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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file number 001-16189
NISOURCE INC.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 35-2108964
- -------------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 East 86th Avenue
Merrillville, Indiana 46410
- --------------------------------------- -----------------
(Address of principal executive offices) Zip Code)
Registrant's telephone number, including area code (877) 647-5990
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, $0.01 Par Value:
263,406,365 shares outstanding at April 30, 2004.
NISOURCE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED MARCH 31, 2004
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Consolidated Income......................................... 3
Consolidated Balance Sheets............................................... 4
Statements of Consolidated Cash Flows..................................... 6
Statements of Consolidated Comprehensive Income........................... 7
Notes to Consolidated Financial Statements................................ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk................ 37
Item 4. Controls and Procedures................................................... 37
PART II OTHER INFORMATION
Item 1 Legal Proceedings......................................................... 38
Item 2. Changes in Securities and Use of Proceeds................................. 38
Item 3. Defaults Upon Senior Securities........................................... 38
Item 4. Submission of Matters to a Vote of Security Holders....................... 38
Item 5. Other Information......................................................... 38
Item 6. Exhibits and Reports on Form 8-K.......................................... 39
Signature........................................................................... 40
2
PART I
ITEM 1. FINANCIAL STATEMENTS
NISOURCE INC.
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Three Months Ended March 31, (in millions, except per share amounts) 2004 2003
- -------------------------------------------------------------------- --------- ---------
NET REVENUES
Gas Distribution $ 1,681.4 $ 1,760.7
Gas Transmission and Storage 345.3 342.2
Electric 273.1 264.3
Other 173.4 157.3
--------- ---------
Gross Revenues 2,473.2 2,524.5
Cost of Sales 1,481.2 1,494.9
--------- ---------
Total Net Revenues 992.0 1,029.6
--------- ---------
OPERATING EXPENSES
Operation and maintenance 323.3 326.5
Depreciation and amortization 125.4 124.6
Loss on sale of assets 0.7 1.1
Other taxes 100.0 105.1
--------- ---------
Total Operating Expenses 549.4 557.3
--------- ---------
OPERATING INCOME 442.6 472.3
--------- ---------
OTHER INCOME (DEDUCTIONS)
Interest expense, net (102.7) (123.0)
Minority interests - (2.5)
Dividend requirements on preferred stock of subsidiaries (1.1) (1.2)
Other, net 3.3 4.1
--------- ---------
Total Other Income (Deductions) (100.5) (122.6)
--------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 342.1 349.7
INCOME TAXES 125.6 127.4
--------- ---------
INCOME FROM CONTINUING OPERATIONS 216.5 222.3
--------- ---------
Loss from Discontinued Operations - net of taxes (3.0) (3.4)
Net loss on Disposition of Discontinued Operations - net of taxes - 44.8
Change in Accounting - net of taxes - (8.8)
--------- ---------
NET INCOME $ 213.5 $ 254.9
========= =========
BASIC EARNINGS PER SHARE ($)
Continuing operations 0.83 0.88
Discontinued operations (0.02) 0.16
Change in accounting - (0.04)
--------- ---------
BASIC EARNINGS PER SHARE 0.81 1.00
--------- ---------
DILUTED EARNINGS PER SHARE ($)
Continuing operations 0.82 0.87
Discontinued operations (0.01) 0.16
Change in accounting - (0.04)
--------- ---------
DILUTED EARNINGS PER SHARE 0.81 0.99
--------- ---------
DIVIDENDS DECLARED PER COMMON SHARE 0.23 0.29
--------- ---------
BASIC AVERAGE COMMON SHARES OUTSTANDING (MILLIONS) 262.3 253.8
DILUTED AVERAGE COMMON SHARES (MILLIONS) 264.3 256.2
--------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, December 31,
(in millions) 2004 2003
- ----------------------------------------------------------------------- ---------- ------------
(unaudited)
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility Plant $ 16,054.0 $ 15,991.5
Accumulated depreciation and amortization (7,162.9) (7,095.9)
----------- ------------
Net utility plant 8,891.1 8,895.6
----------- ------------
Other property, at cost, less accumulated depreciation 465.9 409.3
----------- ------------
Net Property, Plant and Equipment 9,357.0 9,304.9
----------- ------------
INVESTMENTS AND OTHER ASSETS
Assets of discontinued operations and assets held for sale 6.5 6.5
Unconsolidated affiliates 91.9 113.2
Other investments 72.7 67.4
----------- ------------
Total Investments 171.1 187.1
----------- ------------
CURRENT ASSETS
Cash and cash equivalents 44.5 27.3
Restricted cash 15.0 22.8
Accounts receivable (less reserve of $76.3 and $54.1, respectively) 731.0 511.1
Unbilled revenue (less reserve of $2.2 and $3.5, respectively) 230.5 303.2
Gas inventory 77.6 429.4
Underrecovered gas and fuel costs 165.9 203.2
Materials and supplies, at average cost 70.9 71.5
Electric production fuel, at average cost 31.1 29.0
Price risk management assets 82.8 74.3
Exchange gas receivable 173.9 174.8
Regulatory Assets 112.6 114.5
Prepayments and other 96.8 101.8
----------- ------------
Total Current Assets 1,832.6 2,062.9
----------- ------------
OTHER ASSETS
Price risk management assets 153.9 114.4
Regulatory assets 584.8 575.5
Goodwill 3,704.0 3,704.0
Intangible assets 523.7 527.2
Deferred charges and other 148.3 147.8
----------- ------------
Total Other Assets 5,114.7 5,068.9
----------- ------------
TOTAL ASSETS $ 16,475.4 $ 16,623.8
=========== ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, December 31,
(in millions) 2004 2003
- -------------------------------------------------------------------- ---------- ------------
(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 4,526.4 $ 4,415.9
Preferred Stocks--
Series without mandatory redemption provisions 81.1 81.1
Long-term debt, excluding amounts due within one year 5,945.1 5,993.4
---------- ------------
Total Capitalization 10,552.6 10,490.4
---------- ------------
CURRENT LIABILITIES
Current portion of long-term debt 117.1 118.3
Short-term borrowings 222.6 685.5
Accounts payable 426.2 496.6
Dividends declared on common and preferred stocks 61.7 1.8
Customer deposits 83.2 80.4
Taxes accrued 379.3 210.8
Interest accrued 138.4 82.4
Overrecovered gas and fuel costs 53.0 29.2
Price risk management liabilities 30.2 36.5
Exchange gas payable 245.5 290.8
Current deferred revenue 25.4 28.2
Regulatory liabilities 68.4 73.7
Accrued liability for postretirement and pension benefits 71.1 56.8
Other accruals 426.3 418.0
---------- ------------
Total Current Liabilities 2,348.4 2,609.0
---------- ------------
OTHER LIABILITIES AND DEFERRED CREDITS
Price risk management liabilities 6.0 0.2
Deferred income taxes 1,612.5 1,595.9
Deferred investment tax credits 85.1 87.3
Deferred credits 57.9 72.7
Noncurrent deferred revenue 107.3 113.0
Accrued liability for postretirement and pension benefits 404.7 406.9
Preferred stock liabilities with mandatory redemption provisions 2.4 2.4
Regulatory liabilities and other removal costs 1,081.8 1,061.6
Other noncurrent liabilities 216.7 184.4
---------- ------------
Total Other 3,574.4 3,524.4
---------- ------------
COMMITMENTS AND CONTINGENCIES - -
---------- ------------
TOTAL CAPITALIZATION AND LIABILITIES $ 16,475.4 $ 16,623.8
========== ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Three Months Ended March 31, (in millions) 2004 2003
- ------------------------------------------------------------------------- -------- --------
OPERATING ACTIVITIES
Net income $ 213.5 $ 254.9
Adjustments to reconcile net income to net cash from
continuing operations:
Depreciation and amortization 125.4 124.6
Net changes in price risk management activities (6.4) (5.0)
Deferred income taxes and investment tax credits (13.4) 27.1
Deferred revenue (8.5) (4.9)
Amortization of unearned compensation 2.0 2.0
Loss on sale of assets 0.7 1.1
Change in accounting - 8.8
Loss (Gain) from unconsolidated affiliates (1.1) 0.1
Gain from sale of discontinued operations - (44.8)
Loss from discontinued operations 3.0 3.4
Amortization of discount/premium on debt 5.0 4.9
Changes in assets and liabilities, net of effect from acquisitions of
businesses:
Restricted cash 7.8 24.1
Accounts receivable and unbilled revenue (177.8) (438.1)
Inventories 498.6 288.9
Accounts payable (67.4) 219.7
Customer deposits 2.8 7.5
Taxes accrued 177.2 115.6
Interest accrued 56.0 82.6
(Under) Overrecovered gas and fuel costs 61.1 33.9
Exchange gas receivable/payable (5.6) (1.2)
Other accruals (125.2) (57.8)
Prepayment and other current assets 3.6 (1.4)
Regulatory assets/liabilities (6.2) (40.3)
Postretirement and postemployment benefits 12.0 13.2
Deferred credits (14.8) (15.5)
Deferred charges and other noncurrent assets 2.3 10.3
Other noncurrent liabilities 27.8 19.1
-------- --------
Net Cash Flows from Continuing Operations 772.4 632.8
Net Cash Flows from Discontinued Operations - (24.8)
-------- --------
Net Cash Flows from Operating Activities 772.4 608.0
-------- --------
INVESTING ACTIVITIES
Capital expenditures (110.3) (95.1)
Proceeds from disposition of assets - 95.8
Other investing activities (3.2) 2.2
-------- --------
Net Cash Flows from Investing Activities (113.5) 2.9
-------- --------
FINANCING ACTIVITIES
Issuance of long-term debt - 345.3
Retirement of long-term debt (121.2) (95.0)
Change in short-term debt (462.9) (751.9)
Retirement of preferred shares - (345.0)
Issuance of common stock and capital contributed 7.3 346.1
Acquisition of treasury stock (3.7) (0.9)
Dividends paid - common shares (61.2) (72.0)
-------- --------
Net Cash Flows from Financing Activities (641.7) (573.4)
-------- --------
Increase (decrease) in cash and cash equivalents 17.2 37.5
Cash and cash equivalents at beginning of year 27.3 31.1
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44.5 $ 68.6
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest 42.5 36.5
Interest capitalized 0.7 1.0
Cash paid for income taxes 3.3 16.4
-------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended March 31, (in millions) 2004 2003
- ------------------------------------------------------- -------- --------
Net Income $ 213.5 $ 254.9
Other comprehensive income, net of tax
Foreign currency translation adjustment 0.8 0.9
Net unrealized gains on cash flow hedges 10.0 8.3
Net gain (loss) on available for sale securities 1.4 (1.9)
- ------------------------------------------------------- -------- --------
Total other comprehensive income, net of tax 12.2 7.3
- ------------------------------------------------------- -------- --------
Total Comprehensive Income $ 225.7 $ 262.2
- ------------------------------------------------------- -------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
7
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF ACCOUNTING PRESENTATION
The accompanying unaudited consolidated financial statements for NiSource Inc.
(NiSource) reflect all normal recurring adjustments that are necessary, in the
opinion of management, to present fairly the results of operations in accordance
with accounting principles generally accepted in the United States of America.
The accompanying financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in NiSource's
Annual Report on Form 10-K for the fiscal year ended December 31, 2003. Income
for interim periods may not be indicative of results for the calendar year due
to weather variations and other factors. Certain reclassifications have been
made to the 2003 financial statements to conform to the 2004 presentation.
2. DILUTED AVERAGE COMMON SHARES COMPUTATION
Basic earnings per share (EPS) is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. The weighted average shares outstanding for diluted EPS are
impacted by the incremental effect of the various long-term incentive
compensation plans and the forward equity contracts associated with the Stock
Appreciation Income Linked Securities(SM) (SAILS(SM)), and through February 18,
2003, Corporate Premium Income Equity Securities (Corporate PIES). Effective
February 19, 2003, the forward equity contracts related to the Corporate PIES
were settled as prescribed in the agreements. As a result of the settlement,
13.1 million common shares were issued and are reflected in basic average common
shares. In the 2004 period, the SAILS were anti-dilutive and therefore not
included in the calculation.
The numerator in calculating both basic and diluted EPS for each year is
reported net income. The computation of diluted average common shares follows:
Three Months Ended March 31, (in thousands) 2004 2003
- -------------------------------------------------------------- ------- --------
Denominator
Basic average common shares outstanding 262,287 253,847
Dilutive potential common shares
Nonqualified stock options 227 54
Shares contingently issuable under employee stock plans 1,186 1,313
SAILS(SM) - 447
Shares restricted under employee stock plans 631 547
------- -------
Diluted Average Common Shares 264,331 256,208
------- -------
3. STOCK OPTIONS AND AWARDS
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123), encourages, but does not require, entities to adopt the fair value method
of accounting for stock-based compensation plans. The fair value method would
require the amortization of the fair value of stock-based compensation at the
date of grant over the related vesting period. NiSource continues to apply the
intrinsic value method of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," for awards granted under its
stock-based compensation plans. The following table illustrates the effect on
net income and EPS as if NiSource had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation.
8
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
Three Months Ended March 31, ($ in millions, except per share data) 2004 2003
- --------------------------------------------------------------------------------- ----- -----
NET INCOME
As reported 213.5 254.9
Add: Stock-based employee compensation expense included in reported
net income, net of related tax effects 1.3 1.3
Less: Total stock-based employee compensation expense determined
under the fair value method for all awards, net of tax 2.8 3.5
----- -----
Pro forma 212.0 252.7
----- -----
EARNINGS PER SHARE
Basic - as reported 0.81 1.00
- pro forma 0.81 1.00
Diluted - as reported 0.81 0.99
- pro forma 0.80 0.99
4. REGULATORY MATTERS
Through October 2004, Columbia Gas of Ohio, Inc. (Columbia of Ohio) is operating
under a regulatory stipulation approved by the Public Utilities Commission of
Ohio (PUCO). On October 9, 2003, Columbia of Ohio and other parties filed with
the PUCO an amended stipulation that would govern Columbia of Ohio's regulatory
framework from November 2004 through October 2010. The majority of Columbia of
Ohio's contracts with interstate pipelines expire in October 2004, and the
amended stipulation would permit Columbia of Ohio to renew those contracts for
firm capacity sufficient to meet up to 100% of the design peak day requirements
through October 31, 2005 and up to 95% of the design peak day requirements
through October 31, 2010. Among other things, the amended stipulation would
also: (1) extend Columbia of Ohio's Choice(R) program through October 2010; (2)
provide Columbia of Ohio with an opportunity to generate revenues sufficient to
cover the stranded costs associated with the CHOICE(R) program; and, (3) allow
Columbia of Ohio to record post-in-service-carrying charges on plant placed into
service after October 2004, and to defer the property taxes and depreciation
associated with such plant.
On March 11, 2004, the PUCO issued an order that adopted and modified the
stipulation from Columbia of Ohio and a collaborative of parties. The order
extended Columbia of Ohio's CHOICE(R) program. However, the order limited the
time period of the stipulation through December 31, 2007 and declined to
pre-approve the amount of interstate pipeline firm capacity for which Columbia
of Ohio could contract. In addition, the PUCO made other modifications which
would limit Columbia of Ohio's ability to generate additional revenues
sufficient to cover stranded costs, including declining to mandate that natural
gas marketers participating in the CHOICE(R) program obtain 75% of their
interstate capacity directly from Columbia of Ohio and changing the allocation
of revenues generated through off-systems sales. The order allows Columbia of
Ohio to record post-in-service-carrying charges on plant placed in service after
October 2004 and allows the deferral of property taxes and depreciation
associated with such plant. Although this order will have a minimal impact on
2004, NiSource's initial estimate is that this order, if left unchanged, could
potentially reduce operating income by approximately $20 million annually 2005
through 2007. On April 9, 2004, Columbia of Ohio and other signatory parties to
the stipulation, consistent with standard regulatory process, petitioned the
commission for rehearing on the components which have been modified. That same
day the Office of the Ohio Consumers' Counsel also filed an application for
rehearing, and argued that the PUCO should not have permitted Columbia of Ohio
to record post-in-service-carrying charges on plant placed into service after
October 2004, and to defer the property taxes and depreciation associated with
such plant. On April 19, 2004, the Office of the Ohio Consumers' Counsel filed a
motion to dismiss the application for rehearing filed by Columbia of Ohio and
other parties.
9
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
On May 5, 2004 the PUCO issued an order on rehearing, in which it denied the
Office of Consumer Counsels' motion to dismiss and its application for
rehearing. The PUCO granted, in part, the joint application filed by Columbia of
Ohio and others. In granting the joint application for rehearing, in part, the
PUCO did the following: (1) revised the term of the stipulation so that it runs
through October 31, 2008; (2) restored the marketers' responsibility for 75% of
CHOICE(R) costs; and (3) revised the mechanism applicable to Columbia of Ohio's
sharing of Off-System Sales and Capacity Release revenue. Under the revised
Off-System Sales/Capacity Release revenue sharing mechanism, Columbia of Ohio
must now begin sharing such revenue when the annual revenue exceeds $25 million,
instead of $35 million as originally proposed by Columbia of Ohio and other
collaborative parties. NiSource and the other collaborative parties have until
May 25, 2004 to either accept the PUCO modifications, or to reject them and
terminate the stipulation. If accepted, this order would reduce the negative
impact estimated above, however, management is still evaluating the order.
On December 17, 2003, the PUCO approved an application by Columbia of Ohio and
other Ohio local distribution companies (LDCs) to establish a tracking mechanism
that will provide for recovery of current bad debt expense and for the recovery
over a five-year period of previously deferred uncollected accounts receivable.
The approval of the tracker will allow for the recovery of previously
uncollected accounts receivable for Columbia of Ohio. As of March 31, 2004,
Columbia of Ohio has $45.2 million of uncollected accounts receivable pending
future recovery.
On August 11, 1999, the Indiana Utility Regulatory Commission (IURC) approved a
flexible gas cost adjustment mechanism for Northern Indiana. Under the approved
procedure, the demand component of the adjustment factor will be determined,
after hearings and IURC approval, and made effective on November 1 of each year.
The demand component will remain in effect for one year until a new demand
component is approved by the IURC. The commodity component of the adjustment
factor will be determined by monthly filings, which will become effective on the
first day of each calendar month, subject to refund. The monthly filings do not
require IURC approval but will be reviewed by the IURC during the annual hearing
that will take place regarding the demand component filing. Northern Indiana's
gas cost adjustment factor also includes a gas cost incentive mechanism which
allows the sharing of any cost savings or cost increases with customers based on
a comparison of actual gas supply portfolio cost to a market-based benchmark
price. Northern Indiana made its annual filing for 2002 on August 29, 2002
(GCA5). The IURC approved implementation of interim rates, subject to refund,
effective November 1, 2002. Testimony was filed indicating that some gas costs,
for the month of March 2003, should not be recovered. On September 10, 2003, the
IURC issued an order adjusting the recovery of costs in March 2003 and reducing
recovery by $3.8 million. On October 8, 2003, the IURC approved the demand
component of the adjustment factor. Northern Indiana made its annual filing for
2003 on August 26, 2003 (GCA6). The IURC approved implementation of these
interim rates subject to refund, effective November 1, 2003. The parties in the
cases have raised concerns regarding gas cost recovery similar to those
addressed in March 2003. While Northern Indiana pursues settlement of the issues
an estimated refund liability was recognized in the first quarter of 2004.
On June 20, 2002, Northern Indiana, Ameren Corporation and First Energy
Corporation established terms for joining the Midwest Independent System
Operator (MISO) through participation in an independent transmission company
(ITC). Northern Indiana transferred functional control of its electric
transmission assets to the ITC and MISO on October 1, 2003. As part of Northern
Indiana's use of MISO's transmission service, Northern Indiana will incur new
categories of transmission charges based upon MISO's Federal Energy Regulatory
Commission (FERC)-approved tariff. One of the new categories of charges,
Schedule 10, relates to the payment of administrative charges to MISO for its
continuing management and operations of the transmission system. Northern
Indiana filed a petition on September 30, 2003, with the IURC seeking approval
to establish accounting treatment for the deferral of the Schedule 10 charges
from MISO. An IURC hearing was held on March 15, 2004, with final resolution
anticipated during the second quarter 2004.
10
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
The MISO has initiated the Midwest Market Initiative (MMI), which will develop
the structures and processes to be used to implement an electricity market for
the MISO region. This MMI proposes non-discriminatory transmission service,
reliable grid operation, and the purchase and sale of electric energy in a
competitive, efficient and non-discriminatory manner. MISO filed detailed tariff
information, with a planned initial operation date of March 31, 2004. However,
in October 2003, MISO petitioned FERC to withdraw this tariff filing. FERC
approved the withdrawal and has provided guidance to MISO as to how it should
proceed in the future. On March 31, 2004, MISO submitted a revised energy
markets tariff to the FERC for approval. As part of the revised filings, MISO
proposes an initial operation date of December 1, 2004. Northern Indiana and
Energy USA-TPC (TPC) are actively pursuing roles in the MMI. At the current
time, management believes that the MMI will change the manner in which Northern
Indiana and TPC conducts their electric business; however, at this time
management cannot determine the impact the MMI will have on Northern Indiana or
TPC.
Northern Indiana has been recovering the costs of electric power purchased for
sale to its customers through the fuel adjustment clause (FAC). The FAC provides
for costs to be collected if they are below a negotiated cap. If costs exceed
this cap, Northern Indiana must demonstrate that the costs were prudently
incurred to achieve approval for recovery. This negotiated cap agreement is
subject to continuing negotiations. A group of industrial customers challenged
the manner in which Northern Indiana applied costs associated with a specific
interruptible sales tariff. An estimated refund liability was recorded in the
first quarter of 2003. A settlement was reached with the customers and Northern
Indiana recorded the full costs of the settlement. As a result of the
settlement, the industrial customers challenge was withdrawn and dismissed in
January 2004. In addition, as a result of the settlement, Northern Indiana has
sought and received approval by the IURC to reduce the charges under the
interruptible sales tariff. This reduction will remain in effect until the Dean
H. Mitchell Generating Station (Mitchell Station) has been returned to service.
In January 2002, Northern Indiana filed for approval to implement an
environmental cost tracker (ECT). The ECT was approved by the IURC on November
26, 2002. Under the ECT Northern Indiana is permitted to recover (1) allowance
for funds used during construction and a return on the capital investment
expended by Northern Indiana to implement Indiana Department of Environmental
Management's nitrogen oxide State Implementation Plan through an Environmental
Cost Recovery Mechanism (ECRM) and (2) related operation and maintenance and
depreciation expenses once the environmental facilities become operational
through an Environmental Expense Recovery Mechanism (EERM). The IURC order was
appealed to the Indiana Court of Appeals by the Citizens Action Coalition of
Indiana, where it was upheld by the Court on March 9, 2004. The Citizens Action
Coalition of Indiana failed to take any action to continue the appeal of this
case and the Court's decision is now final. Under the Commission's November 26,
2002 order, Northern Indiana is permitted to submit filings on a semi-annual
basis for the ECRM and on an annual basis for the EERM. Northern Indiana made
its initial filing of the ECRM, ECR-1, in February 2003 for capital expenditures
of $58.4 million. On April 30, 2003, the IURC issued an order approving the ECRM
filing, providing for a return on the capital investment through increased rates
beginning with the May 2003 customer bills. Through March 31, 2004 the ECRM
revenues amounted to $8.2 million. On August 1, 2003, Northern Indiana filed
ECR-2 for capital expenditures through June 30, 2003, of $120.0 million. This
petition was approved by the IURC on October 1, 2003. The initial filing of the
EERM was filed with the most recent semi-annual filing of the ECT in February
2004, which included a filing of the ECR-3 for capital expenditures through
December 31, 2003, of $194.1 million, and an EERM amount of $1.9 million. On
March 24, 2004, the IURC approved Northern Indiana's February 2004 filing for
ECR-3 and the initial filing of the EERM. Over the timeframe required to meet
the environmental standards, Northern Indiana anticipates a total capital
investment amounting to approximately $274.2 million. On February 4, 2004, the
IURC approved Northern Indiana's latest compliance plan with the estimate of
$274.2 million.
11
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
5. RESTRUCTURING ACTIVITIES
Since 2000, NiSource has implemented restructuring initiatives to streamline its
operations and realize efficiencies from the acquisition of Columbia Energy
Group (Columbia). The restructuring activities were primarily associated with
reductions in headcount and facility exit costs.
For all of the restructuring plans, a total of approximately 1,600 management,
professional, administrative and technical positions have been identified for
elimination. As of March 31, 2004, approximately 1,560 employees were
terminated, of whom 7 employees were terminated during the first quarter 2004.
As of March 31, 2004 and December 31, 2003, the consolidated balance sheets
reflected liabilities of $18.3 million and $19.5 million related to the
restructuring plans, respectively. For the first quarter of 2004, $1.6 million
in payments were made in association with the restructuring plans and a $0.4
million net increase to the restructuring liability was recorded mainly to
adjust for facility exit costs. Of the remaining restructuring liability, $13.7
million is related to facility exit costs.
6. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
On October 20, 2003, NiSource sold all of the steel-related, "inside-the-fence"
assets of its subsidiary PEI Holdings, Inc. (PEI), to Private Power, LLC
(Private Power). The sale included six PEI operating subsidiaries and the name
"Primary Energy". Private Power paid approximately $325.4 million, comprised of
$113.1 million in cash and the assumption of debt-related liabilities and other
obligations. The assumption of such liabilities and the after tax cash proceeds
from the sale reduced NiSource's debt by $206.3 million. NiSource has accounted
for the assets sold as discontinued operations and has adjusted all periods
presented accordingly.
On August 29, 2003, NiSource sold its exploration and production subsidiary,
Columbia Energy Resources, Inc. (CER), to a subsidiary of Triana Energy Holdings
(Triana). Under the CER sales agreement, Triana , an affiliate of Morgan Stanley
Dean Witter Capital Partners IV, L.P. (MSCP), purchased all of the stock of CER
for $330.0 million, plus the assumption of obligations to deliver approximately
94.0 billion cubic feet (Bcf) of natural gas pursuant to existing forward sales
contracts. The sale transferred 1.1 trillion cubic feet of natural gas reserves.
Approximately $220.0 million of after-tax cash proceeds from the sale were used
to reduce NiSource's debt. In addition, a $213.0 million liability related to
the forward sales contracts was removed from the balance sheet. On January 28,
2003, NiSource's former subsidiary Columbia Natural Resources, Inc. sold its
interest in certain natural gas exploration and production assets in New York
for approximately $95.0 million. NiSource has accounted for CER as discontinued
operations and has adjusted all periods presented accordingly.
During 2002, NiSource decided to exit the telecommunications business. The
results of operations related to Columbia Transmission Communications
Corporation (Transcom) were displayed as discontinued operations on NiSource's
consolidated income statement and its assets and liabilities were separately
aggregated and reflected as assets and liabilities of discontinued operations on
the consolidated balance sheets in 2002. On September 15, 2003, NiSource's
subsidiary Columbia sold 100% of its shares in Transcom.
Results from discontinued operations of CER (including the New York State
properties), the six PEI subsidiaries and Transcom are provided in the following
table:
Three Months Ended March 31, ($ in millions) 2004 2003
- -------------------------------------------- -------- --------
REVENUES FROM DISCONTINUED OPERATIONS $ - $ 59.4
-------- --------
Loss from discontinued operations (5.0) (0.8)
Income taxes (2.0) 2.6
-------- --------
NET LOSS FROM DISCONTINUED OPERATIONS $ (3.0) $ (3.4)
-------- --------
12
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
The assets of discontinued operations were net property, plant, and equipment of
$6.5 million at December 31, 2003 and at March 31, 2004.
7. RISK MANAGEMENT ACTIVITIES
NiSource uses commodity-based derivative financial instruments to manage certain
risks in its business. NiSource accounts for its derivatives under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended,
(SFAS No. 133.)
HEDGING ACTIVITIES. The activity for the first quarter 2004 and 2003 affecting
accumulated other comprehensive income, with respect to cash flow hedges
included the following:
The three months ended March 31, (in millions, net of tax) 2004 2003
- ------------------------------------------------------------------------------------------- -------- --------
Net unrealized gains on derivatives qualifying as cash flow hedges at the $ 91.7 $ 67.8
beginning of the period
Unrealized hedging gains arising during the period on derivatives qualifying
as cash flow hedges 21.3 9.6
Reclassification adjustment for net gain included in net income (11.3) (1.3)
-------- --------
Net unrealized gains on derivatives qualifying as cash flow hedges at the end of the period $ 101.7 $ 76.1
-------- --------
Unrealized gains and losses on NiSource's hedges were recorded as price risk
management assets and liabilities along with unrealized gains on NiSource's
marketing and trading portfolios. The accompanying consolidated balance sheets
reflected price risk management assets related to unrealized gains on hedges of
$210.5 million and $165.6 million at March 31, 2004 and December 31, 2003,
respectively, of which $56.8 million and $51.3 million were included in "Current
Assets" and $153.7 million and $114.3 million were included in "Other Assets."
Price risk management liabilities related to unrealized losses on hedges (and
net option premiums) were $9.6 million and $9.5 million at March 31, 2004 and
December 31, 2003, respectively, of which $3.7 million and $9.3 million were
included in "Current Liabilities" and $5.9 million and $0.2 million were
included in "Other Liabilities and Deferred Credits."
In addition, Northern Indiana and Bay State Gas Company engage in writing
options that potentially obligate them to purchase or sell gas at the holder's
discretion at some future market-based price. These written options are
derivative instruments, must be marked to fair value and do not meet the
requirement for hedge accounting treatment. Northern Indiana also uses NYMEX
derivative contracts to minimize its gas costs. These contracts do not qualify
for hedge accounting and must be marked to fair value. Because these derivatives
are used within the framework of its gas cost incentive mechanism, regulatory
assets or liabilities are recorded to offset the change in the fair value of
these derivatives. The consolidated balance sheets reflected $1.2 million and
$1.2 million of price risk management assets associated with the programs at
March 31, 2004 and December 31, 2003, respectively. In addition, the
consolidated balance sheets reflected $0.2 million and $0.5 million of price
risk management liabilities associated with the programs at March 31, 2004 and
December 31, 2003, respectively.
For regulatory incentive purposes, the Columbia distribution companies,
comprised of Columbia Gas of Kentucky, Inc., Columbia Gas of Maryland, Inc.,
Columbia Gas of Ohio, Inc., Columbia Gas of Pennsylvania, Inc., and Columbia Gas
of Virginia, Inc. enter into contracts that allow counterparties the option to
sell gas to Columbia LDCs at first of the month prices for a particular month of
delivery. Columbia LDCs charge the counterparties a fee for this option. The
changes in the fair value of the options are primarily due to the changing
expectations of the future intra-month volatility of gas prices. Columbia LDCs
defer a portion of the change in the fair value of the options as either a
regulatory asset or liability in accordance with SFAS No. 71. The remaining
change is recognized currently in earnings. The consolidated balance sheets
reflected $1.4 million and $3.3 million of price risk management liabilities
associated with the programs at March 31, 2004 and December 31, 2003,
respectively.
13
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
During the first quarter 2004, a gain of $0.1 million was recognized in earnings
due to the change in value of certain derivative instruments, and there were no
components of the derivatives' fair values excluded in the assessment of hedge
effectiveness. Also during the first quarter, NiSource reclassified no amounts
from other comprehensive income to earnings, due to the probability that certain
forecasted transactions would not occur. It is anticipated that during the next
twelve months the expiration and settlement of cash flow hedge contracts will
result in income recognition of amounts currently classified in other
comprehensive income of approximately $31.9 million, net of tax.
MARKETING AND TRADING ACTIVITIES. The remaining operations of TPC primarily
involve commercial and industrial gas sales and power trading.
In April 2003, the remaining gas-related activities (physical commodity sales to
commercial and industrial customers) that had been classified as derivatives
were considered to fall within the normal purchase and sale exception under SFAS
No. 133. Therefore, all gas-related derivatives used to offset the physical
obligations necessary to fulfill these commodity sales were designated as cash
flow hedges
The fair market values of NiSource's power trading assets and liabilities were
$25.0 million and $25.0 million, respectively, at March 31, 2004 and $21.9
million and $23.4 million, respectively, at December 31, 2003.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FASB INTERPRETATION NO. 46 (REVISED DECEMBER 2003) -- CONSOLIDATION OF VARIABLE
INTEREST ENTITIES. On January 17, 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46R). FIN 46R requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or is entitled to receive a majority of the entity's residual
returns. A company that consolidates a variable interest entity is called the
primary beneficiary of that entity. In general, a variable interest entity is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights, or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. FIN 46R also requires various disclosures
about variable interest entities that a company is not required to consolidate
but in which it has a significant variable interest. On December 18, 2003, the
FASB deferred the implementation of FIN 46R to the first quarter of 2004. As a
result, NiSource consolidated certain low income housing real estate investments
beginning in the first quarter of 2004. Upon consolidation, NiSource increased
its long-term debt by approximately $40 million.
FASB STAFF POSITION NO. FAS 106-1 -- ACCOUNTING AND DISCLOSURE REQUIREMENTS
RELATED TO THE MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF
2003. On December 8, 2003, the President of the United States signed the
Medicare Prescription Drug, Improvement and Modernization Act into law. The Act
introduces a prescription drug benefit under Medicare (Medicare Part D) as well
as a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D.
FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," requires presently enacted changes in relevant laws to be
considered in current period measurements of postretirement benefit costs and
the Accumulated Projected Benefit Obligation. However, specific authoritative
guidance on the accounting for the federal subsidy is currently pending, and
NiSource has elected to defer accounting for the effects of this pronouncement
as allowed by this staff position. It is expected that the law and pronouncement
will reduce the effects of the currently high prescription drug trend rates on
NiSource's post-retirement benefits costs and cash flows assuming that
NiSource's post-retirement benefits remain unchanged. However, it is not certain
at this time what effects this law and pronouncement will have on NiSource's
postretirement benefit costs and cash flows.
14
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
9. LEGAL PROCEEDINGS
In the normal course of its business, NiSource and its subsidiaries have been
named as defendants in various legal proceedings. In the opinion of management,
the ultimate disposition of these currently asserted claims will not have a
material adverse impact on NiSource's consolidated financial position.
10. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table displays the components of Accumulated Other Comprehensive
Loss, which is included in "Common Stock Equity," on the consolidated balance
sheets.
MARCH 31, December 31,
(in millions) 2004 2003
- ----------------------------------------------- --------- ------------
Foreign currency translation adjustment $ - $ (0.7)
Loss on available for sale securities (0.4) (1.8)
Net unrealized gains on cash flow hedges 101.7 91.7
Minimum pension liability adjustment (150.1) (150.2)
--------- ------------
TOTAL ACCUMULATED OTHER COMPREHENSIVE LOSS, NET $ (48.8) $ (61.0)
--------- ------------
11. GUARANTEES AND INDEMNITIES
As a part of normal business, NiSource and certain subsidiaries enter into
various agreements providing financial or performance assurance to third parties
on behalf of other subsidiaries. Such agreements include guarantees and stand-by
letters of credit. These agreements are entered into primarily to support or
enhance the creditworthiness otherwise attributed to a subsidiary on a
stand-alone basis, thereby facilitating the extension of sufficient credit to
accomplish the subsidiaries' intended commercial purposes. The total commercial
commitments in existence at March 31, 2004 and the years in which they expire
are:
(in millions) Total 2004 2005 2006 2007 2008 After
- -------------------------------- --------- ------- -------- -------- ------ ------- ---------
Guarantees of subsidaries debt $ 3,924.5 $ 82.7 $1,183.2 $ 293.1 $ 32.4 $ 8.6 $ 2,324.5
Guarantees supporting commodity
transactions of subsidiaries 1,404.1 263.3 177.9 732.4 37.3 55.4 137.8
Other guarantees 456.9 75.0 51.1 - - 10.7 320.1
Lines of credit 222.6 222.6 - - - - -
Letters of credit 122.9 1.2 20.1 1.1 1.1 99.4 -
- -------------------------------- --------- ------- -------- -------- ------ ------- ---------
Total commercial commitments $ 6,131.0 $ 644.8 $1,432.3 $1,026.6 $ 70.8 $ 174.1 $ 2,782.4
- -------------------------------- --------- ------- -------- -------- ------ ------- ---------
NiSource has guaranteed the payment of $3.9 billion of debt for various
wholly-owned subsidiaries including Whiting Leasing LLC, NiSource Finance Corp.
(NiSource Finance), and through a support agreement, NiSource Capital Markets,
Inc. Other than debt associated with the former PEI subsidiaries that were sold,
the debt is reflected on NiSource's consolidated balance sheet. The subsidiaries
are required to comply with certain financial covenants under the debt indenture
and in the event of default, NiSource would be obligated to pay the debt's
principal and related interest. NiSource does not anticipate its subsidiaries
will have any difficulty maintaining compliance. NiSource Finance also maintains
lines of credit with financial institutions. At March 31, 2004, the amount
outstanding under the lines of credit and guaranteed by NiSource amounted to
$222.6 million. Additionally, NiSource has issued guarantees, which support up
to approximately $1.4 billion of commodity-related payments for its current
subsidiaries involved in energy marketing and trading and those satisfying
requirements under forward gas sales agreements of former subsidiaries. These
guarantees were provided to counterparties in order to facilitate physical and
financial transactions involving natural gas and electricity. To the extent
liabilities exist under the commodity-related contracts subject to these
guarantees, such liabilities are included in the consolidated balance sheets.
15
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
NiSource has issued standby letters of credit of approximately $122.9 million
through financial institutions for the benefit of third parties that have
extended credit to certain subsidiaries. If a subsidiary does not pay amounts
when due under covered contracts, the beneficiary may present its claim for
payment to the financial institution, which will in turn request payment from
NiSource.
NiSource has purchase and sales agreement guarantees totaling $140.0 million,
which guarantee performance of the seller's covenants, agreements, obligations,
liabilities, representations and warranties under the agreements. No amounts
related to the purchase and sales agreement guarantees are reflected in the
consolidated balance sheet.
Management believes that the likelihood NiSource would be required to perform or
otherwise incur any significant losses associated with any of the aforementioned
guarantees is remote.
After the October 20, 2003 sale of six subsidiaries, PEI continues to own
Whiting Clean Energy, Inc. (Whiting Clean Energy). The total of the outstanding
debt guaranteed for Whiting Clean Energy at March 31, 2004 was $326.9 million.
As of March 31, 2004, approximately $304.1 million of debt related to Whiting
Clean Energy was included in NiSource's consolidated balance sheet.
NiSource retains certain operational and financial guarantees with respect to
the former PEI subsidiaries and CER. NiSource has retained guarantees of $157.2
million as of March 31, 2004 of debt outstanding related to three of the former
PEI projects. In addition, NiSource has retained several operational guarantees
related to the former PEI subsidiaries. These operational guarantees are related
to environmental compliance, inventory balances, employee relations, and a
residual future purchase guarantee. The fair value of the guarantees was
determined to be $11.1 million and a portion of the net proceeds in the sale
amount were assumed allocated to the guarantees as prescribed by FIN 45.
NiSource has retained liabilities related to the CER forward gas sales
agreements with Mahonia II Limited (Mahonia) for guarantees of the forward sales
and for indemnity agreements with respect to surety bonds backing the forward
sales. The guarantees, surety bonds and associated indemnity agreements remain
in place subsequent to the closing of the CER sale and decline over time as
volumes are delivered in satisfaction of the contractual obligations, ending in
February 2006. NiSource will be indemnified by Triana, and MSCP will fund up to
a maximum of $221.0 million of additional equity to Triana to support Triana's
indemnity, for Triana's gas delivery and related obligations to Mahonia. The
MSCP commitment declines over time in concert with the surety bonds and the
guaranteed obligation to deliver gas to Mahonia.
Immediately after the close of the sale, Triana owned approximately 1.1 Tcf of
proved reserves, and was capitalized with $330.0 million, approximately $200.0
million of which was provided as initial equity by MSCP and the remainder of
which is provided as part of a $500.0 million revolving credit facility.
NiSource believes that the combination of Triana's proved reserves, sufficient
capitalization, and access to the credit facility, combined with the Triana
indemnity and the $221.0 million of further commitments to Triana from MSCP,
adequately offset any losses that may be incurred by NiSource due to Triana's
non-performance under the Mahonia agreements. Accordingly, NiSource has not
recognized a liability related to the retention of the Mahonia guarantees.
16
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
12. PENSION AND OTHER POSTRETIREMENT BENEFITS
NiSource used a measurement date of September 30, 2003 for the calculation of
its obligations under the pension and other postretirement benefit plans.
NiSource expects to make contributions of $16.7 million to its pension plans and
$50.4 million to its postretirement medical and life plans in 2004.
The following table provides the components of the plans' net periodic benefits
cost (benefit) for first quarter of 2004 as compared to the first quarter of
2003:
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
Three months ended March 31, (in millions) 2004 2003 2004 2003
- ------------------------------------------- ------ ------ ------ ------
NET PERIODIC COST
Service cost $ 9.8 $ 8.8 $ 2.2 1.8
Interest cost 31.7 32.8 9.9 9.1
Expected return on assets (39.3) (35.4) (3.5) (2.6)
Amortization of transitional obligation - 1.4 2.9 2.9
Amortization of prior service cost 2.4 2.1 0.2 -
Recognized actuarial (gain) loss 4.5 6.4 0.7 (0.9)
------ ------ ------ ------
NET PERIODIC BENEFITS COST $ 9.1 $ 16.0 $ 12.4 $ 10.4
------ ------ ------ ------
13. BUSINESS SEGMENT INFORMATION
Operating segments are components of an enterprise for which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
During the second quarter 2003, NiSource re-aligned its reportable segments to
reflect the announced sale of its exploration and production operations. As of
the second quarter 2003, NiSource no longer reported an Exploration and
Production Operations segment. In addition, the PEI subsidiaries sold are
reported as discontinued operations. All periods have been adjusted to conform
with the realignment.
NiSource's operations are divided into four primary business segments. The Gas
Distribution Operations segment provides natural gas service and transportation
for residential, commercial and industrial customers in Ohio, Pennsylvania,
Virginia, Kentucky, Maryland, Indiana, Massachusetts, Maine and New Hampshire.
The Gas Transmission and Storage Operations segment offers gas transportation
and storage services for local distribution companies, marketers and industrial
and commercial customers located in northeastern, mid-Atlantic, midwestern and
southern states and the District of Columbia. The Electric Operations segment
provides electric service in 21 counties in the northern part of Indiana and
engages in electric wholesale and wheeling transactions. The Other Operations
segment primarily includes gas marketing, power marketing and trading and
ventures focused on distributed power generation technologies, including
cogeneration facilities, fuel cells and storage systems.
17
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
The following tables provide information about NiSource's business segments.
NiSource uses operating income as its primary measurement for each of the
reporting segments and makes decisions on finance, dividends and taxes at the
corporate level on a consolidated basis. Segment revenues include intersegment
sales to affiliated subsidiaries, which are eliminated in consolidation.
Affiliated sales are recognized on the basis of prevailing market, regulated
prices or at levels provided for under contractual agreements. Operating income
is derived from revenues and expenses directly associated with each segment.
Three Months Ended March 31,(in millions) 2004 2003
- ---------------------------------------- --------- ---------
REVENUES
GAS DISTRIBUTION
Unaffiliated $ 1,858.2 $ 1,950.2
Intersegment 3.1 9.4
--------- ---------
Total 1,861.3 1,959.6
--------- ---------
GAS TRANSMISSION AND STORAGE
Unaffiliated 166.9 162.9
Intersegment 69.9 73.1
--------- ---------
Total 236.8 236.0
--------- ---------
ELECTRIC OPERATIONS
Unaffiliated 255.8 255.9
Intersegment 5.1 6.9
--------- ---------
Total 260.9 262.8
--------- ---------
OTHER
Unaffiliated 183.8 131.1
Intersegment 5.1 13.3
--------- ---------
Total 188.9 144.4
--------- ---------
Adjustments and eliminations (74.7) (78.3)
--------- ---------
CONSOLIDATED REVENUES $ 2,473.2 $ 2,524.5
--------- ---------
OPERATING INCOME (LOSS)
Gas Distribution $ 285.0 $ 314.2
Gas Transmission and Storage 111.4 111.3
Electric 58.8 52.6
Other (18.2) (13.9)
Corporate 5.6 8.1
--------- ---------
CONSOLIDATED OPERATING INCOME $ 442.6 $ 472.3
--------- ---------
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Management's Discussion and Analysis, including statements regarding market
risk sensitive instruments, contains "forward-looking statements," within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Investors and
prospective investors should understand that many factors govern whether any
forward-looking statement contained herein will be or can be realized. Any one
of those factors could cause actual results to differ materially from those
projected. These forward-looking statements include, but are not limited to,
statements concerning NiSource Inc.'s (NiSource) plans, 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,
weather, fluctuations in supply and demand for energy commodities, growth
opportunities for NiSource's businesses, increased competition in deregulated
energy markets, dealings with third parties over whom NiSource has no control,
actual operating experience of acquired assets, 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, 2003.
CONSOLIDATED REVIEW
EXECUTIVE SUMMARY
NiSource generates nearly all of its net revenue through the sale, distribution,
and storage of natural gas and the generation, transmission and distribution of
electricity, which are rate regulated. A significant portion of NiSource's
operations, most notably in the gas distribution, gas transportation and
electric businesses, is subject to seasonal fluctuations in sales. During the
heating season, which is primarily from November through March, and the cooling
season, which is primarily from June through September, net revenues from gas
and electric sales and transportation services are more significant than in
other months.
For the first quarter of 2004, net income was $213.5 million, or $0.81 per
share. This compares to net income of $254.9 million, or $1.00 per share, for
the year-ago period. Warmer weather during the crucial winter heating season, as
compared to the period a year ago, partially offset by lower operating expenses,
was the primary factor affecting NiSource's first-quarter results. NiSource's
ongoing efforts to control costs have held operation and maintenance expenses
flat. Additionally, continued actions to reduce debt have resulted in
significant improvements to NiSource's balance sheet and reduced interest
expense.
The first quarter of 2004 was marked by many key factors that contributed to our
results. Weather in the markets served by NiSource's natural gas utility and
pipeline companies was close to normal during the first quarter of 2004, but 6
percent warmer compared with the year-ago period. In addition, both this quarter
and the first quarter of 2003 reflect lower interruptible transmission service
revenues than those that have been historically realized by NiSource's pipeline
business. Management has evaluated operational and market conditions, and
anticipates that there will be fewer opportunities for interruptible revenue on
an ongoing basis. Also, with reduction in the company's debt, interest expense
for the first quarter of 2004 decreased by $20.3 million, or 16.5 percent,
compared with the year-ago period. NiSource continues to improve its capital
structure, with a total debt to total capitalization ratio of 58 percent,
compared with 60 percent at year-end 2003. The decrease in the total debt to
total capitalization ratio from December 31, 2003 is a result of a seasonal
reduction in short-term debt due to lower working capital requirements.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
NiSource will continue to build value and customer trust by capitalizing on its
super-regional utility and pipeline operations. NiSource will focus on:
continuing to standardize its operations and improve on predictability and
reliability; continuing to deliver the best possible service at the lowest cost;
continuing to develop innovative ways to help our customers manage heating bills
and gas price volatility, with products such as a fixed-price option; continuing
to find ways to control the cost of generating electricity; and pursuing
projects that will bring long-term attractively priced gas supplies to the
market.
RESULTS OF OPERATIONS
THE QUARTER ENDED MARCH 31, 2004
Net Income
NiSource reported net income of $213.5 million, or $0.81 per share, for the
three months ended March 31, 2004, compared to net income of $254.9 million, or
$1.00 per share, for the first quarter 2003. Operating income was $442.6
million, a decrease of $29.7 million from the same period in 2003. NiSource's
net income reflects the impact of discontinued operations that earned $41.4
million in the first quarter of 2003, which included a gain from the sale of the
company's interest in certain natural gas exploration and production assets in
New York state. All per share amounts are basic earnings per share.
Net Revenues
Total consolidated net revenues (gross revenues less cost of sales) for the
three months ended March 31, 2004, were $992.0 million, a $37.6 million decrease
from the same period last year. The decrease in net revenues was primarily a
result of reduced natural gas sales and deliveries due to warmer weather during
the first quarter of 2004 compared with the same period in 2003 amounting to
$17.7 million, reduced revenue from cost trackers of $13.0 million, and lower
non-traditional and incentive program revenue. Both this quarter and the first
quarter of 2003 reflect lower interruptible transmission service revenues than
those that have been historically realized. Management has evaluated operational
and market conditions, and anticipates that there will be fewer opportunities
for interruptible revenue on an ongoing basis. These lower interruptible
revenues are reflected in the current quarter's results.
Expenses
Operating expenses for the first quarter 2004 were $549.4 million, a decrease of
$7.9 million from the 2003 period. Operation and maintenance expenses for the
first quarter 2004 were $3.2 million lower than they were in first quarter of
2003. Taking into consideration cost trackers directly offset in revenues, as
well as reserve changes, that together impacted both 2004 and 2003 operation and
maintenance expenses, quarter-over-quarter, baseline operation and maintenance
expenses were essentially flat. Other taxes decreased $5.1 million, due to
higher gross receipt taxes in 2003 that were offset in revenues for that period.
Other Income (Deductions)
Interest expense, net was $102.7 million for the quarter, a decrease of $20.3
million compared to the first quarter 2003. The decrease was due to a
quarter-over-quarter reduction in short-term borrowings and lower short- and
long-term interest rates.
Income Taxes
Income tax expense for the first quarter 2004 was $125.6 million, a decrease of
$1.8 million compared to the 2003 period, due to lower pre-tax income.
Change in Accounting
The change in accounting in the first quarter of 2003 of $8.8 million,
net-of-tax, resulted from the cumulative effect of adopting the Financial
Accounting Standards Board statement on asset retirement obligations.
20
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
operating requirements. A significant portion of NiSource's operations, most
notably in the gas distribution, gas transportation and electric businesses, is
subject to seasonal fluctuations in cash flow. During the heating season, which
is primarily from November through March, cash receipts from gas sales and
transportation services typically exceed cash requirements. During the summer
months, cash on hand, together with the seasonal increase in cash flows from the
electric business during the summer cooling season and external short-term and
long-term financing, is used to purchase gas to place in storage for heating
season deliveries, perform necessary maintenance of facilities, make capital
improvements in plant and expand service into new areas.
Net cash from continuing operations for the three months ended March 31, 2004
was $772.4 million. Net cash from continuing operations increased $139.6 million
from the comparable period a year-ago, mainly as a result of increased cash flow
from working capital. Cash flow from working capital was $431.1 million,
principally driven by decreased gas inventories, and the timing of the recovery
of gas and fuel costs, partly offset by the timing of the collections of
accounts receivable.
During February 2004, Northern Indiana Public Service Company (Northern Indiana)
redeemed $111.1 million of its medium-term notes and Bay State Gas Company
redeemed $10.0 million of its medium-term notes, with an average interest rate
of 7.5% and 7.6%, respectively. The associated redemption premium of $4.6
million was charged to expense.
Credit Facilities
During March 2004, NiSource obtained a new $500 million 364-day credit facility
and a $750 million 3-year credit facility with a syndicate of banks led by
Barclays Capital. The new facilities replaced an expiring $1.25 billion credit
facility. NiSource had outstanding credit facility advances under its current
3-year facility of $222.6 million at March 31, 2004, at a weighted average
interest rate of 2.02%, and advances under its previous 3-year credit facility
of $685.5 million at December 31, 2003, at a weighted average interest rate of
1.82%. As of March 31, 2004 and December 31, 2003, NiSource had $117.6 million
and $121.4 million of standby letters of credit outstanding, respectively. At
March 31, 2004, $99.4 million of the $117.6 million total outstanding letters of
credit resided within a separate bi-lateral letter of credit arrangement with
Barclays Bank. During February 2004, NiSource obtained a separate 4-year letter
of credit arrangement on a bi-lateral basis with Barclays Bank PLC. As of March
31, 2004, this facility provided standby letters of credit of $99.4 million,
which will amortize in value through December 2008. As of March 31, 2004,
$1,009.2 million of credit was available under the credit facilities. In
addition, NiSource had standby letters of credit of $5.1 million and $4.9
million as of March 31, 2004 and December 31, 2003 issued under another credit
facility.
Sale of Trade Receivables
Columbia Gas of Ohio, Inc. (Columbia of Ohio) is a party to an agreement to
sell, without recourse, all of its trade receivables, with the exception of
certain low-income payment plan receivables, as they originate, to Columbia
Accounts Receivable Corporation (CARC), a wholly-owned subsidiary of Columbia
Energy Group (Columbia). CARC, in turn, is party to an agreement under which it
sells a percentage ownership interest in the accounts receivable to a commercial
paper conduit. As of March 31, 2004, $75.0 million of accounts receivable had
been sold by CARC. Canadian Imperial Bank of Commerce (CIBC), the administrative
agent for the program, has informed Columbia of Ohio that, CIBC and its
commercial paper conduit entities will let all existing receivable
securitization agreements expire in the normal course of business. As such, the
Columbia of Ohio receivables program with CIBC will terminate on May 15, 2004.
Columbia of Ohio expects to execute a new accounts receivable sales agreement
for up to $300 million with a new administrative agent and conduit replacing the
existing agreement with CIBC. Under the new agreement, Columbia of Ohio will be
party to an agreement to sell, without recourse, substantially all of its trade
receivables, with the exception of affiliate and certain low-income payment plan
receivables, as they originate, to Columbia of Ohio Receivables Corporation
(CORC), a wholly-owned subsidiary of Columbia of Ohio. CORC, in turn, will be
party to an agreement under which it sells an undivided percentage ownership
interest in the accounts receivable to a commercial paper conduit.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
On December 30, 2003, Northern Indiana entered into an agreement to sell,
without recourse, all of its trade receivables, as they originate, to NIPSCO
Receivables Corporation (NRC), a wholly-owned subsidiary of Northern Indiana.
NRC, in turn, is party to an agreement in which it sells an undivided percentage
ownership interest in the accounts receivable to a commercial paper conduit. The
conduit can purchase up to $200 million of accounts receivable under the
agreement. The agreements expire in December 2004. As of March 31, 2004, NRC had
sold $200 million of accounts receivable.
MARKET RISK DISCLOSURES
Through its various business activities, NiSource is exposed to both non-trading
and trading risks. The non-trading risks to which NiSource is exposed include
interest rate risk, commodity market risk and credit risk of its subsidiaries.
The risk resulting from trading activities consists primarily of commodity
market and credit risks. NiSource's risk management policy permits the use of
certain financial instruments to manage its market risk, including futures,
forwards, options and swaps.
Various analytical techniques are employed to measure and monitor NiSource's
market and credit risks, including value-at-risk and instrument sensitivity to
market factors (VaR). VaR represents the potential loss or gain for an
instrument or portfolio from changes in market factors, for a specified time
period and at a specified confidence level.
Non-Trading Risks
Commodity price risk resulting from non-trading activities at NiSource's
rate-regulated subsidiaries is limited, since current regulations allow recovery
of prudently incurred purchased power, fuel and gas costs through the
rate-making process. As states experiment with regulatory reform, these
subsidiaries may begin providing services without the benefit of the traditional
rate-making process and may be more exposed to commodity price risk.
NiSource is exposed to interest rate risk as a result of changes in interest
rates on borrowings under revolving credit agreements and lines of credit, which
have interest rates that are indexed to short-term market interest rates, and
refinancing risk in the commercial paper markets. At March 31, 2004, the
combined borrowings outstanding under these facilities totaled $222.6 million.
NiSource is also exposed to interest rate risk due to changes in interest rates
on fixed-to-variable interest rate swaps that hedge the fair value of long-term
debt. The principal amount of such long-term debt subject to interest rate
hedges at March 31, 2004 was $1,163.0 million. Based upon average borrowings
under agreements subject to fluctuations in short-term market interest rates
during the first quarter 2004, an increase in short-term interest rates of 100
basis points (1%) would have increased interest expense by $3.9 million for the
three months ended March 31, 2004.
Due to the nature of the industry, credit risk is a factor in many of NiSource's
business activities. Credit risk arises because of the possibility that a
customer, supplier or counterparty will not be able or willing to fulfill its
obligations on a transaction on or before the settlement date. For derivative
contracts such as interest rate swaps, credit risk arises when counterparties
are obligated to pay NiSource the positive fair value or receivable resulting
from the execution of contract terms. Exposure to credit risk is measured in
terms of both current and potential exposure. Current credit exposure is
generally measured by the notional or principal value of financial instruments
and direct credit substitutes, such as commitments, standby letters of credit
and guarantees. Because many of NiSource's exposures vary with changes in market
prices, NiSource also estimates the potential credit exposure over the remaining
term of transactions through statistical analyses of market prices. In
determining exposure, NiSource considers collateral and master netting
agreements, which are used to reduce individual counterparty credit risk.
Trading Risks
The transactions associated with NiSource's power trading operations give rise
to various risks, including market risks resulting from the potential loss from
adverse changes in the market prices of electricity. The power trading
operations market and trade over-the-counter contracts for the purchase and sale
of electricity. Those contracts within the power trading portfolio that require
settlement by physical delivery are often net settled in accordance with
industry standards.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Fair value represents the amount at which willing parties would transact an
arms-length transaction. Fair value is determined by applying a current price to
the associated contract volume for a commodity. The current price is derived
from one of three sources including actively quoted markets such as the New York
Mercantile Exchange (NYMEX), other external sources including electronic
exchanges and over-the-counter broker-dealer markets, as well as financial
models such as the Black-Scholes option pricing model.
The fair values of the contracts related to NiSource's trading operations, the
activity affecting the changes in the fair values during the first quarter of
2004, the sources of the valuations of the contracts during 2004 and the years
in which the remaining contracts mature are:
(in millions) 2004
- -------------------------------------------------------------------- ------
Fair value of contracts outstanding at the beginning of the period $ (1.5)
Contracts realized or otherwise settled during the period (including
net option premiums received) (2.7)
Fair value of new contracts entered into during the period (3.1)
Other changes in fair values during the period 7.3
------
Fair value of contracts outstanding at the end of the period $ -
------
(in millions) 2004 2005 2006 2007 2008 After
- ----------------------------------- ------ ------ ------ ------ ------ -----
Prices from other external sources (0.9) $ - $ - $ - $ - $ -
Prices based on models/other method 2.7 $ (1.8) $ - $ - $ - $ -
------ ------ ------ ------ ------ -----
Total fair values $ 1.8 $ (1.8) $ - $ - $ - $ -
------ ------ ------ ------ ------ -----
The caption "Prices from other external sources" generally includes contracts
traded on electronic exchanges and over-the-counter contracts whose value is
based on published indices or other publicly available pricing information.
Contracts shown within "Prices based on models/other method" are generally
valued employing the widely used Black-Scholes option-pricing model.
Market Risk Measurement
Market risk refers to the risk that a change in the level of one or more market
prices, rates, indices, volatilities, correlations or other market factors, such
as liquidity, will result in losses for a specified position or portfolio.
NiSource calculates a one-day VaR at a 95% confidence level for the power
trading group and the gas marketing group that utilize a variance/covariance
methodology. Based on the results of the VaR analysis, the daily market exposure
for power trading on an average, high and low basis was $0.3 million, $0.4
million and effectively zero, during the first quarter of 2004, respectively.
The daily market exposure for the gas marketing portfolio on an average, high
and low basis was $0.2 million, $0.3 million and $0.1 million during the first
quarter of 2004, respectively. Prospectively, management has set the VaR limits
at $2.5 million for power trading and $0.5 million for gas marketing. Exceeding
the VaR limits would result in management actions to reduce portfolio risk.
Refer to "Risk Management Activities" in Note 7 of the Notes to Consolidated
Financial Statements for further discussion of NiSource's risk management.
OFF BALANCE SHEET ARRANGEMENTS
NiSource has issued guarantees that support up to approximately $1.4 billion of
commodity-related payments for its current subsidiaries involved in energy
marketing and power trading and to satisfy requirements under forward gas sales
agreements of a former subsidiary. These guarantees were provided to
counterparties in order to facilitate physical and financial transactions
involving natural gas and electricity. To the extent liabilities exist under the
commodity-related contracts subject to these guarantees, such liabilities are
included in the consolidated balance sheets. In addition, NiSource has other
guarantees, purchase commitments, operating leases, lines of credit and letters
of credit outstanding. Refer to Note 7, Risk Management Activities, and Note 11,
Guarantees and Indemnities, of the Notes to Consolidated Financial Statements
for further discussion of NiSource's off balance sheet arrangements.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
In addition, NiSource has sold certain accounts receivable. NiSource's accounts
receivable programs qualify for sale accounting because they meet the conditions
specified in SFAS No. 140 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." In the agreements, all transferred
assets have been isolated from the transferor and put presumptively beyond the
reach of the transferor and its creditors, even in bankruptcy or other
receivership. NiSource does not retain any interest in the receivables under
these programs.
OTHER INFORMATION
Bargaining Unit Contract
On May 31, 2004, the contract with Northern Indiana's bargaining unit employees
expires. Discussions between Northern Indiana and the bargaining unit's union
representatives are ongoing.
RESULTS AND DISCUSSION OF SEGMENT OPERATIONS
Presentation of Segment Information
NiSource's operations are divided into four primary business segments; Gas
Distribution Operations, Gas Transmission and Storage Operations, Electric
Operations, and Other Operations.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS
Three Months Ended March 31, (in millions) 2004 2003
- ------------------------------------------ --------- ---------
NET REVENUES
Sales Revenues $ 1,679.5 $ 1,776.4
Less: Cost of gas sold 1,280.8 1,344.0
--------- ---------
Net Sales Revenues 398.7 432.4
Transportation Revenues 181.8 183.2
--------- ---------
Net Revenues 580.5 615.6
--------- ---------
OPERATING EXPENSES
Operation and maintenance 183.3 183.8
Depreciation and amortization 47.7 47.6
Other taxes 64.5 70.0
--------- ---------
Total Operating Expenses 295.5 301.4
--------- ---------
Operating Income $ 285.0 $ 314.2
========= =========
REVENUES ($ IN MILLIONS)
Residential 1,115.1 1,176.6
Commercial 395.9 417.7
Industrial 80.7 73.4
Transportation 181.8 183.2
Off System Sales 40.8 43.2
Other 47.0 65.5
--------- ---------
Total 1,861.3 1,959.6
--------- ---------
SALES AND TRANSPORTATION (MMDth)
Residential sales 109.8 121.3
Commercial sales 41.4 45.9
Industrial sales 8.1 8.2
Transportation 187.2 182.3
Off System Sales 7.0 2.7
Other - 0.2
--------- ---------
Total 353.5 360.6
--------- ---------
HEATING DEGREE DAYS 2,724 2,885
NORMAL HEATING DEGREE DAYS 2,655 2,635
% COLDER (WARMER) THAN NORMAL 3% 9%
CUSTOMERS
Residential 2,313,364 2,359,175
Commercial 215,178 219,215
Industrial 5,991 6,047
Transportation 784,219 703,686
Other 61 67
--------- ---------
Total 3,318,813 3,288,190
--------- ---------
NiSource's natural gas distribution operations serve approximately 3.3 million
customers in nine states: Ohio, Indiana, Pennsylvania, Massachusetts, Virginia,
Kentucky, Maryland, New Hampshire and Maine. The regulated subsidiaries offer
both traditional bundled services as well as transportation only for customers
that purchase gas from alternative suppliers. The operating results reflect the
temperature-sensitive nature of customer demand with over 72% 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.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS (CONTINUED)
Regulatory Matters
Through October 2004, Columbia of Ohio is operating under a regulatory
stipulation approved by the Public Utilities Commission of Ohio (PUCO). On
October 9, 2003, Columbia of Ohio and other parties filed with the PUCO an
amended stipulation that would govern Columbia of Ohio's regulatory framework
from November 2004 through October 2010. The majority of Columbia of Ohio's
contracts with interstate pipelines expire in October 2004, and the amended
stipulation would permit Columbia of Ohio to renew those contracts for firm
capacity sufficient to meet up to 100% of the design peak day requirements
through October 31, 2005 and up to 95% of the design peak day requirements
through October 31, 2010. Among other things, the amended stipulation would
also: (1) extend Columbia of Ohio's Choice(R) program through October 2010; (2)
provide Columbia of Ohio with an opportunity to generate revenues sufficient to
cover the stranded costs associated with the CHOICE(R) program; and, (3) allow
Columbia of Ohio to record post-in-service-carrying charges on plant placed into
service after October 2004, and to defer the property taxes and depreciation
associated with such plant.
On March 11, 2004, the PUCO issued an order that adopted and modified the
stipulation from Columbia of Ohio and a collaborative of parties. The order
extended Columbia of Ohio's CHOICE(R) program. However, the order limited the
time period of the stipulation through December 31, 2007 and declined to
pre-approve the amount of interstate pipeline firm capacity for which Columbia
of Ohio could contract. In addition, the PUCO made other modifications which
would limit Columbia of Ohio's ability to generate additional revenues
sufficient to cover stranded costs, including declining to mandate that natural
gas marketers participating in the CHOICE(R) program obtain 75% of their
interstate capacity directly from Columbia of Ohio and changing the allocation
of revenues generated through off-systems sales. The order allows Columbia of
Ohio to record post-in-service-carrying charges on plant placed in service after
October 2004 and allows the deferral of property taxes and depreciation
associated with such plant. Although this order will have a minimal impact on
2004, NiSource's initial estimate is that this order, if left unchanged, could
potentially reduce operating income by approximately $20 million annually 2005
through 2007. On April 9, 2004, Columbia of Ohio and other signatory parties to
the stipulation, consistent with standard regulatory process, petitioned the
commission for rehearing on the components, which have been modified. That same
day the Office of the Ohio Consumers' Counsel also filed an application for
rehearing, and argued that the PUCO should not have permitted Columbia of Ohio
to record post-in-service-carrying charges on plant placed into service after
October 2004, and to defer the property taxes and depreciation associated with
such plant. On April 19, 2004, the Office of the Ohio Consumers' Counsel filed a
motion to dismiss the application for rehearing filed by Columbia of Ohio and
other parties.
On May 5, 2004 the PUCO issued an order on rehearing, in which it denied the
Office of Consumer Counsels' motion to dismiss and its application for
rehearing. The PUCO granted, in part, the joint application filed by Columbia of
Ohio and others. In granting the joint application for rehearing, in part, the
PUCO did the following: (1) revised the term of the stipulation so that it runs
through October 31, 2008; (2) restored the marketers' responsibility for 75% of
CHOICE(R) costs; and (3) revised the mechanism applicable to Columbia of Ohio's
sharing of Off-System Sales and Capacity Release revenue. Under the revised
Off-System Sales/Capacity Release revenue sharing mechanism, Columbia of Ohio
must now begin sharing such revenue when the annual revenue exceeds $25 million,
instead of $35 million as originally proposed by Columbia of Ohio and other
collaborative parties. NiSource and the other collaborative parties have until
May 25, 2004 to either accept the PUCO modifications, or to reject them and
terminate the stipulation. If accepted, this order would reduce the negative
impact estimated above, however, management is still evaluating the order.
On December 17, 2003, the PUCO approved an application by Columbia of Ohio and
other Ohio local distribution companies (LDCs) to establish a tracking mechanism
that will provide for recovery of current bad debt expense and for the recovery
over a five-year period of previously deferred uncollected accounts receivable.
The approval of the tracker will allow for the recovery of previously
uncollected accounts receivable for Columbia of Ohio. As of March 31, 2004,
Columbia of Ohio has $45.2 million of uncollected accounts receivable pending
future recovery.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS (CONTINUED)
On August 11, 1999, the Indiana Utility Regulatory Commission (IURC) approved a
flexible gas cost adjustment mechanism for Northern Indiana. Under the approved
procedure, the demand component of the adjustment factor will be determined,
after hearings and IURC approval, and made effective on November 1 of each year.
The demand component will remain in effect for one year until a new demand
component is approved by the IURC. The commodity component of the adjustment
factor will be determined by monthly filings, which will become effective on the
first day of each calendar month, subject to refund. The monthly filings do not
require IURC approval but will be reviewed by the IURC during the annual hearing
that will take place regarding the demand component filing. Northern Indiana's
gas cost adjustment factor also includes a gas cost incentive mechanism which
allows the sharing of any cost savings or cost increases with customers based on
a comparison of actual gas supply portfolio cost to a market-based benchmark
price. Northern Indiana made its annual filing for 2002 on August 29, 2002
(GCA5). The IURC approved implementation of interim rates, subject to refund,
effective November 1, 2002. Testimony was filed indicating that some gas costs,
for the month of March 2003, should not be recovered. On September 10, 2003, the
IURC issued an order adjusting the recovery of costs in March 2003 and reducing
recovery by $3.8 million. On October 8, 2003, the IURC approved the demand
component of the adjustment factor. Northern Indiana made its annual filing for
2003 on August 26, 2003 (GCA6). The IURC approved implementation of these
interim rates subject to refund, effective November 1, 2003. The parties in the
cases have raised concerns regarding gas cost recovery similar to those
addressed in March 2003. While Northern Indiana pursues settlement of the issues
an estimated refund liability was recognized in the first quarter of 2004.
All of the Columbia distribution companies presently hold long-term contracts
for pipeline and storage services with its affiliate pipelines, Columbia Gas
Transmission Corporation and Columbia Gulf Transmission Company, a majority of
those contracts expire on October 31, 2004. The Columbia distribution companies
are comprised of Columbia Gas of Kentucky, Inc., Columbia Gas of Maryland, Inc.,
Columbia Gas of Ohio, Inc., Columbia Gas of Pennsylvania, Inc., and Columbia Gas
of Virginia, Inc. Each distribution company continues to discuss its plan to
renew pipeline and storage contracts with industry stakeholders to ensure the
continued ability to serve the requirements of firm customers in a tightening
capacity market. All contract negotiations between the distribution companies
and Columbia Gas Transmission Corporation and Columbia Gulf Transmission Company
are expected to be resolved prior to the contracts expiring. In addition, these
contracts will be subject to the approval of the respective state regulatory
agencies. On April 29, 2004, the Pennsylvania Public Utility Commission approved
a request by Columbia of Pennsylvania, Inc. to renew its pipeline and storage
contracts with Columbia Gas Transmission Corporation and Columbia Gulf
Transmission Company. Pursuant to this approval, Columbia of Pennsylvania's
storage contracts and approximately half of its pipeline contracts will be
renewed for terms of fifteen years, while the remaining pipeline contracts will
be renewed on a tiered basis for terms ranging from five or ten years. Columbia
of Pennsylvania, Inc. will also acquire additional capacity to meet customer
requirements on peak days.
Environmental Matters
In January of 2004 Northern Indiana and Kokomo Gas and Fuel Company signed a
multi-site Voluntary Remediation Program Order addressing 14 manufactured gas
plant sites with the Indiana Department of Environmental Management. Northern
Indiana Fuel and Light Company, Inc. expects to enter into a similar agreement
for an additional site. Previously Northern Indiana, together with other
potentially responsible parties, had entered into similar agreements with the
Indiana Department of Environmental Management for 11 additional sites. Those
agreements require Northern Indiana to investigate, and to the extent necessary,
clean up the sites.
Weather
In general, NiSource calculates the weather related revenue variance based on
changing customer demand driven by weather variance from normal heating
degree-days. Normal is evaluated using heating degree days across the NiSource
distribution region. While the temperature base for measuring heating
degree-days (i.e. the estimated average daily temperature at which heating load
begins) varies slightly across the region, the NiSource composite measurement is
based on 62 degrees.
Weather in the Gas Distribution Operation's territories for the first quarter of
2004 was 6% warmer than the comparable quarter in 2003. However, the first
quarter of 2004 was still 3% colder than the normal average.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS (CONTINUED)
Throughput
Total volumes sold and transported of 353.5 million dekatherms (MMDth) for the
first quarter of 2004 decreased 7.1 MMDth from the same period last year
primarily due to the warmer weather in the first quarter of 2004 compared to the
first quarter of 2003.
Net Revenues
Net revenues for the three months ended March 31, 2004 were $580.5 million, a
decrease of $35.1 million from the same period in 2003. The decrease in net
revenues was primarily a result of reduced natural gas sales and deliveries due
to warmer weather during the first quarter of 2004 compared with the same period
in 2003 amounting to $16.6 million, reduced revenue from cost trackers of $11.4
million, generally offset in operating expenses and lower non-traditional and
incentive program revenue, slightly offset by an adjustment for gas costs
associated with certain customers in the 2003 period.
Operating Income
For the first quarter of 2004, Gas Distribution Operations reported operating
income of $285.0 million, a decrease of $29.2 million from the same period in
2003. The decrease was mainly attributable to lower net revenue of $35.1 million
discussed above.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS TRANSMISSION AND STORAGE OPERATIONS
Three Months Ended March 31, (in millions) 2004 2003
- ------------------------------------------ ------- -------
OPERATING REVENUES
Transportation revenues $ 188.3 $ 187.0
Storage revenues 45.2 44.7
Other revenues 3.3 4.3
------- -------
Total Operating Revenues 236.8 236.0
Less: Cost of gas sold 3.9 4.4
------- -------
Net Revenues 232.9 231.6
------- -------
OPERATING EXPENSES
Operation and maintenance 78.3 77.9
Depreciation and amortization 28.3 27.9
Other taxes 14.9 14.5
------- -------
Total Operating Expenses 121.5 120.3
------- -------
Operating Income $ 111.4 $ 111.3
======= =======
THROUGHPUT (MMDth)
Columbia Transmission
Market Area 406.9 434.8
Columbia Gulf
Mainline 160.0 180.0
Short-haul 27.0 29.3
Columbia Pipeline Deep Water 4.4 1.5
Crossroads Gas Pipeline 10.7 7.7
Granite State Pipeline 13.9 14.4
Intrasegment eliminations (154.2) (168.5)
------- -------
Total 468.7 499.2
------- -------
NiSource's Gas Transmission and Storage Operations segment consists of the
operations of Columbia Gas Transmission Corporation (Columbia Transmission),
Columbia Gulf Transmission Company (Columbia Gulf), Columbia Deep Water Service
Company, Crossroads Pipeline Company and Granite State Gas Transmission, Inc. In
total NiSource owns a pipeline network of approximately 16,000 miles extending
from offshore in the Gulf of Mexico to New York and the eastern seaboard. The
pipeline network serves customers in nineteen northeastern, mid-Atlantic,
midwestern and southern states, as well as the District of Columbia. In
addition, the NiSource gas transmission and storage operations segment operates
one of the nation's largest underground natural gas storage systems.
Pipeline Firm Service Contracts
The services of Columbia Transmission and Columbia Gulf consist of open access
transportation services, and open access storage services in the case of
Columbia Transmission. These services are provided primarily to LDCs. The
majority of the firm contracts currently in effect with Columbia Gas and
Columbia Gulf expire in late 2004. Customer decisions on capacity
re-subscription are affected by many factors, including decisions by state
regulators on the treatment of pipeline capacity agreements in the context of
LDC unbundling proceedings. Several LDCs have already committed to extending
their long-term capacity commitments and the companies are in discussions with a
number of other firm capacity holders regarding future capacity commitments.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)
Regulatory Matters
On February 28, 2003, Columbia Transmission filed with Federal Energy Regulatory
Commission (FERC) certain scheduled annual rate adjustments, designated as the
Transportation Costs Rate Adjustment (TCRA), Retainage Adjustment Mechanism
(RAM), and Electric Power Cost Adjustment (EPCA). These filings sought recovery,
during the period April 1, 2003 through March 31, 2004, of certain expenses
relating to transportation costs incurred by Columbia Transmission on
interconnecting pipelines and electric costs incurred in the operation of
certain compressors (TCRA and EPCA, respectively), as well as quantities of gas
required by Columbia Transmission to operate its pipeline system (RAM). The
recovery of each of these costs occurs through a "tracker" which ensures full
recovery of actual expenses. Each of the three filings was conditionally
accepted by FERC subject to refund and the filing of additional data by
Columbia. On October 1, 2003, FERC issued an order accepting Columbia
Transmission's TCRA filing, and accepting the full recovery of upstream
transportation costs. On February 11, 2004, FERC issued an order regarding the
annual EPCA filing, which upheld Columbia Transmission's ability to fully
recover its electric costs, but required Columbia Transmission to implement a
separate EPCA rate to recover electric power costs incurred by a newly expanded
electric-powered compressor station from specific customers. The order also
limits Columbia Transmission's ability to prospectively discount its EPCA rates.
Management does not believe this order will have a material financial impact. On
April 14, 2004 the FERC issued an order accepting Columbia Transmission's RAM
filing and approving the full recovery of gas required in system operations.
FERC will permit parties to pursue certain issues raised in the 2003 filing in
connection with consideration of Columbia's 2004 RAM filing, which became
effective April 1, 2004, and is currently pending.
Environmental Matters
On April 1, 2004, U.S. Environmental Protection Agency (EPA) issued its final
Phase II nitrogen oxide (NOx) regulation establishing NOx budgets for states.
States will be developing State Implementation Plans (SIP) which may impact
compressor stations owned by Columbia Transmission and Columbia Gulf. NiSource
will continue to monitor the development of SIPs, but anticipates that the cost
will not be material.
The EPA has issued maximum achievable control technology (MACT) standards for
hazardous air pollutants for stationary combustion turbines and reciprocating
internal combustion engines. The final standards for turbines do not impose any
compliance costs upon NiSource. The MACT for internal reciprocating internal
combustion engines will only impact one Columbia Transmission facility and the
estimated cost of compliance is expected to be immaterial.
Throughput
Throughput for the Gas Transmission and Storage Operations segment totaled 468.7
MMDth for the first quarter 2004, compared to 499.2 MMDth for the same period in
2003. The decrease of 30.5 MMDth reflected warmer weather in the first quarter
of 2004 than for the comparable period in 2003, a continued decline of offshore
natural gas production, and other non-weather factors.
Net Revenues
Net revenues were $232.9 million for the first quarter 2004, a slight increase
of $1.3 million from the same period in 2003. The 2003 period was unfavorably
impacted by higher costs to meet customer demand during a period of sustained
cold weather in the Northeast market areas during the first quarter of 2003.
Both this quarter and the first quarter of 2003 reflect lower interruptible
transmission service revenues than those that have been historically realized.
Management has evaluated operational and market conditions and anticipates that
there will be fewer opportunities for interruptible revenue on an ongoing basis.
These lower interruptible revenues are reflected in the current quarter's
results.
Operating Income
Operating income was $111.4 million for the first quarter 2004 compared to
$111.3 million in the first quarter 2003. Operating income was affected by the
change in net revenues mentioned above. In addition, operation and maintenance
expenses were slightly higher on a quarter-over-quarter basis, after taking into
consideration reserve changes, which increased 2003 operation and maintenance
expenses by $2.8 million.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS
Three Months Ended March 31, (in millions) 2004 2003
- ----------------------------------------- ------- -------
NET REVENUES
Sales revenues $ 260.9 $ 262.8
Less: Cost of sales 81.4 93.3
------- -------
Net Revenues 179.5 169.5
------- -------
OPERATING EXPENSES
Operation and maintenance 60.3 57.5
Depreciation and amortization 44.1 43.7
Other taxes 16.3 15.7
------- -------
Total Operating Expenses 120.7 116.9
------- -------
Operating Income $ 58.8 $ 52.6
======= =======
REVENUES ($ IN MILLIONS)
Residential 71.2 72.2
Commercial 70.4 66.7
Industrial 101.3 97.9
Wholesale 11.4 19.6
Other 6.6 6.4
------- -------
Total 260.9 262.8
------- -------
SALES (GIGAWATT HOURS)
Residential 754.5 789.6
Commercial 860.2 851.5
Industrial 2,338.1 2,273.5
Wholesale 269.9 541.9
Other 32.4 33.7
------- -------
Total 4,255.1 4,490.2
------- -------
ELECTRIC CUSTOMERS
Residential 388,520 384,991
Commercial 49,394 48,423
Industrial 2,531 2,570
Wholesale 24 26
Other 787 798
------- -------
Total 441,256 436,808
------- -------
NiSource generates and distributes electricity, through its subsidiary Northern
Indiana, to approximately 441 thousand customers in 21 counties in the northern
part of Indiana. The operating results reflect the temperature-sensitive nature
of customer demand with annual sales affected by temperatures in the northern
part of Indiana. As a result, segment operating income is generally higher in
the second and third quarters, reflecting cooling demand during the summer
season.
Market Conditions
The regulatory frameworks applicable to Electric Operations continue to be
affected by fundamental changes that will impact Electric Operations' structure
and profitability. Notwithstanding those changes, competition within the
industry will create opportunities to compete for new customers and revenues.
Management has taken steps to improve operating efficiencies in this changing
environment and improve the transmission interconnections with neighboring
electric utilities.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)
Regulatory Matters
During 2002, Northern Indiana settled matters related to an electric rate
review. On September 23, 2002, the IURC issued an order adopting most aspects of
the settlement. The order approving the settlement provides that electric
customers of Northern Indiana will receive bill credits of approximately $55.1
million each year, for a cumulative total of $225 million, for the minimum
49-month period, beginning on July 1, 2002. The order also provides that 60% of
any future earnings beyond a specified cap will be retained by Northern Indiana.
Credits amounting to $13.1 million and $13.5 million were recognized for
electric customers for the first quarters of 2004 and 2003, respectively. The
order adopting the settlement was appealed to the Indiana Court of Appeals by
both the Citizens Action Coalition of Indiana and fourteen residential
customers. On October 14, 2003, the Appeals Court upheld the IURC's approval of
the settlement. The Citizens Action Coalition of Indiana and the fourteen
residential customers filed a petition for transfer to the Supreme Court of
Indiana; however, on March 19, 2004, the Supreme Court of Indiana denied
transfer. As a result of this denial of transfer, the settlement is no longer
subject to judicial review.
On June 20, 2002, Northern Indiana, Ameren Corporation and First Energy
Corporation established terms for joining the Midwest Independent System
Operator (MISO) through participation in an independent transmission company
(ITC). Northern Indiana transferred functional control of its electric
transmission assets to the ITC and MISO on October 1, 2003. As part of Northern
Indiana's use of MISO's transmission service, Northern Indiana will incur new
categories of transmission charges based upon MISO's FERC-approved tariff. One
of the new categories of charges, Schedule 10, relates to the payment of
administrative charges to MISO for its continuing management and operations of
the transmission system. Northern Indiana filed a petition on September 30,
2003, with the IURC seeking approval to establish accounting treatment for the
deferral of the Schedule 10 charges from MISO. An IURC hearing was held on March
15, 2004, with final resolution anticipated during the second quarter 2004.
The MISO has initiated the Midwest Market Initiative (MMI), which will develop
the structures and processes to be used to implement an electricity market for
the MISO region. This MMI proposes non-discriminatory transmission service,
reliable grid operation, and the purchase and sale of electric energy in a
competitive, efficient and non-discriminatory manner. MISO filed detailed tariff
information, with a planned initial operation date of March 31, 2004. However,
in October 2003, MISO petitioned FERC to withdraw this tariff filing. FERC
approved the withdrawal and has provided guidance to MISO as to how it should
proceed in the future. On March 31, 2004, MISO submitted a revised energy
markets tariff to the FERC for approval. As part of the revised filings, MISO
proposes an initial operation date of December 1, 2004. Northern Indiana and
Energy USA-TPC (TPC) are actively pursuing roles in the MMI. At the current
time, management believes that the MMI will change the manner in which Northern
Indiana and TPC conducts their electric business; however, at this time
management cannot determine the impact the MMI will have on Northern Indiana or
TPC.
Northern Indiana has been recovering the costs of electric power purchased for
sale to its customers through the fuel adjustment clause (FAC). The FAC provides
for costs to be collected if they are below a negotiated cap. If costs exceed
this cap, Northern Indiana must demonstrate that the costs were prudently
incurred to achieve approval for recovery. This negotiated cap agreement is
subject to continuing negotiations. A group of industrial customers challenged
the manner in which Northern Indiana applied costs associated with a specific
interruptible sales tariff. An estimated refund liability was recorded in the
first quarter of 2003. A settlement was reached with the customers and Northern
Indiana recorded the full costs of the settlement. As a result of the
settlement, the industrial customers challenge was withdrawn and dismissed in
January 2004. In addition, as a result of the settlement, Northern Indiana has
sought and received approval by the IURC to reduce the charges under the
interruptible sales tariff. This reduction will remain in effect until the Dean
H. Mitchell Generating Station (Mitchell Station) has been returned to service.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)
Currently, Northern Indiana is reviewing options to meet the electric needs of
its customers. This review includes an assessment of Northern Indiana's oldest
generating units and various options regarding the return to service of the
Mitchell Station, constructed in the early 1950's, in the second half of 2004.
Northern Indiana has requested proposals for outside companies to provide power
under varying terms and conditions. These proposals are being evaluated. In
February 2004, the City of Gary announced an interest to acquire the land on
which the Mitchell Station is located for economic development, including a
proposal to increase the length of the runways at the Gary International
Airport. Northern Indiana had an initial discussion with the City of Gary
regarding the proposal to acquire the land. On May 7, 2004, the City of Gary
filed a petition with the IURC seeking valuation of the Mitchell Station and
determination of the terms and conditions under which the City of Gary would
acquire the Mitchell Station. Northern Indiana will participate in the IURC
proceedings arising from that filing.
In January 2002, Northern Indiana filed for approval to implement an
environmental cost tracker (ECT). The ECT was approved by the IURC on November
26, 2002. Under the ECT Northern Indiana is permitted to recover (1) allowance
for funds used during construction and a return on the capital investment
expended by Northern Indiana to implement Indiana Department of Environmental
Management's nitrogen oxide State Implementation Plan through an Environmental
Cost Recovery Mechanism (ECRM) and (2) related operation and maintenance and
depreciation expenses once the environmental facilities become operational
through an Environmental Expense Recovery Mechanism (EERM). The IURC order was
appealed to the Indiana Court of Appeals by the Citizens Action Coalition of
Indiana, where it was upheld by the Court on March 9, 2004. The Citizens Action
Coalition of Indiana failed to take any action to continue the appeal of this
case and the Court's decision is now final. Under the Commission's November 26,
2002 order, Northern Indiana is permitted to submit filings on a semi-annual
basis for the ECRM and on an annual basis for the EERM. Northern Indiana made
its initial filing of the ECRM, ECR-1, in February 2003 for capital expenditures
of $58.4 million. On April 30, 2003, the IURC issued an order approving the ECRM
filing, providing for a return on the capital investment through increased rates
beginning with the May 2003 customer bills. Through March 31, 2004 the ECRM
revenues amounted to $8.2 million. On August 1, 2003, Northern Indiana filed
ECR-2 for capital expenditures through June 30, 2003, of $120.0 million. This
petition was approved by the IURC on October 1, 2003. The initial filing of the
EERM was filed with the most recent semi-annual filing of the ECT in February
2004, which included a filing of the ECR-3 for capital expenditures through
December 31, 2003, of $194.1 million, and an EERM amount of $1.9 million. On
March 24, 2004, the IURC approved Northern Indiana's February 2004 filing for
ECR-3 and the initial filing of the EERM. Over the timeframe required to meet
the environmental standards, Northern Indiana anticipates a total capital
investment amounting to approximately $274.2 million. On February 4, 2004, the
IURC approved Northern Indiana's latest compliance plan with the estimate of
$274.2 million.
Environmental Matters
Northern Indiana is a potentially responsible party under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) and similar State
laws at two waste disposal sites and shares in the cost of their cleanup with
other potentially responsible parties. At one site, investigations are ongoing
and final costs of clean up have not yet been determined. At the second site,
Northern Indiana has entered into EPA Administrative Orders on Consent to
perform an interim action that includes providing a municipal water supply
system for approximately 275 homes. Northern Indiana has also agreed to conduct
a Remedial Investigation and Feasibility Study in the vicinity of the third
party, state-permitted landfill where Northern Indiana contracted for fly ash
disposal.
Sales
Electric sales for the first quarter 2004 were 4,255.1 gwh, a decrease of 235.1
gwh compared to the 2003 period, as a result of decreased wholesale transaction
sales and a slight decrease in residential sales offset in part by an
improvement in industrial and commercial sales. Commercial sales improved due to
an increase in the number of customers and higher usage, while industrial sales
increased due to increased demand from the steel industry.
Net Revenues
In first quarter 2004, electric net revenues of $179.5 million increased by
$10.0 million from the comparable 2003 period. The increase was primarily a
result of customer settlement obligations that reduced net revenues in the 2003
period.
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)
Operating Income
Operating income for the first quarter 2004 was $58.8 million, an increase of
$6.2 million from the same period in 2003. The increase was primarily due to the
changes in net revenue mentioned above partially offset by a $3.3 million
expense in operations, representing Electric Operations' portion of the
redemption premium from the early extinguishment of certain medium-term notes at
Northern Indiana.
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
OTHER OPERATIONS
Three Months Ended March 31, (in millions) 2004 2003
- ----------------------------------------------- ------- -------
NET REVENUES
Products and services revenue $ 188.9 $ 144.4
Less: Cost of products purchased 188.7 137.9
------- -------
Net Revenues 0.2 6.5
------- -------
OPERATING EXPENSES
Operation and maintenance 13.0 14.5
Depreciation and amortization 2.9 2.9
Loss (gain) on sale or impairment of assets 0.7 1.1
Other taxes 1.8 1.9
------- -------
Total Operating Expenses 18.4 20.4
------- -------
Operating Income (Loss) $ (18.2) $ (13.9)
======= =======
The Other Operations segment participates in energy-related services including
gas marketing, power trading and ventures focused on distributed power
generation technologies, fuel cells and storage systems. PEI Holdings, Inc.
(PEI) operates the Whiting Clean Energy, Inc. (Whiting Clean Energy) project,
which is a 525mw cogeneration facility that uses natural gas to produce
electricity for sale in the wholesale markets and also provides steam for
industrial use. Additionally, the Other Operations segment is involved in real
estate and other businesses.
PEI Holdings, Inc.
WHITING CLEAN ENERGY. PEI's Whiting Clean Energy project at BP's Whiting,
Indiana refinery was placed in service in 2002. Initially, the facility was not
able to deliver steam to BP to the extent originally contemplated without plant
modifications. Whiting Clean Energy has commenced an arbitration proceeding to
seek recovery of damages from the engineering, procurement and construction
contractor. Whiting Clean Energy is also pursuing recovery from the insurance
provider for construction delays and necessary plant modifications. The
contractor has asserted that it fully performed under its contract and is
demanding payment of the full contract price plus additional amounts for
remediation.
PEI estimates that the facility will operate at a loss in the near term based on
the current market view of forward pricing for gas and electricity. For 2003,
the after-tax loss was approximately $30.0 million and the expected 2004
after-tax loss is expected to be similar to 2003. During the first quarter of
2004, Whiting Clean Energy continued to experience losses due to the market for
wholesale power and the contract requirements to run the plant at a level to
produce steam required by the BP refinery in Whiting, Indiana. These contract
requirements currently are being renegotiated. The profitability of the project
in future periods will be dependent on, among other things, prevailing prices in
the energy markets and regional load dispatch patterns. Because of the expected
losses from this facility and decreases in estimated forward pricing for
electricity versus changes in gas prices, an impairment study was performed in
the first quarter of 2003 on this facility in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". The study
indicated that, at that time, no impairment was necessary.
However, the study includes many estimates and assumptions for the 40-year
estimated useful life of the facility. Changes in these estimates and
assumptions, such as forward prices for electricity and gas, volatility in the
market, etc., could result in a situation where total undiscounted net revenues
are less than the carrying value of the facility, which would result in a
write-down that could be significant.
Net Revenues
Net revenues of $0.2 million for the first quarter of 2004 decreased by $6.3
million from the first quarter of 2003, due to reduced net revenue from the
Whiting Clean Energy facility of $3.8 million and lower power trading revenues
as a result of reduced volatility in the power markets.
35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
OTHER OPERATIONS
Operating Income
The Other segment reported an operating loss of $18.2 million for the first
quarter of 2004, versus an operating loss of $13.9 million for the comparable
period 2003. The increase in the operating loss was comprised primarily of
increased losses incurred with the operation of Whiting Clean Energy.
36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NISOURCE INC.
For a discussion regarding quantitative and qualitative disclosures about market
risk see Management's Discussion and Analysis of Financial Condition and Results
of Operations under "Market Risk Sensitive Instruments and Positions."
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
NiSource's chief executive officer and its chief financial officer, after
evaluating the effectiveness of NiSource's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), have concluded based
on the evaluation required by paragraph (b) of Exchange Act Rules 13a-15 and
15d-15 that, as of the end of the period covered by this report. NiSource's
disclosure controls and procedures were adequate and effective to ensure that
material information relating to NiSource and its consolidated subsidiaries
would be made known to them by others within those entities.
Changes in Internal Controls
There was no change in NiSource's internal control over financial reporting
during the fiscal quarter covered by this report that has materially affected,
or is reasonably likely to materially affect, NiSource's internal control over
financial reporting.
37
PART II
ITEM 1. LEGAL PROCEEDINGS
NISOURCE INC.
1. VIRGINIA NATURAL GAS, INC. V. COLUMBIA GAS TRANSMISSION CORP., FEDERAL ENERGY
REGULATORY COMMISSION (FERC)
On January 13, 2004, Virginia Natural Gas, Inc. (VNG) filed with FERC a
"Complaint Seeking Compliance with the Natural Gas Act and with Regulations and
Certificate Orders of the Federal Energy Regulatory Commission and Seeking
Remedies" in Docket No. RP04-139. VNG alleges various violations during the
2002-2003 winter by Columbia Transmission of its firm service obligations to
VNG. VNG seeks monetary damages and remedies (exceeding $37 million), and also
seeks certain prospective remedies. Columbia Transmission filed its response to
the complaint on February 2, 2004, demonstrating the authority under which it
had acted and the limitations on FERC's authority to address the issues and
damage claims raised by VNG. On February 17, 2004, VNG filed an answer and
motion for summary disposition. Columbia filed its response to that most recent
VNG pleading on March 3, 2004. This matter remains pending before FERC.
ITEM 2. CHANGES IN SECURITES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
38
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NISOURCE INC.
(a) Exhibits
(10.1) 3-Year Revolving Credit Agreement, dated as of March 18, 2004
among NiSource Finance Corp., as Borrower, NiSource Inc., as
Guarantor, the Lead Arrangers and Lenders party thereto, as
Lenders, Credit Suisse First Boston, as Syndication Agent,
Bank One, National Association (Main Office, Chicago), The
Bank of Tokyo-Mitsubishi, Ltd., (Chicago Branch) and Citicorp
USA, Inc. as Co-Documentation Agents, Barclays Bank PLC, as
Administrative Agent and LC Bank, Barclays Capital and Credit
Suisse First Boston, as Lead Arrangers and Barclays Capital,
as Sole Book Runner.
(10.2) 364-Day Revolving Credit Agreement, dated as of March 18, 2004
among NiSource Finance Corp., as Borrower, NiSource Inc., as
Guarantor, the Lead Arrangers and Lenders party thereto, as
Lenders, Credit Suisse First Boston, as Syndication Agent,
Bank One, National Association (Main Office, Chicago), The
Bank of Tokyo-Mitsubishi, Ltd., (Chicago Branch) and Citicorp
USA, Inc. as Co-Documentation Agents, Barclays Bank PLC, as
Administrative Agent and LC Bank, Barclays Capital and Credit
Suisse First Boston, as Lead Arrangers and Barclays Capital,
as Sole Book Runner.
(10.3) 4-Year Letter of Credit Reimbursement Agreement, dated as of
February 13, 2004 among NiSource Finance Corp., as Borrower,
NiSource Inc., as Guarantor, the Lead Arrangers and Lenders
party thereto, as Lenders, Barclays Bank PLC, as
Administrative Agent and LC Bank, Barclays Capital, as Lead
Arrangers and Barclays Capital, as Sole Book Runner.
(10.4) Amendment No. 1 to 4-Year Letter of Credit Reimbursement
Agreement, dated as of March 18, 2004, among NiSource Finance
Corp., as Borrower, NiSource Inc., as Guarantor, the Lead
Arrangers and Lenders party thereto, as Lenders, Barclays Bank
PLC, as Administrative Agent and LC Bank, Barclays Capital, as
Lead Arrangers and Barclays Capital, as Sole Book Runner.
(31.1) Certification of Gary L. Neale, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).
(31.2) Certification of Michael W. O'Donnell, Chief Financial
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (filed herewith).
(32.1) Certification of Gary L. Neale, Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith).
(32.2) Certification of Michael W. O'Donnell, Chief Financial
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith).
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, NiSource hereby agrees to
furnish the U.S. Securities and Exchange Commission, upon request, any
instrument defining the rights of holders of long-term debt of NiSource not
filed as an exhibit herein. No such instrument authorizes long-term debt
securities in excess of 10% of the total assets of NiSource and its subsidiaries
on a consolidated basis.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the first quarter of
2004:
Financial
Item Reported Statements Included Date of Event Date Filed
- ------------- ------------------- ------------- ----------
7, 12 Y 1/30/2004 1/30/2004
9 N 2/10/2004 2/10/2004
- ------------- ------------------- ------------- ----------
39
SIGNATURE
NISOURCE INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NiSource Inc.
-----------------------
(Registrant)
Date: May 7, 2004 By: /s/ Jeffrey W. Grossman
-----------------------------------
Jeffrey W. Grossman
Vice President and Controller
(Principal Accounting Officer
and Duly Authorized Officer)
40