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 SEPTEMBER 30, 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
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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 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:
206,793,946 shares outstanding at September 30, 2001.
NISOURCE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Consolidated Income (Loss)................................ 3
Consolidated Balance Sheets............................................. 4
Statements of Consolidated Cash Flows................................... 6
Notes to Consolidated Financial Statements.............................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............. 35
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 36
Item 2. Changes in Securities and Use of Proceeds............................... 38
Item 3. Defaults Upon Senior Securities......................................... 38
Item 4. Submission of Matters to a Vote of Security Holders..................... 38
Item 5. Other Information....................................................... 38
Item 6. Exhibits and Reports on Form 8-K........................................ 38
Signature........................................................................ 39
2
PART I
ITEM 1. FINANCIAL STATEMENTS
NISOURCE INC.
STATEMENTS OF CONSOLIDATED INCOME (LOSS) (unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -----------------------
(in millions) 2001 2000 2001 2000
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NET REVENUES
Gas Distribution 530.3 169.9 3,328.1 814.3
Gas Transmission and Storage 135.5 24.6 446.7 70.5
Electric 281.3 276.6 774.1 759.6
Exploration and Production 36.8 -- 106.6 --
Merchant Operations 701.7 654.1 2,577.4 1,488.3
Other 70.8 55.8 196.4 162.7
------- ------- ------- -------
Gross Revenues 1,756.4 1,181.0 7,429.3 3,295.4
Cost of Sales 1,071.5 845.3 4,934.9 2,206.1
------- ------- ------- -------
Total Net Revenues 684.9 335.7 2,494.4 1,089.3
------- ------- ------- -------
OPERATING EXPENSES
Operation and maintenance 324.4 136.3 1,029.0 422.8
Depreciation, depletion and amortization 155.6 79.6 471.8 239.8
Other taxes 58.5 22.4 217.7 66.6
Impairment of telecommunication assets -- -- 9.2 --
------- ------- ------- -------
Total Operating Expenses 538.5 238.3 1,727.7 729.2
------- ------- ------- -------
OPERATING INCOME 146.4 97.4 766.7 360.1
------- ------- ------- -------
OTHER INCOME (DEDUCTIONS)
Interest expense, net (146.1) (46.8) (458.7) (136.6)
Minority interest (5.1) (5.2) (15.3) (15.3)
Dividend requirements on preferred stock of subsidiaries (1.9) (2.0) (5.6) (6.0)
Other, net (8.7) 51.4 2.6 50.6
------- ------- ------- -------
Total Other Income (Deductions) (161.8) (2.6) (477.0) (107.3)
------- ------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (15.4) 94.8 289.7 252.8
INCOME TAXES 4.3 48.0 131.5 105.5
------- ------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS (19.7) 46.8 158.2 147.3
------- ------- ------- -------
Income (Loss) from Discontinued Operations - net of taxes (0.4) 5.2 (1.5) 7.7
Change in Accounting- net of taxes -- -- 4.0 --
------- ------- ------- -------
NET INCOME (LOSS) (20.1) 52.0 160.7 155.0
======= ======= ======= =======
BASIC EARNINGS (LOSS) PER SHARE ($)
Continuing operations (0.10) 0.39 0.77 1.21
Discontinued operations -- 0.04 (0.01) 0.06
Change in accounting -- -- 0.02 --
------- ------- ------- -------
BASIC EARNINGS (LOSS) PER SHARE (0.10) 0.43 0.78 1.27
------- ------- ------- -------
DILUTED EARNINGS (LOSS) PER SHARE ($)
Continuing operations (0.10) 0.38 0.76 1.17
Discontinued operations -- 0.04 (0.01) 0.06
Change in accounting -- -- 0.02 --
------- ------- ------- -------
DILUTED EARNINGS (LOSS) PER SHARE (0.10) 0.42 0.77 1.23
------- ------- ------- -------
BASIC AVERAGE COMMON SHARES OUTSTANDING (MILLIONS) 205.4 120.6 205.2 121.7
DILUTED AVERAGE COMMON SHARES (MILLIONS) 205.4 123.4 209.3 125.3
------- ------- ------- -------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, December 31,
(in millions) 2001 2000
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(unaudited)
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility Plant $ 16,026.2 $ 15,825.3
Accumulated depreciation and amortization (7,572.5) (7,299.4)
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Net utility plant 8,453.7 8,525.9
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Gas and oil producing properties, full cost method
United States cost center 985.3 923.6
Canadian cost center 21.5 19.7
Accumulated depletion (95.7) (9.1)
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Net gas and oil producing properties 911.1 934.2
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Other property, at cost, less accumulated depreciation 83.9 86.6
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Net Property, Plant and Equipment 9,448.7 9,546.7
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INVESTMENTS AND OTHER ASSETS
Net assets of discontinued operations 366.7 560.4
Unconsolidated affiliates 156.6 96.1
Assets held for sale 19.8 33.5
Other investments 47.1 54.1
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Total Investments 590.2 744.1
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CURRENT ASSETS
Cash and cash equivalents 117.7 193.0
Accounts receivable (less reserve of $23.9 and $43.3, respectively) 767.0 1,490.2
Other receivables 19.7 23.5
Gas inventory 499.3 322.5
Underrecovered gas and fuel costs 73.3 396.1
Materials and supplies, at average cost 79.0 68.7
Electric production fuel, at average cost 24.6 15.6
Price risk management assets 439.5 1,568.5
Exchange gas receivable 275.5 615.9
Prepayments and other 338.8 223.6
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Total Current Assets 2,634.4 4,917.6
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OTHER ASSETS
Regulatory assets 521.3 517.1
Intangible assets, less accumulated amortization 3,703.7 3,603.6
Deferred charges and other 423.7 367.7
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Total Other Assets 4,648.7 4,488.4
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TOTAL ASSETS $ 17,322.0 $ 19,696.8
=========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, December 31,
(in millions) 2001 2000
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(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 3,411.9 $ 3,415.2
Preferred Stocks--
Subsidiary Companies
Series without mandatory redemption provisions 83.6 83.6
Series with mandatory redemption provisions 48.6 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 6,112.8 5,802.7
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Total Capitalization 10,001.9 9,695.6
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CURRENT LIABILITIES
Current portion of long-term debt 87.1 64.8
Short term borrowings 1,863.9 2,496.7
Accounts payable 531.7 1,117.1
Dividends declared on common and preferred stocks 64.7 1.0
Customer deposits 35.5 32.1
Taxes accrued 197.7 189.3
Interest accrued 161.1 78.0
Overrecovered gas and fuel costs 161.7 --
Price risk management liabilities 353.6 1,529.2
Exchange gas payable 205.6 360.5
Current deferred revenue 87.6 451.5
Other accruals 591.5 573.2
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Total Current Liabilities 4,341.7 6,893.4
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OTHER LIABILITIES AND DEFERRED CREDITS
Deferred income taxes 1,741.3 1,806.2
Deferred investment tax credits 107.6 114.3
Deferred credits 298.2 337.3
Noncurrent deferred revenue 464.6 498.0
Accrued liability for postretirement benefits 277.3 272.5
Other noncurrent liabilities 89.4 79.5
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Total Other 2,978.4 3,107.8
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COMMITMENTS AND CONTINGENCIES -- --
----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES $ 17,322.0 $ 19,696.8
=========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS (unaudited)
Nine Months
Ended September 30,
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(in millions) 2001 2000
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OPERATING ACTIVITIES
Net income $ 160.7 $ 155.0
Adjustments to reconcile net income to net cash from
continuing operations:
Depreciation, depletion, and amortization 471.7 239.8
Net changes in price risk management activities 446.5 (19.4)
Asset impairment 9.2 --
Deferred income taxes (88.7) (39.8)
Deferred revenue (397.3) --
Amortization of unearned compensation 24.0 --
Gain on sale of assets (6.4) (51.9)
Income from change in accounting (4.0) --
Income from discontinued operations 1.5 (7.7)
Other, net (7.1) 7.2
-------- --------
610.1 283.2
-------- --------
Changes in components of working capital, net of effect from acquisitions of
businesses:
Accounts receivable, net 723.2 29.2
Inventories (196.1) (127.2)
Accounts payable (596.4) 104.4
Taxes accrued 77.0 (1.9)
(Under) Overrecovered gas and fuel costs 484.5 (7.4)
Exchange gas receivable/payable 185.5 --
Other accruals 18.1 38.4
Other working capital (612.4) (98.1)
-------- --------
Net Cash from Continuing Operations 693.5 220.6
Net Cash from Discontinued Operations -- --
-------- --------
Net Cash from Operating Activities 693.5 220.6
-------- --------
INVESTING ACTIVITIES
Capital expenditures (390.1) (166.6)
Proceeds from disposition of assets 178.9 254.1
Other investing activities, net 8.7 (27.3)
-------- --------
Net Investing Activities (202.5) 60.2
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FINANCING ACTIVITIES
Issuance of long-term debt 306.1 --
Retirement of long-term debt (66.2) (170.5)
Change in short-term debt (632.8) 55.1
Retirement of preferred shares (0.6) (3.8)
Issuance of common stock -- 10.2
Acquisition of treasury stock -- (65.8)
Dividends paid - common shares (172.8) (98.7)
Other financing activities, net -- 0.2
-------- --------
Net Financing Activities (566.3) (273.3)
-------- --------
Increase (decrease) in cash and cash equivalents (75.3) 7.5
Cash and cash equivalents at beginning of year 193.0 41.4
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 117.7 $ 48.9
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized 329.1 131.8
Cash paid for income taxes 164.1 154.2
-------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
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 another 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 Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
(in thousands) 2001 2000 2001 2000
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DENOMINATOR
Basic average common shares outstanding 205,388.9 120,559.0 205,247.2 121,651.5
Dilutive potential common shares -- 2,853.5 4,027.3 3,628.1
--------- --------- --------- ---------
Diluted Average Common Shares 205,388.9 123,412.5 209,274.5 125,279.6
--------- --------- --------- ---------
Due to the net loss that was reported for the three months ended
September 30, 2001, the addition of potential common shares was
anti-dilutive and is therefore not included.
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 $3.7 billion, is reflected as goodwill in the
consolidated financial statements and is being amortized on a
straight-line basis over forty years.
In the second quarter of 2001, NiSource increased goodwill by $63.9
million resulting from a revision of the fair value of the net assets
acquired in the acquisition of Columbia Energy Group. The revised
estimates were primarily associated with the resolution of some
uncertainties surrounding the net assets of Columbia Transmission
Communications Corporation (Transcom), the Company's fiber optic
network.
7
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NiSource may make additional adjustments to the allocation of the
purchase price assumptions based on the ultimate resolution of
contingencies existing at the acquisition date. The Company 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.
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 September
30, 2001, approximately 701 employees had been terminated as a result
of the restructuring plan. Approximately 90 and 354 terminations
occurred for the three months and nine months ended September 30, 2001,
respectively. 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 September 30, 2001, the consolidated balance
sheet reflected a liability of $34.5 million related to the
restructuring plan. This is a $5.8 million decrease from the previous
quarter ended June 30, 2001 and a $30.9 million decrease year to date.
5. Discontinued Operations
The Securities and Exchange Commission (SEC), in its order approving
the acquisition of Columbia, required NiSource to divest its water
utilities within three years from the date of the acquisition. In
January 2001, NiSource adopted a formal plan to dispose of its water
utilities within one year. The water utilities operations are reported
as discontinued operations. See Note 7 on page 9 for further
discussion.
Results from discontinued operations of the water utilities are
provided in the following table:
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
($ in millions) 2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------------------
Revenues from discontinued operations 29.4 29.9 81.3 79.5
Income (Loss) from discontinued operations 0.2 9.2 (0.1) 15.0
Income tax expense (benefit) 0.6 4.0 1.4 7.3
Net income (loss) from discontinued operations (0.4) 5.2 (1.5) 7.7
----------------------------------------------------------------------------------------------------------------------
On August 21, 2001, Columbia sold the stock and assets of Columbia
Propane Corporation and its subsidiaries (Columbia Propane) to AmeriGas
Partners L.P. (AmeriGas) for approximately $196.0 million, consisting
of $152.0 million of cash and $44.0 million of AmeriGas partnership
common units. NiSource has also sold substantially all the assets of
Columbia Petroleum Corporation (Columbia Petroleum), a diversified
petroleum distribution company. The net assets of the water utilities,
Columbia Propane and Columbia Petroleum are reported as net assets of
discontinued operations on the consolidated balance sheets.
8
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
The net assets of the discontinued operations were as follows:
September 30, December 31,
($ in millions) 2001 2000
--------------------------------------------------------------------------------------------------------------
NET ASSETS OF DISCONTINUED OPERATIONS
Accounts receivable, net $ 21.0 $ 107.8
Property, plant and equipment, net 681.2 891.3
Other assets 69.6 173.8
Current liabilities (91.6) (148.2)
Long-term debt (78.9) (169.4)
Other liabilities (234.6) (294.9)
--------------------------------------------------------------------------------------------------------------
NET ASSETS OF DISCONTINUED OPERATIONS $ 366.7 $ 560.4
--------------------------------------------------------------------------------------------------------------
6. Telecommunication Network (Transcom)
As a result of project delays, cost overruns, and the economics of the
fiber optics market that have occurred since the acquisition of
Columbia, NiSource recorded a charge of $9.2 million to operating
income in the second quarter of 2001, related to Transcom, a fiber
optics telecommunications network.
In September and October 2000, management held discussions with
investment banking firms seeking strategic options for the Transcom
assets. Although significant uncertainties existed surrounding the
estimated costs to complete the fiber optic network, time to market in
a competitive environment, and delays due to construction deficiencies
and environmental issues, the decision was made to complete the
Transcom network and sell the assets. The Company has received
subsequent information pertaining to the estimated construction costs
and delays. Consequently, management has concluded that the carrying
value of the telecommunication assets exceeds the realizable value by
approximately $89.2 million. Given the resolution of certain
uncertainties related to Transcom that existed when NiSource acquired
Columbia, the purchase price allocation relating to the Transcom assets
is now essentially complete and goodwill resulting from the acquisition
of Columbia has been increased by the after-tax impact of the excess
carrying amount of $52.0 million.
In August 2001, Transcom invited potential buyers to submit bids for
the assets. Preliminary indications are that the present market
conditions preclude Transcom from realizing the full value of the
assets by selling at the present time. Therefore management has decided
to operate the network, while continuing to evaluate market conditions
for possible sale.
7. Sale of Water Utility Operations
In July 2001, NiSource and the City of Indianapolis (City) signed a
letter of intent for NiSource to sell the assets of the Indianapolis
Water Company and other assets of NiSource's IWC Resources (IWCR)
Corporation and its subsidiaries for $522.5 million, which includes
$132.4 million in IWCR debt. In the transaction, NiSource will retain
$80 million of long-term Indianapolis Water Company debt. As part of
the agreement, the City has committed to offering IWCR employees
comparable employment following completion of the sale and will honor
all collective bargaining agreements. The divestiture of IWCR was
required as part of the order by the SEC approving the November 2000
acquisition of Columbia Energy Group. Closing of the sale is contingent
upon the receipt of all necessary consents, including approval by the
Indiana Utility Regulatory Commission and the ability of the City to
obtain financing. It is anticipated that the transaction will be
completed in the first quarter of 2002.
8. 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
9
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
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
reclassification of deferred revenue to OCI of $17.9 million. During
the third quarter of 2001, approximately $4.1 million of the net gains
previously included in the cumulative effect of a change in accounting
principle component of OCI were reclassified into earnings. During the
nine months ended September 30, 2001, $7.5 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 third quarter resulted in unrealized
losses on qualifying derivatives of $20.1 million and activity for the
first nine months of 2001 resulted in unrealized gains of $45.4. The
activity for the periods included:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- ------------------
(in millions) 2001 2001
-------------------------------------------------------------------------------------------------------------------------
UNREALIZED GAINS (LOSSES) ON DERIVATIVES QUALIFYING AS CASH
FLOW HEDGES:
Unrealized hedging losses arising during the period due to
cumulative effect of a change in accounting principle,
recognized at January 1, 2001, net of tax $ -- $(17.0)
Unrealized hedging gains (losses) arising during the period on
derivatives qualifying as cash flow hedges, net of tax (15.4) 55.4
Reclassification adjustment for net loss (gain) included in net
income, net of tax (including gains of $4.1 and losses of $7.5
million, respectively, related to the cumulative effect
of change in accounting principle) (4.7) 7.0
-------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on derivatives qualifying as cash
flow hedges, net of tax $ (20.1) $ 45.4
-------------------------------------------------------------------------------------------------------------------------
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.
10
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
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.
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
$4.7 million, net of tax, which will be included in net income.
Northern Indiana has futures and options contracts designated as cash
flow hedges through June 2002. At this time Northern Indiana expects to
continue its cash flow hedges due to the probability that the
forecasted transaction will occur.
Northern Utilities, Inc. offers a Guaranteed Price Service Program as
an alternative to the standard gas cost recovery mechanism. This
service provides its New Hampshire customers with the option to lock in
their gas cost. In order to hedge the anticipated physical future
purchases associated with these obligations, Northern Utilities
purchases NYMEX futures that correspond to a fixed price and the
associated delivery month. The NYMEX futures contracts satisfy all
definitions of a derivative. Because these derivatives are used within
the framework of the overall gas cost incentive mechanism, regulatory
assets or liabilities are recorded to offset the change in the fair
value of these derivatives.
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 or an impairment loss is recognized
on an asset to which the hedged forecasted transaction relates. Any
ineffectiveness will be charged to earnings. During the third quarter,
Columbia Resources offset a net impairment loss of $23.6 million for
oil and gas property with accumulated net gains from OCI. Columbia
Resources has a net gain of approximately $1.2 million recognized in
earnings due to 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 income recognition
for amounts currently classified in OCI of approximately $5.1 million,
net of tax, which will be included in net income. Columbia Resources
has forward derivative contracts designated as cash flow hedges through
December 2002. During the third quarter, Columbia Resources
reclassified $2.4 million of certain cash flow hedges into earnings due
to the probability that the forecasted transaction would not occur.
11
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
Merchant Operations
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 loss recognition of
amounts currently classified in OCI of approximately $3.0 million, net
of tax, which will be included in net income. NiSource has designated
certain TPC forward derivative contracts as cash flow hedges through
September 2003. At this time, NiSource expects to continue its cash
flow hedges due to the probability that the forecasted transactions
will occur.
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 $.6 million, net of tax, 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.
Other
Columbia Energy Services, Inc. (Columbia Energy Services) has fixed
price gas delivery commitments to three municipalities in the United
States. 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 $3.0 million, net of tax, 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.
12
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
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.
9. Recently Issued Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." The key concepts from the two interrelated
Statements include mandatory use of the purchase method in accounting
for business combinations, discontinuance of goodwill amortization, a
revised framework for testing for goodwill impairment at a "reporting
unit" level, and new criteria for the identification and potential
amortization of other intangible assets. Other changes to existing
accounting standards involve the amount of goodwill to be used in
determining the gain or loss on the disposal of assets and a
requirement to test goodwill for impairment at least annually under the
revised framework.
The Business Combinations Statement is generally effective for
combinations that are initiated after June 30, 2001. The Statement on
Goodwill and Other Intangible Assets is effective for fiscal years
beginning after December 15, 2001; however, for business combinations
consummated after June 30, 2001, the requirements to discontinue
goodwill amortization are effective upon issuance of the Statements.
The first part of the annual impairment test is to be performed within
six months of adopting the Statement on Goodwill and Other Intangible
Assets.
NiSource adopted the provisions of the Business Combinations Statement
on July 1, 2001, and will adopt the Goodwill and Other Intangible
Assets Statement on January 1, 2002. Although NiSource is currently
evaluating the impact that the Statements will have on its results of
operations, the Company expects the adoption of the Statement on
Goodwill and Other Intangibles to have a significant favorable impact
on operating income beginning January 1, 2002. Effective January 1,
2002, goodwill will no longer be subject to amortization.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." The Statement requires entities to record the
fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially
recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is
accreted to then its present value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement
of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement.
The Statement is effective for fiscal years beginning after June 15,
2002, with earlier application encouraged. NiSource is currently
evaluating the impact that the Statement will have on its financial
position and the results of operations.
On October 3, 2001 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." The Statement
replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," although it
retains the two-step impairment testing methodology used in SFAS No.
121. The accounting and reporting provisions of Accounting Principals
Board Opinion (APBO) No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," are superceded by SFAS No. 144, except that the
Statement preserves the requirement of APBO No. 30 to report
discontinued operations separately from continuing operations. The
Statement covers a variety of implementation issues inherent in SFAS
No. 121, unifies the framework used in accounting for assets to be
disposed of and discontinued operations, and broadens the reporting of
discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and
that will be eliminated from the ongoing operations of the entity in a
disposal transaction.
13
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
The Statement is effective for fiscal years beginning after December
15, 2001. NiSource will adopt SFAS No. 144 on January 1, 2002. The
Company does not expect the adoption of the Statement to have a
material impact on its results of operations.
10. Business Segment Information
Effective for the second quarter of 2001, NiSource realigned a portion
of its operations and reclassified previously reported operating
segment information to conform to the realigned operating structure.
The realignment affected three previously reported segments, and
included moving all ongoing operations of Energy Marketing and certain
operations from the Electric Operations and Other segments to the newly
created Merchant Operations segment. The electric wheeling, bulk power,
and power trading operations were moved from the Electric Operations
segment to Merchant Operations, and the Company's Primary Energy
subsidiary, that develops on-site, industrial-based energy solutions,
was moved from Other to Merchant Operations.
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. The Merchant Operations segment provides energy-related
services including gas marketing, electric wheeling, bulk power, power
trading and asset management services to local distribution companies
(LDC), wholesale, commercial and industrial customers, and participates
in the development of non-rate regulated power projects. The Other
segment participates in real estate, telecommunications and other
businesses.
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.
14
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
($ in millions) 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------------------
REVENUES
GAS DISTRIBUTION
Unaffiliated 520.6 156.5 3,408.3 788.1
Intersegment 19.1 29.1 (37.6) 89.2
------- ------- ------- -------
Total 539.7 185.6 3,370.7 877.3
------- ------- ------- -------
GAS TRANSMISSION AND STORAGE
Unaffiliated 147.8 19.8 479.3 45.6
Intersegment 59.8 0.8 238.5 2.8
------- ------- ------- -------
Total 207.6 20.6 717.8 48.4
------- ------- ------- -------
ELECTRIC OPERATIONS
Unaffiliated 281.3 276.6 774.3 759.6
Intersegment 0.4 0.6 1.4 2.0
------- ------- ------- -------
Total 281.7 277.2 775.7 761.6
------- ------- ------- -------
EXPLORATION AND PRODUCTION
Unaffiliated 42.8 -- 115.0 --
Intersegment 17.3 -- 45.8 --
------- ------- ------- -------
Total 60.1 -- 160.8 --
------- ------- ------- -------
MERCHANT OPERATIONS
Unaffiliated 714.7 662.5 2,595.6 1,505.1
Intersegment 37.2 31.7 137.8 76.7
------- ------- ------- -------
Total 751.9 694.2 2,733.4 1,581.8
------- ------- ------- -------
OTHER
Unaffiliated 39.2 63.2 117.6 188.1
Intersegment -- -- -- --
------- ------- ------- -------
Total 39.2 63.2 117.6 188.1
------- ------- ------- -------
Adjustments and Eliminations (123.8) (59.8) (446.7) (161.8)
------- ------- ------- -------
CONSOLIDATED REVENUES 1,756.4 1,181.0 7,429.3 3,295.4
------- ------- ------- -------
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
($ in millions) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Gas Distribution (32.0) (20.9) 257.1 67.8
Gas Transmission and Storage 54.8 0.4 243.7 1.7
Electric Operations 98.5 107.9 246.0 262.1
Exploration and Production 21.3 -- 58.2 --
Merchant Operations 14.7 18.2 34.1 55.7
Other (4.3) (1.6) (49.4) (6.8)
Corporate and Adjustments (6.6) (6.6) (23.0) (20.4)
------- ------- ------- -------
CONSOLIDATED OPERATING INCOME 146.4 97.4 766.7 360.1
------- ------- ------- -------
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NISOURCE INC.
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).
THIRD QUARTER RESULTS
Net Income
NiSource reported a net loss of $20.1 million, or a 10 cent per share loss, for
the three months ended September 30, 2001, compared to net income of $52.0
million, or 43 cents 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 7. 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 September 30, 2001, were $684.9 million, a $349.2 million
increase over the same period last year. The increase is primarily attributable
to the acquisition of Columbia.
Expenses
Operating expenses for the third quarter of 2001 were $538.5 million, as
compared to $238.3 million in the 2000 period primarily due to the acquisition
of Columbia. Operating expenses included goodwill amortization related to the
Columbia acquisition of $30.1 million.
Other Income (Deductions)
Interest expense was $146.1 million for the quarter, compared to $46.8 million
in the third quarter of 2000. The increase is due to borrowing for the
acquisition of Columbia and the interest on the Columbia outstanding debt.
Other, net for the third quarter of 2001 decreased income by $8.7 million,
compared to an increase of $51.4 million in the 2000 period. The 2000 period
included the $51.9 million gain on the sale of Market Hub Partners, L.P.
("MHP").
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Income Taxes
Income tax expense for the third quarter of 2001 was $4.3 million, compared to
$48.0 million in the 2000 period, due to lower pre-tax income in the current
period, partially offset by a higher effective tax rate because the amortization
of goodwill is not tax deductible.
Discontinued Operations
Discontinued operations, which reflect NiSource's water operations, posted an
after-tax loss of $0.4 million for the third quarter of 2001, compared to a gain
of $5.2 million in the third quarter of 2000. The change is primarily attributed
to cancellation of a lease, interest expense and employee benefits.
NINE MONTH RESULTS
Net Income
NiSource reported net income of $160.7 million, or $0.78 per share, for the nine
months ended September 30, 2001, compared to $155.0 million, or $1.27 per share,
in the 2000 period. The results for 2001 and 2000 are not directly comparable
due to the acquisition of Columbia.
Revenues
Total consolidated net revenues (gross revenues less cost of sales) for the nine
months ended September 30, 2001, were $2,494.4 million, a $1,405.1 million
increase over the same period last year. The increase was primarily attributable
to the acquisition of Columbia and higher gas sales by the distribution segment
due to colder weather than the same period last year.
Expenses
Operating expenses for the first nine months of 2001 were $1,727.7 million,
compared to $729.2 million in the 2000 period. The change is primarily due to
the acquisition of Columbia and the associated goodwill amortization of $85.2
million. Operating expenses also included the settlement of a lawsuit related to
MHP and the impairment of the telecommunication assets.
Other Income (Deductions)
Interest expense was $458.7 million for the nine months, compared to $136.6
million in the 2000 period. The increase is due to borrowing for the acquisition
of Columbia, the interest on the Columbia outstanding debt and carrying costs of
gas purchases due to higher prices for natural gas. Other, net for the first
nine months of 2001 increased income by $2.6 million, compared to an increase of
$50.6 million in the 2000 period. The 2000 period included the $51.9 million
gain on the sale of MHP.
Income Taxes
Income tax expense for the first nine months of 2001 was $131.5 million,
compared to $105.5 million in the 2000 period, due to higher pre-tax income in
the current period and a higher effective tax rate.
Change in Accounting Principle
On January 1, 2001, NiSource adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" as subsequently amended by SFAS No. 137 and
SFAS No. 138. This change in accounting, net of taxes, contributed $4.0 million
to net income at adoption.
Discontinued Operations
Discontinued operations, which reflect NiSource's water operations, posted an
after-tax loss of $1.5 million for the nine months ended September 30, 2001,
compared to net income of $7.7 million in the same period last year. The
decrease is primarily due to cancellation of a lease, interest expense and
employee benefits.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
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, is subject to
seasonal fluctuations in cash flow. During the heating season, which is
primarily from November through March, cash receipts from gas sales and
transportation services typically exceed cash requirements. In the summer
months, cash receipts for electric sales normally exceed requirements. During
other periods of the year, cash on hand, together with external short-term and
long-term financing, is used to purchase gas to place in storage for heating
season deliveries, perform necessary maintenance of facilities, make capital
improvements in plant and expand service into new areas.
Net cash from operations for the first nine months of 2001 was $693.5 million,
an increase of $472.9 million from the same period in 2000 due to the
acquisition of Columbia.
NiSource, through its financing subsidiary NiSource Finance Corp. (NiSource
Finance), actively borrows funds in the commercial paper market, and maintains
a $2.5 billion revolving credit facility with a syndicate of banks for back-up
liquidity purposes. The credit facility is guaranteed by NiSource Inc.
At September 30, 2001 and December 31, 2000, NiSource had $1,863.9 million and
$2,078.8 million of commercial paper outstanding, respectively. The weighted
average interest rate on commercial paper outstanding as of September 30, 2001
and December 31 2000 was 3.52% and 7.44%, respectively. NiSource had no
short-term notes payable at September 30, 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 September 30, 2001, NiSource had $52.7 million of standby letters of credit
outstanding. At December 31, 2000, NiSource had $128.5 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 $459.9 million and $378.5 million at September 30, 2001, respectively, and
$1,608.9 million and $1,568.6 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.
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,
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
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 September 30 2001, and December 31, 2000, the combined borrowings
outstanding under these facilities totaled $1,863.9 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 $4.6 million for the three months
ended September 30, 2001, $14.8 million for the nine months ended September 30,
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 $1.1
million, $2.2 million and $0.5 million, respectively, at September 30, 2001. The
daily VaR for the gas trading portfolio on an average, high and low basis was
$0.4 million, $0.7 million and $0.2 million at September 30, 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. Approximately
$7.5 million of the net losses included in the cumulative effect of a change in
accounting principle component of OCI were reclassified into earnings during the
first nine months of 2001.
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 7, "Accounting Change" for additional information.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
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.
Effective for the second quarter of 2001, NiSource realigned a portion of its
operations and reclassified previously reported operating segment information to
conform to the realigned operating structure. The realignment affected three
previously reported segments, and included moving all ongoing operations of
Energy Marketing and certain operations from the Electric Operations and Other
segments to the newly created Merchant Operations segment. The electric
wheeling, bulk power, and power trading operations were moved from the Electric
Operations segment to Merchant Operations, and the Company's Primary Energy
subsidiary, that develops on-site, industrial-based energy solutions, was moved
from Other to Merchant Operations. 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.
September 11, 2001 Terrorist Attacks
On September 11, 2001 a terrorist attack occurred at the World Trade Center in
New York City and the Pentagon in Washington D.C. This unfortunate incident has
had pervasive negative impacts on several U.S. industries and on the U.S.
economy in general. While NiSource was not directly impacted by the event, the
Company believes that it could be impacted indirectly in the near future. The
indirect impacts may include lower revenues due to the negative impact on
certain of NiSource's industrial customers and higher costs related to items
such as insurance, travel and security.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------------
($ in millions) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------
NET REVENUES
Sales Revenues 480.9 172.3 3,088.4 807.5
Less: Cost of gas sold 349.8 119.9 2,369.9 535.2
----- ----- --------- -----
Net Sales Revenues 131.1 52.4 718.5 272.3
Transportation Revenues 58.8 13.3 282.3 69.8
----- ----- --------- -----
Net Revenues 189.9 65.7 1,000.8 342.1
----- ----- --------- -----
OPERATING EXPENSES
Operation and maintenance 149.4 47.0 466.7 151.7
Depreciation and amortization 51.6 31.5 171.4 95.7
Other taxes 20.9 8.1 105.6 26.9
----- ----- --------- -----
Total Operating Expenses 221.9 86.6 743.7 274.3
----- ----- --------- -----
Operating Income (32.0) (20.9) 257.1 67.8
===== ===== ========= =====
REVENUES ($ IN MILLIONS)
Residential 153.0 90.1 1,672.3 478.9
Commercial 57.7 39.3 641.8 187.9
Industrial 11.6 18.7 93.6 48.6
Transportation 58.8 13.3 282.3 69.8
Off System Sales 238.4 11.6 612.2 51.2
Other 20.2 12.6 68.5 40.9
----- ----- --------- -----
Total 539.7 185.6 3,370.7 877.3
----- ----- --------- -----
SALES AND TRANSPORTATION (MDth)
Residential sales 16.7 7.2 157.9 63.3
Commercial sales 7.7 5.5 64.5 28.8
Industrial sales 2.4 2.2 10.8 9.2
Transportation 101.7 48.4 371.4 170.8
Other 79.5 2.3 135.2 17.1
----- ----- --------- -----
Total 208.0 65.6 739.8 289.2
----- ----- --------- -----
HEATING DEGREE DAYS 125 136 3,529 3,348
NORMAL HEATING DEGREE DAYS 102 123 3,793 4,151
% COLDER (WARMER) THAN NORMAL 23% 11% (7%) (19%)
Customers
Residential 2,262,759 947,202
Commercial 204,711 80,331
Industrial 10,042 9,104
Transportation 674,603 13,771
Other 22 21
--------- ---------
Total 3,152,137 1,050,429
--------- ---------
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
NiSource's natural gas distribution operations (Gas Distribution) serve
approximately 3.2 million customers in nine states. Through its wholly owned
subsidiary, Columbia, NiSource owns five local distribution companies (LDCs)
that provide natural gas to approximately 2.1 million residential, commercial
and industrial customers in Ohio, Pennsylvania, Virginia, Kentucky and Maryland
(Columbia LDC's). 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 Gas Company (Bay State), and its subsidiary Northern
Utilities, Inc., distribute natural gas to more than 320,000 customers in
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 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
In the winter of 2000-2001, spot prices for gas purchases exceeded $6.00 per
Dth. The unprecedented high prices were due primarily to tight supply and
increased demand during this period. Demand was higher than in previous periods
due to the continued economic expansion in 2000, proliferation of gas-fired
electric generation and record cold weather during November and December 2000.
The supply of natural gas was low due to low production as a result of reduced
levels of drilling activity when the price of natural gas was extremely low in
1998-1999. The lower production coupled with increased demand resulted in lower
storage levels of natural gas entering the 2000-2001 winter season.
The current natural gas futures market indicates that spot prices will be
approximately half of prior years' prices for the 2001-2002 winter season. The
higher prices of 2000 and early 2001 encouraged producers to increase natural
gas drilling activities, resulting in the highest level of natural gas drilling
activity since the early 1980s. Higher prices also resulted in fuel switching
and reduced demand for natural gas. All of these factors have led to increased
supply, higher storage injection levels and a favorable supply outlook for the
2001-2002 winter.
All NiSource distribution companies have regulatory approved recovery mechanisms
providing a means for full recovery of prudently incurred gas costs. Utilizing
matching concepts, gas cost expense is recognized when customers are billed for
their gas. Therefore, the higher gas costs of last winter are reflected in
increased gross revenues and a corresponding increase in gas costs resulting in
no impact to net revenues.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
The impact of the higher gas costs on distribution customers' bills is primarily
responsible for increased uncollectible expenses in 2001. The year-to-date
uncollectible expense, including the Columbia companies is $8.8 million higher
than 2000. Fourth quarter 2001 expense is also expected be higher than last
year. The impact of lower gas costs this winter should decrease 2002
uncollectible expense.
Weather
Weather in Gas Distribution's markets was on average 23% cooler than normal for
the third quarter of 2001 and 7% warmer than normal for the nine-month period.
Throughput
Total volumes sold and transported of 208.0 million dekatherms (MDth) for the
third quarter of 2001 increased 142.4 MDth from the same period last year
primarily due to the inclusion of Columbia's five distribution companies'
throughput of 149.0 MDth. Volumes at Northern Indiana and Bay State decreased
due to reduced transportation volumes to industrial customers, primarily
reflecting the steel industry decline. For the nine month period ended September
30, 2001, total volumes sold and transported were 739.8 MDth, an increase of
450.6 MDth from the same period in 2000 primarily due to the inclusion of
Columbia's five distribution companies' throughput of 491.2 MDth.
Net Revenues
Net revenues for the three months ended September 30, 2001 were $189.9 million,
up $124.2 million over the same period in 2000, primarily due to the acquisition
of Columbia. For the nine month period ended September 30, 2001, net revenues
were $1,000.8 million, a $658.7 million increase from the same period in 2000,
primarily due to the acquisition of Columbia. Net revenues also increased due to
weather in northern Indiana that was 8% colder than in the first nine months of
2000.
Operating Income
For the third quarter of 2001, gas distribution reported an operating loss of
$32.0 million, a $11.1 million decrease from the same period in 2000. Operating
income associated with the acquisition of Columbia's five distribution
subsidiaries on November 1, 2000 was largely offset by the amortization of
goodwill associated with the acquisition. Operating income for the third quarter
decreased at Northern Indiana by $15.0 million due to higher uncollectible
accounts and other increased operating expenses. Operating income for the first
nine months of 2001 of $257.1 million increased $189.3 million over the same
period in 2000, primarily due to the acquisition of Columbia and higher net
revenues due to weather that was colder than the prior period.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
TRANSMISSION AND STORAGE OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- ----------------------
($ in millions) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Transportation Revenues 150.2 20.6 550.6 48.4
Storage revenues 45.2 -- 134.6 --
Other revenues 12.2 -- 32.6 --
----- ---- ----- ----
Total Operating Revenues 207.6 20.6 717.8 48.4
Less: Cost of gas sold 16.3 18.7 70.0 41.9
----- ---- ----- ----
Net Revenues 191.3 1.9 647.8 6.5
----- ---- ----- ----
OPERATING EXPENSES
Operation and maintenance 85.2 0.9 243.4 2.8
Depreciation and amortization 40.8 0.4 120.9 1.2
Other taxes 10.5 0.2 39.8 0.8
----- ---- ----- ----
Total Operating Expenses 136.5 1.5 404.1 4.8
----- ---- ----- ----
Operating Income 54.8 0.4 243.7 1.7
===== ==== ===== ====
THROUGHPUT (Bcf)
Columbia Transmission
Market Area 150.9 -- 690.7 --
Columbia Gulf
Mainline 143.1 -- 479.7 --
Short-haul 50.0 -- 138.6 --
Intrasegment eliminations (136.9) -- (467.9) --
Columbia Pipeline Deep Water 0.7 -- 2.5 --
Crossroads Gas Pipeline 8.4 9.3 28.7 29.5
Granite State Pipeline 3.6 4.2 21.4 24.9
----- ---- ----- ----
Total 219.8 13.5 893.7 54.4
----- ---- ----- ----
NiSource's gas transmission and storage segment 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.
In August 2001, TransCanada Pipelines Ltd. and St. Clair Pipelines, Ltd., the
sponsors of the proposed upstream Canadian facilities to the Lake Erie export
point, withdrew their pending applications before Canada's National Energy Board
for approval of the proposed facilities, without prejudice to refiling at a
later date. The withdrawal notice cited the delays encountered in Millennium's
FERC proceedings. On October 4, 2001, FERC staff issued its Final Environmental
Impact Statement for the Millennium Project that concludes the project "would
have limited adverse environmental impact" and is "the preferred alternative"
for providing new natural gas transportation services to the New York City
metropolitan area and the Southern Tier of New York State. The project continues
to await issuance of a final certificate by the FERC. Millennium would
anticipate that the certificate issued by the FERC will contain a condition to
the effect that construction may not commence until any necessary Canadian
authorizations are obtained. To date, eight shippers
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
have signed agreements for a significant portion of the available capacity.
Millennium has advised FERC that it proposes an in-service date of November 1,
2003. This schedule is subject to timely receipt of all necessary regulatory
approvals.
The sponsors of the proposed Millennium Project are Columbia Transmission,
Westcoast Energy, Inc., TransCanada Pipe Lines Ltd. and MCN Energy Group, Inc.
Mainline `99
Columbia Gulf filed an application with the FERC in June 1998, for authority to
increase the maximum certificated capacity of its mainline facilities. Columbia
Gulf's largest expansion of its mainline facilities, referred to as Mainline
'99, was authorized by the FERC in February 1999. The Mainline '99 project has
increased Columbia Gulf's certificated capacity to nearly 2.2 billion cubic feet
per day (Bcf/day) by replacing certain compressor units and increasing the
horsepower capacity of other compressor stations. Appeals challenging the FERC's
authorization of the Mainline '99 facilities were dismissed by the United States
Court of Appeals for the District of Columbia on May 14, 2001.
Columbia Gulf Mainline Capacity Proceeding
On October 5, 2001, Columbia Gulf issued an open season notice to determine
whether there is interest in additional transportation capacity on its mainline
system. This open season is being conducted pursuant to a settlement agreement
reached with FERC staff in which Columbia Gulf agreed, following the conclusion
of all administrative and judicial proceedings, to hold an open season to gauge
the interest in mainline transportation capacity by former sales customers of
Columbia Gas. The open season period will continue for a 30-day period.
Sale of Facilities
Columbia Transmission continues to evaluate and dispose of non-core assets.
Columbia Transmission is currently negotiating with third parties on the sale of
approximately 180 miles of small diameter pipelines and other facilities in West
Virginia, Pennsylvania, Maryland and New York.
Supply Contracts to New Electric Generation Projects
During 2001, Columbia Gas Transmission began providing up to 629,000 dekatherms
a day (Dth/d) to serve five new electric generating facilities. Columbia Gas
Transmission has also requested permission from the FERC to construct facilities
to provide up to 260,000 Dth/d to two electric generating facilities scheduled
to be in service in 2003.
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 219.8 MDth for the
third quarter of 2001, compared to 13.5 MDth in 2000. Throughput in the nine
months ended September 30, 2001 was 893.7 MDth, compared to 54.4 MDth in the
same period of 2000. The increase primarily reflects the addition of Columbia
Transmission and Columbia Gulf Transmission.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Net Revenues
Net revenues were $191.3 million for the third quarter of 2001, an increase of
$189.4 million due primarily to the inclusion of Columbia's operations. Net
revenues were $647.8 million for the nine months ended September 30, 2001, an
increase of $641.3 million from the same period in 2000. The increase is
primarily due to the inclusion of Columbia. This also includes the effect of the
sale of base gas discussed above.
Operating Income
Third quarter 2001 operating income of $54.8 million increased $54.4 million due
primarily to the inclusion of Columbia's operations, partially offset by the
amortization of goodwill for the Columbia acquisition. For the first nine months
of 2001, operating income of $243.7 million, an increase of $242.0 million from
the 2000 period, was due primarily to the inclusion of Columbia's operations,
partially offset by the amortization of goodwill. The $11.4 million of storage
base gas sales in the first quarter of 2001 also contributed to the increase.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- -------------------------
($ in millions) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------
NET REVENUES
Sales revenues 281.7 277.2 775.7 761.6
Less: Cost of sales 73.4 66.6 203.4 185.6
------- ------- -------- --------
Net Revenues 208.3 210.6 572.3 576.0
------- ------- -------- --------
OPERATING EXPENSES
Operation and maintenance 53.5 49.8 159.4 159.6
Depreciation and amortization 41.3 40.4 124.7 120.6
Other taxes 15.0 12.5 42.2 33.7
------- ------- -------- --------
Total Operating Expenses 109.8 102.7 326.3 313.9
------- ------- -------- --------
Operating Income 98.5 107.9 246.0 262.1
======= ======= ======== ========
REVENUES ($ IN MILLIONS)
Residential 94.4 89.7 228.5 221.5
Commercial 80.2 78.1 221.5 214.7
Industrial 101.5 101.3 310.5 315.2
Other electric service 5.6 8.1 15.2 10.2
------- ------- -------- --------
Total 281.7 277.2 775.7 761.6
------- ------- -------- --------
SALES (GIGAWATT HOURS)
Residential 957.0 926.4 2,295.3 2,249.8
Commercial 946.6 945.1 2,612.0 2,568.3
Industrial 2,244.2 2,275.0 6,876.3 7,205.4
Other electric service 31.6 34.5 103.6 117.3
------- ------- -------- --------
Total 4,179.4 4,181.0 11,887.2 12,140.8
------- ------- -------- --------
COOLING DEGREE DAYS 627 553 895 794
NORMAL COOLING DEGREE DAYS 562 562 791 791
% WARMER (COLDER) THAN NORMAL 12% (2%) 13% 0%
ELECTRIC CUSTOMERS
Residential 379,904 378,554
Commercial 47,092 46,334
Industrial 2,659 2,673
Other electric service 803 808
------- -------
Total 430,458 428,369
------- -------
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.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Market Conditions
The regulatory framework applicable to electric operations is 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. On June 18, Northern Indiana
and several other parties filed their case-in-chief. On September 7, 2001,
Northern Indiana and several other parties filed their rebuttal testimony.
Northern Indiana's testimony indicated that if rates are to be changed, they
should be increased. Other parties indicated that rates should be reduced.
Hearings on the testimony began on October 2, 2001. Management is unable at this
time to determine if a broader analysis, which would be performed through a
formal investigation, could result in a rate adjustment that would be higher or
lower than currently allowed rates. Management intends to vigorously oppose any
efforts to reduce rates that may result from this investigation.
Environmental Matters
AIR. During 1998, the United States Environmental Protection Agency (EPA) issued
a final rule, the nitrogen oxides (NOx) State Implementation Plan (SIP) call,
requiring certain states, including Indiana to reduce NOx levels from several
sources, including industrial and utility boilers. At a June 6, 2001 meeting,
the Air Pollution Control Board of Indiana adopted as final the Indiana NOx
control rule to meet the requirements of the EPA NOx SIP call. Before it will
become Indiana regulation the rule must be signed by the Attorney General and
Governor. Preliminary estimates of Northern Indiana's NOx control compliance
costs range from $200 to $300 million. Actual compliance costs may be more than
preliminary estimates due to a number of factors including: market
demand/resource constraints, uncertainty of future equipment and construction
costs, and the potential need for additional control technology.
The EPA has initiated enforcement actions against several electric utilities
alleging violations of the new source review provisions of the Clean Air Act.
Northern Indiana has received and is in the process of responding to information
requests from the EPA on this subject. It is impossible at this time to predict
the result of EPA's review of Northern Indiana's information responses.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
The EPA is in the process of developing a program to address regional haze. The
new administration announced that the EPA would move forward with rules that
mandate the states to require power plants built between 1962 and 1977 to
install the "best available retrofit technology" or BART. The BART program will
target for control by 2013 those pollutants that limit visibility - particulate,
sulfur dioxide and/or nitrogen oxides. Until the program is developed, Northern
Indiana cannot predict the cost of complying with these rules.
WATER. The Great Lakes Water Quality Initiative ("GLI") program is expected to
add new water quality standards for facilities that discharge into the Great
Lakes watershed, including Northern Indiana's three electric generating stations
located on Lake Michigan. The State of Indiana has promulgated its regulations
for this water discharge permit program and has received final EPA approval. As
promulgated, the regulations would provide the Indiana Department of
Environmental Management (IDEM) with the authority to grant water quality
criteria variances and exemptions for non-contact cooling water. However, the
EPA revised the variance language and other minor provisions of IDEM's GLI rule.
The EPA by and large left the non-contact cooling water exemption intact;
however, a separate agreement between the EPA and IDEM on interpretation of this
exemption still leaves uncertainty as to its impact. The EPA change to the
variance rule has prompted litigation by the affected industrial parties and the
EPA/IDEM agreement on the non-contact cooling water exemption may be subject to
future litigation. Northern Indiana expects that IDEM will issue a proposed
permit renewal for each of its lakeside stations. Pending the outcome of
litigation and the proposed permit renewal requirements, the costs of complying
with these requirements cannot be predicted at this time.
Sales
Electric sales for the third quarter of 2001 were 4,179.4 million kilowatt-hours
(kwh), a decrease of 1.6 million kwh, compared to the 2000 period, primarily
reflecting reduced industrial usage somewhat offset by improved sales to
residential customers, due to warmer weather. Electric sales for the first nine
months of 2001 were 11,887.2 million kwh, a decrease of 253.6 million kwh,
compared to the 2000 period, primarily reflecting decreased industrial sales due
to production declines in the steel industry, partially offset by higher
consumption by residential and commercial customers.
Net Revenues
In the third quarter of 2001, electric net revenues of $208.3 million decreased
by $2.3 million from the 2000 period. Industrial net revenues decreased due to
the economic slowdown, partially offset by an improvement in net revenues from
residential customers as a result of warmer weather.
In the first nine months of 2001, electric net revenues of $572.3 million
decreased by $3.7 million when compared to the 2000 period. Sales volumes were
lower overall, partially offset by increased consumption in the higher margin
residential and commercial rate classes.
Operating Income
Operating income for the third quarter of 2001 was $98.5 million, a decrease of
$9.4 million from the same period in 2000. This is due to lower net revenues
discussed above and higher operating expenses resulting from increased
depreciation and property taxes, due to increased plant assets.
Operating income for the first nine months of 2001 was $246.0 million, a
decrease of $16.1 million from the same period in 2000. This is due to lower net
revenues discussed above and higher operating expenses resulting from increased
depreciation and property taxes, due to increased plant assets. In addition, a
reduction of property tax accruals in the second quarter of 2000 favorably
impacted the earlier period.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
EXPLORATION AND PRODUCTION OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
($ in millions) 2001 2001
--------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Gas revenues 54.3 151.4
Gathering revenues 2.7 7.7
Other revenues 3.1 1.7
----- -----
Total Operating Revenues 60.1 160.8
----- -----
Operating Expenses
Operation and maintenance 18.3 49.4
Depreciation and depletion 16.8 39.6
Other taxes 3.7 13.6
----- -----
Total Operating Expenses 38.8 102.6
----- -----
Operating Income 21.3 58.2
===== =====
AVERAGE PRICE OF GAS PRODUCTION ($ PER MCF)
U.S. 4.26 3.86
Canada -- 4.63
GAS PRODUCTION (BCF):
U.S. 12.5 38.6
Canada - 0.1
----- -----
Total 12.5 38.7
----- -----
OIL AND LIQUIDS PRODUCTION STATISTICS
Production (000 Bbls)
U.S. 55.5 155.0
Canada 1.2 5.4
----- -----
Total 56.7 160.4
===== =====
Average Price ($ per Bbl)
U.S. 21.36 23.43
Canada 19.11 27.66
----- -----
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 12.9 Bcf equivalents (Bcfe)
and 39.6 Bcfe of natural gas and oil in the third quarter and the first nine
months of 2001, respectively, 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 September 30, 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 third quarter of 2001, Columbia Resource's
drilling activity resulted in the discovery of 15.7 net Bcfe of gas and oil
reserves. For the nine months ended September 30, 2001, Columbia Resource
discovered 42.7 net Bcfe of gas and oil reserves. During the third quarter of
2001, Columbia Resources has participated in 57 gross (52.3 net) wells with a
success rate of 97 percent. For the nine months ended September 30, 2001,
Columbia Resources participated in 113 gross (105.4 net) wells with a success
rate of 95 percent.
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
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 was 12.5 Bcf and 38.7 Bcf in the third quarter and first nine
months of 2001, respectively. Oil and liquids production was 56.7 barrels and
160.4 barrels in the third quarter and first nine months of 2001, respectively.
Operating Revenues
Operating revenues for the third quarter of 2001 were $60.1 million. Columbia
Resources' natural gas production was fully hedged at an average price of $4.19
per million cubic feet (Mcf). Operating revenues for the first nine months of
2001 were $160.8 million. Approximately 58% of Columbia Resource's natural gas
production was hedged at an average price of $4.12 per Mcf for the nine-month
period.
Operating Income
Operating income for the third quarter of 2001 was $21.3 million. Operating
income for the nine months ended September 30, 2001 was $58.2 million. Depletion
expense for the nine-month period included an impairment write-down of $2.3
million for the Canadian oil and gas properties.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
MERCHANT OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- -------------------------
($ in millions) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------
NET REVENUES
Gas 370.6 456.5 1,943.7 1,113.0
Electric 363.8 221.3 739.0 420.1
Other 17.5 16.4 50.7 48.7
------- ------- -------- -------
Total Revenues 751.9 694.2 2,733.4 1,581.8
Less: Cost of products purchased 717.3 657.9 2,645.9 1,474.7
------- ------- -------- -------
Net Revenues 34.6 36.3 87.5 107.1
------- ------- -------- -------
OPERATING EXPENSES
Operation and maintenance 16.0 17.0 46.7 48.2
Depreciation and amortization 0.6 0.6 1.7 1.5
Other taxes 3.3 0.5 5.0 1.7
------- ------- -------- -------
Total Operating Expenses 19.9 18.1 53.4 51.4
------- ------- -------- -------
Operating Income 14.7 18.2 34.1 55.7
======= ======= ======== =======
VOLUMES
Gas sales (MDth) 115.5 94.6 366.6 291.2
Electric sales (Gigawatt Hours) 6,595.3 2,765.0 14,318.1 7,932.9
------- ------- -------- -------
NiSource provides non-regulated merchant energy through its wholly owned
subsidiaries EnergyUSA, Inc., Primary Energy and Northern Indiana. Energy USA,
Inc., through its subsidiary EnergyUSA-TPC Corp. (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. 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. Northern Indiana provides non-regulated electric power
generation marketing, electric wheeling and bulk power sales.
Primary Energy
Through its subsidiaries, Primary Energy has entered into agreements with
several 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.
A wholly owned subsidiary of Primary Energy has entered into a long-term
agreement to lease a 525 Mw combined cycle cogeneration facility in Indiana.
Though previously scheduled to commence production by November 2001, it is now
expected to be in service by December 31, 2001. The long-term profitability of
this facility is dependent upon the cost of natural gas fuel for the facility
relative to the market value of power produced by the facility. Based upon
current market conditions, Primary Energy expects to realize an operating loss
in the near term, though it is not believed to be material. Future profitability
related to this facility is difficult to predict and depends upon the relative
movement of natural gas and power prices in the Midwest.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
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 commercial operation
scheduled for the fourth quarter of 2001.
Net Revenues
Net revenues of $34.6 million for the third quarter of 2001 decreased $1.7
million from the 2000 third quarter. The decrease in net revenues primarily
reflected the change in forward positions within the trading book, resulting
from changes in location price differentials and values of transportation
capacity and storage. This decrease is partially offset by increases in electric
wheeling due to upgraded interconnections.
Net revenues for the first nine months of 2001 were $87.5 million, compared to
$107.1 million in the same period last year. The decline is due primarily to
mark-to-market adjustments resulting from a decline in the value of basis
positions related to structured transactions in Northeast markets. Increased
results were reported in electric wheeling due to upgraded interconnections with
neighboring electric companies and increases in power marketing.
Operating Income
Merchant Operations had operating income of $14.7 million for the third quarter
of 2001 compared to operating income of $18.2 million for the same period last
year. The decline is primarily due to the decreased net revenues discussed above
and higher operating expenses. For the nine months ended September 30, 2001,
Merchant Operations had operating income of $34.1 million, a decrease of $21.6
million for the same period in 2000. The decrease is primarily due to lower net
revenues discussed above and higher operating expenses.
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
OTHER (INCLUDES ASSETS HELD FOR SALE)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- ----------------------
($ in millions) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------
NET REVENUES
Products and services revenue 39.2 63.2 117.6 188.1
Less: Cost of products purchased 24.3 43.4 82.8 126.7
---- ---- ----- -----
Net Revenues 14.9 19.8 34.8 61.4
---- ---- ----- -----
OPERATING EXPENSES
Operation and maintenance 16.2 14.6 49.1 46.5
Lawsuit settlement charges -- -- 15.5 --
Depreciation and amortization 1.9 5.7 6.0 18.2
Other taxes 1.1 1.1 4.4 3.5
Impairment of telecommunication assets -- -- 9.2 --
---- ---- ----- ----
Total Operating Expenses 19.2 21.4 84.2 68.2
---- ---- ----- ----
Operating Income (Loss) (4.3) (1.6) (49.4) (6.8)
==== ==== ===== ====
NiSource has invested in a number of distributed generation technologies
including fuel cells and micro turbine ventures. NiSource has also built 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.
Telecommunications Network
As a result of project delays, cost overruns, and the economics of the fiber
optics market that have occurred since the acquisition of Columbia, NiSource
recorded a charge of $9.2 million to operating income in the second quarter of
2001, related to Columbia Transmission Communications Corporation (Transcom), a
fiber optics telecommunications network.
In September and October 2000, management held discussions with investment
banking firms seeking strategic options for the Transcom assets. Although
significant uncertainties existed surrounding the estimated costs to complete
the fiber optic network, time to market in a competitive environment, and delays
due to construction deficiencies and environmental issues, the decision was made
to complete the Transcom network and sell the assets. The Company has received
subsequent information pertaining to the estimated construction costs and
delays. Consequently, management has concluded that the carrying value of the
telecommunication assets exceeds the realizable value by approximately $89.2
million. Given the resolution of certain uncertainties related to Transcom that
existed when NiSource acquired Columbia, the purchase price allocation relating
to the Transcom assets is now essentially complete and goodwill resulting from
the acquisition of Columbia has been increased by the after-tax impact of the
excess carrying amount of $52.0 million.
In August 2001, Transcom invited potential buyers to submit bids for the assets.
Preliminary indications are that the present market conditions preclude Transcom
from realizing the full value of the assets by selling at the present time.
Therefore management has decided to operate the network, while continuing to
evaluate market conditions for possible sale.
Environmental Matters
On March 17, April 11 and April 21, 2000, one of Columbia's subsidiaries,
Transcom received directives from the Philadelphia District of the U.S. Army
Corps of Engineers (Philadelphia District) and an administrative order from the
Pennsylvania Department of Environmental Protection (PA DEP) addressing alleged
violations of federal and state laws resulting from construction activities
associated with Transcom's laying fiber optic cable along portions of a route
between Washington, D.C. and New York City. The order and directives required
Transcom to largely cease construction activities. On September 18, 2000,
Transcom entered into a voluntary settlement agreement with the Philadelphia
District under which Transcom contributed $1.2 million to the Pennsylvania
chapter of the Nature Conservancy and the Philadelphia District lifted its
directives. As a result of the voluntary agreement with the Philadelphia
District and communications with the PA DEP, the Maryland Department of the
Environment and the
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Baltimore District of the U.S. Army Corps of Engineers, work in Pennsylvania and
Maryland was allowed to continue and has been completed. Transcom is in the
process of finalizing a Consent Order with the PA DEP. Penalties associated with
this order are expected to be $304,200, which Transcom has reserved. Transcom
cannot predict the nature or amount of total remedies that may be sought in
connection with the foregoing construction activities.
Net Operating Revenues
Net operating revenues of $14.9 million for the third quarter of 2001 decreased
by $4.9 million from the third quarter of 2000. This decrease is due to the
absence of revenues from the non-core businesses that have been sold, partially
offset by higher revenues in the line locating business. Net operating revenues
of $34.8 million for the first nine months of 2001 decreased by $26.6 million
from the same period in 2000. This decrease is due to the absence of revenues
from non-core businesses, partially offset by higher revenues in the line
locating business.
Operating Income (Loss)
Other reported an operating loss of $4.3 million versus an operating loss of
$1.6 million in the third quarter of 2000, reflecting non-core businesses
included in the prior year that were subsequently sold. For the first nine
months of 2001, Other reported an operating loss of $49.4 million versus an
operating loss of $6.8 million in the first nine months of 2000. The decrease
reflects the impairment of telecommunication assets, the settlement of
litigation related to Market Hub Partners, LLP., and the absence of non-core
businesses as discussed above. These items were partially offset by increased
operating income in the line locating business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion regarding quantitative and qualitative disclosures about market
risk see page 19 of the Management's Discussion and Analysis of Financial
Condition and Results of Operations under "Market Risk Sensitive Instruments and
Positions."
35
PART II
ITEM 1. LEGAL PROCEEDINGS
NISOURCE INC.
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. In May 2001, the Court
denied the Columbia defendants' motion to dismiss. The Columbia
defendants joined together with numerous other defendants and filed a
motion requesting the district court to amend its order to include a
certification so that the defendants could request permission from the
United States Court of Appeals for the Tenth Circuit to appeal a
controlling question of law. That motion was denied on July 2, 2001.
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). Quinque 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. In June 2001, the
plaintiff voluntarily dismissed ten of the fourteen Columbia entities.
Discovery relating to personal jurisdiction has begun.
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. The Columbia defendants'
motion to dismiss was partially granted and partially denied by the New
York state court judge on September 24, 2001.
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.
The case has a scheduled trial date of October 17, 2002.
36
ITEM 1. LEGAL PROCEEDINGS (continued)
NISOURCE INC.
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. In October 2001, the parties
reached an agreement in principle to settle this matter and the related
case described below.
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. On April 10, 2001, the West
Virginia case was dismissed without prejudice. In October 2001, the
parties reached an agreement in principle to settle this matter and the
related case described above.
37
NISOURCE INC.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10.27) Pension Restoration Plan of the Columbia Gas System, Inc.,
amended and restated March 1, 1997.
(10.28) Thrift Restoration Plan of the Columbia Gas System, Inc.,
amended and restated January 1, 2000.
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 third quarter
of 2001:
None
38
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: November 07, 2001 By: /s/ Jeffrey W. Grossman
-------------------------------------
Jeffrey W. Grossman
Vice President and Controller
(Principal Accounting Officer
and Duly Authorized Officer)
39