1
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, 2001
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 I-4125
NORTHERN INDIANA PUBLIC SERVICE COMPANY
---------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 35-0552990
------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
801 East 86th Avenue, Merrillville, IN 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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ].
As of August 1, 2001, 73,282,258 shares of the registrant's Common Shares, no
par value, were issued and outstanding, all held beneficially and of record by
NiSource Inc.
Documents Incorporated by Reference
None
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NORTHERN INDIANA PUBLIC SERVICE COMPANY
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 2001
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 Retained Earnings..................... 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......... 23
PART II OTHER INFORMATION
Item 1 Legal Proceedings.................................................. 24
Item 2. Changes in Securities and Use of Proceeds.......................... 24
Item 3. Defaults Upon Senior Securities.................................... 24
Item 4. Submission of Matters to a Vote of Security Holders................ 24
Item 5. Other Information.................................................. 24
Item 6. Exhibits and Reports on Form 8-K................................... 24
Signature.......................................................... 25
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PART I
ITEM 1. FINANCIAL STATEMENTS
NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED INCOME
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
( in millions) 2001 2000 2001 2000
- -------------- ---------- -------- ---------- -------
(unaudited) (unaudited)
NET REVENUES
Gas Distribution $ 112.0 $ 130.3 $ 595.3 $ 393.8
Electric 258.4 255.0 514.8 508.5
-------- -------- -------- --------
Gross Operating Revenues 370.4 385.3 1,110.1 902.3
-------- -------- -------- --------
COST OF ENERGY
Gas costs 68.6 84.7 426.3 246.0
Fuel for electric generation 59.1 56.5 110.7 114.0
Power purchased 8.0 7.0 24.6 15.2
-------- -------- -------- --------
Cost of Sales 135.7 148.2 561.6 375.2
-------- -------- -------- --------
Total Net Revenues 234.7 237.1 548.5 527.1
-------- -------- -------- --------
OPERATING EXPENSES
Operation 59.7 60.3 111.6 121.4
Maintenance 17.7 20.7 36.7 38.5
Depreciation and amortization 62.3 59.5 124.2 118.8
Other taxes 18.6 12.5 42.1 32.3
-------- -------- -------- --------
Total Operating Expenses 158.3 153.0 314.6 311.0
-------- -------- -------- --------
UTILITY OPERATING INCOME BEFORE UTILITY
INCOME TAXES 76.4 84.1 233.9 216.1
-------- -------- -------- --------
UTILITY INCOME TAXES 19.6 23.6 69.7 64.2
-------- -------- -------- --------
UTILITY OPERATING INCOME 56.8 60.5 164.2 151.9
-------- -------- -------- --------
OTHER INCOME (DEDUCTIONS) 0.3 1.3 2.1 1.8
-------- -------- -------- --------
INTEREST
Interest on long-term debt 14.6 16.3 29.2 33.5
Other Interest 4.1 1.5 9.9 2.3
Amortization of premium, reacquisition premium,
discount and expense on debt, net 1.0 1.0 2.0 2.1
-------- -------- -------- --------
Total Interest 19.7 18.8 41.1 37.9
-------- -------- -------- --------
NET INCOME 37.4 43.0 125.2 115.8
DIVIDEND REQUIREMENTS ON PREFERRED STOCKS 1.8 2.0 3.7 4.0
-------- -------- -------- --------
BALANCE AVAILABLE FOR COMMON SHARES $ 35.6 $ 41.0 $ 121.5 $ 111.8
======== ======== ======== ========
COMMON DIVIDENDS DECLARED $ 63.0 $ 57.0 $ 172.0 $ 115.0
-------- -------- -------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31,
ASSETS (in millions) 2001 2000
- -------------------- ----------- ------------
(unaudited)
UTILITY PLANT, at original cost
Electric $4,388.1 $4,343.0
Gas 1,397.1 1,377.6
Common 360.8 362.6
-------- --------
Total Utility Plant 6,146.0 6,083.2
Less: Accumulated provision for depreciation and amortization 3,272.0 3,177.4
-------- --------
Net utility plant 2,874.0 2,905.8
-------- --------
OTHER PROPERTY AND INVESTMENTS 5.1 2.7
-------- --------
CURRENT ASSETS
Cash and cash equivalents 21.2 17.9
Accounts receivable (less reserve of $12.4 and $10.5, respectively) 264.6 259.7
Gas cost adjustment clause 14.4 146.3
Materials and supplies, at average cost 45.7 47.0
Electric production fuel, at average cost 33.2 15.6
Natural gas in storage, at last-in, first-out cost 66.3 109.7
Price risk management assets 81.1 23.2
Prepayments and other 44.8 32.3
-------- --------
Total Current Assets 571.3 651.7
-------- --------
OTHER ASSETS
Regulatory assets 179.1 179.1
Prepayments and other 223.3 199.6
-------- --------
Total Other Assets 402.4 378.7
-------- --------
TOTAL ASSETS $3,852.8 $3,938.9
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31,
CAPITALIZATION AND LIABILITIES (in millions) 2001 2000
- -------------------------------------------- ----------- ------------
(unaudited)
CAPITALIZATION
Common shareholder's equity $1,004.3 $1,058.4
Preferred Stocks --
Series without mandatory redemption provisions 81.1 81.1
Series with mandatory redemption provisions 48.8 49.1
Long-term debt, excluding amounts due within one year 864.0 901.8
-------- --------
Total Capitalization
1,998.2 2,090.4
-------- --------
CURRENT LIABILITIES
Current portion of long-term debt 57.0 19.0
Short term borrowings 343.2 407.1
Accounts payable 349.6 349.9
Dividends declared on common and preferred stocks 0.8 0.9
Customer deposits 30.0 28.6
Taxes accrued 53.9 57.1
Interest accrued 8.0 10.3
Fuel adjustment clause 3.3 0.2
Accrued employment costs 49.2 58.8
Price risk management liabilities 90.4 21.9
Other accruals 27.5 22.1
-------- --------
Total Current Liabilities 1,012.9 975.9
-------- --------
OTHER LIABILITIES AND DEFERRED CREDITS
Deferred income taxes 520.7 562.5
Deferred investment tax credits 74.9 78.5
Deferred credits 39.0 49.1
Accrued liability for postretirement benefits 155.2 149.1
Other noncurrent liabilities 51.9 33.4
-------- --------
Total Other 841.7 872.6
-------- --------
COMMITMENTS AND CONTINGENCIES (see notes) -- --
-------- --------
TOTAL CAPITALIZATION AND LIABILITIES $3,852.8 $3,938.9
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS
Six Months
Ended June 30,
------------------------
( in millions) 2001 2000
- -------------- ----------- ------
(unaudited)
OPERATING ACTIVITIES
Net Income $125.2 $115.8
Adjustments to reconcile net income to net cash:
Depreciation and amortization 124.2 118.8
Net changes in price risk management activities 10.6 6.5
Deferred income taxes (41.8) (32.2)
Amortization of deferred investment tax credits (3.5) (3.5)
Other, net (4.0) 2.1
------ ------
210.7 207.5
Changes in components of working capital:
Accounts receivable, net (8.2) 0.4
Electric production fuel (17.6) (4.5)
Materials and supplies 1.3 (0.4)
Natural gas in storage 43.4 (9.0)
Accounts payable (63.1) 27.7
Taxes accrued (3.1) (4.9)
Fuel adjustment clause 3.1 8.4
Gas cost adjustment clause 131.8 26.4
Accrued employment costs (9.6) (2.3)
Other accruals 3.4 (11.2)
Other, net (13.6) (9.2)
------ ------
Net Cash from Operating Activities
278.5 228.9
------ ------
INVESTING ACTIVITIES
Construction expenditures (86.4) (81.0)
Other investing activities, net (11.9) (5.2)
------ ------
Net Investing Activities (98.3) (86.2)
------ ------
FINANCING ACTIVITIES
Retirement of long-term debt -- (155.0)
Change in short-term debt (63.9) 138.1
Retirement of preferred shares (0.3) (1.5)
Dividends paid - common shares (109.0) (116.0)
Dividends paid - preferred shares (3.8) (4.0)
Other financing activities, net 0.1 0.2
------ ------
Net Financing Activities (176.9) (138.2)
------ ------
Increase (decrease) in cash and cash equivalents 3.3 4.5
Cash and cash equivalents at beginning of period 17.9 6.1
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21.2 $ 10.6
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized 38.2 34.3
Cash paid for income taxes 62.2 98.4
------ ------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- ------------------------
( in millions) 2001 2000 2001 2000
- -------------- ----------- ------- ----------- ------
(unaudited) (unaudited)
BALANCE AT BEGINNING OF PERIOD $163.8 $148.9 $186.4 $136.1
ADD:
OTHER COMPREHENSIVE INCOME (4.0) -- (3.5) --
NET INCOME 37.4 43.0 125.2 115.8
------ ------ ------ ------
197.2 191.9 308.1 251.9
LESS:
DIVIDENDS
Cumulative Preferred Stock 1.9 2.0 3.8 4.0
COMMON SHARES 63.0 57.0 172.0 115.0
------ ------ ------ ------
64.9 59.0 175.8 119.0
------ ------ ------ ------
BALANCE AT END OF PERIOD $132.3 $132.9 $132.3 $132.9
====== ====== ====== ======
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ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Accounting Presentation
The accompanying unaudited consolidated financial statements for Northern
Indiana Public Service Company (Northern Indiana) reflect all normal
recurring adjustments that are necessary, in the opinion of management, to
present fairly the results of operations in accordance with generally
accepted accounting principles.
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, 2000. 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 2000 financial statements
to conform to the 2001 presentation.
2. Restructuring Activities
In the fourth quarter of 2000, NiSource Inc. (NiSource), Northern
Indiana's parent, implemented a plan to restructure its operations as a
result of the acquisition of Columbia Energy Group (Columbia). The
restructuring plan included a severance program, a transition plan to
implement operational efficiency throughout NiSource's operations and a
voluntary early retirement program.
As a result of the restructuring plan, it is estimated that approximately
37 management, professional, administrative and technical positions have
been or will be eliminated at Northern Indiana. As of June 30, 2001, 26
employees had been terminated as a result of the restructuring plan. In
2000, Northern Indiana recorded pre-tax charges of $2.5 million in
operating expense representing severance and related benefits costs. This
charge included $1.3 million of estimated termination benefits. At June
30, 2001, the consolidated balance sheets reflected a liability of $0.6
million related to the restructuring plan.
3. Accounting Change
Effective January 1, 2001, Northern Indiana adopted the Financial
Accounting Standards Board's (FASB) Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as subsequently amended by SFAS No. 137 and SFAS No.
138 (collectively referred to as SFAS No. 133). These statements establish
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. SFAS No. 133
requires an entity to recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of
a recognized asset or liability or an unrecognized firm commitment, (b) a
hedge of the exposure to variable cash flows of a forecasted transaction,
or (c) a hedge of the foreign currency exposure of a net investment in a
foreign-currency-denominated forecasted transaction. The accounting for
changes in the fair value of a derivative depends on the intended use of
the derivative and resulting designation.
The adoption of this statement on January 1, 2001, resulted in an
after-tax increase to other comprehensive income (OCI) of approximately $4
million. The adoption also resulted in the recognition of $16 million of
assets and $12 million of liabilities on the consolidated balance sheet.
During the second quarter of 2001, approximately $0.6 million of the net
gains included in the cumulative effect of a change in accounting
principle component of OCI were reclassified into earnings. During the six
months ended June 30, 2001, approximately $3.3 million of the net gains
included in the cumulative effect of a change in accounting principle
component of OCI were reclassified into earnings. Further detail of the
assets and liabilities recorded on the consolidated financial statements
for the adoption of SFAS No. 133 is as follows:
(in millions) ASSETS LIABILITIES
------------- ------ -----------
Price Risk Management $ 6.2 $ 9.8
Deferred Taxes -- 2.2
Regulatory 9.8 --
----- -----
TOTAL $16.0 $12.0
----- -----
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ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
As stated above, the initial recording of the cumulative effect of this
accounting change included unrealized holding gains of $4.0 million.
However, the activity for the second quarter 2001 and the first half
resulted in unrealized losses on qualifying derivatives of $4.0 million
and $3.5 million, respectively, as reported in the Statements of
Consolidated Retained Earnings. The activity for the periods included:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
( in millions) 2001 2001
- -------------- -------------- --------------
UNREALIZED GAINS ON DERIVATIVES QUALIFYING AS CASH
FLOW HEDGES:
Unrealized holding gain arising during the period due to
cumulative effect of a change in accounting principle,
recognized at January 1, 2001, net of tax $ -- $4.0
Unrealized holding losses arising during the period on
derivatives qualifying as cash flow hedges, net of tax (3.9) (4.6)
Reclassification adjustment for net gain included in net
income, net of tax (including gains of $0.6 million and
$3.3 million, respectively, related to the cumulative
effect of change in accounting principle) (0.1) (2.9)
----- -----
Net unrealized losses on derivatives qualifying as cash
flow hedges, net of tax $(4.0) $(3.5)
----- -----
Northern Indiana's senior management takes an active role in the risk
management process and has developed policies and procedures that require
specific administrative and business functions to assist in the
identification, assessment and control of various risks. In recognition of
the increasingly varied and complex nature of the energy business,
Northern Indiana's risk management policies and procedures continue to
evolve and are subject to ongoing review and modification.
Following is additional information regarding the impact of SFAS No. 133
by segment.
Gas Distribution
Northern Indiana offers a Price Protection Service as an alternative to
the standard gas cost recovery mechanism. This service provides Northern
Indiana customers with the option to either lock in their gas cost or
place a cap on the total cost that could be charged for any future month
specified. In order to hedge the anticipated physical future purchases
associated with these obligations, Northern Indiana purchases NYMEX
futures and options contracts that correspond to a fixed or capped price
and the associated delivery month. The NYMEX futures and options contracts
satisfy all definitions of a derivative and they qualify and are
designated as a cash flow hedge. Northern Indiana has no net gain or loss
recognized in earnings due to ineffectiveness or time value for this
program in the reporting period and none of the components of the
derivative instruments' value are excluded in its assessment of hedge
effectiveness. It is anticipated that during the next 12 months,
expiration of futures and options contracts will result in income
recognition amounts currently classified in OCI of approximately $5.7
million, which will be included in net income. Northern Indiana has
futures and options contracts designated as cash flow hedges through June
2002. At this time Northern Indiana expects to continue its cash flow
hedges due to the probability that the forecasted transaction will occur.
Northern Indiana is also engaged in writing options that potentially
obligate it 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, Northern Indiana may ultimately share in a portion of the gains
or losses on these options with the ratepayers. Regulatory assets or
liabilities are recorded to offset the change in the fair value of these
derivatives until there is certainty as to the level of sharing, if any.
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ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Electric
The adoption and application of SFAS 133 had no impact on this segment.
Merchant
The adoption and application of SFAS 133 had no impact on this segment.
4. Business Segment Information
Effective for the second quarter of 2001, Northern Indiana realigned a
portion of its operations and reclassified previously reported operating
segment information to conform to the realigned operating structure. The
electric wheeling, bulk power and power trading operations were moved from
the Electric Operations segment to a new Merchant Operations segment.
Northern Indiana's operations are divided into three primary business
segments. The Gas Distribution segment provides natural gas service and
transportation for residential, commercial and industrial customers in
Indiana. The Electric Operations segment provides electric service in 21
counties in the northern part of Indiana. The Merchant Operations segment
provides energy-related services including electric wheeling, bulk power
and power trading.
The following tables provide information about business segments.
Adjustments have been made to the segment information to arrive at
information included in the results of operations and financial position.
Northern Indiana uses operating income as its primary measurement for each
of the reported segments and makes decisions on finance, dividends and
taxes at the corporate level on a consolidated basis. Operating income is
derived from revenues and expenses directly associated with each segment.
The adjustments represent the revenues and net pre-tax operating income of
Northern Indiana's electric trading business, which are reflected in the
Merchant Operations segment but are reported as a component of Other
Income (Deductions) in the Statements of Consolidated Income.
($ in millions) GAS ELECTRIC MERCHANT ADJUSTMENTS TOTAL
- --------------- ------ -------- -------- ----------- -----
FOR THE THREE MONTHS ENDED JUNE 30, 2001
Operating revenues 112.0 246.7 251.9 (240.2) 370.4
Utility operating income before utility income taxes (6.3) 74.7 12.4 (4.4) 76.4
FOR THE THREE MONTHS ENDED JUNE 30, 2000
Operating revenues 130.3 241.8 123.3 (110.1) 385.3
Utility operating income before utility income taxes (2.8) 79.2 11.7 (4.0) 84.1
---- ---- ---- ---- ----
($ in millions) GAS ELECTRIC MERCHANT ADJUSTMENTS TOTAL
- --------------- ------ -------- -------- ----------- -------
FOR THE SIX MONTHS ENDED JUNE 30, 2001
Operating revenues 595.3 494.0 375.2 (354.4) 1,110.1
Utility operating income before utility income taxes 67.5 151.5 24.3 (9.4) 233.9
FOR THE SIX MONTHS ENDED JUNE 30, 2000
Operating revenues 393.8 484.4 198.9 (174.8) 902.3
Utility operating income before utility income taxes 48.7 154.2 19.5 (6.3) 216.1
----- ----- ----- ----- -----
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ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Other Income (Deductions) in the Statement of Consolidated Income were
comprised of the following items:
($ in millions) GAS MERCHANT OTHER TOTAL
- --------------- ------ -------- ------ ------
FOR THE THREE MONTHS ENDED JUNE 30, 2001
Power trading revenues 238.2 238.2
Power trading cost of sales (234.5) (234.5)
Power trading administrative expenses (1.3) (1.3)
Power trading unrealized gains (losses) 2.0 2.0
Other -- (4.1) (4.1)
----- ----- ----- -----
Total Other Income (Deductions) -- 4.4 (4.1) 0.3
----- ----- ----- -----
FOR THE THREE MONTHS ENDED JUNE 30,2000
Power trading revenues 110.8 110.8
Power trading cost of sales (105.3) (105.3)
Power trading administrative expenses (0.8) (0.8)
Power trading unrealized gains (losses) (0.7) (0.7)
Other -- -- (2.7) (2.7)
----- ----- ----- -----
Total Other Income (Deductions) -- 4.0 (2.7) 1.3
----- ----- ----- -----
($ in millions) GAS MERCHANT OTHER TOTAL
- --------------- ------ -------- ------ ------
FOR THE SIX MONTHS ENDED JUNE 30, 2001
Power trading revenues 346.8 346.8
Power trading cost of sales (343.3) (343.3)
Power trading administrative expenses (1.7) (1.7)
Power trading unrealized gains (losses) 7.6 7.6
Other -- (7.3) (7.3)
----- ----- ----- -----
Total Other Income (Deductions) -- 9.4 (7.3) 2.1
----- ----- ----- -----
FOR THE SIX MONTHS ENDED JUNE 30, 2000
Power trading revenues 174.9 174.9
Power trading cost of sales (167.2) (167.2)
Power trading administrative expenses (1.3) (1.3)
Power trading unrealized gains (losses) (0.1) (0.1)
Other 0.5 -- (5.0) (4.5)
----- ----- ----- -----
Total Other Income (Deductions) 0.5 6.3 (5.0) 1.8
----- ----- ----- -----
5. Recently Issued Accounting Pronouncements
On July 20, 2001, FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." The key concepts
from the two interrelated Statements include mandatory use of the purchase
method in accounting for business combinations, discontinuance of goodwill
amortization, a revised framework for testing for goodwill impairment at a
"reporting unit" level, and new criteria for the identification and
potential amortization of other intangible assets. Other changes to
existing accounting standards involve the amount of goodwill to be used in
determining the gain or loss on the disposal of assets and a requirement
to test goodwill for impairment at least annually under the revised
framework.
Northern Indiana does not expect the adoption of the Statements to have a
material impact on its results of operations.
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ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
In July 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." The standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes
a cost by increasing the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each period, and
the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement.
The standard is effective for fiscal years beginning after June 15, 2002,
with earlier application encouraged. Northern Indiana is currently
evaluating the impact that the Statement will have on its results of
operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NORTHERN INDIANA PUBLIC SERVICE COMPANY
CONSOLIDATED RESULTS
The Management's Discussion and Analysis, including statements regarding market
risk sensitive instruments, contains "forward-looking statements," within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Investors and
prospective investors should understand that many factors govern whether any
forward-looking statement contained herein will be or can be realized. Any one
of those factors could cause actual results to differ materially from those
projected. These forward-looking statements include, but are not limited to,
statements concerning Northern Indiana's plans, proposed dispositions,
objectives, expected performance, expenditures and recovery of expenditures
through rates, stated on either a consolidated or segment basis, and any and all
underlying assumptions and other statements that are other than statements of
historical fact. From time to time, Northern Indiana may publish or otherwise
make available forward-looking statements of this nature. All such subsequent
forward-looking statements, whether written or oral and whether made by or on
behalf of Northern Indiana, are also expressly qualified by these cautionary
statements. All forward-looking statements are based on assumptions that
management believes to be reasonable; however, there can be no assurance that
actual results will not differ materially. Realization of Northern Indiana's
objectives and expected performance is subject to a wide range of risks and can
be adversely affected by, among other things, increased competition in
deregulated energy markets, weather, fluctuations in supply and demand for
energy commodities, growth opportunities for Northern Indiana's regulated
businesses, dealings with third parties over whom Northern Indiana has no
control, the regulatory process, regulatory and legislative changes, changes in
general economic, capital and commodity market conditions, and counter-party
credit risk, many of which 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.
SECOND QUARTER AND SIX MONTH RESULTS
Net Income
Northern Indiana reported net income of $37.4 million for the three months ended
June 30, 2001, compared to $43.0 million in the 2000 period. The decrease is
attributed to weather 18% warmer than the previous year. For the six months
ended June 30, 2001, Northern Indiana reported net income of $125.2 million, a
$9.4 million increase from the 2000 period. The increase is attributed to
weather 8% colder than the previous year.
Net Revenues
Total consolidated net revenue (operating revenues less cost of sales) for the
three months ended June 30, 2001, was $234.7 million, a $2.4 million decrease
over the same period last year. Decreased gas sales to residential and
commercial customers due to warmer weather contributed to the decrease. Total
consolidated net revenue for the six months ended June 30, 2001, was $548.5
million, a $21.4 million increase over the same period in 2000. Increased gas
sales to residential and commercial customers due to colder weather and
increased net revenues in merchant operations due to trading activities
primarily contributed to the increase.
Expenses
Operating expenses for the second quarter of 2001 were $158.3 million, a
increase of $5.3 million over the same period last year. Operation and
maintenance expenses decreased $3.6 million in connection with reduced outside
services fees and lower payroll and benefits costs. Depreciation and
amortization increased $2.8 million due to plant additions and taxes other than
income increased $6.1 million principally due to an adjustment of property tax
accruals in 2000. For the six months ended June 30, 2001, operating expenses
were $314.6 million, an increase of $3.6 million over the same period last year.
Operation and maintenance expenses decreased $11.6 million primarily resulting
from a first quarter 2001 refund received on liability insurance premiums,
reduced outside services fees and lower payroll and benefits costs. Depreciation
and amortization increased $5.4 million due to plant additions and taxes other
than income increased $9.8 million principally due to an adjustment of property
tax accruals in 2000 and higher gross receipts taxes due to higher gross
revenues.
Utility Income Taxes
Utility income tax expense for the second quarter of 2001 was $19.6 million,
compared to $23.6 million in 2000, due to lower pre-tax income in the current
period. Utility income tax expense for the first six months of 2001 was $69.7,
compared to $64.2 million in 2000, due to higher pre-tax income.
13
14
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 second quarter and first six months ended June
30, 2001 were relatively unchanged from prior year periods.
Interest
Interest expense was $19.7 million for the second quarter of 2001, compared to
$18.8 million in 2000, primarily due to increased short-term debt outstanding,
partially offset by lower long-term debt. Interest expense for the first six
months of 2001 was $41.1 million, a $3.2 million increase from the 2000 period
primarily due to increased short-term debt outstanding, partially offset by
lower long-term debt.
LIQUIDITY AND CAPITAL RESOURCES
Generally, cash flow from operations has provided sufficient liquidity to meet
current operating requirements. A significant portion of Northern Indiana's
operations, most notably in the gas and electric distribution businesses, are
subject to seasonal fluctuations in cash flow. During the heating season, which
is primarily from November through March, cash receipts from gas sales and
transportation services typically exceed cash requirements. In the summer
months, cash receipts for electric sales normally exceed requirements. During
other periods of the year, cash on hand, together with 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 first six months of 2001 was $278.5 million,
and increase of $49.6 million from the same period in 2000. This increase was
primarily due to timing differences associated with gas cost recovery, gas in
storage and other working capital items.
Northern Indiana satisfies its liquidity requirements primarily through
internally generated funds and through intercompany borrowings from NiSource
Finance Corp. (NFC), NiSource's financing subisidiary, which in turn borrows
under a $2.5 billion revolving credit facility (Credit Facility) that was
entered into by NFC with a syndicate of banks during the first quarter of 2001.
The Credit Facility will be drawn on to refinance and consolidate essentially
all of the existing short-term borrowings of NiSource's subsidiaries, including
Northern Indiana, as they come due. This new facility is guaranteed by NiSource.
As of June 30, 2001, Northern Indiana had $343.2 million intercompany short-term
borrowings outstanding with NFC at a weighted average interest rate of 4.27%.
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
Risk is an inherent part of Northern Indiana's energy businesses and activities.
The extent to which Northern Indiana manages each of the various types of risk
involved in its businesses is critical to its profitability. Northern Indiana
seeks to identify, assess, monitor and manage, in accordance with defined
policies and procedures, the following principal risks involved in its energy
businesses: commodity market risk, interest rate risk and credit risk. Risk
management at Northern Indiana is a multi-faceted process with independent
oversight that requires constant communication, judgment and knowledge of
specialized products and markets. Northern Indiana's senior management takes an
active role in the risk management process and has developed policies and
procedures that require specific administrative and business functions to assist
in the identification, assessment and control of various risks. In recognition
of the increasingly varied and complex nature of the energy business, Northern
Indiana's risk management policies and procedures are evolving and subject to
ongoing review and modification.
The fair market value of Northern Indiana's price risk management assets and
liabilities were $110.2 million and $124.3 million at June 30, 2001,
respectively, and $32.1 million and $38.7 million at December 31, 2000,
respectively. The increase between these two periods was due to increased
trading activities.
Northern Indiana is exposed, through its various business activities, to trading
risks and non-trading risks. The non-trading risks to which Northern Indiana is
exposed include interest rate risk and commodity price risk. Northern Indiana's
risk management policy permits the use of certain financial instruments to
manage its market risk,
14
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
including futures, forwards, options and swaps. Risk management at Northern
Indiana is the process by which the organization ensures that the risks to which
it is exposed are the risks to which it desires to be exposed to achieve its
primary business objectives. Northern Indiana employs various analytic
techniques to measure and monitor its market risks, including value-at-risk
(VaR) and instrument sensitivity to market factors. VaR represents the potential
loss or gain for an instrument or portfolio from adverse changes in market
factors, for a specified time period and at a specified confidence level.
Non-Trading Risk
Northern Indiana is exposed to interest rate risk as a result of changes in
interest rates on borrowings under NFC Credit Facility. Interest rates are
indexed to short-term market interest rates. At June 30, 2001, intercompany
borrowings outstanding with NFC totaled $343.2 million. Based upon average
intercompany borrowings with NFC, and outstanding commercial paper and
uncommitted lines of credit during 2001, an increase in short-term interest
rates of 100 basis points (1%) would have increased interest expense by $2.9
million for the three months ending June 30, 2001 and $6.4 million for the six
months ending June 30, 2001.
Trading Risk
Northern Indiana employs a VaR model to assess the market risk of its energy
trading portfolios. Market risk refers to the risk that a change in the level of
one or more market prices, rates, indices, volatilities, correlations or other
market factors, such as liquidity, will result in losses for a specified
position or portfolio. Northern Indiana estimates the one-day VaR across all
trading groups that utilize derivatives using either Monte Carlo simulation or
variance/covariance at a 95% confidence level. Based on the results of the VaR
analysis, the daily market exposure for power trading on an average, high and
low basis was $1.7 million, $2.6 million and $1.0 million, respectively, at June
30, 2001.
Accounting Change
Effective January 1, 2001, Northern Indiana adopted the Financial Accounting
Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," as
subsequently amended by SFAS No. 137 and SFAS No. 138 (collectively referred to
as SFAS No. 133). These statements establish accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 requires an entity to recognize all derivatives as
either assets or liabilities on the balance sheet and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and resulting designation.
The adoption of this statement on January 1, 2001, resulted in an after-tax
increase to other comprehensive income (OCI) of approximately $4 million. The
adoption also resulted in the recognition of $16 million of assets and $12
million of liabilities on the consolidated balance sheet. During the second
quarter of 2001 and the first six months, approximately $0.6 million and $3.3
million, respectively, of the net gains included in the cumulative effect of a
change in accounting principle component of OCI were reclassified into earnings.
Northern Indiana's senior management takes an active role in the risk management
process and has developed policies and procedures that require specific
administrative and business functions to assist in the identification,
assessment and control of various risks. In recognition of the increasingly
varied and complex nature of the energy business, Northern Indiana's risk
management policies and procedures continue to evolve and are subject to ongoing
review and modification. See Note 3, "Accounting Change" for additional
information.
OTHER INFORMATION
Presentation of Segment Information
Effective for the second quarter of 2001, Northern Indiana realigned a portion
of its operations and reclassified previously reported operating segment
information to conform to the realigned operating structure. The electric
wheeling, bulk power and power trading operations were moved from the Electric
Operations segment to a new Merchant Operations segment. Prior periods have been
restated to reflect these changes.
15
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Competition
The regulatory environment applicable to Northern Indiana continues to undergo
fundamental changes. These changes have previously had, and will continue to
have, an impact on Northern Indiana's operations, structure and profitability.
At the same time, competition within the energy industry will create
opportunities to compete for new customers and revenues. Management has taken
steps to become more competitive and profitable in this changing environment.
These initiatives include providing its customers with increased choice for new
products and services.
16
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) 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Net Revenues
Sales revenues 104.3 120.9 573.1 367.9
Less: Cost of gas sold 68.6 84.7 426.3 246.0
- -------------------------------------------------------------------------------------------------------------------
Net Sales Revenues 35.7 36.2 146.8 121.9
Transportation Revenues 7.7 9.4 22.2 25.9
- -------------------------------------------------------------------------------------------------------------------
Net Revenues 43.4 45.6 169.0 147.8
- -------------------------------------------------------------------------------------------------------------------
Operating Expenses
Operation and maintenance 23.9 24.4 45.6 49.4
Depreciation and amortization 20.5 19.3 40.9 38.6
Other taxes 5.3 4.7 15.0 11.1
- -------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 49.7 48.4 101.5 99.1
- -------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) (6.3) (2.8) 67.5 48.7
===================================================================================================================
Revenues ($ in millions)
Residential 105.9 68.8 440.8 239.7
Commercial 34.3 19.8 145.3 72.7
Industrial 17.9 11.8 72.4 32.7
Transportation 7.7 9.4 22.2 25.9
Deferred Gas Costs (67.4) 5.5 (131.8) (26.4)
Other 13.6 15.0 46.4 49.2
- -------------------------------------------------------------------------------------------------------------------
Total 112.0 130.3 595.3 393.8
- -------------------------------------------------------------------------------------------------------------------
Sales and Transportation (MDth)
Residential Sales 7.5 9.0 37.5 37.2
Commercial Sales 2.7 3.0 12.9 12.7
Industrial Sales 1.6 2.2 5.9 6.5
Transportation 31.3 42.4 70.7 95.7
Other 2.1 3.6 5.2 14.8
- -------------------------------------------------------------------------------------------------------------------
Total 45.2 60.2 132.2 166.9
- -------------------------------------------------------------------------------------------------------------------
Heating Degree Days 528 647 3,667 3,399
Normal Heating Degree Days 708 708 3,963 3,996
% Colder (Warmer) than Normal (25%) (9%) (7%) (15%)
Customers
Residential 615,353 610,701
Commercial 47,399 47,040
Industrial 3,411 3,468
Transportation 14,508 16,855
Other 19 18
- -------------------------------------------------------------------------------------------------------------------
Total 680,690 678,082
- -------------------------------------------------------------------------------------------------------------------
17
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS
Northern Indiana's natural gas distribution operations (Gas Distribution) serves
over 680,000 customers in the northern part of Indiana.
Regulatory Matters
At the Federal level, gas industry deregulation began in the mid-1980s when the
Federal Energy Regulatory Commission (FERC) required interstate pipelines to
provide nondiscriminatory transportation services pursuant to unbundled rates.
This regulatory change permitted large industrial and commercial customers to
purchase their gas supplies either from a local distribution company (LDC) or
directly from competing producers and marketers, which would then use the LDC's
facilities to transport the gas. More recently, the focus of deregulation in the
gas industry has shifted to retail customers at the state level.
Northern Indiana pursues initiatives that give retail customers the opportunity
to purchase natural gas directly from marketers and to use Gas Distribution's
facilities for transportation services. Once fully implemented, these programs
would reduce Gas Distribution's commodity sales function and provide all
customer classes with the opportunity to obtain gas supplies from alternative
merchants. As these programs expand to all customers, regulations will have to
be implemented to provide for the recovery of transition capacity costs and
other transition costs incurred by a utility serving as the supplier of last
resort if the marketing company cannot supply the gas. Transition capacity costs
are created as customers enroll in these programs and purchase their gas from
other suppliers, leaving Gas Distribution with pipeline capacity it has
contracted for, but no longer needs. Gas Distribution is currently recovering,
or has the opportunity to recover, the costs resulting from the unbundling of
its services and believes that most of such future costs and costs resulting
from being the supplier of last resort will be mitigated or recovered.
Market Conditions
Weather in Northern Indiana's market area for the second quarter of 2001 was 25%
warmer than normal and 7% warmer than normal for the six month period.
Throughput
Total volumes sold and transported of 45.2 million dekatherms (MDth) for the
second quarter of 2001 decreased 15.0 MDth from the same period last year
primarily due to weather 18% warmer than 2000, lower transportation volumes to
industrial customers and decreased off-system sales. Total volumes sold and
transported of 132.2 MDth for the first six months of 2001 decreased 34.7 MDth
from the same period in 2000 due to lower transportation volumes to industrial
customers and decreased off-system sales.
Net Revenues
Net revenues for the three months ended June 30, 2001 were $43.4 million, down
$2.2 million from the same period in 2000, primarily due to weather 18% warmer
than the second quarter of 2000. Net revenues for the six months ended June 30,
2001 were $169.0 million, up $21.2 million from the same period in 2000,
primarily due to weather 8% colder than the first six months of 2000.
Operating Income (Loss)
Operating loss for the second quarter of 2001 of $6.3 million increased $3.5
million from the same period in 2000, primarily due to the effect of 18% warmer
weather. Depreciation and amortization increased $1.2 million due to plant
additions. Taxes other than income taxes increased $0.6 million due to gross
receipts taxes. These increases in expenses were partially offset by a $0.5
million decrease in operation and maintenance expenses primarily resulting from
reduced outside service fees and lower labor and benefit costs. Operating income
for the first six months of 2001 of $67.5 million increased $18.8 million from
the same period in 2000, primarily due to the effect of 8% colder weather.
Depreciation and amortization increased $2.3 million due to plant additions.
Taxes other than income taxes increased $3.9 million principally due to an
adjustment of a reversal of property tax accruals in 2000. These increases in
expenses were partially offset by a $3.8 million decrease in operations and
maintenance expenses primarily resulting from a first quarter of 2001 refund on
liability insurance premiums, reduced outside service fees and lower labor and
benefit costs.
18
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
( in millions) 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Net Revenues
Sales Revenues $ 246.7 $ 241.8 $ 494.0 $ 484.4
Less: Cost of sales 63.6 58.4 130.0 119.0
- -------------------------------------------------------------------------------------------------------------------
Net Revenues 183.1 183.4 364.0 365.4
- -------------------------------------------------------------------------------------------------------------------
Operating Expenses
Operation and maintenance 53.2 56.2 102.0 109.8
Depreciation and amortization 41.8 40.2 83.3 80.2
Other taxes 13.4 7.8 27.2 21.2
- -------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 108.4 104.2 212.5 211.2
- -------------------------------------------------------------------------------------------------------------------
Operating Income $ 74.7 $ 79.2 $ 151.5 $ 154.2
===================================================================================================================
Revenues ($ in millions)
Residential 65.4 65.4 134.2 131.8
Commercial 73.3 69.3 141.3 136.6
Industrial 104.0 103.9 209.0 213.9
Other 4.0 3.2 9.5 2.1
- -------------------------------------------------------------------------------------------------------------------
Total 246.7 241.8 494.0 484.4
- -------------------------------------------------------------------------------------------------------------------
Sales (Gigawatt Hours)
Residential 640.7 655.8 1,338.4 1,323.4
Commercial 850.0 824.8 1,665.4 1,623.2
Industrial 2,309.1 2,390.8 4,632.1 4,930.3
Other 32.4 42.9 71.8 85.4
- -------------------------------------------------------------------------------------------------------------------
Total 3,832.2 3,914.3 7,707.7 7,962.3
- -------------------------------------------------------------------------------------------------------------------
Customers
Residential 379,059 377,474
Commercial 46,897 46,212
Industrial 2,663 2,671
Other 805 813
- -------------------------------------------------------------------------------------------------------------------
Total 429,424 427,170
- -------------------------------------------------------------------------------------------------------------------
19
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS
Northern Indiana generates and distributes electricity approximately 430,000
customers in 21 counties in the northern part of Indiana. Northern Indiana owns
and operates four coal-fired electric generating stations with a net capability
of 3,179 megawatts (mw), four gas-fired combustion turbine generating units with
a net capability of 203 mw and two hydroelectric generating plants with a net
capability of 10 mw. These facilities provide for a total system net capability
of 3,392 mw. Northern Indiana is interconnected with five neighboring electric
utilities.
Market Conditions
The regulatory frameworks applicable to electric operations are undergoing
fundamental changes. These changes have previously had, and will continue to
have, an impact on Northern Indiana's electric operations, structure and
profitability. At the same time, competition within the industry will create
opportunities to compete for new customers and revenues. Management has taken
steps to become more competitive and profitable in this changing environment,
including converting some of its generating units to allow use of lower cost,
low sulfur coal and improving the transmission interconnections with neighboring
electric utilities.
Regulatory Matters
FERC issued Order No. 888-A in 1996 that required all public utilities owning,
controlling or operating transmission lines to file non-discriminatory
open-access tariffs and offer wholesale electricity suppliers and marketers the
same transmission service they provide themselves. On June 30, 2000, the D.C.
Circuit Court of Appeals upheld FERC's open access orders in all major respects,
although the U.S. Supreme Court on February 26, 2001 agreed to review the case.
In 1997, FERC accepted for filing Northern Indiana's open-access transmission
tariff. On December 20, 1999, FERC issued Order 2000 addressing the formation
and operation of Regional Transmission Organizations (RTOs). The rule is
intended to eliminate pricing inequities in the provision of wholesale
transmission service. On October 16, 2000, Northern Indiana filed with the FERC
indicating that it is committed to joining an RTO and on February 28, 2001
joined the Alliance RTO. The Alliance RTO expects to be fully operational by
FERC's December 15, 2001 deadline. The Alliance RTO companies serve a population
of 41 million within 178,800 square miles in 11 states and own 57,100 miles of
transmission lines.
During the course of a regularly scheduled review, referred to as a Level 1
review, the staff of the Indiana Utility Regulatory Commission (IURC) made a
preliminary determination, based on unadjusted historical financial information
filed by Northern Indiana, that Northern Indiana was earning returns that were
in excess of its last rate order and generally established standards. Despite
holding meetings with the IURC staff during 2000 to explain several adjustments
that needed to be made to the filed information to make such an analysis
meaningful, the staff has recommended that a formal investigation be performed.
The IURC has ordered that an investigation begin. On June 18, Northern Indiana
and several other parties filed their case-in-chief. Northern Indiana's
testimony indicated that if rates are to be changed, they should be increased.
Other parties indicated that rates should be reduced. Management is unable at
this time to determine if a broader analysis, which would be performed through a
formal investigation, could result in a rate adjustment that would be higher or
lower than currently allowed rates. Management intends to vigorously oppose any
efforts to reduce rates that may result from this investigation.
Environmental Matters
AIR. During 1998, the United States Environmental Protection Agency (EPA) issued
a final rule, the nitrogen oxides (NOx) State Implementation Plan (SIP) call,
requiring certain states, including Indiana to reduce NOx levels from several
sources, including industrial and utility boilers. At a June 6, 2001 meeting,
the Air Pollution Control Board of Indiana adopted as final the Indiana NOx
control rule to meet the requirements of the EPA NOx SIP call. Before it will
become Indiana regulation the rule must be signed by the Attorney General and
Governor. Preliminary estimates of Northern Indiana's NOx control compliance
costs range from $200 to $300 million. Actual compliance costs may be more than
preliminary estimates due to a number of factors including: market
demand/resource constraints, uncertainty of future equipment and construction
costs, and the potential need for additional control technology.
20
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
The EPA has initiated enforcement actions against several electric utilities
alleging violations of the new source review provisions of the Clean Air Act.
Northern Indiana has received and is in the process of responding to information
requests from the EPA on this subject. It is impossible at this time to predict
the result of EPA's review of Northern Indiana's information responses.
The EPA is in the process of developing a program to address regional haze. The
new administration announced that the EPA would move forward with rules that
mandate the states to require power plants built between 1962 and 1977 to
install the "best available retrofit technology" or BART. The BART program will
target for control by 2013 those pollutants that limit visibility - particulate,
sulfur dioxide and/or nitrogen oxides. Until the program is developed, Northern
Indiana cannot predict the cost of complying with these rules.
WATER. The Great Lakes Water Quality Initiative ("GLI") program is expected to
add new water quality standards for facilities that discharge into the Great
Lakes watershed, including Northern Indiana's three electric generating stations
located on Lake Michigan. The State of Indiana has promulgated its regulations
for this water discharge permit program and has received final EPA approval. As
promulgated, the regulations would provide the Indiana Department of
Environmental Management (IDEM) with the authority to grant water quality
criteria variances and exemptions for non-contact cooling water. However, the
EPA revised the variance language and other minor provisions of IDEM's GLI rule.
The EPA by and large left the non-contact cooling water exemption intact;
however, a separate agreement between the EPA and IDEM on interpretation of this
exemption still leaves uncertainty as to its impact. The EPA change to the
variance rule has prompted litigation by the affected industrial parties and the
EPA/IDEM agreement on the non-contact cooling water exemption may be subject to
future litigation. Northern Indiana expects that IDEM will issue a proposed
permit renewal for each of its lakeside stations. Pending the outcome of
litigation and the proposed permit renewal requirements, the costs of complying
with these requirements cannot be predicted at this time.
Sales
Electric sales for the second three months of 2001 were 3,832.2 million
kilowatt-hours (kwh), a decrease of 82.1 million kwh, compared to the 2000
period, primarily reflecting decreased industrial sales due to a decline in
production in the steel industry, partially offset by increased commercial
sales. For the six months ended June 30, 2001, electric sales were 7,707.7
million kwh, a decrease of 254.6 million kwh compared to the 2000 period,
reflecting decreased industrial sales due to decline in production in the steel
industry, partially offset by increased residential and commercial sales.
Net Revenues
In the second quarter of 2001, electric net revenues of $183.1 million decreased
by $0.3 million over the 2000 period. This reflects decreased production in the
steel industry on industrial sales, partially offset by increased commercial
sales. The cost of fuel for electric generation in 2001 increased $2.6 million
compared to 2000. The average cost per kwh generated increased 10% from 2000
to 1.50 cents per kwh in 2001. In the first six months of 2001, electric net
revenues of $364.0 million decreased $1.4 million over the 2000 period. The
decrease is primarily due to lower production in the steel industry, partially
offset by increase in growth on residential and commercial sales. The cost of
fuel for electric generation in 2001 decreased $3.3 million compared to 2000.
The average cost per kwh generated increased 7% from 2000 to 1.46 cents per kwh
in 2001.
Operating Income
Operating income for the second quarter of 2001 was $74.7 million, a decrease of
$4.5 million over the 2000 period. Depreciation and amortization increased $1.6
million primarily due to plant additions. Taxes other than income increased $5.6
million principally due to an adjustment of property tax accruals in 2000. These
increases in expenses were partially offset by a $3.0 million decrease in
operation and maintenance expenses primarily resulting from reduced outside
service fees and lower labor and benefit costs. Operating income for the first
six months of 2001 was $151.5 million, a decrease of $2.7 million over the same
period in 2000. Depreciation and
21
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
amortization increased $3.1 million primarily due to plant additions. Taxes
other than income increased $6.0 million principally due to an adjustment of
property tax accruals in 2000. These increases in expenses were partially offset
by a $7.8 million decrease in operation and maintenance expenses primarily
resulting from a first quarter of 2001 refund on liability insurance premiums,
and reduced labor and benefit costs.
22
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
MERCHANT OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
($ in millions) 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Net Revenues
Electric Revenues 251.9 123.3 375.2 198.9
Less: Cost of sales 237.9 110.4 348.6 177.4
- -------------------------------------------------------------------------------------------------------------------
Net Revenues 14.0 12.9 26.6 21.5
- -------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 1.6 1.2 2.3 2.0
- -------------------------------------------------------------------------------------------------------------------
Operating Income 12.4 11.7 24.3 19.5
===================================================================================================================
Volumes
Electric sales (Gigawatt Hours) 5,141.4 2,737.1 7,711.1 5,147.0
- -------------------------------------------------------------------------------------------------------------------
Northern Indiana provides non-regulated electric power generation trading,
wheeling and bulk sales.
Revenues
Total sales revenues of $251.9 million for the second quarter of 2001 increased
$128.6 million over the 2000 second quarter. The increase in sales revenues
primarily reflected an increase in trading activity and higher energy prices.
Net revenues for the second quarter of 2001 were $14.1 million, an increase of
$1.1 million over the same period last year. The improvement is due primarily to
increased trading activities.
Total sales revenues of $375.2 million for the first six months of 2001
increased $176.3 million over the 2000 period. The increase in sales revenues
primarily reflected an increase in trading activity and higher energy prices.
Net revenues for the first six months of 2001 were $26.6 million, compared to
$21.5 million in the same period last year. The increase is due primarily to
increased trading activities.
Operating Income
Merchant Operations had operating income of $12.4 million for the second quarter
of 2001 compared to operating income of $11.7 million for the same period last
year. The increase is primarily due to the increased net revenues discussed
above. For the six months ended June 30, 2001, Merchant Operations had operating
income of $24.3 million compared to operating income of $19.5 for the same
period in 2000. The increase is primarily due to the increase in net revenues
discussed above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion regarding quantitative and qualitative disclosures about market
risk, see page 14 of the Management's Discussion and Analysis of Financial
Condition and Results of Operations under "Market Risk Sensitive Instruments and
Positions."
23
24
PART II
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 11, 2001, by written consent in lieu of the Annual Meeting of
Shareholders, the sole shareholder of Northern Indiana elected Stephen P. Adik,
Patrick J. Mulchay and Jeffrey W. Yundt to serve as directors until the 2002
Annual Meeting of Shareholders.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
24
25
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 9, 2001 By: /s/ Jeffrey W. Grossman
-----------------------------------
Jeffrey W. Grossman
Vice President
(Duly Authorized Officer)
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