-----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, InaxhSkN7+Rei4zVc7ImK+1EuZdX36x2IT2bUcq3/pGNMO45To91pLEuHHZ08DeA Pkd/F/hD1XJFvG0SIgmZdQ== 0000950137-04-006309.txt : 20040806 0000950137-04-006309.hdr.sgml : 20040806 20040806093158 ACCESSION NUMBER: 0000950137-04-006309 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040806 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16189 FILM NUMBER: 04956291 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-Q 1 c87285e10vq.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______ Commission file number 001-16189 NISOURCE INC. ------------- (Exact name of registrant as specified in its charter) Delaware 35-2108964 --------------------------- ----------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 801 East 86th Avenue Merrillville, Indiana 46410 --------------------------- ----------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (877) 647-5990 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No[ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $0.01 Par Value: 263,488,662 shares outstanding at July 31, 2004. NISOURCE INC. FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED JUNE 30, 2004 TABLE OF CONTENTS
Page ---- PART I FINANCIAL INFORMATION Item 1 Financial Statements Statements of Consolidated Income (Loss)..................... 3 Consolidated Balance Sheets.................................. 4 Statements of Consolidated Cash Flows........................ 6 Statements of Consolidated Comprehensive Income (Loss)....... 7 Notes to Consolidated Financial Statements................... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk... 43 Item 4. Controls and Procedures...................................... 43 PART II OTHER INFORMATION Item 1. Legal Proceedings............................................ 44 Item 2. Changes in Securities and Use of Proceeds.................... 45 Item 3. Defaults Upon Senior Securities.............................. 45 Item 4. Submission of Matters to a Vote of Security Holders.......... 46 Item 5. Other Information............................................ 46 Item 6. Exhibits and Reports on Form 8-K............................. 47 Signature............................................................. 48
2 PART I ITEM 1. FINANCIAL STATEMENTS NISOURCE INC. STATEMENTS OF CONSOLIDATED INCOME (LOSS) (UNAUDITED)
Three Months Six Months Ended June 30, Ended June 30, ------------------------ ----------------------- (in millions, except per share amounts) 2004 2003 2004 2003 - ------------------------------------------------------------- ----------- ----------- ----------- ---------- NET REVENUES Gas Distribution $ 612.4 $ 546.8 $ 2,263.3 $ 2,289.4 Gas Transmission and Storage 206.5 221.0 551.8 563.2 Electric 272.6 262.1 536.1 526.4 Other 153.5 111.3 367.0 286.8 ----------- ----------- ----------- ---------- Gross Revenues 1,245.0 1,141.2 3,718.2 3,665.8 Cost of Sales 628.9 499.4 2,110.1 1,994.3 ----------- ----------- ----------- ---------- Total Net Revenues 616.1 641.8 1,608.1 1,671.5 ----------- ----------- ----------- ---------- OPERATING EXPENSES Operation and maintenance 284.7 275.4 608.0 601.9 Depreciation and amortization 127.6 124.9 253.0 249.5 Loss on sale of assets 0.3 0.2 1.0 1.3 Other taxes 46.0 65.5 146.0 170.6 ----------- ----------- ----------- ---------- Total Operating Expenses 458.6 466.0 1,008.0 1,023.3 ----------- ----------- ----------- ---------- OPERATING INCOME 157.5 175.8 600.1 648.2 ----------- ----------- ----------- ---------- OTHER INCOME (DEDUCTIONS) Interest expense, net (99.6) (114.9) (202.3) (237.9) Minority interests - - - (2.5) Dividend requirements on preferred stock of subsidiaries (1.1) (1.1) (2.2) (2.3) Other, net 0.6 5.9 3.9 10.0 ----------- ----------- ----------- ---------- Total Other Income (Deductions) (100.1) (110.1) (200.6) (232.7) ----------- ----------- ----------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 57.4 65.7 399.5 415.5 INCOME TAXES 22.1 26.4 147.7 153.9 ----------- ----------- ----------- ---------- INCOME FROM CONTINUING OPERATIONS 35.3 39.3 251.8 261.6 ----------- ----------- ----------- ---------- Loss from Discontinued Operations - net of taxes (0.7) (1.4) (3.7) (4.8) Loss on Disposition of Discontinued Operations - net of taxes - (362.8) - (318.0) Change in Accounting - net of taxes - - - (8.8) ----------- ----------- ----------- ---------- NET INCOME (LOSS) $ 34.6 $ (324.9) $ 248.1 $ (70.0) =========== =========== =========== ========== BASIC EARNINGS (LOSS) PER SHARE ($) Continuing operations 0.13 0.15 0.96 1.02 Discontinued operations - (1.39) (0.01) (1.25) Change in accounting - - - (0.04) ----------- ----------- ----------- ---------- BASIC EARNINGS (LOSS) PER SHARE 0.13 (1.24) 0.95 (0.27) ----------- ----------- ----------- ---------- DILUTED EARNINGS (LOSS) PER SHARE ($) Continuing operations 0.13 0.15 0.95 1.01 Discontinued operations - (1.38) (0.01) (1.24) Change in accounting - - - (0.04) ----------- ----------- ----------- ---------- DILUTED EARNINGS (LOSS) PER SHARE 0.13 (1.23) 0.94 (0.27) ----------- ----------- ----------- ---------- DIVIDENDS DECLARED PER COMMON SHARE 0.23 0.29 0.46 0.58 ----------- ----------- ----------- ---------- BASIC AVERAGE COMMON SHARES OUTSTANDING (MILLIONS) 262.5 261.3 262.4 257.6 DILUTED AVERAGE COMMON SHARES (MILLIONS) 264.5 263.1 264.6 259.5 ----------- ----------- ----------- ----------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 3 ITEM 1. FINANCIAL STATEMENTS (continued) NISOURCE INC. CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31, (in millions) 2004 2003 - ---------------------------------------------------------------------- ----------- ----------- (unaudited) ASSETS PROPERTY, PLANT AND EQUIPMENT Utility Plant $ 16,041.9 $ 15,977.3 ----------- ----------- Accumulated depreciation and amortization (7,146.6) (7,095.9) ----------- ----------- Net utility plant 8,895.3 8,881.4 ----------- ----------- Other property, at cost, less accumulated depreciation 462.4 409.3 ----------- ----------- Net Property, Plant and Equipment 9,357.7 9,290.7 ----------- ----------- INVESTMENTS AND OTHER ASSETS Assets of discontinued operations and assets held for sale 20.7 20.7 Unconsolidated affiliates 96.3 113.2 Other investments 69.9 67.4 ----------- ----------- Total Investments 186.9 201.3 ----------- ----------- CURRENT ASSETS Cash and cash equivalents 16.4 27.3 Restricted cash 15.3 22.8 Accounts receivable (less reserve of $74.4 and $54.1, respectively) 311.1 511.1 Unbilled revenue (less reserve of $0.9 and $3.5, respectively) 120.8 303.2 Gas inventory 230.8 429.4 Underrecovered gas and fuel costs 159.1 203.2 Materials and supplies, at average cost 71.8 71.5 Electric production fuel, at average cost 30.5 29.0 Price risk management assets 85.4 74.3 Exchange gas receivable 157.8 174.8 Regulatory Assets 123.9 114.5 Prepayments and other 66.5 101.8 ----------- ----------- Total Current Assets 1,389.4 2,062.9 ----------- ----------- OTHER ASSETS Price risk management assets 110.8 114.4 Regulatory assets 581.5 575.5 Goodwill 3,704.0 3,704.0 Intangible assets 520.3 527.2 Deferred charges and other 152.6 147.8 ----------- ----------- Total Other Assets 5,069.2 5,068.9 ----------- ----------- $ 16,003.2 $ 16,623.8 TOTAL ASSETS =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 ITEM 1. FINANCIAL STATEMENTS (continued) NISOURCE INC. CONSOLIDATED BALANCE SHEETS (CONTINUED)
JUNE 30, December 31, (in millions) 2004 2003 - ------------------------------------------------------------------- ----------- ----------- (unaudited) CAPITALIZATION AND LIABILITIES CAPITALIZATION Common Stock Equity $ 4,500.8 $ 4,415.9 Preferred Stocks-- Series without mandatory redemption provisions 81.1 81.1 Long-term debt, excluding amounts due within one year 5,573.1 5,993.4 ----------- ----------- Total Capitalization 10,155.0 10,490.4 ----------- ----------- CURRENT LIABILITIES Current portion of long-term debt 366.1 118.3 Short-term borrowings 143.5 685.5 Accounts payable 482.8 496.6 Dividends declared on common and preferred stocks 61.7 1.8 Customer deposits 82.0 80.4 Taxes accrued 254.3 210.8 Interest accrued 82.2 82.4 Overrecovered gas and fuel costs 32.7 29.2 Price risk management liabilities 36.9 36.5 Exchange gas payable 249.5 290.8 Current deferred revenue 25.4 28.2 Regulatory liabilities 85.0 73.7 Accrued liability for postretirement and pension benefits 75.1 56.8 Other accruals 305.1 418.0 ----------- ----------- Total Current Liabilities 2,282.3 2,609.0 ----------- ----------- OTHER LIABILITIES AND DEFERRED CREDITS Price risk management liabilities 6.3 0.2 Deferred income taxes 1,612.3 1,595.9 Deferred investment tax credits 82.9 87.3 Deferred credits 59.7 72.7 Noncurrent deferred revenue 92.8 113.0 Accrued liability for postretirement and pension benefits 408.2 406.9 Preferred stock liabilities with mandatory redemption provisions 2.4 2.4 Regulatory liabilities and other removal costs 1,089.7 1,061.6 Other noncurrent liabilities 211.6 184.4 ----------- ----------- Total Other 3,565.9 3,524.4 ----------- ----------- COMMITMENTS AND CONTINGENCIES - - ----------- ----------- TOTAL CAPITALIZATION AND LIABILITIES $ 16,003.2 $ 16,623.8 =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5 ITEM 1. FINANCIAL STATEMENTS (continued) NISOURCE INC. STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Six Months Ended June 30, (in millions) 2004 2003 - ------------------------------------------------------------------------ ---------- -------- OPERATING ACTIVITIES Net income (loss) $ 248.1 $ (70.0) Adjustments to reconcile net income to net cash from continuing operations: Depreciation and amortization 253.0 249.5 Net changes in price risk management activities 2.7 (11.0) Deferred income taxes and investment tax credits (11.9) 15.7 Deferred revenue (23.0) (3.5) Amortization of unearned compensation 4.4 2.8 Loss on sale of assets 1.0 1.3 Change in accounting - 8.8 Income from unconsolidated affiliates (0.4) (0.7) Loss from sale of discontinued operations - 318.0 Loss from discontinued operations 3.7 4.8 Amortization of discount/premium on debt 9.4 9.5 Other 1.2 1.7 Changes in assets and liabilities, net of effect from acquisitions of businesses: Restricted cash 7.5 14.9 Accounts receivable and unbilled revenue 377.7 183.3 Inventories 196.7 32.0 Accounts payable (46.7) (35.3) Customer deposits 1.7 7.8 Taxes accrued 40.0 (21.9) Interest accrued (0.2) 12.6 (Under) Overrecovered gas and fuel costs 47.7 93.4 Exchange gas receivable/payable 25.5 (158.6) Other accruals (109.5) (112.6) Prepayment and other current assets 33.9 17.8 Regulatory assets/liabilities 2.9 6.6 Postretirement and postemployment benefits 19.5 19.7 Deferred credits (13.1) (27.0) Deferred charges and other noncurrent assets (1.8) 10.1 Other noncurrent liabilities 23.0 22.0 ---------- -------- Net Cash Flows from Continuing Operations 1,093.0 591.7 Net Cash Flows used for Discontinued Operations - (119.9) ---------- -------- Net Cash Flows from Operating Activities 1,093.0 471.8 ---------- -------- INVESTING ACTIVITIES Capital expenditures (237.7) (237.8) Proceeds from disposition of assets 1.6 99.9 Other investing activities (6.5) (11.1) ---------- -------- Net Cash Flows used for Investing Activities (242.6) (149.0) ---------- -------- FINANCING ACTIVITIES Issuance of long-term debt - 345.3 Retirement of long-term debt (202.5) (465.8) Change in short-term debt (542.0) (53.7) Retirement of preferred shares - (345.0) Issuance of common stock and capital contributed 8.7 348.9 Acquisition of treasury stock (3.7) (1.0) Dividends paid - common shares (121.8) (147.9) ---------- -------- Net Cash Flows used for Financing Activities (861.3) (319.2) ---------- -------- Increase (decrease) in cash and cash equivalents (10.9) 3.6 Cash and cash equivalents at beginning of year 27.3 31.1 ---------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16.4 $ 34.7 ========== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest 194.3 215.7 Interest capitalized 1.2 1.7 Cash paid for income taxes 96.4 145.0 ---------- --------
6 ITEM 1. FINANCIAL STATEMENTS (continued) NISOURCE INC. STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Three Months Six Months Ended June 30, Ended June 30, ----------------- ----------------- (in millions) 2004 2003 2004 2003 - ------------------------------------------------------ ------- -------- -------- ------- Net Income (Loss) $ 34.6 $ (324.9) $ 248.1 $ (70.0) Other comprehensive income, net of tax Foreign currency translation adjustment - 0.6 0.7 1.5 Net unrealized gains (losses) on cash flow hedges (1.5) 17.0 8.5 25.3 Net gain (loss) on available for sale securities (1.0) 2.0 0.5 - ------- -------- -------- ------- Total other comprehensive income (loss), net of tax (2.5) 19.6 9.7 26.8 ------- -------- -------- ------- Total Comprehensive Income (Loss) $ 32.1 $ (305.3) $ 257.8 $ (43.2) ------- -------- -------- -------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 7 ITEM 1. FINANCIAL STATEMENTS (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF ACCOUNTING PRESENTATION The accompanying unaudited consolidated financial statements for NiSource Inc. (NiSource) reflect all normal recurring adjustments that are necessary, in the opinion of management, to present fairly the results of operations in accordance with accounting principles generally accepted in the United States of America. The accompanying financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in NiSource's Annual Report on Form 10-K for the fiscal year ended December 31, 2003. Income for interim periods may not be indicative of results for the calendar year due to weather variations and other factors. Certain reclassifications have been made to the 2003 financial statements to conform to the 2004 presentation. 2. DILUTED AVERAGE COMMON SHARES COMPUTATION Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. The weighted average shares outstanding for diluted EPS are impacted by the incremental effect of the various long-term incentive compensation plans and the forward equity contracts associated with the Stock Appreciation Income Linked Securities(SM) (SAILS(SM)), and through February 18, 2003, Corporate Premium Income Equity Securities (Corporate PIES). Effective February 19, 2003, the forward equity contracts related to the Corporate PIES were settled as prescribed in the agreements. As a result of the settlement, 13.1 million common shares were issued and are reflected in basic average common shares. In the 2003 period, the SAILS(SM) were anti-dilutive and therefore not included in the calculation. The numerator in calculating both basic and diluted EPS for each year is reported net income. The computation of diluted average common shares follows:
Three Months Six Months Ended June 30, Ended June 30, ----------------- ----------------- (in thousands) 2004 2003 2004 2003 - ------------------------------------------------------------ ------- ------- ------- ------- Denominator Basic average common shares outstanding 262,543 261,259 262,414 257,573 Dilutive potential common shares Nonqualified stock options 118 75 166 64 Shares contingently issuable under employee stock plans 1,182 1,313 1,182 1,313 SAILS(SM) 40 - 187 - Shares restricted under employee stock plans 581 491 636 553 ------- ------- ------- ------- Diluted Average Common Shares 264,464 263,138 264,585 259,503 ------- ------- ------- -------
3. STOCK OPTIONS AND AWARDS Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), encourages, but does not require, entities to adopt the fair value method of accounting for stock-based compensation plans. The fair value method would require the amortization of the fair value of stock-based compensation at the date of grant over the related vesting period. NiSource continues to apply the intrinsic value method of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," for awards granted under its stock-based compensation plans. The following table illustrates the effect on net income and EPS as if NiSource had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. 8 ITEM 1. FINANCIAL STATEMENTS (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
Three Months Six Months Ended June 30, Ended June 30, --------------- --------------- ($ in millions, except per share data) 2004 2003 2004 2003 - ------------------------------------------------------------------ ---- ------ ----- ----- NET INCOME (LOSS) As reported 34.6 (324.9) 248.1 (70.0) Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 1.5 1.0 2.8 2.3 Less: Total stock-based employee compensation expense determined under the fair value method for all awards, net of tax (3.1) (2.6) (6.0) (5.6) ---- ------ ----- ----- Pro forma 33.0 (326.5) 244.9 (73.3) ---- ------ ----- ----- EARNINGS PER SHARE Basic - as reported 0.13 (1.24) 0.95 (0.27) - pro forma 0.13 (1.25) 0.93 (0.28) Diluted - as reported 0.13 (1.23) 0.94 (0.27) - pro forma 0.12 (1.24) 0.93 (0.28) ---- ------ ----- -----
4. REGULATORY MATTERS Through October 2004, Columbia Gas of Ohio, Inc. (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 of Ohio to renew those contracts for firm capacity sufficient to meet up to 100% of the design peak day requirements through October 31, 2005 and up to 95% of the design peak day requirements through October 31, 2010. Among other things, the amended stipulation would also: (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 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-system 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. On April 9, 2004, Columbia of Ohio and other signatory parties to the stipulation, consistent with standard regulatory process, petitioned the PUCO for rehearing on the components which have been modified. That same day the Office of the Ohio Consumers' Counsel (OCC) also filed an application for rehearing, and argued that the PUCO should not have permitted Columbia of Ohio to record post-in-service carrying charges on plant placed into service after October 2004, and to defer the property taxes and depreciation associated with such plant. On April 19, 2004, the OCC filed a motion to dismiss the application for rehearing filed by Columbia of Ohio and other parties. 9 ITEM 1. FINANCIAL STATEMENTS (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) On May 5, 2004 the PUCO issued an order on rehearing, in which it denied the OCC's motion to dismiss and its application for rehearing. The PUCO granted, in part, the joint application filed by Columbia of Ohio and others. In granting the joint application for rehearing, in part, the PUCO did the following: (1) revised the term of the stipulation so that it runs through October 31, 2008; (2) restored the marketers' responsibility for 75% of CHOICE(R) costs; and (3) revised the mechanism applicable to Columbia of Ohio's sharing of off-system sales and capacity release revenue. Under the revised off-system sales/capacity release revenue sharing mechanism, Columbia of Ohio must now begin sharing such revenue equally with the customers when the annual revenue exceeds $25 million, instead of $35 million as originally proposed by Columbia of Ohio and other collaborative parties. In a letter docketed on May 12, 2004, Columbia of Ohio and the other signatory parties to the stipulation accepted the PUCO's modifications. On May 14, 2004, the OCC filed a Second Application for Rehearing. In the pleading, the OCC argued that the joint applicants did not meet the statutory requirements for an application for rehearing, and thus the PUCO's order on rehearing granting rehearing was unlawful. The OCC also argued that the rehearing was the result of exclusionary settlement negotiations. The OCC continued to disagree with the PUCO's treatment of off-system sales and capacity release revenues, and post-in-service carrying charges and related deferrals. On June 3, 2004, Columbia of Ohio filed its proposed tariffs and accounting, as required. On June 9, 2004, the PUCO denied the OCC's Second Application for Rehearing. On July 29, 2004, the OCC filed an appeal with the Supreme Court of Ohio, contesting the PUCO's May 5, 2004 order on rehearing, which granted in part Columbia of Ohio's joint application for rehearing, and the PUCO's June 9, 2004 order, denying the OCC's Second Application for Rehearing. On December 17, 2003, the PUCO approved an application by Columbia of Ohio and other Ohio local distribution companies (LDCs) to establish a tracking mechanism that will provide for recovery of current bad debt expense and for the recovery over a five-year period of previously deferred uncollected accounts receivable. As of June 30, 2004, Columbia of Ohio has $46.9 million of uncollected accounts receivable pending future recovery. On June 11, 2004, Columbia Gas of Pennsylvania, Inc. (Columbia of Pennsylvania) signed a settlement agreement ("Settlement Agreement") in its annual gas cost recovery proceeding with The Office of Consumer Advocate, The Office of Small Business Advocate, The Office of Trial Staff, and Commercial & Industrial Intervenors. Under the Settlement Agreement, the signatory parties agreed to financial incentive mechanisms for off-system sales and capacity release transactions performed by Columbia of Pennsylvania. Under the incentive mechanism, customers receive 100% of the total combined proceeds from off-system sales and capacity release transactions up to a benchmark of $6.0 million. After the benchmark is reached, Columbia of Pennsylvania will retain 50% of proceeds from the transactions; however, Columbia of Pennsylvania may never retain more than 40% of the actual net proceeds generated from off-system sales and capacity release transactions. The incentive mechanism begins October 1, 2004 and ends on September 30, 2006. On August 11, 1999, the Indiana Utility Regulatory Commission (IURC) approved a flexible gas cost adjustment (GCA) mechanism for Northern Indiana Public Service Company (Northern Indiana). Under the approved procedure, the demand component of the adjustment factor will be determined, after hearings and IURC approval, and made effective on November 1 of each year. The demand component will remain in effect for one year until a new demand component is approved by the IURC. The commodity component of the adjustment factor will be determined by monthly filings, which will become effective on the first day of each calendar month, subject to refund. The monthly filings do not require IURC approval but will be reviewed by the IURC during the annual hearing that will take place regarding the demand component filing. Northern Indiana's GCA factor also includes a gas cost incentive mechanism which allows the sharing of any cost savings or cost increases with customers based on a comparison of actual gas supply portfolio cost to a market-based benchmark price. Northern Indiana's GCA4 annual demand filing, covering the period November 1, 2002 through October 31, 2003, was made on August 29, 2002 and approved by the IURC for implementation as interim rates, subject to refund effective November 1, 2002. The Indiana Office of Utility Consumer Counselor (OUCC) filed testimony indicating that some gas costs, for the month of March 2003, should not be recovered. On September 10, 2003, the IURC issued an order adjusting the recovery of costs in March 2003 and reducing recovery by $3.8 million. On October 8, 2003, the IURC approved the demand component of the adjustment factor. 10 ITEM 1. FINANCIAL STATEMENTS (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Northern Indiana's GCA5 annual demand filing, covering the period November 1, 2003 through October 31, 2004, was made on August 26, 2003 and approved by the IURC for implementation as interim rates, subject to refund, effective November 1, 2003. On June 8, 2004, Northern Indiana and the OUCC entered into a joint stipulation and agreement resolving all issues in GCA5. A hearing was held before the IURC on July 18, 2004 in support of the settlement. Among the settlement agreement's provisions, Northern Indiana has agreed to return $3.8 million to its customers over a twelve-month period following IURC approval. This refund is the resolution of issues similar to those from March 2003. An additional provision of the agreement was to extend the current Alternative Regulatory Procedure (ARP), including Northern Indiana's gas cost incentive mechanism, from the current expiration date of December 31, 2004 to March 31, 2005. An order approving the settlement is expected in the third quarter of 2004. Negotiations are in progress to extend the ARP past March 31, 2005. On June 20, 2002, Northern Indiana, Ameren Corporation and First Energy Corporation established terms for joining the Midwest Independent System Operator (MISO) through participation in an independent transmission company (ITC). Northern Indiana transferred functional control of its electric transmission assets to the ITC and MISO on October 1, 2003. As part of Northern Indiana's use of MISO's transmission service, Northern Indiana will incur new categories of transmission charges based upon MISO's Federal Energy Regulatory Commission (FERC)-approved tariff. One of the new categories of charges, Schedule 10, relates to the payment of administrative charges to MISO for its continuing management and operations of the transmission system. Northern Indiana filed a petition on September 30, 2003, with the IURC seeking approval to establish accounting treatment for the deferral of the Schedule 10 charges from MISO. On July 21, 2004 the IURC issued an order which denied Northern Indiana's request for deferred accounting treatment for the MISO Schedule 10 administrative fees. Northern Indiana has taken a charge during the second quarter 2004 in the amount of $2.1 million related to the MISO administrative charges deferred through June 30, 2004. The MISO Schedule 10 administrative fees are currently estimated to be approximately $2.8 million annually. Northern Indiana is currently evaluating the IURC order to determine whether an appeal will be filed. The MISO has initiated the Midwest Market Initiative (MMI), which will develop the structures and processes to be used to implement an electricity market for the MISO region. This MMI proposes non-discriminatory transmission service, reliable grid operation, and the purchase and sale of electric energy in a competitive, efficient and non-discriminatory manner. MISO has filed with FERC detailed tariff information, with a planned initial operation date of March 1, 2005. Northern Indiana and EnergyUSA-TPC (TPC) are actively pursuing roles in the MMI. At the current time, management believes that the MMI will change the manner in which Northern Indiana and TPC conduct their electric business; however, at this time management cannot determine the impact the MMI will have on Northern Indiana or TPC. Northern Indiana has been recovering the costs of electric power purchased for sale to its customers through the fuel adjustment clause (FAC). The FAC provides for costs to be collected if they are below a negotiated cap. If costs exceed this cap, Northern Indiana must demonstrate that the costs were prudently incurred to achieve approval for recovery. This negotiated cap agreement is subject to continuing negotiations. A group of industrial customers challenged the manner in which Northern Indiana applied costs associated with a specific interruptible sales tariff. An estimated refund liability was recorded in the first quarter of 2003. A settlement was reached with the customers and Northern Indiana recorded the full costs of the settlement. As a result of the settlement, the industrial customers challenge was withdrawn and dismissed in January 2004. In addition, as a result of the settlement, Northern Indiana has sought and received approval by the IURC to reduce the charges under the interruptible sales tariff. This reduction will remain in effect until the Dean H. Mitchell Generating Station (Mitchell Station) returns to service. Currently, Northern Indiana is reviewing options to meet the electric needs of its customers. This review includes an assessment of Northern Indiana's oldest generating units, which includes the Mitchell Station. Northern Indiana has requested proposals from 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. On May 7, 2004, the City of Gary filed a petition with the IURC seeking valuation of the Mitchell Station and determination of the terms and conditions under which the City of Gary would acquire the Mitchell Station. The procedural schedule for the City of Gary has been set, and Northern Indiana has filed its Prepared Direct Testimony, stating that Northern Indiana has no current plans to restart the Mitchell Station. 11 ITEM 1. FINANCIAL STATEMENTS (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) On May 25, 2004 Northern Indiana filed a petition for approval of a Purchased Power and Transmission Tracker Mechanism to recover the cost of purchased power to meet Northern Indiana's retail electric load requirements and charges imposed on Northern Indiana by MISO and Grid America. Northern Indiana's direct testimony is due to be filed by August 6, 2004. The hearing is set for the fourth quarter of 2004. On July 9, 2004 a verified joint petition was filed by PSI Energy, Inc., Indianapolis Power & Light Company, Northern Indiana and Vectren Energy Delivery of Indiana, Inc., seeking approval of certain changes in operations that are likely to result from the MISO's implementation of energy markets, and for determination of the manner and timing of recovery of costs resulting from the MISO's implementation of standard market design mechanisms, such as the MISO's proposed real-time and day-ahead energy markets. In January 2002, Northern Indiana filed for approval to implement an environmental cost tracker (ECT). The ECT was approved by the IURC on November 26, 2002. Under the ECT Northern Indiana is permitted to recover (1) allowance for funds used during construction and a return on the capital investment expended by Northern Indiana to implement Indiana Department of Environmental Management's nitrogen oxide State Implementation Plan through an Environmental Cost Recovery Mechanism (ECRM) and (2) related operation and maintenance and depreciation expenses once the environmental facilities become operational through an Environmental Expense Recovery Mechanism (EERM). Under the Commission's November 26, 2002 order, Northern Indiana is permitted to submit filings on a semi-annual basis for the ECRM and on an annual basis for the EERM. Northern Indiana's latest ECRM filing (ECR-3) was for capital expenditures of $194.1 million, and was made simultaneous with its first EERM filing (EER-1) for $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. The ECRM revenues amounted to $7.5 million for the six months ended June 30, 2004, and $12.6 million from inception to date, while EERM revenues were $0.3 for the first half of 2004. 5. RESTRUCTURING ACTIVITIES Since 2000, NiSource has implemented restructuring initiatives to streamline its operations and realize efficiencies from the acquisition of Columbia Energy Group (Columbia). The restructuring activities were primarily associated with reductions in headcount and facility exit costs. For all of the restructuring plans, a total of approximately 1,600 management, professional, administrative and technical positions have been identified for elimination. As of June 30, 2004, approximately 1,560 employees were terminated, of whom 1 employee and 10 employees were terminated during the quarter and six months ended June 30, 2004, respectively. As of June 30, 2004 and December 31, 2003, the consolidated balance sheets reflected liabilities of $16.6 million and $19.5 million related to the restructuring plans, respectively. During the quarter and six months ended June 30, 2004, $1.2 million and $2.8 million in payments were made, respectively, in association with the restructuring plans and a $0.6 million net decrease and $0.1 million net increase, respectively, to the restructuring liability was recorded mainly to adjust for facility exit costs. Of the remaining restructuring liability, $13.0 million is related to facility exit costs. 12 ITEM 1. FINANCIAL STATEMENTS (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 6. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS In May 2004, Columbia Gas Transmission Corporation (Columbia Transmission) identified certain facilities as being non-core to the operation of the pipeline system. As a result, Columbia Transmission is in the process of selling these facilities to third parties. NiSource has accounted for the assets of these facilities, with a net book value of approximately $14.2 million, as assets held for sale. On October 20, 2003, NiSource sold all of the steel-related, "inside-the-fence" assets of its subsidiary PEI Holdings, Inc. (PEI), to Private Power, LLC (Private Power). The sale included six PEI operating subsidiaries and the name "Primary Energy". Private Power paid approximately $325.4 million, comprised of $113.1 million in cash and the assumption of debt-related liabilities and other obligations. The assumption of such liabilities and the after tax cash proceeds from the sale reduced NiSource's debt by $206.3 million. NiSource has accounted for the assets sold as discontinued operations and has adjusted all periods presented accordingly. On August 29, 2003, NiSource sold its exploration and production subsidiary, Columbia Energy Resources, Inc. (CER), to a subsidiary of Triana Energy Holdings (Triana). Under the CER sales agreement, Triana , an affiliate of Morgan Stanley Dean Witter Capital Partners IV, L.P. (MSCP), purchased all of the stock of CER for $330.0 million, plus the assumption of obligations to deliver approximately 94.0 billion cubic feet of natural gas pursuant to existing forward sales contracts. The sale transferred 1.1 trillion cubic feet of natural gas reserves. Approximately $220.0 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 $95.0 million. NiSource has accounted for CER as discontinued operations and has adjusted all periods presented accordingly. During 2002, NiSource decided to exit the telecommunications business. The results of operations related to Columbia Transmission Communications Corporation (Transcom) were displayed as discontinued operations on NiSource's consolidated income statement and its assets and liabilities were separately aggregated and reflected as assets and liabilities of discontinued operations on the consolidated balance sheets. On September 15, 2003, NiSource's subsidiary Columbia sold 100% of its shares in Transcom. Results from discontinued operations of CER (including the New York State properties), the six PEI subsidiaries and Transcom are provided in the following table:
Three Months Six Months Ended June 30, Ended June 30, ----------------- ------------------ ($ in millions) 2004 2003 2004 2003 - ------------------------------------- ------ ------- ------ -------- REVENUES FROM DISCONTINUED OPERATIONS $ - $ 52.6 $ - $ 112.1 ------ ------- ------ -------- Loss from discontinued operations (0.7) (5.2) (5.7) (6.0) Income taxes - (3.8) (2.0) (1.2) ------ ------- ------ -------- NET LOSS FROM DISCONTINUED OPERATIONS $ (0.7) $ (1.4) $ (3.7) $ (4.8) ------ ------- ------ --------
The assets held for sale and assets of discontinued operations were net property, plant, and equipment of $20.7 million at June 30, 2004 and December 31, 2003. 7. RISK MANAGEMENT ACTIVITIES NiSource uses commodity-based derivative financial instruments to manage certain risks in its business. NiSource accounts for its derivatives under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, (SFAS No. 133.) 13 ITEM 1. FINANCIAL STATEMENTS (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) HEDGING ACTIVITIES. The activity for the second quarter and six months ended June 30, 2004 and June 30, 2003 affecting accumulated other comprehensive income, with respect to cash flow hedges included the following:
Three Months Six Months Ended June 30, Ended June 30, ------------------- ------------------- (in millions, net of tax) 2004 2003 2004 2003 - ----------------------------------------------------------- -------- ------- -------- ------- Net unrealized gains on derivatives qualifying as cash flow hedges at the beginning of the period $ 101.7 $ 76.1 $ 91.7 $ 67.8 Unrealized hedging gains arising during the period on derivatives qualifying as cash flow hedges 7.3 21.7 28.6 31.4 Reclassification adjustment for net gain included in net income (8.8) (4.7) (20.1) (6.1) -------- ------- -------- ------- Net unrealized gains on derivatives qualifying as cash flow hedges at the end of the period $ 100.2 $ 93.1 $ 100.2 $ 93.1 -------- ------- -------- -------
Unrealized gains and losses on NiSource's hedges were recorded as price risk management assets and liabilities along with unrealized gains on NiSource's marketing and trading portfolios. The accompanying consolidated balance sheets reflected price risk management assets related to unrealized gains on hedges of $166.4 million and $165.6 million at June 30, 2004 and December 31, 2003, respectively, of which $56.2 million and $51.3 million were included in "Current Assets" and $110.2 million and $114.3 million were included in "Other Assets." Price risk management liabilities related to unrealized losses on hedges (and net option premiums) were $14.7 million and $9.5 million at June 30, 2004 and December 31, 2003, respectively, of which $8.7 million and $9.3 million were included in "Current Liabilities" and $6.0 million and $0.2 million were included in "Other Liabilities and Deferred Credits." During the second quarter 2004, no amounts were recognized in earnings due to the change in value of certain derivative instruments, and there were no components of the derivatives' fair values excluded in the assessment of hedge effectiveness. Also during the second quarter, NiSource reclassified no amounts from other comprehensive income to earnings, due to the probability that certain forecasted transactions would not occur. It is anticipated that during the next twelve months the expiration and settlement of cash flow hedge contracts will result in income recognition of amounts currently classified in other comprehensive income of approximately $27.8 million, net of tax. In addition, Northern Indiana and Bay State Gas Company 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 and $1.2 million of price risk management assets associated with the programs at June 30, 2004 and December 31, 2003, respectively. In addition, the consolidated balance sheets reflected $0.6 million and $0.5 million of price risk management liabilities associated with the programs at June 30, 2004 and December 31, 2003, respectively. For regulatory incentive purposes, the Columbia distribution companies, comprised of Columbia Gas of Kentucky, Inc., Columbia Gas of Maryland, Inc., Columbia Gas of Ohio, Inc., Columbia Gas of Pennsylvania, Inc., and Columbia Gas of Virginia, Inc. enter into contracts that allow counterparties the option to sell gas to Columbia LDCs at first of the month prices for a particular month of delivery. Columbia LDCs charge the counterparties a fee for this option. The changes in the fair value of the options are primarily due to the changing expectations of the future intra-month volatility of gas prices. Columbia LDCs defer a portion of the change in the fair value of the options as either a regulatory asset or liability in accordance with SFAS No. 71. The remaining change is recognized currently in earnings. The consolidated balance sheets reflected $1.2 million and $3.3 million of price risk management liabilities associated with the programs at June 30, 2004 and December 31, 2003, respectively. 14 ITEM 1. FINANCIAL STATEMENTS (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) On May 12, 2004, Columbia terminated fixed-to-variable interest rate swap agreements in a notional amount of $663.0 million with five counterparties. Columbia received an aggregate settlement payment of $1.8 million, which is being amortized as a reduction to interest expense over the remaining term of the underlying debt. On May 12, 2004, NiSource entered into fixed-to-variable interest rate swap agreements in a notional amount of $660.0 million with six counterparties having a 6 1/2-year term. NiSource will receive payments based upon a fixed 7.875% interest rate and pay a floating interest amount based on U.S. 6-month British Banker Association (BBA) LIBOR plus an average of 3.08% per annum. There was no exchange of premium at the initial date of the swaps. In addition, each party has the right to cancel the swaps on May 15, 2009 at mid-market. MARKETING AND TRADING ACTIVITIES. The operations of TPC primarily involve commercial and industrial gas sales and power trading. In April 2003, the gas-related activities (physical commodity sales to commercial and industrial customers) that had been classified as derivatives were considered to fall within the normal purchase and sale exception under SFAS No. 133. Therefore, all gas-related derivatives used to offset the physical obligations necessary to fulfill these commodity sales were designated as cash flow hedges. The fair market values of NiSource's power trading assets and liabilities were $28.6 million and $26.7 million, respectively, at June 30, 2004 and $21.9 million and $23.4 million, respectively, at December 31, 2003. 8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS FASB INTERPRETATION NO. 46 (REVISED DECEMBER 2003) -- CONSOLIDATION OF VARIABLE INTEREST ENTITIES. On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46R). FIN 46R requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns. A company that consolidates a variable interest entity is called the primary beneficiary of that entity. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights, or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46R also requires various disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. On December 18, 2003, the FASB deferred the implementation of FIN 46R to the first quarter of 2004. As a result, NiSource consolidated certain low income housing real estate investments beginning in the first quarter of 2004. Upon consolidation, NiSource increased its long-term debt by approximately $40 million. FASB STAFF POSITION (FSP) NO. FAS 106-2 -- ACCOUNTING AND DISCLOSURE REQUIREMENTS RELATED TO THE MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF 2003 (FSP 106-2). (SUPERSEDES FSP 106-1-- ACCOUNTING AND DISCLOSURE REQUIREMENTS RELATED TO THE MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF 2003.) On December 8, 2003, the President of the United States signed the Medicare Prescription Drug, Improvement and Modernization Act into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," requires presently enacted changes in relevant laws to be considered in current period measurements of postretirement benefit costs and the Accumulated Projected Benefit Obligation. FSP 106-2 is effective for fiscal interims beginning after June 15, 2004. NiSource previously elected to defer accounting for the effects of this pronouncement, as allowed by FSP 106-2, and will adopt FSP 106-2 in the third quarter of 2004. NiSource is currently evaluating the impact of FSP 106-2 and believes the impact will not be significant, since NiSource has a restrictive cap on its retiree post age-65 drug coverage plans. 15 ITEM 1. FINANCIAL STATEMENTS (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 9. LEGAL PROCEEDINGS In the normal course of its business, NiSource and its subsidiaries have been named as defendants in various legal proceedings. In the opinion of management, the ultimate disposition of these currently asserted claims will not have a material adverse impact on NiSource's consolidated financial position. Please see Item 1, Part II, "Legal Proceedings," contained herein for more specific information regarding current legal matters. 10. ACCUMULATED OTHER COMPREHENSIVE LOSS The following table displays the components of Accumulated Other Comprehensive Loss, which is included in "Common Stock Equity," on the consolidated balance sheets.
JUNE 30, December 31, (in millions) 2004 2003 - ----------------------------------------------- ---------- ------------ Foreign currency translation adjustment $ - $ (0.7) Net unrealized gains on cash flow hedges 100.2 91.7 Loss on available for sale securities (1.3) (1.8) Minimum pension liability adjustment (150.2) (150.2) ---------- ------------ TOTAL ACCUMULATED OTHER COMPREHENSIVE LOSS, NET $ (51.3) $ (61.0) ---------- ------------
As a part of normal business, NiSource and certain subsidiaries enter into various agreements providing financial or performance assurance to third parties on behalf of other subsidiaries. Such agreements include guarantees and stand-by letters of credit. These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to a subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the subsidiaries' intended commercial purposes. The total commercial commitments in existence at June 30, 2004 and the years in which they expire are: 11. GUARANTEES AND INDEMNITIES
(in millions) Total 2004 2005 2006 2007 2008 After - ------------------------------- ---------- ------- --------- -------- ------ -------- --------- Guarantees of subsidaries debt $ 3,843.1 $ 2.7 $ 1,183.2 $ 293.1 $ 32.4 $ 8.7 $ 2,323.0 Guarantees supporting commodity transactions of subsidiaries 1,389.9 219.7 252.3 669.2 35.1 54.0 159.6 Other guarantees 373.9 - 51.1 - - 10.1 312.7 Lines of credit 143.5 143.5 - - - - - Letters of credit 119.5 1.2 19.2 1.9 1.0 96.2 - ---------- ------- --------- -------- ------ -------- --------- Total commercial commitments $ 5,869.9 $ 367.1 $ 1,505.8 $ 964.2 $ 68.5 $ 169.0 $ 2,795.3 ---------- ------- --------- -------- ------ -------- ---------
NiSource has guaranteed the payment of $3.8 billion of debt for various wholly-owned subsidiaries including Whiting Leasing LLC, NiSource Finance Corp. (NiSource Finance), and through a support agreement, NiSource Capital Markets, Inc. Other than debt associated with the former PEI subsidiaries that were sold, the debt is reflected on NiSource's consolidated balance sheet. The subsidiaries are required to comply with certain financial covenants under the debt indenture and in the event of default, NiSource would be obligated to pay the debt's principal and related interest. NiSource does not anticipate its subsidiaries will have any difficulty maintaining compliance. NiSource Finance also maintains lines of credit with financial institutions. At June 30, 2004, the amount outstanding under the lines of credit and guaranteed by NiSource amounted to $143.5 million. Additionally, NiSource has issued guarantees, which support up to approximately $1.4 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. 16 ITEM 1. FINANCIAL STATEMENTS (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NiSource has issued standby letters of credit of approximately $119.5 million through financial institutions for the benefit of third parties that have extended credit to certain subsidiaries. If a subsidiary does not pay amounts when due under covered contracts, the beneficiary may present its claim for payment to the financial institution, which will in turn request payment from NiSource. NiSource has purchase and sales agreement guarantees totaling $137.5 million, which guarantee performance of the seller's covenants, agreements, obligations, liabilities, representations and warranties under the agreements. No amounts related to the purchase and sales agreement guarantees are reflected in the consolidated balance sheet. Management believes that the likelihood NiSource would be required to perform or otherwise incur any significant losses associated with any of the aforementioned guarantees is remote. After the October 20, 2003 sale of six subsidiaries, PEI continues to own Whiting Clean Energy, Inc. (Whiting Clean Energy). The total of the outstanding debt guaranteed for Whiting Clean Energy at June 30, 2004 was $325.6 million. As of June 30, 2004, approximately $302.8 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 $153.6 million as of June 30, 2004 of debt outstanding related to three of the former PEI projects. In addition, NiSource has retained several operational guarantees related to the former PEI subsidiaries. These operational guarantees are related to environmental compliance, inventory balances, employee relations, and a residual future purchase guarantee. The fair value of the guarantees was determined to be $11.1 million and a portion of the net proceeds in the sale amount were assumed allocated to the guarantees as prescribed by FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). NiSource has retained liabilities related to the CER forward gas sales agreements with Mahonia II Limited (Mahonia) for guarantees of the forward sales and for indemnity agreements with respect to surety bonds backing the forward sales. The guarantees, surety bonds and associated indemnity agreements remain in place subsequent to the closing of the CER sale and decline over time as volumes are delivered in satisfaction of the contractual obligations, ending in February 2006. NiSource will be indemnified by Triana, and MSCP will fund up to a maximum of $221.0 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 closing 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 risk of losses that may be incurred by NiSource due to Triana's non-performance under the Mahonia agreements. Accordingly, NiSource has not recognized a liability related to the retention of the Mahonia guarantees. 12. PENSION AND OTHER POSTRETIREMENT BENEFITS NiSource used a measurement date of September 30, 2003 for the calculation of its obligations under the pension and other postretirement benefit plans. NiSource expects to make contributions of $16.7 million to its pension plans and $50.4 million to its postretirement medical and life plans in 2004. 17 ITEM 1. FINANCIAL STATEMENTS (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The following table provides the components of the plans' net periodic benefits cost (benefit) for the second quarter and six months ended June 30, 2004 and June 30, 2003:
PENSION BENEFITS OTHER BENEFITS ------------------------ ------------------------ Three months ended June 30, (in millions) 2004 2003 2004 2003 - ------------------------------------------ --------- --------- --------- -------- NET PERIODIC COST Service cost $ 9.8 $ 8.8 $ 2.2 $ 1.8 Interest cost 31.7 32.8 9.9 9.1 Expected return on assets (39.3) (35.4) (3.5) (2.6) Amortization of transitional obligation - 1.4 2.9 2.9 Amortization of prior service cost 2.4 2.1 0.2 - Recognized actuarial (gain) loss 4.5 6.4 0.7 (0.9) --------- --------- --------- -------- NET PERIODIC BENEFITS COST $ 9.1 $ 16.1 $ 12.4 $ 10.3 --------- --------- --------- --------
PENSION BENEFITS OTHER BENEFITS ------------------------ ------------------------ Six months ended June 30, (in millions) 2004 2003 2004 2003 - ------------------------------------------ --------- --------- --------- --------- NET PERIODIC COST Service cost $ 19.6 $ 17.6 $ 4.4 $ 3.6 Interest cost 63.4 65.6 19.8 18.2 Expected return on assets (78.6) (70.8) (7.0) (5.2) Amortization of transitional obligation - 2.8 5.8 5.8 Amortization of prior service cost 4.8 4.2 0.4 - Recognized actuarial (gain) loss 9.0 12.8 1.4 (1.8) --------- --------- --------- --------- NET PERIODIC BENEFITS COST $ 18.2 $ 32.2 $ 24.8 $ 20.6 --------- --------- --------- ---------
13. SALE OF TRADE RECEIVABLES On May 14, 2004, Columbia of Ohio entered into an agreement to sell, without recourse, substantially all of its trade receivables, as they originate, to Columbia of Ohio Receivables Corporation (CORC), a wholly-owned subsidiary of Columbia of Ohio. CORC, in turn, is party to an agreement, also dated May 14, 2004, in which it sells an undivided percentage ownership interest in the accounts receivable to a commercial paper conduit sponsored by Dresdner Kleinwort Wasserstein. The conduit can purchase up to $300.0 million of accounts receivable under the agreement. The agreements, which replaced prior similar agreements, expire in May 2005, but can be automatically renewed if mutually agreed to by both parties. As of June 30, 2004, $164.8 million of accounts receivable had been sold by CORC. On December 30, 2003, Northern Indiana entered into an agreement to sell, without recourse, all of its trade receivables, as they originate, to NIPSCO Receivables Corporation (NRC), a wholly-owned subsidiary of Northern Indiana. NRC, in turn, is party to an agreement in which it sells an undivided percentage ownership interest in the accounts receivable to a commercial paper conduit. The conduit can purchase up to $200 million of accounts receivable under the agreement. The agreements expire in December 2004. As of June 30, 2004, NRC had sold $135.6 million of accounts receivable. 14. BUSINESS SEGMENT INFORMATION Operating segments are components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. During the second quarter 2003, NiSource re-aligned its reportable segments to reflect the announced sale of its exploration and production operations. As of the second quarter 2003, NiSource no longer reported an Exploration and Production Operations segment. In addition, the PEI subsidiaries sold are reported as discontinued operations. All periods have been adjusted to conform with the realignment. 18 ITEM 1. FINANCIAL STATEMENTS (continued) NISOURCE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NiSource's operations are divided into four primary business segments. The Gas Distribution Operations segment provides natural gas service and transportation for residential, commercial and industrial customers in Ohio, Pennsylvania, Virginia, Kentucky, Maryland, Indiana, Massachusetts, Maine and New Hampshire. The Gas Transmission and Storage Operations segment offers gas transportation and storage services for LDCs, marketers and industrial and commercial customers located in northeastern, mid-Atlantic, midwestern and southern states and the District of Columbia. The Electric Operations segment provides electric service in 21 counties in the northern part of Indiana and engages in electric wholesale and wheeling transactions. The Other Operations segment primarily includes gas marketing, power marketing and trading and ventures focused on distributed power generation technologies, including cogeneration facilities, fuel cells and storage systems. The following tables provide information about NiSource's business segments. NiSource uses operating income (loss) as its primary measurement for each of the reporting segments and makes decisions on finance, dividends and taxes at the corporate level on a consolidated basis. Segment revenues include intersegment sales to affiliated subsidiaries, which are eliminated in consolidation. Affiliated sales are recognized on the basis of prevailing market prices, regulated prices or at levels provided for under contractual agreements. Operating income (loss) is derived from revenues and expenses directly associated with each segment.
Three Months Six Months Ended June 30, Ended June 30, ------------------------- -------------------------- (in millions) 2004 2003 2004 2003 - ---------------------------- ----------- --------- ----------- ---------- REVENUES GAS DISTRIBUTION Unaffiliated $ 702.1 $ 653.9 $ 2,560.3 $ 2,604.1 Intersegment 0.9 4.9 4.0 14.3 ----------- --------- ----------- ---------- Total 703.0 658.8 2,564.3 2,618.4 ----------- --------- ----------- ---------- GAS TRANSMISSION AND STORAGE Unaffiliated 133.3 141.9 300.2 304.8 Intersegment 61.4 53.4 131.3 126.5 ----------- --------- ----------- ---------- Total 194.7 195.3 431.5 431.3 ----------- --------- ----------- ---------- ELECTRIC OPERATIONS Unaffiliated 263.8 255.9 519.6 511.8 Intersegment 3.6 3.5 8.7 10.4 ----------- --------- ----------- ---------- Total 267.4 259.4 528.3 522.2 ----------- --------- ----------- ---------- OTHER Unaffiliated 136.5 82.3 320.3 213.4 Intersegment 9.1 10.4 14.2 23.7 ----------- --------- ----------- ---------- Total 145.6 92.7 334.5 237.1 ----------- --------- ----------- ---------- Adjustments and eliminations (65.7) (65.0) (140.4) (143.2) ----------- --------- ----------- ---------- CONSOLIDATED REVENUES $ 1,245.0 $ 1,141.2 $ 3,718.2 $ 3,665.8 ----------- --------- ----------- ---------- OPERATING INCOME (LOSS) Gas Distribution $ 15.1 $ 56.8 $ 300.1 $ 371.0 Gas Transmission and Storage 73.5 87.3 184.9 198.6 Electric 82.0 64.1 140.8 116.7 Other (8.1) (10.4) (26.3) (24.3) Corporate (5.0) (22.0) 0.6 (13.8) ----------- --------- ----------- ---------- CONSOLIDATED OPERATING INCOME $ 157.5 $ 175.8 $ 600.1 $ 648.2 ----------- --------- ----------- ----------
19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NISOURCE INC. NOTE REGARDING FORWARD-LOOKING STATEMENTS The Management's Discussion and Analysis, including statements regarding market risk sensitive instruments, contains "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Investors and prospective investors should understand that many factors govern whether any forward-looking statement contained herein will be or can be realized. Any one of those factors could cause actual results to differ materially from those projected. These forward-looking statements include, but are not limited to, statements concerning NiSource Inc.'s (NiSource) plans, objectives, expected performance, expenditures and recovery of expenditures through rates, stated on either a consolidated or segment basis, and any and all underlying assumptions and other statements that are other than statements of historical fact. From time to time, NiSource may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of NiSource, are also expressly qualified by these cautionary statements. All forward-looking statements are based on assumptions that management believes to be reasonable; however, there can be no assurance that actual results will not differ materially. Realization of NiSource's objectives and expected performance is subject to a wide range of risks and can be adversely affected by, among other things, weather, fluctuations in supply and demand for energy commodities, growth opportunities for NiSource's businesses, increased competition in deregulated energy markets, dealings with third parties over whom NiSource has no control, actual operating experience of acquired assets, the regulatory process, regulatory and legislative changes, changes in general economic, capital and commodity market conditions, and counter-party credit risk, many of which risks are beyond the control of NiSource. In addition, the relative contributions to profitability by each segment, and the assumptions underlying the forward-looking statements relating thereto, may change over time. The following Management's Discussion and Analysis should be read in conjunction with NiSource's Annual Report on Form 10-K for the fiscal year ended December 31, 2003. CONSOLIDATED REVIEW EXECUTIVE SUMMARY NiSource generates nearly all of its net revenue through the sale, distribution, and transmission and storage of natural gas and the generation, transmission and distribution of electricity, which are rate regulated. A significant portion of NiSource's operations, most notably in the gas distribution, gas transportation and electric businesses, is subject to seasonal fluctuations in sales. During the heating season, which is primarily from November through March, and the cooling season, which is primarily from June through September, net revenues from gas and electric sales and transportation services are more significant than in other months. For the second quarter of 2004, income from continuing operations was $35.3 million, or $0.13 per share, while for the six months ended June 30, 2004, NiSource reported income from continuing operations of $251.8 million, or $0.96 per share. This compares to income from continuing operations of $39.3 million, or $0.15 per share, for the year-ago quarter and income from continuing operations of $261.6 million, or $1.02 per share for the period ended June 30, 2003. Warmer weather during the crucial winter heating season, as compared to the period a year ago, partially offset by a reduced estimate of property tax expense, were the primary factors affecting NiSource's second quarter and year-to-date results for 2004. Additionally, continued actions to reduce debt have resulted in significant improvements to NiSource's balance sheet and reduced interest expense. All per share amounts are basic earnings per share. 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. The second quarter of 2004 was marked by many key factors that contributed to our results. Weather in the markets served by NiSource's natural gas utility and pipeline companies was approximately 10 percent warmer than normal and 11 percent warmer compared with the year-ago period. In addition, both this quarter and the second quarter of 2003 reflect lower interruptible transmission service revenues than those that have been historically realized by NiSource's pipeline business. Management has evaluated operational and market conditions, and anticipates that there will be fewer opportunities for interruptible revenue on an ongoing basis. Also, with a reduction in the company's debt and lower average long-term borrowing rates, interest expense for the second quarter of 2004 decreased by $15.2 million, or 13.2 percent, compared with the year-ago period. NiSource continues to improve its capital structure, with a total debt to total capitalization ratio of 57 percent, compared with 60 percent at year-end 2003. The decrease in the total debt to total capitalization ratio from December 31, 2003 is a result of a seasonal reduction in short-term debt due to lower working capital requirements. NiSource will continue to build value and customer trust by capitalizing on its super-regional utility and pipeline operations. NiSource will focus on: continuing to standardize its operations and improve on predictability and reliability; continuing to deliver the best possible service at the lowest cost; continuing to develop innovative ways to help our customers manage heating bills and gas price volatility, with products such as a fixed-price option; continuing to find ways to control the cost of generating electricity; and pursuing projects that will bring long-term attractively priced gas supplies to the market. RESULTS OF OPERATIONS THE QUARTER ENDED JUNE 30, 2004 Net Income NiSource reported net income of $34.6 million, or $0.13 per share, for the three months ended June 30, 2004, compared to a net loss of $324.9 million, or $1.24 loss per share, for the second quarter 2003. Operating income was $157.5 million, a decrease of $18.3 million from the same period in 2003. NiSource's net income reflects the impact of the discontinued operations, a $364.2 million loss in the second quarter of 2003, which included the sale of Columbia Energy Resources (CER) and all of the steel-industry-related, inside-the-fence project entities of PEI Holdings, Inc. ( PEI). All per share amounts are basic earnings per share. Net Revenues Total consolidated net revenues (gross revenues less cost of sales) for the three months ended June 30, 2004, were $616.1 million, a $25.7 million decrease from the same period last year. The decrease in gas net revenues was primarily a result of reduced residential and commercial natural gas sales and deliveries of approximately $6.0 million due to warmer weather, and lower non-traditional revenue amounting to $6.1 million during the second quarter of 2004 compared with the same period in 2003. In addition, transmission and storage net revenues decreased by $4.4 million due to a reduction in interruptible service revenues primarily due to lower throughput, which were partially offset by an increase in demand charge revenues. The reduction in gas distribution revenue and transmission and storage revenue were partially offset by a $6.8 million increase in electric net revenue for the 2004 quarter, which was due to greater customer usage and favorable weather. The comparable 2003 period was also favorably impacted by adjustments for gas costs associated with certain customers of about $14.3 million. Expenses Operating expenses for the second quarter 2004 were $458.6 million, a decrease of $7.4 million from the 2003 period. The second quarter of 2004 was favorably impacted by litigation settlements of $3.3 million and an adjustment of insurance reserves of $5.8 million. These 2004 benefits compared to 2003 benefits that included insurance adjustments and recoveries of $13.1 million and the reversal of a litigation reserve upon settlement amounting to $6.6 million. Taking into consideration these items impacting both 2004 and 2003 operation and maintenance expenses, quarter-over-quarter, baseline operation and maintenance expenses were essentially flat. Other taxes expense for the second quarter 2004 was $19.5 million lower than the second quarter of 2003 mainly as a result of reducing an accrual for estimated property tax expense. 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. Other Income (Deductions) Interest expense, net was $99.6 million for the quarter, a decrease of $15.3 million compared to the second quarter 2003. The decrease was the result of a quarter-over-quarter reduction in debt balances along with lower average long-term borrowing rates attributable to debt refinancings completed during 2003. Income Taxes Income tax expense for the second quarter 2004 was $22.1 million, a decrease of $4.3 million compared to the 2003 period, due to lower pre-tax income. Discontinued Operations The after-tax loss from discontinued operations was $0.7 million for the second quarter 2004 versus an after-tax loss from discontinued operations of $364.2 million in the second quarter of 2003. The current quarter after-tax loss from discontinued operations is a result of residual liabilities associated with the sale of NiSource's exploration and production subsidiary, CER, in August 2003. For the comparable quarter in 2003, the after-tax loss of $362.8 million was related to the sales of CER, and all of the steel-industry-related, inside-the-fence project entities of its subsidiary PEI. NiSource accounted for the CER and PEI subsidiaries as discontinued operations as of June 30, 2003. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2004 Net Income NiSource reported net income of $248.1 million, or $0.95 per share, for the six months ended June 30, 2004, compared to a net loss of $70.0 million, or $0.27 loss per share, for the first six month of 2003. Operating income was $600.1 million, a decrease of $48.1 million from the same period in 2003. NiSource's net income reflects the impact of the discontinued operations sales, a $318.0 million loss in the second quarter of 2003, which included CER and all of the steel-industry-related, inside-the-fence project entities of PEI. All per share amounts are basic earnings per share. Net Revenues Total consolidated net revenues (gross revenues less cost of sales) for the six months ended June 30, 2004, were $1,608.1 million, a $63.4 million decrease from the same period last year. The decrease in gas net revenues was primarily a result of reduced residential and commercial natural gas sales and deliveries due to warmer weather of approximately $22.6 million, reduced revenue from cost trackers of $13.6 million and lower non-traditional revenue amounting to $9.2 million during the first half of 2004 compared with the same period in 2003. Both the six-months ended June 30, 2004, and the six-months ended June 30, 2003, reflect lower interruptible transmission service revenues than those that have been historically realized, driving a $3.1 million decrease in transmission net revenue. Management has evaluated operational and market conditions, and anticipates that there will be fewer opportunities for interruptible revenue on an ongoing basis. The reduction in gas distribution revenue and transmission revenue was partially offset by a $16.8 million increase in electric net revenue for the first six months of 2004, which was due to greater customer usage and favorable weather. The comparable 2003 period was also favorably impacted by adjustments for gas costs associated with certain customers. Expenses Operating expenses for the first six months of 2004 were $1,008.0 million, a decrease of $15.3 million from the 2003 period. Other taxes expense for the first half of 2004 was $24.6 million lower than the first half of 2003 mainly as a result of reducing an accrual for estimated property tax expense. Operation and maintenance expenses for the first half of 2004 were $6.1 million higher than they were in first half of 2003. The six months ended June 30, 2004, benefited from the reversal of a reserve upon settlement of a lawsuit of $14.3 million and the adjustment of insurance reserves of $5.1 million, and was reduced by the write-down of a regulatory asset amounting to $8.6 million. The comparable 2003 period was favorably impacted by insurance adjustments and recoveries of $13.1 million and the reversal of litigation reserves upon the settlement of lawsuits amounting to $19.2 million. 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. Other Income (Deductions) Interest expense, net was $202.3 million for the first six months of 2004 compared to $237.9 million for the first six months of last year. This decrease of $35.6 million was mainly due to a reduction in short-term debt balances and lower average long-term borrowing rates attributable to debt refinancings completed during 2003. Income Taxes Income tax expense for the first six months of 2004 was $147.7 million, a decrease of $6.2 million compared to the 2003 period, due to lower pre-tax income. Discontinued Operations The after-tax loss from discontinued operations was $3.7 million for the six months ended June 30, 2004 versus an after-tax loss from discontinued operations of $322.8 million for the comparable 2003 period. The current period's after-tax loss from discontinued operations is a result of residual liabilities associated with the sale of CER in August 2003. For the six months ended June 30, 2003 the after-tax loss of $362.8 million was related to the sales of CER, and all of the steel-industry-related, inside-the-fence project entities of PEI. Change in Accounting The change in accounting in the first half of 2003 of $8.8 million, net-of-tax, resulted from the cumulative effect of adopting the Financial Accounting Standards Board statement on asset retirement obligations. LIQUIDITY AND CAPITAL RESOURCES Generally, cash flow from operations has provided sufficient liquidity to meet operating requirements. A significant portion of NiSource's operations, most notably in the gas distribution, gas transportation and electric businesses, is subject to seasonal fluctuations in cash flow. During the heating season, which is primarily from November through March, cash receipts from gas sales and transportation services typically exceed cash requirements. During the summer months, cash on hand, together with the seasonal increase in cash flows from the electric business during the summer cooling season and external short-term and long-term financing, is used to purchase gas to place in storage for heating season deliveries, perform necessary maintenance of facilities, make capital improvements in plant and expand service into new areas. Net cash from continuing operations for the six months ended June 30, 2004 was $1,093.0 million. Net cash from continuing operations increased $501.3 million from the comparable period a year-ago, mainly as a result of increased cash flow from working capital. The increase in cash flow from working capital was $540.9 million, driven largely by increased factoring of accounts receivable through the expanded accounts receivable sales agreements, decreased gas inventories and the timing of the recovery of gas and fuel costs. During July 2004, NiSource redeemed $32.0 million of Northern Indiana Public Service Company (Northern Indiana) medium-term notes, with an average interest rate of 6.53%. During April 2004, NiSource redeemed $80.0 million of NiSource Capital Markets, Inc. medium-term notes, with an average interest rate of 7.39%. During February 2004, Northern Indiana redeemed $111.1 million of its medium-term notes and Bay State Gas Company redeemed $10.0 million of its medium-term notes, with an average interest rate of 7.49% and 7.63%, respectively. The associated redemption premium was $4.6 million, of which $4.2 million was charged to expense and $0.4 million was recorded as a regulatory asset. 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. Credit Facilities During March 2004, NiSource obtained a new $500 million 364-day credit facility and a $750 million 3-year credit facility with a syndicate of banks led by Barclays Capital. The new facilities replaced an expiring $1.25 billion credit facility. NiSource had outstanding credit facility advances of $143.5 million at June 30, 2004, at a weighted average interest rate of 2.3%, and advances of $685.5 million at December 31, 2003, at a weighted average interest rate of 1.82%. As of June 30, 2004 and December 31, 2003, NiSource had $114.4 million and $121.4 million of standby letters of credit outstanding, respectively. At June 30, 2004, $96.2 million of the $114.4 million total outstanding letters of credit resided within a separate bi-lateral letter of credit arrangement with Barclays Bank which NiSource obtained during February 2004. As of June 30, 2004, $1,088.3 million of credit was available under the credit facilities. In addition, NiSource had standby letters of credit of $5.1 million and $4.9 million as of June 30, 2004 and December 31, 2003, respectively, issued under another credit facility. Sale of Trade Receivables On May 14, 2004, Columbia Gas of Ohio, Inc. (Columbia of Ohio) entered into an agreement to sell, without recourse, substantially all of its trade receivables, as they originate, to Columbia of Ohio Receivables Corporation (CORC), a wholly-owned subsidiary of Columbia of Ohio. CORC, in turn, is party to an agreement, also dated May 14, 2004, in which it sells an undivided percentage ownership interest in the accounts receivable to a commercial paper conduit sponsored by Dresdner Kleinwort Wasserstein. The conduit can purchase up to $300.0 million of accounts receivable under the agreement. The agreements, which replaced prior similar agreements, expire in May 2005, but can be automatically renewed if mutually agreed to by both parties. As of June 30, 2004, $164.8 million of accounts receivable had been sold by CORC. On December 30, 2003, Northern Indiana entered into an agreement to sell, without recourse, all of its trade receivables, as they originate, to NIPSCO Receivables Corporation (NRC), a wholly-owned subsidiary of Northern Indiana. NRC, in turn, is party to an agreement in which it sells an undivided percentage ownership interest in the accounts receivable to a commercial paper conduit. The conduit can purchase up to $200 million of accounts receivable under the agreement. The agreements expire in December 2004. As of June 30, 2004, NRC had sold $135.6 million of accounts receivable. MARKET RISK DISCLOSURES Through its various business activities, NiSource is exposed to both non-trading and trading risks. The non-trading risks to which NiSource is exposed include interest rate risk, commodity market risk and credit risk of its subsidiaries. The risk resulting from trading activities consists primarily of commodity market and credit risks. NiSource's risk management policy permits the use of certain financial instruments to manage its market risk, including futures, forwards, options and swaps. Various analytical techniques are employed to measure and monitor NiSource's market and credit risks, including value-at-risk and instrument sensitivity to market factors (VaR). VaR represents the potential loss or gain for an instrument or portfolio from changes in market factors, for a specified time period and at a specified confidence level. Non-Trading Risks Commodity price risk resulting from non-trading activities at NiSource's rate-regulated subsidiaries is limited, since current regulations allow recovery of prudently incurred purchased power, fuel and gas costs through the rate-making process. As states experiment with regulatory reform, these subsidiaries may begin providing services without the benefit of the traditional rate-making process and may be more exposed to commodity price risk. 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. NiSource is exposed to interest rate risk as a result of changes in interest rates on borrowings under revolving credit agreements and lines of credit, which have interest rates that are indexed to short-term market interest rates. At June 30, 2004, the combined borrowings outstanding under these facilities totaled $143.5 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 June 30, 2004 was $1,160.0 million. Based upon average borrowings under agreements subject to fluctuations in short-term market interest rates during the second quarter 2004, an increase in short-term interest rates of 100 basis points (1%) would have increased interest expense by $4.4 million and $9.6 million for the quarter and six months ended June 30, 2004, respectively. On May 12, 2004, Columbia terminated fixed-to-variable interest rate swap agreements in a notional amount of $663.0 million with five counterparties. Columbia received an aggregate settlement payment of $1.8 million, which is being amortized as a reduction to interest expense over the remaining term of the underlying debt. On May 12, 2004, NiSource entered into fixed-to-variable interest rate swap agreements in a notional amount of $660.0 million with six counterparties having a 6 1/2-year term. NiSource will receive payments based upon a fixed 7.875% interest rate and pay a floating interest amount based on U.S. 6-month British Banker Association (BBA) LIBOR plus an average of 3.08% per annum. There was no exchange of premium at the initial date of the swaps. In addition, each party has the right to cancel the swaps on May 15, 2009 at mid-market. Due to the nature of the industry, credit risk is a factor in many of NiSource's business activities. Credit risk arises because of the possibility that a customer, supplier or counterparty will not be able or willing to fulfill its obligations on a transaction on or before the settlement date. For derivative contracts such as interest rate swaps, credit risk arises when counterparties are obligated to pay NiSource the positive fair value or receivable resulting from the execution of contract terms. Exposure to credit risk is measured in terms of both current and potential exposure. Current credit exposure is generally measured by the notional or principal value of financial instruments and direct credit substitutes, such as commitments, standby letters of credit and guarantees. Because many of NiSource's exposures vary with changes in market prices, NiSource also estimates the potential credit exposure over the remaining term of transactions through statistical analyses of market prices. In determining exposure, NiSource considers collateral and master netting agreements, which are used to reduce individual counterparty credit risk. Trading Risks The transactions associated with NiSource's 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. 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. The fair values of the contracts related to NiSource's trading operations, the activity affecting the changes in the fair values during the second quarter of 2004, the sources of the valuations of the contracts during 2004 and the years in which the remaining contracts mature are:
Three Months Ended Six Months Ended (in millions) June 30, 2004 June 30, 2004 - ---------------------------------------------------------------------------------------------------------------- Fair value of contracts outstanding at the beginning of the period $ - $ (1.5) Contracts realized or otherwise settled during the period (including net option premiums received) 1.1 (1.6) Fair value of new contracts entered into during the period (1.3) (4.4) Other changes in fair values during the period 2.1 9.4 ------------------ ---------------- Fair value of contracts outstanding at the end of the period $ 1.9 $ 1.9 ------------------ ----------------
(in millions) 2004 2005 2006 2007 2008 After - ----------------------------------- ------- -------- ------- ------ ------ ------ Prices actively quoted $ - $ - $ - $ - $ - $ - Prices from other external sources 1.0 0.2 - - - - Prices based on models/other method 2.7 (2.0) - - - - ------- -------- ------- ------ ------ ------ Total fair values $ 3.7 $ (1.8) $ - $ - $ - $ - ------- -------- ------- ------ ------ ------
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 $0.2 million, $0.4 million and effectively zero, during the second quarter of 2004, respectively. The daily market exposure for the gas marketing portfolio on an average, high and low basis was $0.1 million, $0.2 million and $0.1 million during the second quarter of 2004, respectively. Prospectively, management has set the VaR limits at $2.5 million for power trading and $0.5 million for gas marketing. Exceeding the VaR limits would result in management actions to reduce portfolio risk. Refer to "Risk Management Activities" in Note 7 of the Notes to Consolidated Financial Statements for further discussion of NiSource's risk management. OFF BALANCE SHEET ARRANGEMENTS NiSource has issued guarantees that support up to approximately $1.4 billion of commodity-related payments for its current subsidiaries involved in energy marketing and power trading and to satisfy requirements under forward gas sales agreements of a former subsidiary. These guarantees were provided to counterparties to facilitate physical and financial transactions involving natural gas and electricity. To the extent liabilities exist under the commodity-related contracts subject to these guarantees, such liabilities are included in the consolidated balance sheets. In addition, NiSource has other guarantees, purchase commitments, operating leases, lines of credit and letters of credit outstanding. Refer to Note 7, Risk Management Activities, and Note 11, Guarantees and Indemnities, of the Notes to Consolidated Financial Statements for further discussion of NiSource's off balance sheet arrangements. In addition, NiSource subsidiaries have sold certain accounts receivable. NiSource's accounts receivable programs qualify for sale accounting because they meet the conditions specified in the Statement of Financial Accounting Standards (SFAS) No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." In the agreements, all transferred assets have been isolated from the transferor and put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership. NiSource does not retain any interest in the receivables under these programs. 26 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. OTHER INFORMATION Bargaining Unit Contract Northern Indiana reached an agreement with its bargaining unit employees to replace the contract agreements that expired May 31, 2004. The new agreements are for five years, expiring May 31, 2009. RESULTS AND DISCUSSION OF SEGMENT OPERATIONS Presentation of Segment Information NiSource's operations are divided into four primary business segments; Gas Distribution Operations, Gas Transmission and Storage Operations, Electric Operations, and Other Operations. 27 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS DISTRIBUTION OPERATIONS
Three Months Six Months Ended June 30, Ended June 30, --------------------- ----------------------- (in millions) 2004 2003 2004 2003 - ------------- -------- -------- ---------- ---------- NET REVENUES Sales Revenues $ 627.8 $ 576.4 $ 2,307.3 $ 2,352.8 Less: Cost of gas sold 462.0 385.3 1,742.8 1,729.3 -------- -------- ---------- ---------- Net Sales Revenues 165.8 191.1 564.5 623.5 Transportation Revenues 75.2 82.4 257.0 265.6 -------- -------- ---------- ---------- Net Revenues 241.0 273.5 821.5 889.1 -------- -------- ---------- ---------- OPERATING EXPENSES Operation and maintenance 145.7 135.4 329.0 319.2 Depreciation and amortization 48.6 47.9 96.3 95.5 Other taxes 31.6 33.4 96.1 103.4 -------- -------- ---------- ---------- Total Operating Expenses 225.9 216.7 521.4 518.1 -------- -------- ---------- ---------- Operating Income $ 15.1 $ 56.8 $ 300.1 $ 371.0 ======== ======== ========= ========== REVENUES ($ IN MILLIONS) Residential 335.8 378.5 1,450.9 1,555.1 Commercial 116.8 135.0 512.7 552.7 Industrial 38.0 37.1 118.7 110.5 Transportation 75.2 82.4 257.0 265.6 Off System Sales 114.5 17.4 155.3 60.6 Other 22.7 8.4 69.7 73.9 -------- -------- ---------- ---------- Total 703.0 658.8 2,564.3 2,618.4 -------- -------- ---------- ---------- SALES AND TRANSPORTATION (MMDTH) Residential sales 27.6 29.5 137.4 150.8 Commercial sales 11.6 12.1 53.0 58.0 Industrial sales 5.3 3.9 13.4 12.1 Transportation 112.8 103.8 300.0 286.1 Off System Sales 19.0 2.6 26.0 5.3 Other 0.1 2.0 0.1 2.2 -------- -------- ---------- ---------- Total 176.4 153.9 529.9 514.5 -------- -------- ---------- ---------- HEATING DEGREE DAYS 434 486 3,158 3,371 NORMAL HEATING DEGREE DAYS 483 485 3,138 3,120 % COLDER (WARMER) THAN NORMAL (10%) 0% 1% 8% CUSTOMERS Residential 2,303,083 2,303,356 Commercial 211,704 213,982 Industrial 5,863 5,999 Transportation 753,654 744,324 Other 61 65 -------- -------- ---------- ---------- Total - - 3,274,365 3,267,726 -------- -------- ---------- ----------
NiSource's natural gas distribution operations serve approximately 3.3 million customers in nine states: Ohio, Indiana, Pennsylvania, Massachusetts, Virginia, Kentucky, Maryland, New Hampshire and Maine. The regulated subsidiaries offer both traditional bundled services as well as transportation only for customers that purchase gas from alternative suppliers. The operating results reflect the temperature-sensitive nature of customer demand with over 72% of annual residential and commercial throughput affected by seasonality. As a result, segment operating income is higher in the first and fourth quarters reflecting the heating demand during the winter season. 28 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS DISTRIBUTION OPERATIONS (CONTINUED) Regulatory Matters Through October 2004, Columbia of Ohio 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 of Ohio to renew those contracts for firm capacity sufficient to meet up to 100% of the design peak day requirements through October 31, 2005 and up to 95% of the design peak day requirements through October 31, 2010. Among other things, the amended stipulation would also: (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 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-system 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. On April 9, 2004, Columbia of Ohio and other signatory parties to the stipulation, consistent with standard regulatory process, petitioned the PUCO for rehearing on the components which have been modified. That same day the Office of the Ohio Consumers' Counsel (OCC) also filed an application for rehearing, and argued that the PUCO should not have permitted Columbia of Ohio to record post-in-service carrying charges on plant placed into service after October 2004, and to defer the property taxes and depreciation associated with such plant. On April 19, 2004, the OCC filed a motion to dismiss the application for rehearing filed by Columbia of Ohio and other parties. On May 5, 2004 the PUCO issued an order on rehearing, in which it denied the OCC's motion to dismiss and its application for rehearing. The PUCO granted, in part, the joint application filed by Columbia of Ohio and others. In granting the joint application for rehearing, in part, the PUCO did the following: (1) revised the term of the stipulation so that it runs through October 31, 2008; (2) restored the marketers' responsibility for 75% of CHOICE(R) costs; and (3) revised the mechanism applicable to Columbia of Ohio's sharing of off-system sales and capacity release revenue. Under the revised off-system sales/capacity release revenue sharing mechanism, Columbia of Ohio must now begin sharing such revenue equally with the customers when the annual revenue exceeds $25 million, instead of $35 million as originally proposed by Columbia of Ohio and other collaborative parties. In a letter docketed on May 12, 2004, Columbia of Ohio and the other signatory parties to the stipulation accepted the PUCO's modifications. On May 14, 2004, the OCC filed a Second Application for Rehearing. In the pleading, the OCC argued that the joint applicants did not meet the statutory requirements for an application for rehearing, and thus the PUCO's order on rehearing granting rehearing was unlawful. The OCC also argued that the rehearing was the result of exclusionary settlement negotiations. The OCC continued to disagree with the PUCO's treatment of off-system sales and capacity release revenues, and post-in-service carrying charges and related deferrals. On June 3, 2004, Columbia of Ohio filed its proposed tariffs and accounting, as required. On June 9, 2004, the PUCO denied the OCC's Second Application for Rehearing. On July 29, 2004, the OCC filed an appeal with the Supreme Court of Ohio, contesting the PUCO's May 5, 2004 order on rehearing, which granted in part Columbia of Ohio's joint application for rehearing, and the PUCO's June 9, 2004 order, denying the OCC's Second Application for Rehearing. 29 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS DISTRIBUTION OPERATIONS (CONTINUED) On December 17, 2003, the PUCO approved an application by Columbia of Ohio and other Ohio local distribution companies (LDCs) to establish a tracking mechanism that will provide for recovery of current bad debt expense and for the recovery over a five-year period of previously deferred uncollected accounts receivable. As of June 30, 2004, Columbia of Ohio has $46.9 million of uncollected accounts receivable pending future recovery. On June 11, 2004, Columbia Gas of Pennsylvania, Inc. (Columbia of Pennsylvania) signed a settlement agreement ("Settlement Agreement") in its annual gas cost recovery proceeding with The Office of Consumer Advocate, The Office of Small Business Advocate, The Office of Trial Staff, and Commercial & Industrial Intervenors. Under the Settlement Agreement, the signatory parties agreed to financial incentive mechanisms for off-system sales and capacity release transactions performed by Columbia of Pennsylvania. Under the incentive mechanism, customers receive 100% of the total combined proceeds from off-system sales and capacity release transactions up to a benchmark of $6.0 million. After the benchmark is reached, Columbia of Pennsylvania will retain 50% of proceeds from the transactions; however, Columbia of Pennsylvania may never retain more than 40% of the actual net proceeds generated from off-system sales and capacity release transactions. The incentive mechanism begins October 1, 2004 and ends on September 30, 2006. On August 11, 1999, the Indiana Utility Regulatory Commission (IURC) approved a flexible gas cost adjustment (GCA) mechanism for Northern Indiana Public Service Company (Northern Indiana). Under the approved procedure, the demand component of the adjustment factor will be determined, after hearings and IURC approval, and made effective on November 1 of each year. The demand component will remain in effect for one year until a new demand component is approved by the IURC. The commodity component of the adjustment factor will be determined by monthly filings, which will become effective on the first day of each calendar month, subject to refund. The monthly filings do not require IURC approval but will be reviewed by the IURC during the annual hearing that will take place regarding the demand component filing. Northern Indiana's GCA factor also includes a gas cost incentive mechanism which allows the sharing of any cost savings or cost increases with customers based on a comparison of actual gas supply portfolio cost to a market-based benchmark price. Northern Indiana's GCA4 annual demand filing, covering the period November 1, 2002 through October 31, 2003, was made on August 29, 2002 and approved by the IURC for implementation as interim rates, subject to refund effective November 1, 2002. The Indiana Office of Utility Consumer Counselor (OUCC) filed testimony indicating that some gas costs, for the month of March 2003, should not be recovered. On September 10, 2003, the IURC issued an order adjusting the recovery of costs in March 2003 and reducing recovery by $3.8 million. On October 8, 2003, the IURC approved the demand component of the adjustment factor. Northern Indiana's GCA5 annual demand filing, covering the period November 1, 2003 through October 31, 2004, was made on August 26, 2003 and approved by the IURC for implementation as interim rates, subject to refund, effective November 1, 2003. On June 8, 2004, Northern Indiana and the OUCC entered into a joint stipulation and agreement resolving all issues in GCA5. A hearing was held before the IURC on July 18, 2004 in support of the settlement. Among the settlement agreement's provisions, Northern Indiana has agreed to return $3.8 million to its customers over a twelve-month period following IURC approval. This refund is the resolution of issues similar to those from March 2003. An additional provision of the agreement was to extend the current Alternative Regulatory Procedure (ARP), including Northern Indiana's gas cost incentive mechanism, from the current expiration date of December 31, 2004 to March 31, 2005. An order approving the settlement is expected in the third quarter of 2004. Negotiations are in progress to extend the ARP past March 31, 2005. 30 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS DISTRIBUTION OPERATIONS (CONTINUED) All of the Columbia distribution companies presently hold long-term contracts for pipeline and storage services with its affiliate pipelines, Columbia Gas Transmission Corporation (Columbia Transmission) and Columbia Gulf Transmission Company (Columbia Gulf), and a majority of those contracts expire on October 31, 2004. The Columbia distribution companies are comprised of Columbia Gas of Kentucky, Inc., Columbia Gas of Maryland, Inc., Columbia Gas of Ohio, Inc., Columbia Gas of Pennsylvania, Inc., and Columbia Gas of Virginia, Inc. Each distribution company continues to discuss its plan to renew pipeline and storage contracts with industry stakeholders to ensure the continued ability to serve the requirements of firm customers in a tightening capacity market. All contract negotiations between the distribution companies and Columbia Transmission and Columbia Gulf are expected to be resolved prior to the contracts expiring. In addition, certain contracts will be subject to the approval of the respective state regulatory agencies. On April 29, 2004, the Pennsylvania Public Utility Commission approved a request by Columbia of Pennsylvania, Inc. to renew its pipeline and storage contracts with Columbia Transmission and Columbia Gulf. Pursuant to this approval, Columbia of Pennsylvania's storage contracts and approximately half of its pipeline contracts will be renewed for terms of fifteen years, while the remaining pipeline contracts will be renewed on a tiered basis for terms ranging from five or ten years. Columbia of Pennsylvania, Inc. will also acquire additional capacity to meet customer requirements on peak days. In addition, on August 3, 2004, the Virginia State Corporation Commission approved a request by Columbia of Virginia, Inc. to renew its pipeline and storage contracts with Columbia Transmission and Columbia Gulf. Pursuant to this approval, Columbia of Virginia's storage and pipeline contracts with Columbia Transmission and Columbia Gulf will be renewed for terms of fifteen years. Environmental Matters In January of 2004, Northern Indiana and Kokomo Gas and Fuel Company signed a multi-site Voluntary Remediation Program Order addressing 14 former manufactured gas plant sites with the Indiana Department of Environmental Management. Northern Indiana Fuel and Light Company, Inc. expects to enter into a similar agreement for an additional site. Previously Northern Indiana, together with other potentially responsible parties, had entered into similar agreements with the Indiana Department of Environmental Management for 11 additional sites, for which Northern Indiana is required to investigate, and to the extent necessary, clean up. 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. Weather in the Gas Distribution Operation's territories for the second quarter of 2004 was 10% warmer than normal and 11% warmer than the second quarter of 2003. For the first six months of 2004, weather was 1% colder than normal. However, the first six months of 2004 was still 6% warmer than the first six months of 2003. Throughput Total volumes sold and transported of 176.4 million dekatherms (MMDth) for the second quarter of 2004 increased 22.5 MMDth from the same period last year primarily due to increased lower margin off-system sales, partially offset by reduced residential and commercial sales as a result of warmer weather. For the six month period ended June 30, 2004, total volumes sold and transported were 529.9 MMDth, an increase of 15.4 MMDth from the same period in 2003 primarily reflecting increased off-system sales and transportation in the first half of 2004 compared to the first half of 2003, partly offset by a reduction of residential and commercial sales. Net Revenues Net revenues for the three months ended June 30, 2004 were $241.0 million, a decrease of $32.5 million from the same period in 2003. The decrease in net revenues was primarily a result of reduced residential and commercial sales of $6.0 million due to warmer weather and reduced non-traditional revenue of $6.1 million in the 2004 period, while the 2003 period was favorably affected by adjustments recorded for gas costs associated with certain customers. 31 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS DISTRIBUTION OPERATIONS (CONTINUED) For the six month period ended June 30, 2004, net revenues were $821.5 million, a $67.6 million decrease from the same period in 2003, largely due to reduced residential and commercial sales as a result of warmer weather of $22.7 million, lower cost tracker and gross receipts tax revenues of $13.6 million that are generally offset in operating expenses, and lower non-traditional revenues. Operating Income For the second quarter of 2004, Gas Distribution Operations reported operating income of $15.1 million, a decrease of $41.7 million from the same period in 2003. The decrease was mainly attributable to lower net revenue of $32.5 million discussed above and increased operating expenses due primarily to insurance refunds and adjustments of $8.9 million in the 2003 period and a revised allocation methodology of corporate employee and administrative cost of $4.8 million that lowered expenses in the 2003 period, partially offset by the reversal of certain claims reserves in the 2004 period. In addition, Other taxes was impacted by a reduction of an accrual for estimated property tax expense of $4.7 million, offset by a $5.0 million increase in sales tax accrual during the 2004 period. Operating income for the first six months of 2004 totaled $300.1 million, a $70.9 decrease compared to the same period in 2003 largely due to lower net revenues of $67.6 million discussed above. In addition, operating expenses increased slightly, due to increased employee and administrative expenses, insurance refunds and adjustments of $5.2 million in the 2003 period and an adjustment to change the allocation of corporate employee and administrative expenses of $4.8 million in the 2003 period, reduced by lower cost tracker and gross receipts tax offset in revenues. In addition, other taxes was impacted by a reduction of an accrual for estimated property tax expense of $4.7 million, offset by a $5.0 million increase in sales tax accrual during the 2004 period. 32 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS DISTRIBUTION OPERATIONS (CONTINUED)
Three Months Six Months Ended June 30, Ended June 30, --------------------- --------------------- (in millions) 2004 2003 2004 2003 - ------------------------------ -------- -------- -------- -------- OPERATING REVENUES Transportation revenues $ 148.4 $ 148.0 $ 336.7 $ 335.0 Storage revenues 44.5 44.6 89.7 89.3 Other revenues 1.8 2.7 5.1 7.0 -------- -------- -------- -------- Total Operating Revenues 194.7 195.3 431.5 431.3 Less: Cost of gas sold 6.5 2.7 10.4 7.1 -------- -------- -------- -------- Net Revenues 188.2 192.6 421.1 424.2 -------- -------- -------- -------- OPERATING EXPENSES Operation and maintenance 71.1 63.3 149.4 141.2 Depreciation and amortization 29.4 27.7 57.7 55.6 Loss on sale of assets 0.3 0.2 0.3 0.2 Other taxes 13.9 14.1 28.8 28.6 -------- -------- -------- -------- Total Operating Expenses 114.7 105.3 236.2 225.6 -------- -------- -------- -------- Operating Income $ 73.5 $ 87.3 $ 184.9 $ 198.6 ======== ======== ======== ======== THROUGHPUT (MMDTH) Columbia Transmission Market Area 168.4 171.5 575.3 606.3 Columbia Gulf Mainline 140.6 173.7 300.6 353.7 Short-haul 20.9 29.3 47.9 58.6 Columbia Pipeline Deep Water 4.3 1.9 8.7 3.4 Crossroads Gas Pipeline 9.8 8.4 20.5 16.1 Granite State Pipeline 5.7 6.6 19.6 21.0 Intrasegment eliminations (144.5) (168.1) (298.7) (336.6) -------- -------- -------- -------- Total 205.2 223.3 673.9 722.5 -------- -------- -------- --------
NiSource's Gas Transmission and Storage Operations segment consists of the operations of Columbia Transmission, Columbia Gulf, Columbia Deep Water Service Company, Crossroads Pipeline Company and Granite State Gas Transmission, Inc. In total NiSource owns a pipeline network of approximately 16,000 miles extending from offshore in the Gulf of Mexico to New York and the eastern seaboard. The pipeline network serves customers in nineteen northeastern, mid-Atlantic, midwestern and southern states, as well as the District of Columbia. In addition, the NiSource gas transmission and storage operations segment operates one of the nation's largest underground natural gas storage systems. Pipeline Firm Service Contracts The services of Columbia Transmission and Columbia Gulf consist of open access transportation services, and open access storage services in the case of Columbia Transmission. These services are provided primarily to LDCs. The majority of the firm contracts currently in effect with Columbia Gas and Columbia Gulf 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. Numerous LDCs have already committed to extending their long-term capacity commitments and the companies are in discussions with a number of other firm capacity holders regarding future capacity commitments. 33 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS TRANSMISSION AND STORAGE OPERATIONS (CONTINUED) Regulatory Matters On February 28, 2003, Columbia Transmission filed with Federal Energy Regulatory Commission (FERC) certain scheduled annual rate adjustments, designated as the Transportation Costs Rate Adjustment (TCRA), Retainage Adjustment Mechanism (RAM), and Electric Power Cost Adjustment (EPCA). These filings sought recovery, during the period April 1, 2003 through March 31, 2004, of certain expenses relating to transportation costs incurred by Columbia Transmission on interconnecting pipelines and electric costs incurred in the operation of certain compressors (TCRA and EPCA, respectively), as well as quantities of gas required by Columbia Transmission to operate its pipeline system RAM. The recovery of each of these costs occurs through a "tracker" which ensures full recovery of actual expenses. Each of the three filings was conditionally accepted by FERC subject to refund and the filing of additional data by Columbia Transmission. On October 1, 2003, FERC issued an order accepting Columbia Transmission's TCRA filing, and accepting the full recovery of upstream transportation costs. On February 11, 2004, FERC issued an order regarding the annual EPCA filing, which upheld Columbia Transmission's ability to fully recover its electric costs, but required Columbia Transmission to implement a separate EPCA rate to recover electric power costs incurred by a newly expanded electric-powered compressor station from specific customers. The order also limits Columbia Transmission's ability to prospectively discount its EPCA rates. Management does not believe this order will have a material financial impact. On April 14, 2004 the FERC issued an order accepting Columbia Transmission's RAM filing and approving the full recovery of gas required in system operations. FERC will permit parties to pursue certain issues raised in the 2003 filing in connection with consideration of Columbia Transmission's 2004 RAM filing, which became effective April 1, 2004, and is currently pending. Environmental Matters On April 1, 2004, U.S. Environmental Protection Agency (EPA) issued its final Phase II nitrogen oxide (NOx) regulation establishing NOx budgets for states. States will be developing State Implementation Plans (SIPs) which may impact certain compressor station engines/turbines owned by Columbia Transmission and Columbia Gulf. Columbia Transmission and Columbia Gulf will continue to closely monitor the development of SIPs, but anticipates that the cost will not be material. The EPA has issued maximum achievable control technology (MACT) standards for hazardous air pollutants for stationary combustion turbines and reciprocating internal combustion engines. The final standards for turbines do not impose any compliance costs. The MACT for internal reciprocating internal combustion engines will only impact one Columbia Transmission facility and the estimated cost of compliance is expected to be immaterial. On April 15, 2004 EPA finalized the 8-hour ozone non-attainment area designations. Following designation of the 8-hour ozone non-attainment areas, the Clean Air Act provides for a process for promulgation of rules specifying a compliance level, compliance deadline, and necessary controls to be implemented within designated areas. Resulting state rules could require additional reductions in NOx. Columbia Transmission and Columbia Gulf will closely monitor implementation of the rules. While the outcome of such rulemakings is uncertain, the cost could be significant. Proposed Millennium Pipeline Project The proposed Millennium Pipeline Project (Millennium), in which Columbia Transmission is participating and will serve as developer and operator, will provide access to a number of supply and storage basins and the Dawn, Ontario trading hub. The project is now being marketed in two phases. Phase 1 of the project is an expansion of the Algonquin Pipeline extending from Ramapo, N.Y and connecting to the Empire State Pipeline (Empire), 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. Phase 2 would cross the Hudson River, linking to the New York City metropolitan market. 34 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. GAS TRANSMISSION AND STORAGE OPERATIONS (CONTINUED) On September 19, 2002, the FERC issued its order granting final certificate authority for the original Millennium project and specified that Millennium may not begin construction until certain environmental and other conditions are met. One such condition, impacting Phase 2 of the project, is compliance with the Coastal Zone Management Act, which is administered by the State of New York's Department of State (NYDOS). NYDOS has determined that the Hudson River crossing plan is not consistent with the Act. Millennium's appeal of that decision to the United States Department of Commerce was denied. Millennium filed an appeal of the U.S. Department of Commerce ruling relating to the project's Hudson River crossing plan in the U.S. Federal District Court on February 13, 2004. The procedural schedule calls for all briefings to be completed by January 14, 2005. During the second quarter of 2004, a NiSource affiliate purchased an additional interest in the project. NiSource intends to find another sponsor by the end of 2004 to purchase this interest. The other sponsors remain the same and they are Columbia Transmission, Westcoast Energy, Inc. (subsidiary of Duke Energy Corp.) and MCN Energy Group, Inc. (subsidiary of DTE Energy Co.). Throughput Throughput for the Gas Transmission and Storage Operations segment totaled 205.2 MMDth for the second quarter 2004, compared to 223.3 MMDth for the same period in 2003. The decrease of 18.1 MMDth is due mainly to a continued decline of offshore natural gas production. Throughput for the six months ended June 30, 2004 was 673.9 MMDth, a decrease of 48.6MMDth from the same period in 2003 due to warmer weather in the first half of 2004 than for the comparable period in 2003, and a continued decline of offshore natural gas production, and other non-weather factors. Net Revenues Net revenues were $188.2 million for the second quarter 2004, a decrease of $4.4 million from the same period in 2003. Net revenues decreased due to a reduction in interruptible service revenues primarily due to lower throughput, which were partially offset by an increase in demand charge revenues. Net revenues were $421.1 million for the six months ended June 30, 2004, a slight decrease of $3.1 million from the comparable 2003 period. The 2003 period was unfavorably impacted by higher costs to meet customer demand during a period of sustained cold weather in the Northeast market areas during the first quarter of 2003. Both the six-months ended 2004 and the first half of 2003 reflect lower interruptible transmission service revenues than those that have been historically realized. Management has evaluated operational issues and market conditions and anticipates that there will be fewer opportunities for interruptible revenue on an ongoing basis. Also, net revenues decreased due to lower throughput, which was partially offset by an increase in demand charge revenues. Operating Income Operating income was $73.5 million for the second quarter of 2004, a decrease of $13.8 million from the second quarter of 2003. Operating income was mainly affected by reduced net revenues discussed above and a reversal of a litigation reserve of $6.6 million relating to a lawsuit that was settled in the second quarter of 2003. For the first six months of 2004, operating income was $184.9 million, a $13.7 million decrease from the first six months of 2003. The decrease was mainly attributable to reduced revenues discussed above and increased operation and maintenance expenses largely due to the reversal of a litigation reserve of $6.6 million relating to a lawsuit that was settled in the second quarter of 2003. 35 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. ELECTRIC OPERATIONS
Three Months Six Months Ended June 30, Ended June 30, -------------------------- -------------------------- (in millions) 2004 2003 2004 2003 - ------------------------------- ---------- ---------- ---------- ---------- NET REVENUES Sales revenues $ 267.4 $ 259.4 $ 528.3 $ 522.2 Less: Cost of sales 84.9 83.7 166.3 177.0 ---------- ---------- ---------- ---------- Net Revenues 182.5 175.7 362.0 345.2 ---------- ---------- ---------- ---------- OPERATING EXPENSES Operation and maintenance 58.8 52.9 119.1 110.4 Depreciation and amortization 44.4 43.6 88.5 87.3 Other taxes (2.7) 15.1 13.6 30.8 ---------- ---------- ---------- ---------- Total Operating Expenses 100.5 111.6 221.2 228.5 ---------- ---------- ---------- ---------- Operating Income $ 82.0 $ 64.1 $ 140.8 $ 116.7 ========== ========== ========== ========== REVENUES ($ IN MILLIONS) Residential 66.7 62.4 137.9 134.6 Commercial 73.2 69.7 143.6 136.4 Industrial 102.5 93.4 203.8 191.3 Wholesale 11.4 25.8 22.8 45.4 Other 13.6 8.1 20.2 14.5 ---------- ---------- ---------- ---------- Total 267.4 259.4 528.3 522.2 ---------- ---------- ---------- ---------- SALES (GIGAWATT HOURS) Residential 694.2 639.1 1,448.7 1,428.7 Commercial 899.4 859.2 1,759.5 1,710.7 Industrial 2,327.2 2,205.4 4,665.4 4,478.9 Wholesale 289.5 751.5 559.4 1,293.4 Other 33.8 27.5 66.2 61.2 ---------- ---------- ---------- ---------- Total 4,244.1 4,482.7 8,499.2 8,972.9 ---------- ---------- ---------- ---------- COOLING DEGREE DAYS 205 113 205 113 NORMAL COOLING DEGREE DAYS 227 224 227 224 % WARMER (COLDER) THAN NORMAL (10%) (50%) (10%) (50%) ELECTRIC CUSTOMERS Residential 388,824 384,750 Commercial 49,635 48,694 Industrial 2,516 2,560 Wholesale 25 28 Other 776 796 ---------- ---------- Total 441,776 436,828 ---------- ----------
NiSource generates and distributes electricity, through its subsidiary Northern Indiana, to approximately 442 thousand customers in 21 counties in the northern part of Indiana. The operating results reflect the temperature-sensitive nature of customer demand with annual sales affected by temperatures in the northern part of Indiana. As a result, segment operating income is generally higher in the second and third quarters, reflecting cooling demand during the summer season. 36 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. ELECTRIC OPERATIONS (CONTINUED) Market Conditions The regulatory frameworks applicable to Electric Operations continue to be affected by fundamental changes that will impact Electric Operations' structure and profitability. Notwithstanding those changes, competition within the industry will create opportunities to compete for new customers and revenues. Management has taken steps to improve operating efficiencies in this changing environment and improve the transmission interconnections with neighboring electric utilities. 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 $26.8 million and $24.3 million were recognized for electric customers for the first half of 2004 and 2003, respectively. On June 20, 2002, Northern Indiana, Ameren Corporation and First Energy Corporation established terms for joining the Midwest Independent System Operator (MISO) through participation in an independent transmission company (ITC). Northern Indiana transferred functional control of its electric transmission assets to the ITC and MISO on October 1, 2003. As part of Northern Indiana's use of MISO's transmission service, Northern Indiana will incur new categories of transmission charges based upon MISO's Federal Energy Regulatory Commission (FERC)-approved tariff. One of the new categories of charges, Schedule 10, relates to the payment of administrative charges to MISO for its continuing management and operations of the transmission system. Northern Indiana filed a petition on September 30, 2003, with the IURC seeking approval to establish accounting treatment for the deferral of the Schedule 10 charges from MISO. On July 21, 2004 the IURC issued an order which denied Northern Indiana's request for deferred accounting treatment for the MISO Schedule 10 administrative fees. Northern Indiana has taken a charge during the second quarter 2004 in the amount of $2.1 million related to the MISO administrative charges deferred through June 30, 2004. The MISO Schedule 10 administrative fees are currently estimated to be approximately $2.8 million annually. Northern Indiana is currently evaluating the IURC order to determine whether an appeal will be filed. The MISO has initiated the Midwest Market Initiative (MMI), which will develop the structures and processes to be used to implement an electricity market for the MISO region. This MMI proposes non-discriminatory transmission service, reliable grid operation, and the purchase and sale of electric energy in a competitive, efficient and non-discriminatory manner. MISO has filed with FERC detailed tariff information, with a planned initial operation date of March 1, 2005. Northern Indiana and EnergyUSA-TPC (TPC) are actively pursuing roles in the MMI. At the current time, management believes that the MMI will change the manner in which Northern Indiana and TPC conduct their electric business; however, at this time management cannot determine the impact the MMI will have on Northern Indiana or TPC. Northern Indiana has been recovering the costs of electric power purchased for sale to its customers through the fuel adjustment clause (FAC). The FAC provides for costs to be collected if they are below a negotiated cap. If costs exceed this cap, Northern Indiana must demonstrate that the costs were prudently incurred to achieve approval for recovery. This negotiated cap agreement is subject to continuing negotiations. A group of industrial customers challenged the manner in which Northern Indiana applied costs associated with a specific interruptible sales tariff. An estimated refund liability was recorded in the first quarter of 2003. A settlement was reached with the customers and Northern Indiana recorded the full costs of the settlement. As a result of the settlement, the industrial customers challenge was withdrawn and dismissed in January 2004. In addition, as a result of the settlement, Northern Indiana has sought and received approval by the IURC to reduce the charges under the interruptible sales tariff. This reduction will remain in effect until the Dean H. Mitchell Generating Station (Mitchell Station) returns to service. 37 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. ELECTRIC OPERATIONS (CONTINUED) Currently, Northern Indiana is reviewing options to meet the electric needs of its customers. This review includes an assessment of Northern Indiana's oldest generating units, which includes the Mitchell Station. Northern Indiana has requested proposals from 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. On May 7, 2004, the City of Gary filed a petition with the IURC seeking valuation of the Mitchell Station and determination of the terms and conditions under which the City of Gary would acquire the Mitchell Station. The procedural schedule for the City of Gary has been set, and Northern Indiana has filed its Prepared Direct Testimony, stating that Northern Indiana has no current plans to restart the Mitchell Station. On May 25, 2004 Northern Indiana filed a petition for approval of a Purchased Power and Transmission Tracker Mechanism to recover the cost of purchased power to meet Northern Indiana's retail electric load requirements and charges imposed on Northern Indiana by MISO and Grid America. Northern Indiana's direct testimony is due to be filed by August 6, 2004. The hearing is set for the fourth quarter of 2004. On July 9, 2004 a verified joint petition was filed by PSI Energy, Inc., Indianapolis Power & Light Company, Northern Indiana and Vectren Energy Delivery of Indiana, Inc., seeking approval of certain changes in operations that are likely to result from the MISO's implementation of energy markets, and for determination of the manner and timing of recovery of costs resulting from the MISO's implementation of standard market design mechanisms, such as the MISO's proposed real-time and day-ahead energy markets. In January 2002, Northern Indiana filed for approval to implement an environmental cost tracker (ECT). The ECT was approved by the IURC on November 26, 2002. Under the ECT Northern Indiana is permitted to recover (1) allowance for funds used during construction and a return on the capital investment expended by Northern Indiana to implement Indiana Department of Environmental Management's nitrogen oxide State Implementation Plan through an Environmental Cost Recovery Mechanism (ECRM) and (2) related operation and maintenance and depreciation expenses once the environmental facilities become operational through an Environmental Expense Recovery Mechanism (EERM). Under the Commission's November 26, 2002 order, Northern Indiana is permitted to submit filings on a semi-annual basis for the ECRM and on an annual basis for the EERM. Northern Indiana's latest ECRM filing (ECR-3) was for capital expenditures of $194.1 million, and was made simultaneous with its first EERM filing (EER-1) for $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. The ECRM revenues amounted to $7.5 million for the six months ended June 30, 2004, and $12.6 million from inception to date, while EERM revenues were $0.3 for the first half of 2004. Environmental Matters AIR. On April 15, 2004, the U.S. Environmental Protection Agency (EPA) finalized the 8-hour ozone non-attainment area designations. Following designation of the 8-hour ozone non-attainment areas, the Clean Air Act provides for a process for promulgation of rules specifying a compliance level, compliance deadline, and necessary controls to be implemented within designated areas over the next few years. Resulting state rules could require additional reductions in NOx emissions from coal-fired boilers including Northern Indiana's electric generating stations. Until the rules are promulgated, the potential impact on Northern Indiana is uncertain. Northern Indiana will continue to closely monitor developments in this area. On June 28 and 29, 2004, the EPA responded to the states' initial recommendations for EPA designation of areas meeting and not meeting the National Ambient Air Quality Standards (NAAQS) for fine particles. (Fine particles are those less than or equal to 2.5 micrometers in diameter and are also referred to as PM2.5.) The states will have 120 days to comment on or dispute these recommendations. Once the designations are finalized, states will need to initiate rulemaking that would seek emissions reductions to bring the designated areas into attainment. Northern Indiana will continue to closely monitor developments in this area. 38 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. ELECTRIC OPERATIONS (CONTINUED) On April 15, 2004, the EPA proposed amendments to its July 1999 Regional Haze Rule that requires states to set periodic goals for improving visibility in 156 natural areas across the United States. These amendments would apply to the provisions of the regional haze rule that require emissions controls known as best available retrofit technology (BART) for BART eligible industrial facilities emitting air pollutants that reduce visibility. Under the rule, states would be required to develop rules that specify the stringency, type of reductions, and controls that could be applied to BART eligible sources consistent with EPA guidance. The BART eligible sources, including many of the boilers at Northern Indiana's electric generating stations, have the potential to emit more than 250 tons a year of visibility impairing emissions, and fall within one of 26 categories, including utility and industrial boilers. States must develop implementation rules by January 2008. Resulting rules could require additional reductions of NOx, sulfur dioxide (SO2) and particulate matter from coal-fired boilers including Northern Indiana's electric generating stations. Until the state rules are promulgated, the potential impact on Northern Indiana is uncertain. Northern Indiana will continue to closely monitor developments in this area. The EPA Administrator signed a Supplemental Notice of Proposed Rulemaking on May 18, 2004. This rule requires that each state must submit to EPA a plan that demonstrates it will meet its assigned statewide Clean Air Interstate Rule SO2 and NOx emissions budget. The final EPA rule is expected by late Fall, 2004. Until the Federal and State rules are promulgated, the potential impact is uncertain. Northern Indiana will continue to closely monitor developments in this area. In March 2004, the State of North Carolina filed a petition under Section 126 of the Clean Air Act seeking EPA imposition of additional NOx and SO2 reductions from electrical generating units in 13 states, including Indiana. The EPA is addressing the issues raised by North Carolina in other current regulatory initiatives that are being monitored by Northern Indiana. WATER. On February 16, 2004, the EPA Administrator signed the Phase II Rule of the Clean Water Act Section 316(b) which requires all large existing steam electric generating stations to meet certain performance standards to reduce the mortality of aquatic organisms at their cooling water intake structures. EPA has delayed the publication of the rule to complete additional revisions. The rule was reissued on July 9, 2004 and becomes effective on September 7, 2004. Under this rule, plants will either have to demonstrate that the performance of their existing fish protection systems meet the new standards or develop new systems whose compliance is based on any of five options. Northern Indiana is assessing the specific impacts of the final Phase II rule on its four (4) generating stations. REMEDIATION. Northern Indiana is a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act and similar State laws at two waste disposal sites and shares in the cost of their cleanup with other potentially responsible parties. At one site, investigations are ongoing and final costs of clean up have not yet been determined. At the second site, Northern Indiana has entered into EPA Administrative Orders on Consent to perform an interim action that includes providing a municipal water supply system for approximately 275 homes. Northern Indiana has also agreed to conduct a Remedial Investigation and Feasibility Study in the vicinity of the third party, state-permitted landfill where Northern Indiana contracted for fly ash disposal. Sales Electric sales for the second quarter 2004 were 4,244.1 gwh, a decrease of 238.6 gwh compared to the 2003 period, mainly as a result of decreased wholesale transaction sales, which were offset in part by modest improvements in residential, commercial and industrial sales. Residential and commercial sales improved due to an increase in the number of customers and higher usage, while industrial sales increased due to increased demand from the steel industry. Electric sales for the first six months of 2004 was 8,499.2 gwh, a decrease of 473.7 gwh compared to the 2003 period, as a result of decreased wholesale transaction sales, partially offset by increased residential, commercial, and industrial sales. 39 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. ELECTRIC OPERATIONS (CONTINUED) Net Revenues In second quarter 2004, electric net revenues of $182.5 million increased by $6.8 million from the comparable 2003 period. The increase was primarily a result of increased customer usage and customer count of $9.0 million and favorable weather during the quarter, slightly offset by lower wholesale power revenue. In the first six months of 2004, electric net revenues were $362.0 million, an increase of $16.8 million from the comparable 2003 period as a result of increased customer usage and customer count of $8.2 million, favorable weather, and $6.8 million in environmental cost tracker revenues. In addition, Electric Operations was affected by regulatory items that reduced net revenues by $8.5 million in the comparable 2003 period. These increases in Electric Operations revenues for the first half of 2004 were partially offset by increased regulatory revenue credits of $4.6 million and reduced wholesale revenues of $1.6 million. Operating Income Operating income for the second quarter 2004 was $82.0 million, an increase of $17.9 million from the same period in 2003. This increase for the comparative quarters was primarily due to the increase in net revenue mentioned above and a reduction of an accrual for estimated property tax expense. These increases to operating income were partially offset by a $5.9 million increase in operation and maintenance expenses due primarily to higher employee and administrative expenses of $4.8 million and a $2.1 million charge taken for MISO administrative fees. The increased expenses were partially reduced by a $3.2 million reversal of certain claims reserves upon settlement. Operating income for the first six months of 2004 was $140.8 million, an increase of $24.1 million from the same period in 2003. The increase was primarily due to increased net revenue mentioned above and a reduction of an accrual for estimated property tax expense. Operation and maintenance expenses increased $8.7 million due mainly to higher employee and administrative expenses of $3.3 million, a $2.1 million charge taken for MISO administrative fees, and an expense of $3.3 million recorded in the first quarter of 2004, representing Electric Operations' portion of the redemption premium from the early extinguishment of certain medium-term notes at Northern Indiana. These increased expenses were reduced by a $3.2 million reversal of certain claims reserves upon settlement. 40 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. OTHER OPERATIONS
Three Months Six Months Ended June 30, Ended June 30, --------------------------- --------------------------- (in millions) 2004 2003 2004 2003 - ------------- ----------- ----------- ----------- ----------- NET REVENUES Products and services revenue $ 145.6 $ 92.7 $ 334.5 $ 237.1 Less: Cost of products purchased 139.8 86.8 328.5 224.7 ----------- ----------- ----------- ----------- Net Revenues 5.8 5.9 6.0 12.4 ----------- ----------- ----------- ----------- OPERATING EXPENSES Operation and maintenance 9.8 12.1 22.8 26.6 Depreciation and amortization 3.0 3.3 5.9 6.2 Loss on sale or impairment of assets - - 0.7 1.1 Other taxes 1.1 0.9 2.9 2.8 ----------- ----------- ----------- ----------- Total Operating Expenses 13.9 16.3 32.3 36.7 ----------- ----------- ----------- ----------- Operating Loss $ (8.1) $ (10.4) $ (26.3) $ (24.3) =========== =========== =========== ===========
The Other Operations segment participates in energy-related services including gas marketing, power trading and ventures focused on distributed power generation technologies, fuel cells and storage systems. PEI operates the Whiting Clean Energy, Inc. (Whiting Clean Energy) project, which is a 525mw cogeneration facility that uses natural gas to produce electricity for sale in the wholesale markets and also provides steam for industrial use. Additionally, the Other Operations segment is involved in real estate and other businesses. PEI Holdings, Inc. WHITING CLEAN ENERGY. PEI's Whiting Clean Energy project at BP's Whiting, Indiana refinery was placed in service in 2002. Initially, the facility was not able to deliver steam to BP to the extent originally contemplated without plant modifications. Whiting Clean Energy has reached an agreement in principle with the engineering, procurement and construction contractor, which requires the contractor to pay for a portion of the necessary plant modifications. Whiting Clean Energy is also pursuing recovery from the insurance provider for construction delays and necessary plant modifications. PEI estimates that the facility will operate at a loss in the near term based on the current market view of forward pricing for gas and electricity. For 2003, the after-tax loss was approximately $30.0 million and the expected 2004 after-tax loss is expected to be similar to 2003. During the first half of 2004, Whiting Clean Energy continued to experience losses due to the market for wholesale power and the contract requirements to run the plant at a level to produce steam required by the BP refinery in Whiting, Indiana. These contract requirements currently are being renegotiated. The profitability of the project in future periods will be dependent on, among other things, prevailing prices in the energy markets and regional load dispatch patterns. Because of the expected losses from this facility and decreases in estimated forward pricing for electricity versus changes in gas prices, an impairment study was performed in the first quarter of 2003 on this facility in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The study indicated that, at that time, no impairment charge was necessary. However, the study includes many estimates and assumptions for the 40-year estimated useful life of the facility. Changes in these estimates and assumptions, such as forward prices for electricity and gas, volatility in the market, etc., could result in a situation where total undiscounted net revenues are less than the carrying value of the facility, which would result in a write-down that could be significant. Net Revenues Net revenues of $5.8 million for the second quarter of 2004 remained consistent with the same period a year-ago. For the first six months of 2004, net revenues were $6.0 million, a $6.4 million decrease compared to the same period in 2003. The decrease was mainly due to reduced revenues from the Whiting Clean Energy facility of $4.4 million and lower power trading revenues. 41 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NISOURCE INC. OTHER OPERATIONS (CONTINUED) Operating Income The Other segment reported an operating loss of $8.1 million for the second quarter of 2004, versus an operating loss of $10.4 million for the comparable period 2003. The improvement was a result of lower operation and maintenance expense due to a reduction in employee and administrative expenses during the second quarter of 2004 as compared the same period in 2003. For the first six months of 2004, operating loss was $26.3 million compared to an operating loss of $24.3 million for the comparable 2003 period due to increased losses of $3.2 million associated with Whiting Clean Energy and lower power trading revenues. Operation and maintenance expense decreased in the 2004 period as a result of a reduction in employee and administrative expenses during the first half of 2004 as compared the same period in 2003 and a reversal of a litigation reserve during the first half of 2004. 42 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK NISOURCE INC. For a discussion regarding quantitative and qualitative disclosures about market risk see Management's Discussion and Analysis of Financial Condition and Results of Operations under "Market Risk Sensitive Instruments and Positions." ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures NiSource's chief executive officer and its chief financial officer, after evaluating the effectiveness of NiSource's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), have concluded based on the evaluation required by paragraph (b) of Exchange Act Rules 13a-15 and 15d-15 that, as of the end of the period covered by this report. NiSource's disclosure controls and procedures were adequate and effective to ensure that material information relating to NiSource and its consolidated subsidiaries would be made known to them by others within those entities. Changes in Internal Controls There was no change in NiSource's internal control over financial reporting during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, NiSource's internal control over financial reporting. 43 PART II ITEM 1. LEGAL PROCEEDINGS NISOURCE INC. 1. VIRGINIA NATURAL GAS, INC. V. COLUMBIA GAS TRANSMISSION CORP., FEDERAL ENERGY REGULATORY COMMISSION (FERC) On January 13, 2004, Virginia Natural Gas, Inc. (VNG) filed with FERC a "Complaint Seeking Compliance with the Natural Gas Act and with Regulations and Certificate Orders of the Federal Energy Regulatory Commission and Seeking Remedies" in Docket No. RP04-139. VNG alleged various violations during the Winter of 2002-2003 by Columbia Transmission of its firm service obligations to VNG. VNG sought monetary damages and remedies (exceeding $37 million), and also sought certain prospective remedies. On July 29, 2004, FERC issued an order in which it refused to grant VNG any monetary damages and said such claims are best determined by a court of law. FERC also agreed with Columbia Transmission, that Columbia Transmission had not abandoned its obligation to provide service and that it had not inappropriately continued interruptible service to the detriment of firm service. However, FERC did find that Columbia Transmission had failed to exercise sufficient due diligence in its modifications to or its operation of vaporization equipment at its Chesapeake LNG facility and that Columbia Transmission had failed to deliver gas to VNG at 250 psig as called for by the agreement between VNG and Columbia Transmission. FERC declined VNG's request to award damages in this case and, as noted above, stated that any claim for damages could best be determined by a court of law. 2. STAND ENERGY CORPORATION, ET AL. V. COLUMBIA GAS TRANSMISSION CORPORATION, ET AL KANAWHA COUNTY COURT, WEST VIRGINIA, ATLANTIGAS CORPORATION V. NISOURCE, ET AL, U.S. DISTRICT COURT, NORTHERN DISTRICT OF MARYLAND AND TRIAD ENERGY RESOURCES, ET AL. V. NISOURCE, ET AL In June 2002, Atlantigas Corporation filed a complaint in the U.S. District Court, District of Columbia. In March 2003, Triad Energy Resources filed a similar complaint in the U.S. District Court, District of Columbia. On September 29, 2003, the Atlantigas complaint was dismissed for lack of personal jurisdiction and Atlantigas filed a new complaint in the U.S. District Court of Northern Maryland on October 27, 2003. Based on the Court's decision on personal jurisdiction in Atlantigas, the plaintiffs in the Triad case dismissed that case on October 31, 2003 from the District of Columbia and indicated that the case would be refiled in another jurisdiction. On July 14, 2004, Stand Energy Corporation filed a complaint in Kanawha County Court in West Virginia and on or about July 22, Atlantigas filed a voluntary notice of dismissal without prejudice in the case in the U.S. District Court of Northern Maryland, citing its joinder as a plaintiff in the Stand Energy case. All of these complaints contain allegations against various NiSource companies, including Columbia Transmission and Columbia Gulf, and assert that those companies and certain "select shippers" engaged in an "illegal gas scheme" that violated federal anti-trust and state law. The "illegal gas scheme" complained of by the plaintiffs relates to the Columbia Transmission and Columbia Gulf gas imbalance transactions that were the subject of the FERC enforcement staff investigation and subsequent settlement approved in October 2000. An answer in the Stand Energy case is due on August 14, 2004. 44 ITEM 1. LEGAL PROCEEDINGS (continued) NISOURCE INC. 3. UNITED STATES OF AMERICA EX REL. JACK J. GRYNBERG V. COLUMBIA GAS TRANSMISSION CORP., ET AL., U.S. DISTRICT COURT, E.D. LOUISIANA The plaintiff filed a complaint in 1997, under the False Claims Act, on behalf of the United States of America, against approximately seventy pipelines, including Columbia Gulf and Columbia Transmission. The plaintiff claimed that the defendants had submitted false royalty reports to the government (or caused others to do so) by mis-measuring the volume and heating content of natural gas produced on Federal land and Indian lands. The Plaintiff's original complaint was dismissed without prejudice for misjoinder of parties and for failing to plead fraud with specificity. The plaintiff then filed over sixty-five new False Claims Act complaints against over 330 defendants in numerous Federal courts. One of those complaints was filed in the Federal District Court for the Eastern District of Louisiana against Columbia and thirteen affiliated entities. Plaintiff's second complaint, filed in 1997, repeats the mis-measurement claims previously made and adds valuation claims alleging that the defendants have undervalued natural gas for royalty purposes in various ways, including sales to affiliated entities at artificially low prices. Most of the Grynberg cases were transferred to Federal court in Wyoming in 1999. The defendants, including the Columbia defendants, have filed motions to dismiss for lack of subject matter jurisdiction in this case. 4. TAWNEY, ET AL. V. COLUMBIA NATURAL RESOURCES, INC., ROANE COUNTY, WV CIRCUIT COURT The Plaintiffs, who are royalty owners, filed a lawsuit in early 2003 against Columbia Natural Resources alleging that Columbia Natural Resources underpaid royalties by improperly deducting post-production costs and not paying a fair value for the gas produced from their leases. Plaintiffs seek the alleged royalty underpayment and punitive damages claiming that Columbia Natural Resources fraudulently concealed the deduction of post-production charges. In February 2004, the court certified the case as a class action that includes any person who, after January 1, 1980, received or is due royalties from Columbia Natural Resources (and its predecessors or successors) on lands lying within the boundary of the State of West Virginia. All individuals, corporations, agencies, departments or instrumentalities of the United States of America are excepted from the class. Although NiSource sold Columbia Natural Resources in 2003, it remains obligated to manage this litigation and also remains at least partly liable for any damages awarded to the plaintiffs. Columbia Natural Resources appealed the decision certifying the class and the Supreme Court of West Virginia denied the appeal. Trial is scheduled for July 5, 2005. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None 45 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NISOURCE INC. On May 11, 2004, NiSource held its Annual Meeting of Stockholders. On the March 16, 2004 record date, NiSource had 263,302,932 shares of common stock outstanding, each of which was entitled to one vote at the meeting. The following items were voted upon and approved by the requisite number of shares present in person or by proxy at the meeting:
Votes For Votes Against Abstentions --------- ------------- ----------- Ratify appointment of Deloitte & Touche LLP 223,258,822 3,947,982 1,763,421
Votes For Votes Withheld --------- -------------- Directors: Steven C. Beering 214,487,092 14,483,133 Dennis E. Foster 222,087,788 6,882,437 Richard L. Thompson 223,142,752 5,827,473 Carolyn Y. Woo 222,011,931 6,958,294
ITEM 5. OTHER INFORMATION None 46 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K NISOURCE INC. 53 (a) Exhibits (10.1) NiSource Corporate Incentive Plan dated July 16, 2004 and effective as of January 1, 2004. (10.2) Pension Restoration Plan for Nisource Inc. and Affiliates, as amended and restated effective January 1, 2004. (10.3) Savings Restoration Plan for Nisource Inc. and Affiliates, as amended and restated effective January 1, 2004. (10.4) Nisource Inc. Nonemployee Director Stock Incentive Plan, as amended and restated effective January 1, 2004. (10.5) Nisource Inc. Supplemental Executive Retirement Plan, as amended and restated effective January 1, 2004. (10.6) Agreement dated September 1, 2002, with Samuel W. Miller, Jr. (31.1) Certification of Gary L. Neale, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (31.2) Certification of Michael W. O'Donnell, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32.1) Certification of Gary L. Neale, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (32.2) Certification of Michael W. O'Donnell, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, NiSource hereby agrees to furnish the U.S. Securities and Exchange Commission, upon request, any instrument defining the rights of holders of long-term debt of NiSource not filed as an exhibit herein. No such instrument authorizes long-term debt securities in excess of 10% of the total assets of NiSource and its subsidiaries on a consolidated basis. (b) Reports on Form 8-K The following reports on Form 8-K were filed during the second quarter of 2004:
Financial Item Reported Statements Included Date of Event Date Filed - ------------- ------------------- ------------- ---------- 7, 12 Y 4/30/2004 4/30/2004 9 N 5/11/2004 5/11/2004 9 N 5/18/2004 5/18/2004 9 N 6/1/2004 6/01/2004
47 SIGNATURE NISOURCE INC. Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NiSource Inc. ------------------ (Registrant) Date: August 6, 2004 By: /s/ Jeffrey W. Grossman ------------------------------- Jeffrey W. Grossman Vice President and Controller (Principal Accounting Officer and Duly Authorized Officer) 48 EX-10.1 2 c87285exv10w1.txt INCENTIVE PLAN Exhibit 10.1 NISOURCE CORPORATE INCENTIVE PLAN 1. PURPOSE. NiSource Inc. ("Company") established the NiSource Corporate Incentive Plan ("Plan") to provide additional compensation for employees who influence the profitability of the Company and its affiliates (individually, "Employer" and collectively, "Employers"). 2. ADMINISTRATION. The Plan is administered by the Officer Nomination and Compensation Committee ("Committee") of the Board of Directors of the Company ("Board"), which, subject to action of the Board, has complete discretion and authority with respect to the Plan and its application, except to the extent that discretion is expressly limited by the Plan. 3. ELIGIBILITY FOR PARTICIPATION. The participating group of employees ("Participants") under the Plan is comprised of exempt and non-exempt employees of the Company and its affiliates, excluding any employee who has received a last chance letter, final notice letter or equivalent during the Plan year, certain exempt employees who participate in other specialized functional incentive plans and bargaining unit employees of Kokomo Gas and Fuel Company. The Committee, in its sole discretion, shall determine each calendar year the identity of the Participants. The Committee may add additional employees, and remove employees, as Participants during each calendar year. Notwithstanding the previous paragraph, an employee described above shall be a "Limited Participant" if he or she has received a suspension without pay during the Plan year. Any Participant not covered under the preceding sentence is a "Full Participant." 4. DETERMINATION OF INCENTIVE PAYMENT. The incentive payment calculation is shown on Exhibit I attached hereto. The Plan is predicated on establishing an incentive pool based on achievement by the Company of a financial trigger, as shown on Exhibit I, for the applicable calendar year, up to a maximum incentive pool established by the Committee. If the financial trigger is met or exceeded for a calendar year, an incentive pool is created for such calendar year. Each Participant's incentive payment from the incentive pool will be based on such Participant's status (i.e., exempt or non-exempt, Employer and job scope level) as of December 31 of the calendar year on which the incentive payment is based. The incentive payment for a Participant who is an exempt employee is divided into two parts. The first part will be calculated based on a formula set forth in Exhibit I. The remainder of the Participant's potential incentive payment is drawn from a portion of the incentive pool ("Division Pool") allocated to the Participant's manager, in the discretion of the Executive Council of the Company ("Executive Council"), and allocated by such manager among the Participants supervised by the manager. The amount of the Division Pool will be determined by the Executive Council based on the performance of the applicable business unit. The allocation of the Division Pool among the Participants in the business unit will be determined by the manager of such business unit based on individual performance of each Participant in the business unit. The discretion exercised by the Executive Council and each manager in this respect is conclusive. The incentive payment for a Participant who is a non-exempt employee will be awarded to the Participant on a calculated, formula basis set forth in Exhibit I. Any Participant who terminates employment with the Employers and their affiliates due to death, disability or retirement, pursuant to an Employer's qualified retirement plan, during a calendar year will be deemed a Participant on December 31 of such calendar year, and will receive a prorated calculated incentive payment for such year based on his or her Eligible Earnings as determined pursuant to Exhibit I, through the date of termination of employment. 5. DISTRIBUTION OF THE INCENTIVE PAYMENT. The elements of each incentive payment, namely, (1) the calculated incentive payment amount and (2) the discretionary incentive payment amount, if applicable, are distributable to the Participant, or his or her beneficiary, in cash in a single sum as soon after the end of the applicable calendar year as practicable, in the same manner as payroll. 6. CONTINUITY OF THE PLAN. Although it is the present intention of the Company to continue the Plan in effect for an indefinite period of time, the Company reserves the right to terminate the Plan in its entirety as of the end of any calendar year or to modify the Plan as it exists from time to time, provided that no such action shall adversely affect any incentive payment amounts previously earned in a preceding calendar year under the Plan. 7. NOTICES. Any notice required or permitted to be given by the Company or the Committee pursuant to the Plan shall be deemed given when personally delivered or deposited in the United States mail, registered or certified, postage prepaid, addressed to the Participant, his or her beneficiary, executors, administrators, successors, assigns or transferees, at the last address shown for the Participant on the records of the Company or subsequently provided in writing to the Company. 8. WITHHOLDING. The Company may withhold from any incentive payment under the Plan amounts sufficient to satisfy applicable withholding requirements under any federal, state or local law, and deductions as may be required pursuant to agreement with, or with the consent of, a Participant, including any elective deferrals under the NiSource Inc. Retirement Savings Plan and the NiSource Inc. Executive Deferred Compensation Plan. 2 9. MISCELLANEOUS PROVISIONS. (a) No incentive payment under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge prior to actual receipt thereof by the payee; and any attempt to so anticipate, alienate, sell, transfer, assign, pledge, encumber or charge prior to such receipt shall be void; and the Company shall not be liable in any manner for or subject to the debts, contracts, liabilities, engagements or torts of any person entitled to any incentive payment under the Plan. (b) Nothing contained herein will confer upon any Participant the right to be retained in the service of an Employer or any affiliate thereof nor limit the right of an Employer or any subsidiary thereof to discharge or otherwise deal with any Participant without regard to the existence of the Plan. (c) The Plan shall at all times be entirely unfunded and no provision shall at any time be made with respect to segregating assets of an Employer or any affiliate thereof for payment of any incentive payments hereunder. No Participant or any other person shall have any interest in any particular assets of an Employer or any affiliate thereof by reason of the right to receive an incentive payment under the Plan and any such Participant or any other person shall have only the rights of a general unsecured creditor of an Employer or any affiliate thereof with respect to any rights under the Plan. (d) Any portion of the incentive pool not allocated to Participants for a given calendar year shall remain a general asset of the Company. 10. 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. IN WITNESS WHEREOF, the Company has caused the Plan to be executed in its name by its duly authorized officer this 16th day of July, 2004, effective as of the 1st day of January, 2004. NISOURCE INC. By: /s/ Steven A. Barkauskas ---------------------------- 3 EXHIBIT I 2004 INCENTIVE CALCULATION Financial trigger: Basic earnings per share from continuing operations ("EPS") of $1.65 as of December 31, 2004, after accounting for the cost of the incentive pool. Therefore, EPS must be higher than $1.65 in order for an incentive pool to be established. Incentive pool: Any earnings above the financial trigger may, in the discretion of the Committee, fund the incentive pool. Eligible Earnings: Actual base earnings in 2004 plus all shift premiums and overtime pay. (Reimbursements for educational assistance,relocation, meals, mileage, incentive payments, and long-term disability payments are not included in base earnings.) Payout Percentage: Each Participant will be given an incentive opportunity range, from trigger to maximum, during February 2004 and will be assigned his or her Payout Percentage as soon as practicable after the release of 2004 Company earnings. Incentive Payment: (a) Each Full Participant who is a non-exempt employee will receive his or her incentive payment from the incentive pool as a fixed percentage of his or her Eligible Earnings, according to the following formula: Non-Exempt Employee Incentive Payment = Eligible Earnings x Payout Percentage (b) Each Full Participant who is an exempt employee will receive his or her incentive payment from the incentive pool partly from the formula set forth below and partly as a discretionary payment, as described in the Plan. Exempt Employee Incentive Payment = Eligible Earnings x Payout Percentage x 66-2/3% + discretionary payment, if any (c) Each Limited Participant will receive 50% of the amount calculated in paragraph (a) or (b) above, as applicable. 4 EX-10.2 3 c87285exv10w2.txt PENSION RESTORATION PLAN Exhibit 10.2 PENSION RESTORATION PLAN FOR NISOURCE INC. AND AFFILIATES AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2004 TABLE OF CONTENTS
PAGE ---- ARTICLE I PURPOSE.................................................... 1 ARTICLE II DEFINITIONS................................................ 2 2.1 Affiliated Company............................................. 2 2.2 Basic Plan..................................................... 2 2.3 Code........................................................... 2 2.4 Committee...................................................... 2 2.5 Company........................................................ 2 2.6 DCP............................................................ 2 2.7 Employee....................................................... 2 2.8 Employer....................................................... 2 2.9 ERISA.......................................................... 3 2.10 Limits......................................................... 3 2.11 Participant.................................................... 3 2.12 Plan........................................................... 3 ARTICLE III PARTICIPATION IN PLAN...................................... 3 ARTICLE IV AMOUNT OF BENEFIT.......................................... 3 4.1 Participants Before January 1, 2004............................ 3 4.2 Participants On or After January 1, 2004....................... 4 ARTICLE V TIME AND METHOD OF PAYMENT................................. 5 5.1 Method of Payment.............................................. 5 5.2 Timing of Payment.............................................. 6 5.3 Committee Approval............................................. 6 5.4 Interest and Mortality Assumptions............................. 6 ARTICLE VI ADMINISTRATION OF PLAN..................................... 7 ARTICLE VII COMPANY'S RIGHTS TO AMEND OR TERMINATE PLAN................ 7 ARTICLE VIII MISCELLANEOUS PROVISIONS................................... 7
-i- 8.1 Definitions.................................................... 7 8.2 Unsecured General Creditor..................................... 7 8.3 Income Tax Payout.............................................. 8 8.4 General Conditions............................................. 8 8.5 No Guaranty of Benefits........................................ 9 8.6 No Enlargement of Employee Rights.............................. 9 8.7 Spendthrift Provision.......................................... 9 8.8 Applicable Law................................................. 10 8.9 Incapacity of Recipient........................................ 10 8.10 Unclaimed Benefit.............................................. 10 8.11 Limitations on Liability....................................... 10 8.12 Claims Procedure............................................... 11
-ii- PENSION RESTORATION PLAN FOR NISOURCE INC. AND AFFILIATES AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2004 ARTICLE I PURPOSE The Columbia Gas System, Inc., adopted The Pension Restoration Plan for The Columbia Gas System, Inc., as amended and restated effective March 1, 1997. The Plan was amended and restated, effective January 1, 2002, by Columbia Energy Group, successor to Columbia Gas System, Inc., and renamed the Pension Restoration Plan for the Columbia Energy Group. Effective January 1, 2004, NiSource Inc., the parent company of Columbia Energy Group, assumes sponsorship of the Pension Restoration Plan for Columbia Energy Group, renames the Plan the Pension Restoration Plan for NiSource Inc. and Affiliates, and broadens the Plan to include all employees of NiSource Inc. and Affiliated Companies. The purpose of the Plan is to provide for the payment of pension restoration benefits to employees of NiSource Inc. and Affiliated Companies, whose benefits under the Basic Plans are subject to the Limits, or affected by deferrals into the DCP, so that the total pension plan benefits of such employees will be determined on the same basis as is applicable to all other employees of the Company. The Plan is adopted solely (1) for the purpose of providing benefits to Participants in the Plan and their Beneficiaries in excess of the Limits imposed on qualified plans by Sections 415 and 401(a)(17), and any other sections, of the Code, by restoring benefits to such Plan Participants and Beneficiaries that are no longer available under the Basic Plans as a result of the Limits, and (2) for the purpose of restoring benefits to Plan Participants and Beneficiaries that are no longer available under the Basic Plans as a result of the Participant's deferrals into the DCP. The provisions of the Plan apply only to Participants who actively participate in the Plan on or after January 1, 2004. Any Participant who retired or otherwise terminated employment with the Company and Affiliated Companies prior to January 1, 2004, shall have his or her rights determined under the provision of the Plan, as it existed when his or her employment relationship terminated. ARTICLE II DEFINITIONS 2.1 "Affiliated Company" means an affiliate of NiSource Inc. 2.2 "`Basic Plan(s)" means the tax qualified retirement plan(s) maintained by the Company and Affiliated Companies listed on Schedule A, attached hereto. 2.3 "Code" means the Internal Revenue Code of 1986, as amended. 2.4 "Committee" means the NiSource Inc. and Affiliates Retirement Plan Administrative and Investment Committee. 2.5 "Company" means NiSource Inc. 2.6 "DCP" means the Columbia Energy Group, Deferred Compensation Plan on or prior to December 31, 2003, and thereafter the NiSource Inc. Executive Deferred Compensation Plan. 2.7 "Employee" means any individual who is employed by an Employer on a basis that involves payment of salary, wages or commissions. 2.8 "Employer" means the Company or an Affiliated Company whose Employees participate in the Plan. 2 2.9 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 2.10 "Limits" means the limits imposed on tax qualified retirement plans by Sections 415 and 401(a)(17) and any other Sections of the Code. 2.11 "Participant" means any Employee who is participating in the Plan in accordance with its provisions. 2.12 "Plan" means the Pension Restoration Plan for NiSource Inc. and Affiliates (formerly known as the Pension Restoration Plan for the Columbia Energy Group, and before that as the Pension Restoration Plan for The Columbia Gas System, Inc.), as set forth herein. ARTICLE III PARTICIPATION IN THE PLAN Each Employee of an Employer shall be a Participant in the Plan if his or her benefits under a Basic Plan are affected by the Limits or by his or her deferrals under the DCP. ARTICLE IV AMOUNT OF BENEFIT 4.1 Participants Before January 1, 2004. The benefit payable under the Plan to a Participant who was participating in the Plan prior to January 1, 2004, or to his or her Beneficiary under a Basic Plan, shall be equal to the excess (if any) of the benefit determined under Paragraph (a) below over the benefit determined under Paragraph (b) below: (a) The benefit that would have been payable under a Basic Plan to a Participant, or to his or her Beneficiary determined under the Basic Plan, which benefit shall be 3 determined (i) without regard to the Limits and (ii) without regard to the Participant's deferrals into the DCP, if any. (b) The benefit actually payable to the Participant, or to his or her Beneficiary determined under a Basic Plan, which benefit shall be determined after applying the Limits and considering deferrals into the DCP, if any. 4.2 Participants On or After January 1, 2004. (a) The benefit payable under the Plan to a Participant who first becomes a Participant on or after January 1, 2004, and whose Accrued Benefit under a Basic Plan is a Final Average Pay Option Benefit, or to his or her Beneficiary under the Basic Plan, shall be equal to the excess (if any) of the benefit determined under Paragraph (1) below over the benefit determined under Paragraph (2) below: (1) The benefit that would have been payable under a Basic Plan to a Participant or his or her Beneficiary, calculated based upon the Participant's Credited Service and Compensation from and after the date the Participant first becomes eligible to participate in the Plan, which benefit shall be determined (i) without regard to the Limits and (ii) without regard to the Participant's deferrals into the DCP, if any. (2) The benefit actually payable to the Participant, or to his or her Beneficiary determined under a Basic Plan, calculated based upon the Participant's Credited Service and Compensation from and after the date the Participant first becomes eligible to participate in 4 the Plan, which benefit shall be determined after applying the Limits and considering deferrals into the DCP, if any. A Participant's service used under the Basic Plan for purposes of determining eligibility for any retirement benefit shall also be used for similar purposes hereunder. (b) The benefit payable under the Plan to a Participant who first becomes a Participant on or after January 1, 2004, and whose Accrued Benefit under a Basic Plan is an Account Balance Option Benefit, or to his or her Beneficiary under the Basic Plan, shall be equal to the excess (if any) of the benefit determined under Paragraph (1) below over the benefit determined under Paragraph (2) below, determined as if the Participant's Opening Account Balance is $0 as of January 1, 2004: (1) The benefit that would have been payable under a Basic Plan to a Participant or his or her Beneficiary, which benefit shall be determined (i) without regard to the Limits and (ii) without regard to the Participant's deferrals into the DCP, if any. (2) The benefit actually payable to the Participant, or to his or her Beneficiary determined under a Basic Plan, which benefit shall be determined after applying the Limits and considering deferrals into the DCP, if any. ARTICLE V TIME AND METHOD OF PAYMENT OF BENEFIT 5.1 Method of Payment. The benefit payable to a Participant or his or her Beneficiary shall be paid in the same form under which the Basic Plan Accrued Benefit is payable to the 5 Participant or his or her Beneficiary. The Participant's election under the Basic Plan of any optional form of payment of his or her Basic Plan Accrued Benefit (with the valid consent of his or her surviving spouse where required under the Basic Plan) shall also be applicable to the payment of his or her Benefit under the Plan. 5.2 Timing of Payment. Payment of the benefit to a Participant or his or her Beneficiary shall commence on the same date as payment of the Basic Plan Accrued Benefit to the Participant or his or her Beneficiary commences. Any election under the Basic Plan made by the Participant with respect to the commencement of payment of his or her Basic Plan Accrued Benefit shall also be applicable with respect to the commencement of payment of his or her benefit under the Plan. 5.3 Committee Approval. Notwithstanding the provisions of Sections 5.1 and 5.2 above, an election made by the Participant under the Basic Plan with respect to the form of payment of his or her Basic Plan Accrued Benefit (with the valid consent of his or her surviving spouse where required under the Basic Plan), or the date for commencement of payment thereof, shall not be effective with respect to the form of payment or date for commencement of payment of his or her benefit under the Plan unless such election is expressly approved in writing by the Committee with respect to his or her benefit. If the Committee shall not approve such election in writing, then the form of payment or date for commencement of payment of the Participant's benefit under the Plan shall be selected by the Committee at its sole discretion. 5.4 Interest and Mortality Assumptions. Determinations under Sections 5.2 and 5.3 shall be based on the interest and mortality assumptions used in the applicable Basic Plan on the date of such determination. 6 ARTICLE VI ADMINISTRATION OF PLAN The Plan shall be administered by the Committee. ARTICLE VII COMPANY'S RIGHT TO AMEND OR TERMINATE PLAN While the Company intends to maintain the Plan in conjunction with the Basic Plans, the Company, or the Officer Nomination and Compensation Committee of the Board of Directors of the Company, reserves the right to amend the Plan at any time and from time to time, or to terminate it at any time for any reason; provided, however, that no amendment or termination of the Plan shall impair or alter such right to a benefit that would have arisen under the Plan as it read before the effective date of such amendment or termination to or with respect to any employee who has become a Participant in the Plan before the effective date of such amendment or termination or with respect to his her Beneficiary. ARTICLE VIII MISCELLANEOUS PROVISIONS 8.1 Definitions. The terms used in the Plan, that are defined in the Basic Plans, shall have the meanings assigned to them in the Basic Plans unless otherwise defined in the Plan. 8.2 Unsecured General Creditor. Participants and Beneficiaries shall be unsecured general creditors, with no secured or preferential right to any assets of the Company, any other Employer, or any other party for payment of benefits under the Plan. Obligations of the Company and each other Employer under the Plan shall be an unfunded and unsecured promise to pay money in the future. 7 8.3 Income Tax Payout. Notwithstanding anything to the contrary contained herein, (a) in the event that the Internal Revenue Service prevails in its claim that any amount of a benefit payable pursuant to the Plan and held in the general assets of the Company or any other Employer, constitutes taxable income to a Participant or his or her Beneficiary for such taxable year of him or her, prior to the taxable year in which such amount is distributed to him or her, or (b) in the event that legal counsel satisfactory to the Company, and the applicable Participant or his or her Beneficiary, renders an opinion that the Internal Revenue Service would likely prevail in such a claim, the amount of such benefit held in the general assets of the Company or any other Employer, to the extent constituting taxable income, shall be immediately distributed to the Participant or his or her 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 the Participant or Beneficiary, based upon an opinion of legal counsel satisfactory to the Company and the Participant or his or her Beneficiary, 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. 8.4 General Conditions. Except as otherwise expressly provided herein, all terms and conditions of a Basic Plan applicable to a Basic Plan benefit shall also be applicable to a benefit payable hereunder. Any Basic Plan benefit shall be paid solely in accordance with the terms and conditions of the applicable Basic Plan and nothing in the Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Basic Plan. 8 8.5 No Guaranty of Benefits. Nothing contained in the Plan shall constitute a guaranty by the Company or any other Employer or any other entity or person that the assets of the Company or any other Employer will be sufficient to pay any benefit hereunder. 8.6 No Enlargement of Employee Rights. No Participant or Beneficiary shall have any right to a benefit under the Plan except in accordance with the terms of the Plan. Establishment of the Plan shall not be construed to give any Participant or Beneficiary the right to be retained in the service of the Company or any Affiliated Company. 8.7 Spendthrift Provision. No interest of any person or entity in, or right to receive a benefit under, the Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind; nor may such interest or right to receive a benefit be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance, and claims in bankruptcy proceedings. Notwithstanding the preceding paragraph, the benefit 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 ERISA. The Committee shall provide for payment of such benefit to an alternate payee (as defined in ERISA Section 206(d)(3)) as soon as administratively possible 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 benefit that is subject to any qualified domestic relations order shall be reduced by the amount of any payment made pursuant to such order. 9 8.8 Applicable Law. The Plan shall be construed and administered under the laws of the State of Indiana, except to the extent preempted by applicable federal law. 8.9 Incapacity of Recipient. If any person entitled to a benefit payment under the Plan is deemed by the Committee to be incapable of personally receiving and giving a valid receipt for such payment, then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Committee may provide for such payment or any part thereof to be made to any other person or institution then contributing toward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company, any other Employer, the Committee and the Plan therefor. 8.10 Unclaimed Benefit. Each Participant shall keep the Committee informed of his or her current address and the current address of his or her Beneficiaries. The Committee shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Committee within three (3) years after the date on which payment of the Participant's benefit may first be made, payment may be made as though the Participant had died at the end of the three-year period. If, within one additional year after such three-year period has elapsed, or, within three years after the actual death of a Participant, the Committee is unable to locate any Beneficiary of the Participant, then the Committee shall have no further obligation to pay any benefit hereunder to such Participant, Beneficiary, or any other person and such benefit shall be irrevocably forfeited. 8.11 Limitations on Liability. Notwithstanding any of the preceding provisions of the Plan, none of the Company, any other Employer, or any individual acting as an employee, or 10 agent at the direction of the Company or any other Employer, or any member of the Committee, shall be liable to any Participant, former Participant, Beneficiary, or any other person for any claim, loss, liability or expense incurred in connection with the Plan. 8.12 Claims Procedure. Claims for benefits under the Plan shall be made in writing to the Committee. If the Committee wholly or partially denies a claim for benefits, the Committee shall, within a reasonable period of time, but no later than 90 days after receiving the claim, notify the claimant in writing of the denial of the claim. If the Committee fails to notify the claimant in writing of the denial of the claim within 90 days after the Committee receives it, the claim shall be deemed denied. A notice of denial shall be written in a manner calculated to be understood by the claimant, and shall contain: (a) the specific reason or reasons for denial of the claim; (b) a specific reference to the pertinent Plan provisions upon which the denial is based; (c) a description of any additional material or information necessary for the claimant to perfect the claim, together with an explanation of why such material or information is necessary; and (d) an explanation of the Plan's review procedure. Within 60 days of the receipt by the claimant of the written notice of denial of the claim, or within 60 days after the claim is deemed denied as set forth above, if applicable, the claimant may file a written request with the Committee that it conduct a full and fair review of the denial of the claimant's claim for benefits, including the conducting of a hearing, if the Committee deems one necessary. In connection with the claimant's appeal of the denial of his or her benefit, the claimant may review pertinent documents and may submit issues and comments in writing. The Committee shall render a decision on the claim appeal promptly, but not later than 60 days after receiving the claimant's request for review, unless, in the discretion of the Committee, special circumstances (such as the need to hold a hearing) require an extension of 11 time for processing, in which case the 60-day period may be extended to 120 days. The Committee shall notify the claimant in writing of any such extension. The decision upon review shall (1) include specific reasons for the decision, (2) be written in a manner calculated to be understood by the claimant, and (3) contain specific references to the pertinent Plan provisions upon which the decision is based. IN WITNESS WHEREOF, NiSource Inc. has caused this amended and restated Plan to be executed in its name, by its duly authorized officer, on this 16th day of April 2004, effective as of January 1, 2004. NISOURCE INC. Date: April 16, 2004 By: /s/ S. LaNette Zimmerman --------------------------- ATTEST: Date: April 19, 2004 By: /s/ Gary W. Pottorff --------------------------- 12 SCHEDULE A NiSource Inc. and Northern Indiana Public Service Company Pension Plan Provisions Pertaining to Salaried and Non-Exempt employees NiSource Subsidiary Pension Plan Retirement Plan of Columbia Energy Group Companies Bay State Gas Company Pension Plan. 13 EX-10.3 4 c87285exv10w3.txt SAVINGS RESTORATION PLAN Exhibit 10.3 SAVINGS RESTORATION PLAN FOR NISOURCE INC. AND AFFILIATES AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2004 TABLE OF CONTENTS
PAGE ---- ARTICLE I PURPOSE..................................................... 1 ARTICLE II DEFINITIONS................................................. 2 2.1 Affiliated Company.............................................. 2 2.2 Annual Addition................................................. 2 2.3 Basic Plan...................................................... 2 2.4 Code............................................................ 2 2.5 Committee....................................................... 2 2.6 Company......................................................... 2 2.7 DCP............................................................. 3 2.8 Employee........................................................ 3 2.9 Employer........................................................ 3 2.10 ERISA........................................................... 3 2.11 Interest........................................................ 3 2.12 Limits.......................................................... 3 2.13 Participant..................................................... 3 2.14 Plan............................................................ 3 2.15 Plan Year....................................................... 4 2.16 Supplemental Savings Account.................................... 4 ARTICLE III ELIGIBILITY................................................. 4 3.1. Eligibility..................................................... 4 3.2 Notice of Eligibility to Participants........................... 4 3.3 Method of Becoming a Participant................................ 5 3.4 Continuation of Participation................................... 5 ARTICLE IV SUPPLEMENTAL SAVINGS ACCOUNT................................ 5 4.1 Supplemental Savings Account.................................... 5 4.2 Employer Credits................................................ 6
-i- 4.3 Participant Credits............................................. 6 4.4 Interest Credits................................................ 6 ARTICLE V WITHDRAWALS................................................. 7 5.1 Withdrawals..................................................... 7 5.2 Limitations on Withdrawals...................................... 8 ARTICLE VI TERMINATION OF PARTICIPATION AND PAYMENT OF BENEFITS........ 9 6.1 Termination of Participation.................................... 9 6.2 Benefits at Termination of Participation....................... 10 6.3 Time and Method of Payment..................................... 10 ARTICLE VII ADMINISTRATION OF PLAN..................................... 11 ARTICLE VIII COMPANY'S RIGHTS TO AMEND OR TERMINATE PLAN................ 11 ARTICLE IX MISCELLANEOUS PROVISIONS................................... 11 9.1 Definitions.................................................... 11 9.2 Unsecured General Creditor..................................... 12 9.3 Income Tax Payout.............................................. 12 9.4 General Conditions............................................. 13 9.5 No Guaranty of Benefits........................................ 13 9.6 No Enlargement of Employee Rights.............................. 13 9.7 Spendthrift Provision.......................................... 13 9.8 Applicable Law................................................. 14 9.9 Incapacity of Recipient........................................ 14 9.10 Unclaimed Benefit.............................................. 14 9.11 Limitations on Liability....................................... 15 9.12 Claims Procedure............................................... 15
-ii- SAVINGS RESTORATION PLAN FOR NISOURCE INC. AND AFFILIATES AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2004 ARTICLE I PURPOSE Prior to January 1, 2004, Columbia Energy Group sponsored the Savings Restoration Plan for Columbia Energy Group, for eligible executives of Columbia Energy Group and certain affiliated companies. Effective January 1, 2004, NiSource Inc., the parent company of Columbia Energy Group assumes sponsorship of the Savings Restoration Plan for Columbia Energy Group, renames the Plan the Savings Restoration Plan for NiSource Inc. and Affiliates, and broadens the Plan to include all employees of NiSource Inc. and Affiliated Companies. The purpose of the Plan is to provide for the payment of savings restoration benefits to employees of NiSource Inc. and Affiliated Companies, whose benefits under the Basic Plan are subject to the Limits, or affected by deferrals into the DCP, so that the total savings plan benefits of such employees will be determined on the same basis as is applicable to all other employees of the Company. The Plan is adopted solely (1) for the purpose of providing benefits to Participants in the Plan and their Beneficiaries in excess of the Limits imposed on qualified plans by Sections 415 and 401(a)(17), and any other sections, of the Code, by restoring benefits to such Plan Participants and Beneficiaries that are no longer available under the Basic Plan as a result of the Limits, and (2) for the purpose of restoring benefits to Plan Participants and Beneficiaries that are no longer available under the Basic Plan as a result of the Participant's deferrals into the DCP. The provisions of the Plan apply only to Participants who actively participate in the Plan on or after January 1, 2004. Any Participant who retired or otherwise terminated employment 1 with the Company and Affiliated Companies prior to January 1, 2004, shall have his or her rights determined under the provision of the Plan, as it existed when his or her employment relationship terminated. ARTICLE II DEFINITIONS 2.1 "Affiliated Company" means an affiliate of NiSource Inc. 2.2 "Annual Addition" for any Participant means the sum, in any Plan Year, of: (a) the Company's, or any Affiliated Company's, matching or profit sharing contributions to the Basic Plan on behalf of the Participant; plus (b) all Participant deposits to the Basic Plan, including before-tax and after-tax deposits. For purposes of this Plan, the determination of a Participant's Annual Addition shall be made without regard to the Limits. 2.3 "'Basic Plan" means the NiSource Inc. Retirement Savings Plan, as amended and restated effective January 1, 2002, and as may be further amended from time to time. 2.4 "Code" means the Internal Revenue Code of 1986, as amended. 2.5 "Committee" means the NiSource Inc. and Affiliates Retirement Plan Administrative and Investment Committee. 2.6 "Company" means NiSource Inc. 2 2.7 "DCP" means the Columbia Energy Group, Deferred Compensation Plan on or prior to December 31, 2003, and thereafter the NiSource Inc. Executive Deferred Compensation Plan. 2.8 "Employee" means any individual who is employed by an Employer on a basis that involves payment of salary, wages or commissions. 2.9 "Employer" means the Company or an Affiliated Company whose Employees participate in the Plan. 2.10 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 2.11 "Interest" means the average of the prime rates of interest charged as of the last business day of a month, determined under procedures established by the Committee. 2.12 "Limits" means the limits imposed on tax qualified retirement plans by Sections 415 and 401(a)(17) and any other Sections of the Code. 2.13 "Participant" means any Employee who is participating in the Plan in accordance with its provisions. 2.14 "Plan" means the Savings Restoration Plan for NiSource Inc. and Affiliates (formerly known as the Savings Restoration Plan for the Columbia Energy Group, and before that as the Thrift Restoration Plan for the Columbia Energy Group), as set forth herein. 3 2.15 "Plan Year" means the 12-month period commencing each January 1 and ending the following December 31. 2.16 "Supplemental Savings Account" means the sum of credits accrued under Article III on behalf of a Participant, adjusted to reflect Interest credited to the account, and reduced by any withdrawals under Article V. ARTICLE III ELIGIBILITY 3.1 Eligibility. Any Employee who is participating in the Basic Plan and (i) whose Annual Addition in any Plan Year will exceed the Limits for the Plan Year, (ii) whose Compensation in a Plan Year will exceed the Limits, or (iii) who has deferrals in the DCP excluded for purposes of benefit allocations in the Basic Plan, will be eligible to become a Participant in the Plan as of January 1 of such Plan Year. If an Employee who was not expected to be eligible to become a Participant in a given Plan Year subsequently qualifies because his or her Annual Addition exceeds the Limits for that Plan Year, his or her Compensation exceeds the Limits for that Plan Year, or because he or she becomes eligible for, or begins to participate in, the DCP, such Employee will be eligible to participate in the Plan as soon as practicable after this determination has been made or deferrals begin. 3.2 Notice of Eligibility to Participants. The Committee will inform each Employee of his or her eligibility to participate in the Plan as soon as practicable but before the earliest date such Employee's participation could become effective. 4 3.3 Method of Becoming a Participant. In order to become a Participant, each eligible Employee must sign a written agreement with his or her Employer providing for a reduction of his or her Compensation and a corresponding direction of Employer contributions or Participant Pre-tax Contributions that would normally be made to the Basic Plan except for the Limits or deferrals into the DCP, to be credited to his or her Supplemental Savings Account under this Plan, to the extent necessary to satisfy the Limits with respect to the Basic Plan or deferrals into the DCP. 3.4 Continuation of Participation. A Participant will remain a Participant so long as his or her Supplemental Savings Account has not been fully distributed to him or her. ARTICLE IV SUPPLEMENTAL SAVINGS ACCOUNT 4.1 Supplemental Savings Account. A Supplemental Savings Account shall be established for each Participant. The amounts to be credited to a Participant's Supplemental Savings Account shall be determined under procedures established by the Committee and shall consist of: (a) Employer credits, as described in Section 4.2; plus (b) Participant credits, as described in Section 4.3; plus (c) Interest credits under Section 4.4. A Participant's Supplemental Savings Account shall be reduced by any withdrawals made under Article V. 5 4.2 Employer Credits. The amount of Employer credits for a Participant shall equal (a) minus (b) below: (a) The total amount of Matching Contributions that would otherwise have been contributed to the Basic Plan for the Participant without regard to the Limits, or deferrals into the DCP; (b) The actual amount of Matching Contributions contributed to the Basic Plan for the Participant. 4.3 Participant Credits. The amount of Participant credits for a Participant shall equal (a) minus (b) below: (a) The total amount of Pre-tax Contributions that would otherwise have been contributed to the Basic Plan for the Participant without regard to the Limits or deferrals into the DCP; (b) The actual amount of Pre-tax Contributions contributed to the Basic Plan for the Participant. 4.4 Interest Credits. (a) Interest credits to a Participant's Supplemental Savings Account, if applicable, will be considered made on the same day as such amounts would otherwise have been credited under the Basic Plan. 6 (b) All credits will accrue Interest starting with the first full calendar month in which they are deemed to be a part of the applicable Supplemental Savings Account and ending with the last full calendar month in which credits are still deemed to be part of the Supplemental Savings Account. (c) Interest will be based on the balance of the value of the Participant's Supplemental Savings Account as of the first working day of the month and credited as of the last working day of the calendar month. (d) In the event there is a withdrawal by a Participant from his or her Supplemental Savings Account, the value of such Supplemental Savings Account, prior to the withdrawal, will be credited with Interest to the end of the calendar month in which the withdrawal is actually made. The amount at the withdrawal will then be subtracted from the balance so determined. (e) Interest will be earned only on monies held under reserve by an Employer. If the Committee has invested any portion of a Participant's Supplemental Savings Account, Interest shall not be earned on such portion, but such Account shall be adjusted for actual earnings, gains, and losses on such investment. ARTICLE V WITHDRAWALS 5.1 Withdrawals. Subject to the limitations of Section 5.2, a Participant, by filing a written request with the Committee, may elect to withdraw 33%, 67% or 100% of the total amount that has been credited to his or her Supplemental Savings Account. 7 5.2 Limitations on Withdrawals. Any withdrawal under this Article V will be subject to the following provisions: (a) Only one withdrawal will be permitted in any 12-month period. (b) Withdrawals under this Article V will require suspension of Employer credits and Participant credits (but not Interest credits) under this Plan for a period of time varying with the percentage of the value of the Participant's Supplemental Savings Account which is withdrawn, according to the following schedule:
Percentage Suspension - ---------- ---------- 33% 2 months 67% 4 months 100% 6 months
This suspension will not affect a Participant's participation in the Basic Plan nor the basis for determining the Employer contributions or Participant Pre-tax Contributions under the Basic Plan. (c) Withdrawals under paragraphs (a) and (b) of this Article V will be subject to a l0% early distribution penalty. (d) At the written request of a Participant, and in the written discretion of the Committee, up to 100% of the balance in a Participant's Supplemental Savings Account, determined as of the last day of the calendar month prior to the date of distribution, may be distributed to a Participant in a lump sum in the case of an Unforeseeable Emergency, subject to the limitations set forth below. For 8 purposes of this paragraph an Unforeseeable Emergency is a severe financial hardship of the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Code Section 152(a)) 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. The circumstances that will constitute an Unforeseeable Emergency will depend upon the facts of each case, as determined by the Committee in its discretion, but in any case payment may not be made to the extent that such hardship is or may be relieved: (i) through reimbursement or compensation by insurance or otherwise; (ii) by liquidation of the Participant's assets to the extent the liquidation of such assets would not itself cause severe financial hardship; or (iii) by cessation of Participant credits under the Plan. Withdrawal of amounts because of an Unforeseeable Emergency shall be permitted only to the extent reasonably needed to satisfy the Unforeseeable Emergency. ARTICLE VI TERMINATION OF PARTICIPATION AND PAYMENT OF BENEFITS 6.1 Termination of Participation. A Participant's participation in this Plan shall terminate at termination of employment with all Employers for any reason including separation from service, Disability or death. 9 6.2 Benefits at Termination of Participation. Upon his or her termination of participation in the Plan, a Participant, his or her spouse, or his or her Beneficiary or legal representative will be entitled to 100 percent of the value of the Participant's Supplemental Savings Account credited with Interest, if applicable, through the calendar month preceding the date payment is made to the Participant (or to his or her spouse, legal representative or Beneficiary in the case of his or her incapacity or death). 6.3 Time and Method of Payment. (a) The benefit payable under this Plan to a Participant or his or her spouse, Beneficiary, or legal representative shall be paid in the same form under which the Basic Plan benefit is payable to the Participant or his or her spouse, Beneficiary, or legal representative. The Participant's election under the Basic Plan of any optional form of payment of his or her Basic Plan benefit (with the valid consent of his or her surviving spouse where required under the Basic Plan) shall also be applicable to the payment of his or her benefit under this Plan. (b) Payment of the benefit under this Plan to a Participant or his or her spouse, Beneficiary, or legal representative under this Plan shall commence on the same date as payment of the benefit to the Participant or his or her spouse, Beneficiary, or legal representative under the Basic Plan commences. Any election under the Basic Plan made by the Participant with respect to the commencement of payment of his or her benefit under the Basic Plan shall also be applicable with respect to the commencement of payment of his or her benefit under this Plan. (c) Notwithstanding the provisions of paragraphs (a) and (b) above, an election made by the Participant under the Basic Plan with respect to the form of payment of his or her benefit thereunder (with the valid consent of his or her surviving spouse where required under the Basic 10 Plan), or the date for commencement of payment thereof, shall not be effective with respect to the form of payment or date for commencement of payment of his or her benefit under this Plan unless such election is expressly approved in writing by the Committee with respect to his or her benefit. If the Committee shall not approve such election in writing, then the form of payment or date for commencement of payment of the Participant's benefit under this Plan shall be selected by the Committee at its sole discretion. ARTICLE VII ADMINISTRATION OF PLAN The Plan shall be administered by the Committee. ARTICLE VIII COMPANY'S RIGHTS TO AMEND OR TERMINATE PLAN While the Company intends to maintain the Plan in conjunction with the Basic Plan, the Company, or the Officer Nomination and Compensation Committee of the Board of Directors of the Company, reserves the right to amend the Plan at any time and from time to time, or to terminate it at any time for any reason; provided, however, that no amendment or termination of the Plan shall impair or alter such right to a benefit that would have arisen under the Plan as it read before the effective date of such amendment or termination to or with respect to any employee who has become a Participant in the Plan before the effective date of such amendment or termination or with respect to his or her Beneficiary. ARTICLE IX MISCELLANEOUS PROVISIONS 9.1 Definitions. The terms used in the Plan, that are defined in the Basic Plan, shall have the meanings assigned to them in the Basic Plan unless otherwise defined in the Plan. 11 9.2 Unsecured General Creditor. Participants and Beneficiaries shall be unsecured general creditors, with no secured or preferential right to any assets of the Company, any other Employer, or any other party for payment of benefits under the Plan. Obligations of the Company and each other Employer under the Plan shall be an unfunded and unsecured promise to pay money in the future. 9.3 Income Tax Payout. Notwithstanding anything to the contrary contained herein, (a) in the event that the Internal Revenue Service prevails in its claim that any amount of a benefit payable pursuant to the Plan and held in the general assets of the Company or any other Employer, constitutes taxable income to a Participant or his or her Beneficiary for such taxable year of him or her, prior to the taxable year in which such amount is distributed to him or her, or (b) in the event that legal counsel satisfactory to the Company, and the applicable Participant or his or her Beneficiary, renders an opinion that the Internal Revenue Service would likely prevail in such a claim, the amount of such benefit held in the general assets of the Company or any other Employer, to the extent constituting taxable income, shall be immediately distributed to the Participant or his or her 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 the Participant or Beneficiary, based upon an opinion of legal counsel satisfactory to the Company and the Participant or his or her Beneficiary, 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. 12 9.4 General Conditions. Except as otherwise expressly provided herein, all terms and conditions of the Basic Plan applicable to a Basic Plan benefit shall also be applicable to a benefit payable hereunder. Any Basic Plan benefit shall be paid solely in accordance with the terms and conditions of the Basic Plan and nothing in the Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Basic Plan. 9.5 No Guaranty of Benefits. Nothing contained in the Plan shall constitute a guaranty by the Company or any other Employer or any other entity or person that the assets of the Company or any other Employer will be sufficient to pay any benefit hereunder. 9.6 No Enlargement of Employee Rights. No Participant or Beneficiary shall have any right to a benefit under the Plan except in accordance with the terms of the Plan. Establishment of the Plan shall not be construed to give any Participant or Beneficiary the right to be retained in the service of the Company or any other Employer. 9.7 Spendthrift Provision. No interest of any person or entity in, or right to receive a benefit under, the Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind; nor may such interest or right to receive a benefit be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance, and claims in bankruptcy proceedings. Notwithstanding the preceding sentence, the Supplemental Savings 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 ERISA. The Committee shall provide for payment 13 of such portion of a Supplemental Savings Account to an alternate payee (as defined in ERISA Section 206(d)(3)) as soon as administratively possible 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 any Supplemental Savings Account that is subject to any qualified domestic relations order shall be reduced by the amount of any payment made pursuant to such order. 9.8 Applicable Law. The Plan shall be construed and administered under the laws of the State of Indiana, except to the extent preempted by applicable federal law. 9.9 Incapacity of Recipient. If any person entitled to a benefit payment under the Plan is deemed by the Committee to be incapable of personally receiving and giving a valid receipt for such payment, then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Committee may provide for such payment or any part thereof to be made to any other person or institution then contributing toward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company, any other Employer, the Committee and the Plan therefor. 9.10 Unclaimed Benefit. Each Participant shall keep the Committee informed of his or her current address and the current address of his or her Beneficiaries. The Committee shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Committee within three (3) years after the date on which payment of the Participant's benefit may first be made, payment may be made as though the Participant had died 14 at the end of the three-year period. If, within one additional year after such three-year period has elapsed, or, within three years after the actual death of a Participant, the Committee is unable to locate any Beneficiary of the Participant, then the Committee shall have no further obligation to pay any benefit hereunder to such Participant, Beneficiary, or any other person and such benefit shall be irrevocably forfeited. 9.11 Limitations on Liability. Notwithstanding any of the preceding provisions of the Plan, none of the Company, any other Employer, or any individual acting as an employee, or agent at the direction of the Company or any other Employer, or any member of the Committee, shall be liable to any Participant, former Participant, Beneficiary, or any other person for any claim, loss, liability or expense incurred in connection with the Plan. 9.12 Claims Procedure. Claims for benefits under the Plan shall be made in writing to the Committee. If the Committee wholly or partially denies a claim for benefits, the Committee shall, within a reasonable period of time, but no later than 90 days after receiving the claim, notify the claimant in writing of the denial of the claim. If the Committee fails to notify the claimant in writing of the denial of the claim within 90 days after the Committee receives it, the claim shall be deemed denied. A notice of denial shall be written in a manner calculated to be understood by the claimant, and shall contain: (a) the specific reason or reasons for denial of the claim; (b) a specific reference to the pertinent Plan provisions upon which the denial is based; (c) a description of any additional material or information necessary for the claimant to perfect the claim, together with an explanation of why such material or information is necessary; and (d) an explanation of the Plan's review procedure. 15 Within 60 days of the receipt by the claimant of the written notice of denial of the claim, or within 60 days after the claim is deemed denied as set forth above, if applicable, the claimant may file a written request with the Committee that it conduct a full and fair review of the denial of the claimant's claim for benefits, including the conducting of a hearing, if the Committee deems one necessary. In connection with the claimant's appeal of the denial of his or her benefit, the claimant may review pertinent documents and may submit issues and comments in writing. The Committee shall render a decision on the claim appeal promptly, but not later than 60 days after receiving the claimant's request for review, unless, in the discretion of the Committee, special circumstances (such as the need to hold a hearing) require an extension of time for processing, in which case the 60-day period may be extended to 120 days. The Committee shall notify the claimant in writing of any such extension. The decision upon review shall (1) include specific reasons for the decision, (2) be written in a manner calculated to be understood by the claimant, and (3) contain specific references to the pertinent Plan provisions upon which the decision is based. 16 IN WITNESS WHEREOF, NiSource Inc. has caused this amended and restated Plan to be executed in its name, by its duly authorized officer, on this 16th day of April, 2004, effective as of January 1, 2004. NISOURCE INC. Date: April 16, 2004 By: /s/ S. LaNette Zimmerman --------------------------- ATTEST: Date: April 19, 2004 By: /s/ Gary W. Pottorff --------------------------- 17 EX-10.4 5 c87285exv10w4.txt NONEMPLOYEE DIRECTOR STOCK INCENTIVE PLAN Exhibit 10.4 NISOURCE INC. NONEMPLOYEE DIRECTOR STOCK INCENTIVE PLAN (AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2004) TABLE OF CONTENTS
PAGE ---- ARTICLE I ESTABLISHMENT, PURPOSE, AND DURATION........................... 1 1.1 Establishment of the Plan.......................................... 1 1.2 Purpose of the Plan................................................ 2 1.3 Duration of the Plan............................................... 2 ARTICLE II DEFINITIONS.................................................... 3 2.1 Award.............................................................. 3 2.2 Award Agreement.................................................... 3 2.3 Board or Board of Directors........................................ 3 2.4 Change in Control.................................................. 3 2.5 Code............................................................... 3 2.6 Company............................................................ 3 2.7 Committee.......................................................... 3 2.8 Director........................................................... 4 2.9 Disability......................................................... 4 2.10 Employee........................................................... 4 2.11 Fair Market Value.................................................. 4 2.12 Nonemployee Director............................................... 4 2.13 Nonqualified Stock Option or NQSO.................................. 4 2.14 Option............................................................. 4 2.15 Participant........................................................ 4 2.16 Period of Restriction.............................................. 5 2.17 Restricted Stock................................................... 5 2.18 Restricted Stock Unit.............................................. 5 2.19 Shares............................................................. 5 ARTICLE III ADMINISTRATION................................................. 5 3.1 Committee.......................................................... 5 3.2 Administration by the Committee.................................... 5 3.3 Decisions Binding.................................................. 5 ARTICLE IV SHARES AND RESTRICTED STOCK UNITS SUBJECT TO THE PLAN.......... 6 4.1 Number of Shares and Restricted Stock Units........................ 6 4.2 Lapsed Awards...................................................... 6 4.3 Adjustments in Authorized Shares and Restricted Stock Units........ 6 ARTICLE V ELIGIBILITY AND PARTICIPATION.................................. 7 5.1 Eligibility........................................................ 7 5.2 Actual Participation............................................... 7 ARTICLE VI GRANTS OF RESTRICTED STOCK AND RESTRICTED STOCK UNITS.......... 7
i TABLE OF CONTENTS (continued)
PAGE ---- 6.1 Initial Grant...................................................... 7 6.2 Special Grant of Restricted Stock Units............................ 7 6.3 Grants Prior to January 1, 2004.................................... 8 6.4 Future Grants On and After January 1, 2004......................... 8 6.5 Award Agreements................................................... 9 6.6 Other Restrictions................................................. 10 6.7 Certificate Legend................................................. 10 6.8 Restricted Stock Unit Account...................................... 10 6.9 Vesting and Transferability........................................ 11 6.10 Voting and Stock Ownership Rights.................................. 12 6.11 Dividends and Other Distributions.................................. 12 6.12 Payment of Restricted Stock Units.................................. 12 ARTICLE VII NONQUALIFIED STOCK OPTIONS..................................... 13 7.1 Potential Grants of Options........................................ 13 7.2 Option Award Agreement............................................. 13 7.3 Option Price....................................................... 13 7.4 Duration of Options................................................ 14 7.5 Vesting of Shares Subject to Option................................ 14 7.6 Payment............................................................ 14 7.7 Restrictions on Share Transferability.............................. 15 ARTICLE VIII CHANGE IN CONTROL.............................................. 15 ARTICLE IX AMENDMENT, MODIFICATION AND TERMINATION........................ 16 9.1 Amendment, Modification and Termination............................ 16 9.2 Awards Previously Granted.......................................... 16 ARTICLE X GENERAL PROVISIONS............................................. 16 10.1 Additional Awards.................................................. 16 10.2 Gender and Number.................................................. 17 10.3 Severability....................................................... 17 10.4 Indemnification.................................................... 17 10.5 Beneficiary Designation............................................ 18 10.6 Termination of Directorship........................................ 18 10.7 Nontransferability of Options...................................... 19 10.8 No Right of Nomination............................................. 21 10.9 Shares Available................................................... 21 10.10 Additional Compensation............................................ 21 10.11 Successors......................................................... 21 10.12 Requirements of Law................................................ 21 10.13 Governing Law...................................................... 21
ii NISOURCE INC. NONEMPLOYEE DIRECTOR STOCK INCENTIVE PLAN (AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2004) WHEREAS, NiSource Inc. (the "Company") adopted the NiSource Inc. Nonemployee Director Stock Incentive Plan (formerly the NIPSCO Industries, Inc. Nonemployee Director Stock Incentive Plan), effective February 1, 1992, as last amended effective December 16, 1997 and February 1, 1998 ("Plan"); and WHEREAS, the Company adopted the NiSource Inc. Nonemployee Director Restricted Stock Unit Plan (formerly the NIPSCO Industries, Inc. Nonemployee Director Restricted Stock Unit Plan) effective January 1, 1999 ("Stock Unit Plan") and WHEREAS, pursuant to Section 9.1 of the Plan and Section 14 of the Stock Unit Plan, the Company amended the Plan and the Stock Unit Plan in certain respects, and merged the Stock Unit Plan into the Plan and restated the merged Plan in a single document, effective July 1, 2002; and WHEREAS, pursuant to Section 9.1 of the Plan, the Company wishes to further amend and restate the Plan to reflect changes in the structure of nonemployee director compensation. NOW THEREFORE, the Plan is hereby amended and restated, effective January 1, 2004, as follows: ARTICLE I ESTABLISHMENT, PURPOSE, AND DURATION 1.1 ESTABLISHMENT OF THE PLAN. NiSource Inc. established an incentive compensation plan known as the "NiSource Inc. Nonemployee Director Stock Incentive Plan" (the "Plan"), as set forth in this document. The Plan permits the grant of Restricted Stock, Nonqualified Stock Options and Restricted Stock Units to Nonemployee Directors, subject to the terms and provisions set forth herein. Upon approval by the Board of Directors of the Company, subject to ratification within twelve (12) months by an affirmative vote of a majority of Shares present and entitled to vote at the May 20, 2003 annual shareholders meeting at which a quorum was present, the Plan became effective as of July 1, 2002. All grants of Awards made under the Plan from and after July 1, 2002 and prior to the date of such approval were conditioned upon such shareholder approval and would have been null and void if such approval was not obtained by May 20, 2003. Effective July 1, 2002, the Stock Unit Plan was merged into and become a part of the Plan as amended and restated herein. 1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to promote the achievement of long-term objectives of the Company by linking the personal interests of Nonemployee Directors to those of Company shareholders, enhancing the interest of Nonemployee Directors in the growth and success of the Company, and attracting and retaining Nonemployee Directors of outstanding competence. 1.3 DURATION OF THE PLAN. The Plan, as amended and restated herein, is effective January 1, 2004 and shall remain in effect, subject to the right of the Committee to terminate the Plan at any time pursuant to Article IX herein, until all Shares subject to it shall have been purchased or acquired according to the Plan's provisions. However, in no event may an Award be granted under the Plan on or after June 30, 2012. 2 ARTICLE II DEFINITIONS Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the word is capitalized: 2.1 AWARD. "Award" means, individually or collectively, a grant of Restricted Stock, Nonqualified Stock Options or Restricted Stock Units under the Plan. 2.2 AWARD AGREEMENT. "Award Agreement" means an agreement entered into by and between the Company and a Nonemployee Director, setting forth the terms and provisions applicable to an Award granted under the Plan. 2.3 BOARD OR BOARD OF DIRECTORS. "Board" or "Board of Directors" means the Board of Directors of the Company, and includes any committee of the Board of Directors designated by the Board to administer part or all of the Plan. 2.4 CHANGE IN CONTROL. "Change in Control" of the Company shall be deemed to have occurred if any one of the occurrences of "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. 2.5 CODE. "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.6 COMPANY. "Company" means NiSource Inc., a Delaware corporation, or any successor thereto as provided in Section 10.11 herein. 2.7 COMMITTEE. "Committee" means the Corporate Governance Committee of the Board. 3 2.8 DIRECTOR. "Director" means any individual who is a member of the Board of Directors of the Company. 2.9 DISABILITY. "Disability" means any physical or mental condition of a permanent nature which, in the sole judgment of the Committee, based upon the advice of a competent medical professional selected by the Committee, prevents a Director from performing his or her duties as a member of the Board. 2.10 EMPLOYEE. "Employee" means any full-time, nonunion, salaried employee of the Company. For purposes of the Plan, an individual whose only employment relationship with the Company is as a Director shall not be deemed to be an Employee. 2.11 FAIR MARKET VALUE. "Fair Market Value" means 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. 2.12 NONEMPLOYEE DIRECTOR. "Nonemployee Director" means any individual who is a member of the Board of Directors of the Company, but who is not otherwise an Employee of the Company. 2.13 NONQUALIFIED STOCK OPTION OR NQSO. "Nonqualified Stock Option" or "NQSO" means an option to purchase Shares, granted under Article VII herein that does not constitute an Incentive Stock Option under Section 422 (or any successor Section) of the Code. 2.14 OPTION. "Option" means a Nonqualified Stock Option granted under the Plan. 2.15 PARTICIPANT. "Participant" means a Nonemployee Director of the Company who has outstanding a viable Award granted under the Plan. 4 2.16 PERIOD OF RESTRICTION. "Period of Restriction" means the period during which the transfer of Shares of Restricted Stock is limited in some way, and the Shares are subject to a substantial risk of forfeiture, as provided in Article VI herein. 2.17 RESTRICTED STOCK. "Restricted Stock" means an Award granted to a Nonemployee Director pursuant to Article VI herein. 2.18 RESTRICTED STOCK UNIT. "Restricted Stock Unit" means an Award granted to a Nonemployee Director pursuant to Article VI herein. 2.19 SHARES. "Shares" means the common shares of NiSource Inc., without par value. ARTICLE III ADMINISTRATION 3.1 COMMITTEE. The Plan shall be administered by the Committee, subject to the restrictions set forth in the Plan. 3.2 ADMINISTRATION BY THE COMMITTEE. The Committee shall have the full power, discretion and authority to interpret and administer the Plan in a manner which is consistent with the Plan's provisions. However, except as otherwise set forth in Section 10.1, in no event shall the Committee have the power to determine Plan eligibility, or to determine the number, the value, the vesting period, or the timing, of Awards to be made under the Plan (all such determinations are automatic pursuant to the provisions of the Plan). Notwithstanding the preceding sentence, the Committee shall have the authority to designate whether an upcoming grant of Awards shall consist of Restricted Stock, Nonqualified Stock Options or Restricted Stock Units. 3.3 DECISIONS BINDING. All determinations and decisions made by the Committee pursuant to the provisions of the Plan, and all related orders or resolutions of the Committee, 5 shall be final, conclusive and binding on all persons, including the Company, its stockholders, employees, Participants, and their estates and beneficiaries. ARTICLE IV SHARES AND RESTRICTED STOCK UNITS SUBJECT TO THE PLAN 4.1 NUMBER OF SHARES AND RESTRICTED STOCK UNITS. Subject to adjustment as provided in Section 4.3 herein, the total number of Shares available for grant as Awards under the Plan may not exceed an aggregate of 500,000. 4.2 LAPSED AWARDS. If any Share of Restricted Stock, Option, or Restricted Stock Unit granted under the Plan terminates, expires or lapses for any reason, any such Share of Restricted Stock, any Share subject to purchase pursuant to such Option and any such Restricted Stock Unit again shall be available for grant under the Plan. Awards shall be subject to such terms and conditions, in addition to the terms and conditions set forth in the Plan, as the Committee shall determine. 4.3 ADJUSTMENTS IN AUTHORIZED SHARES AND RESTRICTED STOCK UNITS. (a) Appropriate adjustments in the aggregate number of Shares and Restricted Stock Units issuable pursuant to the Plan, the number of Shares and Restricted Stock Units subject to each outstanding Award granted under the Plan and the option price with respect to Options, shall be made to give effect to any increase or decrease in the number of issued Shares resulting from a subdivision or consolidation of shares, whether through recapitalization, stock split, reverse stock split, spin-off, spinout 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 Shares outstanding effected without receipt of consideration by the Company, or any other occurrence for which the Committee determines an adjustment is appropriate. (b) 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 Share then subject to the Plan, and for each 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 Shares of the Company are entitled pursuant to such transaction. 6 (c) Without limiting the generality of the foregoing provisions of this section, 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 or she exercised his or her 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. ARTICLE V ELIGIBILITY AND PARTICIPATION 5.1 ELIGIBILITY. Persons eligible to participate in the Plan are limited to Nonemployee Directors who are serving on the Board on the date of each grant under the Plan. 5.2 ACTUAL PARTICIPATION. All eligible Nonemployee Directors shall receive grants of Restricted Stock, Options and Restricted Stock Units pursuant to the terms and provisions set forth in Articles VI and VII herein. ARTICLE VI GRANTS OF RESTRICTED STOCK AND RESTRICTED STOCK UNITS 6.1 INITIAL GRANT. Each person who was a Nonemployee Director on February 1, 1992 was then granted two hundred fifty (250) Shares of Restricted Stock for each year of service as a Nonemployee Director of the Company or its predecessor (the number of years of service was determined as of the date of the first annual meeting of shareholders of the Company following February 1, 1992). Each person who was a Nonemployee Director on April 14, 1999 was then granted five hundred (500) Restricted Stock Units. 6.2 SPECIAL GRANT OF RESTRICTED STOCK UNITS. Each Nonemployee Director participating in the NiSource Inc. Nonemployee Director Retirement Plan (the "Retirement 7 Plan") on December 31, 2001 made an irrevocable election, by written instrument delivered to the Committee between May 1, 2002 and June 30, 2002, to: (i) continue his or her participation in the Retirement Plan on and after July 1, 2002 or (ii) terminate his or her participation in the Retirement Plan as of June 30, 2002 and have the present value of his or her retirement benefit under Section 5 of the Retirement Plan, determined as of June 30, 2002, converted to Restricted Stock Units of comparable value and granted to him or her under the Plan on July 1, 2002. Any Restricted Stock Units granted to a Nonemployee Director pursuant to this Section 6.2 who had fewer than five (5) Years of Service on June 30, 2002 shall fully vest upon the completion of such Nonemployee Director's fifth Year of Service. "Year of Service" means the 12-month period commencing with the first day of the calendar month in which each annual meeting of the shareholders of the Company takes place, and throughout which a Nonemployee Director served on the Board as a Nonemployee Director. 6.3 GRANTS PRIOR TO JANUARY 1, 2004. Upon each election, reelection or appointment, as applicable, of a Nonemployee Director to serve on the Board, on and after July 1, 2002 and prior to January 1, 2004, such Nonemployee Director was granted twenty-six hundred (2,600) Shares of Restricted Stock and six hundred (600) Restricted Stock Units, subject to the terms of the Plan. Each such grant was made as of the first day of the Board term of the newly-elected, reelected or appointed, as applicable, Nonemployee Director, which began immediately following such election, reelection or appointment, as applicable. 6.4 FUTURE GRANTS ON AND AFTER JANUARY 1, 2004. (a) Each Nonemployee Director shall receive a portion of his or her annual retainer equal to $20,000 in the form of an Award granted in four equal installments on the last business day of each calendar quarter, commencing on March 31, 2004. Such Award shall be a grant of Restricted Stock or Restricted Stock Units, or a combination thereof, as determined by the Committee in its sole discretion. The number of Shares of Restricted Stock or Restricted 8 Stock Units, as applicable, constituting such quarterly grant shall be determined by dividing $5,000 by the Fair Market Value of Shares on the last business day of the relevant quarter. (b) Each Nonemployee Director elected, reelected or appointed on the date of an Annual Meeting of Shareholders shall receive an additional Award equal to $30,000 for each full Year in the term for which he or she is elected, reelected or appointed, granted upon the date of such election, reelection or appointment, as applicable, of such Nonemployee Director to serve on the Board, on and after May 11, 2004. Such additional Award shall be a grant of Restricted Stock or Restricted Stock Units, or a combination thereof, as determined by the Committee in its sole discretion. The number of Shares of Restricted Stock or Restricted Stock Units, as applicable, constituting such grant shall be determined by dividing the total value of the grant under this subsection (b) by the Fair Market Value of Shares on the date of the Annual Meeting of Shareholders coincident with such election, reelection or appointment, or if the Annual Meeting of Shareholders is not held on a business day, the first business day preceding the date of such Meeting. (c) Each Nonemployee Director elected or appointed on a date other than the date of an Annual Meeting of Shareholders shall receive an additional Award equal to $30,000 for each full Year in the term for which he or she is elected or appointed, granted upon the date of such election or appointment, as applicable, of such Nonemployee Director to serve on the Board, on and after May 11, 2004; such Nonemployee Director shall receive an additional Award with respect to any fractional Year in the term for which he or she is elected or appointed equal to $2,500 for each full month of the term from the date of election or appointment to the date of the first Annual Meeting of Shareholders next following such election or appointment, granted upon the date of such election or appointment, as applicable, of such Nonemployee Director to serve on the Board, on and after May 11, 2004. Such additional Award shall be a grant of Restricted Stock or Restricted Stock Units, or a combination thereof, as determined by the Committee in its sole discretion. The number of Shares of Restricted Stock or Restricted Stock Units, as applicable, constituting such grant shall be determined by dividing the total value of the grant under this subsection (c) by the Fair Market Value of Shares on the date of the election or appointment of such Nonemployee Director, or if the election or appointment does not occur on a business day, the first business day preceding such election or appointment. (d) For purposes of subsections (b) and (c), Year shall mean each period commencing on the date of an Annual Meeting of Shareholders and ending on the date of the next Annual Meeting of Shareholders. 6.5 AWARD AGREEMENTS. (a) Each Restricted Stock grant under the Plan shall be evidenced by a Restricted Stock Award Agreement that shall specify the Period(s) of Restriction, the number of Restricted Stock Shares granted and such other provisions as the Committee shall determine consistent with the Plan. (b) Each Restricted Stock Unit grant under the Plan may, in the Committee's sole discretion, be evidenced by a Restricted Stock Unit Award Agreement that shall specify the 9 vesting period of Restricted Stock Units, the number of Restricted Stock Units granted and such other provisions as the Committee shall determine consistent with the Plan. 6.6 OTHER RESTRICTIONS. The Committee shall impose such other restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable, including restrictions imposed under Section 7.7 hereof. Any restriction imposed on Shares of Restricted Stock shall be included in a legend appearing on the certificates representing Shares of Restricted Stock. 6.7 CERTIFICATE LEGEND. In addition to any legends placed on certificates pursuant to Section 6.6 herein, each certificate representing Shares of Restricted Stock granted pursuant to the Plan shall bear the following legend: "The sale or other transfer of the Shares of stock represented by this certificate, whether voluntary, involuntary or by operation of law, is subject to certain restrictions on transfer as set forth in the NiSource Inc. Nonemployee Director Stock Incentive Plan, and in a Restricted Stock Award Agreement. A copy of the Plan and such Restricted Stock Award Agreement may be obtained from the Secretary of NiSource Inc." 6.8 RESTRICTED STOCK UNIT ACCOUNT. Restricted Stock Units granted to a Nonemployee Director under the Plan shall be credited to a Restricted Stock Unit Account (the "Account") established and maintained for such Nonemployee Director. The Account of a Nonemployee Director shall be the record of Restricted Stock Units granted to him or her under the Plan. The Account is solely for accounting purposes and shall not require a segregation of any assets of the Company. Each Restricted Stock Unit shall be valued by the Committee, in the manner provided in Section 6.12, as of the date of payment thereof. Each grant of Restricted Stock Units under the Plan to a Nonemployee Director and the value of such Restricted Stock Units as of the date of grant shall be communicated by the Committee in writing to the Nonemployee Director within thirty (30) days after the date of grant. 10 6.9 VESTING AND TRANSFERABILITY. Except as otherwise provided in the Plan, all Restricted Stock Units granted under the Plan shall vest, and in the case of Restricted Stock shall become freely transferable, by the Participant according to the following schedule:
Annual Cumulative Percentage of Units or Percentage of Units or Anniversary Shares Which Vest or Shares Which are Vested or of Grant Date Become Freely Transferable Became Freely Transferable - ------------- -------------------------- -------------------------- 1 20% 20% 2 20% 40% 3 20% 60% 4 20% 80% 5 20% 100%
Regardless of the schedule set forth above, all Shares of Restricted Stock and Restricted Stock Units held by a Participant or credited to a Participant's Account, as applicable, shall immediately become one hundred percent (100%) freely transferable or vested, as applicable, upon the first to occur of the following: (a) The completion of the schedule set forth above (or in Section 6.2, if applicable); (b) The death of the Participant; (c) The Disability of the Participant; (d) The retirement of the Participant from service on the Board prior to death or Disability and after attaining the age of seventy (70) years; or (e) The effective date of a Change in Control of the Company. However, in no event may any Shares of Restricted Stock granted under the Plan become freely transferable by a Participant prior to six (6) months following the date of its grant. Upon becoming freely transferable, each Participant shall be entitled to have the legend required by Section 6.6 and/or Section 6.7 removed from his or her Share certificates. 11 6.10 VOTING AND STOCK OWNERSHIP RIGHTS. (a) During the Period of Restriction, except as set forth in the applicable Restricted Stock Award Agreement, a Participant holding Shares of Restricted Stock granted hereunder may exercise full voting and other stock ownership rights with respect to such Shares. (b) Except as set forth in Section 6.11(b), no Participant shall be entitled to any voting or other stock ownership rights with respect to Shares attributable to Restricted Stock Units granted under the Plan. 6.11 DIVIDENDS AND OTHER DISTRIBUTIONS. (a) During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder shall be entitled to receive all dividends and other distributions paid with respect to such Shares while they are so held. Any such dividends or distributions shall be fully vested and shall be paid to Participants on the date such dividends are actually paid to shareholders of the Company. (b) Additional Restricted Stock Units shall be credited to each Participant's Account with respect to Restricted Stock Units included in such Account from time to time, to reflect dividends paid to stockholders of the Company with respect to Shares. The additional Restricted Stock Units credited before January 1, 2004 shall be granted at such time or times and shall be subject to such terms and conditions, in addition to the terms and conditions set forth in the Plan, as the Committee shall determine. The additional Restricted Stock Units credited on or after January 1, 2004 shall be fully vested and granted on the date such dividends are actually paid to shareholders of the Company 6.12 PAYMENT OF RESTRICTED STOCK UNITS. (a) Except as provided in paragraph (b) or (c) below, upon a Participant's termination of service on the Board for any reason other than for Cause (as defined in Section 10.6), the Participant shall be entitled to receive from the Company, with respect to each then vested Restricted Stock Unit in the Participant's Account, a number of Shares with an aggregate Fair Market Value on the date of payment equal to the aggregate Fair Market Value of such vested Restricted Stock Units. Payment to a Participant for Restricted Stock Units shall be made in Shares in a single payment within sixty (60) days after the date of termination of the Participant's service on the Board. (b) Restricted Stock Units in the Participant's Account granted pursuant to Section 6.2, and additional Restricted Stock Units with respect thereto credited pursuant to Section 6.11(b), shall be paid to the Participant in a single payment within six (6) months after the date of the Participant's termination of service on the Board. Payment to a Participant for such Restricted Stock Units shall be made in the form of a number of Shares with an aggregate Fair Market Value on the date of payment equal to the aggregate Fair Market Value of such vested Restricted Stock Units in the Participant's Account on the date of payment. 12 (c) With respect to Restricted Stock Units granted pursuant to Section 6.4, and additional Restricted Stock Units with respect thereto credited pursuant to Section 6.11(b), on or after January 1, 2004, upon a Participant's termination of service on the Board for any reason other than for Cause (as defined in Section 10.6), the Participant shall be entitled to receive from the Company, with respect to such then vested Restricted Stock Units in the Participant's Account, a number of Shares with an aggregate Fair Market Value on the date of payment equal to the aggregate Fair Market Value of such vested Restricted Stock Units. Payment to a Participant for Restricted Stock Units shall be made in Shares in a single payment six (6) months after the date of termination of the Participant's service on the Board, or as soon as administratively practicable thereafter. (d) A Participant shall be credited with additional Restricted Stock Units pursuant to Section 6.11(b) on the value of his or her Restricted Stock Units with respect to the period between his or her termination of service on the Board and the receipt of payment under the Plan. ARTICLE VII NONQUALIFIED STOCK OPTIONS 7.1 POTENTIAL GRANTS OF OPTIONS. In the event that the Committee properly designates (pursuant to Section 3.2 herein) that a scheduled Award under Section 6.4 shall consist of Options rather than Restricted Stock or Restricted Stock Units, then each eligible Nonemployee Director shall be granted an Option to purchase a number of Shares so that the Option shall have a value, as determined by the Committee in its sole discretion, equal to the value of the Restricted Stock or Restricted Stock Units that would otherwise have been awarded, subject to the terms and provisions of the Plan. 7.2 OPTION AWARD AGREEMENT. Each Option grant shall be evidenced by an Option Award Agreement that shall specify the Option Price, the duration of the Option, the number of Shares available for purchase under the Option, and such other provisions as the Committee shall determine. 7.3 OPTION PRICE. The purchase price per Share available for purchase under an Option shall equal the Fair Market Value of a Share on the date the Option is granted. 13 7.4 DURATION OF OPTIONS. Each Option shall expire on the tenth (10th) anniversary date of its grant. 7.5 VESTING OF SHARES SUBJECT TO OPTION. Subject to Section 10.6, Participants shall be entitled to exercise Options at any time and from time to time, but no sooner than the time period beginning six (6) months after the grant of the Option and ending ten (10) years after the grant of the Option, and according to the following vesting schedule:
Annual Cumulative Anniversary Percentage of Percentage of of Grant Date Options Which Vest Options Which are Vested - ------------- ------------------ ------------------------ 1 20% 20% 2 20% 40% 3 20% 60% 4 20% 80% 5 20% 100%
Regardless of the vesting schedule set forth above, all Options held by a Participant shall immediately become one hundred percent (100%) vested upon the first to occur of the following: (a) The completion of the vesting schedule set forth above; (b) The death of the Participant; (c) The Disability of the Participant; (d) The retirement of the Participant from service on the Board prior to death or Disability and after attaining the age of seventy (70) years; or (e) The effective date of a Change in Control of the Company. 7.6 PAYMENT. Options shall be exercised by the delivery of a written notice of exercise to the Secretary of the Company, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. 14 The Option Price upon exercise of any Option shall be payable to the Company in full either: (i) in cash or its equivalent, or (ii) by tendering previously acquired Shares having a Fair Market Value at the time of exercise equal to the total Option Price of the Shares for which the Option is being exercised (provided that the Shares tendered upon Option exercise have been held by the Participant for at least six (6) months prior to their tender to satisfy the Option Price), or (iii) by a combination of (i) and (ii). The proceeds from such a payment shall be added to the general funds of the Company and shall be used for general corporate purposes. As soon as practicable after receipt of a written notification of exercise and full payment, the Company shall deliver to the Participant, in the Participant's name, Share certificates in an appropriate amount based upon the number of Shares purchased pursuant to the exercise of the Option. 7.7 RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee shall impose such restrictions on any Shares acquired pursuant to the exercise of an Option under the Plan as it may deem advisable, including, without limitation, restrictions under applicable Federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to such Shares. ARTICLE VIII CHANGE IN CONTROL In the event of a Change in Control of the Company, all Awards granted under the Plan that are still outstanding and not yet vested or freely transferable, shall become immediately one hundred percent (100%) vested and freely transferable for each Participant, as of the effective date of the Change in Control, and shall remain as such for the remaining life of the Award, as such life is provided herein, and within the provisions of the related Award Agreements. All 15 Options that are outstanding as of the effective date of the Change in Control shall remain exercisable for the remaining lives of the Options. ARTICLE IX AMENDMENT, MODIFICATION AND TERMINATION 9.1 AMENDMENT, MODIFICATION AND TERMINATION. Subject to the terms set forth in this Section 9.1, the Committee may terminate, amend or modify the Plan at any time and from time to time; provided, however, that the provisions set forth in the Plan regarding the amount of securities to be awarded to Nonemployee Directors, the price of securities to be awarded to Nonemployee Directors, and the timing of Awards to Nonemployee Directors, may not be amended more than once within any six (6) month period. Amendment or termination of the Plan may occur without the approval of the shareholders of the Company (except as may be required by law or by any national securities exchange or system on which the Shares are then listed or reported, or by a regulatory body having jurisdiction with respect hereto). 9.2 AWARDS PREVIOUSLY GRANTED. Unless required by law, no termination, amendment or modification of the Plan shall in any manner adversely affect any Award previously granted under the Plan without the written consent of the Participant holding the Award. ARTICLE X GENERAL PROVISIONS 10.1 Additional Awards. In addition to any Award received pursuant to Section 6.3, 6.4 or 7.1, each Nonemployee Director who first serves on the Board on or after January 1, 2002, and each Nonemployee Director who served on the Board on December 31, 2001 and who 16 elected to discontinue participation in the NiSource Inc. Nonemployee Director Retirement Plan on and after July 1, 2002, shall receive a grant of Shares of Restricted Stock upon each election, reelection or appointment, as applicable, to the Board on or after July 1, 2002. At the discretion of the Committee, such grant may be in any combination of Shares of Restricted Stock, and Restricted Stock Units, as determined by the Committee. Such Award shall have an aggregate value, as determined by the Committee, based on information provided by the management of the Company, that ensures that the Award, together with other compensation paid to the Nonemployee Director for service on the Board, delivers a compensation package to the Nonemployee Director competitive with the nonemployee director compensation packages offered by companies in the same or similar industries as that of the Company. 10.2 GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular and the singular shall include the plural. 10.3 SEVERABILITY. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 10.4 INDEMNIFICATION. Each individual who is or shall have been a member of the Committee shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement 17 thereof, with the Company's approval, or paid by him or her in satisfaction of any judgment in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such individuals may be entitled under the Company's Articles of Incorporation or By-laws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. 10.5 BENEFICIARY DESIGNATION. Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in the event of his or her death (and/or who may exercise the Participant's vested Options following his or her death). Each designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and shall be effective only when filed by the Participant in writing with the Committee during his or her lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate (and, subject to the terms and provisions of the Plan, any unexercised vested Options may be exercised by the administrator or executor of the Participant's estate). 10.6 TERMINATION OF DIRECTORSHIP. In the event a Participant ceases to be a Director for any reason other than death, Disability, retirement from service on the Board after attaining the age of seventy (70) years, or a Change in Control of the Company, all Shares of Restricted Stock, all Options and all Restricted Stock Units that have not vested or become freely transferable on or prior to the date of the occurrence of such event shall terminate and be 18 forfeited and neither the Participant nor his or her heirs, personal representatives, successors or assigns shall have any future rights with respect to any such Shares of Restricted Stock, Options and Restricted Stock Units. All Options that are vested as of such date shall remain exercisable for six (6) months following the date the Director's service on the Board terminates, or until their expiration date, whichever period is shorter. Notwithstanding any other provision of the Plan, in the event a Participant is discharged from service on the Board for Cause, all rights to any Shares of Restricted Stock that have not become freely transferable, any vested or unvested Options granted on and after July 1, 2002, and any vested or unvested Restricted Stock Units shall be discontinued and forfeited, and the Company shall have no further obligation hereunder to such Participant or any other person. For purposes of the Plan, "Cause" shall mean: (a) the Participant's conviction of any criminal violation involving dishonesty, fraud or breach of trust; (b) the Participant's willful engagement in any misconduct in the performance of his or her duty that materially injures the Company; (c) the Participant's performance of any act which, if known to the customers or stockholders of the Company, would materially and adversely impact the business of the Company; or (d) the Participant's willful and substantial nonperformance of assigned duties. The Committee shall have sole discretion with respect to the application of the provisions of subsections (a)-(d) next above, and such exercise of discretion shall be conclusive and binding upon the Participant and all other persons. 10.7 NONTRANSFERABILITY OF OPTIONS. No Share of Restricted Stock (until the end of the applicable Period of Restriction specified in the Restricted Stock Award Agreement), Option or Restricted Stock Unit granted under the Plan may be sold, transferred, pledged, assigned, or 19 otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. In the event of a Participant's death, payment of any amount due under the Plan shall be made to the duly appointed and qualified executor or other personal representative of the Participant's estate to be distributed in accordance with the Participant's will or applicable intestacy law; or in the event that there shall be no such representative duly appointed and qualified within six (6) months after the date of death of such deceased Participant, then to such persons as, at the date of his or her death, would be entitled to share in the distribution of such deceased Participant's personal estate under the provisions of the applicable statute then in force governing the descent of intestate property, in the proportions specified in such statute. All Options granted to a Participant under the Plan shall be exercisable, during his or her lifetime, only by such Participant. Notwithstanding the preceding provisions of this Section, a Participant, at any time prior to his or her death, may assign all or any portion of an Award granted to him or her under the Plan to (i) his or her spouse or lineal descendant, (ii) the trustee of a trust for the primary benefit of his or her 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 shall be entitled to all of the rights of the Participant with respect to the assigned portion of such Award, and such portion of the Award shall continue to be subject to all of the terms, conditions and restrictions applicable to the Award as set forth herein, and in the related Award Agreement, immediately prior to the effective date of the assignment. Any such assignment shall be permitted only if (A) the Participant does not receive any consideration therefor, and (B) 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 20 Participant, and a copy thereof shall be delivered to the Committee or its delegate on or prior to the effective date of the assignment. 10.8 NO RIGHT OF NOMINATION. Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any Director for reelection by the Company's shareholders. 10.9 SHARES AVAILABLE. The Shares made available pursuant to Awards under the Plan may be either authorized but unissued Shares or Shares which have been or may be reacquired by the Company, as determined from time to time by the Committee. 10.10 ADDITIONAL COMPENSATION. Awards granted under the Plan shall be in addition to any additional annual retainer, attendance fees or other compensation payable to each Participant as a result of his or her service on the Board. 10.11 SUCCESSORS. All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company. 10.12 REQUIREMENTS OF LAW. The granting of Awards under the Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 10.13 GOVERNING LAW. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Indiana. 21 IN WITNESS WHEREOF, the Company has caused the amended and restated Plan to be signed on this 29th day of April 2004, effective as of January 1, 2004. NISOURCE INC. By: /s/ S. LaNette Zimmerman -------------------------------- 22 EX-10.5 6 c87285exv10w5.txt SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Exhibit 10.5 NISOURCE INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2004 TABLE OF CONTENTS
PAGE ---- ARTICLE I PURPOSE.......................................................... 1 ARTICLE II DEFINITIONS...................................................... 1 2.1 Definitions.......................................................... 1 2.2 Principal Entities................................................... 1 2.3 Other Definitions.................................................... 2 ARTICLE III PARTICIPATION.................................................... 3 ARTICLE IV SUPPLEMENTAL RETIREMENT PENSION.................................. 3 4.1 Applicability........................................................ 3 4.2 Supplemental Retirement Pension...................................... 3 4.3 Reduction for Early Retirement....................................... 4 4.4 Termination of Employment Prior to Early Retirement.................. 4 4.5 Supplemental Disability Pension...................................... 5 4.6 Supplemental Spouse Pension.......................................... 5 4.7 Retiree Death Benefit................................................ 6 4.8 Cost of Living Adjustment............................................ 6 4.9 Separate Agreement................................................... 6 ARTICLE V SUPPLEMENTAL RETIREMENT ACCOUNT.................................. 6 5.1 Applicability........................................................ 6 5.2 Supplemental Retirement Account...................................... 7 5.3 Supplemental Credits................................................. 7 5.4 Termination of Employment............................................ 7 5.5 Death................................................................ 7 ARTICLE VI DISTRIBUTIONS.................................................... 8 6.1 Form of Payment...................................................... 8 6.2 Small Benefit Amounts................................................ 8 ARTICLE VII MISCELLANEOUS.................................................... 8 7.1 Plan Financing....................................................... 8 7.2 Non-Compete and Related Provisions................................... 8 7.3 Nonguarantee of Employment........................................... 9 7.4 Nonalienation of Benefits............................................ 9 7.5 Plan Amendment or Termination........................................ 9 7.6 Indemnification...................................................... 10 7.7 Action by Company.................................................... 10 7.8 Protective Provisions................................................ 11 7.9 Governing Law........................................................ 11 7.10 Notice............................................................... 11
i TABLE OF CONTENTS (continued)
PAGE ---- 7.11 Successors........................................................... 11 7.12 Actuarial Assumptions................................................ 11 7.13 Tax Savings.......................................................... 11 ARTICLE VIII CHANGE IN CONTROL................................................ 12 8.1 Change in Control.................................................... 12 8.2 Potential Change in Control.......................................... 12 8.3 Additional Service and Compensation Upon Change in Control........... 12 8.4 Waiver of Service and Age Requirements Upon Change in Control........ 13 8.5 Funding of Plan Benefits Upon Change in Control...................... 13 8.6 Plan Administration and Amendment Upon a Change in Control........... 13 8.7 Committee Discretion to Pay Lump Sum After a Change in Control....... 13 8.8 Lump Sum Election.................................................... 13 8.9 Definitions.......................................................... 14 ARTICLE IX PLAN ADMINISTRATION:THE COMMITTEE................................ 15 9.1 General Powers, Rights and Duties.................................... 15 9.2 Information Required by Committee.................................... 15 9.3 Committee Decision Final............................................. 15 9.4 Claims Procedure..................................................... 16
ii NISOURCE INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2004 ARTICLE I PURPOSE Effective as of December 23, 1982, and as subsequently amended as of January 1, 1989, Northern Indiana Public Service Company adopted the Northern Indiana Public Service Company Supplemental Executive Retirement Plan. Effective as of January 1, 1991, NIPSCO Industries, Inc. (the "Company") adopted the NIPSCO Industries, Inc. Supplemental Executive Retirement Plan (the "Plan"), to benefit the Company by providing key executives and employees with additional security in order to aid the Company in retaining its present management and, should circumstances require it, to aid the Company in attracting additions to management. The Company, by providing such additional benefits, expects key executives and employees to be available for consulting assignments to the Company after retirement, at the Company's request. The Plan was amended and restated, effective January 1, 1993, in order to clarify certain provisions, and was further amended and restated effective September 1, 1994. The Plan was further amended and restated effective June 1, 2002 to reflect the name change of the Company to NiSource Inc. and to make other administrative and technical changes. The Plan is further amended herein, effective January 1, 2004, to reflect changes in the structure of benefits under the Plan. It is intended that the Plan be exempt from the reporting and disclosure requirements of Title I of the Employee Retirement Income Security Act of 1974 because it is an unfunded plan maintained by an employer for the purpose of providing benefits for a select group of management or highly compensated employees. ARTICLE II DEFINITIONS 2.1 Definitions. Where the following words or phrases appear in the Plan, they shall have the respective meanings set forth in the following Sections of this Article, unless the context clearly indicates to the contrary. 2.2 Principal Entities. (a) Board. The Board of Directors of NiSource Inc. (b) Committee. The Officer Nomination and Compensation Committee of the Board which has certain specific duties with respect to the Plan. (c) Company. NiSource Inc. and its subsidiaries and affiliates that adopt the Plan for the benefit of key employees, or its successor or successors. (d) NiSource Pension Plan. NiSource Inc. and Northern Indiana Public Service Company Pension Plan Provisions Pertaining to Salaried and Non-Exempt Employees, as amended from time to time. (e) Participant. An employee or retiree participating in the Plan in accordance with the provisions of Article III. (f) Plan. NiSource Inc. Supplemental Executive Retirement Plan. (g) Qualified Pension Plan. The NiSource Pension Plan and any other tax-qualified defined benefit pension plan maintained by the Company or any Affiliate. 2.3 Other Definitions. (a) Code. The Internal Revenue of Code of 1986, as amended. (b) Compensation. As defined in the NiSource Pension Plan, but disregarding the definition of Taxable Compensation and the limitations required by Code Section 401(a)(17), or any successor Section. In addition, for purposes of the Plan, bonuses shall be considered in full as Compensation and not limited to 50% of base pay. (c) Early Retirement. Termination of employment for reasons other than death or disability after the Participant has both attained age 55 and completed at least 10 years of Service, but before the Participant's Normal Retirement, except as otherwise provided. (d) Final Average Compensation. The result obtained by dividing the total Compensation paid to a Participant during a considered period by the number of months for which such Compensation was received. The considered period shall be the 60 consecutive calendar months within the last 120 months of service that produces the highest result. (e) Normal Retirement. Termination of employment for reasons other than death or disability after a Participant has: (1) attained age 62; or (2) attained age 60 and completed at least 25 years of Service, except as otherwise provided. (f) Pension. A series of monthly amounts that are payable to a person who is entitled to receive benefits under the Plan. (g) Pension Restoration Plan. Pension Restoration Plan for NiSource Inc. and Affiliates, as amended from time to time. 2 (h) Primary Social Security Benefit. The monthly amount available to a Participant at age 65 (or at Retirement, if later) under the provisions of Title II of the Social Security Act in effect at the time of termination of employment, assuming the following: (i) The Participant attained age 65 in the year of Retirement, and (ii) The Participant earned maximum taxable wages under Code Section 3121(a)(1) in all years prior to the year of Retirement. A Participant's Primary Social Security Benefit will be deducted in accordance with Article IV, even though he or she may not be receiving or may not be eligible to receive Social Security benefits. (i) Retirement. A Participant's Normal or Early Retirement. (j) Service. A Participant's or employee's employment or service with the Company, as defined in the NiSource Pension Plan, or such other employment or service date as determined by the Board. ARTICLE III PARTICIPATION The Board or the Committee shall select which key employees of the Company will participate in the Plan. In accordance with Article I, it is intended that officers and certain other employees be eligible for participation. After the Board or the Committee approves participation for an individual, the Company or the Committee shall provide the individual with a notice of participation in the Plan and a description of the Plan. ARTICLE IV SUPPLEMENTAL RETIREMENT PENSION 4.1 Applicability. This Article IV shall apply to each Participant or former Participant who first participated in the Plan prior to January 23, 2004. 4.2 Supplemental Retirement Pension. Upon Normal Retirement, a Participant shall receive a monthly Supplemental Retirement Pension calculated on a single-life basis equal to the larger of (a) or (b) below, reduced in each case by the single-life pension (excluding any supplements related to eligibility for a Social Security benefit) the Participant is eligible to receive under (1) either the Final Average Pay Option or the Account Balance Option of the NiSource Pension Plan, or any other Qualified Pension Plan and (2) the Pension Restoration Plan. 3 (a) The sum of: (i) 1.7% of the Participant's Final Average Compensation multiplied by the Participant's Service to a maximum of 30 years; plus (ii) 0.6% of the Participant's Final Average Compensation multiplied by the Participant's Service in excess of 30 years. (b) The sum of: (i) 3% of the Participant's Final Average Compensation multiplied by the Participant's Service to a maximum of 20 years; plus (ii) 0.5% of the Participant's Final Average Compensation multiplied by the Participant's Service in excess of 20 years, to a maximum of 30 years; (iii) less 5% of the Participant's Primary Social Security Benefit, multiplied by the Participant's Service to a maximum of 20 years. Upon Early Retirement, a Participant shall receive a monthly Supplemental Retirement Pension in a reduced amount (as described in Section 4.3 below). 4.3 Reduction for Early Retirement. A Participant who terminates employment prior to Normal Retirement, but after Early Retirement, shall receive a monthly Supplemental Retirement Pension in an amount determined in accordance with Section 4.2 above, but reduced as follows: (1) by 6% for each of the first two (2) years and 4% for each of the next five (5) years that commencement of the Participant's Supplemental Retirement Pension precedes the date that the Participant would attain age 62; or (2) if the Participant had completed 25 years of Service at the time of his or her termination, by 6% for the first year and 4% for each of the next four (4) years that commencement of the Participant's Supplemental Retirement Pension precedes the date that the Participant would attain age 60, with a pro rata reduction for any fraction of a year. Payment of the Participant's monthly reduced Supplemental Retirement Pension shall normally commence as soon as practicable following termination of employment. Notwithstanding the preceding sentence, a Participant may elect to defer the commencement of his or her reduced Supplemental Retirement Pension to any date between Early Retirement and attainment of age 62 by a written election delivered to the Committee on or before the last day of the calendar year preceding the calendar year of Early Retirement. 4.4 Termination of Employment Prior to Early Retirement. Upon termination of employment prior to Early Retirement, a Participant shall receive a monthly Supplemental Retirement Pension, calculated on a single-life basis equal to the excess, if any, of the single-life pension the Participant would be eligible to receive under either the Final Average Pay Option or the Account Balance Option of the NiSource Pension Plan, or any other Qualified Pension Plan, if the limitations required by Code Sections 401(a)(17) and 415, or any other limitation imposed by the Code, the limitation on bonuses to 50% of base pay and the potential limitations relating 4 to Taxable Compensation were not applied, reduced by the single-life pension the Participant is eligible to receive under (1) either such Option of the NiSource Pension Plan, or any other Qualified Pension Plan and (2) the Pension Restoration Plan, and commencing on the same date as the pension under the NiSource Pension Plan or any other Qualified Pension Plan. 4.5 Supplemental Disability Pension. If a Participant becomes disabled while in the active employment of the Company prior to age 65, the Participant shall be eligible for a monthly Supplemental Disability Pension commencing on the date the disability begins and continuing to the first to occur of the Participant's death or attainment of age 65, calculated on a single-life basis, and equal to the larger of (a) or (b) below, reduced in each case by the basic benefit the Participant is eligible to receive under the long-term group disability insurance coverage provided under any long term disability plan maintained by the Company or any Affiliate. For purposes of the Plan, a Participant is deemed disabled if he or she receives long-term disability benefits from a plan maintained by the Company or an Affiliate or receives Social Security disability payments. (a) The sum of: (i) 1.7% of the Participant's Final Average Compensation multiplied by the Participant's Service to a maximum of 30 years, plus (ii) 0.6% of the Participant's Final Average Compensation multiplied by the Participant's Service in excess of 30 years. (b) The sum of: (i) 3% of the Participant's Final Average Compensation multiplied by the Participant's Service to a maximum of 20 years; plus (ii) 0.5% of the Participant's Final Average Compensation multiplied by the Participant's Service in excess of 20 years, to a maximum of 30 years; (iii) less 5% of the Participant's Primary Social Security Benefit, multiplied by the Participant's Service to a maximum of 20 years. After age 65, the Participant shall be eligible for a monthly Supplemental Retirement Pension in accordance with Section 4.2, based on Service the Participant would have had if the Participant had continued working for the Company or an Affiliate to age 65, the Participant's Final Average Compensation at the time he or she became disabled, the Primary Social Security Benefit determined at the time the Participant became disabled, and the single-life pension the Participant is entitled to receive at age 65 from the NiSource Pension Plan, or any other Qualified Pension Plan, and the Pension Restoration Plan, determined at the time he or she became disabled. 4.6 Supplemental Spouse Pension. Upon the death of a Participant in active employment or while receiving a Supplemental Disability Pension, his or her surviving spouse, if any, shall be eligible to receive a monthly Supplemental Spouse Pension equal to the greater of: 5 (a) 25% of the Participant's Final Average Compensation; or (b) the monthly amount that would have been payable to such surviving spouse if the Participant had elected payment of his or her monthly Supplemental Retirement Pension in the form of a reduced 50% joint and survivor Pension, with his or her spouse as the contingent annuitant, terminated employment (on the date of his or her actual death) and then died immediately prior to the commencement of payments. The Supplemental Spouse Pension shall commence in the month next following the month of the Participant's death and continue for the life of such spouse. In the event that the Supplemental Spouse Pension calculated under option (a) of this Section will provide a greater benefit to the spouse immediately following the Participant's death, but option (b) of this Section will provide a greater monthly benefit as of the date the Participant would have attained age 55, the amount of monthly Supplemental Spouse Pension payable to the surviving spouse shall be: (1) calculated and payable under option (a) during the period immediately following the Participant's death; and (2) recalculated and payable according to option (b) beginning on the date the Participant would have attained age 55. Beginning on the earliest date that the surviving spouse could have begun receiving a benefit under the NiSource Pension Plan, or any other Qualified Pension Plan, the Supplemental Spouse Pension payable under this Section shall be reduced by the amount of benefit under the NiSource Pension Plan, or any other Qualified Pension Plan, and the Pension Restoration Plan that the spouse is (or would have been) entitled to receive. 4.7 Retiree Death Benefit. Upon the death of a retired Participant, a lump-sum death benefit equal to 50% of his or her retiree group life insurance coverage shall be paid to the retiree's spouse or other beneficiaries designated with respect to such coverage. 4.8 Cost of Living Adjustment. For Participants in the Final Average Pay Option of the NiSource Pension Plan, the benefits payable under Sections 4.2 through 4.7 shall be increased in the same percentage and at the same time as cost of living adjustments are made to the pensions of salaried employees of the Company or an Affiliate under the NiSource Pension Plan, or any other Qualified Pension Plan. 4.9 Separate Agreement. Notwithstanding Sections 2.3(d) and (i), each Participant who first becomes eligible to participate in the Plan on and after January 1, 2004 and prior to January 23, 2004 shall have his or her Supplemental Retirement Pension determined based upon his or her Service and Compensation as set forth in a separate, written agreement, if any, between the Company and such Participant. ARTICLE V SUPPLEMENTAL RETIREMENT ACCOUNT 5.1 Applicability. This Article V shall apply to each Participant who first participates in the Plan on and after January 23, 2004. 6 5.2 Supplemental Retirement Account. A Participant's Supplemental Retirement Account is a notional account equal to the sum of his or her Compensation Credits, Supplemental Credits, if any, and Interest Credits. Compensation Credits shall be credited to a Participant's Supplemental Retirement Account as of the last day of each Plan Year beginning on or after January 1, 2004 equal to five percent of the Participant's Compensation for such Plan Year. Supplemental Credits, if any, shall be credited pursuant to Section 5.3. Interest Credits shall be calculated in the same manner and shall be credited to a Participant's Supplemental Retirement Account at the same time as provided under the NiSource Pension Plan or any other Qualified Pension Plan. 5.3 Supplemental Credits. The Committee, subject to approval of the Board, may authorize Supplemental Credits to a Participant's Supplemental Retirement Account in such amounts and at such times, and subject to such specific terms and provisions, as authorized by the Committee. 5.4 Termination of Employment. Upon termination of employment, for any reason other than death, with five or more years of Service, unless a shorter period is provided in a separate, written agreement between the Company and the Participant and approved by the Board, a Participant shall receive the balance of his or her Supplemental Retirement Account distributed in accordance with Sections 6.1 and 6.2. 5.5 Death. Upon the death of a Participant prior to final distribution of his or her Supplemental Retirement Account after completing five or more years of Service, unless a shorter period is provided in a separate, written agreement between the Company and the Participant and approved by the Board, the Participant's beneficiary, designated in such manner as provided by the Committee, shall receive the balance of the Participant's Supplemental Retirement Account distributed in accordance with Sections 6.1 and 6.2. If the Participant designates multiple beneficiaries, he or she shall designate the percentage, in whole numbers, allocated to each such beneficiary. 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: (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. 7 ARTICLE VI DISTRIBUTIONS 6.1 Form of Payment. Notwithstanding Sections 4.2, 4.3 and 4.4, a Participant shall receive distribution of his or her Supplemental Retirement Pension or Supplemental Retirement Account in the same form as his or her 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 or her Supplemental Retirement Pension or Supplemental Retirement Account 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 or her Supplemental Retirement Pension or Supplemental Retirement Account, the Participant's Supplemental Retirement Pension or Supplemental Retirement Account 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 6.1 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 provisions of Article IV and Section 6.2 shall apply. 6.2 Small Benefit Amounts. At the discretion of the Committee, the present value of any benefit payable under the Plan that does not exceed $5,000 may be paid to the Participant or his or her surviving spouse or other designated beneficiary in quarterly, semi-annual or annual installments, or in a single lump sum. ARTICLE VII MISCELLANEOUS 7.1 Plan Financing. Except as set forth below in this Section and in Section 8.5, benefits under the Plan shall be paid from the general assets of the Company. To the extent any Participant or surviving spouse or other designated beneficiary acquires a right to receive payments hereunder, such right shall be no greater than the right of any other unsecured creditor of the Company. Notwithstanding the foregoing, the Company has entered into a trust agreement ("Trust Agreement") whereby the Company agrees to contribute to a trust ("Trust") for the purpose of accumulating assets to assist the Company in fulfilling its obligations to Participants and surviving spouses or other designated beneficiaries hereunder. Such Trust includes the provision that all assets of the Trust shall be subject to the creditors of the Company in the event of its insolvency. 7.2 Non-Compete and Related Provisions. Benefits under the Plan may be forfeited if: (a) A Participant, while employed by the Company or within a period of three (3) years after the Participant's termination of employment for any reason, 8 including Retirement (the "Restrictive Period"), engages in activity or employment that directly or indirectly competes with the business of the Company or its Affiliates, including, but not by way of limitation, by directly or indirectly owning, managing, operating, controlling, financing, or by directly or indirectly serving as an employee, officer or director of or consultant to, or by soliciting or inducing, or attempting to solicit or induce, any employee or agent of the Company or its Affiliates to terminate employment with the Company or its Affiliates, and become employed by, any person, firm, partnership, corporation, trust or other entity that provides commodities, products or services to customers of the Company or its Affiliates of the same type as commodities, products or services provided by the Company or its Affiliates (the "Restrictive Covenant"). The foregoing Restrictive Covenant shall not prohibit a Participant from owning directly or indirectly capital stock or similar securities which are listed on a securities exchange or quoted on the National Association of Securities Dealers Automated Quotation System which do not represent more than 1% of the outstanding capital stock of any such entity; or (b) A Participant performs any action or makes any statement that is detrimental to the Company or its Affiliates, unless such action or statement is retracted to the Company's satisfaction after the Participant is notified regarding such action or statement. 7.3 Nonguarantee of Employment. Participation in the Plan does not limit the right of the Company or an Affiliate to discharge any individual with or without cause. 7.4 Nonalienation of Benefits. Neither a Participant, nor a surviving spouse or other designated beneficiary may assign or transfer any benefits under the Plan. 7.5 Plan Amendment or Termination. The Chairman of the Board of Directors may amend any provision of the Plan except for Articles III, IV and V, which may only be amended by the Company or the Committee. The Company or the Committee may terminate the Plan at any time, except that any benefits that are payable due to a Retirement, death, disability, or other termination of employment occurring prior to the amendment or termination shall not be reduced or discontinued. No amendment or termination of the Plan shall directly or indirectly deprive any current or former Participant (or surviving spouse) of all or any portion of any Supplemental Retirement Benefit, Supplemental Disability Pension, Supplemental Spouse Pension, or Supplemental Retirement Account, the payment of which has commenced prior to the effective date of such amendment or termination, or which would be payable if the Participant terminated employment for any reason on such effective date. Upon termination of the Plan, distribution of Supplemental Retirement Benefits, Supplemental Disability Pension, Supplemental Spouse Pension or Supplemental Retirement Account shall be made to Participants, surviving spouses and beneficiaries in the manner and at the time described in Article VI of the Plan. No additional Supplemental Retirement Benefits, Supplemental Disability Pension, Supplemental Spouse Pension, or Compensation Credits or Supplemental Credits under a Supplemental Retirement Account, shall be earned after termination of the Plan, except as provided in Section 8.3. 9 7.6 Indemnification. (a) Limitation of Liability. Notwithstanding any other provision of the Plan or the Trust, none of the Company, or any member of the Committee, or an individual acting as an employee or agent of any of them, shall be liable to any Participant or former Participant, or any surviving spouse or other designated beneficiary of any Participant or former Participant, for any claim, loss, liability or expense incurred in connection with the Plan or the Trust, except when the same shall have been judicially determined to be due to the willful misconduct of such person. (b) Indemnity. The Company shall indemnify and hold harmless each member of the Committee, or any employee of the Company or any individual acting as an employee or agent of either of them (to the extent not indemnified or saved harmless under any liability insurance or any other indemnification arrangement with respect to the Plan or the Trust) from any and all claims, losses, liabilities, costs and expenses (including attorneys' fees) arising out of any actual or alleged act or failure to act made in good faith pursuant to the provisions of the Plan, including expenses reasonably incurred in the defense of any claim relating thereto with respect to the administration of the Plan or the Trust, except that no indemnification or defense shall be provided to any person with respect to any conduct that has been judicially determined, or agreed by the parties, to have constituted willful misconduct on the part of such person, or to have resulted in his or her receipt of personal profit or advantage to which he or she is not entitled. In connection with the indemnification provided by the preceding sentence, expenses incurred in defending a civil or criminal action, suit or proceeding, or incurred in connection with a civil or criminal investigation, may be paid by the Company in advance of the final disposition of such action, suit, proceeding, or investigation, as authorized by the Committee in the specific case, upon receipt of an undertaking by or on behalf of the party to be indemnified to repay such amount unless it shall ultimately be determined that the person is entitled to be indemnified by the Company pursuant to this paragraph. (c) Severability. Each of the Sections contained in the Plan, and each provision in each Section, shall be enforceable independently of every other Section or provision in the Plan, and the invalidity or unenforceability of any Section or provision shall not invalidate or render unenforceable any other Section or provision contained herein. If any Section or provision in a Section is found invalid or unenforceable, it is the intent of the parties that a court of competent jurisdiction shall reform the Section or provision to produce its nearest enforceable economic equivalent. 7.7 Action by Company. Any action required or permitted of the Company under the Plan shall be by resolution of the Board or of the Committee, or by a person or persons authorized by resolution of the Board or the Committee. 10 7.8 Protective Provisions. A Participant will cooperate with the Company by furnishing any and all information requested by the Company and its Affiliates in order to facilitate the payment of benefits hereunder, and by taking such physical examinations as the Company and its Affiliates may deem necessary and taking such other action as may be requested by the Company and its Affiliates. 7.9 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. 7.10 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 Committee shall be directed to the Company's address. Mailed notice to a Participant, a surviving spouse or other designated beneficiary shall be directed to the individual's last known address in the Company's records. 7.11 Successors. The provisions of the Plan shall bind and inure to the benefit of the Company, its Affiliates and their successors and assigns. The term successors as used herein shall include any corporate or other business entity that shall, whether by merger, consolidation, purchase, or otherwise, acquire all or substantially all of the business and assets of the Company, and successors of any such corporation or other business entity. 7.12 Actuarial Assumptions. Unless otherwise provided in the Plan, all actuarial adjustments necessary to determine the amount, form or timing of any distribution shall be based on the same actuarial assumptions used for the pension a Participant is eligible to receive under the NiSource Pension Plan. 7.13 Tax Savings. Notwithstanding anything to the contrary contained in the Plan, (1) in the event that the Internal Revenue Service prevails in its claim that benefits under the Plan constitute taxable income to a Participant, his or her spouse or other designated beneficiary, for any taxable year, prior to the taxable year in which such benefits are distributed to him or her, or (2) in the event that legal counsel satisfactory to the Company and the applicable Participant, his or her spouse or other designated 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, his or her spouse or other designated 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, his or her spouse or other designated 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. 11 ARTICLE VIII CHANGE IN CONTROL 8.1 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. 8.2 Potential Change in Control. A "Potential Change in Control" shall include any of the following: (a) The delivery to the Company by any "person," as defined in Section 13(d)(3) of The Securities Exchange Act of 1934 (the "Act"), of a statement containing the information required by Schedule 13-D under the Act, or any amendment to any such statement, that shows that such person has acquired, directly or indirectly, the beneficial ownership of (1) more than twenty percent (20%) of any class of equity security of the Company entitled to vote as a class in the election or removal from office of directors, or (2) more than twenty percent (20%) of the voting power of any group of classes of equity securities of the Company entitled to vote as a single class in the election or removal from office of directors. (b) The Company becomes aware that preliminary or definitive copies of a proxy statement and information statement or other information have been filed with the Securities and Exchange Commission pursuant to Rule 14a-6, Rule 14c-5 or Rule 14f-1 under the Act relating to a proposed change in control of the Company. (c) The delivery to the Company pursuant to Rule 14d-3 under the Act of a Tender Offer Statement relating to equity securities of the Company. (d) The Board adopts a resolution to the effect that for purposes of the Plan a Potential Change in Control has occurred. 8.3 Additional Service and Compensation Upon Change in Control. With respect to a Participant who, pursuant to contract with the Company, is entitled to compensation from the Company for an additional 36 months in the event that after a Change in Control the Participant's employment is terminated by the Company or an Affiliate under circumstances described in the contract, such Participant's years of Service under Section 2.3, and Supplemental Retirement Pension under Section 4.2 or Supplemental Retirement Account under Section 5.2, as applicable, shall be calculated as if the Participant had continued in employment with the Company for an additional 36 months at the rate of Compensation in effect immediately prior to his or her employment termination; provided that, in no event shall the counting of a Participant's Compensation during this 36-month period reduce his or her Final Average Compensation figure below its highest level prior to the Participant's termination of employment. 12 8.4 Waiver of Service and Age Requirements Upon Change in Control. A Participant whose employment is terminated within 24 months following a Change in Control for any reason other than a termination by the Company for Good Cause, but prior to Early Retirement, shall be eligible for the Supplemental Retirement Pension specified in Section 4.2, rather than the Supplemental Retirement Pension specified in Section 4.4, commencing at Normal Retirement, except that the Participant may elect to begin receiving such Supplemental Retirement Pension at any time after attaining age 55 years, subject to the reduction specified in Section 4.3. 8.5 Funding of Plan Benefits Upon Change in Control. Upon a Potential Change in Control, the Committee shall identify the amount by which the present value of all benefits earned to date under the Plan (after offsets) exceeds the then fair market value of the applicable Trust assets, calculated using the Pension Benefit Guaranty Corporation immediate annuity interest rate as of the date of the Potential Change in Control, the 1983 GAM mortality tables, and the most valuable optional payment form (the "Full Funding Amount"), and the Company shall contribute such Full Funding Amount to the Trust. Each Participant's benefits for purposes of calculating present value shall be the highest benefit the Participant would have under the Plan within the six (6) months following a Potential Change in Control, assuming that the Participant's employment continues for six (6) months at the same rate of Compensation, and that the Participant receives any benefit enhancement provided by the Plan, or any other agreement, upon a Change in Control. 8.6 Plan Administration and Amendment Upon a Change in Control. Upon and after a Change in Control, the Company no longer shall have the power to appoint or remove members of the Committee, nor the power to approve legal counsel or actuaries employed by the Committee. Upon and after a Change in Control, only the Committee members shall have the power to appoint or remove members. If, at any time after a Change in Control, all members of the Committee have been removed or resigned, then all of the powers, rights and duties vested in the Committee by Article IX below shall be vested in the trustee of the Trust. 8.7 Committee Discretion to Pay Lump Sum After a Change in Control. Upon and after a Change in Control, the Committee may, in its sole discretion, distribute, or cause the trustee under the Trust to distribute, to a Participant or a surviving spouse, the present value (determined in accordance with the assumptions in Section 7.12) of the Participant's Supplemental Retirement Pension or Supplemental Disability Pension, or the surviving spouse's Supplemental Spouse Pension, or the balance of the Participant's Supplemental Retirement Account, payable under the Plan in a lump sum payment. 8.8 Lump Sum Election. Each calendar year, a Participant shall have the right to elect to receive the present value (determined in accordance with the assumptions in Section 7.12) of the Participant's Supplemental Retirement Pension or Supplemental Disability Pension, or the balance of the Participant's Supplemental Retirement Account, in a lump sum if: (a) a Change in Control occurs in the calendar year subsequent to the calendar year in which the election is made; and 13 (b) (i) within 24 months following the Change in Control any one of the payment triggering conditions set forth in the Change in Control and Termination Agreement between the Company and the Participant shall have occurred; or (ii) if no Change in Control and Termination Agreement is in effect between the Company and the Participant on the date of the Change in Control and within 24 months following the Change in Control the employment of the Participant with the Company is terminated by the Company for any reason other than Good Cause or the Participant terminates his or her employment with the Company for Good Reason. Such election shall be irrevocable for the calendar year to which it applies. A distribution pursuant to this Section 8.8 shall be made as soon as practicable following the Participant's termination of employment. Notwithstanding the preceding provisions of this Section 8.8, a Participant shall have the right to make the election set forth in this Section at any time during the first three (3) months of calendar year 2003 with respect to a Change in Control that occurs during the last nine (9) 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 8.8. 8.9 Definitions. (a) "Good Cause" shall be deemed to exist if, and only if: (i) the Participant engages in acts or omissions constituting dishonesty, intentional breach of fiduciary obligation or intentional wrongdoing or malfeasance, in each case that results in substantial harm to the Company; or (ii) the Participant is convicted of a criminal violation involving fraud or dishonesty. (b) "Good Reason" shall be deemed to exist if, and only if: (i) there is a significant change in the nature or the scope of the Participant's authorities or duties; (ii) there is a significant reduction in the Participant's monthly rate of base salary, his or her opportunity to earn a bonus under an incentive bonus compensation plan maintained by the Company or his or her benefits; or (iii) the Company changes by 100 miles or more the principal location in which the Participant is required to perform services. 14 ARTICLE IX PLAN ADMINISTRATION: THE COMMITTEE 9.1 General Powers, Rights and Duties. The Committee has the following powers, rights and duties in addition to those given it elsewhere in the Plan: (a) To interpret the Plan and determine all questions arising in the administration, interpretation and application of the Plan, including, but not limited to, the power to determine the rights or eligibility of employees or Participants, and their surviving spouses and any other beneficiaries, and the amount of their respective benefits under the Plan, and to remedy ambiguities, inconsistencies or omissions. (b) To adopt such rules of procedure and regulations as in its opinion may be necessary for the proper and efficient administration of the Plan and as are consistent with the Plan. (c) To enforce the Plan and the rules and regulations, if any, adopted by the Committee as above. (d) To direct the trustee as respects benefit payments or other distributions from the Trust fund pursuant to the provisions of the Plan. (e) To furnish the Company with such information as may be required by it for tax or other purposes as respects the Plan. (f) To employ agents, attorneys, accountants, actuaries or other persons (who also may be employed by the Company or an Affiliate) and to allocate or delegate to them such powers, rights and duties as the Committee may consider necessary or advisable to properly carry out the administration of the Plan, including maintaining the accounts of Participants, provided that such allocation or delegation, and the acceptance thereof by such agents, attorneys, accountants, actuaries or other persons, shall be in writing. 9.2 Information Required by Committee. The Company shall furnish the Committee with such data and information as the Committee may deem necessary or desirable in order to administer the Plan. The records of the Company as to an employee's or Participant's period or periods of employment, termination of employment and the reason therefor, reemployment and Compensation will be conclusive on all persons unless determined to the Committee's satisfaction to be incorrect. Participants and other persons entitled to benefits under the Plan also shall furnish the Committee with such evidence, data or information as the Committee considers necessary or desirable to administer the Plan. 9.3 Committee Decision Final. Subject to applicable law, and the provisions of Section 9.4, any interpretation of the provisions of the Plan and any decision on any matter within the discretion of the Committee made by the Committee in good faith shall be binding on all persons. To the extent not inconsistent with the Plan, all definitions, terms and provisions set 15 forth in the NiSource Pension Plan, including with respect to the administrative powers and duties of the Committee, the expenses of administration, and the procedures for filing claims, also shall be applicable with respect to the Plan. 9.4 Claims Procedure. Claims for benefits under the Plan shall be made in writing to the Committee. If the Committee wholly or partially denies a claim for benefits, the Committee shall, within a reasonable period of time, but no later than 90 days after receiving the claim, notify the claimant in writing of the denial of the claim. If the Committee fails to notify the claimant in writing of the denial of the claim within 90 days after the Committee receives it, the claim shall be deemed denied. A notice of denial shall be written in a manner calculated to be understood by the claimant, and shall contain: (a) the specific reason or reasons for denial of the claim; (b) a specific reference to the pertinent Plan provisions upon which the denial is based; (c) a description of any additional material or information necessary for the claimant to perfect the claim, together with an explanation of why such material or information is necessary; and (d) an explanation of the Plan's review procedure. Within 60 days of the receipt by the claimant of the written notice of denial of the claim, or within 60 days after the claim is deemed denied as set forth above, if applicable, the claimant may file a written request with the Committee that it conduct a full and fair review of the denial of the claimant's claim for benefits, including the conducting of a hearing, if the Committee deems one necessary. In connection with the claimant's appeal of the denial of his or her benefit, the claimant may review pertinent documents and may submit issues and comments in writing. The Committee shall render a decision on the claim appeal promptly, but not later than 60 days after receiving the claimant's request for review, unless, in the discretion of the Committee, special circumstances (such as the need to hold a hearing) require an extension of time for processing, in which case the 60-day period may be extended to 120 days. The Committee shall notify the claimant in writing of any such extension. The decision upon review shall (1) include specific reasons for the decision, (2) be written in a manner calculated to be understood by the claimant, and (3) contain specific references to the pertinent Plan provisions upon which the decision is based. 16 IN WITNESS WHEREOF, the Company has caused this amendment and restatement of the Plan to be executed in its name by its duly authorized officer this 24th day of May 2004, effective as of the 1st day of January, 2004. NISOURCE INC. By: /s/ Gary L. Neale -------------------------------- 17 EX-10.6 7 c87285exv10w6.txt AGREEMENT WITH SAMUEL W. MILLER, JR. Exhibit 10.6 September 1, 2002 CONFIDENTIAL Mr. Sam Miller 3605 Royal Fox Drive St. Charles, IL 60174 Dear Sam: On behalf of NiSource Corporate Services Company ("Company"), I am pleased to offer you employment as the Chief Operating Officer for the subsidiaries and affiliates of NiSource, Inc., beginning September 1, 2002, conditioned upon approval by the Board of Directors. This letter does not constitute an offer of a contract of guaranteed employment; if you accept this offer, you will be an employee at will. The terms of the offer are as follows: Position: You will report to the Chief Executive Officer. Base Salary: Your annual base salary will be $500,000, payable monthly. Adjustments to base salary may be made periodically. Short Term Incentive: Your annual incentive under the NiSource Inc. 2002 Annual Incentive Plan will be 70% target. You are guaranteed payment of your pro-rata target bonus for 2002, payable in December 2002. Additional payment is possible in March 2003, depending on Company performance. Long Term Incentive: You will also have the opportunity to achieve an annual long-term incentive compensation under the NiSource Inc. 1994 Long Term Incentive Plan, as amended, of $900,000 target current value. This amount may be reviewed periodically at the Board's discretion. Currently, this long-term incentive is structured as a combination of 75% restricted stock and 25% stock options, authorized by action of the Board at its November meeting with an effective date of the grant of January 1, 2003. The Executive Compensation Review that is completed in the fall and presented at the November 2002 meeting of the Nominating and Compensation Committee of the Board may determine a higher annualized value, which would then be reflected in the January 2003 grant. Actual delivery of value may or may not continue in the combination as referenced above. Restricted Stock: You will receive a step-in grant of restricted stock equal to $200,000 in value, with restrictions to lapse three years from the date of the grant. Vacation: You will participate in the executive vacation plan, receiving six weeks of vacation per year. 49 Mr. Sam Miller September 1, 2002 Page 2 Other Fringe Benefits: You will receive the same fringe benefits as other NiSource Corporate Services employees. You are also eligible for AYCO financial counseling and planning. Retirement: You will participate in the NiSource Supplemental Executive Retirement Plan, as amended and restated. NiSource Policies. You are expected to familiarize yourself with and observe all Company policies. During the course of your employment with the Company, you will have access to confidential and proprietary information of the Company. You agree to maintain the confidentiality of such information, both during and after your employment. Severance: If your employment is involuntarily terminated prior to September 1, 2004 due to the transaction currently under discussion or one similar to it, you will receive a lump-sum payment of one year of base pay, target bonus and the prorated value of the long term incentive plan then in effect, through the date of termination. This payment is in lieu of benefits under the NiSource Executive Severance Policy. If your employment is terminated for any other reason at any time, the NiSource Executive Severance Policy will apply to you. If you terminate your employment voluntarily prior to September 1, 2006, the Company will not be obligated to pay any incentives which are unpaid at the time of your voluntary termination, including but not limited to, long term incentive plan payments. Change In Control. If similarly situated officers are offered Change In Control Agreements after September 1, 2004, you will be offered a similar agreement. To acknowledge your acceptance of this offer, please sign and return one copy of this letter to LaNette Zimmerman at your earliest convenience. Sam, I hope that you accept the Company's offer of employment. I am delighted with your interest in continuing to work with us at NiSource and look forward to a mutually beneficial relationship. Please call me if you have any questions. Sincerely, /s/ Gary L. Neale Gary L. Neale /s/ Samuel W. Miller 08/13/02 -------------------- -------- Sam Miller Date 50 EX-31.1 8 c87285exv31w1.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 Quarterly Report of NiSource Inc. on Form 10-Q for the quarter ended June 30, 2004; 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: August 6, 2004 By: /s/ Gary L. Neale -------------------------------------- Gary L. Neale Chairman and Chief Executive Officer EX-31.2 9 c87285exv31w2.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 Quarterly Report of NiSource Inc. on Form 10-Q for the quarter ended June 30, 2004; 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: August 6, 2004 By: /s/ Michael W. O'Donnell -------------------------------- Michael W. O'Donnell Chief Financial Officer EX-32.1 10 c87285exv32w1.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 Quarterly Report of NiSource Inc. (the "Company") on Form 10-Q for the period ending June 30, 2004 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: August 6, 2004 EX-32.2 11 c87285exv32w2.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 Quarterly Report of NiSource Inc. (the "Company") on Form 10-Q for the period ending June 30, 2004 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: August 6, 2004 -----END PRIVACY-ENHANCED MESSAGE-----