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WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 12 months (or for such shorter period that the registrant was
required to file such reports), 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 November 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 SEPTEMBER 30, 2003
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Consolidated Income .................................... 3
Consolidated Balance Sheets........................................... 4
Statements of Consolidated Cash Flows................................. 6
Statements of Consolidated Comprehensive Income ...................... 7
Notes to Consolidated Financial Statements............................ 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 25
Item 4. Controls and Procedures............................................... 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 26
Item 2. Changes in Securities and Use of Proceeds............................. 26
Item 3 Defaults Upon Senior Securities....................................... 26
Item 4. Submission of Matters to a Vote of Security Holders................... 26
Item 5. Other Information..................................................... 26
Item 6. Exhibits and Reports on Form 8-K...................................... 26
Signature........................................................................ 27
2
PART I
ITEM 1. FINANCIAL STATEMENTS
NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED INCOME (unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- -----------------------
(in millions) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Gas $ 82.9 $ 63.8 $ 717.2 $ 488.8
Gas-Affiliated 1.5 2.1 9.6 7.7
Electric 307.5 318.0 819.3 855.5
Electric-Affiliated 7.3 15.1 17.7 24.0
- -------------------------------------------------------------------------------------------------------------------
Gross Operating Revenues 399.2 399.0 1,563.8 1,376.0
- -------------------------------------------------------------------------------------------------------------------
COST OF ENERGY
Gas costs 56.0 30.0 521.1 292.2
Gas costs-Affiliated - 1.4 0.8 7.2
Fuel for electric generation 61.8 59.2 164.6 160.7
Fuel for electric generation-Affiliated 1.0 0.6 2.6 1.2
Power purchased 27.7 15.2 72.7 43.2
Power purchased-Affiliated 18.4 43.1 46.0 83.3
- -------------------------------------------------------------------------------------------------------------------
Cost of sales 164.9 149.5 807.8 587.8
- -------------------------------------------------------------------------------------------------------------------
Total Net Revenues 234.3 249.5 756.0 788.2
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation 65.9 63.1 194.5 191.9
Maintenance 17.7 14.0 52.5 47.9
Depreciation and amortization 64.8 63.3 193.7 188.7
Other taxes 20.9 13.9 69.0 53.6
- -------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 169.3 154.3 509.7 482.1
- -------------------------------------------------------------------------------------------------------------------
UTILITY OPERATING INCOME BEFORE UTILITY
INCOME TAXES 65.0 95.2 246.3 306.1
- -------------------------------------------------------------------------------------------------------------------
UTILITY INCOME TAXES 21.1 29.4 82.4 94.3
- -------------------------------------------------------------------------------------------------------------------
UTILITY OPERATING INCOME 43.9 65.8 163.9 211.8
- -------------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS) (0.4) - (0.4) (0.3)
- -------------------------------------------------------------------------------------------------------------------
INTEREST
Interest on long-term debt 9.7 11.8 32.3 37.1
Other interest (0.1) - 0.7 0.1
Other interest-Affiliated 2.4 0.9 6.1 3.4
Amortization of premium, reacquisition premium,
discount and expense on debt, net 0.9 1.0 2.9 3.2
- -------------------------------------------------------------------------------------------------------------------
Total Interest 12.9 13.7 42.0 43.8
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 30.6 $ 52.1 $ 121.5 $ 167.7
===================================================================================================================
DIVIDEND REQUIREMENTS ON PREFERRED STOCKS $ 1.1 $ 1.9 $ 3.4 $ 5.6
- -------------------------------------------------------------------------------------------------------------------
BALANCE AVAILABLE FOR COMMON SHARES $ 29.5 $ 50.2 $ 118.1 $ 162.1
- -------------------------------------------------------------------------------------------------------------------
COMMON DIVIDENDS DECLARED $ 27.4 $ 44.0 $ 92.9 $ 185.0
- -------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
ITEM 1. FINANCIAL STATEMENTS (Continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, December 31,
(in millions) 2003 2002
===================================================================================================================
(unaudited)
ASSETS
UTILITY PLANT, at original cost
Electric $ 4,717.7 $ 4,590.6
Gas 1,480.8 1,455.1
Common 369.4 369.9
- -------------------------------------------------------------------------------------------------------------------
Total Utility Plant 6,567.9 6,415.6
Less: Accumulated provision for depreciation and amortization 3,704.6 3,547.7
- -------------------------------------------------------------------------------------------------------------------
Net utility plant 2,863.3 2,867.9
- -------------------------------------------------------------------------------------------------------------------
OTHER PROPERTY AND INVESTMENTS 2.4 8.7
- -------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 7.0 4.4
Restricted cash 3.1 -
Accounts receivable (less reserve of $11.1 and $7.8, respectively) 37.9 94.4
Unbilled revenue (less reserve of $0.6 and $0.6, respectively) 64.0 72.3
Underrecovered fuel cost 0.8 2.3
Underrecovered gas cost - 47.8
Materials and supplies, at average cost 46.3 44.3
Electric production fuel, at average cost 32.4 39.0
Natural gas in storage, at last-in, first-out cost 137.5 15.5
Price risk management assets 1.5 3.5
Regulatory assets 13.5 11.5
Prepayments and other 57.3 24.7
- -------------------------------------------------------------------------------------------------------------------
Total Current Assets 401.3 359.7
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Regulatory assets 214.2 225.6
Intangible assets 20.7 25.1
Deferred charges and other 2.9 5.1
- -------------------------------------------------------------------------------------------------------------------
Total Other Assets 237.8 255.8
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,504.8 $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
SEPTEMBER 30, December 31,
(in millions) 2003 2002
- --------------------------------------------------------------------------------------------------------------------
(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity $ 940.9 $ 899.6
Preferred Stocks--
Series without mandatory redemption provisions 81.1 81.1
Series with mandatory redemption provisions - 3.8
Long-term debt, excluding amounts due within one year 681.6 713.4
- --------------------------------------------------------------------------------------------------------------------
Total Capitalization 1,703.6 1,697.9
- --------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt 38.0 130.0
Short-term borrowings-Affiliated 567.0 448.9
Accounts payable 102.5 162.2
Accounts payable-Affiliated 16.6 25.3
Dividends declared on common and preferred stocks 1.1 1.1
Customer deposits 47.6 39.3
Taxes accrued 132.5 71.0
Interest accrued 11.3 9.9
Overrecovered gas costs 4.5 -
Accrued employment costs 21.5 25.7
Price risk management liabilities 3.4 0.8
Regulatory liabilities 3.8 -
Accrued liability for postretirement and pension benefits 13.6 10.0
Other accruals 34.6 46.8
- --------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 998.0 971.0
- --------------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES AND DEFERRED CREDITS
Deferred income taxes 478.7 488.9
Deferred investment tax credits 59.0 64.3
Deferred credits 18.4 43.2
Accrued liability for postretirement and pension benefits 213.3 219.0
Preferred stock liabilities with mandatory redemption provisions 3.0 -
Regulatory liabilities 5.2 4.9
Other noncurrent liabilities 25.6 2.9
- --------------------------------------------------------------------------------------------------------------------
Total Other 803.2 823.2
- --------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES - -
- --------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 3,504.8 $ 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)
Nine Months
Ended September 30,
-----------------------------
(in millions) 2003 2002
- ------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 121.5 $ 167.7
Adjustments to reconcile net income to net cash:
Depreciation and amortization 193.7 188.7
Net changes in price risk management activities 4.6 (4.9)
Deferred income taxes (45.3) (7.6)
Amortization of deferred investment tax credits (5.3) (5.3)
Other, asset items 9.9 15.1
Other, liability items 19.7 11.3
Changes in components of working capital:
Accounts receivable, net 62.0 42.0
Electric production fuel 7.0 0.1
Materials and supplies (2.0) (0.5)
Natural gas in storage (122.0) 71.2
Accounts payable (53.2) 3.1
Taxes accrued 57.8 73.8
(Under) Overrecovered fuel cost 1.5 (12.2)
(Under) Overrecovered gas cost 52.3 2.0
Accrued employment costs (4.2) 5.0
Other accruals (4.8) 23.3
Other assets (3.7) (52.0)
Other liabilities 8.5 8.0
- ------------------------------------------------------------------------------------------------------------------
Net Cash from Operating Activities 298.0 528.8
- ------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Construction expenditures (195.4) (169.4)
Proceeds from disposition of assets 2.8 -
- ------------------------------------------------------------------------------------------------------------------
Net Investing Activities (192.6) (169.4)
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Retirement of long-term debt (124.0) (54.5)
Change in short-term debt 118.1 (159.3)
Retirement of preferred shares (0.6) (0.6)
Dividends paid - common shares (92.9) (141.0)
Dividends paid - preferred shares (3.4) (5.6)
Other financing activities, net - 0.2
- ------------------------------------------------------------------------------------------------------------------
Net Financing Activities (102.8) (360.8)
- ------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 2.6 (1.4)
Cash and cash equivalents at beginning of period 4.4 8.5
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7.0 $ 7.1
==================================================================================================================
($ in millions)
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest 36.4 37.5
Interest capitalized 1.6 1.2
Cash paid for income taxes 87.9 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 (LOSS) (unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
(in millions, net of tax) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Net Income $ 30.6 $ 52.1 $ 121.5 $ 167.7
Other comprehensive income (loss), net of tax
Net unrealized gains (losses) on cash flow hedges (1.3) 0.1 (2.3) 2.9
Minimum pension liability adjustment 18.3 (154.0) 18.3 (154.0)
- ------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) 17.0 (153.9) 16.0 (151.1)
- ------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income (Loss) $ 47.6 $ (101.8) $ 137.5 $ 16.6
==================================================================================================================
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 (UNAUDITED)
1. HOLDING COMPANY STRUCTURE
Effective March 3, 1988, Northern Indiana Public Service Company (Northern
Indiana) became a subsidiary of NIPSCO Industries, Inc., an Indiana corporation.
NIPSCO Industries, Inc. changed its name to NiSource Inc. (NiSource) on April
14, 1999. NiSource is an energy holding company that provides natural gas,
electricity and other products and services to approximately 3.7 million
customers located within a corridor that runs from the Gulf Coast through the
Midwest to New England. Subsequent to the completion of the acquisition of
Columbia Energy Group (Columbia) on November 1, 2000, NiSource became a Delaware
corporation. NiSource is a registered holding company under the Public Utility
Holding Company Act of 1935, as amended.
2. 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 of America.
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.
3. REGULATORY MATTERS
During 2002, Northern Indiana settled matters related to an 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 $39.8 million were recognized for
electric customers for the first nine months of 2003. The order adopting the
settlement was appealed to the Indiana Court of Appeals by both the Citizens
Action Coalition of Indiana and fourteen residential customers. On October 14,
2003, the Appeals Court upheld the IURC's approval of the settlement.
Northern Indiana submitted its quarterly fuel adjustment clause (FAC) 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 has been refunded to customers.
Northern Indiana has been recovering the costs of electric power purchased for
sale to its customers through the 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. An estimated refund liability was recorded in the
first quarter of 2003. A settlement was reached with the customers and Northern
Indiana recorded an additional refund liability in the third quarter. It is
expected that as a result of the settlement the industrial customers challenge
will be withdrawn or dismissed. In January 2002, Northern Indiana filed a
proceeding with the IURC for approval to implement a purchase power tracker. On
March 21, 2003, Northern Indiana amended the January 2002 filing by withdrawing
its request to implement a purchased power tracker and to instead allow
recovery, via the FAC, of transmission costs paid to third parties, and the
costs associated with electric physical derivative transactions, including
option premiums to purchase power, and brokerage commissions. In October 2003,
Northern Indiana voluntarily withdrew its amended request and the entire
proceeding was dismissed.
8
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
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. An August
26, 2003 order accepted Northern Indiana's March 17, 2003 compliance filing.
Northern Indiana made refunds on September 24, 2003 and filed a refund report at
FERC on September 26, 2003.
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 September 30,
2003 the ECRM revenues amounted to $2.5 million. On August 1, Northern Indiana
filed the ECRM on capital investments of $120.0 million. This petition was
approved by the IURC on October 1, 2003. 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 $274.2 million. The IURC
order is currently being appealed to the Indiana Court of Appeals by the
Citizens Action Coalition of Indiana.
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 the ITC and issued an order
addressing the pricing of electric transmission. An IURC order approving the
transfer of functional control of the transmission system to the ITC was issued
on September 24, 2003. 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. This reimbursement was received on September 30, 2003.
Functional control was transferred to the ITC and MISO on October 1, 2003.
4. RESTRUCTURING ACTIVITIES
Since 2000, Northern Indiana's parent company NiSource has implemented
restructuring initiatives to streamline its operations and realize efficiencies
culminating from the acquisition of Columbia.
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 September 30, 2003, 160 employees have
been terminated, of whom 2 employees and 8 employees were terminated during the
third quarter and nine months ended September 30, 2003, respectively. At
September 30, 2003 and December 31, 2002, the consolidated balance sheets
reflected liabilities of $1.3 million and $2.4 million, respectively, related to
the restructuring plans. During the third quarter and nine months ended
September 30, 2003, $0.1 million and $1.0 million of benefits, respectively,
were paid as a result of the restructuring plans. Additionally, during the first
quarter and nine months ended September 30, 2003, the restructuring plan
liability was reduced by $0.1 million due to a reduction in estimated costs
related to the reorganization initiatives.
9
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
5. 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 third quarter and nine months ended
September 30, 2003 and September 30, 2002 affecting accumulated other
comprehensive income, with respect to cash flow hedges included the following:
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
(in millions, net of tax) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on derivatives qualifying as
cash flow hedges at the beginning of the period $ 1.3 $ 0.1 $ 2.3 $ (2.7)
Unrealized hedging gains (losses) arising during the
period of derivatives qualifying as cash flow hedges (0.5) - (2.7) 2.0
Reclassification adjustment for net loss (gain) included
in net income (0.8) 0.1 0.4 0.9
- ------------------------------------------------------------------------------------------------------------------
Net unrealized gains on derivatives qualifying as cash
flow hedges at the end of the period $ - $ 0.2 $ - $ 0.2
- ------------------------------------------------------------------------------------------------------------------
Unrealized gains and losses on Northern Indiana's hedges were recorded as price
risk management assets and liabilities. The accompanying consolidated balance
sheets reflected price risk management assets of $1.5 million and $3.5 million
at September 30, 2003 and December 31, 2002, respectively, which were included
in "Current Assets." Price risk management liabilities were $3.4 million and
$0.8 million at September 30, 2003 and December 31, 2002, respectively, both of
which were included in "Current Liabilities."
During the third quarter 2003, no amounts were recognized in earnings due to
ineffectiveness and there were no components of the derivatives' fair values
excluded in the assessment of hedge effectiveness. Also, during the third
quarter, Northern Indiana did not reclassify any amount 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
no income recognition of amounts being currently classified in other
comprehensive income, net of tax.
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In July 2001, the
FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS
No. 143). SFAS No. 143 requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred. When
the liability is initially recorded, the entity capitalizes 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 is 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.
10
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
Northern Indiana adopted the provisions of SFAS No. 143 on January 1, 2003 and
as a result an asset retirement obligations liability of $1.9 million was
recognized. 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 $651.7 million at September 30, 2003 based on rates for estimated
removal costs embedded in composite depreciation rates.
For the third quarter and nine months ended September 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 September
30, 2003. The asset retirement obligations liability totaled $2.0 million at
September 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.
FASB INTERPRETATION NO. 46 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES. In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities" (FIN 46). On October 8, 2003, the FASB deferred the
implementation of FIN 46 to the fourth quarter of 2003. Northern Indiana is
currently evaluating FIN 46 in order to determine the impact.
SFAS NO. 149 - AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. Effective July 1, 2003, Northern Indiana adopted SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
(SFAS No. 149). SFAS No. 149 codifies and clarifies financial accounting and
reporting for derivative instruments and hedging activities under SFAS No. 133
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. SFAS No. 149 did not have a material impact on Northern Indiana's results
of operations during the third quarter of 2003. However, the statement could
have a significant impact on the number of contracts that will be marked to
market through earnings.
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. As a result of SFAS No. 150, Northern Indiana
reclassified its mandatory redeemable preferred stock to a non-current liability
in the third quarter of 2003.
EITF ISSUE NO. 03-11 - REPORTING REALIZED GAINS AND LOSSES ON DERIVATIVE
INSTRUMENTS THAT ARE SUBJECT TO FASB STATEMENT NO. 133 AND NOT "HELD FOR TRADING
PURPOSES" AS DEFINED IN EITF ISSUE NO. 02-03. In August 2003, the EITF released
Issue No. 03-11, which provides guidance on whether to report realized gains or
losses on derivative contracts that settle on a net basis. Currently, Northern
Indiana generally reports contracts requiring physical delivery of a commodity
on a gross basis, even when the contract is ultimately net settled. EITF No.
03-11 will be applied to financial statement periods after September 30, 2003.
Northern Indiana is currently evaluating the effect that EITF 03-11 will have on
the financial statements.
11
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
7. 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 requires 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. Northern Indiana recognized stock-based employee
compensation cost, net of taxes, of $0.1 million and $0.2 million for the three
and nine months ended September 30, 2003, respectively. 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 Nine Months
Ended September 30, Ended September 30,
---------------------- ---------------------
(in millions, net of tax) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------
NET INCOME
As reported $ 30.6 $ 52.1 $ 121.5 $ 167.7
Add: Stock-based employee compensation expense
included in reported net income, net of
related tax effects 0.1 - 0.2 -
Less: Total stock-based employee compensation
expense determined under the fair
value method for all awards, net of tax (0.4) (0.4) (1.4) (1.0)
- ------------------------------------------------------------------------------------------------------------------
Pro forma $ 30.3 $ 51.7 $ 120.3 $ 166.7
- ------------------------------------------------------------------------------------------------------------------
8. LEGAL PROCEEDINGS
In the normal course of its business, Northern Indiana has been named as
defendants in various legal proceedings. In the opinion of management, the
ultimate disposition of these currently asserted claims would not have a
material adverse impact on Northern Indiana's financial position.
9. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table displays the components of Accumulated Other Comprehensive
Income.
SEPTEMBER December 31,
(in millions, net of tax) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Net unrealized gains on cash flow hedges $ - $ 2.3
Minimum pension liability adjustment (125.2) (143.5)
- -------------------------------------------------------------------------------------------------------------------
Total Accumulated Other Comprehensive Income (Loss), net $ (125.2) $ (141.2)
- -------------------------------------------------------------------------------------------------------------------
10. MINIMUM PENSION LIABILITY
Northern Indiana used a measurement date of September 30, 2003 for the
calculation of its obligations under the pension and other postretirement
benefit plans. Due to the upswing in the equity markets, the fair value of
Northern Indiana's pension fund assets has increased since September 30, 2002.
However, the discount rate used to measure the accumulated benefit obligation
has decreased, which slightly offset the increase in the pension assets. In
accordance with FASB No. 87, "Employers' Accounting for Pensions," Northern
Indiana adjusted its minimum pension liability at September 30, 2003. The
adjustment resulted in a decrease to the retirement benefit liabilities of $33.7
million, a decrease in intangible assets of $4.3 million, a decrease to deferred
income tax assets of $11.1 million and an increase to other comprehensive income
of $18.3 million after-tax.
12
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
11. BUSINESS SEGMENT INFORMATION
During 2002, Northern Indiana re-aligned its reportable segments to reflect its
current operating structure. Electric wholesale and wheeling results were moved
to the Electric segment. As a result of the realignment, all 2002 periods have
been adjusted to reflect the new segments.
Northern Indiana's operations are divided into two primary business segments.
The Gas Distribution segment provides natural gas service and transportation for
residential, commercial and industrial customers in Indiana. The Electric
Operations segment provides electric service in 21 counties in the northern part
of Indiana and engages in electric wholesale and wheeling transactions.
The following tables provide information about business segments. Adjustments
have been made to the segment information to arrive at information included in
the results of operations and financial position. Northern Indiana uses
operating income as its primary measurement for each of the reported segments.
Operating income is derived from revenues and expenses directly associated with
each segment.
($ in millions) GAS ELECTRIC ADJUSTMENTS TOTAL
- ------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
Operating revenues 84.4 314.8 - 399.2
Utility operating income (loss) before utility income taxes (24.5) 89.5 - 65.0
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
Operating revenues 65.9 333.1 - 399.0
Utility operating income (loss) before utility income taxes (11.8) 107.6 (0.6) 95.2
- ------------------------------------------------------------------------------------------------------------------
($ in millions) GAS ELECTRIC ADJUSTMENTS TOTAL
- ------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
Operating revenues 726.8 837.0 - 1,563.8
Utility operating income before utility income taxes 40.1 206.2 - 246.3
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Operating revenues 496.5 879.5 - 1,376.0
Utility operating income (loss) before utility income taxes 46.3 260.4 (0.6) 306.1
- ------------------------------------------------------------------------------------------------------------------
13
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).
THIRD QUARTER AND NINE MONTH RESULTS
Net Income
Northern Indiana reported net income of $30.6 million for the three months ended
September 30, 2003, compared to $52.1 million in the 2002 period.
For the nine months ended September 30, 2003, Northern Indiana reported net
income of $121.5 million, a $46.2 million decrease from the 2002 period.
Net Revenues
Total net revenues (operating revenues less cost of sales) for the three months
ended September 30, 2003, were $234.3 million, a $15.2 million decrease from the
same period last year. The decrease in net revenues was primarily a result of a
$9.1 million decrease in electric net revenues primarily due to cooler weather
in the 2003 period and a $6.1 million decrease in gas net revenues as a result
of lower non-weather related gas sales volumes and incentive program revenues.
Total net revenues for the nine months ended September 30, 2003, were $756.0
million, a $32.2 million decrease from the same period last year. The decrease
was primarily a result of $25.4 million from credits issued pertaining to the
Indiana Utility Regulatory Commission (IURC) electric rate review settlement and
cooler weather during the summer season that decreased electric sales by $21.3
million, partially offset by increased net gas revenues of $7.8 million mostly
due to colder weather during the first three months of the year, and partially
offset by decreased non-weather related gas sales and lower incentive program
revenues.
Expenses
Operating expenses for the third quarter 2003 were $169.3 million, an increase
of $15.0 million over the 2002 period. Operation and maintenance expenses
increased $6.5 million mainly due to increased pension and postretirement costs
of $5.7 million, increased environmental reserves of $1.2 million and increased
electric maintenance expenses of $3.6 million. These increases were partially
offset by a $3.1 million decrease in expense related to the amortization of
electric rate review costs. Depreciation and amortization expense increased by
$1.5
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
million due to plant additions. Other taxes increased $7.0 million, principally
due to increased property taxes and increased gross receipts taxes that are
generally offset in revenues. The property tax increase was primarily due to a
reduction in property taxes in 2002 due to changes in the state property tax
regulations.
Operating expenses for the nine months ended September 30, 2003 were $509.7
million, an increase of $27.6 million from the 2002 period. Operations and
maintenance expenses increased $7.2 million mainly due to increased pension and
postretirement costs of $18.0 million and increased electric maintenance
expenses of $4.3 million. These increases were partially offset by decreased
employee-related and administrative expenses of $11.5 million, decreased expense
related to the amortization of electric rate review costs of $2.6 million and
decreased uncollectibles of $2.5 million. Depreciation and amortization expense
increased by $5.0 million due to plant additions. Other taxes increased $15.4
million, principally due to increased property taxes and higher gross receipts
taxes, which are generally offset in revenues. The property tax increase was
primarily due to a reduction in property taxes in 2002 due to changes in the
state property tax regulations.
Utility Income Taxes
Utility income tax expenses for the third quarter 2003 were $21.1 million,
compared to $29.4 million in 2002, due to lower pre-tax income.
Utility income tax expenses for the nine months of 2003 were $82.4 million
compared to $94.3 million in 2002, due to lower pre-tax income.
Interest
Interest expense for the third quarter 2003 was $12.9 million, a decrease of
$0.8 million compared to the 2002 period, primarily due to a reduction in
long-term debt.
Interest expense for the first nine months of 2003 was $42.0 million, a decrease
of $1.8 million compared to the 2002 period, primarily due to a reduction in
long-term debt, partially offset by increased short-term borrowings.
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 distribution and electric businesses, is
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. 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 nine months ended September 30, 2003 was $298.0
million, a decrease of $230.8 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 increased natural gas,
partly offset by decreased underrecovered gas costs.
During the first nine months of 2003, Northern Indiana redeemed $124.0 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 Public Utility Holding Company Act of 1935. NiSource Finance Corp. (NFC)
provides funding to the NiSource Money Pool from external borrowing sources. Due
to NiSource's strong liquidity position, 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 facility 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
September 30, 2003, Northern Indiana had $567.0 million of intercompany
short-term borrowings outstanding at an interest rate of 1.73%. As of December
31, 2002, Northern Indiana had an intercompany note payable of $448.9 million at
an interest rate of 2.11%.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
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's
outlook for NiSource and all of its subsidiaries 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 from negative to stable.
Northern Indiana may sell up to $100.0 million of certain of its accounts
receivable under a sales agreement, without recourse. As of September 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 Indiana'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 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 may be more exposed to commodity price risk. Northern
Indiana enters into certain sales contracts with customers based upon a fixed
sales price and varying volumes, which are ultimately dependent upon the
customer's supply requirements. Northern Indiana utilizes derivative financial
instruments to reduce the commodity price risk based on modeling techniques to
anticipate these future supply requirements.
Northern Indiana is exposed to interest rate risk as a result of changes in
interest rates on intercompany borrowings with NFC. These borrowings have
interest rates that are indexed to short-term market interest rates. At
September 30, 2003, the outstanding borrowings totaled $567.0 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 $1.4 million and
$3.2 million for the quarter and nine months ended September 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.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
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 IURC, 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 as amended, "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.
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 6 to the Notes of
Consolidated Financial Statements for information regarding recently issued
accounting standards.
Insurance Renewal
Northern Indiana sustained an increase in premiums and expenses for the property
and casualty insurance program of 2003 as compared to 2002. This increase was
anticipated due to insurance market conditions.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Power Outage in the Northeast
On August 14, 2003, a massive power outage affected approximately 50.0 million
people in Michigan, Ohio, New York, Pennsylvania, New Jersey, Connecticut,
Vermont and Canada and completely darkened major metropolitan areas such as New
York City, Cleveland, Detroit and Toronto. Northern Indiana's electric system
operated as it was designed and isolated a section of its system to protect its
electric supply. Northern Indiana's electric system operated without a problem
through the worst blackout in North American history.
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 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 2002 periods have been adjusted to reflect the new segments.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ----------------------
(in millions) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
NET REVENUES
Sales revenues $ 78.1 $ 59.3 $ 690.9 $ 470.1
Less: Cost of gas sold 56.0 31.4 521.9 299.4
- -------------------------------------------------------------------------------------------------------------------
Net Sales Revenues 22.1 27.9 169.0 170.7
Transportation Revenues 6.3 6.6 35.9 26.4
- -------------------------------------------------------------------------------------------------------------------
Net Revenues 28.4 34.5 204.9 197.1
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 26.6 22.6 79.6 74.6
Depreciation and amortization 21.3 20.6 62.9 61.4
Other taxes 5.0 3.1 22.3 14.8
- -------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 52.9 46.3 164.8 150.8
- -------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) $ (24.5) $ (11.8) $ 40.1 $ 46.3
===================================================================================================================
REVENUES ($ IN MILLIONS)
Residential 35.8 31.5 451.1 306.4
Commercial 13.8 11.0 167.9 93.9
Industrial 20.2 10.1 92.3 46.9
Transportation 6.2 6.6 35.9 26.4
Deferred Gas Costs 3.6 2.4 (52.3) (2.1)
Other 4.8 4.3 31.9 25.0
- -------------------------------------------------------------------------------------------------------------------
Total 84.4 65.9 726.8 496.5
- -------------------------------------------------------------------------------------------------------------------
SALES AND TRANSPORTATION (MDTH)
Residential Sales 3.8 3.8 43.3 42.8
Commercial Sales 1.5 1.7 17.7 14.4
Industrial Sales 2.7 2.3 10.2 8.1
Transportation 29.4 34.0 103.7 106.8
Other 0.2 0.4 1.2 5.0
- -------------------------------------------------------------------------------------------------------------------
Total 37.6 42.2 176.1 177.1
- -------------------------------------------------------------------------------------------------------------------
HEATING DEGREE DAYS 77 19 3,499 2,955
NORMAL HEATING DEGREE DAYS 43 42 3,201 3,326
% COLDER (WARMER) THAN NORMAL 79% (55%) 9% (11%)
CUSTOMERS
Residential 594,383 626,406
Commercial 46,867 48,482
Industrial 3,154 3,313
Transportation 46,632 8,745
Other 14 18
- -------------------------------------------------------------------------------------------------------------------
TOTAL 691,050 686,964
- -------------------------------------------------------------------------------------------------------------------
Northern Indiana's natural gas distribution operations serve approximately
691,000 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.
19
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. For many years,
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
September 30, 2003, approximately 48,000 of Northern Indiana's Gas
Distribution's residential and small commercial customers had selected an
alternate supplier.
Northern Indiana continues to offer 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.
On August 11, 1999, the IURC approved a flexible gas cost adjustment mechanism
for Northern Indiana. Under the approved procedure, the demand component of the
adjustment factor will be determined, after hearings and IURC approval, and made
effective on November 1 of each year. The demand component will remain in effect
for one year until a new demand component is approved by the IURC. The commodity
component of the adjustment factor will be determined by monthly filings, which
will become effective on the first day of each calendar month, subject to
refund. The monthly filings do not require IURC approval but will be reviewed by
the IURC during the annual hearing that will take place regarding the demand
component filing. Northern Indiana's gas cost adjustment factor also includes a
gas cost incentive mechanism which allows the sharing of any cost savings or
cost increases with customers based on a comparison of actual gas supply
portfolio cost to a market-based benchmark price. Northern Indiana made its
annual filing on August 29, 2002. The IURC approved implementation of interim
rates, subject to refund, effective November 1, 2002. Another party has filed
testimony indicating that some gas costs should not be recovered. On September
30, 2003, the IURC issued an order adjusting the recovery of costs in March 2003
and reducing recovery by $3.8 million. On October 8, 2003, the IURC approved the
demand component of the adjustment factor.
Weather
For the first nine months of 2003, weather was 9% colder than normal and 18%
colder than the first nine months of 2002.
Throughput
Northern Indiana sold and transported 37.6 million dekatherms (MDth) for the
third quarter 2003, a decrease of 4.6 MDth from the same period last year,
primarily due to decreased transportation volumes when compared to the third
quarter of 2002.
Total volumes sold and transported were 176.1 MDth for the first nine months of
2003, a decrease of 1.0 MDth from the same period in 2002, primarily due to
decreased transportation volumes and decreased off-system sales.
Net Revenues
Net revenues for the three months ended September 30, 2003 were $28.4 million, a
decrease of $6.1 million from the same period in 2002, mainly attributable to
lower non-weather related gas sales and incentive program revenues.
Net revenues for the nine months ended September 30, 2003 were $204.9 million,
an increase of $7.8 million over the same period in 2002, mainly attributable to
colder weather during the first three months of the year, partially offset by
lower non-weather related gas sales and lower incentive program revenues.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS(CONTINUED)
Operating Income (Loss)
Operating loss for the third quarter 2003 was $24.5 million, a $12.7 million
greater loss than the same period in 2002. The increase in the operating loss
was mainly attributable to decreased net revenues mentioned above, $1.3 million
increase in pension and postretirement costs, $1.2 million increase in
environmental reserves, $0.7 million increase in depreciation and amortization
expense due to plant additions and $1.5 million increase in property taxes and
$0.4 million higher gross receipt taxes, which are generally offset in revenues.
Operating income for the first nine months of 2003 was $40.1 million, a decrease
of $6.2 million from the same period in 2002. The increase in net revenues
discussed above was more than offset by increased operating expenses, which were
$14.0 million higher than in 2002. Pension and postretirement costs increased
$4.7 million. Depreciation and amortization expense increased by $1.5 million
due to plant additions. Property taxes increased by $2.2 million and gross
receipt taxes, which are generally offset in revenues, increased $5.0 million,
due to an increase in gross revenues as well as an increase in the utility
receipt tax rate from 1.2% to 1.4%, effective January 1, 2003.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
(in millions) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------
NET REVENUES
Sales Revenues $ 314.8 $ 333.1 $ 837.0 $ 879.5
Less: Cost of sales 108.9 118.1 285.9 288.4
- ------------------------------------------------------------------------------------------------------------------
Net Revenues 205.9 215.0 551.1 591.1
- ------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 57.0 53.9 167.4 164.6
Depreciation and amortization 43.5 42.7 130.8 127.3
Other taxes 15.9 10.8 46.7 38.8
- ------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 116.4 107.4 344.9 330.7
- ------------------------------------------------------------------------------------------------------------------
Operating Income $ 89.5 $ 107.6 $ 206.2 $ 260.4
==================================================================================================================
REVENUES ($ IN MILLIONS)
Residential 94.7 106.7 229.3 245.5
Commercial 84.0 87.7 220.4 233.0
Industrial 90.9 105.2 282.2 296.7
Wholesale 34.0 34.9 79.4 77.0
Other 11.2 (1.4) 25.7 27.3
- ------------------------------------------------------------------------------------------------------------------
Total 314.8 333.1 837.0 879.5
- ------------------------------------------------------------------------------------------------------------------
SALES (GIGAWATT HOURS)
Residential 1,008.1 1,096.3 2,436.8 2,497.9
Commercial 1,011.8 1,040.2 2,722.5 2,763.1
Industrial 2,176.4 2,244.7 6,655.3 6,467.4
Wholesale 911.8 858.7 2,205.2 2,405.4
Other 36.0 30.2 97.2 90.8
- ------------------------------------------------------------------------------------------------------------------
Total 5,144.1 5,270.1 14,117.0 14,224.6
- ------------------------------------------------------------------------------------------------------------------
COOLING DEGREE DAYS 459 752 572 1,015
NORMAL COOLING DEGREE DAYS 584 573 808 792
% WARMER (COLDER) THAN NORMAL (21%) 31% (29%) 28%
CUSTOMERS
Residential 386,227 382,757
Commercial 48,984 48,014
Industrial 2,548 2,604
Wholesale 19 21
Other 795 800
- ------------------------------------------------------------------------------------------------------------------
Total 438,573 434,196
- ------------------------------------------------------------------------------------------------------------------
Northern Indiana generates and distributes electricity to approximately 439,000
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 a 9% improvement in sales
for the nine-month period. The acquisitions of Bethlehem Steel and National
Steel by ISG and U.S. Steel, respectively, have been completed.
22
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 $39.8 million were recognized for electric customers for the first
nine months of 2003. The order adopting the settlement was appealed to the
Indiana Court of Appeals by both the Citizens Action Coalition of Indiana and
fourteen residential customers. On October 14, 2003, the Appeals Court upheld
the IURC's approval of the settlement.
Northern Indiana submitted its quarterly fuel adjustment clause (FAC) 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 has been 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 order approving the transfer of functional
control of the transmission system to the ITC was issued on September 24, 2003.
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.
This reimbursement was received on September 30, 2003. Functional control was
transferred to the ITC and MISO on October 1, 2003.
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 filed detailed tariff information,
with a planned initial operation date of March 31, 2004. However, in October
2003, MISO petitioned FERC to withdraw this tariff filing. FERC approved the
withdrawal and has provided guidance to MISO as to how it should proceed in the
future. It is now expected that MISO will file a new tariff application with
FERC and will delay the initial operation date to December 1, 2004. Northern
Indiana is actively pursuing roles in the MMI. At the current time, management
believes that MMI will change the manner in which Northern Indiana conducts
their 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 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. An estimated refund liability was recorded in the
first quarter of 2003. A settlement was reached with the customers and Northern
Indiana recorded an additional refund liability in the third quarter. It is
expected that as a result of the settlement the industrial customers challenge
will be withdrawn or dismissed. In January 2002, Northern Indiana filed a
proceeding with the IURC for approval to implement a purchase power tracker. On
March 21, 2003, Northern Indiana amended the January 2002 filing by withdrawing
its request to implement a purchased power tracker and to instead allow
recovery, via the FAC, of transmission costs paid to third parties, and the
costs associated with electric physical derivative transactions, including
option premiums to purchase power, and brokerage commissions. In October 2003,
Northern Indiana voluntarily withdrew its amended request and the entire
proceeding was dismissed.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS (CONTINUED)
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. An August 26, 2003 order accepted
Northern Indiana's March 17, 2003 compliance filing. Northern Indiana made
refunds on September 24, 2003 and filed a refund report at FERC on September 26,
2003.
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 September 30,
2003 the ECRM revenues amounted to $2.5 million. On August 1, Northern Indiana
filed the ECRM on capital investments of $120.0 million. This petition was
approved by the IURC on October 1, 2003. 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 $274.2 million. The IURC
order is currently being appealed to the Indiana Court of Appeals by the
Citizens Action Coalition of Indiana.
Environmental Matters
In December 2001, the EPA approved regulations developed by the State of Indiana
to comply with EPA's NOx State Implementation Plan (SIP) call. The NOx SIP call
requires certain states, including Indiana, to reduce NOx levels from several
sources, including industrial and utility boilers, to lower regional transport
of ozone. The NOx emission limitations in the Indiana rules are more restrictive
than those imposed on electric utilities under the Clean Air Act Amendments of
1990 (CAAA) acid rain NOx reduction program. Compliance with the NOx limits
contained in these rules is required by May 31, 2004. Northern Indiana plans to
install Selective Catalytic Reduction NOx reduction technology on specific units
at each of its active generating stations to comply with the rules and estimates
capital costs will range from $250.0 to $300.0 million. Actual compliance costs
may vary depending on a number of factors including market demand/resource
constraints, uncertainty of future equipment and construction costs, and the
potential need for additional control technology.
Sales
Electric sales for the third quarter 2003 were 5,144.1 gwh, a decrease of 126.0
gwh compared to the 2002 period. The decrease was primarily due to a reduction
of 312.5 gwh due to cooler weather during the quarter, partially offset by
increases in non-weather related usage of 163.9 gwh and increased wholesale
sales.
Electric sales for the first nine months of 2003 were 14,117.0 gwh, a decrease
of 107.6 gwh compared to the 2002 period, primarily reflecting decreased sales
to residential and commercial customers due to cooler weather during the second
and third quarters, and decreased sales to wholesale customers. The decline was
partially offset by increased industrial sales due to increased demand from the
steel industry customers.
Net Revenues
In third quarter 2003, electric net revenues of $205.9 million decreased by $9.1
million from the comparable 2002 period. The decrease was primarily due to
cooler weather in the 2003 period compared to the 2002 period.
In the first nine months of 2003, electric net revenue of $551.1 million
decreased by $40.0 million from the 2002 period due to $25.4 million of
additional credits issued as a result of the IURC electric rate review
settlement and cooler weather during the summer season that decreased electric
sales by $21.3 million.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS (CONTINUED)
Operating Income
Operating income for the third quarter 2003 was $89.5 million, a decrease of
$18.1 million from the same period in 2002. The decrease was primarily due to
the changes in revenue mentioned above, increased pension and post-retirement
expenses of $4.4 million, increased property tax expense of $4.8 million and
increased maintenance expenses of $3.6 million. The property tax increase was
primarily due to a reduction in property taxes in 2002 due to changes in the
state property tax regulations. The 2002 period was unfavorably impacted by $3.1
million related to the amortization of electric rate review costs.
Operating income for the first nine months of 2003 was $206.2 million, a
decrease of $54.2 million from the same period in 2002 due to the changes in
revenue mentioned above, increased pension and postretirement benefits expenses
of $13.3 million, increased property tax expense of $7.5 million and increased
maintenance expenses of $4.3 million, which was partially offset by a $7.7
million reduction in employee-related and administrative expenses. The property
tax increase was primarily due to a reduction in property taxes in 2002 due to
changes in the state property tax regulations. The 2002 period was unfavorably
impacted by $2.6 million related to the amortization of electric rate review
costs.
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-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 was no change in Northern Indiana's internal control over financial
reporting during the fiscal quarter covered by this report that has materially
affected, or is reasonably likely to materially affect, Northern Indiana's
internal control over financial reporting.
25
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:
(31.1) Certification of Mark T. Maassel, 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 Mark T. Maassel, 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 third quarter 2003:
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Northern Indiana Public Service Company
---------------------------------------
(Registrant)
Date: November 12, 2003 By: /s/ Jeffrey W. Grossman
-----------------------------------
Jeffrey W. Grossman
Vice President
(Duly Authorized Officer)
27