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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 SEPTEMBER 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
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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.)
801 East 86th Avenue
Merrillville, Indiana 46410
--------------------------- -----------------
(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 November 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 SEPTEMBER 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
Statements of Comprehensive Income (Loss)............... 7
Notes to Consolidated Financial Statements................ 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures................................... 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings......................................... 23
Item 2. Changes in Securities and Use of Proceeds................. 23
Item 3. Defaults Upon Senior Securities........................... 23
Item 4. Submission of Matters to a Vote of Security Holders....... 23
Item 5. Other Information......................................... 23
Item 6. Exhibits and Reports on Form 8-K.......................... 23
Signature................................................. 24
Certifications............................................ 25
2
PART I
ITEM 1. FINANCIAL STATEMENTS
NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
(in millions) 2002 2001 2002 2001
=============================================================================================================================
OPERATING REVENUES
Gas Distribution $ 65.9 $ 58.7 $ 496.5 $ 654.0
Electric 333.1 300.0 879.5 814.8
- -----------------------------------------------------------------------------------------------------------------------------
Gross Operating Revenues 399.0 358.7 1,376.0 1,468.8
- -----------------------------------------------------------------------------------------------------------------------------
COST OF ENERGY
Gas costs 31.4 28.4 299.4 454.7
Fuel for electric generation 59.8 67.5 161.9 178.2
Power purchased 58.3 13.1 126.5 37.7
- -----------------------------------------------------------------------------------------------------------------------------
Cost of sales 149.5 109.0 587.8 670.6
- -----------------------------------------------------------------------------------------------------------------------------
Total Net Revenues 249.5 249.7 788.2 798.2
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation 63.1 73.3 191.9 184.9
Maintenance 14.0 14.4 47.9 51.1
Depreciation and amortization 63.3 61.5 188.7 185.7
Other taxes 13.9 19.5 53.6 61.6
- -----------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 154.3 168.7 482.1 483.3
- -----------------------------------------------------------------------------------------------------------------------------
UTILITY OPERATING INCOME BEFORE UTILITY
INCOME TAXES 95.2 81.0 306.1 314.9
- -----------------------------------------------------------------------------------------------------------------------------
UTILITY INCOME TAXES 29.3 23.2 93.7 92.9
- -----------------------------------------------------------------------------------------------------------------------------
UTILITY OPERATING INCOME 65.9 57.8 212.4 222.0
- -----------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS) (0.1) (1.1) (0.9) 1.0
=============================================================================================================================
INTEREST
Interest on long-term debt 11.8 13.7 37.1 42.9
Other interest 0.9 2.7 3.5 12.6
Amortization of premium, reacquisition premium,
discount and expense on debt, net 1.0 0.9 3.2 2.9
- -----------------------------------------------------------------------------------------------------------------------------
Total Interest 13.7 17.3 43.8 58.4
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 52.1 $ 39.4 $ 167.7 $ 164.6
=============================================================================================================================
DIVIDEND REQUIREMENTS ON PREFERRED STOCKS 1.9 1.9 5.6 5.6
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AVAILABLE FOR COMMON SHARES $ 50.2 $ 37.5 $ 162.1 $ 159.0
- -----------------------------------------------------------------------------------------------------------------------------
COMMON DIVIDENDS DECLARED $ 44.0 $ 54.0 $ 185.0 $ 226.0
- -----------------------------------------------------------------------------------------------------------------------------
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
SEPTEMBER 30, December 31,
(in millions) 2002 2001
==========================================================================================================
(unaudited)
ASSETS
UTILITY PLANT, at original cost
Electric $4,535.9 $4,440.2
Gas 1,447.5 1,423.7
Common 367.3 355.1
==========================================================================================================
Total Utility Plant 6,350.7 6,219.0
Less: Accumulated provision for depreciation and amortization 3,514.0 3,357.2
- ----------------------------------------------------------------------------------------------------------
Net utility plant 2,836.7 2,861.8
- ----------------------------------------------------------------------------------------------------------
OTHER PROPERTY AND INVESTMENTS 8.7 8.1
- ----------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 8.1 16.0
Accounts receivable (less reserve of $10.1 and $11.9, respectively) 93.2 135.2
Fuel cost adjustment clause 8.5 --
Gas cost adjustment clause 26.2 28.2
Materials and supplies, at average cost 45.2 44.7
Electric production fuel, at average cost 29.1 29.2
Natural gas in storage, at last-in, first-out cost 33.5 104.7
Price risk management assets 3.4 --
Prepayments and other 53.9 40.3
==========================================================================================================
Total Current Assets 301.1 398.3
- ----------------------------------------------------------------------------------------------------------
OTHER ASSETS
Regulatory assets 226.8 170.0
Prepayments and other 44.9 194.3
- ----------------------------------------------------------------------------------------------------------
Total Other Assets 271.7 364.3
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $3,418.2 $3,632.5
==========================================================================================================
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
SEPTEMBER 30, December 31,
(in millions) 2002 2001
=========================================================================================================
(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity $ 862.4 $1,036.3
Preferred Stocks --
Series without mandatory redemption provisions 81.1 81.1
Series with mandatory redemption provisions 4.4 5.0
Long-term debt, excluding amounts due within one year 719.2 843.1
=========================================================================================================
Total Capitalization 1,667.1 1,965.5
=========================================================================================================
CURRENT LIABILITIES
Current redeemable preferred stock subject to mandatory redemption 43.0 43.0
Current portion of long-term debt 128.5 59.0
Short-term borrowings 176.1 335.4
Accounts payable 140.4 145.8
Dividends declared on common and preferred stocks 45.7 1.7
Customer deposits 36.0 31.8
Taxes accrued 197.8 195.4
Interest accrued 13.2 7.8
Fuel adjustment clause -- 3.7
Accrued employment costs 39.1 34.1
Price risk management liabilities 4.1 5.6
Other accruals 66.8 43.5
- ---------------------------------------------------------------------------------------------------------
Total Current Liabilities 890.7 906.8
- ---------------------------------------------------------------------------------------------------------
OTHER LIABILITIES AND DEFERRED CREDITS
Deferred income taxes 493.0 464.7
Deferred investment tax credits 66.1 71.4
Deferred credits 44.3 48.9
Accrued liability for postretirement and pension benefits 249.3 160.8
Regulatory liabilities 4.8 4.5
Other noncurrent liabilities 2.9 9.9
- ---------------------------------------------------------------------------------------------------------
Total Other 860.4 760.2
- ---------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES -- --
- ---------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $3,418.2 $3,632.5
=========================================================================================================
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)
Nine Months
Ended September 30,
-----------------------
(in millions) 2002 2001
========================================================================================
OPERATING ACTIVITIES
Net Income $167.7 $164.6
Adjustments to reconcile net income to net cash:
Depreciation and amortization 188.7 185.7
Net changes in price risk management activities (4.9) 21.6
Deferred income taxes (7.6) (110.3)
Amortization of deferred investment tax credits (5.3) (5.3)
Other, net 26.4 (1.3)
- ----------------------------------------------------------------------------------------
365.0 255.0
Changes in components of working capital:
Accounts receivable, net 42.0 63.5
Electric production fuel 0.1 (9.0)
Materials and supplies (0.5) 1.5
Natural gas in storage 71.2 (3.1)
Accounts payable 3.1 (100.6)
Taxes accrued 73.8 93.6
Fuel adjustment clause (12.2) 2.8
Gas cost adjustment clause 2.0 151.7
Accrued employment costs 5.0 (8.3)
Other accruals 23.3 (10.5)
Other, net (50.5) (12.8)
- ----------------------------------------------------------------------------------------
Net Cash from Operating Activities 522.3 423.8
- ----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Construction expenditures (157.1) (127.8)
Other investing activities, net (12.3) (15.4)
- ----------------------------------------------------------------------------------------
Net Investing Activities (169.4) (143.2)
- ----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Retirement of long-term debt (54.5) (54.5)
Change in short-term debt (159.3) (44.9)
Retirement of preferred shares (0.6) (0.6)
Dividends paid - common shares (141.0) (172.0)
Dividends paid - preferred shares (5.6) (5.6)
Other financing activities, net 0.2 0.2
- ----------------------------------------------------------------------------------------
Net Financing Activities (360.8) (277.4)
- ----------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (7.9) 3.2
Cash and cash equivalents at beginning of period 16.0 17.9
- ----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8.1 $ 21.1
========================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized 36.3 47.9
Cash paid for income taxes 33.0 68.7
- ----------------------------------------------------------------------------------------
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
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- -----------------------
(in millions) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 52.1 $39.4 $ 167.7 $164.6
Other comprehensive income (loss), net of tax
Net unrealized gains (losses) on cash flow hedges 0.1 (1.0) 2.9 (4.6)
Minimum pension liability adjustment (154.0) -- (154.0) --
- -----------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) (153.9) (1.0) (151.1) (4.6)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income (Loss) $(101.8) $38.4 $ 16.6 $160.0
- -----------------------------------------------------------------------------------------------------------------------------------
7
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 ELECTRIC RATE REVIEW SETTLEMENT
On June 20, 2002, a settlement agreement was filed with the Indiana Utility
Regulatory Commission (IURC) regarding the Northern Indiana electric rate
review. On September 23, 2002, the IURC issued an order adopting the settlement
in most respects. The order provides that electric customers of Northern Indiana
will receive an amount intended to approximate $55.0 million each year in
credits to their electric bills for 49 months, beginning on July 1, 2002. The
order also provides that 60% of any future earnings beyond a specified cap will
be retained by Northern Indiana.
Pursuant to the settlement, Northern Indiana accrued $14.4 million in credits to
electric customers during the quarter and nine-month periods ended September 30,
2002 and, as authorized, began to amortize one-half of its expenses for this
proceeding over a 49-month period. The remaining expenses were charged to income
in the third quarter 2002.
On October 23, 2002, the IURC denied a petition for reconsideration of the order
filed on October 15, 2002 by fourteen residential customers. Therefore, Northern
Indiana electric customers will begin to receive credits starting with their
November monthly bill. The order adopting the settlement is currently being
appealed by both the Citizen Action Coalition of Indiana and the fourteen
residential customers to the Indiana Court of Appeals.
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. In December 2001 Northern Indiana announced its
plan to indefinitely shut down the Dean H. Mitchell Generating Station located
in Gary, Indiana.
During the third quarter of 2002, NiSource carried out the first phase of a
reorganization initiative, which resulted in the elimination of 4 positions at
Northern Indiana mainly affecting executive and other management-level
employees. The reorganization initiative resulted in the accrual of
approximately $0.5 million of salaries and benefits associated with the
eliminated positions. As of September 30, 2002, no employees had been
terminated.
For all of the plans, a total of approximately 220 management, professional,
administrative and technical positions have been identified for elimination at
Northern Indiana. As of September 30, 2002, 98 employees had been terminated, of
which 10 employees and 72 employees were terminated during the third quarter and
nine months ended September 30, 2002, respectively. At September 30, 2002 and
December 31, 2001, the consolidated balance sheets reflected liabilities of $3.5
million and $9.7 million related to the restructuring plans, respectively.
During the
8
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
third quarter and nine months ended September 30, 2002, $0.3 million and $2.9
million of benefits were paid from the restructuring plans, respectively.
Additionally, during the third quarter and nine months ended September 30, 2002,
the restructuring plan liability was reduced by $3.5 million and $3.8 million,
respectively. The net adjustment during the third quarter was recorded in
response to a reduction in estimated expenses related to previous reorganization
initiatives.
During the fourth quarter 2002, NiSource expects to complete the reorganization
initiative, which began in the third quarter. It is expected that a charge of
approximately $3.8 million will be recorded in the fourth quarter related to
Northern Indiana employee severance.
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."
HEDGING ACTIVITIES. The activity for the third quarter and nine month period
ended September 30, 2002 with respect to cash flow hedges included the
following:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
(in millions, net of tax) 2002 2002
================================================================================================================
Unrealized gains (losses) on derivatives qualifying as
cash flow hedges at the beginning of the period $ 0.1 $ (2.7)
Unrealized hedging gains arising during the period on
derivatives qualifying as cash flow hedges -- 2.0
Reclassification adjustment for net loss (gain) included in
net income 0.1 0.9
- ----------------------------------------------------------------------------------------------------------------
Net unrealized gains on derivatives qualifying as cash
flow hedges at the end of the period $ 0.2 $ 0.2
- ----------------------------------------------------------------------------------------------------------------
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 September 30, 2002, reflected price
risk management assets of $3.4 million, of which, $0.4 million was related to
unrealized gains and losses on hedges and $3.0 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
September 30, 2002, price risk management liabilities were $4.1 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 third quarter of 2002, no components of the derivatives' fair values
were excluded in the assessment of hedge effectiveness. Also during the third
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
$0.2 million at September 30, 2002.
9
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 September 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 was a reduction of $0.9 million.
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In July 2001, the
FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS
No. 143). SFAS No. 143 requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred. When
the liability is initially recorded, the entity capitalizes a cost by increasing
the carrying amount of the related long-lived asset. Over time, the liability is
accreted to its then present value, and the capitalized cost is depreciated over
the useful life of the related asset. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002, with earlier application encouraged. Northern
Indiana is currently evaluating the impact of SFAS No. 143 and does not expect
the adoption of the statement to have a material effect on its financial
condition or results of operations.
EITF ISSUE NO. 02-03 - ISSUES INVOLVED IN ACCOUNTING FOR DERIVATIVE CONTRACTS
HELD FOR TRADING PURPOSES AND CONTRACTS INVOLVED IN ENERGY TRADING AND RISK
MANAGEMENT ACTIVITIES (EITF NO. 02-03). See Note 9.
7. MINIMUM PENSION LIABILITY
Due to the decline in the equity markets, the fair value of Northern Indiana's
pension fund assets has decreased since September 30, 2001. In addition, the
discount rate used to measure the accumulated benefit obligation has decreased,
resulting in an increase in the estimated minimum liability. In accordance with
Financial Accounting Standards Board Statement No. 87, "Employers' Accounting
for Pensions," Northern Indiana recorded a minimum pension liability adjustment
at September 30, 2002. The adjustment resulted in a decrease to prepaid pension
costs of $210.6 million, an increase in intangible assets of $38.6 million, an
increase to retirement benefit liabilities of $86.9 million, an increase to
deferred income tax assets of $104.9 million and a decrease to other
comprehensive income of $154.0 million after-tax.
8. LEGAL PROCEEDINGS
In the normal course of its business, Northern Indiana has been named as
defendants in various legal proceedings. In the opinion of management, the
ultimate disposition of these currently asserted claims would not have a
material adverse impact on Northern Indiana's financial position.
9. BUSINESS SEGMENT INFORMATION
Northern Indiana's operations are divided into three primary business segments.
The Gas Distribution segment provides natural gas service and transportation for
residential, commercial and industrial customers in Indiana. The Electric
Operations segment provides electric service in 21 counties in the northern part
of Indiana. The Merchant Operations segment provides energy-related services
including electric wheeling and bulk power and, through October 31, 2001,
engaged in power trading. Effective November 1, 2001, Northern Indiana's power
trading operations were transferred to TPC.
The following tables provide information about business segments. Adjustments
have been made to the segment information to arrive at information included in
the results of operations and financial position. Northern Indiana uses
operating income as its primary measurement for each of the reported segments.
Operating income is derived from revenues and expenses directly associated with
each segment.
10
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The adjustments represent the revenues and net pre-tax operating income of
Northern Indiana's electric trading business, which are reflected in the
Merchant Operations Segment but are reported as a component of Other Income
(Deductions) in the Statements of Consolidated Income.
($ in millions) GAS ELECTRIC MERCHANT ADJUSTMENTS TOTAL
===============================================================================================================================
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
Operating revenues 65.9 292.8 40.3 -- 399.0
Utility operating income before utility income
taxes (11.8) 99.8 7.8 (0.6) 95.2
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
Operating revenues 58.7 281.7 363.6 (345.3) 358.7
Utility operating income before utility income
taxes (24.3) 94.5 10.3 0.5 81.0
- -------------------------------------------------------------------------------------------------------------------------------
($ in millions) GAS ELECTRIC MERCHANT ADJUSTMENTS TOTAL
===============================================================================================================================
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Operating revenues 496.5 789.2 90.3 -- 1,376.0
Utility operating income before utility income
taxes 46.3 239.9 20.5 (0.6) 306.1
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
Operating revenues 654.0 775.7 738.8 (699.7) 1,468.8
Utility operating income before utility income
taxes 43.2 246.0 34.6 (8.9) 314.9
- -------------------------------------------------------------------------------------------------------------------------------
EITF ISSUE NO. 02-03 -- ISSUES INVOLVED IN ACCOUNTING FOR DERIVATIVE CONTRACTS
HELD FOR TRADING PURPOSES AND CONTRACTS INVOLVED IN ENERGY TRADING AND RISK
MANAGEMENT ACTIVITIES (EITF NO. 02-03). On October 25, 2002, the EITF reached a
final consensus in EITF No. 02-03 that gains and losses (realized or unrealized)
on all derivative instruments within the scope of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133), should be shown
net in the income statement, whether or not settled physically, if the
derivative instruments are held for trading purposes. This consensus will be
effective for financial statements issued for periods beginning after December
15, 2002. Northern Indiana will reevaluate its portfolio of contracts in order
to determine which contracts will be required to be reported net in accordance
with the provisions of the consensus.
For the periods presented, if Northern Indiana had reported its trading
activities pursuant to EITF 98-10 on a net basis, the operating revenues for
the merchant function above would have been $18.7 million and $50.6 million for
the three and nine months ended September 30, 2001 with no impact on total
operating revenues. Northern Indiana had no transactions accounted for pursuant
to EITF No. 98-10 in 2002.
The task force also reached a consensus to rescind EITF Issue No. 98-10,
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities" (EITF No. 98-10), and preclude mark-to-market accounting for energy
trading contracts that are not derivatives pursuant to SFAS No. 133. This
consensus will be effective for fiscal periods beginning after December 15,
2002, for energy trading and energy-related contracts that existed on or before
October 25, 2002 that remain in effect at the date the consensus is initially
applied (January 1, 2003 for Northern Indiana). Contracts entered into after
October 25, 2002, will be analyzed pursuant to a generally accepted accounting
principle hierarchy, excluding EITF No. 98-10. Northern Indiana does not expect
the rescission of EITF No. 98-10 to have a material affect on its financial
condition or results of operations.
11
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other Income (Deductions) in the Statements of Consolidated Income were
comprised of the following items:
($ in millions) MERCHANT OTHER TOTAL
======================================================================================
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
Power trading revenues -- -- --
Power trading cost of sales -- -- --
Power trading administrative expenses -- -- --
Power trading unrealized gains (losses) -- -- --
Other -- (0.1) (0.1)
- --------------------------------------------------------------------------------------
Total Other Income (Deductions) -- (0.1) (0.1)
- --------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
Power trading revenues 354.3 -- 354.3
Power trading cost of sales (344.9) -- (344.9)
Power trading administrative expenses (0.9) -- (0.9)
Power trading unrealized gains (losses) (9.0) -- (9.0)
Other -- (0.6) (0.6)
- --------------------------------------------------------------------------------------
Total Other Income (Deductions) (0.5) (0.6) (1.1)
- --------------------------------------------------------------------------------------
($ in millions) MERCHANT OTHER TOTAL
======================================================================================
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Power trading revenues -- -- --
Power trading cost of sales -- -- --
Power trading administrative expenses -- -- --
Power trading unrealized gains (losses) -- -- --
Other -- (0.9) (0.9)
- --------------------------------------------------------------------------------------
Total Other Income (Deductions) -- (0.9) (0.9)
- --------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
Power trading revenues 701.1 -- 701.1
Power trading cost of sales (688.2) -- (688.2)
Power trading administrative expenses (2.6) -- (2.6)
Power trading unrealized gains (losses) (1.4) -- (1.4)
Other -- (7.9) (7.9)
- --------------------------------------------------------------------------------------
Total Other Income (Deductions) 8.9 (7.9) 1.0
- --------------------------------------------------------------------------------------
12
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).
THIRD QUARTER AND NINE MONTH RESULTS
Net Income
Northern Indiana reported net income of $52.1 million for the three months ended
September 30, 2002, compared to $39.4 million in the 2001 period. For the nine
months ended September 30, 2002, Northern Indiana reported net income of $167.7
million, a $3.1 million increase from the 2001 period.
Net Revenues
Total consolidated net revenues (operating revenues less cost of sales) for the
three months ended September 30, 2002, were $249.5 million, a $0.2 million
decrease from the same period last year. Total consolidated net revenues for the
nine months ended September 30, 2002, were $788.2 million, a $10.0 million
decrease from the same period in 2001. Net revenues decreased as a result of
decreased gas revenues due to 5% warmer weather as compared to the nine month
period in 2001, decreased gas cost incentive mechanisms and decreased wholesale
gas sales. Also contributing to the decrease were credits to be issued to
customers as a result of the Indiana Utility Regulatory Commission (IURC)
electric rate review settlement and decreased industrial sales. The decreases
were partially offset by increased sales to residential and commercial customers
due to 27% warmer weather during the cooling season, as compared to the same
period last year.
Expenses
Operating expenses for the third quarter of 2002 were $154.3 million, a decrease
of $14.4 million from the same period last year. The decrease was due to reduced
expenses related to reorganization initiatives and other decreased
administrative and general expenses, and a decrease of $5.6 million in other
taxes principally due to decreased property taxes, partially offset by IURC
electric rate expenses. For the nine months ended September 30, 2002, operating
expenses were $482.1 million, a decrease of $1.2 million from the same period
last year. The decrease was mainly due to a decrease in other taxes principally
due to decreased property taxes and reduced expenses related to reorganization
initiatives. The reductions were mostly offset by increased administrative and
general expenses, increased uncollectible customer receivables, IURC electric
rate review expenses, and increased depreciation and amortization expenses.
13
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 third quarter of 2002 was $29.3 million,
compared to $23.2 million in 2001, due to higher pre-tax income in the current
period. Utility income tax expense for the first nine months of 2002 was $93.7
million compared to $92.9 million in 2001, due to higher pre-tax income.
Other Income (Deductions)
Other income (Deductions) for the third quarter of 2002 increased $1.0 million,
compared to the comparable period in 2001, mainly as a result of decreased power
trading losses and decreased miscellaneous deductions. Effective November 1,
2001, Northern Indiana's power trading operations were transferred to
EnergyUSA-TPC Corp. (TPC), a subsidiary of NiSource. Other Income (Deductions)
for the first nine months of 2002 decreased $1.9 million mainly as a result of
decreased power trading income and decreased miscellaneous deductions.
Interest
Interest expense for the third quarter and first nine months of 2002 decreased
$3.6 million and $14.6 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. A significant portion of Northern Indiana's
operations, most notably in the gas and electric distribution businesses, 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 the NiSource
Money Pool. 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. NiSource Finance Corp. (NFC) provides funding to the NiSource Money
Pool from external borrowing sources and maintains an aggregate $1.75 billion
revolving credit facility with a syndicate of banks. The credit facility is
guaranteed by NiSource. As of September 30, 2002, Northern Indiana had $176.1
million of intercompany short-term borrowings outstanding at a weighted average
interest rate of 2.54%.
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."
14
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, through October 31, 2001, 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
September 30, 2002, the outstanding borrowings totaled $176.1 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 $0.4 million and
$1.3 million for the quarter and nine months ended September 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 did not result in the physical delivery of electricity. Some contracts
within the trading portfolio required settlement by physical delivery, but were
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.
15
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 substantial property and financial losses
in the energy sector beginning in 2000 and continuing in 2002, developments in
the businesses 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 along with added
restrictions to coverage and capacity for its property and casualty insurance,
which was renewed effective July 1, 2002. Indications are that the upward trend
in insurance costs will continue in the foreseeable future.
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 and bulk power and, through October 31, 2001,
engaged in power trading.
16
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 Nine Months
Ended September 30, Ended September 30,
------------------------------ ------------------------------
( in millions) 2002 2001 2002 2001
==============================================================================================================
NET REVENUES
Sales revenues $ 59.3 $ 52.1 $ 470.1 $ 625.2
Less: Cost of gas sold 31.4 28.4 299.4 454.7
- --------------------------------------------------------------------------------------------------------------
Net Sales Revenues 27.9 23.7 170.7 170.5
Transportation Revenues 6.6 6.6 26.4 28.8
- --------------------------------------------------------------------------------------------------------------
Net Revenues 34.5 30.3 197.1 199.3
- --------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 22.6 30.1 74.6 75.7
Depreciation and amortization 20.6 20.1 61.4 61.0
Other taxes 3.1 4.4 14.8 19.4
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses 46.3 54.6 150.8 156.1
- --------------------------------------------------------------------------------------------------------------
Operating Income (Loss) $ (11.8) $ (24.3) $ 46.3 $ 43.2
==============================================================================================================
REVENUES ($ IN MILLIONS)
Residential 31.5 37.1 306.4 477.9
Commercial 11.0 12.2 93.9 157.5
Industrial 10.1 10.5 46.9 82.9
Transportation 6.6 6.6 26.4 28.8
Deferred Gas Costs 2.4 (19.9) (2.1) (151.7)
Other 4.3 12.2 25.0 58.6
- --------------------------------------------------------------------------------------------------------------
Total 65.9 58.7 496.5 654.0
- --------------------------------------------------------------------------------------------------------------
SALES AND TRANSPORTATION (MDTH)
Residential Sales 3.8 4.3 42.8 41.8
Commercial Sales 1.7 1.6 14.4 14.5
Industrial Sales 2.3 2.0 8.1 7.9
Transportation 34.0 31.5 106.8 102.2
Other 0.4 2.8 5.0 8.0
- --------------------------------------------------------------------------------------------------------------
Total 42.2 42.2 177.1 174.4
- --------------------------------------------------------------------------------------------------------------
HEATING DEGREE DAYS 19 66 2,955 3,120
NORMAL HEATING DEGREE DAYS 42 42 3,326 3,326
% COLDER (WARMER) THAN NORMAL (55%) 57% (11%) (6%)
CUSTOMERS
Residential 626,406 615,144
Commercial 48,482 47,368
Industrial 3,313 3,326
Transportation 8,745 14,027
Other 18 20
- --------------------------------------------------------------------------------------------------------------
TOTAL 686,964 679,885
- --------------------------------------------------------------------------------------------------------------
Northern Indiana's natural gas distribution operations serve approximately
680,000 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.
17
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 $9.6 million in net revenues
from various non-traditional sales and incentive programs in the first nine
months of 2002, a $5.7 million decrease from the prior period.
Weather
Weather in Northern Indiana's market area for the third quarter of 2002 was 55%
warmer than normal and 71% warmer than the third quarter of 2001. For the first
nine months of 2002, weather was 11% warmer than normal and 5% warmer than the
first nine months of 2001.
Throughput
Northern Indiana sold and transported 42.2 million dekatherms (MDth) for the
third quarters of 2002 and 2001. Total volumes sold and transported were 177.1
MDth for the first nine 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, partially offset by
decreased wholesale gas sales.
Net Revenues
Net revenues for the three months ended September 30, 2002 were $34.5 million,
an increase of $4.2 million from the same period in 2001, primarily due to
increased gas cost incentive mechanisms. Net revenues for the nine months ended
September 30, 2002 were $197.1 million, a decrease of $2.2 million from the same
period in 2001. The decrease in net revenues was primarily due to decreased gas
cost incentive mechanisms and decreased wholesale gas sales.
Operating Income (Loss)
Operating loss for the third quarter of 2002 was $11.8 million, compared to an
operating loss for the third quarter of 2001 of $24.3 million, an improvement of
$12.5 million. The improvement was primarily due to increased net revenues,
reduced expenses related to reorganization initiatives and other decreased
administrative and general expenses and decreased property taxes. Operating
income for the first nine months of 2002 was $46.3 million, an increase of $3.1
million from the same period in 2001. The increase was primarily due to reduced
expenses related to reorganization initiatives and other decreased
administrative and general expenses and decreased property taxes, partially
offset by decreased net revenues.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------ -----------------------------
( in millions) 2002 2001 2002 2001
==============================================================================================================
NET REVENUES
Sales Revenues $ 292.8 $ 281.7 $ 789.2 $ 775.7
Less: Cost of sales 86.0 73.4 219.7 203.4
- --------------------------------------------------------------------------------------------------------------
Net Revenues 206.8 208.3 569.5 572.3
- --------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 53.6 57.4 163.7 159.4
Depreciation and amortization 42.7 41.4 127.3 124.7
Other taxes 10.7 15.0 38.6 42.2
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses 107.0 113.8 329.6 326.3
- --------------------------------------------------------------------------------------------------------------
Operating Income $ 99.8 $ 94.5 $ 239.9 $ 246.0
==============================================================================================================
REVENUES ($ IN MILLIONS)
Residential 106.7 94.3 245.5 228.5
Commercial 87.7 80.3 233.0 221.6
Industrial 105.2 101.5 296.7 310.5
Other (6.8) 5.6 14.0 15.1
- --------------------------------------------------------------------------------------------------------------
Total 292.8 281.7 789.2 775.7
- --------------------------------------------------------------------------------------------------------------
SALES (GIGAWATT HOURS)
Residential 1,096.3 956.9 2,497.9 2,295.3
Commercial 1,040.2 946.6 2,763.1 2,612.0
Industrial 2,244.7 2,244.2 6,467.4 6,876.3
Other 36.5 31.8 107.7 103.6
- --------------------------------------------------------------------------------------------------------------
Total 4,417.7 4,179.5 11,836.1 11,887.2
- --------------------------------------------------------------------------------------------------------------
COOLING DEGREE DAYS 752 561 1,015 801
NORMAL COOLING DEGREE DAYS 573 573 792 792
% WARMER (COLDER) THAN NORMAL 31% (2%) 28% 1%
CUSTOMERS
Residential 382,757 379,904
Commercial 48,014 47,092
Industrial 2,604 2,659
Other 801 803
- --------------------------------------------------------------------------------------------------------------
Total 434,176 430,458
- --------------------------------------------------------------------------------------------------------------
Northern Indiana generates and distributes electricity to approximately 434,000
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 Operations, 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.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS (CONTINUED)
Industrial sales, declining during the first two quarters of 2002, rebounded
somewhat in the third quarter, as production levels increased in the local steel
industry. Overall sales to the steel industry increased 1.3 gwh in the third
quarter of 2002 and decreased 350.9 gwh in the first nine months of 2002,
compared to the same periods last year.
Regulatory Matters
On June 20, 2002, a settlement agreement was filed with the IURC regarding the
Northern Indiana electric rate review. On September 23, 2002, the IURC issued an
order adopting the settlement in most respects. The order provides that electric
customers of Northern Indiana will receive an amount intended to approximate
$55.0 million each year in credits to their electric bills for 49 months,
beginning on July 1, 2002. The order also provides that 60% of any future
earnings beyond a specified cap will be retained by Northern Indiana.
Pursuant to the settlement, Northern Indiana accrued $14.4 million in credits
to electric customers during the quarter and nine-month periods ended
September 30, 2002 and, as authorized, began to amortize one-half of its
expenses for this proceeding over a 49-month period. The remaining expenses were
charged to income in the third quarter of 2002.
On October 23, 2002, the IURC denied a petition for reconsideration of the order
filed on October 15, 2002 by fourteen residential customers. Therefore, Northern
Indiana electric customers will begin to receive credits starting with their
November monthly bill. The order adopting the settlement is currently being
appealed by both the Citizen Action of Indiana and the fourteen residential
customers to the Indiana Court of Appeals.
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 $7.9 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, 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 were held on August 13, 2002. Briefings have been completed and a
decision by the IURC will be issued in the future.
20
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. These rules were challenged by industry and others. 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.
At this time, Northern Indiana is unable to predict the result of EPA's
review of Northern Indiana's information responses.
Sales
Electric sales for the third quarter of 2002 were 4,417.7 gwh, an increase of
238.2 gwh compared to the 2001 period, reflecting increased sales to residential
and commercial customers primarily due to warmer weather. Electric sales for the
first nine months of 2002 were 11,836.1 gwh, a decrease of 51.1 gwh, compared to
the 2001 period, reflecting a decrease in industrial demand due to the economic
downturn and other issues negatively impacting the steel industry. The decline
was partially offset by increased sales to higher-margin residential and
commercial customers due to warmer weather during the second and third quarters
of 2002, as compared to the same periods last year.
Net Revenues
In the third quarter of 2002, electric net revenues of $206.8 million decreased
by $1.5 million from the comparable 2001 period. The decrease was primarily a
result of $14.4 million in credits to be issued pertaining to the IURC electric
rate investigation (reflected in the "Other" class of revenues). This decrease
was mostly offset by increased sales to residential and commercial customers due
to the favorable impact of warmer weather during the third quarter. In the first
nine months of 2002, electric net revenues of $569.5 million decreased $2.8
million from the same period in 2001. The decline resulted from the $14.4
million in credits mentioned above and decreased industrial sales. The decreases
were mostly offset by increased sales to residential and commercial customers
due to warmer weather during the second and third quarters of 2002, as compared
to the same periods last year.
Operating Income
Operating income for the third quarter of 2002 was $99.8 million, an increase of
$5.3 million from the same period in 2001, primarily resulting from the
favorable effect of warmer weather and reductions in estimated amounts payable
for property taxes and expenses related to reorganization initiatives. The
increases were mostly offset by lower revenues due to credits to be issued
pertaining to the IURC electric rate review investigation and related expenses.
Operating income for the first nine months of 2002 was $239.9 million, a
decrease of $6.1 million from the same period in 2001. The decrease resulted
from lower revenues due to the credits mentioned above, and related expenses and
increased amounts for uncollectible customer receivables, partially offset by
the favorable impact of warmer weather during the second and third quarters of
2002, as compared to the same periods last year, reduced expenses related to
reorganization initiatives and reductions in estimated amounts payable for
property taxes.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
MERCHANT OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
(in millions) 2002 2001 2002 2001
======================================================================================================
NET REVENUES
Electric Revenues $ 40.3 $ 363.6 $ 90.3 $ 738.8
Less: Cost of sales 32.1 352.1 68.7 700.7
- ------------------------------------------------------------------------------------------------------
Net Revenues 8.2 11.5 21.6 38.1
TOTAL OPERATING EXPENSES 0.4 1.2 1.1 3.5
- ------------------------------------------------------------------------------------------------------
Operating Income $ 7.8 $ 10.3 $ 20.5 $ 34.6
======================================================================================================
VOLUMES
Electric sales (Gigawatt Hours) 852.4 6,589.2 2,388.5 14,300.3
- ------------------------------------------------------------------------------------------------------
Effective November 1, 2001, Northern Indiana's power trading operations were
transferred to TPC.
Net Revenues
Net revenues for the third quarter and first nine months of 2002 were $8.2
million and $21.6 million, respectively, a decrease of $3.3 million and $16.5
million from 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 $7.8 million and $20.5 million for
the third quarter and first nine months of 2002 compared to operating income of
$10.3 million and $34.6 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."
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Northern Indiana's chief executive officer and its principal financial officer,
after evaluating the effectiveness of Northern Indiana's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) on
November 7, 2002, have concluded that, as of such date, Northern Indiana's
disclosure controls and procedures were adequate and effective to ensure that
material information relating to Northern Indiana would be made known to them.
Changes in Internal Controls
There were no significant changes in Northern Indiana's internal controls or in
other factors that could significantly affect Northern Indiana's disclosure
controls and procedures subsequent to the date of their evaluation, nor were
there any significant deficiencies or material weaknesses in Northern Indiana's
internal controls. As a result, no corrective actions were required or
undertaken.
22
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
None
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).
23
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: November 14, 2002 By: /s/ Jeffrey W. Grossman
---------------------------------------
Jeffrey W. Grossman
Vice President
(Duly Authorized Officer)
24
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Barrett Hatches, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Northern
Indiana Public Service Company:
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Barrett Hatches
-------------------------------------
Barrett Hatches
President and Chief Executive Officer
25
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dennis McFarland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Northern
Indiana Public Service Company:
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Dennis McFarland
-------------------------------------
Dennis McFarland
Principal Financial Officer
26