of the four years subsequent
to December 31, 1998 are as follows:
Year Ending December 31,
========================
1999 $ 2,000,000
2000 $158,000,000
2001 $ 19,000,000
2002 $ 59,000,000
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. These
premiums are not earning a return during the recovery period.
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 May 28, 1997, Northern Indiana was authorized to issue and sell up to
$217,692,000 of its Medium-Term Notes, Series E, with various maturities, for
purposes of refinancing certain first mortgage bonds and medium-term notes.
As of December 31, 1997, $139.0 million of the medium-term notes had been
issued with various interest rates and maturities. The proceeds from these
issuances were used to pay short-term debt incurred to redeem its First
Mortgage Bonds, Series N, and to pay at maturity various issues of Medium-Term
Notes, Series D.
(16) CURRENT PORTION OF LONG-TERM DEBT: At December 31, 1997 and 1996,
Northern Indiana's current portion of long-term debt due within one year was
as follows:
December 31, December 31,
1997 1996
============ ============
(Dollars in thousands)
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
First mortgage bonds -
Series O, 6-3/8% - due September 1, 1997 $ 0 $ 25,747
Series P, 6-7/8% - due October 1, 1998 14,509 0
Medium-term notes -
Interest rates of 5.83% and 5.95% with a
weighted average interest rate of 5.86%
and various maturities between
April 6, 1998 and April 13, 1998 35,000 40,000
Sinking funds due within one year 1,500 1,500
------------ ------------
Total current portion of long-term debt $ 51,009 $ 67,247
============ ============
(17) SHORT-TERM BORROWINGS: Northern Indiana uses commercial paper to fund
short-term working capital requirements.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1999. As of December 31, 1997,
there were no borrowings outstanding under this agreement. In addition,
Northern Indiana has $14.2 million in lines of credit which run to May 31,
1998. The credit pricing of each of the lines varies from either the lending
banks' commercial prime or market rates. Northern Indiana has agreed to
compensate the participating banks with arrangements that vary from no
commitment fees to a combination of fees which are mutually satisfactory to
both parties. As of December 31, 1997, there were no borrowings under these
lines of credit. The Credit Agreement and lines of credit are also available
to support the issuance of commercial paper.
Northern Indiana also has $273.5 million of money market lines of
credit. As of December 31, 1997 and 1996, $47.5 million and $79.0 million
of borrowings, respectively, were outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
December 31, 1997, there were no borrowings outstanding under this facility.
At December 31, 1997 and 1996, Northern Indiana's short-term borrowings
were as follows:
December 31, December 31,
1997 1996
============ ============
(Dollars in thousands)
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
Commercial paper -
Weighted average interest rate of 6.16%
at December 31, 1997 $ 71,500 $ 193,905
Notes payable -
Issued at interest rates between 6.03%
and 6.38% with a weighted average
interest rate of 5.86% and various
maturities between January 9, 1998 and
January 23, 1998 47,500 79,000
------------ ------------
Total short-term borrowings $ 119,000 $ 272,905
============ ============
(18) OPERATING LEASES: On April 1, 1990, Northern Indiana entered into a
twenty-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 $3.4 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, 1997:
Year Ending December 31, (Dollars in thousands)
======================== ======================
1998 $ 4,357
1999 3,276
2000 3,055
2001 3,055
2002 3,055
Later years 33,143
---------
Total minimum payments required $ 49,941
=========
The consolidated financial statements include rental expense for all
operating leases as follows:
Year Ending December 31, (Dollars in thousands)
======================== ======================
1997 $ 7,675
1996 $ 9,249
1995 $ 10,824
(19) COMMITMENTS: Northern Indiana estimates that approximately $762
million will be expended for construction purposes for the period from
January 1, 1998 to December 31, 2002. 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 twenty-year contract period.
Northern Indiana has entered into an agreement with IBM to perform all
data center, application development and maintenance, and desktop management
for Northern Indiana.
(20) 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, 1997 December 31, 1996
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
========== ========== ========== ==========
(Dollars in thousands)
Cash and cash
equivalents $ 9,800 $ 9,800 $ 8,279 $ 8,279
Investments $ 256 $ 256 $ 256 $ 256
Long-term debt
(including current
portion) $1,130,505 $1,128,851 $1,059,255 $1,026,743
Preferred stock $ 141,792 $ 135,317 $ 144,200 $ 126,379
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.
(21) 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 1997, 1996 and 1995.
Basic Steel Industry 1997 1996 1995
==================== ====== ====== ======
Gas revenue percent 5 % 2 % 6 %
Electric revenue percent 20 % 22 % 22 %
(22) QUARTERLY FINANCIAL DATA:
The following data summarize certain operating results for each of the
quarters of 1997 and 1996:
1997 Quarters Ended March 31 June 30 Sept. 30 Dec. 31
========== ========== ========== ==========
(Dollars in thousands)
Operating revenues $ 551,498 $ 352,595 $ 360,727 $ 487,562
Operating expenses and taxes 463,646 300,026 305,224 402,366
---------- ---------- ---------- ----------
Operating income 87,852 52,569 55,503 85,196
Other income (deductions) (409) (1,036) (1,041) (1,173)
Interest charges 20,111 19,805 20,463 20,462
---------- ---------- ---------- ----------
Net income 67,332 31,728 33,999 63,561
Dividend requirements on
preferred stock 2,167 2,128 2,123 2,121
---------- ---------- ---------- ----------
Balance available for
common shares $ 65,165 $ 29,600 $ 31,876 $ 61,440
========== ========== ========== ==========
1996 Quarters Ended March 31 June 30 Sept. 30 Dec. 31
========== ========== ========== ==========
(Dollars in thousands)
Operating revenues $ 550,309 $ 352,729 $ 348,622 $ 502,445
Operating expenses and taxes 458,308 303,022 291,608 420,629
---------- ---------- ---------- ----------
Operating income 92,001 49,707 57,014 81,816
Other income (deductions) (994) (953) 2,196 (9)
Interest charges 20,779 20,630 21,013 21,046
---------- ---------- ---------- ----------
Net income 70,228 28,124 38,197 60,761
Dividend requirements on
preferred stock 2,199 2,178 2,174 2,161
---------- ---------- ---------- ----------
Balance available for
common shares $ 68,029 $ 25,946 $ 36,023 $ 58,600
========== ========== ========== ==========
(23) SEGMENTS OF BUSINESS: Northern Indiana is a public utility operating
engaged in distributing natural gas and electric energy. The reportable
items for gas and electric segments for the years 1997, 1996 and 1995 are as
follows:
1997 1996 1995
========== ========== ==========
(Dollars in thousands)
Operating information -
Gas operations:
Operating revenues $ 735,299 $ 731,874 $ 633,355
Operating expenses, excluding
provision for utility income taxes 655,867 642,913 555,072
---------- ---------- ----------
Operating income before utility
income taxes 79,432 88,961 78,283
---------- ---------- ----------
Electric operations:
Operating revenues 1,017,083 1,022,231 1,030,923
Operating expenses, excluding
provision for utility income taxes 705,296 721,603 723,159
---------- ---------- ----------
Operating income before utility
income taxes 311,787 300,628 307,764
---------- ---------- ----------
Total 391,219 389,589 386,047
Other income (deductions) (3,659) 240 (3,619)
Less-interest charges 80,841 83,468 81,533
Less-provision for utility income taxes 110,099 109,051 106,574
---------- ---------- ----------
Net income per Consolidated
Statement of Income 196,620 197,310 194,321
Dividend requirements on
preferred stocks 8,539 8,712 9,046
---------- ---------- ----------
Balance available for common shares $ 188,081 $ 188,598 $ 185,275
========== ========== ==========
Other information-
Depreciation and amortization expense:
Electric $ 153,843 $ 146,444 $ 139,432
Gas 69,182 65,101 58,827
---------- ---------- ----------
Total $ 223,025 $ 211,545 $ 198,259
========== ========== ==========
Construction expenditures:
Electric $ 115,012 $ 146,660 $ 132,273
Gas 59,219 51,563 53,287
---------- ---------- ----------
Total $ 174,231 $ 198,223 $ 185,560
========== ========== ==========
Investment information-
Identifiable assets (a):
Electric $2,507,905 $2,575,995 $2,586,121
Gas 833,106 867,891 768,736
---------- ---------- ----------
Total 3,341,011 3,443,886 3,354,857
Other corporate assets 333,903 330,394 251,342
---------- ---------- ----------
Total assets $3,674,914 $3,774,280 $3,606,199
========== ========== ==========
(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
------------------------------------
Years with
Northern
Name Age Indiana Offices Held in Past 5 Years
===================== ==== ========== ==================================
Gary L. Neale 58 8 Chairman, President and Chief
Executive Officer since March 1993.
President and Chief Operating
Officer prior thereto.
Stephen P. Adik 54 10 Executive Vice President and Chief
Financial Officer since April 1997.
Executive Vice President and Chief
Financial Officer, Finance and
Administration from April 1996 to
March 1997. Executive Vice
President and Chief Financial
Officer from April 1994 to March
1996. Senior Vice President
and General Manager, Finance and
Accounting prior thereto.
Patrick J. Mulchay 56 35 Executive Vice President and Chief
Operating Officer since July 1996.
Executive Vice President and Chief
Operating Officer, Electric from
January 1994 to June 1996. Vice
President and General Manager, Gas
Operations prior thereto.
Jeffrey W. Yundt 52 18 Executive Vice President since July
1996. Executive Vice President
and Chief Operating Officer, Gas
from January 1994 to June 1996.
Vice President and General Manager,
Energy Distribution prior thereto.
Joseph L. Turner, Jr. 61 12 Senior Vice President, Major
Accounts since July 1996. Group
Vice President, Major Accounts
from January 1996 to June 1996.
Group Vice President, Industrial
Marketing and Economic Development
from January 1994 to December 1995.
Vice President and General Manager,
Corporate Marketing prior thereto.
James K. Abcouwer 44 3 Senior Vice President, Commercial
Operations since February 1998.
Vice President and General Manager,
Customer Services and Distribution.
from July 1996 to January 1998.
Vice President, Gas Supply from
June 1994 to June 1996.
Jerry L. Godwin 55 3 Vice President and General Manager,
Electric Supply since July 1996.
Vice President, Electric Supply
from November 1994 to June 1996.
Robert W. Schacht 47 25 Vice President, Distribution
Operations since July 1996. Vice
President, Gas Service and Sales
from January 1994 to June 1996.
Director, West Region prior thereto.
Francis P. Girot, Jr. 53 53 Treasurer
David J. Vajda 42 20 Controller since July 1996.
Director, Strategic and Business
Planning from January 1996 to June
June 1996. Auditor prior thereto.
Nina M. Rausch 54 20 Secretary
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 June 27, 1994, James K. Abcouwer was Vice President of Natural Gas
of GSC - Energy Corporation; and prior to October 31, 1994, Jerry L. Godwin was
Senior Vice President, Wholesale Marketing and Power Supply of Public Service
Company of New Mexico.
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 Steven C.
Beering and Denis E. Ribordy, each for a term of three years to be voted upon
at the annual meeting of common shareholders of Industries to be held April 8,
1998. In addition, upon recommendations of the Nominating and Compensation
Committee, the Board of Directors has nominated Carolyn Y. Woo to replace
Ernestine M. Raclin, who is retiring with the grateful thanks of the Board of
Directors at the expiration of her term.
Has Been
Name, Age and Principal Occupations for Past Director
Five Years and Present Directorships Held Since
============================================ ==========
DIRECTORS WHOSE TERMS EXPIRE IN 1998
Steven C. Beering, 65-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, 70-Chairman of the Board, 1st 1983
Source Corporation, a bank holding company, and 1st
Source Bank, South Bend, Indiana.
Denis E. Ribordy, 68-Vice Chairman of the Chicago Motor 1981
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.
DIRECTORS WHOSE TERMS EXPIRE IN 1999
Ian M. Rolland, 64-Chairman and Chief Executive Officer, 1978
and President since January 1, 1997, of Lincoln National
Corporation, Fort Wayne, Indiana, an insurance and
financial services firm. Mr. Rolland is also a director
of Lincoln National Corporation, Tokheim Corporation,
and Norwest Corporation.
Edmund A. Schroer, 70-Retired March 1, 1993 as Chairman, 1977
President and Chief Executive Officer of Industries and
Chairman and Chief Executive Officer of Northern Indiana.
John W. Thompson, 48-General Manager-IBM North America of 1993
IBM Corporation, White Plains, New York. IBM is a
worldwide corporation, whose offerings include services,
software systems, products and technologies. Mr.
Thompson is also a director of Fortune Brands Inc.
DIRECTORS WHOSE TERMS EXPIRE IN 2000
Arthur J. Decio, 67-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. and St. Joseph
Capital Corporation.
Gary L. Neale, 58-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 and Chicago Bridge and
Iron Company.
Robert J. Welsh, 62-Chairman, President and Chief 1988
Executive 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.
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 1997, 1996 and 1995 awarded to, earned by or
paid to the Chief Executive Officer of Industries during 1997 and the four
other most highly compensated officers of Industries (Named Officers).
SUMMARY COMPENSATION TABLE
Annual Compensation (1)
-----------------------------------
Other
annual
compen-
Salary Bonus sation
Name and principal position Year ($) ($)(2) ($)(3)
=========================== ==== ======== ======== ========
Gary L. Neale, Chairman, 1997 $520,000 $390,000 $ 6,711
President and Chief 1996 460,000 236,624 5,161
Executive Officer 1995 460,000 286,120 2,746
Stephen P. Adik, Executive Vice 1997 250,000 171,250 2,575
President, Chief Financial 1996 205,000 84,952 9,103
Officer and Treasurer 1995 205,000 107,010 2,400
Patrick J. Mulchay, Executive 1997 210,000 150,675 851
Vice President and Chief 1996 175,000 72,520 1,614
Operating Officer - Northern 1995 175,000 91,350 756
Indiana Public Service Company
Jeffrey W. Yundt, Executive 1997 210,000 143,850 8,905
Vice President and Chief 1996 175,000 72,520 1,671
Operating Officer - Energy 1995 175,000 91,350 1,217
Services
Joseph L. Turner, Senior Vice 1997 180,000 113,675(6) 1,175
President 1996 160,000 182,958 5,144
1995 160,000 66,816 1,302
Long Term Compensation
----------------------
Awards Payouts
-------------------- --------
Secur- Long-Term
ities In- All
Under- centive other
lying Plan compen-
Options/ Payouts sation
Name and principal position Year SARs(#) ($)(4) ($)(5)
=========================== ==== ======== ======== =======
Gary L. Neale, Chairman, 1997 50,000 $ 0 $42,993
President and Chief 1996 50,000 567,188 40,129
Executive Officer 1995 40,000 527 812 36,077
Stephen P. Adik, Executive Vice 1997 20,000 0 5,673
President, Chief Financial 1996 20,000 283,594 5,919
Officer and Treasurer 1995 20,000 263,906 5,998
Patrick J. Mulchay, Executive 1997 20,000 0 7,506
Vice President and Chief 1996 20,000 283,594 7,717
Operating Officer - Northern 1995 20,000 87,968 8,368
Indiana Public Service Company
Jeffrey W. Yundt, Executive 1997 20,000 0 3,693
Vice President and Chief 1996 20,000 283,594 3,824
Operating Officer-Energy 1995 20,000 263,906 3,947
Services
Joseph L. Turner, Senior 1997 8,000 0 7,599
Vice President 1996 10,000 283,594 8,100
1995 10,000 263,906 8,567
(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), except for a portion of the Bonus Plan paid to Joseph
L. Turner, which is described in Note 6. The Bonus Plan is designed
to supplement a conservative base salary with incentive bonus payments
if targeted financial performance is attained. The 1997 target
aggregate payout for the Bonus Plan for the Named Officers was
$886,800, which was 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 31, 1997 (based on the average of the high and low
sale prices of the Common Shares on that date as reported in "The
Wall Street Journal") for the Named Officers were as follows: Mr.
Neale, 124,000 shares valued at $3,072,875; Mr. Adik 48,000 shares
valued at $1,189,500: Messrs. Mulchay and Yundt, 40,000 shares each
valued at $991,250; and Mr. Turner, 28,056 shares (includes 4,056
shares purchased pursuant to the PE Plan described in footnote 6)
valued at $695,263. 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 1997 on behalf of
the Named Officers under the supplemental life insurance plan, as
follows: Mr. Neale-$1,055 401(k) Plan, $40,116 premium value and
$1,822 term insurance cost; Mr. Adik - $1,055 401(k) Plan, $4,035
premium value and $583 term insurance cost; Mr. Mulchay, $344 401(k)
Plan, $6,628 premium value and $534 term insurance cost; Mr. Yundt,
$3,287 premium value and $406 term insurance cost and Mr. Turner -
$6,654 premium value and $945 term insurance cost. The value of the
life insurance premiums paid by Industries in excess of term insurance
cost on behalf of the Named Officers under the supplemental life
insurance plan has been restated for all periods in accordance with the
present value interest-free loan method.
(6) Joseph L. Turner is also President of Primary Energy, Inc., a
subsidiary of Industries, and participates in the Primary Energy
Incentive Plan ("PE Plan"). The PE Plan provides for a bonus based
on meeting certain financial performance criteria of Primary Energy.
Under the PE Plan, $41,043 of Mr. Turner's bonus for 1997 was used
to purchase Common Shares of Industries on or about February 27,
1998, the date of payment of the bonus. The PE Plan requires that
the Common Shares are restricted for a period of five years, subject
to continued employment, except that they vest earlier in the event
of the employee's retirement, death or disability.
OPTION GRANTS IN 1997. The following table sets forth grants of options
to purchase Common Shares made during 1997 to the Named Officers. No stock
appreciation rights were awarded during 1997.
OPTION/SAR/GRANTS IN LAST FISCAL YEAR
Individual Grants
Number
of
Secu- Percent of
rities Total
Under- Options/
lying SARs Grant
Options/ granted to Exercise Date
SARs Employees or Base Present
Granted in Fiscal Price Expiration Value
Name (#)(1) Year (2) ($/Sh)(3) Date ($) (4)
=================== ======== ========== ========= ========== ========
Gary L. Neale 50,000 9.4% $ 20.64 08/27/07 $133,000
Stephen P. Adik 20,000 3.7% 20.64 08/27/07 53,200
Patrick J. Mulchay 20,000 3.7% 20.64 08/27/07 53,200
Jeffrey W. Yundt 20,000 3.7% 20.64 08/27/07 53,200
Joseph L. Turner 8,000 1.5% 20.64 08/27/07 21,280
(1) All options granted in 1997 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 533,600 options granted to all employees in
1997.
(3) All options were granted at the average of high and low sale prices
of the Common Shares 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-12.2% (calculated using daily Common
Share prices for the twelve-month period preceding the date of grant);
risk-free rate of return-6.64% (the rate for a ten-year U.S. treasury);
dividend yield-$0.90; option term-ten years; vesting-100% one year
after date of grant; and an expected option term of 5.25 years. No
assumptions relating to non-transferability or risk of forfeiture were
made. Actual gains, if any, on option exercises and Common Shares are
dependent on the future performance of the Common Shares and overall
market condition. There can be no assurance that the amounts reflected
in this table will be achieved.
OPTION EXERCISE IN 1997. The following table sets forth certain
information concerning the exercise of options or stock appreciation rights
("SARs") during 1997 by each of the Named Officers and the number and value
of unexercised options and SARs at December 31, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
Number of Securities
Shares Underlying Unexercised
Acquired Options/SARs at Fiscal
on Value Year-End (#) (1)
Exercise Realized -----------------------------
Name (#) ($) Exercisable Unexercisable
================== ======== ======== =========== =============
Gary L. Neale 0 $ 0 290,000 50,000
Stephen P. Adik 0 0 143,200 20,000
Patrick J. Mulchay 0 0 114,400 20,000
Jeffrey W. Yundt 0 0 132,000 20,000
Joseph L. Turner 10,000 87,813 69,000 8,000
Value of Unexercised
In-the-money Options/SARs
at Fiscal Year-End($) (2)
-------------------------------
Name Exercisable Unexercisable
================ ============= ===============
Gary L. Neale $3,010,312 $ 207,030
Stephen P. Adik 1,669,175 82,812
Patrick J. Mulchay 1,166,450 82,812
Jeffrey W. Yundt 1,452,875 82,812
Joseph L. Turner 658,156 33,124
(1) Includes some SARs granted in tandem with options.
(2) Represents the difference between the option exercise price and
$24.78, the average of high and low sale prices of the Common Shares
on December 31, 1997, as reported in "The Wall Street Journal."
LONG-TERM INCENTIVE PLAN AWARDS IN 1997. The following table sets forth
restricted shares awarded pursuant to the Long-Term Incentive Plan during
1997 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 18,000 2 years 0 18,000 18,000
Stephen P. Adik 0 0 0 0 0
Patrick J. Mulchay 0 0 0 0 0
Jeffrey W. Yundt 0 0 0 0 0
Joseph L. Turner 0 0 0 0 0
The restrictions on shares awarded during 1997 lapse two years from the
date of grant. The vesting of the restricted shares is variable from 0% to
100% of the number awarded, based upon meeting certain specific non-financial
performance objectives. There is a two-year holding period for 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
============ ========= ========= ========= ========= =========
$ 350,000 144,750 193,000 201,750 210,500 210,500
400,000 167,250 223,000 233,000 243,000 243,000
450,000 189,750 253,000 264,250 275,500 275,500
500,000 212,250 283,000 295,500 308,000 308,000
550,000 234,750 313,000 326,750 340,500 340,500
600,000 257,250 343,000 358,000 373,000 373,000
650,000 279,750 373,000 389,250 405,500 405,500
700,000 302,250 403,000 420,500 438,000 438,000
750,000 324,750 433,000 451,750 470,500 470,500
800,000 347,250 463,000 483,000 503,000 503,000
850,000 369,750 493,000 514,250 535,500 535,500
900,000 392,250 523,000 545,500 568,000 568,000
950,000 414,750 553,000 576,750 600,500 600,500
1,000,000 437,250 583,000 608,000 633,000 633,000
1,050,000 459,750 613,000 639,250 665,500 665,500
1,100,000 482,250 643,000 670,500 698,000 698,000
The credited years of service for each of the Named Officers shown in
the Summary Compensation table, pursuant to the Supplemental Plan, are as
follows: Gary L. Neale - 23 years; Stephen P. Adik - 19 years; Patrick J.
Mulchay - 35 years; Jeffrey W. Yundt - 18 years; and Joseph L. Turner - 26
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. The benefits
listed in the Pension Plan table are not subject to any deduction for Social
Security or other offset amounts.
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 target incentive bonus compensation 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 of certain changes in
control of Industries.
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 500 shares for each year of service as a director, and 2,000
restricted Common Shares have been granted to each nonemployee director
elected or reelected since that date. A grant of 2,000 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 derive no
financial benefit from the program, as all deductions relating to the
charitable donations accrue solely to Industries. All current nonemployee
directors are eligible to participate in the program.
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 17.
(2) The following is a list of the Financial Statements
Schedule filed herewith as part of this report on Form 10-K:
Schedule Page of
Number Description 1997 10-K
========= ================================= ===========
II Valuation and Qualifying Accounts 60-63
(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 64-65.
(b) Reports on Form 8-K: None
PART IV
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
Twelve Months Ended December 31, 1997
(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 1997 Expenses Accounts were Created 1997
==================== ======= ========== ======== ============ ========
Reserves Deducted
In Consolidated
Balance Sheet From
Assets To Which
They Apply:
Reserve for
accounts
receivables $ 4,568 $ 5,305 $ 0 $ 5,349 $ 4,524
Reserves Classified
Under Reserve
Section of
Consolidated
Balance Sheet:
Injuries and
damages reserve $ 4,376 $ 4,875 $ 0 $ 3,659 $ 5,592
Environmental
reserves $16,575 $ 9,064 $ 0 $ 6,875 $18,764
Miscellaneous
operating
reserves $ 4,131 $ 0 $ 0 $ 573 $ 3,558
PART IV
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
Twelve Months Ended December 31, 1996
(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 1996 Expenses Accounts were Created 1996
==================== ======= ========== ======== ============ ========
Reserves Deducted
In Consolidated
Balance Sheet From
Assets To Which
They Apply:
Reserve for
accounts
receivables $ 6,418 $ 6,580 $ 0 $ 8,430 $ 4,568
Reserves Classified
Under Reserve
Section of
Consolidated
Balance Sheet:
Injuries and
damages reserve $ 1,837 $ 4,875 $ 0 $ 2,336 $ 4,376
Environmental
reserves $ 4,800 $15,272 $ 0 $ 3,497 $16,575
Miscellaneous
operating
reserves $ 3,781 $ 350 $ 0 $ 0 $ 4,131
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
Enironmental
reserves $ 3,550 $ 2,884 $ 0 $ 1,634 $ 4,800
Miscellaneous
operating
reserves $ 3,781 $ 0 $ 0 $ 0 $ 3,781
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
Northern Indiana Public Service Company
(Registrant)
Date March 26, 1998 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
Gary L. Neale
/s/ Stephen P. Adik Executive Vice President and
- --------------------------- Principal Financial Officer
Stephen P. Adik
/s/ David J. Vajda Controller and Principal
- --------------------------- Accounting Officer
David J. Vajda
/s/ Steven C. Beering Director
- ---------------------------
Steven C. Beering
/s/ Arthur J. Decio Director March 26, 1998
- ---------------------------
Arthur J. Decio
/s/ Ernestine M. Raclin Director
- ---------------------------
Ernestine M. Raclin
Director
- ---------------------------
Denis E. Ribordy
/s/ Ian M. Rolland Director
- ---------------------------
Ian M. Rolland
/s/ Edmund A. Schroer Director
- ---------------------------
Edmund A. Schroer
/s/ John W. Thompson Director
- ---------------------------
John W. Thompson
/s/ Robert J. Welsh Director
- ---------------------------
Robert J. Welsh
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 August 27, 1996 (incorporated by reference
to Exhibit 3 to Northern Indiana Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996).
(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) 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).
(4.4) 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).
(4.5) 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).
(4.6) 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).
(4.7) 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)).
(4.8) First Supplemental Indenture, dated as of December 1, 1991,
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)).
(4.9) Memorandum of Agreement with City of Michigan City, Indiana
(incorporated by reference to Exhibit 7 to Northern Indiana
Registration Statement (Registration No. 2-48531)).
(4.10) 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).
(4.11) 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).
(4.12) 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).*
(23) Consent of Arthur Andersen LLP.
(27) Financial Data Schedule.
*Management contract or compensatory plan arrangement of Northern Indiana
Public Service Company.
EX-23
2
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K into Northern Indiana
Public Service Company's previously filed Form S-3 Registration Statement
No. 333-26847.
/s/ Arthur Andersen LLP
Chicago, Illinois
March 26, 1998
EX-27
3
UT
1,000
12-MOS
DEC-31-1997
JAN-01-1997
DEC-31-1997
PER-BOOK
3,028,259
1,215
341,698
97,777
205,965
3,674,914
859,488
12,522
146,293
1,018,303
58,841
81,123
313,471
47,500
766,025
71,500
51,009
1,828
0
0
1,265,314
3,674,914
1,752,382
110,099
1,361,163
1,471,262
281,120
(3,659)
277,461
80,841
196,620
8,539
188,081
187,775
17,163
458,337
0
0
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