In its first report comparing the full effects of its merger with Columbia Energy Group, NiSource Inc. reported a 33% increase in first quarter net income to $242.2 million, or $1.18 per share, led by a favorable hedging program in its gas production and merchant division, reduced debt and reduced expenses that offset the negative impacts of very warm weather.

Its gas distribution division showed operating earnings of $250 million compared to $288 million a year ago and electric utility operating earnings were down to $66 million from $74 million. Both divisions were negatively impacted by warm weather and the economy. Its E&P division reported operating earnings of $33 million versus $9 million in 1Q2001. The company was able to lock in gas prices over $5/Mcf. For the rest of the year, hedges are expected to result in an average natural gas price of about $3.50/Mcf.

During the quarter, the company cut $750 million in short and long-term debt and achieved reductions of $35 million in interest expense and $66.9 million in operation and maintenance expenses. First quarter results also included a pre-tax gain of $19.2 million from the sale of NiSource’s SM&P utility line-locating business; increased net merchant revenues of $18.5 million due to the favorable impact of higher gas prices, and the elimination of $22.6 million of goodwill amortization. Record warm weather during the period negatively impacted pre-tax earnings by a total of $54.6 million, or 16 cents per share, when compared to normal weather, and $40.3 million, or 12 cents per share, when compared to the first quarter of 2001.

“As we committed to earlier this year, the company’s focus on debt and expense reduction, the sale of non-core assets and improving our credit quality and liquidity has translated right to the earnings statement and balance sheet,” said CEO Gary L. Neale. “We also remain committed to improving the performance of our core businesses, and believe these and other steps we’re taking will strengthen NiSource and position us for growth as the economy and the energy marketplace improve.”

Neale added that the company has significantly improved its liquidity and cut its borrowing needs through its debt and expense reduction initiatives and through a new $500 million one-year credit facility agreement. The company will further reduce short-term debt with proceeds from the sale of the Indianapolis Water Co., which is expected to close by the end of April. NiSource’s total debt reduction efforts are expected to exceed $1 billion in 2002.

Credit Suisse First Boston analyst Curt Launer said he is increasing his earnings per share estimate on the company from $1.95 to $2.00. He is maintaining his estimate for 2003 pending the results of an Indiana utility rate investigation and an expected $500 million equity offering by the company. “Our valuation target for NI is being raised from $22 per share to $25 per share based on the greater security we assess in NI’s dividend and an expectation that it will trade at a 10% premium yield to the group average of 4.2%. This compares to the 20% premium yield NI shows currently. NI is rated Hold,” Launer said.

NiSource’s operating companies provide electric and gas service to 3.7 million customers, mainly in the Midwest and Northeast.

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