STATES UNITED
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended MARCH 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ______ to ______
Commission file number 001-16189
NiSOURCE INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 35-2108964
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 East 86th Avenue
Merrillville, Indiana 46410
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (877) 647-5990
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] or No [ ]
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:
262,565,590 shares outstanding at March 31, 2003.
NISOURCE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements.................................................................... 3
Statements of Consolidated Income....................................................... 3
Consolidated Balance Sheets............................................................. 4
Statements of Consolidated Cash Flows................................................... 6
Statements of Consolidated Comprehensive Income......................................... 7
Notes to Consolidated Financial Statements.............................................. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 33
Item 4. Controls and Procedures................................................................. 33
PART II OTHER INFORMATION
Item 1 Legal Proceedings....................................................................... 35
Item 2. Changes in Securities and Use of Proceeds............................................... 36
Item 3. Defaults Upon Senior Securities......................................................... 36
Item 4. Submission of Matters to a Vote of Security Holders..................................... 36
Item 5. Other Information....................................................................... 36
Item 6. Exhibits and Reports on Form 8-K........................................................ 37
Signature........................................................................................ 38
Certifications................................................................................... 39
2
PART I
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ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
STATEMENTS OF CONSOLIDATED INCOME (unaudited)
Three Months Ended March 31, (in millions, except per share amounts) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
NET REVENUES
Gas Distribution $ 1,760.7 $ 1,078.9
Gas Transmission and Storage 341.9 323.8
Electric 264.3 234.4
Exploration and Production 35.6 51.5
Other 176.8 119.3
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Gross Revenues 2,579.3 1,807.9
Cost of Sales 1,493.3 769.2
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Total Net Revenues 1,086.0 1,038.7
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OPERATING EXPENSES
Operation and maintenance 345.5 304.4
Depreciation, depletion and amortization 146.3 144.4
(Gain) on sale of assets (67.7) (23.4)
Other taxes 111.5 92.1
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Total Operating Expenses 535.6 517.5
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OPERATING INCOME 550.4 521.2
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OTHER INCOME (DEDUCTIONS)
Interest expense, net (126.0) (128.0)
Minority interests (2.6) (5.1)
Dividend requirements on preferred stock of subsidiaries (1.1) (1.9)
Other, net 2.4 2.5
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Total Other Income (Deductions) (127.3) (132.5)
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 423.1 388.7
INCOME TAXES 157.0 144.9
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INCOME FROM CONTINUING OPERATIONS 266.1 243.8
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(Loss) from Discontinued Operations - net of taxes (2.4) (1.6)
Change in Accounting - net of taxes (8.8) -
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 254.9 $ 242.2
===================================================================================================================
BASIC EARNINGS PER SHARE ($)
Continuing operations 1.05 1.19
Discontinued operations (0.01) (0.01)
Change in accounting (0.04) -
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BASIC EARNINGS PER SHARE 1.00 1.18
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DILUTED EARNINGS PER SHARE ($)
Continuing operations 1.04 1.17
Discontinued operations (0.01) (0.01)
Change in accounting (0.04) -
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DILUTED EARNINGS PER SHARE 0.99 1.16
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BASIC AVERAGE COMMON SHARES OUTSTANDING (MILLIONS) 253.8 205.5
DILUTED AVERAGE COMMON SHARES (MILLIONS) 256.2 208.2
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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
MARCH 31, December 31,
(in millions) 2003 2002
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(unaudited)
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility Plant $ 16,505.9 $ 16,435.0
Accumulated depreciation and amortization (8,099.6) (7,998.2)
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Net utility plant 8,406.3 8,436.8
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Gas and oil producing properties, successful efforts method
United States cost center 1,094.0 1,056.3
Canadian cost center 6.0 5.9
Accumulated depletion (147.4) (122.7)
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Net gas and oil producing properties 952.6 939.5
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Other property, at cost, less accumulated depreciation 690.4 691.7
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Net Property, Plant and Equipment 10,049.3 10,068.0
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INVESTMENTS AND OTHER ASSETS
Assets of discontinued operations 77.8 79.2
Unconsolidated affiliates 118.1 118.8
Assets held for sale 8.6 26.1
Other investments 67.5 51.9
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Total Investments 272.0 276.0
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CURRENT ASSETS
Cash and cash equivalents 69.5 54.3
Restricted cash 0.1 1.9
Accounts receivable (less reserve of $73.3 and $53.7, respectively) 1,091.7 580.1
Unbilled revenue (less reserve of $3.3 and $3.5, respectively) 229.5 305.2
Gas inventory 56.8 255.3
Underrecovered gas and fuel costs 168.4 149.9
Materials and supplies, at average cost 68.9 65.9
Electric production fuel, at average cost 39.8 39.0
Price risk management assets 108.9 66.6
Exchange gas receivable 195.3 120.8
Prepayments and other 228.9 229.5
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Total Current Assets 2,257.8 1,868.5
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OTHER ASSETS
Price risk management assets 134.4 116.9
Regulatory assets 595.8 608.8
Goodwill 3,707.6 3,707.6
Intangible assets 55.8 57.3
Deferred charges and other 179.7 193.8
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Total Other Assets 4,673.3 4,684.4
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TOTAL ASSETS $ 17,252.4 $ 16,896.9
===================================================================================================================
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
MARCH 31, December 31,
(in millions) 2003 2002
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(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 4,634.5 $ 4,174.9
Preferred Stocks--
Series without mandatory redemption provisions 81.1 81.1
Series with mandatory redemption provisions 3.8 3.8
Company-obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely Company debentures - 345.0
Long-term debt, excluding amounts due within one year 5,294.3 5,018.0
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Total Capitalization 10,013.7 9,622.8
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CURRENT LIABILITIES
Current portion of long-term debt 1,214.9 1,232.6
Short-term borrowings 161.3 913.1
Accounts payable 715.9 521.6
Dividends declared on common and preferred stocks 77.3 1.1
Customer deposits 72.7 65.2
Taxes accrued 406.5 242.1
Interest accrued 170.4 88.3
Overrecovered gas and fuel costs 9.4 13.1
Price risk management liabilities 82.2 44.9
Exchange gas payable 483.5 411.9
Current deferred revenue 129.9 130.2
Accrued liability for postretirement and pension benefits 53.6 47.4
Other accruals 515.4 465.9
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Total Current Liabilities 4,093.0 4,177.4
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OTHER LIABILITIES AND DEFERRED CREDITS
Price risk management liabilities 3.1 3.2
Deferred income taxes 1,883.1 1,861.7
Deferred investment tax credits 94.1 96.3
Deferred credits 130.6 145.0
Noncurrent deferred revenue 273.0 305.4
Accrued liability for postretirement and pension benefits 440.2 433.2
Liabilities held for sale 5.5 -
Liabilities of discontinued operations 3.0 2.1
Other noncurrent liabilities 313.1 249.8
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Total Other 3,145.7 3,096.7
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COMMITMENTS AND CONTINGENCIES - -
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TOTAL CAPITALIZATION AND LIABILITIES $17,252.4 $16,896.9
===================================================================================================================
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)
Three Months Ended March 31, (in millions) 2003 2002
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OPERATING ACTIVITIES
Net income $ 254.9 $ 242.2
Adjustments to reconcile net income to net cash from
continuing operations:
Depreciation, depletion, and amortization 146.3 144.4
Net changes in price risk management activities (6.5) 27.4
Deferred income taxes and investment tax credits 23.1 17.7
Deferred revenue (32.7) (3.3)
Amortization of unearned compensation 2.0 5.0
Gain on sale of assets (67.7) (23.4)
Change in accounting 8.8 -
Loss from discontinued operations 2.4 1.6
Other, asset items 33.4 (3.1)
Other, liability items (0.4) -
Changes in assets and liabilities, net of effect
from acquisitions of businesses:
Accounts receivable, net (442.8) 55.0
Inventories 194.8 288.1
Accounts payable 207.1 (194.0)
Taxes accrued 160.1 150.0
(Under) Overrecovered gas and fuel costs (22.3) 31.0
Exchange gas receivable/payable (2.9) (17.8)
Other accruals 60.2 (57.1)
Other assets (9.9) (8.0)
Other liabilities 89.6 144.4
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Net Cash Flows from Continuing Operations 597.5 800.1
Net Cash Flows from Discontinued Operations - -
- -----------------------------------------------------------------------------------
Net Cash Flows from Operating Activities 597.5 800.1
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INVESTING ACTIVITIES
Capital expenditures (104.7) (90.3)
Proceeds from disposition of assets 95.8 37.9
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Net Cash Flows from Investing Activities (8.9) (52.4)
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FINANCING ACTIVITIES
Issuance of long-term debt 345.3 -
Retirement of long-term debt (95.0) (8.0)
Change in short-term debt (751.9) (737.5)
Retirement of preferred shares (345.0) -
Issuance of common stock 345.2 -
Dividends paid - common shares (72.0) (60.2)
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Net Cash Flows from Financing Activities (573.4) (805.7)
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Increase (decrease) in cash and cash equivalents 15.2 (58.0)
Cash and cash equivalents at beginning of year 54.3 127.9
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 69.5 $ 69.9
===================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized 39.0 28.7
Interest capitalized 1.4 4.3
Cash paid for income taxes 16.4 -
- -----------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (unaudited)
Three Months Ended March 31, (in millions) 2003 2002
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Net Income $ 254.9 $ 242.2
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment 0.9 (0.2)
Net unrealized gains (losses) on cash flow hedges 8.3 (13.2)
Net gain (loss) on available for sale securities (1.9) 0.1
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Total other comprehensive income (loss), net of tax 7.3 (13.3)
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Total Comprehensive Income $ 262.2 $ 228.9
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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, 2002. Income
for interim periods may not be indicative of results for the calendar year due
to weather variations and other factors. Certain reclassifications have been
made to the 2002 financial statements to conform to the 2003 presentation.
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 Securities(SM) (SAILS(SM)), and through February 18,
2003, Corporate Premium Income Equity Securities (Corporate PIES). Effective
February 19, 2003, the forward equity contracts related to the Corporate PIES
were settled as prescribed in the agreements. As a result of the settlement,
13.1 million common shares were issued and are reflected in basic average common
shares.
The numerator in calculating both basic and diluted EPS for each year is
reported net income. The computation of diluted average common shares follows:
Three Months Ended March 31, (in thousands) 2003 2002
- ---------------------------------------------------------------------------------------------------
Denominator
Basic average common shares outstanding 253,847 205,536
Dilutive potential common shares
Nonqualified stock options 54 232
Shares contingently issuable under employee stock plans 1,313 1,739
SAILS(SM) 447 -
Shares restricted under employee stock plans 547 730
- ---------------------------------------------------------------------------------------------------
Diluted Average Common Shares 256,208 208,237
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3. STOCK OPTIONS AND AWARDS
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123), encourages, but does not require, entities to adopt the fair value method
of accounting for stock-based compensation plans. The fair value method would
require the amortization of the fair value of stock-based compensation at the
date of grant over the related vesting period. NiSource continues to apply the
intrinsic value method of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," for awards granted under its
stock-based compensation plans. The following table illustrates the effect on
net income and EPS as if NiSource had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation.
8
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three Months Ended March 31, ($ in millions, except per share data) 2003 2002
- ---------------------------------------------------------------------------------------------------
NET INCOME
As reported 254.9 242.2
Less: Total stock-based employee compensation expense
determined under the fair value method for all
awards, net of tax 2.2 0.9
- ---------------------------------------------------------------------------------------------------
Pro forma 252.7 241.3
EARNINGS PER SHARE
Basic - as reported 1.00 1.18
- pro forma 1.00 1.17
Diluted - as reported 0.99 1.16
- pro forma 0.99 1.16
- ---------------------------------------------------------------------------------------------------
4. REGULATORY MATTERS
During 2002, Northern Indiana Public Service Company (Northern Indiana) settled
matters related to an electric rate review. On September 23, 2002, the Indiana
Utility Regulatory Commission (IURC) issued an order adopting most aspects of
the settlement. The order approving the settlement provides that electric
customers of Northern Indiana will receive an amount intended to approximate
$55.1 million each year in credits to their electric bills for 49 months,
beginning on July 1, 2002. The order also provides that 60% of any future
earnings beyond a specified cap will be retained by Northern Indiana. Credits
amounting to $13.5 million were recognized for electric customers for the first
quarter 2003. The order adopting the settlement is currently being appealed to
the Indiana Court of Appeals by both the Citizen Action Coalition of Indiana and
fourteen residential customers. NiSource does not expect this matter to have a
significant impact on its results of operations.
Northern Indiana submitted its quarterly fuel adjustment clause filing for the
twelve-month period ended September 30, 2002, which included a calculation for
the sharing of earnings in excess of allowed earnings as outlined in the IURC
order regarding the electric rate review settlement. The IURC issued an order
related to the filing on January 29, 2003 rejecting Northern Indiana's sharing
calculation, which prorated the amount to be shared with the customers based on
the amount of time the rate credit was in effect during the twelve-month period.
Northern Indiana filed a request for a rehearing and reconsideration of the
order. On March 12, 2003, the IURC denied Northern Indiana's request. As a
result of the IURC decision, a reserve was recorded.
Northern Indiana has been recovering the costs of electric power purchased for
sale to its customers through the Fuel Adjustment Clause (FAC). The FAC provides
for costs to be collected if they are below a negotiated cap. If costs exceed
this cap, Northern Indiana must demonstrate that the costs were prudently
incurred to achieve approval for recovery. A group of industrial customers has
challenged the manner in which Northern Indiana has applied costs associated
with a specific interruptible sales tariff. While Northern Indiana continues to
pursue settlement of this proceeding, an estimated refund liability was
recognized in the first quarter 2003. In January 2002, Northern Indiana filed
for approval to implement a purchase power tracker (PPT). On March 21, 2003,
Northern Indiana amended its filing. The amendment, if approved, would allow
Northern Indiana to recover via the FAC, transmission costs paid to third
parties, and the costs associated with electric physical derivative transaction
costs, including option premiums to purchase power, and brokerage commissions.
No actions have been taken by the IURC on this filing.
On December 30, 2002, the Federal Energy Regulatory Commission (FERC) issued an
order that, among other things, reduced the rate base and rate of return allowed
to Northern Indiana under electric rates proposed in connection with the filing
of its 1995 Open Access Transmission Tariff, thus creating a refund liability
for Northern Indiana. Northern Indiana did not seek rehearing of the FERC's
December 30, 2002 order and submitted a compliance filing on March 17, 2003,
which proposed rates and services in compliance with the FERC's order. Based on
this filing, an estimated refund liability was recognized in the first quarter
2003.
9
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In January 2002, Northern Indiana filed for approval to implement an
environmental cost tracker (ECT). On June 20, 2002, 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. The IURC approved the settlement on
November 26, 2002 and Northern Indiana made its initial filing for the ECT in
February 2003. On April 30, 2003, the IURC issued an order approving the filing,
which allows for collection of environmental costs beginning with the May 2003
customer bills.
5. RESTRUCTURING ACTIVITIES
Since 2000, NiSource has implemented restructuring initiatives to streamline its
operations and realize efficiencies from the acquisition of Columbia Energy
Group (Columbia).
For all of the plans, a total of approximately 1,730 management, professional,
administrative and technical positions have been identified for elimination. As
of March 31, 2003, approximately 1,580 employees were terminated, of whom
approximately 180 employees were terminated during the first quarter 2003. At
March 31, 2003 and December 31, 2002, the consolidated balance sheets reflected
liabilities of $37.2 million and $49.6 million related to the restructuring
plans, respectively. During the first quarters of 2003 and 2002, $12.5 million
and $4.6 million of benefits were paid as a result of the restructuring plans,
respectively. Additionally, during the first quarter 2003, the restructuring
plan liability was increased by $0.1 million due to a change in estimated costs
related to reorganization initiatives.
6. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
During 2002, NiSource decided to exit the telecommunications business. The
results of operations related to Columbia Transmission Communications
Corporation (Transcom) were displayed as discontinued operations on NiSource's
consolidated income statement and its assets and liabilities were separately
aggregated and reflected as assets and liabilities of discontinued operations on
the consolidated balance sheets for all periods presented.
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 $540.0 million. The divestiture of
the water utilities was required as part of the U.S. Securities and Exchange
Commission order approving the November 2000 acquisition of Columbia. The water
utilities' operations were reported as discontinued operations through 2002.
Results from discontinued operations of Transcom and the water utilities are
provided in the following table:
Three Months Ended March 31, ($ in millions) 2003 2002
- ----------------------------------------------------------------------------------------------
REVENUES FROM DISCONTINUED OPERATIONS $ 0.1 $ 23.1
- ----------------------------------------------------------------------------------------------
(Loss) from discontinued operations (3.7) (2.4)
Income taxes (1.3) (0.8)
- ----------------------------------------------------------------------------------------------
NET (LOSS) FROM DISCONTINUED OPERATIONS $ (2.4) $ (1.6)
- ----------------------------------------------------------------------------------------------
On January 28, 2003, NiSource's subsidiary Columbia Natural Resources, Inc.
(CNR) sold its interest in a natural gas exploration and production joint
venture in New York State representing 39.3 billion cubic feet (Bcf) in reserves
and approximately 6.0 Bcf of production for approximately $95.0 million.
NiSource recognized an after-tax gain of $44.4 million related to the sale in
the first quarter 2003. The assets of CNR's interest in the joint venture were
reported as assets held for sale on the consolidated balance sheet at December
31, 2002.
10
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 2002, NiSource recognized an after-tax gain of $12.5 million
related to the sale.
The assets and liabilities of discontinued operations and assets and liabilities
held for sale were as follows:
MARCH 31, December 31,
(in millions) 2003 2002
- -----------------------------------------------------------------------------------------------------------------
ASSETS (LIABILITIES) HELD FOR SALE AND ASSETS OF
DISCONTINUED OPERATIONS
Accounts receivable, net $ 11.3 $ 33.7
Property, plant and equipment, net 7.2 36.9
Other assets 67.9 73.6
Current liabilities - (18.1)
Debt - (4.8)
Other liabilities - (16.0)
- --------------------------------------------------------------------------------------------------------------
Assets (Liabilities) Held for Sale and Assets of
Discontinued Operations 86.4 105.3
- --------------------------------------------------------------------------------------------------------------
LIABILITIES HELD FOR SALE AND LIABILITIES OF
DISCONTINUED OPERATIONS
Current liabilities (7.2) (2.1)
Other liabilities (1.3) -
- --------------------------------------------------------------------------------------------------------------
Liabilities Held for Sale and Liabilities of Discontinued Operations (8.5) (2.1)
- --------------------------------------------------------------------------------------------------------------
NET ASSETS AND NET LIABILITIES HELD FOR SALE AND NET ASSETS
AND NET LIABILITIES OF DISCONTINUED OPERATIONS $ 77.9 $ 103.2
- --------------------------------------------------------------------------------------------------------------
7. RISK MANAGEMENT ACTIVITIES
NiSource uses commodity-based derivative financial instruments to manage certain
risks in its business. NiSource accounts for its derivatives under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activity" (SFAS No. 133), and
through 2002, accounted for any energy trading contracts that did not qualify as
derivatives accounted for under SFAS No. 133 pursuant to Emerging Issues Task
Force EITF Issue No. 98-10, "Accounting for Energy Trading and Risk Management
Activities" (EITF No. 98-10).
HEDGING ACTIVITIES. The activity for the first quarter 2003 affecting
accumulated other comprehensive income, with respect to cash flow hedges
included the following:
(in millions, net of tax) 2003
- ------------------------------------------------------------------------------------------------------------------
Net unrealized gains on derivatives qualifying as cash flow hedges at the
beginning of the period $ 67.8
Unrealized hedging gains arising during the period on derivatives qualifying
as cash flow hedges 9.6
Reclassification adjustment for net (gain) included in net income (1.3)
- ------------------------------------------------------------------------------------------------------------------
Net unrealized gains on derivatives qualifying as cash flow hedges at the end of the period $ 76.1
- ------------------------------------------------------------------------------------------------------------------
Unrealized gains and losses on NiSource's hedges were recorded as price risk
management assets and liabilities along with unrealized gains on NiSource's
marketing and trading portfolios. The accompanying consolidated balance sheets
reflected price risk management assets related to unrealized gains on hedges of
$167.4 million and $142.3 million at March 31, 2003 and December 31, 2002,
respectively, of which $36.5 million and $29.4 million were included in "Current
Assets" and $130.9 million and $112.9 million were included in "Other Assets."
Price risk management liabilities related to unrealized losses on hedges (and
net option premiums) were $12.5 million and $9.3 million at March 31, 2003 and
December 31, 2002, respectively, both of which were included in "Current
Liabilities."
11
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the first quarter 2003, a net loss of $0.1 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 first quarter, NiSource reclassified no amounts 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 $17.3 million, net of tax.
MARKETING AND TRADING ACTIVITIES. Effective July 1, 2002, EnergyUSA-TPC (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. Since the sale, the remaining operations of TPC have primarily
involved commercial and industrial gas sales and power trading.
The fair market values of NiSource's power trading assets and liabilities were
$50.6 million and $48.0 million, respectively, at March 31, 2003 and $16.4
million and $16.4 million, respectively, at December 31, 2002. The fair market
values of NiSource's gas marketing assets and liabilities were $25.3 million and
$24.8 million, respectively, at March 31, 2003. The fair market values of
NiSource gas marketing assets and liabilities were $24.8 million and $22.4
million, respectively, at December 31, 2002.
Pursuant to the October 25, 2002 consensus reached regarding 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), beginning in 2003 the results of derivatives
related to trading activities were presented on a net basis. All periods
presented have been adjusted to conform to the revised presentation.
On a gross basis, NiSource's power trading revenues and cost of sales were
$122.5 million and $120.6 million, respectively, for the quarter ended March 31,
2003. For the quarter ended March 31, 2002, NiSource's gross power trading
revenues and cost of sales were $223.0 million and $220.9 million, respectively.
Gross gas trading revenues and cost of sales were $297.4 million and $289.4
million, respectively, for the quarter ended March 31, 2002.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In July 2001, the
FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS
No. 143). SFAS No. 143 requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred. When
the liability is initially recorded, the entity capitalizes the cost, thereby
increasing the carrying amount of the related long-lived asset. Over time, the
liability is accreted, and the capitalized cost is depreciated over the useful
life of the related asset. NiSource's rate-regulated subsidiaries will defer the
difference between the amount recognized for depreciation and accretion and the
amount collected in rates as required pursuant to SFAS No. 71, "Accounting for
the Effects of Certain Types of Regulation."
NiSource's consolidated asset retirement obligations liability was mainly
comprised of obligations for plugging and abandonment costs related to the
exploration and production operations. Significant liabilities were also
calculated for the pipeline operations related to the disposal of offshore
platforms, cutting, capping and filling offshore pipelines and certain storage
facilities planned for abandonment. Liabilities for the removal of buildings and
equipment were calculated at the Primary Energy, Inc. (Primary Energy)
facilities and to a lesser extent at the telecommunications network, which is
currently classified as a discontinued operation. The electric operations
calculated liabilities for the removal of certain hydro towers and obligations
associated with leased railcars. Other asset retirement obligations related to
the major gas and electric distribution facilities and gas pipeline networks
were identified, however the associated liabilities were not quantifiable due to
the indeterminate lives of the associated assets.
12
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NiSource adopted the provisions of SFAS No. 143 on January 1, 2003, and as a
result an asset retirement obligations liability of $54.3 million was
recognized. In addition, NiSource capitalized $41.3 million in additions to
plant assets, net of accumulated amortization, and recognized regulatory assets
and liabilities of $1.2 million and $4.6 million, respectively. NiSource
believes that the amounts recognized as regulatory assets will be recoverable in
future rates. An expense of $1.7 million was recognized immediately upon
adoption related to discontinued operations. The cumulative after-tax effect of
adopting SFAS No. 143 amounted to $8.8 million. Certain costs of removal that
have been, and continue to be, included in depreciation rates and collected in
the service rates of the rate-regulated subsidiaries, did not meet the
definition of an asset retirement obligation pursuant to SFAS No. 143. The
amount of the other costs of removal reflected as a component of NiSource's
accumulated depreciation and amortization was approximately $997.8 million at
March 31, 2003 based on rates for estimated removal costs embedded in composite
depreciation rates.
For the first quarter 2003, NiSource recognized amortization expense of $0.4
million related to the amounts capitalized as additions to plant and recognized
$0.8 million of accretion expense. The asset retirement obligations liability
totaled $55.1 million at March 31, 2003. Had NiSource adopted SFAS No. 143 at
the dates the actual liabilities were incurred, the asset retirement obligations
liability would have been $49.4 million and $45.0 million at December 31, 2001
and 2000, respectively.
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 AND EITF ISSUE NO. 98-10 - ACCOUNTING FOR CONTRACTS
INVOLVED IN ENERGY TRADING AND RISK MANAGEMENT ACTIVITIES. 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 should be shown net in the income statement, whether or not settled
physically, if the derivative instruments are held for trading purposes. For
purposes of the consensus, energy trading activities encompass contracts entered
into with the objective of generating profits on, or exposure to, shifts in
market prices. This consensus became effective for financial statements issued
for periods beginning after December 15, 2002. NiSource reevaluated its
portfolio of contracts in order to determine which contracts were required to be
reported net in accordance with the provisions of the consensus and, as a result
recognized equal and offsetting reductions to revenues and cost of sales of
$97.0 million for the first quarter 2003 and $400.3 million for the comparable
2002 period. NiSource's operating income remained unchanged for all periods
presented.
The task force also reached a consensus to rescind EITF No. 98-10 and preclude
mark-to-market accounting for energy trading contracts that are not derivatives
pursuant to SFAS No. 133. The consensus was effective for fiscal periods
beginning after December 15, 2002, for energy trading contracts that existed on
or before October 25, 2002 that remained in effect at the date the consensus was
initially applied (January 1, 2003 for NiSource). Contracts entered into after
October 25, 2002, were analyzed pursuant to a generally accepted accounting
principles hierarchy, excluding EITF No. 98-10. Since NiSource is no longer
involved in gas-related trading activities and has minimal power trading
activities, the rescission of EITF No. 98-10 did not have a material effect on
its financial condition or results of operations for the first quarter 2003.
FASB INTERPRETATION NO. 46 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES. In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities" (FIN 46). FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or is entitled to receive
a majority of the entity's residual returns. FIN 46 also requires various
disclosures about variable interest entities that the company is not required to
consolidate but in which it has a significant variable interest. The
consolidation requirements apply to existing entities in the first fiscal year
or interim period beginning after June 15, 2003.
Primary Energy's Lakeside project currently falls within the scope of FIN 46.
The Lakeside project was constructed on an industrial customer's site and was
designed to process steam from the customer's facilities to generate up to 161
megawatts of electric power and provide process steam to the customer. As part
of the lease agreement with the variable interest entity, an event of project
termination would accelerate maturity of the underlying debt requiring Primary
Energy to pay the unamortized lease value, which was $40.2 million at March 31,
2003. If the project ownership and financing structure remains in its present
form, the variable interest entity, including the unamortized debt and related
assets associated with the Lakeside project, would be consolidated by NiSource
beginning in the third quarter 2003.
13
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CORPORATE PIES REMARKETING
In February 2003, NiSource issued approximately 13.1 million shares of common
stock associated with the settlement of forward equity agreements comprising a
component of the Corporate PIES. Concurrently, with the settlement of the
forward agreements, NiSource remarketed the underlying debentures, due November
2005, and reset the interest rate to 4.25%. NiSource received net proceeds of
$344.1 million from the remarketing in satisfaction of the Corporate PIES
holders' obligation under the forward equity agreements. As a result of the
transaction, the underlying subsidiary trust was dissolved.
The sole purchaser of the remarketed debentures purchased newly-offered 6.15%
notes due in 2013, using the remarketed debentures as consideration. In
accordance with EITF No. 96-19, "Debtors Accounting for a Modification or
Exchange of Debt Instruments," the debt issued at 4.25% was considered
extinguished, because the net present value of cash flows changed by more than
10% with the issuance of the 6.15% notes. As a result, the $2.2 million of fees
paid to the holder to extinguish the debt was expensed in the first quarter
2003.
10. 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.
11. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table displays the components of Accumulated Other Comprehensive
Income, which is included in "Common Stock Equity," on the consolidated balance
sheets.
MARCH 31, December 31,
(in millions) 2003 2002
- ---------------------------------------------------------------------------------------------------
Foreign currency translation adjustment $ (0.5) $ (1.5)
(Loss) on available for sale securities (5.3) (3.1)
Net unrealized gains on cash flow hedges 76.1 67.8
Minimum pension liability adjustment (203.5) (203.7)
- -------------------------------------------------------------------------------------------------
TOTAL ACCUMULATED OTHER COMPREHENSIVE (LOSS), NET $ (133.2) $ (140.5)
- -------------------------------------------------------------------------------------------------
12. GUARANTEES AND INDEMNITIES
As a part of normal business, NiSource and certain subsidiaries enter into
various agreements providing financial or performance assurance to third parties
on behalf of other subsidiaries. Such agreements include guarantees and stand-by
letters of credit. These agreements are entered into primarily to support or
enhance the creditworthiness otherwise attributed to a subsidiary on a
stand-alone basis, thereby facilitating the extension of sufficient credit to
accomplish the subsidiaries' intended commercial purposes. The total commercial
commitments in existence at March 31, 2003 and the years in which they expire
were:
(in millions) 2003 2004 2005 2006 2007 After
- --------------------------------------------------------------------------------------------------------------
Guarantees of subsidaries debt $1,050.0 $ 131.7 $ 930.3 $ 40.0 $ 29.0 $1,647.2
Guarantees supporting commodity
transactions of subsidiaries 404.0 - 50.0 980.0 45.9 166.6
Other guarantees 130.0 - 51.1 - - 245.5
Lines of credit 64.3 97.0 - - - -
Letters of credit 54.8 4.8 1.2 - - 113.6
- --------------------------------------------------------------------------------------------------------------
Total commercial commitments $1,703.1 $233.5 $1,032.6 $1,020.0 $ 74.9 $2,172.9
- --------------------------------------------------------------------------------------------------------------
14
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NiSource has guaranteed the payment of $3.8 billion of debt for various
wholly-owned subsidiaries including NiSource Finance Corp. (NFC) and through a
support agreement, NiSource Capital Markets, Inc. (Capital Markets). The debt is
reflected on NiSource's consolidated balance sheet. The subsidiaries are
required to comply with certain financial covenants under the debt indenture and
in the event of default. NiSource would be obligated to pay the debt's principal
and related interest. Currently, NiSource does not anticipate its subsidiaries
will have any difficulty maintaining compliance. NFC also maintains lines of
credit with financial institutions. At March 31, 2003, the amount outstanding
under the lines of credit and guaranteed by NiSource amounted to $161.3 million.
Additionally, NiSource has issued guarantees, which support up to approximately
$1.6 billion of commodity-related payments for its subsidiaries involved in
energy marketing and trading and those satisfying requirements under forward gas
sales agreements. These guarantees were provided to counterparties in order to
facilitate physical and financial transactions involving natural gas and
electricity. To the extent liabilities exist under the commodity-related
contracts subject to these guarantees, such liabilities are included in the
consolidated balance sheets.
NiSource has issued standby letters of credit of approximately $174.4 million
through financial institutions for the benefit of third parties that have
extended credit to certain subsidiaries. If a subsidiary does not pay amounts
when due under covered contracts, the beneficiary may present its claim for
payment to the financial institution, which will in turn request payment from
NiSource.
NiSource has purchase and sales agreements guarantees totaling $142.5 million,
which guarantee performance of the seller's covenants, agreements, obligations,
liabilities, representations and warranties under the agreements. No amounts
related to the purchase and sales agreement guarantees are reflected in the
consolidated balance sheet.
Management believes that the likelihood NiSource would be required to perform or
otherwise incur any significant losses associated with any of the aforementioned
guarantees is remote.
Primary Energy continues to lease four of the projects in which it participates,
three of which are recognized on the consolidated balance sheets as capital
leases or assets owned in substance. NiSource through Capital Markets, has
guaranteed or guaranteed in substance most lease payments to the special purpose
entity lessors, including regular lease payments, accelerated lease payments on
an event of default, and payment obligations, including residual guarantee
amounts, at the end of lease terms. In the case of an event of default, a lessor
can accelerate the full, unamortized amount of the lessor's funding. The total
of guarantees outstanding for all the projects at March 31, 2003 was $591.0
million. As of March 31, 2003, approximately $502.9 million of debt for the four
projects was included in NiSource's consolidated balance sheet.
13. BUSINESS SEGMENT INFORMATION
NiSource's operations are divided into five 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 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 Electric Operations segment
provides electric service in 21 counties in the northern part of Indiana. The
Exploration and Production segment produces natural gas and oil in the United
States. The Other segment primarily includes gas marketing, power trading,
ventures focused on distributed power generation technologies, including
cogeneration facilities, fuel cells and storage systems, and real estate
activities.
During 2002, NiSource re-aligned its reportable segments to reflect the decision
to significantly scale back its merchant operations. Electric wholesale and
wheeling results were moved from the Merchant segment to the Electric segment.
The remaining Merchant segment operations were included in the Other segment.
The telecommunications operations were moved from the Other segment to
discontinued operations due to NiSource's decision to exit the
telecommunications business. As a result of the realignment, all periods have
been adjusted to reflect the new segments.
15
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables provide information about NiSource's business segments.
NiSource uses operating income as its primary measurement for each of the
reporting segments and makes decisions on finance, dividends and taxes at the
corporate level on a consolidated basis. Segment revenues include intersegment
sales to affiliated subsidiaries, which are eliminated in consolidation.
Affiliated sales are recognized on the basis of prevailing market, regulated
prices or at levels provided for under contractual agreements. Operating income
is derived from revenues and expenses directly associated with each segment.
Three Months Ended March 31,(in millions) 2003 2002
- -------------------------------------------------------------------------------------------
REVENUES
GAS DISTRIBUTION
Unaffiliated $ 1,950.2 $ 1,210.9
Intersegment 9.4 10.9
- -------------------------------------------------------------------------------------------
Total 1,959.6 1,221.8
- -------------------------------------------------------------------------------------------
GAS TRANSMISSION AND STORAGE
Unaffiliated 162.9 174.3
Intersegment 73.1 84.6
- -------------------------------------------------------------------------------------------
Total 236.0 258.9
- -------------------------------------------------------------------------------------------
ELECTRIC OPERATIONS
Unaffiliated 255.9 257.6
Intersegment 6.9 4.3
- -------------------------------------------------------------------------------------------
Total 262.8 261.9
- -------------------------------------------------------------------------------------------
EXPLORATION AND PRODUCTION
Unaffiliated 40.8 58.2
Intersegment 1.8 15.4
- -------------------------------------------------------------------------------------------
Total 42.6 73.6
- -------------------------------------------------------------------------------------------
OTHER
Unaffiliated 147.9 35.9
Intersegment 13.3 3.4
- -------------------------------------------------------------------------------------------
Total 161.2 39.3
- -------------------------------------------------------------------------------------------
Adjustments and eliminations (82.9) (47.6)
- -------------------------------------------------------------------------------------------
CONSOLIDATED REVENUES $ 2,579.3 $ 1,807.9
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Gas Distribution $ 314.2 $ 249.6
Gas Transmission and Storage 111.3 126.8
Electric 52.6 71.8
Exploration and Production 71.2 32.7
Other (7.0) 16.0
Corporate 8.1 24.3
- -------------------------------------------------------------------------------------------
CONSOLIDATED OPERATING INCOME $ 550.4 $ 521.2
- -------------------------------------------------------------------------------------------
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 Inc.'s (NiSource) 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, 2002 (Form 10-K).
FIRST QUARTER RESULTS
Net Income
NiSource reported net income of $254.9 million, or $1.00 per share, for the
three months ended March 31, 2003, compared to net income of $242.2 million, or
$1.18 per share, for the first quarter 2002. Operating income was $550.4
million, an increase of $29.2 million from the same period in 2002. 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 March 31, 2003, were $1,086.0 million, a $47.3 million
increase over the same period last year. The increase in net revenues was a
result of increased natural gas sales and deliveries due to colder weather
amounting to $73.3 million, net of $17.4 million from lower interruptible
service revenues and lower firm service revenues due to measures taken to meet
customer demand during a period of sustained cold weather in the northeast
market areas. The increase was partially offset by $26.1 million due to lower
average prices related to favorable hedge positions for the 2002 period and
deliveries of natural gas production under forward sales agreements and $13.5
million from credits issued pertaining to the Indiana Utility Regulatory
Commission (IURC) electric rate review settlement.
Expenses
Operating expenses for the first quarter 2003 were $535.6 million, an increase
of $18.1 million from the 2002 period. Operation and maintenance expenses for
the first quarter 2003 were $41.1 million higher than they were in first quarter
of 2002. Taking into consideration cost trackers directly offset in revenues, as
well as reserve changes, that together increased 2003 operation and maintenance
expenses by $22.3 million and decreased 2002 operation and maintenance expenses
by $18.8 million, quarter-over-quarter, baseline operation and maintenance
expenses were essentially flat. The effects of streamlining efforts in 2002 and
2001 largely offset increased pension expenses of $9.4 million and insurance
expenses. A gain on the sale of an interest in a natural gas exploration and
production
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
joint venture in New York State reduced operating expenses for 2003 by $70.8
million. The 2002 period operating expenses were reduced by $23.4 million,
primarily from a gain on the sale of a utility line-locating business. Other
taxes increased $19.4 million, primarily reflecting higher gross receipt taxes
that were offset in revenues.
Other Income (Deductions)
Interest expense was $126.0 million for the quarter, a decrease of $2.0 million
compared to the first quarter 2002. The decrease was due to a reduction of
short- and long-term debt slightly offset by interest expense associated with
the financing of a cogeneration facility placed in service in mid-2002.
Income Taxes
Income tax expense for the first quarter 2003 was $157.0 million, an increase of
$12.1 million compared to the 2002 period, due to higher pre-tax income.
Change in Accounting
The change in accounting of $8.8 million, net-of-tax, resulted from the
cumulative effect of adopting the Financial Accounting Standards Board statement
on asset retirement obligations.
LIQUIDITY AND CAPITAL RESOURCES
Generally, cash flow from operations has provided sufficient liquidity to meet
operating requirements. A significant portion of NiSource's operations, most
notably in the gas distribution, gas transportation and electric businesses, are
subject to seasonal fluctuations in cash flow. During the heating season, which
is primarily from November through March, cash receipts from gas sales and
transportation services typically exceed cash requirements. In the summer
months, cash receipts 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 three months ended March 31, 2003 was $595.2
million. Cash generated from working capital was $233.9 million, principally
driven by drawing down natural gas inventories, increased accounts payables and
taxes accrued, mostly offset by increased accounts receivable. The increase is
accounts receivable was affected by a decrease in sales of receivables of $99.5
million.
On March 31, 2003, NiSource redeemed $75 million of NiSource Capital Markets,
Inc, 7.75% Subordinated Debentures due March 1, 2026. On April 15, 2003,
NiSource also redeemed $300.0 million of NiSource Finance Corp. 5.75% two-year
senior notes that matured April 15, 2003.
In February 2003, NiSource issued approximately 13.1 million shares of common
stock associated with the settlement of forward equity agreements comprising a
component of the Corporate Premium Income Equity Securities (Corporate PIES).
Concurrently, with the settlement of the forward agreements, NiSource remarketed
the underlying debentures, due November 2005, and reset the interest rate to
4.25%. NiSource received net proceeds of $344.1 million from the remarketing in
satisfaction of the Corporate PIES holders' obligation under the forward equity
agreements. The sole purchaser of the remarketed securities purchased
newly-offered 6.15% notes due in 2013, using the remarketed debentures as
consideration.
On January 28, 2003, Columbia Natural Resources, Inc. (CNR) sold its interest in
a natural gas exploration and production joint venture in New York State for $95
million. The proceeds were used to reduce short-term debt.
NiSource plans to refinance approximately $1.2 billion of expiring long-term
debt during 2003 with new debt issuances through its financing subsidiary
NiSource Finance Corp. and may further reduce debt through the monetization of
certain assets.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Credit Facilities
Due to the company's strong liquidity position, NiSource elected not to renew
its $500.0 million 364-day credit facility, which expired on March 20, 2003. The
$1.25 billion three-year facility that expires on March 23, 2004 has been
amended to allow for an increase in aggregate letters of credit outstanding from
$150.0 million to $500.0 million. The reduction in NiSource's short-term
borrowing needs is attributable to the $734.9 million of net proceeds from the
equity offering during November 2002, the successful Corporate PIES remarketing,
the sale of CNR's New York joint venture assets and net cash flow from
continuing operations.
As of March 31, 2003 and December 31, 2002, $64.3 million and $150.0 million of
commercial paper was outstanding, respectively. The weighted average interest
rate on commercial paper outstanding as of March 31, 2003 and December 31, 2002
was 2.25% for each period. In addition, NiSource had outstanding credit facility
advances under its 3-year facility of $97.0 million at March 31, 2003, at a
weighted average interest rate of 2.24%, and credit facility advances of $763.1
million at December 31, 2002, at a weighted average interest rate of 2.10%. As
of March 31, 2003 and December 31, 2002, NiSource had $164.1 million and $171.7
million of standby letters of credit outstanding, respectively. As of March 31,
2003, $924.6 million of credit was available under the credit facilities.
Columbia Gas of Ohio, Inc. is a party to an agreement to sell, without recourse,
up to $200 million 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. As of March 31, 2003, CARC had no outstanding accounts
receivable sales under the conduit.
Northern Indiana may sell up to $100.0 million of certain of its accounts
receivable under a sales agreement, without recourse. Northern Indiana Public
Service Company (Northern Indiana) has sold $100.0 million of its accounts
receivable under this agreement.
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
Through its various business activities, NiSource is exposed to both non-trading
and trading risks. The non-trading risks to which NiSource is exposed include
interest rate risk, commodity market risk and credit risk of its subsidiaries.
The risk resulting from trading activities consists primarily of commodity
market 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.
Various analytic techniques are employed to measure and monitor NiSource's
market and credit risks, including value-at-risk (VaR) and instrument
sensitivity to market factors. VaR represents the potential loss or gain for an
instrument or portfolio from changes in market factors, for a specified time
period and at a specified confidence level.
Non-Trading Risks
Commodity price risk resulting from non-trading activities at 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 states experiment with regulatory reform, these
subsidiaries may begin providing services without the benefit of the traditional
ratemaking process and may be more exposed to commodity price risk.
Effective July 1, 2002, EnergyUSA-TPC (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. Beginning with the
effective date of the sale, the primary remaining operations associated with TPC
include commercial and industrial gas sales and power trading. With the
exception of power trading and one remaining gas trading transaction, which
expired in October 2002, since July 1, 2002 the gas-related activities at TPC
were no longer considered trading activities for accounting purposes.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
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 March 31, 2003, the
combined borrowings outstanding under these facilities totaled $161.3 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. Based upon average borrowings under agreements
subject to fluctuations in short-term market interest rates during the first
quarter 2003, an increase in short-term interest rates of 100 basis points (1%)
would have increased interest expense by $2.6 million for the three months ended
March 31, 2003.
On April 11, 2003, Columbia entered into fixed-to-variable interest rate swap
agreements in a notional amount of $100 million with two counterparties.
NiSource will receive payments based upon a fixed 7.42% interest rate and pay a
floating interest amount based on U.S. 6-month LIBOR-BBA plus 2.38 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 right to cancel the swaps on either April
15, 2008 or April 15, 2013 at mid-market. Effectiveness of the swaps was
determined using the short-cut method pursuant to Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activity" (SFAS No. 133).
On April 4, 2003, Columbia terminated a fixed-to-variable interest rate swap
agreement containing a notional amount of $100 million. NiSource received a
settlement payment from the counterparty amounting to $8.2 million, which will
be amortized as a reduction to interest expense over the remaining term (2.5
years) of the underlying debt.
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 transaction,
which expired in October 2002, the trading activities of TPC have involved power
only.
Fair value represents the amount at which willing parties would transact an
arms-length transaction. 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 New York
Mercantile Exchange (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 during the first quarter of
2003, the sources of the valuations of the contracts during 2003 and the years
in which the remaining contracts (all power trading) mature are:
(in millions) 2003
- ----------------------------------------------------------------------------------------------
Fair value of contracts outstanding at the beginning of the period $ -
Contracts realized or otherwise settled during the period (including
net option premiums received) (1.4)
Fair value of new contracts entered into during the period 1.2
Other changes in fair values during the period 2.8
- ----------------------------------------------------------------------------------------------
Fair value of contracts outstanding at the end of the period $ 2.6
- ----------------------------------------------------------------------------------------------
(in millions) 2003 2004 2005 2006 2007 After
- ------------------------------------------------------------------------------------------------
Prices actively quoted $ - $ - $ - $ - $ - $ -
Prices from other external sources 2.0 ($0.3) $ - $ - $ - $ -
Prices based on models/other method 2.0 ($1.1) $ - $ - $ - $ -
- ------------------------------------------------------------------------------------------------
Total fair values $ 4.0 ($1.4) $ - $ - $ - $ -
- ------------------------------------------------------------------------------------------------
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Contracts reported within the caption "Prices actively quoted" include futures
and options traded on the NYMEX. The caption "Prices from other external
sources" generally includes contracts traded on commodity exchanges and
over-the-counter contracts whose value is based on published indices or other
publicly available pricing information. Contracts shown within "Prices based on
models/other method" are valued employing the widely used Black-Scholes
option-pricing model
Market Risk Measurement
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 for the power trading group that utilizes
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 first quarter of 2003, respectively. The daily VaR for the gas
marketing portfolios on an average, high and low basis was $0.2 million, $0.5
million and $0.1 million during the first quarter of 2003, respectively.
Prospectively, management has set the VaR limits at $2.5 million for power
trading. Exceeding the VaR limits would result in management actions to reduce
portfolio risk.
Refer to "Risk Management Activities" in Note 7 of Notes to the Consolidated
Financial Statements for further discussion of NiSource's risk management.
OTHER INFORMATION
Critical Accounting Policies
NiSource applies certain accounting policies based on the accounting
requirements discussed below that have had, and may continue to have,
significant impacts on NiSource's results of operations and consolidated balance
sheets.
FINANCIAL ACCOUNTING STANDARDS BOARD'S (FASB) STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS SFAS NO. 71 - ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF
REGULATION. SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS No. 71), provides that rate-regulated subsidiaries account for
and report assets and liabilities consistent with the economic effect of the way
in which regulators establish rates, if the rates established are designed to
recover the costs of providing the regulated service and if the competitive
environment makes it probable that such rates can be charged and collected.
NiSource's rate-regulated subsidiaries follow the accounting and reporting
requirements of SFAS No. 71. Certain expenses and credits subject to utility
regulation or rate determination normally reflected in income are deferred on
the balance sheet and are recognized in income as the related amounts are
included in service rates and recovered from or refunded to customers.
In the event that regulation significantly changes the opportunity for NiSource
to recover its costs in the future, all or a portion of NiSource's regulated
operations may no longer meet the criteria for the application of SFAS No. 71.
In such event, a write-down of all or a portion of NiSource's existing
regulatory assets and liabilities could result. If transition cost recovery is
approved by the appropriate regulatory bodies that would meet the requirements
under generally accepted accounting principles for continued accounting as
regulatory assets and liabilities during such recovery period, the regulatory
assets and liabilities would be reported at the recoverable amounts. If unable
to continue to apply the provisions of SFAS No. 71, NiSource would be required
to apply the provisions of SFAS No. 101, "Regulated Enterprises - Accounting for
the Discontinuation of Application of Financial Accounting Standards Board
Statement No. 71." In management's opinion, NiSource's regulated subsidiaries
will be subject to SFAS No. 71 for the foreseeable future.
Certain of the regulatory assets reflected on NiSource's Consolidated Balance
Sheets require specific regulatory action in order to be included in future
service rates. Although recovery of these amounts is not guaranteed, NiSource
believes that these costs meet the requirements for deferral as regulatory
assets under SFAS No. 71.
HEDGING ACTIVITIES. Under SFAS No. 133, the accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and
resulting designation. Unrealized and realized gains and losses are recognized
each period as components of other comprehensive income, regulatory assets and
liabilities or earnings depending on the nature of such derivatives. For
subsidiaries that utilize derivatives for cash flow hedges, the effective
portions of the gains and losses are recorded to other comprehensive income and
are recognized in earnings
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
concurrent with the disposition of the hedged risks. For fair value hedges, the
gains and losses are recorded in earnings each period along with the change in
the fair value of the hedged item. As a result of the rate-making process, the
rate-regulated subsidiaries generally record gains and losses as regulatory
liabilities or assets and recognize such gains or losses in earnings when
recovered in revenues.
In order for a derivative contract to be designated as a hedge, the relationship
between the hedging instrument and the hedged item or transaction must be highly
effective. The effectiveness test is performed at the inception of the hedge and
each reporting period thereafter, throughout the period that the hedge is
designated. Any amounts determined to be ineffective are recorded currently in
earnings.
Although NiSource applies some judgment in the assessment of hedge effectiveness
to designate certain derivatives as hedges, the nature of the contracts used to
hedge the underlying risks is such that the correlation of the changes in fair
values of the derivatives and underlying risks is high. NiSource generally uses
NYMEX exchange-traded natural gas futures and options contracts and
over-the-counter swaps based on published indices to hedge the risks underlying
its natural-gas-related businesses.
PENSIONS AND POSTRETIREMENT BENEFITS. NiSource has defined benefit plans for
both pensions and other postretirement benefits. The plans are accounted for
under SFAS No. 87, "Employers' Accounting for Pensions," and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions." The
calculation of the net obligations and annual expense related to the plans
requires a significant degree of judgment regarding the discount rates to be
used in bringing the liabilities to present value, long-term returns on plan
assets and employee longevity, amongst other assumptions. Due to the size of the
plans and the long-term nature of the associated liabilities, changes in the
assumptions used in the actuarial estimates could have material impacts on the
measurement of the net obligations and annual expense recognition.
Insurance Renewal
With the majority of the NiSource Property and Casualty insurance renewing on
July 1, 2003, indications are that the upward trend in insurance costs that
NiSource experienced between 2001 and 2002 will continue in the foreseeable
future. Increases in premiums, deductibles and retentions along with added
restrictions to coverage and capacity, for its property and casualty insurance
program are anticipated. This upward trend is driven by the overall poor
underwriting experience of the insurance industry over the past few years, in
conjunction with the overall downturn of the capital markets and the economy,
which drives the need for underwriters to seek higher premiums and further
restrict coverage.
Environmental Matters
Proposals for voluntary initiatives and mandatory controls are being discussed
both in the United States and worldwide to reduce so-called "greenhouse gases"
such as carbon dioxide, a by-product of burning fossil fuels. Certain NiSource
affiliates engage in efforts to voluntarily report and reduce their greenhouse
gas emissions. NiSource will monitor and participate in developments related to
efforts to register and potentially regulate greenhouse gas emissions.
Certain NiSource affiliates use various combustion equipment in the generation,
distribution and transmission of energy, including turbines, boilers and various
reciprocating engines. Within the period December 2002 to January 2003, the U.S.
Environmental Protection Agency proposed maximum achievable control technology
(MACT) standards to meet national emission standards for hazardous air
pollutants for stationary combustion turbines, industrial boilers and
reciprocating internal combustion engines. NiSource will continue to monitor the
proposed MACT standards for potential applicability and cost impact to its
operations. Pending finalization of the proposed standards, NiSource is unable
to predict what, if any, additional compliance costs may result.
Presentation of Segment Information
NiSource's operations are divided into five primary business segments; Gas
Distribution, Transmission and Storage, Electric, Exploration and Production,
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 Ended March 31, (in millions) 2003 2002
- --------------------------------------------------------------------------------------
NET REVENUES
Sales Revenues $ 1,776.4 $ 1,069.7
Less: Cost of gas sold 1,344.0 721.0
- --------------------------------------------------------------------------------------
Net Sales Revenues 432.4 348.7
Transportation Revenues 183.2 152.1
- --------------------------------------------------------------------------------------
Net Revenues 615.6 500.8
- --------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 183.8 141.0
Depreciation and amortization 47.6 54.7
Other taxes 70.0 55.5
- --------------------------------------------------------------------------------------
Total Operating Expenses 301.4 251.2
- --------------------------------------------------------------------------------------
Operating Income $ 314.2 $ 249.6
======================================================================================
REVENUES ($ IN MILLIONS)
Residential 1,176.6 682.4
Commercial 417.7 226.8
Industrial 73.4 29.5
Transportation 183.2 152.1
Off system sales 43.2 63.7
Other 65.5 67.3
- --------------------------------------------------------------------------------------
Total 1,959.6 1,221.8
- --------------------------------------------------------------------------------------
SALES AND TRANSPORTATION (MDth)
Residential sales 121.3 97.0
Commercial sales 45.9 33.1
Industrial sales 8.2 5.7
Transportation 182.3 163.8
Off system sales 2.7 27.1
Other 0.2 0.1
- --------------------------------------------------------------------------------------
Total 360.6 326.8
- --------------------------------------------------------------------------------------
HEATING DEGREE DAYS 2,885 2,271
NORMAL HEATING DEGREE DAYS 2,635 2,743
% COLDER (WARMER) THAN NORMAL 9% (17%)
CUSTOMERS
Residential 2,359,175 2,323,484
Commercial 219,215 213,003
Industrial 6,047 6,183
Transportation 703,686 713,800
Other 67 68
- --------------------------------------------------------------------------------------
Total 3,288,190 3,256,538
- --------------------------------------------------------------------------------------
NiSource's natural gas distribution operations (Gas Distribution) serve
approximately 3.3 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)
Weather
Weather in Gas Distribution's territories for the first quarter of 2003 was 9%
colder than normal and 27% colder than the first quarter of 2002.
Throughput
Total volumes sold and transported of 360.6 million dekatherms (MDth) for the
first quarter of 2003 increased 33.8 MDth from the same period last year
primarily due to the colder weather.
Net Revenues
Net revenues for the three months ended March 31, 2003 were $615.6 million, an
increase of $114.8 million over the same period in 2002, mainly attributable to
colder weather during the first quarter of 2003 as compared with the 2002 period
and higher gross receipts taxes offset in operating expenses.
Operating Income
For the first quarter of 2003, Gas Distribution reported operating income of
$314.2 million, an increase of $64.6 million from the same period in 2002. The
increase was mainly attributable to $73.3 million of increased sales and
deliveries of natural gas due to colder weather during the first quarter of
2003, net of an increase of $13.6 million for uncollectible receivables from a
change in the method of calculation and the effects of weather-driven higher gas
costs on the residential customer base. The 2002 period was positively impacted
by $10.6 million from insurance recoveries of environmental expenses. Taking
into account an increase in cost trackers offset in revenues, as well as reserve
changes, that together increased 2003 operation and maintenance expenses by
$31.7 million and decreased 2002 operation and maintenance expenses by $11.1
million, quarter-over-quarter operation and maintenance expenses were
essentially flat.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
TRANSMISSION AND STORAGE OPERATIONS
Three Months Ended March 31, (in millions) 2003 2002
- -----------------------------------------------------------------------------
OPERATING REVENUES
Transportation revenues $ 187.0 $ 210.9
Storage revenues 44.7 45.3
Other revenues 4.3 2.7
- -----------------------------------------------------------------------------
Total Operating Revenues 236.0 258.9
Less: Cost of gas sold 4.4 11.7
- -----------------------------------------------------------------------------
Net Revenues 231.6 247.2
- -----------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 77.9 79.3
Depreciation and amortization 27.9 27.4
(Gain) on sale or impairment of assets - (0.3)
Other taxes 14.5 14.0
- -----------------------------------------------------------------------------
Total Operating Expenses 120.3 120.4
- -----------------------------------------------------------------------------
Operating Income $ 111.3 $ 126.8
=============================================================================
THROUGHPUT (MDth)
Columbia Transmission
Market Area 434.8 377.0
Columbia Gulf
Mainline 180.0 138.4
Short-haul 29.3 40.4
Columbia Pipeline Deep Water 1.5 0.2
Crossroads Gas Pipeline 7.7 8.1
Granite State Pipeline 14.4 11.7
Intrasegment eliminations (168.5) (123.3)
- -----------------------------------------------------------------------------
Total 499.2 452.5
- -----------------------------------------------------------------------------
NiSource's gas transmission and storage segment con Columbia Gas Transmission
Corporation (Columbia Tra Transmission Company (Columbia Gulf), Columbia Pipe
Pipeline Company and Granite State Transmission Sys pipeline network of
approximately 16,062 miles exte Gulf of Mexico to Lake Erie, New York and the
easte network serves customers in seventeen northeastern, 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.
Regulatory Matters
On February 28, 2003, Columbia Transmission filed with the Federal Energy
Regulatory Commission (FERC) its annual Transportation Costs Rate Adjustment,
Retainage Adjustment Mechanism, and Electric Power Cost Adjustment. On March 31,
2003, the FERC requested that Columbia Transmission provide further
documentation for the rate adjustments included in the filings. Responses were
filed with the FERC by April 21, 2003.
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, midwestern, 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 Ohio and
Granite State provides service in New Hampshire, Maine and Massachusetts.
25
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 Gas Transmission and Storage segment totaled 499.2 MDth for
the first quarter 2003, compared to 452.5 MDth for the same period in 2002. The
increase of 46.7 MDth reflected sustained, colder-than-normal weather in 2003
and an increase in market demand in 2003.
Net Revenues
Net revenues were $231.6 million for the first quarter 2003, a decrease of $15.6
million from the same period in 2002. The decrease was primarily due to $7.7
million of lower interruptible service revenues and $9.7 million of lower firm
service revenues due to measures undertaken during a late winter period of
sustained, colder-than-normal weather. The decline in interruptible revenues was
due to higher use of capacity by firm customers resulting in less capacity
available for interruptible services. Firm service revenues were reduced from
actions taken to alleviate late season deliverability limitations in the
pipeline's eastern storage fields. The limitations resulted from the cumulative
effect of facility outages that restricted eastern storage field inventory, a
work stoppage that extended the outages and above-normal demand on storage
withdrawals due to sustained cold weather.
Operating Income
Operating income of $111.3 million in the first quarter 2003 decreased $15.5
million from the same period in 2002. The decrease was primarily due to the
change in net revenues mentioned above. The change in operating income also
included a reduction in operation and maintenance expenses of $1.4 million,
resulting from the effects of reorganization initiatives partially offset by
$3.7 million of costs incurred associated with the purchase of gas for
operational needs.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS
Three Months Ended March 31, (in millions) 2003 2002
- -----------------------------------------------------------------------------
NET REVENUES
Sales revenues $ 262.8 $ 261.9
Less: Cost of sales 93.3 81.2
- -----------------------------------------------------------------------------
Net Revenues 169.5 180.7
- -----------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 57.5 53.4
Depreciation and amortization 43.7 42.2
Other taxes 15.7 13.3
- -----------------------------------------------------------------------------
Total Operating Expenses 116.9 108.9
- -----------------------------------------------------------------------------
Operating Income $ 52.6 $ 71.8
=============================================================================
REVENUES ($ IN MILLIONS)
Residential 72.2 68.9
Commercial 66.7 69.0
Industrial 97.9 91.0
Wholesale 19.6 19.2
Other 6.4 13.8
- -----------------------------------------------------------------------------
Total 262.8 261.9
- -----------------------------------------------------------------------------
SALES (GIGAWATT HOURS)
Residential 789.6 702.4
Commercial 851.5 831.7
Industrial 2,273.5 2,025.8
Wholesale 541.9 762.3
Other 33.7 31.4
- -----------------------------------------------------------------------------
Total 4,490.2 4,353.6
- -----------------------------------------------------------------------------
ELECTRIC CUSTOMERS
Residential 384,991 381,737
Commercial 48,423 47,486
Industrial 2,570 2,622
Wholesale 26 30
Other 798 801
- -----------------------------------------------------------------------------
Total 436,808 432,676
- -----------------------------------------------------------------------------
NiSource generates and distributes electricity, through its subsidiary Northern
Indiana, to approximately 437,000 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 economic situation in the steel and steel-related industries has shown a
significant improvement in the first quarter 2003 as compared to the same
period in the previous year, as evidenced by the increase in
quarter-over-quarter sales in the industrial category. Acquisitions and
reorganizations at the major steel plants in the region continue to occur.
International Steel Group, the company that acquired the LTV Corporation assets
in the northern part of Indiana in 2002, recently purchased Bethlehem Steel,
another major industrial customer. Also, National Steel is expected to be
acquired by U.S. Steel. Steel-related sales increased 21% over the first quarter
2002.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)
Regulatory Matters
During 2002, Northern Indiana settled matters related to an electric rate
review. On September 23, 2002, the IURC issued an order adopting most aspects of
the settlement. The order approving the settlement provides that electric
customers of Northern Indiana will receive an amount intended to approximate
$55.1 million each year in credits to their electric bills for 49 months,
beginning on July 1, 2002. The order also provides that 60% of any future
earnings beyond a specified cap will be retained by Northern Indiana. Credits
amounting to $13.5 million were recognized for electric customers for the first
quarter 2003. The order adopting the settlement is currently being appealed to
the Indiana Court of Appeals by both the Citizen Action Coalition of Indiana and
fourteen residential customers. NiSource does not expect this matter to have a
significant impact on its results of operations
Northern Indiana submitted its quarterly fuel adjustment clause filing for the
twelve-month period ended September 30, 2002, which included a calculation for
the sharing of earnings in excess of allowed earnings as outlined in the IURC
order regarding the electric rate review settlement. The IURC issued an order
related to the filing on January 29, 2003 rejecting Northern Indiana's sharing
calculation, which prorated the amount to be shared with the customers based on
the amount of time the rate credit, was in effect during the twelve-month
period. Northern Indiana filed a request for a rehearing and reconsideration of
the order. On March 12, 2003, the IURC denied Northern Indiana's request. As a
result of the IURC decision, a reserve was recorded.
On June 20, 2002, Northern Indiana, Ameren Corporation and First Energy
Corporation established terms for joining the Midwest Independent System
operator (MISO) through participation in an independent transmission company
(ITC). The MISO arrangements were filed with the FERC, and on July 31, 2002, the
FERC issued an order conditionally approving these arrangements. On November 5,
2002, the ITC, which includes Northern Indiana, signed an agreement with MISO.
At its April 30, 2003 meeting, FERC approved the transfer of functional control
of Northern Indiana's transmission system to GridAmerica and issued an order
addressing the pricing of electric transmission. An IURC proceeding to obtain
approval to transfer functional control of the transmission system to
GridAmerica is ongoing. Northern Indiana has expended approximately $8.5 million
related to joining the Regional Transmission Organization. NiSource believes
that the amounts spent will be reimbursed as a result of the finalization of the
ITC agreement and FERC approval.
Northern Indiana has been recovering the costs of electric power purchased for
sale to its customers through the Fuel Adjustment Clause (FAC). The FAC provides
for costs to be collected if they are below a negotiated cap. If costs exceed
this cap, Northern Indiana must demonstrate that the costs were prudently
incurred to achieve approval for recovery. A group of industrial customers has
challenged the manner in which Northern Indiana has applied costs associated
with a specific interruptible sales tariff. While Northern Indiana continues to
pursue settlement of this proceeding, an estimated refund liability was
recognized in the first quarter 2003. In January 2002, Northern Indiana filed
for approval to implement a purchase power tracker (PPT). On March 21, 2003,
Northern Indiana amended its filing. The amendment, if approved, would allow
Northern Indiana to recover via the FAC, transmission costs paid to third
parties, and the costs associated with electric physical derivative transaction
costs, including option premiums to purchase power, and brokerage commissions.
No actions have been taken by the IURC on this filing.
On December 30, 2002, the FERC issued an order that, among other things, reduced
the rate base and rate of return allowed to Northern Indiana under electric
rates proposed in connection with the filing of its 1995 Open Access
Transmission Tariff, thus creating a refund liability for Northern Indiana.
Northern Indiana did not seek rehearing of the FERC's December 30, 2002 order
and submitted a compliance filing on March 17, 2003, which proposed rates and
services in compliance with the FERC's order. Based on this filing, an estimated
refund liability was recognized in the first quarter 2003.
In January 2002, Northern Indiana filed for approval to implement an
environmental cost tracker (ECT). On June 20, 2002, 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. The IURC approved the settlement on
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)
November 26, 2002 and Northern Indiana made its initial filing for the ECT in
February 2003. On April 30, 2003, the IURC issued an order approving the filing,
which allows for collection of environmental costs beginning with the May 2003
customer bills.
Sales
Electric sales for the first quarter 2003 were 4,490.2 gwh, an increase of 136.6
gwh compared to the 2002 period, reflecting increased sales to residential,
commercial and industrial customers, offset by decreased wholesale transactions.
Residential and commercial sales improved due to increased usage and an increase
in the number of customers, while industrial sales increased due to increased
demand from the steel industry.
Net Revenues
In first quarter 2003, electric net revenues of $169.5 million decreased by
$11.2 million from the comparable 2002 period. The decrease was primarily a
result of lower revenues due to $13.5 million of credits issued pertaining to
the IURC electric rate review settlement and amounts accrued for potential
refund obligations, slightly offset by the aforementioned increased demand.
Operating Income
Operating income for the first quarter 2003 was $52.6 million, a decrease of
$19.2 million from the same period in 2002. The decrease was primarily due to
the changes in revenue mentioned above, increased pension expense of $3.3
million, and increased property taxes of $1.8 million.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
EXPLORATION AND PRODUCTION OPERATIONS
Three Months Ended March 31, (in millions) 2003 2002
- --------------------------------------------------------------------------------------
OPERATING REVENUES
Gas revenues $ 36.9 $ 66.5
Gathering revenues 3.4 2.4
Other revenues 1.7 4.4
- --------------------------------------------------------------------------------------
Total Operating Revenues 42.0 73.3
- --------------------------------------------------------------------------------------
Operating Expenses
Operation and maintenance 17.7 21.6
Depreciation and depletion 18.4 15.6
(Gain) on sale of assets (70.8) -
Other taxes 5.5 3.4
- --------------------------------------------------------------------------------------
Total Operating Expenses (29.2) 40.6
- --------------------------------------------------------------------------------------
Operating Income $ 71.2 $ 32.7
======================================================================================
GAS PRODUCTION STATISTICS
AVERAGE SALES PRICE ($ PER Mcf)
U.S. 2.99 5.02
Canada - 2.67
PRODUCTION (Bcf)
U.S. 12.3 13.2
Canada - -
- --------------------------------------------------------------------------------------
Total 12.3 13.2
- --------------------------------------------------------------------------------------
OIL AND LIQUIDS PRODUCTION STATISTICS
AVERAGE SALES PRICE ($ PER Bbl)
U.S. 27.94 12.90
Canada - 21.08
PRODUCTION (000 Bbls)
U.S. 54.6 51.6
Canada - 4.5
- --------------------------------------------------------------------------------------
Total 54.6 56.1
- --------------------------------------------------------------------------------------
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 holdings in Canada. Columbia
Resources produced 12.6 billion cubic feet (Bcf) equivalents of natural gas and
oil in the first quarter 2003, has financial interests in over 8,200 wells, and
has net proven gas and oil reserve holdings of 1.1 trillion cubic feet
equivalent at March 31, 2003.
Sale of Assets
On January 28, 2003, NiSource's subsidiary Columbia Natural Resources, Inc.
(CNR) sold its interest in a natural gas exploration and production joint
venture in New York State representing 39.3 billion cubic feet (Bcf) in reserves
and approximately 6.0 Bcf of production for approximately $95.0 million.
NiSource recognized an after-tax gain of $44.4 million related to the sale in
the first quarter 2003. The assets of CNR's interest in the joint venture were
reported as assets held for sale on the consolidated balance sheet at December
31, 2002. NiSource continues to seek opportunities to monetize the remaining
exploration and production operations.
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
EXPLORATION AND PRODUCTION OPERATIONS (CONTINUED)
Forward Sale of Natural Gas
CNR has forward gas sales agreements with Mahonia II Limited (Mahonia). During
the first quarter of 2003, CNR delivered 10.9 Bcf to Mahonia. Under the
agreements, CNR has made the required physical deliveries in the past and has a
remaining obligation to deliver 105.2 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 the remaining months of 2003 and beyond will be based on the
following volumes and sales prices:
2003 2004 After Total
- -----------------------------------------------------------------------------------------------------------------------
Volumes to be delivered (Bcf) 33.1 41.5 30.6 105.2
Average sales price (per Mcf) $ 2.56 $ 2.56 $2.26 $ 2.48
- -----------------------------------------------------------------------------------------------------------------------
Volumes
Columbia Resources gas production totaled 12.3 Bcf, a reduction of 0.9 Bcf in
the first quarter of 2003 compared to the comparable 2002 period. The decreased
levels of production are attributable to the sale of the New York joint venture.
Net Revenues
Net revenues were $42.0 million for the first quarter of 2003, a decrease of
$31.3 million from the comparable 2002 period mainly resulting from the effects
of lower average pricing of $26.1 million related to favorable hedge positions
for the 2002 period and deliveries of natural gas production to satisfy
requirements under forward sales agreements and slightly lower production due to
the sale of the New York joint venture.
Operating Income
Operating income for the first quarter of 2003 was $71.2 million, an increase of
$38.5 million from the first quarter 2002. The increase resulted mainly from a
$70.8 million gain on the sale of the New York joint venture. The gain was
partly offset by the decrease in net revenues previously discussed.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
OTHER
Three Months Ended March 31, (in millions) 2003 2002
- -----------------------------------------------------------------------------------------
NET REVENUES
Products and services revenue $ 161.2 $ 39.3
Less: Cost of products purchased 137.9 9.5
- -----------------------------------------------------------------------------------------
Net Revenues 23.3 29.8
- -----------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 20.2 13.9
Depreciation and amortization 6.2 1.8
Loss (gain) on sale or impairment of assets 1.1 (3.5)
Other taxes 2.8 1.6
- -----------------------------------------------------------------------------------------
Total Operating Expenses 30.3 13.8
- -----------------------------------------------------------------------------------------
Operating Income (Loss) $ (7.0) $ 16.0
- -----------------------------------------------------------------------------------------
The Other segment participates in energy-related services including gas
marketing, power trading and ventures focused on distributed power generation
technologies, including cogeneration facilities, fuel cells and storage systems.
Primary Energy, Inc. (Primary Energy), one of the subsidiaries in this segment,
develops, builds, operates and manages on-site, industrial-based energy
solutions for large complexes having multiple energy needs, such as electricity,
steam, by-product fuels or heated water. Additionally, the other segment is
involved in real estate and other businesses.
Sale of Underground Locating and Marking Service
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 2002, NiSource recognized an after-tax gain of $12.5 million
related to the sale. The gain on the sale was reflected in Corporate.
Primary Energy
PROJECT STATUS. Primary Energy is currently involved in six projects that
produce electricity, steam or thermal energy on the sites of industrial
customers. Five 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 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. Two projects (Ironside and North Lake) are owned by subsidiaries
of Primary Energy, while the remaining facilities are owned by unaffiliated
special purpose entities and leased by Primary Energy subsidiaries only one of
which (Lakeside) continues to receive off-balance sheet accounting treatment as
an operating lease. In addition, a subsidiary of Primary Energy is a 50% partner
in a partnership that operates a coal pulverization facility.
Primary Energy's Whiting Clean Energy project at BP's Whiting, Indiana refinery
was placed in service in 2002. 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 from the engineering,
procurement and construction contractor and the insurance provider for
construction delays and necessary plant modifications. The contractor has
asserted that it fully performed under its contract and is demanding payment of
the full contract price plus additional amounts for remediation. On December 31,
2002 the contractor filed a complaint with the court to have the claim
adjudicated in that court rather than the arbitration process prescribed by
contract. The complaint also seeks to force foreclosure on the facility if the
mechanics liens remain unsatisfied. Primary Energy has filed a motion to compel
the arbitration specified in the contract and stay the litigation filed by the
contractor.
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 2003, the after-tax loss is projected to be approximately $28.0
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. Because of the expected losses from this facility and
decreases in estimated forward pricing for electricity versus changes in gas
prices, an impairment study was performed on this
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
OTHER (CONTINUED)
facility in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). The study indicated that, at this
time, no impairment is necessary. However, by necessity, the study includes many
estimates and assumptions for the 40-year estimated useful life of the facility.
Changes in these estimates and assumptions, such as forward prices for
electricity and gas, volatility in the market, etc., could result in a situation
where total undiscounted net revenues are less than the carrying value of the
facility, which would result in a write-down that could be significant.
National Steel Corp. (National) receives electricity, steam and hot water from
Primary Energy's Portside project. On March 6, 2002, National filed for
bankruptcy protection. 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.
Primary Energy has entered into an agreement with the Portside lessor to
purchase the facility before May 31, 2003 for a price equal to the unamortized
funding value plus transaction expenses. The unamortized funding for the
Portside project as of March 31, 2003 is $62.6 million.
ACCOUNTING ISSUES. For the single (Lakeside) leased project not affected by
Emerging Issues Task Force Issue (EITF) No. 97-1, "Implementation Issues in
Accounting for Lease Transactions Including Those Involving Special-Purchase
Entities," and EITF No. 97-10, "The Effect of Lessee Involvement in Asset
Construction," NiSource has not included the assets or related debt associated
with the facilities in its consolidated financial statements. However, due to
the issuance of FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities," if the leasing structure remains unchanged, NiSource will reflect the
assets and related liabilities of this project in its consolidated financial
statements through consolidation of the related special purpose entity beginning
in the third quarter 2003. The aggregate unamortized funding for the project at
March 31, 2003 was $40.2 million.
Net Revenues
Net revenues of $23.3 million for the first quarter of 2003 decreased by $6.5
million from the first quarter of 2002, due to exiting the gas trading business
and reduced volatility in the power markets. The 2003 results reflect trading
activities on a net revenue basis. The 2002 results have been adjusted to
conform to the 2003 presentation.
Operating Income
The Other segment reported an operating loss of $7.0 million, versus operating
income of $16.0 million in 2002. The 2003 period was affected by reduced
revenues as discussed above, decreased costs due to exiting the gas trading
business, and increased depreciation expense primarily related to a cogeneration
facility placed in service in mid-2002. The 2002 period was favorably impacted
by a gain on the sale of gas marketing contracts and the reversal of reserves.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion regarding quantitative and qualitative disclosures about market
risk see Management's Discussion and Analysis of Financial Condition and Results
of Operations under "Market Risk Sensitive Instruments and Positions."
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
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 May 6, 2003, 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
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
OTHER (CONTINUED)
significant deficiencies or material weaknesses in NiSource's internal controls.
As a result, no corrective actions were required or undertaken.
34
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 Energy
Group 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.
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. On April
10, 2003, the judge denied Plaintiffs motion for class certification.
The court has issued an order giving the plaintiffs until May 12, 2003
to file for leave to amend their complaint.
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. (CNR) 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 CNR. Plaintiff seeks the alleged royalty
underpayments and punitive damages. CNR 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
35
PART II
ITEM 1. LEGAL PROCEEDINGS
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. This matter has been resolved through a
settlement.
5. ATLANTIGAS CORPORATION V. NISOURCE, INC., ET AL, U.S. DISTRICT COURT,
DISTRICT OF COLUMBIA AND TRIAD ENERGY RESOURCES, ET AL. V. NISOURCE
INC., ET AL. U.S. DISTRICT COURT, DISTRICT OF COLUMBIA
In June 2002, Atlantigas Corporation filed a complaint alleging that
NiSource, certain of its subsidiaries and other defendants illegally
discounted services to select shippers and sought damages under
anti-trust, RICO, and state law totaling $18 million ($54 million if
trebled). The activities about which the plaintiff is complaining
were the subject of a FERC enforcement staff investigation and
subsequent settlement approved in October 2000. NiSource and its
affiliates filed a motion to dismiss the complaint for lack of
personal jurisdiction and oral argument on that motion was held on
April 8. At the hearing, plaintiff's counsel raised some new issues
on personal jurisdiction. The judge established a supplemental
briefing schedule for these issues, which concludes on May 30.
On March 18, 2003, a related suit was filed by Triad Energy Resources.
This new case purports to be a class action covering customers of
Columbia Gas Transmission who were allegedly damaged by the same
activities complained of in the Atlantigas litigation. The named
defendants include NiSource Inc., certain of its subsidiaries and other
unrelated parties, including shippers who allegedly benefited from the
complained of activities. The plaintiffs claim that all defendants
engaged in vertical restraint of trade by conspiring to provide scarce
transportation/storage capacity to a select group of shippers who in
turn agreed to fix the price of gas. The plaintiffs also claim that the
defendant shippers engaged in horizontal restraint of trade by
conspiring with each other to gain preferential treatment from the
pipeline defendants. There is also a separate count alleging tortious
interference against all defendants. The Company intends to vigorously
defend this matter. However, due to the relationship between this case
and the Atlantigas case, all responses in this matter are deferred
until the court rules on the jurisdictional motions pending in
Atlantigas.
ITEM 2. CHANGES IN SECURITES 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
36
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 first quarter
of 2003:
Financial
Item Reported Statements Included Date of Event Date Filed
- ----------------------------------------------------------------------------------------------------------
9 N 2/10/2003 2/10/2003
- ----------------------------------------------------------------------------------------------------------
37
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NiSource Inc.
--------------------------------
(Registrant)
Date: May 9, 2003 By: /s/ Jeffrey W. Grossman
--------------------------------
Jeffrey W. Grossman
Vice President and Controller
(Principal Accounting Officer
and Duly Authorized Officer)
38
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-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 operation 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 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 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: May 9, 2003 By: /s/ Gary L. Neale
--------------------------------
Gary L. Neale
Chief Executive Officer
39
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-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 operation 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 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 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: May 9, 2003 By: /s/ Michael W. O'Donnell
----------------------------------
Michael W. O'Donnell
Chief Financial Officer
40