UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended JUNE 30, 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.
(Exact Name of Registrant as Specified in its Charter)
Delaware 35-2108964
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 East 86th Avenue
Merrillville, Indiana 46410
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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:
262,794,466 shares outstanding at June 30, 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
Statements of Consolidated Income (Loss)................................ 3
Consolidated Balance Sheets............................................. 4-5
Statements of Consolidated Cash Flows................................... 6
Statements of Consolidated Comprehensive Income......................... 7
Notes to Consolidated Financial Statements.............................. 8-18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 19-37
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............. 37
Item 4. Controls and Procedures................................................. 38
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 39-40
Item 2. Changes in Securities and Use of Proceeds.............................. 40
Item 3. Defaults Upon Senior Securities........................................ 40
Item 4. Submission of Matters to a Vote of Security Holders.................... 40
Item 5. Other Information...................................................... 41
Item 6. Exhibits and Reports on Form 8-K....................................... 41
Signature........................................................................ 42
2
PART I
ITEM 1. FINANCIAL STATEMENTS
NISOURCE INC.
STATEMENTS OF CONSOLIDATED INCOME (LOSS) (unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- -------------------------
(in millions, except per share amounts) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
NET REVENUES
Gas Distribution $ 559.3 $ 459.0 $ 2,320.0 $ 1,537.9
Gas Transmission and Storage 221.0 218.0 563.2 541.9
Electric 262.1 252.9 526.4 487.3
Other 100.8 24.4 256.2 107.9
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Revenues 1,143.2 954.3 3,665.8 2,675.0
Cost of Sales 501.4 307.9 1,994.3 1,077.1
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Total Net Revenues 641.8 646.4 1,671.5 1,597.9
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OPERATING EXPENSES
Operation and maintenance 275.4 317.9 601.9 594.9
Depreciation and amortization 124.9 112.9 249.5 241.2
Loss (Gain) on sale of assets 0.2 (0.1) 1.3 (23.5)
Other taxes 65.5 57.0 170.6 145.2
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Total Operating Expenses 466.0 487.7 1,023.3 957.8
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OPERATING INCOME 175.8 158.7 648.2 640.1
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OTHER INCOME (DEDUCTIONS)
Interest expense, net (114.9) (122.2) (237.9) (249.3)
Minority interests - (5.1) (2.5) (10.2)
Dividend requirements on preferred stock of subsidiaries (1.1) (1.9) (2.3) (3.7)
Other, net 5.9 1.4 10.0 3.2
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Total Other Income (Deductions) (110.1) (127.8) (232.7) (260.0)
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 65.7 30.9 415.5 380.1
INCOME TAXES 26.4 10.1 153.9 139.7
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INCOME FROM CONTINUING OPERATIONS 39.3 20.8 261.6 240.4
- -----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Discontinued Operations - net of taxes (1.4) (3.3) (4.8) 19.3
Gain (Loss) on Disposition of Discontinued Operations - net of taxes (362.8) 7.5 (318.0) 7.5
Change in Accounting - net of taxes - - (8.8) -
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (324.9) $ 25.0 $ (70.0) $ 267.2
===================================================================================================================================
BASIC EARNINGS (LOSS) PER SHARE ($)
Continuing operations 0.15 0.10 1.02 1.17
Discontinued operations (1.39) 0.02 (1.25) 0.13
Change in accounting - - (0.04) -
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BASIC EARNINGS (LOSS) PER SHARE (1.24) 0.12 (0.27) 1.30
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DILUTED EARNINGS (LOSS) PER SHARE ($)
Continuing operations 0.15 0.10 1.01 1.15
Discontinued operations (1.38) 0.02 (1.24) 0.13
Change in accounting - - (0.04) -
- -----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE (1.23) 0.12 (0.27) 1.28
- -----------------------------------------------------------------------------------------------------------------------------------
BASIC AVERAGE COMMON SHARES OUTSTANDING (MILLIONS) 261.3 205.6 257.6 205.6
DILUTED AVERAGE COMMON SHARES (MILLIONS) 263.1 208.2 259.5 208.0
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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
JUNE 30, December 31,
(in millions) 2003 2002
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(unaudited)
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility Plant $ 16,331.3 $ 16,165.5
Accumulated depreciation and amortization (8,043.7) (7,860.4)
- --------------------------------------------------------------------------------------------------------------------
Net utility plant 8,287.6 8,305.1
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Other property, at cost, less accumulated depreciation 419.2 415.3
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Net Property, Plant and Equipment 8,706.8 8,720.4
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INVESTMENTS AND OTHER ASSETS
Assets of discontinued operations and assets held for sale 1,337.9 1,571.0
Unconsolidated affiliates 118.7 125.1
Other investments 69.8 51.6
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Total Investments 1,526.4 1,747.7
- --------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 34.7 55.3
Restricted cash 9.2 -
Accounts receivable (less reserve of $66.0 and $48.8, respectively) 542.1 545.5
Unbilled revenue (less reserve of $1.7 and $3.5, respectively) 125.3 305.2
Gas inventory 218.0 255.3
Underrecovered gas and fuel costs 81.4 149.9
Materials and supplies, at average cost 69.8 65.5
Electric production fuel, at average cost 40.0 39.0
Price risk management assets 92.1 66.4
Exchange gas receivable 229.4 120.1
Prepayments and other 215.8 211.4
- --------------------------------------------------------------------------------------------------------------------
Total Current Assets 1,657.8 1,813.6
- --------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Price risk management assets 153.5 115.1
Regulatory assets 594.7 608.8
Goodwill 3,692.2 3,692.2
Intangible assets 58.2 59.4
Deferred charges and other 132.5 139.2
- --------------------------------------------------------------------------------------------------------------------
Total Other Assets 4,631.1 4,614.7
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 16,522.1 $ 16,896.4
====================================================================================================================
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
JUNE 30, December 31,
(in millions) 2003 2002
- --------------------------------------------------------------------------------------------------------------------
(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 4,257.3 $ 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 5,041.7 4,849.5
- --------------------------------------------------------------------------------------------------------------------
Total Capitalization 9,383.9 9,454.3
- --------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt 926.8 1,224.9
Short-term borrowings 859.4 913.1
Accounts payable 486.6 489.4
Dividends declared on common and preferred stocks 77.6 1.1
Customer deposits 73.0 65.2
Taxes accrued 329.8 222.8
Interest accrued 89.1 76.6
Overrecovered gas and fuel costs 38.0 13.1
Price risk management liabilities 66.1 39.7
Exchange gas payable 362.6 411.9
Current deferred revenue 16.9 17.5
Accrued liability for postretirement and postemployment benefits 61.7 37.1
Other accruals 359.2 462.6
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Total Current Liabilities 3,746.8 3,975.0
- --------------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES AND DEFERRED CREDITS
Price risk management liabilities 0.9 3.2
Deferred income taxes 1,578.0 1,511.3
Deferred investment tax credits 91.8 96.3
Deferred credits 73.8 100.9
Noncurrent deferred revenue 127.2 130.1
Accrued liability for postretirement and postemployment benefits 433.5 421.0
Liabilities of discontinued operations and liabilities held for sale 818.7 959.9
Other noncurrent liabilities 267.5 244.4
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Total Other 3,391.4 3,467.1
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COMMITMENTS AND CONTINGENCIES - -
- --------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 16,522.1 $ 16,896.4
====================================================================================================================
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)
Six Months Ended June 30, (in millions) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ (70.0) $ 267.2
Adjustments to reconcile net income to net cash from
continuing operations:
Depreciation and amortization 249.5 241.2
Net changes in price risk management activities (11.0) (28.3)
Asset impairment - -
Deferred income taxes and investment tax credits 15.7 42.8
Deferred revenue (3.5) (9.9)
Amortization of unearned compensation 2.8 9.5
Loss (Gain) on sale of assets 1.3 (23.5)
Change in accounting 8.8 -
Loss (Gain) on sale of discontinued operations 318.0 (7.5)
Loss (Income) from discontinued operations 4.8 (19.3)
Other, asset items 13.3 (40.8)
Other, liability items (3.0) 60.8
Changes in assets and liabilities, net of effect from acquisitions of
businesses:
Accounts receivable, net 183.3 480.8
Inventories 32.0 119.5
Accounts payable 10.5 (183.9)
Taxes accrued (21.9) 90.0
(Under) Overrecovered gas and fuel costs 93.4 (32.0)
Exchange gas receivable/payable (158.6) 48.1
Other accruals (144.4) (175.8)
Other assets (9.6) 10.8
Other liabilities 45.0 37.5
- -------------------------------------------------------------------------------------------------------------------
Net Cash Flows from Continuing Operations 556.4 887.2
Net Cash Flows from Discontinued Operations (119.9) (41.5)
- -------------------------------------------------------------------------------------------------------------------
Net Cash Flows from Operating Activities 436.5 845.7
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INVESTING ACTIVITIES
Capital expenditures (237.8) (200.8)
Proceeds from disposition of assets 99.9 426.0
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Net Cash Flows from Investing Activities (137.9) 225.2
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of long-term debt 345.3 -
Retirement of long-term debt (465.8) (152.1)
Change in short-term debt (53.7) (853.4)
Retirement of preferred shares (345.0) (2.5)
Issuance of common stock 348.9 2.9
Acquisition of treasury stock (1.0) -
Dividends paid (147.9) (120.3)
- -------------------------------------------------------------------------------------------------------------------
Net Cash Flows from Financing Activities (319.2) (1,125.4)
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (20.6) (54.5)
Cash and cash equivalents at beginning of year 55.3 101.5
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 34.7 $ 47.0
===================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized 215.7 221.3
Interest capitalized 1.7 2.4
Cash paid for income taxes 145.0 76.8
- -------------------------------------------------------------------------------------------------------------------
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 Six Months
Ended June 30, Ended June 30,
----------------------- ----------------------
(in millions) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (324.9) $ 25.0 $ (70.0) $ 267.2
Other comprehensive income, net of tax
Foreign currency translation adjustment 0.6 0.7 1.5 0.6
Net unrealized gains on cash flow hedges 17.0 27.5 25.3 14.3
Net gain (loss) on available for sale securities 2.0 (2.5) - (2.5)
- -------------------------------------------------------------------------------------------------------------------
Total other comprehensive income, net of tax 19.6 25.7 26.8 12.4
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Total Comprehensive Income (Loss) $ (305.3) $ 50.7 $ (43.2) $ 279.6
- -------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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 of America.
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 and the
current report on Form 8-K filed on July 15, 2003. 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, 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). Currently,
the shares associated with the SAILS are anti-dilutive and, therefore not
included in the calculation. 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 Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
(in thousands) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Denominator
Basic average common shares outstanding 261,259 205,645 257,573 205,591
Dilutive potential common shares
Nonqualified stock options 75 326 64 281
Shares contingently issuable under employee stock plans 1,313 1,300 1,313 1,300
Shares restricted under employee stock plans 491 941 553 862
- --------------------------------------------------------------------------------------------------------------------
Diluted Average Common Shares 263,138 208,212 259,503 208,034
- --------------------------------------------------------------------------------------------------------------------
3. STOCK OPTIONS AND AWARDS
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.
NiSource recognized stock-based employee compensation cost, net of taxes, of
$0.3 million and $0.6 million for the three and six months ended June 30, 2003,
respectively, and $4.6 million and $9.5 million for the three and six months
ended June 30, 2002, respectively. The reductions in expense from the 2003
periods compared with the 2002 periods were a result of the affects of
decreasing stock prices on certain variable stock 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 Six Months
Ended June 30, Ended June 30,
---------------------- -----------------------
(in millions, except per share data) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (324.9) $ 25.0 $ (70.0) $ 267.2
As reported
Add: Stock-based employee compensation expense
included in reported net income (loss), net of
related tax effects 0.7 4.6 2.8 9.5
Less: Total stock-based employee compensation
expense determined under the fair
value method for all awards, net of tax (2.4) (6.3) (6.7) (12.1)
- --------------------------------------------------------------------------------------------------------------------------
Pro forma $ (326.6) $ 23.3 $ (71.7) $ 265.5
- --------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE ($)
Basic - as reported (1.24) 0.12 (0.27) 1.30
- pro forma (1.25) 0.11 (0.29) 1.29
Diluted - as reported (1.23) 0.12 (0.27) 1.28
- pro forma (1.24) 0.11 (0.29) 1.27
- --------------------------------------------------------------------------------------------------------------------------
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 $24.3 million were recognized for electric customers for the first
half 2003. The order adopting the settlement is currently being appealed to the
Indiana Court of Appeals by both the Citizens 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 and the
appropriate amount is being refunded to customers.
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. On March 21, 2003, Northern
Indiana amended its filing to allow recovery, via the FAC, of transmission costs
paid to third parties, and the costs associated with electric physical
derivative transactions, including option premiums to purchase power, and
brokerage commissions. No actions have been taken by the IURC on this filing.
9
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 has been recorded.
In January 2002, Northern Indiana filed for approval to implement an
environmental cost tracker (ECT). The ECT was approved by the IURC on November
26, 2002. Under the ECT Northern Indiana will be able to recover (1) allowance
for funds used during construction and a return on the capital investment
expended by Northern Indiana to implement Indiana Department of Environmental
Management's nitrogen oxide State Implementation Plan through an Environmental
Cost Recovery Mechanism (ECRM) and (2) related operation and maintenance and
depreciation expenses once the environmental facilities become operational
through an Environmental Expense Recovery Mechanism (EERM). Northern Indiana
will submit filings on a semi-annual basis for the ECRM and on an annual basis
for the EERM. Northern Indiana made its initial filing of the ECRM in February
2003 for capital expenditures of $ 58.4 million. On April 30, 2003, the IURC
issued an order approving the ECRM filing, which allows for collection of
allowance for funds used during construction and a return on the capital
investment beginning with the May 2003 customer bills. Through June 30, 2003 the
ECRM revenues amounted to $1.0 million. On August 1, Northern Indiana filed the
ECRM for capital investments of $120 million. The initial filing of the EERM is
anticipated with the next semi-annual filing of the ECT. Over the timeframe
required to meet the environmental standards, Northern Indiana anticipates a
total capital investment amounting to approximately $234 million. The IURC order
is currently being appealed to the Indiana Court of Appeals by the Citizens
Action Coalition of Indiana.
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 1,675 management, professional,
administrative and technical positions have been identified for elimination. As
of June 30, 2003, approximately 1,475 employees were terminated, of whom
approximately 5 employees and 130 employees were terminated during the quarter
and six months ended June 30, 2003, respectively. At June 30, 2003 and December
31, 2002, the consolidated balance sheets reflected liabilities of $33.4 million
and $49.6 million related to the restructuring plans, respectively. During the
quarter and six months ended June 30, 2003, $4.0 million and $16.7 million of
benefits were paid, respectively, as a result of the restructuring plans.
Additionally during the quarter and six months ended June 30, 2003, the
restructuring plan liability was increased by $0.2 million and $0.5 million,
respectively, due to adjustments in estimated costs related to the
reorganization initiatives.
6. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
On July 3, 2003, NiSource announced that it reached agreements to sell its
exploration and production subsidiary, Columbia Energy Resources, Inc. (CER) and
the steel-industry-related, inside-the-fence project entities of its Primary
Energy, Inc. (Primary Energy) subsidiary in two independent transactions. Under
the CER sales agreement, Triana Energy Holdings, an exploration and production
company based in Charleston, W.V. and an affiliate of Morgan Stanley Dean Witter
Capital Partners IV, L.P. (MSCP), agreed to purchase all of the stock of CER for
$330 million in cash, plus the assumption of obligations to deliver
approximately 94.0 billion cubic feet (Bcf) of natural gas pursuant to existing
forward sales contracts. The sale will bring about the transfer of 1.1 trillion
cubic feet of natural gas reserves. The Primary Energy agreement involves the
sale of six Primary Energy operating subsidiaries and the Primary Energy name to
Private Power, LLC (Private Power), a privately held power development firm
backed by American Securities Capital Partners, LLC. According to the terms of
the agreement, Private Power agreed to purchase the subsidiaries for
approximately $335.0 million, comprised of $118.0 million in cash and the
assumption of $217.0 million of liabilities and other obligations. The
transactions are expected to be completed in the third quarter 2003. The cash
proceeds from the sales will be used to reduce NiSource's debt. NiSource has
accounted for CER and the Primary Energy subsidiaries as discontinued operations
as of June 30, 2003 and has adjusted all periods presented accordingly. During
the second quarter of 2003, NiSource recognized an after-tax loss of $362.8
million related to the pending sales.
10
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On January 28, 2003, NiSource's subsidiary Columbia Natural Resources, Inc.
(CNR) sold its interest in certain natural gas exploration and production assets
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 on the disposition in the first
quarter 2003. In accordance with the presentation of NiSource's exploration and
production business, CNR's interest in the assets is reported as discontinued
operations. All periods presented have been adjusted to conform to the revised
presentation.
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 July 3, 2003,
NiSource's subsidiary Columbia executed an agreement for the sale of 100% of its
shares in Transcom. The transaction is expected to be completed in the third
quarter of 2003. During the second quarter of 2003, NiSource recognized an
after-tax loss of $2.5 million related to the pending sale.
During 2003, NiSource decided to sell Columbia Service Partners, Inc. (Columbia
Service Partners), a subsidiary of Columbia. The assets and liabilities of
Columbia Service Partners were reported as held for sale at June 30, 2003 and
December 31, 2002.
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 $540.0 million. The divestiture of
the water utilities was required as part of the U.S. Securities and Exchange
Commission order approving the November 2000 acquisition of Columbia. The water
utilities' operations were reported as discontinued operations through 2002.
Results from discontinued operations of CER (including the New York State
properties), the six Primary Energy subsidiaries, Transcom and the water
utilities are provided in the following table:
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
($ in millions) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
REVENUES FROM DISCONTINUED OPERATIONS $ 52.6 $ 72.2 $ 112.1 $ 186.3
- ----------------------------------------------------------------------------------------------------------------------------
Income (Loss) from discontinued operations (5.2) (4.8) (6.0) 32.3
Income taxes (3.8) (1.5) (1.2) 13.0
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS $ (1.4) $ (3.3) $ (4.8) $ 19.3
- ----------------------------------------------------------------------------------------------------------------------------
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.
11
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The assets and liabilities of discontinued operations were as follows:
JUNE 30, December 31,
(in millions) 2003 2002
- --------------------------------------------------------------------------------------------------------------------
ASSETS OF DISCONTINUED OPERATIONS AND ASSETS
HELD FOR SALE
Accounts receivable, net $ 45.2 $ 67.5
Property, plant and equipment, net 1,164.9 1,375.6
Other assets 127.8 166.7
Current liabilities - (18.1)
Debt - (4.8)
Other liabilities - (15.9)
- --------------------------------------------------------------------------------------------------------------------
ASSETS OF DISCONTINUED OPERATIONS AND ASSETS
HELD FOR SALE $ 1,337.9 $ 1,571.0
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES OF DISCONTINUED OPERATIONS AND
LIABILITIES HELD FOR SALE
Debt $ (267.0) $ (176.3)
Current liabilities (205.0) (250.9)
Other liabilities (346.7) (532.7)
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES OF DISCONTINUED OPERATIONS AND
LIABILITIES HELD FOR SALE $ (818.7) $ (959.9)
- --------------------------------------------------------------------------------------------------------------------
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 quarter and six months ended June 30,
2003 and June 30, 2002 affecting accumulated other comprehensive income, with
respect to cash flow hedges included the following:
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
(in millions, net of tax) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Net unrealized gains on derivatives qualifying as cash flow
hedges at the beginning of the period $ 76.1 $ 36.9 $ 67.8 $ 50.1
Unrealized hedging gains arising during the period on
derivatives qualifying as cash flow hedges 21.7 24.7 31.4 35.3
Reclassification adjustment for net gain (loss) included
in net income (loss) (4.7) 2.8 (6.1) (21.0)
- --------------------------------------------------------------------------------------------------------------------
Net unrealized gains on derivatives qualifying as cash flow
hedges at the end of the period $ 93.1 $ 64.4 $ 93.1 $ 64.4
- --------------------------------------------------------------------------------------------------------------------
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
$190.1 million and $140.6 million at June 30, 2003 and December 31, 2002,
respectively, of which $38.7 million and $29.1 million were included in "Current
Assets," $151.3 million and $111.2 million were included in "Other Assets" and
$0.1 million and $0.3 million were included in "Assets of discontinued
operations." Price risk management liabilities related to unrealized losses on
hedges (and net option premiums) were $13.0 million and $10.8 million at June
30,
12
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2003 and December 31, 2002, respectively, of which $3.1 million and $4.1 million
were included in "Current Liabilities" and $9.9 million and $6.7 million were
included in "Liabilities of discontinued operations."
During the second quarter 2003, a net gain of $2.0 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 second quarter, NiSource reclassified $0.9 million from other
comprehensive income to earnings, due to the probability that certain originally
forecasted transactions would not occur. It is anticipated that during the next
twelve months the expiration and settlement of cash flow hedge contracts will
result in income recognition of amounts currently classified in other
comprehensive income of approximately $22.7 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
$45.2 million and $50.3 million, respectively, at June 30, 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 $10.4 million and
$13.6 million, respectively, at June 30, 2003. The fair market values of
NiSource's 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
$191.8 million and $189.6 million, respectively, for the quarter ended June 30,
2003. For the quarter ended June 30, 2002, NiSource's gross power trading
revenues and cost of sales were $437.2 million and $435.6 million, respectively.
Gross gas trading revenues and cost of sales were $476.0 million and $453.6
million, respectively, for the quarter ended June 30, 2002. NiSource had no gas
trading revenue or expenses in 2003.
The volumes for the physically traded contracts for the three and six months
ended June 30, 2003 and 2002 were as follows:
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- ---------------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Electric Sales (Gigawatt Hours) 2,958.0 7,639.7 4,916.4 17,079.1
Gas Sales (MDth) - 53.1 - 176.1
- --------------------------------------------------------------------------------------------------------------------
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS NO. 143 -- ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In July 2001, the
Financial Accounting Standards Board (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 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."
13
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NiSource's consolidated asset retirement obligations liability was mainly
comprised of obligations for plugging and abandonment costs related to the
exploration and production operations, which is currently classified as a
discontinued operation. 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 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.
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. 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 $1.0 billion at June 30, 2003 based on rates for estimated
removal costs embedded in composite depreciation rates.
For the quarter and six months ended June 30 2003, NiSource recognized accretion
expense of $0.9 million and $1.8 million, respectively. The asset retirement
obligations liability totaled $47.9 million at June 30, 2003, of which $37.1
million was reported in discontinued operations. In addition, the liability was
reduced by $8.2 million in the second quarter of 2003 as a result of a change in
the estimated plugging and abandonment costs related to the exploration and
production business. 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, of which $38.3 million and $34.6 million would have been reported
in discontinued operations.
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
$51.0 million and $148.1 million for the three and six months ended June 30,
2003, respectively, and $361.2 million and $761.5 million for the comparable
2002 periods. 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 results of operations since adoption of the consensus.
14
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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). Primary Energy's Lakeside project currently falls
within the scope of FIN 46. Lakeside is one of six the projects included in the
pending sale to Private Power. However, if the project ownership and financing
structure was to remain in its present form, the variable interest entity,
including the unamortized debt of $39.1 million and related assets associated
with the Lakeside project, would be consolidated by NiSource beginning in the
third quarter 2003. NiSource is currently evaluating certain real estate
investments in order to determine if FIN 46 will impact the classification of
the investments.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 149 -- AMENDMENT OF STATEMENT
133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Effective July 1, 2003,
NiSource adopted Statement of Financial Accounting Standards No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS No.
149). SFAS No. 149 codifies and clarifies financial accounting and reporting for
derivative instruments and hedging activities under Statement of Financial
Accounting Standards No. 133, "Derivative Instruments and Hedging Activities,"
primarily in connection with decisions made by the Derivatives Implementation
Group and for implementation issues raised in the application of SFAS No. 133.
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003, as such the impact on NiSource's existing contracts at June 30, 2003 is
not material. Because the effect of SFAS No. 149 is dependent upon the terms of
contracts the company enters into after June 30, 2003, NiSource cannot determine
the impact of adopting SFAS No. 149 on a prospective basis.
SFAS NO. 150 -- ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. In the second quarter 2003, the
FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" (SFAS No. 150). SFAS No. 150
requires classification of a financial instrument within its scope as a
liability because it embodies an obligation of the issuer. As defined in SFAS
No. 150, an obligation is a conditional or unconditional duty or responsibility
to transfer assets or to issue equity shares. Instruments that fall within the
scope of SFAS No. 150 include mandatorily redeemable financial instruments,
obligations to repurchase an issuer's equity shares by transferring assets and
certain obligations to issue a variable number of shares. SFAS No. 150 is
generally effective for interim periods beginning after June 15, 2003 for
financial instruments created prior to June 1, 2003. For any instruments entered
into or modified after May 31, 2003, the Statement is effective for those
instruments upon consummation or modification. Currently, NiSource has mandatory
redeemable preferred stock that will be reclassified as a liability in the third
quarter of 2003. NiSource does not expect SFAS No. 150 to have any impact on its
financial condition or results of operations.
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.
15
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
JUNE 30, December 31,
(in millions) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment $ - $ (1.5)
(Loss) on available for sale securities (2.7) (3.1)
Net unrealized gains on cash flow hedges 93.1 67.8
Minimum pension liability adjustment (204.1) (203.7)
- -------------------------------------------------------------------------------------------------------------------
TOTAL ACCUMULATED OTHER COMPREHENSIVE (LOSS), NET $ (113.7) $ (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 June 30, 2003 and the years in which they expire
were:
(in millions) 2003 2004 2005 2006 2007 After
- -------------------------------------------------------------------------------------------------------------------
Guarantees of subsidaries debt $ 750.0 $ 80.0 $ 930.3 $ 40.0 $ 29.0 $1,623.9
Guarantees supporting commodity
transactions of subsidiaries 421.5 - 50.0 918.7 43.8 163.6
Other guarantees 130.0 - 51.1 - - 239.0
Lines of credit - 859.4 - - - -
Letters of credit 50.2 4.8 1.2 - - 106.4
- -------------------------------------------------------------------------------------------------------------------
Total commercial commitments $1,351.7 $944.2 $1,032.6 $ 958.7 $ 72.8 $2,132.9
- -------------------------------------------------------------------------------------------------------------------
NiSource has guaranteed the payment of $3.5 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 June 30, 2003, the amount outstanding
under the lines of credit and guaranteed by NiSource amounted to $859.4 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 $162.6 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.
16
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 two of the seven projects in which it
participates, Cokenergy and Lakeside Energy. Cokenergy is recognized on the
consolidated balance sheets as a capital lease. 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 in 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 June 30,
2003 was $514.9 million. As of June 30, 2003, approximately $427.9 million of
debt for two of the projects was included in NiSource's consolidated balance
sheet. Of the approximately $427.9 million of debt, $122.5 million relates to
Cokenergy, an asset that will be sold in the third quarter of 2003. The
remainder relates to the Whiting Clean Energy project, which is being retained.
Within the sales agreements of CER and the Primary Energy assets that are
expected to be sold in the third quarter of 2003, NiSource has made certain
operational and financial guarantees. NiSource has retained guarantees of $165.8
million of debt outstanding related to three of the Primary Energy projects. In
addition, NiSource has several operational guarantees related to the Primary
Energy assets. These operational guarantees are related to environmental
compliance, inventory balances, employee relations, and a residual future
purchase guarantee. NiSource is in the process of obtaining consents to replace
NiSource with the buyer on the operational guarantees. The fair value of the
guarantees was determined to be $11.1 million and a portion of the net proceeds
in the sale amount were assumed allocated to the guarantee as prescribed by FASB
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, "Including Indirect Guarantees of Indebtedness of Others."
Certain guarantees by NiSource within the CER sales agreement related to the CNR
forward gas sales agreements with Mahonia II Limited (Mahonia) and the
associated surety bonds will remain in place after the consummation of the
acquisition and will decline over time as volumes (approximately 94.0 Bcf) are
delivered in satisfaction of the contractual obligations, ending in February
2006. Offsetting certain amounts that may be owed by NiSource under the
guarantees, NiSource will be indemnified by Triana and MSCP will fund up to a
maximum of $221.0 million (as of August 31, 2003) of additional equity to Triana
to support Triana's indemnity, for Triana's gas delivery and related obligations
to Mahonia. The MSCP commitment declines over time in concert with the surety
bonds and the guaranteed obligation to deliver gas to Mahonia.
After the close of the transaction, Triana will own approximately 1.1 Tcf of
proved reserves, and will be capitalized with $330 million, approximately $200.0
million of which will be provided as initial equity by MSCP and the remainder of
which will be provided as part of a $500.0 million revolving credit facility.
NiSource believes that the combination of Triana's proved reserves, sufficient
capitalization, and access to the credit facility, combined with the Triana
indemnity and the $221.0 million of further commitments to Triana from MSCP,
will adequately offset any losses that may be incurred by NiSource due to
Triana's non-performance under the Mahonia agreements. Accordingly, NiSource has
not recognized a liability related to the retention of the Mahonia guarantees.
13. BUSINESS SEGMENT INFORMATION
NiSource's operations are divided into four 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
Other segment primarily includes gas marketing; power trading, Whiting Clean
Energy, entities involved in the development of fuel cells and storage systems,
and real estate activities.
17
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the second quarter 2003, NiSource re-aligned its reportable segments to
reflect the announced sale of its exploration and production operations. As of
the second quarter 2003, NiSource will no longer report an Exploration and
Production segment. In addition, the Primary Energy assets being sold are
reported as discontinued operations. Previously, the Primary Energy assets were
reported in the Other segment. All periods have been adjusted to conform with
the realignment.
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.
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 Six Months
Ended June 30, Ended June 30,
--------------------------- ----------------------------
(in millions) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
REVENUES
GAS DISTRIBUTION
Unaffiliated $ 653.9 $ 540.5 $ 2,604.1 $ 1,751.4
Intersegment 4.9 4.6 14.3 15.5
- --------------------------------------------------------------------------------------------------------------------
Total 658.8 545.1 2,618.4 1,766.9
- --------------------------------------------------------------------------------------------------------------------
GAS TRANSMISSION AND STORAGE
Unaffiliated 141.9 141.2 304.8 315.5
Intersegment 53.4 70.8 126.5 155.4
- --------------------------------------------------------------------------------------------------------------------
Total 195.3 212.0 431.3 470.9
- --------------------------------------------------------------------------------------------------------------------
ELECTRIC OPERATIONS
Unaffiliated 255.9 279.9 511.8 537.5
Intersegment 3.5 4.6 10.4 8.9
- --------------------------------------------------------------------------------------------------------------------
Total 259.4 284.5 522.2 546.4
- --------------------------------------------------------------------------------------------------------------------
OTHER
Unaffiliated 82.3 (51.6) 213.4 (33.0)
Intersegment 10.4 53.2 23.7 74.3
- --------------------------------------------------------------------------------------------------------------------
Total 92.7 1.6 237.1 41.3
- --------------------------------------------------------------------------------------------------------------------
Adjustments and eliminations (63.0) (88.9) (143.2) (150.5)
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED REVENUES $ 1,143.2 $ 954.3 $ 3,665.8 $ 2,675.0
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Gas Distribution $ 56.8 $ 34.9 $ 371.0 $ 284.5
Gas Transmission and Storage 87.3 76.6 198.6 203.4
Electric 64.1 81.0 116.7 152.8
Other (10.4) (38.3) (24.3) (29.4)
Corporate (22.0) 4.5 (13.8) 28.8
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATING INCOME $ 175.8 $ 158.7 $ 648.2 $ 640.1
- --------------------------------------------------------------------------------------------------------------------
18
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 dispositions, growth opportunities for NiSource's
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) 2002 and the current report on Form 8-K filed on July 15,
2003.
SECOND QUARTER RESULTS
Net Income (Loss)
NiSource reported net loss of $324.9 million, or a loss of $1.24 per share, for
the three months ended June 30, 2003, compared to net income of $25.0 million,
or $0.12 per share, for the second quarter 2002. Income from continuing
operations was $39.3 million, an increase of $18.5 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 June 30, 2003, were $641.8 million, a $4.6 million decrease
from the same period last year. The decrease in net revenues was primarily a
result of $10.8 million of credits issued pertaining to the Indiana Utility
Regulatory Commission (IURC) electric rate review settlement and reduced
electric and natural gas sales of $10.1 million as a result of unfavorable
weather, partially offset by increased net revenues related to adjustments
recorded in the second quarter 2003 for gas costs associated with certain
customers.
Expenses
Operating expenses for the second quarter 2003 were $466.0 million, a decrease
of $21.7 million from the 2002 period, mainly resulting from lower operation and
maintenance expenses of $42.5 million, slightly offset by increased
depreciation, depletion and amortization and other taxes expenses. The decrease
in operation and maintenance expenses was mainly attributable to a $20.2 million
reduction in employee-related and administrative expenses as a result of the
2002 reorganization initiatives, lower expenses of $7.2 million as a result of
the decision to exit the gas trading business, and a reversal of a litigation
reserve of $6.6 million relating to a lawsuit that was settled in the second
quarter 2003, partly offset by increased pension and postretirement expenses of
$9.4 million. The 2002 period was unfavorably impacted by $17.7 million for
expenses associated with the July 1, 2002, sale of a portfolio of EnergyUSA-TPC
(TPC) gas marketing contracts and the recognition of a reserve related to a
long-term
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
note receivable. Depreciation, depletion and amortization expense increased by
$12.0 million, mainly as a result of the timing of recording annualized
depreciation.
Other Income (Deductions)
Interest expense was $114.9 million for the quarter, a decrease of $7.3 million
compared to the second quarter 2002. The decrease was due to a reduction of
short- and long-term debt and lower short-term interest rates, slightly offset
by interest expense associated with the financing of the Whiting Clean Energy
plant placed in service in 2002.
Income Taxes
Income tax expense for the second quarter 2003 was $26.4 million, an increase of
$16.3 million compared to the 2002 period, due to higher pre-tax income.
Discontinued Operations
Loss from discontinued operations was $364.2 million for the second quarter 2003
versus income from discontinued operations of $4.2 million in the second quarter
or 2002. In early July, NiSource announced that it reached agreements to sell
its exploration and production subsidiary, Columbia Energy Resources, Inc.
(CER), and all of the steel-industry-related, inside-the-fence project entities
of its subsidiary Primary Energy, Inc. (Primary Energy). An after-tax loss of
$362.8 million, related to the sales was recorded in the second quarter.
NiSource accounted for CER and the Primary Energy subsidiaries as discontinued
operations as of June 30, 2003, and adjusted all periods presented accordingly.
SIX MONTH RESULTS
Net Income (Loss)
NiSource reported a net loss of $70.0 million, or a loss of $0.27 per share, for
the six months ended June 30, 2003, compared to net income of $267.2 million, or
$1.30 per share, for the comparable 2002 period. Income from continuing
operations was $261.6 million, an increase of $21.2 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 six
months ended June 30, 2003, were $1,671.5 million, a $73.6 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 during the
first quarter amounting to $60.5 million, net of $20.2 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 early in the year, higher non-weather related gas and
electric sales and higher gross receipts taxes and cost tracker revenues, both
of which are offset in operating expenses. The increase was partially offset by
$24.3 million from credits issued pertaining to the IURC electric rate review
settlement.
Expenses
Operating expenses for the first half of 2003 were $1,023.3 million, an increase
of $65.5 million from the 2002 period. The increase was due to increased pension
and postretirement expenses of $18.8 million and increased uncollectible
receivables of $17.3 million from a modification in the method of calculation
and the effects of weather-driven higher gas costs on the residential customer
base, partly offset by a reduction in employee-related and administrative
expenses of $21.9 million and by a reversal of a litigation reserve of $6.6
million relating to a lawsuit that was settled in the second quarter 2003. The
2002 period operating expenses were reduced by $20.3 million as a result of a
gain on the sale of a utility line-locating business and insurance recoveries of
environmental expenses, slightly offset by expenses associated with the July 1,
2002, sale of a portfolio of TPC gas marketing contracts. Other taxes increased
$25.4 million from the same period in 2002, due to the effects of higher
commodity prices on gross receipts taxes and are generally offset in revenues.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Other Income (Deductions)
Interest expense was $237.9 million for the first six months, a decrease of
$11.4 million compared to the first half of 2002. The decrease was due to a
reduction of short- and long-term debt and lower short-term interest rates,
slightly offset by interest expense associated with the financing of the Whiting
Clean Energy plant placed in service in 2002.
Income Taxes
Income tax expense for the first six months of 2003 was $153.9 million, an
increase of $14.2 million compared to the 2002 period, due to higher pre-tax
income.
Discontinued Operations
Loss from discontinued operations was $322.8 million for the first six months of
2003 versus income from discontinued operations of $26.8 million in the
prior-year period. An after-tax loss of $362.8 million, related to the sales of
CER and Primary Energy was recorded in the second quarter, slightly offset by a
first quarter 2003 gain on the sale of CER's interest in natural gas production
properties in New York State. NiSource accounted for CER and the Primary Energy
subsidiaries as discontinued operations as of June 30, 2003, and adjusted all
periods presented accordingly.
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 continuing operations for the six months ended June 30, 2003 was
$556.4 million. Cash generated from working capital was $29.7 million,
principally driven by a decrease in accounts receivable and decreased
inventories and underrecovered gas and fuel costs, partly offset by decreased
exchange gas payables and other accruals.
On July 29, 2003, NiSource filed a shelf registration statement with the
Securities and Exchange Commission to periodically sell up to $2.5 billion in
debt securities, common and preferred stock and other securities. The
registration statement became effective on August 7, 2003. NiSource's existing
shelf registration statement permits the sale of $307.0 million in previously
registered but unsold securities.
On July 21, 2003, NiSource issued $500.0 million of 5.4% eleven-year senior
unsecured notes that mature July 15, 2014. The proceeds were used to reduce
other debt and for working capital needs. During the first half of 2003,
NiSource redeemed $54.0 million of Northern Indiana medium-term notes. In
addition, on July 8, 2003, NiSource redeemed $70.0 million of Northern Indiana
medium-term notes. On April 15, 2003, NiSource redeemed $300.0 million of
NiSource Finance Corp. (NFC) 5.75% two-year senior notes that matured April 15,
2003. On March 31, 2003, NiSource also redeemed $75.0 million of NiSource
Capital Markets, Inc, 7.75% Subordinated Debentures due March 1, 2026. NiSource
plans to issue an additional $400.0 to $600.0 million in new debt through its
financing subsidiary NFC during the remainder of 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
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
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 July 8, 2003 NiSource announced that it would reduce its annual dividend by
more than 20 percent to 92 cents per share from $1.16 per share. The change in
the dividend, the sale of non-core assets, the November 2002 equity offering and
ongoing debt reduction efforts have stabilized NiSource's credit ratings,
enhanced cash flows and provided funds to reinvest in NiSource's core businesses
for the future. NiSource's decision was also influenced by the fact that the
recent dividend yield and payout ratio have been higher than industry averages.
On July 3, 2003, NiSource announced that it reached agreements to sell its
exploration and production subsidiary, CER and the steel-industry-related,
inside-the-fence project entities of its Primary Energy subsidiary in two
independent transactions. Under the CER agreement, Triana Energy Holdings, an
exploration and production company based in Charleston, WV and an affiliate of
Morgan Stanley Dean Witter Capital Partners IV, L.P., agreed to purchase all of
the stock of CER for $330 million in cash, plus the assumption of obligations to
deliver approximately 94.0 billion cubic feet (Bcf) of natural gas pursuant to
existing forward sales contracts. The sale will bring about the transfer of 1.1
trillion cubic feet of natural gas reserves. The Primary Energy agreement
involves the sale of six Primary Energy operating subsidiaries and the Primary
Energy name to Private Power, LLC (Private Power), a privately held power
development firm backed by American Securities Capital Partners, LLC. According
to the terms of the agreement, Private Power agreed to purchase the subsidiaries
for approximately $335.0 million, comprised of $118.0 million in cash and the
assumption of $217.0 million of liabilities and other obligations. The
transactions are expected to be completed in the third quarter 2003. The cash
proceeds from the sales will be used to reduce NiSource's debt.
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
364-day credit facility allowed NiSource to utilize the $500 million to support
the issuance of letters of credit. As a result of its expiration, 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 Columbia Natural Resources, Inc. (CNR)'s New York joint venture assets
and net cash flow from continuing operations.
NiSource had no commercial paper outstanding as of June 30, 2003. As of December
31, 2002, $150.0 million of commercial paper was outstanding with a weighted
average interest rate of 2.25%. NiSource had outstanding credit facility
advances under its 3-year facility of $859.4 million at June 30, 2003, at a
weighted average interest rate of approximately 1.8%, and credit facility
advances of $763.1 million at December 31, 2002, at a weighted average interest
rate of 2.1%. As of June 30, 2003 and December 31, 2002, NiSource had $162.6
million and $171.7 million of standby letters of credit outstanding,
respectively. As of June 30, 2003, $228.0 million of credit was available under
the credit facilities.
Credit Ratings
On July 8, 2003, Moody's Investors Service affirmed the senior unsecured ratings
of NiSource at Baa3, and the existing ratings of all other subsidiaries,
concluding a review for possible downgrade that began on May 13, 2003. Moody's
ratings outlook for NiSource and its subsidiaries is now "stable". On June 30,
2003, Fitch Ratings affirmed their BBB senior unsecured rating for NiSource and
the BBB+ rating for the Columbia Energy Group (Columbia) subsidiary. Fitch also
lowered the rating of Northern Indiana (Northern Indiana Public Service Company
by one notch to BBB+ due to Fitch's policy of restricting the ratings between a
parent and its subsidiaries where short-term financing facilities are solely at
the holding company level. This does not reflect weakening credit measures at
Northern Indiana. Fitch's outlook for NiSource and all of its subsidiaries is
stable. On June 16, 2003, Standard and Poor's affirmed its senior unsecured
ratings of NiSource at BBB, and the existing ratings of all other subsidiaries.
Standard and Poor's outlook for NiSource and all of its subsidiaries were
revised to stable from negative.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
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. 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
June 30, 2003, CARC had $50.0 million 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. As of June 30, 2003,
Northern Indiana has sold $100.0 million of its accounts receivable under this
agreement. Northern Indiana and Citibank are currently negotiating a new
Accounts Receivable Sales Agreement, which would increase Northern Indiana's
capacity under this program to $200.0 million.
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
Through its various business activities, 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, 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.
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 June 30 2003, the combined
borrowings outstanding under these facilities totaled $859.4 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 $662.9
million of long-term debt at June 30, 2003. Based upon average borrowings under
agreements subject to fluctuations in short-term market interest rates during
the quarter and six months ended June 30, 2003, an increase in short-term
interest rates of 100 basis points (1%) would have increased interest expense by
$2.7 million and $5.3 million for the quarter and six months ended June 30,
2003.
On July 22, 2003, NiSource entered into fixed-to-variable interest rate swap
agreements in a notional amount of $500 million with four counterparties with an
11-year term. NiSource will receive payments based upon a fixed 5.4% interest
rate and pay a floating interest amount based on U.S. 6-month LIBOR-BBA plus
0.78 percent per annum. There was no exchange of premium at the initial date of
the swaps. In addition, each party has the right to cancel the swaps on either
July 15, 2008 or July 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" as subsequently amended by SFAS No. 137 and SFAS No. 138
(collectively referred to as SFAS No. 133).
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
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 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 second quarter
2003, the sources of the valuations of the contracts during 2003 and the years
in which the remaining contracts (all power trading) mature are:
Three Months Ended Six Months Ended
(in millions) June 30, 2003 June 30, 2003
- -----------------------------------------------------------------------------------------------------------------------
Fair value of contracts outstanding at the beginning of the period $ 2.6 $ -
Contracts realized or otherwise settled during the period (including
net option premiums received) 1.2 (0.2)
Fair value of new contracts entered into during the period 2.9 4.1
Other changes in fair values during the period (11.8) (9.0)
- -----------------------------------------------------------------------------------------------------------------------
Fair value of contracts outstanding at the end of the period $ (5.1) $ (5.1)
- -----------------------------------------------------------------------------------------------------------------------
(in millions) 2003 2004 2005 2006 2007 After
- -----------------------------------------------------------------------------------------------------------------------
Prices actively quoted $ - $ - $ - $ - $ - $ -
Prices from other external sources (1.1) (0.5) - - - -
Prices based on models/other method 1.3 (4.8) - - - -
- -----------------------------------------------------------------------------------------------------------------------
Total fair values $ 0.2 $ (5.3) $ - $ - $ - $ -
- -----------------------------------------------------------------------------------------------------------------------
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 electric 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
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
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 $0.5
million $1.3 million and effectively zero, during the second quarter 2003,
respectively. The daily VaR for the gas marketing portfolios on an average, high
and low basis was $0.3 million, $0.5 million and $0.2 million during the second
quarter 2003, respectively. Prospectively, management has set the VaR limits at
$2.5 million for power trading and $0.5 million for gas marketing. 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 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, earnings, or regulatory
assets and liabilities 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 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.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
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.
Refer to "Recently Issued Accounting Pronouncements" in Note 8 of the Notes of
Consolidated Financial Statements for information regarding recently issued
accounting standards.
Insurance Renewal
NiSource sustained an overall increase of 10% in premiums for the property and
casualty insurance program that was renewed on July 1, 2003. The renewal of the
executive liability program, which includes directors and officer's liability
and fiduciary liability, is scheduled for November 1, 2003 and all indications
are that the increase in premiums for those particular coverages will be much
higher. In addition to increases in premiums, NiSource anticipates added
restrictions to coverage and capacity.
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.
Primary Energy has received a Title V air operating permit for the Portside
facility from the Indiana Department of Environmental Management. Primary Energy
filed an objection with the Office of Environmental Adjudication regarding
certain provisions in the permit. Pending the outcome of this process, the
impact, if any, on the operation of the facility cannot be determined at this
time.
In connection with the sale of certain Primary Energy assets, NiSource will
provide indemnification to the purchaser for specified potential environmental
liabilities. However, the total amount of these liabilities is not reasonably
estimable at this time.
In connection with the sale of CER, NiSource will retain responsibility for
remediation of approximately 140 metering stations where mercury was utilized,
and certain other environmental issues. An estimated liability has been
recorded.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Presentation of Segment Information
With the announcement of the sale of the exploration and production business,
NiSource's operations are divided into four primary business segments; Gas
Distribution, Transmission and Storage, Electric, and Other.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- -------------------------
(in millions) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
NET REVENUES
Sales Revenues $ 576.4 $ 465.5 $ 2,352.8 $ 1,535.2
Less: Cost of gas sold 385.3 291.7 1,729.3 1,012.7
- -------------------------------------------------------------------------------------------------------------------
Net Sales Revenues 191.1 173.8 623.5 522.5
Transportation Revenues 82.4 79.6 265.6 231.7
- -------------------------------------------------------------------------------------------------------------------
Net Revenues 273.5 253.4 889.1 754.2
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 135.4 154.3 319.2 295.3
Depreciation and amortization 47.9 39.2 95.5 93.9
Other taxes 33.4 25.0 103.4 80.5
- -------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 216.7 218.5 518.1 469.7
- -------------------------------------------------------------------------------------------------------------------
Operating Income $ 56.8 $ 34.9 $ 371.0 $ 284.5
===================================================================================================================
REVENUES ($ IN MILLIONS)
Residential 378.5 276.0 1,555.1 958.4
Commercial 135.0 83.6 552.7 310.4
Industrial 37.1 22.8 110.5 52.3
Transportation 82.4 79.6 265.6 231.7
Off system sales 17.4 43.0 60.6 106.7
Other 8.4 40.1 73.9 107.4
- -------------------------------------------------------------------------------------------------------------------
Total 658.8 545.1 2,618.4 1,766.9
- -------------------------------------------------------------------------------------------------------------------
SALES AND TRANSPORTATION (MDTH)
Residential sales 29.5 32.8 150.8 129.8
Commercial sales 12.1 16.4 58.0 49.5
Industrial sales 3.9 2.3 12.1 8.0
Transportation 103.8 116.6 286.1 280.4
Off system sales 2.6 9.7 5.3 36.8
Other 2.0 - 2.2 0.1
- -------------------------------------------------------------------------------------------------------------------
Total 153.9 177.8 514.5 504.6
- -------------------------------------------------------------------------------------------------------------------
HEATING DEGREE DAYS 486 523 3,371 2,794
NORMAL HEATING DEGREE DAYS 485 513 3,120 3,256
% COLDER (WARMER) THAN NORMAL 0% 2% 8% (14%)
CUSTOMERS
Residential 2,303,356 2,327,941
Commercial 213,982 212,258
Industrial 5,999 6,200
Transportation 744,324 676,038
Other 65 63
- -------------------------------------------------------------------------------------------------------------------
Total 3,267,726 3,222,500
- -------------------------------------------------------------------------------------------------------------------
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,
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS (CONTINUED)
segment operating income is higher in the first and fourth quarters reflecting
the heating demand during the winter season.
Regulatory Matters
Changes in gas industry regulation, which began in the mid-1980s at the federal
level, have broadened to retail customers at the state level. For many years,
large industrial and commercial customers have had the ability to purchase
natural gas directly from marketers and to use Gas Distribution's facilities for
transportation services. Additionally, as of June 30, 2003, approximately 0.8
million of Gas Distribution's residential and commercial customers had selected
an alternate supplier.
Gas Distribution continues to explore customer choice opportunities through
regulatory initiatives in all of its jurisdictions. However, Columbia Gas of
Kentucky has filed to terminate its choice program for residential and
commercial customers and discussions are ongoing. While customer choice programs
are intended to provide all customer classes with the opportunity to obtain gas
supplies from alternative merchants, Gas Distribution expects to play a
substantial role in supplying gas commodity services to its customers in the
foreseeable future. As customers enroll in these programs and purchase their gas
from other suppliers, the Gas Distribution subsidiaries are sometimes left with
pipeline capacity they have contracted for, but no longer need. The state
commissions in jurisdictions served by Gas Distribution are at various stages in
addressing these issues and other transition considerations. Gas Distribution is
currently recovering, or has the opportunity to recover, the costs resulting
from the unbundling of its services and believes that most of such future costs
will be mitigated or recovered. Methodologies for mitigating or recovering
transition costs include incentive sharing mechanisms, reducing levels of
reserved pipeline capacity and mandatory assignment of pipeline capacity to
alternative suppliers.
Weather
Weather in Gas Distribution's territories for the second quarter 2003 was normal
and 7% warmer than the second quarter of 2002.
For the first six months of 2003, weather was 8% colder than normal and 21%
colder than the first six months of 2002.
Throughput
Total volumes sold and transported of 153.9 million dekatherms (MDth) for the
second quarter 2003, decreased 23.9 MDth from the same period last year
primarily due to warmer weather in the 2003 period.
For the six month period ended June 30 2003, total volumes sold and transported
were 514.5 MDth, an increase of 9.9 MDth from the same period in 2002 primarily
reflecting colder weather in the first three months of the year.
Net Revenues
Net revenues for the three months ended June 30, 2003 were $273.5 million, an
increase of $20.1 million over the same period in 2002, mainly attributable to
adjustments recorded in the second quarter 2003 for gas costs associated with
certain customers.
For the six month period ended June 30, 2003, net revenues were $889.1 million,
a $134.9 million increase from the same period in 2002 due to colder weather
during the first three months of the year and higher gross receipts taxes and
cost tracker revenues both of which were offset in operating expenses.
Operating Income
For the second quarter 2003, Gas Distribution reported operating income of $56.8
million, an increase of $21.9 million from the same period in 2002. The increase
was mainly attributable to the increase in net revenues discussed above and a
reduction in employee-related and administrative expenses of $18.6 million as a
result of the 2002 reorganization initiatives, slightly offset by increased
pension costs of $2.5 million. The 2002 period was favorably impacted by the
timing of recording annualized depreciation.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS (CONTINUED)
Operating income for the first six months of 2003 totaled $371.0 million, an
increase of $86.5 million from the same period in 2002. The increase was due to
$83.0 million of increased sales and deliveries of natural gas due to colder
weather during the first quarter 2003, partly offset by an increase of $17.3
million for uncollectible receivables from a modification in the method of
calculation and the effects of weather-driven higher gas costs on the
residential customer base. Other taxes increased by $22.9 million mainly as a
result of higher gross receipts taxes, which are generally offset in revenues.
The 2002 period was positively impacted by $12.2 million from insurance
recoveries. Taking into account reserve changes, that together increased 2003
operation and maintenance expenses by $8.3 million and decreased 2002 operation
and maintenance expenses by $12.2 million, year-over-year operation and
maintenance expenses were essentially flat.
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
TRANSMISSION AND STORAGE OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
(in millions) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Transportation revenues $ 148.0 $ 164.2 $ 335.0 $ 375.1
Storage revenues 44.6 44.5 89.3 89.8
Other revenues 2.7 3.3 7.0 6.0
- --------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 195.3 212.0 431.3 470.9
Less: Cost of gas sold 2.7 15.0 7.1 26.7
- --------------------------------------------------------------------------------------------------------------------
Net Revenues 192.6 197.0 424.2 444.2
- --------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 63.3 79.0 141.2 158.3
Depreciation and amortization 27.7 27.3 55.6 54.7
(Gain) on sale or impairment of assets 0.2 (0.1) 0.2 (0.4)
Other taxes 14.1 14.2 28.6 28.2
- --------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 105.3 120.4 225.6 240.8
- --------------------------------------------------------------------------------------------------------------------
Operating Income $ 87.3 $ 76.6 $ 198.6 $ 203.4
====================================================================================================================
THROUGHPUT (MDTH)
Columbia Transmission
Market Area 171.5 187.0 606.3 564.0
Columbia Gulf
Mainline 173.7 179.0 353.7 317.4
Short-haul 29.3 34.4 58.6 74.8
Columbia Pipeline Deep Water 1.9 - 3.4 0.2
Crossroads Gas Pipeline 8.4 6.5 16.1 14.6
Granite State Pipeline 6.6 8.4 21.0 20.1
Intrasegment eliminations (168.1) (162.6) (336.6) (285.9)
- --------------------------------------------------------------------------------------------------------------------
Total 223.3 252.7 722.5 705.2
- --------------------------------------------------------------------------------------------------------------------
NiSource's gas transmission and storage segment consists of the operations of
Columbia Gas Transmission Corporation (Columbia Transmission), Columbia Gulf
Transmission Company (Columbia Gulf), Columbia Pipeline Corporation, Crossroads
Pipeline Company and Granite State Transmission System. In total NiSource owns a
pipeline network of approximately 16,046 miles extending from offshore in the
Gulf of Mexico to Lake Erie, New York and the eastern seaboard. The pipeline
network serves customers in seventeen northeastern, mid-Atlantic, midwestern and
southern states, as well as the District of Columbia. In addition, the NiSource
gas transmission and storage segment operates one of the nation's largest
underground natural gas storage systems.
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 on April 21, 2003.
Environmental Matters
The EPA issued final rules revising the National Ambient Air Quality Standards
for ozone and particulate matter in July 1997. These rules were widely
challenged. On March 26, 2002, the United States Court of Appeals for the D.C.
Circuit largely upheld the ambient air standards as challenged. Consequently,
designation of areas not attaining the standards, promulgation of rules
specifying a compliance level, compliance deadline, and controls necessary for
compliance will be completed over the next few years, which will likely change
air emissions compliance requirements. In the interim, existing ozone ambient
air quality standards will remain in place and may
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)
require imposition of additional controls in areas of non-attainment. Resulting
rules could require additional reductions in NOx emissions from reciprocating
engines and turbines at pipeline compressor stations (including compressor
stations owned by Columbia Transmission and Columbia Gulf). The EPA and state
regulatory authorities will set final implementation requirements. Certain
states have already begun to propose new NOx emission requirements that may be
applicable to pipeline engines and turbines. NiSource believes that the costs
relating to compliance with any new limits may be significant but are dependent
upon the ultimate control program agreed to by the targeted states and the EPA,
and are currently not reasonably estimable. NiSource will continue to closely
monitor developments in this area.
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.
Throughput for the Gas Transmission and Storage segment totaled 223.3 MDth for
the second quarter 2003, compared to 252.7 MDth for the same period in 2002. The
decrease of 29.4 MDth is due to lower deliveries to dual fueled electric power
generators, which chose not to run on the high priced gas experienced during the
quarter, and warmer weather in certain gas distribution market areas.
Throughput for the six months ended June 30, 2003 was 722.5 MDth, an increase of
17.3 MDth over the same period in 2002. The increase in volumes delivered is
primarily due to sustained, colder-than-normal weather in early 2003.
Net Revenues
Net revenues were $192.6 million for the second quarter 2003, a decrease of $4.4
million from the same period in 2002. The decrease was primarily due to lower
interruptible service revenues. Factors contributing to this include high gas
commodity costs and early storage refills by firm customers, which reduce
available capacity for interruptible customers.
Net revenues were $424.2 million for the six months ended June 30, 2003, a
decrease of $20.0 million, mainly due to $9.3 million of lower interruptible
service revenues and $9.6 million of lower firm service revenues due to measures
undertaken during a first quarter 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 $87.3 million in the second quarter 2003 increased $10.7
million from the same period in 2002. The increase was mainly attributable to a
reduction in employee-related and administrative expenses of $5.0 million and a
reversal of a litigation reserve of $6.6 million relating to a lawsuit that was
settled in the second quarter of 2003, slightly offset by lower revenues in the
current period mentioned above. The 2002 period was unfavorably impacted by the
recognition of a reserve of $6.0 million related to a long-term note receivable.
For the first six months of 2003, operating income was $198.6 million, a
decrease of $4.8 million from the 2002 period, which was due largely to the
change in net revenues mentioned above, slightly offset by a reversal of a
litigation reserve of $6.6 million relating to a lawsuit that was settled in the
second quarter of 2003. The 2002 period was negatively impacted by a reserve of
$6.0 million related to a long-term note receivable.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
(in millions) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
NET REVENUES
Sales revenues $ 259.4 $ 284.5 $ 522.2 $ 546.4
Less: Cost of sales 83.7 89.1 177.0 170.3
- --------------------------------------------------------------------------------------------------------------------
Net Revenues 175.7 195.4 345.2 376.1
- --------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 52.9 57.3 110.4 110.7
Depreciation and amortization 43.6 42.4 87.3 84.6
Other taxes 15.1 14.7 30.8 28.0
- --------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 111.6 114.4 228.5 223.3
- --------------------------------------------------------------------------------------------------------------------
Operating Income $ 64.1 $ 81.0 $ 116.7 $ 152.8
====================================================================================================================
REVENUES ($ IN MILLIONS)
Residential 62.4 69.9 134.6 138.8
Commercial 69.7 76.3 136.4 145.3
Industrial 93.4 100.5 191.3 191.5
Wholesale 25.8 22.9 45.4 42.1
Other 8.1 14.9 14.5 28.7
- --------------------------------------------------------------------------------------------------------------------
Total 259.4 284.5 522.2 546.4
- --------------------------------------------------------------------------------------------------------------------
SALES (GIGAWATT HOURS)
Residential 639.1 699.2 1,428.7 1,401.6
Commercial 859.2 891.2 1,710.7 1,722.9
Industrial 2,205.4 2,196.9 4,478.9 4,222.7
Wholesale 751.5 784.4 1,293.4 1,546.7
Other 27.5 29.2 61.2 60.6
- --------------------------------------------------------------------------------------------------------------------
Total 4,482.7 4,600.9 8,972.9 8,954.5
- --------------------------------------------------------------------------------------------------------------------
COOLING DEGREE DAYS 113 263 113 263
NORMAL COOLING DEGREE DAYS 224 219 224 219
% WARMER (COLDER) THAN NORMAL (50%) 20% (50%) 20%
ELECTRIC CUSTOMERS
Residential 384,750 381,904
Commercial 48,694 47,790
Industrial 2,560 2,615
Wholesale 28 27
Other 796 801
- --------------------------------------------------------------------------------------------------------------------
Total 436,828 433,137
- --------------------------------------------------------------------------------------------------------------------
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.
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)
Market Conditions
The steel sector continues to show improvement, with second quarter 2003 sales
8% higher than the 2002 level and a 14% improvement for the six-month period.
The acquisitions of Bethlehem Steel and National Steel by ISG and U.S. Steel,
respectively, have been completed.
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 $24.3 million were recognized for electric customers for the first
half 2003. The order adopting the settlement is currently being appealed to the
Indiana Court of Appeals by both the Citizens 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 and the
appropriate amount is being refunded to customers.
On June 20, 2002, Northern Indiana, Ameren Corporation and First Energy
Corporation established terms for joining the Midwest Independent System
operator (MISO) through participation in an independent transmission company
(ITC). The MISO arrangements were filed with the FERC, and on July 31, 2002, the
FERC issued an order conditionally approving these arrangements. On November 5,
2002, the ITC, which includes Northern Indiana, signed an agreement with MISO.
At its April 30, 2003 meeting, FERC approved the transfer of functional control
of Northern Indiana's transmission system to the ITC and issued an order
addressing the pricing of electric transmission. An IURC proceeding to obtain
approval to transfer functional control of the transmission system to the ITC is
ongoing. An uncontested settlement that authorizes reimbursement of $7.4 million
to Northern Indiana for incurred costs was approved by the FERC on July 31,
2003. As of June 30, 2003, Northern Indiana has deferred $6.5 million of costs
related to joining the ITC.
The MISO has initiated the Midwest Market Initiative (MMI), which will develop
the structures and processes to be used to implement an electricity market for
the MISO region. This market proposes non-discriminatory transmission service,
reliable grid operation, and the purchase and sale of electric energy in a fair,
efficient and non-discriminatory manner. MISO has filed detailed tariff
information, with a planned initial operation date of March 31, 2004. Northern
Indiana and TPC, a subsidiary of NiSource, are actively pursuing roles in the
MMI. At the current time, management believes that MMI will change the manner in
which Northern Indiana and TPC conducts their electric business; however,
management cannot determine at this time the final MMI impacts.
Northern Indiana has been recovering the costs of electric power purchased for
sale to its customers through the 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. On March 21, 2003, Northern
Indiana amended its filing to allow recovery, via the FAC, of 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.
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)
On December 30, 2002, the FERC issued an order that, among other things, reduced
the rate base and rate of return allowed to Northern Indiana under electric
rates proposed in connection with the filing of its 1995 Open Access
Transmission Tariff, thus creating a refund liability for Northern Indiana.
Northern Indiana did not seek rehearing of the FERC's December 30, 2002 order
and submitted a compliance filing on March 17, 2003, which proposed rates and
services in compliance with the FERC's order. Based on this filing, an estimated
refund liability has been recorded.
In January 2002, Northern Indiana filed for approval to implement an
environmental cost tracker (ECT). The ECT was approved by the IURC on November
26, 2002. Under the ECT Northern Indiana will be able to recover (1) allowance
for funds used during construction and a return on the capital investment
expended by Northern Indiana to implement Indiana Department of Environmental
Management's nitrogen oxide State Implementation Plan through an Environmental
Cost Recovery Mechanism (ECRM) and (2) related operation and maintenance and
depreciation expenses once the environmental facilities become operational
through an Environmental Expense Recovery Mechanism (EERM). Northern Indiana
will submit filings on a semi-annual basis for the ECRM and on an annual basis
for the EERM. Northern Indiana made its initial filing of the ECRM in February
2003 for capital expenditures of $ 58.4 million. On April 30, 2003, the IURC
issued an order approving the ECRM filing, which allows for collection of
allowance for funds used during construction and a return on the capital
investment beginning with the May 2003 customer bills. Through June 30, 2003 the
ECRM revenues amounted to $1.0 million. On August 1, Northern Indiana filed the
ECRM on capital investments of $120 million. The initial filing of the EERM is
anticipated with the next semi-annual filing of the ECT. Over the timeframe
required to meet the environmental standards, Northern Indiana anticipates a
total capital investment amounting to approximately $234 million. The IURC order
is currently being appealed to the Indiana Court of Appeals by the Citizens
Action Coalition of Indiana.
Sales
Electric sales for the second quarter 2003 were 4,482.7 gigawatts (gwh), a
decrease of 118.2 gwh compared to the 2002 period. The decrease primarily
reflected cooler weather during the quarter.
Electric sales for the first six months of 2003 were 8,972.9 gwh, an increase of
18.4 gwh compared to the 2002 period, primarily reflecting increased sales to
residential and industrial customers, offset by decreased commercial and
wholesale transactions. Residential sales improved due to overall 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 second quarter 2003, electric net revenues of $175.7 million decreased by
$19.7 million from the comparable 2002 period. The decrease was primarily due to
$10.8 million of credits issued pertaining to the IURC electric rate review
settlement and cooler weather that decreased electric sales by $6.2 million.
In the first six months of 2003, electric net revenue of $345.2 million
decreased by $30.9 million over the 2002 period due to $24.3 million of credits
issued pertaining to the IURC electric rate review settlement and cooler weather
at the beginning of the summer season.
Operating Income
Operating income for the second quarter 2003 was $64.1 million, a decrease of
$16.9 million from the same period in 2002. The decrease was primarily due to
the changes in revenue mentioned above.
Operating income for the first half of 2003 was $116.7 million, a decrease of
$36.1 million from the same period in 2001 due to the changes in revenue
mentioned above and increased pension and postretirement benefits expenses of
$9.0 million.
35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
OTHER
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
(in millions) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
NET REVENUES
Other revenue $ 92.7 $ 1.6 $ 237.1 $ 41.3
Less: Cost of products purchased 86.8 8.6 224.7 35.8
- --------------------------------------------------------------------------------------------------------------------
Net Revenues 5.9 (7.0) 12.4 5.5
- --------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 12.1 29.0 26.6 33.7
Depreciation and amortization 3.3 1.0 6.2 2.4
Loss (gain) on sale or impairment of assets - - 1.1 (3.5)
Other taxes 0.9 1.3 2.8 2.3
- --------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 16.3 31.3 36.7 34.9
- --------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) $ (10.4) $ (38.3) $ (24.3) $ (29.4)
- --------------------------------------------------------------------------------------------------------------------
The Other segment participates in energy-related services including gas
marketing, power trading and ventures focused on distributed power generation
technologies, including the Whiting Clean Energy plant, fuel cells and storage
systems. Additionally, the Other segment is involved in real estate and other
businesses.
Sale of Primary Energy Assets
On July 3, 2003, NiSource announced that it reached an agreement to sell the
steel-industry-related, inside-the-fence project entities of its Primary Energy,
subsidiary. The agreement involves the sale of six Primary Energy operating
subsidiaries and the Primary Energy name to Private Power, LLC (Private Power),
a privately held power development firm backed by American Securities Capital
Partners. According to the terms of the agreement, Private Power agreed to
purchase the subsidiaries for approximately $335.0 million, comprised of $118.0
million in cash and the assumption of $217.0 million of liabilities and other
obligations. NiSource has accounted for the Primary Energy subsidiaries as
discontinued operations as of June 30, 2003 and has adjusted all periods
presented accordingly.
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
WHITING CLEAN ENERGY. 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. Primary Energy subsequently filed a motion to
compel the arbitration specified in the contract and stay the litigation filed
by the contractor. On July 28, 2003 the Court granted the motion.
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 in the first quarter of 2003 on this
facility in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal
36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
OTHER (CONTINUED)
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.
During the second quarter of 2003, Primary Energy purchased the Whiting Clean
Energy plant from the special purpose lessor entity and the facility continues
to be an owned asset.
LAKESIDE. Primary Energy's Lakeside project currently falls within the scope of
Interpretation No. 46, "Consolidation of Variable Interest Entities." However,
Lakeside is part of the assets that are to be sold in the third quarter of 2003.
Although, if the project ownership and financing structure remains in its
present form, the variable interest entity, including the unamortized debt of
$39.1 million and related assets associated with the Lakeside project, would be
consolidated by NiSource beginning in the third quarter 2003.
Net Revenues
Net revenues of $5.9 million for the second quarter 2003 increased by $12.9
million from the second quarter of 2002, due to losses recorded in 2002
associated with the gas trading business.
For the first six months of 2003, net revenues were $12.4 million, an increase
of $6.9 million due to losses recorded in 2002 associated with the gas trading
business. 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 $10.4 million in the second
quarter 2003, versus operating loss of $38.3 million in the same period in 2002.
The 2003 period was affected by increased revenues as discussed above, a
reduction in operation and maintenance expenses of $7.2 million as a result of
the decision to exit the gas trading business and lower lease expense of $7.5
million as a result of the recharacterization of the Whiting Clean Energy plant
from an operating lease to an owned asset.
For the first six months of 2003, operating loss was $24.3, versus an operating
loss of $29.4 million in the 2002 period, due to increased revenues as discussed
above and a decrease in operation and maintenance expenses of $7.2 million as a
result of the decision to exit the gas trading business. The 2002 period was
favorably impacted by $12.6 million as a result of a gain on the sale of gas
marketing contracts not associated with TPC 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."
37
ITEM 4. CONTROLS AND PROCEDURES
NISOURCE INC.
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-15(e) and 15d-15(e)), have concluded based
on the evaluation required by paragraph (b) of Exchange Act Rules 13a-15 and
15d-15 that, as of the end of the period covered by this report, 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 internal controls subsequent
to the date of the most recent evaluation, nor were there any significant
deficiencies or material weaknesses in NiSource's internal controls. As a
result, no corrective actions were required or undertaken.
38
PART II
ITEM 1. LEGAL PROCEEDINGS
NISOURCE INC.
1. UNITED STATES OF AMERICA EX REL. JACK J. GRYNBERG V. COLUMBIA GAS
TRANSMISSION CORP., ET AL.
Plaintiff originally filed a complaint under the False Claims Act, on
behalf of the United States of America, against approximately seventy
pipelines. Plaintiff claimed that the defendants had submitted false
royalty reports to the government (or caused others to do so) by
mismeasuring the volume and heating content of natural gas produced on
Federal land and Indian lands. Plaintiff's original complaint was
dismissed without prejudice for misjoinder of parties and for failing
to plead fraud with specificity. In 1997, plaintiff then filed over
sixty-five new False Claims Act complaints against over 330 defendants
in numerous Federal courts. One of those complaints was filed in the
Federal District Court for the Eastern District of Louisiana against
Columbia 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.
On July 28, 2003, the court granted plaintiffs' Motion for Leave to
File a Fourth Amended Complaint. This complaint only names one Columbia
entity, Columbia Energy Services Corporation, as a defendant.
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
Gas Transmission Corporation (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
39
ITEM 1. LEGAL PROCEEDINGS (Continued)
NISOURCE INC.
acquired by Columbia in 1999, and this litigation was retained by
Columbia when Columbia sold its propane operations in 2001. Plaintiff's
complaint arises from an explosion and fire, which occurred in a
Wisconsin vacation cottage in 1997. National Propane, L.P. filed a
third-party complaint for contribution against Natural Gas Odorizing
and Phillips Petroleum Company. 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.
Supplemental briefing was completed on these issues and we are awaiting
the court's ruling.
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
On May 20, 2003, NiSource held its Annual Meeting of Stockholders. On the April
1, 2003 record date, NiSource had 262,172,902 shares of common stock
outstanding, each of which was entitled to one vote at the meeting. Voted upon
and approved by the requisite number of shares present in person or by proxy at
the meeting was: an amendment to the Nonemployee Director Stock Incentive Plan
and the election of three directors each to serve a term of three years.
Votes For Votes Against Abstentions
- -------------------------------------------------------------------------------------------------------------------
Nonemployee Director Stock Incentive Plan 191,012,344 31,753,333 3,912,459
Director: Votes For Votes Withheld
--------------------- ---------------------
Arthur J. Decio 223,121,962 3,556,174
Gary L. Neale 223,391,942 3,286,194
Robert J. Welsh 223,365,721 3,312,415
- -------------------------------------------------------------------------------------------------------------------
40
ITEM 5. OTHER INFORMATION
NISOURCE INC.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(4.1) Third Supplemental Indenture dated August 1, 1943 (incorporated
by reference to Exhibit 7-C to the Northern Indiana Registration
Statement (Registration No. 2-5178)).
(4.2) Thirty-third Supplemental Indenture dated June 1, 1980
(incorporated by reference to Exhibit 1 to the Northern Indiana
Quarterly Report on Form 10-Q for the quarter ended June 30,
1980).
(31.1) Certification of Gary L. Neale, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
(31.2) Certification of Michael W. O'Donnell, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
(32.1) Certification of Gary L. Neale, Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith).
(32.2) Certification of Michael W. O'Donnell, Chief Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished 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 second quarter
2003:
Financial
Item Reported Statements Included Date of Event Date Filed
- -----------------------------------------------------------------------------------------
7,9 Y 4/29/2003 4/29/2003
5 N 5/13/2003 5/13/2003
9 N 5/27/2003 5/27/2003
5,7 Y 7/15/2003 7/15/2003
- -----------------------------------------------------------------------------------------
41
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NiSource Inc.
-------------------------------------
(Registrant)
Date: August 8, 2003 By: /s/ Jeffrey W. Grossman
-------------------------------------
Jeffrey W. Grossman
Vice President and Controller
(Principal Accounting Officer
and Duly Authorized Officer)
42