NiSource Annual Report 2005

← All annual reports

FY2005 Annual Report · NiSource

Loading PDF…

N
i
S
o
u
r
c
e

I
n
c
.

2
0
0
5
M

e
s
s
a
g
e

t
o

S
t
o
c
k
h
o
l
d
e
r
s

Message to
Stockholders
NiSource Inc.
05

CEO’s Letter • 10-K

Stockholder Inquiries
Mellon Investor Services

Analyst Inquiries
Investor Relations

Media Inquiries
Communications

(888) 884-7790

(219) 647-6083

(219) 647-6200

NiSource Inc. 801 E. 86th Ave. Merrillville, IN 46410 www.nisource.com
This document contains “forward-looking statements,” including earnings guidance for fiscal year 2006. For a discussion of factors that
could cause actual results to differ materially from those contained in such statements, please see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in the NiSource Inc. annual report on Form 10-K included herein.

resolution of these challenges. We pledge to leave no
stone unturned in our review of these issues, and to
communicate with you when decisions are made.

Real

in05ProgresS

Despite the impact of the most active hurricane season
on record, which contributed to record high natural gas
prices, and an uneven economy, NiSource made
significant progress during 2005 on each of the four key
components of our platform for growth.

Expansion and Commercial Growth in
the Pipeline and Storage Business
We are poised to strengthen our position as a key player
in meeting the growing need for increased pipeline
and storage capacity in the Mid-Atlantic and
Eastern United States. The NiSource Gas
Transmission and Storage group has

unparalleled strategic reach: access

to North America’s key supply

basins and supply corridors, and
access to the nation’s largest
energy consuming markets. This
valuable footprint is
strategically enhanced by a
substantial market area storage
position, which provides unique
operating flexibility and
commercial optimization
opportunities.

Our strategy for this segment is two-

u
s
i

n
e
s
s
S
e
g
m

ents by Operati

Income

pronged: constant optimization of our
system and aggressive expansion of our
physical network. Several important projects

hit milestones in 2005, with others making

announcements in early 2006:

• A newly restructured management team with an
enhanced focus on market development and
commercial optimization is now leading the NiSource
Gas Transmission and Storage group. The Houston-
based commercial team is responsible for market
development, utilization and pricing of service offerings
to maximize the value of NiSource’s pipeline assets.
With the addition of well-known industry veterans to
our already highly talented leadership team, we are
positioned to grow earnings by unlocking the full value
of our current assets and by making disciplined capital
decisions.

• The Hardy Storage Project in West Virginia received its

Federal Energy Regulatory Commission (FERC)
certificate in November, has begun construction, and
is on track to initiate customer storage injections in the
spring of 2007. This project, a joint effort between

NI
1

Dear Fellow Stockholder :

I begin my first letter to you as CEO of your company with
three main thoughts: We’re listening to you. We’re taking
action to unlock the value of your investment. And we’re
committed to clearly communicating our progress and
our results to you throughout the year.

In 2005, we continued to transform NiSource; a
transformation that is necessary, given our
financial realities, a challenging economy and
the evolving energy industry. Key first
steps in our transformation were
establishing a new base earnings
level for NiSource and launching
our Four-Point Platform for
Growth. One year ago we
predicted that 2005 would be
both rewarding and
challenging. Our outlook
proved to be accurate.

ortfolio of L

d P

e
c
n
a
l
a
B

- R i

s k Assets

Regulated
Electric
Operations
29%

Regulated
Gas
Distribution
37%

Regulated
Gas Transmission
& Storage
34%

Looking forward to the
remainder of 2006 and beyond,
we are building momentum
toward our aspiration of becoming
the Premier Regulated Energy
Company in North America. Our
business plan, which has now been in
place for more than a year, is based on our
solid portfolio of low-risk, regulated assets
capable of producing steady, consistent growth. Already,
our plan is on target for delivering long-term, sustainable
growth, with notable successes being realized from each
of our four key components:

• Expansion and commercial growth in the pipeline and

storage business;

• Regulatory and commercial initiatives;
• Financial management; and
• Process and expense management.

Yet we recognize that we have lingering issues to
address. As of this writing, our stock is trading at a
discount to our peers due to the overhang of several
challenges, including limited financial flexibility, high gas
prices that have caused reduced customer gas usage
and may impact the timing of regulatory initiatives, and
ongoing losses at Whiting Clean Energy. We have
charged small, high-level working groups within our
senior leadership team to define plans for the fast-track

Columbia Gas Transmission and a subsidiary of
Piedmont Natural Gas, will convert an existing natural
gas production field in Hardy and Hampshire counties
in West Virginia into a new underground gas storage
field. When complete, Hardy Storage will have the
capacity to store about 12 billion cubic feet of natural
gas and the capability to deliver up to about 176 million
dekatherms (Dth) of firm storage service per day. The
storage customers include Washington Gas Light,
Piedmont Natural Gas, Baltimore Gas and Electric and
the city of Charlottesville, Va.

• The Millennium Pipeline has signed Consolidated
Edison and KeySpan as anchor customers, and is
moving forward in the FERC approval process.
Columbia Gas Transmission remains a major sponsor of
Millennium Pipeline, along with units of KeySpan and
DTE Energy. The pipeline’s first phase will be a 182-
mile section from Corning, N.Y., to Ramapo, N.Y.,
offering access to new sources of natural gas supply
including local production, enhanced storage options
and added delivery capacity for Northeast utilities and,
ultimately, their customers. Pending receipt of
necessary approvals, Millennium is targeting a
November 2007 in-service date.

• Columbia Gas Transmission’s Eastern Market

Expansion is moving toward a 2009 in-service date,
based on definitive agreements with four East Coast
customers. The Eastern Market Expansion is a
development project to expand existing NiSource
storage and transmission assets to provide nearly
100,000 Dth/day of storage to Eastern growth markets.

• Beyond these specific projects, the Gas Transmission

and Storage group is in active discussions with a
variety of market participants concerning the
continued expansion and extension of its network of
transmission and storage assets.

Regulatory and Commercial Initiatives
NiSource’s gas and electric utilities continue to be
recognized for their steady growth and innovative
regulatory and commercial programs. Our core strategy
is to cultivate win-win strategies that benefit all our
stakeholders, including our distribution customers and
our stockholders, by supporting profitable customer
growth and infrastructure investments. We also seek to
develop pricing structures and mechanisms that are
better aligned with contemporary market conditions,
provide value-added tariffs and services and constantly
optimize our asset portfolio, which is among the most
extensive in the industry.

We added 32,000 net gas and electric customers to our
system last year, and despite choppy economic
conditions, our large industrial and commercial margins
were on par with the previous year. Our gas supply
management team had another strong year of optimizing
our capacity positions for the benefit of our customers as
well as the company. Our electric generation and
transmission team also performed well in bulk power
sales and wheeling services in the developing Midwest
Independent System Operator (MISO) market.

In the regulatory arena, our utilities continue to pursue a
wide variety of initiatives ranging from traditional rate
cases, to programs to assist low-income customers, to
margin expansion efforts. We benefited from several of
these initiatives during 2005:

Executive Team

NI
2

Robert C. Skaggs, Jr., President & Chief Executive Officer
Robert D. Campbell, Senior VP, Human Resources
Peter V. Fazio, Jr., Executive VP & General Counsel
Larry J. Francisco, VP, Audit
Jerry L. Godwin, Senior VP, Electric Generation and Transmission
Christopher A. Helms, Pipeline Group President
Glen L. Kettering, Senior VP, Corporate Affairs
Harris H. Marple, Senior VP, Distribution Operations
Michael W. O’Donnell, Executive VP & Chief Financial Officer
Kathleen O’Leary, Senior VP, Energy Distribution Regulated Revenue
Violet G. Sistovaris, Senior VP, Administrative Services

• NiSource has established several state-of-the-art

trackers, which are rate mechanisms that allow for the
recovery of certain costs without extensive regulatory
process. Trackers increase net revenues by allowing
timely recovery of rising operating expenses. Other
trackers allow for return on required investments. For
example, our environmental cost tracker in Indiana
will allow us to recover up to $306 million in
capital and operation and maintenance
expenses associated with the
installation and operation of NOx
pollution control equipment on
our electric generating stations.
In our Ohio jurisdiction, a
tracker allows for the
recovery of current bad debt
expense, as well as for
previously deferred
uncollected accounts
receivable.

$516

$592

• Last November, our Bay State
Gas Company team secured
regulatory approval of an $11.1
million annual revenue increase in
Massachusetts. The newly approved
rate structure includes an attractive
performance-based rate plan that will be in place
for 10 years and contains earnings-sharing provisions
as well as a pension adjustment mechanism.

• Northern Indiana Public Service Company (NIPSCO)

worked with regulators and consumer representatives
to extend its natural gas alternative regulatory plan
through April 2010. The plan, initially approved in 1997,
allows the utility’s natural gas customers to participate

in optional gas purchasing and billing programs.
NIPSCO is the only utility in Indiana that offers these
competitive products and services. More than 16
percent of its natural gas customers participate in the
programs.

• NIPSCO received regulatory approval of an

extension of its Winter Warmth plan to assist
low-income customers. The program will
direct up to $7.8 million in bill and

$465

$404

$421

$381*

03
Interest Expense
(Millions of Dollars)
* Estimate

deposit assistance to customers with
low incomes or those experiencing

a hardship.

• Columbia Gas of Kentucky
renewed its Customer Choice
Program through March 2009.
The program, which began in
2000 as a pilot, provides
residential and small
commercial customers with the
ability to choose their natural gas

supplier.

Financial Management
After much work to stabilize our credit

ratings in 2002, 2003 and 2004, we had a

unique opportunity to continue to improve
NiSource’s financial profile during 2005. The NiSource
team refinanced $2.4 billion in long-term debt in 2005,
which is expected to result in approximately $43 million in
annual interest expense savings beginning in 2006. In
addition, we put in place short-term credit facilities that
will significantly bolster our liquidity and at the same time
further reduce our borrowing costs. We will require no
major refinancings until 2010.

Gary L. Neale, Chairman
NiSource Inc.

Robert C. Skaggs, Jr., President & CEO
NiSource Inc.

Board of Directors

Dr. Steven C. Beering, President Emeritus
Purdue University

Dennis E. Foster, Retired Vice Chairman
ALLTEL Corp.

Peter McCausland, Chairman & CEO
Airgas, Inc.

Steven R. McCracken
Chairman, President & CEO
Owens-Illinois, Inc.

Ian M. Rolland, Lead Director
Retired Chairman & CEO
Lincoln National Corp.

Richard L. Thompson
Retired Group President
Caterpillar Inc.

Robert J. Welsh, Chairman & CEO
Welsh Holdings, LLC

Dr. Carolyn Y. Woo
Martin J. Gillen Dean &
Ray & Milann Siegfried Professor of
Entrepreneurial Studies
Mendoza College of Business
University of Notre Dame

Roger A. Young, Retired Chairman
Bay State Gas Co.

NI
3

Looking forward, our strategy is to optimize and enhance
our long-term credit and equity capacity. In December
2005, our credit ratings were affirmed, with a stable
outlook, by both Moody’s and Standard & Poor’s. To
ensure that we borrow at the lowest possible rates and
maintain a strong balance sheet, we will continually seek
new means to fund our business needs and reduce our
cost of capital. In addition, we will aggressively manage
our costs to meet working capital requirements, which
have increased in recent months due to high commodity
prices.

Process and Expense Management
Building on our tradition of cost and process discipline,
employees throughout the organization continue to hold
the line on expenses, as we continue to implement
business process changes to further enhance
productivity. Our strategy is premised on operational
excellence, and is driven by a focus on continuous
improvement, employee development, state-of-the-art
technology and selective outsourcing.

As a means to re-deploy capital toward growth
opportunities, transform our administrative infrastructure,
infuse new technologies and reduce operating costs,
NiSource in 2005 moved forward with a landmark
contract to outsource many back-office processes to
IBM. I am pleased to report that we are on track to save
$395 million in operating expenses and capital costs over
10 years, net of costs to achieve. Since July 2005, we
have been transitioning to IBM the operation of support
functions including human resources, finance and
accounting, supply chain (procurement), customer
contact centers, meter-to-cash and information
technology. Over the next 18 months, we will be replacing
a variety of poorly interconnected legacy systems with a
suite of fully integrated financial, transactional, planning,
commercial and operating systems that will literally
transform the way our employees perform their jobs
every day. This transformation will allow the NiSource
team to focus our resources on the core competencies
necessary to provide safe, reliable utility and pipeline
services, and support execution of our Four-Point
Platform for Growth.

In late 2005, we began implementing additional cost
reduction measures as a means of further improving our
earnings outlook for 2006. This set of actions includes
streamlining our executive ranks, realigning executive
compensation, rationalizing corporate budgets,
consolidating facilities and reducing the amount we
spend on employee travel.

Opportunities
Future

for the

As you can see, we have accomplished much. Our team
is executing on our Four-Point Platform for Growth. We
have resolved many of the significant issues that faced

NI
4

us over the last several years, and we are now
addressing the remaining concerns. As we continue to
make progress on all these fronts, we believe that we will
grow earnings and that, in turn, will enable us to
eventually increase the dividend.

For 2006, we have high expectations for the further
success of our business plan, with employees at all levels
and functions of the organization contributing to the
execution of the plan. Each function and subsidiary of
NiSource has a specific operating plan and financial plan
for 2006, linked to the corporation’s overall objectives.
Each employee’s personal goals are tied to those
operating and financial plans, and achievement of those
goals will be evaluated regularly, with incentives aligned
with results.

OUR

Commitment

I would like to take this opportunity to thank our
Chairman, Gary Neale, for his outstanding contributions
to NiSource during his 16-year tenure with the company.
Gary, who was the architect of NiSource’s growth from a
single-state utility to a Fortune 500, integrated energy
holding company operating from the Gulf Coast through
the Midwest to New England, retired from the company
at the end of June 2005 and remains Chairman of the
Board. His commitment to growth and innovation
continues to inspire our efforts.

I also would like to thank our employees for their ongoing
commitment and contributions to serving our customers
safely and reliably. Furthermore, I thank you, our
stockholders, for your continued support. As I stated at
the outset, I believe we are fundamentally undervalued
compared to our industry peers. We’re looking intensely
at how to remedy that situation. We are committed to
enhancing the value of your investment and to
transparency in communicating to you our progress in
making that happen.

In closing, let me assure you that NiSource continues to
be on the right track. We are addressing our financial
realities. We are focused on achieving realistic business
plans and targets. We are doing what it takes to deliver
results. We are committed to becoming the Premier
Regulated Energy Company in North America.

Sincerely,

Robert C. Skaggs, Jr.
President and Chief Executive Officer

Stockholder Info

NiSource Inc. common stock is listed and traded on the New York Stock Exchange under the symbol NI.
The shares are listed in financial stock quotations as NISOURCE. As of Dec. 31, 2005, NiSource Inc. had
46,451 registered common stockholders.

Anticipated Dividend Record and Payment Dates

NiSource Common Stock
Record Date
04-28-06
07-31-06
10-31-06
01-31-07

Payment Date
05-19-06
08-18-06
11-20-06
02-20-07

Common Stock Dividend Declared
At its meeting on Jan. 6, 2006, the board of
directors declared a quarterly dividend of
$0.23 per share, equivalent to $0.92 per share
on an annual basis.

Investor and Financial Information
Financial analysts and investment professionals
should direct written and telephone inquiries to
NiSource Investor Relations at 801 E. 86th Ave.,
Merrillville, IN 46410 or (219) 647-6083.

Copies of NiSource’s financial reports are
available by writing or calling the Investor
Relations department at the address or phone
number listed above. The materials are also
available at www.nisource.com.

Stockholder Services
Questions about stockholder accounts,
stock certificates, transfer of shares, dividend
payments, automatic dividend reinvestment and
stock purchase plan, and electronic deposit may
be directed to Mellon Investor Services at the
following:

Mellon Investor Services
P.O. Box 3315
South Hackensack, NJ 07606
or
480 Washington Boulevard
Jersey City, NJ 07310-1900

(888) 884-7790

TDD for Hearing Impaired
(800) 231-5469

Foreign Stockholders
(201) 680-6610

TDD Foreign Stockholders
(201) 680-6578

www.melloninvestor.com

On June 3, 2005, NiSource’s Chief Executive Officer submitted to the New York Stock Exchange (“NYSE”)
an annual certification stating that as of that date he was not aware of any violation by the company
of the New York Stock Exchange’s corporate governance listing standards, as required by Section
303A.12(a) of the NYSE’s Listed Company Manual. NiSource’s Chief Executive Officer and Chief Financial
Officer have provided certifications to the U.S. Securities and Exchange Commission as required by
Section 302 of the Sarbanes-Oxley Act of 2002. These certifications are included as Exhibits 31.1 and 31.2
to the company’s 10-K for the year ended December 31, 2005.

N
i
S
o
u
r
c
e

I
n
c
.

2
0
0
5
M

e
s
s
a
g
e

t
o

S
t
o
c
k
h
o
l
d
e
r
s

Message to
Stockholders
NiSource Inc.
05

CEO’s Letter • 10-K

Stockholder Inquiries
Mellon Investor Services

Analyst Inquiries
Investor Relations

Media Inquiries
Communications

(888) 884-7790

(219) 647-6083

(219) 647-6200