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Filed by: NiSource Inc.
Pursuant to Rule 425 under the Securities Act of 1933
Subject Company: Columbia Energy Group
Commission File No: 333-33896
NiSource Inc.'s 1999 Annual Report to Shareholders refers to its proposed
merger with Columbia Energy Group. The following is the text of the report:
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Creating The Next Generation
[NISOURCE LOGO]
1999 Annual Report To Shareholders
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NiSource Inc. is a holding company whose
primary business is the distribution of
electricity, natural gas and water in the
Midwest and Northeast United States.
The Company also markets utility
services and customer-focused
resource solutions along a
corridor stretching from
Texas to Maine.
[GRAPH]
TEXAS
LOUISIANA
MISSISSIPPI
TENNESSEE
KENTUCKY
INDIANA
OHIO
WEST VIRGINIA
VIRGINIA
MARYLAND
PENNSYLVANIA
NEW JERSEY
NEW YORK
[GRAPH]
NiSource/Columbia Assets*
Columbia Gas Transmission
Columbia Gulf Transmission
Cove Point Pipeline
PGNTS
Cover Point LNG Terminal
Cover Storage Fields
NiSource Storage Fields
NiSource Power Plants
Columbia Gas Transmission
Service Territory
Columbia Gas Distribution
Service Territory
NiSource Gas Distribution
Service Territory
Bay State Gas Company
NiSource Electric Territory
IWC Territory
*This merger, subject to shareholder
and regulatory approval, is expected
to be completed by the end of 2000.
Contents
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page 1 ONE COMPANY, STRONG BRANDS
page 2 DEAR FELLOW SHAREHOLDER
page 20 THE BOARD OF DIRECTORS
page 22 THE 1999 FINANCIALS
On the cover: Determination, energy and focus drive
salmon to their destination to create the next
generation.
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ONE COMPANY, STRONG BRANDS
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REGULATED BUSINESSES
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Northern Indiana Public Service Company, serving more than 1 million customers
in northern Indiana, is the state's largest natural gas distribution company and
the second-largest electric company.
Bay State Gas Company is among the largest natural gas utilities in New
England, serving customers in ~Massachusetts.
Indianapolis Water Company, a subsidiary of IWC Resources Corporation (IWCR),
provides water to customers in Indianapolis and central Indiana. IWCR also
provides water to customers through its subsidiary Harbour Water Corporation and
its operation of Lawrence Water.
Kokomo Gas and Fuel Company is a natural gas provider with distribution service
to customers in central Indiana.
Northern Indiana Fuel and Light Company, Inc., provides natural gas distribution
service to customers in northeastern Indiana.
Northern Utilities, Inc., a Bay State Gas Company subsidiary, serves customers
in New Hampshire and southern Maine communities.
Crossroads Pipeline Company provides gas transportation and load-management
services to customers in markets extending from the Chicago hub into Indiana
and Ohio.
Granite State Gas Transmission, Inc., is an interstate gas transmission system
operating in Maine, Massachusetts and New Hampshire.
NONREGULATED BUSINESSES
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Primary Energy, Inc., is the leading developer of on-site industrial power
generation in the United States.
Miller Pipeline Corporation, an EnergyUSA subsidiary, is a leading pipeline
construction company serving the gas, water, wastewater and industrial markets
throughout the United States.
SM&P Utility Resources, Inc., an EnergyUSA subsidiary, is the nation's largest
below-ground utility locating and marking service business.
Lake Erie Land Company develops commercial and residential communities focused
on environmental restoration and smart-growth principles.
EnergyUSA provides for the integration of many of NiSource's nonregulated
services under one umbrella, including natural gas marketing, commercial energy
services, retail commodity sales and product development.
EnergyUSA-TPC is a natural gas marketer and gas-asset portfolio manager for
utilities. Its Market Hub Partners subsidiary is North America's largest
independent owner and operator of salt-cavern gas storage, with facilities in
Texas and Louisiana.
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DEAR FELLOW SHAREHOLDER:
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As I sat down to write my report to you, I struggled with how best to
characterize the past 12 months. In many respects, 1999 was a year of overcoming
adversity, much like the challenges confronted by salmon swimming upstream to
spawn in Coffee Creek near my home here in northern Indiana. After roaming the
expanse of the Great Lakes, the salmon focus on a single destination. They fight
their way upstream--against the elements, over the rocks and past the
predators--with perseverance and determination until they reach their goal. They
are focused solely on creating the next generation.
As in any industry undergoing structural change, companies in the energy
industry have been struggling to redefine themselves. They are trying to find
their way, choose the right destination and set their direction in an
environment that is constantly changing. At NiSource, we believe the evolving
energy marketplace offers unparalleled opportunity for growth. In the last two
years, we have charted and maintained a course that will position our Company to
become the industry's premier competitor in the nation's energy corridor.
TRANSFORMING OUR COMPANY
It has become the general belief in our industry that scale and geography will
be critical to profitability and success in this new competitive environment.
Unfortunately, over the last several years, the prices being paid for small- to
medium-sized distribution assets have skyrocketed. We actively reviewed a number
of gas, electric and water properties in 1999, but concluded that those smaller
transactions, at the prices being asked, would not be a good investment for our
shareholders. Consequently, on June 7 we made an offer to acquire
TOTAL REVENUES OPERATING INCOME
in millions of dollars ($) in millions of dollars ($)
[CHART] [CHART]
BASIC EARNINGS COMMON DIVIDENDS
PER SHARE PAID PER SHARE
in dollars ($) in dollars ($)
[CHART] [CHART]
2
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[PHOTO]
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Changing the Company's name from NIPSCO Industries, Inc., to NiSource Inc. in
1999 better reflects the Company's growth and focus as a multi-state supplier of
energy and water resources and related services.
Columbia Energy Group, one of the nation's largest integrated energy companies
with five gas distribution companies, two major interstate gas pipelines and
Appalachian exploration and production assets.
I am pleased to report that on February 27, 2000, NiSource and Columbia
reached a definitive merger agreement. The combination establishes a powerful
platform for growth with access to 30 percent of the U.S. population and 40
percent of the nation's energy consumption.
NiSource/Columbia will be the largest gas company east of the Rocky
Mountains and the second largest in the nation, serving more than 4.1 million
customers located in nine states spanning the high-growth energy corridor.
Columbia's gas distribution companies in Ohio, Kentucky, Pennsylvania, Maryland
and Virginia link NiSource's gas properties in Indiana with those in
Massachusetts, New Hampshire and Maine.
The combined company also will have 19,000 miles of gas pipelines, 700
billion cubic feet (bcf) of gas storage, 4,000 megawatts of power generation and
965 bcf of proven natural gas reserves.
The acquisition will fulfill our well-defined strategy of building a
super-regional energy company with assets stretching from the Gulf of Mexico
through the Midwest to the Northeast--a strategy we have discussed with you and
have been implementing for the past two years.
This transaction offers the opportunity to create significant shareholder
value with lower risk and higher returns. Although we anticipate that
integration costs and other first-year expenses will reduce earnings by 10 to 15
cents per share in 2001, the combination is expected to add to earnings in 2002
and beyond. NiSource also intends to maintain its current dividend policy.
NiSource has obtained a commitment from Credit Suisse First Boston and
Barclays Bank Plc for a bank facility to finance the cash portion of the
purchase price. Anticipated asset sales of more than $1 billion will minimize
equity needs and reduce leverage. As a result, we fully expect to maintain a
strong financial profile with solid investment-grade credit ratings.
Although our effort to acquire Columbia began as a contested transaction,
today Columbia's Board of Directors and senior management fully support this
combination and are committed to helping achieve a rapid and seamless
integration of the two companies. Therefore, we expect the transaction to close
by the end of 2000, following approval by the shareholders of both companies and
various regulatory commissions.
Our new company will be strategically positioned for the explosive growth
projected for the competitive natural gas industry. A new American Gas
Foundation study projects that gas consumption will increase 60 percent within
the next 20 years. The economic and environmental benefits of natural gas will
spawn new applications such as distributed power generation, which will
fuel this growth.
3
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===============================================================================
NISOURCE/COLUMBIA VALUE CHAIN
- -------------------------- ---------------------- --------------------------
UPSTREAM COMMODITY DISTRIBUTION DOWNSTREAM
- -------------------------- ---------------------- --------------------------
- - 19,000 Miles of Pipeline - Regulated Utilities - Energy Related Products
- - 700 Bcf of Gas Storage - Customer Growth - Cogeneration
- - Marketing Services - Distributed Generation
- - Gas Optionality - Commodity Conversion
- - Electric Optionality
===============================================================================
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NiSource's distribution value chain strategy focuses on logical extensions of
the Company's core gas, electricity and water businesses.
Natural gas is the fuel of the future. This is especially true within the
energy-intensive geographic corridor in which the combined NiSource/Columbia
will operate. Our strategic location and breadth of assets, including the
pipelines, the nation's largest volume of gas storage and distribution companies
in nine states, will give us the unique ability to boost the value of these
assets beyond simply adding them together. We will leverage their value by
arbitraging opportunities across fuel types, weather patterns, demand profiles,
market anomalies and other conditions.
BUILDING VALUE
Much like the salmon's life at sea, the environment in which utility companies
traditionally operated kept them relatively well financed and well protected.
That model may have moderated risk, but it also limited opportunity and return.
More recently, deregulation, the advent of competition and other developments
have changed that environment forever. Service territories have given way to
markets; stable returns to greater risk and changing opportunities.
Responding to that changing environment, some of our competitors have
diversified into telecommunications, financial services, and non-asset-based
power and gas trading. Others have focused on nuclear power or have sold off
generation assets altogether. A number have looked for
[PHOTO]
4
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----------------------------------------------------------------
[PHOTO]
----------------------------------------------------------------
Northern Indiana Public Service Company meterman Carl Maglish
installs a HomeGuard device, which protects appliances and
electronic equipment from surges that can enter a home or
business through electric, cable and telephone lines.
opportunity in foreign waters.
Our strategy at NiSource is to build on what we do best--efficient,
reliable, regional energy commodity distribution. We focus on building value for
our customers--and our shareholders--by offering resource solutions around our
commodity distribution channels.
You will recall that the Company changed its name from NIPSCO Industries,
Inc., to NiSource Inc. in 1999. Our new name better conveys our strategic
direction and more accurately reflects a geographic focus extending beyond our
traditional home base in Indiana. Our Midwest operations now link the Gulf Coast
with New England. This geographic focus is key to our profitably delivering on
the upstream and downstream opportunities afforded by our distribution value
chain strategy.
GAS MARKETING
millions of dekatherms
[CHART]
Let me give you a few examples of the opportunities upstream and downstream
from our commodity distribution businesses. Upstream opportunities enable us to
reduce our risk profile and add value. They include gas and electric supply, gas
transportation and storage, asset-based commodity trading, and utility services
such as specialty construction and underground facility locating.
Most important, however, is our upstream ability to capitalize on the
optionality of our assets. This optionality is the reason we made our offer for
Columbia. The flexibility embedded in the utilization and operation of our
combined assets will allow us to create a virtually unlimited number of high
value energy packages. With distribution assets in nine states, pipeline
operations in 16 states and the largest storage capacity in the U.S., the
[PHOTO]
Life in the endless seas is marked by a plentiful supply of food and a "group"
approach to avoiding threats by traveling together with others. Maturity and
environmental cues signal the time to leave the security of the sea. There will
be many miles and countless days spent reaching the right river. Then a number
of estuaries will be tested before fixing on the right direction.
5
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[PHOTO]
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A Northern Indiana Public Service Company crew installs a steel utility pole as
part of an initiative to compare performance as well as installation and
maintenance costs of steel poles with traditional wooden poles.
NiSource/Columbia combination provides the greatest optionality opportunities in
the industry.
Our downstream activities will focus on services and solutions which meet
our customers' energy and service needs. These include heating and cooling
equipment leasing, installation and maintenance; water purification; and--most
importantly--onsite, gas-fired back-up and distributed electric power
generation.
We intend to keep our focus and provide greater value to each customer. In
doing so, we will combine the strong cash flow and limited risk profile of our
regulated assets with the ability to deliver the optionality value embedded in
those assets.
CHALLENGES AND PROGRESS
Although it is exciting to talk about the opportunities for the future, I also
want to give you an update on current operations and performance. The Company's
earnings per share declined 19 percent in 1999. We suffered through unseasonably
warm winter and fall weather. We struggled with less-than-ideal seasonal timing
in closing our acquisitions of Bay State Gas Company and TPC Corporation. We
addressed the need to sell or close a number of operations and facilities that
do not fit our strategic direction. Finally, we watched energy and utility
stocks get battered by the market as investors rushed to the "dot-com" startups.
Compared to our 10-year track record of outperforming the Standard & Poor's
500, our performance in 1999 was clearly below the standard we
[PHOTO]
6
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set for ourselves and what you have come to expect.
Our decline in earnings was largely due to the timing of our Bay State Gas
and TPC transactions and milder than normal winter and fall weather. The merger
with Massachusetts-based Bay State Gas closed February 12. The acquisition of
Houston-based TPC, a major unregulated energy portfolio manager and a leading
developer of high-deliverability natural gas storage, was completed April 1.
As gas businesses, Bay State Gas and what we now call the EnergyUSA
Commodities Group generate the bulk of their revenues during the winter heating
season. In both cases, the timing of the closing of the transactions caused us
to lose 40 to 60 percent of earnings while incurring most of the first year's
expenses. At the end of the year, milder-than-normal weather dampened demand for
these two subsidiaries as well as NiSource's other natural gas businesses. The
number of heating-degree days during the year remained below normal.
During the year we decided to exit a number of non-core businesses and
facilities that are no longer consistent with our strategic direction. We also
saw adverse economic conditions impact other equity
GIGAWATT HOURS
GENERATED
[CHART]
TOTAL UTILITY CUSTOMERS
at year-end, in thousands
[CHART]
[PHOTO]
Along the way, there are tremendous currents, hidden obstacles, and predators to
be overcome. Too little water and the way is impassable; too much and it is
all-consuming. Occasional stops must be made in calmer waters to regain strength
before continuing. But there lurk the predators, waiting for their chance. Only
a keen instinct for danger allows them to drive safely toward their destination,
despite the threats.
7
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[PHOTO]
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NIPSCO's Mike Lohrman looks for conditions that could lead to an electrical
outage using an infrared imaging device. The equipment improves the
reliability of the Company's transmission system.
investments, the most significant of which was in oil and gas development. In
the aggregate these had a negative impact on net income of $21.7 million or 17
cents per share.
Otherwise, our operations performed well. ~At Northern Indiana Public
Service Company (NIPSCO), electric generation reached an all-time high at
17,005 gigawatt hours--3 percent above the 1998 record--giving NIPSCO more power
to sell on the bulk market and enabling the Company to purchase less power
during peak periods. NIPSCO also reduced its cost of generation by 3.5 percent
and its fuel cost by 4.7 percent. NIPSCO's generation continues to be a viable
player in the growing Midwest markets for electricity.
NIPSCO customer growth continued during 1999, as did the number of
customers selecting their natural gas supplier as part of the NIPSCO Choice
program. NIPSCO expanded Choice from a pilot program to its entire customer
base last year, resulting in nearly a 200 percent increase in participation.
NIPSCO continued its aggressive program to continually upgrade and maintain
its electric transmission and distribution systems. This program is aimed at
increasing customer satisfaction by enhancing reliability. The program covers
all facets of the system: identifying and improving circuit performance,
converting the system to a higher
[PHOTO]
8
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voltage level, replacing aging underground cable, improving substation grounding
and replacing and reinforcing poles.
A new outage-tracking program will be placed in service in 2000. The system
will capture information about outages and analyze the extent of damage and the
frequency and duration of service interruption. This information will be used to
better inform customers on the extent and duration of outages and to identify
future capital projects that will further improve reliability.
The Indianapolis Water Company (IWC), our primary water distribution
business, added a record 22,000 new customers in 1999. Operations were broadened
with the addition of the Lawrence Municipal Water Utility and the assets of
Eastern Morgan County Rural Water Company, Inc. During the year, IWC pumped and
delivered a record volume of water to its customers.
We expanded our presence in the utility services segment through Miller
Pipeline Corporation, our pipeline construction company. Specializing in
customer service through the planning, design and application of innovative
pipeline rehabilitation and replacement processes, Miller operates in several
multi-billion-dollar markets, including natural gas and water distribution as
well as wastewater systems. As utilities continue to outsource underground
construction projects, we expect that Miller will continue to capture a growing
portion of this profitable business.
NiSource continued to expand its presence in the underground
utility-locating business by acquiring a 50 percent share of Underground
Technology, Inc. (UTI), a California-based operation with the same high-quality
reputation as our SM&P Utility Resources, Inc. subsidiary. The combined services
of UTI and SM&P make us the market leader in the underground-locating business
in volume and frequency of locates. Our business continues to grow as customers
ask us to follow them into new markets to meet their growing needs. For example,
SBC, the nation's largest telecommunications company, recently named SM&P its
supplier of choice with a five-year contract.
EnergyUSA, our nonregulated subsidiary, and
[PHOTO]
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[PHOTO]
Gypsum wallboard is manufactured from a by-product of the electric-generating
process at Georgia-Pacific Corp.'s new facility adjacent to Northern Indiana
Public Service Company's R. M. Schahfer Generating Station (above). The
wallboard is made from the by-product of scrubbing sulfur dioxide from coal
burned at Schahfer.
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[PHOTO]
To increase water safety, Indianapolis Water Company (IWC) is in the process of
completing a conversion from chlorine gas to bleach. The South Well Field, shown
here, was constructed as IWC's first well field to use bleach.
NIPSCO have teamed up to introduce Appliance Care to NIPSCO's residential
customers. The program offers customers a way to avoid expensive appliance
repairs for a monthly fee that is added to the customer's utility bill.
EnergyUSA expects to expand Appliance Care to cover air conditioning units just
in time for the 2000 cooling season.
NIPSCO and EnergyUSA also initiated Hot2Lease, offering NIPSCO customers
the option to purchase or lease a new water heater for a monthly fee. Another
new service, providing whole-house surge protection, is also being tested in
NIPSCO markets.
The Internet continues to revolutionize the way we do business. NIPSCO
customers are now able to check the Company's gas and electric rates, receive
their bills and pay them online. Under the NIPSCO Choice program, qualified
suppliers may now
[PHOTO]
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[PHOTO]
Lake Erie Land Company has won acclaim for incorporating environmental
sustainability into the design of Coffee Creek Center, a 640-acre residential
and commercial project in Chesterton, Indiana.
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[PHOTO]
Richard Elden (left) of the North American Waterfowl Management Plan Committee
presents Gary Neale with the National Great Blue Heron Award recognizing the
leadership role NiSource has played in wetland conservation.
use the Internet to enroll customers. NIPSCO and Bay State commercial and
industrial customers can effectively manage gas transportation and load through
our Energy Access System Online. EnergyUSA and NIPSCO also offer products and
services through their Web sites.
As I noted earlier, our acquisition of Bay State Gas was completed on
February 12, 1999. Bay State and its subsidiary, Northern Utilities, Inc., give
us a strong presence in the Northeast with more than 320,000 customers in
Massachusetts, New Hampshire and Maine.
The New England market has excellent growth potential, as barely half of
the region's homes and businesses heat with natural gas, compared to 95 percent
in the Midwest. This has enabled Bay State and Northern Utilities to
significantly increase customers year after year, with 7,000 customers added in
1999. The recent run-up in heating oil prices in this region offers a great
opportunity to convert customers to natural gas. Over the last decade, New
England increased its use of natural gas by about four times the national
average.
Northern Utilities contributed to this growth with its pipeline extension
through Kittery and Eliot, Maine--one of the largest system expansions in recent
years. One of the primary reasons for the
[PHOTO]
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expansion was to provide natural gas service to the Portsmouth Naval Shipyard,
which was seeking to diversify its energy portfolio, switch to a cleaner fuel
and reduce overall energy costs. A military housing development was also
converted from propane to natural gas as part of the project.
Bay State and the Massachusetts Municipal Wholesale Electric Company
(MMWEC) reached an agreement for Bay State to transport up to 13 million cubic
feet per year of natural gas to MMWEC's ~Stony Brook power plant, which provides
electricity to 25 Massachusetts municipal utilities. Increasing the use of
natural gas will enable the plant to produce less expensive power and reduce air
emissions.
TOTAL ASSETS
in millions of dollars ($)
[CHART]
During the year, we also combined the gas supply operations of Bay State
with that of NiSource to better capitalize on savings in the marketplace and
eliminate redundancies.
The acquisition of TPC provides NiSource with TPC's strong expertise in
gas-asset management and customer partnering. NiSource also increased its share
of Market Hub Partners, L.P. (MHP) through the transaction. NiSource now
indirectly owns 100 percent of MHP, the largest high-deliverability storage
developer/operator in North America. MHP holds a marketing and customer-service
advantage in being connected to 11 intra- and interstate pipelines that serve
the Midwest and eastern United States.
Operational efficiency improvements continue throughout the Company with
the advent of NiSource's Shared Services, which began in 1999 and will be
completed at the end of 2000. We have identified an estimated $30 million in
savings at NiSource alone, as a result of reorganizing and integrating the
Company's administrative services. This approach to Shared Services will be one
of the primary vehicles for synergy savings in the NiSource/Columbia
integration. However, the real long-term value of Shared Services lies in
improving
[PHOTO]
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[PHOTO]
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The micro-turbine heat, cooling and power system installed by EnergyUSA at a
Walgreens location in Chesterton, Indiana, provides twice the energy efficiency
as conventional generation.
quality, efficiency and consistency, and increasing coordination within our
growing company.
Energy for the Future
Our goal at NiSource is to create a stronger strain of energy company, one that
can survive the transition, compete and win. The way we see it, the only way to
truly deliver value in tomorrow's energy world is for the old ways to die,
giving birth to ~new ideas. Successful companies must shift from worn, tired
perspectives to a spirit characterized by creativity, risk analysis and
enthusiasm.
NiSource's focus on new forms of electric generation systems clearly
illustrates this emphasis. We are developing energy products that will change
the way electricity is generated and delivered to the factory, to the office, to
the store and to the home.
For the last several years, our Primary Energy subsidiary has been helping
large industrial customers use waste gases and other by-products
[PHOTO]
Those that arrive have defied the odds of survival. They may be frayed or
wounded, but their energy is still focused on producing the next generation and
preparing an environment in which they can thrive.
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[PHOTO]
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Northern Utilities completed a five-mile steel natural gas pipeline extension
that runs through Kittery and Eliot, Maine (upper). The Massachusetts Municipal
Wholesale Electric Company (MMWEC) and Bay State Gas announced an agreement for
Bay State to transport natural gas to MMWEC's Stony Brook power plant (lower).
to become more energy self-efficient. Primary Energy has set a new standard of
service in delivering cost-effective and environmentally supportive on-site
energy solutions.
Primary Energy finalized agreements in 1999 to develop, engineer and
construct two major cogeneration facilities in northern Indiana. Construction
will begin in the first quarter of 2000 on a 525-megawatt natural gas-fired
facility at BP Amoco's refinery in Whiting, Indiana. Primary Energy will also
operate and maintain the $250 million facility when construction is completed in
2001.
Also during the first quarter of 2000, Primary Energy will begin
construction of a 50-megawatt facility at the LTV Steel Company's manufacturing
complex in East Chicago, Indiana. This "inside-the-fence" power project will
enable LTV to generate electricity using by-product fuels from blast furnace
operations.
[PHOTO]
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The $60 million project will be completed in late 2001. LTV will be responsible
for the facility's operation and maintenance.
These projects enable us to expand clean power technologies without
building significant new infrastructure for our regulated utilities. Moreover,
the existing generating capacity freed up by the two projects will be used to
supply competitively priced electricity for NIPSCO's growing customer base in
northern Indiana and the expanding wholesale market in the Midwest.
With its seventh project under way, Primary Energy has found that its
customers don't want to build plants; they want to build markets. They don't
want to generate power; they want to manufacture products. Increasing pressures
on cost and performance from global and domestic competition are forcing heavy
industrial companies to focus more on their core competencies, optimizing their
assets and outsourcing non-core functions to experts. These trends offer Primary
Energy numerous
===============================================================================
INDUSTRIAL
PRIMARY ENERGY PROJECTS
1993 HARBOR COAL CO.
Joint-venture partnership with Ispat Inland Inc. in East Chicago,
Indiana, to process coal for Inland's blast furnaces.
1996 NORTH LAKE ENERGY CORP.
(75 Megawatts)
Turbine-generator facility providing electricity to Ispat Inland in
East Chicago, Indiana.
1997 LAKESIDE ENERGY CORP.
(161 Megawatts)
Turbine-generator facility providing electricity and process steam to
U.S. Steel Gary Works in Gary, Indiana.
PORTSIDE ENERGY CORP.
(63 Megawatts)
Combined-cycle facility supplying steam, hot water and electricity to
National Steel Corp.'s Midwest Steel Division in Portage, Indiana.
1998 COKENERGY, INC.
(95 Megawatts)
Steam turbine-generator facility at Ispat Inland in East Chicago,
Indiana, that will remove sulfur and particulate from the coke
battery.
2001 WHITING CLEAN ENERGY, INC.
(525 Megawatts)
Combined cycle power plant at BP Amoco Refinery in Whiting, Indiana.
IRONSIDE ENERGY
(50 Megawatts)
Steam turbine-generator facility that will generate steam and
electricity at LTV Steel Co.'s East Chicago, Indiana, plant.
===============================================================================
[PHOTO]
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prospects in the refining, chemicals, metals, mining, pharmaceutical, food and
beverage, and pulp and paper industries. We believe that Primary Energy--with
its double-digit growth potential--provides a strong cornerstone for our overall
generation business strategy.
Our next step is to build on the lessons we learned from Primary Energy's
industrial projects. We are now developing revolutionary distributed generation
technology for the commercial and residential markets.
Last summer, EnergyUSA installed the nation's first commercially successful
energy micro-generation system providing electricity and thermal energy for
heating, air conditioning and hot water. The natural gas-fired unit, in
operation 24 hours a day, at a Walgreens store in Chesterton, Indiana, reduces
overall energy costs for the customer, and improves power quality and
reliability. It has operated continuously for more than nine months.
We are also investing time and capital in the development of a fuel
cell-based energy system that can provide electricity and thermal energy for
heating, air conditioning and hot water in homes and small businesses. This
total-energy package is being developed by MOSAIC Energy, LLC, a partnership
between EnergyUSA and the Institute for Gas Technology (IGT).
Roughly the size of a home furnace, the unit combines MOSAIC's
fuel-processing technology with a patented fuel-cell stack design. The fuel
processor changes natural gas or propane into hydrogen and sends it to the fuel
cell, which converts it into electricity. I believe our partnership is the
patented leader in cost-effective proton-exchange membrane and plate design and
efficient hydrogen reformation, both critical steps in putting fuel cell
technology over the hurdle to become a commercial success.
Field units will be installed later this year to demonstrate the system's
ability to accommodate a broad range of residential and commercial applications.
The system will offer customers greater power reliability and a true energy
choice. It will also reduce the total energy bill for a home or business by
about 15 percent. The design is environmentally
[PHOTO]
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[PHOTO]
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In the first quarter of 2000, Primary Energy will begin construction on a
525-megawatt natural gas-fired facility at BP Amoco's refinery in Whiting,
Indiana. Here Primary Energy's Larry Androskaut works with a BP Amoco
representative on site preparation and plant schematics (shown at right).
friendly, safe, compact and quiet.
When we add the benefits of the system to EnergyUSA's extensive marketing
and engineering network, we believe that NiSource is uniquely positioned to
succeed in developing and servicing this new market. In fact, we're so
optimistic about the future of our fuel-cell venture that we are doubling our
investment this year in MOSAIC Energy.
We expect both the fuel cell and micro-generation product lines to become
key components of the nation's future energy supply as economic, energy and
environmental policies converge to encourage investment in technology that is
cleaner and more efficient and not dependent on large-scale transmission
systems.
PROTECTING THE ENVIRONMENT
At NiSource, we believe that environmental stewardship enhances value. As such,
our mission to create value for our customers while reducing any
[PHOTO]
Many die soon after spawning the next generation. But the new ones, given a
reasonable opportunity, grow in strength and numbers, creating stronger strains
that can better handle the challenges ahead.
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<PAGE> 21
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adverse impact on the environment is not only the right thing to do, but it also
makes good business sense.
As an example, NIPSCO sells all of the by-product gypsum from scrubbers at
its R. M. Schahfer Generating Station to Georgia-Pacific Corp., which uses the
gypsum to manufacture wallboard. The gypsum is sent directly from the NIPSCO
station to an adjacent $65 million plant that Georgia-Pacific built in 1999.
This waste, formerly land-filled at considerable cost, has turned into a revenue
source.
Last year was the first time that the nation's electric utilities were
required by the U.S. Environmental Protection Agency to report their chemical
releases to the environment. Although NIPSCO burned 35 percent more coal in 1998
(the reporting year) than 1990, the utility reduced emissions of diluted gas
chemicals and trace metals by 31 percent.
We also take great pride in the fact that two more NiSource businesses have
joined NIPSCO, the first ISO-certified utility in the U.S., in becoming ISO
14001 certified. Northern Indiana Fuel and Light Company, Inc. and Primary
Energy Inc.'s Portside Energy Corporation subsidiary have each achieved the
international standard for implementing an effective environmental management
system.
Finally, there are those salmon I referred to at the opening of this
letter, swimming their way up Coffee Creek. NiSource's Lake Erie Land Company is
restoring the native prairie and watershed there as a part of an innovative
development earning national acclaim for combining traditional neighborhood
design, energy efficiency and environmental sustainability. Only two years ago,
that creek was home to little more than junk cars and a diminished fish
population. I can't express how gratified I was to witness the salmon's upstream
struggle when I visited Coffee Creek one day last October.
OUR COMMITMENT
Just as NiSource played a role in transforming Coffee Creek, we will continue to
transform our business. Throughout this year, I believe we kept our focus. We
have positioned NiSource to return to our traditional earnings growth pattern
and, if
[PHOTO]
18
<PAGE> 22
- -------------------------------------------------------------------------------
[PHOTO]
MOSAIC Energy, a partnership of EnergyUSA and the Institute of Gas Technology
(IGT), is developing a fuel cell-based integrated energy system that will
provide greater power reliability and choice to residential and small commercial
markets. Here an IGT engineer works with the system that will reduce residential
or commercial energy bills by an estimated 15 percent.
market conditions allow, to the stock performance you have come to
expect. We are convinced that we are headed in the right direction, we have
adopted the right approach, we are connecting with the right partners and we are
developing the right ideas.
These are the principles by which we run our business. Our goal is to
return NiSource to the top of the industry in shareholder value. Your Board of
Directors and management clearly are disappointed with the current price of the
Company's stock. We believe that at these price levels, NiSource stock is
significantly undervalued. This Company and all of its employees are committed
to the goal of increasing value. Like those salmon at Coffee Creek, we remain
determined in the face of numerous obstacles and unrelenting in our focus on the
destination--creating the next generation.
On behalf of all of us at NiSource, I want to thank you, our shareholders,
for your continued support and confidence.
/s/ Gary L. Neale
-----------------------
Gary L. Neale
Chairman, President and
Chief Executive Officer
March 14, 2000
[PHOTO]
19
<PAGE> 23
OUR BOARD OF DIRECTORS
- ------------------------------
MR. GARY L. NEALE
Chairman, President and
Chief Executive Officer
NiSource Inc.
Merrillville, Indiana
DR. STEVEN C. BEERING
President
Purdue University
West Lafayette, Indiana
MR. ARTHUR J. DECIO
Chairman of the Board and
Chief Executive Officer
Skyline Corporation
Elkhart, Indiana
MR. DENNIS E. FOSTER
Vice Chairman
ALLTEL Corporation
Little Rock, Arkansas
MR. JAMES T. MORRIS
Chairman, Chief Executive
Officer and President
IWC Resources Corporation
Indianapolis, Indiana
[PHOTO]
20
<PAGE> 24
MR. IAN M. ROLLAND
Retired Chairman and
Chief Executive Officer
Lincoln National Corporation
Fort Wayne, Indiana
MR. JOHN W. THOMPSON
Chairman, President and
Chief Executive Officer
Symantec Corp.
Cupertino, California
MR. ROBERT J. WELSH
Chairman and
Chief Executive Officer
Welsh, Inc.
Merrillville, Indiana
DR. CAROLYN Y. WOO
Gillen Dean and Siegfried
Professor of Management
University of Notre Dame
College of Business
Administration
Notre Dame, Indiana
ROGER A. YOUNG
Chairman
Bay State Gas Company
Westborough,
Massachusetts
[PHOTO]
21
<PAGE> 25
THE 1999 FINANCIALS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CONTENTS
- -------------------------------------------------------------------------------
Report of Management on Responsibility for Financial Reporting...............23
Report of Independent Public Accountants.....................................23
1999 Financial Review -- Management's Discussion
and Analysis of Financial Condition and Results of Operations................24
Consolidated Statement of Income.............................................34
Consolidated Statement of Cash Flows.........................................35
Consolidated Balance Sheet...................................................36
Consolidated Statement of Capitalization.....................................38
Consolidated Statement of Long-Term Debt.....................................39
Consolidated Statement of Common Shareholders' Equity........................40
Notes to Consolidated Financial Statements...................................41
Selected Supplemental Information............................................64
Glossary of Selected Energy Terms............................................68
Shareholder Information and Services.........................................69
Officers of the Corporation and Principal Subsidiaries.......................70
- -------------------------------------------------------------------------------
FINANCIAL PERFORMANCE HIGHLIGHTS
- -------------------------------------------------------------------------------
%
Increase
1999 1998 (Decrease)
(In millions, except per share data)
Total Assets.................... $6,835 $4,987 37.1%
Operating Revenues.............. $3,145 $2,932 7.3%
Cost of Sales................... $1,651 $1,692 (2.4%)
Operating Margin................ $1,494 $1,240 20.5%
Operating Expenses.............. $1,032 $ 819 26.0%
Operating Income................ $ 462 $ 422 9.5%
Net Income...................... $ 160 $ 194 (17.5%)
Basic earnings per average
common share.................. $ 1.29 $ 1.60 (19.4%)
Diluted earnings per average
common share.................. $ 1.27 $ 1.59 (20.1%)
Dividends declared per
common share.................. $1.035 $0.975 6.2%
Average common shares
outstanding -- basic (000's).. 124,343 120,778 3.0%
Year-end common shares
outstanding (000's)........... 124,139 117,531 5.6%
22
<PAGE> 26
REPORT OF MANAGEMENT ON RESPONSIBILITY FOR FINANCIAL REPORTING
===============================================================================
TO THE SHAREHOLDERS OF NISOURCE INC.:
The management of NiSource Inc. (NiSource) has the responsibility for preparing
the accompanying consolidated financial statements and for their integrity and
objectivity. The statements were prepared in accordance with generally accepted
accounting principles. The consolidated financial statements include amounts
that are based on management's best estimates and judgments. Management also
prepared the other information in the annual report and is responsible for its
accuracy and consistency with the consolidated financial statements.
To meet its responsibilities for the reliability of the consolidated
financial statements and related financial data, NiSource's management has
established and maintains a system of internal control that provides reasonable
assurance as to the integrity and reliability of the financial statements, the
protection of assets from unauthorized use or disposition and the prevention and
detection of errors and irregularities on a timely basis. The system of internal
control provides for appropriate division of responsibility and is documented by
written policies and procedures that are communicated to employees with
significant roles in the financial reporting process and are updated as
necessary. Management routinely monitors the system of internal control for
compliance. NiSource also maintains a strong internal auditing program that
independently assesses the effectiveness of the internal controls and recommends
possible improvements thereto. Management believes that NiSource's system of
internal control is adequate to accomplish the objectives discussed above.
February 28, 2000
/s/ Stephen P. Adik
- --------------------------------------
Stephen P. Adik
Senior Executive Vice President and
Chief Financial Officer and Treasurer
/s/ Gary L. Neale
- --------------------------------------
Gary L. Neale
Chairman, President and
Chief Executive Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
===============================================================================
TO THE BOARD OF DIRECTORS OF NISOURCE INC.:
We have audited the accompanying consolidated balance sheet and consolidated
statements of capitalization and long-term debt of NiSource Inc. (an Indiana
corporation) and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, common shareholders' equity and cash flows
for each of the three years in the period ended December 31, ~1999. These
consolidated financial statements are the responsibility of NiSource's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NiSource
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Chicago, Illinois Arthur Andersen LLP
February 18, 2000
(Except with respect to the matter discussed in the Note "Announcement of Merger
Agreement with Columbia Energy Group," as to which the date is February 28,
2000.)
23
<PAGE> 27
1999 FINANCIAL REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
- --------------------------------------------------------------------------------
HOLDING COMPANY
- --------------------------------------------------------------------------------
NiSource Inc. (NiSource), formerly NIPSCO Industries, Inc., is an energy and
utility-based holding company headquartered in Merrillville, Indiana, that
provides natural gas, electricity and water to the public for residential,
commercial and industrial uses. NiSource was organized as an Indiana holding
company in 1987 under the name "NIPSCO Industries, Inc.," and changed its name
to NiSource Inc. on April 14, 1999, to reflect its new direction as a
multi-state supplier of energy and water resources and related services.
NiSource's gas business is comprised primarily of regulated gas utilities that
operate throughout northern Indiana and New England. In addition, NiSource
expanded its gas marketing, trading and storage operations with the April 1999
acquisition of TPC Corporation, now renamed EnergyUSA-TPC Corp. (TPC).
NiSource's electric business is comprised of a regulated electric utility that
operates in northern Indiana. The electric business also includes wholesale
sales and power trading activities. NiSource's regulated gas and electric
subsidiaries are collectively referred to as the "Energy Utilities." NiSource's
regulated water subsidiaries are collectively called the "Water Utilities."
Collectively the Energy and Water Utilities are referred to as the "Utilities."
Non-regulated energy and utility-related products and services are provided
through the "Products and Services" subsidiaries. Products and Services
subsidiaries perform energy-related services and offer products in connection
with these services, which include pipeline construction, repair and maintenance
of underground gas pipelines and locating and marking utility lines.
In addition to the Utilities and the Products and Services subsidiaries,
NiSource has a wholly-owned subsidiary, NiSource Capital Markets, Inc. (Capital
Markets), which engages in financing activities for NiSource and certain of its
subsidiaries, excluding Northern Indiana Public Service Company (Northern
Indiana).
- --------------------------------------------------------------------------------
NET INCOME
- --------------------------------------------------------------------------------
Net income decreased $33.5 million from 1998 to $160.4 million for 1999.
The 1999 and 1998 twelve month periods are not directly comparable due to the
acquisition of Bay State Gas Company (BSG) in February 1999 and TPC in April
1999. As natural gas businesses, BSG and TPC record the bulk of their revenues
during the winter heating season. The timing of these acquisitions, the seasonal
nature of these operations and a milder-than-normal winter and fall resulted in
lower earnings for the year.
Excluding the results of operations of the BSG and TPC, 1999 earnings
reflected stronger operating results from NiSource's electric and water
businesses along with continued customer growth. Results include after-tax
charges of $8.1 million incurred in connection with the company's attempted
acquisition of Columbia Energy Group (CEG). NiSource also recorded after-tax
adjustments of $21.7 million during 1999. These adjustments were the result of
adverse economic conditions which impacted equity investments, the most
significant of which was in oil and gas development, and the decision to abandon
a number of non-core businesses and facilities.
For 1998, net income increased $3.1 million from 1997 to $193.9 million due
primarily to an increase in electric utility margin resulting from a warmer 1998
summer as compared to 1997 and a full year of results of operations relating to
the Water Utilities, offset partially by a weak performance in electric
wholesale operations.
- --------------------------------------------------------------------------------
GAS REVENUES
- --------------------------------------------------------------------------------
The gas revenues described herein represent the combined revenues of our gas
utilities and gas marketing segments adjusted for intercompany transactions. Gas
revenues were $1.7 billion in 1999, an increase of $443.7 million from 1998.
This increase was primarily due to the inclusion of $316.4 million gas revenues
from BSG, increased gas marketing and trading revenues as a result of the TPC
acquisition in April 1999 and increased gas sales to residential customers as a
result of colder weather during 1999, partially offset by decreased gas sales to
commercial and industrial customers. During 1999, gas deliveries in dekatherms
(dth), which include transportation services and BSG, increased 31%. Gas
deliveries to residential and commercial customers increased reflecting the
acquisition of BSG and heating degree-days 12% higher than 1998. The Energy
Utilities had 1,071,221 gas customers at December 31, 1999.
Gas revenues were $1.2 billion in 1998, an increase of $25.2 million from
1997. This increase is attributable to increased gas marketing activity
partially offset by decreased deliveries to residential and commercial customers
due to significantly warmer weather than 1997, decreased gas costs per dth and
decreased gas transition costs. During 1998, gas deliveries in dth, which
include transportation services, increased 6% due to increased gas marketing
activities, partially offset by gas deliveries to residential and commercial
customers which decreased 20% and 23%, respectively, reflecting heating
degree-days 21% lower than 1997.
Large commercial and industrial customers continue
24
<PAGE> 28
1999 FINANCIAL REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
================================================================================
to utilize transportation services provided by the Energy Utilities. Gas
transportation customers purchase much of their gas directly from producers and
marketers and then pay a transportation fee to have their gas delivered over the
Energy Utilities' systems. The Energy Utilities transported 252.5, 202.9, and
200.9 million dth for others in 1999, 1998 and 1997, respectively. The basic
steel industry accounted for 15% of natural gas delivered (including volumes
transported) during 1999.
The components of the changes in gas revenues are shown in the following
table:
YEAR 1999 YEAR 1998
COMPARED TO COMPARED TO
YEAR 1998 YEAR 1997
(In millions)
Gas Revenue Changes
Pass through of net
changes in purchased
gas costs, gas storage
and storage trans-
portation costs...................... $ 12.9 $ (60.6)
Gas transition costs.................... (4.3) (22.4)
Changes in sales levels................. 26.1 (100.5)
Bay State Gas
Acquisition.......................... 316.4 --
Gas transported......................... 6.4 8.4
Gas marketing
and trading.......................... 86.2 200.3
-------- --------
Gas Revenue Change........................ $443.7 $ 25.2
- --------------------------------------------------------------------------------
GAS COSTS OF SALES
- --------------------------------------------------------------------------------
The gas costs described herein represent the combined costs of our gas utilities
and gas marketing segments adjusted for intercompany transactions. The gas costs
increased $262.4 million (28%) in 1999 due to the inclusion of gas costs of
$155.2 million for BSG, increased gas marketing and trading activities and
increased purchased gas costs per dth for the Energy Utilities. The average cost
for the Energy Utilities' purchased gas in 1999, after adjustment for gas
transition costs billed to transport customers, was $2.67 per dth excluding
purchased gas costs of BSG as compared to $2.60 per dth in 1998. Gas costs
increased $67.9 million (8%) in 1998 mainly due to increased purchases of gas of
$198 million related to gas marketing activities partially offset by decreased
gas purchases, decreased gas transition costs and decreased gas costs per dth by
the Energy Utilities. The average cost for the Energy Utilities' purchased gas
in 1998, after adjustment for gas transition costs billed to transport
customers, was $2.60 per dth as compared to $3.15 per dth in 1997.
- --------------------------------------------------------------------------------
GAS OPERATING MARGINS
- --------------------------------------------------------------------------------
Gas operating margin increased $181.3 million in 1999. This increase mainly
reflects $161.2 million of gas operating margin from BSG and increased
deliveries to residential and commercial customers reflecting colder weather
during 1999, partially offset by decreased deliveries to industrial customers.
Gas operating margin decreased $42.7 million in 1998 due to decreased deliveries
to residential and commercial customers reflecting the warmer heating season in
1998 than 1997, partially offset by increased deliveries of gas transported for
others.
- --------------------------------------------------------------------------------
ELECTRIC REVENUES
- --------------------------------------------------------------------------------
In 1999, electric revenues were $1.1 billion (after elimination of intercompany
transactions of approximately $3.0 million), a decrease of $305.6 million from
1998. Sales of electricity in kilowatt-hours (kwh) decreased 38% from 1998.
Electric revenues decreased as a result of significantly reduced non-regulated
wholesale sales and power marketing transactions, partially offset by increased
electric sales to residential and commercial customers due to warmer weather
during the third quarter of 1999, and increased industrial sales. Sales to
residential and commercial customers increased 2% and 4% in kwh, respectively,
reflecting the warmer summer in 1999. At December 31, 1999, NiSource had 425,833
electric customers.
In 1998, electric revenues were $1.4 billion, an increase of $242.0 million
from 1997. Sales of electricity in kwh increased 25.5% from 1997. The increase
in elec-
25
<PAGE> 29
tric revenue was primarily due to increased sales to residential and
commercial customers (increases of 7% and 6% in kwh, respectively), reflecting a
significantly warmer summer in 1998 and increased wholesale sales and power
marketing activities. The increases were partially offset by a 2% kwh reduction
in sales to industrial customers, reflecting a full year of operations at two
cogeneration projects located at major industrial customers' facilities. The
basic steel industry accounted for 29% of electric sales during 1999.
The components of the changes in electric revenues are shown in the
following table:
YEAR 1999 YEAR 1998
COMPARED TO COMPARED TO
YEAR 1998 YEAR 1997
----------- -----------
(In millions)
Electric Revenue Changes
Pass through of net changes in fuel costs $ 5.5 $ (9.3)
Changes in sales levels.................. 39.1 15.3
Wholesale sales and power marketing...... (350.2) 236.0
----------- -----------
Electric Revenue Change.................... $(305.6) $ 242.0
----------- -----------
- --------------------------------------------------------------------------------
ELECTRIC COST OF SALES
- --------------------------------------------------------------------------------
Cost of fuel for electric generation in 1999 decreased $1.5 million compared to
1998 primarily due to decreased fuel costs per kwh generated. The average cost
per kwh generated decreased 3% from 1998 to 1.47 cents per kwh in 1999. Cost of
fuel for electric generation in 1998 increased mainly as a result of increased
production of 8%. The average cost per kwh generated decreased 3% from 1997 to
1.52 cents per kwh in 1998.
- --------------------------------------------------------------------------------
POWER PURCHASED
- --------------------------------------------------------------------------------
Power Purchased decreased $340.5 million in 1999 as a result of decreased
wholesale sales and power marketing activities. Power purchased increased $208.5
million in 1998 as a result of increased bulk power purchases and increased
wholesale power marketing activities.
- --------------------------------------------------------------------------------
ELECTRIC OPERATING MARGINS
- --------------------------------------------------------------------------------
Operating margin from electric sales in 1999 increased $36.5 million. This
increase occurred mainly due to improved margins on wholesale sales and power
trading transactions and increased sales to residential and commercial customers
as a result of warmer weather in the third quarter of 1999. Operating margin
from electric sales in 1998 increased $21.4 million due to increased sales to
residential and commercial customers, reflecting a significantly warmer summer
in 1998 than in 1997, and increased wholesale sales, partially offset by
decreased sales to industrial customers.
- --------------------------------------------------------------------------------
WATER REVENUE
- --------------------------------------------------------------------------------
Water revenues in 1999 were $98.4 million (after elimination of intercompany
transactions of approximately $0.1 million), of which water sales to residential
and commercial customers accounted for $88.2 million. The $14.4 million increase
was primarily due to increased water volumes sold and increased water rates for
Indianapolis Water Company (IWC) that became effective on April 8, 1998 and
April 8, 1999. The Water Utilities had sales of 45,424 in millions of gallons
(m.g.)
26
<PAGE> 30
1999 FINANCIAL REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
================================================================================
and served 275,688 customers at December 31, 1999. Water revenues for 1998 were
$84.0 million. Water sales to residential and commercial customers accounted for
$75.2 million of 1998 revenues. The Water Utilities had sales of 40,822 m.g. and
served 253,664 customers at December 31, 1998. Water revenues for the period
April 1997 through December 1997 were $60.7 million, of which water sales to
residential and commercial customers accounted for $54.4 million. March 1997 was
the month during which NiSource acquired the Water Utilities. The Water
Utilities had sales of 32,504 m.g. during the last nine months of 1997 and
served 246,643 customers at December 31, 1997.
The components of the changes in water revenues are shown in the following
table:
YEAR 1999 YEAR 1998
COMPARED TO COMPARED TO
YEAR 1998 YEAR 1997
(In millions)
Water Revenue Changes
Rate increase.................... $ 4.9 $ 3.9
Changes in sales levels.......... 9.5 19.4
------- -------
Water Revenue Change............... $14.4 $23.3
- --------------------------------------------------------------------------------
WATER OPERATING MARGINS
- --------------------------------------------------------------------------------
The Water Utilities' operating margin in 1999 increased $14.4 million. This
increase was primarily due to increased water volumes sold and increased water
rates for IWC that became effective on April 8, 1998 and April 8, 1999. The
Water Utilities' operating margin in 1998 increased $23.2 million reflecting the
inclusion in the NiSource consolidated financial statements of a full year of
the Water Utilities' operating results in 1998. The Water Utilities contributed
$60.7 million to operating margin in 1997, reflecting the March 1997 acquisition
of the Water Utilities.
- --------------------------------------------------------------------------------
PRODUCTS AND SERVICES REVENUE
- --------------------------------------------------------------------------------
In 1999, Products and Services revenues were $271.7 million (after elimination
of intercompany transactions of approximately $12 million), an increase of $59.3
million from 1998. This increase reflects revenues from a new cogeneration
project which began commercial operations in August 1998, increased pipeline
construction activity, increased line locating and marking activity and the
inclusion of revenue of BSG's unregulated subsidiaries commencing in February
1999. In 1998, Products and Services revenues were $212.4 million, an increase
of $55.8 million from 1997. This increase reflected increased pipeline
construction activity and line locating and marking activities in the amount of
$31.7 million reflecting a full year of operations included in 1998 (the
pipeline construction and line locating businesses were acquired in March 1997)
and a new cogeneration project which began commercial operations in August 1998.
The components of the changes in operating revenues at Products and
Services are shown in the following table:
YEAR 1999 YEAR 1998
COMPARED TO COMPARED TO
YEAR 1998 YEAR 1997
(In millions)
Products and Services
Revenue Changes
Pipeline construction............ $11.1 $14.4
Locate and marking............... 5.4 17.3
Cogeneration project............. 19.1 16.1
Other............................ 23.7 8.0
Products and Services ------- -------
Revenue Change................... $59.3 $55.8
- --------------------------------------------------------------------------------
PRODUCTS AND SERVICES COST OF SALES
- --------------------------------------------------------------------------------
The cost of sales in 1999 for Products and Services increased $38.3 million.
This increase reflects the inclusion of cost of sales for certain subsidiaries
acquired in connection with the BSG acquisition and increased pipeline
construction activity and line locating and marking activities.
27
<PAGE> 31
1999 FINANCIAL REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
================================================================================
The cost of sales in 1998 for Products and Services increased $28.3 million
mainly due to inclusion of the cost of sales for the pipeline construction and
line locating and marking subsidiaries (acquired in March 1997) for twelve
months in 1998 compared to nine months in 1997.
- --------------------------------------------------------------------------------
PRODUCTS AND SERVICES COST OF SALES
- --------------------------------------------------------------------------------
Products and Services operating margin increased $21.0 million during 1999,
reflecting a new energy-related project, which began commercial operations in
August 1998 and increased pipeline construction activity and the inclusion of
the operating margin of BSG's unregulated subsidiaries in February 1999.
Products and Services operating margin in 1998 increased $27.6 million
reflecting the inclusion of a full year of operations of pipeline construction
activity and line locating and marking activities and a new cogeneration project
which began commercial operations in August 1998.
- --------------------------------------------------------------------------------
OPERATING EXPENSES AND TAXES (EXCEPT INCOME)
- --------------------------------------------------------------------------------
Operating expenses and taxes (except income) increased $213.1 million from 1998,
of which $127.3 million is due to the acquisition of BSG in February 1999.
Operating expenses and taxes (except income) increased $18.5 million in 1998
from 1997.
The operating and maintenance expenses of the Energy Utilities increased
$89.1 million from 1998. The increase was primarily due to the inclusion of
$79.1 million of operating expenses of BSG commencing in February 1999,
increased operating costs of $7.4 million, increased employee related costs of
$15.6 million and increased expenses for distributed generation and fuel cell
research and development which were partially offset by a $13 million insurance
settlement related to manufactured gas plants site cleanup costs. The
unregulated gas and electric businesses operation expenses increased $10.4
million primarily due to the inclusion of $6.1 million of TPC operation costs
from April to December 1999. Operating and maintenance expenses at the Energy
Utilities decreased $22.7 million 1998 from 1997 mainly due to decreased
employee related costs of $11.7 million, decreased sales and marketing
activities of $5.7 million and decreased electric production operating costs of
$4.3 million.
28
<PAGE> 32
1999 FINANCIAL REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
================================================================================
Operating expenses at the Water Utilities increased $5.8 million from 1998 due
to increased water treatment and employee related costs. Operation expenses at
the Water Utilities increased $12.2 million from 1997 reflecting the inclusion
of a full year of operation of the Water Utilities.
Operating expenses for Products and Services increased $14 million in 1999
reflecting the inclusion of operating expense of BSG's unregulated subsidiaries
in February 1999, and a full year of operating costs for a new cogeneration
facility which began commercial operation during 1998. Operating expenses for
Products and Services increased $22.6 million in 1998 from 1997 reflecting a
full year of operations for pipeline construction and line locating activities
acquired in March 1997 and the startup of operations of a new cogeneration
facility during 1998.
Operating expenses also include charges of $13.1 million for professional
fees and filing costs incurred during 1999 in connection with the attempted
acquisition of CEG.
Depreciation and amortization expenses increased $54.9 million in 1999 from
1998, primarily resulting from inclusion of depreciation and amortization for
BSG ($36.2 million) and increased depreciation expense at the Energy and Water
Utilities due to plant additions. Depreciation and amortization expense
increased $6.7 million in 1998 from 1997 as a result of plant additions and the
inclusion of twelve months of depreciation and amortization expenses for the
Water Utilities and its unregulated subsidiaries, including the pipeline
construction business and the line locating and marking business.
Taxes (except income) increased $15.4 million in 1999 primarily as the
result of the BSG acquisition ($12.0 million).
- --------------------------------------------------------------------------------
INTEREST EXPENSE, NET
- --------------------------------------------------------------------------------
Interest expense, net increased $37.8 million and $8.2 million in 1999 and
1998, respectively. The 1999 increase reflects the inclusion of interest charges
for BSG of $19 million, interest on the September 1999 issuance of $160 million
in Puttable Reset Securities (PURS) and increased interest expense on higher
short-term borrowings. The 1998 increase reflects twelve months of interest
payments on $300 million of Capital Markets' medium-term notes and $75 million
of Capital Markets' Junior Subordinated Deferrable Interest Debentures, Series A
and the inclusion of twelve months of interest expense at IWC Resources
Corporation (IWCR), which was acquired in March 1997.
29
<PAGE> 33
1999 FINANCIAL REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
================================================================================
- --------------------------------------------------------------------------------
MINORITY INTERESTS
- --------------------------------------------------------------------------------
The 1999 increase of $16.7 million in minority interests reflects the dividends
paid on Company-obligated mandatorily redeemable Preferred Securities issued in
February 1999.
- --------------------------------------------------------------------------------
OTHER NET
- --------------------------------------------------------------------------------
Other, net decreased $29.6 million primarily reflecting the impact of adverse
economic conditions on certain equity investments, the most significant of which
was in oil and gas development. NiSource also decided to abandon certain
businesses and facilities that were not consistent with its strategic direction.
- --------------------------------------------------------------------------------
INCOME TAXES
- --------------------------------------------------------------------------------
Income Taxes decreased $10.4 million in 1999. This decrease ~is primarily a
result of decreased income before income taxes. Income taxes decreased $5.3
million in 1998. This decrease is primarily as a result of a decrease in income
before income taxes and a lower effective income tax rate.
See Notes to Consolidated Financial Statements for a discussion of
accounting policies and transactions impacting this analysis.
- --------------------------------------------------------------------------------
ENVIRONMENTAL MATTERS
- --------------------------------------------------------------------------------
The operations of NiSource are subject to extensive and evolving federal, state
and local environmental laws and regulations intended to protect the public
health and the environment. Such environmental laws and regulations affect
NiSource's operations as they relate to impacts on air, water and land.
Refer to "Environmental Matters" in the Notes to Consolidated Financial
Statements for information regarding certain environmental issues.
30
<PAGE> 34
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================================================================================
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Generally, cash flow from operations has provided sufficient liquidity to meet
current operating requirements. Because the utility and utility construction
business is seasonal in nature, commercial paper is issued for short-term
financing. As of December 31, 1999 and December 31, 1998, $299.6 million and
$193.7 million of commercial paper was outstanding, respectively. The weighted
average interest rate on commercial paper outstanding as of December 31, 1999
was 6.29%.
NiSource and its subsidiaries may borrow under two five-year, $100 million
revolving credit agreements that terminate on September 23, 2003 and two 364-day
$100 million revolving credit agreements that terminate on September 23, 2000.
The 364-day agreements may be extended at expiration for additional periods of
364 days. Under these agreements, funds are borrowed at a floating rate of
interest or, under certain circumstances, at a fixed rate of interest for
short-term periods. These agreements provide financing flexibility and may be
used to support the issuance of commercial paper. At December 31, 1999 and 1998,
there were no borrowings outstanding under these agreements.
In addition, various NiSource subsidiaries maintain lines of credit for up
to an aggregate of $199.9 million with lenders at either the lender's commercial
prime or market lending rates. As of December 31, 1999, there were $54.1 million
of borrowings outstanding under these lines of credit with a weighted average
interest rate of 6.06%. As of December 31, 1998, there were $84.1 million of
borrowings outstanding under these lines of credit.
NiSource and its subsidiaries maintain money market lines of credit for up
to $394.4 million. As of December 31, 1999, there were $156.2 million
outstanding under these money market lines of credit at a weighted average
interest rate of 6.78%. At December 31, 1998, there were $127.3 million of
borrowings outstanding under these money market lines of credit.
Forty million dollars in revenue bonds were issued in July 1998 and $80.0
million in medium-term notes were issued in February 1999. The revenue bonds,
which were used to redeem previously existing revenue bonds, bear interest at
5.95% per annum and mature on July 15, 2028. The medium-term notes, which were
used in part to reduce existing credit facilities, consist of $35.0 million in
ten-year notes that bear interest at 5.99% interest per annum and $45.0 million
in twenty-year notes that bear interest at 6.61% per annum.
In February 1999 an underwritten public offering of Corporate Premium
Income Equity Securities (Corporate PIES) was completed. The net proceeds of
approximately $334.7 million were primarily used to refinance the short-term
borrowings incurred to pay the cash portion of the acquisition cost of BSG, and
repay other short-term indebtedness. In September 1999, Capital Markets issued
$160 million of PURS in an underwritten public offering and the underwriters
acquired a call option to purchase the PURS on September 28, 2000. The net
proceeds from the sale of the PURS of $162.4 million were also used to refinance
short-term indebtedness incurred in connection with the acquisition of BSG in
February 1999. See "Short-Term Borrowings" in the Notes to the Consolidated
Financial Statements for a description of the Corporate PIES and the PURS.
In June 1999, NiSource commenced a tender offer to acquire CEG. In December
1999, CEG acknowledged preliminary indications of interest from numerous other
third parties and invited formal bids from those companies that had indicated a
preliminary value higher than the NiSource tender offer price of $74 per share.
As a result, in December, NiSource wrote off the costs associated with its
tender offer. On February 11, 2000, the NiSource tender offer expired.
On February 28, 2000, after completion of the bidding process initiated by
CEG, NiSource and CEG announced approval of a merger agreement under which
NiSource will form a new holding company, which will acquire all of the
outstanding shares of CEG valued at approximately $6 billion. The new holding
company will also assume approximately $2.5 billion of CEG debt. Under the
agreement, CEG shareholders have the option to receive new holding company stock
for up to 30% of the outstanding CEG shares. Under the common stock option, each
CEG share will be exchanged for $74 in new holding company stock, based on the
average NiSource share price prior to the closing, but not more than 4.4848
shares of new holding company stock for each CEG share. Under the cash option,
each CEG share will be exchanged for $70 in cash plus a $2.60 face value unit
(consisting of a zero coupon debt security with a forward equity contract). A
commitment letter was accepted under which certain financial institutions
agreed, under specified conditions, to provide up to $6.0 billion to finance the
acquisition of CEG. The merger is conditioned upon, among other things, the
approvals of the shareholders of both companies and various regulatory
commissions. If NiSource shareholder approval is not obtained, the merger
agreement provides that the transaction will automatically be restructured to
eliminate the 30% common stock option for CEG shareholders.
Utility construction expenditures for 1999, 1998 and 1997 were
approximately $341 million, $245 million and $219 million, respectively.
NiSource's total utility plant investment on December 31, 1999 was $8.2 billion.
During recent years, NiSource has been able to finance its construction program
with internally generated funds and expects to be able to meet future
commitments through such funds.
The Energy Utilities do not anticipate the need to file for retail gas or
electric base rate increases in the near future. IWC has agreed to a moratorium
on water rate increases until 2002.
On January 27, 2000, the Citizens Action Coalition
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OPERATIONS (Continued)
================================================================================
(CAC), a private consumer organization, filed a petition before the Indiana
Utility Regulatory Commission (IURC). The petition does not seek a specified
amount of rate reduction, but rather alleges that the existing Northern Indiana
electric rates are "unreasonable and unsafe," and seeks to have the IURC force
Northern Indiana to produce detailed financial calculations that would justify
its electric rates. Northern Indiana intends to oppose the petition on both
legal and factual grounds, and believes that its current rates are just and
reasonable as required by statute.
During 1999, NiSource's non-utility subsidiaries acquired interests in
other properties and investments totalling approximately $44 million.
- --------------------------------------------------------------------------------
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
- --------------------------------------------------------------------------------
Risk Management
Risk is an inherent part of NiSource's energy businesses and activities. The
extent to which NiSource properly and effectively identifies, assesses, monitors
and manages each of the various types of risk involved in its businesses is
critical to its profitability. NiSource seeks to identify, assess, monitor and
manage, in accordance with defined policies and procedures, the following
principal risks involved in NiSource's energy businesses: commodity market risk,
interest rate risk, credit risk and foreign currency risk. Risk management at
NiSource is a multi-faceted process with independent oversight that requires
constant communication, judgment and knowledge of specialized products and
markets. NiSource's senior management takes an active role in the risk
management process and has developed policies and procedures that require
specific administrative and business functions to assist in the identification,
assessment and control of various risks. In recognition of the increasingly
varied and complex nature of the energy business, NiSource's risk management
policies and procedures are evolving and subject to ongoing review and
modification.
NiSource is exposed to risk through various daily business activities,
including specific trading risks and non-trading risks. The non-trading risks to
which NiSource is exposed include interest rate risk, foreign currency risk and
commodity price risk of its Energy Utilities and certain gas marketing
activities. The market risk resulting from trading activities consists primarily
of commodity price risk. NiSource's risk management policy permits the use of
certain financial instruments to manage its market risk, including futures,
forwards, options and swaps. Risk management at NiSource is defined as the
process by which the organization ensures that the risks to which it is exposed
are the risks to which it desires to be exposed to achieve its primary business
objectives. NiSource employs various analytic techniques to measure and monitor
its market risks, including value-at-risk (VaR) and instrument sensitivity to
market factors. VaR represents the potential loss for an instrument or portfolio
from adverse changes in market factors, for a specified time period and at a
specified confidence level.
Trading Risks
COMMODITY MARKET RISK. 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 employs a VaR model to assess the market risk of
all open derivative financial instruments. NiSource estimates the one-day VaR
across all trading groups which utilize derivatives using either Monte Carlo
simulation or variance/covariance at a 95 percent confidence level. Based on the
results of the VaR analysis, the daily market risk exposure for power trading on
an average, high, and low basis was $0.4, $1.2, and $0.014 million during 1999,
respectively. The daily VaR for gas trading on an average, high and low basis
was $1.3, $2.1 and $0.4 million, during 1999, respectively. At December 31,
1998, the daily VaR for gas trading was not significant.
NiSource implemented a VaR methodology in 1999 to introduce additional
market sophistication and to recognize the developing complexity of its
businesses.
Non-Trading Risks
COMMODITY MARKET RISK. Currently, commodity price risk resulting from
non-trading activities at the Energy Utilities is limited, since current
regulations allow the Energy Utilities to recoup any prudently incurred fuel and
gas costs through rate-making. As the utility industry undergoes deregulation,
however, the Energy Utilities will be providing services without the benefit of
the traditional rate-making and, therefore, will be more exposed to commodity
price risk. Additionally, NiSource enters into certain sales contracts with
customers based upon a fixed sales price and varying volumes which are
ultimately dependent upon the customer's supply requirements. NiSource utilizes
derivative financial instruments to reduce the commodity price risk based on
modeling techniques to anticipate these future supply requirements.
INTEREST RATE RISK. Long-term debt is utilized as a primary source of
capital. A significant portion of this long-term debt consists of medium-term
notes. In addition, longer term fixed-price debt instruments have been used that
in the past have been refinanced when interest rates decreased. To the extent
that such refinancing is economical, refinancing these fixed-price instruments
will continue.
CREDIT RISK. Credit risk arises in many of NiSource's business activities.
In sales and trading activities, credit risk arises because of the possibility
that a counterparty will not be able or willing to fulfill its obligations on a
32
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1999 FINANCIAL REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Concluded)
================================================================================
transaction on or before settlement date. In derivative activities, credit risk
arises when counterparties to derivative contracts, such as interest rate swaps,
are obligated to pay NiSource the positive fair value or receivable resulting
from the execution of contract terms. Exposure to credit risk is measured in
terms of both current and potential exposure. Current credit exposure is
generally measured by the notional or principal value of financial instruments
and direct credit substitutes, such as commitments and standby letters of credit
and guarantees. Current credit exposure includes the positive fair value of
derivative instruments. Because many of NiSource's exposures vary with changes
in market prices, NiSource also estimates the potential credit exposure over the
remaining term of transactions through statistical analyses of market prices. In
determining exposure, NiSource considers collateral and master netting
agreements, which are used to reduce individual counterparty risk, primarily in
connection with derivative products.
FOREIGN CURRENCY RISK. NiSource is exposed to foreign currency risk
arising from equity investments in businesses owned and operated in foreign
countries. Exposures to these investments are periodically reviewed by
management and were not material to consolidated results in 1999.
Refer to Consolidated Statement of Long-Term Debt for detailed information
related to NiSource's long-term debt outstanding and "Fair Value of Financial
Instruments" in Notes to Consolidated Financial Statements for current market
valuation of long-term debt. Refer to "Summary of Significant Accounting
Policies--Accounting for Price Risk Management Activities" for further
discussion of NiSource's risk management.
Risk
"Year 2000 issues" were concerned with the ability of electronic processing
equipment to process date sensitive information and recognize the last two
digits of a date as occurring in or after the year 2000. Any failure in any
system could have resulted in material operational and financial risks. Possible
scenarios included a system failure in a generating plant, an operating
disruption or delay in transmission or distribution of gas, electricity or
water, or an inability to interconnect with the systems of other utilities.
Failure to achieve year 2000 readiness could have had a material adverse effect
on results of operations, financial position and cash flows.
The program to address risks associated with the year 2000 on both
information technology (IT) and non-IT systems was completed in a timely manner.
State of Readiness
The NiSource year 2000 program consisted of four phases: inventory (identifying
systems potentially affected by the year 2000), assessment (testing identified
systems), remediation (correcting or replacing non-compliant systems) and
validation (evaluating testing remediated systems to confirm compliance). All
phases in all subsidiaries were completed in a timely manner.
Because NiSource depends on outside suppliers and vendors with similar year
2000 issues, the ability of those suppliers and vendors to provide an
uninterrupted supply of goods and services was assessed. Critical vendors and
suppliers were contacted in order to investigate their year 2000 efforts. In
addition, electricity and gas industry groups such as the North American
Electric Reliability Council, the Electric Power Research Institute and the
American Gas Association were helpful in evaluating the potential impact of year
2000 problems upon the electric grid systems and pipeline networks.
Costs
The total cost of the NiSource year 2000 program was $25.0 million. These costs
were funded from operations. Costs related to the maintenance or modification of
existing systems were expensed as incurred. Costs related to the acquisition of
replacement systems were capitalized. These costs did not have a material impact
on results of operations.
Contingency Plans
NiSource developed its contingency plans to address the possibility that any
mission-critical system would be non-compliant. This included identifying
alternate suppliers and vendors, conducting staff training and developing
communication plans. In addition, NiSource evaluated the ability to maintain or
restore service in the event of a power failure or operating disruption or
delay, along with the limited ability to mitigate the effects of a network
failure by isolating its own network from the non-compliant segments of the
greater network. These contingency plans were completed during the second
quarter of 1999 and reviewed during the fourth quarter of 1999. They were not
needed for the century rollover.
Results NiSource did not experience any system failures as a result of the
year 2000 issue.
- --------------------------------------------------------------------------------
COMPETITION AND REGULATORY CHANGES
- --------------------------------------------------------------------------------
The regulatory frameworks applicable to the Energy Utilities, at both the state
and federal levels, are undergoing fundamental changes. These changes have
impacted and will continue to have an impact on NiSource's operations, structure
and profitability. At the same time, competition within the electric and gas
industries will create opportunities to compete for new customers and revenues.
Management has taken steps to become more competitive and profitable in this
changing environment, including partnering on energy projects with major
industrial customers, converting some of its generating units to allow use of
lower cost, low sulfur coal, providing its gas customers with increased customer
choice for new products and services, acquiring companies which increase our
scale and establishing subsidiaries that provide gas and develop new
energy-related products for residential, commercial and industrial customers.
The Electric Industry. At the Federal level, the Federal Energy Regulatory
Commission (FERC) issued Order No. 888-A in 1996 which required all public
utilities owning, controlling or operating transmission lines to file
non-discriminatory open-access tariffs and offer wholesale electricity suppliers
and marketers the same transmission service they provide themselves. In 1997,
FERC approved Northern Indiana's open-access transmission tariff. On December
20, 1999, FERC issued a final rule addressing the formation and operation of
Regional Transmission Organizations (RTOs). The rule is intended to eliminate
pricing inequities in the provision of wholesale transmission service. NiSource
does not believe that compliance with the new rules will be material to future
earnings. Although wholesale customers currently represent a small portion of
Northern Indiana's electricity sales, it intends to continue its efforts to
retain and add wholesale customers by offering competitive rates and also
intends to expand the customer base for which it provides transmission services.
At the state level, NiSource announced in 1997 and 1998 that if a consensus
could be reached regarding electric utility restructuring legislation, NiSource
would support a restructuring bill before the Indiana General Assembly. During
1999, discussions were held with the other investor-owned utilities in Indiana
and with other segments of the Indiana electric industry regarding the technical
and economic aspects of possible legislation leading to greater customer choice.
A consensus was not reached. Therefore, NiSource did not support legislation
regarding electric restructuring during the 2000 session of the Indiana General
Assembly. During 2000, discussions will continue with all segments of the
Indiana electric industry in an attempt to reach a consensus on electric
restructuring legislation for introduction during the 2001 session of the
Indiana General Assembly.
The Gas Industry. At the Federal level, gas industry deregulation began in
the mid-1980s when FERC required interstate pipelines to provide
nondiscriminatory transportation services pursuant to unbundled rates. This
regulatory change permitted large industrial and commercial customers to
purchase their gas supplies either from the Energy Utilities or directly from
competing producers and marketers, which would then use the Energy Utilities'
facilities to transport the gas. More recently, the focus of deregulation in the
gas industry has shifted to the states.
At the state level, the IURC approved in 1997 Northern Indiana's
Alternative Regulatory Plan (ARP) which implemented new rates and services that
included, among other things, unbundling of services for additional customer
classes (primarily residential and commercial users), negotiated services and
prices, a gas cost incentive mechanism, and a price protection program. The gas
cost incentive mechanism allows Northern Indiana to share any cost savings or
cost increases with its customers based upon a comparison of Northern Indiana's
actual gas supply portfolio cost to a market-based benchmark price. Phase I of
Northern Indiana's Customer Choice Pilot Program ended on March 31, 1999. This
pilot program offered 82,000 residential customers within St. Joseph County and
10,000 commercial customers throughout the NiSource service area the right to
choose alternative gas suppliers. Phase II of Northern Indiana's Customer Choice
Pilot Program commenced April 1, 1999 and will continue for a one-year period.
During this phase, Northern Indiana is offering customer choice to all 660,000
residential and 50,000 commercial customers throughout its gas service
territory. A limit of 150,000 residential and 20,000 commercial customers are
eligible to enroll in Phase II of the program. The IURC order allows NiSource's
natural gas marketing subsidiary to participate as a supplier of choice to
Northern Indiana customers. In addition, as Northern Indiana has allowed
residential and commercial customers to designate alternative gas suppliers, it
has also offered new services to all classes of customers including price
protection, negotiated sales and services, gas lending and parking, and new
storage services.
In Massachusetts, Bay State implemented new unbundled rates and services
for all commercial-industrial customers in 1993, and launched one of the
nation's earliest residential and small commercial-industrial customer choice
pilot programs in 1996. The Bay State pilot, in which almost 28% of eligible
customers participated, is scheduled to conclude on April 1, 2000 when all
Massachusetts gas utilities are expected to begin making unbundled gas service
available to all customer classes pursuant to new statewide model terms and
conditions that are currently awaiting approval by the Massachusetts Department
of Telecommunications and Energy.
In New Hampshire, Northern Utilities introduced unbundled tariffs and
services for all commercial-industrial customers in 1994. In 1998, the New
Hampshire Public Utilities Commission (NHPUC) formed a collaborative group to
investigate the merits of further unbundling and advise the NHPUC accordingly.
The collaborative group has recommended new model tariffs and regulation
designed to make unbundled services available to all commercial-industrial
customers statewide on November 1, 2000, with consideration of residential
unbundling at a later date. Hearings before the NHPUC regarding the
recommendations are expected to be held during the first quarter of 2000.
In Maine, Northern Utilities introduced unbundled rates and services for
large commercial-industrial customers in December 1995 and expanded the
availability to all daily metered commercial and industrial customers on
November 1, 1999. In June 1999 the Maine Public Utilities Commission opened an
inquiry into the potential merits of further regulatory changes related to
unbundling. This inquiry is intended to investigate all the key elements of full
customer choice and will include a review of customer choice programs in
Massachusetts and New Hampshire.
To date, the Energy Utilities have not been materially affected by
competition and management does not foresee substantial adverse affects in the
near future unless the current regulatory structure is substantially altered.
NiSource believes the steps that it has taken to deal with increased competition
have had and will continue to have significant positive effects in the next few
years.
- --------------------------------------------------------------------------------
IMPACT OF ACCOUNTING STANDARDS
- --------------------------------------------------------------------------------
Refer to "Summary of Significant Accounting Policies--Impact of Accounting
Standards" in the Notes to Consolidated Financial Statements for information
regarding impact of accounting standards not yet adopted.
- --------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
- --------------------------------------------------------------------------------
This report contains forward-looking statements within the meaning of the
securities laws. Forward-looking statements include terms such as "may," "will,"
"expect," "believe," "plan" and other similar terms. NiSource cautions that,
while it believes such statements to be based on reasonable assumptions and
makes such statements in good faith, you cannot be assured that the actual
results will not differ materially from such assumptions or that the
expectations set forth in the forward-looking statements derived from these
assumptions will be realized. You should be aware of important factors that
could have a material impact on future results. These factors include weather,
the federal and state regulatory environment, the economic climate, regional,
commercial, industrial and residential growth in the service territories served
by NiSource's subsidiaries, customers' usage patterns and preferences, the speed
and degree to which competition enters the utility industry, the timing and
extent of changes in commodity prices, changing conditions in the capital and
equity markets and other uncertainties, all of which are difficult to predict,
and many of which are beyond NiSource's control.
33
<PAGE> 37
CONSOLIDATED STATEMENT OF INCOME
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
----------------------- ---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Operating Revenues:
Gas...................................................... $1,653,450 $1,209,775 $1,184,621
Electric................................................. 1,121,038 1,426,600 1,184,591
Water.................................................... 98,383 83,979 60,743
Products and Services.................................... 271,705 212,424 156,586
--------- --------- ---------
3,144,576 2,932,778 2,586,541
--------- --------- ---------
Cost of Sales:
Gas costs................................................ 1,187,458 925,038 857,146
Fuel for electric generation............................. 249,164 250,649 238,548
Power purchased.......................................... 71,745 412,290 203,800
Products and Services.................................... 142,684 104,390 76,120
--------- --------- ---------
1,651,051 1,692,367 1,375,614
--------- --------- ---------
Operating Margin............................................ 1,493,525 1,240,411 1,210,927
--------- --------- ---------
Operating Expenses and Taxes (except income):
Operation................................................ 534,808 399,594 390,253
Maintenance.............................................. 82,208 74,630 76,552
Depreciation and amortization............................ 311,404 256,474 249,804
Taxes (except income).................................... 103,569 88,207 83,765
----------- ----------- -----------
1,031,989 818,905 800,374
----------- ----------- -----------
Operating Income............................................ 461,536 421,506 410,553
----------- ----------- -----------
Other Income (Deductions):
Interest expense, net.................................... (166,617) (128,804) (120,607)
Minority interests....................................... (17,693) (1,024) (356)
Dividend requirements on preferred stock................. (8,334) (8,538) (8,691)
Other, net............................................... (18,030) 11,608 16,124
----------- ----------- -----------
(210,674) (126,758) (113,530)
----------- ----------- -----------
Income before income taxes 250,862 294,748 297,023
----------- ----------- -----------
Income Taxes 90,448 100,862 106,174
----------- ----------- -----------
Net Income $ 160,414 $ 193,886 $ 190,849
=========== =========== ===========
Average common shares outstanding--basic 124,343,117 120,778,077 123,849,126
=========== =========== ===========
Basic earnings per average common share $ 1.29 $ 1.60 $ 1.54
=========== =========== ===========
Diluted earnings per average common share $ 1.27 $ 1.59 $ 1.53
=========== =========== ===========
Dividends declared per common share $ 1.035 $ 0.975 $ 0.915
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
34
<PAGE> 38
CONSOLIDATED STATEMENT OF INCOME
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
----------------------- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 160,414 $ 193,886 $ 190,849
Adjustments to reconcile net income to net cash:
Depreciation and amortization............................ 311,404 256,474 249,804
Deferred federal and state operating
income taxes, net..................................... (7,891) (21,941) (1,649)
Deferred investment tax credits, net..................... (7,691) (7,361) (7,376)
Other, net............................................... 22,472 (2,740) (9,756)
Change in certain assets and liabilities--*
Accounts receivable, net............................... 52,508 (21,137) (37,369)
Other receivables...................................... 8,570 75,451 (65,047)
Natural gas in storage................................. 46,905 (8,204) 3,657
Accounts payable....................................... (113,534) 19,785 (18,567)
Taxes accrued.......................................... (3,714) (9,833) 3,389
Gas cost adjustment clause............................. (20,660) 44,253 10,223
Accrued employment costs............................... 252 (6,678) 12,135
Other accruals......................................... 36,540 (11,641) 11,994
Other, net............................................... (32,545) (16,182) 92,270
---------- -------- --------
Net cash provided by operating activities............ 453,030 484,132 434,557
---------- -------- --------
Cash flows provided by (used in) investing activities:
Utility construction expenditures........................ (341,263) (245,825) (218,931)
Acquisition of businesses, net of cash acquired.......... (737,869) -- (288,932)
Proceeds from disposition of assets...................... 29,775 12,588 35,993
Proceeds from settlement of litigation................... -- -- 41,069
Other, net............................................... (61,080) (57,638) (66,561)
---------- -------- --------
Net cash used in investing activities................ (1,110,437) (290,875) (497,362)
---------- -------- --------
Cash flows provided by (used in) financing activities:
Issuance of long-term debt............................... 269,536 47,380 658,232
Retirement of long-term debt............................. (203,957) (95,631) (324,604)
Change in short-term debt................................ 168,978 197,018 (237,361)
Retirement of preferred shares........................... (2,407) (2,413) (2,408)
Proceeds from Corporate Premium Income Equity
Securities, net ....................................... 334,650 -- --
Issuance of common shares................................ 324,893 10,356 218,566
Acquisition of treasury shares........................... (126,455) (203,976) (133,073)
Cash dividends paid on common shares..................... (125,599) (116,386) (111,593)
Other, net............................................... 453 463 (507
---------- -------- --------
Net cash provided by (used in) financing activities 640,092 (163,189) 67,252
---------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (17,315) 30,068 4,447
Cash and cash equivalents at beginning of period............ 60,848 30,780 26,333
========== ======== ========
Cash and cash equivalents at end of period.................. $ 43,533 $ 60,848 $ 30,780
========== ======== ========
</TABLE>
*Net of effect from acquisitions of businesses.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
35
<PAGE> 39
CONSOLIDATED STATEMENT OF INCOME
================================================================================
<TABLE>
<CAPTION>
December 31, 1999 1998
------------ ---- ----
<S> <C> <C>
(Dollars in thousands)
Assets
Property, Plant and Equipment:
Utility Plant (including construction work in progress of $240,637 and
$197,112, respectively):
Electric................................................................... $4,237,427 $4,154,060
Gas........................................................................ 2,871,824 1,447,945
Water...................................................................... 750,376 663,355
Common..................................................................... 381,486 364,822
--------- ---------
8,241,113 6,630,182
Less--Accumulated provision for depreciation and amortization.............. 3,444,311 2,968,078
--------- ---------
Total utility plant........................................................ 4,796,802 3,662,104
--------- ---------
Other property, at cost, less accumulated provision for depreciation
of $56,414 and $39,090, respectively ........................................ 433,616 86,565
--------- ---------
Total Property, Plant and Equipment........................................ 5,230,418 3,748,669
--------- ---------
Investments:
Investments, at equity......................................................... 118,259 111,340
Investments, at cost........................................................... 55,851 41,609
Other investments.............................................................. 32,839 28,702
--------- ---------
Total Investments.......................................................... 206,949 181,651
--------- ---------
Current Assets:
Cash and cash equivalents...................................................... 43,533 60,848
Accounts receivable, less reserve of $30,619 and $8,984, respectively.......... 390,990 261,971
Other receivables.............................................................. 6,572 1,780
Fuel adjustment clause......................................................... 4,201 --
Gas cost adjustment clause..................................................... 92,498 45,738
Materials and supplies, at average cost........................................ 64,530 62,818
Electric production fuel, at average cost...................................... 31,968 32,402
Natural gas in storage......................................................... 63,750 69,640
Prepayments and other.......................................................... 73,561 41,670
--------- ---------
Total current assets....................................................... 771,603 576,867
--------- ---------
Other Assets:
Regulatory assets.............................................................. 208,634 209,059
Intangible assets, less accumulated provision for amortization................. 128,564 65,039
Prepayments and other.......................................................... 289,061 205,218
--------- ---------
Total other assets......................................................... 626,259 479,316
--------- ---------
$6,835,229 $4,986,503
========= =========
</TABLE>
36
<PAGE> 40
CONSOLIDATED STATEMENT OF INCOME
================================================================================
<TABLE>
<CAPTION>
December 31, 1999 1998
------------ ---- ----
<S> <C> <C>
(Dollars in thousands)
Capitalization and Liabilities
Capitalization:
Common shareholders' equity ...................................... $1,353,504 $1,149,708
Preferred stocks--
Northern Indiana Public Service Company:
Series without mandatory redemption provisions
81,114 81,116
Series with mandatory redemption provisions .................. 54,030 56,435
Indianapolis Water Company:
Series without mandatory redemption provisions ............... 4,497 4,497
Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely Company debentures ................. 345,000 --
Long-term debt, excluding amounts due within one year .......... 1,975,184 1,667,965
--------- ---------
Total capitalization ......................................... 3,813,329 2,959,721
--------- ---------
Current Liabilities:
Current portion of long-term debt .............................. 173,721 6,790
Short-term borrowings .......................................... 679,321 411,040
Accounts payable ............................................... 277,358 251,399
Dividends declared on common and preferred stocks .............. 34,535 31,072
Customer deposits .............................................. 28,736 22,199
Taxes accrued .................................................. 42,853 44,939
Interest accrued ............................................... 34,157 21,202
Fuel adjustment clause ......................................... -- 6,279
Accrued employment costs .................................... 60,647 52,121
Other ....................................................... 142,388 39,022
--------- ---------
Total current liabilities ................................. 1,473,716 886,063
--------- ---------
Other:
Deferred income taxes ......................................... 996,193 667,167
Deferred investment tax credits, being amortized over life of
related property ............................................ 94,946 98,177
Deferred credits .............................................. 94,058 68,046
Customer advances and contributions in aid of construction .... 140,562 118,778
Accrued liability for postretirement benefits ................. 157,517 143,870
Other noncurrent liabilities .................................. 64,908 44,681
--------- ---------
Total other ............................................... 1,548,184 1,140,719
--------- ---------
Commitments and Contingencies (see notes)
$6,835,229 $4,986,503
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
37
<PAGE> 41
CONSOLIDATED STATEMENT OF LONG-TERM DEBT
===============================================================================
<TABLE>
<CAPTION>
December 31, 1999 1998
(Dollars in thousands)
<S> <C> <C> <C> <C>
Common shareholders' equity .......................... $1,353,504 35.5% $1,149,708 38.8%
Preferred Stocks, which are redeemable solely at
option of issuer:
Northern Indiana Public Service Company--
Cumulative preferred stock--$100 par value--
41/4% series--209,035 and 209,051 shares
outstanding, respectively ................. 20,903 20,905
41/2% series--79,996 shares outstanding ..... 8,000 8,000
4.22% series--106,198 shares outstanding .... 10,620 10,620
4.88% series--100,000 shares outstanding .... 10,000 10,000
7.44% series--41,890 shares outstanding ..... 4,189 4,189
7.50% series--34,842 shares outstanding ..... 3,484 3,484
Premium on preferred stock .................. 254 254
Cumulative preferred stock--no par value--
Adjustable Rate Series A (stated value--
$50 per share), 473,285 shares
outstanding 23,664 23,664
81,114 2.1% 81,116 2.7%
Indianapolis Water Company--
Cumulative preferred stock--$100 par value--
41/2% Series--44,966 shares outstanding ..... 4,497 0.1% 4,497 0.2%
Redeemable Preferred Stocks, subject to mandatory-
redemption requirements or
whose redemption is outside the control of issuer:
Northern Indiana Public Service Company--
Cumulative preferred stock--$100 par value--
8.85% series--37,500 and 50,000 shares
outstanding, respectively ................ 3,750 5,000
73/4% series--27,798 and 33,352 shares
outstanding, respectively ................ 2,780 3,335
8.35% series--45,000 and 51,000 shares
outstanding, respectively ................ 4,500 5,100
Cumulative preferred stock--no par value--
6.50% series--430,000 shares outstanding .... 43,000 43,000
54,030 1.4% 56,435 1.9%
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely Company debentures .................... 345,000 9.0% -- --
Long-term debt ....................................... 1,975,184 51.9% 1,667,965 56.4%
Total capitalization ......................... $3,813,329 100.0% $2,959,721 100.0%
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
38
<PAGE> 42
CONSOLIDATED STATEMENT OF LONG-TERM DEBT
===============================================================================
<TABLE>
<CAPTION>
December 31, 1999 1998
------------ ---- ----
(Dollars in thousands)
<S> <C> <C>
Northern Indiana Public Service Company
First mortgage bonds--
Series T, 71/2%--due April 1, 2002 .................... $ 38,500 $ 39,000
Series NN, 7.10%--due July 1, 2017 .................... 55,000 55,000
Total ............................................. 93,500 94,000
Pollution control notes and bonds--
-Series A note--City of Michigan City--5.70% due
October 1, 2003 .................................... 14,000 16,500
-Series 1988 Bonds--Jasper County--Series A, B
and C ~ 4.06% weighted average at
December 31, 1999, due November 1, 2016 ............ 130,000 130,000
-Series 1988 Bonds--Jasper County--
Series D 4.04% weighted average at
December 31, 1999, due November 1, 2007 ............ 24,000 24,000
-Series 1994 Bonds--Jasper County--Series A
4.80% at December 31, 1999, due
August 1, 2010 ..................................... 10,000 10,000
-Series 1994 Bonds--Jasper County--Series B
4.80% at December 31, 1999, due June 1, 2013 ....... 18,000 18,000
-Series 1994 Bonds--Jasper County--Series C
3.80% at December 31, 1999, due April 1, 2019 ...... 41,000 41,00
Total ............................................. 237,000 239,500
Medium-term notes--
Issued at interest rates between 6.50% and 7.69%,
with a weighted average interest rate of 7.05%
and various maturities between August 15, 2001
and August 4, 2027 ................................... 593,025 748,025
Unamortized premium and discount on long-term
debt, net ............................................ (3,112) (3,567)
Total long-term debt of Northern Indiana
Public Service Company .......................... 920,413 1,077,958
IWC Resources Corporation:
Senior Notes Payable--6.31%--due March 15, 2001 ......... 14,000 14,000
Variable Bank Loan--7.47875%--due August 7, 2003 ........ 5,600 5,600
Installment promissory Note--7.00%--due
December 1, 2018 ...................................... 10,237 --
Indianapolis Water Company:
First mortgage bonds
Series 5.20%--due May 1, 2001 ......................... 11,600 11,600
Series 8.00%--due December 15, 2001 ................... -- 3,000
Series 9.83%--due June 15, 2019 ....................... 5,000 5,000
Series 6.10%--due December 1, 2022 .................... 5,000 5,000
Series 8.19%--due December 1, 2022 .................... 10,000 10,000
Series 5.85%--due September 1, 2025 ................... 18,000 18,000
Series 5.05%--due July 15, 2028 ....................... 40,000 40,000
89,600 92,600
Medium Term Notes--
Series 5.99%--due February 1, 2009 .................... 35,000 --
Series 6.61%--due February 1, 2019 .................... 45,000 --
80,000 --
Total long-term debt of IWC Resources Corporation ... 199,437 112,200
NiSource Capital Markets, Inc.:
Subordinated Debentures--Series A, 73/4%,
due March 31, 2026 .................................... 75,000 75,000
Senior Notes Payable--6.78%, due December 1, 2027 ....... 75,000 75,000
Medium-term notes--
Issued at interest rates between 7.38% and
7.99%, with a weighted average interest
rate of 7.66% and various maturities between
April 1, 2004 and May 5, 2027 ....................... 300,000 300,000
Total long-term debt of NiSource Capital
Markets, Inc. ................................... 450,000 450,000
NiSource Development Company, Inc.:
Lake Erie Land Company--Notes Payable--9.00%--due
July 7, 2004 .......................................... -- 2,533
NDC Douglas Properties, Inc.--Notes Payable--
Interest rates between 6.72% and 8.38% with a
weighted average ~ interest rate of 7.88% and
maturities through January 1, 2008 .................... 21,244 25,274
Total long-term debt of NiSource Development
Company, Inc. ................................... 21,244 27,807
EnergyUSA, Inc.:
EnergyUSA-TPC Corp.:
Notes Payable--
Interest rates between 7.00% and 12.00% with a
weighted average interest rate of 10.08% and
various maturities between September 6, 2003
and February 6, 2010 ................................ 1,224 --
EnergyUSA, Inc. (MA):
Notes payable--6.12% .................................. 3,033 --
Market Hub Partners, L.P.:
Notes Payable--
Interest rates of 10.34% and 8.25% with a weighted
average interest rate of 8.74% and maturities of
December 31, 2001 and March, 1, 2008 ................ 150,000 --
Total long-term debt of EnergyUSA, Inc. ........... 154,257 --
Bay State Gas Company:
Medium Term Notes--
Interest rates between 6.00% and 9.20% with a weighted
average interest rate of 6.96% and maturities between
January 30, 2001 and February 15, 2028 ................ 183,500 --
Northern Utilities:
Revolving Credit Agreement--due March 17, 2001 ........ 25,000 --
Medium Term Notes--Interest rates of 6.93%
and 9.70% with a weighted average interest rate of
6.91% and maturities of September 1, 2010 and
September 1, 2031 ................................. 21,333 --
Long-term debt of Bay State Gas Company ......... 229,833 --
Total long-term debt, excluding amount due within
one year ...................................... $ 1,975,184 $ 1,667,965
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
39
<PAGE> 43
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
===============================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
Accum.
Additional Other
Common Treasury Paid-in Retained Comp. Comp.
Shares Shares Capital Earnings Other Income Total Income
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 ............................ $870,930 $(392,995) $ 32,868 $591,370 $(4,280) $2,608 $1,100,501
Comprehensive Income
Net income ....................................... 190,849 190,849 $ 190,849
Other comprehensive income, net of tax:
Gain/loss on available for sale securities:
Unrealized gain (net of income tax of $1,033) 1,689 1,689 1,689
Gain (loss) on foreign currency translation:
Unrealized ................................. (1,430) (1,430) (1,430)
Total Comprehensive Income .......................... $ 191,108
Dividends:
Common shares .................................... (114,303) (114,303)
Treasury shares acquired ............................ (133,073) 1 (133,072)
Issued:
Employee stock purchase plan ..................... 273 424 697
Long-term incentive plan ......................... 5,329 116 (443) 5,002
IWC Resources Corporation acquisition ............ 152,405 55,007 207,412
Acquisition of minority interest ................. 4,118 1,351 5,469
Amortization of unearned compensation ............... 2,099 2,099
Other ............................................... 1 (126) (125)
BALANCE, DECEMBER 31, 1997 .......................... $870,930 $(363,943) $ 89,768 $667,790 $(2,624) $2,867 $1,264,788
Comprehensive Income
Net income ....................................... 193,886 193,886 193,886
Other comprehensive income, net of tax:
Gain/loss on available for sale securities:
Unrealized gain (net of income tax of $873) ... 1,429 1,429 1,429
Realized gain (net of income tax of $1,340) ......... (2,195) (2,195) (2,195)
Gain (loss) on foreign currency translation:
Unrealized ................................. (1,157) (1,157) (1,157)
Realized ................................... 186 186 186
Total Comprehensive Income .......................... $ 192,149
Dividends:
Common shares .................................... (116,596) (116,596)
Treasury shares acquired ............................ (203,976) 2 (203,974)
Issued:
Employee stock purchase plan ..................... 341 889 1,230
Long-term incentive plan ......................... 8,551 575 (1,084) 8,042
Amortization of unearned compensation ............... 1,893 1,893
Other ............................................... 2,947 (771) 2,176
BALANCE, DECEMBER 31, 1998 .......................... $870,930 $(559,027) $ 94,181 $744,309 $(1,815) $1,130 $1,149,708
Comprehensive Income
Net income ....................................... 160,414 160,414 $ 160,414
Other comprehensive income, net of tax:
Gain/loss on available for sale securities:
Unrealized (net of income tax of $1,064) ..... 1,741 1,741 1,741
Realized (net of income tax of $445) 728 728 728
Gain/loss on foreign currency translation:
Unrealized ................................. 645 645 645
Realized ................................... 942 942 942
Total Comprehensive Income
$ 164,470
Dividends:
Common shares .................................... (129,144) (129,144)
Treasury shares acquired ............................ (126,455) (126,455)
Issued:
Employee stock purchase plan ..................... 473 1,084 1,557
Long-term incentive plan ......................... 3,853 188 (571) 3,470
Other acquisitions ............................... 2,722 939 3,661
Bay State Gas acquisition ........................ 205,881 109,753 315,634
Amortization of unearned compensation ............... 3,497 3,497
Equity contract costs ............................... (34,001) (34,001)
Other ............................................... 2,261 (1,154) 1,107
BALANCE, DECEMBER 31, 1999 .......................... $870,930 $(472,553) $174,405 $774,425 $1,111 $5,186 $1,353,504
</TABLE>
40
<PAGE> 44
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY (Concluded)
================================================================================
Common Treasury
Shares* Shares*
BALANCE, JANUARY 1, 1997............................. 147,784,218 (28,172,896)
Treasury shares acquired............................. (6,536,928)
Issued:
Employee stock purchase plan....................... 34,376
Long-term incentive plan........................... 353,066
IWC Resources Corporation acquisition.............. 10,580,764
Acquisition of minority interest................... 270,064
Amortization of unearned compensation................
Other................................................
BALANCE, DECEMBER 31, 1997........................... 147,784,218 (23,471,554)
Treasury shares acquired............................. (7,309,906)
Issued:
Employee stock purchase plan....................... 42,796
Long-term incentive plan........................... 485,144
Amortization of unearned compensation................
Other................................................
BALANCE, DECEMBER 31, 1998........................... 147,784,218 (30,253,520)
Treasury shares acquired............................. (4,821,253)
Issued:
Employee stock purchase plan....................... 59,475
Long-term incentive plan........................... 194,208
Other acquisitions................................. 134,453
Bay State Gas acquisition.......................... 11,041,811
Amortization of unearned compensation................
Equity contract costs................................
Other................................................
BALANCE, DECEMBER 31, 1999........................... 147,784,218 (23,644,826)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
HOLDING COMPANY STRUCTURE
- --------------------------------------------------------------------------------
NiSource Inc. (NiSource), formerly NIPSCO Industries Inc., is an energy and
utility-based holding company headquartered in Merrillville, Indiana that
provides natural gas, electricity and water to the public for residential,
commercial and industrial uses. NiSource was organized as an Indiana holding
company in 1987 under the name NIPSCO Industries Inc., and changed its name to
NiSource Inc. on April 14, 1999 to reflect its new direction as a multi-state
supplier of energy and water resources and related services.
NiSource's gas business is comprised primarily of regulated gas utilities
that operate throughout northern Indiana and New England. In addition, NiSource
expanded its gas marketing, trading and storage operations with the April 1999
acquisition of TPC Corporation, now renamed EnergyUSA-TPC Corp. (TPC).
NiSource's electric business is comprised of a regulated electric utility that
operates in northern Indiana. The electric business also includes wholesale
sales and power trading activities. NiSource's regulated gas and electric
subsidiaries are collectively referred to as the "Energy Utilities." NiSource's
regulated water subsidiaries are collectively called the "Water Utilities."
Collectively the Energy and Water Utilities are referred to as the "Utilities."
The Utilities are subject to regulation with respect to rates, accounting and
certain other matters by the Indiana Utility Regulatory Commission (IURC), the
Massachusetts Department of Telecommunications and Energy (MDTE), the New
Hampshire Public Utilities Commission (NHPUC), the Maine Public Utilities
Commission (MEPUC) and the Federal Energy Regulatory Commission (FERC),
collectively called the "Commissions." Market Hub Partners, L.P., which is a
subsidiary of TPC Gas Storage Services L.P., is subject to regulation by the
Texas Railroad Commission and FERC.
Non-regulated energy and utility-related products and services are provided
through the "Products and Services" subsidiaries. Products and Services
subsidiaries perform energy-related services and offer products in connection
with these services, which include pipeline construction, repair and maintenance
of underground gas pipelines and locating and marking utility lines.
In addition to the Utilities and the Products and Services subsidiaries,
NiSource has a wholly-owned subsidiary, NiSource Capital Markets, Inc. (Capital
Markets), which engages in financing activities for NiSource and certain of its
subsidiaries, excluding Northern Indiana Public Service Company (Northern
Indiana).
ANNOUNCEMENT OF MERGER AGREEMENT WITH COLUMBIA ENERGY GROUP
In June 1999, NiSource commenced a tender offer to acquire CEG. In December
1999, CEG acknowledged preliminary indications of interest from numerous other
third parties and invited formal bids from those companies
41
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
that had indicated a preliminary value higher than the NiSource tender offer
price of $74 per share. As a result, in December, NiSource wrote off the costs
associated with its tender offer. On February 11, 2000, the NiSource tender
offer expired.
On February 28, 2000, after completion of the bidding process initiated by
CEG, NiSource and CEG announced approval of a merger agreement under which
NiSource will form a new holding company, which will acquire all of the
outstanding shares of CEG valued at approximately ~$6 billion. The new holding
company will also assume approximately $2.5 billion of CEG debt. Under the
agreement, CEG shareholders have the option to receive new holding company stock
for up to 30% of the outstanding CEG shares. Under the common stock option, each
CEG share will be exchanged for $74 in new holding company stock, based on the
average NiSource share price prior to the closing, but not more than 4.4848
shares of new holding company stock for each CEG share. Under the cash option,
each CEG share will be exchanged for $70 in cash plus a $2.60 face value unit
(consisting of a zero coupon debt security with a forward equity contract). A
commitment letter was accepted under which certain financial institutions
agreed, under specified conditions, to provide up to $6.0 billion to finance the
acquisition of CEG. The merger is conditioned upon, among other things, the
approvals of the shareholders of both companies and various regulatory
commissions. If NiSource shareholder approval is not obtained, the merger
agreement provides that the transaction will automatically be restructured to
eliminate the 30% common stock option for CEG shareholders.
CEG, based in Herndon, Va., is one of the nation's leading energy services
companies, with assets of approximately $7 billion. Its operating companies
engage in virtually all phases of the natural gas business, including
exploration and production, transmission, storage and distribution, as well as
propane and petroleum product sales, electric power generation and retail energy
marketing. CEG sells natural gas to about 2 million customers in Kentucky,
Maryland, Ohio, Pennsylvania and Virginia. It owns 16,500 miles of interstate
gas pipelines that run from Louisiana to the Northeast.
- --------------------------------------------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of NiSource and its
majority-owned subsidiaries after the elimination of significant intercompany
accounts and transactions. Investments for which at least a 20% interest is
owned and certain joint ventures are accounted for under the equity method.
Investments with less than a 20% interest are accounted for under the cost
method. Certain reclassifications were made to conform the prior years'
financial statements to the current presentation.
On February 12, 1999, NiSource acquired Bay State Gas Company (BSG) and its
subsidiaries. Accordingly, the consolidated financial statements and disclosures
include operating results from BSG from the date of acquisition through December
31, 1999.
On April 1, 1999, NiSource acquired the stock of TPC. As a result of the
TPC acquisition, NiSource indirectly owned a 77.3% equity interest in Market Hub
Partners, L.P. (MHP), which stores natural gas in salt caverns. In the fourth
quarter of 1999 NiSource acquired the remaining interests in MHP. The
consolidated financial statements and disclosures include operating results of
TPC from the date of acquisition through December 31, 1999.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
OPERATING REVENUES
Except as discussed below, revenues are recorded as products and services are
delivered. However, utility revenues are billed to customers monthly on a cycle
basis. Effective January 1, 1999, revenues relating to energy trading operations
are recorded based upon changes in the fair values, net of reserves, of the
related energy trading contracts. Construction revenues are recognized on the
percentage of completion method whereby revenues are recognized in proportion to
costs incurred over the life of each project. Provisions for losses on
construction contracts, if any, are recorded in the period in which such losses
become probable.
DEPRECIATION AND MAINTENANCE
The Utilities provide depreciation on a straight-line method over the remaining
service lives of the electric, gas, water and common properties. The approximate
weighted average remaining lives for major components of electric, gas, and
water plant are as follows:
Electric:
Electric generation plant......................................... 24 years
Transmission plant................................................ 26 years
Distribution plant................................................ 25 years
Other electric plant.............................................. 24 years
Gas:
Gas storage plant................................................. 15 years
Transmission plant................................................ 18 years
Distribution plant................................................ 34 years
Other gas plant................................................... 16 years
Water:
Water source and treatment plant.................................. 34 years
Distribution plant................................................ 68 years
Other water plant................................................. 13 years
42
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
The depreciation provisions for utility plant, as a percentage of the original
cost, for the period ended December 31, 1999, 1998 and 1997 were as follows:
1999 1998 1997
Electric........................................ 3.7% 3.7% 3.6%
Gas............................................. 4.4% 5.1% 5.1%
Water........................................... 2.1% 2.1% 2.1%
The Utilities follow the practice of charging maintenance and repairs,
including the cost of removal of minor items of property, to expense as
incurred. When property that represents a retired unit is replaced or removed,
the cost of such property is credited to utility plant, and such cost, together
with the cost of removal less salvage, is charged to the accumulated provision
for depreciation.
AMORTIZATION OF SOFTWARE COSTS
External and incremental internal costs associated with computer software
developed for internal use are capitalized. Capitalization of such costs
commences upon the completion of the preliminary stage of the project. Once the
installed software is ready for its intended use, such capitalized costs are
amortized on a straight-line basis over a period of five to ten years which the
FERC prescribes as reasonable useful life estimates for capitalized software.
PLANT ACQUISITION ADJUSTMENTS
Net utility plant includes amounts allocated to utility plant in excess of the
original cost as part of the purchase price allocation associated with the
acquisition of utility businesses, net of accumulated amortization. Net plant
acquisition adjustments were $722.8 million and $185.4 million at December 31,
1999 and December 31, 1998, respectively, and are being amortized over
forty-year periods from the respective dates of acquisition.
INTANGIBLE ASSETS
The excess of cost over the fair value of the net assets of non-utility
businesses acquired is recorded as goodwill. Goodwill of $125.7 million and
$61.9 million at December 31, 1999 and December 31, 1998, respectively, is being
amortized over a weighted average period of 27 years. Other intangible assets,
approximating $12.8 million and $7.7 million at December 31, 1999 and December
31, 1998, respectively, are being amortized over periods of four to eight years.
The recoverability of intangible assets is assessed on a periodic basis to
confirm that expected future cash flows will be sufficient to support the
recorded intangible assets. Accumulated amortization of intangible assets at
December 31, 1999 and December 31, 1998 was approximately $9.9 million and $4.6
million, respectively.
COAL RESERVES
The costs of reserves under a long-term mining contract to mine coal reserves
through the year 2001 are being recovered through the rate-making process as
such coal reserves are used to produce electricity.
ACCOUNTS RECEIVABLE
At December 31, 1999, $100.0 million of accounts receivable had been sold under
a sales agreement, which expires on May 31, 2002.
CUSTOMER ADVANCES AND CONTRIBUTIONS IN AID OF CONSTRUCTION
Certain developers install and provide for the installation of water main
extensions, which will be transferred to IWC upon completion. The cost of the
main extensions and the amount of any funds advanced for the cost of water mains
installed are included in customer advances for construction and are generally
refundable to the customer over a period of ten years. Advances not refunded
within ten years are permanently transferred to contributions in aid of
construction.
COMPREHENSIVE INCOME
Comprehensive income is reported in the consolidated statements of common
shareholders' equity. The components of accumulated other comprehensive income
include unrealized gains (losses), net of income taxes, on available for sale
securities ("securities") and on foreign currency translation adjustments
("foreign currency"). The accumulated amounts for these components are as
follows:
JAN. 1, DEC. 31, DEC. 31, DEC. 31,
1997 1997 1998 1999
(In millions)
Securities.................... $ 2.7 $ 4.5 $ 3.6 $ 6.1
Foreign
currency.................... $(0.1) $(1.6) $(2.5) $(0.9)
STATEMENT OF CASH FLOWS
Temporary cash investments with an original maturity of three months or less are
considered to be cash equivalents.
Cash paid during the periods reported for income taxes and interest was as
follows:
1999 1998 1997
(In thousands)
Income taxes.................. $115,992 $127,713 $116,849
Interest, net of
amounts
capitalized................. 160,046 118,079 102,361
FUEL ADJUSTMENT CLAUSE
All metered electric rates contain a provision for adjustment in charges for
electric energy to reflect increases and decreases in the cost of fuel and the
fuel cost of purchased power through operation of a fuel adjustment clause. As
prescribed by order of the IURC applicable to metered retail rates, the
adjustment factor has been calculated based on the estimated cost of fuel and
the fuel cost of purchased power in a future three-month period. If two
statutory requirements relating to expense and return levels are satisfied, any
under-recovery or over-recovery caused by variances between estimated and
43
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
actual cost in a given three-month period will be included in a future filing.
Northern Indiana records any under-recovery or over-recovery as a current asset
or current liability until such time as it is billed or refunded to its
customers. The fuel adjustment factor is subject to a quarterly hearing by the
IURC and remains in effect for a three-month period.
On August 18, 1999, the IURC issued a generic order which established new
guidelines for the recovery of purchased power costs through fuel adjustment
clauses. The IURC ruled that each utility had to establish a "benchmark" which
is the utility's highest on-system fuel cost per kilowatt-hour (kwh) during the
most recent annual period. The IURC stated that if the weekly average of a
utility's purchased power costs were less than the "benchmark," these costs per
kwh should be considered net energy costs which are presumed "fuel costs
included in purchased power." If the weekly average of a utility's purchased
power costs exceeded the "benchmark," the utility would need to submit
additional evidence demonstrating the reasonableness of these costs. The Office
of Utility Consumer Counselor (OUCC) has appealed the August 18 order to the
Indiana Court of Appeals.
GAS COST ADJUSTMENT CLAUSE
All metered gas sales rates contain an adjustment factor, which reflects the
increases and decreases in the cost of purchased gas, contracted gas storage and
storage transportation charges. Each gas cost adjustment factor is subject to a
monthly, quarterly, semi-annual or annual hearing by the state Commissions and
remains in effect for a one-month, three-month, six-month or twelve-month
period. On August 11, 1999, the IURC approved a flexible gas cost adjustment
mechanism for Northern Indiana. Under the new 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.
If the statutory requirement relating to the level of return for the gas
utilities is satisfied, any under-recovery or over-recovery caused by variances
between estimated and actual cost in a given one-month, three-month, six-month
or twelve-month period will be included in a future filing. Any under-recovery
or over-recovery is recorded as a current asset or current liability until such
time it is billed or refunded to customers.
Northern Indiana's gas cost adjustment factor includes a gas cost incentive
mechanism (GCIM) 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.
NATURAL GAS IN STORAGE
Both the last-in, first-out (LIFO) inventory methodology and the weighted
average methodology are used to value natural gas in storage. Based on the
average cost of gas purchased under the LIFO method in December 1999 and
December 1998, the estimated replacement cost of gas in storage (current and
non-current) at December 31, 1999 and December 31, 1998 exceeded the stated LIFO
cost by $48.9 million and $33.7 million, respectively. Inventory valued using
LIFO was $23.0 million and $50.8 million at December 31, 1999 and December 31,
1998, respectively. Inventory valued using the weighted average methodology was
$40.8 million and $18.8 million at December 31, 1999 and December 31, 1998,
respectively.
ACCOUNTING FOR PRICE RISK MANAGEMENT ACTIVITIES
NiSource is exposed to commodity price risk in its natural gas and electric
operations. A variety of commodity-based derivative financial instruments are
utilized to reduce this price risk. When these derivatives are used to reduce
price risk in non-trading operations such as activities in gas supply for
regulated gas utilities, certain customer choice programs for residential
customers and other retail customer activity, gains and losses on these
derivative financial instruments are deferred as assets and liabilities and are
recognized in earnings concurrent with the disposition of the underlying
physical commodity. In certain circumstances, a derivative financial instrument
will serve to hedge the acquisition cost of natural gas injected into storage.
In this situation, the gain or loss on the derivative financial instrument is
deferred as part of the cost basis of gas in storage and recognized upon the
ultimate disposition of the gas. If a derivative financial instrument contract
is terminated early because it is probable that a transaction or forecasted
transaction will not occur, any gain or loss as of such date is immediately
recognized in earnings. If a derivative financial instrument is terminated for
other economic reasons, any gains or losses as of the termination date is
deferred and recorded when the associated transaction or forecasted transaction
affects earnings.
NiSource also uses derivative financial instruments in connection with
trading activities at its power trading and certain gas marketing and trading
operations. These derivatives, along with the related physical contracts, are
recorded at fair value pursuant to Emerging Issues Task Force (EITF) Issue No.
98-10, "Accounting for Energy Trading and Risk Management Activities." Because
the majority of our trading activities started in 1999, the impact of adopting
EITF Issue No. 98-10 on January 1, 1999, was insignificant. Transactions related
to utility system load management do not qualify as a trading activity under
EITF Issue No. 98-10 and are accounted for on an accrual basis. NiSource refers
to this activity as Power Marketing.
44
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
IMPACT OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," in June 1998 and SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement No. 133" in June 1999. Statement No. 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring that a company recognize those items
as assets or liabilities in the balance sheet and measure them at fair value.
The standard also suggests in certain circumstances commodity based contracts
may qualify as derivatives. Special accounting within this Statement generally
provides for matching of the timing of gain or loss recognition of derivative
instruments qualifying as a hedge with the recognition of changes in the fair
value of the hedged asset or liability through earnings, and requires that a
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting treatment. The Statement also
provides that the effective portion of a hedging instrument's gain or loss on a
forecasted transaction be initially reported in other comprehensive income and
subsequently reclassified into earnings when the hedged forecasted transaction
affects earnings. Unless those specific hedge accounting criteria are met, SFAS
No. 133 requires that changes in derivatives' fair value be recognized currently
in earnings.
SFAS No. 133, as amended by SFAS No. 137, is not effective for NiSource
until January 1, 2001. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts.
With respect to hybrid instruments, a company may elect to apply SFAS No. 133,
as amended, to (1) all hybrid instruments, (2) only those hybrid instruments
that were issued, acquired or substantively modified after December 31, 1997, or
(3) only those hybrid instruments that were issued, acquired or substantively
modified after December 31, 1998.
NiSource anticipates adopting SFAS No. 133 on January 1, 2001, but has not
yet determined the impact or method of adoption. The fair value of derivatives
used in price risk management are described in "Risk Management Activities."
The fair value of these derivatives would be recognized as assets or
liabilities on the balance sheet consistent with the current accounting
treatment for certain freestanding derivatives. NiSource has not yet quantified
the other effects of adopting SFAS No. 133 on its financial statements. However,
the Statement could increase volatility in earnings and other comprehensive
income.
REGULATORY ASSETS
The Utilities' operations are subject to the regulation of the appropriate state
commission and, in the case of the Energy Utilities, the FERC. Accordingly, the
Utilities' accounting policies are subject to the provisions of SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation." The Utilities
monitor changes in market and regulatory conditions and the resulting impact of
such changes in order to continue to apply the provisions of SFAS No. 71 to some
or all of their operations. As of December 31, 1999 and December 31, 1998, the
regulatory assets identified below represent probable future revenues to the
Utilities as these costs are recovered through the rate-making process. If a
portion of the Utilities' operations becomes no longer subject to the provisions
of SFAS No. 71, a write-off of certain regulatory assets might be required,
unless some form of transition cost recovery is established by the appropriate
regulatory body which would meet the requirements under generally accepted
accounting principles for continued accounting as regulatory assets during such
recovery period. Regulatory assets were comprised of the following items:
DECEMBER 31, DECEMBER 31,
1999 1998
(In thousands)
Unamortized reacquisition premium on debt
(See Long-Term Debt note).............. $ 39,719 $ 43,233
Unamortized R. M. Schahfer Unit 17 and
Unit 18 carrying charges and deferred
depreciation........................... 58,111 62,329
Bailly scrubber carrying charges and
deferred depreciation.................. 8,010 8,945
Deferral of SFAS No. 106 expense not
recovered (See Postretirement Benefits
note).................................. 75,527 81,339
FERC Order No. 636 transition costs...... 13,728 22,093
Regulatory income tax asset, net......... 24,941 18,793
Other.................................... 12,843 4,936
232,879 241,668
Less: Current portion of regulatory
assets................................. 24,245 32,609
$208,634 $209,059
CARRYING CHARGES AND DEFERRED DEPRECIATION
Upon completion of R. M. Schahfer Units 17 and 18, Northern Indiana capitalized
the carrying charges and deferred depreciation in accordance with orders of the
IURC until the cost of each unit was allowed in rates. Such carrying charges and
deferred depreciation are being amortized over the remaining life of each unit.
Northern Indiana has capitalized carrying charges and deferred depreciation
and certain operating expenses relating to its scrubber service agreement for
its Bailly Generating Station in accordance with an order of the IURC. The
accumulated balance of the deferred costs and related carrying charges is being
amortized over the remaining life of the scrubber service agreement.
45
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
FOREIGN CURRENCY TRANSLATION
Translation gains or losses are based upon the end-of-period exchange rate and
are recorded as a separate component of other comprehensive income reflected in
the Consolidated Statement of Shareholders' Equity.
INVESTMENTS IN REAL ESTATE
A series of affordable housing projects are held as investments and accounted
for using the equity method. These investments include certain tax benefits,
including low-income housing tax credits and tax deductions for operating losses
of the housing projects. Investments, at equity, include $33.3 million and $34.0
million relating to affordable housing projects at December 31, 1999 and
December 31, 1998, respectively.
INCOME TAXES
The liability method of accounting is used for income taxes under which deferred
income taxes are recognized, at currently enacted income tax rates, to reflect
the tax effect of temporary differences between the book and tax bases of
assets and liabilities. Deferred investment tax credits are being amortized
over the life of the related property.
ACQUISITIONS
On February 12, 1999, the acquisition of BSG was completed for approximately
$560.1 million in cash and NiSource common shares. The $237.7 million cash
portion was partially financed by the issuance of Corporate Premium Income
Equity Securities (Corporate PIES) and partially financed by the issuance of the
Puttable Reset Securities (PURS). The acquisition was accounted for as a
purchase, and the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values. The accompanying
financial statements reflect the allocation of the purchase price.
Assets acquired and liabilities assumed in the acquisition of BSG were
comprised of the following:
(In thousands)
Assets acquired:
Utility plant, net of accumulated
depreciation................................................ $1,086,008
Intangible assets............................................. 17,443
Other current assets.......................................... 177,148
Other noncurrent assets....................................... 75,126
1,355,725
Less liabilities assumed:
Long-term debt................................................ 244,337
Short-term debt............................................... 100,295
Other current liabilities..................................... 122,408
Deferred taxes.............................................. 299,710
Other noncurrent liabilities.................................. 28,866
795,616
Net assets acquired............................................. $ 560,109
On a pro forma basis, NiSource's consolidated results of operations for the
twelve months ended December 31, 1999, including BSG, would have been:
UNAUDITED
(In thousands) TWELVE MONTHS TWELVE MONTHS
DECEMBER 31, DECEMBER 31,
1999 1998
Operating revenue....... $3,218,730 $3,364,513
Operating income..... $ 469,386 $ 423,277
Net income........... $ 164,868 $ 179,922
Pro forma adjustments primarily reflect adjustments for the addition of the
plant acquisition adjustment and intangible assets, the issuance of the
applicable Corporate PIES and additional income taxes, as if the acquisition had
occurred on January 1, 1999 and 1998 for the twelve month results.
On April 1, 1999, NiSource acquired the stock of TPC, a Houston-based
natural gas marketing and storage company, for approximately $150 million in
cash. The acquisition was accounted for as a purchase, with the purchase price
allocated to the assets and liabilities acquired based on their estimated fair
values. As a result of the TPC acquisition, NiSource had an indirect investment
in the amount of $126.0 million, representing a 77.3% interest in MHP. During
the fourth quarter of 1999, NiSource purchased the remaining interests in MHP.
The accompanying financial statements reflect the preliminary allocation of the
purchase price. Assets acquired and liabilities assumed in the acquisition of
TPC and MHP were comprised of the following:
(In thousands) Assets acquired:
Other property, at cost............................... $320,048
Intangible assets..................................... 45,779
Other current assets.................................. 116,503
Other noncurrent assets............................... 7,154
489,484
Less Liabilities assumed:
Long-term debt........................................ 151,462
Short-term debt....................................... 165
Other current liabilities............................. 88,622
Deferred taxes........................................ 40,843
Other noncurrent liabilities.......................... 18,471
299,563
Net assets acquired..................................... $189,921
46
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
================================================================================
- --------------------------------------------------------------------------------
NESI ENERGY MARKETING CANADA LTD. LITIGATION
- --------------------------------------------------------------------------------
On October 31, 1996, NiSource's subsidiary NiSource Energy Services Canada Ltd.
(NESI Canada) acquired 70% of the outstanding shares of Chandler Energy Inc., a
gas marketing and trading company located in Calgary, Alberta, and subsequently
renamed it NESI Energy Marketing Canada Ltd. (NEMC). Between November 1 and
November 27, 1996, gas prices in the Calgary market increased dramatically. As a
result, NEMC was selling gas, pursuant to contracts entered into prior to the
acquisition date, at prices substantially below its costs to acquire such gas.
On November 27, 1996, NEMC ceased doing business and sought protection from its
creditors under the Companies' Creditors Arrangement Act, a Canadian corporate
reorganization statute. NEMC was declared bankrupt as of December 12, 1996.
Certain creditors of NEMC have filed claims in the Canadian courts against
NiSource, Capital Markets, NI Energy Services, Inc. and NESI Canada, alleging
certain misrepresentations relating to NEMC's financial condition and claiming
damages. In addition, certain creditors of NEMC have, through the Canadian
bankruptcy court, asserted fraudulent transfer and other claims against
NiSource, Capital Markets, NI Energy Services, Inc., NESI Canada and the
directors of NEMC. NiSource intends to vigorously defend against such claims and
any other claims seeking to assert that any party other than NEMC is responsible
for NEMC's liabilities. Management believes that any loss relating to NEMC will
not be material to the financial position or results of operations of NiSource.
- --------------------------------------------------------------------------------
ENVIRONMENTAL MATTERS
- --------------------------------------------------------------------------------
General
The operations of NiSource are subject to extensive and evolving federal, state
and local environmental laws and regulations intended to protect public health
and the environment. Such environmental laws and regulation affect operations as
they relate to impacts on air, water and land.
Superfund
Because several NiSource subsidiaries are a "potentially responsible party"
(PRP) under the Comprehensive Environmental Response, Compensation and Liability
Act (CERCLA) at several waste disposal sites, as well as at former
manufactured-gas plant sites which it, or its corporate predecessors, own or
owned or operated, it may be required to share in the cost of clean up of such
sites. A program was instituted to investigate former manufactured-gas plant
sites where it is the current or former owner, which investigation has
identified forty-six such sites. Initial sampling has been conducted at thirty
sites. Investigation activities have been completed at twenty-three sites and
remedial measures have been selected or implemented at sixteen sites. NiSource
intends to continue to evaluate its facilities and properties with respect to
environmental laws and regulations and take any required corrective action.
In an effort to recover a portion of the costs related to the former
manufactured gas plants, various companies that provided insurance coverage
which NiSource believed covered costs related to former manufactured-gas plant
sites were approached. Northern Indiana filed claims in Indiana state court
against various insurance companies, seeking coverage for costs associated with
several manufactured-gas plant sites and damages for alleged misconduct by some
of the insurance companies. Settlements have been reached with all insurance
companies. Additionally, agreements have been reached with other Indiana
utilities relating to cost sharing and management of the investigation and
remediation of several former manufactured-gas plant sites at which Northern
Indiana and such utilities or their predecessors were operators or owners.
BSG and Northern Utilities, Inc. have rate recovery for environmental
response costs in Maine, Massachusetts and New Hampshire. The rate treatment
allows for the recovery of 100% of prudently incurred costs for investigation
and remediation over a 5-7 year period from date of payment. Recoveries from
third parties or insurance companies in Maine and Massachusetts are allocated
50% to rate payers and 50% to shareholders. In New Hampshire 100% of any
recoveries from third parties or insurance companies are returned to rate
payers.
As of December 31, 1999, a reserve of approximately $23.8 million has been
recorded to cover probable corrective actions. The ultimate liability in
connection with these sites will depend upon many factors, including the volume
of material contributed to the site, the number of other PRPs and their
financial viability, the extent of corrective actions required and rate
recovery. Based upon investigations and management's understanding of current
environmental laws and regulations, NiSource believes that any corrective
actions required, after consideration of insurance coverages, contributions from
other PRPs and rate recovery, will not have a material effect on its financial
position or results of operations.
Clean Air Act
The Clean Air Act Amendments of 1990 (CAAA) imposed limits to control acid rain
on the emission of sulfur dioxide and nitrogen oxides (NOx) which become fully
effective in 2000. All of NiSource's facilities are already in compliance with
the sulfur dioxide limits. NiSource has already taken most of the steps
necessary to meet the NOx limits.
The CAAA also contain other provisions that could lead to limitations on
emissions of hazardous air pollutants and other air pollutants (including
47
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
NOx as discussed below), which may require significant capital expenditures for
control of these emissions. Until specific rules have been issued that affect
NiSource's facilities, what these requirements will be or the costs of complying
with these potential requirements cannot be predicted.
NITROGEN OXIDES
During 1998, the Environmental Protection Agency (EPA) issued a final rule, the
NOx State Implementation Plan (SIP) call, requiring certain states, including
Indiana, to reduce NOx levels from several sources, including industrial and
utility boilers. The EPA stated that the intent of the rule is to lower regional
transport of ozone impacting other states' ability to attain the federal ozone
standard. According to the rule, the State of Indiana must issue regulations
implementing the control program. The State of Indiana, as well as some other
states, filed a legal challenge in December 1998 to the EPA NOx SIP call rule.
Lawsuits have also been filed against the rule by various groups, including
utilities. On May 25, 1999, the D.C. Circuit Court of Appeals issued an order
staying the NOx SIP call rule's September 30, 1999 deadline for the state
submittals until further order of the court. Any resulting NOx emission
limitations could be more restrictive than those imposed on electric utilities
under the CAAA's acid rain NOx reduction program described above. NiSource is
evaluating the EPA's final rule and any potential requirements that could result
from the final rule as implemented by the State of Indiana. NiSource believes
that the costs relating to compliance with the new standards may be substantial,
but such costs depend upon the outcome of the current litigation and the
ultimate control program agreed to by the targeted states and the EPA. Northern
Indiana is continuing its programs to reduce NOx emissions and NiSource will
continue to closely monitor developments in this area.
In a related matter to EPA's NOx SIP call, several Northeastern states have
filed petitions with the EPA under Section 126 of the Clean Air Act. The
petitions allege harm and request relief from sources of emissions in the
Midwest that allegedly cause or contribute to ozone nonattainment in their
states. NiSource is monitoring EPA's decisions on these petitions and existing
litigation to determine the impact of these developments on Northern Indiana's
programs to reduce NOx emissions.
The EPA issued final rules revising the National Ambient Air Quality
Standards for ozone and particulate matter in July 1997. On May 14, 1999, the
United States Court of Appeals for the D.C. Circuit remanded the new rules for
both ozone and particulate matters to the EPA. Once rectified, the revised
standards could require additional reductions in sulfur dioxide, particulate
matter and NOx emissions from coal-fired boilers (including Northern Indiana's
generating stations) beyond measures discussed above. Final implementation
methods will be set by the EPA as well as state regulatory authorities. NiSource
believes that the costs relating to compliance with any new limits may be
substantial but are dependent upon the ultimate control program agreed to by the
targeted states and the EPA. NiSource will continue to closely monitor
developments in this area and anticipates the exact nature of the impact of the
new limits on its operations will not be known for some time.
In a letter dated September 15, 1999, the Attorney General of the State of
New York alleged that Northern Indiana violated the Clean Air Act by
constructing a major modification of one of its electric generating stations
without obtaining pre-construction permits required by the Prevention of
Significant Deterioration (PSD) program. The major modification allegedly took
place at the R. M. Schahfer Station when, "in approximately 1995-1997, Northern
Indiana upgraded the coal handling system at Unit 14 at the plant." While
Northern Indiana is investigating these allegations, Northern Indiana does not
believe that the modifications required pre-construction review under the PSD
program and believes that all appropriate permits were acquired.
CARBON DIOXIDE
Initiatives are being discussed both in the United States and worldwide to
reduce so-called "greenhouse gases" such as carbon dioxide and other by-products
of burning fossil fuels. Reduction of such emissions could result in significant
capital outlays or operating expenses to NiSource.
CLEAN WATER ACT AND RELATED MATTERS
NiSource's wastewater and water operations are subject to pollution control and
water quality control regulations, including those issued by the EPA and the
States of Indiana, Louisiana, Massachusetts and Texas.
Under the Federal Clean Water Act and state regulations, NiSource must obtain
National Pollutant Discharge Elimination System permits for water discharges
from various facilities, including electric generating and water treatment
stations and a propane plant. These facilities either have permits for their
water discharge or they have applied for a permit renewal of any expiring
permits. These permits continue in effect pending review of the current
applications.
Under the Federal Safe Drinking Water Act (SDWA), the Water Utilities are
subject to regulation by the EPA for the quality of water sold and treatment
techniques used to make the water potable. The EPA promulgates nationally-
applicable maximum contaminant levels (MCLs) for contaminants found in drinking
water. Management believes that the Water Utilities are currently in compliance
with all MCLs promulgated to date. The EPA has continuing authority, however, to
issue additional regulations under the SDWA. In August 1996, Congress amended
the SDWA to allow the EPA more authority to weigh the costs and benefits of
regulations being considered in some, but not all, cases. In December 1998, EPA
promulgated two National Primary Drinking Water rules, the Interim Enhanced
Surface Water Treatment Rule and the Disinfectants and Disinfection Byproducts
Rule. The Water Utilities must comply with these rules by December 2001.
Management does not believe that significant changes will be required for the
Water Utilities' operations to comply with these rules; however, some
48
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
cost expenditures for equipment modifications or enhancements may
be necessary to comply with the Interim Enhanced Surface Water Treatment Rule.
Additional rules are anticipated to be promulgated under the 1996 amendments.
Compliance with such rules could be costly and could require substantial changes
in the Water Utilities' operations.
Under a 1991 law enacted by the Indiana legislature, a water utility may
petition the IURC for prior approval of its plans and estimated expenditures
required to comply with the provisions of, and regulations under, the Federal
Clean Water Act and SDWA. Upon obtaining such approval, a water utility may
include such costs in its rate base for rate-making purposes, to the extent of
its estimated costs as approved by the IURC, and recover its costs of developing
and implementing the approved plans if statutory standards are met. The capital
costs for such new systems, equipment or facilities or modifications of existing
facilities may be included in a water utility's rate base upon completion of
construction of the project or any part thereof. Such an addition to rate base,
however, would effect a change in water rates. NiSource's principal water
utility, IWC, has agreed to a moratorium on water rate increases until 2002.
Therefore, recovery of any increased costs discussed above may not be timely.
- --------------------------------------------------------------------------------
INCOME TAXES
- --------------------------------------------------------------------------------
Deferred income taxes are recognized as costs in the rate-making process by the
Commissions having jurisdiction over the rates charged by the Utilities.
Deferred income taxes are provided as a result of provisions in the income tax
law that either require or permit certain items to be reported on the income tax
return in a different period than they are reported in the consolidated
financial statements. These taxes are reversed by a debit or credit to deferred
income tax expense as the temporary differences reverse. Investment tax credits
have been deferred and are being amortized to income over the life of the
related property.
To the extent certain deferred income taxes of the Utilities are recoverable
or payable through future rates, regulatory assets and liabilities have been
established. Regulatory assets are primarily attributable to undepreciated
allowance for funds used during construction-equity ~(AFUDC) and the cumulative
net amount of other income tax timing differences for which deferred taxes had
not been provided in the past, when regulators did not recognize such taxes as
costs in the rate-making process. Regulatory liabilities are primarily
attributable to the Utilities' obligation to credit to ratepayers deferred
income taxes provided at rates higher than the current federal income tax rate
currently being credited to ratepayers using the average rate assumption method
and unamortized deferred investment tax credits.
The components of the net deferred income tax liability at December 31, 1999
and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
(In thousands)
<S> <C> <C>
Deferred tax liabilities--
Accelerated depreciation and other property differences.................... $1,125,132 $ 806,148
AFUDC-equity............................................................... 31,274 33,029
Adjustment clauses......................................................... 16,730 14,965
Other regulatory assets.................................................... 27,616 29,739
Prepaid pension and other benefits......................................... 64,853 34,170
Reacquisition premium on debt.............................................. 15,919 17,311
Deferred tax assets--
Deferred investment tax credits............................................ (36,650) (37,236)
Removal costs.............................................................. (171,645) (157,728)
Other postretirement/postemployment benefits............................... (55,684) (51,754)
Other, net................................................................. (28,871) (29,353)
988,674 659,291
Less: Deferred income taxes related to current assets and liabilities........ (7,519) (7,876)
Deferred income taxes--noncurrent............................................ $ 996,193 $ 667,167
</TABLE>
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<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
Federal and state income taxes as set forth in the Consolidated Statement of
Income are comprised of the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Current income taxes--
Federal................................................................. $ 91,899 $113,680 $ 98,126
State................................................................... 14,131 16,484 17,073
-------- -------- --------
106,030 130,164 115,199
-------- -------- --------
Deferred income taxes, net--
Federal................................................................. (7,877) (20,426) (1,772)
State................................................................... (14) (1,515) 123
-------- -------- --------
(7,891) (21,941) (1,649)
-------- -------- --------
Deferred investment tax credits, net...................................... (7,691) (7,361) (7,376)
-------- -------- --------
Total income taxes.................................................... $ 90,448 $100,862 $106,174
======== ======== ========
</TABLE>
A reconciliation of total income tax expense to an amount computed by applying
the statutory federal income tax rate to pretax income is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net income................................................................ $160,414 $193,886 $190,849
Add--Income taxes......................................................... 90,448 100,862 106,174
Dividend requirements on preferred stocks of subsidiaries................. 8,334 8,538 8,691
-------- -------- --------
Income before preferred dividend requirements of subsidiaries and
income taxes............................................................ $259,196 $303,286 $305,714
======== ======== ========
Amount derived by multiplying pretax income by statutory rate............. $ 90,719 $106,150 $107,000
Reconciling items multiplied by the statutory rate:
Book depreciation over related tax depreciation......................... 3,934 3,992 4,072
Amortization of deferred investment tax credits......................... (7,691) (7,361) (7,376)
State income taxes, net of federal income tax benefit................... 9,171 9,200 11,220
Reversal of deferred taxes provided at rates in excess of the
current federal income tax rate....................................... (5,457) (6,472) (6,151)
Low-income housing credits.............................................. (4,512) (3,840) (3,056)
Nondeductible amounts related to amortization of intangible
assets and plant acquisition adjustments.............................. 2,476 2,516 1,640
Other, net................................................................ 1,808 (3,323) (1,175)
-------- -------- --------
Total income taxes.................................................... $ 90,448 $100,862 $106,174
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
PENSION PLANS
- --------------------------------------------------------------------------------
Noncontributory, defined benefit retirement plans cover the majority of
employees. Benefits under the plans reflect the employees' compensation, years
of service and age of retirement.
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Benefit obligation at beginning of year (January 1,)...................................... $949,039 $875,756
Service cost.............................................................................. 19,811 17,092
Interest cost............................................................................. 69,610 60,686
Plan amendments........................................................................... -- 14,656
Actuarial (gain) loss..................................................................... (60,108) 38,773
Acquisition of BSG........................................................................ 78,684 --
Benefits paid............................................................................. (66,687) (57,924)
-------- --------
Benefit obligation at end of the year (December 31,)...................................... $990,349 $949,039
======== ========
</TABLE>
50
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
The change in the fair value of the plans' assets for the years 1999 and 1998
is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- --------
(In thousands)
<S> <C> <C>
Fair value of plan assets at beginning of year (January 1,)............................... $ 987,030 $924,857
Actual return on plan assets.............................................................. 170,814 85,254
Employer contributions.................................................................... 42,641 34,843
Acquisition of BSG........................................................................ 92,070 --
Benefits paid............................................................................. (66,687) (57,924)
---------- --------
Plan assets at fair value at end of the year (December 31,)............................... $1,225,868 $987,030
========== ========
</TABLE>
The plans' assets are invested primarily in common stocks, bonds and notes.
The plans' funded status as of December 31, 1999 and December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
1999 1998
---------- --------
(In thousands)
<S> <C> <C>
Plan assets in excess of benefit obligation............................................... $ 235,519 $ 37,991
Unrecognized net actuarial (gain)......................................................... (150,984) (10,938)
Unrecognized prior service cost........................................................... 55,662 57,193
Unrecognized transition amount............................................................ 22,113 26,813
---------- --------
Prepaid pension costs..................................................................... $ 162,310 $111,059
========== ========
</TABLE>
The benefit obligation is the present value of future pension benefit payments
and is based on a plan benefit formula which considers expected future salary
increases. Discount rates of 7.75% and 7.00% and rates of increase in
compensation levels of 4.5% and 4.5% were used to determine the benefit
obligations at December 31, 1999 and 1998, respectively.
The long-term portion of prepaid pension cost amounts for 1999 and 1998 are
included in "Prepayments and other" in the Consolidated Balance Sheet.
The following items are the components of provisions for pensions for the
years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Service costs............................................................. $ 19,811 $ 17,092 $ 14,438
Interest costs............................................................ 69,610 60,686 57,645
Expected return on plan assets............................................ (95,228) (82,671) (72,253)
Amortization of transition obligation..................................... 6,169 5,294 5,326
Amortization of prior service costs....................................... 6,510 4,746 3,501
-------- -------- --------
$ 6,872 $ 5,147 $ 8,657
======== ======== ========
</TABLE>
Assumptions used in the valuation and determination of 1999, 1998 and 1997
pension expense were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Discount rate............................................................. 7.00% 7.00% 7.75%
Rate of increase in compensation levels................................... 4.50% 4.50% 5.50%
Expected long-term rate of return on assets............................... 9.00% 9.00% 9.00%
</TABLE>
Certain union employees participate in industry-wide, multi-employer pension
plans which provide for monthly benefits based on length of service. Specified
amounts per compensated hour for each employee are contributed to the trustees
of these plans. Contributions of $2.5 million, $2.0 and $1.7 million were made
to these plans for the years ended December 31, 1999, 1998 and 1997,
respectively. The relative position of each employer participating in these
plans with respect to the actuarial present value of accumulated plan benefits
and net assets available for benefits is not available.
- --------------------------------------------------------------------------------
POSTRETIREMENT BENEFITS
- --------------------------------------------------------------------------------
NiSource provides certain health care and life insurance benefits for certain
retired employees. The majority of employees may become eligible for these
benefits if they reach retirement age while working for NiSource.
The expected cost of such benefits is accrued during the employees' years of
service. Current rates include postretirement benefit costs on an accrual basis,
including amortization of the regulatory assets that arose prior to inclusion of
these costs in rates. Cash contributions are remitted to grantor trusts.
51
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
The following table sets forth the change in the plans' accumulated
postretirement benefit obligation (APBO) as of December 31, 1999 and 1998:
1999 1998
-------- --------
(In thousands)
Accumulated postretirement
benefit obligation at
beginning of year
(January 1,)............... $240,601 $223,908
Service cost................. 5,531 5,249
Interest cost................ 18,101 15,793
Participant contributions.... 1,204 --
Plan amendments.............. -- (283)
Actuarial (gain) loss........ (17,627) 8,453
Acquisition of Bay State..... 23,205 --
Benefits paid................ (17,116) (12,519)
-------- --------
Accumulated postretire-
ment benefit obligation
at end of the year
(December 31,)............. $253,899 $240,601
======== ========
The change in the fair value of the plan assets for the years 1999 and 1998 is
as follows:
1999 1998
-------- --------
(In thousands)
Fair value of plan assets at
beginning of year
(January 1,)............... $ 2,903 $ 2,400
Actual return of plan
assets..................... 2,521 1,103
Employer contributions....... 13,877 10,637
Participant contributions.... 1,204 1,282
Acquisition of Bay State..... 26,620 --
Benefits paid................ (17,116) (12,519)
-------- --------
Plan assets at fair value
at end of the year
(December 31,)............. $ 30,009 $ 2,903
======== ========
Following is the funded status for postretirement benefits as of December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
Funded status............................................................. $(223,890) $(237,698)
Unrecognized net actuarial gain........................................... (106,161) (87,087)
Unrecognized prior service cost........................................... 3,550 3,873
Unrecognized transition amount............................................ 167,322 164,436
--------- ---------
Accrued liability for postretirement benefits............................. $(159,179) $(156,476)
========= =========
</TABLE>
In order to determine the APBO at December 31, 1999, a discount rate of 7.75%
and a pre-Medicare medical trend rate of 6% to a long-term rate of 5% was used,
and at December 31, 1998, a discount rate of 7% and a pre-Medicare medical trend
rate of 7% declining to a long-term rate of 5% was used.
Net periodic postretirement benefit costs, before consideration of the
rate-making discussed previously, for the years ended December 31, 1999, 1998
and 1997 include the following components:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Service costs............................................................. $ 5,531 $ 5,249 $ 4,904
Interest costs............................................................ 18,101 15,793 15,878
Expected return on plan assets............................................ (2,347) (216) --
Amortization of prior service cost........................................ 322 322 279
Amortization of transition obligation..................................... 12,810 11,745 11,558
Amortization of (gain) loss............................................... (5,637) (5,747) (5,844)
------- ------- -------
$28,780 $27,146 $26,775
======= ======= =======
</TABLE>
Assumptions used in the determination of 1999, 1998 and 1997 net periodic
postretirement benefit costs were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate............................................................. 7.00% 7.00% 7.75%
Rate of increase in compensation levels................................... 4.50% 4.50% 5.50%
Assumed annual rate of increase in health care benefits................... 7.00% 8.00% 8.00%
Assumed ultimate trend rate............................................... 5.00% 5.00% 6.00%
</TABLE>
The effect of a 1% increase in the assumed health care cost trend rates for each
future year would increase the accumulated postretirement benefit obligation at
December 31, 1999 by approximately $25.6 million, and increase the aggregate of
the service and interest cost components of plan costs by approximately $5.2
million for the year ended December 31, 1999. The effect of a 1% decrease in the
assumed health care cost trend rates
52
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
for each future year would decrease the accumulated postretirement benefit
obligation at December 31, 1999 by approximately $21.1 million, and decrease the
aggregate of the service and interest cost components of plan costs by
approximately $4.0 million. Amounts disclosed above could be changed
significantly in the future by changes in health care costs, work force
demographics, interest rates, or plan changes.
Authorized Classes of Cumulative Preferred and Preference Shares
NiSource--20,000,000 shares--Preferred--without par value. 4,000,000 shares are
designated Series A Junior Participating Preferred Shares and are reserved for
issuance pursuant to the Share Purchase Rights Plan described in Common Shares.
The authorized classes of par value and no par value cumulative preferred
and preference stocks of Northern Indiana are as follows: Cumulative
Preferred--$100 par value--2,400,000 shares; Cumulative Preferred--no par
value--3,000,000 shares; Cumulative Preference--$50 par value--2,000,000 shares
(none outstanding); and Cumulative Preference--no par value--3,000,000 shares
(none outstanding).
Indianapolis Water Company--(IWC) 300,000 shares --Cumulative
Preferred--$100 par value.
The preferred shareholders of Northern Indiana and IWC have no voting
rights, except in the event of default on the payment of four consecutive
quarterly dividends, or as required by Indiana law to authorize additional
preferred shares, or by the Articles of Incorporation in the event of certain
merger transactions.
The redemption prices at December 31, 1999 for the cumulative preferred
stock, which is redeemable solely at the option of Northern Indiana and IWC, in
whole or in part, at any time upon thirty days' notice, were as follows:
REDEMPTION
PRICE PER
SERIES SHARE
Northern Indiana Public Service Company:
Cumulative preferred stock--$100 par value--......... 41/4% $101.20
41/2% $100.00
4.22% $101.60
4.88% $102.00
7.44% $101.00
7.50% $101.00
Cumulative preferred stock--no par value--
adjustable rate (6.00% at December 31, 1999),
Series A (stated value $50 per share).............. $50.00
Indianapolis Water Company:
Cumulative preferred stock--$100 par value--
rates ranging from 4% to 5% $100-$105
The redemption prices at December 31, 1999, as well as sinking fund provisions,
for the cumulative preferred stock subject to mandatory redemption requirements,
or whose redemption is outside the control of Northern Indiana, were as follows:
<TABLE>
<CAPTION>
REDEMPTION PRICE SINKING FUND OR
SERIES PER SHARE MANDATORY REDEMPTION
<S> <C> <C>
Cumulative preferred stock--$100 par value--
8.85% $100.37, reduced periodically 12,500 shares on or before April 1.
8.35% $103.20, reduced periodically 3,000 shares on or before July 1;
increasing to 6,000 shares
beginning in 2004; noncumu-
lative option to double amount
each year.
73/4% $103.88, reduced periodically 2,777 shares on or before
December 1; noncumulative
option to double amount
each year.
Cumulative preferred stock--no par value--
6.50% $100.00 on October 14, 2002 430,000 shares on October 14,
2002.
</TABLE>
Sinking fund requirements with respect to redeemable preferred stocks
outstanding at December 31, 1999 for each of the four years subsequent to
December 31, 2000 were as follows:
Year Ending December 31, (In thousands)
2001..................................................... $ 1,828
2002..................................................... $44,828
2003..................................................... $ 1,828
2004..................................................... $ 878
Sinking fund payments due within one year are reported under the caption "Other"
in the Consolidated Balance Sheets.
53
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
- --------------------------------------------------------------------------------
COMMON SHARE DIVIDEND
- --------------------------------------------------------------------------------
During the next few years, NiSource's ability to pay dividends will depend upon
dividends it receives from Northern Indiana. Northern Indiana's Indenture dated
August 1, 1939, as amended and supplemented (Indenture), provides that it will
not declare or pay any dividends on any class of capital stock (other than
preferred or preference stock) except out of the earned surplus or net profits
of Northern Indiana. At December 31, 1999, Northern Indiana had approximately
$136.1 million of retained earnings (earned surplus) available for the payment
of dividends. Future dividends will depend upon adequate retained earnings,
adequate future earnings and the absence of adverse developments.
- --------------------------------------------------------------------------------
EARNINGS PER SHARE
- --------------------------------------------------------------------------------
Basic earnings per share were computed by dividing net income, reduced for
preferred dividends, by the average number of common shares outstanding during
the period. The diluted earnings per share calculation assumes the conversion of
nonqualified stock options and the equity forward share purchase contract into
common shares.
The net income, preferred dividends and shares used to compute basic and
diluted earnings per share is presented in the following table:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Basic
Weighted Average Number of Shares:
Average Common Shares Outstanding.......................... 124,343,117 120,778,077 123,849,126
=========== =========== ===========
Net Income to be Used to Compute Basic Earnings per Average
Common Share:
Net Income............................................... $160,414 $193,886 $190,849
=========== =========== ===========
Basic Earnings per Average Common Share...................... $ 1.29 $ 1.60 $ 1.54
=========== =========== ===========
Diluted
Weighted Average Number of Shares:
Average Common Shares Outstanding.......................... 124,343,117 120,778,077 123,849,126
Dilutive Shares............................................ 996,275 556,799 374,344
----------- ------------ -----------
Weighted Average Shares.................................... 125,339,392 121,334,876 124,223,470
Net Income to be Used to Compute Diluted Earnings per
Average Common Share:
Net Income............................................... $160,414 $193,886 $190,849
=========== =========== ===========
Diluted Earnings per Average Common Share.................... $ 1.27 $ 1.59 $ 1.53
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
COMMON SHARES
- --------------------------------------------------------------------------------
On April 8, 1998, shareholders approved an increase in the number of authorized
common shares without par value from 200,000,000 shares to 400,000,000 shares.
All references to numbers of common shares reported, including per share amounts
and stock option data, have been adjusted to reflect the two-for-one stock split
paid February 20, 1998.
SHARE PURCHASE RIGHTS PLAN
Each Right, when exercisable, would initially entitle the holder to purchase
from NiSource one two-hundredth of a share of Series A Junior Participating
Preferred Share, without par value, at a price of $30 per one two-hundredth of a
share. In certain circumstances, if an acquirer ~obtained 25% of NiSource's
outstanding shares, or merged into NiSource or merged NiSource into the
acquirer, the Rights would entitle the holders to purchase NiSource's or the
acquirer's common shares for one-half of the market price. The Rights will not
dilute NiSource's common shares nor affect earnings per share unless they become
exercisable for common shares. The Plan was not adopted in response to any
specific attempt to acquire control of NiSource. The Rights are not currently
exercisable. On February 17, 2000, the Board of Directors of NiSource adopted a
new Share Purchase Rights Plan which has substantially the same terms as the
existing Share Purchase Rights Plan.
54
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
COMMON SHARE REPURCHASES
The Board has authorized the repurchase of 62.1 million common shares, subject
to certain limits. At December 31, 1999, approximately 56.2 million shares had
been repurchased at an average price of $16.98 per share.
EQUITY FORWARD SHARE PURCHASE CONTRACT
During the second quarter of 1999, a forward purchase contract was entered into
covering the purchase of up to 5% of NiSource's outstanding common shares. At
the end of each quarterly period during the term of the forward purchase
contract, NiSource has the option, but not the obligation, to settle the forward
purchase contract with respect to all or a portion of the common shares held by
the counterparty. As of December 31, 1999, the counterparty informed NiSource
that approximately 5.6 million shares had been purchased at a weighted average
cost of $26.90 per share. NiSource has the option to settle with the
counterparty by means of physical, net cash or net share settlement. On a
quarterly basis, NiSource will pay the counterparty a fee based on the amount
paid for common shares purchased by the counterparty, and the counterparty will
remit dividends received on shares owned. All such amounts paid and remitted
under the contract are reflected in equity contract costs of common
shareholders' equity. The net amount was a charge of $658,128 for the year
ending December 31, 1999.
NiSource will be obligated to settle the forward purchase contract with
respect to all the remaining common shares in May 2003, or under certain
circumstances after an extension period of up to six months, at NiSource's
option. As of December 31, 1999, the nominal amount and fair value of the equity
forward purchase contract was approximately $150 million and $100 million,
respectively.
- --------------------------------------------------------------------------------
LONG-TERM INCENTIVE PLANS
- --------------------------------------------------------------------------------
There are two long-term incentive plans for key management employees that were
approved by shareholders on April 13, 1988 (1988 Plan) and April 13, 1994 (1994
Plan), each of which provides for the issuance of up to 5.0 million common
shares to key employees through April 1998 and April 2004, respectively. The
1988 Plan, as amended and restated, and the 1994 Plan, as amended and restated,
were re-approved by shareholders at the 1999 Annual Meeting of Shareholders,
held on April 14, 1999.
At December 31, 1999, there were 1.8 million shares reserved for future
awards under the 1994 Plan. The Plans permit the following types of grants,
separately or in combination: nonqualified stock options, incentive stock
options, restricted stock awards, stock appreciation rights and performance
units. No incentive stock options or performance units were outstanding at
December 31, 1999. Under the Plans, the exercise price of each option equals the
market price of common stock on the date of grant. Each option has a maximum
term of ten years and vests one year from the date of grant.
In connection with the acquisition of BSG, all outstanding BSG nonqualified
stock options were replaced with NiSource nonqualified stock options. The
replacement of such options did not change their original vesting provisions,
terms or fair values. Information regarding these options can be found in the
following tables about changes in nonqualified stock options under the caption
"converted."
Stock appreciation rights (SARs) may be granted only in tandem with stock
options on a one-for-one basis and are payable in cash, NiSource's common
shares, or a combination thereof. There were no SARs outstanding at December 31,
1999. Restricted stock awards are restricted as to transfer and are subject to
forfeiture for specific periods from the date of grant. Restrictions on shares
awarded in 1995 lapse five years from date of grant, and vesting varies from 0%
to 200% of the number awarded, subject to specific earnings per share and stock
appreciation goals. Restrictions on shares awarded in 1998 and 1999 lapse two
years from date of grant and vesting varies from 0% to 100% of the number
awarded, subject to specific performance goals. If a participant's employment is
terminated prior to vesting other than by reason of death, disability or
retirement, restricted shares are forfeited. There were 513,500, 534,666 and
542,666 restricted shares outstanding at December 31, 1999, 1998 and 1997,
respectively.
The Nonemployee Director Stock Incentive Plan, which was approved by
shareholders, provides for the issuance of up to 200,000 common shares to
nonemployee directors. The Plan provides for awards of common shares which vest
in 20% per year increments, with full vesting after five years. The Plan also
allows for the award of nonqualified stock options, subject to immediate vesting
in the event of the director's death or disability, or a change in control of
NiSource. If a director's service on the Board is terminated for any reason
other than retirement at or after age seventy, death or disability, any common
shares not vested as of the date of termination are forfeited. As of December
31, 1999, 75,500 shares had been issued under the Plan.
These plans are accounted for under Accounting Principles Board Opinion No.
25, under which no compensation cost has been recognized for nonqualified stock
options. The compensation cost that was charged against net income for
restricted stock awards was $3.5 million, $1.9 million and $2.1 million for the
years ended December 31, 1999, 1998 and 1997, respectively. Had compensation
cost for nonqualified stock options been determined consistent with SFAS No. 123
"Accounting for Stock-Based Compensation," net income and earnings per average
common share would have been reduced to the following pro forma amounts:
55
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Net Income:
As reported............................ $160,414 $193,886 $190,849
Pro forma.............................. 158,764 192,764 189,999
Earnings Per Average Common Share:
Basic:
As reported.......................... $ 1.29 $ 1.60 $ 1.54
Pro forma............................ 1.27 1.59 1.53
Diluted:
As reported.......................... $ 1.27 $ 1.59 $ 1.53
Pro forma............................ 1.26 1.59 1.52
</TABLE>
The fair value of each option granted as used to determine pro forma net
income is estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in
the years ended December 31, 1999, 1998 and 1997 respectively: risk-free
interest rate of 5.87%, 5.29% and 6.19%; expected dividend yield of $1.02, $0.96
and $0.90 per share; expected option term of five and one-quarter years for 1999
and 1998, and five years for 1997; and expected volatility of 15.72% for 1999
and 13.09% for 1998 and 12.2% for 1997.
Changes in outstanding shares under option for 1997, 1998 and 1999, are as
follows:
NONQUALIFIED
STOCK OPTIONS
---------------------
WEIGHTED
AVERAGE
OPTION
YEAR ENDED DECEMBER 31, 1997 OPTIONS PRICE
---------- --------
Balance at beginning of year......................... 2,360,900 $15.33
Granted............................................ 533,600 $20.64
Exercised.......................................... (330,400) $15.29
Cancelled.......................................... (28,700) $19.21
---------- -------
Balance at end of year............................... 2,535,400 $16.41
========== =======
Shares exercisable................................... 2,006,800 $15.30
========== =======
Weighted average fair value of options granted....... $2.66
==========
WEIGHTED
AVERAGE
OPTION
YEAR ENDED DECEMBER 31, 1998 OPTIONS PRICE
---------- ---------
Balance at beginning of year........................ 2,535,400 $16.41
Granted........................................... 607,000 $29.22
Exercised......................................... (457,700) $14.88
Cancelled......................................... (33,400) $16.07
---------- -------
Balance at end of year.............................. 2,651,300 $19.61
========== =======
Shares exercisable.................................. 2,046,300 $16.77
========== =======
Weighted average fair value of options granted...... $4.28
==========
56
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
WEIGHTED
AVERAGE
OPTION
YEAR ENDED DECEMBER 31, 1999 OPTIONS PRICE
---------- --------
Balance at beginning of year.......................... 2,651,300 $19.61
Granted............................................. 744,750 $24.59
Converted........................................... 740,780 $15.03
Exercised........................................... (171,374) $14.03
Cancelled........................................... (15,000) $28.45
---------- --------
Balance at end of year................................ 3,950,456 $19.90
========== ========
Shares exercisable.................................... 3,208,206 $18.82
========== ========
Weighted average fair value of options granted........ $3.66
At December 31, 1997, there were 11,200 SARs outstanding with an option price
of $5.47. There were no SARs outstanding at December 31, 1998 or 1999,
respectively.
The following table summarizes information about nonqualified stock options
at December 31, 1999:
OPTIONS OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------ --------------------------------------------------------
Weighted
Average Weighted
Remaining Average Weighted
Range of Outstanding as of Contractual Exercise Exercisable as of Average
Exercise Prices December 31, 1999 Life Price December 31, 1999 Exercise Price
- --------------- --------
<S> <C> <C> <C> <C> <C>
$ 8.53-$12.76 154,500 1.4 $10.46 154,500 $10.46
$12.77-$19.15 1,913,119 4.0 $15.79 1,913,119 $15.79
$19.16-$28.74 1,290,337 8.8 $22.85 548,087 $20.48
$28.75-$29.22 592,500 8.6 $29.22 592,500 $29.22
- ------------- --------- --- ------ --------- ------
$ 8.53-$29.22 3,950,456 6.1 $19.90 3,208,206 $18.81
============= ========= === ====== ========= ======
</TABLE>
- --------------------------------------------------------------------------------
LONG-TERM DEBT
- --------------------------------------------------------------------------------
The sinking fund requirements and maturities of long-term debt outstanding at
December 31, 1999, for each of the four years subsequent to December 31, 2000,
were as follows:
YEAR ENDING DECEMBER 31, (In thousands)
- ------------------------
2001.................................................$127,167
2002.................................................$119,183
2003.................................................$157,451
2004.................................................$118,158
Unamortized debt expense, premium and discount on long-term debt applicable to
outstanding bonds are being amortized over the lives of such bonds.
Reacquisition premiums have been deferred and are being amortized. These
premiums are not earning a return during the recovery period.
The first mortgage bonds constitute a direct first mortgage lien upon certain
utility property and franchises. Certain trust indentures require annual sinking
or improvement payments amounting to .50% of the maximum aggregate amount
outstanding. As permitted, this requirement has been satisfied by substituting a
portion of permanent additions to utility plant.
Northern Indiana is authorized to issue and sell up to $217,692,000
Medium-Term Notes, Series E, with various maturities, for purposes of
refinancing certain first mortgage bonds and medium-term notes. As of December
31, 1999, $139.0 million of these medium-term notes had been issued with various
interest rates and maturities.
In February 1999, $35.0 million of ten-year medium term notes were issued at
a rate of 5.99% with a maturity date of February 1, 2009 and $45.0 million of
twenty-year medium term notes were issued at a rate of 6.61% with a maturity
date of February 1, 2019. The majority of the proceeds were used to reduce
existing credit facilities and the remaining proceeds were used for general
corporate purposes.
The financial obligations of Capital Markets are subject to a Support
Agreement between NiSource and Capital Markets, under which NiSource has
committed to make payments of interest and principal on Capital Markets'
obligations in the event of a failure to pay by Capital
57
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
Markets. Restrictions in the Support Agreement prohibit recourse on the part of
Capital Markets' creditors against the stock and assets of Northern Indiana that
are owned by NiSource. Under the terms of the Support Agreement, in addition to
the cash flow of cash dividends paid to NiSource by any of its consolidated
subsidiaries, the assets of NiSource, other than the stock and assets of
Northern Indiana, are available as recourse for the benefit of Capital Markets'
creditors. The carrying value of the assets of NiSource, other than the assets
of Northern Indiana, were approximately $3.2 billion at December 31, 1999.
- --------------------------------------------------------------------------------
CURRENT PORTION OF LONG-TERM DEBT
- --------------------------------------------------------------------------------
At December 31, 1999 and 1998, NiSource's current portion of long-term debt due
within one year was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -----------
(In thousands)
<S> <C> <C>
Medium-term notes--Interest rates between 6.0% and 6.93% with a weighted
average interest rate of 6.80% and maturities between September 1, 1999, and
November 17, 2006.................................................................... $166,254 $ --
Notes payable--Interest rates between 6.72% and 10.08% with a weighted
average interest rate of 7.82% and maturities between August 15, 2000, and
January 1, 2007...................................................................... 4,467 4,790
Sinking funds due within one year...................................................... 3,000 2,000
-------- ------
Total current portion of long-term debt.............................................. $173,721 $6,790
======== ======
</TABLE>
- --------------------------------------------------------------------------------
SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
NiSource and its subsidiaries may borrow under two five-year $100 million
revolving credit agreements that terminate on September 23, 2003 and two 364-day
$100 million revolving credit agreements that terminate on September 23, 2000.
The 364-day agreements may be extended at expiration for additional periods of
364 days. Under these agreements, funds are borrowed at a floating rate of
interest or, under certain circumstances, at a fixed rate of interest for
short-term periods. These agreements provide financing flexibility and may be
used to support the issuance of commercial paper. At December 31, 1999, there
were no borrowings outstanding under these agreements.
In addition, various NiSource subsidiaries maintain lines of credit for up to
an aggregate of $199.9 million with lenders at either the lender's commercial
prime or market lending rates. As of December 31, 1999, there were $54.1 million
of borrowings outstanding under these lines of credit with a weighted average
interest rate of 6.06%. As of December 31, 1998, there were $84.1 million of
borrowings outstanding under these lines of credit.
NiSource and its subsidiaries maintain market lines of credit for up to
$394.4 million. As of December 31, 1999, there were $156.2 million outstanding
under these money market lines of credit with a weighted average interest rate
of 6.78%. At December 31, 1998, there were $127.3 million of borrowings
outstanding under these money market lines of credit.
In September 1999, Capital Markets issued $160 million PURS in an
underwritten public offering. The PURS are unsecured debentures of Capital
Markets and rank equally with all other unsecured and unsubordinated debt of
Capital Markets. The PURS are subject to a call option under which the
underwriters may purchase all of the outstanding PURS from the holders on
September 28, 2000. The net proceeds from the sale of the PURS and the call
option of $162.4 million were used to refinance short-term indebtedness incurred
in connection with the acquisition of BSG in February 1999. Until September 28,
2000, the PURS will accrue interest at a rate based on LIBOR plus 1.25%. On
September 28, 2000, if the underwriters do not exercise their call option,
Capital Markets will be obligated to repurchase all of the outstanding PURS. If
the underwriters purchase all of the outstanding PURS pursuant to their call
option, the interest rate will be reset to a fixed rate based on then current
market rates plus a fixed margin and the PURS will remain outstanding until
2010.
58
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
At December 31, 1999 and 1998, NiSource's short-term borrowings were as
follows:
DECEMBER 31, DECEMBER 31,
1999 1998
---- ----
(In thousands)
Commercial paper--
Weighted average inter-
est rate of 6.29% at
December 31, 1999................ $299,565 $193,700
Notes payable--
Interest rates between
4.96% and 7.45% with
a weighted average
interest rate of 6.57%
and maturities between
January 10, 2000 and
March 15, 2000................... 379,756 217,340
-------- --------
Total short-term borrowings...... $679,321 $411,040
======== ========
CORPORATE PREMIUM INCOME EQUITY SECURITIES AND COMPANY-OBLIGATED MANDATORILY
REDEEMABLE PREFERRED SECURITIES OF TRUST HOLDING SOLELY COMPANY DEBENTURES
In February 1999 NiSource completed an underwritten public offering of Corporate
PIES. The net proceeds of approximately $334.7 million were primarily used to
fund the cash portion of the consideration payable in the acquisition of BSG,
and to repay short-term indebtedness.
The Corporate PIES were offered as one unit comprised of two separable
instruments. The first component consists of stock purchase contracts to
purchase, four years from the date of issuance, common shares at a face value of
$50. The second component consists of mandatorily redeemable preferred
securities (Preferred Securities) which represent an undivided beneficial
ownership ~interest in the assets of NIPSCO Capital Trust I (Capital Trust). The
Preferred Securities have a stated liquidation amount of $50. The sole assets of
Capital Trust are subordinated debentures (Debentures) of Capital Markets that
earn interest at the same rates as the Preferred Securities to which they
relate, and certain rights under related guarantees by Capital Markets. The
Preferred Securities have been pledged to secure the holders' obligation to
purchase common shares under the stock purchase contracts.
The face value of the stock purchase contracts is not recorded in the
Consolidated Balance Sheet. A $22.2 million present value contract fee payable
to the stock purchase contract holders has been recorded as a liability and as
reduction to paid-in capital. In addition, paid-in capital has been reduced by
$10.4 million for the issuance costs of the stock purchase contracts.
The distributions paid on Preferred Securities are presented under the
caption "minority interests" in NiSource's Consolidated Statements of Income.
The amounts outstanding are presented under the caption, "Company-obligated
mandatorily redeemable preferred securities of subsidiary trust holding solely
company debentures," in NiSource's Consolidated Balance Sheet. At December 31,
1999, there were 6.9 million 5.9% Preferred Securities outstanding with Capital
Trust assets of $345 million.
- --------------------------------------------------------------------------------
OPERATING LEASES
- --------------------------------------------------------------------------------
The following is a schedule, by years, of future minimum rental payments,
excluding those to associated companies, required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1999:
YEAR ENDING DECEMBER 31, (In thousands)
- ------------------------
2000............................................. $34,372
2001............................................. 34,223
2002............................................. 64,639
2003............................................. 80,513
2004............................................. 25,341
Later years...................................... 218,905
--------
Total minimum payments required.................. $457,993
========
The consolidated financial statements include rental expense for all
operating leases as follows:
YEAR ENDING DECEMBER 31, (In thousands)
- ------------------------
1999............................................. $50,277
1998............................................. 23,700
1997............................................. 8,837
- --------------------------------------------------------------------------------
COMMITMENTS
- --------------------------------------------------------------------------------
NiSource expects that approximately $1.6 billion will be expended for
construction purposes for the period from January 1, 2000 to December 31, 2004.
Substantial commitments have been made in connection with this construction
program.
Northern Indiana has entered into a service agreement with Pure Air, a
general partnership between Air Products and Chemicals, Inc. and Mitsubishi
Heavy Industries
59
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
America, Inc., under which Pure Air provides scrubber services to reduce sulfur
dioxide emissions for Units 7 and 8 at Bailly Generating Station. Services under
this contract commenced on June 15, 1992 with annual charges approximating $20
million. The agreement provides that, assuming various performance standards are
met by Pure Air, a termination payment would be due if Northern Indiana
terminates the agreement prior to the end of the twenty-year contract period.
A ten-year agreement to outsource all data center, application development
and maintenance, and desktop management expires in 2005. Annual fees under the
agreement are approximately $20 million.
Primary Energy, Inc. ("Primary") arranges energy-related projects for large
energy-intensive customers and offers such customers nationwide expertise in
managing the engineering, construction, operation and maintenance of such
projects. Through its subsidiaries, Primary has entered into agreements with
several of NiSource's largest industrial customers, principally steel mills and
a refinery, to service a portion of their energy needs. In order to serves its
customers under the agreements, Primary, through its subsidiaries, has entered
into certain operating lease commitments to lease these energy-related projects
which have a combined capacity of 393 megawatts. NiSource, principally through
Capital Markets, guarantees certain of Primary's obligations under each lease,
which are included in the Operating Leases.
Primary has advanced approximately $36.6 million and $31.8 million, at
December 31, 1999 and December 31, 1998, respectively, to the lessors of the
energy-related projects discussed above. These net advances are included in
"Other Receivables" in the Consolidated Balance Sheet and as a component of
operating activities in the Consolidated Statement of Cash Flows.
- --------------------------------------------------------------------------------
RISK MANAGEMENT ACTIVITIES
- --------------------------------------------------------------------------------
NiSource uses certain commodity-based derivative financial instruments to
manage certain risks inherent in its business. NiSource's senior management
takes an active role in the risk management process and has developed policies
and procedures that require specific administrative and business functions to
assist in the identification, assessment and control of various risks. The open
positions resulting from risk management activities are managed in accordance
with strict policies which limit exposure to market risk and require daily
reporting to management of potential financial exposure.
NiSource uses futures contracts, options and swaps to hedge a portion of
its price risk associated with its non-trading activities in gas supply for its
regulated gas utilities, certain customer choice programs for residential
customers and other retail customer activity. At December 31, 1999, NiSource had
futures contracts representing the hedge of natural gas sales in the notional
amount of 8.0 billion cubic feet (BCF) resulting in a deferred gain of $0.9
million.
NiSource's trading operations includes the activities of its power trading
business and non-affiliated transactions associated with TPC. NiSource employs a
VaR model to assess the market risk of its energy trading portfolios. NiSource
estimates the one-day VaR for both trading groups which utilize derivatives
using either a Monte Carlo simulation or variance/covariance at a 95 percent
confidence level. Based on the results of the VaR analysis, the daily market
exposure for power trading on an average, high and low basis was $0.4, $1.2 and
$0.014 million during 1999, respectively. The daily VaR for the gas trading
portfolio on an average, high and low basis was $1.3, $2.1 and $0.4 million
during 1999, respectively. There were no significant trading positions during
1998.
Unrealized gains and losses on our portfolio are recorded as price risk
management assets and liabilities. The market prices used to value price risk
management activities reflect the best estimate of market prices considering
various factors, including closing exchange and over-the-counter quotations and
price volatility factors underlying the commitments. The accompanying financial
statements reflect price risk management assets and liabilities (including net
option premiums) of $32 million and $54 million at December 31, 1999. Power
trading results are reflected on a net basis in the accompanying statement of
income, consistent with the guidance in EITF Issue No. 98-10 with respect to the
use of written options. NiSource has recorded a net profit of $11 million as a
component of electric revenues for the year ended December 31, 1999. Activities
with respect to gas trading are reflected on a gross basis with revenues and
cost of goods sold consistent with the physical nature of the trades. NiSource
has recorded gas trading revenues and cost of goods sold of approximately $365
million and $371 million, respectively for the year ended December 31, 1999.
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate fair
value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value due to the short maturity of those
instruments.
INVESTMENTS
Where feasible, the fair value of investments is estimated based on market
prices for those or similar investments.
60
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
LONG-TERM DEBT/PREFERRED STOCK AND PREFERRED SECURITIES
The fair values of these securities are estimated based on the quoted market
prices for the same or similar issues or on the rates offered for securities of
the same remaining maturities. Certain premium costs associated with the early
settlement of long-term debt are not taken into consideration in determining
fair value.
The carrying values and estimated fair values of financial instruments were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------ ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents..................................... $ 43,533 $ 43,533 $ 60,848 $ 60,848
Investments................................................... 49,064 49,352 36,594 36,028
Long-term debt (including current portion).................... 2,148,905 1,992,348 1,674,755 1,769,937
Preferred stock (including current portion)................... 141,469 119,702 143,876 140,420
Preferred securities.......................................... $ 345,000 $ 248,831 N/A N/A
</TABLE>
A substantial portion of the long-term debt relates to utility operations.
The Utilities are subject to regulation and gains or losses may be included in
rates over a prescribed amortization period, if in fact settled at amounts
approximating those above.
- --------------------------------------------------------------------------------
CUSTOMER CONCENTRATIONS
- --------------------------------------------------------------------------------
The Utilities supply natural gas, electric energy and water. Natural gas and
electric energy are supplied to the northern third of Indiana and portions of
Massachusetts, New Hampshire and Maine. The Water Utilities serve Indianapolis,
Indiana, and surrounding areas. Although the Energy Utilities have a diversified
base of residential and commercial customers, a substantial portion of their
electric and gas industrial deliveries are dependent upon the basic steel
industry. The following table shows the basic steel industry percentage of gas
revenue (including transportation services) and electric revenue for 1999, 1998
and 1997:
BASIC STEEL INDUSTRY 1999 1998 1997
---- ---- ----
Gas revenue percent................ 2% 3% 4%
Electric revenue percent........... 18% 13% 17%
- --------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA(a)
- --------------------------------------------------------------------------------
The following data summarize certain operating results for each of the quarters
of 1999 and 1998:
<TABLE>
<CAPTION>
1999 QUARTERS ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating revenues.................................... $891,604 $675,294 $692,993 $884,685
Operating expenses.................................... 735,723 590,370 586,944 770,003
-------- -------- -------- --------
Operating income...................................... 155,881 84,924 106,049 114,682
Others income (deductions)
Interest and other charges.......................... (38,804) (42,391) (44,447) (49,309)
Other, net.......................................... 4,404 (7,933) (19,866) (12,328)
Income taxes.......................................... 44,922 11,656 13,781 20,089
-------- -------- -------- --------
Net income............................................ $ 76,559 $ 22,944 $ 27,955 $ 32,956
-------- -------- -------- --------
Basic earnings per average common share(a)............ $ 0.62 $ 0.18 $ 0.22 $ 0.26
-------- -------- -------- --------
Diluted earnings per average common share(a).......... $ 0.62 $ 0.18 $ 0.22 $ 0.25
-------- -------- -------- --------
Market price for the quarter:
High................................................ $ 30.500 $ 28.188 $ 26.875 $ 23.000
Low................................................. $ 25.875 $ 25.813 $ 21.750 $ 16.563
</TABLE>
61
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
<TABLE>
<CAPTION>
1998 QUARTERS ENDED
-------------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating revenues.................................... $779,344 $652,408 $747,792 $753,234
Operating expenses.................................... 662,230 573,365 650,844 624,833
-------- -------- -------- --------
Operating income...................................... 117,114 79,043 96,948 128,401
Other income (deductions)
Interest and other charges.......................... 32,497 33,243 35,199 36,403
Other, net.......................................... 8,448 (931) 2,870 197
Income taxes.......................................... 32,343 15,424 21,492 31,603
-------- -------- -------- --------
Net income............................................ $ 60,722 $ 29,445 $ 43,127 $ 60,592
======== ======== ======== ========
Basic earnings per average common share(a)............ $ 0.49 $ 0.24 $ 0.36 $ 0.51
======== ======== ======== ========
Diluted earnings per average common share(a).......... $ 0.48 $ 0.24 $ 0.35 $ 0.51
======== ======== ======== ========
Market price for the quarter:
High................................................ $ 28.375 $ 28.313 $ 32.875 $ 33.625
Low................................................. $ 24.750 $ 25.813 $ 26.625 $ 28.875
</TABLE>
(a) Because of the combined mathematical effect of common shares repurchased and
issued and the cyclical nature of net income during the year, the sum of
earnings per share data for any four quarterly periods may vary slightly
from the earnings per share data for the equivalent twelve-month period.
- --------------------------------------------------------------------------------
SEGMENTS OF BUSINESS
- --------------------------------------------------------------------------------
Operating segments are defined as components of an enterprise for which separate
financial information is available and is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
There are four reportable operating segments: Gas, Electric, Water and Gas
Marketing. The Gas segment includes regulated gas utilities which provide
natural gas distribution and transportation services. The Electric segment is
comprised principally of Northern Indiana, a regulated electric utility, which
generates, transmits and distributes electricity. In addition, the Electric
segment includes wholesale power marketing and trading operation which markets
wholesale power to other utilities and electric power marketers. The Water
segment includes regulated water utilities which provide distribution of water
supply to the public. The Gas Marketing segment provides natural gas marketing,
trading, storage and sales to wholesale and industrial customers.
Reportable segments are operations that are managed separately and meet
certain quantitative thresholds. The Other Products and Services column includes
a variety of businesses, such as installation, repair and maintenance of
underground pipelines, utility line locating and marking, the arrangement of
energy-related projects for large energy-intensive facilities, and other
products and services, which collectively do not constitute a segment for
reporting purposes.
Revenues for each segment are principally attributable to customers in the
United States. Additional revenues, which are insignificant to consolidated
revenues, are attributable to customers in Canada and the United Kingdom.
The following tables provide information about business segments. NiSource
uses income before interest and income taxes as its primary measurement for each
of the reported segments. NiSource makes decisions on finance, dividends and
taxes at the corporate level. These topics are addressed on a consolidated
basis. In addition, adjustments have been made to the segment information to
arrive at information included in the results of operations and financial
position. These adjustments include unallocated corporate assets, revenues and
expenses and the elimination of intercompany transactions. The accounting
policies of the operating segments are the same as those described in "Summary
of Significant Accounting Policies."
62
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
================================================================================
<TABLE>
<CAPTION>
Corporate
Other and
Gas Gas Products Adjust
1999 Utilities Electric Water Marketing & Services ments Total
- --------------------------------------- (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues .................. $1,072,778 $1,124,157 $ 98,500 $771,776 $283,528 $(206,163) $3,144,576
Other Income (Deductions)............ $ 4,162 $ 756 $ 1,982 $ 5,206 $(22,711) $ (7,425) $ (18,030)
Depreciation and amortization........ $ 116,145 $ 158,976 $ 15,427 $ 3,136 $ 13,109 $ 4,611 $ 311,404
Income before Interest and Other
Charges and Income Taxes........... $ 119,606 $ 363,674 $ 29,139 $ (485) $(16,482) $ (51,946) $ 443,506
Assets .............................. $2,424,695 $2,764,397 $685,346 $597,008 $555,206 $(191,423) $6,835,229
Capital Expenditures ................ $ 145,182 $ 134,019 $ 64,590 $ 733 $ 13,999 $ - $ 358,523
Investment in equity-method investees.. $ - $ - $ - $ 7,620 $129,145 $ - $ 136,765
<CAPTION>
Corporate
Other and
Gas Gas Products Adjust
1998 Utilities Electric Water Marketing & Services ments Total
- --------------------------------------- (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues .................. $ 637,098 $1,429,986 $ 83,979 $657,692 $226,901 $(102,878) $2,932,778
Other Income (Deductions) ........... $ 2,802 $ 553 $ 712 $ 2,017 $ 3,813 $ 1,711 $ 11,608
Depreciation and amortization ....... $ 75,547 $ 156,844 $ 11,589 $ 332 $ 11,223 $ 939 $ 256,474
Income before Interest and Other
Charges and Income Taxes ............ $ 68,284 $ 341,433 $ 23,460 $ 5,006 $ 5,814 $ (10,883) $ 433,114
Assets .............................. $1,074,501 $2,774,482 $619,505 $121,574 $465,674 $ (69,233) $4,986,503
Capital Expenditures ................ $ 62,981 $ 124,044 $ 59,265 $ 24 $ 11,325 $ - $ 257,639
Investment in equity-method investees.. $ - $ - $ - $ 6,707 $104,633 $ - $ 111,340
<CAPTION>
Corporate
Other and
Gas Gas Products Adjust
1997 Utilities Electric Water Marketing & Services ments Total
- --------------------------------------- (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues .................. $ 807,239 $1,186,331 $ 60,743 $480,986 $172,977 $(121,735) $2,586,541
Other Income (Deductions) ........... $ 821 $ 637 $ 1,465 $ 3,349 $ 11,047 $ (1,195) $ 16,124
Depreciation and amortization ....... $ 73,017 $ 153,843 $ 8,241 $ 233 $ 13,005 $ 1,465 $ 249,804
Income before Interest and Other
Charges and Income Taxes ............ $ 88,950 $ 312,243 $ 19,363 $ 7,085 $ 13,057 $ (14,021) $ 426,677
Assets .............................. $1,111,372 $2,746,232 $565,717 $ 94,690 $491,550 $ (72,528) $4,937,033
Capital Expenditures ................ $ 64,009 $ 115,012 $ 39,910 $ - $ - $ - $ 218,931
Investment in equity-method investees.. $ - $ - $ - $ 6,710 $ 76,145 $ - $ 82,855
</TABLE>
The following table reconciles total reportable segment income before
interest taxes to NiSource's consolidated net income for each of the years
ending 1999, 1998 and other charges and income and 1997 as follows:
<TABLE>
<CAPTION>
1999 1998 1999
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Total segment profit ................................ $443,506 $ 433,114 $ 426,677
Interest expense, net ............................... (166,617) (128,804) (120,607)
Minority interests .................................. (17,693) (1,024) (356)
Dividends requirements on preferred stock ........... (8,344) (8,538) (8,694)
-------- --------- ---------
Income before income taxes .......................... 250,862 294,748 297,023
Less: income taxes .................................. 90,448 100,&62 106,174
-------- --------- ---------
Net Income .......................................... $160,414 $ 193,886 $ 190,849
======== ========= =========
</TABLE>
63
<PAGE> 67
SELECTED SUPPLEMENTAL INFORMATION
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
GAS STATISTICS 1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating Revenues ($000's):
Sales
Residential........................................................... $ 572,134 $ 385,030 $ 479,461
Commercial............................................................ 207,533 124,903 164,359
Industrial............................................................ 58,498 62,003 78,531
----------- ----------- -----------
Total............................................................... 838,165 571,936 722,351
Transportation
Residential........................................................... 5,609 741 --
Commercial............................................................ 34,350 4,873 1,742
Industrial............................................................ 35,124 34,279 35,062
----------- ----------- -----------
Total............................................................... 75,083 39,893 36,804
Transmission............................................................ 2,073 2,955 2,581
Gas marketing and trading............................................... 710,376 623,338 419,419
Other*.................................................................. 27,753 (28,347) 3,466
----------- ----------- -----------
Total............................................................... $ 1,653,450 $ 1,209,775 $ 1,184,621
=========== =========== ===========
Deliveries in dth (000's):
Sales
Residential........................................................... 92,766 63,514 79,816
Commercial............................................................ 38,834 24,256 31,640
Industrial............................................................ 13,205 12,824 16,989
----------- ----------- -----------
Total............................................................... 144,805 100,594 128,445
Transportation
Residential........................................................... 1,592 207 --
Commercial............................................................ 40,928 5,384 3,957
Industrial............................................................ 188,056 177,604 165,627
----------- ----------- -----------
Total............................................................... 230,576 183,195 169,584
Transmission............................................................ 21,878 19,695 31,275
Gas marketing and trading............................................... 354,399 311,942 249,857
Other................................................................... 601 503 566
----------- ----------- -----------
Total............................................................... 752,259 615,929 579,727
=========== =========== ===========
Customers Served--End of Year:
Sales
Residential........................................................... 939,426 675,782 669,833
Commercial............................................................ 85,632 53,061 55,088
Industrial............................................................ 3,788 3,801 4,179
----------- ----------- -----------
Total............................................................... 1,028,846 732,644 729,100
Transportation
Residential........................................................... 30,947 3,207 --
Commercial............................................................ 10,687 2,857 36
Industrial............................................................ 664 613 229
----------- ----------- -----------
Total............................................................... 42,298 6,677 265
Transmission............................................................ 8 8 9
Other................................................................... 69 71 75
----------- ----------- -----------
Total............................................................... 1,071,221 739,400 729,449
=========== =========== ===========
</TABLE>
*Includes deferred gas cost revenue of $(4,474), $(42,055) and $(11,075),
respectively.
64
<PAGE> 68
SELECTED SUPPLEMENTAL INFORMATION (Continued)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
ELECTRIC STATISTICS 1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating Revenues ($000's):(a)
Residential............................................................. $ 294,223 $ 290,738 $ 272,619
Commercial.............................................................. 275,160 267,718 253,235
Industrial.............................................................. 415,388 404,507 416,741
Street lighting......................................................... 8,976 8,740 8,697
Wholesale............................................................... 90,006 430,422 214,150
Other**................................................................. 37,285 24,475 19,149
----------- ----------- -----------
Total................................................................. $ 1,121,038 $ 1,426,600 $ 1,184,591
=========== =========== ===========
Sales in kilowatt-hours (000's):(a)
Residential............................................................. 2,996,650 2,936,762 2,723,990
Commercial.............................................................. 3,292,066 3,159,095 2,973,823
Industrial.............................................................. 9,186,132 8,782,363 8,971,926
Street lighting......................................................... 59,713 57,607 57,764
Wholesale............................................................... 2,765,394 14,480,608 8,688,014
Other................................................................... 79,024 64,037 84,935
----------- ----------- -----------
Total................................................................. 18,378,979 29,480,472 23,500,452
=========== =========== ===========
Customers Served--End of Year:
Residential............................................................. 376,483 372,383 368,907
Commercial.............................................................. 45,821 44,960 43,802
Industrial.............................................................. 2,677 2,736 2,764
Other................................................................... 852 868 885
----------- ----------- -----------
Total................................................................. 425,833 420,947 416,358
=========== =========== ===========
</TABLE>
**Includes deferred fuel cost revenue of $10,480, $(8,880) and $(5,223),
respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
WATER STATISTICS 1999 1998 1997***
----------- ----------- -----------
<S> <C> <C> <C>
Operating Revenues ($000's):
Residential............................................................. $ 65,830 $ 55,281 $ 39,570
Commercial.............................................................. 22,393 19,942 14,763
Industrial.............................................................. 4,855 4,227 3,015
Other................................................................... 5,305 4,529 3,395
----------- ----------- -----------
Total................................................................. $ 98,383 $ 83,979 $ 60,743
=========== =========== ===========
Sales in millions of gallons (000's):
Residential............................................................. 25,964 22,454 18,095
Commercial.............................................................. 13,711 13,029 10,345
Industrial.............................................................. 4,690 4,392 3,310
Other................................................................... 1,059 947 754
----------- ----------- -----------
Total................................................................. 45,424 40,822 32,504
=========== =========== ===========
Customers Served--End of Year:
Residential............................................................. 254,075 232,333 225,627
Commercial.............................................................. 17,338 17,265 17,083
Industrial.............................................................. 343 348 347
Other................................................................... 3,932 3,718 3,586
----------- ----------- -----------
Total................................................................. 275,688 253,664 246,643
=========== =========== ===========
</TABLE>
***Amounts are for the period April 1997 through December 1997.
(a) 1997 and 1998 revenues and sales have been restated for consolidation.
65
<PAGE> 69
SELECTED SUPPLEMENTAL INFORMATION (Continued)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Operating Revenues
Gas ($000's)(a)............................................................ $ 1,653,450 $ 1,209,775 $ 1,184,621
Electric ($000's)(a)....................................................... 1,121,038 1,426,600 1,184,591
Water ($000's)............................................................. 98,383 83,979 60,743
Products and Services ($000's)(a)............................................. 271,705 212,424 156,586
------------ ------------ ------------
Total Operating Revenues ($000's)....................................... $ 3,144,576 $ 2,932,778 $ 2,586,541
Operating Margin ($000's)..................................................... $ 1,493,525 $ 1,240,411 $ 1,210,927
Operating Income ($000's)..................................................... $ 461,536 $ 421,506 $ 410,553
Net Income ($000's)........................................................... $ 160,414 $ 193,886 $ 190,849
Shares outstanding at year end................................................ 124,139,392 117,530,698 124,312,664
Number of common shareholders................................................. 40,741 36,277 37,373
Basic earnings per average common share....................................... $ 1.29 $ 1.60 $ 1.54
Diluted earnings per average common share..................................... $ 1.27 $ 1.59 $ 1.53
Return on average common equity............................................... 12.8% 16.1% 16.1%
Times interest earned (pre-tax)............................................... 2.07 3.13 3.43
Dividends paid per share...................................................... $ 1.02 $ 0.96 $ 0.90
Dividend payout ratio......................................................... 79.1% 60.0% 58.4%
Market values during the year:
High....................................................................... $ 30.500 $ 33.625 $ 24.938
Low........................................................................ $ 16.563 $ 24.750 $ 19.000
Close...................................................................... $ 17.875 $ 30.437 $ 24.719
Book value of common shares................................................... $ 10.90 $ 9.78 $ 10.17
Market-to-book ratio at year end.............................................. 163.9% 311.2% 243.1%
Total Assets ($000's)......................................................... $ 6,835,229 $ 4,986,503 $ 4,937,033
Utility construction expenditures ($000's)(b)................................. $ 341,263 $ 245,825 $ 218,931
Capitalization:
Common shareholders' equity ($000's)....................................... $ 1,353,504 $ 1,149,708 $ 1,264,788
Preferred and preference stock--
Northern Indiana Public Service Company:
Series without mandatory redemption provision ($000's)................ $ 81,114 $ 81,116 $ 81,123
Series with mandatory redemption provisions ($000's).................. $ 54,030 $ 56,435 $ 58,841
NIPSCO Industries, Inc.:
Series with mandatory redemption provision ($000's)................... $ -- $ -- $ --
Indianapolis Water Company:
Series without mandatory redemption provision ($000's)................ $ 4,497 $ 4,497 $ 4,497
Company obligated, mandatorily redeemable preferred securities of trust
holding solely Company debentures..................................... $ 345,000 $ -- $ --
Long-Term debt ($000's)....................................................... $ 1,975,184 $ 1,667,965 $ 1,667,925
------------ ------------ ------------
Total Capitalization ($000's)........................................... $ 3,813,329 $ 2,959,721 $ 3,077,174
Number of employees........................................................... 7,399 6,035 5,984
</TABLE>
Notes: (a) 1998 and 1997 revenues restated for consolidation.
(b) Including AFUDC.
66
<PAGE> 70
SELECTED SUPPLEMENTAL INFORMATION (Continued)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating Revenues
Gas ($000's)(a).................................................. $ 799,395 $ 691,402 $ 681,909 $ 714,229
Electric ($000's)(a)............................................. 1,022,231 1,030,923 994,492 963,643
Water ($000's)................................................... -- -- -- --
Products and Services ($000's)(a)................................... 166,322 46,983 91,628 59,387
------------ ------------ ------------ ------------
Total Operating Revenues ($000's)............................. $ 1,987,948 $ 1,769,308 $ 1,768,029 $ 1,737,259
Operating Margin ($000's)........................................... $ 1,115,965 $ 1,074,820 $ 1,014,566 $ 1,001,542
Operating Income ($000's)........................................... $ 386,308 $ 381,877 $ 353,452 $ 355,918
Net Income ($000's)................................................. $ 176,734 $ 175,465 $ 163,987 $ 156,140
Shares outstanding at year end...................................... 119,611,322 124,759,192 127,810,778 131,657,676
Number of common shareholders....................................... 35,339 37,299 39,172 41,038
Basic earnings per average common share............................. $ 1.44 $ 1.36 $ 1.24 $ 1.15
Diluted earnings per average common share........................... $ 1.43 $ 1.35 $ 1.23 $ 1.15
Return on average common equity..................................... 15.9% 15.5% 14.6% 14.4%
Times interest earned (pre-tax)..................................... 3.62 3.72 3.61 3.48
Dividends paid per share............................................ $ 0.84 $ 0.78 $ 0.72 $ 0.66
Dividend payout ratio............................................... 58.3% 57.4% 58.1% 57.4%
Market values during the year:
High............................................................. $ 20.125 $ 19.250 $ 16.500 $ 17.438
Low.............................................................. $ 17.625 $ 14.625 $ 13.063 $ 13.063
Close............................................................ $ 19.813 $ 19.125 $ 14.875 $ 16.438
Book value of common shares......................................... $ 9.20 $ 9.00 $ 8.67 $ 8.31
Market-to-book ratio at year end.................................... 215.4% 212.5% 171.6% 197.8%
Total Assets ($000's)............................................... $ 4,288,883 $ 3,999,520 $ 3,947,138 $ 3,912,324
Utility construction expenditures ($000's)(b)....................... $ 207,881 $ 192,966 $ 202,545 $ 180,852
Capitalization:
Common shareholders' equity ($000's)............................. $ 1,100,501 $ 1,122,215 $ 1,107,848 $ 1,094,672
Preferred and preference stock--
Northern Indiana Public Service Company:
Series without mandatory redemption provision ($000's)...... $ 81,126 $ 81,325 $ 86,389 $ 97,753
Series with mandatory redemption provisions ($000's)........ $ 61,246 $ 63,651 $ 66,057 $ 68,462
NIPSCO Industries, Inc.:
Series with mandatory redemption provision ($000's)......... $ -- $ 35,000 $ 35,000 $ 35,000
Indianapolis Water Company:
Series without mandatory redemption provision ($000's)...... $ -- $ -- $ -- $ --
Company obligated, mandatorily redeemable preferred
securities of trust holding solely Company debentures....... $ -- $ -- $ -- $ --
Long-Term debt ($000's)............................................. $ 1,127,106 $ 1,175,728 $ 1,180,338 $ 1,192,500
------------ ------------ ------------ ------------
Total Capitalization ($000's)................................. $ 2,369,979 $ 2,477,919 $ 2,475,632 $ 2,488,387
Number of employees................................................. 4,168 4,356 4,441 4,602
</TABLE>
67
<PAGE> 71
SELECTED SUPPLEMENTAL INFORMATION (Continued)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1992 1991 1990 1989
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating Revenues
Gas ($000's)(a).............................................. $ 666,221 $ 601,920 $ 625,159 $ 677,262
Electric ($000's)(a)......................................... 916,135 933,241 895,836 882,303
Water ($000's)............................................... -- -- -- --
Products and Services ($000's)(a)............................... -- -- -- --
------------ ------------ ------------ ------------
Total Operating Revenues ($000's)......................... $ 1,582,356 $ 1,535,161 $ 1,520,995 $ 1,559,565
Operating Margin ($000's)....................................... $ 927,089 $ 919,951 $ 885,262 $ 900,035
Operating Income ($000's)....................................... $ 246,217 $ 254,354 $ 247,777 $ 252,807
Net Income ($000's)............................................. $ 136,648 $ 133,388 $ 125,361 $ 72,112 (c)
Shares outstanding at year end.................................. 131,516,700 133,343,230 137,748,458 138,738,984
Number of common shareholders................................... 38,097 39,346 41,285 43,763
Basic earnings per average common share......................... $ 1.00 $ 0.97 $ 0.90 $ 0.50 (c)
Diluted earnings per average common share....................... $ 0.99 $ 0.96 $ 0.89 $ 0.49 (c)
Return on average common equity................................. 13.1% 12.9% 12.7% 7.2%(c)
Times interest earned (pre-tax)................................. 3.17 2.93 2.81 2.02 (c)
Dividends paid per share........................................ $ 0.62 $ 0.58 $ 0.52 $ 0.42
Dividend payout ratio........................................... 62.0% 59.8% 57.8% 84.0%(c)
Market values during the year:
High......................................................... $ 13.313 $ 13.500 $ 9.625 $ 9.813
Low.......................................................... $ 11.250 $ 9.250 $ 7.875 $ 6.563
Close........................................................ $ 13.250 $ 12.875 $ 9.438 $ 9.688
Book value of common shares..................................... $ 7.87 $ 7.59 $ 7.30 $ 6.96
Market-to-book ratio at year end................................ 168.4% 169.6% 129.3% 139.2%
Total Assets ($000's)........................................... $ 3,807,941 $ 3,647,557 $ 3,625,181 $ 3,657,718
Utility construction expenditures ($000's)(b)................... $ 172,329 $ 168,958 $ 152,280 $ 150,786
Capitalization:
Common shareholders' equity ($000's)......................... $ 1,034,530 $ 1,011,666 $ 1,005,982 $ 965,437
Preferred and preference stock--
Northern Indiana Public Service Company:
Series without mandatory redemption provision ($000's).. $ 97,917 $ 98,710 $ 99,374 $ 99,874
Series with mandatory redemption provisions ($000's).... $ 70,668 $ 53,978 $ 59,358 $ 66,309
NIPSCO Industries, Inc.:
Series with mandatory redemption provision ($000's)..... $ 35,000 $ 35,000 $ 35,000 $ --
Indianapolis Water Company:
Series without mandatory redemption provision ($000's).. $ -- $ -- $ -- $ --
Company obligated, mandatorily redeemable preferred
securities of trust holding solely Company debentures... $ -- $ -- $ -- $ --
Long-Term debt ($000's)......................................... $ 1,054,454 $ 1,068,708 $ 1,165,682 $ 1,261,760
------------ ------------ ------------ ------------
Total Capitalization ($000's)............................. $ 2,292,569 $ 2,268,062 $ 2,365,396 $ 2,393,380
Number of employees............................................. 4,648 4,600 4,547 4,825
</TABLE>
(c) Earnings per share were reduced by $0.72 due to the $82.0 million refund,
less associated tax benefits of $30.3 million, related to the Bailly N1
generating unit.
68
<PAGE> 72
GLOSSARY OF SELECTED ENERGY TERMS
===============================================================================
BRITISH THERMAL UNIT (BTU): The standard unit for measuring quantity of heat
energy. One Btu is the amount of heat energy required to raise the temperature
of one pound of water 1(degree) Fahrenheit at a specified temperature.
COGENERATION: The sequential production of thermal and electric energy from the
same fuel source.
CONSTRUCTION WORK IN PROGRESS (CWIP): A sub-account in the utility plant section
of the balance sheet representing the sum of the balances of work orders for
utility plant in process of construction, but not yet placed in service.
DEFERRED TAXES: Income taxes resulting from the use of income tax law
provisions which allow recognition of certain items of revenue and expense in
the tax return prior to their being recorded on the books of the Company.
Deferred taxes do not constitute earnings available to pay dividends to
investors.
DEKATHERM (DTH): A unit of heating value equivalent to 10 therms or 1,000,000
Btus; equal to 1,000 cubic feet (1 mcf) at 1,000 Btus per cubic foot.
DISTRIBUTED GENERATION: A system of energy production that is located at the
point of use. It typically involves less than 500 kilowatts of capacity and
often includes provisions for thermal energy recovery and electric production.
FEDERAL ENERGY REGULATORY COMMISSION (FERC): An independent five-member
commission within the Department of Energy responsible for setting rates and
charges for the wholesale transportation and sale of natural gas and
electricity; the licensing of hydroelectric power projects; and for
establishing rates or charges for the transportation of oil by pipeline, as
well as the valuation of such pipelines.
FIRM POWER, ELECTRIC: Power or power-producing capacity intended to be available
at all times during the period covered by a commitment, even under adverse
conditions.
KILOWATT (KW): 1,000 watts. A watt is a measure of the rate at which electricity
is generated or consumed.
MEGAWATT (MW): The generating capacity of utility plants is expressed in
megawatts; a megawatt is 1,000 kilowatts or 1 million watts.
OPERATING MARGIN: The difference between operating revenues and the cost of
sales. It is the contribution made to cover all other operating costs, fixed
costs and profit margin.
PEAK LOAD, DEMAND: Electricity or gas supplied during a period of the greatest
demand.
RATE BASE: The amount invested on which a regulatory agency allows utilities to
earn a return.
SPOT MARKET GAS: Natural gas purchased under short-term agreement by a gas
utility or end user from sources other than pipeline companies.
THERM: A quantity of heat equivalent to 100,000 British thermal units (Btus).
TRANSPORTATION RATES: Rates charged by a gas utility when it simply moves gas
owned by a third party through its system.
UTILITY PLANT: All property and equipment used for the generation, transmission,
and distribution of electricity, storage, transmission and distribution of gas,
and transmission and distribution of water.
WHEELING: Electric utility operation wherein transmission facilities of one
system are used to transmit power produced by another system.
- ----------------
REFERENCES
Lewis, Adam, Salmon of the Pacific. Vancouver: Raincoast Books, 1994.
Steelquist, Robert, Field Guide to the Pacific Salmon. Seattle: Sasquatch
Books, 1992, 1996.
69
<PAGE> 73
SHAREHOLDER INFORMATION AND SERVICES
===============================================================================
NISOURCE INC. common shares are listed and traded on the New York, Pacific and
Chicago stock exchanges ~under the symbol NI. The shares are listed in financial
stock quotations as NiSource. As of December 31, 1999, NiSource INC. had 40,741
common shareholders.
- -------------------------------------------------------------------------------
NISOURCE SHAREHOLDER SERVICES WILL ASSIST YOU WITH:
- -------------------------------------------------------------------------------
- - Address changes - Dividend reinvestment - Lost, destroyed or
- - Automatic Dividend plan statement history stolen stock
Reinvestment and Share - Duplicate 1099 or W-9 certificates
Purchase Plan tax certification forms - Name changes
- - Consolidation of - Duplicate mailings - Replacement of
accounts - Electronic funds transfer dividend checks
- - Direct deposit of - Safekeeping program
dividends - Stock ownership
- Stock transfers
- -------------------------------------------------------------------------------
COMMON DIVIDEND INCREASED
- -------------------------------------------------------------------------------
At its regular meeting on December 17, 1999, the Board of Directors increased
the dividend on common shares. The quarterly dividend was increased to 27 cents
per share, or $1.08 on an annual basis. The common ~dividend was 251/2 cents per
share for the previous four quarters, or $1.02 on an annual basis.
- -------------------------------------------------------------------------------
ASK ABOUT OUR SERVICES
- -------------------------------------------------------------------------------
DIRECT DEPOSIT OF DIVIDENDS (ELECTRONIC FUNDS TRANSFER)
Stockholders of record can have immediate access to dividend money. Your
dividend money can be deposited directly into your checking or savings account.
Verification of dividend receipts will appear on your monthly bank statements.
AUTOMATIC DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN
The Company's Automatic Dividend Reinvestment and Share Purchase Plan provides
holders of the Company's common shares with a convenient and economical way to
purchase additional common shares of the Company without payment of brokerage
fees or commissions. Participants may also make voluntary cash payments for the
purchase of additional shares. Some important features of the Plan:
- - Cash contributions are invested once each month.
- - Voluntary cash contributions from $25 to $5,000 can be made each quarter.
- - A "safekeeping" feature allows shareholders to have Harris Trust and Savings
Bank hold their shares.
SAFEKEEPING PROGRAM
Shareholders who are participants in the Automatic Dividend Reinvestment and
Share Purchase Plan can select the Safekeeping Program for their shares. Some of
the advantages of Safekeeping are elimination of lost, destroyed or stolen stock
certificates, avoidance of costly stock replacement fees and no need for a
safety deposit box to store stock certificates.
TELEPHONE CONTACT
Shareholder Services' hours are 8:00 a.m. to 5:00 p.m.
Central Time, Monday through Friday.
Local calls 219-853-5700
Long Distance (Toll-Free) 800-348-6466
WRITTEN REQUESTS
Form 10-K Requests and Correspondence
NiSource Inc.
Shareholder Services Department
5265 Hohman Avenue
Hammond, Indiana 46320
TRANSFER AGENT, REGISTRAR, SHAREHOLDER RECORDS AND
DIVIDEND DISBURSING AGENT
Harris Trust and Savings Bank
Corporate Agencies
311 W. Monroe Street, 11th Floor
Chicago, Illinois 60606
ANTICIPATED DIVIDEND RECORD AND
PAYMENT DATES
COMMON
Record Date Payment Date
April 28, 2000 May 19, 2000
July 31, 2000 August 18, 2000
October 31, 2000 November 20, 2000
January 31, 2001 February 20, 2001
PREFERRED
Record Date Payment Date
March 16, 2000 April 14, 2000
June 16, 2000 July 14, 2000
September 15, 2000 October 13, 2000
December 15, 2000 January 12, 2001
70
<PAGE> 74
OFFICERS OF THE CORPORATION AND PRINCIPAL SUBSIDIARIES
===============================================================================
- -------------------------------------------------------------------------------
NISOURCE INC.
- -------------------------------------------------------------------------------
Gary L. Neale
Chairman, President and Chief
Executive Officer
Stephen P. Adik
Senior Executive Vice President,
Chief Financial Officer and
Treasurer
Patrick J. Mulchay
Executive Vice President
Jeffrey W. Yundt
Executive Vice President
James K. Abcouwer
Senior Vice President
Joseph L. Turner, Jr.
Senior Vice President
Thomas J. Aruffo
Vice President and
Chief Information Officer
David A. Kelly
Vice President, Tax
Mark T. Maassel
Vice President, Regulatory and
Government Policy
Mark D. Wyckoff
Vice President, Human Resources
and Assistant Secretary
Gail W. Harowski
Assistant Treasurer
Dennis E. Senchak
Assistant Treasurer
Nina M. Rausch
Secretary
Gary W. Pottorff
Auditor
Arthur E. Smith, Jr.
Environmental Officer and
Counsel
James M. Clarke
Risk Management Officer,
NiSource Corporate Services
Company
Daniel D. Gavito
Vice President, Corporate Gas
Supply, NiSource Corporate
Services Company
Francis P. Girot, Jr.
Treasurer, NiSource Corporate
Services Company
Arthur A. Paquin
Controller, NiSource Corporate
Services Company
- -------------------------------------------------------------------------------
NORTHERN INDIANA PUBLIC SERVICE COMPANY
- -------------------------------------------------------------------------------
Patrick J. Mulchay
President and Chief Operating
Officer
Jerry L. Godwin
Vice President and General
Manager, Electric Supply
Peggy H. Landini
Vice President, Commercial
Operations
Robert J. Schacht
Vice President, Distribution
Operations
David J. Vajda
Vice President, Finance
- -------------------------------------------------------------------------------
BAY STATE GAS COMPANY
- -------------------------------------------------------------------------------
Roger A. Young
Chairman
Jeffrey W. Yundt
President and Chief Executive
Officer
Thomas W. Sherman
Executive Vice President and
Chief Financial Officer
Kenneth M. Margossian
Senior Vice President, Operations
James D. Simpson
Senior Vice President, Revenue
and Regulatory Development
Barbara S. McKay
Vice President, Corporate
Communications and Human
Resources
- -------------------------------------------------------------------------------
IWC RESOURCES CORPORATION
- -------------------------------------------------------------------------------
James T. Morris
Chairman, Chief Executive
Officer and President
Joseph R. Broyles
President, IWC Utilities and
Indianapolis Water Company
David A. Kelly
Executive Vice President and
Chief Financial Officer
Kenneth N. Giffin
Senior Vice President,
Governmental Relations,
Real Estate and Public Affairs
John M. Davis
Vice President, General Counsel
and Secretary
- -------------------------------------------------------------------------------
ENERGYUSA, INC.
- -------------------------------------------------------------------------------
James K. Abcouwer
President and Chief Executive
Officer
William A. Lang
Senior Vice President
President and Chief Operating
Officer, Commodities Group
Michael B. Stayton
Senior Vice President
President and Chief Operating
Officer, Commercial Group
Donald K. Eldert
Vice President
President, Commercial
Energy Services
David W. Manly
Vice President and General
Manager, Consumer/
Retail Group
John J. McGuire
Vice President, Business
Development and Customer
Relations
- -------------------------------------------------------------------------------
PRIMARY ENERGY, INC.
- -------------------------------------------------------------------------------
Joseph L. Turner, Jr.
President
V. Michael Alverson
Vice President
Dean H. Hall
Vice President
71
<PAGE> 75
With respect to the discussion about our proposed merger with Columbia Energy
Group, NiSource and the new holding company will be filing a registration
statement, which will contain a joint proxy statement/prospectus of NiSource and
Columbia, and other documents with the Securities and Exchange Commission.
Investors and security holders are urged to read the joint proxy
statement/prospectus and any other relevant documents filed with the SEC when
they become available because they will contain important information. Investors
and security holders will be able to receive the joint proxy
statement/prospectus and other documents free of charge at the SEC's web site,
www.sec.gov, or from NiSource Investor Relations at 801 East 86th Avenue,
Merrillville, Indiana 46410.
<PAGE> 76
[NISOURCE LOGO] BULK RATE
U.S. POSTAGE PAID
801 E. 86th Avenue NISOURCE
Merrillville, Indiana 46410-6272
[PICTURE] Contact Information
SHAREHOLDER INQUIRIES
Shareholder Services
(800) 348-6466
ANALYST INQUIRIES
Investor Relations
(219) 647-6200
MEDIA INQUIRIES
Corporate Communications
(219) 647-6200
www.nisource.com
This report is issued for the purpose of providing statistical information. It
is not a representation, prospectus or circular in respect to the stock or
securities of this corporation, and is not transmitted in connection with any
sale or offer to sell or buy any stock or security now or hereafter to be
issued, or with any preliminary negotiation for such sale. This report contains
forward-looking statements.
