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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 MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____ to ______
Commission file number 1-4125
NORTHERN INDIANA PUBLIC SERVICE COMPANY
---------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 35-0552990
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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
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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 [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
As of May 1, 2003, 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
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None
NORTHERN INDIANA PUBLIC SERVICE COMPANY
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
Page
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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 Consolidated Comprehensive Income ...................................... 7
Notes to Consolidated Financial Statements............................................ 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 20
Item 4. Controls and Procedures................................................................ 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
Certifications................................................................................ 23-24
2
PART I
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ITEM 1. FINANCIAL STATEMENTS
NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED INCOME (unaudited)
Three Months Ended March 31, (in millions) 2003 2002
- -------------------------------------------------------------------------
OPERATING REVENUES
Gas $492.4 $283.7
Gas-Affiliated 6.7 5.1
Electric 255.9 257.6
Electric-Affiliated 6.9 4.3
- -------------------------------------------------------------------------
Gross Operating Revenues 761.9 550.7
- -------------------------------------------------------------------------
COST OF ENERGY
Gas costs 372.7 173.3
Gas costs-Affiliated 0.6 3.4
Fuel for electric generation 49.7 52.6
Fuel for electric generation-Affiliated 0.8 0.2
Power purchased 26.0 10.6
Power purchased-Affiliated 16.8 17.8
- -------------------------------------------------------------------------
Cost of sales 466.6 257.9
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Total Net Revenues 295.3 292.8
- -------------------------------------------------------------------------
OPERATING EXPENSES
Operation 67.2 63.7
Maintenance 18.3 16.1
Depreciation and amortization 64.3 62.6
Other taxes 26.6 19.8
- -------------------------------------------------------------------------
Total Operating Expenses 176.4 162.2
- -------------------------------------------------------------------------
UTILITY OPERATING INCOME BEFORE UTILITY
INCOME TAXES 118.9 130.6
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UTILITY INCOME TAXES 42.4 42.2
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UTILITY OPERATING INCOME 76.5 88.4
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OTHER INCOME (DEDUCTIONS) 0.2 (0.1)
- -------------------------------------------------------------------------
INTEREST
Interest on long-term debt 11.7 12.9
Other interest 1.7 2.0
Amortization of premium, reacquisition premium,
discount and expense on debt, net 1.0 0.6
- -------------------------------------------------------------------------
Total Interest 14.4 15.5
- -------------------------------------------------------------------------
NET INCOME $ 62.3 $ 72.8
=========================================================================
DIVIDEND REQUIREMENTS ON PREFERRED STOCKS 1.1 1.9
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BALANCE AVAILABLE FOR COMMON SHARES $ 61.2 $ 70.9
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COMMON DIVIDENDS DECLARED $ -- $ 31.0
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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
MARCH 31, December 31,
(in millions) 2003 2002
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(unaudited)
ASSETS
UTILITY PLANT, at original cost
Electric $4,623.8 $4,590.6
Gas 1,460.8 1,455.1
Common 372.9 369.9
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Total Utility Plant 6,457.5 6,415.6
Less: Accumulated provision for depreciation and amortization 3,608.9 3,547.7
- ----------------------------------------------------------------------------------------------------
Net utility plant 2,848.6 2,867.9
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OTHER PROPERTY AND INVESTMENTS 8.8 8.7
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CURRENT ASSETS
Cash and cash equivalents 14.2 4.4
Accounts receivable (less reserve of $11.4 and $7.8, respectively) 186.2 94.4
Unbilled revenue (less reserve of $0.7 and $0.6, respectively) 67.1 72.3
Fuel cost adjustment clause 1.5 2.3
Gas cost adjustment clause 31.4 47.8
Materials and supplies, at average cost 45.6 44.3
Electric production fuel, at average cost 39.8 39.0
Natural gas in storage, at last-in, first-out cost 14.0 15.5
Price risk management assets 4.1 3.5
Prepayments and other 43.1 36.2
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Total Current Assets 447.0 359.7
- ----------------------------------------------------------------------------------------------------
OTHER ASSETS
Regulatory assets 222.6 225.6
Intangible assets 25.1 25.1
Prepayments and other 5.4 5.1
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Total Other Assets 253.1 255.8
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TOTAL ASSETS $3,557.5 $3,492.1
====================================================================================================
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
MARCH 31, December 31,
(in millions) 2003 2002
- ----------------------------------------------------------------------------------------------------
(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity $ 960.6 $ 899.6
Preferred Stocks--
Series without mandatory redemption provisions 81.1 81.1
Series with mandatory redemption provisions 3.8 3.8
Long-term debt, excluding amounts due within one year 713.4 713.4
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Total Capitalization 1,758.9 1,697.9
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CURRENT LIABILITIES
Current portion of long-term debt 110.0 130.0
Short-term borrowings-Affiliated 329.8 448.9
Accounts payable 222.2 162.2
Accounts payable-Affiliated 19.5 25.3
Dividends declared on common and preferred stocks 1.1 1.1
Customer deposits 41.5 39.3
Taxes accrued 152.5 71.0
Interest accrued 13.7 9.9
Accrued employment costs 20.6 35.7
Price risk management liabilities 0.9 0.8
Accrued liability for postretirement and pension benefits - current 13.6 10.0
Other accruals 52.5 36.8
- ----------------------------------------------------------------------------------------------------
Total Current Liabilities 977.9 971.0
- ----------------------------------------------------------------------------------------------------
OTHER LIABILITIES AND DEFERRED CREDITS
Deferred income taxes 481.2 488.9
Deferred investment tax credits 62.5 64.3
Deferred credits 33.0 43.2
Accrued liability for postretirement and pension benefits - noncurrent 228.1 219.0
Regulatory liabilities 4.9 4.9
Other noncurrent liabilities 11.0 2.9
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Total Other 820.7 823.2
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COMMITMENTS AND CONTINGENCIES -- --
- ----------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $3,557.5 $3,492.1
====================================================================================================
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)
Three Months Ended March 31, (in millions) 2003 2002
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 62.3 $ 72.8
Adjustments to reconcile net income to net cash:
Depreciation and amortization 64.3 62.6
Net changes in price risk management activities (0.5) (5.8)
Deferred income taxes (15.8) (6.0)
Amortization of deferred investment tax credits (1.8) (1.8)
Other, asset items 2.6 6.7
Other, liability items 6.3 --
Changes in components of working capital:
Accounts receivable, net (86.6) (27.9)
Electric production fuel (0.8) (4.2)
Materials and supplies (1.3) (1.4)
Natural gas in storage 1.5 98.8
Accounts payable 66.4 0.7
Taxes accrued 80.7 69.2
Fuel adjustment clause 0.8 (3.7)
Gas cost adjustment clause 16.4 (1.6)
Accrued employment costs (15.1) 10.8
Other accruals 19.3 4.8
Other assets 2.2 3.2
Other liabilities 6.0 (5.0)
- --------------------------------------------------------------------------------
Net Cash from Operating Activities 206.9 272.2
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Construction expenditures (63.2) (34.2)
Other investing activities, net 6.4 (12.7)
- --------------------------------------------------------------------------------
Net Investing Activities (56.8) (46.9)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Retirement of long-term debt (20.0) --
Change in short-term debt (119.1) (195.9)
Dividends paid - common shares -- (31.0)
Dividends paid - preferred shares (1.2) (1.8)
- --------------------------------------------------------------------------------
Net Financing Activities (140.3) (228.7)
- --------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 9.8 (3.4)
Cash and cash equivalents at beginning of period 4.4 8.5
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14.2 $ 5.1
================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized 9.3 9.5
Interest capitalized 0.5 0.3
Cash paid for income taxes -- --
- --------------------------------------------------------------------------------
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 (unaudited)
Three Months Ended March 31, (in millions) 2003 2002
- --------------------------------------------------------------------------------
Net Income (Loss) $ 62.3 $ 72.8
Other comprehensive income (loss), net of tax
Net unrealized gains (losses) on cash flow hedges (0.2) 2.7
- --------------------------------------------------------------------------------
Total Comprehensive Income $ 62.1 $ 75.5
================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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,
2002. 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 2002 financial statements to conform to
the 2003 presentation.
2. REGULATORY MATTERS
During 2002, Northern Indiana settled matters related to its electric rate
review. On September 23, 2002, the Indiana Utility Regulatory Commission (IURC)
issued an order adopting most aspects of the settlement. The order approving the
settlement provides that electric customers of Northern Indiana will receive an
amount intended to approximate $55.1 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. Credits amounting to $13.5 million were recognized for
electric customers in the first quarter 2003. The order adopting the settlement
is currently being appealed to the Indiana Court of Appeals by both the Citizen
Action Coalition of Indiana and fourteen residential customers. Northern Indiana
does not expect this matter to have a significant impact on its results of
operations.
Northern Indiana submitted its quarterly fuel adjustment clause filing for the
twelve-month period ended September 30, 2002, which included a calculation for
the sharing of earnings in excess of allowed earnings as outlined in the IURC
order regarding the electric rate review settlement. The IURC issued an order
related to the filing on January 29, 2003 rejecting Northern Indiana's sharing
calculation, which prorated the amount to be shared with the customers based on
the amount of time the rate credit was in effect during the twelve-month period.
Northern Indiana filed a request for a rehearing and reconsideration of the
order. On March 12, 2003, the IURC denied Northern Indiana's request. As a
result of the IURC decision, a reserve was recorded.
Northern Indiana has been recovering the costs of electric power purchased for
sale to its customers through the Fuel Adjustment Clause (FAC). The FAC provides
for costs to be collected if they are below a negotiated cap. If costs exceed
this cap, Northern Indiana must demonstrate that the costs were prudently
incurred to achieve approval for recovery. A group of industrial customers has
challenged the manner in which Northern Indiana has applied costs associated
with a specific interruptible sales tariff. While Northern Indiana continues to
pursue settlement of this proceeding, an estimated refund liability was
recognized in the first quarter 2003. In January 2002, Northern Indiana filed
for approval to implement a purchase power tracker (PPT). On March 21, 2003,
Northern Indiana amended its filing. The amendment, if approved, would allow
Northern Indiana to recover via the FAC, transmission costs paid to third
parties, and the costs associated with electric physical derivative transaction
costs, including option premiums to purchase power, and brokerage commissions.
No actions have been taken by the IURC on this filing.
On December 30, 2002, the Federal Energy Regulatory Commission (FERC) issued an
order that, among other things, reduced the rate base and rate of return allowed
to Northern Indiana under electric rates proposed in connection with the filing
of its 1995 Open Access Transmission Tariff, thus creating a refund liability
for Northern Indiana. Northern Indiana did not seek rehearing of the FERC's
December 30, 2002 order and submitted a compliance filing on March 17, 2003,
which proposed rates and services in compliance with the FERC's order. Based on
this filing, an estimated refund liability was recognized in the first quarter
2003.
8
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In January 2002, Northern Indiana filed for approval to implement an
environmental cost tracker (ECT). On June 20, 2002, Northern Indiana and the
Office of Utility Consumer Counselor filed an ECT Stipulation and Settlement
Agreement (ECT Settlement Agreement), which resolved 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. The IURC approved the settlement on
November 26, 2002 and Northern Indiana made its initial filing for the ECT in
February 2003. On April 30, 2003, the IURC issued an order approving the filing,
which allows for collection of environmental costs beginning with the May 2003
customer bills.
3. RESTRUCTURING ACTIVITIES
Since 2000, NiSource Inc. (NiSource) has implemented restructuring initiatives
to streamline its operations and realize efficiencies culminating from the
acquisition of Columbia Energy Group.
For all of the plans, a total of approximately 180 management, professional,
administrative and technical positions have been identified for elimination at
Northern Indiana. As of March 31, 2003, 158 employees were terminated, of whom 6
employees were terminated during the first quarter of 2003. At March 31, 2003
and December 31, 2002, the consolidated balance sheets reflected liabilities of
$1.4 million and $2.4 million related to the restructuring plans, respectively.
During the first quarter of 2003 and 2002, $0.9 million and $1.6 million of
benefits were paid from the restructuring plans, respectively. Additionally,
during the first quarter 2003 and 2002, the restructuring plan liability was
reduced by $0.1 million and $0.3 million, respectively, due to a reduction in
estimated expenses related to reorganization initiatives.
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 Financial Accounting Standards Board's (FASB) Statement of
Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133).
HEDGING ACTIVITIES. The activity for the first quarter 2003 affecting
accumulated other comprehensive income, with respect to cash flow hedges
included the following:
Three Months Ended March 31, (in millions, net of tax) 2003
- -----------------------------------------------------------------------------
Unrealized gains on derivatives qualifying as cash flow
hedges at the beginning of the period $ 2.3
Unrealized hedging losses arising during the period on
derivatives qualifying as cash flow hedges (1.2)
Reclassification adjustment for net loss included in net income 1.0
- -----------------------------------------------------------------------------
Net unrealized gains on derivatives qualifying as cash
flow hedges at the end of the period $ 2.1
- ------------------------------------------------------------------------------
Unrealized gains and losses on Northern Indiana's hedges were recorded as price
risk management assets and liabilities. The accompanying consolidated balance
sheets reflects price risk management assets related to unrealized gains on
hedges of $4.1 million and $3.5 million at March 31, 2003 and December 31, 2002,
respectively, which were included in "Current Assets." Price risk management
liabilities related to unrealized losses on hedges (and net option premiums)
were $0.9 million and $0.8 million at March 31, 2003 and December 31, 2002,
respectively, both of which were included in "Current Liabilities."
9
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the first quarter of 2003, Northern Indiana had no net gain or loss
recognized in earnings due to the change in value of derivative instruments
primarily representing time value, and there were no components of the
derivatives' fair values excluded in the assessment of hedge effectiveness. It
is anticipated that during the next twelve months the expiration and settlement
of cash flow hedge contracts will result in income recognition of amounts
currently classified in accumulated other comprehensive income of approximately
$2.1 million, net of tax.
5. 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 the cost, thereby
increasing the carrying amount of the related long-lived asset. Over time, the
liability is accreted, and the capitalized cost is depreciated over the useful
life of the related asset. Northern Indiana will defer the difference between
the amount recognized for depreciation and accretion and the amount collected in
rates as required pursuant to SFAS No. 71,"Accounting for the Effects of Certain
Types of Regulation."
Northern Indiana's asset retirement obligations liability was mainly comprised
of obligations for the removal of certain hydro towers and obligations
associated with leased railcars. Asset retirement obligations related to the gas
and electric distribution facilities were identified, however the associated
liabilities were not quantifiable due to the indeterminate lives of the
associated assets.
Northern Indiana adopted the provisions of SFAS No. 143 on January 1, 2003 and
as a result, Northern Indiana recognized an asset retirement obligations
liability of $1.9 million. In addition, Northern Indiana capitalized $0.8
million in additions to plant assets, net of accumulated amortization, and
recognized regulatory assets of $1.2 million. Certain costs of removal that have
been, and continue to be, included in depreciation rates and collected in
Northern Indiana's service rates, did not meet the definition of an asset
retirement obligation pursuant to SFAS No. 143. The amount of the other costs of
removal reflected as a component of Northern Indiana's accumulated depreciation
and amortization was approximately $631.4 million at March 31, 2003.
For the first quarter 2003, Northern Indiana amortized less than $0.1 million
related to the amounts capitalized as additions to plant and accreted the
liability by $0.1 million with corresponding amounts recognized as regulatory
assets. The asset retirement obligations liability totaled $2.0 million at March
31, 2003. Had Northern Indiana adopted SFAS No. 143 at the dates the actual
liabilities were incurred, the asset retirement obligations liability would have
been $1.8 million and $1.5 million at December 31, 2001 and 2000, respectively.
6. STOCK OPTIONS AND AWARDS
NiSource currently issues long-term incentive grants to key management
employees, including the management of Northern Indiana. SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), encourages, but does
not require, entities to adopt the fair value method of accounting for
stock-based compensation plans. The fair value method would require the
amortization of the fair value of stock-based compensation at the date of grant
over the related vesting period. NiSource continues to apply the intrinsic value
method of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25), for awards granted under the
stock-based compensation plans. The following table illustrates the effect on
Northern Indiana's net income as if NiSource had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation.
10
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three Months Ended March 31, ($ in millions) 2003 2002
- --------------------------------------------------------------------------------------
NET INCOME
As reported 62.3 72.8
Less: Total stock-based employee compensation expense
determined under the fair value based method for all
awards, net of tax 0.5 0.3
- --------------------------------------------------------------------------------------
Pro forma 61.8 72.5
- --------------------------------------------------------------------------------------
7. 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.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table displays the components of Accumulated Other Comprehensive
Income.
MARCH 31, December 31,
(in millions) 2003 2002
- --------------------------------------------------------------------------------
Net unrealized gains on cash flow hedges $ 2.1 $ 2.3
Minimum pension liability adjustment (143.5) (143.5)
- --------------------------------------------------------------------------------
Total Accumulated Other Comprehensive Income, net $(141.4) $(141.2)
- --------------------------------------------------------------------------------
9. BUSINESS SEGMENT INFORMATION
During 2002, Northern Indiana re-aligned its reportable segments to reflect its
current operating structure. Electric wholesale and wheeling results were moved
to the Electric segment.
Northern Indiana's operations are divided into two primary business segments.
The Gas Distribution segment provides natural gas service and transportation for
residential, commercial and industrial customers in Indiana. The Electric
Operations segment provides electric service in 21 counties in the northern part
of Indiana and engages in electric wholesale and wheeling transactions.
During 2002, Northern Indiana realigned a portion of its operations and
reclassified previously reported operating segment information to conform to the
realigned operating structure. The electric wheeling and bulk power operations
were moved to the Electric Operations segment. As a result of the realignment,
all periods have been adjusted to reflect the new segments.
The following tables provide information about business segments. Adjustments
have been made to the segment information to arrive at information included in
the results of operations and financial position. Northern Indiana uses
operating income as its primary measurement for each of the reported segments.
Operating income is derived from revenues and expenses directly associated with
each segment.
($ in millions) GAS ELECTRIC TOTAL
- --------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2003
Operating revenues 499.1 262.8 761.9
Utility operating income before utility income taxes 66.3 52.6 118.9
FOR THE THREE MONTHS ENDED MARCH 31, 2002
Operating revenues 288.8 261.9 550.7
Utility operating income before utility income taxes 58.8 71.8 130.6
- --------------------------------------------------------------------------------------
11
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, proposed dispositions,
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, 2002 (Form 10-K).
FIRST QUARTER RESULTS
Net Income
Northern Indiana reported net income of $62.3 million for the three months ended
March 31, 2003, compared to $72.8 million in the 2002 period.
Net Revenues
Total consolidated net revenues (operating revenues less cost of sales) for the
three months ended March 31, 2003, were $295.3 million, a $2.5 million increase
over the same period last year. The increase is attributable to increased gas
margins, which increased $13.7 million due to 8% colder weather as compared to
the three month period in 2002, partially offset by electric margins, which
decreased $11.2 million mainly from $13.5 million of credits issued pertaining
to the Indiana Utility Regulatory Commission (IURC) electric rate review
settlement.
Expenses
Operating expenses for the first quarter of 2003 were $176.4 million, an
increase of $14.2 million from the 2002 period. Operation and maintenance
expenses increased $5.7 million mainly due to increased pension expense of $5.3
million. Other taxes increased $6.8 million, principally due to higher gross
receipt taxes that were offset in revenues and increased property taxes.
Utility Income Taxes
Utility income tax expenses for the first quarter of 2003 of $42.4 million
remained relatively unchanged compared to $42.2 million in the 2002 period.
Although, net income decreased by $10.5 million, the Indiana state income tax
rate increased, which resulted in a higher effective tax rate.
Interest
Interest expense for the first quarter of 2003 decreased $1.1 million primarily
due to a reduction in long-term debt.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
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 a maximum of $1.0 billion through the
NiSource Money Pool as approved by the Securities and Exchange Commission under
the 1935 Act. NiSource Finance Corp. (NFC) provides funding to the NiSource
Money Pool from external borrowing sources. NFC elected not to renew its $500.0
million 364-day credit facility, which expired on March 20, 2003. The NFC $1.25
billion three-year facility that expires on March 23, 2004 has been amended to
allow for an increase in the aggregate letters of credit outstanding from $150.0
million to $500.0 million. The credit facility is guaranteed by NiSource. As of
March 31, 2003, Northern Indiana had $329.8 million of intercompany short-term
borrowings outstanding at an interest rate of 1.79%. As of December 31, 2002,
Northern Indiana had an intercompany note payable of $448.9 million at an
interest rate of 2.11%.
Northern Indiana may sell up to $100.0 million of certain of its accounts
receivable under a sales agreement, without recourse. As of March 31, 2003,
Northern Indiana has sold $100.0 million of its accounts receivable under this
agreement.
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
Through its various business activities, Northern Indiana is exposed to risk
including commodity price, interest rate 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.
Non-Trading Risks
Commodity price risk at Northern Indiana is limited, since current regulations
allow recovery of prudently incurred purchased power, fuel and gas costs through
the rate-making process. As states experiment with regulatory reform, Northern
Indiana may begin providing services without the benefit of the traditional
rate-making 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 March
31, 2003, the outstanding borrowings totaled $329.8 million. Based upon average
borrowings during the first quarter 2003, an increase in short-term interest
rates of 100 basis points (1%) would have increased interest expense by $0.9
million for the quarter ended March 31, 2003.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
OTHER INFORMATION
Critical Accounting Policies
Northern Indiana applies certain accounting policies based on the accounting
requirements discussed below that have had, and may continue to have,
significant impacts on Northern Indiana's results of operations and consolidated
balance sheets.
FINANCIAL ACCOUNTING STANDARDS BOARD'S (FASB) STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS (SFAS) NO. 71 ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF
REGULATION. SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS No. 71), provides that rate-regulated subsidiaries account for
and report assets and liabilities consistent with the economic effect of the way
in which regulators establish rates, if the rates established are designed to
recover the costs of providing the regulated service and if the competitive
environment makes it probable that such rates can be charged and collected.
Northern Indiana follows the accounting and reporting requirements of SFAS No.
71. Certain expenses and credits subject to utility regulation or rate
determination normally reflected in income are deferred on the balance sheet and
are recognized in income as the related amounts are included in service rates
and recovered from or refunded to customers.
In the event that regulation significantly changes the opportunity for Northern
Indiana to recover its costs in the future, all or a portion of Northern
Indiana's regulated operations may no longer meet the criteria for the
application of SFAS No. 71. In such event, a write-down of all or a portion of
Northern Indiana's existing regulatory assets and liabilities could result. If
transition cost recovery is approved by the appropriate regulatory bodies that
would meet the requirements under generally accepted accounting principles for
continued accounting as regulatory assets and liabilities during such recovery
period, the regulatory assets and liabilities would be reported at the
recoverable amounts. If unable to continue to apply the provisions of SFAS No.
71, Northern Indiana would be required to apply the provisions of SFAS No. 101,
"Regulated Enterprises - Accounting for the Discontinuation of Application of
FASB Statement No. 71." In management's opinion, Northern Indiana will be
subject to SFAS No. 71 for the foreseeable future.
Certain of the regulatory assets reflected on Northern Indiana's Consolidated
Balance Sheets require specific regulatory action in order to be included in
future service rates. Although recovery of these amounts is not guaranteed,
Northern Indiana believes that these costs meet the requirements for deferral as
regulatory assets under SFAS No. 71.
HEDGING ACTIVITIES. Under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as subsequently amended by SFAS No. 137 and SFAS No.
138 (collectively referred to as SFAS No. 133), the accounting for changes in
the fair value of a derivative depends on the intended use of the derivative and
resulting designation. Unrealized and realized gains and losses are recognized
each period as components of other comprehensive income, regulatory assets and
liabilities or earnings depending on the nature of such derivatives. Because
Northern Indiana utilizes derivatives for cash flow hedges, the effective
portions of the gains and losses are recorded to other comprehensive income and
are recognized in earnings concurrent with the disposition of the hedged risks.
As a result of the rate-making process, Northern Indiana generally records gains
and losses as regulatory liabilities or assets and recognizes such gains or
losses in earnings when recovered in revenues.
Although Northern Indiana applies some judgment in the assessment of hedge
effectiveness to designate certain derivatives as hedges, the nature of the
contracts used to hedge the underlying risks is such that the correlation of the
changes in fair values of the derivatives and underlying risks is high. Northern
Indiana generally uses NYMEX exchange-traded natural gas futures and options
contracts and over-the-counter swaps based on published indices to hedge the
risks underlying its natural gas-related businesses.
PENSIONS AND POSTRETIREMENT BENEFITS. Northern Indiana, through NiSource has
defined benefit plans for both pensions and other postretirement benefits. The
plans are accounted for under SFAS No. 87, "Employers' Accounting for Pensions,"
and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions." The calculation of the net obligations and annual expense related to
the plans requires a significant degree of judgment regarding the discount rates
to be used in bringing the liabilities to present value, long-term returns on
plan assets and employee longevity, amongst other assumptions. Due to the size
of the plans and the
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
long-term nature of the associated liabilities, changes in the assumptions used
in the actuarial estimates could have material impacts on the measurement of the
net obligations and annual expense recognition.
Insurance Renewal
With the majority of the Northern Indiana property and casualty insurance
renewing on July 1, 2003, indications are that the upward trend in insurance
costs that Northern Indiana experienced between 2001 & 2002 will continue in the
foreseeable future. Increases in premiums, deductibles and retentions along with
added restrictions to coverage and capacity, for its property and casualty
insurance program are anticipated. This upward trend is driven by the overall
poor underwriting experience of the insurance industry over the past few years,
in conjunction with the overall downturn of the capital markets and the economy,
which drives the need for underwriters to seek higher premiums and further
restrict coverage.
Environmental Matters
Proposals for voluntary initiatives and mandatory controls are being discussed
both in the United States and worldwide to reduce so-called "greenhouse gases"
such as carbon dioxide, a by-product of burning fossil fuels. Northern Indiana
engages in efforts to voluntarily report and reduce its greenhouse gas
emissions. Northern Indiana will monitor and participate in developments related
to efforts to register and potentially regulate greenhouse gas emissions.
Northern Indiana uses various combustion equipment in the generation,
distribution and transmission of energy, including turbines, boilers and various
reciprocating engines. Within the period December 2002 to January 2003, the U.S.
Environmental Protection Agency (EPA) proposed maximum achievable control
technology (MACT) standards to meet national emission standards for hazardous
air pollutants (NESHAP) for stationary combustion turbines, industrial boilers
and reciprocating internal combustion engines. Northern Indiana will continue to
monitor the proposed MACT standards for potential applicability and cost impact
to its operations. Pending finalization of the proposed standards, Northern
Indiana is unable to predict what, if any, additional compliance costs may
result.
Presentation of Segment Information
During 2002, 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 and bulk power operations
were moved to the Electric Operations segment. As a result of the realignment,
all periods have been adjusted to reflect the new segments.
15
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 Ended March 31, (in millions) 2003 2002
- --------------------------------------------------------------------------
NET REVENUES
Sales revenues $ 478.8 $ 276.5
Less: Cost of gas sold 373.3 176.7
- --------------------------------------------------------------------------
Net Sales Revenues 105.5 99.8
Transportation Revenues 20.3 12.3
- --------------------------------------------------------------------------
Net Revenues 125.8 112.1
- --------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 28.0 26.4
Depreciation and amortization 20.6 20.4
Other taxes 10.9 6.5
- --------------------------------------------------------------------------
Total Operating Expenses 59.5 53.3
- --------------------------------------------------------------------------
Operating Income $ 66.3 $ 58.8
==========================================================================
REVENUES ($ IN MILLIONS)
Residential 309.4 182.3
Commercial 118.2 56.0
Industrial 47.8 22.9
Transportation 20.3 12.3
Deferred Gas Costs (16.4) 0.8
Other 19.8 14.5
- --------------------------------------------------------------------------
Total 499.1 288.8
- --------------------------------------------------------------------------
SALES AND TRANSPORTATION (MDTH)
Residential Sales 30.8 28.9
Commercial Sales 13.0 9.5
Industrial Sales 5.1 3.9
Transportation 42.2 40.0
Other 0.9 3.8
- --------------------------------------------------------------------------
Total 92.0 86.1
- --------------------------------------------------------------------------
HEATING DEGREE DAYS 2,924 2,375
NORMAL HEATING DEGREE DAYS 2,704 2,809
% COLDER (WARMER) THAN NORMAL 8% (15%)
CUSTOMERS
Residential 598,568 626,621
Commercial 47,603 48,095
Industrial 3,241 3,318
Transportation 48,848 14,810
Other 14 15
- --------------------------------------------------------------------------
TOTAL 698,274 692,859
- --------------------------------------------------------------------------
Northern Indiana's natural gas distribution operations serve approximately
698,000 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.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS (CONTINUED)
Weather
Weather in Northern Indiana's market area for the first three months of 2003 was
8% colder than normal and 23% colder than the first quarter of 2002.
Throughput
Total volumes sold and transported of 92.0 million dekatherms (MDth) for the
first quarter of 2003 increased 5.9 MDth from the same period last year
primarily due to the colder weather.
Net Revenues
Net revenues for the three months ended March 31, 2003 were $125.8 million, an
increase of $13.7 million over the same period in 2002, mainly attributable to
colder weather during the first quarter of 2003 as compared with the 2002
period.
Operating Income
Operating income for the first quarter of 2003 was $66.3 million, an increase of
$7.5 million from the same period in 2002. The increase was mainly attributable
to increased net revenues mentioned above, partly offset by $3.8 million of
higher gross receipt taxes that were offset in revenues and $2.0 million of
increased pension expense.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS
Three Months Ended March 31, (in millions) 2003 2002
- ---------------------------------------------------------------------
NET REVENUES
Sales Revenues $ 262.8 $ 261.9
Less: Cost of sales 93.3 81.2
- ---------------------------------------------------------------------
Net Revenues 169.5 180.7
- ---------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 57.5 53.4
Depreciation and amortization 43.7 42.2
Other taxes 15.7 13.3
- ---------------------------------------------------------------------
Total Operating Expenses 116.9 108.9
- ---------------------------------------------------------------------
Operating Income $ 52.6 $ 71.8
=====================================================================
REVENUES ($ IN MILLIONS)
Residential 72.2 68.9
Commercial 66.7 69.0
Industrial 97.9 91.0
Wholesale 19.6 19.2
Other 6.4 13.8
- ---------------------------------------------------------------------
Total 262.8 261.9
- ---------------------------------------------------------------------
SALES (GIGAWATT HOURS)
Residential 789.6 702.4
Commercial 851.5 831.7
Industrial 2,273.5 2,025.8
Wholesale 541.9 762.3
Other 33.7 31.4
- ---------------------------------------------------------------------
Total 4,490.2 4,353.6
- ---------------------------------------------------------------------
CUSTOMERS
Residential 384,991 381,737
Commercial 48,423 47,486
Industrial 2,570 2,622
Wholesale 26 30
Other 798 801
- ---------------------------------------------------------------------
Total 436,808 432,676
- ---------------------------------------------------------------------
Northern Indiana generates and distributes electricity to approximately 437,000
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 economic situation in the steel and steel-related industries has shown a
significant improvement in the first quarter 2003 as compared to the same period
in the previous year, as evidenced by the increase in quarter-over-quarter sales
in the industrial category. Acquisitions and reorganizations at the major steel
plants in the region continue to occur. International Steel Group, the company
that acquired the LTV Corporation assets in the northern part of Indiana in
2002, recently purchased Bethlehem Steel, another major industrial customer.
Also, National Steel is expected to be acquired by U.S. Steel. Steel-related
sales increased 21% over the first quarter 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)
Regulatory Matters
During 2002, Northern Indiana settled matters related to an electric rate
review. On September 23, 2002, the IURC issued an order adopting most aspects of
the settlement. The order approving the settlement provides that electric
customers of Northern Indiana will receive an amount intended to approximate
$55.1 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. Credits
amounting to $13.5 million were recognized for electric customers in the first
quarter 2003. The order adopting the settlement is currently being appealed to
the Indiana Court of Appeals by both the Citizen Action Coalition of Indiana and
fourteen residential customers. Northern Indiana does not expect this matter to
have a significant impact on its results of operations.
Northern Indiana submitted its quarterly fuel adjustment clause filing for the
twelve-month period ended September 30, 2002, which included a calculation for
the sharing of earnings in excess of allowed earnings as outlined in the IURC
order regarding the electric rate review settlement. The IURC issued an order
related to the filing on January 29, 2003 rejecting Northern Indiana's sharing
calculation, which prorated the amount to be shared with the customers based on
the amount of time the rate credit was in effect during the twelve-month period.
Northern Indiana filed a request for a rehearing and reconsideration of the
order. On March 12, 2003, the IURC denied Northern Indiana's request. As a
result of the IURC decision, a reserve was recorded.
On June 20, 2002, Northern Indiana, Ameren Corporation and First Energy
Corporation established terms for joining the Midwest Independent System
operator (MISO) through participation in an independent transmission company
(ITC). The MISO arrangements were filed with the FERC, and on July 31, 2002, the
FERC issued an order conditionally approving these arrangements. On November 5,
2002, the ITC, which includes Northern Indiana, signed an agreement with MISO.
At its April 30, 2003 meeting, FERC approved the transfer of functional control
of Northern Indiana's transmission system to GridAmerica and issued an order
addressing the pricing of electric transmission. An IURC proceeding to obtain
approval to transfer functional control of the transmission system to
GridAmerica is ongoing. Northern Indian has expended approximately $8.5 million
related to joining the Regional Transmission Organizations. Northern Indiana
believes that the amounts spent will be reimbursed as a result of the
finalization of the ITC agreement and FERC approval.
Northern Indiana has been recovering the costs of electric power purchased for
sale to its customers through the Fuel Adjustment Clause (FAC). The FAC provides
for costs to be collected if they are below a negotiated cap. If costs exceed
this cap, Northern Indiana must demonstrate that the costs were prudently
incurred to achieve approval for recovery. A group of industrial customers has
challenged the manner in which Northern Indiana has applied costs associated
with a specific interruptible sales tariff. While Northern Indiana continues to
pursue settlement of this proceeding, an estimated refund liability was
recognized in the first quarter 2003. In January 2002, Northern Indiana filed
for approval to implement a purchase power tracker (PPT). On March 21, 2003,
Northern Indiana amended its filing. The amendment, if approved, would allow
Northern Indiana to recover via the FAC, transmission costs paid to third
parties, and the costs associated with electric physical derivative transaction
costs, including option premiums to purchase power, and brokerage commissions.
No actions have been taken by the IURC on this filing.
On December 30, 2002, the Federal Energy Regulatory Commission (FERC) issued an
order that, among other things, reduced the rate base and rate of return allowed
to Northern Indiana under electric rates proposed in connection with the filing
of its 1995 Open Access Transmission Tariff, thus creating a refund liability
for Northern Indiana. Northern Indiana did not seek rehearing of the FERC's
December 30, 2002 order and submitted a compliance filing on March 17, 2003,
which proposed rates and services in compliance with the FERC's order. Based on
this filing, an estimated refund liability was recognized in the first quarter
2003.
In January 2002, Northern Indiana filed for approval to implement an
environmental cost tracker (ECT). On June 20, 2002, Northern Indiana and the
Office of Utility Consumer Counselor filed an ECT Stipulation and Settlement
Agreement (ECT Settlement Agreement), which resolved 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. The IURC approved the settlement on
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS (CONTINUED)
November 26, 2002 and Northern Indiana made its initial filing for the ECT in
February 2003. On April 30, 2003, the IURC issued an order approving the filing,
which allows for collection of environmental costs beginning with the May 2003
customer bills.
Sales
Electric sales for the first quarter 2003 were 4,490.2 gwh, an increase of 136.6
gwh compared to the 2002 period, reflecting increased sales to residential,
commercial and industrial customers, offset by decreased wholesale transactions.
Residential and commercial sales improved due to increased usage and an increase
in the number of customers, while industrial sales increased due to increased
demand from the steel industry.
Net Revenues
In first quarter 2003, electric net revenues of $169.5 million decreased by
$11.2 million from the comparable 2002 period. The decrease was primarily a
result of lower revenues due to $13.5 million of credits issued pertaining to
the IURC electric rate review settlement and amounts accrued for potential
refund obligations, slightly offset by the aforementioned increased demand.
Operating Income
Operating income for the first quarter 2003 was $52.6 million, a decrease of
$19.2 million from the same period in 2002. The decrease was primarily due to
the change in revenue mentioned above, increased pension expense of $3.3
million, and increased property taxes of $1.8 million.
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 principal 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 May 6, 2003, 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.
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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(99.1) Certification of Barrett Hatches, Principal 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 William M. O'Malley, 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).
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the first quarter 2003:
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: May 12, 2003 By: /s/ Jeffrey W. Grossman
-------------------------------------
Jeffrey W. Grossman
Vice President
(Duly Authorized Officer)
22
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: May 12, 2003 By: /s/ Barrett Hatches
-----------------------------
Barrett Hatches
President
23
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2003
I, William M. O'Malley, 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: May 12, 2003 By: /s/ William M. O'Malley
--------------------------------
William M. O'Malley
Vice President, Finance
24