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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ______ to ______
Commission file number 001-16189
NISOURCE INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 35-2108964
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 East 86th Avenue
Merrillville, Indiana 46410
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (877) 647-5990
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, $0.01 Par Value:
207,660,198 shares outstanding at June 30, 2002.
NISOURCE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 2002
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Consolidated Income (Loss).............. 3
Consolidated Balance Sheets........................... 4
Statements of Consolidated Cash Flows................. 6
Notes to Consolidated Financial Statements............ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................... 34
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................... 35
Item 2. Changes in Securities and Use of Proceeds............. 36
Item 3. Defaults Upon Senior Securities....................... 36
Item 4. Submission of Matters to a Vote of Security Holders... 36
Item 5. Other Information..................................... 36
Item 6. Exhibits and Reports on Form 8-K...................... 37
Signature..................................................... 38
2
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
STATEMENTS OF CONSOLIDATED INCOME (LOSS) (unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
(in millions, except per share amounts) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
NET REVENUES
Gas distribution $ 538.7 $ 754.3 $ 1,767.8 $ 2,797.8
Gas transmission and storage 137.8 140.8 309.5 311.2
Electric 252.9 246.0 487.3 492.8
Exploration and production 33.8 21.7 85.3 69.9
Merchant 376.2 649.9 850.4 1,875.7
Other 36.2 60.1 81.7 125.5
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Gross Revenues 1,375.6 1,872.8 3,582.0 5,672.9
Cost of sales 668.8 1,163.1 1,836.6 3,863.4
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Total Net Revenues 706.8 709.7 1,745.4 1,809.5
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OPERATING EXPENSES
Operation and maintenance 350.6 341.1 656.9 714.3
Depreciation, amortization and depletion 131.6 157.8 276.4 324.1
Loss (gain) on sale or impairment of assets -- 9.2 (23.0) 9.2
Other taxes 62.3 61.5 154.8 159.3
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Total Operating Expenses 544.5 569.6 1,065.1 1,206.9
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OPERATING INCOME 162.3 140.1 680.3 602.6
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OTHER INCOME (DEDUCTIONS)
Interest expense, net (123.7) (149.4) (251.9) (312.6)
Minority interests (5.1) (5.1) (10.2) (10.2)
Preferred stock dividends of subsidiaries (1.9) (2.0) (3.7) (3.8)
Other, net 3.2 8.9 6.2 11.4
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Total Other Income (Deductions) (127.5) (147.6) (259.6) (315.2)
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 34.8 (7.5) 420.7 287.4
INCOME TAXES 14.1 2.4 158.0 120.0
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INCOME (LOSS) FROM CONTINUING OPERATIONS 20.7 (9.9) 262.7 167.4
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Loss from Discontinued Operations - net of taxes (3.2) (1.7) (3.0) (1.1)
Gain on Sale of Discontinued Operations - net of taxes 7.5 -- 7.5 --
Change in Accounting - net of tax -- -- -- 4.0
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NET INCOME (LOSS) $ 25.0 $ (11.6) $ 267.2 $ 170.3
===================================================================================================================================
BASIC EARNINGS (LOSS) PER SHARE ($)
Continuing operations 0.10 (0.05) 1.28 0.82
Discontinued operations 0.02 (0.01) 0.02 (0.01)
Change in accounting -- -- -- 0.02
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BASIC EARNINGS (LOSS) PER SHARE 0.12 (0.06) 1.30 0.83
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DILUTED EARNINGS (LOSS) PER SHARE ($)
Continuing operations 0.10 (0.05) 1.26 0.80
Discontinued operations 0.02 (0.01) 0.02 (0.01)
Change in accounting -- -- -- 0.02
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DILUTED EARNINGS (LOSS) PER SHARE 0.12 (0.06) 1.28 0.81
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BASIC AVERAGE COMMON SHARES OUTSTANDING (MILLIONS) 205.6 205.3 205.6 205.2
DILUTED AVERAGE COMMON SHARES (MILLIONS) 208.2 205.3 208.0 209.7
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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
JUNE 30, December 31,
(in millions) 2002 2001
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(unaudited)
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility plant $16,268.0 $16,078.9
Accumulated depreciation and amortization (7,826.2) (7,616.4)
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Net utility plant 8,441.8 8,462.5
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Gas and oil producing properties, successful
efforts method
United States cost center 1,034.2 1,011.5
Canadian cost center 8.6 22.3
Accumulated depletion (101.7) (74.6)
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Net gas and oil producing properties 941.1 959.2
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Other property, at cost, less accumulated
depreciation 690.7 133.0
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Net Property, Plant and Equipment 10,073.6 9,554.7
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INVESTMENTS AND OTHER ASSETS
Net assets of discontinued operations -- 375.0
Unconsolidated affiliates 121.2 123.9
Assets held for sale 106.6 15.4
Other investments 54.7 47.8
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Total Investments 282.5 562.1
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CURRENT ASSETS
Cash and cash equivalents 54.8 127.9
Accounts receivable (less reserves of $61.4 and
$63.4, respectively) 538.2 937.7
Other receivables 18.3 10.1
Gas inventory 181.2 377.7
Underrecovered gas and fuel costs 146.3 129.4
Materials and supplies, at average cost 80.1 73.3
Electric production fuel, at average cost 34.4 29.2
Price risk management assets 78.1 299.2
Exchange gas receivable 157.7 186.8
Prepayments and other 295.0 395.4
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Total Current Assets 1,584.1 2,566.7
- --------------------------------------------------------------------------------
OTHER ASSETS
Price risk management assets 106.2 18.5
Regulatory assets 608.8 522.3
Goodwill, less accumulated amortization 3,726.7 3,735.7
Deferred charges and other 375.3 414.1
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Total Other Assets 4,817.0 4,690.6
- --------------------------------------------------------------------------------
TOTAL ASSETS $16,757.2 $17,374.1
================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31,
(in millions) 2002 2001
- --------------------------------------------------------------------------------
(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 3,579.7 $ 3,469.4
Preferred Stocks --
Series without mandatory redemption provisions 81.1 83.6
Series with mandatory redemption provisions 5.0 5.0
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
Company debentures 345.0 345.0
Long-term debt, excluding amounts due within one
year 5,930.5 5,780.8
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Total Capitalization 9,941.3 9,683.8
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CURRENT LIABILITIES
Current redeemable preferred stock subject to
mandatory redemption 43.0 43.0
Current portion of long-term debt 692.8 398.2
Short-term borrowings 1,000.7 1,854.3
Accounts payable 391.4 646.6
Dividends declared on common and preferred stocks 62.0 1.8
Customer deposits 57.9 36.3
Taxes accrued 264.8 339.0
Interest accrued 90.8 79.6
Overrecovered gas and fuel costs 29.0 49.3
Price risk management liabilities 79.6 242.3
Exchange gas payable 305.8 287.2
Current deferred revenue 118.3 89.0
Other accruals 480.9 662.0
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Total Current Liabilities 3,617.0 4,728.6
- --------------------------------------------------------------------------------
OTHER LIABILITIES AND DEFERRED CREDITS
Price risk management liabilities 10.2 11.4
Deferred income taxes 1,875.1 1,726.3
Deferred investment tax credits 100.8 105.2
Deferred credits 257.1 231.0
Noncurrent deferred revenue 371.2 435.4
Accrued liability for postretirement benefits 290.1 277.7
Liabilities held for sale 118.3 --
Other noncurrent liabilities 176.1 174.7
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Total Other 3,198.9 2,961.7
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COMMITMENTS AND CONTINGENCIES -- --
- --------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $16,757.2 $17,374.1
================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS (unaudited)
Six Months Ended June 30,
--------------------------
(in millions) 2002 2001
- --------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 267.2 $ 170.3
Adjustments to reconcile net income to net cash from
continuing operations:
Depreciation, depletion, and amortization 276.4 324.1
Net changes in price risk management activities (33.0) (2.7)
Asset impairment -- 9.2
Deferred income taxes and investment tax credits 44.5 (106.5)
Deferred revenue (35.0) (177.6)
Gain on sale of assets (23.0) --
Income from change in accounting -- (4.0)
Gain on sale of discontinued assets (7.5) --
Income from discontinued operations 3.0 1.1
Other, net 12.3 (9.5)
- --------------------------------------------------------------------------------------------
504.9 204.4
- --------------------------------------------------------------------------------------------
Changes in components of working capital, net of effect
from acquisitions of businesses:
Accounts receivable, net 459.1 558.0
Inventories 119.5 115.9
Accounts payable (255.5) (636.1)
Taxes accrued (24.0) 70.7
(Under) Overrecovered gas and fuel costs (37.2) 441.0
Exchange gas receivable/payable 47.7 (11.0)
Other accruals (181.0) (60.2)
Other working capital 242.6 (160.1)
- --------------------------------------------------------------------------------------------
Net Cash from Continuing Operations 876.1 522.6
Net Cash from Discontinued Operations -- --
- --------------------------------------------------------------------------------------------
Net Cash from Operating Activities 876.1 522.6
- --------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (249.8) (185.9)
Proceeds from disposition of assets 426.0 --
Other investing activities, net -- 15.3
- --------------------------------------------------------------------------------------------
Net Investing Activities 176.2 (170.6)
- --------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of long-term debt -- 300.0
Retirement of long-term debt (152.1) (36.9)
Change in short-term debt (853.4) (559.6)
Retirement of preferred shares (2.5) (0.3)
Issuance of common stock 2.9 13.5
Dividends paid - common shares (120.3) (120.2)
- --------------------------------------------------------------------------------------------
Net Financing Activities (1,125.4) (403.5)
- --------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (73.1) (51.5)
Cash and cash equivalents at beginning of year 127.9 193.0
- --------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 54.8 $ 141.5
============================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized 223.7 320.9
Cash paid for income taxes 76.8 138.0
- --------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF ACCOUNTING PRESENTATION
The accompanying unaudited consolidated financial statements for NiSource Inc.
(NiSource) reflect all normal recurring adjustments that are necessary, in the
opinion of management, to present fairly the results of operations in accordance
with accounting principles generally accepted in the United States.
The accompanying financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in NiSource's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001. Income
for interim periods may not be indicative of results for the calendar year due
to weather variations and other factors. Certain reclassifications have been
made to the 2001 financial statements to conform to the 2002 presentation. The
2001 results have been adjusted to reflect the change to successful efforts
accounting in NiSource's Exploration and Production segment.
2. DILUTED AVERAGE COMMON SHARES COMPUTATION
Basic earnings per share (EPS) is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. The weighted average shares outstanding for diluted EPS are
impacted by the incremental effect of the various long-term incentive
compensation plans and the forward equity contracts associated with the Stock
Appreciation Income Linked Securities(SM) (SAILS(SM)) and Corporate Premium
Income Equity Securities.
The numerator in calculating both basic and diluted EPS for each year is
reported net income. The computation of diluted average common shares follows:
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------------------
(in thousands) 2002 2001 2002 2001
- --------------------------------------------------------------------------------
Denominator
Basic average common shares
outstanding 205,645 205,309 205,591 205,175
Dilutive potential common shares 2,567 -- 2,443 4,488
- --------------------------------------------------------------------------------
Diluted Average Common Shares 208,212 205,309 208,034 209,663
- --------------------------------------------------------------------------------
3. INDIANA UTILITY REGULATORY COMMISSION RATE SETTLEMENT
On June 20, 2002, a settlement agreement was filed with the Indiana Utility
Regulatory Commission (IURC) that would enable electric customers of Northern
Indiana to receive an amount intended to approximate $55.0 million each year in
credits to their electric bills for 49 months. The settlement was the result of
months of negotiations among Northern Indiana, the Indiana Office of Utility
Consumer Counselor, and a group of commercial and industrial customers. Other
customers have opposed the settlement. Hearings on the settlement were held on
July 22 and 23, 2002.
If approved by the IURC, Northern Indiana's electric customers, other than those
on certain contract rates, will receive a credit of approximately 6 percent of
the electric portion of their monthly Northern Indiana bill. Briefings were
completed by all parties on August 13 and the IURC will issue a final order in
the matter sometime after that date.
4. RESTRUCTURING ACTIVITIES
During 2000, NiSource developed and began the implementation of a plan to
restructure its operations. The restructuring plan included a severance program,
a transition plan to implement operational efficiencies throughout NiSource's
operations and a voluntary early retirement program. During 2001, the
restructuring initiative was continued with the addition of a plan to
restructure the operations within NiSource's Gas Distribution and Electric
Operations segments. Additionally, in December 2001 NiSource announced its plan
to indefinitely shut down the Dean H. Mitchell Generating Station located in
Gary, Indiana.
7
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For all of the plans, a total of approximately 1,400 management, professional,
administrative and technical positions have been identified for elimination. As
of June 30, 2002, approximately 900 employees had been terminated, of which
approximately 110 employees and 190 employees were terminated during the quarter
and six months ended June 30, 2002, respectively. At June 30, 2002 and December
31, 2001, the consolidated balance sheets reflected liabilities of $47.2 million
and $58.3 million related to the restructuring plans, respectively. During the
quarter and six months ended June 30, 2002, $6.2 million and $10.9 million of
benefits were paid as a result of the restructuring plans, respectively.
Additionally, during the second quarter and six months ended June 30, 2002, the
restructuring plan liability was adjusted by $0.2 million.
5. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
On April 30, 2002, NiSource sold the water utility assets of the Indianapolis
Water Company (IWC) and other assets of IWC Resources Corporation (IWCR) and its
subsidiaries to the City of Indianapolis for $540.0 million, which included
$157.5 million in IWC debt and the redemption of $2.5 million of IWC preferred
stock. As a result of this transaction, NiSource recorded an after-tax gain of
$7.5 million in the second quarter of 2002. The gain included a tax benefit of
$33.2 million resulting from the reduction of a deferred tax liability no longer
required. NiSource also sold its interest in White River Environmental
Partnership (WREP), which was an IWC investment, to the other partners for $8.0
million. The sales price of WREP approximated book value. The divestiture of the
water utilities was required as part of the order by the U.S. Securities and
Exchange Commission approving the November 2000 acquisition of Columbia Energy
Group (Columbia). During 2002 and 2001, the water utilities' operations were
reported as discontinued operations. Previously they were reported in the Other
segment.
Results from discontinued operations of the water utilities are provided in the
following table:
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------------------
($ in millions) 2002 2001 2002 2001
- --------------------------------------------------------------------------------
REVENUES FROM DISCONTINUED OPERATIONS 7.8 27.0 30.7 51.8
- --------------------------------------------------------------------------------
Loss from discontinued operations (8.8) (2.0) (8.3) (0.2)
Income taxes (5.6) (0.3) (5.3) 0.9
- --------------------------------------------------------------------------------
NET LOSS FROM DISCONTINUED OPERATIONS (3.2) (1.7) (3.0) (1.1)
- --------------------------------------------------------------------------------
On July 1, 2002, EnergyUSA-TPC, a consolidated subsidiary, sold its net
obligations under a portion of its gas forward transaction portfolio, physical
storage inventory and associated agreements to a third party. According to the
terms of the agreement, NiSource paid $6.8 million to settle the net
obligations. The net assets and net liabilities of EnergyUSA-TPC transferred
pursuant to the agreement were reported as held for sale at June 30, 2002.
On January 28, 2002, NiSource sold all of the issued and outstanding capital
stock of SM&P Utility Resources, Inc. (SM&P), a wholly owned subsidiary of
NiSource, to The Laclede Group, Inc. for $37.9 million. SM&P operates an
underground line locating and marking service in ten midwestern states. In the
first quarter of 2002, NiSource recognized an after-tax gain of $12.5 million
related to the sale. The net assets of SM&P were reported as assets held for
sale on the consolidated balance sheets at December 31, 2001.
8
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Assets held for sale and net assets of discontinued operations and liabilities
held for sale were as follows:
JUNE 30, December 31,
(in millions) 2002 2001
- --------------------------------------------------------------------------------
ASSETS HELD FOR SALE AND NET ASSETS OF
DISCONTINUED OPERATIONS
Accounts receivable, net $ 21.3 $ 48.4
Property, plant and equipment, net 74.2 706.0
Other assets 51.4 98.9
Current liabilities (18.2) (146.6)
Debt (7.7) (78.7)
Other liabilities (14.4) (237.6)
- --------------------------------------------------------------------------------
Assets Held for Sale and Net Assets of Discontinued
Operations $106.6 $390.4
- --------------------------------------------------------------------------------
LIABILITIES HELD FOR SALE
Current liabilities $(98.0) --
Debt -- --
Other liabilities (20.3) --
- --------------------------------------------------------------------------------
Liabilities Held for Sale $(118.3) --
- --------------------------------------------------------------------------------
NET ASSETS AND (LIABILITIES) HELD FOR SALE AND NET
ASSETS OF DISCONTINUED OPERATIONS $(11.7) $390.4
- --------------------------------------------------------------------------------
6. RISK MANAGEMENT ACTIVITIES
NiSource uses commodity-based derivative financial instruments to manage certain
risks inherent in its business. NiSource accounts for its derivatives under
Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting
for Derivative Instruments and Hedging Activities" and accounts for its trading
contracts that do not qualify as derivatives accounted for under SFAS No. 133
pursuant to Emerging Issues Task Force (EITF) Issue No. 98-10, "Accounting for
Contracts Involved in Energy Trading and Risk Management Activities."
SFAS NO. 133. The activity for the second quarter and six-month period ended
June 30, 2002 with respect to cash flow hedges included the following:
Three Months Six Months
Ended Ended
(in millions, net of tax) June 30, 2002 June 30, 2002
- --------------------------------------------------------------------------------
Net unrealized gains on derivatives qualifying
as cash flow hedges at the beginning of the period $ 36.9 $ 50.1
Unrealized hedging gains arising during the period
on derivatives qualifying as cash flow hedges 24.7 35.3
Reclassification adjustment for net loss (gain) 2.8 (21.0)
included in net income
- --------------------------------------------------------------------------------
Net unrealized gains on derivatives qualifying
as cash flow hedges at the end of the period $ 64.4 $ 64.4
- --------------------------------------------------------------------------------
Unrealized gains and losses on NiSource's cash flow and fair value hedges were
recorded as price risk management assets and liabilities along with unrealized
gains and losses on NiSource's gas and power marketing portfolios. The
accompanying Consolidated Balance Sheets reflected price risk management assets
related to unrealized gains and losses on hedges of $111.8 million and $66.0
million at June 30, 2002 and December 31, 2001, respectively, of which $16.3
million and $65.9 million were included in "Current Assets" and $95.5 million
and $0.1 million were included in "Other Assets." Price risk management
liabilities related to unrealized gains and losses on hedges were $9.5 million
and $10.3 million at June 30, 2002 and December 31, 2001, respectively, all of
which were included in "Current Liabilities."
9
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the second quarter of 2002, no amounts were recognized in earnings due to
the change in value of certain derivative instruments primarily representing
time value, and there were no components of the derivatives' fair values
excluded in the assessment of hedge effectiveness. Also during the second
quarter, NiSource reclassified $0.4 million, net of tax, related to its cash
flow hedges of natural gas production, from other comprehensive income to
earnings due to the probability that certain forecasted transactions would not
occur. It is anticipated that during the next twelve months the expiration and
settlement of cash flow hedge contracts will result in net income recognition of
amounts currently classified in other comprehensive income of approximately
$12.2 million, net of tax.
TRADING ACTIVITIES. NiSource's trading operations include the activities of its
power trading business and gas trading business associated with TPC. NiSource
employs a value-at-risk (VaR) model to assess the market risk of its energy
trading portfolios. NiSource estimates the one-day VaR across all trading
groups that utilize derivatives using variance/covariance at a 95% confidence
level. Based on the results of the VaR analysis, the daily market exposure for
power trading on an average, high and low basis was $0.6 million, $0.8 million
and $0.4 million during the second quarter of 2002 and $1.7 million, $2.6
million and $1.0 million during the second quarter of 2001. The daily VaR for
the gas trading portfolio on an average, high and low basis was $0.2 million,
$0.2 million and $0.1 million during the second quarter of 2002 and $0.5
million, $1.0 million and $0.2 million during the second quarter of 2001.
NiSource recorded power trading revenues and cost of sales of $195.4 million and
$209.6 million, respectively, for the quarter ended June 30, 2002 and $410.7
million and $433.0 million, respectively, for the six-months ended June 30,
2002. NiSource recorded power trading revenues and cost of sales of $238.2
million and $234.5 million, respectively, for the quarter ended June 30, 2001
and $346.8 million and $343.3 million, respectively, for the six-months ended
June 30, 2001. NiSource recorded gas trading revenues and cost of sales of
$153.3 million and $211.2 million, respectively, for the quarter ended June 30,
2002 and $409.1 million and $465.9 million, respectively, for the six-months
ended June 30, 2002. NiSource recorded gas trading revenues and cost of sales of
$392.8 million and $397.8 million, respectively, for the quarter ended June 30,
2001 and $1,472.0 million and $1,543.1 million, respectively, for the six-months
ended June 30, 2001.
The fair market value of NiSource power trading assets and liabilities were
$59.5 million and $65.3 million, respectively, at June 30, 2002 and $60.3
million and $59.4 million, respectively, at December 31, 2001. The fair market
value of NiSource gas trading assets and liabilities were $55.2 million and
$60.6 million, respectively, at June 30, 2002. The fair market value of NiSource
gas trading assets and liabilities were $192.0 million and $184.0 million,
respectively, at December 31, 2001. On July 1, 2002, NiSource sold its net
obligations under a portion of its gas forward transaction portfolio, physical
storage inventory and associated agreements to a third-party, and accordingly a
portion of the price risk management assets and liabilities are included in
"Assets held for sale" and "Liabilities held for sale" on the Consolidated
Balance Sheets at June 30, 2002.
Unrealized gains and losses on NiSource's trading portfolio are recorded as
price risk management assets and liabilities along with unrealized gains and
losses on NiSource's hedges. The accompanying Consolidated Balance Sheets
reflected price risk management assets related to unrealized gains and losses on
trading activities of $114.7 million and $252.3 million at June 30, 2002 and
December 31, 2001, respectively, of which $61.8 million and $233.3 million were
included in "Current Assets" and $10.7 million and $19.0 million were included
in "Other Assets." Additionally, at June 30, 2002, $42.2 million of price risk
management assets were included in "Assets held for sale." Price risk management
liabilities related to unrealized gains and losses on trading activities
(including net option premiums) were $125.9 million and $243.4 million, of which
$70.1 million and $232.0 million were included in "Current Liabilities" and
$10.2 million and $11.4 million were included in "Other Liabilities and Deferred
Credits" at June 30, 2002 and December 31, 2001, respectively. Additionally, at
June 30, 2002, $45.6 million of price risk management liabilities were included
in "Liabilities held for sale."
10
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS NOS. 141 AND 142 - BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE
ASSETS. In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, "Business Combinations
(SFAS No. 141)," and SFAS No. 142, "Goodwill and Other Intangible Assets (SFAS
No.142)." The key requirements of the two interrelated Statements include
mandatory use of the purchase method of accounting for business combinations,
discontinuance of goodwill amortization, a revised framework for testing for
goodwill impairment at a "reporting unit" level, and new criteria for the
identification and potential amortization of other intangible assets. Other
changes to existing accounting standards involve the amount of goodwill to be
used in determining the gain or loss on the disposal of assets and a requirement
to test goodwill for impairment at least annually.
NiSource adopted the provisions of SFAS No. 141 on July 1, 2001. The adoption of
SFAS No. 142 on January 1, 2002 resulted in an increase in operating income of
$23.0 million and $45.6 million for the second quarter and six month period
ending June 30, 2002, respectively, reflecting the effects of discontinuing the
amortization of goodwill. Net income would have been $11.4 million, or $0.05 per
basic share for the second quarter of 2001 and $215.9 million, or $1.05 per
basic share, for the six-month period ending June 30, 2001 had NiSource
discontinued the amortization of goodwill effective January 1, 2001. NiSource
amortized approximately $93.1 million of goodwill during the entire year of
2001.
Pursuant to the requirements of SFAS No. 142, NiSource has aggregated the
subsidiaries related to the acquisition of Columbia Energy Group into two
distinct reporting units, one within the Gas Distribution segment and one within
the Transmission and Storage segment, for the purpose of testing goodwill for
impairment. At June 30, 2002, goodwill, net of accumulated amortization was
$1,722.4 million and $2,004.3 million for the Gas Distribution reporting unit
and the Transmission and Storage reporting unit, respectively. NiSource has
completed its analysis of the transitional goodwill impairment test as of June
30, 2002. The results indicated that no impairment charge was required.
EITF ISSUE NO. 02-03 - RECOGNITION AND REPORTING OF GAINS AND LOSSES ON ENERGY
TRADING CONTRACTS UNDER EITF ISSUE NO. 98-10, "ACCOUNTING FOR CONTRACTS INVOLVED
IN ENERGY TRADING AND RISK MANAGEMENT ACTIVITIES," AND NO. 00-17, "MEASURING THE
FAIR VALUE OF ENERGY-RELATED CONTRACTS IN APPLYING ISSUE NO. 98-10." In June
2002, the EITF reached a consensus on one issue related to Issue No. 02-03
(Issue). The key requirements include that all gains and losses on energy
trading contracts should be shown net in the income statement. The gross
transaction volumes for those energy trading contracts that are physically
settled should be disclosed in the notes to the financial statements. The Issue
is effective for financial statements issued for periods ending after July 15,
2002.
NiSource currently recognizes gains and losses on its trading derivatives on a
net basis; however, transactions that result in physical delivery are displayed
on a gross basis. NiSource will adjust its statements of consolidated income to
reflect the physical transactions on a net basis in accordance with the Issue in
the third quarter of 2002. The adoption of the Issue will have a material impact
on NiSource's gross revenues and cost of sales, however the Issue will have no
impact on operating income.
8. TELECOMMUNICATIONS NETWORK
NiSource, through its subsidiary Columbia Transmission Communications
Corporation (Transcom), has built a dark-fiber optics telecommunications network
primarily along its pipeline rights-of-way between New York and Washington D.C.
In August 2001, Transcom invited potential buyers to submit bids for the assets.
Based on the results of the bids, management decided to operate the network
while continuing to evaluate the possibility of a sale based on conditions in
the telecommunications market. The anticipated cash flow from Transcom's most
recent business plan indicated that the asset's current carrying value was
ultimately realizable. The realizability of the asset's carrying value is
dependent upon management's ability to execute the business plan or alternative
strategies. However, the unfavorable market conditions remain and continue to
adversely impact Transcom's ability to implement its business plan. Management
is continuing to pursue and evaluate strategic alternatives, including a sale.
11
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CHANGE IN INDIANA CORPORATE INCOME TAX RATE
On June 28, 2002, the governor of Indiana signed into law legislation that
increases the Indiana Corporate Income tax rate from 4.5% to 8.5% effective
January 1, 2003. As a result, NiSource recorded an additional deferred income
tax liability of $65.9 million (net) in the second quarter of 2002, to reflect
the impact of the increased tax rate. NiSource's regulated subsidiaries recorded
a regulatory asset in the amount of $65.0 million to reflect the probable
collection of the increased tax liability though future rates. The overall
impact on income tax expense in the second quarter was an increase of $0.9
million.
10. SYNTHETIC LEASES
Primary Energy is currently involved in six projects that are concerned with the
generation of electricity, steam or thermal energy on the sites of industrial
customers. Four projects generate energy from process streams or fuel provided
by the industrial customers. The energy is then delivered to the industrial
customers under long-term contracts providing for tolling fees, sublease
payments, unit sale payments or processing fees. With respect to the Ironside
project described below, Ironside is in negotiations for an agreement for the
project to provide energy generated from process streams to the new owner of the
mill. One project, Whiting Clean Energy, uses natural gas to produce electricity
for sale in the wholesale markets and is expected to provide steam for
industrial use. In addition, a subsidiary of Primary Energy is a 50% partner in
a partnership, which operates a coal pulverization facility. Generally the
facilities are owned by unaffiliated special purpose entities.
Previously, the assets and related debt associated with these projects were not
included in NiSource's consolidated financial statements, which treatment was
approved by NiSource's former independent public accountants. However, NiSource
has now determined in consultation with Deloitte & Touche, its independent
public accountants, that certain language contained in the operative agreements
for four of the projects did not support characterization of those transactions
as off-balance-sheet operating leases under EITF Issue No. 97-1. "Implementation
Issues in Accounting for Lease Transactions, Including Those Involving Special
Purpose Entities," and EITF No. 97-10 "The Effect of Lessee Involvement in Asset
Construction." Certain provisions in the operative documents for two
transactions (Whiting Clean Energy and Ironside), which were subject to EITF No.
97-10, could be interpreted to transfer substantial construction period risks to
the lessee, resulting in Primary Energy being deemed the owner of the projects.
Certain provisions in the other two leases (Cokenergy and Portside) could be
interpreted to require the inclusion of certain default-related obligations in
minimum lease payments, resulting in the characterization of those leases as
capital leases.
As a result of this determination NiSource has changed the characterization of
the leases associated with the four projects from synthetic leases to two owned
assets and two capital leases for financial reporting purposes. Due to the
change in the lease characterization, Primary Energy recognized $576 million of
assets and an equal amount of related debt on its balance sheet at June 30,
2002. The impact on the results of operations for prior periods was immaterial.
The recognition of the debt did not alter NiSource's compliance with its debt
covenants and is consistent with the treatment of such leases by the rating
agencies in the analysis of NiSource's credit ratings.
11. BUSINESS SEGMENT INFORMATION
NiSource's operations are divided into six primary business segments. The Gas
Distribution segment provides natural gas service and transportation for
residential, commercial and industrial customers in Ohio, Pennsylvania,
Virginia, Kentucky, Maryland, Indiana, Massachusetts, Maine and New Hampshire.
The Electric Operations segment provides electric service in 21 counties in the
northern part of Indiana. The Gas Transmission and Storage segment offers gas
transportation and storage services for local distribution companies, marketers
and industrial and commercial customers located in northeastern, mid-Atlantic,
midwestern and southern states and the District of Columbia. The Exploration and
Production segment explores for, develops, produces and markets gas and oil in
the United States and in Canada. The Merchant Operations segment provides
energy-related services including gas marketing, electric wheeling, bulk power,
power trading, natural gas sales and management services to commercial and
industrial customers, and participates in the development of non-rate regulated
power projects. The Other segment participates in real estate,
telecommunications and other businesses.
12
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables provide information about the business segments. NiSource
uses operating income as its primary measurement for each of the reported
segments and makes decisions regarding finance, dividends and taxes at the
corporate level on a consolidated basis. Segment revenues include intersegment
sales to affiliated subsidiaries, which are eliminated in consolidation.
Affiliated sales are recognized on the basis of prevailing market prices,
regulated prices or at levels provided for under contractual agreements.
Operating income is derived from revenues and expenses directly associated with
each segment.
Three Months Six Months
-------------------- ---------------------
Ended June 30, Ended June 30,
(in millions) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------
REVENUES
GAS DISTRIBUTION
Unaffiliated 544.4 758.9 1,758.0 2,810.2
Intersegment 0.7 7.9 7.0 20.7
- ------------------------------------------------------------------------------------
Total 545.1 766.8 1,765.0 2,830.9
- ------------------------------------------------------------------------------------
GAS TRANSMISSION AND STORAGE
Unaffiliated 141.3 144.6 316.0 331.6
Intersegment 70.8 71.8 155.3 178.6
- ------------------------------------------------------------------------------------
Total 212.1 216.4 471.3 510.2
- ------------------------------------------------------------------------------------
ELECTRIC OPERATIONS
Unaffiliated 253.0 246.2 487.5 492.9
Intersegment 4.6 0.5 8.9 1.1
- ------------------------------------------------------------------------------------
Total 257.6 246.7 496.4 494.0
- ------------------------------------------------------------------------------------
EXPLORATION AND PRODUCTION
Unaffiliated 38.7 21.0 96.9 74.2
Intersegment 9.7 26.7 25.1 28.5
- ------------------------------------------------------------------------------------
Total 48.4 47.7 122.0 102.7
- ------------------------------------------------------------------------------------
MERCHANT OPERATIONS
Unaffiliated 387.6 661.7 889.2 1,880.4
Intersegment 42.8 35.9 99.8 101.1
- ------------------------------------------------------------------------------------
Total 430.4 697.6 989.0 1,981.5
- ------------------------------------------------------------------------------------
OTHER
Unaffiliated 13.4 41.4 31.6 78.3
Intersegment -- -- -- 0.1
- ------------------------------------------------------------------------------------
Total 13.4 41.4 31.6 78.4
- ------------------------------------------------------------------------------------
Adjustments and eliminations (131.4) (143.8) (293.3) (324.8)
- ------------------------------------------------------------------------------------
CONSOLIDATED REVENUES $1,375.6 $1,872.8 $3,582.0 $5,672.9
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Gas Distribution $ 34.9 $ 1.0 $ 284.5 $ 289.1
Gas Transmission and Storage 76.6 64.7 203.4 188.9
Electric 74.5 73.8 140.1 147.5
Exploration and Production 5.9 9.7 38.6 19.3
Merchant Operations (25.8) 17.9 (11.7) 19.4
Other (6.4) (15.9) (1.2) (45.1)
Corporate 2.6 (11.1) 26.6 (16.5)
- ------------------------------------------------------------------------------------
CONSOLIDATED OPERATING INCOME $ 162.3 $ 140.1 $ 680.3 $ 602.6
- ------------------------------------------------------------------------------------
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NISOURCE INC.
CONSOLIDATED RESULTS
The Management's Discussion and Analysis, including statements regarding market
risk sensitive instruments, contains "forward-looking statements," within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Investors and
prospective investors should understand that many factors govern whether any
forward-looking statement contained herein will be or can be realized. Any one
of those factors could cause actual results to differ materially from those
projected. These forward-looking statements include, but are not limited to,
statements concerning NiSource's plans, proposed dispositions, objectives,
expected performance, expenditures and recovery of expenditures through rates,
stated on either a consolidated or segment basis, and any and all underlying
assumptions and other statements that are other than statements of historical
fact. From time to time, NiSource may publish or otherwise make available
forward-looking statements of this nature. All such subsequent forward-looking
statements, whether written or oral and whether made by or on behalf of
NiSource, are also expressly qualified by these cautionary statements. All
forward-looking statements are based on assumptions that management believes to
be reasonable; however, there can be no assurance that actual results will not
differ materially. Realization of NiSource's objectives and expected performance
is subject to a wide range of risks and can be adversely affected by, among
other things, increased competition in deregulated energy markets, weather,
fluctuations in supply and demand for energy commodities, successful
consummation of proposed acquisitions and dispositions, growth opportunities for
NiSource's regulated and nonregulated businesses, dealings with third parties
over whom NiSource has no control, actual operating experience of acquired
assets, NiSource's ability to integrate acquired operations into its operations,
the regulatory process, regulatory and legislative changes, changes in general
economic, capital and commodity market conditions, and counter-party credit
risk, many of which risks are beyond the control of NiSource. In addition, the
relative contributions to profitability by each segment, and the assumptions
underlying the forward-looking statements relating thereto, may change over
time.
The following Management's Discussion and Analysis should be read in conjunction
with NiSource's Annual Report on Form 10-K for the fiscal year ended December
31, 2001 (Form 10-K).
SECOND QUARTER RESULTS
Net Income
NiSource reported net income of $25.0 million, or 12 cents per share, for the
three months ended June 30, 2002, compared to a net loss of $11.6 million, or a
loss of 6 cents per share, for the second quarter in 2001. Operating income was
$162.3 million, up $22.2 million from the same period in 2001. The 2001 results
reflect the change to successful efforts accounting in the company's Exploration
and Production segment. All per share amounts are basic earnings per share.
Net Revenues
Total consolidated net revenues (gross revenues less cost of sales) for the
three months ended June 30, 2002, were $706.8 million, a $2.9 million decrease
over the same period last year. Decreased revenues in the Merchant segment due
to scaling back NiSource's energy trading operations were offset by increased
net revenues in the Gas Distribution segment due to colder weather during the
quarter compared to the same period in 2001.
Expenses
Operating expenses for the second quarter of 2002 were $544.5 million, a
decrease of $25.1 million from the 2001 period. Operating expenses decreased
primarily as a result of discontinuing the amortization of goodwill. The 2001
period included a $9.2 million write-down related to NiSource's
telecommunications network.
Other Income (Deductions)
Interest expense was $123.7 million for the quarter, a decrease of $25.7 million
compared to the second quarter of 2001. The decrease is due to a reduction of
short and long-term debt and lower short-term interest rates. Other, net for the
second quarter of 2002 increased income by $3.2 million, a decrease of $5.7
million primarily due to a decrease in interest income.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Income Taxes
Income tax expense for the second quarter of 2002 was $14.1 million, an increase
of $11.7 million compared to the 2001 period, due to higher pretax income.
Discontinued Operations
Discontinued operations positively impacted net income by $4.3 million for the
second quarter of 2002, compared to a reduction of $1.7 million in the second
quarter of 2001. On April 30, 2002 NiSource completed the sale of the water
utility assets of the Indianapolis Water Company (IWC) and other assets of IWC
Resources Corporation (IWCR) and its subsidiaries to the City of Indianapolis
resulting in an after-tax gain of $7.5 million. The gain included a tax benefit
of $33.2 million resulting from a reduction of a deferred tax liability no
longer required.
SIX MONTH RESULTS
Net Income
NiSource reported net income of $267.2 million, or $1.30 per share, for the six
months ended June 30, 2002, an increase of $96.9 million, or 47 cents per share,
over the second quarter in 2001. Operating income was $680.3 million, up $77.7
million from the same period in 2001. The 2001 results reflect the change to
successful efforts accounting in the company's Exploration and Production
segment. All per share amounts are basic earnings per share.
Net Revenues
Total consolidated net revenues (gross revenues less cost of sales) for the six
months ended June 30, 2002, were $1,745.4 million, a $64.1 million decrease over
the same period last year. The decrease is primarily attributable to weather
that was 7% warmer than the comparable 2001 period and the economic downturn,
which unfavorably impacted electric sales to industrial customers. Partially
offsetting this decrease were increased revenues in the Exploration and
Production segment, reflecting the benefits of favorable pricing associated with
hedge positions for production during the first three months of the 2002 period.
Expenses
Operating expenses for the six months of 2002 were $1,065.1 million, a decrease
of $141.8 million from the 2001 period. The decrease was mainly due to lower
operation and maintenance expenses of $57.4 million, due to lower amounts
provided for both uncollectible customer receivables and insurance recoveries
for environmental remediation costs; the $19.2 million gain on the sale of
NiSource's utility line-locating business; lower depreciation and amortization
expenses of $47.7 million mainly resulting from discontinuing the amortization
of goodwill; and reduced expenses related to the timing of recording annualized
depreciation and property taxes. In addition, the 2001 period was unfavorably
impacted by a $15.5 million settlement of a lawsuit related to Market Hub
Partners, L.P and a $9.2 million write-down related to NiSource's
telecommunications network.
Other Income (Deductions)
Interest expense was $251.9 million for the six months a decrease of $60.7
million compared to the first half of 2001. The decrease is due to a reduction
of short and long-term debt and lower short-term interest rates. Other, net for
the first six months of 2002 was $6.2 million, a decrease of $5.2 million
compared to the prior year, primarily due to a decrease in interest income.
Income Taxes
Income tax expense for the first six months of 2002 was $158.0 million, an
increase of $38.0 million compared to the 2001 period, due to higher pretax
income.
Discontinued Operations
Discontinued operations positively impacted net income by $4.5 million mainly
due to the sale of the water utility assets of IWC and IWCR in the second
quarter of 2002, compared to a reduction of $1.1 million in the first six months
of 2001.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
LIQUIDITY AND CAPITAL RESOURCES
Generally, cash flow from operations has provided sufficient liquidity to meet
current operating requirements. A significant portion of NiSource's operations,
most notably in the gas and electric distribution businesses, are subject to
seasonal fluctuations in cash flow. During the heating season, which is
primarily from November through March, cash receipts from gas sales and
transportation services typically exceed cash requirements. In the summer
months, cash receipts from electric sales normally exceed cash requirements.
Also, during the summer months, cash on hand, together with external short-term
and long-term financing, is used in operations to purchase gas to place in
storage for heating season deliveries; perform necessary maintenance of
facilities; make capital improvements in plant; and expand service into new
areas.
Net cash from operations for the six months ending June 30, 2002 was $876.1
million. Cash generated from working capital was $371.2 million principally
driven by the reduction of accounts receivable and inventories, partially offset
by a reduction in current liabilities. Net cash from operations and proceeds
from the sale of the water utility operations and SM&P Utility Resources, Inc.
(SM&P) were used to reduce borrowings during the first six months of 2002 from
December 31, 2001 by $985.3 million. NiSource intends to continue strengthening
its balance sheet and improving liquidity through the issuance of additional
equity and long-term debt securities subsequent to the approval of the electric
rate settlement by the Indiana Utility Regulatory Commission.
Credit Facilities
During March 2002, NiSource, through its subsidiary NiSource Finance Corp.
(NFC), negotiated a new $500 million 364-day credit agreement with a syndicate
of banks, led by Barclays Capital. This new facility replaced an expiring $1.25
billion 364-day credit facility and complements the company's existing $1.25
billion three-year facility that expires on March 23, 2004. The reduction in the
Company's short-term borrowing needs was attributable to the sales of the water
utility assets of Indianapolis Water Company and SM&P, along with positive
operating cash flows.
As of June 30, 2002 and December 31, 2001, $400.0 million and $1,004.3 million
of commercial paper was outstanding, respectively. The weighted average interest
rate on commercial paper outstanding as of June 30, 2002 and December 31, 2001
was 3.02% and 3.14%, respectively. In addition, NiSource had outstanding credit
facility advances under its 3-year facility of $573.8 million at June 30, 2002
at a weighted average interest rate of 2.54% and credit facility advances (notes
payable) of $850.0 million at December 31, 2001, at a weighted average interest
rate of 2.575%. As of June 30, 2002 and December 31, 2001, NiSource had $56.9
million and $51.7 million of standby letters of credit outstanding,
respectively. As of June 30, 2002, $719.3 million of credit was available under
the credit facilities.
Credit Ratings
During January 2002, Standard and Poor's reaffirmed NiSource's BBB senior
unsecured long-term credit rating and its A2 commercial paper rating with a
negative outlook. On February 1, 2002, Moody's Investor Service (Moody's)
downgraded the senior unsecured long-term debt ratings of NiSource and NFC to
Baa3 and the commercial paper rating of NFC to P3 with a negative outlook. In
addition, Moody's downgraded the long-term debt ratings of all other rated
NiSource subsidiaries to Baa2 to align the ratings of the subsidiaries and bring
them closer to NiSource's ratings going forward. On February 5, 2002 Fitch
Ratings reaffirmed NiSource's BBB senior unsecured long-term credit rating and
its F2 commercial paper rating, but revised NiSource's ratings outlook from
"Stable" to "Negative."
Columbia of Ohio is a party to an agreement to sell, without recourse,
substantially all of its trade receivables to Columbia Accounts Receivable
Corporation (CARC), a wholly owned subsidiary of Columbia Energy Group
(Columbia). CARC, in turn, is party to an agreement in which it sells a
percentage ownership interest in a defined pool of the accounts receivable to a
commercial paper conduit. Under these agreements, CARC may not sell any new
affiliate receivables to the conduit if Columbia's debt rating falls below BBB
or Baa2 at Standard and Poor's and Moody's, respectively. In addition, if
Columbia's debt rating falls below investment grade, the agreements terminate
and CARC may not sell any new receivables to the conduit. As of June 30, 2002,
Columbia of Ohio has sold $79.1 million to the conduit.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Northern Indiana may sell up to $100.0 million of certain of its accounts
receivable to Citibank under a sales agreement, without recourse, which expires
in May 2003. Northern Indiana has sold $100.0 million under this agreement.
Under this agreement, Northern Indiana may not sell any new receivables to
Citibank if Northern Indiana's debt rating falls below BBB- or Baa3 at Standard
and Poor's and Moody's, respectively.
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
Through its various business activities, NiSource is exposed to risk including
non-trading and trading risks. The non-trading risks to which NiSource is
exposed include interest rate risk, commodity price risk and credit risk of its
subsidiaries. The risk resulting from trading activities consists primarily of
commodity price and credit risks. NiSource's risk management policy permits the
use of certain financial instruments to manage its market risk, including
futures, forwards, options and swaps. NiSource employs various analytic
techniques to measure and monitor its 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 adverse changes
in market factors, for a specified time period and at a specified confidence
level.
Non-Trading Risks
Commodity price risk resulting from non-trading activities at NiSource's
rate-regulated subsidiaries is limited, since current regulations allow recovery
of prudently incurred purchased power, fuel and gas costs through the
rate-making process. As the utility industry undergoes deregulation, these
operations may be providing services without the benefit of the traditional
ratemaking process and will be more exposed to commodity price risk. NiSource
enters into certain sales contracts with customers based upon a fixed sales
price and varying volumes, which are ultimately dependent upon the customer's
supply requirements. NiSource utilizes derivative financial instruments to
reduce the commodity price risk based on modeling techniques to anticipate these
future supply requirements.
NiSource's exploration and production segment is also exposed to market risk due
primarily to fluctuations in commodity prices. In order to help minimize this
risk, NiSource has adopted a policy that requires commodity-hedging activities
to help ensure stable cash flow, favorable prices and margins.
NiSource is exposed to interest rate risk as a result of changes in interest
rates on borrowings under revolving credit agreements and lines of credit, which
have interest rates that are indexed to short-term market interest rates, and
refinancing risk in the commercial paper markets. At June 30, 2002, the combined
borrowings outstanding under these facilities totaled $973.8 million. In
addition, Columbia has entered into fixed-to-variable interest rate swaps on
$581.5 million of its long-term debt. Based upon average borrowings under these
agreements during the quarter and six months ended June 30, 2002, an increase in
short-term interest rates of 100 basis points (1%) would have increased interest
expense by $3.6 million and $8.7 million for the quarter and six months ended
June 30, 2002, respectively. NiSource is also exposed to interest rate risk
under a synthetic lease agreement related to its Primary Energy subsidiary. A
portion of the synthetic lease payment floats with a referenced interest rate,
thus exposing Primary Energy to interest rate risks. Although Primary Energy had
engaged in interest rate swaps to fix the floating payment and designated these
instruments as cash flow hedges, the swaps expired June 30, 2002.
Due to the nature of the industry, credit risk is a factor in many of NiSource's
business activities. In sales and trading activities, credit risk arises because
of the possibility that counterparty will not be able or willing to fulfill its
obligations on a transaction on or before settlement date. In derivative
activities, credit risk arises when counter-parties to derivative contracts,
such as interest rate swaps, are obligated to pay NiSource the positive fair
value or receivable resulting from the execution of contract terms. Exposure to
credit risk is measured in terms of both current and potential exposure. Current
credit exposure is generally measured by the notional or principal value of
financial instruments and direct credit substitutes, such as commitments and
standby letters of credit and guarantees. Current credit exposure includes the
positive fair value of derivative instruments. Because many of NiSource's
exposures vary with changes in market prices, NiSource also estimates the
potential credit exposure over the remaining term of transactions through
statistical analyses of market prices. In determining exposure, NiSource
considers collateral and master netting agreements, which are used to reduce
individual counterparty credit risk.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Trading Risks
The transactions associated with NiSource's energy trading operations give rise
to various risks, including market risks resulting from the potential loss from
adverse changes in the market prices of natural gas or electricity. The gas and
power trading operations market and trade over-the-counter contracts for the
purchase and sale of natural gas and electricity and also trade natural gas
products on the New York Mercantile Exchange (NYMEX). The gas marketing and
trading activities consists of both physical and trading activities. The power
trading activities generally do not result in the physical delivery of
electricity. Some contracts within the trading portfolio may require settlement
by physical delivery, but are net settled in accordance with industry standards.
On July 1, 2002, NiSource sold its net obligations under its gas forward
transaction portfolio, physical storage inventory and associated agreements to a
third-party. According to the terms of the agreement, NiSource paid $6.8 million
to settle the net obligations.
NiSource employs a VaR model to assess the market risk of its energy trading
portfolios. Market risk refers to the risk that a change in the level of one or
more market prices, rates, indices, volatilities, correlations or other market
factors, such as liquidity, will result in losses for a specified position or
portfolio. NiSource estimates the one-day VaR across all trading groups that
utilize derivatives using variance/covariance at a 95% confidence level. Based
on the results of the VaR analysis, the daily market exposure for power trading
on an average, high and low basis was $0.6 million, $0.8 million and $0.4
million, during the second quarter of 2002, respectively. The daily VaR for the
gas trading portfolio on an average, high and low basis was $0.2 million, $0.2
million and $0.1 million during the second quarter of 2002, respectively.
Trading Contracts
Fair value represents the amount at which willing parties would transact an
arms-length exchange. Fair value is determined by applying a current price to
the associated contract volume for a commodity. The current price is derived
from one of three sources including actively quoted markets such as the NYMEX,
commodity exchanges and over-the-counter markets including brokers and dealers,
or financial models such as the Black-Scholes option pricing model.
The fair values of the contracts related to NiSource's trading operations, the
activity affecting the changes in the fair values for the quarter and six months
ending June 30, 2002, the sources of the valuations of the contracts at June 30,
2002 and the years in which they mature are:
Three Months Ended Six Months Ended
(in millions) June 30, 2002 June 30, 2002
- ----------------------------------------------------------------------------------------------------------------
Fair value of contracts outstanding at the beginning of the period $(18.9) $ 8.9
Contracts realized or otherwise settled during the period
(including net option premiums received) 10.3 (20.8)
Fair value of new contracts entered into during the period 3.6 6.8
Other changes in fair values during the period (6.2) (6.1)
- ----------------------------------------------------------------------------------------------------------------
Fair value of contracts outstanding at the end of the period $(11.2)* $(11.2)*
- ----------------------------------------------------------------------------------------------------------------
(in millions) 2002 2003 2004 2005 2006 After Total
- --------------------------------------------------------------------------------------------------------------------
Prices actively quoted $ 0.4 $ (4.6) $ (0.6) $ - $ - $ - $ (4.8)
Prices from other external sources (9.9) 1.9 0.3 0.2 0.3 0.1 (7.1)
Prices based on models/other method 2.7 (2.0) - - - - 0.7
- --------------------------------------------------------------------------------------------------------------------
Total fair values $(6.8) $ (4.7) $ (0.3) $ 0.2 $ 0.3 $ 0.1 $ (11.2)
- --------------------------------------------------------------------------------------------------------------------
* The fair value of contracts outstanding at June 30, 2002 does not include the
fair value of natural gas in storage of $53.3 million. The fair value of natural
gas in storage and the portion of the fair value of the gas marketing contacts
to be sold are reflected as assets held for sale in the consolidated balance
sheet at June 30, 2002.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Refer to "Risk Management Activities" in Note 5 of Notes to the Consolidated
Financial Statements for further discussion of NiSource's risk management.
OTHER INFORMATION
Competition
The regulatory environment applicable to NiSource's subsidiaries continues to
undergo fundamental changes. These changes have previously had, and will
continue to have an impact on NiSource's operations, structure and
profitability. At the same time, competition within the energy industry will
create opportunities to compete for new customers and revenues. Management has
taken steps to become more competitive and profitable in this changing
environment. These initiatives include partnering on energy projects with major
industrial customers, providing its customers with increased choice for new
products and services, acquiring companies that increase NiSource's scale of
operations and establishing subsidiaries that develop new energy-related
products for residential, commercial and industrial customers, including the
development of distributed generation technologies.
Insurance Renewal
As a result of many factors including the September 11, 2001 terrorist attack,
substantial property and financial losses in the energy sector in 2000 and 2001,
developments in the business and accounting practices of certain companies in
the energy sector, and the overall economic downturn, rate increases and
additional coverage restrictions have been expected in the energy insurance
market. NiSource experienced increases in premiums, deductibles and retentions
ranging from 50% to 100% with added restrictions to coverage and capacity for
its property and casualty insurance, which was renewed effective July 1, 2002.
Presentation of Segment Information
NiSource's operations are divided into six primary business segments; Gas
Distribution, Transmission and Storage, Electric, Exploration and Production,
Merchant, and Other.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------ -------------------------------
(in millions) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------
NET REVENUES
Sales revenues $ 467.1 $ 696.5 $ 1,538.1 $ 2,608.7
Less: Cost of gas sold 291.7 533.3 1,010.8 2,020.0
- ------------------------------------------------------------------------------------------------------------------
Net Sales Revenues 175.4 163.2 527.3 588.7
Transportation revenues 78.0 70.3 226.9 222.2
- ------------------------------------------------------------------------------------------------------------------
Net Revenues 253.4 233.5 754.2 810.9
- ------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 154.3 151.4 295.3 317.4
Depreciation and amortization 39.2 55.3 93.9 119.8
Other taxes 25.0 25.8 80.5 84.6
- ------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 218.5 232.5 469.7 521.8
- ------------------------------------------------------------------------------------------------------------------
Operating Income $ 34.9 $ 1.0 $ 284.5 $ 289.1
==================================================================================================================
REVENUES ($ IN MILLIONS)
Residential 275.7 289.5 958.1 1,521.3
Commercial 86.7 106.8 313.5 585.2
Industrial 17.1 14.9 46.6 81.5
Transportation 78.0 70.3 226.9 222.2
Off-system sales 44.9 228.7 104.6 307.7
Other 42.7 56.6 115.3 113.0
- ------------------------------------------------------------------------------------------------------------------
Total 545.1 766.8 1,765.0 2,830.9
- ------------------------------------------------------------------------------------------------------------------
SALES AND TRANSPORTATION (MDTH)
Residential sales 32.8 26.2 129.8 140.9
Commercial sales 11.4 11.1 45.4 56.7
Industrial sales 2.5 2.2 7.3 8.3
Transportation 116.3 103.2 280.1 268.7
Off-system sales 11.8 46.0 38.9 56.0
Other 0.3 0.1 0.4 0.3
- ------------------------------------------------------------------------------------------------------------------
Total 175.1 188.8 501.9 530.9
- ------------------------------------------------------------------------------------------------------------------
HEATING DEGREE DAYS 523 374 2,794 3,002
NORMAL HEATING DEGREE DAYS 513 515 3,256 3,264
% COLDER (WARMER) THAN NORMAL 2% (27%) (14%) (8%)
CUSTOMERS
Residential 2,328,268 2,328,714
Commercial 212,573 212,666
Industrial 5,795 5,887
Transportation 676,129 629,772
- ------------------------------------------------------------------------------------------------------------------
Total 3,222,765 3,177,039
- ------------------------------------------------------------------------------------------------------------------
NiSource's natural gas distribution operations (Gas Distribution) serve
approximately 3.2 million customers in nine states: Ohio, Indiana, Pennsylvania,
Massachusetts, Virginia, Kentucky, Maryland, New Hampshire and Maine. The
regulated subsidiaries offer both traditional bundled services as well as
transportation only for customers that purchase gas from alternative suppliers.
The operating results reflect the temperature-sensitive nature of customer
demand with over 70% of annual residential and commercial throughput affected by
seasonality. As a result, segment operating income is higher in the first and
fourth quarters reflecting the heating demand during the winter season.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS (CONTINUED)
Regulatory Matters
On November 20, 2001, the Public Utilities Commission of Ohio (PUCO) issued
final rules to implement the provisions of choice legislation enacted by the
Ohio General Assembly on March 27, 2001. The rules have been approved by a Joint
Committee on Agency Rule Review of the Ohio Legislature, and are effective on
July 5, 2002. The new rules establish the process for PUCO certification and
regulation of competitive retail natural gas suppliers, establish minimum
service standards for competitive natural gas suppliers, and specify the
procedures for establishment of governmental aggregation programs, in which
consumers have the right to "opt-out" of the program. Utilities must file
tariffs incorporating the rules by October 1, 2002. A number of communities in
the service territory of Columbia Gas of Ohio have passed aggregation
initiatives in recent elections. There are approximately 210,000 eligible
customers in these communities. It is anticipated that the communities will
begin the governmental aggregations in the first half of 2003.
As part of the Kentucky Public Service Commission order approving the
acquisition of Columbia, Columbia Gas of Kentucky was required to file a rate
case that included an estimate of net merger savings and a mechanism to reflect
merger savings on customers' bills. On May 1, 2002, Columbia Gas of Kentucky
filed a general rate case, requesting an increase in revenue of approximately
$2.5 million or 4% of annual operating revenues including the net merger
savings. The discovery process is ongoing.
In November 2001, Northern Utilities New Hampshire (NUNH) filed a general rate
case, requesting an increase in revenue of approximately $3.8 million or 7% of
annual operating revenues. In February, 2002, NUNH received approval of interim
rates, to be applied to gas consumed on and after February 7, which are designed
to generate an additional $2.3 million in revenues annually. This increase is
subject to adjustment, increase or decrease with a resulting refund or increased
collections following conclusion of the formal rate proceeding. In July 2002,
the New Hampshire Public Utilities Commission Staff filed testimony proposing a
reduction in the revenues of NUNH of $0.6 million. Hearings in this matter are
scheduled for September 2002.
Weather
Weather in Gas Distribution's markets for the second quarter of 2002 was on
average 2% colder than normal and 40% colder than the second quarter of 2001.
For the first six months of 2002, weather was 14% warmer than normal and 7%
warmer than the first six-months of 2001.
Throughput
Total volumes sold and transported of 175.1 million dekatherms (MDth) for the
second quarter of 2002 decreased 13.7 MDth from the same period last year
reflecting a reduction 34.2 MDth decline in off-system sales partially offset by
the impact of colder weather and increased demand from power generation
facilities in Virginia. For the six month period ended June 30, 2002, total
volumes sold and transported were 501.9 MDth, a decrease of 29.0 MDth from the
same period in 2001 primarily reflecting reduced levels of off-system sales and
warmer weather.
Net Revenues
Net revenues for the three months ended June 30, 2002 were $253.4 million, up
$19.9 million over the same period in 2001. Weather that was colder than the
comparable 2001 quarter contributed $12.9 million to the increase. For the six
month period ended June 30, 2002, net revenues were $754.2 million, a $56.7
million decrease from the same period in 2001. While the warmer weather
experienced in the first three months of the year was partially offset by the
colder weather during the second quarter, on a year-to-date basis net revenues
were lower $29.8 million due to weather. The remaining net revenue decline
reflected reduced billings for revenue-based taxes and reduced net revenues from
non-traditional sales and incentive programs.
Operating Income
For the second quarter of 2002, gas distribution reported operating income of
$34.9 million, a $33.9 million increase from the same period in 2001, resulting
from the increase in net revenues and lower operating expenses associated with
discontinuing the amortization of goodwill totaling $10.5 million and reduced
expenses related to the timing of recording annualized depreciation and
property taxes. Operating income for the first six months of
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS (CONTINUED)
2002 totaling $284.5 million decreased $4.6 million from the same period in
2001. The decrease in net revenues was partially offset by the discontinuation
of goodwill amortization of $20.9 million, insurance recoveries for
environmental expenses, lower amounts for uncollectible customer receivables and
reduced expenses related to the timing of recording annualized depreciation and
property taxes.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
TRANSMISSION AND STORAGE OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
------------------- ------------------
(in millions) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------
OPERATING REVENUES
Transportation revenues $164.2 $167.7 $375.1 $400.4
Storage revenues 44.4 44.8 89.7 89.4
Other revenues 3.5 3.9 6.5 20.4
- ----------------------------------------------------------------------------------------
Total Operating Revenues 212.1 216.4 471.3 510.2
Less: Cost of gas sold 15.0 18.6 26.7 53.7
- ----------------------------------------------------------------------------------------
Net Revenues 197.1 197.8 444.6 456.5
- ----------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 79.0 78.8 158.3 158.2
Depreciation and amortization 27.3 40.2 54.7 80.2
Other taxes 14.2 14.1 28.2 29.2
- ----------------------------------------------------------------------------------------
Total Operating Expenses 120.5 133.1 241.2 267.6
- ----------------------------------------------------------------------------------------
Operating Income $ 76.6 $ 64.7 $203.4 $188.9
========================================================================================
THROUGHPUT (MDTH)
Columbia Transmission
Market Area 187.1 154.9 564.1 539.8
Columbia Gulf
Mainline 179.0 170.5 317.4 336.6
Short-haul 34.3 49.8 74.7 88.6
Intrasegment eliminations (162.6) (169.5) (285.9) (331.0)
Columbia Pipeline Deep Water -- 0.9 0.2 1.8
Crossroads Gas Pipeline 6.5 9.5 14.6 20.3
Granite State Pipeline 8.4 4.7 20.1 17.8
- ----------------------------------------------------------------------------------------
Total 252.7 220.8 705.2 673.9
- ----------------------------------------------------------------------------------------
NiSource's gas transmission and storage segment consists of the operations of
Columbia Gas Transmission Corporation (Columbia Transmission), Columbia Gulf
Transmission Company (Columbia Gulf), Columbia Pipeline Corporation, Crossroads
Pipeline Company (Crossroads) and Granite State Transmission System (Granite).
In total NiSource owns a pipeline network of approximately 16,130 miles
extending from offshore in the Gulf of Mexico to Lake Erie, New York and the
eastern seaboard. Together they serve customers in seventeen northeastern,
mid-Atlantic, midwestern and southern states, as well as the District of
Columbia. In addition, the NiSource gas transmission and storage segment
operates one of the nation's largest underground natural gas storage systems.
Lost and Unaccounted For Gas
On March 28, 2002, the Federal Energy Regulatory Commission (FERC) issued an
order affirming its earlier holdings rejecting challenges to Columbia
Transmission's ability to recover certain lost and unaccounted-for gas in its
annual Retainage Adjustment Mechanism filing. FERC directed Columbia
Transmission to file additional information requested by interveners in the 2001
proceeding. As directed by the FERC, Columbia Transmission provided this
information in the new annual filing made on March 1, 2002. Columbia
Transmission expects that the FERC will uphold its previous rulings regarding
this matter.
Long-Term Notes Receivable
In 1999, Columbia Transmission sold certain gathering facilities to a
third-party for approximately $22 million. The two parties executed a promissory
note, which provides for payment of the purchase price to Columbia Transmission
over a five-year period. The balance, including interest, is approximately $18
million. The counterparty is currently behind schedule in making payments under
the note, which is secured by the facilities conveyed to the purchaser. In the
second quarter, an appropriate reserve was recorded against the receivable in
light
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)
of the failure to receive timely payments from the counterparty. Management is
continuing to review the realizability of the note and the security provided
thereon. Once this review is complete, management will evaluate the need for any
adjustment to the reserve. However, it is not anticipated that this matter will
have a significant impact on NiSource's results of operations.
Throughput
Columbia Transmission's throughput consists of transportation and storage
services for local distribution companies and other customers within its market
area, which covers portions of northeastern, mid-Atlantic, mid-western, and
southern states and the District of Columbia. Throughput for Columbia Gulf
reflects mainline transportation services from Rayne, Louisiana to Leach,
Kentucky and short-haul transportation services from the Gulf of Mexico to
Rayne, Louisiana. Crossroads serves customers in northern Indiana and Granite
provides service in New Hampshire.
Throughput for the Transmission and Storage segment totaled 252.7 MDth for the
second quarter of 2002, an increase of 31.9 MDth from the comparable period in
2001, primarily due to an increase in market demand. Throughput for the six
months ended June 30, 2002 was 705.2 MDth, an increase of 31.3 MDth over the
same period in 2001. The increase is primarily due to increased market demand,
partially offset by warmer than normal weather during the first three months of
2002.
Net Revenues
Net revenues were $197.1 million for the second quarter of 2002, essentially
unchanged compared to the same period last year. Net revenues were $444.6
million for the six months ended June 30, 2002, a decrease of $11.9 million from
the same period in 2001. The 2001 period reflected a $11.4 million gain on the
sale of base gas.
Operating Income
Second quarter 2002 operating income of $76.6 million increased $11.9 million
from 2001 reflecting the effects of discontinuing the amortization of goodwill.
For the first six months of 2002, operating income was $203.4 million, an
increase of $14.5 million from the 2001 period, which was due largely to the
effects of discontinuing the amortization of goodwill. The 2001 period reflected
a $11.4 million gain on the sale of base gas.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
(in millions) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------
NET REVENUES
Sales revenues $ 257.6 $ 246.7 $ 496.4 $ 494.0
Less: Cost of sales 69.1 63.6 133.7 130.0
- --------------------------------------------------------------------------------------------------------
Net Revenues 188.5 183.1 362.7 364.0
- --------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 57.0 54.2 110.1 106.1
Depreciation and amortization 42.4 41.8 84.6 83.3
Other taxes 14.6 13.3 27.9 27.1
- --------------------------------------------------------------------------------------------------------
Total Operating Expenses 114.0 109.3 222.6 216.5
- --------------------------------------------------------------------------------------------------------
Operating Income $ 74.5 $ 73.8 $ 140.1 $ 147.5
========================================================================================================
REVENUES ($ IN MILLIONS)
Residential 69.9 65.4 138.8 134.2
Commercial 76.3 73.3 145.3 141.3
Industrial 100.5 104.0 191.5 209.0
Other electric service 10.9 4.0 20.8 9.5
- --------------------------------------------------------------------------------------------------------
Total 257.6 246.7 496.4 494.0
- --------------------------------------------------------------------------------------------------------
SALES (GIGAWATT HOURS)
Residential 699.2 640.7 1,401.6 1,338.4
Commercial 891.2 850.0 1,722.9 1,665.4
Industrial 2,196.9 2,309.1 4,222.7 4,632.1
Other electric service 34.4 32.4 71.2 71.8
- --------------------------------------------------------------------------------------------------------
Total 3,821.7 3,832.2 7,418.4 7,707.7
- --------------------------------------------------------------------------------------------------------
COOLING DEGREE DAYS 263 240 263 240
NORMAL COOLING DEGREE DAYS 219 219 219 219
% WARMER (COLDER) THAN NORMAL 20% 10% 20% 10%
ELECTRIC CUSTOMERS
Residential 381,904 379,059
Commercial 47,790 46,897
Industrial 2,615 2,663
Other electric service 802 805
- --------------------------------------------------------------------------------------------------------
Total 433,111 429,424
- --------------------------------------------------------------------------------------------------------
NiSource generates and distributes electricity, through its subsidiary Northern
Indiana Public Service Company (Northern Indiana), to approximately 433,000
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
the cooling demand during the summer season.
Market Conditions
The regulatory frameworks applicable to Electric Operations continue to be
affected by fundamental changes. These changes will continue to have an impact
on NiSource's Electric Operation's structure and profitability. At the same
time, competition within the industry will create opportunities to compete for
new customers and revenues. Management has taken steps to become more
competitive and profitable in this changing environment, including shutting down
inefficient generating units, converting some of its generating units to allow
use of lower cost, low sulfur coal and improving the transmission
interconnections with neighboring electric utilities.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)
The overall weakening of the U.S. economy is reflected in the 112.2
gigawatt-hour (gwh) decline in sales to the industrial customer class in the
second quarter of 2002 versus the comparable 2001 period. In particular, the
steel and steel-related industries have been adversely impacted by recent events
and market conditions. Overall deliveries to the steel industry were down 152.7
gwh in the second quarter of 2002 and were down 382.5 gwh in the first six
months of 2002, compared to the same periods last year.
Regulatory Matters
On June 20, 2002, a settlement agreement was filed with the Indiana Utility
Regulatory Commission (IURC) that would enable electric customers of Northern
Indiana to receive an amount intended to approximate $55.0 million each year in
credits to their electric bills for 49 months. The settlement was the result of
months of negotiations among Northern Indiana, the Indiana Office of Utility
Consumer Counselor, and a group of commercial and industrial customers. Other
customers have opposed the settlement. Hearings on the settlement were held on
July 22 and 23, 2002.
If approved by the IURC, Northern Indiana's electric customers, other than those
on certain contract rates, will receive a credit of approximately 6 percent of
the electric portion of their monthly Northern Indiana bill. Briefings were
completed by all parties on August 13 and the IURC will issue a final order in
the matter sometime after that date.
In 1999, the FERC issued Order 2000 addressing the formation and operation of
Regional Transmission Organizations (RTOs). On February 28, 2001, Northern
Indiana joined the Alliance RTO. On December 18, 2001, the IURC issued an order
denying Northern Indiana's request to transfer functional control of its
transmission facilities to the Alliance RTO. On December 20, 2001, the FERC
reversed prior orders that had preliminarily approved the Alliance RTO and
concluded that the Alliance RTO failed to meet Order 2000's scope and
configuration requirements. FERC ordered the Alliance RTO companies, including
Northern Indiana, to pursue membership in the Midwest Independent System
Operator (MISO). On June 20, 2002, Northern Indiana, Ameren Corporation and
First Energy Corporation established terms for joining the MISO through
participation in an independent transmission company. The MISO arrangements were
filed with the FERC, and on July 31, 2002, the FERC issued an order
conditionally approving these arrangements. Northern Indiana has expended
approximately $7.7 million related to joining the Alliance RTO. NiSource
believes that the amounts spent will be recoverable.
Northern Indiana has been recovering the costs of electric power purchased for
sale to its customers through the Fuel Adjustment Clause. The Fuel Adjustment
Clause provides for costs to be collected if they are below a cap set based upon
the costs of Northern Indiana's most expensive generating unit. If costs exceed
this cap, Northern Indiana must demonstrate why it should be allowed recovery
before recovery is approved. In January 2002, Northern Indiana filed for
approval to implement a purchase power tracker (PPT). The PPT would allow
recovery of all costs related to purchasing electricity for use by Northern
Indiana's customers on a periodic basis. No actions have been taken by the IURC
on this filing.
In January 2002, Northern Indiana filed for approval to implement an
environmental cost tracker (ECT). On June 20, Northern Indiana and the Office of
Utility Consumer Counselor filed an ECT Stipulation and Settlement Agreement
(ECT Settlement Agreement), which resolves all issues in the proceeding. Under
the ECT Settlement Agreement, Northern Indiana will be able to recover (1)
allowance for funds used during construction and a return on the capital
investment expended by Northern Indiana to implement Indiana Department of
Environmental Management's (IDEM) nitrogen oxide State Implementation Plan
and (2) related operation and maintenance and depreciation expenses once the
environmental facilities become operational. Hearings on the ECT Settlement
Agreement were held on August 13, 2002.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)
Environmental Matters
The U.S. Environmental Protection Agency (EPA) issued final rules revising the
National Ambient Air Quality Standards for ozone and particulate matter in July
1997. On May 14, 1999, the United States Court of Appeals for the D.C. Circuit
remanded the new rules for both ozone and particulate matters to the EPA. The
Court of Appeals decision was appealed to the Supreme Court, which heard oral
arguments on November 7, 2000. The Supreme Court rendered a complex ruling on
February 27, 2001 that required several issues to be resolved by the D.C.
Circuit Court before final rulemaking could occur. On March 26, 2002, the D.C.
Circuit Court largely upheld the ambient air standards as proposed.
Consequently, final rules specifying a compliance level and controls necessary
for compliance will now be developed by EPA which will likely change air
emissions compliance requirements. Resulting rules could require additional
reductions in sulfur dioxide, particulate matter and nitrogen oxides emissions
from coal-fired boilers (including Northern Indiana's electric generating
stations). Final implementation methods will be set by the EPA as well as state
regulatory authorities. NiSource believes that the costs relating to compliance
with any new limits may be substantial but are dependent upon the ultimate
control program agreed to by the targeted states and the EPA and are currently
not reasonably estimable. NiSource will continue to closely monitor developments
in this area, however, the exact nature of the impact of the new standards on
its operations will not be known for some time.
The EPA has initiated enforcement actions against several electric utilities
alleging violations of the new source review provisions of the Clean Air Act.
Northern Indiana has received and responded to information requests from the EPA
on this subject over the last two years, most recently in June 2002. It is
impossible at this time to predict the result of EPA's review of Northern
Indiana's information responses.
Sales
Electric sales for the second quarter of 2002 were 3,821.7 gwh, a decrease of
10.5 million gwh compared to the 2001 period, reflecting a decrease in
industrial demand primarily due to the economic downturn, offset by increased
sales to higher-margin commercial and residential customers. Electric sales for
the first six months of 2002 were 7,418.4 gwh, a decrease of 289.3 gwh, compared
to the 2001 period, primarily reflecting the decrease in demand due to the
economic downturn. The decline in industrial sales was partially offset by
increased deliveries to higher-margin residential and commercial customers due
to warmer weather during the second quarter.
Net Revenues
In the second quarter of 2002, electric net revenues of $188.5 million increased
by $5.4 million from 2001. The increased sales to higher-margin residential and
commercial customers more than offset the lower sales to the industrial
customers during the latter part of the quarter. In the first six months of
2002, electric net revenues of $362.7 million decreased by $1.3 million over the
2001 period. The decline in industrial sales was partially offset by increased
deliveries to higher-margin residential and commercial customers due to warmer
weather during the second quarter.
Operating Income
Operating income for the second quarter of 2002 was $74.5 million, an increase
of $0.7 million from the same period in 2001. Higher net revenues were offset by
higher operating expenses. Operating income for the first half of 2002 was
$140.1 million, a decrease of $7.4 million over the same period in 2001. This
decrease resulted from reduced net revenues and higher operating expenses.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
EXPLORATION AND PRODUCTION OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
(in millions) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------
OPERATING REVENUES
Gas revenues $ 42.6 $ 46.5 $ 108.6 $ 93.8
Gathering revenues 2.5 2.5 4.9 5.0
Other revenues 2.8 (2.1) 7.7 1.9
- --------------------------------------------------------------------------------------
Total Operating Revenues 47.9 46.9 121.2 100.7
- --------------------------------------------------------------------------------------
Operating Expenses
Operation and maintenance 20.2 17.4 41.8 40.7
Depreciation and depletion 17.8 15.5 33.4 30.8
Other taxes 4.0 4.3 7.4 9.9
- --------------------------------------------------------------------------------------
Total Operating Expenses 42.0 37.2 82.6 81.4
- --------------------------------------------------------------------------------------
Operating Income $ 5.9 $ 9.7 $ 38.6 $ 19.3
======================================================================================
GAS PRODUCTION STATISTICS
AVERAGE SALES PRICE ($ PER Mcf)
U.S. 2.97 4.06 3.95 3.67
Canada -- 5.00 -- 6.69
PRODUCTION (Bcf)
U.S. 14.5 11.6 27.7 26.1
Canada -- 0.1 -- 0.1
- --------------------------------------------------------------------------------------
Total 14.5 11.7 27.7 26.2
======================================================================================
OIL AND LIQUIDS PRODUCTION STATISTICS
AVERAGE SALES PRICE ($ PER Bbl)
U.S. 20.60 22.75 16.81 24.59
Canada -- 28.92 -- 30.15
PRODUCTION (000 Bbls)
U.S. 48.0 41.0 104.0 100.0
Canada -- 2.0 -- 4.0
- --------------------------------------------------------------------------------------
Total 48.0 43.0 104.0 104.0
- --------------------------------------------------------------------------------------
NiSource's exploration and production subsidiary, Columbia Energy Resources,
Inc. (Columbia Resources), is one of the largest independent natural gas and oil
producers in the Appalachian Basin and also has production operations in Canada.
Columbia Resources produced 14.8 Bcf equivalents (Bcfe) of natural gas and oil
in the second quarter of 2002, has financial interests in over 8,000 wells, and
has net proven gas and oil reserve holdings of 1.1 trillion cubic feet
equivalent at June 30, 2002.
Forward Sale of Natural Gas
Columbia Resources has forward gas sales agreements with Mahonia II Limited
(Mahonia). During the second quarter of 2002 Columbia Resources delivered 9 Bcf
to Mahonia. Under the agreements, Columbia Resources has made the required
physical deliveries in the past and has a remaining obligation to deliver 134.2
Bcf of natural gas to Mahonia through February 2006. Cash received in advance
from sales of production to be delivered in the future is recorded as deferred
revenue and recognized as income upon delivery of the natural gas.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
EXPLORATION AND PRODUCTION OPERATIONS (CONTINUED)
Deliveries for 2002 and beyond will be based on the following volumes and sales
prices:
2002 2003 2004 After Total
- ------------------------------------------------------------------------------------------------------
Volumes to be delivered (BCF) 27.1 44.0 41.5 30.6 143.2
Average sales price (per Mcf) $ 2.76 $ 2.56 $ 2.56 $ 2.26 $ 2.53
- ------------------------------------------------------------------------------------------------------
Canadian Oil and Gas Properties
Columbia Resources has entered into an agreement to sell a portion of its
Canadian oil and gas properties. This transaction is expected to occur in the
third quarter of 2002. The agreement calls for the sale of the majority of the
Ontario assets for approximately $2.0 million. Because the fair value is lower
than the book value of the assets, Columbia Resources has written down the value
of the held-for-sale assets by $0.3 million. In addition, the remaining Ontario
assets were impaired, resulting in a $0.5 million charge to operating income.
Volumes
Columbia Resources gas production totaled 14.5 Bcf and 27.7 Bcf, up 2.8 Bcf and
1.5 Bcf, in the second quarter and first six months of 2002, respectively. The
increased levels of production are attributable to the results of the drilling
program and facility enhancement projects.
Net Revenues
Net revenues for the second quarter of 2002 were $47.9 million, essentially
unchanged from the prior period. Increased natural gas production for the
quarter was offset by lower prices. Net revenues for the first half of 2002 were
$121.2 million, an increase of $20.5 million compared to the same period in
2001, reflecting the benefits of favorable pricing associated with hedge
positions for production during the first three months of the 2002 period.
Operating Income
Operating income for the second quarter of 2002 was $5.9 million, a $3.8 million
decrease over the same period in 2001, which resulted primarily from higher
operating expenses. Operating income for the six months ended June 30, 2002 was
$38.6 million, up $19.3 million from the comparable period in 2001, due to the
benefits of favorable pricing associated with hedge positions for production
during the first three months of the 2002 period.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
MERCHANT OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
(in millions) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------
NET REVENUES
Gas revenues $ 173.6 $ 428.7 $ 468.7 $ 1,573.1
Electric revenues 241.1 252.0 487.2 375.2
Other revenues 15.7 16.9 33.1 33.2
- ----------------------------------------------------------------------------------------------
Total Revenues 430.4 697.6 989.0 1,981.5
Less: Cost of products purchased 418.7 662.7 943.6 1,928.6
- ----------------------------------------------------------------------------------------------
Net Revenues 11.7 34.9 45.4 52.9
- ----------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 35.1 15.6 52.7 30.7
Depreciation and amortization 0.7 0.5 1.4 1.1
Other taxes 1.7 0.9 3.0 1.7
- ----------------------------------------------------------------------------------------------
Total Operating Expenses 37.5 17.0 57.1 33.5
- ----------------------------------------------------------------------------------------------
Operating Income (Loss) $ (25.8) $ 17.9 $ (11.7) $ 19.4
===============================================================================================
VOLUMES
Gas sales (MDth) 53.1 88.0 228.4 251.2
Electric sales (Gigawatt Hours) 8,418.8 5,141.4 18,615.1 7,711.1
- ----------------------------------------------------------------------------------------------
NiSource provides non-regulated merchant energy through its wholly owned
subsidiaries EnergyUSA, Inc., Primary Energy and Northern Indiana. Energy USA,
Inc., through its subsidiary EnergyUSA-TPC Corp. (TPC), provides natural gas
sales and management services to industrial and commercial customers, engages in
natural gas marketing and power trading activities and provides gas supply.
Primary Energy develops, builds, operates and manages industrial based energy
projects. The focus of the company is to develop on-site, industrial-based
energy solutions for large complexes having multiple energy flows, such as
electricity, steam, by-product fuels or heated water. Northern Indiana currently
provides FERC-regulated electric wheeling and bulk power sales.
On July 1, 2002, NiSource sold its net obligations under its gas forward
transaction portfolio, physical storage inventory and associated agreements to a
third-party. According to the terms of the agreement, NiSource paid $6.8 million
to settle the net obligations.
Primary Energy
Primary Energy is currently involved in six projects that are concerned with the
generation of electricity, steam or thermal energy on the sites of industrial
customers. Four projects generate energy from process streams or fuel provided
by the industrial customers. The energy is then delivered to the industrial
customers under long-term contracts providing for tolling fees, sublease
payments, unit sale payments or processing fees. With respect to the Ironside
project described below, Ironside is in negotiations for an agreement for the
project to provide energy generated from process streams to the new owner of the
mill. One project, Whiting Clean Energy, uses natural gas to produce electricity
for sale in the wholesale markets and is expected to provide steam for
industrial use. In addition, a subsidiary of Primary Energy is a 50% partner in
a partnership, which operates a coal pulverization facility. Generally, the
facilities are owned by unaffiliated special purpose entities.
Primary Energy's Whiting Clean Energy project at BP's Whiting, Indiana refinery
has incurred delays primarily associated with remediating damage that occurred
during commissioning in September 2001. The delays have also resulted in an
increase in estimated project costs and the need for approximately $20 million
of additional funding which closed on July 25, 2002. In addition, the facility
is not able at this time to deliver steam to BP to the extent originally
contemplated without plant modifications. The engineering, procurement and
construction contractor has asserted that it fully performed under its contract
and is demanding payment of the full contract price plus additional amounts for
remediation. Whiting Clean Energy is seeking recovery of damages for the delay
and necessary plant modifications. Whiting Clean Energy and the contractor are
engaged in a dispute resolution process, as prescribed under their contract,
relating to these claims.
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
MERCHANT OPERATIONS (CONTINUED)
The project has begun producing electricity and since March 31, 2002 has been
under lease to Whiting Clean Energy. Primary Energy estimates that the facility
will operate at a loss in the near term based on the current market view of
forward pricing for gas and electricity. For 2002, the after-tax loss is
projected to be approximately $20 million. The profitability of the project in
future periods will be dependent on, among other things, prevailing prices in
the energy markets and regional load dispatch patterns. The total estimated cost
of the Whiting project, not including the plant modifications, is approximately
$320 million.
Primary Energy's Ironside project at LTV Steel Company's (LTV) former East
Chicago, Indiana mill has been negatively impacted by LTV's bankruptcy filing in
December 2000 and LTV's December 2001 decision to idle the steel mill. The
Ironside facility cannot currently be operated on an economic basis if the mill
is not operating. On April 12, 2002, LTV completed the sale of the mill to
International Steel Group. During the second quarter 2002, International Steel
Group started operation of the major rolling mills and one of the blast
furnaces. LTV has filed a notice of its rejection of the ground and facility
leases with Ironside in its bankruptcy proceedings. Ironside has filed an
objection to the notice. NiSource is currently involved in negotiations with
International Steel Group regarding an agreement to replace the agreements with
LTV. The total cost of the Ironside project is approximately $66 million.
The idling of the steel mill and transfer of the mill to International Steel
Group caused a delay in Ironside's ability to successfully conclude the project
testing necessary to fully complete the project as required by the lease
financing documents. This delay also resulted in an increase in estimated
project costs and the need for approximately $2 million of additional financing.
Ironside notified the lessor and its lenders of an extension to the required
completion date under the lease financing documents in accordance with the force
majeure provisions of those documents and entered into discussions with the
lessor and its lenders regarding the terms of the additional financing. In July
2002, Ironside received a letter from a lender to the lessor stating the
lender's belief that Ironside is not entitled to an extension to the completion
date and that Ironside is in default under the lease financing documents because
of the increase in project costs. Ironside disagrees with both of these
assertions. Subsequently, the lender issued a letter to clarify that it is not
declaring a default under the agreements. NiSource has determined that it will
provide the $62.3 million in financing related to the project.
The lease at Primary Energy's North Lake project is due to expire in December
2002. The strategy at this time is to pursue refinancing. If Primary Energy
purchases the project at the end of the lease period, at the expected amount of
approximately $39 million, the payment would be funded by Primary Energy.
On March 6, 2002, National Steel Corp. (National) filed for bankruptcy
protection. National receives electricity, steam and hot water from Primary
Energy's Portside project. Currently, National is evaluating its options for its
agreements related to the Portside project. National has paid post-petition fees
due to date. Pre-petition tolling and other fees not paid total $0.7 million.
The unamortized funding for the Portside project is $62.6 million.
Certain environmental issues related to Primary Energy's Cokenergy project are
discussed in "Environmental Matters" below.
ACCOUNTING ISSUES. Most of the Primary Energy projects are structured as
synthetic leases where the lessors are special purpose entities and Primary
Energy subsidiaries act as the lessees. Previously, the assets and related debt
associated with these projects were not included in NiSource's consolidated
financial statements, which treatment was approved by NiSource's former
independent public accountants. However, NiSource has now determined in
consultation with Deloitte & Touche, its independent public accountants, that
certain language contained in the operative agreements for four of the projects
did not support characterization of those transactions as off-balance-sheet
operating leases under EITF Issue No. 97-1, "Implementation Issues in
Accounting for Lease Transactions, Including Those Involving Special Purpose
Entities," and EITF No. 97-10 "The Effect of Lessee Involvement in Asset
Construction." Certain provisions in the operative documents for two
transactions (Whiting Clean Energy and Ironside), which were subject to EITF
No. 97-10, could be interpreted to transfer substantial construction period
risks to the lessee, resulting in Primary Energy being deemed the owner of the
projects. Certain provisions in the other two leases (Cokenergy and Portside)
could be interpreted to require the inclusion of certain default-related
obligations in minimum lease payments, resulting in the characterization of
those leases as capital leases.
As a result of this determination NiSource has changed the characterization of
the leases associated with the four projects from synthetic leases to two owned
assets and two capital leases for financial reporting purposes. Due to the
change in the lease characterization, Primary Energy recognized $576 million of
assets and an equal amount of related debt on its balance sheet at June 30,
2002. The impact on the results of operations for prior periods was immaterial.
The recognition of the debt did not alter NiSource's compliance with its debt
covenants and is consistent with the treatment of such leases by the rating
agencies in the analysis of NiSource's credit ratings.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
MERCHANT OPERATIONS (CONTINUED)
For two of the projects not affected by EITF No. 97-1 and EITF No. 97-10.
NiSource does not consolidate the assets or related debt associated with the
facilities in its consolidated financial statements. The aggregate unamortized
funding for the two projects at June 30, 2002 was $81.5 million.
The Financial Accounting Standards Board (FASB) has issued an exposure draft of
a Proposed Interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements" that addresses issues related to identifying and
accounting for special purpose entities. The exposure draft requires that the
primary beneficiary of a special purpose entity consolidate the entity unless:
(1) the entity has sufficient independent economic substance, (2) a third party
has the substantive risks of ownership of the entity and its investment is
subordinate to all other interests, and (3) the nominal owners have voting or
other rights to make decisions and manage the special purpose entity to the
extent that the business activities are not predetermined. The Proposed
Interpretation is effective for reporting periods beginning after March 15, 2003
for special purpose entities in existence on the issuance date of the final
Interpretation. If the FASB issues the Interpretation as proposed, the two
special purpose entities associated with the Primary Energy projects remaining
under synthetic leases, in their present form, would be consolidated by NiSource
beginning in the second quarter of 2003 at fair value.
Environmental Matters
On June 26, 2002, EPA issued a Notice of Violation (NOV) to three companies
including NiSource's Primary Energy subsidiary, Cokenergy. The NOV alleges
violations of the construction permit requirements of the Clean Air Act in
association with a project at Ispat Inland Inc.'s East Chicago, Indiana
facility. Flue gas produced from a coal carbonization facility at Inland,
operated by Indiana Harbor Coke Company (IHCC), is delivered to Cokenergy for
operation of a heat recovery power generation facility that delivers energy to
Inland. All three companies received the NOV. At issue is whether air emissions
permitting requirements for major sources applied to the construction of the
project in 1997. Without further information from EPA regarding the details of
their allegations, the period of time that may be involved in any alleged
violation, any further compliance costs and any potential penalty amount cannot
be reasonably estimated. Cokenergy believes the project was properly permitted
by the State of Indiana and plans to vigorously defend these claims.
On December 30, 1996, the IDEM issued a construction permit for a comprehensive
coal carbonization and energy project to Inland. In 1998, each of the three
separate companies, IHCC, Cokenergy and Inland, were issued operating permits by
IDEM for their respective parts of the project, and these permits were amended
in 2001. Based on the existence of these permits and their continual review by
IDEM, Cokenergy believes the project was properly permitted and operated and
plans to vigorously defend these claims.
Net Revenues
Net revenues of $11.7 million for the second quarter of 2002 decreased $23.2
million from the comparable 2001 period. This decrease in net revenues primarily
resulted from NiSource's efforts to scale back its gas marketing business. Net
revenues of $45.4 million for the first half of 2002 decreased by $7.5 million
from the same period in 2001. This decrease in net revenues primarily resulted
from NiSource's efforts to scale back its gas marketing business.
Operating Income
Merchant Operations had an operating loss of $25.8 million for the second
quarter of 2002, compared to operating income of $17.9 million from the same
period last year. The decrease of $43.7 million was primarily due to the change
in value related to the company's gas and power marketing portfolios totaling
$17.7 million; lease and operating expenses associated with two recently
completed cogeneration projects amounting to $12.8 million; and expenses
associated with the July 1, 2002 sale of a portfolio of TPC gas marketing
contracts.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
MERCHANT OPERATIONS (CONTINUED)
For the first six months ended June 31, 2002, Merchant Operations had an
operating loss of $11.7 million, compared to operating income of $19.4 million
from the same period last year. The decrease of $31.1 million was primarily due
to lease and operating expenses associated with two recently completed
cogeneration projects amounting to $12.8 million; the change in value of the
company's gas and power marketing portfolios totaling $4.2 million; and expenses
associated with the July 1, 2002 sale of a portfolio of TPC gas marketing
contracts.
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
OTHER
Three Months Six Months
Ended June 30, Ended June 30,
(in millions) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------
NET REVENUES
Products and services revenue $13.4 $41.4 $31.6 $78.4
Less: Cost of products purchased 7.8 29.7 23.3 58.4
- -----------------------------------------------------------------------------------------
Net Revenues 5.6 11.7 8.3 20.0
- -----------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 9.8 14.3 8.6 48.5
Depreciation and amortization 1.3 2.0 2.8 4.1
Loss (gain) on sale or impairment of assets -- 9.2 (3.5) 9.2
Other taxes 0.9 2.1 1.6 3.3
- -----------------------------------------------------------------------------------------
Total Operating Expenses 12.0 27.6 9.5 65.1
- -----------------------------------------------------------------------------------------
Operating Loss $(6.4) $(15.9) $(1.2) $(45.1)
- -----------------------------------------------------------------------------------------
NiSource, through its subsidiary Columbia Transmission Communications
Corporation (Transcom), has built a dark-fiber optics telecommunications network
primarily along its pipeline rights-of-way between New York and Washington D.C.
NiSource has also invested in a number of ventures focused on distributed
generation technologies including fuel cells and micro turbines.
Telecommunications Network
In August 2001, Transcom invited potential buyers to submit bids for the assets.
Based on the results of the bids, management decided to operate the network
while continuing to evaluate the possibility of a sale based on conditions in
the telecommunications market. The anticipated cash flow from Transcom's most
recent business plan indicated that the asset's current carrying value was
ultimately realizable. The realizability of the asset's carrying value is
dependent upon management's ability to execute the business plan or alternative
strategies. However, the unfavorable market conditions remain and continue to
adversely impact Transcom's ability to implement its business plan. Management
is continuing to pursue and evaluate strategic alternatives, including a sale.
Sale of Assets
On January 28, 2002, NiSource sold SM&P, its line locating and marking business,
and recognized an after-tax gain of $12.5 million. The gain on the sale is
reflected in Corporate.
Net Revenues
Net revenues of $5.6 million for the second quarter of 2002 decreased by $6.1
million from the second quarter of 2001. Net revenues of $8.3 million for the
first half of 2002 were down $11.7 million compared to the same period in 2001.
In both periods, the decrease was attributed to the sale of SM&P.
Operating Loss
Other reported an operating loss of $6.4 million versus an operating loss of
$15.9 million in the second quarter of 2001, reflecting the $9.2 million
write-down related to NiSource's telecommunications network that occurred in
2001.
For the first six months of 2002, Other reported an operating loss of $1.2
million, versus an operating loss of $45.1 million during the comparable period
in 2001, reflecting the $15.5 million 2001 litigation settlement of Market Hub
Partners, L.P., and reduced losses related to the company's telecommunications
network and other operating subsidiaries.
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."
34
PART II
ITEM 1. LEGAL PROCEEDINGS
NISOURCE INC.
1. UNITED STATES OF AMERICA EX REL. JACK J. GRYNBERG V. COLUMBIA GAS
TRANSMISSION CORP., ET AL.
The plaintiff filed a complaint under the False Claims Act, on behalf
of the United States of America, against approximately seventy
pipelines. The plaintiff claimed that the defendants had submitted
false royalty reports to the government (or caused others to do so) by
mismeasuring the volume and heating content of natural gas produced on
Federal land and Indian lands. Plaintiff's original complaint was
dismissed without prejudice for misjoinder of parties and for failing
to plead fraud with specificity. In 1997, the plaintiff then filed over
sixty-five new False Claims Act complaints against over 330 defendants
in numerous Federal courts. One of those complaints was filed in the
Federal District Court for the Eastern District of Louisiana against
Columbia and thirteen affiliated entities. Plaintiff's second complaint
repeats the mismeasurement claims previously made and adds valuation
claims alleging that the defendants have undervalued natural gas for
royalty purposes in various ways, including by making sales to
affiliated entities at artificially low prices. Most of the Grynberg
cases were transferred to Federal court in Wyoming in 1999. In December
1999, the Columbia defendants filed a motion to dismiss plaintiff's
second complaint primarily based on a failure to plead fraud with
specificity. In May 2001, the Court denied the Columbia defendants'
motion to dismiss. The Columbia defendants joined together with
numerous other defendants and filed a motion requesting the district
court to amend its order to include a certification so that the
defendants could request permission from the United States Court of
Appeals for the Tenth Circuit to appeal a controlling question of law.
That motion was denied on July 2, 2001. Pretrial proceedings continue.
2. PRICE ET AL V. GAS PIPELINES, ET AL.
Plaintiff filed an amended complaint in Stevens County, Kansas state
court on September 23, 1999, against over 200 natural gas measurers,
mostly natural gas pipelines, including Columbia and thirteen
affiliated entities. The allegations in Price (formerly known as
Quinque) are similar to those made in Grynberg; however, Price broadens
the claims to cover all oil and gas leases (other than the Federal and
Indian leases that are the subject of Grynberg). Price asserts a breach
of contract claim, negligent or intentional misrepresentation, civil
conspiracy, common carrier liability, conversion, violation of a
variety of Kansas statutes and other common law causes of action. Price
purports to be a nationwide class action filed on behalf of all
similarly situated gas producers, royalty owners, overriding royalty
owners, working interest owners and certain state taxing authorities.
The defendants had previously removed the case to Federal court. On
January 12, 2001, the Federal court remanded the case to state court.
In June 2001, the plaintiff voluntarily dismissed ten of the fourteen
Columbia entities. Discovery relating to personal jurisdiction has
begun. On September 12, 2001 the four remaining Columbia defendants
along with other defendants filed a joint motion to dismiss the amended
complaint. That motion is currently pending before the court.
3. VIVIAN K. KERSHAW ET AL. V. COLUMBIA NATURAL RESOURCES, INC., ET AL.
In February 2000, plaintiff filed a complaint in New York state court
against Columbia, Columbia Natural Resources, Inc. (Columbia Natural
Resources) and Columbia Transmission. The complaint alleges that
Kershaw owns an interest in an oil and gas lease in New York and that
the defendants have underpaid royalties on those leases by, among other
things, failing to base royalties on the price at which natural gas is
sold to the end user and by improperly deducting post-production costs.
The complaint also seeks class action status on behalf of all royalty
owners in oil and gas leases operated by Columbia Natural Resources.
Plaintiff seeks the alleged royalty underpayments and punitive damages.
Columbia Natural Resources and Columbia Transmission removed the case
to Federal court in March 2000. The Federal court has remanded Kershaw
back to New York state court. The Columbia defendants' motion to
dismiss was partially granted and partially denied by the New York
state court judge on September 24, 2001. On December 3, 2001, the
defendants filed an answer to the plaintiffs' complaint. Recovery
regarding claim certification is ongoing.
4. ANTHONY GONZALEZ, ET AL. V. NATIONAL PROPANE CORPORATION, ET AL.
On December 11, 1997, plaintiffs Anthony Gonzalez, Helen Pieczynski, as
Special Administrator of the Estate of Edmund Pieczynski, deceased,
Michael Brown and Stephen Pieczynski filed a multiple-count complaint
for personal injuries in the Circuit Court of Cook County, Illinois
against National Propane Corporation and the Estate of Edmund
Pieczynski sounding in strict tort liability and negligence. National
Propane Corporation was
35
ITEM 1. LEGAL PROCEEDINGS (continued)
NISOURCE INC.
acquired by Columbia in 1999, and this litigation was retained by
Columbia when Columbia Propane was sold in 2001. Plaintiff's complaint
arises from an explosion and fire, which occurred in a Wisconsin
vacation cottage in 1997. National Propane, L.P. filed a third-party
complaint for contribution against Natural Gas Odorizing and Phillips
Petroleum Company. Written discovery has been completed and expert
discovery is to be completed by October 25, 2002. The case has a
scheduled trial date of March 31, 2003.
5. COLUMBIA GAS TRANSMISSION CORP. V. CONSOLIDATION COAL CO., ET AL.
On December 21, 1999, Columbia Transmission filed a complaint in
Federal court in Pittsburgh, Pennsylvania against Consolidation Coal
Co. and McElroy Coal Co. (collectively, Consol), seeking declaratory
and permanent injunctive relief enjoining Consol from pursuing its
current plan to conduct longwall mining through Columbia Transmission's
Victory Storage Field (Victory) in northern West Virginia. The
complaint was served on April 10, 2000. In October 2001, the parties
reached an agreement in principle to settle this matter and the related
case described below.
6. MCELROY COAL COMPANY V. COLUMBIA GAS TRANSMISSION CORPORATION
On February 12, 2001, McElroy Coal Company (McElroy), an affiliate of
Consolidation Coal Co., filed a complaint against Columbia Transmission
in Federal court in Wheeling, West Virginia. The West Virginia
complaint seeks declaratory and injunctive relief as to McElroy's
alleged right to mine coal within Victory, and Columbia Transmission's
obligation to take all necessary measures to permit McElroy to longwall
mine. The complaint also seeks compensation for the inverse
condemnation of any coal that cannot be mined due to Columbia
Transmission's Victory operations. Except for the claim of inverse
condemnation, McElroy's West Virginia complaint appears to be virtually
identical to Consol's original counterclaim to Columbia Transmission's
Federal court action in Pennsylvania. On April 10, 2001, the West
Virginia case was dismissed without prejudice. In October 2001, the
parties reached an agreement in principle to settle this matter and the
related case described above.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 21, 2002, NiSource held its Annual Meeting of Stockholders. On the April
2, 2002 record date, NiSource had 207,522,305 shares of common stock
outstanding, each of which was entitled to one vote at the meeting. Voted upon
and approved by the requisite number of shares present in person or by proxy at
the meeting was: an amendment to the Long-Term Incentive Plan and the election
of four directors each to serve a term of three years.
Votes For Votes Withheld Abstentions
Long-Term Incentive Plan 155,100,449 23,603,402 2,236,858
Director:
Stephen P. Adik 177,740,007 3,200,702 --
Ian M. Rolland 176,240,246 4,700,463 --
John W. Thompson 175,515,917 5,424,792 --
Roger A. Young 178,002,010 2,938,699 --
ITEM 5. OTHER INFORMATION
None
36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NISOURCE INC.
(a) Exhibits
(99.1) Certification of Gary L. Neale, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (filed herewith)
(99.2) Certification of Michael W. O'Donnell, Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, NiSource hereby
agrees to furnish the U.S. Securities and Exchange Commission, upon
request, any instrument defining the rights of holders of long-term
debt of NiSource not filed as an exhibit herein. No such instrument
authorizes long-term debt securities in excess of 10% of the total
assets of NiSource and its subsidiaries on a consolidated basis.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the second quarter
of 2002:
Financial
Item Reported Statements Included Date of Event Date Filed
- -----------------------------------------------------------------------------------
4 No 5/21/02 5/21/02
- -----------------------------------------------------------------------------------
37
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NiSource Inc.
---------------------------------
(Registrant)
Date: August 14, 2002 By: /s/ Jeffrey W. Grossman
-----------------------------
Jeffrey W. Grossman
Vice President and Controller
(Principal Accounting Officer
and Duly Authorized Officer)
38