Despite the economic downturn and considerably milder weather, NiSource Inc. posted net income of $66.9 million ($0.32 per diluted share) for the fourth quarter of 2001, compared to a net income loss of $4.2 million ($0.02 loss per diluted share) for the equivalent quarter in 2000. The company also had a strong full year, turning a loss in 2000 into a sizeable gain in 2001. The company reported $216.2 million ($1.03 per diluted share) in 2001 net income, compared to $150.9 million ($1.12 per diluted share) in 2000.

“While we were disappointed with market conditions and, therefore, 2001 results, NiSource is committed to improving the performance of its core businesses by reducing costs and increasing productivity and efficiencies,” said Gary L. Neale, CEO of NiSource. “These initiatives, which are already under way, will lead us through this economic downturn and establish a strong foundation for future growth.”

Just a few days after NiSource reported its results, Moody’s Investor Service downgraded the company’s senior debt to Baa3 and its subsidiaries to Baa2, noting that the “outlook remains negative.” Moody’s said the downgrades reflect higher-than-expected debt levels and weaker-than-expected cash flow from its subsidiaries.

“The negative outlooks reflect the execution risk entailed in the company’s plan to de-leverage itself over the next 12 to 18 months,” the rating service said. “With market capital of roughly $4 billion, it will be a challenge to issue enough equity to offset over $8 billion of debt on its balance sheet. Other than the pending sale of the Indianapolis Water Company, NiSource’s plan does not include any large asset sales in the near future.”

The downgrade also reflects NiSource’s reliance on dividends from its Northern Indiana Public Service Company (NIPSCO) subsidiary, which is currently riding out a weak economy in northern Indiana. “The local economy and a substantial portion of NIPSCO’s revenues are tied to the steel industry, which is undergoing a cyclical downturn and consolidation,” Moody’s said. “Furthermore, the Indiana Utility Regulatory Commission is investigating whether to reduce NIPSCO’s retail electric rates. A significant reduction in NIPSCO’s rates would stress the parent company, which is expecting it to provide almost three-quarters of its cash flows.”

However, Neale said in the company’s earnings release that NiSource expects to stick to its earnings guidance. “As we reported in November, we view 2002 as a transition year and are reaffirming our previously articulated 2002 earnings guidance of $2.15 to $2.20 per share from continuing operations based on normal weather, inclusive of the benefits of no longer having to amortize annual goodwill of $0.50 per share from the acquisition of Columbia in 2000, Neale said.”

The company said many factors weighed on its full year results. NiSource estimated that 12% warmer-than-normal weather lowered operating income by $61.7 million ($0.19 per share), while restructuring charges taken in the fourth quarter associated with further cost reductions and company-wide efficiency improvements were $28.7 million ($0.09 per share).

“In light of the price and operating volatility that has characterized the energy market for much of the last year, NiSource believes that shareholder value is created through a balanced combination of balance sheet integrity and returns,” Neale added. “As such, the company will continue to pursue the gas marketing and trading joint venture with Aquila, which we believe is far superior to building our own expensive platform.

“As a means of further improving the balance sheet, the company intends to reduce leverage and improve liquidity through a combination of (i) the application of the proceeds of the divestiture of the Indianapolis Water Company and SM&P, our utility locating business, (ii) terming out bank debt, (iii) continued reductions of operating and capital costs and, (iv) the sale of equity subsequent to the resolution of its pending rate investigation with the Indiana Utility Regulatory Commission,” Neale said.

NiSource’s Gas Distribution operations reported 2001 operating income of $380.8 million, up $139.8 million over 2000, reflecting the benefit of twelve months of the acquired Columbia Gas operations, compared to two months in 2000. The jump in operating income was partially offset by record warm weather among other things.

The company’s Gas Transmission and Storage operations also reported a strong 2001. The segment contributed operating income of $349 million, an increase of $301.4 million from 2000, reflecting the benefit of twelve months of Columbia operations in 2001, compared to two months in 2000, partially offset by the amortization of goodwill associated with the acquisition.

Electric operations reported operating income of $309.6 million for the year, a decrease of $6.1 million from 2000. NiSource said the decline reflects the downturn in the heavy manufacturing sector and the economic downturn and charges related to the planned shutdown of the Dean H. Mitchell generating station in northwest Indiana.

NiSource’s Exploration and Production operations reported operating income of $51.9 million, an increase of $46.5 million from 2000, resulting from a full year of operations in 2001. The company’s merchant operations contributed operating income of $22.2 million, a decrease of $56.8 million from 2000. NiSource attributed the reduction primarily to mark-to-market loss on January East Coast trades, restrictions on gas trading, and a fourth quarter charge to provide for potential uncollectibles related to the Enron bankruptcy.

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