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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 September 30, 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)
(877) 647-5990
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(Registrant's telephone number, including area code)
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 Rule 12b-2 of the Exchange Act).
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:
263,587,751 shares outstanding at October 31, 2004.
NISOURCE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Consolidated Income (Loss)................................ 3
Consolidated Balance Sheets............................................. 4
Statements of Consolidated Cash Flows................................... 6
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 .......................................... 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............. 44
Item 4. Controls and Procedures................................................. 44
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ...................................................... 45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............. 46
Item 3. Defaults Upon Senior Securities......................................... 46
Item 4. Submission of Matters to a Vote of Security Holders..................... 47
Item 5. Other Information....................................................... 47
Item 6. Exhibits ............................................................... 48
Signature........................................................................ 49
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NISOURCE INC.
STATEMENTS OF CONSOLIDATED INCOME (LOSS) (UNAUDITED)
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
(in millions, except per share amounts) 2004 2003 2004 2003
- ------------------------------------------------------------- ------- -------- -------- ---------
NET REVENUES
Gas Distribution $ 325.8 $ 274.0 $2,589.1 $ 2,563.4
Gas Transmission and Storage 199.8 189.2 753.1 753.5
Electric 305.0 328.2 841.1 854.6
Other 149.2 106.9 514.7 392.5
------- -------- -------- ---------
Gross Revenues 979.8 898.3 4,698.0 4,564.0
Cost of Sales 389.4 321.0 2,499.5 2,315.3
------- -------- -------- ---------
Total Net Revenues 590.4 577.3 2,198.5 2,248.7
------- -------- -------- ---------
OPERATING EXPENSES
Operation and maintenance 283.5 273.0 891.5 874.9
Depreciation and amortization 125.9 123.1 378.9 372.6
Loss (Gain) on sale of assets (0.1) (16.2) 0.9 (14.9)
Other taxes 53.3 48.5 199.3 219.1
------- -------- -------- ---------
Total Operating Expenses 462.6 428.4 1,470.6 1,451.7
------- -------- -------- ---------
OPERATING INCOME 127.8 148.9 727.9 797.0
------- -------- -------- ---------
OTHER INCOME (DEDUCTIONS)
Interest expense, net (100.0) (113.6) (302.3) (351.5)
Minority interests - - - (2.5)
Dividend requirements on preferred stock of subsidiaries (1.1) (1.1) (3.3) (3.4)
Other, net 1.5 2.4 5.4 12.4
------- -------- -------- ---------
Total Other Income (Deductions) (99.6) (112.3) (300.2) (345.0)
------- -------- -------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 28.2 36.6 427.7 452.0
INCOME TAXES 6.7 13.1 154.4 166.9
------- -------- -------- ---------
INCOME FROM CONTINUING OPERATIONS 21.5 23.5 273.3 285.1
------- -------- -------- ---------
Income from Discontinued Operations - net of taxes 8.9 6.1 5.2 1.3
Loss on Disposition of Discontinued Operations - net of taxes (1.6) (14.2) (1.6) (332.2)
Change in Accounting - net of taxes - - - (8.8)
------- -------- -------- ---------
NET INCOME (LOSS) $ 28.8 $ 15.4 $ 276.9 $ (54.6)
======= ======== ======== =========
BASIC EARNINGS (LOSS) PER SHARE ($)
Continuing operations 0.08 0.09 1.04 1.10
Discontinued operations 0.03 (0.03) 0.02 (1.28)
Change in accounting - - - (0.03)
------- -------- -------- ---------
BASIC EARNINGS (LOSS) PER SHARE 0.11 0.06 1.06 (0.21)
------- -------- -------- ---------
DILUTED EARNINGS (LOSS) PER SHARE ($)
Continuing operations 0.08 0.09 1.03 1.09
Discontinued operations 0.03 (0.03) 0.02 (1.27)
Change in accounting - - - (0.03)
------- -------- -------- ---------
DILUTED EARNINGS (LOSS) PER SHARE 0.11 0.06 1.05 (0.21)
------- -------- -------- ---------
------- -------- -------- ---------
DIVIDENDS DECLARED PER COMMON SHARE 0.23 0.29 0.69 0.87
------- -------- -------- ---------
BASIC AVERAGE COMMON SHARES OUTSTANDING (MILLIONS) 262.7 261.4 262.5 258.9
DILUTED AVERAGE COMMON SHARES (MILLIONS) 264.6 263.4 264.5 260.9
------- -------- -------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, December 31,
(in millions) 2004 2003
- ---------------------------------------------------------------------- ------------ ------------
(unaudited)
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility Plant $ 16,124.5 $ 15,977.3
Accumulated depreciation and amortization (7,203.6) (7,095.9)
------------ ------------
Net utility plant 8,920.9 8,881.4
------------ ------------
Other property, at cost, less accumulated depreciation 458.0 409.3
------------ ------------
Net Property, Plant and Equipment 9,378.9 9,290.7
------------ ------------
INVESTMENTS AND OTHER ASSETS
Assets of discontinued operations and assets held for sale 19.2 20.7
Unconsolidated affiliates 96.3 113.2
Other investments 73.6 73.3
------------ ------------
Total Investments 189.1 207.2
------------ ------------
CURRENT ASSETS
Cash and cash equivalents 40.4 27.3
Restricted cash 19.9 22.8
Accounts receivable (less reserve of $49.3 and $54.1, respectively) 318.3 546.3
Unbilled revenue (less reserve of $5.6 and $3.5, respectively) 76.6 268.0
Gas inventory 555.7 429.4
Underrecovered gas and fuel costs 185.6 203.2
Materials and supplies, at average cost 71.3 71.5
Electric production fuel, at average cost 26.5 29.0
Price risk management assets 113.3 74.3
Exchange gas receivable 168.3 174.8
Regulatory Assets 126.2 114.5
Prepayments and other 59.3 101.8
------------ ------------
Total Current Assets 1,761.4 2,062.9
------------ ------------
OTHER ASSETS
Price risk management assets 168.5 114.4
Regulatory assets 575.2 575.5
Goodwill 3,698.1 3,698.1
Intangible assets 522.1 527.2
Deferred charges and other 169.5 147.8
------------ ------------
Total Other Assets 5,133.4 5,063.0
------------ ------------
TOTAL ASSETS $ 16,462.8 $ 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 (CONTINUED)
SEPTEMBER 30, December 31,
(in millions) 2004 2003
- ------------------------------------------------------------------- ------------- ------------
(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 4,503.3 $ 4,415.9
Preferred Stocks --
Series without mandatory redemption provisions 81.1 81.1
Long-term debt, excluding amounts due within one year 5,589.2 5,993.4
------------- ------------
Total Capitalization 10,173.6 10,490.4
------------- ------------
CURRENT LIABILITIES
Current portion of long-term debt 368.0 118.3
Short-term borrowings 678.4 685.5
Accounts payable 295.1 496.6
Dividends declared on common and preferred stocks 61.7 1.8
Customer deposits 82.0 80.4
Taxes accrued 161.2 210.8
Interest accrued 140.9 82.4
Overrecovered gas and fuel costs 27.1 29.2
Price risk management liabilities 48.4 36.5
Exchange gas payable 249.8 290.8
Deferred revenue 25.8 28.2
Regulatory liabilities 36.5 73.7
Accrued liability for postretirement and pension benefits 47.0 56.8
Other accruals 363.1 418.0
------------- ------------
Total Current Liabilities 2,585.0 2,609.0
------------- ------------
OTHER LIABILITIES AND DEFERRED CREDITS
Price risk management liabilities 5.7 0.2
Deferred income taxes 1,639.1 1,595.9
Deferred investment tax credits 80.6 87.3
Deferred credits 61.3 72.7
Deferred revenue 93.7 113.0
Accrued liability for postretirement and pension benefits 432.9 406.9
Preferred stock liabilities with mandatory redemption provisions 1.2 2.4
Regulatory liabilities and other removal costs 1,176.0 1,061.6
Other noncurrent liabilities 213.7 184.4
------------- ------------
Total Other 3,704.2 3,524.4
------------- ------------
COMMITMENTS AND CONTINGENCIES - -
------------- ------------
TOTAL CAPITALIZATION AND LIABILITIES $ 16,462.8 $ 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)
Nine Months Ended September 30, (in millions) 2004 2003
- ------------------------------------------------------- -------- --------
OPERATING ACTIVITIES
Net income (loss) $ 276.9 $ (54.6)
Adjustments to reconcile net income to net cash from
continuing operations:
Depreciation and amortization 378.9 372.6
Net changes in price risk management activities 3.2 14.7
Deferred income taxes and investment tax credits (5.9) (4.8)
Deferred revenue (21.7) (7.3)
Amortization of unearned compensation 6.9 7.4
Loss (Gain) on sale of assets 0.9 (14.9)
Change in accounting - 8.8
Income from unconsolidated affiliates (1.1) (0.4)
Loss from sale of discontinued operations 1.6 332.2
Income from discontinued operations (5.2) (1.3)
Amortization of discount/premium on debt 13.9 14.2
Other (1.9) (2.8)
Changes in assets and liabilities:
Restricted cash 2.8 (17.0)
Accounts receivable and unbilled revenue 395.6 368.0
Inventories (123.7) (301.9)
Accounts payable (196.4) (100.4)
Customer deposits 1.7 8.2
Taxes accrued (49.4) (12.6)
Interest accrued 58.5 94.2
(Under) Overrecovered gas and fuel costs 15.5 44.7
Exchange gas receivable/payable 7.8 (222.9)
Other accruals (38.2) (28.4)
Prepayment and other current assets 41.1 41.0
Regulatory assets/liabilities 40.7 21.6
Postretirement and postemployment benefits 15.8 (59.1)
Deferred credits (11.4) (30.6)
Deferred charges and other noncurrent assets (18.0) 12.4
Other noncurrent liabilities 25.5 (5.2)
-------- --------
Net Cash Flows from Continuing Operations 814.4 475.8
Net Cash Flows used for Discontinued Operations - (139.1)
-------- --------
Net Cash Flows from Operating Activities 814.4 336.7
-------- --------
INVESTING ACTIVITIES
Capital expenditures (382.3) (365.9)
Proceeds from disposition of assets 5.9 437.7
Other investing activities (5.7) (12.5)
-------- --------
Net Cash Flows (used for) or from Investing Activities (382.1) 59.3
-------- --------
FINANCING ACTIVITIES
Issuance of long-term debt - 845.6
Retirement of long-term debt (235.8) (552.7)
Change in short-term debt (7.1) (470.2)
Retirement of preferred shares (1.2) (345.0)
Issuance of common stock and capital contributed 11.1 350.8
Acquisition of treasury stock (3.7) (1.8)
Dividends paid - common shares (182.5) (223.9)
-------- --------
Net Cash Flows used for Financing Activities (419.2) (397.2)
-------- --------
Increase (decrease) in cash and cash equivalents 13.1 (1.2)
Cash and cash equivalents at beginning of year 27.3 31.1
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 40.4 $ 29.9
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest 231.8 245.8
Interest capitalized 1.9 2.8
Cash paid for income taxes 136.8 136.6
-------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- --------------------
(in millions) 2004 2003 2004 2003
- ------------------------------------------------------ ------ ------ ------- --------
Net Income (Loss) $ 28.8 $ 15.4 $ 276.9 $ (54.6)
Other comprehensive income, net of tax
Foreign currency translation adjustment - (0.6) 0.7 0.9
Net unrealized gains (losses) on cash flow hedges 18.1 (17.8) 26.7 7.5
Net gain (loss) on available for sale securities 0.3 (0.5) 0.7 (0.4)
Minimum pension liability adjustment 4.6 55.3 4.6 55.3
------ ------ ------- --------
Total other comprehensive income, net of tax 23.0 36.4 32.7 63.3
------ ------ ------- --------
Total Comprehensive Income $ 51.8 $ 51.8 $ 309.6 $ 8.7
------ ------ ------- --------
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 2003 period, the SAILS(SM) 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 Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
(in thousands) 2004 2003 2004 2003
- ------------------------------------------------------------ ------- ------- ------- -------
Denominator
Basic average common shares outstanding 262,651 261,440 262,494 258,876
Dilutive potential common shares
Nonqualified stock options 134 61 155 62
Shares contingently issuable under employee stock plans 1,180 1,103 1,180 1,103
SAILS(SM) - - 18 -
Shares restricted under employee stock plans 601 790 649 906
------- ------- ------- -------
Diluted Average Common Shares 264,566 263,394 264,496 260,947
------- ------- ------- -------
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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
($ in millions, except per share data) 2004 2003 2004 2003
- ------------------------------------------------------------------ ---- ---- ----- -----
NET INCOME (LOSS)
As reported 28.8 15.4 276.9 (54.6)
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects 1.6 2.4 4.3 4.7
Less: Total stock-based employee compensation expense
determined under the fair value method for all awards,
net of tax (3.2) (3.7) (9.0) (9.7)
---- ---- ----- -----
Pro forma 27.2 14.1 272.2 (59.6)
---- ---- ----- -----
EARNINGS (LOSS) PER SHARE
Basic - as reported 0.11 0.06 1.06 (0.21)
- pro forma 0.10 0.05 1.04 (0.23)
Diluted - as reported 0.11 0.06 1.05 (0.21)
- pro forma 0.10 0.05 1.03 (0.23)
---- ---- ----- -----
4. REGULATORY MATTERS
Gas Operations Related Matters
Through October 2004, Columbia Gas of Ohio, Inc. (Columbia of Ohio) operated
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 expired in October 2004, and the
amended stipulation would have permitted 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 have: (1) extended Columbia of Ohio's CHOICE(R) program
through October 2010; (2) provided Columbia of Ohio with an opportunity to
generate revenues sufficient to cover the stranded costs associated with the
CHOICE(R) program; and (3) allowed 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 only 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-system sales. The order allowed
Columbia of Ohio to record post-in-service carrying charges on plant placed in
service after October 2004 and allowed the deferral of property taxes and
depreciation associated with such plant.
On April 9, 2004, Columbia of Ohio and other signatory parties to the
stipulation, consistent with standard regulatory process, petitioned the PUCO
for rehearing on the components which were modified in the order. That same day
the Office of the Ohio Consumers' Counsel (OCC) 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 OCC 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
OCC's 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 mandate that required natural gas marketers participating in
the CHOICE(R) program obtain 75% of their interstate capacity directly from
Columbia of Ohio; 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 with the customers when the annual revenue
exceeds $25 million, instead of $35 million as originally proposed by Columbia
of Ohio and other collaborative parties.
In a letter docketed on May 12, 2004, Columbia of Ohio and the other signatory
parties to the stipulation accepted the PUCO's modifications. On May 14, 2004,
the OCC filed a Second Application for Rehearing. In the pleading, the OCC
argued that the joint applicants did not meet the statutory requirements for an
application for rehearing, and thus the PUCO's order on rehearing granting
rehearing was unlawful. The OCC also argued that the rehearing was the result of
exclusionary settlement negotiations. The OCC continued to disagree with the
PUCO's treatment of off-system sales and capacity release revenues, and
post-in-service carrying charges and related deferrals.
On June 3, 2004, Columbia of Ohio filed its proposed tariffs and accounting, as
required. On June 9, 2004, the PUCO denied the OCC's Second Application for
Rehearing. On July 29, 2004, the OCC filed an appeal with the Supreme Court of
Ohio, contesting the PUCO's May 5, 2004 order on rehearing, which granted in
part Columbia of Ohio's joint application for rehearing, and the PUCO's June 9,
2004 order, denying the OCC's Second Application for Rehearing. On August 4,
2004, Columbia of Ohio moved to intervene in the appellate proceeding.
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.
As of September 30, 2004, Columbia of Ohio has $48 million of uncollected
accounts receivable pending future recovery. On October 1, 2004 Columbia of Ohio
filed an application for approval to increase its Uncollectible Expense Rider.
On October 20, 2004 the PUCO issued an Entry that approved this request.
The PUCO's approval of this request will result in Columbia's commencement
of recovery in November 2004 of the aforementioned deferred uncollectible
accounts receivables and future bad-debt recovery requirements.
On June 11, 2004, Columbia Gas of Pennsylvania, Inc. (Columbia of Pennsylvania)
signed a settlement agreement (Settlement Agreement) in its annual gas cost
recovery proceeding with The Office of Consumer Advocate, The Office of Small
Business Advocate, The Office of Trial Staff, and Commercial & Industrial
Intervenors. Under the Settlement Agreement, the signatory parties agreed to
financial incentive mechanisms for off-system sales and capacity release
transactions performed by Columbia of Pennsylvania. Under the incentive
mechanism, customers receive 100% of the total combined proceeds from off-system
sales and capacity release transactions up to a benchmark of $6 million. After
the benchmark is reached, Columbia of Pennsylvania will retain 50% of proceeds
from the transactions; however, Columbia of Pennsylvania may never retain more
than 40% of the actual net proceeds generated from off-system sales and capacity
release transactions. The incentive mechanism begins October 1, 2004 and ends on
September 30, 2006. On September 10, 2004, the Pennsylvania Public Utility
Commission approved the Settlement Agreement.
On August 11, 1999, the Indiana Utility Regulatory Commission (IURC) approved a
flexible gas cost adjustment (GCA) mechanism for Northern Indiana Public Service
Company (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 GCA 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.
10
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
Northern Indiana's GCA4 annual demand filing, covering the period November 1,
2002 through October 31, 2003, was made on August 29, 2002 and approved by the
IURC for implementation as interim rates, subject to refund effective November
1, 2002. The Indiana Office of Utility Consumer Counselor (OUCC) filed testimony
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's GCA5 annual demand filing, covering the period November 1,
2003 through October 31, 2004, was made on August 26, 2003 and approved by the
IURC for implementation as interim rates, subject to refund, effective November
1, 2003. On June 8, 2004, Northern Indiana and the OUCC entered into a joint
stipulation and agreement resolving all issues in GCA5. A hearing was held
before the IURC on July 18, 2004 in support of the settlement. Among the
settlement agreement's provisions, Northern Indiana has agreed to return $3.8
million to its customers over a twelve-month period following IURC approval.
This refund is the resolution of issues similar to those from March 2003. An
additional provision of the agreement was to extend the current Alternative
Regulatory Procedure (ARP), including Northern Indiana's gas cost incentive
mechanism, from the current expiration date of December 31, 2004 to March 31,
2005. The IURC approved the joint stipulation and agreement, without change, at
their August 18, 2004 administrative meeting.
Northern Indiana's GCA 6 annual demand filing, covering the period November 1,
2004 through October 31, 2005 was made on August 26, 2004 and approved by the
IURC on October 20, 2004 for implementation as interim rates, subject to refund,
effective November 1, 2004.
Northern Indiana, the OUCC, Testimonial Staff of the IURC, and the Marketer
Group (a group which collectively represents 7 marketers participating in
Northern Indiana Choice) filed a Stipulation and Agreement with the IURC on
October 12, 2004, that, among other things, extends the expiration date of the
1997 ARP decision to March 31, 2006. The agreement, if approved by the IURC
extends the expiration date of Northern Indiana's gas incentive mechanism - GCIM
to March 31, 2006 as well. The agreement grandfathers the terms of existing
contracts that marketers have with Choice customers. Lastly, the agreement
establishes a scope for negotiations that parties will follow when convening
within the next several months to establish a long-term resolution of the ARP.
On September 21, 2004, Northern Indiana petitioned the IURC under the ARP
statutory requirements to permit a two-year pilot low-income energy assistance
program. The program, filed under the name NIPSCO Winter Warmth provides, if
approved, approximately $4.0 million of assistance for customer security
deposits and bill assistance for qualifying low-income customers presently
disconnected for non-payment or at risk for disconnection. As proposed, Northern
Indiana will fund this program through a monthly $0.50 charge to residential and
general service customers and an annual contribution of $200,000 from Northern
Indiana.
Electric Operations Related Matters
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. On July 21, 2004 the IURC issued an order which denied Northern
Indiana's request for deferred accounting treatment for the MISO Schedule 10
administrative fees. Northern Indiana recorded a charge during the second
quarter 2004 in the amount of $2.1 million related to the MISO administrative
charges deferred through June 30, 2004, and recognized $0.9 million in MISO fees
in the third quarter 2004. The MISO Schedule 10 administrative fees are
currently estimated to be approximately $2.8 million annually. On October 6,
2004, the IURC denied Northern Indiana's Motion for Reconsideration. Northern
Indiana filed its notice of appeal and this matter is pending.
11
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 has filed with the
FERC detailed tariff information, with a planned initial operation date of March
1, 2005. Northern Indiana and EnergyUSA-TPC Corp. (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 conduct 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) returns to service.
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, which includes the Mitchell Station. On October 8, 2004,
Northern Indiana requested proposals from wholesale power marketers to provide
power under varying terms and conditions. These proposals will be evaluated
after the submittal date on November 5, 2004. Northern Indiana requested similar
proposals during 2003 which were not executed. 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. 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. The procedural schedule for the City of Gary has
been set, and Northern Indiana has filed its prepared direct testimony, stating
that Northern Indiana has no current plans to restart the Mitchell Station.
Interveners, including the Indiana Office of Utility Consumer Council, filed
direct testimony on October 12, 2004. The IURC hearing of the City of Gary
petition is scheduled for the fourth quarter of 2004.
On May 25, 2004, Northern Indiana filed a petition for approval of a Purchased
Power and Transmission Tracker Mechanism to recover the cost of purchased power
to meet Northern Indiana's retail electric load requirements and charges imposed
on Northern Indiana by MISO and Grid America. Northern Indiana's direct
testimony was filed on August 6, 2004. The hearing in this matter is also
scheduled for the fourth quarter of 2004.
On July 9, 2004, a verified joint petition was filed by PSI Energy, Inc.,
Indianapolis Power & Light Company, Northern Indiana and Vectren Energy Delivery
of Indiana, Inc., seeking approval of certain changes in operations that are
likely to result from the MISO's implementation of energy markets, and for
determination of the manner and timing of recovery of costs resulting from the
MISO's implementation of standard market design mechanisms, such as the MISO's
proposed real-time and day-ahead energy markets. The hearing in this matter is
scheduled for the first quarter of 2005.
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). 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's latest ECRM filing (ECR-4) was made in August 2004 for
capital expenditures of $231.3 million. Northern
12
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
Indiana's first annual EERM filing (EER-1) was made in February 2004 for $1.9
million. On February 4, 2004, the IURC approved Northern Indiana's latest
compliance plan with the estimate of $274.2 million. On October 8, 2004,
Northern Indiana filed for approval of the revised cost estimates to meet the
environmental standards. Northern Indiana anticipates a total capital investment
amounting to approximately $305 million. The ECRM revenues amounted to $12.8
million for the nine months ended September 30, 2004, and $18.0 million from
inception to date, while EERM revenues were $0.8 million for the first nine
months of 2004.
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 September 30, 2004, approximately 1,565 employees were
terminated, of whom 3 and 13 employees were terminated during the quarter and
nine months ended September 30, 2004, respectively. As of September 30, 2004 and
December 31, 2003, the consolidated balance sheets reflected liabilities of
$15.6 million and $19.5 million related to the restructuring plans,
respectively. During the quarter and nine months ended September 30, 2004, $0.9
million and $3.7 million in payments were made, respectively, in association
with the restructuring plans. Adjustments of $0.2 million were made for the
first nine months of 2004, decreasing the restructuring liability for facility
exit costs. Of the remaining restructuring liability, $12.3 million is related
to facility exit costs.
6. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
In May 2004, Columbia Gas Transmission Corporation (Columbia Transmission)
identified certain facilities as being non-core to the operation of the pipeline
system. As a result, Columbia Transmission is in the process of selling these
facilities to third parties. NiSource has accounted for the assets of these
facilities, with a net book value of approximately $14.2 million, as assets held
for sale. During the third quarter of 2004, $1.1 million of these assets were
sold for a nominal amount.
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 million, plus the assumption of obligations to deliver approximately 94
billion cubic feet of natural gas pursuant to existing forward sales contracts.
The sale transferred 1.1 trillion cubic feet of natural gas reserves.
Approximately $220 million of after-tax cash proceeds from the sale were used to
reduce NiSource's debt. In addition, a $213 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 $95 million. NiSource has accounted for CER as discontinued
operations and has adjusted all periods presented accordingly.
During 2002, NiSource decided to exit the telecommunications business. The
results of operations related to Columbia Transmission Communications
Corporation (Transcom) were displayed as discontinued operations on NiSource's
consolidated income statement and its assets and liabilities were separately
aggregated and reflected as assets and liabilities of discontinued operations on
the consolidated balance sheets. On September 15, 2003, NiSource's subsidiary
Columbia sold 100% of its shares in Transcom.
13
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
Results from discontinued operations of CER (including the New York State
properties), the six PEI subsidiaries and Transcom are provided in the following
table:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- ---------------------
($ in millions) 2004 2003 2004 2003
- ------------------------------------------ ------ ------ ------ -------
REVENUES FROM DISCONTINUED OPERATIONS $ - $ 42.5 $ - $ 154.6
------ ------ ------ -------
Loss (Income) from discontinued operations (5.2) 10.5 (10.9) 4.5
Income taxes (14.1) 4.4 (16.1) 3.2
------ ------ ------ -------
NET INCOME FROM DISCONTINUED OPERATIONS $ 8.9 $ 6.1 $ 5.2 $ 1.3
------ ------ ------ -------
The assets held for sale and assets of discontinued operations were net
property, plant, and equipment of $19.2 million and $20.7 million at September
30, 2004 and December 31, 2003, respectively.
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 third quarter and nine months ended
September 30, 2004 and September 30, 2003 affecting accumulated other
comprehensive income, with respect to cash flow hedges included the following:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- --------------------
(in millions, net of tax) 2004 2003 2004 2003
- -------------------------------------------------------------------------- ------- -------- ------- --------
Net unrealized gains on derivatives qualifying as cash flow
hedges at the beginning of the period $ 100.2 $ 93.1 $ 91.6 $ 67.8
Unrealized hedging gains (losses) arising during the period on derivatives
qualifying as cash flow hedges 27.0 (19.5) 57.2 11.9
Reclassification adjustment for net gain (loss) included
in net income (8.9) 1.7 (30.5) (4.4)
------- -------- ------- --------
Net unrealized gains on derivatives qualifying as cash flow
hedges at the end of the period $ 118.3 $ 75.3 $ 118.3 $ 75.3
------- -------- ------- --------
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
$242.0 million and $165.6 million at September 30, 2004 and December 31, 2003,
respectively, of which $73.7 million and $51.3 million were included in "Current
Assets" and $168.3 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 $18.5 million and $9.5 million at September 30, 2004
and December 31, 2003, respectively, of which $12.8 million and $9.3 million
were included in "Current Liabilities" and $5.7 million and $0.2 million were
included in "Other Liabilities and Deferred Credits."
14
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
During the third quarter 2004, there were no components of the derivatives' fair
values excluded in the assessment of hedge effectiveness. Also during the third
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
$33.7 million, net of tax.
In addition, Northern Indiana engages in writing options that potentially
obligate Northern Indiana 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, Northern Indiana Fuel and Light
Company, Kokomo Gas and Fuel Company and Northern Utilities, Inc. also use NYMEX
derivative contracts to minimize risk associated with gas price volatility.
These derivative hedging programs must be marked to fair value, but because
these derivatives are used within the framework of their respective gas cost
recovery mechanisms, regulatory assets or liabilities are recorded to offset the
change in the fair value of these derivatives. The consolidated balance sheets
reflected $11.3 million and $1.2 million of price risk management assets
associated with these programs at September 30, 2004 and December 31, 2003,
respectively. In addition, the consolidated balance sheets reflected $0.7
million and $0.5 million of price risk management liabilities associated with
these programs at September 30, 2004 and December 31, 2003, respectively.
For regulatory incentive purposes, the Columbia LDCs, comprised of Columbia Gas
of Kentucky, Inc., Columbia Gas of Maryland, Inc., Columbia of Ohio, Columbia of
Pennsylvania, 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, "Accounting for the Effects of Certain Types of
Regulation." The remaining change is recognized currently in earnings. The
consolidated balance sheets reflected $6.6 million and $3.3 million of price
risk management liabilities associated with the programs at September 30, 2004
and December 31, 2003, respectively.
On May 12, 2004, Columbia terminated fixed-to-variable interest rate swap
agreements in a notional amount of $663.0 million with five counterparties.
Columbia received an aggregate settlement payment of $1.8 million, which is
being amortized as a reduction to interest expense over the remaining term of
the underlying debt.
On May 12, 2004, NiSource entered into fixed-to-variable interest rate swap
agreements in a notional amount of $660.0 million with six counterparties having
a 6 1/2-year term. NiSource will receive payments based upon a fixed 7.875%
interest rate and pay a floating interest amount based on U.S. 6-month British
Banker Association LIBOR plus an average of 3.08% per annum. There was no
exchange of premium at the initial date of the swaps. In addition, each party
has the right to cancel the swaps on May 15, 2009 at mid-market.
MARKETING AND TRADING ACTIVITIES. The operations of TPC primarily involve
commercial and industrial gas sales and power trading.
In April 2003, the 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
$28.3 million and $28.3 million, respectively, at September 30, 2004 and $21.9
million and $23.4 million, respectively, at December 31, 2003.
15
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
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 (FSP) NO. FAS 106-2 -- ACCOUNTING AND DISCLOSURE
REQUIREMENTS RELATED TO THE MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND
MODERNIZATION ACT OF 2003 (FSP 106-2). (SUPERSEDES FSP 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.
FSP 106-2 is effective for the first interim or annual period beginning after
June 15, 2004. NiSource had previously elected to defer accounting for the
effects of this pronouncement, as allowed by FSP 106-1. On July 1, 2004,
NiSource adopted the provisions of FSP 106-2. The impact of accounting for the
federal subsidy was not material to NiSource's financial position or results of
operations.
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. Please
see Item 1, Part II, "Legal Proceedings," contained herein for more specific
information regarding current legal matters.
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.
SEPTEMBER 30, December 31,
(in millions) 2004 2003
- ----------------------------------------------- ------------- ------------
Foreign currency translation adjustment $ - $ (0.7)
Net unrealized gains on cash flow hedges 118.3 91.7
Loss on available for sale securities (1.0) (1.8)
Minimum pension liability adjustment (145.6) (150.2)
------- -------
TOTAL ACCUMULATED OTHER COMPREHENSIVE LOSS, NET $ (28.3) $ (61.0)
------- -------
16
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
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 September 30, 2004 and the years in which they
expire are:
(in millions) Total 2004 2005 2006 2007 2008 After
- ------------------------------- --------- ------- --------- ------- ------ ------- ---------
Guarantees of subsidaries debt $ 3,843.1 $ 2.7 $ 1,183.2 $ 293.1 $ 32.4 $ 8.6 $ 2,323.1
Guarantees supporting commodity
transactions of subsidiaries 1,260.3 113.3 309.1 606.0 32.8 53.0 146.1
Other guarantees 368.5 - 50.4 - - 9.6 308.5
Lines of credit 678.4 678.4 - - - - -
Letters of credit 116.6 1.1 19.3 1.8 1.0 93.4 -
--------- ------- --------- ------- ------ ------- ---------
Total commercial commitments $ 6,266.9 $ 795.5 $ 1,562.0 $ 900.9 $ 66.2 $ 164.6 $ 2,777.7
--------- ------- --------- ------- ------ ------- ---------
NiSource has guaranteed the payment of $3.8 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 September 30, 2004, the amount
outstanding under the lines of credit and guaranteed by NiSource amounted to
$678.4 million. Additionally, NiSource has issued guarantees, which support up
to approximately $1.3 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.
NiSource has issued standby letters of credit of approximately $116.6 million
through financial institutions for the benefit of third parties that have
extended credit to certain subsidiaries. If a subsidiary does not pay amounts
when due under covered contracts, the beneficiary may present its claim for
payment to the financial institution, which will in turn request payment from
NiSource.
NiSource has purchase and sales agreement guarantees totaling $137.5 million,
which guarantee performance of the seller's covenants, agreements, obligations,
liabilities, representations and warranties under the agreements. No amounts
related to the purchase and sales agreement guarantees are reflected in the
consolidated balance sheet.
Management believes that the likelihood NiSource would be required to perform or
otherwise incur any significant losses associated with any of the aforementioned
guarantees is remote.
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 September 30, 2004 was $325.6
million. As of September 30, 2004, approximately $302.8 million of debt related
to Whiting Clean Energy was included in NiSource's consolidated balance sheet.
17
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
NiSource retains certain operational and financial guarantees with respect to
the former PEI subsidiaries and CER. NiSource has retained guarantees of $150.3
million as of September 30, 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 FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" (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 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 closing of the sale, Triana owned approximately 1.1 Tcf of
proved reserves, and was capitalized with $330 million, approximately $200
million of which was provided as initial equity by MSCP and the remainder of
which is provided as part of a $500 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 million of further commitments to Triana from MSCP,
adequately offset any risk of 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.
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. The
following table provides the components of the plans' net periodic benefits cost
(benefit) for the third quarter and nine months ended September 30, 2004 and
September 30, 2003:
PENSION BENEFITS OTHER BENEFITS
------------------------ ----------------------
Three months ended September 30, (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 $ 16.1 $ 12.4 $ 10.3
--------- -------- -------- --------
18
ITEM 1. FINANCIAL STATEMENTS (continued)
NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
PENSION BENEFITS OTHER BENEFITS
------------------------ ----------------------
Nine months ended September 30, (in millions) 2004 2003 2004 2003
- --------------------------------------------- --------- -------- -------- --------
NET PERIODIC COST
Service cost $ 29.4 $ 26.4 $ 6.6 $ 5.4
Interest cost 95.1 98.4 29.7 27.3
Expected return on assets (117.9) (106.2) (10.5) (7.8)
Amortization of transitional obligation - 4.2 8.7 8.7
Amortization of prior service cost 7.2 6.3 0.6 -
Recognized actuarial (gain) loss 13.5 19.2 2.1 (2.7)
--------- -------- -------- --------
NET PERIODIC BENEFITS COST $ 27.3 $ 48.3 $ 37.2 $ 30.9
--------- -------- -------- --------
NiSource made a $14.9 million contribution to its pension plans and expects to
contribute $40.1 million to its postretirement medical and life plans in 2004.
13. SALE OF TRADE RECEIVABLES
On May 14, 2004, Columbia of Ohio entered into an agreement to sell, without
recourse, substantially all of its trade receivables, as they originate, to
Columbia of Ohio Receivables Corporation (CORC), a wholly-owned subsidiary of
Columbia of Ohio. CORC, in turn, is party to an agreement, also dated May 14,
2004, in which it sells an undivided percentage ownership interest in the
accounts receivable to a commercial paper conduit sponsored by Dresdner
Kleinwort Wasserstein. The conduit can purchase up to $300 million of accounts
receivable under the agreement. The agreements, which replaced prior similar
agreements, expire in May 2005, but can be renewed if mutually agreed to by both
parties. As of September 30, 2004, $43.5 million of accounts receivable had been
sold by CORC.
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, but can be renewed if
mutually agreed to by both parties. As of September 30, 2004, NRC had sold
$105.0 million of accounts receivable.
14. 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 LDCs, 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.
19
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 (loss) 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 prices,
regulated prices or at levels provided for under contractual agreements.
Operating income (loss) is derived from revenues and expenses directly
associated with each segment.
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ------------------------
(in millions) 2004 2003 2004 2003
- ----------------------------- ------- ------- --------- ---------
REVENUES
GAS DISTRIBUTION
Unaffiliated $ 394.8 $ 344.2 $ 2,955.1 $ 2,948.3
Intersegment 4.6 2.0 8.6 16.3
------- ------- --------- ---------
Total 399.4 346.2 2,963.7 2,964.6
------- ------- --------- ---------
GAS TRANSMISSION AND STORAGE
Unaffiliated 133.1 136.7 433.3 441.5
Intersegment 55.7 54.7 187.0 181.2
------- ------- --------- ---------
Total 188.8 191.4 620.3 622.7
------- ------- --------- ---------
ELECTRIC OPERATIONS
Unaffiliated 298.7 307.5 818.3 819.3
Intersegment 4.6 7.3 13.3 17.7
------- ------- --------- ---------
Total 303.3 314.8 831.6 837.0
------- ------- --------- ---------
OTHER
Unaffiliated 144.2 83.7 464.5 297.1
Intersegment 5.1 13.8 19.3 37.5
------- ------- --------- ---------
Total 149.3 97.5 483.8 334.6
------- ------- --------- ---------
Adjustments and eliminations (61.0) (51.6) (201.4) (194.9)
------- ------- --------- ---------
CONSOLIDATED REVENUES $ 979.8 $ 898.3 $ 4,698.0 $ 4,564.0
------- ------- --------- ---------
OPERATING INCOME (LOSS)
Gas Distribution $ (35.7) $ (27.2) $ 264.4 $ 343.8
Gas Transmission and Storage 69.1 90.8 254.0 289.4
Electric 95.4 89.5 236.2 206.2
Other (0.9) (12.3) (27.2) (36.6)
Corporate (0.1) 8.1 0.5 (5.8)
------- ------- --------- ---------
CONSOLIDATED OPERATING INCOME $ 127.8 $ 148.9 $ 727.9 $ 797.0
------- ------- --------- ---------
15. SUBSEQUENT EVENT
On November 1, 2004 NiSource issued approximately 6.8 million shares of common
stock upon the settlement of the forward stock purchase contracts comprising a
component of NiSource's Stock Appreciation Income Linked Securities(SM)
(SAILS(SM)). NiSource received approximately $144.4 million in satisfaction of
the SAILS holders' obligation under the stock purchase contracts, which was used
to pay down short-term borrowings. Effective November 1, 2004, the interest rate
on the $144.4 million of debentures that comprised the other component of the
SAILS was reset to 3.628% per annum. The debentures mature November 1, 2006.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 transmission 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 third quarter of 2004, income from continuing operations was $21.5
million, or $0.08 per share, compared to income from continuing operations of
$23.5 million, or $0.09 per share for the 2003 period. Weather for the summer
cooling season in the markets served by NiSource's electric utility this quarter
was 18% cooler than the comparable quarter last year. Operating expenses for the
third quarter of 2004 were favorably impacted by a reduction in uncollectible
expense. Operating expenses increased by $34.2 million mainly due to the affect
of reserve reversals and the gain on the sale of Columbia Service Partners, Inc.
in the third quarter of 2003. Interest expense for the quarter decreased $13.6
million due to lower long-term interest rates as a result of refinancing
activity completed in 2003 and a quarter-over-quarter reduction in debt
balances. All per share amounts are basic earnings per share.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
For the nine months ended September 30, 2004, NiSource reported income from
continuing operations of $273.3 million, or $1.04 per share versus income from
continuing operations of $285.1 million, or $1.10 per share for the comparable
2003 period. The first nine months of 2004 were affected by many key factors.
Weather in the markets served by NiSource's natural gas utility and pipeline
companies was approximately 7 percent warmer than the year-ago period. In
addition, both this year and last year 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. Operating expenses in first nine months of 2004 were
favorable impacted by reduced uncollectible expense, a reduction in estimated
property taxes and the favorable settlement of a lawsuit. These reductions in
expense in the 2004 period partially offset the 2003 impact of the gain on the
sale of Columbia Service Partners, Inc., and the reversal of reserves and
accrued expenses in 2003. Also, with lower average long-term borrowing rates and
a reduction in the company's long-term debt, interest expense for the first nine
month of 2004 decreased by $49.2 million, or 14.0 percent, compared with the
year-ago period.
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 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 SEPTEMBER 30, 2004
Net Income
NiSource reported net income of $28.8 million, or $0.11 per share, for the three
months ended September 30, 2004, compared to net income of $15.4 million, or
$0.06 per share, for the third quarter 2003. Operating income was $127.8
million, a decrease of $21.1 million from the same period in 2003. NiSource's
net income reflects the impact of the discontinued operations, a $7.3 million
gain in the third quarter of 2004, and an $8.1 million loss for the 2003 period.
All per share amounts are basic earnings per share.
Net Revenues
Total consolidated net revenues (gross revenues less cost of sales) for the
three months ended September 30, 2004, were $590.4 million, a $13.1 million
increase from the same period last year. Electric net revenue increased $5.0
million for the third quarter primarily due to increased revenue from
environmental trackers. The impact of cooler weather on NiSource's electric
utility was offset by the impact of reserves recorded for regulatory refunds
recorded in the 2003 period. NiSource's Other Operations net revenues increased
due mainly to a $5.1 million settlement of a lawsuit.
Expenses
Operating expenses for the third quarter 2004 were $462.6 million, an increase
of $34.2 million from the 2003 period. Operation and maintenance expenses for
NiSource increased, as the comparative results for the current quarter were
impacted by the reversal of $11.0 million of accrued expenses for environmental
remediation and the reversal of $6.8 million of reserves and accrued expenses in
the 2003 period. In the current quarter, a decrease in uncollectible expense of
$11.8 million, largely attributable to the bad debt cost tracker that was
approved for Columbia Gas of Ohio, Inc. (Columbia of Ohio) in 2003, was
partially offset by increases in employee and administrative expenses
attributable mostly to pension funding. The 2003 period was also favorably
impacted by a $16.2 million gain on the sale of Columbia Service Partners, Inc.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Other Income (Deductions)
Interest expense, net was $100.0 million for the quarter, a decrease of $13.6
million compared to the third quarter 2003. The decrease was due mainly to lower
long-term interest rates as a result of refinancing activity completed in 2003
and a quarter-over-quarter reduction in debt balances.
Income Taxes
Income tax expense for the third quarter 2004 was $6.7 million, a decrease of
$6.4 million compared to the 2003 period, due to lower pre-tax income and the
reversal of a $5.7 million tax reserve.
Discontinued Operations
The income from discontinued operations, net of tax, of $8.9 million for the
third quarter 2004 is due mostly to a reduction in estimated state taxes
associated with NiSource's exploration and production subsidiary, Columbia
Energy Resources, Inc. (CER). The loss of $1.6 million on the disposition of
discontinued operations was related to a post-sale adjustment. The loss of $8.1
million in the 2003 period was a result of an after-tax loss of $14.2 million,
related to the sale of CER in the third quarter of 2003, slightly offset by
income related to the operations of CER and the Primary Energy Inc. (Primary
Energy) subsidiaries that were sold in the fourth quarter of 2003. NiSource
accounted for CER and the Primary Energy subsidiaries as discontinued operations
and has adjusted all periods presented accordingly.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2004
Net Income
NiSource reported net income of $276.9 million, or $1.06 per share, for the nine
months ended September 30, 2004, compared to a net loss of $54.6 million, or
$0.21 loss per share, for the first nine months of 2003. Operating income was
$727.9 million, a decrease of $69.1 million from the same period in 2003.
NiSource's net income reflects the impact of the discontinued operations, a $3.6
million gain for the first nine months of 2004 versus a $330.9 million loss for
the comparable 2003 period.
Net Revenues
Total consolidated net revenues (gross revenues less cost of sales) for the nine
months ended September 30, 2004, were $2,198.5 million, a $50.2 million decrease
from the same period last year. The decrease in gas net revenues was primarily a
result of reduced residential and commercial natural gas sales and deliveries
due to warmer weather of approximately $29.0 million, reduced revenue from cost
trackers of $11.9 million, largely offset in operating expenses, and lower
non-traditional revenue during the first nine months of 2004 compared with the
same period in 2003. Both the 2004 period and the 2003 period 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. The reduction in gas distribution
revenue and transmission revenue was partially offset by a $21.8 million
increase in electric net revenue for the first nine months of 2004, which was
due to higher net revenues from environmental trackers, increased customer usage
and the effect of reserves recorded for regulatory refunds in the comparable
2003 period.
Expenses
Operating expenses for the first nine months of 2004 were $1,470.6 million, an
increase of $18.9 million from the 2003 period. Operation and maintenance
expenses for the first nine months of 2004 were $16.6 million higher than they
were in the 2003 period. The 2004 operating expenses were favorably impacted by
reduced uncollectible expense of $15.1 million, the favorable settlement of a
lawsuit of $14.3 million and a reduction in estimated property taxes of $19.8
million. The 2003 operating expenses were favorably impacted by a $16.2 million
gain on the sale of Columbia Service Partners, Inc., the reversal of legal,
environmental and other reserves and accrued expenses of $33.8 million and the
favorable impact of insurance adjustments and recoveries of $15.8 million.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
Other Income (Deductions)
Interest expense, net was $302.3 million for the first nine months of 2004
compared to $351.5 million for the first nine months of last year. This decrease
of $49.2 million was mainly due to lower long-term interest rates as a result of
refinancing activity completed in 2003 and a year-over-year reduction in
long-term debt and average short-term debt balances.
Income Taxes
Income tax expense for the first nine months of 2004 was $154.4 million, a
decrease of $12.5 million compared to the 2003 period, due to lower pre-tax
income and the reversal of a tax reserve.
Discontinued Operations
Income from discontinued operations, net-of-tax, was $5.2 million for the nine
months ended September 30, 2004. The current period's income from discontinued
operations, net-of-tax, is mostly due to a reduction in estimated state taxes
associated with NiSource's exploration and production subsidiary, CER. For the
2003 period, an after-tax loss of $332.2 million was related to the sales of
CER, six Primary Energy subsidiaries and Columbia Transmission Communications
Corporation (Transcom), slightly offset by a first quarter 2003 gain on the sale
of CER's interest in natural gas production properties in New York State.
NiSource accounted for CER, Transcom and the Primary Energy subsidiaries as
discontinued operations and has adjusted all periods presented accordingly.
Change in Accounting
The change in accounting in the first nine months 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.
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 nine months ended September 30, 2004
was $814.4 million. Net cash from continuing operations increased $338.6 million
from the comparable period a year-ago, mainly as a result of increased cash flow
from working capital. The increase in cash flow from working capital was $242.4
million, driven largely by a lower level of exchange gas activity and reduction
of higher priced inventory levels during 2004.
On November 1, 2004 NiSource issued approximately 6.8 million shares of common
stock upon the settlement of the forward stock purchase contracts comprising a
component of NiSource's Stock Appreciation Income Linked Securities(SM)
(SAILS(SM)). NiSource received approximately $144.4 million in satisfaction of
the SAILS holders' obligation under the stock purchase contracts, which was used
to pay down short-term borrowings. Effective November 1, 2004, the interest rate
on the $144.4 million of debentures that comprised the other component of the
SAILS was reset to 3.628% per annum. The debentures mature November 1, 2006.
During July 2004, Northern Indiana Public Service Company (Northern Indiana)
redeemed $32.0 million of its medium-term notes, with an average interest rate
of 6.53%.
During April 2004, NiSource redeemed $80.0 million of NiSource Capital Markets,
Inc. medium-term notes, with an average interest rate of 7.39%.
During February 2004, 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 7.49% and 7.63%,
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
respectively. The associated redemption premium was $4.6 million, of which $4.2
million was charged to expense and $0.4 million was recorded as a regulatory
asset.
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 of $678.4 million at
September 30, 2004, at a weighted average interest rate of 2.57%, and advances
of $685.5 million at December 31, 2003, at a weighted average interest rate of
1.82%. As of September 30, 2004 and December 31, 2003, NiSource had $111.6
million and $121.4 million of standby letters of credit outstanding,
respectively. At September 30, 2004, $93.3 million of the $111.6 million total
outstanding letters of credit resided within a separate bi-lateral letter of
credit arrangement with Barclays Bank which NiSource obtained during February
2004. As of September 30, 2004, $553.4 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 September 30, 2004 and December 31, 2003,
respectively, issued under another credit facility.
Sale of Trade Receivables
On May 14, 2004, Columbia of Ohio entered into an agreement to sell, without
recourse, substantially all of its trade receivables, as they originate, to
Columbia of Ohio Receivables Corporation (CORC), a wholly-owned subsidiary of
Columbia of Ohio. CORC, in turn, is party to an agreement, also dated May 14,
2004, in which it sells an undivided percentage ownership interest in the
accounts receivable to a commercial paper conduit sponsored by Dresdner
Kleinwort Wasserstein. The conduit can purchase up to $300 million of accounts
receivable under the agreement. The agreements, which replaced prior similar
agreements, expire in May 2005, but can be renewed if mutually agreed to by both
parties. As of September 30, 2004, $43.5 million of accounts receivable had been
sold by CORC.
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, but can be renewed if
mutually agreed to by both parties. As of September 30, 2004, NRC had sold
$105.0 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.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
NiSource is exposed to interest rate risk as a result of changes in interest
rates on borrowings under revolving credit agreements and lines of credit, which
have interest rates that are indexed to short-term market interest rates. At
September 30, 2004, the combined borrowings outstanding under these facilities
totaled $678.4 million. NiSource is also exposed to interest rate risk due to
changes in interest rates on fixed-to-variable interest rate swaps that hedge
the fair value of long-term debt. The principal amount of such long-term debt
subject to interest rate hedges at September 30, 2004 was $1,160.0 million.
Based upon average borrowings under agreements subject to fluctuations in
short-term market interest rates during the third quarter 2004, an increase in
short-term interest rates of 100 basis points (1%) would have increased interest
expense by $5.3 million and $14.9 million for the quarter and nine months ended
September 30, 2004, respectively.
On May 12, 2004, Columbia Energy Group (Columbia) terminated fixed-to-variable
interest rate swap agreements in a notional amount of $663.0 million with five
counterparties. Columbia received an aggregate settlement payment of $1.8
million, which is being amortized as a reduction to interest expense over the
remaining term of the underlying debt.
On May 12, 2004, NiSource entered into fixed-to-variable interest rate swap
agreements in a notional amount of $660.0 million with six counterparties having
a 6 1/2-year term. NiSource will receive payments based upon a fixed 7.875%
interest rate and pay a floating interest amount based on U.S. 6-month British
Banker Association LIBOR plus an average of 3.08% per annum. There was no
exchange of premium at the initial date of the swaps. In addition, each party
has the right to cancel the swaps on May 15, 2009 at mid-market.
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 analysis 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.
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.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
The fair values of the contracts related to NiSource's trading operations, the
activity affecting the changes in the fair values during the third quarter of
2004, the sources of the valuations of the contracts during 2004 and the years
in which the remaining contracts mature are:
Three Months Ended Nine Months Ended
(in millions) September 30, 2004 September 30, 2004
- ------------------------------------------------------------------ ------------------ ------------------
Fair value of contracts outstanding at the beginning of the period $ 1.9 $ (1.5)
Contracts realized or otherwise settled during the period
(including net option premiums received) 1.6 -
Fair value of new contracts entered into during the period (3.0) (7.4)
Other changes in fair values during the period (0.5) 8.9
----- ------
Fair value of contracts outstanding at the end of the period $ - $ -
----- ------
(in millions) 2004 2005 2006 2007 2008 After
- ----------------------------------- ----- ------ ---- ---- ---- -----
Prices actively quoted $ - $ - $ - $ - $ - $ -
Prices from other external sources 0.7 0.3 - - - -
Prices based on models/other method 0.7 (1.7) - - - -
----- ------ ---- ---- ---- -----
Total fair values $ 1.4 $ (1.4) $ - $ - $ - $ -
----- ------ ---- ---- ---- -----
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 $0.1 million, $0.2
million and effectively zero, during the third quarter of 2004, respectively.
The daily market exposure for the gas marketing portfolio on an average, high
and low basis was $0.1 million, $0.1 million and $0.1 million during the third
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 $1.3 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 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.
In addition, NiSource subsidiaries have sold certain accounts receivable.
NiSource's accounts receivable programs qualify for sale accounting because they
meet the conditions specified in the Statement of Financial Accounting Standards
(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.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
OTHER INFORMATION
Bargaining Unit Contract
Northern Indiana reached an agreement with its bargaining unit employees to
replace the contract agreements that expired May 31, 2004. The new agreements
are for five years, expiring May 31, 2009.
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.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ----------------------
(in millions) 2004 2003 2004 2003
- -------------------------------- -------- -------- --------- ---------
NET REVENUES
Sales Revenues $ 330.7 $ 291.5 $ 2,636.5 $ 2,643.2
Less: Cost of gas sold 220.7 170.0 1,963.5 1,899.3
-------- -------- --------- ---------
Net Sales Revenues 110.0 121.5 673.0 743.9
Transportation Revenues 68.7 54.7 327.2 321.4
-------- -------- --------- ---------
Net Revenues 178.7 176.2 1,000.2 1,065.3
-------- -------- --------- ---------
OPERATING EXPENSES
Operation and maintenance 142.8 137.4 471.8 456.6
Depreciation and amortization 48.2 47.2 144.5 142.7
Other taxes 23.4 18.8 119.5 122.2
-------- -------- --------- ---------
Total Operating Expenses 214.4 203.4 735.8 721.5
-------- -------- --------- ---------
Operating Income (Loss) $ (35.7) $ (27.2) $ 264.4 $ 343.8
======== ======== ========= =========
REVENUES ($ IN MILLIONS)
Residential 193.8 164.9 1,644.7 1,720.0
Commercial 70.8 61.4 583.5 614.1
Industrial 27.6 28.4 146.3 138.9
Transportation 68.7 54.7 327.2 321.4
Off System Sales 24.9 6.6 180.2 67.2
Other 13.6 30.2 81.8 103.0
-------- -------- --------- ---------
Total 399.4 346.2 2,963.7 2,964.6
-------- -------- --------- ---------
SALES AND TRANSPORTATION (MMDTH)
Residential sales 13.8 13.2 151.2 164.0
Commercial sales 6.4 6.2 59.4 64.2
Industrial sales 4.1 3.5 17.5 15.6
Transportation 95.6 86.3 395.6 372.4
Off System Sales 4.5 1.3 30.5 6.6
Other 0.1 1.3 0.2 3.5
-------- -------- --------- ---------
Total 124.5 111.8 654.4 626.3
-------- -------- --------- ---------
HEATING DEGREE DAYS 33 66 3,191 3,437
NORMAL HEATING DEGREE DAYS 58 58 3,196 3,178
% COLDER (WARMER) THAN NORMAL (43%) 14% 0% 8%
CUSTOMERS
Residential 2,314,195 2,229,713
Commercial 211,649 206,600
Industrial 5,820 5,882
Transportation 725,572 783,964
Other 61 155
-------- -------- --------- ---------
Total - - 3,257,297 3,226,314
-------- -------- --------- ---------
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.
29
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 operated 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 expired in October 2004, and the amended stipulation would
have permitted 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 have:
(1) extended Columbia of Ohio's CHOICE(R) program through October 2010; (2)
provided Columbia of Ohio with an opportunity to generate revenues sufficient to
cover the stranded costs associated with the CHOICE(R) program; and (3) allowed
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 only 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-system sales. The order allowed
Columbia of Ohio to record post-in-service carrying charges on plant placed in
service after October 2004 and allowed the deferral of property taxes and
depreciation associated with such plant.
On April 9, 2004, Columbia of Ohio and other signatory parties to the
stipulation, consistent with standard regulatory process, petitioned the PUCO
for rehearing on the components which were modified in the order. That same day
the Office of the Ohio Consumers' Counsel (OCC) 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 OCC 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
OCC's 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 mandate that required natural gas marketers participating in
the CHOICE(R) program obtain 75% of their interstate capacity directly from
Columbia of Ohio; 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 with the customers when the annual revenue
exceeds $25 million, instead of $35 million as originally proposed by Columbia
of Ohio and other collaborative parties.
In a letter docketed on May 12, 2004, Columbia of Ohio and the other signatory
parties to the stipulation accepted the PUCO's modifications. On May 14, 2004,
the OCC filed a Second Application for Rehearing. In the pleading, the OCC
argued that the joint applicants did not meet the statutory requirements for an
application for rehearing, and thus the PUCO's order on rehearing granting
rehearing was unlawful. The OCC also argued that the rehearing was the result of
exclusionary settlement negotiations. The OCC continued to disagree with the
PUCO's treatment of off-system sales and capacity release revenues, and
post-in-service carrying charges and related deferrals.
On June 3, 2004, Columbia of Ohio filed its proposed tariffs and accounting, as
required. On June 9, 2004, the PUCO denied the OCC's Second Application for
Rehearing. On July 29, 2004, the OCC filed an appeal with the Supreme Court of
Ohio, contesting the PUCO's May 5, 2004 order on rehearing, which granted in
part Columbia of Ohio's joint application for rehearing, and the PUCO's June 9,
2004 order, denying the OCC's Second Application for Rehearing. On August 4,
2004, Columbia of Ohio moved to intervene in the appellate proceeding.
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS (CONTINUED)
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.
As of September 30, 2004, Columbia of Ohio has $48 million of uncollected
accounts receivable pending future recovery. On October 1, 2004 Columbia of Ohio
filed an application for approval to increase its Uncollectible Expense Rider.
On October 20, 2004 the PUCO issued an Entry that approved this request. The
PUCOs approval of this request will result in Columbia's commencement of
recovery in November 2004 of the aforementioned deferred uncollectible accounts
receivables and future bad-debt recovery requirements.
On June 11, 2004, Columbia Gas of Pennsylvania, Inc. (Columbia of Pennsylvania)
signed a settlement agreement (Settlement Agreement) in its annual gas cost
recovery proceeding with The Office of Consumer Advocate, The Office of Small
Business Advocate, The Office of Trial Staff, and Commercial & Industrial
Intervenors. Under the Settlement Agreement, the signatory parties agreed to
financial incentive mechanisms for off-system sales and capacity release
transactions performed by Columbia of Pennsylvania. Under the incentive
mechanism, customers receive 100% of the total combined proceeds from off-system
sales and capacity release transactions up to a benchmark of $6 million. After
the benchmark is reached, Columbia of Pennsylvania will retain 50% of proceeds
from the transactions; however, Columbia of Pennsylvania may never retain more
than 40% of the actual net proceeds generated from off-system sales and capacity
release transactions. The incentive mechanism begins October 1, 2004 and ends on
September 30, 2006. On September 10, 2004, the Pennsylvania Public Utility
Commission approved the Settlement Agreement.
On August 11, 1999, the Indiana Utility Regulatory Commission (IURC) approved a
flexible gas cost adjustment (GCA) 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 GCA 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's GCA4 annual demand filing, covering the period November 1,
2002 through October 31, 2003, was made on August 29, 2002 and approved by the
IURC for implementation as interim rates, subject to refund effective November
1, 2002. The Indiana Office of Utility Consumer Counselor (OUCC) filed testimony
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's GCA5 annual demand filing, covering the period November 1,
2003 through October 31, 2004, was made on August 26, 2003 and approved by the
IURC for implementation as interim rates, subject to refund, effective November
1, 2003. On June 8, 2004, Northern Indiana and the OUCC entered into a joint
stipulation and agreement resolving all issues in GCA5. A hearing was held
before the IURC on July 18, 2004 in support of the settlement. Among the
settlement agreement's provisions, Northern Indiana has agreed to return $3.8
million to its customers over a twelve-month period following IURC approval.
This refund is the resolution of issues similar to those from March 2003. An
additional provision of the agreement was to extend the current Alternative
Regulatory Procedure (ARP), including Northern Indiana's gas cost incentive
mechanism, from the current expiration date of December 31, 2004 to March 31,
2005. The IURC approved the joint stipulation and agreement, without change, at
their August 18, 2004 administrative meeting.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS (CONTINUED)
Northern Indiana's GCA 6 annual demand filing, covering the period November 1,
2004 through October 31, 2005 was made on August 26, 2004 and approved by the
IURC on October 20, 2004 for implementation as interim rates, subject to refund,
effective November 1, 2004.
Northern Indiana, the OUCC, Testimonial Staff of the IURC, and the Marketer
Group (a group which collectively represents 7 marketers participating in
Northern Indiana Choice) filed a Stipulation and Agreement with the IURC on
October 12, 2004, that, among other things, extends the expiration date of the
1997 ARP decision to March 31, 2006. The agreement, if approved by the IURC
extends the expiration date of Northern Indiana's gas incentive mechanism - GCIM
to March 31, 2006 as well. The agreement grandfathers the terms of existing
contracts that marketers have with Choice customers. Lastly, the agreement
establishes a scope for negotiations that Parties will follow when convening
within the next several months to establish a long-term resolution of ARP.
On September 21, 2004, Northern Indiana petitioned the IURC under the ARP
statutory requirements to permit a two-year pilot low-income energy assistance
program. The program, filed under the name NIPSCO Winter Warmth provides, if
approved, approximately $4.0 million of assistance for customer security
deposits and bill assistance for qualifying low-income customers presently
disconnected for non-payment or at risk for disconnection. As proposed, Northern
Indiana will fund this program through a monthly $0.50 charge to residential and
general service customers and an annual contribution of $200,000 from Northern
Indiana.
All of the Columbia distribution companies hold long-term contracts for pipeline
and storage services with its affiliate pipelines, Columbia Gas Transmission
Corporation (Columbia Transmission) and Columbia Gulf Transmission Company
(Columbia Gulf), and a majority of those contracts expired on October 31, 2004.
The Columbia distribution companies are comprised of Columbia Gas of Kentucky,
Inc., Columbia Gas of Maryland, Inc., Columbia of Ohio, Columbia of
Pennsylvania, and Columbia Gas of Virginia, Inc. (Columbia of Virginia). Several
distribution companies discussed their 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 Transmission and
Columbia Gulf have been resolved prior to the contracts expiring. In addition,
certain contracts were 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 to renew its pipeline
and storage contracts with Columbia Transmission and Columbia Gulf. 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 will also acquire
additional capacity to meet customer requirements on peak days. In addition, on
August 3, 2004, the Virginia State Corporation Commission approved a request by
Columbia of Virginia to renew its pipeline and storage contracts with Columbia
Transmission and Columbia Gulf. Pursuant to this approval, Columbia of
Virginia's storage and pipeline contracts with Columbia Transmission and
Columbia Gulf will be renewed for terms of fifteen years.
Environmental Matters
In January of 2004, Northern Indiana and Kokomo Gas and Fuel Company signed a
multi-site Voluntary Remediation Program Order addressing 14 former 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.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS DISTRIBUTION OPERATIONS (CONTINUED)
Weather in the Gas Distribution Operation's territories for the third quarter of
2004 was 43% warmer than normal and 50% warmer than the third quarter of 2003.
For the first nine months of 2004, weather was normal. However, the first nine
months of 2004 was 7% warmer than the first nine months of 2003.
Throughput
Total volumes sold and transported of 124.5 million dekatherms (MMDth) for the
third quarter of 2004 increased 12.7 MMDth from the same period last year
primarily due to increased transportation sales and off-system sales.
For the nine month period ended September 30, 2004, total volumes sold and
transported were 654.4 MMDth, an increase of 28.1 MMDth from the same period in
2003 primarily reflecting increased off-system sales and transportation sales in
the first nine months of 2004 compared to the first nine months of 2003, partly
offset by a reduction of residential and commercial sales.
Net Revenues
Net revenues for the three months ended September 30, 2004 were $178.7 million,
an increase of $2.5 million from the same period in 2003. The increase in net
revenues was primarily a result of higher transportation revenue in the current
quarter, and the affect of lower non-weather related gas sales and incentive
program revenue in the comparable 2003 period.
For the nine month period ended September 30, 2004, net revenues were $1,000.2
million, a $65.1 million decrease from the same period in 2003, largely due to
reduced residential and commercial sales of $29.0 million as a result of warmer
weather, lower cost tracker and gross receipts tax revenues of $11.9 million
that are generally offset in operating expenses, and lower non-traditional
revenues.
Operating Income (Loss)
For the third quarter of 2004, Gas Distribution Operations reported an operating
loss of $35.7 million, versus an operating loss of $27.2 million for the
comparable period in 2003. The increased operating loss was mainly attributable
to higher operating expenses for the third quarter 2004 due primarily to the
comparable 2003 period being favorably impacted by the reversal of $8.9 million
in reserves and accrued expenses. The current period was favorably impacted by a
decrease in uncollectible expense of $11.2 million largely attributable to the
bad debt cost tracker that was approved for Columbia of Ohio in December 2003,
partially offset by an increase in employee and administrative expenses.
Operating income for the first nine months of 2004 totaled $264.4 million, a
$79.4 million decrease compared to the same period in 2003 largely due to lower
net revenues of $65.1 million discussed above. Higher employee and
administrative expenses were offset by a decrease in uncollectible expense of
$14.5 million. Operating expenses increased $14.3 million due mainly to the
impact of the reversal of reserves and accrued expenses of $11.1 million and an
adjustment to change the allocation of corporate employee and administrative
expenses of $5.2 million in the 2003 period. Other taxes was favorably impacted
by a reduction of an accrual for estimated property tax expense of $6.5 million
and lower gross receipts taxes offset in revenue, and unfavorably impacted by
$11.7 million of increased sales tax accruals in the 2004 and 2003 periods.
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS TRANSMISSION AND STORAGE OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- --------------------
(in millions) 2004 2003 2004 2003
- -------------------------------- ------- -------- ------- --------
OPERATING REVENUES
Transportation revenues $ 142.4 $ 145.1 $ 479.1 $ 480.1
Storage revenues 44.3 44.2 134.0 133.5
Other revenues 2.1 2.1 7.2 9.1
------- -------- ------- --------
Total Operating Revenues 188.8 191.4 620.3 622.7
Less: Cost of gas sold 2.1 5.7 12.5 12.8
------- -------- ------- --------
Net Revenues 186.7 185.7 607.8 609.9
------- -------- ------- --------
OPERATING EXPENSES
Operation and maintenance 76.9 56.4 226.3 197.6
Depreciation and amortization 28.2 27.8 85.9 83.4
Loss (Gain) on sale of assets (0.1) (0.1) 0.2 0.1
Other taxes 12.6 10.8 41.4 39.4
------- -------- ------- --------
Total Operating Expenses 117.6 94.9 353.8 320.5
------- -------- ------- --------
Operating Income $ 69.1 $ 90.8 $ 254.0 $ 289.4
======= ======== ======= ========
THROUGHPUT (MMDTH)
Columbia Transmission
Market Area 125.9 127.8 701.2 734.1
Columbia Gulf
Mainline 114.9 127.8 415.5 481.5
Short-haul 28.9 35.9 76.8 94.5
Columbia Pipeline Deep Water 4.1 1.5 12.8 4.9
Crossroads Gas Pipeline 9.2 9.1 29.7 25.2
Granite State Pipeline 3.5 2.1 23.1 23.1
Intrasegment eliminations (116.6) (127.6) (415.3) (464.2)
------- -------- ------- --------
Total 169.9 176.6 843.8 899.1
------- -------- ------- --------
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. On October
31, 2004, firm contracts expired for both Columbia Transmission and Columbia
Gulf, representing approximately 60% of the Transmission Segment's net annual
revenues. Based upon commitments made to date, the Transmission Segment is
projecting a reduction of approximately $40 million in annual revenues under the
replacement contracts, which represents approximately 5% of total Segment
revenues. The terms of the replacement contracts entered into by Columbia
Transmission and Columbia Gulf range from one year to 15 years, with an average
term of approximately 7 years. Certain customers, who have storage and related
transportation contracts which were extended through the end of the 2004/2005
winter, have not made long-term commitments. These customers represent 16% of
the Transmission Segment's annual net revenues. It's anticipated that these
customers will make longer-term elections in early 2005.
34
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 the 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 the FERC subject to refund and the filing of
additional data by Columbia Transmission. On October 1, 2003, the FERC issued an
order accepting Columbia Transmission's TCRA filing, and accepting the full
recovery of upstream transportation costs. On February 11, 2004, the 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. The FERC will permit parties to pursue certain issues raised
in the 2003 filing in connection with consideration of Columbia Transmission's
2004 RAM filing, which became effective April 1, 2004, and is currently pending.
Environmental Matters
On April 1, 2004, the 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 (SIPs) which may
impact certain compressor station engines/turbines owned by Columbia
Transmission and Columbia Gulf. Columbia Transmission and Columbia Gulf 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
additional compliance costs. The MACT for reciprocating internal combustion
engines will only impact one Columbia Transmission facility and the estimated
cost of compliance is expected to be immaterial.
On April 15, 2004, the EPA finalized the 8-hour ozone non-attainment areas.
After designation, the Clean Air Act provides for a process for promulgation of
rules specifying a compliance level, compliance deadline, and necessary controls
to be implemented within designated areas. Resulting state rules could require
additional reductions in NOx. Columbia Transmission and Columbia Gulf will
monitor implementation of the rules. While the outcome of such rulemakings is
uncertain, the cost could be significant.
Proposed Millennium Pipeline Project
The proposed Millennium Pipeline Project (Millennium), in which Columbia
Transmission is participating and will serve as developer and operator, will
provide access to a number of supply and storage basins and the Dawn, Ontario
trading hub. The project is now being marketed in two phases. Phase 1 of the
project is to begin at a proposed interconnect with the Empire State Pipeline
(Empire), an existing pipeline that originates at the Canadian border and
extends easterly towards Syracuse. Empire would construct a lateral pipeline
southward to connect with Millennium near Corning, N.Y. Millennium would extend
eastward to an interconnect with Algonquin Gas Transmission at Ramapo, N.Y. As
currently planned, Phase 2 would cross the Hudson River, linking to the New York
City metropolitan market.
35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
GAS TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)
On September 19, 2002, the FERC issued its order granting final certificate
authority for the original Millennium project and specified that Millennium may
not begin construction until certain environmental and other conditions are met.
One such condition, impacting what is now being marketed as Phase 2 of the
project, is compliance with the Coastal Zone Management Act, which is
administered by the State of New York's Department of State (NYDOS). NYDOS has
determined that the Hudson River crossing plan is not consistent with the Act.
Millennium's appeal of that decision to the United States Department of Commerce
was denied. Millennium filed an appeal of the U.S. Department of Commerce ruling
relating to the project's Hudson River crossing plan in the U.S. Federal
District Court on February 13, 2004. The procedural schedule calls for all
briefings to be completed by the first quarter of 2005.
During the second quarter of 2004, a NiSource affiliate purchased an additional
interest in the project. NiSource intends to find another sponsor by the end of
2004 to purchase this interest. During the third quarter of 2004, KeySpan
Millennium, L.L.C. (subsidiary of KeySpan Corporation) purchased the interest of
West Coast Energy, Inc. (subsidiary of Duke Energy Corp.). The other sponsors
are Columbia Transmission and MCN Energy Group, Inc. (subsidiary of DTE Energy
Co.).
Throughput
Throughput for the Gas Transmission and Storage Operations segment totaled 169.9
MMDth for the third quarter 2004, compared to 176.6 MMDth for the same period in
2003. The decrease of 6.7 MMDth is due mainly to a continued decline of offshore
natural gas production.
Throughput for the nine months ended September 30, 2004 was 843.8 MMDth, a
decrease of 55.3 MMDth from the same period in 2003 due to warmer weather in the
first half 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 $186.7 million for the third quarter of 2004, an increase of
$1.0 million from the same period in 2003. Net revenues increased due to higher
demand charge revenues partially offset by a reduction in interruptible service
revenues primarily due to lower throughput.
Net revenues were $607.8 million for the nine months ended September 30, 2004, a
decrease of $2.1 million from the comparable 2003 period. Both of the nine-month
periods reflect lower interruptible transmission service revenues than those
that have been historically realized. Management has evaluated operational
issues and market conditions and anticipates that there will be fewer
opportunities for interruptible revenue on an ongoing basis. 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. Also, net revenues for the 2004 period decreased due to lower throughput,
which was partially offset by an increase in demand changes.
Operating Income
Operating income was $69.1 million for the third quarter of 2004, a decrease of
$21.7 million from the third quarter of 2003 due to increased operating
expenses. The increase in operating expenses in the third quarter 2004 is
attributable to higher employee and administrative expenses of $6.7 million,
primarily due to an increase in pension expense. The comparable 2003 period
benefited from the reversal of $11.0 million in accrued expenses for
environmental remediation, the reversal of a franchise tax reserve and the
receipt of insurance proceeds.
For the nine months ended September 30, 2004, operating income was $254.0
million, a $35.4 million decrease from the comparable 2003 period. The decrease
was mainly attributable to higher operating expenses as a result of higher
employee and administrative expenses of $9.0 million, primarily due to an
increase in pension expense. The comparable 2003 period benefited from the
reversal of $11.0 million in accrued expenses for environmental remediation and
the $6.6 million reversal of a legal reserve.
36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- ----------------------
(in millions) 2004 2003 2004 2003
- --------------------------------- -------- -------- --------- ---------
NET REVENUES
Sales revenues $ 303.3 $ 314.8 $ 831.6 $ 837.0
Less: Cost of sales 92.4 108.9 258.7 285.9
-------- -------- --------- ---------
Net Revenues 210.9 205.9 572.9 551.1
-------- -------- --------- ---------
OPERATING EXPENSES
Operation and maintenance 57.2 57.0 176.3 167.4
Depreciation and amortization 44.1 43.4 132.6 130.7
Other taxes 14.2 16.0 27.8 46.8
-------- -------- --------- ---------
Total Operating Expenses 115.5 116.4 336.7 344.9
-------- -------- --------- ---------
Operating Income $ 95.4 $ 89.5 $ 236.2 $ 206.2
======== ======== ========= =========
REVENUES ($ IN MILLIONS)
Residential 86.9 94.7 224.8 229.3
Commercial 78.8 84.0 222.4 220.4
Industrial 100.3 90.9 304.1 282.2
Wholesale 18.8 34.0 41.6 79.4
Other 18.5 11.2 38.7 25.7
-------- -------- --------- ---------
Total 303.3 314.8 831.6 837.0
-------- -------- --------- ---------
SALES (GIGAWATT HOURS)
Residential 923.7 1,008.1 2,372.4 2,436.8
Commercial 990.1 1,011.8 2,749.6 2,722.5
Industrial 2,295.3 2,176.4 6,960.7 6,655.3
Wholesale 504.2 911.8 1,063.6 2,205.2
Other 31.0 36.0 97.2 97.2
-------- -------- --------- ---------
Total 4,744.3 5,144.1 13,243.5 14,117.0
-------- -------- --------- ---------
COOLING DEGREE DAYS 377 459 582 572
NORMAL COOLING DEGREE DAYS 576 584 803 808
% WARMER (COOLER) THAN NORMAL (35%) (21%) (28%) (29%)
ELECTRIC CUSTOMERS
Residential 389,878 386,227
Commercial 49,983 48,984
Industrial 2,518 2,548
Wholesale 26 19
Other 777 795
-------- -------- --------- ---------
Total 443,182 438,573
-------- -------- --------- ---------
NiSource generates and distributes electricity, through its subsidiary Northern
Indiana, to approximately 443 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.
37
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)
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.
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 $41.9 million and $39.8 million were recognized for
electric customers for the first nine months of 2004 and 2003, respectively.
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. On July 21, 2004 the IURC issued
an order which denied Northern Indiana's request for deferred accounting
treatment for the MISO Schedule 10 administrative fees. Northern Indiana
recorded a charge during the second quarter 2004 in the amount of $2.1 million
related to the MISO administrative charges deferred through June 30, 2004, and
recognized $0.9 million in MISO fees in the third quarter 2004. The MISO
Schedule 10 administrative fees are currently estimated to be approximately $2.8
million annually. On October 6, 2004, the IURC denied Northern Indiana's Motion
for Reconsideration. Northern Indiana filed its notice of appeal and this matter
is pending.
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 has filed with the
FERC detailed tariff information, with a planned initial operation date of March
1, 2005. Northern Indiana and EnergyUSA-TPC Corp. (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 conduct 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) returns to service.
38
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, which includes the Mitchell Station. On October 8, 2004,
Northern Indiana requested proposals from wholesale power marketers to provide
power under varying terms and conditions. These proposals will be evaluated
after the submittal date on November 5, 2004. Northern Indiana requested similar
proposals during 2003 which were not executed. 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. 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. The procedural schedule for the City of Gary has
been set, and Northern Indiana has filed its prepared direct testimony, stating
that Northern Indiana has no current plans to restart the Mitchell Station.
Interveners, including the Indiana Office of Utility Consumer Council, filed
direct testimony on October 12, 2004. The IURC hearing of the City of Gary
petition is scheduled for the fourth quarter of 2004.
On May 25, 2004, Northern Indiana filed a petition for approval of a Purchased
Power and Transmission Tracker Mechanism to recover the cost of purchased power
to meet Northern Indiana's retail electric load requirements and charges imposed
on Northern Indiana by MISO and Grid America. Northern Indiana's direct
testimony was filed on August 6, 2004. The hearing in this matter is also
scheduled for the fourth quarter of 2004.
On July 9, 2004, a verified joint petition was filed by PSI Energy, Inc.,
Indianapolis Power & Light Company, Northern Indiana and Vectren Energy Delivery
of Indiana, Inc., seeking approval of certain changes in operations that are
likely to result from the MISO's implementation of energy markets, and for
determination of the manner and timing of recovery of costs resulting from the
MISO's implementation of standard market design mechanisms, such as the MISO's
proposed real-time and day-ahead energy markets. The hearing in this matter is
scheduled for the first quarter of 2005.
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). 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's latest ECRM filing (ECR-4) was made in August 2004 for
capital expenditures of $231.3 million. Northern Indiana's first annual EERM
filing (EER-1) was made in February 2004 for $1.9 million. On February 4, 2004,
the IURC approved Northern Indiana's latest compliance plan with the estimate of
$274.2 million. On October 8, 2004, Northern Indiana filed for approval of the
revised cost estimates to meet the environmental standards. Northern Indiana
anticipates a total capital investment amounting to approximately $305 million.
The ECRM revenues amounted to $12.8 million for the nine months ended September
30, 2004, and $18.0 million from inception to date, while EERM revenues were
$0.8 million for the first nine months of 2004.
Environmental Matters
AIR. In December 2001, the EPA approved regulations developed by the State of
Indiana to comply with the EPA's NOx SIP call. The NOx SIP call requires certain
states, including Indiana, to reduce NOx levels from several sources, including
industrial and utility boilers, to lower regional transport of ozone. Compliance
with the NOx limits contained in these rules was required by May 31, 2004. To
comply with the rule, Northern Indiana developed a NOx Compliance plan and is
currently in compliance with the NOx limits. In implementing the NOx compliance
plan, Northern Indiana has expended approximately $264.2 million as of September
30, 2004 to install NOx reduction technology at each of its active generating
stations and estimates total capital costs of approximately $305 million. Actual
compliance costs may vary depending on a number of factors including market
demand and resource constraints, uncertainty of future equipment and
construction costs, and the potential need for additional control technology.
39
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)
In March 2004, the State of North Carolina filed a petition under Section 126 of
the Clean Air Act seeking the EPA imposition of additional NOx and sulfur
dioxide (SO2) reductions from electrical generating units in 13 states,
including Indiana. The EPA is addressing the issues raised by North Carolina in
other current regulatory initiatives that are being monitored by Northern
Indiana.
On April 15, 2004, the EPA finalized the 8-hour ozone non-attainment area
designations. After designation, the Clean Air Act provides for a process for
promulgation of rules specifying a compliance level, compliance deadline, and
necessary controls to be implemented within designated areas over the next few
years. Resulting state rules could require additional reductions in NOx
emissions from coal-fired boilers including Northern Indiana's electric
generating stations. Until the rules are promulgated, the potential impact on
Northern Indiana is uncertain. Northern Indiana will continue to closely monitor
developments in this area.
On April 15, 2004, the EPA proposed amendments to its July 1999 Regional Haze
Rule that requires states to set periodic goals for improving visibility in 156
natural areas across the United States. These amendments would apply to the
provisions of the regional haze rule that require emissions controls known as
best available retrofit technology (BART) for BART eligible industrial
facilities emitting air pollutants that reduce visibility. Under the rule,
states would be required to develop rules that specify the stringency, type of
reductions, and controls that could be applied to BART eligible sources
consistent with the EPA guidance. The BART eligible sources include facilities
that were built between 1962 and 1977, have the potential to emit more than 250
tons a year of visibility impairing emissions, and fall within one of 26
categories, including utility and industrial boilers. States must develop
implementation rules by January 2008. Resulting rules could require additional
reductions of NOx, SO2 and particulate matter from coal-fired boilers including
Northern Indiana's electric generating stations. Until the state rules are
promulgated, the potential impact on Northern Indiana is uncertain. Northern
Indiana will continue to closely monitor developments in this area.
The EPA Administrator signed a Supplemental Notice of Proposed Rulemaking on May
18, 2004. This rule requires that each state must submit to the EPA a plan that
demonstrates it will meet its assigned statewide Clean Air Interstate Rule SO2
and NOx emissions budget. The final EPA rule is expected by late Fall, 2004.
Until the Federal and State rules are promulgated, the potential impact is
uncertain. Northern Indiana will continue to closely monitor developments in
this area.
On June 28 and 29, 2004, the EPA responded to the states' initial
recommendations for the EPA designation of areas meeting and not meeting the
National Ambient Air Quality Standards (NAAQS) for fine particles. (Fine
particles are those less than or equal to 2.5 micrometers in diameter and are
also referred to as PM2.5.) The states will have 120 days to comment on or
dispute these recommendations. Once the designations are finalized, states will
need to initiate rulemaking that would seek emissions reductions to bring the
designated areas into attainment. Northern Indiana will continue to closely
monitor developments in this area.
In late 1999 the EPA initiated a New Source Review enforcement action against
several industries including the electric utility industry concerning rule
interpretations that have been the subject of recent (prospective) reform
regulations. Northern Indiana has received and responded to the EPA information
requests on this subject, most recently in June 2002. The EPA issued a Notice of
Violation (NOV) to Northern Indiana on September 29, 2004, for alleged
violations of the Clean Air Act and the SIP. Specifically, the NOV alleges that
modifications were made to certain boiler units at the Michigan City, Schahfer,
and Bailly Generating Stations without obtaining appropriate air permits for the
modifications. Northern Indiana has held an initial meeting with the EPA to
discuss the violations alleged in the NOV but is unable, at this time, to
predict the timing or likely outcome of this EPA action.
WATER. On February 16, 2004, the EPA Administrator signed the Phase II Rule of
the Clean Water Act Section 316(b) which requires all large existing steam
electric generating stations meet certain performance standards to reduce the
mortality of aquatic organisms at their cooling water intake structures. The EPA
has delayed the publication of the rule to complete additional revisions. The
rule was reissued on July 9, 2004 and becomes effective on September 7, 2004.
Under this rule, plants will either have to demonstrate that the performance of
their existing fish protection systems meet the new standards or develop new
systems whose compliance is based on any of five options. Specific impacts of
the final Phase II rule on the four (4) Northern Indiana generating stations are
in the process of being determined at this time.
40
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)
REMEDIATION. Northern Indiana is a potentially responsible party under the
Comprehensive Environmental Response Compensation and Liability Act 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 third quarter 2004 were 4,744.3 gwh, a decrease of 399.8
gwh compared to the 2003 period, mainly as a result of 18% cooler weather than
the comparable period and decreased wholesale transaction sales, which was
offset in part by an improvement in industrial sales due to increased demand
from the steel industry.
Electric sales for the first nine months of 2004 was 13,243.5 gwh, a decrease of
873.5 gwh compared to the 2003 period, as a result of the cooler weather during
the third quarter and decreased wholesale transaction sales.
Net Revenues
In the third quarter 2004, electric net revenues of $210.9 million increased by
$5.0 million from the comparable 2003 period. Net revenue increased primarily
due to environmental trackers of $4.3 million, increased transmission revenues
of $2.1 million, and the impact of reserves of $3.0 million recorded for
regulatory refunds in the 2003 period. These increases were partially offset by
a reduction of $6.2 million in net revenues resulting from cooler weather in the
current period.
In the first nine months of 2004, electric net revenues were $572.9 million, an
increase of $21.8 million from the comparable 2003 period due to higher net
revenues from environmental trackers of $11.0 million, and an increase in
non-weather-related usage and customer count of $7.4 million and the effect of
reserves recorded for regulatory refunds of $12.3 million in the comparable 2003
period. These increases were partially offset by unfavorable weather amounting
to $6.0 million, the majority of which occurred in the current quarter and a
decrease in net revenues of $3.2 million as a result of a reduced interruptible
sales tariff for industrial customers approved by the IURC earlier this year.
Operating Income
Operating income for the third quarter 2004 was $95.4 million, an increase of
$5.9 million from the same period in 2003. This increase for the comparative
quarters was primarily due to the increase in net revenue mentioned above.
Operating expenses decreased due to reduced electric production maintenance
expenses of $2.7 million, a $1.7 million reduction of an accrual for estimated
property tax expense and a $0.6 million decrease in employee and administrative
expenses. These decreases in operating expenses were partially offset by an
increase in insurance expense of $1.0 million, MISO administrative fees of $0.9
million in the current quarter and the impact of a $1.8 million adjustment to a
reserve for employee insurance in the 2003 period.
Operating income for the first nine months of 2004 was $236.2 million, an
increase of $30.0 million from the same period in 2003. The increase was
primarily due to increased net revenue mentioned above and an overall reduction
in operating expenses of $8.2 million. Contributing to current period expense
savings was a reduction of an accrual for prior year estimated property taxes of
$14.9 million and a reduction in the current year accrual of $4.5 million.
Operation and maintenance expenses increased $8.9 million due mainly to an
adjustment to an insurance reserve of $3.8 million recorded in 2003, an expense
of $3.3 million recorded in the first quarter of 2004 representing Electric
Operations' portion of the redemption premium from the early extinguishment of
certain medium-term notes at Northern Indiana, MISO administrative expenses of
$3.0 million recognized this year, higher outside services expense of $1.8
million and higher employee and administrative expenses of $1.4 million. These
increases in operation and maintenance expenses were partially offset by a $3.2
million reversal of claims reserves upon settlement in the second quarter of
2004, lower electric production maintenance expense of $2.4 million, and $1.5
million in property insurance reimbursements.
41
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
OTHER OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- -------------------
(in millions) 2004 2003 2004 2003
- --------------------------------------- -------- -------- ------- --------
NET REVENUES
Products and services revenue $ 149.3 $ 97.5 $ 483.8 $ 334.6
Less: Cost of products purchased 134.0 90.4 462.5 315.1
-------- -------- ------- --------
Net Revenues 15.3 7.1 21.3 19.5
-------- -------- ------- --------
OPERATING EXPENSES
Operation and maintenance 12.1 17.2 34.9 43.8
Depreciation and amortization 3.0 2.4 8.9 8.6
Loss on sale or impairment of assets - - 0.7 1.1
Other taxes 1.1 (0.2) 4.0 2.6
-------- -------- ------- --------
Total Operating Expenses 16.2 19.4 48.5 56.1
-------- -------- ------- --------
Operating Loss $ (0.9) $ (12.3) $ (27.2) $ (36.6)
======== ======== ======= ========
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 reached an agreement in October 2004 with
the engineering, procurement and construction contractor, which requires the
contractor to pay for a portion of the necessary plant modifications and other
expenses. Whiting Clean Energy is also pursuing recovery from the insurance
provider for construction delays and necessary plant modifications and repairs.
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 nine months
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 charge 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 were $15.3 million for the third quarter of 2004, an increase of
$8.2 million compared with the same period a year-ago due mostly to a $5.1
million settlement of a lawsuit in the current period.
For the first nine months of 2004, net revenues were $21.3 million, a $1.8
million increase compared to the same period in 2003. The increase was mainly
due to a $5.1 million settlement of a lawsuit in the current period partially
offset by reduced revenues from the Whiting Clean Energy facility of $4.4
million.
42
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
OTHER OPERATIONS (CONTINUED)
Operating Loss
The Other segment reported an operating loss of $0.9 million for the third
quarter of 2004, versus an operating loss of $12.3 million for the comparable
period 2003. This improvement is the result of the settlement of a lawsuit in
the third quarter of 2004 mentioned above and the effect of an accrual in the
comparable period in 2003 for an unrelated lawsuit of approximately $4.4
million.
For the first nine months of 2004, the operating loss was $27.2 million compared
to an operating loss of $36.6 million for the comparable 2003 period. This
improvement was mainly due to a $5.1 million settlement of a lawsuit in the
current period and the effect of an accrual in the comparable period in 2003 for
two unrelated lawsuits totaling approximately $9.4 million, partially offset by
reduced revenues from the Whiting Clean Energy facility of $4.4 million.
43
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.
44
PART II - OTHER INFORMATION
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 the 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 alleged
various violations during the winter of 2002-2003 by Columbia Gas
Transmission Corp. (Columbia Transmission) of its firm service obligations
to VNG. VNG sought monetary damages and remedies (exceeding $37 million),
and also sought certain prospective remedies. On July 29, 2004, the FERC
issued an order in which it refused to grant VNG any monetary damages and
said such claims are best determined by a court of law. The FERC also
agreed with Columbia Transmission, that Columbia Transmission had not
abandoned its obligation to provide service and that it had not
inappropriately continued interruptible service to the detriment of firm
service. However, the FERC did find that Columbia Transmission had failed
to exercise sufficient due diligence in its modifications to or its
operation of vaporization equipment at its Chesapeake LNG facility and
that Columbia Transmission had failed to deliver gas to VNG at 250 pounds
per square inch gauge (psig) as called for by the agreement between VNG
and Columbia Transmission. The FERC declined VNG's request to award
damages in this case and, as noted above, stated that any claim for
damages could best be determined by a court of law. Both VNG and Columbia
Transmission sought rehearing of the FERC order, but the FERC denied the
requests for rehearing at its October 26, 2004 public meeting.
2. STAND ENERGY CORPORATION, ET AL. V. COLUMBIA GAS TRANSMISSION CORPORATION,
ET AL KANAWHA COUNTY COURT, WEST VIRGINIA, ATLANTIGAS CORPORATION V.
NISOURCE, ET AL, U.S. DISTRICT COURT, NORTHERN DISTRICT OF MARYLAND AND
TRIAD ENERGY RESOURCES, ET AL. V. NISOURCE, ET AL
In June 2002, Atlantigas Corporation filed a complaint in the U.S.
District Court, District of Columbia. In March 2003, Triad Energy
Resources filed a similar complaint in the U.S. District Court, District
of Columbia. On September 29, 2003, the Atlantigas complaint was dismissed
for lack of personal jurisdiction and Atlantigas filed a new complaint in
the U.S. District Court of Northern Maryland on October 27, 2003. Based on
the Court's decision on personal jurisdiction in Atlantigas, the
plaintiffs in the Triad case dismissed that case on October 31, 2003 from
the District of Columbia and indicated that the case would be refiled in
another jurisdiction. On July 14, 2004, Stand Energy Corporation filed a
complaint in Kanawha County Court in West Virginia and on or about July
22, Atlantigas filed a voluntary notice of dismissal without prejudice in
the case in the U.S. District Court of Northern Maryland, citing its
joinder as a plaintiff in the Stand Energy case. All of these complaints
contain allegations against various NiSource companies, including Columbia
Transmission and Columbia Gulf Transmission Company (Columbia Gulf), and
assert that those companies and certain "select shippers" engaged in an
"illegal gas scheme" that violated federal anti-trust and state law. The
"illegal gas scheme" complained of by the plaintiffs relates to the
Columbia Transmission and Columbia Gulf gas imbalance transactions that
were the subject of the FERC enforcement staff investigation and
subsequent settlement approved in October 2000. Columbia Transmission and
Columbia Gulf filed a Notice of Removal with the Federal Court in West
Virginia on August 13, 2004 and a Motion to Dismiss on September 10, 2004.
All briefing on the Motion to Dismiss is now complete.
45
ITEM 1. LEGAL PROCEEDINGS (continued)
NISOURCE INC.
3. UNITED STATES OF AMERICA EX REL. JACK J. GRYNBERG V. COLUMBIA GAS
TRANSMISSION CORP., ET AL., U.S. DISTRICT COURT, E.D. LOUISIANA
The plaintiff filed a complaint in 1997, under the False Claims Act, on
behalf of the United States of America, against approximately seventy
pipelines, including Columbia Gulf and Columbia Transmission. The
plaintiff claimed that the defendants had submitted false royalty reports
to the government (or caused others to do so) by mis-measuring the volume
and heating content of natural gas produced on Federal land and Indian
lands. The Plaintiff's original complaint was dismissed without prejudice
for misjoinder of parties and for failing to plead fraud with specificity.
The plaintiff then filed over sixty-five new False Claims Act complaints
against over 330 defendants in numerous Federal courts. One of those
complaints was filed in the Federal District Court for the Eastern
District of Louisiana against Columbia and thirteen affiliated entities.
Plaintiff's second complaint, filed in 1997, repeats the mis-measurement
claims previously made and adds valuation claims alleging that the
defendants have undervalued natural gas for royalty purposes in various
ways, including sales to affiliated entities at artificially low prices.
Most of the Grynberg cases were transferred to Federal court in Wyoming in
1999.
The defendants, including the Columbia defendants, have filed motions to
dismiss for lack of subject matter jurisdiction in this case. Responses
and replies to the motions are to be filed on or before December 1, 2004.
4. TAWNEY, ET AL. V. COLUMBIA NATURAL RESOURCES, INC., ROANE COUNTY, WV
CIRCUIT COURT
The Plaintiffs, who are royalty owners, filed a lawsuit in early 2003
against Columbia Natural Resources alleging that Columbia Natural
Resources underpaid royalties by improperly deducting post-production
costs and not paying a fair value for the gas produced from their leases.
Plaintiffs seek the alleged royalty underpayment and punitive damages
claiming that Columbia Natural Resources fraudulently concealed the
deduction of post-production charges. In February 2004, the court
certified the case as a class action that includes any person who, after
January 1, 1980, received or is due royalties from Columbia Natural
Resources (and its predecessors or successors) on lands lying within the
boundary of the State of West Virginia. All individuals, corporations,
agencies, departments or instrumentalities of the United States of America
are excepted from the class. Although NiSource sold Columbia Natural
Resources in 2003, it remains obligated to manage this litigation and also
remains at least partly liable for any damages awarded to the plaintiffs.
Columbia Natural Resources appealed the decision certifying the class and
the Supreme Court of West Virginia denied the appeal. Members of the class
had until October 15, 2004 to opt out; the list of class members is now
being prepared by the Special Master. Trial is scheduled for July 5, 2005.
5. ENVIRONMENTAL PROTECTION AGENCY NOTICE OF VIOLATION
On September 29, 2004, the United States Environmental Protection Agency,
(EPA) issued a Notice of Violation (NOV) to Northern Indiana Public
Service Company (Northern Indiana) for alleged violations of the Clean Air
Act and the Indiana State Implementation Plan. The NOV alleges that
modifications were made to certain boiler units at three of Northern
Indiana's power plants without obtaining appropriate air permits for the
modifications. Northern Indiana has met with the EPA to discuss the
violations alleged in the NOV.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
46
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
47
ITEM 6. EXHIBITS
NISOURCE INC.
(10.1) Change in Control Agreement, between Samuel W. Miller, Jr. and
NiSource Inc., dated August 17, 2004.
(10.2) Supplemental Executive Retirement Agreement between Michael W.
O'Donnell and NiSource Inc., dated July 28, 2004.
(31.1) Certification of Gary L. Neale, Chief Executive Officer, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification of Michael W. O'Donnell, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification of Gary L. Neale, Chief Executive Officer, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(32.2) Certification of Michael W. O'Donnell, Chief Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.
48
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: November 2, 2004 By: /s/ Jeffrey W. Grossman
-------------------------------------
Jeffrey W. Grossman
Vice President and Controller
(Principal Accounting Officer
and Duly Authorized Officer)
49