-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WjMUjZvXF0ZKCWHTHBKSUnEjDEOWgaEzxkgQ8mrtGQrUh1kBHUnNpMDgOqHPtsPc hQb8IQQHxt6jmjx0AVFtew== 0000950137-03-005856.txt : 20031112 0000950137-03-005856.hdr.sgml : 20031111 20031112142200 ACCESSION NUMBER: 0000950137-03-005856 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHERN INDIANA PUBLIC SERVICE CO CENTRAL INDEX KEY: 0000072843 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 350552990 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04125 FILM NUMBER: 03992969 BUSINESS ADDRESS: STREET 1: 801 E. 86TH AVENUE CITY: MERRILLVILLE STATE: IN ZIP: 46410-6272 BUSINESS PHONE: 2198535200 MAIL ADDRESS: STREET 1: 801 E. 86TH AVENUE CITY: MERRILLVILLE STATE: IN ZIP: 46410-6272 10-Q 1 c80864e10vq.txt FORM 10-Q 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, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_____ to ______ Commission file number 1-4125 NORTHERN INDIANA PUBLIC SERVICE COMPANY ------------------------------------------------------ (Exact name of registrant as specified in its charter) Indiana 35-0552990 ------------------------------ ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 801 East 86th Avenue Merrillville, Indiana 46410 --------------------------- ----------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (877) 647-5990 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered -------------------------------------------- --------------------- Series A Cumulative Preferred - No Par Value New York 4-1/4% Cumulative Preferred - $100 Par Value American Securities registered pursuant to Section 12(g) of the Act: Cumulative Preferred Stock - $100 Par Value (4-1/2%, 4.22%, 4.88%, 7.44% and 7.50% Series) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] As of November 1, 2003, 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, 2003 TABLE OF CONTENTS
Page ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Statements of Consolidated Income .................................... 3 Consolidated Balance Sheets........................................... 4 Statements of Consolidated Cash Flows................................. 6 Statements of Consolidated Comprehensive Income ...................... 7 Notes to Consolidated Financial Statements............................ 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 25 Item 4. Controls and Procedures............................................... 25 PART II OTHER INFORMATION Item 1. Legal Proceedings..................................................... 26 Item 2. Changes in Securities and Use of Proceeds............................. 26 Item 3 Defaults Upon Senior Securities....................................... 26 Item 4. Submission of Matters to a Vote of Security Holders................... 26 Item 5. Other Information..................................................... 26 Item 6. Exhibits and Reports on Form 8-K...................................... 26 Signature........................................................................ 27
2 PART I ITEM 1. FINANCIAL STATEMENTS NORTHERN INDIANA PUBLIC SERVICE COMPANY STATEMENTS OF CONSOLIDATED INCOME (unaudited)
Three Months Nine Months Ended September 30, Ended September 30, -------------------- ----------------------- (in millions) 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------------------------- OPERATING REVENUES Gas $ 82.9 $ 63.8 $ 717.2 $ 488.8 Gas-Affiliated 1.5 2.1 9.6 7.7 Electric 307.5 318.0 819.3 855.5 Electric-Affiliated 7.3 15.1 17.7 24.0 - ------------------------------------------------------------------------------------------------------------------- Gross Operating Revenues 399.2 399.0 1,563.8 1,376.0 - ------------------------------------------------------------------------------------------------------------------- COST OF ENERGY Gas costs 56.0 30.0 521.1 292.2 Gas costs-Affiliated - 1.4 0.8 7.2 Fuel for electric generation 61.8 59.2 164.6 160.7 Fuel for electric generation-Affiliated 1.0 0.6 2.6 1.2 Power purchased 27.7 15.2 72.7 43.2 Power purchased-Affiliated 18.4 43.1 46.0 83.3 - ------------------------------------------------------------------------------------------------------------------- Cost of sales 164.9 149.5 807.8 587.8 - ------------------------------------------------------------------------------------------------------------------- Total Net Revenues 234.3 249.5 756.0 788.2 - ------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Operation 65.9 63.1 194.5 191.9 Maintenance 17.7 14.0 52.5 47.9 Depreciation and amortization 64.8 63.3 193.7 188.7 Other taxes 20.9 13.9 69.0 53.6 - ------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 169.3 154.3 509.7 482.1 - ------------------------------------------------------------------------------------------------------------------- UTILITY OPERATING INCOME BEFORE UTILITY INCOME TAXES 65.0 95.2 246.3 306.1 - ------------------------------------------------------------------------------------------------------------------- UTILITY INCOME TAXES 21.1 29.4 82.4 94.3 - ------------------------------------------------------------------------------------------------------------------- UTILITY OPERATING INCOME 43.9 65.8 163.9 211.8 - ------------------------------------------------------------------------------------------------------------------- OTHER INCOME (DEDUCTIONS) (0.4) - (0.4) (0.3) - ------------------------------------------------------------------------------------------------------------------- INTEREST Interest on long-term debt 9.7 11.8 32.3 37.1 Other interest (0.1) - 0.7 0.1 Other interest-Affiliated 2.4 0.9 6.1 3.4 Amortization of premium, reacquisition premium, discount and expense on debt, net 0.9 1.0 2.9 3.2 - ------------------------------------------------------------------------------------------------------------------- Total Interest 12.9 13.7 42.0 43.8 - ------------------------------------------------------------------------------------------------------------------- NET INCOME $ 30.6 $ 52.1 $ 121.5 $ 167.7 =================================================================================================================== DIVIDEND REQUIREMENTS ON PREFERRED STOCKS $ 1.1 $ 1.9 $ 3.4 $ 5.6 - ------------------------------------------------------------------------------------------------------------------- BALANCE AVAILABLE FOR COMMON SHARES $ 29.5 $ 50.2 $ 118.1 $ 162.1 - ------------------------------------------------------------------------------------------------------------------- COMMON DIVIDENDS DECLARED $ 27.4 $ 44.0 $ 92.9 $ 185.0 - -------------------------------------------------------------------------------------------------------------------
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, (in millions) 2003 2002 =================================================================================================================== (unaudited) ASSETS UTILITY PLANT, at original cost Electric $ 4,717.7 $ 4,590.6 Gas 1,480.8 1,455.1 Common 369.4 369.9 - ------------------------------------------------------------------------------------------------------------------- Total Utility Plant 6,567.9 6,415.6 Less: Accumulated provision for depreciation and amortization 3,704.6 3,547.7 - ------------------------------------------------------------------------------------------------------------------- Net utility plant 2,863.3 2,867.9 - ------------------------------------------------------------------------------------------------------------------- OTHER PROPERTY AND INVESTMENTS 2.4 8.7 - ------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents 7.0 4.4 Restricted cash 3.1 - Accounts receivable (less reserve of $11.1 and $7.8, respectively) 37.9 94.4 Unbilled revenue (less reserve of $0.6 and $0.6, respectively) 64.0 72.3 Underrecovered fuel cost 0.8 2.3 Underrecovered gas cost - 47.8 Materials and supplies, at average cost 46.3 44.3 Electric production fuel, at average cost 32.4 39.0 Natural gas in storage, at last-in, first-out cost 137.5 15.5 Price risk management assets 1.5 3.5 Regulatory assets 13.5 11.5 Prepayments and other 57.3 24.7 - ------------------------------------------------------------------------------------------------------------------- Total Current Assets 401.3 359.7 - ------------------------------------------------------------------------------------------------------------------- OTHER ASSETS Regulatory assets 214.2 225.6 Intangible assets 20.7 25.1 Deferred charges and other 2.9 5.1 - ------------------------------------------------------------------------------------------------------------------- Total Other Assets 237.8 255.8 - ------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 3,504.8 $3,492.1 ===================================================================================================================
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, (in millions) 2003 2002 - -------------------------------------------------------------------------------------------------------------------- (unaudited) CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholder's equity $ 940.9 $ 899.6 Preferred Stocks-- Series without mandatory redemption provisions 81.1 81.1 Series with mandatory redemption provisions - 3.8 Long-term debt, excluding amounts due within one year 681.6 713.4 - -------------------------------------------------------------------------------------------------------------------- Total Capitalization 1,703.6 1,697.9 - -------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Current portion of long-term debt 38.0 130.0 Short-term borrowings-Affiliated 567.0 448.9 Accounts payable 102.5 162.2 Accounts payable-Affiliated 16.6 25.3 Dividends declared on common and preferred stocks 1.1 1.1 Customer deposits 47.6 39.3 Taxes accrued 132.5 71.0 Interest accrued 11.3 9.9 Overrecovered gas costs 4.5 - Accrued employment costs 21.5 25.7 Price risk management liabilities 3.4 0.8 Regulatory liabilities 3.8 - Accrued liability for postretirement and pension benefits 13.6 10.0 Other accruals 34.6 46.8 - -------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 998.0 971.0 - -------------------------------------------------------------------------------------------------------------------- OTHER LIABILITIES AND DEFERRED CREDITS Deferred income taxes 478.7 488.9 Deferred investment tax credits 59.0 64.3 Deferred credits 18.4 43.2 Accrued liability for postretirement and pension benefits 213.3 219.0 Preferred stock liabilities with mandatory redemption provisions 3.0 - Regulatory liabilities 5.2 4.9 Other noncurrent liabilities 25.6 2.9 - -------------------------------------------------------------------------------------------------------------------- Total Other 803.2 823.2 - -------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES - - - -------------------------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION AND LIABILITIES $ 3,504.8 $ 3,492.1 ====================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5 ITEM 1. FINANCIAL STATEMENTS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY STATEMENTS OF CONSOLIDATED CASH FLOWS (unaudited)
Nine Months Ended September 30, ----------------------------- (in millions) 2003 2002 - ------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net Income $ 121.5 $ 167.7 Adjustments to reconcile net income to net cash: Depreciation and amortization 193.7 188.7 Net changes in price risk management activities 4.6 (4.9) Deferred income taxes (45.3) (7.6) Amortization of deferred investment tax credits (5.3) (5.3) Other, asset items 9.9 15.1 Other, liability items 19.7 11.3 Changes in components of working capital: Accounts receivable, net 62.0 42.0 Electric production fuel 7.0 0.1 Materials and supplies (2.0) (0.5) Natural gas in storage (122.0) 71.2 Accounts payable (53.2) 3.1 Taxes accrued 57.8 73.8 (Under) Overrecovered fuel cost 1.5 (12.2) (Under) Overrecovered gas cost 52.3 2.0 Accrued employment costs (4.2) 5.0 Other accruals (4.8) 23.3 Other assets (3.7) (52.0) Other liabilities 8.5 8.0 - ------------------------------------------------------------------------------------------------------------------ Net Cash from Operating Activities 298.0 528.8 - ------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Construction expenditures (195.4) (169.4) Proceeds from disposition of assets 2.8 - - ------------------------------------------------------------------------------------------------------------------ Net Investing Activities (192.6) (169.4) - ------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Retirement of long-term debt (124.0) (54.5) Change in short-term debt 118.1 (159.3) Retirement of preferred shares (0.6) (0.6) Dividends paid - common shares (92.9) (141.0) Dividends paid - preferred shares (3.4) (5.6) Other financing activities, net - 0.2 - ------------------------------------------------------------------------------------------------------------------ Net Financing Activities (102.8) (360.8) - ------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents 2.6 (1.4) Cash and cash equivalents at beginning of period 4.4 8.5 - ------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7.0 $ 7.1 ================================================================================================================== ($ in millions) - ------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest 36.4 37.5 Interest capitalized 1.6 1.2 Cash paid for income taxes 87.9 33.0 - ------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 6 ITEM 1. FINANCIAL STATEMENTS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (unaudited)
Three Months Nine Months Ended September 30, Ended September 30, ---------------------- ---------------------- (in millions, net of tax) 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------------------------ Net Income $ 30.6 $ 52.1 $ 121.5 $ 167.7 Other comprehensive income (loss), net of tax Net unrealized gains (losses) on cash flow hedges (1.3) 0.1 (2.3) 2.9 Minimum pension liability adjustment 18.3 (154.0) 18.3 (154.0) - ------------------------------------------------------------------------------------------------------------------ Total other comprehensive income (loss) 17.0 (153.9) 16.0 (151.1) - ------------------------------------------------------------------------------------------------------------------ Total Comprehensive Income (Loss) $ 47.6 $ (101.8) $ 137.5 $ 16.6 ==================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 7 ITEM 1. FINANCIAL STATEMENTS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. HOLDING COMPANY STRUCTURE Effective March 3, 1988, Northern Indiana Public Service Company (Northern Indiana) became a subsidiary of NIPSCO Industries, Inc., an Indiana corporation. NIPSCO Industries, Inc. changed its name to NiSource Inc. (NiSource) on April 14, 1999. NiSource is an energy holding company that provides natural gas, electricity and other products and services to approximately 3.7 million customers located within a corridor that runs from the Gulf Coast through the Midwest to New England. Subsequent to the completion of the acquisition of Columbia Energy Group (Columbia) on November 1, 2000, NiSource became a Delaware corporation. NiSource is a registered holding company under the Public Utility Holding Company Act of 1935, as amended. 2. 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 of America. The accompanying financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Northern Indiana's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. 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 2002 financial statements to conform to the 2003 presentation. 3. REGULATORY MATTERS During 2002, Northern Indiana settled matters related to an electric rate review. On September 23, 2002, the Indiana Utility Regulatory Commission (IURC) issued an order adopting most aspects of the settlement. The order approving the settlement provides that electric customers of Northern Indiana will receive an amount intended to approximate $55.1 million each year in credits to their electric bills for 49 months, beginning on July 1, 2002. The order also provides that 60% of any future earnings beyond a specified cap will be retained by Northern Indiana. Credits amounting to $39.8 million were recognized for electric customers for the first nine months of 2003. The order adopting the settlement was appealed to the Indiana Court of Appeals by both the Citizens Action Coalition of Indiana and fourteen residential customers. On October 14, 2003, the Appeals Court upheld the IURC's approval of the settlement. Northern Indiana submitted its quarterly fuel adjustment clause (FAC) filing for the twelve-month period ended September 30, 2002, which included a calculation for the sharing of earnings in excess of allowed earnings as outlined in the IURC order regarding the electric rate review settlement. The IURC issued an order related to the filing on January 29, 2003 rejecting Northern Indiana's sharing calculation, which prorated the amount to be shared with the customers based on the amount of time the rate credit, was in effect during the twelve-month period. Northern Indiana filed a request for a rehearing and reconsideration of the order. On March 12, 2003, the IURC denied Northern Indiana's request and the appropriate amount has been refunded to customers. Northern Indiana has been recovering the costs of electric power purchased for sale to its customers through the FAC. The FAC provides for costs to be collected if they are below a negotiated cap. If costs exceed this cap, Northern Indiana must demonstrate that the costs were prudently incurred to achieve approval for recovery. A group of industrial customers has challenged the manner in which Northern Indiana has applied costs associated with a specific interruptible sales tariff. An estimated refund liability was recorded in the first quarter of 2003. A settlement was reached with the customers and Northern Indiana recorded an additional refund liability in the third quarter. It is expected that as a result of the settlement the industrial customers challenge will be withdrawn or dismissed. In January 2002, Northern Indiana filed a proceeding with the IURC for approval to implement a purchase power tracker. On March 21, 2003, Northern Indiana amended the January 2002 filing by withdrawing its request to implement a purchased power tracker and to instead allow recovery, via the FAC, of transmission costs paid to third parties, and the costs associated with electric physical derivative transactions, including option premiums to purchase power, and brokerage commissions. In October 2003, Northern Indiana voluntarily withdrew its amended request and the entire proceeding was dismissed. 8 ITEM 1. FINANCIAL STATEMENTS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) On December 30, 2002, the Federal Energy Regulatory Commission (FERC) issued an order that, among other things, reduced the rate base and rate of return allowed to Northern Indiana under electric rates proposed in connection with the filing of its 1995 Open Access Transmission Tariff, thus creating a refund liability for Northern Indiana. Northern Indiana did not seek rehearing of the FERC's December 30, 2002 order and submitted a compliance filing on March 17, 2003, which proposed rates and services in compliance with the FERC's order. An August 26, 2003 order accepted Northern Indiana's March 17, 2003 compliance filing. Northern Indiana made refunds on September 24, 2003 and filed a refund report at FERC on September 26, 2003. In January 2002, Northern Indiana filed for approval to implement an environmental cost tracker (ECT). The ECT was approved by the IURC on November 26, 2002. Under the ECT Northern Indiana will be able to recover (1) allowance for funds used during construction and a return on the capital investment expended by Northern Indiana to implement Indiana Department of Environmental Management's nitrogen oxide State Implementation Plan through an Environmental Cost Recovery Mechanism (ECRM) and (2) related operation and maintenance and depreciation expenses once the environmental facilities become operational through an Environmental Expense Recovery Mechanism (EERM). Northern Indiana will submit filings on a semi-annual basis for the ECRM and on an annual basis for the EERM. Northern Indiana made its initial filing of the ECRM in February 2003 for capital expenditures of $58.4 million. On April 30, 2003, the IURC issued an order approving the ECRM filing, which allows for collection of allowance for funds used during construction and a return on the capital investment beginning with the May 2003 customer bills. Through September 30, 2003 the ECRM revenues amounted to $2.5 million. On August 1, Northern Indiana filed the ECRM on capital investments of $120.0 million. This petition was approved by the IURC on October 1, 2003. The initial filing of the EERM is anticipated with the next semi-annual filing of the ECT. Over the timeframe required to meet the environmental standards, Northern Indiana anticipates a total capital investment amounting to approximately $274.2 million. The IURC order is currently being appealed to the Indiana Court of Appeals by the Citizens Action Coalition of Indiana. On June 20, 2002, Northern Indiana, Ameren Corporation and First Energy Corporation established terms for joining the Midwest Independent System operator (MISO) through participation in an independent transmission company (ITC). The MISO arrangements were filed with the FERC, and on July 31, 2002, the FERC issued an order conditionally approving these arrangements. On November 5, 2002, the ITC, which includes Northern Indiana, signed an agreement with MISO. At its April 30, 2003 meeting, FERC approved the transfer of functional control of Northern Indiana's transmission system to the ITC and issued an order addressing the pricing of electric transmission. An IURC order approving the transfer of functional control of the transmission system to the ITC was issued on September 24, 2003. An uncontested settlement that authorizes reimbursement of $7.4 million to Northern Indiana for incurred costs was approved by the FERC on July 31, 2003. This reimbursement was received on September 30, 2003. Functional control was transferred to the ITC and MISO on October 1, 2003. 4. RESTRUCTURING ACTIVITIES Since 2000, Northern Indiana's parent company NiSource has implemented restructuring initiatives to streamline its operations and realize efficiencies culminating from the acquisition of Columbia. For all of the initiatives, a total of approximately 180 management, professional, administrative and technical positions have been identified for elimination at Northern Indiana. As of September 30, 2003, 160 employees have been terminated, of whom 2 employees and 8 employees were terminated during the third quarter and nine months ended September 30, 2003, respectively. At September 30, 2003 and December 31, 2002, the consolidated balance sheets reflected liabilities of $1.3 million and $2.4 million, respectively, related to the restructuring plans. During the third quarter and nine months ended September 30, 2003, $0.1 million and $1.0 million of benefits, respectively, were paid as a result of the restructuring plans. Additionally, during the first quarter and nine months ended September 30, 2003, the restructuring plan liability was reduced by $0.1 million due to a reduction in estimated costs related to the reorganization initiatives. 9 ITEM 1. FINANCIAL STATEMENTS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 5. 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 Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). HEDGING ACTIVITIES. The activity for the third quarter and nine months ended September 30, 2003 and September 30, 2002 affecting accumulated other comprehensive income, with respect to cash flow hedges included the following:
Three Months Nine Months Ended September 30, Ended September 30, ---------------------- ---------------------- (in millions, net of tax) 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------------------------ Unrealized gains (losses) on derivatives qualifying as cash flow hedges at the beginning of the period $ 1.3 $ 0.1 $ 2.3 $ (2.7) Unrealized hedging gains (losses) arising during the period of derivatives qualifying as cash flow hedges (0.5) - (2.7) 2.0 Reclassification adjustment for net loss (gain) included in net income (0.8) 0.1 0.4 0.9 - ------------------------------------------------------------------------------------------------------------------ Net unrealized gains on derivatives qualifying as cash flow hedges at the end of the period $ - $ 0.2 $ - $ 0.2 - ------------------------------------------------------------------------------------------------------------------
Unrealized gains and losses on Northern Indiana's hedges were recorded as price risk management assets and liabilities. The accompanying consolidated balance sheets reflected price risk management assets of $1.5 million and $3.5 million at September 30, 2003 and December 31, 2002, respectively, which were included in "Current Assets." Price risk management liabilities were $3.4 million and $0.8 million at September 30, 2003 and December 31, 2002, respectively, both of which were included in "Current Liabilities." During the third quarter 2003, no amounts were recognized in earnings due to ineffectiveness and there were no components of the derivatives' fair values excluded in the assessment of hedge effectiveness. Also, during the third quarter, Northern Indiana did not reclassify any amount from other comprehensive income to earnings, due to the probability that certain originally forecasted transactions would not occur. It is anticipated that during the next twelve months the expiration and settlement of cash flow hedge contracts will result in no income recognition of amounts being currently classified in other comprehensive income, net of tax. 6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143 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 the cost, thereby increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted, and the capitalized cost is depreciated over the useful life of the related asset. Northern Indiana defers the difference between the amount recognized for depreciation and accretion and the amount collected in rates as required pursuant to SFAS No. 71,"Accounting for the Effects of Certain Types of Regulation." Northern Indiana's asset retirement obligations liability is mainly comprised of obligations for the removal of certain hydro towers and obligations associated with leased railcars. Asset retirement obligations related to the gas and electric distribution facilities were identified, however the associated liabilities were not quantifiable due to the indeterminate lives of the associated assets. 10 ITEM 1. FINANCIAL STATEMENTS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Northern Indiana adopted the provisions of SFAS No. 143 on January 1, 2003 and as a result an asset retirement obligations liability of $1.9 million was recognized. In addition, Northern Indiana capitalized $0.8 million in additions to plant assets, net of accumulated amortization, and recognized regulatory assets of $1.2 million. Certain costs of removal that have been, and continue to be, included in depreciation rates and collected in Northern Indiana's service rates, did not meet the definition of an asset retirement obligation pursuant to SFAS No. 143. The amount of the other costs of removal reflected as a component of Northern Indiana's accumulated depreciation and amortization was approximately $651.7 million at September 30, 2003 based on rates for estimated removal costs embedded in composite depreciation rates. For the third quarter and nine months ended September 30, 2003, Northern Indiana amortized less than $0.1 million and $0.1 million, respectively, related to the amounts capitalized as additions to plant and accreted the liability by $0.1 million with corresponding amounts recognized as regulatory assets at September 30, 2003. The asset retirement obligations liability totaled $2.0 million at September 30, 2003. Had Northern Indiana adopted SFAS No. 143 at the dates the actual liabilities were incurred, the asset retirement obligations liability would have been $1.8 million and $1.5 million at December 31, 2001 and 2000, respectively. FASB INTERPRETATION NO. 46 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). On October 8, 2003, the FASB deferred the implementation of FIN 46 to the fourth quarter of 2003. Northern Indiana is currently evaluating FIN 46 in order to determine the impact. SFAS NO. 149 - AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Effective July 1, 2003, Northern Indiana adopted SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS No. 149). SFAS No. 149 codifies and clarifies financial accounting and reporting for derivative instruments and hedging activities under SFAS No. 133 primarily in connection with decisions made by the Derivatives Implementation Group and for implementation issues raised in the application of SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. SFAS No. 149 did not have a material impact on Northern Indiana's results of operations during the third quarter of 2003. However, the statement could have a significant impact on the number of contracts that will be marked to market through earnings. SFAS NO. 150 - ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. In the second quarter 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" (SFAS No. 150). SFAS No. 150 requires classification of a financial instrument within its scope as a liability because it embodies an obligation of the issuer. As defined in SFAS No. 150, an obligation is a conditional or unconditional duty or responsibility to transfer assets or to issue equity shares. Instruments that fall within the scope of SFAS No. 150 include mandatorily redeemable financial instruments, obligations to repurchase an issuer's equity shares by transferring assets and certain obligations to issue a variable number of shares. SFAS No. 150 is generally effective for interim periods beginning after June 15, 2003 for financial instruments created prior to June 1, 2003. For any instruments entered into or modified after May 31, 2003, the Statement is effective for those instruments upon consummation or modification. As a result of SFAS No. 150, Northern Indiana reclassified its mandatory redeemable preferred stock to a non-current liability in the third quarter of 2003. EITF ISSUE NO. 03-11 - REPORTING REALIZED GAINS AND LOSSES ON DERIVATIVE INSTRUMENTS THAT ARE SUBJECT TO FASB STATEMENT NO. 133 AND NOT "HELD FOR TRADING PURPOSES" AS DEFINED IN EITF ISSUE NO. 02-03. In August 2003, the EITF released Issue No. 03-11, which provides guidance on whether to report realized gains or losses on derivative contracts that settle on a net basis. Currently, Northern Indiana generally reports contracts requiring physical delivery of a commodity on a gross basis, even when the contract is ultimately net settled. EITF No. 03-11 will be applied to financial statement periods after September 30, 2003. Northern Indiana is currently evaluating the effect that EITF 03-11 will have on the financial statements. 11 ITEM 1. FINANCIAL STATEMENTS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 7. STOCK OPTIONS AND AWARDS NiSource currently issues long-term incentive grants to key management employees, including the management of Northern Indiana. SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), encourages, but does not require, entities to adopt the fair value method of accounting for stock-based compensation plans. The fair value method requires the amortization of the fair value of stock-based compensation at the date of grant over the related vesting period. NiSource continues to apply the intrinsic value method of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), for awards granted under the stock-based compensation plans. Northern Indiana recognized stock-based employee compensation cost, net of taxes, of $0.1 million and $0.2 million for the three and nine months ended September 30, 2003, respectively. The following table illustrates the effect on Northern Indiana's net income as if NiSource had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.
Three Months Nine Months Ended September 30, Ended September 30, ---------------------- --------------------- (in millions, net of tax) 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------------------------ NET INCOME As reported $ 30.6 $ 52.1 $ 121.5 $ 167.7 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 0.1 - 0.2 - Less: Total stock-based employee compensation expense determined under the fair value method for all awards, net of tax (0.4) (0.4) (1.4) (1.0) - ------------------------------------------------------------------------------------------------------------------ Pro forma $ 30.3 $ 51.7 $ 120.3 $ 166.7 - ------------------------------------------------------------------------------------------------------------------
8. LEGAL PROCEEDINGS In the normal course of its business, Northern Indiana has been named as defendants in various legal proceedings. In the opinion of management, the ultimate disposition of these currently asserted claims would not have a material adverse impact on Northern Indiana's financial position. 9. ACCUMULATED OTHER COMPREHENSIVE INCOME The following table displays the components of Accumulated Other Comprehensive Income.
SEPTEMBER December 31, (in millions, net of tax) 2003 2002 - ------------------------------------------------------------------------------------------------------------------- Net unrealized gains on cash flow hedges $ - $ 2.3 Minimum pension liability adjustment (125.2) (143.5) - ------------------------------------------------------------------------------------------------------------------- Total Accumulated Other Comprehensive Income (Loss), net $ (125.2) $ (141.2) - -------------------------------------------------------------------------------------------------------------------
10. MINIMUM PENSION LIABILITY Northern Indiana used a measurement date of September 30, 2003 for the calculation of its obligations under the pension and other postretirement benefit plans. Due to the upswing in the equity markets, the fair value of Northern Indiana's pension fund assets has increased since September 30, 2002. However, the discount rate used to measure the accumulated benefit obligation has decreased, which slightly offset the increase in the pension assets. In accordance with FASB No. 87, "Employers' Accounting for Pensions," Northern Indiana adjusted its minimum pension liability at September 30, 2003. The adjustment resulted in a decrease to the retirement benefit liabilities of $33.7 million, a decrease in intangible assets of $4.3 million, a decrease to deferred income tax assets of $11.1 million and an increase to other comprehensive income of $18.3 million after-tax. 12 ITEM 1. FINANCIAL STATEMENTS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 11. BUSINESS SEGMENT INFORMATION During 2002, Northern Indiana re-aligned its reportable segments to reflect its current operating structure. Electric wholesale and wheeling results were moved to the Electric segment. As a result of the realignment, all 2002 periods have been adjusted to reflect the new segments. Northern Indiana's operations are divided into two primary business segments. The Gas Distribution segment provides natural gas service and transportation for residential, commercial and industrial customers in Indiana. The Electric Operations segment provides electric service in 21 counties in the northern part of Indiana and engages in electric wholesale and wheeling transactions. The following tables provide information about business segments. Adjustments have been made to the segment information to arrive at information included in the results of operations and financial position. Northern Indiana uses operating income as its primary measurement for each of the reported segments. Operating income is derived from revenues and expenses directly associated with each segment.
($ in millions) GAS ELECTRIC ADJUSTMENTS TOTAL - ------------------------------------------------------------------------------------------------------------------ FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 Operating revenues 84.4 314.8 - 399.2 Utility operating income (loss) before utility income taxes (24.5) 89.5 - 65.0 FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 Operating revenues 65.9 333.1 - 399.0 Utility operating income (loss) before utility income taxes (11.8) 107.6 (0.6) 95.2 - ------------------------------------------------------------------------------------------------------------------
($ in millions) GAS ELECTRIC ADJUSTMENTS TOTAL - ------------------------------------------------------------------------------------------------------------------ FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 Operating revenues 726.8 837.0 - 1,563.8 Utility operating income before utility income taxes 40.1 206.2 - 246.3 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 Operating revenues 496.5 879.5 - 1,376.0 Utility operating income (loss) before utility income taxes 46.3 260.4 (0.6) 306.1 - ------------------------------------------------------------------------------------------------------------------
13 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 risks are beyond the control of Northern Indiana. In addition, the relative contributions to profitability by each segment, and the assumptions underlying the forward-looking statements relating thereto, may change over time. The following Management's Discussion and Analysis should be read in conjunction with Northern Indiana's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (Form 10-K). THIRD QUARTER AND NINE MONTH RESULTS Net Income Northern Indiana reported net income of $30.6 million for the three months ended September 30, 2003, compared to $52.1 million in the 2002 period. For the nine months ended September 30, 2003, Northern Indiana reported net income of $121.5 million, a $46.2 million decrease from the 2002 period. Net Revenues Total net revenues (operating revenues less cost of sales) for the three months ended September 30, 2003, were $234.3 million, a $15.2 million decrease from the same period last year. The decrease in net revenues was primarily a result of a $9.1 million decrease in electric net revenues primarily due to cooler weather in the 2003 period and a $6.1 million decrease in gas net revenues as a result of lower non-weather related gas sales volumes and incentive program revenues. Total net revenues for the nine months ended September 30, 2003, were $756.0 million, a $32.2 million decrease from the same period last year. The decrease was primarily a result of $25.4 million from credits issued pertaining to the Indiana Utility Regulatory Commission (IURC) electric rate review settlement and cooler weather during the summer season that decreased electric sales by $21.3 million, partially offset by increased net gas revenues of $7.8 million mostly due to colder weather during the first three months of the year, and partially offset by decreased non-weather related gas sales and lower incentive program revenues. Expenses Operating expenses for the third quarter 2003 were $169.3 million, an increase of $15.0 million over the 2002 period. Operation and maintenance expenses increased $6.5 million mainly due to increased pension and postretirement costs of $5.7 million, increased environmental reserves of $1.2 million and increased electric maintenance expenses of $3.6 million. These increases were partially offset by a $3.1 million decrease in expense related to the amortization of electric rate review costs. Depreciation and amortization expense increased by $1.5 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY million due to plant additions. Other taxes increased $7.0 million, principally due to increased property taxes and increased gross receipts taxes that are generally offset in revenues. The property tax increase was primarily due to a reduction in property taxes in 2002 due to changes in the state property tax regulations. Operating expenses for the nine months ended September 30, 2003 were $509.7 million, an increase of $27.6 million from the 2002 period. Operations and maintenance expenses increased $7.2 million mainly due to increased pension and postretirement costs of $18.0 million and increased electric maintenance expenses of $4.3 million. These increases were partially offset by decreased employee-related and administrative expenses of $11.5 million, decreased expense related to the amortization of electric rate review costs of $2.6 million and decreased uncollectibles of $2.5 million. Depreciation and amortization expense increased by $5.0 million due to plant additions. Other taxes increased $15.4 million, principally due to increased property taxes and higher gross receipts taxes, which are generally offset in revenues. The property tax increase was primarily due to a reduction in property taxes in 2002 due to changes in the state property tax regulations. Utility Income Taxes Utility income tax expenses for the third quarter 2003 were $21.1 million, compared to $29.4 million in 2002, due to lower pre-tax income. Utility income tax expenses for the nine months of 2003 were $82.4 million compared to $94.3 million in 2002, due to lower pre-tax income. Interest Interest expense for the third quarter 2003 was $12.9 million, a decrease of $0.8 million compared to the 2002 period, primarily due to a reduction in long-term debt. Interest expense for the first nine months of 2003 was $42.0 million, a decrease of $1.8 million compared to the 2002 period, primarily due to a reduction in long-term debt, partially offset by increased short-term borrowings. 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 distribution and electric businesses, is subject to seasonal fluctuations in cash flow. During the heating season, which is primarily from November through March, cash receipts from gas sales and transportation services typically exceed cash requirements. During the summer months, cash on hand, together with 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. Net cash from operations for the nine months ended September 30, 2003 was $298.0 million, a decrease of $230.8 million from the comparable period in 2002. The decrease was mainly due to a reduction in cash generated from working capital, principally driven by a decrease in accounts payable and increased natural gas, partly offset by decreased underrecovered gas costs. During the first nine months of 2003, Northern Indiana redeemed $124.0 million of medium-term notes. Northern Indiana satisfies its liquidity requirements primarily through internally generated funds and through intercompany borrowings from the NiSource Money Pool. Northern Indiana may borrow a maximum of $1.0 billion through the NiSource Money Pool as approved by the Securities and Exchange Commission under the Public Utility Holding Company Act of 1935. NiSource Finance Corp. (NFC) provides funding to the NiSource Money Pool from external borrowing sources. Due to NiSource's strong liquidity position, NFC elected not to renew its $500.0 million 364-day credit facility, which expired on March 20, 2003. The 364-day credit facility allowed NFC to utilize the $500 million facility to support the issuance of letters of credit. As a result of its expiration, the NFC $1.25 billion three-year facility that expires on March 23, 2004 has been amended to allow for an increase in the aggregate letters of credit outstanding from $150.0 million to $500.0 million. The credit facility is guaranteed by NiSource. As of September 30, 2003, Northern Indiana had $567.0 million of intercompany short-term borrowings outstanding at an interest rate of 1.73%. As of December 31, 2002, Northern Indiana had an intercompany note payable of $448.9 million at an interest rate of 2.11%. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY Credit Ratings On July 8, 2003, Moody's Investors Service affirmed the senior unsecured ratings of NiSource at Baa3, and the existing ratings of all other subsidiaries, concluding a review for possible downgrade that began on May 13, 2003. Moody's ratings outlook for NiSource and its subsidiaries is now "stable". On June 30, 2003, Fitch Ratings affirmed their BBB senior unsecured rating for NiSource. Fitch also lowered the rating of Northern Indiana by one notch to BBB+ due to Fitch's policy of restricting the ratings between a parent and its subsidiaries where short-term financing facilities are solely at the holding company level. This does not reflect weakening credit measures at Northern Indiana. Fitch's outlook for NiSource and all of its subsidiaries is stable. On June 16, 2003, Standard and Poor's affirmed its senior unsecured ratings of NiSource at BBB, and the existing ratings of all other subsidiaries. Standard and Poor's outlook for NiSource and all of its subsidiaries were revised from negative to stable. Northern Indiana may sell up to $100.0 million of certain of its accounts receivable under a sales agreement, without recourse. As of September 30, 2003, Northern Indiana has sold $100.0 million of its accounts receivable under this agreement. Northern Indiana and Citibank are currently negotiating a new Accounts Receivable Sales Agreement which would increase Northern Indiana's capacity under this program to $200.0 million. MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS Through its various business activities, Northern Indiana is exposed to risk including commodity price, interest rate and credit risks. Northern Indiana's risk management policy permits the use of certain financial instruments to manage its market risk, including futures, forwards, options and swaps. Non-Trading Risks Commodity price risk at Northern Indiana is limited, since regulations allow recovery of prudently incurred purchased power, fuel and gas costs through the rate-making process. As states experiment with regulatory reform, Northern Indiana may begin providing services without the benefit of the traditional rate-making process and may be more exposed to commodity price risk. Northern Indiana enters into certain sales contracts with customers based upon a fixed sales price and varying volumes, which are ultimately dependent upon the customer's supply requirements. Northern Indiana utilizes derivative financial instruments to reduce the commodity price risk based on modeling techniques to anticipate these future supply requirements. Northern Indiana is exposed to interest rate risk as a result of changes in interest rates on intercompany borrowings with NFC. These borrowings have interest rates that are indexed to short-term market interest rates. At September 30, 2003, the outstanding borrowings totaled $567.0 million. Based upon average borrowings during 2003, an increase in short-term interest rates of 100 basis points (1%) would have increased interest expense by $1.4 million and $3.2 million for the quarter and nine months ended September 30, 2003. OTHER INFORMATION Critical Accounting Policies Northern Indiana applies certain accounting policies based on the accounting requirements discussed below that have had, and may continue to have, significant impacts on Northern Indiana's results of operations and consolidated balance sheets. FINANCIAL ACCOUNTING STANDARDS BOARD'S (FASB) STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 71 ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION. SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71), provides that rate-regulated subsidiaries account for and report assets and liabilities consistent with the economic effect of the way in which regulators establish rates, if the rates established are designed to recover the costs of providing the regulated service and if the competitive environment makes it probable that such rates can be charged and collected. Northern Indiana follows the accounting and reporting requirements of SFAS No. 71. Certain expenses and credits subject to utility regulation or rate determination normally reflected in income are deferred on the balance sheet and are recognized in income as the related amounts are included in service rates and recovered from or refunded to customers. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY In the event that regulation significantly changes the opportunity for Northern Indiana to recover its costs in the future, all or a portion of Northern Indiana's regulated operations may no longer meet the criteria for the application of SFAS No. 71. In such event, a write-down of all or a portion of Northern Indiana's existing regulatory assets and liabilities could result. If transition cost recovery is approved by the IURC, that would meet the requirements under generally accepted accounting principles for continued accounting as regulatory assets and liabilities during such recovery period, the regulatory assets and liabilities would be reported at the recoverable amounts. If unable to continue to apply the provisions of SFAS No. 71, Northern Indiana would be required to apply the provisions of SFAS No. 101, "Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement No. 71." In management's opinion, Northern Indiana will be subject to SFAS No. 71 for the foreseeable future. Certain of the regulatory assets reflected on Northern Indiana's Consolidated Balance Sheets require specific regulatory action in order to be included in future service rates. Although recovery of these amounts is not guaranteed, Northern Indiana believes that these costs meet the requirements for deferral as regulatory assets under SFAS No. 71. HEDGING ACTIVITIES. Under SFAS No. 133 as amended, "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), the accounting for changes in the fair value of a derivative depends on the intended use of the derivative and resulting designation. Unrealized and realized gains and losses are recognized each period as components of other comprehensive income, earnings, or regulatory assets and liabilities depending on the nature of such derivatives. Because Northern Indiana utilizes derivatives for cash flow hedges, the effective portions of the gains and losses are recorded to other comprehensive income and are recognized in earnings concurrent with the disposition of the hedged risks. Although Northern Indiana applies some judgment in the assessment of hedge effectiveness to designate certain derivatives as hedges, the nature of the contracts used to hedge the underlying risks is such that the correlation of the changes in fair values of the derivatives and underlying risks is high. Northern Indiana generally uses NYMEX exchange-traded natural gas futures and options contracts and over-the-counter swaps based on published indices to hedge the risks underlying its natural gas-related businesses. PENSIONS AND POSTRETIREMENT BENEFITS. Northern Indiana, through NiSource, has defined benefit plans for both pensions and other postretirement benefits. The plans are accounted for under SFAS No. 87, "Employers' Accounting for Pensions," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." The calculation of the net obligations and annual expense related to the plans requires a significant degree of judgment regarding the discount rates to be used in bringing the liabilities to present value, long-term returns on plan assets and employee longevity, amongst other assumptions. Due to the size of the plans and the long-term nature of the associated liabilities, changes in the assumptions used in the actuarial estimates could have material impacts on the measurement of the net obligations and annual expense recognition. Refer to "Recently Issued Accounting Pronouncements" in Note 6 to the Notes of Consolidated Financial Statements for information regarding recently issued accounting standards. Insurance Renewal Northern Indiana sustained an increase in premiums and expenses for the property and casualty insurance program of 2003 as compared to 2002. This increase was anticipated due to insurance market conditions. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY Power Outage in the Northeast On August 14, 2003, a massive power outage affected approximately 50.0 million people in Michigan, Ohio, New York, Pennsylvania, New Jersey, Connecticut, Vermont and Canada and completely darkened major metropolitan areas such as New York City, Cleveland, Detroit and Toronto. Northern Indiana's electric system operated as it was designed and isolated a section of its system to protect its electric supply. Northern Indiana's electric system operated without a problem through the worst blackout in North American history. Environmental Matters Proposals for voluntary initiatives and mandatory controls are being discussed both in the United States and worldwide to reduce so-called "greenhouse gases" such as carbon dioxide, a by-product of burning fossil fuels. Northern Indiana engages in efforts to voluntarily report and reduce its greenhouse gas emissions. Northern Indiana will monitor and participate in developments related to efforts to register and potentially regulate greenhouse gas emissions. Northern Indiana uses various combustion equipment in the generation, distribution and transmission of energy, including turbines, boilers and various reciprocating engines. Within the period December 2002 to January 2003, the U.S. Environmental Protection Agency (EPA) proposed maximum achievable control technology (MACT) standards to meet national emission standards for hazardous air pollutants for stationary combustion turbines, industrial boilers and reciprocating internal combustion engines. Northern Indiana will continue to monitor the proposed MACT standards for potential applicability and cost impact to its operations. Pending finalization of the proposed standards, Northern Indiana is unable to predict what, if any, additional compliance costs may result. Presentation of Segment Information During 2002, 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 and bulk power operations were moved to the Electric Operations segment. As a result of the realignment, all 2002 periods have been adjusted to reflect the new segments. 18 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) 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------------------------- NET REVENUES Sales revenues $ 78.1 $ 59.3 $ 690.9 $ 470.1 Less: Cost of gas sold 56.0 31.4 521.9 299.4 - ------------------------------------------------------------------------------------------------------------------- Net Sales Revenues 22.1 27.9 169.0 170.7 Transportation Revenues 6.3 6.6 35.9 26.4 - ------------------------------------------------------------------------------------------------------------------- Net Revenues 28.4 34.5 204.9 197.1 - ------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Operation and maintenance 26.6 22.6 79.6 74.6 Depreciation and amortization 21.3 20.6 62.9 61.4 Other taxes 5.0 3.1 22.3 14.8 - ------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 52.9 46.3 164.8 150.8 - ------------------------------------------------------------------------------------------------------------------- Operating Income (Loss) $ (24.5) $ (11.8) $ 40.1 $ 46.3 =================================================================================================================== REVENUES ($ IN MILLIONS) Residential 35.8 31.5 451.1 306.4 Commercial 13.8 11.0 167.9 93.9 Industrial 20.2 10.1 92.3 46.9 Transportation 6.2 6.6 35.9 26.4 Deferred Gas Costs 3.6 2.4 (52.3) (2.1) Other 4.8 4.3 31.9 25.0 - ------------------------------------------------------------------------------------------------------------------- Total 84.4 65.9 726.8 496.5 - ------------------------------------------------------------------------------------------------------------------- SALES AND TRANSPORTATION (MDTH) Residential Sales 3.8 3.8 43.3 42.8 Commercial Sales 1.5 1.7 17.7 14.4 Industrial Sales 2.7 2.3 10.2 8.1 Transportation 29.4 34.0 103.7 106.8 Other 0.2 0.4 1.2 5.0 - ------------------------------------------------------------------------------------------------------------------- Total 37.6 42.2 176.1 177.1 - ------------------------------------------------------------------------------------------------------------------- HEATING DEGREE DAYS 77 19 3,499 2,955 NORMAL HEATING DEGREE DAYS 43 42 3,201 3,326 % COLDER (WARMER) THAN NORMAL 79% (55%) 9% (11%) CUSTOMERS Residential 594,383 626,406 Commercial 46,867 48,482 Industrial 3,154 3,313 Transportation 46,632 8,745 Other 14 18 - ------------------------------------------------------------------------------------------------------------------- TOTAL 691,050 686,964 - -------------------------------------------------------------------------------------------------------------------
Northern Indiana's natural gas distribution operations serve approximately 691,000 customers in the northern part of Indiana. Northern Indiana offers both traditional bundled services as well as transportation only for customers that purchase gas from alternative suppliers. The operating results reflect the temperature-sensitive nature of customer demand. As a result, segment operating income is generally higher in the first and fourth quarters reflecting the heating demand during the winter season. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY GAS DISTRIBUTION OPERATIONS (CONTINUED) Regulatory Matters Changes in gas industry regulation, which began in the mid-1980s at the federal level, has broadened to retail customers at the state level. For many years, large industrial and commercial customers have had the ability to purchase natural gas directly from marketers and to use Northern Indiana's Gas Distribution's facilities for transportation services. Additionally, as of September 30, 2003, approximately 48,000 of Northern Indiana's Gas Distribution's residential and small commercial customers had selected an alternate supplier. Northern Indiana continues to offer customer choice opportunities through regulatory initiatives. While these programs are intended to provide all customer classes with the opportunity to obtain gas supplies from alternative merchants, Northern Indiana expects to play a substantial role in supplying gas commodity services to its customers in the foreseeable future. As customers enroll in these programs and purchase their gas from other suppliers, Northern Indiana is sometimes left with pipeline capacity it has contracted for, but no longer needs. Northern Indiana 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 will be mitigated or recovered. On August 11, 1999, the IURC approved a flexible gas cost adjustment mechanism for Northern Indiana. Under the approved procedure, the demand component of the adjustment factor will be determined, after hearings and IURC approval, and made effective on November 1 of each year. The demand component will remain in effect for one year until a new demand component is approved by the IURC. The commodity component of the adjustment factor will be determined by monthly filings, which will become effective on the first day of each calendar month, subject to refund. The monthly filings do not require IURC approval but will be reviewed by the IURC during the annual hearing that will take place regarding the demand component filing. Northern Indiana's gas cost adjustment factor also includes a gas cost incentive mechanism which allows the sharing of any cost savings or cost increases with customers based on a comparison of actual gas supply portfolio cost to a market-based benchmark price. Northern Indiana made its annual filing on August 29, 2002. The IURC approved implementation of interim rates, subject to refund, effective November 1, 2002. Another party has filed testimony indicating that some gas costs should not be recovered. On September 30, 2003, the IURC issued an order adjusting the recovery of costs in March 2003 and reducing recovery by $3.8 million. On October 8, 2003, the IURC approved the demand component of the adjustment factor. Weather For the first nine months of 2003, weather was 9% colder than normal and 18% colder than the first nine months of 2002. Throughput Northern Indiana sold and transported 37.6 million dekatherms (MDth) for the third quarter 2003, a decrease of 4.6 MDth from the same period last year, primarily due to decreased transportation volumes when compared to the third quarter of 2002. Total volumes sold and transported were 176.1 MDth for the first nine months of 2003, a decrease of 1.0 MDth from the same period in 2002, primarily due to decreased transportation volumes and decreased off-system sales. Net Revenues Net revenues for the three months ended September 30, 2003 were $28.4 million, a decrease of $6.1 million from the same period in 2002, mainly attributable to lower non-weather related gas sales and incentive program revenues. Net revenues for the nine months ended September 30, 2003 were $204.9 million, an increase of $7.8 million over the same period in 2002, mainly attributable to colder weather during the first three months of the year, partially offset by lower non-weather related gas sales and lower incentive program revenues. 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY GAS DISTRIBUTION OPERATIONS(CONTINUED) Operating Income (Loss) Operating loss for the third quarter 2003 was $24.5 million, a $12.7 million greater loss than the same period in 2002. The increase in the operating loss was mainly attributable to decreased net revenues mentioned above, $1.3 million increase in pension and postretirement costs, $1.2 million increase in environmental reserves, $0.7 million increase in depreciation and amortization expense due to plant additions and $1.5 million increase in property taxes and $0.4 million higher gross receipt taxes, which are generally offset in revenues. Operating income for the first nine months of 2003 was $40.1 million, a decrease of $6.2 million from the same period in 2002. The increase in net revenues discussed above was more than offset by increased operating expenses, which were $14.0 million higher than in 2002. Pension and postretirement costs increased $4.7 million. Depreciation and amortization expense increased by $1.5 million due to plant additions. Property taxes increased by $2.2 million and gross receipt taxes, which are generally offset in revenues, increased $5.0 million, due to an increase in gross revenues as well as an increase in the utility receipt tax rate from 1.2% to 1.4%, effective January 1, 2003. 21 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) 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------------------------ NET REVENUES Sales Revenues $ 314.8 $ 333.1 $ 837.0 $ 879.5 Less: Cost of sales 108.9 118.1 285.9 288.4 - ------------------------------------------------------------------------------------------------------------------ Net Revenues 205.9 215.0 551.1 591.1 - ------------------------------------------------------------------------------------------------------------------ OPERATING EXPENSES Operation and maintenance 57.0 53.9 167.4 164.6 Depreciation and amortization 43.5 42.7 130.8 127.3 Other taxes 15.9 10.8 46.7 38.8 - ------------------------------------------------------------------------------------------------------------------ Total Operating Expenses 116.4 107.4 344.9 330.7 - ------------------------------------------------------------------------------------------------------------------ Operating Income $ 89.5 $ 107.6 $ 206.2 $ 260.4 ================================================================================================================== REVENUES ($ IN MILLIONS) Residential 94.7 106.7 229.3 245.5 Commercial 84.0 87.7 220.4 233.0 Industrial 90.9 105.2 282.2 296.7 Wholesale 34.0 34.9 79.4 77.0 Other 11.2 (1.4) 25.7 27.3 - ------------------------------------------------------------------------------------------------------------------ Total 314.8 333.1 837.0 879.5 - ------------------------------------------------------------------------------------------------------------------ SALES (GIGAWATT HOURS) Residential 1,008.1 1,096.3 2,436.8 2,497.9 Commercial 1,011.8 1,040.2 2,722.5 2,763.1 Industrial 2,176.4 2,244.7 6,655.3 6,467.4 Wholesale 911.8 858.7 2,205.2 2,405.4 Other 36.0 30.2 97.2 90.8 - ------------------------------------------------------------------------------------------------------------------ Total 5,144.1 5,270.1 14,117.0 14,224.6 - ------------------------------------------------------------------------------------------------------------------ COOLING DEGREE DAYS 459 752 572 1,015 NORMAL COOLING DEGREE DAYS 584 573 808 792 % WARMER (COLDER) THAN NORMAL (21%) 31% (29%) 28% CUSTOMERS Residential 386,227 382,757 Commercial 48,984 48,014 Industrial 2,548 2,604 Wholesale 19 21 Other 795 800 - ------------------------------------------------------------------------------------------------------------------ Total 438,573 434,196 - ------------------------------------------------------------------------------------------------------------------
Northern Indiana generates and distributes electricity to approximately 439,000 customers in 21 counties in the northern part of Indiana. The operating results reflect the temperature-sensitive nature of customer demand with annual sales affected by temperatures in the northern part of Indiana. As a result, segment operating income is generally higher in the second and third quarters reflecting the cooling demand during the summer season. Market Conditions The steel sector continues to show improvement, with a 9% improvement in sales for the nine-month period. The acquisitions of Bethlehem Steel and National Steel by ISG and U.S. Steel, respectively, have been completed. 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) NORTHERN INDIANA PUBLIC SERVICE COMPANY ELECTRIC OPERATIONS (CONTINUED) Regulatory Matters During 2002, Northern Indiana settled matters related to an electric rate review. On September 23, 2002, the IURC issued an order adopting most aspects of the settlement. The order approving the settlement provides that electric customers of Northern Indiana will receive an amount intended to approximate $55.1 million each year in credits to their electric bills for 49 months, beginning on July 1, 2002. The order also provides that 60% of any future earnings beyond a specified cap will be retained by Northern Indiana. Credits amounting to $39.8 million were recognized for electric customers for the first nine months of 2003. The order adopting the settlement was appealed to the Indiana Court of Appeals by both the Citizens Action Coalition of Indiana and fourteen residential customers. On October 14, 2003, the Appeals Court upheld the IURC's approval of the settlement. Northern Indiana submitted its quarterly fuel adjustment clause (FAC) filing for the twelve-month period ended September 30, 2002, which included a calculation for the sharing of earnings in excess of allowed earnings as outlined in the IURC order regarding the electric rate review settlement. The IURC issued an order related to the filing on January 29, 2003 rejecting Northern Indiana's sharing calculation, which prorated the amount to be shared with the customers based on the amount of time the rate credit, was in effect during the twelve-month period. Northern Indiana filed a request for a rehearing and reconsideration of the order. On March 12, 2003, the IURC denied Northern Indiana's request and the appropriate amount has been refunded to customers. On June 20, 2002, Northern Indiana, Ameren Corporation and First Energy Corporation established terms for joining the Midwest Independent System operator (MISO) through participation in an independent transmission company (ITC). The MISO arrangements were filed with the Federal Energy Regulatory Commission (FERC), and on July 31, 2002, the FERC issued an order conditionally approving these arrangements. On November 5, 2002, the ITC, which includes Northern Indiana, signed an agreement with MISO. At its April 30, 2003 meeting, FERC approved the transfer of functional control of Northern Indiana's transmission system to the ITC and issued an order addressing the pricing of electric transmission. An IURC order approving the transfer of functional control of the transmission system to the ITC was issued on September 24, 2003. An uncontested settlement that authorizes reimbursement of $7.4 million to Northern Indiana for incurred costs was approved by the FERC on July 31, 2003. This reimbursement was received on September 30, 2003. Functional control was transferred to the ITC and MISO on October 1, 2003. The MISO has initiated the Midwest Market Initiative (MMI), which will develop the structures and processes to be used to implement an electricity market for the MISO region. This market proposes non-discriminatory transmission service, reliable grid operation, and the purchase and sale of electric energy in a fair, efficient and non-discriminatory manner. MISO filed detailed tariff information, with a planned initial operation date of March 31, 2004. However, in October 2003, MISO petitioned FERC to withdraw this tariff filing. FERC approved the withdrawal and has provided guidance to MISO as to how it should proceed in the future. It is now expected that MISO will file a new tariff application with FERC and will delay the initial operation date to December 1, 2004. Northern Indiana is actively pursuing roles in the MMI. At the current time, management believes that MMI will change the manner in which Northern Indiana conducts their electric business; however, management cannot determine at this time the final MMI impacts. Northern Indiana has been recovering the costs of electric power purchased for sale to its customers through the FAC. The FAC provides for costs to be collected if they are below a negotiated cap. If costs exceed this cap, Northern Indiana must demonstrate that the costs were prudently incurred to achieve approval for recovery. A group of industrial customers has challenged the manner in which Northern Indiana has applied costs associated with a specific interruptible sales tariff. An estimated refund liability was recorded in the first quarter of 2003. A settlement was reached with the customers and Northern Indiana recorded an additional refund liability in the third quarter. It is expected that as a result of the settlement the industrial customers challenge will be withdrawn or dismissed. In January 2002, Northern Indiana filed a proceeding with the IURC for approval to implement a purchase power tracker. On March 21, 2003, Northern Indiana amended the January 2002 filing by withdrawing its request to implement a purchased power tracker and to instead allow recovery, via the FAC, of transmission costs paid to third parties, and the costs associated with electric physical derivative transactions, including option premiums to purchase power, and brokerage commissions. In October 2003, Northern Indiana voluntarily withdrew its amended request and the entire proceeding was dismissed. 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) NORTHERN INDIANA PUBLIC SERVICE COMPANY ELECTRIC OPERATIONS (CONTINUED) On December 30, 2002, the FERC issued an order that, among other things, reduced the rate base and rate of return allowed to Northern Indiana under electric rates proposed in connection with the filing of its 1995 Open Access Transmission Tariff, thus creating a refund liability for Northern Indiana. Northern Indiana did not seek rehearing of the FERC's December 30, 2002 order and submitted a compliance filing on March 17, 2003, which proposed rates and services in compliance with the FERC's order. An August 26, 2003 order accepted Northern Indiana's March 17, 2003 compliance filing. Northern Indiana made refunds on September 24, 2003 and filed a refund report at FERC on September 26, 2003. In January 2002, Northern Indiana filed for approval to implement an environmental cost tracker (ECT). The ECT was approved by the IURC on November 26, 2002. Under the ECT Northern Indiana will be able to recover (1) allowance for funds used during construction and a return on the capital investment expended by Northern Indiana to implement Indiana Department of Environmental Management's nitrogen oxide State Implementation Plan through an Environmental Cost Recovery Mechanism (ECRM) and (2) related operation and maintenance and depreciation expenses once the environmental facilities become operational through an Environmental Expense Recovery Mechanism (EERM). Northern Indiana will submit filings on a semi-annual basis for the ECRM and on an annual basis for the EERM. Northern Indiana made its initial filing of the ECRM in February 2003 for capital expenditures of $58.4 million. On April 30, 2003, the IURC issued an order approving the ECRM filing, which allows for collection of allowance for funds used during construction and a return on the capital investment beginning with the May 2003 customer bills. Through September 30, 2003 the ECRM revenues amounted to $2.5 million. On August 1, Northern Indiana filed the ECRM on capital investments of $120.0 million. This petition was approved by the IURC on October 1, 2003. The initial filing of the EERM is anticipated with the next semi-annual filing of the ECT. Over the timeframe required to meet the environmental standards, Northern Indiana anticipates a total capital investment amounting to approximately $274.2 million. The IURC order is currently being appealed to the Indiana Court of Appeals by the Citizens Action Coalition of Indiana. Environmental Matters In December 2001, the EPA approved regulations developed by the State of Indiana to comply with EPA's NOx State Implementation Plan (SIP) call. The NOx SIP call requires certain states, including Indiana, to reduce NOx levels from several sources, including industrial and utility boilers, to lower regional transport of ozone. The NOx emission limitations in the Indiana rules are more restrictive than those imposed on electric utilities under the Clean Air Act Amendments of 1990 (CAAA) acid rain NOx reduction program. Compliance with the NOx limits contained in these rules is required by May 31, 2004. Northern Indiana plans to install Selective Catalytic Reduction NOx reduction technology on specific units at each of its active generating stations to comply with the rules and estimates capital costs will range from $250.0 to $300.0 million. Actual compliance costs may vary depending on a number of factors including market demand/resource constraints, uncertainty of future equipment and construction costs, and the potential need for additional control technology. Sales Electric sales for the third quarter 2003 were 5,144.1 gwh, a decrease of 126.0 gwh compared to the 2002 period. The decrease was primarily due to a reduction of 312.5 gwh due to cooler weather during the quarter, partially offset by increases in non-weather related usage of 163.9 gwh and increased wholesale sales. Electric sales for the first nine months of 2003 were 14,117.0 gwh, a decrease of 107.6 gwh compared to the 2002 period, primarily reflecting decreased sales to residential and commercial customers due to cooler weather during the second and third quarters, and decreased sales to wholesale customers. The decline was partially offset by increased industrial sales due to increased demand from the steel industry customers. Net Revenues In third quarter 2003, electric net revenues of $205.9 million decreased by $9.1 million from the comparable 2002 period. The decrease was primarily due to cooler weather in the 2003 period compared to the 2002 period. In the first nine months of 2003, electric net revenue of $551.1 million decreased by $40.0 million from the 2002 period due to $25.4 million of additional credits issued as a result of the IURC electric rate review settlement and cooler weather during the summer season that decreased electric sales by $21.3 million. 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) NORTHERN INDIANA PUBLIC SERVICE COMPANY ELECTRIC OPERATIONS (CONTINUED) Operating Income Operating income for the third quarter 2003 was $89.5 million, a decrease of $18.1 million from the same period in 2002. The decrease was primarily due to the changes in revenue mentioned above, increased pension and post-retirement expenses of $4.4 million, increased property tax expense of $4.8 million and increased maintenance expenses of $3.6 million. The property tax increase was primarily due to a reduction in property taxes in 2002 due to changes in the state property tax regulations. The 2002 period was unfavorably impacted by $3.1 million related to the amortization of electric rate review costs. Operating income for the first nine months of 2003 was $206.2 million, a decrease of $54.2 million from the same period in 2002 due to the changes in revenue mentioned above, increased pension and postretirement benefits expenses of $13.3 million, increased property tax expense of $7.5 million and increased maintenance expenses of $4.3 million, which was partially offset by a $7.7 million reduction in employee-related and administrative expenses. The property tax increase was primarily due to a reduction in property taxes in 2002 due to changes in the state property tax regulations. The 2002 period was unfavorably impacted by $2.6 million related to the amortization of electric rate review costs. 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." ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Northern Indiana's principal executive officer and its principal financial officer, after evaluating the effectiveness of Northern Indiana's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), have concluded based on the evaluation required by paragraph (b) of Exchange Act Rules 13a-15 and 15d-15 that, as of the end of the period covered by this report, Northern Indiana's disclosure controls and procedures were adequate and effective to ensure that material information relating to Northern Indiana would be made known to them. Changes in Internal Controls There was no change in Northern Indiana's internal control over financial reporting during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, Northern Indiana's internal control over financial reporting. 25 PART II NORTHERN INDIANA PUBLIC SERVICE COMPANY ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: (31.1) Certification of Mark T. Maassel, Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). (31.2) Certification of William M. O'Malley, Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). (32.1) Certification of Mark T. Maassel, Principal Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). (32.2) Certification of William M. O'Malley, Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). (b) Reports on Form 8-K There were no reports on Form 8-K filed during the third quarter 2003: 26 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 12, 2003 By: /s/ Jeffrey W. Grossman ----------------------------------- Jeffrey W. Grossman Vice President (Duly Authorized Officer) 27 EX-31.1 3 c80864exv31w1.txt CERTIFICATION OF MARK T. MAASSEL EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Mark T. Maassel , certify that: 1. I have reviewed this Quarterly Report of Northern Indiana Public Service Company on Form 10-Q for the quarter ended September 30, 2003; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; c) Disclosed in this report any change in the registrant's internal control over the financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2003 By: /s/ Mark T. Maassel ---------------------------- Mark T. Maassel President EX-31.2 4 c80864exv31w2.txt CERTIFICATION OF WILLIAM M. O'MALLEY EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, William M. O'Malley, certify that: 1. I have reviewed this Quarterly Report of Northern Indiana Public Service Company on Form 10-Q for the quarter ended September 30, 2003; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; c) Disclosed in this report any change in the registrant's internal control over the financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2003 By: /s/ William M. O'Malley -------------------------- William M. O'Malley Vice President, Finance EX-32.1 5 c80864exv32w1.txt CERTIFICATION OF MARK T. MAASSEL EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Northern Indiana Public Service Company (the "Company") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark T. Maassel, President of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: November 12, 2003 By: /s/ Mark T. Maassel -------------------------- Mark T. Maassel President EX-32.2 6 c80864exv32w2.txt CERTIFICATION OF WILLIAM M. O'MALLEY EXHIBIT 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Northern Indiana Public Service Company (the "Company") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William M. O'Malley, Vice President, Finance of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: November 12, 2003 By: /s/ William M. O'Malley -------------------------- William M. O'Malley Vice President, Finance -----END PRIVACY-ENHANCED MESSAGE-----