-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QqRD4loZSyrjo8gzjE9+ObBWJAjcjhAGhij82jtz5NPmsZ5Q3sRbQRZTFRVPemLk dObG7D26TYr7VZ2bhwmg6Q== 0000893220-02-000181.txt : 20020414 0000893220-02-000181.hdr.sgml : 20020414 ACCESSION NUMBER: 0000893220-02-000181 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NISOURCE INC/DE CENTRAL INDEX KEY: 0001111711 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 352108964 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-16189 FILM NUMBER: 02556221 BUSINESS ADDRESS: STREET 1: 801 EAST 86TH AVE CITY: MERRILLVILLE STATE: IN ZIP: 46410-6272 BUSINESS PHONE: 2196475200 MAIL ADDRESS: STREET 1: 801 EAST 86TH AVE CITY: MERRILLVILLE STATE: IN ZIP: 46410-6272 FORMER COMPANY: FORMER CONFORMED NAME: NEW NISOURCE INC DATE OF NAME CHANGE: 20000412 10-K 1 w57495e10-k.txt NISOURCE, INC FORM 10-K As Filed with the United States Securities and Exchange Commission on February 22, 2002. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_____ to ______ Commission file number 001-16189 NISOURCE INC. ------------- (Exact name of registrant as specified in its charter) Delaware 35-2108964 --------------------------- ----------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 801 East 86th Avenue Merrillville, Indiana 46410 --------------------------- ----------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (877) 647-5990 -------------- Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------------------------------- ----------------------------- Common Stock New York, Chicago and Pacific Preferred Share Purchase Rights New York, Chicago and Pacific Corporate Premium Income Equity Securities New York Stock Appreciation Income Linked Securities New York
Securities registered pursuant to Section 12(g) of the Act: None 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, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] or No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of January 31, 2002, 207,505,264 shares of Common Stock were outstanding. The aggregate market value of Common Stock (based upon the January 31, 2002, closing price of $20.80 on the New York Stock Exchange) held by non-affiliates was approximately $4,282,473,748.80. Documents Incorporated by Reference Part III of this report incorporates by reference specific portions of the Registrant's Notice of Annual Meeting and Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 21, 2002. CONTENTS
Page Part I No. ----- Item 1. Business....................................................................... 3 Item 2. Properties..................................................................... 6 Item 3. Legal Proceedings.............................................................. 7 Item 4. Submission of Matters to a Vote of Security Holders............................ 9 Supplemental Item -- Executive Officers of the Registrant...................... 9 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...... 12 Item 6. Selected Financial Data........................................................ 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 14 Item 8. Financial Statements and Supplementary Data.................................... 47 Item 9. Change In and Disagreements with Accountants on Accounting and Financial Disclosure........................................................... 100 Part III Item 10. Directors and Executive Officers of the Registrant............................. 100 Item 11. Executive Compensation......................................................... 100 Item 12. Security Ownership of Certain Beneficial Owners and Management................. 100 Item 13. Certain Relationships and Related Transactions................................. 100 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 100 Signatures............................................................................... 102 Exhibits................................................................................. 103
2 PART I ITEM 1. BUSINESS NISOURCE INC. NiSource Inc. (NiSource) is an energy holding company whose subsidiaries provide natural gas, electricity and other products and services to approximately 3.7 million customers located within a corridor that runs from the Gulf Coast through the Midwest to New England. NiSource, organized as an Indiana holding company in 1987 under the name of NIPSCO Industries, Inc., changed its name to NiSource Inc. on April 14, 1999. In connection with the acquisition of Columbia Energy Group (Columbia) on November 1, 2000, as discussed below, NiSource became a Delaware holding company registered under the Public Utility Holding Company Act of 1935, as amended (1935 Act). NiSource derives substantially all its revenues and earnings from the operating results of its 16 direct subsidiaries. On November 1, 2000, NiSource completed its acquisition of Columbia for an aggregate consideration of approximately $6 billion, consisting of $3,888 million in cash, 72.4 million shares of common stock valued at $1,761 million and Stock Appreciation Income Linked Securities(SM) (SAILS(SM)) (units consisting of a zero coupon debt security coupled with a forward equity contract in NiSource shares) valued at $114 million. NiSource also assumed approximately $2 billion in Columbia debt. As a result of the acquisition, NiSource is the largest natural gas distribution company operating east of the Rocky Mountains, as measured by number of customers. NiSource's principal subsidiaries include Columbia, a vertically-integrated natural gas distribution, transmission, storage and exploration and production holding company whose subsidiaries provide service to customers in the Midwest, the Mid-Atlantic and the Northeast; Northern Indiana Public Service Company (Northern Indiana), a vertically-integrated gas and electric company providing service to customers in northern Indiana; and Bay State Gas Company (Bay State), a natural gas distribution company serving customers in New England. NiSource's primary business segments are: Gas Distribution Operations; Gas Transmission and Storage Operations; Electric Operations; Exploration and Production Operations; Merchant Operations; and Other. Gas Distribution Operations NiSource's natural gas distribution operations serve more than 3.2 million customers in 9 states and operate over 54,612 miles of pipeline. Through its wholly-owned subsidiary, Columbia, NiSource owns five distribution subsidiaries that provide natural gas to approximately 2.1 million residential, commercial and industrial customers in Ohio, Pennsylvania, Virginia, Kentucky and Maryland. NiSource also distributes natural gas to approximately 760,000 customers in northern Indiana through three subsidiaries: Northern Indiana, Kokomo Gas and Fuel Company and Northern Indiana Fuel and Light Company, Inc. Additionally, NiSource's subsidiaries Bay State and Northern Utilities, Inc. distribute natural gas to more than 340,000 customers in Massachusetts, Maine and New Hampshire. The distribution subsidiaries are currently pursuing initiatives that give residential and small commercial customers the opportunity to choose their natural gas suppliers and to use the distribution subsidiaries for transportation service. Gas Transmission and Storage Operations NiSource's gas transmission and storage subsidiaries own and operate approximately 16,130 miles of interstate pipelines and operate one of the nation's largest underground natural gas storage systems capable of storing approximately 670 billion cubic feet (Bcf) of natural gas. Through its subsidiaries, Columbia Gas Transmission Corporation (Columbia Transmission), Columbia Gulf Transmission Company (Columbia Gulf), Crossroads Pipeline Company and Granite State Gas Transmission, Inc. (Granite State), it owns and operates an interstate pipeline network extending from offshore in the Gulf of Mexico to Lake Erie, New York and the eastern seaboard. Together, these companies serve customers in 19 northeastern, mid-Atlantic, midwestern and southern states and the District of Columbia. The gas transmission and storage subsidiaries are engaged in several projects that will expand their service territory and throughput. The largest such project is Millennium Pipeline, which will replace parts of an existing Columbia Transmission pipeline and will transport 700,000 Dekatherms (Dth) of natural gas per day to growing markets in New York and the northeast United States. 3 ITEM 1. BUSINESS (continued) NISOURCE INC. Electric Operations NiSource generates and distributes electricity through its subsidiary Northern Indiana to approximately 430,000 customers in 21 counties in the northern part of Indiana. Northern Indiana owns and operates four coal-fired electric generating stations with a net capability of 3,179 megawatts (mw), four gas fired combustion turbine generating units with a net capability of 203 mw and two hydroelectric generating plants with a net capability of 10 mw. These facilities provide for a total system net capability of 3,392 mw. Northern Indiana is interconnected with five neighboring electric utilities. During the year ended December 31, 2001, Northern Indiana generated 93.2% and purchased 6.8% of its electric requirements. On December 5, 2001, Northern Indiana announced that it will indefinitely shutdown its Dean Mitchell Generating Station (Mitchell Station). The Mitchell Station ceased production of electricity in January 2002 with completion of the shutdown process expected by March 1, 2002. Following completion of the shutdown, Northern Indiana will operate three coal-fired generation stations with a net capacity of 2,694 mw, three gas-fired combustion turbine generating station units with a net capacity of 186 mw and two hydroelectric plants with a net capability of 10 mw. Exploration and Production Operations NiSource's exploration and production subsidiary, Columbia Energy Resources, Inc. (Columbia Resources), is one of the largest independent natural gas and oil producers in the Appalachian Basin and also has production operations in Canada. NiSource acquired Columbia Resources as part of the Columbia acquisition on November 1, 2000. Columbia Resources produced nearly 54.1 billion cubic feet equivalent (Bcfe) of natural gas and oil for the twelve months ended December 31, 2001. Columbia Resources has financial interests in over 8,000 wells, and has net proven gas and oil reserve holdings of 1.1 trillion cubic feet equivalent (Tcfe). Columbia Resources also owns and operates approximately 6,200 miles of gathering pipelines. Columbia Resources seeks to achieve asset and profit growth primarily through aggressive drilling activities. For the year ended 2001, Columbia Resource discovered 70 net Bcfe of gas and oil reserves and participated in 183 gross (172.2 net) wells with a success rate of 92 percent. Merchant Operations The Merchant Operations segment provides energy-related services including gas marketing, electric transmission services, bulk power, power trading and asset management services to local distribution companies (LDC), wholesale, commercial and industrial customers, and participates in the development of merchant power projects. EnergyUSA-TPC Corp. (TPC), provides energy related asset management and asset portfolio replacement opportunities for LDCs and fuel requirement services for electric utilities, independent power producers and cogeneration facilities. TPC also provides natural gas sales and management services to industrial and commercial customers, engages in natural gas marketing activities and provides gas supply services to LDC's. Primary Energy, Inc. (Primary Energy) develops, builds, operates and manages industrial based energy projects. Primary Energy develops on-site, industrial-based energy solutions for large complexes having multiple energy needs, such as electricity, steam, by-product fuels or heated water. Other The Other segment participates in real estate, telecommunications and other businesses. NiSource has built a fiber optics telecommunications network primarily along its pipeline rights-of-way between New York and Washington D.C. Divestiture of Non-Core Assets In connection with the Columbia acquisition, NiSource sold or is divesting certain businesses judged to be non-core to the company's strategy, including Indianapolis Water Company (IWC) and other assets of IWC Resources Corporation (IWCR), SM&P Utility Resources, Inc. (SM&P) and Columbia Propane Corporation. See Discontinued Operations in Item 7 and Item 8, Note 5 for additional information. See Item 7 for additional information about NiSource business segments. Growth Strategy NiSource is focused on becoming the premier energy company serving customers throughout the energy-intensive corridor that extends from the supply areas in the Gulf Coast through the consumption centers in the Midwest, Mid-Atlantic, New England and Northeast. This corridor includes 30% of the nation's population and 40% of its energy consumption. NiSource believes natural gas will be the fuel preferred by customers to meet the corridor's growing energy needs. 4 ITEM 1. BUSINESS (continued) NISOURCE INC. Competition and Changes in the Regulatory Environment The regulatory frameworks applicable to NiSource's operations, at both the state and federal levels, are undergoing fundamental changes. These changes have had and will continue to have an impact NiSource's operations, structure and profitability. At the same time, competition within the gas and electric industries will create opportunities to compete for new customers and revenues. Management continually seeks new ways to be 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 that will provide improved economies of scale and efficiencies; and developing new energy-related products for residential, commercial and industrial customers. NATURAL GAS COMPETITION. Open access to natural gas supplies over interstate pipelines and the deregulation of the commodity price of gas has led to tremendous change in the energy markets, which continue to evolve. During the past few years, LDC customers and marketers began to purchase gas directly from producers and marketers and an open competitive market for gas supplies emerged. This separation or "unbundling" of the transportation and other services offered by pipelines and LDCs allows customers to select the service they want independent from the purchase of the commodity. NiSource's gas distribution subsidiaries are involved in programs that provide residential customers the opportunity to purchase their natural gas requirements from third parties and use the NiSource gas distribution subsidiaries for transportation services only. ELECTRIC COMPETITION. In 1996, the Federal Energy Regulatory Commission (FERC) ordered that all public utilities owning, controlling or operating electric transmission lines file non-discriminatory open-access tariffs and offer wholesale electricity suppliers and marketers the same transmission service they provide to themselves. In 1997, FERC accepted for filing Northern Indiana's open-access transmission tariff. In December 1999, FERC issued Order 2000 a final rule addressing the formation and operation of Regional Transmission Organizations (RTOs), (see Item 7, Electric Operations - Regulatory Matters). The rule was intended to eliminate pricing inequities in the provision of wholesale transmission service. NiSource does not believe that compliance with the new rules will be material to its 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. NiSource's other operations also experience competition for energy sales and related services from third party providers. NiSource meets these challenges through innovative programs aimed at providing energy products and services at competitive prices while also providing new services that are responsive to the evolving energy market and customer requirements. See Competition in Item 7 for additional information. Financing Subsidiary NiSource Finance Corp. (NiSource Finance) is a wholly owned consolidated special purpose finance subsidiary of NiSource that engages in financing activities to raise funds for the business operations of NiSource and its subsidiaries. NiSource Finance was incorporated in February 2000 under the laws of the State of Indiana. NiSource Finance actively borrows funds in the commercial paper market, and maintains a $2.5 billion revolving credit facility with a syndicate of banks for back-up liquidity purposes. NiSource Finance's obligations are fully and unconditionally guaranteed by NiSource. The function of NiSource Finance was previously performed by NiSource Capital Markets, Inc. (Capital Markets). Other Relevant Business Information NiSource's customer base is broadly diversified, with no single customer accounting for a significant portion of revenues. As of December 31, 2001, NiSource had 12,501 full-time employees of which 4,704 were subject to collective bargaining agreements. NiSource sold SM&P on January 28, 2002. SM&P had 1,913 employees at December 31, 2001. For a listing of certain subsidiaries of NiSource refer to Exhibit 21. 5 ITEM 2. PROPERTIES NISOURCE INC. Discussed below are the principal properties held by NiSource and its subsidiaries as of December 31, 2001. GAS DISTRIBUTION OPERATIONS. NiSource's gas distribution operations own and operate a total of 54,612 miles of pipelines. This includes (i) for the five distribution subsidiaries of its Columbia system, 33,215 miles of pipelines 3,300 acres of underground storage, 8 storage wells and one compressor station with 800 horsepower (hp) of installed capacity, (ii) for its Northern Indiana system, 14,099 miles of pipelines and 2 compressor stations with a total of 6,000 hp of installed capacity, (iii) for its Bay State system, 5,674 miles of pipelines, (iv) for its Northern Indiana Fuel and Light system, 879 miles of pipelines, and (v) for its Kokomo Gas and Fuel system, 781 miles of pipelines. The physical properties of the NiSource gas utilities are located throughout Ohio, Indiana, Pennsylvania, Virginia, Kentucky, Maryland, Massachusetts, Maine and New Hampshire. GAS TRANSMISSION AND STORAGE OPERATIONS. Columbia Transmission has 882,511 acres of underground storage, 3,603 storage wells, 11,702 miles of interstate pipelines and 103 compressor stations with 589,835 hp of installed capacity. These operations are located in Delaware, Kentucky, Maryland, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Virginia and West Virginia. Columbia Gulf has 4,144 miles of transmission pipelines and 12 compressor stations with 479,102 hp of installed capacity. Columbia Gulf's operations are located in Kentucky, Louisiana, Mississippi, Tennessee, Texas and Wyoming. Granite State Pipeline has 82 miles of transmission pipeline with operations located in Maine, Massachusetts and New Hampshire. Crossroads Pipeline has 202 miles of transmission pipeline and one compressor station with 3,000 hp of installed capacity. Crossroad's operations are located in Indiana and Ohio. ELECTRIC OPERATIONS. Northern Indiana owns and operates four coal-fired electric generating stations with net capabilities of 3,179 mw, two hydroelectric generating plants with net capabilities of 10 mw and four gas-fired combustion turbine-generating units with net capabilities of 203 mw, for a total system net capability of 3,392 mw. It has 288 substations with an aggregate transformer capacity of 23,230,100 kilovolts (kva). Its transmission system, with voltages from 34,500 to 345,000 volts, consists of 3,116 circuit miles of line. The electric distribution system extends into 21 counties and consists of 7,881 circuit miles of overhead and 1,725 cable miles of underground primary distribution lines operating at various voltages from 2,400 to 12,500 volts. Northern Indiana has distribution transformers having an aggregate capacity of 11,738,624 kva and 451,310 electric watt-hour meters. On December 5, 2001, Northern Indiana announced that it will indefinitely shutdown its Mitchell Station. The Mitchell Station ceased production of electricity in January 2002 with completion of the shutdown process expected by March 1, 2002. Following completion of the shutdown, Northern Indiana will operate three coal-fired generation stations with a net capacity of 2,694 mw, three gas-fired combustion turbine generating station units with a net capacity of 186 mw and two hydroelectric plants with a net capability of 10 mw. EXPLORATION AND PRODUCTION OPERATIONS. Columbia Resources has net proven gas and oil reserve holdings of approximately 1.1 Tcfe and financial interests in over 8,000 wells. In addition, Columbia Resources owns and operates approximately 6,200 miles of gathering pipelines and 86 compressor stations with 31,145 hp of installed capacity. OTHER. Columbia Transmission Communications Corporation (Transcom), a subsidiary of NiSource, owns a fiber optics telecommunications network that runs along the right-of-way of Columbia Gas Transmission's pipelines between New York and Washington D.C. This network consists of approximately 270 miles of fiber optics cable. Through subsidiaries, NiSource owns Southlake Complex, a 325,000 square foot headquarters building located in Merrillville, Indiana and a golf course, surrounding residential development and land held for resale in Chesterton, Indiana. CHARACTER OF OWNERSHIP. Substantially all of the properties of Northern Indiana are subject to the lien of its First Mortgage Indenture. The principal offices and properties of NiSource and its subsidiaries are held in fee and are free from other encumbrances, subject to minor exceptions, none of which are of such a nature as to impair substantially the usefulness of such properties. Many of the offices in various communities served are occupied by subsidiaries of NiSource under leases. All properties are subject to liens for taxes, assessments and undetermined charges (if any) incidental to construction. It is NiSource's practice regularly to pay such amounts, as and when due, unless contested in 6 ITEM 2. PROPERTIES (continued) NISOURCE INC. good faith. In general, the electric lines, gas pipelines and related facilities are located on land not owned in fee but are covered by necessary consents of various governmental authorities or by appropriate rights obtained from owners of private property. NiSource does not, however, generally have specific easements from the owners of the property adjacent to public highways over, upon or under which its electric lines and gas pipelines are located. At the time each of the principal properties was purchased a title search was made. In general, no examination of titles as to rights-of-way for electric lines, gas pipelines or related facilities was made, other than examination, in certain cases, to verify the grantors' ownership and the lien status thereof. ITEM 3. LEGAL PROCEEDINGS 1. UNITED STATES OF AMERICA EX REL. JACK J. GRYNBERG V. COLUMBIA GAS TRANSMISSION CORP., ET. AL. The plaintiff filed a complaint under the False Claims Act, on behalf of the United States of America, against approximately seventy pipelines. The plaintiff claimed that the defendants had submitted false royalty reports to the government (or caused others to do so) by mismeasuring the volume and heating content of natural gas produced on Federal land and Indian lands. Plaintiff's original complaint was dismissed without prejudice for misjoinder of parties and for failing to plead fraud with specificity. In 1997, the plaintiff then filed over sixty-five new False Claims Act complaints against over 330 defendants in numerous Federal courts. One of those complaints was filed in the Federal District Court for the Eastern District of Louisiana against Columbia and twelve affiliated entities. Plaintiff's second complaint repeats the mismeasurement claims previously made and adds valuation claims alleging that the defendants have undervalued natural gas for royalty purposes in various ways, including by making sales to affiliated entities at artificially low prices. Most of the Grynberg cases were transferred to Federal court in Wyoming in 1999. In December 1999, the Columbia defendants filed a motion to dismiss plaintiff's second complaint primarily based on a failure to plead fraud with specificity. In May 2001, the Court denied the Columbia defendants' motion to dismiss. The Columbia defendants joined together with numerous other defendants and filed a motion requesting the district court to amend its order to include a certification so that the defendants could request permission from the United States Court of Appeals for the Tenth Circuit to appeal a controlling question of law. That motion was denied on July 2, 2001. 2. QUINQUE OPERATING CO. ET AL V. GAS PIPELINES, ET. AL. Plaintiff filed an amended complaint in Stevens County; Kansas state court on September 23, 1999, against over 200 natural gas measurers, mostly natural gas pipelines, including Columbia and fourteen affiliated entities. The allegations in Quinque are similar to those made in Grynberg; however, Quinque broadens the claims to cover all oil and gas leases (other than the Federal and Indian leases that are the subject of Grynberg). Quinque asserts a breach of contract claim, negligent or intentional misrepresentation, civil conspiracy, common carrier liability, conversion, violation of a variety of Kansas statutes and other common law causes of action. Quinque purports to be a nationwide class action filed on behalf of all similarly situated gas producers, royalty owners, overriding royalty owners, working interest owners and certain state taxing authorities. The defendants had previously moved the case to Federal court. On January 12, 2001, the Federal court remanded the case to state court. In June 2001, the plaintiff voluntarily dismissed nine of the thirteen Columbia entities. Discovery relating to personal jurisdiction has begun. 3. VIVIAN K. KERSHAW ET AL. V. COLUMBIA NATURAL RESOURCES, INC., ET AL. In February 2000, plaintiff filed a complaint in New York state court against Columbia, Columbia Natural Resources, Inc. and Columbia Transmission. The complaint alleges that Kershaw owns an interest in an oil and gas lease in New York and that the defendants have underpaid royalties on those leases by, among other things, failing to base royalties on the price at which natural gas is sold to the end user and by improperly deducting post-production costs. The complaint also seeks class action status on behalf of all royalty owners in oil and gas leases operated by Columbia Resources. Plaintiff seeks the alleged royalty underpayments and punitive damages. Columbia Resources and Columbia Transmission removed the case to Federal court in March 2000. The Federal court has now remanded Kershaw back to New York state court. The Columbia defendants' motion to dismiss was partially granted and partially denied by the New York state court judge on September 24, 2001. 7 ITEM 3. LEGAL PROCEEDINGS (continued) NISOURCE INC. 4. ANTHONY GONZALEZ, ET AL. V. NATIONAL PROPANE CORPORATION, ET AL. On December 11, 1997, plaintiffs Anthony Gonzalez, Helen Pieczynski, as Special Administrator of the Estate of Edmund Pieczynski, deceased, Michael Brown and Stephen Pieczynski filed a multiple-count complaint for personal injuries in the Circuit Court of Cook County, Illinois against National Propane Corporation and the Estate of Edmund Pieczynski sounding in strict tort liability and negligence. National Propane Corporation was acquired by Columbia in 1999, and this litigation was retained by Columbia when Columbia Propane was sold in 2001. Plaintiff's complaint arises from an explosion and fire, which occurred in a Wisconsin vacation cottage in 1997. National Propane, L.P. filed a third-party complaint for contribution against Natural Gas Odorizing and Phillips Petroleum Company. Written discovery has been completed and the parties are conducting oral discovery of the fact witnesses. The case has a scheduled trial date of October 17, 2002. 5. COLUMBIA GAS TRANSMISSION CORP. V. CONSOLIDATION COAL CO., ET AL. On December 21, 1999, Columbia Transmission filed a complaint in Federal court in Pittsburgh, Pennsylvania against Consolidation Coal Co. and McElroy Coal Co. (collectively, Consol), seeking declaratory and permanent injunctive relief enjoining Consol from pursuing its current plan to conduct longwall mining through Columbia Transmission's Victory Storage Field (Victory) in northern West Virginia. The complaint was served on April 10, 2000. In October 2001, the parties reached an agreement in principle to settle this matter and the related case described below. 6. MCELROY COAL COMPANY V. COLUMBIA GAS TRANSMISSION CORPORATION On February 12, 2001, McElroy Coal Company (McElroy), an affiliate of Consolidation Coal Co., filed a complaint against Columbia Transmission in Federal court in Wheeling, West Virginia. The West Virginia complaint seeks declaratory and injunctive relief as to McElroy's alleged right to mine coal within Victory, and Columbia Transmission's obligation to take all necessary measures to permit McElroy to longwall mine. The complaint also seeks compensation for the inverse condemnation of any coal that cannot be mined due to Columbia Transmission's Victory operations. Except for the claim of inverse condemnation, McElroy's West Virginia complaint appears to be virtually identical to Consol's original counterclaim to Columbia Transmission's Federal court action in Pennsylvania. On April 10, 2001, the West Virginia case was dismissed without prejudice. In October 2001, the parties reached an agreement in principle to settle this matter and the related case described above. 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None SUPPLEMENTAL ITEM--EXECUTIVE OFFICERS OF THE REGISTRANT The following is a list of the Executive Officers of the Registrant, including their names, ages and offices held, as of February 1, 2002.
YEARS WITH NAME AGE NISOURCE OFFICE(s) HELD IN PAST 5 YEARS - ---- --- ---------- ------------------------------ Gary L. Neale....................... 62 12 Chairman, President and Chief Executive Officer of NiSource Inc. since March 1993. Stephen P. Adik..................... 58 15 Vice Chairman of NiSource Inc. since November 2000. Senior Executive Vice President, Chief Financial Officer and Treasurer of NiSource Inc. from February 1999 to November 2000. Executive Vice President, Chief Financial Officer and Treasurer of NiSource Inc. from January 1994 to January 1999. Catherine G. Abbott................. 51 1 Group President, Pipeline of NiSource Inc. since November 2000. Chief Executive Officer and President of Columbia Gas Transmission Corporation and Chief Executive Officer of Columbia Gulf Transmission Company since January 1996. James M. Clarke..................... 43 4 Senior Vice President, Enterprise Risk Management since January 2002. Executive Vice President, Portfolio Management, Merchant Energy from August 2001 to January 2002. Senior Vice President, Risk Management and Capital Allocation of NiSource Inc. since November 2000 to August 2001. Vice President of Risk Management & Capital Allocation of NiSource Inc. from June 2000 to November 2000. Risk Management Officer from February 1998 to May 2000. Prior thereto head of equity trading at DRW Investments. Peter V. Fazio, Jr.................. 61 1 Executive Vice President and General Counsel of NiSource Inc. since November 2000. Partner in the law firm of Schiff Hardin & Waite since 1984.
9 NISOURCE INC. SUPPLEMENTAL ITEM--EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
YEARS WITH NAME AGE NISOURCE OFFICE(s) HELD IN PAST 5 YEARS - ---- --- ---------- ------------------------------ Jeffrey W. Grossman................. 50 1 Vice President and Controller of NiSource Inc. since November 2000. Vice President and Controller of Columbia Energy Group from May 1996 to October 2000. Dennis W. McFarland................. 49 1 Vice President and Treasurer of NiSource Inc. since June 2001. Vice President, Finance and Planning of NiSource Inc. from November 2000 to May 2001. Senior Vice President of Finance and Planning of Columbia Gas of Ohio from March 1996 to October 2000. Patrick J. Mulchay.................. 60 39 Group President, Merchant Energy of NiSource Inc. since November 2000. Executive Vice President of NiSource Inc. and Chief Operating Officer at Northern Indiana Public Service Company from February 1999 to October 2000. Executive Vice President and Chief Operating Officer at Northern Indiana Public Service Company from July 1996 to January 1999. Michael W. O'Donnell................ 57 1 Executive Vice President and Chief Financial Officer of NiSource Inc. since November 2000. Senior Vice President and Chief Financial Officer of Columbia Energy Group from October 1993 to October 2000. Stephen P. Smith.................... 41 1 President and Chief Operating Officer of NiSource Corporate Services Company and President, Business Services of NiSource Inc. since November 2000. Deputy Chief Financial Officer for Columbia Energy Group from December 1999 to October 2000. Senior Vice President and Chief Financial Officer at Columbia Gas Transmission Corporation and Columbia Gulf Transmission Company from February 1997 to December 1999. Vice President of Business Development at Columbia Gas Transmission Corporation from June 1996 to February 1997.
10 NISOURCE INC. SUPPLEMENTAL ITEM--EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
YEARS WITH NAME AGE NISOURCE OFFICE(s) HELD IN PAST 5 YEARS - ---- --- ---------- ------------------------------ Mark D. Wyckoff..................... 39 10 President and Chief Operating Officer of Primary Energy since November 2001 and President, Energy Technologies of NiSource Inc. since November 2000. Vice President of Human Resources of NiSource Inc. from June 1998 to November 2000. Assistant Treasurer of NiSource Inc. from September 1997 to November 2000. Principal, NiSource Development Company, Inc. from January 1994 to August 1997. Jeffrey W. Yundt.................... 56 22 Group President, Energy Distribution of NiSource Inc. since November 2000. Executive Vice President of NiSource and President and Chief Executive Officer at Bay State Gas Company from February 1999 to October 2000. Executive Vice President and Chief Operating Officer of EnergyUSA, Inc. and President of NI Energy Services, Inc. from July 1996 to January 1999.
11 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS NISOURCE INC. NiSource's common shares are listed and traded on the New York, Chicago and Pacific stock exchanges. The table below indicates the high and low sales price of NiSource's common shares, on the composite tape, during the periods indicated.
2001 2000 ------------------ ------------------ HIGH LOW High Low ---- --- ---- --- First Quarter 31.20 25.87 21.31 12.81 Second Quarter 32.55 26.15 19.13 16.44 Third Quarter 28.70 22.20 26.31 18.56 Fourth Quarter 24.48 18.25 31.50 23.69
As of January 31, 2002, NiSource had 49,389 common stockholders of record and 207,505,264 shares outstanding. On November 1, 2000, NiSource issued 72,452,733 shares of common stock in exchange for Columbia shares in connection with the Columbia acquisition. On November 27, 2000, NiSource issued 11,500,000 shares of common stock with the proceeds used to reduce borrowings under the NiSource Finance acquisition credit facility The policy of the Board has been to declare cash dividends on a quarterly basis payable on or about the 20th day of February, May, August and November. NiSource paid quarterly common dividends of $0.29 per share during 2001. At its January 2002 meeting, the Board declared a quarterly common dividend of $0.29 per share, payable on February 20, 2002 to holders of record on January 31, 2002. Holders of NiSource's common shares are entitled to receive dividends when, as and if declared by the Board out of funds legally available. Although the Board currently intends to consider the payment of regular quarterly cash dividends on common shares, the timing and amount of future dividends will depend on the earnings of NiSource's subsidiaries, their financial condition, cash requirements, regulatory restrictions, any restrictions in financing agreements and other factors deemed relevant by the Board. The following limitations on payment of dividends apply to Northern Indiana: When any bonds are outstanding under its First Mortgage Indenture, Northern Indiana may not pay cash dividends on its stock (other than preferred or preference stock) or purchase or retire common shares, except out of earned surplus or net profits computed as required under the provisions of the maintenance and renewal fund. At December 31, 2001, Northern Indiana had approximately $157.7 million of retained earnings (earned surplus) available for the payment of dividends. Future common share dividends by Northern Indiana will depend upon adequate retained earnings, adequate future earnings and the absence of adverse developments. So long as any shares of Northern Indiana's cumulative preferred stock are outstanding, no cash dividends shall be paid on its common shares in excess of 75% of the net income available for the preceding calendar year, unless the aggregate of the capital applicable to stocks subordinate as to assets and dividends, would equal or exceed 25% of the sum of all obligations evidenced by bonds, notes, debentures or other securities, plus the total capital and surplus. At December 31, 2001, the sum of the capital applicable to stocks subordinate to the cumulative preferred stock plus the surplus was equal to 43% of the total capitalization including surplus. 12 ITEM 6. SELECTED FINANCIAL DATA NISOURCE INC. SELECTED SUPPLEMENTAL INFORMATION
Year Ended December 31, ($ in millions) 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- Gross Revenues Gas Distribution 4,241.2 2,025.5 954.0 614.7 800.8 Gas Transmission and Storage 606.8 231.1 79.9 61.6 47.2 Electric 1,010.5 1,002.1 1,014.4 1,426.6 1,015.4 Exploration and Production 156.9 37.4 -- -- -- Merchant Operations 3,004.9 2,498.1 1,029.0 595.0 383.8 Other 438.4 236.5 201.2 145.9 275.1 ======= ======= ======= ======= ======= TOTAL GROSS REVENUES 9,458.7 6,030.7 3,273.5 2,843.8 2,522.3 ------- ------- ------- ------- ------- Net Revenues 3,403.4 1,948.0 1,392.7 1,152.6 1,146.8 Operating Income 1,008.9 557.4 437.9 402.8 390.0 Net Income 216.2 150.9 160.4 193.9 190.8 Shares outstanding at the end of the year 207,492 205,553 124,139 117,531 124,312 Number of common shareholders 49,589 52,085 40,741 36,277 37,373 Basic Earnings Per Share ($) Continuing operations 1.03 1.05 1.24 1.56 1.48 Income from discontinued operations -- 0.07 0.05 0.04 0.06 Change in accounting 0.02 -- -- -- -- ------- ------- ------- ------- ------- Basic Earnings Per Share 1.05 1.12 1.29 1.60 1.54 ======= ======= ======= ======= ======= Diluted Earnings Per Share ($) Continuing operations 1.01 1.04 1.22 1.55 1.47 Income from discontinued operations -- 0.07 0.05 0.04 0.06 Change in accounting 0.02 -- -- -- -- ------- ------- ------- ------- ------- Diluted Earnings Per Share 1.03 1.11 1.27 1.59 1.53 ======= ======= ======= ======= ======= Return on average common equity 6.3% 6.3% 12.8% 16.1% 16.1% Times interest earned (pre-tax) 1.51 1.74 2.20 3.26 3.48 Dividends paid per share 1.16 1.08 1.02 0.96 0.90 Dividend payout ratio 110.5% 96.4% 79.1% 60.0% 58.4% Market values during the year: High 32.55 31.50 30.50 33.63 24.94 Low 18.25 12.81 16.56 24.75 19.00 Close 23.06 30.75 17.88 30.44 24.72 Book value of common shares 16.72 16.59 10.90 9.78 10.17 Market-to-book ratio at year end 137.9% 185.4% 163.9% 311.2% 243.1% Total Assets 17,374.1 19,682.7 6,428.6 4,595.4 4,618.2 Capital expenditures 679.2 365.8 293.9 198.3 179.0 Capitalization Common shareholder's equity 3,469.4 3,409.1 1,353.5 1,149.7 1,264.8 Preferred and preference stock 88.6 132.7 139.6 142.0 144.5 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company debentures 345.0 345.0 345.0 -- -- Long-term debt 5,780.8 5,802.7 1,775.8 1,555.8 1,555.7 ======= ======= ======= ======= ======= TOTAL CAPITALIZATION 9,683.8 9,689.5 3,613.9 2,847.5 2,965.0 ======= ======= ======= ======= ======= NUMBER OF EMPLOYEES 12,501 14,674 7,399 6,035 5,984 ======= ======= ======= ======= =======
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NISOURCE INC.
INDEX PAGE - ----- ---- Consolidated Review.................................................. 14 Liquidity and Capital Resources...................................... 17 Market Risk Sensitive Instruments and Positions...................... 20 Other Information.................................................... 23 Gas Distribution Operations.......................................... 26 Gas Transmission and Storage Operations.............................. 32 Electric Operations.................................................. 36 Exploration and Production Operations................................ 40 Merchant Operations.................................................. 42 Other................................................................ 45
The Management's Discussion and Analysis, including statements regarding market risk sensitive instruments, contains "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Investors and prospective investors should understand that many factors govern whether any forward-looking statement contained herein will be or can be realized. Any one of those factors could cause actual results to differ materially from those projected. These forward-looking statements include, but are not limited to, statements concerning NiSource's plans, proposed dispositions, objectives, expected performance, expenditures and recovery of expenditures through rates, stated on either a consolidated or segment basis, and any and all underlying assumptions and other statements that are other than statements of historical fact. From time to time, NiSource may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of NiSource, are also expressly qualified by these cautionary statements. All forward-looking statements are based on assumptions that management believes to be reasonable; however, there can be no assurance that actual results will not differ materially. Realization of NiSource's objectives and expected performance is subject to a wide range of risks and can be adversely affected by, among other things, increased competition in deregulated energy markets, weather, fluctuations in supply and demand for energy commodities, successful consummation of proposed acquisitions and dispositions, growth opportunities for NiSource's regulated and nonregulated businesses, dealings with third parties over whom NiSource has no control, actual operating experience of acquired assets, NiSource's ability to integrate acquired operations into its operations, the regulatory process, regulatory and legislative changes, changes in general economic, capital and commodity market conditions, and counter-party credit risk, many of which risks are beyond the control of NiSource. In addition, the relative contributions to profitability by each segment, and the assumptions underlying the forward-looking statements relating thereto, may change over time. CONSOLIDATED REVIEW The Consolidated Review information should be read taking into account the critical accounting policies adopted by NiSource and discussed in "Other Information" of this Item 7. Net Income For the twelve months ended December 31, 2001, NiSource reported income from continuing operations of $212.1 million, or $1.03 per share, compared to $141.1 million, or $1.05 per share, in 2000 and $153.9 million, or $1.24 per share in 1999. After adjusting for non-recurring items as reflected on the table below, income from continuing operations was $249.6 million, or $1.22 per share in 2001, $251.5 million, or $1.87 per share in 2000 and $172.0 million or $1.38 per share in 1999. All per share amounts are based on basic common shares. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC.
Twelve months ended December 31, (in millions, except per share amounts) 2001 2000 1999 -------- -------- -------- Income from Continuing Operations as Reported $ 212.1 $ 141.1 $ 153.9 Adjustments for non-recurring items: Costs related to Columbia acquisition 4.1 67.4 8.1 Write-down of assets 5.8 63.2 18.3 MHP (gain) and subsequent settlement 9.7 (23.8) -- Restructuring costs 17.9 3.6 -- Insurance settlement -- -- (8.3) ======== ======== ======== Total Adjustments for Non-recurring Items 37.5 110.4 18.1 ======== ======== ======== Income from Continuing Operations after Adjustments $ 249.6 $ 251.5 $ 172.0 ======== ======== ======== Earnings Per Basic Common Share $ 1.22 $ 1.87 $ 1.38 ======== ======== ========
Taking into account income from continuing operations, results from discontinued operations and a change in accounting, NiSource reported 2001 net income of $216.2 million, or $1.05 per share, 2000 net income of $150.9 million, or $1.12 per share, and $160.4 million, or $1.29 per share for 1999. The results for 2001 and 2000 are not comparable due to the acquisition of Columbia that was completed on November 1, 2000. The current year includes a full twelve months of Columbia operations while 2000 included November and December only. In addition, earnings per share are not comparable because of the issuance of additional NiSource shares in connection with the Columbia acquisition. The positive impact of the addition of two million Columbia gas customers as well as the addition of new business segments (Gas Transmission and Storage and Exploration and Production) was reduced by record setting warm weather, a continuing economic downturn in the industrial and manufacturing sectors and a reduced level of trading opportunities for the merchant segment. The results for 2000 and 1999 are not directly comparable, due to the Columbia acquisition completed on November 1, 2000. The positive impact of Columbia's net income for November and December of 2000 was increased by improved results from EnergyUSA, Inc., higher weather-related natural gas deliveries and electric sales in December 2000 and summer 2000 and a $23.8 million after-tax gain on the sale of NiSource's interests in Market Hub Partners, L.P. (MHP) in September 2000. Results were negatively impacted by approximately $67.4 million of costs in 2000 and $8.1 million in 1999 related to the Columbia acquisition, and $63.2 million of expense in 2000 and $18.3 million for 1999 for the write-down of certain assets. In 1999, a favorable adjustment of $8.3 million after-tax was recorded for an insurance settlement associated with clean-up activities for certain manufactured gas plant sites. Additional expense was also incurred in 2000 related to restructuring activities and the amortization of goodwill and higher interest and facility fees on borrowings. In November 2001, NiSource, IWCR and the city of Indianapolis (City) signed a definitive agreement for the City to buy the assets of IWC and other assets of IWCR and its subsidiaries for $515.0 million, which includes $132.4 million in IWCR debt and the redemption of $2.5 million of IWC preferred stock. NiSource will retain $80.0 million in IWC debt. It is anticipated that the transaction will be completed in the second quarter of 2002. Consequently, these operations are reflected in discontinued operations. These discontinued operations resulted in after-tax income of $0.1 million for 2001, $9.8 million for 2000 and $6.5 million in 1999. Net Revenues Total consolidated net revenues (gross revenues less cost of sales) for the twelve months ended December 31, 2001, were $3,403.4 million, a $1,455.4 million increase over 2000. The increase, primarily attributable to twelve months of Columbia operations in 2001 compared to two months in 2000, was reduced by approximately $63.0 million by record setting warmer than normal weather. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. Net revenues for 2000 of $1,948 million, increased $555.3 million over 1999 due in part to $433.1 million from the inclusion of Columbia's operations for the last two months of 2000 and an increase of $41.4 million for the full year effect of Bay State. Bay State was acquired in February 1999. Also contributing to the increase were improved margins on electric and wholesale natural gas sales, gas and power trading activities and increased sales to commercial and industrial customers. Expenses Operating expenses were $2,394.5 million in 2001, a $1,003.9 million increase over 2000. The increase was primarily attributable to including twelve months of Columbia operations in 2001 compared to two months in 2000. In addition, the current year was negatively impacted by restructuring costs of $28.7 million, uncollectibles of $17.8 million related to the Enron bankruptcy, an increase in uncollectible customer accounts of $13.1 million and a one time charge of $15.5 million related to the settlement of the MHP litigation. Other transition and one-time events increased operating expenses $21.7 million. Depreciation, depletion and amortization expense in 2001 included goodwill amortization of $93.1 million for twelve months attributable to the Columbia acquisition compared to $15.0 million for two months in 2000. Operating expenses of $1,390.6 million for 2000 increased $435.8 million over 1999. Operation and maintenance expense was $245.9 million higher due primarily to the inclusion of Columbia's results for November and December 2000 and the full year effect of Bay State. Higher expense in 2000 compared to 1999 was also attributable to costs related to restructuring activities that were implemented in 2000 to improve efficiencies, and higher employee related costs. In addition, $65.8 million of expense was recorded in 2000 to reflect losses on the sale of certain assets. In 1999, expense was reduced $13 million due to a favorable insurance adjustment related to manufactured gas plant site clean-up costs. Depreciation, amortization and depletion expense increased $81.1 million reflecting Columbia's operations for the last two months of 2000, the amortization of goodwill associated with the Columbia acquisition and the full year effect of Bay State as well as additional plant in service. Taxes other than income were $156.1 million higher also primarily due to the inclusion of Columbia for the last two months of 2000 and the full year effect of Bay State. Other Income (Deductions)
Twelve Months Ended December 31, (in millions) 2001 2000 1999 ------- ------- ------- Interest expense, net $(597.7) $(304.5) $(155.4) Minority interests (20.4) (20.4) (17.7) Preferred stock dividends (7.5) (7.8) (8.1) Other, net 12.0 42.3 (20.6) ======= ======= ======= Total Other Income (Deductions) $(613.6) $(290.4) $(201.8) ======= ======= =======
Other Income (Deductions) in 2001 reduced income $613.6 million compared to a reduction in 2000 of $290.4 million. Interest expense, net increased $293.2 million over 2000 primarily due to the full year effect of interest on Columbia outstanding debt and the debt incurred for the acquisition, offset by a decrease in interest rate on short-term borrowings. See Note 8 of the Notes to Consolidated Financial Statements for additional information. Dividends paid on Company-obligated mandatorily redeemable preferred securities reflected in the table above as minority interests, were $20.4 million in 2001 and 2000. Preferred stock dividends paid were $7.5 million in 2001 and $7.8 million in 2000. Other, net increased 2001 income $12.0 million in 2001 and $42.3 million in 2000. The year 2000 included a $51.9 million gain on the sale of NiSource's interest in MHP. Other Income (Deductions) in 2000 reduced income $290.4 million compared to a reduction in income of $201.8 million in 1999. Interest expense, net increased $149.1 million over 1999 due to additional borrowings incurred as a result of the acquisition of Columbia, the full year effect of interest on the $160 million in Puttable Reset Securities (PURS) issued in September 1999 and increased short-term borrowings. Costs associated with facility fees and the ineffective component of interest rate hedges were charged to interest expense in 2000. See Note 8 of the Notes to Consolidated Financial Statements for additional information. In 2000, dividends paid on Company-obligated mandatorily redeemable preferred securities reflected in the table above as minority interests, were $20.4 million, an increase of $2.7 million from 1999, reflecting the full year effect of dividends on these securities, which were issued in February 1999. Other, net, increased $62.9 million primarily reflecting a $51.9 million gain on the sale of 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. NiSource's interests in MHP in September 2000. In 1999, a $16.5 million non-recurring charge was recorded associated with the carrying value of oil and gas properties and a loss that resulted from a decision to abandon certain businesses and facilities that were not consistent with NiSource's strategic direction. Income Taxes Income taxes increased $57.3 million in 2001 over 2000 and increased $43.7 million in 2000 over 1999 primarily as a result of changes in pre-tax income and timing differences for certain deferred tax issues. The effective income tax rate was 46.3%, 47.2% and 34.8% in 2001, 2000 and 1999, respectively. See Note 9 of the Notes to Consolidated Financial Statements for additional information. Discontinued Operations Discontinued operations reflected after-tax gain of $0.1 million, or less than one cent per share, in 2001 compared to after-tax income of $9.8 million, or $0.07 per share, in 2000 and $6.5 million, or $0.05 per share, in 1999. Income on discontinued operations reflects results for NiSource's water operations. LIQUIDITY AND CAPITAL RESOURCES Generally, cash flow from operations has provided sufficient liquidity to meet current operating requirements. A significant portion of NiSource's operations, most notably in the gas and electric distribution businesses, are subject to seasonal fluctuations in cash flow. During the heating season, which is primarily from November through March, cash receipts from gas sales and transportation services typically exceed cash requirements. In the summer months, cash receipts for electric sales normally exceed requirements. Also, during the summer months, cash on hand, together with external short-term and long-term financing, is used in operations to purchase gas to place in storage for heating season deliveries; perform necessary maintenance of facilities; make capital improvements in plant; and expand service into new areas. Credit Facilities On November 1, 2000, NiSource completed the acquisition of Columbia for approximately $6 billion plus the assumption of approximately $2 billion of Columbia debt. The acquisition was accomplished through the creation of a new holding company. To complete the acquisition of Columbia, NiSource, through NiSource Finance, arranged a $6 billion 364-day acquisition facility with a syndicate of banks. On November 1, 2000, the closing date of the acquisition, the facility supported $4.1 billion of commercial paper issued to finance the Columbia acquisition. Subsequent to the November 1, 2000 Columbia acquisition, NiSource reduced its acquisition related commercial paper borrowings through the issuance of $2.5 billion of privately placed notes completed on November 10, 2000. This issuance included $750 million of three-year notes paying a 7.5% coupon and maturing on November 15, 2003, $750 million of five-year notes paying a 7.625% coupon and maturing on November 15, 2005 and $1 billion of ten-year notes paying a 7.875% coupon and maturing on November 15, 2010. Subsequently, an additional $150 million of five-year notes were issued, bearing a 7.625% coupon and maturing on November 15, 2005. On November 27, 2000, NiSource issued 11,500,000 new shares of NiSource common stock at an offering price of $25.25 per share. The $280.9 million of net proceeds were used to repay commercial paper. During March 2001, NiSource arranged $2.5 billion in revolving credit facilities with a syndicate of banks to support its future working capital requirements, providing back-stop support for NiSource's commercial paper program. The new facility consolidated essentially all of NiSource's existing short-term credit facilities into one credit facility. The $2.5 billion credit facility consists of a $1.25 billion 364-day facility that terminates on March 22, 2002 and a $1.25 billion facility that terminates on March 23, 2004. On April 6, 2001, NiSource Finance issued $300.0 million of unsecured two-year notes guaranteed by NiSource, paying a 5.75% coupon and maturing on April 15, 2003. The proceeds were used to repay commercial paper. As a means of further improving the balance sheet, NiSource intends to improve liquidity through proceeds obtained from the divestiture of the Indianapolis Water Company and SM&P, the issuance of additional notes and the sale of equity subsequent to the resolution of its pending rate investigation with the Indiana Utility Regulatory Commission. Additionally, NiSource is currently evaluating the appropriate dollar commitment level, if any, to be renewed under the 364-day facility on March 22, 2002. NiSource has begun preparation for the facility renewal and syndication process. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. As of December 31, 2001 and December 31, 2000, $1,004.3 million and $2,078.8 million of commercial paper was outstanding, respectively. The weighted average interest rate on commercial paper outstanding as of December 31, 2001 and December 31, 2000 was 3.14% and 7.44%, respectively. In addition, NiSource had outstanding credit facility advances under its 3-year facility of $850.0 million at December 31, 2001 at a weighted average interest rate of 2.575%, and credit facility advances (notes payable) of $417.9 million at December 31, 2000, at a weighted average interest rate of 7.78%. As of December 31, 2001 and December 31, 2000, NiSource had $51.7 million and $128.5 million of standby letters of credit outstanding, respectively. As of December 31, 2001, $629.0 million of credit was available under the facility. See Note 15 of the Notes to the Consolidated Financial Statements for more information. Credit Ratings On December 6, 2001 Fitch Ratings downgraded the long-term debt ratings of NiSource Inc and its subsidiaries. Fitch cited weak consolidated credit coverage ratios and higher than projected debt levels at NiSource, resulting in a credit profile which was more consistent with a "BBB" rating category, rather than the previous "BBB+" rating. At the same time, Fitch also assigned a "Stable" ratings outlook for NiSource and its subsidiaries. On February 5, 2002, Fitch reaffirmed the credit ratings of NiSource Inc. and its subsidiaries, but revised the Company's ratings outlook from "Stable" to "Negative". In January 2002, Standard and Poor's affirmed NiSource's BBB credit rating and its A2 commercial paper rating with a negative outlook. On December 7, 2001, Moody's Investors Service put under review for possible downgrade the short-term and long-term debt ratings of NiSource Inc. and its subsidiaries. Moody's stated rationale for their negative ratings watch action was NiSource's higher than expected overall leverage level and concerns about the effect that the weakening local economy might have on the Company's operating results. Immediately following the Moody's ratings watch action, the Company's ability to rollover maturities within the A2/P2 commercial paper market was significantly constrained. As a result, the Company utilized its revolving credit facility to fund a number of commercial paper maturities occurring subsequent to the Moody's ratings watch action. At December 31, 2001, $850.0 million of commercial paper maturities had been refinanced through NiSource's revolving credit facility. On February 1, 2001, Moody's downgraded the senior unsecured long-term debt ratings of NiSource and NiSource Finance to Baa3 and the commercial paper rating of NiSource Finance to P3. In addition, Moody's downgraded the long-term debt ratings of all other rated subsidiaries to Baa2 to align the ratings of the subsidiaries and bring them closer to the parent's ratings going forward. As a split-rated A2/P3 commercial paper issuer, the Company expects that its access to the commercial paper market will be significantly constrained and will meet its liquidity needs going forward by using its revolving credit facility and also terming-out a portion of its short-term borrowing requirements in the fixed-income capital markets. Moody's also revised the Company's Outlook from "Stable" to "Negative". NiSource has entered into gas and electric trading agreements that contain "ratings triggers" that require increased collateral if the credit ratings of the Company or certain of its subsidiaries fall below BBB- at Standard and Poor's or Baa3 at Moody's. The collateral requirement from a downgrade below the ratings trigger levels would amount to approximately $50.0 million to $60.0 million. In addition to agreements with ratings triggers, there are other agreements that contain "adequate assurance" or "material adverse change" provisions. The collateral requirement for those agreements would amount to approximately $110.0 million to $115.0 million. In the case of NiSource's Primary Energy subsidiaries, ratings triggers would result in increases in the financing rates used to calculate operating lease payments for four of the projects. One other Primary Energy project would require the issuance of a letter of credit in the event of a ratings downgrade below Ba1 by Moody's or BB+ by Standard and Poor's. The letter of credit required in the event of a downgrade would have a face amount of $17 million to $35 million depending on the extent of the downgrade. Columbia is the principal for surety bonds issued to guarantee performance under forward gas sales agreements. The surety bonds related to forward gas sales under agreements with Mahonia II Limited have indemnity values amounting to approximately $294.0 million declining over time and have ratings triggers if the credit rating of Columbia falls below BBB at Standard and Poor's or Baa2 at Moody's. Columbia's long-term debt ratings are currently BBB and Baa2 at Standard and Poor's and Moody's, respectively. The collateral requirement from a downgrade below the ratings trigger levels would require the posting of a letter of credit of approximately $294.0 million declining over time. In another, but unrelated transaction, the surety in accordance with the terms of its indemnity agreement, has asked that NiSource post a letter of credit in the face amount of approximately $131.0 million declining over time to support the bonds. NiSource will comply with this request. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. Columbia of Ohio is a party to an agreement to sell, without recourse, substantially all of its trade receivables to Columbia Accounts Receivable Corporation (CARC), a wholly-owned subsidiary of Columbia. CARC, in turn, is party to an agreement in which it sells a percentage ownership interest in a defined pool of the accounts receivable to a commercial paper conduit. Under these agreements, CARC may not sell any new receivables to the conduit if Columbia's debt rating falls below BBB or Baa2 at Standard and Poor's and Moody's, respectively. In addition, if Columbia's debt rating falls below investment grade, the agreements terminate and CARC may not sell any new receivables to the conduit. Contractual Obligations and Commercial Commitments NiSource has certain contractual obligations that extend out beyond 2002. These commitments include long-term debt; lease obligations, primarily operating leases related to the Company's Primary Energy subsidiaries; and unconditional purchase obligations for pipeline capacity, transportation and storage services through the Company's Gas Distribution subsidiaries. The total contractual cash obligations in existence at December 31, 2001 due pursuant to contractual commitments are:
(in millions) 2002 2003 2004 2005 2006 After -------- -------- -------- -------- -------- -------- Long-term debt $ 398.0 $1,199.0 $ 115.4 $1,013.7 $ 440.0 $3,152.1 Capital leases 0.2 0.2 0.3 0.3 0.4 1.0 Operating leases 149.8 168.1 110.5 109.3 157.9 643.2 Unconditional purchase obligations 136.2 92.8 80.8 64.8 53.2 237.5 -------- -------- -------- -------- -------- -------- Total contractual obligations $ 684.2 $1,460.1 $ 307.0 $1,188.1 $ 651.5 $4,033.8 ======== ======== ======== ======== ======== ========
NiSource also has made certain commercial commitments that extend beyond 2002. These commitments include lines of credit, letters of credit and financing guarantees. The total commercial commitments in existence at December 31, 2001 and the years in which they expire are:
(in millions) 2002 2003 2004 2005 2006 After -------- -------- -------- -------- -------- -------- Lines of credit $1,004.3 $ -- $ 850.0 $ -- $ -- $ -- Letters of credit 7.2 40.2 2.8 0.6 -- 1.0 Guarantees 722.8 17.0 -- 116.8 1,095.0 1,090.3 -------- -------- -------- -------- -------- -------- Total commercial commitments $1,734.3 $ 57.2 $ 852.8 $ 117.4 $1,095.0 $1,091.3 ======== ======== ======== ======== ======== ========
Capital Expenditures The table below reflects actual capital expenditures by segment for 2001 and 2000 and an estimate for year 2002:
(in millions) 2002E 2001 2000 ------ ------ ------ Gas Distribution $190.7 $211.3 $138.3 Transmission & Storage 132.3 137.4 50.3 Electric 205.1 134.7 132.2 Exploration & Production 91.0 118.8 22.7 Merchant 6.1 0.8 1.2 Other 25.6 76.2 21.1 ------ ------ ------ Total $650.8 $679.2 $365.8 ====== ====== ======
For 2001, capital expenditures were $679.2 million, an increase of $313.4 million over 2000. These figures are not directly comparable due to the Columbia acquisition on November 1, 2000. Columbia's capital expenditures for the last two months are included in the 2000 financial statements. The gas distribution segment's capital program in 2001 included investments to extend service to new areas and develop future markets, as well as expenditures to ensure safe, reliable and improved service to customers. The transmission and storage segment spent $85.7 million in 2001 to ensure the safety and reliability of the pipelines. The remaining $51.7 million was used for market development activities and new business initiatives. The electric program expenditures mainly related to adding new customers and maintaining equipment. The exploration and production segment's 2001 program primarily included the drilling of 230 new wells in the Appalachian Basin and Canada. Other products and services comprised of $28.7 million for the completion of Transcom's fiber optics network, $13.0 million for investments in fuel cell technologies and the remainder for information technology improvements and infrastructure maintenance. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. For 2002, the projected capital program is expected to be $650.8 million, which is $28.4 million lower than the 2001 level. This reduced spending reflects the continued commitment of NiSource to focus on optimizing return on investments at the core business segments. The program will be funded primarily from cash from operations as well as anticipated capital markets transactions. All estimated capital and investment expenditures for the above segments are subject to periodic review and revision and may vary depending on a number of factors including, but not limited to, industry restructuring, regulatory constraints, acquisition opportunities, market volatility and economic trends. Enron Bankruptcy Filing On December 2, 2001, Enron Corp. filed for protection from creditors under Chapter 11 of the United States Bankruptcy Code. NiSource has certain exposure to Enron, as a result of hedging and trading activities and providing services to Enron at NiSource's gas pipeline and gas distribution subsidiaries. Prior to Enron's bankruptcy filing, NiSource had basis and commodity swaps, pipeline transportation and storage agreements, physical commodity contracts for natural gas, electricity and coal, and SO2 trading agreements in place with Enron as the counterparty. All contracts, with the exception of the pipeline transportation and storage agreements and a contract to supply gas to choice customers of the Columbia of Ohio gas distribution subsidiary, were terminated by NiSource at the end of November 2001. NiSource recorded a pre-tax charge of $17.8 million in 2001 related to the Enron bankruptcy filing. MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS 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 and credit 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 continue to evolve and are subject to ongoing review and modification. Through its various business activities, NiSource is exposed to risk including non-trading and trading risks. The non-trading risks to which NiSource is exposed include interest rate risk, commodity price risk and credit risk of its subsidiaries. The risk resulting from trading activities consists primarily of commodity price and credit risks. NiSource's risk management policy permits the use of certain financial instruments to manage its market risk, including futures, forwards, options and swaps. 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 and credit risks, including value-at-risk (VaR) and instrument sensitivity to market factors. VaR represents the potential loss or gain for an instrument or portfolio from adverse changes in market factors, for a specified time period and at a specified confidence level. Non-Trading Risks Commodity price risk resulting from non-trading activities at NiSource's rate-regulated subsidiaries is limited, since current regulations allow recovery of prudently incurred purchased power, fuel and gas costs through the rate-making process. As the utility industry undergoes deregulation, these operations may be providing services without the benefit of the traditional rate-making process and will be more exposed to commodity price risk. NiSource enters into certain sales contracts with customers based upon a fixed sales price and varying volumes, which are ultimately dependent upon the customer's supply requirements. NiSource utilizes derivative financial instruments to reduce the commodity price risk based on modeling techniques to anticipate these future supply requirements. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. NiSource's exploration and production segment is also exposed to market risk due primarily to fluctuations in commodity prices. In order to help minimize this risk, NiSource has adopted a policy that requires commodity-hedging activities to help ensure stable cash flow, favorable prices and margins. NiSource is exposed to interest rate risk as a result of changes in interest rates on borrowings under revolving credit agreements and lines of credit, which have interest rates that are indexed to short-term market interest rates, and refinancing risk in the commercial paper markets. At December 31, 2001 and December 31, 2000, the combined borrowings outstanding under these facilities totaled $1,854.3 million and $2,496.7 million, respectively. Based upon average borrowings under these agreements during 2001 and 2000, an increase in short-term interest rates of 100 basis points (1%) would have increased interest expense by $19.4 million and $15.7 million for the year ended 2001 and 2000, respectively. NiSource is also exposed to interest rate risk under a synthetic lease agreement related to its Primary Energy subsidiary. A portion of the synthetic lease payment floats with a referenced interest rate, thus exposing Primary Energy to interest rate risks. Primary Energy engages in interest rate swaps to fix the floating payment and designates these instruments as cash flow hedges. The swaps are entered into to effectively hedge the cash flow risk of the anticipated lease payments. Due to the nature of the industry, credit risk is a factor in many of NiSource's business activities. In sales and trading activities, credit risk arises because of the possibility that counterparty will not be able or willing to fulfill its obligations on a transaction on or before settlement date. In derivative activities, credit risk arises when counter-parties to derivative contracts, such as interest rate swaps, are obligated to pay NiSource the positive fair value or receivable resulting from the execution of contract terms. Exposure to credit risk is measured in terms of both current and potential exposure. Current credit exposure is generally measured by the notional or principal value of financial instruments and direct credit substitutes, such as commitments and standby letters of credit and guarantees. Current credit exposure includes the positive fair value of derivative instruments. Because many of NiSource's exposures vary with changes in market prices, NiSource also estimates the potential credit exposure over the remaining term of transactions through statistical analyses of market prices. In determining exposure, NiSource considers collateral and master netting agreements, which are used to reduce individual counterparty credit risk. Trading Risks The transactions associated with NiSource's energy trading operations give rise to various risks, including market risks resulting from the potential loss from adverse changes in the market prices of natural gas or electricity. The gas and power trading operations market and trade over-the-counter contracts for the purchase and sale of natural gas and electricity and also trade natural gas products on the NYMEX. The gas marketing and trading activities consists of both physical and trading activities. The power trading activities generally do not result in the physical delivery of electricity. Some contracts within the trading portfolio may require settlement by physical delivery, but are net settled in accordance with industry standards. NiSource employs a VaR model to assess the market risk of its energy trading portfolios. Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as liquidity, will result in losses for a specified position or portfolio. NiSource estimates the one-day VaR across all trading groups that utilize derivatives using 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 $1.1 million, $3.7 million and effectively zero, respectively, at December 31, 2001. The daily VaR for the gas trading portfolio on an average, high and low basis was $0.9 million, $4.7 million and $0.2 million at December 31, 2001, respectively. Trading Contracts A summary of the activity affecting the change in fair value of NiSource's trading contracts during 2001 is as follows:
(in millions) 2001 ------- Fair value of contracts outstanding at the beginning of the period $ 22.5 Contracts realized or otherwise settled during the period (including net option premiums received) (62.2) Fair value of new contracts entered into during the period 64.5 Other changes in fair values during the period (15.9) ------ Fair value of contracts outstanding at the end of the period $ 8.9 ======
21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. The fair values of the contracts related to NiSource's trading operations, the sources of the valuations of the contracts at December 31, 2001 and the years in which they mature are:
(in millions) 2002 2003 2004 2005 2006 After ----- ----- ----- ----- ----- ----- Prices actively quoted $0.8 $0.5 $ -- $ -- $ -- $ -- Prices from other external sources (1.2) 4.3 2.4 0.5 0.2 -- Prices based on models/other method 1.6 (0.2) -- -- -- -- ---- ---- ---- ---- ---- ---- Total fair values $1.2 $4.6 $2.4 $0.5 $0.2 $ -- ==== ==== ==== ==== ==== ====
Contracts reported within the caption "Prices actively quoted" include futures and options traded on the NYMEX. The caption "Prices from other external sources" generally includes contracts traded on commodity exchanges and over-the-counter contracts whose value is based on published indices or other publicly available pricing information. Contracts shown within "Prices based on models/other method" are valued using a Black-Scholes option pricing model. Accounting Change Effective January 1, 2001, NiSource adopted the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as subsequently amended by SFAS No. 137 and SFAS No. 138 (collectively referred to as SFAS No. 133). These statements establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and resulting designation. The adoption of this statement on January 1, 2001, resulted in a cumulative after-tax increase to net income of approximately $4 million and an after-tax reduction to other comprehensive income (OCI) of approximately $17 million. The adoption also resulted in the recognition of $178 million of assets and $212.8 million of liabilities on the consolidated balance sheet. Additionally, the adoption resulted in the reduction of hedged risk basis of $3.8 million and the reclassification of deferred revenue to OCI of $17.9 million. Approximately $7.4 million of the net losses included in the cumulative effect of a change in accounting principle component of OCI were reclassified into earnings during 2001. Refer to "Summary of Significant Accounting Policies - Accounting for Risk Management Activities" and "Risk Management Activities" in Notes 2 and 8, respectively, of Notes to the Consolidated Financial Statements for further discussion of NiSource's risk management. OTHER INFORMATION Critical Accounting Policies NiSource has adopted certain accounting policies based on the accounting requirements discussed below that have had, and may continue to have, significant impacts on NiSource's results of operations and consolidated balance sheets. SFAS NO. 71 - ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION. Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71), provides that rate-regulated subsidiaries account for and report assets and liabilities consistent with the economic effect of the way in which regulators establish rates, if the rates established are designed to recover the costs of providing the regulated service and if the competitive environment makes it probable that such rates can be charged and collected. NiSource's rate-regulated subsidiaries follow the accounting and reporting requirements of SFAS No. 71. Certain expenses and credits subject to utility regulation or rate determination normally reflected in income are deferred on the balance sheet and are recognized in income as the related amounts are included in service rates and recovered from or refunded to customers. The total amounts of regulatory assets and liabilities reflected on the Consolidated Balance Sheets were $751.3 million and $82.7 million at December 31, 2001, and $970.6 million and $22.1 million at December 31, 2000, respectively. 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. In the event that regulation significantly changes the opportunity for NiSource to recover its costs in the future, all or a portion of NiSource's regulated operations may no longer meet the criteria for the application of SFAS No. 71. In such event, a write-down of all or a portion of NiSource's existing regulatory assets and liabilities could result. If transition cost recovery is approved by the appropriate regulatory bodies that would meet the requirements under generally accepted accounting principles for continued accounting as regulatory assets and liabilities during such recovery period, the regulatory assets and liabilities would be reported at the recoverable amounts. If NiSource would not be able to continue to apply the provisions of SFAS No. 71, NiSource would have to apply the provisions of SFAS No. 101, "Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement No. 71." In management's opinion, NiSource's regulated subsidiaries will be subject to SFAS No. 71 for the foreseeable future. Certain of the regulatory assets reflected on NiSource's Consolidated Balance Sheets require specific regulatory action in order to be included in future service rates. Although recovery of these amounts is not guaranteed, NiSource believes that these costs meet the requirements for deferral as regulatory assets under SFAS No. 71. Regulatory assets requiring specific regulatory action amounted to $278.4 million and $196.6 million at December 31, 2001 and 2000, respectively. SFAS NO. 133 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and resulting designation. Unrealized and realized gains and losses are recognized each period as components of other comprehensive income, regulatory assets and liabilities or earnings depending on the nature of such derivatives. For subsidiaries that utilize derivatives for cash flow hedges, the effective portions of the gains and losses are recorded to other comprehensive income and are recognized in earnings concurrent with the disposition of the hedged risks. For fair value hedges, the gains and losses are recorded in earnings each period along with the change in the fair value of the hedged item. For hedges of foreign currency the accounting treatment generally follows the treatment for cash flow hedges or fair value hedges depending on the nature of the foreign currency hedge. As a result of the rate-making process, the rate-regulated subsidiaries generally record gains and losses as regulatory liabilities or assets and recognize such gains or losses in earnings when recovered in revenues. In order for a derivative contract to be designated as a hedge, the relationship between the hedging instrument and the hedged item or transaction must be highly effective. The effectiveness test is performed at the inception of the hedge and each reporting period thereafter, throughout the period that the hedge is designated. Any amounts determined to be ineffective are recorded currently in earnings. Although NiSource applies some judgment in the assessment of hedge effectiveness to designate certain derivatives as hedges, the nature of the contracts used to hedge the underlying risks is such that the correlation of the changes in fair values of the derivatives and underlying risks is generally high. NiSource generally uses NYMEX exchange-traded natural gas futures and options contracts and over-the-counter swaps based on published indices to hedge the risks underlying its natural gas-related businesses. NiSource had $66.0 million of price risk management assets and $10.3 million of price risk management liabilities primarily related to cash flow hedges at December 31, 2001. The amount of unrealized gains recorded to other comprehensive income was $50.1 million at December 31, 2001. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. EMERGING ISSUES TASK FORCE ISSUE NO. 98-10 - ACCOUNTING FOR ENERGY TRADING AND RISK MANAGEMENT ACTIVITIES. NiSource evaluates the contracts of its trading operations in accordance with the criteria for derivative contracts under SFAS No. 133. Contracts not meeting the criteria under SFAS No. 133 are recorded at fair value under Emerging Issues Task Force Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities" (EITF No. 98-10). EITF No. 98-10 indicates that when certain trading criteria are met, energy contracts, including "energy-related contracts" such as tolling, transportation and storage contracts, should be accounted for at fair value (marked to market) along with any related derivative contracts. The related gains and losses should be included currently in earnings. Energy trading activities refers to energy contracts entered into with the objective of generating profits on or from exposure to shifts or changes in market prices. NiSource believes that the primary business of its trading operations indicates that the results of the trading activities should be accounted for under EITF No. 98-10. Pursuant to the requirements of EITF No. 98-10, NiSource records the results of its trading operations on a mark to market basis with realized and unrealized gains and losses recorded currently in earnings. The assessment of fair values is mainly based on pricing information on exchange-traded contracts. NiSource does not recognize significant amounts of income or loss at the origination of its trading deals. At December 31, 2001 and 2000, NiSource reflected $252.3 million and $1,591.1 million of price risk management assets and $243.4 million and $1,568.6 million of price risk management liabilities related to unrealized gains and losses on trading activities, respectively. Trading revenues, net of cost of sales, were $59.3 million, $24.5 million and $9.6 million for the years 2001, 2000 and 1999, respectively. EMERGING ISSUES TASK FORCE ISSUE NO. 97-10 - THE EFFECT OF LESSEE INVOLVEMENT IN ASSET CONSTRUCTION. Emerging Issues Task Force Issue No. 97-10, "The Effect of Lessee Involvement in Asset Construction" (EITF No. 97-10), provides the accounting requirements for situations in which an entity (lessee) is involved on behalf of an owner (lessor) with the construction of an asset that will be leased to the lessee when construction of the asset is completed. Various forms of the lessee's involvement during the construction period may indicate that the lessee is, in substance, the owner of the asset for financial reporting purposes. Generally, the lessee is considered the owner of the asset if the lessee has substantially all of the construction period risks. If the lessee is considered the owner of the asset during the construction period, a sale and leaseback of the asset occurs when construction of the asset is complete and the lease term begins. In these synthetic lease situations, the owner-lessor is generally a special purpose entity. Pursuant to Emerging Issues Task Force Issue No. 90-15, "Impact of Nonsubstantive Lessors, Residual Value Guarantees and Other Provisions in Leasing Transactions" (EITF No. 90-15), these special purpose entities are not consolidated by the lessee when parties unrelated to the lessee have made substantive residual equity capital investments in the amount of at least three percent of the entities' capitalization. If the three percent test is met, the constructed asset and related debt, if any, are not included in the lessee's consolidated financial statements. Primary Energy has projects that are accounted for under EITF No. 97-10 and EITF No. 90-15. The aggregate unamortized funding for all the projects at December 31, 2001 was $629.7 million. NiSource does not consolidate the assets or related debt in its consolidated financial statements. Competition The regulatory environment applicable to NiSource's subsidiaries continues to undergo fundamental changes. These changes have previously had, and will continue to have an impact on NiSource's operations, structure and profitability. At the same time, competition within the energy industry will create opportunities to compete for new customers and revenues. Management has taken steps to become more competitive and profitable in this changing environment. These initiatives include partnering on energy projects with major industrial customers, providing its customers with increased choice for new products and services, acquiring companies that increase NiSource's scale of operations and establishing subsidiaries that develop new energy-related products for residential, commercial and industrial customers, including the development of distributed generation technologies. September 11, 2001 Terrorist Attacks The September 11, 2001 terrorist attacks that occurred on the World Trade Center in New York City and the Pentagon in Washington D.C. has had pervasive negative impacts on several U.S. industries and on the U.S. economy in general. While NiSource was not directly impacted by the event, the Company believes that it has been impacted indirectly. Since the incident, NiSource has noted evidence of substantial rate increases and additional coverage restrictions in the energy insurance market. The Company expects the cost of its insurance and related deductibles to be higher than they were previously, when much of its insurance is renewed in July 2002. Other indirect impacts of the September 11 incident include lower revenues due to the negative impact on certain of NiSource's industrial customers and higher costs related to items such as travel and security. Presentation of Segment Information As a result of the November 1, 2000 acquisition of Columbia, NiSource revised its presentation of primary business segment information. Columbia's gas transmission and storage and exploration and production businesses are now reported as business segments of NiSource. Columbia's gas distribution operations have been combined with NiSource's gas distribution business. During 2001, NiSource realigned a portion of its operations and reclassified previously reported operating segment information to conform to the realigned operating structure. The realignment affected three previously reported segments, and included moving all ongoing operations of Energy Marketing and certain operations from the Electric Operations and Other segments to the newly created Merchant Operations segment. The electric wheeling, bulk power, and power trading operations were moved from the Electric Operations segment to Merchant Operations, and the Company's Primary Energy subsidiary, which develops on-site, industrial-based energy solutions, was moved from Other to Merchant Operations. All periods presented reflect these changes. The business segment information should be read taking into account the critical accounting policies adopted by NiSource and discussed in "Other Information" of this Item 7. 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS DISTRIBUTION OPERATIONS
Year Ended December 31, (in millions) 2001 2000 1999 ------------ ------------ ------------ NET REVENUES Sales Revenues $ 3,892.1 $ 2,008.6 $ 966.6 Less: Cost of gas sold 2,889.5 1,417.2 588.8 ------------ ------------ ------------ Net Sales Revenues 1,002.6 591.4 377.8 Transportation Revenues 389.8 144.6 75.1 ------------ ------------ ------------ Net Revenues 1,392.4 736.0 452.9 ------------ ------------ ------------ OPERATING EXPENSES Operation and maintenance 638.1 280.2 189.1 Depreciation and amortization 228.8 146.7 115.0 Other taxes 144.7 68.1 34.8 ------------ ------------ ------------ Total Operating Expenses 1,011.6 495.0 338.9 ------------ ------------ ------------ Operating Income $ 380.8 $ 241.0 $ 114.0 ============ ============ ============ REVENUES ($ IN MILLIONS) Residential 2,148.9 1,250.4 572.1 Commercial 820.3 446.5 207.5 Industrial 118.1 92.2 58.5 Transportation 389.8 144.6 75.1 Off System Sales 613.4 97.2 101.9 Other 191.4 122.3 26.6 ------------ ------------ ------------ Total 4,281.9 2,153.2 1,041.7 ------------ ------------ ------------ SALES AND TRANSPORTATION (MDTH) Residential sales 220.3 142.4 94.2 Commercial sales 92.8 57.3 39.2 Industrial sales 15.3 15.2 13.3 Transportation 507.7 304.6 263.1 Other 171.4 19.9 40.8 ------------ ------------ ------------ Total 1,007.5 539.4 450.6 ------------ ------------ ------------ HEATING DEGREE DAYS 4,791 5,284 5,593 NORMAL HEATING DEGREE DAYS 5,434 6,454 6,104 % COLDER (WARMER) THAN NORMAL (12)% (18)% (8)% CUSTOMERS Residential 2,294,395 2,352,219 939,426 Commercial 230,389 216,346 85,632 Industrial 5,835 5,952 3,788 Transportation 721,075 637,075 42,306 Other 21 24 69 ------------ ------------ ------------ Total 3,251,715 3,211,616 1,071,221 ------------ ------------ ------------
25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS DISTRIBUTION OPERATIONS (CONTINUED) Competition Gas Distribution competes with investor-owned, municipal, and cooperative electric utilities throughout its service area, and to a lesser extent with propane and fuel oil suppliers. Gas Distribution continues to be a strong competitor in the energy market as a result of strong customer preference for natural gas. Electric competition is generally strongest in the residential and commercial markets of Kentucky, southern Ohio, southwestern Pennsylvania and western Virginia where electric rates are primarily driven by low-cost coal-fired generation. Gas competes with fuel oil and propane in the New England markets. Restructuring In December 2001, NiSource announced a restructuring program designed to generate greater efficiencies in field operations, customer contact centers and administrative support staff throughout various Gas Distribution and Electric Operations companies. In October 2001, NiSource executed a reorganization of sales and marketing functions. The current year results include $28.7 million in expenses mainly for severance costs associated with these programs. Of this total, $22.5 million was included in the Gas Distribution segment operating results with the remainder included in the Electric Operations segment results. The programs will result in a reduction of 500 employees in field operations, contact centers, administrative support and sales and marketing functions throughout the NiSource Gas Distribution and Electric Operations segment companies. Regulatory Matters The gas industry deregulation, which began in the mid-1980s at the federal level, has broadened to retail customers at the state level. Large industrial and commercial customers have had the ability to purchase natural gas directly from marketers and to use Gas Distribution's facilities for transportation services for several years. This opportunity to choose an alternative supplier is now migrating into the small commercial and residential customer classes with approved or pilot transportation programs being used in 8 of the 9 states. As of December 31, 2001, approximately 700,000 of Gas Distribution's 3.2 million customers have selected an alternate supplier. Gas Distribution continues to develop customer choice opportunities through regulatory initiatives in all of its jurisdictions. While these programs are intended to provide all customer classes with the opportunity to obtain gas supplies from alternative merchants, Gas Distribution expects to play a substantial role in supplying gas commodity services to its customers in the foreseeable future. As customers enroll in these programs and purchase their gas from other suppliers, the Gas Distribution subsidiaries are left with pipeline capacity they have contracted for, but no longer need. The state commissions in jurisdictions served by Gas Distribution are at various stages in addressing these issues and other transition considerations. Gas Distribution is currently recovering, or has the opportunity to recover, the costs resulting from the unbundling of its services and believes that most of such future costs will be mitigated or recovered. Methodologies for mitigating or recovering transition costs include incentive sharing mechanisms, decontracting of pipeline capacity and mandatory assignment of pipeline capacity to alternative suppliers. In December 1999, the Public Utilities Commission of Ohio (PUCO) approved a request from Columbia Gas of Ohio, Inc. (Columbia of Ohio) that extends Columbia of Ohio's Customer CHOICE(SM) program through October 31, 2004, freezes base rates through October 31, 2004 and resolves the issue of transition costs from pipeline capacity. Under the agreement, Columbia of Ohio assumes total financial risk for mitigation of transition capacity costs at no additional cost to customers. Columbia of Ohio has the opportunity to utilize non-traditional revenue sources as a means of offsetting the costs. On November 20, 2001, the PUCO issued final rules to implement the provisions of choice legislation enacted by the Ohio General Assembly on March 27, 2001. The new rules establish the process for PUCO certification and regulation of competitive retail natural gas suppliers, establish minimum service standards for competitive natural gas suppliers, and specify the procedures for establishment of governmental aggregation programs, in which consumers have the right to "opt-out" of the program. The new rules are expected to become effective in mid-2002. A number of parties, including Columbia of Ohio, have requested rehearing on certain provisions of these rules. The PUCO has granted a rehearing. 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS DISTRIBUTION OPERATIONS (CONTINUED) As part of the Kentucky Public Service Commission order approving the acquisition of Columbia, Columbia of Kentucky is required to file a rate case that includes an estimate of net merger savings and a mechanism to reflect on customers' bills merger savings. Northern Utilities, New Hampshire Division, filed a general rate case in November 2001. The filing proposes an increase in revenue of $3.8 million or approximately 7.4% of annual operating revenues. On February 7, 2002, the New Hampshire Public Utilities Commission (NHPUC) granted an interim rate increase of approximately $2.3 million. Actual revenues will be reconciled to permanent rates at the conclusion of the general rate case. On August 11, 1999, the Indiana Utility Regulatory Commission (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. Northern Indiana's gas cost adjustment factor also 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. Northern Indiana made its annual filing on September 1, 2001. FERC Order 637 The FERC issued Order 637 on February 9, 2000. The order sets forth revisions to the previous regulatory framework to improve the competitiveness and the efficiency of the interstate natural gas transportation market. It effects changes in regulations relating to scheduling procedures, pipeline penalties, more transparent pricing, new pipeline service offerings, capacity release capabilities, new reporting requirements and various other service related issues intended to enhance competition in the industry. Since the order was issued, pipelines have made pro forma filings to comply. Gas Distribution has actively engaged in settlement discussions with all of its pipeline suppliers as well as with other major customers on those pipeline systems in an effort to resolve pertinent issues. To date, only a few minor pipeline suppliers have been able to reach an agreement with customers and file settlements, which have generally been approved by FERC. The major pipeline suppliers have virtually all made revised pro forma compliance filings, which continue to be protested by the majority of their customers. Those filings have been awaiting FERC action since early last fall. Based upon early orders from FERC on some pipelines' compliance filings, Gas Distribution believes that implementation of Order 637 will begin to take place prior to the winter of 2002-2003. Not all of the pipelines serving Gas Distribution have resolved their Order 637 proceedings; however, FERC's recent clarifications have provided some guidance regarding the effect of Order 637 on various aspects of pipeline operations. Gas Distribution is evaluating those effects, but given the degree of compromise that occurred from all segments of the industry, management believes that full implementation of Order No. 637 will not have a material effect upon Gas Distribution costs, operations, or income. Environmental Matters REMEDIATION. Several Gas Distribution subsidiaries are "potentially responsible parties" (PRPs) at waste disposal sites under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) (commonly known as Superfund) and similar state laws, including at former manufactured gas plant (MGP) sites which such subsidiaries, or their corporate predecessors, own or previously owned or operated. Gas Distribution subsidiaries may be required to share in the cost of clean up of such sites. In addition, some Gas Distribution subsidiaries have corrective action liability under the Resource Conservation and Recovery Act (RCRA) for closure and clean up costs associated with underground storage tanks, and under the Toxic Substances Control Act (TSCA) for clean up of polychlorinated biphenyls (PCBs) released at various facilities. 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS DISTRIBUTION OPERATIONS (CONTINUED) Gas Distribution subsidiaries are parties to or otherwise involved in clean up of four waste disposal sites under Superfund or similar state laws. For one of these sites the potential liability is de minimis and, for the other three, the final costs of clean up have not yet been determined. As site investigations and clean-ups proceed and as additional information becomes available, waste disposal site liability is reviewed periodically and adjusted. A program has been instituted to identify and investigate former MGP sites where Gas Distribution subsidiaries or predecessors are the current or former owner. The investigation has identified 84 such sites. Initial investigation has been conducted at 42 sites. Of these sites, additional investigation activities have been completed or are in progress at 34 sites and remedial measures have been implemented or completed at 19 sites. Only those site investigation, characterization and remediation costs currently known and determinable can be considered "probable and reasonably estimable" under Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" (SFAS No. 5). As costs become probable and reasonably estimable, reserves will be adjusted as appropriate. As reserves are recorded, regulatory assets are recorded to the extent environmental expenditures are expected to be recovered through rates. NiSource is unable, at this time, to accurately estimate the time frame and potential costs of the entire program. Management expects that, as characterization is completed, additional remediation work is performed and more facts become available, NiSource will be able to develop a probable and reasonable estimate for the entire program or a major portion thereof consistent with the Securities and Exchange Commission's Staff Accounting Bulletin No. 92 (SAB No. 92) which covers accounting and disclosures relating to loss contingencies, SFAS No. 5, and American Institute of Certified Public Accountants Statement of Position 96-1 "Environmental Remediation Liabilities" (SOP No.96-1). As of December 31, 2001, a reserve of approximately $68.2 million has been recorded to cover probable environmental response actions. The ultimate liability in connection with these sites will depend upon many factors, including the volume of material contributed to the site, years of ownership or operation, the number of other PRPs and their financial viability and the extent of environmental response actions required. Based upon investigations and management's understanding of current environmental laws and regulations, NiSource believes that any environmental response actions required, after consideration of insurance coverage, contributions from other PRPs and rate recovery, will not have a material effect on its financial position. MERCURY PROGRAM. Until the 1960s, gas regulators containing small quantities of mercury were installed in homes on some natural gas systems. The purpose of these regulators was to reduce the pressure of the natural gas flowing from the service line for use inside of the home. In 2000, several gas distribution companies unaffiliated with NiSource were involved in highly publicized testing and clean up programs resulting from mercury spills associated with the removal of gas regulators containing mercury. A number of the NiSource Gas Distribution subsidiaries historically utilized gas regulators that contained small quantities of mercury. All NiSource Gas Distribution subsidiaries have implemented programs to investigate, maintain and/or remove and replace gas regulators containing mercury, including procedures ensuring that any accidental mercury spills are detected and properly cleaned up. To date no material problems associated with past or current use or removal of mercury regulators have been identified. As a result, NiSource believes it is unlikely that any financial exposure from this matter would have a material effect on its financial position or results of operations of its Gas Distribution subsidiaries. Market Conditions The recession during 2001 contributed to lower demand. Reduced production and fuel switching (to coal, #6 oil and distillate) resulted in industrial throughput falling 25% from its peak of over 400 Bcf. The steel industry, which has historically represented over two-thirds of the industrial throughput in Indiana and over one-third of the industrial throughput in the major markets of Ohio, Pennsylvania and Kentucky, was particularly hard hit with a number of companies filing for bankruptcy. 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS DISTRIBUTION OPERATIONS (CONTINUED) In the winter of 2000-2001, spot prices for gas purchases exceeded $6.00/dth. The unprecedented high prices were due primarily to tight supply and increased demand during this period. Demand was higher than in previous periods due to the continued economic expansion in 2000, proliferation of gas-fired electric generation and record cold weather during November and December 2000. Lower production coupled with increased demand resulted in lower storage levels of natural gas for many companies during the 2000-2001 winter season. Spot prices for the current winter period are in the low to mid-$2.00/dth range; prices more in line with winter seasons in the 1990s. Entering this winter, storage levels were well above those of recent years as a result of the economic downturn, reduced demand for gas-driven electric power generation and increased natural gas drilling activity. Given the high storage levels in place mid-way through this winter, the current price levels are expected to continue through this winter season. The higher prices of late 2000 and early 2001 encouraged producers to increase natural gas drilling activities over levels experienced in 1999. By mid 2001, this resulted in the highest level of natural gas drilling activity since the early 1980s. However, with the drop in prices since last winter, that trend in drilling has turned around, with about 26% fewer active rigs in December 2001 compared to the high experienced in July 2001, and about 6% fewer compared to a year ago in December 2000. All NiSource Gas Distribution companies have state-approved recovery mechanisms that provide a means for full recovery of prudently incurred gas costs. Gas costs are treated as pass-through costs and have no impact on the net revenues recorded in the period. The gas costs included in revenues are matched with the gas cost expense recorded in the period and the difference is recorded on the balance sheet to be included in a future billing mechanism to true up customer billings. The impact of the higher gas costs on Gas Distribution customers' bills and bankruptcies in the steel industry were primarily responsible for the $13.1 million, or 22%, increase in uncollectible expenses recorded in 2001. In Ohio, regulatory approval was given to defer $19.5 million of current year uncollectible expense, representing the excess of current year expense over the amounts collected in base rates. The Gas Distribution companies have pursued non-traditional revenue sources within the evolving natural gas marketplace. These efforts include both the sale of products and services upstream of its service territory, the sale of products and services in its service territories and gas supply cost incentive mechanisms for service to its core markets. The upstream products are made up of transactions that occur between the Gas Distribution company and a buyer for the sales of unbundled or rebundled gas supply and capacity products. The on-system services are offered by the company to customers and include products such as the transportation of gas on the Gas Distribution company system. The incentive mechanisms give the Gas Distribution companies an opportunity to share in the savings created from such things as gas purchase prices paid below an agreed benchmark and its ability to reduce pipeline capacity charges. The treatment of the revenues generated from these types of transactions vary by operating company with some sharing in the benefits with customers and others using these revenues to mitigate transition costs occurring as the result of choice programs described above under "Regulatory Matters." Gas Distribution generated $42.2 in net revenues from various non-traditional sales and incentive programs in 2001, a $38.7 million increase over the prior year. Weather Weather in the Gas Distribution service territory was 12% warmer than normal. This negatively impacted the deliveries primarily to residential and commercial customers by approximately 36.0 million dekatherms (Mdth) versus prior year and reduced net revenues by approximately $63.0 million from prior year. Weather in 2000 and 1999 was 18% and 8%, respectively, warmer than normal. Throughput Total volumes sold and transported of 1,007.5 MDth for 2001 increased 468.1 MDth from 2000. Columbia's five Gas Distribution companies contributed 550.8 MDth additional throughput. This increase was partially offset by the impact of the economic decline on the industrial demand, primarily the steel industry. Additionally, the warmer weather reduced current period throughput by 35.7 Mdth. Throughput for 2000 of 539.4 MDth increased 88.8 MDth from 1999, due to the acquisition of Columbia on November 1, 2000. 29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS DISTRIBUTION OPERATIONS (CONTINUED) Net Revenues Net revenues for 2001 were $1,392.4 million, up $656.4 million over 2000. The acquisition of Columbia generated higher net revenues of $704.5 million, partially offset by a decline of approximately $63.0 million as a result of warmer weather. Operating Income For the twelve months ended December 31, 2001, operating income for Gas Distribution operations was $380.8 million, an increase of $139.8 million over the same period in 2000, reflecting the benefit of twelve months of Columbia operations compared to two months in 2000. The increase was tempered by record setting warmer than normal weather that reduced operating income by approximately $63.0 million, a $36.0 million increase in amortization of goodwill associated with the acquisition of Columbia and $23.4 million for restructuring costs. In addition, higher uncollectibles increased $13.1 million over the prior year, primarily resulting from the higher cost of gas in the 2000-2001 heating period. This negative variance was reduced by the impact of a favorable order that allows regulatory treatment of customer bad debts totaling approximately $19.5 million. Operating income of $241.0 million for 2000 increased $127.0 million over 1999 reflecting two months of Columbia's operations and the full year effect of Bay State operations. Tempering these improvements was $16.9 million of expense in 2000 for the write-down of certain assets in preparation for sale and approximately $6.9 million of expense related to the amortization of goodwill attributable to the acquisition of Columbia, restructuring costs and higher employee related costs. These higher costs were partially offset by lower customer related expenses. 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS TRANSMISSION AND STORAGE OPERATIONS
Year Ended December 31, (in millions) 2001 2000 ------- ------ OPERATING REVENUES Transportation Revenues $ 756.7 $ 199.9 Storage revenues 178.9 29.9 Other revenues 28.1 3.6 ------- ------ Total Operating Revenues 963.7 233.4 Less: Cost of gas sold 80.1 62.4 ------- ------ Net Revenues 883.6 171.0 ------- ------ OPERATING EXPENSES Operation and maintenance 321.0 68.9 Depreciation and amortization 161.4 27.7 Loss on asset impairment - 16.9 Other taxes 52.2 9.9 ------- ------ Total Operating Expenses 534.6 123.4 ------- ------ Operating Income $ 349.0 $ 47.6 ======= ====== THROUGHPUT (MDTH) Columbia Transmission Market Area 970.2 285.0 Columbia Gulf Mainline 626.3 114.2 Short-haul 184.7 28.8 Intrasegment eliminations (609.2) (109.8) Columbia Pipeline Deep Water 3.0 0.1 Crossroads Gas Pipeline 37.4 40.7 Granite State Pipeline 29.0 36.4 ------- ------ Total 1,241.4 395.4 ======= =====
Proposed Millennium Pipeline Project The proposed Millennium Pipeline Project (Millennium Project), in which Columbia Transmission is participating and will serve as developer and operator, will transport western gas supplies to northeast and mid-Atlantic markets. The 442-mile pipeline will connect to Canadian facilities at a new Lake Erie export point and transport approximately 700,000 Dth per day to eastern markets. In August 2001, TransCanada Pipelines Ltd. and St. Clair Pipelines, Ltd., the sponsors of the proposed upstream Canadian facilities to the Lake Erie export point, withdrew their pending applications before Canada's National Energy Board for approval of the proposed facilities, without prejudice to refiling at a later date. The withdrawal notice cited the delays encountered in Millennium's FERC proceedings. On December 19, 2001, the FERC issued a certificate approving the construction and operation of the pipeline, subject to a number of conditions, including a condition that construction may not commence until any necessary Canadian authorizations are obtained. Furthermore, the certificate requires that the Millennium facilities be constructed within two years from the date of the order. Rehearing requests were filed on January 18, 2002. To date, a number of shippers have signed agreements for a significant portion of the available capacity. In light of the changing market environment, Millennium is in ongoing discussions with potential shippers regarding the extent and timing their needs. The sponsors of the proposed Millennium Project are Columbia Transmission, Westcoast Energy, Inc., TransCanada Pipe Lines Ltd. and MCN Energy Group, Inc. 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS TRANSMISSION AND STORAGE OPERATIONS (CONTINUED) Sale of Facilities Columbia Transmission continues to evaluate and dispose of non-core assets. Columbia Transmission is currently negotiating with third parties on the sale of small diameter pipelines and other facilities in Kentucky, Ohio, New York, Pennsylvania and West Virginia. Transportation for New Electric Generation Projects During 2001, Columbia Transmission began providing up to 629,000 dekatherms a day (Dth/d) to serve five new electric generating facilities. Columbia Transmission has also requested permission from the FERC to construct facilities to provide up to 260,000 Dth/d to two electric generating facilities scheduled to be in service in 2003. Effect of LDC Unbundling Services NiSource's Gas Transmission and Storage subsidiaries compete with other interstate pipelines for the transportation and storage of natural gas. Since the issuance of FERC Order No. 636, various states throughout Columbia Transmission's service area have initiated proceedings dealing with open access and unbundling of LDC services. Among other things, unbundling involves providing all LDCs with the choice of what entity will serve as transporter as well as merchant supplier. While the scope and timing of these various unbundling initiatives varies from state to state, retail choice programs are being extended to LDC customers throughout Columbia Transmission's market area. Among the issues being addressed in the state unbundling proceedings is the treatment of the pipeline transmission and storage agreements that have underpinned the traditional LDC merchant function. In the case of Columbia Transmission and Columbia Gulf, contracts covering the majority of their firm transportation and storage quantities with LDCs have primary terms that extend to October 31, 2004. Management fully expects that the LDCs, or those entities to which pipeline capacity may be assigned as a result of the LDC unbundling process, will continue to fulfill their obligations under these contracts. However, in view of the changing market and regulatory environment, NiSource's Gas Transmission and Storage companies have commenced the process of discussing long-term transportation and storage service needs with their firm customers. Those discussions could result in the restructuring of some of these contracts on mutually agreeable terms prior to 2004. Environmental Matters Columbia Transmission continues to conduct characterization and remediation activities at specific sites under a 1995 EPA Administrative Order by Consent (AOC). The program pursuant to the AOC covers approximately 240 facilities, approximately 13,000 liquid removal points, approximately 2,200 mercury measurement stations and about 3,700 storage well locations. As of December 31, 2001, field characterization has been performed at all sites. Site characterization reports and remediation plans, which must be submitted to the EPA for approval, are in various stages of development and completion. Remediation has been completed at the mercury measurement stations, liquid removal point sites and storage well locations and at a number of the 240 facilities. Only those site investigation, characterization and remediation costs currently known and determinable can be considered "probable and reasonably estimable" under SFAS No. 5. As costs become probable and reasonably estimable, reserves will be adjusted as appropriate. Columbia Transmission is unable, at this time, to accurately estimate the time frame and potential costs of the entire program. Management expects that as characterization reports and remediation plans are completed and approved by the EPA and additional remediation work is performed, Columbia Transmission should be able to develop a probable and reasonable estimate for the entire program consistent with SAB No. 92, SFAS No. 5, and SOP No. 96-1. Columbia Transmission and Columbia Gulf are PRPs at several waste disposal sites. The potential liability is believed to be de minimis, however, the final allocation of clean-up costs has yet to be determined. As site investigations and clean-ups proceed and as additional information becomes available, waste disposal site liability is reviewed periodically and adjusted. At the end of 2001, the remaining environmental liability recorded on the balance sheet for Gas Transmission and Storage operations was $ 90.5 million. Columbia Transmission's environmental cash expenditures are expected to be approximately $ 12.5 million in 2002. These expenditures will be charged against the previously recorded liability. A regulatory asset has been recorded to the extent environmental expenditures are expected to be recovered through 32 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS TRANSMISSION AND STORAGE OPERATIONS (CONTINUED) rates. Management does not believe that Columbia Transmission's environmental expenditures will have a material adverse effect on NiSource's operations, liquidity or financial position, based on known facts, existing laws, regulations, Columbia Transmission's cost recovery settlement with customers and the long time period over which expenditures will be made. Lost and Unaccounted For Gas On March 1, 2001, Columbia Transmission made its annual Retainage Adjustment Mechanism (RAM) filing with the FERC to revise the retainage percentages applicable to its tariff services to be effective April 2, 2001, based on actual activity for the calendar year 2000, and projected activity over the 12-month period commencing April 1. On March 28, 2001, the FERC accepted and suspended the filing, subject to refund and further review, and noted the increase in the actual level of lost and unaccounted-for gas during 2000. On April 30, 2001, in response to the March 28, 2001 order, Columbia Transmission submitted responses to certain questions asked by the FERC with respect to the company's March 1 filing. In its responses, Columbia Transmission agreed to review certain factors that may have contributed to the increase in lost and unaccounted-for gas for calendar year 2000, and to file a report setting forth steps that may be taken to mitigate future losses. Columbia Transmission filed a report with the FERC on October 31, 2001, setting forth its analysis of items that may have contributed to the increase in lost and unaccounted-for gas. On the same date, Columbia Transmission made a supplemental filing with the FERC to decrease the transportation retainage percentage level established in the March 1 filing. On December 19, 2001, the FERC issued an order accepting the company's April 30 and October 31 filings. The order requires the company to answer certain questions in its next annual filing on March 1, 2002. Request for rehearing of the FERC's December 19 order have been filed. It is the opinion of management that the outcome of this matter is not expected to have a material effect on NiSource's financial position. Storage Base Gas Sales Columbia Transmission sold 5.4 (MDth) of base gas volumes during 2001 resulting in a pre-tax gain of $11.4 million. Base gas represents storage volumes that are maintained to ensure that adequate pressure exists to deliver current inventory. As a result of ongoing improvements made in its storage operations, Columbia Transmission determined that a portion of these storage volumes were no longer necessary to maintain deliverability of current inventory. Capital Expenditure Program The Gas Transmission and Storage segment's net capital expenditure program was $137.4 million in 2001 and is projected to be approximately $132.3 million in 2002. New business initiatives totaled approximately $51.7 million in 2001 and are expected to be $58.3 million in 2002. The remaining expenditures are for modernizing and upgrading facilities. Throughput Columbia Transmission's throughput consists of transportation and storage services for LDCs and other customers within its market area, which covers portions of northeastern, mid-Atlantic, midwestern, and southern states and the District of Columbia. Throughput for Columbia Gulf reflects mainline transportation services from Rayne, Louisiana to Leach, Kentucky and short-haul transportation services from the Gulf of Mexico to Rayne, Louisiana. Crossroads serves customers in northern Indiana and Ohio and Granite provides service in New Hampshire, Maine and Massachusetts. Throughput for the Transmission and Storage segment totaled 1,241.4 MDth for 2001, compared to 395.4 MDth in 2000. The increase primarily reflects the addition of Columbia Transmission and Columbia Gulf as a result of the acquisition of Columbia. Net Revenues Net revenues were $883.6 million for 2001, an increase of $712.6 million from 2000. This increase is primarily due to the inclusion of Columbia's operations for a full twelve months in 2001 compared to two months in 2000. 33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS TRANSMISSION AND STORAGE OPERATIONS (CONTINUED) Operating Income Operating income of $349.0 million in 2001 was an increase of $301.4 million from 2000. This increase was due primarily to the inclusion of Columbia's operations for twelve months, partially offset by an increase of $42.2 million for twelve months of amortization of goodwill for the Columbia acquisition. In addition, the current year results compare favorably to 2000 due to the negative impact for an asset impairment recognized in 2000. 34 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. ELECTRIC OPERATIONS
Year Ended December 31, (in millions) 2001 2000 1999 ---------- ---------- ---------- NET REVENUES Sales revenues $ 1,014.8 $ 1,004.6 $ 1,017.1 Less: Cost of sales 260.2 245.3 257.7 ---------- ---------- ---------- Net Revenues 754.6 759.3 759.4 ---------- ---------- ---------- OPERATING EXPENSES Operation and maintenance 222.1 232.9 223.8 Depreciation and amortization 166.8 162.7 158.5 Other taxes 56.1 48.0 53.1 ---------- ---------- ---------- Total Operating Expenses 445.0 443.6 435.4 ---------- ---------- ---------- Operating Income $ 309.6 $ 315.7 $ 324.0 ========== ========== ========== REVENUES ($ IN MILLIONS) Residential 295.7 291.1 294.2 Commercial 292.9 282.2 275.4 Industrial 404.0 413.8 416.2 Other electric service 22.2 17.5 31.3 ---------- ---------- ---------- Total 1,014.8 1,004.6 1,017.1 ---------- ---------- ---------- SALES (GIGAWATT HOURS) Residential 2,956.9 2,953.3 2,996.7 Commercial 3,446.3 3,375.9 3,293.9 Industrial 8,935.5 9,494.9 9,198.3 Other electric service 150.8 157.2 186.8 ---------- ---------- ---------- Total 15,489.5 15,981.3 15,675.7 ---------- ---------- ---------- COOLING DEGREE DAYS 879 792 1,022 NORMAL COOLING DEGREE DAYS 791 791 791 % WARMER (COLDER) THAN NORMAL 11% 0% 29% ELECTRIC CUSTOMERS Residential 381,440 379,908 376,483 Commercial 47,286 46,638 45,822 Industrial 2,643 2,663 2,678 Other electric service 802 807 816 ---------- ---------- ---------- Total 432,171 430,016 425,799 ---------- ---------- ----------
Market Conditions The regulatory frameworks applicable to Electric Operations continue to work through fundamental changes as noted below. These changes will continue to have an impact on NiSource's Electric Operation's structure and profitability. At the same time, competition within the industry will create opportunities to compete for new customers and revenues. Management has taken steps to become more competitive and profitable in this changing environment, including shutting down inefficient generating plant, converting some of its generating units to allow use of lower cost, low sulfur coal and improving the transmission interconnections with neighboring electric utilities. The overall weakening of the U.S. economy is reflected in the 559.4 gigawatt-hour (gwh) decline in sales to the industrial customer class in 2001 versus 2000. In particular, the steel and steel related industries have been adversely impacted by recent events and market conditions, with two major customers (LTV Corp. and Bethlehem Steel Corp.) declaring bankruptcy. Overall deliveries to the steel industry were down 345.8 gwh in 2001 versus the prior year. Additionally, uncollectible expense in the current year was $2.4 million higher than the prior year reflecting steel industry bankruptcies. 35 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. ELECTRIC OPERATIONS (CONTINUED) The summer cooling season weather in the electric service territory was 16% warmer in 2001 than the prior summer, causing a 130.3 kwh increase in sales to residential and commercial class customers. However, the positive impact of the warmer summer was tempered by the negative impact of a warmer than normal winter heating season, resulting in an annual 11% increase in cooling degree days and a 74.0 kwh increase in sales for the 2001 compared to 2000. Restructuring In December 2001, NiSource announced a restructuring program designed to generate greater efficiencies in field operations, customer contact centers and administrative support staff throughout various Gas Distribution and Electric Operations companies. In October 2001, NiSource executed a reorganization of sales and marketing functions. The current year results include $28.7 million in expenses mainly for severance costs associated with these programs. Of this total, $22.5 million was included in the Gas Distribution segment operating results with the remainder included in the electric segment results. The programs will result in a reduction of approximately 500 employees in field operations, contact centers, administrative support and sales and marketing functions throughout the NiSource Gas Distribution and Electric Operations segment companies. As part of the restructuring programs and in response to the decline in electric demand, the Mitchell Station, with a net capacity of 502 mw, will be shutdown by the end of the first quarter of 2002. Originally constructed in 1955, this facility has the oldest active operating units and is the least efficient station in the Northern Indiana electric production system. In addition to the high level of ongoing maintenance costs, there are substantial capital investments that are necessary to comply with future environmental standards. Costs totaling $2.2 million have been accrued for severance related to the plant shutdown. These costs for employee reductions are included in the $28.7 restructuring charge. Regulatory Matters In 1999, FERC issued Order 2000 addressing the formation and operation of RTOs. On February 28, 2001, Northern Indiana joined the Alliance RTO. On December 18, 2001, the IURC issued an order denying Northern Indiana's request to transfer functional control of its transmission facilities to the Alliance RTO. On December 20, 2001, the FERC reversed prior orders that had preliminarily approved the Alliance RTO and concluded that the Alliance RTO failed to meet Order 2000's scope and configuration requirements. FERC ordered the Alliance RTO companies, including Northern Indiana, to pursue membership in the Midwest Independent System Operator (MISO). The Alliance RTO is actively negotiating to become a part of the MISO. Northern Indiana has expended approximately $5.6 million related to joining the Alliance RTO. The Company believes that the amounts spent will be recoverable. Also, FERC has indicated that a December 15, 2001 start date for RTOs was not achievable and no alternative date has been proposed. 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. Northern Indiana has been recovering the costs of electric power purchased for sale to its customers through the Fuel Adjustment Clause. The recovery provides for cost to be collected if they are below a cap set based upon the costs of Northern Indiana's most expensive generating unit. If costs exceed this cap, Northern Indiana must demonstrate why it should be allowed recovery before recovery is approved. In January 2002, Northern Indiana filed for approval to implement a purchase power tracker (PPT). The PPT would allow recovery of all costs related to purchasing electricity for use by Northern Indiana's customers on a periodic basis. No actions have been taken by the IURC on this filing. During the course of a regularly scheduled review, referred to as a Level 1 review, the staff of the IURC made a preliminary determination, based on unadjusted historical financial information filed by Northern Indiana, that Northern Indiana was earning returns that were in excess of its last rate order and generally established standards. Despite efforts to explain to the IURC staff several adjustments that needed to be made to the filed information to make such an analysis meaningful, the staff recommended that a formal investigation be performed. During 2001, Northern Indiana and several other parties filed testimony, participated in hearings and submitted proposed forms of the order and comments on these proposed orders. Northern Indiana's testimony indicated that if rates are to be changed, they should be increased. 36 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. ELECTRIC OPERATIONS (CONTINUED) Environmental Matters AIR. 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 became fully effective in 2000. All of Northern Indiana's facilities are in compliance with the sulfur dioxide and NOx limits. During 1998, the U.S. 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. Consistent with EPA requirements, the State of Indiana developed regulations implementing the control program, which became effective September 16, 2001. The EPA approved the state rules effective December 10, 2001. Compliance with the NOx limits contained in these rules is required by May 31, 2004. The NOx emission limitations in the Indiana rules are more restrictive than those imposed on electric utilities under the CAAA's acid rain NOx reduction program described above. Capital estimates of Northern Indiana's NOx control compliance costs range from $200 to $300 million over the next 2 years. Actual compliance costs may vary depending on a number of factors including market demand/resource constraints, uncertainty of future equipment and construction costs, and the potential need for additional control technology. In a matter related to the 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 the EPA's decisions on these petitions and existing litigation to determine the impact of these developments on programs to reduce NOx emissions at Northern Indiana's electric facilities. 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. The Court of Appeals decision was appealed to the Supreme Court, which heard oral arguments on November 7, 2000. The Supreme Court rendered a complex ruling on February 27, 2001 that will require some issues to be resolved by the D.C. Circuit Court and the EPA before final rulemaking occurs. Consequently, final rules specifying a compliance level, deadline, and controls necessary for compliance are not expected in the near future. Resulting rules could require additional reductions in sulfur dioxide, particulate matter and NOx emissions from coal-fired boilers (including Northern Indiana's electric 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 and are currently not reasonably estimable. NiSource will continue to closely monitor developments in this area; however, the exact nature of the impact of the new standards on its operations will not be known for some time. The EPA has initiated enforcement actions against several electric utilities alleging violations of the new source review provisions of the Clean Air Act. Northern Indiana has received and is in the process of responding to information requests from the EPA on this subject. It is impossible at this time to predict the result of EPA's review of Northern Indiana's information responses. Initiatives are being discussed both in the United States and worldwide to reduce so-called "greenhouse gases" such as carbon dioxide, a by-product of burning fossil fuels. Reduction of such emissions could result in significant capital outlays or operating expenses for Northern Indiana. The CAAA also contain other provisions that could lead to limitations on emissions of hazardous air pollutants. In response to the CAAA requirements, on December 20, 2000, the EPA issued a finding that the regulation of emissions of mercury and other air toxics from coal and oil-fired electric steam generating units is necessary and appropriate. The EPA expects to issue proposed regulations by December 15, 2003, and finalized regulations by December 15, 2004. The potential impact, if any, to NiSource's financial results that may occur because of any of these potential new regulations is unknown at this time. 37 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. ELECTRIC OPERATIONS (CONTINUED) The EPA is in the process of developing a program to address regional haze. The new administration announced that the EPA would move forward with rules that mandate the states to require power plants built between 1962 and 1977 to install the "best available retrofit technology" or BART. The BART program will target for control by 2013 those pollutants that limit visibility, namely particulate, sulfur dioxide and/or nitrogen oxides. Until the program is developed, Northern Indiana cannot predict the cost of complying with these rules. WATER. The Great Lakes Water Quality Initiative ("GLI") program is expected to add new water quality standards for facilities that discharge into the Great Lakes watershed, including Northern Indiana's three electric generating stations located on Lake Michigan. The State of Indiana has promulgated its regulations for this water discharge permit program and has received final EPA approval. As promulgated, the regulations would provide the Indiana Department of Environmental Management (IDEM) with the authority to grant water quality criteria variances and exemptions for non-contact cooling water. However, the EPA revised the variance language and other minor provisions of IDEM's GLI rule. The EPA by and large left the non-contact cooling water exemption intact; however, a separate agreement between the EPA and IDEM on interpretation of this exemption still leaves uncertainty as to its impact. The EPA change to the variance rule has prompted litigation by the affected industrial parties and the EPA/IDEM agreement on the non-contact cooling water exemption may be subject to future litigation. Northern Indiana expects that IDEM will issue a proposed permit renewal for each of its lakeside stations. Pending the outcome of litigation and the proposed permit renewal requirements, the costs of complying with these requirements cannot be predicted at this time. REMEDIATION. Northern Indiana is a PRP at four waste disposal sites under CERCLA and similar state laws, and may be required to share in the cost of clean-up of such sites. In addition, Northern Indiana has corrective action liability under RCRA for closure and clean-up costs associated with treatment, storage, and disposal sites. As of December 31, 2001, a reserve of approximately $2.2 million has been recorded to cover probable environmental response actions at these sites. The ultimate liability in connection with these sites will depend upon many factors, including the volume of material contributed to the site, years of ownership of operations, the number of other PRPs and their financial viability and the extent of environmental response required. Based upon investigations and management's understanding of current environmental laws and regulations, NiSource believes that any environmental response required will not have a material effect on its financial position or results of operations. Sales Electric sales for 2001 of 15,489.5 gwh decreased 491.8 gwh compared to 2000, due primarily to reduced industrial sales reflecting the economic downturn and steel industry bankruptcies, partially offset by the impact of warmer weather. In 2000, electric sales of 15,981.3 gwh increased 305.6 gwh from 1999. Net Revenues Electric net revenues of $754.6 million for 2001 decreased by $4.7 million from 2000, primarily reflecting the reduced deliveries to the industrial segment. The positive impact of slightly warmer weather in the second quarter was offset by slightly cooler weather in the third quarter. In 2000, electric net revenues of $759.3 million were relatively unchanged from 1999. Operating Income Operating income for 2001 was $309.6 million, a decrease of $6.1 million from 2000. This is due to lower net revenues discussed above and higher operating expenses of $1.4 million. The 2001 operating expenses included increased uncollectible expenses of $2.4 million and restructuring charges of $6.2 million. Operating income for 2000 was $315.7 million, a decrease of $8.3 million from 1999. This was due to higher operating expenses, attributable to generally increased operating costs and higher depreciation expense as result of additional plant in service. These higher expenses were partially offset by lower other taxes. 38 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. EXPLORATION AND PRODUCTION OPERATIONS
Year Ended December 31, (in millions) 2001 2000 ------- ------- OPERATING REVENUES Gas revenues $ 215.4 $ 37.1 Gathering revenues 10.4 1.8 Other revenues 6.9 1.7 ------- ------- Total Operating Revenues 232.7 40.6 ------- ------- Operating Expenses Operation and maintenance 100.2 21.2 Depreciation and depletion 63.1 11.0 Other taxes 17.5 3.0 ------- ------- Total Operating Expenses 180.8 35.2 ------- ------- Operating Income $ 51.9 $ 5.4 ======= ======= AVERAGE PRICE OF GAS PRODUCTION ($ PER Mcf) U.S 4.04 3.98 Canada 3.99 4.52 GAS PRODUCTION (BCF): U.S 54.0 9.5 Canada 0.1 -- ------- ------- Total 54.1 9.5 ------- ------- OIL AND LIQUIDS PRODUCTION STATISTICS Production (000 Bbls) U.S 22.5 29.2 Canada 23.6 36.3 ------- ------- Total 46.1 65.5 ======= ======= Average Price ($ per Bbl) U.S 212.90 24.90 Canada 11.40 1.60 ------- -------
Change in Accounting Method During the fourth quarter of 2001, NiSource changed its method of accounting for acquisition, exploration and development activities related to oil and gas reserves from the full cost method to the successful efforts method. Under the successful efforts method of accounting, except for property acquisition costs, only costs associated with specific discovered reserves are capitalized. Capitalized costs include mineral interests in properties, wells and related equipment and facilities, support equipment, and uncompleted wells. Depletion expense is equal to annual production multiplied by the depletion rate per unit that is derived by spreading the total costs capitalized under successful efforts over the number of units expected to be extracted over the life of the reserves on a lease basis. Compared to the full cost method, the change to successful efforts reduced operating income by $5.3 million and $10.3 million for 2001 and 2000, respectively. Forward Sale of Natural Gas In 1999 and 2000, a subsidiary of Columbia Resources entered into agreements with Mahonia II Limited (Mahonia), whereby the subsidiary agreed to sell 156.7 Bcf of natural gas to Mahonia for the period February 2000 through July 2005. On March 30, 2001, the subsidiary restructured its existing forward gas sales agreements with Mahonia to postpone physical deliveries of 19.9 Bcf of natural gas originally scheduled for the period April 2001 through March 2002. These deliveries have been scheduled to resume in January 2003 and continue through February 2006. The restructuring also increased the amount of gas to be delivered by 31.7 Bcf. 39 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. EXPLORATION AND PRODUCTION OPERATIONS (CONTINUED) The forward sales under the Mahonia agreements have been guaranteed through the use of surety bonds with indemnity values amounting to approximately $294.0 million declining over time. The surety bonds have ratings triggers if the credit rating of Columbia falls below BBB at Standard and Poor's or Baa2 at Moody's. Columbia's long-term debt ratings are currently BBB and Baa2 at Standard and Poor's and Moody's, respectively. The collateral requirement from a downgrade below the ratings trigger levels would require the posting of a letter of credit in the amount of approximately $294.0 million declining over time. Volumes Gas production was 54.1 Bcf in 2001 and 9.5 Bcf in the last two months of 2000. Oil and liquids production was 53,100 barrels in 2001 and 26,500 barrels in the last two months of 2000. Operating Revenues Operating revenues for the year were $232.7 million, an increase of $192.1 million over 2000, primarily due to 2001 including twelve months of operations compared to two months in 2000. Approximately 92% of Columbia Resource's natural gas production was hedged at an average price of $4.04 per million cubic feet (Mcf) for the twelve-month period compared to an average hedged price of $3.98 per Mcf in 2000. Operating Income Operating income for 2001 was $51.9 million, an increase of $46.5 million over 2000, primarily due to 2001 including twelve months of operations compared to two months in 2000. 40 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. MERCHANT OPERATIONS
Year Ended December 31, (in millions) 2001 2000 1999 --------- --------- --------- NET REVENUES Gas $ 2,292.7 $ 2,032.8 $ 720.8 Electric 1,029.4 555.3 331.8 Other 68.6 62.7 59.4 --------- --------- --------- Total Revenues 3,390.7 2,650.8 1,112.0 Less: Cost of products purchased 3,277.7 2,497.0 1,002.4 --------- --------- --------- Net Revenues 113.0 153.8 109.6 --------- --------- --------- OPERATING EXPENSES Operation and maintenance 82.1 70.4 56.5 Depreciation and amortization 2.3 2.1 1.8 Other taxes 6.4 2.3 1.8 --------- --------- --------- Total Operating Expenses 90.8 74.8 60.1 --------- --------- --------- Operating Income $ 22.2 $ 79.0 $ 49.5 ========= ========= ========= VOLUMES Gas sales (MDth) 496.8 440.0 259.6 Electric sales (Gigawatt Hours) 25,905.7 11,352.9 6,873.6 --------- --------- ---------
Primary Energy Primary Energy is currently involved in six projects that are concerned with the generation of electricity, steam or thermal energy on the sites of industrial customers. Five projects generate energy from process streams or fuel provided by the industrial customers. The energy is then delivered to the industrial customers under long-term contracts providing for tolling fees, sublease payments, unit sale payments or processing fees. One project, Whiting Clean Energy, will obtain natural gas to produce electricity for sale in the wholesale markets and steam for industrial use. Each project is developed by a wholly-owned subsidiary (the "Lessee") of Primary Energy. The Lessee leases the facility after completion of construction from a non-affiliated special purpose entity (the "Lessor"), which owns the facility and advances the funds for construction. The Lessor obtains funding primarily from bank borrowings or a private placement of notes, secured by the Lessor's rights in the facility. The indebtedness of the Lessor is not treated as indebtedness of NiSource under generally accepted accounting principles in the United States. The lease payments from the Lessee to the Lessor are based on a return on the amounts advanced plus any amortization of the amounts advanced. With respect to three of the projects, the costs of the project financing depend on the debt rating on NiSource's outstanding commercial paper or long-term debt. The projects are located on the customers' premises pursuant to long-term ground leases. The responsibility for operation and maintenance lies directly with the industrial customers for two of the projects and with the Lessee on the remaining projects. Where the Lessee is responsible for the operation and maintenance, it contracts with third parties to manage and perform the operation and maintenance activities. NiSource, either directly or through Capital Markets, has guaranteed or in substance guaranteed most lease payments to the Lessors, including regular lease payments, accelerated lease payments on an event of default, and payment obligations, including residual guarantee amounts, at the end of lease terms. In the case of an event of default, a Lessor can accelerate the full, unamortized amount of the Lessor's funding. The aggregate unamortized funding for all the projects at December 31, 2001 was $629.7 million. At the end of an initial lease term, the Lessee has the right to purchase the facility for the unamortized amount of the Lessor's funding. If the Lessee cannot satisfy return conditions, the Lessee is required to purchase the facility at such price. If the Lessee determines not to purchase the facility and the Lessee can satisfy the return conditions, the 41 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. MERCHANT OPERATIONS (CONTINUED) Lessee may be responsible for a residual guarantee amount. Since the energy contracts with the industrial customers are long-term and typically extend past the initial lease term. One strategy is to attempt to refinance the property and extend the lease term. The present value of a Lessee's aggregate liability for lease payments and residual guarantees is generally limited to an amount equal to less than 90% of the amount advanced. The following table shows, by year, future minimum rental payments, including maximum residual guarantee amounts and additional amounts due if the Lessees were to purchase all the facilities at the end of the initial terms of the leases.
Minimum Rental Additional ($ in millions) Payments Payment TOTAL - --------------- -------------- ---------- ----- 2002 87.7 5.5 93.2 2003 103.2 12.1 115.3 2004 52.6 -- 52.6 2005 52.7 -- 52.7 2006 102.2 8.6 110.8 After 472.9 81.3 554.2
The amounts contained in the first column, representing future minimum rental payments, are included as part of the future minimum rental payments for operating leases shown in Note 18G in the Notes to Consolidated Financial Statements. Primary Energy's Whiting Clean Energy project at BP's Whiting, Indiana refinery has incurred delays primarily associated with remediating damage that occurred during commissioning in September 2001. The delays have also resulted in an increase in estimated project costs and the need for approximately $20 million of additional funding. Primary Energy has asserted a claim against the construction contractor relating to the delay. The project is expected to be capable of producing electricity in the first quarter of 2002, at a total cost of approximately $320 million. In addition to the construction issues at the Whiting Clean Energy facility, NiSource projects that the facility will operate at a loss based on the current market view of forward pricing in the gas and electric markets. For 2002, the after-tax loss is projected to be approximately $16.0 million. The profitability of the project in future periods will be dependent on, among other things, prevailing prices in the energy markets and regional load dispatch patterns. Primary Energy's Ironside project at LTV Steel Company's East Chicago, Indiana mill has been negatively impacted by LTV's bankruptcy filing in December 2000 and LTV's December 2001 decision to idle the steel mill. The Ironside facility is complete in all material respects. However, the facility cannot currently be operated on an economic basis if the mill is not operating. In addition, there can be no guarantee that LTV will not reject the project contracts in connection with the bankruptcy, in which event the Lessee will have limited contract damages against LTV and the status of an unsecured creditor. Primary Energy believes that the Ironside project brings economic value to the operator of the mill by utilizing energy waste streams to generate electricity for the mill at attractive prices. However, there can be no assurance that any successor to LTV will reopen the mill or be willing to restructure the transaction on an economic basis to Primary Energy. The winner of the bids for the purchase of LTV's steel mill will be determined on February 28, 2002. The total cost of the Ironside project is approximately $67 million. The lease at Primary Energy's North Lake project is due to expire in June 2002. Of the several options available, the most likely outcomes are that the project will be refinanced and the lease will be extended or that the Lessee will purchase the project at its unamortized cost of approximately $38 million. If the Lessee purchases the project, the payment will be funded by NiSource. The strategy at this time is to pursue refinancing. 42 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. MERCHANT OPERATIONS (CONTINUED) In addition, a subsidiary of Primary Energy is a 50% partner in a partnership which operates a coal pulverization facility. The partnership has entered into a lease of a 50% undivided interest in the facility. NiSource has entered into a guarantee of all of the obligations of the partnership under the lease. Minimum rental payments under the lease are as follows: ($ in millions) 2002 3.4 2003 6.2 2004 4.3 2005 4.3 2006 4.3 After 19.5
In an event of default, the partnership will be required to pay a stipulated amount under the lease. This amount was $34.7 million as of December 31, 2001. Net Revenues Net revenues of $113.0 million for 2001 decreased $40.8 million from 2000. The reduction is primarily due to mark to market loss on January East Coast trades and limited trading opportunities. This decrease is partially offset by increases in electric wheeling due to upgraded interconnections with neighboring electric companies and increases in power marketing. Net revenues for 2000 were $153.8 million, compared to $109.6 million in 1999. The improvement is due primarily to the addition of significant asset management contracts in the TPC portfolio and the full year effect in 2000 of TPC operations. TPC was acquired in April 1999. Operating Income Merchant Operations reported operating income of $22.2 million, a decrease of $56.8 million from 2000. The reduction is primarily due to mark to market loss on January East Coast trades, limited trading opportunities and a fourth quarter charge of $16.0 million related to the Enron bankruptcy. Operating income of $79.0 million in 2000 was an increase of $29.5 million from 1999. The improvement is due primarily to the addition of significant asset management contracts in the TPC portfolio and the full year effect in 2000 of TPC operations. 43 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. OTHER
Year Ended December 31, (in millions) 2001 2000 1999 ------ ------ ------ NET REVENUES Products and services revenue $159.7 $251.5 $224.0 Less: Cost of products purchased 113.6 177.5 159.7 ------ ------ ------ Net Revenues 46.1 74.0 64.3 ------ ------ ------ OPERATING EXPENSES Operation and maintenance 87.5 60.8 53.5 Depreciation and amortization 8.3 21.3 13.6 Other taxes 8.3 5.4 4.5 Impairment of telecommunication assets 9.2 14.5 -- ------ ------ ------ Total Operating Expenses 113.3 102.0 71.6 ------ ------ ------ Operating Income (Loss) $(67.2) $(28.0) $ (7.3) ------ ------ ------
Telecommunications Network As a result of project delays, cost overruns and a decline in the fiber optics market that have occurred since the acquisition of Columbia, NiSource recorded a charge of $9.2 million to operating income in the second quarter of 2001, related to Transcom, a fiber optics telecommunications network. In September and October 2000, management held discussions with investment banking firms seeking strategic options for the Transcom assets. Although significant uncertainties existed surrounding the estimated costs to complete the fiber optic network, time to market in a competitive environment, and delays due to construction deficiencies and environmental issues, management decided to complete the Transcom network and sell the completed network. The Company received subsequent information pertaining to the estimated construction costs and delays. Consequently, management concluded that the carrying value of the telecommunication assets exceeded the realizable value by approximately $89.2 million. Consequently, goodwill resulting from the acquisition of Columbia was increased by a substantial portion of such excess carrying amount ($52.0 million after-tax). In August 2001, Transcom invited potential buyers to submit bids for the assets. Based on these bids, present market conditions preclude Transcom from realizing the carrying value of the assets by selling at the present time. Therefore management has decided to operate the network, while continuing to evaluate market conditions for possible sale. At December 31, 2001, the anticipated cash flow from Transcom's business plan indicates that the asset's current carrying value is realizable. However, economic and other events may adversely affect the Transcom's ability to achieve such plan. Sale of Underground Locating and Marking Service On January 28, 2002, NiSource sold all of the issued and outstanding capital stock of SM&P, a wholly owned subsidiary of NiSource, to The Laclede Group, Inc. for $37.9 million. SM&P operates an underground locating and marking service in ten midwestern states. In the first quarter of 2002, NiSource will recognize an after-tax gain of $10.3 million related to the sale. The net assets of SM&P were reported as assets held for sale on the consolidated balance sheets. Environmental Matters TRANSCOM. In spring 2000, Transcom received directives from the Philadelphia District of the U.S. Army Corps of Engineers (Philadelphia District) and an administrative order from Pennsylvania Department of Environmental Protection (PA DEP) addressing alleged violations of federal and state laws resulting from construction activities associated with Transcom's laying fiber optic cable along portions of a route between Washington, D.C. and New York City. The order and directives required Transcom to largely cease construction activities. On September 18, 2000, Transcom entered into a voluntary settlement agreement with the Philadelphia District under which Transcom contributed $1.2 million to the Pennsylvania chapter of the Nature Conservancy and the Philadelphia District lifted its directives. As a result of the voluntary agreement with the Philadelphia District and communications with the PA 44 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. OTHER (CONTINUED) DEP, the Maryland Department of the Environment and the Baltimore District of the US Army Corps of Engineers, work in Pennsylvania and Maryland was allowed to be continued and has been completed. On October 25, 2001, Transcom entered into a Consent Order and Agreement with the PA DEP in settlement of its enforcement action under which Transcom paid $80,633 in penalties and $223,567 to fund six community environmental projects. OTHER AFFILIATES. NiSource affiliates have retained environmental cleanup liability associated with some its former companies, including Columbia Propane, Columbia Petroleum and certain local gas distribution companies. The primary environmental liability associated with former propane operations relates to a former manufactured gas plant (MGP) site in Wisconsin for which reserves have been accrued. Environmental liability associated with former petroleum operations includes relatively minor cleanups of product spills at third party properties and liability for pre-existing environmental conditions at former petroleum terminals. A NiSource affiliate also retains liability for two former MGP sites associated with a local gas distribution company in New York, for which reserves have been accrued. The ultimate liability in connection with these sites will depend upon many factors including the extent of environmental response actions required, other PRPs and their financial viability, and indemnification from previous facility owners. Only those corrective action costs currently known and determinable can be considered "probable and reasonably estimable" under SFAS No. 5 and consistent with SOP No. 96-1. As costs become probable and reasonably estimable, reserves will be adjusted as appropriate. NiSource believes that any environmental response actions required at former operations, for which it is ultimately liable, after consideration of insurance coverage and contributions from other PRPs, will not have a material adverse effect on NiSource's financial position. Net Operating Revenues Net operating revenues of $46.1 million for 2001 decreased by $27.9 million from 2000. This decrease is due to the sale of non-core businesses, partially offset by higher revenues in the line locating business. Net operating revenues of $74.0 million for 2000 increased by $9.7 million from 1999. This increase is primarily due to higher revenues in the line locating business. Operating Income (Loss) The Other segment reported an operating loss of $67.2 million in 2001 versus an operating loss of $28.0 million in 2000, reflecting the impairment of telecommunication assets, the settlement of litigation related to Market Hub Partners (MHP) which was sold in 2000 and negative impact of winding down non-core businesses. Other reported an operating loss of $28.0 million for 2000 versus an operating loss of $7.3 million in 1999. 45 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA NISOURCE INC.
INDEX PAGE - ----- ---- Report of Independent Public Accountants .............................. 48 Statements of Consolidated Income ..................................... 49 Statements of Consolidated Cash Flows ................................. 50 Consolidated Balance Sheets ........................................... 51 Statements of Consolidated Capitalization ............................. 53 Statements of Consolidated Long-Term Debt ............................. 54 Statements of Consolidated Common Stockholders' Equity ................ 55 Notes to Consolidated Financial Statements ............................ 57 Schedule I ............................................................ 94 Schedule II ........................................................... 98
46 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS OF NISOURCE INC.: We have audited the accompanying consolidated balance sheets and statements of consolidated capitalization and long-term debt of NiSource Inc. and subsidiaries as of December 31, 2001 and 2000, and the related statements of consolidated income, common stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of NiSource's management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the financial position of NiSource Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As explained in Note 2 to the financial statements, NiSource Inc. has given retroactive effect to the change in accounting for acquisition, exploration and development activities related to oil and gas reserves from the full cost method to the successful efforts method. As explained in Note 8 to the financial statements, effective January 1, 2001, NiSource Inc. adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives Instruments and Hedging Activities," as amended. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedules listed in the Index to Item 8, Financial Statements and Supplementary Data are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP Chicago, Illinois January 29, 2002 47 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. STATEMENTS OF CONSOLIDATED INCOME
Year Ended December 31, (in millions, except per share amounts) 2001 2000 1999 ---- ---- ---- NET REVENUES Gas Distribution $ 4,241.2 $ 2,025.5 $ 954.0 Gas Transmission and Storage 606.8 231.1 74.9 Electric 1,010.5 1,002.1 1,014.4 Exploration and Production 156.9 37.4 -- Merchant Operations 3,004.9 2,498.1 1,029.0 Other 438.4 236.5 201.2 --------- --------- --------- Gross Revenues 9,458.7 6,030.7 3,273.5 Cost of Sales 6,055.3 4,082.7 1,880.8 --------- --------- --------- Total Net Revenues 3,403.4 1,948.0 1,392.7 --------- --------- --------- OPERATING EXPENSES Operation and maintenance 1,449.0 810.2 536.0 Depreciation, depletion and amortization 641.7 376.1 295.0 Other taxes 294.6 138.5 95.5 Loss on asset impairment 9.2 65.8 28.3 --------- --------- --------- Total Operating Expenses 2,394.5 1,390.6 954.8 --------- --------- --------- OPERATING INCOME 1,008.9 557.4 437.9 --------- --------- --------- OTHER INCOME (DEDUCTIONS) Interest expense, net (597.7) (304.5) (155.4) Minority interest (20.4) (20.4) (17.7) Dividend requirements on preferred stock of subsidiaries (7.5) (7.8) (8.1) Other, net 12.0 42.3 (20.6) --------- --------- --------- Total Other Income (Deductions) (613.6) (290.4) (201.8) --------- --------- --------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 395.3 267.0 236.1 INCOME TAXES 183.2 125.9 82.2 --------- --------- --------- INCOME FROM CONTINUING OPERATIONS 212.1 141.1 153.9 --------- --------- --------- Income from Discontinued Operations - net of taxes 0.1 9.8 6.5 Change in Accounting- net of taxes 4.0 -- -- --------- --------- --------- NET INCOME $ 216.2 $ 150.9 $ 160.4 ========= ========= ========= BASIC EARNINGS PER SHARE ($) Continuing operations $ 1.03 $ 1.05 $ 1.24 Discontinued operations -- 0.07 0.05 Change in accounting 0.02 -- -- --------- --------- --------- BASIC EARNINGS PER SHARE $ 1.05 $ 1.12 $ 1.29 --------- --------- --------- DILUTED EARNINGS PER SHARE ($) Continuing operations $ 1.01 $ 1.04 $ 1.22 Discontinued operations -- 0.07 0.05 Change in accounting 0.02 -- -- --------- --------- --------- DILUTED EARNINGS PER SHARE $ 1.03 $ 1.11 $ 1.27 --------- --------- --------- BASIC AVERAGE COMMON SHARES OUTSTANDING (MILLIONS) 205.3 134.5 124.3 DILUTED AVERAGE COMMON SHARES (MILLIONS) 209.8 135.8 125.3 --------- --------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 48 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. STATEMENTS OF CONSOLIDATED CASH FLOWS
Year Ended December 31, (in millions) 2001 2000 1999 - ------------------------------------- -------- -------- -------- OPERATING ACTIVITIES Net income $ 216.2 $ 150.9 $ 160.4 Adjustments to reconcile net income to net cash from continuing operations: Depreciation, depletion, and amortization 641.7 376.1 295.0 Net changes in price risk management activities (42.0) (89.8) 10.4 Asset impairment 9.2 65.8 28.3 Deferred income taxes and investment tax credits (43.1) 34.7 (17.3) Deferred revenue (425.1) (8.0) -- Amortization of unearned compensation 30.0 6.8 3.5 Gain on sale of assets (11.0) (55.4) (7.5) Income from change in accounting (4.0) -- -- Income from discontinued operations (0.1) (9.8) (6.5) Other, net (24.5) 27.0 (11.6) -------- -------- -------- 347.3 498.3 454.7 -------- -------- -------- Changes in components of working capital, net of effect from acquisitions of businesses: Accounts receivable, net 552.5 (753.0) 52.7 Inventories (73.3) 13.0 46.4 Accounts payable (495.5) 629.4 (128.6) Taxes accrued 142.1 (51.1) (6.4) (Under) Overrecovered gas and fuel costs 312.3 (198.5) (12.8) Exchange gas receivable/payable 355.8 58.6 -- Other accruals 156.8 (131.5) 3.8 Other working capital (255.4) (51.7) 8.3 -------- -------- -------- Net Cash from Continuing Operations 1,042.6 13.5 418.1 Net Cash from Discontinued Operations -- (28.7) -- -------- -------- -------- Net Cash from Operating Activities 1,042.6 (15.2) 418.1 -------- -------- -------- INVESTING ACTIVITIES Capital expenditures (668.1) (357.3) (313.0) Acquisition of businesses -- (5,654.5) (725.8) Proceeds from disposition of assets 227.9 535.2 29.8 Other investing activities, net (7.0) 9.2 (49.1) -------- -------- -------- Net Investing Activities (447.2) (5,467.4) (1,058.1) -------- -------- -------- FINANCING ACTIVITIES Issuance of long-term debt 300.0 2,629.3 189.2 Retirement of long-term debt (93.0) (488.1) (201.0) Change in short-term debt (642.5) 1,655.4 229.1 Retirement of preferred shares (1.1) (6.9) (2.4) Proceeds from Corporate Premium Income Equity Securities, net -- -- 334.7 Issuance of common stock 15.1 2,042.1 324.9 Acquisition of treasury stock -- (65.9) (126.5) Dividends paid - common shares (239.0) (131.8) (125.2) -------- -------- -------- Net Financing Activities (660.5) 5,634.1 622.8 -------- -------- -------- Increase (decrease) in cash and cash equivalents (65.1) 151.5 (17.2) Cash and cash equivalents at beginning of year 193.0 41.5 58.7 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 127.9 $ 193.0 $ 41.5 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest, net of amounts capitalized 518.0 244.5 152.7 Cash paid for income taxes 250.2 227.0 115.8 -------- -------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 49 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. CONSOLIDATED BALANCE SHEETS
As of December 31, (in millions) 2001 2000 - -------------------------------- --------- --------- ASSETS PROPERTY, PLANT AND EQUIPMENT Utility Plant $16,078.9 $15,825.3 Accumulated depreciation and amortization (7,616.4) (7,299.4) --------- --------- Net utility plant 8,462.5 8,525.9 --------- --------- Gas and oil producing properties, successful efforts method United States cost center 1,011.5 904.4 Canadian cost center 22.3 19.7 Accumulated depletion (74.6) (11.0) --------- --------- Net gas and oil producing properties 959.2 913.1 --------- --------- Other property, at cost, less accumulated depreciation 133.0 86.6 --------- --------- Net Property, Plant and Equipment 9,554.7 9,525.6 --------- --------- INVESTMENTS AND OTHER ASSETS Net assets of discontinued operations 375.0 560.4 Unconsolidated affiliates 123.9 96.1 Assets held for sale 15.4 33.5 Other investments 47.8 54.1 --------- --------- Total Investments 562.1 744.1 --------- --------- CURRENT ASSETS Cash and cash equivalents 127.9 193.0 Accounts receivable (less reserve of $63.4 and $43.3, respectively) 937.7 1,490.2 Other receivables 10.1 23.5 Gas inventory 377.7 322.5 Underrecovered gas and fuel costs 129.4 396.1 Materials and supplies, at average cost 73.3 68.7 Electric production fuel, at average cost 29.2 15.6 Price risk management assets 299.2 1,558.5 Exchange gas receivable 186.8 615.9 Prepayments and other 395.4 233.6 --------- --------- Total Current Assets 2,566.7 4,917.6 --------- --------- OTHER ASSETS Price risk management assets 19.1 32.6 Regulatory assets 521.7 517.1 Intangible assets, less accumulated amortization 3,737.9 3,610.6 Deferred charges and other 411.9 335.1 --------- --------- Total Other Assets 4,690.6 4,495.4 --------- --------- TOTAL ASSETS $17,374.1 $19,682.7 ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 50 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. CONSOLIDATED BALANCE SHEETS
As of December 31, (in millions) 2001 2000 - -------------------------------- --------- --------- CAPITALIZATION AND LIABILITIES CAPITALIZATION Common Stock Equity $ 3,469.4 $ 3,409.1 Preferred Stocks-- Subsidiary Companies Series without mandatory redemption provisions 83.6 83.6 Series with mandatory redemption provisions 5.0 49.1 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company debentures 345.0 345.0 Long-term debt, excluding amounts due within one year 5,780.8 5,802.7 --------- --------- Total Capitalization 9,683.8 9,689.5 --------- --------- CURRENT LIABILITIES Current redeemable preferred stock subject to mandatory redemption 43.0 -- Current portion of long-term debt 398.2 64.8 Short term borrowings 1,854.3 2,496.7 Accounts payable 646.6 1,117.1 Dividends declared on common and preferred stocks 1.8 1.0 Customer deposits 36.3 32.1 Taxes accrued 274.7 189.3 Interest accrued 79.6 78.0 Overrecovered gas and fuel costs 49.3 -- Price risk management liabilities 242.3 1,529.2 Exchange gas payable 287.2 360.5 Current deferred revenue 89.0 451.5 Other accruals 726.3 573.2 --------- --------- Total Current Liabilities 4,728.6 6,893.4 --------- --------- OTHER LIABILITIES AND DEFERRED CREDITS Price risk management liabilities 11.4 39.4 Deferred income taxes 1,726.3 1,798.2 Deferred investment tax credits 105.2 114.3 Deferred credits 352.5 318.5 Noncurrent deferred revenue 435.4 498.0 Accrued liability for postretirement benefits 277.7 272.5 Other noncurrent liabilities 53.2 58.9 --------- --------- Total Other 2,961.7 3,099.8 --------- --------- COMMITMENTS AND CONTINGENCIES -- -- --------- --------- TOTAL CAPITALIZATION AND LIABILITIES $17,374.1 $19,682.7 ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 51 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. STATEMENTS OF CONSOLIDATED CAPITALIZATION
As of December 31, (in millions) 2001 2000 - -------------------------------- -------- -------- Common shareholders' equity $3,469.4 $3,409.1 -------- -------- Preferred Stocks, which are redeemable solely at option of issuer: Northern Indiana Public Service Company-- Cumulative preferred stock--$100 par value-- 4-1/4% series--209,035 outstanding 20.9 20.9 4-1/2% series--79,996 shares outstanding 8.0 8.0 4.22% series--106,198 shares outstanding 10.6 10.6 4.88% series--100,000 shares outstanding 10.0 10.0 7.44% series--41,890 shares outstanding 4.2 4.2 7.50% series--34,842 shares outstanding 3.5 3.5 Premium on preferred stock and other 2.8 2.8 Cumulative preferred stock--no par value-- Adjusted rate series A (stated value--$50 per share), 473,285 shares outstanding 23.6 23.6 -------- -------- Series without mandatory redemption provisions 83.6 83.6 -------- -------- Redeemable Preferred Stocks, subject to mandatory redemption requirements or whose redemption is outside the control of issuer: Northern Indiana Public Service Company-- Cumulative preferred stock--$100 par value-- 7-3/4% series--16,669 and 22,244 shares outstanding, respectively 1.7 2.2 8.35% series--33,000 and 39,000 shares outstanding, respectively 3.3 3.9 Cumulative preferred stock--no par value-- 6.50% series--0 and 430,000 shares outstanding, respectively -- 43.0 -------- -------- Series with mandatory redemption provisions 5.0 49.1 -------- -------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company debentures 345.0 345.0 -------- -------- Long-term debt 5,780.8 5,802.7 -------- -------- TOTAL CAPITALIZATION $9,683.8 $9,689.5 -------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 52 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. STATEMENTS OF CONSOLIDATED LONG-TERM DEBT
As of December 31, (in millions) 2001 2000 - -------------------------------- -------- -------- NiSource Inc.: Debentures due November 1, 2006, with interest imputed at 5.95% (SAILS(SM)) $ 116.9 $ 108.5 -------- -------- Bay State Gas Company: Medium Term Notes-- Interest rates between 6.00% and 9.20% with a weighted average interest rate of 6.91% and maturities between September 29, 2003 and February 15, 2028 95.5 168.5 Northern Utilities: Medium Terms Notes--Interest rates of 6.93% and 9.70% with a weighted average interest rate of 8.84% and maturities of September 1, 2010 and September 1, 2031 18.8 20.5 -------- -------- Total long-term debt of Bay State Gas Company 114.3 189.0 -------- -------- Columbia Energy Group: Debentures-- 6.61% Series B - due November 28, 2002 -- 281.5 6.80% Series C - due November 28, 2005 281.5 281.5 7.05% Series D - due November 28, 2007 281.5 281.5 7.32% Series E - due November 28, 2010 281.5 281.5 7.42% Series F - due November 28, 2015 281.5 281.5 7.62% Series G - due November 28, 2025 229.2 229.2 -------- -------- Total 1,355.2 1,636.7 Unamortized discount on long-term debt (118.7) (130.5) Subsidiary debt--Capitalized lease obligations 2.2 2.4 -------- -------- Total long-term debt of Columbia Energy Group 1,238.7 1,508.6 -------- -------- EnergyUSA, Inc. and subsidiaries: Notes Payable-- Interest rates between 6.12% and 12.00% with a weighted average interest rate of 8.72% and various maturities between September 6, 2003 and February 6, 2010 -- 2.3 -------- -------- Total long-term debt of EnergyUSA, Inc. -- 2.3 -------- -------- NiSource Capital Markets, Inc: Subordinate Debentures--Series A, 7-3/4%, due March 31, 2026 75.0 75.0 Senior Notes Payable--6.78%, due December 1, 2027 75.0 75.0 Medium-term notes-- Issued at interest rates between 7.38% and 7.99%, with a weighted average interest rate of 7.66% and various maturities between April 1, 2004 and May 5, 2027 300.0 300.0 -------- -------- Total long-term debt of NiSource Capital Markets, Inc. 450.0 450.0 -------- -------- Indianapolis Water Company: Medium-term notes-- Medium Terms Notes--Interest rates of 5.99% and 6.61% with a weighted average interest rate of 6.34% and maturities of February 1, 2009 and February 1, 2019 80.0 -- -------- -------- Total long-term debt of Indianapolis Water Company 80.0 -- -------- -------- NiSource Development Company, Inc.: NDC Douglas Properties, Inc.--Notes Payable-- Interest rate between 6.72% and 8.38% with a weighted average interest rate of 8.00% and various maturities between January 1, 2003 and January 1, 2008 8.2 16.9 -------- -------- Total long-term debt of NiSource Development Company, Inc. 8.2 16.9 -------- -------- NiSource Finance Corp.: Long-Term Notes-- 5 3/4% - due April 15, 2003 300.0 -- 7 1/2% - due November 15, 2003 750.0 750.0 7 5/8% - due November 15, 2005 900.0 900.0 7 7/8% - due November 15, 2010 1,000.0 1,000.0 Unamortized discount on long-term debt (20.4) (24.4) -------- -------- Total long-term debt of NiSource Finance Corp, Inc. 2,929.6 2,625.6 -------- -------- Northern Indiana Public Service Company: First mortgage bonds-- Series T, 7-1/2% - due April 1, 2002 -- 38.0 Series NN, 7.10% - due July 1, 2017 55.0 55.0 Pollution control notes and bonds-- Issued at interest rates between 1.56% and 5.7%, with a weighted average interest rate of 1.66% and various maturities between October 1, 2003 and April 1, 2019 229.0 233.5 Medium-term notes-- Issued at interest rates between 6.50% and 7.69%, with a weighted average interest rate of 7.07% and various maturities between March 31, 2003 and August 4, 2027 561.5 578.0 Unamortized premiums and discount on long-term debt, net (2.4) (2.7) -------- -------- Total long-term debt of Northern Indiana Public Service Company 843.1 901.8 -------- -------- Total long-term debt, excluding amount due within one year $5,780.8 $5,802.7 -------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 53 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. STATEMENTS OF CONSOLIDATED COMMON STOCKHOLDERS' EQUITY
ADDITIONAL ACCUM. COMMON TREASURY PAID-IN RETAINED OTHER COMP. COMP. (IN MILLIONS) STOCK STOCK CAPITAL EARNINGS OTHER INCOME TOTAL INCOME - ------------- ------- --------- ----------- -------- ------ ----------- -------- ------- BALANCE JANUARY 1, 1999 $ 870.9 $ (559.0) $ 94.3 $ 744.3 $ (1.8) $ 1.0 $1,149.7 Comprehensive Income: Net Income 160.4 160.4 $ 160.4 Other comprehensive income, net of tax: Gain/loss on available for sale securities: Unrealized 1.8 1.8 1.8 Realized 0.7 0.7 0.7 Gain/loss on foreign currency translation: Unrealized 0.6 0.6 0.6 Realized 1.0 1.0 1.0 ------- -------- -------- ------- ------ ------ -------- ------- Total comprehensive income $ 164.5 Dividends: Common stock (129.1) (129.1) Treasury stock acquired (126.5) (126.5) Issued: Employee stock purchase plan 0.5 1.1 1.6 Long-term incentive plan 3.9 0.2 (0.6) 3.5 Other acquisition 2.7 0.9 3.6 Bay State acquisition 205.9 109.7 315.6 Amortization of unearned compensation 3.5 3.5 Equity contract costs (34.0) (34.0) Other 2.2 (1.1) 1.1 ------- -------- -------- ------- ------ ------ -------- ------- BALANCE DECEMBER 31, 1999 $ 870.9 $ (472.5) $ 174.4 $ 774.5 $ 1.1 $ 5.1 $1,353.5 ------- -------- -------- ------- ------ ------ -------- ------- Comprehensive Income: Net Income 150.9 150.9 $ 150.9 Other comprehensive income, net of tax: Gain/loss on available for sale securities: Unrealized (3.2) (3.2) (3.2) Realized 2.1 2.1 2.1 Gain/loss on foreign currency translation: Unrealized 0.4 0.4 0.4 ------- -------- -------- ------- ------ ------ -------- ------- Total comprehensive income $ 150.2 Dividends: Common stock (98.3) (98.3) Treasury stock acquired (65.9) (65.9) Issued: Columbia acquisition 0.7 1,760.5 1,761.2 Reduction of credit facility 0.1 280.8 280.9 Long-term incentive plan - 22.7 2.2 (14.0) 10.9 Formation of new NiSource (869.7) 515.1 354.6 - Amortization of unearned compensation 6.8 6.8 Equity contract costs 7.7 7.7 Other 0.6 4.9 (3.4) 2.1 ------- -------- -------- ------- ------ ------ -------- ------- BALANCE DECEMBER 31, 2000 $ 2.0 $ 0.0 $2,585.1 $ 823.7 $ (6.1) $ 4.4 $3,409.1 ------- -------- -------- ------- ------ ------ -------- ------- Comprehensive Income: Net Income 216.2 216.2 $ 216.2 Other comprehensive income, net of tax: Unrealized (3.2) (3.2) (3.2) Realized 0.8 0.8 0.8 Gain/loss on foreign currency translation: Unrealized (0.9) (0.9) (0.9) Net unrealized gains on derivatives qualifying as cash flow hedges 50.1 50.1 50.1 ------- -------- -------- ------- ------ ------ -------- ------- Total comprehensive income $ 263.0 Dividends: Common stock (239.7) (239.7) Treasury stock acquired Issued: Employee stock purchase plan 1.3 1.3 Long-term incentive plan 0.1 27.1 (18.0) 9.2 Amortization of unearned compensation 30.0 30.0 Equity contract costs (1.9) (1.9) Other (1.6) (1.6) ------- -------- -------- ------- ------ ------ -------- ------- BALANCE DECEMBER 31, 2001 $ 2.1 $ 0.0 $2,611.6 $ 798.6 $ 5.9 $ 51.2 $3,469.4 ------- -------- -------- ------- ------ ------ -------- -------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 54 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. STATEMENTS OF CONSOLIDATED COMMON STOCKHOLDERS' EQUITY (CONTINUED)
COMMON TREASURY SHARES (IN THOUSANDS) SHARES SHARES - --------------------- -------- -------- BALANCE JANUARY 1, 1999 147,784 (30,254) Treasury stock acquired -- (4,821) Issued: Employee stock purchase plan -- 60 Long-term incentive plan -- 194 Bay State acquisition -- 11,042 Other acquisition -- 134 -------- -------- BALANCE DECEMBER 31, 1999 147,784 (23,645) -------- -------- Treasury stock cancelled (26,410) 26,410 Treasury stock acquired (3,971) Issued: Columbia acquisition 72,453 -- Stock issuance 11,500 -- Employee stock purchase plan -- 62 Long-term incentive plan 226 1,144 -------- -------- BALANCE DECEMBER 31, 2000 205,553 -- -------- -------- Treasury stock acquired Issued: Employee stock purchase plan 46 -- Long-term incentive plan 1,893 -- -------- -------- BALANCE DECEMBER 31, 2001 207,492 -- -------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 55 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. HOLDING COMPANY STRUCTURE NiSource Inc. (NiSource) is an energy holding company whose subsidiaries provide natural gas, electricity and other products and services to 3.6 million customers located within a corridor that runs from the Gulf Coast through the Midwest to New England. NiSource, organized as an Indiana holding company in 1987 under the name of NIPSCO Industries, Inc., changed its name to NiSource Inc. on April 14, 1999. Subsequent to the completion of the acquisition of Columbia Energy Group (Columbia) on November 1, 2000, as discussed in Note 3 below, NiSource became a Delaware holding company registered under the Public Utility Holding Company Act of 1935, as amended (1935 Act). NiSource derives substantially all its revenues and earnings from the operating results of its 16 direct subsidiaries. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of NiSource and its majority-owned subsidiaries after the elimination of all intercompany accounts and transactions. Investments for which at least a 20% interest is owned, certain joint ventures and limited partnership interests of more than 3% are accounted for under the equity method. With limited exceptions, 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. B. DILUTED AVERAGE COMMON SHARES COMPUTATION. Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The weighted average shares outstanding for diluted EPS include the incremental effect of the various long-term incentive compensation plans. For 2001 and 2000, the weighted average shares outstanding for diluted EPS also includes the incremental effect of a forward equity contract associated with the Stock Appreciation Income Linked Securities(SM) (SAILS(SM)). For 1999, the incremental effect of shares of common stock associated with another equity forward share purchase contract, calculated under the reverse treasury stock method, is also included in the weighted average shares outstanding for diluted EPS. See Note 12B for a description of the equity forward share purchase contract. The numerator in calculating both basic and diluted EPS for each year is reported net income. The computation of diluted average common shares follows:
Diluted Average Common Shares Computation 2001 2000 1999 - ----------------------------------------- ------- ------- ------- Denominator (thousands) Basic average common shares outstanding 205,300 134,470 124,343 Dilutive potential common shares 4,457 1,341 996 ------- ------- ------- Diluted Average Common Shares 209,757 135,811 125,339 ------- ------- -------
C. CASH AND CASH EQUIVALENTS. NiSource considers all investments with original maturities of three months or less to be cash equivalents. D. BASIS OF ACCOUNTING FOR RATE-REGULATED SUBSIDIARIES. Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71), provides that rate-regulated subsidiaries account for and report assets and liabilities consistent with the economic effect of the way in which regulators establish rates, if the rates established are designed to recover the costs of providing the regulated service and if the competitive environment makes it probable that such rates can be charged and collected. NiSource's rate-regulated subsidiaries follow the accounting and reporting requirements of SFAS No. 71. Certain expenses and credits subject to utility regulation or rate determination normally reflected in income are deferred on the balance sheet and are recognized in income as the related amounts are included in service rates and recovered from or refunded to customers. In the event that regulation significantly changes the opportunity for NiSource to recover its costs in the future, all or a portion of NiSource's regulated operations may no longer meet the criteria for the application of SFAS No. 71. In such event, a write-down of all or a portion of NiSource's existing regulatory assets 56 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and liabilities could result. If transition cost recovery is approved by the appropriate regulatory bodies that would meet the requirements under generally accepted accounting principles for continued accounting as regulatory assets and liabilities during such recovery period, the regulatory assets and liabilities would be reported at the recoverable amounts. If NiSource would not be able to continue to apply the provisions of SFAS No. 71, NiSource would have to apply the provisions of SFAS No. 101, "Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement No. 71." In management's opinion, NiSource's regulated subsidiaries will be subject to SFAS No. 71 for the foreseeable future. Net regulatory assets and liabilities were comprised of the following items:
At December 31, (in millions) 2001 2000 - ----------------------------- ------ ------ ASSETS Reacquisition premium on debt (see Note 14) $ 32.7 $ 36.2 R. M. Schahfer Unit 17 and Unit 18 carrying charges and deferred depreciation (see Note 2G) 49.7 49.7 Bailly scrubber carrying charges and deferred depreciation (see Note 2G) 6.1 6.4 Postemployment and other postretirement costs (see Note 10) 198.6 211.2 Retirement income plan costs 15.5 21.1 Environmental costs 73.5 88.8 FERC Order No. 636 transition costs 5.3 7.9 Net regulatory effects of accounting for income taxes (See Note 2R) 94.4 75.7 Underrecovered gas and fuel costs 129.4 396.1 Depreciation (see Note 2G) 64.5 39.9 Uncollectible expense deferred 19.5 -- Other 62.1 37.6 ------ ------ TOTAL ASSETS $751.3 $970.6 ------ ------ LIABILITIES Rate refunds and reserves $ 15.1 $ 13.5 Overrecovered gas and fuel costs 49.3 -- Other 18.3 8.6 ------ ------ TOTAL LIABILITIES $ 82.7 $ 22.1 ------ ------
Regulatory assets of approximately $461.7 million are not presently included in the rate base and consequently are not earning a return on investment. These regulatory assets are being recovered through cost of service. The remaining recovery periods generally range from 1 to 15 years. Regulatory assets of approximately $278.4 million require specific rate action. E. UTILITY PLANT AND OTHER PROPERTY AND RELATED DEPRECIATION AND MAINTENANCE. Property, plant and equipment (principally utility plant) are stated at cost. The cost of utility and other plant of the rate-regulated subsidiaries includes an allowance for funds used during construction (AFUDC). Property, plant and equipment of other subsidiaries include interest during construction (IDC). The 2001 before-tax rates for AFUDC and IDC were 6.6% and 6.8%, respectively. The 2000 before-tax rates for AFUDC and IDC were 6.4% and 6.8%, respectively. The 1999 before-tax rate for AFUDC was 5.5%. The regulated subsidiaries record depreciation using a straight-line method over the remaining service lives of the electric, gas and common properties. The depreciation provisions for utility plant, as a percentage of the original cost, for the periods ended December 31, 2001, 2000 and 1999 were as follows:
2001 2000 1999 ---- ---- ---- Electric 3.7% 3.7% 3.7% Gas 3.0% 4.6% 4.4%
57 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The regulated subsidiaries 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. Net utility plant includes amounts allocated to utility plant in excess of the original cost as part of purchase price allocations associated with the acquisition of certain utility businesses, net of accumulated depreciation. Net plant acquisition adjustments were $496.5 million and $553.4 million at December 31, 2001, and December 31, 2000, respectively, and are being amortized over forty-year periods from the respective dates of acquisition. F. GAS AND OIL PRODUCING PROPERTIES. During the fourth quarter of 2001, NiSource changed its method of accounting for acquisition, exploration and development activities related to oil and gas reserves from the full cost method to the successful efforts method. Under the successful efforts method of accounting, except for property acquisition costs, only costs associated with specific discovered reserves are capitalized. Capitalized costs include mineral interests in properties, wells and related equipment and facilities, support equipment, and uncompleted wells. Depletion expense is equal to annual production multiplied by the depletion rate per unit that is derived by spreading the total costs capitalized under successful efforts over the number of units expected to be extracted over the life of the reserves on a lease basis. The costs capitalized using the successful efforts method, net of accumulated depletion, are subject to impairment under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121), through 2001. Beginning January 1, 2002, the net capitalized costs will be subject to impairment testing under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144), which supercedes SFAS No. 121. NiSource, as well as the Securities Exchange Commission (SEC), believes that the successful efforts method is preferable when compared with the full cost method. The accounting change requires that the financial statements of all periods presented be restated to take into account the effect of the change. Compared to full cost, the change to successful efforts reduced operating income by $5.3 million and $10.3 million for 2001 and 2000, respectively. G. CARRYING CHARGES AND DEFERRED DEPRECIATION. Upon completion of R. M. Schahfer Units 17 and 18, Northern Indiana Public Service Company (Northern Indiana) capitalized the carrying charges and deferred depreciation in accordance with orders of the Indiana Utility Regulatory Commission (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. In Columbia Gas of Ohio, Inc.'s (Columbia of Ohio) 1999 rate agreement, the Public Utilities Commission of Ohio (PUCO) authorized Columbia of Ohio to revise its depreciation accrual rates for the period January 1, 1999 through December 31, 2004. The revised depreciation rates are lower than those that would have been utilized if Columbia of Ohio were not subject to regulation and, accordingly, a regulatory asset has been established for the difference. The amount of depreciation that would have been recorded for 2001 had Columbia of Ohio not been subject to rate regulation is $37.1 million, a $24.5 million increase over the $12.6 million reflected in rates. The amount of depreciation that would have been recorded for 2000 had Columbia of Ohio not been subject to rate regulation is $34.6 million, a $21.2 million increase over the $13.4 million reflected in rates. The regulatory asset was $64.5 million as of December 31, 2001. H. 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 each project in accordance with SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." 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. 58 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) I. INTANGIBLE ASSETS. Intangible assets were recorded at cost and are amortized on a straight-line basis. The excess of cost over the fair value of the net assets acquired in an acquisition was recorded as goodwill. Goodwill assets of $3.8 billion were reported at December 31, 2001. The goodwill associated with the Columbia acquisition is being amortized over forty years, while goodwill associated with other acquisitions is being amortized over a weighted average period of twenty-seven years. Other intangible assets were approximately $5.0 million at December 31, 2001 and 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 undiscounted future cash flows would be sufficient to support the recorded intangible assets. Accumulated amortization of other intangible assets at December 31, 2001 was approximately $2.8 million. Effective beginning January 1, 2002, goodwill will no longer be amortized pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). Instead goodwill will be subject to annual impairment testing under SFAS No. 142. Intangible assets other than goodwill with finite useful lives will continue to be amortized over the assets' useful lives. Intangible assets, other than goodwill, will be subject to impairment testing under SFAS No. 144 which supercedes SFAS No. 121 beginning January 1, 2002. (See Note 6A and 6C). J. REVENUE RECOGNITION. Except as discussed below, revenues are recorded as products and services are delivered. Utility revenues are billed to customers monthly on a cycle basis. Revenues are recorded on the accrual basis and include an estimate for electricity and gas delivered. Cash received in advance from sales of commodities to be delivered in the future is recorded as deferred revenue and recognized as income upon delivery of the commodities. Revenues relating to energy trading operations are recorded based upon changes in the fair values, net of reserves, of the related energy trading contracts. K. ESTIMATED RATE REFUNDS. Certain rate-regulated subsidiaries collect revenues subject to refund pending final determination in rate proceedings. In connection with such revenues, estimated rate refund liabilities are recorded which reflects management's current judgment of the ultimate outcome of the proceedings. No provisions are made when, in the opinion of management, the facts and circumstances preclude a reasonable estimate of the outcome. L. ACCOUNTS RECEIVABLE SALES PROGRAM. NiSource enters into agreements with third parties to sell certain accounts receivable without recourse. These sales are reflected as reductions of accounts receivable in the accompanying consolidated balance sheets and as operating cash flows in the accompanying statements of consolidated cash flows. The costs of this program, which are based upon the purchasers' level of investment and borrowing costs, are charged to other income in the accompanying statements of consolidated income. M. USE OF ESTIMATES. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent 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. N. 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 regulatory 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. O. GAS COST ADJUSTMENT CLAUSE. NiSource's gas distribution subsidiaries defer differences between gas purchase costs and the recovery of such costs in revenues, and adjust future billings for such deferrals on a basis consistent with applicable state-approved tariff provisions. 59 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) P. 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 using the LIFO method in December 2001 and December 2000, the estimated replacement cost of gas in storage at December 31, 2001, and December 31, 2000, exceeded the stated LIFO cost by $71.2 million and $791.1 million, respectively. The unusually high estimated replacement cost at December 31, 2000 is due to the spike in gas prices that occurred during the closing months of the year. Inventory valued using LIFO was $300.4 million and $257.2 million at December 31, 2001, and December 31, 2000, respectively. Inventory valued using the weighted average methodology was $77.3 million and $65.3 million at December 31, 2001, and December 31, 2000, respectively. Q. ACCOUNTING FOR RISK MANAGEMENT ACTIVITIES. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and resulting designation. Unrealized and realized gains and losses are recognized each period as components of other comprehensive income, regulatory assets and liabilities or earnings depending on the nature of such derivatives. For subsidiaries that utilize derivatives for cash flow hedges, the effective portions of the gains and losses are recorded to other comprehensive income and are recognized in earnings concurrent with the disposition of the hedged risks. If a forecasted transaction does not occur, the gains or losses are recognized currently in earnings. For fair value hedges, the gains and losses are recorded in earnings each period along with the change in the fair value of the hedged item. For hedges of foreign currency the accounting treatment generally follows the treatment for cash flow hedges or fair value hedges depending on the nature of the foreign currency hedge. As a result of the rate-making process, the rate-regulated subsidiaries generally record gains and losses as regulatory liabilities or assets and recognize such gains or losses in earnings when recovered in revenues. In order for a derivative contract to be designated as a hedge, the relationship between the hedging instrument and the hedged item or transaction must be highly effective. The effectiveness test is performed at the inception of the hedge and each reporting period thereafter, throughout the period that the hedge is designated. Any amounts determined to be ineffective are recorded currently in earnings. NiSource evaluates the contracts of its trading operations in accordance with the criteria for derivative contracts under SFAS No. 133. Contracts not meeting the criteria under SFAS No. 133 are recorded at fair value under Emerging Issues Task Force Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities" (EITF No. 98-10). EITF No. 98-10 indicates that when certain trading criteria are met, energy contracts, including "energy-related contracts" such as tolling, transportation and storage contracts, should be accounted for at fair value (marked to market) along with any related derivative contracts. The related gains and losses should be included currently in earnings. Energy trading activities refers to energy contracts entered into with the objective of generating profits on or from exposure to shifts or changes in market prices. R. INCOME TAXES AND INVESTMENT TAX CREDITS. NiSource records income taxes to recognize full interperiod tax allocations. Under the liability method of income tax accounting, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax base of existing assets and liabilities. Previously recorded investment tax credits of the regulated subsidiaries were deferred and are being amortized over the life of the related properties to conform to regulatory policy. S. ENVIRONMENTAL EXPENDITURES. NiSource accrues for costs associated with environmental remediation obligations when such costs are probable and can be reasonably estimated, regardless of when expenditures are made. The undiscounted estimated future expenditures are based on currently enacted laws and regulations, existing technology and site-specific costs. The liability is adjusted as further information is discovered or circumstances change. Rate-regulated subsidiaries applying SFAS No. 71 establish regulatory assets on the balance sheet to the extent that future recovery of environmental remediation costs is probable through the regulatory process. T. STOCK OPTIONS AND AWARDS. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), encourages, but does not require, entities to adopt the fair value method of accounting for stock-based compensation plans. The fair value method would require the amortization of 60 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the fair value of stock-based compensation at the date of grant over the related vesting period. NiSource continues to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." U. SYNTHETIC LEASES RELATING TO REAL ESTATE. NiSource accounts for the synthetic leases of its Primary Energy subsidiary in accordance with Emerging Issues Task Force Issue No. 97-10, "The Effect of Lessee Involvement in Asset Construction" (EITF No. 97-10). EITF No. 97-10 provides the accounting requirements for situations in which an entity (lessee) is involved on behalf of an owner (lessor) with the construction of an asset that will be leased to the lessee when construction of the asset is completed. In these situations, the owner-lessor is generally a special purpose entity. NiSource does not consolidate the special purpose entities related to its Primary Energy projects, pursuant to Emerging Issues Task Force Issue No. 90-15, "Impact of Nonsubstantive Lessors, Residual Value Guarantees and Other Provisions in Leasing Transactions," when parties unrelated to NiSource have made substantive residual equity capital investments in the amount of at least three percent of the entities' capitalization. 3. ACQUISITIONS On November 1, 2000, NiSource completed its acquisition of Columbia for an aggregate consideration of approximately $6 billion, primarily consisting of $3,888 million in cash, 72.4 million shares of common stock valued at $1,761 million and SAILS(SM) (units each consisting of a zero coupon debt security coupled with a forward equity contract in NiSource shares) valued at $114 million. NiSource also assumed approximately $2 billion in Columbia debt. NiSource has accounted for the acquisition in accordance with the purchase method of accounting. The purchase price was allocated to the assets and liabilities acquired based on the fair value of those assets and liabilities as of the acquisition date. Based upon the nature of the regulatory environment in which Columbia's rate regulated subsidiaries operate, the fair value of rate-regulated assets and liabilities are generally considered to approximate historical cost. The excess of the aggregate purchase price over the estimated fair value of the net assets acquired, approximately $3.8 billion, has been reflected as goodwill in the consolidated financial statements and has been amortized on a straight-line basis over forty years through 2001. The final allocation of the purchase price to assets acquired and liabilities assumed in the acquisition of Columbia was as follows:
(in billions) 2000 - ------------- ----- ASSETS ACQUIRED: Utility plant, net of accumulated depreciation $ 4.2 Oil and gas properties, net of accumulated depletion 1.0 Intangible assets 3.8 Other current assets 1.9 Other noncurrent assets 0.5 ----- TOTAL ASSETS 11.4 LIABILITIES ASSUMED: Long-term debt 1.8 Short-term debt 0.2 Other current liabilities 1.6 Other noncurrent liabilities 1.8 ----- TOTAL LIABILITIES 5.4 ----- NET ASSETS ACQUIRED $ 6.0 -----
On February 12, 1999, the acquisition of Bay State Gas Company (Bay State) was completed for approximately $560.1 million in cash and NiSource common shares. The $237.7 million cash portion was partially financed by the issuance of Corporate Premium Income Equity Securities (Corporate PIES) (See Note 16). The acquisition was accounted for as a purchase, and the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. On a pro forma basis, NiSource's consolidated results of operations for the twelve months ended December 31, 2000 and December 31, 1999, assuming the acquisition of Columbia had occurred on January 1, 1999, would have been: UNAUDITED
Twelve Months Ended December 31, ($ in millions) 2000 1999 - ------------------------------------------------ ------- ------- Operating revenue 8,069.7 6,106.9 Operating income 1,001.8 1,014.5 Net income 131.3 121.5
61 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On April 1, 1999, NiSource acquired the stock of TPC Corporation, a Houston-based natural gas marketing and storage company, for approximately $150 million in cash. The acquisition was accounted for as a purchase, with the purchase price allocated to the assets and liabilities acquired based on their estimated fair values. As a result of the TPC Corporation acquisition, NiSource had an indirect investment in the amount of $126.0 million, representing a 77.3% interest in Market Hub Partners, L.P. (MHP). In the fourth quarter of 1999, NiSource acquired the remaining interests in MHP. On September 18, 2000, NiSource sold its ownership interests in MHP to Duke Energy Gas Transmission for $250 million in cash plus the assumption of $150 million in debt. This transaction resulted in a pre-tax gain of $51.9 million, which is reflected as a component of other, net under other income (deductions) in the accompanying 2000 statement of consolidated income. Results for periods presented prior to the acquisition of TPC are not impacted significantly by pro forma results of TPC applied to those periods. 4. RESTRUCTURING ACTIVITIES During 2000, NiSource developed and began the implementation of a plan to restructure its operations as a result of the acquisitions discussed in Note 3. The restructuring plan included a severance program, a transition plan to implement operational efficiencies throughout NiSource's operations and a voluntary early retirement program. During 2001, the restructuring initiative was continued with the addition of a plan to restructure the operations within the Company's Gas Distribution and Electric Operations segments. Additionally, in December 2001 NiSource announced its plan to indefinitely shut down the Dean H. Mitchell Generating Station located in Gary, Indiana. As a result of the restructuring plan initiated during 2001, approximately 500 positions will be eliminated. For all of the plans, a total of approximately 1,400 management, professional, administrative and technical positions will be eliminated. As of December 31, 2001, approximately 725 employees had been terminated. During 2001, NiSource recorded a pre-tax charge amounting to $28.7 million comprised primarily of severance and related benefits costs for the plans to restructure the operations within the Gas Distribution and Electric Operations segments and indefinitely shut down the generating station. In October 2000, a pre-tax charge of $5.8 million was recorded for severance and related benefits costs. In addition, due to the merger with Columbia during 2000, NiSource assumed $66.9 million in liabilities related to the restructuring of Columbia's operations representing severance and related benefits costs and relocation of certain operations. At December 31, 2001 and 2000, the consolidated balance sheets reflected liabilities of $58.3 million and $65.4 million related to the restructuring plans, respectively. 5. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE In November 2001, NiSource, its subsidiary IWC Resources Corporation (IWCR) and the City of Indianapolis (City) signed a definitive agreement for the City to buy the assets of the Indianapolis Water Company (IWC) and other assets of IWCR and its subsidiaries for $515.0 million, which includes $132.4 million in IWC debt and the redemption of $2.5 million of IWC preferred stock. NiSource will retain $80 million of IWC debt. The divestiture of IWCR was required as part of the order by the SEC approving the November 2000 acquisition of Columbia. Closing of the sale is contingent upon the receipt of all necessary consents, including approval by the Indiana Utility Regulatory Commission and the ability of the City to obtain financing. It is anticipated that the transaction will be completed in the second quarter of 2002. The water utilities' operations were reported as discontinued operations. Results from discontinued operations of the water utilities are provided in the following table:
Twelve months ended December 31, ($ in millions) 2001 2000 1999 - ------------------------------------------------ ------ ------ ------ REVENUES FROM DISCONTINUED OPERATIONS 106.3 104.7 105.1 ------ ------ ------ Income from discontinued operations 3.1 35.1 14.7 Income taxes 3.0 25.3 8.2 ------ ------ ------ NET INCOME FROM DISCONTINUED OPERATIONS 0.1 9.8 6.5 ------ ------ ------
62 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On January 28, 2002, NiSource sold all of the issued and outstanding capital stock of SM&P Utility Resources, Inc. (SM&P), a wholly owned subsidiary of NiSource to The Laclede Group, Inc. for $37.9 million. SM&P operates an underground locating and marking service in ten midwestern states. In the first quarter of 2002, NiSource will recognize an after-tax gain of $12.3 million related to the sale. The net assets of SM&P were reported as assets held for sale on the consolidated balance sheets. On August 21, 2001, Columbia sold Columbia Propane Corporation and its subsidiaries (Columbia Propane) to AmeriGas Partners L.P. (AmeriGas) for approximately $196.0 million, consisting of $152.0 million of cash and $44.0 million of AmeriGas partnership common units. On December 11, 2001, NiSource sold the common units in a public offering for $48.5 million. NiSource has also sold substantially all the assets of Columbia Petroleum Corporation (Columbia Petroleum), a diversified petroleum distribution company. At December 31, 2000, the net assets of Columbia Propane and Columbia Petroleum were reported as net assets of discontinued operations on the consolidated balance sheets. The net assets of the discontinued operations and assets held for sale were as follows:
As of December 31, (in millions) 2001 2000 - -------------------------------- ------- ------- NET ASSETS OF ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS Accounts receivable, net $ 48.4 $ 137.3 Property, plant and equipment, net 706.0 897.3 Other assets 98.9 212.7 Current liabilities (146.6) (188.2) Debt (78.7) (169.4) Other liabilities (237.6) (295.8) ------- ------- NET ASSETS OF ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS $ 390.4 $ 593.9 ------- -------
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS A. SFAS NOS. 141 AND 142 - BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS. In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The key requirements of the two interrelated Statements include mandatory use of the purchase method of accounting for business combinations, discontinuance of goodwill amortization, a revised framework for testing for goodwill impairment at a "reporting unit" level, and new criteria for the identification and potential amortization of other intangible assets. Other changes to existing accounting standards involve the amount of goodwill to be used in determining the gain or loss on the disposal of assets and a requirement to test goodwill for impairment at least annually. The Business Combinations Statement is generally effective for combinations initiated after June 30, 2001. The Statement on Goodwill and Other Intangible Assets is effective for fiscal years beginning after December 15, 2001; however, for business combinations consummated after June 30, 2001 the requirements to discontinue goodwill amortization are effective upon issuance of the Statements. The first part of the annual impairment test is to be performed within six months of adopting the Statement on Goodwill and Other Intangible Assets. NiSource adopted the provisions of the Business Combinations Statement on July 1, 2001, and adopted the Goodwill and Other Intangible Assets Statement on January 1, 2002. Although NiSource is currently evaluating the impact that the Statements will have on its results of operations, the Company expects the adoption of the Statement on Goodwill and Other Intangibles to have a significantly favorable impact on operating income beginning January 1, 2002 since goodwill is no longer required to be amortized. NiSource amortized approximately $93.1 million of goodwill during 2001. B. SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The Statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, 63 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the liability is accreted to its then present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss. The Statement is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. NiSource is currently evaluating the impact that the Statement will have on its financial position and results of operations. C. SFAS NO. 144 - ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). The Statement replaces SFAS No. 121, although it retains the two-step impairment testing methodology used in SFAS No. 121. The accounting and reporting provisions of Accounting Principals Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (APBO No. 30), are superceded by SFAS No. 144, except that the Statement preserves the requirement of APBO No. 30 to report discontinued operations separately from continuing operations. The Statement covers a variety of implementation issues inherent in SFAS No. 121, unifies the framework used in accounting for assets to be disposed of and discontinued operations and broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The Statement is effective for fiscal years beginning after December 15, 2001. NiSource adopted SFAS No. 144 on January 1, 2002. The Company does not expect the adoption of the Statement to have a material impact on its financial position and results of operations. 7. ELECTRIC OPERATIONS REGULATORY REVIEW During the course of a regularly scheduled review, referred to as a Level 1 review, the staff of the IURC made a preliminary determination, based on unadjusted historical financial information filed by Northern Indiana, that Northern Indiana was earning returns that were in excess of its last rate order and generally established standards. Despite efforts to explain to the IURC staff several adjustments that needed to be made to the filed information to make such an analysis meaningful, the staff recommended that a formal investigation be performed. During 2001, Northern Indiana and several other parties filed testimony, participated in hearings and submitted proposed forms of the order and comments on these proposed orders. Northern Indiana's testimony indicated that if rates are to be changed, they should be increased. 8. RISK MANAGEMENT ACTIVITIES NiSource uses commodity-based derivative financial instruments to manage certain risks inherent in its business. 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. In recognition of the increasingly varied and complex nature of the energy business, NiSource's risk management policies and procedures continue to evolve and are subject to ongoing review and modification. ACCOUNTING CHANGE - SFAS NO. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." Effective January 1, 2001, NiSource adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as subsequently amended by SFAS No. 137 and SFAS No. 138 (collectively referred to as SFAS No. 133). These statements establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) 64 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) a hedge of the foreign currency exposure of a net investment in a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and resulting designation. The adoption of this statement on January 1, 2001, resulted in a cumulative after-tax increase to net income of approximately $4.0 million and an after-tax reduction to other comprehensive income (OCI) of approximately $17.0 million. The adoption also resulted in the recognition of $178.0 million of assets and $212.8 million of liabilities on the consolidated balance sheet. Additionally, the adoption resulted in the reclassification of deferred revenue to OCI of $17.9 million. During 2001, approximately $7.4 million of the net losses previously included in the cumulative effect of a change in accounting principle component of OCI were reclassified into earnings. Further detail of the assets and liabilities recorded on the consolidated financial statements for the adoption of SFAS No. 133 is as follows:
(in millions) ASSETS LIABILITIES - ------------- ------ ----------- Price Risk Management $161.6 $219.9 Deferred Taxes -- (7.1) Regulatory 16.4 -- Debt -- (3.8) Deferred Revenue -- (17.9) ------ ------ TOTAL $178.0 $191.1 ------ ------
As stated above, the initial recording of the cumulative effect of this accounting change included unrealized holding losses in OCI of $17.0 million. However, the activity for 2001 resulted in unrealized gains on qualifying derivatives of $50.1 million. The activity for 2001 included:
(in millions) 2001 - ------------- ------ Unrealized gains (losses) on derivatives qualifying as cash flow hedges: Unrealized hedging losses arising as a result of the cumulative effect of a change in accounting principle, recognized at January 1, 2001, net of tax $(17.0) Unrealized hedging gains arising during the period on derivatives qualifying as cash flow hedges, net of tax 69.7 Reclassification adjustment for net gain included in net income, net of tax (including losses of $7.4 million related to the cumulative effect of a change in accounting principle) (2.6) ------ Net unrealized gains on derivatives qualifying as cash flow hedges, net of tax $ 50.1 ------
Unrealized gains and losses on NiSource's hedges were recorded as price risk management assets and liabilities along with unrealized gains and losses on NiSource's trading portfolio. The accompanying Consolidated Balance Sheets reflected price risk management assets related to unrealized gains and losses on hedges of $66.0 million at December 31, 2001, of which $65.9 million was included in "Current Assets" and $0.1 million was included in "Other Assets." Price risk management liabilities related to unrealized gains and losses on hedges (including net option premiums) were $10.3 million at December 31, 2001, all of which were included in "Current Liabilities." Following is additional information regarding the impact of SFAS No. 133 by segment. GAS DISTRIBUTION. For regulatory incentive purposes, the Columbia gas distribution subsidiaries (Columbia LDCs) enter into contracts that allow counterparties the option to sell gas to Columbia LDCs at first of the month prices for a particular month of delivery. Columbia LDCs charge the counterparties a fee for this option. The changes in the fair value of the options are primarily due to the changing expectations of the future intra-month volatility of gas prices. Columbia LDCs defer a portion of the change in the fair value of the options as either a regulatory asset or liability in accordance with SFAS No. 71. The remaining change is recognized currently in earnings. 65 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Northern Indiana offers a Price Protection Service as an alternative to the standard gas cost recovery mechanism. This service provides Northern Indiana customers with the option to either lock in their gas cost or place a cap on the total cost that could be charged for any future month specified. In order to hedge the anticipated physical future purchases associated with these obligations, Northern Indiana purchases NYMEX futures and options contracts that correspond to a fixed or capped price and the associated delivery month. The NYMEX futures and options contracts satisfy all definitions of a derivative and they qualify and are designated as a cash flow hedge. Northern Indiana has no net gain or loss recognized in earnings due to ineffectiveness or time value for this program in the reporting period and none of the components of the derivative instruments' value are excluded in its assessment of hedge effectiveness. It is anticipated that during the next 12 months, expiration of futures and options contracts will result in loss recognition of amounts currently classified in OCI of approximately $2.7 million, net of tax, which will be included in net income. Northern Indiana has futures and options contracts designated as cash flow hedges through December 2002. At this time Northern Indiana expects to continue its cash flow hedges due to the probability that the forecasted transaction will occur. Northern Utilities, Inc. offers a Guaranteed Price Service Program as an alternative to the standard gas cost recovery mechanism. This service provides its New Hampshire customers with the option to lock in their gas cost. In order to hedge the anticipated physical future purchases associated with these obligations, Northern Utilities purchases NYMEX futures that correspond to a fixed price and the associated delivery month. The NYMEX futures contracts satisfy all definitions of a derivative. Regulatory assets or liabilities are recorded to offset the change in the fair value of these derivatives. Northern Indiana and Bay State Gas Company also engage in writing options that potentially obligate them to purchase or sell gas at the holder's discretion at some future market-based price. These written options are derivative instruments, must be marked to fair value and do not meet the requirement for hedge accounting treatment. Northern Indiana also uses NYMEX derivative contracts to minimize its gas costs. These contracts do not qualify for hedge accounting and must be marked to fair value. Because these derivatives are used within the framework of its gas cost incentive mechanism, Northern Indiana may ultimately share in a portion of the gains or losses on these options with the ratepayers. Regulatory assets or liabilities are recorded to offset the change in the fair value of these derivatives until there is certainty as to the level of sharing, if any. EXPLORATION AND PRODUCTION. In conjunction with certain fixed price gas delivery commitments, Columbia Resources has purchased financial basis swaps to transfer basis risk from the counterparty back to Columbia Resources. Because these transactions by definition are derivatives and do not qualify for hedge accounting, the changes in the fair value of these swaps directly impact earnings. Additionally, Columbia Resources has engaged in commodity and basis swaps to hedge the anticipated future sale of natural gas. These contracts are derivatives and are designated as cash flow hedges of anticipated future sales. The fair value of the effective portions of these derivatives are recorded in OCI until the related sale. Any ineffectiveness is charged to earnings. Columbia Resources has a net gain of approximately $0.7 million recognized in earnings due to time value in the reporting period and has not excluded components of the derivatives' values in its assessment of hedge effectiveness. It is anticipated that during the next 12 months, expiration of derivatives contracts will result in income recognition for amounts currently classified in OCI of approximately $17.6 million, net of tax, which will be included in net income. Columbia Resources has forward derivative contracts designated as cash flow hedges through December 2002. During 2001, Columbia Resources reclassified $2.4 million of certain cash flow hedges into earnings due to the probability that the forecasted transaction would not occur. MERCHANT OPERATIONS. Certain contracts that would be considered trading contracts at EnergyUSA-TPC Corp. (TPC) are not considered trading contracts at the consolidated level. Certain corresponding, offsetting third-party forward purchase commitments or long futures contracts are designated as cash flow hedges. The mark to fair value impact of the effective portions of these hedges is offset in OCI. There is no net gain or loss recognized in earnings due to ineffectiveness or time value in the reporting period and no components of the derivatives' values have been excluded in the assessment of hedge effectiveness. It is anticipated that during the next 12 months, expiration of forward contracts will result in loss recognition of amounts currently classified in OCI of approximately $2.0 million, net of tax, which will be included 66 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) in net income. NiSource has designated certain TPC forward derivative contracts as cash flow hedges through September 2003. At this time, NiSource expects to continue its cash flow hedges due to the probability that the forecasted transactions will occur. Primary Energy, Inc. (Primary Energy) finances, builds and operates cogeneration plants that generate energy and convert waste products into alternative forms of energy. Primary Energy finances the construction of these facilities by creating synthetic leases. A portion of the synthetic lease payment floats with a referenced interest rate, thus exposing Primary Energy to interest rate risks. Primary Energy engages in interest rate swaps to fix the floating payment and designates these instruments as cash flow hedges. The swaps are entered into to effectively hedge the cash flow risk of the anticipated lease payments. Any earnings impact of changes in the effective portions of the swaps' fair values is charged to OCI until the calculation period is settled. Any ineffectiveness is charged currently to earnings. Primary Energy has no net gain or loss recognized in earnings due to ineffectiveness or time value in the reporting period and it has not excluded any component of the derivative instrument's value in its assessment of hedge effectiveness. It is anticipated that during the next twelve months, expiration of interest rate swap contracts will result in loss recognition of amounts currently classified in OCI of approximately $0.5 million, net of tax, which will be included in net income. Primary Energy has interest rate swap contracts designated as cash flow hedges through June 2002. At this time, Primary Energy expects to continue its cash flow hedges due to the probability that the forecasted transactions will occur. OTHER. Columbia Energy Services, Inc. (Columbia Energy Services) has fixed price gas delivery commitments to three municipalities in the United States. Columbia Energy Services entered into a forward purchase agreement with a gas supplier, wherein the supplier will fulfill the delivery obligation requirements at a slight premium to index. In order to hedge this anticipated future purchase of gas from the gas supplier, Columbia Energy Services entered into pay fixed/receive floating swaps priced at the locations designated for physical delivery. These swaps are designated as cash flow hedges of the anticipated purchases. Changes in the effective portions of the swaps' fair values are included in OCI until the sales are completed. Any ineffectiveness is included in earnings. Columbia Energy Services has no net gain or loss recognized in earnings due to ineffectiveness. It is anticipated that during the next 12 months, expiration of forward swap contracts will result in income recognition of amounts currently classified in OCI of approximately $1.5 million, net of tax. Columbia Energy Services has forward swap contracts designated as cash flow hedges through December 2008. At this time, Columbia Energy Services expects to continue its cash flow hedges due to the probability that the forecasted transactions will occur. INTEREST RATE SWAPS. Columbia has entered into interest rate swap agreements to modify the interest characteristics of its outstanding long-term debt. At December 31, 2001, Columbia had four interest rate swap agreements outstanding effective through November 28, 2002, on $200.0 million notional amount of its 6.61% Series B Debentures due November 28, 2002. In addition, Columbia has two other outstanding interest rate swap agreements, including a $100.0 million notional value swap effective through November 28, 2005 on its 6.80% Series C Debentures due November 28, 2005 and a $281.5 million notional value swap effective through November 28, 2007 on its 7.05% Series D Debentures due November 28, 2007. The Series D swap can be terminated at the option of the counter party at any time between the optional termination date of November 28, 2005 and the stated termination date of November 28, 2007. Under the terms of all the swap agreements, Columbia pays interest based on a floating rate index and receives interest based on a fixed rate. The effect of these agreements is to modify the interest rate characteristics of a portion of Columbia's long-term debt from fixed to variable. As a result of these transactions, $581.5 million of Columbia's long-term debt is now subject to fluctuations in interest rates. These interest rate swaps are designated as fair value hedges. The effectiveness of the interest rate swaps in offsetting the exposure to changes in the debt's fair value is measured using the short-cut method. Columbia had no net gain or loss recognized in earnings due to ineffectiveness during 2001. NiSource entered into forward interest rate swaps to hedge the interest rate risk exposure associated with $1.6 billion of its anticipated financing of the Columbia acquisition debt. The swaps had an effective date of March 30, 2001. The interest rate swaps on the $600 million notional amount was scheduled to terminate on March 30, 2006, the interest rate swap on the $500 million notional amount was scheduled to terminate on March 30, 2011 and the interest rate swap on the other $500 million amount was scheduled to terminate on March 30, 2031. Financing for the Columbia acquisition was completed on November 14, 2000, as a result, the interest rate swaps referred to above were terminated early and the ineffective component of the change in the value of the swaps was charged to expense in 2000. 67 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TRADING ACTIVITIES. NiSource's trading operations include the activities of its power trading business and gas trading business associated with TPC. NiSource employs a value-at-risk (VaR) model to assess the market risk of its energy trading portfolios. NiSource estimates the one-day VaR across all trading groups, 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 $1.1 million, $3.7 million and effectively zero and $0.8 million, $2.7 million and effectively zero during 2001 and 2000, respectively. The daily VaR for the gas trading portfolio on an average, high and low basis was $0.9 million, $4.7 million and $0.2 million and $2.3 million, $8.1 million and $0.5 million during 2001 and 2000, respectively. The fair market value of NiSource power trading assets and liabilities were $60.3 million and $59.4 million, respectively, at December 31, 2001 and $30.9 million and $42.6 million, respectively, at December 31, 2000. The fair market value of NiSource gas trading assets and liabilities were $192.0 million and $184.0 million, respectively, at December 31, 2001. The fair market value of NiSource gas trading assets and liabilities were $1,560.2 million and $1,526.0 million, respectively, at December 31, 2000. NiSource has recorded power trading revenues and cost of sales of $979.7 million and $966.3 million, respectively, for the year ended December 31, 2001. NiSource has recorded power trading revenues and cost of sales of $485.2 million and $472.9 million, respectively, for the year ended December 31, 2000. Power trading revenues and cost of sales were $237.8 million and $230.4 million, respectively, for the year ended December 31, 1999. NiSource has recorded gas trading revenues and cost of sales of $2,146.1 million and $2,100.2 million, respectively, for the year ended December 31, 2001. NiSource has recorded gas trading revenues and cost of sales of $1,893.3 million and $1,881.1 million, respectively, for the year ended December 31, 2000. Gas trading revenues and cost of sales were $390.4 million and $388.2 million, respectively, for the year ended December 31, 1999. Unrealized gains and losses on NiSource's trading portfolio are recorded as price risk management assets and liabilities along with unrealized gains and losses on NiSource's hedges. The accompanying Consolidated Balance Sheets reflected price risk management assets related to unrealized gains and losses on trading activities of $252.3 million and $1,591.1 million at December 31, 2001 and December 31, 2000, respectively, of which $233.3 million and $1,558.5 million were included in "Current Assets" and $19.0 million and $32.6 million were included in "Other Assets." Price risk management liabilities related to unrealized gains and losses on trading activities (including net option premiums) were $243.4 million and $1,568.6 million, of which $232.0 million and $1,529.2 million were included in "Current Liabilities" and $11.4 million and $39.4 million were included in "Other Liabilities and Deferred Credits" at December 31, 2001 and December 31, 2000, respectively. 9. INCOME TAXES The components of income tax expense are as follows:
Year Ended December 31, (in millions) 2001 2000 1999 - ------------------------------------- ------- ------- ------- INCOME TAXES Current Federal $ 194.0 $ 81.3 $ 86.4 State 32.3 14.2 13.1 ------- ------- ------- Total Current 226.3 95.5 99.5 ------- ------- ------- Deferred Federal (40.3) 35.1 (9.5) State 6.2 3.1 (0.2) ------- ------- ------- Total Deferred (34.1) 38.2 (9.7) ------- ------- ------- Deferred Investment Credits (9.0) (7.8) (7.6) ------- ------- ------- INCOME TAXES INCLUDED IN CONTINUING OPERATIONS $ 183.2 $ 125.9 $ 82.2 ------- ------- -------
68 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Total income taxes from continuing operations are different from the amount that would be computed by applying the statutory Federal income tax rate to book income before income tax. The major reasons for this difference are as follows:
Year Ended December 31, (in millions) 2001 2000 1999 - ------------------------------------- ----------------- ----------------- ----------------- Book income from Continuing Operations before income taxes $ 395.3 $ 267.0 $ 236.1 Tax expense at statutory Federal income tax rate 138.4 35.0% 93.5 35.0% 82.6 35.0% Increases (reductions) in taxes resulting from: Book depreciation over related tax depreciation 2.5 0.6 2.8 1.0 3.9 1.6 Amortization of deferred investment tax credits (9.0) (2.3) (7.8) (2.9) (7.6) (3.2) State income taxes, net of federal income tax benefit 25.0 6.3 10.2 3.6 8.3 3.5 Reversal of deferred taxes provided at rates in excess of the current federal income tax rate (2.6) (0.6) (4.4) (1.6) (5.5) (2.3) Low-income housing / Section 29 credits (7.0) (1.8) (5.8) (2.2) (4.5) (1.9) Nondeductible amounts related to amortization of intangible assets and plant acquisition adjustments 33.1 8.4 8.8 3.3 0.4 0.2 Basis and stock sale differences -- -- 19.2 7.2 -- -- Other, net 2.8 0.7 9.4 3.8 4.6 1.9 ------- ------- ------- ------- ------- ------- INCOME TAXES FROM CONTINUING OPERATIONS $ 183.2 46.3% $ 125.9 47.2% $ 82.2 34.8% ------- ------- ------- ------- ------- -------
Deferred income taxes result from temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The principal components of NiSource's net deferred tax liability are as follows:
At December 31, (in millions) 2001 2000 - ----------------------------- -------- -------- DEFERRED TAX LIABILITIES Accelerated depreciation and other property differences $1,788.9 $1,768.1 Unrecovered gas & fuel costs 28.1 138.1 Other regulatory assets 20.1 23.4 Prepaid pension and other benefits 76.6 63.9 Premiums and discounts associated with long-term debt 56.0 58.8 -------- -------- Total Deferred Tax Liabilities 1,969.7 2,052.3 -------- -------- DEFERRED TAX ASSETS Deferred investment tax credits (63.6) (69.0) Other postretirement/postemployment benefits (75.3) (63.0) Gas Inventory (18.2) (15.9) Tax loss carryforwards (19.0) (32.7) Other (86.0) (59.3) -------- -------- Total Deferred Tax Assets (262.1) (239.9) -------- -------- Less: Deferred income taxes related to current assets and liabilities (18.7) 14.2 -------- -------- NON-CURRENT DEFERRED TAX LIABILITY $1,726.3 $1,798.2 -------- --------
10. PENSION AND OTHER POSTRETIREMENT BENEFITS 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. 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 of rate-regulated companies include postretirement benefit costs on an accrual basis, including amortization of the regulatory assets that arose prior to inclusion of these costs in rates. For most plans, cash contributions are remitted to grantor trusts. 69 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Beginning in 2000, NiSource is reflecting the information presented below as of September 30 rather than December 31. The effect of utilizing September 30 rather than December 31 is not significant. The following tables provide a reconciliation of the plans' funded status and amounts reflected in NiSource's Consolidated Balance Sheets at December 31:
PENSION BENEFITS OTHER BENEFITS ---------------------- ---------------------- (in millions) 2001 2000 2001 2000 - ------------- -------- -------- -------- -------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $1,772.5 $ 975.8 $ 497.1 $ 226.5 Service cost 45.7 24.4 13.4 6.7 Interest cost 139.0 84.7 39.6 21.4 Plan participants' contributions -- -- 1.3 0.4 Plan amendments (9.7) 0.5 8.5 -- Additional liability for disabled participants -- -- -- 2.4 Actuarial (gain) loss (33.0) (33.2) (1.5) (4.1) Settlement (gain) loss 15.8 -- -- -- Acquisition of business -- 760.8 -- 255.4 Special termination benefits -- 8.0 -- -- Curtailment (gain) loss (5.0) -- (11.2) -- Settlement payments (76.2) -- -- -- Benefits paid (113.7) (48.5) (27.9) (11.6) -------- -------- -------- -------- Benefit obligation at end of year 1,735.4 1,772.5 519.3 497.1 -------- -------- -------- -------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 2,260.9 1,207.0 169.4 30.0 Actual return on plan assets (230.1) 49.5 (35.7) 0.5 Employer contributions 2.9 40.8 37.1 9.8 Plan participants' contributions -- -- 1.3 0.4 Acquisition of business -- 1,012.1 -- 140.3 Settlement payments (76.2) -- -- -- Benefits paid (113.7) (48.5) (27.9) (11.6) -------- -------- -------- -------- Fair value of plan assets at end of year 1,843.8 2,260.9 144.2 169.4 -------- -------- -------- -------- Funded status 108.4 488.4 (375.1) (327.7) Contributions made after measurement date and before fiscal year end -- 0.1 -- -- Unrecognized actuarial (gain) loss 48.5 (390.0) (83.7) (135.5) Unrecognized prior service cost 63.3 91.0 15.2 5.6 Unrecognized transition obligation 11.9 18.7 130.5 144.6 Fourth quarter contributions -- 0.3 5.9 7.0 One time adjustment -- -- 0.2 -- -------- -------- -------- -------- NET AMOUNT RECOGNIZED AT YEAR-END $ 232.1 $ 208.5 $ (307.0) $ (306.0) -------- -------- -------- --------
PENSION BENEFITS OTHER BENEFITS -------------------- -------------------- 2001 2000 2001 2000 ----- ----- ----- ----- WEIGHTED-AVERAGE ASSUMPTIONS AS OF SEPTEMBER 30, Discount rate assumption 7.50% 8.00% 7.50% 8.00% Compensation growth rate assumption 4.50% 4.50% 4.50% 4.50% Medical cost trend assumption - - 5.25% 5.25% Assets earnings rate assumption * 9.00% 9.00% 9.00% 9.00%
* One of the several established medical trusts and the trust established for life insurance are subject to taxation which results in an after-tax asset earnings rate that is less than 9.00% 70 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table provides the components of the plans expense for each of the three years:
PENSION BENEFITS OTHER BENEFITS ------------------------------ ------------------------------ (in millions) 2001 2000 1999 2001 2000 1999 - ------------- ------ ------ ------ ------ ------ ------ NET PERIODIC COST Service cost $ 45.7 $ 24.4 $ 18.7 $ 13.4 $ 6.7 $ 4.7 Interest cost 139.0 84.7 68.5 39.6 21.4 16.3 Expected return on assets (197.9) (123.9) (93.9) (11.5) (3.5) (2.3) Amortization of transitional obligation 6.6 6.3 6.3 11.9 12.0 12.0 Amortization of prior service cost 10.3 7.0 6.4 0.5 0.3 0.3 Recognized actuarial (gain) loss (12.7) (5.3) -- (7.8) (5.9) (5.6) Special termination benefits -- 8.0 -- -- -- -- Curtailment credits -- -- -- (8.9) -- -- ------ ------ ------ ------ ------ ------ NET PERIODIC BENEFITS COST (BENEFIT) $ (9.0) $ 1.2 $ 6.0 $ 37.2 $ 31.0 $ 25.4 ------ ------ ------ ------ ------ ------
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1% point 1% point (in millions) increase decrease - ------------- -------- -------- Effect on service and interest components of net periodic cost $ 7.0 $ (5.8) Effect on accumulated postretirement benefit obligation $50.6 $(42.6)
11. AUTHORIZED CLASSES OF CUMULATIVE PREFERRED AND PREFERENCE STOCKS NiSource has 20,000,000 authorized shares of Preferred with a $0.01 par value, of which 4,000,000 shares are designated Series A Junior Participating Preferred Shares and are reserved for issuance pursuant to the Share Purchase Rights Plan described in Note 12A. The authorized classes of par value and no par value cumulative preferred and preference stocks of Northern Indiana are as follows: 2,400,000 shares of Cumulative Preferred with a $100 par value; 3,000,000 shares of Cumulative Preferred with no par value; 2,000,000 shares of Cumulative Preference with a $50 par value (none outstanding); and 3,000,000 shares of Cumulative Preference with no par value (none outstanding). The preferred stockholders of Northern Indiana have no voting rights, except in the event of default on the payment of four consecutive quarterly dividends, or as required by Indiana law to authorize additional preferred shares, or by the Articles of Incorporation in the event of certain merger transactions. The redemption prices at December 31, 2001, for the cumulative preferred stock, which is redeemable solely at the option of Northern Indiana, in whole or in part, at any time upon thirty days' notice, were as follows:
Redemption Series Price per Share ------- --------------- Northern Indiana Public Service Company: Cumulative preferred stock - $100 par value - 4-1/4% $ 101.20 4-1/2% $ 100.00 4.22% $ 101.60 4.88% $ 102.00 7.44% $ 101.00 7.50% $ 101.00 Cumulative preferred stock - no par value adjustable rate (6.00% at December 31, 2001), Series A (stated value $50 per share) $ 50.00
71 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The redemption prices at December 31, 2001, as well as sinking fund provisions, for the cumulative preferred stock subject to mandatory redemption requirements, or whose redemption is outside the control of Northern Indiana, were as follows:
Redemption Sinking Fund or Mandatory Series Price per Share Redemption Provisions - ------ --------------- ------------------------- Cumulative preferred stock - $100 par value - 8.35% $102.71, 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 7-3/4% $103.53, reduced periodically 2,777 shares on or before December 1; noncumulative option to double amount each year Cumulative preferred stock - No par value - 6.50% $100.00 on October 14, 2002 430,000 shares on October 14, 2002
Sinking fund requirements with respect to redeemable preferred stocks outstanding at December 31, 2001, for each of the subsequent five years were as follows:
Year Ending December 31, ($ in millions) - ---------------------------------------- 2002 43.6 2003 0.6 2004 0.9 2005 0.9 2006 0.9
12. COMMON STOCK As of December 31, 2001, NiSource had 400,000,000 of authorized shares of common stock with a $0.01 par value. A. SHAREHOLDER RIGHTS PLAN. The Board of Directors of NiSource has adopted a Shareholder Rights Plan, pursuant to which one Right accompanies each share of common stock. 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 Stock, with $0.01 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 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 stock nor affect earnings per share unless they become exercisable for common stock. The Plan was not adopted in response to any specific attempt to acquire control of NiSource. The Rights are not currently exercisable. B. EQUITY FORWARD SHARE PURCHASE CONTRACT. During the second quarter of 1999, NiSource entered into a forward purchase contract covering the purchase of up to 5% of NiSource's outstanding common stock. At the end of each quarterly period during the term of the forward purchase contract, NiSource had 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 72 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) counterparty. The counterparty informed NiSource that approximately 5.6 million shares had been purchased at a weighted average cost of $26.90 per share. NiSource had the option to settle with the counterparty by means of physical, net cash or net share settlement. On a quarterly basis, NiSource paid the counterparty a fee based on the amount paid for common stock purchased by the counterparty, and the counterparty remitted dividends received on shares owned. All such amounts paid and remitted under the contract are reflected in equity contract costs of common stockholders' equity. On December 26, 2000 the contract was terminated and a new agreement was entered into that allowed NiSource to cash settle with the counterparty. The fair value of the new agreement was recorded on the balance sheet as of December 31, 2000 and settled in January 2001. 13. LONG-TERM INCENTIVE PLANS NiSource currently issues long-term incentive grants to key management employees under a long-term incentive plan approved by stockholders on April 13, 1994 (1994 Plan). The 1994 Plan, as amended and restated, permits the following types of grants, separately or in combination: nonqualified stock options, incentive stock options, restricted stock awards, stock appreciation rights (SARs), performance units, contingent stock awards and dividend equivalents payable on grants of options, performance units and contingent stock awards. Each option has a maximum term of ten years and vests one year from the date of grant. SARs may be granted only in tandem with stock options on a one-for-one basis and are payable in cash, common stock, or a combination thereof. The amended and restated 1994 Plan provides for the issuance of up to 11 million shares through April 2004. At December 31, 2001, there were 1,920,208 shares reserved for future awards under the amended and restated 1994 Plan. In connection with the acquisition of Bay State (see Note 3), all outstanding Bay State 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." In connection with the acquisition of Columbia, no options were converted or assumed. 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. Restricted stock grants made in 2001 and 2000 were exchanged in 2001 for new grants equal to 150% of the shares of common stock subject to the original grants. Restricted stock issued in conjunction with the new grants generally will vest over a period of years beginning on December 31, 2002, and for the Chief Executive Officer, the awards will vest after the year of death, disability, termination without cause, change of control or retirement. Shares subject to the new grants must be held until December 31, 2004. If a participant's employment is terminated prior to vesting other than by reason of death, disability or retirement, restricted shares are forfeited. There were 1,991,643 and 667,500 restricted shares outstanding at December 31, 2001 and December 31, 2000, respectively. The Nonemployee Director Stock Incentive Plan, which was approved by stockholders, provides for the issuance of up to 200,000 shares of common stock to nonemployee directors. The Plan provides for awards of common stock, which vest in 20% increments per year, 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 shares of common stock not vested as of the date of termination are forfeited. As of December 31, 2001, 87,500 shares had been issued under the Plan. These plans are accounted for under APB Opinion No. 25. The compensation cost that was charged against net income for restricted stock awards was $30.0 million, $6.8 million and $3.5 million for years ended December 31, 2001, 2000 and 1999, respectively. On January 1, 2001, NiSource granted 1.7 million employee stock options with an identical exercise price that was less than fair market value at the time of the grant. The Company recorded a pre-tax charge of $6.9 million in 2001 related to this option grant. 73 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Transactions for the three years ended December 31, 2001, are as follows:
Weighted Average Options Option Price ($) ---------- ---------------- Outstanding at December 31, 1998 2,651,300 19.61 Granted 744,750 24.59 Converted 740,780 15.03 Exercised (171,374) 14.03 Cancelled (17,000) 28.45 ---------- ----- Outstanding at December 31, 1999 3,948,456 19.90 Granted 1,235,000 20.97 Exercised (603,073) 14.95 Cancelled (117,500) 23.88 ---------- ----- Outstanding at December 31, 2000 4,462,883 20.76 Granted 1,725,105 25.92 Exercised (563,908) 17.40 Cancelled (117,498) 25.93 ---------- ----- OUTSTANDING AT DECEMBER 31, 2001 5,506,582 22.62 Exercisable at December 31, 2001 3,822,269 21.17 ---------- -----
The following table summarizes information on stock options outstanding and exercisable at December 31, 2001:
Options Outstanding Options Exercisable ----------------------------------------------------------- ----------------------------------- Weighted Average Weighted Average Weighted Average Range of Exercise Number Exercise Price Remaining Contractual Number Exercise Price Prices Per Share ($) Outstanding Per Share ($) Life in Years Exercisable Per Share ($) - -------------------- ----------- ---------------- --------------------- ----------- ---------------- 13.03 - 19.55 1,573,569 16.82 4.0 1,573,569 16.82 19.56 - 29.22 3,933,013 24.95 8.0 2,248,700 24.21 ------------- --------- ----- --- --------- ----- 13.03 - 29.22 5,506,582 22.63 6.9 3,822,269 21.17 ------------- --------- ----- --- --------- -----
There were no SARs outstanding at December 31, 2001, 2000 or 1999. Had compensation cost been determined consistent with the provisions of the SFAS No. 123 fair value method (See Note 2T), NiSource's net income and earnings per share would have been the pro forma amounts below:
Year Ended December 31, ($ in millions, except per share data) 2001 2000 1999 - -------------------------------------------------------------- ----- ----- ----- NET INCOME As reported 216.2 150.9 160.4 Pro forma 210.7 147.6 158.8 Earnings per share Basic - as reported 1.05 1.12 1.29 - pro forma 1.02 1.10 1.27 Diluted - as reported 1.03 1.11 1.27 - pro forma 1.00 1.09 1.27
74 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with a dividend yield of 3.58 - 4.90%. The weighted average fair value of options granted was $8.44, $4.61 and $3.66 during the years 2001, 2000 and 1999, respectively. The following assumptions used for grants in 2001, 2000 and 1999:
2001 2000 1999 ---- ---- ---- Expected Life 5.6 YRS. 5.4 - 5.8 yrs. 5.25 yrs. Interest Rate 4.0 - 4.9% 6.1 - 6.6% 5.9% Volatility 27.5 - 28.4% 26.2 - 29.0% 15.7%
14. LONG-TERM DEBT In November 2000, NiSource, through its NiSource Finance subsidiary, issued $2.5 billion of notes, providing a layer of permanent financing for the acquisition of Columbia. This issuance included $750.0 million of three-year notes bearing a 7.50% coupon and maturing on November 15, 2003; $750.0 million of five-year notes bearing a 7.625% coupon and maturing on November 15, 2005 and $1.0 billion of ten-year notes bearing a 7.875% coupon and maturing on November 15, 2010. Subsequently, an additional $150.0 million of five-year notes were issued, bearing a 7.625% coupon and maturing on November 15, 2005. The notes are guaranteed by NiSource. As a portion of the consideration payable in the acquisition of Columbia (See Note 3), NiSource issued 55.5 million SAILS(SM). The SAILS(SM) were issued as one unit consisting of two separate instruments: a debenture with a stated amount of $2.60 and a purchase contract requiring the holder to purchase for $2.60 cash, a number of shares of NiSource common stock based on a settlement rate that is indexed to the market price of NiSource common stock. The purchase contract settlement date will be on November 1, 2004 or earlier if there is a change in control of NiSource before that date. The purchase contracts may not be settled prior to the purchase contract settlement date. The debentures, which mature on November 1, 2006, have been pledged to secure the holders' obligation to purchase common stock under the purchase contract. Sinking fund requirements and maturities of long-term debt outstanding at December 31, 2001, for each of the four years subsequent to December 31, 2002 were as follows:
($ in millions) - --------------- 2003 1,199.2 2004 115.7 2005 1,014.0 2006 440.4
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. Of NiSource's $5,780.8 million of long-term debt at December 31, 2001, $450.0 million was issued by NiSource's affiliate, Capital Markets. 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, was $13.8 billion at December 31, 2001. Columbia has entered into interest rate swap agreements to modify the interest characteristics of its outstanding long-term debt. At December 31, 2001, Columbia had four interest rate swap agreements outstanding effective through November 28, 2002, on $200.0 million notional amount of its 6.61% Series B Debentures due November 28, 2002. In addition, Columbia has two other outstanding interest rate swap agreements, including a $100.0 million 75 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) notional value swap effective through November 28, 2005 on its 6.80% Series C Debentures due November 28, 2005 and a $281.5 million notional value swap effective through November 28, 2007 on its 7.05% Series D Debentures due November 28, 2007. The Series D swap can be terminated at the option of the counter party at any time between the optional termination date of November 28, 2005 and the stated termination date of November 28, 2007. Under the terms of all the swap agreements, Columbia pays interest based on a floating rate index and receives interest based on a fixed rate. The effect of these agreements is to modify the interest rate characteristics of a portion of Columbia's long-term debt from fixed to variable. 15. SHORT-TERM BORROWINGS Acquisition Financing In November 2000, NiSource, through its NiSource Finance subsidiary, entered into a $6.0 billion 364-day acquisition facility with a syndicate of banks. The facility was put in place to finance $6.0 billion acquisition of Columbia, which was consummated on November 1, 2000. Borrowings under the facility were guaranteed by NiSource. On November 1, 2000, the facility supported $4.1 billion of commercial paper issued by NiSource Finance to finance the Columbia acquisition. At December 31, 2000, the facility supported the remaining $1.1 billion of commercial paper originally issued in connection with the Columbia acquisition. Subsequent to the November 1, 2000 Columbia acquisition, the Company reduced its acquisition related commercial paper borrowings through the issuance of $2.65 billion of notes, completed in the fourth quarter of 2000. On November 27, 2000, the Company issued 11,500,000 new shares of NiSource, Inc. common stock at an offering price of $25.25 per share. The $280.9 million of net proceeds were used to reduce borrowings under the NiSource Finance acquisition credit facility. Permanent Credit Facility During March 2001, NiSource arranged $2.5 billion in revolving credit facilities with a syndicate of banks to support its future working capital requirements, providing back-stop support for NiSource's commercial paper program. The new facility consolidated essentially all of NiSource's existing short-term credit facilities into one credit facility at NiSource Finance. The $2.5 billion credit facility is evenly split between a $1.25 billion 364-day facility that terminates on March 22, 2002 and a $1.25 billion facility that terminates on March 23, 2004. NiSource is currently evaluating the appropriate dollar commitment level, if any, to be renewed under the 364-day facility on March 22, 2002. In addition, NiSource has begun preparation for the facility renewal and syndication process. As of December 31, 2001, NiSource had $51.7 million of letters of credit outstanding. At December 31, 2000, NiSource had $128.5 million of letters of credit outstanding. Short-term borrowings were as follows:
At December 31, (in millions) 2001 2000 - ----------------------------- --------- --------- Commercial paper weighted average interest rate of 3.14% for 2001. $ 1,004.3 $ 2,078.8 Credit facility (3-Year Facility) borrowings weighted average interest rate of 2.58% at 12/31/01 850.0 417.9 --------- --------- TOTAL SHORT-TERM BORROWINGS $ 1,854.3 $ 2,496.7 --------- ---------
16. 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 Premium Income Equity Securities (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 Bay State, and to repay short-term indebtedness. 76 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, shares of common stock at a face value of $50. The second component consists of mandatorily redeemable preferred securities (Preferred Securities), which represent an undivided beneficial ownership interest in the assets of NIPSCO Capital Trust I (Capital Trust). The Preferred Securities have a stated liquidation amount of $50. The sole assets of Capital Trust are subordinated debentures (Debentures) of Capital Markets that earn interest at the same rates as the Preferred Securities to which they relate, and certain rights under related guarantees by Capital Markets. The Preferred Securities have been pledged to secure the holders' obligation to purchase common stock under the stock purchase contracts. Distributions paid on the Preferred Securities are presented under the caption "Minority Interests" in NiSource's Statements of Consolidated 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 Sheets. At December 31, 2001, there were 6.9 million 5.9% Preferred Securities outstanding with Capital Trust assets of $345.0 million. At December 31, 2000, there were 6.9 million 5.9% Preferred Securities outstanding with Capital Trust assets of $345.0 million. 17. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value: INVESTMENTS. Where feasible, the fair value of investments is estimated based on market prices for those or similar investments. LONG-TERM DEBT/PREFERRED STOCK AND PREFERRED SECURITIES. The fair values of these securities are estimated based on the quoted market prices for the same or similar issues or on the rates offered for securities of the same remaining maturities. Certain premium costs associated with the early settlement of long-term debt are not taken into consideration in determining fair value. The carrying values and estimated fair values of financial instruments were as follows:
CARRYING ESTIMATED Carrying Estimated AMOUNT FAIR VALUE Amount Fair Value At December 31, ($ in millions) 2001 2001 2000 2000 - ------------------------------- -------- ---------- -------- ----------- Long-term investments 44.8 44.6 57.4 56.5 Long-term debt (including current portion) 6,179.0 6,508.1 5,867.5 5,291.7 Preferred stock (including current portion) 132.2 114.0 133.3 107.1 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company debentures 345.0 313.6 345.0 372.6
A 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. In October 1999, Columbia of Ohio entered into an agreement to sell, without recourse, substantially all of its trade accounts receivable to Columbia Accounts Receivable Corporation (CARC), a wholly owned subsidiary of Columbia. At the same time, CARC entered into an agreement, with a third party, Canadian Imperial Bank of Commerce (CIBC), to sell a percentage ownership interest in a defined pool of accounts receivable (Sales Program). Under this Sales Program, CARC can transfer an undivided interest in a designated pool of its accounts receivable on an ongoing basis up to a maximum of either $125.0 million or $100.0 million, as determined by the seasonal fluctuation in Columbia of Ohio's account receivable balances and the mutual consent of both parties. The amount available at any measurement date varies based upon the level of eligible receivables. Under this agreement, approximately $82.8 million of receivables were sold as of December 31, 2001. 77 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Under a separate agreement, in conjunction with the Sales Program, Columbia of Ohio acts as agent for CIBC, the ultimate purchaser of the receivables, by performing record keeping and cash collection functions for the accounts receivable sold by CARC. Columbia of Ohio receives a fee, which provides adequate compensation, for such services. Northern Indiana may sell, without recourse, up to $100 million of certain of its accounts receivable to Citibank under a sales agreement, which expires May 2003. Northern Indiana has sold $100 million under this agreement. Under a separate agreement, in conjunction with the sales agreement, Northern Indiana acts as agent for Citibank, by performing record keeping and cash collection functions for the accounts receivable sold to Citibank. Northern Indiana receives a fee, which provides adequate compensation, for such services. 18. OTHER COMMITMENTS AND CONTINGENCIES A. CAPITAL EXPENDITURES. NiSource expects that approximately $650.8 million will be expended for construction purposes during 2002. Substantial commitments have been made in connection with this construction program. B. SERVICE AGREEMENTS. 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. C. ASSETS UNDER LIEN. Substantially all of Columbia Transmission's properties have been pledged to Columbia as security for debt owed by Columbia Transmission to Columbia. The first mortgage bonds of Northern Indiana constitute a first mortgage lien on certain utility property and franchises. D. GUARANTEES AND INDEMNITIES. PRIMARY ENERGY. Primary Energy is currently involved in six projects that are concerned with the generation of electricity, steam, or thermal energy on the sites of industrial customers. Five projects generate energy from process streams or fuel provided by the industrial customers. The energy is then delivered to the industrial customers under long-term contracts providing for tolling fees, sublease payments, unit sale payments or processing fees. One project, Whiting Clean Energy, will obtain natural gas to produce electricity for sale in the wholesale markets and steam for industrial use. Each project is developed by a wholly-owned subsidiary (the "Lessee") of Primary Energy. The Lessee leases the facility after completion of construction from a non-affiliated special purpose entity (the "Lessor"), which owns the facility and advances the funds for construction. The Lessor obtains funding primarily from bank borrowings or a private placement of notes, secured by the Lessor's rights in the facility. The indebtedness of the Lessor is not treated as indebtedness of NiSource under generally accepted accounting principles in the United States. The lease payments from the Lessee to the Lessor are based on a return on the amounts advanced plus any amortization of the amounts advanced. With respect to three of the projects, the costs of the project financing depend on the debt rating on NiSource's outstanding commercial paper or long-term debt. The projects are located on the customers' premises pursuant to long-term ground leases. The responsibility for operation and maintenance lies directly with the industrial customers for two of the projects and with the Lessee on the remaining projects. Where the Lessee is responsible for the operation and maintenance, it contracts with third parties to manage and perform the operation and maintenance activities. NiSource, either directly or through Capital Markets, has guaranteed or in substance guaranteed most lease payments to the Lessors, including regular lease payments, accelerated lease payments on an event of default, and payment obligations, including residual guarantee amounts, at the end of lease terms. In the case of an event of default, a Lessor can accelerate the full, unamortized amount of the Lessor's funding. The aggregate unamortized funding for all the projects at December 31, 2001 was $629.7 million. 78 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At the end of an initial lease term, the Lessee has the right to purchase the facility for the unamortized amount of the Lessor's funding. If the Lessee cannot satisfy return conditions, the Lessee is required to purchase the facility at such price. If the Lessee determines not to purchase the facility and the Lessee can satisfy the return conditions, the Lessee may be responsible for a residual guarantee amount. Since the energy contracts with the industrial customers are long-term and typically extend past the initial lease term, the Lessee's strategy is to attempt to refinance the property and extend the lease term. The present value of a Lessee's aggregate liability for lease payments and residual guarantees is generally limited to an amount equal to less than 90% of the amount advanced. The following table shows, by year, future minimum rental payments, including maximum residual guarantee amounts and additional amounts due if the Lessees were to purchase all the facilities at the end of the initial terms of the leases.
Minimum Rental Additional ($ in millions) Payments Payment TOTAL - --------------- -------------- ---------- ----- 2002 87.7 5.5 93.2 2003 103.2 12.1 115.3 2004 52.6 -- 52.6 2005 52.7 -- 52.7 2006 102.2 8.6 110.8 After 472.9 81.3 554.2
The amounts contained in the first column, representing future minimum rental payments are included as part of the future minimum rental payments for operating leases shown in Note 18G. Primary Energy's Whiting Clean Energy project at BP's Whiting, Indiana refinery has incurred delays primarily associated with remediating damage that occurred during commissioning in September 2001. The delays have also resulted in an increase in estimated project costs and the need for approximately $20 million of additional funding. Primary Energy has asserted a claim against the construction contractor relating to the delay. The project is expected to be capable of producing electricity in the first quarter of 2002, at a total cost of approximately $320 million. In addition to the construction issues at the Whiting Clean Energy facility, NiSource projects that the facility will operate at a loss based on the current market view of forward pricing in the gas and electric markets. For 2002, the after-tax loss is projected to be approximately $16.0 million. The profitability of the project in future periods will be dependent on, among other things, prevailing prices in the energy markets and regional load dispatch patterns. Primary Energy's Ironside project at LTV Steel Company's East Chicago, Indiana mill has been negatively impacted by LTV's bankruptcy filing in December 2000 and LTV's December 2001 decision to idle the steel mill. The Ironside facility is complete in all material respects. However, the facility cannot currently be operated on an economic basis if the mill is not operating. In addition, there can be no guarantee that LTV will not reject the project contracts in connection with the bankruptcy, in which event the Lessee will have limited contract damages against LTV and the status of an unsecured creditor. Primary Energy believes that the Ironside project brings economic value to the operator of the mill by utilizing energy waste streams to generate electricity for the mill at attractive prices. However, there can be no assurance that any successor to LTV will reopen the mill or be willing to restructure the transaction on an economic basis to Primary Energy. The winner of the bids for the purchase of LTV's steel mill will be determined on February 28, 2002. The total cost of the Ironside project is approximately $67 million. The lease at Primary Energy's North Lake project is due to expire in June 2002. Of the several options available, the most likely outcomes are that the project will be refinanced and the lease will be extended or that the Lessee will purchase the project at its unamortized cost of approximately $38 million. If the Lessee purchases the project, the payment will be funded by NiSource. The strategy at this time is to pursue refinancing. 79 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In addition, a subsidiary of Primary Energy is a 50% partner in a partnership, which operates a coal pulverization facility. The partnership has entered into a lease of a 50% undivided interest in the facility. NiSource has entered into a guarantee of all of the obligations of the partnership under the lease. Minimum rental payments under the lease are as follows:
($ in millions) - --------------- 2002 3.4 2003 6.2 2004 4.3 2005 4.3 2006 4.3 After 19.5
In an event of default, the partnership will be required to pay a stipulated amount under the lease. This amount was $34.7 million as of December 31, 2001. E. OTHER LEGAL PROCEEDINGS. In the normal course of its business, NiSource and its subsidiaries have been named as defendants in various legal proceedings. In the opinion of management, the ultimate disposition of these currently asserted claims will not have a material adverse impact on NiSource's consolidated financial position. F. 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. GAS DISTRIBUTION. Several Gas Distribution subsidiaries are "potentially responsible parties" (PRPs) at waste disposal sites under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) (commonly known as Superfund) and similar state laws, including at former manufactured gas plant (MGP) sites which such subsidiaries, or their corporate predecessors, own or previously owned or operated. Gas Distribution subsidiaries may be required to share in the cost of clean up of such sites. In addition, some Gas Distribution subsidiaries have corrective action liability under the Resource Conservation and Recovery Act (RCRA) for closure and clean-up costs associated with underground storage tanks and under the Toxic Substances Control Act (TSCA) for clean up of polychlorinated biphenyls (PCBs) released at various facilities. Gas Distribution subsidiaries are parties to or otherwise involved in clean up of four waste disposal sites under Superfund or similar state laws. For one of these sites the potential liability is de minimis and, for the other three, the final costs of clean up have not yet been determined. As site investigations and clean-ups proceed and as additional information becomes available, waste disposal site liability is reviewed periodically and adjusted. A program has been instituted to identify and investigate former MGP sites where Gas Distribution subsidiaries or predecessors are the current or former owner. The investigation has identified 84 such sites. Initial investigation has been conducted at 42 sites. Of these sites, additional investigation activities have been completed or are in progress at 34 sites and remedial measures have been implemented or completed at 19 sites. Only those site investigation, characterization and remediation costs currently known and determinable can be considered "probable and reasonably estimable" under Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" (SFAS No. 5). As costs become probable and reasonably estimable, reserves will be adjusted as appropriate. As reserves are recorded, regulatory assets are recorded to the extent environmental expenditures are expected to be recovered through rates. NiSource is unable, at this time, to accurately estimate the time frame and potential costs of the entire program. Management expects that, as characterization is completed, additional remediation work is performed and 80 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) more facts become available, NiSource will be able to develop a probable and reasonable estimate for the entire program or a major portion thereof consistent with the SEC's Staff Accounting Bulletin No. 92 (SAB No. 92) which covers accounting and disclosures relating to loss contingencies, SFAS No. 5, and American Institute of Certified Public Accountants Statement of Position 96-1, "Environmental Remediation Liabilities" (SOP No.96-1). As of December 31, 2001, a reserve of approximately $68.2 million has been recorded to cover probable environmental response actions. The ultimate liability in connection with these sites will depend upon many factors, including the volume of material contributed to the site, years of ownership or operation, the number of other PRPs and their financial viability and the extent of environmental response actions required. Based upon investigations and management's understanding of current environmental laws and regulations, NiSource believes that any environmental response actions required, after consideration of insurance coverage, contributions from other PRPs and rate recovery, will not have a material effect on its financial position. MERCURY PROGRAM. Until the 1960s, gas regulators containing small quantities of mercury were installed in homes on some natural gas systems. The purpose of these regulators was to reduce the pressure of the natural gas flowing from the service line for use inside of the home. In 2000, several gas distribution companies unaffiliated with NiSource were involved in highly publicized testing and clean-up programs resulting from mercury spills associated with the removal of gas regulators containing mercury. A number of the NiSource Gas Distribution subsidiaries historically utilized gas regulators that contained small quantities of mercury. All NiSource Gas Distribution subsidiaries have implemented programs to investigate, maintain and/or remove and replace gas regulators containing mercury, including procedures ensuring that any accidental mercury spills are detected and properly cleaned up. To date no material problems associated with past or current use or removal of mercury regulators have been identified. As a result, NiSource believes it is unlikely that any financial exposure from this matter would have a material effect on its financial position or results of operations of its Gas Distribution subsidiaries. ELECTRIC OPERATIONS. 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 became fully effective in 2000. All of Northern Indiana's facilities are in compliance with the sulfur dioxide and NOx limits. During 1998, the U.S. 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. Consistent with the EPA requirements, the State of Indiana developed regulations implementing the control program, which became effective September 16, 2001. The EPA approved the state rules effective December 10, 2001. Compliance with the NOx limits contained in these rules is required by May 31, 2004. The NOx emission limitations in the Indiana rules are more restrictive than those imposed on electric utilities under the CAAA's acid rain NOx reduction program described above. Capital estimates of Northern Indiana's NOx control compliance costs range from $200 to $300 million over the next 2 years. Actual compliance costs may vary depending on a number of factors including market demand/resource constraints, uncertainty of future equipment and construction costs, and the potential need for additional control technology. In a matter related to the 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 the EPA's decisions on these petitions and existing litigation to determine the impact of these developments on programs to reduce NOx emissions at Northern Indiana's electric facilities. 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. The Court of Appeals decision was appealed to the Supreme Court, which heard oral arguments on November 7, 2000. The Supreme Court rendered a complex ruling on February 27, 2001 that will require some issues to be resolved by the D.C. Circuit Court and the EPA before final rulemaking 81 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) occurs. Consequently, final rules specifying a compliance level, deadline, and controls necessary for compliance are not expected in the near future. Resulting rules could require additional reductions in sulfur dioxide, particulate matter and NOx emissions from coal-fired boilers (including Northern Indiana's electric 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 and are currently not reasonably estimable. NiSource will continue to closely monitor developments in this area. However, the exact nature of the impact of the new standards on its operations will not be known for some time. The EPA has initiated enforcement actions against several electric utilities alleging violations of the new source review provisions of the Clean Air Act. Northern Indiana has received and is in the process of responding to information requests from the EPA on this subject. It is impossible at this time to predict the result of EPA's review of Northern Indiana's information responses. Initiatives are being discussed both in the United States and worldwide to reduce so-called "greenhouse gases" such as carbon dioxide, a by-product of burning fossil fuels. Reduction of such emissions could result in significant capital outlays or operating expenses for Northern Indiana. The CAAA also contain other provisions that could lead to limitations on emissions of hazardous air pollutants. In response to the CAAA requirements, on December 20, 2000, the EPA issued a finding that the regulation of emissions of mercury and other air toxics from coal and oil-fired electric steam generating units is necessary and appropriate. The EPA expects to issue proposed regulations by December 15, 2003, and finalized regulations by December 15, 2004. The potential impact, if any, to NiSource's financial results that may occur because of any of these potential new regulations is unknown at this time. The EPA is in the process of developing a program to address regional haze. The new administration announced that the EPA would move forward with rules that mandate the states to require power plants built between 1962 and 1977 to install the "best available retrofit technology" or BART. The BART program will target for control by 2013 those pollutants that limit visibility, namely particulate, sulfur dioxide and/or nitrogen oxides. Until the program is developed, Northern Indiana cannot predict the cost of complying with these rules. WATER. The Great Lakes Water Quality Initiative ("GLI") program is expected to add new water quality standards for facilities that discharge into the Great Lakes watershed, including Northern Indiana's three electric generating stations located on Lake Michigan. The State of Indiana has promulgated its regulations for this water discharge permit program and has received final EPA approval. As promulgated, the regulations would provide the Indiana Department of Environmental Management (IDEM) with the authority to grant water quality criteria variances and exemptions for non-contact cooling water. However, the EPA revised the variance language and other minor provisions of IDEM's GLI rule. The EPA by and large left the non-contact cooling water exemption intact; however, a separate agreement between the EPA and IDEM on interpretation of this exemption still leaves uncertainty as to its impact. The EPA change to the variance rule has prompted litigation by the affected industrial parties and the EPA/IDEM agreement on the non-contact cooling water exemption may be subject to future litigation. Northern Indiana expects that IDEM will issue a proposed permit renewal for each of its lakeside stations. Pending the outcome of litigation and the proposed permit renewal requirements, the costs of complying with these requirements cannot be predicted at this time. REMEDIATION. Northern Indiana is a PRP at four waste disposal sites under CERCLA and similar state laws, and may be required to share in the cost of clean up of such sites. In addition, Northern Indiana has corrective action liability under the RCRA for closure and clean-up costs associated with treatment, storage, and disposal sites. As of December 31, 2001, a reserve of approximately $2.2 million has been recorded to cover probable environmental response actions at these sites. The ultimate liability in connection with these sites will depend upon many factors, including the volume of material contributed to the site, years of ownership of operations, the number of other PRPs and their financial viability and the extent of environmental response required. Based upon investigations and management's understanding of current environmental laws and regulations, NiSource believes that any environmental response required will not have a material effect on the its financial position or results of operations. 82 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GAS TRANSMISSION. Columbia Transmission continues to conduct characterization and remediation activities at specific sites under a 1995 EPA Administrative Order by Consent (AOC). The program pursuant to the AOC covers approximately 240 facilities, approximately 13,000 liquid removal points, approximately 2,200 mercury measurement stations and about 3,700 storage well locations. As of December 31, 2001, field characterization has been performed at all sites. Site characterization reports and remediation plans, which must be submitted to the EPA for approval, are in various stages of development and completion. Remediation has been completed at the mercury measurement stations, liquid removal point sites and storage well locations and at a number of the 240 facilities. Only those site investigation, characterization and remediation costs currently known and determinable can be considered "probable and reasonably estimable" under SFAS No. 5. As costs become probable and reasonably estimable, reserves will be adjusted as appropriate. Columbia Transmission is unable, at this time, to accurately estimate the time frame and potential costs of the entire program. Management expects that as characterization reports and remediation plans are completed and approved by the EPA, and additional remediation work is performed, Columbia Transmission should be able to develop a probable and reasonable estimate for the entire program consistent with SAB No. 92, SFAS No. 5, and SOP No. 96-1. Columbia Transmission and Columbia Gulf are PRPs at several waste disposal sites. The potential liability is believed to be de minimis, however, the final allocation of clean-up costs has yet to be determined. As site investigations and clean-ups proceed and as additional information becomes available, waste disposal site liability is reviewed periodically and adjusted. At the end of 2001, the remaining environmental liability recorded on the balance sheet for the Gas Transmission and Storage operations was $90.5 million. Columbia Transmission's environmental cash expenditures are expected to be approximately $12.5 million in 2002. These expenditures will be charged against the previously recorded liability. A regulatory asset has been recorded to the extent environmental expenditures are expected to be recovered through rates. Management does not believe that Columbia Transmission's environmental expenditures will have a material adverse effect on NiSource's operations, liquidity or financial position, based on known facts, existing laws, regulations, Columbia Transmission's cost recovery settlement with customers and the time period over which expenditures will be made. TRANSCOM. In spring 2000, Transcom received directives from the Philadelphia District of the U.S. Army Corps of Engineers (Philadelphia District) and an administrative order from Pennsylvania Department of Environmental Protection (PA DEP) addressing alleged violations of federal and state laws resulting from construction activities associated with Transcom's laying fiber optic cable along portions of a route between Washington, D.C. and New York City. The order and directives required Transcom to largely cease construction activities. On September 18, 2000, Transcom entered into a voluntary settlement agreement with the Philadelphia District under which Transcom contributed $1.2 million to the Pennsylvania chapter of the Nature Conservancy and the Philadelphia District lifted its directives. As a result of the voluntary agreement with the Philadelphia District and communications with the PA DEP, the Maryland Department of the Environment and the Baltimore District of the US Army Corps of Engineers, work in Pennsylvania and Maryland was allowed to be continued and has been completed. On October 25, 2001, Transcom entered into a Consent Order and Agreement with the PA DEP in settlement of its enforcement action under which Transcom paid $80,633 in penalties and $223,567 to fund six community environmental projects through the Green Valleys Association. DISCONTINUED OPERATIONS. NiSource affiliates have retained environmental cleanup liability associated with some of its former companies, including Columbia Propane, Columbia Petroleum, and certain local gas distribution companies. The primary environmental liability associated with former propane operations relates to a former MGP site in Wisconsin for which reserves have been accrued. Environmental liability associated with former petroleum operations includes relatively minor cleanups of product spills at third party properties and liability for pre-existing environmental conditions at former petroleum terminals pursuant to sale agreements. A NiSource affiliate also retains liability for two former MGP sites associated with a local gas distribution company in New York, for which reserves have been accrued. 83 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The ultimate liability in connection with these sites will depend upon many factors including the extent of environmental response actions required, other PRPs and their financial viability, and indemnification from previous facility owners. Only those corrective action costs currently known and determinable can be considered "probable and reasonably estimable" under SFAS No. 5 and consistent with SOP No. 96-1. As costs become probable and reasonably estimable, reserves will be adjusted as appropriate. NiSource believes that any environmental response actions required at former operations, for which it is ultimately liable, after consideration of insurance coverage and contributions from other PRPs, will not have a material adverse effect on NiSource's financial position. NiSource's discontinued wastewater and water operations are subject to pollution control and water quality control regulations. Under the Federal Clean Water Act and state regulations, National Pollutant Discharge Elimination System permits must be obtained for water discharges and water treatment stations. 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), IWCR's water utility subsidiaries are subject to regulation by the EPA for the quality of water sold and treatment techniques used to make the water potable. The EPA promulgates nationally-applicable maximum contaminant levels (MCLs) for contaminants found in drinking water. Management believes 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, the EPA promulgated two National Primary Drinking Water rules, the Interim Enhanced Surface Water Treatment Rule and the Disinfectants and Disinfection Byproducts Rule. 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 its estimated costs are 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. ENVIRONMENTAL RESERVES. It is management's continued intent to address environmental issues in cooperation with regulatory authorities in such a manner as to achieve mutually acceptable compliance plans. However, there can be no assurance that fines and penalties will not be incurred. Management expects most environmental assessment and remediation costs to be recoverable through rates for certain of NiSource companies. As of December 31, 2001, a reserve of approximately $167.3 million has been recorded to cover probable corrective actions at sites where NiSource has environmental remediation liability. 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. 84 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) G. OPERATING LEASES. Payments made in connection with operating leases are primarily charged to operation and maintenance expense as incurred. Such amounts were $132.4 million in 2001, $57.4 million in 2000 and $48.5 million in 1999. Future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year are:
($ in millions) - --------------- 2002 149.8 2003 168.1 2004 110.5 2005 109.3 2006 157.9 After 643.2
H. PURCHASE COMMITMENTS. NiSource has service agreements that provide for pipeline capacity, transportation and storage services. These agreements, which have expiration dates ranging from 2002 to 2014, provide for NiSource to pay fixed monthly charges. The estimated aggregate amounts of such payments at December 31, 2001, were:
($ in millions) - --------------- 2002 136.2 2003 92.8 2004 80.8 2005 64.8 2006 53.2 After 237.5
19. ENRON BANKRUPTCY FILING On December 2, 2001, Enron Corp. filed for protection from creditors under Chapter 11 of the United States Bankruptcy Code. NiSource has certain exposure to Enron as a result of hedging and trading activities and providing services to Enron at NiSource's gas pipeline and gas distribution subsidiaries. Prior to Enron's bankruptcy filing, NiSource had basis and commodity swaps, pipeline transportation and storage agreements, physical commodity contracts for natural gas, electricity and coal, and SO2 trading agreements in place with Enron as the counterparty. All contracts, with the exception of the pipeline transportation and storage agreements and a contract to supply gas to choice customers of the Columbia of Ohio gas distribution subsidiary, were terminated by NiSource at the end of November 2001. NiSource recorded a pre-tax charge of $17.8 million in 2001 related to the Enron bankruptcy filing. 20. TELECOMMUNICATION NETWORK (TRANSCOM) As a result of project delays, cost overruns and a decline in the fiber optics market that have occurred since the acquisition of Columbia, NiSource recorded a charge of $9.2 million to operating income in the second quarter of 2001, related to Transcom, a fiber optics telecommunications network. In September and October 2000, management held discussions with investment banking firms seeking strategic options for the Transcom assets. Although significant uncertainties existed surrounding the estimated costs to complete the fiber optic network, time to market in a competitive environment, and delays due to construction deficiencies and environmental issues, management decided to complete the Transcom network and sell the completed network. 85 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company received subsequent information pertaining to the estimated construction costs and delays. Consequently, management concluded that the carrying value of the telecommunication assets exceeded the realizable value by approximately $89.2 million. Consequently, goodwill resulting from the acquisition of Columbia was increased by a substantial portion of such excess carrying amount ($52.0 million after-tax). In August 2001, Transcom invited potential buyers to submit bids for the assets. Based on these bids, present market conditions preclude Transcom from realizing the carrying value of the assets by selling at the present time. Therefore management has decided to operate the network, while continuing to evaluate market conditions for possible sale. At December 31, 2001, the anticipated cash flow from Transcom's business plan indicates that the asset's current carrying value is realizable. However, economic and other events may adversely affect Transcom's ability to achieve such plan. 21. OTHER, NET
Year Ended December 31, (in millions) 2001 2000 1999 - ------------------------------------- ------ ------ ------- Interest income $ 0.1 $ 18.7 $ 6.5 Gain on sale of assets 18.8 55.4 7.5 Miscellaneous (6.9) (31.8) (34.6) ------ ------ ------ TOTAL OTHER, NET $ 12.0 $ 42.3 $(20.6)
22. INTEREST EXPENSE, NET
Year Ended December 31, (in millions) 2001 2000 1999 - ------------------------------------- ------- ------- ------- Interest on long-term debt $ 438.6 $ 136.6 $ 119.5 Interest on short-term debt 145.1 166.6 31.5 Discount on prepayment transactions 20.5 7.9 4.7 Allowance for borrowed funds used and interest during construction (4.3) (3.9) (0.7) Other (2.2) (2.7) 0.4 ------- ------- ------- TOTAL INTEREST EXPENSE, NET $ 597.7 $ 304.5 $ 155.4 ------- ------- -------
23. 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. Effective for the second quarter of 2001, NiSource realigned a portion of its operations and reclassified previously reported operating segment information to conform to the realigned operating structure. The realignment affected three previously reported segments, and included moving all ongoing operations of Energy Marketing and certain operations from the Electric Operations and Other segments to the newly created Merchant Operations segment. The electric wheeling, bulk power, and power trading operations were moved from the Electric Operations segment to Merchant Operations, and the Company's Primary Energy subsidiary, which develops on-site, industrial-based energy solutions, was moved from Other to Merchant Operations. NiSource's operations are divided into six primary business segments. The Gas Distribution segment provides natural gas service and transportation for residential, commercial and industrial customers in Ohio, Pennsylvania, Virginia, Kentucky, Maryland, Indiana, Massachusetts, Maine and New Hampshire. The Electric Operations segment provides electric service in 21 counties in the northern part of Indiana. The Gas Transmission and Storage segment offers gas transportation and storage services for local distribution companies, marketers and industrial and commercial customers located in northeastern, mid-Atlantic, midwestern and southern states and the District of Columbia. The Exploration and Production segment explores for, develops, produces and markets gas and oil in the 86 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) United States and in Canada. The Merchant Operations segment provides energy-related services including gas marketing, electric transmission, bulk power, power trading and asset management services to local distribution companies (LDC), wholesale, commercial and industrial customers, and participates in the development of merchant power projects. The Other segment participates in real estate, telecommunications and other businesses. The following tables provide information about business segments. NiSource uses operating income as its primary measurement for each of the reported segments and makes decisions on finance, dividends and taxes at the corporate level on a consolidated basis. Segment revenues include intersegment sales to affiliated subsidiaries, which are eliminated in consolidation. Affiliated sales are recognized on the basis of prevailing market, regulated prices or at levels provided for under contractual agreements. Operating income is derived from revenues and expenses directly associated with each segment.
(in millions) 2001 2000 1999 - ------------- --------- --------- --------- REVENUES GAS DISTRIBUTION Unaffiliated $ 4,241.3 $ 2,085.7 $ 977.2 Intersegment 40.6 67.5 64.5 --------- --------- --------- Total 4,281.9 2,153.2 1,041.7 --------- --------- --------- GAS TRANSMISSION AND STORAGE Unaffiliated 634.7 151.3 2.3 Intersegment 329.0 82.1 47.3 --------- --------- --------- Total 963.7 233.4 49.6 --------- --------- --------- ELECTRIC OPERATIONS Unaffiliated 1,012.0 1,002.1 1,014.4 Intersegment 2.8 2.5 2.7 --------- --------- --------- Total 1,014.8 1,004.6 1,017.1 --------- --------- --------- EXPLORATION AND PRODUCTION Unaffiliated 170.4 40.6 -- Intersegment 65.3 0.5 -- --------- --------- --------- Total 235.7 41.1 -- --------- --------- --------- MERCHANT OPERATIONS Unaffiliated 3,240.0 2,511.3 1,053.1 Intersegment 150.7 139.5 59.0 --------- --------- --------- Total 3,390.7 2,650.8 1,112.1 --------- --------- --------- OTHER Unaffiliated 157.7 248.6 221.6 Intersegment 2.0 2.9 2.4 Total 159.7 251.5 224.0 --------- --------- --------- Adjustments and eliminations (587.8) (303.9) (171.0) --------- --------- --------- CONSOLIDATED REVENUES $ 9,458.7 $ 6,030.7 $ 3,273.5 --------- --------- ---------
87 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in millions) 2001 2000 1999 - ------------- --------- --------- --------- OPERATING INCOME (LOSS) Gas Distribution $ 380.8 $ 241.0 $ 114.0 Gas Transmission and Storage 349.0 47.6 2.4 Electric 309.6 315.7 324.0 Exploration and Production 51.9 5.4 -- Merchant Operations 22.2 79.0 49.5 Other (67.3) (28.0) (7.3) Corporate (10.8) (115.8) (44.9) Adjustments and eliminations (26.5) 12.5 0.2 --------- --------- --------- CONSOLIDATED $ 1,008.9 $ 557.4 $ 437.9 --------- --------- --------- DEPRECIATION AMORTIZATION & DEPLETION Gas Distribution $ 228.8 $ 146.7 $ 115.0 Gas Transmission and Storage 161.5 27.7 1.4 Electric 166.8 162.8 158.5 Exploration and Production 63.1 11.0 -- Merchant Operations 2.3 2.1 1.8 Other 8.3 21.3 13.7 Corporate 10.4 4.5 4.6 Adjustments and eliminations 0.5 -- -- --------- --------- --------- CONSOLIDATED $ 641.7 $ 376.1 $ 295.0 --------- --------- --------- ASSETS Gas Distribution $ 5,503.4 $ 6,061.2 $ 2,559.4 Gas Transmission and Storage 2,849.1 2,934.4 -- Electric 2,624.2 2,796.6 2,595.4 Exploration and Production 1,017.6 939.5 -- Merchant Operations 619.7 2,222.7 641.0 Other 648.0 737.6 382.5 Corporate 10,380.0 10,170.9 1,615.6 Adjustments and eliminations (6,267.9) (6,180.2) (1,365.3) --------- --------- --------- CONSOLIDATED $17,374.1 $19,682.7 $ 6,428.6 --------- --------- --------- CAPITAL EXPENDITURES Gas Distribution $ 211.3 $ 138.3 $ 145.2 Gas Transmission and Storage 137.4 50.3 -- Electric 134.7 132.2 134.0 Exploration and Production 118.8 22.7 -- Merchant Operations 0.8 1.2 0.7 Other 76.2 21.1 14.0 Corporate -- -- -- --------- --------- --------- CONSOLIDATED $ 679.2 $ 365.8 $ 293.9 --------- --------- ---------
88 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 24. QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data does not always reveal the trend of NiSource's business operations due to nonrecurring items and seasonal weather patterns, which affect earnings, and related components of net revenues and operating income.
First Second Third Fourth ($ in millions, except per share data) Quarter Quarter Quarter Quarter - -------------------------------------- --------- --------- --------- --------- 2001 Gross revenues 3,798.1 1,874.8 1,756.4 2,029.4 Operating Income 460.6 142.1 144.9 261.3 Income (Loss) from Continuing Operations 177.3 (9.9) (20.6) 65.3 Income from Discontinued Operations - net of taxes 0.6 (1.7) (0.4) 1.6 Change in Accounting- net of taxes 4.0 -- -- -- Net Income 181.9 (11.6) (21.0) 66.9 Basic Earnings Per Share of Common Stock Continuing Operations 0.86 (0.05) (0.10) 0.32 Discontinued Operations -- (0.01) -- 0.01 Change in accounting 0.02 -- -- -- --------- --------- --------- --------- Basic Earnings Per Share 0.88 (0.06) (0.10) 0.33 --------- --------- --------- --------- Diluted Earnings Per Share of Common Stock Continuing Operations 0.85 (0.05) (0.10) 0.31 Discontinued Operations -- (0.01) -- 0.01 Change in accounting 0.02 -- -- -- --------- --------- --------- --------- Diluted Earnings Per Share 0.87 (0.06) (0.10) 0.32 --------- --------- --------- --------- 2000 Gross revenues 1,109.8 1,004.6 1,181.0 2,735.3 Operating Income 178.2 84.5 97.4 197.3 Income (Loss) from Continuing Operations 79.1 21.4 46.9 (6.3) Income from Discontinued Operations - net of taxes 0.5 2.0 5.2 2.1 Net Income 79.6 23.4 52.1 (4.2) Basic Earnings Per Share of Common Stock Continuing Operations 0.64 0.18 0.39 (0.03) Discontinued Operations -- 0.01 0.04 0.01 --------- --------- --------- --------- Basic Earnings Per Share 0.64 0.19 0.43 (0.02) --------- --------- --------- --------- Diluted Earnings Per Share of Common Stock Continuing Operations 0.62 0.17 0.38 (0.03) Discontinued Operations -- 0.01 0.04 0.01 --------- --------- --------- --------- Diluted Earnings Per Share 0.62 0.18 0.42 (0.02) --------- --------- --------- ---------
89 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 25. EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) Reserve information contained in the following tables for the U.S. and Canadian properties is management's estimate, which was reviewed by the independent consulting firms of Ryder Scott Company Petroleum Engineers for the U.S. reserves and Sproule Associates Limited for the Canadian reserves. Reserves are reported as net working interest. Gross revenues are reported after deduction of royalty interest payments. The below information begins with the year 2001, due to Columbia Resources not being acquired until November 1, 2000. RESERVE QUANTITY INFORMATION
United States Canada -------------------------- -------------------------- Oil & Other Oil & Other Gas Liquids Gas Liquids Proved Reserves (Bcf) (000 Bbls) (Bcf) (000 Bbls) ----------- ----------- ----------- ----------- Reserves as of December 31, 2000 1,098.6 1,221 1.0 178 Revisions of previous estimate (90.9) (106) -- (63) Extensions, discoveries and other additions 62.2 -- -- -- Production (53.9) (213) (0.1) (7) Purchase of reserves-in-place -- -- -- -- Sale of reserves-in-place (3.2) (7) -- -- ----------- ----------- ----------- ----------- RESERVES AS OF DECEMBER 31, 2001 1,012.8 895 0.9 108 ----------- ----------- ----------- ----------- Proved developed reserves as of December 31, 2000 820.6 1,043 1.0 178 2001 729.0 728 0.9 108 ----------- ----------- ----------- -----------
CAPITALIZED COSTS
U.S. CANADA TOTAL ($ in millions) 2001 2001 2001 ----------- ----------- ----------- Capitalized Costs at Year End Proved properties 916.6 18.4 935.0 Unproved properties (a) 94.9 3.9 98.8 ----------- ----------- ----------- Total capitalized costs 1,011.5 22.3 1,033.8 Accumulated depletion (66.9) (7.7) (74.6) ----------- ----------- ----------- Net Capitalized Costs 944.6 14.6 959.2 ----------- ----------- ----------- Costs Capitalized During Year Acquisition properties Proved 2.0 -- 2.0 Unproved 6.7 -- 6.7 Exploration 7.2 1.5 8.7 Development 57.0 6.2 63.2 ----------- ----------- ----------- Costs Capitalized 72.9 7.7 80.6 ----------- ----------- -----------
(a) Represents expenditures associated with properties on which evaluations have not been completed. 90 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OTHER EXPLORATION AND PRODUCTION DATA
UNITED STATES CANADA ($ in millions) 2001 2001 - --------------- ------------- ------ Average sales price per Mcf of gas ($)(a) 4.04 3.99 Average sales price per barrel of oil and other liquids ($) 22.52 23.63 Production (lifting) cost per dollar of gross revenue ($) 0.16 1.14 Depletion rate per dollar of gross revenue ($) 0.25 5.43
(a) Includes the effect of hedging activities HISTORICAL RESULTS OF OPERATIONS
UNITED STATES CANADA TOTAL ($ in millions) 2001 2001 2001 - --------------- ------------- ------ ----- Gross revenues Unaffiliated 157.4 0.7 158.1 Affiliated 65.4 - 65.4 Production costs 35.7 0.8 36.5 Depletion 56.3 3.8 60.1 Successful Efforts Expense 21.9 3.6 25.5 Income tax expense 41.9 (2.6) 39.3 ---- ---- ---- Results of Operations 67.0 (4.9) 62.1 ---- ---- ----
Results of operations for exploration and production activities exclude administrative and general costs, corporate overhead and interest expense. Income tax expense is expressed at statutory rates less Section 29 credits. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
UNITED STATES CANADA TOTAL ($ in millions) 2001 2001 2001 - --------------- ------------- ------ ------- Future cash inflows 3,158.8 4.7 3,163.5 Future production costs (793.5) (2.1) (795.6) Future development costs (311.8) (0.1) (311.9) Future income tax expense (642.7) 2.5 (640.2) ------- ----- ------- Future net cash flows 1,410.8 5.0 1,415.8 Less: 10% discount 797.3 2.1 799.4 ------- ----- ------- Standardized Measure of Discounted Future Net Cash Flow 613.5 2.9 616.4 ------- ----- -------
Future cash inflows are computed by applying year-end prices to estimated future production of proved gas and oil reserves. Future expenditures (based on year-end costs) represent those costs to be incurred in developing and producing the reserves. Discounted future net cash flows are derived by applying a 10% discount rate, as required by the Financial Accounting Standards Board, to the future net cash flows. This data is not intended to reflect the actual economic value of Columbia's gas and oil producing properties or the true present value of estimated future cash flows since many arbitrary assumptions are used. The data does provide a means of comparison among companies through the use of standardized measurement techniques. A reconciliation of changes in the standardized measure of discounted cash flows is omitted. The Exploration and Production Operations segment became a part of Nisource Operations on November 1, 2000, as a result of the Columbia acquisition and consequently, the years are not comparable. 91 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. AND SUBSIDIARIES SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEET
As of December 31, (in millions) 2001 2000 - -------------------------------- -------- -------- ASSETS Other property, at cost, less accumulated depreciation $ 21.3 $ 17.2 Investments and Other Assets: Net assets of discontinued operations 375.0 560.4 Assets held for sale 15.4 33.5 Investments in subsidiary companies 7,571.0 7,166.5 -------- -------- Total Investments 7,961.4 7,760.4 -------- -------- Current Assets: Cash and cash equivalents 7.8 3.5 Amounts receivable from subsidiaries 196.5 468.9 Prepayments 0.1 37.9 -------- -------- Total Current Assets 204.4 510.3 -------- -------- Other (principally notes receivable from associated companies) 236.0 483.5 -------- -------- TOTAL ASSETS $8,423.1 $8,771.4 ======== ======== CAPITALIZATION AND LIABILITIES Capitalization: Common stock equity $3,469.4 $3,409.1 Long-term debt, excluding amounts due within one year 116.9 108.5 -------- -------- Total Capitalization 3,586.3 3,517.6 -------- -------- Current Liabilities 117.6 182.1 Other (principally notes payable to associated companies) 4,719.2 5,071.7 -------- -------- TOTAL CAPITALIZATION AND LIABILITIES $8,423.1 $8,771.4 ======== ========
92 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. AND SUBSIDIARIES SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF INCOME
Year Ended December 31, (in millions, except per share amounts) 2001 2000 1999 - --------------------------------------------------------------- ----------- ----------- ----------- Equity in net earnings of subsidiaries $ 368.9 $ 312.2 $ 214.6 ----------- ----------- ----------- Other income (deductions): Administrative and general expenses (12.4) (52.1) (14.1) Loss on asset impairment (9.2) (65.8) (28.3) Interest income 32.3 51.6 41.1 Interest expense (78.5) (141.5) (88.1) Other, net (116.5) (22.3) (8.1) ----------- ----------- ----------- (184.3) (230.1) (97.5) ----------- ----------- ----------- Income from continuing operations before income taxes 184.6 82.1 117.1 Income taxes (27.5) (59.0) (36.8) ----------- ----------- ----------- Income from continuing operations 212.1 141.1 153.9 ----------- ----------- ----------- Income from discontinued operations - net of tax 0.1 9.8 6.5 Change in accounting - net of taxes 4.0 -- -- ----------- ----------- ----------- NET INCOME $ 216.2 $ 150.9 $ 160.4 =========== =========== =========== Average common shares outstanding (thousands) 205,301 134,470 124,343 Basic earnings per share Continuing operations $ 1.03 $ 1.05 $ 1.24 Income from discontinued operations -- 0.07 0.05 Change in accounting 0.02 -- -- ----------- ----------- ----------- BASIC EARNINGS PER SHARE $ 1.05 $ 1.12 $ 1.29 =========== =========== =========== Diluted earnings per share Continuing operations $ 1.01 $ 1.04 $ 1.22 Income from discontinued operations -- 0.07 0.05 Change in accounting 0.02 -- -- ----------- ----------- ----------- DILUTED EARNINGS PER SHARE $ 1.03 $ 1.11 $ 1.27 =========== =========== ===========
93 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. AND SUBSIDIARIES SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF CASH FLOWS
Year Ended December 31, (in millions, except per share amounts) 2001 2000 1999 - --------------------------------------------------------------- -------- -------- -------- Net cash provided in operating activities $ 521.2 $ (152.0) $ 167.3 -------- -------- -------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired -- (5,654.5) (550.2) Construction work in progress (2.0) 0.7 (8.7) Proceeds from disposition of assets -- 68.3 -- Investments at cost (2.7) -- (10.0) -------- -------- -------- Net cash provided by (used in) investing activities (4.7) (5,585.5) (568.9) -------- -------- -------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issuance of common shares (0.1) 2,042.1 314.5 Increase (decrease) in notes payable to subsidiaries (364.9) 3,785.0 585.2 Increase in notes receivable from subsidiaries 90.8 108.3 (253.0) Cash dividends paid on common shares (238.0) (131.8) (125.6) Acquisition of treasury shares -- (65.9) (126.4) -------- -------- -------- Net cash provided by (used in) financing activities (512.2) 5,737.7 394.7 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 4.3 0.2 (6.9) Cash and cash equivalents at beginning of year 3.5 3.3 10.2 -------- -------- -------- Cash and cash equivalents at end of year $ 7.8 $ 3.5 $ 3.3 -------- -------- --------
94 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. AND SUBSIDIARIES SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL STATEMENTS 1. DIVIDENDS FROM SUBSIDIARIES Cash dividends paid to NiSource Inc. (NiSource) by its consolidated subsidiaries were (in millions of dollars): $248.0, $302.2 and $239.2 in 2001, 2000 and 1999, respectively. 2. NOTES TO CONDENSED FINANCIAL STATEMENTS See Item 8 for the full text of notes to the Consolidated Financial Statements. 95 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS TWELVE MONTHS ENDED DECEMBER 31, 2001
Additions -------------------- Deductions for Charged to Charged Purposes for Balance Costs and to Other which Reserves Balance Description ($ in millions) Jan. 1, 2001 Acquisitions Expenses Account Sale of Assets were Created Dec. 31, 2001 ------------ ------------- ---------- --------- -------------- -------------- ------------- Reserves Deducted in Consolidated Balance Sheet from Assets to Which They Apply: Reserve for accounts receivable 43.3 -- 61.9 59.3 -- 101.1 63.4 Reserve for other investments 43.4 -- 7.0 4.0 14.4 14.4 25.6 Reserves Classified Under Reserve Section of Consolidated Balance Sheet: Injuries and damages reserve 11.4 -- 4.3 -- -- 5.8 9.9 Environmental reserves 130.5 -- 54.9 -- -- 18.0 167.3 Restructuring reserve 65.4 (6.3) 28.7 -- -- 29.5 58.3 Other 4.6 -- -- -- -- -- 4.6
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS TWELVE MONTHS ENDED DECEMBER 31, 2000
Additions -------------------- Deductions for Charged to Charged Purposes for Balance Costs and to Other which Reserves Balance Description ($ in millions) Jan. 1, 2000 Acquisitions Expenses Account Sale of Assets were Created Dec. 31, 2000 ------------ ------------- ---------- --------- -------------- -------------- ------------- Reserves Deducted in Consolidated Balance Sheet from Assets to Which They Apply: Reserve for accounts receivable 30.4 15.0 94.7 1.2 0.2 97.8 43.3 Reserve for other investments 24.7 -- 21.5 -- -- 2.8 43.4 Reserves Classified Under Reserve Section of Consolidated Balance Sheet: Injuries and damages reserve 13.0 -- 6.5 -- 1.2 6.9 11.4 Environmental reserves 23.8 110.0 1.8 -- -- 5.1 130.5 Restructuring reserve -- 66.9 5.8 -- -- 7.3 65.4 Other 4.1 -- 0.5 -- -- -- 4.6
96 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) ] NISOURCE INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS TWELVE MONTHS ENDED DECEMBER 31, 2001
Additions -------------------- Deductions for Charged to Charged Purposes for Balance Costs and to Other which Reserves Balance Description ($ in millions) Jan. 1, 1999 Acquisitions Expenses Account Sale of Assets were Created Dec. 31, 1999 ------------ ------------- ---------- --------- -------------- -------------- ------------- Reserves Deducted in Consolidated Balance Sheet from Assets to Which They Apply: Reserve for accounts receivable 9.0 8.9 28.4 -- -- 15.7 30.6 Reserve for other investments 1.0 -- 23.9 -- -- 0.2 24.7 Reserves Classified Under Reserve Section of Consolidated Balance Sheet: Injuries and damages reserve 7.4 5.2 8.7 -- -- 8.3 13.0 Environmental reserves 19.1 6.0 3.9 -- -- 5.2 23.8 Restructuring reserve -- -- -- -- -- -- -- Other 7.1 -- 0.2 -- -- 3.2 4.1
97 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NISOURCE INC. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding executive officers is included as a supplemental item at the end of Item 4 of Part I of this Form 10-K. Information regarding directors will be included in the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Stockholders to be held on May 21, 2002, which information is incorporated by reference. Information regarding delinquent filings under Section 16 of the Securities Exchange Act of 1934 by executive officers and directors will be included in the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Stockholders to be held on May 21, 2002, which information is incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation will be included in the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Stockholders held on May 21, 2002, which information is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management will be included in the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Stockholders held on May 21, 2002, which information is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Exhibits The exhibits filed herewith as a part of this report on Form 10-K are listed on the Exhibit Index. Each management contract or compensatory plan or arrangement of NiSource, listed on the Exhibit Index, is separately identified by an asterisk. Financial Statement Schedules All of the financial statements and financial statement schedules filed as a part of the Annual Report on Form 10-K are included in Item 8. 98 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued) NISOURCE INC. Reports on Form 8-K
Financial Statements Item Reported Included Date of Event Date Filed ------------- ---------- ----------------- ----------------- 9 No December 03, 2001 December 03, 2001
99 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, hereunto duly authorized. NiSource Inc. ------------------------------ (Registrant) Date February 22, 2002 By: /s/ GARY L. NEALE ------------------------------ ------------------------------- Gary L. Neale Chairman, President and Chief Executive Officer, and Director (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ GARY L. NEALE Chairman, President and Chief February 22, 2002 - -------------------------------------------- Executive Officer, and Director Gary L. Neale (Principal Executive Officer) /s/ STEPHEN P. ADIK Vice Chairman and Director February 22, 2002 - -------------------------------------------- Stephen P. Adik /s/ STEVEN C. BEERING Director February 22, 2002 - -------------------------------------------- Steven C. Beering /s/ ARTHUR J. DECIO Director February 22, 2002 - -------------------------------------------- Arthur J. Decio /s/ DENNIS E. FOSTER Director February 22, 2002 - -------------------------------------------- Dennis E. Foster /s/ JEFFREY W. GROSSMAN Vice President and Controller February 22, 2002 - -------------------------------------------- (Principal Accounting Officer) Jeffrey W. Grossman /s/ JAMES T. MORRIS Director February 22, 2002 - -------------------------------------------- James T. Morris /s/ MICHAEL W. O'DONNELL Executive Vice President and February 22, 2002 - -------------------------------------------- Chief Financial Officer Michael W. O'Donnell (Principal Financial Officer) /s/ IAN M. ROLLAND Director February 22, 2002 - -------------------------------------------- Ian M. Rolland /s/ JOHN W. THOMPSON Director February 22, 2002 - -------------------------------------------- John W. Thompson /s/ ROBERT J. WELSH Director February 22, 2002 - -------------------------------------------- Robert J. Welsh /s/ DR. CAROLYN Y. WOO Director February 22, 2002 - -------------------------------------------- Dr. Carolyn Y. Woo /s/ ROGER A. YOUNG Director February 22, 2002 - -------------------------------------------- Roger A. Young
100 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF ITEM - ------- ------------------- (2.1) Agreement and Plan of Merger dated as of February 27, 2000, as amended and restated as of March 31, 2000, among Columbia Energy Group, NiSource Inc., New NiSource Inc., Parent Acquisition Corp., Company Acquisition Corp. and NiSource Finance Corp (incorporated by reference to Annex I to the joint proxy statement/prospectus dated April 24, 2000, filed as a part of the Registration Statement on Form S-4 (No. 333-33896)). (3.1) Amended and Restated Certificate of Incorporation of NiSource Inc., effective October 31, 2000, as amended November 1, 2000 (incorporated by reference to Exhibit 3.1 to the NiSource Inc. Current Report on Form 8-K dated November 1, 2000). (3.2) Amended and Restated By-Laws of NiSource Inc.** (4.1) Indenture dated August 1, 1939 between Northern Indiana Public Service Company (Northern Indiana) and Trustees (incorporated by reference to Exhibit 7 to the Northern Indiana Registration Statement (Registration No. 2-5178)). (4.2) Third Supplemental Indenture dated August 1, 1943 (incorporated by reference to Exhibit 7-C to the Northern Indiana Registration Statement (Registration No. 2-5178)). (4.3) Eighteenth Supplemental Indenture dated September 1, 1967 (incorporated by reference to Exhibit 1 to the Northern Indiana Current Report on Form 8-K dated October 9, 1967). (4.4) Nineteenth Supplemental Indenture dated October 1, 1968 (incorporated by reference to Exhibit 1 to the Northern Indiana Current Report on Form 8-K dated November 8, 1968). (4.5) Twenty-third Supplemental Indenture dated March 31, 1972 (incorporated by reference to Exhibit 2 to the Northern Indiana Current Report on Form 8-K dated May 5, 1972). (4.6) Thirty-third Supplemental Indenture dated June 1, 1980 (incorporated by reference to Exhibit 1 to the Northern Indiana Quarterly Report on Form 10-Q for the quarter ended June 30, 1980). (4.7) Forty-first Supplemental Indenture dated July 1, 1991 (incorporated by reference to Exhibit 1 to the -Northern Indiana Current Report on Form 8-K dated March 25, 1992). (4.8) Indenture dated as of March 1, 1988, between Northern Indiana and Manufacturers Hanover Trust Company, as Trustee (incorporated by reference to Exhibit 4 to the Northern Indiana Registration Statement (Registration No. 33-44193)). (4.9) First Supplemental Indenture dated as of December 1, 1991, between Northern Indiana and Manufacturers Hanover Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to the Northern Indiana Registration Statement (Registration No. 33-63870)). (4.10) Memorandum of Agreement with City of Michigan City, Indiana (incorporated by reference to Exhibit 7 to the Northern Indiana Registration Statement (Registration No. 2-48531)). (4.11) Financing Agreement No. 1 dated November 1, 1988, between Northern Indiana and Jasper County, Indiana regarding $37,000,000 Series 1988A Pollution Control Refunding Revenue Bonds. Identical Financing agreements between Northern Indiana and Jasper County, Indiana provide for the issuance of $47,000,000 Series 1988B, $46,000,000 Series 1988C and $24,000,000 Series 1988D Pollution Control Refunding Revenue Bonds (incorporated by reference to Exhibit 8 to the Northern Indiana Current Report on Form 8-K dated March 16, 1989).
**Exhibit filed herewith. 101 EXHIBIT INDEX (continued)
EXHIBIT NUMBER DESCRIPTION OF ITEM - ------- ------------------- (4.12) Financing Agreement dated July 1, 1991, with Jasper County, Indiana regarding $55,000,000 Series 1991 Collateralized Pollution Control Refunding Revenue Bonds (incorporated by reference to Exhibit 3 to the Northern Indiana Current Report on Form 8-K dated March 25, 1992). (4.13) Financing Agreement dated August 1, 1994, with Jasper County, Indiana regarding $10,000,000 Series 1994A, $18,000,000 Series 1994B and $41,000,000 Series 1994C Pollution Control Refunding Revenue Bonds (incorporated by reference to Exhibit 4.16 to the Northern Indiana Annual Report on Form 10-K for year ended December 31, 1994). (4.14) Indenture between NIPSCO Industries, Inc., NIPSCO Capital Markets, Inc. and Chemical Bank as Trustees dated February 1, 1996 (incorporated by reference to Exhibit 1 to the NIPSCO Industries, Inc. Registration Statement (Registration No. 33-65285)). (4.15) Rights Agreement, dated November 1, 2000, between NiSource Inc. and ChaseMellon Shareholder Services, L.L.C., as rights agent. (incorporated by reference to Exhibit 4.1 to the NiSource Inc. Current Report on Form 8-K dated November 1, 2000). (4.16) Indenture Agreement between NIPSCO Industries, Inc., NIPSCO Capital Markets, Inc. and Chase Manhattan Bank as trustee dated February 14, 1997 (incorporated by reference to Exhibit 4.1 to the NIPSCO Industries, Inc. Registration Statement (Registration No. 333-22347)). (4.17) Fourteenth Supplemental Indenture dated as of January 15, 1978, between the Fidelity Bank, and IWC, including as Appendix A the "Restatement of Principal Indenture of Indianapolis Water Company," which, except as otherwise specified, restates the granting clauses and all other sections contained in the First Mortgage dated July 1, 1936, between Fidelity-Philadelphia Trust Company and IWC as amended by the Fourth, Fifth, Sixth, Eighth, Twelfth and Fourteenth Supplemental Indentures (incorporated by reference to Exhibit 4-B1 to IWC's Annual Report on Form 10-K for the year ended December 31, 1980). (4.18) Eleventh Supplemental Indenture dated as of December 1, 1971 (incorporated by reference to Exhibit 4-B6 to IWC's Annual Report on Form 10-K for the year ended December 31, 1980). (4.19) Seventeenth Supplemental Indenture dated as of March 1, 1989, between Fidelity Bank, National Association and IWC (incorporated by reference to Exhibit 4-A9 to the IWC Resources Corporation (IWCR) Annual Report on Form 10-K for the year ended December 31, 1988). (4.20) Eighteenth Supplemental Indenture dated as of March 1, 1989, between Fidelity Bank, National Association and IWC (incorporated by reference to Exhibit 4-A10 to IWCR's Annual Report on Form 10-K for the year ended December 31, 1988). (4.21) Nineteenth Supplemental Indenture dated as of June 1, 1989, between Fidelity Bank, National Association and IWC (incorporated by reference to Exhibit 4-A9 to IWCR's Registration Statement (Registration No. 33-43939)). (4.22) Twentieth Supplemental Indenture dated as of December 1, 1992, between Fidelity Bank, National Association and IWC (incorporated by reference to Exhibit 4-A9 to IWCR's Annual Report on Form 10-K for the year ended December 31, 1992). (4.23) Twenty-first Supplemental Indenture dated as of December 1, 1992, between Fidelity Bank, National Association and IWC (incorporated by reference to Exhibit 4-A10 to IWCR's Annual Report on Form 10-K for the year ended December 31, 1992).
102 EXHIBIT INDEX (continued)
EXHIBIT NUMBER DESCRIPTION OF ITEM - ------- ------------------- (4.25) Indenture of Trust dated as of December 1, 1992, between City of Indianapolis, Indiana, and IWC to National City Bank, Indiana, as Trustee (incorporated by reference to Exhibit 10-J to IWCR's Annual Report on Form 10-K for the year ended December 31, 1992). (4.26) Loan Agreement dated as of December 1, 1992, between IWC and City of Indianapolis, Indiana (incorporated by reference to Exhibit 10-K to IWCR's Annual Report on Form 10-K for the year ended December 31, 1992). (4.27) Guaranty Agreement dated as of December 1, 1992, between IWCR and National City Bank, Indiana, as Trustee (incorporated by reference to Exhibit 10-L to IWCR's Annual Report on Form 10-K for the year ended December 31, 1992). (4.28) Indenture of Trust, City of Indianapolis, Indiana, and IWC to National City Bank, Indiana, as Trustee, dated as of April 1, 1993 (incorporated by reference to Exhibit 4.14 to IWCR's Annual Report on Form 10-K for the year ended December 31, 1993). (4.29) Loan Agreement dated as of April 1, 1993, between IWC and the City of Indianapolis (incorporated by reference to Exhibit 10.11 to IWCR's Annual Report on Form 10-K for the year ended December 31, 1993). (4.30) Guaranty Agreement between IWCR and National City Bank, Indiana, as Trustee, dated as of April 1, 1993 (incorporated by reference to Exhibit 10.12 to IWCR's Annual Report on Form 10-K for the year ended December 31, 1993). (4.31) Note Agreement dated as of March 1, 1994, between IWCR and American United Life Insurance Company (incorporated by reference to Exhibit 10.12 to IWCR's Annual Report on Form 10-K for the year ended December 31, 1992). (4.32) Indenture of Trust of Town of Fishers and IWC to National City Bank of Indiana, As Trustee, dated as of July 15, 1998 (including Form of $30,000,000 Town of Fishers, Indiana Economic Development Water Facilities Refunding Revenue bond, series 1998 (Indianapolis Water Company Project) (incorporated by reference to Exhibit 4.1 to NIPSCO Industries, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 1998). (4.33) Indenture of Trust of City of Indianapolis, Indiana and IWC to National City Bank of Indiana, As Trustee, dated as of July 15, 1998 (including Form of $10,000,000 City of Indianapolis, Indiana Economic Development Water Facilities Refunding Revenue Bonds, Series 1998 (Indianapolis Water Company Project) (incorporated by reference to Exhibit 4.2 to NIPSCO Industries, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 1998). (4.34) Certificate of Trust of NIPSCO Capital Trust I by and among Chase Manhattan Bank Delaware, The Chase Manhattan Bank, Stephen P. Adik, Francis P. Girot, Jr., and Arthur A. Paquin dated December 17, 1998 (incorporated by reference to Exhibit 4.6 to the NIPSCO Industries, Inc. Registration Statement on Form S-3 dated December 18, 1998). (4.35) Amended and Restated Declaration of Trust of NIPSCO Capital Trust I by and among NIPSCO Capital Markets, Inc., The Chase Manhattan Bank, Chase Manhattan Bank Delaware, Stephen P. Adik, Francis P. Girot, Jr., and Arthur A. Paquin dated February 16, 1999 (incorporated by reference to Exhibit 4.35 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 1999). (4.36) First Supplemental Indenture dated February 16, 1999, by and among NIPSCO Capital Markets, Inc., NIPSCO Industries, Inc., and the Chase Manhattan Bank, as Trustee (incorporated by reference to Exhibit 4.36 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 1999).
103 EXHIBIT INDEX (continued)
EXHIBIT NUMBER DESCRIPTION OF ITEM - ------- ------------------- (4.37) Purchase Contract Agreement by and among NIPSCO Industries, Inc. and The Chase Manhattan Bank, as Purchase Contract Agent, dated February 16, 1999 (incorporated by reference to Exhibit 4.37 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 1999). (4.38) Pledge Agreement by and among NIPSCO Industries, Inc., The First National Bank of Chicago, as Collateral Agent and Securities Intermediary, and The Chase Manhattan Bank, As Purchase Contract Agent dated February 16, 1999 (incorporated by reference to Exhibit 4.38 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 1999). (4.39) Remarketing Agreement dated February 16, 1999, among NIPSCO Industries, Inc., NIPSCO Capital Markets, Inc., NIPSCO Capital Trust I, and Lehman Brothers Inc., as Remarketing Agent (incorporated by reference to Exhibit 4.39 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 1999). (4.40) Indenture, dated November 1, 2000, between NiSource Inc. and The Chase Manhattan Bank, as trustee (incorporated by reference to Exhibit 4.3 to the NiSource Inc. Current Report on Form 8-K dated November 1, 2000). (4.41) First Supplemental Indenture, dated November 1, 2000, between NiSource Inc. and The Chase Manhattan Bank, as trustee (incorporated by reference to Exhibit 4.4 to the NiSource Inc. Current Report on Form 8-K dated November 1, 2000). (4.42) Purchase Contract Agreement, dated November 1, 2000, between NiSource Inc. and The Chase Manhattan Bank, as purchase contract agent (incorporated by reference to Exhibit 4.5 to the NiSource Inc. Current Report on Form 8-K dated November 1, 2000). (4.43) Pledge Agreement, dated November 1, 2000, between NiSource Inc., Bank One, National Association, as collateral agent, Bank One, National Association, as securities intermediary, and The Chase Manhattan Bank, as purchase contract agent (incorporated by reference to Exhibit 4.6 to the NiSource Inc. Current Report on Form 8-K dated November 1, 2000). (4.44) Remarketing Agreement, dated November 1, 2000, between NiSource Inc. and Credit Suisse First Boston Corporation, as remarketing Agent (incorporated by reference to Exhibit 4.7 to the NiSource Inc. Current Report on Form 8-K dated November 1, 2000). (4.45) Second Supplemental Indenture, dated as of November 1, 2000, among NiSource Capital Markets, Inc., NiSource Inc., New NiSource Inc., and The Chase Manhattan Bank, as trustee (incorporated by reference to Exhibit 4.45 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 2000). (4.46) First Supplemental Indenture, dated as of November 1, 2000, among NiSource Capital Markets, Inc., NiSource Inc., and The Chase Manhattan Bank, as trustee (incorporated by reference to Exhibit 4.46 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 2000). (4.47) Supplemental Agreement dated November 1, 2000, between NiSource Inc., The Chase Manhattan Bank, as purchase contract agent, and The First National Bank of Chicago, as collateral agent and securities intermediary (incorporated by reference to Exhibit 4.47 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 2000).
104 EXHIBIT INDEX (continued)
EXHIBIT NUMBER DESCRIPTION OF ITEM - ------- ------------------- (4.48) 364-Day Revolving Credit Agreement, dated as of March 23, 2001, among NiSource Finance Corp., as Borrower, NiSource Inc., as Guarantor, the Lead Arrangers, Arrangers, Senior Managing Agents, Managers, and Lenders party thereto, as Lenders, Credit Suisse First Boston, as Syndication Agent, Bank One, National Association (Main Office, Chicago), Citibank, N.A., Toronto Dominion (Texas), Inc. as Co-Documentation Agents, Barclays Bank PLC, as Administrative Agent and LC Bank, Barclays Capital and Credit Suisse First Boston, as Lead Arrangers and Barclays Capital, as Sole Book Runner.** (4.49) Indenture, dated November 14, 2000, among NiSource Finance Corp., NiSource Inc., as guarantor, and The Chase Manhattan Bank, as Trustee (incorporated by reference to Exhibit 4.3 to the NiSource Inc. Form S-3, dated January 17, 2001 (Registration No. 333-49330)). (4.50) Indenture between The Columbia Gas System, Inc. and Marine Midland Bank, N.A. Trustee, dated as of November 28, 1995 (incorporated by reference to Exhibit 4-S to the Columbia Gas System Registration Statement (Registration No. 33-64555)). (4.51) First Supplemental Indenture, between The Columbia Gas System, Inc. and Marine Midland Bank, N.A. Trustee, dated as of November 28, 1995 (incorporated by reference to Exhibit 4-T to the Columbia Gas System Registration Statement (Registration No. 33-64555)). (4.52) Second Supplemental Indenture, between The Columbia Gas System, Inc., and Marine Midland Bank, N.A. Trustee, dated as of November 28, 1995 (incorporated by reference to Exhibit 4-U to the Columbia Gas System Registration Statement (Registration No. 33-64555)). (4.53) Third Supplemental Indenture, between The Columbia Gas System, Inc. and Marine Midland Bank, N.A. Trustee, dated as of November 28, 1995 (incorporated by reference to Exhibit 4-V to the Columbia Gas System Registration Statement (Registration No. 33-64555)). (4.54) Fourth Supplemental Indenture, between The Columbia Gas System, Inc. and Marine Midland Bank, N.A. Trustee, dated as of November 28, 1995 (incorporated by reference to Exhibit 4-W to the Columbia Gas System Registration Statement (Registration No. 33-64555)). (4.55) Fifth Supplemental Indenture, between The Columbia Gas System, Inc. and Marine Midland Bank, N.A. Trustee, dated as of November 28, 1995 (incorporated by reference to Exhibit 4-X to the Columbia Gas System Registration Statement (Registration No. 33-64555)). (4.56) Sixth Supplemental Indenture, between The Columbia Gas System, Inc. and Marine Midland Bank, N.A. Trustee, dated as of November 28, 1995 (incorporated by reference to Exhibit 4-Y to the Columbia Gas System Registration Statement (Registration No. 33-64555)). (4.57) Seventh Supplemental Indenture, between The Columbia Gas System, Inc. and Marine Midland Bank, N.A., Trustee, dated as of November 28, 1995 (incorporated by reference to Exhibit 4-Z to the Columbia Gas System Registration Statement (Registration No. 33-64555)). (4.58) Instrument of Resignation, Appointment and Acceptance dated as of March 1, 1999, between Columbia Energy Group and Marine Midland Bank, as Resigning Trustee and The First National Bank of Chicago, as Successor Trustee (incorporated by reference to Exhibit 4-I to the Columbia Energy Group Annual Report on Form 10-K for the period ended December 31, 1998.
**Exhibit filed herewith. 105 EXHIBIT INDEX (continued)
EXHIBIT NUMBER DESCRIPTION OF ITEM - ------- ------------------- (4.59) 3-Year Revolving Credit Agreement, dated as of March 23, 2001, among NiSource Finance Corp., as Borrower, NiSource Inc., as Guarantor, the Lead Arrangers, Arrangers, Senior Managing Agents, Managers, and Lenders party thereto, as Lenders, Credit Suisse First Boston, as Syndication Agent, Bank One, National Association (Main Office, Chicago), Citibank, N.A., Toronto Dominion (Texas), Inc. as Co-Documentation Agents, Barclays Bank PLC, as Administrative Agent and LC Bank, Barclays Capital and Credit Suisse First Boston, as Lead Arrangers and Barclays Capital, as Sole Book Runner (incorporated by reference to Exhibit 4.60 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 2000). (4.61) First Amendment to Financing Agreement No. 1, dated as of November 1, 2000, between Jasper County and Northern Indiana regarding Series 1988A Pollution Control Refunding Revenue Bonds. Northern Indiana entered into identical First Amendments to Financing Agreements Nos. 2, 3 and 4, each dated as of November 1, 2000, between Jasper County and Northern Indiana in connection with the Series 1988B, 1988C and 1988D Pollution Control Refunding Revenue Bonds (incorporated by reference to Exhibit 4.61 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 2000). (10.1) Supplemental Life Insurance Plan effective January 1, 1991 (incorporated by reference to Exhibit 2 to the NIPSCO Industries, Inc. Current Report on Form 8-K dated March 25, 1992).* (10.2) Executive Deferred Compensation Plan effective December 1, 1990 (incorporated by reference to Exhibit 3 to the NIPSCO Industries, Inc. Current Report on Form 8-K dated March 25, 1992).* (10.3) Form of Change in Control and Termination Agreements and Schedule of Parties to the Agreements (incorporated by reference to Exhibit 10.3 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 2000).* (10.4) Nonemployee Director Stock Incentive Plan of NIPSCO Industries, Inc. (As Amended and Restated Effective February 1, 1998, incorporated by reference to exhibit 10.3 to the NIPSCO Industries, Inc. Annual Report on Form 10-K for the year ended December 31, 1998).* (10.5) First Amendment to NiSource Inc. Nonemployee Director Stock Incentive Plan (Effective April 1, 1999) (incorporated by reference to Exhibit 10.5 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 1999).* (10.6) NiSource Inc. Long-Term Incentive Plan (As Amended and Restated Effective April 14, 1999) (incorporated by reference to Exhibit 10.6 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 1999).* (10.7) Amended and Restated Pension Plan Provisions effective January 1, 1989 (incorporated by reference to Exhibit 17 to the Northern Indiana Current Report on Form 8-K dated March 25, 1992).* (10.8) NiSource Inc. 1994 Long-Term Incentive Plan (As Amended and Restated Effective January 1, 2000) (incorporated by reference to Annex VI to the joint proxy statement/prospectus dated April 24, 2000, filed as a part of the Registration Statement on Form S-4 (No. 333-33896)).* (10.9) First and Second Amendments to the NiSource Inc. 1994 Long Term Incentive Plan.* ** (10.10) Employment Agreement (incorporated by reference to Exhibit 10.13 to the NIPSCO Industries, Inc. Annual Report on Form 10-K for the year ended December 31, 1997).*
* Management contract or compensatory plan or arrangement of NiSource Inc. ** Exhibit filed herewith. 106 EXHIBIT INDEX (continued)
EXHIBIT NUMBER DESCRIPTION OF ITEM - ------- ------------------- (10.11) Executive Supplemental Pension Agreement (incorporated by reference to Exhibit 10.14 the NIPSCO Industries, Inc. Annual Report on Form 10-K for the year ended December 31, 1997).* (10.12) Agreement dated October 18, 1971, between IWC and Department of Public Works of the City of Indianapolis, Indiana, regarding the purchase of water at Eagle Creek Reservoir (incorporated by reference to Exhibit 5 to IWC's Registration Statement (Registration Statement No. 2-55201)). (10.13) Letter Agreement dated October 25, 1999, between Mr. Roger A. Young and NiSource Inc. (incorporated by reference to Exhibit 10.1 to NiSource Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 1999).* (10.14) Letter Agreement dated April 9, 1999, between Mr. Joseph L. Turner, Jr. and NiSource Inc. (incorporated by reference to Exhibit 10.2 to NiSource Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 1999).* (10.15) Amended and Restated Indenture of Mortgage and Deed of Trust by Columbia Gas Transmission Corporation to Wilmington Trust Company, dated as of November 28, 1995 (incorporated by reference to Exhibit 10-AF to the Columbia Energy Group Annual Report on Form 10-K for the period ended December 31, 1995). (10.16) $50,000,000 Amended and Restated Credit Agreement dated October 11, 2000, among Columbia Energy Group and certain banks party thereto and Citibank, N.A. as Administrative and Syndication Agent (incorporated by reference to Exhibit 10-CQ to the Columbia Energy Group Annual Report on Form 10-K for the period ended September 30, 2000). (10.17) $850,000,000 Amended and Restated Credit Agreement dated October 11, 2000, among Columbia Energy Group and certain banks party thereto and Citibank, N.A. as Administrative and Syndication Agent (incorporated by reference to Exhibit 10-CR to the Columbia Energy Group Annual Report on Form 10-K for the period ended September 30, 2000). (10.18) Annual Incentive Compensation Plan of The Columbia Gas System, Inc., as amended, dated as of November 16, 1988 (incorporated by reference to Exhibit 10-BB to Columbia Energy Group's Annual Report on Form 10-K for the period ended December 31, 1988). (10.19) Memorandum of Understanding among the Millennium Pipeline Project partners (Columbia Transmission, West Coast Energy, MCN Investment Corp. and TransCanada Pipelines Limited) dated December 1, 1997 (incorporated by reference to Exhibit 10-CF to Columbia Energy Group's Annual Report on Form 10-K for the period ended December 31, 1998). (10.20) Agreement of Limited Partnership of Millennium Pipeline Company, L.P. dated May 31, 1998 (incorporated by reference to Exhibit 10-CG to Columbia Energy Group's Annual Report on Form 10-K for the period ended December 31, 1998). (10.21) Contribution Agreement Between Columbia Gas Transmission Corporation and Millennium Pipeline Company, L.P. dated July 31, 1998 (incorporated by reference to Exhibit 10-CH to Columbia Energy Group's Annual Report on Form 10-K for the period ended December 31, 1998). (10.22) Regulations of Millennium Pipeline Management Company, L.L.C. dated May 31, 1998 (incorporated by reference to Exhibit 10-CI to Columbia Energy Group's Annual Report on Form 10-K for the period ended December 31, 1998).
* Management contract or compensatory plan or arrangement of NiSource Inc. ** Exhibit filed herewith. 107 EXHIBIT INDEX (continued)
EXHIBIT NUMBER DESCRIPTION OF ITEM - ------- ------------------- (10.23) Nonemployee Director Retirement Plan (incorporated by reference to Exhibit 10.16 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 1999).* (10.24) Nonemployee Director Restricted Stock Unit Plan (Effective January 1, 1999) (incorporated by reference to Exhibit 10.17 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 1999).* (10.25) First Amendment to Nonemployee Director Restricted Stock Unit Plan (Effective April 1, 1999) (incorporated by reference to Exhibit 10.18 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 1999). (10.26) Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.19 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 1999).* (10.27) Pension Restoration Plan of The Columbia Gas System, Inc., amended and restated March 1, 1997 (incorporated by reference to Exhibit 10.27 of the NiSource Inc. Quarterly Report on Form 10-Q for the period ended September 30, 2001). (10.28) Thrift Restoration Plan of The Columbia Gas System, Inc. dated January 1, 1989 (incorporated by reference to Exhibit 10.28 of the NiSource Inc. Quarterly Report on Form 10-Q for the period ended September 30, 2001). (10.29) Agreement dated December 18, 2000 between Catherine G. Abbott and NiSource Inc. (incorporated by reference to Exhibit 10.29 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 2000).* (10.30) Natural Gas Advance Sale Contract, dated December 1, 1999, between Columbia Natural Resources, Inc. and Mahonia II Limited (incorporated by reference to Exhibit 10.30 to the NiSource Inc. Quarterly Report on Form 10-Q for the period ended March 31, 2001). (10.31) First Amendment to Natural Gas Advance Sale Contract (dated December 1, 1999), effective March 30, 2001, between Columbia Natural Resources, Inc. and Mahonia II Limited (incorporated by reference to Exhibit 10.31 to the NiSource Inc. Quarterly Report on Form 10-Q for the period ended March 31, 2001). (10.32) Natural Gas Advance Sale Contract, dated August 24, 2000, between Columbia Natural Resources, Inc. and Mahonia II Limited (incorporated by reference to Exhibit 10.32 to the NiSource Inc. Quarterly Report on Form 10-Q for the period ended March 31, 2001). (10.33) First Amendment to Natural Gas Advance Sale Contract (dated August 24, 2000), effective March 30, 2001, between Columbia Natural Resources, Inc. and Mahonia II Limited (incorporated by reference to Exhibit 10.33 to the NiSource Inc. Quarterly Report on Form 10-Q for the period ended March 31, 2001). (10.34) Form of Agreement between NiSource Inc. and certain officers of Columbia Energy Group and schedule of parties to such Agreements.* ** (10.35) NiSource Inc. Directors' Charitable Gift Program effective January 1, 2001 (incorporated by reference to Exhibit 10.35 to the NiSource Inc. Quarterly Report on Form 10-Q for the period ended June 30, 2001).* (12) Ratio of Earnings to Fixed Charges.**
* Management contract or compensatory plan or arrangement of NiSource Inc. ** Exhibit filed herewith. 108 EXHIBIT INDEX (continued)
EXHIBIT NUMBER DESCRIPTION OF ITEM - ------- ------------------- (21) List of Subsidiaries.** (23.1) Consent of Arthur Andersen LLP.** (23.2) Written consent, dated February 1, 2002, to the filing and use of information contained in such letter report, in Reports and Registration Statements filed during 2001, of Ryder Scott Company Petroleum Engineers, independent petroleum and natural gas consultants.** (23.3) Written consent, dated January 24, 2002, to the filing and use of information contained in such letter report, in Reports and Registration Statements filed during 2001, of Sproule Associated Limited, independent petroleum and natural gas consultants.**
* Management contract or compensatory plan or arrangement of NiSource Inc. ** Exhibit filed herewith. References made herein to Columbia Energy Group filings can be found at Commission File Number 001-01098 and references made to NiSource Inc. filings made prior to November 1, 2000 can be found at Commission File Number 001-09779. 109 EX-3.2 3 w57495ex3-2.txt AMENDED AND RESTATED BY-LAWS OF NISOURCE, INC. EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF NISOURCE INC. ARTICLE I SEAL The corporate seal of the Corporation shall consist of a metallic stamp circular in form, bearing in its center the figures "2000" and the words "Incorporated" and "Delaware" and on the outer edge the name of the Corporation. ARTICLE II OFFICES The location of the Corporation's principal office shall be at 801 East 86th Avenue, in the Town of Merrillville, County of Lake, in the State of Indiana. The Corporation may, in addition to its principal office in the State of Indiana, establish and maintain an office or offices in such other states and places as the Board of Directors may from time to time find necessary or desirable. The books, documents, and papers of the Corporation, except as may be otherwise required by the laws of the State of Delaware, may be kept outside of the said State at such places as the Board of Directors may from time to time designate. ARTICLE III CAPITAL STOCK Every stockholder shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the Chairman, the President or a Vice President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by him in the Corporation; provided, however, that any such signature on the certificate may be a facsimile. In case any officer or officers, Transfer Agent or Registrar who shall have signed, or whose facsimile signature or signatures shall have been used on any such certificate or certificates shall cease to be such officer or officers of the Corporation, Transfer Agent or Registrar, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures shall have been used thereon had not 1 ceased to be such officer or officers of the Corporation, Transfer Agent or Registrar. Such certificates shall be transferable on the stock books of the Corporation in person or by attorney, but, except as hereinafter provided in the case of loss, destruction or mutilation of certificates, no transfer of stock shall be entered until the previous certificate, if any, given for the same shall have been surrendered and canceled. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. The Board of Directors may make such rules and regulations as it may deem expedient, not inconsistent with these By-Laws, concerning the issue, transfer and registration of certificates for shares of the capital stock of the Corporation. It may appoint one or more Transfer Agents or one or more Registrars or both, and may require all certificates of stock to bear the signature of either or both. In order that the Corporation may determine the stockholders entitled to notice of, or to vote at, a meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any other change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix in advance a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If in any case involving the determination of stockholders for any purpose other than notice of or voting at a meeting of stockholders the Board shall not fix such a record date, the record date for determining stockholders for such purpose shall be the close of business on the day on which the Board shall adopt the resolution relating thereto. A determination of stockholders entitled to notice of, or to vote at, a meeting of stockholders, shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. In case of loss, destruction or mutilation of any certificate of stock, another may be issued in its place upon proof of such loss, destruction or mutilation and upon the giving to the Corporation of a bond sufficient to indemnify the Corporation, its Transfer Agents and Registrars, against any claim that may be made against it or them on account of the alleged loss or destruction of any such certificate or the issuance of such new certificate; provided, however, that a new certificate may be issued without requiring any bond when, in the judgment of the Board of Directors, it is proper so to do. ARTICLE IV STOCKHOLDERS' MEETINGS (a) All meetings of the stockholders shall be held at such place, either within or without the State of Delaware, as the Board of Directors shall determine. The place at which any given meeting shall be held shall be distinctly specified in the notice of such meeting. (b) The annual meeting of the stockholders of the Corporation, for the election of Directors and for the transaction of such other business as may come before the meeting, shall be held on the third Tuesday in May of each year, at ten o'clock in the morning, unless such day shall fall on a legal holiday, in which event the annual meeting shall be held on the day following. Such date and time of meeting may be changed by action of the Board of Directors. 2 (c) Special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption) (d) If the annual meeting of the stockholders is not held as herein prescribed, the election of Directors may be held at any meeting thereafter called pursuant to these By-Laws. (e) Notice of the annual and of all special meetings of the stockholders shall be given each holder of stock of the Corporation having power to vote at such meeting by depositing in the United States mail a written or printed notice of the same not less than ten nor more than sixty days prior to the meeting, with postage prepaid, to each such stockholder of record of the Corporation and addressed to him at his address as registered upon the books of the Corporation. Except in special cases where other provision is made by statute, no publication of any notice of a meeting of stockholders shall be required. Every notice of a meeting of stockholders shall state the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy except a stockholder who shall attend such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Except where otherwise required by statute for an adjournment exceeding thirty days or if a new record date is fixed for the adjourned meeting, notice of any adjourned meeting of the stockholders of the Corporation shall not be required to be given if the time and place thereof are announced at the meeting which is adjourned. It shall be the duty of the officer who shall have charge of the stock ledger of the Corporation to prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing their addresses of record and the number of shares held by each. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, for a period of at least ten days prior to the meeting: (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (ii) during ordinary business hours, at the principal place of business of the Corporation. In the event that the meeting is to be held at a place other than the Corporation's principal place of business, then the list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting. (f) The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person, or represented by proxy, shall be requisite and shall constitute a quorum at all meetings of the stockholders for the transaction of any business except as otherwise provided by law, by the Certificate of Incorporation or by these By-Laws. If, however, such majority shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat present in person or by proxy shall have power to adjourn the meeting from time to time. At any such adjourned meeting at which the requisite amount of voting stock shall be represented any business may be transacted which might have been transacted at the meeting as originally called. 3 Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy, but no proxy shall be valid after three years from the date of its execution, unless a longer time is expressly provided therein. Without limiting the manner in which a shareholder may authorize another person or persons to act for such shareholder as proxy pursuant to the foregoing sentence, a shareholder may validly grant such authority (i) by executing a writing authorizing another person or persons to act for such stockholder as proxy or (ii) by authorizing another person or persons to act for such stockholder as proxy by transmitting or authorizing the transmission of a telegram, cablegram, or other means of electronic submission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or similar agency duly authorized by the person who will be the holder of the proxy to receive the submission, provided that any such telegram, cablegram or other means of electronic submission must either contain or be accompanied by information from which it can be determined that the telegram, cablegram or other electronic submission was transmitted by or authorized by the stockholder, or by any other method allowed under the Delaware General Corporation Law. (g) Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. (h) At any annual or special meeting of stockholders, persons nominated for election as directors by stockholders and the proposal of business to be considered by the stockholders shall be entertained only if advance notice thereof has been timely given as provided herein and such proposals or nominations are otherwise proper for consideration under applicable law and the Certificate of Incorporation and By-Laws of the Corporation. Notice of any proposal to be presented by any stockholder or of the name of any person to be nominated by any stockholder for election as a director of the Corporation at any meeting of stockholders shall be delivered to the Secretary of the Corporation at its principal executive office not less than 90 nor more than 120 days prior to the date of the meeting; provided, however, that if the date of the meeting is first publicly announced or disclosed (in a public filing or otherwise) less than 100 days prior to the date of the meeting, such advance notice shall be given not more than ten days after such date is first so announced or disclosed. Public notice shall be deemed to have been given more than 100 days in advance of the annual meeting if the Corporation shall have previously disclosed, in these By-Laws or otherwise, that the annual meeting in each year is to be held on a determinable date, unless and until the Board determines to hold the meeting on a different date. Any stockholder who gives notice of any such proposal shall deliver therewith the text of the proposal to be presented and a brief written statement of the reasons why such stockholder favors the proposal and setting forth such stockholder's name and address, the number and class of all shares of each class of stock of the Corporation beneficially owned by such stockholder and any material interest of such stockholder in the proposal (other than as a stockholder). Any stockholder desiring to nominate any person for election as a director of the Corporation shall deliver with such notice a statement in writing setting forth the name of the person to be nominated, the number and class of all shares of each class of stock of the Corporation beneficially owned by such person, the information regarding such person required by paragraphs (a), (e) and (f) of Item 401 of Regulation S--K adopted by the U.S. Securities and Exchange Commission (or the corresponding provisions of any regulation subsequently adopted by the U.S. Securities and Exchange Commission applicable to the Corporation), such person's signed consent to serve as a director of the Corporation if elected, such stockholder's name and address and the number and class of all shares of each class of stock of the Corporation beneficially owned by such stockholder. As used herein, shares "beneficially owned" shall mean all shares as 4 to which such person, together with such person's affiliates and associates (as defined in Rule 12b-2 under the Securities Exchange Act of 1934), may be deemed to beneficially own pursuant to Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as well as all shares as to which such person, together with such person's affiliates and associates, has the right to become the beneficial owner pursuant to any agreement or understanding, or upon the exercise of warrants, options or rights to convert or exchange (whether such rights are exercisable immediately or only after the passage of time or the occurrence of conditions). The person presiding at the meeting, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall determine whether such notice has been duly given and shall direct that proposals and nominees not be considered if such notice has not been given. ARTICLE V BOARD OF DIRECTORS (a) The management of business and affairs of the Corporation shall be under the direction of a Board of Directors consisting of not less than nine (9) or more than twelve (12) persons, the exact number to be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time of any such resolution is presented to the Board for adoption). The Directors shall be divided into three classes, as nearly equal in number as possible, with the term of office of the first class to expire at the 2001 annual meeting of stockholders, the term of office of the second class to expire at the 2002 annual meeting of stockholders and the term of office of the third class to expire at the 2003 annual meeting of stockholders. Except as otherwise provided in the Corporation's Certificate of Incorporation, at each annual meeting of the stockholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of the stockholders after their election. (b) Any director of the Corporation may resign at any time by giving written notice thereof to the Corporation. Such resignation shall take effect at the time specified therefor, and unless otherwise specified with respect thereto the acceptance of such resignation shall not be necessary to make it effective. Subject to the rights of the holders of the Preferred Stock to elect directors under specified circumstances, any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80 percent of the combined voting power of all of the then outstanding shares of stock of all classes and series of the Corporation entitled to vote generally (the "Voting Stock"), voting together as a single class (it being understood that, for all purposes of these By-Laws, each share of the Preferred Stock shall have the number of votes granted to it pursuant to the Corporation's Certificate of Incorporation or any designation of terms of any class or series of Preferred Stock made pursuant to the Certificate of Incorporation). The Corporation must notify the director of the grounds of his impending removal and the director shall have an opportunity, at the expense of the Corporation, to present his defense to the stockholders by a statement which accompanies or precedes the Corporation's solicitation of proxies to remove him. The term 'entire Board' as used in these By-Laws means the total number of directors which the Corporation would have if there were no vacancies. 5 (c) Newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors then in office, even though less than a quorum of the Board of Directors, acting at a regular or special meeting. If any applicable provision of the Delaware General Corporation Law expressly confers power on stockholders to fill such a directorship at a special meeting of stockholders, such a directorship may be filled at such a meeting only by the affirmative vote of at least 80 percent of the Voting Stock of the Corporation; provided, however, that when (a) pursuant to the provisions of Article IV of the Certificate of Incorporation the holders of Preferred Stock have the right, and have exercised such right, to elect directors and (b) The Delaware General Corporation Law expressly confers on stockholders voting rights as aforesaid, if the directorship to be filled had been occupied by a director elected by holders of Common Stock, then such directorship shall be filled by an 80 percent vote as aforesaid, but if such directorship to be filled had been elected by holders of Preferred Stock, then such directorship shall be filled by the majority vote of the holders of Preferred Stock. Any director elected in accordance with the two preceding sentences shall hold office for the remainder of the full term of the directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. No decrease in the authorized number of directors constituting the entire Board of Directors shall shorten the term of any incumbent director. (d) Without prejudice to the general powers conferred by subdivision (a) of this Article, the Board of Directors shall have and exercise each and every power granted to them in Article VI of the Certificate of Incorporation of the Corporation. (e) Regular meetings of the Board of Directors shall be held at such office or offices, whether within or without the State of Delaware, and at such times as the Board shall from time to time determine. Special meetings of the Board of Directors may be called at any time by the Chief Executive Officer or, if he is incapacitated or unable to call such meetings, by any member of the Board of Directors. Such meetings may take place in the office of the Corporation in the State of Delaware or in such office or offices as the Directors may establish. (f) Except as aforesaid, notice of all special meetings of the Board of Directors shall be given to each Director by five days' service of the same by telegram, or telephone or letter or personally. Notice of any special meeting of the Board of Directors shall state the place and hour of the meeting, but need not state the purposes thereof. Notice of any meeting of the Board or of any Committee need not be given to any Director if waived by him in writing, or by telegraph or cable, whether before or after such meeting be held, or if he shall be present at the meeting; and any meeting of the Board of Directors or of any Committee shall be a legal meeting without any notice thereof having been given, if all the members shall be present thereat. Notice of regular meetings of the Board need not be given. In the absence of written instructions from a Director designating some other address, notice shall be sufficiently given if addressed to him at his usual business address. (g) Except as provided in clause (c) of this Article, a majority of the total number of Directors shall constitute a quorum for the transaction of business at all meetings of the Board of Directors; but less than a quorum may adjourn the meeting. 6 (h) Each Director of the Corporation shall be entitled to receive such fixed sum per meeting of the Board of Directors attended, or such annual sum, or both, as the Board shall from time to time determine, together with his expenses of attendance at such meeting. ARTICLE VI COMMITTEES (a) The Board of Directors may from time to time, in its discretion, by resolution passed by a majority of the Board, designate, and appoint, from the directors committees of one or more persons which shall have and may exercise such lawfully delegable powers and duties conferred or authorized by the resolutions of designation and appointment. The Board of Directors shall have power at any time to change the members of any such committee, to fill vacancies, and to discharge any such committee. (b) Unless the Board of Directors shall provide otherwise, the presence of one-half of the total membership of any committee of the Board of Directors shall constitute a quorum for the transaction of business at any meeting of such committee and the act of a majority of those present shall be necessary and sufficient for the taking of any action thereat. (c) Notwithstanding the provisions of clause (a) of this Article, the Merger Committee of the Board of Directors that was designated and appointed in October 2000, prior to the increase in the number of Directors effected by amendment and restatement of the Corporation's Certificate of Incorporation and these By-Laws, shall remain a committee of the Board of Directors until December 31, 2000 with the powers, duties and membership authorized in the resolutions designating and appointing that committee. ARTICLE VII OFFICERS (a) The officers of the Corporation shall be the President, the Presidents of the Corporation's Business Segments, one or more Vice Presidents, the Secretary, and the Treasurer, who shall be elected by the Board of Directors, and may include the Controller, such additional Assistant Secretaries, Assistant Treasurers, and special subordinate officers as may from time to time be elected or appointed by the Board of Directors or appointed by the Chief Executive Officer. A Chairman and a Vice Chairman may be elected by the Board of Directors. The Board shall designate an officer as the Chief Executive Officer. Any two of the above offices may be held by the same person except those of Chairman, Chief Executive Officer or President, and Secretary. The Chairman shall, if present, preside at all meetings of the stockholders and at all meetings of the Board of Directors. If the Chairman is not present, the Vice Chairman shall preside at all meetings of the stockholders and the Board of Directors. The Chief Executive Officer or an officer designated by the Chief Executive Officer shall make a report on the state of the business of the Corporation at each annual meeting of stockholders. All of the officers of the Corporation shall hold office for one year and until others are elected or appointed and qualified in their stead, unless in the election or appointment of the 7 officer it shall be specified that he holds his office for a shorter period or subject to the pleasure of the Board of Directors or the Chief Executive Officer. All vacancies in such offices by resignation, death or otherwise may be filled by the Board of Directors. In the case of absence or inability to act of any officer of the Corporation, and of any person herein authorized to act in his place, the Board of Directors may from time to time delegate the powers or duties of such officer to any other officer or any Director or other person whom they may select. (b) The Chief Executive Officer shall have general and active supervision and direction over the business and affairs of the Corporation and over its several officers; subject, however, to the control of the Board of Directors. The Chief Executive Officer shall see that all orders and resolutions of the Board of Directors are carried into effect. The Chief Executive Officer shall perform such other duties as from time to time may be assigned by the Board of Directors. (c) The Chairman, if elected, shall perform such duties as from time to time may be assigned by the Board of Directors. (d) The Vice Chairman, if elected, shall perform such duties as from time to time may be assigned by the Chairman, the Chief Executive Officer, the Board of Directors or these By-Laws. In the absence or the inability to act of the Chairman and the Chief Executive Officer, the Vice Chairman shall perform the duties of the Chairman and Chief Executive Officer and when so acting shall have all the powers of and be subject to all the restrictions upon the Chairman and Chief Executive Officer. (e) The President, the Presidents of the Corporation's Business Segments and the Vice Presidents shall perform such duties as the Chairman, the Chief Executive Officer or the Board of Directors shall, from time to time, require. (f) The Treasurer shall have charge and be responsible for keeping full and accurate accounts of receipts and disbursements in books belonging to the Corporation, depositing all moneys and other valuables in the name and to the credit of the Corporation, in such depositaries as may be directed by the Board of Directors, disbursing the funds of the Corporation as may be ordered by the Board of Directors or the Chief Executive Officer taking proper vouchers therefor and rendering to the Chief Executive Officer and the Directors whenever they may require it an account of all his transactions as Treasurer and of the financial condition of the Corporation. The Treasurer shall also perform such other duties as the Board of Directors may from time to time require. If required by the Board of Directors, the Treasurer shall give the Corporation a bond in a form and in a sum with surety satisfactory to the Board of Directors for the faithful performance of the duties of the office of Treasurer and the restoration to the Corporation in the case of the officer's death, resignation or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the officer's possession belonging to the Corporation. At the request of the Treasurer, or in the Treasurer's absence or inability to act, the Assistant Treasurer or, if there be more than one, the Assistant Treasurer designated by the Treasurer, shall perform the duties of the Treasurer and when so acting shall have the powers of and be subject to all the restrictions of the Treasurer. The Assistant Treasurers shall perform such 8 other duties as may from time to time be assigned to them by the Chief Executive Officer, the Treasurer or the Board of Directors. (g) The Secretary shall attend all meetings of the Board of Directors and of the stockholders and act as Clerk thereof and record all votes and the minutes of all proceedings in a book to be kept for that purpose, and shall perform like duties for the standing committees when required. The Secretary shall keep in safe custody the seal of the Corporation and, whenever authorized by the Board, affix the seal to any instrument requiring the same. The Secretary shall see that proper notice is given of all meetings of the stockholders of the Corporation and of the Board of Directors and shall perform such other duties as may be prescribed from time to time by the Board of Directors or the Chief Executive Officer. At the request of the Secretary, or in the Secretary's absence or inability to act, the Assistant Secretary or, if there be more than one, the Assistant Secretary designated by the Secretary, shall perform the duties of the Secretary and when so acting shall have all the powers of and be subject to all the restrictions of the Secretary. The Assistant Secretaries shall perform such other duties as may from time to time be assigned to them by the Chief Executive Officer, the Secretary or the Board of Directors. (h) Any officer of the Corporation may be removed, either with or without cause, at any time, by resolution adopted by the Board of Directors at a regular meeting or at a special meeting of the Board called for that purpose, by any Committee upon whom such power of removal may be conferred by the Board of Directors or by a superior officer upon whom such power of removal may be conferred by the Board of Directors. ARTICLE VIII CONTRACTS, CHECKS, NOTES, ETC. (a) All contracts and agreements authorized by the Board of Directors shall, unless otherwise directed by the Board of Directors, or unless otherwise required by law, be signed by any one of the following officers: the Chairman, the Vice Chairman, the President, any President of a Business Segment, any Vice President, the Treasurer, the Secretary, any Assistant Treasurer or any Assistant Secretary, any other person authorized by a resolution of the Board of Directors, and any other person authorized by the Chairman, as evidenced by a written instrument of delegation. Any such authorization by the Board of Directors or the Chairman shall remain in effect until rescinded by action of the Board of Directors or (in the case of a delegation by the Chairman) by the Chairman and, where it identifies the authorized signatory by office rather than by name, shall not be rescinded solely by virtue of a change in the person holding that office or a temporary vacancy in that office. All checks, drafts, notes, bonds, bills of exchange and orders for the payment of money (including orders for repetitive or non-repetitive electronic funds transfers) may be signed by any one of the Chairman, the Vice Chairman, the President, any President of a Business Segment, any Vice President, the Treasurer, any Assistant Treasurer or the Controller or in such manner as shall from time to time be determined by resolution of the Board of Directors. Further, the Treasurer is authorized to designate to the Corporation's banks, in writing, individuals employed in the NiSource Corporate Services Company, who need not be officers or employees of the Corporation, to give in the name of the Corporation telephonic, telegraphic, or electronic transfer instructions for the payment of money, which may, with respect 9 to routine items, include instructions as to the amount to be transferred, to any bank, pursuant to previously issued written orders, signed by officers of the Corporation in any manner provided above, which designate the recipients of such amounts and which identify what shall be treated as routine items. (b) Anything in subdivision (a) of this Article VIII to the contrary notwithstanding, the officers of this Corporation may open in the name of the Corporation special accounts appropriately designated in which shall be deposited funds of the Corporation transferred from the Corporation's other accounts by its checks signed in accordance with the requirements of subdivision (a) of this Article VIII, but from which special accounts funds may be disbursed by check, draft, or other instrument of the Corporation designated as drawn against such special account and signed by the single signature of any one of the executive officers of the Corporation authorized by subdivision (a) of this Article VIII to sign checks, drafts and other instruments of the Corporation or signed by the single signature of any other person expressly authorized by the Board to sign checks, drafts and other instruments disbursing funds from such special accounts. (c) Anything in subdivision (a) of this Article VIII to the contrary notwithstanding, (i) bonds, notes, debentures and other evidence of indebtedness of the Corporation issued under an indenture may be executed in the name of the Corporation by the facsimile signature, printed, engraved or otherwise used thereon, of the Chairman, the Vice Chairman, the President, any President of a Business Segment, any Vice President, the Treasurer or any Assistant Treasurer of the Corporation, and the corporate seal affixed thereto or impressed, printed, engraved or otherwise reproduced thereon may be attested by the facsimile signature of the Secretary or an Assistant Secretary of the Corporation, provided that the indenture require the same to be authenticated by the trustee under such indenture, and (ii) interest coupons attached to any such bond, note, debenture or other evidence of indebtedness may be executed on behalf of the Corporation by the facsimile signature of the Treasurer or any Assistant Treasurer of the Corporation. ARTICLE IX FISCAL YEAR The fiscal year of the Corporation shall begin on the first day of January in each year. ARTICLE X AMENDMENT OF BY LAWS These By-Laws may be amended, added to, rescinded or repealed at any meeting of the Board of Directors or of the stockholders, provided notice of the proposed change was given in the notice of the meeting or, in the case of a meeting of the Board of Directors, in a notice given not less than two days prior to the meeting; provided, however, that, notwithstanding any other provisions of these By-Laws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, the Certificate of Incorporation, any class or series of Preferred Stock or these By-Laws, the affirmative vote of at least 80 percent of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such alteration, amendment or repeal is presented to the Board for adoption), shall be required to alter, amend or repeal Article IV(c), IV(g), V(a), V(b), V(c), and V(g) of these By-Laws or this proviso to this Article X of these By-Laws. 10 NISOURCE INC. AMENDED AND RESTATED BY-LAWS AS AMENDED OCTOBER 23, 2001 EX-4.48 4 w57495ex4-48.txt 364-DAY REVOLVING CREDIT AGREEMENT EXHIBIT 4.48 364-DAY REVOLVING CREDIT AGREEMENT among NISOURCE FINANCE CORP., as Borrower, NISOURCE INC., as Guarantor, THE LEAD ARRANGERS ARRANGERS SENIOR MANAGING AGENTS MANAGERS and LENDERS Party Hereto, as Lenders, CREDIT SUISSE FIRST BOSTON as Syndication Agent, BANK ONE, NATIONAL ASSOCIATION (Main Office, Chicago) CITIBANK, N.A. TORONTO DOMINION (TEXAS), INC. as Co-Documentation Agents BARCLAYS BANK PLC, as Administrative Agent and LC Bank, ---------- BARCLAYS CAPITAL and CREDIT SUISSE FIRST BOSTON Lead Arrangers BARCLAYS CAPITAL Sole Book Runner ---------- Dated as of March 23, 2001 TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS SECTION 1.01. Defined Terms...................................................1 SECTION 1.02. Classification of Loans and Borrowings.........................16 SECTION 1.03. Terms Generally................................................17 SECTION 1.04. Accounting Terms; GAAP.........................................17 ARTICLE II THE CREDITS SECTION 2.01. Commitments....................................................17 SECTION 2.02. Revolving Loans and Revolving Borrowings; Requests for Borrowings...................................................18 SECTION 2.03. Swingline Loans................................................19 SECTION 2.04. Letters of Credit..............................................21 SECTION 2.05. Funding of Borrowings..........................................24 SECTION 2.06. Interest Elections.............................................25 SECTION 2.07. Mandatory Termination or Reduction of Commitments..............26 SECTION 2.08. Mandatory Prepayments..........................................26 SECTION 2.09. Optional Reduction of Commitments..............................27 SECTION 2.10. Repayment of Loans; Evidence of Debt...........................27 SECTION 2.11. Optional Prepayment of Loans...................................28 SECTION 2.12. Fees...........................................................28 SECTION 2.13. Interest.......................................................30 SECTION 2.14. Alternate Rate of Interest.....................................30 SECTION 2.15. Increased Costs................................................31 SECTION 2.16. Break Funding Payments.........................................32 SECTION 2.17. Taxes..........................................................33 SECTION 2.18. Payments Generally; Pro Rata Treatment; Sharing of Set-Offs....34 SECTION 2.19. Mitigation Obligations; Replacement of Lenders.................35 SECTION 2.20. Extension of Termination Date..................................36 ARTICLE III CONDITIONS SECTION 3.01. Conditions Precedent to the Initial Extension of Credit........36 SECTION 3.02. Conditions Precedent to Each Extension of Credit...............38 ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Credit Parties...........38
i ARTICLE V AFFIRMATIVE COVENANTS SECTION 5.01. Affirmative Covenants..........................................41 ARTICLE VI NEGATIVE COVENANTS SECTION 6.01. Negative Covenants.............................................44 ARTICLE VII FINANCIAL COVENANTS SECTION 7.01. Interest Coverage Ratio........................................48 SECTION 7.02. Debt to Capitalization Ratio...................................48 ARTICLE VIII EVENTS OF DEFAULT SECTION 8.01. Events of Default..............................................49 ARTICLE IX THE ADMINISTRATIVE AGENT SECTION 9.01. The Administrative Agent.......................................52 ARTICLE X GUARANTY SECTION 10.01. The Guaranty..................................................54 SECTION 10.02. Waivers.......................................................56 ARTICLE XI MISCELLANEOUS SECTION 11.01. Notices.......................................................57 SECTION 11.02. Waivers; Amendments...........................................58 SECTION 11.03. Expenses; Indemnity; Damage Waiver............................59 SECTION 11.04. Successors and Assigns........................................60 SECTION 11.05. Survival......................................................63 SECTION 11.06. Counterparts; Integration; Effectiveness......................63 SECTION 11.07. Severability..................................................63 SECTION 11.08. Right of Setoff...............................................63 SECTION 11.09. Governing Law; Jurisdiction; Consent to Service of Process....64 SECTION 11.10. WAIVER OF JURY TRIAL..........................................64 SECTION 11.11. Headings......................................................65 SECTION 11.12. Confidentiality...............................................65
ii ANNEXES, EXHIBITS AND SCHEDULES ANNEX A Pricing Grid iii 364-DAY REVOLVING CREDIT AGREEMENT, dated as of March 23, 2001 (this "AGREEMENT"), among NISOURCE FINANCE CORP., an Indiana corporation, as Borrower (the "BORROWER"), NISOURCE INC., a Delaware corporation ("NISOURCE"), as Guarantor (the "GUARANTOR"), the Lead Arrangers, Arrangers, Senior Managing Agents, Managers, and other Lenders from time to time party hereto, the Co-Documentation Agents party hereto, CREDIT SUISSE FIRST BOSTON, as Syndication Agent and BARCLAYS BANK PLC, as issuer of any Letters of Credit provided for hereunder (in such capacity, the "LC BANK") and as administrative agent for the Lenders hereunder (in such capacity, the "ADMINISTRATIVE AGENT"). WITNESSETH: WHEREAS, the parties are willing to enter into this 364-Day Revolving Credit Agreement on the terms and subject to the conditions herein set forth. NOW, THEREFORE, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Defined Terms. As used in this Agreement, the following terms have the meanings specified below: "ABR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate. "ACQUISITION FACILITY" means the financing facilities represented by that certain 364-Day Revolving Credit Agreement, dated as of November 1, 2000, among the Borrower, the Guarantor, Old Nisource, the co-syndication agents, documentation agent and lenders parties thereto and Credit Suisse First Boston as administrative agent thereunder. "ADMINISTRATIVE QUESTIONNAIRE" means an Administrative Questionnaire in a form supplied by the Administrative Agent. "AFFILIATE" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "AGGREGATE COMMITMENTS" means the aggregate amount of the Commitments of all Lenders, as in effect from time to time; provided, that, prior to the termination and payment in full of the Terminating Facilities and the release by the holders thereof of any collateral security securing such facilities, the Aggregate Commitments shall be deemed not to exceed $600,000,000, except for purposes of calculating any Lender's Applicable Percentage. 2 "ALTERNATE BASE RATE" means, for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "APPLICABLE PERCENTAGE" means, with respect to any Lender, the percentage of the Aggregate Commitments represented by such Lender's Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments. "APPLICABLE RATE" means, for any day, with respect to any ABR Loan or Eurodollar Revolving Loan, or with respect to the Facility Fees and the Utilization Fee payable hereunder, as the case may be, the applicable rate per annum determined pursuant to the Pricing Grid. "ARRANGERS" shall mean each of Barclays and Credit Suisse First Boston. "ASSIGNMENT AND ACCEPTANCE" means an assignment and acceptance entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 11.04), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent. "AVAILABILITY PERIOD" means the period from and including the Effective Date to but excluding the Termination Date. "BANK ONE" means Bank One, National Association, a national banking association having its main office in Chicago, Illinois. "BARCLAYS" means Barclays Bank PLC, an English banking corporation. "BENEFICIARY" has the meaning set forth in Section 10.01. "BOARD" means the Board of Governors of the Federal Reserve System of the United States of America. "BORROWER" means NiSource Finance Corp., Inc. an Indiana corporation. "BORROWING" means Loans of the same Type and Class, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect. "BORROWING REQUEST" means a request by the Borrower for a Revolving Borrowing in accordance with Section 2.02. 3 "BUSINESS DAY" means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed; provided that, when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "CAPITAL LEASE" means, as to any Person, any lease of real or personal property in respect of which the obligations of the lessee are required, in accordance with GAAP, to be capitalized on the balance sheet of such Person. "CAPITAL STOCK" means any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person other than a corporation (including, but not limited to, all common stock and preferred stock and partnership, membership and joint venture interests in a Person), and any and all warrants, rights or options to purchase any of the foregoing. "CASH ACCOUNT" has the meaning set forth in Section 8.01. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act, 42, U.S.C. Section 9601 et seq., as amended. "CHANGE OF CONTROL" means (a) any "person" or "group" within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended, shall become the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of more than 50% of the then outstanding voting Capital Stock of the Guarantor, (b) Continuing Directors shall cease to constitute at least a majority of the directors constituting the Board of Directors of the Guarantor, (c) a consolidation or merger of the Guarantor shall occur after which the holders of the outstanding voting Capital Stock of the Guarantor immediately prior thereto hold less than 50% of the outstanding voting Capital Stock of the surviving entity; (d) more than 50% of the outstanding voting Capital Stock of the Guarantor shall be transferred to an entity of which the Guarantor owns less than 50% of the outstanding voting Capital Stock; (e) there shall occur a sale of all or substantially all of the assets of the Guarantor; or (f) the Borrower, NIPSCO or Columbia shall cease to be a Wholly-Owned Subsidiary of the Guarantor (except to the extent otherwise permitted under Section 6.01(b)). "CHANGE IN LAW" means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender (or, for purposes of Section 2.15(b), by any lending office of such Lender or by such Lender's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. 4 "CLASS", when used in reference to any Loan or Borrowing, refers to whether such Loan is, or the Loans comprising such Borrowing are, Revolving Loans or Swingline Loans. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. "COLUMBIA" means Columbia Energy Group, a Delaware corporation. "COMMITMENT" means, with respect to each Lender, the commitment of such Lender to make Revolving Loans hereunder and to participate in Letters of Credit issued hereunder as set forth herein, as such commitment may be (a) reduced from time to time or terminated pursuant to Section 2.07 or Section 2.09 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 11.04. The initial amount of each Lender's Commitment is (x) the amount set forth on Schedule 2.01 opposite such Lender's name; or (y) the amount set forth in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Commitment, as applicable. "CONSOLIDATED CAPITALIZATION" means the sum of (a) Consolidated Debt, (b) consolidated common equity of the Guarantor and its Consolidated Subsidiaries determined in accordance with GAAP, and (c) the aggregate liquidation preference of preferred stocks (other than preferred stocks subject to mandatory redemption or repurchase) of the Guarantor and its Consolidated Subsidiaries upon involuntary liquidation. "CONSOLIDATED DEBT" means, at any time, the indebtedness of the Guarantor and its Consolidated Subsidiaries that would be classified as debt on a balance sheet of the Guarantor determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED INTEREST EXPENSE" means, for any period, the interest expense of the Guarantor and its Consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED NET INCOME" means, for any period, the net income of the Guarantor and its Consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP, adjusted to exclude: (a) any extraordinary gain or loss, (b) any gain or loss on dispositions of capital assets, (c) the non-cash effects of any impairment or write-down of assets and (d) up to $106,800,000 in the aggregate of merger and restructuring charges relating to the Merger. "CONSOLIDATED NET TANGIBLE ASSETS" means, at any time, the total amount of assets appearing on a consolidated balance sheet of the Guarantor and its Subsidiaries (other than Utility Subsidiaries), determined in accordance with GAAP and prepared as of the end of the fiscal quarter then most recently ended, less, without duplication, the following (other than those of Utility Subsidiaries): 5 (a) all current liabilities (excluding any thereof that are by their terms extendable or renewable at the sole option of the obligor thereon, without requiring the consent of the obligee, to a date more than 12 months after the date of determination); (b) all reserves for depreciation and other asset valuation reserves (but excluding any reserves for deferred Federal income taxes, arising from accelerated amortization or otherwise); (c) all intangible assets, such as goodwill, trademarks, trade names, patents and unamortized debt discount and expense, carried as an asset on such balance sheet; and (d) all appropriate adjustments on account of minority interests of other Persons holding common stock of any Subsidiary of the Guarantor. "CONSOLIDATED SUBSIDIARY" means, on any date, each Subsidiary of the Guarantor the accounts of which, in accordance with GAAP, would be consolidated with those of the Guarantor in its consolidated financial statements if such statements were prepared as of such date. "CONTINGENT GUARANTY" means a direct or contingent liability in respect of a Project Financing (whether incurred by assumption, guaranty, endorsement or otherwise) that either (a) is limited to guarantying performance of the completion of the Project that is financed by such Project Financing or (b) is contingent upon, or the obligation to pay or perform under which is contingent upon, the occurrence of any event other than failure of the primary obligor to pay upon final maturity (whether by acceleration or otherwise). "CONTINUING DIRECTORS" means (a) all members of the board of directors of the Guarantor who have held office continually since the Effective Date, and (b) all members of the board of directors of the Guarantor who were elected as directors after the Effective Date and whose nomination for election was approved by a vote of at least 50% of the Continuing Directors. "CONTRACTUAL OBLIGATION" means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "CONTROL" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "Controlling" and "Controlled" have meanings correlative thereto. "CREDIT DOCUMENTS" means (a) this Agreement, the Notes and any Assignment and Acceptances, (b) any certificates, opinions and other documents required to be delivered pursuant to Section 3.01, and (c) any other documents delivered by a Credit Party pursuant to or in connection with any one or more of the foregoing. "CREDIT PARTY" means each of the Borrower and the Guarantor. 6 "DEBT FOR BORROWED MONEY" means, as to any Person, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all Capital Lease obligations of such Person, and (d) all obligations of such Person under synthetic leases, tax retention operating leases, off-balance sheet loans or other off-balance sheet financing products that, for tax purposes, are considered indebtedness of borrowed money of the lessee but are classified as operating leases under GAAP. "DEBT TO CAPITALIZATION RATIO" means, at any time, the ratio of Consolidated Debt to Consolidated Capitalization. "DEFAULT" means any event or condition that constitutes an Event of Default or that, upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "DOLLARS" or "$" refers to lawful money of the United States of America. "EFFECTIVE DATE" means the date on which this Agreement has been executed and delivered by each of the Borrower, the Guarantor, the Syndication Agent, the Co-Documentation Agents, the initial Lenders and Swingline Lenders, the LC Bank and the Administrative Agent . "ENVIRONMENTAL LAWS" means any and all foreign, federal, state, local or municipal laws (including, without limitation, common laws), rules, orders, regulations, statutes, ordinances, codes, decrees, judgments, awards, writs, injunctions, requirements of any Governmental Authority or other requirements of law regulating, relating to or imposing liability or standards of conduct concerning, pollution, waste, industrial hygiene, occupational safety or health, the presence, transport, manufacture, generation, use, handling, treatment, distribution, storage, disposal or release of Hazardous Substances, or protection of human health, plant life or animal life, natural resources or the environment, as now or at any time hereafter in effect. "ENVIRONMENTAL LIABILITY" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Guarantor or any of its Subsidiaries directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA AFFILIATE" means any Person who, for purposes of Title IV of ERISA, is a member of the Guarantor's controlled group, or under common control with the 7 Guarantor, within the meaning of Section 414 of the Code and the regulations promulgated and rulings issued thereunder. "ERISA EVENT" means (a) a reportable event, within the meaning of Section 4043 of ERISA, unless the 30-day notice requirement with respect thereto has been waived by the PBGC, (b) the provision by the administrator of any Plan of a notice of intent to terminate such Plan, pursuant to Section 4041(a)(2) and 4041(c) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA), (c) the withdrawal by the Guarantor or an ERISA Affiliate from a Multiple Employer Plan during a plan year for which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA, (d) the failure by the Guarantor or any ERISA Affiliate to make a payment to a Plan required under Section 302(f)(1) of ERISA, which Section imposes a lien for failure to make required payments, (e) the adoption of an amendment to a Plan requiring the provision of security to such Plan, pursuant to Section 307 of ERISA, or (f) the institution by the PBGC of proceedings to terminate a Plan, pursuant to Section 4042 of ERISA, or the occurrence of any event or condition which may reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer a Plan. "EUROCURRENCY LIABILITIES" has the meaning assigned to that term in Regulation D of the Board, as in effect from time to time. "EURODOLLAR", when used in reference to any Loan or Borrowing, refers to whether such Loan is, or the Loans comprising such Borrowing are, bearing interest at a rate determined by reference to the LIBO Rate. "EURODOLLAR RATE RESERVE PERCENTAGE" of any Lender for the Interest Period for any Eurodollar Loan means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time to time by the Board (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Lender with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. "EVENT OF DEFAULT" has the meaning assigned to such term in Article VIII. "EXCLUDED TAXES" means, with respect to the Administrative Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income or net earnings by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located and (b) in case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.19(d)), any withholding tax that (i) is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement, 8 except to the extent that such Foreign Lender's assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 2.17(a) or (ii) is attributable to such Foreign Lender's failure to comply with Section 2.17 (e) when legally able to do so. "EXPOSURE" means, with respect to any Lender at any time, such Lender's Outstanding Loans plus such Lender's Applicable Percentage of the aggregate LC Outstandings at such time plus such Lender's Applicable Percentage of the aggregate Unreimbursed LC Disbursements at such time. "EXTENSION OF CREDIT" means (a) the making by any Lender of a Revolving Loan, (b) the making by any Swingline Lender of any Swingline Loan, (c) the issuance of a Letter of Credit by the LC Bank or (d) the amendment of any Letter of Credit having the effect of extending the stated termination date thereof, increasing the LC Outstandings, or otherwise altering any of the material terms or conditions thereof. "FACILITY FEE" has the meaning set forth in Section 2.12. "FEDERAL FUNDS EFFECTIVE RATE" means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "FOREIGN LENDER" means any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction. "GAAP" means generally accepted accounting principles in the United States of America consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e). "GOVERNMENTAL AUTHORITY" means the government of the United States of America, any other nation, or any political subdivision of the United States of America or any other nation, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government and includes, in any event, an "Independent System Operator" or any entity performing a similar function. "GRANTING LENDER" has the meaning set forth in Section 11.04. "GUARANTOR" means NiSource. 9 "GUARANTY" means the guaranty of the Guarantor pursuant to Article X of this Agreement. "HAZARDOUS MATERIALS" means any asbestos; flammables; volatile hydrocarbons; industrial solvents; explosive or radioactive materials; hazardous wastes; toxic substances; liquefied natural gas; natural gas liquids; synthetic gas; oil, petroleum, or related materials and any constituents, derivatives, or byproducts thereof or additives thereto; or any other material, substance, waste, element or compound (including any product) regulated pursuant to any Environmental Law, including, without limitation, substances defined as "hazardous substances," "hazardous materials," "contaminants," "pollutants," "hazardous wastes," "toxic substances," "solid waste," or "extremely hazardous substances" in (i) CERCLA, (ii) the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801 et seq., (iii) the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., (iv) the Federal Water Pollution Control Act, as amended, 33 U.S.C. Section 1251 et seq., (v) the Clean Air Act, 42 U.S.C. Section 7401 et seq., (vi) the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., (vii) the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq., or (viii) foreign, state, local or municipal law, in each case, as may be amended from time to time. "INDEBTEDNESS" of any Person means (without duplication) (a) Debt for Borrowed Money, (b) obligations to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business which are not overdue, (c) all obligations, contingent or otherwise, in respect of any letters of credit, bankers' acceptances or interest rate, currency or commodity swap, cap or floor arrangements, (d) all indebtedness of others secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the indebtedness secured thereby has been assumed, (e) all amounts payable in connection with mandatory redemptions or repurchases of preferred stock, and (f) obligations under direct or indirect guarantees in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (a) through (e) above. "INDEMNIFIED TAXES" means Taxes other than Excluded Taxes. "INDEMNITEE" has the meaning set forth in Section 11.03. "INDEX DEBT" means the senior unsecured long-term debt securities of the Borrower, without third-party credit enhancement provided by a Person other than the Guarantor. "INFORMATION" has the meaning set forth in Section 11.12. "INITIAL CREDIT EVENT DATE" means the date on which the initial Loan or Borrowing is funded or the initial Letter of Credit hereunder is issued. "INSUFFICIENCY" means, with respect to any Plan, the amount, if any, by which the present value of all vested and unvested accrued benefits under such Plan exceeds the fair 10 market value of assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan using actuarial assumptions used in determining such Plan's normal cost for purposes of Section 412(b)(2)(A) of the Code. "INTEREST COVERAGE RATIO" means, for any period, the ratio of (i) the sum of (a) Consolidated Net Income for such period plus (b) income taxes deducted in determining such Consolidated Net Income plus (c) Consolidated Interest Expense for such period to (ii) Consolidated Interest Expense for such period. "INTEREST ELECTION REQUEST" means a request by the Borrower to convert or continue a Revolving Borrowing in accordance with Section 2.06. "INTEREST PAYMENT DATE" means (a) with respect to any ABR Loan, the last day of each March, June, September and December, (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, the day that is three months after the first day of such Interest Period, (c) with respect to any Swingline Loan, the date such Swingline Loan is required to be repaid and (d) with respect to any Loan, the Termination Date. "INTEREST PERIOD" means with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as the Borrower may elect; provided that (a) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day; and (b) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and, in the case of a Revolving Borrowing, thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing. "LC OUTSTANDINGS" means, for any date of determination, the aggregate maximum amount available to be drawn under all Letters of Credit outstanding on such date (assuming the satisfaction of all conditions for drawing enumerated therein). "LC RISK PARTICIPATION FEE" has the meaning set forth in SECTION 2.12. "LENDERS" means (a) the Persons listed on Schedule 2.01, including any such Person identified thereon or in the signature pages hereto as a Lead Arranger, Arranger, Senior Managing Agent or Manager, and any other Person that shall have become a party hereto pursuant to an Assignment and Acceptance, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Acceptance, (b) each Swingline 11 Lender in respect of the Swingline Loans made by it and (c) if and to the extent so provided in Section 2.04(c), the LC Bank. "LETTER OF CREDIT" means a letter of credit issued by the LC Bank pursuant to the terms of this Agreement, as such letter of credit may from time to time be amended, modified or extended in accordance with the terms of this Agreement. "LIBO RATE" means, with respect to any Eurodollar Borrowing for any Interest Period, the rate appearing on Telerate Page 3750 (or on any successor or substitute page of such service, or any successor to or substitute for such service, providing rate quotations comparable to those currently provided on such page of such service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the "LIBO RATE" with respect to such Eurodollar Borrowing for such Interest Period shall be the rate at which Dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "LIEN" has the meaning set forth in Section 6.01(a). "LOANS" means the loans made by the Lenders to the Borrower pursuant to this Agreement. "MARGIN Stock" means margin stock within the meaning of Regulations U and X issued by the Board. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the business, assets, operations, condition (financial or otherwise) or prospects of the Guarantor and its Subsidiaries taken as a whole; (b) the validity or enforceability of any of Credit Documents or the rights, remedies and benefits available to the Administrative Agent and the Lenders thereunder; or (c) the ability of the Borrower or the Guarantor to consummate the Transactions. "MATERIAL SUBSIDIARY" means at any time the Borrower, NIPSCO, Columbia, and each Subsidiary of the Guarantor, other than the Borrower, NIPSCO and Columbia, in respect of which: (a) the Guarantor's and its other Subsidiaries' investments in and advances to such Subsidiary and its Subsidiaries exceed 10% of the consolidated total assets of the Guarantor and its Subsidiaries taken as a whole, as of the end of the most recent fiscal year; or 12 (b) the Guarantor's and its other Subsidiaries' proportionate interest in the total assets (after intercompany eliminations) of such Subsidiary and its Subsidiaries exceeds 10% of the consolidated total assets of the Guarantor and its Subsidiaries as of the end of the most recent fiscal year; or (c) the Guarantor's and its other Subsidiaries' equity in the income from continuing operations before income taxes, extraordinary items and cumulative effect of a change in accounting principles of such Subsidiary and its Subsidiaries exceeds 10% of the consolidated income of the Guarantor and its Subsidiaries for the most recent fiscal year. "MERGER" means, collectively: (a) the merger of Parent Acquisition Corp., an Indiana corporation, with and into Old NiSource, (b) the merger of Company Acquisition Corp., a Delaware corporation, with and into Columbia and (c) the merger of Old NiSource into New NiSource, which transactions were consummated on November 1, 2000. "MOODY'S" means Moody's Investors Service, Inc. "MULTIEMPLOYER PLAN" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "MULTIPLE EMPLOYER PLAN" means a single employer plan, as defined in Section 4001(a)(15) of ERISA, which (a) is maintained for employees of the Borrower or an ERISA Affiliate and at least one Person other than the Borrower and its ERISA Affiliates, or (b) was so maintained and in respect of which the Borrower or an ERISA Affiliate could have liability under Section 4064 or 4069 of ERISA in the event that such plan has been or were to be terminated. "NIPSCO" means Northern Indiana Public Service Company, an Indiana corporation. "NON-RECOURSE DEBT" means Indebtedness of the Guarantor or any of its Subsidiaries which is incurred in connection with the acquisition, construction, sale, transfer or other disposition of specific assets, to the extent recourse, whether contractual or as a matter of law, for non-payment of such Indebtedness is limited (a) to such assets or (b) if such assets are (or are to be) held by a Subsidiary formed solely for such purpose, to such Subsidiary or the Capital Stock of such Subsidiary. "OBLIGATIONS" means all amounts, direct or indirect, contingent or absolute, of every type or description, and at any time existing and whenever incurred (including, without limitation, after the commencement of any bankruptcy proceeding), owing to the Administrative Agent or any Lender pursuant to the terms of this Agreement or any other Credit Document. "OLD NISOURCE" means NiSource Inc., an Indiana corporation and predecessor by merger to NiSource. 13 "OTHER CREDIT AGREEMENT" means the 3-Year Revolving Credit Agreement, dated as of the date hereof, among the Borrower, the Guarantor, the lead arrangers, arrangers, senior managing agents, managers, co-documentation agents and other lenders from time to time parties thereto, Credit Suisse First Boston, as syndication agent and Barclays, as issuer of any letters of credit provided for thereunder and as administrative agent thereunder. "OTHER TAXES" means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement. "OUTSTANDING LOANS" means, as to any Lender at any time, the aggregate principal amount of all Loans made or maintained by such Lender then outstanding; provided, however, that for purposes of any calculation of the Outstanding Loans, any then outstanding Swingline Loans shall be deemed allocated among the Lenders (other than the Swingline Lenders in their respective capacities as such) in accordance with their respective Applicable Percentages. "PARTICIPANT" has the meaning set forth in Section 11.04. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions. "PERSON" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "PLAN" means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "PNC" means PNC Bank, National Association. "PRICING GRID" means the pricing grid attached hereto as Annex A. "PRIME RATE" means the rate of interest per annum publicly announced from time to time by Barclays as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. "PROJECT" means an energy or power generation, transmission or distribution facility (including, without limitation, a thermal energy generation, transmission or distribution facility and an electric power generation, transmission or distribution facility (including, without limitation, a cogeneration facility)), a gas production, transportation or distribution facility, or a minerals extraction, processing or distribution facility, together with (a) all related electric power transmission, fuel supply and fuel 14 transportation facilities and power supply, thermal energy supply, gas supply, minerals supply and fuel contracts, (b) other facilities, services or goods that are ancillary, incidental, necessary or reasonably related to the marketing, development, construction, management, servicing, ownership or operation of such facility, (c) contractual arrangements with customers, suppliers and contractors in respect of such facility, and (d) any infrastructure facility related to such facility, including, without limitation, for the treatment or management of waste water or the treatment or remediation of waste, pollution or potential pollutants. "PROJECT FINANCING" means Indebtedness incurred by a Project Financing Subsidiary to finance (a) the development and operation of the Project such Project Financing Subsidiary was formed to develop or (b) activities incidental thereto; provided that such Indebtedness does not include recourse to the Guarantor or any of its other Subsidiaries other than (x) recourse to the Capital Stock in any such Project Financing Subsidiary, and (y) recourse pursuant to a Contingent Guaranty. "PROJECT FINANCING SUBSIDIARY" means any Subsidiary (a) that (i) is not a Material Subsidiary, and (ii) whose principal purpose is to develop a Project and activities incidental thereto (including, without limitation, the financing and operation of such Project), or to become a partner, member or other equity participant in a partnership, limited liability company or other entity having such a principal purpose, and (b) substantially all the assets of which are limited to the assets relating to the Project being developed or Capital Stock in such partnership, limited liability company or other entity (and substantially all of the assets of any such partnership, limited liability company or other entity are limited to the assets relating to such Project); provided that such Subsidiary incurs no Indebtedness other than in respect of a Project Financing. "REGISTER" has the meaning set forth in Section 11.04. "RELATED PARTIES" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "REQUEST FOR ISSUANCE" has the meaning set forth in Section 2.04. "REQUIRED LENDERS" means Lenders having at least 51% in aggregate amount of the Commitments, or if the Commitments shall have been terminated, of the Total Outstanding Principal. "RESPONSIBLE OFFICER" of a Credit Party means any of (a) the President, the chief financial officer, the chief accounting officer and the Treasurer of such Credit Party and (b) any other officer of such Credit Party whose responsibilities include monitoring compliance with this Agreement. "REVOLVING LOAN" means a Loan made pursuant to Section 2.02. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw Hill Companies, Inc. 15 "SPFV" has the meaning set forth in Section 11.04. "SUBSIDIARY" means, with respect to any Person, any corporation or other entity of which at least a majority of the outstanding shares of stock or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other managers of such corporation or other entity (irrespective of whether or not at the time stock or other equity interests of any other class or classes of such corporation or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more of the Subsidiaries of such Person. "SUBSTANTIAL SUBSIDIARIES" has the meaning set forth in Section 8.01. "SWINGLINE COMMITMENT" means, for any Swingline Lender, the amount set forth as such Swingline Lender's Swingline Commitment on Schedule 2.01 hereto. "SWINGLINE FACILITY AMOUNT" has the meaning specified in Section 2.01(b). "SWINGLINE LOAN" means a loan made by a Swingline Lender pursuant to the terms of this Agreement. "SWINGLINE LENDER" means Barclays, PNC and Bank One. "SWINGLINE RATE" means: (a) in the case of a Swingline Loan in an original principal amount of $100,000 or more, a fixed rate of interest equal to the sum of (i) the relevant Swingline Lender's cost of funds as determined by such Swingline Lender in its sole discretion with reference to its funding sources on the date such Swingline Loan is made for a term equal to the period such Swingline Loan is to be outstanding plus (ii) the Applicable Rate then in effect for Eurodollar Revolving Loans or (b) in the case of a Swingline Loan in an original principal amount of less than $100,000, a floating rate of interest equal to the sum of (i) the Alternate Base Rate plus (ii) the Applicable Rate then in effect for Alternate Base Rate Loans, in each case, as notified to the Borrower at the time such Swingline Loan is made. Any Swingline Rate determined in accordance with clause (a), above, shall be adjusted in each case from time to time to give effect to all applicable reserve requirements, including, without limitation, special, emergency or supplemental reserves. "SWINGLINE REQUEST" means a request by the Borrower for a Swingline Lender to make a Swingline Loan, which shall contain the information in respect of such requested Swingline Loan specified in Section 2.03(b) and shall be delivered to such Swingline Lender and the Administrative Agent in writing, or by telephone, immediately confirmed in writing. "SYNDICATION AGENT" means Credit Suisse First Boston, in its capacity as syndication agent for the Lenders hereunder. 16 "TAXES" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority, including any interest, penalties and additions to tax imposed thereon or in connection therewith. "TERMINATION DATE" means the earliest of (a) March 22, 2002 and (b) the date upon which the Commitments are terminated pursuant to Section 8.1 or otherwise. "TOTAL OUTSTANDING PRINCIPAL" means the aggregate amount of the Outstanding Loans of all Lenders plus the aggregate LC Outstandings plus the aggregate Unreimbursed LC Disbursements. "TERMINATING FACILITIES" means financing facilities described on Schedule 3.01 hereto. "TRANSACTIONS" means the execution, delivery and performance by the Borrower of this Agreement and the Borrowing of Loans and issuances of Letters of Credit hereunder. "TYPE", when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the LIBO Rate or the Alternate Base Rate. "UNREIMBURSED LC DISBURSEMENT" means the unpaid obligation (or, if the context so requires, the amount of such obligation) of the Borrower to reimburse the LC Bank for a payment made by the LC Bank under a Letter of Credit, but shall not include any portion of such obligation that has been repaid with the proceeds of, or converted to, Loans hereunder. "UTILITY SUBSIDIARY" means a Subsidiary of the Guarantor that is subject to regulation by a Governmental Authority (federal, state or otherwise) having authority to regulate utilities. "UTILIZATION FEE" has the meaning set forth in Section 2.12. "WHOLLY-OWNED SUBSIDIARY" shall mean, with respect to any Person, any corporation or other entity of which all of the outstanding shares of stock or other ownership interests in which, other than directors' qualifying shares (or the equivalent thereof), are at the time directly or indirectly owned or controlled by such Person or one or more of the Subsidiaries of such Person. "WITHDRAWAL LIABILITY" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Sections 4201, 4203 and 4205 of ERISA. SECTION 1.02. CLASSIFICATION OF LOANS AND BORROWINGS. For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a "REVOLVING LOAN") or by Type (e.g., a "EURODOLLAR LOAN") or by Class and Type (e.g., a "EURODOLLAR REVOLVING LOAN"). Borrowings also may be classified and referred to by Class (e.g., a "REVOLVING BORROWING") or by Type (e.g., a "EURODOLLAR BORROWING") or by Class and Type (e.g., a "EURODOLLAR REVOLVING BORROWING"). 17 SECTION 1.03. TERMS GENERALLY. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "or" shall not be exclusive. The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. The terms "knowledge of", "awareness of" and "receipt of notice of" in relation to a Credit Party, and other similar expressions, mean knowledge of, awareness of, or receipt of notice by, a Responsible Officer of such Credit Party. SECTION 1.04. ACCOUNTING TERMS; GAAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided that, if the Borrower notifies the Administrative Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the Effective Date in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. ARTICLE II THE CREDITS SECTION 2.01. COMMITMENTS. (a) Subject to the terms and conditions set forth herein, each Lender agrees to make Revolving Loans to the Borrower from time to time during the Availability Period in an aggregate principal amount that will not result in (i) such Lender's Exposure exceeding such Lender's Commitment or (ii) the sum of the Exposures of all of the Lenders exceeding the Aggregate Commitments. 18 (b) Subject to the terms and conditions set forth herein, each Swingline Lender agrees to make Swingline Loans to the Borrower from time to time during the Availability Period in an aggregate principal amount that will not result in (i) the sum of the aggregate principal amount of all Swingline Loans made by such Swingline Lender then outstanding under this Agreement and the aggregate principal amount of all "Swingline Loans" made by such Swingline Lender then outstanding under (and as defined in) the Other Credit Agreement exceeding such Swingline Lender's Swingline Commitment, (ii) the sum of the aggregate principal amount of all Swingline Loans then outstanding under this Agreement and aggregate principal amount of all "Swingline Loans" then outstanding under (and as defined in) the Other Credit Agreement exceeding $150,000,000 (the "SWINGLINE FACILITY AMOUNT"), (iii) any Lender's Exposure exceeding such Lender's Commitment or (iii) the sum of the Exposures of all of the Lenders exceeding the Aggregate Commitments. (c) Subject to the terms and conditions set forth herein, the LC Bank agrees to issue Letters of Credit and each Lender agrees to participate in such Letters of Credit, in each case as set forth herein, from time to time during the Availability Period in an aggregate stated amount that will not result in (i) the sum of the aggregate LC Outstandings under this Agreement and the aggregate "LC Outstandings" under (and as defined in) the Other Credit Agreement exceeding $150,000,000, (ii) any Lender's Exposure exceeding such Lender's Commitment or (iii) the sum of the Exposures of all of the Lenders exceeding the Aggregate Commitments. (d) Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving Loans and Swingline Loans and request the issuance of Letters of Credit. SECTION 2.02. REVOLVING LOANS AND REVOLVING BORROWINGS; REQUESTS FOR BORROWINGS. (a) Each Revolving Loan shall be made as part of a Borrowing consisting of Revolving Loans made by the Lenders ratably in accordance with their respective Commitments. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments of the Lenders are several and no Lender shall be responsible for any other Lender's failure to make Loans as required. (b) Subject to Section 2.14, each Revolving Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request in accordance herewith. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. (c) At the commencement of each Interest Period for any Eurodollar Revolving Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $5,000,000 and not less than $25,000,000. At the time that each ABR Revolving Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $100,000; provided that an ABR Revolving Borrowing may be to an aggregate amount that is equal to the entire unused balance of the Aggregate Commitments. Borrowings of more than one Type and 19 Class may be outstanding at the same time; provided that there shall not at any time be more than a total of ten Eurodollar Revolving Borrowings outstanding under this Agreement and the Other Credit Agreement. (d) To request a Revolving Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Borrowing or (b) in the case of an ABR Borrowing, not later than 11:00 a.m., New York City time, on the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information: (i) the aggregate amount of the requested Borrowing; (ii) the date of such Borrowing, which shall be a Business Day; (iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and (iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period". If no election as to the Type of Borrowing is specified, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Revolving Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing. (e) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Eurodollar Borrowing if the Interest Period requested with respect thereto would end after the Termination Date. SECTION 2.03. SWINGLINE LOANS. (a) Each Swingline Loan to be made by a Swingline Lender shall be made on notice given by the Borrower to such Swingline Lender and the Administrative Agent via fax transmission in accordance with Section 11.01 hereof not later than 11:00 A.M. (New York City time) on the borrowing date of the proposed Swingline Loan (which shall be a Business Day) or such later time as such Swingline Lender and the Administrative Agent may agree. Each such notice (a "SWINGLINE REQUEST") shall specify the requested borrowing date of such Swingline Loan, the amount thereof and the maturity date thereof (which shall be a Business Day not later than five days from the date such Swingline Loan is to be made). Upon receipt of any Swingline Request, the relevant Swingline Lender shall give to the Administrative Agent prompt notice thereof by fax transmission, and shall notify the Borrower and the Administrative Agent of the 20 Swingline Rate to be applicable thereto. Such Swingline Lender shall, before 2:00 P.M. (New York City time) on the borrowing date of such Swingline Loan, make such Swingline Loan available to the Administrative Agent, in same day funds, and, after the Administrative Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to the Borrower to an account within the United States of America specified in the relevant Swingline Request or, if not so specified, in accordance with Section 2.05. (b) No Swingline Loan shall be used for the purpose of funding the repayment or prepayment of principal of any other Swingline Loan. Each Swingline Loan shall bear interest at the Swingline Rate and shall mature on the first to occur of: (i) the date specified in the relevant Swingline Request, (ii) the date that is five days following the date such Swingline Loan was made and (iii) the Termination Date. At no time shall more than a total of five Swingline Loans be outstanding under this Agreement and the Other Credit Agreement. (c) At any time upon written demand by a Swingline Lender, with a copy of such demand to the Administrative Agent, and automatically upon the occurrence of an Event of Default, each other Lender shall purchase from such Swingline Lender, and such Swingline Lender shall sell and assign to each such other Lender, such other Lender's pro rata share (based on its Commitment Percentage) of the Swingline Loans of such Swingline Lender outstanding as of the date of such demand or occurrence, as the case may be, by making available to the Administrative Agent for the account of such Swingline Lender an amount in same day funds equal to the portion of the principal amount of each outstanding Swingline Loan to be purchased by such Lender; provided, however, that no such Lender shall be required to purchase its pro rata share of any Swingline Loans from any Swingline Lender if the aggregate principal amount of Swingline Loans to be purchased by all Lenders is less than $100,000. The Borrower hereby agrees to each such sale and assignment. Each Lender agrees to purchase its pro rata share (based on its Commitment Percentage) of each outstanding Swingline Loan on (i) the Business Day on which demand therefor is made by the relevant Swingline Lender, provided, that, notice of such demand is received by such Lender not later than 11:00 A.M. (New York City time) on such Business Day, (ii) the first Business Day next succeeding such demand, if notice of such demand is received after such time or (iii) the first Business Day next succeeding the occurrence of such Event of Default. Upon any such assignment by a Swingline Lender to any other Lender of a portion of any Swingline Loan, such Swingline Lender represents and warrants to such other Lender that such Swingline Lender is the legal and beneficial owner of the interest being assigned by it, but makes no other representation or warranty and assumes no responsibility with respect to such Swingline Loan, the Financing Documents or the Borrower. If and to the extent that any Lender shall not have so made the amount of such Swing Line Loan or portion thereof available to the Administrative Agent for the account of the relevant Swingline Lender, such Lender agrees to pay to such Swingline Lender forthwith on demand such amount together with interest thereon for each day from the date of demand by such Swingline Lender until the date such amount is paid to such Swingline Lender, at the Federal Funds Effective Rate. If such Lender shall pay such amount to such Swingline Lender on any Business Day, such amount so paid in respect of principal shall constitute an ABR Revolving Loan made by such Lender on such Business Day for all purposes of this Agreement, and the outstanding principal amount of the relevant Swingline Loan(s) shall be reduced accordingly by such amount on such Business Day. The obligation of each other Lender to purchase its pro rata share of any Swingline 21 Lender's Swingline Loans in accordance with this subsection shall be absolute and unconditional, notwithstanding the occurrence of any circumstances, including without limitation any Event of Default or any setoff, deduction or other defense asserted by the Borrower or any other Person, except that any Lender shall have the right to bring suit against a Swingline Lender, and such Swingline Lender shall be liable to such Lender, to the extent of any direct, as opposed to consequential, damages suffered by such Lender which such Lender proves were caused by such Swingline Lender's wilful misconduct or gross negligence. SECTION 2.04. LETTERS OF CREDIT (a) LC Bank. Subject to the terms and conditions hereof, the Borrower may from time to time request Barclays, as LC Bank, to issue one or more Letters of Credit hereunder. Any such request by the Borrower shall be notified to the Administrative Agent at least five Business Days prior to the date upon which the Borrower proposes that the LC Bank issue such Letter of Credit. At no time shall (i) the aggregate LC Outstandings exceed the sum of the Commitments or (ii) the sum of the aggregate LC Outstandings under this Agreement and the aggregate "LC Outstandings " under (and as defined in) the Other Credit Agreement exceed $150,000,000. (b) Letters of Credit. Each Letter of Credit shall be issued (or the stated maturity thereof extended or terms thereof modified or amended) on not less than five Business Days' prior written notice thereof to the Administrative Agent (which shall promptly distribute copies thereof to the Lenders) and the LC Bank. Each such notice (a "REQUEST FOR ISSUANCE") shall specify (i) the date (which shall be a Business Day) of issuance of such Letter of Credit (or the date of effectiveness of such extension, modification or amendment) and the stated expiry date thereof (which shall be not later than the Termination Date), (ii) the proposed stated amount of such Letter of Credit and (iii) such other information as shall demonstrate compliance of such Letter of Credit with the requirements specified therefor in this Agreement. Each Request for Issuance shall be irrevocable unless modified or rescinded by the Borrower not less than two days prior to the proposed date of issuance (or effectiveness) specified therein. If the LC Bank shall have approved the form of such Letter of Credit (or such extension, modification or amendment thereof), the LC Bank shall not later than 11:00 A.M. (New York City time) on the proposed date specified in such Request for Issuance, and upon fulfillment of the applicable conditions precedent and the other requirements set forth herein and as otherwise agreed to between the LC Bank and the Borrower, issue (or extend, amend or modify) such Letter of Credit and provide notice and a copy thereof to the Administrative Agent. The Administrative Agent shall furnish (x) to each Lender, a copy of such notice and (y) to each Lender that may so request, a copy of such Letter of Credit. (c) Reimbursement on Demand. Subject to the provisions of Section 2.04(d) hereof, the Borrower hereby agrees to pay (whether with the proceeds of Loans made pursuant to this Agreement or otherwise) to the LC Bank on demand (i) on and after each date on which the LC Bank shall pay any amount under any Letter of Credit a sum equal to such amount so paid (which sum shall constitute a demand loan from the LC Bank to the Borrower from the date of such payment by the LC Bank until so paid by the Borrower), plus (ii) interest on any amount remaining unpaid by the Borrower to the LC Bank under clause (i), above, from the date such 22 amount becomes payable on demand until payment in full, at a rate per annum which is equal to 2% plus the then applicable Alternate Base Rate until paid in full. (d) Loans for Unreimbursed LC Disbursements. If the LC Bank shall make any payment under any Letter of Credit and if the conditions precedent set forth in Section 3.02 of this Agreement have been satisfied as of the date of such honor, then, each Lender's payment made to the LC Bank pursuant to paragraph (e) of this Section 2.04 in respect of such Unreimbursed LC Disbursement shall be deemed to constitute an ABR Loan made for the account of the Borrower by such Lender. Each such ABR Loan shall have an Interest Period ending on (i) the first March 31, June 30, September 30 or December 31 to occur following the date such ABR Loan is made, or (ii) if earlier, the Termination Date. (e) Participation; Reimbursement of LC Bank. (i) Upon the issuance of any Letter of Credit by the LC Bank, the LC Bank hereby sells and transfers to each Lender, and each Lender hereby acquires from the LC Bank, an undivided interest and participation to the extent of such Lender's Applicable Percentage in and to such Letter of Credit, including the obligations of the LC Bank under and in respect thereof and the Borrower's reimbursement and other obligations in respect thereof, whether now existing or hereafter arising. (ii) If the LC Bank shall not have been reimbursed in full for any payment made by the LC Bank under any Letter of Credit on the date of such payment, the LC Bank shall promptly notify the Administrative Agent and the Administrative Agent shall promptly notify each Lender of such non-reimbursement and the amount thereof. Upon receipt of such notice from the Administrative Agent, each Lender shall pay to the Administrative Agent for the account of the LC Bank an amount equal to such Lender's Applicable Percentage of such Unreimbursed LC Disbursement, plus interest on such amount at a rate per annum equal to the Federal Funds Rate from the date of such payment by the LC Bank to the date of payment to the LC Bank by such Lender. All such payments by each Lender shall be made in United States dollars and in same day funds not later than 3:00 P.M. (New York City time) on the later to occur of (A) the Business Day immediately following the date of such payment by the LC Bank and (B) the Business Day on which such Lender shall have received notice of such non-reimbursement; provided, however, that if such notice is received by such Lender later than 11:00 A.M. (New York City time) on such Business Day, such payment shall be payable on the next Business Day. Each Lender agrees that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. If a Lender shall have paid to the LC Bank its ratable portion of any Unreimbursed LC Disbursement, together with all interest thereon required by the second sentence of this subparagraph (ii), such Lender shall be entitled to receive its ratable share of all interest paid by the Borrower in respect of such Unreimbursed LC Disbursement. If such Lender shall have made such payment to the LC Bank, but without all such interest thereon required by the second sentence of this subparagraph (ii), such Lender shall be entitled to receive its ratable share of the interest paid by the Borrower in respect of such Unreimbursed LC Disbursement only from the date it shall have paid all interest required by the second sentence of this subparagraph (ii). 23 (iii) The failure of any Lender to make any payment to the LC Bank in accordance with subparagraph (ii) above, shall not relieve any other Lender of its obligation to make payment, but neither the LC Bank nor any Lender shall be responsible for the failure of any other Lender to make such payment. If any Lender shall fail to make any payment to the LC Bank in accordance with subparagraph (ii) above, then such Lender shall pay to the LC Bank forthwith on demand such corresponding amount together with interest thereon, for each day until the date such amount is repaid to the LC Bank at the Federal Funds Rate. Nothing herein shall in any way limit, waive or otherwise reduce any claims that any party hereto may have against any non-performing Lender. (iv) If any Lender shall fail to make any payment to the LC Bank in accordance with subparagraph (ii), above, then, in addition to other rights and remedies which the LC Bank may have, the Administrative Agent is hereby authorized, at the request of the LC Bank, to withhold and to apply to the payment of such amounts owing by such Lender to the LC Bank and any related interest, that portion of any payment received by the Administrative Agent that would otherwise be payable to such Lender. In furtherance of the foregoing, if any Lender shall fail to make any payment to the LC Bank in accordance with subparagraph (ii), above, and such failure shall continue for five Business Days following written notice of such failure from the LC Bank to such Lender, the LC Bank may acquire, or transfer to a third party in exchange for the sum or sums due from such Lender, such Lender's interest in the related Unreimbursed LC Disbursement and all other rights of such Lender hereunder in respect thereof, without, however, relieving such Lender from any liability for damages, costs and expenses suffered by the LC Bank as a result of such failure, and prior to such transfer, the LC Bank shall be deemed, for purposes of Section 2.18 and Article VIII hereof, to be a Lender hereunder owed a Loan in an amount equal to the outstanding principal amount due and payable by such Lender to the Administrative Agent for the account of such LC Bank pursuant to subparagraph (ii), above. The purchaser of any such interest shall be deemed to have acquired an interest senior to the interest of such Lender and shall be entitled to receive all subsequent payments which the LC Bank or the Administrative Agent would otherwise have made hereunder to such Lender in respect of such interest. (f) Obligations Absolute. The payment obligations of each Lender under Section 2.04(e) and of the Borrower under Section 2.04(c) of this Agreement in respect of any payment under any Letter of Credit and any Loan made under Section 2.04(d) shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances: (i) any lack of validity or enforceability of any Credit Document or any other agreement or instrument relating thereto or to such Letter of Credit; (ii) any amendment or waiver of, or any consent to departure from, all or any of the Credit Documents; (iii) the existence of any claim, set-off, defense or other right which the Borrower may have at any time against any beneficiary, or any transferee, of such Letter 24 of Credit (or any Persons for whom any such beneficiary or any such transferee may be acting), the LC Bank, or any other Person, whether in connection with this Agreement, the transactions contemplated herein or by such Letter of Credit, or any unrelated transaction; (iv) any statement or any other document presented under such Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (v) payment in good faith by the LC Bank under the Letter of Credit issued by the LC Bank against presentation of a draft or certificate which does not comply with the terms of such Letter of Credit; or (vi) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. (g) Liability of LC Bank and the Lenders. The Borrower assumes all risks of the acts and omissions of any beneficiary or transferee of any Letter of Credit. Neither the LC Bank, the Lenders nor any of their respective officers, directors, employees, agents or Affiliates shall be liable or responsible for (i) the use that may be made of such Letter of Credit or any acts or omissions of any beneficiary or transferee thereof in connection therewith; (ii) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged; (iii) payment by the LC Bank against presentation of documents that do not comply with the terms of such Letter of Credit, including failure of any documents to bear any reference or adequate reference to such Letter of Credit; or (iv) any other circumstances whatsoever in making or failing to make payment under such Letter of Credit, except that the Borrower or any Lender shall have the right to bring suit against the LC Bank, and the LC Bank shall be liable to the Borrower and any Lender, to the extent of any direct, as opposed to consequential, damages suffered by the Borrower or such Lender which the Borrower or such Lender proves were caused by the LC Bank's wilful misconduct or gross negligence, including the LC Bank's wilful or grossly negligent failure to make timely payment under such Letter of Credit following the presentation to it by the beneficiary thereof of a draft and accompanying certificate(s) which strictly comply with the terms and conditions of such Letter of Credit. In furtherance and not in limitation of the foregoing, the LC Bank may accept sight drafts and accompanying certificates presented under the Letter of Credit issued by the LC Bank that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. Notwithstanding the foregoing, no Lender shall be obligated to indemnify the Borrower for damages caused by the LC Bank's wilful misconduct or gross negligence, and the obligation of the Borrower to reimburse the Lenders hereunder shall be absolute and unconditional, notwithstanding the gross negligence or wilful misconduct of the LC Bank. SECTION 2.05. FUNDING OF BORROWINGS. (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 3:00 p.m., New York City time, to the account of the Administrative Agent most recently designated by it for such purpose by 25 notice to the Lenders. The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account established and maintained by the Borrower at the Administrative Agent's office in New York City. (b) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed time of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the Federal Funds Effective Rate or (ii) in the case of the Borrower, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing. SECTION 2.06. INTEREST ELECTIONS. (a) Each Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. (b) To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.02 if the Borrower were requesting a Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower. (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02: (i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing); 26 (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and (iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period". If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. (d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing. (e) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto. SECTION 2.07. MANDATORY TERMINATION OR REDUCTION OF COMMITMENTS. (a) Unless previously terminated, the Commitments shall terminate on the Termination Date. SECTION 2.08. MANDATORY PREPAYMENTS. (a) If at any time the Total Outstanding Principal exceeds the Aggregate Commitments then in effect for any reason whatsoever (including, without limitation, as a result of any reduction in the Aggregate Commitments pursuant to Section 2.09), the Borrower shall prepay Loans in such aggregate amount (together with accrued interest thereon to the extent required by Section 2.13) as shall be necessary so that, after giving effect to such prepayment, the Total Outstanding Principal does not exceed the Aggregate Commitments. (b) Each prepayment of Loans pursuant to this Section 2.08 shall be accompanied by the Borrower's payment of any amounts payable under Section 2.16 in connection with such prepayment. Prepayments of Revolving Loans shall be applied ratably to the Loans so prepaid. 27 SECTION 2.09. OPTIONAL REDUCTION OF COMMITMENTS. (a) The Borrower may at any time terminate, or from time to time reduce, the Commitments; provided that (i) each reduction of the Commitments shall be in an amount that is an integral multiple of $5,000,000 and not less than $25,000,000 and (ii) the Borrower shall not terminate or reduce the Commitments if, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.11, the Total Outstanding Principal would exceed the Aggregate Commitments thereafter in effect. (b) The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Commitments under Section 2.09(a) at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable; provided that a notice of termination of the Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Commitments shall be permanent. (c) Each reduction of the Commitments pursuant to this Section 2.09 shall be made ratably among the Lenders in accordance with their respective Commitments immediately preceding such reduction. SECTION 2.10. REPAYMENT OF LOANS; EVIDENCE OF DEBT. (a) The Borrower hereby unconditionally promises to pay to the Administrative Agent (i) for the account of each Lender the then unpaid principal amount of each Revolving Loan on the Termination Date and (ii) for the account of the relevant Swingline Lender the then unpaid principal amount of each Swingline Loan on the maturity date therefor as determined pursuant to Section 2.03. (b) Each Lender (including each Swingline Lender) shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan (including each Swingline Loan) made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders (including the Swingline Lenders) and each Lender's share thereof. (d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Lender or the Administrative Agent to maintain 28 such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement. (e) Any Lender (including any Swingline Lender) may request that Loans made by it be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Administrative Agent. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 11.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns). SECTION 2.11. OPTIONAL PREPAYMENT OF LOANS. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing (including any Swingline Borrowing) in whole or in part, subject to prior notice in accordance with paragraph (b) of this Section. (b) The Borrower shall notify the Administrative Agent by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment, (ii) in the case of prepayment of an ABR Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of prepayment or (iii) in the case of prepayment of a Swingline Borrowing, not later than 11:00 a.m., New York City time, on the date of prepayment . Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid; provided that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.09, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.09. Promptly following receipt of any such notice relating to a Borrowing, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Revolving Borrowing shall be in an amount that would be permitted in the case of an advance of a Revolving Borrowing of the same Type as provided in Section 2.02, and each partial prepayment of a Swingline Borrowing shall be in an amount not less than $100,000 or any integral multiple thereof, it being understood that the foregoing minimums shall not apply to the prepayment in whole of the outstanding Revolving Loans of all Lenders or to the prepayment in whole of the outstanding Swingline Loans of any Swingline Lender. Each prepayment of a Revolving Borrowing shall be applied ratably to the Loans included in the prepaid Revolving Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.13 and by any amounts payable under Section 2.16 in connection with such prepayment. SECTION 2.12. FEES. (a) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a facility fee (each a "FACILITY FEE"), which shall accrue at the Applicable Rate on the daily amount of the Commitment of such Lender (whether used or unused) during the period from and including the Effective Date to but excluding the date on which such Commitment 29 terminates; provided that, if such Lender continues to have any Outstanding Loans after its Commitment terminates, then such Facility Fee shall continue to accrue on the daily amount of such Lender's Outstanding Loans from and including the date on which its Commitment terminates to but excluding the date on which such Lender ceases to have any Outstanding Loans. Accrued Facility Fees shall be payable in arrears on the last day of March, June, September and December of each year and on the date on which the Commitments terminate, commencing on the first such date to occur after the Effective Date; provided that any Facility Fees accruing after the date on which the Commitments terminate shall be payable on demand. All Facility Fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (b) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a letter of credit risk participation fee (each a "LC RISK PARTICIPATION FEE"), which shall accrue at the Applicable Rate on the average daily amount of the LC Outstandings during the period from and including the Effective Date to but excluding the Termination Date or such later date as on which there shall cease to be any LC Outstandings. Accrued LC Risk Participation Fees shall be payable in arrears on the last day of March, June, September and December of each year and on the date on which the Commitments terminate, commencing on the first such date to occur after the Effective Date; provided that any LC Risk Participation Fees accruing after the date on which the Commitments terminate shall be payable on demand. All LC Risk Participation Fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (c) The Borrower agrees to pay to the Administrative Agent, for its own account and for the account of the other Persons entitled thereto, the fees provided for in that certain fee letter dated March 1, 2001, executed and delivered with respect to the credit facility provided for herein, in each case, in the amounts and at the times set forth therein and in immediately available funds. (d) If at any time (i) the sum of (A) the Total Outstanding Principal plus (B) the "Total Outstanding Principal" under (and as defined in) the Other Credit Agreement exceeds 33% of (ii) the sum of (X) the Aggregate Commitments plus (Y) the "Aggregate Commitments" under (and as defined in) the Other Credit Agreement, the Borrower shall pay to the Administrative Agent, for the account of the Lenders ratably in proportion to their respective Applicable Percentages, a utilization fee (the "UTILIZATION FEE") calculated for each day with respect to the Total Outstanding Principal on such day at the rate for such day determined in accordance with the Pricing Grid. The accrued Utilization Fee shall be payable in arrears on the last day of March, June, September and December of each year and on the date on which the Commitments terminate, commencing on the first such date to occur after the Effective Date; provided that any Utilization Fee accruing after the date on which the Commitments terminate shall be payable on demand. The Utilization Fee shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (e) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent (for distribution, in the case of Facility Fees, LC 30 Risk Participation Fees and any Utilization Fee, to the Lenders). Fees due and paid shall not be refundable under any circumstances. SECTION 2.13. INTEREST. (a) The Loans comprising each ABR Borrowing shall bear interest at a rate per annum equal to the Alternate Base Rate plus the Applicable Rate. (b) The Loans comprising each Eurodollar Borrowing shall bear interest at a rate per annum equal to the LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate. (c) Each Swingline Loan shall bear interest at a rate per annum equal to the Swingline Rate, as determined for such Swingline Loan and notified by the relevant Swingline Lender to the Borrower in accordance with Section 2.03(a). (d) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided above or (ii) in the case of any other amount, 2% plus the rate applicable to ABR Loans as provided above. (e) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan; provided that (i) interest accrued pursuant to paragraph (d) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan, accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment, (iii) in the event of any conversion of any Eurodollar Revolving Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion and (iv) all accrued interest shall be payable upon termination of the Commitments. (f) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate or LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. SECTION 2.14. ALTERNATE RATE OF INTEREST. If prior to the commencement of any Interest Period for a Eurodollar Borrowing: (a) the Administrative Agent reasonably determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the LIBO Rate for such Interest Period; or 31 (b) the Administrative Agent is advised by the Required Lenders that the LIBO Rate for such Interest Period will not adequately and fairly reflect the cost to such Lenders of making or maintaining their Loans included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Revolving Borrowing to, or continuation of any Revolving Borrowing as, a Eurodollar Borrowing shall be ineffective and (ii) if any Borrowing Request requests a Eurodollar Revolving Borrowing, such Borrowing shall be made as an ABR Borrowing. SECTION 2.15. INCREASED COSTS. If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or the LC Bank (except any such reserve requirement described in paragraph (e) of this Section); or (ii) impose on any Lender or the LC Bank or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender or participation therein or Unreimbursed LC Disbursements or Letters of Credit and participations therein; and the result of any of the foregoing shall be to increase the cost to such Lender or the LC Bank of making or maintaining any Eurodollar Loan or Unreimbursed LC Disbursement or issuing or maintaining Letters of Credit and participation interests therein (or of maintaining its obligation to make any such Loan or issue or participate in such Letter of Credit) or to reduce the amount of any sum received or receivable by such Lender or the LC Bank hereunder (whether of principal, interest or otherwise), then the Borrower will pay to such Lender or the LC Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the LC Bank for such additional costs incurred or reduction suffered. (b) If any Lender or the LC Bank determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's or the LC Bank's capital or on the capital of its holding company, if any, as a consequence of this Agreement to a level below that which such Lender or the LC Bank or its holding company could have achieved but for such Change in Law (taking into consideration its policies and the policies of its holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender or the LC Bank, as the case may be, such additional amount or amounts as will compensate it or its holding company for any such reduction suffered. (c) A certificate of a Lender or the LC Bank, as the case may be, setting forth the amount or amounts necessary to compensate it or its holding company as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay the amount shown as due on any such certificate within 10 days after receipt thereof. 32 (d) Failure or delay on the part of any Lender or the LC Bank to demand compensation pursuant to this Section shall not constitute a waiver of its right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender pursuant to this Section for any increased costs or reductions incurred more than ninety days prior to the date that such Lender or the LC Bank notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of its intention to claim compensation therefor; provided, further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the ninety day period referred to above shall be extended to include the period of retroactive effect thereof. (e) The Borrower shall pay (without duplication as to amounts paid under this Section 2.15) to each Lender, so long as such Lender shall be required under regulations of the Board to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities, additional interest on the unpaid principal amount of each Eurodollar Loan of such Lender, from the date of such Loan until such principal amount is paid in full, at an interest rate per annum equal at all times to the remainder obtained by subtracting (i) the LIBO Rate for the Interest Period for such Loan from (ii) the rate obtained by dividing such LIBO Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such Lender for such Interest Period, payable on each date on which interest is payable on such Loan. Such additional interest determined by such Lender and notified to the Borrower and the Administrative Agent, accompanied by the calculation of the amount thereof, shall be conclusive and binding for all purposes absent manifest error. SECTION 2.16. BREAK FUNDING PAYMENTS. In the event of (a) the payment of any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Revolving Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice is permitted to be revocable under Section 2.11(b) and is revoked in accordance therewith), or (d) the assignment of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 2.19, then, in any such event, the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, the loss to any Lender attributable to any such event shall be deemed to include an amount reasonably determined by such Lender to be equal to the excess, if any, of (x) the amount of interest that such Lender would pay for a deposit equal to the principal amount of such Loan for the period from the date of such payment, conversion, failure or assignment to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, convert or continue, the duration of the Interest Period that would have resulted from such borrowing, conversion or continuation) if the interest rate payable on such deposit were equal to the LIBO Rate for such Interest Period, over (y) the amount of interest that such Lender would earn on such principal amount for such period if such Lender were to invest such principal amount for such period at the interest rate that would be bid by such Lender (or an affiliate of such Lender) for dollar deposit from other banks in the eurodollar market at the commencement of such period. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be 33 conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. SECTION 2.17. TAXES. (a) Any and all payments by or on account of any obligation of the Borrower hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if any Credit Party shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent, LC Bank or Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Credit Party shall make such deductions and (iii) such Credit Party shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrower shall indemnify the Administrative Agent, the LC Bank and each Lender, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (and for any Taxes imposed or asserted on or attributable to amounts payable under this Section) paid by the Administrative Agent, the LC Bank or such Lender, as the case may be, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender or the LC Bank, or by the Administrative Agent on its own behalf or on behalf of a Lender or the LC Bank, shall be conclusive absent manifest error. (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by a Credit Party to a Governmental Authority, such Credit Party shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the laws of the jurisdiction in which the Borrower or the Guarantor is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with an additional original or a photocopy, as required under applicable rules and procedures, to the Administrative Agent), at the time or times prescribed by applicable law or reasonably requested by the Borrower, such properly completed and executed documentation prescribed by applicable law as shall be necessary to permit such payments to be made without withholding or at a reduced rate. Further, in those circumstances as shall be necessary to allow payments hereunder to be made free of (or at a reduced rate of) withholding tax, each other Lender and the Administrative Agent, as applicable, shall deliver to Borrower such documentation as the Borrower may reasonably request in writing. 34 (f) Except with the prior written consent of the Administrative Agent, all amounts payable by a Credit Party hereunder shall be made by such Credit Party in its own name and for its own account from within the United States by a payor that is a United States person (within the meaning of Section 7701 of the Code). SECTION 2.18. PAYMENTS GENERALLY; PRO RATA TREATMENT; SHARING OF SET-OFFS. (a) The Borrower shall make each payment required to be made by it hereunder (whether of principal, interest or fees, or under Section 2.15, 2.16, 2.17 or 11.03, or otherwise) prior to 12:00 noon, New York City time, on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its offices at 222 Broadway, New York, New York, except that payments pursuant to Sections 2.15, 2.16, 2.17 and 11.03 shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder shall be made in Dollars. (b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied (i) first, to pay interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, to pay principal then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal then due to such parties. (c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of the Obligations owing to it resulting in such Lender receiving payment of a greater proportion of the aggregate amount of such Obligations and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Revolving Loans; provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to the Guarantor, the Borrower or any other Subsidiary or Affiliate of the Guarantor (as to which the provisions of this paragraph shall apply). The Borrower and the Guarantor consent to the foregoing and agree, to the extent they may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements 35 may exercise against the Borrower and the Guarantors rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower or the affected Guarantor in the amount of such participation. (d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the Federal Funds Effective Rate. (e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.03(c), 2.04(e), 2.05(b) or 2.18(d), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid. SECTION 2.19. MITIGATION OBLIGATIONS; REPLACEMENT OF LENDERS. Any Lender claiming reimbursement or compensation from the Borrower under either of Sections 2.15 and 2.17 for any losses, costs or other liabilities shall use reasonable efforts (including, without limitation, reasonable efforts to designate a different lending office of such Lender for funding or booking its Loans or to assign its rights and obligations hereunder to another of its offices, branches or affiliates) to mitigate the amount of such losses, costs and other liabilities, if such efforts can be made and such mitigation can be accomplished without such Lender suffering (i) any economic disadvantage for which such Lender does not receive full indemnity from the Borrower under this Agreement or (ii) otherwise be disadvantageous to such Lender. (b) In determining the amount of any claim for reimbursement or compensation under Sections 2.15 and 2.17, each Lender will use reasonable methods of calculation consistent with such methods customarily employed by such Lender in similar situations. (c) Each Lender will notify the Borrower either directly or through the Administrative Agent of any event giving rise to a claim under Section 2.15 or Section 2.17 promptly after the occurrence thereof which notice shall be accompanied by a certificate of such Lender setting forth in reasonable detail the circumstances of such claim. (d) If any Lender requests compensation under Section 2.15, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, or if any Lender defaults in its obligation to fund Loans hereunder, or if any Lender shall decline to consent to an extension of the Termination Date pursuant to Section 2.20, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 11.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such 36 obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Borrower shall have received the prior written consent of the Administrative Agent and the LC Bank, which consent, in the case of the Administrative Agent, shall not unreasonably be withheld and, in the case of the LC Bank, may be given or withheld in the sole discretion of the LC Bank, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.15 or payments required to be made pursuant to Section 2.17, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply. SECTION 2.20. EXTENSION OF TERMINATION DATE. Unless the Commitments shall have been terminated in whole, or an Event of Default or a Default shall have occurred and then be continuing, the Borrower may request the Administrative Agent and the Lenders to extend the then scheduled Termination Date by 364 days, and the Termination Date shall be so extended if Lenders holding 100% of the Commitments each in its sole discretion consents in writing to such extension, subject to such terms and conditions as they shall impose; provided that the Borrower may not request an extension any earlier than the 60th day, and the Lenders may not provide their consent to an extension any earlier than the 45th day, prior to the then scheduled Termination Date. In the event that any Lender shall fail to consent to such a request for extension, the Borrower shall have the right to replace such Dissenting Lender in accordance with Section 2.19. ARTICLE III CONDITIONS SECTION 3.01. CONDITIONS PRECEDENT TO THE INITIAL EXTENSION OF CREDIT. The obligation of each Lender to make the Initial Extension of Credit shall not become effective until the date on which each of the following conditions, and each of the conditions set forth in Section 3.02, is satisfied (or waived in accordance with Section 11.02); provided that each of the conditions set forth in this Section 3.01 shall be satisfied or waived no later than the Initial Credit Event Date. (a) The Administrative Agent (or its counsel) shall have received from each party thereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement. (b) The Lenders, the Administrative Agent, the Arrangers and each other Person entitled to the payment of fees or the reimbursement or payment of expenses, pursuant hereto or to that certain fee letter dated March 1, 2001, executed and delivered with respect to the credit 37 facility provided for herein, shall have received all fees required to be paid by the Initial Credit Event Date, and all expenses for which invoices have been presented on or before the Initial Credit Event Date. (c) The Administrative Agent shall have received certified copies of the resolutions of the Board of Directors of each of the Guarantor and the Borrower approving this Agreement, and of all documents evidencing other necessary corporate action and governmental and regulatory approvals with respect to this Agreement. (d) The Administrative Agent shall have received from each of the Borrower and the Guarantor, to the extent generally available in the relevant jurisdiction, a copy of a certificate or certificates of the Secretary of State (or other appropriate public official) of the jurisdiction of its incorporation, dated reasonably near the Initial Credit Event Date, (i) listing the charters of the Borrower or the Guarantor, as the case may be, and each amendment thereto on file in such office and certifying that such amendments are the only amendments to the Borrower's or the Guarantor's charter, as the case may be, on file in such office, and (ii) stating that the Borrower, or the Guarantor, as the case may be, is duly incorporated and in good standing under the laws of the jurisdiction of its place of incorporation. (e) (i) The Administrative Agent shall have received a certificate or certificates of each of the Borrower and the Guarantor, signed on behalf of the Borrower and the Guarantor respectively, by a the Secretary, an Assistant Secretary or a Responsible Officer thereof, dated the Initial Credit Event Date, certifying as to (A) the absence of any amendments to the charter of the Borrower or the Guarantor, as the case may be, since the date of the certificates referred to in paragraph (d) above, (B) a true and correct copy of the bylaws of each of the Borrower or the Guarantor, as the case may be, as in effect on the Initial Credit Event Date, (C) the absence of any proceeding for the dissolution or liquidation of the Borrower or the Guarantor, as the case may be, (D) the truth, in all material respects, of the representations and warranties contained in the Credit Documents to which the Borrower or the Guarantor is a party, as the case may be, as though made on and as of the Initial Credit Event Date, and (E) the absence, as of the Initial Credit Event Date, of any Default or Event of Default; and (ii) each of such certifications shall be true. (f) The Administrative Agent shall have received a certificate of the Secretary or an Assistant Secretary of each of the Guarantor and the Borrower certifying the names and true signatures of the officers of Guarantor or the Borrower, as the case may be, authorized to sign, and signing, this Agreement and the other Credit Documents to be delivered hereunder on or before the Initial Credit Event Date. (g) The Administrative Agent shall have received from Schiff Hardin & Waite, counsel for the Guarantor and the Borrower, a favorable opinion, substantially in the form of Exhibit B hereto and as to such other matters as any Lender through the Administrative Agent may reasonably request. (h) The Administrative Agent shall have received such evidence as it and its counsel may reasonably require of the termination and payment in full of the Acquisition Facility. 38 SECTION 3.02. CONDITIONS PRECEDENT TO EACH EXTENSION OF CREDIT. The obligation of each Lender to make any Extension of Credit and of the LC Bank to issue any Letter of Credit (including the initial Extension of Credit but excluding any conversion or continuation of any Loan) shall be subject to the satisfaction (or waiver in accordance with Section 11.02) of each of the following conditions: (a) The representations and warranties of the Guarantor and the Borrower set forth in this Agreement shall be true and correct in all material respects on and as of the date of such Extension of Credit, except to the extent that such representations and warranties are specifically limited to a prior date, in which case such representations and warranties shall be true and correct in all material respects on and as of such prior date. (b) After giving effect to (A) such Extension of Credit, together with all other Extensions of Credit to be made contemporaneously therewith, and (B) the repayment of any Loans that are to be contemporaneously repaid at the time such Loan is made, such Extension of Credit will not result in the sum of the then Total Outstanding Principal exceeding the Aggregate Commitments. (c) Such Extension of Credit will comply with all other applicable requirements of Article II, including without limitation Sections 2.01, 2.02, 2.03 and 2.04, as applicable. (d) At the time of and immediately after giving effect to such Borrowing, no Default or Event of Default shall have occurred and be continuing. (e) In the case of a Revolving Loan, the Administrative Agent shall have timely received a Borrowing Request; and, in the case of a Letter of Credit issuance, a Request for Issuance. (f) In the case of any Extension of Credit to be made after March 31, 2001, the Administrative Agent shall have received such evidence as it and its counsel may reasonably require of the termination and payment in full of the Terminating Facilities and the release by the holders thereof of any collateral security securing such facilities. Each Extension of Credit and the acceptance by the Borrower of the benefits thereof shall be deemed to constitute a representation and warranty by the Borrower on the date thereof as to the matters specified in paragraphs (a), (b), (c) and (d) of this Section. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. REPRESENTATIONS AND WARRANTIES OF THE CREDIT PARTIES. Each of the Borrower and the Guarantors represents and warrants as follows: (a) Each of the Borrower and the Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the State of its incorporation. 39 (b) The execution, delivery and performance by each of the Credit Parties of the Credit Documents to which it is a party are within such Credit Party's corporate powers, (i) have been duly authorized by all necessary corporate action, (ii) do not contravene (A) such Credit Party's charter or by-laws, as the case may be, or (B) any law, rule or regulation (including, without limitation, the Public Utility Holding Company Act of 1935, as amended), or any material Contractual Obligation or legal restriction, binding on or affecting any Credit Party or any Material Subsidiary, as the case may be, and (iii) do not require the creation of any Lien on the property of any Credit Party or any Material Subsidiary under any Contractual Obligation binding on or affecting such Credit Party or any Material Subsidiary. (c) No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority or other Person is required for the due execution, delivery and performance by any Credit Party of this Agreement or any other Credit Document to which any of them is a party, except for such as have been obtained or made and that are in full force and effect. (d) Each Credit Document to which any Credit Party is a party is a legal, valid and binding obligation of such Credit Party, enforceable against such Credit Party in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. (e) The balance sheet of Old NiSource as at September 30, 2000, and the related statements of income and retained earnings of Old NiSource for the nine months then ended, copies of which have been made available or furnished to each Lender, fairly present (subject to year-end adjustments) the financial condition of Old NiSource as at such date and the results of the operations of Old NiSource for the period ended on such date, all in accordance with generally accepted accounting principles consistently applied. The balance sheet of Columbia as at September 30, 2000, and the related statements of income and retained earnings of Columbia for the nine months then ended, copies of which have been made available or furnished to each Lender, fairly present (subject to year-end adjustments) the financial condition of Columbia as at such date and the results of the operations of Columbia for the period ended on such date, all in accordance with generally accepted accounting principles consistently applied. (f) Since September 30, 2000, there has been no material adverse change in such condition or operations, or in the business, assets, operations, condition (financial or otherwise) or prospects of any of the Credit Parties or of Columbia. (g) There is no pending or threatened action or proceeding affecting such Credit Party before any court, governmental agency or other Governmental Authority or arbitrator that (taking into account the exhaustion of appeals) would have a Material Adverse Effect, or that (i) purports to affect the legality, validity or enforceability of this Agreement, or (ii) seeks to prohibit the ownership or operation, by any Credit Party or any of their respective Subsidiaries, of all or a material portion of their respective businesses or assets. 40 (h) The Guarantor and its Subsidiaries, taken as a whole, do not hold or carry Margin Stock having an aggregate value in excess of 10% of the value of their consolidated assets, and no part of the proceeds of any Loan hereunder will be used to buy or carry any Margin Stock. (i) No ERISA Event has occurred, or is reasonably expected to occur, with respect to any Plan that could reasonably be expected to have a Material Adverse Effect. (j) Schedule B (Actuarial Information) to the 1999 Annual report (Form 5500 Series) for each Plan, copies of which have been filed with the Internal Revenue Service and made available or furnished to each Lender, is complete and accurate and fairly presents the funding status of such Plan, and since the date of such Schedule B there has been no adverse change in such funding status which may reasonably be expected to have a Material Adverse Effect. (k) Neither the Guarantor nor any ERISA Affiliate has incurred or is reasonably expected to incur any Withdrawal Liability to any Multiemployer Plan which may reasonably be expected to have a Material Adverse Effect. (l) Neither the Guarantor nor any ERISA Affiliate has been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title VI of ERISA, and no Multiemployer Plan is reasonably expected to be in reorganization or to be terminated, within the meaning of Title IV of ERISA, in either such case, that could reasonably be expected to have a Material Adverse Effect. (m) No Credit Party is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. (n) The Guarantor is a "public utility holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended, registered in compliance therewith. (o) Each Credit Party has filed all tax returns (Federal, state and local) required to be filed by it and has paid or caused to be paid all taxes due for the periods covered thereby, including interest and penalties, except for any such taxes, interest or penalties which are being contested in good faith and by proper proceedings and in respect of which such Credit Party has set aside adequate reserves for the payment thereof in accordance with GAAP. (p) Each Credit Party and its Subsidiaries are and have been in compliance with all laws (including, without limitation, the Public Utility Holding Company Act of 1935, as amended, and all Environmental Laws), except to the extent that any failure to be in compliance, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. (q) No Subsidiary of any Credit Party is party to, or otherwise bound by, any agreement that prohibits such Subsidiary from making any payments, directly or indirectly, to such Credit Party, by way of dividends, advances, repayment of loans or advances, reimbursements of management or other intercompany charges, expenses and accruals or other returns on investment, or any other agreement that restricts the ability of such Subsidiary to make 41 any payment, directly or indirectly, to such Credit Party, other than prohibitions and restrictions permitted to exist under Section 6.01(e). ARTICLE V AFFIRMATIVE COVENANTS SECTION 5.01. AFFIRMATIVE COVENANTS. So long as any Lender shall have any Commitment hereunder or any principal of any Loan, interest or fees payable hereunder shall remain unpaid or any Letter of Credit shall remain outstanding, each of the Credit Parties will, unless the Required Lenders shall otherwise consent in writing: (a) COMPLIANCE WITH LAWS, ETC. Comply, and cause each of its Subsidiaries to comply, in all material respects with all applicable laws, rules, regulations and orders (including, without limitation, any of the foregoing relating to employee health and safety or public utilities and all Environmental Laws), unless the failure to so comply could not reasonably be expected to have a Material Adverse Effect. (b) MAINTENANCE OF PROPERTIES, ETC. Maintain and preserve, and cause each Material Subsidiary to maintain and preserve, all of its material properties which are used in the conduct of its business in good working order and condition, ordinary wear and tear excepted, if the failure to do so could reasonably be expected to have a Material Adverse Effect. (c) PAYMENT OF TAXES, ETC. Pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, (i) all taxes, assessments and governmental charges or levies imposed upon it or upon its property, and (ii) all legal claims which, if unpaid, might by law become a lien upon its property; provided, however, that neither any Credit Party nor any of its Subsidiaries shall be required to pay or discharge any such tax, assessment, charge or claim which is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained. (d) MAINTENANCE OF INSURANCE. Maintain, and cause each of its Subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually obtained by companies engaged in similar businesses of comparable size and financial strength and owning similar properties in the same general areas in which such Credit Party or such Subsidiary operates, or to the extent such Credit Party or Subsidiary deems it reasonably prudent to do so, through its own program of self-insurance. 42 (e) PRESERVATION OF CORPORATE EXISTENCE, Etc. Preserve and maintain, and cause each Material Subsidiary to preserve and maintain, its corporate existence, rights (charter and statutory) and franchises, except as otherwise permitted under this Agreement; provided that that no such Person shall be required to preserve any right or franchise with respect to which the Board of Directors of such Person has determined that the preservation thereof is no longer desirable in the conduct of the business of such Person and that the loss thereof is not disadvantageous in any material respect to such Person or the Lenders. (f) VISITATION RIGHTS. At any reasonable time and from time to time, permit the Administrative Agent or any of the Lenders or any agents or representatives thereof, on not less than five Business Days' notice, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, such Credit Party or any of its Subsidiaries, and to discuss the affairs, finances and accounts of the Credit Parties and their respective Subsidiaries with any of their respective officers and with their independent certified public accountants; subject, however, in all cases to the imposition of such conditions as the affected Credit Party or Subsidiary shall deem necessary based on reasonable considerations of safety and security and provided that so long as no Default or Event of Default shall have occurred and be continuing, each Lender will be limited to one visit each year. (g) KEEPING OF BOOKS. Keep, and cause each of its Subsidiaries to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of each of the Credit Parties and each of their respective Subsidiaries in accordance with generally accepted accounting principles consistently applied. (h) REPORTING REQUIREMENTS. Deliver to the Administrative Agent for distribution to the Lenders: (i) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Guarantor, balance sheets of the Guarantor and its Consolidated Subsidiaries in comparative form as of the end of such quarter and statements of income and retained earnings of the Guarantor and its Consolidated Subsidiaries for the period commencing at the end of the previous fiscal year of the Guarantor and ending with the end of such quarter, certified by the chief financial officer of the Guarantor. (ii) as soon as available and in any event within 90 days after the end of each fiscal year of the Guarantor, a copy of the annual report for such year for the Guarantor and its Consolidated Subsidiaries containing financial statements for such year reported on by independent public accountants of recognized national standing acceptable to the Required Lenders, together with a certificate of such accounting firm to the Administrative Agent and the Lenders stating that in the course of the regular audit of the business of the Guarantor and its Consolidated Subsidiaries, which audit was conducted by such accounting firm in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge that a Default or an Event of Default has occurred and is continuing, or if, in the opinion of such accounting firm, a Default or an Event of Default has occurred and is continuing, a statement as to the nature thereof; 43 (iii) concurrently with the delivery of financial statements pursuant to clauses (i) and (ii) above or the notice relating thereto contemplated by the final sentence of this Section 5.01(h), a certificate of a senior financial officer of each of the Guarantor and the Borrower (A) to the effect that no Default or Event of Default has occurred and is continuing (or, if any Default or Event of Default has occurred and is continuing, describing the same in reasonable detail and describing the action that the Guarantor or the Borrower, as the case may be, has taken and proposes to take with respect thereto), and (B) in the case of the certificate relating to the Guarantor, setting forth calculations, in reasonable detail, establishing Borrower's compliance, as at the end of such fiscal quarter, with the financial covenants contained in Article VII; (iv) as soon as possible and in any event within five days after the occurrence of each Default or Event of Default continuing on the date of such statement, a statement of the chief financial officer of the Borrower setting forth details of such Event of Default or event and the action which the Borrower has taken and proposes to take with respect thereto; (v) promptly after the sending or filing thereof, copies of all reports which the Guarantor sends to its stockholders, and copies of all reports and registration statements (other than registration statements filed on Form S-8 and filings under the Public Utilities Holding Company Act of 1935, as amended) that the Guarantor, the Borrower or any Subsidiary of the Guarantor or the Borrower, files with the Securities and Exchange Commission or any national securities exchange; (vi) promptly and in any event within 30 days after the filing thereof with the Internal Revenue Service, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Plan; (vii) promptly and in any event within 10 days after the Guarantor knows or has reason to know that any material ERISA Event has occurred, a statement of the chief financial officer of the Borrower describing such ERISA Event and the action, if any, which the Guarantor or any affected ERISA Affiliate proposes to take with respect thereto; (viii) promptly and in any event within two Business Days after receipt thereof by the Guarantor (or knowledge being obtained by the Guarantor of the receipt thereof by any ERISA Affiliate), copies of each notice from the PBGC stating its intention to terminate any Plan or to have a trustee appointed to administer any Plan; (ix) promptly and in any event within five Business Days after receipt thereof by the Guarantor (or knowledge being obtained by the Guarantor of the receipt thereof by any ERISA Affiliate) from the sponsor of a Multiemployer Plan, a copy of each notice received by the Guarantor or any ERISA Affiliate concerning (A) the imposition of material Withdrawal Liability by a Multiemployer Plan, (B) the reorganization or termination, within the meaning of Title IV of ERISA, of any Multiemployer Plan or (C) the amount of liability incurred, or which may be incurred, by the Guarantor or any ERISA Affiliate in connection with any event described in clause (A) or (B) above; 44 (x) promptly after the Guarantor has knowledge of the commencement thereof, notice of any actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting the Guarantor or any Material Subsidiary of the type described in Section 4.01(g); (xi) promptly after the Guarantor or the Borrower knows of any change in the rating of the Index Debt by S&P or Moody's, a notice of such changed rating; and (xii) such other information respecting the condition or operations, financial or otherwise, of the Guarantor or any of its Subsidiaries as any Lender through the Administrative Agent may from time to time reasonably request. Notwithstanding the foregoing, the Credit Parties' obligations to deliver the documents or information required under any of clauses (i), (ii) and (v) above shall be deemed to be satisfied upon (x) the relevant documents or information being publicly available on the Guarantor's website or other publicly available electronic medium (such as EDGAR) within the time period required by such clause, and (y) the delivery by the Guarantor or the Borrower of notice to the Administrative Agent and the Lenders, within the time period required by such clause, that such documents or information are so available. (i) USE OF PROCEEDS. Use the proceeds of the Loans and the Letters of Credit hereunder for general corporate purposes, including to provide liquidity support for commercial paper issued by the Borrower. (j) RATINGS. At all times maintain ratings by both Moody's and S&P with respect to the Index Debt. (k) TERMINATING FACILITIES. Terminate and pay in full, or cause to be terminated and paid in full, each of the Terminating Facilities not later than March 31, 2001; and furnish or cause to be furnished to the Administrative Agent such evidence as it and its counsel may reasonably require of such termination and payment and the release by the holders thereof of any collateral security securing the Terminating Facilities (or any of them). ARTICLE VI NEGATIVE COVENANTS SECTION 6.01. NEGATIVE COVENANTS. So long as any Lender shall have any Commitment hereunder or any principal of any Loan, interest or fees payable hereunder shall remain unpaid or any Letter of Credit shall remain outstanding, no Credit Party will, without the written consent of the Required Lenders: (a) LIMITATION ON LIENS. Create or suffer to exist, or permit any of its Subsidiaries (other than a Utility Subsidiary) to create or suffer to exist, any lien, security interest, or other charge or encumbrance (collectively, "LIENS") upon or with respect to any of its properties, whether now owned or hereafter acquired, or collaterally assign for security purposes, or permit any of its Subsidiaries (other than a Utility Subsidiary) to so assign any right to receive income 45 in each case to secure or provide for or guarantee the payment of Debt for Borrowed Money of any Person, without in any such case effectively securing, prior to or concurrently with the creation, issuance, assumption or guaranty of any such Debt for Borrowed Money, the Obligations (together with, if the Guarantor shall so determine, any other Debt for Borrowed Money of or guaranteed by the Guarantor or any of its Subsidiaries ranking equally with the Loans and then existing or thereafter created) equally and ratably with (or prior to) such Debt for Borrowed Money; provided, however, that the foregoing restrictions shall not apply to or prevent the creation or existence of: (i) (A) Liens on any property acquired, constructed or improved by the Guarantor or any of its Subsidiaries (other than a Utility Subsidiary) after the date of this Agreement that are created or assumed prior to, contemporaneously with, or within 180 days after, such acquisition or completion of such construction or improvement, to secure or provide for the payment of all or any part of the purchase price of such property or the cost of such construction or improvement; or (B) in addition to Liens contemplated by clauses (ii) and (iii) below, Liens on any property existing at the time of acquisition thereof, provided that the Liens shall not apply to any property theretofore owned by the Guarantor or any such Subsidiary other than, in the case of any such construction or improvement, (1) unimproved real property on which the property so constructed or the improvement is located, (2) other property (or improvements thereon) that is an improvement to or is acquired or constructed for specific use with such acquired or constructed property (or improvement thereof), and (3) any rights and interests (A) under any agreements or other documents relating to, or (B) appurtenant to, the property being so constructed or improved or such other property; (ii) existing Liens on any property or indebtedness of a corporation that is merged with or into or consolidated with any Credit Party or any of its Subsidiaries; provided that such Lien was not created in contemplation of such merger or consolidation; (iii) Liens on any property or indebtedness of a corporation existing at the time such corporation becomes a Subsidiary of any Credit Party; provided that such Lien was not created in contemplation of such occurrence; (iv) Liens to secure Debt for Borrowed Money of a Subsidiary of a Credit Party to a Credit Party or to another Subsidiary of the Guarantor; (v) Liens in favor of the United States of America, any State, any foreign country or any department, agency or instrumentality or political subdivision of any such jurisdiction, to secure partial, progress, advance or other payments pursuant to any contract or statute or to secure any Debt for Borrowed Money incurred for the purpose of financing all or any part of the purchase price of the cost of constructing or improving the property subject to such Liens, including, without limitation, Liens to secure Debt for Borrowed Money of the pollution control or industrial revenue bond type; 46 (vi) Liens on any property (including any natural gas, oil or other mineral property) to secure all or part of the cost of exploration, drilling or development thereof or to secure Debt for Borrowed Money incurred to provide funds for any such purpose; (vii) Liens existing on the date of this Agreement; (viii) Liens for the sole purposes of extending, renewing or replacing in whole or in part Debt for Borrowed Money secured by any Lien referred to in the foregoing clauses (i) through (vii), inclusive, or this clause (viii); provided, however, that the principal amount of Debt for Borrowed Money secured thereby shall not exceed the principal amount of Debt for Borrowed Money so secured at the time of such extension, renewal or replacement (which, for purposes of this limitation as it applies to a synthetic lease, shall be deemed to be (x) the lessor's original cost of the property subject to such lease at the time of extension, renewal or replacement, less (y) the aggregate amount of all prior payments under such lease allocated pursuant to the terms of such lease to reduce the principal amount of the lessor's investment, and borrowings by the lessor, made to fund the original cost of the property), and that such extension, renewal or replacement shall be limited to all or a part of the property or indebtedness which secured the Lien so extended, renewed or replaced (plus improvements on such property); (ix) Liens on any property or assets of a Project Financing Subsidiary, or on any Capital Stock in a Project Financing Subsidiary, in either such case, that secure only a Project Financing or a Contingent Guaranty that supports a Project Financing; or (x) Any Lien, other than a Lien described in any of the foregoing clauses (i) through (ix), inclusive, to the extent that it secures Debt for Borrowed Money, or guaranties thereof, the outstanding principal balance of which at the time of creation of such Lien, when added to the aggregate principal balance of all Debt for Borrowed Money secured by Liens incurred under this clause (x) then outstanding, does not exceed 5% of Consolidated Net Tangible Assets. If at any time any Credit Party or any of its Subsidiaries shall create, issue, assume or guaranty any Debt for Borrowed Money secured by any Lien and the first paragraph of this Section 6.01(a) requires that the Loans be secured equally and ratably with such Debt for Borrowed Money, the Borrower shall promptly deliver to the Administrative Agent and each Lender: (1) a certificate of a duly authorized officer of the Borrower stating that the covenant contained in the first paragraph of this Section 6.01(a) has been complied with; and (2) an opinion of counsel acceptable to the Required Lenders to the effect that such covenant has been complied with and that all documents executed by any Credit Party or any of its Subsidiaries in the performance of such covenant comply with the requirements of such covenant. (b) MERGERS, ETC. Merge or consolidate with or into, or, except in a transaction permitted under paragraph (c) of this Section, convey, transfer, lease or otherwise dispose 47 of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to any Person, or permit any of its Subsidiaries to do so, except that: (i) any Subsidiary of the Guarantor may merge or consolidate with or transfer assets to or acquire assets from any other Subsidiary of the Guarantor; and (ii) any Subsidiary of the Guarantor may merge into or transfer assets to the Borrower; and (iii) the Guarantor or any Subsidiary of the Guarantor may merge, or consolidate with or transfer all or substantially all of its assets to any other Person; provided that in each case, immediately after giving effect thereto, (A) no Event of Default shall have occurred and be continuing (determined, for purposes of compliance with Section 7.01 after giving effect to such transaction, on a pro forma basis for the period of four consecutive fiscal quarters of the Guarantor then most recently ended, as if such transaction had occurred on the first day of such period, and, for purposes of compliance with Section 7.02 after giving effect to such transaction, on a pro forma basis as if such transaction had occurred on the last day of the Guarantor's fiscal quarter then most recently ended); (B) in the case of any merger, consolidation or transfer of assets to which the Borrower is a party (other than a merger, consolidation or transfer of assets between the Borrower and the Guarantor), the Borrower shall be the continuing or surviving corporation; (C) in the case of any merger, consolidation or transfer of assets between the Borrower and the Guarantor, the Guarantor shall have assumed all of the obligations of the Borrower under and in respect of the Credit Documents by written instrument satisfactory to the Administrative Agent and its counsel in their reasonable discretion, accompanied by such opinions of counsel and other supporting documents as they may reasonably require; (D) in the case of any merger, consolidation, or transfer of assets to which NIPSCO or Columbia is a party (other than a merger, consolidation or transfer of assets between such Person and a Credit Party), NIPSCO or Columbia, as the case may be, shall be the continuing or surviving corporation; (E) in the case of any merger, consolidation or transfer of assets to which the Guarantor is a party, the Guarantor shall be the continuing or surviving corporation; and (F) the Index Debt shall be rated at least BBB- by S&P and at least Baa3 by Moody's. (c) SALES, ETC. OF ASSETS. Sell, lease, transfer or otherwise dispose of, or permit any of their respective Subsidiaries to sell, lease, transfer or otherwise dispose of (other than in connection with a transaction authorized by paragraph (b) of this Section) any substantial part of its assets; provided that the foregoing shall not prohibit any such sale, conveyance, lease, transfer or other disposition that (i) constitutes realization on a Lien permitted to exist under Section 6.01(a); or (ii) (A) (1) is for a price not materially less than the fair market value of such assets, (2) would not materially impair the ability of any Credit Party to perform its obligations under this Agreement and (3) together with all other such sales, conveyances, leases, transfers and other dispositions, would have no Material Adverse Effect, or (B) would not result in the sale, lease, transfer or other disposition, in the aggregate, of more than 10% of the consolidated total assets of the Guarantor and its Subsidiaries, determined in accordance with GAAP, on November 1, 2000 after giving effect to the Merger. 48 (d) COMPLIANCE WITH ERISA. (i) Terminate, or permit any ERISA Affiliate to terminate, any Plan so as to result in a Material Adverse Effect or (ii) permit to exist any occurrence of any Reportable Event (as defined in Title IV of ERISA), or any other event or condition, that presents a material (in the reasonable opinion of the Required Lenders) risk of such a termination by the PBGC of any Plan, if such termination could reasonably be expected to have a Material Adverse Effect. (e) CERTAIN RESTRICTIONS. Permit any of its Subsidiaries (other than, in the case of the Guarantor, the Borrower) to enter into or permit to exist any agreement that by its terms prohibits such Subsidiary from making any payments, directly or indirectly, to such Credit Party by way of dividends, advances, repayment of loans or advances, reimbursements of management or other intercompany charges, expenses and accruals or other returns on investment, or any other agreement that restricts the ability of such Subsidiary to make any payment, directly or indirectly, to such Credit Party; provided that the foregoing shall not apply to prohibitions and restrictions imposed by this Agreement or (i) (A) imposed under an agreement in existence on the date of this Agreement, and (B) described on Schedule 6.01(e), (ii) existing with respect to a Subsidiary on the date it becomes a Subsidiary that are not created in contemplation thereof (but shall apply to any extension or renewal of, or any amendment or modification expanding the scope of, any such prohibition or restriction), (iii) contained in agreements relating to the sale of a Subsidiary pending such sale, provided that such prohibitions or restrictions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, (iv) imposed on a Project Financing Subsidiary in connection with a Project Financing, or (v) that could not reasonably be expected to have a Material Adverse Effect. ARTICLE VII FINANCIAL COVENANTS So long as any Lender shall have any Commitment hereunder or any principal of any Loan, interest or fees payable hereunder shall remain unpaid or any Letter of Credit shall remain outstanding, the Guarantor shall: SECTION 7.01. INTEREST COVERAGE RATIO. (a) Maintain an Interest Coverage Ratio of not less than 1.75 to 1.00 for each period of four consecutive fiscal quarters, commencing with the four fiscal quarters ended March 31, 2001. SECTION 7.02. DEBT TO CAPITALIZATION RATIO. Maintain a Debt to Capitalization Ratio of not more than 0.70:1:00; provided, however, that neither the Borrower or the Guarantor shall be deemed to be in default of this covenant as of any time that all of the following conditions are satisfied: (a) the Guarantor or any Consolidated Subsidiary of the Guarantor has incurred indebtedness after the Effective Date to finance a material acquisition; (b) the Index Debt shall be rated at least BBB by S&P and Baa2 by Moody's and shall not have been downgraded below those levels since the Effective Date; and 49 (c) the Debt to Capitalization ratio does not exceed 0.75 to 1.00 at such time and has not exceeded 0.70:1:00 for more than a single period of time not to exceed six months. ARTICLE VIII EVENTS OF DEFAULT SECTION 8.01. EVENTS OF DEFAULT. If any of the following events ("EVENTS OF DEFAULT") shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Loan or Unreimbursed LC Disbursement when the same becomes due and payable or shall fail to pay any interest, fees or other amounts hereunder within three days after when the same becomes due and payable; or (b) Any representation or warranty made by any Credit Party herein or by any Credit Party (or any of its officers) in connection with this Agreement shall prove to have been incorrect in any material respect when made; or (c) Any Credit Party shall fail to perform or observe any term, covenant or agreement contained in Section 5.01(e), 5.01(f), 5.01(h), 5.01(i), 6.01 or Article VII; or (d) Any Credit Party shall fail to perform or observe any term, covenant or agreement contained in this Agreement on its part to be performed or observed (other than one identified in paragraph (a), (b) or (c) above) if the failure to perform or observe such other term, covenant or agreement shall remain unremedied for thirty days after written notice thereof shall have been given to the Borrower by the Administrative Agent or any Lender; or (e) The Guarantor, the Borrower or any of their respective Subsidiaries shall fail to pay any principal of or premium or interest on any Indebtedness (excluding Non-Recourse Debt) which is outstanding in a principal amount of at least $50,000,000 in the aggregate (but excluding the Loans) of the Guarantor, the Borrower or such Subsidiary, as the case may be, when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Indebtedness and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the scheduled maturity of such Indebtedness; or any such Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or an "Event of Default" shall occur and be continuing under (and as defined in) the Other Credit Agreement; or (f) Any Credit Party shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against any Credit Party seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the 50 entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against any Credit Party (but not instituted by any Credit Party), either such proceeding shall remain undismissed or unstayed for a period of 60 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, any Credit Party or for any substantial part of its property) shall occur; or any Credit Party shall take any corporate action to authorize any of the actions set forth above in this paragraph (f); or (g) One or more Subsidiaries of the Guarantor (other than any Credit Party) in which the aggregate sum of (i) the amounts invested by the Guarantor and its other Subsidiaries in the aggregate, by way of purchases of Capital Stock, Capital Leases, loans or otherwise, and (ii) the amount of recourse, whether contractual or as a matter of law (but excluding Non-Recourse Debt), available to creditors of such Subsidiary or Subsidiaries against the Guarantor or any of its other Subsidiaries, is $100,000,000 or more (collectively, "SUBSTANTIAL SUBSIDIARIES") shall generally not pay their respective debts as such debts become due, or shall admit in writing their respective inability to pay their debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against Substantial Subsidiaries seeking to adjudicate them bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of them or theft respective debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for them or for any substantial part of their respective property and, in the case of any such proceeding instituted against Substantial Subsidiaries (but not instituted by any Subsidiary of the Guarantor), either such proceeding shall remain undismissed or unstayed for a period of 60 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, the Substantial Subsidiaries or for any substantial part of their respective property) shall occur; or Substantial Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this paragraph (g); or (h) Any judgment or order for the payment of money in excess of $50,000,000 shall be rendered against the Borrower, the Guarantor or any of its other Subsidiaries and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (i) Any ERISA Event shall have occurred with respect to a Plan and, 30 days after notice thereof shall have been given to the Guarantor or the Borrower by the Administrative Agent, (i) such ERISA Event shall still exist and (ii) the sum (determined as of the date of occurrence of such ERISA Event) of the Insufficiency of such Plan and the Insufficiency of any and all other Plans with respect to which an ERISA Event shall have occurred and then exist (or, in the case of a Plan with respect to which an ERISA Event described in clauses (iii) through (vi) of the definition of ERISA Event shall have occurred and then exist, the liability related thereto) is equal to or greater than $10,000,000 (when aggregated with paragraphs (j), (k) and (l) of this Section), and a Material Adverse Effect could reasonably be expected to occur as a result thereof; or 51 (j) The Guarantor or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability to such Multiemployer Plan in an amount which, when aggregated with all other amounts required to be paid to Multiemployer Plans by the Guarantor and its ERISA Affiliates as Withdrawal Liability (determined as of the date of such notification), exceeds $10,000,000 or requires payments exceeding $10,000,000 per annum (in either case, when aggregated with paragraphs (i), (k) and (l) of this Section), and a Material Adverse Effect could reasonably be expected to occur as a result thereof; or (k) The Guarantor or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, if as a result of such reorganization or termination the aggregate annual contributions of the Guarantor and its ERISA Affiliates to all Multiemployer Plans which are then in reorganization or being terminated have been or will be increased over the amounts contributed to such Multiemployer Plans for the respective plan year of each such Multiemployer Plan immediately preceding the plan year in which the reorganization or termination occurs by an amount exceeding $10,000,000 (when aggregated with paragraphs (i), (j) and (l) of this Section), and a Material Adverse Effect could reasonably be expected to occur as a result thereof; or (l) The Guarantor or any ERISA Affiliate shall have committed a failure described in Section 302(f)(1) of ERISA and the amount determined under Section 302(f)(3) of ERISA is equal to or greater than $10,000,000 (when aggregated with paragraphs (i), (j) and (k) of this Section), and a Material Adverse Effect could reasonably be expected to occur as a result thereof; or (m) Any provision of the Credit Documents shall be held by a court of competent jurisdiction to be invalid or unenforceable against any Credit Party purported to be bound thereby, or any Credit Party shall so assert in writing; or (n) Any Change of Control shall occur; then, and in any such event, the Administrative Agent (i) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrower, declare the Commitment of each Lender, the obligation of each Swingline Lender to make or maintain Swingline Loans and the obligation of the LC Bank to issue or maintain Letters of Credit hereunder to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrower, declare all amounts payable under this Agreement to be forthwith due and payable, whereupon all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided that in the event of an actual or deemed entry of an order for relief with respect to any Credit Party under the Federal Bankruptcy Code, (1) the Commitment of each Lender, the obligation of each Swingline Lender to make or maintain Swingline Loans and the obligation of the LC Bank to issue or maintain Letters of Credit hereunder shall automatically be terminated and (2) all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. 52 Notwithstanding anything to the contrary contained herein, no notice given or declaration made by the Administrative Agent pursuant to this Section 8.01 shall affect (i) the obligation of the LC Bank to make any payment under any outstanding Letter of Credit in accordance with the terms of such Letter of Credit, (ii) the obligations of each Lender in respect of each such Letter of Credit or (iii) the obligation of each Lender to purchase its pro rata share of any Swingline Loans; provided, however, that upon the occurrence and during the continuance of any Event of Default, the Administrative Agent shall at the request, or may with the consent, of the Required Lenders, upon notice to the Borrower, require the Borrower to deposit with the Administrative Agent an amount in the cash account (the "CASH ACCOUNT") described below equal to the then current LC Outstandings. Such Cash Account shall at all times be free and clear of all rights or claims of third parties. The Cash Account shall be maintained with the Administrative Agent in the name of, and under the sole dominion and control of, the Administrative Agent, and amounts deposited in the Cash Account shall bear interest at a rate equal to the rate generally offered by Barclays for deposits equal to the amount deposited by the Borrower in the Cash Account pursuant to this Section 8.01, for a term to be agreed to between the Borrower and the Administrative Agent. If any drawings then outstanding or thereafter made are not reimbursed in full immediately upon demand or, in the case of subsequent drawings, upon being made, then, in any such event, the Administrative Agent may apply the amounts then on deposit in the Cash Account, in such priority as the Administrative Agent shall elect, toward the payment in full of any or all of the Borrower's obligations hereunder as and when such obligations shall become due and payable. Upon payment in full, after the termination of the Letters of Credit, of all such obligations, the Administrative Agent will repay to the Borrower any cash then on deposit in the Cash Account. ARTICLE IX THE ADMINISTRATIVE AGENT SECTION 9.01. THE ADMINISTRATIVE AGENT. (a) Each of the Lenders and the LC Bank hereby irrevocably appoints the Administrative Agent as its agent and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof, together with such actions and powers as are reasonably incidental thereto. (b) The Person serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the any Credit Party or any of such Credit Party's Subsidiaries or other Affiliates thereof as if it were not the Administrative Agent hereunder. (c) The Administrative Agent shall not have any duties or obligations except those expressly set forth herein. Without limiting the generality of the foregoing, (i) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (ii) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Administrative Agent is 53 required to exercise in writing by the Required Lenders, and (iii) except as expressly set forth herein, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower, the Guarantor or any of its other Subsidiaries that is communicated to or obtained by the bank serving as Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders or in the absence of its own gross negligence or willful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by the Borrower or a Lender, and the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (1) any statement, warranty or representation made in or in connection with this Agreement, (2) the contents of any certificate, report or other document delivered hereunder or in connection herewith, (3) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein, (4) the validity, enforceability, effectiveness or genuineness of this Agreement or any other agreement, instrument or document, or (5) the satisfaction of any condition set forth in Article III or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent and the conformity thereof to such express requirement. (d) The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Administrative Agent may consult with legal counsel (who may be counsel for a Credit Party) independent accountants and other experts selected by it and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. (e) The Administrative Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent. (f) Subject to the appointment and acceptance of a successor Administrative Agent as provided in this paragraph, the Administrative Agent may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right, with the consent of the Borrower (which consent shall not unreasonably be withheld), to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank, in any event having total assets in excess of $500,000,000 and who shall serve until such time, if any, as an Agent shall have been appointed 54 as provided above. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 11.03 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. (g) Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any related agreement or any document furnished hereunder or thereunder. (h) No Lender identified on the signature pages of this Agreement as a "Lead Arranger", "Arranger", "Senior Managing Agent", "Manager", "Co-Documentation Agent" or "Syndication Agent", or that is given any other title hereunder other than "LC Bank", "Swingline Lender" or "Administrative Agent", shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Without limiting the generality of the foregoing, no Lender so identified as a "Lead Arranger", "Arranger", "Senior Managing Agent", "Manager", "Co-Documentation Agent" or "Syndication Agent" or that is given any other title hereunder, shall have, or be deemed to have, any fiduciary relationship with any Lender. Each Lender acknowledges that is has not relied, and will not rely, on the Lenders so identified in deciding to enter into this Agreement or in taking or not taking action hereunder. ARTICLE X GUARANTY SECTION 10.01. THE GUARANTY. (a) The Guarantor, as primary obligor and not merely as a surety, hereby irrevocably, absolutely and unconditionally guarantees to the Administrative Agent and the Lenders and each of their respective successors, endorsees, transferees and assigns (each a "BENEFICIARY" and collectively, the "BENEFICIARIES") the prompt and complete payment by the Borrower, as and when due and payable, of the Obligations, in accordance with the terms of the Credit Documents. The provisions of this Article X are sometimes referred to hereinafter as the "GUARANTY". (b) The Guarantor hereby guarantees that the Obligations will be paid strictly in accordance with the terms of the Credit Documents, regardless of any law now or hereafter in effect in any jurisdiction affecting any such terms or the rights of the Beneficiaries with respect thereto. The obligations and liabilities of the Guarantor under this Guaranty shall be absolute 55 and unconditional irrespective of: (i) any lack of validity or enforceability of any of the Obligations or any Credit Document, or any delay, failure or omission to enforce or agreement not to enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise of any right with respect to the foregoing (including, in each case, without limitation, as a result of the insolvency, bankruptcy or reorganization of any Beneficiary, the Borrower or any other Person); (ii) any change in the time, manner or place of payment of, or in any other term in respect of, all or any of the Obligations, or any other amendment or waiver of or consent to any departure from the Credit Documents or any agreement or instrument relating thereto; (iii) any exchange or release of, or non-perfection of any Lien on or in any collateral, or any release, amendment or waiver of, or consent to any departure from, any other guaranty of, or agreement granting security for, all or any of the Obligations; (iv) any claim, set-off, counterclaim, defense or other rights that such Guarantor may have at any time and from time to time against any Beneficiary or any other Person, whether in connection with this transaction or any unrelated transaction; or (v) any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Borrower or any other guarantor or surety in respect of the Obligations or such Guarantor in respect hereof. (c) The Guaranty provided for herein (i) is a guaranty of payment and not of collection; (ii) is a continuing guaranty and shall remain in full force and effect until the Commitments and Letters of Credit have been terminated and the Obligations have been paid in full in cash; and (iii) shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be returned by any Beneficiary upon or as a result of the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or otherwise, all as though such payment had not been made. (d) The obligations and liabilities of the Guarantor hereunder shall not be conditioned or contingent upon the pursuit by any Beneficiary or any other Person at any time of any right or remedy against the Borrower or any other Person that may be or become liable in respect of all or any part of the Obligations or against any collateral security or guaranty therefor or right of setoff with respect thereto. (e) The Guarantor hereby consents that, without the necessity of any reservation of rights against such Guarantor and without notice to or further assent by such Guarantor, any demand for payment of any of the Obligations made by any Beneficiary may be rescinded by such Beneficiary and any of the Obligations continued after such rescission. (f) The Guarantor's obligations under this Guaranty shall be unconditional, irrespective of any lack of capacity of the Borrower or any lack of validity or enforceability of any other provision of this Agreement or any other Credit Document, and this Guaranty shall not be affected in any way by any variation, extension, waiver, compromise or release of any or all of the Obligations or of any security or guaranty from time to time therefor. (g) The obligations of the Guarantor under this Guaranty shall not be reduced, limited, impaired, discharged, deferred, suspended or terminated by any proceeding or action, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, marshalling of assets, assignment for the benefit of creditors, composition with creditors, 56 readjustment, liquidation or arrangement of the Borrower or any similar proceedings or actions, or by any defense the Borrower may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding or action. Without limiting the generality of the foregoing, the Guarantor's liability shall extend to all amounts and obligations that constitute the Obligations and would be owed by the Borrower, but for the fact that they are unenforceable or not allowable due to the existence of any such proceeding or action. SECTION 10.02. WAIVERS. (a) The Guarantor hereby unconditionally waives: (i) promptness and diligence; (ii) notice of or proof of reliance by the Administrative Agent or the Lenders upon this Guaranty or acceptance of this Guaranty; (iii) notice of the incurrence of any Obligation by the Borrower or the renewal, extension or accrual of any Obligation or of any circumstances affecting the Borrower's financial condition or ability to perform the Obligations; (iv) notice of any actions taken by the Beneficiaries or the Borrower or any other Person under any Credit Document or any other agreement or instrument relating thereto; (v) all other notices, demands and protests, and all other formalities of every kind in connection with the enforcement of the Obligations, of the obligations of the Guarantor hereunder or under any other Credit Document, the omission of or delay in which, but for the provisions of this Section 10 might constitute grounds for relieving the Guarantor of its obligations hereunder; (vi) any requirement that the Beneficiaries protect, secure, perfect or insure any Lien or any property subject thereto, or exhaust any right or take any action against the Borrower or any other Person or any collateral; and (vii) each other circumstance, other than payment of the Obligations in full, that might otherwise result in a discharge or exoneration of, or constitute a defense to, the Guarantor's obligations hereunder. (b) No failure on the part of any Beneficiary to exercise, and no delay in exercising, any right, remedy, power or privilege hereunder or under any Credit Document or any other agreement or instrument relating thereto shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege hereunder or under any Credit Document or any other agreement or instrument relating thereto preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. This Guaranty is in addition to and not in limitation of any other rights, remedies, powers and privileges the Beneficiaries may have by virtue of any other instrument or agreement heretofore, contemporaneously herewith or hereafter executed by the Guarantor or any other Person or by applicable law or otherwise. All rights, remedies, powers and privileges of the Beneficiaries shall be cumulative and may be exercised singly or concurrently. The rights, remedies, powers and privileges of the Beneficiaries under this Guaranty against the Guarantor are not conditional or contingent on any attempt by the Beneficiaries to exercise any of their rights, remedies, powers or privileges against any other guarantor or surety or under the Credit Documents or any other agreement or instrument relating thereto against the Borrower or against any other Person. (c) The Guarantor hereby acknowledges and agrees that, until the Commitments have been terminated and all of the Obligations have been paid in full in cash, under no circumstances shall it be entitled to be subrogated to any rights of any Beneficiary in respect of the Obligations performed by it hereunder or otherwise, and the Guarantor hereby expressly and irrevocably waives, until the Commitments have been terminated and all of the Obligations have been paid in full in cash, (i) each and every such right of subrogation and any claims, reimbursements, right 57 or right of action relating thereto (howsoever arising), and (ii) each and every right to contribution, indemnification, set-off or reimbursement, whether from the Borrower or any other Person now or hereafter primarily or secondarily liable for any of the Obligations, and whether arising by contract or operation of law or otherwise by reason of the Guarantor's execution, delivery or performance of this Guaranty. (d) The Guarantor represents and warrants that it has established adequate means of keeping itself informed of the Borrower's financial condition and of other circumstances affecting the Borrower's ability to perform the Obligations, and agrees that neither the Administrative Agent nor any Lender shall have any obligation to provide to the Guarantor any information it may have, or hereafter receive, in respect of the Borrower. ARTICLE XI MISCELLANEOUS SECTION 11.01. NOTICES. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to any Credit Party, to it at: 801 East 86th Avenue Merrillville, Indiana 46410 Attention: Treasurer Telecopier: (219) 647-6060; with a copy to such Credit Party at: 801 East 86th Avenue Merrillville, Indiana 46410 Attention: Director Corporate Finance and Treasury Telecopier: (219) 647-6180; (b) if to the Administrative Agent or the LC Bank, to Barclays Bank PLC at: 222 Broadway New York, New York 10038 Attn: Sydney G. Dennis, Power and Utilities Group Telecopier: (212) 412-6709 with a copy to such party at: 58 222 Broadway New York, New York 10038 Attn: Jeff Pannullo, Customer Service Unit Telephone: (212) 412-3724 Telecopier: (212) 412-5306 (c) if to any Lender or Swingline Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. Any Party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. SECTION 11.02. WAIVERS; AMENDMENTS. (a) No failure or delay by the Administrative Agent, the LC Bank or any Lender in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the LC Bank and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by any Credit Party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, no Extension of Credit shall be construed as a waiver of any Default, regardless of whether the Administrative Agent, the LC Bank or any Lender may have had notice or knowledge of such Default at the time. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower, the Guarantor and the Required Lenders or by the Borrower, the Guarantor and the Administrative Agent with the consent of the Required Lenders; provided that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the scheduled date of payment of the principal amount of any Loan, or any interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (iv) change Section 2.18(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender, (v) release the Guarantor from its obligations under the Guaranty, or (vi) change any of the provisions of this Section or the definition of "Required Lenders" or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender; provided, further, that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent or the LC Bank hereunder without the prior written consent of the Administrative Agent or the LC Bank, as the case may be. 59 SECTION 11.03. EXPENSES; INDEMNITY; DAMAGE WAIVER. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent, in connection with the initial syndication of the credit facilities provided for herein, the preparation and administration of this Agreement or any amendments, modifications or waivers of the provisions hereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable out-of-pocket expenses incurred by the LC Bank, including the reasonable fees, charges and disbursements of counsel for the LC Bank, in connection with the execution, delivery, administration, modification and amendment of any Letters of Credit to be issued by it hereunder, and (iii) all out-of-pocket expenses incurred by the Administrative Agent, the LC Bank or any Lender, including the fees, charges and disbursements of any counsel for the Administrative Agent, the LC Bank or any Lender, in connection with the enforcement or protection of its rights in connection with this Agreement, including its rights under this Section, or in connection with the Loans made and Letters of Credit issued hereunder, including in connection with any workout, restructuring or negotiations in respect thereof. (b) The Borrower shall indemnify the Administrative Agent, the Syndication Agent, each Co-Documentation Agent, the LC Bank, each Lender and Swingline Lender, and each Related Party of any of the foregoing Persons (each such Person being called an "INDEMNITEE") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the consummation of the Transactions or any other transaction contemplated hereby, (ii) any Loan or Letter of Credit or the use of the proceeds therefrom, (iii) any actual or alleged presence or release of Hazardous Materials on or from any property now, in the past or hereafter owned or operated by the Borrower, the Guarantor or any of its other Subsidiaries, or any Environmental Liability related in any way to the Borrower, the Guarantor or any of its other Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. (c) To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent or the LC Bank under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent or the LC Bank such Lender's Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent or the LC Bank in its capacity as such. 60 (d) To the extent permitted by applicable law, each party hereto shall not assert, and hereby waives, any claim against each other party, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions or any Loan or the use of the proceeds thereof. (e) All amounts due under this Section shall be payable not later than 20 days after written demand therefor. SECTION 11.04. SUCCESSORS AND ASSIGNS. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that no Credit Party may assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender and the LC Bank (and any attempted assignment or transfer by a Credit Party without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) Any Lender may, in consultation with the Borrower (except in the case of an assignment to a Lender or an Affiliate of a Lender), assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that (i) except in the case of an assignment to a Lender or an Affiliate of a Lender, each of the Administrative Agent and the LC Bank must give its prior written consent to such assignment (which consent, in the case of the Administrative Agent, shall not unreasonably be withheld and, in the case of the LC Bank, may be given or withheld in the sole discretion of the LC Bank), (ii) except in the case of an assignment to a Lender or an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender's Commitment, the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $10,000,000 unless each of the Borrower and the Administrative Agent otherwise consent, (iii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement and the Other Credit Agreement, (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500, and (v) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire; provided, further, that any consent of the Borrower otherwise required under this paragraph shall not be required if an Event of Default under clause (f) or (g) of Article VIII has occurred and is continuing. Upon acceptance and recording pursuant to paragraph (d) of this Section, from and after the effective date specified in each Assignment and Acceptance, the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Lender's rights and 61 obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.15, 2.16, 2.17 and 11.03), any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (e) of this Section. (c) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "REGISTER"). The entries in the Register shall be conclusive (absent manifest error), and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. (d) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Acceptance and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (e) Any Lender may, without the consent of the Borrower or the Administrative Agent, sell participations to one or more banks or other entities (a "PARTICIPANT") in all or a portion of such Lender's rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Guarantors and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 11.02(b) that affects such Participant. Subject to paragraph (f) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.15, 2.16 and 2.17 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. (f) A Participant shall not be entitled to receive any greater payment under Section 2.15 or 2.17 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. A Participant that would be a Foreign Lender 62 if it were a Lender shall not be entitled to the benefits of Section 2.17 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 2.17(e) as though it were a Lender. (g) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such assignee for such Lender as a party hereto. (h) Anything herein to the contrary notwithstanding, each Lender (the "GRANTING LENDER") shall have the right, without the prior consent of the Borrower, to grant to a special purpose funding vehicle (the "SPFV") that is utilized by such Granting Lender, identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Borrower, the option to provide all or any part of any Loan that such Granting Lender would otherwise be obligated to make hereunder, provided that (i) nothing herein shall constitute a commitment to make any Loan by any SPFV or shall relieve its Granting Lender of any obligation of such Granting Lender hereunder or under any other Credit Document, except to the extent that such SPFV actually funds all or part of any Loan such Granting Lender is obligated to make hereunder, (ii) if an SPFV elects not to exercise such option or otherwise fails to provide all or any part of such Loan, such Granting Lender shall be obligated to make such Loan pursuant to the terms hereof, (iii) the Granting Lender hereby indemnifies and holds the Administrative Agent harmless from and against any liability, loss, cost or expense (including for or in respect of Taxes) arising out of such identification and grant or any transaction contemplated thereby, and (iv) the provisions of this paragraph (h) shall not impose any increased cost or liability on any Credit Party. The making of a Loan by an SPFV hereunder shall utilize the Commitment of its Granting Lender to the same extent, and as if, such Loan were made by such Granting Lender. Each party hereto agrees that no SPFV shall be liable for any payment under this Agreement or any other Credit Document for which a Lender would otherwise be liable, for so long as, and to the extent that, its Granting Lender makes such payment. As to any Loans or portions of Loans made by it, each SPFV shall have all the rights that a Lender making such Loans or such portions of Loans would have had under this Agreement and otherwise; provided that (1) its voting rights under this Agreement shall be exercised solely by its Granting Lender and (2) its Granting Lender shall remain solely responsible to the other parties hereto for the performance of such SPFV's obligations under this Agreement, including its obligations in respect of the Loans or portions of Loans made by it. No additional Notes, if any, shall be required to evidence the Loans or portions of Loans made by a SPFV; and the Granting Lender shall be deemed to hold its Note, if any, as agent for its SPFV to the extent of the Loans or portions of Loans funded by such SPFV. Each Granting Lender shall act as administrative agent for its SPFV and give and receive notices and other communications on its behalf. Any payments for the account of any SPFV shall be paid to its Granting Lender as administrative agent for such SPFV, and neither any Credit Party nor the Administrative Agent shall be responsible for any Granting Lender's application of such payments. In furtherance of the foregoing, each party hereto hereby agrees that, until the date that is one year and one day after the payment in full of all outstanding senior Debt of any SPFV, it shall not institute against, or join any other Person in instituting against, such SPFV any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings (or any similar proceedings) under the laws 63 of the United States of America or any State thereof. In addition, notwithstanding anything to the contrary contained in this paragraph (h), an SPFV may (1) (A) with notice to, but without the prior written consent of, the Administrative Agent or the Borrower and without paying any processing fee therefor, assign all or any portion of its interest in any Loan to its Granting Lender or (B) with the consent (which consent shall not be unreasonably withheld) of the Administrative Agent and (if no Event of Default has occurred and is continuing) the Borrower, but without paying any processing fee therefor, assign all or any portion of its interest in any Loan to any financial institution providing liquidity or credit facilities to or for the account of such SPFV to fund the Loans funded by such SPFV or to support any securities issued by such SPFV to fund such Loans, and (2) disclose, on a confidential basis, any non-public information relating to Loans funded by it to any rating agency, commercial paper dealer or provider of a surety, guaranty or credit or liquidity enhancement to such SPFV. The Borrower shall not be required to pay, or to reimburse any Granting Lender for, its expenses relating to any SPFV identified by such Granting Lender pursuant to this paragraph (h). SECTION 11.05. SURVIVAL. All covenants, agreements, representations and warranties made by the Borrower herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the making of any Loans. The provisions of Sections 2.15, 2.16, 2.17 and 11.03 and Article IX shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Commitments or the termination of this Agreement or any provision hereof. SECTION 11.06. COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement, the commitment letter relating to the credit facility provided hereby (to the extent provided therein) and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 3.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 11.07. SEVERABILITY. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. SECTION 11.08. RIGHT OF SETOFF. If an Event of Default shall have occurred and be continuing, each Lender or the LC Bank or any Affiliate of either is hereby authorized at any 64 time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of any Credit Party against any of and all the Obligations now or hereafter existing under this Agreement held by such Lender or the LC Bank, irrespective of whether or not such Lender or the LC Bank shall have made any demand under this Agreement and although such Obligations may be unmatured. The rights of each Lender and the LC Bank under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. SECTION 11.09. GOVERNING LAW; JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York, without regard to principles of conflicts of law. (b) Each Credit Party hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement against any Credit Party or its properties in the courts of any jurisdiction. (c) Each Credit Party hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 11.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 11.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD 65 NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. SECTION 11.11. HEADINGS. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. SECTION 11.12. CONFIDENTIALITY. Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) with the consent of the Borrower or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than a Credit Party or any Subsidiary of a Credit Party. For the purposes of this Section, "INFORMATION" means all information received from any Credit Party or any Subsidiary of a Credit Party relating to a Credit Party or any Subsidiary of a Credit Party or their respective businesses, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by any Credit Party or any Subsidiary of a Credit Party; provided that, in the case of information received from any Credit Party or any Subsidiary of a Credit Party after the Effective Date, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. S-1 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. NISOURCE FINANCE CORP., as Borrower By: /s/ Dennis W. McFarland -------------------------------------- Name: Dennis W. McFarland Title: Vice President NISOURCE INC., as Guarantor By: /s/ Dennis W. McFarland -------------------------------------- Name: Dennis W. McFarland Title: Vice President Signature Page to 364-Day Credit Agreement S-2 BARCLAYS BANK PLC, as a Lead Arranger and Lender, as Swingline Lender, as LC Bank and as Administrative Agent By: /s/ Eric Chilton -------------------------------------- Name: Eric Chilton Title: Managing Director Signature Page to 364-Day Credit Agreement S-3 CREDIT SUISSE FIRST BOSTON, as a Lead Arranger and Lender and as Syndication Agent By: /s/ Andrea E. Shkane ----------------------------------------- Name: Andrea E. Shkane Title: Vice President By: /s/ Jay Chall ----------------------------------------- Name: Jay Chall Title: Director Signature Page to 364-Day Credit Agreement Annex A PRICING GRID The "Applicable Rate" for any day with respect to any Eurodollar Loan, ABR Loan, Facility Fee, Utilization Fee or LC Risk Participation Fee, as the case may be, is the percentage set forth below in the applicable row under the column corresponding to the Status that exists on such day:
Status Level I Level II Level III Level IV Level V Level VI - ------------------------- ------- -------- --------- -------- ------- -------- Eurodollar Revolving Loans/Eurodollar Term Loans (basis points) 47.5 57.5 72.5 100.0 115.0 140.0 ABR Loans (basis points) 0 0 0 0 15.0 40.0 Facility Fee (basis points) 10 12.5 15 25 40 50 Utilization Fee (basis points) 15.0 15.0 15.0 15.0 15.0 15.0 LC Risk Participation Fee (basis points) 47.5 57.5 72.5 100.0 115.0 140.0
For purposes of this Pricing Grid, the following terms have the following meanings (as modified by the provisos below): "LEVEL I STATUS" exists at any date if, at such date, the Index Debt is rated either A- or higher by S&P or A3 or higher by Moody's. "LEVEL II STATUS" exists at any date if, at such date, the Index Debt is rated either BBB+ by S&P or Baa1 by Moody's. "LEVEL III STATUS" exists at any date if, at such date, the Index Debt is rated either BBB by S&P or Baa2 by Moody's. "LEVEL IV STATUS" exists at any date if, at such date, the Index Debt is rated either BBB- by S&P or Baa3 by Moody's. "LEVEL V STATUS" exists at any date if, at such date, the Index Debt is rated either BB+ or lower by S&P or Ba1 or lower by Moody's. "LEVEL VI STATUS" exists at any date if, at such date, no other Status exists. "STATUS" refers to the determination of which of Level I Status, Level II Status, Level III Status, Level IV Status, Level V Status or Level VI Status exists at any date. The credit ratings to be utilized for purposes of this Pricing Grid are those assigned to the Index Debt, and any rating assigned to any other debt security of the Borrower shall be disregarded. The rating in effect at any date is that in effect at the close of business on such date. Provided, that the applicable Status shall change as and when the applicable Index Debt ratings change. Provided further, that if the Index Debt is split-rated, the applicable Status shall be determined on the basis of the higher of the two ratings then applicable; provided further, that, if such higher rating is BBB-/Baa3 or lower, the applicable Status shall instead be determined on the basis of the lower of the two ratings then applicable. Provided further, that if both Moody's and S&P, or their successors as applicable, shall have ceased to issue or maintain such ratings, then the applicable Status shall be Level VI. Annex A-2 EX-10.9 5 w57495ex10-9.txt 1ST & 2ND AMENDMENTS TO THE NISOURCE 1994 LTIP... EXHIBIT 10.9 FIRST AMENDMENT TO THE NISOURCE INC. 1994 LONG-TERM INCENTIVE PLAN (AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2000) WHEREAS, NiSource Inc. (the "Company") maintains the NiSource Inc. 1994 Long-Term Incentive Plan, as amended and restated effective January 1, 2000 (the "Plan"); WHEREAS, pursuant to Section 20 of the Plan, the Company deems it to be in its best interests to amend the Plan as described below; NOW, THEREFORE, the Plan is hereby amended, effective October 1, 2001, as follows: 1. Section 14 of the Plan is amended to read as follows: DIVIDEND EQUIVALENTS. From and after the date, if any, specified in an applicable contingent stock award agreement, the holder of such contingent stock award shall receive a distribution of an amount equivalent to the dividends payable in cash or property (other than stock of the Company) that would have been payable to the holder with respect to the number of Common Shares subject to such award, had the holder been the legal owner of such Common Shares on the applicable date on which such dividend is declared by the Company on Common Shares. Any such dividend equivalent payable in cash or property (other than stock of the Company) shall be payable directly to the holder of the contingent stock award at such time, in such form, and upon such terms and conditions, as are applicable to the actual cash or property dividend actually declared with respect to Common Shares. Any participant entitled to receive a cash dividend equivalent pursuant to his contingent stock award agreement may, by written election filed with the Company, at least ten days prior to the date for payment of such dividend equivalent, elect to have such dividend equivalent credited to an account maintained for his benefit under a dividend reinvestment plan maintained by the Company. Appropriate adjustments with respect to awards shall be made to give effect to the payment of stock dividends as set forth in subsection 3(b) above. 2. Section 17 of the Plan is amended to read as follows: 17. EMPLOYMENT RIGHTS. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any participant the right to continue in employment with the Company or affect any right which his employer or the Company may have to terminate the employment of such participant. For purposes of the Plan, termination of employment shall be deemed to occur on the date the recipient of an award last performed services for the Company or his employer affiliated with the Company and shall not be deemed to include any period during which the recipient is entitled to receive severance pay from the Company or any such affiliate. IN WITNESS WHEREOF, the Company has caused this First Amendment to be executed on its behalf, by its duly authorized officer, on this 22nd day of October, 2001. NiSource Inc. By: /s/ Stephen P. Adik ----------------------------- Its: Vice Chairman ----------------------------- SECOND AMENDMENT TO THE NISOURCE INC. 1994 LONG-TERM INCENTIVE PLAN (AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2000) WHEREAS, NiSource Inc. (the "Company") maintains the NiSource Inc. 1994 Long-Term Incentive Plan, as amended and restated effective January 1, 2000, and further amended effective October 1, 2001 (the "Plan"); WHEREAS, pursuant to Section 20 of the Plan, the Company deems it to be in its best interest to amend the Plan for clarification purposes as described below; NOW THEREFORE, Section 6 of the Plan is amended, effective January 1, 2001, by the addition of the following sentence at the end thereof: "The limitations set forth in this Section 6 shall relate only to years or other periods of time in which such awards constitute applicable employee remuneration under Internal Revenue Code Section 162(m). IN WITNESS WHEREOF, the Company has caused this Second Amendment to the Plan to be executed on its behalf, by its duly authorized officer, on this 25th day of January, 2002. NISOURCE INC. By: /s/ Stephen P. Adik ------------------------------ Its: Vice Chairman ------------------------------ EX-10.34 6 w57495ex10-34.txt FORM OF AGREEMENT EXHIBIT 10.34 AGREEMENT This Agreement (the "Agreement") is entered into as of this 1st day of February, 2001 (the "Agreement Date"), by and between NiSource Inc., a Delaware corporation ("NiSource") and ___________________ ("Executive"). WITNESSETH: WHEREAS, Executive's employment with Columbia Energy Group ("Columbia") and all of its Affiliates was constructively terminated by Columbia and its Affiliates on November 1, 2000 and Executive was rehired by NiSource or an Affiliate on such date; and WHEREAS, Executive entered into a Change in Control Agreement with Columbia effective July 14, 1999 (the "Columbia Change in Control Agreement"), attached hereto as Exhibit A, and expressly elects to waive benefits provided thereunder, except as otherwise provided herein, in return for benefits provided under the Agreement. NOW, THEREFORE, in consideration of future services to be rendered by Executive to NiSource or an Affiliate, and in further consideration of the mutual covenants and promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. DEFINITIONS. (a) "Account" shall mean the NiSource Phantom Stock Unit Account established for Executive hereunder containing benefits credited as NiSource Phantom Stock Units, pursuant to Section 5. (b) "Affiliate" shall have the meaning set forth in Rule 12b-2 under the Securities Exchange Act of 1934. (c) "Beneficiary" shall mean the person or entity designated by Executive, by written instrument delivered to NiSource, to receive the benefits payable with respect to him under the Agreement in the event of HIS death. If Executive fails to designate a Beneficiary, or if no Beneficiary survives Executive, such death benefits shall be paid: (i) to his surviving spouse; (ii) if there is no surviving spouse, to his living descendants per stirpes; or (iii) if there is neither a surviving spouse nor descendants then living, to his duly appointed and qualified executor or personal representative. (d) "NiSource Phantom Stock Unit" shall mean a unit whose value is related to the value of the common stock of NiSource. 2. SERVICE. Notwithstanding the constructive termination of Executive's employment with Columbia and all of its Affiliates on November 1, 2000, Executive's service performed for Columbia or any of its Affiliates prior to November 1, 2000 shall be credited for all purposes under any employee benefit plan or program sponsored by Columbia, NiSource or any of their Affiliates in which Executive participates at any time on or after November 1, 2000. 3. BENEFITS. (a) In consideration of Executive's acceptance of employment with NiSource, his Account shall be credited with _______ NiSource Phantom Stock Units. (b) Notwithstanding any provisions contained elsewhere in the Agreement, the provisions contained in the following Sections of the Columbia Change in Control Agreement shall be preserved, and shall remain in effect pursuant to the terms of the Columbia Change in Control Agreement: (i) Section 3(b) - providing for a tax gross-up payment, which shall apply to payments under the Columbia Change in Control Agreement and the Agreement; 2 (ii) Section 5 - providing for reimbursement of litigation expenses; and (iii) Section 10 - providing for a confidentiality restriction. (c) Notwithstanding any provisions contained elsewhere in the Agreement, the benefits contained in the following Sections of the Columbia Change in Control Agreement shall be provided to Executive if he terminates employment with NiSource and all of its Affiliates for any reason, and at any time, during the three year period following November 1, 2000: (i) outplacement services, pursuant to Section 3a(ii)(B); and (ii) continued health and welfare coverage for the remainder of such three year period, pursuant to Section 3a(ii)(C). 4. BONUS. In addition to the amount set forth in Section 3(a), ______ NiSource Phantom Stock Units shall be credited to Executive's Account. 5. NISOURCE PHANTOM STOCK UNIT ACCOUNT. A NiSource Phantom Stock Unit Account shall be established for Executive. Amounts credited to Executive's Account shall be measured in terms of NiSource Phantom Stock Units. Except as otherwise provided in Section 11(a), Executive shall be fully vested in his Account at all times. 6. DIVIDENDS. Amounts equivalent to dividends that would have been declared on NiSource Phantom Stock Units credited to Executive's Account, had such NiSource Phantom Stock Units actually constituted issued shares of common stock of NiSource, shall be treated as follows: (a) The amount of such dividend equivalents for each calendar year shall, at the election of Executive, either be (i) paid to Executive in cash, within 10 days after NiSource pays the related dividend on its common stock, or (ii) credited to Executive's Account as additional NiSource Phantom Stock Units, based on the price per share of common stock of NiSource, as listed on the New York Stock Exchange at the close of business on the date each dividend related to a dividend equivalent is declared. 3 (b) An election by Executive as to whether such dividend equivalents shall be paid in cash or credited as additional NiSource Phantom Stock Units, with respect to dividend equivalents for each calendar year, shall be in writing, signed by Executive, and delivered to NiSource prior to January 1 of the calendar year in which the dividends related to such dividend equivalents to be deferred, or paid (as the case may be), are declared by NiSource. Such election (and any subsequent election) shall continue until suspended or modified in a writing delivered by Executive to NiSource, which new election shall only apply to dividend equivalents that become applicable after the end of the calendar year in which such election is delivered to NiSource. (c) Any such election made by Executive shall be irrevocable with respect to any dividend equivalent covered by such election, including the dividend equivalents applicable to the calendar year in which the election suspending or modifying the prior election is delivered to NiSource. (d) If no election is made by Executive for a calendar year, dividend equivalents for such year shall be credited to Executive's Account as additional NiSource Phantom Stock Units, in the manner set forth in paragraph (a) above. 7. DISTRIBUTION. Upon termination of employment of Executive with NiSource and all of its Affiliates for any reason, Executive (or in the event of death, his Beneficiary) shall be entitled to receive from NiSource an amount, with respect to each NiSource Phantom Stock Unit then credited to Executive's Account, equal to the greater of (a) the price per share of common stock of NiSource, as listed on the New York Stock Exchange at the close of business on the date of termination, and (b) 85% of the price per share of common stock of NiSource, as listed on the New York Stock Exchange at the close of business on November 1, 2000. Such amount shall be paid in a cash lump sum payment within 30 days following Executive's termination of employment with NiSource and all Affiliates, but only if (except in the case of Executive's death) Executive executes a Release in the form attached hereto as Exhibit B within 7 days after Executive's termination of employment with NiSource and all of its Affiliates. 8. NONCOMPETITION AND NONSOLICITATION. Executive acknowledges that NiSource and its Affiliates would be substantially damaged by an association of Executive with a similar organization that competes for customers of NiSource and any of its Affiliates. Without the written consent of NiSource, Executive shall not at any time 4 during his employment with NiSource and any of its Affiliates, and for a period of one year commencing on the date of Executive's termination of employment with NiSource and any of its Affiliates, anywhere in the United States, (a) solicit as a customer any person who was a customer of NiSource or any of its Affiliates, or offer the same products or render the same services to such customer as are provided or proposed to be provided by NiSource or any of its Affiliates to such customer, (b) directly or indirectly, on Executive's behalf or in the service or on the behalf of others, engage in, assist, perform services for, establish, or have any equity interest in any entity or person, in any line of business offered by NiSource or any of its Affiliate, whether as an officer, partner, trustee, consultant, independent contractor, or employee for any such person or entity, or (c) actively induce or solicit any employees of NiSource or any of its Affiliates to leave the employ of NiSource or any of its Affiliates. The provisions of this Section 8 shall not apply with respect to activities performed by Executive in the normal course of his duties with NiSource and any of its Affiliates. For purposes of this Section 8, "person" shall include any individual, corporation, partnership, trust, firm, proprietorship, venture, or other entity of any nature whatsoever. 9. CHANGE IN CONTROL AND TERMINATION AGREEMENT. On the Agreement Date, Executive and NiSource shall enter into a Change in Control and Termination Agreement, in the form attached hereto as Exhibit C, applicable in the event of a Change in Control of NiSource, as therein defined. 10. RELIEF. The following shall apply in the event of a breach or threatened or intended breach by Executive of the covenants and agreements set forth in Section 8: (a) All amounts attributable to NiSource Phantom Stock Units credited to Executive's Account pursuant to Section 4, and dividend equivalents related thereto, to which Executive or any other person would otherwise be entitled under the Agreement, shall be forfeited. (b) NiSource shall be entitled to injunctions, both preliminary and permanent, enjoining such breach or threatened or intended breach, and Executive hereby consents to the issuance thereof forthwith in any court of competent jurisdiction. (c) The taking of any action by NiSource, or the forbearance of NiSource to take any action with respect to such breach or intended or threatened breach, shall not 5 constitute a waiver by NiSource of any of its rights to remedies or reliefs under the Agreement or under law or equity. 11. NISOURCE ASSIGNMENT. NiSource may not assign the Agreement, except that NiSource's obligations hereunder shall be binding legal obligations of any successor to all or substantially all of NiSource's business by purchase, merger, consolidation, or otherwise. 12. EXECUTIVE ASSIGNMENT. No interest of Executive or his Beneficiary under the Agreement, or any right to receive any payment or distribution hereunder, shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind, nor may such interest or right to receive a payment or distribution be taken, voluntarily or involuntarily, for the satisfaction of the obligations or debts of, or other claims against, Executive or his Beneficiary, including claims for alimony, support, separate maintenance, and claims in bankruptcy proceedings. 13. BENEFITS UNFUNDED. All rights of Executive and his Beneficiary under the Agreement shall at all times be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of NiSource for payment of any amounts due hereunder. Neither Executive nor his Beneficiary shall have any interest in or rights against any specific assets of NiSource or any of its Affiliates, and Executive and his Beneficiary shall have only the rights of a general unsecured creditor of NiSource and its Affiliates. References to an Account shall be for bookkeeping purposes only, and shall not constitute a segregation of assets of NiSource or any of its Affiliates. 14. WAIVER. No waiver by either party hereto at any time of any breach by the other party of, or compliance with, any condition or provision of the Agreement to be performed by the other party shall be deemed a waiver of any other provisions or conditions at the same time or at any prior or subsequent time. 15. APPLICABLE LAW. The Agreement shall be construed and interpreted pursuant to the laws of Indiana. 16. ENTIRE AGREEMENT. The Agreement contains the entire Agreement between NiSource and Executive and supersedes any and all previous agreements, 6 written or oral, among the parties relating to the subject matter hereof, including the Columbia Change in Control Agreement, except as provided in paragraphs (b) and (c) of Section 3. No amendment or modification of the terms of the Agreement shall be binding upon the parties hereto unless reduced to writing and signed by NiSource and Executive. 17. NO EMPLOYMENT CONTRACT. Nothing contained in the Agreement shall be construed to be an employment contract between Executive and NiSource or any of its Affiliates. Executive is employed at will and NiSource or any of its Affiliates may terminate his employment at any time, with or without cause. 18. WITHHOLDING. NiSource or any of its Affiliates shall have the right to deduct from all amounts paid pursuant to the Agreement any taxes required by law to be withheld with respect to such awards. 19. COUNTERPARTS. The Agreement may be executed in counterparts, each of which shall be deemed an original. 20. SEVERABILITY. In the event any provision of the Agreement is held illegal or invalid, the remaining provisions of the Agreement shall not be affected thereby. 21. SUCCESSORS. The Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, representatives and successors. 22. NOTICE. Notices required under the Agreement shall be in writing and sent by registered mail, return receipt requested, to the following addresses or to such other address as the party being notified may have previously furnished to the other party by written notice: If to NiSource: NiSource Inc. 801 E. 86th Avenue Merrillville, Indiana 46410 Attention: Gary L. Neale Phone: 219-647-6004 Facsimile: 219-647-6061 7 With a copy to: Schiff Hardin & Waite 6600 Sears Tower 233 S. Wacker Drive Chicago, Illinois 60606 Attention: Lawrence H. Jacobson Phone: 312-258-5580 Facsimile: 312-258-5700 If to Executive: [___________________] NiSource Inc. 801 E. 86th Avenue Merrillville, Indiana 46410 Phone: 219-647-6004 Facsimile: 219-647-6061 8 IN WITNESS WHEREOF, Executive has hereunto set his hand, and NiSource has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. NISOURCE INC. By: ----------------------------- Title: -------------------------- -------------------------------- [ ] ------------------- 9 EXHIBIT B GENERAL RELEASE In consideration of the benefits set forth in the Agreement attached hereto, the sufficiency of which consideration is hereby acknowledged, I do hereby fully, finally and unconditionally release and forever discharge NiSource, and all its parent, sister and subsidiary corporations and all of its affiliates, as well as all of its former and current directors, officers, employees, attorneys, agents, predecessors, successors and assigns, in their personal and corporate capacities, from any and all liabilities, actions, causes of action, claims, rights, obligations, charges, damages, costs, attorneys' fees, suits, re-employment rights and demands of any and every kind, nature and character, known and unknown, liquidated or unliquidated, absolute or contingent, in law or in equity, enforceable under any local, state, or federal statute or ordinance, or under the common law of the United States, from the beginning of the world to the date of this General Release, including, but not limited to, all claims relating to the Age Discrimination in Employment Act of 1967, as amended, 29 U.S.C. Section 621 et seq. and the specific statutes referred to in footnote(1) and the Indiana doctrines of defamation, libel, slander, invasion of privacy, intentional infliction of emotional distress, interference with contractual relations, retaliatory discharge, employment contracts, wrongful discharge, implied contracts or implied covenants of good faith, or fair dealing, and any other statute, authority or law, providing a cause of action as to my employment with NiSource and all its parent, sister and subsidiary corporations and all of its affiliates, and/or its termination. Except to enforce the terms of the Agreement, I also agree not to sue NiSource or any of the other released entities or persons with respect to the claims covered by the foregoing General Release. I acknowledge and agree that this General Release is being given only in exchange for consideration to which I am not otherwise entitled. I acknowledge that I have been hereby advised in writing by NiSource to consult with an attorney prior to executing this General Release and have been given a period of 21 days within which to consider its terms. For a period of 7 days following my execution of this General Release, I shall have the right to revoke this General Release and it shall not become effective or enforceable until such revocation period has expired. - --------- (1) Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C.Section 2000e et seq.; the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. Section 1001 et seq.; the Rehabilitation Act of 1973, as amended, 29 U.S.C. Section 701 et seq.; the Americans with Disabilities Act of 1990, as amended, 42 U.S.C. Section 12101 et seq.; the Family and Medical Leave Act of 1993, 29 U.S.C. Section 2601 et seq.; the Fair Labor Standards Act of 1938, as amended, 29 U.S.C. Section 201 et seq.; the civil Rights Act of April 9, 1866, 42 U.S.C. Section 1981 et seq.; the National Labor-Management Relations Act, 29 U.S.C. Section 141 et seq.; the Worker Adjustment Retraining Notification Act, 29 U.S.C. Section 2101 et seq.; the Occupational Safety and Health Act, 29 U.S.C. Section 651 et seq.; the Indiana Civil Rights Law, Ind. Code Section 22-9-1 et seq. B-1 I also acknowledge having read and understood the provisions of this General Release and represent that the execution of this General Release constitutes my knowing and voluntary act, made without coercion or intimidation. I understand that this General Release is binding upon me, my heirs, executors and administrators. DATED: --------------------------- --------------------------- [ ] ------------------- DATED: --------------------------- --------------------------- Witness' Signature B-2 EXHIBIT C CHANGE IN CONTROL AND TERMINATION AGREEMENT NiSource Inc., a Delaware corporation ("Employer"), which as used herein shall mean NiSource Inc. and all of its Affiliates, and ___________________ ("Executive") hereby enter into a Change in Control and Termination Agreement as of February 1, 2001 ("Agreement"), which Agreement is hereinafter set forth. WITNESSETH: WHEREAS, Employer desires to provide security to Executive in connection with Executive's employment with Employer in the event of a Change in Control; and WHEREAS, Executive and Employer desire to enter into this Agreement pertaining to the terms of the security Employer is providing to Executive with respect to his employment in the event of a Change in Control; NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Term. The term of this Agreement shall be the period beginning on the date hereof and terminating on the date 36 months after such date (the "Term"), provided that for each day from and after the date hereof the Term will automatically be extended for an additional day, unless either Employer or Executive has given written notice to the other party of its or his election to cease such automatic extension, in which case the Term shall be the 36-month period beginning on the date such notice is received by such other party. C-1 2. Definitions. For purposes of this Agreement: (a) "Affiliate" or "Associate" shall have the meaning set forth in Rule 12b-2 under the Securities Exchange Act of 1934. (b) "Base Salary" shall mean Executive's monthly base salary at the rate in effect on the date of a reduction for purposes of paragraph (g) of this Section, or on the date of a termination of employment under circumstances described in subsections 3(a) or (b) below, whichever is higher; provided, however, that such rate shall in no event be less than the highest rate in effect for Executive at any time during the Term. (c) "Beneficiary" shall mean the person or entity designated by Executive, by written instrument delivered to Employer, to receive the benefits payable under this Agreement in the event of his death. If Executive fails to designate a Beneficiary, or if no Beneficiary survives Executive, such death benefits shall be paid: (i) to his surviving spouse; or (ii) if there is no surviving spouse, to his living descendants per stirpes; or (iii) if there is neither a surviving spouse nor descendants, to his duly appointed and qualified executor or personal representative. (d) "Bonus" shall mean Executive's target annual incentive bonus compensation for the calendar year in which the date of a termination of employment under circumstances described in subsection 3(a) below occurs, under the incentive bonus compensation plan then maintained by Employer; provided, however, that such target annual incentive bonus compensation shall in no event be less than the highest target annual incentive bonus compensation C-2 of Executive under any such incentive bonus compensation plan for any calendar year commencing during the Term. (e) A "Change in Control" shall be deemed to take place on the occurrence of any of the following events: (1) The acquisition by an entity, person or group (including all Affiliates or Associates of such entity, person or group) of beneficial ownership, as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, of capital stock of NiSource Inc. entitled to exercise more than 30% of the outstanding voting power of all capital stock of NiSource Inc. entitled to vote in elections of directors ("Voting Power"); (2) The effective time of (i) a merger or consolidation of NiSource Inc. with one or more other corporations as a result of which the holders of the outstanding Voting Power of NiSource Inc. immediately prior to such merger or consolidation (other than the surviving or resulting corporation or any Affiliate or Associate thereof) hold less than 50% of the Voting Power of the surviving or resulting corporation, or (ii) a transfer of 30% of the Voting Power, or a Substantial Portion of the Property, of NiSource Inc. other than to an entity of which NiSource Inc. owns at least 50% of the Voting Power; or (3) The election to the Board of Directors of NiSource Inc. of candidates who were not recommended for election by the Board of Directors of NiSource Inc. in office immediately prior to the election, if such candidates constitute a majority of those elected in that particular election. Notwithstanding the foregoing, a Change in Control shall not be deemed to take place by virtue of any transaction in which Executive is a participant in a group effecting an acquisition of NiSource Inc. and, after such acquisition, Executive holds an equity interest in the entity that has acquired NiSource Inc. C-3 (f) "Good Cause" shall be deemed to exist if, and only if: (1) Executive engages in acts or omissions constituting dishonesty, intentional breach of fiduciary obligation or intentional wrongdoing or malfeasance, in each case that results in substantial harm to Employer; or (2) Executive is convicted of a criminal violation involving fraud or dishonesty. (g) "Good Reason" shall be deemed to exist if, and only if: (1) there is a significant change in the nature or the scope of Executive's authorities or duties; (2) there is a significant reduction in Executive's monthly rate of Base Salary, his opportunity to earn a bonus under an incentive bonus compensation plan maintained by Employer or his benefits; or (3) Employer changes by 100 miles or more the principal location in which Executive is required to perform services. (h) "Pension Plan" shall mean any Retirement Plan that is a defined benefit plan as defined in Section 3(35) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). (i) "Retirement Plan" shall mean any qualified or supplemental employee pension benefit plan, as defined in Section 3(2) of ERISA, currently or hereinafter made available by Employer in which Executive is eligible to participate. (j) "Severance Period" shall mean the period beginning on the date Executive's employment with Employer terminates under circumstances described in subsection 3(a) and ending on the date 36 months thereafter. C-4 (k) "Substantial Portion of the Property of NiSource Inc." shall mean 50% of the aggregate book value of the assets of NiSource Inc. and its Affiliates and Associates as set forth on the most recent balance sheet of NiSource Inc., prepared on a consolidated basis, by its regularly employed, independent, certified public accountants. (l) "Welfare Plan" shall mean any health and dental plan, disability plan, survivor income plan or life insurance plan, as defined in Section 3(1) of ERISA, currently or hereafter made available by Employer in which Executive is eligible to participate. 3. Benefits Upon Termination of Employment. (a) The following provisions will apply if a Change in Control occurs during the Term, and (i) at any time during the 24 months after the Change in Control occurs (whether during or after the expiration of the Term), the employment of Executive with Employer is terminated by Employer for any reason other than Good Cause, or Executive terminates his employment with Employer for Good Reason, or (ii) at any time during the seventh month after the Change in Control occurs (whether during or after the expiration of the Term), Executive terminates his employment with Employer for any reason: (1) Employer shall pay Executive an amount equal to 36 times the sum of (a) Executive's Base Salary plus (b) one-twelfth of his Bonus. Such amount shall be paid to Executive in a lump sum within 180 days after his date of termination of employment; provided, however, Executive, by written notice to Employer, may elect to receive such payment on any date that is no earlier than the later to occur of (i) the date 10 days after the date of termination, and (ii) the date 10 days after receipt of such notice. (2) Employer shall pay Executive an amount equal to the pro rata portion of Executive's target annual incentive bonus compensation for the calendar year in which the date of termination of employment occurs, under the C-5 incentive bonus compensation plan then maintained by Employer, that is applicable to the period commencing on the first day of such calendar year and ending on the date of termination. Such amount shall be paid to Executive in a lump sum within 180 days after his date of termination of employment; provided, however, Executive, by written notice to Employer, may elect to receive such payment on any date that is no earlier than the later to occur of (i) the date 10 days after the date of termination, and (ii) the date 10 days after receipt of such notice. (3) Executive shall receive any and all benefits accrued under any Retirement Plan, Welfare Plan or other plan or program in which he participates at the date of termination of employment, to the date of termination of employment, the amount, form and time of payment of such benefits to be determined by the terms of such Retirement Plan, Welfare Plan and other plan or program, and Executive's employment shall be deemed to have terminated by reason of retirement, and without regard to vesting limitations in all such Plans and other plans or programs not subject to the qualification requirements of Section 401 (a) of the Internal Revenue Code of 1986 as amended ("Code"), under circumstances that have the most favorable result for Executive thereunder for all purposes of such Plans and other plans or programs. Payment shall be made at the earliest date permitted under any such Plan or other plan or program that is not funded with a trust agreement. (4) (A) Employer shall pay to Executive a monthly Supplemental Pension Benefit in an amount equal to the amount determined pursuant to clause (i) below less the amount determined pursuant to clause (ii) below: (i) the aggregate monthly amount of the pension benefit ("Pension") that would have been payable to Executive under all Pension Plans if that Pension were computed (A) by treating the Severance Period C-6 as service for all purposes of the Pension Plans and (B) by considering his compensation during the Severance Period to be his Base Salary and one-twelfth of his Bonus for all purposes of the Pension Plans; (ii) the aggregate monthly amount of any Pension actually paid to Executive under all Pension Plans. (B) The Supplemental Pension Benefit payable to Executive hereunder shall be paid (i) commencing at the later to occur of the last day of the Severance Period or the date payment of his Pension commences under the Pension Plans; and (ii) in the same form as is applicable to the Pension payable to Executive under the Pension Plans. (C) If Executive dies prior to commencement of payment to him of his Pension under the Pension Plans, under circumstances in which a death benefit under the Pension Plans is payable to his surviving spouse or other beneficiary, then Employer shall pay a monthly Supplemental Death Benefit to Executive's surviving spouse or other beneficiary entitled to receive the death benefit payable with respect to Executive under the Pension Plans in an amount equal to the amount determined pursuant to clause (i) below less the amount determined pursuant to clause (ii) below: (i) the aggregate monthly amount of the death benefit that would have been payable to the surviving spouse or other beneficiary of Executive under the Pension Plans if that death benefit were computed (A) by treating the Severance Period as service for all purposes of the Pension Plans and (B) by considering his compensation during the Severance Period to be his Base Salary and one-twelfth of his Bonus for all purposes of the Pension Plans; C-7 (ii) the aggregate monthly amount of any death benefit actually paid to the surviving spouse or other beneficiary of Executive under the Pension Plans. (D) The Supplemental Death Benefit payable with respect to Executive hereunder shall be payable at the same time, in the same form, and to the same persons as is applicable to the death benefit payable with respect to Executive under the Pension Plans. (E) Notwithstanding the foregoing provisions, the total of the actual years of service of Executive for purposes of each of the Pension Plans and the years of service for which credit is given pursuant to subparagraphs (3)(A) and (C) shall not exceed the maximum number of years of service, if any, that can be considered pursuant to the terms of such Pension Plan. (F) Any actuarial adjustments made under the Pension Plans with respect to the form or time of payment of a Pension or death benefit to Executive or his surviving spouse or other beneficiary under the Pension Plans shall also be applicable to the Supplemental Pension Benefit or Supplemental Death Benefit payable hereunder and shall be based upon the same actuarial assumptions as those specified in the Pension Plans. (5) If upon the date of termination of Executive's employment Executive holds any options with respect to stock of Employer, all such options will immediately become exercisable upon such date and will be exercisable for 200 days thereafter. Any restrictions on stock of Employer owned by Executive on the date of termination of his employment will lapse on such date. (6) During the Severance Period Executive and his spouse and other dependents will continue to be covered by all Welfare Plans maintained by Employer in which he and his spouse and other dependents were participating immediately prior to the date of his termination as if he continued to be an C-8 employee of Employer and Employer will continue to pay the costs of coverage of Executive and his spouse and other dependents under such Welfare Plans on the same basis as is applicable to active employees covered thereunder; provided that, if participation in any one or more of such Welfare Plans is not possible under the terms thereof, Employer will provide substantially identical benefits. Coverage under any such Welfare Plan will cease if and when Executive obtains employment with another employer during the Severance Period, and becomes eligible for coverage under any substantially similar Welfare Plan provided by his new employer. (7) During the Severance Period, Executive shall not be entitled to reimbursement for fringe benefits, including without limitation, dues and expenses related to club memberships, automobile expenses, expenses for professional services and other similar perquisites. (b) If the employment of Executive with Employer is terminated by Employer or Executive other than under circumstances set forth in subsection 3(a), Executive's Base Salary shall be paid through the date of his termination, and Employer shall have no further obligation to Executive or any other person under this Agreement. Such termination shall have no effect upon Employee's other rights, including but not limited to, rights under the Retirement Plans and the Welfare Plans. (c) Notwithstanding anything herein to the contrary, (1) in the event Employer shall terminate the employment of Executive for Good Cause hereunder, Employer shall give Executive at least thirty (30) days prior written notice specifying in detail the reason or reasons for Executive's termination, and (2) in the event Executive terminates his employment for Good Reason hereunder, Executive shall give Employer at least thirty (30) days prior written notice specifying in detail the reason or reasons for Executive's termination. C-9 (d) This Agreement shall have no effect, and Employer shall have no obligations hereunder, if Executive's employment terminates for any reason at any time other than during the 24 months following a Change in Control. 4. Excise Tax. (a) In the event that a Change in Control shall occur, and a final determination is made by legislation, regulation, ruling directed to Executive or Employer, by court decision, or by independent tax counsel described in subsection (b) next below, that the aggregate amount of any payment made to Executive (1) hereunder, and (2) pursuant to any plan, program or policy of Employer in connection with, on account of, or as a result of, such Change in Control ("Total Payments") will be subject to the excise tax provisions of Section 4999 of the Code, or any successor section thereof, Executive shall be entitled to receive from Employer, in addition to any other amounts payable hereunder, a lump sum payment (the "Gross-Up Payment"), sufficient to cover the full cost of such excise taxes and Executive's federal, state and local income and employment taxes on this additional payment so that the net amount retained by Executive, after the payment of all such excise taxes on the Total Payments, and all federal, state and local income and employment taxes and excise taxes on the Gross-Up Payment, shall be equal to the Total Payments. The Total Payments, however, shall be subject to any federal, state and local income and employment taxes thereon. For this purpose, Executive shall be deemed to be in the highest marginal rate of federal, state and local taxes. The Gross-Up Payment shall be made at the same time as the payments described in subsections 3(a)(1) and (2) above. (b) Employer and Executive shall mutually and reasonably determine the amount of the Gross-Up Payment to be made to Executive pursuant to the preceding subsection. Prior to the making of any such Gross-Up Payment, either party may request a determination as to the amount of such Gross-Up Payment. If such a determination is requested, it shall be made promptly, at Employer's expense, by C-10 independent tax counsel selected by Executive and approved by Employer (which approval shall not unreasonably be withheld), and such determination shall be conclusive and binding on the parties. Employer shall provide such information as such counsel may reasonably request, and such counsel may engage accountants or other experts at Employer's expense to the extent that they deem necessary or advisable to enable them to reach a determination. The term "independent tax counsel," as used herein, shall mean a law firm of recognized expertise in federal income tax matters that has not previously advised or represented either party. It is hereby agreed that neither Employer nor Executive shall engage any such firm as counsel for any purpose, other than to make the determination provided for herein, for three years following such firm's announcement of its determination. (c) In the event the Internal Revenue Service subsequently adjusts the excise tax computation made pursuant to subsections 4(a) and (b) above, Employer shall pay to Executive, or Executive shall pay to Employer, as the case may be, the full amount necessary to make either Executive or Employer whole had the excise tax initially been computed as subsequently adjusted, including the amount of any underpaid or overpaid excise tax, and any related interest and/or penalties due to the Internal Revenue Service. 5. Setoff. No payments or benefits payable to or with respect to Executive pursuant to this Agreement shall be reduced by any amount Executive or his spouse or Beneficiary, or any other beneficiary under the Pension Plans, may earn or receive from employment with another employer or from any other source, except as expressly provided in subsection 3(a)(6). 6. Death. If Executive's employment with Employer terminates under circumstances described in subsections 3(a) or (b), then upon Executive's subsequent death, all unpaid amounts payable to Executive under subsections 3(a)(1), (2) or (3) or 3(b), or Section 4, if any, shall be paid to his Beneficiary, all amounts payable under C-11 subsection 3(a)(4) shall be paid pursuant to the terms of said subsection to his spouse or other beneficiary under the Pension Plans, and if subsection 3(a) applies, his spouse and other dependents shall continue to be covered under all applicable Welfare Plans during the remainder of the Severance Period, if any, pursuant to subsection 3(a)(6). 7. No Solicitation of Representatives and Employees. Executive agrees that he shall not, during the Term or the Severance Period, directly or indirectly, in his individual capacity or otherwise, induce, cause, persuade, or attempt to do any of the foregoing in order to cause, any representative, agent or employee of Employer to terminate such person's employment relationship with Employer, or to violate the terms of any agreement between said representative, agent or employee and Employer. 8. Confidentiality. Executive acknowledges that preservation of a continuing business relationship between Employer and their respective customers, representatives, and employees is of critical importance to the continued business success of Employer and that it is the active policy of Employer to guard as confidential certain information not available to the public and relating to the business affairs of Employer. In view of the foregoing, Executive agrees that he shall not during the Term and at any time thereafter, without the prior written consent of Employer, disclose to any person or entity any such confidential information that was obtained by Executive in the course of his employment by Employer. This section shall not be applicable if and to the extent Executive is required to testify in a legislative, judicial or regulatory proceeding pursuant to an order of Congress, any state or local legislature, a judge, or an administrative law judge or is otherwise required by law to disclose such information. 9. Forfeiture. If Executive shall at any time violate any obligation of his under Sections 7 or 8 in a manner that results in material damage to the Employer or its business, he shall immediately forfeit his right to any benefits under this Agreement, and Employer shall thereafter have no further obligation hereunder to Executive or his spouse, Beneficiary or any other person. C-12 10. Executive Assignment. No interest of Executive, his spouse or any Beneficiary, or any other beneficiary under the Pension Plans, under this Agreement, or any right to receive any payment or distribution hereunder, shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind, nor may such interest or right to receive a payment or distribution be taken, voluntarily or involuntarily, for the satisfaction of the obligations or debts of, or other claims against, Executive or his spouse, Beneficiary or other beneficiary, including claims for alimony, support, separate maintenance, and claims in bankruptcy proceedings. 11. Benefits Unfunded. Except as otherwise provided in Section 13, all rights under this Agreement of Executive and his spouse, Beneficiary or other beneficiary under the Pension Plans, shall at all times be entirely unfunded, and no provision shall at any time be made with respect to segregating any assets of Employer for payment of any amounts due hereunder. None of Executive, his spouse, Beneficiary or any other beneficiary under the Pension Plans shall have any interest in or rights against any specific assets of Employer, and Executive and his spouse, Beneficiary or other beneficiary shall have only the rights of a general unsecured creditor of Employer. Except as otherwise provided in Section 13, and notwithstanding the preceding provisions of this Section, the Nominating and Compensation Committee of the Board of Directors of Employer, in its discretion, shall have the right, at any time and from time to time, to cause amounts payable to Executive or his Beneficiary hereunder to be paid to the trustee of the NIPSCO Industries, Inc. Umbrella Trust For Management established effective January 1, 1991, as amended from time to time, or any similar trust at any time established by Employer ("Trust"). 12. Waiver. No waiver by any party at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be C-13 performed by such other party shall be deemed a waiver of any other provisions or conditions at the same time or at any prior or subsequent time. 13. Litigation Expenses. Employer shall pay Executive's reasonable attorneys' fees and legal expenses in connection with any judicial proceeding to enforce this Agreement, or to construe or determine the validity of this Agreement or otherwise in connection therewith, whether or not Executive is successful in such litigation. Within 10 days following the occurrence of a Potential Change in Control (as defined in the Trust described in Section 11), the Nominating and Compensation Committee of the Board of Directors of Employer shall cause Employer to contribute the sum of $100,000 to the Trust to be applied in satisfaction of Employer's obligations under this Section. The Nominating and Compensation Committee shall cause Employer to contribute additional amounts to the Trust, at such time or times as the Committee deems appropriate, to the extent the aggregate of (1) the aforementioned sum of $100,000, plus Trust earnings thereon, and (2) any additional Employer contributions to the Trust, plus Trust earnings thereon, is not sufficient to satisfy in full Employer's obligations under this Section. 14. Applicable Law. This Agreement shall be construed and interpreted pursuant to the laws of Indiana. 15. Entire Agreement. This Agreement contains the entire Agreement between the Employer and Executive and supersedes any and all previous agreements; written or oral; between the parties relating to the subject matter hereof. No amendment or modification of the terms of this Agreement shall be binding upon the parties hereto unless reduced to writing and signed by Employer and Executive. 16. No Employment Contract. Nothing contained in this Agreement shall be construed to be an employment contract between Executive and Employer. 17. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original. C-14 18. Severability. In the event any provision of this Agreement is held illegal or invalid, the remaining provisions of this Agreement shall not be affected thereby. 19. Successors. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, representatives and successors. 20. Employment with an Affiliate. For purposes of this Agreement, (A) employment or termination of employment of Executive shall mean employment or termination of employment with Employer and all Affiliates, (B) Base Salary and Bonus shall include remuneration received by Executive from Employer and all Affiliates, and (C) the terms Pension Plan, Retirement Plan and Welfare Plan maintained or made available by Employer shall include any such plans of any Affiliate of Employer. 21. Notice. Notices required under this Agreement shall be in writing and sent by registered mail, return receipt requested, to the following addresses or to such other address as the party being notified may have previously furnished to the other party by written notice: If to Employer: NiSource Inc. 801 E. 86th Avenue Merrillville, Indiana 46410 Attention: Gary L. Neale If to Executive: NiSource Inc. 801 E. 86th Avenue Merrillville, Indiana 46410 Attention: [___________________] C-15 IN WITNESS WHEREOF, Executive has hereunto set his hand, and Employer has caused these presents to be executed in its name on its behalf, all on this 1st day of February, 2001. NISOURCE INC. By ------------------------------ Title: --------------------------- --------------------------------- [ ], Executive ----------------- C-16 Schedule of Parties to Executive Agreements: The following NiSource executives have entered into an Agreement in substantially the form hereof with NiSource: Jeffrey Grossman (20,336 Units in consideration of employment and 12,965 Units in consideration of non-compete), Michael W. O'Donnell (73,020 Units in consideration of employment and 26,533 Units in consideration of non-compete) and Stephen P. Smith (38,907 Units in consideration of employment and 19,899 Units in consideration of non-compete). The contracts are substantially identical in all material respects except as to the parties, the execution dates, the number of Units credited to the employee (such number is identified by parenthetical above), and terms of the change of control agreements attached as Exhibit B thereto (which are substantially identical in all material respects except as to the parties, the execution dates, whether the termination provisions of the agreement apply (from 7-24 months), the monthly base payout (24 to 36 months), and whether or not the executive's payout is grossed up for taxes). B-1 EX-12 7 w57495ex12.txt RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 NiSource, INC. RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, ------------------------------------------------------------------------------ 1997 1998 1999 2000 2001 ------------ ------------ ------------ ------------ -------------- EARNINGS AS DEFINED IN ITEM 503(d) OF REGULATION S-K: Income before interest charges ........................ $319,514,639 $338,081,136 $376,782,105 $504,120,756 $ 883,366,001 Adjustments- Federal income taxes ........... 97,010,863 115,799,335 91,898,851 81,292,674 193,915,089 State income tax ............... 16,856,952 16,785,056 14,131,404 14,249,484 32,364,742 Deferred investment tax credit, net .................. (7,375,636) (7,360,787) (7,691,257) (7,806,853) (9,008,085) Deferred income taxes, net ..... (1,466,940) (22,460,744) (7,890,731) 38,155,011 (34,112,781) Federal and state income taxes included in other income ....................... 987,240 (1,900,910) -- -- -- Amortization of capitalized interest ......... -- -- -- -- -- ------------ ------------ ------------ ------------ -------------- $425,527,118 $438,943,086 $467,230,372 $630,011,072 $1,066,524,966 ============ ============ ============ ============ ============== FIXED CHARGES AS DEFINED IN ITEM 503(d) OF REGULATION S-K: Interest on long-term debt ....... $102,842,096 $111,419,929 $131,788,755 $133,879,888 $ 436,427,884 Other interest ................... 13,453,006 16,536,021 33,234,752 166,561,203 145,040,904 Amortization of premium, reacquisition premium, discount and expense on debt, net ................... 4,718,120 4,589,696 5,148,168 7,913,866 20,509,675 Interest portion of rent expense ........................ 2,939,650 7,899,302 16,757,234 19,143,000 44,135,938 Minority Interest (Topies) ....... -- -- 17,810,625 20,355,000 20,355,000 Capitalized interest during period ......................... 0 0 0 0 0 ------------ ------------ ------------ ------------ -------------- $123,952,872 $140,444,948 $204,739,534 $347,852,957 $ 666,469,401 ============ ============ ============ ============ ============== Plus preferred stock dividends: Preferred dividend requirements of subsidiary ..... $ 8,691,457 $ 8,538,180 $ 8,334,254 $ 7,817,003 $ 7,473,412 Preferred dividend requirements factor ............ 1.54 1.49 1.61 1.61 1.61 ------------ ------------ ------------ ------------ -------------- Preferred dividend requirements of subsidiary ..... 13,384,844 12,721,888 13,418,149 12,585,375 12,032,193 Fixed charges .................... 123,952,872 140,444,948 204,739,534 347,852,957 666,469,401 ------------ ------------ ------------ ------------ -------------- $137,337,716 $153,166,836 $218,157,683 $360,438,332 $ 678,501,594 ============ ============ ============ ============ ============== Ratio of earnings to fixed charges .......................... 3.10 2.87 2.14 1.75 1.57
EX-21 8 w57495ex21.txt LIST OF SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF NISOURCE INC. as of December 31, 2001
STATE OF SEGMENT / SUBSIDIARY INCORPORATION -------------------- ------------- GAS DISTRIBUTION OPERATIONS Bay State Gas Company Massachusetts Columbia Gas of Kentucky, Inc. Kentucky Columbia Gas of Maryland, Inc. Delaware Columbia Gas of Ohio, Inc. Ohio Columbia Gas of Pennsylvania, Inc. Pennsylvania Columbia Gas of Virginia, Inc. Virginia Kokomo Gas and Fuel Company Indiana Northern Indiana Fuel and Light Company, Inc. Indiana Northern Utilities, Inc. New Hampshire Columbia Service Partners, Inc. Delaware Northern Indiana Public Service Company* Indiana ELECTRIC OPERATIONS Northern Indiana Public Service Company* Indiana GAS TRANSMISSION AND STORAGE OPERATIONS Columbia Gas Transmission Corporation Delaware Columbia Gulf Transmission Company Delaware Columbia Pipeline Corporation Delaware NiSource Pipeline Group, Inc. Indiana Crossroads Pipeline Company Indiana Granite State Gas Transmission, Inc. New Hampshire EXPLORATION AND PRODUCTION OPERATIONS Columbia Energy Resources, Inc. Delaware MERCHANT OPERATIONS EnergyUSA-TPC Corp. Indiana NESI Energy Marketing, L.L.C. Indiana Primary Energy, Inc. Indiana OTHER PRODUCTS AND SERVICES OPERATIONS Columbia Transmission Communications Corporation Delaware SM&P Utility Resources, Inc. Indiana NI Energy Services, Inc. Indiana NiSource Energy Technologies, Inc. Indiana NiSource Development Company, Inc. Indiana Columbia Energy Services Corporation Kentucky NI-TEX Gas Services, Inc. Delaware EnergyUSA, Inc. Indiana NI Fuel Company, Inc. Indiana DISCONTINUED OPERATIONS IWC Resources Corporation Indiana
STATE OF SEGMENT / SUBSIDIARY INCORPORATION -------------------- ------------- CORPORATE Columbia Energy Group Delaware NiSource Capital Trust I Delaware NiSource Finance Corp. Indiana NiSource Capital Markets, Inc. Indiana NiSource Corporate Services Company Indiana Columbia Insurance Corporation, Ltd. Bermuda
* Reported under Gas Distribution Operations and Electric Operations. EX-23.1 9 w57495ex23-1.txt CONSENT OF ARTHUR ANDERSEN EXHIBIT 23.1 CONSENT OF ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 29, 2002 included in this Form 10-K, into NiSource Inc.'s previously filed Form S-3 Registration Statement No. 333-49330 and 333-49330-01,Form S-4 Registration Statement No. 333-54650 and 333-54650-01, and Form S-4 Registration Statement Nos. 333-33896 and 333-33896-01. /s/ Arthur Andersen LLP Chicago, Illinois February 22, 2002 EX-23.2 10 w57495ex23-2.txt CONSENT DATED FEBRUARY 1, 2002 Exhibit 23.2 [RYDER SCOTT COMPANY LOGO] RYDER SCOTT COMPANY - --------------------- PETROLEUM CONSULTANTS FAX (713) 651-0849 1100 LOUISIANA SUITE 3800 HOUSTON, TEXAS 77002-5218 TELEPHONE (713) 651-9191 CONSENT As independent petroleum and natural gas consultants, we hereby consent to the use of our name in the Annual Report of Columbia Energy Group, to the Securities and Exchange Commission on Form 10-K, and any Registration Statement of Columbia Energy Group, relating to the issue of securities to the public during 2001. We have no interest of a substantial or material nature in Columbia Energy Group, or in any affiliate. We have not been employed on a contingent basis, and we are not connected with Columbia Energy Group, or any affiliate as a promoter, underwriter, voting trustee, director, officer, employee, or affiliate. /s/ Ryder Scott Company, L.P. RYDER SCOTT COMPANY, L.P. Houston, Texas February 1, 2002 1100 530-8TH AVENUE, S.W. CALGARY, ALBERTA TRP 358 TEL (403) 262-2799 FAX (403) 262-2790 600 17TH STREET, SUITE 1610N DENVER, COLORADO 80202-5416 TEL (303) 623-9147 FAX (303) 623-4258 EX-23.3 11 w57495ex23-3.txt CONSENT DATED JANUARY 24, 2002 Exhibit 23.3 CONSENT January 24, 2002 RE: EVALUATION OF THE P&NG RESERVES OF COLUMBIA NATURAL RESOURCES-CANADA, LTD. (AS OF DECEMBER 31, 2001), CONSTANT PRICE AND COST VERSION FOR U.S. SECURITIES REPORTING REQUIREMENTS As independent petroleum and natural gas consultants, we hereby consent to the filing of this Letter Report in its entirety as an Exhibit to the 2001 Annual Report of NiSource Inc. to the Securities and Exchange Commission on Form 10-K, and any Registration Statement of NiSource Inc., relating to the issue of securities to the public during 2002; to the quotation or summarization of portions of this Letter Report, subject to our approval of the related page(s) of the document(s), in the 10-K, the Prospectus included in said Registration Statement(s) or the 2001 Annual Report to Stockholders; and, subject to approval of the related page(s) of the document(s), to the use of our name and the reliance upon our authority as experts in said Annual Report to Stockholders, Form 10-K and Prospectus(es) and in Part II of said Registration Statement(s). We have no interest of a substantial or material nature in NiSource Inc., or in any affiliate, nor are we to receive any such interest as payment for the preparation of this Letter Report; we have not been employed for such preparation on a contingent fee basis; and we are not connected with NiSource Inc. or any affiliate as a promoter, underwriter, voting trustee, director, officer, employee, or affiliate. - ----------------------------------------- PERMIT TO PRACTICE SPROULE ASSOCIATES LIMITED Sincerely, - ----------------------------------------- - ----------------------------------------- Signature Peter C. Sidey, P.Eng. Associate - ----------------------------------------- Date Harry J. Helwerda, P.Eng. PERMIT NUMBER P417 Vice-President, Engineering The Association of Professional Engineers Geologists and Geophysicists of Alberta - ----------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----