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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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 May 1, 2004, 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.
NORTHERN INDIANA PUBLIC SERVICE COMPANY
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED MARCH 31, 2004
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.............. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 22
Item 4. Controls and Procedures...................................... 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings ........................................... 23
Item 2. Changes in Securities and Use of Proceeds.................... 23
Item 3. Defaults Upon Senior Securities ............................. 23
Item 4. Submission of Matters to a Vote of Security Holders.......... 23
Item 5. Other Information............................................ 23
Item 6. Exhibits and Reports on Form 8-K............................. 23
Signature............................................................... 24
2
PART I
ITEM 1. FINANCIAL STATEMENTS
NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Three Months Ended March 31, (in millions) 2004 2003
---------- ----------
OPERATING REVENUES
Gas $ 414.4 $ 492.4
Gas-Affiliated 1.1 6.7
Electric 255.7 255.9
Electric-Affiliated 5.2 6.9
---------- ----------
Gross Operating Revenues 676.4 761.9
---------- ----------
COST OF ENERGY
Gas costs 302.5 372.7
Gas costs-Affiliated -- 0.6
Fuel for electric generation 54.4 49.7
Fuel for electric generation-Affiliated 1.3 0.8
Power purchased 18.6 26.0
Power purchased-Affiliated 7.1 16.8
---------- ----------
Cost of sales 383.9 466.6
---------- ----------
Total Net Revenues 292.5 295.3
---------- ----------
OPERATING EXPENSES
Operation 74.6 67.2
Maintenance 17.2 18.3
Depreciation and amortization 65.5 64.3
Other taxes 26.7 26.6
---------- ----------
Total Operating Expenses 184.0 176.4
---------- ----------
UTILITY OPERATING INCOME BEFORE UTILITY
INCOME TAXES 108.5 118.9
---------- ----------
UTILITY INCOME TAXES 40.7 42.4
---------- ----------
UTILITY OPERATING INCOME 67.8 76.5
---------- ----------
OTHER INCOME (DEDUCTIONS) 1.5 0.2
---------- ----------
INTEREST
Interest on long-term debt 8.0 11.7
Other interest 0.7 --
Other interest-Affiliated 2.1 1.7
Amortization of premium, reacquisition premium,
discount and expense on debt, net 1.0 1.0
---------- ----------
Total Interest 11.8 14.4
---------- ----------
NET INCOME $ 57.5 $ 62.3
========== ==========
DIVIDEND REQUIREMENTS ON PREFERRED STOCKS 1.1 1.1
---------- ----------
BALANCE AVAILABLE FOR COMMON SHARES $ 56.4 $ 61.2
---------- ----------
COMMON DIVIDENDS DECLARED $ -- $ --
---------- ----------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
CONSOLIDATED BALANCE SHEETS
MARCH 31, December 31,
(in millions) 2004 2003
---------- ----------
(unaudited)
ASSETS
UTILITY PLANT, at original cost
Electric $ 4,799.7 $ 4,774.1
Gas 1,501.4 1,494.0
Common 368.5 368.0
---------- ----------
Total Utility Plant 6,669.6 6,636.1
---------- ----------
Less - Accumulated provision for depreciation
and amortization 3,121.7 3,082.7
---------- ----------
Net Utility Plant 3,547.9 3,553.4
---------- ----------
OTHER PROPERTY AND INVESTMENTS 2.4 2.4
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 8.3 0.3
Restricted cash 1.7 2.6
Accounts receivable (less reserve of $11.2 and $9.6, respectively) 53.9 69.7
Unbilled revenue (less reserve of $0.3 and $0.7, respectively) 40.9 74.2
Materials and supplies, at average cost 44.0 43.8
Electric production fuel, at average cost 31.1 29.0
Natural gas in storage, at last-in, first-out cost 22.3 131.8
Price risk management assets 2.6 4.6
Regulatory assets 13.2 12.4
Prepayments and other 59.2 41.0
---------- ----------
Total Current Assets 277.2 409.4
---------- ----------
OTHER ASSETS:
Regulatory assets 206.5 210.4
Intangible assets 25.2 25.2
Deferred charges and other 5.9 6.6
---------- ----------
Total Other Assets 237.6 242.2
---------- ----------
TOTAL ASSETS $ 4,065.1 $ 4,207.4
========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
CONSOLIDATED BALANCE SHEETS
MARCH 31, December 31,
(in millions) 2004 2003
------------ ------------
(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity $ 1,027.0 $ 971.8
Preferred Stocks --
Series without mandatory redemption provisions 81.1 81.1
Long-term debt, excluding amounts due within one year 571.0 682.0
------------ ------------
Total Capitalization 1,679.1 1,734.9
------------ ------------
CURRENT LIABILITIES
Current portion of long-term debt 32.0 32.0
Short term borrowings-Affiliated 465.7 578.4
Accounts payable 83.4 140.1
Accounts payable-Affiliated 14.7 19.9
Dividends declared on preferred stocks 1.1 1.1
Customer deposits 52.9 51.1
Taxes accrued 151.2 58.9
Interest accrued 7.6 6.9
Overrecovered fuel costs 6.3 1.1
Overrecovered gas costs 29.2 25.8
Accrued employment costs 20.5 21.4
Price risk management liabilities 0.4 0.5
Accrued liability for postretirement and pension benefits 23.0 13.6
Other accruals 35.8 55.9
------------ ------------
Total Current Liabilities 923.8 1,006.7
------------ ------------
OTHER LIABILITIES AND DEFERRED CREDITS
Deferred income taxes 457.0 472.2
Deferred investment tax credits 55.5 57.2
Deferred credits 19.2 16.9
Accrued liability for postretirement and pension benefits 222.9 224.2
Preferred stock liabilities with mandatory redemption provisions 2.4 2.4
Regulatory liabilities and other removal costs 677.9 667.2
Other noncurrent liabilities 27.3 25.7
------------ ------------
Total Other 1,462.2 1,465.8
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
------------ ------------
TOTAL CAPITALIZATION AND LIABILITIES $ 4,065.1 $ 4,207.4
============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Three Months Ended March 31, (in millions) 2004 2003
---------- ----------
OPERATING ACTIVITIES
Net Income $ 57.5 $ 62.3
Adjustments to reconcile net income to net cash:
Depreciation and amortization 65.5 64.3
Net changes in price risk management activities 0.8 (0.7)
Deferred income taxes and investment tax credits (31.1) (17.6)
Amortization of discount/premium on debt 1.0 1.0
Changes in assets and liabilities:
Restricted cash 0.9 --
Accounts receivable and unbilled revenue 49.1 (86.6)
Inventories 107.2 (0.6)
Accounts payable (51.7) 66.4
Customer deposits 1.8 2.2
Taxes accrued 90.0 80.7
Interest accrued 0.7 3.8
(Under) Overrecovered gas and fuel costs 8.6 17.2
Prepayments and other current assets (1.8) (9.3)
Regulatory assets/liabilities 3.8 (4.4)
Postretirement and postemployment benefits 8.1 12.7
Deferred credits 0.7 (26.3)
Other accruals (21.0) 0.6
Deferred charges and other noncurrent assets 0.7 (0.4)
Other noncurrent liabilities (1.7) 41.6
---------- ----------
Net Cash from Operating Activities 289.1 206.9
---------- ----------
INVESTING ACTIVITIES
Construction expenditures (56.2) (63.2)
Other investing activities, net -- 6.4
---------- ----------
Net Investing Activities (56.2) (56.8)
---------- ----------
FINANCING ACTIVITIES
Retirement of long-term debt (111.1) (20.0)
Change in short-term debt (112.7) (119.1)
Dividends paid - preferred shares (1.1) (1.2)
---------- ----------
Net Financing Activities (224.9) (140.3)
---------- ----------
Increase (decrease) in cash and cash equivalents 8.0 9.8
Cash and cash equivalents at beginning of period 0.3 4.4
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8.3 $ 14.2
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest 10.5 9.8
Interest capitalized 0.4 0.5
Cash paid for income taxes -- --
---------- ----------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended March 31, (in millions) 2004 2003
-------- --------
Net Income $ 57.5 $ 62.3
Other comprehensive loss, net of tax
Net unrealized losses on cash flow hedges (1.2) (0.2)
-------- --------
Total Comprehensive Income $ 56.3 $ 62.1
======== ========
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. BASIS OF ACCOUNTING PRESENTATION
Northern Indiana Public Service Company (Northern Indiana) is a subsidiary of
NiSource Inc. (NiSource). 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. NiSource is a Delaware corporation and a
registered holding company under the Public Utility Holding Company Act of 1935,
as amended.
The accompanying unaudited consolidated financial statements for 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,
2003. 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 2003 financial statements to conform to
the 2004 presentation.
2. REGULATORY MATTERS
On August 11, 1999, the Indiana Utility Regulatory Commission (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 for 2002 on August 29, 2002
(GCA5). The IURC approved implementation of interim rates, subject to refund,
effective November 1, 2002. Testimony was filed indicating that some gas costs,
for the month of March 2003, should not be recovered. On September 10, 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. Northern Indiana made its annual filing for
2003 on August 26, 2003 (GCA6). The IURC approved implementation of these
interim rates subject to refund, effective November 1, 2003. The parties in the
cases have raised concerns regarding gas cost recovery similar to those
addressed in March 2003. While Northern Indiana pursues settlement of the issues
an estimated refund liability was recognized in the first quarter of 2004.
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). Northern Indiana transferred functional control of its electric
transmission assets to the ITC and MISO on October 1, 2003. As part of Northern
Indiana's use of MISO's transmission service, Northern Indiana will incur new
categories of transmission charges based upon MISO's Federal Energy Regulatory
Commission (FERC)-approved tariff. One of the new categories of charges,
Schedule 10, relates to the payment of administrative charges to MISO for its
continuing management and operations of the transmission system. Northern
Indiana filed a petition on September 30, 2003, with the IURC seeking approval
to establish accounting treatment for the deferral of the Schedule 10 charges
from MISO. An IURC hearing was held on March 15, 2004, with final resolution
anticipated during the second quarter 2004.
8
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
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 MMI proposes non-discriminatory transmission service,
reliable grid operation, and the purchase and sale of electric energy in a
competitive, 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. On March 31, 2004, MISO submitted a revised energy
markets tariff to the FERC for approval. As part of the revised filings, MISO
proposes an initial operation date of December 1, 2004. Northern Indiana is
actively pursuing a role in the MMI. At the current time, management believes
that the MMI will change the manner in which Northern Indiana conducts its
electric business; however, at this time management cannot determine the impact
the MMI will have on Northern Indiana.
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. This negotiated cap agreement is
subject to continuing negotiations. A group of industrial customers challenged
the manner in which Northern Indiana 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 the full costs of the settlement. As a result of the
settlement, the industrial customers challenge was withdrawn and dismissed in
January 2004. In addition, as a result of the settlement, Northern Indiana has
sought and received approval by the IURC to reduce the charges under the
interruptible sales tariff. This reduction will remain in effect until the Dean
H. Mitchell Generating Station (Mitchell Station) has been returned to service.
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 is permitted 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). The IURC order was
appealed to the Indiana Court of Appeals by the Citizens Action Coalition of
Indiana, where it was upheld by the Court on March 9, 2004. The Citizens Action
Coalition of Indiana failed to take any action to continue the appeal of this
case and the Court's decision is now final. Under the Commission's November 26,
2002 order, Northern Indiana is permitted to 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, ECR-1, in February 2003 for capital expenditures
of $58.4 million. On April 30, 2003, the IURC issued an order approving the ECRM
filing, providing for a return on the capital investment through increased rates
beginning with the May 2003 customer bills. Through March 31, 2004 the ECRM
revenues amounted to $8.2 million. On August 1, 2003, Northern Indiana filed
ECR-2 for capital expenditures through June 30, 2003, of $120.0 million. This
petition was approved by the IURC on October 1, 2003. The initial filing of the
EERM was filed with the most recent semi-annual filing of the ECT in February
2004, which included a filing of the ECR-3 for capital expenditures through
December 31, 2003, of $194.1 million, and an EERM amount of $1.9 million. On
March 24, 2004, the IURC approved Northern Indiana's February 2004 filing for
ECR-3 and the initial filing of the EERM. Over the timeframe required to meet
the environmental standards, Northern Indiana anticipates a total capital
investment amounting to approximately $274.2 million. On February 4, 2004, the
IURC approved Northern Indiana's latest compliance plan with the estimate of
$274.2 million.
3. RESTRUCTURING ACTIVITIES
Since 2000, NiSource has implemented restructuring initiatives to streamline its
operations and realize efficiencies from the acquisition of Columbia Energy
Group. The restructuring activities were primarily associated with reductions in
headcount.
9
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
For all of the restructuring plans, a total of approximately 180 management,
professional, administrative and technical positions have been identified for
elimination at Northern Indiana. As of March 31, 2004, 161 employees have been
terminated. At March 31, 2004 and at December 31, 2003, the consolidated balance
sheets reflected liabilities of $1.2 million related to the restructuring plans.
4. RISK MANAGEMENT ACTIVITIES
Northern Indiana uses commodity-based derivative financial instruments to manage
certain risks 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," as amended, (SFAS No. 133).
HEDGING ACTIVITIES. The activity for the first quarter 2004 and 2003 affecting
accumulated other comprehensive income, with respect to cash flow hedges
included the following:
Three Months Ended March 31, (in millions, net of tax) 2004 2003
-------- --------
Unrealized gains on derivatives qualifying as cash flow
hedges at the beginning of the period $ 2.6 $ 2.3
Unrealized hedging gains (losses) arising during the period on
derivatives qualifying as cash flow hedges 0.6 (1.2)
Reclassification adjustment for net loss (gain) included in net income (1.8) 1.0
-------- --------
Net unrealized gains on derivatives qualifying as cash
flow hedges at the end of the period $ 1.4 $ 2.1
-------- --------
Unrealized gains and losses on Northern Indiana's hedges were recorded as price
risk management assets and liabilities. The accompanying consolidated balance
sheets reflected price risk management assets of $2.6 million and $4.6 million
at March 31, 2004 and December 31, 2003, respectively, which were included in
"Current Assets." Price risk management liabilities were $0.4 million and $0.5
million at March 31, 2004 and December 31, 2003, respectively, all of which were
included in "Current Liabilities."
Northern Indiana is also engaged in writing options that potentially obligates
Northern Indiana to purchase or sell gas at the holder's discretion at some
future market-based price. These written options are derivative instruments,
must be marked to fair value and do not meet the requirement for hedge
accounting treatment. Northern Indiana also uses NYMEX derivative contracts to
minimize its gas costs. These contracts do not qualify for hedge accounting and
must be marked to fair value. Because these derivatives are used within the
framework of its gas cost incentive mechanism, regulatory assets or liabilities
are recorded to offset the change in the fair value of these derivatives. The
consolidated balance sheets reflected $0.2 million at March 31, 2004 and
December 31, 2003, of price risk management liabilities associated with these
programs.
During the first quarter 2004, a gain of $0.1 million was recognized in earnings
due to the change in value of certain derivative instruments, and there were no
components of the derivatives' fair values excluded in the assessment of hedge
effectiveness. Also, during the first quarter, Northern Indiana reclassified no
amounts from other comprehensive income to earnings, due to the probability that
certain 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
other comprehensive income of approximately $1.2 million, net of tax.
10
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FASB INTERPRETATION NO. 46 - (REVISED DECEMBER 2003) CONSOLIDATION OF VARIABLE
INTEREST ENTITIES. On January 17, 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities"(FIN 46). FIN 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or is entitled to receive a majority of the entity's residual
returns. A company that consolidates a variable interest entity is called the
primary beneficiary of that entity. In general, a variable interest entity is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights, or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. FIN 46 also requires various disclosures
about variable interest entities that a company is not required to consolidate
but in which it has a significant variable interest. On December 18, 2003, the
FASB deferred the implementation of FIN 46 to the first quarter of 2004.
Northern Indiana adopted FIN 46 on January 1, 2004. The adoption of FIN 46 had
no impact on Northern Indiana's financial position or results of operations.
FASB STAFF POSITION NO. FAS 106-1 - ACCOUNTING AND DISCLOSURE REQUIREMENTS
RELATED TO THE MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF
2003. On December 8, 2003, the President of the United States signed the
Medicare Prescription Drug, Improvement and Modernization Act into law. The Act
introduces a prescription drug benefit under Medicare (Medicare Part D) as well
as a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D.
FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," requires presently enacted changes in relevant laws to be
considered in current period measurements of postretirement benefit costs and
the Accumulated Projected Benefit Obligation. However, specific authoritative
guidance on the accounting for the federal subsidy is currently pending, and
Northern Indiana has elected to defer accounting for the effects of this
pronouncement as allowed by this staff position. It is expected that the law and
pronouncement will reduce the effects of the currently high prescription drug
trend rates on Northern Indiana's post-retirement benefits costs and cash flows
assuming that Northern Indiana's post-retirement benefits remain unchanged.
However, it is not certain at this time what effects this law and pronouncement
will have on Northern Indiana's postretirement benefit costs and cash flows.
6. LEGAL PROCEEDINGS
In the normal course of its business, Northern Indiana has been named as a
defendant in various legal proceedings. In the opinion of management, the
ultimate disposition of these currently asserted claims will not have a material
adverse impact on Northern Indiana's consolidated financial position.
7. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table displays the components of Accumulated Other Comprehensive
Loss, which is included in "Common shareholder's equity," on the consolidated
balance sheets.
MARCH 31, December 31,
(in millions, net of tax) 2004 2003
-------- --------
Net unrealized gains on cash flow hedges $ 1.4 $ 2.6
Minimum pension liability adjustment (124.3) (124.3)
-------- --------
Total Accumulated Other Comprehensive Loss, net $ (122.9) $ (121.7)
-------- --------
11
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
9. PENSION AND OTHER POSTRETIREMENT BENEFITS
Northern Indiana participates in the NiSource pension and postretirement benefit
plans. NiSource used a measurement date of September 30, 2003 for the
calculation of its obligations under the pension and other postretirement
benefit plans. Northern Indiana does not expect to make contributions to the
pension plan in 2004. However, Northern Indiana expects to contribute $20.3
million to the postretirement medical and life plans in 2004. Northern Indiana
recognized $4.0 million and $8.1 million in allocated pension expenses, and $7.0
million and $5.0 million in other benefit expenses for the first quarter of 2004
and the first quarter of 2003, respectively.
The following disclosures are for the NiSource pension and postretirement
benefit plans, which include Northern Indiana and NiSource Corporate Service
employees. The following table provides the components of the plans' net
periodic benefits cost (benefit) for first quarter of 2004 as compared to the
first quarter of 2003:
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
Three months ended March 31, (in millions) 2004 2003 2004 2003
-------- -------- -------- --------
NET PERIODIC COST
Service cost $ 4.3 $ 3.9 $ 1.0 $ 0.8
Interest cost 17.6 18.1 4.0 3.4
Expected return on assets (21.8) (19.5) (0.1) --
Amortization of transitional obligation -- 1.4 2.6 2.6
Amortization of prior service cost 1.9 1.7 -- --
Recognized actuarial (gain) loss 3.8 5.1 -- (1.3)
-------- -------- -------- --------
NET PERIODIC BENEFITS COST (BENEFIT) $ 5.8 $ 10.7 $ 7.5 $ 5.5
-------- -------- -------- --------
10. BUSINESS SEGMENT INFORMATION
Northern Indiana's operations are divided into three primary business segments.
The Gas Distribution Operations 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 Other Operations segment includes the results of NIPSCO
Receivables Corporation (NRC), a wholly-owned subsidiary of Northern Indiana,
whose sole activity is to purchase accounts receivable from Northern Indiana and
sell these accounts to a commercial paper conduit, within the limits of the
agreement between NRC and the conduit. NRC commenced operations on December 30,
2003.
The following tables provide information about Northern Indiana business
segments. 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 OTHER TOTAL
-------- -------- -------- --------
FOR THE THREE MONTHS ENDED MARCH 31, 2004
Operating revenues 415.5 260.9 -- 676.4
Utility operating income before utility income taxes 49.9 58.8 (0.2) 108.5
FOR THE THREE MONTHS ENDED MARCH 31, 2003
Operating revenues 499.1 262.8 -- 761.9
Utility operating income before utility income taxes 66.3 52.6 -- 118.9
-------- -------- -------- --------
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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,
weather, fluctuations in supply and demand for energy commodities, growth
opportunities for Northern Indiana's businesses, increased competition in
deregulated energy markets, 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, 2003.
CONSOLIDATED REVIEW
RESULTS OF OPERATIONS
THE QUARTER ENDED MARCH 31, 2004
Net Income
Northern Indiana reported net income of $57.5 million for the three months ended
March 31, 2004, a decrease of $4.8 million as compared to the $62.3 million
recorded in the 2003 period.
Net Revenues
Total consolidated net revenues (operating revenues less cost of sales) for the
three months ended March 31, 2004, were $292.5 million, a $2.8 million decrease
from the same period last year. The decrease in net revenues was primarily a
result of reduced natural gas sales and deliveries due to warmer weather during
the first quarter 2004 compared with the same period in 2003 amounting to $4.9
million and a decrease in revenue due to lower residential and commercial
non-heating demand. In addition, non-traditional revenues were down $2.3
million. These decreases were partially offset by increased electric net
revenues, primarily a result of customer settlement obligations that reduced net
revenues in the 2003 period.
Expenses
Operating expenses for the first quarter 2004 were $184.0 million, an increase
of $7.6 million over the 2003 period. The increase was primarily due to $4.2
million of redemption premium from the early extinguishment of certain
medium-term notes, and increased depreciation and amortization expense of $1.2
million due to plant additions.
Utility Income Taxes
Utility income tax expenses for the first quarter 2004 were $40.7 million,
compared to $42.4 million in 2003, due to lower pre-tax income.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Other Income (Deductions)
Other Income (Deductions) for the first quarter was $1.5 million, an increase of
$1.3 million compared to the 2003 period, primarily due to a decrease in
administrative fees associated with sale of accounts receivable and a decrease
in donations.
Interest
Interest expense for the first quarter 2004 was $11.8 million, a decrease of
$2.6 million compared to the 2003 period, primarily due to a reduction in
long-term debt and lower short-term interest rates, partially offset by
increased short-term borrowings during the period.
LIQUIDITY AND CAPITAL RESOURCES
Generally, cash flow from operations has provided sufficient liquidity to meet
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 the seasonal increase in cash flows from the
electric business during the summer cooling season and external short-term and
long-term financing, is used 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 three months ended March 31, 2004 was $289.1
million, an increase of $82.2 million from the comparable period in 2003, mainly
as a result of increased working capital. Cash flow from working capital was
$204.8 million, principally driven by decreased natural gas in storage as a
result of withdrawing storage in the winter heating season, and a decrease in
accounts receivable and unbilled revenue as a result of the timing of
collections.
During February 2004, Northern Indiana redeemed $111.1 million of its
medium-term notes with an average interest rate of 7.5%. The associated
redemption premium of $4.2 million was charged to expense.
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.
During March 2004, NFC obtained a new $500 million 364-day credit facility and a
$750 million 3-year credit facility with a syndicate of banks led by Barclays
Capital. The credit facility is guaranteed by NiSource. As of March 31, 2004,
Northern Indiana had $465.7 million of intercompany short-term borrowings
outstanding at an interest rate of 1.52%. As of December 31, 2003, Northern
Indiana had $578.4 million of intercompany short-term borrowings outstanding at
an interest rate of 1.74%.
Sale of Trade Receivables
On December 30, 2003, Northern Indiana entered into an agreement to sell,
without recourse, all of its trade receivables, as they originate, to NIPSCO
Receivables Corporation (NRC), a wholly-owned subsidiary of Northern Indiana.
NRC, in turn, is party to an agreement in which it sells an undivided percentage
ownership interest in the accounts receivable to a commercial paper conduit. The
conduit can purchase up to $200 million of accounts receivable under the
agreement. The agreements expire in December 2004. As of March 31, 2004, NRC had
sold $200 million of accounts receivable.
MARKET RISK DISCLOSURES
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.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Non-Trading Risks
Commodity price risk resulting from non-trading activities at Northern Indiana
is limited, since current regulations allow recovery of prudently incurred
purchased power, fuel and gas costs through the rate-making process. If Indiana
were to explore regulatory reform, Northern Indiana may expand the number of
services that it would provide that would not have 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 March
31, 2004, the outstanding borrowings totaled $465.7 million. Based upon average
borrowings during 2004, an increase in short-term interest rates of 100 basis
points (1%) would have increased interest expense by $1.2 million for the three
months ended March 31, 2004.
Due to the nature of the industry, credit risk is a factor in many of Northern
Indiana's business activities. Credit risk arises because of the possibility
that a customer, supplier or counterparty will not be able or willing to fulfill
its obligations on a transaction on or before the settlement date. Exposure to
credit risk is measured in terms of both current and potential exposure. Current
credit exposure is generally measured by the notional or principal value of
financial instruments and direct credit substitutes, such as commitments,
standby letters of credit and guarantees. Because many of Northern Indiana's
exposures vary with changes in market prices, Northern Indiana also estimates
the potential credit exposure over the remaining term of transactions through
statistical analysis of market prices. In determining exposure, Northern Indiana
considers collateral and master netting agreements, which are used to reduce
individual counterparty credit risk.
OFF BALANCE SHEET ARRANGEMENTS
Northern Indiana has purchase commitments and operating leases
In addition, Northern Indiana has sold certain accounts receivable. Northern
Indiana's accounts receivable program qualifies for sale accounting because it
meets the conditions specified in Statement of Financial Accounting Standards
(SFAS) No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." In the agreement, all transferred assets have
been isolated from the transferor and put presumptively beyond the reach of the
transferor and its creditors, even in bankruptcy or other receivership. Northern
Indiana does not retain any interest in the receivables under these programs.
OTHER INFORMATION
Bargaining Unit Contract
On May 31, 2004, the contract with Northern Indiana's bargaining unit employees
expires. Discussions between Northern Indiana and bargaining unit's union
representatives are ongoing.
RESULTS AND DISCUSSION OF SEGMENT OPERATIONS
Presentation of Segment Information
Northern Indiana's operations are divided into three primary business segments:
Gas Distribution Operations, Electric Operations and Other Operations. The Other
Operations segment includes the results of NRC, a wholly-owned subsidiary of
Northern Indiana, whose sole activity is to purchase accounts receivable from
Northern Indiana and sell these accounts to a commercial paper conduit, within
the limits of the agreement between NRC and the conduit. NRC commenced
operations on December 30, 2003.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS
Three Months Ended March 31, (in millions) 2004 2003
- ------------------------------------------ ---- ----
NET REVENUES
Sales revenues $ 395.8 $ 478.8
Less: Cost of gas sold 302.5 373.3
---------- ----------
Net Sales Revenues 93.3 105.5
Transportation Revenues 19.7 20.3
---------- ----------
Net Revenues 113.0 125.8
---------- ----------
OPERATING EXPENSES
Operation and maintenance 31.3 28.0
Depreciation and amortization 21.4 20.6
Other taxes 10.4 10.9
---------- ----------
Total Operating Expenses 63.1 59.5
---------- ----------
Operating Income $ 49.9 $ 66.3
========== ==========
REVENUES ($ IN MILLIONS)
Residential 278.3 309.4
Commercial 92.1 118.2
Industrial 49.8 47.8
Transportation 19.7 20.3
Deferred Gas Costs (32.9) (16.4)
Other 8.5 19.8
---------- ----------
Total 415.5 499.1
---------- ----------
SALES AND TRANSPORTATION (MMDTH)
Residential Sales 28.7 30.8
Commercial Sales 10.5 13.0
Industrial Sales 4.8 5.1
Transportation 48.4 42.2
Other -- 0.9
---------- ----------
Total 92.4 92.0
---------- ----------
HEATING DEGREE DAYS 3,189 3,361
NORMAL HEATING DEGREE DAYS 3,156 3,124
% COLDER (WARMER) THAN NORMAL 1% 8%
CUSTOMERS
Residential 602,778 598,568
Commercial 47,412 47,603
Industrial 3,121 3,241
Transportation 50,064 48,848
Other 11 14
---------- ----------
TOTAL 703,386 698,274
---------- ----------
Northern Indiana's natural gas distribution operations serve approximately
703,000 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 with over 71% of annual
residential and commercial throughput affected by seasonality. As a result,
segment operating income is higher in the first and fourth quarters reflecting
the heating demand during the winter season.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS (CONTINUED)
Regulatory Matters
On August 11, 1999, the Indiana Utility Regulatory Commission (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 for 2002 on August 29, 2002
(GCA5). The IURC approved implementation of interim rates, subject to refund,
effective November 1, 2002. Testimony was filed indicating that some gas costs,
for the month of March 2003, should not be recovered. On September 10, 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. Northern Indiana made its annual filing for
2003 on August 26, 2003 (GCA6). The IURC approved implementation of these
interim rates subject to refund, effective November 1, 2003. The parties in the
cases have raised concerns regarding gas cost recovery similar to those
addressed in March 2003. While Northern Indiana pursues settlement of the issues
an estimated refund liability was recognized in the first quarter of 2004.
Environmental Matters
In January of 2004 Northern Indiana signed a multi-site Voluntary Remediation
Program Order addressing 13 manufactured gas plant sites with the Indiana
Department of Environmental Management. Previously Northern Indiana together
with other potentially responsible parties had entered into similar agreements
with the Indiana Department of Environmental Management for 11 additional sites.
Those agreements require Northern Indiana to investigate and to the extent
necessary clean up the sites.
Weather
In general, Northern Indiana calculates the weather related revenue variance
based on changing customer demand driven by weather variance from normal heating
degree-days. Normal is evaluated using heating degree days across the Northern
Indiana's distribution region. The temperature base for measuring heating degree
days (i.e. the estimated average daily temperature at which heating load begins)
is 65 degrees.
For the first quarter of 2004, weather was 1% colder than normal and 5% warmer
than the first quarter 2003.
Throughput
Northern Indiana sold and transported 92.4 million dekatherms (MMDth) for the
first quarter 2004, as compared to 92.0 million MMDth from the same period last
year. The increase in MMDth's as compared with the year ago period was mainly
from higher low margin transportation throughput.
Net Revenues
Net revenues for the three months ended March 31, 2004 were $113.0 million, a
decrease of $12.8 million from the same period in 2003. The decrease in net
revenues was primarily a result of reduced natural gas sales and deliveries due
to warmer weather during the first quarter 2004 compared with the same period in
2003 amounting to $4.9 million and a decrease in revenue due to lower
residential and commercial non-heating demand. In addition, non-traditional
revenues were down $2.3 million.
Operating Income
For the first quarter of 2004, operating income was $49.9 million, a decrease of
$16.4 million from the same period in 2003. The decrease was mainly attributable
to lower net revenues of $12.8 million discussed above, $0.9 million Gas
Operations' portion of redemption premium from the early extinguishment of
certain medium-term notes and $0.8 million increase in depreciation and
amortization expenses due to plant additions.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS
Three Months Ended March 31, (in millions) 2004 2003
- ------------------------------------------ ---- ----
NET REVENUES
Sales Revenues $ 260.9 $ 262.8
Less: Cost of sales 81.4 93.3
---------- ----------
Net Revenues 179.5 169.5
---------- ----------
OPERATING EXPENSES
Operation and maintenance 60.3 57.5
Depreciation and amortization 44.1 43.7
Other taxes 16.3 15.7
---------- ----------
Total Operating Expenses 120.7 116.9
---------- ----------
Operating Income $ 58.8 $ 52.6
========== ==========
REVENUES ($ IN MILLIONS)
Residential 71.2 72.2
Commercial 70.4 66.7
Industrial 101.3 97.9
Wholesale 11.4 19.6
Other 6.6 6.4
---------- ----------
Total 260.9 262.8
---------- ----------
SALES (GIGAWATT HOURS)
Residential 754.5 789.6
Commercial 860.2 851.5
Industrial 2,338.1 2,273.5
Wholesale 269.9 541.9
Other 32.4 33.7
---------- ----------
Total 4,255.1 4,490.2
---------- ----------
CUSTOMERS
Residential 388,520 384,991
Commercial 49,394 48,423
Industrial 2,531 2,570
Wholesale 24 26
Other 787 798
---------- ----------
Total 441,256 436,808
---------- ----------
Northern Indiana generates and distributes electricity to approximately 441,000
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
cooling demand during the summer season.
Market Conditions
The regulatory frameworks applicable to Electric Operations continue to be
affected by fundamental changes, that will impact Electric Operations' structure
and profitability. Notwithstanding those changes, competition within the
industry will create opportunities to compete for new customers and revenues.
Management has taken steps to improve operating efficiencies in this changing
environment and improve the transmission interconnections with neighboring
electric utilities.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS (CONTINUED)
Regulatory Matters
During 2002, Northern Indiana settled matters related to an electric rate
review. On September 23, 2002, the IURC issued an order adopting most aspects of
the settlement. The order approving the settlement provides that electric
customers of Northern Indiana will receive bill credits of approximately $55.1
million each year, for a cumulative total of $225 million, for the minimum 49
month period, beginning on July 1, 2002. The order also provides that 60% of any
future earnings beyond a specified cap will be retained by Northern Indiana.
Credits amounting to $13.1 million and $13.5 million were recognized for
electric customers for the first quarters of 2004 and 2003, respectively. 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. The Citizens Action Coalition of Indiana and the fourteen
residential customers filed a petition for transfer to the Supreme Court of
Indiana; however, on March 19, 2004, the Supreme Court of Indiana denied
transfer. As a result of this denial of transfer, the settlement is no longer
subject to judicial review.
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). Northern Indiana transferred functional control of its electric
transmission assets to the ITC and MISO on October 1, 2003. As part of Northern
Indiana's use of MISO's transmission service, Northern Indiana will incur new
categories of transmission charges based upon MISO's Federal Energy Regulatory
Commission (FERC)-approved tariff. One of the new categories of charges,
Schedule 10, relates to the payment of administrative charges to MISO for its
continuing management and operations of the transmission system. Northern
Indiana filed a petition on September 30, 2003, with the IURC seeking approval
to establish accounting treatment for the deferral of the Schedule 10 charges
from MISO. An IURC hearing was held on March 15, 2004, with final resolution
anticipated during the second quarter 2004.
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 MMI proposes non-discriminatory transmission service,
reliable grid operation, and the purchase and sale of electric energy in a
competitive, 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. On March 31, 2004, MISO submitted a revised energy
markets tariff to the FERC for approval. As part of the revised filings, MISO
proposes an initial operation date of December 1, 2004. Northern Indiana is
actively pursuing a role in the MMI. At the current time, management believes
that the MMI will change the manner in which Northern Indiana conducts its
electric business; however, at this time management cannot determine the impact
the MMI will have on Northern Indiana.
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. This negotiated cap agreement is
subject to continuing negotiations. A group of industrial customers challenged
the manner in which Northern Indiana 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 the full costs of the settlement. As a result of the
settlement, the industrial customers challenge was withdrawn and dismissed in
January 2004. In addition, as a result of the settlement, Northern Indiana has
sought and received approval by the IURC to reduce the charges under the
interruptible sales tariff. This reduction will remain in effect until the Dean
H. Mitchell Generating Station (Mitchell Station) has been returned to service.
Currently, Northern Indiana is reviewing options to meet the electric needs of
its customers. This review includes an assessment of Northern Indiana's oldest
generating units and various options regarding the return to service of the
Mitchell Station, constructed in the early 1950's, in the second half of 2004.
Northern Indiana has requested proposals for outside companies to provide power
under varying terms and conditions. These proposals are being evaluated. In
February 2004, the City of Gary announced an interest to acquire the land on
which the Mitchell Station is located for economic development, including a
proposal to increase the length of the runways at the Gary
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS (CONTINUED)
International Airport. Northern Indiana had an initial discussion with the City
of Gary regarding the proposal to acquire the land. On May 7, 2004, the City of
Gary filed a petition with the IURC seeking valuation of the Mitchell Station
and determination of the terms and conditions under which the City of Gary
would acquire the Mitchell Station. Northern Indiana will participate in the
IURC proceedings arising from that filing.
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 is permitted 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). The IURC order was
appealed to the Indiana Court of Appeals by the Citizens Action Coalition of
Indiana, where it was upheld by the Court on March 9, 2004. The Citizens Action
Coalition of Indiana failed to take any action to continue the appeal of this
case and the Court's decision is now final. Under the Commission's November 26,
2002 order, Northern Indiana is permitted to 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, ECR-1, in February 2003 for capital expenditures
of $58.4 million. On April 30, 2003, the IURC issued an order approving the ECRM
filing, providing for a return on the capital investment through increased rates
beginning with the May 2003 customer bills. Through March 31, 2004 the ECRM
revenues amounted to $8.2 million. On August 1, 2003, Northern Indiana filed
ECR-2 for capital expenditures through June 30, 2003, of $120.0 million. This
petition was approved by the IURC on October 1, 2003. The initial filing of the
EERM was filed with the most recent semi-annual filing of the ECT in February
2004, which included a filing of the ECR-3 for capital expenditures through
December 31, 2003, of $194.1 million, and an EERM amount of $1.9 million. On
March 24, 2004, the IURC approved Northern Indiana's February 2004 filing for
ECR-3 and the initial filing of the EERM. Over the timeframe required to meet
the environmental standards, Northern Indiana anticipates a total capital
investment amounting to approximately $274.2 million. On February 4, 2004, the
IURC approved Northern Indiana's latest compliance plan with the estimate of
$274.2 million.
Environmental Matters
Northern Indiana is a potentially responsible party under Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) and similar State
laws at two waste disposal sites and shares in the cost of their cleanup with
other potentially responsible parties. At one site, investigations are ongoing
and final costs of clean up have not yet been determined. At the second site,
Northern Indiana has entered into U. S. Environmental Protection Agency
Administrative Orders on Consent to perform an interim action that includes
providing a municipal water supply system for approximately 275 homes. Northern
Indiana has also agreed to conduct a Remedial Investigation and Feasibility
Study in the vicinity of the third party, state-permitted landfill where
Northern Indiana contracted for fly ash disposal.
Sales
Electric sales for the first quarter 2004 were 4,255.1 gwh, a decrease of 235.1
gwh compared to the 2003 period, as a result of decreased wholesale transaction
sales and a slight decrease in residential sales offset in part by an
improvement in industrial and commercial sales. Commercial sales improved due to
an increase in the number of customers and higher usage, while industrial sales
increased due to increased demand from the steel industry.
Net Revenues
In first quarter 2004, electric net revenues of $179.5 million increased by
$10.0 million from the comparable 2003 period. The increase was primarily a
result of customer settlement obligations that reduced net revenues in the 2003
period.
Operating Income
Operating income for the first quarter 2004 was $58.8 million, an increase of
$6.2 million from the same period in 2003. The increase was primarily due to the
changes in net revenue mentioned above partially offset by a $3.3 million
expense in operations, representing Electric Operations' portion of the
redemption premium from the early extinguishment of certain medium-term notes at
Northern Indiana.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
OTHER OPERATIONS
Three Months Ended March 31, (in millions) 2004 2003
- ------------------------------------------ ---- ----
Net Revenues -- --
Total Operating Expenses 0.2 --
---------- ----------
Operating Loss $ (0.2) $ --
========== ==========
The Other Operations segment includes the results of NRC, a wholly-owned
subsidiary of Northern Indiana, whose sole activity is to purchase accounts
receivable from Northern Indiana and sell these accounts to a commercial paper
conduit, within the limits of the agreement between NRC and the conduit. NRC
commenced operations on December 30, 2003.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NORTHERN INDIANA PUBLIC SERVICE COMPANY
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 and its consolidated subsidiaries would be made known to them by others
within those entities.
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.
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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
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 (filed
herewith).
(32.2) Certification of William M. O'Malley, Principal Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the first quarter 2004:
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Northern Indiana Public Service Company
-----------------------------------------
(Registrant)
Date: May 7, 2004 By: /s/ Jeffrey W. Grossman
-----------------------------------------
Jeffrey W. Grossman
Vice President
(Duly Authorized Officer)
24