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| NI > SEC Filings for NI > Form 10-K on 27-Feb-2009 | All Recent SEC Filings |
27-Feb-2009
Annual Report
Consolidated Review 24 Executive Summary 24 Results of Operations 31 Liquidity and Capital Resources 34 Off Balance Sheet Items 41 Market Risk Disclosures 41 Other Information 44 Results and Discussion of Segment Operations 52 Gas Distribution Operations 53 Gas Transmission and Storage Operations 59 Electric Operations 66 Other Operations 72
Note regarding forward-looking statements
The Management's Discussion and Analysis, including statements regarding market
risk sensitive instruments, contains "forward-looking statements," within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Investors and
prospective investors should understand that many factors govern whether any
forward-looking statement contained herein will be or can be realized. Any one
of those factors could cause actual results to differ materially from those
projected. These forward-looking statements include, but are not limited to,
statements concerning NiSource's plans, objectives, expected performance,
expenditures and recovery of expenditures through rates, stated on either a
consolidated or segment basis, and any and all underlying assumptions and other
statements that are other than statements of historical fact. From time to time,
NiSource may publish or otherwise make available forward-looking statements of
this nature. All such subsequent forward-looking statements, whether written or
oral and whether made by or on behalf of NiSource, are also expressly qualified
by these cautionary statements. All forward-looking statements are based on
assumptions that management believes to be reasonable; however, there can be no
assurance that actual results will not differ materially.
Realization of NiSource's objectives and expected performance is subject to a
wide range of risks and can be adversely affected by, among other things,
weather, fluctuations in supply and demand for energy commodities, growth
opportunities for NiSource's businesses, increased competition in deregulated
energy markets, the success of regulatory and commercial initiatives, dealings
with third parties over whom NiSource has no control, the success of NiSource's
restructured outsourcing agreement, actual operating experience of NiSource's
assets, the regulatory process, regulatory and legislative changes, changes in
general economic, capital and commodity market conditions, and counter-party
credit risk, many of which risks are beyond the control of NiSource. In
addition, the relative contributions to profitability by each segment, and the
assumptions underlying the forward-looking statements relating thereto, may
change over time.
CONSOLIDATED REVIEW
Executive Summary
NiSource is an energy holding company whose subsidiaries are engaged in the
transmission, storage and distribution of natural gas in the high-demand energy
corridor stretching from the Gulf Coast through the Midwest to New England and
the generation, transmission and distribution of electricity in Indiana.
NiSource generates virtually 100% of its operating income through these
rate-regulated businesses. A significant portion of NiSource's operations is
subject to seasonal fluctuations in sales. During the heating season, which is
primarily from November through March, net revenues from gas sales are more
significant, and during the cooling season, which is primarily from June through
September, net revenues from the Electric Operations segment are more
significant than in other months.
NiSource is a holding company under the Public Utility Holding Company Act of
2005.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
For the twelve months ended December 31, 2008, NiSource reported income from
continuing operations of $369.8 million, or $1.35 per basic share, compared to
$302.9 million, or $1.10 per basic share in 2007.
Increases in income from continuing operations were due primarily to the
following items:
• Net revenues for Distribution Operations increased from 2007. This increase
was due primarily to regulatory and service programs including impacts from
rate proceedings at Columbia of Pennsylvania, Columbia of Ohio, Columbia of
Kentucky and Bay State, the impact of an adjustment for estimated unbilled
revenues of $14.6 million recorded by Northern Indiana in 2007, increased
trackers which are offset in expense and colder weather.
• On December 31, 2007, Whiting Clean Energy redeemed $292.1 million of its notes due June 20, 2011, having an average interest rate of 8.30%. The associated redemption premium of $40.6 million was charged to loss on early extinguishment of long-term debt in 2007 results.
• Interest expense decreased due to lower short-term interest rates and the retirement late in 2007 of high cost debt associated with the Whiting Clean Energy facility.
• Other, net was income of $17.6 million for 2008 versus expense of $6.4 million in 2007. The 2008 results include 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. The additional change from last year is due from lower costs related to the sale of accounts receivable.
• The effective income tax rate was 33.4% in 2008 a decrease from the 35.2% effective rate reported in 2007. The decrease was primarily due to recent legislation in Massachusetts that reduced income tax expense by $14.9 million in 2008. Refer to Note 11, "Income Taxes," in the Notes to Consolidated Financial Statements for additional detail.
Decreases in income from continuing operations were due primarily to the
following items:
• Operating expenses increased primarily due to higher operation and maintenance
expenses across NiSource's business segments. Increased depreciation charges
and other taxes also contributed to the higher operating expenses. See the
following bullet points for explanations for these increases.
• Operation and maintenance expenses increased due primarily to higher employee and administrative expenses that include payroll, benefits and corporate services. The increase was a result of higher payroll costs for increased headcount, costs of living and performance adjustments, and corporate service costs related to information technology and consulting.
• Operation and maintenance expenses also increased due to higher electric generation and maintenance costs and higher trackers which are collected in revenues partially offset by lower legal reserves and an adjustment to medical expenses. The increase in electric generation and maintenance costs resulted from planned turbine and boiler maintenance and a generator overhaul, as well as incremental costs associated with the Sugar Creek facility.
• The higher depreciation cost includes an $8.3 million depreciation expense adjustment recorded by Northern Indiana during the second quarter of 2008 and depreciation on the new Sugar Creek facility. The increase in other taxes is primarily due to higher gross receipts taxes that are mostly subject to trackers and are therefore collected in net revenues.
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."
Strengthening NiSource's Financial Position and Balance Sheet
As part of its efforts to strengthen its balance sheet and focus on its core
regulated assets, NiSource took a number of steps in 2008 to divest certain
non-strategic assets and to address certain legacy issues. These included:
• The completion of the sale of Northern Utilities and Granite State Gas
Transmission to Unitil Corp. in December 2008 for $201.6 million, including
working capital. The working capital amount will be adjusted based upon the
final settlement during the first quarter of 2009.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
• The sale of the Whiting Clean Energy facility to BPAE in June 2008 for
$216.7 million, including working capital.
• The disposition of certain non-strategic Columbia Gulf assets in the Gulf of Mexico area.
• The resolution of the Tawney class action litigation, which involved natural gas royalty claims asserted against CNR, a former NiSource subsidiary for which NiSource retained primary financial responsibility. On November 22, 2008, a West Virginia court approved a settlement of the case, with NiSource to pay an amount not to exceed $338.8 million.
The following steps were also taken during 2008 to secure financing and
strengthen NiSource's liquidity position:
• During the second quarter, NiSource issued $700 million of senior unsecured
debt.
• In September 2008, NiSource supplemented its $1.5 billion revolving credit facility that extends to July 2011 with a new, six-month $500 million credit facility. That facility helped ensure ample liquidity to accommodate the company's seasonal cash flow requirements and to provide near-term funding flexibility related to the Tawney settlement. On February 13, 2009, the six-month credit facility was terminated in conjunction with the closing of a new two-year bank loan facility.
• NiSource also refinanced $254 million in Northern Indiana Pollution Control Bonds in August 2008 at a weighted average fixed interest rate of 5.58%, and renewed Northern Indiana's $200 million accounts receivable facility in December 2008.
Reaction to Global Financial Environment
Since the financial crisis began, NiSource and its Board have been closely
monitoring developments, assessing potential impacts on its businesses and
developing plans to effectively manage through this period. A key area of focus
relates to continued access to credit markets on reasonable terms. NiSource is
also concentrating on the impacts of the economic decline on the industrial
customer segment and other markets it serves, and increases in pension expense
and funding requirements.
Through a combination of capital spending, working capital and operation and
maintenance reductions, NiSource expects to reduce its total projected 2009
financing requirements from nearly $1 billion to approximately $500 million. The
company's resulting $500 million financing requirement of 2009 together with
improvements to working capital are expected to be sufficient to fund the
refinancing of outstanding debt scheduled to mature in November 2009 and all
payments associated with the Tawney settlement. See further discussion within
the "Liquidity and Capital Resources" of Management's Discussion and Analysis.
NiSource will continue to closely monitor events in the credit markets, as well
as overall economic conditions in the nation and markets it serves. Maintaining
financial flexibility will remain a key priority for NiSource.
Four-Point Platform for Growth
NiSource's four-part business plan will continue to center on 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
requested a two-step increase. The first step request was for an increase of
approximately $24 million. The second step was for an additional increase of
approximately $81 million to incorporate the return on and recovery of the Sugar
Creek facility. Such increase was expected to become effective at the date of
dispatch of Sugar Creek by MISO. On December 1, 2008, Northern Indiana
successfully dispatched Sugar Creek into MISO, simultaneous with the termination
of its PJM commitment. As a result, a revised case-in-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
chief was filed on December 19, 2008, incorporating Sugar Creek and resulting in
a traditional one-step case, requesting an increase in base rates calculated to
produce additional gross margin of $85.7 million annually. Several stakeholder
groups have intervened in the case, representing customer groups and various
counties and towns within Northern Indiana's electric service territory. A field
hearing allowing customers to individually participate will occur on March 3,
2009. The OUCC and intervenors are scheduled to file their cases-in-chief by
April 17, 2009. Northern Indiana is scheduled to file its rebuttal testimony in
June 2009, and final hearings are planned to begin July 27, 2009. If a
settlement agreement is not reached, and the full procedural schedule takes
place, it is anticipated that new rates would take effect in early 2010.
Northern Indiana is seeking to offer DSM and energy efficiency programs to its
electric customers and, accordingly, in December 2008 filed a case-in-chief
requesting approval to implement a variety of DSM programs. Proposed programs
include rebates for energy efficiency appliances and an air-conditioning cycling
program, designed to reduce peak load. The IURC is also reviewing a program that
would allow customers to reduce their cost of electricity by agreeing to
interrupt their service under some yet to be defined guidelines that would match
rules established by MISO.
Northern Indiana included a commitment to using renewable energy in its IRP
filed in November 2007, and a subsequent filing was made with the IURC,
requesting approval for Northern Indiana to enter into power purchase agreements
with subsidiaries of Iberdrola Renewables for wind-generated power from Iowa and
South Dakota, and requesting full recovery of all associated costs. On July 24,
2008, the IURC issued an order approving Northern Indiana's proposed purchase
power agreement with subsidiaries of Iberdrola Renewables. The agreement
provides Northern Indiana the opportunity to purchase 100 mw of wind power,
which began in early 2009.
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. The Sugar Creek facility is a CCGT located in West Terre
Haute, Indiana and has a plant capacity rating of 535 mw. Sugar Creek has
transmission access to both the MISO and PJM Interconnection wholesale
electricity markets. In November 2008, an arrangement was reached to release
Northern Indiana from its contractual commitment binding the Sugar Creek power
plant to provide capacity to PJM Interconnection's Reliability Pricing Model
market. Effective December 1, 2008, Sugar Creek was accepted as an internal
designated network resource within the MISO.
Columbia of Ohio filed a base rate case with the PUCO on March 3, 2008, and a
settlement agreement was filed on October 24, 2008. In the base rate case,
Columbia of Ohio sought recovery of increased infrastructure rehabilitation
costs, as well as the stabilization of revenues and cost recovery through rate
design. The agreement included an annual revenue increase of $47.1 million, and
also provides for recovery of costs associated with Columbia of Ohio's
infrastructure rehabilitation program. On December 3, 2008, the PUCO approved
the settlement agreement in all material respects, and approved Columbia of
Ohio's proposed rate design. On January 2, 2009, Columbia of Ohio filed a notice
of its intent to adjust its Infrastructure Replacement Program Rider, pursuant
to the rate order, indicating that an application to adjust the rider would be
filed by February 27, 2009.
On January 15, 2009, Columbia of Ohio filed an application with the PUCO
requesting authority to increase Columbia of Ohio's PIPP rider rate. The
application proposes to increase the PIPP rider rate in order to collect
$82.2 million in PIPP arrearages.
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 of Ohio'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 of Ohio'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.
Columbia of Ohio and other stakeholders reached an agreement in the fourth
quarter of 2007 that establishes the framework for operations under Columbia of
Ohio's CHOICE® program for the next several years and provides for
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
a wholesale gas supply auction by early 2010. On January 23, 2008 the PUCO
approved the agreement. The stipulation also included a commitment, on behalf of
Columbia of Ohio, to file on or before February 1, 2009 an application that
proposes to implement by no later than April 1, 2010 a wholesale auction
procedure to secure the gas supply required to serve its sales customers.
Columbia of Ohio filed this application on January 30, 2009. Pursuant to that
application, Columbia of Ohio proposes to implement two consecutive one year
long SSO periods, starting in April 2010 with the intent to obtain commodity
supplies for both Columbia of Ohio's PIPP and the SSO load. Columbia of Ohio
will obtain gas supplies from alternative suppliers and pass the price of that
gas on to its sales customers at a monthly rate called the SSO rate.
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. As part of its approval of the settlement
agreement in Columbia of Ohio's rate case, the PUCO approved the DSM cost
recovery rider.
On January 28, 2008, Columbia of Pennsylvania filed a base rate case with the
PPUC, and on July 2, 2008, Columbia of Pennsylvania and all interested parties
filed a unanimous settlement. In the base rate case, 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 October 23, 2008, the PPUC issued an Order
approving the settlement as filed, increasing annual revenues by $41.5 million.
Included in the annual revenue increase is consideration for costs associated
with Columbia of Pennsylvania's infrastructure rehabilitation program.
On October 1, 2008, Columbia of Maryland filed a base rate case with the
Maryland Public Service Commission, and on February 20, 2009, Columbia of
Maryland and all interested parties filed a unanimous settlement in the case,
recommending an annual revenue increase of $1.2 million. In its initial filing,
Columbia of Maryland sought an increase of $3.7 million annually. Columbia of
Maryland anticipates approval of the settlement and implementation of new rates
in the second quarter of 2009.
Refer to the "Results and Discussion of Segment Operations" for a complete
discussion of regulatory matters.
Bear Garden Station. Columbia of Virginia has entered into an agreement with
Dominion Virginia Power to install facilities to serve a 585 mw combined cycle
generating station in Buckingham County, VA, known as the Bear Garden station.
The project requires approximately 13.3 miles of 24-inch steel pipeline and
associated facilities to serve the station. The station is anticipated to have
an in-service date of September 1, 2010, and the total estimated cost for
Columbia of Virginia's facilities is $51.0 million.
Commercial Growth and Expansion of the Gas Transmission and Storage Business
Millennium Pipeline Project. In June 2007, construction began on the Millennium
pipeline, which includes 182-miles of newly constructed, 30-inch-diameter pipe
across New York's Southern Tier and lower Hudson Valley. Substantially all of
the facilities related to the project were completed in the fourth quarter of
2008 and the pipeline commenced service on December 22, 2008. Clean up work
along the right-of-ways will be completed in early 2009. Millennium 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, DTE Energy and National
Grid.
Hardy Storage Project. Hardy Storage is in service, receiving customer
injections and withdrawing natural gas from its new underground natural gas
storage facility in West Virginia. Injections in 2008 allowed 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, and the ability to deliver
176,000 Dth of natural gas per day. Hardy Storage is a joint venture of
subsidiaries of Columbia Transmission and Piedmont.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
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 service
during April 2007.
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 will be a
natural complement to NiSource's gas transmission and storage growth strategy,
and, if further pursued, could provide NiSource access to competitively priced
capital to support future growth investment. The initial public offering did not
occur in 2008 due to the damage sustained at Columbia Gulf's Hartsville,
Tennessee, compressor station, following a tornado at the facility, as well as
overall financial market conditions. NiSource is in the process of withdrawing
its registration statement with the SEC due to market conditions and other
internal and external factors.
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 FERC
issued an 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 hp 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 an order which
granted a certificate to construct the project. Construction is in progress and
the project is expected to be in service by the second half of 2009.
Financial Management of the Balance Sheet
NiSource's interest expense decreased $22.2 million for the year ended
December 31, 2008 compared to 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.
Despite recent turmoil in business and financial markets, NiSource is committed
to maintaining its liquidity position. NiSource has been closely monitoring
developments relative to the financial crisis and has developed a plan to
effectively manage through this period. Specifically, NiSource has developed a
liquidity plan which is multi-faceted and is intended to demonstrate to the
financial markets that the Company has multiple avenues for gaining access to
the capital markets.
Key elements of the liquidity plan include:
• Addressing critical funding requirements during calendar years 2009 and
2010, including the resolution of the Tawney class action litigation in an
amount not to exceed $338.8 million; annual anticipated dividend payments
of approximately $252 million; and debt maturities of $417.6 million in
November 2009 and $932.4 million in November 2010.
• Reducing the Company's total projected 2009 funding requirements from nearly $1 billion to approximately $500 million by reducing planned capital spending for 2009 from in excess of $1 billion to $800 million; and through a $250 million reduction in working capital requirements for 2009; To further improve the company's liquidity position, NiSource . . .
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