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 SEPTEMBER 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 1-4125
NORTHERN INDIANA PUBLIC SERVICE COMPANY
(Exact name of registrant as specified in its charter)
Indiana 35-0552990
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
801 East 86th Avenue, Merrillville, IN 46410
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(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 November 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
NORTHERN INDIANA PUBLIC SERVICE COMPANY
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 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
Notes to Consolidated Financial Statements....................................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 23
Item 2. Changes in Securities and Use of Proceeds........................................ 23
Item 3. Defaults Upon Senior Securities.................................................. 23
Item 4. Submission of Matters to a Vote of Security Holders.............................. 23
Item 5. Other Information................................................................ 23
Item 6. Exhibits and Reports on Form 8-K................................................. 23
Signature........................................................................ 24
2
PART I
ITEM 1. FINANCIAL STATEMENTS
NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED INCOME
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ------------------------
( in millions) 2001 2000 2001 2000
- ------------------------------------------------------------------------------ ------------------------
(unaudited) (unaudited)
NET REVENUES
Gas Distribution $ 58.7 $ 119.5 $ 654.0 $ 513.3
Electric 300.0 292.2 814.8 800.7
-------- -------- ---------- ----------
Gross Operating Revenues 358.7 411.7 1,468.8 1,314.0
-------- -------- ---------- ----------
COST OF ENERGY
Gas costs 28.4 82.6 454.7 328.6
Fuel for electric generation 67.5 64.8 178.2 178.8
Power purchased 13.1 7.0 37.7 22.2
-------- -------- ---------- ----------
Cost of Sales 109.0 154.4 670.6 529.6
-------- -------- ---------- ----------
Total Net Revenues 249.7 257.3 798.2 784.4
-------- -------- ---------- ----------
OPERATING EXPENSES
Operation 73.3 60.0 184.9 181.4
Maintenance 14.4 12.6 51.1 51.1
Depreciation and amortization 61.5 59.9 185.7 178.7
Other taxes 19.5 16.7 61.6 49.0
-------- -------- ---------- ----------
Total Operating Expenses 168.7 149.2 483.3 460.2
-------- -------- ---------- ----------
UTILITY OPERATING INCOME BEFORE UTILITY
INCOME TAXES 81.0 108.1 314.9 324.2
-------- -------- ---------- ----------
UTILITY INCOME TAXES 23.2 31.9 92.9 96.1
-------- -------- ---------- ----------
UTILITY OPERATING INCOME 57.8 76.2 222.0 228.1
-------- -------- ---------- ----------
OTHER INCOME (DEDUCTIONS) (1.1) 0.3 1.0 2.1
-------- -------- ---------- ----------
INTEREST
Interest on long-term debt 13.7 14.9 42.9 48.4
Other Interest 2.7 3.9 12.6 6.2
Amortization of premium, reacquisition premium,
discount and expense on debt, net 0.9 1.6 2.9 3.7
-------- -------- ---------- ----------
Total Interest 17.3 20.4 58.4 58.3
-------- -------- ---------- ----------
NET INCOME 39.4 56.1 164.6 171.9
DIVIDEND REQUIREMENTS ON PREFERRED STOCKS 1.9 2.0 5.6 6.0
-------- -------- ---------- ----------
BALANCE AVAILABLE FOR COMMON SHARES $ 37.5 $ 54.1 $ 159.0 $ 165.9
======== ======== ========== ==========
COMMON DIVIDENDS DECLARED $ 54.0 $ 53.0 $ 226.0 $ 168.0
======== ======== ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, December 31,
ASSETS (in millions) 2001 2000
- -----------------------------------------------------------------------------------------------------
(unaudited)
UTILITY PLANT, at original cost
Electric 4,406.3 $ 4,343.0
Gas 1,411.2 1,377.6
Common 357.0 362.6
------- ----------
Total Utility Plant 6,174.5 6,083.2
Less: Accumulated provision for depreciation and amortization 3,317.5 3,177.4
------- ----------
Net utility plant 2,857.0 2,905.8
------- ----------
OTHER PROPERTY AND INVESTMENTS 5.9 2.7
------- ----------
CURRENT ASSETS
Cash and cash equivalents 21.1 17.9
Accounts receivable (less reserve of $12.6 and $10.5, respectively) 189.5 259.7
Gas cost adjustment clause -- 146.3
Materials and supplies, at average cost 45.4 47.0
Electric production fuel, at average cost 24.6 15.6
Natural gas in storage, at last-in, first-out cost 112.8 109.7
Price risk management assets 62.1 23.2
Prepayments and other 45.7 32.3
------- ----------
Total Current Assets 501.2 651.7
------- ----------
OTHER ASSETS
Regulatory assets 182.1 179.1
Prepayments and other 193.8 199.6
------- ----------
Total Other Assets 375.9 378.7
------- ----------
TOTAL ASSETS 3,740.0 $ 3,938.9
======= ==========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, December 31,
CAPITALIZATION AND LIABILITIES (in millions) 2001 2000
- -----------------------------------------------------------------------------------
(unaudited)
CAPITALIZATION
Common shareholder's equity $ 986.8 $ 1,058.4
Preferred Stocks--
Series without mandatory redemption provisions 81.1 81.1
Series with mandatory redemption provisions 48.5 49.1
Long-term debt, excluding amounts due within one year 847.5 901.8
---------- ----------
Total Capitalization 1,963.9 2,090.4
---------- ----------
CURRENT LIABILITIES
Current portion of long-term debt 58.0 19.0
Short term borrowings 322.7 407.1
Accounts payable 247.8 349.9
Dividends declared on common and preferred stocks 55.8 0.9
Customer deposits 31.1 28.6
Taxes accrued 150.6 57.1
Interest accrued 14.9 10.3
Fuel adjustment clause 3.0 0.2
Gas adjustment clause 5.5 --
Accrued employment costs 50.5 58.8
Price risk management liabilities 89.1 21.9
Other accruals 7.0 22.1
---------- ----------
Total Current Liabilities 1,036.0 975.9
---------- ----------
OTHER LIABILITIES AND DEFERRED CREDITS
Price risk liability long-term 10.1 20.7
Deferred income taxes 452.2 562.5
Deferred investment tax credits 73.2 78.5
Deferred credits 35.0 49.1
Accrued liability for postretirement benefits 157.9 149.1
Other noncurrent liabilities 11.7 12.7
---------- ----------
Total Other 740.1 872.6
---------- ----------
COMMITMENTS AND CONTINGENCIES (see notes) -- --
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES 3,740.0 $ 3,938.9
========== ==========
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
Nine Months
Ended September 30,
----------------------
( in millions) 2001 2000
- -------------------------------------------------------------------------------------
(unaudited)
OPERATING ACTIVITIES
Net Income $ 164.6 $ 171.9
Adjustments to reconcile net income to net cash:
Depreciation and amortization 185.7 178.7
Net changes in price risk management activities 21.6 (10.7)
Deferred income taxes (110.3) (32.5)
Amortization of deferred investment tax credits (5.3) (5.3)
Other, net (1.3) (6.2)
-------- --------
255.0 295.9
Changes in components of working capital:
Accounts receivable, net 63.5 22.8
Electric production fuel (9.0) 5.5
Materials and supplies 1.5 (0.5)
Natural gas in storage (3.1) (65.4)
Accounts payable (100.6) 37.7
Taxes accrued 93.6 (25.7)
Fuel adjustment clause 2.8 5.6
Gas cost adjustment clause 151.7 (9.4)
Accrued employment costs (8.3) 0.8
Other accruals (10.5) (1.2)
Other, net (12.8) 17.0
-------- --------
Net Cash from Operating Activities 423.8 283.1
-------- --------
INVESTING ACTIVITIES
Construction expenditures (127.8) (129.7)
Other investing activities, net (15.4) (8.3)
-------- --------
Net Investing Activities (143.2) (138.0)
-------- --------
FINANCING ACTIVITIES
Retirement of long-term debt (54.5) (155.5)
Change in short-term debt (44.9) 194.9
Retirement of preferred shares (0.6) (1.8)
Dividends paid - common shares (172.0) (173.0)
Dividends paid - preferred shares (5.6) (6.0)
Other financing activities, net 0.2 0.3
-------- --------
Net Financing Activities (277.4) (141.1)
-------- --------
Increase (decrease) in cash and cash equivalents 3.2 4.0
Cash and cash equivalents at beginning of period 17.9 6.2
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21.1 $ 10.2
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized 47.9 42.3
Cash paid for income taxes 68.7 141.3
-------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
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
September 30, 2001, 26 employees had been terminated as a result of the
restructuring plan. Two terminations occurred for the nine months ended
September 30, 2001. There were no terminations for the three months
ended September 30, 2001. 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 September 30, 2001, the consolidated balance
sheets reflected a liability of $0.6 million related to the
restructuring plan. There is no change in the accrual from the previous
quarter ended June 30, 2001 and a $0.6 million decrease year-to-date.
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 third quarter of 2001, approximately $0.4
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 nine months ended September 30, 2001,
approximately $3.7 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:
7
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
(in millions) ASSETS LIABILITIES
- ---------------------------------------------
Price Risk Management $ 6.2 $ 9.8
Deferred Taxes -- 2.2
Regulatory Asset 9.8 --
------- -------
TOTAL $ 16.0 $ 12.0
------- -------
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 third quarter 2001 and the nine months ended September 30,
2001, resulted in unrealized losses on qualifying derivatives of $1.0 million
and $4.6 million, respectively. The activity for the periods included:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ -------------------
( in millions) 2001 2001
- -----------------------------------------------------------------------------------------------------------------------------
UNREALIZED LOSSES ON DERIVATIVES QUALIFYING AS CASH
FLOW HEDGES:
Unrealized 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 losses arising during the period on
derivatives qualifying as cash flow hedges, net of tax (2.6) (7.3)
Reclassification adjustment for net loss (gain) included in net income, net
of tax (including gains of $0.4 million and $3.7 million, respectively,
related to the cumulative effect of change in accounting principle) 1.6 (1.3)
------ ------
Net unrealized losses on derivatives qualifying as cash
flow hedges, net of tax $ (1.0) $ (4.6)
------ ------
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 $4.6 million, net of tax, which will
be included in net income. Northern Indiana has futures and options
contracts designated as cash flow hedges through September 2002. At
this time Northern Indiana expects to continue its cash flow hedges due
to the probability that the forecasted transaction will occur.
8
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
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.
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. 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 SEPTEMBER 30, 2001
Operating revenues 58.7 281.7 363.6 (345.3) 358.7
Utility operating income before utility income taxes (24.3) 94.5 10.3 0.5 81.0
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
Operating revenues 119.5 277.2 221.2 (206.2) 411.7
Utility operating income before utility income taxes (9.3) 108.0 11.3 (1.9) 108.1
- -------------------------------------------------------------------------------------------------------------------
($ in millions) GAS ELECTRIC MERCHANT ADJUSTMENTS TOTAL
- --------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
Operating revenues 654.0 775.7 738.8 (699.7) 1,468.8
Utility operating income before utility income taxes 43.2 246.0 34.6 (8.9) 314.9
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
Operating revenues 513.3 761.6 420.1 (381.0) 1,314.0
Utility operating income before utility income taxes 39.4 262.2 30.7 (8.1) 324.2
- --------------------------------------------------------------------------------------------------------------------
9
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 SEPTEMBER 30, 2001
Power trading revenues 354.3 354.3
Power trading cost of sales (344.9) (344.9)
Power trading administrative expenses (0.9) (0.9)
Power trading unrealized gains (losses) (9.0) (9.0)
Other -- (0.6) (0.6)
- -----------------------------------------------------------------------------------------------------------------
Total Other Income (Deductions) -- (0.5) (0.6) (1.1)
- -----------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
Power trading revenues 203.1 203.1
Power trading cost of sales (203.1) (203.1)
Power trading administrative expenses (1.2) (1.2)
Power trading unrealized gains (losses) 3.1 3.1
Other (0.1) -- (1.5) (1.6)
- -----------------------------------------------------------------------------------------------------------------
Total Other Income (Deductions) (0.1) 1.9 (1.5) 0.3
- -----------------------------------------------------------------------------------------------------------------
($ in millions) GAS MERCHANT OTHER TOTAL
- -----------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
Power trading revenues 701.1 701.1
Power trading cost of sales (688.2) (688.2)
Power trading administrative expenses (2.6) (2.6)
Power trading unrealized gains (losses) (1.4) (1.4)
Other -- (7.9) (7.9)
- -----------------------------------------------------------------------------------------------------------------
Total Other Income (Deductions) -- 8.9 (7.9) 1.0
- -----------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
Power trading revenues 378.0 378.0
Power trading cost of sales (370.3) (370.3)
Power trading administrative expenses (2.6) (2.6)
Power trading unrealized gains (losses) 3.0 3.0
Other 0.4 -- (6.4) (6.0)
- -----------------------------------------------------------------------------------------------------------------
Total Other Income (Deductions) 0.4 8.1 (6.4) 2.1
- -----------------------------------------------------------------------------------------------------------------
5. Recently Issued Accounting Pronouncements
On October 3, 2001, FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The Statement replaces SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," although it retains the two-step impairment testing
methodology used in SFAS No. 121. The accounting and reporting
provisions of Accounting Principals Board Opinion (APBO) No. 30,
"Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," are superceded by SFAS
No. 144, except that the Statement preserves the requirement of APBO
No. 30 to report discontinued operations separately from continuing
operations. The Statement covers a variety of implementation issues
inherent in SFAS No. 121, unifies the framework used in accounting for
assets to be disposed of and discontinued operations, and broadens the
reporting of discontinued operations to include all components of an
entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction.
10
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
The Statement is effective for fiscal years beginning after December
15, 2001. Northern Indiana will adopt SFAS No. 144 on January 1, 2002.
Northern Indiana does not expect the adoption of the Statement to have
a material impact on its results of operations.
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.
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.
11
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.
THIRD QUARTER AND NINE MONTH RESULTS
Net Income
Northern Indiana reported net income of $39.4 million for the three months ended
September 30, 2001, compared to $56.1 million in the 2000 period. The decrease
is attributed to lower gas margins and increased administrative and general
expenses. For the nine months ended September 30, 2001, Northern Indiana
reported net income of $164.6 million, a $7.3 million decrease from the 2000
period. The decrease is attributed to increase in property taxes and
depreciation expenses, partially offset by favorable impact of weather and
increase in gas cost incentive revenues.
Net Revenues
Total consolidated net revenue (operating revenues less cost of sales) for the
three months ended September 30, 2001, was $249.7 million, a $7.6 million
decrease over the same period last year. The decrease is attributed to lower gas
margins. Total consolidated net revenue for the nine months ended September 30,
2001, was $798.2 million, a $13.8 million increase over the same period in 2000.
The favorable impact of weather, increase in gas cost incentive mechanism
revenues and improved net revenues in merchant operations contributed to the
increase.
Expenses
Operating expenses for the third quarter of 2001 were $168.7 million, an
increase of $19.5 million over the same period last year. Operation and
maintenance expenses increased $15.1 million due to increased administrative and
general expenses. Depreciation and amortization increased $1.6 million due to
plant additions. Other taxes increased $2.8 million principally due to increased
property taxes. For the nine months ended September 30, 2001, operating expenses
were $483.3 million, an increase of $23.1 million over the same period last
year. Operation and maintenance expenses increased $3.5 million, primarily due
to increased administrative and general expenses and higher uncollectible
expenses. Depreciation and amortization increased $7.0 million due to plant
additions. Other taxes increased $12.6 million principally due to an adjustment
of property tax accruals in 2000 and higher gross receipts taxes due to higher
gross revenues.
12
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 expense for the third quarter of 2001 was $23.2 million,
compared to $31.9 million in 2000, due to lower pre-tax income in the current
period. Utility income tax expense for the first nine months of 2001 was $92.9
million, compared to $96.1 million in 2000, due to lower pre-tax income.
Other Income (Deductions)
Other income (Deductions) for the third quarter of 2001 decreased $1.4 million
mainly as a result of decreased power trading operating income. Other Income
(Deductions) for the first nine months of 2001 decreased $1.1 million mainly as
a result of decreased miscellaneous non-operating revenues.
Interest
Interest expense was $17.3 million for the third quarter of 2001, compared to
$20.4 million in 2000, primarily due to lower average interest rates in
short-term debt outstanding and lower long-term debt. Interest expense for the
first nine months of 2001 was $58.4 million, a $0.1 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 nine months of 2001 was $423.8 million,
an increase of $140.7 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 subsidiary. NFC actively borrows funds
in the commercial paper market and maintains a $2.5 billion revolving credit
facility with a syndicate of banks for back-up liquidity purposes. The credit
facility is guaranteed by NiSource.
As of September 30, 2001, Northern Indiana had $322.7 million intercompany
short-term borrowings outstanding with NFC at a weighted average interest rate
of 3.52%.
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.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NORTHERN INDIANA PUBLIC SERVICE COMPANY
The fair market value of Northern Indiana's price risk management assets totaled
$66.2 million of which $62.1 million were current, and price risk management
liabilities totaled $99.2 million of which $89.1 million were current at
September 30, 2001. The fair market value of Northern Indiana's price risk
management assets totaled $30.9 million of which $23.2 million were current, and
price risk management liabilities totaled $42.6 million of which $21.9 million
were current at December 31, 2000. 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, 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 intercompany borrowings from NFC. Interest rates are indexed
to short-term market interest rates. At September 30, 2001, intercompany
borrowings outstanding with NFC totaled $322.7 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 $3.0
million for the three months ending September 30, 2001 and $9.4 million for the
nine months ending September 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 $1.1 million, $2.2 million and $0.5 million, respectively, at
September 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 third
quarter of 2001 and the nine months ended September 30, 2001, approximately $0.4
million and $3.7 million, respectively, of the net gains included in the
cumulative effect of a change in accounting principle component of OCI were
reclassified into earnings.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NORTHERN INDIANA PUBLIC SERVICE COMPANY
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.
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.
September 11, 2001 Terrorist Attack
On September 11, 2001 a terrorist attack occurred at the World Trade Center in
New York City. This unfortunate incident has had pervasive negative impacts on
several U.S. industries and on the U.S. economy in general. While Northern
Indiana was not directly impacted by the event, Northern Indiana believes that
it could be impacted indirectly in the near future. The indirect impacts may
include lower revenues due to the negative impact on certain Northern Indiana's
industrial customers and higher costs related to items such as insurance,
travel, and security.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- ---------------------------
( in millions) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------
NET REVENUES
Sales revenues 52.1 112.0 625.2 479.9
Less: Cost of gas sold 28.4 82.6 454.7 328.6
--------- --------- --------- ---------
Net Sales Revenues 23.7 29.4 170.5 151.3
Transportation Revenues 6.6 7.5 28.8 33.4
--------- --------- --------- ---------
Net Revenues 30.3 36.9 199.3 184.7
--------- --------- --------- ---------
OPERATING EXPENSES
Operation and maintenance 30.1 22.4 75.7 71.8
Depreciation and amortization 20.1 19.6 61.0 58.2
Other taxes 4.4 4.2 19.4 15.3
--------- --------- --------- ---------
Total Operating Expenses 54.6 46.2 156.1 145.3
--------- --------- --------- ---------
Operating Income (Loss) (24.3) (9.3) 43.2 39.4
========= ========= ========= =========
REVENUES ($ IN MILLIONS)
Residential 37.1 37.8 477.9 277.5
Commercial 12.2 13.0 157.5 85.7
Industrial 10.5 11.5 82.9 44.2
Transportation 6.6 7.5 28.8 33.4
Deferred Gas Costs (19.9) 35.8 (151.7) 9.4
Other 12.2 13.9 58.6 63.1
--------- --------- --------- ---------
Total 58.7 119.5 654.0 513.3
--------- --------- --------- ---------
SALES AND TRANSPORTATION (MDth)
Residential Sales 4.3 4.6 41.8 41.8
Commercial Sales 1.6 1.8 14.5 14.5
Industrial Sales 2.0 2.0 7.9 8.5
Transportation 31.5 38.1 102.2 133.8
Other 2.8 2.2 8.0 17.0
--------- --------- --------- ---------
Total 42.2 48.7 174.4 215.6
--------- --------- --------- ---------
HEATING DEGREE DAYS 146 143 3,830 3,542
NORMAL HEATING DEGREE DAYS 108 108 4,071 4,104
% COLDER (WARMER) THAN NORMAL 35% 32% (6%) (14%)
CUSTOMERS
Residential 615,144 612,628
Commercial 47,368 46,716
Industrial 3,326 3,468
Transportation 14,027 16,866
Other 20 21
--------- --------- --------- ---------
TOTAL 679,885 679,699
--------- --------- --------- ---------
16
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) serve
approximately 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
In the winter of 2000-2001, spot prices for gas purchases exceeded $6.00 per
dekatherms. The unprecedented high prices were due primarily to tight supply and
increased demand during this period. Demand was higher than in previous periods
due to the continued economic expansion in 2000, proliferation of gas-fired
electric generation and record cold weather during November and December 2000.
The supply of natural gas was low due to low production as a result of reduced
levels of drilling activity when the price of natural gas was extremely low in
1998-1999. The lower production coupled with increased demand resulted in lower
storage levels of natural gas entering the 2000-2001 winter season.
The current natural gas futures market indicates that spot prices will be
approximately half of prior years' prices for the 2001-2002 winter season. The
higher prices of 2000 and early 2001 encouraged producers to increase natural
gas drilling activities, resulting in the highest level of natural gas drilling
activity since the early 1980s. Higher prices also resulted in fuel switching
and reduced demand for natural gas. All of these factors have led to increased
supply, higher storage injection levels and a favorable supply outlook for the
2001-2002 winter.
Northern Indiana has regulatory approved recovery mechanisms providing a means
for full recovery of prudently incurred gas costs. Utilizing matching concepts,
the gas cost portion of revenues in the period are adjusted to match the gas
purchase expenses incurred with the difference recorded as a deferred gas cost
revenue. 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.
The impact of the higher gas costs on Northern Indiana customers' bills is
primarily responsible for increased uncollectible expenses in 2001. The
year-to-date gas uncollectible expense is $1.8 million higher than 2000. Fourth
quarter 2001 expense is also expected be higher than last year. The impact of
lower gas costs this winter should decrease 2002 uncollectible expense.
Weather
Weather in Northern Indiana's market was an average 35% cooler than normal for
the third quarter of 2001 and 6% warmer than normal for the nine-month period.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Throughput
Total volumes sold and transported of 42.2 million dekatherms (MDth) for the
third quarter of 2001 decreased 6.5 MDth from the same period last year
primarily due to reduced transportation volumes to industrial customers,
reflecting the steel industry decline. Total volumes sold and transported of
174.4 MDth for the first nine months of 2001 decreased 41.2 MDth from the same
period in 2000 due to reduced transportation volumes to industrial customers and
decreased off-system sales.
Net Revenues
Net revenues for the three months ended September 30, 2001 were $30.3 million,
down $6.6 million from the same period in 2000, primarily due to reduced
transportation volumes discussed above and lower gas margins. Net revenues for
the nine months ended September 30, 2001 were $199.3 million, up $14.6 million
from the same period in 2000, primarily due to increase in gas cost incentive
mechanism revenues and weather that was 8% colder than in the first nine months
of 2000, partially offset by reduced transportation to industrial customers.
Operating Income (Loss)
Operating loss for the third quarter of 2001 of $24.3 million increased $15.0
million from the same period in 2000, due to decrease in net revenues discussed
above and increased operation and maintenance expenses. Other taxes were
relatively unchanged from the same period in 2000. Operating income for the
first nine months of 2001 of $43.2 million increased $3.8 million from the same
period in 2000. Operation and maintenance expenses increased $3.9 million,
primarily resulting from increased administrative and general expenses and
higher uncollectible expenses. Depreciation and amortization increased $2.8
million due to plant additions. Other taxes increased $4.1 million principally
due to higher gross receipt taxes These decreases to operating income were more
than offset by the net revenue increase discussed above.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
( in millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------
NET REVENUES
Sales Revenues $ 281.7 $ 277.2 $ 775.7 $ 761.6
Less: Cost of sales 73.4 66.6 203.4 185.6
---------- ---------- ---------- ----------
Net Revenues 208.3 210.6 572.3 576.0
---------- ---------- ---------- ----------
OPERATING EXPENSES
Operation and maintenance 57.4 49.8 159.4 159.6
Depreciation and amortization 41.4 40.3 124.7 120.5
Other taxes 15.0 12.5 42.2 33.7
---------- ---------- ---------- ----------
Total Operating Expenses 113.8 102.6 326.3 313.8
---------- ---------- ---------- ----------
Operating Income $ 94.5 $ 108.0 $ 246.0 $ 262.2
========== ========== ========== ==========
REVENUES ($ IN MILLIONS)
Residential 94.3 89.7 228.5 221.5
Commercial 80.3 78.1 221.6 214.7
Industrial 101.5 101.3 310.5 315.2
Other 5.6 8.1 15.1 10.2
---------- ---------- ---------- ----------
Total 281.7 277.2 775.7 761.6
---------- ---------- ---------- ----------
SALES (GIGAWATT HOURS)
Residential 956.9 926.4 2,295.3 2,249.8
Commercial 946.6 945.1 2,612.0 2,568.3
Industrial 2,244.2 2,275.1 6,876.3 7,205.4
Other 31.8 34.4 103.6 119.8
---------- ---------- ---------- ----------
Total 4,179.5 4,181.0 11,887.2 12,143.3
---------- ---------- ---------- ----------
COOLING DEGREE DAYS 627 553 895 794
NORMAL COOLING DEGREE DAYS 562 562 791 791
% WARMER (COLDER) THAN NORMAL 12% (2%) 13% 0%
CUSTOMERS
Residential 379,904 378,554
Commercial 47,092 46,334
Industrial 2,659 2,673
Other 803 808
---------- ---------- ---------- ----------
Total 430,458 -- 428,369
---------- ---------- ---------- ----------
19
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. On September 7, 2001,
Northern Indiana and several other parties filed their rebuttal testimony.
Northern Indiana's testimony indicated that if rates are to be changed, they
should be increased. Other parties indicated that rates should be reduced.
Hearings on the testimony began on October 2, 2001. 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
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 third quarter of 2001 were 4,179.5 million kilowatt-hours
(kwh), a decrease of 1.5 million kwh, compared to the 2000 period, primarily
reflecting reduced industrial usage somewhat offset by improved sales to
residential customers, due to warmer weather. Electric sales for the nine months
of 2001 were 11,887.2 million kwh, a decrease of 256.1 million kwh compared to
the 2000 period, primarily reflecting decreased industrial sales due to a
production decline in the steel industry, partially offset by higher consumption
by residential and commercial sales.
Net Revenues
In the third quarter of 2001, electric net revenues of $208.3 million decreased
by $2.3 million over the 2000 period. Industrial net revenues decreased due to
the economic slowdown, partially offset by an improvement in net revenues from
residential customers as a result of warmer weather. In the first nine months of
2001, electric net revenues of $572.3 million decreased $3.7 million when
compared to the 2000 period. Sales volumes were lower overall, partially offset
by increased consumption in the higher margin residential and commercial
customers.
Operating Income
Operating income for the third quarter of 2001 was $94.5 million, a decrease of
$13.5 million from the same period in 2000. Operation and maintenance expenses
increased $7.6 million, primarily resulting from increased administrative and
general expenses. Depreciation and amortization increased $1.1 million primarily
due to plant additions. Other taxes increased $2.5 million principally due to
higher property taxes. Operating income for the first nine months of 2001 was
$246.0 million, a decrease of $16.2 million over the same period in 2000.
Depreciation and amortization increased $4.2 million primarily due to plant
additions. Operation and maintenance expenses were relatively unchanged from the
same period in 2000. Other taxes increased $8.5 million principally due to an
adjustment of property tax accruals in 2000.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
MERCHANT OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
($ in millions) 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------
NET REVENUES
Electric Revenues 363.6 221.2 738.8 420.1
Less: Cost of sales 352.1 208.3 700.7 385.7
-------- -------- -------- --------
Net Revenues 11.5 12.9 38.1 34.4
TOTAL OPERATING EXPENSES 1.2 1.6 3.5 3.7
-------- -------- -------- --------
Operating Income 10.3 11.3 34.6 30.7
======== ======== ======== ========
VOLUMES
Electric sales (Gigawatt Hours) 6,589.2 2,757.3 14,300.3 7,904.3
-------- -------- -------- --------
Northern Indiana provides non-regulated electric power generation trading,
wheeling and bulk sales.
Net Revenues
Net revenues for the third quarter of 2001 were $11.5 million, a decrease of
$1.4 million over the same period last year. The decrease is due primarily to
decreased trading margins, partially offset by increases in electric wheeling
due to upgraded interconnections.
Net revenues for the first nine months of 2001 were $38.1 million, compared to
$34.4 million in the same period last year. Increased results were reported in
electric wheeling due to upgraded interconnections with neighboring electric
companies.
Operating Income
Merchant Operations had operating income of $10.3 million for the third quarter
of 2001 compared to operating income of $11.3 million for the same period last
year. The decrease is primarily due to the decreased net revenues discussed
above. For the nine months ended September 30, 2001, Merchant Operations had
operating income of $34.6 million compared to operating income of $30.7 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 13 of the Management's Discussion and Analysis of Financial
Condition and Results of Operations under "Market Risk Sensitive Instruments and
Positions."
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PART II
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Northern Indiana Public Service Company
(Registrant)
Date: November 13, 2001 By: /s/ Jeffrey W. Grossman
----------------------------------
Jeffrey W. Grossman
Vice President
(Duly Authorized Officer)
24