UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended SEPTEMBER 30, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 East 86th Avenue
Merrillville, Indiana 46410
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (877) 647-5990
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] or No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, $0.01 Par Value:
262,464,847 shares outstanding at October 31, 2003.
NISOURCE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Consolidated Income (Loss) .............. 3
Consolidated Balance Sheets ........................... 4
Statements of Consolidated Cash Flows ................. 5
Statements of Consolidated Comprehensive Income ....... 7
Notes to Consolidated Financial Statements ............ 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 22
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ........................................... 40
Item 4. Controls and Procedures ............................... 41
PART II OTHER INFORMATION
Item 1. Legal Proceedings ..................................... 42
Item 2. Changes in Securities and Use of Proceeds ............. 43
Item 3. Defaults Upon Senior Securities ....................... 43
Item 4. Submission of Matters to a Vote of Security Holders ... 43
Item 5. Other Information ..................................... 43
Item 6. Exhibits and Reports on Form 8-K ...................... 43
Signature ...................................................... 45
2
PART I
ITEM 1. FINANCIAL STATEMENTS
NISOURCE INC.
STATEMENTS OF CONSOLIDATED INCOME (LOSS) (unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
(in millions, except per share amounts) 2003 2002 2003 2002
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NET REVENUES
Gas Distribution $ 286.6 $ 298.2 $2,606.6 $1,836.1
Gas Transmission and Storage 189.0 186.1 752.2 728.0
Electric 328.2 317.9 854.6 855.2
Other 94.5 106.2 350.6 164.1
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Gross Revenues 898.3 908.4 4,564.0 3,583.4
Cost of Sales 321.0 303.0 2,315.3 1,380.1
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Total Net Revenues 577.3 605.4 2,248.7 2,203.3
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OPERATING EXPENSES
Operation and maintenance 273.0 257.3 874.9 852.2
Depreciation and amortization 123.1 124.6 372.6 365.8
Gain on sale of assets (16.2) (4.2) (14.9) (27.7)
Other taxes 48.5 49.6 219.1 194.8
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Total Operating Expenses 428.4 427.3 1,451.7 1,385.1
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OPERATING INCOME 148.9 178.1 797.0 818.2
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OTHER INCOME (DEDUCTIONS)
Interest expense, net (113.6) (137.1) (351.5) (386.4)
Minority interests - (5.1) (2.5) (15.3)
Dividend requirements on preferred stock of subsidiaries (1.1) (1.8) (3.4) (5.5)
Other, net 2.4 3.4 12.4 6.6
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Total Other Income (Deductions) (112.3) (140.6) (345.0) (400.6)
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 36.6 37.5 452.0 417.6
INCOME TAXES 13.1 14.3 166.9 154.0
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INCOME FROM CONTINUING OPERATIONS 23.5 23.2 285.1 263.6
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Income from Discontinued Operations - net of taxes 6.1 -- 1.3 19.3
Gain (Loss) on Disposition of Discontinued Operations - net of taxes (14.2) -- (332.2) 7.5
Change in Accounting - net of taxes -- -- (8.8) --
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NET INCOME (LOSS) $ 15.4 $ 23.2 $ (54.6) $ 290.4
================================================================================================================================
BASIC EARNINGS (LOSS) PER SHARE ($)
Continuing operations 0.09 0.11 1.10 1.28
Discontinued operations (0.03) -- (1.28) 0.13
Change in accounting -- -- (0.03) --
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BASIC EARNINGS (LOSS) PER SHARE 0.06 0.11 (0.21) 1.41
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DILUTED EARNINGS (LOSS) PER SHARE ($)
Continuing operations 0.09 0.11 1.09 1.26
Discontinued operations (0.03) -- (1.27) 0.13
Change in accounting -- -- (0.03) --
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DILUTED EARNINGS (LOSS) PER SHARE 0.06 0.11 (0.21) 1.39
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BASIC AVERAGE COMMON SHARES OUTSTANDING (MILLIONS) 261.4 205.7 258.9 205.6
DILUTED AVERAGE COMMON SHARES (MILLIONS) 263.4 208.1 260.9 208.7
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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
SEPTEMBER 30, December 31,
(in millions) 2003 2002
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(unaudited)
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility Plant $ 16,445.1 $ 16,165.5
Accumulated depreciation and amortization (8,121.4) (7,860.4)
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Net utility plant 8,323.7 8,305.1
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Other property, at cost, less accumulated depreciation 408.0 415.3
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Net Property, Plant and Equipment 8,731.7 8,720.4
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INVESTMENTS AND OTHER ASSETS
Assets of discontinued operations and assets held for sale 338.1 1,571.0
Unconsolidated affiliates 118.9 125.1
Other investments 70.7 51.6
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Total Investments 527.7 1,747.7
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CURRENT ASSETS
Cash and cash equivalents 29.8 31.1
Restricted cash 41.2 24.2
Accounts receivable (less reserve of $51.5 and $48.8, respectively) 370.7 545.5
Unbilled revenue (less reserve of $1.7 and $3.5, respectively) 126.5 305.2
Gas inventory 560.4 255.3
Underrecovered gas and fuel costs 154.7 206.1
Materials and supplies, at average cost 68.9 65.5
Electric production fuel, at average cost 32.4 39.0
Price risk management assets 60.2 66.4
Exchange gas receivable 210.4 120.1
Regulatory assets 98.3 99.6
Prepayments and other 122.6 111.8
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Total Current Assets 1,876.1 1,869.8
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OTHER ASSETS
Price risk management assets 135.2 115.1
Regulatory assets 574.5 608.8
Goodwill 3,692.2 3,692.2
Intangible assets 35.7 59.4
Deferred charges and other 131.0 139.2
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Total Other Assets 4,568.6 4,614.7
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TOTAL ASSETS $ 15,704.1 $ 16,952.6
=============================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, December 31,
(in millions) 2003 2002
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(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 4,253.7 $ 4,174.9
Preferred Stocks--
Series without mandatory redemption provisions 81.1 81.1
Series with mandatory redemption provisions -- 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 5,513.3 4,849.5
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Total Capitalization 9,848.1 9,454.3
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CURRENT LIABILITIES
Current portion of long-term debt 874.4 1,224.9
Short-term borrowings 442.9 913.1
Accounts payable 397.5 513.1
Dividends declared on common and preferred stocks 62.0 1.1
Customer deposits 73.3 65.2
Taxes accrued 295.5 222.8
Interest accrued 183.4 76.5
Overrecovered gas and fuel costs 6.4 13.1
Price risk management liabilities 58.5 39.7
Exchange gas payable 279.3 411.9
Current deferred revenue 18.9 17.5
Regulatory liabilities 18.0 13.5
Accrued liability for postretirement and postemployment benefits 57.8 47.1
Other accruals 336.9 415.5
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Total Current Liabilities 3,104.8 3,975.0
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OTHER LIABILITIES AND DEFERRED CREDITS
Price risk management liabilities 0.6 3.2
Deferred income taxes 1,596.7 1,511.3
Deferred investment tax credits 89.6 96.3
Deferred credits 70.3 100.9
Noncurrent deferred revenue 121.3 130.1
Accrued liability for postretirement and postemployment benefits 351.1 421.0
Preferred stock liabilities with mandatory redemption provisions 3.0 --
Liabilities of discontinued operations and liabilities held for sale 219.6 959.9
Regulatory liabilities 92.4 89.6
Other noncurrent liabilities 206.6 211.0
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Total Other 2,751.2 3,523.3
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COMMITMENTS AND CONTINGENCIES -- --
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TOTAL CAPITALIZATION AND LIABILITIES $ 15,704.1 $ 16,952.6
==============================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS (unaudited)
Nine Months Ended September 30, (in millions) 2003 2002
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OPERATING ACTIVITIES
Net income (loss) $ (54.6) $ 290.4
Adjustments to reconcile net income to net cash from
continuing operations:
Depreciation and amortization 372.6 365.8
Net changes in price risk management activities 14.7 (39.6)
Deferred income taxes and investment tax credits (4.8) 79.8
Deferred revenue (7.3) (11.5)
Amortization of unearned compensation 7.4 12.3
Gain on sale of assets (14.9) (27.7)
Change in accounting 8.8 -
Loss (Gain) on sale of discontinued operations 332.2 (7.5)
Loss (Income) from discontinued operations (1.3) (19.3)
Other, asset items 44.9 53.9
Other, liability items 10.1 4.3
Changes in assets and liabilities, net of effect from acquisitions of
businesses:
Accounts receivable, net 368.0 504.6
Inventories (301.9) (92.9)
Accounts payable (100.4) (318.3)
Taxes accrued (12.6) (102.7)
(Under) Overrecovered gas and fuel costs 44.7 (70.2)
Exchange gas receivable/payable (222.9) 165.7
Other accruals (128.2) (108.7)
Other assets (6.3) 52.0
Other liabilities 115.0 146.3
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Net Cash Flows from Continuing Operations 463.2 876.7
Net Cash Flows from Discontinued Operations (139.1) (32.9)
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Net Cash Flows from Operating Activities 324.1 843.8
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INVESTING ACTIVITIES
Capital expenditures (365.9) (284.9)
Proceeds from disposition of assets 437.7 432.8
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Net Cash Flows from Investing Activities 71.8 147.9
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FINANCING ACTIVITIES
Issuance of long-term debt 845.6 --
Retirement of long-term debt (552.7) (248.2)
Change in short-term debt (470.2) (595.4)
Retirement of preferred shares (345.0) (2.5)
Issuance of common stock 350.8 4.1
Acquisition of treasury stock (1.8) --
Dividends paid (223.9) (180.6)
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Net Cash Flows from Financing Activities (397.2) (1,022.6)
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Increase (decrease) in cash and cash equivalents (1.3) (30.9)
Cash and cash equivalents at beginning of year 31.1 72.4
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29.8 $ 41.5
==============================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest 233.2 260.7
Interest capitalized 2.8 2.4
Cash paid for income taxes 136.6 77.2
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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 Nine Months
Ended September 30, Ended September 30,
--------------------------- --------------------------
(in millions) 2003 2002 2003 2002
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Net Income (Loss) $ 15.4 $ 23.2 $ (54.6) $ 290.4
Other comprehensive income, net of tax
Foreign currency translation adjustment (0.6) (0.6) 0.9 --
Net unrealized (losses) gains on cash flow hedges (17.8) (7.6) 7.6 6.7
Net loss on available for sale securities (0.5) (0.1) (0.5) (2.6)
Minimum pension liability adjustment 55.3 (196.5) 55.3 (196.5)
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Total other comprehensive income (Loss) 36.4 (204.8) 63.3 (192.4)
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Total Comprehensive Income (Loss) $ 51.8 $ (181.6) $ 8.7 $ 98.0
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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 (unaudited)
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 October 6, 2003 with respect to the financial
statements for the year ended December 31, 2002. Income for interim periods may
not be indicative of results for the calendar year due to weather variations and
other factors. Certain reclassifications have been made to the 2002 financial
statements to conform to the 2003 presentation.
2. DILUTED AVERAGE COMMON SHARES COMPUTATION
Basic earnings per share (EPS) is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. The weighted average shares outstanding for diluted EPS are
impacted by the incremental effect of the various long-term incentive
compensation plans, the forward equity contracts associated with the Stock
Appreciation Income Linked Securities(SM) (SAILS(SM)), and through February 18,
2003, the Corporate Premium Income Equity Securities (Corporate PIES).
Currently, the shares associated with the SAILS(SM) are anti-dilutive in 2003
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 Nine Months
Ended September 30, Ended September 30,
------------------------- -----------------------
(in thousands) 2003 2002 2003 2002
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Denominator
Basic average common shares outstanding 261,440 205,712 258,876 205,607
Dilutive potential common shares
Nonqualified stock options 61 119 62 235
Shares contingently issuable under employee stock plans 1,103 1,160 1,103 1,160
SAILS(SM) -- 91 -- 817
Shares restricted under employee stock plans 790 1,030 906 927
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Diluted Average Common Shares 263,394 208,112 260,947 208,746
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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
$4.6 million and $7.4 million for the three and nine months ended September 30,
2003, respectively, and $2.6 million and $12.1 million for the three and nine
months ended September 30, 2002, respectively. 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) (unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ -------------------------
(in millions, except per share data) 2003 2002 2003 2002
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NET INCOME (LOSS)
As reported $ 15.4 $ 23.2 $ (54.6) $ 290.4
Add: Stock-based employee compensation 4.6 2.6 7.4 12.1
expense included in reported net income
(loss), net of related tax effects
Less: Total stock-based employee compensation
expense determined under the fair
value method for all awards, net of tax (6.0) (4.6) (12.7) (16.7)
- -----------------------------------------------------------------------------------------------------------------------------------
Pro forma $ 14.0 $ 21.2 $ (59.9) $ 285.8
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EARNINGS (LOSS) PER SHARE ($)
Basic - as reported 0.06 0.11 (0.21) 1.41
- pro forma 0.05 0.10 (0.23) 1.39
Diluted - as reported 0.06 0.11 (0.21) 1.39
- pro forma 0.05 0.10 (0.23) 1.37
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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 $39.8 million were recognized for electric customers for the first
nine months of 2003. The order adopting the settlement was appealed to the
Indiana Court of Appeals by both the Citizens Action Coalition of Indiana and
fourteen residential customers. On October 14, 2003, the Appeals Court upheld
the IURC's approval of the settlement.
Northern Indiana submitted its quarterly fuel adjustment clause (FAC) 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 has been refunded to customers.
Northern Indiana has been recovering the costs of electric power purchased for
sale to its customers through the 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. An estimated refund liability was recorded in the
first quarter of 2003. A settlement was reached with the customers and Northern
Indiana recorded an additional refund liability in the third quarter. It is
expected that as a result of the settlement the industrial customers challenge
will be withdrawn or dismissed. In January 2002, Northern Indiana filed a
proceeding with the IURC for approval to implement a purchase power tracker. On
March 21, 2003, Northern Indiana amended the January 2002 filing by withdrawing
its request to implement a purchased power tracker and to instead 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. In October 2003,
Northern Indiana voluntarily withdrew its amended request and the entire
proceeding was dismissed.
9
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)
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. An August
26, 2003 order accepted Northern Indiana's March 17, 2003 compliance filing.
Northern Indiana made refunds on September 24 and filed a refund report at FERC
on September 26.
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 September 30,
2003 the ECRM revenues amounted to $2.5 million. On August 1, Northern Indiana
filed the ECRM on capital investments of $120.0 million. This petition was
approved by the IURC on October 1, 2003. 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 $274.2 million. The IURC
order is currently being appealed to the Indiana Court of Appeals by the
Citizens Action Coalition of Indiana.
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 order approving the
transfer of functional control of the transmission system to the ITC was issued
on September 24, 2003. 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. This reimbursement was received on September 30, 2003.
Functional control was transferred to the ITC and MISO on October 1, 2003.
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 1,620 management, professional,
administrative and technical positions have been identified for elimination. As
of September 30, 2003, approximately 1,535 employees have been terminated, of
whom approximately 65 employees and 226 employees were terminated during the
quarter and nine months ended September 30, 2003, respectively. At September 30,
2003 and December 31, 2002, the consolidated balance sheets reflected
liabilities of $22.3 million and $49.6 million related to the restructuring
plans, respectively. During the quarter and nine months ended September 30,
2003, $3.4 million and $20.1 million of benefits were paid, respectively, as a
result of the restructuring plans. Additionally during the quarter and nine
months ended September 30, 2003, the restructuring plan liability was decreased
by $7.7 million and $7.2 million, respectively, due to adjustments in estimated
costs related to the reorganization initiatives.
10
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)
6. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
On October 20, 2003, NiSource closed the previously announced sale of all of the
steel-related, inside-the-fence assets of its subsidiary Primary Energy, Inc.
(Primary Energy), to Private Power, LLC (Private Power), a privately held power
development firm backed by American Securities Capital Partners, LLC, a New York
private equity investment firm. NiSource sold six Primary Energy operating
subsidiaries and the Primary Energy name to Private Power. Private Power
purchased the subsidiaries for approximately $325.4 million, comprised of $113.1
million in cash and the assumption of debt-related liabilities and other
obligations. The assumption of such liabilities and the after tax cash proceeds
from the sale, reduced NiSource's debt by $273.6 million, of which $67.3 million
was off balance sheet. NiSource has accounted for Primary Energy since June 30,
2003, excluding Whiting Clean Energy, as discontinued operations and has
adjusted all periods presented accordingly. During 2003, NiSource recognized an
after-tax loss of $27.3 million related to the sale. As a result of the sale,
Primary Energy was renamed PEI Holdings, Inc.
On August 29, 2003, NiSource closed the previously announced sale of its
exploration and production subsidiary, Columbia Energy Resources, Inc. (CER).
Under the CER sales agreement, Triana Energy Holdings (Triana), an exploration
and production company based in Charleston, W.V. and an affiliate of Morgan
Stanley Dean Witter Capital Partners IV, L.P. (MSCP), purchased all of the stock
of CER for $330.0 million, 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 transferred 1.1 trillion cubic feet of natural
gas reserves. The $220.0 million after-tax cash proceeds from the sale were used
to reduce NiSource's debt. In addition, a $213.0 million liability related to
the forward sales contracts was removed from the balance sheet. On January 28,
2003, NiSource's former subsidiary Columbia Natural Resources, Inc. sold its
interest in certain natural gas exploration and production assets in New York
State representing 39.3 Bcf in reserves and approximately 6.0 Bcf of production
for approximately $95.0 million. NiSource has accounted for CER as discontinued
operations and has adjusted all periods presented accordingly. During 2003,
NiSource recognized an after-tax loss of $302.5 million related to the sales.
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 was completed September 15, 2003. During
2003, NiSource recognized an additional after-tax loss of $2.5 million related
to the sale.
On September 30, 2003, NiSource sold Columbia Service Partners, Inc. (Columbia
Service Partners), a subsidiary of Columbia for approximately $22.5 million. In
the third quarter of 2003, NiSource recognized a pre-tax gain of $16.2 million
and an after-tax gain of $10.6 million related to the sale. Columbia Service
Partners was reported as assets held for sale.
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.
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 operated 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. SM&P was reported as assets held for sale.
11
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)
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 Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
(in millions) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
REVENUES FROM DISCONTINUED OPERATIONS $ 42.5 $ 58.7 $ 154.6 $ 244.9
- ---------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from discontinued operations 10.5 (0.1) 4.5 32.3
Income taxes 4.4 (0.1) 3.2 13.0
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME FROM DISCONTINUED OPERATIONS $ 6.1 $ -- $ 1.3 $ 19.3
- ---------------------------------------------------------------------------------------------------------------------------------
The assets and liabilities of discontinued operations and the assets and
liabilities held for sale were as follows:
SEPTEMBER 30, December 31,
(in millions) 2003 2002
- ---------------------------------------------------------------------------------------------------
ASSETS OF DISCONTINUED OPERATIONS AND ASSETS
HELD FOR SALE
Accounts receivable, net $ 11.0 $ 67.5
Property, plant and equipment, net 288.2 1,375.6
Other assets 38.9 166.7
Current liabilities -- (18.1)
Debt -- (4.8)
Other liabilities -- (15.9)
- ---------------------------------------------------------------------------------------------------
ASSETS OF DISCONTINUED OPERATIONS AND ASSETS
HELD FOR SALE $ 338.1 $1,571.0
- ---------------------------------------------------------------------------------------------------
LIABILITIES OF DISCONTINUED OPERATIONS AND
LIABILITIES HELD FOR SALE
Debt $ (114.9) $ (176.3)
Current liabilities (69.9) (250.9)
Other liabilities (34.8) (532.7)
- ---------------------------------------------------------------------------------------------------
LIABILITIES OF DISCONTINUED OPERATIONS AND
LIABILITIES HELD FOR SALE $ (219.6) $ (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) as subsequently amended by SFAS No. 137, SFAS No. 138 and
SFAS No. 149, 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).
12
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)
HEDGING ACTIVITIES. The activity for the quarter and nine months ended September
30, 2003 and September 30, 2002 affecting accumulated other comprehensive
income, with respect to cash flow hedges included the following:
Three Months Nine Months
Ended September 30, Ended September 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 $ 93.1 $ 64.4 $ 67.8 $ 50.1
Unrealized hedging gains (losses) arising during the period on
derivatives qualifying as cash flow hedges (19.5) (7.9) 11.9 27.4
Reclassification adjustment for net gain (loss) included
in net income (loss) 1.7 0.3 (4.3) (20.7)
- -------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains on derivatives qualifying as cash flow
hedges at the end of the period $ 75.3 $ 56.8 $ 75.4 $ 56.8
- -------------------------------------------------------------------------------------------------------------------------------
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
$164.0 million and $140.6 million at September 30, 2003 and December 31, 2002,
respectively, of which $29.9 million and $29.1 million were included in "Current
Assets," $134.0 million and $111.2 million were included in "Other Assets."
Price risk management liabilities related to unrealized losses on hedges (and
net option premiums) were $6.9 million and $4.1 million at September 30, 2003
and December 31, 2002, respectively, of which $6.9 million and $4.1 million were
included in "Current Liabilities."
During the third quarter 2003, no amounts were recognized in earnings due to
ineffectiveness and there were no components of the derivatives' fair values
excluded in the assessment of hedge effectiveness. Also, during the third
quarter, NiSource did not reclassify any amount 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 $14.9 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
$23.9 million and $30.3 million, respectively, at September 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 $7.5 million and
$21.9 million, respectively, at September 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.
13
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)
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."
Significant liabilities were 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, which are currently classified as discontinued operations. 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 September 30, 2003 based on rates for
estimated removal costs embedded in composite depreciation rates.
For the quarter and nine months ended September 30, 2003, NiSource recognized
accretion expense of $0.2 million and $0.6 million, respectively. The asset
retirement obligations liability totaled $13.1 million at September 30, 2003, of
which $2.6 million was reported in discontinued operations. 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
$105.4 million and $866.9 million for the three and nine months ended September
30, 2002. NiSource's operating income remained unchanged for all periods
presented.
14
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)
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.
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). On October 8, 2003, the FASB deferred the
implementation of FIN 46 to the fourth quarter of 2003. NiSource is currently
evaluating certain real estate investments in order to determine if FIN 46 will
impact the classification of the investments.
SFAS NO. 149 - AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES. Effective July 1, 2003, NiSource adopted SFAS 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 SFAS No. 133 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. SFAS No. 149 did not have a
material impact on NiSource's results of operations during the third quarter
of 2003. However, the statement could have a significant impact on the
number of contracts that will be marked to market through earnings.
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. As a result of SFAS No. 150, NiSource
reclassified its mandatory redeemable preferred stock to a non-current liability
in the third quarter of 2003.
EITF ISSUE NO. 03-11 - REPORTING REALIZED GAINS AND LOSSES ON DERIVATIVE
INSTRUMENTS THAT ARE SUBJECT TO FASB STATEMENT NO. 133 AND NOT "HELD FOR TRADING
PURPOSES" AS DEFINED IN EITF ISSUE NO. 02-03. In August 2003, the EITF released
Issue No. 03-11, which provides guidance on whether to report realized gains or
losses on derivative contracts that settle on a net basis. Currently, NiSource
generally reports contracts requiring physical delivery of a commodity on a
gross basis, even when the contract is ultimately net settled. EITF No. 03-11
will be applied to financial statement periods after September 30, 2003.
NiSource is currently evaluating the effect that EITF 03-11 will have on the
financial statements.
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 February
19, 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.
15
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)
The sole purchaser of the remarketed debentures purchased newly offered 6.15%
notes due in 2013, using the remarketed debentures as consideration. In
accordance with EITF No. 96-19, "Debtors Accounting for a Modification or
Exchange of Debt Instruments," the debt issued at 4.25% was considered
extinguished, because the net present value of cash flows changed by more than
10% with the issuance of the 6.15% notes. As a result, the $2.2 million of fees
paid to the holder to extinguish the debt was expensed in the first quarter
2003.
10. LEGAL PROCEEDINGS
In the normal course of its business, NiSource and its subsidiaries have been
named as defendants in various legal proceedings. In the opinion of management,
the ultimate disposition of these currently asserted claims would not have a
material adverse impact on NiSource's consolidated financial position.
11. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table displays the components of Accumulated Other Comprehensive
Income, which is included in "Common Stock Equity," on the consolidated balance
sheets.
SEPTEMBER 30, December 31,
(in millions) 2003 2002
- ---------------------------------------------------------------------------------------------
Foreign currency translation adjustment $ (0.6) $ (1.5)
(Loss) on available for sale securities (3.3) (3.1)
Net unrealized gains on cash flow hedges 75.3 67.8
Minimum pension liability adjustment (148.7) (203.7)
- ---------------------------------------------------------------------------------------------
TOTAL ACCUMULATED OTHER COMPREHENSIVE (LOSS), NET $ (77.3) $ (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 September 30, 2003 and the years in which they
expire were:
(in millions) 2003 2004 2005 2006 2007 After
- ---------------------------------------------------------------------------------------------------------------------------------
Guarantees of subsidaries debt $ 750.0 $ 82.5 $ 933.1 $ 43.0 $ 32.2 $2,438.7
Guarantees supporting commodity
transactions of subsidiaries 389.0 25.0 50.0 858.4 41.7 161.0
Other guarantees 75.0 -- 50.7 -- -- 234.1
Lines of credit -- 442.9 -- -- -- --
Letters of credit 30.7 19.8 1.5 -- 1.1 106.8
- ---------------------------------------------------------------------------------------------------------------------------------
Total commercial commitments $1,244.7 $570.2 $1,035.3 $ 901.4 $ 75.0 $2,940.6
- ---------------------------------------------------------------------------------------------------------------------------------
16
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)
NiSource has guaranteed the payment of $4.3 billion of debt for various
wholly-owned subsidiaries including NiSource Finance Corp. (NFC), the former
Primary Energy subsidiaries that were sold in the fourth quarter and through a
support agreement, NiSource Capital Markets, Inc. 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. NiSource does not anticipate its subsidiaries will have any difficulty
maintaining compliance. NFC also maintains lines of credit with financial
institutions. At September 30, 2003, the amount outstanding under the lines of
credit and guaranteed by NiSource amounted to $442.9 million. Additionally,
NiSource has issued guarantees, which support up to approximately $1.5 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 $159.8 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 agreement guarantees totaling $140.0 million,
which guarantee performance of the seller's covenants, agreements, obligations,
liabilities, representations and warranties under the agreements. No amounts
related to the purchase and sales agreement guarantees are reflected in the
consolidated balance sheet.
Management believes that the likelihood NiSource would be required to perform or
otherwise incur any significant losses associated with any of the aforementioned
guarantees is remote.
After the sale of six subsidiaries, Primary Energy continues to own Whiting
Clean Energy. The total of the guarantee outstanding for Whiting Clean Energy at
September 30, 2003 was $328.2 million. As of September 30, 2003, approximately
$305.4 million of debt related to Whiting Clean Energy was included in
NiSource's consolidated balance sheet.
NiSource retains certain operational and financial guarantees with respect to
the former Primary Energy subsidiaries and CER. NiSource has retained guarantees
of $164.7 million of debt outstanding related to three of the Primary Energy
projects. In addition, NiSource has retained several operational guarantees
related to the Primary Energy subsidiaries. These operational guarantees are
related to environmental compliance, inventory balances, employee relations, and
a residual future purchase guarantee. 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 guarantees as prescribed by FASB
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, "Including Indirect Guarantees of Indebtedness of Others."
NiSource has retained liabilities related to the CER forward gas sales
agreements with Mahonia II Limited (Mahonia) for guarantees of the forward sales
and for indemnity agreements with respect to surety bonds backing the forward
sales. The guarantees, surety bonds and associated indemnity agreements remain
in place subsequent to the closing of the CER sale and decline over time as
volumes (approximately 94.0 Bcf) are delivered in satisfaction of the
contractual obligations, ending in February 2006. NiSource will be indemnified
by Triana, and MSCP will fund up to a maximum of $221.0 million 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.
Immediately after the close of the sale, Triana owned approximately 1.1 Tcf of
proved reserves, and was capitalized with $330.0 million, approximately $200.0
million of which was provided as initial equity by MSCP and the remainder of
which is 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,
adequately offset any
17
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)
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. MINIMUM PENSION LIABILITY
NiSource used a measurement date of September 30, 2003 for the calculation of
its obligations under the pension and other postretirement benefit plans. Due to
the upswing in the equity markets, the fair value of NiSource's pension fund
assets has increased since September 30, 2002. However, the discount rate used
to measure the accumulated benefit obligation has decreased, which slightly
offset the increase in the pension assets. In accordance with FASB Statement No.
87, "Employers' Accounting for Pensions," NiSource adjusted its minimum pension
liability at September 30, 2003. The adjustment resulted in a decrease to the
retirement benefit liabilities of $111.3 million, a decrease in intangible
assets of $22.5 million, a decrease to deferred income tax assets of $33.5
million and an increase to other comprehensive income of $55.3 million
after-tax. NiSource expects pension expense for 2004 to decrease approximately
$20.0 to $30.0 million from the amount recognized in 2003.
14. 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.
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 no longer reported an Exploration and
Production segment. In addition, the Primary Energy subsidiaries 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 reclassified 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.
18
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------- ------------------------------
(in millions) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
REVENUES
GAS DISTRIBUTION
Unaffiliated $ 344.2 $ 351.5 $ 2,948.3 $ 2,102.9
Intersegment 2.0 2.4 16.3 17.9
- -------------------------------------------------------------------------------------------------------------------------------
Total 346.2 353.9 2,964.6 2,120.8
- -------------------------------------------------------------------------------------------------------------------------------
GAS TRANSMISSION AND STORAGE
Unaffiliated 136.7 136.3 441.5 451.8
Intersegment 54.7 68.1 181.2 223.5
- -------------------------------------------------------------------------------------------------------------------------------
Total 191.4 204.4 622.7 675.3
- -------------------------------------------------------------------------------------------------------------------------------
ELECTRIC OPERATIONS
Unaffiliated 307.5 318.0 819.3 855.5
Intersegment 7.3 15.1 17.7 24.0
- -------------------------------------------------------------------------------------------------------------------------------
Total 314.8 333.1 837.0 879.5
- -------------------------------------------------------------------------------------------------------------------------------
OTHER
Unaffiliated 83.7 29.0 297.1 (4.0)
Intersegment 13.8 (11.8) 37.5 62.5
- -------------------------------------------------------------------------------------------------------------------------------
Total 97.5 17.2 334.6 58.5
- -------------------------------------------------------------------------------------------------------------------------------
Adjustments and eliminations (51.6) (0.2) (194.9) (150.7)
- -------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED REVENUES $ 898.3 $ 908.4 $ 4,564.0 $ 3,583.4
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Gas Distribution $ (27.2) $ (20.2) $ 343.8 $ 264.3
Gas Transmission and Storage 90.8 86.1 289.4 289.5
Electric 89.5 107.6 206.2 260.4
Other (12.3) 4.9 (36.6) (24.5)
Corporate 8.1 (0.3) (5.8) 28.5
- -------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATING INCOME $ 148.9 $ 178.1 $ 797.0 $ 818.2
- -------------------------------------------------------------------------------------------------------------------------------
19
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, 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 October 6,
2003 with respect to the financial statements for the year ended December 31,
2002.
THIRD QUARTER RESULTS
Net Income
NiSource reported net income of $15.4 million, or 6 cents per share, for the
three months ended September 30, 2003, compared to net income of $23.2 million,
or 11 cents per share, for the third quarter 2002. Income from continuing
operations was $23.5 million, an increase of $0.3 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 September 30, 2003, were $577.3 million, a $28.1 million
decrease from the same period last year. The decrease in net revenues was
primarily a result of reduced electric and natural gas sales of $16.9 million as
a result of unfavorable weather and lower interruptible service revenues
resulting from high gas commodity costs and early storage refills by firm
customers, which reduce available capacity for interruptible customers.
Expenses
Operating expenses for the third quarter 2003 were $428.4 million, an increase
of $1.1 million from the 2002 period, mainly resulting from higher operation and
maintenance expenses of $15.7 million, mostly offset by higher gains on the sale
of assets of $12.0 million primarily as a result of a gain of $16.2 million from
the sale of Columbia Service Partners Inc. in the third quarter of 2003. The
increase in operation and maintenance expenses was attributable to favorable
impacts to the 2002 period of $ 34.5 million as a result of environmental
insurance recoveries, an improvement to income based on a decrease in estimated
environmental expenditures and a reduction in estimated sales taxes related to
sales of natural gas customers of a subsidiary previously engaged in the retail
and wholesale gas marketing business. The 2003 period was favorably impacted by
a $16.4 million reduction in employee-related and administrative expenses as a
result of the 2002 reorganization initiatives, an improvement to income based on
a decrease in estimated environmental expenditures of $8.4 million and a
reduction of $6.9 million related to the 2002 reorganization reserve, partly
offset by increased pension expense of $9.4 million.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Other Income (Deductions)
Interest expense was $113.6 million for the quarter, a decrease of $23.5 million
compared to the third quarter 2002. The decrease was due to a reduction of
short- and long-term debt, lower short-term interest rates, and additional
interest expense of $5.9 million recorded in the third quarter of 2002 related
to Whiting Clean Energy.
Income Taxes
Income tax expense for the third quarter 2003 was $13.1 million, a decrease of
$1.2 million compared to the 2002 period, due to lower pre-tax income.
Discontinued Operations
Loss from discontinued operations was $8.1 million for the third quarter 2003
versus zero from discontinued operations in the third quarter of 2002. The loss
of $8.1 million was a result of an after-tax loss of $14.2 million, related to
the sale of Columbia Energy Resources, Inc. (CER) in the third quarter of 2003,
slightly offset by income related to the operations of CER and the Primary
Energy Inc. (Primary Energy) subsidiaries that were sold in the fourth quarter
of 2003. NiSource accounted for CER and the Primary Energy subsidiaries as
discontinued operations and adjusted all periods presented accordingly.
NINE MONTH RESULTS
Net Income (Loss)
NiSource reported a net loss of $54.6 million, or a loss of 21 cents per share,
for the nine months ended September 30, 2003, compared to net income of $290.4
million, or $1.41 per share, for the comparable 2002 period. Income from
continuing operations was $285.1 million, an increase of $21.5 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 nine
months ended September 30, 2003, were $2,248.7 million, a $45.4 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 $63.7 million, higher gross receipts taxes and cost
tracker revenues of $17.0 million, both of which are offset in operating
expenses, and increased off-system gas sales. The increase was partially offset
by $25.4 million of additional credits issued as a result of the Indiana Utility
Regulatory Commission (IURC) electric rate review settlement and $19.1 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.
Expenses
Operating expenses for the first nine months of 2003 were $1,451.7 million, an
increase of $66.6 million from the 2002 period. The increase was primarily due
to increased operations and maintenance expense of $22.7 million, lower gains on
the sale of assets of $12.8 million and higher amounts for other taxes of $24.3
million. The increase in operations and maintenance expense was a result of
increased pension expense of $28.2 million and increased uncollectible
receivables of $16.4 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 $44.1 million, an improvement to income based on a decrease in
estimated environmental expenditures of $8.4 million and 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 was favorably impacted by environmental
insurance recoveries of $24.5 million, a reduction in estimated sales taxes of
$12.5 million related to sales of natural gas customers of a subsidiary
previously engaged in the retail and wholesale gas marketing business and an
improvement to income based on a decrease in estimated environmental
expenditures of $10.0 million. Gain on the sale of assets decreased $12.8
million, primarily as a result of a gain on the sale of a utility line-locating
business in 2002. Other taxes increased $24.3 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.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Other Income (Deductions)
Interest expense was $351.5 million for the first nine months, a decrease of
$34.9 million compared to the first nine months of 2002. The decrease was due to
a reduction of short- and long-term debt and lower short-term interest rates.
Income Taxes
Income tax expense for the first nine months of 2003 was $166.9 million, an
increase of $12.9 million compared to the 2002 period, due to higher pre-tax
income.
Discontinued Operations
Loss from discontinued operations was $330.9 million for the first nine months
of 2003 versus income from discontinued operations of $26.8 million in the
prior-year period. An after-tax loss of $332.2 million was related to the sales
of CER, six Primary Energy subsidiaries and Columbia Transmission Communications
Corporation (Transcom), 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, Transcom and the Primary Energy subsidiaries as
discontinued operations 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, is
subject to seasonal fluctuations in cash flow. During the heating season, which
is primarily from November through March, cash receipts from gas sales and
transportation services typically exceed cash requirements. 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 nine months ended September 30, 2003
was $463.2 million. Cash used for working capital was $244.6 million,
principally driven by decreased exchange gas payables, accounts payable, other
accruals and increased inventories, partly offset by a decrease in accounts
receivable and underrecovered gas and fuel costs.
On November 4, 2003, NiSource Finance Corp. (NFC) issued $250.0 million of
18-month floating rate unsecured notes that mature May 4, 2005, the notes are
callable, at par, at the option of NiSource on or after May 4, 2004. Also on
November 4, 2003, NFC issued $250.0 million of 3.20% three year unsecured notes
that mature November 1, 2006. The proceeds will be used to fund NiSource's
$750.0 million NFC notes maturing on November 15, 2003.
On October 20, 2003, NiSource closed the previously announced sale of all of the
steel-related, inside-the-fence assets of its subsidiary Primary Energy, to
Private Power, LLC (Private Power), a privately held power development firm
backed by American Securities Capital Partners, LLC, a New York private equity
investment firm. NiSource sold six Primary Energy operating subsidiaries and the
Primary Energy name to Private Power. Private Power purchased the subsidiaries
for approximately $325.4 million, comprised of $113.1 million in cash and the
assumption of debt-related liabilities and other obligations. The assumption of
such liabilities and the after tax cash proceeds from the sale, reduced
NiSource's debt by $273.6 million, of which $67.3 million was off balance sheet.
NiSource has accounted for Primary Energy as discontinued operations and has
adjusted all periods presented accordingly. During 2003, NiSource recognized an
after-tax loss of $27.3 million related to the sale. As a result of the sale,
Primary Energy was renamed PEI Holdings, Inc.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
On August 29, 2003, NiSource closed the previously announced sale of its
exploration and production subsidiary, CER. 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., purchased all of the stock of CER for $330.0 million, 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
transferred 1.1 trillion cubic feet of natural gas reserves. The $220.0 million
after-tax cash proceeds from the sale were used to reduce NiSource's debt. In
addition, a $213.0 million liability related to the forward sales contracts was
removed from the balance sheet. On January 28, 2003, NiSource's former
subsidiary Columbia Natural Resources, Inc. (CNR) sold its interest in certain
natural gas exploration and production assets in New York State representing
39.3 Bcf in reserves and approximately 6.0 Bcf of production for approximately
$95.0 million. NiSource has accounted for CER as discontinued operations and has
adjusted all periods presented accordingly. During 2003, NiSource recognized an
after-tax loss of $302.5 million related to the sales.
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 5.40% 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 Public Service Company
(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 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.
On July 8, 2003 NiSource announced that it would reduce its annual dividend to
92 cents per share from $1.16 per share effective with the dividend payable on
November 20, 2003. 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 its dividend yield and payout ratio prior to the
dividend reduction were higher than industry averages.
In February 2003, NiSource issued approximately 13.1 million shares of common
stock upon 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 most of the
underlying debentures, due February 19, 2005, and reset the interest rate to
4.25%. NiSource received net proceeds of $344.1 million from the remarketing in
satisfaction of the Corporate PIES holders' obligation under the forward equity
agreements. The sole purchaser of the remarketed securities purchased
newly-offered 6.15% notes due March 1, 2013, using the remarketed debentures as
consideration.
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 facility 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 over the past four fiscal quarters 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 CER, Primary Energy and CNR's
New York joint venture assets and net cash flow from continuing operations.
NiSource currently anticipates that its $1.25 billion 3-year credit facility
expiring March 23, 2004 will be renewed during the first quarter of 2004 and
will be evenly split between a $625.0 million 364-day credit facility and a
$625.0 million 3-year credit facility.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
NiSource had no commercial paper outstanding as of September 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 $442.9 million at September 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 September 30, 2003 and December 31, 2002, NiSource
had $159.8 million and $171.7 million of standby letters of credit outstanding,
respectively. As of September 30, 2003, $647.3 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 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 from negative to stable.
Columbia Gas of Ohio, Inc. (Columbia Gas of Ohio) is a party to an agreement to
sell, without recourse, all 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 September 30, 2003, CARC had $31.5 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 September 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 counterparties.
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 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.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Effective July 1, 2002, EnergyUSA-TPC (TPC) sold a significant portion of its
net obligations under its gas forward transaction portfolio, physical storage
inventory and associated agreements to a third party. Beginning with the
effective date of the sale, the primary remaining operations associated with TPC
include commercial and industrial gas sales and power trading. With the
exception of power trading and one remaining gas trading transaction, which
expired in October 2002, since July 1, 2002 the gas-related activities at TPC
were no longer considered trading activities for accounting purposes.
NiSource is exposed to interest rate risk as a result of changes in interest
rates on borrowings under revolving credit agreements and lines of credit, which
have interest rates that are indexed to short-term market interest rates, and
refinancing risk in the commercial paper markets. At September 30, 2003, the
combined borrowings outstanding under these facilities totaled $442.9 million.
NiSource is also exposed to interest rate risk due to changes in interest rates
on fixed-to-variable interest rate swaps that hedge the fair value of $1,162.9
million of long-term debt at September 30, 2003. Based upon average borrowings
under agreements subject to fluctuations in short-term market interest rates
during the quarter and nine months ended September 30, 2003, an increase in
short-term interest rates of 100 basis points (1%) would have increased interest
expense by $4.0 million and $9.3 million for the quarter and nine months ended
September 30, 2003.
On July 22, 2003, NiSource entered into fixed-to-variable interest rate swap
agreements in a notional amount of $500.0 million with four counterparties with
an 11-year term. NiSource will receive payments based upon a fixed 5.40%
interest rate and pay a floating interest amount based on U.S. 6-month LIBOR-BBA
plus an average of 0.78% 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" (SFAS 133) as subsequently amended by SFAS No.
137, SFAS No. 138 and SFAS No. 149 (collectively referred to as SFAS No. 133).
On April 11, 2003, Columbia entered into fixed-to-variable interest rate swap
agreements in a notional amount of $100 million with two counterparties.
Columbia 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 an average of
2.39% 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 $100.0 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 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), other external sources including electronic
exchanges and over-the-counter broker-dealer markets, as well as financial
models such as the Black-Scholes option pricing model.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
The fair values of the contracts related to NiSource's trading operations, the
activity affecting the changes in the fair values during the third 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 Nine Months Ended
(in millions) September 30, 2003 September 30, 2003
- ------------- ------------------ ------------------
Fair value of contracts outstanding at the beginning of the period $(5.1) $ --
Contracts realized or otherwise settled during the period (including
net option premiums received) (6.4) (6.6)
Fair value of new contracts entered into during the period 1.9 6.0
Other changes in fair values during the period 3.2 (5.8)
----- -----
Fair value of contracts outstanding at the end of the period $(6.4) $(6.4)
----- -----
(in millions) 2003 2004 2005 2006 2007 After
- ------------- ------- ------- ------- ------- ------- -------
Prices actively quoted $ -- $ -- $ -- $ -- $ -- $ --
Prices from other external sources (1.5) 0.1 -- -- -- --
Prices based on models/other method (0.3) (4.7) -- -- -- --
------- ------- ------- ------- ------- -------
Total fair values $ (1.8) $ (4.6) $ -- $ -- $ -- $ --
------- ------- ------- ------- ------- -------
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 calculates a one-day VaR at a 95% confidence level for the power
trading group and the gas marketing group that utilizes a variance/covariance
methodology. 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, $0.8
million and $0.2 million during the third quarter 2003, respectively. The daily
VaR for the gas marketing portfolios on an average, high and low basis was 0.3
million, $0.4 million and $0.2 million during the third 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 (FASB) 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.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
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 as amended, 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.
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 combined increase of just over 11% in premiums and
expenses for the property and casualty insurance program in 2003 as compared to
2002. This increase was anticipated due to insurance market conditions.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Power Outage in the Northeast
On August 14, 2003, a massive power outage affected approximately 50.0 million
people in Michigan, Ohio, New York, Pennsylvania, New Jersey, Connecticut,
Vermont and Canada and completely darkened major metropolitan areas such as New
York City, Cleveland, Detroit and Toronto. Northern Indiana's electric system
operated as it was designed and isolated a section of its system to protect its
electric supply. Northern Indiana's electric system operated without a problem
through the worst blackout in North American history.
Pension Expense
Due to the upswing in the equity markets, the fair value of NiSource's pension
fund assets has increased since September 30, 2002 and NiSource expects pension
expense for 2004 to decrease approximately $20.0 to $30.0 million from the
amount recognized in 2003.
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 (EPA) 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, which has subsequently been resolved.
In connection with the sale of certain Primary Energy assets, NiSource has
agreed to 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 has agreed to retain responsibility
for remediation of approximately 140 metering stations where mercury was
utilized, and certain other environmental issues. An estimated liability has
been recorded for the remediation.
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.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
(in millions) 2003 2002 2003 2002
- ------------- ---- ---- ---- ----
NET REVENUES
Sales Revenues $ 291.7 $ 302.7 $ 2,644.5 $ 1,837.9
Less: Cost of gas sold 170.0 166.5 1,899.3 1,179.2
------------ ------------ ------------ ------------
Net Sales Revenues 121.7 136.2 745.2 658.7
Transportation Revenues 54.5 51.2 320.1 282.9
------------ ------------ ------------ ------------
Net Revenues 176.2 187.4 1,065.3 941.6
------------ ------------ ------------ ------------
OPERATING EXPENSES
Operation and maintenance 137.4 137.3 456.6 432.6
Depreciation and amortization 47.2 47.4 142.7 141.3
Other taxes 18.8 22.9 122.2 103.4
------------ ------------ ------------ ------------
Total Operating Expenses 203.4 207.6 721.5 677.3
------------ ------------ ------------ ------------
Operating Income $ (27.2) $ (20.2) $ 343.8 $ 264.3
============ ============ ============ ============
REVENUES ($ IN MILLIONS)
Residential 164.9 146.4 1,720.0 1,104.8
Commercial 61.4 50.5 614.1 360.9
Industrial 28.4 14.7 138.9 67.0
Transportation 54.5 51.2 320.1 282.9
Off system sales 6.6 60.6 67.2 167.3
Other 30.4 30.5 104.3 137.9
------------ ------------ ------------ ------------
Total 346.2 353.9 2,964.6 2,120.8
------------ ------------ ------------ ------------
SALES AND TRANSPORTATION (MDTH)
Residential sales 13.2 13.5 164.0 143.3
Commercial sales 6.2 2.8 64.2 52.3
Industrial sales 3.5 3.0 15.6 11.0
Transportation 86.3 107.7 372.4 388.1
Off system sales 1.3 20.2 6.6 57.0
Other 1.3 -- 3.5 0.1
------------ ------------ ------------ ------------
Total 111.8 147.2 626.3 651.8
------------ ------------ ------------ ------------
HEATING DEGREE DAYS 66 17 3,437 2,811
NORMAL HEATING DEGREE DAYS 58 59 3,178 3,315
% COLDER (WARMER) THAN NORMAL 14% (71%) 8% (15%)
CUSTOMERS
Residential 2,229,713 2,338,718
Commercial 206,600 214,271
Industrial 5,882 6,227
Transportation 783,964 645,327
Other 155 71
------------ ------------
Total 3,226,314 3,204,614
------------ ------------
NiSource's natural gas distribution operations (Gas Distribution) serve
approximately 3.2 million customers in nine states: Ohio, Indiana, Pennsylvania,
Massachusetts, Virginia, Kentucky, Maryland, New Hampshire and Maine. The
regulated subsidiaries offer both traditional bundled services as well as
transportation only for customers that purchase gas from alternative suppliers.
The operating results reflect the temperature-sensitive nature of customer
demand with over 70% of annual residential and commercial throughput affected by
seasonality. As a result,
29
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 September 30, 2003, approximately
0.8 million of Gas Distribution's residential and small commercial customers had
selected an alternate supplier.
Gas Distribution continues to offer customer choice opportunities through
regulatory initiatives in all of its jurisdictions. Columbia Gas of Kentucky,
Inc. has received approval to continue its choice program for residential and
commercial customers through May 31, 2005. 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.
On August 11, 1999, the IURC approved a flexible gas cost adjustment mechanism
for Northern Indiana. Under the approved procedure, the demand component of the
adjustment factor will be determined, after hearings and IURC approval, and made
effective on November 1 of each year. The demand component will remain in effect
for one year until a new demand component is approved by the IURC. The commodity
component of the adjustment factor will be determined by monthly filings, which
will become effective on the first day of each calendar month, subject to
refund. The monthly filings do not require IURC approval but will be reviewed by
the IURC during the annual hearing that will take place regarding the demand
component filing. Northern Indiana's gas cost adjustment factor also includes a
gas cost incentive mechanism which allows the sharing of any cost savings or
cost increases with customers based on a comparison of actual gas supply
portfolio cost to a market-based benchmark price. Northern Indiana made its
annual filing on August 29, 2002. The IURC approved implementation of interim
rates, subject to refund, effective November 1, 2002. Another party has filed
testimony indicating that some gas costs should not be recovered. On September
30, 2003, the IURC issued an order adjusting the recovery of costs in March 2003
and reducing recovery by $3.8 million. On October 8, 2003, the IURC approved the
demand component of the adjustment factor.
Through October 2004, Columbia Gas of Ohio is operating under a regulatory
stipulation approved by the Public Utilities Commission of Ohio (PUCO). On
October 9, 2003, Columbia Gas of Ohio and other parties filed with the PUCO an
amended stipulation that would govern Columbia Gas of Ohio's regulatory
framework from October 2004 through October 2010. The majority of Columbia Gas
of Ohio's contracts with interstate pipelines expire in October 2004, and the
amended stipulation would permit Columbia to renew those contracts for firm
capacity sufficient to meet up to 100% of the design peak day requirements
through October 31, 2005 and up to 95% of the design peak day requirements
through October 31, 2010. Among other things, the amended stipulation would
also: (1) extend Columbia Gas of Ohio's Choice program through October 2010; (2)
provide Columbia Gas of Ohio with an opportunity to generate revenues sufficient
to cover the stranded costs associated with the Choice program; and, (3) allow
Columbia Gas of Ohio to record post-in-service-carrying charges on plant placed
into service after October 2004, and to defer the property taxes and
depreciation associated with such plant. The PUCO is currently reviewing the
amended stipulation. Management cannot predict what action the PUCO will take on
the amended stipulation.
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS (CONTINUED)
Weather
Weather in Gas Distribution's territories for the third quarter 2003 was 14%
colder than normal.
For the first nine months of 2003, weather was 8% colder than normal and 22%
colder than the first nine months of 2002.
Throughput
Total volumes sold and transported of 111.8 million dekatherms (MDth) for the
third quarter 2003, decreased 35.4 MDth from the same period last year primarily
due to reduced transportation and off system sales as a result of the decreased
demand requirements from cogeneration clients due to cooler temperatures.
For the nine month period ended September 30 2003, total volumes sold and
transported were 626.3 MDth, a decrease of 25.5 MDth from the same period in
2002 primarily reflecting a decrease in off system sales as a result of the
decreased demand requirements from cogeneration clients due to cooler
temperatures, partly offset by increased gas sales of 32.6 MDth to residential
and commercial customers due to colder weather in the first three months of the
year.
Net Revenues
Net revenues for the three months ended September 30, 2003 were $176.2 million,
a decrease of $11.2 million from the same period in 2002, mainly attributable to
lower non-weather related gas sales and incentive program revenue.
For the nine month period ended September 30, 2003, net revenues were $1,065.3
million, a $123.7 million increase over the same period in 2002, primarily due
to colder weather during the first three months of the year which increased gas
sales by $85.0 million, a $10.9 million adjustment for gas costs associated with
certain customers and higher gross receipts taxes which were offset in operating
expenses.
Operating Income
For the third quarter 2003, Gas Distribution reported an operating loss of $27.2
million versus an operating loss of $20.2 million from the same period in 2002.
The increase in the operating loss was mainly attributable to the reduction in
revenues mentioned above partly offset by a reduction in estimated sales taxes
of $4.7 million. Operation and maintenance expense remained relatively flat due
to a reduction in employee-related and administrative expenses of $12.6 million,
slightly offset by $4.8 million of increased uncollectible expenses resulting
from a change in the method of calculation and the effects of weather-driven
higher gas costs on the residential customer base and a $3.8 million increase in
environmental expenditures. The 2002 period was positively impacted by $13.3
million of insurance recoveries of environmental expenses and a reversal of
environmental expenditures.
Operating income for the first nine months of 2003 totaled $343.8 million, an
increase of $79.5 million from the same period in 2002. The increase was mainly
attributable to $85.0 million of increased sales and deliveries of natural gas
due to colder weather primarily during the first quarter of 2003 and a $33.5
million reduction in employee-related and administrative expenses partly offset
by increased uncollectible receivables resulting from a change in the method of
calculation and the effects of weather-driven higher gas costs on the
residential customer base of $21.0 million. The 2002 period was positively
impacted by $25.5 million from insurance recoveries of environmental expenses.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
TRANSMISSION AND STORAGE OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- --------------------
(in millions) 2003 2002 2003 2002
- ------------- ------- ------- ------- -------
OPERATING REVENUES
Transportation revenues $ 145.1 $ 157.3 $ 480.1 $ 532.4
Storage revenues 44.2 44.7 133.5 134.5
Other revenues 2.1 2.4 9.1 8.4
------- ------- ------- -------
Total Operating Revenues 191.4 204.4 622.7 675.3
Less: Cost of gas sold 5.7 13.4 12.8 40.1
------- ------- ------- -------
Net Revenues 185.7 191.0 609.9 635.2
------- ------- ------- -------
OPERATING EXPENSES
Operation and maintenance 56.4 66.4 197.6 224.7
Depreciation and amortization 27.8 27.3 83.4 82.0
Loss (Gain) on sale of assets (0.1) (1.1) 0.1 (1.5)
Other taxes 10.8 12.3 39.4 40.5
------- ------- ------- -------
Total Operating Expenses 94.9 104.9 320.5 345.7
------- ------- ------- -------
Operating Income $ 90.8 $ 86.1 $ 289.4 $ 289.5
======= ======= ======= =======
THROUGHPUT (MDTH)
Columbia Transmission
Market Area 127.8 151.8 734.1 715.8
Columbia Gulf
Mainline 127.8 150.3 481.5 467.7
Short-haul 35.9 40.0 94.5 114.8
Columbia Pipeline Deep Water 1.5 -- 4.9 0.2
Crossroads Gas Pipeline 9.1 5.6 25.2 20.2
Granite State Pipeline 2.1 1.5 23.1 21.6
Intrasegment eliminations (127.6) (132.6) (464.2) (418.5)
------- ------- ------- -------
Total 176.6 216.6 899.1 921.8
------- ------- ------- -------
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
(TCRA), 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. On October 7, 2003, FERC issued a Letter
Order accepting Columbia Transmission's supplemental informational compliance
filing to support its annual TCRA filing. The Order finds that the April 21st
filing complies with the March 31, 2003 order and supports Columbia
Transmission's proposed TCRA rates.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)
Environmental Matters
The EPA issued final rules revising the National Ambient Air Quality Standards
for ozone and particulate matter in July 1997. These rules were 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 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.
Columbia Transmission continues to conduct characterization and remediation
activities at specific sites under a 1995 EPA Administrative Order by Consent
(AOC). The program pursuant to the AOC covers approximately 240 facilities,
approximately 13,000 liquid removal points, approximately 2,200 mercury
measurement stations and about 3,700 storage well locations. Field
characterization has been performed at all sites. Site characterization reports
and remediation plans, which must be submitted to the EPA for approval, are in
various stages of development and completion. Remediation has been completed at
the mercury measurement stations, liquid removal point sites and storage well
locations and at a number of the 240 facilities.
Only those site investigation, characterization and remediation costs currently
known and determinable can be considered "probable and reasonably estimable"
under SFAS No. 5. As costs become probable and reasonably estimable, the
associated reserves will be adjusted as appropriate. During the nine months
ended September 30, 2003, Columbia Transmission completed a sufficient number of
the characterization reports and remediation plans to adjust its estimate for
the entire program. As a result, the liability was reduced by $44.2 million, the
related regulatory asset was decreased by $33.2 million, and there was an
improvement to income of $11.0 million. The estimate may be adjusted as
additional work is completed consistent with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 92, FASB's SFAS No. 5, and American
Institute of Certified Public Accountants Statement of Position No. 96-1.
At September 30, 2003, the remaining environmental liability recorded on the
balance sheet of Columbia Transmission was $7.6 million. Future expenditures
will be charged against the previously recorded liability. Management does not
believe that Columbia Transmission's environmental expenditures will have a
material adverse effect on NiSource's operations, liquidity or financial
position, based on known facts, existing laws, regulations, Columbia
Transmission's cost recovery settlement with customers and the time period over
which expenditures will be made.
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 176.6 MDth for
the third quarter 2003, compared to 216.6 MDth for the same period in 2002. The
decrease of 40.0 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.
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)
Throughput for the nine months ended September 30, 2003 was 899.1 MDth, a
decrease of 22.7 MDth over the same period in 2002. The decrease is primarily
due to lower deliveries to dual fueled electric power generators, which chose
not to run on the high priced gas, partly offset by colder-than-normal weather
in early 2003, which increased usage.
Net Revenues
Net revenues were $185.7 million for the third quarter 2003, a decrease of $5.3
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 reduced
available capacity for interruptible customers.
Net revenues were $609.9 million for the nine months ended September 30, 2003, a
decrease of $25.3 million, mainly due to $9.3 million of lower interruptible
service revenues and $10.4 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 $90.8 million in the third quarter 2003 increased $4.7
million from the same period in 2002. The increase was mainly attributable to a
$5.1 million reduction in employee-related and administrative expenses and an
improvement to income of $11.0 million based on a decrease in estimated
environmental expenditures, partly offset by the above-mentioned decrease in
revenues. The 2002 period was also favorably impacted by $10.0 million based on
a reduction in estimated environmental expenditures.
For the first nine months of 2003, operating income was $289.4 million, a
decrease of $0.1 million from the 2002 period, which was due to the
above-mentioned decrease in revenues mostly offset by a $12.4 million reduction
in employee-related and administrative expense, an improvement to income of
$11.0 million based on a decrease in estimated environmental expenditures, and a
$6.6 million reversal of a litigation reserve relating to a lawsuit that was
settled in the second quarter of 2003. The 2002 period was also favorably
impacted by $10.0 million based on a reduction in estimated environmental
expenditures, slightly offset by $6.5 million related to the recognition of a
reserve related to a long-term note receivable.
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
(in millions) 2003 2002 2003 2002
---------- ---------- ---------- ----------
NET REVENUES
Sales revenues $ 314.8 $ 333.1 $ 837.0 $ 879.5
Less: Cost of sales 108.9 118.1 285.9 288.4
---------- ---------- ---------- ----------
Net Revenues 205.9 215.0 551.1 591.1
---------- ---------- ---------- ----------
OPERATING EXPENSES
Operation and maintenance 57.0 53.9 167.4 164.6
Depreciation and amortization 43.4 42.7 130.7 127.3
Other taxes 16.0 10.8 46.8 38.8
---------- ---------- ---------- ----------
Total Operating Expenses 116.4 107.4 344.9 330.7
---------- ---------- ---------- ----------
Operating Income $ 89.5 $ 107.6 $ 206.2 $ 260.4
========== ========== ========== ==========
REVENUES ($ IN MILLIONS)
Residential 94.7 106.7 229.3 245.5
Commercial 84.0 87.7 220.4 233.0
Industrial 90.9 105.2 282.2 296.7
Wholesale 34.0 34.9 79.4 77.0
Other 11.2 (1.4) 25.7 27.3
---------- ---------- ---------- ----------
Total 314.8 333.1 837.0 879.5
---------- ---------- ---------- ----------
SALES (GIGAWATT HOURS)
Residential 1,008.1 1,096.3 2,436.8 2,497.9
Commercial 1,011.8 1,040.2 2,722.5 2,763.1
Industrial 2,176.4 2,244.7 6,655.3 6,467.4
Wholesale 911.8 858.7 2,205.2 2,405.4
Other 36.0 30.2 97.2 90.8
---------- ---------- ---------- ----------
Total 5,144.1 5,270.1 14,117.0 14,224.6
---------- ---------- ---------- ----------
COOLING DEGREE DAYS 459 752 572 1,015
NORMAL COOLING DEGREE DAYS 584 573 808 792
% WARMER (COLDER) THAN NORMAL (21%) 31% (29%) 28%
ELECTRIC CUSTOMERS
Residential 386,227 382,757
Commercial 48,984 48,014
Industrial 2,548 2,604
Wholesale 19 21
Other 795 800
---------- ----------
Total 438,573 434,196
---------- ----------
NiSource generates and distributes electricity, through its subsidiary Northern
Indiana, to approximately 439,000 customers in 21 counties in the northern part
of Indiana. The operating results reflect the temperature-sensitive nature of
customer demand with annual sales affected by temperatures in the northern part
of Indiana. As a result, segment operating income is generally higher in the
second and third quarters, reflecting cooling demand during the summer season.
Market Conditions
The steel sector continues to show improvement, with a 9% improvement in sales
for the nine-month period. The acquisitions of Bethlehem Steel and National
Steel by ISG and U.S. Steel, respectively, have been completed.
35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)
Regulatory Matters
During 2002, Northern Indiana settled matters related to an electric rate
review. On September 23, 2002, the IURC issued an order adopting most aspects of
the settlement. The order approving the settlement provides that electric
customers of Northern Indiana will receive an amount intended to approximate
$55.1 million each year in credits to their electric bills for 49 months,
beginning on July 1, 2002. The order also provides that 60% of any future
earnings beyond a specified cap will be retained by Northern Indiana. Credits
amounting to $39.8 million were recognized for electric customers for the first
nine months of 2003. The order adopting the settlement was appealed to the
Indiana Court of Appeals by both the Citizens Action Coalition of Indiana and
fourteen residential customers. On October 14, 2003, the Appeals Court upheld
the IURC's approval of the settlement.
Northern Indiana submitted its quarterly fuel adjustment clause (FAC) 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 has been 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 order approving the
transfer of functional control of the transmission system to the ITC was issued
on September 24, 2003. 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. This reimbursement was received on September 30, 2003.
Functional control was transferred to the ITC and MISO on October 1, 2003.
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 filed detailed tariff information,
with a planned initial operation date of March 31, 2004. However, in October
2003, MISO petitioned FERC to withdraw this tariff filing. FERC approved the
withdrawal and has provided guidance to MISO as to how it should proceed in the
future. It is now expected that MISO will file a new tariff application with
FERC and will delay the initial operation date to December 1, 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 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. An estimated refund liability was recorded in the
first quarter of 2003. A settlement was reached with the customers and Northern
Indiana recorded an additional refund liability in the third quarter. It is
expected that as a result of the settlement the industrial customers challenge
will be withdrawn or dismissed. In January 2002, Northern Indiana filed a
proceeding with the IURC for approval to implement a purchase power tracker. On
March 21, 2003, Northern Indiana amended the January 2002 filing by withdrawing
its request to implement a purchased power tracker and to instead 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. In October 2003,
Northern Indiana voluntarily withdrew its amended request and the entire
proceeding was dismissed.
36
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. An August 26, 2003 order accepted
Northern Indiana's March 17, 2003 compliance filing. Northern Indiana made
refunds on September 24, 2003 and filed a refund report at FERC on September 26,
2003.
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 September 30,
2003 the ECRM revenues amounted to $2.5 million. On August 1, Northern Indiana
filed the ECRM on capital investments of $120.0 million. This petition was
approved by the IURC on October 1, 2003. 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 $274.2 million. The IURC
order is currently being appealed to the Indiana Court of Appeals by the
Citizens Action Coalition of Indiana.
Environmental Matters
In December 2001, the EPA approved regulations developed by the State of Indiana
to comply with EPA's NOx State Implementation Plan (SIP) call. The NOx SIP call
requires certain states, including Indiana, to reduce NOx levels from several
sources, including industrial and utility boilers, to lower regional transport
of ozone. The NOx emission limitations in the Indiana rules are more restrictive
than those imposed on electric utilities under the Clean Air Act Amendments of
1990 (CAAA) acid rain NOx reduction program. Compliance with the NOx limits
contained in these rules is required by May 31, 2004. Northern Indiana plans to
install Selective Catalytic Reduction NOx reduction technology on specific units
at each of its active generating stations to comply with the rules and estimates
capital costs will range from $250.0 to $300.0 million. Actual compliance costs
may vary depending on a number of factors including market demand/resource
constraints, uncertainty of future equipment and construction costs, and the
potential need for additional control technology.
Sales
Electric sales for the third quarter 2003 were 5,144.1 gwh, a decrease of 126.0
gwh compared to the 2002 period. The decrease was primarily due to a reduction
of 312.5 gwh due to cooler weather during the quarter, partially offset by
increases in non-weather related usage of 163.9 gwh and increased wholesale
sales.
Electric sales for the first nine months of 2003 were 14,117.0 gwh, a decrease
of 107.6 gwh compared to the 2002 period, primarily reflecting decreased sales
to residential and commercial customers due to cooler weather during the second
and third quarters, and decreased sales to wholesale customers. The decline was
partially offset by increased industrial sales due to increased demand from the
steel industry customers.
Net Revenues
In third quarter 2003, electric net revenues of $205.9 million decreased by $9.1
million from the comparable 2002 period. The decrease was primarily due to
cooler weather in the 2003 period compared to the 2002 period.
In the first nine months of 2003, electric net revenue of $551.1 million
decreased by $40.0 million from the 2002 period due to $25.4 million of
additional credits issued as a result of the IURC electric rate review
settlement and cooler weather during the summer season that decreased electric
sales by $21.3 million.
37
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)
Operating Income
Operating income for the third quarter 2003 was $89.5 million, a decrease of
$18.1 million from the same period in 2002. The decrease was primarily due to
the changes in revenue mentioned above, increased pension and post-retirement
expenses of $4.4 million, increased property tax expense of $4.8 million and
increased maintenance expenses of $3.6 million. The property tax increase was
primarily due to a reduction in property taxes in 2002 due to changes in the
state property tax regulations. The 2002 period was unfavorably impacted by $3.1
million related to the amortization of electric rate review costs.
Operating income for the first nine months of 2003 was $206.2 million, a
decrease of $54.2 million from the same period in 2002 due to the changes in
revenue mentioned above, increased pension and postretirement benefits expenses
of $13.3 million, increased property tax expense of $7.5 million and increased
maintenance expenses of $4.3 million, which was partially offset by a $7.7
million reduction in employee-related and administrative expenses. The property
tax increase was primarily due to a reduction in property taxes in 2002 due to
changes in the state property tax regulations. The 2002 period was unfavorably
impacted by $2.6 million related to the amortization of electric rate review
costs.
38
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
OTHER
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
(in millions) 2003 2002 2003 2002
- ------------- ---- ---- ---- ----
NET REVENUES
Other revenue $ 97.5 $ 17.2 $ 334.6 $ 58.5
Less: Cost of products purchased 90.4 8.5 315.1 44.3
------- ------- -------- -------
Net Revenues 7.1 8.7 19.5 14.2
------- ------- -------- -------
OPERATING EXPENSES
Operation and maintenance 17.2 0.6 43.8 34.3
Depreciation and amortization 2.4 5.0 8.6 7.4
Loss (Gain) on sale of assets - (3.1) 1.1 (6.6)
Other taxes (0.2) 1.3 2.6 3.6
------- ------- -------- -------
Total Operating Expenses 19.4 3.8 56.1 38.7
------- ------- -------- -------
Operating Income (Loss) $ (12.3) $ 4.9 $ (36.6) $ (24.5)
------- ------- -------- -------
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 October 20, 2003, NiSource closed the previously announced sale of all of the
steel-related, inside-the-fence assets of its subsidiary Primary Energy, to
Private Power, a privately held power development firm backed by American
Securities Capital Partners, LLC, a New York private equity investment firm.
NiSource sold six Primary Energy operating subsidiaries and the Primary Energy
name to Private Power. Private Power purchased the subsidiaries for
approximately $325.4 million, comprised of $113.1 million in cash and the
assumption of debt-related liabilities and other obligations. The assumption of
such liabilities and the after tax cash proceeds from the sale, reduced
NiSource's debt by $273.6 million, of which $67.3 million was off balance sheet.
NiSource has accounted for Primary Energy, excluding Whiting Clean Energy, as
discontinued operations and has adjusted all periods presented accordingly.
During 2003, NiSource recognized an after-tax loss of $27.3 million related to
the sale. As a result of the sale, Primary Energy was renamed PEI Holdings, Inc.
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 operated 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.
39
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
OTHER (CONTINUED)
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 of Long-Lived Assets". 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.
Net Revenues
Net revenues of $7.1 million for the third quarter 2003 decreased by $1.6
million from the third quarter of 2002, due to lower revenues associated with
the power trading business primarily resulting from lower volatility in the
market and decreased volumes sold.
For the first nine months of 2003, net revenues were $19.5 million, an increase
of $5.3 million due to losses recorded in 2002 of $9.3 million associated with
the gas trading business, slightly offset by losses of $3.8 million recorded in
2003 associated with the power trading business as a result of lower volatility
in the market and decreased volumes sold.
The 2003 results reflect power trading activities on a net revenue basis. The
2002 results reflect power trading and gas trading activities on a net basis.
However, beginning July 1, 2002, NiSource exited the gas trading business. All
gas marketing sales at NiSource after June 30, 2003 were reported on a gross
basis.
Operating Income
The Other segment reported an operating loss of $12.3 million in the third
quarter 2003, versus operating income of $4.9 million in the same period in
2002. The decrease was mainly attributable, to a reduction in estimated sales
taxes related to sales of natural gas customers of a subsidiary previously
engaged in the retail and wholesale gas marketing business that favorably
impacted the 2002 period and the decrease in revenues mentioned above.
For the first nine months of 2003, operating loss was $36.6 million, versus an
operating loss of $24.5 million in the 2002 period. The decrease was mainly
attributable to a reduction in estimated sales taxes related to sales of natural
gas customers of a subsidiary previously engaged in the retail and wholesale gas
marketing business that favorably impacted the 2002 period, slightly offset by
the increase in revenues mentioned above.
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."
40
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 was no change in NiSource's internal control over financial reporting
during the fiscal quarter covered by this report that has materially affected,
or is reasonably likely to materially affect, NiSource's internal control over
financial reporting.
41
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 sought certification as a nationwide
class action on behalf of all similarly situated gas producers, royalty
owners, overriding royalty owners, working interest owners and certain
state taxing authorities. However, on April 10, 2003, the judge denied
Plaintiffs motion for class certification of the nationwide class. On July
28, 2003, the court granted Plaintiffs' Motion for Leave to File a Fourth
Amended Complaint, which narrows the number of defendants and scope of the
allegations to volume mismeasurement in Kansas, Wyoming, and Colorado.
This complaint only names one Columbia entity, Columbia Energy Services
Corporation ("CES"), as a defendant. On October 9, 2003, the court also
allowed the Plaintiffs to file a related case alleging BTU
mis-measurement, in which CES again is the only Columbia entity named 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.
42
ITEM 1. LEGAL PROCEEDINGS (continued)
NISOURCE INC.
4. 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. On September 29, 2003, the court
granted the NiSource defendants' motion to dismiss for lack of personal
jurisdiction. On October 8, 2003, plaintiff moved to modify the court's
order to provide for transfer of the case to the U.S. District Court for
Delaware, rather than outright dismissal. The NiSource defendants filed
their opposition to plaintiff's motion on October 15, 2003. In addition,
on October 27, 2003 the plaintiff also filed its complaint in U.S.
District Court for the Northern District of Maryland.
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. Based on the court's
decision in Atlantigas, the Triad plaintiffs have moved to dismiss this
case from the District of Columbia in order to refile it in another
jurisdiction.
ITEM 2. CHANGES IN SECURITES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(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).
43
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued)
NISOURCE INC.
(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 third quarter
2003:
Financial
Item Reported Statements Included Date of Event Date Filed
------------- ------------------- ------------- ----------
5, 7 Y 07/15/03 07/15/03
7, 12 Y 08/01/03 08/01/03
9 N 09/18/03 09/18/03
9 N 09/30/03 09/30/03
5, 7 Y 10/06/03 10/06/03
5, 7 Y 10/06/03 10/06/03
44
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NiSource Inc.
----------------------------------
(Registrant)
Date: November 10, 2003 By: /s/ Jeffrey W. Grossman
----------------------------------
Jeffrey W. Grossman
Vice President and Controller
(Principal Accounting Officer
and Duly Authorized Officer)
45