<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
Commission file number 1-9779
NISOURCE INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1719974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 East 86th Avenue, Merrillville, Indiana 46410
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 853-5200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of April 30, 2000, 121,105,573 common shares were outstanding.
<PAGE> 2
NISOURCE INC.
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of
NiSource Inc.:
We have audited the accompanying consolidated balance sheet and consolidated
statement of capitalization of NiSource Inc. (an Indiana corporation) and
subsidiaries as of March 31, 2000 and 1999, and the related consolidated
statements of income, common shareholders' equity and cash flows for the three
and twelve month periods ended March 31, 2000 and 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 March 31, 2000 and 1999, and the results of their
operations and their cash flows for the three and twelve month periods ended
March 31, 2000 and 1999, in conformity with accounting principles generally
accepted in the United States.
Arthur Andersen LLP
Chicago, Illinois
May 2, 2000
<PAGE> 3
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, December 31,
2000 1999
ASSETS --------- -----------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT:
Utility Plant, (including Construction Work in
Progress of $256,608 and $240,637, respectively)
Electric $4,252,465 $4,237,427
Gas 2,886,618 2,871,824
Water 759,328 750,376
Common 384,946 381,486
---------- ----------
8,283,357 8,241,113
Less -Accumulated depreciation and amortization 3,504,960 3,444,311
---------- ----------
Net Utility Plant 4,778,397 4,796,802
---------- ----------
Other property, at cost, less accumulated provision for
depreciation of $62,350 and $56,414 respectively 429,101 427,190
---------- ----------
Total Property, Plant and Equipment 5,207,498 5,223,992
---------- ----------
INVESTMENTS:
Investments, at equity 95,972 118,259
Investments, at cost 55,936 55,851
Other investments 33,317 32,839
---------- ----------
Total Investments 185,225 206,949
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 78,151 43,533
Accounts receivable, less reserve of $23,171 and
$56,414, respectively 459,505 390,990
Other receivables 2,925 6,572
Fuel adjustment clause -- 4,201
Gas cost adjustment clause 43,311 92,498
Materials and supplies, at average cost 65,592 64,530
Electric production fuel, at average cost 35,390 31,968
Natural gas in storage 43,706 63,750
Prepayments and other 186,691 132,589
---------- ----------
Total Current Assets 915,271 830,631
---------- ----------
OTHER ASSETS:
Regulatory assets 206,358 208,634
Intangible assets, net of accumulated amortization 136,794 139,337
Prepayments and other 304,421 289,061
---------- ----------
Total Other Assets 647,573 637,032
---------- ----------
$6,955,567 $6,898,604
========== ==========
</TABLE>
2
<PAGE> 4
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, December 31,
2000 1999
---------- -------------
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholders' equity
(See accompanying statement) $1,367,261 $1,353,504
Preferred stocks-
Northern Indiana Public Service Company:
Series without mandatory redemption provisions 81,114 81,114
Series with mandatory redemption provisions 52,780 54,030
Indianapolis Water Company:
Series without mandatory redemption provisions 2,517 4,497
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely Company debentures 345,000 345,000
Long-term debt, excluding amounts due within one year 1,927,408 1,975,184
---------- ----------
Total Capitalization 3,776,080 3,813,329
---------- ----------
CURRENT LIABILITIES:
Current portion of long-term debt 211,967 173,721
Short-term borrowings 601,095 679,321
Accounts payable 268,054 277,358
Dividends declared on common and preferred stocks 34,144 34,535
Customer deposits 29,435 28,736
Taxes accrued 118,570 42,853
Interest accrued 29,480 34,157
Fuel adjustment clause 2,655 --
Accrued employment costs 54,336 60,647
Other 261,783 203,274
---------- ----------
Total Current Liabilities 1,611,519 1,534,602
---------- ----------
OTHER:
Deferred income taxes 990,078 998,682
Deferred investment tax credits, being amortized over
life of related property 93,036 94,946
Deferred credits 114,732 94,058
Customer advances and contributions in aid of construction 144,331 140,562
Accrued liability for postretirement benefits 161,365 157,517
Other noncurrent liabilities 64,426 64,908
---------- ----------
Total Other 1,567,968 1,550,673
---------- ----------
COMMITMENTS AND CONTINGENCIES (SEE NOTES)
$6,955,567 $6,898,604
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of this statement.
3
<PAGE> 5
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating Revenues:
Gas $ 726,822 $ 553,896 $ 1,826,376 $ 1,364,755
Electric 255,578 264,442 1,112,174 1,368,130
Water 22,913 20,869 100,427 87,139
Products and Services 62,236 52,368 281,573 224,985
------------- ------------- ------------- -------------
1,067,549 891,575 3,320,550 3,045,009
------------- ------------- ------------- -------------
Cost of Sales:
Gas costs 518,905 379,590 1,326,773 1,010,021
Fuel for electric generation 57,499 58,298 248,365 253,353
Power purchased 8,234 22,050 57,929 344,063
Products and Services 34,803 25,589 151,898 110,047
------------- ------------- ------------- -------------
619,441 485,527 1,784,965 1,717,484
------------- ------------- ------------- -------------
Operating Margin 448,108 406,048 1,535,585 1,327,525
------------- ------------- ------------- -------------
Operating Expenses and Taxes (except income):
Operation 134,051 127,023 541,836 430,446
Maintenance 22,443 22,309 82,342 77,992
Depreciation and amortization 84,479 72,855 323,028 266,055
Taxes (except income) 28,227 28,009 103,787 92,788
------------- ------------- ------------- -------------
269,200 250,196 1,050,993 867,281
------------- ------------- ------------- -------------
Operating Income 178,908 155,852 484,592 460,244
------------- ------------- ------------- -------------
Other Income (Deductions):
Interest expense, net (47,610) (36,688) (177,539) (135,162)
Minority interests (5,041) (2,708) (20,026) (3,981)
Dividend requirements on preferred stock
of subsidiaries (2,034) (2,116) (8,252) (8,487)
Other, net 3,277 7,141 (21,894) 10,550
------------- ------------- ------------- -------------
(51,408) (34,371) (227,711) (137,080)
------------- ------------- ------------- -------------
Income before income taxes 127,500 121,481 256,881 323,164
------------- ------------- ------------- -------------
Income Taxes 47,884 44,922 93,410 113,441
------------- ------------- ------------- -------------
Net Income $ 79,616 $ 76,559 $ 163,471 $ 209,723
============= ============= ============= =============
Average common shares outstanding - basic 124,304,233 122,646,186 124,750,826 120,475,670
Basic earnings per average common share $ 0.64 $ 0.62 $ 1.31 $ 1.74
============= ============= ============= =============
Diluted earnings per average common share $ 0.62 $ 0.62 $ 1.29 $ 1.72
============= ============= ============= =============
Dividends declared per common share $ 0.270 $ 0.255 $ 1.050 $ 0.990
============= ============= ============= =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
4
<PAGE> 6
NISOURCE INC.
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
(Dollars in thousands) Additional Other
Common Treasury Paid-in Retained Comprehensive Comprehensive
Three Months Ended Shares Shares Capital Earnings Other Income Total Income
------------------ ------ ------ ------- -------- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $ 870,930 $ (559,027) $ 94,181 $ 744,309 $ (1,815) $ 1,130 $1,149,708
Comprehensive Income:
Net income 76,559 76,559 $ 76,559
Other comprehensive income,
net of tax:
Gain/loss on available for
sale securities:
Unrealized (net of income
tax of $133) 217 217 217
Realized (net of income tax
of $78) 127 127 127
Gain/loss on foreign currency
translation:
Unrealized (70) (70) (70)
Realized 186 186 186
----------
Total Comprehensive Income $ 77,019
==========
Dividends:
Common shares (32,107) (32,107)
Treasury shares acquired (107,658) (107,658)
Issued:
Employee stock purchase plan 115 326 441
Long-term incentive plan 1,106 121 (382) 845
Bay State Gas Acquisition 205,896 109,787 315,683
Amortization of
unearned compensation 723 723
Equity contract costs (32,829) (32,829)
Other (210) (210)
Balance, March 31, 1999 $ 870,930 $ (459,568) $ 171,586 $ 788,551 $ (1,474) $ 1,590 $1,371,615
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, January 1, 2000 $ 870,930 $ (472,553) $ 174,405 $ 774,425 $ 1,111 $ 5,186 $1,353,504
Comprehensive Income:
Net income 79,616 79,616 $ 79,616
Other comprehensive income,
net of tax:
Gain/loss on available for
sale securities:
Unrealized (net of income
tax of $568) (264) (264) (264)
Realized (net of income tax
of $ -- ) -- -- --
Gain/loss on foreign currency
translation:
Unrealized 382 382 382
Realized -- --
----------
Total Comprehensive Income $ 79,734
==========
Dividends:
Common shares (33,305) (33,305)
Treasury shares acquired (34,442) (34,442)
Issued:
Employee stock purchase plan 173 217 390
Long-term incentive plan 15,536 (14,061) 1,475
Amortization of
unearned compensation 1,325 1,325
Equity contract costs (1,080) (1,080)
Other 807 (1,147) 340
Balance, March 31, 2000 $ 870,930 $ (491,286) $ 174,349 $ 819,589 $ (11,625) $ 5,304 $1,387,261
---------- ---------- ---------- ---------- ---------- ---------- ----------
SHARES
Common Treasury
THREE MONTHS ENDED Shares Shares
------------------ ------ ------
Balance January 1, 1999 147,784 (30,254)
Tresury shares acquired (3,847)
Issued:
Empolyee stock purchase plan 15
Long-term incentive plan 59
Bay State Gas acquiation 11,042
---------- ----------
Balance March 31, 1999 147,784 (22,985)
========== ==========
Balance January 1, 2000 147,784 (23,645)
Tresury shares acquired (2,125)
Issued:
Employee stock purchase plan 22
Long-term incentive plan 770
---------- ----------
Balance March 31, 2000 147,784 (24,978)
========== ==========
</TABLE>
5
<PAGE> 7
NISOURCE INC.
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
(Dollars in thousands) Additional Other
Common Treasury Paid-in Retained Comprehensive Comprehensive
Three Months Ended Shares Shares Capital Earnings Other Income Total Income
------------------ ------ ------ ------- -------- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1998 $ 870,930 $ (384,009) $ 89,878 $ 697,928 $ (2,159) $ 3,962 $1,276,530
Comprehensive Income:
Net income 209,723 209,723 $ 209,723
Other comprehensive income,
net of tax:
Gain/loss on available for
sale securities:
Unrealized (net of income
tax of $322) 527 527 527
Realized (net of income tax
of $1,282) (2,068) (2,068) (2,068)
Gain/loss on foreign currency
translation:
Unrealized (1,017) (1,017) (1,017)
Realized 186 186 186
----------
Total Comprehensive Income $ 207,351
==========
Dividends:
Common shares (118,774) (118,774)
Treasury shares acquired (288,336) (288,338)
Issued:
Employee stock purchase plan 399 1,095 1,494
Long-term incentive plan 6,482 708 (1,432) 5,758
Bay State Gas Acquisition 205,896 109,787 315,683
Amortization of
unearned compensation 2,117 2,117
Equity contract costs (32,829) (32,829)
Other 2,947 (328) 2,621
Balance, March 31, 1999 $ 870,930 $ (459,568) $ 171,586 $ 788,551 $ (1,474) $ 1,590 $1,371,615
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, April 1, 1999 $ 870,930 $ (472,553) $ 174,586 $ 788,551 $ (1,474) $ 1,590 $1,371,615
Comprehensive Income:
Net income 163,471 163,471 $ 163,471
Other comprehensive income,
net of tax:
Gain/loss on available for
sale securities:
Unrealized (net of income
tax of $363) 1,280 1,280 1,280
Realized (net of income tax
of $367) 601 601 601
Gain/loss on foreign currency
translation:
Unrealized 911 911 911
Realized 942 942 942
----------
Total Comprehensive Income $ 167,185
==========
Dividends:
Common shares (130,342) (130,342)
Treasury shares acquired (53,239) (53,239)
Issued:
Employee stock purchase plan 631 975 1,508
Long-term incentive plan 18,283 67 (14,250) 4,100
Bay state Gas Acquiation (15) (34) (49)
Other Acquisitions 2,722 939 3,681
Amortization of
unearned compensation 4,099 4,099
Equity contract costs (2,252) (2,252)
Other 3,068 (2,091) 977
Balance, March 31, 2000 $ 870,930 $ (491,286) $ 174,349 $ 819,589 $ (11,625) $ 5,304 $1,387,261
---------- ---------- ---------- ---------- ---------- ---------- ----------
SHARES
Common Treasury
THREE MONTHS ENDED Shares Shares
------------------ ------ ------
Balance April 1, 1998 147,784 (24,178)
Tresury shares acquired (10,246)
Issued:
Empolyee stock purchase plan 50
Long-term incentive plan 347
Bay State Gas acquiation 11,042
---------- ----------
Balance March 31, 1999 147,784 (22,985)
========== ==========
Balance April 1, 1999 147,784 (22,985)
Tresury shares acquired (3,099)
Issued:
Employee stock purchase plan 57
Long-term incentive plan 905
Other Acquisitions 134
---------- ----------
Balance March 31, 2000 147,784 (24,978)
========== ==========
</TABLE>
6
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
---------------------------------------------------
(Dollars in thousands) 2000 1999 2000 1999
------------ --------- --------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 79,616 $ 76,559 $ 163,471 $ 209,723
Adjustments to reconcile net income
to net cash:
Depreciation and amortization 84,479 72,909 322,974 266,109
Deferred federal and state
income taxes, net (23,384) (26,928) (4,347) (18,829)
Deferred investment tax credits, net (1,909) (1,887) (7,713) (7,427)
Other, net 3,192 (6,437) 34,001 (4,130)
Change in certain assets and liabilities -*
Accounts receivable, net (70,088) (18,978) 1,398 (33,224)
Other receivables 3,647 (4,307) 16,524 91,734
Natural gas in storage 20,044 51,558 15,391 2,941
Accounts payable (1,703) (55,918) (59,319) (22,663)
Taxes accrued 90,655 94,139 (7,198) 3,993
Gas cost adjustment clause 49,187 74,347 (45,820) 66,581
Accrued employment costs (6,311) (20,628) 14,569 (11,010)
Other accruals (3,859) 31,450 1,231 26,548
Other, net 11,873 21,340 (43,912) 440
----------- --------- --------- ---------
Net cash provided by operating activities 235,439 287,219 401,250 570,786
----------- --------- --------- ---------
Cash flows provided by (used in) investing activities:
Utility construction expenditures (51,480) (58,115) (334,628) (250,237)
Acquisition of businesses,
net of cash acquired -- (562,266) (175,603) (562,266)
Acquisition of minority interest -- -- -- --
Proceeds from disposition of assets 15,590 25,416 19,949 28,299
Proceeds from settlement of litigation -- -- -- --
Other, net (7,673) (16,263) (52,490) (42,485)
----------- --------- --------- ---------
Net cash used in investing activities (43,563) (611,228) (542,772) (826,689)
----------- --------- --------- ---------
Cash flows provided by (used in) financing activities:
Issuance of long-term debt -- 78,255 191,281 119,264
Retirement of long-term debt (9,644) (4,718) (208,883) (97,802)
Change in short-term debt (78,226) (260,370) 351,122 6,400
Retirement of preferred shares (3,230) -- (5,637) (2,412)
Proceeds from Corporate Premium
Income Equity Securities, net -- 334,650 -- 334,650
Issuance of common shares 1,475 317,351 9,017 324,367
Acquisition of treasury shares (34,442) (107,658) (53,239) (288,336)
Cash dividends paid on common shares (33,305) (29,980) (128,924) (116,577)
Other, net 114 113 454 455
----------- --------- --------- ---------
Net cash provided by (used in)
financing activities (157,258) 327,643 155,191 280,009
----------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 34,618 3,634 13,669 24,106
Cash and cash equivalents at
beginning of the period 43,533 60,848 64,482 40,376
----------- --------- --------- ---------
Cash and cash equivalents at
end of the period $ 78,151 $ 64,482 $ 78,151 $ 64,482
=========== ========= ========= =========
</TABLE>
*Net of effect from acquisitions of businesses
The accompanying notes to consolidated financial statements are
an integral part of these statements.
7
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) 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, water and
related services to the public for residential, commercial and industrial uses
through a number of regulated and non-regulated subsidiaries. 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 and gas transmission companies that operate throughout northern
Indiana and New England. In addition, NiSource expanded its gas marketing,
trading and storage operations with the 1999 acquisition of TPC Corporation, now
renamed EnergyUSA-TPC Corp. (TPC) and Market Hub Partners, L.P. (MHP).
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 and
development and operation of "inside the fence" cogeneration plants.
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).
In June 1999, NiSource commenced a tender offer to acquire Columbia
Energy Group (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 entered into a merger agreement pursuant to which
NiSource agreed to acquire CEG for approximately $6 billion, plus the assumption
of approximately $2.5 billion of CEG debt. If the shareholders of NiSource
approve the merger agreement, the acquisition will be effected using a new
holding company. Each NiSource common share will be exchanged for one common
share of the new holding company. Each CEG share will be exchanged for $70.00 in
cash plus $2.60 principal amount of a unit issued by the holding company
(consisting of a zero coupon debt security coupled with a forward equity
contract) or, at the election of the CEG shareholder, $74.00 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. Stock elections will be subject to proration if they are made with
respect to more than 30% of CEG's outstanding shares. If NiSource shareholder
approval is not obtained, the transaction will automatically be restructured to
eliminate the new holding company, and each CEG share will be exchanged for
$74.00 in cash and $3.02 principal amount of a unit issued by NiSource. NiSource
has accepted a commitment letter under which certain financial institutions
agreed, under specified conditions, to provide up to $6.0
8
<PAGE> 10
billion to finance the acquisition of CEG. The merger is conditioned upon, among
other things, the approvals of the CEG shareholders and various regulatory
commissions.
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.
(2) 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.
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 MHP,
which is a leading developer, owner and operator of high deliverability salt
cavern natural gas storage capacity. 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 April 1, 1999 and the
consolidated results of MHP from December 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.
9
<PAGE> 11
The approximate weighted average remaining lives for major components of
electric, gas, and water utility 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
The depreciation provisions for utility plant, as a percentage of the original
cost, for the three-month and twelve-month periods ended March 31, 2000 and 1999
were as follows:
Three Months Twelve Months
Ended March 31, Ended March 31,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------ -------
Electric 3.6% 3.7% 3.7% 3.7%
Gas 4.6% 4.6% 4.6% 4.6%
Water 2.3% 2.0% 2.3% 2.0%
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.
10
<PAGE> 12
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 $718.0 million
and $722.8 million at March 31, 2000 and December 31, 1999, 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 $138.9
million and $125.7 million at March 31, 2000 and December 31, 1999,
respectively, is being amortized over a weighted average period of 27 years.
Other intangible assets, approximating $12.1 million and $12.8 million at March
31, 2000 and December 31, 1999, 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 March 31, 2000 and December 31, 1999, was approximately $14.2 million
and $9.9 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 September 30, 1999, $100 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 the Water Utilities 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:
(Dollars In millions)
April 1, January 1, March 31, January 1, March 31,
1998 1999 1999 2000 2000
--------- ---------- ----------- ---------- ---------
Securities $ 5.6 $ 3.6 $ 4.0 $ 6.1 $ 5.9
Foreign currency $ (1.6) $ (2.5) $ (2.4) $ (0.9) $ (0.6)
STATEMENTS 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:
Three Months Twelve Months
Ended March 31, Ended March 31,
-------------------- -------------------
(Dollars in thousands) 2000 1999 2000 1999
--------- -------- -------- --------
Income taxes $ 1,371 $ 1,465 $115,898 $129,178
Interest, net of amounts capitalized $ 47,544 $ 31,351 $176,239 $125,881
11
<PAGE> 13
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 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, 1999 order to
the Indiana Court of Appeals. All briefs have been filed and the case is pending
Court decision.
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 March 2000
and December 1999, the estimated replacement cost of gas in storage (current and
non-current) at March 31, 2000 and December 31, 1999 exceeded the stated LIFO
cost by $42.9 million and $48.9 million, respectively. Inventory valued using
LIFO was $21.0 million and $23.0 million at March 31, 2000 and December 31,
1999, respectively. Inventory valued using the weighted average methodology was
$22.7 million and $40.8 million at March 31, 2000 and December 31, 1999,
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
12
<PAGE> 14
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.
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 March 31,
2000, and December 31, 1999, 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
13
<PAGE> 15
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:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 2000 1999
-------- ------------
<S> <C> <C>
Unamortized reacquisition premium on debt (see Note 16) $ 38,841 $ 39,719
Unamortized R. M. Schahfer Unit 17 and Unit 18 carrying
charges and deferred depreciation (see below) 57,057 58,111
Bailly scrubber carrying charges and deferred depreciation
(see below) 7,776 8,010
Deferral of SFAS No. 106 expense not recovered (see Note 8) 74,074 75,527
FERC Order No. 636 transition costs 11,150 13,728
Regulatory income tax asset, net 26,392 24,941
Other 12,735 12,843
-------- --------
228,025 232,879
-------- --------
Less: Current portion of regulatory assets 21,667 24,245
-------- --------
$206,358 $208,634
======== ========
</TABLE>
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.
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 Statements 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 $32.2 million and $33.3 million relating to affordable housing projects
at March 31, 2000 and December 31, 1999, 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.
(3) 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
14
<PAGE> 16
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.
On a pro forma basis, NiSource's consolidated results of operations for the
three months and twelve months ended March 31, 1999, including BSG, would have
been:
UNAUDITED
(Dollars in thousands) Three Months Twelve Months
------------ -------------
Operating revenue $ 966,113 $ 3,382,538
Operating income $ 164,382 $ 443,153
Net income $ 79,746 $ 182,342
Pro forma adjustments primarily reflect adjustments for the addition of
the plant acquisition adjustment and intangible assets, the issuance of the
applicable Corporate Premium Income Equity Securities and additional income
taxes, as if the acquisition had occurred on January 1, 1999 for the three month
results and on April 1, 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, including estimates with respect to the tax bases of certain assets
acquired. 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, the leading developer, owner and operator of high deliverability salt
cavern natural gas storage capacity. During the fourth quarter of 1999, NiSource
purchased the remaining interests in MHP. On a pro forma basis the impact to
operating income and net income to the three-month and twelve-month periods
ended March 31, 2000 was not significant.
(4) 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.
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<PAGE> 17
(5) ENVIRONMENTAL MATTERS:
GENERAL. 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 operations as they relate to impacts on air, water and land.
SUPERFUND. Because several NiSource subsidiaries are "potentially responsible
parties" (PRPs) 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 costs 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 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 March 31, 2000, a reserve of approximately $23.7 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 the 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) impose 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 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
16
<PAGE> 18
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 United States Court of Appeals for the D.C.
Circuit issued an order staying the NOx SIP call rule's September 30, 1999
deadline for the state submittals until further order of the court. In a March
3, 2000 decision, the United States Court of Appeals for the D.C. Circuit ruled
largely in favor of EPA's regional NOx plan. An appeal of this decision is
expected. The State of Indiana in February 2000 proposed a moderate NOx control
plan designed to address Indiana's ozone nonattainment areas and regional ozone
transport. Any NOx emission limitations resulting from these actions 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 court
decision and any potential requirements that could result from the rules 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 are
dependent 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 standards 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
17
<PAGE> 19
nationally-applicable maximum contaminant levels (MCLs) for contaminants found
in drinking water. Management believes 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 to the Water Utilities' operations to comply with these rules; however,
some 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 standards could be costly and 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, Indianapolis Water Company (IWC), has agreed to a moratorium on water
rate increases until 2002. Therefore, recovery of any increased costs discussed
above may not be timely.
(6) 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.
18
<PAGE> 20
The components of the net deferred income tax liability at March 31, 2000 and
December 31, 1999, were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 2000 1999
----------- -----------
<S> <C> <C>
Deferred tax liabilities--
Accelerated depreciation and other
property differences $ 1,124,265 $ 1,129,011
AFUDC-equity 29,563 31,274
Adjustment clauses 1,898 16,730
Other regulatory assets 27,085 27,616
Prepaid pension and other benefits 64,829 64,853
Reacquisition premium on debt 15,573 15,919
Deferred tax assets--
Deferred investment tax credits (36,351) (36,650)
Removal costs (174,803) (171,645)
Other postretirement/postemployment benefits (59,178) (58,645)
Other, net (25,260) (27,300)
----------- -----------
967,621 991,163
Less: Deferred income taxes related to current
assets and liabilities (22,457) (7,519)
----------- -----------
Deferred income taxes--noncurrent $ 990,078 $ 998,682
=========== ===========
</TABLE>
Federal and state income taxes as set forth in the Consolidated Statements of
Income were comprised of the following:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
---------------------- ----------------------
(Dollars in thousands) 2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Current income taxes -
Federal $ 63,462 $ 63,513 $ 91,848 $ 121,276
State 9,717 10,224 13,624 18,421
--------- --------- --------- ---------
73,179 73,737 105,472 139,697
--------- --------- --------- ---------
Deferred income taxes, net -
Federal (21,557) (24,789) (4,645) (17,409)
State (1,828) (2,139) 297 (1,420)
--------- --------- --------- ---------
(23,385) (26,928) (4,348) (18,829)
--------- --------- --------- ---------
Deferred investment tax
credits, net (1,910) (1,887) (7,714) (7,427)
--------- --------- --------- ---------
Total income taxes $ 47,884 $ 44,922 $ 93,410 $ 113,441
========= ========= ========= =========
</TABLE>
19
<PAGE> 21
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>
Three Months Twelve Months
Ended March 31, Ended March 31,
---------------------- ----------------------
(Dollars in thousands) 2000 1999 2000 1999
========= ========= ========= =========
<S> <C> <C> <C> <C>
Net income $ 79,616 $ 76,559 $ 163,471 $ 209,723
Add - Income taxes 47,884 44,922 93,410 113,441
Dividend requirements on preferred stocks
of subsidiaries 2,034 2,116 8,252 8,487
--------- --------- --------- ---------
Income before preferred dividend requirements of
subsidiaries and income taxes $ 129,534 $ 123,597 $ 265,133 $ 331,651
========= ========= ========= =========
Amount derived by multiplying pre-tax
income by the statutory rate $ 45,337 $ 43,259 $ 92,797 $ 116,078
Reconciling items multiplied by the statutory rate:
Book depreciation over related tax depreciation 918 969 3,883 3,963
Amortization of deferred investment tax credits (1,910) (1,887) (7,714) (7,427)
State income taxes, net of federal income tax benefit 4,488 4,507 9,153 10,554
Reversal of deferred taxes provided at rates in excess
of the current federal income tax rate (919) (721) (5,655) (5,922)
Low-income housing credits (1,267) (1,128) (4,651) (4,008)
Nondeductible amounts related to amortization of
intangible assets and plant acquisition adjustments 619 619 2,476 2,506
Other, net 618 (696) 3,121 (2,303)
--------- --------- --------- ---------
Total income taxes $ 47,884 $ 44,922 $ 93,410 $ 113,441
========= ========= ========= =========
</TABLE>
(7) 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 at retirement.
The change in the benefit obligation for 1999 and 1998 was as follows:
(Dollars in thousands) 1999 1998
--------- ---------
Benefit obligation at beginning of year (January 1,) $ 949,039 $ 875,756
Service cost 19,811 17,093
Interest cost 69,610 60,686
Plan amendments -- 14,655
Actuarial (gain) loss (60,108) 38,773
Acquisition of Bay State 78,684 --
Benefits paid (66,687) (57,924)
--------- ---------
Benefit obligation at end of the year (December 31,) $ 990,349 $ 949,039
========= =========
20
<PAGE> 22
The change in the fair value of the plans' assets for the years 1999 and 1998
was as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
----------- -----------
<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 Bay State 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 1998 is as follows:
(Dollars in thousands) 1999 1998
--------- ---------
Plan assets in excess of benefit obligation $ 235,519 $ 37,991
Unrecognized net actuarial loss (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
========= =========
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.
Prepaid pension costs were $176.0 million at March 30, 2000 and are
reported under the captions "Prepayments and Other" in the Consolidated Balance
Sheets.
21
<PAGE> 23
The following items are the components of provisions for pensions for the
three-month and twelve-month periods ended March 31, 2000 and March 31, 1999:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
-------------------- --------------------
(Dollars in thousands) 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Service costs $ 5,228 $ 5,419 $ 19,620 $ 15,993
Interest costs 18,876 17,214 71,272 56,116
Expected return on plan assets (25,966) (22,995) (98,199) (76,413)
Amortization of transition obligation 1,472 1,479 6,162 4,940
Amortization of prior service costs 1,580 1,587 6,503 4,242
Amortization of gain/loss (720) -- (720) --
-------- -------- -------- --------
$ 470 $ 2,704 $ 4,638 $ 4,878
======== ======== ======== ========
</TABLE>
Assumptions used in the valuation and determination of 2000 and 1999 pension
expense were as follows:
2000 1999
------ -----
Discount rate 7.75% 7.00%
Rate of increase in compensation levels 4.50% 4.50%
Expected long-term rate of return on assets 9.00% 9.00%
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 $0.4 million and $2.5 million were
made to these plans for the three-month and twelve-month periods ended March 31,
2000, 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.
(8) 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.
22
<PAGE> 24
The following table sets forth the change in the plans' accumulated
postretirement benefit obligation (APBO) as of December 31, 1999 and 1998:
(Dollars in thousands) 1999 1998
--------- ---------
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 postretirement 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:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
Following is the funded status for postretirement benefits as of December 31,
1999 and 1998:
(Dollars in thousands) 1999 1998
--------- ---------
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)
========= =========
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
23
<PAGE> 25
pre-Medicare medical trend rate of 7% declining to a long-term rate of 5% was
used. The accrued liability for postretirement benefits was $166.8 million at
March 31, 2000.
Net periodic postretirement benefit costs, before consideration of the
rate-making discussed previously, for the three-month and twelve-month periods
ended March 31, 2000 and March 31, 1999, include the following components:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
-------------------- ---------------------
(Dollars in thousands) 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Service costs $ 1,521 $ 996 $ 4,716 $ 5,058
Interest costs 4,980 4,510 14,687 16,230
Expected return on plan assets (580) (379) (462) (545)
Amortization of transition obligation 3,215 3,041 10,922 11,857
Amortization of prior service costs 86 86 279 333
Amortization of (gain) loss (1,412) (1,176) (5,792) (5,530)
-------- -------- -------- --------
$ 7,810 $ 7,078 $ 24,350 $ 27,403
======== ======== ======== ========
</TABLE>
Assumptions used in the determination of 2000 and 1999 net periodic
postretirement benefit costs were as follows:
2000 1999
------- --------
Discount rate 7.75% 7.00%
Rate of increase in compensation levels 4.50% 4.50%
Assumed annual rate of increase in health care benefits 7.00% 7.00%
Assumed ultimate trend rate 5.00% 5.00%
The effect of a 1% increase in the assumed health care cost trend
rates for each future year would increase the APBO at January 1, 2000 by
approximately $6.4 million, and increase the aggregate of the service and
interest cost components of plan costs by approximately $1.3 million for the
three-month period ended March 31, 2000. The effect of a 1% decrease in the
assumed health care cost trend rates for each future year would decrease the
APBO at January 1, 2000 by approximately $5.3 million, and decrease the
aggregate of the service and interest cost components of plan costs by
approximately $1.0 million for the three-month period ended March 31, 2000.
Amounts disclosed above could be changed significantly in the future by changes
in health care costs, work force demographics, interest rates, or plan changes.
24
<PAGE> 26
(9) AUTHORIZED CLASSES OF CUMULATIVE PREFERRED AND PREFERENCE STOCKS:
NISOURCE -
20,000,000 shares-Preferred-without par value
4,000,000 of NiSource's Series A Junior Participating Preferred Shares
are reserved for issuance pursuant to the Share Purchase Rights Plan described
in Note 14, Common Shares.
NORTHERN INDIANA -
2,400,000 shares - Cumulative Preferred - $100 par value
3,000,000 shares - Cumulative Preferred - no par value
2,000,000 shares - Cumulative Preference - $50 par value (none
outstanding) 3,000,000 shares - Cumulative Preference - no par value
(none issued)
INDIANAPOLIS WATER COMPANY (IWC)-
300,000 shares - Cumulative Preferred - $100 par value
Note 10 sets forth the preferred stocks which are redeemable solely at the
option of the issuer, and Note 11 sets forth the preferred stocks which are
subject to mandatory redemption requirements or whose redemption is outside the
control of the issuer.
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.
(10) PREFERRED STOCKS, REDEEMABLE SOLELY AT THE OPTION OF THE ISSUER:
<TABLE>
<CAPTION>
Redemption
Price at
March 31, December 31, March 31,
(Dollars in thousands) 2000 1999 2000
-------- ----------- ----------
<S> <C> <C> <C>
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
CUMULATIVE PREFERRED STOCK - $100 PAR VALUE -
4-1/4% series - 209,035 shares outstanding $ 20,903 $ 20,903 $101.20
4-1/2% series - 8,000 shares outstanding 8,000 8,000 $100.00
4.22% series - 106,198 shares outstanding 10,620 10,620 $101.60
4.88% series - 100,000 shares outstanding 10,000 10,000 $102.00
7.44% series - 41,890 shares outstanding 4,189 4,189 $101.00
7.50% series - 34,842 shares outstanding 3,484 3,484 $101.00
Premium on preferred stock 254 254 N/A
CUMULATIVE PREFERRED STOCK - NO PAR VALUE -
Adjustable rate (6.00% at March 31, 2000),
Series A (stated value $50 per share) 473,285
shares outstanding 23,664 23,664 $ 50.00
INDIANAPOLIS WATER COMPANY:
CUMULATIVE PREFERRED STOCK- $100 PAR VALUE
4% to 5%, 25,166 shares outstanding 2,517 4,497 $100.00-$105.00
--------- ---------
$ 83,631 $ 85,611
========= =========
</TABLE>
During the period April 1, 1999 to March 31, 2000, there were no
additional issuances of the above preferred stocks. The foregoing preferred
stocks are redeemable in whole or in part at any time upon thirty days' notice
at the option of the issuer at the redemption prices shown.
25
<PAGE> 27
(11) PREFERRED STOCKS, REDEMPTION OUTSIDE CONTROL OF ISSUER:
Preferred stocks subject to mandatory redemption requirements or whose
redemption is outside the control of issuer, excluding sinking fund payments due
within one year were as follows:
March 31, December 31,
(Dollars in thousands) 2000 1999
---------- ------------
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
CUMULATIVE PREFERRED STOCK -$100 PAR VALUE -
8.85% series - 25,000 shares outstanding $ 2,500 $ 3,750
7-3/4% series - 27,798 shares outstanding 2,780 2,780
8.35% series - 45,000 shares outstanding 4,500 4,500
CUMULATIVE PREFERRED STOCK -NO PAR VALUE -
6.50% series - 430,000 shares outstanding 43,000 43,000
---------- -------
$ 52,780 $54,030
========== =======
The redemption prices at March 31, 2000, as well as sinking fund provisions, for
the cumulative preferred stocks subject to mandatory redemption requirements, or
whose redemption is outside the control of Northern Indiana, were as follows:
<TABLE>
<CAPTION>
Sinking Fund or
Series Redemption Price Per Share Mandatory Redemption Provisions
------ -------------------------- -------------------------------
<S> <C> <C>
Cumulative preferred stock -$100 par value -
8.85% $100.37, reduced periodically 12,500 shares on or before April 1.
7-3/4% $103.88, reduced periodically 2,777 shares on or before December 1;
noncumulative option to double amount each year.
8.35% $103.20, reduced periodically 3,000 shares on or before July 1; increasing to 6,000
shares beginning in 2004; 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 March 31, 2000 for each of the twelve-month periods subsequent to
March 31, 2001, were as follows:
Twelve Months Ended March 31, (Dollars in thousands)
----------------------------- ----------------------
2002 $ 1,828
2003 $ 44,828
2004 $ 578
2005 $ 878
Sinking fund payments due within one year are reported under the
caption "Other accruals" in the Consolidated Balance Sheets.
26
<PAGE> 28
(12) COMMON DIVIDEND: NiSource's ability to pay dividends depends 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 earned surplus or net profits of Northern
Indiana. At March 31, 2000, Northern Indiana had approximately $149.0 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.
(13) EARNINGS PER SHARE: Basic earnings per share were computed by dividing net
income by the average number of common shares outstanding during the period. The
diluted earnings per share calculation include the dilutive effects of the
various long-term incentive compensation plans, 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>
Three Months Twelve Months
Ended March 31, Ended March 31,
--------------------------- ---------------------------
(Dollars in thousands, except per share amounts) 2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BASIC
Weighted Average Number of Common Shares Outstanding 124,304,233 122,646,186 124,750,826 120,475,670
============ ============ ============ ============
Net Income to be Used to Compute Basic Earnings per Share:
Net Income $ 79,616 $ 76,559 $ 163,471 $ 209,723
============ ============ ============ ============
Basic Earnings per Average Common Share $ 0.64 $ 0.62 $ 1.31 $ 1.74
============ ============ ============ ============
DILUTED
Weighted Average Number of Common Shares Outstanding 124,304,233 122,646,186 124,750,826 120,475,670
Dilutive Shares 3,846,131 699,796 1,710,501 770,512
------------ ------------ ------------ ------------
------------ ------------
Weighted Average Shares 128,150,364 123,345,982 126,461,327 121,246,182
============ ============ ============ ============
Net Income to be Used to Compute Diluted Earnings per Share:
Net Income $ 79,616 $ 76,559 $ 163,471 $ 209,723
============ ============ ============ ============
Diluted Earnings per Average Common Share $ 0.62 $ 0.62 $ 1.29 $ 1.72
============ ============ ============ ============
</TABLE>
(14) COMMON SHARES: As of March 31, 2000 the Company has 400,000,000 of
authorized common shares without par value. 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. On February 17, 2000, the Board of Directors of
NiSource adopted a new Share Purchase Rights Plan which has substantially the
same terms as an existing Share Purchase Rights Plan. Each Right, when
exercisable, would initially entitle the holder to purchase from NiSource one
one-hundredth of a share of Series A Junior Participating Preferred Share,
without par value, at a price of $60 per one one-hundredth of a share. In
certain circumstances, if an acquirer obtained 25% of NiSource's outstanding
shares, or merged into NiSource or
27
<PAGE> 29
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.
COMMON SHARE REPURCHASES. The Board has authorized the repurchase of 62.1
million common shares, subject to certain limits. At March 31, 2000,
approximately 58.3 million shares had been repurchased at an average price of
$16.95 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 $0.7 million and
$1.0 million for the three-month and twelve month periods ended March 31, 2000.
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 March 31, 2000, the nominal amount and fair value of the equity
forward purchase contract was approximately $150 million and $94 million,
respectively.
(15) 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 March 31, 2000, there were 805,836 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 March 31, 2000.
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 (see Note 3), 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, common shares, or a
combination thereof. There were no SARs outstanding at March 31, 2000.
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 lapsed on January 27, 2000 and vested at 116% of the number
awarded, due to attaining specific earnings per share and stock appreciation
goals. Restrictions on shares awarded in 1998 lapsed two years from date of
grant and vested at 100% of the number awarded. Restrictions on shares awarded
in 2000 lapse three years from date of grant and vesting may vary from 0% to
200% of the number awarded, subject to specific performance goals. If a
participant's employment is terminated
28
<PAGE> 30
prior to vesting other than by reason of death, disability or retirement,
restricted shares are forfeited. There were 683,500 and 513,500 restricted
shares outstanding at March 31, 2000 and December 31, 1999, respectively.
On January 29, 2000, the Board of Directors of NiSource approved
certain additional amendments to the 1994 Plan. The amended and restated 1994
Plan would provide for the number of common shares subject to the plan to
increase from 5.0 million to 11.0 million, and would permit contingent stock
awards and dividend equivalents payable on grants of options, SARs, performance
units and contingent stock awards. The amended and restated 1994 Plan is subject
to shareholder approval at the 2000 Annual Meeting of Shareholders of NiSource.
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 March 31,
2000, 75,000 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 $1.3 million and $0.7 million for the three-month
and $4.1 million and $2.1 million for the twelve-month periods ended March 31,
2000 and 1999, 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:
(Dollars in thousands, except per share data)
Three Months Twelve Months
Ended March 31, Ended March 31,
------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- -----------
NET INCOME:
As reported $ 79,616 $ 76,559 $163,471 $ 209,723
Pro forma $ 79,079 $ 76,152 $161,688 $ 208,408
EARNINGS PER AVERAGE COMMON SHARE:
Basic:
--------
As reported $ 0.64 $ 0.62 $ 1.31 $ 1.74
Pro forma $ 0.63 $ 0.62 $ 1.29 $ 1.72
Diluted:
----------
As reported $ 0.62 $ 0.62 $ 1.29 $ 1.72
Pro forma $ 0.61 $ 0.61 $ 1.27 $ 1.71
29
<PAGE> 31
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 2000, 1999 and 1998:
2000 1999 1998
------ ------ ------
Interest Rate 6.60% 5.87% 5.29%
Expected Dividend Yield $1.08 $1.02 $0.96
Expected Life (in years) 5.4 5.25 5.4
Volatility 28.98% 15.72% 13.09%
Changes in outstanding shares under option and SARs for the three-month and
twelve-month periods ended March 31, 2000 and March 31, 1999 were as follows:
<TABLE>
<CAPTION>
NONQUALIFIED STOCK OPTIONS
-----------------------------------
Weighted Weighted
Average Average
Option Option
Three Months Ended March 31, 2000 Price 1999 Price
- ---------------------------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Balance, beginning of period 3,950,456 $ 19.90 3,392,080 $ 19.61
Granted 283,000 18.44 -- --
Exercised (11,000) 16.22 (44,417) 16.61
Canceled (5,000) 24.60 (1,500) 29.22
---------- ----------
Balance, end of period 4,217,456 $ 19.81 3,346,163 $ 18.69
========== ==========
Shares exercisable 3,197,206 $ 18.82 2,742,663 $ 16.37
========== ==========
Weighted average fair value
of options granted $ 3.79
=========
</TABLE>
<TABLE>
<CAPTION>
NONQUALIFIED STOCK OPTIONS
---------------------------------------------------
Weighted Weighted
Average Average
Option Option
Twelve Months Ended March 31, 2000 Price 1999 Price
- ----------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, beginning of period 3,346,163 $ 18.63 3,075,380 $ 16.73
Granted 1,027,750 22.90 607,000 29.22
Exercised (137,957) 13.38 (312,517) 16.69
Canceled (18,500) 27.34 (23,700) 22.55
---------- ----------
Balance, end of period 4,217,456 $ 19.81 3,346,163 $ 18.69
========== ==========
Shares exercisable 3,197,206 $ 18.82 2,742,663 $ 16.37
========== ==========
Weighted average fair value
of options granted $ 3.69 $ 4.28
========== ==========
</TABLE>
30
<PAGE> 32
The following table summarizes information about nonqualified stock options at
March 31, 2000:
OPTIONS OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF MARCH 31, 2000
<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 March 31, 2000 Life Price March 31, 2000 Exercise Price
- ----------------- ----------------- ------------- ----------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$ 8.53-$12.76 154,500 1.0 $10.46 154,500 $10.46
$12.77-$19.15 2,185,119 4.4 $16.13 1,902,119 $15.79
$19.16-$28.74 1,285,337 8.5 $22.84 548,087 $20.48
$28.75-$29.22 592,500 8.3 $29.22 592,500 $29.22
- ----------------- --------- ------- --------- ----------------- --------
4,217,456 6.1 $19.81 3,197,206 $18.2
</TABLE>
(16) LONG-TERM DEBT:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 2000 1999
----------- ------------
<S> <C> <C>
First mortgage bonds -
Weighted average interest rate of 6.62% and various
maturities between May 1, 2001 and July 15, 2028 $ 183,100 $ 183,100
Pollution control notes and bonds-
Weighted average interest rate of 3.91 and various
maturities between October 1, 2003 and April 1, 2019 237,000 237,000
Medium-term notes -
Weighted average interest rate of 7.12% and various
maturities between August 15, 2001 and February 15, 2028 1,172,858 1,180,892
Subordinated Debentures -7-3/4%, due March 31, 2026 75,000 75,000
Senior Notes Payable - 6.78%, due December 1, 2027 75,000 75,000
Notes payable -
Weighted average interest rate of 8.58% and various
maturities between December 31, 2001 and September 1, 2031 181,848 196,704
Variable bank loans - interest rate of 7.48%, due
August 7, 2003 5,600 30,600
Unamortized premium and discount on long-term debt, net (2,998) (3,112)
----------- -----------
Total long-term debt, excluding amounts due within one year $ 1,927,408 $ 1,975,184
=========== ===========
</TABLE>
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<PAGE> 33
Sinking fund requirements and maturities of long-term debt outstanding at March
31, 2000 for the twelve-month periods subsequent to March 31, 2001, were as
follows:
(Dollars in thousands)
Twelve Months Ended March 31, (Dollars in thousands)
----------------------------------------------------------------
2002 $ 83,027
2003 $138,802
2004 $136,697
2005 $116,947
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 March 31,
2000, $139.0 million of these medium-term notes had been issued with various
interest rates and maturities.
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 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 $3.3 billion at March 31, 2000.
(17) CURRENT PORTION OF LONG-TERM DEBT:
At March 31, 2000 and December 31, 1999, the current portion of long-term debt
due within one year was as follows:
March 31, December 31,
(Dollars in thousands) 2000 1999
--------- ------------
Medium-term notes--
Weighted average interest rate of 6.74% $165,251 $166,254
Notes payable--
Weighted average interest rate of 6.13% 18,716 4,467
Sinking funds due within one year 3,000 3,000
Revolving Credit Agreement 5.75%, due March 17, 2001 25,000 --
-------- --------
Total current portion of long-term debt $211,967 $173,721
======== ========
32
<PAGE> 34
(18) 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 working capital requirements and may be used to support the issuance of
commercial paper. At March 31, 2000, 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 March 31, 2000, there were $30.6
million of borrowings outstanding under these lines of credit with a weighted
average interest rate of 5.80%. As of December 31, 1999, there were $54.1
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 March 31, 2000, there were $121.5 million
outstanding under these money market lines of credit with a weighted average
interest rate of 6.57%. At December 31, 1999, there were $156.2 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.
At March 31, 2000 and December 31, 1999, short-term borrowings were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 2000 1999
--------- ------------
<S> <C> <C>
Commercial paper--
Weighted average interest rate of 6.12% at March 31, 2000 $252,850 $299,565
Notes payable--
Weighted average interest rate of 6.25% at March 31, 2000 348,245 379,756
-------- --------
Total short-term borrowings $601,095 $679,321
======== ========
</TABLE>
(19) 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
33
<PAGE> 35
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.
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 March 31, 2000,
there were 6.9 million 5.9% Preferred Securities outstanding with Capital Trust
assets of $345 million.
(20) 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
March 31, 2000:
Twelve Months Ended March 31, (Dollars in thousands)
---------------------------- ---------------------
2001 $ 34,418
2002 $ 34,413
2003 $ 63,886
2004 $ 79,773
2005 $ 24,698
Later years $ 212,817
---------
Total minimum payments required $ 450,005
=========
The Consolidated Financial Statements include rental expense for all operating
leases as follows:
March 31, March 31,
(Dollars in thousands) 2000 1999
------- ---------
Three months ended $12,246 $ 9,307
Twelve months ended $53,216 $27,968
(21) 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 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.
34
<PAGE> 36
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 in Note 20.
Primary has advanced approximately $49.7 million and $36.6 million, at
March 31, 2000 and December 31, 1999, 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.
(22) 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 March 31, 2000, NiSource had
futures contracts representing the hedge of natural gas sales in the notional
amount of 4.4 billion cubic feet (BCF) resulting in a deferred loss of $2.5
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% 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, $1.3 and
$0.02 million and $0.4, $1.3 and $0.01 million for the three-month and
twelve-month periods ended March 31, 2000, respectively. The daily VaR for the
gas trading portfolio on an average, high and low basis was $1.2, $4.9 and $0.5
million and $1.5, $4.9 and $0.4 million for the three-month and twelve-month
periods ended March 31, 2000, respectively.
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 of $151.5 million and $90.7
million at March 31, 2000 and December 31, 1999, respectively; of which $148.3
million and $90.7 million were included in prepayments and other - current at
March 31, 2000 and December 31, 1999, respectively. At March 31, 2000, $ 7.7
million was included in prepayments and other - long term. The accompanying
financial statements also reflect price risk management liabilities (including
net option premiums) of $174.1 million and $113.0 million which were included in
other current liabilities at March 31, 2000 and December 31, 1999, respectively.
At March 31, 2000, $ 1.6 million was included in other noncurrent liabilities.
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 $2.8 million
and $13.6 million as a component of electric revenues for the three-month and
twelve-month periods ended March 31, 2000, respectively. Activities with respect
to gas trading are reflected on a gross basis with revenues and cost of
35
<PAGE> 37
goods sold consistent with the physical nature of the trades. NiSource has
recorded gas trading revenues and cost of goods sold of approximately $264
million and $258 million respectively, for the three-month period ended March
31, 2000, and $365 million and $371 million respectively, for the year ended
December 31, 1999.
(23) 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.
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>
March 31, 2000 December 31, 1999
------------------------ -----------------------
Carrying Estimated Carrying Estimated
(Dollars in thousands) Amount Fair Value Amount Fair Value
------------------------ -----------------------
<S> <C> <C> <C> <C>
Investments $ 48,586 $ 49,466 $ 49,064 $ 49,352
Long-term debt (including current portion) $2,139,375 $1,980,529 $2,148,905 $1,992,348
Preferred stock (including current portion) $ 138,238 $ 112,954 $ 141,469 $ 119,702
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely Company debentures $ 345,000 $ 251,850 $ 345,000 $ 248,831
</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.
(24) 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 natural gas is supplied in 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 portion of gas and a substantial portion of their
electric industrial deliveries are dependent upon the basic steel industry.
36
<PAGE> 38
The following table shows the basic steel industry percentage of gas revenue
(including transportation services) and electric revenue for 2000 and 1999.
Twelve Months Twelve Months
Ended March 31, Ended March 31,
Basic Steel Industry 2000 1999
-------------------- -------------- ----------------
Gas revenue percentage 2% 3%
Electric revenue percentage 19% 14%
(25) 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 Utilities, Electric,
Water and Gas Marketing and Storage. 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."
37
<PAGE> 39
<TABLE>
<CAPTION>
Gas Other
(Dollars in thousands) Gas Marketing Products Corporate &
For the three months ended March 31, 2000 Utilities Electric Water & Storage & Services Adjustments Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues $ 479,250 $ 256,384 $ 22,950 $ 309,577 $ 64,941 $ (65,553) $ 1,067,549
Other Net $ 2,004 $ (21) $ 147 $ 200 $ 2,961 $ (2,014) $ 3,277
Depreciation and Amortization $ 32,440 $ 40,117 $ 4,239 $ 3,034 $ 3,853 $ 796 $ 84,479
Income before Interest and Other
Charges and Income Taxes $ 98,892 $ 82,687 $ 3,727 $ 9,718 $ (117) $ (12,722) $ 182,185
Assets $2,507,060 $ 2,754,017 $ 690,973 $ 701,228 $ 557,249 $(254,960) $ 6,955,567
Capital Expenditures $ 21,018 $ 24,946 $ 9,368 $ 4,836 $ 5,610 $ -- $ 65,778
Investment in Equity-Method Investees $ -- $ -- $ -- $ 7,844 $ 88,128 $ -- $ 95,972
Gas Other
(Dollars in thousands) Gas Marketing Products Corporate &
For the three months ended March 31, 1999 Utilities Electric Water & Storage & Services Adjustments Total
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 393,258 $ 265,300 $ 20,898 $ 215,360 $ 55,765 $ (59,006) $ 891,575
Other Net $ 1,746 $ 128 $ 196 $ 402 $ 6,443 $ (1,774) $ 7,141
Depreciation and Amortization $ 26,378 $ 39,655 $ 3,479 $ 84 $ 2,646 $ 613 $ 72,855
Income before Interest and Other
Charges and Income Taxes $ 88,464 $ 73,607 $ 2,357 $ 892 $ 5,260 $ (7,587) $ 162,993
Assets $2,399,686 $ 2,700,678 $ 632,832 $ 107,420 $ 509,971 $(124,183) $ 6,226,404
Capital Expenditures $ 26,844 $ 26,638 $ 27,788 $ 29 $ 5,140 $ -- $ 86,439
Investment in Equity-Method Investees $ -- $ -- $ 4,476 $ 7,365 $ 118,032 $ -- $ 129,873
Gas Other
(Dollars in thousands) Gas Marketing Products Corporate &
For the three months ended March 31, 1999 Utilities Electric Water & Storage & Services Adjustments Total
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Revenues $1,158,765 $ 1,115,248 $ 100,552 $ 865,994 $ 292,701 $(212,710) $ 3,320,550
Other Net $ 4,420 $ 608 $ 1,934 $ 5,004 $ (26,194) $ (7,666) $ (21,894)
Depreciation and Amortization $ 122,208 $ 159,439 $ 17,442 $ 6,086 $ 13,062 $ 4,791 $ 323,028
Income before Interest and Other
Charges and Income Taxes $ 130,028 $ 372,761 $ 23,582 $ 8,340 $ (14,933) $ (57,080) $ 462,698
Assets $2,507,060 $ 2,754,017 $ 690,973 $ 701,228 $ 557,249 $(254,960) $ 6,955,567
Capital Expenditures $ 142,243 $ 132,331 $ 67,704 $ 14,982 $ 26,554 $ -- $ 383,814
Investment in Equity-Method Investees $ -- $ -- $ -- $ 7,844 $ 88,128 $ -- $ 95,972
Gas Other
(Dollars in thousands) Gas Marketing Products Corporate &
For the three months ended March 31, 1999 Utilities Electric Water & Storage & Services Adjustments Total
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 787,621 $ 1,371,452 $ 87,257 $ 698,187 $ 239,180 $(138,688) $ 3,045,009
Other Net $ 3,943 $ 592 $ 806 $ 1,902 $ 2,686 $ 621 $ 10,550
Depreciation and Amortization $ 83,210 $ 157,730 $ 13,102 $ 350 $ 10,271 $ 1,392 $ 266,055
Income before Interest and Other
Charges and Income Taxes $ 108,022 $ 341,278 $ 17,685 $ 5,787 $ 12,433 $ (14,411) $ 470,794
Assets $2,399,686 $ 2,700,678 $ 632,832 $ 107,420 $ 509,971 $(124,183) $ 6,226,404
Capital Expenditures $ 79,048 $ 128,120 $ 72,878 $ 400 $ 25,166 $ -- $ 305,612
Investment in Equity-Method Investees $ -- $ -- $ 4,476 $ 7,365 $ 118,032 $ -- $ 129,873
</TABLE>
38
<PAGE> 40
The following table reconciles total reportable segment income before interest
and other charges and income taxes to net income for three and twelve months
ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
---------------------- ----------------------
(Dollars in thousands) 2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total Segment profit (loss) $ 182,185 $ 162,993 $ 462,698 $ 470,794
Interest expense, net (47,610) (36,688) (177,539) (135,162)
Minority interests (5,041) (2,708) (20,026) (3,981)
Dividends requirements on preferred stock of subsidiaries (2,034) (2,116) (8,252) (8,487)
--------- --------- --------- ---------
Income before income taxes 127,500 121,481 256,881 323,164
Less: Income taxes 47,884 44,922 93,410 113,441
--------- --------- --------- ---------
Net Income $ 79,616 $ 76,559 $ 163,471 $ 209,723
========= ========= ========= =========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, water and related services to the public
for residential, commercial and industrial uses through a number of regulated
and non-regulated subsidiaries. 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
and gas transmission companies 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) and Market Hub Partners, L.P. (MHP). 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 and
development and operation of "inside the fence" cogeneration plants.
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).
39
<PAGE> 41
NET INCOME
Net income decreased $46.3 million from the twelve-months ended March
31, 1999 to $163.5 million for the twelve months ended March 31, 2000 and
increased $3.1 million from the three-months ended March 31, 1999 to $79.6
million for the three months ended March 31, 2000. Results for the two periods
ended March 31 are not directly comparable year to year due to the acquisition
of three NiSource subsidiaries in 1999. NiSource established its New England
presence when it acquired BSG in February 1999. The natural gas marketing, asset
optimization and natural gas storage units of EnergyUSA-TPC and Market Hub
Partners were also acquired in 1999.
GAS REVENUES
The gas revenues represent the combined revenues of our gas utilities
and gas marketing and storage segments adjusted for intercompany transactions.
Gas revenues were $1.8 billion for the twelve months ended March 31, 2000 (after
elimination of intercompany transmission, marketing and storage revenue of
approximately $194 million), an increase of $461.6 million from the comparable
period ended March 31,1999. This increase was primarily due to increased gas
revenues from BSG of $274.4 million reflecting twelve months results, increased
gas marketing, storage and trading revenues as a result of the TPC acquisition
in April 1999 and increased gas costs partially offset by decreased sales to the
Indiana Energy Utilities residential and commercial customers as a result of
warmer weather during the period and decreased gas transition costs. During the
period, gas deliveries in dekatherms (dth), which include transportation
services, increased due to increased gas marketing and storage activities and
BSG partially offset by decreased deliveries to the Indiana Energy Utilities
residential and commercial customers reflecting heating degree-days 10% lower
than 1999.
Gas revenues were $726.8 million for the three months ended March 31,
2000 (after elimination of intercompany transmission, marketing and storage
revenue of approximately $61.5 million) an increase of $172.9 million from the
comparable period ended March 31, 1999. This increase is attributable to
increased gas marketing, storage and trading revenues as a result of the TPC
acquisition in April 1999, three months results from BSG in the 2000 period and
the pass-through of increased gas costs partially offset by decreased sales to
the residential customers of those energy utilities located in northern Indiana
(Indiana Energy Utilities) due to significantly warmer weather than 1999. During
the period, gas deliveries in dth, which include transportation services,
increased due to increased gas marketing and storage activities and BSG,
partially offset by decreased gas deliveries to the Indiana Energy Utilities
residential and commercial customers reflecting heating degree-days 11% lower
than 1999.
Large commercial and industrial customers continue 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 234.2 and 66.1 million dth
for others during the twelve and three months ended March 31, 2000,
respectively.
The basic steel industry accounted for 16% of natural gas delivered
(including volumes transported) during the twelve months ended March 31, 2000.
40
<PAGE> 42
The components of the changes in gas revenues are shown in the following table:
<TABLE>
<CAPTION>
----------------------
Ended March 31, 2000
---------------------
Three Twelve
(Dollars in millions) Months Months
--------- ---------
<S> <C> <C>
Gas Revenue Changes
Pass through of net changes in purchased gas costs, gas
storage and storage transportation costs $ 46,330 $ 87,173
Gas transition costs (340) (3,593)
Changes in sales levels of Indiana Energy Utilities (36,960) (51,146)
Bay State Gas
Acquisition 68,401 274,831
Gas transported 1,996 4,189
Gas marketing, storage and trading 93,499 150,167
--------- ---------
Gas Revenue Change $ 172,926 $ 461,621
========= =========
</TABLE>
GAS COSTS OF SALES
The gas costs represent the combined costs of our gas utilities and gas
marketing and storage segments adjusted for intercompany transactions. The gas
costs increased $316.8 million (31%) to $1.3 billion for the twelve months ended
March 31, 2000 from the comparable period ended March 31, 1999, due to the
increased gas costs of $135.0 million for BSG reflecting a full twelve months of
operations, increased gas marketing, storage and trading activities of $118.7
million and increased purchased gas costs per dth for the Energy Utilities,
partially offset by decreased gas purchases for the Indiana Energy Utilities.
The average cost for the Energy Utilities' purchased gas for the period, after
adjustment for gas transition costs billed to transport customers, was $2.93 per
dth, excluding purchased gas costs of BSG, as compared to $2.46 per dth for the
comparable period ended March 31, 1999.
Gas costs increased $139.4 million (37%) to $518.9 million for the
three months ended March 31, 2000 from the comparable period ended March 31,
1999, mainly due to increased gas purchases of $80.8 million related to gas
marketing and storage activities, increased gas cost of $38.4 million for BSG
reflecting three months results and increased gas costs per dth for the Energy
Utilities partially offset by decreased gas purchases for the Indiana Energy
Utilities. The average cost for the Energy Utilities' purchased gas for the
period, after adjustment for gas transition costs billed to transport customers,
was $2.87 per dth, excluding purchased gas costs of BSG, as compared to $2.21
per dth for the comparable period ended March 31, 1999.
GAS OPERATING MARGINS
Gas operating margins for the twelve months ended March 31, 2000
increased $144.9 million to $499.6 million from the comparable period ended
March 31, 1999. This increase mainly reflects $139.6 million of increased gas
operating margin from BSG and increased gas marketing, storage and trading
activities, partially offset by decreased deliveries to Indiana Energy Utilities
residential and commercial customers reflecting a warmer heating season during
the period.
Gas operating margin increased $33.6 million to $207.9 million during
the three months ended March 31, 2000 from the comparable period ended March 31,
1999. This increase mainly reflects $29.8 million of increased gas operating
margin from BSG and increased gas marketing, storage and trading activities,
partially offset by
41
<PAGE> 43
decreased deliveries to Indiana Energy Utilities residential and commercial
customers reflecting the warmer heating season during the first quarter of 2000
from the comparable period ended March 31, 1999.
ELECTRIC REVENUES
Electric revenues were $1.1 billion for the twelve months ended March
31, 2000 (after elimination of intercompany transactions of approximately $2.6
million), a decrease of $256 million from the comparable period ended March 31,
1999. Sales of electricity in kilowatt-hours (kwh) decreased 33% from the
comparable period ended March 31, 1999. Electric revenues decreased as a result
of significantly reduced non-regulated wholesale sales and power marketing
transactions, partially offset by increased electric sales to commercial
customers due to warmer weather during the third quarter of 1999, and increased
industrial sales.
Electric revenues were $255.6 million for the three months ended March
31, 2000 (after elimination of intercompany transactions of approximately $0.7
million) a decrease of $8.9 million from the comparable period ended March 31,
1999. Sales of electricity in kwh decreased 10% from the comparable period ended
March 31, 1999. Electric revenues decreased as a result of reduced regulated and
non-regulated wholesale sales and power marketing transactions partially offset
by increased electric sales to commercial and industrial customers.
The basic steel industry accounted for 32% of electric sales during the
twelve months ended March 31, 2000.
The components of the changes in electric revenues are shown in the following
table:
------------------------
Ended March 31, 2000
------------------------
Three Twelve
(Dollars in millions) Months Months
--------- ---------
Electric Revenue Changes
Pass through of net changes in fuel costs $ (2,816) $ 1,813
Changes in sales levels 10,192 41,491
Wholesale sales and power marketing (16,241) (299,260)
--------- ---------
Electric Revenue Change $ (8,865) $(255,956)
========= =========
ELECTRIC COST OF SALES
Cost of fuel for electric generation decreased $5 million to $248.4
million for the twelve months ended March 31, 2000 from the comparable period
ended March 31, 1999. The decrease is primarily due to decreased fuel costs per
kwh generated. The average cost per kwh generated decreased 5% from the
comparable period ended March 31, 1999, to 1.44 cents per kwh, for the twelve
months ended March 31, 2000.
Cost of fuel for electric generation decreased $0.8 million to $57.5
million for the three months ended March 31, 2000 from the comparable period
ended March 31, 1999. The decrease is primarily due to decreased fuel costs per
kwh generated. The average cost per kwh generated decreased 7% from the
comparable period ended March 31, 1999, to 1.37 cents per kwh, for the three
months ended March 31, 2000.
42
<PAGE> 44
POWER PURCHASED
Power purchased decreased $286.1 million to $57.9 million for the
twelve months ended March 31, 2000 from the comparable period ended March 31,
1999. The decrease is a result of decreased wholesale sales and power marketing
activities.
Power purchased decreased $13.8 million to $8.2 million for the three
months ended March 31, 2000 from the comparable period ended March 31, 1999. The
decrease is a result of decreased wholesale sales and power marketing
activities.
ELECTRIC OPERATING MARGINS
Operating margin from electric sales increased $35.2 million to $805.9
million for the twelve months ended March 31, 2000 from the comparable period
ended March 31, 1999. This increase occurred mainly due to improved margins on
wholesale sales and power trading transactions and increased sales to commercial
and industrial customers.
Operating margin from electric sales increased $5.8 million to $189.8
million for the three months ended March 31, 2000 from the comparable period
ended March 31, 1999. This increase occurred mainly due to improved margins on
wholesale sales and power trading transactions and increased sales to commercial
and industrial customers partially offset by decreased sales to residential
customers.
WATER REVENUE
Water revenues were $100.4 million for the twelve months ended March
31, 2000 (after elimination of intercompany transactions of approximately $0.1
million for the twelve months ended March 31, 2000) an increase of $13.3 million
from the comparable period ended March 31, 1999. This increase was primarily due
to increased water volumes sold and base rates for Indianapolis Water Company
(IWC).
Water revenues were $22.9 million for the three months ended March 31,
2000 (after elimination of intercompany transactions of approximately $0.02
million for the three months ended March 31, 2000) an increase of $2 million
from the comparable period ended March 31, 1999. This increase was primarily due
to increased water volumes sold and base rates for IWC.
The components of the changes in water revenues are shown in the following
table:
-----------------------
Ended March 31, 2000
-----------------------
Three Twelve
(Dollars in millions) Months Months
------- -------
Water Revenue Changes
Rate increase $ 1,160 $ 4,962
Changes in sales levels 884 8,326
------- -------
Water Revenue Change $ 2,044 $13,288
======= =======
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<PAGE> 45
PRODUCTS AND SERVICES REVENUE
Products and Services revenues were $281.6 million for the twelve
months ended March 31, 2000 (after elimination of intercompany transactions of
approximately $16.1 million), an increase of $56.6 million from the comparable
period ended March 31, 1999. This increase reflects revenues from a new
cogeneration facility, which began commercial operations in August 1998,
increased pipeline construction activity, and increased line locating and
marking activity and the inclusion of revenue of BSG's unregulated subsidiaries
commencing in February 1999.
Products and Services revenues were $62.2 million for the three months
ended March 31, 2000 (after elimination of intercompany transactions of
approximately $3.3 million), an increase of $9.9 million from the comparable
period ended March 31, 1999. This increase reflects increased line locating and
marking activity increased pipeline construction activity and the inclusion of
revenue of BSG's unregulated subsidiaries for the entire quarter ending March
31, 2000.
The components of the changes in operating revenues at Products and Services are
shown in the following table:
---------------------
Ended March 31, 2000
---------------------
Three Twelve
(Dollars in millions) Months Months
------- -------
Products and Services
Revenue Changes
Pipeline construction $ 2,446 $11,875
Locate and marking 5,299 10,088
Cogeneration project (544) 11,237
Other 2,667 23,388
------- -------
Products and Services Revenue Change $ 9,868 $56,588
======= =======
PRODUCTS AND SERVICES COST OF SALES
The cost of sales for Products and Services increased $41.9 million to
$151.9 million for the twelve months ended March 31, 2000 from the comparable
period ended March 31, 1999. 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.
The cost of sales for Products and Services increased $9.2 million to
$34.8 million for the three months ended March 31, 2000 from the comparable
period ended March 31, 1999 mainly due to inclusion of the cost of sales for the
line locating and marking subsidiaries and pipeline construction and the
inclusion of cost of sales for certain subsidiaries acquired in connection with
the BSG acquisition.
PRODUCTS AND SERVICES OPERATING MARGINS
Products and Services operating margin increased $14.7 million to
$129.7 million for the twelve months ended March 31, 2000, 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 certain subsidiaries acquired in connection with the BSG acquisition.
44
<PAGE> 46
Products and Services operating margin increased $0.7 million to $27.4
million for the three months ended March 31, 2000, reflecting increased pipeline
construction activity and the inclusion of certain subsidiaries acquired in
connection with the BSG acquisition.
OPERATING EXPENSES AND TAXES (EXCEPT INCOME)
Operating expenses and taxes (except income) increased $126.7 million
to $728 million for the twelve months ended March 31, 2000 from the comparable
period ended March 31, 1999. Operating expenses and taxes (except income)
increased $7.4 million to $184.7 million for the three months ended March 31,
2000 from the comparable period ended March 31, 1999.
The operation and maintenance expenses of the Energy Utilities
increased $68.5 million to $424.6 million for the twelve months ended March 31,
2000 from the comparable period ended March 31, 1999. The increase was primarily
due to an increase of $73.6 million of operation expenses from BSG reflecting
twelve months expenses, increased employee related cost of $9.2 million,
increased expenses for distributed generation and fuel cell research and
development of $4 million partially offset by decreased operation costs for
electric production facilities of $2.3 million and a $13 million insurance
settlement in the 1999 period related to manufactured gas plants site cleanup
costs. The unregulated gas and electric businesses operation expenses increased
$10.9 million to $16.4 million for the twelve months ended March 31, 2000
primarily due to the inclusion of $10.5 million of EnergyUSA-TPC operation
costs. Operation expenses at the Water Utilities increased $3.7 million to $53.6
million for the twelve months ended March 31, 2000 from the comparable period
ended March 31, 1999 due to increased water treatment and employee related
costs. Operation expenses for Products and Services increased $5.6 million to
$108.6 million for the twelve months ended March 31, 2000 from the comparable
period ended March 31, 1999 reflecting the inclusion of operation expense of
BSG's unregulated subsidiaries in February 1999, and a full year of operation
costs for a new cogeneration facility which began commercial operation during
1998.
Operation expenses for the twelve months ended March 31, 2000 also
include charges of $13.1 million for professional fees and filing costs incurred
during 1999 in connection with the initial tender offer for CEG.
The operation and maintenance expenses of the Energy Utilities
increased $1.4 million to $108.8 million for the three months ended March 31,
2000 from the comparable period ended March 31, 1999. This increase was
primarily due to increased operation expenses from BSG of $9.5 million
reflecting three months expenses partially offset by decreased employee related
costs of $4.2 million and other decreased operation costs. The unregulated gas
and electric businesses operation expenses increased $3.5 million to $5.6
million for the three month ended March 31, 2000 from the comparable period
ended March 31, 1999 primarily due to the inclusion of $4.4 million of TPC
operation costs. Operation expenses at the Water Utilities decreased $0.4
million to $12.8 million for the three months ended March 31, 2000 from the
comparable period ended March 31, 1999 due to decreased employee related costs.
Operation expenses for Products and Services increased $0.7 million to $27.4
million for the three month ended March 31, 2000 from the comparable period
ended March 31, 1999 reflecting the inclusion of operation expense of BSG's
unregulated subsidiaries in February 1999 and an increase in line locating and
marking operation expenses.
Depreciation and amortization expenses increased $57 million to $323
million for the twelve months ended March 31, 2000 from the comparable period
ended March 31, 1999, primarily resulting from increased depreciation and
amortization expense $40.3 million as a result of our acquisitions of BSG and
TPC and increased depreciation expense at the Energy and Water Utilities due to
plant additions.
Depreciation and amortization expenses increased $11.6 million to $84.5
million for the three months ended March 31, 2000 from the comparable periods
ended March 31, 1999, primarily resulting from increased depreciation and
amortization expense from BSG of $5.1 million reflecting three months expenses,
the acquisition of EnergyUSA-TPC caused an increase of $3 million and increased
depreciation expense at the Energy and Water Utilities due to plant additions.
45
<PAGE> 47
Taxes (except income) increased $11 million to $103.8 million for the
twelve months ended March 31, 2000, from the comparable period ended March 31,
1999 primarily as the result of increased expenses from BSG of $13 million
reflecting a full twelve months.
Taxes (except income) increased $0.2 million to $28.2 million for the
three months ended March 31, 2000 from the comparable period ended March 31,
1999, primarily as the result of increased expenses from BSG and EnergyUSA-TPC
reflecting a full three months partially offset by decreased taxes (except
income) from the Indiana Energy Utilities.
INTEREST EXPENSE, NET
Interest expense, net increased $42.3 million to $177.5 million for the
twelve months ended March 31, 2000 from the comparable period ended March
31,1999. This increase reflects the inclusion of a full twelve months of
interest expense from BSG of $18.6 million, interest on the September 1999
issuance of $160 million in Puttable Reset Securities (PURS) and increased
interest expense on higher short-term borrowings.
Interest expense, net increased $10.9 million to $47.6 million for the
three months ended March 31, 2000 from the comparable periods ended March
31,1999. This increase reflects the inclusion of three months of interest
charges for BSG, interest on the September 1999 issuance of $160 million in
Puttable Reset Securities (PURS) and increased interest expense on higher
short-term borrowings.
MINORITY INTERESTS
Minority interest increased $16 and $2.3 million to $20 and $5 million
for the twelve and three months ended March 31, 2000, respectively, from the
comparable period ended March 31, 1999. The increases reflect the inclusion of
dividends paid on Company-obligated mandatorily redeemable Preferred Securities
issued in February 1999.
OTHER, NET
Other, net decreased $32.4 million to a loss of $21.9 million for the
twelve months ended March 31, 2000 from the comparable period ended March 31,
1999, 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.
Other, net decreased $3.9 million to $3.3 million for the three months
ended March 31, 2000 from the comparable period ended March 31, 1999. This
decrease reflects higher net gains on the disposition of businesses and
properties in prior periods.
INCOME TAXES
Income taxes decreased $20 million to $93.4 million for the twelve
months ended March 31, 2000 from the comparable period ended March 31, 1999.
This decrease is primarily a result of decreased pre-tax income.
Income taxes increased $3 million to $47.9 million for the three months
ended March 31, 2000 from the comparable period ended March 31, 1999. This
increase is primarily as a result of an increase in pre-tax income and higher
effective income tax rate.
See Notes to Consolidated Financial Statements for a discussion of
accounting policies and transactions impacting this analysis.
46
<PAGE> 48
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.
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 March 31, 2000 and December 31, 1999, $252.9 million
and $299.6 million of commercial paper was outstanding, respectively. The
weighted average interest rate on commercial paper outstanding as of March 31,
2000 was 6.12%.
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 March 31, 2000, 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 March 31, 2000, there were $30.6
million of borrowings outstanding under these lines of credit with a weighted
average interest rate of 5.80%. As of December 31, 1999, there were $54.1
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 March 31, 2000, there were $121.5 million
outstanding under these money market lines of credit at a weighted average
interest rate of 6.57%. At December 31, 1999, there were $156.2 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. (See
Note 18)
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.
47
<PAGE> 49
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.
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 (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.
CONSTRUCTION PROGRAM. Future Commitments with respect to the construction
program are expected to be met through internally generated funds.
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
48
<PAGE> 50
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% 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, $1.3 and $0.02 million and $0.4, $1.3 and
$0.01 million for the three-month and twelve-month periods ended March 31, 2000,
respectively. The daily VaR for the gas trading portfolio on an average, high
and low basis was $1.2, $4.9 and $0.5 million and $1.5, $4.9 and $0.4 million
for the three-month and twelve-month periods ended March 31, 2000, respectively.
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. NiSource is exposed to interest rate risk as a result from
changes in interest rates on borrowings under the revolving credit agreements
and lines of credit. These instruments have interest rates that are indexed to
short-term market interest rates. At March 31, 2000 and December 31, 1999, the
combined borrowings outstanding under these facilities totaled $ 601 million and
$ 679 million, respectively. Based upon average borrowings under these
agreements during 2000 and 1999, an increase in short-term interest rates of 100
basis points (1%) would have increased interest expense by $ 6.4 million and
$3.3 million for the three months ending March 31, 2000 and 1999 and $ 21.7
million and $12.2 million for the twelve months ending March 31, 2000 and 1999,
respectively.
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
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.
49
<PAGE> 51
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 the Consolidated Financial Statements for
current market valuation of long-term debt. Refer to "Summary of Significant
Accounting Policies--Accounting for Price Risk Management Activities" in Notes
to the Consolidated Financial Statements for further discussion of NiSource's
risk management.
Refer to "Financial Instruments and Risk Management" in Notes to the
Consolidated Financial Statements for a discussion of commodity-based derivative
financial instruments and risk management.
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,
including the development of a line of distributed generation technologies.
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
is committed to joining a RTO. 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
50
<PAGE> 52
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. The gas cost incentive
mechanism will be reviewed by parties to the ARP proceeding for possible
revision. 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, BSG 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 BSG pilot, in which almost 28% of eligible customers
participated, is scheduled to conclude on June 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 terms and conditions and
regulations 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. A hearing before the
NHPUC regarding the recommendations was held in April.
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. Comments from all participating parties were submitted at the time
of the technical session in July 1999. 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. Northern Utilities
is currently awaiting the Commission's proposed model terms and conditions as
the next step.
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
51
<PAGE> 53
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For a discussion of primary market risks and risk management policy, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations- Market Risk Sensitive Instruments and Positions."
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
NiSource and its subsidiaries are parties to various pending proceedings,
including suits and claims against them for personal injury, death and property
damage. Such proceedings and suits, and the amounts involved, are routine
litigation and proceedings for the kinds of businesses conducted by NiSource and
its subsidiaries, except as described under Note 4 (NESI Energy Marketing Canada
Ltd. Litigation) and Note 5 (Environmental Matters) in the notes to consolidated
financial statements under Part I, Item 1 of this Report on Form 10-Q, which
notes are incorporated by reference. No other material legal proceedings against
NiSource or its subsidiaries are pending or, to the knowledge of NiSource,
contemplated by governmental authorities or other parties.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
52
<PAGE> 54
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 10.1 - Form of Amendment to Change in Control and
Termination Agreement and Schedule of Parties to
Amendment.
Exhibit 23 - Consent of Arthur Andersen LLP
Exhibit 27 - Financial Data Schedule
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, NiSource hereby
agrees to furnish the SEC, upon request, any instrument defining
the rights of holders of long-term debt of NiSource not filed as
an exhibit herein. No such instrument authorizes long-term debt
securities in excess of 10% of the total assets of NiSource and
its subsidiaries on a consolidated basis.
(b) Reports on Form 8-K.
A report on Form 8-K was filed February 14, 2000. All events were
reported under Item 5, Other Events.
A report on Form 8-K was filed February 24, 2000. All events
were reported under Item 5, Other Events.
A report on Form 8-K was filed March 3, 2000. All events
were reported under Item 5, Other Events.
53
<PAGE> 55
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NiSource Inc.
(Registrant)
/s/ STEPHEN P. ADIK
------------------------------------------------
Stephen P. Adik
Senior Executive Vice President,
Chief Financial Officer,
Treasurer and Chief Accounting Officer
Date: May 12, 2000
54
<PAGE> 1
FORM OF
AMENDMENT TO CHANGE IN CONTROL
AND TERMINATION AGREEMENT
WHEREAS, NiSource Inc. (formerly NIPSCO Industries, Inc.) ("Employer") and
_____________ ("Executive") entered into a Change in Control and Termination
Agreement dated as of February 5, 1990, and as amended and restated as of
September 1, 1997 ("Agreement"); and
WHEREAS, Employer and Executive wish to clarify the intent of the Agreement
that a Change in Control for purposes of the Agreement means a transaction
pursuant to which the management of Employer immediately prior to consummation
of such transaction ceases to manage Employer immediately following the
consummation of such transaction; and
WHEREAS, the consummation of the transactions described in the Agreement
and Plan of Merger between Columbia Energy Group and Employer, dated as of
February 27, 2000, as amended and restated as of March 31, 2000, might, under
the holding company merger structure described therein, literally constitute a
Change in Control of Employer as presently defined in Subsection 2(e) of the
Agreement, and, under the alternative merger structure described therein, would
not constitute a Change in Control as so defined; and
WHEREAS, Employer and Executive agree that the consummation of the
transactions described in such Agreement and Plan of Merger would not result in
a change in the current management of Employer;
NOW THEREFORE it is agreed, for good and valuable consideration, the
receipt of which is hereby acknowledged, that, effective April 1, 2000, the
following sentence be added at the end of the definition of "Change in Control"
in Subsection 2(e) of the Agreement:
Notwithstanding the preceding provisions of this Subsection (e), neither
the execution of the Agreement and Plan of Merger between Columbia Energy
Group and Employer dated as of February 27, 2000, as amended and restated
as of March 31, 2000, nor the consummation of any of the transactions
described therein, shall constitute a Change in Control for purposes of the
Agreement.
<PAGE> 2
IN WITNESS WHEREOF, Executive has hereunto set his hand, and Employer has
caused this Amendment I to be executed in its name and on its behalf, as of this
_____ day of ______________, 2000.
NISOURCE INC.
By:
- -------------------------------------- --------------------------------
Executive
2
<PAGE> 3
Schedule of Parties to the Amendment to Change of Control and Termination
Agreement
The following NiSource executives have entered into the Amendment to Change
in Control and Termination Agreement: Gary L. Neale, Stephen P. Adik, Patrick J.
Mulchay, Jeffrey W. Yundt, Joseph L. Turner, James K. Abcouwer, Jerry L. Godwin,
David A. Kelly, Mark T. Maassel, Thomas J. Aruffo, Peggy Landini, Mark D.
Wyckoff and Robert J. Schacht. The amendments are substantially identical in all
material respects except as to the parties and the execution dates.
3
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-Q, into NiSource Inc.'s (formerly known as
NIPSCO Industries, Inc.) previously filed Form S-8 Registration Statement No.
33-30619; Form S-8 Registration Statement No. 33-30621; Form S-8 Registration
Statement No. 333-08263; Form S-8 Registration Statement No. 333-19981; Form S-8
Registration Statement No. 333-19983; Form S-8 Registration Statement No.
333-19985; Form S-3 Registration Statement No. 333-26847; Form S-8 Registration
Statement No. 333-59151; Form S-8 Registration Statement No. 333-59153; Form S-3
Registration Statement No. 333-69279; Form S-8 Registration Statement No.
333-72367; Form S-8 Registration Statement No. 333-72401; Form S-3 Registration
Statement No. 333-76645 and Form S-3 Registration Statement No. 333-76909.
/s/ Arthur Andersen LLP
Chicago, Illinois
May 12, 2000
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF NISOURCE INC. FOR THREE MONTHS ENDED MARCH 31, 2000, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,778,397
<OTHER-PROPERTY-AND-INVEST> 614,326
<TOTAL-CURRENT-ASSETS> 915,271
<TOTAL-DEFERRED-CHARGES> 304,421
<OTHER-ASSETS> 343,152
<TOTAL-ASSETS> 6,955,567
<COMMON> 379,644
<CAPITAL-SURPLUS-PAID-IN> 162,724
<RETAINED-EARNINGS> 824,893
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,367,261
52,780
83,631
<LONG-TERM-DEBT-NET> 417,102
<SHORT-TERM-NOTES> 348,245
<LONG-TERM-NOTES-PAYABLE> 1,510,306
<COMMERCIAL-PAPER-OBLIGATIONS> 252,850
<LONG-TERM-DEBT-CURRENT-PORT> 211,967
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<CAPITAL-LEASE-OBLIGATIONS> 0
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<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,711,455
<TOT-CAPITALIZATION-AND-LIAB> 6,955,597
<GROSS-OPERATING-REVENUE> 1,067,549
<INCOME-TAX-EXPENSE> 47,884
<OTHER-OPERATING-EXPENSES> 888,641
<TOTAL-OPERATING-EXPENSES> 888,641
<OPERATING-INCOME-LOSS> 178,908
<OTHER-INCOME-NET> 3,277
<INCOME-BEFORE-INTEREST-EXPEN> 182,185
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<EARNINGS-AVAILABLE-FOR-COMM> 79,616
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