UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____ to ______
Commission file number 1-4125
NORTHERN INDIANA PUBLIC SERVICE COMPANY
(Exact name of registrant as specified in its charter)
Indiana 35-0552990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 East 86th Avenue
Merrillville, Indiana 46410
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (877) 647-5990
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Series A Cumulative Preferred - No Par Value New York
4-1/4% Cumulative Preferred - $100 Par Value American
Securities registered pursuant to Section 12(g) of the Act: Cumulative Preferred
Stock - $100 Par Value (4-1/2%, 4.22%, 4.88%, 7.44% and 7.50% Series)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __.
As of May 1, 2002, 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 MARCH 31, 2002
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 .......... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings ........................................ 20
Item 2. Changes in Securities and Use of Proceeds ................ 20
Item 3. Defaults Upon Senior Securities .......................... 20
Item 4. Submission of Matters to a Vote of Security Holders ...... 20
Item 5. Other Information ........................................ 20
Item 6. Exhibits and Reports on Form 8-K ......................... 20
Signature ................................................ 21
2
PART I
ITEM 1. FINANCIAL STATEMENTS
NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED INCOME
Three Months Ended March 31, (in millions) 2002 2001
- --------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
OPERATING REVENUES
Gas Distribution $ 288.8 $ 483.3
Electric 261.9 256.4
- --------------------------------------------------------------------------------------------------------------------
Gross Operating Revenues 550.7 739.7
- --------------------------------------------------------------------------------------------------------------------
COST OF ENERGY
Gas costs 176.7 357.7
Fuel for electric generation 52.8 51.6
Power purchased 28.4 16.6
- --------------------------------------------------------------------------------------------------------------------
Cost of sales 257.9 425.9
- --------------------------------------------------------------------------------------------------------------------
Total Net Revenues 292.8 313.8
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OPERATING EXPENSES
Operation 63.7 51.9
Maintenance 16.1 19.0
Depreciation and amortization 62.6 61.9
Other taxes 19.8 23.5
- --------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 162.2 156.3
- --------------------------------------------------------------------------------------------------------------------
UTILITY OPERATING INCOME BEFORE UTILITY
INCOME TAXES 130.6 157.5
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UTILITY INCOME TAXES 41.8 50.1
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UTILITY OPERATING INCOME 88.8 107.4
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OTHER INCOME (DEDUCTIONS) (0.5) 1.8
- --------------------------------------------------------------------------------------------------------------------
INTEREST
Interest on long-term debt 12.9 14.6
Other interest 2.0 5.8
Amortization of premium, reacquisition premium,
discount and expense on debt, net 0.6 1.0
- --------------------------------------------------------------------------------------------------------------------
Total Interest 15.5 21.4
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 72.8 $ 87.8
====================================================================================================================
DIVIDEND REQUIREMENTS ON PREFERRED STOCKS 1.9 1.9
- --------------------------------------------------------------------------------------------------------------------
BALANCE AVAILABLE FOR COMMON SHARES $ 70.9 $ 85.9
- --------------------------------------------------------------------------------------------------------------------
COMMON DIVIDENDS DECLARED $ 31.0 $ 109.0
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The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
CONSOLIDATED BALANCE SHEETS
MARCH 31, December 31,
(in millions) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
UTILITY PLANT, at original cost
Electric $ 4,456.7 $ 4,440.2
Gas 1,429.2 1,423.7
Common 364.1 355.1
- ------------------------------------------------------------------------------------------------------------------------
Total Utility Plant 6,250.0 6,219.0
Less: Accumulated provision for depreciation and amortization 3,415.1 3,357.2
- ------------------------------------------------------------------------------------------------------------------------
Net utility plant 2,834.9 2,861.8
- ------------------------------------------------------------------------------------------------------------------------
OTHER PROPERTY AND INVESTMENTS 8.4 8.1
- ------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 8.4 16.0
Accounts receivable (less reserve of $11.2 and $11.9, respectively) 144.3 116.4
Gas cost adjustment clause 29.8 28.2
Materials and supplies, at average cost 46.1 44.7
Electric production fuel, at average cost 33.4 29.2
Natural gas in storage, at last-in, first-out cost 5.9 104.7
Price risk management assets 0.3 --
Prepayments and other 44.7 40.3
- ------------------------------------------------------------------------------------------------------------------------
Total Current Assets 312.9 379.5
- ------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Regulatory assets 168.3 170.0
Prepayments and other 191.0 194.3
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Total Other Assets 359.3 364.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,515.5 $ 3,613.7
========================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
CONSOLIDATED BALANCE SHEETS
MARCH 31, December 31,
(in millions) 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity $ 1,079.0 $ 1,036.3
Preferred Stocks--
Series without mandatory redemption provisions 81.1 81.1
Series with mandatory redemption provisions 5.0 5.0
Long-term debt, excluding amounts due within one year 823.1 843.1
- -------------------------------------------------------------------------------------------------------------------------
Total Capitalization 1,988.2 1,965.5
- -------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current redeemable preferred stock subject to mandatory redemption 43.0 43.0
Current portion of long-term debt 79.0 59.0
Short term borrowings 139.5 335.4
Accounts payable 136.4 145.8
Dividends declared on common and preferred stocks 1.8 1.7
Customer deposits 33.4 31.8
Taxes accrued 264.6 195.4
Interest accrued 14.7 7.8
Fuel adjustment clause -- 3.7
Accrued employment costs 44.9 34.1
Price risk management liabilities 0.1 5.6
Other accruals 22.5 24.7
- -------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 779.9 888.0
- -------------------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES AND DEFERRED CREDITS
Deferred income taxes 458.0 464.7
Deferred investment tax credits 69.6 71.4
Deferred credits 45.2 48.9
Accrued liability for postretirement benefits 160.7 160.8
Regulatory liabilities 4.6 4.5
Other noncurrent liabilities 9.3 9.9
- -------------------------------------------------------------------------------------------------------------------------
Total Other 747.4 760.2
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COMMITMENTS AND CONTINGENCIES (see notes) -- --
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 3,515.5 $ 3,613.7
=========================================================================================================================
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
Three Months Ended March 31, (in millions) 2002 2001
- ------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
OPERATING ACTIVITIES
Net Income $ 72.8 $ 87.8
Adjustments to reconcile net income to net cash:
Depreciation and amortization 62.6 61.9
Net changes in price risk management activities (5.8) 5.1
Deferred income taxes (6.0) (8.0)
Amortization of deferred investment tax credits (1.8) (1.8)
Other, net 6.7 (4.8)
- ------------------------------------------------------------------------------------------------------------------
128.5 140.2
Changes in components of working capital:
Accounts receivable, net (27.9) (70.6)
Electric production fuel (4.2) (11.5)
Materials and supplies (1.4) 2.0
Natural gas in storage 98.8 93.5
Accounts payable 0.7 (122.8)
Taxes accrued 69.2 84.5
Fuel adjustment clause (3.7) 1.0
Gas cost adjustment clause (1.6) 64.5
Accrued employment costs 10.8 (18.9)
Other accruals 4.8 22.7
Other, net (6.0) (3.0)
- ------------------------------------------------------------------------------------------------------------------
Net Cash from Operating Activities 268.0 181.6
- ------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Construction expenditures (34.2) (43.4)
Other investing activities, net (12.7) (10.2)
- ------------------------------------------------------------------------------------------------------------------
Net Investing Activities (46.9) (53.6)
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Change in short-term debt (195.9) (78.4)
Dividends paid - common shares (31.0) (50.0)
Dividends paid - preferred shares (1.8) (1.8)
- ------------------------------------------------------------------------------------------------------------------
Net Financing Activities (228.7) (130.2)
- ------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (7.6) (2.2)
Cash and cash equivalents at beginning of period 16.0 17.9
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8.4 $ 15.7
==================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized 9.5 14.6
Cash paid for income taxes -- --
- ------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
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 accounting principles generally
accepted in the United States.
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,
2001. 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 2001 financial statements to conform to
the 2002 presentation.
2. RESTRUCTURING ACTIVITIES
During 2000, NiSource Inc. (NiSource) developed and began the implementation of
a plan to restructure its operations. The restructuring plan included a
severance program, a transition plan to implement operational efficiencies
throughout NiSource's operations and a voluntary early retirement program.
During 2001, the restructuring initiative was continued with the addition of a
plan to restructure the operations within the NiSource's Gas Distribution and
Electric Operations segments. Additionally, in December 2001 Northern Indiana
announced its plan to indefinitely shut down the Dean H. Mitchell Generating
Station located in Gary, Indiana.
For all of the plans, a total of approximately 225 management, professional,
administrative and technical positions will be eliminated. As of March 31, 2002,
66 employees had been terminated. At March 31, 2002 and December 31, 2001, the
consolidated balance sheets reflected liabilities of $7.8 million and $9.7
million related to the restructuring plans.
3. ELECTRIC OPERATIONS REGULATORY REVIEW
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
efforts to explain to the IURC staff several adjustments that needed to be made
to the filed information to make such an analysis meaningful, the staff
recommended that a formal investigation be performed. During 2001, Northern
Indiana and several other parties filed testimony, participated in hearings and
submitted proposed forms of the order and comments on these proposed orders.
Northern Indiana's testimony indicated that if rates are to be changed, they
should be increased.
4. RISK MANAGEMENT ACTIVITIES
Northern Indiana uses commodity-based derivative financial instruments
to manage certain risks inherent in its business. Northern Indiana accounts for
its derivatives under Statement of Financial Accounting Standards No. 133 (SFAS
No. 133), "Accounting for Derivative Instruments and Hedging Activities" and
accounts for its trading derivatives that do not qualify as derivatives
accounted for under SFAS No. 133 pursuant to Emerging Issues Task Force Issue
No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities."
7
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SFAS NO. 133. The activity for the first quarter of 2002 quarter with respect
to cash flow hedges included the following:
Three Months Ended March 31, ( in millions) 2002
- -----------------------------------------------------------------------------------------
UNREALIZED GAINS (LOSSES) ON DERIVATIVES QUALIFYING AS CASH
FLOW HEDGES:
Unrealized hedging (losses) arising during the period due
to cumulative effect of a change in accounting principle,
recognized at January 1, 2002, net of tax $ (2.7)
Unrealized hedging gains arising during the period on
derivatives qualifying as cash flow hedges, net of tax 1.8
Reclassification adjustment for net gain included in net
income, net of tax 0.9
- -----------------------------------------------------------------------------------------
Net unrealized gains (losses) on derivatives qualifying as cash
flow hedges, net of tax $ --
- -----------------------------------------------------------------------------------------
Unrealized gains and losses on Northern Indiana's cash flow and fair value
hedges were recorded as price risk management assets and liabilities along with
unrealized gains and losses on Northern Indiana's trading portfolio. The
accompanying Consolidated Balance Sheets reflected price risk management assets
related to unrealized gains and losses on hedges of $0.3 million and effectively
zero at March 31, 2002 and December 31,2001, respectively,and all of which was
included in "Current Assets." Price risk management liabilities related to
unrealized gains and losses on hedges were $0.1 million and $ 5.6 million at
March 31, 2002 and December 31, 2001, respectively all of which was included in
"Current Liabilities."
During the first quarter of 2002, no components of the derivatives' fair values
were excluded in the assessment of hedge effectiveness. Also during the first
quarter, no amounts were reclassified from other comprehensive income to
earnings due to the probability that the forecasted transactions would not
occur. Accumulated other comprehensive income related to cash flow hedges is
zero at March 31, 2002.
8
ITEM 1. FINANCIAL STATEMENTS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TRADING ACTIVITIES. Northern Indiana's trading operations included the
activities of its power trading business. Since power trading assets and
liabilities were temporarily transferred to Energy USA-TPC Corp., a subsidiary
of NiSource, effective November 1, 2001, there were no trading assets and
liabilities at March 31, 2002 and December 31, 2001.
5. BUSINESS SEGMENT INFORMATION
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 provided power trading through
October 31, 2001.
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 MARCH 31, 2002
Operating revenues 288.8 238.8 23.1 -- 550.7
Utility operating income before utility income taxes 58.8 65.6 6.2 -- 130.6
FOR THE THREE MONTHS ENDED MARCH 31, 2001
Operating revenues 483.3 247.3 123.3 (114.2) 739.7
Utility operating income before utility income taxes 73.8 76.8 11.9 (5.0) 157.5
- ---------------------------------------------------------------------------------------------------------------
Other Income (Deductions) in the Statement of Consolidated Income were comprised
of the following items:
($ in millions) MERCHANT OTHER TOTAL
- ---------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2002
Power trading revenues -- -- --
Power trading cost of sales -- -- --
Power trading administrative expenses -- -- --
Power trading unrealized gains (losses) -- -- --
Other -- (0.5) (0.5)
- ---------------------------------------------------------------------------------------------------------------
Total Other Income (Deductions) -- (0.5) (0.5)
- ---------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2001
Power trading revenues 108.6 -- 108.6
Power trading cost of sales (108.8) -- (108.8)
Power trading administrative expenses (0.4) -- (0.4)
Power trading unrealized gains (losses) 5.6 -- 5.6
Other -- (3.2) (3.2)
- ---------------------------------------------------------------------------------------------------------------
Total Other Income (Deductions) 5.0 (3.2) 1.8
- ---------------------------------------------------------------------------------------------------------------
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NORTHERN INDIANA PUBLIC SERVICE COMPANY
CONSOLIDATED RESULTS
The Management's Discussion and Analysis, including statements regarding market
risk sensitive instruments, contains "forward-looking statements," within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Investors and
prospective investors should understand that many factors govern whether any
forward-looking statement contained herein will be or can be realized. Any one
of those factors could cause actual results to differ materially from those
projected. These forward-looking statements include, but are not limited to,
statements concerning Northern Indiana's plans, objectives, expected
performance, expenditures and recovery of expenditures through rates, stated on
either a consolidated or segment basis, and any and all underlying assumptions
and other statements that are other than statements of historical fact. From
time to time, Northern Indiana may publish or otherwise make available
forward-looking statements of this nature. All such subsequent forward-looking
statements, whether written or oral and whether made by or on behalf of Northern
Indiana, are also expressly qualified by these cautionary statements. All
forward-looking statements are based on assumptions that management believes to
be reasonable; however, there can be no assurance that actual results will not
differ materially. Realization of Northern Indiana's objectives and expected
performance is subject to a wide range of risks and can be adversely affected
by, among other things, increased competition in deregulated energy markets,
weather, fluctuations in supply and demand for energy commodities, growth
opportunities for Northern Indiana's regulated businesses, dealings with third
parties over whom Northern Indiana has no control, the regulatory process,
regulatory and legislative changes, changes in general economic, capital and
commodity market conditions, and counter-party credit risk, many of which are
beyond the control of Northern Indiana. In addition, the relative contributions
to profitability by each segment, and the assumptions underlying the
forward-looking statements relating thereto, may change over time.
The following Management's Discussion and Analysis should be read in conjunction
with Northern Indiana's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 (Form 10-K).
FIRST QUARTER RESULTS
Net Income
Northern Indiana reported net income of $72.8 million for the three months ended
March 31, 2002, compared to $87.8 million in the 2001 period.
Net Revenues
Total consolidated net revenue (operating revenues less cost of sales) for the
three months ended March 31, 2002, was $292.8 million, a $21.0 million decrease
over the same period last year. The decrease is attributed to lower gas,
electric and merchant margins and the unfavorable impact of warmer than normal
weather. Decrease in gas cost recovery initiative revenues also contributed to
the decrease.
Expenses
Operating expenses for the first quarter of 2002 were $162.2 million, an
increase of $5.9 million over the same period last year. Operation and
maintenance expenses increased $8.9 million due to increased administrative and
general expenses and increased customer accounts expenses, partially offset by
decreased electric production maintenance expenses. Depreciation and
amortization increased $0.7 million due to plant additions. Other taxes
decreased $3.7 million principally due to decreased Indiana Gross Income Tax.
Utility Income Taxes
Utility income tax expense for the first quarter of 2002 was $41.8 million,
compared to $50.1 million in 2001, due to lower pre-tax income in the current
period.
Other Income (Deductions)
Other income (Deductions) for the first quarter of 2002 decreased $2.3 million
mainly as a result of decreased power trading operating income. Effective
November 1, 2001, Northern Indiana's power trading operations were temporarily
transferred to Energy USA-TPC Corp., a subsidiary of Nisource.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Interest
Interest expense was $15.5 million for the first quarter of 2002, compared to
$21.4 million in 2001, primarily due to lower average interest rates on
short-term debt outstanding and decreased short-term and 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. Also,
during the summer months, cash on hand, together with external short-term and
long-term financing, is used in operations to purchase gas to place in storage
for heating season deliveries, perform necessary maintenance of facilities, make
capital improvements in plant and expand service into new areas.
Northern Indiana satisfies its liquidity requirements primarily through
internally generated funds and through intercompany borrowings from NiSource
Finance Corp. (NFC). NFC borrows funds in the commercial paper market and
maintains a $1.75 billion revolving credit facility with a syndicate of banks
for back-up liquidity purposes. The credit facility is guaranteed by NiSource.
Northern Indiana may borrow on an intercompany basis a maximum of one billion
dollars through the NiSource Money Pool as approved by the Securities and
Exchange Commission under the Public Utility Holding Company Act of 1935. As of
March 31, 2002, Northern Indiana had $139.5 million of intercompany short-term
borrowings outstanding with NFC at a weighted average interest rate of 2.68%.
Northern Indiana may sell up to $100 million of certain of its accounts
receivable to Citibank under a sales agreement, without recourse, which expires
May 2003. Northern Indiana has sold $100 million under this agreement. Under
this agreement, Northern Indiana may not sell any new receivables to Citibank if
Northern Indiana's debt rating falls below BBB- or Baa3 at Standard and Poor's
and Moody's Investor Service, respectively.
Credit Ratings
On December 6, 2001 Fitch Ratings downgraded the long-term debt ratings of
NiSource and its subsidiaries. Fitch cited weak consolidated credit coverage
ratios and higher than projected debt levels at NiSource, resulting in a credit
profile which was more consistent with a "BBB" rating category, rather than the
previous "BBB+" rating. At the same time, Fitch also assigned a "Stable" ratings
outlook for NiSource and its subsidiaries. On February 5, 2002, Fitch reaffirmed
the credit ratings of NiSource and its subsidiaries, but revised NiSource's
ratings outlook from "Stable" to "Negative". In January 2002, Standard and
Poor's affirmed NiSource's BBB credit rating and its A2 commercial paper rating
with a negative outlook. On December 7, 2001, Moody's Investors Service put
under review for possible downgrade the short-term and long-term debt ratings of
NiSource and its subsidiaries. Moody's stated rationale for their negative
ratings watch action was NiSource's higher than expected overall leverage level
and concerns about the effect that the weakening local economy might have on
NiSource's operating results. Immediately following the Moody's ratings watch
action, NiSource's ability to rollover maturities within the A2/P2 commercial
paper market was significantly constrained. As a result, NiSource utilized its
revolving credit facility to fund a number of commercial paper maturities
occurring subsequent to the Moody's ratings watch action. At March 31, 2002,
$1.0 billion of commercial paper maturities had been refinanced through
NiSource's revolving credit facility. On February 1, 2002, Moody's downgraded
the senior unsecured long-term debt ratings of NiSource and NFC to Baa3 and the
commercial paper rating of NFC to P3 with a negative outlook. In addition,
Moody's downgraded the long-term debt ratings of all other rated subsidiaries to
Baa2 to align the ratings of the subsidiaries and bring them closer to the
parent's ratings going forward. As a split-rated A2/P3 commercial paper issuer,
NiSource has had its access to the commercial paper market constrained and has
met its liquidity needs going forward by using its revolving credit facility and
is expected to refinance a portion of its short-term borrowing requirements in
the fixed-income capital markets.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
Through its various business activities, Northern Indiana is exposed to risk
including non-trading and trading risks. The non-trading risks to which Northern
Indiana is exposed include interest rate risk and commodity price risk. The risk
resulting from trading activities consists primarily of commodity price and
credit 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 defined as 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 for an instrument or portfolio from
adverse changes in market factors, for a specified time period and at a
specified confidence level.
Non-Trading Risks
Commodity price risk resulting from non-trading activities at Northern Indiana
is limited, since current regulations allow recovery of prudently incurred
purchased power, fuel and gas costs through the rate-making process. As the
utility industry undergoes deregulation, however, these operations may be
providing services without the benefit of the traditional rate-making process
and will be more exposed to commodity price risk. Northern Indiana enters into
certain sales contracts with customers based upon a fixed sales price and
varying volumes, which are ultimately dependent upon the customer's supply
requirements. Northern Indiana utilizes derivative financial instruments to
reduce the commodity price risk based on modeling techniques to anticipate these
future supply requirements.
Northern Indiana is exposed to interest rate risk as a result of changes in
interest rates on intercompany borrowings with NFC. These instruments have
interest rates that are indexed to short-term market interest rates. At March
31, 2002, the combined borrowings outstanding under these facilities totaled
$139.5 million. Based upon average borrowings under these agreements during
2002, an increase in short-term interest rates of 100 basis points (1%) would
have increased interest expense by $0.6 million for the three months ending
March 31, 2002.
Due to the nature of the industry, credit risk is a factor in many of Northern
Indiana's business activities. In sales and trading activities, credit risk
arises because of the possibility that a counterparty will not be able or
willing to fulfill its obligations on a transaction on or before settlement
date. In derivative activities, credit risk arises when counterparties to
derivative contracts, such as interest rate swaps, are obligated to pay Northern
Indiana the positive fair value or receivable resulting from the execution of
contract terms. Exposure to credit risk is measured in terms of both current and
potential exposure. Current credit exposure is generally measured by the
notional or principal value of financial instruments and direct credit
substitutes, such as commitments and standby letters of credit and guarantees.
Current credit exposure includes the positive fair value of derivative
instruments. Because many of Northern Indiana's exposures vary with changes in
market prices, Northern Indiana also estimates the potential credit exposure
over the remaining term of transactions through statistical analyses of market
prices. In determining exposure, Northern Indiana considers collateral and
master netting agreements, which are used to reduce individual counterparty
risk.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Trading Risks
Effective November 1, 2001, Northern Indiana power trading activities were
temporarily transferred to Energy USA-TPC Corp., a subsidiary of NiSource. The
transactions associated with Northern Indiana's power trading operations have
given rise to various risks, including market risks resulting from the potential
loss from adverse changes in the market prices of electricity. The power trading
operations marketed and traded over-the-counter contracts for the purchase and
sale of electricity. The power trading activities generally have not resulted in
the physical delivery of electricity. Some contracts within the trading
portfolio required settlement by physical delivery, but were net settled in
accordance with industry standards.
Refer to and "Risk Management Activities" in Note 4 of Notes to the Consolidated
Financial Statements for further discussion of Northern Indiana's risk
management.
OTHER INFORMATION
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.
Insurance Renewal
Since the September 11, 2001 terrorist attacks that occurred on the World Trade
Center in New York City and the Pentagon in Washington D.C, Northern Indiana has
noted evidence of substantial rate increases and additional coverage
restrictions in the energy insurance market. Northern Indiana expects the cost
of its insurance and related deductibles to be higher than they were previously,
when much of its insurance is renewed in July 2002.
Presentation of Segment Information
During 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 Merchant
Operations. All periods presented reflect these changes.
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 through October 31,
2001.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS
Three Months Ended March 31, (in millions) 2002 2001
- ------------------------------------------------------------------------------------------------------------
NET REVENUES
Sales revenues $ 276.5 $ 468.8
Less: Cost of gas sold 176.7 357.7
- ------------------------------------------------------------------------------------------------------------
Net Sales Revenues 99.8 111.1
Transportation Revenues 12.3 14.5
- ------------------------------------------------------------------------------------------------------------
Net Revenues 112.1 125.6
- ------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 26.4 21.7
Depreciation and amortization 20.4 20.4
Other taxes 6.5 9.7
- ------------------------------------------------------------------------------------------------------------
Total Operating Expenses 53.3 51.8
- ------------------------------------------------------------------------------------------------------------
Operating Income (Loss) $ 58.8 $ 73.8
============================================================================================================
REVENUES ($ IN MILLIONS)
Residential 182.3 334.9
Commercial 56.0 111.0
Industrial 22.9 54.5
Transportation 12.3 14.5
Deferred Gas Costs 0.8 (64.4)
Other 14.5 32.8
- ------------------------------------------------------------------------------------------------------------
Total 288.8 483.3
- ------------------------------------------------------------------------------------------------------------
SALES AND TRANSPORTATION (MDth)
Residential Sales 28.9 30.0
Commercial Sales 9.5 10.2
Industrial Sales 3.9 4.3
Transportation 40.0 39.4
Other 3.8 3.1
- ------------------------------------------------------------------------------------------------------------
Total 86.1 87.0
- ------------------------------------------------------------------------------------------------------------
HEATING DEGREE DAYS 2,375 2,725
NORMAL HEATING DEGREE DAYS 2,809 2,809
% COLDER (WARMER) THAN NORMAL (15%) (3%)
CUSTOMERS
Residential 626,621 621,969
Commercial 48,095 48,183
Industrial 3,318 3,459
Transportation 14,810 15,352
Other 15 21
- ------------------------------------------------------------------------------------------------------------
TOTAL 692,859 688,984
- ------------------------------------------------------------------------------------------------------------
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS (CONTINUED)
Northern Indiana's natural gas distribution operations (Gas Distribution) serve
approximately 693,000 customers in the northern part of Indiana.
Market Conditions
Northern Indiana has state-approved recovery mechanisms that provide a means for
full recovery of prudently incurred gas costs. Gas costs are treated as
pass-through costs and have no impact on the net revenues recorded in the
period. The gas costs included in revenues are matched with the gas cost expense
recorded in the period and the difference is recorded on the balance sheet to be
included in a future billing mechanism to true up customer billings.
Northern Indiana has pursued non-traditional revenue sources within the evolving
natural gas marketplace. These efforts include both the sale of products and
services upstream of its service territory, the sale of products and services in
its service territories and gas supply cost incentive mechanisms for service to
its core markets. The upstream products are made up of transactions that occur
between Northern Indiana and a buyer for the sales of unbundled or rebundled gas
supply and capacity products. The on-system services are offered by Northern
Indiana to customers and include products such as the transportation of gas on
Northern Indiana's system. The incentive mechanisms gives Northern Indiana an
opportunity to share in the savings created from such things as gas purchase
prices paid below an agreed benchmark and its ability to reduce pipeline
capacity charges. The treatment of the revenues generated from these types of
transactions varies. Northern Indiana generated $3.6 million in net revenues
from various non-traditional sales and incentive programs in the first quarter
of 2002, a $5.5 million decrease over the prior period.
Weather
Weather in Northern Indiana's market area for the first three months of 2002 was
15% warmer than normal and 13% warmer than the first quarter of 2001.
Throughput
Total volumes sold and transported of 86.1 million dekatherms (MDth) for the
first quarter of 2002 decreased 0.9 MDth from the same period last year.
Net Revenues
Net revenues for the three months ended March 31, 2002 were $112.1 million, a
decrease of $13.5 million from the same period in 2001, primarily due to a
decline of approximately $9.6 million as a result of warmer weather, decreased
gas cost recovery initiatives and decreased industrial sales.
Operating Income
Operating income for the first quarter of 2002 of $58.8 million decreased $15.0
million from the same period in 2001. Operation and maintenance expenses
increased $4.7 million, primarily resulting from increased administrative and
general expenses and increased customer accounts expenses. Other taxes decreased
$3.2 million principally due to decreased Indiana Gross Income Tax.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS
Three Months Ended March 31, (in millions) 2002 2001
- -----------------------------------------------------------------------------------------------------
NET REVENUES
Sales Revenues $ 238.8 $ 247.3
Less: Cost of sales 64.6 66.4
- -----------------------------------------------------------------------------------------------------
Net Revenues 174.2 180.9
- -----------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 53.1 48.8
Depreciation and amortization 42.2 41.5
Other taxes 13.3 13.8
- -----------------------------------------------------------------------------------------------------
Total Operating Expenses 108.6 104.1
- -----------------------------------------------------------------------------------------------------
Operating Income $ 65.6 $ 76.8
=====================================================================================================
REVENUES ($ IN MILLIONS)
Residential 68.9 68.8
Commercial 69.0 68.0
Industrial 91.0 105.0
Other electric service 9.9 5.5
- -----------------------------------------------------------------------------------------------------
Total 238.8 247.3
- -----------------------------------------------------------------------------------------------------
SALES (GIGAWATT HOURS)
Residential 702.4 697.7
Commercial 831.7 815.4
Industrial 2,025.8 2,323.0
Other electric service 36.8 39.4
- -----------------------------------------------------------------------------------------------------
Total 3,596.7 3,875.5
- -----------------------------------------------------------------------------------------------------
CUSTOMERS
Residential 381,737 379,898
Commercial 47,486 46,670
Industrial 2,622 2,660
Other electric service 802 805
- -----------------------------------------------------------------------------------------------------
Total 432,647 430,033
- -----------------------------------------------------------------------------------------------------
Northern Indiana generates and distributes electricity approximately 433,000
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. The shutdown of the Dean Mitchell Generating Station
(Mitchell Station) announced in December 2001 was completed in the first
quarter of 2002. The net capability of the Mitchell Station was 502 mw. As of
March 31, 2002, excluding the Mitchell Station, these facilities provide for a
total system net capability of 2,890 mw. Northern Indiana is interconnected
with five neighboring electric utilities.
Market Conditions
The regulatory frameworks applicable to Electric Operations continue to work
through fundamental changes as noted below. These changes 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 indefinitely shutting down an inefficient generating plant, converting
some of its generating units to allow use of lower cost, low sulfur coal and
improving the transmission interconnections with neighboring electric utilities.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS (CONTINUED)
The overall weakening of the U.S. economy is reflected in the 297.2
gigawatt-hour (gwh) decline in sales to the industrial customer class for the
first quarter of 2002 compared to the same period last year. In particular, the
steel and steel related industries have been adversely impacted by recent events
and market conditions, with three major customers (LTV Corp., Bethlehem Steel
Corp. and National Steel Corp.) declaring bankruptcy. Overall deliveries to the
steel industry were down 229.8 gwh in the first quarter of 2002 compared to the
same period last year.
Regulatory Matters
In 1999, The Federal Energy Regulatory Commission (FERC) issued Order 2000
addressing the formation and operation of Regional Transmission Organization
(RTO). On February 28, 2001, Northern Indiana joined the Alliance RTO. On
December 18, 2001, the IURC issued an order denying Northern Indiana's request
to transfer functional control of its transmission facilities to the Alliance
RTO. On December 20, 2001, the FERC reversed prior orders that had preliminarily
approved the Alliance RTO and concluded that the Alliance RTO failed to meet
Order 2000's scope and configuration requirements. FERC ordered the Alliance RTO
companies, including Northern Indiana, to pursue membership in the Midwest
Independent System Operator (MISO). The Alliance RTO is actively negotiating to
become a part of the MISO. On April 24, 2002, FERC issued an Order giving
guidance regarding the rate design and delegation of functions applicable to the
Alliance companies, including efforts to join a RTO as an Independent
Transmission Company (ITC). In addition the Alliance companies must make a
filing by May 27, 2002 detailing which RTO they plan to join and whether such
participation will be collective or individual. Northern Indiana has expended
approximately $7.2 million related to joining the Alliance RTO. Northern Indiana
believes that the amounts spent will be recoverable.
Northern Indiana has been recovering the costs of electric power purchased for
sale to its customers through the Fuel Adjustment Clause. The recovery provides
for cost to be collected if they are below a cap set based upon the costs of
Northern Indiana's most expensive generating unit. If costs exceed this cap,
Northern Indiana must demonstrate why it should be allowed recovery before
recovery is approved. In January 2002, Northern Indiana filed for approval to
implement a purchase power tracker (PPT). The PPT would allow recovery of all
costs related to purchasing electricity for use by Northern Indiana's customers
on a periodic basis. No actions have been taken by the IURC on this filing.
During the course of a regularly scheduled review, referred to as a Level 1
review, the staff of the 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 efforts to explain to the IURC
staff several adjustments that needed to be made to the filed information to
make such an analysis meaningful, the staff recommended that a formal
investigation be performed. During 2001, Northern Indiana and several other
parties filed testimony, participated in hearings and submitted proposed forms
of the order and comments on these proposed orders. Northern Indiana's testimony
indicated that if rates are to be changed, they should be increased.
Environmental Matters
The U.S Environmental Protection Agency (EPA) issued final rules revising the
National Ambient Air Quality Standards for ozone and particulate matter in July
1997. On May 14, 1999, the United States Court of Appeals for the D.C. Circuit
remanded the new rules for both ozone and particulate matters to the EPA. The
Court of Appeals decision was appealed to the Supreme Court, which heard oral
arguments on November 7, 2000. The Supreme Court rendered a complex ruling on
February 27, 2001 that required several issues to be resolved by the D.C.
Circuit Court before final rulemaking could occur. On March 26, 2002, the D.C.
Circuit Court largely upheld the ambient air standards as proposed.
Consequently, final rules specifying a compliance level and controls necessary
for compliance will now be developed by EPA which will likely change air
emissions compliance requirements. Resulting rules could require additional
reductions in sulfur dioxide, particulate matter and nitrogen oxides emissions
from coal-fired boilers (including Northern Indiana's electric generating
stations). Final implementation
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS (CONTINUED)
methods will be set by the EPA as well as state regulatory authorities. Northern
Indiana believes that the costs relating to compliance with any new limits may
be substantial but are dependent upon the ultimate control program agreed to by
the targeted states and the EPA and are currently not reasonably estimable.
Northern Indiana will continue to closely monitor developments in this area,
however, the exact nature of the impact of the new standards on its operations
will not be known for some time.
Sales
Electric sales for the first quarter of 2002 were 3,596.7 million kilowatt-hours
(kwh), a decrease of 278.8 million kwh, compared to the 2001 period, primarily
due to reduced industrial sales reflecting the economic downturn.
Net Revenues
In the first quarter of 2002, electric net revenues of $174.2 million decreased
by $6.7 million over the 2001 period, primarily attributable to a decrease in
industrial net revenues due to the economic downturn.
Operating Income
Operating income for the first quarter of 2002 was $65.6 million, a decrease of
$11.2 million from the same period in 2001. Operation and maintenance expenses
increased $4.3 million, primarily resulting from increased administrative and
general expenses and increased customer accounts expenses, partially offset by
decreased electric production maintenance expenses. Depreciation and
amortization increased $0.7 million primarily due to plant additions.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
MERCHANT OPERATIONS
Three Months Ended March 31, (in millions) 2002 2001
- --------------------------------------------------------------------------------------------------------
NET REVENUES
Electric Revenues $ 23.1 $ 123.3
Less: Cost of sales 16.6 110.7
- --------------------------------------------------------------------------------------------------------
Net Revenues 6.5 12.6
TOTAL OPERATING EXPENSES 0.3 0.7
- --------------------------------------------------------------------------------------------------------
Operating Income $ 6.2 $ 11.9
========================================================================================================
VOLUMES
Electric sales (Gigawatt Hours) 756.9 2,569.7
- --------------------------------------------------------------------------------------------------------
Effective November 1, 2001, Northern Indiana's power trading operations were
temporarily transferred to Energy USA-TPC Corp., a subsidiary of NiSource.
Net Revenues
Net revenues for the first quarter of 2002 were $6.5 million, a decrease of $6.1
million over the same period last year. The decrease is due primarily to
decreased power trading margins since there were no power trading operations for
the first quarter of 2002.
Operating Income
Merchant Operations had operating income of $6.2 million for the first quarter
of 2002 compared to operating income of $11.9 million for the same period last
year. The decrease is primarily due to the decreased 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 Management's Discussion and Analysis of Financial Condition and
Results of Operations under "Market Risk Sensitive Instruments and Positions."
19
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
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Northern Indiana Public Service Company
----------------------------------------------
(Registrant)
Date: May 9, 2002 By: /s/ Jeffrey W. Grossman
----------------------------------------------
Jeffrey W. Grossman
Vice President
(Duly Authorized Officer)
21