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, 2002
[ ] 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.
(Exact Name of Registrant as Specified in its Charter)
Delaware 35-2108964
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 East 86th Avenue
Merrillville, Indiana 46410
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (877) 647-5990
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:
207,771,244 shares outstanding at September 30, 2002.
NISOURCE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Consolidated Income (Loss)............................................ 3
Consolidated Balance Sheets......................................................... 4
Statements of Consolidated Cash Flows............................................... 6
Statements of Comprehensive Income (Loss)........................................... 7
Notes to Consolidated Financial Statements.......................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................... 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................... 38
Item 4. Controls and Procedures............................................................. 38
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 39
Item 2. Changes in Securities and Use of Proceeds........................................... 40
Item 3. Defaults Upon Senior Securities..................................................... 40
Item 4. Submission of Matters to a Vote of Security Holders................................. 40
Item 5. Other Information................................................................... 40
Item 6. Exhibits and Reports on Form 8-K.................................................... 41
Signature...................................................................................... 42
Certifications................................................................................. 43
2
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
STATEMENTS OF CONSOLIDATED INCOME (LOSS) (unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
(in millions, except per share amounts) 2002 2001 2002 2001
- --------------------------------------- --------- --------- --------- ---------
NET REVENUES
Gas distribution $ 350.6 $ 530.3 $ 2,118.4 $ 3,328.1
Gas transmission and storage 134.0 135.5 443.5 446.7
Electric 277.6 281.3 764.9 774.1
Exploration and production 34.3 36.7 119.6 106.6
Merchant 240.0 701.8 1,090.4 2,577.4
Other 29.6 70.8 111.3 196.4
--------- --------- --------- ---------
Gross Revenues 1,066.1 1,756.4 4,648.1 7,429.3
Cost of sales 410.0 1,071.5 2,246.6 4,934.9
--------- --------- --------- ---------
Total Net Revenues 656.1 684.9 2,401.5 2,494.4
--------- --------- --------- ---------
OPERATING EXPENSES
Operation and maintenance 276.2 332.7 933.1 1,039.9
Depreciation, amortization and depletion 145.1 152.8 421.5 476.9
Loss (gain) on sale or impairment of assets (4.9) -- (27.9) 9.2
Other taxes 56.4 58.4 211.2 217.7
--------- --------- --------- ---------
Total Operating Expenses 472.8 543.9 1,537.9 1,743.7
--------- --------- --------- ---------
OPERATING INCOME 183.3 141.0 863.6 750.7
--------- --------- --------- ---------
OTHER INCOME (DEDUCTIONS)
Interest expense, net (139.9) (146.1) (391.8) (458.7)
Minority interests (5.1) (5.1) (15.3) (15.3)
Preferred stock dividends of subsidiaries (1.9) (1.9) (5.6) (5.6)
Other, net 1.0 (4.7) 7.2 (0.5)
--------- --------- --------- ---------
Total Other Income (Deductions) (145.9) (157.8) (405.5) (480.1)
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 37.4 (16.8) 458.1 270.6
INCOME TAXES 14.2 3.8 172.2 123.8
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS 23.2 (20.6) 285.9 146.8
--------- --------- --------- ---------
Loss from Discontinued Operations - net of tax -- (0.4) (3.0) (1.5)
Gain on Sale of Discontinued Operations - net of tax -- -- 7.5 --
Change in Accounting - net of tax -- -- -- 4.0
--------- --------- --------- ---------
NET INCOME (LOSS) $ 23.2 $ (21.0) $ 290.4 $ 149.3
========= ========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE ($)
Continuing operations 0.11 (0.10) 1.39 0.72
Discontinued operations -- -- 0.02 (0.01)
Change in accounting -- -- -- 0.02
--------- --------- --------- ---------
BASIC EARNINGS (LOSS) PER SHARE 0.11 (0.10) 1.41 0.73
--------- --------- --------- ---------
DILUTED EARNINGS (LOSS) PER SHARE ($)
Continuing operations 0.11 (0.10) 1.37 0.70
Discontinued operations -- -- 0.02 (0.01)
Change in accounting -- -- -- 0.02
--------- --------- --------- ---------
DILUTED EARNINGS (LOSS) PER SHARE 0.11 (0.10) 1.39 0.71
--------- --------- --------- ---------
BASIC AVERAGE COMMON SHARES OUTSTANDING (MILLIONS) 205.7 205.4 205.6 205.2
DILUTED AVERAGE COMMON SHARES (MILLIONS) 208.1 205.4 208.7 209.3
--------- --------- --------- ---------
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) 2002 2001
- ------------- ------------- ------------
(unaudited)
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility plant $16,386.1 $16,078.9
Accumulated depreciation and amortization (7,920.8) (7,616.4)
--------- ---------
Net utility plant 8,465.3 8,462.5
--------- ---------
Gas and oil producing properties, successful efforts method
United States cost center 1,061.6 1,011.5
Canadian cost center 5.7 22.3
Accumulated depletion (115.0) (74.6)
--------- ---------
Net gas and oil producing properties 952.3 959.2
--------- ---------
Other property, at cost, less accumulated depreciation 668.2 133.0
--------- ---------
Net Property, Plant and Equipment 10,085.8 9,554.7
--------- ---------
INVESTMENTS AND OTHER ASSETS
Net assets of discontinued operations -- 375.0
Unconsolidated affiliates 119.9 123.9
Assets held for sale 6.3 15.4
Other investments 54.8 47.8
--------- ---------
Total Investments 181.0 562.1
--------- ---------
CURRENT ASSETS
Cash and cash equivalents 64.9 127.9
Accounts receivable (less reserves of $53.0 and $63.4, respectively) 478.7 956.7
Other receivables -- 10.1
Gas inventory 407.8 377.7
Underrecovered gas and fuel costs 174.5 129.4
Materials and supplies, at average cost 70.2 73.3
Electric production fuel, at average cost 29.1 29.2
Price risk management assets 55.0 299.2
Exchange gas receivable 144.7 186.8
Prepayments and other 206.0 344.0
--------- ---------
Total Current Assets 1,630.9 2,534.3
--------- ---------
OTHER ASSETS
Price risk management assets 111.7 18.5
Regulatory assets 601.9 522.3
Goodwill, less accumulated amortization 3,724.9 3,735.7
Deferred charges and other 290.9 465.3
--------- ---------
Total Other Assets 4,729.4 4,741.8
--------- ---------
TOTAL ASSETS $16,627.1 $17,392.9
========= =========
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) 2002 2001
- ------------- ------------- ------------
(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 3,343.0 $ 3,469.4
Preferred Stocks--
Series without mandatory redemption provisions 81.1 83.6
Series with mandatory redemption provisions 4.4 5.0
Company-obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely Company debentures 345.0 345.0
Long-term debt, excluding amounts due within one year 5,792.9 5,780.8
--------- ---------
Total Capitalization 9,566.4 9,683.8
--------- ---------
CURRENT LIABILITIES
Current redeemable preferred stock subject to mandatory
redemption 43.0 43.0
Current portion of long-term debt 766.4 398.2
Short-term borrowings 1,258.9 1,854.3
Accounts payable 331.9 646.6
Dividends declared on common and preferred stocks 62.0 1.8
Customer deposits 59.1 36.3
Taxes accrued 131.3 339.0
Interest accrued 185.9 79.6
Overrecovered gas and fuel costs 24.2 49.3
Price risk management liabilities 39.0 242.3
Exchange gas payable 410.9 287.2
Current deferred revenue 126.2 89.0
Other accruals 560.3 680.8
--------- ---------
Total Current Liabilities 3,999.1 4,747.4
--------- ---------
OTHER LIABILITIES AND DEFERRED CREDITS
Price risk management liabilities 4.4 11.4
Deferred income taxes 1,817.0 1,726.3
Deferred investment tax credits 98.5 105.2
Deferred credits 247.3 231.0
Noncurrent deferred revenue 338.3 435.4
Accrued liability for postretirement and pension benefits 390.5 277.7
Other noncurrent liabilities 165.6 174.7
--------- ---------
Total Other 3,061.6 2,961.7
--------- ---------
COMMITMENTS AND CONTINGENCIES -- --
--------- ---------
TOTAL CAPITALIZATION AND LIABILITIES $16,627.1 $17,392.9
========= =========
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,
-------------------------------
(in millions) 2002 2001
-------- --------
OPERATING ACTIVITIES
Net income $ 290.4 $ 149.3
Adjustments to reconcile net income to net cash from
continuing operations:
Depreciation, depletion, and amortization 421.4 476.9
Net changes in price risk management activities (19.1) 446.5
Asset impairment -- 9.2
Deferred income taxes and investment tax credits 80.7 (96.2)
Deferred revenue (60.0) (397.3)
Gain on sale of assets (27.8) (6.4)
Income from change in accounting -- (4.0)
Gain on sale of discontinued assets (7.5) --
Income from discontinued operations 3.0 1.5
Amortization of unearned compensation 12.3 24.0
Other, net 21.5 (7.1)
-------- --------
714.9 596.4
-------- --------
Changes in components of working capital, net of effect
from acquisitions of businesses:
Accounts receivable, net 533.4 723.2
Inventories (92.9) (196.1)
Accounts payable (320.7) (588.9)
Taxes accrued (145.6) 77.0
(Under) Overrecovered gas and fuel costs (70.2) 484.5
Exchange gas receivable/payable 165.7 185.5
Other accruals (120.3) 18.1
Other working capital 236.2 (612.4)
-------- --------
Net Cash from Continuing Operations 900.5 687.3
Net Cash from Discontinued Operations -- --
-------- --------
Net Cash from Operating Activities 900.5 687.3
-------- --------
INVESTING ACTIVITIES
Capital expenditures (373.7) (383.9)
Proceeds from disposition of discontinued operations 388.1 --
Proceeds from disposition of assets 44.7 178.9
Other investing activities, net -- 8.7
--------
Net Investing Activities 59.1 (196.3)
-------- --------
FINANCING ACTIVITIES
Issuance of long-term debt -- 306.1
Retirement of long-term debt (248.2) (66.2)
Change in short-term debt (595.4) (632.8)
Retirement of preferred shares (2.5) (0.6)
Issuance of common stock 4.1 --
Dividends paid - common shares (180.6) (172.8)
-------- --------
Net Financing Activities (1,022.6) (566.3)
-------- --------
Increase (decrease) in cash and cash equivalents (63.0) (75.3)
Cash and cash equivalents at beginning of year 127.9 193.0
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 64.9 $ 117.7
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized 260.7 329.1
Cash paid for income taxes 77.2 164.1
-------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
(in millions) 2002 2001 2002 2001
- ------------- ------ ------ ------ ------
Net Income (Loss) $ 23.2 $(21.0) $290.4 $149.3
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment (0.7) (0.5) -- (1.1)
Net unrealized gains (losses) on cash flow hedges (7.6) 6.5 6.7 72.0
Gain (loss) on available for sale securities
Realized, net of tax -- -- 0.3 --
Unrealized, net of tax (1.2) (1.3) (2.9) (3.1)
Minimum pension liability adjustment (196.5) -- (196.5) --
------ ------ ------ ------
Total other comprehensive income (loss), net of tax (206.0) 4.7 (192.4) 67.8
------ ------ ------ ------
Total Comprehensive Income (Loss) $(182.8) $(16.3) $ 98.0 $217.1
------ ------ ------ ------
7
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 accounting principles generally accepted in the United States.
The accompanying financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in NiSource's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001. Income
for interim periods may not be indicative of results for the calendar year due
to weather variations and other factors. Certain reclassifications have been
made to the 2001 financial statements to conform to the 2002 presentation. The
2001 results have been adjusted to reflect the change to successful efforts
accounting in NiSource's Exploration and Production segment.
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 are
impacted by the incremental effect of the various long-term incentive
compensation plans and the forward equity contracts associated with the Stock
Appreciation Income Linked SecuritiesSM and Corporate Premium Income Equity
Securities.
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) 2002 2001 2002 2001
- --------------------------------------- ------- ------- ------- -------
Denominator
Basic average common shares outstanding 205,712 205,389 205,607 205,247
Dilutive potential common shares 2,400 -- 3,139 4,027
------- ------- ------- -------
Diluted Average Common Shares 208,112 205,389 208,746 209,274
------- ------- ------- -------
3. INDIANA UTILITY REGULATORY COMMISSION ELECTRIC RATE REVIEW SETTLEMENT
On June 20, 2002, a settlement agreement was filed with the Indiana Utility
Regulatory Commission (IURC) regarding the Northern Indiana Public Service
Company (Northern Indiana) electric rate review. On September 23, 2002, the IURC
issued an order adopting the settlement in most respects. The order provides
that electric customers of Northern Indiana will receive an amount intended to
approximate $55.0 million each year in credits to their electric bills for 49
months, beginning on July 1, 2002. The order also provides that 60% of any
future earnings beyond a specified cap will be retained by Northern Indiana.
Pursuant to the settlement, Northern Indiana accrued $14.4 million in credits to
electric customers during the quarter and nine-month periods ended September 30,
2002 and, as authorized, began to amortize one-half of its expenses for this
proceeding over a 49-month period. The remaining expenses were charged to income
in the third quarter 2002.
On October 23, 2002, the IURC denied a petition for reconsideration of the order
filed on October 15, 2002 by fourteen residential customers. Therefore, Northern
Indiana electric customers will begin to receive credits starting with their
November monthly bill. The order adopting the settlement is currently being
appealed by both the Citizen Action Coalition of Indiana and the fourteen
residential customers to the Indiana Court of Appeals.
8
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RESTRUCTURING ACTIVITIES
During 2000, NiSource developed and began the implementation of a plan to
restructure its operations. The restructuring plan included a severance program,
a transition plan to implement operational efficiencies throughout NiSource's
operations and a voluntary early retirement program. During 2001, the
restructuring initiative was continued with the addition of a plan to
restructure the operations within NiSource's Gas Distribution and Electric
Operations segments. In December 2001, NiSource announced its plan to
indefinitely shut down the Dean H. Mitchell Generating Station located in Gary,
Indiana.
During the third quarter of 2002, NiSource carried out the first phase of a new
reorganization initiative, which resulted in the elimination of approximately 50
positions throughout the organization mainly affecting executive and other
management-level employees. NiSource has accrued approximately $10.3 million of
salaries and benefits associated with the eliminated positions. As of September
30, 2002, 14 of the approximately 50 employees were terminated.
For all of the plans, a total of approximately 1,400 management, professional,
administrative and technical positions have been identified for elimination. As
of September 30, 2002, approximately 1,087 employees had been terminated, of
whom approximately 160 employees and 362 employees were terminated during the
quarter and nine months ended September 30, 2002, respectively. At September 30,
2002 and December 31, 2001, the consolidated balance sheets reflected
liabilities of $34.4 million and $58.3 million related to the restructuring
plans, respectively. During the quarter and nine months ended September 30,
2002, $13.3 million and $24.1 million of benefits were paid as a result of the
restructuring plans, respectively. Additionally, during the third quarter and
nine months ended September 30, 2002, the restructuring plan liability was
reduced by $9.7 million and $10.1 million, respectively. The net adjustment
during the third quarter was recorded in response to a reduction in estimated
expenses related to previous reorganization initiatives.
During the fourth quarter of 2002, NiSource expects to complete the
reorganization initiative which began in the third quarter. It is expected that
a charge of approximately $30 million to $35 million will be recorded in the
fourth quarter related to employee severance and the consolidation of
facilities.
5. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
On April 30, 2002, NiSource sold the water utility assets of the Indianapolis
Water Company (IWC) and other assets of IWC Resources Corporation and its
subsidiaries to the City of Indianapolis for $540.0 million, which included
$157.5 million in IWC debt and the redemption of $2.5 million of IWC preferred
stock. As a result of this transaction, NiSource recorded an after-tax gain of
$7.5 million in the second quarter of 2002. The gain included a tax benefit of
$33.2 million resulting from the reduction of a deferred tax liability no longer
required. NiSource also sold its interest in White River Environmental
Partnership (WREP), which was an IWC investment, to the other partners for $8.0
million. The sales price of WREP approximated book value. The divestiture of the
water utilities was required as part of the order of the U.S. Securities and
Exchange Commission approving the November 2000 acquisition of Columbia Energy
Group (Columbia). The water utilities' operations are reported as discontinued
operations.
Results from discontinued operations of the water utilities are provided in the
following table:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
($ in millions) 2002 2001 2002 2001
- --------------- ---- ---- ---- ----
REVENUES FROM DISCONTINUED OPERATIONS -- 29.4 30.7 81.3
---- ---- ---- ----
Loss from discontinued operations -- 0.2 (8.3) (0.1)
Income taxes -- 0.6 (5.3) 1.4
---- ---- ---- ----
NET LOSS FROM DISCONTINUED OPERATIONS -- (0.4) (3.0) (1.5)
---- ---- ---- ----
9
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On July 1, 2002, EnergyUSA-TPC (TPC), a wholly owned subsidiary, sold its net
obligations under a significant portion of its gas forward transaction
portfolio, physical storage inventory and associated agreements to a third
party. In accordance with the terms of the agreement, NiSource paid $6.8 million
to settle the net obligations. As a result of the sale, a $3.1 million pre-tax
gain was recorded in the third quarter of 2002.
On January 28, 2002, NiSource sold all of the issued and outstanding capital
stock of SM&P Utility Resources, Inc. (SM&P), a wholly owned subsidiary of
NiSource, to The Laclede Group, Inc. for $37.9 million. SM&P operates an
underground line locating and marking service in ten midwestern states. In the
first quarter of 2002, NiSource recognized an after-tax gain of $12.5 million
related to the sale. The net assets of SM&P were reported as assets held for
sale on the consolidated balance sheets at December 31, 2001.
Assets and liabilities held for sale and net assets of discontinued operations
were as follows:
SEPTEMBER 30, December 31,
(in millions) 2002 2001
- ------------- ------------- ------------
ASSETS (LIABILITIES) HELD FOR SALE AND NET ASSETS OF
DISCONTINUED OPERATIONS
Accounts receivable, net $ 28.3 $ 48.4
Property, plant and equipment, net 7.9 706.0
Other assets 11.2 98.9
Current liabilities (27.1) (146.6)
Debt -- (78.7)
Other liabilities (14.0) (237.6)
------ ------
ASSETS (LIABILITIES) HELD FOR SALE AND NET ASSETS OF
DISCONTINUED OPERATIONS $ 6.3 $390.4
------ ------
6. RISK MANAGEMENT ACTIVITIES
NiSource uses commodity-based derivative financial instruments to manage certain
risks in its business. NiSource accounts for its derivatives under Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities" and, though October 25, 2002,
accounts for any trading contracts that do not qualify as derivatives accounted
for under SFAS No. 133 (Transportation and Storage Capacity Contracts) pursuant
to Emerging Issues Task Force (EITF) Issue No. 98-10, "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities."
HEDGING ACTIVITIES. The activity for the three and nine-month periods ended
September 30, 2002 with respect to cash flow hedges included the following:
Three Months Ended Nine Months Ended
(in millions, net of tax) September 30, 2002 September 30, 2002
- ------------------------- ------------------ ------------------
Net unrealized gains on derivatives qualifying as cash
flow hedges at the beginning of the period $64.4 $50.1
Unrealized hedging gains (loss) arising during the period on
derivatives qualifying as cash flow hedges (7.9) 27.4
Reclassification adjustment for net loss (gain) included
in net income 0.3 (20.7)
----- -----
Net unrealized gains on derivatives qualifying as cash
flow hedges at the end of the period $56.8 $56.8
----- -----
10
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unrealized gains and losses on NiSource's cash flow and fair value hedges were
recorded as price risk management assets and liabilities along with unrealized
gains and losses on NiSource's gas and power marketing portfolios. The
accompanying Consolidated Balance Sheets reflect price risk management assets
related to unrealized gains and losses on hedges of $123.9 million and $66.0
million at September 30, 2002 and December 31, 2001, respectively, of which
$16.9 million and $65.9 million were included in "Current Assets" and $107.0
million and $0.1 million were included in "Other Assets." Price risk management
liabilities related to unrealized gains and losses on hedges were $12.8 million
and $10.3 million at September 30, 2002 and December 31, 2001, respectively, all
of which were included in "Current Liabilities."
During the third quarter of 2002, a net loss of $0.3 million, net of tax, was
recognized in earnings due to the change in value of certain derivative
instruments primarily representing time value, and there were no components of
the derivatives' fair values excluded in the assessment of hedge effectiveness.
Also during the third quarter, NiSource reclassified an insignificant amount
related to its cash flow hedges of natural gas production from other
comprehensive income to earnings, due to the probability that certain forecasted
transactions would not occur. It is anticipated that during the next twelve
months the expiration and settlement of cash flow hedge contracts will result in
income recognition of amounts currently classified in other comprehensive income
of approximately $7.6 million, net of tax.
On September 3, 2002, NiSource entered into "receive fixed" and "pay floating"
interest rate swap agreements in a notional amount of $281.5 million with three
counterparties effective as of September 5, 2002. NiSource will receive payments
based upon a fixed 7.32% interest rate and pay a floating interest amount based
on U.S. 6-month LIBOR-BBA plus 2.66 percent per annum. There was no exchange of
premium at the initial date of the swaps. The swaps contain mirror-image call
provisions that allow the counterparties to cancel the agreements beginning
November 28, 2005 through the stated maturity date. In addition, each party has
the one-time right to cancel the swaps on September 5, 2007 at mid-market.
Effectiveness of the swaps was determined using the short-cut method pursuant to
SFAS No. 133.
MARKETING AND TRADING ACTIVITIES. Effective July 1, 2002, TPC sold a significant
portion of its net obligations under its gas forward transaction portfolio,
physical storage inventory and associated agreements to a third party. Prior to
the sale, TPC's operations included the activities of its gas and power trading
businesses. Beginning with the effective date of the sale, the primary remaining
operations associated with TPC include commercial and industrial gas sales
(including arranging supply), gas supply and power marketing associated with
NiSource's single merchant cogeneration facility, marketing a portion of the gas
produced from NiSource's exploration and production operations and power
trading. With the exception of power trading and one remaining gas trading deal,
which expired in October 2002, since July 1 the activities at TPC are no longer
considered trading activities, and all positions will be marked to fair value
pursuant to SFAS No. 133.
NiSource employs a value-at-risk (VaR) model to assess the market risk of its
energy marketing and trading portfolios. NiSource estimates the one-day VaR
using variance/covariance at a 95% confidence level. Based on the results of the
VaR analysis, the daily market exposure for power trading on an average, high
and low basis was $0.4 million, $0.7 million and $0.2 million during the third
quarter of 2002. The daily VaR for the gas marketing portfolio and remaining gas
trading deal on an average, high and low basis was $0.2 million, $0.3 million
and $0.1 million during the third quarter of 2002.
Power trading revenues and cost of sales were $165.2 million and $161.8 million,
respectively, for the quarter ended September 30, 2002 and $602.5 million and
$597.5 million, respectively, for the nine-months ended September 30, 2002. On a
gross basis, power trading revenues and cost of sales were $345.5 million and
$345.1 million, respectively, for the quarter ended September 30, 2001 and
$699.9 million and $688.4 million, respectively, for the nine-months ended
September 30, 2001. On a gross basis, gas marketing and trading revenues and
cost of sales were $82.2 million and $79.4 million, respectively, for the
quarter ended September 30, 2002 and $558.2 million and $556.9 million,
respectively, for the nine-months ended September 30, 2002. On a gross basis,
gas trading revenues and cost of sales were $371.7 million and $366.0 million,
respectively, for the quarter ended September 30, 2001 and $1,945.8 million and
$1,948.2 million, respectively, for the nine-months ended September 30, 2001.
11
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair market values of NiSource power trading assets and liabilities were
$25.0 million and $23.4 million, respectively, at September 30, 2002 and $60.3
million and $59.4 million, respectively, at December 31, 2001. The fair market
values of NiSource gas marketing and trading assets and liabilities were $17.8
million and $7.2 million, respectively, at September 30, 2002. The fair market
values of NiSource gas trading assets and liabilities were $192.0 million and
$184.0 million, respectively, at December 31, 2001.
Unrealized gains and losses on NiSource's marketing and trading portfolios are
recorded as price risk management assets and liabilities along with unrealized
gains and losses on NiSource's hedges pursuant to SFAS 133. The accompanying
Consolidated Balance Sheets reflect price risk management assets related to
unrealized gains and losses on marketing and trading activities of $42.8 million
and $252.3 million at September 30, 2002 and December 31, 2001, respectively, of
which $38.1 million and $233.3 million were included in "Current Assets" and
$4.7 million and $18.4 million were included in "Other Assets." Price risk
management liabilities related to unrealized gains and losses on marketing and
trading activities (including net option premiums) were $30.6 million and $243.4
million, of which $26.3 million and $232.0 million were included in "Current
Liabilities" and $4.3 million and $11.4 million were included in "Other
Liabilities and Deferred Credits" at September 30, 2002 and December 31, 2001,
respectively.
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS NOS. 141 AND 142 - BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE
ASSETS. In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
(SFAS No. 141), and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS
No. 142). The key requirements of the two interrelated Statements include
mandatory use of the purchase method of 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.
NiSource adopted the provisions of SFAS No. 141 on July 1, 2001. The adoption of
SFAS No. 142 on January 1, 2002 resulted in an increase in operating income of
$23.4 million and $69.0 million for the third quarter and nine month period
ending September 30, 2002, respectively, reflecting the effects of discontinuing
the amortization of goodwill. Net income would have been $2.4 million, or $0.01
per basic share for the third quarter of 2001 and $218.3 million, or $1.06 per
basic share, for the nine-month period ending September 30, 2001 had NiSource
discontinued the amortization of goodwill effective January 1, 2001. NiSource
amortized approximately $93.1 million of goodwill during the entire year of
2001.
Pursuant to the requirements of SFAS No. 142, NiSource has aggregated the
subsidiaries related to the acquisition of Columbia into two distinct reporting
units, one within the Gas Distribution segment and one within the Transmission
and Storage segment, for the purpose of testing goodwill for impairment. At
September 30, 2002, goodwill, net of accumulated amortization was $1,721.5
million and $2,003.4 million for the Gas Distribution reporting unit and the
Transmission and Storage reporting unit, respectively. NiSource completed its
analysis of the transitional goodwill impairment test as of June 30, 2002. The
results indicated that no impairment charge was required.
SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In July 2001, the
FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS
No. 143). SFAS No. 143 requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred. When
the liability is initially recorded, the entity capitalizes a cost by increasing
the carrying amount of the related long-lived asset. Over time, the liability is
accreted to its then present value, and the capitalized cost is depreciated over
the useful life of the related asset. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002, with earlier application encouraged. NiSource is
currently evaluating the impact of SFAS No. 143 and does not expect the adoption
of the statement to have a material effect on its financial condition or results
of operations.
12
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EITF ISSUE NO. 02-03 - ISSUES INVOLVED IN ACCOUNTING FOR DERIVATIVE CONTRACTS
HELD FOR TRADING PURPOSES AND CONTRACTS INVOLVED IN ENERGY TRADING AND RISK
MANAGEMENT ACTIVITIES (EITF NO. 02-03). On October 25, 2002, the EITF reached a
final consensus in EITF No. 02-03 that gains and losses (realized or unrealized)
on all derivative instruments within the scope of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133), should be shown
net in the income statement, whether or not settled physically, if the
derivative instruments are held for trading purposes. This consensus will be
effective for financial statements issued for periods beginning after December
15, 2002. NiSource will reevaluate its portfolio of contracts in order to
determine which contracts will be required to be reported net in accordance with
the provisions of the consensus.
For the periods presented, if NiSource had reported its trading
activities pursuant to EITF 98-10 on a net basis, each of consolidated gross
revenues and consolidated cost of sales for the three months ended September
30, 2002 and 2001 would have been lower by $106.0 million and $621.2 million,
respectively and for the nine months ended September 30, 2002 and 2001 would
have been lower by $870.9 million and $2,406.1 million, respectively. Operating
income for all periods would remain as reported on the Statements of
Consolidated Income.
The task force also reached a consensus to rescind EITF Issue No.
98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities" (EITF No. 98-10), and preclude mark-to-market accounting for energy
trading contracts that are not derivatives pursuant to SFAS No. 133. This
consensus will be effective for fiscal periods beginning after December 15,
2002, for energy trading and energy-related contracts that existed on or before
October 25, 2002 that remain in effect at the date the consensus is initially
applied (January 1, 2003 for the Company). Contracts entered into after October
25, 2002, will be analyzed pursuant to a generally accepted accounting
principle hierarchy, excluding EITF No. 98-10. NiSource does not expect the
rescission of EITF No. 98-10 to have a material affect on its financial
condition or results of operations.
8. TELECOMMUNICATIONS NETWORK
NiSource, through its subsidiary Columbia Transmission Communications
(Transcom), has built a dark-fiber optics telecommunications network primarily
along its pipeline rights-of-way between New York and Washington, D.C. For the
year ending December 31, 2002, the network is projected to incur a pre-tax
operating loss of approximately $10.7 million. Due to the current oversupply of
dark fiber in Transcom's market area, management projects that the company will
continue to operate at a loss. The company's future profitability will be
dependent on, among other factors, a recovery in the telecommunications market.
NiSource is currently reviewing the carrying value of its investment in Transcom
and whether an impairment charge will be required. Management continues to
pursue and evaluate strategic alternatives, including a sale.
9. CHANGE IN INDIANA CORPORATE INCOME TAX RATE
On June 28, 2002, the governor of Indiana signed into law legislation that
increases the Indiana Corporate Income tax rate from 4.5% to 8.5% effective
January 1, 2003. As a result, NiSource's subsidiaries in Indiana recorded an
additional deferred income tax liability of $65.9 million (net) in the second
quarter of 2002, to reflect the impact of the increased tax rate. NiSource's
regulated subsidiaries recorded a regulatory asset in the amount of $65.0
million to reflect the probable collection of the increased tax liability though
future rates. The overall impact on income tax expense was an increase of $0.9
million.
10. SYNTHETIC LEASES
Primary Energy is currently involved in six projects, which produce electricity,
steam or thermal energy on the sites of industrial customers. Four projects
generate energy from process streams or fuel provided by the industrial
customers. The energy is then delivered to the industrial customers under
long-term contracts providing for tolling fees, sublease payments, unit sale
payments or processing fees. One project, Whiting Clean Energy, uses natural gas
13
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to produce electricity for sale in the wholesale markets and is expected to
provide steam for industrial use. In addition, a subsidiary of Primary Energy is
a 50% partner in a partnership that operates a coal pulverization facility.
While one project, Ironside, is now owned by NiSource, generally the facilities
are owned by unaffiliated special purpose entities.
Prior to the June 30, 2002 financial statements, the assets and related debt
associated with these projects were not included in NiSource's consolidated
financial statements, which treatment was approved by NiSource's former
independent public accountants. However, NiSource has now determined in
consultation with Deloitte & Touche, its independent public accountants, that
certain language contained in the operative agreements for four of the projects
did not support characterization of those transactions as off-balance-sheet
operating leases under EITF Issue No. 97-1, "Implementation Issues in Accounting
for Lease Transactions, Including Those Involving Special Purpose Entities," and
EITF No. 97-10 "The Effect of Lessee Involvement in Asset Construction." Certain
provisions in the operative documents for two transactions (Whiting Clean Energy
and Ironside), which were subject to EITF No. 97-10, could be interpreted to
transfer substantial construction period risks to the lessee, resulting in
Primary Energy being deemed the owner of the projects. Certain provisions in the
other two leases (Cokenergy and Portside) could be interpreted to require the
inclusion of certain default-related obligations in minimum lease payments,
resulting in the characterization of those leases as capital leases.
At June 30, 2002, as a result of this determination, NiSource changed the
characterization of the leases associated with the four projects from synthetic
leases to owned assets (for Whiting Clean Energy and Ironside) and capital
leases (for Cokenergy and Portside) for financial reporting purposes.
Subsequently, on September 10, 2002, NiSource purchased the assets associated
with the Ironside project for $65.9 million resulting in a termination of the
leasing transaction. As of September 30, 2002, NiSource has included
approximately $565.0 million of assets and a corresponding amount of related
debt on its balance sheet related to these projects. The impact on the results
of operations for prior periods was immaterial. The recognition of the debt did
not alter NiSource's compliance with its debt covenants and is consistent with
the treatment of such leases by the rating agencies in the analysis of
NiSource's credit ratings.
The lease at Primary Energy's North Lake project is due to expire in December
2002. Primary Energy intends to purchase the project at the end of the lease
period, at an amount expected to be approximately $38.0 million.
11. MINIMUM PENSION LIABILITY
Due to the decline in the equity markets, the fair value of the Company's
pension fund assets has decreased since September 30, 2001. In addition, the
discount rate used to measure the accumulated benefit obligation has decreased,
resulting in an increase in the estimated minimum liability. In accordance with
Financial Accounting Standards Board Statement No. 87, "Employers' Accounting
for Pensions," NiSource recorded a minimum pension liability adjustment at
September 30, 2002. The adjustment resulted in a decrease to prepaid pension
costs of $271.9 million, an increase in intangible assets of $59.9 million, an
increase to retirement benefit liabilities of $115.0 million, an increase to
deferred income tax assets of $130.5 million and a decrease to other
comprehensive income of $196.5 million after-tax. Nisource expects pension
expense for 2003 to increase approximately $50.0 million over the amount
recognized in 2002.
12. SALE OF EXPLORATION AND PRODUCTION BUSINESS
On October 11, 2002, NiSource announced its intention to sell Columbia Energy
Resources, Inc., and its affiliates, including Columbia Natural Resources, Inc.,
its natural gas exploration and production business. The decision to sell the
exploration and production business is part of NiSource's business strategy of
focusing on its core, regulated assets and strengthening its balance sheet by
reducing debt. NiSource intends to enter into a definitive sale agreement for
the exploration and production business by the end of 2002. The results of
operations related to the exploration and production business will be displayed
as discontinued operations in the fourth quarter 2002 and prior period financial
statements will be adjusted to conform to the discontinued operations
presentation.
13. LEGAL PROCEEDINGS
In the normal course of its business, NiSource and its subsidiaries have been
named as defendants in various legal proceedings. In the opinion of management,
the ultimate disposition of these currently asserted claims would not have a
material adverse impact on NiSource's consolidated financial position.
14
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. EQUITY OFFERING
On November 13, 2002, NiSource issued 36.0 million shares of common stock at a
price of $18.30 ($17.75 on a net basis) per share. The net proceeds of
approximately $639.0 million was used to reduce debt.
15. BUSINESS SEGMENT INFORMATION
NiSource's operations are divided into six primary business segments. The Gas
Distribution segment provides natural gas service and transportation for
residential, commercial and industrial customers in Ohio, Pennsylvania,
Virginia, Kentucky, Maryland, Indiana, Massachusetts, Maine and New Hampshire.
The Electric Operations segment provides electric service in 21 counties in the
northern part of Indiana. The Gas Transmission and Storage segment offers gas
transportation and storage services for local distribution companies, marketers
and industrial and commercial customers located in northeastern, mid-Atlantic,
midwestern and southern states and the District of Columbia. The Exploration and
Production segment explores for, develops, produces and markets gas and oil in
the United States and in Canada. The Merchant Operations segment provides
energy-related services including gas marketing, electric wheeling, bulk power,
power trading, natural gas sales and management services to 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.
15
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables provide information about the business segments. NiSource
uses operating income as its primary measurement for each of the reported
segments and makes decisions regarding 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 prices,
regulated prices or at levels provided for under contractual agreements.
Operating income is derived from revenues and expenses directly associated with
each segment.
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
(in millions) 2002 2001 2002 2001
- ------------ -------- -------- -------- --------
REVENUES
GAS DISTRIBUTION
Unaffiliated 344.3 531.2 2,102.3 3,341.4
Intersegment 10.9 8.6 17.9 29.3
-------- -------- -------- --------
Total 355.2 539.8 2,120.2 3,370.7
-------- -------- -------- --------
Gas Transmission and Storage
Unaffiliated 135.4 137.7 451.3 469.3
Intersegment 68.1 69.9 223.5 248.5
-------- -------- -------- --------
Total 203.5 207.6 674.8 717.8
-------- -------- -------- --------
Electric Operations
Unaffiliated 277.7 281.4 765.2 774.3
Intersegment 15.1 0.3 24.0 1.4
-------- -------- -------- --------
Total 292.8 281.7 789.2 775.7
-------- -------- -------- --------
Exploration and Production
Unaffiliated 39.1 43.5 136.0 117.7
Intersegment 3.0 17.3 28.1 45.8
-------- -------- -------- --------
Total 42.1 60.8 164.1 163.5
-------- -------- -------- --------
Merchant Operations
Unaffiliated 251.3 732.3 1,140.5 2,612.8
Intersegment 43.7 19.6 143.5 120.6
-------- -------- -------- --------
Total 295.0 751.9 1,284.0 2,733.4
-------- -------- -------- --------
Other
Unaffiliated 7.3 38.9 38.9 117.2
Intersegment 3.4 -- 3.4 0.1
-------- -------- -------- --------
Total 10.7 38.9 42.3 117.3
Adjustments and eliminations (133.2) (124.3) (426.5) (449.1)
-------- -------- -------- --------
Consolidated Revenues $1,066.1 $1,756.4 $4,648.1 $7,429.3
-------- -------- -------- --------
OPERATING INCOME (LOSS)
Gas Distribution $ (20.2) $ (32.0) $ 264.3 $ 257.1
Gas Transmission and Storage 86.1 54.8 289.5 243.7
Electric 99.8 98.5 239.9 246.0
Exploration and Production 1.7 19.9 40.3 39.2
Merchant Operations 16.6 14.6 3.5 34.0
Other (0.9) (4.3) (2.1) (49.4)
Corporate 0.2 (10.5) 28.2 (19.9)
-------- -------- -------- --------
CONSOLIDATED OPERATING INCOME $ 183.3 $ 141.0 $ 863.6 $ 750.7
-------- -------- -------- --------
16
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 nonregulated 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 risks 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, 2001 (Form 10-K).
THIRD QUARTER RESULTS
Net Income
NiSource reported net income of $23.2 million, or 11 cents per share, for the
three months ended September 30, 2002, compared to a net loss of $21.0 million,
or a loss of 10 cents per share, for the third quarter in 2001. Operating income
was $183.3 million, up $42.3 million from the same period in 2001. The 2001
results have been adjusted to reflect the change to successful efforts
accounting in the company's Exploration and Production segment. All per share
amounts are basic earnings per share.
Net Revenues
Total consolidated net revenues (gross revenues less cost of sales) for the
three months ended September 30, 2002, were $656.1 million, a $28.8 million
decrease over the same period last year. The decrease in net revenues was a
result of lower pricing related to increased deliveries of natural gas
production under forward sales agreements, credits to be issued to customers as
a result of the Indiana Utility Regulatory Commission (IURC) electric rate
review settlement and the scaling back of NiSource's energy marketing
operations. The decreases were partially offset by the favorable impact of 34%
warmer weather during the quarter, which increased sales of electricity.
Expenses
Operating expenses for the third quarter of 2002 were $472.8 million, a decrease
of $71.1 million from the 2001 period. Operating expenses decreased primarily as
a result of discontinuing the amortization of goodwill, lower corporate
overhead, insurance recoveries of environmental expenses, a reduction in
estimated environmental expenditures, and a reduction in estimated sales taxes
payable related to previous sales of natural gas to retail and wholesale gas
marketing customers. The reductions in operating expenses were partly offset by
expenses for reorganization initiatives and increased pension costs.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Other Income (Deductions)
Interest expense was $139.9 million for the quarter, a decrease of $6.2 million
compared to the third quarter of 2001. The decrease was due to a reduction of
short and long-term debt and lower short-term interest rates. Other, net for the
third quarter of 2002 increased income by $1.0 million, compared to a loss of
$4.7 million in the 2001 period.
Income Taxes
Income tax expense for the third quarter of 2002 was $14.2 million, an increase
of $10.4 million compared to the 2001 period, due to higher pre-tax income in
the current period.
NINE MONTH RESULTS
Net Income
NiSource reported net income of $290.4 million, or $1.41 per share, for the nine
months ended September 30, 2002, an increase of $141.1 million over the same
period last year. Operating income was $863.6 million, an increase of $112.9
million from the same period in 2001. The 2001 results have been adjusted to
reflect the change to successful efforts accounting in the company's Exploration
and Production segment. All per share amounts are basic earnings per share.
Net Revenues
Total consolidated net revenues (gross revenues less cost of sales) for the nine
months ended September 30, 2002, were $2,401.5 million, a $92.9 million decrease
over the same period last year. The decrease was primarily attributable to
weather that was 9% warmer than the 2001 period during the heating season,
partly offset by the favorable impact of warmer weather during the cooling
season. Also contributing to the decrease were reduced revenues due to the sale
of SM&P, Nisource's utility line-locating and marketing business, credits to be
issued to customers as a result of the IURC electric rate review settlement, a
reduction in off-system and incentive program revenues at the gas distribution
companies, and the change in the value of the gas and power marketing
portfolios, partly due to the scaling back of NiSource's gas trading operations.
Net revenues were also lower in the 2002 period because of a gain of $11.4
million from the sale of base gas that occurred in 2001.
Expenses
Operating expenses for the nine months of 2002 were $1,537.9 million, a decrease
of $205.8 million from the 2001 period. The decrease was mainly due to lower
operation and maintenance expenses of $106.8 million, resulting from insurance
recoveries of environmental expenses, a reduction in estimated environmental
expenditures, a reduction in estimated sales taxes payable related to previous
sales of natural gas to retail and wholesale gas marketing customers and lower
amounts for uncollectible customer receivables. Operating expenses were also
lower due to gains on the sales of NiSource's utility line-locating and marking
business and a significant portion of TPC's gas marketing contracts, and lower
depreciation and amortization expenses mainly resulting from discontinuing the
amortization of goodwill. In addition, the 2001 period was unfavorably impacted
by a $15.5 million settlement of a lawsuit related to Market Hub Partners, L.P.
and a $9.2 million write-down related to NiSource's telecommunications network.
Other Income (Deductions)
Interest expense was $391.8 million for the nine months, a decrease of $66.9
million compared to the first nine months of 2001. The decrease was due to a
reduction of short and long-term debt and lower short-term interest rates.
Other, net for the first nine months of 2002 was $7.2 million, compared to a
loss of $0.5 million in the prior year.
Income Taxes
Income tax expense for the first nine months of 2002 was $172.2 million, an
increase of $48.4 million compared to the 2001 period, due to higher pretax
income.
Discontinued Operations
Discontinued operations positively impacted net income by $4.5 million mainly
due to the gain on the sale of the water utility assets of Indianapolis Water
Company and other IWC Resources Corporation subsidiaries in the second quarter
of 2002, compared to a reduction of $1.5 million in the first nine months of
2001.
18
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 distribution, transportation businesses and the electric
distribution business, are subject to seasonal fluctuations in cash flow. During
the heating season, which is primarily from November through March, cash
receipts from gas sales and transportation services typically exceed cash
requirements. In the summer months, cash receipts from electric sales normally
exceed cash requirements. Also, during the summer months, cash on hand, together
with external short-term and long-term financing, is used in operations to
purchase gas to place in storage for heating season deliveries; perform
necessary maintenance of facilities; make capital improvements in plant; and
expand service into new areas.
Net cash from operations for the nine months ended September 30, 2002 was $900.5
million. Cash generated from working capital was $185.6 million principally
driven by cash receipts from customer accounts receivable, partially offset by
payments for current liabilities. Net cash from operations and proceeds from the
sales of the water utility assets of IWC Resources and SM&P Utility Resources,
Inc. (SM&P) were used to reduce borrowings during the first nine months of 2002
by $843.6 million.
On November 13, 2002, Nisource issued 36.0 million shares of common stock at a
price of $18.30 ($17.75 on a net basis) per share. The net proceeds of
approximately $639.0 million was used to reduce debt.
Credit Facilities
During March 2002, NiSource, through its subsidiary NiSource Finance Corp.
(NFC), negotiated a $500 million 364-day credit agreement with a syndicate of
banks, led by Barclays Capital. This new facility replaced an expiring $1.25
billion 364-day credit facility and complements the company's existing $1.25
billion three-year facility that expires on March 23, 2004. The reduction in the
Company's short-term borrowing needs was attributable to the sales of the water
utility assets of IWC Resources and SM&P, along with positive operating cash
flows.
As of September 30, 2002 and December 31, 2001, $121.5 million and $1,004.3
million of commercial paper was outstanding, respectively. The weighted average
interest rate on commercial paper outstanding as of September 30, 2002 and
December 31, 2001 was 2.97% and 3.14%, respectively. In addition, NiSource had
outstanding credit facility advances under its 3-year facility of $1,100.0
million at September 30, 2002 at a weighted average interest rate of 2.50% and
credit facility advances (notes payable) of $850.0 million at December 31, 2001,
at a weighted average interest rate of 2.575%. As of September 30, 2002 and
December 31, 2001, NiSource had $170.7 million and $51.7 million of standby
letters of credit outstanding, respectively. As of September 30, 2002, $357.8
million of credit was available under the credit facilities. Additionally, Bay
State Gas, a subsidiary of NiSource, financed the purchase of the majority of
its gas inventory through a product financing agreement with a third party. As
of September 30, 2002, Bay State Gas had approximately $37.4 million of
short-term debt associated with its gas inventory purchases.
Credit Ratings
During January 2002, Standard and Poor's reaffirmed NiSource's BBB senior
unsecured long-term credit rating and its A2 commercial paper rating with a
negative outlook. On February 1, 2002, Moody's Investor Service (Moody's)
downgraded the senior unsecured long-term debt ratings of NiSource and NFC to
Baa3 and the commercial paper rating of NFC to P3 with a negative outlook. In
addition, Moody's downgraded the long-term debt ratings of all other rated
NiSource subsidiaries to Baa2 to align the ratings of the subsidiaries and bring
them closer to NiSource's ratings going forward. On February 5, 2002 Fitch
Ratings reaffirmed NiSource's BBB senior unsecured long-term credit rating and
its F2 commercial paper rating, but revised NiSource's ratings outlook from
"Stable" to "Negative."
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Columbia Gas of Ohio is a party to an agreement to sell, without recourse,
substantially all of its trade receivables to Columbia Accounts Receivable
Corporation (CARC), a wholly owned subsidiary of Columbia Energy Group
(Columbia). CARC, in turn, is party to an agreement in which it sells a
percentage ownership interest in a defined pool of the accounts receivable to a
commercial paper conduit. Under these agreements, CARC may not sell any new
affiliate receivables to the conduit if Columbia's debt rating falls below BBB
or Baa2 at Standard and Poor's and Moody's, respectively. In addition, if
Columbia's debt rating falls below investment grade, the agreements terminate
and CARC may not sell any new receivables to the conduit. As of September 30,
2002, Columbia of Ohio has sold $32.5 million to the conduit.
Northern Indiana Public Service Company (Northern Indiana) may sell up to $100.0
million of certain of its accounts receivable to Citibank under a sales
agreement, without recourse, which expires in May 2003. Northern Indiana has
sold $100.0 million under this agreement. Under this agreement, Northern Indiana
may not sell any new receivables to Citibank if Northern Indiana's debt rating
falls below BBB- or Baa3 at Standard and Poor's and Moody's, respectively.
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
Through its various business activities, NiSource is exposed to risk including
non-trading and trading risks. The non-trading risks to which NiSource is
exposed include interest rate risk, commodity price risk and credit risk of its
subsidiaries. The risk resulting from trading activities consists primarily of
commodity price and credit risks. NiSource's risk management policy permits the
use of certain financial instruments to manage its market risk, including
futures, forwards, options and swaps.
Non-Trading Risks
Commodity price risk resulting from non-trading activities at NiSource's
rate-regulated subsidiaries is limited, since current regulations allow recovery
of prudently incurred purchased power, fuel and gas costs through the
rate-making process. As the utility industry undergoes deregulation, these
operations may be providing services without the benefit of the traditional
ratemaking process and will be more exposed to commodity price risk. NiSource
enters into certain sales contracts with customers based upon a fixed sales
price and varying volumes, which are ultimately dependent upon the customer's
supply requirements. NiSource utilizes derivative financial instruments to
reduce the commodity price risk based on modeling techniques to anticipate these
future supply requirements.
Effective July 1, 2002, TPC sold a significant portion of its net obligations
under its gas forward transaction portfolio, physical storage inventory and
associated agreements to a third party. Prior to the sale, TPC's operations
included the activities of its gas and power trading businesses. Beginning with
the effective date of the sale, the primary remaining operations associated with
TPC include commercial and industrial gas sales (including arranging supply),
power marketing and gas supply associated with NiSource's single merchant
cogeneration facility, marketing a portion of the gas produced from NiSource's
exploration and production operations and power trading.
With the exception of power trading and one remaining gas trading deal, which
expired in October 2002, since July 1 the activities at TPC are no longer
considered trading activities for accounting purposes. For trading activities,
under the accounting rules, derivatives and other trading contracts are marked
to fair value through earnings. Because TPC's activities are no longer
considered trading in nature, only derivatives are marked to fair value through
earnings.
NiSource's exploration and production segment is exposed to market risk due
primarily to fluctuations in commodity prices. In order to help minimize this
risk, NiSource has adopted a policy that requires commodity-hedging activities
to help ensure stable cash flow, favorable prices and margins.
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, which
have interest rates that are indexed to short-term market interest rates, and
refinancing risk in the commercial paper markets. At September 30, 2002, the
combined borrowings outstanding under these facilities totaled $1,258.9 million.
NiSource is also exposed to interest rate risk due to changes in interest rates
on fixed-to-variable interest rate swaps that hedge the fair value of a portion
of Columbia's long-term debt. On September 3, 2002, Columbia entered into
"receive fixed" and "pay floating" interest rate swap agreements totaling $281.5
million with three counterparties effective as of September 5, 2002. According
to the
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
agreement. NiSource will receive payments based upon a fixed 7.32% interest rate
and will pay a floating interest amount based on U.S. 6-month LIBOR-BBA plus
2.66% per annum. In total, Columbia has entered into fixed-to-variable interest
rate swaps on $863.0 million of its long-term debt. Based upon average
borrowings under these agreements during the quarter and nine months ended
September 30, 2002, an increase in short-term interest rates of 100 basis points
(1%) would have increased interest expense by $4.4 million and $13.1 million for
the quarter and nine months ended September 30, 2002, respectively.
A portion of a lease payment associated with NiSource's Primary Energy
subsidiary floats with a referenced interest rate, thus exposing Primary Energy
to interest rate risks. Primary Energy had engaged in interest rate swaps to fix
the floating payment and designated these instruments as cash flow hedges,
however, the swaps expired June 30, 2002.
Due to the nature of the industry, credit risk is a factor in many of NiSource's
business activities. In sales and trading activities, credit risk arises because
of the possibility that a counterparty will not be able or willing to fulfill
its obligations on a transaction on or before the settlement date. For
derivative contracts such as interest rate swaps, credit risk arises when
counterparties are obligated to pay NiSource the positive fair value or
receivable resulting from the execution of contract terms. Exposure to credit
risk is measured in terms of both current and potential exposure. Current credit
exposure is generally measured by the notional or principal value of financial
instruments and direct credit substitutes, such as commitments and standby
letters of credit and guarantees. Current credit exposure includes the positive
fair value of derivative instruments. Because many of NiSource's exposures vary
with changes in market prices, NiSource also estimates the potential credit
exposure over the remaining term of transactions through statistical analyses of
market prices. In determining exposure, NiSource considers collateral and master
netting agreements, which are used to reduce individual counterparty credit
risk.
Trading Risks
Prior to the July 1, 2002 sale of the TPC gas marketing and trading contracts,
NiSource's trading operations consisted of gas- and power-related activities.
Beginning July 1, with the exception of one remaining gas trading deal which
expired in October 2002, the trading activities of TPC have involved power only.
The transactions associated with NiSource's power trading operations give rise
to various risks, including market risks resulting from the potential loss from
adverse changes in the market prices of electricity. The power trading
operations market and trade over-the-counter contracts for the purchase and sale
of electricity. Power trading activities generally do not result in the physical
delivery of electricity. Some contracts within the trading portfolio may require
settlement by physical delivery, but are net settled in accordance with industry
standards.
Fair value represents the amount at which willing parties would transact an
arms-length exchange. Fair value is determined by applying a current price to
the associated contract volume for a commodity. The current price is derived
from one of three sources including actively quoted markets such as the NYMEX,
commodity exchanges and over-the-counter markets including brokers and dealers,
or financial models such as the Black-Scholes option pricing model.
The fair values of the contracts related to NiSource's trading operations, the
activity affecting the changes in the fair values for the quarter and nine
months ending September 30, 2002, the sources of the valuations of the contracts
at September 30, 2002 and the years in which they mature are:
Three Months Ended Nine Months Ended
(in millions) September 30, 2002 September 30, 2002
==============================================================================================================
Fair value of contracts outstanding at the beginning of the period $(11.2) $ 8.9
Contracts realized or otherwise settled during the period
(including net option premiums received) (6.7) (27.5)
Fair value of new contracts entered into during the period 2.4 9.2
Other changes in fair values during the period 16.9 10.8
- --------------------------------------------------------------------------------------------------------------
Fair value of contracts outstanding at the end of the period $ 1.4 * $ 1.4 *
- --------------------------------------------------------------------------------------------------------------
* The fair value of contracts outstanding at September 30, 2002 does not include
the fair value of natural gas in storage of $5.0 million.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
(in millions) 2002 2003 2004 2005 2006 After Total
============================================================================================================
Prices actively quoted $ - $ - $- $- $- $- $ -
Prices from other external sources 3.1 (1.8) - - - - 1.3
Prices based on models/other method 0.8 (0.7) - - - - 0.1
- ------------------------------------------------------------------------------------------------------------
Total fair values $3.9 $(2.5) $- $- $- $- $1.4
- ------------------------------------------------------------------------------------------------------------
Market Risk Measurement
Value-at-risk (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. 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 marketing and trading groups that utilize derivatives using
variance/covariance at a 95% confidence level. Based on the results of the VaR
analysis, the daily market exposure for power trading on an average, high and
low basis was $0.4 million, $0.7 million and $0.2 million, during the third
quarter of 2002, respectively. The daily VaR for the gas marketing portfolio on
an average, high and low basis was $0.2 million, $0.3 million and $0.1 million
during the third quarter of 2002, respectively.
Refer to "Risk Management Activities" in Note 6 of Notes to the Consolidated
Financial Statements for further discussion of NiSource's risk management.
OTHER INFORMATION
Union Strike Settlement
In September 2002, employee members of the Paper, Allied-Industrial, Chemical
and Energy Worker's Union (PACE) Locals 5-0372 and 5-0628 ratified a five-year
contract from Columbia Gas Transmission, Columbia Natural Resources, Inc. and
Columbia Gas of Kentucky. Employees covered by the collective bargaining
agreement at all three companies resumed work September 24, 2002 after a work
stoppage that began August 28. The strike did not have a material impact on
NiSource's results of operations.
Competition
The regulatory environment applicable to NiSource's subsidiaries continues to
undergo fundamental changes. These changes have 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 its 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.
Insurance Renewal
As a result of many factors including substantial property and financial losses
in the energy sector beginning in 2000 and continuing in 2002, developments in
the businesses and accounting practices of certain companies in the energy
sector and the overall economic downturn, NiSource expects rate increases and
additional coverage restrictions in the energy insurance market. NiSource
experienced increases in premiums averaging 44%, with additional increases in
deductibles and retentions along with added restrictions to coverage and
capacity, for its property and casualty insurance, which was renewed effective
July 1, 2002. Indications are that the upward trend in insurance costs will
continue in the foreseeable future.
Presentation of Segment Information
NiSource's operations are divided into six primary business segments; Gas
Distribution, Transmission and Storage, Electric, Exploration and Production,
Merchant, and Other.
22
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) 2002 2001 2002 2001
=============================================================================================
NET REVENUES
Sales revenues $299.2 $481.7 $ 1,837.3 $ 3,090.4
Less: Cost of gas sold 167.8 349.9 1,178.6 2,369.9
- ---------------------------------------------------------------------------------------------
Net Sales Revenues 131.4 131.8 658.7 720.5
Transportation revenues 56.0 58.1 282.9 280.3
- ---------------------------------------------------------------------------------------------
Net Revenues 187.4 189.9 941.6 1,000.8
- ---------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 137.3 149.3 432.6 466.7
Depreciation and amortization 47.4 51.6 141.3 171.4
Other taxes 22.9 21.0 103.4 105.6
- ---------------------------------------------------------------------------------------------
Total Operating Expenses 207.6 221.9 677.3 743.7
- ---------------------------------------------------------------------------------------------
Operating Income $(20.2) $(32.0) $ 264.3 $ 257.1
=============================================================================================
REVENUES ($ IN MILLIONS)
Residential 141.8 165.4 1,099.9 1,773.3
Commercial 50.8 61.8 364.3 673.9
Industrial 14.0 15.0 60.6 111.2
Transportation 56.0 58.1 282.9 280.3
Off-system sales 53.9 236.9 162.5 571.6
Other 38.7 2.6 150.0 (39.6)
- ---------------------------------------------------------------------------------------------
Total 355.2 539.8 2,120.2 3,370.7
- ---------------------------------------------------------------------------------------------
SALES AND TRANSPORTATION (MDTH)
Residential sales 13.5 17.0 143.3 157.9
Commercial sales 7.4 7.8 52.8 64.5
Industrial sales 3.0 2.5 10.3 10.8
Transportation 107.7 102.7 387.8 371.4
Off-system sales 18.0 79.0 56.9 135.0
Other - - 0.4 0.3
- ---------------------------------------------------------------------------------------------
Total 149.6 209.0 651.5 739.9
- ---------------------------------------------------------------------------------------------
HEATING DEGREE DAYS 17 82 2,811 3,084
NORMAL HEATING DEGREE DAYS 59 60 3,315 3,324
% COLDER (WARMER) THAN NORMAL (71%) 37% (15%) (7%)
CUSTOMERS
Residential 2,339,402 2,262,759
Commercial 208,698 204,711
Industrial 11,765 10,042
Transportation 636,093 674,603
Other 19 24
- ---------------------------------------------------------------------------------------------
Total 3,195,977 3,152,139
- ---------------------------------------------------------------------------------------------
NiSource's natural gas distribution operations (Gas Distribution) serve
approximately 3.2 million customers in nine states: Ohio, Indiana, Pennsylvania,
Massachusetts, Virginia, Kentucky, Maryland, New Hampshire and Maine. The
regulated subsidiaries offer both traditional bundled services as well as
transportation only for customers that purchase gas from alternative suppliers.
The operating results reflect the temperature-sensitive nature of customer
demand with over 70% of annual residential and commercial throughput affected by
seasonality. As a result, segment operating income is higher in the first and
fourth quarters reflecting the heating demand during the winter season.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS (CONTINUED)
Regulatory Matters
On November 20, 2001, the Public Utilities Commission of Ohio (PUCO) issued
final rules to implement the provisions of choice legislation enacted by the
Ohio General Assembly on March 27, 2001. The rules have been approved by a Joint
Committee on Agency Rule Review of the Ohio Legislature, and were effective on
July 5, 2002. The new rules establish the process for PUCO certification and
regulation of competitive retail natural gas suppliers, establish minimum
service standards for competitive natural gas suppliers, and specify the
procedures for establishment of governmental aggregation programs, in which
consumers have the right to "opt-out" of the program. Columbia Gas of Ohio filed
tariffs incorporating the rules on November 1, 2002. A number of communities in
the service territory of Columbia Gas of Ohio have passed aggregation
initiatives in recent elections. There are approximately 222,000 eligible
customers in these communities. It is anticipated that the communities will
begin the governmental aggregations in late 2002 or the first half of 2003.
As part of the Kentucky Public Service Commission (KPSC) order approving the
acquisition of Columbia, Columbia Gas of Kentucky was required to file a rate
case that included an estimate of net merger savings and a mechanism to reflect
merger savings on customers' bills. On May 1, 2002, Columbia Gas of Kentucky
filed a general rate case, requesting an increase in revenue of approximately
$2.5 million or 4% of annual operating revenues including the net merger
savings. On September 30, 2002, Columbia Gas of Kentucky and all other parties
of record in this proceeding filed a settlement with the KPSC. The settlement,
if adopted by the KPSC, would reduce Columbia of Kentucky's base rates by $7.8
million, with $0.5 million of the reduction recovered through a tracking
mechanism to cover the costs of a program to support low-income customers. The
KPSC is reviewing the settlement and must issue an order before the settlement
can take effect. If approved, the changes become effective in March 2003.
In November 2001, Northern Utilities New Hampshire (NUNH) filed a general rate
case requesting an increase in revenue of approximately $3.8 million or 7% of
annual operating revenues. In February 2002, NUNH received approval of interim
rates, designed to generate an additional $2.3 million in revenues annually, to
be applied to gas consumed on and after February 7, 2002. In September 2002,
NUNH and all parties in this proceeding filed a settlement with the NHPUC that
will increase rates by approximately $1.1 million. On October 28, the NHPUC
issued an order approving the settlement, with new permanent rates effective as
of November 1, 2002. NUNH will be refunding to customers approximately $0.5
million which is the difference between the revenue collected from the interim
increase, generated from temporary rates, and the lower revenues based on the
permanent rates for the period from February 7 to November 1. The net amount
will be refunded to customers over the 12-month period of November 2002 through
October 2003.
Weather
Weather in Gas Distribution's markets for the third quarter of 2002 was 71%
warmer than normal and 79% warmer than the third quarter of 2001. For the first
nine months of 2002, weather was 15% warmer than normal and 9% warmer than the
first nine-months of 2001.
Throughput
Total volumes sold and transported of 149.6 million dekatherms (MDth) for the
third quarter of 2002 decreased 59.4 MDth from the same period last year,
reflecting a 61.0 MDth decline in off-system sales slightly offset by increased
transportation volumes. For the nine month period ended September 30, 2002,
total volumes sold and transported were 651.5 MDth, a decrease of 88.4 MDth from
the same period in 2001, primarily reflecting reduced levels of off-system sales
and warmer weather during the heating season.
Net Revenues
Net revenues for the three months ended September 30, 2002 were $187.4 million,
a reduction of $2.5 million over the same period in 2001, primarily due to a
decrease in off-system sales and incentive programs. For the nine month period
ended September 30, 2002, net revenues were $941.6 million, a $59.2 million
decrease from the same period in 2001. On a year-to-date basis, net revenues
were lower by $32.2 million due to weather. The remaining net revenue decline
reflected reduced billings for revenue based taxes and reduced net revenues from
off-system sales and incentive programs.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS (CONTINUED)
Operating Income
For the third quarter of 2002, Gas Distribution reported an operating loss of
$20.2 million, compared to an operating loss of $32.0 million for the same
period in 2001. The $11.8 million decrease in operating loss was due to lower
operating expenses, mainly resulting from discontinuing the amortization of
goodwill, insurance recoveries for environmental expenses and decreased
corporate overhead. These factors were partially offset by increased expenses
related to the timing of depreciation and property tax expenses, increased
expenses related to NiSource's reorganization initiatives and slightly lower
revenues from reduced gas sales. Operating income for the first nine months of
2002, totaling $264.3 million, increased $7.2 million from the same period in
2001, due to the discontinuation of goodwill amortization of $31.7 million,
insurance recoveries for environmental expenses and lower amounts for
uncollectible customer receivables. The impact of lower expenses was mostly
offset by overall warmer weather during the 2002 heating season, lower net
revenues as discussed above and increased expenses related to NiSource's
reorganization initiatives.
25
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) 2002 2001 2002 2001
===============================================================================================
OPERATING REVENUES
Transportation revenues $157.3 $160.1 $532.4 $560.5
Storage revenues 44.8 45.2 134.5 134.6
Other revenues 1.4 2.3 7.9 22.7
- -----------------------------------------------------------------------------------------------
Total Operating Revenues 203.5 207.6 674.8 717.8
Less: Cost of gas sold 13.4 16.3 40.1 70.0
- -----------------------------------------------------------------------------------------------
Net Revenues 190.1 191.3 634.7 647.8
- -----------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 66.4 85.2 224.7 243.4
Depreciation and amortization 27.4 40.7 82.1 120.9
(Gain) on sale or impairment of assets (2.1) - (2.1) -
Other taxes 12.3 10.6 40.5 39.8
- -----------------------------------------------------------------------------------------------
Total Operating Expenses 104.0 136.5 345.2 404.1
- -----------------------------------------------------------------------------------------------
Operating Income $ 86.1 $54.8 $289.5 $243.7
===============================================================================================
THROUGHPUT (MDTH)
Columbia Transmission
Market Area 151.7 150.9 715.8 690.7
Columbia Gulf
Mainline 150.3 143.0 467.7 479.6
Short-haul 40.0 50.0 114.7 138.6
Intrasegment eliminations (132.6) (136.8) (418.5) (467.8)
Columbia Pipeline Deep Water - 0.7 0.2 2.5
Crossroads Gas Pipeline 7.1 8.4 21.7 28.7
Granite State Pipeline 2.4 3.6 22.5 21.4
- -----------------------------------------------------------------------------------------------
Total 218.9 219.8 924.1 893.7
- -----------------------------------------------------------------------------------------------
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 16,130 miles
extending from offshore in the Gulf of Mexico to Lake Erie, New York and the
eastern seaboard. The pipeline network serves 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), 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 Canadian facilities at a new Lake Erie export
point and transport approximately 700 MDth 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 Federal
Energy Regulatory Commission (FERC) proceedings. On December 19, 2001, the FERC
issued a certificate approving the construction and operation of the pipeline,
subject to a number of conditions, including a condition that construction may
not commence until any necessary Canadian authorizations are obtained. Rehearing
requests were filed on January 18, 2002.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)
On September 19, 2002, the FERC issued its order granting final certificate
authority for the project. The order largely supports the finding of the
December 19 certificate order and holds that the FERC adequately complied with
the requirements of the National Environmental Policy Act in approving the
project. The order specifies that Millennium may not begin construction until
the required approvals from Canada's National Energy Board and other agencies
are received and certain environmental and other conditions are met. To date, a
number of shippers have signed agreements for a significant portion of the
available capacity. Millennium is in ongoing discussions with potential shippers
regarding the extent and timing of their needs.
The sponsors of the proposed Millennium project are Columbia Transmission,
Westcoast Energy, Inc., TransCanada Pipe Lines Ltd. and MCN Energy Group, Inc.
Lost and Unaccounted For Gas
On March 28, 2002, the FERC issued an order affirming its earlier holdings
rejecting challenges to Columbia Transmission's ability to recover certain lost
and unaccounted-for gas in its annual Retainage Adjustment Mechanism (RAM)
filing. In addition, FERC had previously directed Columbia Transmission to file
information requested by interveners in its last annual RAM proceeding. Columbia
Transmission provided the information in the annual filing made on March 1,
2002. On September 10, 2002, the FERC issued an order accepting the information
filed by Columbia Transmission.
Long-Term Notes Receivable
In 1999, Columbia Transmission sold certain gathering facilities to a third
party for approximately $22 million. The buyer executed a promissory note, which
provides for payment of the purchase price to Columbia Transmission over a
five-year period. In the second quarter of 2002, an appropriate reserve was
recorded against the receivable in light of the failure to receive timely
payments from the counterparty. During the third quarter, management was able to
negotiate a new payment schedule and secure a guarantee from the third party's
parent company as security for the loan. At September 30, 2002, the balance of
the note was approximately $11.0 million, including interest.
Environmental Matters
Columbia Transmission continues to conduct characterization and remediation
activities at specific sites under a 1995 Environmental Protection Agency (EPA)
Administrative Order by Consent (AOC). The program pursuant to the AOC covers
approximately 240 facilities, approximately 13,000 liquid removal points,
approximately 2,200 mercury measurement stations and about 3,700 storage well
locations. As of December 31, 2001, field characterization had been performed at
all sites. Site characterization reports and remediation plans, which must be
submitted to the EPA for approval, are in various stages of development and
completion. Remediation has been completed at the mercury measurement stations,
liquid removal point sites and storage well locations and at a number of the 240
facilities.
As of September 30, 2002, Columbia Transmission completed enough of the
characterization reports and remediation plans to adjust its original estimate
for the entire program. As a result, the liability was reduced by $15.5 million.
The estimate may be adjusted as additional work is completed.
At September 30, 2002, the remaining environmental liability recorded on the
balance sheet for Gas Transmission and Storage operations was $66.1 million.
Management does not believe that Columbia Transmission's environmental
expenditures will have a material adverse effect on NiSource's operations or
financial position.
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.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)
Throughput for the Transmission and Storage segment totaled 218.9 MDth for the
third quarter of 2002, a slight decrease of 0.9 MDth from the comparable period
in 2001. Throughput for the nine months ended September 30, 2002 was 924.1 MDth,
an increase of 30.4 MDth over the same period in 2001. The increase was
primarily due to increased market demand, partially offset by warmer than normal
weather during the first three months of 2002.
Net Revenues
Net revenues were $190.1 million for the third quarter of 2002, a decrease of
$1.2 million from the comparable 2001 period, primarily due to decreased demand
in offshore volumes and lower transportation revenues. Net revenues were $634.7
million for the nine months ended September 30, 2002, a decrease of $13.1
million from the same period in 2001. The decrease was primarily due to a gain
of $11.4 million from the sale of base gas that occurred in 2001.
Operating Income
Third quarter 2002 operating income of $86.1 million increased $31.3 million
from the comparable 2001 period, reflecting the effects of discontinuing the
amortization of goodwill, lower corporate overhead and a reduction in estimated
environmental expenditures. For the first nine months of 2002, operating income
was $289.5 million, an increase of $45.8 million from the 2001 period, due to
the effects of discontinuing the amortization of goodwill, a reduction in
estimated environmental expenditures and lower corporate overhead. The favorable
impacts were partly offset by the impact of a gain on the sale base gas that
occurred in the 2001 period.
28
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) 2002 2001 2002 2001
=================================================================================================
NET REVENUES
Sales revenues $ 292.8 $ 281.7 $ 789.2 $ 775.7
Less: Cost of sales 86.0 73.4 219.7 203.4
- -------------------------------------------------------------------------------------------------
Net Revenues 206.8 208.3 569.5 572.3
- -------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 53.6 53.3 163.7 159.4
Depreciation and amortization 42.7 41.4 127.3 124.7
Other taxes 10.7 15.1 38.6 42.2
- -------------------------------------------------------------------------------------------------
Total Operating Expenses 107.0 109.8 329.6 326.3
- -------------------------------------------------------------------------------------------------
Operating Income $ 99.8 $98.5 $ 239.9 $246.0
=================================================================================================
REVENUES ($ IN MILLIONS)
Residential 106.7 94.3 245.5 228.5
Commercial 87.7 80.3 233.0 221.6
Industrial 105.2 101.5 296.7 310.5
Other (6.8) 5.6 14.0 15.1
- -------------------------------------------------------------------------------------------------
Total 292.8 281.7 789.2 775.7
- -------------------------------------------------------------------------------------------------
SALES (GIGAWATT HOURS)
Residential 1,096.3 956.9 2,497.9 2,295.3
Commercial 1,040.2 946.6 2,763.1 2,612.0
Industrial 2,244.7 2,244.2 6,467.4 6,876.3
Other 36.5 31.8 107.7 103.6
- -------------------------------------------------------------------------------------------------
Total 4,417.7 4,179.5 11,836.1 11,887.2
- -------------------------------------------------------------------------------------------------
COOLING DEGREE DAYS 752 561 1,015 801
NORMAL COOLING DEGREE DAYS 573 573 792 792
% WARMER (COLDER) THAN NORMAL 31% (2%) 28% 1%
ELECTRIC CUSTOMERS
Residential 382,757 379,904
Commercial 48,014 47,092
Industrial 2,604 2,659
Other 801 803
- -------------------------------------------------------------------------------------------------
Total 434,176 430,458
- -------------------------------------------------------------------------------------------------
NiSource generates and distributes electricity, through its subsidiary Northern
Indiana, to approximately 434,000 customers in 21 counties in the northern part
of Indiana. The operating results reflect the temperature-sensitive nature of
customer demand with annual sales affected by temperatures in the northern part
of Indiana. As a result, segment operating income is generally higher in the
second and third quarters, reflecting cooling demand during the summer season.
Market Conditions
The regulatory frameworks applicable to Electric Operations continue to be
affected by fundamental changes. These changes will continue to have an impact
on 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 shutting down less
efficient generating units, converting some of its generating units to allow use
of lower cost, low sulfur coal and improving the transmission interconnections
with neighboring electric utilities.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)
Industrial sales, declining during the first two quarters of 2002, rebounded
somewhat in the third quarter, as production levels increased in the local steel
industry. Overall sales to the steel industry increased 1.3 gwh in the third
quarter of 2002 and decreased 350.9 gwh in the first nine months of 2002,
compared to the same periods last year.
Regulatory Matters
On June 20, 2002, a settlement agreement was filed with IURC regarding the
Northern Indiana electric rate review. On September 23, 2002, the IURC issued an
order adopting, in most respects, the settlement. The order provides that
electric customers of Northern Indiana will receive an amount intended to
approximate $55.0 million each year in credits to their electric bills for 49
months, beginning on July 1, 2002. The order also provides that 60% of any
future earnings beyond a specified cap will be retained by Northern Indiana.
Pursuant to the settlement, Northern Indiana accrued $14.4 million in credits
owed to electric customers during the quarter and nine-month periods ended
September 30, 2002 and, as authorized, began to amortize one-half of its
expenses for this proceeding over a 49-month period. The remaining expenses were
charged to income in the third quarter of 2002.
On October 23, 2002, the IURC denied a petition for reconsideration of the order
filed on October 15, 2002 by fourteen residential customers. Therefore, Northern
Indiana electric customers will begin to receive credits starting with their
November monthly bill. The order adopting the settlement is currently being
appealed by both the Citizen Action Coalition of Indiana and the fourteen
residential customers to the Indiana Court of Appeals.
In 1999, the FERC issued Order 2000 addressing the formation and operation of
Regional Transmission Organizations (RTOs). On February 28, 2001, Northern
Indiana joined the Alliance RTO. On December 18, 2001, the IURC issued an order
denying Northern Indiana's request to transfer functional control of its
transmission facilities to the Alliance RTO. On December 20, 2001, the FERC
reversed prior orders that had preliminarily approved the Alliance RTO and
concluded that the Alliance RTO failed to meet Order 2000's scope and
configuration requirements. FERC ordered the Alliance RTO companies, including
Northern Indiana, to pursue membership in the Midwest Independent System
Operator (MISO). On June 20, 2002, Northern Indiana, Ameren Corporation and
First Energy Corporation established terms for joining the MISO through
participation in an independent transmission company. The MISO arrangements were
filed with the FERC, and on July 31, 2002, the FERC issued an order
conditionally approving these arrangements. On November 5, 2002, the independent
transmission company, which includes Northern Indiana, signed an agreement with
MISO. Northern Indiana has expended approximately $7.9 million related to
joining the Alliance RTO. NiSource believes that the amounts spent will be
recoverable.
Northern Indiana has been recovering the costs of electric power purchased for
sale to its customers through the Fuel Adjustment Clause. The Fuel Adjustment
Clause provides for costs to be collected if they are below a cap set based upon
the costs of Northern Indiana's most expensive generating unit. If costs exceed
this cap, Northern Indiana must demonstrate why it should be allowed recovery
before recovery is approved. In January 2002, Northern Indiana filed for
approval to implement a purchase power tracker (PPT). The PPT would allow
recovery of all costs related to purchasing electricity for use by Northern
Indiana's customers on a periodic basis. No actions have been taken by the IURC
on this filing.
In January 2002, Northern Indiana filed for approval to implement an
environmental cost tracker (ECT). On June 20, Northern Indiana and the Office of
Utility Consumer Counselor filed an ECT Stipulation and Settlement Agreement
(ECT Settlement Agreement), which resolved all issues in the proceeding. Under
the ECT Settlement Agreement, Northern Indiana will be able to recover (1)
allowance for funds used during construction and a return on the capital
investment expended by Northern Indiana to implement Indiana Department of
Environmental Management's nitrogen oxide State Implementation Plan and (2)
related operation and maintenance and depreciation expenses once the
environmental facilities become operational. Hearings on the ECT Settlement
Agreement were held on August 13, 2002. Briefings have been completed and a
decision by the IURC will be issued in the future.
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)
Environmental Matters
The EPA issued final rules revising the National Ambient Air Quality Standards
for ozone and particulate matter in July 1997. These rules were challenged by
industry and others. On March 26, 2002, the D.C. Circuit Court largely upheld
the ambient air standards as proposed. Consequently, final rules specifying a
compliance level and controls necessary for compliance will now be developed by
EPA which will likely change air emissions compliance requirements. Resulting
rules could require additional reductions in sulfur dioxide, particulate matter
and nitrogen oxide emissions from coal-fired boilers (including Northern
Indiana's electric generating stations). Final implementation methods will be
set by the EPA as well as state regulatory authorities. NiSource believes that
the costs relating to compliance with any new limits may be substantial but are
dependent upon the ultimate control program agreed to by the targeted states and
the EPA and are currently not reasonably estimable. NiSource will continue to
closely monitor developments in this area, however, the exact nature of the
impact of the new standards on its operations will not be known for some time.
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 responded to information requests from the EPA
on this subject over the last two years, most recently in June 2002. At this
time, NiSource is unable to predict the result of EPA's review of Northern
Indiana's information responses.
Sales
Electric sales for the third quarter of 2002 were 4,417.7 gwh, an increase of
238.2 gwh compared to the 2001 period, reflecting increased sales to residential
and commercial customers primarily due to warmer weather. Electric sales for the
first nine months of 2002 were 11,836.1 gwh, a decrease of 51.1 gwh, compared to
the 2001 period, reflecting a decrease in industrial demand due to the economic
downturn and other issues negatively impacting the steel industry. The decline
was partially offset by increased sales to higher-margin residential and
commercial customers due to warmer weather during the second and third quarters
of 2002, as compared to the same periods last year.
Net Revenues
In the third quarter of 2002, electric net revenues of $206.8 million
decreased by $1.5 million from the comparable 2001 period. The decrease was
primarily a result of $14.4 million in credits to be issued pertaining to the
IURC electric rate investigation (reflected in the "Other" class of revenues).
This decrease was mostly offset by increased sales to residential and
commercial customers due to the favorable impact of warmer weather during the
third quarter. In the first nine months of 2002, electric net revenues of
$569.5 million decreased $2.8 million from the same period in 2001. The decline
resulted from the $14.4 million in credits mentioned above and decreased
industrial sales. The decreases were mostly offset by increased sales to
residential and commercial customers due to warmer weather during the second
and third quarters of 2002, as compared to the same periods last year.
Operating Income
Operating income for the third quarter of 2002 was $99.8 million, an increase of
$1.3 million from the same period in 2001, primarily resulting from the
favorable effect of warmer weather and reductions in estimated amounts payable
for property taxes and expenses related to reorganization initiatives. The
increases were mostly offset by lower revenues due to credits to be issued
pertaining to the IURC electric rate review investigation and related expenses.
Operating income for the first nine months of 2002 was $239.9 million, a
decrease of $6.1 million from the same period in 2001. The decrease resulted
from lower revenues due to the credits mentioned above and related expenses and
increased amounts for uncollectible customer receivables, partially offset by
the favorable impact of warmer weather during the second and third quarters of
2002, as compared to the same periods last year, reduced expenses related to
reorganization initiatives and reductions in estimated amounts payable for
property taxes.
31
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) 2002 2001 2002 2001
===============================================================================================
OPERATING REVENUES
Gas revenues $34.8 $ 55.9 $ 143.4 $149.7
Gathering revenues 2.8 2.7 7.7 7.7
Other revenues 2.6 1.5 10.3 3.4
- -----------------------------------------------------------------------------------------------
Total Operating Revenues 40.2 60.1 161.4 160.8
- -----------------------------------------------------------------------------------------------
Operating Expenses
Operation and maintenance 19.1 22.7 60.9 63.4
Depreciation and depletion 15.2 13.9 48.6 44.7
Gain on sale or impairment of assets 0.3 - 0.3 -
Other taxes 3.9 3.6 11.3 13.5
- -----------------------------------------------------------------------------------------------
Total Operating Expenses 38.5 40.2 121.1 121.6
- -----------------------------------------------------------------------------------------------
Operating Income $ 1.7 $ 19.9 $ 40.3 $ 39.2
===============================================================================================
GAS PRODUCTION STATISTICS
AVERAGE SALES PRICE ($ PER MCF)
U.S. 2.80 4.26 3.58 3.86
Canada - - 2.52 4.63
PRODUCTION (BCF)
U.S. 13.1 12.5 40.8 38.6
Canada - - - 0.1
- -----------------------------------------------------------------------------------------------
Total 13.1 12.5 40.8 38.7
- -----------------------------------------------------------------------------------------------
OIL AND LIQUIDS PRODUCTION STATISTICS
AVERAGE SALES PRICE ($ PER BBL)
U.S. 21.00 21.36 18.05 23.43
Canada - 19.11 22.12 27.66
PRODUCTION (000 BBLS)
U.S. 49.6 55.5 149.6 155.0
Canada - 1.2 4.3 5.4
- -----------------------------------------------------------------------------------------------
Total 49.6 56.7 153.9 160.4
- -----------------------------------------------------------------------------------------------
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.
Columbia Resources produced 13.4 billion cubic feet (Bcf) equivalents of natural
gas and oil in the third quarter 2002, 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, 2002.
Sale of Exploration and Production Business
On October 11, 2002, NiSource announced its intention to sell Columbia Energy
Resources, Inc., and its affiliates, including Columbia Natural Resources, Inc.,
its natural gas exploration and production business. The decision to sell the
exploration and production business is part of NiSource's business strategy of
focusing on its core, regulated assets and strengthening its balance sheet by
reducing debt. NiSource intends to enter into a definitive sale agreement for
the exploration and production business by the end of 2002. The results of
operations related to the exploration and production business will be displayed
as discontinued operations in the fourth quarter 2002 and prior period financial
statements will be adjusted to conform to the discontinued operations
presentation.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
EXPLORATION AND PRODUCTION OPERATIONS (CONTINUED)
Columbia Resources has entered into an agreement to sell a portion of its
Canadian oil and gas properties. This transaction is expected to occur in the
fourth quarter of 2002. The agreement calls for the sale of the majority of the
Ontario assets for approximately $2.0 million. Because the fair value is lower
than the book value of the assets, Columbia Resources has written down the value
of the held-for-sale assets by $0.3 million in the second quarter of 2002. An
additional charge of $0.5 million was recorded in the second quarter of 2002 as
a result of a determination that the remaining Ontario assets were impaired.
Forward Sale of Natural Gas
Columbia Natural Resources has forward gas sales agreements with Mahonia II
Limited (Mahonia). During the third quarter of 2002 Columbia Resources delivered
9.1 Bcf to Mahonia. Under the agreements, Columbia Natural Resources has made
the required physical deliveries in the past and has a remaining obligation to
deliver 125.1 Bcf of natural gas to Mahonia through February 2006. Cash received
in advance from sales of production to be delivered in the future was recorded
as deferred revenue and is recognized as income upon delivery of the natural
gas.
Deliveries for 2002 and beyond will be based on the following volumes and sales
prices:
2002 2003 2004 After Total
=====================================================================================
Volumes to be delivered (Bcf) 27.1 44.0 41.5 30.6 143.2
Average sales price (per Mcf) $2.76 $2.56 $2.56 $2.26 $ 2.53
- -------------------------------------------------------------------------------------
Volumes
Columbia Resources gas production totaled 13.1 Bcf and 40.8 Bcf, up 0.6 Bcf and
2.1 Bcf, in the third quarter and first nine months of 2002, respectively,
compared to the comparable 2001 periods. The increased levels of production are
attributable to the results of the drilling program and facility enhancement
projects.
Net Revenues
Net revenues were $40.2 million for the third quarter of 2002, a decrease of
$19.9 million from the comparable 2001 period mainly resulting from the effects
of lower pricing related to increased deliveries of natural gas production under
forward sales agreements partially offset by slightly higher production. Net
revenues were $161.4 million for the first nine months of 2002, an increase of
$0.6 million compared to the same period in 2001. This increase was a result of
increased production offset by lower prices mainly arising from increased
deliveries of natural gas production under forward sales agreements.
Operating Income
Operating income for the third quarter of 2002 was $1.7 million, an $18.2
million decrease over the same period in 2001, resulting from lower net revenues
as discussed above. Operating income for the nine months ended September 30,
2002 was $40.3 million, an increase of $1.1 million from the comparable period
in 2001, due to increased production and a reduction in estimated expenses from
organizational initiatives, mostly offset by effects of lower pricing related to
increased deliveries of natural gas production under forward sales agreements.
33
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) 2002 2001 2002 2001
==================================================================================================
NET REVENUES
Gas revenues $ 73.0 $ 370.6 $ 541.7 $ 1,943.7
Electric revenues 205.5 363.8 692.7 739.0
Other revenues 16.5 17.5 49.6 50.7
- --------------------------------------------------------------------------------------------------
Total Revenues 295.0 751.9 1,284.0 2,733.4
Less: Cost of products purchased 263.9 717.3 1,208.9 2,645.9
- --------------------------------------------------------------------------------------------------
Net Revenues 31.1 34.6 75.1 87.5
- --------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 5.2 16.0 57.9 46.7
Depreciation and amortization 9.1 0.6 10.5 1.7
(Gain) on sale or impairment of assets (3.1) - (3.1) -
Other taxes 3.3 3.4 6.3 5.1
- --------------------------------------------------------------------------------------------------
Total Operating Expenses 14.5 20.0 71.6 53.5
- --------------------------------------------------------------------------------------------------
Operating Income $ 16.6 $ 14.6 $ 3.5 $34.0
==================================================================================================
VOLUMES
Gas sales (MDth) 15.3 115.4 191.4 366.6
Electric sales (Gigawatt Hours) 4,748.9 6,589.2 23,364.0 14,300.3
- --------------------------------------------------------------------------------------------------
NiSource provides non-regulated energy services through its wholly owned
subsidiaries EnergyUSA, Inc., Primary Energy and Northern Indiana. EnergyUSA,
Inc., through its subsidiary TPC, provides natural gas sales (including gas
supply) to industrial and commercial customers, and engages in power trading
activities. Primary Energy develops, builds, operates and manages on-site,
industrial-based energy projects for large complexes having multiple energy
flows, such as electricity, steam, by-product fuels or heated water. Northern
Indiana currently provides FERC-regulated electric wheeling and bulk power
sales.
On July 1, 2002, NiSource sold its net obligations under its gas forward
transaction portfolio, physical storage inventory and associated agreements to a
third-party. According to the terms of the agreement, NiSource paid $6.8 million
to settle the net obligations. As a result of the sale, a $3.1 million pre-tax
gain was recorded during the third quarter of 2002. The primary remaining
operations associated with TPC include commercial and industrial gas sales
(including arranging supply), power marketing and gas supply associated with
NiSource's single merchant cogeneration facility, marketing a portion of the gas
produced from NiSource's exploration and production operations and power
trading.
Primary Energy
Primary Energy is currently involved in six projects, which produce electricity,
steam or thermal energy on the sites of industrial customers. Four projects
generate energy from process streams or fuel provided by the industrial
customers. The energy is then delivered to the industrial customers under
long-term contracts providing for tolling fees, sublease payments, unit sale
payments or processing fees. One project, Whiting Clean Energy, uses natural gas
to produce electricity for sale in the wholesale markets and is expected to
provide steam for industrial use. In addition, a subsidiary of Primary Energy is
a 50% partner in a partnership that operates a coal pulverization facility.
While one project (Ironside) is now owned by NiSource, generally the facilities
are owned by unaffiliated special purpose entities.
Primary Energy's Whiting Clean Energy project at BP's Whiting, Indiana refinery
has incurred delays primarily associated with remediating damage that occurred
during commissioning in September 2001. The delays have also resulted in an
increase in estimated project costs and the need for approximately $20.0 million
of additional funding, which closed on July 25, 2002. In addition, the facility
is not able at this time to deliver steam to BP to the extent originally
contemplated without plant modifications. Whiting Clean Energy is seeking
recovery of damages for the
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
MERCHANT OPERATIONS (CONTINUED)
delays and necessary plant modifications. The engineering, procurement and
construction contractor has asserted that it fully performed under its contract
and is demanding payment of the full contract price plus additional amounts for
remediation. Whiting Clean Energy and the contractor are engaged in a dispute
resolution process, as prescribed under their contract, relating to these
claims.
The project has begun producing electricity and since March 31, 2002 has been
under lease to Whiting Clean Energy. Primary Energy estimates that the facility
will operate at a loss in the near term based on the current market view of
forward pricing for gas and electricity. For 2002, the after-tax loss is
projected to be approximately $20.0 million. The profitability of the project in
future periods will be dependent on, among other things, prevailing prices in
the energy markets and regional load dispatch patterns. The total estimated cost
of the Whiting project, not including the plant modifications, is approximately
$320.0 million.
Primary Energy's Ironside project at LTV Steel Company's (LTV) East Chicago,
Indiana mill was negatively impacted during 2002 by LTV's decision in December
2001 to idle the mill and file for bankruptcy. On April 12, 2002, LTV completed
the sale of the mill to International Steel Group (ISG), and ISG re-started
operations during the second and third quarters. On September 27, 2002
Ironside and ISG entered into letter of intent for a 15-year agreement for
Ironside to lease the facility to ISG. On September 10, 2002, NiSource purchased
the Ironside assets for $65.9 million from the special purpose entity that
financed the project.
The lease at Primary Energy's North Lake project is due to expire in December
2002. Primary Energy intends to purchase the project at the end of the lease
period, at an amount expected to be approximately $38.0 million.
On March 6, 2002, National Steel Corp. (National) filed for bankruptcy
protection. National receives electricity, steam and hot water from Primary
Energy's Portside project. Currently, National is evaluating its options for its
agreements related to the Portside project. National has paid post-petition fees
due to date. Pre-petition tolling and other fees not paid total $0.7 million.
The unamortized funding for the Portside project is $62.6 million.
Certain environmental issues related to Primary Energy's Cokenergy project are
discussed in "Environmental Matters" below.
ACCOUNTING ISSUES. Most of the Primary Energy projects were initially structured
as synthetic leases where the lessors are special purpose entities and Primary
Energy subsidiaries act as the lessees. Previously, the assets and related debt
associated with these projects were not included in NiSource's consolidated
financial statements, which treatment was approved by NiSource's former
independent public accountants. However, during the review of the second quarter
2002, NiSource determined in consultation with Deloitte & Touche, its
independent public accountants, that certain language contained in the operative
agreements for four of the projects did not support characterization of those
transactions as off-balance-sheet operating leases under EITF Issue No. 97-1,
"Implementation Issues in Accounting for Lease Transactions, Including Those
Involving Special Purpose Entities," and EITF No. 97-10 "The Effect of Lessee
Involvement in Asset Construction." Certain provisions in the operative
documents for two transactions (Whiting Clean Energy and Ironside), which were
subject to EITF No. 97-10, could be interpreted to transfer substantial
construction period risks to the lessee, resulting in Primary Energy being
deemed the owner of the projects. Certain provisions in the other two leases
(Cokenergy and Portside) could be interpreted to require the inclusion of
certain default-related obligations in minimum lease payments, resulting in the
characterization of those leases as capital leases.
As a result of this determination, NiSource changed the characterization of the
leases associated with the four projects from synthetic leases to two owned
assets and two capital leases for financial reporting purposes. Subsequently,
during the third quarter 2002, NiSource purchased the assets related to the
Ironside project. Due to the change in the lease characterization and purchase
of the Ironside project assets, Primary Energy has recognized approximately
$565.0 million of assets and a corresponding amount of related debt on its
balance sheet at September
35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
MERCHANT OPERATIONS (CONTINUED)
30, 2002. The impact on the results of operations for prior periods due to the
revised characterization was immaterial. The recognition of the debt did not
alter NiSource's compliance with its debt covenants and is consistent with the
treatment of such leases by the rating agencies in the analysis of NiSource's
credit ratings.
For two of the projects not affected by EITF No. 97-1 and EITF No. 97-10,
NiSource does not include the assets or related debt associated with the
facilities in its consolidated financial statements. The aggregate unamortized
funding for the two projects at September 30, 2002 was $81.5 million.
The Financial Accounting Standards Board (FASB) has issued an exposure draft of
a Proposed Interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements" that addresses issues related to identifying and
accounting for special purpose entities. The exposure draft requires that the
primary beneficiary of a special purpose entity consolidate the entity unless:
(1) the entity has sufficient independent economic substance, (2) a third party
has the substantive risks of ownership of the entity and its investment is
subordinate to all other interests, and (3) the nominal owners have voting or
other rights to make decisions and manage the special purpose entity to the
extent that the business activities are not predetermined. The Proposed
Interpretation would be effective for reporting periods beginning after March
15, 2003 for special purpose entities in existence on the issuance date of the
final Interpretation. If the FASB issues the Interpretation as proposed, the two
special purpose entities associated with the Primary Energy projects that are
not currently included in NiSource's financial statements, in their present
form, would be consolidated by NiSource beginning in the second quarter 2003.
Environmental Matters
On June 26, 2002, EPA issued a Notice of Violation (NOV) to three companies
including Primary Energy's subsidiary, Cokenergy. The NOV alleges violations of
the construction permit requirements of the Clean Air Act in association with a
project at Ispat Inland Inc.'s East Chicago, Indiana facility. At issue is
whether air emissions permitting requirements for major sources applied to the
construction of the project in 1997. Cokenergy representatives met with EPA in
mid-September 2002 to discuss the details of the allegations. Cokenergy
maintains its belief that the project was properly permitted by the State of
Indiana and pending further discussion with EPA, cannot predict whether any
fines or penalties will be assessed or if additional compliance costs will be
incurred.
Net Revenues
Net revenues of $31.1 million for the third quarter of 2002 decreased $3.5
million from the comparable 2001 period. The decrease in net revenues primarily
resulted from NiSource's efforts to scale back its gas trading business. Net
revenues of $75.1 million for the first nine months of 2002 decreased by $12.4
million from the same period in 2001. The decrease in net revenues primarily
resulted from NiSource's efforts to scale back its gas trading business, the
change in value of the company's gas and power marketing portfolios and
decreased electric wheeling revenues due to the expiration of certain contracts.
Operating Income
Merchant Operations reported operating income of $16.6 million for the third
quarter of 2002, an increase of $2.0 million from the same period last year. The
increase was primarily due to a gain of $3.1 million from the July 1, 2002 sale
of a significant portion of TPC gas marketing contracts. Operating income for
the first nine months of 2002 was $3.5 million, a decrease of $30.5 million over
the same period in 2001. This decrease was primarily attributable to
depreciation and operating expenses associated with two recently completed
cogeneration projects, balance sheet reconciliation adjustments,
employee-related expenses associated with the scaling back of the gas trading
business, decreased electric wheeling revenues due to the expiration of certain
contracts and the change in value of the company's gas and power marketing
portfolios. These amounts were partly offset by a $3.1 million gain on the sale
of a substantial portion of TPC gas marketing contracts.
36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
OTHER
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
(in millions) 2002 2001 2002 2001
===================================================================================================
NET REVENUES
Products and services revenue $10.7 $38.9 $42.3 $117.3
Less: Cost of products purchased 8.8 24.1 32.1 82.5
- ---------------------------------------------------------------------------------------------------
Net Revenues 1.9 14.8 10.2 34.8
- ---------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 0.7 16.1 9.3 64.6
Depreciation and amortization 1.2 1.9 4.0 6.0
Loss (gain) on sale or impairment of assets - - (3.5) 9.2
Other taxes 0.9 1.1 2.5 4.4
- ---------------------------------------------------------------------------------------------------
Total Operating Expenses 2.8 19.1 12.3 84.2
- ---------------------------------------------------------------------------------------------------
Operating Loss $ (0.9) $(4.3) $(2.1) $(49.4)
- ---------------------------------------------------------------------------------------------------
NiSource, through its subsidiary Columbia Transmission Communications
Corporation (Transcom), has built a dark-fiber optics telecommunications network
primarily along its pipeline rights-of-way between New York and Washington D.C.
NiSource has also invested in a number of ventures focused on distributed
generation technologies including fuel cells and micro turbines.
Telecommunications Network
In August 2001, Transcom invited potential buyers to submit bids for its assets.
For the year ending December 31, 2002, the network is projected to incur a
pre-tax operating loss of approximately $10.7 million. Due to the current
oversupply of dark fiber in Transcom's market area, management projects that the
company will continue to operate at a loss. The company's future profitability
will be dependent on, among other factors, a recovery in the telecommunications
market. NiSource is currently reviewing the carrying value of its investment in
Transcom and whether an impairment charge will be required. Management continues
to pursue and evaluate strategic alternatives, including a sale.
Sale of Assets
On January 28, 2002, NiSource sold SM&P, its line locating and marking business,
and recognized an after-tax gain of $12.5 million. The gain on the sale was
reflected in Corporate.
Net Revenues
Net revenues of $1.9 million for the third quarter of 2002 decreased by $12.9
million from the third quarter of 2001. Net revenues of $10.2 million for the
first nine months of 2002 declined $24.6 million compared to the same period in
2001. In both periods, the decreases were mainly attributable to the sale of
SM&P.
Operating Income
Other reported an operating loss of $0.9 million in the third quarter of 2002
versus an operating loss of $4.3 million in the third quarter of 2001,
reflecting a reduction in estimated sales taxes related to sales of natural gas
to customers of a subsidiary previously engaged in the retail and wholesale gas
marketing business, partly offset by an increase in operating expenses for
certain non-core subsidiaries. For the first nine months of 2002, Other reported
an operating loss of $2.1 million, versus an operating loss of $49.4 million
during the comparable period in 2001, reflecting the $15.5 million litigation
settlement related to Market Hub Partners, L.P. affecting the 2001 period, a
reduction in estimated sales taxes related to sales of natural gas to retail and
wholesale customers of a subsidiary previously engaged in the gas marketing
business, and reduced losses related to the company's telecommunications network
and other non-core subsidiaries.
37
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NISOURCE INC.
For a discussion regarding quantitative and qualitative disclosures about market
risk see Management's Discussion and Analysis of Financial Condition and Results
of Operations under "Market Risk Sensitive Instruments and Positions."
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
NiSource's chief executive officer and its chief financial officer, after
evaluating the effectiveness of NiSource's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) on November 7, 2002,
have concluded that, as of such date, NiSource's disclosure controls and
procedures were adequate and effective to ensure that material information
relating to NiSource and its consolidated subsidiaries would be made known to
them by others within those entities.
Changes in Internal Controls
There were no significant changes in NiSource's internal controls or in other
factors that could significantly affect NiSource's disclosure controls and
procedures subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in NiSource's internal controls.
As a result, no corrective actions were required or undertaken.
38
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.
Plaintiff originally filed a complaint under the False Claims Act, on
behalf of the United States of America, against approximately seventy
pipelines. 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, 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.
Pretrial proceedings continue.
2. PRICE 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 thirteen affiliated
entities. The allegations in Price (formerly known as Quinque) are similar
to those made in Grynberg; however, Price broadens the claims to cover all
oil and gas leases (other than the Federal and Indian leases that are the
subject of Grynberg). Price 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. Price 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 removed 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. On September 12, 2001 the four remaining Columbia
defendants along with other defendants filed a joint motion to dismiss the
amended complaint. That motion is currently pending before the court.
3. VIVIAN K. KERSHAW ET AL. V. COLUMBIA NATURAL RESOURCES, INC., ET AL.
In February 2000, plaintiff filed a complaint in New York state court
against Columbia, Columbia Natural Resources, Inc. (Columbia Natural
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 the lease 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 Natural Resources. Plaintiff seeks the
alleged royalty underpayments and punitive damages. Columbia Natural
Resources and Columbia Transmission removed the case to Federal court in
March 2000. The Federal court has 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. On December 3, 2001, the defendants filed an answer to the
plaintiffs' complaint. Discovery regarding class certification is ongoing.
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. National Propane Corporation was
39
ITEM 1. LEGAL PROCEEDINGS (continued)
NISOURCE INC.
acquired by Columbia in 1999, and this litigation was retained by Columbia
when Columbia sold its propane operations in 2001. 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 expert discovery is to be
completed by October 25, 2002. The case has a scheduled trial date of
March 31, 2003.
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. On September 18, 2002, the parties executed a settlement
agreement with respect to this matter and the related case described
below, allowing Columbia Transmission to continue operating Victory at
full capacity during long wall mining. Technical teams from the parties
continue to finalize exhibits to the settlement agreement. Once these
exhibits are final, the parties will move to dismiss the litigation.
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. On September
18, 2002, the parties executed a settlement agreement with respect to this
matter and the related case described above, allowing Columbia
Transmission to continue operating Victory at full capacity during long
wall mining. Technical teams from the parties continue to finalize
exhibits to the settlement agreement. Once these exhibits are final, the
parties will move to dismiss the litigation.
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
40
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NISOURCE INC.
(a) Exhibits
(99.1) Certification of Gary L. Neale, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
(99.2) Certification of Michael W. O'Donnell, Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith).
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, NiSource hereby agrees
to furnish the U.S. Securities and Exchange Commission, 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
2002:
Financial
Item Reported Statements Included Date of Event Date Filed
==============================================================================
7, 9 N 8/14/2002 8/14/2002
9 N 9/11/2002 9/11/2002
- ------------------------------------------------------------------------------
41
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 14, 2002 By: /s/ Jeffrey W. Grossman
----------------------------------
Jeffrey W. Grossman
Vice President and Controller
(Principal Accounting Officer
and Duly Authorized Officer)
42
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARVANES-OXLEY ACT OF 2002
I, Gary L. Neale, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NiSource Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Gary L. Neale
-----------------------------
Gary L. Neale
Chief Executive Officer
43
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARVANES-OXLEY ACT OF 2002
I, Michael W. O'Donnell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NiSource Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Michael W. O'Donnell
-----------------------------
Michael W. O'Donnell
Chief Financial Officer
44