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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 JUNE 30, 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
----------------------------- ------------------
(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 [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
As of August 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
-----------------------------------
None
NORTHERN INDIANA PUBLIC SERVICE COMPANY
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 2003
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Consolidated Income (Loss).............................. 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....................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 22
Item 4. Controls and Procedures............................................... 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 24
Item 2. Changes in Securities and Use of Proceeds............................. 24
Item 3 Defaults Upon Senior Securities....................................... 24
Item 4. Submission of Matters to a Vote of Security Holders................... 24
Item 5. Other Information..................................................... 24
Item 6. Exhibits and Reports on Form 8-K...................................... 24
Signature........................................................................ 25
2
PART I
ITEM 1. FINANCIAL STATEMENTS
NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED INCOME (unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
----------------------------- ----------------------
(in millions) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Gas $ 141.9 $ 141.3 $ 634.3 $ 425.0
Gas-Affiliated 1.4 0.5 8.1 5.6
Electric 255.9 279.9 511.8 537.5
Electric-Affiliated 3.5 4.6 10.4 8.9
- --------------------------------------------------------------------------------------------------------------------
Gross Operating Revenues 402.7 426.3 1,164.6 977.0
- --------------------------------------------------------------------------------------------------------------------
COST OF ENERGY
Gas costs 92.4 88.9 465.1 262.2
Gas costs-Affiliated 0.2 2.4 0.8 5.8
Fuel for electric generation 53.1 48.9 102.8 101.5
Fuel for electric generation-Affiliated 0.8 0.4 1.6 0.6
Power purchased 19.0 17.4 45.0 28.0
Power purchased-Affiliated 10.8 22.4 27.6 40.2
- --------------------------------------------------------------------------------------------------------------------
Cost of sales 176.3 180.4 642.9 438.3
- --------------------------------------------------------------------------------------------------------------------
Total Net Revenues 226.4 245.9 521.7 538.7
- --------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation 61.4 65.1 128.6 128.8
Maintenance 16.5 17.8 34.8 33.9
Depreciation and amortization 64.6 62.8 128.9 125.4
Other taxes 21.5 19.9 48.1 39.7
- --------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 164.0 165.6 340.4 327.8
- --------------------------------------------------------------------------------------------------------------------
UTILITY OPERATING INCOME BEFORE UTILITY
INCOME TAXES 62.4 80.3 181.3 210.9
- --------------------------------------------------------------------------------------------------------------------
UTILITY INCOME TAXES 18.9 22.7 61.3 64.9
- --------------------------------------------------------------------------------------------------------------------
UTILITY OPERATING INCOME 43.5 57.6 120.0 146.0
- --------------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS) (0.2) (0.2) - (0.3)
- --------------------------------------------------------------------------------------------------------------------
INTEREST
Interest on long-term debt 10.9 12.4 22.6 25.3
Other interest 0.8 - 0.8 0.1
Other interest-Affiliated 2.0 0.9 3.7 2.5
Amortization of premium, reacquisition premium,
discount and expense on debt, net 1.0 1.3 2.0 2.2
- --------------------------------------------------------------------------------------------------------------------
Total Interest 14.7 14.6 29.1 30.1
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 28.6 $ 42.8 $ 90.9 $ 115.6
====================================================================================================================
DIVIDEND REQUIREMENTS ON PREFERRED STOCKS $ 2.6 $ 1.8 $ 3.7 $ 3.7
- --------------------------------------------------------------------------------------------------------------------
BALANCE AVAILABLE FOR COMMON SHARES $ 26.0 $ 41.0 $ 87.2 $ 111.9
- --------------------------------------------------------------------------------------------------------------------
COMMON DIVIDENDS DECLARED $ 65.5 $ 110.0 $ 65.5 $ 141.0
- --------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31,
(in millions) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
UTILITY PLANT, at original cost
Electric $ 4,673.9 $ 4,590.6
Gas 1,470.4 1,455.1
Common 374.9 369.9
- -------------------------------------------------------------------------------------------------------------------
Total Utility Plant 6,519.2 6,415.6
Less: Accumulated provision for depreciation and amortization 3,660.7 3,547.7
- -------------------------------------------------------------------------------------------------------------------
Net utility plant 2,858.5 2,867.9
- -------------------------------------------------------------------------------------------------------------------
OTHER PROPERTY AND INVESTMENTS 8.9 8.7
- -------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 6.3 4.4
Accounts receivable (less reserve of $11.5 and $7.8, respectively) 89.5 94.4
Unbilled revenue (less reserve of $0.7 and $0.6, respectively) 64.9 72.3
Fuel cost adjustment clause 1.8 2.3
Gas cost adjustment clause - 47.8
Materials and supplies, at average cost 46.1 44.3
Electric production fuel, at average cost 40.0 39.0
Natural gas in storage, at last-in, first-out cost 61.9 15.5
Price risk management assets 2.8 3.5
Prepayments and other 57.9 36.2
- -------------------------------------------------------------------------------------------------------------------
Total Current Assets 371.2 359.7
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Regulatory assets 218.4 225.6
Intangible assets 25.1 25.1
Deferred charges and other 4.5 5.1
- -------------------------------------------------------------------------------------------------------------------
Total Other Assets 248.0 255.8
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,486.6 $ 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
JUNE 30, December 31,
(in millions) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity $ 921.9 $ 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 713.5 713.4
- -------------------------------------------------------------------------------------------------------------------
Total Capitalization 1,720.3 1,697.9
- -------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt 76.0 130.0
Short-term borrowings-Affiliated 515.5 448.9
Accounts payable 113.5 162.2
Accounts payable-Affiliated 17.5 25.3
Dividends declared on common and preferred stocks 1.1 1.1
Customer deposits 45.3 39.3
Taxes accrued 93.2 71.0
Interest accrued 9.7 9.9
Gas cost adjustment clause 8.2 -
Accrued employment costs 20.6 35.7
Price risk management liabilities 1.1 0.8
Accrued liability for postretirement and pension benefits 13.6 10.0
Other accruals 29.7 36.8
- -------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 945.0 971.0
- -------------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES AND DEFERRED CREDITS
Deferred income taxes 473.9 488.9
Deferred investment tax credits 60.8 64.3
Deferred credits 18.8 43.2
Accrued liability for postretirement and pension benefits 237.6 219.0
Regulatory liabilities 5.2 4.9
Other noncurrent liabilities 25.0 2.9
- -------------------------------------------------------------------------------------------------------------------
Total Other 821.3 823.2
- -------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES - -
- -------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 3,486.6 $ 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)
Six Months
Ended June 30,
------------------------------
(in millions) 2003 2002
- --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 90.9 $ 115.6
Adjustments to reconcile net income to net cash:
Depreciation and amortization 128.9 125.4
Net changes in price risk management activities 1.0 (6.1)
Deferred income taxes (39.6) (4.3)
Amortization of deferred investment tax credits (3.5) (3.6)
Other, asset items 7.3 15.0
Other, liability items 16.0 -
Changes in components of working capital:
Accounts receivable, net 12.2 14.9
Electric production fuel (1.0) (5.2)
Materials and supplies (1.8) (2.3)
Natural gas in storage (46.4) 93.2
Accounts payable (43.5) 4.7
Taxes accrued 20.1 49.8
Fuel adjustment clause 0.5 (10.2)
Gas cost adjustment clause 56.0 4.5
Accrued employment costs (15.1) 13.0
Other accruals (3.5) (1.8)
Other assets 4.9 5.5
Other liabilities 4.7 2.5
- --------------------------------------------------------------------------------------------------------------------
Net Cash from Operating Activities 188.1 410.6
- --------------------------------------------------------------------------------------------------------------------
Investing Activities
Construction expenditures (131.1) (106.6)
- --------------------------------------------------------------------------------------------------------------------
Net Investing Activities (131.1) (106.6)
- --------------------------------------------------------------------------------------------------------------------
Financing Activities
Retirement of long-term debt (54.0) (54.5)
Change in short-term debt 66.6 (155.1)
Dividends paid - common shares (65.5) (94.0)
Dividends paid - preferred shares (2.2) (3.7)
Other financing activities, net - 0.1
- --------------------------------------------------------------------------------------------------------------------
Net Financing Activities (55.1) (307.2)
- --------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1.9 (3.2)
Cash and cash equivalents at beginning of period 4.4 8.5
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 6.3 $ 5.3
====================================================================================================================
($ in millions)
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized 25.4 28.3
Interest capitalized 1.0 0.7
Cash paid for income taxes 62.5 33.0
- --------------------------------------------------------------------------------------------------------------------
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 Six Months
Ended June 30, Ended June 30,
-------------------------- -------------------------
(in millions) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Net Income $ 28.6 $ 42.8 $ 90.9 $ 115.6
Other comprehensive income (loss), net of tax
Net unrealized gains (losses) on cash flow hedges (0.8) 0.1 (1.0) 2.8
- -------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income $ 27.8 $ 42.9 $ 89.9 $ 118.4
===================================================================================================================
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 $24.3 million were recognized for
electric customers for the first half of 2003. The order adopting the settlement
is currently being appealed to the Indiana Court of Appeals by both the Citizens
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 and the
appropriate amount is being refunded to customers.
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. On March 21, 2003, Northern
Indiana amended its filing to allow recovery, via the FAC, of 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 has been recorded.
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). The ECT was approved by the IURC on November
26, 2002. Under the ECT 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 through an Environmental
Cost Recovery Mechanism (ECRM) and (2) related operation and maintenance and
depreciation expenses once the environmental facilities become operational
through an Environmental Expense Recovery Mechanism (EERM). Northern Indiana
will submit filings on a semi-annual basis for the ECRM and on an annual basis
for the EERM. Northern Indiana made its initial filing of the ECRM in February
2003 for capital expenditures of $58.4 million. On April 30, 2003, the IURC
issued an order approving the ECRM filing, which allows for collection of
allowance for funds used during construction and a return on the capital
investment beginning with the May 2003 customer bills. Through June 30, 2003 the
ECRM revenues amounted to $1.0 million. On August 1, Northern Indiana filed the
ECRM for capital investments of $120 million. The initial filing of the EERM is
anticipated with the next semi-annual filing of the ECT. Over the timeframe
required to meet the environmental standards, Northern Indiana anticipates a
total capital investment amounting to approximately $234 million. The IURC order
is currently being appealed to the Indiana Court of Appeals by the Citizens
Action Coalition of Indiana
3. RESTRUCTURING ACTIVITIES
Since 2000, Northern Indiana's parent company 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 initiatives, a total of approximately 180 management,
professional, administrative and technical positions have been identified for
elimination at Northern Indiana. As of June 30, 2003, 158 employees were
terminated, of whom 6 employees were terminated during the first quarter and six
months ended June 30, 2003. At June 30, 2003 and December 31, 2002, the
consolidated balance sheets reflected liabilities of $1.4 million and $2.4
million, respectively, related to the restructuring plans. During the first
quarter and six months ended June 30, 2003, $0.9 million of benefits were paid
as a result of the restructuring plans. Additionally, during the first quarter
2003 and six months ended June 30, 2003, the restructuring plan liability was
reduced by $0.1 million due to a reduction in estimated costs related to the
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 second quarter and six months ended
June 30, 2003 and June 30, 2002 affecting accumulated other comprehensive
income, with respect to cash flow hedges included the following:
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------
(in millions, net of tax) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Unrealized gains on derivatives qualifying as cash flow
hedges at the beginning of the period $ 2.1 $ - $ 2.3 $ (2.7)
Unrealized hedging gains (losses) arising during the
period of derivatives qualifying as cash flow hedges (1.0) 0.2 (2.2) 2.0
Reclassification adjustment for net loss (gain) included
in net income 0.2 (0.1) 1.2 0.8
- -------------------------------------------------------------------------------------------------------------------
Net unrealized gains on derivatives qualifying as cash
flow hedges at the end of the period $ 1.3 $ 0.1 $ 1.3 $ 0.1
- -------------------------------------------------------------------------------------------------------------------
9
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unrealized gains and losses on Northern Indiana's hedges were recorded as price
risk management assets and liabilities. The accompanying consolidated balance
sheets reflect price risk management assets related to unrealized gains on
hedges of $2.8 million and $3.5 million at June 30, 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 $1.1 million and $0.8 million at June 30, 2003 and December 31, 2002,
respectively, both of which were included in "Current Liabilities."
During the first and second quarters 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.
Also, during the second quarter, Northern Indiana reclassified $0.9 million from
other comprehensive income to earnings, due to the probability that certain
originally forecasted transactions would not occur. 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 $1.3 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 defers 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 $642.0 million at June 30, 2003.
For the second quarter and six months ended June 30, 2003, Northern Indiana
amortized less than $0.1 million and $0.1 million, respectively, related to the
amounts capitalized as additions to plant and accreted the liability by $0.1
million with corresponding amounts recognized as regulatory assets at June 30,
2003. The asset retirement obligations liability totaled $2.0 million at June
30, 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.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 149, "AMENDMENT OF STATEMENT 133
ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS NO. 149"). Effective
July 1, 2003, Northern Indiana adopted Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS No. 149 codifies and clarifies financial accounting
and reporting for derivative instruments and hedging activities under Statement
of Financial Accounting Standards No. 133, "Derivative Instruments and Hedging
Activities," primarily in connection with decisions made by the Derivatives
Implementation Group and for implementation issues raised in the application of
SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, as such the impact on Northern Indiana's existing contracts
at June 30, 2003 is not material. Because the effect of SFAS No. 149 is
dependent upon the terms
10
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of contracts the company enters into after June 30, 2003, Northern Indiana
cannot determine the impact of adopting SFAS No. 149 on a prospective basis.
SFAS NO. 150 -- ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. In the second quarter 2003, the
FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" (SFAS No. 150). SFAS No. 150
requires classification of a financial instrument within its scope as a
liability because it embodies an obligation of the issuer. As defined in SFAS
No. 150, an obligation is a conditional or unconditional duty or responsibility
to transfer assets or to issue equity shares. Instruments that fall within the
scope of SFAS No. 150 include mandatorily redeemable financial instruments,
obligations to repurchase an issuer's equity shares by transferring assets and
certain obligations to issue a variable number of shares. SFAS No. 150 is
generally effective for interim periods beginning after June 15, 2003 for
financial instruments created prior to June 1, 2003. For any instruments entered
into or modified after May 31, 2003, the Statement is effective for those
instruments upon consummation or modification. Currently, Northern Indiana has
mandatory redeemable preferred stock that will be reclassified as a liability in
the third quarter of 2003. Northern Indiana does not expect SFAS No. 150 to have
any impact on its financial condition or results of operations.
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.
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- --------------------
($ in millions) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
NET INCOME
As reported 28.6 42.8 90.9 115.6
Less: Total stock-based employee compensation
expense determined under the fair value based
method for all awards, net of tax 0.4 0.4 0.9 0.6
- -------------------------------------------------------------------------------------------------------------------
Pro forma 28.2 42.4 90.0 115.0
- -------------------------------------------------------------------------------------------------------------------
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.
JUNE 30, December 31,
(in millions, net of tax) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Net unrealized gains on cash flow hedges $ 1.3 $ 2.3
Minimum pension liability adjustment (143.5) (143.5)
- -------------------------------------------------------------------------------------------------------------------
Total Accumulated Other Comprehensive Income, net $ (142.2) $ (141.2)
- -------------------------------------------------------------------------------------------------------------------
11
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. As a result of the realignment, all 2002 periods have
been adjusted to reflect the new segments.
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.
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 June 30, 2003
Operating revenues 143.3 259.4 402.7
Utility operating income (loss) before utility income taxes (1.7) 64.1 62.4
FOR THE THREE MONTHS ENDED JUNE 30, 2002
Operating revenues 141.8 284.5 426.3
Utility operating income before utility income taxes (0.7) 81.0 80.3
- -------------------------------------------------------------------------------------------------------------------
($ in millions) GAS ELECTRIC TOTAL
- -------------------------------------------------------------------------------------------------------------------
For the Six Months Ended June 30, 2003
Operating revenues 642.4 522.2 1,164.6
Utility operating income before utility income taxes 64.6 116.7 181.3
FOR THE SIX MONTHS ENDED JUNE 30, 2002
Operating revenues 430.6 546.4 977.0
Utility operating income before utility income taxes 58.1 152.8 210.9
- -------------------------------------------------------------------------------------------------------------------
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, 2002 (Form 10-K).
SECOND QUARTER AND SIX MONTH RESULTS
Net Income
Northern Indiana reported net income of $28.6 million for the three months ended
June 30, 2003, compared to $42.8 million in the 2002 period.
For the six months ended June 30, 2003, Northern Indiana reported net income of
$90.9 million, a 24.7 million decrease from the 2002 period.
Net Revenues
Total consolidated net revenues (operating revenues less cost of sales) for the
three months ended June 30, 2003, were $226.4 million, a $19.5 million decrease
from the same period last year. The decrease in net revenues was primarily a
result of $10.8 million of credits issued pertaining to the Indiana Utility
Regulatory Commission (IURC) electric rate review settlement and reduced
electric sales of $6.2 million as a result of cooler weather toward the end of
the quarter.
Total consolidated net revenues for the six months ended June 30, 2003, were
$521.7 million, a $17.0 million decrease from the same period last year. The
decrease was primarily a result of $24.3 million from credits issued pertaining
to the IURC electric rate review settlement and reduced electric sales of $6.2
million as a result of cooler weather toward the end of the quarter, partially
offset by increased net gas revenues of $18.4 million due to colder weather
during the first three months of the year.
Expenses
Operating expenses for the second quarter 2003 were $164.0 million, a decrease
of $1.6 million from the 2002 period. Operation and maintenance expenses
decreased $5.0 million mainly due to $8.3 million reduction in employee-related
and administrative expenses, $2.9 decrease in uncollectible expenses, partially
offset by increased pension and postretirement expenses of $6.5 million.
Depreciation and amortization expense increased by $1.8 million due to plant
additions. Other taxes increased $1.6 million, principally due to increased
property taxes and higher gross receipts taxes that are generally offset in
revenues.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Operating expenses for the six months ended June 30, 2003 were $340.4 million,
an increase of $12.6 million from the 2002 period. Operations and maintenance
expenses were relatively flat, but reflected increases of $12.3 million due to
higher pension and postretirement costs. These increases were offset by a
decrease in employee-related and administrative costs. Depreciation and
amortization expense increased by $3.5 million due to plant additions. Other
taxes increased $8.4 million, principally due to increased property taxes and
higher gross receipts taxes, which are generally offset in revenues.
Utility Income Taxes
Utility income tax expenses for the second quarter 2003 were $18.9 million,
compared to $22.7 million in 2002, due to lower pre-tax income.
Utility income tax expenses for the six months of 2003 were $61.3 million
compared to $64.9 million in 2002, due to lower pre-tax income.
Interest
Interest expense for the second quarter 2003 remained relatively unchanged
compared to the 2002 period.
Interest expense for the first six months of 2003 was $29.1 million, a decrease
of $1.1 million compared to the 2002 period, primarily due to a reduction in
long-term debt.
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.
Net cash from operations for the six months ended June 30, 2003 was $188.1
million, a decrease of $222.5 million from the comparable period in 2002. The
decrease was mainly due to a reduction in cash generated from working capital,
principally driven by a decrease in accounts payable and an increase in natural
gas in storage, partly offset by decreased under recovered gas and fuel costs.
During the first half of 2003, Northern Indiana redeemed $54.0 million of
medium-term notes. In addition, on July 8, 2003, Northern Indiana redeemed $70.0
million of medium-term notes.
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 364-day
credit facility allowed NFC to utilize the $500 million to support the issuance
of letters of credit. As a result of its expiration, 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 June 30,
2003, Northern Indiana had $515.5 million of intercompany short-term borrowings
outstanding at an interest rate of 1.96%. As of December 31, 2002, Northern
Indiana had an intercompany note payable of $448.9 million at an interest rate
of 2.11%.
Credit Ratings
On July 8, 2003, Moody's Investors Service affirmed the senior unsecured ratings
of NiSource at Baa3, and the existing ratings of all other subsidiaries,
concluding a review for possible downgrade that began on May 13, 2003. Moody's
ratings outlook for NiSource and its subsidiaries is now "stable". On June 30,
2003, Fitch Ratings affirmed their BBB senior unsecured rating for NiSource.
Fitch also lowered the rating of Northern Indiana by one notch to BBB+ due to
Fitch's policy of restricting the ratings between a parent and its subsidiaries
where short-term financing facilities are solely at the holding company level.
This does not reflect weakening credit measures at Northern Indiana. Fitch
rating outlook for all entities is stable. On June 16, 2003, Standard and Poor's
affirmed its senior unsecured ratings of NiSource at BBB, and the existing
ratings of all other subsidiaries. Standard and Poor's outlook for NiSource and
all of its subsidiaries were revised to stable from negative.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Northern Indiana may sell up to $100.0 million of certain of its accounts
receivable under a sales agreement, without recourse. As of June 30, 2003,
Northern Indiana has sold $100.0 million of its accounts receivable under this
agreement. Northern Indiana and Citibank are currently negotiating a new
Accounts Receivable Sales Agreement which would increase Northern's capacity
under this program to $200.0 million.
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 June 30,
2003, the outstanding borrowings totaled $515.5 million. Based upon average
borrowings during 2003, an increase in short-term interest rates of 100 basis
points (1%) would have increased interest expense by $1.0 million and $1.9
million for the quarter and six months ended June 30, 2003.
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.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
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, earnings, or regulatory
assets and liabilities 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 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.
Refer to "Recently Issued Accounting Pronouncements" in Note 5 of the Notes of
Consolidated Financial Statements for information regarding recently issued
accounting standards.
Insurance Renewal
Northern Indiana sustained an overall increase in premiums for the property and
casualty insurance program that renewed on July 1, 2003. However, the renewal of
the executive liability program, which includes directors and officer's
liability and fiduciary liability, is scheduled for November 1, 2003 and all
indications are that the increase in premiums for those particular coverages
will be much higher. In addition to increases in premiums, we anticipate added
restrictions to coverage and capacity.
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.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
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 2002 periods have been adjusted to reflect the new segments.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- ------------------------
(in millions) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
NET REVENUES
Sales revenues $ 134.0 $ 134.3 $ 612.8 $ 410.8
Less: Cost of gas sold 92.6 91.3 465.9 268.0
- --------------------------------------------------------------------------------------------------------------------
Net Sales Revenues 41.4 43.0 146.9 142.8
Transportation Revenues 9.3 7.5 29.6 19.8
- --------------------------------------------------------------------------------------------------------------------
Net Revenues 50.7 50.5 176.5 162.6
- --------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 25.0 25.6 53.0 52.0
Depreciation and amortization 21.0 20.4 41.6 40.8
Other taxes 6.4 5.2 17.3 11.7
- --------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 52.4 51.2 111.9 104.5
- --------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) $ (1.7) $ (0.7) $ 64.6 $ 58.1
====================================================================================================================
REVENUES ($ IN MILLIONS)
Residential 105.9 92.6 415.3 274.9
Commercial 35.9 26.9 154.1 82.9
Industrial 24.3 13.9 72.1 36.8
Transportation 9.4 7.5 29.7 19.8
Deferred Gas Costs (39.5) (5.3) (55.9) (4.5)
Other 7.3 6.2 27.1 20.7
- --------------------------------------------------------------------------------------------------------------------
Total 143.3 141.8 642.4 430.6
- --------------------------------------------------------------------------------------------------------------------
SALES AND TRANSPORTATION (MDTH)
Residential Sales 8.7 10.1 39.5 39.0
Commercial Sales 3.2 3.2 16.2 12.7
Industrial Sales 2.4 1.9 7.5 5.8
Transportation 32.1 32.8 74.3 72.8
Other 0.1 0.8 1.0 4.6
- --------------------------------------------------------------------------------------------------------------------
Total 46.5 48.8 138.5 134.9
- --------------------------------------------------------------------------------------------------------------------
HEATING DEGREE DAYS 498 561 3,422 2,936
NORMAL HEATING DEGREE DAYS 454 475 3,158 3,284
% COLDER (WARMER) THAN NORMAL 10% 18% 8% (11%)
CUSTOMERS
Residential 594,195 623,679
Commercial 47,154 47,934
Industrial 3,221 3,296
Transportation 45,670 12,032
Other 14 13
- --------------------------------------------------------------------------------------------------------------------
TOTAL 690,254 686,954
- --------------------------------------------------------------------------------------------------------------------
Northern Indiana's natural gas distribution operations serve approximately
690,000 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.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS (CONTINUED)
Regulatory Matters
Changes in gas industry regulation, which began in the mid-1980s at the federal
level, has broadened to retail customers at the state level. Large industrial
and commercial customers have had the ability to purchase natural gas directly
from marketers and to use Northern Indiana's Gas Distribution's facilities for
transportation services. Additionally, as of June 30, 2003, approximately 45,000
of Northern Indiana's Gas Distribution's residential and commercial customers
had selected an alternate supplier.
Northern Indiana continues to develop customer choice opportunities through
regulatory initiatives. While these programs are intended to provide all
customer classes with the opportunity to obtain gas supplies from alternative
merchants, Northern Indiana expects to play a substantial role in supplying gas
commodity services to its customers in the foreseeable future. As customers
enroll in these programs and purchase their gas from other suppliers, Northern
Indiana is sometimes left with pipeline capacity it has contracted for, but no
longer needs. Northern Indiana is currently recovering, or has the opportunity
to recover, the costs resulting from the unbundling of its services and believes
that most of such future costs will be mitigated or recovered.
Weather
Weather in Northern Indiana's market area for the second quarter 2003 was 10%
colder than normal and 11% warmer than the second quarter 2002.
For the first six months of 2003, weather was 8% colder than normal and 17%
colder than the first six months of 2002.
Throughput
Northern Indiana sold and transported 46.5 million dekatherms (MDth) for the
second quarter 2003, a decrease of 2.3 MDth from the same period last year,
primarily due to warmer weather when compared to the second quarter of 2002.
Total volumes sold and transported were 138.5 MDth for the first six months of
2003, an increase of 3.6 MDth from the same period in 2002, primarily due to
colder weather during the first three months of the year, partially offset by
decreased off-system sales.
Net Revenues
Net revenues for the three months ended June 30, 2003 of $50.7 million were
relatively unchanged from the same period in 2002.
Net revenues for the six months ended June 30, 2003 were $176.5 million, an
increase of $13.9 million from the same period in 2002, mainly attributable to
colder weather during the first three months of the year.
Operating Income (Loss)
Operating loss for the second quarter 2003 was $1.7 million, $1.0 million
greater than the loss in the same period in 2002. The decrease was mainly
attributable to $0.6 million increase in depreciation and amortization expense
due to plant additions and $0.3 million increase in property taxes.
Operating income for the first six months of 2003 was $64.6 million, an increase
of $6.5 million from the same period in 2002. The increase was mainly
attributable to $18.4 million of increased sales and deliveries of natural gas
due to the colder weather during the first three months of the year. Pension and
postretirement costs increased $3.4 million. Depreciation and amortization
expense increased by $0.8 million due to plant additions. Other taxes increased
by $5.6 million, principally due to increased property taxes and higher gross
receipt taxes, which are generally offset in revenues.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- ------------------------
(in millions) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
NET REVENUES
Sales Revenues $ 259.4 $ 284.5 $ 522.2 $ 546.4
Less: Cost of sales 83.7 89.1 177.0 170.3
- -------------------------------------------------------------------------------------------------------------------
Net Revenues 175.7 195.4 345.2 376.1
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 52.9 57.3 110.4 110.7
Depreciation and amortization 43.6 42.4 87.3 84.6
Other taxes 15.1 14.7 30.8 28.0
- -------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 111.6 114.4 228.5 223.3
- -------------------------------------------------------------------------------------------------------------------
Operating Income $ 64.1 $ 81.0 $ 116.7 $ 152.8
===================================================================================================================
REVENUES ($ IN MILLIONS)
Residential 62.4 69.9 134.6 138.8
Commercial 69.7 76.3 136.4 145.3
Industrial 93.4 100.5 191.3 191.5
Wholesale 25.8 22.9 45.4 42.1
Other 8.1 14.9 14.5 28.7
- -------------------------------------------------------------------------------------------------------------------
Total 259.4 284.5 522.2 546.4
- -------------------------------------------------------------------------------------------------------------------
SALES (GIGAWATT HOURS)
Residential 639.1 699.2 1,428.7 1,401.6
Commercial 859.2 891.2 1,710.7 1,722.9
Industrial 2,205.4 2,196.9 4,478.9 4,222.7
Wholesale 751.5 784.4 1,293.4 1,546.7
Other 27.5 29.2 61.2 60.6
- -------------------------------------------------------------------------------------------------------------------
Total 4,482.7 4,600.9 8,972.9 8,954.5
- -------------------------------------------------------------------------------------------------------------------
COOLING DEGREE DAYS 113 263 113 263
NORMAL COOLING DEGREE DAYS 224 219 224 219
% WARMER (COLDER) THAN NORMAL (50%) 20% (50%) 20%
CUSTOMERS
Residential 384,750 381,904
Commercial 48,694 47,790
Industrial 2,560 2,615
Wholesale 28 27
Other 796 801
- -------------------------------------------------------------------------------------------------------------------
Total 436,828 433,137
- -------------------------------------------------------------------------------------------------------------------
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 steel sector continues to show improvement, with second quarter 2003 sales
8% higher than the 2002 level and a 14% improvement for the six month period.
The acquisitions of Bethlehem Steel and National Steel by International Steel
Group and U.S. Steel, respectively, have been completed.
20
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 $24.3 million were recognized for electric customers in the first
half of 2003. The order adopting the settlement is currently being appealed to
the Indiana Court of Appeals by both the Citizens 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 and the
appropriate amount is being refunded to customers.
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 Federal Energy Regulatory
Commission (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 the ITC 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 the ITC is ongoing. An
uncontested settlement that authorizes reimbursement of $7.4 million to Northern
Indiana for incurred costs was approved by the FERC on July 31, 2003. As of June
30, 2003, Northern Indiana has deferred $6.5 million of costs related to joining
the ITC.
The MISO has initiated the Midwest Market Initiative (MMI), which will develop
the structures and processes to be used to implement an electricity market for
the MISO region. This market proposes non-discriminatory transmission service,
reliable grid operation, and the purchase and sale of electric energy in a fair,
efficient and non-discriminatory manner. MISO has filed detailed tariff
information with a planned initial operation date of March 31, 2004. Northern
Indiana is actively pursuing its role in the MMI. At the current time,
management believes that MMI will change the manner in which Northern Indiana
conducts its electric business, however, management cannot determine at this
time the final MMI impacts.
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. 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 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 has been recorded.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS (CONTINUED)
In January 2002, Northern Indiana filed for approval to implement an
environmental cost tracker (ECT). The ECT was approved by the IURC on November
26, 2002. Under the ECT 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 through an Environmental
Cost Recovery Mechanism (ECRM) and (2) related operation and maintenance and
depreciation expenses once the environmental facilities become operational
through an Environmental Expense Recovery Mechanism (EERM). Northern Indiana
will submit filings on a semi-annual basis for the ECRM and on an annual basis
for the EERM. Northern Indiana made its initial filing of the ECRM in February
2003 for capital expenditures of $58.4 million. On April 30, 2003, the IURC
issued an order approving the ECRM filing, which allows for collection of
allowance for funds used during construction and a return on the capital
investment beginning with the May 2003 customer bills. Through June 30, 2003 the
ECRM revenues amounted to $1.0 million. On August 1, Northern Indiana filed the
ECRM for capital investments of $120 million. The initial filing of the EERM is
anticipated with the next semi-annual filing of the ECT. Over the timeframe
required to meet the environmental standards, Northern Indiana anticipates a
total capital investment amounting to approximately $234 million. The IURC order
is currently being appealed to the Indiana Court of Appeals by the Citizens
Action Coalition of Indiana.
Sales
Electric sales for the second quarter 2003 were 4,482.7 gwh, a decrease of 118.2
gwh compared to the 2002 period. The decrease primarily reflected cooler weather
during the quarter.
Electric sales for the first six months of 2003 were 8,972.9 gwh, an increase of
18.4 gwh compared to the 2002 period, primarily reflecting increased sales to
residential and industrial customers, offset by decreased commercial and
wholesale transactions. Residential sales improved due to overall 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 second quarter 2003, electric net revenues of $175.7 million decreased by
$19.7 million from the comparable 2002 period. The decrease was primarily due to
$10.8 million of credits issued pertaining to the IURC electric rate review
settlement and cooler weather that decreased electric sales by $6.2 million.
In the first six months of 2003, electric net revenue of $345.2 million
decreased by $30.9 million from the 2002 period due to $24.3 million of credits
issued pertaining to the IURC electric rate review settlement and cooler weather
at the beginning of the summer season.
Operating Income
Operating income for the second quarter 2003 was $64.1 million, a decrease of
$16.9 million from the same period in 2002. The decrease was primarily due to
the changes in revenue mentioned above.
Operating income for the first half of 2003 was $116.7 million, a decrease of
$36.1 million from the same period in 2001 due to the changes in revenue
mentioned above and increased pension and postretirement benefits expenses of
$9.0 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."
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ITEM 4. CONTROLS AND PROCEDURES
NORTHERN INDIANA PUBLIC SERVICE COMPANY
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-15(e) and
15d-15(e)), have concluded based on the evaluation required by paragraph (b) of
Exchange Act Rules 13a-15 and 15d-15 that, as of the end of the period covered
by this report, 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 internal
controls subsequent to the date of the most recent 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.
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PART II
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 9, 2003, by written consent in lieu of the Annual Meeting of
Shareholders, the sole shareholder of Northern Indiana elected Barrett Hatches
and Samuel W. Miller, Jr. to serve as directors until the 2004 Annual Meeting of
Shareholders.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(31.1) Certification of Barrett Hatches, Principal Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
(31.2) Certification of William M. O'Malley, Principal Financial
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith).
(32.1) Certification of Barrett Hatches, Principal Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith).
(32.2) Certification of William M. O'Malley, Principal Financial
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (furnished herewith).
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the second quarter 2003:
24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Northern Indiana Public Service Company
-----------------------------------------------
(Registrant)
Date: August 12, 2003 By: /s/ Jeffrey W. Grossman
----------------------------------------------
Jeffrey W. Grossman
Vice President
(Duly Authorized Officer)
25