Favorable weather and lower interest rates helped natural gas distributor NiSource Inc. reverse year-ago quarterly losses. The Merrillville, IN-based company, which serves 3.7 million natural gas and electric customers from the Gulf Coast through the Midwest to New England, reported third quarter net income of $23.2 million (11 cents a share), compared with a net loss of $21 million (minus 10 cents) for the same period of 2001.

The results, said the company, are indicative of the quarterly earnings pattern, with the bulk of earnings concentrated in the first and fourth quarters because of the seasonal nature of its core natural gas operations. CEO Gary L. Neale added that the financial results were consistent with NiSource’s plans to focus on regulated entities. “We achieved a settlement in the Indiana electric rate investigation, continued our focus on expense control, and announced we are seeking a buyer for our exploration and production (E&P) assets to complement our planned fourth-quarter equity offering.”

NiSource announced in mid-October that it planned to sell its two-year-old North American E&P businesses, which include Columbia Energy Resources Inc. and affiliate Columbia Natural Resources Inc. (CNR) to focus on its core, regulated generation assets and debt reduction (see Daily GPI, Oct. 14, Oct. 15). The equity offering is planned for November.

“Balancing our credit rating requirements with our shareholders’ expectations also remains a key priority,” Neale said. Because of its “ongoing efforts,” Neale said NiSource expects to meet full-year 2002 earnings estimates of $1.90 a share, excluding any impact from the E&P asset sales. Full-year E&P earnings are estimated at $29 million of net income. It also assumes normal weather for the rest of the year, the planned equity offering and expenses from its “reorganization initiatives,” he said.

Compared with last year’s third quarter, the third quarter of 2002 was “favorably impacted by warmer weather, which increased pre-tax earnings by approximately $9.8 million (3 cents), mostly because of increased power sales,” said the company. As a result of debt reduction efforts and lower short-term interest rates during 2002, NiSource also realized improvements in interest expense of $6.2 million (2 cents), compared with a year earlier. The quarterly earnings showed lower operation and maintenance expenses as well, totaling $56.5 million and the elimination of $23.4 million of goodwill amortization as a result of a Financial Accounting Standards Board change that affected goodwill amortization beginning Jan. 1, 2002.

The favorable results, said NiSource, were partially offset by credits that will be issued to customers under an Indiana Utility Regulatory Commission (IURC) electric rate review settlement that was approved in September (see Power Market Today, Sept. 25).

Since the beginning of the year, NiSource said it had paid down approximately $850 million of debt, which it accomplished after meeting the working capital needs for gas storage purchases for the winter heating season, as well as capital expenditures for seasonal construction projects as part of the normal business cycle. NiSource noted that its balance sheet at Sept. 30 is “not comparable to the previous year due to the inclusion of $565 million of assets and related debt for four projects involving subsidiary Primary Energy Inc., which were treated as off-balance-sheet leases prior to the second quarter of 2002.”

As of July 1, NiSource also completed the sale of a “substantial” portion of its natural gas marketing portfolio, which limited its marketing operations primarily to gas sales to commercial and industrial customers. Like the rest of the sector, merchant operations have taken on heavy losses since the beginning of the year. Within its merchant division, NiSource’s natural gas sales plummeted to 15.3 M Dth for the quarter, down from $115.4 M Dth for the third quarter of 2001. Electric sales also fell to 4,748.9 GWh, down from 6,589.2 GWh for the same period a year ago.

In summary, NiSource’s third quarter operating income was $183.3 million for the quarter, up from $141.0 million from the same period in 2001. Gas Distribution operations reported a third-quarter operating loss of $20.2 million, better than the $32.0 million operating loss from a year earlier. Gas Transmission and Storage operations reported operating income of $86.1 million, an increase of $31.3 million from the year-ago period. Electric operations reported operating income of $99.8 million, an increase of $1.3 million from the third quarter of 2001, mostly because of warmer weather and reductions in taxes and reorganization costs.

Because of lower gas prices, Exploration and Production operating income fell to $1.7 million, a decrease of $18.2 million from the third quarter of 2001. Merchant operations had operating income of $16.6 million, an increase of $2.0 million from a year ago. The increase came from a gain of $3.1 million, following the July sale of a portion of EnergyUSA-TPC gas marketing contracts. NiSource said 2002 results reflect trading activities on a net revenue basis, and 2001 results were adjusted to conform to the 2002 presentation.

The Other segment reported an operating loss of $0.9 million, versus an operating loss of $4.3 million in 2001, mostly because of a reduction in natural gas sales to customers of a NiSource subsidiary that had engaged in retail and wholesale gas marketing. Gains were partly offset by an increase in operating expenses for certain non-core subsidiaries.

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