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| NI > SEC Filings for NI > Form 10-Q on 4-Aug-2009 | All Recent SEC Filings |
4-Aug-2009
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
• Electric Operations net revenues were $26.9 million lower primarily due to
lower industrial usage and off-system sales. Industrial volumes are down
approximately 23% in the first six months of 2009 when compared to the same
2008 period.
• NiSource's Gas Transmission and Storage Operations segment recorded a $19.8 million restructuring charge in the first quarter of 2009.
• Interest expense increased $16.6 million primarily due to incremental interest expense associated with the issuance of $700 million of long-term debt in May of 2008 and $600 million of long-term debt in March of 2009, partially offset by the open market debt repurchase of $100 million in January 2009, the $250.6 million tender offer debt repurchase in April 2009 and lower short-term interest rates.
Decreases in income from continuing operations were partially offset due to the
following items:
• Gas Distribution Operations' net revenues increased by $39.4 million due
primarily to increased revenues of $47.6 million from regulatory initiatives
including impacts from rate proceedings.
• Gas Transmission and Storage Operations' net revenues increased by $24.1 million due primarily to increases in firm capacity reservation fees and shorter term transportation and storage services. The increase in firm capacity reservation fees was the result of higher revenue for storage services, new Appalachian Supply interconnects, and incremental revenue from transportation agreements.
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'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 and progress
continues with Northern Indiana's electric base rate case. 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. The case-in-chief was originally filed on August 29, 2008, and
amended on December 19, 2008 after the Sugar Creek facility was successfully
dispatched into MISO. The filing requested an increase in base rates calculated
to produce additional annual gross margin of $85.7 million. Evidentiary hearings
on Northern Indiana's direct case commenced on January 12, 2009 and concluded on
February 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. Field hearings to record customer
testimonies were held on March 3, 2009 and July 15, 2009. The OUCC and
intervenors filed their cases-in-chief on May 8, 2009. Northern Indiana filed
its rebuttal testimony on June 26, 2009. Northern Indiana made several minor
changes to its revenue requirement, and, as a result the margin requirement in
the rebuttal filing is $6 million less than the original request. Final hearings
began on July 27, 2009. The case is expected to be resolved, and new electric
rates effective during early 2010.
Columbia of Ohio received authority on July 8, 2009 from the PUCO to defer the
difference between actual pension and other postretirement benefits expenses and
the levels reflected in Columbia of Ohio's base rates effective January 1, 2009.
The financial impact of the deferral, which is expected to positively impact
2009 operating income by approximately $13.0 million, will be reflected in the
company's results for the third and fourth quarters.
On April 16, 2009, Bay State filed a base rate case with the Massachusetts
Department of Public Utilities, requesting an increase of $34.6 million. In its
initial filing, Bay State is seeking revenue decoupling, as well as an expedited
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
mechanism for the recovery of costs associated with the rehabilitation of the
company's infrastructure. This matter is currently pending and expected to be
resolved with new rates taking effect in the fourth quarter 2009.
On May 1, 2009, Columbia of Kentucky filed a base rate case with the Kentucky
PSC, requesting an annual increase of $11.6 million. In its initial filing,
Columbia of Kentucky is seeking enhancements to rate design, as well as an
expedited mechanism for the recovery of costs associated with the rehabilitation
of the company's infrastructure. This matter is currently pending.
Northern Indiana received a favorable regulatory order on February 18, 2009
related to its actions to increase its electric generating capacity and advance
its electric rate case. Acting on a settlement reached among Northern Indiana
and its regulatory stakeholders, the IURC ruled that Northern Indiana's Sugar
Creek electric generating plant was "in service" for ratemaking purposes as of
December 1, 2008. The IURC also approved the deferral of depreciation expenses
and carrying costs associated with the $330 million Sugar Creek investment.
Northern Indiana purchased Sugar Creek on May 30, 2008 and effective December 1,
2008, Sugar Creek was accepted as an internal designated network resource within
the MISO.
On January 15, 2009, Columbia of Ohio filed an application with the PUCO
requesting authority to increase Columbia of Ohio's PIPP rider rate in order to
collect $82.2 million in PIPP arrearages over a three year period. On March 3,
2009, Columbia of Ohio's proposal was deemed approved and became effective.
On October 1, 2008, Columbia of Maryland filed a base rate case with the
Maryland PSC. 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. On March 27, 2009, the settlement was approved as
filed.
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. In March 2009, the VSCC approved
Dominion Virginia Power Company's planned Bear Garden station with service
expected to begin by the summer of 2011.
Commercial Growth and Expansion of the Gas Transmission and Storage Business
Hardy Storage Project. The first two phases of Hardy Storage are in service,
receiving customer injections and withdrawing natural gas from its new
underground natural gas storage facility in West Virginia. When the third and
final Phase is fully operational in November 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.
Line 1570 Project. In October 2008, Columbia Transmission entered into a
Precedent Agreement to gather and transport phased in volumes of up to 150,000
Dth per day of gas in the Waynesburg, PA area along Line 1570. The first two
phases of this project were available for service in October 2008 and
March 2009. Additional volumes will be phased in later in 2009 and during 2010.
Facilities are expected to be completed in fourth quarter of 2009.
Millennium Pipeline Project. The Millennium pipeline was substantially completed
in the fourth quarter of 2008 and the pipeline commenced service on December 22,
2008, with the capability to transport up to 525,400 Dth per day of natural gas
to markets along its route, as well as to the New York City market through its
pipeline interconnections. The Millennium partnership is currently comprised of
interest from Columbia Transmission (47.5%), DTE Millennium Company (26.25%),
and National Grid Millennium LLC (26.25%) with Columbia Transmission acting as
operator.
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 Renovo, PA, referred to as the "Columbia Penn" corridor. This
two-phase development will provide access to pipeline capacity in conjunction
with production increases in the Marcellus Shale formation which
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
underlies Columbia Transmission's transmission and storage network in the
region. Phase I was placed into service in February 2009 and Phase II should be
available by the end of 2009.
Eastern Market Expansion Project. The project allows Columbia Transmission to
expand its facilities to provide additional storage and transportation services
and to replace certain existing facilities. The Eastern Market Expansion is
adding 97,000 Dth per day of storage and transportation deliverability and is
fully subscribed on a 15-year contracted firm basis. Construction of the
facilities is complete and was placed in service April 1, 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 Bcf and 103,400 Dth per day of daily
deliverability. Approval was granted in March 2009 and construction of the
facilities began in April 2009. Partial service related to this expansion was
available beginning May 2009 and the remainder will be available no later than
the fourth quarter of 2009. The expansion capacity is 58% contracted on a
long-term, firm basis, with the FERC authorized market-based rates for these
services.
Appalachian Expansion Project. On August 22, 2008, the FERC issued an order to
Columbia Transmission, which granted a certificate to construct the project. The
project includes building a new 9,470 hp compressor station in West Virginia.
The Appalachian Expansion Project added 100,000 Dth per day of transportation
capacity and is fully subscribed on a 15-year contracted firm basis.
Construction is complete and the project was placed in service on July 1, 2009.
Easton Compressor Station. On March 30, 2009, Columbia Transmission announced a
binding open season for capacity into premium East Coast markets resulting from
modifications made to the company's Easton Compressor Station. The modifications
will increase delivery capacity from the Wagoner interconnection point between
the Columbia Transmission and Millennium pipeline systems. Through the open
season, which closed on April 3, 2009, Columbia Transmission received 30,000 Dth
per day of binding bids. Construction is under way and service is expected to
commence in the fourth quarter of 2009.
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 being reviewed in
conjunction with other market opportunities on the East Lateral in South
Louisiana. The project is expected to be placed into service in late 2010.
Cobb Compressor Station Expansion. Shippers have also executed precedent
agreements for a total of approximately 25,500 Dth per day of long-term firm
transportation service associated with a facility expansion at Cobb Compressor
Station in Kanawha County, West Virginia. The Cobb Expansion is expected to be
in service April 1, 2010.
Financial Management of the Balance Sheet
NiSource has been closely monitoring developments relative to the financial
crisis and has executed on its plan to effectively manage through this period.
During the past several months, NiSource has successfully executed against its
financing and liquidity plan through the following actions:
• On June 25, 2009, Columbia of Virginia received approval from the VSCC for the
issuance of external long-term debt of up to $75 million of either external
long-term debt or long-term inter-company notes. Northern Indiana is also
seeking to amend its financing petition to allow for the issuance of
$120 million of either external long-term debt or long-term inter-company
notes.
• On April 9, 2009, NiSource Finance announced the final closing of a $385 million senior unsecured two-year bank term loan with a syndicate of banks maturing February 11, 2011. Borrowings under the bank term loan have an effective cost of LIBOR plus 538 basis points. On February 16, 2009, NiSource announced the initial closing of the bank term loan at the level of $265 million. Under an accordion feature, NiSource was able to increase the loan by $120 million prior to final closing.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
• On March 31, 2009, NiSource Finance announced that it was commencing a cash
tender offer for up to $300 million aggregate principal amount of its
outstanding 7.875% Notes due 2010. On April 28, 2009, NiSource Finance
announced that $250.6 million of these notes were successfully tendered.
• On March 9, 2009, NiSource Finance issued $600 million of senior unsecured notes in an underwritten offering. NiSource will use the proceeds from the issuance to complete the refinancing of outstanding debt scheduled to mature in November 2009 and for general corporate purposes, including refinancing a portion of outstanding debt scheduled to mature in November 2010.
During the third quarter of 2009, NiSource also expects to file a petition to
add an accounts receivable securitization facility for Columbia of Pennsylvania
and is in the process of executing new facilities at Columbia of Ohio and
Northern Indiana. Total capacity of these facilities is expected to be
approximately $525 million with opportunities for annual renewal and capacity
increases as required.
NiSource's overall liquidity strategy, including the recent financial and
optimization initiatives, not only fully addresses the company's 2009 debt
refinancing requirements but also places the company well on the way toward
meeting the remaining 2010 refinancing needs. NiSource estimates that its
remaining financing requirements through 2010 will be less than $500 million.
NiSource will continue to closely monitor events in the credit markets, as well
as overall economic conditions in the nation and the markets it serves.
Maintaining financial flexibility will remain a key priority for NiSource.
Credit Ratings. On March 5, 2009, Standard and Poor's affirmed its senior
unsecured ratings for NiSource and its subsidiaries at BBB-, and revised the
outlook to stable from negative. On July 29, 2009, Moody's Investors Service
affirmed the senior unsecured ratings for NiSource at Baa3, and the existing
ratings of all other subsidiaries. Moody's outlook for NiSource and its
subsidiaries is negative. On February 4, 2009, Fitch lowered its senior
unsecured ratings for NiSource to BBB- and for Northern Indiana to BBB. Fitch's
outlook for NiSource and all of its subsidiaries is stable. Although all ratings
continue to be investment grade, an additional downgrade by Standard and Poor's,
Moody's or Fitch would result in a rating that is below investment grade.
Process and Expense Management
In February 2009, NiSource announced an organizational restructuring of the Gas
Transmission and Storage Operations segment. NiSource is eliminating positions
across the 16 state operating territory of Gas Transmission and Storage
Operations. The reductions will occur through normal attrition as well as
through voluntary programs and involuntary separations. In addition to employee
reductions, the Gas Transmission and Storage Operations segment will take steps
to achieve additional cost savings by efficiently managing its various business
locations, reducing its fleet operations, creating alliances with third party
service providers, and implementing other changes in line with its strategic
plan for growth and in response to current economic conditions. During the first
half of 2009, NiSource recorded a pre-tax restructuring charge, net of
adjustments, of $19.8 million to "Operation and maintenance" expense on the
Condensed Statement of Consolidated Income (Loss) (unaudited), which primarily
includes costs related to severance and other employee related costs for
approximately 360 employees. As of June 30, 2009, 246 employees had been severed
from employment bringing the restructuring liability balance for this initiative
to $5.7 million. NiSource expects this restructuring initiative to be
substantially complete by the end of 2009. Refer to Note 4, "Restructuring
Activities," in the Notes to Condensed Consolidated Financial Statements
(unaudited) for additional information regarding restructuring initiatives.
In the second quarter of 2009, Northern Indiana and representatives of the
United Steelworkers union reached five-year collective bargaining agreements
covering approximately 1,900 Northern Indiana employees. The parties' new labor
agreements are scheduled to expire May 31, 2014.
Ethics and Controls
NiSource has had a long term commitment to providing accurate and complete
financial reporting as well as high standards for ethical behavior by its
employees. NiSource's senior management takes an active role in the development
of this Form 10-Q and the monitoring of the company's internal control structure
and performance. In addition, NiSource will continue its mandatory ethics
training program in which employees at every level throughout the organization
participate.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Refer to "Controls and Procedures" included in Item 4.
Results of Operations
Quarter Ended June 30, 2009
Net Income
NiSource reported a net loss of $4.8 million, or $0.02 loss per basic share, for
the three months ended June 30, 2009, compared to a net loss of $202.3 million,
or $0.74 loss per basic share, for the second quarter 2008. The loss from
continuing operations was $8.7 million, or $0.03 loss per basic share, for the
three months ended June 30, 2009, compared to income of $19.7 million, or $0.07
per basic share, for the second quarter 2008. Operating income was
$103.9 million, a decrease of $10.5 million from the same period in 2008. All
per share amounts are basic earnings per share. Basic average shares of common
stock outstanding at June 30, 2009 were 274.7 million compared to 274.0 million
at June 30, 2008.
Comparability of line item operating results was impacted by regulatory and tax
trackers that allow for the recovery in rates of certain costs such as bad debt
expenses. Therefore, increases in these tracked operating expenses are offset by
increases in net revenues and had essentially no impact on income from
continuing operations. A net increase in operating expenses of $2.2 million for
the second quarter of 2009 was offset by a corresponding net increase to net
revenues reflecting recovery of these tracked costs.
Net Revenues
Total consolidated net revenues (gross revenues less cost of sales) for the
three months ended June 30, 2009, were $671.0 million, a $5.8 million increase
from the same period last year. This increase in net revenues was primarily due
to increased Gas Distribution Operations' net revenues of $17.8 million and
increased Gas Transmission and Storage Operations' net revenues of $13.1
million, partially offset by lower Electric Operations' net revenues of
$21.9 million. Gas Distribution Operations' net revenues increased due to
increased revenues of $28.7 million from regulatory initiatives including
impacts from rate proceedings, partially offset by decreased usage from
residential and industrial customers. Within Gas Transmission and Storage
Operations, net revenues increased due primarily to increases in firm capacity
reservation fees and shorter term transportation and storage services of
$12.9 million. The increase in firm capacity reservation fees was the result of
higher revenue for storage services, new Appalachian Supply interconnects, and
incremental revenue from transportation agreements. Electric Operations' net
revenues decreased due to lower industrial usage, which was significantly
impacted by steel and steel-related companies. The major steel companies were
operating at close to full capacity in early 2008 and are now operating at about
half capacity.
Expenses
Operating expenses for the second quarter 2009 were $564.5 million, an increase
of $12.1 million from the 2008 period. This increase was primarily due to higher
pension expense of approximately $25 million, increased legal reserves of
$6.4 million and $5.0 million higher electric generation and maintenance costs,
partially offset by lower employee and administrative expenses, excluding
pension, of $15.3 million across NiSource's business segments and decreased
other taxes of $9.6 million. The increase in pension expense for 2009 is due to
a $797.7 million reduction in pension plan assets in 2008 from a 30.3% negative
return on assets for the year due to the overall market decline and benefit
payments of $165.9 million made during 2008.
Other Income (Deductions)
Interest expense increased by $17.9 million primarily due to incremental
interest expense associated with the issuance of $700 million of long-term debt
in May of 2008 and $600 million of long-term debt in March of 2009, partially
offset by the open market debt repurchase of $100 million in January 2009, the
$250.6 million tender offer debt repurchase in April 2009 and lower short-term
interest rates. Other, net was a loss of $0.5 million compared to income of $1.3
million for the second quarter of 2008 as a result of lower interest income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Income Taxes
Income taxes for the second quarter of 2009 were $6.1 million, a decrease of
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