1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended MARCH 31, 2001
[ ] 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 001-16189
NISOURCE INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 35-2108964
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
801 East 86th Avenue, Merrillville, IN 46410
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (877) 647-5990
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. [X]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, $0.01 Par
Value: 206,519,996 shares outstanding at March 31, 2001.
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NISOURCE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED MARCH 31, 2001
TABLE OF CONTENTS
Page
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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 Common Shareholder's Equity 7
Notes to Consolidated Financial Statements ........... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............... 15
Item 3. Quantitative and Qualitative Disclosures About Market
Risk ........................................................ 31
PART II OTHER INFORMATION
Item 1 Legal Proceedings .................................... 32
Item 2. Changes in Securities and Use of Proceeds ............ 33
Item 3. Defaults Upon Senior Securities ...................... 33
Item 4. Submission of Matters to a Vote of Security Holders .. 33
Item 5. Other Information .................................... 33
Item 6. Exhibits and Reports on Form 8-K ..................... 34
Signature ..................................................... 35
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PART I
ITEM 1. FINANCIAL STATEMENTS
NISOURCE INC.
STATEMENTS OF CONSOLIDATED INCOME (unaudited)
Three Months Ended March 31, (in millions) 2001 2000
================================================================================================
NET REVENUES
Gas Distribution $ 2,043.5 $ 442.9
Gas Transmission and Storage 170.4 15.2
Electric 370.0 317.5
Exploration and Production 48.2 --
Energy Marketing 1,102.5 283.9
Other 63.5 46.8
- ------------------------------------------------------------------------------------------------
Gross Revenues 3,798.1 1,106.3
Cost of Sales 2,700.3 681.3
- ------------------------------------------------------------------------------------------------
Total Net Revenues 1,097.8 425.0
- ------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 366.5 144.4
Depreciation, depletion and amortization 161.2 80.1
Other taxes 97.9 25.8
- ------------------------------------------------------------------------------------------------
Total Operating Expenses 625.6 250.3
- ------------------------------------------------------------------------------------------------
OPERATING INCOME 472.2 174.7
- ------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Interest expense, net (163.2) (44.5)
Minority interest (5.1) (5.0)
Dividend requirements on preferred stock of subsidiaries (1.9) (2.0)
Other, net 4.5 2.4
- ------------------------------------------------------------------------------------------------
Total Other Income (Deductions) (165.7) (49.1)
- ------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 306.5 125.6
INCOME TAXES 122.3 46.5
- ------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 184.2 79.1
- ------------------------------------------------------------------------------------------------
Income from Discontinued Operations - net of taxes 0.6 0.5
Change in Accounting- net of taxes 4.0 --
- ------------------------------------------------------------------------------------------------
NET INCOME $ 188.8 $ 79.6
================================================================================================
BASIC EARNINGS PER SHARE ($)
Continuing operations 0.90 0.64
Discontinued operations -- --
Change in accounting 0.02 --
- ------------------------------------------------------------------------------------------------
Basic Earnings Per Share 0.92 0.64
- ------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE ($)
- ------------------------------------------------------------------------------------------------
Continuing operations 0.88 0.62
Discontinued operations -- --
Change in accounting 0.02 --
- ------------------------------------------------------------------------------------------------
Diluted Earnings Per Share 0.90 0.62
- ------------------------------------------------------------------------------------------------
BASIC AVERAGE COMMON SHARES OUTSTANDING (MILLIONS) 205.0 124.3
DILUTED AVERAGE COMMON SHARES (MILLIONS) 209.4 128.2
- ------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, December 31,
(in millions) 2001 2000
==============================================================================================================
(unaudited)
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility Plant $15,910.9 $15,825.3
Accumulated depreciation and amortization (7,423.4) (7,299.4)
- --------------------------------------------------------------------------------------------------------------
Net utility plant 8,487.5 8,525.9
- --------------------------------------------------------------------------------------------------------------
Gas and oil producing properties, full cost method
United States cost center 940.1 923.6
Canadian cost center 19.6 19.7
Accumulated depletion (17.9) (9.1)
- --------------------------------------------------------------------------------------------------------------
Net gas and oil producing properties 941.8 934.2
- --------------------------------------------------------------------------------------------------------------
Other property, at cost, less accumulated depreciation 84.5 86.6
- --------------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 9,513.8 9,546.7
- --------------------------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Net assets of discontinued operations 522.0 560.4
Unconsolidated affiliates 109.9 96.1
Assets held for sale 32.0 33.5
Other investments 53.9 54.1
- --------------------------------------------------------------------------------------------------------------
Total Investments 717.8 744.1
- --------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 111.8 193.0
Accounts receivable (less reserve of $60.1 and $43.3, respectively) 1,808.3 1,490.2
Other receivables 33.7 23.5
Gas inventory 113.4 322.5
Underrecovered gas and fuel costs 180.0 396.1
Materials and supplies, at average cost 71.6 68.7
Electric production fuel, at average cost 27.1 15.6
Price risk management assets 302.9 1,568.5
Exchange gas receivable 650.8 615.9
Prepayments and other 348.6 223.6
- --------------------------------------------------------------------------------------------------------------
Total Current Assets 3,648.2 4,917.6
- --------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Regulatory assets 554.9 517.1
Intangible assets, less accumulated amortization 3,620.7 3,603.6
Deferred charges and other 439.9 367.7
- --------------------------------------------------------------------------------------------------------------
Total Other Assets 4,615.5 4,488.4
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $18,495.3 $19,696.8
==============================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, December 31,
(in millions) 2001 2000
==================================================================================================
(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 3,518.7 $ 3,415.2
Preferred Stocks--
Subsidiary Companies
Series without mandatory redemption provisions 83.6 83.6
Series with mandatory redemption provisions 49.1 49.1
Company-obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely Company debentures 345.0 345.0
Long-term debt, excluding amounts due within one year 5,799.4 5,802.7
- --------------------------------------------------------------------------------------------------
Total Capitalization 9,795.8 9,695.6
- --------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt 64.4 64.8
Short term borrowings 2,202.1 2,496.7
Accounts payable 741.8 1,117.1
Dividends declared on common and preferred stocks 61.4 1.0
Customer deposits 33.8 32.1
Taxes accrued 357.7 189.3
Interest accrued 149.1 78.0
Overrecovered gas and fuel costs 203.6 --
Price risk management liabilities 243.9 1,529.2
Exchange gas payable 389.5 360.5
Current deferred revenue 423.3 451.5
Other accruals 535.4 573.2
- --------------------------------------------------------------------------------------------------
Total Current Liabilities 5,406.0 6,893.4
- --------------------------------------------------------------------------------------------------
OTHER LIABILITIES AND DEFERRED CREDITS
Deferred income taxes 1,866.3 1,806.2
Deferred investment tax credits 112.0 114.3
Deferred credits 379.7 337.3
Noncurrent deferred revenue 526.1 498.0
Accrued liability for postretirement benefits 278.2 272.5
Other noncurrent liabilities 131.2 79.5
- --------------------------------------------------------------------------------------------------
Total Other 3,293.5 3,107.8
- --------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (see notes) -- --
- --------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $18,495.3 $19,696.8
==================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS (unaudited)
Three Months Ended March 31, (in millions) 2001 2000
===================================================================================================================
OPERATING ACTIVITIES
Net income $ 188.8 $ 79.6
Adjustments to reconcile net income to net cash from continuing operations
Depreciation, depletion, and amortization 161.1 80.1
Net changes in price risk management activities 8.8 --
Deferred income taxes (64.0) (26.7)
Income from change in accounting (4.0) --
Income from discontinued operations (0.6) (0.5)
Other, net (3.9) 3.1
- -------------------------------------------------------------------------------------------------------------------
286.2 135.6
- -------------------------------------------------------------------------------------------------------------------
Changes in components of working capital, net of effect from acquisitions of
businesses:
Accounts receivable, net (318.1) (67.1)
Inventories 194.7 20.0
Accounts payable (375.3) 3.3
Taxes accrued 196.8 88.5
(Under) Overrecovered gas and fuel costs 419.7 49.2
Exchange gas receivable/payable (5.9) --
Other accruals (79.6) (10.1)
Other working capital 110.1 10.5
- -------------------------------------------------------------------------------------------------------------------
Net Cash from Continuing Operations 428.6 229.9
Net Cash from Discontinued Operations (16.9) 5.5
- -------------------------------------------------------------------------------------------------------------------
Net Cash from Operating Activities 411.7 235.4
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (122.1) (51.5)
Proceeds from disposition of assets -- 15.6
Other investing activities, net (11.1) (7.7)
- -------------------------------------------------------------------------------------------------------------------
Net Investing Activities (133.2) (43.6)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Retirement of long-term debt (10.9) (9.6)
Change in short-term debt (294.6) (78.2)
Retirement of preferred shares -- (3.2)
Issuance of common stock 5.1 1.4
Acquisition of treasury stock -- (34.4)
Dividends paid - common shares (59.3) (33.3)
Other financing activities, net -- 0.1
- -------------------------------------------------------------------------------------------------------------------
Net Financing Activities (359.7) (157.2)
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (81.2) 34.6
Cash and cash equivalents at beginning of year 193.0 43.5
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 111.8 $ 78.1
===================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized 53.1 42.5
Cash paid for income taxes 5.5 1.4
- -------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
STATEMENTS OF CONSOLIDATED SHAREHOLDER'S EQUITY (unaudited)
ADDITIONAL ACCUM.
COMMON TREASURY PAID-IN RETAINED OTHER COMP. COMP.
(Dollars in millions) SHARES SHARES CAPITAL EARNINGS OTHER INCOME TOTAL INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE JANUARY 1, 2000 870.9 (472.5) 174.4 774.4 1.1 5.2 1,353.5
Comprehensive Income:
Net Income 79.6 79.6 79.6
Other comprehensive income, net of tax:
Gain/loss on available for sale securities:
Unrealized (0.3) (0.3) (0.3)
Gain/loss on foreign currency translation:
Unrealized 0.4 0.4 0.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 79.7
Dividends:
Common shares (33.3) (33.3)
Treasury shares acquired (34.4) (34.4)
Issued:
Employee stock purchase plan 0.1 0.2 0.3
Long-term incentive plan 15.5 (14.0) 1.5
Amortization of unearned compensation 1.3 1.3
Equity contract costs (1.1) (1.1)
Other 0.8 (1.1) (0.3)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 2000 870.9 (491.3) 174.3 819.6 (11.6) 5.3 1,367.2
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE JANUARY 1, 2001 2.1 -- 2,585.1 829.7 (6.1) 4.4 3,415.2
Comprehensive Income:
Net Income 188.8 188.8 188.8
Other comprehensive income, net of tax:
Gain/loss on foreign currency translation:
Unrealized (2.9) (2.9) (2.9)
Net unrealized gains on derivatives
qualifying as cash flow hedges 28.7 28.7 28.7
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 214.6
Dividends:
Common shares (119.8) (119.8)
Treasury shares acquired
Issued:
Employee stock purchase plan 0.3 0.3
Long-term incentive plan 24.3 (17.7) 6.6
Amortization of unearned
compensation 3.7 3.7
Equity contract costs (1.9) (1.9)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 2001 2.1 -- 2,607.8 898.7 (20.1) 30.2 3,518.7
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON TREASURY COMMON TREASURY
Shares (in thousands) SHARES SHARES SHARES SHARES
- ---------------------------------------------------------------------------------------------------------------------------------
Balance January 1, 2000 147,784 (23,645) Balance January 1, 2001 205,553 --
Treasury shares acquired (2,125) Treasury shares acquired
Issued: Issued:
Employee stock purchase plan 22 Employee stock purchase plan 10
Long-term incentive plan 770 Long-term incentive plan 957
- ---------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 2000 147,784 (24,978) Balance March 31, 2001 206,520 --
=================================================================================================================================
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ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Accounting Presentation
The accompanying unaudited consolidated financial statements for NiSource
Inc. (NiSource) reflect all normal recurring adjustments that are
necessary, in the opinion of management, to present fairly the results of
operations in accordance with generally accepted accounting principles.
The accompanying financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in
NiSource's Annual Report on Form 10-K for the fiscal year ended December
31, 2000. Income for interim periods may not be indicative of results for
the calendar year due to weather variations and other factors. Certain
reclassifications have been made to the 2000 financial statements to
conform to the 2001 presentation.
2. Diluted Average Common Shares Computation
Basic earnings per share (EPS) is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. The weighted average shares outstanding for
diluted EPS include the incremental effect of the various long-term
incentive compensation plans. For 2001, the weighted average shares
outstanding for diluted EPS also includes the incremental effect of the
forward equity contract associated with the Stock Appreciation Income
Linked Securities(SM) (SAILS(SM)). For 2000, the incremental effect of
common shares associated with the equity forward purchase contract,
calculated under the reverse treasury stock method is also included in the
weighted average shares outstanding for diluted EPS. On December 26, 2000,
the contract was terminated.
The numerator in calculating both basic and diluted EPS for each year is
reported net income. The computation of diluted average common shares
follows:
Three Months Ended March 31, ($ in thousands) 2001 2000
--------------------------------------------------------------------------
Denominator
Basic average common shares outstanding 205,040 124,304
Dilutive potential common shares 4,402 3,846
--------------------------------------------------------------------------
Diluted Average Common Shares 209,442 128,150
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3. Acquisition
On November 1, 2000, NiSource completed its acquisition of Columbia Energy
Group (Columbia) for an aggregate consideration of approximately $6
billion, consisting of $3,888 million in cash, 72.4 million shares of
common stock valued at $1,761 million, and SAILS(SM) (units consisting of
a zero coupon debt security coupled with a forward equity contract in
NiSource shares) valued at $114 million. NiSource also assumed
approximately $2 billion in Columbia debt. NiSource accounted for the
acquisition in accordance with the purchase method of accounting. The
purchase price was allocated to the assets and liabilities acquired based
on the fair value of those assets and liabilities as of the acquisition
date. Based upon the nature of the regulatory environment in which
Columbia's rate regulated subsidiaries operate, the fair value of rate
regulated assets and liabilities are generally considered to be historic
cost. The excess of the aggregate purchase price over the estimated fair
value of the net assets acquired, approximately $3.6 billion, is reflected
as goodwill in the consolidated financial statements and is being
amortized on a straight-line basis over forty years. NiSource may make
adjustments to the allocation of the purchase price assumptions based on
the ultimate resolution of contingencies existing at the acquisition
date. NiSource does not anticipate that the final evaluation of these
issues will materially affect the allocation of the purchase price.
4. Restructuring Activities
During 2000, NiSource implemented a plan to restructure its operations as
a result of the acquisition of Columbia discussed above. The restructuring
plan included a severance program, a transition plan to implement
operational efficiency throughout NiSource's operations and a voluntary
early retirement program.
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ITEM 1. FINANCIAL STATEMENTS (continued)
As a result of the restructuring plan, it is estimated that approximately
900 management, professional, administrative and technical positions have
been or will be eliminated. As of March 31, 2001, approximately 510
employees had been terminated as a result of the restructuring plan. In
October 2000, NiSource recorded pre-tax charges of $5.8 million in
operating expense representing severance and related benefits costs. This
charge included $5.1 million of estimated termination benefits. In
addition, NiSource assumed $66.9 million in liabilities related to the
restructuring of Columbia's operations representing severance and related
benefits costs and relocation of certain operations. At March 31, 2001,
the consolidated balance sheets reflected a liability of $48 million
related to the restructuring plan.
5. Discontinued Operations and Assets Held for Sale
The Securities and Exchange Commission (SEC), in its order approving the
acquisition of Columbia, required NiSource to divest its water utilities
within three years from the date of the acquisition. In January 2001,
NiSource adopted a formal plan to dispose of its water utilities within
one year. The water utilities operations are reported as discontinued
operations.
Results from discontinued operations of the water utilities are provided
in the following table:
Three Months Ended March 31, ($ in millions) 2001 2000
-------------------------------------------------------------------------
REVENUES FROM DISCONTINUED OPERATIONS 24.8 23.8
Income from discontinued operations 1.8 1.9
Income taxes 1.2 1.4
Net income from discontinued operations 0.6 0.5
-------------------------------------------------------------------------
On May 22, 2000, as a result of its ongoing strategic assessment, Columbia
announced that it decided to sell its propane operations, which consists
of Columbia Propane Corporation and its subsidiaries (Columbia Propane).
On January 31, 2001, Columbia signed a definitive agreement to sell the
stock and assets of Columbia Propane to AmeriGas Partners L.P. (AmeriGas)
for approximately $208 million, consisting of $155 million of cash and $53
million of AmeriGas partnership common units. The transaction, subject to
customary conditions, is scheduled to close in the second quarter of 2001.
NiSource has also sold substantially all the assets of Columbia Petroleum
Corporation (Columbia Petroleum), a diversified petroleum distribution
company. The net assets of the water utilities, Columbia Propane and
Columbia Petroleum are reported as net assets of discontinued operations
on the consolidated balance sheets.
The net assets of the discontinued operations were as follows:
Three Months Ended, (in millions) 2001 2000
-------------------------------------------------------------------------
NET ASSETS OF DISCONTINUED OPERATIONS
Accounts receivable, net $ 83.7 $ 107.8
Property, plant and equipment, net 877.8 891.3
Other assets 121.4 173.8
Current liabilities (121.4) (148.2)
Debt (171.8) (169.4)
Other liabilities (267.7) (294.9)
-------------------------------------------------------------------------
NET ASSETS OF DISCONTINUED OPERATIONS $ 522.0 $ 560.4
-------------------------------------------------------------------------
6. Accounting Change
Effective January 1, 2001, NiSource adopted the Financial Accounting
Standards Board's (FASB) Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as subsequently amended by SFAS No. 137 and SFAS No. 138
(collectively referred to as SFAS No. 133). These statements establish
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. SFAS No. 133
requires an entity to recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of
a recognized asset or liability or an unrecognized firm commitment, (b) a
hedge of the exposure to variable cash flows of a forecasted transaction,
or (c) a hedge of the foreign currency exposure of a net investment in a
foreign-currency-denominated forecasted transaction. The accounting for
changes in the fair value of a derivative depends on the intended use of
the derivative and resulting designation.
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ITEM 1. FINANCIAL STATEMENTS (continued)
The adoption of this statement on January 1, 2001, resulted in a
cumulative after-tax increase to net income of approximately $4 million
and an after-tax reduction to other comprehensive income (OCI) of
approximately $17 million. The adoption also resulted in the recognition
of $178 million of assets and $212.8 million of liabilities on the
consolidated balance sheet. Additionally, the adoption resulted in the
reduction of hedged risk basis of $3.8 million and the reclassification of
deferred revenue to OCI in transition of $17.9 million. During the first
quarter of 2001, approximately $6.4 million of the net losses included in
the cumulative effect of a change in accounting principle component of OCI
were reclassified into earnings. Further detail of the assets and
liabilities recorded on the consolidated financial statements for the
adoption of SFAS No. 133 is as follows:
(in millions) ASSETS LIABILITIES
-----------------------------------------------------------------------
Price Risk Management $161.6 $ 219.9
Deferred Taxes -- (7.1)
Regulatory 16.4 --
Debt -- (3.8)
Deferred Revenue -- (17.9)
-----------------------------------------------------------------------
TOTAL $178.0 $ 191.1
-----------------------------------------------------------------------
As stated above, the initial recording of the cumulative effect of this
accounting change included unrealized holding losses of $17.0 million.
However, the activity for the quarter resulted in unrealized gains on
qualifying derivatives of $28.7 million as reported in the Statements of
Consolidated Shareholder's Equity. The activity for the quarter included:
(in millions)
----------------------------------------------------------------------------------------------------
UNREALIZED GAINS ON DERIVATIVES QUALIFYING AS CASH FLOW HEDGES:
Unrealized holding losses arising during the period due to cumulative effect of a
change in accounting principle, recognized at January 1, 2001, net of tax $ (17.0)
Unrealized holding gains arising during the period on derivatives qualifying as
cash flow hedges, net of tax 39.3
Reclassification adjustment for net losses included in net income, net of tax 6.4
----------------------------------------------------------------------------------------------------
Net unrealized gains on derivatives qualifying as cash flow hedges, net of tax $ 28.7
----------------------------------------------------------------------------------------------------
NiSource's senior management takes an active role in the risk management
process and has developed policies and procedures that require specific
administrative and business functions to assist in the identification,
assessment and control of various risks. In recognition of the
increasingly varied and complex nature of the energy business, NiSource's
risk management policies and procedures continue to evolve and are subject
to ongoing review and modification.
Following is additional information regarding the impact of SFAS No.
133 by segment.
Gas Distribution
For regulatory incentive purposes, the Columbia gas distribution
subsidiaries (Columbia LDCs) enter into contracts that allow
counterparties the option to sell gas to Columbia LDCs at specified prices
during specified periods of time. Columbia LDCs charge the counterparties
a fee for this option. The changes in the fair value of the options are
primarily due to the difference between the cost of gas during the
contracted delivery period and the market price of gas during that same
period. Columbia LDCs defer a portion of the change in the fair value of
the options as either a regulatory asset or liability in accordance with
SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation."
The remaining change is recognized currently in earnings.
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ITEM 1. FINANCIAL STATEMENTS (continued)
Northern Indiana Public Service Company (Northern Indiana) offers a Price
Protection Service as an alternative to the standard gas cost recovery
mechanism. This service provides Northern Indiana customers with the
option to either lock in their gas cost or place a cap on the total cost
that could be charged for any future month specified. In order to hedge
the anticipated physical future purchases associated with these
obligations, Northern Indiana purchases NYMEX futures and options
contracts that correspond to a fixed or capped price and the associated
delivery month. The NYMEX futures and options contracts satisfy all
definitions of a derivative and they qualify and are designated as a cash
flow hedge. Northern Indiana has no net gain or loss recognized in
earnings due to ineffectiveness or time value for this program in the
reporting period and none of the components of the derivative instruments'
value are excluded in its assessment of hedge effectiveness. It is
anticipated that during the next 12 months, expiration of futures and
options contracts will result in income recognition of amounts currently
classified in OCI of approximately $0.5 million, which will be included in
net income. Northern Indiana has futures and options contracts designated
as cash flow hedges through April 2001. At this time Northern Indiana
expects to continue its cash flow hedges due to the probability that the
forecasted transaction will occur.
Northern Indiana and Bay State Gas Company also engage in writing options
that potentially obligate them to purchase or sell gas at the holder's
discretion at some future market-based price. These written options are
derivative instruments, must be marked to fair value and do not meet the
requirement for hedge accounting treatment. Northern Indiana also uses
NYMEX derivative contracts to minimize its gas costs. These contracts do
not qualify for hedge accounting and must be marked to fair value. Because
these derivatives are used within the framework of its gas cost incentive
mechanism, Northern Indiana may ultimately share in a portion of the gains
or losses on these options with the ratepayers. Regulatory assets or
liabilities are recorded to offset the change in the fair value of these
derivatives until there is certainty as to the level of sharing, if any.
Exploration and Production
In conjunction with certain fixed price gas delivery commitments,
Columbia Energy Resources, Inc. (Columbia Resources) has purchased
financial basis swaps to transfer basis risk from the counterparty back to
Columbia Resources. Because these transactions by definition are
derivatives and do not qualify for hedge accounting, the mark to fair
value of these swaps will directly impact earnings. Additionally, Columbia
Resources has engaged in commodity and basis swaps to hedge the
anticipated future sale of natural gas. These contracts are derivatives
and are designated as cash flow hedges of anticipated future sales. The
fair value of these derivatives will be recorded in OCI until the related
sale occurs. Any ineffectiveness will be charged to earnings. Columbia
Resources has no net gain or loss recognized in earnings due to
ineffectiveness or time value in the reporting period and has not excluded
components of the derivatives' values in its assessment of hedge
effectiveness. It is anticipated that during the next 12 months,
expiration of forward swap contracts will result in loss recognition for
amounts currently classified in OCI of approximately $86.7 million, which
will be included in net income. Columbia Resources has forward derivative
contracts designated as cash flow hedges through December 2001. At this
time, Columbia Resources expects to continue its cash flow hedges due to
the probability that the forecasted events will occur.
Energy Marketing
EnergyUSA-TPC Corp. (TPC) is affected by SFAS No. 133 on a corporate basis
relative to certain intercompany sales contracts. These contracts on a
stand-alone basis are trading contracts to TPC; however, because
counterparties are consolidated affiliates, TPC may not mark them to fair
value on a consolidated basis. Certain corresponding, offsetting
third-party forward purchase commitments or long futures contracts are
designated as cash flow hedges. The mark to fair value impact of the
effective portions of these hedges is offset in OCI. The impact of
remaining sales contracts without offsetting purchase commitments/futures
is recorded currently in earnings on a consolidated basis. There is no net
gain or loss recognized in earnings due to ineffectiveness or time value
in the reporting period and no components of the derivatives' values have
been excluded in the assessment of hedge effectiveness. It is anticipated
that during the next 12 months, expiration of forward contracts will
result in income recognition of amounts currently classified in OCI of
approximately $4.9 million, which will be included in net income. NiSource
has designated certain TPC forward derivative contracts as cash flow
hedges through August 2002. At this time, NiSource expects to continue its
cash flow hedges due to the probability that the forecasted transactions
will occur.
11
12
ITEM 1. FINANCIAL STATEMENTS (continued)
Other Products and Services
Primary Energy, Inc. (Primary Energy) finances, builds and operates
cogeneration plants that convert waste products into alternative forms of
energy. Primary Energy finances the construction of these facilities by
creating synthetic leases. A portion of the synthetic lease payment floats
with a referenced interest rate, thus exposing Primary Energy to interest
rate risks. Primary Energy engages in interest rate swaps to fix the
floating payment and designates these instruments as cash flow hedges.
They are assessed to effectively hedge the cash flow risk of the
anticipated lease payments. Any earnings impact of changes in the swap's
fair value is charged to OCI until the calculation period is settled. Any
ineffectiveness is charged currently to earnings. Primary Energy has no
net gain or loss recognized in earnings due to ineffectiveness or time
value in the reporting period and it has not excluded any component of the
derivative instrument's value in its assessment of hedge effectiveness. It
is anticipated that during the next twelve months, expiration of interest
rate swap contracts will result in loss recognition of amounts currently
classified in OCI of approximately $0.5 million, which will be included in
net income. Primary Energy has interest rate swap contracts designated as
cash flow hedges through June 2002. At this time, Primary Energy expects
to continue its cash flow hedges due to the probability that the
forecasted transactions will occur.
Columbia Energy Services, Inc. (Columbia Energy Services) has fixed price
gas delivery commitments to three municipalities in the U.S. Columbia
Energy Services entered into a forward purchase agreement with a gas
supplier, wherein the supplier will fulfill the delivery obligation
requirements at a slight premium to index. In order to hedge this
anticipated future purchase of gas from the gas supplier, Columbia Energy
Services entered into pay fixed/receive floating swaps priced at the
locations designated for physical delivery. These swaps are designated as
cash flow hedges of the anticipated purchases. Any impact of changes in
the swaps' fair values is included in OCI until the sales are completed.
Any ineffectiveness is included in earnings. Columbia Energy Services has
no net gain or loss recognized in earnings due to ineffectiveness or time
value in the reporting period and it has not excluded any component of the
derivative instruments' value in its assessment of hedge effectiveness. It
is anticipated that during the next 12 months, expiration of forward swap
contracts will result in income recognition of amounts currently
classified in OCI of approximately $32.4 million, which will be included
in net income. Columbia Energy Services has forward swap contracts
designated as cash flow hedges through December 2008. At this time,
Columbia Energy Services expects to continue its cash flow hedges due to
the probability that the forecasted transactions will occur.
Gas Transmission and Storage
The adoption and application of SFAS 133 had no impact on this segment.
Electric Operations
The adoption and application of SFAS 133 had no impact on this segment.
Interest Rate Swaps
Columbia utilizes fixed-to-floating interest rate swap agreements to
modify the interest characteristics of a portion of its outstanding
long-term debt. As a result of these transactions, $300 million of
Columbia's long-term debt is now subject to fluctuations in interest
rates. Columbia has no net gain or loss recognized in earnings due to
ineffectiveness or time value in this reporting period. Columbia has not
excluded any component of the derivative instruments' value in its
assessments of hedge effectiveness. Columbia would recognize approximately
$1 million in earnings over the remaining life of the corresponding
long-term debt if the hedging relationship was to be discontinued
7. Business Segment Information
NiSource's operations are divided into six primary business segments. The
Gas Distribution segment provides natural gas service and transportation
for residential, commercial and industrial customers in Ohio,
Pennsylvania, Virginia, Kentucky, Maryland, Indiana, Massachusetts, Maine
and New Hampshire. The Electric Operations segment provides electric
service in 21 counties in the northern part of Indiana. The Gas
Transmission and Storage segment offers gas transportation and storage
services for local distribution companies, marketers and industrial and
commercial customers located in northeastern, mid-Atlantic, midwestern and
southern states and the District of Columbia. The Exploration and
Production segment explores for, develops, produces and markets gas and
oil in the United States and in Canada.
12
13
ITEM 1. FINANCIAL STATEMENTS (continued)
The Energy Marketing segment provides energy-related services including
gas marketing and asset management services to local distribution
companies (LDC), wholesale, commercial and industrial customers. The other
products and services segment participates in the development of non-rate
regulated power projects, real estate, telecommunications and other
businesses.
The current segment structure is different than segments reported prior to
the acquisition of Columbia. Previous periods did not include a
transmission and storage or an exploration and production segment, but did
include a water utilities segment. As discussed in Note 5, the water
utilities business is being reported as discontinued operations.
The following tables provide information about business segments. NiSource
uses operating income as its primary measurement for each of the reported
segments and makes decisions on finance, dividends and taxes at the
corporate level on a consolidated basis. Segment revenues include
intersegment sales to affiliated subsidiaries, which are eliminated in
consolidation. Affiliated sales are recognized on the basis of prevailing
market, regulated prices or at levels provided for under contractual
agreements. Operating income is derived from revenues and expenses
directly associated with each segment.
13
14
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
Three Months Ended March 31, ($ in millions) 2001 2000
===============================================================================
REVENUES
GAS DISTRIBUTION
Unaffiliated 2,051.5 437.2
Intersegment 12.6 35.4
- -------------------------------------------------------------------------------
Total 2,064.1 472.6
- -------------------------------------------------------------------------------
GAS TRANSMISSION AND STORAGE
Unaffiliated 186.9 13.9
Intersegment 106.9 --
- -------------------------------------------------------------------------------
Total 293.8 13.9
- -------------------------------------------------------------------------------
ELECTRIC
Unaffiliated 370.0 317.5
Intersegment 0.6 0.7
- -------------------------------------------------------------------------------
Total 370.6 318.2
- -------------------------------------------------------------------------------
EXPLORATION AND PRODUCTION
Unaffiliated 53.2 --
Intersegment 1.8 --
- -------------------------------------------------------------------------------
Total 55.0 --
- -------------------------------------------------------------------------------
ENERGY MARKETING
Unaffiliated 1,092.2 286.9
Intersegment 60.5 24.2
- -------------------------------------------------------------------------------
Total 1,152.7 311.1
- -------------------------------------------------------------------------------
OTHER PRODUCTS AND SERVICES
Unaffiliated 42.9 52.0
Intersegment -- --
- -------------------------------------------------------------------------------
Total 42.9 52.0
- -------------------------------------------------------------------------------
Adjustments and eliminations (181.0) (61.5)
- -------------------------------------------------------------------------------
CONSOLIDATED REVENUES 3,798.1 1,106.3
- -------------------------------------------------------------------------------
Three Months Ended March 31, ($ in millions) 2001 2000
===============================================================================
OPERATING INCOME (LOSS)
Gas Distribution 288.1 96.2
Gas Transmission and Storage 124.2 0.9
Electric 85.6 82.7
Exploration and Production 21.3 --
Energy Marketing (31.8) 8.4
Other Products and Services (9.7) (2.8)
Corporate (13.5) (6.9)
Adjustments and Eliminations 8.0 (3.8)
- -------------------------------------------------------------------------------
CONSOLIDATED OPERATING INCOME 472.2 174.7
- -------------------------------------------------------------------------------
14
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 NiSource's plans, proposed dispositions, objectives,
expected performance, expenditures and recovery of expenditures through rates,
stated on either a consolidated or segment basis, and any and all underlying
assumptions and other statements that are other than statements of historical
fact. From time to time, NiSource 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
NiSource, 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 NiSource'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, successful
consummation of proposed acquisitions and dispositions, growth opportunities for
NiSource's regulated and non-regulated businesses, dealings with third parties
over whom NiSource has no control, actual operating experience of acquired
assets, NiSource's ability to integrate acquired operations into its operations,
the regulatory process, regulatory and legislative changes, changes in general
economic, capital and commodity market conditions, and counter-party credit
risk, many of which factors are beyond the control of NiSource. 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 NiSource's Annual Report on Form 10-K for the fiscal year ended December
31, 2000. (Form 10-K).
FIRST QUARTER RESULTS
Net Income
NiSource reported net income of $188.8 million, or $0.92 per share, for the
three months ended March 31, 2001, compared to $79.6 million, or $0.64 per
share, in the 2000 period. The results for 2001 and 2000 are not directly
comparable due to the acquisition of Columbia Energy Group (Columbia) completed
on November 1, 2000, as discussed in Note 3. on page 8. All per share amounts
are basic earnings per share.
Revenues
Total consolidated net revenues (gross revenues less cost of sales) for the
three months ended March 31, 2001, was $1,097.8 million, a $672.8 million
increase over the same period last year. The increase was primarily attributable
to the acquisition of Columbia and increased gas sales by the distribution
segment due to colder weather than the same period last year.
Expenses
Operating expenses for the first quarter of 2001 were $625.6 million, an
increase of $375.3 million over the same period last year, due to the
acquisition of Columbia and the settlement of a lawsuit related to Market Hub
Partners, L.P. (MHP). Operating expenses also included additional goodwill
amortization related to the Columbia acquisition of $25.4 million.
Other Income (Deductions)
Other, net for the first quarter of 2001 increased income by $4.5 million,
compared to $2.4 million in the 2000 period. Interest expense was $163.2 million
for the quarter, compared to $44.5 million in the first quarter of 2000, due to
borrowing for the acquisition of Columbia, the interest on the Columbia
outstanding debt and increased carrying costs of gas purchases due to higher
prices for natural gas.
15
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Income Taxes
Income tax expense for the first quarter of 2001 was $122.3 million, compared to
$46.5 million in the 2000 period, due to higher pre-tax income in the current
period and a higher effective tax rate because of the amortization of goodwill.
Change in Accounting Principle
On January 1, 2001, NiSource adopted SFAS No. 133, Accounting for Derivative
Securities. This change in accounting, net of taxes, contributed $4.0
million to net income.
Discontinued Operations
Discontinued operations, which reflect NiSource's water operations, posted an
after-tax gain of $0.6 million for the first quarter of 2001, an increase of
$0.1 million from the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
Generally, cash flow from operations has provided sufficient liquidity to meet
current operating requirements. A significant portion of NiSource's operations,
most notably in the gas and electric distribution businesses, are subject to
seasonal fluctuations in cash flow. During the heating season, which is
primarily from November through March, cash receipts from gas sales and
transportation services typically exceed cash requirements. In the summer
months, cash receipts for electric sales normally exceed requirements. During
other periods of the year, cash on hand, together with external short-term and
long-term financing, is used to purchase gas to place in storage for heating
season deliveries, perform necessary maintenance of facilities, make capital
improvements in plant and expand service into new areas.
NiSource, through its financing subsidiary NiSource Finance Corp. (NiSource
Finance), entered into a new $2.5 billion revolving credit facility with a
syndicate of banks for working capital requirements. The new facility will be
drawn on to refinance and consolidate essentially all of NiSource's short-term
borrowings as they come due. The new facility is guaranteed by NiSource.
At March 31, 2001 and December 31, 2000, NiSource had $2,202.1 million and
$2,078.8 million of commercial paper outstanding, respectively. The weighted
average interest rate on commercial paper outstanding as of March 31, 2001, was
5.86%. In addition, NiSource had no short-term notes payable at March 31, 2001
and $417.9 million at December 31, 2000 at a weighted average interest rate of
7.78%.
On April 6, 2001, NiSource Finance issued $300 million of unsecured two-year
notes guaranteed by NiSource, paying a 5.75% coupon and maturing on April 15,
2003.
At March 31, 2001, NiSource had $147.5 million of standby letters of credit
outstanding. At December 31, 2000, NiSource had $165.5 million of standby
letters of credit outstanding.
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
Risk is an inherent part of NiSource's energy businesses and activities. The
extent to which NiSource manages each of the various types of risk involved in
its businesses is critical to its profitability. NiSource seeks to identify,
assess, monitor and manage, in accordance with defined policies and procedures,
the following principal risks involved in its energy businesses: commodity
market risk, interest rate risk and credit risk. Risk management at NiSource is
a multi-faceted process with independent oversight that requires constant
communication, judgment and knowledge of specialized products and markets.
NiSource's senior management takes an active role in the risk management process
and has developed policies and procedures that require specific administrative
and business functions to assist in the identification, assessment and control
of various risks. In recognition of the increasingly varied and complex nature
of the energy business, NiSource's risk management policies and procedures
continue to evolve and are subject to ongoing review and modification.
The fair market value of NiSource's price risk management assets and liabilities
were $302.9 million and $243.9 million at March 31, 2001, respectively, and
$1,568.5 million and $1,529.2 million at December 31, 2000, respectively. The
significant decrease in these assets and liabilities that occurred between these
two periods was due primarily to sharply lower energy prices, and to a lesser
extent reduced trading activities.
16
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource is exposed, through its various business activities, to trading risks
and non-trading risks. The non-trading risks to which NiSource is exposed
include interest rate risk and commodity price risk of its subsidiaries and
certain gas marketing activities. Trading risks consist primarily of commodity
price risks resulting from trading activities. NiSource's risk management policy
permits the use of certain financial instruments to manage its market risk,
including futures, forwards, options and swaps. Risk management at NiSource is
the process by which the organization ensures that the risks to which it is
exposed are the risks to which it desires to be exposed to achieve its primary
business objectives. NiSource employs various analytic techniques to measure and
monitor its market risks, including value-at-risk (VaR) and instrument
sensitivity to market factors. VaR represents the potential loss or gain for an
instrument or portfolio from adverse changes in market factors, for a specified
time period and at a specified confidence level.
Non-Trading Risk
NiSource is exposed to interest rate risk as a result of changes in interest
rates on borrowings under revolving credit agreements and lines of credit. These
instruments have interest rates that are indexed to short-term market interest
rates. At March 31, 2001, and December 31, 2000, the combined borrowings
outstanding under these facilities totaled $2,202.1 million and $2,496.7
million, respectively. Based upon average borrowings under these agreements, a
change in short-term interest rates of 100 basis points (1%) would have
increased or decreased interest expense by $5.9 million for the three months
ended March 31, 2001 and $15.7 million for the twelve months ended December 31,
2000.
For a discussion of non-trading commodity price and credit risk, please see the
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Form 10-K.
Trading Risk
NiSource employs a VaR model to assess the market risk of its energy trading
portfolios. Market risk refers to the risk that a change in the level of one or
more market prices, rates, indices, volatilities, correlations or other market
factors, such as liquidity, will result in losses for a specified position or
portfolio. NiSource estimates the one-day VaR across all trading groups that
utilize derivatives using either Monte Carlo simulation or variance/covariance
at a 95% confidence level. Based on the results of the VaR analysis, the daily
market exposure for power trading on an average, high and low basis was $0.8
million, $3.7 million and zero, respectively, at March 31, 2001. The daily VaR
for the gas trading portfolio on an average, high and low basis was $2.1
million, $4.7 million and $0.8 million at March 31, 2001, respectively.
Accounting Change
Effective January 1, 2001, NiSource adopted the Financial Accounting Standards
Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as subsequently
amended by SFAS No. 137 and SFAS No. 138 (collectively referred to as SFAS No.
133). These statements establish accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 requires an entity to recognize all derivatives as
either assets or liabilities on the balance sheet and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and resulting designation.
The adoption of this statement on January 1, 2001, resulted in a cumulative
after-tax increase to net income of approximately $4 million and an after-tax
reduction to other comprehensive income (OCI) of approximately $17 million. The
adoption also resulted in the recognition of $178 million of assets and $212.8
million of liabilities on the consolidated balance sheet. Additionally, the
adoption resulted in the reduction of hedged risk basis of $3.8 million and the
elimination of prior hedge accounting balances of $17.9 million. During the
first quarter of 2001, approximately $6.4 million of the net losses included in
the cumulative effect of a change in accounting principle component of OCI were
reclassified into earnings.
17
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource's senior management takes an active role in the risk management process
and has developed policies and procedures that require specific administrative
and business functions to assist in the identification, assessment and control
of various risks. In recognition of the increasingly varied and complex nature
of the energy business, NiSource's risk management policies and procedures
continue to evolve and are subject to ongoing review and modification.
See Note 6., "Accounting Change" for additional information.
OTHER INFORMATION
Presentation of Segment Information
As a result of the November 1, 2000 acquisition of Columbia, NiSource revised
its presentation of primary business segment information. Columbia's gas
transmission and storage and exploration and production businesses are now
reported as business segments of NiSource. Columbia's gas distribution
operations have been combined with NiSource's gas distribution business. Other
products and services develop unregulated power projects as well as other
energy-related businesses. Prior periods have been restated to reflect these
changes.
Competition
The regulatory environment applicable to NiSource's rate-regulated subsidiaries
continues to undergo fundamental changes. These changes previously had, and will
continue to have, an impact on NiSource's operations, structure and
profitability. At the same time, competition within the energy industry will
create opportunities to compete for new customers and revenues. Management has
taken steps to become more competitive and profitable in this changing
environment. These initiatives include partnering on energy projects with major
industrial customers, providing NiSource's customers with increased choice for
new products and services, acquiring companies that increase NiSource's scale of
operations and establishing subsidiaries that develop new energy-related
products for residential, commercial and industrial customers, including the
development of distributed generation technologies.
18
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS
Three Months Ended March 31, ($ in millions) 2001 2000
- --------------------------------------------------------------------------------------
NET REVENUES
Sales Revenues 1,911.4 437.4
Less: Cost of gas sold 1,486.7 280.4
- --------------------------------------------------------------------------------------
Net Sales Revenues 424.7 157.0
Transportation Revenues 152.7 35.2
- --------------------------------------------------------------------------------------
Net Revenues 577.4 192.2
- --------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 166.0 53.5
Depreciation and amortization 64.5 32.1
Other taxes 58.8 10.4
- --------------------------------------------------------------------------------------
Total Operating Expenses 289.3 96.0
- --------------------------------------------------------------------------------------
Operating Income 288.1 96.2
======================================================================================
REVENUES ($ IN MILLIONS)
Residential 1,197.1 301.6
Commercial 475.7 97.3
Industrial 90.5 34.7
Transportation 152.7 35.2
Other 148.1 3.8
- --------------------------------------------------------------------------------------
Total 2,064.1 472.6
- --------------------------------------------------------------------------------------
SALES AND TRANSPORTATION (Bcf)
Residential sales 107.0 43.0
Commercial sales 40.4 18.2
Industrial sales 7.7 4.8
Transportation 168.1 67.8
Other 4.6 11.2
- --------------------------------------------------------------------------------------
Total 327.8 145.0
- --------------------------------------------------------------------------------------
HEATING DEGREE DAYS 2,907 2,855
NORMAL HEATING DEGREE DAYS 3,040 3,246
% COLDER (WARMER) THAN NORMAL (4%) (12%)
CUSTOMERS
Residential 2,370,612 961,569
Commercial 214,070 86,052
Industrial 10,792 3,867
Transportation 643,045 19,073
Other 19 71
- --------------------------------------------------------------------------------------
Total 3,238,538 1,070,632
- --------------------------------------------------------------------------------------
19
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource's natural gas distribution operations (Gas Distribution) serve more
than 3.2 million customers in nine states. Through its wholly owned subsidiary,
Columbia, NiSource owns five distribution subsidiaries that provide natural gas
to approximately 2.1 million residential, commercial and industrial customers in
Ohio, Pennsylvania, Virginia, Kentucky and Maryland. NiSource also distributes
natural gas to approximately 751,000 customers in northern Indiana through three
subsidiaries: Northern Indiana Public Service Company (Northern Indiana), Kokomo
Gas and Fuel Company and Northern Indiana Fuel and Light Company, Inc.
Additionally, NiSource's subsidiary, Bay State, and its subsidiary Northern
Utilities, Inc., distribute natural gas to more than 320,000 customers in areas
of Massachusetts, Maine, and New Hampshire.
Regulatory Matters
At the Federal level, gas industry deregulation began in the mid-1980s when the
Federal Energy Regulatory Commission (FERC) required interstate pipelines to
provide nondiscriminatory transportation services pursuant to unbundled rates.
This regulatory change permitted large industrial and commercial customers to
purchase their gas supplies either from a LDC or directly from competing
producers and marketers, which would then use the LDC's facilities to transport
the gas. More recently, the focus of deregulation in the gas industry has
shifted to retail customers at the state level.
NiSource pursues initiatives that give retail customers the opportunity to
purchase natural gas directly from marketers and to use Gas Distribution's
facilities for transportation services. These opportunities are being pursued
through regulatory initiatives in all of its jurisdictions. Once fully
implemented, these programs would reduce Gas Distribution's commodity sales
function and provide all customer classes with the opportunity to obtain gas
supplies from alternative merchants. As these programs expand to all customers,
regulations will have to be implemented to provide for the recovery of
transition capacity costs and other transition costs incurred by a utility
serving as the supplier of last resort if a marketing company cannot supply the
gas. Transition capacity costs are created as customers enroll in these programs
and purchase their gas from other suppliers, leaving the Gas Distribution
subsidiaries with pipeline capacity it has contracted for, but no longer needs.
The state commissions in jurisdictions served by Gas Distribution are at various
stages in addressing these issues and other transition considerations. Gas
Distribution is currently recovering, or has the opportunity to recover, the
costs resulting from the unbundling of its services and believes that most of
such future costs and costs resulting from being the supplier of last resort
will be mitigated or recovered.
Market Conditions
Weather in Gas Distribution's markets for the first three months of 2001, which
included the Columbia LDCs, was on average 4% warmer than normal. In the
northern Indiana and Massachusetts regions, weather was 14% and 2% colder in the
first quarter of 2001, respectively, than the same period in 2000.
The colder weather in the last quarter of 2000 and first quarter of 2001
combined with the significantly higher cost of gas in those periods has led to
some challenges. NiSource's Customer Service Call Centers received a
significantly higher number of calls in this winter period than in previous
years from customers concerned about the impact of and their ability to pay
higher heating bills. Gas Distribution personnel worked with customers to ease
the burden by offering budget billing programs, payment plans, customer choice
programs and referrals to energy assistance programs. These programs have not
only assisted the customers, but also reduced the amount of uncollectible
accounts the Gas Distribution companies would have otherwise faced.
Throughput
Total volumes sold and transported of 327.8 Bcf for the first quarter of 2001
increased 182.8 Bcf from the same period last year primarily due to the
inclusion of Columbia's five distribution companies' throughput of 205.8 Bcf and
colder weather. Volumes at Northern Indiana decreased due to lower
transportation volumes to industrial customers and decreased off-system sales.
Net Revenues
Net revenues for the three months ended March 31, 2001, were $577.4 million, up
$385.2 million over the same period in 2000, primarily due to the acquisition of
Columbia. Northern Indiana's revenues increased $10.8 million due to 14% colder
weather than the first quarter of 2000.
20
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Operating Income
Operating income for the first quarter of 2001 of $288.1 million increased
$191.9 million over the same period in 2000, primarily due to the acquisition of
Columbia's five distribution subsidiaries on November 1, 2000, and the effect of
14% colder weather in northern Indiana. Operating expenses increased due to the
acquisition of Columbia's five distribution subsidiaries; however, compared to
NiSource and Columbia on a combined basis, operating expenses were reduced, due
largely to lower labor costs and other taxes, partially offset by the
amortization of goodwill. The reduced labor costs were primarily attributable to
restructuring activities.
21
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSOURCE INC.
TRANSMISSION AND STORAGE OPERATIONS
Three Months Ended March 31, ($ in millions) 2001 2000
- ---------------------------------------------------------------------------------
OPERATING REVENUES
Transportation Revenues 232.7 13.9
Storage revenues 44.6 --
Other revenues 16.5 --
- ---------------------------------------------------------------------------------
Total Operating Revenues 293.8 13.9
Less: Cost of gas sold 35.1 11.4
- ---------------------------------------------------------------------------------
Net Revenues 258.7 2.5
- ---------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 79.4 1.0
Depreciation and amortization 40.0 0.4
Other taxes 15.1 0.2
- ---------------------------------------------------------------------------------
Total Operating Expenses 134.5 1.6
- ---------------------------------------------------------------------------------
Operating Income 124.2 0.9
=================================================================================
THROUGHPUT (Bcf)
Columbia Transmission
Market Area 366.7 --
Columbia Gulf
Mainline 161.3 --
Short-haul 37.0 --
Intrasegment eliminations (157.3) --
Columbia Pipeline Deep Water 0.8 --
Crossroads Gas Pipeline 10.9 10.5
Granite State Pipeline 13.1 14.1
- ---------------------------------------------------------------------------------
Total 432.5 24.6
- ---------------------------------------------------------------------------------
22
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource's gas transmission and storage segment primarily consists of the
operations of Columbia Gas Transmission Corporation (Columbia Transmission),
Columbia Gulf Transmission Company (Columbia Gulf), Columbia Pipeline
Corporation, Crossroads Pipeline Company (Crossroads) and Granite State
Transmission System (Granite). In total NiSource owns a pipeline network of
approximately 16,500 miles extending from offshore in the Gulf of Mexico to Lake
Erie, New York and the eastern seaboard. Together they serve customers in
seventeen northeastern, mid-Atlantic, midwestern and southern states, as well as
the District of Columbia. In addition, the NiSource gas transmission and storage
segment operates one of the nation's largest underground natural gas storage
systems.
Proposed Millennium Pipeline Project
The proposed Millennium Pipeline Project (Millennium Project), in which Columbia
Transmission is participating and will serve as developer and operator, will
transport western gas supplies to northeast and mid-Atlantic markets. The
442-mile pipeline will connect to TransCanada Pipe Lines Ltd. at a new Lake Erie
export point and transport approximately 700,000 Dth per day to eastern markets.
To date, nine shippers have signed agreements for a significant portion of the
available capacity. Based on the current status of the regulatory approval
process of the FERC, the Millennium Project sponsors have advised the FERC of a
revised in-service date of November 1, 2002.
The sponsors of the proposed Millennium Project are Columbia Transmission,
Westcoast Energy, Inc., TransCanada Pipe Lines Ltd. and MCN Energy Group, Inc.
Storage Base Gas Sales
Columbia Transmission sold 5.2 billion cubic feet (Bcf) of base gas volumes in
the first quarter of 2001 resulting in a pre-tax gain of $11.4 million. Base gas
represents storage volumes that are maintained to ensure that adequate pressure
exists to deliver current inventory. As a result of ongoing improvements made in
its storage operations, Columbia Transmission determined that a portion of these
storage volumes were no longer necessary to maintain deliverability of current
inventory.
Throughput
Columbia Transmission's throughput consists of transportation and storage
services for local distribution companies and other customers within its market
area, which covers portions of northeastern, mid-Atlantic, mid-western, and
southern states and the District of Columbia. Throughput for Columbia Gulf
reflects mainline transportation services from Rayne, Louisiana to Leach,
Kentucky and short-haul transportation services from the Gulf of Mexico to
Rayne, Louisiana. Crossroads serves customers in northern Indiana and Granite
provides service in New Hampshire.
Throughput for the Transmission and Storage segment totaled 432.5 Bcf for the
first quarter of 2001, compared to 24.6 Bcf in 2000. The increase primarily
reflects the addition of Columbia Transmission and Columbia Gulf Transmission
that resulted from the acquisition of Columbia.
Operating Revenues
Total operating revenues were $258.7 million for the first quarter of 2001, an
increase of $256.2 due primarily to the inclusion of Columbia operations. This
also includes the effect of the sale of base gas discussed above.
Operating Income
First quarter 2001 operating income of $124.2 million increased $123.3 million
due primarily to the inclusion of Columbia's operations, partially offset by the
amortization of goodwill for the Columbia acquisition. In 2001, $11.4 million of
storage base gas sales also contributed to the increase.
23
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSOURCE INC.
ELECTRIC OPERATIONS
Three Months Ended March 31,($ in millions) 2001 2000
===============================================================================
NET REVENUES
Sales revenues 370.6 318.2
Less: Cost of sales 177.0 127.7
- -------------------------------------------------------------------------------
Net Revenues 193.6 190.5
- -------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 52.7 54.4
Depreciation and amortization 41.5 40.0
Other taxes 13.8 13.4
- -------------------------------------------------------------------------------
Total Operating Expenses 108.0 107.8
- -------------------------------------------------------------------------------
Operating Income 85.6 82.7
===============================================================================
REVENUES ($ IN MILLIONS)
Residential 68.8 66.4
Commercial 68.0 67.3
Industrial 105.0 109.8
Wholesale & Power Trading 127.6 73.7
Other electric service 1.2 1.0
- -------------------------------------------------------------------------------
Total 370.6 318.2
- -------------------------------------------------------------------------------
SALES (GIGAWATT HOURS)
Residential 697.6 667.6
Commercial 815.4 798.2
Industrial 2,323.0 2,535.8
Wholesale & Power Trading 2,593.0 2,753.0
Other electric service 16.2 32.0
- -------------------------------------------------------------------------------
Total 6,445.2 6,786.6
- -------------------------------------------------------------------------------
ELECTRIC CUSTOMERS
Residential 379,898 376,715
Commercial 46,670 45,953
Industrial 2,660 2,676
Wholesale & Power Trading 23 35
Other electric service 804 815
- -------------------------------------------------------------------------------
Total 430,055 426,194
- -------------------------------------------------------------------------------
24
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource generates and distributes electricity, through its subsidiary Northern
Indiana, to approximately 430,000 customers in 21 counties in the northern part
of Indiana. Northern Indiana owns and operates four coal-fired electric
generating stations with a net capability of 3,179 megawatts, four gas-fired
combustion turbine generating units with a net capability of 203 megawatts and
two hydroelectric generating plants with a net capability of 10 megawatts. These
facilities provide for a total system net capability of 3,392 megawatts.
Northern Indiana is interconnected with five neighboring electric utilities.
Market Conditions
The regulatory framework applicable to electric operations are undergoing
fundamental changes. These changes have previously had, and will continue to
have, an impact on NiSource's electric operations, structure and profitability.
At the same time, competition within the industry will create opportunities to
compete for new customers and revenues. Management has taken steps to become
more competitive and profitable in this changing environment, including
converting some of its generating units to allow use of lower cost, low sulfur
coal and improving the transmission interconnections with neighboring electric
utilities.
Regulatory Matters
FERC issued Order No. 888-A in 1996 that required all public utilities owning,
controlling or operating transmission lines to file non-discriminatory
open-access tariffs and offer wholesale electricity suppliers and marketers the
same transmission service they provide themselves. On June 30, 2000, the D.C.
Circuit Court of Appeals upheld FERC's open access orders in all major respects,
although the U.S. Supreme Court on February 26, 2001 agreed to review the case.
In 1997, FERC accepted for filing Northern Indiana's open-access transmission
tariff. On December 20, 1999, FERC issued Order 2000 addressing the formation
and operation of Regional Transmission Organizations (RTOs). The rule is
intended to eliminate pricing inequities in the provision of wholesale
transmission service. On October 16, 2000, NiSource filed with the FERC
indicating that it is committed to joining an RTO and on February 28, 2001
joined the Alliance RTO. The Alliance RTO expects to be fully operational by
FERC's December 15, 2001 deadline. The Alliance RTO companies serve a population
of 41 million within 178,800 square miles in 11 states and own 57,100 miles of
transmission lines.
During the course of a regularly scheduled review, referred to as a Level 1
review, the staff of the Indiana Utility Regulatory Commission (IURC) made a
preliminary determination, based on unadjusted historical financial information
filed by Northern Indiana, that Northern Indiana was earning returns that were
in excess of its last rate order and generally established standards. Despite
holding meetings with the IURC staff during 2000 to explain several adjustments
that needed to be made to the filed information to make such an analysis
meaningful, the staff has recommended that a formal investigation be performed.
The IURC has ordered that an investigation begin. Management is unable at this
time to determine if a broader analysis, which would be performed through a
formal investigation, could result in a rate adjustment that would be higher or
lower than currently allowed rates. Management intends to vigorously oppose any
efforts to reduce rates that may result from this investigation.
Environmental Matters
The Great Lakes Water Quality Initiative ("GLI") program is expected to add new
water quality standards for facilities that discharge into the Great Lakes
watershed, including Northern Indiana's three electric generating stations
located on Lake Michigan. The State of Indiana has promulgated its regulations
for this water discharge permit program and is in the process of seeking final
United States Environmental Protection Agency (US EPA) approval. The promulgated
regulations currently provide the Indiana Department of Environmental Management
(IDEM) with the authority to grant water quality criteria variances and for
non-contact cooling water. However, the US EPA has objected to these provisions.
Northern Indiana expects that IDEM will issue a proposed permit renewal for each
of its lakeside stations. Pending the outcome of program approval discussions
between IDEM and US EPA, including discussions with respect to exemption
authority and permit renewal requirements, the costs of complying with these
requirements cannot be predicted.
Sales
Electric sales for the first three months of 2001 were 6,445.2 million
kilowatt-hours (kwh), a decrease of 341.4 million kwh, or 5%, compared to the
2000 period, reflecting decreased industrial sales due to a decline in
production in the steel industry and decreased bulk power sales, offset by
increased residential and commercial usage. The basic steel industry accounted
for approximately 21% of electric sales in the first quarter of 2001.
25
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Net Revenues
In the first quarter of 2001, electric net revenues of $193.6 million increased
by $3.1 million over the 2000 period. This improvement primarily reflects
increased power trading margins of $2.8 million. Net utility revenues increased
$0.3 million primarily due to the beneficial impact of weather and customer
growth on residential and commercial sales partially offset by the adverse
impact of decreased production in the steel industry on industrial sales and
fewer opportunities in the bulk power market. Average revenue per kwh sold
increased 11% from the first quarter of 2000 to 6.5 cents per kwh for the same
period in 2001. The average cost per kwh generated increased 4% from the first
quarter of 2000 to 1.43 cents per kwh for the 2001 period due primarily to
higher coal costs. The cost of fuel for electric generation, which is primarily
coal, in the first quarter of 2001 decreased $5.9 million from the 2000 period
reflecting reduced electric generation due to lower demand for electric power.
Operating Income
Operating income for the first quarter of 2001 was $85.6 million, an increase of
$2.9 million over the same period in 2000. This increase primarily reflects the
favorable impact of net revenues described above.
26
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSOURCE INC.
EXPLORATION AND PRODUCTION OPERATIONS
Three Months Ended March 31,($ in millions) 2001
- -------------------------------------------------------------------------------
OPERATING REVENUES
Gas revenues 50.0
Other revenues 3.8
- -------------------------------------------------------------------------------
Total Operating Revenues 53.8
- -------------------------------------------------------------------------------
Operating Expenses
Operation and maintenance 16.7
Depreciation and depletion 10.2
Other taxes 5.6
- -------------------------------------------------------------------------------
Total Operating Expenses 32.5
- -------------------------------------------------------------------------------
Operating Income 21.3
===============================================================================
AVERAGE PRICE OF GAS PRODUCTION ($ PER Mcf)
U.S. 3.33
CANADA 8.46
GAS PRODUCTION (Bcf):
U.S. 14.5
CANADA -
- -------------------------------------------------------------------------------
TOTAL 14.5
- -------------------------------------------------------------------------------
NiSource's exploration and production subsidiary, Columbia Energy Resources,
Inc. (Columbia Resources), is one of the largest independent natural gas and oil
producers in the Appalachian Basin and also has production operations in Canada.
NiSource acquired Columbia Resources as part of the Columbia acquisition on
November 1, 2000. Columbia Resources produced nearly 14 Bcf equivalents (Bcfe)
of natural gas and oil in the first quarter of 2001, has financial interests in
over 8,000 wells, and has net proven gas and oil reserve holdings of 1.1
trillion cubic feet equivalent at March 31, 2001. Columbia Resources also owns
and operates approximately 6,200 miles of gathering pipelines.
Columbia Resources seeks to achieve asset and profit growth primarily through
expanded drilling activities. For the first quarter of 2001, Columbia Resource's
drilling activity resulted in the discovery of 12.4 net Bcfe of gas and oil
reserves. During the first quarter of 2001, Columbia Resources has participated
in 24 gross (22.4 net) wells with a success rate of 100 percent.
Forward Sale of Natural Gas
On March 30, 2001, Columbia Resources restructured its existing forward gas
sales agreements with Mahonia II Limited (Mahonia). Physical deliveries of 19.9
Bcf of natural gas to Mahonia, required under the previous agreements for the
period April 2001 through March 2002, have been postponed. These deliveries have
been scheduled to resume in January 2003 and continue through February 2006,
with 31.7 Bcf of gas to be delivered in addition to the previous requirements of
the forward gas sales agreements.
Volumes
Gas production of 14.5 Bcf and oil and liquid production of 61,000 barrels in
the first quarter of 2001 reflect recent drilling successes, along with
improvements to Columbia Resources' gathering facilities and reduced capacity
constraints.
Operating Revenues
Operating revenues for the first quarter of 2001 were $53.8 million.
Approximately 69% of Columbia Resources' natural gas production was hedged at an
average price of $4.08 per Mcf.
27
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Operating Income
Operating income for the first quarter 2001 was $21.3 million. Depletion expense
included an impairment write-down of $1.6 million for the Canadian oil and gas
properties.
28
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSOURCE INC.
ENERGY MARKETING OPERATIONS
Three Months Ended March 31, ($ in millions) 2001 2000
- -----------------------------------------------------------------------------------
NET REVENUES
Sales revenues 1,152.7 311.1
Less: Cost of products purchased 1,161.8 288.7
- -----------------------------------------------------------------------------------
Net Revenues (9.1) 22.4
- -----------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 21.4 9.7
Depreciation and amortization 0.7 3.9
Other taxes 0.6 0.4
- -----------------------------------------------------------------------------------
Total Operating Expenses 22.7 14.0
- -----------------------------------------------------------------------------------
Operating Income (Loss) (31.8) 8.4
===================================================================================
NiSource provides non-regulated energy marketing services through its wholly
owned subsidiary EnergyUSA, Inc. and its subsidiary EnergyUSA-TPC Corp. (TPC).
TPC provides energy related asset management and asset portfolio replacement
opportunities for LDCs and fuel requirement services for electric utilities,
independent power producers and cogeneration facilities. TPC also provides
natural gas sales and management services to industrial and commercial
customers, engages in natural gas marketing activities and provides gas supply
to Northern Indiana, Kokomo Gas and Northern Indiana Fuel and Light under spot
and term contracts.
Net Revenues
Total sales revenues of $1,152.7 million for the first quarter of 2001,
increased $841.6 million over the 2000 first quarter. The significant increase
in sales revenues primarily reflected a substantial increase in gas trading
activity. These higher revenues were more than offset by increased gas costs.
Net Revenues for the first quarter of 2001 were a loss of $9.1 million, a
decrease of $31.5 million over the same period last year. The decrease is due
primarily to TPC's mark-to-market adjustments due to a decline in the value of
basis positions related to structured transactions in Northeast markets and the
absence of revenues from MHP, which were included in the prior year's results.
MHP was sold in September 2000.
Operating Income (Loss)
Energy Marketing had an operating loss of $31.8 million for the first quarter of
2001 compared to operating income of $8.4 million for the same period last year.
The decrease is primarily due to the reduction of net revenues discussed above
and the settlement of a lawsuit in the first quarter of 2001 related to MHP.
29
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSOURCE INC.
OTHER PRODUCTS AND SERVICES
Three Months Ended March 31, ($ in millions) 2001 2000
- --------------------------------------------------------------------------------
NET REVENUES
Products and services revenue 42.9 52.0
Less: Cost of products purchased 22.2 28.8
- --------------------------------------------------------------------------------
Net Revenues 20.7 23.2
- --------------------------------------------------------------------------------
Operating Expenses
Operation and maintenance 27.0 21.7
Depreciation and amortization 2.0 2.9
Other taxes 1.4 1.4
- --------------------------------------------------------------------------------
Total Operating Expenses 30.4 26.0
- --------------------------------------------------------------------------------
Operating Loss (9.7) (2.8)
================================================================================
NiSource develops power projects through its subsidiary, Primary Energy, Inc.
(Primary Energy), which works with industrial customers in managing the
engineering, construction, operation and maintenance of "inside the fence"
cogeneration plants that provide cost-effective, long-term sources of energy for
energy-intensive facilities. NiSource has also invested in a number of
distributed generation technologies including fuel cells and microturbine
ventures. NiSource is also building a dark-fiber optics telecommunications
network primarily along its pipeline rights-of-way between New York and
Washington D.C. NiSource is pursuing strategic alternatives for its
telecommunications network, has recently exited the pipeline construction
business and is in the process of selling the line locating and marking
business.
Primary Energy
Primary Energy develops, builds, owns, operates and manages industrial based
energy projects. The focus of the company is to develop on-site,
industrial-based energy solutions for large complexes having multiple energy
flows, such as electricity, steam, by-product fuels or heated water. Through its
subsidiaries, Primary Energy has entered into agreements with several of
NiSource's largest industrial customers, principally steel mills and a refinery,
to service a portion of their energy needs. In order to serve its customers
under the agreements, and to have electricity available for the wholesale
market, Primary Energy, through its subsidiaries, has entered into certain
operating lease commitments to lease these energy-related projects, which have a
combined capacity of 393 megawatts in operation and 575 megawatts under
construction. NiSource, through subsidiaries, guarantees certain of Primary
Energy's obligations under each lease.
LTV Bankruptcy
The LTV Corporation, parent of LTV Steel Company, Inc. (LTV), filed for
protection under Chapter 11 of the Federal Bankruptcy Code on December 29, 2000.
Primary Energy is constructing a cogeneration plant on the site of LTV's East
Chicago mill. While the bankruptcy affords LTV an opportunity to reject the
current 15-year contract for use of the facility, Primary Energy is working
closely with LTV to obtain contract affirmation. LTV's decision is expected
during 2001. Work on the project is continuing with commercialization scheduled
for September 2001.
Net Operating Revenues
Net Operating Revenues of $20.7 million for the first quarter of 2001 decreased
by $2.5 million from the first quarter of 2000. This is due to decreases at
Primary Energy for development fees and lower production in the steel industry.
Operating Income (Loss)
Other products and services reported an operating loss of $9.7 million versus an
operating loss of $2.8 million in 2000, reflecting additional start-up costs
related to new services and reduced revenues generated from providing services
to the steel industry. Operation and maintenance expense increased $5.3 million,
due primarily to additional outside services, project technical support and
franchise fees.
30
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion regarding quantitative and qualitative disclosures about market
risk see page 15 of the Management's Discussion and Analysis of Financial
Condition and Results of Operations under "Market Risk Sensitive Instruments and
Positions."
31
32
PART II
ITEM 1. LEGAL PROCEEDINGS
1. UNITED STATES OF AMERICA EX REL. JACK J. GRYNBERG V. COLUMBIA GAS
TRANSMISSION CORP. ET. AL.
The plaintiff filed a complaint under the False Claims Act, on behalf of
the United States of America, against approximately seventy pipelines,
including Columbia Gulf. The plaintiff claimed that the defendants had
submitted false royalty reports to the government (or caused others to do
so) by mismeasuring the volume and heating content of natural gas produced
on Federal land and Indian lands. Plaintiff's original complaint was
dismissed without prejudice for misjoinder of parties and for failing to
plead fraud with specificity. In 1997, the plaintiff then filed over
sixty-five new False Claims Act complaints against over 330 defendants in
numerous Federal courts. One of those complaints was filed in the Federal
District Court for the Eastern District of Louisiana against Columbia and
thirteen affiliated entities. Plaintiff's second complaint repeats the
mismeasurement claims previously made and adds valuation claims alleging
that the defendants have undervalued natural gas for royalty purposes in
various ways, including by making sales to affiliated entities at
artificially low prices. Most of the Grynberg cases were transferred to
Federal court in Wyoming in 1999. In December 1999, the Columbia
defendants filed a motion to dismiss plaintiff's second complaint
primarily based on a failure to plead fraud with specificity. A hearing
was held on the motion in March 2000 but the court has not yet ruled.
2. QUINQUE OPERATING CO. ET AL V. GAS PIPELINES ET AL.
Plaintiff filed an amended complaint in Stevens County, Kansas state court
on September 23, 1999, against over 200 natural gas measurers, mostly
natural gas pipelines, including Columbia and fourteen affiliated
entities. The allegations in Quinque are similar to those made in
Grynberg; however, Quinque broadens the claims to cover all oil and gas
leases (other than the Federal and Indian leases that are the subject of
Grynberg). Qunique asserts a breach of contract claim, negligent or
intentional misrepresentation, civil conspiracy, common carrier liability,
conversion, violation of a variety of Kansas statutes and other common law
causes of action. Quinque purports to be a nationwide class action filed
on behalf of all similarly situated gas producers, royalty owners,
overriding royalty owners, working interest owners and certain state
taxing authorities. The defendants had previously moved the case to
Federal court. On January 12, 2001, the Federal court remanded the case to
state court.
3. VIVIAN K. KERSHAW ET AL. V. COLUMBIA NATURAL RESOURCES, INC., ET AL.
In February 2000, plaintiff filed a complaint in New York state court
against Columbia Resources and Columbia Transmission. The complaint
alleges that Kershaw owns an interest in an oil and gas lease in New York
and that the defendants have underpaid royalties on those leases by, among
other things, failing to base royalties on the price at which natural gas
is sold to the end user and by improperly deducting post-production costs.
The complaint also seeks class action status on behalf of all royalty
owners in oil and gas leases operated by Columbia Resources. Plaintiff
seeks the alleged royalty underpayments and punitive damages. Columbia
Resources and Columbia Transmission removed the case to Federal court in
March 2000. The Federal court has now remanded Kershaw back to New York
state court.
4. ANTHONY GONZALEZ, ET AL. V. NATIONAL PROPANE CORPORATION, ET AL.
On December 11, 1997, plaintiffs Anthony Gonzalez, Helen Pieczynski, as
Special Administrator of the Estate of Edmund Pieczynski, deceased,
Michael Brown and Stephen Pieczynski filed a multiple-count complaint for
personal injuries in the Circuit Court of Cook County, Illinois against
National Propane Corporation and the Estate of Edmund Pieczynski sounding
in strict tort liability and negligence. Plaintiff's complaint arises from
an explosion and fire which occurred in a Wisconsin vacation cottage in
1997. National Propane, L.P. filed a third-party complaint for
contribution against Natural Gas Odorizing and Phillips Petroleum Company.
Written discovery has been completed and the parties are conducting oral
discovery of the fact witnesses. There has been no trial date set in the
matter, and the next court date is June 27, 2001, at which time further
scheduling of discovery will occur.
32
33
ITEM 1. LEGAL PROCEEDINGS (continued)
5. COLUMBIA GAS TRANSMISSION CORP. V. CONSOLIDATION COAL CO., ET AL.
On December 21, 1999, Columbia Transmission filed a complaint in Federal
court in Pittsburgh, Pennsylvania against Consolidation Coal Co. and
McElroy Coal Co. (collectively, Consol), seeking declaratory and permanent
injunctive relief enjoining Consol from pursuing its current plan to
conduct longwall mining through Columbia Transmission's Victory Storage
Field (Victory) in northern West Virginia. The complaint was served on
April 10, 2000. Consol's current plans to longwall mine through Victory
would destroy certain infrastructure of Victory, including all of Columbia
Transmission's storage wells in the path of the mining. The parties are
holding discussions concerning resolution of this matter. On December 8,
2000, the court denied Consol's motion to dismiss. On March 5, 2001, the
court denied Consol's motion to transfer this action to Federal court in
West Virginia (see McElroy Coal Company v. Columbia Gas Transmission
Corporation below). On March 27, 2001, the court also granted Columbia's
motion to enjoin Consol from further prosecuting the West Virginia action
and from initiating any further actions in any other court raising
compulsory counterclaims to this action. On April 2, 2001, Consol filed an
appeal of the March 27, 2001 order to the United States Court of Appeals
for the Third Circuit. Consol also filed a Motion for Leave to File a
Counterclaim on April 10, 2001, including a claim for inverse
condemnation. The court accepted Consol's Motion for Leave on April 12,
2001. Meanwhile, discovery is proceeding.
6. MCELROY COAL COMPANY V. COLUMBIA GAS TRANSMISSION CORPORATION
On February 12, 2001, McElroy Coal Company (McElroy), an affiliate of
Consolidation Coal Co., filed a complaint against Columbia Transmission in
Federal court in Wheeling, West Virginia. The West Virginia complaint
seeks declaratory and injunctive relief as to McElroy's alleged right to
mine coal within Victory, and Columbia Transmission's obligation to take
all necessary measures to permit McElroy to longwall mine. The complaint
also seeks compensation for the inverse condemnation of any coal that
cannot be mined due to Columbia Transmission's Victory operations. Except
for the claim of inverse condemnation, McElroy's West Virginia complaint
appears to be virtually identical to Consol's original counterclaim to
Columbia Transmission's Federal court action in Pennsylvania. As discussed
in Columbia Gas Transmission Corp. v. Consolidation Coal Co., et al,
above, the federal court in Pittsburgh has granted Columbia's motion to
enjoin McElroy from further prosecution of this action.
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
33
34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10.30) Natural Gas Advance Sale Contract dated December 1, 1999, between
Columbia Natural Resources, Inc. and Mahonia II Limited.
(10.31) First Amendment to Natural Gas Advance Sale Contract (dated December
1, 1999), effective March 30, 2001, between Columbia Natural
Resources, Inc. and Mahonia II Limited.
(10.32) Natural Gas Advance Sale Contract dated August 24, 2000, between
Columbia Natural Resources, Inc. and Mahonia II Limited.
(10.33) First Amendment to Natural Gas Advance Sale Contract (dated August
24, 2000), effective March 30, 2001, between Columbia Natural
Resources, Inc. and Mahonia II Limited.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, NiSource hereby agrees
to furnish the SEC, upon request, any instrument defining the rights of
holders of long-term debt of NiSource not filed as an exhibit herein. No
such instrument authorizes long-term debt securities in excess of 10% of
the total assets of NiSource and its subsidiaries on a consolidated basis.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the first quarter of
2001:
Financial
Item Statements
Reported Included Date of Event Date Filed
-------- -------- ------------- ----------
7 Yes April 2, 2001 April 2, 2001
5 No March 13, 2001 March 13, 2001
34
35
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.
NiSource Inc.
--------------------------------------
(Registrant)
Date: May 9, 2001 By: /s/ Jeffrey W. Grossman
--------------------------------------
Jeffrey W. Grossman
Vice President and Controller
(Principal Accounting Officer
and Duly Authorized Officer)
35