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| NI > SEC Filings for NI > Form 10-Q on 4-Nov-2008 | All Recent SEC Filings |
4-Nov-2008
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Increases in income from continuing operations were due primarily to the
following items:
• Income tax expense decreased $22.8 million due to recent legislation in
Massachusetts that reduced income tax expense by $13.5 million in the third
quarter of 2008. Income tax expense also decreased due to lower pre-tax book
income for the nine months ended September 30, 2008 versus the comparable
period in 2007. Refer to Note 13, "Income Taxes," in the Notes to Condensed
Consolidated Financial Statements for additional detail.
• Interest expense decreased $19.2 million due to lower short-term interest rates and the retirement late in 2007 of high cost debt associated with the Whiting Clean Energy facility.
• Gas Transmission and Storage Operations' net revenues increased by $10.2 million due primarily to greater subscriptions for firm transportation services related to new interconnects along the Columbia Gulf pipeline system, deliveries from the Hardy Storage field and incremental demand revenues on the Columbia Transmission system.
• Other, net increased by $22.4 million due primarily to NiSource Development Company's sale of its interest in JOF Transportation Company to Lehigh Service Corporation on August 27, 2008, for a pre-tax gain of $16.7 million. JOF Transportation Company held 40% interest in Chicago South Shore & South Bend Railroad Co. and a 40% interest in Indiana Illinois Development Company, LLC.
Decreases in income from continuing operations were due primarily to the
following items:
• Operating expenses increased by $59.1 million primarily due to higher employee
and administrative expenses of $29.6 million across NiSource's business
segments, a $19.1 million increase in depreciation which includes an
$8.3 million depreciation expense adjustment recorded by Northern Indiana
during the second quarter of 2008 and higher electric generation and
maintenance costs of $11.8 million. The increased electric generation and
maintenance costs resulted primarily from planned turbine and boiler
maintenance and a generator overhaul, as well as $2.3 million in incremental
costs associated with the Sugar Creek facility.
• Lower Electric Operations net revenues, which were negatively impacted by $20.4 million due to non-recoverable power purchased and non-recoverable MISO charges. Additionally, lower residential and commercial margins contributed to lower net revenues and were partially offset by higher industrial usage and margins.
These factors and other impacts to the financial results are discussed in more
detail within the following discussions of "Results of Operations" and "Results
and Discussion of Segment Operations."
Four-Point Platform for Growth
NiSource has established four key initiatives to build a platform for long-term,
sustainable growth: commercial and regulatory initiatives; commercial growth and
expansion of the gas transmission and storage business; financial management of
the balance sheet; and process and expense management.
Commercial and Regulatory Initiatives
Rate Development and Other Regulatory Matters. NiSource is moving forward on
regulatory initiatives across several distribution company markets. Whether
through full rate case filings or other approaches, NiSource's goal is to
develop strategies that benefit all stakeholders as it addresses changing
customer conservation patterns, develops more contemporary pricing structures,
and embarks on long-term investment programs to enhance its infrastructure.
Northern Indiana filed a petition for new electric base rates and charges on
June 27, 2008 and filed its case-in-chief on August 29, 2008. The filing
requests a two-step increase. Step One is a request for an increase in base
rates calculated to produce additional gross margin of approximately
$24 million. Step Two requests an additional increase to incorporate the return
on and recovery of the Sugar Creek facility, which Northern Indiana purchased on
May 30, 2008. The Step Two increase, if granted, would become effective as soon
as the Sugar Creek facility is no longer committed to the PJM Interconnection
market and is dispatched into MISO, but no later than June 1, 2010. The hearing
on Northern Indiana's case-in-chief is scheduled to begin on January 6, 2009.
Several stakeholder groups have intervened in the case, representing customer
groups and various counties and towns within Northern Indiana's electric service
territory. Testimony from the OUCC and all intervenors will be due by April 17,
2009. Assuming the case goes through the full procedural schedule without
settlement, the final hearing is scheduled to begin July 27, 2009 and new rates
are anticipated to take effect in early 2010.
Columbia of Ohio filed a base rate case with PUCO on March 3, 2008, requesting
an increase in base rates in excess of $80 million annually. Columbia of Ohio is
seeking recovery of increased infrastructure rehabilitation costs, as well as
the stabilization of revenues and cost recovery through rate design. A
settlement agreement was filed on
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
October 24, 2008. The agreement recommends an annual revenue increase of
$47.1 million, and also provides for recovery of costs associated with Columbia
of Ohio's infrastructure rehabilitation program. Rate design issues are to be
resolved by the PUCO. The case is currently pending, and is expected to be
resolved before the end of 2008.
On January 28, 2008, Columbia of Pennsylvania filed a base rate case with the
Pennsylvania Public Utility Commission, seeking an increase of approximately
$60 million annually, effective October 28, 2008. Through this filing, Columbia
of Pennsylvania sought to recover costs associated with its significant
infrastructure rehabilitation program, as well as stabilize revenues and cost
recovery through modifications to rate design. On July 2, 2008, Columbia of
Pennsylvania and all interested parties filed a unanimous settlement with the
Pennsylvania Public Utilities Commission. On October 23, 2008, the Pennsylvania
Public Utilities Commission issued an Order approving the settlement as filed,
increasing annual revenues by $41.5 million.
On October 1, 2008, Columbia of Maryland filed a base rate case with the
Maryland Public Service Commission, seeking an increase of approximately
$3.7 million annually. New rates are expected to take effect during the second
quarter of 2009.
On April 9, 2008, the PUCO issued an order approving, in all material respects,
a joint Stipulation submitted on behalf of Columbia of Ohio. This Stipulation is
a result of a process that began on April 13, 2005 with a PUCO ordered
investigation into the type of gas risers installed in the state, the conditions
of installation and overall performance. The Stipulation provides for:
establishment of accounting for and recovery of costs resulting from the Staff's
investigation; Columbia's performance of a survey to identify those
customer-owned risers on its system prone to failure; and related customer
education and other program related expenses. In addition this Stipulation
provides for: Columbia's assumption of financial responsibility for the
replacement of all risers identified as prone to failure; repair or replacement
of hazardous customer owned service lines; and capitalization of this investment
with recovery to be addressed in future rate proceedings. As of September 30,
2008, Columbia of Ohio has approximately $38.5 million in costs associated with
the gas riser and customer service line programs recorded as a regulatory asset
and/or capitalized plant.
In July 2008, Columbia of Ohio filed an application with the PUCO for permission
to create a new comprehensive energy conservation program. If approved by the
PUCO, Columbia of Ohio's DSM program would offer a wide range of services to
residential and small commercial customers. Columbia of Ohio proposes to recover
the three-year, $24.9 million cost of the DSM conservation program through a
rider that would be added to residential and small commercial customer bills
beginning in May 2010. On July 23, 2008, the PUCO issued an order approving
Columbia of Ohio's proposal subject to the approval of the DSM cost recovery
rider proposed in the currently pending rate case, and any other conditions that
may be imposed in the rate case.
On May 30, 2008, Northern Indiana purchased Sugar Creek for $329.7 million. This
purchase was in response to Northern Indiana's need to add approximately 1,000
mw of new capacity. Refer to Note 8, "Regulatory Matters," in the Notes to
Condensed Consolidated Financial Statements (unaudited) for further discussion.
The Sugar Creek facility is a CCGT located in West Terre Haute, Indiana. Sugar
Creek has a plant capacity rating of 535 mw. Sugar Creek has transmission access
to and is able to participate in both the MISO and PJM Interconnection wholesale
electricity markets. The plant is currently committed to the PJM Interconnection
market until May 31, 2010. At acquisition, Northern Indiana recorded at fair
value $328.1 million related to utility plant. No goodwill was recorded in
conjunction with the purchase. The preliminary allocation of the purchase price
was assigned to the assets and liabilities of Sugar Creek, based on their
estimated fair value in accordance with GAAP. This allocation is subject to
completion of certain analyses and allocation of property, plant and equipment
unit of accounts.
Refer to the "Results and Discussion of Segment Operations" for a complete
discussion of regulatory matters.
Sale of Whiting Clean Energy. On June 30, 2008, NiSource sold Whiting Clean
Energy to BPAE for $217.2 million, which included $16.3 million in working
capital, resulting in an after-tax loss of $31.9 million.
Sale of Northern Utilities and Granite State Gas. On February 15, 2008, NiSource
reached a definitive agreement under which Unitil Corporation will acquire
NiSource subsidiaries Northern Utilities and Granite State Gas. Under
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
the terms of the transaction, Unitil Corporation will acquire Northern
Utilities, a local gas distribution company serving 52 thousand customers in 44
communities in Maine and New Hampshire and Granite State Gas, an 86-mile FERC
regulated gas transmission pipeline primarily located in Maine and New
Hampshire. In the first quarter of 2008, net assets for Northern Utilities and
Granite State Gas were reclassified to assets and liabilities of discontinued
operations and held for sale on the Consolidated Balance Sheets. During the
third quarter and nine months ended September 30, 2008, estimated losses of
$4.8 million and $71.7 million were recorded to Gain (Loss) on Disposition of
Discontinued Operations in the Condensed Statements of Consolidated Income
(Loss) (unaudited).
NiSource acquired Northern Utilities and Granite State Gas in 1999 as part of
the company's larger acquisition of Bay State. NiSource is retaining its
ownership of Bay State as a core component of the company's long-term,
investment-driven growth strategy.
Sale of Columbia Gulf's Offshore Assets. On June 27, 2008, Columbia Gulf sold a
portion of Columbia Gulf's offshore assets to Tennessee Gas Pipeline Company for
$7.5 million, which resulted in a gain of $2.9 million that was recorded during
the second quarter of 2008. Payment was received on July 1, 2008.
Commercial Growth and Expansion of the Gas Transmission and Storage Business
Master Limited Partnership. On December 21, 2007, NiSource Energy Partners,
L.P., an MLP and subsidiary of NiSource, filed a Form S-1 registration statement
with the SEC in which it proposed making an initial public offering of common
units in the MLP and NiSource proposed contributing its interest in Columbia
Gulf to the MLP. NiSource management believes the formation of an MLP is a
natural complement to NiSource's gas transmission and storage growth strategy,
and should provide NiSource access to competitively priced capital to support
future growth investment. The initial public offering will not occur in 2008 due
to the damage sustained at Columbia Gulf's Hartsville, Tennessee, compressor
station, following the tornados at the facility as described previously, as well
as overall financial market conditions.
Millennium Pipeline Project. In June 2007, construction began on the Millennium
Pipeline, a 182-mile-long, 30-inch-diameter pipeline across New York's Southern
Tier and lower Hudson Valley. The project is expected to be completed in the
fourth quarter of 2008 and will transport up to 525,400 Dth per day of natural
gas to markets along its route, as well as to the New York City markets through
its pipeline interconnections. Millennium is jointly owned by affiliates of
NiSource, KeySpan Corporation, and DTE Energy.
Hardy Storage Project. Hardy Storage completed its sixth full quarter of
operations, receiving customer injections and withdrawing natural gas from its
new underground natural gas storage facility in West Virginia. Injections this
year will allow the field to deliver up to 150,000 Dth of natural gas per day
during the 2008-2009 winter heating season. Customers withdrew over 5.44 Bcf
from the storage field during the 2007-2008 winter heating season. When fully
operational in 2009, the field will have a working storage capacity of 12 Bcf,
delivering more than 176,000 Dth of natural gas per day. Hardy Storage is a
joint venture of subsidiaries of Columbia Transmission and Piedmont.
Columbia Transmission, the operator of Hardy Storage, has expanded its natural
gas transmission system by 176,000 Dth per day to provide the capacity needed to
deliver Hardy Storage supplies to customer markets. Construction of these
transmission facilities is complete and the facilities were placed into full
service during the first half of 2008.
Florida Gas Transmission Expansion Project. An open season to solicit interest
and contracts for expanded capacity on Columbia Gulf's system for delivery to
Florida Gas Transmission was held in late 2007 and contracts for 100,000 Dth per
day of capacity were executed. This project was placed into service in May 2008.
Eastern Market Expansion Project. On May 3, 2007, Columbia Transmission filed a
certificate application before the FERC for approval to expand its facilities to
provide additional storage and transportation services and to replace certain
existing facilities. This Eastern Market Expansion project is projected to add
97,000 Dth per day of storage and transportation deliverability and is fully
subscribed on a 15-year contracted firm basis. On January 14, 2008, the
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
FERC issued a favorable order which granted a certificate to construct the
project. Construction of the facilities is underway and the project is expected
to be in service by April 2009.
Appalachian Expansion Project. On February 29, 2008, Columbia Transmission filed
an application before the FERC for approval to build a new 9,470 horsepower
compressor station in West Virginia. The Appalachian Expansion Project will add
100,000 Dth per day of transportation capacity and is fully subscribed on a
15-year contracted firm basis. On August 22, 2008, the FERC issued a favorable
order which granted a certificate to construct the project. Construction is in
progress and the project is expected to be in service in the fourth quarter of
2009.
Ohio Storage Project. On June 24, 2008, Columbia Transmission filed an
application before the FERC for approval to expand two of its Ohio storage
fields for additional capacity of nearly 7 MMDths and 103,400 Dth per day of
daily deliverability. If required approvals are granted as requested,
construction would begin in 2009 and the expanded facilities would be placed in
service by the end of 2009. The expansion capacity is 58% contracted on a
long-term, firm basis.
New Penn Transmission Project. During the first quarter of 2008, Columbia
Transmission concluded an open season to gauge customer interest in a new
pipeline system to provide 500,000 Dth per day of firm service from storage
facilities near Leidy, PA to a new interconnection with Millennium Pipeline in
Steuben County, New York in 2010. NiSource is continuing to explore interest in
this project and other demand for capacity in the region.
Centerville Expansion Project. An open season to solicit interest and receive
bids for expanded capacity on Columbia Gulf's system for delivery to Southern
Natural Gas and the Louisiana intrastate pipeline market was held during the
first quarter of 2008, and bids for 60,000 Dth per day of capacity were
submitted. The remaining 175,000 Dth per day of capacity is expected to be sold
under firm contracts prior to the facilities being placed into service. The
project is expected to be placed into service in late 2010.
MarkWest Energy Partners, LP Joint Venture Project. In August 2008, Columbia
Transmission and MarkWest Energy Partners, LP, announced their intention to
jointly develop several natural gas gathering and processing projects to support
increased natural gas production in the Appalachian Basin. The two companies are
in discussions with several natural gas producers to provide new gathering and
gas processing services in association with Columbia Transmission's existing
Majorsville, WV, compressor station, located in the northern panhandle area of
West Virginia and Western Pennsylvania.
Columbia Penn Project. In September 2008, Columbia Transmission announced its
intention to develop additional natural gas transmission, gathering and
processing services along and around its existing pipeline corridor between
Waynesburg, PA, and Corning, NY, referred to as the "Columbia Penn" corridor.
This two-phased development will accelerate access to pipeline capacity in
conjunction with production increases in the Marcellus Shale formation which
underlies Columbia Transmission's transmission and storage network in the
region. Phase I is anticipated to give customers access to capacity in early
2009, while Phase II would be available by the end of 2009.
Financial Management of the Balance Sheet
Despite recent turmoil in business and financial markets, enhancing shareholder
value through disciplined, investment-driven earnings growth continues to be the
foundation of NiSource's balanced business plan. NiSource is committed to
maintaining its strong liquidity position. NiSource recently supplemented its
$1.5 billion revolving credit facility which extends through July 2011, with a
new $500 million temporary credit facility which expires in March 2009. This
agreement helps ensure ample liquidity to accommodate the company's seasonable
cash flow requirements, such as the purchase of natural gas supplies to meet
customer needs.
NiSource will continue to closely monitor events in the credit markets, as well
as overall economic conditions in the nation and the markets we serve.
Maintaining financial flexibility as we work through this challenging period
will remain a key priority for the company's management and its board of
directors.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
NiSource's interest expense decreased $19.2 million for the first nine months of
2008 compared to the first nine months of last year. This decrease was due
primarily to lower short-term interest rates and the retirement late in 2007 of
high cost debt associated with the Whiting Clean Energy facility.
In the second quarter of 2008, NiSource issued long-term debt of $700 million to
fund future capital expenditures. While the capital markets have recently been
adversely impacted by a variety of negative economic events, NiSource believes
these events will not impact its continued access to the traditional capital
markets.
On August 25, 2008, Northern Indiana converted all of the Jasper County
Pollution Control Bonds from a variable rate demand mode to a fixed rate mode,
and reoffered the bonds to external investors. As a result of the fixed rate
conversion and reoffering process, the weighted average interest rate is now
fixed at 5.58%.
Process and Expense Management
IBM Agreement. In December 2007, NiSource and IBM finalized a restructuring of
their business services agreement. Under the restructured agreement, IBM will
primarily provide information technology services, with a number of other
business service functions to be transitioned back to the NiSource organization.
Through the third quarter of 2008, certain Meter to Cash, Human Resources, Sales
Center, remaining Finance and Accounting (except for Accounts Payable) and
Supply Chain Management support services transitioned back to the company.
NiSource has made a decision to transition certain Accounts Payable functions to
another Service Provider.
In January 2008, NiSource and IBM also agreed to move forward with the Indiana
deployment of a Work Management System and its associated transformation
initiatives. The Work Management System project will provide technologies that
standardize, integrate and support transformation of processes and eliminate
costly and inefficient manual work processes while meeting regulatory/compliance
standards. Implementation planned for late 2008 has been delayed. The project
team is currently working on adjusting the project roll out schedule into 2009.
Results of Operations
Quarter Ended September 30, 2008
Net Income
NiSource reported net income of $20.0 million, or $0.08 per basic share, for the
three months ended September 30, 2008, compared to net income of $11.0 million,
or $0.04 per basic share, for the third quarter 2007. Income from continuing
operations was $32.6 million, or $0.12 per basic share, for the three months
ended September 30, 2008, compared to $7.9 million, or $0.03 per basic share,
for the third quarter 2007. Operating income was $107.9 million, a decrease of
$1.6 million from the same period in 2007. All per share amounts are basic
earnings per share. Basic average shares of common stock outstanding at
September 30, 2008 were 274.0 million compared to 273.9 million at September 30,
2007.
Net Revenues
Total consolidated net revenues (gross revenues less cost of sales) for the
three months ended September 30, 2008, were $616.4 million, a $4.6 million
increase from the same period last year. This increase in net revenues was
attributable to higher net revenues from Electric Operations, Gas Transmission
and Storage Operations and Other Operations of $2.8 million, $1.8 million and
$1.2 million, respectively. Net revenues from Electric Operations increased
primarily due to the impact of a $33.5 million settlement in third quarter of
2007 related to the cost of power purchased by Northern Indiana in 2006 and
2007, incremental revenues of $3.8 million from the new Sugar Creek plant and
$2.6 million in increased industrial net revenues. These increases in net
revenues were partially offset by lower wholesale sales of $13.9 million, lower
residential and commercial sales volumes and margins of $8.9 million, the impact
of cooler weather of approximately $7 million and $4.3 million of
non-recoverable purchased power. The non-recoverable purchased power costs are
due to the settlement reached in 2007 by Northern Indiana with regulatory
stakeholders and large customers as noted previously. The increase in Gas
Transmission and Storage net revenues was due to increased subscriptions for
firm transportation services of $7.2 million related to new interconnects along
the Columbia Gulf pipeline system, deliveries from the Hardy Storage field and
. . .
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