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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
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
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(Exact name of registrant as specified in its charter)
Indiana 35-0552990
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 East 86th Avenue
Merrillville, Indiana 46410
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (877) 647-5990
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 twelve months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
As of August 1, 2002, 73,282,258 shares of the registrant's Common Shares, no
par value, were issued and outstanding, all held beneficially and of record by
NiSource Inc.
Documents Incorporated by Reference
-----------------------------------
None
NORTHERN INDIANA PUBLIC SERVICE COMPANY
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 2002
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Consolidated Income............................. 3
Consolidated Balance Sheets................................... 4
Statements of Consolidated Cash Flows......................... 6
Notes to Consolidated Financial Statements...................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................... 21
Item 2. Changes in Securities and Use of Proceeds....................... 21
Item 3. Defaults Upon Senior Securities................................. 21
Item 4. Submission of Matters to a Vote of Security Holders............. 21
Item 5. Other Information............................................... 21
Item 6. Exhibits and Reports on Form 8-K................................ 21
Signature....................................................... 22
2
PART I
ITEM 1. FINANCIAL STATEMENTS
NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Three Months Six Months
Ended June 30, Ended June 30,
------------------ --------------------
(in millions) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------
OPERATING REVENUES
Gas Distribution $ 141.8 $ 112.0 $ 430.6 $ 595.3
Electric 284.5 258.4 546.4 514.8
- ---------------------------------------------------------------------------------------------
Gross Operating Revenues 426.3 370.4 977.0 1,110.1
- ---------------------------------------------------------------------------------------------
COST OF ENERGY
Gas costs 91.3 68.6 268.0 426.3
Fuel for electric generation 49.3 59.1 102.1 110.7
Power purchased 39.8 8.0 68.2 24.6
- ---------------------------------------------------------------------------------------------
Cost of sales 180.4 135.7 438.3 561.6
- ---------------------------------------------------------------------------------------------
Total Net Revenues 245.9 234.7 538.7 548.5
- ---------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation 65.1 59.7 128.8 111.6
Maintenance 17.8 17.7 33.9 36.7
Depreciation and amortization 62.8 62.3 125.4 124.2
Other taxes 19.9 18.6 39.7 42.1
- ---------------------------------------------------------------------------------------------
Total Operating Expenses 165.6 158.3 327.8 314.6
- ---------------------------------------------------------------------------------------------
UTILITY OPERATING INCOME BEFORE UTILITY
INCOME TAXES 80.3 76.4 210.9 233.9
- ---------------------------------------------------------------------------------------------
UTILITY INCOME TAXES 22.6 19.6 64.4 69.7
- ---------------------------------------------------------------------------------------------
UTILITY OPERATING INCOME 57.7 56.8 146.5 164.2
- ---------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS) (0.3) 0.3 (0.8) 2.1
- ---------------------------------------------------------------------------------------------
INTEREST
Interest on long-term debt 12.4 14.6 25.3 29.2
Other interest 1.3 4.1 3.3 9.9
Amortization of premium, reacquisition premium,
discount and expense on debt, net 0.9 1.0 1.5 2.0
- ---------------------------------------------------------------------------------------------
Total Interest 14.6 19.7 30.1 41.1
- ---------------------------------------------------------------------------------------------
NET INCOME $ 42.8 $ 37.4 $ 115.6 $ 125.2
=============================================================================================
DIVIDEND REQUIREMENTS ON PREFERRED STOCKS 1.8 1.8 3.7 3.7
- ---------------------------------------------------------------------------------------------
BALANCE AVAILABLE FOR COMMON SHARES $ 41.0 $ 35.6 $ 111.9 $ 121.5
- ---------------------------------------------------------------------------------------------
COMMON DIVIDENDS DECLARED $ 110.0 $ 63.0 $ 141.0 $ 172.0
- ---------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31,
(in millions) 2002 2001
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(unaudited)
ASSETS
UTILITY PLANT, at original cost
Electric $ 4,496.9 $ 4,440.2
Gas 1,439.5 1,423.7
Common 366.4 355.1
- -------------------------------------------------------------------------------------------------
Total Utility Plant 6,302.8 6,219.0
Less: Accumulated provision for depreciation and amortization 3,467.3 3,357.2
- -------------------------------------------------------------------------------------------------
Net utility plant 2,835.5 2,861.8
- -------------------------------------------------------------------------------------------------
OTHER PROPERTY AND INVESTMENTS 8.4 8.1
- -------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 5.8 16.0
Accounts receivable (less reserve of $9.5 and $11.9, respectively) 101.5 116.4
Fuel cost adjustment clause 6.5 --
Gas cost adjustment clause 23.7 28.2
Materials and supplies, at average cost 47.0 44.7
Electric production fuel, at average cost 34.4 29.2
Natural gas in storage, at last-in, first-out cost 11.5 104.7
Price risk management assets 5.0 --
Prepayments and other 36.3 40.3
- -------------------------------------------------------------------------------------------------
Total Current Assets 271.7 379.5
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OTHER ASSETS
Regulatory assets 230.6 170.0
Prepayments and other 187.7 194.3
- -----------------------------------------------------------------------------------------------
Total Other Assets 418.3 364.3
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TOTAL ASSETS $ 3,533.9 $ 3,613.7
===============================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31,
(in millions) 2002 2001
- -------------------------------------------------------------------------------------------------
(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity $ 1,010.0 $ 1,036.3
Preferred Stocks--
Series without mandatory redemption provisions 81.1 81.1
Series with mandatory redemption provisions 5.0 5.0
Long-term debt, excluding amounts due within one year 789.2 843.1
- -------------------------------------------------------------------------------------------------
Total Capitalization 1,885.3 1,965.5
- -------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current redeemable preferred stock subject to mandatory redemption 43.0 43.0
Current portion of long-term debt 58.5 59.0
Short-term borrowings 180.3 335.4
Accounts payable 144.0 145.8
Dividends declared on common and preferred stocks 48.8 1.7
Customer deposits 34.2 31.8
Taxes accrued 249.8 195.4
Interest accrued 8.9 7.8
Fuel adjustment clause -- 3.7
Accrued employment costs 47.1 34.1
Price risk management liabilities 4.5 5.6
Other accruals 21.8 24.7
- -------------------------------------------------------------------------------------------------
Total Current Liabilities 840.9 888.0
- -------------------------------------------------------------------------------------------------
OTHER LIABILITIES AND DEFERRED CREDITS
Deferred income taxes 524.3 464.7
Deferred investment tax credits 67.9 71.4
Deferred credits 46.6 48.9
Accrued liability for postretirement benefits 161.2 160.8
Regulatory liabilities 4.8 4.5
Other noncurrent liabilities 2.9 9.9
- -------------------------------------------------------------------------------------------------
Total Other 807.7 760.2
- -------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES -- --
- -------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 3,533.9 $ 3,613.7
=================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Six Months Ended June 30,
------------------------
(in millions) 2002 2001
- -----------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 115.6 $ 125.2
Adjustments to reconcile net income to net cash:
Depreciation and amortization 125.4 124.2
Net changes in price risk management activities (6.1) 10.6
Deferred income taxes (4.3) (41.8)
Amortization of deferred investment tax credits (3.6) (3.5)
Other, net 15.0 (4.0)
- -----------------------------------------------------------------------------------
242.0 210.7
Changes in components of working capital:
Accounts receivable, net 14.9 (8.2)
Electric production fuel (5.2) (17.6)
Materials and supplies (2.3) 1.3
Natural gas in storage 93.2 43.4
Accounts payable 4.7 (63.1)
Taxes accrued 49.8 (3.1)
Fuel adjustment clause (10.2) 3.1
Gas cost adjustment clause 4.5 131.8
Accrued employment costs 13.0 (9.6)
Other accruals (1.8) 3.4
Other, net 1.0 (13.6)
- -----------------------------------------------------------------------------------
Net Cash from Operating Activities 403.6 278.5
- -----------------------------------------------------------------------------------
INVESTING ACTIVITIES
Construction expenditures (96.5) (86.4)
Other investing activities, net (10.1) (11.9)
- -----------------------------------------------------------------------------------
Net Investing Activities (106.6) (98.3)
- -----------------------------------------------------------------------------------
FINANCING ACTIVITIES
Retirement of long-term debt (54.5) --
Change in short-term debt (155.1) (63.9)
Retirement of preferred shares -- (0.3)
Dividends paid - common shares (94.0) (109.0)
Dividends paid - preferred shares (3.7) (3.8)
Other financing activities, net 0.1 0.1
- -----------------------------------------------------------------------------------
Net Financing Activities (307.2) (176.9)
- -----------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (10.2) 3.3
Cash and cash equivalents at beginning of period 16.0 17.9
- -----------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5.8 $ 21.2
===================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized 28.3 38.2
Cash paid for income taxes 33.0 62.2
- -----------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF ACCOUNTING PRESENTATION
The accompanying unaudited consolidated financial statements for Northern
Indiana Public Service Company (Northern Indiana) reflect all normal recurring
adjustments that are necessary, in the opinion of management, to present fairly
the results of operations in accordance with accounting principles generally
accepted in the United States.
The accompanying financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in Northern
Indiana's Annual Report on Form 10-K for the fiscal year ended December 31,
2001. Income for interim periods may not be indicative of results for the
calendar year due to weather variations and other factors. Certain
reclassifications have been made to the 2001 financial statements to conform to
the 2002 presentation.
2. INDIANA UTILITY REGULATORY COMMISSION RATE SETTLEMENT
On June 20, 2002, a settlement agreement was filed with the Indiana Utility
Regulatory Commission (IURC) that would enable electric customers of Northern
Indiana to receive an amount intended to approximate $55.0 million each year in
credits to their electric bills for 49 months. The settlement is the result of
months of negotiations among Northern Indiana, the Indiana Office of Utility
Consumer Counselor, and a group of commercial and industrial customers. Other
customers have opposed the settlement. Hearings on the settlement were held on
July 22 and 23, 2002.
If approved by the IURC, Northern Indiana's electric customers, other than those
on certain contract rates, will receive a credit of approximately 6 percent of
the electric portion of their monthly Northern Indiana bill. Briefings will be
completed by all parties by August 13 and the IURC will issue a final order in
the matter sometime after that date.
3. RESTRUCTURING ACTIVITIES
During 2000, NiSource Inc. (NiSource) developed and began the implementation of
a plan to restructure its operations. The restructuring plan included a
severance program, a transition plan to implement operational efficiencies
throughout NiSource's operations and a voluntary early retirement program.
During 2001, the restructuring initiative was continued with the addition of a
plan to restructure the operations within NiSource's Gas Distribution and
Electric Operations segments. Additionally, in December 2001 Northern Indiana
announced its plan to indefinitely shut down the Dean H. Mitchell Generating
Station located in Gary, Indiana.
For all of the plans, a total of approximately 215 management, professional,
administrative and technical positions have been identified for elimination at
Northern Indiana. As of June 30, 2002, 88 employees had been terminated, of
which 22 employees and 62 employees were terminated during the second quarter
and six months ended June 30, 2002, respectively. At June 30, 2002 and December
31, 2001, the consolidated balance sheets reflected liabilities of $6.8 million
and $9.7 million related to the restructuring plans, respectively. During the
second quarter and six months ended June 30, 2002, $1.0 million and $2.6 million
of benefits were paid from the restructuring plans, respectively. Additionally,
during the six months ended June 30, 2002, the restructuring plan liability was
reduced by $0.3 million.
4. RISK MANAGEMENT ACTIVITIES
Northern Indiana uses commodity-based derivative financial instruments to manage
certain risks inherent in its business. Northern Indiana accounts for its
derivatives under Statement of Financial Accounting Standards No. 133 (SFAS No.
133), "Accounting for Derivative Instruments and Hedging Activities" and
accounts for its trading contracts that do not qualify as derivatives accounted
for under SFAS No. 133 pursuant to Emerging Issues Task Force (EITF) Issue No.
98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities."
7
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SFAS NO. 133. The activity for the second quarter and six month period ended
June 30, 2002 with respect to cash flow hedges included the following:
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ----------------
(in millions, net of tax) 2002 2002
- -----------------------------------------------------------------------------------------------
Unrealized (losses) on derivatives qualifying as cash flow
hedges at the beginning of the period $ -- $ (2.7)
Unrealized hedging gains arising during the period on
derivatives qualifying as cash flow hedges 0.2 2.0
Reclassification adjustment for net loss (gain) included in
net income (0.1) 0.8
- ----------------------------------------------------------------------------------------------
Net unrealized gains on derivatives qualifying as cash
flow hedges at the end of the period $ 0.1 $ 0.1
- ----------------------------------------------------------------------------------------------
Unrealized gains and losses on Northern Indiana's cash flow and fair value
hedges were recorded as price risk management assets and liabilities along with
unrealized gains and losses on Northern Indiana's power trading portfolio. The
accompanying Consolidated Balance Sheet at June 30, 2002, reflected price risk
management assets of $5.0 million, of which, $0.5 million was related to
unrealized gains and losses on hedges and $4.5 million was related to a
physical delivery obligation that remained with Northern Indiana after the
transfer of power trading activities to Energy USA-TPC Corp. (TPC), a subsidiary
of NiSource, all of which were included in "Current Assets." Northern Indiana
had price risk management assets that were virtually zero at December 31, 2001.
At June 30, 2002, price risk management liabilities were $4.5 million included
in "Current Liabilities," which were related to a physical delivery obligation
that remained with Northern Indiana after the transfer of power trading
activities to TPC. Northern Indiana had price risk management liabilities of
$5.6 million relating to unrealized gains and losses on hedges at December 31,
2001, all of which were included in "Current Liabilities."
During the second quarter of 2002, no components of the derivatives' fair values
were excluded in the assessment of hedge effectiveness. Also during the second
quarter, no amounts were reclassified from other comprehensive income to
earnings due to the probability that the forecasted transactions would not
occur. Accumulated other comprehensive income related to cash flow hedges was
$0.1 million at June 30, 2002.
TRADING ACTIVITIES. Northern Indiana's trading operations included the
activities of its power trading business. Since power trading assets and
liabilities were transferred to TPC, effective November 1, 2001, there were no
trading assets and liabilities at June 30, 2002 and December 31, 2001.
5. CHANGE IN INDIANA CORPORATE INCOME TAX RATE
On June 28, 2002, the governor of Indiana signed into law legislation that
increases the Indiana Corporate Income tax rate from 4.5% to 8.5% effective
January 1, 2003. As a result, Northern Indiana recorded an additional deferred
income tax liability of $64.1 million (net) in the second quarter of 2002, to
reflect the impact of the increased tax rate. A regulatory asset in the amount
of $65.0 million was recorded to reflect the probable collection of the
increased tax liability through future rates. The overall impact on income tax
expense in the second quarter was a reduction of $0.9 million.
8
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
EITF ISSUE NO. 02-03 -- RECOGNITION AND REPORTING OF GAINS AND LOSSES ON ENERGY
TRADING CONTRACTS UNDER EITF ISSUE NO. 98-10, "ACCOUNTING FOR CONTRACTS INVOLVED
IN ENERGY TRADING AND RISK MANAGEMENT ACTIVITIES," AND NO. 00-17, "MEASURING THE
FAIR VALUE OF ENERGY-RELATED CONTRACTS IN APPLYING ISSUE NO. 98-10." In June
2002, the EITF reached a consensus on one issue related to Issue No. 02-03
(Issue). The key requirements include that all gains and losses on energy
trading contracts should be shown net in the income statement. The gross
transaction volumes for those energy trading contracts that are physically
settled should be disclosed in the notes to the financial statements. The Issue
is effective for financial statements issued for periods ending after July 15,
2002.
Northern Indiana recognizes gains and losses on its trading derivatives on a net
basis. It is anticipated that the adoption of the Issue will have no impact on
Northern Indiana's operating results.
7. BUSINESS SEGMENT INFORMATION
Northern Indiana's operations are divided into three primary business segments.
The Gas Distribution segment provides natural gas service and transportation for
residential, commercial and industrial customers in Indiana. The Electric
Operations segment provides electric service in 21 counties in the northern part
of Indiana. The Merchant Operations segment provides energy-related services
including electric wheeling, bulk power and provided power trading through
October 31, 2001. Effective November 1, 2001, Northern Indiana's power trading
operations were transferred to TPC.
The following tables provide information about business segments. Adjustments
have been made to the segment information to arrive at information included in
the results of operations and financial position. Northern Indiana uses
operating income as its primary measurement for each of the reported segments.
Operating income is derived from revenues and expenses directly associated with
each segment.
The adjustments represent the revenues and net pre-tax operating income of
Northern Indiana's electric trading business, which are reflected in the
Merchant Operations Segment but are reported as a component of Other Income
(Deductions) in the Statements of Consolidated Income.
($ in millions) GAS ELECTRIC MERCHANT ADJUSTMENTS TOTAL
- ----------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2002
Operating revenues 141.8 257.6 26.9 -- 426.3
Utility operating income before utility income taxes (0.7) 74.5 6.5 -- 80.3
FOR THE THREE MONTHS ENDED JUNE 30, 2001
Operating revenues 112.0 246.7 251.9 (240.2) 370.4
Utility operating income before utility income taxes (6.3) 74.7 12.4 (4.4) 76.4
- ----------------------------------------------------------------------------------------------------------------
($ in millions) GAS ELECTRIC MERCHANT ADJUSTMENTS TOTAL
- ----------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002
Operating revenues 430.6 496.4 50.0 -- 977.0
Utility operating income before utility income taxes 58.1 140.1 12.7 -- 210.9
FOR THE SIX MONTHS ENDED JUNE 30, 2001
Operating revenues 595.3 494.0 375.2 (354.4) 1,110.1
Utility operating income before utility income taxes 67.5 151.5 24.3 (9.4) 233.9
- ----------------------------------------------------------------------------------------------------------------
9
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other Income (Deductions) in the Statements of Consolidated Income were
comprised of the following items:
($ in millions) MERCHANT OTHER TOTAL
- ---------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2002
Power trading revenues --
Power trading cost of sales --
Power trading administrative expenses --
Power trading unrealized gains (losses) --
Other (0.3) (0.3)
- ---------------------------------------------------------------------------------
Total Other Income (Deductions) -- (0.3) (0.3)
- ---------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2001
Power trading revenues 238.2 238.2
Power trading cost of sales (234.5) (234.5)
Power trading administrative expenses (1.3) (1.3)
Power trading unrealized gains (losses) 2.0 2.0
Other -- (4.1) (4.1)
- ---------------------------------------------------------------------------------
Total Other Income (Deductions) 4.4 (4.1) 0.3
- ---------------------------------------------------------------------------------
($ in millions) MERCHANT OTHER TOTAL
- ---------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002
Power trading revenues --
Power trading cost of sales --
Power trading administrative expenses --
Power trading unrealized gains (losses) --
Other (0.8) (0.8)
- ---------------------------------------------------------------------------------
Total Other Income (Deductions) -- (0.8) (0.8)
- ---------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2001
Power trading revenues 346.8 346.8
Power trading cost of sales (343.3) (343.3)
Power trading administrative expenses (1.7) (1.7)
Power trading unrealized gains (losses) 7.6 7.6
Other -- (7.3) (7.3)
- ---------------------------------------------------------------------------------
Total Other Income (Deductions) 9.4 (7.3) 2.1
- ---------------------------------------------------------------------------------
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NORTHERN INDIANA PUBLIC SERVICE COMPANY
CONSOLIDATED RESULTS
The Management's Discussion and Analysis, including statements regarding market
risk sensitive instruments, contains "forward-looking statements," within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Investors and
prospective investors should understand that many factors govern whether any
forward-looking statement contained herein will be or can be realized. Any one
of those factors could cause actual results to differ materially from those
projected. These forward-looking statements include, but are not limited to,
statements concerning Northern Indiana's plans, objectives, expected
performance, expenditures and recovery of expenditures through rates, stated on
either a consolidated or segment basis, and any and all underlying assumptions
and other statements that are other than statements of historical fact. From
time to time, Northern Indiana may publish or otherwise make available
forward-looking statements of this nature. All such subsequent forward-looking
statements, whether written or oral and whether made by or on behalf of Northern
Indiana, are also expressly qualified by these cautionary statements. All
forward-looking statements are based on assumptions that management believes to
be reasonable; however, there can be no assurance that actual results will not
differ materially. Realization of Northern Indiana's objectives and expected
performance is subject to a wide range of risks and can be adversely affected
by, among other things, increased competition in deregulated energy markets,
weather, fluctuations in supply and demand for energy commodities, growth
opportunities for Northern Indiana's regulated businesses, dealings with third
parties over whom Northern Indiana has no control, the regulatory process,
regulatory and legislative changes, changes in general economic, capital and
commodity market conditions, and counter-party credit risk, many of which risks
are beyond the control of Northern Indiana. In addition, the relative
contributions to profitability by each segment, and the assumptions underlying
the forward-looking statements relating thereto, may change over time.
The following Management's Discussion and Analysis should be read in conjunction
with Northern Indiana's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 (Form 10-K).
SECOND QUARTER AND SIX MONTH RESULTS
Net Income
Northern Indiana reported net income of $42.8 million for the three months ended
June 30, 2002, compared to $37.4 million in the 2001 period. For the six months
ended June 30, 2002, Northern Indiana reported net income of $115.6 million, a
$9.6 million decrease from the 2001 period.
Net Revenues
Total consolidated net revenues (operating revenues less cost of sales) for the
three months ended June 30, 2002, were $245.9 million, a $11.2 million increase
over the same period last year. Net revenues increased as a result of increased
gas revenues due to 71% colder weather when compared to the second quarter of
2001 and increased electric sales to higher-margin residential and commercial
customers. Total consolidated net revenues for the six months ended June 30,
2002, were $538.7 million, a $9.8 million decrease over the same period in 2001.
Net revenues decreased as a result of decreased gas revenues due to 4% warmer
weather when compared to the six month period in 2001, decreased gas cost
recovery initiatives and a decline in electric industrial sales due to the
economic downturn.
Expenses
Operating expenses for the second quarter of 2002 were $165.6 million, an
increase of $7.3 million over the same period last year. The increase was mainly
due to increased operation and maintenance expenses of $5.5 million as a result
of increased administrative and general expenses, and an increase of $1.3
million in other taxes principally due to increased real estate taxes. For the
six months ended June 30, 2002, operating expenses were $327.8 million, an
increase of $13.2 million over the same period last year. The increase was
mainly due to increased operation and maintenance expenses of $14.4 million as a
result of increased administrative and general expenses, partially offset by
decreased electric production maintenance expenses and a decrease of $2.4
million principally due to decreased Indiana Gross Income Tax Expense.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Utility Income Taxes
Utility income tax expense for the second quarter of 2002 was $22.6 million,
compared to $19.6 million in 2001, due to higher pre-tax income in the current
period. Utility income tax expense for the first six months of 2002 was $64.4
million compared to $69.7 million in 2001, due to lower pre-tax income.
Other Income (Deductions)
Other income (Deductions) for the second quarter and first six months of 2002
decreased $0.6 million and $2.9 million, respectively, compared to the
comparable period in 2001, mainly as a result of decreased power trading
operating income. Effective November 1, 2001, Northern Indiana's power trading
operations were transferred to EnergyUSA-TPC Corp.(TPC), a subsidiary of
NiSource.
Interest
Interest expense for the second quarter and first six months of 2002 decreased
$5.1 million and $11.0 million, respectively, primarily due to a reduction in
short-term and long-term debt and lower short-term interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Generally, cash flow from operations has provided sufficient liquidity to meet
current operating requirements. Northern Indiana's operations are subject to
seasonal fluctuations in cash flow. During the heating season, which is
primarily from November through March, cash receipts from gas sales and
transportation services typically exceed cash requirements. In the summer
months, cash receipts for electric sales normally exceed cash requirements.
Also, during the summer months, cash on hand, together with external short-term
and long-term financing, is used in operations to purchase gas to place in
storage for heating season deliveries; perform necessary maintenance of
facilities; make capital improvements in plant; and expand service into new
areas.
Northern Indiana satisfies its liquidity requirements primarily through
internally generated funds and through intercompany borrowings from NiSource
Finance Corp. (NFC). NFC borrows funds in the commercial paper market and
maintains a $1.75 billion revolving credit facility with a syndicate of banks
for back-up liquidity purposes. The credit facility is guaranteed by NiSource.
Northern Indiana may borrow on an intercompany basis a maximum of one billion
dollars through the NiSource Money Pool as approved by the Securities and
Exchange Commission under the Public Utility Holding Company Act of 1935. As of
June 30, 2002, Northern Indiana had $180.3 million of intercompany short-term
borrowings outstanding with NFC at a weighted average interest rate of 2.73%.
Northern Indiana may sell up to $100 million of certain of its accounts
receivable to Citibank under a sales agreement, without recourse, which expires
May 2003. Northern Indiana has sold $100 million under this agreement. Under
this agreement, Northern Indiana may not sell any new receivables to Citibank if
Northern Indiana's debt rating falls below BBB- or Baa3 at Standard and Poor's
and Moody's Investor's Service (Moody's), respectively.
Credit Ratings
During January 2002, Standard and Poor's reaffirmed NiSource's BBB senior
unsecured long-term credit rating and its A2 commercial paper rating with a
negative outlook. On February 1, 2002, Moody's downgraded the senior unsecured
long-term debt ratings of NiSource and NFC to Baa3 and the commercial paper
rating of NFC to P3 with a negative outlook. In addition, Moody's downgraded the
long-term debt ratings of all other rated NiSource subsidiaries, including
Northern Indiana, to Baa2 to align the ratings of the subsidiaries and bring
them closer to NiSource's ratings going forward. On February 5, 2002 Fitch
Ratings reaffirmed NiSource's BBB senior unsecured long-term credit rating and
its F2 commercial paper rating, but revised NiSource's ratings outlook from
"Stable" to "Negative."
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
Through its various business activities, Northern Indiana is exposed to risk
including non-trading and trading risks. The non-trading risks to which Northern
Indiana is exposed include interest rate risk and commodity price risk. The risk
resulting from trading activities consists primarily of commodity price and
credit risks. Northern Indiana's risk management policy permits the use of
certain financial instruments to manage its market risk, including futures,
forwards, options and swaps. Northern Indiana employs various analytic
techniques to measure and monitor its market risks, including value-at-risk
(VaR) and instrument sensitivity to market factors. VaR represents the potential
loss or gain for an instrument or portfolio from adverse changes in market
factors, for a specified time period and at a specified confidence level.
Non-Trading Risks
Commodity price risk resulting from non-trading activities at Northern Indiana
is limited, since current regulations allow recovery of prudently incurred
purchased power, fuel and gas costs through the ratemaking process. As the
utility industry undergoes deregulation, these operations may be providing
services without the benefit of the traditional ratemaking process and will be
more exposed to commodity price risk. Northern Indiana enters into certain sales
contracts with customers based upon a fixed sales price and varying volumes,
which are ultimately dependent upon the customer's supply requirements. Northern
Indiana utilizes derivative financial instruments to reduce the commodity price
risk based on modeling techniques to anticipate these future supply
requirements.
Northern Indiana is exposed to interest rate risk as a result of changes in
interest rates on intercompany borrowings with NFC. These borrowings have
interest rates that are indexed to short-term market interest rates. At June 30,
2002, the outstanding borrowings totaled $180.3 million. Based upon average
borrowings during 2002, an increase in short-term interest rates of 100 basis
points (1%) would have increased interest expense by $0.3 million and $0.9
million for the quarter and six months ended June 30, 2002, respectively.
Due to the nature of the industry, credit risk is a factor in many of Northern
Indiana's business activities. In sales and trading activities, credit risk
arises because of the possibility that a counterparty will not be able or
willing to fulfill its obligations on a transaction on or before settlement
date. In derivative activities, credit risk arises when counterparties to
derivative contracts are obligated to pay Northern Indiana the positive fair
value or receivable resulting from the execution of contract terms. Exposure to
credit risk is measured in terms of both current and potential exposure. Current
credit exposure is generally measured by the notional or principal value of
financial instruments and direct credit substitutes, such as commitments and
standby letters of credit and guarantees. Current credit exposure includes the
positive fair value of derivative instruments. Because many of Northern
Indiana's exposures vary with changes in market prices, Northern Indiana also
estimates the potential credit exposure over the remaining term of transactions
through statistical analyses of market prices. In determining exposure, Northern
Indiana considers collateral and master netting agreements, which are used to
reduce individual counterparty credit risk.
Trading Risks
Effective November 1, 2001, Northern Indiana power trading activities were
transferred to TPC. The transactions associated with Northern Indiana's power
trading operations have given rise to various risks, including market risks
resulting from the potential loss from adverse changes in the market prices of
electricity. The power trading operations marketed and traded over-the-counter
contracts for the purchase and sale of electricity. The power trading activities
generally do not result in the physical delivery of electricity. Some contracts
within the trading portfolio required settlement by physical delivery, but are
net settled in accordance with industry standards.
Refer to "Risk Management Activities" in Note 4 of Notes to the Consolidated
Financial Statements for further discussion of Northern Indiana's risk
management.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
OTHER INFORMATION
Competition
The regulatory environment applicable to Northern Indiana continues to undergo
fundamental changes. These changes have previously had, and will continue to
have, an impact on Northern Indiana's operations, structure and profitability.
At the same time, competition within the energy industry will create
opportunities to compete for new customers and revenues. Management has taken
steps to become more competitive and profitable in this changing environment.
These initiatives include providing its customers with increased choice for new
products and services.
Insurance Renewal
As a result of many factors including the September 11, 2001 terrorist attack,
substantial property and financial losses in the energy sector in 2000 and 2001,
developments in the business and accounting practices of certain companies in
the energy sector, and the overall economic downturn, rate increases and
additional coverage restrictions have been expected in the energy insurance
market. Northern Indiana experienced increases in premiums, deductibles and
retentions with added restrictions to coverage and capacity for its property and
casualty insurance, which was renewed effective July 1, 2002.
Presentation of Segment Information
During 2001, Northern Indiana realigned a portion of its operations and
reclassified previously reported operating segment information to conform to the
realigned operating structure. The electric wheeling, bulk power, and power
trading operations were moved from the Electric Operations segment to Merchant
Operations. In addition, Northern Indiana's power trading business was
transferred to TPC as of November 1, 2001. All periods presented reflect these
changes.
Northern Indiana's operations are divided into three primary business segments.
The Gas Distribution segment provides natural gas service and transportation for
residential, commercial and industrial customers in Indiana. The Electric
Operations segment provides electric service in 21 counties in the northern part
of Indiana. The Merchant Operations segment provides energy-related services
including electric wheeling, bulk power and provided power trading through
October 31, 2001.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------ ------------------------------
(in millions) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------
NET REVENUES
Sales revenues $ 134.3 $ 104.3 $ 410.8 $ 573.1
Less: Cost of gas sold 91.3 68.6 268.0 426.3
- -----------------------------------------------------------------------------------------------------
Net Sales Revenues 43.0 35.7 142.8 146.8
Transportation Revenues 7.5 7.7 19.8 22.2
- -----------------------------------------------------------------------------------------------------
Net Revenues 50.5 43.4 162.6 169.0
- -----------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 25.6 23.9 52.0 45.6
Depreciation and amortization 20.4 20.5 40.8 40.9
Other taxes 5.2 5.3 11.7 15.0
- -----------------------------------------------------------------------------------------------------
Total Operating Expenses 51.2 49.7 104.5 101.5
- -----------------------------------------------------------------------------------------------------
Operating Income (Loss) $ (0.7) $ (6.3) $ 58.1 $ 67.5
=====================================================================================================
REVENUES ($ IN MILLIONS)
Residential 92.6 105.9 274.9 440.8
Commercial 26.9 34.3 82.9 145.3
Industrial 13.9 17.9 36.8 72.4
Transportation 7.5 7.7 19.8 22.2
Deferred Gas Costs (5.3) (67.4) (4.5) (131.8)
Other 6.2 13.6 20.7 46.4
- -----------------------------------------------------------------------------------------------------
Total 141.8 112.0 430.6 595.3
- -----------------------------------------------------------------------------------------------------
SALES AND TRANSPORTATION (MDTH)
Residential Sales 10.1 7.5 39.0 37.5
Commercial Sales 3.2 2.7 12.7 12.9
Industrial Sales 1.9 1.6 5.8 5.9
Transportation 32.8 31.3 72.8 70.7
Other 0.8 2.1 4.6 5.2
- -----------------------------------------------------------------------------------------------------
Total 48.8 45.2 134.9 132.2
- -----------------------------------------------------------------------------------------------------
HEATING DEGREE DAYS 561 329 2,936 3,054
NORMAL HEATING DEGREE DAYS 475 475 3,284 3,284
% COLDER (WARMER) THAN NORMAL 18% (31%) (11%) (7%)
CUSTOMERS
Residential 623,679 615,353
Commercial 47,934 47,399
Industrial 3,296 3,411
Transportation 12,032 14,508
Other 13 19
- -----------------------------------------------------------------------------------------------------
TOTAL 686,954 680,690
- -----------------------------------------------------------------------------------------------------
Northern Indiana's natural gas distribution operations serve approximately
687,000 customers in the northern part of Indiana. Northern Indiana offers both
traditional bundled services as well as transportation only for customers that
purchase gas from alternative suppliers. The operating results reflect the
temperature-sensitive nature of customer demand. As a result, segment operating
income is generally higher in the first and fourth quarters reflecting the
heating demand during the winter season.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS (CONTINUED)
Market Conditions
Northern Indiana has state-approved recovery mechanisms that provide a means for
full recovery of prudently incurred gas costs. Gas costs are treated as
pass-through costs and have no impact on the net revenues recorded in the
period. The gas costs included in revenues are matched with the gas cost expense
recorded in the period. The difference between current gas costs and those
recovered in revenues is deferred on the balance sheet to be included in future
billings.
Northern Indiana has pursued non-traditional revenue sources within the evolving
natural gas marketplace. These efforts include both the sale of products and
services upstream of its service territory, the sale of products and services in
its service territories and gas supply cost incentive mechanisms for service to
its core markets. The upstream products are made up of transactions that occur
between Northern Indiana and a buyer for the sales of unbundled or rebundled gas
supply and capacity products. The on-system services are offered by Northern
Indiana to customers and include products such as the transportation of gas on
Northern Indiana's system. The incentive mechanisms gives Northern Indiana an
opportunity to share in the savings created from, for example, gas purchase
prices paid below an agreed benchmark and its ability to reduce pipeline
capacity charges. The treatment of the revenues generated from these types of
transactions varies. Northern Indiana generated $5.8 million in net revenues
from various non-traditional sales and incentive programs in the first six
months of 2002, a $7.5 million decrease from the prior period.
Weather
Weather in Northern Indiana's market area for the second quarter of 2002 was 18%
colder than normal and 71% colder than the second quarter of 2001. For the first
six months of 2002, weather was 11% warmer than normal and 4% warmer than the
first six months of 2001.
Throughput
Northern Indiana sold and transported 48.8 million dekatherms (MDth) for the
second quarter of 2002, an increase of 3.6 MDth from the same period last year,
primarily due to colder weather when compared to the second quarter of 2001 and
increased transportation volumes to industrial customers, partially offset by
decreased off-system sales. Total volumes sold and transported were 134.9 MDth
for the first six months of 2002, an increase of 2.7 MDth from the same period
in 2001, primarily due to increased transportation volumes to industrial
customers and increased sales to residential customers.
Net Revenues
Net revenues for the three months ended June 30, 2002 were $50.5 million, an
increase of $7.1 million from the same period in 2001, primarily due to an
increase of approximately $5.2 million as a result of colder weather early in
the quarter when compared to the second quarter of 2001, partially offset by
decreased gas cost recovery initiatives. Net revenues for the six months ended
June 30, 2002 were $162.6 million, a decrease of $6.4 million from the same
period in 2001. The decrease in net revenues were due to warmer weather and
decreased gas cost recovery initiatives when compared to the six months of 2001.
Operating Income (Loss)
Operating loss for the second quarter of 2002 was $0.7 million, compared to an
operating loss for the second quarter of 2001 of $6.3 million, an improvement of
$5.6 million. The increase was primarily due to increased net revenues,
partially offset by increased operation and maintenance expenses of $1.7
million, resulting from increased administrative and general expenses. Operating
income for the first six months of 2002 was $58.1 million, a decrease of $9.4
million from the same period in 2001. The decrease was primarily due to an
increase in operation and maintenance expenses of $6.4 million, resulting from
increased administrative and general expenses and decreased net revenues,
partially offset by a decrease of $3.3 million in other taxes principally due to
decreased Indiana Gross Income Tax Expense.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
(in millions) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------
NET REVENUES
Sales Revenues $ 257.6 $ 246.7 $ 496.4 $ 494.0
Less: Cost of sales 69.1 63.6 133.7 130.0
- ---------------------------------------------------------------------------------------------------
Net Revenues 188.5 183.1 362.7 364.0
- ---------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 57.0 53.2 110.1 102.0
Depreciation and amortization 42.4 41.8 84.6 83.3
Other taxes 14.6 13.4 27.9 27.2
- ---------------------------------------------------------------------------------------------------
Total Operating Expenses 114.0 108.4 222.6 212.5
- ---------------------------------------------------------------------------------------------------
Operating Income $ 74.5 $ 74.7 $ 140.1 $ 151.5
===================================================================================================
REVENUES ($ IN MILLIONS)
Residential 69.9 65.4 138.8 134.2
Commercial 76.3 73.3 145.3 141.3
Industrial 100.5 104.0 191.5 209.0
Other 10.9 4.0 20.8 9.5
- ---------------------------------------------------------------------------------------------------
Total 257.6 246.7 496.4 494.0
- ---------------------------------------------------------------------------------------------------
SALES (GIGAWATT HOURS)
Residential 699.2 640.7 1,401.6 1,338.4
Commercial 891.2 850.0 1,722.9 1,665.4
Industrial 2,196.9 2,309.1 4,222.7 4,632.1
Other 34.4 32.4 71.2 71.8
- ---------------------------------------------------------------------------------------------------
Total 3,821.7 3,832.2 7,418.4 7,707.7
- ---------------------------------------------------------------------------------------------------
COOLING DEGREE DAYS 263 240 263 240
NORMAL HEATING DEGREE DAYS 219 219 219 219
% WARMER (COLDER) THAN NORMAL 20% 10% 20% 10%
CUSTOMERS
Residential 381,904 379,059
Commercial 47,790 46,897
Industrial 2,615 2,663
Other 802 805
- ---------------------------------------------------------------------------------------------------
Total 433,111 429,424
- ---------------------------------------------------------------------------------------------------
Northern Indiana generates and distributes electricity approximately 433,000
customers in 21 counties in the northern part of Indiana. The operating results
reflect the temperature-sensitive nature of customer demand with annual sales
affected by temperatures in the northern part of Indiana. As a result, segment
operating income is generally higher in the second and third quarters reflecting
the cooling demand during the summer season.
Market Conditions
The regulatory frameworks applicable to Electric Operations continue to work
through fundamental changes. These changes will continue to have an impact on
Northern Indiana's Electric Operation's, structure and profitability. At the
same time, competition within the industry will create opportunities to compete
for new customers and revenues. Management has taken steps to become more
competitive and profitable in this changing environment, including shutting down
inefficient generating units, converting some of its generating units to allow
use of lower cost, low sulfur coal and improving the transmission
interconnections with neighboring electric utilities.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS (CONTINUED)
The overall weakening of the U.S. economy is reflected in the 112.2
gigawatt-hour (gwh) decline in sales to the industrial customer class in the
second quarter of 2002 versus the comparable 2001 period. In particular, the
steel and steel-related industries have been adversely impacted by recent events
and market conditions. Overall deliveries to the steel industry were down 152.7
gwh in the second quarter of 2002 and were down 382.5 gwh in the first six
months of 2002, compared to the same periods last year.
Regulatory Matters
On June 20, 2002, a settlement agreement was filed with the Indiana Utility
Regulatory Commission (IURC) that would enable electric customers of Northern
Indiana to receive an amount intended to approximate $55.0 million each year in
credits to their electric bills for 49 months. The settlement is the result of
months of negotiations among Northern Indiana, the Indiana Office of Utility
Consumer Counselor, and a group of commercial and industrial customers. Other
customers have opposed the settlement. Hearings on the settlement were held on
July 22 and 23, 2002.
If approved by the IURC, Northern Indiana's electric customers, other than those
on certain contract rates, will receive a credit of approximately 6 percent of
the electric portion of their monthly Northern Indiana bill. Briefings will be
completed by all parties by August 13 and the IURC will issue a final order in
the matter sometime after that date.
In 1999, the FERC issued Order 2000 addressing the formation and operation of
Regional Transmission Organizations (RTOs). On February 28, 2001, Northern
Indiana joined the Alliance RTO. On December 18, 2001, the IURC issued an order
denying Northern Indiana's request to transfer functional control of its
transmission facilities to the Alliance RTO. On December 20, 2001, the FERC
reversed prior orders that had preliminarily approved the Alliance RTO and
concluded that the Alliance RTO failed to meet Order 2000's scope and
configuration requirements. FERC ordered the Alliance RTO companies, including
Northern Indiana, to pursue membership in the Midwest Independent System
Operator (MISO). On June 20, 2002, Northern Indiana, Ameren Corporation and
First Energy Corporation established terms for joining the MISO through
participation in an independent transmission company. The MISO arrangements were
filed with the FERC, and on July 31, 2002, the FERC issued an order
conditionally approving these arrangements. Northern Indiana has expended
approximately $7.7 million related to joining the Alliance RTO. Northern Indiana
believes that the amounts spent will be recoverable.
Northern Indiana has been recovering the costs of electric power purchased for
sale to its customers through the Fuel Adjustment Clause. The Fuel Adjustment
Clause provides for cost to be collected if they are below a cap set based upon
the costs of Northern Indiana's most expensive generating unit. If costs exceed
this cap, Northern Indiana must demonstrate why it should be allowed recovery
before recovery is approved. In January 2002, Northern Indiana filed for
approval to implement a purchase power tracker (PPT). The PPT would allow
recovery of all costs related to purchasing electricity for use by Northern
Indiana's customers on a periodic basis. No actions have been taken by the IURC
on this filing.
In January 2002, Northern Indiana filed for approval to implement an
environmental cost tracker (ECT). On June 20, Northern Indiana and the Office of
Utility Consumer Counselor filed an ECT Stipulation and Settlement Agreement
(ECT Settlement Agreement), which resolves all issues in the proceeding. Under
the ECT Settlement Agreement, Northern Indiana will be able to recover (1)
allowance for funds used during construction and a return on the capital
investment expended by Northern Indiana to implement Indiana Department of
Environmental Management's (IDEM), nitrogen oxide State Implementation Plan, and
(2) related operation and maintenance and depreciation expenses once the
environmental facilities become operational. Hearings on the ECT Settlement
Agreement are scheduled for August 13, 2002.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS (CONTINUED)
Environmental Matters
The U.S Environmental Protection Agency (EPA) issued final rules revising the
National Ambient Air Quality Standards for ozone and particulate matter in July
1997. On May 14, 1999, the United States Court of Appeals for the D.C. Circuit
remanded the new rules for both ozone and particulate matters to the EPA. The
Court of Appeals decision was appealed to the Supreme Court, which heard oral
arguments on November 7, 2000. The Supreme Court rendered a complex ruling on
February 27, 2001 that required several issues to be resolved by the D.C.
Circuit Court before final rulemaking could occur. On March 26, 2002, the D.C.
Circuit Court largely upheld the ambient air standards as proposed.
Consequently, final rules specifying a compliance level and controls necessary
for compliance will now be developed by EPA which will likely change air
emissions compliance requirements. Resulting rules could require additional
reductions in sulfur dioxide, particulate matter and nitrogen oxides emissions
from coal-fired boilers (including Northern Indiana's electric generating
stations). Final implementation methods will be set by the EPA as well as state
regulatory authorities. Northern Indiana believes that the costs relating to
compliance with any new limits may be substantial but are dependent upon the
ultimate control program agreed to by the targeted states and the EPA and are
currently not reasonably estimable. Northern Indiana will continue to closely
monitor developments in this area, however, the exact nature of the impact of
the new standards on its operations will not be known for some time.
The EPA has initiated enforcement actions against several electric utilities
alleging violations of the new source review provisions of the Clean Air Act.
Northern Indiana has received and responded to information requests from the EPA
on this subject over the last two years, most recently in June 2002. It is
impossible at this time to predict the result of EPA's review of Northern
Indiana's information responses.
Sales
Electric sales for the second three months of 2002 were 3,821.7 million
kilowatt-hours (kwh), a decrease of 10.5 million kwh, compared to the 2001
period, reflecting a decrease in industrial demand primarily due to the economic
downturn, partially offset by increased sales to higher-margin residential and
commercial customers. Electric sales for the six months ended June 30, 2002 were
7,418.4 million kwh, a decrease of 289.3 million kwh compared to the 2001
period, primarily reflecting the decrease in demand due to the economic
downturn. The decline in industrial sales was partially offset by increased
sales to higher-margin residential and commercial customers due to warmer
weather during the second quarter of 2002, when compared to the same period of
2001.
Net Revenues
In the second quarter of 2002, electric net revenues of $188.5 million increased
by $5.4 million over the 2001 period. The increased sales to residential and
commercial customers more than offset the lower sales to industrial customers
during the latter part of the quarter. In the first six months of 2002, electric
net revenues of $362.7 million decreased $1.3 million over the 2001 period. The
decline in industrial sales was partially offset by increased sales to
higher-margin residential and commercial customers due to the warmer weather
during the second quarter of 2002, when compared to the same period of 2001.
Operating Income
Operating income for the second quarter of 2002 was $74.5 million, a decrease of
$0.2 million from the 2001 period. The decrease was a result of an increase in
operation and maintenance expenses of $3.8 million, primarily resulting from
increased administrative and general expenses, partially offset by increased net
revenues. Operating income for the first six months of 2002 was $140.1 million,
a decrease of $11.4 million over the same period in 2001. The decrease was a
result of reduced net revenues, an increase in operation and maintenance
expenses of $8.1 million, primarily resulting from increased administrative and
general expenses, partially offset by decreased electric production maintenance
expenses.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
MERCHANT OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------------
($ in millions) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------
NET REVENUES
Electric Revenues $ 26.9 $ 251.9 $ 50.0 $ 375.2
Less: Cost of sales 20.0 237.9 36.6 348.6
- --------------------------------------------------------------------------------------------
Net Revenues 6.9 14.0 13.4 26.6
TOTAL OPERATING EXPENSES 0.4 1.6 0.7 2.3
- --------------------------------------------------------------------------------------------
Operating Income $ 6.5 $ 12.4 $ 12.7 $ 24.3
============================================================================================
VOLUMES
Electric sales (Gigawatt Hours) 779.2 5,141.4 1,536.1 7,711.1
- --------------------------------------------------------------------------------------------
Effective November 1, 2001, Northern Indiana's power trading operations were
transferred to TPC.
Net Revenues
Net revenues for the second quarter and first six months of 2002 were $6.9
million and $13.4 million, respectively, a decrease of $7.1 million and $13.2
million over the same periods last year, respectively. The decrease is due
primarily to the transfer of power trading operations to TPC.
Operating Income
Merchant Operations had operating income of $6.5 million and $12.7 million for
the second quarter and first six months of 2002 compared to operating income of
$12.4 million and $24.3 million for the same periods last year, respectively.
The decrease is primarily due to the decreased net revenues discussed above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion regarding quantitative and qualitative disclosures about market
risk, see Management's Discussion and Analysis of Financial Condition and
Results of Operations under "Market Risk Sensitive Instruments and Positions."
20
PART II
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 10, 2002, by written consent in lieu of the Annual Meeting of
Shareholders, the sole shareholder of Northern Indiana elected Stephen P. Adik,
Patrick J. Mulchay and Jeffrey W. Yundt to serve as directors until the 2003
Annual Meeting of Shareholders.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
(99.1) Certification of Barrett Hatches, Chief Executive Officer, pursuant
to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
(99.2) Certification of Dennis McFarland, Principal Financial Officer,
pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
21
SIGNATURE
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 thereunto duly authorized.
Northern Indiana Public Service Company
---------------------------------------------
(Registrant)
Date: August 9, 2002 By: /s/ Jeffrey W. Grossman
---------------------------------------------
Jeffrey W. Grossman
Vice President
(Duly Authorized Officer)
22