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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 JUNE 30, 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 August 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 JUNE 30, 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................................. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 27
Item 4. Controls and Procedures......................................................... 27
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 28
Item 2. Changes in Securities and Use of Proceeds....................................... 28
Item 3. Defaults Upon Senior Securities................................................. 28
Item 4. Submission of Matters to a Vote of Security Holders............................. 28
Item 5. Other Information............................................................... 28
Item 6. Exhibits and Reports on Form 8-K................................................ 28
Signature.................................................................................. 29
2
PART I
ITEM 1. FINANCIAL STATEMENTS
NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
(in millions) 2004 2003 2004 2003
- ------------- ---- ---- ---- ----
OPERATING REVENUES
Gas $ 149.1 $ 141.9 $ 563.5 $ 634.3
Gas-Affiliated 1.4 1.4 2.5 8.1
Electric 263.9 255.9 519.6 511.8
Electric-Affiliated 3.5 3.5 8.7 10.4
------- ------- ------- -------
Gross Operating Revenues 417.9 402.7 1.094.3 1.164.6
------- ------- ------- -------
COST OF ENERGY
Gas costs 106.2 92.4 408.7 465.1
Gas costs-Affiliated 0.0 0.2 - 0.8
Fuel for electric generation 54.0 53.1 108.4 102.8
Fuel for electric generation-Affiliated 1.4 0.8 2.7 1.6
Power purchased 22.1 19.0 40.7 45.0
Power purchased-Affiliated 7.4 10.8 14.5 27.6
------- ------- ------- -------
Cost of sales 191.1 176.3 575.0 642.9
------- ------- ------- -------
Total Net Revenues 226.8 226.4 519.3 521.7
------- ------- ------- -------
OPERATING EXPENSES
Operation 70.6 61.4 145.2 128.6
Maintenance 17.8 16.5 35.0 34.8
Depreciation and amortization 66.1 64.6 131.6 128.9
Other taxes 2.5 21.5 29.2 48.1
------- ------- ------- -------
Total Operating Expenses 157.0 164.0 341.0 340.4
------- ------- ------- -------
UTILITY OPERATING INCOME BEFORE UTILITY
INCOME TAXES 69.8 62.4 178.3 181.3
------- ------- ------- -------
UTILITY INCOME TAXES 24.2 18.9 63.6 61.3
------- ------- ------- -------
UTILITY OPERATING INCOME 45.6 43.5 114.7 120.0
------- ------- ------- -------
OTHER INCOME (DEDUCTIONS) (0.3) (0.2) 0.5 -
------- ------- ------- -------
INTEREST
Interest on long-term debt 6.7 10.9 14.7 22.6
Other interest 1.5 0.8 2.2 0.8
Other interest-Affiliated 1.6 2.0 3.7 3.7
Amortization of premium, reacquisition premium,
discount and expense on debt, net 0.8 1.0 1.8 2.0
------- ------- ------- -------
Total Interest 10.6 14.7 22.4 29.1
------- ------- ------- -------
NET INCOME $ 35.3 $ 28.6 $ 92.8 $ 90.9
======= ======= ======= =======
DIVIDEND REQUIREMENTS ON PREFERRED STOCKS $ 1.1 $ 1.2 $ 2.2 $ 2.3
------- ------- ------- -------
BALANCE AVAILABLE FOR COMMON SHARES $ 34.2 $ 27.4 $ 90.6 $ 88.6
------- ------- ------- -------
COMMON DIVIDENDS DECLARED $ - $ 65.5 $ - $ 65.5
------- ------- ------- -------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31,
(in millions) 2004 2003
- ----------------- ---- ----
(unaudited)
ASSETS
UTILITY PLANT, at original cost
Electric $ 4,810.8 $ 4,774.1
Gas 1,510.6 1,494.0
Common 364.9 368.0
--------- ---------
Total Utility Plant 6,686.3 6,636.1
--------- ---------
Less - Accumulated provision for depreciation
and amortization 3,134.9 3,082.7
--------- ---------
Net Utility Plant 3,551.4 3,553.4
--------- ---------
OTHER PROPERTY AND INVESTMENTS 2.4 2.4
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents 2.4 0.3
Restricted cash 2.9 2.6
Accounts receivable (less reserve of $11.6 and $9.6, respectively) 62.2 69.7
Unbilled revenue (less reserve of $0.2 and $0.7, respectively) 31.4 74.2
Materials and supplies, at average cost 44.7 43.8
Electric production fuel, at average cost 30.5 29.0
Natural gas in storage, at last-in, first-out cost 52.8 131.8
Price risk management assets 1.6 4.6
Regulatory assets 15.5 12.4
Prepayments and other 45.7 41.0
--------- ---------
Total Current Assets 289.7 409.4
--------- ---------
OTHER ASSETS:
Regulatory assets 202.3 210.4
Intangible assets 25.2 25.2
Deferred charges and other 5.4 6.6
--------- ---------
Total Other Assets 232.9 242.2
--------- ---------
TOTAL ASSETS $ 4,076.4 $ 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
JUNE 30, December 31,
(in millions) 2004 2003
- ------------- ----------- ------------
(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity $ 1,060.6 $ 971.8
Preferred Stocks--
Series without mandatory redemption provisions 81.1 81.1
Series with mandatory redemption provisions - -
Long-term debt, excluding amounts due within one year 531.8 682.0
--------- ----------
Total Capitalization 1,673.5 1,734.9
--------- ----------
CURRENT LIABILITIES
Current portion of long-term debt 71.3 32.0
Short term borrowings-Affiliated 464.8 578.4
Accounts payable 132.4 140.1
Accounts payable-Affiliated 13.6 19.9
Dividends declared on preferred stocks 1.1 1.1
Customer deposits 53.1 51.1
Taxes accrued 104.4 58.9
Interest accrued 6.5 6.9
Overrecovered fuel costs 5.4 1.1
Overrecovered gas costs 19.1 25.8
Accrued employment costs 22.7 21.4
Price risk management liabilities 1.0 0.5
Accrued liability for postretirement and pension benefits 23.0 13.6
Other accruals 26.0 55.9
--------- ----------
Total Current Liabilities 944.4 1,006.7
--------- ----------
OTHER LIABILITIES AND DEFERRED CREDITS
Deferred income taxes 446.3 472.2
Deferred investment tax credits 53.7 57.2
Deferred credits 19.0 16.9
Accrued liability for postretirement and pension benefits 227.2 224.2
Preferred stock liabilities with mandatory redemption provisions 2.4 2.4
Regulatory liabilities and other removal costs 687.3 667.2
Other noncurrent liabilities 22.6 25.7
--------- ----------
Total Other 1,458.5 1,465.8
--------- ----------
COMMITMENTS AND CONTINGENCIES - -
--------- ----------
TOTAL CAPITALIZATION AND LIABILITIES $ 4,076.4 $ 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)
Six Months Ended June 30, (in millions) 2004 2003
- --------------------------------------- ---- ----
OPERATING ACTIVITIES
Net Income $ 92.8 $ 90.9
Adjustments to reconcile net income to net cash:
Depreciation and amortization 131.6 128.9
Net changes in price risk management activities 1.8 1.0
Deferred income taxes and investment tax credits (40.8) (43.1)
Amortization of discount/premium on debt 1.9 2.0
Other 0.6 1.0
Changes in assets and liabilities:
Restricted cash (0.3) -
Accounts receivable and unbilled revenue 50.9 12.2
Inventories 76.6 (49.2)
Accounts payable (7.8) (43.5)
Customer deposits 2.0 6.0
Taxes accrued 43.2 20.1
Interest accrued (0.4) (0.2)
(Under) Overrecovered gas and fuel costs (2.4) 56.5
Prepayments and other current assets 9.1 (4.4)
Regulatory assets/liabilities 4.6 (2.8)
Postretirement and postemployment benefits 12.4 22.2
Deferred credits 2.1 (41.8)
Other accruals (28.6) (23.2)
Deferred charges and other noncurrent assets 1.2 0.6
Other noncurrent liabilities (8.0) 54.9
------- -------
Net Cash from Operating Activities 342.5 188.1
------- -------
INVESTING ACTIVITIES
Construction expenditures (114.0) (131.1)
Proceeds from disposition of assets 1.6 -
------- -------
Net Investing Activities (112.4) (131.1)
------- -------
FINANCING ACTIVITIES
Retirement of long-term debt (111.1) (54.0)
Change in short-term debt (114.6) 66.6
Dividends paid - common shares - (65.5)
Dividends paid - preferred shares (2.3) (2.2)
------- -------
Net Financing Activities (228.0) (55.1)
------- -------
Increase (decrease) in cash and cash equivalents 2.1 1.9
Cash and cash equivalents at beginning of period 0.3 4.4
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2.4 $ 6.3
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest 21.5 26.4
Interest capitalized 0.6 1.0
Cash paid for income taxes 66.0 87.0
------- -------
6
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
(in millions, net of tax) 2004 2003 2004 2003
- ------------------------- ------ ------ ------ ------
Net Income $ 35.3 $ 28.6 $ 92.8 $ 90.9
Other comprehensive loss, net of tax
Net unrealized losses on cash flow hedges (0.5) (0.8) (1.7) (1.0)
------ ------ ------ ------
Total Comprehensive Income $ 34.8 $ 27.8 $ 91.1 $ 89.9
====== ====== ====== ======
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 (CONTINUED) (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 (GCA) 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 GCA 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's GCA4 annual demand filing. covering the period November 1,
2002 through October 31, 2003, was made on August 29, 2002 and approved by the
IURC for implementation as interim rates, subject to refund effective November
1, 2002, The Indiana Office of Utility Consumer Counselor (OUCC) filed testimony
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's GCA5 annual demand filing. covering the period November 1,
2003 through October 31, 2004, was made on August 26, 2003 and approved by the
IURC for implementation as interim rates, subject to refund effective November
1, 2003. On June 8, 2004, Northern Indiana and the OUCC entered into a joint
stipulation and agreement resolving all issues in GCA5. A hearing was held
before the IURC on July 18, 2004 in support of the settlement. Among the
settlement agreement's provisions. Northern Indiana has agreed to return $3.8
million to its customers over a twelve-month period following IURC approval.
This refund is the resolution of issues similar to those from March 2003. An
additional provision of the agreement was to extend the current Alternative
Regulatory Procedure (ARP), including Northern Indiana's gas cost incentive
mechanism, from the current expiration date of December 31, 2004 to March 31,
2005. An order approving the settlement is expected in the third quarter of
2004. Negotiations are in progress to extend the ARP past March 31, 2005.
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)-
8
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
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. On July 21,
2004 the IURC issued an order which denied Northern Indiana's request for
deferred accounting treatment for the MISO Schedule 10 administrative fees.
Northern Indiana has taken a charge during the second quarter 2004 in the amount
of $2.1 million related to the MISO administrative charges deferred through June
30, 2004. The MISO Schedule 10 administrative fees are currently estimated to be
approximately $2.8 million annually. Northern Indiana is currently evaluating
the IURC order to determine whether an appeal will be filed.
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 has filed detailed
tariff information with FERC, with a planned initial operation date of March 1,
2005. 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) returns 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, which includes the Mitchell Station. Northern Indiana has
requested proposals from 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 International Airport. 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. The procedural schedule for the City of Gary has
been set, and Northern Indiana has filed its Prepared Direct Testimony, stating
that Northern Indiana has no current plans to restart the Mitchell Station.
On May 25, 2004 Northern Indiana filed a petition for approval of a Purchased
Power and Transmission Tracker Mechanism to recover the cost of purchased power
to meet Northern Indiana's retail electric load requirements and charges imposed
on Northern Indiana by MISO and Grid America. Northern Indiana's direct
testimony is due to be filed by August 6, 2004. The hearing is set for the
fourth quarter of 2004.
On July 9, 2004 a verified joint petition was filed by PSI Energy, Inc.,
Indianapolis Power & Light Company. Northern Indiana and Vectren Energy Delivery
of Indiana, Inc., seeking approval of certain changes in operations that are
likely to result from the MISO's implementation of energy markets, and for
determination of the manner and timing of recovery of costs resulting from the
MISO's implementation of standard market design mechanisms, such as the MISO's
proposed real-time and day-ahead energy markets.
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
9
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
depreciation expenses once the environmental facilities become operational
through an Environmental Expense Recovery Mechanism (EERM). 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's latest ECRM filing (ECR-3) was for capital expenditures of
$194.1 million, and was made simultaneous with its first EERM filing (EER-1) for
$1.9 million. 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. The ECRM
revenues amounted to $7.5 million for the six months ended June 30, 2004, and
$12.6 million from inception to date, while EERM revenues were $0.3 for the
first half of 2004.
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.
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 June 30, 2004, 161 employees have been
terminated. At June 30, 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 second quarter and six months ended
June 30, 2004 and June 30, 2003 affecting accumulated other comprehensive
income, with respect to cash flow hedges included the following:
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
(in millions, net of tax) 2004 2003 2004 2003
----- ----- ----- -----
Unrealized gains on derivatives qualifying as cash flow
hedges at the beginning of the period $ 1.4 $ 2.1 $ 2.6 $ 2.3
Unrealized hedging gains (losses) arising during the
period of derivatives qualifying as cash flow hedges - (1.0) 0.6 (2.2)
Reclassification adjustment for net loss (gain) included
in net income (0.5) 0.2 (2.3) 1.2
----- ----- ----- -----
Net unrealized gains on derivatives qualifying as cash
flow hedges at the end of the period $ 0.9 $ 1.3 $ 0.9 $ 1.3
===== ===== ===== =====
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 $1.6 million and $4.6 million
at June 30, 2004 and December 31, 2003, respectively, which were included in
"Current Assets." Price risk management liabilities were $1.0 million and $0.5
million at June 30, 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.
10
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
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 June 30, 2004 and December
31, 2003, of price risk management liabilities associated with these programs.
During the second quarter 2004, no amounts were 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 second 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 $0.7 million, net of tax.
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 46R). FIN 46R 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 46R 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 46R to the first quarter of 2004.
Northern Indiana adopted FIN 46R on January 1, 2004. The adoption of FIN 46R had
no impact on Northern Indiana's financial position or results of operations.
FASB STAFF POSITION NO. (FSP) NO. 106-2 - ACCOUNTING AND DISCLOSURE REQUIREMENTS
RELATED TO THE MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF
2003 (SUPERSEDES FSP 106-2 -- 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.
FSP 106-2 is effective for fiscal interims beginning after June 15, 2004.
Northern Indiana previously elected to defer accounting for the effects of this
pronouncement, as allowed by FSP 106-2, and will adopt FSP 106-2 in the third
quarter of 2004. Northern Indiana is currently evaluating the impact of FSP
106-2 and believes the impact will not be significant, since Northern Indiana
has a restrictive cap on its post age-65 drug coverage plans.
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.
11
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
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.
JUNE 30, December 31,
(in millions, net of tax) 2004 2003
- ------------------------------------------------ -------- ------------
Net unrealized gains on cash flow hedges $ 0.9 $ 2.6
Minimum pension liability adjustment (124.3) (124.3)
-------- --------
Total Accumulated Other Comprehensive Loss, net $ (123.4) $ (121.7)
======== ========
8. 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 $3.9 million and $8.2 million in allocated pension expenses. and $7.1
million and $5.1 million in other benefit expenses for the second quarter of
2004 and the second quarter of 2003, respectively. Northern Indiana recognized
$7.9 million and $16.3 million in allocated pension expenses, and $14.1 million
and $10.1 million in other benefit expenses for the first half of 2004 and the
first half of 2003, respectively.
The following disclosures are for the NiSource pension and postretirement
benefit plans, which include Northern Indiana employees. The following table
provides the components of the plans' net periodic benefits cost (benefit) for
second quarter and six months ended June 30, 2004 and June 30, 2003:
PENSION BENEFITS OTHER BENEFITS
------------------ -------------------
Three months ended June 30, (in millions) 2004 2003 2004 2003
- -------------------------------------------- ---- ---- ---- ----
NET PERIODIC COST
Service cost $ 4.3 $ 3.9 $ 0.9 $ 0.8
Interest cost 17.6 18.2 4.0 3.5
Expected return on assets (21.7) (19.4) - (0.1)
Amortization of transitional obligation - 1.3 2.5 2.6
Amortization of prior service cost 1.8 1.7 - -
Recognized actuarial (gain) loss 3.7 5.0 - (1.3)
----- ------ ----- -----
NET PERIODIC BENEFITS COST (BENEFIT) $ 5.7 $ 10.7 $ 7.4 $ 5.5
===== ====== ===== =====
PENSION BENEFITS OTHER BENEFITS
------------------- -------------------
Six months ended June 30, (in millions) 2004 2003 2004 2003
- ----------------------------------------- ----- ---- ---- ----
NET PERIODIC COST
Service cost $ 8.6 $ 7.8 $ 1.9 $ 1.6
Interest cost 35.2 36.3 8.0 6.9
Expected return on assets (43.5) (38.9) (0.1) (0.1)
Amortization of transitional obligation - 2.7 5.1 5.2
Amortization of prior service cost 3.7 3.4 - -
Recognized actuarial (gain) loss 7.5 10.1 - (2.6)
------ ------ ------ ------
NET PERIODIC BENEFITS COST (BENEFIT) $ 11.5 $ 21.4 $ 14.9 $ 11.0
====== ====== ====== ======
12
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
9. 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 JUNE 30, 2004
Operating revenues 150.5 267.4 - 417.9
Utility operating income (loss) before utility income taxes (11.9) 82.0 (0.3) 69.8
FOR THE THREE MONTHS ENDED JUNE 30, 2003
Operating revenues 143.3 259.4 - 402.7
Utility operating income (loss) before utility income taxes (1.7) 64.1 - 62.4
----- ----- --- -----
($ in millions) GAS ELECTRIC OTHER TOTAL
- ---------------------- --- -------- ----- -----
FOR THE SIX MONTHS ENDED JUNE 30, 2004
Operating revenues 566.0 528.3 - 1,094.3
Utility operating income (loss) before utility income taxes 38.0 140.8 (0.5) 178.3
FOR THE SIX MONTHS ENDED JUNE 30, 2003
Operating revenues 642.4 522.2 - 1,164.6
Utility operating income before utility income taxes 64.6 116.7 - 181.3
----- ----- ---- -------
13
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 JUNE 30, 2004
Net Income
Northern Indiana reported net income of $35.3 million for the three months ended
June 30, 2004, an increase of $6.7 million as compared to the $28.6 million
recorded in the 2003 period.
Net Revenues
Total consolidated net revenues (operating revenues less cost of sales) for the
three months ended June 30, 2004, were $226.8 million, virtually unchanged from
the same period last year. Gas net revenues for the second quarter 2004 were
$44.3 million, a decrease of $6.4 million from the same period in 2003. The
decrease in gas net revenues was primarily a result of warmer weather in 2004
compared with the same period in 2003 amounting to $2.7 million and lower
non-traditional revenues of $3.8 million. In second quarter 2004, electric net
revenues of $182.5 million increased by $6.8 million from the comparable 2003
period. The increase was primarily a result of increased customer usage and
customer count of $9.0 million and favorable weather during the quarter,
slightly offset by lower wholesale power revenue.
Expenses
Operating expenses for the second quarter 2004 were $157.0 million, a decrease
of $7.0 million from the 2003 period. The decrease was primarily due to the
favorable net impact of a $22.7 million reduction in a property tax accrual and
a $5.0 million increase in a sales tax accrual, reduced by an increase in
operation and maintenance expenses of $10.5 million for the second quarter 2004.
The increase in operation and maintenance expenses is a result of higher
employee and administrative expenses of $10.8 million, increased environmental
costs of $1.4 million, as well as a $2.1 million charge for Midwest Independent
System Operator (MISO) administrative fees, reduced by a reversal of certain
claims reserves upon settlement of $5.7 million. In addition, depreciation and
amortization expense increased $1.5 million mainly due to plant additions.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Utility Income Taxes
Utility income tax expenses for the second quarter 2004 were $24.2 million,
compared to $18.9 million in 2003, due to increased pre-tax income.
Interest
Interest expense for the second quarter 2004 was $10.6 million, a decrease of
$4.1 million compared to the 2003 period, primarily due to a reduction in
long-term debt and lower average long-term interest rates.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004
Net Income
Northern Indiana reported net income of $92.8 million for the six months ended
June 30, 2004, an increase of $1.9 million as compared to the $90.9 million
recorded in the 2003 period.
Net Revenues
Total consolidated net revenues (operating revenues less cost of sales) for the
six months ended June 30, 2004, were $519.3 million, a $2.4 million decrease
from the same period last year. The decrease in net revenues was primarily a
result of reduced gas sales due to warmer weather during the second quarter 2004
compared with the same period in 2003 amounting to $7.6 million, and a reduction
in non-traditional gas revenues of $6.0 million. This decrease was partially
offset by increased electric usage and customer count amounting to $8.2 million.
favorable weather, and $6.8 million in environmental cost tracker revenues for
Electric Operations. In addition, Electric Operations was affected by regulatory
items that reduced net revenues by $8.5 million in the comparable 2003 period.
These increases in Electric Operations revenues for the first half of 2004 were
partially offset by increased regulatory revenue credits of $4.6 million and
reduced wholesale revenues of $1.6 million.
Expenses
Operating expenses for the six months ended June 30, 2004 were $341.0 million.
an increase of $0.6 million over the 2003 period. Although the six-month results
were relatively flat to last year, operation and maintenance expenses were up
$16.8 million, mainly due to increased employee and administrative expenses of
$11.2 million, higher environmental costs of $2.3 million, a $4.2 million
expense related to a redemption premium from the early extinguishment of certain
medium-term notes, and a $2.1 million charge for MISO administrative fees
deferred through June 30, 2004. These increased expenses were partially offset
by a $5.7 million reversal of certain claims reserves upon settlement. In
addition, depreciation and amortization expense increased $2.7 million mainly
due to plant additions. Offsetting these increases was the favorable $17.7
million net impact of a $22.7 million reduction in property tax accrual and a
$5.0 million increase in sales tax accrual during the second quarter.
Utility Income Taxes
Utility income tax expenses for the six months ended June 30, 2004 were $63.6
million, compared to $61.3 million in 2003, due to increased pre-tax income.
Interest
Interest expense for the six months ended June 30, 2004 was $22.4 million, a
decrease of $6.7 million compared to the 2003 period, primarily due to a
reduction in long-term debt and lower average long-term interest rates.
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.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Net cash from operations for the six months ended June 30, 2004 was $342.5
million, an increase of $154.4 million from the comparable period in 2003,
mainly as a result of increased working capital. Cash flow from working capital
increased by $173.4 million, principally driven by decreased gas inventories,
and a decrease in accounts receivable and unbilled revenue as a result of the
timing of collections.
During July 2004. Northern Indiana redeemed $32.0 million of medium-term notes,
with an average interest rate of 6.53%.
During February 2004, Northern Indiana redeemed $111.1 million of its
medium-term notes with an average interest rate of 7.49%. 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 June 30, 2004,
Northern Indiana had $464.8 million of intercompany short-term borrowings
outstanding at an interest rate of 1.35%. 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 June 30, 2004, NRC had
sold $135.6 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 commodity price risk, including futures, forwards, options and swaps.
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 June 30,
2004, the outstanding borrowings totaled $464.8 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 $1.0 million and $2.2
million for the quarter and six months ended June 30, 2004, respectively.
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
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
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
At June 30, 2004, there have been no material changes in Northern Indiana's
purchase commitments and operating leases obligations from those reported in
Northern Indiana's Form 10-K for the year ended December 31, 2003.
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 the 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
Northern Indiana reached an agreement with its bargaining unit employees to
replace the contract agreements that expired May 31, 2004. The new agreements
are for five years, expiring May 31, 2009.
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.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
----------------------------------------------------
(in millions) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------
NET REVENUES
Sales revenues $ 140.7 $ 134.0 $ 536.5 $ 612.8
Less: Cost of gas sold 106.2 92.6 408.7 465.9
- --------------------------------------------------------------------------------------------------------------------
Net Sales Revenues 34.5 41.4 127.8 146.9
Transportation Revenues 9.8 9.3 29.5 29.6
- --------------------------------------------------------------------------------------------------------------------
Net Revenues 44.3 50.7 157.3 176.5
- --------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 29.3 25.0 60.6 53.0
Depreciation and amortization 21.7 21.0 43.1 41.6
Other taxes 5.2 6.4 15.6 17.3
- --------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 56.2 52.4 119.3 111.9
- --------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) $ (11.9) $ (1.7) $ 38.0 $ 64.6
====================================================================================================================
REVENUES ($ IN MILLIONS)
Residential 88.8 105.9 367.1 415.3
Commercial 30.5 35.9 122.6 154.1
Industrial 26.3 24.3 76.1 72.1
Transportation 9.8 9.4 29.5 29.7
Deferred Gas Costs (10.5) (39.5) (43.4) (55.9)
Other 5.6 7.3 14.1 27.1
- --------------------------------------------------------------------------------------------------------------------
Total 150.5 143.3 566.0 642.4
- --------------------------------------------------------------------------------------------------------------------
SALES AND TRANSPORTATION (MMDth)
Residential Sales 7.3 8.7 36.0 39.5
Commercial Sales 3.4 3.2 13.9 16.2
Industrial Sales 2.9 2.4 7.7 7.5
Transportation 35.7 32.1 84.1 74.3
Other 0.1 0.1 0.1 1.0
- --------------------------------------------------------------------------------------------------------------------
Total 49.4 46.5 141.8 138.5
- --------------------------------------------------------------------------------------------------------------------
HEATING DEGREE DAYS 596 732 3,785 4,093
NORMAL HEATING DEGREE DAYS 678 678 3,834 3,802
% COLDER (WARMER) THAN NORMAL (12%) 8% (1%) 8%
CUSTOMERS
Residential 594,859 594,195
Commercial 45,852 47,154
Industrial 3,031 3,221
Transportation 52,910 45,670
Other 12 14
- --------------------------------------------------------------------------------------------------------------------
Total 696,664 690,254
- --------------------------------------------------------------------------------------------------------------------
Northern Indiana's natural gas distribution operations serve approximately
697,000 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 72% 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.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS (CONTINUED)
Regulatory Matters
On August 11, 1999, the Indiana Utility Regulatory Commission (IURC) approved a
flexible gas cost adjustment (GCA) 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's GCA4 annual demand filing, covering the period November 1,
2002 through October 31, 2003, was made on August 29, 2002 and approved by the
IURC for implementation as interim rates, subject to refund effective November
1, 2002. The Indiana Office of Utility Consumer Counselor (OUCC) filed testimony
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's GCA5 annual demand filing, covering the period November 1,
2003 through October 31, 2004, was made on August 26, 2003 and approved by the
IURC for implementation as interim rates, subject to refund effective November
1, 2003. On June 8, 2004, Northern Indiana and the OUCC entered into a joint
stipulation and agreement resolving all issues in GCA5. A hearing was held
before the IURC on July 18, 2004 in support of the settlement. Among the
settlement agreement's provisions, Northern Indiana has agreed to return $3.8
million to its customers over a twelve-month period following IURC approval.
This refund is the resolution of issues similar to those from March 2003. An
additional provision of the agreement was to extend the current Alternative
Regulatory Procedure (ARP), including Northern Indiana's gas cost incentive
mechanism, from the current expiration date of December 31, 2004 to March 31,
2005. An order approving the settlement is expected in the third quarter of
2004. Negotiations are in progress to extend the ARP past March 31, 2005.
Environmental Matters
In January of 2004 Northern Indiana signed a multi-site Voluntary Remediation
Program Order addressing 13 former 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,
for which Northern Indiana is required to investigate, and to the extent
necessary, clean up.
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 second quarter of 2004, weather was 12% warmer than normal and 19%
warmer than the second quarter of 2003.
For the first six months of 2004, weather was 1% warmer than normal and 8%
warmer than the first six months of 2003.
Throughput
Northern Indiana sold and transported 49.4 million dekatherms (MMDth) for the
second quarter 2004, as compared to 46.5 million MMDth from the same period last
year. The increase in MMDth's was mainly due to increased transport throughput,
partially offset by reductions in residential usage.
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)
Total volumes sold and transported were 141.8 MDth for the first six months of
2004, an increase of 3.3 MDth from the same period in 2003, primarily due to
increased transportation, partially offset by reductions in residential and
commercial usage.
Net Revenues
Net revenues for the second quarter ended June 30, 2004 were $44.3 million, a
decrease of $6.4 million from the same period in 2003. The decrease in net
revenues was primarily a result of warmer weather in 2004 compared with the same
period in 2003 amounting to $2.7 million and lower non-traditional revenues of
$3.8 million.
Net revenues for the first six months of 2004 were $157.3 million, a decrease of
$19.2 million from the same period in 2003. The decrease in net revenues was
primarily a result of reductions in residential and commercial natural gas sales
due to warmer weather during the first half of 2004 compared with the same
period in 2003 amounting to $7.6 million and lower non-traditional revenues of
$6.0 million.
Operating Income
For the second quarter of 2004, operating loss was $11.9 million compared to a
loss of $1.7 million from the same period in 2003. The decrease was mainly
attributable to lower net revenues of $6.4 million discussed above, and a $4.3
million increase in operation and maintenance expenses. The increase in
operating expense was primarily due to higher employee and administrative
expenses of $6.0 million and increased environmental costs of $1.2 million,
reduced by a reversal of certain claims reserves upon settlement of $2.5
million. In addition, a $4.7 million reduction in property tax accrual was
offset by a $5.0 million increase in sales tax accrual during the second
quarter.
For the first six months of 2004, operating income was $38.0 million, a decrease
of $26.6 million from the same period in 2003. The decrease was mainly
attributable to lower net revenues of $19.2 million discussed above, and a $7.6
million increase in operation and maintenance expenses. Operating expenses
increased $8.7 million due to higher employee and administrative expenses of
$7.9 million, increased environmental costs of $2.1 million and $0.9 million due
to expense recorded in the first quarter related to Gas Operations' portion of
redemption premium from the early extinguishment of certain medium-term notes.
These increased expenses were partially offset by a reversal of certain claims
reserves upon settlement of $2.5 million. In addition, a $4.7 million reduction
in property tax accrual was offset by a $5.0 million increase in sales tax
accrual during the second quarter.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
- -------------------------------------------------------------------------------------------------------------------
(in millions) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------
NET REVENUES
Sales Revenues $ 267.4 $ 259.4 $ 528.3 $ 522.2
Less: Cost of sales 84.9 83.7 166.3 177.0
- -------------------------------------------------------------------------------------------------------------------
Net Revenues 182.5 175.7 362.0 345.2
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 58.8 52.9 119.1 110.4
Depreciation and amortization 44.4 43.6 88.5 87.3
Other taxes (2.7) 15.1 13.6 30.8
- -------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 100.5 111.6 221.2 228.5
- -------------------------------------------------------------------------------------------------------------------
Operating Income $ 82.0 $ 64.1 $ 140.8 $ 116.7
===================================================================================================================
REVENUES ($ IN MILLIONS)
Residential 66.7 62.4 137.9 134.6
Commercial 73.2 69.7 143.6 136.4
Industrial 102.5 93.4 203.8 191.3
Wholesale 11.4 25.8 22.8 45.4
Other 13.6 8.1 20.2 14.5
- -------------------------------------------------------------------------------------------------------------------
Total 267.4 259.4 528.3 522.2
- -------------------------------------------------------------------------------------------------------------------
SALES (GIGAWATT HOURS)
Residential 694.2 639.1 1,448.7 1,428.7
Commercial 899.3 859.2 1,759.5 1,710.7
Industrial 2,327.3 2,205.4 4,665.4 4,478.9
Wholesale 289.5 751.5 559.4 1,293.4
Other 33.8 27.5 66.2 61.2
- -------------------------------------------------------------------------------------------------------------------
Total 4,244.1 4,482.7 8,499.2 8,972.9
- -------------------------------------------------------------------------------------------------------------------
COOLING DEGREE DAYS 205 113 205 113
NORMAL COOLING DEGREE DAYS 227 224 227 224
% WARMER (COLDER) THAN NORMAL (10%) (50%) (10%) (50%)
CUSTOMERS
Residential 388,824 384,750
Commercial 49,635 48,694
Industrial 2,516 2,560
Wholesale 25 28
Other 776 796
- -------------------------------------------------------------------------------------------------------------------
Total 441,776 436,828
- -------------------------------------------------------------------------------------------------------------------
Northern Indiana generates and distributes electricity to approximately 442,000
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.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS (CONTINUED)
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.
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 $26.8 million and $24.3 million were recognized for
electric customers for the first half of 2004 and 2003, respectively.
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. On July 21, 2004 the IURC issued an order which denied Northern
Indiana's request for deferred accounting treatment for the MISO Schedule 10
administrative fees. Northern Indiana has taken a charge during the second
quarter 2004 in the amount of $2.1 million related to the MISO administrative
charges deferred through June 30, 2004. The MISO Schedule 10 administrative fees
are currently estimated to be approximately $2.8 million annually. Northern
Indiana is currently evaluating the IURC order to determine whether an appeal
will be filed.
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 has filed with FERC
detailed tariff information, with a planned initial operation date of March 1,
2005. 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) returns 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, which includes the Mitchell Station. Northern Indiana has
requested proposals from 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 International Airport. On May 7, 2004, the City of
Gary filed a petition with the IURC seeking
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS (CONTINUED)
valuation of the Mitchell Station and determination of the terms and conditions
under which the City of Gary would acquire the Mitchell Station. The procedural
schedule for the City of Gary has been set, and Northern Indiana has filed its
Prepared Direct Testimony, stating that Northern Indiana has no current plans to
restart the Mitchell Station.
On May 25, 2004 Northern Indiana filed a petition for approval of a Purchased
Power and Transmission Tracker Mechanism to recover the cost of purchased power
to meet Northern Indiana's retail electric load requirements and charges imposed
on Northern Indiana by MISO and Grid America. Northern Indiana's direct
testimony is due to be filed by August 6, 2004. The hearing is set for the
fourth quarter of 2004.
On July 9, 2004 a verified joint petition was filed by PSI Energy, Inc.,
Indianapolis Power & Light Company, Northern Indiana and Vectren Energy Delivery
of Indiana, Inc., seeking approval of certain changes in operations that are
likely to result from the MISO's implementation of energy markets, and for
determination of the manner and timing of recovery of costs resulting from the
MISO's implementation of standard market design mechanisms, such as the MISO's
proposed real-time and day-ahead energy markets.
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). 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's latest ECRM filing (ECR-3) was for capital expenditures of
$194.1 million, and was made simultaneous with its first EERM filing (EER-1) for
$1.9 million. 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. The ECRM
revenues amounted to $7.5 million for the six months ended June 30, 2004, and
$12.6 million from inception to date, while EERM revenues were $0.3 for the
first half of 2004.
Environmental Matters
AIR. On April 15, 2004, the U.S. Environmental Protection Agency (EPA) finalized
the 8-hour ozone non-attainment area designations. Following the designation of
the 8-hour ozone non-attainment areas, the Clean Air Act provides for a process
for promulgation of rules specifying a compliance level, compliance deadline,
and necessary controls to be implemented within designated areas over the next
few years. Resulting state rules could require additional reductions in nitrogen
oxide (NOx) emissions from coal-fired boilers including Northern Indiana's
electric generating stations. Until the rules are promulgated, the potential
impact on Northern Indiana is uncertain. Northern Indiana will continue to
closely monitor developments in this area.
On June 28 and 29, 2004, the EPA responded to the states' initial
recommendations for EPA designation of areas meeting and not meeting the
National Ambient Air Quality Standards (NAAQS) for fine particles. (Fine
particles are those less than or equal to 2.5 micrometers in diameter and are
also referred to as PM2.5.). The states will have 120 days to comment on or
dispute these recommendations. Once the designations are finalized, states will
need to initiate rulemaking that would seek emissions reductions to bring the
designated areas into attainment. Northern Indiana will continue to closely
monitor developments in this area.
On April 15, 2004, the EPA proposed amendments to its July 1999 Regional Haze
Rule that requires states to set periodic goals for improving visibility in 156
natural areas across the United States. These amendments would apply to the
provisions of the regional haze rule that require emissions controls known as
best available retrofit technology (BART) for BART eligible industrial
facilities emitting air pollutants that reduce visibility. Under the rule,
states would be required to develop rules that specify the stringency, type of
reductions, and controls that could be applied to BART eligible sources
consistent with EPA guidance. The BART eligible sources, including many of the
boilers at Northern Indiana's electric generating stations, have the potential
to emit more than 250 tons a year of visibility impairing emissions, and fall
within one of 26 categories, including utility and industrial boilers. States
must develop implementation rules by January 2008. Resulting rules could require
additional reductions of NOx, sulfur dioxide
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS (CONTINUED)
(SO2) and particulate matter from coal-fired boilers including Northern
Indiana's electric generating stations. Until the state rules are promulgated,
the potential impact on Northern Indiana is uncertain. Northern Indiana will
continue to closely monitor developments in this area.
The EPA Administrator signed a Supplemental Notice of Proposed Rulemaking on May
18, 2004. This rule requires that each state must submit to EPA a plan that
demonstrates it will meet its assigned statewide Clean Air Interstate Rule SO2
and NOx emissions budget. The final EPA rule is expected by late Fall, 2004.
Until the Federal and State rules are promulgated, the potential impact is
uncertain. Northern Indiana will continue to closely monitor developments in
this area.
In March 2004, the State of North Carolina filed a petition under Section 126 of
the Clean Air Act seeking EPA imposition of additional NOx and SO2 reductions
from electrical generating units in 13 states, including Indiana. The EPA is
addressing the issues raised by North Carolina in other current regulatory
initiatives that are being monitored by Northern Indiana.
WATER. On February 16, 2004, the EPA Administrator signed the Phase II Rule of
the Clean Water Act Section 316(b) which requires all large existing steam
electric generating stations to meet certain performance standards to reduce the
mortality of aquatic organisms at their cooling water intake structures. EPA has
delayed the publication of the rule to complete additional revisions. The rule
was reissued on July 9, 2004 and becomes effective on September 7, 2004. Under
this rule, plants will either have to demonstrate that the performance of their
existing fish protection systems meet the new standards or develop new systems
whose compliance is based on any of five options. Northern Indiana is assessing
the specific impacts of the final Phase II rule on its four (4) generating
stations.
REMEDIATION. Northern Indiana is a potentially responsible party under the
Comprehensive Environmental Response Compensation and Liability Act 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 EPA 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 second quarter 2004 were 4,244.1 gwh, a decrease of 238.6
gwh compared to the 2003 period, mainly as a result of decreased wholesale
transaction sales, which were offset in part by modest improvements in
residential, commercial and industrial sales. Residential and 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.
Electric sales for the first six months of 2004 was 8,499.2 gwh, a decrease of
473.7 gwh compared to the 2003 period, as a result of decreased wholesale
transaction sales, partially offset by increased residential, commercial, and
industrial sales.
Net Revenues
In second quarter 2004, electric net revenues of $182.5 million increased by
$6.8 million from the comparable 2003 period. The increase was primarily a
result of increased customer usage and customer count of $9.0 million and
favorable weather during the quarter, slightly offset by lower wholesale power
revenue.
In the first six months of 2004, electric net revenues were $362.0 million, an
increase of $16.8 million from the comparable 2003 period as a result of
increased customer usage and customer count of $8.2 million, favorable weather,
and $6.8 million in environmental cost tracker revenues. In addition, Electric
Operations was affected by regulatory items that reduced net revenues by $8.5
million in the comparable 2003 period. These increases in Electric Operations
revenues for the first half of 2004 were partially offset by increased
regulatory revenue credits of $4.6 million and reduced wholesale revenues of
$1.6 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 second quarter 2004 was $82.0 million, an increase of
$17.9 million from the same period in 2003. This increase for the comparative
quarters was primarily due to the increase in net revenue mentioned above and a
reduction of an accrual for estimated property tax expense. These increases to
operating income were partially offset by a $5.9 million increase in operation
and maintenance expenses due primarily to higher employee and administrative
expenses of $4.8 million and a $2.1 million charge taken for MISO administrative
fees. The increased expenses were partially reduced by a $3.2 million reversal
of certain claims reserves upon settlement.
Operating income for the first six months of 2004 was $140.8 million, an
increase of $24.1 million from the same period in 2003. The increase was
primarily due to increased net revenue mentioned above and a reduction of an
accrual for estimated property tax expense. Operation and maintenance expenses
increased $8.7 million due mainly to higher employee and administrative expenses
of $3.3 million, a $2.1 million charge taken for MISO administrative fees, and
an expense of $3.3 million recorded in the first quarter of 2004, representing
Electric Operations' portion of the redemption premium from the early
extinguishment of certain medium-term notes at Northern Indiana. These increased
expenses were reduced by a $3.2 million reversal of certain claims reserves upon
settlement.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
OTHER OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
(in millions) 2004 2003 2004 2003
- ------------- ---- ---- ---- ----
Net Revenues $ - $ - $ - -
------------------------------------------------
Total Operating Expenses 0.3 - 0.5 -
------------------------------------------------
Operating Loss $(0.3) $ - $ 0.5) $ -
================================================
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.
26
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.
27
PART II
ITEM 1. LEGAL PROCEEDINGS
NORTHERN INDIANA PUBLIC SERVICE COMPANY
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 11, 2004, the sole common stockholder of Northern Indiana unanimously
elected at the annual meeting, held via a written consent, Timothy A. Dehring,
Jerry L. Godwin, and Mark T. Maassel, as directors of the corporation until the
next annual meeting of the stockholders.
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.
(31.2) Certification of William M. O'Malley, Principal Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification of Mark T. Maassel, Principal Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(32.2) Certification of William M. O'Malley, Principal Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the second quarter 2004:
28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Northern Indiana Public Service Company
----------------------------------------------
(Registrant)
Date: August 6, 2004 By: /s/ Jeffrey W. Grossman
----------------------------------------------
Jeffrey W. Grossman
Vice President
(Duly Authorized Officer)
29