-----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, E/qImDcKfUVelz5HF7/pUvs2Mbz1xDsoPYHPmtgQvWv2O4kF1qffjp0jMgMstdZi opLk5etQWbaM4CvJnpFy+g== 0000950137-04-001796.txt : 20040312 0000950137-04-001796.hdr.sgml : 20040312 20040312155207 ACCESSION NUMBER: 0000950137-04-001796 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040312 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: 04666128 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 c83669e10vk.txt ANNUAL REPORT 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, 2003 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 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark 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. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ] The aggregate market value of Common Stock (based upon the June 30, 2003, closing price of $19.00 on the New York Stock Exchange) held by non-affiliates was approximately $4,929,601,082. 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 11, 2004. CONTENTS
Page Part I No. ------ Item 1. Business......................................................................... 3 Item 2. Properties....................................................................... 6 Item 3. Legal Proceedings................................................................ 8 Item 4. Submission of Matters to a Vote of Security Holders.............................. 9 Supplemental Item. Executive Officers of the Registrant..................................... 10 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 7A. Quantitative and Qualitative Disclosures About Market Risk....................... 44 Item 8. Financial Statements and Supplementary Data...................................... 45 Item 9. Change In and Disagreements with Accountants on Accounting and Financial Disclosure............................................................. 102 Item 9A. Controls and Procedures.......................................................... 102 Part III Item 10. Directors and Executive Officers of the Registrant............................... 102 Item 11. Executive Compensation........................................................... 102 Item 12. Security Ownership of Certain Beneficial Owners and Management................... 102 Item 13. Certain Relationships and Related Transactions................................... 103 Item 14. Principal Accounting Fees and Services........................................... 103 Part IV Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K.................. 104 Signatures.................................................................................. 105 Exhibits.................................................................................... 106
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 is the successor to an Indiana corporation organized in 1987 under the name of NIPSCO Industries, Inc., which changed its name to NiSource Inc. on April 14, 1999. In connection with the acquisition of Columbia Energy Group (Columbia) on November 1, 2000, NiSource became a Delaware corporation registered under the Public Utility Holding Company Act of 1935, as amended. 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 and storage 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 derives substantially all of its revenues and earnings from the operating results of its 15 direct subsidiaries. NiSource's business segments are: Gas Distribution Operations; Gas Transmission and Storage Operations; Electric Operations; and Other Operations. During the second quarter of 2003, NiSource sold its exploration and production operations. Previous to this sale, NiSource reported these operations in an Exploration and Production segment. In addition, during the fourth quarter, NiSource sold certain subsidiaries of PEI Holdings, Inc. (formerly Primary Energy, Inc.)(PEI). Previously, the PEI assets were reported in the Other Operations segment. All periods have been adjusted to include the PEI subsidiaries and the exploration and production segment as discontinued operations. Gas Distribution Operations NiSource's natural gas distribution operations serve more than 3.3 million customers in 9 states and operate over 55,000 miles of pipeline. Through its wholly owned subsidiary, Columbia, NiSource owns five distribution subsidiaries that provide natural gas to approximately 2.2 million residential, commercial and industrial customers in Ohio, Pennsylvania, Virginia, Kentucky and Maryland. NiSource also distributes natural gas to approximately 770,000 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 329,000 customers in Massachusetts, Maine and New Hampshire. Gas Transmission and Storage Operations NiSource's Gas Transmission and Storage Operations subsidiaries own and operate approximately 16,000 miles of interstate pipelines and operate one of the nation's largest underground natural gas storage systems capable of storing approximately 646 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 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 Operations subsidiaries are engaged in several projects that will expand their facilities and throughput. The largest such project is the proposed Millennium Pipeline. The Millennium Pipeline is a project proposed by a partnership of energy companies including Columbia Transmission, which would replace parts of an existing Columbia Transmission pipeline. 3 ITEM 1. BUSINESS (continued) NISOURCE INC. Electric Operations NiSource generates and distributes electricity through its subsidiary Northern Indiana to approximately 440,000 customers in 21 counties in the northern part of Indiana. Northern Indiana owns and has the ability to operate four coal-fired electric generating stations with a net capability of 3,059 megawatts (mw), six gas-fired generating units with a net capability of 323 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's transmission system, with voltages from 34,500 to 345,000 volts, consists of 3,187 circuit miles. Northern Indiana is interconnected with five neighboring electric utilities. In January 2002, Northern Indiana indefinitely shut down its Dean H. Mitchell Generating Station (Mitchell Station). Northern Indiana now operates three coal-fired generation stations with a net capacity of 2,574 mw, five gas-fired generating units with a net capacity of 306 mw and two hydroelectric plants with a net capability of 10 mw. During the year ended December 31, 2003, Northern Indiana generated 77.2% and purchased 22.8% of its electric requirements. Currently, Northern Indiana is reviewing options to meet the electric needs of its customers. This review includes an assessment of Northern Indiana's oldest generating station units and various options regarding the return of the Mitchell Station, constructed in the early 1950's, to service in the second half of 2004. Other Operations The Other Operations segment participates in energy-related services including gas marketing, power trading and ventures focused on distributed power generation technologies, including a cogeneration facility, fuel cells and storage systems. PEI operates the Whiting Clean Energy project, which is a 525 mw cogeneration facility that uses natural gas to produce electricity for sale in the wholesale markets and also provides steam for industrial use. Additionally, the Other Operations segment is involved in real estate and other businesses. See Item 7 for additional information about NiSource's business segments. Divestiture of Non-Core Assets Since the Columbia acquisition, NiSource has sold certain businesses judged to be non-core to NiSource's strategy, including Indianapolis Water Company and other assets of IWC Resources Corporation (IWCR), SM&P Utility Resources, Inc. (SM&P), Columbia Propane Corporation, a significant portion of EnergyUSA-TPC Corp. (TPC) net obligations under its gas forward transaction portfolio, physical storage inventory and associated agreements, Columbia Energy Resources, Inc. (CER), Columbia Transmission Communications Corporation (Transcom), Columbia Service Partners, Inc., all of the steel-related, inside-the-fence assets of PEI, and other non-core assets (See "Discontinued Operations" in Item 7 and Note 4 of Notes to the Consolidated Financial Statements for additional information.). Business Strategy NiSource has focused its business strategy on its core, rate-regulated asset-based businesses with virtually 100% of its operating income generated from the rate-regulated businesses. With the nation's fourth largest natural gas pipeline, the largest natural gas distribution network east of the Rocky Mountains and one of the nation's largest natural gas storage networks, NiSource operates 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. Competition and Changes in the Regulatory Environment The regulatory frameworks applicable to NiSource's operations, at both the state and federal levels, continue to evolve. These changes have had and will continue to have an impact on NiSource's operations, structure and profitability. Management continually seeks new ways to be more competitive and profitable in this changing environment, including providing gas customers with increased choices for products and services, disposing of non-core assets and operations, and developing new energy-related products and services for residential, commercial and industrial customers. 4 ITEM 1. BUSINESS (continued) NISOURCE INC. 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, local distribution company (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 services independent from the purchase of the commodity. NiSource's Gas Distribution Operations 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 Operations subsidiaries for transportation services. 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 and issued an opinion on December 31, 2002. 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 provisioning of wholesale transmission service. NiSource does not believe that compliance with the new rules will be material to its future earnings. NiSource's Other Operations subsidiaries 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. Financing Subsidiary NiSource Finance Corp. (NiSource Finance) is a wholly-owned, consolidated 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's obligations are fully and unconditionally guaranteed by NiSource. The function of NiSource Finance was previously performed by NiSource Capital Markets, Inc. 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, 2003, NiSource had 8,614 employees of whom 3,351 were subject to collective bargaining agreements. For a listing of certain subsidiaries of NiSource refer to Exhibit 21. NiSource files various reports with the Securities and Exchange Commission (SEC). The reports include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. NiSource makes all SEC filings available without charge to the public on its web site at http://www.nisource.com. 5 ITEM 2. PROPERTIES NISOURCE INC. Discussed below are the principal properties held by NiSource and its subsidiaries as of December 31, 2003. GAS DISTRIBUTION OPERATIONS. NiSource's Gas Distribution Operations subsidiaries own and operate a total of 55,469 miles of pipelines and certain related facilities. This includes: (i) for the five distribution subsidiaries of its Columbia system, 33,624 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, 14,403 miles of pipelines, 27,129 acres of underground storage and 2 compressor stations with a total of 6,000 hp of installed capacity, (iii) for its Bay State system, 5,745 miles of pipelines, (iv) for its Northern Indiana Fuel and Light Company Inc. system, 909 miles of pipelines, and (v) for its Kokomo Gas and Fuel Company system, 788 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 841,992 acres of underground storage, 3,578 storage wells, 11,604 miles of interstate pipelines and 92 compressor stations with 589,519 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 4,133 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, Wyoming and the offshore Gulf of Mexico. 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 Pipeline's operations are located in Indiana and Ohio. ELECTRIC OPERATIONS. Northern Indiana owns and has the ability to operate four coal-fired electric generating stations with a net capability of 3,059 mw, six gas-fired generating units with a net capability of 323 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. It has 289 substations with an aggregate transformer capacity of 23,159,300 kilovolt-amps. Its transmission system, with voltages from 34,500 to 345,000 volts, consists of 3,187 circuit miles of line. The electric distribution system extends into 21 counties and consists of 7,786 circuit miles of overhead and 1,769 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 12,794,855 kilovolt-amps and 458,962 electric watt-hour meters. In January 2002, Northern Indiana indefinitely shutdown its Mitchell Station. Northern Indiana now operates three coal-fired generation stations with a net capacity of 2,574 mw, five gas-fired generating units with a net capacity of 306 mw and two hydroelectric plants with a net capability of 10 mw. Currently, Northern Indiana is reviewing options to meet the electric needs of its customers. This review includes an assessment of Northern Indiana's oldest generating station units and various options regarding the return of the Mitchell Station, constructed in the early 1950's, to service in the second half of 2004. Northern Indiana has requested proposals for outside companies to provide power under varying terms and conditions. These proposals are being evaluated. In February 2004, the city of Gary announced an interest to acquire the land on which the Mitchell Station is located for economic development, including a proposal to increase the length of the runways at the Gary International Airport. Northern Indiana expects to discuss the proposal to acquire the land with the city of Gary in the near future. To date, the city has not commenced any legal proceedings. OTHER OPERATIONS. PEI owns and operates the Whiting Clean Energy project, which is a 525 mw cogeneration facility that uses natural gas to produce electricity for sale in the wholesale markets and also provides steam for industrial use. Through other subsidiaries, NiSource owns Southlake Complex, its 325,000 square foot headquarters building located in Merrillville, Indiana and other residential and development property which it holds for resale in Indiana. 6 ITEM 2. PROPERTIES NISOURCE INC. CHARACTER OF OWNERSHIP. The principal offices and properties of NiSource and its subsidiaries are held in fee and are free from 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 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 distribution 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. 7 ITEM 3. LEGAL PROCEEDINGS NISOURCE INC. 1. VIRGINIA NATURAL GAS, INC. V. COLUMBIA GAS TRANSMISSION CORP., FEDERAL ENERGY REGULATORY COMMISSION (FERC) On January 13, 2004, Virginia Natural Gas, Inc. (VNG) filed with FERC a "Complaint Seeking Compliance with the Natural Gas Act and with Regulations and Certificate Orders of the Federal Energy Regulatory Commission and Seeking Remedies" in Docket No. RP04-139. VNG alleges various violations during the 2002-2003 winter by Columbia Transmission of its firm service obligations to VNG. VNG seeks monetary damages and remedies (exceeding $37 million), and also seeks certain prospective remedies. Columbia Transmission filed its response to the complaint on February 2, 2004, demonstrating the authority under which it had acted and the limitations on FERC's authority to address the issues and damage claims raised by VNG. On February 17, 2004, VNG filed an answer and motion for summary disposition. Columbia filed its response to that most recent VNG pleading on March 3, 2004. FERC has taken no action to date regarding the complaint. 2. ATLANTIGAS CORPORATION V. NISOURCE, ET AL, U.S. DISTRICT COURT, NORTHERN DISTRICT OF MARYLAND AND TRIAD ENERGY RESOURCES, ET AL. V. NISOURCE, ET AL In the Atlantigas proceeding, the original complaint was filed in June 2002 in the U.S. District Court, District of Columbia. This original complaint was dismissed for lack of personal jurisdiction on September 29, 2003. A new complaint was filed in the U.S. District Court of Northern Maryland on October 27, 2003. This complaint alleges that various NiSource companies, including Columbia Transmission and Columbia Gulf, and certain "select shippers" engaged in an "illegal gas scheme" that violated federal anti-trust and state law. The "illegal gas scheme" complained of by the plaintiff relates to the Columbia Transmission and Columbia Gulf gas imbalance transactions that were the subject of the FERC enforcement staff investigation and subsequent settlement approved in October 2000. In January 2004, the defendants filed a motion to dismiss the suit on the issue of Atlantigas' standing to sue and the case is stayed pending argument on that motion. The Triad Energy case which was filed in March of 2003 was also originally filed in the U.S. District Court, District of Columbia. This case was a purported class action against various NiSource companies (including Columbia Transmission and Columbia Gulf) as well as several "select shippers" who allegedly benefited from the gas imbalance transactions described in the Atlantigas proceeding. Plaintiffs asserted a claim for damages of $1.716 billion ($5.147 billion if trebled). Based on the Court's decision on personal jurisdiction in Atlantigas, the plaintiffs dismissed this case on October 31, 2003 from the District of Columbia and indicated that the case would be refiled in another jurisdiction. To date, the plaintiffs have not refiled a case against any NiSource companies. 3. VIVIAN K. KERSHAW ET AL. V. COLUMBIA NATURAL RESOURCES, INC., ET AL., CHAUTAUQUA COUNTY COURT, NEW YORK Plaintiffs filed a complaint in 2000 against Columbia Natural Resources, a former subsidiary, Columbia Transmission, Columbia Energy Group and Columbia Energy Resources, Inc. The complaint alleges that plaintiffs own an interest in oil and gas leases 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. Plaintiffs seek the alleged royalty underpayment and punitive damages. The complaint also seeks class action status on behalf of all royalty owners in oil and gas leases owned by the defendants. Discovery is still proceeding regarding class certification issues. 8 ITEM 3. LEGAL PROCEEDINGS (continued) NISOURCE INC. 4. UNITED STATES OF AMERICA EX REL. JACK J. GRYNBERG V. COLUMBIA GAS TRANSMISSION CORP., ET AL., U.S. DISTRICT COURT, E.D. LOUISIANA The plaintiff filed a complaint in 1997, under the False Claims Act, on behalf of the United States of America, against approximately seventy pipelines, including Columbia Gulf and Columbia Transmission. The plaintiff claimed that the defendants had submitted false royalty reports to the government (or caused others to do so) by mis-measuring the volume and heating content of natural gas produced on Federal land and Indian lands. The Plaintiff's original complaint was dismissed without prejudice for misjoinder of parties and for failing to plead fraud with specificity. The plaintiff then filed over sixty-five new False Claims Act complaints against over 330 defendants in numerous Federal courts. One of those complaints was filed in the Federal District Court for the Eastern District of Louisiana against Columbia and thirteen affiliated entities. Plaintiff's second complaint, filed in 1997, repeats the mis-measurement claims previously made and adds valuation claims alleging that the defendants have undervalued natural gas for royalty purposes in various ways, including sales to affiliated entities at artificially low prices. Most of the Grynberg cases were transferred to Federal court in Wyoming in 1999. This case is still in the discovery process. 5. PRICE ET AL V. GAS PIPELINES, ET AL., STEVENS COUNTY COURT, KANSAS This was originally a nationwide class action suit filed in 1999 on behalf of all domestic producers and all state taxing authorities against over 200 natural gas measurers, mostly natural gas pipelines. The plaintiffs allege that, since January 1, 1974, Defendants have mismeasured the volume and/or heating content of natural gas from non-federal oil and gas leases and, as a result, caused substantial royalty underpayments. The allegations in this case are in most respects identical to the allegations in the Grynberg case described above but these allegations apply to all "non-federal" leases. Plaintiffs have filed their Fourth Amendment Petition, in which they narrow the number of defendants, now down to only 53, and the geographic scope of their allegations (from a nationwide class to actions occurring in Kansas, Wyoming and Colorado only). Plaintiffs have also filed a companion suit against the same defendants named in the Fourth Amended Petition alleging mismeasurement relating to BTU content. The only remaining NiSource defendant is Columbia Energy Service Corporation. NiSource is seeking to have Columbia Energy Service Corporation dismissed as a defendant. 6. TAWNEY, ET AL. V. COLUMBIA NATURAL RESOURCES, INC., ROANE COUNTY, WV CIRCUIT COURT The Plaintiffs, who are royalty owners, filed a lawsuit in early 2003 against Columbia Natural Resources alleging that Columbia Natural Resources underpaid royalties by improperly deducting post-production costs and not paying a fair value for the gas produced from their leases. Plaintiffs seek the alleged royalty underpayment and punitive damages claiming that Columbia Natural Resources fraudulently concealed the deduction of post-production charges. In February 2004, the court certified the case as a class action that includes any person who, after January 1, 1980, received or is due royalties from Columbia Natural Resources (and its predecessors or successors) on lands lying within the boundary of the State of West Virginia. All individuals, corporations, agencies, departments or instrumentalities of the United States of America are excepted from the class. Although NiSource sold Columbia Natural Resources in 2003, it remains obligated to manage this litigation and also remains at least partly liable for any damages awarded to the plaintiffs. The company intends to appeal the decision granting class certification. Refer to Footnote 17E,"Other Commitments and Contingencies" in the notes to the consolidated financial statements, for additional information regarding legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 9 SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT NISOURCE INC. The following is a list of the Executive Officers of the Registrant, including their names, ages and offices held, as of February 1, 2004.
YEARS WITH NAME AGE NISOURCE OFFICE(S) HELD IN PAST 5 YEARS - ---- --- -------- ------------------------------ Gary L. Neale....................... 63 14 Chairman, President and Chief Executive Officer of NiSource since March 1993. Samuel W. Miller, Jr................ 44 2 Executive Vice President and Chief Operating Officer of NiSource since September 2002. Partner in the consulting firm Accenture prior to September 2002. Michael W. O'Donnell................ 59 3 Executive Vice President and Chief Financial Officer of NiSource since November 2000. Senior Vice President and Chief Financial Officer of Columbia from October 1993 to October 2000. Robert C. Skaggs, Jr................ 49 3 Executive Vice President, Regulated Revenue of NiSource since October 2003. President of Columbia Gas of Ohio, Inc. from February 1997 to October 2003 and Columbia Gas of Kentucky, Inc. from January 1997 to October 2003. President of Bay State and Northern Utilities, Inc. from November 2000 to October 2003. President of Columbia Gas of Virginia, Inc., Columbia Gas of Maryland, Inc., and Columbia Gas of Pennsylvania, Inc. from December 2001 to October 2003. Peter V. Fazio, Jr.................. 64 3 Executive Vice President and General Counsel of NiSource since November 2000. Partner in the law firm of Schiff Hardin LLP since 1984. S. LaNette Zimmerman................ 59 3 Executive Vice President, Human Resources and Communications of NiSource since March 2002. Executive Vice President and Chief Human Resources Officer at NiSource from November 2000 to February 2002. Consultant to NiSource from June 2000 to October 2000 on human resources and other matters. Prior thereto, Sr. Vice President Human Resources at Chicago Title and Trust Company.
10 SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT (continued) NISOURCE INC.
YEARS WITH NAME AGE NISOURCE OFFICE(S) HELD IN PAST 5 YEARS - ---- --- -------- ------------------------------ Jeffrey W. Grossman................. 52 3 Vice President and Controller of NiSource since November 2000. Vice President and Controller of Columbia from May 1996 to October 2000. David J. Vajda...................... 48 27 Vice President and Treasurer of NiSource since January 2003. Vice President, Finance, Indiana Energy Group of NiSource Corporate Services Company from August 2002 to December 2002. Vice President, Finance and Administration, Merchant Energy of NiSource Corporate Services Company from October 2000 to July 2002. Vice President, Finance of Northern Indiana from February 2000 to September 2000. Controller of Northern Indiana from July 1996 to January 2000.
11 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS NISOURCE INC. NiSource's common stock is listed and traded on the New York, Chicago and Pacific stock exchanges. The table below indicates the high and low sales prices of NiSource's common stock, on the composite tape, during the periods indicated.
2003 2002 --------------------- ------------------- HIGH LOW High Low ================================================================================ First Quarter 21.70 16.39 24.14 19.00 Second Quarter 20.68 17.94 24.99 20.71 Third Quarter 20.65 18.58 22.05 16.25 Fourth Quarter 21.97 19.70 20.43 14.51 - --------------------------------------------------------------------------------
As of December 31, 2003, NiSource had 42,034 common stockholders of record and 262,630,409 shares outstanding. In February 2003, NiSource issued approximately 13.1 million shares of common stock upon the settlement of forward equity agreements comprising a component of the Corporate PIES. Concurrently with the settlement of the forward agreements, NiSource remarketed most of the underlying debentures, due February 19, 2005, and reset the interest rate to 4.25%. NiSource received net proceeds of $344.1 million from the remarketing in satisfaction of the Corporate PIES holders' obligation under the forward equity agreements. The sole purchaser of the remarketed debentures purchased newly-offered 6.15% notes of NiSource Finance due March 1, 2013, using the remarketed debentures as consideration. In November 2002, NiSource issued 41.4 million shares of common stock at a per-share price of $18.30 ($17.75 on a net basis). The net proceeds of approximately $734.9 million were used to reduce debt. Holders of shares of NiSource's common stock are entitled to receive dividends when, as and if declared by NiSource's Board of Directors (Board) out of funds legally available. 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 totaling $1.10 per share for 2003 and $1.16 per share for 2002. Beginning with the November 2003 dividend, NiSource reduced its annual dividend to $0.92 per share from $1.16 per share in line with the company's objectives of ongoing debt reduction, cash flow and core business reinvestment for the future. This decision was also influenced by the fact that its dividend yield and payout ratio prior to the dividend reduction were higher than industry averages. At its January 5, 2004 meeting, the Board declared a quarterly common dividend of $0.23 cents per share, payable on February 20, 2004 to holders of record on January 30, 2004. Although the Board currently intends to continue the payment of regular quarterly cash dividends on common shares, the timing and amount of future dividends will depend on the earnings of NiSource's subsidiaries, their financial condition, cash requirements, regulatory restrictions, any restrictions in financing agreements and other factors deemed relevant by the Board. The following limitation on payment of dividends applies to Northern Indiana: So long as any shares of Northern Indiana's cumulative preferred stock are outstanding, no cash dividends shall be paid or declared on its common stock in excess of 75% of the net income available for the preceding calendar year, unless the aggregate of the capital applicable to stocks subordinate as to assets and dividends to the cumulative preferred stock plus the surplus, after giving effect to such common stock dividends, would equal or exceed 25% of the sum of all obligations evidenced by bonds, notes, debentures or other securities, plus the total capital and surplus. At December 31, 2003, the sum of the capital applicable to stocks subordinate to the cumulative preferred stock plus the surplus was equal to 41% of the total capitalization including surplus. 12 ITEM 6. SELECTED FINANCIAL DATA NISOURCE INC. SELECTED SUPPLEMENTAL INFORMATION
Year Ended December 31, ($ in millions except per share data) 2003 2002 2001 2000 1999* - ----------------------------------------------------------------------------------------------------------------------------------- Gross Revenues Gas Distribution 3,619.4 2,890.4 3,849.9 1,879.6 883.8 Gas Transmission and Storage 1,033.5 1,014.1 997.1 375.8 150.0 Electric 1,115.9 1,103.6 1,060.2 1,070.1 1,014.4 Other 477.8 311.7 363.5 378.2 1,230.2 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL GROSS REVENUES 6,246.6 5,319.8 6,270.7 3,703.7 3,278.4 - ----------------------------------------------------------------------------------------------------------------------------------- Net Revenues (Gross Revenues less Cost of Sales) 3,060.3 3,070.9 3,126.8 1,838.4 1,392.7 Operating Income 1,116.3 1,152.2 967.9 581.8 445.4 Net Income 85.2 372.5 216.2 150.9 160.4 Shares outstanding at the end of the year (000's) 262,630 248,860 207,492 205,553 124,139 Number of common shareholders 42,034 47,472 49,589 52,085 40,741 Basic Earnings (Loss) Per Share ($) Continuing operations 1.64 1.89 0.93 0.91 1.24 Income from discontinued operations (1.28) (0.12) 0.10 0.21 0.05 Change in accounting (0.03) -- 0.02 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE 0.33 1.77 1.05 1.12 1.29 - ----------------------------------------------------------------------------------------------------------------------------------- Diluted Earnings (Loss) Per Share ($) Continuing operations 1.63 1.87 0.91 0.89 1.22 Income from discontinued operations (1.27) (0.12) 0.10 0.22 0.05 Change in accounting (0.03) -- 0.02 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE 0.33 1.75 1.03 1.11 1.27 - ----------------------------------------------------------------------------------------------------------------------------------- Return on average common equity 2.0% 9.7% 6.3% 6.3% 12.8% Times interest earned (pre-tax) 2.32 2.08 1.46 1.66 2.20 Dividends paid per share 1.10 1.16 1.16 1.08 1.02 Dividend payout ratio 333.3% 65.5% 110.5% 96.4% 79.1% Market values during the year: High 21.97 24.99 32.55 31.50 30.50 Low 16.39 14.51 18.25 12.81 16.56 Close 21.94 20.00 23.06 30.75 17.88 Book value of common stock 16.81 16.78 16.72 16.59 10.90 Market-to-book ratio at year end 130.5% 119.2% 137.9% 185.4% 164.0% Total Assets 16,623.8 17,942.6 18,826.6 20,570.5 7,006.5 Capital expenditures 572.5 527.5 531.0 365.8 293.9 Capitalization Common stockholders' equity 4,415.9 4,174.9 3,469.4 3,409.1 1,353.5 Preferred and preference stock 81.1 84.9 88.6 132.7 139.6 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company debentures -- 345.0 345.0 345.0 345.0 Long-term debt 5,993.4 4,849.5 6,065.1 5,802.7 1,775.8 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION 10,490.4 9,454.3 9,968.1 9,689.5 3,613.9 - ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF EMPLOYEES 8,614 9,307 12,501 14,674 7,399 - -----------------------------------------------------------------------------------------------------------------------------------
* 1999 has not been adjusted for the effects of discontinued operations and the consensus reached at the October 25, 2002 Emerging Issues Task Force (EITF) meeting regarding EITF Issue No. 02-03 "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities." Information for those periods is not available. The results in the table above for years prior to 2001 are not comparable as a result of the Columbia acquisition in 2000. Also, in 2002, NiSource discontinued the amortization of goodwill consistent with SFAS No. 142, "Goodwill and Other Intangible Assets" 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC.
INDEX PAGE - ------------------------------------------------------------------------------- Consolidated Review................................................... 14 Results of Operations............................................ 15 Liquidity and Capital Resources.................................. 17 Market Risk Disclosures.......................................... 22 Off Balance Sheet Items.......................................... 25 Other Information................................................ 26 Results and Discussion of Segment Operations.......................... 29 Gas Distribution Operations...................................... 30 Gas Transmission and Storage Operations.......................... 35 Electric Operations.............................................. 39 Other Operations................................................. 43 - -------------------------------------------------------------------------------
NOTE REGARDING FORWARD-LOOKING STATEMENTS The Management's Discussion and Analysis, including statements regarding market risk sensitive instruments, contains "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Investors and prospective investors should understand that many factors govern whether any forward-looking statement contained herein will be or can be realized. Any one of those factors could cause actual results to differ materially from those projected. These forward-looking statements include, but are not limited to, statements concerning NiSource Inc.'s (NiSource) plans, objectives, expected performance, expenditures and recovery of expenditures through rates, stated on either a consolidated or segment basis, and any and all underlying assumptions and other statements that are other than statements of historical fact. From time to time, NiSource may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of NiSource, are also expressly qualified by these cautionary statements. All forward-looking statements are based on assumptions that management believes to be reasonable; however, there can be no assurance that actual results will not differ materially. Realization of NiSource's objectives and expected performance is subject to a wide range of risks and can be adversely affected by, among other things, weather, fluctuations in supply and demand for energy commodities, growth opportunities for NiSource's businesses, increased competition in deregulated energy markets, dealings with third parties over whom NiSource has no control, actual operating experience of acquired assets, the regulatory process, regulatory and legislative changes, changes in general economic, capital and commodity market conditions, and counter-party credit risk, many of which risks are beyond the control of NiSource. In addition, the relative contributions to profitability by each segment, and the assumptions underlying the forward-looking statements relating thereto, may change over time. CONSOLIDATED REVIEW EXECUTIVE SUMMARY NiSource generates nearly all of its net revenue through the sale, distribution, and storage of natural gas and the generation, transmission and distribution of electricity, which are rate regulated. A significant portion of NiSource's operations, most notably in the gas distribution, gas transportation and electric businesses, is subject to seasonal fluctuations in sales. During the heating season, which is primarily from November through March, and the cooling season, which is primarily from June through September, net revenues from gas and electric sales and transportation services are more significant than other months. As a regulated company, NiSource is exposed to regulatory risk. Currently, NiSource is in discussions with various regulatory bodies. This past year, NiSource implemented several creative agreements by working collaboratively with regulators and other key stakeholders, which provided value for our customers and shareholders. Ohio regulators have approved a surcharge, to begin in April 2004, that will allow Columbia of Ohio to recover previously uncollected bad debts, and will allow payment-troubled customers to have the opportunity to participate in Customer CHOICE(sm) programs for the first time. Columbia Gas of Ohio, Inc. (Columbia of Ohio) offers one of the most successful gas utility choice programs in the nation. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. However, the Ohio regulators have recently decided to modify parts of a regulatory stipulation designed to enhance the Customer CHOICE(sm) program and provide Columbia of Ohio customers rate certainty. The Company is likely to seek rehearing on the components that have been modified. Columbia Gas of Pennsylvania, Inc. (CPA) received regulatory approval in October to recover certain costs of an affordable payment plan to low-income gas customers with long-term bill payment problems. This agreement should reduce CPA's arrearages and bad debt write-offs going forward. Northern Indiana Public Service Company (Northern Indiana) received approval from the Indiana Utility Regulatory Commission (IURC) in 2003 to recover costs associated with environmental compliance programs for nitrogen oxide (NOx) pollution-reduction equipment at the company's generating stations. All regulatory matters are discussed in the segments section of the management discussion and analysis. NiSource has had many accomplishments in the current and recent years. The divestiture of major non-core businesses, which allowed NiSource to reduce debt and business risk, and focus on the core, regulated assets, and the reduction of the dividend in November 2003 has helped NiSource affirm its investment grade credit rating with a stable outlook. In addition NiSource reduced interest expense during 2003 by $51.7 million as compared to last year, or 10 percent, by retiring $1.28 billion in debt and reissuing another $1.35 billion of debt at a lower rate. NiSource also downsized the revolving credit facility by $500 million and retired $345 million in mandatory redeemable preferred securities, which further reduced fixed charges. NiSource currently anticipates that its $1.25 billion 3-year credit facility expiring March 23, 2004 will be replaced during the first quarter of 2004 and will be split between a 364-day facility and a 3-year facility. NiSource also completed the previously announced divestitures of non-core assets, including the gas exploration and production unit, PEI Holdings Inc.'s (PEI) steel-related cogeneration assets and the telecommunications business. These sales generated about $305 million after taxes, plus the elimination of roughly $274 million of debt that was assumed by the buyers. This strengthened the balance sheet and lowered NiSource's risk profile. NiSource will capitalize on the stable portfolio of virtually 100 percent regulated and strategically located gas and electric businesses. In addition, NiSource adopted a new organizational structure that will focus on the regulated, core businesses of strategically located gas and electric operations that generate virtually 100% of the company's operating income. Through this focus on operations and a new organizational structure, NiSource has been able to hold the line on operation and maintenance costs, despite increases in employee benefits and pension costs. Through these and many other efforts NiSource was able to deliver income from continuing operations of $1.64 per share for the year ended December 31, 2003. Going forward, NiSource will continue to build value and customer trust by capitalizing on its super-regional utility and pipeline operations. NiSource will focus on: continuing to standardize its operations and focus on predictability and reliability; continuing to deliver the best possible service at the lowest cost; continuing to develop innovative ways to help our customers manage heating bills and gas price volatility, with products such as its fixed-price option; continuing to find ways to control the cost of generating electricity; and pursuing projects that will bring long-term attractively priced gas supplies to the market. Finally, NiSource has always been committed to accurate and complete financial reporting - and requires a strong commitment to ethical behavior by its employees. NiSource's senior management takes an active role in the development of the Form 10-K. In addition, NiSource will continue our mandatory ethics training program in which employees at every level and in every function of our organization participate. RESULTS OF OPERATIONS The Consolidated Review information should be read taking into account the critical accounting policies applied by NiSource and discussed in "Other Information" of this Item 7. Net Income For the twelve months ended December 31, 2003, NiSource reported income from continuing operations of $425.7 million, or $1.64 per share, compared to $398.1 million, or $1.89 per share, in 2002 and $191.0 million, or 93 cents per share in 2001. All per share amounts are based on basic weighted common shares outstanding. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. Including results from discontinued operations and a change in accounting, NiSource reported 2003 net income of $85.2 million, or 33 cents per share, 2002 net income of $372.5 million, or $1.77 per share, and $216.2 million, or $1.05 per share for 2001. Earnings per share are not comparable because of 13.1 million shares issued upon the settlement of forward equity agreements in February 2003 and an equity offering of 41.4 million shares that was completed in November 2002. Net Revenues Total consolidated net revenues (gross revenues less cost of sales) for the twelve months ended December 31, 2003 were $3,060.3 million, a $10.6 million decrease compared with 2002. Items that favorably impacted the year included colder weather during the heating season in the first quarter amounting to $60.1 million and modest increases in non-traditional and non-weather related volume of $15.4 million. These favorable items were offset by reduced electric revenue of $21.9 million due to cooler weather during the summer cooling season, lower interruptible service revenues and firm service revenues of $19.7 million in the Gas Transmission and Storage Operations segment due to measures undertaken during the first quarter period of sustained, colder-than-normal weather, a decrease in storage and transportation revenues of $13.5 million due mainly to reduced deliveries to power generating facilities, and credits totaling $24.0 million pertaining to the Indiana Utility Regulatory Commission (IURC) electric rate review settlement. Total consolidated net revenues (gross revenues less cost of sales) for the twelve months ended December 31, 2002 were $3,070.9 million, a $55.9 million decrease compared with 2001. The decrease in revenues was primarily attributable to reduced off-system sales, incentive programs and non-weather-related gas sales totaling $41.5 million; credits totaling $28.1 million pertaining to the IURC electric rate review settlement; $12.9 million from scaling back the energy trading operations and an $8.5 million reduction in gains on the sales of storage base gas. Offsetting the decrease was a $36.6 million impact of favorable weather due to a much colder fall heating season, which increased natural gas sales and deliveries, and a warmer summer cooling season that positively impacted electric sales. Expenses Operating expenses were $1,944.0 million in 2003, a $25.3 million increase from 2002. Operating expense increases experienced during the year included $28.5 million in pension and post-retirement expenses, an increase in uncollectible accounts receivable expense amounting to $21.3 million, and increased operating tax expense of $12.3 million consisting primarily of increased property taxes. Expense reductions for 2003 include $27.5 million in reduced administrative and employee-related expense and the approval of a bad debt tracker for Columbia of Ohio for the recovery of $25.2 million of previously uncollected accounts receivable. In addition, NiSource sold Columbia Service Partners, Inc. for a gain of $16.6 million in third quarter of 2003 and Midtex Gas Storage for a gain of $7.5 million in the fourth quarter of 2003. The 2002 period included $24.5 million of insurance recoveries for environmental expenses, a reduction in estimated sales taxes of $11.4 million that occurred in 2002 related to sales of natural gas to customers of a subsidiary previously engaged in the retail and wholesale gas marketing business, a reduction in a reserve for environmental expenditures of $10.0 million and a $10.0 million reversal in reserves related to unaccounted-for gas, offset by $14.8 million of increased expenses related to NiSource's reorganization initiatives and other employee-related costs and $8.7 million related to the recognition of a reserve related to a long-term note receivable. Operating expenses of $1,918.7 million for 2002 decreased $240.2 million over 2001. A portion of the decrease was attributable to a $123.0 million reduction in operation and maintenance expenses primarily due to lower employee-related, support services and facilities expenses of $35.4 million resulting from reorganization initiatives; insurance recoveries of environmental expenses totaling $24.5 million; a reversal of $30.3 million in reserves for estimated taxes and environmental expenditures; and a reduction of $16.8 million from reduced uncollectible customer accounts and other customer-related expenses. The 2001 period was unfavorably impacted by the $15.5 million litigation settlement related to Market Hub Partners, L.P. (MHP). Also contributing to the decrease was the elimination of $93.1 million of goodwill amortization as a result of a Financial Accounting Standards Board (FASB) accounting standard that affected goodwill amortization beginning January 1, 2002 and $27.1 million primarily from gains on the sales of NiSource's utility line-locating and marking business and a significant portion of TPC's gas trading contracts. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. Other Income (Deductions) Other Income (Deductions) in 2003 reduced income $456.4 million compared to a reduction of $535.2 million in 2002. Interest expense, net decreased $51.7 million from 2002 primarily due to lower short-term and long-term interest rates and a decrease in total debt of $191 million from December 31, 2002. Minority interest, consisting of dividends paid on company-obligated mandatorily redeemable preferred securities associated with the Corporate Premium Income Equity Securities (Corporate PIES), was $2.5 million in 2003 compared to $20.4 million in 2002 as a result of the settlement and remarketing of the Corporate PIES in February 2003. Other Income (Deductions) in 2002 reduced income $535.2 million compared to a reduction of $610.3 million in 2001. Interest expense, net decreased $75.6 million from 2001 primarily due to debt reduction during 2002 of $1.4 billion resulting from proceeds from the sale of 41.4 million shares of common stock, approximating $734.9 million, and the sales of IWCR and SM&P. Lower short-term interest rates also contributed to the decrease. Minority interest, consisting of dividends paid on company-obligated mandatorily redeemable preferred securities associated with the Corporate PIES, was $20.4 million in both 2002 and 2001. Income Taxes Income taxes increased $15.3 million in 2003 as compared with 2002 and increased $52.3 million in 2002 over 2001 primarily as a result of higher pre-tax income in each succeeding period. The effective income tax rates were 35.5%, 35.5 % and 46.6% in 2003, 2002 and 2001, respectively. The decrease in the effective tax rate after 2002 was primarily due to discontinuing the amortization of goodwill in 2002. See Note 9 of the Notes to Consolidated Financial Statements for additional information. Discontinued Operations Discontinued operations reflected an after-tax loss of $331.7 million, or a loss of $1.28 per share, in 2003 compared to a loss of $25.6 million, or loss of 12 cents per share, in 2002 and income of $21.2 million, or 10 cents per share, in 2001. In 2003, an after-tax loss of $301.2 million was related to the sale of NiSource's exploration and production properties, CER, while a loss of $29.1 million was recognized on the sale of six PEI subsidiaries and a loss of $1.3 million on the sale of Columbia Transmission Communications Corporation (Transcom). The 2002 results were unfavorably impacted by a non-cash charge of $51.3 million, after tax, that was recognized as a result of the continuing depressed market for dark fiber and NiSource's decision to exit the telecommunications business. 2001 results included income of $30.4 million from CER partly offset by a loss of $14.3 million from Transcom, which included an impairment charge of $5.7 million, after-tax. NiSource accounted for CER, six of the PEI subsidiaries, Transcom and water utility assets that were sold in 2002 as discontinued operations. Change in Accounting The change in accounting in 2003 of $8.8 million, net-of-tax, resulted from the cumulative effect of adopting the Financial Accounting Standards Board statement on asset retirement obligations. The change in accounting in 2001 is a result of the adoption of the Financial Accounting Standards Board statement on derivative accounting. LIQUIDITY AND CAPITAL RESOURCES Generally, cash flow from operations has provided sufficient liquidity to meet operating requirements. A significant portion of NiSource's operations, most notably in the gas distribution, gas transportation and electric businesses, is subject to seasonal fluctuations in cash flow. During the heating season, which is primarily from November through March, cash receipts from gas sales and transportation services typically exceed cash requirements. During the summer months, cash on hand, together with the seasonal increase in cash flows from the electric business during the summer cooling season and external short-term and long-term financing, is used to purchase gas to place in storage for heating season deliveries, perform necessary maintenance of facilities, make capital improvements in plant and expand service into new areas. Net cash from continuing operations for the twelve months ended December 31, 2003 was $472.9 million. Cash used for working capital was $430.7 million, principally driven by increased gas inventories and gas exchange receivables and decreased exchange gas payables, partly offset by lower accounts receivable and the timing of the recovery of gas and fuel costs. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. During February 2004, Northern Indiana redeemed $111.1 million of its medium-term notes and Bay State redeemed $10.0 million of its medium-term notes, with an average interest rate of 7.5% and 7.6%, respectively. The associated redemption premium was $4.6 million. On December 18, 2003, $55.0 million of new tax-exempt Pollution Control Revenue Refunding Bonds were issued by Jasper County, Indiana on behalf of Northern Indiana. The new tax-exempt bonds were issued on an auction rate basis and bear interest at a floating rate as determined in 35-day increments by the tax-exempt auction process. The proceeds of the bonds were loaned to Northern Indiana, pursuant to a financing agreement dated as of December 1, 2003, and were used to refund Northern Indiana's $55.0 million aggregate principal amount of Jasper County, Indiana Collateralized Pollution Control Refunding Revenue Bonds Series 1991. As a result of the refunding, the final series of First Mortgage Bonds outstanding under Northern Indiana's First Mortgage Indenture were discharged, cancelled and returned to Northern Indiana. There are no longer any First Mortgage Bonds outstanding under the First Mortgage Indenture. Northern Indiana intends to obtain and file in due course in the appropriate recording offices in Indiana the releases necessary to remove the First Mortgage Indenture from the title records with respect to the Northern Indiana property formerly subject to the lien of the First Mortgage Indenture. On November 4, 2003, NiSource Finance issued $250.0 million of 18-month floating rate unsecured notes that mature May 4, 2005. The notes are callable, at par, at the option of NiSource on or after May 4, 2004. Also on November 4, 2003, NiSource Finance issued $250.0 million of 3.20% three year unsecured notes that mature November 1, 2006. The proceeds were used to repay a portion of NiSource Finance's $750.0 million notes, which matured on November 15, 2003. On October 20, 2003, NiSource sold all of the steel-related, "inside-the-fence" assets of its subsidiary PEI, to Private Power, LLC (Private Power). The sale included six PEI operating subsidiaries and the name "Primary Energy". Private Power paid approximately $325.4 million, comprised of $113.1 million in cash and the assumption of debt-related liabilities and other obligations. The assumption of such liabilities and the after tax cash proceeds from the sale, reduced NiSource's debt by $206.3 million. NiSource has accounted for the assets sold as discontinued operations and has adjusted periods after 1999 accordingly. During 2003, NiSource recognized an after-tax loss of $29.1 million related to the sale. On August 29, 2003, NiSource sold its exploration and production subsidiary, CER to a subsidiary of Triana Energy Holdings for $330.0 million, plus the assumption of obligations to deliver approximately 94.0 billion cubic feet (Bcf) of natural gas pursuant to existing forward sales contracts. On January 28, 2003, NiSource's former subsidiary Columbia Natural Resources, Inc. (CNR) sold its interest in certain natural gas exploration and production assets in New York for approximately $95.0 million. NiSource has accounted for CER as discontinued operations and has adjusted periods after 1999 accordingly. During 2003, NiSource recognized an after-tax loss of $301.2 million related to the sales. On July 29, 2003, NiSource filed a shelf registration statement with the Securities and Exchange Commission to periodically sell up to $2.5 billion in debt securities, common and preferred stock, and other securities. The registration statement became effective on August 7, 2003, which when combined with NiSource's pre-existing shelf capacity, provided the Company with an aggregate $2.8 billion of total issuance capacity. After the November 4, 2003 debt offerings discussed previously herein, the Company's shelf capacity remains at $2.3 billion. On July 21, 2003, NiSource Finance issued $500.0 million of 5.40% eleven-year senior unsecured notes that mature July 15, 2014. The proceeds were used to reduce other maturing debt and for working capital needs. During the time period of March 2003 through July 2003, Northern Indiana redeemed $124.0 million of Northern Indiana medium term notes. On April 15, 2003, NiSource Finance repaid at maturity $300.0 million of its 5.75% two-year senior notes. On March 31, 2003, NiSource Capital Markets Inc. (NiSource Capital Markets) redeemed $75.0 million of its 7.75% Subordinated Debentures due March 1, 2026. On July 8, 2003 NiSource announced that it would reduce its common stock dividend to 92 cents per share from $1.16 per share on an annual basis. This change took effect beginning with the dividend payable on November 20, 2003. The change in the dividend, the sale of non-core assets, the November 2002 equity offering and ongoing debt reduction efforts have stabilized NiSource's credit ratings, enhanced cash flows and provided funds to reinvest in 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. NiSource's core businesses for the future. NiSource's decision was also influenced by the fact that its dividend yield and payout ratio prior to the dividend reduction were higher than industry averages. In February 2003, NiSource issued approximately 13.1 million shares of common stock upon the settlement of forward equity agreements comprising a component of the Corporate PIES. Concurrently with the settlement of the forward agreements, NiSource remarketed most of the underlying debentures, due February 19, 2005, and reset the interest rate to 4.25%. NiSource received net proceeds of $344.1 million from the remarketing in satisfaction of the Corporate PIES holders' obligations under the forward equity agreements. The sole purchaser of the remarketed debentures purchased newly-offered 6.15% notes of NiSource Finance due March 1, 2013, using the remarketed debentures as consideration. In November 2002, NiSource issued 41.4 million shares of common stock at a per-share price of $18.30 ($17.75 on a net basis). The net proceeds of approximately $734.9 million were used to reduce debt. Credit Facilities Due to the company's strong liquidity position, NiSource elected not to renew its $500.0 million 364-day credit facility, which expired on March 20, 2003. The 364-day credit facility was used to support the issuance of letters of credit. As a result of the 364-day facility expiring, the $1.25 billion three-year facility that expires on March 23, 2004 was amended to allow for an increase in aggregate letters of credit outstanding from $150.0 million to $500.0 million. The recent reduction in NiSource's short-term borrowing needs is attributable to the $734.9 million of net proceeds from the equity offering during November 2002, the Corporate PIES remarketing, the sale of the exploration and production properties, the sale of PEI's assets and net cash flow from continuing operations. NiSource currently anticipates that its $1.25 billion 3-year credit facility expiring March 23, 2004 will be replaced during the first quarter of 2004 and will be split between a 364-day facility and a 3-year facility. As of December 31, 2003 and 2002, zero and $150.0 million of commercial paper was outstanding, respectively. The weighted average interest rate on commercial paper outstanding as of December 31, 2002 was 2.25%. In addition, NiSource had outstanding credit facility advances under its 3-year facility of $685.5 million at December 31, 2003, at a weighted average interest rate of 1.82%, and credit facility advances of $763.1 million at December 31, 2002, at a weighted average interest rate of 2.107%. As of December 31, 2003 and 2002, NiSource had $121.4 million and $171.7 million of standby letters of credit outstanding, respectively. As of December 31, 2003, $443.1 million of credit was available under the credit facilities. In addition, NiSource had standby letters of credit of $4.9 million as of December 31, 2003 and 2002 issued under another credit facility. Debt Covenants NiSource is subject to two financial covenants under both its 364-day and 3-year revolving credit facilities. These covenants are not expected to change materially under NiSource's current renewal of the credit facilities. On a consolidated basis, NiSource must maintain an interest coverage ratio of not less than 1.75, as determined for each period of four consecutive fiscal quarters. Additionally, NiSource must maintain a debt to capitalization ratio that does not exceed 70 percent. As of December 31, 2003, NiSource was in compliance with these financial covenants. NiSource is also subject to certain negative covenants under the revolving credit facilities. Such covenants include a limitation on the creation or existence of new liens on NiSource's assets, generally exempting liens on utility assets, purchase money security interests, preexisting security interests and an additional asset basket equal to 5.0% of NiSource's consolidated net tangible assets. An asset sale covenant generally restricts the sale, lease and/or transfer of NiSource's assets to no more than 10.0% of its consolidated total assets. The revolving credit facilities also include a cross-default provision, which triggers an event of default under the credit facility in the event of an uncured payment default relating to any indebtedness of NiSource or any of its subsidiaries in a principal amount of $50.0 million or more. NiSource's bond indentures generally do not contain any financial maintenance covenants. However, NiSource's bond indentures are generally subject to cross default provisions ranging from uncured payment defaults of $5.0 to $50.0 million, and limitations 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. on the incurrence of liens on NiSource's assets, generally exempting liens on utility assets, purchase money security interests, preexisting security interests and an additional asset basket capped at either 5.0% or 10.0% of NiSource's consolidated net tangible assets. Sale of Trade Receivables Columbia of Ohio is a party to an agreement to sell, without recourse, all of its trade receivables, with the exception of certain low-income payment plan receivables, as they originate, to Columbia Accounts Receivable Corporation (CARC), a wholly-owned subsidiary of Columbia Energy Group (Columbia). CARC, in turn, is party to an agreement under which it sells a percentage ownership interest in the accounts receivable to a commercial paper conduit. Under these agreements, CARC may not sell any new affiliate 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. As of December 31, 2003, $89.5 million of accounts receivable had been sold by CARC. Canadian Imperial Bank of Commerce (CIBC), the administrative agent for the program, has informed Columbia of Ohio that, CIBC and its commercial paper conduit entities will let all existing receivable securitization agreements expire in the normal course of business. As such, the Columbia of Ohio receivables program with CIBC will terminate on May 15, 2004 and Columbia of Ohio plans to initiate a new program with a new agent and conduit purchaser. On December 30, 2003, Northern Indiana entered into an agreement to sell, without recourse, all of its trade receivables, as they originate, to NIPSCO Receivables Corporation (NRC), a wholly-owned subsidiary of Northern Indiana. NRC, in turn, is party to an agreement in which it sells a percentage ownership interest in the accounts receivable to a commercial paper conduit. The conduit can purchase up to $200 million of accounts receivable under the agreement. The agreements expire in December 2004. As of December 31, 2003, $166.8 million of accounts receivable had been sold by NRC. Under the arrangement, Northern Indiana may not sell any new receivables if Northern Indiana's debt rating falls below BBB- or Baa3 at Standard and Poor's and Moody's, respectively. Credit Ratings On July 8, 2003, Moody's Investors Service affirmed the senior unsecured ratings of NiSource at Baa3, and the existing ratings of all other subsidiaries, concluding a review for possible downgrade that began on May 13, 2003. Moody's ratings outlook for NiSource and its subsidiaries is now "stable". On June 30, 2003, Fitch Ratings affirmed their BBB senior unsecured rating for NiSource and the BBB+ rating for Columbia. Fitch also lowered the rating of Northern Indiana by one notch to BBB+ due to Fitch's policy of restricting the ratings between a parent and its subsidiaries where short-term financing facilities are solely at the holding company level. This did not reflect weakening credit at Northern Indiana. Fitch's outlook for NiSource and all of its subsidiaries is stable. On June 16, 2003, Standard and Poor's affirmed its senior unsecured ratings of NiSource at BBB, and the existing ratings of all other subsidiaries. Standard and Poor's outlook for NiSource and all of its subsidiaries was revised from negative to stable. Certain TPC electric trading agreements contain "ratings triggers" that require increased collateral if the credit ratings of NiSource or certain of its subsidiaries are rated below BBB- by Standard and Poor's or Baa3 by Moody's. The collateral requirement from a downgrade below the ratings trigger levels would amount to approximately $5.0 million to $10.0 million. In addition to agreements with ratings triggers, there are other electric or gas trading agreements that contain "adequate assurance" or "material adverse change" provisions. The collateral requirement for those agreements would amount to approximately $48.0 million to $53.0 million. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. 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 $184.3 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 $184.3 million declining over time. In another, but unrelated transaction, the surety, in accordance with the terms of its indemnity agreement, required NiSource to post a letter of credit in the face amount of approximately $131.0 million, declining over time, to support the bonds. At December 31, 2003, the total amount of letters of credit required with respect to these transactions was $103.2 million. Contractual Obligations and Commercial Commitments NiSource has certain contractual obligations that extend beyond 2004. The obligations include long-term debt, mandatorily redeemable preferred stock, lease obligations, and purchase obligations for pipeline capacity, transportation and storage services by NiSource's Gas Distribution Operations subsidiaries. The total contractual obligations in existence at December 31, 2003 and their maturities were:
(in millions) Total 2004 2005 2006 2007 2008 After - ------------------------------------------------------------------------------------------------------------------------------------ Long-term debt $6,109.7 $ 118.0 $1,550.5 $ 430.5 $ 370.9 $ 33.5 $3,606.3 Mandatorily redeemable preferred stock 3.3 0.9 0.9 0.9 0.6 -- -- Capital leases 2.0 0.3 0.3 0.4 0.4 0.3 0.3 Operating leases 207.8 39.0 33.2 30.3 26.5 22.3 56.5 Purchase obligations 1,151.7 210.7 168.6 123.4 106.2 96.0 446.8 - ------------------------------------------------------------------------------------------------------------------------------------ Total contractual obligations $7,474.5 $ 368.9 $1,753.5 $ 585.5 $ 504.6 $ 152.1 $4,109.9 - ------------------------------------------------------------------------------------------------------------------------------------
NiSource has obligations associated with interest and tax payments. For 2004, NiSource projects that it will be required to make interest and tax payments of $890.1 million. Also, NiSource expects to make contributions of $18.1 million to its pension plans and $51.5 million to its postretirement medical and life plans in 2004. In addition, Northern Indiana has a service agreement with Pure Air, a general partnership between Air Products and Chemicals, Inc. and First Air Partners LP, under which Pure Air provides scrubber services to reduce sulfur dioxide emissions for Units 7 and 8 at the Bailly Generating Station. Services under this contract commenced on June 15, 1992, and have current annual charges approximating $16.5 million. The agreement provides that, assuming various performance standards are met by Pure Air, a termination payment would be due if Northern Indiana terminated the agreement prior to the end of the twenty-year contract period. NiSource has made certain commercial commitments that extend beyond 2004. The commitments include lines of credit, letters of credit and guarantees, which support commercial activities. The total commercial commitments in existence at December 31, 2003, including commercial commitments for discontinued operations, and the years in which they expire were:
(in millions) Total 2004 2005 2006 2007 2008 After - ------------------------------------------------------------------------------------------------------------------------------------ Lines of credit $ 685.5 $ 685.5 $ -- $ -- $ -- $ -- $ -- Letters of credit 126.3 20.4 1.5 0.1 1.1 103.2 -- Guarantees 5,820.8 542.9 1,334.6 1,089.6 71.9 77.3 2,704.5 - ------------------------------------------------------------------------------------------------------------------------------------ Total commercial commitments $6,632.6 $1,248.8 $1,336.1 $1,089.7 $ 73.0 $ 180.5 $2,704.5 - ------------------------------------------------------------------------------------------------------------------------------------
21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. Of the commercial commitments outstanding shown above, NiSource had approximately $4.6 billion of debt and capital lease obligations recorded on its consolidated balance sheet at December 31, 2003. Capital Expenditures The table below reflects actual capital expenditures by segment for 2003 and 2002 and an estimate for year 2004:
(in millions) 2004E 2003 2002 - -------------------------------------------------------------------------------- Gas Distribution Operations $ 210.2 $ 195.1 $ 196.4 Transmission & Storage Operations 138.5 120.5 128.0 Electric Operations 144.7 225.1 197.8 Other Operations 25.2 31.8 5.3 - -------------------------------------------------------------------------------- Total $ 518.6 $ 572.5 $ 527.5 - --------------------------------------------------------------------------------
For 2003, capital expenditures were $572.5 million, an increase of $45.0 million over 2002. The Gas Distribution Operations segment's capital program in 2003 included business initiatives to extend service to new areas and develop future markets through new services that may be added to the existing business and to create a potential new pool of customers, as well as expenditures to ensure safe, reliable and improved service to customers and modernize and upgrade facilities. The Gas Transmission and Storage Operations segment invested primarily in modernizing and upgrading facilities with some expenditure for new business initiatives. The Electric Operations segment capital program included improvements related to the operational integrity of generation, transmission and distribution assets, expenditures related to environmental compliance regarding nitrogen oxide (NOx) reduction, and additions to electric distribution systems related to new business. While the NOx expenditures are being funded with cash from operations, a portion will be recovered over time through the Northern Indiana environmental tracker. The Other Operations segment primarily reflects capital spending for enterprise-wide information technology infrastructure improvements. For 2004, the projected capital program is expected to be $518.6 million, which is a decrease of 9%, or $53.9 million, from capital expenditures in 2003. This reduction in the capital expenditure budget is mainly due to a reduction in estimated expenditures for NOx compliance. Pension Funding Due to the upswing in the equity markets, the fair value of NiSource's pension fund assets has increased since September 30, 2002. NiSource expects market returns to revert to normal levels as demonstrated in historical periods. However, NiSource may be required to provide additional funding for the pension obligations if returns on plan assets fall short of the assumed 9.0% long-term earnings rate assumption. As a result of the increase in the fair value of the plans assets, NiSource expects pension expense for 2004 to decrease approximately $19.2 million from the amount recognized in 2003. See Note 10 of Notes to the Consolidated Financial Statements for more information. MARKET RISK DISCLOSURES Risk is an inherent part of NiSource's energy businesses. 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 trading and non-trading risks that are 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 committee 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 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. business, NiSource's risk management policies and procedures continue to evolve and are subject to ongoing review and modification. Various analytical techniques are employed to measure and monitor NiSource's market and credit risks, including value-at-risk and instrument sensitivity to market factors (VaR). VaR represents the potential loss or gain for an instrument or portfolio from changes in market factors, for a specified time period and at a specified confidence level. Non-Trading Risks Commodity price risk resulting from non-trading activities at NiSource's rate-regulated subsidiaries is limited, since regulations allow recovery of prudently incurred purchased power, fuel and gas costs through the rate-making process. If states should explore additional regulatory reform, these subsidiaries may begin providing services without the benefit of the traditional ratemaking process and may be more exposed to commodity price risk. Effective July 1, 2002, TPC sold a significant portion of its net obligations under its gas forward transaction portfolio, physical storage inventory and associated agreements to a third party. Beginning with the effective date of the sale, the primary remaining operations associated with TPC include commercial and industrial gas sales (including arranging supply), power marketing and gas supply associated with NiSource's single merchant cogeneration facility and power trading. With the exception of power trading and one remaining gas trading transaction, which expired in October 2002, since July 1, 2002 the gas-related activities at TPC were no longer considered trading activities for accounting purposes. NiSource is exposed to interest rate risk as a result of changes in interest rates on borrowings under revolving credit agreements and lines of credit, which have interest rates that are indexed to short-term market interest rates. At December 31, 2003, the combined borrowings outstanding under these facilities totaled $685.5 million. NiSource is also exposed to interest rate risk due to changes in interest rates on fixed-to-variable interest rate swaps that hedge the fair value of long-term debt. The principal amount of such long-term debt subject to interest rate hedges at December 31, 2003 was $1,163.0 million. Based upon average borrowings under agreements subject to fluctuations in short-term market interest rates during 2003 and 2002, an increase in short-term interest rates of 100 basis points (1%) would have increased interest expense by $13.6 million and $17.5 million for the years 2003 and 2002, respectively. On July 22, 2003, NiSource entered into fixed-to-variable interest rate swap agreements in a notional amount of $500.0 million with four counterparties with an 11-year term. NiSource will receive payments based upon a fixed 5.40% interest rate and pay a floating interest amount based on U.S. 6-month British Banker Association (BBA) LIBOR plus an average of 0.78% per annum. There was no exchange of premium at the initial date of the swaps. In addition, each party has the right to cancel the swaps on either July 15, 2008 or July 15, 2013 at mid-market. On April 11, 2003, Columbia entered into fixed-to-variable interest rate swap agreements in a notional amount of $100 million with two counterparties. Columbia will receive payments based upon a fixed 7.42% interest rate and pay a floating interest amount based on U.S. 6-month BBA LIBOR plus an average of 2.39% per annum. There was no exchange of premium at the initial date of the swaps. The swaps contain mirror-image call provisions that allow the counterparties to cancel the agreements beginning November 28, 2005 through the stated maturity date. In addition, each party has the right to cancel the swaps on either April 15, 2008 or April 15, 2013 at mid-market. On April 4, 2003, Columbia terminated a fixed-to-variable interest rate swap agreement in a notional amount of $100.0 million. NiSource received a settlement payment from the counterparty amounting to $8.2 million, which is being amortized as a reduction to interest expense over the remaining term of the underlying debt. On September 3, 2002, Columbia entered into new fixed-to-variable interest rate swap agreements totaling $281.5 million with three counterparties effective as of September 5, 2002. According to the agreements, NiSource will receive payments based upon a fixed 7.32% interest rate and will pay a floating interest amount based on U.S. 6-month BBA LIBOR plus 2.66% per annum. There was no exchange of premium at inception of the swaps. The swaps contain mirror-image call provisions that allow the counterparties to cancel the agreements beginning November 28, 2005 through the stated maturity date. In addition, each party has the one-time right to cancel the swaps on September 5, 2007 at mid-market. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. Due to the nature of the industry, credit risk is a factor in many of NiSource's business activities. Credit risk arises because of the possibility that a customer, supplier or counterparty will not be able or willing to fulfill its obligations on a transaction on or before the settlement date. For derivative contracts such as interest rate swaps, credit risk arises when counterparties are obligated to pay NiSource the positive fair value or receivable resulting from the execution of contract terms. Exposure to credit risk is measured in terms of both current and potential exposure. Current credit exposure is generally measured by the notional or principal value of financial instruments and direct credit substitutes, such as commitments, standby letters of credit and guarantees. Because many of NiSource's exposures vary with changes in market prices, NiSource also estimates the potential credit exposure over the remaining term of transactions through statistical analyses of market prices. In determining exposure, NiSource considers collateral and master netting agreements, which are used to reduce individual counterparty credit risk. Trading Risks Prior to the July 1, 2002 sale of the TPC gas marketing and trading contracts, NiSource's trading operations consisted of gas- and power-related activities. Beginning July 1, 2002, with the exception of one remaining gas trading transaction, which expired in October 2002, the trading activities of TPC have involved power only. The transactions associated with NiSource's power trading operations give rise to various risks, including market risks resulting from the potential loss from adverse changes in the market prices of electricity. The power trading operations market and trade over-the-counter contracts for the purchase and sale of electricity. Those contracts within the power trading portfolio that require settlement by physical delivery are often net settled in accordance with industry standards. Fair value represents the amount at which willing parties would transact an arms-length transaction. Fair value is determined by applying a current price to the associated contract volume for a commodity. The current price is derived from one of three sources including actively quoted markets such as the New York Mercantile Exchange (NYMEX), other external sources including electronic exchanges and over-the-counter broker-dealer markets, as well as financial models such as the Black-Scholes option pricing model. The fair values of the contracts related to NiSource's trading operations, the activity affecting the changes in the fair values during 2003, the sources of the valuations of the contracts during 2003 and the years in which the remaining contracts (all power trading) mature are:
(in millions at December 31) 2003 - ----------------------------------------------------------------------------------------------------------------------------------- Fair value of trading contracts outstanding at the beginning of the period $ -- Contracts realized or otherwise settled during the period (including net option premiums received) (5.4) Fair value of new contracts entered into during the period 3.7 Other changes in fair values during the period 0.2 - ----------------------------------------------------------------------------------------------------------------------------------- Fair value of contracts outstanding at the end of the period $ (1.5) - -----------------------------------------------------------------------------------------------------------------------------------
(in millions) 2003 2004 2005 2006 2007 After - ------------------------------------------------------------------------------------------------------------------------------------ Prices from other external sources $ (0.3) $ -- $ -- $ -- $ -- $ -- Prices based on models/other method (0.8) (0.4) -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total fair values $ (1.1) $ (0.4) $ -- $ -- $ -- $ -- - ------------------------------------------------------------------------------------------------------------------------------------
24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. The caption "Prices from other external sources" generally includes contracts traded on electronic exchanges and over-the-counter contracts whose value is based on published indices or other publicly available pricing information. Contracts shown within "Prices based on models/other method" are generally valued employing the widely used Black-Scholes option-pricing model. Market Risk Measurement Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as liquidity, will result in losses for a specified position or portfolio. NiSource calculates a one-day VaR at a 95% confidence level for the power trading group and the gas marketing group that utilize a variance/covariance methodology. Based on the results of the VaR analysis, the daily market exposure for power trading on an average, high and low basis was $0.4 million, $1.3 million and effectively zero, during 2003, respectively. The daily market exposure for the gas marketing and trading portfolios on an average, high and low basis was $0.3 million, $0.5 million and $0.1 million during 2003, respectively. Prospectively, management has set the VaR limits at $2.5 million for power trading and $0.5 million for gas marketing. Exceeding the VaR limits would result in management actions to reduce portfolio risk. Refer to "Critical Accounting Policies" of this Item 7, and "Risk Management Activities" in Notes 1 and 7, respectively, of Notes to the Consolidated Financial Statements for further discussion of NiSource's risk management. OFF BALANCE SHEET ARRANGEMENTS NiSource has issued guarantees that support up to approximately $1.5 billion of commodity-related payments for its current subsidiaries involved in energy marketing and power trading and to satisfy requirements under forward gas sales agreements of a former subsidiary. These guarantees were provided to counterparties in order to facilitate physical and financial transactions involving natural gas and electricity. To the extent liabilities exist under the commodity-related contracts subject to these guarantees, such liabilities are included in the consolidated balance sheets. In addition, NiSource has other guarantees, purchase commitments, operating leases, lines of credit and letters of credit outstanding. Refer to Note 7, Risk Management Activities, and Note 17, Other Commitments and Contingencies, for additional information about NiSource's off balance sheet arrangements. Northern Indiana has a service agreement with Pure Air, a general partnership between Air Products and Chemicals, Inc. and First Air Partners LP, under which Pure Air provides scrubber services to reduce sulfur dioxide emissions for Units 7 and 8 at the Bailly Generating Station. Services under this contract commenced on June 15, 1992, and have current annual charges approximating $16.5 million. The agreement provides that, assuming various performance standards are met by Pure Air, a termination payment would be due if Northern Indiana terminated the agreement prior to the end of the twenty-year contract period. In addition, NiSource has sold certain accounts receivable. NiSource's accounts receivable programs qualify for sale accounting because they meet the conditions specified in SFAS No. 140 "Accounting for Transfers and Servicing of Financial Asset and Extinguishments of Liabilities." In the agreements, all transferred assets have been isolated from the transferor and put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership. NiSource does not retain any interest in the receivables under these programs. Refer to Note 16, Fair Value of Financial Instruments, of the Consolidated Financial Statements for additional information on these agreements. 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. OTHER INFORMATION Critical Accounting Policies NiSource applies 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. BASIS OF ACCOUNTING FOR RATE-REGULATED SUBSIDIARIES. SFAS 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 $927.7 million and $1,199.0 million at December 31, 2003, and $953.2 million and $156.8 million at December 31, 2002, respectively. Additionally, refer to SFAS No. 143 "Accounting for Asset Retirement Obligations" under this Item 7 heading titled, "Accounting Changes and Recently Issued Accounting Pronouncements". 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 unable to continue to apply the provisions of SFAS No. 71, NiSource would be required 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 $153.3 million at December 31, 2003. If NiSource determined that the amounts included as regulatory assets were not recoverable, a charge to income would immediately be required to the extent of the unrecoverable amounts. ACCOUNTING FOR RISK MANAGEMENT ACTIVITIES. Under SFAS No. 133, as amended, 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, earnings, or regulatory assets and liabilities 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. 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. 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. 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 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 $166.8 million of price risk management assets and $13.3 million of price risk management liabilities primarily related to hedges at December 31, 2003. The amount of unrealized gains recorded to other comprehensive income was $91.7 million at December 31, 2003. ACCOUNTING FOR ENERGY TRADING ACTIVITIES. 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 evaluates the contracts of its trading operations in accordance with the criteria for derivative contracts under SFAS No. 133. Through 2002, contracts not meeting the criteria under SFAS No. 133 were 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). Pursuant to EITF No. 98-10, 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, recognizing related gains and losses currently in earnings. In the October 2002 EITF meeting, EITF No. 98-10 was rescinded and only contracts meeting the definition in SFAS No. 133 can be marked to market. Refer to Note 7 to the consolidated financial statement for further information. While the assessment of fair values for NiSource's trading contracts have been mainly based on pricing information for exchange-traded contracts, transportation and storage agreements related to gas trading deals entered into prior to the cessation of gas trading activities were marked to fair value based on the results of internal models. No estimates of fair values on transportation and storage contracts related to gas trading activities remained as of December 31, 2002 due to the sale or expiration of all gas-trading related agreements during the year. In addition, power trading options were marked to fair value through earnings based on internal calculations of fair value employing the widely-used Black-Scholes option pricing model. At December 31, 2003, the fair value of the "mark-to-fair-value" options outstanding was a loss of $1.5 million. At December 31, 2003, NiSource's balance sheet contained $21.9 million of price risk management assets and $23.4 million of price risk management liabilities related to unrealized gains and losses on trading activities, respectively. PENSIONS AND POSTRETIREMENT BENEFITS. NiSource has defined benefit plans for both pensions and other postretirement benefits. The plans are accounted for under SFAS No. 87, and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." The calculation of the net obligations and annual expense related to the plans requires a significant degree of judgment regarding the discount rates to be used in bringing the liabilities to present value, long-term returns on plan assets and employee longevity, among other assumptions. Due to the size of the plans and the long-term nature of the associated liabilities, changes in the assumptions used in the actuarial estimates could have material impacts on the measurement of the net obligations and annual expense recognition. For further discussion of NiSource's pensions and other postretirement benefits see Note 10 of the Notes to Consolidated Financial Statements. 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. Accounting Changes and Recently Issued Accounting Pronouncements STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES", AS SUBSEQUENTLY AMENDED BY SFAS NO. 137, SFAS NO. 138 AND SFAS NO. 149 (COLLECTIVELY REFERRED TO AS SFAS NO. 133). Effective January 1, 2001, NiSource adopted the FASB's Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as subsequently amended by SFAS No. 137, SFAS No. 138 and SFAS 149. 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, or (b) a hedge of the exposure to variable cash flows of a 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 SFAS No. 133 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, which was recognized in earnings during 2002 and 2001. 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 reduction of hedged risk basis of $3.8 million and the reclassification of deferred revenue to OCI of $17.9 million. EITF ISSUE NO. 02-03 - ISSUES INVOLVED IN ACCOUNTING FOR DERIVATIVE CONTRACTS HELD FOR TRADING PURPOSES AND CONTRACTS INVOLVED IN ENERGY TRADING AND RISK MANAGEMENT ACTIVITIES AND EITF ISSUE NO. 98-10 - ACCOUNTING FOR CONTRACTS INVOLVED IN ENERGY TRADING AND RISK MANAGEMENT ACTIVITIES. On October 25, 2002, the EITF reached a final consensus in EITF No. 02-03 that gains and losses (realized or unrealized) on all derivative instruments within the scope of SFAS No. 133 should be shown net in the income statement, whether or not settled physically, if the derivative instruments are held for trading purposes. For purposes of the consensus, energy trading activities encompass contracts entered into with the objective of generating profits on, or exposure to, shifts in market prices. This consensus was effective for financial statements issued for periods beginning after December 15, 2002. Upon implementation of EITF No. 02-03 in 2003, NiSource reevaluated its portfolio of contracts in order to determine which contracts were required to be reported net in accordance with the provisions of the consensus. EITF No. 02-03 implementation resulted in equal and offsetting reductions to revenues and cost of sales of $945.4 million, $2,910.8 million and $2,214.8 million for the years ended December 31, 2002, 2001 and 2000 respectively. Accordingly, NiSource's operating income remained unchanged for all periods presented. SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. NiSource adopted the provisions of SFAS No. 143 on January 1, 2003, and as a result an asset retirement obligations liability of $54.3 million was recognized, of which $43.4 was related to assets sold in 2003. In addition, NiSource capitalized $41.3 million in additions to plant assets, net of accumulated amortization, of which $21.7 million was related to assets sold in 2003, and recognized regulatory assets and liabilities of $1.2 million and $4.6 million, respectively. NiSource believes that the amounts recognized as regulatory assets will be recoverable in future rates. The cumulative after-tax effect of adopting SFAS No. 143 amounted to $8.8 million. Certain costs of removal that have been, and continue to be, included in depreciation rates and collected in the service rates of the rate-regulated subsidiaries, did not meet the definition of an asset retirement obligation pursuant to SFAS No. 143. The amount of the other costs of removal was approximately $1.0 billion at December 31, 2003 and December 31, 2002 based on rates for estimated removal costs embedded in composite depreciation rates. NiSource reclassified its cost of removal as of December 31, 2002 from accumulated depreciation 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. to regulatory liabilities and other removal costs on the consolidated balance sheet and upon adoption of SFAS No. 143 "Accounting for Asset Retirement Obligations" recharacterized the liability as a regulatory liability as of December 31, 2003. For the twelve months ended December 31, 2003, NiSource recognized accretion expense of $0.6 million. The asset retirement obligations liability totaled $11.4 million at December 31, 2003. Had NiSource adopted SFAS No. 143 at the dates the actual liabilities were incurred, the asset retirement obligations liability would have been $49.4 million and $45.0 million at December 31, 2001 and 2000, respectively, of which $38.3 million and $34.6 million were related to assets sold in 2003. Additionally, refer to "Recently Issued Accounting Pronouncements" in Note 5 of the Notes of Consolidated Financial Statements for information regarding recently issued accounting standards. Environmental Matters NiSource affiliates have retained environmental liability, including cleanup liability, associated with some of its former operations including those of propane operations, petroleum operations, certain local gas distribution companies and Columbia Energy Resources. Most significant environmental liability relates to former manufactured gas plant (MGP) sites whereas less significant liability is associated with former petroleum operations and metering stations using mercury-containing measuring equipment. The ultimate liability in connection with the contamination sites will depend upon many factors including the extent of environmental response actions required, other potentially responsible parties 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, "Accounting for Contingencies" and consistent with American Institute of Certified Public Accountants Statement of Position 96-1, "Environmental Remediation Liabilities." As costs become probable and reasonably estimable, reserves will be recorded and adjusted as appropriate. NiSource believes that any environmental response actions required at former operations, for which it is ultimately liable, will not have a material adverse effect on NiSource's financial position. Proposals for voluntary initiatives and mandatory controls 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, and methane, a component of natural gas. Certain Nisource affiliates engage in efforts to voluntarily report and reduce their greenhouse gas emissions. Nisource will monitor and participate in developments related to efforts to register and potentially regulate greenhouse gas emissions. Power Outage in the Northeast On August 14, 2003, a massive power outage affected approximately 50.0 million people in Michigan, Ohio, New York, Pennsylvania, New Jersey, Connecticut, Vermont and Canada and completely darkened major metropolitan areas such as New York City, Cleveland, Detroit and Toronto. Northern Indiana's electric system operated as it was designed and separated its system from the affected blackout area. Bargaining Unit Contract As of December 31, 2003, NiSource had 8,614 employees of which 3,351 were subject to collective bargaining agreements. On May 31, 2004, the contracts with Northern Indiana's bargaining unit employees expire. Discussions between Northern Indiana and bargaining unit's union representatives are ongoing. RESULTS AND DISCUSSION OF SEGMENT OPERATIONS Presentation of Segment Information With the sale of the exploration and production business, NiSource's operations are divided into four primary business segments; Gas Distribution Operations, Gas Transmission and Storage Operations, Electric Operations, and Other Operations. 29 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) 2003 2002 2001 - --------------------------------------------------------------------------------------------------------------------------------- NET REVENUES Sales Revenues $ 3,659.9 $ 2,905.4 $ 3,890.5 Less: Cost of gas sold 2,625.3 1,921.6 2,887.9 - --------------------------------------------------------------------------------------------------------------------------------- Net Sales Revenues 1,034.6 983.8 1,002.6 Transportation Revenues 442.0 405.0 389.8 - --------------------------------------------------------------------------------------------------------------------------------- Net Revenues 1,476.6 1,388.8 1,392.4 - --------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Operation and maintenance 615.4 589.6 638.1 Depreciation and amortization 190.2 189.2 228.8 Other taxes 164.6 150.9 144.7 - --------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 970.2 929.7 1,011.6 - --------------------------------------------------------------------------------------------------------------------------------- Operating Income $ 506.4 $ 459.1 $ 380.8 ================================================================================================================================= REVENUES ($ IN MILLIONS) Residential $ 2,356.2 $ 1,790.7 $ 2,231.0 Commercial 841.3 625.8 842.4 Industrial 194.0 101.9 131.8 Transportation 442.0 405.0 389.8 Off System Sales 86.1 191.5 636.8 Other 182.3 195.5 47.9 - --------------------------------------------------------------------------------------------------------------------------------- Total $ 4,101.9 $ 3,310.4 $ 4,279.7 - --------------------------------------------------------------------------------------------------------------------------------- SALES AND TRANSPORTATION (MDTH) Residential sales 230.4 223.4 220.3 Commercial sales 89.7 83.6 92.8 Industrial sales 21.8 17.3 15.3 Transportation 522.9 536.9 507.7 Off System Sales 10.5 62.8 170.4 Other 3.6 0.2 0.3 - --------------------------------------------------------------------------------------------------------------------------------- Total 878.9 924.2 1,006.8 - --------------------------------------------------------------------------------------------------------------------------------- HEATING DEGREE DAYS 5,134 4,757 4,500 NORMAL HEATING DEGREE DAYS 4,949 5,129 5,144 % COLDER (WARMER) THAN NORMAL 4% (7%) (13%) CUSTOMERS Residential 2,278,768 2,318,862 2,294,395 Commercial 210,967 216,024 213,052 Industrial 6,009 5,818 5,835 Transportation 779,802 705,430 720,993 Other 135 146 150 - --------------------------------------------------------------------------------------------------------------------------------- Total 3,275,681 3,246,280 3,234,425 - ---------------------------------------------------------------------------------------------------------------------------------
30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS DISTRIBUTION OPERATIONS Competition Gas Distribution Operations competes with investor-owned, municipal, and cooperative electric utilities throughout its service area, and to a lesser extent with other regulated natural gas utilities and propane and fuel oil suppliers. Gas Distribution Operations continues to be a strong competitor in the energy market as a result of strong customer preference for natural gas. Competition with providers of electricity is generally strongest in the residential and commercial markets of Kentucky, southern Ohio, central Pennsylvania and western Virginia where electric rates are primarily driven by low-cost, coal-fired generation. In Ohio and Pennsylvania, gas on gas competition is also common. Gas competes with fuel oil and propane in the New England markets mainly due to the installed base of fuel oil and propane-based heating which, over time, has comprised a declining percentage of the overall market. Restructuring During 2002, NiSource carried out a new reorganization initiative, which resulted in the elimination of approximately 400 positions throughout all NiSource segments mainly affecting executive and other management-level employees. Gas Distribution Operations accrued approximately $7.8 million of salaries, benefits and facilities costs associated with the reorganization initiative. The charge included $2.4 million related to the consolidation of facilities affecting leased office space in Richmond, Virginia and Mount Lebanon, Pennsylvania. Payments made in 2003 in respect of the restructuring items within Gas Distribution Operations were $5.6 million. Additionally, during 2003, the restructuring reserve was decreased by $3.1 million related to previous reorganization initiatives due to adjustments in estimated costs. The restructuring liability at December 31, 2003 and 2002 was $9.9 million and $18.7 million, respectively. Regulatory Matters Changes in gas industry regulation, which began in the mid-1980s at the federal level, have broadened to retail customers at the state level. For many years, large industrial and commercial customers have had the ability to purchase natural gas directly from marketers and to use Gas Distribution Operations' facilities for transportation services. Beginning in the mid-1990s, Gas Distribution Operations has provided these "CHOICE(R)" programs for their retail customers. Through December 2003, approximately 0.8 million of Gas Distribution Operations' residential and small commercial customers have selected an alternate supplier. Gas Distribution Operations continues to offer Customer Choice(SM) opportunities through regulatory initiatives in all of its jurisdictions. While Customer Choice(SM) programs are intended to provide all customer classes with the opportunity to obtain gas supplies from alternative merchants, Gas Distribution Operations 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 Operations subsidiaries are sometimes left with pipeline capacity they have contracted for, but no longer need. The state commissions in jurisdictions served by Gas Distribution Operations are at various stages in addressing these issues and other transition considerations. Gas Distribution Operations 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, reducing levels of reserved pipeline capacity and mandatory assignment of pipeline capacity to alternative suppliers. Through October 2004, Columbia of Ohio is operating under a regulatory stipulation approved by the Public Utilities Commission of Ohio (PUCO). On October 9, 2003, Columbia of Ohio and other parties filed with the PUCO an amended stipulation that would govern Columbia of Ohio's regulatory framework from November 2004 through October 2010. The majority of Columbia of Ohio's contracts with interstate pipelines expire in October 2004, and the amended stipulation would permit Columbia to renew those contracts for firm capacity sufficient to meet up to 100% of the design peak day requirements through October 31, 2005 and up to 95% of the design peak day requirements through October 31, 2010. Among other things, the amended stipulation would also: (1) extend Columbia of Ohio's CHOICE(R) program through October 2010; (2) provide Columbia of Ohio with an opportunity to generate revenues sufficient to cover the stranded costs associated with the CHOICE(R) program; and, (3) allow Columbia of Ohio to record post-in-service-carrying charges on plant placed into service after October 2004, and to defer the property taxes and depreciation associated with such plant. On March 11, 2004, the PUCO issued an order that adopted and modified the stipulation from Columbia Gas of Ohio and a collaborative of parties. The order extended Columbia of Ohio's CHOICE (R) program. However, the order limited the time period of the stipulation through December 31, 2007 and declined to pre-approve the amount of interstate pipeline firm capacity for which Columbia of Ohio could contract. In addition, the PUCO made other modifications which would limit Columbia of Ohio's ability to generate additional revenues sufficient to cover stranded costs, including declining to mandate that natural gas marketers participating in the CHOICE (R) program obtain 75% of their interstate capacity directly from Columbia of Ohio and changing the allocation of revenues generated through off-systems sales. The order allows Columbia of Ohio to record post-in-service-carrying charges on plant placed in service after October 2004 and allows the deferral of property taxes and depreciation associated with such plant. Although this order will have a minimal impact on 2004, NiSource's initial estimate is that this order, if left unchanged, could potentially reduce operating income by approximately $20 million annually 2005 through 2007. Columbia Gas of Ohio anticipates, consistent with standard regulatory process, petitioning the commission for rehearing on the components which have been modified. 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS DISTRIBUTION OPERATIONS As part of the 2002 annual review of Columbia of Ohio's gas cost recovery rates, the PUCO retained Exeter Associates, Inc. ("Exeter") to conduct a management/performance review of Columbia of Ohio's gas purchasing practices and strategies. On July 25, 2003, Exeter filed its final audit report. In the audit report Exeter questioned Columbia of Ohio's decision to recontract for all of its pipeline capacity, and recommended that Columbia of Ohio should contract for only that post-October 2004 capacity necessary to serve its bundled service customers, to meet the balancing requirements of CHOICE(R) customers, and to accommodate the capacity assignment elections of CHOICE(R) suppliers. According to Exeter, this approach would eliminate the need for Columbia of Ohio to engage in off-system sales activities to recover stranded costs. Exeter also criticized Columbia of Ohio's procedures for dealing with operational flow orders and operational matching orders, which procedures had been the subject of a stipulation previously approved by the PUCO. Exeter therefore recommended that Columbia of Ohio's procedures for dealing with operational flow orders and operational matching orders be revised. Exeter further criticized Columbia of Ohio's volume banking and balancing service because the service allegedly does not reflect the costs of certain interstate pipeline charges, and recommended that Columbia of Ohio redesign its balancing rates. The issues raised in the Exeter report will be resolved by the PUCO either in a rehearing on the stipulation or in the 2002 gas cost recovery case. On December 17, 2003, the PUCO approved an application by Columbia of Ohio and other Ohio LDCs to establish a tracking mechanism that will provide for recovery of current bad debt expense and for the recovery over a five-year period of previously deferred uncollected accounts receivable. The approval of the tracker will allow for the recovery of $25.2 million in previously uncollected accounts receivable for Columbia of Ohio. On August 11, 1999, the IURC approved a flexible gas cost adjustment mechanism for Northern Indiana. Under the approved procedure, the demand component of the adjustment factor will be determined, after hearings and IURC approval, and made effective on November 1 of each year. The demand component will remain in effect for one year until a new demand component is approved by the IURC. The commodity component of the adjustment factor will be determined by monthly filings, which will become effective on the first day of each calendar month, subject to refund. The monthly filings do not require IURC approval but will be reviewed by the IURC during the annual hearing that will take place regarding the demand component filing. Northern Indiana's gas cost adjustment factor also includes a gas cost incentive mechanism which allows the sharing of any cost savings or cost increases with customers based on a comparison of actual gas supply portfolio cost to a market-based benchmark price. Northern Indiana made its annual filing for 2002 on August 29, 2002. The IURC approved implementation of interim rates, subject to refund, effective November 1, 2002. Testimony was filed indicating that some gas costs should not be recovered. On September 30, 2003, the IURC issued an order adjusting the recovery of costs in March 2003 and reducing recovery by $3.8 million. On October 8, 2003, the IURC approved the demand component of the adjustment factor. Northern Indiana made its annual filing for 2003 on August 26, 2003. The IURC approved implementation of interim rates subject to refund, effective November 1, 2003. NiSource expects the proceeding with respect to the 2003 program to be concluded during the second quarter of 2004. In addition, the gas cost incentive mechanism program, which allows the sharing of any cost savings or cost increases with the customers expires at the end of 2004, under the current settlement approved by the IURC. NiSource expects the program to continue after 2004. Effective November 2003, the Pennsylvania Public Utility Commission approved a surcharge allowing CPA. to recover certain expenses related to Columbia's Customer Assistance Program for low-income customers. The Customer Assistance Program is available to customers with incomes at or below 150% of the poverty level. The estimated increase in annual revenues as a result of the surcharge is $11.5 million annually. However, the surcharge will fluctuate based on the number of customers and cost of gas. Approximately $1.8 million is reflected in the year ended December 31, 2003. The Pennsylvania Public Utility Commission approved the Customer Assistance Surcharge on October 30, 2003, subject to customer complaint cases filed in opposition to the surcharge. Environmental Matters Currently, various environmental matters impact the Gas Distribution Operations segment. As of December 31, 2003, a reserve has been recorded to cover probable environmental response actions. Refer to Footnote 17G "Environmental Matters" in the notes to the consolidated financial statements, for additional information regarding environmental matters for the Gas Distribution Operations segment. 32 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS DISTRIBUTION OPERATIONS Market Conditions An economic slowdown during 2001, which has extended through 2003, contributed to lower demand and the reduced industrial production and fuel switching (to coal, heating oil and distillate) resulted in industrial throughput falling 25% from its peak of over 400 billion cubic feet (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 steel-related companies filing for bankruptcy. Spot prices for the winter of 2002-2003 were in the $4.00-$6.00 per dekatherm (Dth) range with a large spike toward $10 in February, significantly higher than the prices experienced during the 2001-2002 winter season. Entering the 2002-2003 winter season, storage levels were near the top of the five-year range; however, concerns over lower levels of natural gas production and near-normal temperatures sustained higher prices. Mid-way through the 2002-2003 winter season natural gas storage levels fell below the trailing five-year average ending the winter season with the lowest level of gas in storage ever recorded by the Energy Information Administration (EIA) since the EIA began recording such data in 1976. Throughout the summer of 2003, prices stayed between $4.50 and $5.50/Dth. Thus far during the winter of 2003-2004 price levels are between $5.00 and $7.00/Dth, though stocks of storage gas continue to be higher than the five-year average. All NiSource Gas Distribution Operations 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 future customer billings. During times of unusually high gas prices, throughput and net revenue may be adversely affected as customers may reduce their usage as a result of higher gas cost. The Gas Distribution Operations 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 their service territory, the sale of products and services in their service territories and gas supply cost incentive mechanisms for service to their core markets. The upstream products are made up of transactions that occur between an individual Gas Distribution company and a buyer for the sales of unbundled or rebundled gas supply and capacity. The on-system services are offered by NiSource to customers and include products such as the transportation and balancing of gas on the Gas Distribution Operations company system. The incentive mechanisms give the Gas Distribution Operations companies an opportunity to share in the savings created from such things as gas purchase prices paid below an agreed upon 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 the benefits with customers and others using these revenues to mitigate transition costs occurring as the result of customer choice programs described above under "Regulatory Matters." Capital Expenditures The Gas Distribution Operations segment's net capital expenditure program was $195.1 million in 2003 and is projected to be approximately $210.2 million in 2004. New business initiatives totaled approximately $85.6 million in 2003 and are expected to be $82.6 million in 2004. The remaining expenditures are primarily for modernizing and upgrading facilities. Weather In general, NiSource calculates the weather related revenue variance based on changing customer demand driven by weather variance from normal heating degree-days. Normal is evaluated using heating degree days across the NiSource distribution region. While the temperature base for measuring heating degree-days (i.e. the estimated average daily temperature at which heating load begins) varies slightly across the region, the NiSource composite measurement is based on 62 degrees. In 2003, NiSource changed its definition of normal heating degree-days using weather information from the average of 30 years ended 2001. This resulted in a decrease in normal heating degree-days of about 3.5%. 33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS DISTRIBUTION OPERATIONS Weather in the Gas Distribution Operations service territories for 2003 was approximately 4% colder than normal and 8% colder than 2002, increasing net revenues by approximately $60.1 million over the year ended December 31, 2002. In 2002, weather in the Gas Distribution Operations service territories was 7% warmer than normal. However, weather conditions were 6% colder than for the year ended December 31, 2001, which resulted in increased net revenue of approximately $21.8 million over 2001. Throughput Total volumes sold and transported for the year ended December 31, 2003 were 878.9 million dekatherms (MDth), compared to 924.2 MDth for 2002. This reduction was primarily due to a decrease in off-system sales as a result of fewer market opportunities. Total volumes sold and transported of 924.2 MDth for 2002 decreased 82.6 MDth from 2001. This decrease was primarily due to the decline in off-system sales. Net Revenues Net revenues for 2003 were $1,476.6 million, up $87.8 million from 2002, mainly as a result of increased deliveries of natural gas to residential, commercial and industrial customers of $60.1 million due to colder weather during the first quarter of 2003, increased non-traditional revenues of $8.6 million and higher cost trackers and gross receipts taxes generally offset in operating expenses. Net revenues for 2002 were $1,388.8 million, down $3.6 million from 2001 mainly as a result of a decrease in off-system sales and incentive programs amounting to $24.3 million, mostly offset by a $21.8 million increase in gas distribution revenue as a result of colder weather as compared to 2001. Operating Income For the twelve months ended December 31, 2003, operating income for the Gas Distribution Operations segment was $506.4 million, an increase of $47.3 million over the same period in 2002. The increase was the result of higher net revenue mentioned above, the approval of a bad debt tracker for Columbia of Ohio for the recovery $25.2 million of previously uncollected accounts receivable and reduced administrative and employee related expenses of $14.5 million. These benefits to operating income were offset in part by increased bad debt expense of $25.9 million, higher pension and postretirement expenses of $9.8 million, and $22.4 million of insurance recoveries for environmental expenses recognized in the 2002 period. For the twelve months ended December 31, 2002, operating income for the Gas Distribution Operations segment was $459.1 million, an increase of $78.3 million over the same period in 2001. The increase consisted of $21.8 million from increased deliveries as a result of favorable weather and $81.9 million from lower operating expenses. These lower operating expenses consisted mainly of the discontinuation of the amortization of goodwill of $42.8 million, $22.4 million of insurance recoveries for environmental expenses, decreased employee-related and support services expenses resulting from reorganization initiatives of $19.3 million and reductions of $9.2 million in reduced uncollectible customer accounts and other customer related expenses. The favorable variances were partially offset by a decrease of $24.3 million in off-system sales and incentive programs. 34 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) 2003 2002 2001 - -------------------------------------------------------------------------------- OPERATING REVENUES Transportation revenues $ 663.2 $ 730.4 $ 756.7 Storage revenues 177.9 178.9 178.9 Other revenues 12.2 12.9 28.1 - -------------------------------------------------------------------------------- Total Operating Revenues 853.3 922.2 963.7 Less: Cost of gas sold 16.0 47.8 80.1 - -------------------------------------------------------------------------------- Net Revenues 837.3 874.4 883.6 - -------------------------------------------------------------------------------- OPERATING EXPENSES Operation and maintenance 278.3 316.2 321.0 Depreciation and amortization 111.4 109.4 161.4 Gain on sale or impairment of assets (1.8) (2.2) -- Other taxes 50.6 52.7 52.2 - -------------------------------------------------------------------------------- Total Operating Expenses 438.5 476.1 534.6 - -------------------------------------------------------------------------------- Operating Income $ 398.8 $ 398.3 $ 349.0 ================================================================================ THROUGHPUT (MDTH) Columbia Transmission Market Area 1,018.9 1,043.8 970.2 Columbia Gulf Mainline 612.6 614.4 626.3 Short-haul 124.4 146.9 184.7 Columbia Pipeline Deep Water 7.4 0.7 2.9 Crossroads Gas Pipeline 34.3 29.2 37.4 Granite State Pipeline 33.4 33.2 29.1 Intrasegment eliminations (592.1) (553.9) (609.3) - -------------------------------------------------------------------------------- Total 1,238.9 1,314.3 1,241.3 - --------------------------------------------------------------------------------
Pipeline Firm Service Contracts Since implementation of Order No. 636 in the early 1990's, the services of Columbia Transmission and Columbia Gulf have consisted of open access transportation services, and open access storage services in the case of Columbia Transmission. These services are provided primarily to local distribution companies (LDC), and compete to some degree with comparable services provided by other interstate pipelines. The majority of the firm contracts that were restructured in Order No. 636 expire in late 2004. Customer decisions on capacity re-subscription are affected by many factors, including decisions by state regulators on the treatment of pipeline capacity agreements in the context of LDC unbundling proceedings. Several LDC's have effectively extended their long-term capacity commitments and the companies are in the process of negotiating with other firm capacity holders. Transportation for New Electric Generation Projects Columbia Transmission received approval from the FERC to construct facilities to provide service at levels up to 560,000 Dth per day to three electric generating facilities originally planned to be in service in 2003. Due to market conditions, customers at two of the proposed electric generation facilities elected to cancel the underlying contracts for service, and plans for these facilities have been terminated. Initial service to a 1,020-megawatt generating facility in Maryland began in November 2003 under contracts providing up to 270,000 Dth per day of transportation capacity. 35 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS TRANSMISSION AND STORAGE OPERATIONS (CONTINUED) Proposed Millennium Pipeline Project The proposed Millennium Pipeline Project (Millennium), in which Columbia Transmission is participating and will serve as developer and operator, will provide access to a number of supply and storage basins and the Dawn, Ontario, trading hub. The Millennium partnership recently announced its intention to develop the project in two phases. Phase 1 of the project, subject to demand, is expected to be in service by November 2006 and will include the 186-mile section from Corning, N.Y. to Ramapo, N.Y., transporting 500,000 Dth per day. Millennium's upstream link will be via the Empire State Pipeline, an existing pipeline that originates at the Canadian border and extends easterly to near Syracuse. Empire will construct a lateral pipeline southward to connect with Millennium near Corning, N.Y. This will provide a continuous link between Canadian gas supplies and the Millennium Pipeline with a capacity of at least 250,000 Dth per day. Assuming the resolution of certain permitting issues discussed below, plans call for the 46-mile Millennium Phase 2 to cross the Hudson River, linking to the New York City metropolitan market via the Consolidated Edison distribution system. On September 19, 2002, the FERC issued its order granting final certificate authority for the original Millennium project and specified that Millennium may not begin construction until certain environmental and other conditions are met. One such condition, impacting Phase 2 of the project, is compliance with the Coastal Zone Management Act, which is administered by the State of New York's Department of State (NYDOS). NYDOS has determined that the Hudson River crossing plan is not consistent with the Act. Millennium's appeal of that decision to the United States Department of Commerce was denied. Millennium filed an appeal of the U.S. Department of Commerce ruling relating to the project's Hudson River crossing plan in the U.S. District Court for the District of Columbia on February 13, 2004. Millennium is in ongoing discussions with potential shippers regarding the extent, location, and timing of their needs and anticipates filing, later in 2004, to amend its FERC certificate to accommodate the above-described phasing of the project. The sponsors of the proposed Millennium project are Columbia Transmission, Westcoast Energy, Inc. (subsidiary of Duke Energy Corp.), TransCanada Pipe Lines Ltd. and MCN Energy Group, Inc. (subsidiary of DTE Energy Co.). Regulatory Matters On February 28, 2003, Columbia Transmission filed with the Federal Energy Regulatory Commission (FERC) certain scheduled annual rate adjustments, designated as the Transportation Costs Rate Adjustment (TCRA), Retainage Adjustment Mechanism (RAM), and Electric Power Cost Adjustment (EPCA). These filings seek to recover certain expenses relating to transportation costs incurred by Columbia Transmission on interconnecting pipelines and electric costs incurred in the operation of certain compressors (TCRA and EPCA, respectively), as well as quantities of gas required by Columbia Transmission to operate its pipeline system (RAM). The recovery of each of these costs is done through a "tracker" which ensures recovery of only actual expenses. On October 1, 2003, FERC issued an order accepting Columbia Transmission's compliance filing supporting its TCRA filing, and accepting the full recovery of upstream transportation costs as proposed in the filing. On February 11, 2004, FERC approved an order regarding the annual EPCA filing, which upheld Columbia Transmission's ability to fully recover its electric costs, but required Columbia Transmission to implement a separate EPCA rate to recover electric power costs incurred by a newly expanded electric-powered compressor station from specific customers. The order also limits Columbia Transmission's ability to prospectively discount its EPCA rates. Management does not believe this order will have a material financial impact. The FERC has not yet issued a final Order in Columbia Transmission's 2003 RAM proceeding. Restructuring During 2002, NiSource carried out a new reorganization initiative, which resulted in the elimination of approximately 400 positions throughout all NiSource segments mainly affecting executive and other management-level employees. During 2002, Gas Transmission and Storage Operations accrued approximately $14.8 million of salaries, benefits and facilities costs associated with the reorganization initiative. Payments made in 2003 in respect of restructured items within Gas Transmission and Storage Operations was $8.3 million. Additionally, during 2003, the restructuring reserve was decreased by $1.5 million related to previous reorganization initiatives due to adjustments in estimated costs. The restructuring liability at December 31, 2003 and 2002 was $7.1 million and $16.9 million, respectively. 36 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS TRANSMISSION AND STORAGE OPERATIONS (CONTINUED) Environmental Matters Currently, various environmental matters impact the Gas Transmission and Storage Operations segment. As of December 31, 2003, a reserve has been recorded to cover probable environmental response actions. Refer to Footnote 17G "Environmental Matters" in the notes to the consolidated financial statements, for additional information regarding environmental matters for the Gas Transmission and Storage Operations. Storage Base Gas Sales Base gas represents storage volumes that are maintained to ensure that adequate pressure exists to deliver current gas 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. Columbia Transmission sold 0.8 MDth, 2.0 MDth and 5.4 MDth of storage base gas volumes during 2003, 2002 and 2001, respectively. These sales resulted in pre-tax gains of $1.6 million, $2.9 million and $11.4 million in 2003, 2002 and 2001, respectively. Long-Term Notes Receivable In 1999, Columbia Transmission sold certain gathering facilities to a third party for approximately $22 million. The buyer executed a promissory note, which provides for payment of the purchase price to Columbia Transmission over a five-year period. In the second quarter of 2002, an appropriate reserve was recorded against the receivable in light of the failure to receive timely payments from the counterparty. During the third quarter, of 2002 management negotiated a new payment schedule and secured a guarantee from the third party's parent company as security for the note. Columbia Transmission is in discussions with the counterparty about its failure to make a $500,000 payment that was due on January 1, 2004. A notice of default was sent on February 10, 2004. The counterparty has until March 11, 2004 to make this payment or Columbia Transmission will proceed to execute the default remedies outlined in the agreement. At December 31, 2003, the balance of the note was $9.2 million. Capital Expenditure Program The Gas Transmission and Storage Operations segment's capital expenditure program was $120.5 million in 2003 and is projected to be approximately $138.5 million in 2004. New business initiatives totaled approximately $16.2 million in 2003. Only $3.1 million of new business expenditures in 2004 are currently budgeted excluding any capital requirements for the proposed Millennium project. The remaining expenditures are primarily for modernizing and upgrading facilities and complying with the requirements of the U.S. Department of Transportation's (DOT) recently issued Integrity Management Rule. The DOT Integrity Management Rule requires that high consequence areas on transmission lines be assessed and remediated, if required, within a 10-year period beginning December 2002. Compliance will entail extensive assessment, including pipeline modifications to allow for testing devices, and facility replacement depending on test results. 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 State provides service in New Hampshire, Maine and Massachusetts. Throughput for the Gas Transmission and Storage Operations segment totaled 1,238.9 MDth for 2003, compared to 1,314.3 MDth in 2002. The decrease of 75.4 MDth was primarily due to lower deliveries to dual fueled electric power generators, which chose not to run on the high priced gas experienced throughout 2003. Also, contributing to the decrease was the continued decline of offshore natural gas production. Throughput for the Gas Transmission and Storage Operations segment totaled 1,314.3 MDth for 2002, compared to 1,241.3 MDth in 2001. The increase of 73.0 MDth reflected slightly colder weather in 2002 and an increase in market demand. 37 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS TRANSMISSION AND STORAGE OPERATIONS (CONTINUED) Net Revenues Net revenues were $837.3 million for 2003, a decrease of $37.1 million from 2002. The decrease was primarily due to $9.3 million of lower interruptible service revenues and $10.4 million of lower firm service revenues. The decline in interruptible revenues was due to higher use of capacity by firm customers resulting in less capacity available for interruptible services. Firm service revenues were reduced due to actions taken to alleviate late season deliverability limitations in the pipeline's eastern storage fields. The limitations resulted from the cumulative effect of facility outages that restricted eastern storage field inventory, a work stoppage that extended the outages and above-normal demand on storage withdrawals due to sustained cold weather. In addition, storage and transportation revenues decreased $13.5 million primarily due to reduced deliveries to power generating facilities. Net revenues were $874.4 million for 2002, a decrease of $9.2 million from 2001. The decrease was primarily due to an $8.5 million reduction in gains on the sales of storage base gas that occurred in the 2002 period compared to the 2001 period. Operating Income Operating income of $398.8 million in 2003 increased $0.5 million from 2002. The $37.1 million decline in revenues discussed above was offset by a $12.5 million reduction in employee-related and administrative expense, an improvement to income of $11.0 million based on a decrease in estimated environmental expenditures, and a $6.6 million reversal of a litigation reserve relating to a lawsuit that was settled in the second quarter of 2003. The 2002 period was also favorably impacted a reduction in a reserve for environmental expenditures of $10.0 million, a $10.0 million reduction in reserves related to unaccounted-for gas, offset by $14.8 million of increased expenses related to NiSource's reorganization initiatives and other employee-related costs and $8.7 million related to the recognition of a reserve related to a long-term note receivable. Operating income of $398.3 million in 2002 increased $49.3 million from 2001. The increase was due primarily to the effects of discontinuing the amortization of $50.3 million of goodwill, a reduction in a reserve for environmental expenditures of $10.0 million, a $10.0 million reduction in reserves related to unaccounted-for gas and lower employee-related and support services expenses approximating $13.6 million. The favorable impacts were partly offset by $8.5 million from lower gains on the sales of storage base gas that occurred in the 2002 period, compared with the 2001 period, expenses related to NiSource's reorganization initiatives totaling $14.8 million and $8.7 million related to the recognition of a reserve related to a long-term note receivable. 38 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) 2003 2002 2001 - -------------------------------------------------------------------------------- NET REVENUES Sales revenues $ 1,092.8 $ 1,137.4 $ 1,064.5 Less: Cost of sales 364.2 369.0 277.6 - -------------------------------------------------------------------------------- Net Revenues 728.6 768.4 786.9 - -------------------------------------------------------------------------------- OPERATING EXPENSES Operation and maintenance 224.7 222.8 223.3 Depreciation and amortization 175.1 172.2 166.8 Other taxes 61.3 51.1 56.1 - -------------------------------------------------------------------------------- Total Operating Expenses 461.1 446.1 446.2 - -------------------------------------------------------------------------------- Operating Income $ 267.5 $ 322.3 $ 340.7 ================================================================================ REVENUES ($ IN MILLIONS) Residential $ 294.9 $ 309.5 $ 295.7 Commercial 289.8 297.2 292.9 Industrial 380.2 393.6 404.0 Wholesale 92.8 92.9 29.6 Other 35.1 44.2 42.3 - -------------------------------------------------------------------------------- Total $ 1,092.8 $ 1,137.4 $ 1,064.5 - -------------------------------------------------------------------------------- SALES (GIGAWATT HOURS) Residential 3,122.5 3,228.4 2,956.9 Commercial 3,579.7 3,618.3 3,446.3 Industrial 8,972.2 8,822.4 8,935.5 Wholesale 2,623.2 2,983.5 845.0 Other 141.6 123.3 127.6 - -------------------------------------------------------------------------------- Total 18,439.2 18,775.9 16,311.3 - -------------------------------------------------------------------------------- COOLING DEGREE DAYS 572 1,015 801 NORMAL COOLING DEGREE DAYS 808 792 792 % WARMER (COLDER) THAN NORMAL (29%) 28% 1% ELECTRIC CUSTOMERS Residential 388,123 384,891 381,440 Commercial 49,252 48,286 47,286 Industrial 2,543 2,577 2,643 Wholesale 21 22 23 Other 794 799 801 - -------------------------------------------------------------------------------- Total 440,733 436,575 432,193 - --------------------------------------------------------------------------------
Market Conditions The regulatory frameworks applicable to Electric Operations continue to be affected by fundamental changes., that will impact Electric Operations' structure and profitability. Notwithstanding those changes, competition within the industry will create opportunities to compete for new customers and revenues. Management has taken steps to improve operating efficiencies in this changing environment and improve the transmission interconnections with neighboring electric utilities. 39 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. ELECTRIC OPERATIONS (CONTINUED) The economic situation in the steel and steel-related industries continues to have an impact on electric sales. The Indiana facilities of LTV Corporation (LTV) and Bethlehem Steel, which declared bankruptcy, were acquired by International Steel Group (ISG) in early 2002. The steel sector continues to show improvement, with a 6% improvement in sales for 2003 over 2002. The acquisitions of Bethlehem Steel and National Steel by ISG and U.S. Steel, respectively, have been completed. Restructuring During the third quarter of 2002, NiSource carried out a new reorganization initiative, which resulted in the elimination of approximately 400 positions throughout all NiSource segments mainly affecting executive and other management-level employees. During 2002, Electric Operations accrued approximately $2.5 million of salaries and benefits associated with the reorganization initiative. Payments of $0.6 million were made in 2003 in respect of the reorganization initiatives mentioned above. Additionally, during 2003, the restructuring reserve was decreased by $0.1 million related to previous reorganization initiatives. The restructuring program for Electric Operations is substantially complete with $0.7 million remaining of restructuring liability at December 31, 2003. Regulatory Matters During 2002, Northern Indiana settled matters related to an electric rate review. On September 23, 2002, the IURC issued an order adopting most aspects of the settlement. The order approving the settlement provides that electric customers of Northern Indiana will receive bill credits of approximately $55.1 million each year, for a cumulative total of $225 million, for the minimum 49-month period, beginning on July 1, 2002. The order also provides that 60% of any future earnings beyond a specified cap will be retained by Northern Indiana. Credits amounting to $52.0 million were recognized for electric customers in 2003. The order adopting the settlement was appealed to the Indiana Court of Appeals by both the Citizens Action Coalition of Indiana and fourteen residential customers. On October 14, 2003, the Appeals Court upheld the IURC's approval of the settlement. The Citizens Action Coalition of Indiana and the fourteen residential customers have filed a petition for transfer to the Supreme Court of Indiana. Northern Indiana submitted its quarterly fuel adjustment clause (FAC) filing for the twelve-month period ended September 30, 2002, which included a calculation for the sharing of earnings in excess of allowed earnings as outlined in the IURC order regarding the electric rate review settlement. The IURC issued an order related to the filing on January 29, 2003 rejecting Northern Indiana's sharing calculation, which prorated the amount to be shared with the customers based on the amount of time the rate credit, was in effect during the twelve-month period. Northern Indiana filed a request for a rehearing and reconsideration of the order. On March 12, 2003, the IURC denied Northern Indiana's request and the appropriate amount has been refunded to customers. On June 20, 2002, Northern Indiana, Ameren Corporation and First Energy Corporation established terms for joining the Midwest Independent System Operator (MISO) through participation in an independent transmission company (ITC). The MISO arrangements were filed with the FERC, and on July 31, 2002, the FERC issued an order conditionally approving these arrangements. On November 5, 2002, the ITC signed an agreement with MISO. At its April 30, 2003 meeting, FERC approved the transfer of functional control of Northern Indiana's transmission system to the ITC and issued an order addressing the pricing of electric transmission. An IURC order approving the transfer of functional control of the transmission system to the ITC was issued on September 24, 2003. An uncontested settlement that authorized the reimbursement of $7.4 million to Northern Indiana for incurred costs was approved by the FERC on July 31, 2003. This reimbursement was received on September 30, 2003. Functional control was transferred to the ITC and MISO on October 1, 2003. As part of Northern Indiana's use of MISO's transmission service, Northern Indiana will incur new categories of transmission charges based upon MISO's FERC-approved tariff. One of the new categories of charges, Schedule 10, relates to the payment of administrative charges to MISO for its continuing management and operations of the transmission system. Northern Indiana filed a petition on September 30, 2003, with the IURC seeking approval to establish accounting treatment for the deferral of the Schedule 10 charges from MISO. A hearing at the IURC is scheduled for March 15, 2004. 40 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. ELECTRIC OPERATIONS (CONTINUED) The MISO has initiated the Midwest Market Initiative (MMI), which will develop the structures and processes to be used to implement an electricity market for the MISO region. This MMI proposes non-discriminatory transmission service, reliable grid operation, and the purchase and sale of electric energy in a fair, efficient and non-discriminatory manner. MISO filed detailed tariff information, with a planned initial operation date of March 31, 2004. However, in October 2003, MISO petitioned FERC to withdraw this tariff filing. FERC approved the withdrawal and has provided guidance to MISO as to how it should proceed in the future. It is now expected that MISO will file a new tariff application with FERC and will delay the initial operation date to December 1, 2004. Northern Indiana and TPC are actively pursuing roles in the MMI. At the current time, management believes that the MMI will change the manner in which Northern Indiana and TPC conducts their electric business; however, at this time management cannot determine the impact the MMI will have on Northern Indiana or TPC. Northern Indiana has been recovering the costs of electric power purchased for sale to its customers through the fuel adjustment clause (FAC). The FAC provides for costs to be collected if they are below a negotiated cap. If costs exceed this cap, Northern Indiana must demonstrate that the costs were prudently incurred to achieve approval for recovery. A group of industrial customers challenged the manner in which Northern Indiana applied costs associated with a specific interruptible sales tariff. An estimated refund liability was recorded in the first quarter of 2003. A settlement was reached with the customers and Northern Indiana recorded the full costs of the settlement. As a result of the settlement, the industrial customers challenge was withdrawn and dismissed in January 2004. In addition, as a result of the settlement, Northern Indiana has sought and received approval by the IURC to reduce the charges under the interruptible sales tariff. This reduction will remain in effect until the Dean H. Mitchell Generating Station (Mitchell Station) has been returned to service. Currently, Northern Indiana is reviewing options to meet the electric needs of its customers. This review includes an assessment of Northern Indiana's oldest generating station units and various options regarding the return of the Mitchell Station, constructed in the early 1950's, to service in the second half of 2004. Northern Indiana has requested proposals for outside companies to provide power under varying terms and conditions. These proposals are being evaluated. In February 2004, the city of Gary announced an interest to acquire the land on which the Mitchell Station is located for economic development, including a proposal to increase the length of the runways at the Gary International Airport. Northern Indiana expects to discuss the proposal to acquire the land with the city of Gary in the near future. To date, the city has not commenced any legal proceedings. In January 2002, Northern Indiana filed for approval to implement an environmental cost tracker (ECT). The ECT was approved by the IURC on November 26, 2002. Under the ECT Northern Indiana will be able to recover (1) allowance for funds used during construction and a return on the capital investment expended by Northern Indiana to implement Indiana Department of Environmental Management's nitrogen oxide State Implementation Plan through an Environmental Cost Recovery Mechanism (ECRM) and (2) related operation and maintenance and depreciation expenses once the environmental facilities become operational through an Environmental Expense Recovery Mechanism (EERM). The IURC order was appealed to the Indiana Court of Appeals by the Citizens Action Coalition of Indiana, where it was upheld by the Court on March 9, 2004. The Citizens Action Coalition of Indiana has 30 days from the date of that decision to petition the Court of Appeals for rehearing or the Supreme Court of Indiana for transfer of the case to that court. Under the Commission's November 26, 2002 order, Northern Indiana is permitted to submit filings on a semi-annual basis for the ECRM and on an annual basis for the EERM. Northern Indiana made its initial filing of the ECRM, ECR-1, in February 2003 for capital expenditures of $58.4 million. On April 30, 2003, the IURC issued an order approving the ECRM filing, providing for the collection of funds expended during construction and a return on the capital investment through increased rates beginning with the May 2003 customer bills. Through December 31, 2003 the ECRM revenues amounted to $5.2 million. On August 1, Northern Indiana filed ECR-2 for capital investments of $120.0 million. This petition was approved by the IURC on October 1, 2003. The initial filing of the EERM was filed with the most recent semi-annual filing of the ECT in February 2004, which included a filing of the ECR-3 for capital investments of $194.1 million and an EERM amount of $1.9 million. Over the timeframe required to meet the environmental standards, Northern Indiana anticipates a total capital investment amounting to approximately $274.2 million. On February 4, 2004, the IURC approved Northern Indiana's latest compliance plan with the estimate of $274.2 million. 41 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. ELECTRIC OPERATIONS (CONTINUED) Environmental Matters Currently, various environmental matters impact Electric Operations segment. As of December 31, 2003, a reserve has been recorded to cover probable environmental response actions. Refer to Footnote 17G "Environmental Matters" in the notes to the consolidated financial statements, for additional information regarding environmental matters for the Electric Operations segment. Capital Expenditure Program The Electric Operations segment's capital expenditure program was $225.1 million in 2003 and is projected to be approximately $144.7 million in 2004. Expenditures for 2003 included improvements related to the operational integrity of generation, transmission and distribution assets, expenditures related to environmental compliance (NOx reduction), and additions to electric distribution systems related to new business. Estimated expenditures for 2004 are approximately $26.4 million for the NOx reduction program. The remaining expenditures are for new business initiatives and maintenance programs. Sales Electric Operations sales were 18,439.2 gwh for the year 2003, a decrease of 336.7 gwh compared to 2002. The decrease in sales resulted from cooler weather during the summer cooling season, partially offset by increases in non-weather related usage and increased customer count. Electric Operations sales for 2002 of 18,775.9 gwh increased 2,464.6 gwh compared to 2001 due primarily to 27% warmer weather during the summer cooling season. Net Revenues Electric Operations net revenues were $728.6 million for 2003, a decrease of $39.8 million from 2002, primarily as a result of $24.0 million in additional credits issued representing a full year of credits pertaining to the IURC electric rate review settlement and the unfavorable impact of cooler weather of $21.9 million. These decreases were partially offset by increases in non-weather-related usage and customer growth. Electric Operations net revenues were $768.4 million for 2002, a decrease of $18.5 million from 2001, primarily as a result of $28.1 million in credits issued pertaining to the IURC electric rate review settlement and $5.2 million from decreased wholesale and wheeling net revenues. The unfavorable variance was partially offset by $14.8 million from warmer weather during the summer cooling season as compared to 2001. Operating Income Operating income for 2003 was $267.5 million, a decrease of $54.8 million from 2002. The decrease was primarily a result of the above-mentioned decreases in revenues, increased pension and post-retirement expenses of $18.7 million and increased property tax expense of $9.6 million, partially offset by decreased administrative and employee related expenses of $12.3 and lower uncollectible accounts receivable expense of $4.6 million Operating income for 2002 was $322.3 million, a decrease of $18.4 million from 2001. The decrease was primarily a result of $28.1 million in credits issued pertaining to the IURC electric rate review settlement and $5.2 million from decreased wholesale and wheeling revenues, partially offset by $14.8 million from the favorable impact of warmer weather during the summer cooling season. 42 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. OTHER OPERATIONS
Year Ended December 31, (in millions) 2003 2002 2001 - -------------------------------------------------------------------------------- NET REVENUES Other revenue $ 466.2 $ 112.0 $ 207.8 Less: Cost of products purchased 450.2 98.2 145.6 - -------------------------------------------------------------------------------- Net Revenues 16.0 13.8 62.2 - -------------------------------------------------------------------------------- OPERATING EXPENSES Operation and maintenance 50.9 47.9 111.3 Depreciation and amortization 11.2 10.3 8.7 Loss (Gain) on sale of assets (6.4) (5.8) 0.1 Other taxes 4.1 4.5 11.7 - -------------------------------------------------------------------------------- Total Operating Expenses 59.8 56.9 131.8 - -------------------------------------------------------------------------------- Operating Income (Loss) $ (43.8) $ (43.1) $ (69.6) - --------------------------------------------------------------------------------
Sale of PEI Assets On October 20, 2003, NiSource sold all of the steel-related, "inside-the-fence" assets of its subsidiary PEI, to Private Power. The sale included six PEI operating subsidiaries and the name "Primary Energy". Private Power paid approximately $325.4 million, comprised of $113.1 million in cash and the assumption of debt-related liabilities and other obligations. The assumption of such liabilities and the after tax cash proceeds from the sale, reduced NiSource's debt by $273.6 million, of which $67.3 million was off balance sheet. NiSource has accounted for the assets sold as discontinued operations and has adjusted periods after 1999 accordingly. Midtex Gas Storage Company, LLP. On November 26, 2003, NiSource sold its interest in Midtex Gas Storage Company, LLP for approximately $15.8 million and the assumption, by the buyer, of $1.7 million in debt. In the fourth quarter of 2003, NiSource recognized a pre-tax gain of $7.5 million and an after tax gain of $4.4 million related to this sale. 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 operated an underground line locating and marking service in ten midwestern states. In the first quarter of 2002, NiSource recognized an after-tax gain of $12.5 million related to the sale. The gain on the sale was reflected in Corporate. PEI Holdings, Inc. WHITING CLEAN ENERGY. PEI's Whiting Clean Energy project at BP's Whiting, Indiana refinery was placed in service in 2002. Initially, the facility was not able to deliver steam to BP to the extent originally contemplated without plant modifications. Whiting Clean Energy has commenced an arbitration proceeding to seek recovery of damages from the engineering, procurement and construction contractor. Whiting Clean Energy is also pursuing recovery from the insurance provider for construction delays and necessary plant modifications. The contractor has asserted that it fully performed under its contract and is demanding payment of the full contract price plus additional amounts for remediation. PEI estimates that the facility will operate at a loss in the near term based on the current market view of forward pricing for gas and electricity. For 2003, the after-tax loss was approximately $30.0 million and the expected 2004 after-tax loss is expected to be similar to 2003 based on a similar market for gas and electricity. The profitability of the project in future periods will be dependent on, among other things, prevailing prices in the energy markets and regional load dispatch patterns. Because of the expected losses from this facility and decreases in estimated forward pricing for electricity versus changes in gas prices, an impairment study was performed in the first quarter of 2003 on this facility in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The study indicated that, at that time, no impairment was necessary. 43 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. OTHER OPERATIONS (CONTINUED) However, the study includes many estimates and assumptions for the 40-year estimated useful life of the facility. Changes in these estimates and assumptions, such as forward prices for electricity and gas, volatility in the market, etc., could result in a situation where total undiscounted net revenues are less than the carrying value of the facility, which would result in a write-down that could be significant. During the second quarter of 2003, PEI's wholly owned subsidiary Whiting Energy, LLC purchased the Whiting Clean Energy plant from a special purpose lessor entity and the facility is accounted for as an owned asset. Environmental Matters Currently, various environmental matters impact Other Operations segment. As of December 31, 2003, a reserve has been recorded to cover probable environmental response actions. Refer to Footnote 17G "Environmental Matters" in the notes to the consolidated financial statements, for additional information regarding environmental matters for the Other Operations segment. Net Revenues For the year ended 2003, net operating revenues were $16.0 million, an increase of $2.2 million from 2002. The increase in net revenues was primarily due to losses of $11.7 million recorded in 2002 associated with NiSource's decision to scale back its gas trading business, slightly offset by losses of $1.6 million recorded in 2003 associated with the power trading business as a result of lower volatility in the market and decreased volumes sold and a decrease in Whiting Clean Energy net revenues of $7.0. For the year ended 2002, net operating revenues were $13.8 million, a decrease of $48.4 million from 2001. The decrease in net revenues primarily resulted from NiSource's decision to scale back its gas trading business, the change in value of NiSource's gas and power marketing portfolios and the sale of SM&P. All results reflect power trading activities on a net revenue basis. The 2001 and half of the 2002 results related to gas trading activities are reflected on a net basis. Beginning July 1, 2002 NiSource exited the gas trading business. All gas marketing sales at NiSource after June 30, 2003 were reported on a gross basis pursuant to EITF 02-03. . (Refer to Footnote 5 for further information on EITF 02-03.) Operating Income (Loss) The Other Operations segment reported an operating loss of $43.8 million in 2003 compared to an operating loss of $43.1 million in the 2002 period. The 2003 period included a gain on the sale of NiSource's interest in Mid-Tex Gas Storage, LLP of $7.5 million, a reversal of a litigation reserve of $7.0 relating to a lawsuit that was settled in the fourth quarter of 2003 and an increase in operating losses at Whiting Clean Energy. 2002 operating expenses were lower as a result of a reduction in estimated sales taxes of $11.4 million that occurred in 2002 related to sales of natural gas to customers of a subsidiary previously engaged in the retail and wholesale gas marketing business, mostly offset by expenses of $9.8 million associated with the July 1, 2002 sale of a portfolio of TPC gas marketing contracts. The Other Operations segment reported an operating loss of $43.1 million for 2002, an improvement of $26.5 million compared to the 2001 period. The improvement was primarily attributable to reduced losses related to NiSource's other non-core subsidiaries, a $15.5 million litigation settlement related to MHP affecting the 2001 period, a $11.4 million reduction in reserves for estimated sales taxes of a subsidiary previously engaged in the gas marketing business, consolidation of facilities of $11.3 million resulting from reorganization initiatives and a $3.1 million gain on the sale of contracts associated with scaling back the energy trading operations. The improvements were partly offset by an increase of $13.9 million in depreciation and operating expenses associated with Whiting Clean Energy and a decrease of $12.9 million in the value of the power trading portfolio. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and Qualitative Disclosures about Market Risk are reported in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk Disclosures." 44 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA NISOURCE INC.
INDEX PAGE - -------------------------------------------------------------------------------- Independent Auditors' Report............................................ 46 Statements of Consolidated Income....................................... 47 Consolidated Balance Sheets............................................. 48 Statements of Consolidated Cash Flows................................... 50 Statements of Consolidated Capitalization............................... 51 Statements of Consolidated Long-Term Debt............................... 52 Statements of Consolidated Common Stockholders' Equity.................. 54 Notes to Consolidated Financial Statements.............................. 56 Schedule I.............................................................. 96 Schedule II............................................................. 100 - --------------------------------------------------------------------------------
45 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. INDEPENDENT AUDITORS' REPORT 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, 2003 and 2002, 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, 2003. Our audits also included the financial statement Schedules I & II. These consolidated financial statements and financial statement schedules are the responsibility of NiSource's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NiSource Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As explained in Note 1P to the consolidated financial statements, effective January 1, 2001, NiSource Inc. adopted Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. As explained in Notes 1H and 5 to the consolidated financial statements, effective January 1, 2002, NiSource adopted SFAS 142, "Goodwill and Other Intangible Assets." As explained in Notes 1I and 5 to the consolidated financial statements, effective January 1, 2003, NiSource Inc. adopted EITF Issue No. 02-03, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities." Amounts for the years 2001 and 2002 have been reclassified in the accompanying consolidated statement of income to conform to this new method of presentation. As explained in Note 5 to the consolidated financial statements, effective January 1, 2003, NiSource Inc. adopted SFAS 143, "Accounting for Asset Retirement Obligations." DELOITTE & TOUCHE LLP Chicago, Illinois March 11, 2004 46 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. STATEMENTS OF CONSOLIDATED INCOME
Year Ended December 31, (in millions, except per share amounts) 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- NET REVENUES Gas distribution $ 3,619.4 $ 2,890.4 $ 3,849.9 Gas transmission and storage 1,033.5 1,014.1 997.1 Electric 1,115.9 1,103.6 1,060.2 Other 477.8 311.7 363.5 - ----------------------------------------------------------------------------------------------------------------------------------- Gross Revenues 6,246.6 5,319.8 6,270.7 Cost of sales 3,186.3 2,248.9 3,143.9 - ----------------------------------------------------------------------------------------------------------------------------------- Total Net Revenues 3,060.3 3,070.9 3,126.8 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Operation and maintenance 1,185.9 1,185.0 1,308.0 Depreciation and amortization 497.0 491.2 576.7 Loss (Gain) on sale or impairment of assets (24.9) (27.5) (0.1) Other taxes 286.0 270.0 274.3 - ----------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 1,944.0 1,918.7 2,158.9 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 1,116.3 1,152.2 967.9 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER INCOME (DEDUCTIONS) Interest expense, net (464.7) (516.4) (592.0) Minority interests (2.5) (20.4) (20.4) Preferred stock dividends of subsidiaries (4.5) (6.7) (7.5) Other, net 15.3 8.3 9.6 - ----------------------------------------------------------------------------------------------------------------------------------- Total Other Income (Deductions) (456.4) (535.2) (610.3) - ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CHANGE IN ACCOUNTING 659.9 617.0 357.6 INCOME TAXES 234.2 218.9 166.6 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE CHANGE IN ACCOUNTING 425.7 398.1 191.0 - ----------------------------------------------------------------------------------------------------------------------------------- Income (Loss) from Discontinued Operations - net of taxes (0.5) 18.2 21.2 Loss on Disposition of Discontinued Operations - net of taxes (331.2) (43.8) - Change in Accounting - net of tax (8.8) - 4.0 - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 85.2 $ 372.5 $ 216.2 =================================================================================================================================== BASIC EARNINGS (LOSS) PER SHARE ($) Continuing operations $ 1.64 $ 1.89 $ 0.93 Discontinued operations (1.28) (0.12) 0.10 Change in accounting (0.03) - 0.02 - ----------------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE $ 0.33 $ 1.77 $ 1.05 - ----------------------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS (LOSS) PER SHARE ($) Continuing operations $ 1.63 $ 1.87 $ 0.91 Discontinued operations (1.27) (0.12) 0.10 Change in accounting (0.03) - 0.02 - ----------------------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE $ 0.33 $ 1.75 $ 1.03 - ----------------------------------------------------------------------------------------------------------------------------------- BASIC AVERAGE COMMON SHARES OUTSTANDING (MILLIONS) 259.6 211.0 205.3 DILUTED AVERAGE COMMON SHARES (MILLIONS) 261.6 212.8 209.8 - -----------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 47 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. CONSOLIDATED BALANCE SHEETS
As of December 31, (in millions) 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS PROPERTY, PLANT AND EQUIPMENT Utility Plant $15,991.5 $15,579.7 Accumulated depreciation and amortization (7,095.9) (6,813.7) - ----------------------------------------------------------------------------------------------------------------------------------- Net utility plant 8,895.6 8,766.0 - ----------------------------------------------------------------------------------------------------------------------------------- Other property, at cost, less accumulated depreciation 409.3 415.3 - ----------------------------------------------------------------------------------------------------------------------------------- Net Property, Plant and Equipment 9,304.9 9,181.3 - ----------------------------------------------------------------------------------------------------------------------------------- INVESTMENTS AND OTHER ASSETS Assets of discontinued operations and assets held for sale 6.5 1,571.0 Unconsolidated affiliates 113.2 125.1 Other investments 67.4 51.6 - ----------------------------------------------------------------------------------------------------------------------------------- Total Investments 187.1 1,747.7 - ----------------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents 27.3 31.1 Restricted cash 22.8 24.2 Accounts receivable (less reserve of $54.1 and $48.8, respectively) 511.1 545.5 Unbilled revenue (less reserve of $3.5 and $3.5, respectively) 303.2 305.2 Gas inventory 429.4 255.3 Underrecovered gas and fuel costs 203.2 206.1 Materials and supplies, at average cost 71.5 68.6 Electric production fuel, at average cost 29.0 39.0 Price risk management assets 74.3 66.4 Exchange gas receivable 174.8 120.1 Regulatory assets 114.5 99.5 Prepayments and other 101.8 111.8 - ----------------------------------------------------------------------------------------------------------------------------------- Total Current Assets 2,062.9 1,872.8 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS Price risk management assets 114.4 115.1 Regulatory assets 575.5 608.8 Goodwill 3,704.0 3,722.1 Intangible assets 527.2 552.2 Deferred charges and other 147.8 142.6 - ----------------------------------------------------------------------------------------------------------------------------------- Total Other Assets 5,068.9 5,140.8 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $16,623.8 $17,942.6 ===================================================================================================================================
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. CONSOLIDATED BALANCE SHEETS
As of December 31, (in millions) 2003 2002 - ---------------------------------------------------------------------------------------------------------------------------------- CAPITALIZATION AND LIABILITIES CAPITALIZATION Common Stock Equity $ 4,415.9 $ 4,174.9 Preferred Stocks-- Series without mandatory redemption provisions 81.1 81.1 Series with mandatory redemption provisions - 3.8 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company debentures - 345.0 Long-term debt, excluding amounts due within one year 5,993.4 4,849.5 - ---------------------------------------------------------------------------------------------------------------------------------- Total Capitalization 10,490.4 9,454.3 - ---------------------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Current portion of long-term debt 118.3 1,224.9 Short-term borrowings 685.5 913.1 Accounts payable 496.6 536.7 Dividends declared on common and preferred stocks 1.8 1.1 Customer deposits 80.4 65.2 Taxes accrued 210.8 222.8 Interest accrued 82.4 76.6 Overrecovered gas and fuel costs 29.2 13.1 Price risk management liabilities 36.5 39.7 Exchange gas payable 290.8 411.9 Current deferred revenue 28.2 17.5 Regulatory liabilities 73.7 13.5 Accrued liability for postretirement and postemployment benefits 56.8 48.9 Other accruals 418.0 391.8 - ---------------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 2,609.0 3,976.8 - ---------------------------------------------------------------------------------------------------------------------------------- OTHER LIABILITIES AND DEFERRED CREDITS Price risk management liabilities 0.2 3.2 Deferred income taxes 1,595.9 1,517.8 Deferred investment tax credits 87.3 96.3 Deferred credits 72.7 100.9 Noncurrent deferred revenue 113.0 130.1 Accrued liability for postretirement and postemployment benefits 406.9 419.2 Preferred stock liabilities with mandatory redemption provisions 2.4 - Liabilities of discontinued operations and liabilities held for sale - 959.9 Regulatory liabilities and other removal costs 1,061.6 1,073.2 Other noncurrent liabilities 184.4 210.9 - ---------------------------------------------------------------------------------------------------------------------------------- Total Other 3,524.4 4,511.5 - ---------------------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES - - - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION AND LIABILITIES $16,623.8 $17,942.6 ==================================================================================================================================
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. STATEMENTS OF CONSOLIDATED CASH FLOWS
Year Ended December 31, (in millions) 2003 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 85.2 $ 372.5 $ 216.2 Adjustments to reconcile net income to net cash from continuing operations: Depreciation and amortization 497.0 491.2 576.7 Net changes in price risk management assets and liabilities (4.3) (43.3) 22.4 Deferred income taxes and investment tax credits 77.9 95.8 (52.5) Deferred revenue (6.4) (15.2) (416.1) Stock compensation expense 12.9 7.3 30.0 Gain on sale or impairment of assets (24.9) (27.5) (0.1) Change in accounting, net of tax 8.8 - (4.0) Loss (Income) from unconsolidated affiliates 5.4 (2.6) (10.3) Loss on sale of discontinued operations 331.2 43.8 - Loss (Income) from discontinued operations 0.5 (18.2) (21.2) Amortization of Discount/Premium on Debt 18.9 21.0 20.5 Changes in assets and liabilities Restricted cash 1.4 14.7 12.7 Accounts receivable and unbilled revenue 67.3 43.6 533.0 Inventories (166.9) 117.0 (73.2) Accounts payable (41.4) (50.6) (443.8) Customer deposits 15.2 55.2 14.7 Taxes accrued (89.5) (8.1) 25.7 Interest accrued 5.9 8.6 (10.0) (Under) Overrecovered gas and fuel costs 18.9 (107.6) 275.9 Exchange gas receivable/payable (196.0) 191.3 355.8 Other accruals (55.5) (203.1) (94.1) Prepayments and other current assets 9.9 25.9 18.5 Regulatory assets/liabilities 3.3 (13.7) 7.8 Postretirement and postemployment benefits 82.6 (19.2) 16.9 Deferred credits (28.1) (11.8) (87.8) Deferred charges and other noncurrent assets 14.2 243.5 (134.1) Other noncurrent liabilities (29.1) (39.5) 124.2 - ---------------------------------------------------------------------------------------------------------------------------------- Net Cash Flows from Continuing Operations 614.4 1,171.0 903.8 Net Cash Flows from Discontinued Operations (141.5) (133.3) 6.8 - ---------------------------------------------------------------------------------------------------------------------------------- Net Cash Flows from Operating Activities 472.9 1,037.7 910.6 - ---------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Capital expenditures (574.6) (531.9) (525.3) Proceeds from disposition of assets 586.5 419.2 227.9 Other investing activities (17.6) (2.2) (7.4) - ---------------------------------------------------------------------------------------------------------------------------------- Net Cash Flows for Investing Activities (5.7) (114.9) (304.8) - ---------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Issuance of long-term debt 1,401.5 - 300.0 Retirement of long-term debt (1,366.9) (462.8) (93.0) Change in short-term debt (227.6) (941.2) (642.5) Retirement of preferred shares (346.2) (46.7) (1.1) Issuance of common stock 354.7 734.9 15.1 Acquisition of treasury stock (2.5) (6.9) - Dividends paid - common shares (284.0) (241.5) (239.0) - ---------------------------------------------------------------------------------------------------------------------------------- Net Cash Flows for Financing Activities (471.0) (964.2) (660.5) - ---------------------------------------------------------------------------------------------------------------------------------- Decrease in cash and cash equivalents (3.8) (41.4) (54.7) Cash and cash equivalents at beginning of year 31.1 72.5 127.2 - ---------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 27.3 $ 31.1 $ 72.5 ================================================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest, net of amounts capitalized $ 442.3 $ 493.8 $ 518.0 Interest capitalized 2.5 2.4 4.3 Cash paid for income taxes 256.8 118.8 250.2 - ----------------------------------------------------------------------------------------------------------------------------------
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. STATEMENTS OF CONSOLIDATED CAPITALIZATION
As of December 31, (in millions, except shares outstanding and par value) 2003 2002 - ------------------------------------------------------------------------------------------------------------------------------------ Common shareholders' equity $ 4,415.9 $ 4,174.9 - ------------------------------------------------------------------------------------------------------------------------------------ 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 0.3 0.3 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 81.1 81.1 - ------------------------------------------------------------------------------------------------------------------------------------ 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--0 and 11,136 shares outstanding, respectively -- 1.1 8.35% series--0 and 27,000 shares outstanding, respectively -- 2.7 - ------------------------------------------------------------------------------------------------------------------------------------ Series with mandatory redemption provisions -- 3.8 - ------------------------------------------------------------------------------------------------------------------------------------ Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company debentures -- 345.0 - ------------------------------------------------------------------------------------------------------------------------------------ Long-term debt 5,993.4 4,849.5 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CAPITALIZATION $10,490.4 $ 9,454.3 - ------------------------------------------------------------------------------------------------------------------------------------
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 LONG-TERM DEBT
As of December 31, (in millions) 2003 2002 - --------------------------------------------------------------------------------------------------------------------------------- NiSource Inc.: Debentures due November 1, 2006, with interest imputed at 7.77% (SAILS(SM) $ 135.8 $ 126.0 - --------------------------------------------------------------------------------------------------------------------------------- Bay State Gas Company: Medium-Term Notes-- Interest rates between 6.26% and 9.20% with a weighted average interest rate of 6.90% and maturities between June 21, 2005 and February 15, 2028 68.5 80.5 Northern Utilities: Medium-Term Note--Interest rate of 6.93% and maturity of September 1, 2010 5.0 5.8 - --------------------------------------------------------------------------------------------------------------------------------- Total long-term debt of Bay State Gas Company 73.5 86.3 - --------------------------------------------------------------------------------------------------------------------------------- Columbia Energy Group: Debentures-- 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 Fair value adjustment of debentures for interest rate swap agreements 11.2 30.6 Unamortized discount on long-term debt (98.2) (108.0) Subsidiary debt--Capital lease obligations 1.7 2.0 - --------------------------------------------------------------------------------------------------------------------------------- Total long-term debt of Columbia Energy Group 1,269.9 1,279.8 - --------------------------------------------------------------------------------------------------------------------------------- PEI Holdings, Inc.: Long-Term Notes-- Whiting Clean Energy, Inc.-- Interest rates between 6.73% and 8.58% with a weighted average interest rate of 8.30% and maturity of June 20, 2011 301.5 302.5 - --------------------------------------------------------------------------------------------------------------------------------- Total long-term debt of PEI Holdings, Inc. 301.5 302.5 - --------------------------------------------------------------------------------------------------------------------------------- NiSource Capital Markets, Inc: Senior Unsecured Notes --4.25%, due February 19, 2005 0.3 - Subordinated Debentures--Series A, 7-3/4%, due March 31, 2026 - 75.0 Senior Notes --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 15, 2005 and May 5, 2027 220.0 300.0 - --------------------------------------------------------------------------------------------------------------------------------- Total long-term debt of NiSource Capital Markets, Inc. 295.3 450.0 - --------------------------------------------------------------------------------------------------------------------------------- NiSource Development Company, Inc.: NDC Douglas Properties, Inc.--Notes Payable-- Interest rates between 7.69% and 8.38% with a weighted average interest rate of 8.22% and various maturities between January 1, 2005 and January 1, 2008 2.6 5.1 - --------------------------------------------------------------------------------------------------------------------------------- Total long-term debt of NiSource Development Company, Inc. 2.6 5.1 - ---------------------------------------------------------------------------------------------------------------------------------
52 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. STATEMENTS OF CONSOLIDATED LONG-TERM DEBT (CONTINUED)
As of December 31, (in millions) 2003 2002 - ------------------------------------------------------------------------------------------------------------------------------- NiSource Finance Corp.: Long-Term Notes-- Floating Rate Notes-- 1.93% at December 31, 2003, due May 4, 2005 250.0 - 7-5/8% - due November 15, 2005 900.0 900.0 3.20% - due November 1, 2006 250.0 - 7-7/8% - due November 15, 2010 1,000.0 1,000.0 Senior Unsecured Notes --6.15%, due March 1, 2013 345.0 - 5.40% - due July 15, 2014 500.0 - Fair value adjustment of notes for interest rate swap agreements 3.3 - Unamortized discount on long-term debt (15.5) (13.6) - ------------------------------------------------------------------------------------------------------------------------------- Total long-term debt of NiSource Finance Corp, Inc. 3,232.8 1,886.4 - ------------------------------------------------------------------------------------------------------------------------------- Northern Indiana Public Service Company: First mortgage bonds-- Series NN, 7.10% - due July 1, 2017 - 55.0 Pollution control notes and bonds-- Issued at interest rates between 1.00% and 1.125%, with a weighted average interest rate of 1.07% and various maturities between November 1, 2007 and April 1, 2019 278.0 223.0 Medium-term notes-- Issued at interest rates between 6.59% and 7.69%, with a weighted average interest rate of 7.24% and various maturities between June 9, 2005 and August 4, 2027 405.5 437.5 Unamortized premiums and discount on long-term debt, net (1.5) (2.1) - ------------------------------------------------------------------------------------------------------------------------------- Total long-term debt of Northern Indiana Public Service Company 682.0 713.4 - ------------------------------------------------------------------------------------------------------------------------------- Total long-term debt, excluding amount due within one year $5,993.4 $4,849.5 - -------------------------------------------------------------------------------------------------------------------------------
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, 2001 $ 2.0 $ 0.0 $ 2,597.3 $ 823.7 $ (18.3) $ 4.4 $ 3,409.1 - ---------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income: Net Income 216.2 216.2 $ 216.2 Other comprehensive income, net of tax: Gain/loss on available for sale securities: 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 40.6 (31.5) 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 $ 2,637.3 $ 798.6 $ (19.8) $ 51.2 $ 3,469.4 - ---------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income: Net Income 372.5 372.5 $ 372.5 Other comprehensive income, net of tax: Gain/loss on available for sale securities: Unrealized (6.0) (6.0) (6.0) Realized 0.3 0.3 0.3 Net unrealized gains on derivatives qualifying as cash flow hedges 17.7 17.7 17.7 Minimum pension liability adjustment (203.7) (203.7) (203.7) - ---------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income $ 180.8 Dividends: Common stock (240.8) (240.8) Treasury stock acquired (6.9) (6.9) Issued: Common stock issuance 0.4 734.3 734.7 Employee stock purchase plan 0.9 0.9 Long-term incentive plan 17.0 (0.7) 16.3 Amortization of unearned compensation 19.9 19.9 Other 0.6 0.6 - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 2002 $ 2.5 $ (6.9) $ 3,389.5 $ 930.9 $ (0.6) $ (140.5) $ 4,174.9 - ---------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income: Net Income 85.2 85.2 $ 85.2 Other comprehensive income, net of tax: Gain/loss on available for sale securities: Unrealized 1.4 1.4 1.4 Gain/loss on foreign currency translation: Unrealized 0.7 0.7 0.7 Net unrealized gains on derivatives qualifying as cash flow hedges 23.9 23.9 23.9 Minimum pension liability adjustment 53.5 53.5 53.5 - ---------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income $ 164.7 Dividends: Common stock (284.8) (284.8) Treasury stock acquired (2.5) (2.5) Issued: Common stock issuance 0.1 344.9 345.0 Employee stock purchase plan 0.6 0.6 Long-term incentive plan 21.6 (4.5) 17.1 Amortization of unearned compensation 0.9 0.9 - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 2003 $ 2.6 $ (9.4) $ 3,756.6 $ 731.3 $ (4.2) $ (61.0) $ 4,415.9 - ----------------------------------------------------------------------------------------------------------------------------------
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, 2001 205,553 -- - ------------------------------------------------------------------------------ Issued: Employee stock purchase plan 46 -- Long-term incentive plan 1,893 -- - ------------------------------------------------------------------------------ BALANCE DECEMBER 31, 2001 207,492 -- - ------------------------------------------------------------------------------ Treasury stock acquired (350) Issued: Stock issuance 41,400 -- Employee stock purchase plan 43 -- Long-term incentive plan 275 -- - ------------------------------------------------------------------------------ BALANCE DECEMBER 31, 2002 249,210 (350) - ------------------------------------------------------------------------------ Treasury stock acquired (128) Issued: Stock issuance 13,111 -- Employee stock purchase plan 33 -- Long-term incentive plan 754 -- - ------------------------------------------------------------------------------ BALANCE DECEMBER 31, 2003 263,108 (478) - ------------------------------------------------------------------------------
55 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. COMPANY STRUCTURE AND PRINCIPLES OF CONSOLIDATION. NiSource Inc. (NiSource), a Delaware corporation, is a 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. 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 holding company registered under the Public Utility Holding Company Act of 1935, as amended. NiSource derives substantially all of its revenues and earnings from the operating results of its 15 direct subsidiaries. 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. Except where noted above and in the event where NiSource has significant influence, investments with less than a 20% interest are accounted for under the cost method. Certain amounts in 2002 and 2001 have been reclassified to conform with the current year 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 effects of the various long-term incentive compensation plans and the forward equity contracts associated with the Stock Appreciation Income Linked Securities(SM) (SAILS(SM)) and the Corporate Premium Income Equity Securities (Corporate PIES). 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 2003 2002 2001 - ----------------------------------------------------------------------------------- Denominator (thousands) Basic average common shares outstanding 259,550 211,009 205,300 Dilutive potential common shares Nonqualified stock options 73 130 575 Shares contingently issuable under employee stock plans 1,157 880 1,723 SAILS(SM) - 458 1,251 Shares restricted under employee stock plans 805 297 847 Corporate PIES - - 61 - ----------------------------------------------------------------------------------- Diluted Average Common Shares 261,585 212,774 209,757 - -----------------------------------------------------------------------------------
C. CASH, CASH EQUIVALENTS, AND RESTRICTED CASH. NiSource considers all investments with original maturities of three months or less to be cash equivalents. NiSource reports amounts deposited in brokerage accounts for margin requirements in the restricted cash balance sheet caption. In addition, NiSource has amounts deposited in trust to satisfy requirements for the provision of various property, liability, workers compensation, and long-term disability insurance, which is classified as restricted cash and disclosed as an operating cash flow on the statement of cash flows.. D. BASIS OF ACCOUNTING FOR RATE-REGULATED SUBSIDIARIES. NiSource's rate-regulated subsidiaries follow the accounting and reporting requirements of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). 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 it is probable that such rates can be charged and collected. 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. 56 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 was 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 unable to continue to apply the provisions of SFAS No. 71, NiSource would be required to apply the provisions of SFAS No. 101, "Regulated Enterprises - Accounting for the Discontinuation of Application of Financial Accounting Standards Board (FASB) Statement No. 71." In management's opinion, NiSource's regulated subsidiaries will be subject to SFAS No. 71 for the foreseeable future. Regulatory assets and liabilities were comprised of the following items:
At December 31, (in millions) 2003 2002 - ---------------------------------------------------------------------------------- ASSETS Reacquisition premium on debt $ 27.3 $ 29.4 R. M. Schahfer Unit 17 and Unit 18 carrying charges and deferred depreciation (see Note 1F) 41.2 45.4 Bailly scrubber carrying charges and deferred depreciation (see Note 1F) 4.3 5.2 Postemployment and other postretirement costs (see Note 10) 161.2 179.5 Retirement income plan costs 22.4 16.8 Environmental costs 28.6 56.4 Regulatory effects of accounting for income taxes (See Note 1Q) 224.5 232.4 Underrecovered gas and fuel costs 203.2 206.1 Depreciation (see Note 1F) 103.0 85.3 Uncollectible accounts receivable deferred for future recovery 36.7 22.5 Other 75.3 74.2 - ---------------------------------------------------------------------------------- TOTAL ASSETS $ 927.7 $ 953.2 - ---------------------------------------------------------------------------------- LIABILITIES Rate refunds and reserves $ 4.4 $ 10.2 Overrecovered gas and fuel costs 29.2 13.1 Cost of Removal 1,030.7 - Regulatory effects of accounting for income taxes 64.5 73.2 Transition capacity cost 68.7 56.2 Other 1.5 4.1 - ---------------------------------------------------------------------------------- TOTAL LIABILITIES $1,199.0 $ 156.8 - ----------------------------------------------------------------------------------
Regulatory assets of approximately $488.6 million are not presently included in rate base and consequently are not earning a return on investment. These regulatory assets are being recovered as components of cost of service over a remaining life of up to 11 years. Regulatory assets of approximately $153.5 million require specific rate action. NiSource reclassified its cost of removal as of December 31, 2002 from accumulated depreciation to regulatory liabilities and other removal costs on the consolidated balance sheet and, upon adoption of SFAS No. 143 "Accounting for Asset Retirement Obligations" (SFAS No. 143), recharacterized the liability as a regulatory liability as of December 31, 2003. 57 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) E. UTILITY PLANT AND OTHER PROPERTY AND RELATED DEPRECIATION AND MAINTENANCE. Property, plant and equipment (principally utility plant) are stated at cost. The rate-regulated subsidiaries record depreciation using composite rates on a straight-line basis over the remaining service lives of the electric, gas and common properties. For rate-regulated companies, an allowance for funds used during construction (AFUDC) is capitalized on all classes of property except organization, land, autos, office equipment, tools and other general property purchases. The allowance is applied to construction costs for that period of time between the date of the expenditure and the date on which such project is completed and placed in service. The pre-tax rate for AFUDC was 2.0% in 2003, 2.8% in 2002, and 6.6% in 2001. The decline in the 2003 AFUDC rate, as compared with 2002, was due to lower short-term interest rates and the use of short-term borrowings to fund construction efforts. The depreciation provisions for utility plant, as a percentage of the original cost, for the periods ended December 31, 2003, 2002 and 2001 were as follows:
2003 2002 2001 - ------------------------------------------------------------------------------ Electric 3.6 3.6 3.7 Gas 2.9 3.0 3.0 - ------------------------------------------------------------------------------
The Whiting Clean Energy facility owned by PEI Holdings, Inc. (PEI), a consolidated subsidiary of NiSource, is being depreciated on a straight-line basis over a 40-year useful life. Generally, NiSource's 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, net of salvage, is charged to the accumulated provision for depreciation. F. CARRYING CHARGES AND DEFERRED DEPRECIATION. Upon completion of units 17 and 18 at the R. M. Schahfer Generating Station, 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), pending the inclusion of the cost of each unit in rates. Such carrying charges and deferred depreciation are being amortized over the remaining service 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's) 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 October 31, 2004. The revised depreciation rates are lower than those which 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 2003 had Columbia of Ohio not been subject to rate regulation is $36.6 million, a $22.1 million increase over the $14.5 million reflected in rates. The amount of depreciation that would have been recorded for 2002 had Columbia of Ohio not been subject to rate regulation is $35.0 million, a $21.6 million increase over the $13.4 million reflected in rates. The amount of depreciation that would have been recorded for 2001 had Columbia of Ohio not been subject to rate regulation was $34.9 million, a $22.3 million increase over the $12.6 million reflected in rates. The balance of the regulatory asset was $103.0 million and 85.3 million as of December 31, 2003 and 2002, respectively. G. AMORTIZATION OF SOFTWARE COSTS. External and 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 Statement of Position (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. NiSource amortized $12.0 million in 2003, $9.1 million in 2002 and $9.5 million in 2001 related to software costs. 58 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) H. INTANGIBLE ASSETS. Substantially all goodwill relates to the excess of cost over the fair value of the net assets acquired in the Columbia acquisition. Originally, goodwill was being amortized over forty years, but beginning January 1, 2002, goodwill amortization was discontinued pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). The change in goodwill from December 31, 2002 to 2003 was a result of adjustments relating to income taxes. Pursuant to the requirements of SFAS No. 142, NiSource has aggregated the subsidiaries related to the acquisition of Columbia into two distinct reporting units, one within the Gas Distribution Operations segment and one within the Transmission and Storage Operations segment, for the purpose of testing goodwill for impairment. NiSource completes its analysis of potential goodwill impairment annually at June 30. The results in 2003 indicated that no impairment charge was required. Franchise right intangible assets apart from goodwill were identified as part of the purchase price allocations associated with the acquisition of Bay State Gas Company (Bay State), a wholly owned subsidiary of NiSource, and its subsidiaries. These amounts were $475.2 million and $492.8 million, net of amortization of $69.0 million and $53.3 million at December 31, 2003, and 2002, respectively, and are being amortized over forty years from the date of acquisition. In addition, NiSource had approximately $51.2 million and $57.3 million of other intangible assets recorded at December 31, 2003 and 2002, respectively, which reflected the additional minimum liability associated with the unrecognized service cost of the pension plans pursuant to SFAS No. 87, "Employers' Accounting for Pensions" (SFAS No. 87). I. REVENUE RECOGNITION. With the exception of amounts recognized for energy trading activities, 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 estimates 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. Changes in the fair values of energy trading contracts are recognized in revenues net of associated costs. Gains and losses relating to non-trading derivatives designated as cash flow or fair value hedges are reported on a gross basis, upon settlement, in the same income statement category as the related hedged item. Normal purchase or sale contracts are reported on a gross basis upon settlement and recorded in the corresponding income statement category based on commodity type Beginning with financial statements issued for the first quarter 2003, revenues associated with trading activities are displayed net of related costs pursuant to Emerging Issues Task Force Issue (EITF) No. 02-03 "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities" (EITF No. 02-03), whether or not resulting in physical delivery. All periods have been adjusted to conform to the net presentation. (Refer to Note 5 for further information.) J. 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 outcomes of the proceedings. No provisions are made when, in the opinion of management, the facts and circumstances preclude a reasonable estimate of the outcome. K. 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 these programs, which are based upon the purchasers' level of investment and borrowing costs, are charged to other income in the accompanying statements of consolidated income. L. 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. 59 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) M. FUEL ADJUSTMENT CLAUSE. All metered electric rates contain a provision for adjustment 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 costs in a given three-month period will be included in a future filing. The differences are recognized in income when rates are adjusted to accommodate the differences. Northern Indiana records any under-recovery or over-recovery as a current regulatory asset or 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. N. GAS COST ADJUSTMENT CLAUSE. All of NiSource's Gas Distribution Operations subsidiaries except for Northern Indiana defer most 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. Northern Indiana adjusts its revenues for differences between amounts collected from customers and actual gas costs and adjusts future billings for such deferrals on a basis consistent with applicable state-approved tariff provisions O. 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. The application of different methodologies is due to the acquisition of Bay State. Bay State uses the weighted average cost of gas method, as approved by state regulators, in setting its rates while both Northern Indiana and the Columbia subsidiaries use the LIFO methodology when setting rates in their respective jurisdictions. Inventory valued using LIFO was $378.2 million and $230.2 million at December 31, 2003, and 2002, respectively. Based on the average cost of gas using the LIFO method, the estimated replacement cost of gas in storage at December 31, 2003 and December 31, 2002, exceeded the stated LIFO cost by $220.1 million and $281.6 million, respectively. Inventory valued using the weighted average methodology was $51.2 million at December 31, 2003 and $25.1 million at December 31, 2002. P. ACCOUNTING FOR RISK MANAGEMENT ACTIVITIES. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activity" (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 at fair value, unless such contracts are exempted as normal under the provisions of the standard. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and resulting designation. NiSource adopted SFAS No. 133 effective January 1, 2001, resulting in a cumulative after-tax increase to net income of approximately $4.0 million and an after-tax reduction to other comprehensive income of approximately $17.0 million. 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, or (b) a hedge of the exposure to variable cash flows of a forecasted transaction. 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 recognized currently in earnings. As of December 31, 2003, the ineffectiveness on NiSource's hedged instruments was immaterial. 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 corresponding to a cash flow hedge is not expected to occur, the accumulated gains or losses on the derivative 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. 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 accommodated in rates. 60 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 evaluates the contracts of its trading operations in accordance with the criteria for derivative contracts under SFAS No. 133. Through 2002, trading contracts not meeting the criteria to be accounted for as derivatives under SFAS No. 133 were recorded at fair value under EITF 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 resulting gains and losses resulting from marking the contracts to fair value are included currently in earnings. During an October 25, 2002 EITF meeting, EITF No. 98-10 was rescinded effective immediately for contracts entered into after that date, and beginning January 1, 2003 for existing trading contracts. (Refer to Note 5 for further information.) Q. INCOME TAXES AND INVESTMENT TAX CREDITS. NiSource records income taxes to recognize full interperiod tax allocations. Under the liability method, 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 tax basis 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. R. ENVIRONMENTAL EXPENDITURES. NiSource accrues for costs associated with environmental remediation obligations when the incurrence of such costs is probable and the amounts can be reasonably estimated, regardless of when the expenditures are actually 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. In addition, Northern Indiana received approval from the IURC in 2003 to recover costs associated with environmental compliance programs for nitrogen oxide pollution-reduction equipment at the company's generating stations. (See Note 6 for further information.) S. STOCK OPTIONS AND AWARDS. SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), encourages, but does not require, entities to adopt the fair value method of accounting for stock-based compensation plans. The fair value method would require the amortization of the fair value of stock-based compensation at the date of grant over the related vesting period. NiSource continues to apply the intrinsic value method of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), for awards granted under its stock-based compensation plans. The following table illustrates the effect on net income and EPS as if NiSource had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.
(in millions, except per share data) 2003 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) As reported $ 85.2 $ 372.5 $ 216.2 Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects 8.3 4.5 4.3 Less: Total stock-based employee compensation expense determined under the fair value method for all awards, net of tax (15.0) (11.0) (14.8) - -------------------------------------------------------------------------------------------------------------------------------- Pro forma $ 78.5 $ 366.0 $ 205.7 - -------------------------------------------------------------------------------------------------------------------------------- EARNINGS (LOSS) PER SHARE ($) Basic - as reported 0.33 1.77 1.05 - pro forma 0.30 1.73 1.00 Diluted - as reported 0.33 1.75 1.03 - pro forma 0.30 1.72 0.98 - --------------------------------------------------------------------------------------------------------------------------------
61 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) T. EXCISE TAXES. NiSource accounts for excise taxes that are customer liabilities by separately stating on its invoices the tax to its customers and recording amounts invoiced as liabilities payable to the applicable taxing jurisdiction. These types of taxes, comprised largely of sales taxes collected, are presented on a net basis affecting neither revenues nor cost of sales. NiSource accounts for other taxes for which it is liable by recording a liability for the expected tax with a corresponding charge to "Other Taxes" expense. U. EQUITY FORWARD CONTRACTS. NiSource accounts for equity forward contracts on its own common shares as permanent equity consistent with the provisions of EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" (EITF No. 00-19). Accordingly, such contracts are recorded in equity at fair value at the date of inception and changes in fair value are not recognized as long as the contracts continue to be classified as equity. 2. ACQUISITIONS NiSource accounted for the acquisition of Columbia in accordance with the purchase method of accounting. 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. The goodwill was being amortized on a straight-line basis over forty years through 2001; however, the amortization was discontinued effective January 1, 2002 pursuant to the adoption of SFAS No. 142. The remaining goodwill balances related to the Columbia acquisition were $3,675.1 million and $3,692.2 million at December 31, 2003 and 2002, respectively. 3. RESTRUCTURING ACTIVITIES Since 2000, NiSource has implemented restructuring initiatives to streamline its operations and realize efficiencies from the acquisition of Columbia. The restructuring activities were primarily associated with reductions in headcount and facility exit costs. NiSource recognized a restructuring charge, net of prior initiative adjustments, of $22.3 million in 2001. During 2002, NiSource developed a new reorganization initiative, which resulted in the elimination of approximately 400 positions throughout the organization mainly affecting executive and other management-level employees. NiSource recognized a restructuring charge, net of prior initiative adjustments, of approximately $28.0 million during 2002. As of December 31, 2003, 397 of the approximately 400 employees were terminated. For all of the plans, a total of approximately 1,600 management, professional, administrative and technical positions have been identified for elimination. As of December 31, 2003, approximately 1,550 employees had been terminated, of whom approximately 250 were terminated during 2003. At December 31, 2003 and 2002, the consolidated balance sheets reflected liabilities of $19.5 million and $49.6 million related to the restructuring plans, respectively. During 2003 and 2002, payments of $22.6 million and $36.6 million were made in association with the restructuring plans, respectively. Additionally, during 2003, the restructuring plan liability was reduced by $7.5 million due to a reduction in estimated expenses related to previous reorganization initiatives. The reduction in the estimated liability was reflected in operation and maintenance expense. 4. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE On November 26, 2003, NiSource sold its interest in Midtex Gas Storage Company, LLP for approximately $15.8 million and the assumption, by the buyer, of $1.7 million in debt. In the fourth quarter of 2003, NiSource recognized an after tax gain of $4.4 million related to this sale. On October 20, 2003, NiSource sold all of the steel-related, "inside-the-fence" assets of its subsidiary PEI Holdings, Inc. (PEI), to Private Power, LLC (Private Power). The sale included six PEI operating subsidiaries and the name "Primary Energy". Private Power paid approximately $325.4 million, comprised of $113.1 million in cash and the assumption of debt-related liabilities and other obligations. The assumption of such liabilities and the after tax cash proceeds from the sale reduced NiSource's debt by $206.3 million. NiSource has accounted for the assets sold as discontinued operations and has adjusted all periods presented accordingly. During 2003, NiSource recognized an after-tax loss of $29.1 million related to the sale. 62 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On September 30, 2003, NiSource sold Columbia Service Partners, Inc. (Columbia Service Partners), a subsidiary of Columbia for approximately $22.5 million. In the third quarter of 2003, NiSource recognized an after-tax gain of $10.6 million related to the sale. Columbia Service Partners had been reported as assets held for sale. On August 29, 2003, NiSource sold its exploration and production subsidiary, Columbia Energy Resources, Inc. (CER), to a subsidiary of Triana Energy Holdings (Triana). Under the CER sales agreement, Triana , an affiliate of Morgan Stanley Dean Witter Capital Partners IV, L.P. (MSCP), purchased all of the stock of CER for $330.0 million, plus the assumption of obligations to deliver approximately 94.0 billion cubic feet (Bcf) of natural gas pursuant to existing forward sales contracts. The sale transferred 1.1 trillion cubic feet of natural gas reserves. Approximately $220.0 million of after-tax cash proceeds from the sale were used to reduce NiSource's debt. In addition, a $213.0 million liability related to the forward sales contracts was removed from the balance sheet. On January 28, 2003, NiSource's former subsidiary Columbia Natural Resources, Inc. sold its interest in certain natural gas exploration and production assets in New York for approximately $95.0 million. NiSource has accounted for CER as discontinued operations and has adjusted all periods presented accordingly. During 2003, NiSource recognized an after-tax loss of $301.2 million related to the sales. During 2002, NiSource decided to exit the telecommunications business. The results of operations related to Columbia Transmission Communications Corporation (Transcom) were displayed as discontinued operations on NiSource's consolidated income statement and its assets and liabilities were separately aggregated and reflected as assets and liabilities of discontinued operations on the consolidated balance sheets in 2002. On September 15, 2003, NiSource's subsidiary Columbia sold 100% of its shares in Transcom. During 2003, NiSource recognized an additional after-tax loss of $1.3 million related to the sale. On April 30, 2002, NiSource sold the water utility assets of the Indianapolis Water Company and other assets of IWC Resources Corporation and its subsidiaries to the City of Indianapolis for $540.0 million. The divestiture of the water utilities was required as part of the U.S. Securities and Exchange Commission order approving the November 2000 acquisition of Columbia. The water utilities' operations were reported as discontinued operations through 2002. 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 operated an underground line locating and marking service in ten midwestern states. In the first quarter 2002, NiSource recognized an after-tax gain of $12.5 million related to the sale. SM&P was reported as assets held for sale. On August 21, 2001, Columbia sold Columbia Propane Corporation and its subsidiaries to AmeriGas Partners L.P. 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, a diversified petroleum distribution company. Results from discontinued operations of CER (including the New York State properties), the six PEI subsidiaries, Transcom and the water utilities are provided in the following table:
Twelve months ended December 31, (in millions) 2003 2002 2001 - -------------------------------------------------------------------------------- REVENUES FROM DISCONTINUED OPERATIONS $ 154.7 $ 308.5 $ 406.4 - -------------------------------------------------------------------------------- Income (Loss) from discontinued operations 2.0 25.3 40.7 Income taxes 2.5 7.1 19.5 - -------------------------------------------------------------------------------- NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS $ (0.5) $ 18.2 $ 21.2 - --------------------------------------------------------------------------------
63 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The assets and liabilities of discontinued operations and assets and liabilities held for sale were as follows:
As of December 31, (in millions) 2003 2002 - ------------------------------------------------------------------------------------------------------------------------------ ASSETS OF DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE Accounts receivable, net $ -- $ 67.5 Property, plant and equipment, net 6.5 1,375.6 Other assets -- 166.7 Current liabilities -- (18.1) Debt -- (4.8) Other liabilities -- (15.9) - ------------------------------------------------------------------------------------------------------------------------------ Assets (Liabilities) Held for Sale and Net Assets of Discontinued Operations $ 6.5 $1,571.0 - ------------------------------------------------------------------------------------------------------------------------------ LIABILITIES OF DISCONTINUED OPERATIONS AND LIABILITIES HELD FOR SALE Debt $ -- $ (176.3) Current liabilities -- (250.9) Other liabilities -- (532.7) - ------------------------------------------------------------------------------------------------------------------------------ Liabilities Held for Sale and Liabilities of Discontinued Operations $ -- $ (959.9) - ------------------------------------------------------------------------------------------------------------------------------
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS SFAS NOS. 141 AND 142 -- BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS. In July 2001, the FASB issued SFAS No. 141, "Business Combinations" (SFAS No. 141), and SFAS No. 142. 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 adoption of SFAS No. 142 on January 1, 2002 resulted in an increase in operating income of $93.1 million for the year ending December 31, 2002, reflecting the effects of discontinuing the amortization of goodwill. Net income would have been $309.3 million, or $1.51 per basic share for 2001 had NiSource discontinued the amortization of goodwill effective January 1, 2001. NiSource adopted the provisions of SFAS No. 141 on July 1, 2001. In addition, NiSource has aggregated the subsidiaries related to the acquisition of Columbia into two distinct reporting units, one within the Gas Distribution Operations segment and one within the Transmission and Storage Operations segment, for the purpose of testing goodwill for impairment. NiSource completed its analysis of the goodwill impairment test as of June 30, 2003. The results indicated that no impairment charge was required. NiSource will continue to complete the goodwill impairment test on an annual basis at June 30. FASB INTERPRETATION NO. 45 -- GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. In November of 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Refer to "Other Commitments and Contingencies - Guarantees and Indemnities" in Note 17D for further discussion of NiSource's guarantees. 64 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SFAS NO. 143 -- ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In July 2001, the FASB issued SFAS No. 143. SFAS No. 143 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 the cost, thereby increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted, and the capitalized cost is depreciated over the useful life of the related asset. The rate-regulated subsidiaries defer the difference between the amount recognized for depreciation and accretion and the amount collected in rates as required pursuant to SFAS No. 71. NiSource adopted the provisions of SFAS No. 143 on January 1, 2003, and as a result an asset retirement obligation liability of $54.3 million was recognized, of which $43.4 was related to assets sold in 2003. In addition, NiSource capitalized $41.3 million in additions to plant assets, net of accumulated amortization, of which $27.1 million was related to assets sold in 2003, and recognized regulatory assets and liabilities of $1.2 million and $4.6 million, respectively. NiSource believes that the amounts recognized as regulatory assets will be recoverable in future rates. The cumulative after-tax effect of adopting SFAS No. 143 amounted to $8.8 million. Certain costs of removal that have been, and continue to be, included in depreciation rates and collected in the service rates of the rate-regulated subsidiaries, did not meet the definition of an asset retirement obligation pursuant to SFAS No. 143. The amount of the other costs of removal reflected as a component of NiSource's accumulated depreciation and amortization was approximately $1.0 billion at December 31, 2003 and 2002 based on rates for estimated removal costs embedded in composite depreciation rates. NiSource reclassified its cost of removal as of December 31, 2002 from accumulated depreciation to regulatory liabilities and other removal costs on the consolidated balance sheet and upon adoption of SFAS No. 143 "Accounting for Asset Retirement Obligations" recharacterized the liability as a regulatory liability as of December 31, 2003. For the twelve months ended December 31, 2003, NiSource recognized accretion expense of $0.6 million. The asset retirement obligations liability totaled $11.4 million at December 31, 2003. Had NiSource adopted SFAS No. 143 at the dates the actual liabilities were incurred, the asset retirement obligations liability would have been $49.4 million and $45.0 million at December 31, 2001 and 2000, respectively, of which $38.3 million and $34.6 million were related to assets sold in 2003. EITF ISSUE NO. 02-03 -- ISSUES INVOLVED IN ACCOUNTING FOR DERIVATIVE CONTRACTS HELD FOR TRADING PURPOSES AND CONTRACTS INVOLVED IN ENERGY TRADING AND RISK MANAGEMENT ACTIVITIES AND EITF ISSUE NO. 98-10 (EITF NO. 98-10) - ACCOUNTING FOR CONTRACTS INVOLVED IN ENERGY TRADING AND RISK MANAGEMENT ACTIVITIES. On October 25, 2002, the EITF reached a final consensus in EITF No. 02-03 that gains and losses (realized or unrealized) on all derivative instruments within the scope of SFAS No. 133 should be shown net in the income statement, whether or not settled physically, if the derivative instruments are held for trading purposes. For purposes of the consensus, energy trading activities encompass contracts entered into with the objective of generating profits on, or exposure to, shifts in market prices. This consensus became effective for financial statements issued for periods beginning after December 15, 2002. NiSource reevaluated its portfolio of contracts in order to determine which contracts were required to be reported net in accordance with the provisions of the consensus and, as a result recognized equal and offsetting reductions to revenues and cost of sales of $945.4 million and $2,910.8 million for the years ended December 31, 2002 and 2001 respectively. Accordingly, NiSource's operating income remained unchanged for all periods presented. The task force also reached a consensus to rescind EITF No. 98-10 and preclude mark-to-market accounting for energy trading contracts that are not derivatives pursuant to SFAS No. 133. The consensus was effective for fiscal periods beginning after December 15, 2002, for energy trading contracts that existed on or before October 25, 2002 that remained in effect at the date the consensus was initially applied (January 1, 2003 for NiSource). Contracts entered into after October 25, 2002, were analyzed pursuant to a generally accepted accounting principles hierarchy, excluding EITF No. 98-10. Since NiSource is no longer involved in gas-related trading activities and has minimal power trading activities, the rescission of EITF No. 98-10 did not have a material effect on its results of operations since adoption of the consensus. 65 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FASB INTERPRETATION NO. 46 (REVISED DECEMBER 2003) -- CONSOLIDATION OF VARIABLE INTEREST ENTITIES. On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46) FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns. A company that consolidates a variable interest entity is called the primary beneficiary of that entity. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights, or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 also requires various disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. On December 18, 2003, the FASB deferred the implementation of FIN 46 to the first quarter of 2004. Currently, NiSource expects to consolidate certain real estate investments beginning in the first quarter of 2004. Upon consolidation, NiSource will increase its assets and liabilities by approximately $50 million. SFAS NO. 149 -- AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Effective July 1, 2003, NiSource adopted SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS No. 149). SFAS No. 149 codifies and clarifies financial accounting and reporting for derivative instruments and hedging activities under SFAS No. 133 primarily in connection with decisions made by the Derivatives Implementation Group and for implementation issues raised in the application of SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. SFAS No. 149 did not have a material impact on NiSource's results of operations during 2003. However, the statement could have a significant impact on the number of contracts that will be marked to market through earnings. SFAS NO. 150 -- ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. In the second quarter 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" (SFAS No. 150). SFAS No. 150 requires classification of a financial instrument within its scope as a liability because it embodies an obligation of the issuer. As defined in SFAS No. 150, an obligation is a conditional or unconditional duty or responsibility to transfer assets or to issue equity shares. Instruments that fall within the scope of SFAS No. 150 include mandatorily redeemable financial instruments, obligations to repurchase an issuer's equity shares by transferring assets and certain obligations to issue a variable number of shares. SFAS No. 150 is generally effective for interim periods beginning after June 15, 2003 for financial instruments created prior to June 1, 2003. For any instruments entered into or modified after May 31, 2003, the Statement is effective for those instruments upon consummation or modification. As a result of SFAS No. 150, NiSource reclassified its mandatory redeemable preferred stock to a non-current liability in the third quarter of 2003. EITF ISSUE NO. 03-11 -- REPORTING REALIZED GAINS AND LOSSES ON DERIVATIVE INSTRUMENTS THAT ARE SUBJECT TO FASB STATEMENT NO. 133 AND NOT "HELD FOR TRADING PURPOSES" AS DEFINED IN EITF ISSUE NO. 02-03. (EIF NO. 03-11) In August 2003, the EITF released Issue No. 03-11, which provides guidance on whether to report realized gains or losses on derivative contracts that settle on a net basis. Currently, NiSource generally reports contracts requiring physical delivery of a commodity on a gross basis. EITF No. 03-11 did not have a material impact on NiSource's results of operations. FASB STAFF POSITION NO. FAS 106-1 -- ACCOUNTING AND DISCLOSURE REQUIREMENTS RELATED TO THE MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF 2003. On December 8, 2003, the President of the United States signed the Medicare Prescription Drug, Improvement and Modernization Act into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," requires presently enacted changes in relevant laws to be considered in current period measurements of postretirement benefit costs and the Accumulated Projected Benefit Obligation. However, specific authoritative guidance on the accounting for the federal subsidy is currently pending, and NiSource has elected to defer accounting for the effects of this pronouncement as allowed by this staff position. It is expected that the law and pronouncement will reduce the effects of the currently high prescription drug trend rates on NiSource's post-retirement benefits costs and cash flows assuming that NiSource's post-retirement benefits remain unchanged. However, it is not certain at this time what effects this law and pronouncement will have on NiSource's postretirement benefit costs and cash flows. 66 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. REGULATORY MATTERS On December 17, 2003, the PUCO approved an application by Columbia of Ohio and other Ohio LDCs to establish a tracking mechanism that will provide for recovery of current bad debt expense and for the recovery over a five-year period of previously deferred uncollected accounts receivable. The approval of the tracker will allow for the recovery of $25.2 million in previously uncollected accounts receivable for Columbia of Ohio. Through October 2004, Columbia of Ohio is operating under a regulatory stipulation approved by the PUCO. On October 9, 2003, Columbia of Ohio and other parties filed with the PUCO an amended stipulation that would govern Columbia of Ohio's regulatory framework from November 2004 through October 2010. The majority of Columbia of Ohio's contracts with interstate pipelines expire in October 2004, and the amended stipulation would permit Columbia to renew those contracts for firm capacity sufficient to meet up to 100% of the design peak day requirements through October 31, 2005 and up to 95% of the design peak day requirements through October 31, 2010. Among other things, the amended stipulation would also: (1) extend Columbia of Ohio's Choice(R) program through October 2010; (2) provide Columbia of Ohio with an opportunity to generate revenues sufficient to cover the stranded costs associated with the CHOICE(R) program; and, (3) allow Columbia of Ohio to record post-in-service-carrying charges on plant placed into service after October 2004, and to defer the property taxes and depreciation associated with such plant. On March 11, 2004, the PUCO issued an order that adopted and modified the stipulation from Columbia Gas of Ohio and a collaborative of parties. The order extended Columbia of Ohio's CHOICE(R) program. However, the order limited the time period of the stipulation through December 31, 2007 and declined to pre-approve the amount of interstate pipeline firm capacity for which Columbia of Ohio could contract. In addition, the PUCO made other modifications which would limit Columbia of Ohio's ability to generate additional revenues sufficient to cover stranded costs, including declining to mandate that natural gas marketers participating in the CHOICE(R) program obtain 75% of their interstate capacity directly from Columbia of Ohio and changing the allocation of revenues generated through off-systems sales. The order allows Columbia of Ohio to record post-in-service-carrying charges on plant placed in service after October 2004 and allows the deferral of property taxes and depreciation associated with such plant. Although this order will have a minimal impact on 2004, NiSource's initial estimate is that this order, if left unchanged, could potentially reduce operating income by approximately $20 million annually 2005 through 2007. Columbia Gas of Ohio anticipates, consistent with standard regulatory process, petitioning the commission for rehearing on the components which have been modified. During 2002, Northern Indiana settled matters related to an electric rate review. On September 23, 2002, the IURC issued an order adopting most aspects of the settlement. The order approving the settlement provides that electric customers of Northern Indiana will receive bill credits of approximately $55.1 million each year, for a cumulative total of $225 million, for the minimum 49 month period, beginning on July 1, 2002. The order also provides that 60% of any future earnings beyond a specified cap will be retained by Northern Indiana. Credits amounting to $52.0 million were recognized for electric customers in 2003. The order adopting the settlement was appealed to the Indiana Court of Appeals by both the Citizens Action Coalition of Indiana and fourteen residential customers. On October 14, 2003, the Appeals Court upheld the IURC's approval of the settlement. The Citizens Action Coalition of Indiana and the fourteen residential customers have filed a petition for transfer to the Supreme Court of Indiana. Northern Indiana submitted its quarterly fuel adjustment clause (FAC) filing for the twelve-month period ended September 30, 2002, which included a calculation for the sharing of earnings in excess of allowed earnings as outlined in the IURC order regarding the electric rate review settlement. The IURC issued an order related to the filing on January 29, 2003 rejecting Northern Indiana's sharing calculation, which prorated the amount to be shared with the customers based on the amount of time the rate credit, was in effect during the twelve-month period. Northern Indiana filed a request for a rehearing and reconsideration of the order. On March 12, 2003, the IURC denied Northern Indiana's request and the appropriate amount has been refunded to customers. On June 20, 2002, Northern Indiana, Ameren Corporation and First Energy Corporation established terms for joining the Midwest Independent System Operator (MISO) through participation in an independent transmission company (ITC). The MISO arrangements were filed with the FERC, and on July 31, 2002, the FERC issued an order conditionally approving these arrangements. On November 5, 2002, the ITC signed an agreement with MISO. At its April 30, 2003 meeting, FERC approved the transfer of functional control of Northern Indiana's transmission system to the ITC and issued an order addressing the pricing of electric transmission. An IURC order approving the transfer of functional control of the transmission system to the ITC was issued on September 24, 2003. An uncontested settlement that authorized the reimbursement of $7.4 million to Northern Indiana for incurred costs was approved by the FERC on July 31, 2003. This reimbursement was received on September 30, 2003. Functional control was transferred to the ITC and MISO on October 1, 2003. 67 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Northern Indiana has been recovering the costs of electric power purchased for sale to its customers through the FAC. The FAC provides for costs to be collected if they are below a negotiated cap. If costs exceed this cap, Northern Indiana must demonstrate that the costs were prudently incurred to achieve approval for recovery. A group of industrial customers challenged the manner in which Northern Indiana applied costs associated with a specific interruptible sales tariff. An estimated refund liability was recorded in the first quarter of 2003. A settlement was reached with the customers and Northern Indiana recorded the full costs of the settlement. As a result of the settlement, the industrial customers challenge was withdrawn and dismissed in January 2004. In addition, as a result of the settlement, Northern Indiana has sought and received approval by the IURC to reduce the charges under the interruptible sales tariff. This reduction will remain in effect until the Dean H. Mitchell Generating Station (Mitchell Station) has been returned to service. Currently, Northern Indiana is reviewing options to meet the electric needs of its customers. This review includes an assessment of Northern Indiana's oldest generating station units and various options regarding the return of the Mitchell Station, constructed in the early 1950's, to service in the second half of 2004. Northern Indiana has requested proposals for outside companies to provide power under varying terms and conditions. These proposals are being evaluated. In February 2004, the city of Gary announced an interest to acquire the land on which the Mitchell Station is located for economic development, including a proposal to increase the length of the runways at the Gary International Airport. Northern Indiana expects to discuss the proposal to acquire the land with the city of Gary in the near future. To date, the city has not commenced any legal proceedings. In January 2002, Northern Indiana filed for approval to implement an environmental cost tracker (ECT). The ECT was approved by the IURC on November 26, 2002. Under the ECT Northern Indiana will be able to recover (1) allowance for funds used during construction and a return on the capital investment expended by Northern Indiana to implement Indiana Department of Environmental Management's nitrogen oxide State Implementation Plan through an Environmental Cost Recovery Mechanism (ECRM) and (2) related operation and maintenance and depreciation expenses once the environmental facilities become operational through an Environmental Expense Recovery Mechanism (EERM). The IURC order was appealed to the Indiana Court of Appeals by the Citizens Action Coalition of Indiana, where it was upheld by the Court on March 9, 2004. The Citizens Action Coalition of Indiana has 30 days from the date of that decision to petition the Court of Appeals for rehearing or the Supreme Court of Indiana for transfer of the case to that court. Under the Commission's November 26, 2002 order, Northern Indiana is permitted to submit filings on a semi-annual basis for the ECRM and on an annual basis for the EERM. Northern Indiana is permitted to submit filings on a semi-annual basis for the ECRM and on an annual basis for the EERM. Northern Indiana made its initial filing of the ECRM, ECR-1, in February 2003 for capital expenditures of $58.4 million. On April 30, 2003, the IURC issued an order approving the ECRM filing, providing for the collection of funds expended during construction and a return on the capital investment through increased rates beginning with the May 2003 customer bills. Through December 31, 2003 the ECRM revenues amounted to $5.2 million. On August 1, Northern Indiana filed ECR-2 for capital investments of $120.0 million. This petition was approved by the IURC on October 1, 2003. The initial filing of the EERM was filed with the most recent semi-annual filing of the ECT in February 2004, which included a filing of the ECR-3 for capital investments of $194.1 million and an EERM amount of $1.9 million. Over the timeframe required to meet the environmental standards, Northern Indiana anticipates a total capital investment amounting to approximately $274.2 million. On February 4, 2004, the IURC approved Northern Indiana's latest compliance plan with the estimate of $274.2 million. 68 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. RISK MANAGEMENT ACTIVITIES NiSource uses commodity-based derivative financial instruments to manage certain risks in its business. NiSource accounts for its derivatives under SFAS No. 133 and, through 2002, accounted for any trading contracts that did not qualify as derivatives accounted for under SFAS No. 133 pursuant to EITF No. 98-10. HEDGING ACTIVITIES. The activity for the years 2003 and 2002 affecting other comprehensive income, with respect to cash flow hedges included the following:
(in millions, net of tax) 2003 2002 - --------------------------------------------------------------------------------------------------------------------------------- Net unrealized gains on derivatives qualifying as cash flow hedges at the beginning of the period $ 67.8 $ 50.1 Unrealized hedging gains arising during the period on derivatives qualifying as cash flow hedges 13.0 24.7 Reclassification adjustment for net loss (gain) included in net income 10.9 (7.0) - --------------------------------------------------------------------------------------------------------------------------------- Net unrealized gains on derivatives qualifying as cash flow hedges at the end of the period $ 91.7 $ 67.8 - ---------------------------------------------------------------------------------------------------------------------------------
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 $165.6 million and $140.6 million at December 31, 2003 and 2002, respectively, of which $51.3 million and $29.2 million were included in "Current Assets", $114.3 million and $111.4 million were included in "Other Assets." Price risk management liabilities related to unrealized gains and losses on hedges (including net option premiums) were $3.5 million and $4.1 million at December 31, 2003 and 2002, respectively, all of which was included in "Current Liabilities." During 2003 and 2002, a gain of $2.0 million, net of tax and zero respectively, was recognized in earnings due to the change in value of certain derivative instruments primarily representing time value, and there were no components of the derivatives' fair values excluded in the assessment of hedge effectiveness. Also during 2003 and 2002, NiSource reclassified $0.9 million and zero respectively, related to its cash flow hedges from other comprehensive income to earnings, due to the probability that certain forecasted transactions would not occur. It is anticipated that during the next twelve months the expiration and settlement of cash flow hedge contracts will result in income recognition of amounts currently classified in other comprehensive income of approximately $25.2 million, net of tax. 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. 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 opportunity 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 New York Mercantile Exchange (NYMEX) futures and options contracts that correspond to a fixed or capped price and the associated delivery month. The NYMEX futures and options contracts are designated as cash flow hedges. 69 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Northern Indiana offers a Dependabill program as an alternative to the standard tariff rate that is charged to residential customers. The program allows Northern Indiana customers to fix their total monthly bill at a flat rate regardless of gas usage or commodity cost. In order to hedge the anticipated physical purchases associated with these obligations, Northern Indiana purchases fixed priced gas and the option to call on additional volumes that match the anticipated delivery needs of the program. These derivatives are presently marked-to-market and have not been designated as cash flow hedges. The consolidated balance sheets reflected $0.3 million of price risk management liabilities associated with these programs. Northern Utilities, Inc. has implemented a hedging program designed to fix a portion of their gas supply costs for the coming year of service. In order to fix these costs, Northern Utilities purchases NYMEX futures that correspond to the associated delivery month. Since any gains or losses on the fair value of these derivatives are passed through to the ratepayer directly, the value of these derivatives is offset by either a regulatory asset or liability. In addition, Northern Indiana and Bay State engage in writing options that potentially obligate them to purchase or sell gas at the holder's discretion at some future market-based price. These written options are derivative instruments, must be marked to fair value and do not meet the requirement for hedge accounting treatment. Northern Indiana also uses NYMEX derivative contracts to minimize its gas costs. These contracts do not qualify for hedge accounting and must be marked to fair value. Because these derivatives are used within the framework of its gas cost incentive mechanism, regulatory assets or liabilities are recorded to offset the change in the fair value of these derivatives. The consolidated balance sheets reflected $1.2 million of price risk management assets associated with the programs. Columbia Energy Services Corporation (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 commodity swaps priced at the locations designated for physical delivery. These swaps are designated as cash flow hedges of the anticipated purchases. NiSource has entered into interest rate swap agreements to modify the interest rate characteristics of its outstanding long-term debt from fixed to variable On July 22, 2003, NiSource entered into fixed-to-variable interest rate swap agreements in a notional amount of $500.0 million with four counterparties with an 11-year term. NiSource will receive payments based upon a fixed 5.40% interest rate and pay a floating interest amount based on U.S. 6-month British Bankers Association (BBA) LIBOR plus an average of 0.78% per annum. There was no exchange of premium at the initial date of the swaps. In addition, each party has the right to cancel the swaps on either July 15, 2008 or July 15, 2013 at mid-market. Columbia has entered into interest rate swap agreements to modify the interest rate characteristics of its outstanding long-term debt from fixed to variable. On April 11, 2003, Columbia entered into fixed-to-variable interest rate swap agreements in a notional amount of $100 million with two counterparties. Columbia will receive payments based upon a fixed 7.42% interest rate and pay a floating interest amount based on U.S. 6-month BBA LIBOR plus an average of 2.39% per annum. There was no exchange of premium at the initial date of the swaps. The swaps contain mirror-image call provisions that allow the counterparties to cancel the agreements beginning November 28, 2005 through the stated maturity date. In addition, each party has the right to cancel the swaps on either April 15, 2008 or April 15, 2013 at mid-market. On April 4, 2003, Columbia terminated a fixed-to-variable interest rate swap agreement containing a notional amount of $100.0 million. NiSource received a settlement payment from the counterparty amounting to $8.2 million, which will be amortized as a reduction to interest expense over the remaining term of the underlying debt. 70 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On September 3, 2002, Columbia entered into new fixed-to-variable interest rate swap agreements for a combined notional amount of $281.5 million with three counterparties effective as of September 5, 2002. Columbia will receive payments based upon a fixed 7.32% interest rate and pay a floating interest amount based on U.S. 6-month BBA LIBOR plus 2.66% per annum. There was no exchange of premium at inception of the swaps. The swaps contain mirror-image call provisions that allow the counterparties to cancel the agreements beginning November 28, 2005 through the stated maturity date. In addition, each party has the one-time right to cancel the swaps on September 5, 2007 at mid-market. As a result of the interest rate swap transactions, $500.0 million of NiSource Finance Corporation's (NiSource Finance) long-term debt and $663.0 million of Columbia's long-term debt is now subject to fluctuations in interest rates. The 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 pursuant to SFAS No. 133. Both NiSource and Columbia had no net gain or loss recognized in earnings due to hedging ineffectiveness from prior years. MARKETING AND TRADING ACTIVITIES. Effective July 1, 2002, EnergyUSA-TPC (TPC) sold a significant portion of its net obligations under its gas forward transaction portfolio, physical storage inventory and associated agreements to a third party. Prior to the sale, TPC's operations included the activities of its gas and power trading businesses. Beginning with the effective date of the sale, the primary remaining operations associated with TPC include commercial and industrial gas sales (including arranging supply), gas supply and power marketing associated with NiSource's single merchant cogeneration facility and power trading. With the exception of power trading and one remaining gas trading deal, which expired in October 2002, since July 1, 2002 the gas-related activities at TPC have no longer been considered trading activities, and all positions were marked to fair value pursuant to SFAS No. 133. In April 2003, the remaining gas-related activities (physical commodity sales to commercial and industrial customers) that had been classified as derivatives were considered to fall within the normal purchase and sale exception under SFAS No. 133. Therefore, all gas-related derivatives used to offset the physical obligations necessary to fulfill these commodity sales were designated as cash flow hedges. The fair market values of NiSource's power trading assets and liabilities were $21.9 million and $23.4 million, respectively, at December 31, 2003 and $16.4 million and $16.4 million, respectively, at December 31, 2002. The fair market values of NiSource's gas marketing assets and liabilities were $24.8 million and $22.4 million, respectively, at December 31, 2002. Pursuant to the October 25, 2002 consensus reached regarding EITF No. 02-03 beginning in 2003 the results of derivatives related to trading activities were presented on a net basis. All periods presented have been adjusted to conform to the revised presentation. 71 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. EQUITY INVESTMENT SUBSIDIARIES Certain investments of NiSource are accounted for under the equity method of accounting. All investments shown as limited partnerships are limited partnership interests. The following is a list of NiSource's equity investments at December 31, 2003.
% of Voting Power or Investee Type of Investment Interest Held - ----------------------------------------------------------------------------------------------------------------------------------- Bittersweet Pointe, L.P. Limited Partnership 99.0 Bristol Resources Production Company, L.L.C. LLC Membership 64.0 Chicago South Shore & South Bend Railroad Co. General Partnership 40.0 Douglas Pointe Associates, L.P. Limited Partnership 99.0 Douglas Pointe II Associates, L.P. Limited Partnership 99.0 Douglas Pointe III Associates, L.L.C. LLC Membership 99.0 Dunedin I, L.L.C. LLC Membership 99.0 Dunedin II, L.L.C. LLC Membership 99.0 EnerTek Partners, LP Limited Partnership 16.5 Haverstraw Bay, L.L.C. LLC Membership 98.0 Hebron Pointe, L.L.C. LLC Membership 99.0 House Investments - Midwest Corporate Tax Credit Fund, L.P. Limited Partnership 12.2 Illinois Indiana Development Company, L.L.C. LLC Membership 40.0 Kingsmill Development Co., L.L.C. LLC Membership 99.9 Laredo Nueces Pipeline Company Common Shares 50.0 Millennium Pipeline Company, L.P. Limited Partnership 47.0 Millennium Pipeline Management Company, L.L.C. LLC Membership 47.5 N Squared Aviation, L.L.C. LLC Membership 33.3 Nth Power Technologies Fund II, L.P. Limited Partnership 4.1 Nth Power Technologies Fund II-A, L.P. Limited Partnership 5.4 Prestwick Square of Fort Wayne Associates, L.P. Limited Partnership 99.9 Robertson's Building, L.L.C. LLC Membership 99.0 SunPower Corporation Preferred Shares 14.7 The Wellingshire Joint Venture General Partnership 50.0 Utech Climate Challenge Fund, L.P. Limited Partnership 17.9 Woodland Crossing, L.L.C. LLC Membership 99.0 - -----------------------------------------------------------------------------------------------------------------------------------
72 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES The components of income tax expense were as follows:
Year Ended December 31, (in millions) 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME TAXES Current Federal $ 132.0 $ 126.4 $ 189.7 State 24.3 (3.3) 29.4 - ----------------------------------------------------------------------------------------------------------------------------------- Total Current 156.3 123.1 219.1 - ----------------------------------------------------------------------------------------------------------------------------------- Deferred Federal 82.4 74.8 (44.9) State 4.4 29.9 1.4 - ----------------------------------------------------------------------------------------------------------------------------------- Total Deferred 86.8 104.7 (43.5) - ----------------------------------------------------------------------------------------------------------------------------------- Deferred Investment Credits (8.9) (8.9) (9.0) - ----------------------------------------------------------------------------------------------------------------------------------- INCOME TAXES INCLUDED IN CONTINUING OPERATIONS $ 234.2 $ 218.9 $ 166.6 - -----------------------------------------------------------------------------------------------------------------------------------
Total income taxes from continuing operations were 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 were as follows:
Year Ended December 31, (in millions) 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- Book income from Continuing Operations before income taxes $ 659.9 $ 617.0 $ 357.6 Tax expense at statutory Federal income tax rate 231.0 35.0% 216.0 35.0% 125.2 35.0% Increases (reductions) in taxes resulting from: State income taxes, net of federal income tax benefit 18.6 2.8 17.1 2.8 19.8 5.5 Book depreciation over related tax depreciation 1.2 0.2 (2.2) (0.4) (0.1) - Amortization of deferred investment tax credits (8.9) (1.3) (8.9) (1.4) (9.0) (2.5) Low-income housing / Section 42 credits (5.1) (0.8) (5.1) (0.8) (4.8) (1.3) Nondeductible amounts related to amortization of intangible assets and plant acquisition adjustments -- -- -- -- 32.8 9.2 Other, net (2.6) (0.4) 2.0 0.3 2.7 0.7 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME TAXES FROM CONTINUING OPERATIONS $ 234.2 35.5% $ 218.9 35.5% $ 166.6 46.6% - -----------------------------------------------------------------------------------------------------------------------------------
73 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred income taxes resulted 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 were as follows:
At December 31, (in millions) 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES Accelerated depreciation and other property differences $ 1,521.2 $ 1,482.0 Unrecovered gas & fuel costs 67.2 46.7 Other regulatory assets 217.9 238.4 SFAS No. 133 and price risk adjustments 49.0 42.7 Premiums and discounts associated with long-term debt 58.1 60.7 - ----------------------------------------------------------------------------------------------------------------------------------- Total Deferred Tax Liabilities 1,913.4 1,870.5 - ----------------------------------------------------------------------------------------------------------------------------------- DEFERRED TAX ASSETS Deferred investment tax credits and other regulatory liabilities (54.0) (62.4) Pension and other postretirement/postemployment benefits (151.7) (163.4) Environmental liabilities (18.8) (41.2) Other accrued liabilities (33.1) (52.3) Other, net (2.9) (38.2) - ----------------------------------------------------------------------------------------------------------------------------------- Total Deferred Tax Assets (260.5) (357.5) - ----------------------------------------------------------------------------------------------------------------------------------- Less: Deferred income taxes related to current assets and liabilities 57.0 (4.8) - ----------------------------------------------------------------------------------------------------------------------------------- NON-CURRENT DEFERRED TAX LIABILITY $ 1,595.9 $ 1,517.8 - -----------------------------------------------------------------------------------------------------------------------------------
On June 28, 2002, the governor of Indiana signed into law legislation that increased the Indiana Corporate Income tax rate from 4.5% to 8.5% effective January 1, 2003. As a result, NiSource recorded an additional deferred income tax liability of $63.3 million (net) in the second quarter of 2002 to reflect the impact of the increased tax rate. NiSource's regulated subsidiaries recorded a regulatory asset in the amount of $65.0 million to reflect the probable collection of the increased tax liability through future rates. The overall impact on income tax expense in 2002 was a reduction of $1.7 million. 10. PENSION AND OTHER POSTRETIREMENT BENEFITS NiSource provides defined contribution plans and noncontributory defined benefit retirement plans that cover its employees. Benefits under the defined benefit retirement plans reflect the employees' compensation, years of service and age at retirement. Additionally, NiSource provides 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. NiSource uses September 30 as its measurement date for its pension and postretirement benefit plans. NiSource employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and asset class volatility. The investment portfolio contains a diversified blend of equity and fixed income investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value, small and large capitalizations. Other assets such as private equity and hedge funds are used judiciously to enhance long-term returns while improving portfolio diversification. Derivatives may be used to gain market exposure in an efficient and timely manner; however, derivatives may not be used to leverage the portfolio beyond the market value of the underlying assets. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and periodic asset/liability studies. 74 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The most important component of an investment strategy is the portfolio asset mix, or the allocation between the various classes of securities available to the pension plan for investment purposes. The asset mix and acceptable minimum and maximum ranges established represents a long-term view and are as follows: Asset Mix Policy of Total Fund:
ASSET CATEGORY MINIMUM MAXIMUM - ----------------------------------------------------------------------------------------------------------------------------------- Domestic Equities 40% 60% International Equities 10% 20% Fixed Income 15% 45% Real Estate/Alternative Investments 0% 10% Short-Term Investments 0% 10% - -----------------------------------------------------------------------------------------------------------------------------------
Pension Plan and Postretirement Plan Asset Mix at September 30, 2003:
POST RETIREMENT DEFINED BENEFIT WELFARE PLAN (in millions) PENSION ASSETS 9/30/2003 ASSETS 9/30/2003 - ----------------------------------------------------------------------------------------------------------------------------------- ASSET CLASS ASSET VALUE % OF TOTAL ASSETS ASSET VALUE % OF TOTAL ASSETS - ----------------------------------------------------------------------------------------------------------------------------------- Domestic Equities $ 925.7 50.6% $ 89.9 53.5% International Equities 290.9 15.9% 30.3 18.0% Fixed Income 523.2 28.6% 45.7 27.2% Alternative Investments 86.0 4.7% -- 0.0% Cash/Other 3.7 0.2% 2.2 1.3% - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL $ 1,829.5 100.0% $ 168.1 100.0% - -----------------------------------------------------------------------------------------------------------------------------------
NiSource employs a building block approach with proper consideration of diversification and rebalancing in determining the long-term rate of return for plan assets. Historical markets are studied and long-term historical relationships between equities and fixed income are analyzed to ensure that they are consistent with the widely accepted capital market principle that assets with higher volatility generate greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. Peer data and historical returns are reviewed to check for reasonability and appropriateness. Due to the upswing in the equity markets in 2003, the fair value of NiSource's pension fund assets has increased since September 30, 2002. However, the discount rate used to measure the accumulated benefit obligation has decreased, which slightly offset the increase in the pension assets. In accordance with FASB Statement No. 87, "Employers' Accounting for Pensions," NiSource adjusted its minimum pension liability at December 31, 2003. The adjustment resulted in a decrease to the retirement benefit liabilities of $94.8 million, a decrease in intangible assets of $6.1 million, a decrease to deferred income tax assets of $35.2 million and an increase to other comprehensive income of $53.5 million after-tax. As a result of the increase in the fair value of the plans assets, NiSource expects pension expense for 2004 to decrease approximately $19.2 million from the amount recognized in 2003. In addition, NiSource expects to make contributions of $18.1 million to its pensions plans and $51.5 million to its postretirement medical and life plans in 2004. 75 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following tables provide a reconciliation of the plans' funded status and amounts reflected in NiSource's Consolidated Balance Sheets at December 31 based on a September 30 measurement date:
PENSION BENEFITS OTHER BENEFITS ------------------------------ ------------------------------- (in millions) 2003 2002 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 1,948.3 $ 1,740.3 $ 541.3 $ 519.3 Service cost 35.1 39.5 7.2 11.3 Interest cost 131.0 125.8 36.5 33.3 Plan participants' contributions -- -- 1.7 1.1 Plan amendments 15.1 1.1 10.7 (14.0) Actuarial (gain) loss 141.4 194.3 103.5 23.2 Benefits paid (157.3) (152.7) (41.9) (32.9) - ----------------------------------------------------------------------------------------------------------------------------------- BENEFIT OBLIGATION AT END OF YEAR $ 2,113.6 $ 1,948.3 $ 659.0 $ 541.3 - ----------------------------------------------------------------------------------------------------------------------------------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ 1,651.1 $ 1,847.5 $ 138.3 $ 144.2 Actual return on plan assets 334.0 (92.0) 25.3 (7.0) Employer contributions 1.7 48.3 44.7 32.9 Plan participants' contributions -- -- 1.7 1.1 Settlement payments -- -- -- -- Benefits paid (157.3) (152.7) (41.9) (32.9) - ----------------------------------------------------------------------------------------------------------------------------------- FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 1,829.5 $ 1,651.1 $ 168.1 $ 138.3 - ----------------------------------------------------------------------------------------------------------------------------------- Funded status $ (284.1) $ (297.2) $ (490.9) $ (403.0) Contributions made after measurement date and before fiscal year end 0.6 0.2 14.5 7.7 Unrecognized actuarial (gain) loss 417.2 493.9 57.1 (34.8) Unrecognized prior service cost 61.6 54.7 13.3 1.9 Unrecognized transition obligation -- 5.5 104.1 116.5 - ----------------------------------------------------------------------------------------------------------------------------------- NET AMOUNT RECOGNIZED AT END OF YEAR $ 195.3 $ 257.1 $ (301.9) $ (311.7) - ----------------------------------------------------------------------------------------------------------------------------------- AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION CONSIST OF: Accrued benefit liability (107.9) (141.1) Intangible asset 51.2 57.3 Accumulated other comprehensive income, pre-tax 252.0 340.9 - ----------------------------------------------------------------------------------------------------------------------------------- NET AMOUNT RECOGNIZED AT END OF YEAR $ 195.3 $ 257.1 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER COMPREHENSIVE INCOME, PRE-TAX, ATTRIBUTABLE TO CHANGE IN ADDITIONAL MINIMUM LIABILITY RECOGNITION $ (88.7) $ 339.3 - -----------------------------------------------------------------------------------------------------------------------------------
76 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PENSION BENEFITS OTHER BENEFITS ------------------------------- ------------------------------- 2003 2002 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- WEIGHTED-AVERAGE ASSUMPTIONS AS OF SEPTEMBER 30, Discount rate assumption 6.25% 7.0% 6.25% 7.0% Compensation growth rate assumption 4.0% 4.0% 4.0% 4.0% Medical cost trend assumption -- -- 5.0% 5.5% Assets earnings rate assumption 9.0% 9.0% 9.0% 9.0% - -----------------------------------------------------------------------------------------------------------------------------------
The following table provides the components of the plans' net periodic benefits cost (benefit) for each of the three years:
PENSION BENEFITS OTHER BENEFITS ----------------------------------- ------------------------------------- (in millions) 2003 2002 2001 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- NET PERIODIC COST Service cost $ 35.1 $ 39.5 $ 45.9 $ 7.2 $ 11.3 $ 13.4 Interest cost 131.0 125.8 139.3 36.5 33.3 39.6 Expected return on assets (141.7) (161.1) (198.2) (10.2) (10.0) (11.5) Amortization of transitional obligation 5.5 6.3 6.5 11.6 11.8 11.9 Amortization of prior service cost 8.3 9.9 10.3 0.1 1.5 0.5 Recognized actuarial (gain) loss 25.7 1.4 (12.7) (3.5) (8.5) (7.8) Settlement (gain) loss -- -- (8.4) -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- NET PERIODIC BENEFITS COST (BENEFIT) $ 63.9 $ 21.8 $ (17.3) $ 41.7 $ 39.4 $ 46.1 - -----------------------------------------------------------------------------------------------------------------------------------
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 $ 4.6 $ (4.1) Effect on accumulated postretirement benefit obligation 45.5 (41.9) - -----------------------------------------------------------------------------------------------------------------------------------
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 13B. 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. 77 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The redemption prices at December 31, 2003, 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, 2003), Series A (stated value $50 per share) $ 50.00 - -----------------------------------------------------------------------------------------------------------------------------------
The redemption prices at December 31, 2003, 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% $102.22, 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% $103.18, reduced periodically 2,777 shares on or before December 1; noncumulative option to double amount each year - -----------------------------------------------------------------------------------------------------------------------------------
Sinking fund requirements with respect to redeemable preferred stocks outstanding at December 31, 2003, for each of the subsequent five years were as follows:
Year Ending December 31, (in millions) - ----------------------------------------------------------------------------------------------------------------------------------- 2004 $ 0.9 2005 0.9 2006 0.9 2007 0.6 2008 -- - -----------------------------------------------------------------------------------------------------------------------------------
12. COMMON STOCK As of December 31, 2003, NiSource had 400,000,000 authorized shares of common stock with a $0.01 par value. A. CORPORATE PIES REMARKETING. In February 2003, NiSource issued approximately 13.1 million shares of common stock associated with the settlement of forward equity agreements comprising a component of the Corporate PIES. Concurrently with the settlement of the forward agreements, NiSource remarketed the underlying debentures, due February 19, 2005, and reset the interest rate to 4.25%. NiSource received net proceeds of $344.1 million from the remarketing in satisfaction of the Corporate PIES holders' obligation under the forward equity agreements. As a result of the transaction, the underlying subsidiary trust was dissolved. 78 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) B. EQUITY OFFERING. In November 2002, NiSource issued 41.4 million shares of common stock at a per-share price of $18.30 ($17.75 on a net basis). The net proceeds of approximately $734.9 million were used to reduce debt. C. 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. D. NORTHERN INDIANA DIVIDEND RESTRICTION. So long as any shares of Northern Indiana's cumulative preferred stock are outstanding, no cash dividends shall be paid or declared on its common stock 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 to the cumulative preferred stock plus the surplus, after giving effect to such common stock 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, 2003, the sum of the capital applicable to stocks subordinate to the cumulative preferred stock plus the surplus was equal to 41% of the total capitalization including surplus. E. COMMON STOCK DIVIDEND. Holders of shares of NiSource's common stock are entitled to receive dividends when, as and if declared by NiSource's Board of Directors (Board) out of funds legally available. 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 totaling $1.10 per share for the 2003 year. Beginning with the November 2003 dividend, NiSource reduced its annual dividend to $0.92 per share from $1.16 per share. At its January 5, 2004 meeting, the Board declared a quarterly common dividend of $0.23 cents per share, payable on February 20, 2004 to holders of record on January 30, 2004. 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. In addition, NiSource currently has non-qualified option grants outstanding and not vested which were granted under a 1988 long-term incentive plan. The amended and restated 1994 Plan provides for the issuance of up to 21 million shares through December 31, 2005. At December 31, 2003, there were 8,101,539 shares reserved for future awards under the amended and restated 1994 Plan. 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. 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 641,529 and 861,740 restricted shares outstanding and not vested at December 31, 2003 and 2002, respectively. 79 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 2003, NiSource had 799,829 outstanding awards under a contingent stock plan. The terms of the awards contain a provision that varies the number of shares to be issued based on the level of attainment of certain stock performance targets and also allows for the accrual of dividends on the contingent stock awards. In 2003, based on the performance of NiSource's common stock through December 31, 2003, NiSource recorded expense of $6.7 million for the 2003 year related to the awards of contingent shares under the 1994 Plan. NiSource established a time accelerated restricted stock award plan (TARSAP), which governs restricted stock awards beginning with the January 1, 2003 grants. Under the plan, key executives are granted awards of restricted stock or contingent stock that generally vest over a period of six years or at age 62 if an employee would become age 62 within six years, but not less than three years. If certain predetermined criteria involving measures of total shareholder return are met, as measured at the end of the third year after the grant date, the awards vest at the end of the third year. On January 1, 2003, 732,029 grants of restricted and contingent shares were issued under the TARSAP. NiSource recognized expense of $4.4 million for TARSAP awards for the year ended December 31, 2003. The Amended and Restated Non-employee Director Stock Incentive Plan, which was approved by the board and stockholders at the 2003 annual meeting, provides for the issuance of up to 500,000 shares of common stock to non-employee directors. The Plan provides for awards of common stock, which vest in 20% increments per year, with full vesting after five years. The Plan permits the granting of restricted stock units and 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, 2003, 100,500 shares had been issued under the Plan. The long-term incentive plans have been accounted for using the intrinsic value method under APB No. 25. The compensation cost that was charged against net income for restricted stock awards was $12.9 million; $7.3 million and $7.3 million for years ended December 31, 2003, 2002 and 2001, respectively. Option grants are granted with an exercise price equal to the average of the high and low market price on the day of the grant. Stock option transactions for the three years ended December 31, 2003, were as follows:
Weighted Average Options Option Price ($) - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding at January 1, 2001 4,462,883 20.76 Granted 1,725,105 25.92 Exercised (563,908) 17.40 Cancelled (141,014) 25.93 - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 2001 5,483,066 22.62 Granted 2,190,745 21.80 Exercised (307,978) 15.47 Cancelled (401,080) 24.06 - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 2002 6,964,753 22.62 Granted 2,464,996 19.79 Exercised (544,327) 17.44 Cancelled (728,726) 23.19 - ----------------------------------------------------------------------------------------------------------------------------------- OUTSTANDING AT DECEMBER 31, 2003 8,156,696 22.03 EXERCISABLE AT DECEMBER 31, 2003 5,856,044 22.91 Exercisable at December 31, 2002 5,017,914 22.90 Exercisable at December 31, 2001 3,822,269 21.17 - -----------------------------------------------------------------------------------------------------------------------------------
80 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information on stock options outstanding and exercisable at December 31, 2003:
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 ($) - ----------------------------------------------------------------------------------------------------------------------------------- $11.69 - $14.61 121,300 14.38 0.6 121,300 14.38 $14.62 - $17.53 150,800 16.22 1.6 150,800 16.22 $17.54 - $20.45 2,913,914 19.56 7.4 613,262 18.71 $20.46 - $23.38 2,204,652 21.32 5.6 2,204,652 21.32 $23.39 - $26.30 2,323,280 25.20 5.9 2,323,280 25.20 $26.31 - $29.22 442,750 29.22 3.8 442,750 29.22 - ----------------------------------------------------------------------------------------------------------------------------------- 8,156,696 22.03 6.1 5,856,044 22.91 - -----------------------------------------------------------------------------------------------------------------------------------
There were no SARs outstanding at December 31, 2003, 2002 or 2001. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with a dividend yield of 4.9-6.0%. The weighted average fair value of options granted was $3.44, $6.03 and $8.44 during the years 2003, 2002 and 2001, respectively. The following assumptions were used for grants in 2003, 2002 and 2001:
2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- Expected Life 5.9 5.8 yrs 5.6 yrs Interest Rate 3.17-3.33% 4.4-5.1% 4.0-4.9% Volatility 31.2% 40.7-42.0% 27.5-28.4% - -----------------------------------------------------------------------------------------------------------------------------------
14. LONG-TERM DEBT On November 4, 2003, NiSource Finance issued $250.0 million of 18-month floating rate unsecured notes that mature May 4, 2005. The notes are callable, at par, at the option of NiSource on or after May 4, 2004. Also on November 4, 2003, NiSource Finance issued $250.0 million of 3.20% three year unsecured notes that mature November 1, 2006. On July 21, 2003, NiSource issued $500.0 million of 5.40% eleven-year senior unsecured notes that mature July 15, 2014. In February 2003, NiSource remarketed most of the underlying debentures due February 19, 2005, which were comprised of a component of the Corporate PIES, resetting the interest rate to 4.25%. NiSource received net proceeds of $344.1 million from the remarketing in satisfaction of the Corporate PIES holders' obligation under the forward equity agreements. The sole purchaser of the remarketed securities purchased newly offered 6.15% notes due March 1, 2013, using the remarketed debentures as consideration. As a portion of the consideration payable in the acquisition of Columbia, NiSource issued 55.5 million SAILSSM. The SAILSSM 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 fractional number of shares of NiSource common stock based on a settlement rate 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 debentures, which mature on November 1, 2006, have been pledged to secure the holders' obligation to purchase common stock under the purchase contract. 81 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The value of the consideration received, Columbia shares, was allocated between the debenture and the stock purchase contract consistent with the provisions of APB Opinion No. 14, "Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants." Payments under the debenture were $144.4 million nominally and were discounted at a market interest rate to reflect a fair value of $107.0 million at the date of issuance. The debentures are reflected as a component of long-term debt on NiSource's consolidated balance sheet. The value of the forward equity contracts at the date of issuance was determined to be $7.4 million. The value of the stock purchase contracts was reflected as a component of equity, consistent with the provisions of EITF Issue No. 96-13, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's Own Stock" (at that time) and, subsequently, EITF No. 00-19. Sinking fund requirements and maturities of long-term debt outstanding at December 31, 2003, for each of the five years subsequent to December 31, 2003 were as follows:
Year Ending December 31, (in millions) - ------------------------------------------------------------------------------- 2004 $ 118.3 2005 1,550.8 2006 430.9 2007 371.3 2008 33.8 - -------------------------------------------------------------------------------
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 $5,993.4 million of long-term debt at December 31, 2003, $295.3 million was issued by NiSource's affiliate, NiSource Capital Markets, Inc. (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 Market's obligations in the event of a failure to pay by Capital Markets. 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 Market's creditors. The carrying value of the assets of NiSource, other than the assets of Northern Indiana, was $12.4 billion at December 31, 2003. Columbia has entered into interest rate swap agreements for $663.0 million of its outstanding long-term debt. In addition, NiSource has entered into interest rate swap agreements for $500.0 million of its outstanding long-term debt. The effect of these agreements is to modify the interest rate characteristics of a portion of their respective long-term debt from fixed to variable. See Note 7 for further information regarding the interest rate swaps. NiSource is subject to two financial covenants under both its 364-day and 3-year revolving credit facilities. These covenants are not expected to change materially under NiSource's current renewal of the credit facilities. On a consolidated basis, NiSource must maintain an interest coverage ratio of not less than 1.75, as determined for each period of four consecutive fiscal quarters. Additionally, NiSource must maintain a debt to capitalization ratio that does not exceed 70 percent. As of December 31, 2003, NiSource was in compliance with these financial covenants. NiSource is also subject to certain negative covenants under the revolving credit facilities. Such covenants include a limitation on the creation or existence of new liens on NiSource's assets, generally exempting liens on utlity assets, purchase money security interests, preexisting security interests and an additional asset basket equal to 5.0% of NiSource's consolidated net tangible assets. An asset sale covenant generally restricts the sale, lease and/or transfer of NiSource's assets to no more than 10.0% of its consolidated total assets. The revolving credit facilities also include a cross-default provision, which triggers an event of default under the credit facility in the event of any uncured payment default relating to any indebtedness of NiSource or any of its subsidiaries in a principal amount of $50.0 million or more. 82 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NiSource's bond indentures generally do not contain any financial maintenance covenants. However, NiSource's bond indentures are generally subject to cross default provisions ranging from uncured payment defaults of $5.0 to $50.0 million, and limitations on the incurrence of liens on NiSource's assets, generally exempting liens on utility assets, purchase money security interests, preexisting security interests and an additional asset basket capped at either 5.0% or 10.0% of NiSource's consolidated net tangible assets. 15. SHORT-TERM BORROWINGS Due to the company's liquidity position, NiSource elected not to renew its $500.0 million 364-day credit facility, which expired on March 20, 2003. The 364-day credit facility was utilized to support the issuance of letters of credit. As a result of the 364-day facility expiring, the $1.25 billion three-year facility that expires on March 23, 2004 was amended to allow for an increase in aggregate letters of credit outstanding from $150.0 million to $500.0 million. The recent reduction in NiSource's short-term borrowing needs is attributable to the $734.9 million of net proceeds from the equity offering during November 2002, the successful Corporate PIES remarketing, the sale of the exploration and production properties, certain assets of PEI and net cash flow from continuing operations. NiSource currently anticipates that its $1.25 billion 3-year credit facility expiring March 23, 2004 will be replaced during the first quarter of 2004 and will be split between a 364-day facility and a 3-year facility. As of December 31, 2003, NiSource had $121.4 million of letters of credit outstanding. At December 31, 2002, NiSource had $171.7 million of letters of credit outstanding. Short-term borrowings were as follows:
At December 31, (in millions) 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Commercial paper weighted average interest rate of 2.25% $ -- $ 150.0 Credit facility (3-Year Facility) borrowings weighted average interest rate of 1.82% at December 31, 2003 685.5 763.1 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL SHORT-TERM BORROWINGS $ 685.5 $ 913.1 - -----------------------------------------------------------------------------------------------------------------------------------
16. 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 amount 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) 2003 2003 2002 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Long-term investments $ 76.0 $ 76.0 $ 59.7 $ 59.3 Long-term debt (including current portion) 6,111.7 6,733.3 6,074.4 6,539.4 Preferred stock (including current portion) 84.4 84.8 85.5 86.1 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company debentures -- -- 345.0 265.0 - -----------------------------------------------------------------------------------------------------------------------------------
83 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SALE OF TRADE ACCOUNTS RECEIVABLE. NiSource's accounts receivable programs qualify for sale accounting based upon the conditions met in SFAS No. 140 "Accounting for Transfers and Servicing of Financial Asset and Extinguishments of Liabilities." In the agreements, all transferred assets have been isolated from the transferor and put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership. NiSource does not retain any interest in the receivables under both agreements. Columbia of Ohio is a party to an agreement to sell, without recourse, all of its trade receivables, with the exception of certain low-income payment plan receivables, as they originate, to Columbia Accounts Receivable Corporation (CARC), a wholly-owned subsidiary of Columbia. CARC, in turn, is party to an agreement under which it sells a percentage ownership interest in the accounts receivable to a commercial paper conduit. Under these agreements, CARC may not sell any new affiliate 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. As of December 31, 2003, $89.5 million of accounts receivable had been sold by CARC. Canadian Imperial Bank of Commerce (CIBC), the administrative agent for the program, has informed Columbia of Ohio that, CIBC and its commercial paper conduit entities will let all existing receivable securitization agreements expire in the normal course of business. As such, the Columbia of Ohio receivables program with CIBC will terminate on May 15, 2004 and Columbia of Ohio plans to initiate a new program with a new agent and conduit purchaser. Under the agreements, Columbia of Ohio acts as administrative agent, 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. On December 30, 2003, Northern Indiana entered into an agreement to sell, without recourse, all of its trade receivables, as they originate, to NIPSCO Receivable Corporation (NRC), a wholly-owned subsidiary of Northern Indiana. NRC, in turn, is party to an agreement in which it sells a percentage ownership interest in the accounts receivable to a commercial paper conduit. The conduit can purchase up to $200 million of accounts receivable under the agreement. The agreements expire in December 2004. As of December 31, 2003, $166.8 million of accounts receivable had been sold by NRC. Under the arrangement, Northern Indiana may not sell any new receivables if Northern Indiana's debt rating falls below BBB- or Baa3 at Standard and Poor's and Moody's, respectively. Under the agreements, Northern Indiana acts as servicer, performing record keeping and cash collection functions for the accounts receivable sold. Northern Indiana receives a fee, which provides adequate compensation, for such services. 17. OTHER COMMITMENTS AND CONTINGENCIES A. CAPITAL EXPENDITURES. NiSource expects that approximately $518.6 million will be expended for construction purposes during 2004. B. SERVICE AGREEMENTS. Northern Indiana has a service agreement with Pure Air, a general partnership between Air Products and Chemicals, Inc. and First Air Partners LP, under which Pure Air provides scrubber services to reduce sulfur dioxide emissions for Units 7 and 8 at the Bailly Generating Station. Services under this contract commenced on June 15, 1992, and have current annual charges approximating $16.5 million. The agreement provides that, assuming various performance standards are met by Pure Air, a termination payment would be due if Northern Indiana terminated the agreement prior to the end of the twenty-year contract period. C. ASSETS UNDER LIEN. Substantially all of Columbia Gas Transmission Corporation's (Columbia Transmission) properties have been pledged to Columbia as security for debt owed by Columbia Transmission to Columbia. 84 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) D. GUARANTEES AND INDEMNITIES. As a part of normal business, NiSource and certain subsidiaries enter into various agreements providing financial or performance assurance to third parties on behalf of certain subsidiaries. Such agreements include guarantees and stand-by-letters of credit. These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to a subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the subsidiaries' intended commercial purposes. The total commercial commitments in existence at December 31, 2003 and the years in which they expire were: (in millions) Total 2004 2005 2006 2007 2008 After - ----------------------------------------------------------------------------------------------------------------------------------- Guarantees of subsidaries debt $ 3,924.4 $ 82.6 $ 1,183.2 $ 293.1 $ 32.4 $ 8.6 $ 2,324.5 Guarantees supporting commodity transactions of subsidiaries 1,463.5 310.3 100.2 796.5 39.5 57.4 159.6 Other guarantees 432.9 150.0 51.2 -- -- 11.3 220.4 Lines of credit 685.5 685.5 - -- -- -- -- Letters of credit 126.3 20.4 1.5 0.1 1.1 103.2 -- - ----------------------------------------------------------------------------------------------------------------------------------- Total commercial commitments $ 6,632.6 $ 1,248.8 $ 1,336.1 $ 1,089.7 $ 73.0 $ 180.5 $ 2,704.5 - -----------------------------------------------------------------------------------------------------------------------------------
NiSource has guaranteed the payment of $3.9 billion of debt for various wholly-owned subsidiaries including NiSource Finance, the former PEI subsidiaries that were sold in the fourth quarter and through a support agreement, Capital Markets. Other than the debt associated with the former PEI subsidiaries that were sold, the debt is reflected on NiSource's consolidated balance sheet. The subsidiaries are required to comply with certain financial covenants under the debt indenture and in the event of default, NiSource would be obligated to pay the debt's principal and related interest. NiSource does not anticipate its subsidiaries will have any difficulty maintaining compliance. NiSource Finance also maintains lines of credit with financial institutions. At December 31, 2003, the amount outstanding under the lines of credit and guaranteed by NiSource amounted to $685.5 million. Additionally, NiSource has issued guarantees, which support up to approximately $1.5 billion of commodity-related payments for its current subsidiaries involved in energy marketing and trading and those satisfying requirements under forward gas sales agreements of former subsidiaries. These guarantees were provided to counterparties in order to facilitate physical and financial transactions involving natural gas and electricity. To the extent liabilities exist under the commodity-related contracts subject to these guarantees, such liabilities are included in the consolidated balance sheets. NiSource has issued standby letters of credit of approximately $126.3 million through financial institutions for the benefit of third parties that have extended credit to certain subsidiaries. If a subsidiary does not pay amounts when due under covered contracts, the beneficiary may present its claim for payment to the financial institution, which will in turn request payment from NiSource. NiSource has purchase and sales agreement guarantees totaling $140.0 million, which guarantee performance of the seller's covenants, agreements, obligations, liabilities, representations and warranties under the agreements. No amounts related to the purchase and sales agreement guarantees are reflected in the consolidated balance sheet. Management believes that the likelihood NiSource would be required to perform or otherwise incur any significant losses associated with any of the aforementioned guarantees is remote. After the October 20, 2003 sale of six subsidiaries, PEI, continues to own Whiting Clean Energy. The total of the outstanding debt guaranteed for Whiting Clean Energy at December 31, 2003 was $326.9 million. As of December 31, 2003, approximately $304.1 million of debt related to Whiting Clean Energy was included in NiSource's consolidated balance sheet. NiSource retains certain operational and financial guarantees with respect to the former PEI subsidiaries and CER. NiSource has retained guarantees of $158.0 million as of December 31, 2003 of debt outstanding related to three of the PEI projects. In addition, NiSource has retained several operational guarantees related to the former PEI subsidiaries. These operational guarantees are related to environmental compliance, inventory balances, employee relations, and a residual future purchase guarantee. The fair value of the guarantees was determined to be $11.1 million and a portion of the net proceeds in the sale amount were assumed allocated to the guarantees as prescribed by FIN 45. 85 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NiSource has retained liabilities related to the CER forward gas sales agreements with Mahonia II Limited (Mahonia) for guarantees of the forward sales and for indemnity agreements with respect to surety bonds backing the forward sales. The guarantees, surety bonds and associated indemnity agreements remain in place subsequent to the closing of the CER sale and decline over time as volumes (approximately 72.1 Bcf as of December 31, 2003) are delivered in satisfaction of the contractual obligations, ending in February 2006. NiSource will be indemnified by Triana, and MSCP will fund up to a maximum of $221.0 million of additional equity to Triana to support Triana's indemnity, for Triana's gas delivery and related obligations to Mahonia. The MSCP commitment declines over time in concert with the surety bonds and the guaranteed obligation to deliver gas to Mahonia. Immediately after the close of the sale, Triana owned approximately 1.1 Tcf of proved reserves, and was capitalized with $330.0 million, approximately $200.0 million of which was provided as initial equity by MSCP and the remainder of which is provided as part of a $500.0 million revolving credit facility. NiSource believes that the combination of Triana's proved reserves, sufficient capitalization, and access to the credit facility, combined with the Triana indemnity and the $221.0 million of further commitments to Triana from MSCP, adequately offset any losses that may be incurred by NiSource due to Triana's non-performance under the Mahonia agreements. Accordingly, NiSource has not recognized a liability related to the retention of the Mahonia guarantees. 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. INTERNAL REVENUE SERVICE (IRS) AUDIT. The IRS issued its Revenue Agent Report (RAR) covering the former Columbia's remaining open tax years (1998, 1999 and ten months ended November 1, 2000) on December 2, 2003. All issues included in the RAR were negotiated and agreed to at the IRS Examination Team level and payment of the tax and related interest was made on December 15, 2003. The audit of NiSource's 1999 and 2000 consolidated federal income tax returns commenced on March 6, 2003. Completion of that audit cycle is expected by the end of 2004. The start of the 2001-2002 audit cycle is planned for June 2004. Management believes adequate reserves have been established for issues related to these and subsequently filed returns. G. 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. Proposals for voluntary initiatives and mandatory controls 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, and methane, a component of natural gas. Certain NiSource affiliates engage in efforts to voluntarily report and reduce their greenhouse gas emissions. NiSource will monitor and participate in developments related to efforts to register and potentially regulate greenhouse gas emissions. GAS DISTRIBUTION. Several Gas Distribution Operations subsidiaries are potentially responsible parties at waste disposal sites under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) (commonly known as Superfund) and similar state laws, including former manufactured gas plant (MGP) sites, which such subsidiaries, or their corporate predecessors, own or previously owned or operated. Gas Distribution Operations subsidiaries may be required to share in the cost of clean up of such sites. In addition, some Gas Distribution Operations subsidiaries have responsibility for corrective action under the Resource Conservation and Recovery Act (RCRA) for closure and clean-up costs associated with underground storage tanks, under the Toxic Substances Control Act for clean up of polychlorinated biphenyls, and for mercury releases. The final costs of clean up have not yet been determined. As site investigations and clean up proceed and as additional information becomes available reserves are adjusted. 86 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A program has been instituted to identify and investigate former MGP sites where Gas Distribution Operations subsidiaries or predecessors are the current or former owner. The program has identified 84 such sites and initial investigations have been conducted at 45 sites. Of these sites, additional investigation activities have been completed or are in progress at 42 sites and remedial measures have been implemented or completed at 23 sites. This effort includes the sites contained in the January 2004 agreement entered into by the Indiana Department of Environmental Management, Northern Indiana, and other Indiana utilities under the Indiana Voluntary Remediation Program. Only those site investigation, characterization and remediation costs currently known and determinable can be considered "probable and reasonably estimable" under SFAS No. 5, "Accounting for Contingencies". As costs become probable and reasonably estimable, reserves will be adjusted. 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 Security 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, 2003, a reserve of approximately $63.0 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 potentially responsible parties 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 will not have a material effect on its financial position. GAS TRANSMISSION AND STORAGE 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 245 facilities, approximately 13,000 liquid removal points, approximately 2,200 mercury measurement stations and about 3,700 storage well locations. Field characterization has been performed at all sites. Site characterization reports and remediation plans, which must be submitted to the U.S. Environmental Protection Agency (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 most of the 245 facilities. During 2003, Columbia Transmission completed a sufficient number of the characterization reports and remediation plans to adjust its estimate for the entire program. As a result, the liability was reduced by $44.2 million, the related regulatory asset was decreased by $33.2 million, and there was an improvement to operating income of $11.0 million. As of December 31, 2003 the remaining environmental liability recorded on the balance sheet of Columbia Transmission was approximately $4.6 million. Columbia Transmission and Columbia Gulf are potentially responsible parties at several waste disposal sites under CERCLA and similar state laws. 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 reserves will be adjusted. 87 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) After a lengthy legal proceeding, the EPA has begun implementing the Particulate Matter and Ozone National Ambient Air Quality Standards it revised in July 1997. As a result, EPA is in the process of designating areas not attaining the standards. After designation, the Clean Air Act provides for a process that would provide for promulgation of rules specifying a compliance level, compliance deadline, and necessary controls to be implemented within designated areas over the next few years. In the interim, existing ozone ambient air quality standards will remain in place and may require imposition of additional controls in areas of non-attainment. In addition, EPA may reissue the portion of the nitrogen oxide (NOx) State Implementation Plan (SIP) Call regulation (dealing with regional ozone transport) which is applicable to certain pipeline engines, but which was remanded by the Court of Appeals after challenge by the pipeline industry. Resulting rules could require additional reductions in NOx emissions from reciprocating engines and turbines at pipeline compressor stations (including compressor stations owned by Columbia Transmission and Columbia Gulf). The EPA and state regulatory authorities will set final implementation requirements. Certain states have already begun to propose new NOx emission requirements that may be applicable to pipeline compressor station engines and turbines. NiSource believes that the costs relating to compliance with any new limits may be significant but are dependent upon the ultimate control program established by the targeted states and the EPA, and currently are not reasonably estimable. NiSource will continue to closely monitor developments in this area. The EPA has proposed Maximum Achievable Control Technology (MACT) standards for hazardous air pollutants for stationary combustion turbines, industrial boilers and reciprocating internal combustion engines. Final MACT standards for stationary combustion turbines have been issued and standards for the other categories are expected to be issued in the near future. The final standards for turbines are not anticipated to impose substantial compliance costs upon NiSource. NiSource will continue to monitor the proposed MACT standards for potential applicability and cost impact to its operations. Pending finalization of the proposed standards, NiSource is unable to predict what, if any, additional compliance costs may result. ELECTRIC OPERATIONS. AIR. In December 2001, the EPA approved regulations developed by the State of Indiana to comply with EPA's NOx SIP call. The NOx SIP call requires certain states, including Indiana, to reduce NOx levels from several sources, including industrial and utility boilers, to lower regional transport of ozone. Compliance with the NOx limits contained in these rules is required by May 31, 2004. Northern Indiana's plans include the installation of Selective Catalytic Reduction NOx reduction technology at each of its active generating stations to comply with the rules and estimates total capital costs will range from $250.0 to $300.0 million. Actual compliance costs may vary depending on a number of factors including market demand and resource constraints, uncertainty of future equipment and construction costs, and the potential need for additional control technology. After a lengthy legal proceeding, the EPA has begun implementing the Particulate Matter and Ozone National Ambient Air Quality Standards it revised in July 1997. As a result, EPA is in the process of designating areas not attaining the standards. After designation, the Clean Air Act provides for a process that would provide for promulgation of rules specifying a compliance level, compliance deadline, and necessary controls to be implemented within designated areas over the next few years. Resulting rules could require additional reductions in sulfur dioxide, particulate matter and NOx emissions from coal-fired boilers (including Northern Indiana's electric generating stations). In 2003, the Bush Administration and the EPA proposed new legislation and rules for SO2, NOx and mercury emissions from electric power generating stations. The Administration's Clear Skies Act would provide for significant reductions of SO2, NOx and mercury emissions from electric power generating stations, including Northern Indiana's stations. Similarly, EPA's proposed regulations contain phased in reductions for these three pollutants under alternative control approaches, including emission allowance based trading programs. Until the legislation passes or the rulemaking is completed by EPA and implemented by the States, the potential impact on Northern Indiana will be uncertain. Nonetheless, if implemented, these potential reduction requirements could impose substantial costs on affected utilities, including Northern Indiana. 88 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During 1999, the EPA initiated enforcement actions against several electric utilities alleging violations of the new source review provisions of the Clean Air Act and subsequently has issued additional information collection requests to many other utilities. Northern Indiana has received and responded to information requests from the EPA on this subject most recently in June 2002. At this time, Northern Indiana is unable to predict the result of the EPA's review of Northern Indiana's information responses. Subsequent to this activity the EPA has undertaken to reform its New Source Rules. The EPA has proposed MACT standards for hazardous air pollutants for stationary combustion turbines, industrial boilers and reciprocating internal combustion engines. The EPA has issued final regulations for stationary turbines and is expected to issue final standards for the other categories in the near future. The final regulations for turbines are not expected to have a substantial impact on Northern Indiana. Northern Indiana will continue to monitor the proposed MACT standards for potential applicability and cost impact to its operations. Until finalization of the proposed standards, Northern Indiana is unable to predict what, if any, additional compliance costs may result. The EPA is in the process of developing a program to address regional haze. That program will mandate that states require power plants built between 1962 and 1977 to install the "best available retrofit technology" (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 it. 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. All issues in subsequent litigation related to the EPA's actions have been resolved with the exception of the EPA's disapproval of the Indiana Department of Environmental Management's (IDEM) method for testing whole effluent toxicity. Northern Indiana expects that IDEM will issue a proposed permit renewal for each of its lakeside stations. Pending issuance of these permits, the costs of complying with these requirements cannot be predicted at this time. In 2003 the EPA proposed revised rules under section 316(b) of the Clean Water Act that would establish requirements for minimizing adverse environmental impacts from cooling water intake structures and the water withdrawn by steam electric power plants, including Northern Indiana's electric generating stations. The EPA is expected to issue final rules in 2004. The requirements will be implemented through permits for the affected facilities. Until the rules are finalized and the new permit requirements are established, the costs of complying with these rules cannot be predicted. REMEDIATION. Northern Indiana is a potentially responsible party under CERCLA and similar state laws at three waste disposal sites and shares in the cost of their cleanup with other potentially responsible parties. At one of these sites, Northern Indiana has entered into an EPA Administrative Order on Consent to perform a removal action in the vicinity of a third party, state permitted landfill where Northern Indiana contracted for fly ash disposal. The site is the subject of a Federal citizens suit and a state court action. Meanwhile, Northern Indiana, the EPA, and the IDEM are currently evaluating the potential for additional actions at this site. In addition, Northern Indiana has corrective action liability under the Resource Conservation & Recovery Act (RCRA) for closure and clean-up costs associated with treatment, storage and disposal sites. As of December 31, 2003, a reserve of approximately $2.9 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 potentially responsible parties 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. OTHER OPERATIONS. PEI. In connection with the sale of certain PEI assets mentioned above, NiSource has agreed to provide indemnification to the purchaser for specified potential environmental liabilities. However, the total amount of these liabilities is not reasonably estimable at this time. 89 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On June 26, 2002, EPA issued a Notice of Violation (NOV) to three companies involved with a project at Ispat Inland Inc.'s East Chicago, Indiana facility, including PEI's former subsidiary, Cokenergy. The NOV alleges violations of the construction permit requirements of the Clean Air Act. At issue is whether air emissions permitting requirements for major sources applied to the construction of the project in 1997. NiSource maintains that the project was properly permitted by the IDEM and cannot predict whether any fines or penalties will be assessed or if additional compliance costs will be incurred. OTHER INFORMATION. OTHER AFFILIATES NiSource affiliates have retained environmental liabilities, including cleanup liabilities associated with some of its former operations including those of propane operations, petroleum operations, certain local gas distribution companies and CER. Most significant environmental liability relates to former MGP sites whereas less significant liability is associated with former petroleum operations and former mercury metering stations. The ultimate liability in connection with these contamination sites will depend upon many factors including the extent of environmental response actions required, other potentially responsible parties 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, will not have a material adverse effect on NiSource's financial position. 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 NiSource companies. As of December 31, 2003, a reserve of approximately $76.6 million has been recorded to cover probable corrective actions at sites where NiSource has environmental remediation liability. Regulatory assets have been recorded to the extent environmental expenditures are expected to be recovered in rates. 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 potentially responsible parties 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 will not have a material effect on its financial position or results of operations. H. OPERATING LEASES. Payments made in connection with operating leases are primarily charged to operation and maintenance expense as incurred. Such amounts were $54.8 million in 2003, $60.3 million in 2002 and $93.2 million in 2001. Future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year are:
(in millions) - ------------------------------------------------------------------------------- 2004 $ 39.0 2005 33.2 2006 30.3 2007 26.5 2008 22.3 After 56.5 - ------------------------------------------------------------------------------- Total operating leases $ 207.8 - -------------------------------------------------------------------------------
90 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) I. PURCHASE COMMITMENTS. NiSource has service agreements that provide for pipeline capacity, transportation and storage services. These agreements, which have expiration dates ranging from 2004 to 2016, require NiSource to pay fixed monthly charges. The estimated aggregate amounts of such payments at December 31, 2003, were:
(in millions) - -------------------------------------------------------------------------------- 2004 $ 210.7 2005 168.6 2006 123.4 2007 106.2 2008 96.0 After 446.8 - -------------------------------------------------------------------------------- Total purchase commitments $ 1,151.7 - --------------------------------------------------------------------------------
J. WHITING CLEAN ENERGY. PEI's Whiting Clean Energy project at BP's Whiting, Indiana refinery was placed in service in 2002. Initially, the facility was not able to deliver steam to BP to the extent originally contemplated without plant modifications. Whiting Clean Energy has commenced an arbitration proceeding to seek recovery of damages from the engineering, procurement and construction contractor. Whiting Clean Energy is also pursuing recovery from the insurance provider for construction delays and necessary plant modifications. The contractor has asserted that it fully performed under its contract and is demanding payment of the full contract price plus additional amounts for remediation. PEI estimates that the facility will operate at a loss in the near term based on the current market view of forward pricing for gas and electricity. For 2003, the after-tax loss was approximately $30.0 million.. The profitability of the project in future periods will be dependent on, among other things, prevailing prices in the energy markets and regional load dispatch patterns. Because of the expected losses from this facility and decreases in estimated forward pricing for electricity versus changes in gas prices, an impairment study was performed in the first quarter of 2003 on this facility in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The study indicated that, at that time, no impairment was necessary. However, by necessity, the study includes many estimates and assumptions for the 40-year estimated useful life of the facility. Changes in these estimates and assumptions, such as forward prices for electricity and gas, volatility in the market, etc., could result in a situation where total undiscounted net revenues are less than the carrying value of the facility, which would result in a write-down that could be significant. 18. 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. In 2002, an additional pre-tax charge of $4.7 million was recognized. It is not anticipated that the final disposition of Enron's liability to NiSource will have a significant effect on income. 91 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. ACCUMULATED OTHER COMPREHENSIVE INCOME The following table displays the components of Accumulated Other Comprehensive Income.
Year Ended December 31, (in millions) 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Foreign currency translation adjustment $ (0.7) $ (1.5) Loss on available for sale securities (1.8) (3.1) Net unrealized gains on cash flow hedges 91.7 67.8 Minimum pension liability adjustment (150.2) (203.7) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ACCUMULATED OTHER COMPREHENSIVE LOSS, NET $ (61.0) $ (140.5) - -----------------------------------------------------------------------------------------------------------------------------------
20. OTHER, NET
Year Ended December 31, (in millions) 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- Interest income $ 14.8 $ 12.3 $ 16.0 Miscellaneous 0.5 (4.0) (6.4) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL OTHER, NET $ 15.3 $ 8.3 $ 9.6 - -----------------------------------------------------------------------------------------------------------------------------------
21. INTEREST EXPENSE, NET
Year Ended December 31, (in millions) 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- Interest on long-term debt $ 427.1 $ 458.9 $ 485.4 Interest on short-term borrowings 8.9 28.4 92.1 Discount on prepayment transactions 19.0 21.0 20.5 Allowance for borrowed funds used and interest during construction (2.5) (2.4) (4.3) Other 12.2 10.5 (1.7) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE, NET $ 464.7 $ 516.4 $ 592.0 - -----------------------------------------------------------------------------------------------------------------------------------
22. SEGMENTS OF BUSINESS Operating segments are components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. During the second quarter 2003, NiSource re-aligned its reportable segments to reflect the announced sale of its exploration and production operations. As of the second quarter 2003, NiSource no longer reported an Exploration and Production Operations segment. In addition, the PEI subsidiaries sold are reported as discontinued operations. All periods have been adjusted to conform with the realignment. NiSource's operations are divided into four primary business segments. The Gas Distribution Operations segment provides natural gas service and transportation for residential, commercial and industrial customers in Ohio, Pennsylvania, Virginia, Kentucky, Maryland, Indiana, Massachusetts, Maine and New Hampshire. The Gas Transmission and Storage Operations segment offers gas transportation and storage services for local distribution companies, marketers and industrial and commercial customers located in northeastern, mid-Atlantic, midwestern and southern states and the District of Columbia. The Electric Operations segment provides electric service in 21 counties in the northern part of Indiana. The Other Operations segment primarily includes gas marketing, power marketing and trading and ventures focused on distributed power generation technologies, including cogeneration facilities, fuel cells and storage systems. 92 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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) 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- REVENUES GAS DISTRIBUTION OPERATIONS Unaffiliated $ 4,084.4 $ 3,290.8 $ 4,239.7 Intersegment 17.5 19.6 40.6 - ----------------------------------------------------------------------------------------------------------------------------------- Total 4,101.9 3,310.4 4,280.3 - ----------------------------------------------------------------------------------------------------------------------------------- TRANSMISSION AND STORAGE OPERATIONS Unaffiliated 604.0 621.8 634.7 Intersegment 249.3 300.4 329.0 - ----------------------------------------------------------------------------------------------------------------------------------- Total 853.3 922.2 963.7 - ----------------------------------------------------------------------------------------------------------------------------------- ELECTRIC OPERATIONS Unaffiliated 1,074.0 1,104.3 1,061.7 Intersegment 18.8 33.1 2.8 - ----------------------------------------------------------------------------------------------------------------------------------- Total 1,092.8 1,137.4 1,064.5 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER OPERATIONS Unaffiliated 415.9 101.0 157.9 Intersegment 50.3 11.0 49.9 - ----------------------------------------------------------------------------------------------------------------------------------- Total 466.2 112.0 207.8 - ----------------------------------------------------------------------------------------------------------------------------------- Adjustments and eliminations (267.6) (162.2) (245.6) - ----------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED REVENUES $ 6,246.6 $ 5,319.8 $ 6,270.7 - -----------------------------------------------------------------------------------------------------------------------------------
93 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in millions) 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) Gas Distribution Operations $ 506.4 $ 459.1 $ 380.8 Gas Transmission and Storage Operations 398.8 398.3 349.0 Electric Operations 267.5 322.3 340.7 Other Operations (43.8) (43.1) (69.6) Corporate (12.6) 4.3 (10.9) Adjustments and eliminations -- 11.3 (22.1) - ----------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED $ 1,116.3 $ 1,152.2 $ 967.9 - ----------------------------------------------------------------------------------------------------------------------------------- DEPRECIATION AND AMORTIZATION Gas Distribution Operations $ 190.2 $ 189.2 $ 228.8 Gas Transmission and Storage Operations 111.4 109.4 161.4 Electric Operations 175.1 172.2 166.8 Other Operations 11.2 10.3 8.7 Corporate 9.1 10.3 10.4 Adjustments and eliminations -- (0.2) 0.6 - ----------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED $ 497.0 $ 491.2 $ 576.7 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Gas Distribution Operations $ 6,096.4 $ 5,967.0 $ 5,889.0 Gas Transmission and Storage Operations 2,913.0 2,940.1 2,990.5 Electric Operations 3,079.7 2,968.8 3,102.0 Other Operations 1,411.3 1,727.1 1,579.6 Corporate 9,729.1 10,607.6 14,319.0 Adjustments and eliminations (6,605.7) (6,268.0) (9,053.5) - ----------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED $ 16,623.8 $ 17,942.6 $ 18,826.6 - ----------------------------------------------------------------------------------------------------------------------------------- CAPITAL EXPENDITURES Gas Distribution Operations $ 195.1 $ 196.4 $ 211.3 Gas Transmission and Storage Operations 120.5 128.0 137.4 Electric Operations 225.1 197.8 134.7 Other Operations 31.8 5.3 47.6 - ----------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED $ 572.5 $ 527.5 $ 531.0 - -----------------------------------------------------------------------------------------------------------------------------------
94 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 23. 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 - ---------------------------------------------------------------------------------------------------------------------------------- 2003 Gross revenues $ 2,524.5 $ 1,141.2 $ 898.3 $ 1,682.6 Operating Income 472.3 175.8 148.9 319.3 Income from Continuing Operations 349.7 65.7 36.6 207.9 Income (Loss) from Discontinued Operations - net of taxes 41.4 (364.2) (8.1) (0.8) Change in Accounting - net of taxes (8.8) -- -- -- Net Income (Loss) 254.9 (324.9) 15.4 139.8 Basic Earnings Per Share of Common Stock Continuing Operations 0.88 0.15 0.09 0.54 Discontinued Operations 0.16 (1.39) (0.03) -- Change in Accounting (0.04) -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Basic Earnings (Loss) Per Share $ 1.00 $ (1.24) $ 0.06 $ 0.54 - ---------------------------------------------------------------------------------------------------------------------------------- Diluted Earnings Per Share of Common Stock Continuing Operations 0.87 0.15 0.09 0.53 Discontinued Operations 0.16 (1.38) (0.03) -- Change in Accounting (0.04) -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Diluted Earnings (Loss) Per Share $ 0.99 $ (1.23) $ 0.06 $ 0.53 - ---------------------------------------------------------------------------------------------------------------------------------- 2002 Gross revenues $ 1,720.7 $ 954.3 $ 908.4 $ 1,736.4 Operating Income 481.4 158.7 178.1 334.0 Income from Continuing Operations 219.6 20.8 23.2 134.5 Income (Loss) from Discontinued Operations - net of taxes 22.6 4.2 -- (52.4) Net Income 242.2 25.0 23.2 82.1 Basic Earnings Per Share of Common Stock Continuing Operations 1.07 0.10 0.11 0.59 Discontinued Operations 0.11 0.02 -- (0.23) - ---------------------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share $ 1.18 $ 0.12 $ 0.11 $ 0.36 - ---------------------------------------------------------------------------------------------------------------------------------- Diluted Earnings Per Share of Common Stock Continuing Operations 1.05 0.10 0.11 0.59 Discontinued Operations 0.11 0.02 -- (0.23) - ---------------------------------------------------------------------------------------------------------------------------------- Diluted Earnings Per Share $ 1.16 $ 0.12 $ 0.11 $ 0.36 - ----------------------------------------------------------------------------------------------------------------------------------
95 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) 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Other property, at cost, less accumulated depreciation $ 12.3 $ 12.4 Investments and Other Assets: Net assets of discontinued operations 6.5 608.8 Assets held for sale -- 26.1 Investments in subsidiary companies 7,871.0 7,269.0 - ----------------------------------------------------------------------------------------------------------------------------------- Total Investments 7,877.5 7,903.9 - ----------------------------------------------------------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents 2.5 1.3 Amounts receivable from subsidiaries 67.5 666.1 Other Current Assets 100.6 111.6 - ----------------------------------------------------------------------------------------------------------------------------------- Total Current Assets 170.6 779.0 - ----------------------------------------------------------------------------------------------------------------------------------- Other (principally notes receivable from associated companies) 28.6 28.5 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 8,089.0 $ 8,723.8 =================================================================================================================================== CAPITALIZATION AND LIABILITIES Capitalization: Common stock equity $ 4,415.9 $ 4,174.9 Long-term debt, excluding amounts due within one year 135.8 126.0 - ----------------------------------------------------------------------------------------------------------------------------------- Total Capitalization 4,551.7 4,300.9 - ----------------------------------------------------------------------------------------------------------------------------------- Current Liabilities 22.5 81.9 Other (principally notes payable to associated companies) 3,514.8 4,341.0 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION AND LIABILITIES $ 8,089.0 $ 8,723.8 ===================================================================================================================================
96 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) 2003 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- Equity in net earnings of subsidiaries $ 596.7 $ 607.2 $ 347.8 - ---------------------------------------------------------------------------------------------------------------------------------- Other income (deductions): Administrative and general expenses (34.7) (21.8) (12.4) Loss(Gain) on sale or impairment of assets -- 19.5 (9.2) Gain on sale of assets/property -- -- -- Interest income 6.8 9.0 32.3 Interest expense (237.0) (292.1) (78.5) Other, net 2.6 (10.5) (116.5) - ---------------------------------------------------------------------------------------------------------------------------------- (262.3) (295.9) (184.3) - ---------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes 334.4 311.3 163.5 Income taxes (91.3) (86.8) (27.5) - ---------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations 425.7 398.1 191.0 - ---------------------------------------------------------------------------------------------------------------------------------- Income from discontinued operations - net of tax (0.5) 18.2 21.2 Loss on Disposition of discontinued operations - net of tax (331.2) (43.8) Change in accounting - net of taxes (8.8) -- 4.0 - ---------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 85.2 $ 372.5 $ 216.2 ================================================================================================================================== Average common shares outstanding (thousands) 259.6 211.0 205.3 Basic earnings per share Continuing operations $ 1.64 $ 1.89 $ 0.93 Discontinued Operations (1.28) (0.12) 0.10 Change in accounting (0.03) -- 0.02 - ---------------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE $ 0.33 $ 1.77 $ 1.05 ================================================================================================================================== Diluted earnings per share Continuing operations $ 1.63 $ 1.87 $ 0.91 Discontinued Operations $ (1.27) (0.12) 0.10 Change in accounting $ (0.03) -- 0.02 - ---------------------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE $ 0.33 $ 1.75 $ 1.03 ==================================================================================================================================
97 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) 2003 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided in operating activities $ 182.3 $ 119.8 $ 507.0 - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Proceeds from disposition of assets -- 35.6 -- Investments (18.0) (261.9) (4.7) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (18.0) (226.3) (4.7) - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issuance of common shares 354.7 734.9 15.1 Increase (decrease) in notes payable to subsidiaries (818.1) (298.0) (364.9) Increase in notes receivable from subsidiaries 586.8 (88.5) 90.8 Cash dividends paid on common shares (284.0) (241.5) (239.0) Acquisition of treasury shares (2.5) (6.9) -- - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (163.1) 100.0 (498.0) - ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 1.2 (6.5) 4.3 Cash and cash equivalents at beginning of year 1.3 7.8 3.5 - ---------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 2.5 $ 1.3 $ 7.8 ==================================================================================================================================
98 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 by its consolidated subsidiaries were (in millions of dollars): $465.8, $444.4 and $248.0 in 2003, 2002 and 2001, respectively. In addition, NiSource received (in millions of dollars): $2.9, $2.9 and $3.1 in cash distributions from equity investments adjusted for investments sold in connections with discontinued operations in 2003, 2002 and 2001, respectively. 2. NOTES TO CONDENSED FINANCIAL STATEMENTS See Item 8 for the full text of notes to the Consolidated Financial Statements. 99 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS TWELVE MONTHS ENDED DECEMBER 31, 2003
Additions --------------------- Deductions for Charged to Charged Purposes for Balance Costs and to Other which Reserves Balance Description ($ in millions) Jan. 1, 2003 Acquisitions Expenses Account Sale of Assets were Created Dec. 31, 2003 - ------------------------------------------------------------------------------------------------------------------------------------ Reserves Deducted in Consolidated Balance Sheet from Assets to Which They Apply: Reserve for accounts receivable 52.3 -- 167.4 37.1 -- 199.0 57.8 Reserve for other investments 29.4 -- (0.2) -- -- -- 29.2 Reserves Classified Under Reserve Section of Consolidated Balance Sheet: Environmental reserves 132.1 -- 4.7 (33.2) -- 27.0 76.6 Restructuring reserve 49.6 -- (7.5) -- -- 22.6 19.5 Reserve for cost of operational gas 4.0 -- -- -- -- -- 4.0 Accumulated provision for rate refund 12.0 -- 14.4 (3.3) -- 8.9 14.2 Unpaid medical claims 8.7 7.5 7.5 8.7 Gas air conditioning development funding reserve 1.3 -- -- -- -- 1.1 0.2 Amount owed for purchase gas imbalance 0.4 -- -- (0.4) -- -- -- Construction project reserve 3.2 -- -- -- -- 3.2 -- - ------------------------------------------------------------------------------------------------------------------------------------
TWELVE MONTHS ENDED DECEMBER 31, 2002
Additions --------------------- Deductions for Charged to Charged Purposes for Balance Costs and to Other which Reserves Balance Description ($ in millions) Jan. 1, 2002 Acquisitions Expenses Account Sale of Assets were Created Dec. 31, 2002 - ------------------------------------------------------------------------------------------------------------------------------------ Reserves Deducted in Consolidated Balance Sheet from Assets to Which They Apply: Reserve for accounts receivable 53.9 -- 54.3 46.4 -- 102.3 52.3 Reserve for other investments 25.6 -- (0.5) 4.3 -- -- 29.4 Reserves Classified Under Reserve Section of Consolidated Balance Sheet: Environmental reserves 167.4 -- (2.9) (5.5) -- 26.9 132.1 Restructuring reserve 58.3 -- 41.2 (13.3) -- 36.6 49.6 Reserve for cost of operational gas 13.7 -- (6.8) -- -- 2.9 4.0 Accumulated provision for rate refund 11.3 -- 25.4 0.5 -- 25.1 12.1 Unpaid medical claims 10.4 -- 6.8 -- -- 8.5 8.7 Gas air conditioning development funding reserve 1.3 -- -- -- -- -- 1.3 Amount owed for purchase gas imbalance 0.4 -- -- -- -- -- 0.4 Construction project reserve 3.2 -- -- -- -- -- 3.2 - ------------------------------------------------------------------------------------------------------------------------------------
100 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued) NISOURCE INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS TWELVE MONTHS ENDED DECEMBER 31, 2003
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 -- 61.8 59.3 -- 110.5 53.9 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: Environmental reserves 130.5 -- 54.9 -- -- 18.0 167.4 Restructuring reserve 65.4 (6.4) 28.7 -- -- 29.4 58.3 Reserve for cost of operational gas 1.2 -- 19.8 -- -- 7.3 13.7 Accumulated provision for rate refund 9.2 -- 17.6 -- -- 16 11.3 Unpaid medical claims 10.1 -- 7.4 -- -- 7.1 10.4 Gas air conditioning development funding reserve 1.3 -- -- -- -- -- 1.3 Amount owed for purchase gas imbalance 0.4 -- -- -- -- -- 0.4 Construction project reserve 1.8 -- -- 1.4 -- -- 3.2 - ------------------------------------------------------------------------------------------------------------------------------------
101 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NISOURCE INC. On May 21, 2002 the Board of Directors of NiSource, upon recommendation of its Audit Committee, dismissed Arthur Andersen LLP as the independent public accountants for NiSource and its subsidiaries, Columbia Energy Group and Northern Indiana Public Service Company (collectively, the "Registrants"), and decided to engage Deloitte & Touche LLP to serve as the Registrants' independent public accountants for 2002. Information with respect to this matter is included in NiSource's current report on Form 8-K filed May 21, 2002, which information is incorporated herein by reference. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures NiSource's chief executive officer and its chief financial officer, after evaluating the effectiveness of NiSource's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), have concluded based on the evaluation required by paragraph (b) of Exchange Act Rules 13a-15 and 15d-15 that, as of the end of the period covered by this report, NiSource's disclosure controls and procedures were adequate and effective to ensure that material information relating to NiSource and its consolidated subsidiaries would be made known to them by others within those entities. Changes in Internal Controls There was no change in NiSource's internal control over financial reporting during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, NiSource's internal control over financial reporting. 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 11, 2004, 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 11, 2004, which information is incorporated by reference. Information regarding NiSource's code of ethics, corporate governance guidelines and Board of Directors Committee charters will be included in the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Stockholders to be held on May 11, 2004, 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 to be held on May 11, 2004, 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 and the Equity Compensation Plan Information will be included in the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Stockholders to be held on May 11, 2004, which information is incorporated by reference. 102 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS NISOURCE INC. Not applicable. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information regarding principle accounting fees and services will be included in the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Stockholders to be held on May 11, 2004, which information is incorporated by reference. 103 PART IV ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K NISOURCE INC. 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. Reports on Form 8-K The following reports on Form 8-K were filed during the fourth quarter of 2003.
Financial Item Reported Statements Included Date of Event Date Filed - ------------------------------------------------------------------------------- 5, 7 Y 10/6/2003 10/6/2003 5, 7 Y 10/6/2003 10/6/2003 7, 12 Y 10/30/2003 10/30/2003 5, 7 N 11/3/2003 11/3/2003 9 N 11/17/2003 11/17/2003 - -------------------------------------------------------------------------------
104 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 March 12, 2004 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 March 12, 2004 - -------------------------------------------- Executive Officer, and Director Gary L. Neale (Principal Executive Officer) /s/ MICHAEL W. O'DONNELL Executive Vice President and March 12, 2004 - -------------------------------------------- Chief Financial Officer Michael W. O'Donnell (Principal Financial Officer) /s/ JEFFREY W. GROSSMAN Vice President and Controller March 12, 2004 - -------------------------------------------- (Principal Accounting Officer) Jeffrey W. Grossman /s/ STEPHEN P. ADIK Director March 12, 2004 - -------------------------------------------- Stephen P. Adik /s/ STEVEN C. BEERING Director March 12, 2004 - -------------------------------------------- Steven C. Beering /s/ ARTHUR J. DECIO Director March 12, 2004 - -------------------------------------------- Arthur J. Decio /s/ DENNIS E. FOSTER Director March 12, 2004 - -------------------------------------------- Dennis E. Foster /s/ IAN M. ROLLAND Director March 12, 2004 - -------------------------------------------- Ian M. Rolland /s/ JOHN W. THOMPSON Director March 12, 2004 - -------------------------------------------- John W. Thompson /s/ ROBERT J. WELSH Director March 12, 2004 - -------------------------------------------- Robert J. Welsh /s/ DR. CAROLYN Y. WOO Director March 12, 2004 - -------------------------------------------- Dr. Carolyn Y. Woo /s/ ROGER A. YOUNG Director March 12, 2004 - -------------------------------------------- Roger A. Young
105 ITEM 15. EXHIBIT INDEX (CONTINUED) NISOURCE INC.
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., as amended through November 1, 2000. ** (3.2) Amended and Restated By-Laws of NiSource Inc. as amended through October 23, 2001. ** (4.1) 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)). (4.2) 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)). (4.3) 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). (4.4) 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). (4.5) 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). (4.6) 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)). (4.7) 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) (4.8) 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). (4.9) 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).
106 ITEM 15. EXHIBIT INDEX (CONTINUED) NISOURCE INC.
EXHIBIT NUMBER DESCRIPTION OF ITEM - ------- ------------------- (4.10) 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). (4.11) 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). (4.12) 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). (4.13) 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). (4.14) 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 4.1 to the NiSource Inc. Form S-3, dated November 17, 2000 (Registration No. 333-49330)). (4.15) 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)). (4.16) 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)). (4.17) 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)). (4.18) 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)). (4.19) 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)). (4.20) 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)). (4.21) 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. (4.22) 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,
107 ITEM 15. EXHIBIT INDEX (CONTINUED) NISOURCE INC. 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). (10.1) Supplemental Life Insurance Plan effective January 1, 1991, as amended, (incorporated by reference to Exhibit 2 to the NIPSCO Industries, Inc. Current Report on Form 8-K dated March 25, 1992). * (10.2) NiSource Inc. Executive Deferred Compensation Plan, as amended and restated, effective January 1, 2004. * ** (10.3) Form of Change in Control and Termination Agreements and Schedule of Parties to the Agreements (incorporated by reference to Exhibit 10.4 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 2002). * (10.4) NiSource Inc. Nonemployee Director Stock Incentive Plan (As Amended July 7, 2002 and Restated Effective July 1, 2002) (incorporated by reference to Exhibit 10.5 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 2002).* (10.5) NIPSCO Industries, 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). * (10.6) NiSource Inc. 1994 Long-Term Incentive Plan, as amended and restated effective January 1, 2004. * ** (10.7) Letter Agreement dated December 3, 2003 between Stephen P. Adik and NiSource Corporate Services Company. ** *** (10.8) Noncompetition Agreement dated February 12, 1999 between Roger A. Young and Bay State Gas Company. ** (10.9) Employment Agreement dated February 12, 1999 between Mr. Roger A. Young and Bay State Gas Company. ** (10.10) 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). (10.11) 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, 1997). (10.12) 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). (10.13) 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).
108 ITEM 15. EXHIBIT INDEX (CONTINUED) NISOURCE INC. (10.14) 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). (10.15) NiSource Inc. Nonemployee Director Retirement Plan, as amended and restated effective January 1, 2002 (incorporated by reference to Exhibit 10.21 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 2002). * (10.16) NiSource Inc. Supplemental Executive Retirement Plan, as amended and restated effective June 1, 2002 (incorporated by reference to Exhibit 10.22 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 2002). * (10.17) Bay State Gas Company Supplemental Executive Retirement Plan restated January 1, 1992 (incorporated by reference to Exhibit 10.23 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 2002). * (10.18) 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). * (10.19) Thrift Restoration Plan for The Columbia Energy Group, as amended and restated effective January 1, 2000 (incorporated by reference to Exhibit 10.28 to the NiSource Inc. Quarterly Report or Form 10-Q for the period ended September 30, 2001). * (10.20) NiSource Inc. Executive Severance Policy, effective June 1, 2002 (incorporated by reference to Exhibit 10.27 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 2002). * (10.21) Amendment to NiSource Inc. Executive Severance Policy. * ** (10.22) NiSource Inc. Executive Severance Policy, effective January 1, 2004. * ** (10.23) Form of Agreement between NiSource Inc. and certain officers of Columbia Energy Group and schedule of parties to such Agreements (incorporated by reference to Exhibit 10.33 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 2002). * (10.24) 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). * (10.25) Letter Agreement between NiSource Corporate Services Company and S. LaNette Zimmerman, dated July 15, 2002 (incorporated by reference to Exhibit 10.35 to the NiSource Inc. Annual Report on Form 10-K for the period ended December 31, 2002). * (10.26) Description of NiSource Inc. Annual Incentive Plan, effective as of January 1, 2003. * ** (10.27) First Amendment to NiSource Inc. Supplemental Executive Retirement Plan. ** (10.28) Second Amendment to the NiSource Inc. Supplemental Executive Retirement Plan. ** (10.29) Third Amendment to the NiSource Inc. Supplemental Executive Retirement Plan. ** (10.30) Financing Agreement dated as of December 1, 2003 between Jasper County, Indiana and Northern Indiana Public Service Company.**
109 ITEM 15. EXHIBIT INDEX (CONTINUED) NISOURCE INC. (10.31) Insurance Agreement, dated as of December 18, 2003, by and between AMBAC Assurance Corporation and Northern Indiana Public Service Company. ** (12) Ratio of Earnings to Fixed Charges. ** (21) List of Subsidiaries. ** (23.1) Consent of Deloitte & Touche LLP. ** (31.1) Certification of Gary L. Neale, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. ** (31.2) Certification of Michael W. O'Donnell, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. ** (32.1) Certification of Gary L. Neale, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). ** (32.2) Certification of Michael W. O'Donnell, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). **
* Management contract or compensatory plan or arrangement of NiSource Inc. ** Exhibit filed herewith. *** Confidential portions of this exhibit have been redacted and filed separately with the Commission pursuant to a confidential treatment request in accordance with Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 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. 110 EX-3.1 3 c83669exv3w1.txt AMENDED AND RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF NISOURCE INC. AS AMENDED THROUGH NOVEMBER 1, 2000 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF NISOURCE INC. ARTICLE I NAME The name of this Corporation is NiSource Inc. ARTICLE II REGISTERED OFFICE The registered office of the Corporation in the State of Delaware is located at Corporation Service Company, 2711 Centerville Road, Suite 400, in the City of Wilmington, County of New Castle. The name of its registered agent is Corporation Service Company, and the address of said registered agent is 2711 Centerville Road, Suite 400, in said city. ARTICLE III STATEMENT OF PURPOSE The nature of the business to be conducted and the purposes of the Corporation are to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law, as amended. ARTICLE IV CLASSES OF CAPITAL STOCK The total number of shares of all classes of stock which the Corporation shall have authority to issue is Four hundred twenty million (420,000,000), of which Twenty million (20,000,000) shares of the par value $.01 each are to be of a class designated Preferred Stock and Four hundred million (400,000,000) shares of the par value of $.01 each are to be of a class designated Common Stock. A. COMMON STOCK 1. Subject to the powers, preferences and other special rights afforded Preferred Stock by the provisions of this Article IV or resolutions adopted pursuant hereto, the holders of the Common Stock shall be entitled to receive, to the extent permitted by Delaware law, such 1 dividends as may from time to time be declared by the Board of Directors. 2. Except as otherwise required by Delaware law and as otherwise provided in this Article IV and resolutions adopted pursuant hereto with respect to Preferred Stock, and subject to the provisions of the Bylaws of the Corporation, as from time to time amended, with respect to the closing of the transfer books and the fixing of a record date for the determination of stockholders entitled to vote, the holders of the Common Stock shall exclusively possess voting power for the election of directors and for all other purposes, and the holders of the Preferred Stock shall have no voting power and shall not be entitled to any notice of any meeting of stockholders. 3. Except as may otherwise be required by law, this Amended and Restated Certificate of Incorporation or the provisions of the resolution or resolutions as may be adopted by the Board of Directors pursuant to this Article IV with respect to Preferred Stock, each holder of Common Stock, and each holder of Preferred Stock, if entitled to vote on such matter, shall be entitled to one vote in respect of each share of Common Stock or Preferred Stock, as the case may be, held by such holder on each matter voted upon by stockholders, and any such right to vote shall not be cumulative. 4. Any action required or permitted to be taken by the stockholders of the Corporation must be effected at an annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. Except as otherwise required by law and subject to the rights of the holders of any class or any series of Preferred Stock, 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). 5. In the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding-up of the Corporation, after distribution in full of the preferential amounts, if any, to be distributed to the holders of Preferred Stock, as set forth in this Article IV or the resolutions adopted with respect to such series under this Article IV, holders of Common Stock shall be entitled to receive all of the remaining assets of the Corporation of whatever kind available for distribution to the stockholders ratably and in proportion to the number of shares of Common Stock held by them respectively. The Board of Directors may distribute in kind to the holders of Common Stock such remaining assets of the Corporation or may sell, transfer, otherwise dispose of all or any part of such remaining assets to any other corporation, trust or other entity and receive payment therefor in cash, stock or obligations of such other corporation, trust or other entity, or a combination thereof, and may set all or make any part of the consideration so received and distributed or any balance thereof in kind to holders of Common Stock. The merger or consolidation of the Corporation into or with any other corporation, or the merger of any other corporation into it, or any purchase or redemption of shares of stock of the Corporation of any class, shall not be deemed to be a dissolution, liquidation, or winding-up of the Corporation for the purposes of this Article IV. 2 B. PREFERRED STOCK The express grant of authority to the Board of Directors of the Corporation to fix by resolution or resolutions the designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of the shares of Preferred Stock that are not fixed by this Amended and Restated Certificate of Incorporation is as follows: 1. The Preferred Stock may be issued from time to time in any amount, not exceeding in the aggregate the total number of shares of Preferred Stock herein above authorized, reduced by the number of shares of Preferred Stock designated under Section C of this Article IV, as Preferred Stock of one or more series, as hereinafter provided. All shares of any one series of Preferred Stock shall be alike in every particular, each series thereof shall be distinctively designated by letter or descriptive words, and all series of Preferred Stock shall rank equally and be identical in all respects except as permitted by the provisions of Subsection B.2 of this Article IV. 2. Authority is hereby expressly granted to and vested in the Board of Directors from time to time to issue the Preferred Stock as Preferred Stock of any series and in connection with the creation of each such series to fix, by the resolution or resolutions providing for the issue of shares thereof, the voting powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, if any, of such series, to the full extent now or hereafter permitted by the laws of the State of Delaware. Pursuant to the foregoing general authority vested in the Board of Directors, but not in limitation of the powers conferred on the Board of Directors thereby and by the laws of the State of Delaware, the Board of Directors is expressly authorized to determine with respect to each series of Preferred Stock other than the series designated under Section C of this Article IV: (a) the designation of such series and number of shares constituting such series; (b) the dividend rate or amount of such series, the payment dates for dividends on shares of such series, the status of such dividends as cumulative or non-cumulative, the date from which dividends on shares of such series, if cumulative, shall be cumulative, and the status of such as participating or non-participating after the payment of dividends as to which such shares are entitled to any preference; (c) the price or prices (which amount may vary under different conditions or at different dates) at which, and the times, terms and conditions on which, the shares of such series may be redeemed at the option of the Corporation; (d) whether or not the shares of such series shall be made optionally or mandatorily convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of the Corporation or other securities and, if made so convertible or exchangeable, the conversion price or prices, or the rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made and any other terms and conditions of such conversion or exchange; 3 (e) whether or not the shares of such series shall be entitled to the benefit of a retirement or sinking fund to be applied to the purchase or redemption of shares of such series, and if so entitled, the amount of such fund and the manner of its application, including the price or prices at which shares of such series may be redeemed or purchased through the application of such fund; (f) whether or not the issue of any additional shares of such series or any future series in addition to such series or of any shares of any other class of stock of the Corporation shall be subject to restrictions and, if so, the nature thereof; (g) the rights and preferences, if any, of the holders of such series of Preferred Stock upon the voluntary or involuntary liquidation, dissolution or winding-up of the Corporation, and the status of the shares of such series as participating or non-participating after the satisfaction of any such rights and preferences; (h) the full or limited voting rights, if any, to be provided for shares of such series, in addition to the voting rights provided by law; and (i) any other relative powers, preferences and participating, optional or other special rights and the qualifications, limitations or restrictions thereof, of shares of such series; in each case, so far as not inconsistent with the provisions of this Amended and Restated Certificate of Incorporation or the Delaware General Corporation Law then in effect. C. SERIES A JUNIOR PARTICIPATING PREFERRED STOCK. The designation and number of shares, and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of a series of Preferred Stock are fixed by this Section C of ARTICLE IV as follows: 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be 4,000,000. 2. Dividends and Distributions. (a) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar shares) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of Series A Preferred Stock, in preference to the holders of Common Stock and of any other junior shares, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the 20th day of February, May, August and November in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (i) $26 or (ii) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per 4 share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in Common Stock or a subdivision of the outstanding Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share of Series A Preferred Stock or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph 2(a) of this Section C immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $26 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. 3. Voting Rights. The holders of Series A Preferred Stock will have the following voting rights: 5 (a) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) Except as otherwise provided in this Amended and Restated Certificate of Incorporation, in any resolution creating a series of Preferred Stock or by law, the holders of Series A Preferred Stock and the holders of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (c) If at the time of any annual meeting of stockholders for the election of directors a "default in preference dividends" on the Series A Preferred Stock shall exist, the number of directors constituting the Board of Directors of the Corporation shall be increased by two (2), and the holders of the Preferred Stock of all series (whether or not the holders of such series of Preferred Stock would be entitled to vote for the election of directors if such default in preference dividends did not exist) shall have the right at such meeting, voting together as a single class without regard to series, to the exclusion of the holders of Common Stock, to elect two (2) directors of the Corporation to fill such newly created directorships. Such right shall continue until there are no dividends in arrears upon the Preferred Stock. Each director elected by the holders of Preferred Stock (a "Preferred Director") shall continue to serve as such director for the full term for which he shall have been elected, notwithstanding that prior to the end of such term a default in preference dividends shall cease to exist. Any Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of the outstanding Preferred Stock voting together as a single class without regard to series, at a meeting of the stockholders or of the holders of Preferred Stock called for the purpose. So long as a default in any preference dividends on the Preferred Stock shall exist, (i) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (ii)) by an instrument in writing signed by the remaining Preferred Director and filed with the Corporation and (ii) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote of the holders of the outstanding Preferred Stock voting together as a single class without regard to series, at the same meeting at which such removal shall be voted. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. Whenever the term of office of the Preferred Directors shall end and a default in preference dividends shall no longer exist, the number of directors constituting the Board of Directors of the Corporation shall be reduced by two (2). For the purposes hereof, a 6 "default in preference dividends" on the Preferred Stock shall be deemed to have occurred whenever the amount of accrued dividends upon any series of the Preferred Stock shall be equivalent to six (6) full quarterly dividends or more, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accrued dividends on all Preferred Stock of each and every series then outstanding shall have been paid to the end of the last preceding quarterly dividend period. (d) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 4. Certain Restrictions. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock, as provided in paragraph 2 of this Section C, are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity shares on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration any shares ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior shares in exchange for any shares of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any Series A Preferred Stock, or any shares ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such stock upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. 7 (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of the Corporation unless the Corporation could, under paragraph 4(a) of this Section C, purchase or otherwise acquire such shares at such time and in such manner. 5. Reacquired Shares. Any Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and, upon the filing of any certificate that may be required by Delaware law, canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth in this Article IV or any resolution providing for the creation of any series of Preferred Stock adopted pursuant thereto or as otherwise required by law. 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (a) to the holders of shares ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of Series A Preferred Stock shall have received $6,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock, or (b) to the holders of shares ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity shares in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (a) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of Common Stock that were outstanding immediately prior to such event. 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other shares or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of shares, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Shares payable in shares of Common Stock, or effect a 8 subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 8. No Redemption. The Series A Preferred Stock shall not be redeemable. 9. Conversion. The Series A Preferred Stock shall not be convertible into Common Stock or shares of any other series of any other class of Preferred Stock. 10. Rank. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of Preferred Stock, unless the terms of any such series shall provide otherwise. 11. Amendment. This Amended and Restated Certificate of Incorporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding Series A Preferred Stock, voting together as a single class. ARTICLE V BOARD OF DIRECTORS A. ELECTION AND REMOVAL OF DIRECTORS 1. The Board of Directors shall consist 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 any such resolution is presented to the Board for adoption), provided, however, this provision shall not act to limit Board size in the event the holders of one or more series of Preferred Stock are entitled to elect directors to the exclusion of holders of Common Stock. The directors shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, as may be provided in the manner specified in the Bylaws, Class I Directors to hold office initially for a term expiring at the annual meeting of stockholders to be held in 2001, Class II Directors to hold office initially for a term expiring at the annual meeting of stockholders to be held in 2002, and Class III Directors to hold office initially for a term expiring at the annual meeting of stockholders to be held in 2003, with the members of each class to hold office until their successors are duly elected and qualified. At each annual meeting of the stockholders of the Corporation, the successors to the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. 2. Notwithstanding the foregoing and except as otherwise provided by law, 9 whenever the holders of any series of Preferred Stock shall have the right (to the exclusion of holders of Common Stock) to elect directors of the Corporation pursuant to the provisions of Article IV or any resolution adopted pursuant thereto, the election of such directors of the Corporation shall be governed by the terms and provisions of Article IV or said resolutions and such directors so elected shall not be divided into classes pursuant to this Subsection A.2 of Article V and shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the first year following their election or, if such right of the holders of the Preferred Stock is terminated, for a term expiring in accordance with the provisions of Article IV or such resolutions. 3. 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, Article IV or any resolution adopted pursuant to Article IV 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 combined voting powers of the outstanding shares of stock of the Corporation entitled to vote generally; provided, however, that when (a) pursuant to the provisions of Article IV or any resolutions adopted pursuant thereto, the holders of any series of Preferred Stock have the right (to the exclusion of holders of the Common Stock), and have exercised such right, to elect directors and (b) Delaware General Corporation Law, Article IV or any such resolution expressly confers on stockholders voting rights as aforesaid, if the directorship to be filled had been occupied by a director elected by the 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 in accordance with Article IV or the applicable resolutions adopted under Article IV. Any director elected in accordance with the two preceding sentences shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified unless such director was elected by holders of Preferred Stock (acting to the exclusion of the holders of Common Stock), in which case such director's term shall expire in accordance with Article IV or the applicable resolutions adopted pursuant to Article IV. No decrease in the number of authorized directors constituting the entire Board of Directors shall shorten the term of any incumbent director, except as otherwise provided in Article IV or the applicable resolutions adopted pursuant to Article IV with respect to directorships created pursuant to one or more series of Preferred Stock. 4. Subject to the rights of the holders of any series of Preferred Stock to elect directors under specified circumstances, any director or 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 the Corporation entitled to vote generally, voting together as a single class (it being understood that for all purposes of this Article V, each share of Preferred Stock shall have the number of votes, if any, granted to it pursuant to this Amended and Restated Certificate of Incorporation or any resolution adopted pursuant to Article IV). 10 5. Notwithstanding any other provision of this Amended and Restated Certificate of Incorporation 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 stock of the Corporation required by law, this Amended and Restated Certificate of Incorporation or any resolution adopted pursuant to Article IV, 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 this Article V, or any provision hereof. B. Liability, Indemnification and Insurance 1. Limitation on Liability. To the fullest extent that the Delaware General Corporation Law as it exists on the date hereof or as it may hereafter be amended permits the limitation or elimination of the personal liability of directors, no director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. No amendment to or repeal of this Section B.1 shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. 2. Right to Indemnification. The Corporation shall to the fullest extent permitted by applicable law as then in effect indemnify any person (the Indemnitee) who was or is involved in any manner (including, without limitation, as a party or a witness) or is threatened to be made so involved in any threatened, pending or completed investigation, claim, action, suit or proceeding, whether civil, criminal, administrative or investigative (including, without limitation, any action, suit or proceeding by or in the right of the Corporation to procure a judgment in its favor) (a "Proceeding") by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or of NiSource Corporate Services Company or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (including, without limitation, any employee benefit plan) against all expenses including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such Proceeding. Such indemnification shall be a contract right and shall include the right to receive payment of any expenses incurred by the Indemnitee in connection with such Proceeding in advance of its final disposition, consistent with the provisions of applicable law as then in effect. 3. Insurance, Contracts and Funding. The Corporation may purchase and maintain insurance to protect itself and any Indemnitee against any expenses, judgments, fines and amounts paid in settlement as specified in Subsection B.2 of this Section B or incurred by any Indemnitee in connection with any Proceeding referred to in Subsection B.2 of this Section B, to the fullest extent permitted by applicable law as then in effect. The Corporation may enter into contracts with any director, officer, employee or agent of the Corporation in furtherance of the provisions of this Section B and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Section B. 4. Indemnification; No Exclusive Right. The right of indemnification provided in this Section B shall not be exclusive of any other rights to which those seeking indemnification 11 may otherwise be entitled, and the provisions of this Section B shall inure to the benefit of the heirs and legal representatives of any person entitled to indemnity under this Section B and shall be applicable to Proceedings commenced or continuing after the adoption of this Section B, whether arising from acts or omissions occurring before or after such adoption. 5. Advancement of Expenses; Procedures; Presumptions and Effect of Certain Proceedings; Remedies. In furtherance, but not in limitation of the foregoing provisions, the following procedures, presumptions and remedies shall apply with respect to advancement of expenses and the right to indemnification under this Section B: (a) Advancement of Expenses. All reasonable expenses incurred by or on behalf of the Indemnitee in connection with any Proceeding shall be advanced to the Indemnitee by the Corporation within twenty (20) days after the receipt by the Corporation of a statement or statements from the Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the expenses incurred by the Indemnitee and, if required by law at the time of such advance, shall include or be accompanied by an undertaking by or on behalf of the Indemnitee to repay the amounts advanced if it should ultimately be determined that the Indemnitee is not entitled to be indemnified against such expenses pursuant to this Section B. (b) Procedure for Determination of Entitlement to Indemnification. (i) To obtain indemnification under this Section B, an Indemnitee shall submit to the Secretary of the Corporation a written request, including such documentation and information as is reasonably available to the Indemnitee and reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification (the "Supporting Documentation"). The determination of the Indemnitee's entitlement to indemnification shall be made not later than sixty (60) days after receipt by the Corporation of the written request for indemnification together with the Supporting Documentation. The Secretary of the Corporation shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that the Indemnitee has requested indemnification. (ii) The Indemnitee's entitlement to indemnification under this Section B shall be determined in one of the following ways: (A) by a majority vote of the Disinterested Directors (as hereinafter defined), even if they constitute less than a quorum of the Board; (B) by a written opinion of Independent Counsel (as hereinafter defined) if (x) a Change of Control (as hereinafter defined) shall have occurred and the Indemnitee so requests or (y) there are no Disinterested Directors or a majority of such Disinterested Directors so directs; (C) by the stockholders of the Corporation (but only if a majority of the Disinterested Directors presents the issue of entitlement to indemnification to the stockholders for their determination); or (D) as provided in Section B.5(c). 12 (iii) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section B.5(b)(ii), a majority of the Disinterested Directors shall select the Independent Counsel (except that if there are no Disinterested Directors, the Corporation's General Counsel shall select the Independent Counsel), but only an Independent Counsel to which the Indemnitee does not reasonably object; provided, however, that if a Change of Control shall have occurred, the Indemnitee shall select such Independent Counsel, but only an Independent Counsel to which the Board of Directors does not reasonably object. (iv) The only basis upon which a finding of no entitlement to indemnification may be made is that indemnification is prohibited by law. (c) Presumptions and Effect of Certain Proceedings. Except as otherwise expressly provided in this Section B, if a Change of Control shall have occurred, the Indemnitee shall be presumed to be entitled to indemnification under this Section B upon submission of a request for indemnification together with the Supporting Documentation in accordance with Section B.5(b)(i), and thereafter the Corporation shall have the burden of proof to overcome that presumption in reaching a contrary determination. In any event, if the person or persons empowered under Section B.5(b) to determine entitlement to indemnification shall not have been appointed or shall not have made a determination within sixty (60) days after receipt by the Corporation of the request therefor together with the Supporting Documentation, the Indemnitee shall be deemed to be entitled to indemnification and the Indemnitee shall be entitled to such indemnification unless (A) the Indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (B) such indemnification is prohibited by law. The termination of any Proceeding described in Section B.2, or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, adversely affect the right of the Indemnitee to indemnification or create a presumption that the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation or, with respect to any criminal Proceeding, that the Indemnitee had reasonable cause to believe that the Indemnitee's conduct was unlawful. (d) Remedies of Indemnitee. (i) In the event that a determination is made, pursuant to Section B.5(b) that the Indemnitee is not entitled to indemnification under this Section B, (A) the Indemnitee shall be entitled to seek an adjudication of his entitlement to such indemnification either, at the Indemnitee's sole option, in (x) an appropriate court of the State of Delaware or any other court of competent jurisdiction or (y) an arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association; (B) any such judicial Proceeding or arbitration shall be de novo and the Indemnitee shall not be prejudiced by reason of such adverse determination; and (C) in any such judicial Proceeding or arbitration the 13 Corporation shall have the burden of proving that the Indemnitee is not entitled to indemnification under this Section B. (ii) If a determination shall have been made or deemed to have been made, pursuant to Section B.5(b) or (c), that the Indemnitee is entitled to indemnification, the Corporation shall be obligated to pay the amounts constituting such indemnification within five (5) days after such determination has been made or deemed to have been made and shall be conclusively bound by such determination unless (A) the Indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (B) such indemnification is prohibited by law. In the event that (x) advancement of expenses is not timely made pursuant to Section B.5(a) or (y) payment of indemnification is not made within five (5) days after a determination of entitlement to indemnification has been made or deemed to have been made pursuant to Section B.5(b) or (c), the Indemnitee shall be entitled to seek judicial enforcement of the Corporation's obligation to pay to the Indemnitee such advancement of expenses or indemnification. Notwithstanding the foregoing, the Corporation may bring an action, in an appropriate court in the State of Delaware or any other court of competent jurisdiction, contesting the right of the Indemnitee to receive indemnification hereunder due to the occurrence of an event described in subclause (A) or (B) of this clause (ii) (a "Disqualifying Event"); provided, however, that in any such action the Corporation shall have the burden of proving the occurrence of such Disqualifying Event. (iii) The Corporation shall be precluded from asserting in any judicial Proceeding or arbitration commenced pursuant to this Section B.5(d) that the procedures and preemptions of this Section B are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Corporation is bound by all the provisions of this Section B. (iv) In the event that the Indemnitee, pursuant to this Section B.5(d), seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Section B, the Indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any expenses actually and reasonably incurred by the Indemnitee if the Indemnitee prevails in such judicial adjudication or arbitration. If it shall be determined in such judicial adjudication or arbitration that the Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by the Indemnitee in connection with such judicial adjudication or arbitration shall be prorated accordingly. (e) Definitions. For purposes of this Section B.5: (i) "Change in Control" means (A) so long as the Public Utility Holding Company Act of 1935 is in effect, any "company" becoming a "holding company in respect to the Corporation or any determination by the Securities and 14 Exchange Commission that any "person" should be subject to the obligations, duties, and liabilities if imposed by said Act by virtue of his, hers or its influence over the management or policies of the Corporation, or (B) whether or not said Act is in effect a change in control of the Corporation of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), whether or not the Corporation is then subject to such reporting requirement; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing ten percent or more of the combined voting power of the Corporation's then outstanding securities without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such acquisition; (ii) the Corporation is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors. (ii) "Disinterested Director" means a director of the Corporation who is not or was not a party to the Proceeding in respect of which indemnification is sought by the Indemnitee. (iii) "Independent Counsel" means a law firm or a member of a law firm that neither presently is, nor in the past five years has been, retained to represent: (A) the Corporation or the Indemnitee in any matter material to either such party or (B) any other party to the Proceeding giving rise to a claim for indemnification under this Section B. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing under Delaware law, would have a conflict of interest in representing either the Corporation or the Indemnitee in an action to determine the Indemnitee's rights under this Section B. 6. Severability. If any provision or provisions of this Section B shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (i) the validity, legality and enforceability of the remaining provision of this Section B (including, without limitation, all portions of any paragraph of this Section B containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (ii) to the fullest extent possible, the provisions of this Section B (including, without limitation, all portions of any paragraph of this Section B 15 containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 7. Successor Laws, Regulations and Agencies. Reference herein to laws, regulations or agencies shall be deemed to include all amendments thereof, substitutions therefor and successors thereto. ARTICLE VI GENERAL POWERS OF THE BOARD OF DIRECTORS A. BYLAWS The Board of Directors shall have the power to make, alter, amend and repeal the Bylaws of the Corporation in such form and with such terms as the Board may determine, subject to the power granted to stockholders to alter or repeal the Bylaws provided under Delaware law; provided, however, that, notwithstanding any other provision of this Amended and Restated Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, 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 any provision of the Bylaws which is to the same effect as any one or more sections of this Article VI. B. Charter Amendments Subject to the provisions hereof, the Corporation, through its Board of Directors, reserves the right at any time, and from time to time, to amend, alter, repeal or rescind any provision contained in this Amended and Restated Certificate of Incorporation in the manner now or hereinafter prescribed by law, and any other provisions authorized by Delaware law at the time enforced may be added or inserted, in the manner now or hereinafter prescribed by law, and any and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Amended and Restated Certificate of Incorporation in its present form or as hereinafter amended are granted subject to the rights reserved in this Article. 16 EX-3.2 4 c83669exv3w2.txt AMENDED AND RESTATED BY-LAWS EXHIBIT 3.2 NISOURCE INC. AMENDED AND RESTATED BY-LAWS AS AMENDED OCTOBER 23, 2001 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 EX-10.2 5 c83669exv10w2.txt EXECUTIVE DEFERRED COMPENSATION PLAN EXHIBIT 10.2 NISOURCE INC. EXECUTIVE DEFERRED COMPENSATION PLAN EFFECTIVE JANUARY 1, 2004 . . . TABLE OF CONTENTS
PAGE ---- ARTICLE I PURPOSE; EFFECTIVE DATE................................................................... 1 1.1 Purpose....................................................................................... 1 1.2 Effective Date................................................................................ 1 ARTICLE II DEFINITIONS............................................................................... 1 2.1 Account....................................................................................... 1 2.2 Beneficiary................................................................................... 2 2.3 Code.......................................................................................... 2 2.4 Committee..................................................................................... 2 2.5 Company....................................................................................... 2 2.6 Compensation.................................................................................. 2 2.7 Deferral Commitment........................................................................... 2 2.8 Deferral Period............................................................................... 2 2.9 Determination Date............................................................................ 2 2.10 Discretionary Contribution.................................................................... 2 2.11 Election Form................................................................................. 3 2.12 Employer...................................................................................... 3 2.13 Participant................................................................................... 3 2.14 Plan.......................................................................................... 3 2.15 Retirement Committee.......................................................................... 3 2.16 Severe Financial Hardship..................................................................... 3 2.17 Gender and Number............................................................................. 3 ARTICLE III MERGER OF NISOURCE PLAN AND OTHER PLANS................................................... 4 3.1 Bay State Plan................................................................................ 4 3.2 Columbia Plan................................................................................. 4 ARTICLE IV PARTICIPATION AND DEFERRAL COMMITMENTS.................................................... 4 4.1 Eligibility and Participation................................................................. 4 4.2 Form and Amount of Deferral................................................................... 5 4.3 Deferral Options.............................................................................. 6 4.4 Modification of Deferral Commitment........................................................... 6 4.5 Change in Employment Status................................................................... 6 ARTICLE V DEFERRED COMPENSATION ACCOUNT............................................................. 6 5.1 Account....................................................................................... 6 5.2 Timing of Credits; Withholding................................................................ 6 5.3 Discretionary Contributions................................................................... 7 5.4 Determination of Account...................................................................... 7 5.5 Vesting of Account............................................................................ 7 5.6 Statement of Account.......................................................................... 8 ARTICLE VI INVESTMENTS............................................................................... 8 6.1 Investment Options............................................................................ 8
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PAGE ---- 6.2 Special Investment Option for Former Participants in the Bay State Plan and Participants in the Plan...................................................................... 8 6.3 Special Investment Option for Former Participants in the Columbia Plan........................ 9 ARTICLE VII PLAN BENEFITS............................................................................. 10 7.1 Distributions Prior to Termination of Employment.............................................. 10 7.2 Distributions Following Termination of Employment............................................. 11 7.3 Form of Benefit Payment....................................................................... 11 7.4 Valuation and Settlement...................................................................... 12 7.5 Modification of Distribution.................................................................. 13 7.6 Distribution Provisions Applicable to a Transferred Bay State Account......................... 13 7.7 Withholding for Taxes......................................................................... 14 7.8 Payment to Guardian........................................................................... 14 ARTICLE VIII BENEFICIARY DESIGNATION................................................................... 15 8.1 Beneficiary Designation....................................................................... 15 8.2 Changing Beneficiary.......................................................................... 15 8.3 Community Property............................................................................ 15 8.4 No Beneficiary Designation.................................................................... 16 ARTICLE IX ADMINISTRATION............................................................................ 17 9.1 Committee; Duties............................................................................. 17 9.2 Agents........................................................................................ 17 9.3 Binding Effect of Decisions................................................................... 17 9.4 Indemnity of Retirement Committee............................................................. 17 ARTICLE X CLAIMS PROCEDURE.......................................................................... 18 10.1 Claim......................................................................................... 18 10.2 Review of Claim............................................................................... 18 10.3 Notice of Denial of Claim..................................................................... 18 10.4 Reconsideration of Denied Claim............................................................... 19 10.5 Employer to Supply Information................................................................ 20 ARTICLE XI AMENDMENT AND TERMINATION OF PLAN......................................................... 20 11.1 Amendment..................................................................................... 20 11.2 Employer's Right to Terminate................................................................. 21 ARTICLE XII MISCELLANEOUS............................................................................. 22 12.1 Unfunded Plan................................................................................. 22 12.2 Company and Employer Obligations.............................................................. 22 12.3 Unsecured General Creditor.................................................................... 22 12.4 Trust Fund.................................................................................... 22 12.5 Nonassignability.............................................................................. 23 12.6 Not a Contract of Employment.................................................................. 23 12.7 Protective Provisions......................................................................... 24
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PAGE ---- 12.8 Governing Law................................................................................. 24 12.9 Validity...................................................................................... 24 12.10 Notice........................................................................................ 24 12.11 Successors.................................................................................... 24 12.12 Tax Savings Clause............................................................................ 25
iii NISOURCE INC. EXECUTIVE DEFERRED COMPENSATION PLAN ARTICLE I PURPOSE; EFFECTIVE DATE 1.1 PURPOSE. The purpose of this Executive Deferred Compensation Plan is to provide current tax planning opportunities as well as supplemental funds for retirement or death for selected employees of an Employer. It is intended that the Plan will aid in attracting and retaining employees of exceptional ability by providing them with these benefits. Effective November 1, 2000, the Bay State Gas Company Key Employee Deferred Compensation Plan (the "Bay State Plan") was merged into the NIPSCO Industries, Inc. Executive Deferred Compensation Plan (the "NIPSCO Plan"), and the NIPSCO Plan was renamed the NiSource Inc. Executive Deferred Compensation Plan (the "Plan"). Effective January 1, 2004, the Columbia Energy Group Deferred Compensation Plan (the "Columbia Plan") shall be merged into the Plan. 1.2 EFFECTIVE DATE. The Plan is effective as of January 1, 2004. ARTICLE II DEFINITIONS For the purposes of the Plan, the following terms shall have the meanings indicated, unless the context clearly indicates otherwise: 2.1 ACCOUNT. "Account" means the device used by an Employer to measure and determine the amount to be paid to a Participant under the Plan. Each account shall be divided into a NiSource Account containing contributions to the Plan and, if applicable, a Transferred Bay State Account containing any amount transferred from the Bay State Plan or a Transferred Columbia Account containing any amount transferred from the Columbia Plan. 2.2 BENEFICIARY. "Beneficiary" means the person, persons or entity entitled under Article VIII to receive any Plan benefits payable after a Participant's death. 2.3 CODE. "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.4 COMMITTEE. "Committee" means the Nominating and Compensation Committee of the Board of Directors of the Company. 2.5 COMPANY. "Company" means NiSource Inc., a Delaware corporation. 2.6 COMPENSATION. "Compensation" means base salary and incentive awards paid to a Participant during the calendar year, before reduction for amounts deferred under the Plan or any other salary reduction program. Compensation does not include expense reimbursements, any form of noncash compensation, or benefits. Compensation does not include lump severance payments or lump sum vacation payout. 2.7 DEFERRAL COMMITMENT. "Deferral Commitment" means a commitment made by a Participant to defer Compensation pursuant to Article IV. 2.8 DEFERRAL PERIOD. "Deferral Period" means each calendar year. 2.9 DETERMINATION DATE. "Determination Date" means each business day. 2.10 DISCRETIONARY CONTRIBUTION. "Discretionary Contribution" means the Employer contribution credited to a Participant's Account under Section 5.3. 2 2.11 ELECTION FORM. "Election Form" means the agreement submitted by a Participant to the Retirement Committee prior to the beginning of a Deferral Period, with respect to a Deferral Commitment made for such Deferral Period. 2.12 EMPLOYER. "Employer" means the Company and any subsidiary or affiliate of the Company designated by the Committee to participate in the Plan. 2.13 PARTICIPANT. "Participant" means any eligible individual who has elected to defer Compensation under the Plan. 2.14 PLAN. "Plan" means the NiSource Inc. Executive Deferred Compensation Plan, as set forth herein and as amended from time to time. 2.15 RETIREMENT COMMITTEE. "Retirement Committee" means a committee consisting of the Executive Vice President, Human Resources and Communications and the Vice President, Total Rewards of the Company. 2.16 SEVERE FINANCIAL HARDSHIP. "Severe Financial Hardship" means a financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent of the Participant, or loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. 2.17 GENDER AND NUMBER. Except when otherwise required by the context, any masculine terminology in this document shall include the feminine, and any singular terminology shall include the plural. 3 ARTICLE III MERGER OF NISOURCE PLAN AND OTHER PLANS 3.1 BAY STATE PLAN. As of November 1, 2000, the Bay State Plan was merged into the Plan. The balance of the account of each Bay State Plan participant, determined as of November 1, 2000, was transferred to the Plan and became the initial balance in such Participant's Transferred Bay State Account in the Plan. A Participant's Transferred Bay State Account shall be held, administered, invested, and distributed pursuant to the terms of the Plan. 3.2 COLUMBIA PLAN. As of January 1, 2004, the Columbia Plan was merged into the Plan. The balance of the account of each Columbia Plan participant, determined as of December 31, 2003, was transferred to the Plan and became the initial balance in such Participant's Transferred Columbia Account in the Plan. A Participant's Transferred Columbia Account shall be held, administered, invested, and distributed pursuant to the terms of the Plan. ARTICLE IV PARTICIPATION AND DEFERRAL COMMITMENTS 4.1 ELIGIBILITY AND PARTICIPATION. (a) Eligibility. Any employee who was eligible to participate in the Bay State Plan or the NIPSCO Plan as of October 31, 2000 remained eligible to participate in the Plan as of November 1, 2000. Any employee eligible to participate in the Columbia Plan or the Plan as of December 31, 2003 shall be eligible to participate in the Plan as of the Effective Date. From and after the Effective Date, eligibility to participate in the Plan for a Deferral Period shall be limited to (1) an employee in job scope level D2 or above, and (2) any other key employee of an Employer who is designated from time to time by the Committee. 4 (b) Participation. An eligible individual may elect to become a Participant in the Plan with respect to any Deferral Period by submitting an Election Form to the Retirement Committee during the annual enrollment period, established by the Retirement Committee, last preceding the beginning of the Deferral Period. (c) Part-Year Participation. When an individual first becomes eligible to become a Participant during a Deferral Period, an Election Form may be submitted to the Retirement Committee within thirty (30) days after the Retirement Committee notifies the individual of eligibility to participate. Such Election Form shall be effective beginning with regard to Compensation payable in the next payroll period or as soon as practicable following submission of such Election Form to the Retirement Committee. 4.2 FORM AND AMOUNT OF DEFERRAL. A Participant may elect Deferral Commitments in the Election Form as follows: (a) Salary Deferral Commitment. A salary Deferral Commitment for a Deferral Period shall be related to the base salary payable by an Employer to a Participant during that Deferral Period. The amount to be deferred shall be stated as a whole percentage of base salary from 5% to 80%. (b) Incentive Award Deferral Commitment. An incentive award Deferral Commitment for a Deferral Period shall be related to the incentive award payable to the Participant in that Deferral Period. The amount to be deferred shall be stated as a whole percentage of the incentive award from 5% to 100%. No Deferral Commitment shall be made subsequent to the date of a Participant's termination of employment with all Employers. 5 4.3 DEFERRAL OPTIONS. A Participant shall make an election in his Election Form as to the time and form of payment of the Deferral Commitment for each Deferral Period. A Participant shall not be required to designate the same time and form of payment for each Deferral Period. However, payments pursuant to a Deferral Commitment shall not be made or begin later than the Participant's date of termination of employment with all Employers. 4.4 MODIFICATION OF DEFERRAL COMMITMENT. Except as provided in Sections 7.1(a) and 7.5 below, Deferral Commitments shall be irrevocable. 4.5 CHANGE IN EMPLOYMENT STATUS. If the Committee determines that a Participant's performance is no longer at a level that deserves reward through participation in the Plan, but does not terminate the Participant's employment with an Employer, the Participant's existing Deferral Commitment shall terminate at the end of the current Deferral Period, and no new Deferral Commitment may be made by such Participant for any Deferral Period beginning after notice of such determination is given by the Committee. ARTICLE V DEFERRED COMPENSATION ACCOUNT 5.1 ACCOUNT. The Compensation deferred by a Participant under the Plan, any Discretionary Contributions and earnings thereon shall be credited to the Participant's Account. Separate subaccounts may be maintained to reflect different forms of distribution, investment options, levels of vesting, and forms of payment. The Account shall be a bookkeeping device utilized for the sole purpose of determining the benefits payable under the Plan and shall not constitute a separate fund of assets. 5.2 TIMING OF CREDITS; WITHHOLDING. A Participant's deferred Compensation shall be credited to the Participant's Account at the time it would have been payable to the Participant. 6 Any withholding of taxes or other amounts with respect to deferred Compensation that is required by state, federal or local law shall be withheld from the Participant's nondeferred Compensation to the maximum extent possible and any remaining amount shall reduce the amount credited to the Participant's Account. 5.3 DISCRETIONARY CONTRIBUTIONS. An Employer may make Discretionary Contributions to a Participant's Account. Discretionary Contributions shall be credited at such times and in such amounts as the Committee in its sole discretion shall determine. 5.4 DETERMINATION OF ACCOUNT. Each Participant's Account as of each Determination Date shall consist of the balance of the Account as of the immediately preceding Determination Date, adjusted as follows: (a) New Deferrals. The Account shall be increased by any deferred Compensation credited since such preceding Determination Date. (b) Discretionary Contributions. The Account shall be increased by any Discretionary Contributions credited since such preceding Determination Date. (c) Distributions. The Account shall be reduced by any benefits distributed from the Account to the Participant since such preceding Determination Date. (d) Valuation of Account. The Account shall be increased or decreased by the aggregate earnings, gains and losses on such Account since such preceding Determination Date. 5.5 VESTING OF ACCOUNT. Each Participant shall be vested in the amounts credited to such Participant's Account and earnings thereon as follows: 7 (a) Amounts Deferred. A Participant shall be one hundred percent (100%) vested at all times in the amount of Compensation elected to be deferred under the Plan, and earnings thereon. (b) Discretionary Contributions. A Participant's Discretionary Contributions, and earnings thereon, shall become vested as determined by the Committee. (c) Transferred Account. A Participant shall be one hundred percent (100%) vested at all times in the balance of his Transferred Bay State Account or Transferred Columbia Account, if any. 5.6 STATEMENT OF ACCOUNT. The Retirement Committee shall give to each Participant a statement showing the balance in the Participant's Account on a quarterly basis and at such other times as may be determined by the Retirement Committee. ARTICLE VI INVESTMENTS 6.1 INVESTMENT OPTIONS. Amounts credited hereunder to the Account of a Participant shall be invested as such Participant elects among the investment choices set forth on Exhibit A or available pursuant to Sections 6.2 and 6.3. No election of a Deferral Commitment by a Participant shall be effective until such time as the Participant submits his initial investment election to the Company. Such investment election shall continue to apply to subsequent Deferral Commitments made by the Participant until changed by the Participant. 6.2 SPECIAL INVESTMENT OPTION FOR FORMER PARTICIPANTS IN THE BAY STATE PLAN AND PARTICIPANTS IN THE PLAN. Former participants in the Bay State Plan who became Participants in the Plan, or Participants in the Plan, on November 1, 2000, shall have an additional special 8 investment option applicable solely to their Transferred Bay State Account balances, or their Account balances in the Plan, valued as of November 1, 2000, and any subsequent amounts contributed to such Participant's Account. Such Participants may invest their Transferred Bay State Account balances, or their Account balances in the Plan as of November 1, 2000, and any subsequent amounts contributed to such Participant's Account, in a subaccount which shall be credited with earnings equal to one (1) percentage point higher than the effective annual yield of the average of the Moody's Average Corporate Bond Yield Index for the previous calendar month as published by Moody's Investor Services, Inc. (or any successor publisher thereto), or, if such index is no longer published, a substantially similar index selected by the Committee. A Participant's Transferred Bay State Account balance, or his Account balance in the Plan on November 1, 2000, shall be invested pursuant to this special investment option from and after November 1, 2000 and until such time as another investment choice is designated by him pursuant to Section 6.1 with respect to all or a portion of his Transferred Bay State Account, or his Account balance in the Plan on November 1, 2000. Subsequent amounts contributed to any such Participant's Account may be invested pursuant to this option as designated by the Participant pursuant to Section 6.1. However, any portion of a Transferred Bay State Account, or an Account balance in the Plan, subsequently transferred from the investment option described in this Section 6.2 to another investment option may not be reinvested under this Section 6.2. 6.3 SPECIAL INVESTMENT OPTION FOR FORMER PARTICIPANTS IN THE COLUMBIA PLAN. Former participants in the Columbia Plan who become Participants in the Plan on January 1, 2004 shall have an additional special investment option applicable solely to their Transferred Columbia Account balances, valued as of January 1, 2004. Such Participants may invest all or any portion of their Transferred Columbia Account balances in a subaccount which shall be 9 credited each day with earnings equal to the prime rate of interest in effect as of such business day, as listed in The Wall Street Journal. All or the designated portion of a Participant's Transferred Columbia Account balance shall be invested pursuant to this special investment option from and after January 1, 2004 and until such time as another investment choice is designated by him pursuant to Section 6.1 with respect to all or a portion of his Transferred Columbia Account. Any portion of a Transferred Columbia Account subsequently transferred from the investment option described in this Section 6.3 to another investment option may not be reinvested under the investment option described in this Section 6.3. Amounts contributed to any such Participant's Account on or after January 1, 2004 shall not be eligible for the investment option described in this Section 6.3. ARTICLE VII PLAN BENEFITS 7.1 DISTRIBUTIONS PRIOR TO TERMINATION OF EMPLOYMENT. A Participant's Account may be distributed to the Participant prior to termination of employment as follows: (a) Hardship Distributions. Upon a finding that a Participant has suffered a Severe Financial Hardship, the Retirement Committee may, in its sole discretion, make distributions from the Participant's Account (including his Transferred Bay State Account or Transferred Columbia Account, if applicable) or allow a Participant to suspend entirely his Deferral Commitment. The amount of such a distribution shall be limited to the amount reasonably necessary to meet the Participant's needs resulting from the Severe Financial Hardship. Any distribution pursuant to this Section 7.1(a) shall be payable in a lump sum. The distribution shall be paid within thirty (30) days after the determination of a Severe Financial Hardship. 10 (b) Deferral to Designated Year. The Employer shall pay the Participant an amount of a Deferral Commitment and earnings thereon not paid pursuant to Section 7.1(a) in the year designated by the Participant in such Deferral Commitment. Such amount shall be payable in the manner provided in Sections 7.3 and 7.6 and at the time provided in Section 7.4. 7.2 DISTRIBUTIONS FOLLOWING TERMINATION OF EMPLOYMENT. Upon a Participant's termination of employment with an Employer for any reason, the Employer shall pay the Participant, or in the case of death the Participant's Beneficiary, an amount equal to the balance in the Participant's Account. Such amount shall be payable in the manner provided in Sections 7.3 and 7.6 and at the time provided in Section 7.4. 7.3 FORM OF BENEFIT PAYMENT. (a) Subject to Section 8.3(c), the amount of a Deferral Commitment and earnings thereon not paid pursuant to Section 7.1(a) shall be paid (1) in the year designated by the Participant in such Deferral Commitment, or (2) following termination of employment, as applicable, to the Participant (or to his Beneficiary in the case of his death) in the form selected by the Participant in his Election Form at the time of the Deferral Commitment. Options include: (i) A lump sum payment. (ii) Equal annual installments over a period of not more than fifteen (15) years. (b) In the event a Participant's Account balance at the time distribution begins, or following a distribution pursuant to subsection (a)(ii) above, is fifteen thousand 11 dollars ($15,000) or less, that balance shall be paid to the Participant or his Beneficiary in a lump sum on the next annual installment distribution date notwithstanding any form of benefit payment elected by the Participant. 7.4 VALUATION AND SETTLEMENT. (a) Lump Sum in Designated Year. The amount of a lump sum payment in a designated year pursuant to Section 7.1(b) shall be based on the value of the Participant's Account, or a Deferral Commitment and earnings thereon, as of the March 15th of such designated year. The distribution date shall be March 31st of such year or as soon as practicable thereafter. (b) Lump Sum Following Termination. The amount of a lump sum payment following termination of employment pursuant to Section 7.2 shall be based on the value of the Participant's Account, or a Deferral Commitment and earnings thereon, on the date of termination. The distribution date shall be as soon as practicable after the Participant's date of termination of employment. (c) Installments. The amount of an installment payment, pursuant to Section 7.1(b) or 7.2, shall be based on the value of the Participant's Account, or a Deferral Commitment and earnings thereon, as of the March 15th preceding distribution of each such installment. The distribution date shall be each subsequent March 31st or as soon as practicable thereafter. 7.5 MODIFICATION OF DISTRIBUTION. Notwithstanding any other provision of the Plan, a Participant may modify his election as to the form or time of commencement of payment of his entire Account, or of any Deferral Commitment under the Plan and earnings thereon, by a 12 writing filed with the Retirement Committee at any time prior to the commencement of payment. A Participant's modification of his election as to the form or time of commencement of payment shall be ineffective, unless (1) the modification election is filed with the Retirement Committee more than twelve (12) months prior to the time of commencement of payment, or (2) a Participant elects by written instrument delivered to the Company prior to the time of commencement of payment to have his Account or the applicable Deferral Commitment reduced by 10%. This reduction shall be forfeited and used by the Plan to reduce expenses of administration. This reduction is intended to discourage a Participant from modifying his election as to the form or time of commencement of payment within the period set forth in clause (1) above and prevent him from being deemed in constructive receipt of his Account prior to its actual payment to him. 7.6 DISTRIBUTION PROVISIONS APPLICABLE TO A TRANSFERRED BAY STATE ACCOUNT. Notwithstanding any other provision in the Plan, the following provisions shall apply to the form and time of payment of the balance of a Transferred Bay State Account: (a) The portion of a Transferred Bay State Account not paid pursuant to paragraph (a) of Section 7.1, shall be paid to a Participant following his termination of employment, or to his Beneficiary in the case of death, in the form selected by the Participant, by written instrument delivered to the Retirement Committee before November 1, 2000. If no form is selected by the Participant, payment shall be made in a lump sum. The provisions of Sections 7.3 and 7.5 shall apply with respect to the election of the form of payment of a Transferred Bay State Account and the modification of such election. 13 (b) Any former employee of Bay State Gas Company who (1) was a participant in the Bay State Plan immediately prior to November 1, 2000, (2) terminated employment with Bay State Gas Company prior to November 1, 2000 for any reason other than Retirement, death or Disability (as such terms were defined in the Bay State Plan immediately prior to November 1, 2000), and (3) as of November 1, 2000 had not commenced payment of his Account, shall not commence payment of his Transferred Bay State Account until the earlier of the Participant's attainment of age 65, Disability or death. Notwithstanding the preceding sentence, the Retirement Committee may, in its sole discretion, vary the manner and time of making the payment of a Participant's Transferred Bay State Account to such former Bay State employee, and may make such distributions over a longer or shorter period of time or in a lump sum. 7.7 WITHHOLDING FOR TAXES. To the extent required by the law in effect at the time payments are made, an Employer shall withhold from the payments made hereunder any taxes required to be withheld by the federal or any state or local government, including any amounts which the Employer determines is reasonably necessary to pay any generation-skipping transfer tax which is or may become due. A Beneficiary, however, may elect not to have withholding of federal income tax pursuant to Code Section 3405(a)(2). 7.8 PAYMENT TO GUARDIAN. The Retirement Committee may direct payment to the duly appointed guardian, conservator or other similar legal representative of a Participant or Beneficiary to whom payment is due. In the absence of such a legal representative, the Retirement Committee may, in its sole and absolute discretion, make payment to a person having the care and custody of a minor, incompetent or person incapable of handling the disposition of property upon proof satisfactory to the Retirement Committee of incompetency, minority or 14 incapacity. Such distribution shall completely discharge the Company from all liability with respect to such benefit. ARTICLE VIII BENEFICIARY DESIGNATION 8.1 BENEFICIARY DESIGNATION. Subject to Section 8.3, each Participant shall have the right, at any time, to designate one (1) or more persons or an entity as Beneficiary (both primary as well as secondary) to whom benefits under the Plan shall be paid in the event of the Participant's death prior to complete distribution of the Participant's Account. Each Beneficiary designation shall be in a written form prescribed by the Retirement Committee and shall be effective only when filed with the Retirement Committee during the Participant's lifetime. 8.2 CHANGING BENEFICIARY. Subject to Section 8.3, any Beneficiary designation may be changed by a Participant without the consent of the previously named Beneficiary by the filing of a new designation with the Retirement Committee. The filing of a new designation shall cancel all designations previously filed. 8.3 COMMUNITY PROPERTY. If the Participant resides in a community property state, the following rules shall apply: (a) Designation by a married Participant of a Beneficiary other than the Participant's spouse shall not be effective unless the spouse executes a written consent that acknowledges the effect of the designation, or it is established the consent cannot be obtained because the spouse cannot be located. 15 (b) A married Participant's Beneficiary designation may be changed by a Participant with the consent of the Participant's spouse as provided for in Section 8.3(a) by the filing of a new designation with the Retirement Committee. (c) If the Participant's marital status changes after the Participant has designated a Beneficiary, the following shall apply: (i) If the Participant is married at the time of death but was unmarried when the designation was made, the designation shall be void unless the spouse has consented to it in the manner prescribed in Section 8.3(a). (ii) If the Participant is unmarried at the time of death but was married when the designation was made: (A) The designation shall be void if the spouse was named as Beneficiary, unless the designation is reaffirmed when the Participant is unmarried. (B) The designation shall remain valid if a nonspouse Beneficiary was named. (iii) If the Participant was married when the designation was made and is married to a different spouse at death, the designation shall be void unless the new spouse has consented to it in the manner prescribed above. 8.4 NO BENEFICIARY DESIGNATION. If any Participant fails to designate a Beneficiary in the manner provided above, if the designation is void or if the Beneficiary designated by a deceased Participant dies before the Participant or before complete distribution of the Participant's benefits, the Participant's Beneficiary shall be the person in the first of the following classes in which there is a survivor: 16 (a) The Participant's spouse; (b) The Participant's children in equal shares, except that if any of the children predeceases the Participant but leaves issue surviving, then such issue shall take by right of representation the share the parent would have taken if living; (c) The Participant's estate. ARTICLE IX ADMINISTRATION 9.1 COMMITTEE; DUTIES. The Plan shall be administered by the Retirement Committee. The Retirement Committee shall have the authority to make, amend, interpret, and enforce all appropriate rules and regulations for the administration of the Plan and decide or resolve any and all questions, including interpretations of the Plan, as may arise in such administration. Members of the Retirement Committee may be Participants under the Plan. 9.2 AGENTS. The Retirement Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit, and may from time to time consult with counsel who may be counsel to the Company. 9.3 BINDING EFFECT OF DECISIONS. The decision or action of the Retirement Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final, conclusive and binding upon all persons having any interest in the Plan. 9.4 INDEMNITY OF RETIREMENT COMMITTEE. The Company shall indemnify and hold harmless the members of the Retirement Committee against any and all claims, loss, damage, expense, or liability arising from any action or failure to act with respect to the Plan on account 17 of such person's service on the Retirement Committee, except in the case of gross negligence or willful misconduct. ARTICLE X CLAIMS PROCEDURE 10.1 CLAIM. The Retirement Committee shall establish rules and procedures to be followed by Participants and Beneficiaries in filing claims for benefits, and for furnishing and verifying proof necessary to establish the right to benefits in accordance with the Plan, consistent with the remainder of this Article. Such rules and procedures shall require that claims and proofs be made in writing and directed to the Retirement Committee. 10.2 REVIEW OF CLAIM. The Retirement Committee shall review all claims for benefits. Upon receipt by the Retirement Committee of such a claim, it shall determine all facts which are necessary to establish the right of the claimant to benefits under the provisions of the Plan and the amount thereof as herein provided within ninety (90) days of receipt of such claim. If prior to the expiration of the initial ninety (90) day period, the Retirement Committee determines additional time is needed to come to a determination on the claim, the Retirement Committee shall provide written notice to the Participant, Beneficiary or other claimant of the need for the extension, not to exceed a total of one hundred eighty (180) days from the date the application was received. 10.3 NOTICE OF DENIAL OF CLAIM. In the event that any Participant, Beneficiary or other claimant claims to be entitled to a benefit under the Plan, and the Retirement Committee determines that such claim should be denied in whole or in part, the Retirement Committee shall, in writing, notify such claimant that the claim has been denied, in whole or in part, setting forth the specific reasons for such denial. Such notification shall be written in a manner reasonably 18 expected to be understood by such claimant and shall refer to the specific sections of the Plan relied on, shall describe any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary, and where appropriate, shall include an explanation of how the claimant can obtain reconsideration of such denial. 10.4 RECONSIDERATION OF DENIED CLAIM. (a) Within sixty (60) days after receipt of the notice of the denial of a claim, such claimant or duly authorized representative may request, by mailing or delivery of such written notice to the Retirement Committee, a reconsideration by the Retirement Committee of the decision denying the claim. If the claimant or duly authorized representative fails to request such a reconsideration within such sixty (60) day period, it shall be conclusively determined for all purposes of the Plan that the denial of such claim by the Retirement Committee is correct. If such claimant or duly authorized representative requests a reconsideration within such sixty (60) day period, the claimant or duly authorized representative shall have thirty (30) days after filing a request for reconsideration to submit additional written material in support of the claim, review pertinent documents and submit issues and comments in writing. (b) After such reconsideration request, the Retirement Committee shall determine within sixty (60) days of receipt of the claimant's request for reconsideration whether such denial of the claim was correct and shall notify such claimant in writing of its determination. The written notice of decision shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, as well as specific references to the pertinent Plan provisions on which the 19 decision is based. In the event of special circumstances determined by the Retirement Committee, the time for the Retirement Committee to make a decision may be extended by an additional sixty (60) days upon written notice to the claimant prior to the commencement of the extension. If such determination is favorable to the claimant, it shall be binding and conclusive. If such determination is adverse to such claimant, it shall be binding and conclusive unless the claimant or his duly authorized representative notifies the Retirement Committee within ninety (90) days after the mailing or delivery to the claimant by the Retirement Committee of its determination that claimant intends to institute legal proceedings challenging the determination of the Retirement Committee and actually institutes such legal proceedings within one hundred eighty (180) days after such mailing or delivery. 10.5 EMPLOYER TO SUPPLY INFORMATION. To enable the Retirement Committee to perform its functions, each Employer shall supply full and timely information to the Retirement Committee of all matters relating to the retirement, death or other cause for termination of employment of all Participants, and such other pertinent facts as the Retirement Committee may require. ARTICLE XI AMENDMENT AND TERMINATION OF PLAN 11.1 AMENDMENT. The Committee may at any time amend the Plan by written instrument, notice of which is given to all Participants, and to Beneficiaries receiving installment payments. Notwithstanding the preceding sentence, no amendment shall reduce the amount accrued in any Account prior to the date such notice of the amendment is given. 20 11.2 EMPLOYER'S RIGHT TO TERMINATE. The Committee may at any time partially or completely terminate the Plan if, in its judgment, the tax, accounting or other effects of the continuance of the Plan, or potential payments thereunder, would not be in the best interests of the Employers. (a) Partial Termination. The Committee may partially terminate the Plan by instructing the Retirement Committee not to accept any additional Deferral Commitments. If such a partial termination occurs, the Plan shall continue to operate and be effective with regard to Deferral Commitments entered into prior to the effective date of such partial termination. (b) Complete Termination. The Committee may completely terminate the Plan by instructing the Retirement Committee not to accept any additional Deferral Commitments, and by terminating all ongoing Deferral Commitments. If such a complete termination occurs, the Plan shall cease to operate and the Employers shall pay out each Account. Payment shall be made in equal monthly installments over the following period, based on the Account balance:
ACCOUNT BALANCE PAYOUT PERIOD - --------------- ------------- Less than $50,000 Lump Sum $50,000 but less than $100,000 3 Years More than $100,000 5 Years
Payments shall commence within sixty-five (65) days after the Committee terminates the Plan and earnings shall continue to be credited on the unpaid Account balance. 21 ARTICLE XII MISCELLANEOUS 12.1 UNFUNDED PLAN. This Plan is an unfunded plan maintained primarily to provide deferred Compensation benefits for a select group of "management or highly-compensated employees" within the meaning of Sections 201, 301 and 401 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and therefore is exempt from the provisions of Parts 2, 3 and 4 of Title I of ERISA. 12.2 COMPANY AND EMPLOYER OBLIGATIONS. The obligation to make benefit payments to any Participant under the Plan shall be a joint and several liability of the Company and the Employer that employed the Participant. 12.3 UNSECURED GENERAL CREDITOR. Participants and Beneficiaries shall be unsecured general creditors, with no secured or preferential right to any assets of the Employer or any other party for payment of benefits under the Plan. Any life insurance policies, annuity contracts or other property purchased by the Employer in connection with the Plan shall remain its general, unpledged and unrestricted assets. The Employer's obligation under the Plan shall be an unfunded and unsecured promise to pay money in the future. 12.4 TRUST FUND. Subject to Section 12.3, the Company may establish separate subtrusts for deferrals by employees of each Employer, pursuant to a trust agreement entered into with such trustees as the Committee may approve, for the purpose of providing for the payment of benefits owed under the Plan. At its discretion, each Employer may contribute deferrals under the Plan for its employees to the subtrust established with respect to such Employer under such trust agreement. To the extent any benefits provided under the Plan are paid from any such subtrust, the Employer shall have no further obligation to pay them. If not paid from a subtrust, 22 such benefits shall remain the obligation of the Employer. Although such subtrusts may be irrevocable, their assets shall be held for payment of all the Company's general creditors in the event of insolvency or bankruptcy. 12.5 NONASSIGNABILITY. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage, or otherwise encumber, transfer, hypothecate, or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof or rights to, which are expressly declared to be unassignable and nontransferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony, or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. Notwithstanding the preceding paragraph, the Account of any Participant shall be subject to and payable in the amount determined in accordance with any qualified domestic relations order, as that term is defined in Section 206(d)(3) of the Employee Retirement Income Security Act of 1974, as amended. The Retirement Committee shall provide for payment in a lump sum from a Participant's Account to an alternate payee (as defined in Code Section 414(p)(8)) as soon as administratively practicable following receipt of such order. Any federal, state or local income tax associated with such payment shall be the responsibility of the alternate payee. The balance of an Account that is subject to any qualified domestic relations order shall be reduced by the amount of any payment made pursuant to such order. 12.6 NOT A CONTRACT OF EMPLOYMENT. The Plan shall not constitute a contract of employment between an Employer and the Participant. Nothing in the Plan shall give a 23 Participant the right to be retained in the service of an Employer or to interfere with the right of an Employer to discipline or discharge a Participant at any time. 12.7 PROTECTIVE PROVISIONS. A Participant shall cooperate with his Employer by furnishing any and all information requested by the Employer in order to facilitate the payment of benefits hereunder, and by taking such physical examinations as the Employer may deem necessary and taking such other action as may be requested by the Employer. 12.8 GOVERNING LAW. The provisions of the Plan shall be construed and interpreted according to the laws of the State of Indiana, except as preempted by federal law. 12.9 VALIDITY. In case any provision of the Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but the Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein. 12.10 NOTICE. Any notice required or permitted under the Plan shall be sufficient if in writing and hand delivered or sent by registered or certified mail. Such notice shall be deemed as given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Mailed notice to the Retirement Committee shall be directed to the Company's address. Mailed notice to a Participant or Beneficiary shall be directed to the individual's last known address in the applicable Employer's records. 12.11 SUCCESSORS. The provisions of the Plan shall bind and inure to the benefit of the Employers and their successors and assigns. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase, 24 or otherwise, acquire all or substantially all of the business and assets of an Employer, and successors of any such corporation or other business entity. 12.12 TAX SAVINGS CLAUSE. Notwithstanding anything to the contrary contained in the Plan, (1) in the event that the Internal Revenue Service prevails in its claim that amounts contributed to the Plan for the benefit of a Participant, and/or earnings thereon, constitute taxable income to the Participant or his Beneficiary for any taxable year, prior to the taxable year in which such contributions and/or earnings are distributed to him, or (2) in the event that legal counsel satisfactory to the Company and the applicable Participant or his Beneficiary renders an opinion that the Internal Revenue Service would likely prevail in such a claim, the assets in the Plan, to the extent constituting taxable income, shall be immediately distributed to the Participant or his Beneficiary. For purposes of this Section, the Internal Revenue Service shall be deemed to have prevailed in a claim if such claim is upheld by a court of final jurisdiction, or, if based upon an opinion of legal counsel satisfactory to the Company and the Participant or his Beneficiary, the Plan fails to appeal a decision of the Internal Revenue Service, or a court of applicable jurisdiction, with respect to such claim to an appropriate Internal Revenue Service appeals authority or to a court of higher jurisdiction within the appropriate time period. IN WITNESS WHEREOF, the Company has caused the Plan to be executed in its name by its duly authorized officer this 23rd day of January, 2003, effective as of the 1st day of January, 2004. NISOURCE INC. By: /s/ Gary L. Neale 25 EXHIBIT A INVESTMENT OPTIONS
FIDELITY BASED FUNDS -------------------- Contra Fund Equity Income Fund Growth & Income Fund Growth Company Fund Magellan Fund Small Cap Independence Fund Europe Fund Overseas Fund Pacific Basin Fund Freedom 2010 Fund Freedom 2020 Fund Freedom 2030 Fund Freedom 2040 Fund Freedom Income Fund Balanced Fund Puritan Fund Intermediate Bond Fund Spartan U.S. Equity Index Fund
NON FIDELITY FUNDS ------------------ American Funds EuroPacific Growth Fund Dreyfus Emerging Leaders Fund Janus Small Cap Value Inst. Fund Morgan Stanley IFT U.S. Small Cap Core Fund PIMCO Long Term Gov't Fund PIMCO Low Duration Fund PIMCO Total Return Fund Inst. PIMCO StocksPLUS Fund Inst. Vanguard U.S. Growth Fund Money Market Fund A-1 EX-10.6 6 c83669exv10w6.txt 1994 LONG-TERM INCENTIVE PLAN, AS AMENDED & RSTD EXHIBIT 10.6 NISOURCE INC. 1994 LONG-TERM INCENTIVE PLAN AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2004 NISOURCE INC. 1994 LONG-TERM INCENTIVE PLAN As Amended and Restated Effective January 1, 2004 TABLE OF CONTENTS
Page ---- 1. Purpose............................................................................................... -1- 2. Administration........................................................................................ -1- 3. Common Shares Subject to the Plan..................................................................... -1- 4. Participants.......................................................................................... -2- 5. Awards Under the Plan................................................................................. -2- 6. Section 162(m) Limitations............................................................................ -3- 7. NonQualified Stock Options............................................................................ -3- (a) Option Price.......................................................................................... -3- (b) Exercise of Option.................................................................................... -3- (c) Payment for Shares.................................................................................... -5- (d) Transferability....................................................................................... -4- (e) Rights Upon Termination of Employment................................................................. -4- 8. Incentive Stock Options............................................................................... -5- (a) Option Price.......................................................................................... -5- (b) Exercise of Option.................................................................................... -5- (c) Payment for Shares.................................................................................... -5- (d) Transferability....................................................................................... -6- (e) Rights Upon Termination of Employment................................................................. -6- 9. Stock Appreciation Rights............................................................................. -6- (a) Awards................................................................................................ -7- (b) Term.................................................................................................. -7- (c) Payment............................................................................................... -7- 10. Performance Units..................................................................................... -7- (a) Performance Period.................................................................................... -7- (b) Valuation of Units.................................................................................... -7- (c) Performance Targets................................................................................... -8- (d) Adjustments........................................................................................... -8-
-i- (e) Payments of Units..................................................................................... -8- (f) Termination of Employment............................................................................. -8- (g) Other Terms........................................................................................... -8- 11. Restricted Stock Awards............................................................................... -8- (a) Restriction Period.................................................................................... -9- (b) Restrictions Upon Transfer............................................................................ -9- (c) Certificates.......................................................................................... -9- (d) Lapse of Restrictions................................................................................. -9- (e) Termination Prior to Lapse of Restrictions............................................................ -9- 12. Contingent Stock Awards............................................................................... -10- (a) Restriction Period.................................................................................... -10- (b) Lapse of Restrictions................................................................................. -10- (c) Termination Prior to Lapse of Restrictions............................................................ -10- 13. Supplemental Cash Payments............................................................................ -10- 14. Dividend Equivalents.................................................................................. -11- 15. General Restrictions.................................................................................. -11- 16. Rights as a Shareholder............................................................................... -12- 17. Employment Rights..................................................................................... -12- 18. Tax Withholding....................................................................................... -12- 19. Change in Control..................................................................................... -12- 20. Amendment or Termination.............................................................................. -13- 21. Effect on Other Plans................................................................................. -13- 22. Assumption of Options................................................................................. -13- 23. Duration of the Plan.................................................................................. -14-
-ii- NISOURCE INC. 1994 LONG-TERM INCENTIVE PLAN (AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2004) WHEREAS, NiSource Inc. (formerly NIPSCO Industries, Inc.) (the "Company") adopted the NIPSCO Industries, Inc. 1994 Long-Term Incentive Plan effective April 13, 1994, as amended and restated effective April 14, 1999, and now known as the NiSource Inc. 1994 Long-Term Incentive Plan (the "Plan"); WHEREAS, the Company further amended and restated the Plan effective January 1, 2000, and subsequently amended the Plan effective January 1, 2001, October 1, 2001, January 1, 2002, March 1, 2003, and August 25, 2003; and WHEREAS, pursuant to Section 20 of the Plan, the Company wishes to further amend the Plan and restate it and all amendments thereto in a single document; NOW THEREFORE, the Plan is hereby amended and restated, effective January 1, 2004, as follows: 1. PURPOSE. The purpose of the NiSource Inc. 1994 Long-Term Incentive Plan (the "Plan") is to further the earnings of NiSource Inc. (the "Company") and its subsidiaries. The Plan provides long-term incentives to those officers and key executives who make substantial contributions by their ability, loyalty, industry and invention. The Company intends that the Plan will thereby facilitate securing, retaining, and motivating management employees of high caliber and potential. 2. ADMINISTRATION. The Plan shall be administered by the Nominating and Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board"). The Committee shall be composed of not fewer than two members of the Board who are "nonemployee directors" of the Company within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and "outside directors" of the Company within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, (the "Code"), and the regulations thereunder. Subject to the express provisions of the Plan, the Committee may interpret the Plan, prescribe, amend and rescind rules and regulations relating to it, determine the terms and provisions of awards to officers and other key executive employees under the Plan (which need not be identical), and make such other determinations as it deems necessary or advisable for the administration of the Plan. The decisions of the Committee under the Plan shall be conclusive and binding. No member of the Board or of the Committee shall be liable for any action taken, or determination made, hereunder in good faith. Service on the Committee shall constitute service as a director of the Company so that members of the Committee shall be entitled to indemnification and reimbursement as directors of the Company, pursuant to its by-laws. 3. COMMON SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of subsection 3(b), the shares that may be issued, or may be the measure of stock appreciation rights granted, under the Plan shall not exceed in the aggregate 21,000,000 of the common shares without par value of the Company (the "Common Shares"). Such shares may be authorized and unissued shares or treasury shares. Except as otherwise provided herein, any shares subject to an option or right which for any reason expires or is terminated, unexercised as to such shares, shall again be available under the Plan. (b) (i) Appropriate adjustments in the aggregate number of Common Shares issuable pursuant to the Plan, the number of Common Shares subject to each outstanding award granted under the Plan, the option price with respect to options and connected stock appreciation rights, the specified price of stock appreciation rights not connected to options, and the value for performance units, shall be made to give effect to any increase or decrease in the number of issued Common Shares resulting from a subdivision or consolidation of shares, whether through recapitalization, stock split, reverse stock split, spin-off, spin-out or other distribution of assets to stockholders, stock distributions or combinations of shares, payment of stock dividends, other increase or decrease in the number of such Common Shares outstanding effected without receipt of consideration by the Company, or any other occurrence for which the Committee determines an adjustment is appropriate. (ii) In the event of any merger, consolidation or reorganization of the Company with any other corporation or corporations, or an acquisition by the Company of the stock or assets of any other corporation or corporations, there shall be substituted on an equitable basis, as determined by the Committee in its sole discretion, for each Common Share then subject to the Plan, and for each Common Share then subject to an award granted under the Plan, the number and kind of shares of stock, other securities, cash or other property to which the holders of Common Shares of the Company are entitled pursuant to such transaction. (iii) Without limiting the generality of the foregoing provisions of this paragraph, any such adjustment shall be deemed to have prevented any dilution or enlargement of a participant's rights, if such participant receives in any such adjustment, rights that are substantially similar (after taking into account the fact that the participant has not paid the applicable option price) to the rights the participant would have received had he exercised his outstanding award and become a shareholder of the Company immediately prior to the event giving rise to such adjustment. Adjustments under this paragraph shall be made by the Committee, whose decision as to the amount and timing of any such adjustment shall be conclusive and binding on all persons. 4. PARTICIPANTS. Persons eligible to participate shall be limited to those officers and other key executive employees of the Company and its subsidiaries who are in positions in which their decisions, actions and counsel significantly impact upon profitability. Directors who are not otherwise officers or employees shall not be eligible to participate in the Plan. 5. AWARDS UNDER THE PLAN. Awards under the Plan may be in the form of stock options (both options designed to satisfy statutory requirements necessary to receive favorable tax -2- treatment pursuant to any present or future legislation and options not designed to so qualify), incentive stock options, stock appreciation rights, performance units, restricted shares, contingent stock awards, or such combinations of the above as the Committee may in its discretion deem appropriate. Except in accordance with equitable adjustments as provided in subsection 3(b), no stock option granted under the Plan shall at any time be repriced or subject to cancellation and replacement. 6. SECTION 162(m) LIMITATIONS. Subject to subsection 3(b) of the Plan, the maximum number of stock options and stock appreciation rights that may be granted to any person who qualifies as an executive officer named from time to time in the summary compensation table in the Company's annual meeting proxy statement and who is employed by the Company on the last day of the taxable year (the "SCT Executives") shall be 600,000 options and stock appreciation rights with respect to Common Shares per year and 3,000,000 options and stock appreciation rights with respect to Common Shares during the term of the Plan. The maximum number of performance units that may be granted to any SCT Executive shall be 400,000 units per year, provided that no more than 800,000 units may be granted in any three year period and the maximum number of units that may be granted to any SCT Executive during the term of the Plan shall be 1,500,000. The maximum number of restricted stock awards that may be granted to any SCT Executive shall be 400,000 Common Shares per year, provided that no more than 800,000 Shares of restricted stock may be granted in any three year period, and that the maximum number of Shares of restricted stock that may be granted to any SCT Executive during the term of the Plan shall be 1,500,000. The maximum number of contingent stock awards that may be granted to any SCT Executive shall be 400,000 Common Shares per year, provided that no more than 800,000 Common Shares may be subject to contingent stock awards granted in any three year period and the maximum number of Common Shares subject to contingent stock awards that may be granted to any SCT Executive during the term of the Plan shall be 1,500,000. 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 Code Section 162(m). 7. NONQUALIFIED STOCK OPTIONS. Options shall be evidenced by stock option agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) OPTION PRICE. The purchase price per Common Share deliverable upon the exercise of an option shall not be less than 100% of the fair market value of a Common Share on the day the option is granted, as determined by the Committee. Fair market value of Common Shares for purposes of the Plan shall be the average of the high and low prices on the New York Stock Exchange Composite Transactions on the date of the grant, or on any other applicable date. (b) EXERCISE OF OPTION. Each stock option agreement shall state the period or periods of time within which the option may be exercised by the optionee, in whole or in part, which shall be such period or periods of time as may be determined by the Committee, provided that the option exercise period shall not commence earlier than six months after the date of the grant of the option nor end later than ten years after the date of the grant of the option. The -3- Committee shall have the power to permit in its discretion an acceleration of the previously determined exercise terms, within the terms of the Plan, under such circumstances and upon such terms and conditions as it deems appropriate. (c) PAYMENT FOR SHARES. Except as otherwise provided in the Plan, or in any stock option agreement, the optionee shall pay the purchase price of the Common Shares upon the exercise of any option (i) in cash, (ii) in cash received from a broker-dealer to whom the optionee has submitted an exercise notice consisting of a fully endorsed option (however in the case of an optionee subject to Section 16 of the 1934 Act, this payment option shall only be available to the extent such payment procedures comply with Regulation T issued by the Federal Reserve Board), (iii) by delivering Common Shares owned by the optionee for at least six months prior to the date of exercise having an aggregate fair market value on the date of exercise equal to the option exercise price, (iv) by such other medium of payment as the Committee in its discretion shall authorize at the time of grant, or (v) by any combination of (i), (ii), (iii) and (iv). In the case of an election pursuant to (i) or (ii) above, cash shall mean cash or check issued by a federally insured bank or savings and loan association and made payable to NiSource Inc. In the case of payment pursuant to (ii) or (iii) above, the optionee's election must be made on or prior to the date of exercise and shall be irrevocable. In lieu of a separate election governing each exercise of an option, an optionee may file a blanket election with the Committee which shall govern all future exercises of options until revoked by the optionee. The Company shall issue, in the name of the optionee, stock certificates representing the total number of Common Shares issuable pursuant to the exercise of any option as soon as reasonably practicable after such exercise, provided that any Common Shares purchased by an optionee through a broker-dealer pursuant to clause (ii) above, shall be delivered to such broker-dealer in accordance with 12 C.F.R. Section 220.3(e)(4), or other applicable provision of law. (d) TRANSFERABILITY. Each stock option agreement shall provide that the option subject thereto is not transferable by the optionee otherwise than by will or the laws of descent or distribution. Notwithstanding the preceding sentence, an optionee, at any time prior to his death, may assign all or any portion of the option to (i) his spouse or lineal descendant, (ii) the trustee of a trust for the primary benefit of his spouse or lineal descendant, or (iii) a tax-exempt organization as described in Section 501(c)(3) of the Code. In such event the spouse, lineal descendant, trustee or tax-exempt organization will be entitled to all of the rights of the optionee with respect to the assigned portion of such option, and such portion of the option will continue to be subject to all of the terms, conditions and restrictions applicable to the option as set forth herein, and in the related stock option agreement, immediately prior to the effective date of the assignment. Any such assignment will be permitted only if (i) the optionee does not receive any consideration therefor, and (ii) the assignment is expressly approved by the Committee or its delegate. Any such assignment shall be evidenced by an appropriate written document executed by the optionee, and a copy thereof shall be delivered to the Committee or its delegate on or prior to the effective date of the assignment. This paragraph shall apply to all nonqualified stock options granted under the Plan at any time. (e) RIGHTS UPON TERMINATION OF EMPLOYMENT. In the event that an optionee ceases to be an employee for any reason other than death, disability or retirement, the optionee shall -4- have the right to exercise the option during its term within a period of thirty days after such termination to the extent that the option was exercisable at the date of such termination of employment, or during such other period and subject to such terms as may be determined by the Committee. In the event that an optionee dies, retires, or becomes disabled prior to termination of his option without having fully exercised his option, the optionee or his successor shall have the right to exercise the option during its term within a period of three years after the date of such termination due to death, disability or retirement, to the extent that the option was exercisable at the date of termination due to death, disability or retirement, or during such other period and subject to such terms as may be determined by the Committee. For purposes of the Plan, the term "disability" shall mean disability as defined in the Company's Long-Term Disability Plan. The Committee, in its sole discretion, shall determine the date of any disability. For purposes of the Plan, the term "retirement" shall mean retirement as defined in the Company's pension plan. 8. INCENTIVE STOCK OPTIONS. Incentive stock options shall be evidenced by stock option agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) OPTION PRICE. Except as otherwise provided in subsection 8(b), the purchase price per share of stock deliverable upon the exercise of an incentive stock option shall not be less than 100% of the fair market value of the Common Shares on the day the option is granted, as determined by the Committee. (b) EXERCISE OF OPTION. Each stock option agreement shall state the period or periods of time within which the option may be exercised by the optionee, in whole or in part, which shall be such period or periods of time as may be determined by the Committee, provided that the option period shall not commence earlier than six months after the date of the grant of the option nor end later than ten years after the date of the grant of the option. The aggregate fair market value (determined with respect to each incentive stock option at the time of grant) of the Common Shares with respect to which incentive stock options are exercisable for the first time by an individual during any calendar year (under all incentive stock option plans of the Company and its parent and subsidiary corporations) shall not exceed $100,000. If the aggregate fair market value (determined at the time of grant) of the Common Shares subject to an option, which first becomes exercisable in any calendar year exceeds the limitation of this Section 8(b), so much of the option that does not exceed the applicable dollar limit shall be an incentive stock option and the remainder shall be a nonqualified stock option; but in all other respects, the original option agreement shall remain in full force and effect. As used in this Section 8, the words "parent" and "subsidiary" shall have the meanings given to them in Section 424(e) and 424(f) of the Code. Notwithstanding anything herein to the contrary, if an incentive stock option is granted to an individual who owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of its parent or subsidiary corporations, within the meaning of Section 422(b)(6) of the Code, (i) the purchase price of each Common Share subject to the incentive stock option shall be not less than one hundred ten percent (110%) of the fair market value of the Common Shares on the date the incentive stock option is granted, and (ii) the incentive stock option shall expire, and all rights to purchase -5- Common Shares thereunder shall cease, no later than the fifth anniversary of the date the incentive stock option was granted. (c) PAYMENT FOR SHARES. Except as otherwise provided in the Plan or in any stock option agreement, the optionee shall pay the purchase price of the Common Shares upon the exercise of any option, (i) in cash, (ii) in cash received from a broker-dealer to whom the optionee has submitted an exercise notice consisting of a fully-endorsed option (however, in the case of an optionee subject to Section 16 of the 1934 Act, this payment option shall only be available to the extent such payment procedures comply with Regulation T issued by the Federal Reserve Bank), (iii) by delivering Common Shares owned by the optionee for at least six months prior to the date of exercise having an aggregate fair market value on the date of exercise equal to the option exercise price, (iv) by such other medium of payment as the Committee in its discretion shall authorize at the time of grant, or (v) by any combination of (i), (ii), (iii) and (iv). In the case of an election pursuant to (i) or (ii), cash shall mean cash or check issued by a federally insured bank or savings and loan association made payable to NiSource Inc. In the case of a payment pursuant to (ii) or (iii) above, the optionee's election must be made on or prior to the date of exercise and shall be irrevocable. In lieu of a separate election governing each exercise of an option, an optionee may file a blanket election with the Committee which shall govern all future exercises of options until revoked by the optionee. The Company shall issue, in the name of the optionee, stock certificates representing the total number of Common Shares issuable pursuant to the exercise of any option as soon as reasonably practicable after such exercise, provided that any Common Shares purchased by an optionee through a broker-dealer pursuant to clause (ii) above, shall be delivered to such broker-dealer in accordance with 12 C.F.R. Section 220.3(e)(4), or other applicable provision of law. (d) TRANSFERABILITY. Each stock option agreement shall provide that it is not transferable by the optionee otherwise by will or the laws of descent or distribution. (e) RIGHTS UPON TERMINATION OF EMPLOYMENT. In the event that an optionee ceases to be an employee for any reason other than death, disability or retirement, the optionee shall have the right to exercise the option during its term within a period of thirty days after such termination to the extent that the option was exercisable at the date of such termination of employment, or during such other period and subject to such terms as may be determined by the Committee. In the event that an optionee dies, retires, or becomes disabled prior to termination of his option without having fully exercised his option, the optionee or his successor shall have the right to exercise the option during its term within a period of three years after the date of such termination due to death, disability or retirement, to the extent that the option was exercisable at the date of termination due to death, disability or retirement, or during such other period and subject to such terms as may be determined by the Committee. Notwithstanding the foregoing, in accordance with Section 422 of the Code, if an incentive stock option is exercised more than ninety days after termination of employment, that portion of the option exercised after such date shall automatically be a nonqualified stock option, but in all other respects, the original option agreement shall remain in full force and effect. -6- The provisions of this Section 8 shall be construed and applied, and (subject to the limitations of Section 23) shall be amended from time to time so as to comply with Section 422 or its successors of the Code and regulations issued thereunder. 9. STOCK APPRECIATION RIGHTS. Stock appreciation rights shall be evidenced by stock appreciation right agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) AWARDS. A stock appreciation right shall entitle the grantee to receive upon exercise the excess of (i) the fair market value of a specified number of shares of the Company Common Shares at the time of exercise over (ii) a specified price which shall not be less than 100% of the fair market value of the Common Shares at the time the stock appreciation right was granted, or, if connected with a previously issued stock option, not less than 100% of the fair market value of Common Shares at the time such option was granted. A stock appreciation right may be granted in connection with all of any portion of a previously or contemporaneously granted stock option or not in connection with a stock option. (b) TERM. Stock appreciation rights shall be granted for a period of not less than one year nor more than ten years, and shall be exercisable in whole or in part, at such time or times and subject to such other terms and conditions, as shall be prescribed by the Committee at the time of grant, subject to the following: (i) No stock appreciation right shall be exercisable in whole or in part, during the six-month period starting with the date of grant; and (ii) Stock appreciation rights will be exercisable only during a grantee's employment, except that in the discretion of the Committee a stock appreciation right may be made exercisable for up to thirty days after the grantee's employment is terminated for any reason other than death, disability or retirement. ln the event that a grantee dies, retires, or becomes disabled without having fully exercised his stock appreciation rights, the grantee or his successor shall have the right to exercise the stock appreciation rights during their term within a period of three years after the date of such termination due to death, disability or retirement to the extent that the right was exercisable at the date of such termination or during such other period and subject to such terms as may be determined by the Committee. The Committee shall have the power to permit in its discretion an acceleration of previously determined exercise terms, within the terms of the Plan, under such circumstances and upon such terms and conditions as it deems appropriate. (c) PAYMENT. Upon exercise of a stock appreciation right, payment shall be made in cash, in the form of Common Shares at fair market value, or in a combination thereof, as the Committee may determine. -7- 10. PERFORMANCE UNITS. Performance Units ("Units") shall be evidenced by performance unit agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) PERFORMANCE PERIOD. At the time of award, the Committee shall establish with respect to each Unit award a performance period of not less than two, nor more than five, years. (b) VALUATION OF UNITS. At the time of award, the Committee shall establish with respect to each such award a value for each Unit which shall not thereafter change, or which may vary thereafter determinable from criteria specified by the Committee at the time of award. (c) PERFORMANCE TARGETS. At the time of award, the Committee shall establish maximum and minimum performance targets to be achieved with respect to each award during the performance period. The participant shall be entitled to payment with respect to all Units awarded if the maximum target is achieved during the performance period, but shall be entitled to payment with respect to a portion of the Units awarded according to the level of achievement of performance targets, as specified by the Committee, for performance during the performance period which meets or exceeds the minimum target but fails to meet the maximum target. The performance targets established by the Committee shall relate to corporate, division, or unit performance and may be established in terms of growth in gross revenue, earnings per share, ratio of earnings to shareholders' equity or to total assets, dividend payments and total shareholders' return. Multiple targets may be used and may have the same or different weighting, and they may relate to absolute performance or relative performance as measured against other institutions or divisions or units thereof. (d) ADJUSTMENTS. At any time prior to payment of the Units, the Committee may adjust previously established performance targets and other terms and conditions, including the corporation's, or division's or unit's financial performance for Plan purposes, to reflect major unforeseen events such as changes in laws, regulations or accounting practices, mergers, acquisitions or divestitures or extraordinary, unusual or non-recurring items or events. (e) PAYMENTS OF UNITS. Following the conclusion of each performance period, the Committee shall determine the extent to which performance targets have been attained for such period as well as the other terms and conditions established by the Committee. The Committee shall determine what, if any, payment is due on the Units. Payment shall be made in cash, in the form of Common Shares at fair market value, or in a combination thereof, as the Committee may determine. (f) TERMINATION OF EMPLOYMENT. In the event that a participant holding a Unit award ceases to be an employee prior to the end of the applicable performance period by reason of death, disability or retirement, his Units, to the extent earned under the applicable performance targets, shall be payable at the end of the performance period in proportion to the active service of the participant during the performance period, as determined by the Committee. -8- Upon any other termination of employment, participation shall terminate forthwith and all outstanding Units held by the participant shall be canceled. (g) OTHER TERMS. The Unit agreements shall contain such other terms and provisions and conditions not inconsistent with the Plan as shall be determined by the Committee. 11. RESTRICTED STOCK AWARDS. Restricted stock awards under the Plan shall be in the form of Common Shares of the Company, restricted as to transfer and subject to forfeiture, and shall be evidenced by restricted stock agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) RESTRICTION PERIOD. Restricted Common Shares awarded pursuant to the Plan shall be subject to such terms, conditions, and restrictions, including without limitation: prohibitions against transfer, substantial risks of forfeiture, attainment of performance objectives and repurchase by the Company or right of first refusal, and for such period or periods as shall be determined by the Committee at the time of grant. The Committee shall have the power to permit in its discretion, an acceleration of the expiration of the applicable restriction period with respect to any part or all of the Common Shares awarded to a participant. The performance objectives established by the Committee shall relate to corporate, division or unit performance, and may be established in terms of growth and gross revenue, earnings per share, ratio of earnings to shareholder's equity or to total assets, dividend payments and total shareholders' return. Multiple objectives may be used and may have the same or different weighting, and they may relate to absolute performance or relative performance as measured against other institutions or divisions or units thereof. (b) RESTRICTIONS UPON TRANSFER. Common Shares awarded, and the right to vote such Shares and to receive dividends thereon, may not be sold, assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered, except as herein provided, during the restriction period applicable to such Shares. Subject to the foregoing, and except as otherwise provided in the Plan or a restricted stock award agreement, the participant shall have all the other rights of a shareholder including, but not limited to, the right to receive dividends and the right to vote such Shares. (c) CERTIFICATES. Each certificate issued in respect of Common Shares awarded to a participant shall be deposited with the Company, or its designee, and shall bear the following legend: "This certificate and the shares represented hereby are subject to the terms and conditions (including forfeiture and restrictions against transfer) contained in the NiSource Inc. 1994 Long-Term Incentive Plan and an Agreement entered into by the registered owner. Release from such terms and conditions shall obtain only in -9- accordance with the provisions of the Plan and Agreement, a copy of each of which is on file in the office of the Secretary of said Company." (d) LAPSE OF RESTRICTIONS. A restricted stock agreement shall specify the terms and conditions upon which any restrictions upon Common Shares awarded under the Plan shall lapse, as determined by the Committee. Upon the lapse of such restrictions, Common Shares, free of the foregoing restrictive legend, shall be issued to the participant or his legal representative. (e) TERMINATION PRIOR TO LAPSE OF RESTRICTIONS. In the event of a participant's termination of employment, other than due to death, disability or retirement, prior to the lapse of restrictions applicable to any Common Shares awarded to such participant, all Shares as to which there still remains unlapsed restrictions shall be forfeited by such participant without payment of any consideration to the participant, and neither the participant nor any successors, heirs, assigns, or personal representatives of such participant shall thereafter have any further rights or interest in such Shares or certificates. 12. CONTINGENT STOCK AWARDS. Contingent stock awards under the Plan shall be in the form of the issuance of Common Shares of the Company following the lapse of restrictions applicable to such awards. Such awards shall be restricted as to transfer and subject to forfeiture, and shall be evidenced by contingent stock award agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) RESTRICTION PERIOD. Contingent stock awards shall be subject to such terms, conditions and restrictions, including without limitations, prohibitions against transfer, substantial risk of forfeiture and attainment of performance objectives, and for such period or periods, as shall be determined by the Committee at the time of grant. The Committee shall have the power to permit in its discretion an acceleration of the expiration of the applicable restriction period with respect to any part or all of a contingent stock award. The performance objectives established by the Committee shall relate to corporate, division or unit performance, and may be established in terms of growth and gross revenue, earnings per share, ratios of earnings to shareholders' equity or to total assets, dividend payments and total shareholders' return. Multiple objectives may be used and may have the same or different weighting, and they may relate to absolute performance or relative performance as measured against other institutions or divisions or units thereof. (b) LAPSE OF RESTRICTIONS. A contingent stock award agreement shall specify the terms and conditions upon which any restrictions applicable to such award shall lapse as determined by the Committee. Upon lapse of such restriction, Common Shares subject to such contingent stock award shall be issued to the participant or his legal representative. Such Common Shares, when issued to the participant or his legal representative, shall either be free of any restrictions, or shall be subject to such further restrictions, as the Committee shall determine. In the event that Common Shares issued pursuant to a contingent stock award are subject to further restrictions, the certificates issued in respect of the Common Shares awarded pursuant to -10- the contingent stock award shall be deposited with the Company, or its designee, and shall bear the legend set forth in subsection 11(c) above. Upon the lapse of such restrictions, Common Shares free of such restrictive legend shall be issued to the participant or his legal representative. (c) TERMINATION PRIOR TO LAPSE OF RESTRICTIONS. Except as otherwise provided in any contingent stock award agreement, in the event of a participant's termination of employment, other than due to death, disability or retirement, prior to the lapse of restrictions applicable to any contingent stock award granted to such participant, such award and all Common Shares subject thereto as to which there still remain unlapsed restrictions, shall be forfeited by such participant without payment of any consideration to the participant and neither the participant nor any successors, heirs, assigns or personal representatives of such participant shall have any further rights or interests in such contingent stock awards or such Common Shares subject thereto. 13. SUPPLEMENTAL CASH PAYMENTS. Subject to the Company's discretion, stock options, incentive stock options, stock appreciation rights, performance units, restricted stock agreements or contingent stock award agreements may provide for the payment of a supplemental cash payment to a participant promptly after the exercise of an option or stock appreciation right, or, at the time of payment of a performance unit, or at the end of a restriction period of a restricted stock or contingent stock award. Supplemental cash payments shall be subject to such terms and conditions as shall be provided by the Committee at the time of grant, provided that in no event shall the amount of each payment exceed: (a) In the case of an option, the excess of the fair market value of a Common Share on the date of exercise over the option price multiplied by the number of Common Shares for which such option is exercised, or (b) In the case of a stock appreciation right, performance unit, restricted stock award or contingent stock award, the value of the Common Shares and other consideration issued in payment of such award. 14. DIVIDEND EQUIVALENTS. From and after the date, if any, specified in an applicable incentive stock option agreement, stock appreciation right agreement not granted in connection with a stock option, performance unit award agreement or contingent stock award agreement, and except as otherwise provided in such agreement, the holder of such 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. Except as otherwise provided in any contingent stock award agreement, any such dividend equivalent payable in cash or property (other than stock of the Company) shall be payable directly to the holder of the applicable 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. Except as otherwise provided in any contingent stock award agreement, any participant entitled to receive a cash dividend equivalent pursuant to his -11- applicable 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. 15. GENERAL RESTRICTIONS. Each award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that (i) the listing, registration or qualification of the Common Shares subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the recipient of an award with respect to the disposition of Common Shares, is necessary or desirable as a condition of, or in connection with, the granting of such award or the issue or purchase of Common Shares thereunder, such award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained, free of any conditions not acceptable to the Committee. 16. RIGHTS AS A SHAREHOLDER. The recipient of any award under the Plan, unless otherwise provided by the Plan, shall have no rights as a shareholder with respect thereto unless and until certificates for Common Shares are issued to the recipient. 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. 18. TAX WITHHOLDING. Whenever the Company proposes or is required to issue or transfer Common Shares to a participant under the Plan, the Company shall have the right to require the participant to remit to the Company an amount sufficient to satisfy all federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Common Shares. If such certificates have been delivered prior to the time a withholding obligation arises, the Company shall have the right to require the participant to remit to the Company an amount sufficient to satisfy all federal, state or local withholding tax requirements at the time such obligation arises and to withhold from other amounts payable to the participant, as compensation or otherwise, as necessary. Whenever payments under the Plan are to be made to a participant in cash, such payment shall be net of any amount sufficient to satisfy all federal, state and local withholding tax requirements. In lieu of requiring a participant to make a payment to the Company in an amount related to the withholding tax requirement, the Committee may, in its discretion, provide that, at the participant's election, the tax withholding obligation shall be satisfied by the Company's withholding a portion of the Common Shares otherwise distributable to the participant, such Common Shares being valued at their fair market value at the date of exercise, or by the participant's delivering to the Company a portion of the Common Shares previously delivered by the Company, such Common Shares being valued at -12- their fair market value as of the date of delivery of such Common Shares by the participant to the Company. For this purpose, the amount of required withholding shall be a specified rate not less than the statutory minimum federal, state and local (if any) withholding rate, and not greater than the maximum federal, state and local (if any) marginal tax rate applicable to the participant and to the particular transaction. Notwithstanding any provision of the Plan to the contrary, a participant's election pursuant to the preceding sentences (a) must be made on or prior to the date as of which income is realized by the recipient in connection with the particular transaction, and (b) must be irrevocable. In lieu of a separate election on each effective date of each transaction, a participant may file a blanket election with the Committee which shall govern all future transactions until revoked by the participant. 19. CHANGE IN CONTROL. (a) Effect of Change in Control. Notwithstanding any of the provisions of the Plan or any agreement evidencing awards granted hereunder, upon a Change in Control of the Company (as defined in subsection 19(b)) all outstanding awards shall become fully exercisable and all restrictions thereon shall terminate in order that participants may fully realize the benefits thereunder. Further, the Committee, as constituted before such Change in Control, is authorized, and has sole discretion, as to any award, either at the time such award is granted hereunder or any time thereafter, to take any one or more of the following actions: (i) provide for the exercise of any such award for an amount of cash equal to the difference between the exercise price and the then fair market value of the Common Shares covered thereby had such award been currently exercisable; (ii) provide for the vesting or termination of the restrictions on any such award; (iii) make such adjustment to any such award then outstanding as the Committee deems appropriate to reflect such Change in Control; and (iv) cause any such award then outstanding to be assumed, by the acquiring or surviving corporation, after such Change in Control. (b) Definition of Change in Control. A "Change in Control" of the Company shall be deemed to have occurred if any one of the occurrences of a "Change in Control" set forth in the Change in Control and Termination Agreements between the Company and certain executive officers thereof shall have been satisfied. 20. AMENDMENT OR TERMINATION. The Board or the Committee may at any time terminate, suspend or amend the Plan without the authorization of shareholders to the extent allowed by law, including without limitation any rules issued by the Securities and Exchange Commission under Section 16 of the 1934 Act, insofar as shareholder approval thereof is required in order for the Plan to continue to satisfy the requirements of Rule 16b-3 under the 1934 Act, or the rules of any applicable stock exchange. No termination, suspension or amendment of the Plan shall adversely affect any right acquired by any participant under an award granted before the date of such termination, suspension or amendment, unless such participant shall consent; but it shall be conclusively presumed that any adjustment for changes in capitalization as provided for herein does not adversely affect any such right. Subject to the preceding sentence, the Plan as amended and restated effective January 1, 2004, shall apply to all awards at any time granted hereunder. 21. EFFECT ON OTHER PLANS. Unless otherwise specifically provided, participation in the Plan shall not preclude an employee's eligibility to participate in any other benefit or incentive plan -13- and any awards made pursuant to the Plan shall not be considered as compensation in determining the benefits provided under any other plan. 22. ASSUMPTION OF OPTIONS. Pursuant to the terms of Section 5.22 of the Amended and Restated Agreement and Plan of Merger by and among the Company, Acquisition Gas Company, Inc., a wholly owned subsidiary of the Company, and Bay State Gas Company ("Bay State"), dated as of December 18, 1997 and amended and restated as of March 4, 1998 and further amended as of November 16, 1998 (as may be further amended, restated or supplemented, the "Agreement'), and at the Effective Time defined in the Agreement, each outstanding stock option issued under the Bay State Gas Company 1989 Key Employee Stock Option Plan ("Bay State Stock Option Plan"), shall be assumed by the Company. Each such stock option ("Assumed Option") shall be deemed to constitute an option to acquire Common Shares in an amount and at a purchase price determined pursuant to Section 5.22 of the Agreement. Each Assumed Option shall be subject to all of the terms and conditions applicable to options granted under the Plan. Notwithstanding the preceding sentence: (1) if the employment of the holder of an Assumed Option with the Company and its subsidiaries terminates for any reason other than death, disability, retirement or Cause, he, or his legal representatives or beneficiary, may exercise the Assumed Option at any time within three months immediately following such termination of employment, but not later than the expiration of the term of such Assumed Option; (2) if the holder of an Assumed Option that is a non-qualified stock option terminates employment with the Company and its subsidiaries because of death, disability or retirement, he, or his legal representatives or beneficiary, may exercise the Assumed Option at any time during the term of such Assumed Option to the extent he was entitled to exercise it at the date of death, disability or retirement; (3) if the holder of an Assumed Option that is an incentive stock option terminates employment with the Company and its subsidiaries because of death, his legal representatives or beneficiary may exercise the Assumed Option at any time during the term of such Assumed Option to the extent he was entitled to exercise it at the date of death; (4) if the holder of an Assumed Option that is an incentive stock option terminates employment with the Company and its subsidiaries because of disability or retirement, he, or his legal representatives or beneficiary, may exercise the Assumed Option at any time within three months immediately following such termination of employment, but not later than the expiration of the term of such Assumed Option; -14- (5) if the employment of the holder of an Assumed Option with the Company and its subsidiaries terminates for Cause, the Assumed Option shall expire as of the date of such termination of employment. For purposes of this Section, "Cause" shall have the same meaning as defined in the holder's severance agreement with the Company or any of its subsidiaries in effect on the date of termination of employment. If the holder has not entered into a severance agreement with the Company or any subsidiary that is in effect on the date of termination of employment, or if the term "Cause" is not defined therein, Cause shall mean the holder's conviction for the commission of a felony, or the holder's fraud or dishonesty which has resulted in or is likely to result in material economic damage to the Company or any subsidiary. Each Assumed Option shall be evidenced by an amended and restated stock option agreement entered into as of the Effective Time by and among the Company, Bay State and the applicable optionee. 23. DURATION OF THE PLAN. The Plan shall remain in effect until all awards under the Plan have been satisfied by the issuance of Common Shares or the payment of cash, but no award shall be granted more than six years after the date the Plan, as amended and restated effective January 1, 2000, was approved by the shareholders, which shall be its effective date of adoption. IN WITNESS WHEREOF, the Company has caused this Amendment and Restatement to be executed on its behalf by its officer duly authorized, on this 30th day of December, 2003. NISOURCE INC. By: /s/ S. LaNette Zimmerman 15 EX-10.7 7 c83669exv10w7.txt LETTER AGREEMENT DATED 12/3/03 EXHIBIT 10.7 Portions of this Exhibit have been omitted pursuant to a request for confidential treatment and such portions have been filed separately with the Commission. PRIVILEGED AND CONFIDENTIAL December 3, 2003 Stephen P. Adik 488 Wexford Road Valparaiso, IN 46385 Dear Steve: This Letter Agreement confirms our decision concerning your employment status. As we discussed, your employment with NiSource Corporate Services Company will be terminated as a result of your voluntary retirement. If you sign this Letter Agreement, it will constitute the mutual agreement between you and the Company regarding the termination of your employment. As used herein, "the Company" shall mean NiSource Inc. or any of its affiliates or subsidiaries, including NiSource Corporate Services Company, and "NiSource" shall mean exclusively NiSource Inc. 1. Employment Status Unless you are discharged for cause, you will continue as an active employee of the Company through December 31, 2003 for purposes of determining your NiSource post-retirement health, life insurance and retirement benefits, as well as participation in the 2003 NiSource bonus plan. You will be treated as retiring as an active employee on January 1, 2004 for purposes of vesting (a) any restricted and contingent stock in NiSource owned by you and (b) any NiSource stock options owned by you; provided, however, you shall be treated as retiring as an active employee on January 29, 2004 for purposes of vesting the contingent stock grant awarded to you by NiSource January 29, 2000. Thereafter, you will retire from the Company with the benefits which you are entitled to as a retired employee of the Company and only those additional benefits set forth in Paragraphs 2 and 3, provided that you shall be entitled to the benefits set forth in Paragraphs 2 and 3 after you timely execute a release in the form attached as Exhibit 1 hereto. You will resign as an officer and director of the Company on December 31, 2003, except you will not resign as a director of NiSource. After your retirement, you agree to cooperate whenever needed in the preparation for and/or defense of any litigation in which the Company is involved. 2. Retirement Payments A. Special Retirement Cash Bonus On December 31, 2003, and in recognition for your past services to the Company, you will receive a cash bonus in the amount of $450,000 (the "Special Bonus"). The Special Bonus will be subject to legally-mandated deductions for Social Security and federal, state and local taxes. B. Special Restricted Stack Grant On January 2, 2004, and in recognition for your past services to the Company, you will receive $450,000 in value of NiSource restricted common stock, with the number of restricted shares to be issued to equal $450,000 divided by the closing stock price of a share of NiSource common stock on January 2, 2004 (the "Special Restricted Stock Grant"). The terms of the Special Restricted Stock Grant agreement are attached as Exhibit 2. C. Previously Issued Stock Options and Restricted Stock Grants Exhibit 3 lists the terms of all stock options, restricted stock grants and contingent stock grants previously issued to you and which remain outstanding as of January 1, 2004. 3. Change In Control You acknowledge that you are not currently owed any benefits under your Change in Control Agreement dated as of February 5, 1990, and as amended and restated as of September 1, 1997 and April 19, 2000 (the "CIC"). Nonetheless, as additional consideration for your execution of this Agreement, the Company agrees that, if (a) an Acquisition of NiSource (as defined below) (**) is announced on or before June 30, 2005, or (b) (**) then you will receive 34,101 shares of NiSource common stock (determined by taking the difference between 55,529 TARSAP shares forfeited upon your retirement less 21,428 shares granted to you under the Special Restricted Stock Grant and based on the assumption the shares issued under the Restricted Stock Grant are valued at $21.00 per share). You will not receive any payments in the event there is an Acquisition of NiSource under circumstances not specifically described in the previous sentence. For purposes of this Paragraph 3, the phrase "Acquisition of NiSource" means a transaction which is defined as a "Change in Control" in the CIC.(**) - --------------------- (**) Text has been omitted pursuant to a request for confidential treatment and such text has been filed separately with the Commission. -2- 4. Vacation You are eligible to receive a lump sum payment representing compensation for your accrued and unused vacation in the amount of $80,288.49. This payment will be subject to legally-mandated deductions for Social Security and federal, state and local taxes, as well as deductions for any contributory benefit plans in which you elect to continue participation. 5. COBRA Coverage Your retirement is a qualifying event under the Consolidated Omnibus Budget Reconciliation Act ("COBRA"). The Company will notify you and/or your dependents of the insurance coverage which you may continue on a self-pay basis as provided by COBRA upon termination of your employment. You are entitled to 18 months of COBRA for dental and vision insurance on a self-pay basis commencing January 1, 2004. Notwithstanding the foregoing, you will be reimbursed by the Company for the first 12 months of COBRA for dental and vision insurance. 6. Waiver of Severance Payments You agree to waive any rights to severance payments under the NiSource Executive Severance Policy that became effective as of June 1, 2002 7. Long Term Incentive Program You will be treated as an active employee of the Company through January 1, 2004 for purposes of the 1994 Long Term Incentive Plan as amended, including the vesting of any contingent or restricted stock or stock options. 8. Indemnification You will be entitled to indemnification by the Company pursuant to the provisions of Article 6 of NiSource Corporate Services Company's by-laws in effect on December 31, 2003 notwithstanding any change made thereafter, except as such change may be required by law. You will also be entitled to coverage under the directors and officers liability insurance coverage maintained by the Company (as in effect from time to time) to the same extent as other former officers of the Company. 9. Company Property The Company will transfer to you, title to your current Company automobile, at no cost to you, at a time of your choosing, but in no event later than January 31, 2004. The Company, in accordance with practices previously in place, will reimburse any income tax liability incurred by you as a result of this transfer. -3- You agree to return to the Company any and all of its property, including but not limited to, keys, employee identification or security access cards, telephones, computing equipment, PDAs, credit cards and cars on or before January 1, 2004. Notwithstanding the foregoing, you may continue to use your Company mobile telephones until January 31, 2004. 10. Confidentiality You acknowledge that preservation of a continuing business relationship between the Company and their respective customers, representatives, and employees is of critical importance to the continued business success of the Company and that it is the active policy of the Company to guard as confidential certain information not available to the public and relating to the business affairs of the Company. In view of the foregoing, you agree that you shall not disclose to any person or entity any such confidential information that was obtained by you in the course of your employment by the Company (including your employment as a director of NiSource) without the prior written consent of the Company. It will not be considered a violation of this Paragraph 10 if you are required to disclose confidential information in a proceeding to enforce your rights under this Letter Agreement or pursuant to a subpoena, order of court or other governmental or administrative directive, compliance with which is mandatory, provided you give the Company notice that you have been served with such a subpoena or order immediately upon receiving service. Moreover, you agree that upon termination of your employment, you will promptly deliver to the Company all documentation and other materials relating to the Company's business or the business of any NiSource company which are in your possession or under your control, including customer and potential customer lists, product lists, and marketing material, whether in written or electronic data form; and you will delete, destroy or discard all copies of such confidential information remaining in your possession, provided, however, you shall be entitled to retain documentation and other materials relating to the Company's business that is necessary for you to serve as a director of NiSource. To facilitate the foregoing, the Company will allow you to use your existing office space and will provide you with secretarial assistance on an as-needed basis, until the earlier of the date upon which you certify that you have complied with the foregoing, or April 1, 2004. You further acknowledge and agree that the Company's remedy in the form of monetary damages for any breach by you of any of the provisions of this paragraph may be inadequate and that, in addition to any monetary damages for such breach, the Company shall be entitled to institute and maintain any appropriate proceeding or proceedings, including an action for specific performance and/or injunction. -4- 11. Status as a Director Unless nominated by NiSource, you hereby agree not to stand for re-election as a director of NiSource upon the expiration of your current term as a director of NiSource. Subsequent to December 31, 2003, you will have the status of a non-employee director of NiSource and shall be entitled to such compensation for board and committee duties as is accorded to non-employee directors of NiSource. 12. Release of Claims In consideration of the payment and benefits described above, you, on behalf of yourself and your heirs, executors, and administrators, fully and finally settle, release, and waive any and all local, state (including but not limited to the Indiana Civil Frights Law), and federal civil, common law, statutory (including, but not limited to, the AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act of 1990, the Family and Medical Leave Act of 1993, and the Employee Retirement Income Security Act of 1974, as those Acts are amended), and equitable claims against the Company and NiSource, Inc. and its subsidiaries and affiliated companies, and all the stockholders, predecessors, successors, agents, directors, officers, employees, representatives, and attorneys of NiSource, and its subsidiaries and affiliated companies, known or unknown, occurring or arising prior to you signing this Letter Agreement, except for claims relating to the enforcement of this Letter Agreement. You acknowledge and agree that this release is being given only in exchange for consideration to which you are not otherwise entitled. Based on the knowledge the Company has of the date of this Letter Agreement, the Company has no intention to sue you or your heirs, executors or administrators. 13. Outstanding Charges You hereby agree to pay the Company any outstanding amounts owed to the Company, and further agree that by signing this Letter Agreement you hereby authorize the Company to deduct any outstanding charges from your lump sum or salary continuation payments. 14. Governing Law This Letter Agreement shall be construed in accordance with the laws of Indiana. -5- 15. Severability In the event that one or more of the provisions contained in this Letter Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, the Company shall have the right to enforce the remainder of this Letter Agreement. 16. Non-Disclosure Except to the extent that disclosure is required to enforce your rights under this Letter Agreement or otherwise is required by subpoena, order of court or other governmental or administrative directive, compliance with which is mandatory, you expressly agree to keep the terms of this Letter Agreement strictly confidential and that you will not disclose the terms of this Letter Agreement to anyone other than your spouse, your legal counsel or your tax advisor, provided that they each agree to preserve the confidentiality of the terms of this Letter Agreement. You agree not to make any false and disparaging statements about the Released Parties to any media outlet, industry group, financial institution or analyst, or current or former employee, consultant, client or customer of the Company. NiSource and the officers of NiSource shall not make any false and disparaging statements about you to any media outlet, individual group, financial institution or analyst. Nothing herein should be construed as a limitation on your ability to consult with your counsel or with an administrative agency. 17. Complete Agreement You acknowledge that in accepting this Letter Agreement, you have not relied upon any representation or promise other than those expressly stated in this Letter Agreement. This Letter Agreement and those sections of other Agreements specifically referenced herein, constitute the complete understanding between you and the Company relating to your separation and supersede any and all prior agreements, promises, representations or inducements, no matter their form, concerning your employment with the Company. No promises or agreements made subsequent to the execution of this Agreement by these parties shall be binding unless reduced to writing and signed by authorized representatives of these parties. 18. Important Information YOU ACKNOWLEDGE THAT THE COMPANY HAS ADVISED YOU TAKE UP TO 21 DAYS TO CONSIDER THE TERMS AND CONDITIONS OUTLINED ABOVE, AND THAT THE COMPANY HAS ALSO ADVISED YOU TO CONSULT AN ATTORNEY BEFORE SIGNING THIS LETTER -6- AGREEMENT. YOU ALSO HAVE THE RIGHT TO REVOKE YOUR EXECUTION OF THIS LETTER AGREEMENT WITHIN 7 DAYS AFTER EXECUTION IN ACCORDANCE WITH THE NOTICE TO EMPLOYEE ATTACHED HERETO. IF YOU ACCEPT THE TERMS AND CONDITIONS OUTLINED ABOVE, INCLUDING PARAGRAPH 12, PLEASE SIGN BOTH COPIES OF THIS LETTER AGREEMENT IN THE SPACE PROVIDED BELOW TO SIGNIFY YOUR ACCEPTANCE, AND RETURN BOTH COPIES TO GARY L. NEALE BY DECEMBER 24, 2003, ON WHICH DATE THIS OFFER WILL EXPIRE IF NOT ACCEPTED. IF YOU ACCEPT THE TERMS AND CONDITIONS OUTLINED ABOVE, YOUR ACCEPTANCE IS IN LIEU OF ANY AND ALL OTHER SEVERANCE PROGRAMS OFFERED BY THE COMPANY AND YOU KNOWINGLY AND VOLUNTARILY WAIVE PARTICIPATION IN ALL OTHER SEVERANCE PROGRAMS OFFERED BY THE COMPANY. YOU ACKNOWLEDGE THAT THE COMPANY'S PERFORMANCE UNDER THIS AGREEMENT CONSTITUTES FULL AND COMPLETE PAYMENT OF ALL AMOUNTS DUE TO YOU FROM THE COMPANY AND CONSTITUTES ADDITIONAL CONSIDERATION TO WHICH YOU ARE NOT OTHERWISE ENTITLED. Very truly yours, /s/ Gary L. Neale Gary L. Neale Accepted: /s/ Stephen P. Adik Stephen P. Adik Date: ____________________ Witness: /s/ Peter V. Fazio, Jr. Date:_________________ -7- EXHIBIT 1 GENERAL RELEASE ATTN: THIS GENERAL RELEASE SHOULD NOT BE SIGNED PRIOR TO EMPLOYEE'S TERMINATION DATE, JANUARY 1, 2004. In consideration of the payments and benefits set forth in the Letter Agreement attached hereto, the sufficiency of which consideration is hereby acknowledged, I, for myself and my heirs, executors and administrators, do hereby fully, finally and unconditionally release and forever discharge NiSource Inc. and all of its parent, sister and subsidiary corporations and all of its affiliates, as well as all of its former and current directors, officers, employees, stockholders, attorneys, agents, predecessor, successors and assigns, in their personal and corporate capacities (hereinafter "Released Parties"), 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 and local, state, or federal statute or ordinance, or under the common laws of the United States, FROM THE BEGINNING OF TIME 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(1), any and all claims relative to any agreement relating to my employment with any of the Released Parties, including but not limited to any claims under the doctrines of defamation, libel, slander, invasion of privacy, intentional infliction of emotional distress, interference with contractual relations, retaliatory discharge, breach of contract, wrongful discharge, breach of implied contract or implied covenant of good faith or fair dealing, and any other statute, authority or law, providing a cause of action relating to my employment with NiSource and all of its parent, sister and subsidiary corporations and all of its affiliates, and/or its termination. I also agree not to sue NiSource or any of the other Released Parties with respect to the claims covered by the foregoing General Release. This General Release shall not apply to: (1) any third party claims against me relating to or arising from my employment with the released Parties; or any of its related parties; or (2) the Letter Agreement attached hereto. I acknowledge that prior to entering into the Letter Agreement to which this General Release is attached and made a part of, I was advised in writing to consult with an attorney before executing the Letter Agreement and that I was given a period of at least twenty-one (21) - ---------------------------- (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, 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, as amended, 29 U.S.C. Section 201 et seq.; the Civil Rights Act of 1866, 42 U.S.C. Section 1981 et seq.; the Worker Adjustment Retraining Notification Act, 29 U.S.C. 2101 Section et seq., the Occupational Safety and Health Act, 29 U.S.C. Section 651 et seq. and the Indiana Civil Rights Act. -8- days within which to consider the Letter Agreement, including the terms of this General Release. Moreover, I was advised in writing of my right, for seven days following my execution of the Letter Agreement, to revoke the Letter Agreement and thereby decline to execute this General Release. I expressly represent that I did not revoke the Letter Agreement. Accordingly, I acknowledge and agree that the Letter Agreement is effective and enforceable. I hereby represent that I have read and understand the terms of this General Release and represent that my execution of this General Release constitutes my knowing and voluntary act, made without coercion or intimidation. I understand that this General Release in applicable to any claims arising prior to the date of this General Release and is binding upon me, my heirs, executors and assigns. __________________________ Stephen P. Adik Date: __________________________ __________________________ Witness' Signature Date: __________________________ NISOURCE RELEASE Based on the knowledge NiSource Inc. and its affiliates have as of the date of this Release, NiSource Inc. has no intention to sue you or your heirs, executors or administrators. NISOURCE INC. By:_____________________________ Its:_____________________________ -9- EXHIBIT 2 NISOURCE INC. 1994 LONG-TERM INCENTIVE PLAN, AS AMENDED AND RESTATED RESTRICTED STOCK AGREEMENT This Agreement is made as of the 2nd day of January, 2004 ("Date of Award"), between NiSource Inc. (the "Company") and Stephen P. Adik (the "Grantee"). In consideration of the agreements set forth below, the Company an the Grantee agree as follows: 1. Grant. A restricted stock award ("Award") of 20,736 shares ("Restricted Shares") of the Company's common stock, par value $.01 per share, is hereby granted by the Company to the Grantee, subject to the following terms and conditions, and, to the extent relevant and not covered by this Agreement, to the provisions of the NiSource Inc. 1994 Long-Term Incentive Plan, as Amended and Restated Effective January 1, 2004 (the "Plan"), the terms of which are incorporated by reference herein. 2. Transfer Restrictions. None of the Restricted Shares shall be sold, assigned, pledged or otherwise transferred, voluntarily or involuntarily, by the Grantee prior to the lapse of restrictions pursuant to Sections 3, 4 and 5 below. 3. Lapse of Restrictions. The restrictions set forth in Section 2 above shall lapse with respect to the Restricted Shares as follows: The restrictions shall lapse on the first to occur of (i) April 17, 2005 and (ii) the date of the Grantee's death. 4. Change in Control. Notwithstanding the provisions of Section 3 above, in the event of a Change in Control of the Company, as defined in the Flan, all restrictions applicable to the Restricted Shares shall lapse. 5. Forfeiture. All of the Restricted Shares shall be forfeited to the Company if, on or before April 1.7, 2015, the Grantee enters into an employment, commercial or consulting relationship with (i) another public utility, public utility holding company or a subsidiary of a public utility holding company, (ii) a regulated or nonregulated energy company or subsidiary of a regulated or nonregulated energy company, or (iii) an independent power producer; or solicits any employee of the Company or its subsidiaries to work for a business entity described in this Section 5; provided, however, the Grantee shall be allowed to undertake an employment, commercial or consulting arrangement with a business entity whose business operations are described above if the Chief Executive Officer of the Company agrees in writing that such activities would not conflict with the best interests of the Company, which agreement shall not he unreasonably withheld. 6. Rights as Stockholder. During the restriction period, the Grantee shall be entitled to all of the rights of a stockholder with respect to the Restricted Shares, including without limitation the right to vote and tender such Restricted Shares, and to receive dividends and other distributions payable with respect to such Restricted Shares since the Date of Award. 7. Escrow of Share Certificates. Certificates for the Restricted Shares shall be issued in the Grantee's name and shall be held in escrow by the Company until all restrictions lapse or such Shares are forfeited as provided herein. A certificate or certificates representing the Restricted Shares as to which restrictions have lapsed shall be delivered from escrow by the Company to the grantee upon such lapse. 8. Government Regulations. Notwithstanding anything contained herein to the contrary, the Company's obligation to issue or deliver certificates evidencing the Restricted Shares shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or rational securities exchanges as may be required. 9. Withholding Taxes. The Company shall have the right to require the Grantee to remit to the Company, or to withhold from other amounts payable to the Grantee, as compensation or otherwise, an amount sufficient to satisfy all federal, state and local withholding tax requirements as provided in the Plan. 10. Governing Law. This Agreement shall be construed under the laws of the State of Indiana. In Witness Whereof, the Company has caused this Award to be granted, and the Grantee has accepted this Award, as of the date first above written. NISOURCE INC. By: ____________________________ Chairman of the Nominating and Compensation Committee Board of Directors _________________________________ Stephen P. Adik, Grantee -2- EXHIBIT 3 A. Vested NiSource Stock Options
GRANT EXPIRATION PLAN GRANT OPTIONS OPTION OPTIONS OPTIONS OPTIONS DATE DATE ID TYPE GRANTED PRICE OUTSTANDING VESTED EXERCISABLE - --------- ---------- ---- ------------- ------- ---------- ----------- ------- ----------- 8/23/1994 8/23/2004 1988 Non-Qualified 16,000 $14.375000 16,000 16,000 16,000 8/22/1995 8/22/2005 1988 Non-Qualified 20,000 $16.218800 20,000 20,000 20,000 8/27/1996 8/27/2006 1988 Non-Qualified 20,000 $18.906300 20,000 20,000 20,000 8/26/1997 8/26/2007 1994 Non-Qualified 20,000 $20.640700 20,000 20,000 20,000 8/25/1998 8/25/2008 1994 Non-Qualified 20,000 $29.218800 20,000 20,000 20,000 8/24/1999 8/24/2009 1994 Non-Qualified 30,000 $24.593800 30,000 30,000 30,000 1/31/2000 1/31/2010 1994 Non-Qualified 45,000 $18.437500 45,000 45,000 45,000 8/22/2000 8/22/2010 1994 Non-Qualified 45,000 $22.22000 45,000 45,000 45,000 1/1/2001 1/1/2011 1994 Non-Qualified 56,604 $25.940000 56,604 56,604 56,604 1/25/2002 1/25/2012 1994 Non-Qualified 68,493 $21.005000 68,493 68,493 68,493 1/1/2003 1/1/2013 1994 Non-Qualified 135,546 $19.840000 135,546 135,546 135,546
B. Vested Restricted Shares 1. 151,992 restricted NiSource shares which vest on January 1, 2004. C. Vested NiSource Contingent Shares 1. 25,000 contingent NiSource shares granted in 2000 and vesting on January 29, 2004. 2. 25,000 contingent NiSource shares granted in 2000 and vesting on January 29, 2005. 3. 16,361 contingent NiSource shares granted in 2001 and vesting on January 1, 2004. 4. 16,360 contingent NiSource shares granted in 2001 and vesting on January 1, 2005. 5. 27,765 contingent TARSAP NiSource shares granted in 2003 and vesting on January 1, 2004. -3- EX-10.8 8 c83669exv10w8.txt NONCOMPETITION AGREEMENT DATED 2/12/99 EXHIBIT 10.8 NONCOMPETITTON AGREEMENT THIS NONCOMPETITION AGREEMENT is made as of February 12, 1999, by and between Bay State Gas Company, a Massachusetts corporation ("Company"), and Roger A. Young ("Young"). RECITALS l. Pursuant to the Agreement and Plan of Merger dated as of December 18, 1997 ("Merger Agreement") by and among NIPSCO Industries, Inc, ("NIPSCO"), the Company (which was previously named Acquisition Gas Company) and Bay State Gas Company, a Massachusetts corporation ("Bay State"), Bay State merged on this date with and into the Company ("Merger"). 2. The Company and Young desire to enter arrangements to preclude Young from engaging in activities during his employment and upon his termination of employment with the Company (or any corporation which is a direct or indirect subsidiary of NIPSCO) which compete with the Company, NIPSCO and its subsidiaries or any of their predecessors. NOW THEREFORE, in consideration of the mutual covenants and promises herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Young, each intending to be legally bound, agree as follows: 1. COVENANTS CONCERNING COMPETITION (a) Covenant Not To Compete. During the term of Young's employment with the Company and for a period of three years thereafter, Young will not in any manner, directly or indirectly: (i) manage, consult, be employed by, operate, join, promote, be compensated by, render advice to, control or participate in the business of any individual, firm, corporation, institution or company engaged in the Same or Similar Activities (as defined below) carried on by Bay State, the Company, NIPSCO or its subsidiaries or any of their predecessors in any of the United States (excluding Alaska and Hawaii); or (ii) own or have any ownership interest in any privately-held corporation, firm, institution or company engaged in the Same or Similar Activities carried on by Bay State, the Company, NIPSCO or its subsidiaries or any of their predecessors in any of the United States (excluding Alaska and Hawaii); or (iii) own or have an ownership interest of more than 2% of the publicly-traded securities of any public corporation, firm, institution or company engaged in the Same or Similar Activities carried on by Bay State, the Company, NIPSCO or its subsidiaries or any of their predecessors in any of the United States (excluding Alaska and Hawaii). For purposes of the Noncompetition Agreement, Same or Similar Activities shall mean the operation of a: (i) natural gas utility business, (ii) electric utility business, (iii) gas or electric generator business, (iv) gas or electric distribution business, (v) gas transportation business, (vi) gas pipeline or transmission business, (vii) pipeline construction business, (viii) utility locating and marking services business, (ix) business involving the provision of non-regulated energy products and services of a type provided by Bay State as of this date, and (x) any business involving gas storage facilities. (b) Non-Solicitation. During the term of Young's employment with the Company and for a period of three years thereafter, Young will not in any manner, directly or indirectly, cause, persuade, solicit, induce or attempt to do any of the foregoing in order to: (i) cause any person, business or entity which is a supplier or customer of the Company, NIPSCO or its subsidiaries at any time during the term of his employment to terminate any written or oral agreement or understanding with the Company, NIPSCO or its subsidiaries; or (ii) cause any person employed by the Company, NIPSCO or its subsidiaries at any time during the term of his employment to terminate their employment with the Company, NIPSCO or its subsidiaries in order to work for any individual, firm, corporation, institution or company engaged in the Same or Similar Activities carried on by the Company, NIPSCO or its subsidiaries in any of the United States (excluding Alaska and Hawaii). (c) Judicial Modification of Covenants Concerning Competition. If any provision contained in this Section 1 shall for any reason be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Section l, rather this Section 1 shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. It is the intention of the parties that if any of the restrictions or covenants contained herein is held to cover a geographic area or to be of a duration of time which is not permitted by applicable law, or in any way construed to be too broad or to any extent invalid, such provisions shall not be construed to be null, void or of no effect, but, to the extent such provision would be valid or enforceable under applicable law if limited in scope or duration, a court of competent jurisdiction shall construe and interpret or reform this Section 1 to provide for a covenant having the maximum enforceable geographic area, time period and other provisions (not greater than those contained herein) as shall be valid and enforceable under such applicable law. (d) Company's and NIPSCO's Interest. Young acknowledges that the Company and NIPSCO and its subsidiaries have a legitimate interest which the provisions of this Section 1 are reasonably necessary to protect, that the restrictions on competition contained in this Section 1 are reasonable and that the consideration set forth in Section 2 is sufficient for purposes of this Section 1. 2 (e) Survival of Obligations. If Young's employment with the Company is terminated for any reason, Young's duties, obligations and responsibilities under this Noncompetition Agreement shall survive and shall continue as set forth herein. 2. CONSIDERATION In consideration of Young entering into this Noncompetition Agreement, Young shall be paid compensation as follows: (a) Consideration. In consideration of Young entering into this Noncompetition Agreement, the Company will be making principal payments to Young in connection with this Noncompetition Agreement in the amount of $3,200,000. Except as provided in this Section 2(a), the Company shall pay Young the payment in the amounts shown in the column "Payment" and on the dates set forth on Schedule 2(a) attached hereto. In the event Young is not a director of NIPSCO on June 30, 2002, and his failure to be a director is not due to his death or resignation as a director, then the Company shall pay Young the amount shown in the column "Payment" for June 2002 as set forth in Schedule 2(b) attached hereto. In the event Young is not a director of NIPSCO at any time between June 30, 1999 and June 30, 2005, and such failure is due to Young's resignation as a director, then the Company shall pay to Young in a lump sum the sum of the amounts set forth in the columns "End Balance" and "Payment" on Schedule 2(a) which corresponds to the date of the calendar quarter during which such resignation occurs. If Young dies prior to the payment by the Company of all of the amounts set forth on Schedule 2(a) and Young has a surviving spouse, at the option of Young's surviving spouse, the Company shall either (i) pay to Young's surviving spouse in a lump sum the sum of the amounts set forth on Schedule 2(a) in the columns "End Balance" and "Payment" which corresponds to the date of the calendar quarter during which Young died or (ii) continue to pay to Young's surviving spouse the payment plus accrued interest thereon in the amounts and on the dates set forth on Schedule 2(a). If Young dies prior to the payment by the Company of all of the amounts set forth on Schedule 2(a) and Young does not have a surviving spouse, the Company shall pay to Young's Beneficiary in a lump sum the sum of the amounts set forth on Schedule 2(a) in the columns "End Balance" and "Payment" which corresponds to the date of the calendar quarter during which Young died. For purposes of this Agreement, Young's "Beneficiary" shall be any person, trust or other entity designated in writing by Young, or if not so designated, the personal representative of Young's estate or if no such representative shall be appointed within six months after the date of Young's death, Young's heirs under the laws of descent arid distribution in effect in the state in which Young is domiciled at the date of his death. 3. BREACH Young acknowledges that the Company would be irreparably harmed by any breach of Section 1 and that there would be no adequate remedy at law or in damages to compensate the Company for any such breach. Accordingly, the Company will be entitled, in addition to any offer rights or remedies it may have at law or in equity, to apply for an injunction enjoining and restraining Young from doing or continuing to do any such act or any other violations or threatened violations of Section 1. 3 4. NOTICES Any notice or communication given pursuant to this Noncompetition Agreement must be in writing and shall be effective only if delivered personally; or sent by facsimile transmission; or delivered by overnight courier service; or sent by certified mall, postage paid, return receipt requested, to the recipient at the address indicated below or to such other address as the party being notified may have previously furnished to the other party by written notice pursuant to this Section 4: If to the Company or NIPSCO, to: NIPSCO Industries, Inc. 801 East 86th Avenue Merrillville, Indiana 46410 Telephone: (219) 647-6004 Facsimile: (219) 647-6061 Attn: Chairman, President and Chief Executive Officer If to Young, to: Roger A. Young 125 Mill Street P. O. Box 95 Sherborn, Massachusetts 01770 Telephone: (548) 653-1534 Notices under this Noncompetition Agreement shall be effective and deemed received on the date of personal delivery or facsimile transmission (as evidenced by facsimile confirmation of transmission); on the day after sending by overnight courier service (as evidenced by the shipping invoice signed by a representative of the recipient); or on the date of actual delivery to the party to whom such notice or communication was sent by certified mail, postage prepaid, return receipt requested (as evidenced by the return receipt signed by a representative of such party). 5. ENTIRE AGREEMENT; AMENDMENT This Noncompetition Agreement represents the entire agreement of the Company and Young with respect to the matters set forth in it. No amendment or modification of the terms of this Noncompetition Agreement shall be binding upon the parties unless reduced to writing and signed by each of the parties. 6. SEVERABILITY Any provision of this Noncompetition Agreement prohibited by law or deemed unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions. 4 7. GOVERNING LAW This Noncompetition Agreement shall be interpreted and construed under the laws of the State of Indiana. 8. SUCCESSORS AND ASSIGNS This Noncompetition Agreement shall inure to the benefit of the Company and its successors and assigns. 9. 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 Noncompetition Agreement to be 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. 10. SURVIVAL OF AGREEMENT This Noncompetition Agreement shall survive the termination of Young's employment with the Company and shall survive until the expiration or termination of this Noncompetition Agreement. 11. COUNTERPARTS This Noncompetition Agreement may be executed in counterparts, each of which shall be deemed an original. 12. LITIGATION EXPENSES In the event of any litigation or other proceeding between the Company and Young with respect to the subject matter of this Agreement and the enforcement of rights hereunder, the Company shall reimburse Young for all reasonable costs and expenses relating to such litigation or other proceeding as they are incurred, including reasonable attorneys fees and expenses, regardless of whether such litigation results in any settlement or judgment or order in favor of any party; provided, however, that any claim or action initiated by Young relating to this Agreement shall have been made or brought after reasonable inquiry and shall be well-grounded, in fact, and warranted by existing law or a good faith argument for the extension, modification or reversal of existing law, and that is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation. Notwithstanding any provision of Indiana law to the contrary, in no event shall Young be required to reimburse the Company for any of the costs and expenses relating to such litigation or other proceeding. The obligation of the Company under this paragraph 12 shall survive the termination for any reason of this Agreement (whether such termination is by the Company by Young, upon expiration of this Agreement or otherwise). [The remainder of this page left intentionally blank.] 5 IN WITNESS WHEREOF, the parties, intending to be legally bound hereby, have duly executed this Noncompetition Agreement as of the day and year first set forth above. BAY STATE GAS COMPANY By: /s/ Jeffrey W. Yundt Title: President and CEO /s/ Roger A. Young ROGER A. YOUNG The undersigned hereby guarantees the performance of the Company of its obligations hereunder. NIPSCO INDUSTRIES, INC. By: /s/ Mark D. Wyckoff Title: Vice President, Human Resources 6 SCHEDULE 2(a) Roger Young Non Compete Ending Date First Period 3/31/00 Deferral 0 quarters Interest Only 0 quarters Principal 22 quarters Interest Rate 6.76% 1.69%
Quarter Beg End Period Ending Balance Interest Principal Payment Balance 1 Mar-00 3,200,000 54,080 -4,080 50,000 3,204,080 2 Jun-00 3,204,080 54,149 -4,149 50,000 3,208,229 3 Sep-00 3,208,229 54,219 -4,219 50,000 3,212,448 4 Dec-00 3,212,448 54,290 -4,290 50,000 3,216,738 5 Mar-01 3,216,738 54,363 -4,363 50,000 3,221,101 6 Jun-01 3,221,101 54,437 -4,437 50,000 3,225,538 7 Sep-01 3,225,538 54,512 -4,512 50,000 3,230,049 8 Dec-01 3,230,049 54,588 -4,588 50,000 3,234,637 9 Mar-02 3,234,637 54,665 -4,665 50,000 3,239,303 10 Jun-02 3,239,303 54,744 -4,744 50,000 3,224,047 11 Sep-02 3,244,047 54,824 -4,824 50,000 3,248,871 12 Dec-02 3,248,871 54,906 -4,906 50,000 3,253,777 13 Mar-03 3,253,777 54,989 -4,989 50,000 3,258,766 14 Jun-03 3,258,766 55,073 -5,073 50,000 3,263,839 15 Sep-03 3,263,839 55,159 -5,159 50,000 3,268,998 16 Dec-03 3,268,998 55,246 -5,246 50,000 3,274,244 17 Mar-04 3,274,244 55,335 -5,335 50,000 3,279,579 18 Jun-04 3,279,579 55,425 -5,425 50,000 3,285,004 19 Sep-04 3,285,004 55,517 -5,517 50,000 3,290,520 20 Dec-04 3,290,520 55,610 -5,610 50,000 3,296,130 21 Mar-05 3,296,130 55,705 -5,705 50,000 3,301,835 22 Jun-05 3,301,835 55,801 3,301,835 3,357,636 0 23 Sep-05 0 0 0 0 0 24 Dec-05 0 0 0 0 0 25 Mar-06 0 0 0 0 0 26 Jun-06 0 0 0 0 0 27 Sep-06 0 0 0 0 0 28 Dec-06 0 0 0 0 0 29 Mar-07 0 0 0 0 0 30 Jun-07 0 0 0 0 0 31 Sep-07 0 0 0 0 0 32 Dec-07 0 0 0 0 0 33 Mar-08 0 0 0 0 0 34 Jun-08 0 0 0 0 0 35 Sep-08 0 0 0 0 0 36 Dec-08 0 0 0 0 0 37 Mar-09 0 0 0 0 0 38 Jun-09 0 0 0 0 0 39 Sep-09 0 0 0 0 0 40 Dec-09 0 0 0 0 0
SCHEDULE 2(b) Roger Young Non Compete Ending Date First Period 3/31/00 Deferral 0 quarters Interest Only 0 quarters Principal 22 quarters Interest Rate 6.76% 1.69%
Quarter Beg End Period Ending Balance Interest Principal Payment Balance 1 Mar-00 3,200,000 54,080 -4,080 50,000 3,204,080 2 Jun-00 3,204,080 54,149 -4,149 50,000 3,208,229 3 Sep-00 3,208,229 54,219 -4,219 50,000 3,212,448 4 Dec-00 3,212,448 54,290 -4,290 50,000 3,216,738 5 Mar-01 3,216,738 54,363 -4,363 50,000 3,221,101 6 Jun-01 3,221,101 54,437 -4,437 50,000 3,225,538 7 Sep-01 3,225,538 54,512 -4,512 50,000 3,230,049 8 Dec-01 3,230,049 54,588 -4,588 50,000 3,234,637 9 Mar-02 3,234,637 54,665 -4,665 50,000 3,239,303 10 Jun-02 3,239,303 54,744 3,239,303 3,294,047 0 11 Sep-02 0 0 0 0 0 12 Dec-02 0 0 0 0 0 13 Mar-03 0 0 0 0 0 14 Jun-03 0 0 0 0 0 15 Sep-03 0 0 0 0 0 16 Dec-03 0 0 0 0 0 17 Mar-04 0 0 0 0 0 18 Jun-04 0 0 0 0 0 19 Sep-04 0 0 0 0 0 20 Dec-04 0 0 0 0 0 21 Mar-05 0 0 0 0 0 22 Jun-05 0 0 0 0 0 23 Sep-05 0 0 0 0 0 24 Dec-05 0 0 0 0 0 25 Mar-06 0 0 0 0 0 26 Jun-06 0 0 0 0 0 27 Sep-06 0 0 0 0 0 28 Dec-06 0 0 0 0 0 29 Mar-07 0 0 0 0 0 30 Jun-07 0 0 0 0 0 31 Sep-07 0 0 0 0 0 32 Dec-07 0 0 0 0 0 33 Mar-08 0 0 0 0 0 34 Jun-08 0 0 0 0 0 35 Sep-08 0 0 0 0 0 36 Dec-08 0 0 0 0 0 37 Mar-09 0 0 0 0 0 38 Jun-09 0 0 0 0 0 39 Sep-09 0 0 0 0 0 40 Dec-09 0 0 0 0 0
EX-10.9 9 c83669exv10w9.txt EMPLOYMENT AGREEMENT DATED 2/12/99 EXHIBIT 10.9 EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of February 12, 1999, by and between Bay State Gas Company, a Massachusetts corporation ("Company"), and Roger A. Young ("Executive"). RECITALS 1. Pursuant to the Agreement and Plan of Merger dated as of December 18, 1997 ("Merger Agreement") by and among NIPSCO Industries, Inc. ("NIPSCO"), the Company (which was previously named Acquisition Gas Company) and Bay State Gas Company, a Massachusetts corporation ("Bay State"), Bay State merged on this date with and into the Company ("Merger"). 2. Executive was Chairman of Bay State and will be Chairman of the Company. 3. Company and Executive desire to enter into arrangements to provide for the continuation of Executive's employment following consummation of the Merger. NOW THEREFORE, in consideration of the mutual covenants and promises herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executive, each intending to be legally bound, agree as follows: 1. TERM The term of employment ("Term") shall commence as of the date of this Agreement and shall expire on the nine month anniversary thereof, unless sooner terminated as set forth in Section 5 below. 2. DUTIES Upon the terms and subject to the conditions set forth in this Agreement, the Company agrees to employ Executive as Chairman of the Company. Executive agrees to serve as Chairman of the Company and to perform such duties in and consistent with that office as may reasonably be assigned to him by the Company's Board of Directors. Executive agrees to devote his full time, energy and skill to the business of the Company except for periods of vacation and absences made necessary because of illness, authorized leaves of absence and holidays and to promote the Company's best interests during the Term. Executive further agrees not to work for any other employer as an employee during the Term; provided, however, that nothing in this Agreement shall preclude Executive from devoting time during reasonable periods required for: (i) serving as a director or member of a committee of any company or organization involving no conflict of interest with the Company or any of its subsidiaries or affiliates; (ii) delivering lectures and fulfilling speaking engagements; and (iii) engaging in educational, charitable or community activities, provided that such activities do not materially affect or interfere with the performance of Executive's obligations to the Company. 3. COMPENSATION AND BENEFITS During the Term, Executive shall be entitled to receive compensation and benefits as follows: (a) Base Compensation. Executive shall receive Base Compensation from the Company during the Term of $641,000, payable monthly. (b) Additional Benefits. During the Term and thereafter, Executive and his dependents shall be entitled to participate in any health plan, disability plan and life insurance plan or arrangement then made available by the Company to its senior executives generally during the Term or subsequent thereto, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements and the Company's practices with respect to such plans. During the Term, Executive shall also be entitled to all miscellaneous fringe benefits and perquisites provided to him or for his benefit during the nine months preceding the date hereof, as described in Schedule 3(b). However, Executive shall not be entitled to participate, from this date forward, in any non-qualified retirement plan (or any other deferred compensation plan) of the Company or NIPSCO, and no compensation payable to Executive under this Agreement shall be considered compensation for purposes of any non-qualified retirement plan (or any other deferred compensation plan) of the Company or NIPSCO. Upon termination of employment, Executive shall be entitled to receive his benefits from any qualified retirement plan of the Company or NIPSCO in which he participates. (c) Vacation. Upon commencement of the Term, Executive shall be granted vacation of 4 weeks. Such vacations shall be taken at times mutually convenient to the Company and Executive. 4. ADDITIONAL COMPENSATION Executive is entitled to receive additional compensation pursuant to a Severance Agreement between the Company and Executive dated December 12, 1996 (the "Severance Agreement"). The Company arid Executive agree that, with the exception of compensation payable to Executive under the 1997 Bay State Stock Performance Plan and the fringe benefits described in Section 3(b) of this Agreement, the compensation provided in this Section 4 and the Noncompetition Agreement by and between the Company and Executive dated the date hereof ("Noncompetition Agreement") is in lieu of any payment described in the Severance Agreement and that Executive shall be entitled to no payments pursuant to the Severance Agreement other than the compensation described in this Section 4, the 1997 Bay State Stock Performance Plan and the Noncompetition Agreement. Executive shall be entitled to receive such payments as follows: (a) Performance Incentive Bonus. Unless Executive is terminated for cause (as defined below) during the Term, Executive shall be entitled to receive an annual Performance Incentive Bonus equal to 3.75% of NIPSCO's consolidated earnings before extraordinary items, losses from discontinued operations, interest, taxes, depreciation and amortization ("EBITDA") 2 for fiscal year 1999. The maximum amount of the Bonus payable to Executive for the nine month period (without regard to interest) shall be $1,600,000 ("Maximum Amount"). Except as provided in this Section 4(a), the Company shall pay Executive the Bonus in the amounts shown in the column "Payment" and on the dates set forth on Schedule 4(a) attached hereto. In the event Executive is not a director of NIPSCO on June 30, 2002, and his failure to be a director is not due to his death or resignation as a director, then the Company shall pay Executive the Bonus in the amounts shown in the column "Payment" for June 2002 as set forth in Schedule 4(b) attached hereto. In the event Executive is not a director of NIPSCO at any time between June 30, 1999 and June 30, 2005, and such failure is due to Executive's resignation as a director, then the Company shall pay to Executive in a lump sum the sum of the amounts set forth in the columns "End Balance" and "Payment" on Schedule 4(a) which corresponds to the date of the calendar quarter during which such resignation occurs. The payments set forth on Schedules 4(a) and (b) are based on the assumption that the Maximum Amount will be earned during 1999. The payments set forth on Schedules 4(a) and (b) will be modified, consistent with the foregoing assumptions, in the event that: (i) Executive is terminated for cause during the Term, in which case, Executive shall not be entitled to any Bonus for or based on the fiscal year during which such termination occurs; or (ii) Executive does not earn the Maximum Amount in 1999, in which case, the payments set forth on Schedules 4(a) and (b) shall be adjusted to reflect the amount of the Bonus earned and the years in which the Bonus was actually earned. If Executive dies prior to the payment by the Company of all of the amounts set forth on Schedule 4(a) and Executive has a surviving spouse, at the option of Executive's surviving spouse, the Company shall either (i) pay to Executive's surviving spouse in a lump sum the sum of the amounts set forth on Schedule 4(a) in the columns "End Balance" and "Payment" which corresponds to the date of the calendar quarter during which Executive died or (ii) continue to pay to Executive's surviving spouse the Bonus in the amounts and on the dates set forth on Schedule 4(a). If Executive dies prior to the payment by the Company of all of the amounts set forth on Schedule 4(a) and Executive does not have a surviving spouse, the Company shall pay to Executive's Beneficiary in a lump sum the sum of the amounts set forth on Schedule 4(a) in the columns "End Balance" and "Payment" which corresponds to the date of the calendar quarter during which Executive died. (b) Gross-Up Payments. In the event it shall be determined that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Code Section 4999 or comparable state or local tax or any interest or penalties with respect to such excise tax or comparable state or local tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Executive shall be entitled to receive an additional payment (a "Gross-Up Payment"). The Gross-Up Payment shall be equal to the sum of the Excise Tax and all taxes (including any interest or penalties imposed with respect to such taxes) imposed upon the Gross-Up Payment. If Executive determines that a Gross-Up Payment is required, Executive shall so notify the Company in writing, specifying the amount of Gross-Up Payment required and details as to the calculation thereof. The Company shall, within 30 days, either pay such Gross-Up Payment (net of applicable wage withholding) to Executive or furnish an unqualified opinion from Independent Tax Counsel (as defined below), addressed to Executive and the Company, that 3 there is substantial authority (within the meaning of Section 6661 of the Code) for the position that no Gross-Up Payment is required. "Independent Tax Counsel" means a lawyer with expertise in the area of executive compensation tax law, who shall be selected by Executive and shall be reasonably acceptable to the Company, and whose fees and disbursements shall be paid by the Company. If the Internal Revenue Service or other tax authority proposes in writing an adjustment to the income tax of Executive which would result in a Gross-Up Payment, Executive shall promptly notify the Company in writing and shall refrain for at least thirty days after giving such notice, if so permitted by law, from paying any tax (including interest, penalties and additions to tax) asserted to be payable as a result of such proposed adjustment. Before the expiration of such period, the Company shall either pay the Gross-Up Payment or provide an opinion from Independent Tax Counsel to Executive and the Company as to whether it is more likely than not that the proposed adjustment would be successfully challenged if the matter were to be litigated. If the opinion provides that a challenge would be more likely than not successful if the issue were litigated, and the Company requests in writing that Executive contest such proposed adjustment, Executive shall contest the proposed adjustment; provided that Executive, after such consultation with the Company, shall determine in his sole discretion the nature of all action to be taken to contest such proposed adjustment, including (a) whether any such action shall initially be by way of judicial or administrative proceedings, or both, (b) whether any such proposed adjustment shall be contested by resisting payment thereof or by paying the same and seeking a refund thereof, and (c) if the Executive shall undertake judicial action with respect to such proposed adjustment, the court or other judicial body before which such action shall be commenced and the court or other judicial body to which any appeals should be taken. Executive agrees to take appropriate appeals of any judicial decision that would require the Company to pay a Gross-Up Payment, provided the Company requests in writing that Executive do so and provides an opinion from Independent Tax Counsel to Executive and the Company that it is more likely than not that the appeal would be successful. Executive further agrees to settle, compromise or otherwise terminate a contest with the Internal Revenue Service or other tax authority with respect to all or a portion of the proposed adjustment giving rise to the Gross-Up Payment, if requested by the Company in writing to do so at any time, in which case Executive shall be entitled to receive from the Company the Gross-Up Payment. In no event shall Executive compromise or settle all or any portion of a proposed adjustment which would result in a Gross-Up Payment without the written consent of the Company. Executive shall not be required to take or continue any action pursuant to this Section 4(b) unless the Company acknowledges its liability under this Agreement in the event that the Internal Revenue Service of other tax authority prevails in the contest. The Company hereby agrees to indemnify Executive in a manner reasonably satisfactory to Executive for any fees, expenses, penalties, interest or additions to tax which Executive may incur as a result of contesting the validity of any Excise Tax and to pay Executive promptly upon receipt of a written demand therefor all costs and expenses which Executive may incur in connection with contesting such proposed adjustment (including reasonable fees and disbursements of Independent Tax Counsel); provided, however, that the Company shall not be required to pay any amount necessary to permit Executive's institution of a claim for refund under this Section 4(b). 4 If Executive shall have contested any proposed adjustment as above provided, and for so long as Executive shall be required under the terms of this paragraph to continue such contest, the Company shall not be required to pay a Gross-Up Payment until there occurs a Final Determination (as defined below) of the liability of Executive for the tax and any interest, penalties and additions to tax asserted to be payable as a result of such proposed adjustment. A "Final Determination" shall mean (a) a decision, judgment, decree or other order by any court of competent jurisdiction, which decision, judgment, decree or other order has become final after all allowable appeals by either party to the action have been exhausted, the time for filing such appeal has expired or Executive has no right under the terms hereof to request an appeal, (b) a closing agreement entered into under Section 7121 of the Code or any other settlement agreement entered into in connection with an administrative or judicial proceeding and with the consent of Executive, or (c) the expiration of the time for instituting a claim for refund, or if such a claim was filed, the expiration of the time for instituting suit with respect thereto, In the event Executive receives any refund from the Internal Revenue Service or other tax authority on account of an overpayment of Excise Tax, such amount, together with that part of any Gross-Up Payment attributable to such amount, shall be promptly paid by Executive to the Company. 5. TERMINATION OF EMPLOYMENT (a) Termination for Cause. The Company shall have the right to terminate Executive's employment with the Company for cause. For purposes of this Agreement, "cause" shall mean the following: (i) Executive's conviction for the commission of a felony or in the event of Executive's fraud or dishonesty which has resulted or is likely to result in material economic damage to the Company or any of its affiliates, as determined in good faith by the Directors of the Company at a meeting of the Board of Directors at which Executive is provided an opportunity to be heard; or (ii) Executive's violation or breach of any material provision of this Agreement or the Noncompetition Agreement and the continuation thereof after the receipt by Executive of written notice from the Company. In the event it is being proposed by the Company that Executive be terminated for cause, Executive shall be entitled to a hearing at the Board of Directors meeting during which the Executive's proposed termination will be acted upon, and Executive and his legal counsel (whose reasonable legal fees shall be paid by the Company) shall be entitled to be present at such meeting. (b) Termination by Executive. Executive shall have the right, at any time during the term of this Agreement, and for any reason, to terminate his employment with the Company upon giving 30-days' written Notice of Termination as set forth below to the Company; provided, however that Executive's employment shall not be deemed terminated by Executive as a result of the actual of proposed assignment or reassignment by the Company of Executive to another place of employment more than 50 miles from Executive's current place of employment, (c) Compensation in the Event of Termination for Cause or by Executive. If Executive's employment with the Company is terminated by the Company for cause, or if Executive's employment with the Company is terminated by Executive, then (i) the Base Compensation provided for in Section 3 shall cease to accrue as of the date of termination of Executive's employment with the Company ("Termination Date") specified in the Notice of 5 Termination as set forth below; (ii) the Company shall pay to Executive any compensation payable in the amount, at the time and in the manner set forth in Sections 3 and 4 and specifically shall pay the Bonus described in Section 4(a) plus any accrued interest thereon if termination is other than for cause; and (iii) Executive and his dependents shall cease to participate in the benefit plans and programs, as provided for in Section 3, as of the Termination Date specified in the Notice of Termination. Any benefits payable under insurance or health plans as a result of Executive's participation in such plans through the Termination Date shall be paid when due under those plans. (d) Disability. The company shall have the right to terminate Executive's employment effective after the determination that Executive is unable to work due to a Disability. If Executive's employment is terminated pursuant to this Section 5(d), then: (i) the Base Compensation provided for in Section 3 shall cease to accrue as of the Termination Date specified in the Notice of Termination as set forth below; (ii) the Company shall pay to Executive any compensation payable in the amount, at the time and in the manner set forth in Sections 3 and 4 and, specifically, shall pay the amount described in Section 4(a); and (iii) at the option of Executive, Executive and his dependents may continue to participate in the benefit plans as provided for in Section 3 to the extent Executive and his dependents are eligible to participate in such benefit plans pursuant to the terms of such benefit plans. Any benefits payable under insurance and health plans as a result of Executive's participation in such plans through the Termination Date shall be paid when due under those plans. Following the Termination Date, the Company is not obligated to provide Executive or his dependents the benefits provided for in Section 3 in the event that Executive or his dependents are not eligible for participation in such plans pursuant to the terms of such plans due to the termination of Executive's employment with the Company or for any other reason. For purposes of this Agreement, "Disability" shall mean a physical or mental disability, as determined by an independent physician selected by the Company, that renders Executive incapable of performing his duties under this Agreement for 180 days or more within any 365-day period, of which at least 90 days are consecutive. The Termination Date pursuant to this Section 5(d) shall be no earlier than the date of the first day following the 180-day period described in this paragraph. (e) Death. If Executive dies during the term of this Agreement, the Company shall (i) pay Executive's Base Compensation for the period ending on the date of his death to his Beneficiary; and (ii) pay to Executive's Beneficiary any compensation payable in the amount, at the time and in the manner set forth in Sections 3 and 4 and specifically shall pay the amounts described in Section 4(a). Executive's dependents may continue to participate in the benefit plans as provided for in Section 3 to the extent Executive's dependents are eligible to participate in such benefit plans pursuant to the terms of such benefit plans. Following the Termination Date, the Company is not obligated to provide Executive's dependents the benefits provided for in Section 3 in the event that Executive's dependents are not eligible for participation in such plans pursuant to the terms of such plans due to the termination of Executive's employment with the Company or for any other reason. For purposes of this Agreement, Executive's "Beneficiary" shall be any person, trust or other entity designated in writing by Executive, or if not so designated, the personal 6 representative of Executive's estate or if no such representative shall be appointed within six months after the date of Executive's death, Executive's heirs under the laws of descent and distribution in effect in the state in which Executive is domiciled at the date of his death). (f) Other Termination. If Executive's employment with the Company is terminated other than pursuant to Sections 5(a), (b), (d) or (e), then (i) the Base Compensation provided for in Section 3 shall continue being paid through the nine month anniversary of the date of this Agreement as if Executive had continued to be employed through such period; and (ii) the Company shall pay to Executive any compensation described in Section 4. If Executive's employment with the Company is terminated due to Executive's retirement, at the option of Executive, Executive and his dependents may continue to participate in the benefit plans as provided for in Section 3 to the extent Executive and his dependents are eligible to participate in such benefit plans pursuant to the terms of such benefit plans. The participation of Executive and his dependents in such plans shall cease as of the date Executive becomes employed by another employer. Following the Termination Date, the Company is not obligated to provide Executive or his dependents the benefits provided for in Section 3 in the event that Executive or his dependents are not eligible for participation in such plans pursuant to the terms of such plans due to the termination of Executive's employment with the Company or for any other reason. (g) Notice of Termination. Any termination of Executive's employment with the Company pursuant to this Section 5 (except in the circumstances of Executive's death) shall be communicated by a written notice of termination by the terminating party to the other party ("Notice of Termination") and shall indicate the Termination Date. The Notice of Termination by the Company for termination for cause shall indicate the specific provisions of this Agreement relied upon and shall set forth the reason for such termination. (h) Survival of Obligations Provided for in Section 6 and Noncompetition Agreement. If Executive's employment with the Company is terminated for any reason, Executive's obligations, duties and responsibilities, as provided for in Section 6 and the Noncompetition Agreement shall survive the termination of Executive's employment and shall continue as set forth therein. 6. CONFIDENTIALITY (a) Covenant Concerning Confidentiality. Executive agrees that he shall not disclose, during the Term and thereafter, without the prior written consent of NIPSCO, to anyone outside of the Company, NIPSCO and its subsidiaries any confidential matters of the Company, NIPSCO or its subsidiaries or their predecessors for as long as such matters remain confidential and not generally known to the public, including without limitation, trade secrets, customer lists, pricing policies, operating methods, any proprietary information of any nature or any information concerning the business of, or any customer, representative, agent or employee of, the Company, NIPSCO or its subsidiaries or their predecessors that was obtained by Executive in the course of his employment by the Company, NIPSCO or its subsidiaries or their predecessors, unless such disclosure is made as a proper part of performing his duties for the Company. Executive further agrees that if his employment by the Company is terminated for any reason, he will not take with him, but will leave with and deliver to the Company, any and all records and papers of whatever nature that relates to his employment by the Company or bears any information about the 7 Company, NIPSCO or its subsidiaries or their predecessors. In the event Executive violates this provision, the Company shall be entitled to any and all its remedies at law or in equity but shall not be entitled, unless directed by a court of law, to withhold payment of any amounts due Executive hereunder. (b) Limitation on Covenant Concerning Confidentiality. Executive's obligations pursuant to this Section shall not apply to any confidential information if and to the extent Executive is required pursuant to any statute, law, ordinance, rule, resolution or order of the U.S. Congress, any state or local legislature, a judge or an administrative law judge to testify in or to a legislative, judicial or regulatory proceeding or otherwise to disclose such confidential information. All such information is and will remain the exclusive property of NIPSCO. For purposes of this Agreement, the terms "trade secrets" and "confidential information" include, but are not limited to, processes, methods, techniques, systems, formulas, patents, models, devices, compilations, customer lists or any information of whatever nature that gives to the Company, Bay State and its subsidiaries an opportunity to obtain an advantage over a competitor who did not know or use it, but excludes matters which, without breach of Executive's obligations, are generally known to the public. (c) Judicial Modification of Covenant Concerning Confidentiality. If any provision contained in this Section shall for any reason be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Section, rather this Section shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. It is the intention of the parties that if any of the restrictions or covenants contained herein is held to any extent invalid, such provisions shall not be construed to be null, void or of no effect, but, to the extent such provision would be valid or enforceable under applicable law if limited in scope, a court of competent jurisdiction shall construe and interpret or reform this Section to provide for a covenant having the maximum enforceable scope and other provisions (not greater than those contained herein) as shall be valid and enforceable under such applicable law. 7. NO ASSIGNMENT No interest or amount payable to Executive, his spouse or any other beneficiary under this Agreement shall be assignable (in law or equity) by Executive or such beneficiary and shall not be subject to any manner of alienation, sale, transfer, assignment, claims of creditors, pledge, attachment, garnishment, levy, execution or encumbrance of any kind. No such interest or amount payable or right to receive a payment or distribution may be taken, voluntarily or involuntarily, for the satisfaction of the obligations or debts of, or other claims against, Executive or his spouse or other beneficiary, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings. This Agreement is personal in nature and, except as set forth in Section 13, neither this Agreement nor any rights or obligations under it may be assigned or delegated by either party without the express written consent of the other. 8 8. INDEMNITY Executive shall be indemnified under the Company's By-Laws and covered by officers liability insurance policies to the extent the Company or NIPSCO provides such coverage for its other officers. 9. NOTICES Any notice or communication given pursuant to this Agreement must be in writing and shall be effective only if delivered personally; or sent by facsimile transmission; or delivered by overnight courier service; or sent by certified mail, postage paid, return receipt requested, to the recipient at the address indicated below or to such other address as the party being notified may have previously furnished to the other party by written notice pursuant to this Section 9: If to the Company, to: NIPSCO Industries, Inc. 801 East 86th Avenue Merrillville, Indiana 46410 Telephone: (219) 647-6004 Facsimile: (219) 647-6061 Attn: Chairman, President and Chief Executive Officer If to Executive, to: Roger A. Young 125 Mill Street P.O. Box 95 Sherborn, Massachusetts 01770 Telephone: (508) 653-1534 Notices under this Agreement shall be effective and deemed received on the date of personal delivery or facsimile transmission (as evidenced by facsimile confirmation of transmission); on the day after sending by overnight courier service (as evidenced by the shipping invoice signed by a representative of the recipient); or on the date of actual delivery to the party to whom such notice or communication was sent by certified mail, postage prepaid, return receipt requested (as evidenced by the return receipt signed by a representative of such party). 10. ENTIRE AGREEMENT; AMENDMENT This Agreement and the Noncompetition Agreement represent the entire agreement of the Company and Executive with respect to the matters set forth in them. No amendment or modification of the terms of this Agreement shall be binding upon the parties unless reduced to writing and signed by each of the parties. 9 11. SEVERABILITY Any provision of this Agreement prohibited by law or deemed unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions. 12. GOVERNING LAW This Agreement shall be interpreted and construed under the laws of the State of Indiana. 13. SUCCESSORS AND ASSIGNS This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns. 14. 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 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. 15. SURVIVAL OF PROVISIONS The provisions of Sections 6, 8, 10, 11, 12, 13, 14 and 15 of this Agreement and the Noncompetition Agreement shall survive the termination of Executive's employment with the Company and the expiration or termination of this Agreement. 16. COUNTERPARTS This Agreement may be executed in counterparts, each of which shall be deemed an original. 17. WITHHOLDING The Company may withhold from any payment that it is required to make under this Agreement amounts sufficient to satisfy applicable withholding requirements under any federal, state or local law. 18. LITIGATION EXPENSES In the event of any litigation or other proceeding between the Company and Executive with respect to the subject matter of this Agreement and the enforcement of rights hereunder, the Company shall reimburse Executive for all reasonable costs and expenses relating to such litigation or other proceeding as they are incurred, including reasonable attorneys fees and expenses, regardless of whether such litigation results in any settlement or judgment or order in favor of any party; provided, however, that any claim or action initiated by Executive relating to this Agreement shall have been made or brought after reasonable inquiry and shall be well- 10 grounded, in fact, and warranted by existing law or a good faith argument for the extension, modification or reversal of existing law, and that is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation. Notwithstanding any provision of Indiana law to the contrary, in no event shall Executive be required to reimburse the Company for any of the costs and expenses relating to such litigation or other proceeding. The obligation of the Company under this paragraph 18 shall survive the termination for any reason of this Agreement (whether such termination is by the Company by Executive, upon expiration of this Agreement or otherwise). [The remainder of this page left intentionally blank) 11 IN WITNESS WHEREOF, the parties, intending to be legally bound hereby, have duly executed this Agreement as of the day and year first set forth above. BAY STATE GAS COMPANY By: /s/ Jeffrey W. Yundt Title: President and CEO /s/ Roger A. Young ROGER A. YOUNG The undersigned hereby guarantees the performance of the Company of its obligations hereunder. NIPSCO INDUSTRIES, INC. By: /s/ Mark D. Wykoff Title: Vice President, Human Resources 12 SCHEDULE 4(a) Roger Young Performance Incentive Ending Date First Period 3/31/00 Deferral 0 quarters Interest Only 0 quarters Principal 22 quarters Interest Rate 6.76% 1.69%
Quarter Beg. End Period Ending Balance Interest Principal Payment Balance - ------------- --------- -------- --------- --------- --------- 1 Mar-00 1,600,000 27,040 -2,040 25,000 1,602,040 2 Jun-00 1,602,040 27,074 -2,074 25,000 1,604,114 3 Sep-00 1,604,114 27,110 -2,110 25,000 1,606,224 4 Dec-00 1,606,224 27,145 -2,145 25,000 1,608,369 5 Mar-01 1,608,369 27,181 -2,181 25,000 1,610,551 6 Jun-01 1,610,551 27,218 -2,218 25,000 1,612,769 7 Sep-01 1,612,769 27,256 -2,256 25,000 1,615,025 8 Dec-01 1,615,025 27,294 -2,294 25,000 1,617,319 9 Mar-02 1,617,319 27,333 -2,333 25,000 1,619,651 10 Jun-02 1,619,651 27,372 -2,372 25,000 1,622,023 11 Sep-02 1,622,023 27,412 -2,412 25,000 1,624,436 12 Dec-02 1,624,436 27,453 -2,453 25,000 1,626.889 13 Mar-03 1,626,889 27,494 -2,494 25,000 1,629,383 14 Jun-03 1,629,383 27,537 -2,537 25,000 1,631,920 15 Sep-03 1,631,920 27,579 -2,579 25,000 1,634,499 16 Dec-03 1,634,499 27,623 -2,623 25,000 1,637,122 17 Mar-04 1,637,122 27,667 -2,667 25,000 1,639,789 18 Jun-04 1,639,789 27,712 -2,712 25,000 1,642,502 19 Sep-04 1,642,502 27,758 -2,758 25,000 1,645,260 20 Dec-04 1,645,260 27,805 -2,805 25,000 1,648,065 21 Mar-05 1,648,065 27,852 -2,852 25,000 1,650,917 22 Jun-05 1,650,917 27,901 1,650,917 1,678,818 0 23 Sep-05 0 0 0 0 0 24 Dec-05 0 0 0 0 0 25 Mar-06 0 0 0 0 0 26 Jun-06 0 0 0 0 0 27 Sep-06 0 0 0 0 0 28 Dec-06 0 0 0 0 0 29 Mar-07 0 0 0 0 0 30 Jun-07 0 0 0 0 0 31 Sep-07 0 0 0 0 0 32 Dec-07 0 0 0 0 0 33 Mar-08 0 0 0 0 0 34 Jun-08 0 0 0 0 0 35 Sep-08 0 0 0 0 0 36 Dec-08 0 0 0 0 0 37 Mar-09 0 0 0 0 0 38 Jun-09 0 0 0 0 0 39 Sep-09 0 0 0 0 0 40 Dec-09 0 0 0 0 0
SCHEDULE 4(b) Roger Young Performance Incentive Ending Date First Period 3/31/00 Deferral 0 quarters Interest Only 0 quarters Principal 22 quarters Interest Rate 6.76% 1.69%
Quarter Beg. End Period Ending Balance Interest Principal Payment Balance - ------------- --------- -------- --------- --------- --------- 1 Mar-00 1,600,000 27,040 -2,040 25,000 1,602,040 2 Jun-00 1,602,040 27,074 -2,074 25,000 1,604,114 3 Sep-00 1,604,114 27,110 -2,110 25,000 1,606,224 4 Dec-00 1,606,224 27,145 -2,145 25,000 1,608,369 5 Mar-01 1,608,369 27,181 -2,181 25,000 1,610,551 6 Jun-01 1,610,551 27,218 -2,218 25,000 1,612,769 7 Sep-01 1,612,769 27,256 -2,256 25,000 1,615,025 8 Dec-01 1,615,025 27,294 -2,294 25,000 1,617,319 9 Mar-02 1,617,319 27,333 -2,333 25,000 1,619,651 10 Jun-02 1,619,651 27,372 1,619,651 1,647,023 0 11 Sep-02 0 0 0 0 0 12 Dec-02 0 0 0 0 0 13 Mar-03 0 0 0 0 0 14 Jun-03 0 0 0 0 0 15 Sep-03 0 0 0 0 0 16 Dec-03 0 0 0 0 0 17 Mar-04 0 0 0 0 0 18 Jun-04 0 0 0 0 0 19 Sep-04 0 0 0 0 0 20 Dec-04 0 0 0 0 0 21 Mar-05 0 0 0 0 0 22 Jun-05 0 0 0 0 0 23 Sep-05 0 0 0 0 0 24 Dec-05 0 0 0 0 0 25 Mar-06 0 0 0 0 0 26 Jun-06 0 0 0 0 0 27 Sep-06 0 0 0 0 0 28 Dec-06 0 0 0 0 0 29 Mar-07 0 0 0 0 0 30 Jun-07 0 0 0 0 0 31 Sep-07 0 0 0 0 0 32 Dec-07 0 0 0 0 0 33 Mar-08 0 0 0 0 0 34 Jun-06 0 0 0 0 0 35 Sep-06 0 0 0 0 0 36 Dec-08 0 0 0 0 0 37 Mar-09 0 0 0 0 0 38 Jun-09 0 0 0 0 0 39 Sep-09 0 0 0 0 0 40 Dec-09 0 0 0 0 0
EX-10.21 10 c83669exv10w21.txt AMENDMENT TO EXECUTIVE SEVERANCE POLICY EXHIBIT 10.21 Resolutions of the Nominating and Compensation Committee of the Board of Directors of NiSource Inc. Adopted August 25, 2003 WHEREAS, The Corporation and certain of its affiliates sponsor various severance plans and policies for employees of the Corporation and its affiliates; and WHEREAS, The Corporation desires to extend the term of each such plan and policy. NOW, THEREFORE, BE IT RESOLVED, That the Committee hereby extends the term of each severance plan and policy maintained for employees of the Corporation and its affiliates to December 31, 2003. FURTHER RESOLVED, That the Committee ratifies any action heretofore taken in connection with the foregoing resolution. FURTHER RESOLVED, That the appropriate officers of the Corporation are authorized to take such other action and execute such other documents as shall be appropriate to implement the foregoing resolution. EX-10.22 11 c83669exv10w22.txt EXECUTIVE SEVERANCE POLICY, EFFECTIVE 1/1/04 EXHIBIT 10.22 NISOURCE POLICY SUBJECT: EXECUTIVE SEVERANCE POLICY EFFECTIVE DATE: JUNE 1, 2002 REVISED: JANUARY 1, 2004 1. Purpose. The NiSource Executive Severance Policy ("Policy") was established, effective June 1, 2002, to provide Severance Pay and other benefits, to terminated executive-level employees of certain subsidiary and affiliate corporations of NiSource Inc. ("Company"), while they seek alternative employment. In consideration for such severance benefits, an employee will release the Company and its affiliated entities from any and all actions, suits, proceedings, claims and demands related to the termination. Benefits under the Policy shall be in lieu of any benefits available under the NiSource Severance Policy or any other severance plan or policy maintained by the Company or any Affiliate. The Policy is amended and restated effective January 1, 2004. 2. Administration. The Policy is administered by the Nominating and Compensation Committee of the Board of Directors of the Company ("Committee"). The Committee has the complete discretion and authority with respect to the Policy and its application. The Committee reserves the right to interpret the Policy, prescribe, amend and rescind rules and regulations relating to it, determine the terms and provisions of severance benefits and make all other determinations it deems necessary or advisable for the administration of the Policy. The determination of the Committee in all matters regarding the Policy shall be conclusive and binding on all persons. The Committee may delegate any of its duties under the Policy to the Executive Vice President of Human Resources and Communications of the Company. 3. Scope. The Policy will apply to all full-time or part-time regular, non-union employees of the Company and each of its subsidiary corporations (collectively, "Affiliates" and each an "Affiliate") whose target bonus under the NiSource Inc. Management Incentive Plan for the calendar year in which he or she becomes entitled to receive Severance Pay equals or exceeds 25% ("Participants"). 4. Eligibility for Severance Pay. A Participant becomes entitled to receive Severance Pay only if he or she is terminated by an Affiliate for any of the following reasons: (a) Reductions in force or other restructurings that eliminate the Participant's position. (b) The Participant's position must relocate and the Participant chooses not to relocate. (c) The Participant's position is constructively terminated. Constructive termination means the scope of the Participant's position is changed materially or the Participant's base pay is reduced or the Participant's total participation in the short-term and long-term incentive compensation plans of the Affiliates is materially reduced or is eliminated and the Participant chooses not to remain in the position. The decision on constructive termination shall be made by the Committee, not the Participant. If the Participant disagrees, the Participant must follow the claims procedure, as set forth in Section 15. 5. Conditions to Receipt of Benefits. (a) Severance Pay is not available to a Participant otherwise eligible for Severance Pay who transfers to another position within any Affiliate. (b) During the period in which a Participant is entitled to consider the execution of the release described in Section 6, he or she may be required to complete unfinished business projects and be available for discussions regarding matters relative to the Participant's duties. (c) A Participant must return, or agree to return, all Affiliate property and information to the Affiliate. (d) A Participant must agree to pay all outstanding amounts owed to any Affiliate and authorize the Affiliate to withhold any outstanding amounts from his or her final paycheck and/or Severance Pay. 6. Amount of Severance Pay. The amount of Severance Pay to which a Participant is entitled under the Policy is 52 weeks of base salary (at the rate in effect on the date of termination). A Participant who is receiving benefits under a short term disability plan maintained by any Affiliate will be entitled to Severance Pay at the end of the period of payment of short term disability if, and only if, (1) he or she is not then eligible for benefits under a long term disability plan maintained by an Affiliate, and (2) he or she is not offered employment with an Affiliate that, in the discretion of the Committee, is comparable to that in effect at the time the applicable period of short term disability commenced. Severance Pay will be paid to a Participant in one lump sum cash payment. Payment will be made as soon as practicable after the last to occur of (1) the date of the Participant's termination of employment, (2) the effective date of the Participant's valid executed release of the Affiliates, and their respective officers, directors and employees, from any 2 and all actions, suits, proceedings, claims and demands relating to the Participant's employment with the Affiliates and the termination thereof, (3) the effective date of the Participant's valid executed release and waiver of all rights and benefits required under the NiSource Severance Policy or any other severance policy or plan maintained by any Affiliate, and (4) the satisfaction of the conditions described in clauses (b), (c) and (d) of Section 5. Severance Pay shall be reduced by applicable amounts necessary to comply with federal, state and local income tax withholding requirements. 7. Benefits. (a) Welfare Benefits. A Participant entitled to Severance Pay shall receive, at the time of payment of Severance Pay, a lump sum payment equivalent to 130% of 52-weeks of COBRA (as defined in Section 4980B of the Internal Revenue Code of 1986, as amended, and Sections 601-609 of the Employee Retirement Income Security Act of 1974, as amended, or any successor sections) continuation coverage premiums in lieu of any continued medical, dental, vision, and other welfare benefits offered by the Company or any Affiliate. Such 52-week period of COBRA continuation coverage shall be included as part of the period during which the Participant may elect continued group health coverage under COBRA. (b) Outplacement Services. A Participant shall receive outplacement services, selected by the Company at its expense, for a period not to exceed 12 months. (c) Vacation. Accrual of vacation benefits will cease as of the date of termination of employment. Payment for earned and unused vacation time, based upon the vacation policy of the applicable Affiliate on the date of termination, will be included in the Participant's final regular pay check as an active employee. (d) Retirement Plans. Severance Pay shall not be considered for purposes of any retirement, pension, savings, profit sharing or pension plan maintained by any Affiliate. Participation by the Participant in each such plan as an active employee will cease as of the date of termination of employment, and the Participant will have only the rights of a terminated employee with respect to his or her benefits earned under such plan as of the date of termination of employment. 8. Unemployment Compensation. Applicable state law will determinate the eligibility of a Participant for unemployment compensation benefits. 9. Independent Contractor Status. A Participant who receives benefits pursuant to the Policy shall not be eligible at any time after termination of employment to enter into a consulting or independent contractor relationship with any Affiliate pursuant to which relationship he or she shall perform the same or similar services, upon the same or similar terms and conditions, as were applicable to such Participant on the date of termination of employment. 3 10. Death of Participant. If a Participant dies prior to receiving Severance Pay to which he or she is entitled under the Policy, payment will be made to the representative of his or her estate. 11. Term of Policy. The term of the Policy, as amended and restated herein, will commence on January 1, 2004 and will expire on December 31, 2005. 12. Amendment or Termination. (a) The Policy may be amended or terminated by the Company at any time during its term when, in its judgment, such amendment or termination is necessary or desirable. No such termination or amendment will affect the rights of any Participant who is then entitled to receive Severance Pay or other benefits under the Policy at the time of such amendment or termination. The Policy can only be changed by written endorsement by an officer of the Company and only when the Company attaches the written amendment to the Policy. No agent or other employee, other than an officer of the Company, has the authority to change or waive any provision of the Policy. (b) Severance benefits under the Policy are not intended to be a vested right. 13. Governing Law. The terms of the Policy shall, to the extent not preempted by federal law, be governed by, and construed and enforced in accordance with, the laws of the State of Indiana, including all matters of construction, validity and performance. 14. Miscellaneous Provisions. (a) Severance Pay and other benefits pursuant to the Policy shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge prior to actual receipt by a Participant, and any attempt to so anticipate, alienate, sell, transfer, assign, pledge, encumber or charge prior to such receipt shall be void and no Affiliate shall be liable in any manner for, or subject to, the debts, contracts, liabilities, engagements or torts of any person entitled to any Severance Pay or other benefits under the Policy. (b) Nothing contained in the Policy shall confer upon any individual the right to be retained in the service of any Affiliate, nor limit the right of any Affiliate to discharge or otherwise deal with any individual without regard to the existence of the Policy. (c) The Policy shall at all times be entirely unfunded. No provision shall at any time be made with respect to segregating assets of any Affiliate for payment of any Severance Pay or other benefits hereunder. No employee or any other person shall have any interest in any particular assets of any Affiliate by reason of the right to receive Severance Pay or other benefits under the Policy, and any such employee or any other person shall have only the rights of a general unsecured creditor of an Affiliate with respect to any rights under the Policy. 4 15. Claims Procedure. If a claim for benefits under the Policy by a Participant or his or her beneficiary is denied, either in whole or in part, the Committee will let the claimant know in writing within 90 days. If the claimant does not hear within 90 days, the claimant may treat the claim as if it had been denied. A notice of a denial of a claim will refer to a specific reason or reasons for the denial of the claim; will have specific references to the Policy provisions upon which the denial is based; will describe any additional material or information necessary for the claimant to perfect the claim and explain why such material information is necessary; and will have an explanation of the Policy's review procedure. The claimant will have 60 days after the date of the denial to ask for a review and a hearing. The claimant must file a written request with the Committee for a review. During this time the claimant may review pertinent documents and may submit issues and comments in writing. The Committee will have another 60 days in which to consider the claimant's request for review. If special circumstances require an extension of time for processing, the Committee may have an additional 60 days to answer the claimant. The claimant will receive a written notice if the extra days are needed. The claimant may submit in writing any document, issues and comments he or she may wish. The decision of the Committee will tell the claimant the specific reasons for its actions, and refer the claimant to the specific Policy provisions upon which its decision is based. 16. Rights Under ERISA. Each Participant in the Policy is entitled to certain rights and protection under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). ERISA provides that all Policy Participants shall be entitled to: (a) Examine, without charge, at the Company's office all Policy documents, and copies of all documents filed for the Policy with the United States Department of Labor, such as detailed annual reports and descriptions. (b) Obtain copies of all Policy documents and other Policy information upon written request to the Committee. The Committee may make a reasonable charge for the copies. (c) Receive a summary of the Policy's annual report. The Committee is required by law to furnish each Participant with a copy of the summary annual report. In addition to creating rights for Policy Participants, ERISA imposes duties upon the people who are responsible for the operation of an employee benefit plan. The people who operate the Policy, called "fiduciaries" of the Policy, have a duty to do so prudently and in the interest of the Policy Participants and beneficiaries. No one, including the Company, any affiliate or any other person, may fire a Participant or otherwise discriminate against a Participant in any way to prevent him or her from obtaining a benefit or exercising his or her rights under ERISA. If a Participant's claim for a benefit is denied in whole or in part, he or she must receive a written explanation of the reason for the denial. A Participant has the right to have the Committee review and reconsider his or her claim. Under ERISA, there are steps a Participant can take to enforce the above rights. For instance, if a Participant requests materials from the Committee and 5 does not receive them within thirty (30) days, he or she may file suit in a federal court. In such a case the court may require the Committee to provide the materials and pay the Participant up to $110 a day until the Participant receives the materials, unless the materials were not sent because of reasons beyond the control of the Committee. If a Participant has a claim for benefits, which is denied or ignored, in whole or in part, he or she may file suit in a state or federal court. If it should happen that the Policy fiduciaries misuse the Policy's money, or if a Participant is discriminated against for asserting his or her rights, he or she may ask assistance from the United States Department of Labor, or he or she may file suit in a federal court. The court will decide who should pay the court costs and legal fees. If the Participant is successful, the court may order the person he or she has sued to pay these costs and fees. If the Participant loses, the court may order him or her to pay these costs and fees, for example, if it finds his or her claim to be frivolous. If a Participant has questions about the Policy, he or she should contact the Committee. If a Participant has any questions about this statement or about his or her rights under ERISA, he or she should contact the nearest Area Office of the United States Labor-Management Services Administration, Department of Labor. 17. Policy Facts: Company: NiSource Inc. Address: 801 E. 86th Avenue Merrillville, Indiana 46410 - ----------------------------------------------------------------------------------------------------------- Plan Name: NiSource Executive Severance Policy - ----------------------------------------------------------------------------------------------------------- Type of Plan: Severance Policy-Welfare Benefits Plan - ----------------------------------------------------------------------------------------------------------- Policy Year: Calendar year - ----------------------------------------------------------------------------------------------------------- Employer Identification Number (EIN): 35-1719974 - ----------------------------------------------------------------------------------------------------------- Policy Number: ___ - ----------------------------------------------------------------------------------------------------------- Policy Administrator: Nominating and Compensation Committee of NiSource Inc. - ----------------------------------------------------------------------------------------------------------- Business Address: 801 E. 86th Avenue Merrillville, Indiana 46410 - ----------------------------------------------------------------------------------------------------------- Business Telephone: 219-647-5200 - -----------------------------------------------------------------------------------------------------------
6 Agent for Service of Legal Process: Nominating and Compensation Committee of NiSource Inc. - ----------------------------------------------------------------------------------------------------------- (Address) 801 E. 86th Avenue Merrillville, Indiana 46410 - -----------------------------------------------------------------------------------------------------------
7 IN WITNESS WHEREOF, the Company has caused this Policy to be executed in its name by its duly authorized officer this 26th day of January, 2003, effective as of the 1st day of January, 2004. NISOURCE INC. By: /s/ S. LaNette Zimmerman S. LaNette Zimmerman Its: Executive Vice President, Human Resources and Communications 8 EX-10.26 12 c83669exv10w26.txt DESCRIPTION OF ANNUAL INCENTIVE PLAN EXHIBIT 10.26 DESCRIPTION OF NISOURCE INC. 2003 ANNUAL INCENTIVE PLAN NiSource's annual incentive plan for the year 2003 covered most NiSource employees, including all NiSource executive officers. The Annual Incentive Plan established a trigger amount of financial performance (below which no annual incentive may be paid) and a maximum level (above which no additional annual incentive may be paid). Additionally, a profit sharing contribution of between 0.5% and 1.5% of an employee's eligible earnings may be made to the participant's account in the Company's 401(k) Savings Plan on behalf of all eligible employees, including the executive officers. In 2003, the trigger was based on income from continuing operations (after accounting for the cost of the incentive plan). For 2003, the Company exceeded the trigger amount of income from continuing operations resulting in payments under the Annual Incentive Plan to most of the Company's employees and to the executive officers. In February and March 2004, the incentive payments were made amounting to approximately 118% of the aggregate trigger amounts for all employees and profit sharing contributions to the 401(k) Savings Plan accounts at slightly above the trigger level of 0.5%. Each employee that participated in the plan was given an individual incentive opportunity that ranged from a "trigger" to "maximum" percentage. Annual incentives awarded to certain executive officers were based purely on overall corporate performance, rather than the individual performance of the executive. For the remainder of the employees who participated in the plan, the payment had two components. The first component was based on a formula and was equal to two-thirds of the amount the employee was entitled to receive based on the attainment of corporate financial measures in relation to his or her trigger percentage. The second component of the payment was left to the discretion of management. For non-exempt employees the second component was based on the performance of their respective business unit or corporate function and not on their individual performance. For exempt employees, NiSource senior management calculated the total pool owed to all exempt employees based on NiSource's income from continuing operations and subtracted the amount owed to employees under the formula portion of the plan. The remaining pool of money was allocated by senior management to the various business units and corporate functions based on senior management's assessment of the performance by that business unit or corporate function. The management of each business unit and corporate function was then allowed to distribute the money allocated to him or her based on an assessment of each individual employee's performance during the year. EX-10.27 13 c83669exv10w27.txt AMEND #1 TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EXHIBIT 10.27 FIRST AMENDMENT TO NISOURCE INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (AS AMENDED AND RESTATED EFFECTIVE JUNE 1, 2002) WHEREAS, NiSource Inc. ("Company") maintains the NiSource Inc. Supplemental Executive Retirement Plan, as Amended and Restated Effective June 1, 2002 ("Plan"), and WHEREAS, the Company, by action of the Chairman of its Board of Directors, may amend any provision of the Plan, except for Article III and Article IV which may only be amended by the Company; and WHEREAS, the Chairman of the Board of Directors of the Company, on behalf of the Company, wishes to amend Section 6.8 of the Plan; NOW THEREFORE, Section 6.8 of the Plan is hereby amended, effective March 1, 2003, by adding the following at the end thereof: Notwithstanding the preceding provisions of this Section 6.8, a Participant shall have the right to make the election set forth in this Section at any time during the first three months of calendar year 2003 with respect to a Change in Control that occurs during the last nine months of calendar year 2003. Any such election shall be irrevocable for calendar year 2003 and shall be subject to the other provisions of this Section 6.8. IN WITNESS WHEREOF, the Chairman of the Board of Directors of the Company, on behalf of the Company, has executed this First Amendment on this 25th day of February, 2003. NISOURCE INC. By: /s/ Gary L. Neale Gary L. Neale Title: Chairman of the Board of Directors EX-10.28 14 c83669exv10w28.txt AMEND #2 TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EXHIBIT 10.28 SECOND AMENDMENT TO THE NISOURCE INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (AS AMENDED AND RESTATED EFFECTIVE JUNE 1, 2002) WHEREAS, NiSource Inc. (the "Company") maintains the NiSource Inc. Supplemental Executive Retirement Plan, as amended and restated effective June 1, 2002 and further amended effective March 1, 2003 (the "Plan"); and WHEREAS, pursuant to Section 5.5 of the Plan, the Company deems it desirable to amend the Plan as described below. NOW, THEREFORE, Section 4.6 of the Plan is hereby amended, effective August 25, 2003, to read as follows: "4.6 Form of Payment. Notwithstanding Sections 4.1, 4.2 and 4.3, a Participant shall receive distribution of his Supplemental Retirement Pension in the same form as his distribution under the NiSource Pension Plan, computed in the same manner as in the NiSource Pension Plan, or under any other Qualified Pension Plan, computed in the same manner as in such Qualified Pension Plan. Any election under the NiSource Pension Plan or any other Qualified Pension Plan shall apply to his Supplemental Retirement Pension pursuant to the preceding sentence only if it is made by written instrument delivered to the Committee at least 30 days prior to the date of such distribution. If such election is not so made at least 30 days prior to the date of distribution of his Supplemental Retirement Pension, the Participant's Supplemental Retirement Pension shall be paid as a single-life Pension. If a Participant who makes an election pursuant to this Section 4.6 at least 30 days prior to the date of distribution dies prior to distribution pursuant to such election, such election shall be revoked and the other provisions of this Article IV shall apply." IN WITNESS WHEREOF, the Company has caused this Second Amendment to be executed on its behalf, by its officer duly authorized, this 25th day of August, 2003. NISOURCE INC. By: /s/ S. LaNette Zimmerman EX-10.29 15 c83669exv10w29.txt AMEND #3 TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EXHIBIT 10.29 THIRD AMENDMENT TO THE NISOURCE INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (AS AMENDED AND RESTATED EFFECTIVE JUNE 1, 2002) WHEREAS, NiSource Inc. (the "Company") maintains the NiSource Inc. Supplemental Executive Retirement Plan, as amended and restated effective June 1, 2002 and further amended effective March 1, 2003 and August 25, 2003 (the "Plan"); and WHEREAS, pursuant to Section 5.5 of the Plan, the Company deems it desirable to amend the Plan as described below. NOW, THEREFORE, Section 4.6 of the Plan is hereby amended, effective August 25, 2003, to read as follows: "4.6 Form of Payment. Notwithstanding Sections 4.1, 4.2 and 4.3, a Participant shall receive distribution of his Supplemental Retirement Pension in the same form as his distribution under the NiSource Pension Plan, computed in the same manner as in the NiSource Pension Plan, or under any other Qualified Pension Plan, computed in the same manner as in such Qualified Pension Plan. Any election under the NiSource Pension Plan or any other Qualified Pension Plan shall apply to his Supplemental Retirement Pension pursuant to the preceding sentence only if it is made by written instrument delivered to the Committee at least 30 days prior to the date of such distribution. If such election is not so made at least 30 days prior to the date of distribution of his Supplemental Retirement Pension, the Participant's Supplemental Retirement Pension shall be paid as a 50% joint and survivor Pension if such Participant is married, or as a single-life Pension if such Participant is unmarried. If a Participant who makes an election pursuant to this Section 4.6 at least 30 days prior to the date of distribution dies prior to distribution pursuant to such election, such election shall be revoked and the other provisions of this Article IV shall apply." IN WITNESS WHEREOF, the Company has caused this Third Amendment to be executed on its behalf, by its officer duly authorized, this 1st day of December 2003. NISOURCE INC. By: /s/ S. LaNette Zimmerman Its: Executive Vice President, Human Resources and Communications 2 EX-10.30 16 c83669exv10w30.txt FINANCING AGREEMENT DATED AS OF 12/1/03 ================================================================================ EXHIBIT 10.30 JASPER COUNTY, INDIANA, Issuer AND NORTHERN INDIANA PUBLIC SERVICE COMPANY, Company FINANCING AGREEMENT Dated as of December 1, 2003 The amounts payable to Jasper County, Indiana (the "Issuer") (except for amounts payable to, and certain rights and privileges of, the Issuer under Sections 3.4, 4.2(f), 5.3, 5.9, 5.10, 6.3, 6.4 and 6.5 hereof and any rights of the Issuer to receive any notices, certificates, requests, requisitions or communication hereunder) and certain other rights of the Issuer under this Financing Agreement have been pledged and assigned to National City Bank of Indiana, as Trustee, under the Indenture of Trust dated as of December 1, 2003, from the Issuer. ================================================================================ FINANCING AGREEMENT TABLE OF CONTENTS (This Table of Contents is not a part of this Agreement and is only for convenience of reference.)
SECTION HEADING PAGE ARTICLE I DEFINITIONS.......................................................... 1 ARTICLE II REPRESENTATIONS...................................................... 6 Section 2.1. Representations and Covenants by the Issuer.......................... 6 Section 2.2. Representations and Covenants by the Company......................... 7 ARTICLE III ISSUANCE OF THE BONDS................................................ 8 Section 3.1. Agreement to Issue Bonds; Application of Bond Proceeds............... 8 Section 3.2. Investments.......................................................... 8 Section 3.3. Arbitrage Covenant................................................... 9 Section 3.4. Costs of Issuance.................................................... 9 ARTICLE IV LOAN AND PROVISIONS FOR REPAYMENT.................................... 9 Section 4.1. Loan of Bond Proceeds................................................ 9 Section 4.2. Loan Repayments and Other Amounts Payable............................ 10 Section 4.3. No Defense or Set-Off................................................ 12 Section 4.4. Payments Pledged and Assigned........................................ 12 Section 4.5. Certain Payments to Paying Agent..................................... 13 Section 4.6. Payment of the Bonds and Other Amounts............................... 13 ARTICLE V SPECIAL COVENANTS AND AGREEMENTS..................................... 13 Section 5.1. Company to Maintain its Corporate Existence; Conditions under Which Exceptions Permitted................................... 13 Section 5.2. Financial Statements................................................. 14 Section 5.3. Maintenance and Repair; Insurance; Taxes; Etc........................ 14 Section 5.4. Recordation and Other Instruments.................................... 14 Section 5.5. No Warranty by the Issuer............................................ 14 Section 5.6. Agreement as to Ownership and Use of the Project..................... 15 Section 5.7. Company to Furnish Notice of Adjustments of Interest Rate Periods.... 15 Section 5.8. Information Reporting................................................ 15 Section 5.9. Limited Liability of Issuer.......................................... 15 Section 5.10. Tax Exempt Status of the Bonds....................................... 16
-i- ARTICLE VI EVENTS OF DEFAULT AND REMEDIES................................... 16 Section 6.1. Events of Default Defined........................................ 16 Section 6.2. Remedies on Default.............................................. 18 Section 6.3. No Remedy Exclusive.............................................. 18 Section 6.4. Agreement to Pay Fees and Expenses of Counsel.................... 19 Section 6.5. No Additional Waiver Implied by One Waiver; Consents to Waivers.. 19 ARTICLE VII OPTION AND OBLIGATION OF COMPANY TO PREPAY....................... 19 Section 7.1. Option to Prepay................................................. 19 Section 7.2. Obligation to Prepay............................................. 20 Section 7.3. Notice of Prepayment; Amount to Be Prepaid....................... 20 Section 7.4. Cancellation at Expiration of Term............................... 21 ARTICLE VIII MISCELLANEOUS.................................................... 21 Section 8.1. Notices.......................................................... 21 Section 8.2. Assignments...................................................... 21 Section 8.3. Severability..................................................... 21 Section 8.4. Execution in Counterparts........................................ 22 Section 8.5. Amounts Remaining in Bond Fund................................... 22 Section 8.6. Amendments, Changes and Modifications............................ 22 Section 8.7. Governing Law.................................................... 22 Section 8.8. Authorized Issuer and Company Representatives.................... 22 Section 8.9. Amendments, Changes and Modifications of Reimbursement Agreements....................................................... 22 Section 8.10. Term of the Agreement............................................ 23 Section 8.11. Insurer as Third Party Beneficiary............................... 23
-ii- THIS FINANCING AGREEMENT made and entered into as of the first day of December, 2003, by and between JASPER COUNTY, INDIANA, a political subdivision of the State of Indiana (hereinafter sometimes referred to as the "Issuer"), and NORTHERN INDIANA PUBLIC SERVICE COMPANY, a corporation duly organized and existing under the laws of the State of Indiana (hereinafter sometimes referred to as the "Company"), W I T N E S S E T H: In consideration of the respective representations and agreements hereinafter contained, the parties hereto agree as follows (provided, that in the performance of the agreements of the Issuer herein contained, any obligation it may thereby incur shall not constitute or give rise to a pecuniary liability or a charge upon its general credit or against its taxing powers but shall be payable solely out of the proceeds derived from this Financing Agreement and the Bonds, as hereinafter defined): ARTICLE I DEFINITIONS The following terms shall have the meanings specified in this Article unless the context requires otherwise. The singular shall include the plural and the masculine shall include the feminine. "Act" means, collectively, Indiana Code Title 36, Article 7, Chapters 11.9 and 12, as supplemented and amended, and Indiana Code Title 5, Article 1, Chapter 5, as supplemented and amended. "Act of Bankruptcy" means the filing of a petition in bankruptcy by or against the Company or the Issuer under the United States Bankruptcy Code. "Administrative Expenses" means the reasonable and necessary expenses (including the reasonable value of employee services and reasonable fees and expenses of Counsel) incurred by the Issuer in connection with the Bonds, this Agreement, the Indenture and any transaction or event contemplated by this Agreement or the Indenture. "Agreement" means this Financing Agreement between the Issuer and the Company, and all amendments and supplements hereto. "Authorized Company Representative" means any person who, at the time, shall have been designated as such by a written certificate furnished to the Issuer, the Remarketing Agent and the Trustee containing the specimen signature of such person and signed on behalf of the Company by any officer of the Company. Such certificate may designate an alternate or alternates. "Authorized Issuer Representative" means any person at the time designated to act on behalf of the Issuer by a written certificate furnished to the Company and the Trustee containing the specimen signature of such person and signed on behalf of the Issuer by one of its Commissioners or its County Auditor. Such certificate may designate an alternate or alternates. "Bond" or "Bonds" means any one or more of the bonds authorized, authenticated and delivered under the Indenture. "Bond Counsel" means nationally recognized municipal bond counsel mutually acceptable to the Issuer, the Trustee and the Company. "Bond Fund" means the fund created by Section 702 of the Indenture. "Bondholder" or "Owner" or "owner of Bonds" means the Person or Persons in whose name or names a Bond shall be registered on books of the Issuer kept by the Registrar for that purpose in accordance with the terms of the Indenture. "Business Day" means a day on which banks located in the city or cities in which the principal offices of the Trustee, the Paying Agent and the Remarketing Agent are located, are not required or authorized to remain closed and on which The New York Stock Exchange is not closed. "Code" means the United States Internal Revenue Code of 1986, as amended, and regulations thereunder or under prior law applicable thereto. "Company" means Northern Indiana Public Service Company, an Indiana corporation, and its successors and assigns and any surviving, resulting or transferee corporation as permitted under Section 5.1 hereof. "Counsel" means an attorney at law or a firm of attorneys (who may be an employee of or counsel to the Issuer or the Company or the Trustee) duly admitted to the practice of law before the highest court of any state of the United States of America or of the District of Columbia. "Extraordinary Services" and "Extraordinary Expenses" mean all services rendered and all reasonable expenses (including reasonable fees and expenses of Counsel) incurred under the Indenture and the Tax Agreement other than Ordinary Services and Ordinary Expenses. "Force Majeure" means acts of God, strikes, lockouts or other industrial disturbances; acts of public enemies; orders or restraints of any kind of the governments of the United States or of the State, or any of their departments, agencies or officials, or any other civil or military authority; insurrections; riots; landslides; lightning; earthquakes; fires; tornadoes; volcanoes; storms; droughts; floods; explosions, breakage, or malfunction or accident to machinery, transmission lines, pipes or canals, even if resulting from negligence; civil disturbances; or any other cause not reasonably within the control of the Company. -2- "Governing Body" means the County Council of the Issuer. The words "hereof," "herein," "hereunder" and other words of similar import refer to this Agreement as a whole. "Indenture" means the Indenture of Trust relating to this Agreement between the Issuer and National City Bank of Indiana, as Trustee, of even date herewith, pursuant to which the Bonds are authorized to be issued, including any indentures supplemental thereto or amendatory thereof. "Insurance Policy" means the financial guaranty insurance policy issued by the Insurer insuring the payment when due of the principal of and interest on the Bonds as provided therein. "Insurer" means Ambac Assurance Corporation, a Wisconsin-domiciled stock insurance company, and its successors and assigns. "Issuer" means Jasper County, Indiana, a political subdivision of the State of Indiana, and any successor body to the duties or functions of the Issuer, and, for purposes of any exculpatory and indemnity provisions of this Agreement and the Indenture, the term "Issuer" also includes the Jasper County Economic Development Commission. "Loan Repayments" means the payments to be made by the Company pursuant to Section 4.2 of the Agreement. "Moody's" means Moody's Investors Service, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and their assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, "Moody's" shall be deemed to refer to any other nationally recognized securities rating agency designated by the Company, with notice to the Trustee and the Remarketing Agent, if any. "Ordinance" means the Ordinance duly adopted and approved by the Governing Body of the Issuer on September 16, 2003, authorizing the issuance and sale of the Bonds and the execution of this Agreement and the Indenture. "Ordinary Services" and "Ordinary Expenses" mean those services normally rendered and those expenses, including reasonable fees and expenses of Counsel, normally incurred by a trustee or paying agent under instruments similar to the Indenture. "Outstanding," "outstanding" or "Bonds Outstanding," in connection with the Bonds means, as of the time in question, all Bonds authenticated and delivered under the Indenture, except: A. Bonds theretofore cancelled or required to be cancelled under Section 210 or 712 of the Indenture; -3- B. Bonds which are deemed to have been paid in accordance with Article IX of the Indenture; and C. Bonds (including Bonds which are deemed to have been purchased pursuant to Sections 401(e), 402(c), 403(f) and 404(d) of the Indenture) in substitution for which other Bonds have been authenticated and delivered pursuant to Article II of the Indenture. In determining whether the Owners of a requisite aggregate principal amount of outstanding Bonds have concurred in any request, demand, authorization, direction, notice, consent or waiver under the provisions of the Indenture, Bonds which are owned of record by the Company or any affiliate thereof or held by the Trustee for the account of the Company shall be disregarded and deemed not to be Outstanding under the Indenture for the purpose of any such determination (except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Bonds which the Trustee knows to be so owned or held shall be disregarded) unless all Bonds are owned by the Company or any affiliate thereof and/or held by the Trustee for the account of the Company, in which case such Bonds shall be considered outstanding for the purpose of such determination. For the purpose of this definition, an "affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person and "control," when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Person" means natural persons, firms, partnerships, associations, limited liability companies, corporations, trusts and public bodies. "Prior Agreement" means the Financing Agreement dated as of July 1, 1991, entered into by and between the Issuer and the Company in connection with the issuance of the Prior Bonds. "Prior Bonds" means the $55,000,000 aggregate principal amount of Jasper County, Indiana Collateralized Pollution Control Refunding Revenue Bonds (Northern Indiana Public Service Company Project) Series 1991, which were previously issued on July 9, 1991 by the Issuer to refund obligations issued to finance a portion of the cost of acquisition, construction and installation of the Project and which Bonds are to be refunded with the proceeds of the Bonds. "Prior Indenture" means the Indenture of Trust securing the Prior Bonds between the Issuer and National City Bank of Indiana, successor to Merchants National Bank & Trust Company of Indianapolis, as trustee, and dated as of July 1, 1991. "Prior Trustee" means the trustee under the Prior Indenture. "Project" means certain air and water pollution control, and sewage and solid waste disposal facilities at Units 17 and 18 of the Company's Rollin M. Schahfer Generating Station -4- located in Jasper County, Indiana and owned by the Company, as described in Exhibit A to the Prior Agreement. "Project and Refunding Certificate" means the Company's certificate delivered concurrently with the issuance of the Bonds with respect to certain facts which are within the knowledge of the Company to enable Bond Counsel to determine whether interest on the Bonds is subject to income taxation under applicable provisions of the Code. "Recording Officer" means the County Auditor of the Issuer. "Registrar" means the Paying Agent as provided in Section 204 of the Indenture. "Reimbursement Agreement" means the Insurance Agreement dated as of December __, 2003, by and between the Company and the Insurer, and any and all modifications, amendments and supplements thereto. "Remarketing Agent" means the remarketing agent appointed in accordance with Section 1301 of the Indenture and any permitted successor thereto. "Revenues" means the amounts pledged under the Indenture to the payment of principal of, premium, if any, and interest on the Bonds, consisting of the following: (i) all amounts payable from time to time by the Company in respect of the indebtedness under this Agreement, and all receipts of the Trustee credited under the provisions of the Indenture against said amounts payable, (ii) any portion of the net proceeds of the Bonds deposited with the Trustee under Section 703 of the Indenture and (iii) any amounts paid into the Bond Fund, including income on investments. Revenues shall not include any amounts payable by the Company to the Issuer pursuant to Sections 4.2(g), 5.3 and 6.4 of this Agreement. "S&P" means Standard & Poor's [Ratings Services], a Division of The McGraw-Hill Companies, Inc., a corporation organized and existing under the laws of the State of New York, its successors and their assigns, and if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, "S&P" shall be deemed to refer to any other nationally recognized securities rating agency designated by the Company, with notice to the Trustee and the Remarketing Agent, if any. "State" means the State of Indiana. "Trust Estate" means the property conveyed to the Trustee pursuant to the Granting Clauses of the Indenture. "Trustee" means National City Bank of Indiana, the trustee named in the Indenture, and any successor Trustee pursuant to Section 1106 or 1109 of the Indenture at the time serving as successor Trustee thereunder. All other terms used herein which are defined in the Indenture shall have the same meanings assigned them in the Indenture unless the context otherwise requires. -5- ARTICLE II REPRESENTATIONS Section 2.1. Representations and Covenants by the Issuer. The Issuer makes the following representations and covenants as the basis for the undertakings on its part herein contained: (a) The Issuer is a duly organized and existing political subdivision of the State. (b) The Issuer has issued and there are now outstanding and unpaid under the Prior Indenture the Prior Bonds in an aggregate principal amount of $55,000,000. (c) The Prior Agreement and Prior Indenture are in full force and effect, without amendment or supplement thereto. (d) No event has occurred and is continuing under the provisions of the Prior Agreement or Prior Indenture which event now constitutes, or with the lapse of time or the giving of notice, or both, would constitute an event of default under any of such prior documents. (e) To provide for the refunding of the Prior Bonds, the Issuer proposes to issue the Bonds in the amount and having the terms and conditions specified in Article II of the Indenture. (f) The Bonds are to be issued under and secured by the Indenture, pursuant to which certain of the Issuer's interests in this Agreement and the respective Revenues derived by the Issuer pursuant to this Agreement will be pledged and assigned to the Trustee as security for payment of the principal of, premium, if any, and interest on the Bonds. (g) The Governing Body of the Issuer has found that the refunding of the Prior Bonds will further the public purposes of the Act. (h) Simultaneously with the execution and delivery of this Agreement and the Indenture and the issuance of the Bonds, there have been deposited with the Prior Trustee the net proceeds of the Bonds (other than accrued interest thereon, if any), which will be used to pay the principal of the outstanding and unpaid Prior Bonds. (i) The Issuer has not assigned and will not assign its interest in this Agreement other than to secure the Bonds. (j) No member of the Board of Commissioners or of the County Council of the Issuer, nor any other officer or member of the Issuer and its Economic Development -6- Commission, has any interest, financial, employment or other, in the Company or in the transactions contemplated hereby. (k) Neither the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby, nor the fulfillment of or compliance with the terms and conditions of this Agreement conflicts with or results in a breach of the terms, conditions or provisions of any restriction or any agreement or instrument to which the Issuer is now a party or by which it is bound, or constitutes a default under any of the foregoing. (l) When executed by the Board of Commissioners of the Issuer, this Agreement will constitute a valid, binding and enforceable obligation of the Issuer. Section 2.2. Representations and Covenants by the Company. The Company makes the following representations and covenants as the basis for the undertakings on its part herein contained: (a) The Company is a corporation duly incorporated under the laws of the State and is validly existing in that State, is qualified to do business as a foreign corporation in all other states and jurisdictions wherein the nature of the business transacted by the Company or the nature of the property owned or leased by it makes such licensing or qualification necessary, has power to enter into and by proper corporate action has been duly authorized to execute and deliver this Agreement. (b) Neither the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby, nor the fulfillment of or compliance with the terms and conditions of this Agreement, conflicts with or results in a breach of any of the terms, conditions or provisions of any corporate restriction or any agreement or instrument to which the Company is now a party or by which it is bound, or constitutes a default under any of the foregoing, or results in the creation or imposition of any lien, charge or encumbrance whatsoever upon any of the property or assets of the Company under the terms of any instrument or agreement other than the Indenture. (c) There have been issued and there are now outstanding and unpaid under the Prior Indenture the Prior Bonds in an aggregate principal amount of $55,000,000. (d) The Prior Agreement and Prior Indenture are in full force and effect, without amendment or supplement thereto. (e) No event has occurred and is continuing under the provisions of the Prior Agreement or Prior Indenture which event now constitutes, or with the lapse of time or the giving of notice, or both, would constitute an event of default under such prior documents. (f) There will be deposited with the Prior Trustee moneys and securities, including the net proceeds of the Bonds, in amounts sufficient to pay the principal of, -7- premium and accrued interest on all of the outstanding and unpaid Prior Bonds on the dates fixed for redemption. (g) The statements, information and descriptions contained in the Project and Refunding Certificate, as of the date hereof and at the time of the delivery of the Bonds to the initial purchasers thereof, are and will be true, correct and complete, do not and will not contain any untrue statement or misleading statement of a material fact, and do not and will not omit to state a material fact required to be stated therein or necessary to make the statements, information and descriptions contained therein, in the light of the circumstances under which they were made, not misleading, and the estimates and the assumptions contained in the Project and Refunding Certificate, as of the date hereof and at the time of the delivery of the Bonds to the initial purchasers thereof, are and will be reasonable and based on the best information available to the Company. (h) All authorizations, approvals, licenses, permits, consents and orders of any governmental authority, legislative body, board, agency or commission having jurisdiction of the matter which are required for the due authorization of, which would constitute a condition precedent to, or the absence of which would materially adversely affect the due performance by the Company of its obligations under, this Agreement and the consummation of the transactions contemplated hereby have been duly obtained or will be obtained on or before the date of issuance of the Bonds except for such authorizations, approvals, licenses, permits, consents and orders as may be required under the Blue Sky or securities laws of any state in connection with the offering and sale of the Bonds. ARTICLE III ISSUANCE OF THE BONDS Section 3.1. Agreement to Issue Bonds; Application of Bond Proceeds. In order to provide funds to lend to the Company to refund the Prior Bonds, the Issuer agrees that it will issue under the Indenture, sell and cause to be delivered to the initial purchasers thereof, its Bonds in an aggregate principal amount of $55,000,000, bearing interest and maturing as set forth in the Indenture. Upon receipt of the net proceeds the Issuer will (a) deposit in the Bond Fund sums equal to the accrued interest on the Bonds, if any, required to be so deposited pursuant to Section 703 of the Indenture and (b) cause, in accordance with Article IV of the Prior Indenture, the remainder of the proceeds of the Bonds, to be used to pay to the owners of the Prior Bonds that portion of the principal of the Prior Bonds to be retired thereby and cancelled by the Prior Trustee upon the redemption thereof, on the dates fixed for redemption of the Prior Bonds. The Company covenants that on or prior to the date of issuance of the Bonds, such additional amounts as may be required to redeem the Prior Bonds will be deposited with the Prior Trustee pursuant to the Prior Indenture for such purpose. Section 3.2. Investments. Any moneys held as a part of the Bond Fund shall be invested or reinvested by the Trustee at the written direction of an Authorized Company Representative as -8- to specific investments, to the extent permitted by law and in particular by the Act, and consented to in writing by the Insurer. In the absence of specific instructions, the Trustee shall invest such moneys in the Armada Money Market Treasury Fund (so long as such fund is rated AAAm-G, AAAm or AAm by S&P) or other money market fund (so long as such fund is rated AAAm-G, AAAm or AAm by S&P) that invests exclusively in short-term U.S. Treasury obligations including repurchase agreements collateralized by such treasury obligations and when-issued securities, U. S. Treasury bills, notes and other securities issued or backed by the U. S. Government. The investments so purchased shall be held by the Trustee and shall be deemed at all times a part of the Bond Fund and the interest accruing thereon and any profit realized therefrom shall be credited to such fund, and any losses resulting from such investment shall be charged to such fund and paid by the Company. The Company shall not direct the Trustee to make any investments or reinvestments other than those specified in the Act or otherwise permitted by law. In making any such investments, the Trustee may rely on directions delivered to it pursuant to this Section, and the Trustee shall be relieved of all liability with respect to making such investments in accordance with such directions. The Company agrees that to the extent any moneys in the Bond Fund represent moneys held for the payment of the principal of Bonds which have become due at maturity or on a redemption date and the premium, if any, on such Bonds or interest due on Bonds in all cases where Bonds have not been presented for payment and paid or such interest is unclaimed, or to the extent any moneys are held by the Trustee for the payment of the purchase price of Bonds which have not been presented for payment, such moneys shall not be invested. Section 3.3. Arbitrage Covenant. The Company covenants that none of the proceeds of the Bonds or the payments to be made under this Agreement, or any other funds which may be deemed to be proceeds of the Bonds pursuant to Section 148(a) of the Code, will be invested or used in such a way, and that no actions will be taken or not taken, to violate or fail to comply with the Tax Agreement and the applicable accounting, segregation, reporting and rebate requirements, if any, of Section 148 of the Code and any regulations promulgated or proposed thereunder. Section 3.4. Costs of Issuance. The Company covenants and agrees to pay all costs incurred in connection with the issuance of the Bonds and the Issuer shall have no obligation with respect to such costs. ARTICLE IV LOAN AND PROVISIONS FOR REPAYMENT Section 4.1. Loan of Bond Proceeds. (a) The Issuer agrees, upon the terms and conditions in this Agreement, to lend to the Company the gross proceeds received by the Issuer from the sale of the Bonds in order to refund the Prior Bonds and the Company agrees to apply the gross proceeds of such loan to the refunding of the Prior Bonds. -9- (b) The Issuer and the Company expressly reserve the right to enter into, to the extent permitted by law, an agreement or agreements other than this Agreement, with respect to the issuance by the Issuer, under an indenture or indentures other than the Indenture, of obligations to provide additional funds to refund all or any principal amount of the Bonds, or any combination thereof. (c) Concurrently with the authentication and delivery by the Issuer of the Bonds, the Company agrees to deliver the Insurance Policy and agrees to pay all payments when due thereunder. Section 4.2. Loan Repayments and Other Amounts Payable. (a) On the Business Day prior to each date provided in or pursuant to the Indenture for the payment of principal (whether at maturity or upon redemption or acceleration) of, premium, if any, and/or interest on the Bonds, until the principal of, premium, if any, and interest on the Bonds shall have been fully paid or provision for the payment thereof shall have been made in accordance with the Indenture, the Company shall pay to the Trustee in immediately available funds, for deposit in the Bond Fund, as a repayment installment of the loans of the proceeds of the Bonds pursuant to Section 4.1 hereof, sums equal to the amounts payable on such interest payment or redemption or acceleration or maturity dates as principal (whether at maturity or upon redemption or acceleration), premium, if any, and interest upon the Bonds as provided in the Indenture . Each repayment installment paid pursuant to this Section 4.2(a) shall at all times be sufficient to pay the total amount of interest and principal (whether at maturity or upon redemption or acceleration) and premium, if any, payable on such interest payment or redemption or acceleration or maturity date, as the case may be; provided that the Excess Amount (as hereinafter defined) held by the Trustee in the Bond Fund on any such payment date shall be credited against the payment due on such date; and provided further that, subject to the provisions of the next succeeding sentence, if at any time the amount held by the Trustee in the Bond Fund should be sufficient (and remain sufficient) to pay at the times required the principal of, interest and premium, if any, on the Bonds then remaining unpaid, the Company shall not be obligated to make any further installment payments under this Section 4.2(a). Notwithstanding the provisions of the preceding sentence, if on any date the Excess Amount held by the Trustee in the Bond Fund is insufficient to make the then required payments of principal (whether at maturity or upon redemption or acceleration), interest and premium, if any, on the Bonds due on such date, the Company shall forthwith pay such deficiency as a repayment installment hereunder. The term "Excess Amount" as of any date shall mean the amount in the Bond Fund on such date in excess of the amount required for payment of the principal of the Bonds which have matured at maturity or on a redemption date and the premium, if any, on such Bonds and interest due on Bonds in all cases where Bonds have not been presented for payment and paid or such interest is unclaimed. (b) In the event that for any reason moneys in the Bond Fund on any Interest Payment Date or on any payment date of the Bonds (whether at maturity, by redemption or acceleration or otherwise) are insufficient to pay the principal of, premium, if any, or interest due on the Bonds on such date and to the extent the Company has not made payment pursuant hereto, the Company shall pay, and hereby unconditionally agrees to pay, to the Trustee for the account of the Issuer -10- for deposit into the Bond Fund, until the principal of, premium, if any, and interest on the Bonds shall have been fully paid or provision for the payment thereof shall have been made in accordance with the Indenture, in funds immediately available to the Trustee (i) such sum as shall be necessary, together with other moneys in the account available for the purpose, to pay the amount payable on any such date as interest on the Bonds, as provided in the Indenture and (ii) such sum as shall be necessary, together with other moneys in the account available for the purpose, to pay the amount payable on any such date as principal and premium, if any, on the Bonds as provided in the Indenture. Each payment due under this subsection (c) shall at all times be sufficient, together with any Excess Amount in the Bond Fund available for the purpose, to pay the total amount of interest or interest and principal (whether at stated maturity or by redemption or acceleration) and premium, if any, payable on any such date with respect to the Bonds. (c) The Company agrees to pay to the Trustee (i) an amount equal to the annual fee of the Trustee for the Ordinary Services rendered by it and an amount equal to the Ordinary Expenses incurred by it under the Indenture, as and when the same become due, and (ii) the reasonable fees, charges and expenses of the Paying Agent, as Registrar, and as paying agent, as and when the same become due, and (iii) the reasonable fees, charges and expenses of the Trustee for reasonable Extraordinary Services and Extraordinary Expenses, as and when the same become due. In the event the Company should fail to make any of the payments required in this Subsection, the item or installment so in default shall continue as an obligation of the Company until the amount in default shall have been fully paid. The Company agrees that the Trustee, its officers, agents, servants and employees, shall not be liable for, and agrees that it will at all times indemnify and hold harmless the Trustee, its officers, agents, servants and employees against, and pay all expenses of the Trustee, its officers, agents, servants and employees, relating to, any lawsuit, proceeding or claim resulting from any action or omission taken or made by or on behalf of the Trustee, its officers, agents, servants and employees pursuant to this Agreement or the Indenture that may be occasioned by any cause (other than the negligence or willful misconduct of the Trustee, its officers, agents, servants and employees). In case any action shall be brought against the Trustee in respect of which indemnity may be sought against the Company, the Trustee shall promptly notify the Company in writing and the Company shall be entitled to assume control of the defense thereof, including the employment of Counsel and the payment of all expenses. The Trustee shall have the right to employ separate Counsel in any such action and participate in the defense thereof, but the fees and expenses of such Counsel shall be paid by the Trustee unless the employment of such Counsel has been authorized by the Company. The Company shall not be liable for any settlement of any such action without its consent, but if any such action is settled with the consent of the Company or if there be final judgment for the plaintiff in any such action, the Company agrees to indemnify and hold harmless the Trustee from and against any loss or liability by reason of such settlement or final judgment. (d) The Company agrees to pay to the Remarketing Agent and the Paying Agent, respectively, the reasonable fees, charges and expenses of such Remarketing Agent and Paying Agent. -11- (e) In the event the Company shall fail to make any of the payments required in this Article IV with respect to any Bonds, the payment so in default shall continue as an obligation of the Company until the amount in default shall have been fully paid and the Company will pay interest on any overdue principal and, to the extent permitted by law, on overdue interest, at the rate of interest borne by the Bonds on the date on which such principal or interest became due and payable. (f) The Company agrees to indemnify and hold harmless the Issuer and any member, officer, official or employee of the Issuer against any and all losses, costs, charges, expenses, judgments and liabilities created by or arising out of this Agreement or the Indenture or otherwise incurred in connection with the issuance or remarketing of the Bonds. The Issuer may submit to the Company periodic statements, not more frequently than monthly, for its Administrative Expenses and the Company shall make payment to the Issuer of the full amount of each such statement within 30 days after the Company receives such statement, provided that the Company within such 30 day period may in writing and in good faith specifically protest all or any portion of the amounts included in such statement and in such event the Company shall not be obligated to make payment to the Issuer of the amount which has been protested in such manner until 10 days after such protest shall have been resolved either by agreement between the Issuer and the Company or by an appropriate tribunal. In the event the Company should fail to make any of the payments required in this Subsection when the Company is obligated to do so, the item or installment so in default shall continue as an obligation of the Company until the amount in default shall have been fully paid, and the Company agrees to pay the same with interest thereon to the extent permitted by law at a rate 1% above the rate of interest then charged by the Trustee on 90 day commercial loans to its prime commercial borrowers until paid. Section 4.3. No Defense or Set-Off. The obligation of the Company to make the payments pursuant to this Agreement shall be absolute and unconditional without defense or set-off by reason of any default by the Issuer under this Agreement or under any other agreement between the Company and the Issuer or for any other reason, it being the intention of the parties that the payments required hereunder will be paid in full when due without any delay or diminution whatsoever. Section 4.4. Payments Pledged and Assigned. It is understood and agreed that all payments required to be made by the Company pursuant to Section 4.2 hereof (except payments made to the Trustee pursuant to Sections 4.2(c) and 6.4 hereof and payments to be made to the Remarketing Agent and the Paying Agent pursuant to Section 4.2(d) hereof and payments to be made to the Issuer pursuant to Sections 3.4, 4.2(f), 5.3 and 6.4 hereof) and certain rights of the Issuer hereunder are pledged and assigned to the Trustee by the Indenture. The Company consents to such pledge and assignment. The Issuer hereby directs the Company and the Company hereby agrees to pay or cause to be paid to the Trustee all said amounts required to be paid by or for the account of the Company pursuant to Section 4.2 hereof (except payments to be made to the Remarketing Agent and the Paying Agent pursuant to Section 4.2(d) hereof and payments to be made to the Issuer pursuant to Sections 3.4, 4.2(f), 5.3 and 6.4 hereof). The Project will not constitute any part of the security for the Bonds. -12- Section 4.5. Certain Payments to Paying Agent. The Company shall pay to the Paying Agent amounts equal to the amounts to be paid by the Paying Agent pursuant to Sections 401(e), 402(c), 403(f) and 404(d) of the Indenture in respect of Outstanding Bonds, such amounts to be paid by the Company to the Paying Agent on the dates such payments pursuant to Sections 401(e), 402(c), 403(f) and 404(d) of the Indenture are to be made. Section 4.6. Payment of the Bonds and Other Amounts. The Bonds shall be payable from payments made by the Company to the Trustee under Section 4.2(a) and Article VII hereof. Payments of principal of, premium, if any, or interest on the Bonds with moneys in the Bond Fund constituting proceeds from the sale of such Bonds or earnings on investments made under the provisions of the Indenture shall be credited against the obligation to pay required by Section 4.2(a) hereof. Whenever any Bonds are redeemable in whole or in part at the option of the Company, the Trustee, on behalf of the Issuer, shall redeem the same upon the request of the Company in compliance with the Indenture and such redemption shall constitute payment of amounts required by Section 4.2(a) and Article VII hereof equal to the redemption price of such Bonds. Whenever payment or provision therefor has been made in respect of the principal of, premium, if any, or interest on, all or any portion of the Bonds in accordance with the Indenture (whether at maturity or upon redemption or acceleration or upon provision for payment in accordance with Article IX of the Indenture), payments shall be deemed paid to the extent such payment or provision therefor has been made and is considered to be a payment of principal or premium, if any, or interest on such Bonds. If such Bonds are thereby deemed paid in full, the Trustee shall notify the Company and the Issuer that such payment requirement has been satisfied. Subject to the foregoing, or unless the Company is entitled to a credit under this Agreement or the Indenture, all payments shall be in the full amount required by Section 4.2(a) and Article VII hereof. ARTICLE V SPECIAL COVENANTS AND AGREEMENTS Section 5.1. Company to Maintain its Corporate Existence; Conditions under Which Exceptions Permitted. Unless the provisions of Sections 7.1, 7.2 or 7.3 hereof are applicable and the Company elects or is obligated to prepay amounts due thereunder in whole as provided therein, the Company agrees that during the term of this Agreement, it will maintain its corporate existence in the State, will not dissolve or otherwise dispose of all or substantially all of its assets and will not consolidate with or merge into another corporation unless the acquirer of its assets or the corporation with which it shall consolidate or into which it shall merge shall be a corporation organized under the laws of one of the states of the United States of America, is qualified to do business in the State, shall have a net worth immediately subsequent to such acquisition, consolidation or merger at least equal to that of the Company immediately prior to such acquisition, consolidation or merger and shall assume in writing all of the obligations of the Company under this Agreement and the Trustee and the Issuer shall receive an opinion of -13- Counsel to the effect that such disposition, consolidation or merger complies with this Agreement. Section 5.2. Financial Statements. (a) So long as any of the Bonds are Outstanding and the Company files annual and periodic reports with the United States Securities and Exchange Commission, the Company shall furnish, a copy of its most recent Form 10-K Annual Report and Form 10-Q Quarterly Report filed with United States Securities and Exchange Commission to the Trustee, to the Insurer and to the owner, or any beneficial owner, of any Bond who shall have requested the same in writing. The Trustee shall have no responsibility with respect to such reports, including the review of the contents thereof, except to make them available for reasonable examination by the owner of any Bond upon request. Each Form 10-K Annual Report shall be accompanied by a certificate of the regular independent certified public accountants of the Company that the financial statements therein have been prepared in accordance with generally accepted accounting principles. (b) In the event that the Company no longer files annual and periodic reports with the United States Securities and Exchange Commission, and so long as any of the Bonds are outstanding, the Company shall furnish to the Trustee, to the Insurer and to the owner or any beneficial owner of any Bond who shall have requested the same in writing a copy of its most recent audited annual financial statements, accompanied by a certificate of the regular independent certified public accountants of the Company that such financial statements have been prepared in accordance with generally accepted accounting principles, and a copy of its most recent unaudited quarterly financial statements, if any. The Trustee shall have no responsibility with respect to such financial statements, including the review of the contents thereof, except to make them available for reasonable examination by the owner of any Bond upon request. Section 5.3. Maintenance and Repair; Insurance; Taxes; Etc. The Company shall maintain or cause to be maintained the Project in good repair and keep it properly insured and shall pay or cause to be paid all costs thereof. The Company shall pay or cause to be paid all taxes, special assessments, and all governmental, utility and other charges with respect to the Project. Section 5.4. Recordation and Other Instruments. The Company shall cause such security agreements, financing statements and all supplements thereto and other instruments as may be required from time to time to be kept, to be recorded and filed in such manner and in such places as may be required by law in order to fully preserve, protect and perfect the security of the Owners of the Bonds and the rights of the Trustee, and to perfect the security interest created by the Indenture. The Company agrees to abide by the provisions of Section 604 of the Indenture to the extent applicable to the Company. Section 5.5. No Warranty by the Issuer. The Issuer makes no warranty, either express or implied, as to the Project or that it will be suitable for the purposes of the Company or needs of the Company. -14- Section 5.6. Agreement as to Ownership and Use of the Project. The Issuer and the Company agree that title to the Project shall be in and remain in the Company, and that such Project shall be the sole property of the Company, in which the Issuer shall have no interest. Section 5.7. Company to Furnish Notice of Adjustments of Interest Rate Periods. The Company is hereby granted the option to designate from time to time changes in the type of Interest Rate borne by the Bonds in the manner and to the extent set forth in Article III of the Indenture. In the event the Company elects to exercise any such option, the Company agrees that it shall cause notices of such changes to be given to the Issuer, the Trustee, the Paying Agent and the Remarketing Agent in accordance with Article III of the Indenture. Section 5.8. Information Reporting. The Issuer covenants and agrees that, upon the direction of the Company or Bond Counsel, it will mail or cause to be mailed to the Secretary of the Treasury (or his designee as prescribed by regulation, currently the Internal Revenue Service Center, Ogden, Utah 84201) a statement setting forth the information required by Section 149(e) of the Code, which statement shall be in the form of the Information Reporting Statement (Form 8038) of the Internal Revenue Service (or any successor form). Section 5.9. Limited Liability of Issuer. Any obligation or liability of the Issuer created by or arising out of this Agreement or otherwise incurred in connection with the issuance of the Bonds (including without limitation any liability created by or arising out of the representations, warranties or covenants set forth herein or otherwise) shall not impose a debt or pecuniary liability upon the Issuer or the State or any political subdivision thereof, or a charge upon the general credit or taxing powers of any of the foregoing, but shall be payable solely out of the Revenues or other amounts payable by the Company to the Issuer hereunder or otherwise (including without limitation any amounts derived from indemnifications given by the Company). Neither the issuance of the Bonds nor the delivery of this Agreement shall, directly or indirectly or contingently, obligate the Issuer or the State or any political subdivision thereof to levy any form of taxation therefor or to make any appropriation for their payment. Nothing in the Bonds or in the Indenture or this Agreement or the proceedings of the Issuer authorizing the Bonds or in the Act or in any other related document shall be construed to authorize the Issuer to create a debt of the Issuer or the State or any political subdivision thereof within the meaning of any constitutional or statutory provision of the State. The principal of, premium, if any, and interest on the Bonds shall be payable solely from the funds pledged for their payment in accordance with the Indenture and available therefor under this Agreement and the Insurance Policy. Neither the State nor any political subdivision thereof shall in any event be liable for the payment of the principal of, premium, if any, or interest on the Bonds or for the performance of any pledge, obligation or agreement of any kind whatsoever which may be undertaken by the Issuer. No breach of any such pledge, obligation or agreement may impose any pecuniary liability upon the Issuer or the State or any political subdivision thereof, or any charge upon the general credit or against the taxing power of the Issuer or the State or any political subdivision thereof. -15- Section 5.10. Tax Exempt Status of the Bonds. The Company hereby covenants for the benefit of the Owners of the Bonds and the Issuer that it (a) has not taken, and will not take or permit to be taken on its behalf, any action which would adversely affect the exclusion of interest on the Bonds from gross income of the recipients thereof for federal income tax purposes and (b) will take, or cause to be taken, such actions as may, from time to time, be required under applicable law or regulation to continue to cause the interest on the Bonds to be so excluded. The Company hereby acknowledges that in the event of an examination by the Internal Revenue Service of the exclusion of interest on the Bonds from the gross income of the Owners thereof for federal income tax purposes under current regulations, the Internal Revenue Service will treat the Issuer as the "taxpayer" in such examination. The Company and the Issuer each agree that it will respond in a commercially reasonable manner to any inquiries from the Internal Revenue Service in connection with such an examination. The Issuer hereby covenants that it will cooperate with the Company, at the Company's expense and at its direction, in connection with such examination. The Company covenants and agrees to comply with the Tax Agreement and to notify the Trustee and the Issuer of the occurrence of any event of which the Company has notice and which event would require the Company to prepay the Bonds in accordance with Section 7.2 hereof. ARTICLE VI EVENTS OF DEFAULT AND REMEDIES Section 6.1. Events of Default Defined. The following shall be "events of default" under this Agreement with respect to the Bonds and the terms "event of default" or "default" shall mean, whenever they are used in this Agreement, any one or more of the following events: (a) Failure by the Company to pay when due any amounts required to be paid under Section 4.2(a) hereof or any amount required to be paid under Section 4.2(c) hereof, which failure results in an event of default under subparagraphs (a) or (b) of Section 1001 of the Indenture; or (b) Failure by the Company to pay or cause to be paid any payment required to be paid under Section 4.5 hereof, which failure results in an event of default under subparagraph (e) of Section 1001 of the Indenture; or (c) Any material breach by the Company of a representation or warranty made in this Agreement or failure by the Company to observe and perform any covenant, condition or agreement on its part to be observed or performed in this Agreement, other than as referred to in (a) and (b) above, for a period of 60 days after written notice, specifying such failure and requesting that it be remedied, and stating that such notice is a "Notice of Default" hereunder, given to the Company by the Trustee or to the Company and the Trustee by the Issuer, unless the Issuer, the Insurer and the Trustee shall agree in writing to an extension of such time prior to its expiration; provided, however, if the -16- failure stated in the notice cannot be corrected within the applicable period, the Issuer, the Insurer and the Trustee will not unreasonably withhold their consent to an extension of such time if corrective action is instituted within the applicable period and diligently pursued until the failure is corrected and the fact of such non-correction, corrective action or diligent pursuit is evidenced to the Trustee by a certificate of an Authorized Company Representative; or (d) A proceeding or case shall be commenced, without the application or consent of the Company, in any court of competent jurisdiction seeking (i) liquidation, reorganization, dissolution, winding-up or composition or adjustment of debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of the Company or of all or any substantial part of its assets, or (iii) similar relief under any law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts, and such proceeding or cause shall continue undismissed, or an order, judgment, or decree approving or ordering any of the foregoing shall be entered and shall continue in effect for a period of 90 days; or an order for relief against the Company shall be entered against the Company in an involuntary case under the United States Bankruptcy Code (as now or hereafter in effect) or other applicable law; or (e) The Company shall admit in writing its inability to pay its debts generally as they become due or shall file a petition in voluntary bankruptcy or shall make any general assignment for the benefit of its creditors, or shall consent to the appointment of a receiver or trustee of all or substantially all of its property, or shall commence a voluntary case under the United States Bankruptcy Code (as now or hereafter in effect), or shall file in any court of competent jurisdiction a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts, or shall fail to controvert in a timely or appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under such United States Bankruptcy Code or other applicable law; or (f) Dissolution or liquidation of the Company; provided that the term "dissolution or liquidation of the Company" shall not be construed to include the cessation of the corporate existence of the Company resulting either from a merger or consolidation of the Company into or with another corporation or a dissolution or liquidation of the Company following a transfer of all or substantially all of its assets as an entirety, under the conditions permitting such actions contained in Section 5.1 hereof; or (g) The occurrence of an "event of default" under the Indenture. The foregoing provisions of Section 6.1(c) are subject to the following limitations: If by reason of Force Majeure the Company is unable in whole or in part to carry out its agreements on its part herein contained other than the obligations on the part of the Company contained in Article IV and Section 5.3 hereof the Company shall not be deemed in default during the continuance of such inability. The Company agrees, however, to remedy with all reasonable dispatch the cause or causes preventing the Company from carrying out its agreements; provided -17- that the settlement of strikes, lockouts and other industrial disturbances shall be entirely within the discretion of the Company and the Company shall not be required to make settlement of strikes, lockouts and other industrial disturbances by acceding to the demands of the opposing party or parties when such course is in the sole judgment of the Company unfavorable to the Company. Section 6.2. Remedies on Default. Whenever any event of default referred to in Section 6.1 hereof shall have happened and be continuing, the Trustee, as assignee of the Issuer: (a) shall, by notice in writing to the Company declare the unpaid indebtedness under Section 4.2(a) hereof to be due and payable immediately, if concurrently with or prior to such notice the unpaid principal amount of the Bonds shall have been declared to be due and payable, and upon any such declaration the same (being an amount sufficient, together with other moneys available therefor in the Bond Fund, to pay the unpaid principal of, premium, if any, and interest accrued on the Bonds) shall become and shall be immediately due and payable; and (b) may take whatever action at law or in equity may appear necessary or desirable to collect the payments and other amounts then due and thereafter to become due hereunder or to enforce performance and observance of any obligation, agreement or covenant of the Company under this Agreement. Any amounts collected pursuant to action taken under this Section 6.2 shall be paid into the Bond Fund (unless otherwise provided in this Agreement) and applied in accordance with the provisions of the Indenture. No action taken pursuant to this Section 6.2 shall relieve the Company from the Company's obligations pursuant to Section 4.2 or 4.6 hereof. No recourse shall be had for any claim based on this Agreement against any officer, director or stockholder, past, present or future, of the Company as such, either directly or through the Company, under any constitutional provision, statute or rule of law, or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise. Nothing herein contained shall be construed to prevent the Issuer from enforcing directly any of its rights under Sections 3.4, 4.2(f), 5.3, 5.9, 5.10, 6.3, 6.4 and 6.5 hereof. Section 6.3. No Remedy Exclusive. No remedy herein conferred upon or reserved to the Issuer or the Trustee is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Agreement or now or hereafter existing at law or in equity or by statute. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Issuer or the Trustee to exercise any remedy reserved to it in this Article, it shall not be necessary to give any notice, other than such notice as may be herein expressly required. Such rights and remedies as are given the Issuer hereunder shall also extend to the Trustee, and the Owners of the -18- Bonds, subject to the provisions of the Indenture, shall be entitled to the benefit of all covenants and agreements herein contained. Section 6.4. Agreement to Pay Fees and Expenses of Counsel. In the event the Company should default under any of the provisions of this Agreement and the Issuer, the Paying Agent or the Trustee should employ Counsel or incur other expenses for the collection of the indebtedness hereunder or the enforcement of performance or observance of any obligation or agreement on the part of the Company herein contained, the Company agrees that it will on demand therefor pay to the Trustee, the Paying Agent, the Issuer or, if so directed by the Issuer, to the Counsel for the Issuer, the reasonable fees and expenses of such Counsel and such other expenses (to the extent reasonable) so incurred by or on behalf of the Issuer, the Paying Agent or the Trustee. Section 6.5. No Additional Waiver Implied by One Waiver; Consents to Waivers. In the event any agreement contained in this Agreement should be breached by either party and thereafter waived by the other party, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder. No waiver shall be effective unless in writing and signed by the party making the waiver. The Issuer shall have no power to waive any default hereunder by the Company without the consent of both the Trustee and the Insurer to such waiver. The Trustee and the Insurer acting jointly shall have power to waive any default by the Company hereunder, except a default under Section 3.4, 4.2(f), 5.3, 5.9, 5.10, 6.3 or 6.4, without the prior written concurrence of the Issuer. Notwithstanding the foregoing, if, after the acceleration of the maturity of the outstanding Bonds by the Trustee pursuant to Section 1002 of the Indenture, (i) all arrears of principal of and interest on the outstanding Bonds and interest on overdue principal and (to the extent permitted by law) on overdue installments of interest at the rate of interest borne by the Bonds on the date on which such principal or interest became due and payable and the premium, if any, on all Bonds then Outstanding which have become due and payable otherwise than by acceleration, and all other sums payable under the Indenture, except the principal of and the interest on such Bonds which by such acceleration shall have become due and payable, shall have been paid, (ii) all other things shall have been performed in respect of which there was a default, (iii) there shall have been paid the reasonable fees and expenses of the Trustee and of the Owners of such Bonds, including reasonable attorneys' fees and expenses paid or incurred and (iv) such event of default under the Indenture shall be waived in accordance with Section 1009 of the Indenture with the consequence that such acceleration under Section 1002 of the Indenture is rescinded, then the Company's default hereunder shall be deemed to have been waived and its consequences rescinded and no further action or consent by the Trustee or the Issuer or the Insurer shall be required. ARTICLE VII OPTION AND OBLIGATION OF COMPANY TO PREPAY Section 7.1. Option to Prepay. The Company shall have, and is hereby granted, the option to prepay the payments due hereunder in whole or in part at any time or from time to time (a) to provide for the redemption of all or a portion of the Bonds pursuant to the provisions of -19- Section 501(a) of the Indenture, (b) to provide for the extraordinary optional redemption of all or a portion of the Bonds pursuant to the provisions of Section 501(b) of the Indenture, or (c) to provide for the defeasance of the Bonds pursuant to Article IX of the Indenture. In the event the Company elects to provide for the redemption of Bonds as permitted by this Section, the Company shall notify and instruct the Trustee in accordance with Section 7.3 hereof to redeem all or any portion of the Bonds in advance of maturity. Section 7.2. Obligation to Prepay. In the event the Bonds or portions thereof become subject to special mandatory redemption pursuant to Section 501(c) of the Indenture, the Company covenants and agrees to prepay the amounts due and to become due hereunder in an amount sufficient to redeem such Bonds or portions thereof on the applicable redemption dates of the Bonds, which redemption shall occur not later than 180 days after the occurrence of a Determination of Taxability. Section 7.3. Notice of Prepayment; Amount to Be Prepaid. (a) Unless otherwise provided in Section 7.1 or 7.2 hereof, following either (i) the exercise of the options granted to the Company in Section 7.1 hereof, or (ii) the occurrence of the event described in Section 7.2 hereof, the Company shall give at least forty-five (45) days written notice to the Issuer, to the Insurer, to the Trustee, to the Paying Agent and to the Remarketing Agent, if any of the Bonds shall then be unpaid or provision for payment shall not have been made in accordance with the provisions of the Indenture. On the date fixed for redemption of the Bonds or portions thereof, there shall be deposited with the Trustee from payments by the Company as required by Section 7.1 or 7.2 hereof, as appropriate, for payment into the Bond Fund the amount required in subsection (b) of this Section. The notice shall provide for the date of the application of the prepayment made by the Company hereunder to the redemption of the Bonds or portions thereof in whole or in part pursuant to call for redemption, shall specify the redemption date and shall be given to the Trustee, the Paying Agent, the Issuer and the Remarketing Agent in accordance with the provisions of the Indenture for the redemption of Bonds or portions thereof. (b) The prepayment payable by the Company hereunder upon either (i) the exercise of the options granted to the Company in Section 7.1 hereof, or (ii) the occurrence of the event specified in Section 7.2 shall be, to the extent applicable and except as otherwise provided in Article V of the Indenture, the sum of the following: (1) the amount of money which, when added to the amount on deposit in the Bond Fund prior to the prepayment being made and available for such purpose, will be sufficient to provide all funds necessary to redeem the Bonds or portions thereof designated in the notice specified in subsection (a) of this Section to be redeemed on the date set forth in the notice, including, without limitation, principal, premium, if any, and all interest to accrue to said redemption date and redemption expenses; plus (2) in the event all of the Bonds are to be redeemed, an amount of money equal to all Administrative Expenses and the Trustee's, Remarketing Agent's and Paying Agent's fees and expenses under the Indenture accrued and to accrue until the final payment and redemption of the Bonds. -20- (c) Any prepayment made pursuant to Section 7.1 or 7.2 hereof shall be deposited into the Bond Fund. No prepayment or investment of the proceeds thereof shall be made which shall cause the Bonds to be "arbitrage bonds" within the meaning of Section 148(a) of the Code. Section 7.4. Cancellation at Expiration of Term. At the acceleration, termination or expiration of the term of this Agreement and following full payment of the Bonds or provision for payment thereof and of all other fees and charges having been made in accordance with the provisions of this Agreement and the Indenture, the Issuer shall deliver to the Company any documents and take or cause the Trustee to take such actions as may be necessary to effectuate the cancellation and evidence the termination of this Agreement. ARTICLE VIII MISCELLANEOUS Section 8.1. Notices. All notices, certificates or other communications shall be sufficiently given in writing and shall be deemed given on the day on which the same have been sent by confirmed, facsimile transmission or when mailed by first class mail, postage prepaid, or by certified mail, postage prepaid, addressed as follows: if to the Issuer, at Rensselaer, Indiana 47978, Facsimile No.: 219-866-4940, Telephone No.: 219-866-4930, Attention: County Auditor; if to the Company, at 801 East 86th Avenue, Merrillville, Indiana 46410, Facsimile No. 219-647-6180, Telephone No.: 219-647-5520, Attention: Treasurer; if to the Trustee, at 101 W. Washington, Suite 655 South, Indianapolis, Indiana 46255, Facsimile No. 317-267-7658, Telephone No.: 317-267-8872, Attention: Corporate Trust Department; if to the Paying Agent, at 101 W. Washington, Suite 655 South, Indianapolis, Indiana 46255, Facsimile No. 317-267-7658, Telephone No.: 317-267-8872, Attention: Corporate Trust Department; if to the Insurer, at One State Street Plaza, New York, New York 10004, Facsimile No.: (212) 797-5725, Telephone No. (212) 668-0340, Attention: Global Utilities Surveillance Department; and, if to the Remarketing Agent, at 1221 Avenue of the Americas, New York, New York 10020, Facsimile No. 212-296-2771, Telephone No. 212-296-7612, Attention: Municipal Note Trading Desk. A duplicate copy of each notice, certificate or other communication given hereunder by either the Issuer or the Company to the other shall also be given to the Trustee. The Issuer, the Company, the Trustee, the Paying Agent and the Remarketing Agent may, by notice given hereunder, designate any further or different addresses to which subsequent notices, certificates or other communications shall be sent. Section 8.2. Assignments. This Agreement may not be assigned by either party without consent of the other and the Insurer, except that the Issuer shall assign to the Trustee its rights under this Agreement (except under Sections 3.4, 4.2(f), 5.3, 5.9, 5.10, 6.3, 6.4 and 6.5 hereof) as provided by Section 4.4 hereof, and the Company may assign its rights under this Agreement to any transferee or any surviving or resulting corporation as provided by Section 5.1 hereof. Section 8.3. Severability. If any provision of this Agreement shall be held or deemed to be or shall, in fact, be illegal, inoperative or unenforceable, the same shall not affect any other -21- provision or provisions herein contained or render the same invalid, inoperative, or unenforceable to any extent whatever. Section 8.4. Execution in Counterparts. This Agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Section 8.5. Amounts Remaining in Bond Fund. It is agreed by the parties hereto that after payment in full of (i) the Bonds (or provision for payment thereof having been made in accordance with the provisions of the Indenture), (ii) the fees, charges and expenses of the Trustee related to the Bonds in accordance with the Indenture, (iii) the Administrative Expenses related to the Bonds, (iv) the fees and expenses of the Remarketing Agent, the Paying Agent and the Issuer related to the Bonds and (v) all other amounts required to be paid under this Agreement and the Indenture, any amounts remaining in the Bond Fund shall belong to and be paid to the Company by the Trustee[; provided, that if there remain reimbursement obligations of the Company under the Reimbursement Agreement, such moneys remaining in the Bond Fund shall be paid by the Trustee to the Insurer upon written direction of the Insurer]. Section 8.6. Amendments, Changes and Modifications. This Agreement may be amended, changed, modified, altered or terminated only by written instrument executed by the Issuer and the Company, and only if the written consent of the Trustee and the Insurer thereto is obtained. Subject to the written consent of the Trustee and the Insurer, the Issuer and the Company agree to enter into such amendments, changes and modifications to this Agreement (i) as may be required by the provisions of this Agreement or the Indenture, (ii) for the purpose of curing any ambiguity, formal defect or omission in this Agreement or in connection with any other change therein provided no such action is to the prejudice of the Trustee or the Owners of the Bonds, (iii) to describe more fully or to amplify or correct the description of any property pledged by this Agreement or intended so to be or (iv) to preserve the exemption from federal income taxes of interest on the Bonds, or any of them. Section 8.7. Governing Law. This Agreement shall be governed exclusively by and construed in accordance with the applicable laws of the State. Section 8.8. Authorized Issuer and Company Representatives. Whenever under the provisions of this Agreement the approval of the Issuer or the Company is required to take some action at the request of the other, such approval of such request shall be given for the Issuer by the Authorized Issuer Representative and for the Company by the Authorized Company Representative, and the other party hereto and the Trustee shall be authorized to act on any such approval or request and neither party hereto shall have any complaint against the other or against the Trustee as a result of any such action taken. Section 8.9. Amendments, Changes and Modifications of Reimbursement Agreements. The Company hereby agrees and undertakes to promptly furnish or cause to be promptly furnished to the Trustee a copy of any amendment, change or modification of the Reimbursement Agreement. -22- Section 8.10. Term of the Agreement. This Agreement shall be in full force and effect from its date to and including such date as all of the Bonds issued under the Indenture shall have been fully paid or retired (or provision for such payment shall have been made as provided in the Indenture), provided that all representations and certifications by the Company as to all matters affecting the tax-exempt status of the Bonds and the covenants of the Company in Sections 4.2(c) and 4.2(f) shall survive the termination of this Agreement. Section 8.11. Insurer as Third Party Beneficiary. The Insurer is a third-party beneficiary to this Agreement. -23- IN WITNESS WHEREOF, the Issuer and the Company have caused this Agreement to be executed in their respective corporate names and their respective corporate seals to be hereunto affixed and attested by their duly authorized officers, all as of the date first above written. BOARD OF COMMISSIONERS OF JASPER COUNTY, INDIANA By: s/ Richard E. Maxwell By: /s/ Gary A. Green By: /s/ Willis Petterson (SEAL) Attest: By: /s/ Rita J. Steele County Auditor NORTHERN INDIANA PUBLIC SERVICE COMPANY By: /s/ David J. Vajda Title: Treasurer -24- EX-10.31 17 c83669exv10w31.txt INSURANCE AGREEMENT DATED AS OF 12/18/03 EXHIBIT 10.31 INSURANCE AGREEMENT THIS INSURANCE AGREEMENT, dated as of December 18, 2003, is entered into by and between AMBAC ASSURANCE CORPORATION, a Wisconsin-domiciled stock insurance company ("Ambac"), and NORTHERN INDIANA PUBLIC SERVICE COMPANY, a corporation duly organized under the laws of the State of Indiana (the "Company"). WHEREAS, pursuant to the Indenture of Trust, dated as of December 1, 2003 (the "Indenture"), between Jasper County, Indiana (the "Issuer") and National City Bank of Indiana, as Trustee (the "Trustee"), the Issuer issued its Pollution Control Refunding Revenue Bonds (Northern Indiana Public Service Company Project) Series 2003 in the aggregate principal amount of $55,000,000 (the "Bonds"); WHEREAS, the Company entered into a Financing Agreement with the Issuer, dated as of December 1, 2003 (the "Financing Agreement"), pursuant to which the Issuer has loaned to the Company the proceeds of the Bonds and the Company has agreed to make repayment in an amount sufficient, together with other funds available for such purpose, to pay when due the principal of, premium, if any, and interest on the Bonds; WHEREAS, Ambac has made a commitment to issue its Financial Guaranty Insurance Policy (the "Policy") to insure the scheduled payments of principal of and interest on the Bonds, as specified in the Policy; and WHEREAS, the Company understands that Ambac expressly requires the delivery of this Agreement as part of the consideration for the delivery by Ambac of the Policy; NOW, THEREFORE, in consideration of the premises and of the agreements herein contained and of the execution and delivery of the Policy, the Company and Ambac agree as follows: [remainder of page left blank] ARTICLE I DEFINITIONS; PREMIUM AND EXPENSES Section 1.01. Definitions. Except as otherwise expressly provided herein or unless the context otherwise requires, the terms which are capitalized herein shall have the meanings specified in Annex B hereto. Section 1.02. Premium. In consideration of Ambac agreeing to issue the Policy hereunder, the Company hereby agrees to pay the Premium, as follows: (a) $1,756,647.70 shall be payable as a lump sum upon delivery of the Policy (the "Initial Premium"); (b) an amount equal to the product of the Annual Premium Rate and the principal amount of Bonds outstanding on each December 18 (the "Annual Premium") shall be payable annually in advance on each December 18, commencing on December 18, 2004; provided, that the Annual Premium due on the December 18 immediately preceding the stated maturity date of the Bonds shall be calculated on a pro rata basis to reflect the period from such December 18 to such stated maturity date. Once paid, no Premium is refundable in whole or in part for any reason, including, without limitation, in the event that the Bonds are retired prior to their stated maturity. To the extent that any payment of Annual Premium is not paid when due, interest shall accrue on such unpaid amounts at a rate equal to the Effective Interest Rate. Section 1.03. Certain Other Expenses. The Company will pay all reasonable fees and disbursements of Ambac's counsel related to any Company-requested modification of any Bond Document or, if delivered pursuant to Section 3.01, First Mortgage Bonds. ARTICLE II REIMBURSEMENT OBLIGATION; UNCONDITIONAL OBLIGATION Section 2.01. Reimbursement Obligation. (a) The Company agrees to reimburse Ambac, from any available funds, immediately and unconditionally upon demand, for all amounts advanced by Ambac under the Policy. To the extent that any such payment due hereunder is not paid when due, interest shall accrue on such unpaid amounts at a rate equal to the Effective Interest Rate. (b) The Company also agrees to reimburse Ambac immediately and unconditionally upon demand for (i) all reasonable expenses incurred by Ambac in connection with each Policy Payment and (ii) all reasonable expenses incurred by Ambac in connection with the enforcement by Ambac of the Company's obligations under any Bond Document or, if delivered pursuant to Section 3.01, First Mortgage Bonds, together with interest on all such expenses from and including 2 the date which is 30 days from the date a statement for such expenses is received by the Company to the date of payment at the Effective Interest Rate. Section 2.02. Unconditional Obligation. The obligations of the Company hereunder are absolute and unconditional and will be paid or performed strictly in accordance with this Agreement, irrespective of: (a) any lack of validity or enforceability of, or any amendment or other modification of, or waiver with respect to the Bonds, any other Bond Document or, if delivered pursuant to Section 3.01, the First Mortgage Bonds; (b) any exchange, release or nonperfection of any security interest in property securing the Bonds, any other Bond Document , the First Mortgage Bonds (if delivered pursuant to Section 3.01), or any obligations under or related to the foregoing instruments and documents; (c) any circumstances which might otherwise constitute a defense available to, or discharge of, the Company under any Bond Document or otherwise with respect to the Bonds or, if delivered pursuant to Section 3.01, the First Mortgage Bonds; or (d) whether or not the Company's obligations under the Bond Documents or the obligations represented by the Bonds or, if delivered pursuant to Section 3.01, the First Mortgage Bonds, are contingent or matured, disputed or undisputed, liquidated or unliquidated. ARTICLE III COVENANTS AND REPRESENTATIONS OF THE COMPANY Section 3.01. Negative Pledge; Delivery of Collateral. (a) The Company agrees that, so long as any Bonds remain outstanding or any Reimbursement Obligations remain unpaid, (i) if at any time the Company shall incur Secured Debt, the Company shall, concurrently with incurrence of such Secured Debt, grant to the Trustee, for the benefit of the holders of the Bonds, a pari passu lien on the Property that secures such Secured Debt, to secure the Company's obligations under the Financing Agreement; and (ii) the Company shall not incur or suffer to exist any indebtedness to an affiliate the payment of which is secured by a lien on any Property of the Company. As used in this Section 3.01(a)(ii), the term "affiliate" means an entity controlling, controlled by, or under common control with, the Company. (b) In the event that the ratings assigned to the Company's senior unsecured long-term debt are downgraded to "Ba1" or below, in the case of Moody's, or "BB+" or below, in the case of S&P, the Company shall, within thirty (30) days of such downgrade deliver First Mortgage Bonds to the Trustee for the benefit of the holders of the Bonds, or grant a security interest to the 3 Trustee for the benefit of the holders of the Bonds in utility assets acceptable to Ambac, to secure the Company's obligations under the Financing Agreement. Section 3.02. Reorganization; Allocation of Debt. The Company hereby agrees that, in the event of a Reorganization, unless otherwise consented to by Ambac, the obligations of the Company under, and in respect of, the Bond Documents and, if delivered pursuant to Section 3.01, the First Mortgage Bonds, shall be assumed by, and shall become direct and primary obligations of, a Regulated Utility Company that holds substantially all of the assets that were held by the Company prior to such Reorganization. Section 3.03. Liquidity Facilities. For so long as the Policy remains in effect or any Reimbursement Obligation or Premium remains unpaid, the Company will ensure that whenever a Bond bears interest at a rate (other than an Auction Rate (as defined in the Indenture)) that is not fixed to maturity, the obligation of the Company to purchase, or provide funds for the purchase of, such Bonds at the end of any interest rate period shall be supported by a standby bond purchase agreement or other liquidity facility from a provider, and on terms and conditions, acceptable to Ambac. Section 3.04. Representations and Warranties. The Company represents and warrants as follows: (a) it is incorporated and validly existing under the laws of the State of Indiana; (b) it has the corporate power to enter into and perform its obligations under or with respect to the Bond Documents to which it is a party, to carry out the transactions contemplated by the Bond Documents to which it is a party, to own its property and assets, and to carry on its business as now conducted or contemplated; (c) it has taken all necessary action to authorize the entry into and performance of its obligations under or with respect to the Bond Documents to which it is a party and to perform obligations under them; (d) its obligations under the Bond Documents to which it is a party are legal, valid, binding and enforceable in accordance with their respective terms, except to the extent that the enforceability of such obligations may be limited by any applicable bankruptcy, insolvency, liquidation, rehabilitation or other similar law or enactment now or hereafter enacted affecting the enforcement of creditors' rights generally and by general principles of equity; (e) the execution by it of the Bond Documents to which it is a party and the carrying out of the transactions under or contemplated by them do not violate in any respect any provision of: (i) its constituent documents or any law, regulation or order applicable to it; or (ii) any other document or agreement which is binding upon it or its assets; 4 (f) to the best of its knowledge and belief no action or administrative proceedings of or before any court or agency is pending or is threatened which, if adversely determined, might reasonably be expected to have a material adverse effect on its ability to perform its obligations under the Bond Documents to which it is a party; (g) the Company has not withheld from Ambac any document, information or other fact which would reasonably be expected to be material to the decision of Ambac to enter into and perform the obligations contained in the Policy; (h) with respect to its obligations under the Bond Documents to which it is a party it does not, nor do its assets, enjoy immunity from any suit or execution; (i) it has not taken any action, corporate or otherwise, nor does it have actual notice that any other person has taken any action in respect of: (i) its winding up, dissolution, de-registration or reorganization; or (ii) the appointment to or over it, or any substantial part of its assets, of any liquidator, provisional liquidator, administrator, receiver, receiver and manager, trustee or similar official. ARTICLE IV EVENTS OF DEFAULT; REMEDIES Section 4.01. Events of Default. The following events shall constitute Events of Default hereunder: (a) The Company shall fail to pay to Ambac any amount payable under Section 1.02, 1.03 or 2.01 hereof and such failure shall have continued for a period in excess of ten days after receipt by the Company of written notice thereof; (b) Any representation or warranty made by the Company hereunder or any statement in the application for the Policy or any report, certificate, financial statement or other instrument provided in connection with the Policy or herewith shall have been materially false at the time when made; (c) The Company shall default in the observance or performance of any covenant contained in Article III hereof; (d) Except as otherwise provided in this Section 4.01, the Company shall fail to perform any of its other obligations hereunder, provided that such failure continues for more than thirty (30) days after receipt by the Company of written notice of such failure to perform; (d) The Company shall (i) voluntarily commence any proceeding or file any petition seeking relief under the United States Bankruptcy Code or any other Federal, state or foreign 5 bankruptcy, insolvency or similar law, (ii) consent to the institution of, or fail to controvert in a timely and appropriate manner, any such proceeding or the filing of any such petition, (iii) apply for or consent to the appointment of a receiver, paying agent, custodian, sequestrator or similar official for the Company or for a substantial part of its property, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take action for the purpose of effecting any of the foregoing; (e) An involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of the Company, or of a substantial part of its property, under the United States Bankruptcy Code or any other Federal, state or foreign bankruptcy, insolvency or similar law or (ii) the appointment of a receiver, paying agent, custodian, sequestrator or similar official for the Company or for a substantial part of its property; and such proceeding or petition shall continue undismissed or unstayed for ninety (90) days or an order or decree approving or ordering any of the foregoing shall continue unstayed and in effect for ninety (90) days; or (f) An "Event of Default" under (and as defined in) the Indenture shall occur. Section 4.02. Remedies. If an Event of Default shall occur and be continuing, then Ambac may take whatever action at law or in equity may appear necessary or desirable, including, without limitation, legal action for the specific performance of any covenant made by the Company herein, and, to the extent applicable, the pursuit of remedies available under the Bond Documents or any collateral delivered pursuant to Section 3.01 hereof, to collect the amounts then due and thereafter to become due under this Agreement and the other Bond Documents, or to enforce performance and observance of any obligation, agreement or covenant of the Company under this Agreement and the other Bond Documents. All rights and remedies of Ambac under this Section 4.02 are cumulative and the exercise of any one remedy does not preclude the exercise of one or more of the other available remedies under this Agreement, the other Bond Documents or any collateral delivered pursuant to Section 3.01 hereof, whether now or hereafter existing at law or in equity. ARTICLE V MISCELLANEOUS Section 5.01. Certain Information and Notices to Ambac. The Company agrees that while the Policy is in effect: (a) the Company shall furnish to Ambac (i) as soon as practicable after the filing thereof, a copy of each Form 10-K and Form 10-Q of the Company and a copy of any audited financial statements and annual reports of the Company and (ii) as promptly as practicable, such other information as Ambac shall reasonably request; and 6 (b) upon receipt of reasonable (but no more than thirty (30) days') prior written notice, the Company will permit Ambac to discuss the affairs, finances and accounts of the Company with appropriate officers of the Company. Section 5.02. Parties Interested Herein. Nothing in this Agreement expressed or implied is intended or shall be construed to confer upon, or to give or grant to, any person or entity, other than the Company and Ambac, any right, remedy or claim under or by reason of this Agreement or any covenant, condition or stipulation hereof, and all covenants, stipulations, promises and agreements in this Agreement contained by and on behalf of the Company shall be for the sole and exclusive benefit of the Company and Ambac. Section 5.03. Amendment and Waiver. Any provision of this Agreement may be amended, waived, supplemented, discharged or terminated only with the prior written consent of the Company and Ambac. Section 5.04. Successors and Assigns; Descriptive Headings. (a) This Agreement shall bind, and the benefits thereof shall inure to, the Company and Ambac and their respective successors and assigns; provided, that the Company may not transfer or assign any or all of its rights and obligations hereunder without the prior written consent of Ambac. (b) The descriptive headings of the various provisions of this Agreement are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. Section 5.05. Counterparts. This Agreement may be executed in any number of copies and by the different parties hereto on the same or separate counterparts, each of which fully-executed counterparts shall be deemed to be an original instrument, and all of which shall constitute but one and the same instrument. Section 5.06. Term. This Agreement shall expire upon the later of (i) the expiration of the Policy in accordance with the terms thereof and (ii) the repayment in full to Ambac of any amounts due and owing to it by the Company under this Agreement or otherwise in respect of the Policy. Section 5.07. Exercise of Rights. No failure or delay on the part of Ambac to exercise any right, power or privilege under this Agreement or the other Bond Documents or in respect of any collateral delivered pursuant to Section 3.01 hereof, and no course of dealing between Ambac and the Company or any other party, shall operate as a waiver of any such right, power or privilege, nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which Ambac would otherwise have pursuant to law or equity. No notice to or demand 7 on any party in any case shall entitle such party to any other or further notice or demand in similar or other circumstances, or constitute a waiver of the right of the other party to any other or further action in any circumstances without notice or demand. Section 5.08. Waiver. The Company waives any defense that this Agreement was executed subsequent to the date of the Commitment, admitting and covenanting that such Commitment was delivered pursuant to the Company's request and in reliance on the Company's promise to execute this Agreement. Section 5.09. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes any and all prior agreements and understandings of the parties hereto with respect to the subject matter hereof, including but not limited to the Commitment. Section 5.10. Notices. All written notices to or upon the respective parties hereto shall be deemed to have been given or made when actually received, or in the case of telecopier machine owned or operated by a party hereto, when sent and confirmed in writing by such machine as having been received, addressed as specified below or at such other address as any of the parties hereto may specify in writing to the others: If to the Company: Northern Indiana Public Service Company 801 E. 86th Avenue Merrillville, IN 46410 Attention: Director, Corporate Finance Fax: (219) 647-6180 If to Ambac: Ambac Assurance Corporation One State Street Plaza New York, New York 10004 Attention: General Counsel Fax: (212) 208-3558 Section 5.11. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York. [remainder of page left blank] 8 IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Agreement to be duly executed and delivered as of the date first above written. NORTHERN INDIANA PUBLIC SERVICE COMPANY By: /s/ William M. O'Malley Name: William M. O'Malley Title: Vice President Finance AMBAC ASSURANCE CORPORATION By: /s/ Louis Iaconetti Name: Louis Iaconetti Title: Vice President 9 ANNEX A COMMITMENT [Attached.] 10 ANNEX B DEFINITIONS For all purposes of this Agreement, except as otherwise expressly provided herein or unless the context otherwise requires, all capitalized terms shall have the meaning as set out below. "Agreement" means this Insurance Agreement. "Annual Premium" has the meaning set forth in Section 1.02(b) of this Agreement. "Annual Premium Rate" means (i) in the event that the Rating is "AA-" or higher (in the case of S&P) or "Aa3" or higher (in the case of Moody's), 0.20%; (ii) in the event that the Rating is "A+", "A" or "A-" (in the case of S&P) or "A1", "A2" or "A3" (in the case of Moody's), 0.25%; (iii) in the event that the Rating is "BBB+" or "BBB" (in the case of S&P) or "Baa1" or "Baa2" (in the case of Moody's), 0.30%; (iv) in the event that the Rating is "BBB-" (in the case of S&P) or "Baa3" (in the case of Moody's), 0.40%; and (v) in the event that the Rating is "BB+" or lower (in the case of S&P) or "Ba1" or lower (in the case of Moody's), 0.75%. "Bond Documents" means the Indenture, the Financing Agreement, the Bonds and this Agreement. "Commitment" means that certain letter, dated December 3, 2003, attached hereto as Annex A. "Effective Interest Rate" means the "prime rate" announced by Citibank, N.A., from time to time, plus 1%. "Event of Default" means an event of default set forth in Section 4.01 of this Agreement. "First Mortgage Bonds" means first mortgage bonds issued by the Company pursuant to the Indenture, dated as of August 1, 1939, as amended and supplemented, between the Company and BNY Midwest Trust Company, successor trustee to Harris Trust and Savings Bank, or any other similar document or arrangement with respect to the issuance by the Company of first mortgage bonds. 11 "Moody's" means Moody's Investors Service, Inc. "Policy Payment" means a payment by Ambac pursuant to the terms and conditions of the Policy. "Premium" means the Initial Premium and the Annual Premium payable by the Company to Ambac pursuant to Section 1.02 hereof. "Property" means any type of real, personal, tangible, intangible or mixed property. "Rating" mean the lower of the ratings assigned to the Company's senior, unsecured non-credit-enhanced long-term debt by S&P and Moody's, determined as of each date on which an Annual Premium is calculated. "Regulated Utility Company" means a corporation engaged in the transmission and distribution of electricity and natural gas, which is regulated by the applicable public service commissions in all of the states that comprise its service area. "Reimbursement Obligations" means the amounts payable by the Company to Ambac pursuant to the provisions of Section 2.01(a) and (b) hereof. "Reorganization" means any reorganization of the Company, or any transfer of a substantial portion of the assets of the Company, where as a result of such reorganization or transfer, the Company ceases to be a Regulated Utility Company. "S&P" means Standard & Poor's Credit Market Services, a Division of The McGraw Hill Companies, Inc. "Secured Debt" means indebtedness the payment of which is secured by a mortgage, security interest, lien or other encumbrance on any power generating, transmission or distribution assets of the Company. 12 EX-12 18 c83669exv12.txt RATIO OF EARNINGS TO FIXED CHARGES . . . NiSource, INC. EXHIBIT 12 RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, ------------ ------------ -------------- -------------- -------------- 1999 2000 2001 2002 2003 ------------ ------------ -------------- -------------- -------------- EARNINGS AS DEFINED IN ITEM 503(d) OF REGULATION S-K: Income before interest charges.................................... $376,782,105 $ 494,519,475 $ 870,211,161 $ 991,748,855 $ 934,045,019 Adjustments- Federal income taxes....................... 91,898,851 71,139,657 189,680,818 126,444,712 130,354,596 State income tax........................... 14,131,404 13,355,910 29,423,420 (3,328,930) 24,282,318 Deferred investment tax credit, net............................... (7,691,257) (7,806,853) (9,008,085) (8,948,881) (8,873,363) Deferred income taxes, net................. (7,890,731) 38,720,144 (43,505,150) 104,733,584 88,426,495 Federal and state income taxes included in other income.................................... - - - - - Amortization of capitalized interest...................... - - - - - ------------ ------------ -------------- -------------- -------------- $467,230,372 $609,928,333 $1,036,802,164 $1,210,649,340 $1,168,235,065 ============ ============ ============== ============== ============== FIXED CHARGES AS DEFINED IN ITEM 503(d) OF REGULATION S-K: Interest on long-term debt.................. $131,788,755 $136,618,874 $ 438,229,953 $ 426,983,858 $ 403,595,874 Other interest.............................. 33,234,752 163,630,341 139,332,645 70,950,052 44,636,174 Amortization of premium, reacquisition premium, discount and expense on debt, net............................... 5,148,168 7,966,977 20,509,675 20,984,140 18,944,887 Interest portion of rent expense.................................... 16,757,234 8,989,500 31,061,310 20,107,170 18,280,335 Minority Interest (Topies) 17,810,625 20,396,000 20,393,000 20,355,000 2,544,375 Capitalized interest during period.......... 0 0 0 0 0 ------------ ------------ -------------- -------------- -------------- $204,739,534 $337,601,692 $ 649,526,583 $ 559,380,220 $ 488,001,645 ============ ============ ============== ============== ============== Plus preferred stock dividends: Preferred dividend requirements of subsidiary................ $ 8,334,254 $ 7,817,003 $ 7,473,412 $ 6,782,448 $ 4,502,884 Preferred dividend requirements factor........................ 1.61 1.61 1.61 1.61 1.61 ------------ ------------ -------------- -------------- -------------- Preferred dividend requirements of subsidiary................. 13,418,149 12,585,375 12,032,193 10,919,741 7,249,643 Fixed charges............................... 204,739,534 337,601,692 649,526,583 559,380,220 488,001,645 ------------ ------------ -------------- -------------- -------------- $218,157,683 $350,187,067 $ 661,558,776 $ 570,299,961 $ 495,251,289 ============ ============ ============== ============== ============== Ratio of earnings to fixed charges.................................... 2.14 1.74 1.57 2.12 2.36
EX-21 19 c83669exv21.txt LIST OF SUBSIDIARIES . . . Exhibit 21 SUBSIDIARIES OF NISOURCE AS OF DECEMBER 31, 2003
SEGMENT/SUBSIDIARY STATE OF 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 Crossroads Pipeline Company Indiana
SEGMENT/SUBSIDIARY STATE OF INCORPORATION - --------------------------------------------------------------------- ---------------------- Granite State Gas Transmission, Inc. New Hampshire OTHER OPERATIONS NI Energy Services, Inc. Indiana NiSource Energy Technologies, Inc. Indiana NiSource Development Company, Inc. Indiana Columbia Energy Services Corporation Kentucky EnergyUSA, Inc. Indiana NiSource Retail Services, Inc. Delaware NI Fuel Company, Inc. Indiana EnergyUSA-TPC Corp. Indiana PEI Holdings, Inc. Indiana DISCONTINUED OPERATIONS IWC Resources Corporation Indiana CORPORATE Columbia Energy Group Delaware NiSource Capital Trust I Delaware NiSource Finance Corp. Indiana NiSource Capital Markets, Inc. Indiana NiSource Corporate Services Company Delaware NiSource Insurance Corporation, Limited Bermuda * Reported under Gas Distribution Operations and Electric Operations.
2 EX-23.1 20 c83669exv23w1.txt CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-107421 and 333-107421-01 of NiSource Inc. on Form S-3, Registration Statement Nos 333-107748 and 333-107743 on Form S-8 and Registration Statement Nos. 333-33896 and 333-33896-01 of NiSource Inc. on Form S-4 of our report dated March 11, 2004 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the changes in the method of accounting for goodwill as described Notes 1H and 5, asset retirement obligations as described in Note 5, and derivative and hedging activities as described in Note 1P, and revenues and related costs associated with trading activities as described in Notes 1I and 5), appearing in this Annual Report on Form 10-K of NiSource Inc. for the year ended December 31, 2003. DELOITTE & TOUCHE LLP Chicago, Illinois March 12, 2004 EX-31.1 21 c83669exv31w1.txt 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Gary L. Neale, certify that: 1. I have reviewed this Annual Report of NiSource Inc. on Form 10-K for the year ended December 31, 2003; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 12, 2004 By: /s/ Gary L. Neale ----------------------------------- Gary L. Neale Chairman and Chief Executive Officer EX-31.2 22 c83669exv31w2.txt 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Michael W. O'Donnell, certify that: 1. I have reviewed this Annual Report of NiSource Inc. on Form 10-K for the year ended December 31, 2003; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 12, 2004 By: /s/ Michael W. O'Donnell --------------------------------- Michael W. O'Donnell Chief Financial Officer EX-32.1 23 c83669exv32w1.txt 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of NiSource Inc. (the "Company") on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gary L. Neale, Chairman and Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Gary L. Neale - ------------------------------------ Gary L. Neale Chairman and Chief Executive Officer Date: March 12, 2004 EX-32.2 24 c83669exv32w2.txt 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of NiSource Inc. (the "Company") on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael W. O'Donnell, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Michael W. O'Donnell - ---------------------------------------------------- Michael W. O'Donnell Executive Vice President and Chief Financial Officer Date: March 12, 2004 -----END PRIVACY-ENHANCED MESSAGE-----