Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2008
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to
Commission file number 001-16189
NiSource Inc.
(Exact name of registrant as specified in its charter)
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Delaware |
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35-2108964 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
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801 East 86th Avenue |
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Merrillville, Indiana |
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46410 |
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(Address of principal executive offices) |
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(Zip Code) |
(877) 647-5990
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ
Accelerated filer o
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Non-accelerated filer o
Smaller reporting company o
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(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: Common Stock, $0.01 Par Value: 274,228,968 shares outstanding at
July 31, 2008.
NISOURCE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 2008
Table of Contents
2
DEFINED TERMS
The following is a list of frequently used abbreviations or acronyms that are found in this report:
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NiSource Subsidiaries and Affiliates |
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Bay State
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Bay State Gas Company |
Capital Markets
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NiSource Capital Markets, Inc. |
CER
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Columbia Energy Resources, Inc. |
CNR
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Columbia Natural Resources, Inc. |
Columbia
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Columbia Energy Group |
Columbia Deep Water
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Columbia Deep Water Service Company |
Columbia Energy Services
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Columbia Energy Services Corporation |
Columbia Gulf
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Columbia Gulf Transmission Company |
Columbia of Kentucky
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Columbia Gas of Kentucky, Inc. |
Columbia of Maryland
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Columbia Gas of Maryland, Inc. |
Columbia of Ohio
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Columbia Gas of Ohio, Inc. |
Columbia of Pennsylvania
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Columbia Gas of Pennsylvania, Inc. |
Columbia of Virginia
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Columbia Gas of Virginia, Inc. |
Columbia Transmission
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Columbia Gas Transmission Corporation |
CORC
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Columbia of Ohio Receivables Corporation |
Crossroads Pipeline
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Crossroads Pipeline Company |
Granite State Gas
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Granite State Gas Transmission, Inc. |
Hardy Storage
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Hardy Storage Company, L.L.C. |
Kokomo Gas
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Kokomo Gas and Fuel Company |
Lake Erie Land
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Lake Erie Land Company |
Millennium
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Millennium Pipeline Company, L.P. |
NDC Douglas Properties
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NDC Douglas Properties, Inc. |
NiSource
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NiSource Inc. |
NiSource Corporate Services
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NiSource Corporate Services Company |
NiSource Development Company
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NiSource Development Company, Inc. |
NiSource Finance
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NiSource Finance Corp. |
Northern Indiana
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Northern Indiana Public Service Company |
Northern Indiana Fuel and Light
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Northern Indiana Fuel and Light Company |
Northern Utilities
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Northern Utilities, Inc. |
NRC
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NIPSCO Receivables Corporation |
PEI
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PEI Holdings, Inc. |
TPC
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EnergyUSA-TPC Corp. |
Whiting Clean Energy
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Whiting Clean Energy, Inc. |
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Abbreviations |
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AFUDC
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Allowance for funds used during construction |
Algonquin
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Algonquin Gas Transmission Co. |
ANPR
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Advance Notice of Proposed Rulemaking |
AOC
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Administrative Order by Consent |
ARRs
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Auction Revenue Rights |
ASM
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Ancillary Services Market |
BBA
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British Banker Association |
Bcf
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Billion cubic feet |
BPAE
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BP Alternative Energy North America Inc |
CAA
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Clean Air Act |
CAIR
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Clean Air Interstate Rule |
CAMR
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Clean Air Mercury Rule |
CCGT
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Combined Cycle Gas Turbine |
CERCLA
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Comprehensive Environmental Response Compensation and Liability Act (Also known as Superfund) |
CPCN
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Certificate of Public Convenience and Necessity |
3
DEFINED TERMS (continued)
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Day 2
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Began April 1, 2005 and refers to the operational control of the energy markets by MISO, including the
dispatching of wholesale electricity and generation, managing transmission constraints, and managing the
day-ahead, real-time and financial transmission rights markets |
DPU
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Massachusetts Department of Public Utilities |
DSM
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Demand Side Management |
Dth
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dekatherms |
ECR
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Environmental Cost Recovery |
ECRM
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Environmental Cost Recovery Mechanism |
ECT
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Environmental cost tracker |
EER
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Environmental Expense Recovery |
EERM
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Environmental Expense Recovery Mechanism |
EITF Issue No. 02-3
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EITF Issue No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes
and Contracts Involved in Energy Trading and Risk Management Activities |
Empire
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Empire State Pipeline |
EPA
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United States Environmental Protection Agency |
EPS
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Earnings per share |
FAC
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Fuel adjustment clause |
FASB
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Financial Accounting Standards Board |
FERC
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Federal Energy Regulatory Commission |
FIN 47
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FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations |
FIN 48
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FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109 |
FIP
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Federal Implementation Plan |
FSP
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FASB Staff Position |
FSP FAS 157-2
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FASB Staff Position FAS 157-2: Effective Date of FASB Statement No. 157 |
FSP FIN 39-1
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FASB Staff Position FIN 39-1: Amendment of FASB Interpretation No. 39 |
FTRs
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Financial Transmission Rights |
GAAP
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Generally Accepted Accounting Principles |
gwh
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Gigawatt hours |
IBM
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International Business Machines Corp. |
IBM Agreement
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The Agreement for Business Process & Support Services |
IDEM
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Indiana Department of Environmental Management |
Iroquois
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Iroquois Gas Transmission System LP |
IRP
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Integrated Resource Plan |
IURC
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Indiana Utility Regulatory Commission |
LDCs
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Local distribution companies |
LIBOR
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London InterBank Offered Rate |
LIFO
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Last-in, first out |
MGP
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Manufactured gas plant |
MISO
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Midwest Independent Transmission System Operator |
MMDth
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Million dekatherms |
mw
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Megawatts |
NAAQS
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National Ambient Air Quality Standards |
NOV
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Notice of Violation |
NOx
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Nitrogen oxides |
NPDES
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National Pollutant Discharge Elimination System |
NYMEX
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New York Mercantile Exchange |
OUCC
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Indiana Office of Utility Consumer Counselor |
PCB
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Polychlorinated biphenyls |
Piedmont
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Piedmont Natural Gas Company, Inc. |
PPS
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Price Protection Service |
PUCO
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Public Utilities Commission of Ohio |
4
DEFINED TERMS (continued)
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RCRA
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Resource Conservation and Recovery Act |
SAB No. 92
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Staff Accounting Bulletin No. 92, Accounting and Disclosures Relating to Loss Contingencies |
SEC
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Securities and Exchange Commission |
SFAS No. 5
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Statement of Financial Accounting Standards No. 5, Accounting for Contingencies |
SFAS No. 71
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Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of
Regulation |
SFAS No. 123R
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Statement of Financial Accounting Standards No. 123R, Share-Based Payment |
SFAS No. 133
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Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended |
SFAS No. 140
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Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities a replacement of FASB Statement 125 |
SFAS No. 141R
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Statement of Financial Accounting Standards No. 141R, Business Combinations |
SFAS No. 143
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Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations |
SFAS No. 157
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Statement of Financial Accounting Standards No. 157, Fair Value Measurements |
SFAS No. 158
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Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans |
SFAS No. 159
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Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115 |
SFAS No. 160
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Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51 |
SFAS No. 161
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Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging an amendment of SFAS No. 133 |
SIP
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State Implementation Plan |
SO2
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Sulfur dioxide |
SOP 96-1
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Statement of Position 96-1, Environmental Remediation Liabilities |
VaR
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Value-at-risk and instrument sensitivity to market factors |
VADEQ
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Virginia Department of Environmental Quality |
5
PART I
ITEM 1. FINANCIAL STATEMENTS
NiSource Inc.
Condensed Statements of Consolidated Income (Loss) (unaudited)
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Three Months |
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Six Months |
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Ended June 30, |
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Ended June 30, |
(in millions, except per share amounts) |
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2008 |
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2007 |
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2008 |
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2007 |
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Net Revenues |
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Gas Distribution |
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$ |
923.8 |
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$ |
752.5 |
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$ |
3,153.5 |
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$ |
2,596.8 |
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Gas Transportation and Storage |
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235.6 |
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228.5 |
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592.8 |
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572.8 |
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Electric |
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339.8 |
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333.5 |
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671.6 |
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659.5 |
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Other |
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292.9 |
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252.4 |
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663.9 |
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582.5 |
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Gross Revenues |
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1,792.1 |
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1,566.9 |
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5,081.8 |
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4,411.6 |
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Cost of Sales (excluding depreciation and amortization) |
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1,121.8 |
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889.2 |
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3,370.3 |
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2,691.3 |
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Total Net Revenues |
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670.3 |
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677.7 |
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1,711.5 |
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1,720.3 |
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Operating Expenses |
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Operation and maintenance |
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345.2 |
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333.9 |
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755.9 |
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710.0 |
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Depreciation and amortization |
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147.7 |
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133.5 |
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283.3 |
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267.8 |
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Impairment and (gain) loss on sale of assets |
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(0.9 |
) |
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6.3 |
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(2.4 |
) |
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9.2 |
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Other taxes |
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63.3 |
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63.8 |
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166.9 |
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164.2 |
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Total Operating Expenses |
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555.3 |
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537.5 |
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1,203.7 |
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1,151.2 |
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Equity Earnings in Unconsolidated Affiliates |
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1.6 |
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3.7 |
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3.6 |
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5.2 |
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Operating Income |
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116.6 |
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143.9 |
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511.4 |
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574.3 |
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Other Income (Deductions) |
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Interest expense, net |
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(87.4 |
) |
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(98.4 |
) |
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(179.2 |
) |
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(197.5 |
) |
Other, net |
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1.3 |
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(0.1 |
) |
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(0.2 |
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(3.0 |
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Total Other Income (Deductions) |
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(86.1 |
) |
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(98.5 |
) |
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(179.4 |
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(200.5 |
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Income From Continuing Operations Before Income Taxes |
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30.5 |
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45.4 |
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332.0 |
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373.8 |
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Income Taxes |
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9.5 |
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16.5 |
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121.6 |
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138.4 |
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Income from Continuing Operations |
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21.0 |
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28.9 |
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210.4 |
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235.4 |
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Income (Loss) from Discontinued Operations net of taxes |
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(220.5 |
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(1.4 |
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(214.5 |
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2.2 |
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Gain (Loss) on Disposition of Discontinued Operations net of taxes |
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(2.8 |
) |
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(0.8 |
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(98.9 |
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5.8 |
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Net Income (Loss) |
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$ |
(202.3 |
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$ |
26.7 |
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$ |
(103.0 |
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$ |
243.4 |
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Basic Earnings Per Share ($) |
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Continuing operations |
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$ |
0.08 |
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$ |
0.11 |
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$ |
0.77 |
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$ |
0.86 |
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Discontinued operations |
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(0.82 |
) |
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(0.01 |
) |
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(1.15 |
) |
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|
0.03 |
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Basic Earnings Per Share |
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$ |
(0.74 |
) |
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$ |
0.10 |
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$ |
(0.38 |
) |
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$ |
0.89 |
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Diluted Earnings Per Share ($) |
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Continuing operations |
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$ |
0.08 |
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$ |
0.11 |
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$ |
0.77 |
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$ |
0.86 |
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Discontinued operations |
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(0.81 |
) |
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(0.01 |
) |
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(1.14 |
) |
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0.03 |
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Diluted Earnings Per Share |
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$ |
(0.73 |
) |
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$ |
0.10 |
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$ |
(0.37 |
) |
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$ |
0.89 |
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Dividends Declared Per Common Share |
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$ |
0.23 |
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$ |
0.23 |
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$ |
0.69 |
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$ |
0.69 |
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Basic Average Common Shares Outstanding (millions) |
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274.0 |
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273.8 |
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273.9 |
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273.7 |
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Diluted Average Common Shares (millions) |
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275.4 |
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274.9 |
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275.4 |
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|
274.8 |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these
unaudited statements.
6
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Condensed Consolidated Balance Sheets (unaudited)
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June 30, |
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December 31, |
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(in millions) |
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2008 |
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2007 |
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ASSETS |
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Property, Plant and Equipment |
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Utility Plant |
|
$ |
18,040.9 |
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$ |
17,295.6 |
|
Accumulated depreciation and amortization |
|
|
(7,982.5 |
) |
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|
(7,787.0 |
) |
|
Net utility plant |
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|
10,058.4 |
|
|
|
9,508.6 |
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Other property, at cost, less accumulated depreciation |
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67.7 |
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|
67.3 |
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Net Property, Plant and Equipment |
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10,126.1 |
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|
9,575.9 |
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Investments and Other Assets |
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Assets of discontinued operations and assets held for sale |
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299.2 |
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593.2 |
|
Unconsolidated affiliates |
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76.0 |
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72.7 |
|
Other investments |
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110.8 |
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117.2 |
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Total Investments and Other Assets |
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486.0 |
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|
783.1 |
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Current Assets |
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Cash and cash equivalents |
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45.9 |
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34.6 |
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Restricted cash |
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1.3 |
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|
57.7 |
|
Accounts receivable (less reserve of $43.2 and $37.0, respectively) |
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|
737.0 |
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|
900.6 |
|
Gas inventory |
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|
270.1 |
|
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|
452.2 |
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Underrecovered gas and fuel costs |
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344.5 |
|
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158.3 |
|
Materials and supplies, at average cost |
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82.1 |
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78.1 |
|
Electric production fuel, at average cost |
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48.3 |
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58.1 |
|
Price risk management assets |
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248.4 |
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102.2 |
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Exchange gas receivable |
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464.2 |
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210.5 |
|
Regulatory assets |
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200.3 |
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215.4 |
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Assets of discontinued operations and assets held for sale |
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64.4 |
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85.0 |
|
Prepayments and other |
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173.9 |
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|
107.3 |
|
|
Total Current Assets |
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|
2,680.4 |
|
|
|
2,460.0 |
|
|
|
|
|
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|
|
|
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Other Assets |
|
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|
|
|
|
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Price risk management assets |
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|
131.8 |
|
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|
25.2 |
|
Regulatory assets |
|
|
885.5 |
|
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|
867.5 |
|
Goodwill |
|
|
3,677.3 |
|
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|
3,677.3 |
|
Intangible assets |
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|
336.1 |
|
|
|
341.6 |
|
Postretirement and postemployment benefits assets |
|
|
178.8 |
|
|
|
157.8 |
|
Deferred charges and other |
|
|
114.2 |
|
|
|
121.5 |
|
|
Total Other Assets |
|
|
5,323.7 |
|
|
|
5,190.9 |
|
|
Total Assets |
|
$ |
18,616.2 |
|
|
$ |
18,009.9 |
|
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these
unaudited statements.
7
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Condensed Consolidated Balance Sheets (unaudited) (continued)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(in millions, except share amounts) |
|
2008 |
|
|
2007 |
|
|
CAPITALIZATION AND LIABILITIES |
|
|
|
|
|
|
|
|
Capitalization |
|
|
|
|
|
|
|
|
Common Stockholders Equity |
|
|
|
|
|
|
|
|
Common stock $0.01 par value, 400,000,000 shares authorized;
274,216,784 |
|
|
|
|
|
|
|
|
and 274,176,752 shares issued and outstanding, respectively |
|
$ |
2.7 |
|
|
$ |
2.7 |
|
Additional paid-in capital |
|
|
4,015.4 |
|
|
|
4,011.0 |
|
Retained earnings |
|
|
782.2 |
|
|
|
1,074.5 |
|
Accumulated other comprehensive income |
|
|
34.0 |
|
|
|
11.7 |
|
Treasury stock |
|
|
(23.4 |
) |
|
|
(23.3 |
) |
|
Total Common Stockholders Equity |
|
|
4,810.9 |
|
|
|
5,076.6 |
|
Long-term debt, excluding amounts due within one year |
|
|
6,059.9 |
|
|
|
5,594.4 |
|
|
Total Capitalization |
|
|
10,870.8 |
|
|
|
10,671.0 |
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
|
43.1 |
|
|
|
33.9 |
|
Short-term borrowings |
|
|
506.0 |
|
|
|
1,061.0 |
|
Accounts payable |
|
|
665.2 |
|
|
|
713.0 |
|
Dividends declared |
|
|
63.1 |
|
|
|
|
|
Customer deposits |
|
|
112.4 |
|
|
|
112.8 |
|
Taxes accrued |
|
|
223.7 |
|
|
|
188.4 |
|
Interest accrued |
|
|
99.9 |
|
|
|
99.3 |
|
Overrecovered gas and fuel costs |
|
|
0.7 |
|
|
|
10.4 |
|
Price risk management liabilities |
|
|
117.4 |
|
|
|
79.9 |
|
Exchange gas payable |
|
|
687.0 |
|
|
|
441.6 |
|
Deferred revenue |
|
|
14.1 |
|
|
|
38.7 |
|
Regulatory liabilities |
|
|
113.1 |
|
|
|
87.8 |
|
Accrued liability for postretirement and postemployment benefits |
|
|
4.9 |
|
|
|
4.8 |
|
Liabilities of discontinued operations and liabilities held for sale |
|
|
57.2 |
|
|
|
20.1 |
|
Temporary LIFO liquidation credit |
|
|
174.8 |
|
|
|
|
|
Legal and environmental reserves |
|
|
452.2 |
|
|
|
112.3 |
|
Other accruals |
|
|
314.0 |
|
|
|
393.6 |
|
|
Total Current Liabilities |
|
|
3,648.8 |
|
|
|
3,397.6 |
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities and Deferred Credits |
|
|
|
|
|
|
|
|
Price risk management liabilities |
|
|
55.6 |
|
|
|
1.7 |
|
Deferred income taxes |
|
|
1,522.2 |
|
|
|
1,466.2 |
|
Deferred investment tax credits |
|
|
49.8 |
|
|
|
53.4 |
|
Deferred credits |
|
|
85.5 |
|
|
|
81.3 |
|
Deferred revenue |
|
|
0.2 |
|
|
|
0.2 |
|
Accrued liability for postretirement and postemployment benefits |
|
|
553.1 |
|
|
|
547.8 |
|
Liabilities of discontinued operations and liabilities held for sale |
|
|
86.9 |
|
|
|
141.3 |
|
Regulatory liabilities and other removal costs |
|
|
1,427.3 |
|
|
|
1,337.7 |
|
Asset retirement obligations |
|
|
128.2 |
|
|
|
128.2 |
|
Other noncurrent liabilities |
|
|
187.8 |
|
|
|
183.5 |
|
|
Total Other Liabilities and Deferred Credits |
|
|
4,096.6 |
|
|
|
3,941.3 |
|
|
Commitments
and Contingencies (Refer to Note 17) |
|
|
|
|
|
|
|
|
|
Total Capitalization and Liabilities |
|
$ |
18,616.2 |
|
|
$ |
18,009.9 |
|
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these
unaudited statements.
8
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Condensed Statements of Consolidated Cash Flows (unaudited)
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, (in millions) |
|
2008 |
|
|
2007 |
|
|
Operating Activities |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(103.0 |
) |
|
$ |
243.4 |
|
Adjustments to reconcile net income to net cash from continuing operations: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
283.3 |
|
|
|
267.8 |
|
Net changes in price risk management assets and liabilities |
|
|
19.1 |
|
|
|
(1.3 |
) |
Deferred income taxes and investment tax credits |
|
|
52.1 |
|
|
|
(17.7 |
) |
Deferred revenue |
|
|
(24.6 |
) |
|
|
(22.4 |
) |
Stock compensation expense |
|
|
4.5 |
|
|
|
1.3 |
|
Gain on sale of assets |
|
|
(4.0 |
) |
|
|
(0.5 |
) |
Loss on impairment of assets |
|
|
1.6 |
|
|
|
9.7 |
|
Income from unconsolidated affiliates |
|
|
(1.1 |
) |
|
|
(7.7 |
) |
(Gain) loss on disposition of discontinued operations net of taxes |
|
|
98.9 |
|
|
|
(5.8 |
) |
(Income) loss from discontinued operations net of taxes |
|
|
214.5 |
|
|
|
(2.2 |
) |
Amortization of discount/premium on debt |
|
|
3.7 |
|
|
|
3.6 |
|
AFUDC Equity |
|
|
(4.1 |
) |
|
|
(1.9 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
223.9 |
|
|
|
168.7 |
|
Inventories |
|
|
361.9 |
|
|
|
286.4 |
|
Accounts payable |
|
|
(73.7 |
) |
|
|
(138.9 |
) |
Customer deposits |
|
|
(0.5 |
) |
|
|
|
|
Taxes accrued |
|
|
12.9 |
|
|
|
33.8 |
|
Interest accrued |
|
|
0.6 |
|
|
|
(5.1 |
) |
(Under) Overrecovered gas and fuel costs |
|
|
(195.9 |
) |
|
|
(59.0 |
) |
Exchange gas receivable/payable |
|
|
7.6 |
|
|
|
(45.1 |
) |
Other accruals |
|
|
(149.4 |
) |
|
|
(140.4 |
) |
Prepayments and other current assets |
|
|
2.8 |
|
|
|
50.9 |
|
Regulatory assets/liabilities |
|
|
(53.7 |
) |
|
|
14.5 |
|
Postretirement and postemployment benefits |
|
|
5.0 |
|
|
|
(51.7 |
) |
Deferred credits |
|
|
1.7 |
|
|
|
(3.6 |
) |
Deferred charges and other noncurrent assets |
|
|
(13.2 |
) |
|
|
5.0 |
|
Other noncurrent liabilities |
|
|
(30.6 |
) |
|
|
|
|
|
Net Operating Activities from Continuing Operations |
|
|
640.3 |
|
|
|
581.8 |
|
Net Operating Activities from or (used for) Discontinued Operations |
|
|
(1.9 |
) |
|
|
6.1 |
|
|
Net Cash Flows from Operating Activities |
|
|
638.4 |
|
|
|
587.9 |
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(422.8 |
) |
|
|
(323.9 |
) |
Sugar Creek purchase |
|
|
(329.7 |
) |
|
|
|
|
Proceeds from disposition of assets |
|
|
229.6 |
|
|
|
2.3 |
|
Restricted cash |
|
|
136.5 |
|
|
|
73.5 |
|
Other investing activities |
|
|
(2.1 |
) |
|
|
(9.0 |
) |
|
Net Investing Activities used for Continuing Operations |
|
|
(388.5 |
) |
|
|
(257.1 |
) |
Net Investing Activities from or (used for)
Discontinued Operations |
|
|
0.9 |
|
|
|
(5.7 |
) |
|
Net Cash Flows used for Investing Activities |
|
|
(387.6 |
) |
|
|
(262.8 |
) |
|
Financing Activities |
|
|
|
|
|
|
|
|
Issuance of long-term debt |
|
|
706.0 |
|
|
|
2.3 |
|
Retirement of long-term debt |
|
|
(12.0 |
) |
|
|
(45.6 |
) |
Repurchase of long-term debt |
|
|
(254.0 |
) |
|
|
|
|
Change in short-term debt |
|
|
(555.0 |
) |
|
|
(171.5 |
) |
Issuance of common stock |
|
|
0.8 |
|
|
|
7.7 |
|
Acquisition of treasury stock |
|
|
(0.2 |
) |
|
|
(2.1 |
) |
Dividends paid common stock |
|
|
(126.1 |
) |
|
|
(126.0 |
) |
|
Net Cash Flows used for Financing Activities |
|
|
(240.5 |
) |
|
|
(335.2 |
) |
|
Increase (decrease) in cash and cash equivalents |
|
|
10.3 |
|
|
|
(10.1 |
) |
Cash inflows from discontinued operations |
|
|
1.0 |
|
|
|
0.1 |
|
Cash and cash equivalents at beginning of period |
|
|
34.6 |
|
|
|
32.8 |
|
|
Cash and cash equivalents at end of period |
|
$ |
45.9 |
|
|
$ |
22.8 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
188.0 |
|
|
$ |
219.1 |
|
Interest capitalized |
|
|
12.4 |
|
|
|
7.7 |
|
Cash paid for income taxes |
|
|
38.3 |
|
|
|
86.8 |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these
unaudited statements.
9
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
1. Basis of Accounting Presentation
The accompanying unaudited condensed consolidated financial statements for NiSource reflect all
normal recurring adjustments that are necessary, in the opinion of management, to present fairly
the results of operations in accordance with GAAP in the United States of America.
The accompanying financial statements should be read in conjunction with the consolidated financial
statements and notes thereto included in NiSources Annual Report on Form 10-K for the fiscal year
ended December 31, 2007. Income for interim periods may not be indicative of results for the
calendar year due to weather variations and other factors.
The following unaudited condensed consolidated financial statements have been prepared pursuant to
the rules and regulations of the SEC. Certain information and note disclosures normally included
in annual financial statements prepared in accordance with GAAP have been condensed or omitted
pursuant to those rules and regulations, although NiSource believes that the disclosures made are
adequate to make the information not misleading.
2. Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
SFAS No. 157 Fair Value Measurements. In September 2006, the FASB issued SFAS No. 157 to define
fair value, establish a framework for measuring fair value and to expand disclosures about fair
value measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS No. 157 does not change the requirements to apply
fair value in existing accounting standards.
Under SFAS No. 157, fair value refers to the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants in the market in
which the reporting entity transacts. The standard clarifies that fair value should be based on
the assumptions market participants would use when pricing the asset or liability.
To increase consistency and comparability in fair value measurements, SFAS No. 157 establishes a
fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value
into three levels. The level in the fair value hierarchy disclosed is based on the lowest level of
input that is significant to the fair value measurement. The three levels of the fair value
hierarchy defined by SFAS No. 157 are as follows:
|
|
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical asset or
liabilities that the company has the ability to access as of the reporting date. |
|
|
|
|
Level 2 inputs are inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly through corroboration
with observable market data. |
|
|
|
|
Level 3 inputs are unobservable inputs, such as internally developed pricing models for
the asset or liability due to little or no market activity for the asset or liability. |
SFAS No. 157 became effective for NiSource as of January 1, 2008. The provisions of SFAS No. 157
are to be applied prospectively, except for the initial impact on the following three items, which
are required to be recorded as an adjustment to the opening balance of retained earnings in the
year of adoption: (1) changes in fair value measurements of existing derivative financial
instruments measured initially using the transaction price under EITF Issue No. 02-3, (2) existing
hybrid financial instruments measured initially at fair value using the transaction price and (3)
blockage factor discounts. The adoption of SFAS No. 157 did not have an impact on NiSources
January 1, 2008 balance of retained earnings and is not anticipated to have a material impact
prospectively.
10
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
In February 2008, the FASB issued FSP FAS 157-2, which delays the effective date of SFAS No. 157
for all nonrecurring fair value measurements of non-financial assets and liabilities until fiscal
years beginning after November 15, 2008. NiSource has elected to defer the adoption of the
nonrecurring fair value measurement disclosures of non-financial assets and liabilities.
See Note 11, Fair Value of Financial Assets and Liabilities, in the Notes to Condensed
Consolidated Financial Statements for additional information regarding the adoption of SFAS No.
157.
SFAS No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans.
In September 2006, the FASB issued SFAS No. 158 to improve existing reporting for defined benefit
postretirement plans by requiring employers to recognize in the statement of financial position the
overfunded or underfunded status of a defined benefit postretirement plan, among other changes.
In the fourth quarter of 2006, NiSource adopted the provisions of SFAS No. 158. Based on the
measurement of the various defined benefit pension and other postretirement plans assets and
benefit obligations at September 30, 2006, the pretax impact of adopting SFAS No. 158 decreased
intangible assets by $46.5 million, decreased deferred charges and other assets by $1.1 million,
increased regulatory assets by $538.8 million, increased accumulated other comprehensive income by
$239.8 million and increased accrued liabilities for postretirement and postemployment benefits by
$251.4 million. In addition, NiSource recorded a reduction in deferred income taxes of
approximately $96 million. With the adoption of SFAS No. 158 NiSource determined that for certain
rate-regulated subsidiaries the future recovery of pension and other postretirement plans costs is
probable in accordance with the requirements of SFAS No. 71. These rate-regulated subsidiaries
recorded regulatory assets and liabilities that would otherwise have been recorded to accumulated
other comprehensive income.
On January 1, 2007, NiSource adopted the SFAS No. 158 measurement date provisions requiring
employers to measure plan assets and benefit obligations as of the fiscal year-end. The pre-tax
impact of adopting the SFAS No. 158 measurement date provisions increased deferred charges and
other assets by $9.4 million, decreased regulatory assets by $89.6 million, decreased retained
earnings by $11.3 million, increased accumulated other comprehensive income by $5.3 million and
decreased accrued liabilities for postretirement and postemployment benefits by $74.2 million.
NiSource also recorded a reduction in deferred income taxes of approximately $2.6 million. In
addition, 2007 expense for pension and postretirement benefits reflects the updated measurement
date valuations. Refer to Note 14, Pension and Other Postretirement Benefits, in the Notes to
Condensed Consolidated Financial Statements for additional information.
SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities Including an
amendment of FASB Statement No. 115. In February 2007, the FASB issued SFAS No. 159 which permits
entities to choose to measure certain financial instruments at fair value that are not currently
required to be measured at fair value. Upon adoption, a cumulative adjustment would be made to
beginning retained earnings for the initial fair value option remeasurement. Subsequent unrealized
gains and losses for fair value option items will be reported in earnings. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007 and should not be applied
retrospectively, except as permitted for certain conditions for early adoption. NiSource has
chosen not to elect to measure any applicable financial assets or liabilities at fair value
pursuant to this standard when SFAS No. 159 was adopted on January 1, 2008.
FSP FIN 39-1 FASB Staff Position Amendment of FASB Interpretation No. 39. In April 2007, the
FASB posted FSP FIN 39-1 to amend paragraph 3 of FIN 39 to replace the terms conditional contracts
and exchange contracts with the term derivative instruments as defined in SFAS No. 133. This FSP
also amends paragraph 10 of FIN 39 to permit a reporting entity to offset fair value amounts
recognized for the right to reclaim cash collateral or the obligation to return cash collateral
against fair value amounts recognized for derivative instruments executed with the same
counterparty under a master netting arrangement. This FSP became effective for NiSource as of
January 1, 2008. NiSource has not elected to net fair value amounts for its derivative instruments
or the fair value amounts recognized for its right to receive cash collateral or obligation to pay
cash collateral arising from those derivative instruments recognized at fair value, which are
executed with the same counterparty under a master netting arrangement. This is consistent with
NiSources current accounting policy prior to the adoption of this amended standard. NiSource
discloses amounts recognized for the right to reclaim cash collateral within Restricted
11
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
cash and amounts recognized for the right to return cash collateral within current liabilities on
the Consolidated Balance Sheets.
FIN 48 Accounting for Uncertainty in Income Taxes. In June 2006, the FASB issued FIN 48 to
reduce the diversity in practice associated with certain aspects of the recognition and measurement
requirements related to accounting for income taxes. Specifically, this interpretation requires
that a tax position meet a more-likely-than-not recognition threshold for the benefit of an
uncertain tax position to be recognized in the financial statements and requires that benefit to be
measured at the largest amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement. The determination of whether a tax position meets the more-likely-than-not
recognition threshold is based on whether it is probable of being sustained on audit by the
appropriate taxing authorities, based solely on the technical merits of the position.
Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006.
On January 1, 2007, NiSource adopted the provisions of FIN 48. As a result of the implementation
of FIN 48, NiSource recognized a charge of $0.8 million to the opening balance of retained
earnings. Refer to Note 13, Income Taxes, in the Notes to Condensed Consolidated Financial
Statements for additional information.
Recently Issued Accounting Pronouncements
SFAS No. 161 Disclosures about Derivative Instruments and Hedging an amendment of SFAS No. 133.
In March 2008, the FASB issued SFAS No. 161 to amend and expand the disclosure requirements of
SFAS No. 133 with the intent to provide users of the financial statement with an enhanced
understanding of how and why an entity uses derivative instruments, how these derivatives are
accounted for and how the respective reporting entitys financial statements are affected. SFAS
No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008, and
earlier application is encouraged. NiSource is currently reviewing the provisions of SFAS No. 161
to determine the impact it may have on its disclosures within the Notes to Condensed Consolidated
Financial Statements.
SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB
No. 51. In December 2007, the FASB issued SFAS No. 160 to improve the relevance, comparability,
and transparency of the financial information that a reporting entity provides in its consolidated
financial statements regarding non-controlling ownership interests in a business and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008 and earlier adoption is
prohibited. NiSource is currently reviewing the provisions of SFAS No. 160 to determine the impact
it may have on the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated
Financial Statements.
SFAS No. 141R Business Combinations. In December 2007, the FASB issued SFAS No. 141R to improve
the relevance, representational faithfulness, and comparability of information that a reporting
entity provides in its financial reports regarding business combinations and its effects, including
recognition of assets and liabilities, the measurement of goodwill and required disclosures. SFAS
No. 141R is effective for fiscal years, and interim periods within those fiscal years, beginning on
or after December 15, 2008 and earlier adoption is prohibited. NiSource is currently reviewing the
provisions of SFAS No. 141R to determine the impact on future business combinations.
12
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
3. Earnings Per Share
Basic EPS is computed by dividing income available to common stockholders by the weighted-average
number of shares of common stock outstanding for the period. The weighted average shares
outstanding for diluted EPS include the incremental effects of the various long-term incentive
compensation plans. The numerator in calculating both basic and diluted EPS for each period is
reported net income. The computation of diluted average common shares follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic average common shares outstanding |
|
|
273,973 |
|
|
|
273,817 |
|
|
|
273,947 |
|
|
|
273,706 |
|
Dilutive potential common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified stock options |
|
|
|
|
|
|
301 |
|
|
|
|
|
|
|
337 |
|
Shares contingently issuable under employee
stock plans |
|
|
1,230 |
|
|
|
626 |
|
|
|
1,230 |
|
|
|
626 |
|
Shares restricted under employee stock plans |
|
|
192 |
|
|
|
174 |
|
|
|
180 |
|
|
|
168 |
|
|
Diluted Average Common Shares |
|
|
275,395 |
|
|
|
274,918 |
|
|
|
275,357 |
|
|
|
274,837 |
|
|
4. Restructuring Activities
In the fourth quarter of 2005, NiSource announced a plan to reduce its executive ranks by
approximately 15% to 20% of the top-level executive group. In part, this reduction came through
anticipated attrition and consolidation of certain positions. Fourteen employees were terminated
as a result of the executive initiative.
In previous years, NiSource implemented restructuring initiatives to streamline its operations and
realize efficiencies as a result of the acquisition of Columbia. As of June 30, 2008, 1,567
employees were terminated. Of the $0.8 million remaining restructuring liability from the Columbia
merger and related initiatives, $0.6 million is related to facility exit costs.
Restructuring reserve by restructuring initiative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
(in millions) |
|
December 31, 2007 |
|
|
Benefits Paid |
|
|
Adjustments |
|
|
June 30, 2008 |
|
|
Executive initiative |
|
$ |
0.6 |
|
|
$ |
(0.6 |
) |
|
$ |
|
|
|
$ |
|
|
Columbia merger and
related initiatives |
|
|
2.2 |
|
|
|
(1.4 |
) |
|
|
|
|
|
|
0.8 |
|
|
Total |
|
$ |
2.8 |
|
|
$ |
(2.0 |
) |
|
$ |
|
|
|
$ |
0.8 |
|
|
5. Gas in Storage
Gas Distribution Operations price storage injections at the average of the costs of natural gas
supply purchased during the year. For interim periods, the difference between current projected
replacement cost and the LIFO cost for quantities of gas temporarily withdrawn from storage is
recorded as a temporary LIFO liquidation credit within the Condensed Consolidated Balance Sheets.
Due to seasonality requirements, NiSource expects interim reductions in LIFO layers to be
replenished by year-end. Changes between the temporary LIFO liquidation credit and gas inventory
in the amounts of $174.8 million and $11.8 million during the first six months of 2008 and 2007,
respectively, are considered non-cash activity for the Condensed Statements of Consolidated Cash
Flow.
13
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
6. Discontinued Operations and Assets Held for Sale
The assets and liabilities of discontinued operations and held for sale on the Condensed
Consolidated Balance Sheet at June 30, 2008 were:
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant |
|
|
|
|
|
Materials and |
|
|
|
|
|
|
|
|
Assets of discontinued |
|
and equipment, |
|
Accounts |
|
supplies, at |
|
Regulatory |
|
Intangible |
|
Other |
|
|
operations and held for sale: |
|
net |
|
receivable, net |
|
average cost |
|
assets |
|
assets |
|
assets |
|
Total |
|
Northern Utilities |
|
$ |
174.3 |
|
|
$ |
27.1 |
|
|
$ |
1.5 |
|
|
$ |
16.2 |
|
|
$ |
41.8 |
|
|
$ |
23.5 |
|
|
$ |
284.4 |
|
Granite State Gas |
|
|
15.2 |
|
|
|
0.3 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
10.5 |
|
|
|
26.1 |
|
Bay State |
|
|
20.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.1 |
|
Lake Erie Land |
|
|
12.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.5 |
|
NiSource Corporate
Services |
|
|
7.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.9 |
|
NDC Douglas Properties |
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9 |
|
|
|
6.0 |
|
Columbia Transmission |
|
|
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.2 |
|
Columbia of Ohio |
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.2 |
|
Northern Indiana |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
Total |
|
$ |
241.7 |
|
|
$ |
27.4 |
|
|
$ |
1.5 |
|
|
$ |
16.3 |
|
|
$ |
41.8 |
|
|
$ |
34.9 |
|
|
$ |
363.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued |
|
|
|
|
|
Accounts |
|
Deferred |
|
Deferred |
|
Regulatory |
|
Other |
|
|
operations and held for sale: |
|
Debt |
|
payable |
|
income taxes |
|
credits |
|
liabilities |
|
liabilities |
|
Total |
|
Northern Utilities |
|
$ |
|
|
|
$ |
12.3 |
|
|
$ |
58.3 |
|
|
$ |
0.1 |
|
|
$ |
23.9 |
|
|
$ |
27.2 |
|
|
$ |
121.8 |
|
Granite State Gas |
|
|
|
|
|
|
0.4 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
10.5 |
|
|
|
16.0 |
|
NDC Douglas Properties |
|
|
5.8 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
6.3 |
|
|
Total |
|
$ |
5.8 |
|
|
$ |
12.8 |
|
|
$ |
63.4 |
|
|
$ |
0.1 |
|
|
$ |
23.9 |
|
|
$ |
38.1 |
|
|
$ |
144.1 |
|
|
14
ITEM 1. FINANCIAL
STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
The assets and liabilities of discontinued operations and held for sale on the Consolidated Balance
Sheet at December 31, 2007 including reclassifications of balances for entities discontinued during
2008, were:
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant |
|
|
|
|
|
Materials and |
|
|
|
|
|
|
|
|
Assets of discontinued operations |
|
and equipment, |
|
Accounts |
|
supplies, at |
|
Regulatory |
|
Intangible |
|
Other |
|
|
and held for sale: |
|
net |
|
receivable, net |
|
average cost |
|
assets |
|
assets |
|
assets |
|
Total |
|
Northern Utilities |
|
$ |
168.8 |
|
|
$ |
27.2 |
|
|
$ |
1.4 |
|
|
$ |
16.1 |
|
|
$ |
72.4 |
|
|
$ |
22.0 |
|
|
$ |
307.9 |
|
Whiting Clean Energy |
|
|
269.9 |
|
|
|
12.7 |
|
|
|
8.9 |
|
|
|
|
|
|
|
|
|
|
|
11.8 |
|
|
|
303.3 |
|
Granite State Gas |
|
|
17.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
0.1 |
|
|
|
8.1 |
|
|
|
0.2 |
|
|
|
25.8 |
|
Lake Erie Land |
|
|
12.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.6 |
|
NiSource Corporate
Services |
|
|
9.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.5 |
|
Columbia Transmission |
|
|
8.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.0 |
|
NDC Douglas Properties |
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9 |
|
|
|
6.1 |
|
Columbia Gulf
Transmission |
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.8 |
|
Northern Indiana |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
Total |
|
$ |
496.2 |
|
|
$ |
40.1 |
|
|
$ |
10.3 |
|
|
$ |
16.2 |
|
|
$ |
80.5 |
|
|
$ |
34.9 |
|
|
$ |
678.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued |
|
|
|
|
|
Accounts |
|
Deferred |
|
Deferred |
|
Regulatory |
|
Other |
|
|
operations and held for sale: |
|
Debt |
|
payable |
|
income taxes |
|
credits |
|
liabilities |
|
liabilities |
|
Total |
|
Northern Utilities |
|
$ |
|
|
|
$ |
9.9 |
|
|
$ |
56.0 |
|
|
$ |
0.1 |
|
|
$ |
17.3 |
|
|
$ |
10.2 |
|
|
$ |
93.5 |
|
Whiting Clean Energy |
|
|
|
|
|
|
1.1 |
|
|
|
36.0 |
|
|
|
17.0 |
|
|
|
|
|
|
|
1.9 |
|
|
|
56.0 |
|
NDC Douglas Properties |
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.7 |
|
|
|
6.3 |
|
Granite State Gas |
|
|
|
|
|
|
0.4 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
5.6 |
|
|
Total |
|
$ |
4.6 |
|
|
$ |
11.4 |
|
|
$ |
97.1 |
|
|
$ |
17.1 |
|
|
$ |
17.3 |
|
|
$ |
13.9 |
|
|
$ |
161.4 |
|
|
Assets classified as discontinued operations and held for sale are no longer depreciated.
NiSource reached an agreement on April 18, 2008 with BPAE for the 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. During the first quarter of 2008 an estimated loss of $32.5 million was
recorded to Gain (Loss) on Disposition of Discontinued Operation in the Condensed Statements of
Consolidated Income (Loss). During the second quarter of 2008, a $0.6 million adjustment was made
to the estimated loss on the disposition of the asset.
On February 15, 2008, NiSource reached a definitive agreement under which Unitil Corporation will
acquire NiSource subsidiaries Northern Utilities and Granite State Gas. Under 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. For the second quarter and six months ended June 30, 2008, estimated
losses of $3.4 million and $66.9 million were included in Gain (Loss) on Disposition of
Discontinued Operation in the Condensed Statements of Consolidated Income (Loss).
On June 27, 2008, Columbia Gulf sold a portion of Columbia Gulfs offshore assets to Tennessee Gas
Pipeline Company for $7.5 million. A receivable was recorded in June 2008 and the payment was
received on July 1, 2008. A gain of $2.9 million was recorded on the sale during the second quarter
of 2008.
NDC Douglas Properties, a subsidiary of NiSource Development Company, is in the process of exiting
some of its low income housing investments. One of these investments was disposed of during 2007
and two other investments are expected to be sold or disposed of during 2009. NiSource has
accounted for the investments to be sold as assets and liabilities of discontinued operations and
held for sale.
15
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
NiSource Corporate Services is continuing to work with several potential buyers to sell its Marble
Cliff facility. In late February 2008 an offer was accepted but the parties have failed to reach a
definitive agreement. As a result of the initial offer, an impairment loss of $1.6 million was
recognized during the first quarter of 2008. During the first quarter of 2007 an impairment loss
of $3.2 million was recognized due to the current book value exceeding the estimated fair value of
the facility. NiSource has accounted for this facility as assets held for sale.
Lake Erie Land, which is wholly-owned by NiSource, is in the process of selling real estate over a
10-year period as a part of an agreement reached in June, 2006 with a private real estate
development group. Part of the sale transaction included the assets of the Sand Creek Golf Club,
and NiSource began accounting for the operations of the Sand Creek Golf Club as discontinued
operations at that time. NiSource estimates the property to be sold to the private developer
during the next twelve months and classifies these assets as assets of discontinued operations and
held for sale.
Columbia Transmission is in the process of selling certain facilities that are non-core to the
operation of the pipeline system. In the first quarter of 2008, certain assets in Ohio were sold,
which resulted in a $3.8 million decrease to the balance of assets held for sale. Northern Indiana
and Columbia of Ohio are also in the process of selling non-core assets. NiSource has accounted
for these assets as assets held for sale.
During the second quarter of 2008 Bay State signed a letter of intent to sell certain assets.
During the second quarter of 2008, these assets were classified as assets held for sale.
Results from discontinued operations from Whiting Clean Energy, Granite State Gas, Northern
Utilities, NDC Douglas Properties low income housing investments, the golf course assets of Lake
Erie Land and reserve changes for NiSources former exploration and production subsidiary, CER, are
provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
(in millions) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Revenues from Discontinued Operations |
|
$ |
54.3 |
|
|
$ |
48.9 |
|
|
$ |
155.2 |
|
|
$ |
137.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
|
(338.0 |
) |
|
|
(0.9 |
) |
|
|
(327.8 |
) |
|
|
5.3 |
|
Income tax expense (benefit) |
|
|
(117.5 |
) |
|
|
0.5 |
|
|
|
(113.3 |
) |
|
|
3.1 |
|
|
Income (Loss) from Discontinued Operations -
net of taxes |
|
$ |
(220.5 |
) |
|
$ |
(1.4 |
) |
|
$ |
(214.5 |
) |
|
$ |
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Disposition of Discontinued
Operations -
net of taxes |
|
$ |
(2.8 |
) |
|
$ |
(0.8 |
) |
|
$ |
(98.9 |
) |
|
$ |
5.8 |
|
|
Losses from Discontinued Operations for the quarter and first six months of 2008 are primarily
attributable to an increase to the reserve for the Tawney litigation associated with CER. Refer to
Note 17-B, Other Legal Proceedings, in the Notes to Condensed Consolidated Financial Statements
for further discussion on the Tawney litigation. The results from Discontinued Operations for the
first six months of 2008 also include the after tax loss on disposition related to the sale of
Whiting Clean Energy and pending sales of Northern Utilities and Granite State Gas of $31.9
million, $52.0 million and $14.9 million, respectively.
7. Purchase of Sugar Creek Plant
On May 30, 2008, Northern Indiana purchased Sugar Creek for $329.7 million. This purchase was in
response to Northern Indianas need to add approximately 1,000 mw of new capacity. Refer to Note
9, Regulatory Matters, in the Notes to Condensed Consolidated Financial Statements 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
16
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
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. Northern Indiana has up to one year from the date of
purchase to complete its final purchase price allocation.
8. Asset Retirement Obligations
NiSource accounts for its asset retirement obligations in accordance with SFAS No. 143 and FIN 47.
Certain costs of removal that have been, and continue to be, included in depreciation rates and
collected in the service rates of the rate-regulated subsidiaries are classified as regulatory
liabilities and other removal costs on the Condensed Consolidated Balance Sheets.
NiSource activity for asset retirement obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
(in millions) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Accretion expense |
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
Accretion recorded as a regulatory asset |
|
|
1.6 |
|
|
|
1.6 |
|
|
|
2.8 |
|
|
|
3.1 |
|
Settlements |
|
|
(3.2 |
) |
|
|
|
|
|
|
(3.2 |
) |
|
|
|
|
|
Increase (Decrease) in Asset Retirement
Obligation Liability |
|
$ |
(1.4 |
) |
|
$ |
1.8 |
|
|
$ |
|
|
|
$ |
3.5 |
|
|
Northern Indiana performed retirement activities associated with a landfill resulting in
settlements of $3.2 million for the second quarter of 2008.
9. Regulatory Matters
Gas Distribution Operations Regulatory Matters
Significant Rate Developments. 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. The case is currently pending, and is expected to
be resolved by the fourth quarter 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. If approved, the settlement authorizes Columbia to
increase revenues by $41.5 million annually, and make certain other accounting, tariff and
service changes. The Pennsylvania Public Utilities Commission is expected to issue an order
in this case by the third quarter of 2008, with new rates expected to take effect during the
fourth quarter.
On October 17, 2007, Bay State petitioned the DPU to allow the company to collect an additional
$7.5 million in annual revenue related to usage reductions occurring since its last rate case. Bay
State also requested approval of a steel infrastructure tracker that would allow for recovery of
ongoing infrastructure replacement program investments. The DPU held hearings on this matter in
the first quarter of 2008 and issued an order denying Bay States petition on April 30, 2008.
NiSource has decided not to appeal this case, and is weighing other options at this time. On July
16, 2008, the DPU issued an order in its generic decoupling proceeding for gas utilities. NiSource
is still reviewing the order, but considers the DPUs action favorable and will evaluate the order
in light of the order in Bay States recent case.
17
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Cost Recovery and Trackers. A significant portion of the distribution companies revenue is
related to the recovery of gas costs, the review and recovery of which occurs via standard
regulatory proceedings. All states require periodic review of actual gas procurement activity to
determine prudence and to permit the recovery of prudently incurred costs related to the supply of
gas for customers. NiSource distribution companies have historically been found prudent in the
procurement of gas supplies to serve customers.
Certain operating costs of the NiSource distribution companies are significant, recurring in
nature, and generally outside the control of the distribution companies. Some states allow the
recovery of such costs via cost tracking mechanisms. Such tracking mechanisms allow for
abbreviated regulatory proceedings in order for the distribution companies to implement charges and
recover appropriate costs. Tracking mechanisms allow for more timely recovery of such costs as
compared with more traditional cost recovery mechanisms. Examples of such mechanisms include gas
cost recovery adjustment mechanisms, tax riders, and bad debt recovery mechanisms.
Comparability of Gas Distribution Operations line item operating results is impacted by these
regulatory trackers that allow for the recovery in rates of certain costs such as bad debt
expenses. Increases in the expenses that are the subject of trackers result in a corresponding
increase in net revenues and therefore have essentially no impact on total operating income
results.
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 Commission 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 Staffs investigation;
Columbias 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: Columbias 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.
On December 28, 2007, Columbia of Ohio entered into a Stipulation with the Ohio Consumers Counsel
and PUCO Staff and other stakeholders resolving litigation concerning a pending Gas Cost Recovery
audit of Columbia of Ohio. The Stipulation calls for an accelerated pass back to customers of
$36.6 million that will occur from January 31, 2008 through January 31, 2009, generated through
off-system sales and capacity release programs, the development of new energy efficiency programs
for introduction in 2009, and the development of a wholesale auction process for customer supply to
take effect in 2010. Approximately $19.2 million was passed back through June 2008. The
Stipulation also resolves issues related to pending and future Gas Cost Recovery Management
Performance audits through 2008. The PUCO approved this agreement on January 23, 2008.
Gas Transmission and Storage Operations Regulatory Matters
Significant FERC Developments. Columbia Gulf and Columbia Transmission are cooperating with the
FERC on an informal, non-public investigation of certain operating practices regarding tariff
services offered by those companies. Although the companies are continuing to cooperate with the
FERC in an effort to reach a consensual settlement, it is likely that any settlement will require
the payment of fines or refunds.
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 a
favorable order which granted a certificate to construct the project and the project is expected to
be in service by spring 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. The project is expected to be in service in
the fourth quarter of 2009.
18
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
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 6,900,000 Dth 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.
Electric Operations Regulatory Matters
Significant Rate Developments. Northern Indiana filed a petition for new electric base rates and
charges on June 27, 2008 and will file its detailed case on or before August 29, 2008. The
prehearing conference to establish the procedural schedule for the electric rate case was held on
July 29, 2008. Initial hearings are anticipated in January 2009.
During 2002, Northern Indiana settled certain regulatory matters related to an electric rate
review. On September 23, 2002, the IURC issued an order adopting most aspects of the settlement.
The order approving the settlement provides that electric customers of Northern Indiana will
receive bill credits of approximately $55.1 million each year. The credits will continue at
approximately the same annual level and per the same methodology, until the IURC enters a base rate
order that approves revised Northern Indiana electric rates. The order included a rate moratorium
that expired on July 31, 2006. The order also provides that 60% of any future earnings beyond a
specified earnings level will be retained by Northern Indiana. The revenue credit is calculated
based on electric usage; therefore, in times of high usage the credit may be more than $55.1
million. Credits amounting to $25.1 million and $27.7 million were recognized for electric
customers for the first half of 2008 and 2007, respectively.
MISO. As part of Northern Indianas participation in the MISO transmission service and wholesale
energy market, certain administrative fees and non-fuel costs have been incurred. IURC orders have
been issued authorizing the deferral for consideration in a future rate case proceeding of the
administrative fees and certain non-fuel related costs incurred after Northern Indianas rate
moratorium, which expired on July 31, 2006. During the first half of 2008 non-fuel cost of $1.5
million were deferred in accordance with the aforementioned orders. In addition, administrative,
FERC and other fees of $3.4 million were deferred. In the first half of 2008 and 2007, MISO costs
of $4.9 million and $6.3 million, respectively, were deferred.
On April 25, 2006, the FERC issued an order on the MISOs Transmission and Energy Markets Tariff,
stating that MISO had violated the tariff on several issues including not assessing revenue
sufficiency guarantee charges on virtual bids and offers and for charging revenue sufficiency
guarantee charges on imports. The FERC ordered MISO to perform a resettlement of these charges
back to the start of the Day 2 Market. The resettlement began on June 9, 2007 and ended in January
2008. Certain charge types included in the resettlement were originally considered to be non-fuel
and were recorded as regulatory assets, in accordance with previous IURC orders allowing deferral
of certain non-fuel MISO costs. During the fourth quarter 2007, based on precedent set by an IURC
ruling for another Indiana utility, Northern Indiana reclassified these charges, totaling $16.7
million, as fuel and included them in the fuel cost recovery mechanism in its latest FAC filing.
Prior to the hearing for FAC-78 on April 17, 2008, several intervenors objected to a portion of the
$16.7 million and Northern Indiana agreed to remove $7.6 million from the FAC filing. This amount
represents the portion of the resettlement costs related to periods prior to December 9, 2005. The
$7.6 million was recorded as a reduction to net revenues in the first quarter of 2008.
Northern Indiana is an active stakeholder in the process used in designing, testing and
implementing the ASM and in developing the surrounding business practices. On January 18, 2008,
Northern Indiana as part of a Joint Petition among several other Indiana utilities, filed a request
to the IURC to participate in ASM and seek approval of timely cost recovery for the associated
costs of participating. The evidentiary hearing is planned for September 4, 2008. At this time,
Northern Indiana is unable to determine what impact the ASM will have on its operations or cash
flows.
Cost Recovery and Trackers. A significant portion of the Northern Indianas revenue is related to
the recovery of fuel costs to generate power and the fuel costs related to purchased power. These
costs are recovered through a FAC, a standard, quarterly, summary regulatory proceeding in
Indiana.
19
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
On May 30, 2008, Northern Indiana purchased the Sugar Creek facility for $329.7 million. 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. The purchase was in response to Northern
Indianas need to add approximately 1,000 mw of new capacity, as filed in its bi-annual IRP with
the IURC on November 1, 2007.
The IRP included a commitment to using renewable energy, and a subsequent filing was made with the
IURC, requesting approval for Northern Indiana to enter into power purchase contracts for
wind-generated power in Iowa and South Dakota, and requesting full recovery of all associated
costs. On July 24, 2008, the IURC issued an order approving Northern Indianas proposed purchase
power agreement with Iberdrola Renewables. The agreement provides Northern Indiana the opportunity
to purchase 100 mw of wind power commencing in early 2009.
The IURC had issued an order on May 28, 2008 approving the purchase of Sugar Creek, but denied
Northern Indianas request for deferral of depreciation expense and carrying costs related to the
plant, beginning with the acquisition date, on the basis that the facility would not be used and
useful property under traditional regulation until the facility was operating inside of MISO. The
order also denied Northern Indianas request for alternative regulatory treatment of the plant,
based on incomplete presentation of evidence, but allowed for the establishment of a subdocket to
allow for the proper presentation and consideration of alternative regulatory treatment. On June
6, 2008, Northern Indiana filed its (A) Verified Petition for Rehearing; (B) Request for
Establishment of a Subdocket for Presentation and Consideration of an Alternative Regulatory Plan;
and (C) Motion for Consolidation (a single document) in Cause No. 43396. The subdocket requests
the same deferral accounting treatment that was requested for depreciation expense and carrying
costs associated with the Sugar Creek facility. An order in the subdocket proceeding is expected in
the third quarter of 2008.
On January 30, 2008, the IURC approved a settlement agreement which was reached in October 2007
with the OUCC, LaPorte County and a group of Northern Indiana industrial customers to resolve
questions relating to purchased power costs in the period from January 1, 2006 through September
30, 2007. The terms of the settlement called for Northern Indiana to make a one-time payment of
$33.5 million. A reserve for the entire amount was recorded in the third quarter of 2007 and the
refund was made to customers via the FAC in the periods of February through July 2008. As part of
this agreement, Northern Indiana implemented a new benchmarking standard, that became effective
in October 2007, which defines the price above which purchased power costs must be absorbed by
Northern Indiana and are not permitted to be passed on to customers. The benchmark is based upon
the costs of power generated by a hypothetical natural gas fired CCGT using gas purchased and
delivered to Northern Indiana. During the first half of 2008, the amount of purchased power costs
exceeding the benchmark amounted to $6.5 million, which was recognized as a net reduction of
revenues. The agreement also contemplated Northern Indiana adding generating capacity to its
existing portfolio and that the benchmark would be adjusted as new capacity is added. It was
anticipated that the addition of the Sugar Creek capacity would trigger a change in the benchmark
beginning in June 2008. However, based on the IURC order in the CPCN as described above, the Sugar
Creek capacity will not be considered until the plant is operating inside of MISO and therefore the
benchmark is unchanged.
On November 26, 2002, Northern Indiana received approval from the IURC for an ECT. Under the ECT,
Northern Indiana is permitted to recover (1) AFUDC and a return on the capital investment expended
by Northern Indiana to implement IDEMs NOx State Implementation Plan through an ECRM and (2)
related operation and maintenance and depreciation expenses once the environmental facilities
become operational through an EERM. Under the IURCs November 26, 2002 order, Northern Indiana is
permitted to submit filings on a semi-annual basis for the ECRM and on an annual basis for the
EERM. In December 2006, Northern Indiana filed a petition with the IURC for appropriate cost
treatment and recovery of emission control construction needed to address the Phase I CAIR
requirements of the Indiana Air Pollution Control Boards CAIR rules that became effective on
February 25, 2007. On July 3, 2007, Northern Indiana received an IURC order issuing a CPCN for the
CAIR and CAMR Phase I Compliance Plan Projects, estimated to cost approximately $23 million.
Northern Indiana will include the CAIR and CAMR Phase I Compliance Plan costs to be recovered in
the semi-annual and annual ECRM and EERM filing six months after construction costs begin. On
December 19, 2007, the IURC approved Northern Indianas latest compliance plan with the estimate of
$338.5 million. On April 2, 2008, the IURC approved ECR-11 for $252.6 million in capital
expenditures (net of accumulated depreciation) and EER-5 for $14.1 million in expenses, for
20
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
which billing began in May 2008. In July 2008, Northern Indiana filed ECR-12 for $265.2 million
in capital expenditures (net of accumulated depreciation), requesting approval for new billing
factors beginning November 2008.
On October 27, 2006, Indiana Gasification, LLC, Vectren Energy Delivery of Indiana, Citizens Gas &
Coke Utility and Northern Indiana filed a joint petition at the IURC seeking approval for Indiana
Gasification, LLC to construct a coal gasification facility and the respective utilities to enter
into long-term contracts to purchase the energy output of the plant, both gas and electricity.
This filing was based upon a Letter of Intent that was entered into by the parties, but subject to
finalization of a contract and regulatory approval. On December 12, 2007, Citizens Gas & Coke
Utility filed a Motion with the IURC to withdraw from the petition. The parties have had frequent
negotiations during the two year period, but have not reached a definitive agreement. Northern
Indiana anticipates filing a notice with the IURC on the status of the project in the third quarter
of 2008.
10. Risk Management and Energy Marketing Activities
NiSource uses commodity-based derivative financial instruments primarily to manage commodity price
risk and interest rate risk exposure in its business as well as for commercial and industrial
sales. NiSource is not involved in speculative energy trading activity. NiSource accounts for its
derivatives in accordance with SFAS No. 133. Under SFAS No. 133, if certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, or (b) a hedge of the
exposure to variable cash flows of a forecasted transaction. Additionally, certain NiSource
subsidiaries enter into forward physical contracts with various third parties to procure natural
gas or power for its operational needs. These forward physical contracts are derivatives which
qualify for the normal purchase normal sales exception under SFAS No. 133 and do not require
mark-to-market accounting.
NiSources derivatives on the Condensed Consolidated Balance Sheets at June 30, 2008 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Hedge |
|
Non-Hedge |
|
Total |
|
Price risk management assets |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
161.4 |
|
|
$ |
87.0 |
|
|
$ |
248.4 |
|
Other assets |
|
|
114.0 |
|
|
|
17.8 |
|
|
|
131.8 |
|
|
Total price risk management assets |
|
$ |
275.4 |
|
|
$ |
104.8 |
|
|
$ |
380.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price risk management liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
111.8 |
|
|
$ |
5.6 |
|
|
$ |
117.4 |
|
Other liabilities |
|
|
55.6 |
|
|
|
|
|
|
|
55.6 |
|
|
Total price risk management liabilities |
|
$ |
167.4 |
|
|
$ |
5.6 |
|
|
$ |
173.0 |
|
|
NiSources derivatives on the Consolidated Balance Sheets at December 31, 2007 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Hedge |
|
Non-Hedge |
|
Total |
|
Price risk management assets |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
88.5 |
|
|
$ |
13.7 |
|
|
$ |
102.2 |
|
Other assets |
|
|
25.0 |
|
|
|
0.2 |
|
|
|
25.2 |
|
|
Total price risk management assets |
|
$ |
113.5 |
|
|
$ |
13.9 |
|
|
$ |
127.4 |
|
|
|
Price risk management liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
53.8 |
|
|
$ |
26.1 |
|
|
$ |
79.9 |
|
Other liabilities |
|
|
1.5 |
|
|
|
0.2 |
|
|
|
1.7 |
|
|
Total price risk management liabilities |
|
$ |
55.3 |
|
|
$ |
26.3 |
|
|
$ |
81.6 |
|
|
21
ITEM 1. FINANCIAL
STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
The hedging activity for the second quarter and six months ended June 30, 2008 and 2007 affecting
accumulated other comprehensive income, with respect to cash flow hedges included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
(in millions, net of taxes) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Net unrealized gains on derivatives qualifying as cash flow
hedges at the beginning of the period |
|
$ |
24.9 |
|
|
$ |
59.6 |
|
|
$ |
7.6 |
|
|
$ |
31.4 |
|
Unrealized hedging gains (losses) arising during the period on
derivatives qualifying as cash flow hedges |
|
|
26.3 |
|
|
|
(12.6 |
) |
|
|
52.7 |
|
|
|
15.8 |
|
|
Reclassification adjustment for net loss (gain) included in net income |
|
|
(16.3 |
) |
|
|
(12.4 |
) |
|
|
(25.4 |
) |
|
|
(12.6 |
) |
|
Net unrealized gains on derivatives qualifying as cash flow
hedges at the end of the period |
|
$ |
34.9 |
|
|
$ |
34.6 |
|
|
$ |
34.9 |
|
|
$ |
34.6 |
|
|
During the second quarter of 2008 and 2007, a loss of $0.2 million and zero, net of taxes
respectively, were recognized in earnings due to the ineffectiveness of derivative instruments
being accounted for as hedges. All derivatives classified as a hedge are assessed for hedge
effectiveness, with any components determined to be ineffective charged to earnings or classified
as a regulatory asset or liability per SFAS No. 71 as appropriate. During the second quarter of
2008 and 2007, NiSource did not reclassify any amounts related to its cash flow hedges from
accumulated other comprehensive income to earnings due to the probability that the underlying
forecasted transactions would not occur. It is anticipated that during the next twelve months the
expiration and settlement of cash flow hedge contracts will result in income statement recognition
of amounts currently classified in accumulated other comprehensive income of approximately $16.9
million of income, net of taxes.
Commodity Price Risk Programs. Northern Indiana, Northern Indiana Fuel and Light, Kokomo Gas,
Columbia of Pennsylvania, Columbia of Kentucky, Columbia of Maryland and Columbia of Virginia use
NYMEX derivative contracts to minimize risk associated with gas price volatility. These derivative
hedging programs must be marked to fair value, but because these derivatives are used within the
framework of the companies gas cost recovery mechanism, regulatory assets or liabilities are
recorded to offset the change in the fair value of these derivatives.
Northern Indiana offers a PPS as an alternative to the standard gas cost recovery mechanism. This
service provides Northern Indiana customers with the opportunity to either lock in their gas cost
or place a cap on the gas costs that could be charged in future months. In order to hedge the
anticipated physical purchases associated with these obligations, Northern Indiana has purchased
NYMEX futures, NYMEX options and basis contracts that correspond to a fixed or capped price in the
associated future delivery months and currently enters into forward physical purchase contracts to
secure forward gas prices. Columbia of Virginia started a program in April 2005 similar to the
Northern Indiana PPS, which allows non-jurisdictional customers the opportunity to lock in their
future gas costs. The NYMEX futures and option contracts associated with these programs are
generally designated and accounted for as cash flow hedges and Northern Indiana elects the normal
purchase normal sale exemption under SFAS No. 133 for its forward physical contracts associated
with this program.
Northern Indiana also offers a DependaBill program to its customers as an alternative to the
standard tariff rate that is charged to residential customers. The program allows Northern Indiana
customers to fix their total monthly bill in future months at a flat rate regardless of gas usage
or commodity cost. In order to hedge the anticipated physical purchases associated with these
obligations, Northern Indiana has purchased NYMEX futures, NYMEX options and basis contracts that
match the anticipated future delivery needs of the program to secure forward gas prices and
currently enters into forward physical purchase contracts to secure forward gas prices. The NYMEX
futures contracts associated with this program are generally designated and accounted for as cash
flow hedges and Northern Indiana elects the normal purchase normal sale exemption under SFAS No.
133 for its forward physical contracts associated with this program.
As part of the MISO Day 2 initiative, Northern Indiana was allocated and has purchased FTRs. These
FTRs help Northern Indiana offset congestion costs due to the MISO Day 2 activity. The FTRs do not
qualify for hedge
22
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
accounting treatment, but since congestion costs are recoverable through the fuel
cost recovery mechanism, the related gains and losses
associated with marking these derivatives to market are recorded as a regulatory asset or
liability, in accordance with SFAS No. 71. In the second quarter of 2008, MISO changed its
allocation procedures from an allocation of FTRs to an allocation of ARRs, whereby Northern Indiana
was allocated ARRs based on its historical use of the MISO administered transmission system. ARRs
entitle the holder to a stream of revenues or charges based on the price of the associated FTR in
the FTR auction. Northern Indiana converted the ARRs that were received in the second quarter of
2008 into FTRs. Additionally, Northern Indiana also uses derivative contracts to minimize risk
associated with power price volatility. These derivative programs must be marked to fair value,
but because these derivatives are used within the framework of their cost recovery mechanism,
regulatory assets or liabilities are recorded to offset the change in the fair value of these
derivatives.
For regulatory incentive purposes, Northern Indiana enters into gas purchase contracts at first of
the month prices that give counterparties the daily option to either sell an additional package of
gas at first of the month prices or recall the original volume to be delivered. Northern Indiana
charges a fee for this option. The changes in the fair value of these options are primarily due to
the changing expectations of the future intra-month volatility of gas prices. These written
options are derivative instruments, must be marked to fair value and do not meet the requirement
for hedge accounting treatment. However, in accordance with SFAS No. 71, Northern Indiana records
the related gains and losses associated with these transactions as a regulatory asset or liability.
For regulatory incentive purposes, Columbia of Kentucky, Columbia of Ohio, Columbia of
Pennsylvania, and Columbia of Maryland (collectively, the Columbia LDCs) enter into contracts
that allow counterparties the option to sell gas to Columbia LDCs at first of the month prices for
a particular month of delivery. Columbia LDCs charge the counterparties a fee for this option.
The changes in the fair value of the options are primarily due to the changing expectations of the
future intra-month volatility of gas prices. These Columbia LDCs defer a portion of the change in
the fair value of the options as either a regulatory asset or liability in accordance with SFAS No.
71 based on the regulatory customer sharing mechanisms in place, with the remaining changes in fair
value recognized currently in earnings.
As of June 30, 2008, Columbia Energy Services has fixed price gas delivery commitments to two
municipalities in the United States, one of which expired in July 2008 and the other will expire in
December 2008. Columbia Energy Services entered into a forward purchase agreement with a gas
supplier, wherein the supplier will fulfill the delivery obligation requirements at a slight
premium to index. In order to hedge this anticipated future purchase of gas from the gas supplier,
Columbia Energy Services entered into commodity swaps priced at the locations designated for
physical delivery. These commodity swap derivatives are accounted for as cash flow hedges.
Commodity price risk programs included in price risk assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
December 31, 2007 |
(in millions) |
|
Assets |
|
Liabilities |
|
Assets |
|
Liabilities |
|
Gas price volatility program derivatives |
|
$ |
98.6 |
|
|
$ |
2.8 |
|
|
$ |
0.2 |
|
|
$ |
22.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPS program derivatives |
|
|
2.5 |
|
|
|
|
|
|
|
0.2 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DependaBill program derivatives |
|
|
0.2 |
|
|
|
|
|
|
|
0.1 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric energy program derivatives |
|
|
6.0 |
|
|
|
0.4 |
|
|
|
13.7 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory incentive program derivatives |
|
|
|
|
|
|
2.4 |
|
|
|
|
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward purchase agreements derivatives |
|
|
26.4 |
|
|
|
|
|
|
|
41.0 |
|
|
|
|
|
|
Total commodity price risk programs included |
|
$ |
133.7 |
|
|
$ |
5.6 |
|
|
$ |
55.2 |
|
|
$ |
29.2 |
|
|
Interest Rate Risk Activities. Contemporaneously with the pricing of the 5.25% and 5.45% notes
issued September 16, 2005, NiSource Finance settled $900 million of forward starting interest rate
swap agreements with six counterparties. NiSource paid an aggregate settlement payment of $35.5
million which is being amortized as an
23
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
increase to interest expense over the term of the underlying debt, resulting in an effective
interest rate of 5.67% and 5.88%, respectively.
NiSource has entered into interest rate swap agreements to modify the interest rate characteristics
of its outstanding long-term debt from fixed to variable. On May 12, 2004, NiSource Finance
entered into fixed-to-variable interest rate swap agreements in a notional amount of $660 million
with six counterparties having a 6 1/2-year term. NiSource Finance will receive payments based
upon a fixed 7.875% interest rate and pay a floating interest amount based on U.S. 6-month BBA
LIBOR plus an average of 3.08% per annum. There was no exchange of premium at the initial date of
the swaps. In addition, each party has the right to cancel the swaps on May 15, 2009.
On July 22, 2003, NiSource Finance entered into fixed-to-variable interest rate swap agreements in
a notional amount of $500 million with four counterparties with an 11-year term. NiSource Finance
will receive payments based upon a fixed 5.40% interest rate and pay a floating interest amount
based on U.S. 6-month BBA LIBOR plus an average of 0.78% per annum. There was no exchange of
premium at the initial date of the swaps. In addition, each party has the right to cancel the
swaps on July 15, 2013.
As a result of the fixed-to-variable interest rate swap transactions referenced above, $1,160
million of NiSource Finances existing long-term debt is now subject to fluctuations in interest
rates. These interest rate swaps are designated as fair value hedges. The effectiveness of the
interest rate swaps in offsetting the exposure to changes in the debts fair value is measured
pursuant to SFAS No. 133. NiSource had no net gain or loss recognized in earnings due to hedging
ineffectiveness from prior years.
Interest rate risk activities programs included in price risk management assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
December 31, 2007 |
(in millions) |
|
Assets |
|
Liabilities |
|
Assets |
|
Liabilities |
|
Interest rate swap derivatives |
|
$ |
23.6 |
|
|
$ |
|
|
|
$ |
18.8 |
|
|
$ |
|
|
|
Marketing and Other Activities. The operations of TPC primarily involve commercial and industrial
gas sales, whereby TPC utilizes gas derivatives to hedge its expected future gas purchases. These
derivatives associated with commercial and industrial gas sales are accounted for as cash flow
hedges. In addition, TPC, on behalf of Whiting Clean Energy, has also entered into power and gas
derivative contracts to manage commodity price risk associated with operating Whiting Clean Energy
prior to its sale in the second quarter of 2008 to BPAE.
Marketing and power programs included in price risk management assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
December 31, 2007 |
(in millions) |
|
Assets |
|
Liabilities |
|
Assets |
|
Liabilities |
|
Gas marketing derivatives |
|
$ |
222.9 |
|
|
$ |
167.4 |
|
|
$ |
53.2 |
|
|
$ |
52.4 |
|
|
Power forward derivatives |
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
Total marketing and power programs |
|
$ |
222.9 |
|
|
$ |
167.4 |
|
|
$ |
53.4 |
|
|
$ |
52.4 |
|
|
11. Fair Value of Financial Assets and Liabilities
NiSource adopted the provisions of SFAS No. 157 on January 1, 2008. There was no impact on
retained earnings as a result of the adoption.
24
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Recurring Fair Value Measurements. The following table presents assets and liabilities measured
and recorded at fair value on NiSources Condensed Consolidated Balance Sheet on a recurring basis
and their level within the fair value hierarchy as of June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
Significant |
|
|
|
|
|
|
Active Markets |
|
Other |
|
Significant |
|
|
|
|
for Identical |
|
Observable |
|
Unobservable |
|
|
Recurring Fair Value Measurements |
|
Assets |
|
Inputs |
|
Inputs |
|
Balance as of |
(in millions) |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
June 30, 2008 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price risk management assets |
|
$ |
345.4 |
|
|
$ |
29.2 |
|
|
$ |
5.6 |
|
|
$ |
380.2 |
|
Available-for-sale securities |
|
|
26.8 |
|
|
|
29.7 |
|
|
|
|
|
|
|
56.5 |
|
|
Total |
|
$ |
372.2 |
|
|
$ |
58.9 |
|
|
$ |
5.6 |
|
|
$ |
436.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price risk management liabilities |
|
$ |
161.1 |
|
|
$ |
6.7 |
|
|
$ |
5.3 |
|
|
$ |
173.1 |
|
Deferred compensation |
|
|
|
|
|
|
12.3 |
|
|
|
|
|
|
|
12.3 |
|
|
Total |
|
$ |
161.1 |
|
|
$ |
19.0 |
|
|
$ |
5.3 |
|
|
$ |
185.4 |
|
|
Price risk management assets and liabilities include commodity exchange-traded and
non-exchange-based derivative contracts. Exchange-traded derivative contracts are generally based
on unadjusted quoted prices in active markets and are classified within Level 1. Certain
non-exchange-traded derivatives are valued using broker or over-the-counter, on-line exchanges. In
such cases, these non-exchange-traded derivatives are classified within Level 2. Non-exchange-based
derivative instruments include swaps, forwards, and options. In certain instances, these
instruments may utilize models to measure fair value. The company uses a similar model to value
similar instruments. Valuation models utilize various inputs that include quoted prices for similar
assets or liabilities in active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, other observable inputs for the asset or liability, and
market-corroborated inputs, i.e., inputs derived principally from or corroborated by observable
market data by correlation or other means. Where observable inputs are available for substantially
the full term of the asset or liability, the instrument is categorized in Level 2. Certain
derivatives trade in less active markets with a lower availability of pricing information and
models may be utilized in the valuation. When such inputs have a significant impact on the
measurement of fair value, the instrument is categorized in Level 3.
Price risk management assets also include fixed-to-floating interest-rate swaps, which are
designated as fair-value hedges, as a means to achieve its targeted level of variable-rate debt as
a percent of total debt. NiSource uses a calculation of future cash inflows and estimated future
outflows related to the swap agreements, which are discounted and netted to determine the current
fair value. Additional inputs to the present value calculation include the contract terms, as well
as market parameters such as current and projected interest rates and volatility. As they are
based on observable data and valuations of similar instruments, the interest-rate swaps are
categorized in Level 2 in the fair value hierarchy.
Available-for-sale securities include assets in NiSources deferred compensation trust and
investments pledged as collateral for trust accounts related to NiSources wholly-owned insurance
company. Available-for-sale securities are included within Investments and other in the Condensed
Consolidated Balance Sheets. Securities classified within Level 1 include U.S. Treasury debt
securities which are highly liquid and are actively traded in over-the-counter markets. NiSource
values corporate and mortgage-backed debt securities using a matrix pricing model that incorporates
market-based information. These securities trade less frequently and are classified within Level
2. Unrealized gains and losses from our available-for-sale securities are included in OCI.
NiSources deferred compensation plan allows participants to defer certain cash compensation into a
notional investment account. NiSource includes the plan in other noncurrent liabilities in the
Condensed Consolidated Balance Sheets. The value of the deferred compensation obligation is based
on the market value of the participants notional investment accounts. The notional investments
include balances which are credited based upon published interest and bond yield indices and
investments in mutual funds. NiSource uses the lowest level of input significant
25
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
to the valuation
to determine the fair value hierarchy classification, and therefore the liability is categorized in
Level 2.
The following tables present the fair value reconciliation of Level 3 assets and liabilities
measured at fair value on a recurring basis during the three and six months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
Three Months Ended June 30, 2008 (in millions) |
|
Transmission Rights |
|
Other Derivatives |
|
Total |
|
Balance as of March 31, 2008 |
|
$ |
0.8 |
|
|
$ |
(2.9 |
) |
|
$ |
(2.1 |
) |
|
Total gains or losses (unrealized/realized)
Included in regulatory assets/liabilities |
|
|
|
|
|
|
(0.7 |
) |
|
|
(0.7 |
) |
Purchases, issuances and settlements (net) |
|
|
4.8 |
|
|
|
(1.7 |
) |
|
|
3.1 |
|
|
Balance as of June 30, 2008 |
|
$ |
5.6 |
|
|
$ |
(5.3 |
) |
|
$ |
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains/(losses) relating
to instruments still held as of June 30, 2008 |
|
$ |
|
|
|
$ |
(1.0 |
) |
|
$ |
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
Six Months Ended June 30, 2008 (in millions) |
|
Transmission Rights |
|
Other Derivatives |
|
Total |
|
Balance as of January 1, 2008 |
|
$ |
12.6 |
|
|
$ |
(3.5 |
) |
|
$ |
9.1 |
|
|
Total gains or losses (unrealized/realized)
Included in regulatory assets/liabilities |
|
|
(0.1 |
) |
|
|
0.7 |
|
|
|
0.6 |
|
Purchases, issuances and settlements (net) |
|
|
(6.9 |
) |
|
|
(2.5 |
) |
|
|
(9.4 |
) |
|
Balance as of June 30, 2008 |
|
$ |
5.6 |
|
|
$ |
(5.3 |
) |
|
$ |
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains/(losses)
relating to instruments still held as of
June 30, 2008 |
|
$ |
(0.1 |
) |
|
$ |
(1.0 |
) |
|
$ |
(1.1 |
) |
|
Realized gains and losses for Level 3 recurring items are included in income within Cost of Sales
on the Condensed Statements of Consolidated Income (Loss). Unrealized gains and losses from Level 3
recurring items are included within regulatory assets and liabilities on the Condensed Consolidated
Balance Sheets.
As part of the MISO Day 2 initiative, Northern Indiana was allocated and has purchased FTRs. These
rights help Northern Indiana offset congestion costs due to the MISO Day 2 activity. These
instruments are considered derivatives and are valued utilizing forecasted congestion source and
sink prices in the Day Ahead market. They are classified as Level 3 and reflected in the table
above. The FTRs do not qualify for hedge accounting treatment, but since congestion costs are
recoverable through the fuel cost recovery mechanism, the related gains and losses associated with
these transactions are recorded as a regulatory asset or liability, in accordance with SFAS No. 71.
12. Goodwill Assets
NiSources goodwill assets at June 30, 2008 were $3,677.3 million pertaining primarily to the
acquisition of Columbia on November 1, 2000. The goodwill balances at June 30, 2008 for Northern
Indiana Fuel and Light and Kokomo Gas were $13.3 million and $5.5 million, respectively.
In the quarters ended June 30, 2008 and June 30, 2007, NiSource performed its annual impairment
test of goodwill associated with the purchases of Columbia, Northern Indiana Fuel and Light and
Kokomo Gas. The results of the June 30, 2008 and June 30, 2007 impairment tests indicated that no
impairment charge was required. For the purpose of testing impairment
of the goodwill recorded in
the acquisition of Columbia, the related subsidiaries were
26
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
aggregated into two distinct reporting units, one within the Gas Distribution Operations segment
and one within the Gas Transmission and Storage Operations segment. NiSource uses the discounted
cash flow method to estimate the fair value of its reporting units for the purposes of this test.
13. Income Taxes
NiSources interim effective tax rates reflect the estimated annual effective tax rate for 2008 and
2007, respectively, adjusted for tax expense associated with certain discrete items. The effective
tax rates for the quarters ended June 30, 2008 and June 30, 2007 were 31.1% and 36.3%,
respectively. The effective tax rates for the six months ended June 30, 2008 and June 30, 2007
were 36.6% and 37.0%, respectively. These effective tax rates differ from the federal tax rate of
35% primarily due to the effects of tax credits, state income taxes, utility rate-making, and other
permanent book-to-tax differences such as the electric production tax deduction provided under
Internal Revenue Code Section 199.
The 5.2% decrease in the second quarter of 2008 effective tax rate versus the second quarter of
2007 effective tax rate is primarily due to a change in the estimated annual 2008 effective tax
rate recognized in the second quarter as a result of an increase in projected AFUDC-Equity. For
the six months ended June 30, 2008 versus the six months ended June 30, 2007, the 0.4% decrease in
the effective tax rate is primarily attributable to the tax impact of additional estimated
AFUDC-Equity for 2008 versus 2007.
Both the six months ended June 30, 2008 and six months ended June 30, 2007 include increases to tax
expense for discrete items. On March 31, 2008, the governor of West Virginia signed legislation
that phases in a reduction in income tax rates from the current rate of 8.75% to 6.5% over the
years 2009 through 2014, provided certain state budgetary targets are met. NiSource has West
Virginia deferred income tax benefits recorded on its Consolidated Balance Sheets that, because of
the rate decrease, were required to be written down in the first quarter of 2008. The impact of
the write-down on six months ended June 30, 2008 net income is a reduction of $2.7 million. This
reduced benefit was offset by a $0.5 million decrease in income tax expense due primarily to the
discontinuance of filing consolidated Kentucky state income tax returns in 2008. The six months
ended June 30, 2007 period includes an increase in income tax expense of $1.5 million, due mostly
to state income tax issues. There were no adjustments to tax expense for discrete items in the
second quarter of 2008.
NiSource adopted the provisions of FIN 48 on January 1, 2007, recognizing a charge of $0.8 million
to the opening balance of retained earnings. As of December 31, 2007, the total liability for
unrecognized tax benefits, which is included in Other noncurrent liabilities on the Consolidated
Balance Sheets, was $3.7 million ($4.0 million including interest). There have been no material
changes in NiSources FIN 48 liabilities from the December 31, 2007 amounts.
Effective January 1, 2007, NiSource records interest and penalties (if any) on prior year tax
liabilities as a component of income tax expense.
14. Pension and Other Postretirement Benefits
NiSource provides defined contribution plans and noncontributory defined benefit retirement plans
that cover its employees. Benefits under the defined benefit retirement plans reflect the
employees compensation, years of service and age at retirement. Additionally, NiSource provides
health care and life insurance benefits for certain retired employees. The majority of employees
may become eligible for these benefits if they reach retirement age while working for NiSource.
The expected cost of such benefits is accrued during the employees years of service. Current
rates of rate-regulated companies include postretirement benefit costs, including amortization of
the regulatory assets that arose prior to inclusion of these costs in rates. For most plans, cash
contributions are remitted to grantor trusts.
On January 1, 2007, NiSource adopted the SFAS No. 158 measurement date provisions requiring
employers to measure plan assets and benefit obligations as of the fiscal year-end. The pre-tax
impact of adopting the SFAS No. 158 measurement date provisions increased deferred charges and
other assets by $9.4 million, decreased regulatory
27
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
assets by $89.6 million, decreased retained
earnings by $11.3 million, increased accumulated other comprehensive income by $5.3 million and
decreased accrued liabilities for postretirement and postemployment benefits by $74.2
million. NiSource also recorded a reduction in deferred income taxes of approximately $2.6
million. In addition, 2007 expense for pension and postretirement benefits reflects the updated
measurement date valuations. In the fourth quarter of 2006, NiSource adopted the provisions of
SFAS No. 158 requiring employers to recognize in the statement of financial position the overfunded
or underfunded status of a defined benefit postretirement plan, measured as the difference between
the fair value of the plan assets and the benefit obligation.
The key assumptions used to measure NiSources various postretirement benefits plans funded status
at December 31, 2007 were the same as those used for the previous January 1, 2007 measurement date.
NiSource expects to make contributions of $6.4 million to its pension plans and $38.3 million to
its other postretirement benefit plans during 2008. Through June 30, 2008, NiSource has
contributed $3.3 million to its pension plans and $18.5 million to its other postretirement benefit
plans.
The following tables provide the components of the plans net periodic benefits cost for the second
quarter and six months ended June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other Postretirement Benefits |
Three Months Ended June 30, (in millions) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Components of Net Periodic Benefit Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
9.4 |
|
|
$ |
10.3 |
|
|
$ |
2.3 |
|
|
$ |
2.5 |
|
Interest cost |
|
|
33.1 |
|
|
|
31.9 |
|
|
|
11.9 |
|
|
|
10.9 |
|
Expected return on assets |
|
|
(48.5 |
) |
|
|
(46.7 |
) |
|
|
(6.3 |
) |
|
|
(5.3 |
) |
Amortization of transitional obligation |
|
|
|
|
|
|
|
|
|
|
2.0 |
|
|
|
2.0 |
|
Amortization of prior service cost |
|
|
1.0 |
|
|
|
1.4 |
|
|
|
0.2 |
|
|
|
0.1 |
|
Recognized actuarial loss |
|
|
0.3 |
|
|
|
2.0 |
|
|
|
1.0 |
|
|
|
1.5 |
|
|
Total Net Periodic Benefits Cost |
|
$ |
(4.7 |
) |
|
$ |
(1.1 |
) |
|
$ |
11.1 |
|
|
$ |
11.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other Postretirement Benefits |
Six Months Ended June 30, (in millions) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Components of Net Periodic Benefit Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
18.7 |
|
|
$ |
20.6 |
|
|
$ |
4.7 |
|
|
$ |
4.9 |
|
Interest cost |
|
|
66.2 |
|
|
|
63.8 |
|
|
|
23.8 |
|
|
|
21.8 |
|
Expected return on assets |
|
|
(97.0 |
) |
|
|
(93.4 |
) |
|
|
(12.6 |
) |
|
|
(10.5 |
) |
Amortization of transitional obligation |
|
|
|
|
|
|
|
|
|
|
4.0 |
|
|
|
4.0 |
|
Amortization of prior service cost |
|
|
2.1 |
|
|
|
2.8 |
|
|
|
0.4 |
|
|
|
0.2 |
|
Recognized actuarial loss |
|
|
0.6 |
|
|
|
4.0 |
|
|
|
2.0 |
|
|
|
3.0 |
|
|
Total Net Periodic Benefits Cost |
|
$ |
(9.4 |
) |
|
$ |
(2.2 |
) |
|
$ |
22.3 |
|
|
$ |
23.4 |
|
|
15. Long-Term Debt
On May 15, 2008, NiSource Finance issued $500.0 million of 6.80% unsecured notes that mature
January 15, 2019 and $200.0 million of 6.15% unsecured notes that mature on March 1, 2013. The
notes due in 2013 constitute a further issuance of the $345.0 million 6.15% notes issued February
19, 2003, and will form a single series having an aggregate principal amount outstanding of $545.0
million.
Jasper County Pollution Control Bonds. Northern Indiana has seven series of Jasper County
Pollution Control Bonds with a total principal value of $254 million currently outstanding. Prior
to March 25, 2008, each of the series bore interest at rates established through auctions that took
place at either 7, 28, or 35 day intervals. Between February 13, 2008 and March 5, 2008, Northern
Indiana received notice that six separate market auctions of four
28
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
series of the Jasper County Pollution Control Bonds had failed. As a result, those series
representing an aggregate principal amount of $112 million of the Jasper County Pollution Control
Bonds bore interest at default rates equal to 15% or 18% per annum. Subsequent auctions were
successful, but resulted in interest rates between 5.13% and 11.0%, which are in excess of
historical rates. These auction failures were attributable to the recent lack of liquidity in the
auction rate securities market, largely driven by the recent turmoil in the bond insurance market.
The Jasper County Pollution Control Bonds are insured by either Ambac Assurance Corporation or MBIA
Insurance Corporation.
Northern Indiana converted all seven series of Jasper County Pollution Control Bonds from the
auction rate mode to a variable rate demand bond mode between March 25, 2008 and April 11, 2008 and
repurchased the bonds as part of the conversion process. As of April 11, 2008, all of the Jasper
County Pollution Control Bonds were purchased and are held in Northern Indianas treasury.
Northern Indiana is currently evaluating its options for reoffering the debt to the public.
Northern Indiana has recorded the repurchased bonds as an offset to long-term debt in the Condensed
Consolidated Balance Sheet as the debt is considered extinguished per SFAS No. 140. Unamortized
debt expense previously recorded under deferred charges and other qualifies for regulatory
treatment and has been reclassified as a regulatory asset. The repurchase of the bonds is included
in the financing activities section in the Condensed Statement of Consolidated Cash Flow.
16. Share-Based Compensation
NiSource currently issues long-term incentive grants to key management employees under a long-term
incentive plan approved by stockholders on April 13, 1994 (1994 Plan). The 1994 Plan, as amended
and restated, permits the following types of grants, separately or in combination: nonqualified
stock options, incentive stock options, restricted stock awards, stock appreciation rights,
restricted stock units, contingent stock units and dividend equivalents payable on grants of
options, performance units and contingent stock awards. At June 30, 2008, there were 27,915,592
shares reserved for future awards under the amended and restated 1994 Plan.
NiSource recognized stock-based employee compensation expense of $4.5 million and $1.3 million
during the first six months of 2008 and 2007, respectively, as well as related tax benefits of $1.7
million and $0.5 million, respectively. There were no modifications to awards as a result of the
adoption of SFAS No. 123R.
As of June 30, 2008, the total remaining unrecognized compensation cost related to nonvested awards
amounted to $15.3 million, which will be amortized over the weighted-average remaining requisite
service period of 2.1 years.
Stock Options. As of June 30, 2008, approximately 5.2 million options were outstanding and
exercisable with a weighted average option price of $22.91.
Restricted and Contingent Stock Unit Awards. In March 2008, 197,311 restricted stock units subject
to service conditions were granted. The grant date fair-value of the restricted units was $3.5
million, based on the average market price of NiSources common stock at the date of grant of
$17.49, which will be expensed net of forfeitures over the vesting period of approximately 3 years.
The service conditions lapse on January 31, 2011. If before January 31, 2011, the employee
terminates employment (1) due to retirement, having attained age 55 and completed ten years of
service, or (2) due to death or disability, the employment conditions will lapse with respect to a
pro rata portion of the restricted units on the date of termination. Termination due to any other
reason will result in all restricted units awarded being forfeited effective the employees date of
termination. Employees will be entitled to receive dividends upon vesting. As of June 30, 2008,
200,273 nonvested restricted stock units were granted and remaining.
In March 2008, 394,604 contingent stock units subject to performance conditions were granted. The
grant date fair-value of the award was $6.9 million, which will be expensed net of forfeitures over
the vesting period of approximately 3 years. The average market price of NiSources common stock
at the date of grant was $17.49. The performance conditions are based on achievement of a non-GAAP
financial measure, cumulative net operating earnings, that NiSource defines as income from
continuing operations adjusted for certain items and cumulative
29
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
funds from operations that NiSource
defines as net operating cash flows provided by continuing operations. Per the agreement, to the
extent base performance conditions are exceeded during the 3 year performance period, the award
will be increased in increments of 10% up to 50%. If prior to the lapse of the performance
conditions, the employee terminates employment (1) due to retirement, having attained age 55 and
completed ten years of service, (2) due to disability, or (3) due to death with less than or equal
to 12 months remaining in the performance period, the employee will receive a pro rata portion of
the contingent shares if the performance conditions have been met. If prior to the lapse of the
performance conditions, the employee terminates employment due to death with more than 12 months
remaining in the performance period, the employee will receive a pro rata portion of the contingent
shares as if the performance conditions had been met. Termination due to any other reason will
result in all contingent shares awarded being forfeited effective the employees date of
termination. Employees will be entitled to receive dividends upon vesting. As of June 30, 2008,
400,527 nonvested contingent stock units were granted and remaining.
In March 2007, 320,330 contingent stock units were granted. The grant date fair-value of the award
was $7.5 million, based on the average market price of NiSources common stock at the date of grant
of $23.46, which will be expensed net of forfeitures over the vesting period of approximately 3
years. The shares are subject to both performance and service conditions. The performance
conditions were based on achievement of a non-GAAP financial measure (net operating earnings) as
described above. Per the agreement, to the extent base performance conditions were exceeded, the
award would be increased in increments of 10% up to 50%. If the performance conditions were not
met, the grants would be cancelled and the shares would be forfeited. Subsequent to meeting the
performance conditions, an additional two year service period will then be required before the
shares vest on December 31, 2009. If after completing the performance conditions but prior to
completing the service conditions the employee terminates employment (1) due to retirement, having
attained age 55 and completed ten years of service, or (2) due to death or disability, the
employment conditions will lapse with respect to a pro rata portion of the contingent shares on the
date of termination. Termination due to any other reason will result in all contingent shares
awarded being forfeited effective the employees date of termination. During 2007, base
performance conditions were exceeded, resulting in an increase of the number of shares to be issued
upon vesting by 20%. Accordingly, 62,319 additional shares were granted in January 2008. As of
June 30, 2008, 357,799 nonvested contingent shares were remaining. Employees will be entitled to
receive dividends upon vesting.
Time-accelerated Awards. NiSource awarded restricted shares and restricted stock units that
contain provisions for time-accelerated vesting to key executives under the 1994 Plan. Most of
these awards were issued in January 2003 and January 2004. The total shareholder return measures
established were not met; therefore these grants do not have an accelerated vesting period. At
June 30, 2008, NiSource had 504,633 awards outstanding which contained the time-accelerated
provisions.
Non-employee Director Awards. The Amended and Restated Non-employee Director Stock Incentive Plan
provides for awards of restricted stock, stock options and restricted stock units, which vest in
20% increments per year, with full vesting after five years. Effective March 25, 2008, the board
approved to amend the vesting provisions of the plan such that all outstanding grants and future
grants of restricted stock units will vest immediately. As of June 30, 2008, 89,860 restricted
shares and 187,334 restricted stock units had been issued under the Plan.
30
|
|
|
ITEM 1. |
|
FINANCIAL STATEMENTS (continued) |
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
17. Other Commitments and Contingencies
A. Guarantees and Indemnities. As a part of normal business, NiSource and certain subsidiaries
enter into various agreements providing financial or performance assurance to third parties on
behalf of certain subsidiaries. Such agreements include guarantees and stand-by letters of credit.
These agreements are entered into primarily to support or enhance the creditworthiness otherwise
attributed to a subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient
credit to accomplish the subsidiaries intended commercial purposes. The total commercial
commitments in existence at June 30, 2008 and the years in which they expire were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Total |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
After |
|
|
Guarantees of subsidiaries debt |
|
$ |
5,814.0 |
|
|
$ |
|
|
|
$ |
460.0 |
|
|
$ |
1,000.0 |
|
|
$ |
|
|
|
$ |
315.0 |
|
|
$ |
4,039.0 |
|
Guarantees supporting commodity
transactions of subsidiaries |
|
|
549.1 |
|
|
|
292.8 |
|
|
|
241.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.6 |
|
Lines of credit |
|
|
506.0 |
|
|
|
506.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit |
|
|
94.3 |
|
|
|
9.4 |
|
|
|
69.6 |
|
|
|
|
|
|
|
14.3 |
|
|
|
|
|
|
|
1.0 |
|
Other guarantees |
|
|
464.4 |
|
|
|
63.7 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
16.7 |
|
|
|
380.3 |
|
|
Total commercial commitments |
|
$ |
7,427.8 |
|
|
$ |
871.9 |
|
|
$ |
775.0 |
|
|
$ |
1,000.0 |
|
|
$ |
14.3 |
|
|
$ |
331.7 |
|
|
$ |
4,434.9 |
|
|
Guarantees of Subsidiaries Debt. NiSource has guaranteed the payment of $5.8 billion of debt for
various wholly-owned subsidiaries including NiSource Finance, and through a support agreement,
Capital Markets, which is reflected on NiSources Condensed Consolidated Balance Sheet as of June
30, 2008. The subsidiaries are required to comply with certain financial covenants under the debt
instruments and in the event of default, NiSource would be obligated to pay the debts principal
and related interest. NiSource does not anticipate its subsidiaries will have any difficulty
maintaining compliance.
Guarantees Supporting Commodity Transactions of Subsidiaries. NiSource has issued guarantees,
which support up to approximately $549.1 million of commodity-related payments for its current
subsidiaries involved in energy marketing to satisfy requirements under forward gas sales. These
guarantees were provided to counterparties in order to facilitate physical and financial
transactions involving natural gas and electricity. To the extent liabilities exist under the
commodity-related contracts subject to these guarantees, such liabilities are included in the
Condensed Consolidated Balance Sheets.
Lines and Letters of Credit. NiSource Finance maintains a five-year revolving line of credit with
a syndicate of financial institutions which can be used either for borrowings or the issuance of
letters of credit. On July 7, 2006, NiSource Finance amended the $1.25 billion five-year revolving
credit facility, increasing the aggregate commitment level to $1.5 billion and extending the
termination date by one year to July 2011. At June 30, 2008, NiSource had $506.0 million in
short-term borrowings outstanding under the credit facility. Through the five-year revolver and
through other letter of credit facilities, NiSource has issued stand-by letters of credit of
approximately $94.3 million for the benefit of third parties.
Other Guarantees or Obligations. NiSource reached an agreement on April 18, 2008 with BPAE for the
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. The agreement with BPAE contains
customary representations, warranties, covenants and closing conditions. NiSource has executed
purchase and sales agreement guarantees totaling $220 million which guarantee performance of PEIs
covenants, agreements, obligations, liabilities, representations and warranties under the agreement
with BPAE. No amounts related to the purchase and sales agreement guarantees are reflected in the
Condensed Consolidated Balance Sheet as of June 30, 2008.
On August 29, 2007, Millennium entered into a bank credit agreement to finance the construction of
the Millennium Pipeline project. As a condition precedent to the credit agreement, NiSource issued
a guarantee securing payment for 47.5%, its indirect ownership interest percentage, of amounts
borrowed under the credit agreement up until such time as the amounts payable under the agreement
are paid in full. The permanent financing is expected to be completed in the first quarter of
2009. As of June 30, 2008, Millennium borrowed $458.0 million under the financing agreements, of
which NiSource guaranteed $217.6 million. NiSource recorded an accrued liability of approximately
$6.5 million related to the fair value of this guarantee.
31
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
On June 29, 2006, Columbia Transmission, Piedmont, and Hardy Storage entered into multiple
agreements to finance the construction of the Hardy Storage project, which is accounted for by
NiSource as an equity investment. Under the financing agreement, Columbia Transmission issued
guarantees securing payment for 50% of any amounts issued in connection with Hardy Storage up until
such time as the project is placed in service and operated within certain specified parameters. As
of June 30, 2008, Hardy Storage borrowed $123.4 million under the financing agreement, for which
Columbia Transmission recorded an accrued liability of approximately $1.2 million related to the
fair value of its guarantee securing payment for $61.7 million, which is 50% of the amount
borrowed.
NiSource has purchase and sales agreement guarantees totaling $77.5 million, which guarantee
performance of the sellers covenants, agreements, obligations, liabilities, representations and
warranties under the agreements. No amounts related to the purchase and sales agreement guarantees
are reflected in the Condensed Consolidated Balance Sheets. Management believes that the
likelihood NiSource would be required to perform or otherwise incur any significant losses
associated with any of the aforementioned guarantees is remote.
NiSource has issued other guarantees supporting derivative related payments associated with
interest rate swap agreements issued by NiSource Finance, operating leases for many of its
subsidiaries and for other agreements entered into by its current and former subsidiaries.
B. Other Legal Proceedings. In the normal course of its business, NiSource and its subsidiaries
have been named as defendants in various legal proceedings. NiSource assesses liabilities and
contingencies in connection with asserted or potential legal matters on a regular basis, and
establishes reserves when appropriate.
In the case of Tawney, et al. v. Columbia Natural Resources, Inc., the Plaintiffs, who are West
Virginia landowners, filed a lawsuit in early 2003 against CNR alleging that CNR underpaid
royalties on gas produced on their land by improperly deducting post-production costs and not
paying a fair value for the gas. In December 2004, the court granted plaintiffs motion to
add NiSource and Columbia as defendants. Plaintiffs also claimed that the defendants
fraudulently concealed the deduction of post-production charges. The court certified the case
as a class action that includes any person who, after July 31, 1990, received or is due
royalties from CNR (and its predecessors or successors) on lands lying within the boundary of
the state of West Virginia. All claims by the government of the United States are excluded
from the class. Although NiSource sold CNR in 2003, NiSource remains obligated to manage this
litigation and for the majority of any damages ultimately awarded to the plaintiffs. On
January 27, 2007, the jury hearing the case returned a verdict against all defendants in the
amount of $404.3 million; this is comprised of $134.3 million in compensatory damages and $270
million in punitive damages. In January 2008, the Defendants filed their petition for appeal,
and on March 24, 2008, the Defendants filed their amended petition for appeal with the West
Virginia Supreme Court of Appeals. On May 22, 2008, the West Virginia Supreme Court of
Appeals refused the Defendants petition for appeal. The Defendants are preparing a petition
to the United States Supreme Court for a writ of certiorari; the petition to the United States
Supreme Court is due August 20, 2008. Given the West Virginia Courts refusal of the appeal,
NiSource has adjusted its reserve in the second quarter of 2008 to reflect the portion of the
trial court judgment for which NiSource would be responsible, inclusive of interest. This
amount is included in Legal and environmental reserves, on the Condensed Consolidated
Balance Sheet as of June 30, 2008.
C. Environmental Matters.
General. The operations of NiSource are subject to extensive and evolving federal, state and local
environmental laws and regulations intended to protect the public health and the environment. Such
environmental laws and regulations affect operations as they relate to impacts on air, water and
land.
A reserve of $80.4 million and $77.2 million has been recorded as of June 30, 2008 and December 31,
2007, respectively, to cover probable corrective actions at sites where NiSource has environmental
remediation liability. Regulatory assets have been recorded to the extent environmental
expenditures are expected to be recovered in rates. NiSource accrues for costs associated with
environmental remediation obligations when the incurrence of such costs is probable and the amounts
can be reasonably estimated, regardless of when the expenditures are actually made. The
undiscounted estimated future expenditures are based on many factors including currently enacted
laws and regulations, existing technology and estimated site-specific costs whereby assumptions may
be made about the nature and extent of site contamination, the extent of cleanup efforts, costs of
alternative cleanup methods and other
32
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
variables. NiSources estimated environmental remediation liability will be refined as events in
the remediation process occur. Actual remediation costs may differ materially from NiSources
estimates due to the dependence on the factors listed above.
Proposals for voluntary initiatives and mandatory controls are being discussed both in the United
States and worldwide to reduce so-called greenhouse gases such as carbon dioxide, a by-product of
burning fossil fuels, and methane, a component of natural gas. Certain NiSource affiliates engage
in efforts to voluntarily report and reduce their greenhouse gas emissions. NiSource is currently
a participant in the EPAs Climate Leaders program. On April 2, 2007, in Massachusetts v. EPA, the
Supreme Court ruled that the EPA does have authority under the CAA to regulate emissions of
greenhouse gases if it is determined that greenhouse gases have a negative impact on human health
or the environment. On July 11, 2008, in response to the April 2, 2007, U.S. Supreme Court
decision in Massachusetts v. EPA, the EPA released an ANPR soliciting public input on the effects
of climate change and the potential ramifications of the CAA in relation to greenhouse gas
emissions. In the ANPR, the EPA presents and requests comment on the best-available science,
requests relevant data, and poses questions about the advantages and disadvantages of using the CAA
to potentially regulate stationary and mobile sources of greenhouse gases. The ANPR also reviews
various petitions, lawsuits and court deadlines before the agency, and the profound effect
regulating under the CAA could have on the economy. NiSource will continue to monitor and
participate in developments related to efforts to register and potentially regulate greenhouse gas
emissions.
On March 12, 2008, the EPA announced the tightening of the 8-hour ozone NAAQS from 0.08 parts per
million to 0.075 parts per million. The number of areas that do not meet the new standards could
significantly increase across the country. Over the next several years, states will be required to
develop ozone attainment plans to implement the standards and improve air quality in these areas.
This could lead to additional emission reductions of NOx, an ozone precursor, from facilities owned
by NiSource. NiSource will closely monitor developments in these matters and cannot at this time
accurately estimate the timing or cost of emission controls that may eventually be required.
Gas Distribution Operations. Several Gas Distribution Operations subsidiaries are potentially
responsible parties at waste disposal sites under the CERCLA (commonly known as Superfund) and
similar state laws, as well as at MGP sites, which such subsidiaries, or their corporate
predecessors, own or previously owned or operated. Gas Distribution Operations subsidiaries may be
required to share in the cost of cleanup of such sites. In addition, some Gas Distribution
Operations subsidiaries have responsibility for corrective action under the RCRA for closure and
cleanup costs associated with underground storage tanks and under the Toxic Substances Control Act
for cleanup of PCBs. The final costs of cleanup have not yet been determined. As site
investigations and cleanup proceed and as additional information becomes available reserves are
adjusted.
A program has been instituted to identify and investigate former MGP sites where Gas Distribution
Operations subsidiaries or predecessors are the current or former owner. The program has
identified up to 86 such sites and initial investigations have been conducted at 54 sites.
Additional investigation activities have been completed or are in progress at 50 sites and remedial
measures have been implemented or completed at 37 sites. This effort includes the sites contained
in the January 2004 agreement entered into with the IDEM, Northern Indiana, Kokomo Gas, and other
Indiana utilities under the Indiana Voluntary Remediation Program. Only those site investigation,
characterization and remediation costs currently known and determinable can be considered probable
and reasonably estimable under SFAS No. 5. As costs become probable and reasonably estimable,
reserves will be adjusted. As reserves are recorded, regulatory assets are recorded to the extent
environmental expenditures are expected to be recovered through rates. NiSource is unable, at this
time, to accurately estimate the time frame and potential costs of the entire program. Management
expects that, as characterization is completed, additional remediation work is performed and more
facts become available, NiSource will be able to develop a probable and reasonable estimate for the
entire program or a major portion thereof consistent with the SECs SAB No. 92, SFAS No. 5 and SOP
96-1.
Gas Transmission and Storage Operations. Columbia Transmission continues to conduct
characterization and remediation activities at specific sites under a 1995 EPA AOC. The program
pursuant to the AOC covers approximately 245 facilities, approximately 13,000 liquid removal
points, approximately 2,200 mercury measurement stations and about 3,700 storage well locations.
Field characterization has been performed at all sites. Site characterization reports and
remediation plans, which must be submitted to the EPA for approval, are in various stages of
development and completion. Remediation has been completed at the mercury measurement stations,
33
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
liquid removal point sites and storage well locations and at all but 8 of the 245 facilities. The
AOC was amended in 2007 to facilitate payment of EPA oversight costs and to remove remediated sites
from the AOC.
Columbia Transmission and Columbia Gulf are potentially responsible parties at several waste
disposal sites under CERCLA and similar state laws. The potential liability is believed to be de
minimis. However, the final allocation of cleanup costs has yet to be determined. As site
investigations and cleanups proceed and as additional information becomes available reserves will
be adjusted.
On February 21, 2007, Pennsylvania Department of Environmental Protection provided representatives
of Columbia Transmission with a proposed Consent Order and Agreement covering an unmanned equipment
storage site located in rural southwest Pennsylvania. The proposed order alleges that Columbia
Transmission has violated the states Clean Streams Act and Solid Waste Management Act by
discharging petroleum products onto the property and into the waters of the state. In addition to
requiring remediation and monitoring activities at the site, the state has proposed penalties for
these violations. Columbia Transmission plans to engage in further discussions with the agency
regarding the proposed order, including the rationale for the proposed penalty. The site is
currently undergoing remediation via an EPA approved Remedial Action Work Plan. The Pennsylvania
Department of Environmental Protection has provided written notification that it will not attempt
to stop the EPA approved work and will seek the aforementioned Order after the remedy is completed.
On September 26, 2007, Columbia Transmission received an NOV related to bentonite discharge
associated with a horizontal directional drill operation for the Hardy Storage project. On
November 29, 2007, Columbia Transmission received an NOV related to the collapse of Swift Run
stream bed associated with the same horizontal directional drill operation. Columbia Transmission
received the Draft Consent Special Order from the VADEQ on March 3, 2008. NiSource has provided
comments to the VADEQ on the Draft Consent Special Order and continues to work with the VADEQ on
the content of the Draft Consent Special Order. The VADEQ issued a proposed penalty of $38,000
subject to public comment and final approval by VADEQ. Stream restoration activities are
continuing. Continued monitoring of the stream will occur for the next six months to two years.
Electric Operations.
Remediation. Northern Indiana is a potentially responsible party under the CERCLA and similar
state laws at two waste disposal sites and shares in the cost of their cleanup with other
potentially responsible parties. At one site, the Remedial Investigation and Feasibility Study was
submitted to the EPA in 2007. The EPA has issued a proposed plan to remediate the site which is
in the public comment period. At the second site, Northern Indiana has agreed to conduct a
Remedial Investigation and Feasibility Study in the vicinity of the third party, state-permitted
landfill where Northern Indiana contracted for fly ash disposal. In addition, Northern Indiana has
corrective action liability under the RCRA for three facilities that historically stored hazardous
waste.
As of June 30, 2008 and December 31, 2007, reserves of $3.3 million and $3.1 million, respectively,
have been recorded to cover probable environmental response actions for Electric Operations. The
ultimate liability in connection with these sites cannot be estimated at this time.
Air. In December 2001, the EPA approved regulations developed by the State of Indiana to comply
with the EPAs NOx SIP call. The NOx SIP call requires certain states, including Indiana, to
reduce NOx levels from several sources, including industrial and utility boilers, to lower regional
transport of ozone. Compliance with the NOx limits contained in these rules was required by May
31, 2004. To comply with the rule, Northern Indiana developed a NOx compliance plan, which
included the installation of Selective Catalytic Reduction NOx reduction technology at each of its
active generating stations and is currently in compliance with the NOx limits. In implementing the
NOx compliance plan, Northern Indiana has expended approximately $310.9 million as of June 30,
2008. Actual costs may vary depending on a number of factors including market demand and resource
constraints, uncertainty of future equipment and construction costs, and the potential need for
additional control technology.
On March 10, 2005, the EPA issued the CAIR final regulations. The rule establishes phased
reductions of NOx and SO2 from 28 Eastern states, including electric utilities in Indiana, by
establishing an annual emissions cap for NOx and SO2 and an additional cap on NOx emissions during
the ozone control season. On March 15, 2006, the EPA signed three related rulemakings providing
final regulatory decisions on implementing the CAIR. The EPA, in one
34
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
of the rulings, denied several petitions for reconsideration of various aspects of the CAIR,
including requests by Northern Indiana to reconsider SO2 and NOx allocations. On March 25, 2008,
the U. S. Court of Appeals for the D. C. Circuit held oral arguments in litigation challenging the
CAIR. Northern Indiana, along with other utilities, directly participated in one of the arguments
addressing the legality of using the allowance allocations of the Acid Rain program for the purpose
of complying with the CAIR SO2 reduction requirements. On July 11, 2008, the court vacated the
CAIR and the CAIR FIP in their entirety, and remanded them back to the EPA to promulgate a rule
consistent with the courts opinion. Per the Courts rules, the mandate will be deferred during
the 45-day period allowed for the filing of any petitions for rehearing.
On October 3, 2007, the Indiana Air Pollution Control Board adopted, with minor changes from the
EPA Clean Air Mercury Rule, the state rule to implement EPAs CAMR. The rule became effective on
February 3, 2008, with compliance required in 2010. On February 8, 2008, the United States Court
of Appeals for the District of Columbia Circuit vacated two EPA rules addressing utility mercury
emissions that are the stimulus for the Indiana Air Pollution Control Boards CAMR. The first is
the EPAs rule delisting coal and oil-fired electric generating units from the list of sources
whose emissions are regulated under section 112 of the CAA, 42 U.S.C. § 7412. Revision of December
2000 Regulatory Finding (Delisting Rule), 70 Fed. Reg. 15,994 (March 29, 2005). The second is
the EPAs rule that set performance standards for new coal-fired electric generating units and
established total mercury emission limits for states along with a cap-and-trade program for new and
existing coal-fired electric generating units. Standards of Performance for New and Existing
Stationary Sources: Electric Utility Steam Generating Units (CAMR), 70 Fed. Reg. 28,606 (May 18,
2005). On March 24, 2008, the EPA and industry filed petitions with the court for rehearing of
these decisions and on May 20, 2008, the D.C. Circuit denied the rehearing requests. Any party
wanting to appeal the decision has until August 16, 2008, to file a petition for certiorari with
the U. S. Supreme Court. The resolution of this legal action and the EPAs response will affect
the implementation and timing of the installation of controls to address potential mercury
reduction obligations. Northern Indiana will closely monitor developments regarding any further
action by the EPA and subsequent regulatory developments from the EPA and/or the Indiana Air
Pollution Control Board in this matter.
Local air quality has improved in three counties in which Northern Indiana generating assets are
located. In recognition of this improvement the IDEM submitted petitions to the EPA seeking
redesignation of the Indiana counties of Lake, Porter, and LaPorte to attainment of the eight-hour
ozone NAAQS. Final EPA rulemaking approving the LaPorte County redesignation became effective on
July 19, 2007. The EPA approval for Lake and Porter counties is undergoing further evaluation and
may be delayed until after the 2008 ozone season due to monitored values in 2007 at one site that
put the design value just above the NAAQS. On October 3, 2007, the Air Pollution Control Board
adopted the redesignation of LaPorte County to attainment as part of a reformatting of the state
attainment designation rule. The rule became effective January 28, 2008. Upon promulgation of the
EPA and subsequent IDEM regulations to implement the redesignations to attainment, new source
review rules are expected to change from nonattainment new source review rules to prevention of
significant deterioration while measures responsible for existing emission reductions would
continue. The March 12, 2008 EPA tightening of the 8-hour ozone NAAQS may preclude the approval of
the redesignation requests and may result in these counties remaining and/or again being designated
as nonattainment of the ozone NAAQS. As discussed above under General, the EPA ozone NAAQS
revision could lead to additional emission reductions of NOx, an ozone precursor, from facilities
owned by Northern Indiana. Northern Indiana will closely monitor developments in these matters and
cannot at this time accurately estimate the timing or cost of emission controls that may eventually
be required.
The U. S. Court of Appeals for the D. C. Circuit, in late 2006, ruled a requirement to impose CAA
§185 fees on emissions sources located in counties that failed to timely attain the previous
(one-hour) ozone standard, which had been rescinded by the EPA in May 2005, remained applicable
retroactive to November 2005. The court remanded the issue to the EPA for reconsideration. In
January 2008, the U. S. Supreme Court denied a petition to hear an appeal on this matter. The EPA
has announced that it intends to propose regulations in fall 2008 to specify how CAA §185 fees will
be imposed and calculated. One of Northern Indianas operating generating assets is located in
Porter County where this fee could potentially be applied. On July 7, 2008, the EPA proposed a
finding of attainment of the one-hour ozone NAAQS for the Illinois and Indiana one-hour ozone
nonattainment area which includes Porter County. Included in the proposed rule is a finding that
the area, including Porter County, is not subject to the imposition of the CAA §185 penalty fees.
Northern Indiana will closely monitor developments in this matter.
35
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
In late 1999, the EPA initiated a New Source Review enforcement action against several industries,
including the electric utility industry, concerning rule interpretations that have been the subject
of recent (prospective) reform regulations. Northern Indiana has received and responded to the EPA
information requests on this subject, most recently in June 2002. The EPA issued an NOV to
Northern Indiana on September 29, 2004, for alleged violations of the CAA and the SIP.
Specifically, the NOV alleges that modifications were made to certain boiler units at the Michigan
City, Schahfer, and Bailly Generating Stations between the years of 1985 and 1995 without obtaining
appropriate air permits for the modifications. An adverse outcome in this matter could require
capital expenditures beyond the EPA requirements that cannot be determined at this time and could
require payment of substantial penalties. Northern Indiana is unable, at this time, to predict the
timing or outcome of this EPA action.
Water. The Great Lakes Water Quality Initiative program is expected to add new water quality
standards for facilities that discharge into the Great Lakes watershed and the State of Indiana has
promulgated its regulations for this water discharge permit program and has received final EPA
approval. The permit for the Bailly Generating Station was issued on June 26, 2006, and became
effective on August 1, 2006. Northern Indiana appealed the Bailly Generating Station NPDES permit,
due to an unacceptable internal outfall monitoring permit condition. On February 18, 2008, the
Bailly Generating Station NPDES permit was modified to resolve the monitoring issue and to address
the 316(b) rule status due to the remand mentioned below. Due to additional pending studies, the
cost of complying with the permit requirements cannot be estimated at this time.
On February 16, 2004, the EPA Administrator signed the Phase II Rule of the Clean Water Act Section
316(b) which requires all large existing steam electric generating stations meet certain
performance standards to reduce the effects on aquatic organisms at their cooling water intake
structures. The rule became effective on September 7, 2004. Under this rule, stations will either
have to demonstrate that the performance of their existing fish protection systems meet the new
standards or develop new systems, such as a closed-cycle cooling tower. On January 25, 2007, the
Second Circuit in a court decision on the Phase II 316(b) rule, remanded for EPA reconsideration
the options providing flexibility for meeting the requirements of the rule. On March 20, 2007, the
EPA issued a guidance memo advising its Regional Administrators that the Agency considers the
316(b), Phase II Rule governing cooling water withdrawals suspended and will be issuing a Federal
Register notice to that effect. On July 9, 2007, the EPA published a notice in the Federal
Register suspending the Phase II rule. The notice explained that the EPA is not accepting comments
on the suspension and notes that best professional judgment is to be used in making 316(b)
decisions. The EPA will need to propose a revised 316(b) rule and/or provide guidance to address
the impact of the court decision. Northern Indiana will closely monitor the EPA rule developments.
On July 5, 2007, the Second Circuit Court of Appeals denied the petitions for rehearing asking the
court to reconsider its remand of the Phase II 316(b) ruling. Various parties submitted petitions
for a writ of certiorari to the U. S. Supreme Court in early November seeking to reverse the Second
Circuit Courts decision. The U.S. Supreme Court has agreed to hear the appeal which is based on
the role of cost-benefit analysis in establishing standards for compliance with the rule. The case
is scheduled to be heard during the fall of 2008. Northern Indiana will continue to closely
monitor this activity.
Coal Combustion Products. The Federal government has recently shown an increased interest in
evaluating the advisability of Federal regulation of coal combustion waste products because of
concern over potential health and environmental risks. A House subcommittee has begun to study
this issue building on the EPAs ongoing activities in this matter. Northern Indiana will continue
to monitor this activity for any future regulatory actions and cannot predict the potential
financial impact at this time.
36
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
18. Changes in Common Stockholders Equity and Comprehensive Income (Loss)
The following table displays the changes in Common Stockholders Equity and Comprehensive Income
(Loss) for the six months ended June 30, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Accum |
|
|
|
|
|
Comp |
|
|
Common |
|
Treasury |
|
Paid-In |
|
Retained |
|
Other Comp |
|
|
|
|
|
Income |
(in millions) |
|
Stock |
|
Stock |
|
Capital |
|
Earnings |
|
Income/(Loss) |
|
Total |
|
(Loss) |
|
Balance January 1,
2008 |
|
$ |
2.7 |
|
|
$ |
(23.3 |
) |
|
$ |
4,011.0 |
|
|
$ |
1,074.5 |
|
|
$ |
11.7 |
|
|
$ |
5,076.6 |
|
|
|
|
|
|
Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103.0 |
) |
|
|
|
|
|
|
(103.0 |
) |
|
|
(103.0 |
) |
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/loss on available for sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.0 |
) |
|
|
(2.0 |
) |
|
|
(2.0 |
) |
Net unrealized losses on derivatives
qualifying as cash flow hedges (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27.3 |
|
|
|
27.3 |
|
|
|
27.3 |
|
Unrecognized Pension Benefit and OPEB cost (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.0 |
) |
|
|
(3.0 |
) |
|
|
(3.0 |
) |
|
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80.7 |
) |
Dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(189.3 |
) |
|
|
|
|
|
|
(189.3 |
) |
|
|
|
|
Treasury stock acquired |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
Issued: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase plan |
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
Long-term incentive plan |
|
|
|
|
|
|
|
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
3.5 |
|
|
|
|
|
Amortization of Long-term
incentive Plan |
|
|
|
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
Balance June 30, 2008 |
|
$ |
2.7 |
|
|
$ |
(23.4 |
) |
|
$ |
4,015.4 |
|
|
$ |
782.2 |
|
|
$ |
34.0 |
|
|
$ |
4,810.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Accum |
|
|
|
|
|
|
|
|
Common |
|
Treasury |
|
Paid-In |
|
Retained |
|
Other Comp |
|
|
|
|
|
Comp |
(in millions) |
|
Stock |
|
Stock |
|
Capital |
|
Earnings |
|
Income/(Loss) |
|
Total |
|
Income |
|
Balance January 1, 2007 |
|
$ |
2.7 |
|
|
$ |
(21.2 |
) |
|
$ |
3,998.3 |
|
|
$ |
1,012.9 |
|
|
$ |
20.9 |
|
|
$ |
5,013.6 |
|
|
|
|
|
|
Adjustment to initially apply new measurement
date pursuant to SFAS No. 158, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.8 |
) |
|
|
|
|
|
|
(6.8 |
) |
|
|
|
|
Adjustment to initially apply
FIN 48, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.8 |
) |
|
|
|
|
|
|
(0.8 |
) |
|
|
|
|
|
Beginning balance, as adjusted |
|
$ |
2.7 |
|
|
$ |
(21.2 |
) |
|
$ |
3,998.3 |
|
|
$ |
1,005.3 |
|
|
$ |
20.9 |
|
|
$ |
5,006.0 |
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243.4 |
|
|
|
|
|
|
|
243.4 |
|
|
|
243.4 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/loss on available for sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.3 |
|
Net unrealized gains on derivatives
qualifying as cash flow hedges (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2 |
|
|
|
3.2 |
|
|
|
3.2 |
|
Unrecognized Pension
Benefit and OPEB cost (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5 |
|
|
|
3.5 |
|
|
|
3.5 |
|
|
Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250.4 |
|
Dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(189.1 |
) |
|
|
|
|
|
|
(189.1 |
) |
|
|
|
|
Treasury stock acquired |
|
|
|
|
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.1 |
) |
|
|
|
|
Issued: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase plan |
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
Long-term incentive plan |
|
|
|
|
|
|
|
|
|
|
8.4 |
|
|
|
|
|
|
|
|
|
|
|
8.4 |
|
|
|
|
|
Amortization of Long-term
incentive Plan |
|
|
|
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
Balance June 30, 2007 |
|
$ |
2.7 |
|
|
$ |
(23.3 |
) |
|
$ |
4,007.6 |
|
|
$ |
1,059.6 |
|
|
$ |
27.9 |
|
|
$ |
5,074.5 |
|
|
|
|
|
|
|
|
|
(a) |
|
Net unrealized losses on available for sale securities, net of $1.3 million
tax benefit and $0.5 million tax expense in the first half of 2008 and 2007,
respectively. |
|
(b) |
|
Net unrealized gains (losses) on derivatives qualifying as cash flow
hedges, net of $18.7 million and $4.7 million tax expense in the first half of
2008 and 2007, respectively. |
|
(c) |
|
Unrecognized pension benefit and OPEB costs, net of $1.8 million tax
benefit and $2.1 million tax expense in the first half of 2008 and 2007,
respectively. |
37
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
19. Accumulated Other Comprehensive Income
The following table displays the components of Accumulated Other Comprehensive Income, which is
included in Common Stockholders Equity, on the Condensed Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
Other comprehensive income (loss), before taxes: |
Unrealized gains on securities |
|
$ |
3.9 |
|
|
$ |
7.2 |
|
Tax (expense) on unrealized gains on securities |
|
|
(1.6 |
) |
|
|
(2.8 |
) |
Unrealized gains on cash flow hedges |
|
|
56.2 |
|
|
|
10.2 |
|
Tax (expense) on unrealized gains on cash flow hedges |
|
|
(21.3 |
) |
|
|
(2.6 |
) |
Unrecognized pension benefit and OPEB costs |
|
|
(5.2 |
) |
|
|
(0.5 |
) |
Tax benefit on unrecognized pension benefit and OPEB costs |
|
|
2.0 |
|
|
|
0.2 |
|
|
Total Accumulated Other Comprehensive Income, net of taxes |
|
$ |
34.0 |
|
|
$ |
11.7 |
|
|
20. Business Segment Information
Operating segments are components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The NiSource Chief Executive Officer is the chief
operating decision maker.
NiSources operations are divided into four primary business segments. The Gas Distribution
Operations segment provides natural gas service and transportation for residential, commercial and
industrial customers in Ohio, Pennsylvania, Virginia, Kentucky, Maryland, Indiana and
Massachusetts. The Gas Transmission and Storage Operations segment offers gas transportation and
storage services for LDCs, marketers and industrial and commercial customers located in
northeastern, mid-Atlantic, midwestern and southern states and the District of Columbia. The
Electric Operations segment provides electric service in 20 counties in the northern part of
Indiana. The Other Operations segment primarily includes gas and power marketing, and ventures
focused on distributed power generation technologies, including fuel cells and storage systems.
38
ITEM 1.
FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
The following table provides information about business segments. NiSource uses operating income
as its primary measurement for each of the reported segments and makes decisions on finance,
dividends and taxes at the corporate level on a consolidated basis. Segment revenues include
intersegment sales to affiliated subsidiaries, which are eliminated in consolidation. Affiliated
sales are recognized on the basis of prevailing market, regulated prices or at levels provided for
under contractual agreements. Operating income is derived from revenues and expenses directly
associated with each segment. Electric Operations operating income
was negatively impacted by an $8.3 million depreciation expense
adjustment recorded by Northern Indiana during the second quarter of 2008. The non-cash adjustment to depreciation expense was not
material to the results of operations and consolidated financial statements and will not materially
impact depreciation charges in future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
(in millions) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Distribution Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated |
|
$ |
1,025.0 |
|
|
$ |
854.8 |
|
|
$ |
3,465.4 |
|
|
$ |
2,903.1 |
|
Intersegment |
|
|
4.4 |
|
|
|
4.0 |
|
|
|
11.5 |
|
|
|
10.8 |
|
|
Total |
|
|
1,029.4 |
|
|
|
858.8 |
|
|
|
3,476.9 |
|
|
|
2,913.9 |
|
|
Gas Transmission and Storage Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated |
|
|
151.2 |
|
|
|
141.6 |
|
|
|
319.5 |
|
|
|
305.1 |
|
Intersegment |
|
|
44.8 |
|
|
|
48.3 |
|
|
|
107.8 |
|
|
|
113.8 |
|
|
Total |
|
|
196.0 |
|
|
|
189.9 |
|
|
|
427.3 |
|
|
|
418.9 |
|
|
Electric Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated |
|
|
341.1 |
|
|
|
334.3 |
|
|
|
673.9 |
|
|
|
661.2 |
|
Intersegment |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.4 |
|
|
Total |
|
|
341.3 |
|
|
|
334.5 |
|
|
|
674.3 |
|
|
|
661.6 |
|
|
Other Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated |
|
|
272.4 |
|
|
|
233.2 |
|
|
|
618.5 |
|
|
|
537.8 |
|
Intersegment |
|
|
12.9 |
|
|
|
9.5 |
|
|
|
26.1 |
|
|
|
26.6 |
|
|
Total |
|
|
285.3 |
|
|
|
242.7 |
|
|
|
644.6 |
|
|
|
564.4 |
|
|
Adjustments and eliminations |
|
|
(59.9 |
) |
|
|
(59.0 |
) |
|
|
(141.3 |
) |
|
|
(147.2 |
) |
|
Consolidated Revenues |
|
$ |
1,792.1 |
|
|
$ |
1,566.9 |
|
|
$ |
5,081.8 |
|
|
$ |
4,411.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Distribution Operations |
|
$ |
(10.0 |
) |
|
$ |
13.3 |
|
|
$ |
244.9 |
|
|
$ |
267.4 |
|
Gas Transmission and Storage Operations |
|
|
77.9 |
|
|
|
67.8 |
|
|
|
182.7 |
|
|
|
174.4 |
|
Electric Operations |
|
|
50.7 |
|
|
|
64.8 |
|
|
|
89.1 |
|
|
|
137.8 |
|
Other Operations |
|
|
0.7 |
|
|
|
(0.4 |
) |
|
|
0.2 |
|
|
|
(0.2 |
) |
Corporate |
|
|
(2.7 |
) |
|
|
(1.6 |
) |
|
|
(5.5 |
) |
|
|
(5.1 |
) |
|
Consolidated Operating Income |
|
$ |
116.6 |
|
|
$ |
143.9 |
|
|
$ |
511.4 |
|
|
$ |
574.3 |
|
|
21. Hartsville and Delhi Compressor Stations
On February 5, 2008, tornados struck Columbia Gulfs Hartsville Compressor Station in Macon County,
Tennessee. The damage to the facility forced Columbia Gulf to declare force majeure because no gas
was flowing through this portion of the pipeline system while a facility assessment was being
performed and the current contractual transportation agreements of 2.156 Bcf per day could not be
met. Since that time Columbia Gulf has constructed both temporary and permanent facilities at
Hartsville and has restored gas flow to 2.156 Bcf per day. During the next 12 to 18 months the
temporary facilities that were constructed to restore system capabilities will be replaced with a
permanent solution. This capacity would remain in place while the permanent solution is
implemented.
39
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
NiSource expects the majority of the reconstruction costs during the 18 to 24 month
period for the compressor
station and ancillary facilities plus business interruption losses during the twelve month period
from the event will be recoverable through insurance.
On December 14, 2007, Columbia Gulfs Line 100 ruptured approximately two miles north of its Delhi
Compressor Station in Louisiana. The damage to the pipeline forced Columbia Gulf to declare force
majeure because no gas was flowing through this portion of the pipeline system on Lines 100, 200
and 300 while a facility assessment was performed. As a result the current contractual
transportation agreements of 2.156 Bcf per day could not be met. By December 15, 2007 Lines 200
and 300 were returned to service and gas flow was restored to 2.0 Bcf per day on December 16, 2007.
On December 19, 2007, the U.S. Department of Transportation issued a Corrective Action Order which
was applicable to Line 100 from the Rayne, LA Compressor Station to Leach, KY. The Order required
Columbia Gulf to develop a remedial work plan, which included assessments on Line 100 using in-line
inspection tools. The Order also required a 20% reduction in pressure on Line 100 from the Rayne
Compressor Station to the Corinth Compressor Station which resulted in a reduction in gas flow on
December 21, 2007 to 1.6 Bcf per day. The next day the capacity was increased to 1.75 Bcf per day.
Between December 22, 2007 and February 5, 2008 the capacity varied between 1.6 and 1.75 Bcf per
day as a result of remediation work on Line 100. On July 1, 2008, Columbia Gulf received
permission from the U.S. Department of Transportation to restore full pressure on Line 100
pipeline. NiSource expects to recover a portion of the pipeline replacement costs plus business
interruption losses through insurance.
40
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
NiSource Inc.
Note regarding forward-looking statements
The Managements 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 NiSources 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 NiSources 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 NiSources 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 effectiveness of NiSources outsourcing
initiative, actual operating experience of NiSources assets, the regulatory process, regulatory
and legislative changes, changes in general economic, capital and commodity market conditions, and
counterparty 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.
The following Managements Discussion and Analysis should be read in conjunction with NiSources
Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
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 NiSources operations is subject to seasonal fluctuations in
sales. During the heating season, which is primarily from November through March, net revenues
from gas are more significant, and during the cooling season, which is primarily from June through
September, net revenues from electric sales and transportation services are more significant than
in other months.
NiSource is a holding company under the Public Utility Holding Company Act of 2005.
For the six months ended June 30, 2008, NiSource reported income from continuing operations of
$210.4 million, or $0.77 per basic share, compared to $235.4 million, or $0.86 per basic share in
2007.
Decreases in income from continuing operations were due primarily to the following items:
|
|
Operating expenses increased by $52.5 million primarily due to higher employee and
administrative expenses of $28.7 million across NiSources business segments, a $15.5 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 $6.2 million. The increased electric
generation and maintenance costs resulted primarily from planned turbine and boiler
maintenance and a generator overhaul. |
41
ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
|
|
Electric Operations net revenues were negatively impacted by $14.1 million due to
non-recoverable power purchased and non-recoverable MISO charges. Additionally, lower
residential and commercial margins contributed to lower net revenues partially offset by higher
industrial usage and margins. |
Increases impacting income from continuing operations that partially offset the decreases described
above included:
|
|
Interest expense decreased $18.3 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 $8.4 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. |
|
|
|
Lower income taxes of $16.8 million due to lower income from continuing operations and a
lower effective tax rate. |
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, NiSources 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 will
file its detailed case on or before August 29, 2008. The prehearing conference to establish the
procedural schedule for the electric rate case was held on July 29, 2008. Initial hearings are
anticipated in January 2009.
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. The case is currently pending, and is expected to be resolved by the fourth
quarter 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.
If approved, the settlement authorizes Columbia to increase revenues by $41.5 million annually, and
make certain other accounting, tariff and service changes. The Pennsylvania Public Utilities
Commission is expected to issue an order in this case by the third quarter of 2008, with new rates
expected to take effect during the fourth quarter.
42
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
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 Commission 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 Staffs investigation;
Columbias 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: Columbias 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.
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 Ohios 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 Ohios 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 Indianas need to add approximately 1,000 mw of new capacity. Refer to Note 9,
Regulatory Matters, in the Notes to Condensed Consolidated Financial Statements 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.
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 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 second
quarter and six months ended June 30, 2008, estimated losses of $3.4 million and $66.9 million were
recorded to Gain (Loss) on Disposition of Discontinued Operation in the Condensed Statements of
Consolidated Income (Loss).
NiSource acquired Northern Utilities and Granite State Gas in 1999 as part of the companys larger
acquisition of Bay State. NiSource is retaining its ownership of Bay State as a core component of
the companys long-term, investment-driven growth strategy.
Sale of Columbia Gulfs Offshore Assets. On June 27, 2008, Columbia Gulf sold a portion of
Columbia Gulfs offshore assets to Tennessee Gas Pipeline Company for $7.5 million. A gain of $2.9
million was recorded on the sale during the second quarter of 2008.
43
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
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 NiSources gas transmission and storage growth strategy, and should provide
NiSource access to competitively priced capital to support future growth investment. Due to the
damage sustained at Columbia Gulfs Hartsville, Tennessee, compressor station, following the
tornados at the facility as described previously, as well as overall financial market conditions,
the timing of the initial public offering is not likely to occur during 2008.
Millennium Pipeline Project. In June 2007, construction began on the Millennium Pipeline, a
182-mile-long, 30-inch-diameter pipeline across New Yorks 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 first full year 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 billion cubic feet, 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, is expanding 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 has been completed with the
facilities being placed into 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 Gulfs system for delivery to Florida Gas Transmission was held in
late 2007 and contracts for 100,000 Dth per day of capacity were executed. The remaining 80,000
Dth per day of capacity is expected to be sold under firm contracts during the fourth quarter of
2008. 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 a
favorable order which granted a certificate to construct the project and the project is expected to
be in service by spring 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. 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 6,900,000 Dth 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 a
successful open season to gauge customer interest in a new pipeline system to provide 500,000 Dth
per day of firm service
44
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
from storage facilities near Leidy, PA to a new interconnection with Millennium Pipeline in Steuben
County, New York in 2010.
Centerville Expansion Project. An open season to solicit interest and contracts for expanded
capacity on Columbia Gulfs system for delivery to Southern Natural Gas and the Louisiana
intrastate pipeline market was held during the first quarter of 2008, and contracts for 60,000 Dth
per day of capacity were executed. 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.
Financial Management of the Balance Sheet
NiSources interest expense decreased $18.3 million for the first six months of 2008 compared to
the first six 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.
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 second quarter of 2008, certain Meter to Cash, Human
Resources, Sales Center, and Supply Chain Management support services transitioned back to the
company. Transition of the remaining business support services returning to NiSource will continue
through the third quarter of 2008.
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 is planned for late 2008.
Results of Operations
Quarter Ended June 30, 2008
Net Income
NiSource reported a net loss of $202.3 million, or $0.74 loss per basic share, for the three months
ended June 30, 2008, compared to net income of $26.7 million, or $0.10 per basic share, for the
second quarter 2007. The loss was due to $223.3 million of losses related to discontinued
operations (discussed below). Income from continuing operations was $21.0 million, or $0.08 per
basic share, for the three months ended June 30, 2008, compared to $28.9 million, or $0.11 per
basic share, for the second quarter 2007. Operating income was $116.6 million, a decrease of $27.3
million from the same period in 2007. All per share amounts are basic earnings per share. Basic
average shares of common stock outstanding at June 30, 2008 were 274.0 million compared to 273.8
million at June 30, 2007.
Net Revenues
Total consolidated net revenues (gross revenues less cost of sales) for the three months ended June
30, 2008, were $670.3 million, a $7.4 million decrease from the same period last year. This
decrease in net revenues was primarily due to lower Gas Distribution Operations net revenues of
$11.2 million primarily attributable to warmer weather of approximately $8 million and decreased
net revenues from the implementation of the Columbia of Ohio Stipulation entered into with the Ohio
Consumers Counsel and PUCO at the end of 2007, partially offset by regulatory increases from rate
proceedings and other service programs. Net revenues from Electric Operations also accounted
45
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
for a portion of the overall decrease in net revenues by declining $3.3 million from the comparable
2007 period primarily due to the impact of cooler weather of approximately $4 million and $2.7
million of non-recoverable purchased power, partially offset by higher industrial volumes of $1.6
million, the timing of revenue credits of $1.5 million and incremental revenues from the new Sugar
Creek plant of $1.3 million. 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. These decreases in net revenues from Gas Distribution Operations and Electric
Operations were partially offset by higher net revenues from Gas Transmission and Storage
Operations of $6.4 million which primarily resulted from increased subscriptions for firm
transportation services of $6.3 million 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.
Expenses
Operating expenses for the second quarter 2008 were $555.3 million, an increase of $17.8 million
from the 2007 period. This increase was primarily due to higher employee and administrative
expenses of $11.8 million across NiSources business segments, a $14.2 million increase in
depreciation which includes an $8.3 million depreciation expense
adjustment recorded by Northern Indiana during
the second quarter of 2008, and a $2.8 million reversal
of a reserve in the comparable 2007 period for a legal matter. The non-cash adjustment to
depreciation expense was not material to the results of operations and consolidated financial
statements and will not materially impact depreciation charges in future periods. These increases
in operating expenses were partially offset by a $6.6 million impairment charge recognized in the
comparable 2007 period related to base gas at a storage field and a $2.9 million gain recognized on
the sale of certain Columbia Gulf offshore assets.
Other Income (Deductions)
Interest expense, net was $87.4 million for the quarter, a decrease of $11.0 million compared to
the second quarter of 2007. 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.
Other, net was income of $1.3 million for the current quarter compared to a loss of $0.1 million
for the comparable 2007 period due primarily to lower costs associated with the sale of accounts
receivable.
Income Taxes
Income tax for the second quarter of 2008 was $9.5 million, a decrease of $7.0 million compared to
the second quarter of 2007 due primarily to lower pretax income and a lower effective tax rate.
The effective tax rate for the quarter ended June 30, 2008 was 31.1% compared to 36.3% for the
comparable period. The 5.2% decrease in the second quarter of 2008 effective tax rate versus the
second quarter of 2007 effective tax rate is primarily due to a change in the estimated annual 2008
effective tax rate recognized in the second quarter as a result of an increase in projected
AFUDC-Equity.
Discontinued Operations
For the three months ended June 30, 2008, NiSource recognized a $220.5 million loss from
discontinued operations compared to a loss from discontinued operations of $1.4 million in the
comparable 2007 period. This loss is primarily attributable to an adjustment to the reserve for
the Tawney litigation mentioned previously. Additionally, in the first quarter of 2008, NiSource
began accounting for the operations of Northern Utilities, Granite State Gas and Whiting Clean
Energy as discontinued operations. As such, a net loss of $1.4 million from continuing operations
was classified to net income (loss) from discontinued operations for the three months ended June
30, 2008, and a net loss of $0.8 million was reclassified for the three months ended June 30, 2007.
In the second quarter of 2008, NiSource recorded an estimated after-tax loss adjustment of $2.8
million for the disposition of Northern Utilities, Granite State Gas and Whiting Clean Energy.
46
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Results of Operations
Six Months Ended June 30, 2008
Net Income
NiSource reported a net loss of $103.0 million, or $0.38 loss per basic share, for the six months
ended June 30, 2008, compared to net income of $243.4 million, or $0.89 per basic share, for the
first six months 2007. Income from continuing operations was $210.4 million, or $0.77 per basic
share, for the six months ended June 30, 2008, compared to $235.4 million, or $0.86 per basic
share, for the comparable 2007 period. Operating income was $511.4 million, a decrease of $62.9
million from the same period in 2007. All per share amounts are basic earnings per share. Basic
average shares of common stock outstanding at June 30, 2008 were 273.9 million compared to 273.7
million at June 30, 2007.
Net Revenues
Total consolidated net revenues (gross revenues less cost of sales) for the six months ended June
30, 2008, were $1,711.5 million, an $8.8 million decrease from the same period last year. Net
revenues decreased primarily due to lower Electric Operations net revenues of $18.3 million from
the comparable 2007 period. This decrease in Electric Operations net revenues was primarily due to
$14.1 million of non-recoverable purchased power and non-recoverable MISO charges. This decrease
in Electric Operations net revenues was partially offset by higher net revenues within Gas
Transmission and Storage Operations of $8.4 million. Gas Transmission and Storage Operations net
revenues increased due to higher subscriptions for firm transportation services of $11.3 million
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. These increases
were partially offset by insurance proceeds from a business interruption claim that improved last
years results by $2.6 million.
Expenses
Operating expenses for the first six months of 2008 were $1,203.7 million, an increase of $52.5
million from the comparable 2007 period. This increase was primarily due to higher employee and
administrative expenses of $28.7 million, due in part to adjustments that reduced benefit expense
by $8.3 million during 2007, a $15.5 million increase in
depreciation which includes an $8.3 million
depreciation expense adjustment recorded by Northern Indiana during the second quarter of 2008, higher electric generation and maintenance expenses of $6.2
million and a $2.8 million reversal of a reserve in the comparable 2007 period for a legal matter.
Operating expenses increases were partially offset by a $6.6 million impairment charge recognized
in the comparable 2007 period related to base gas at a storage field and a $2.9 million gain
recognized on the sale of certain Columbia Gulf offshore assets. The higher generation and
maintenance expenses were primarily attributable to a planned turbine and boiler maintenance and a
generator overhaul.
Other Income (Deductions)
Interest expense, net was $179.2 million for the first six months of 2008 compared to $197.5
million for the first six months of last year. This decrease of $18.3 million was mainly 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 a loss of $0.2 million for the first half of
2008 compared to a loss of $3.0 million for the comparable 2007 period due to lower costs
associated with the sale of accounts receivable.
Income Taxes
Income tax for the first six months of 2008 was $121.6 million, a decrease of $16.8 million
compared to the first six months of 2007 due primarily to lower pretax income. The effective tax
rate for the first six months of 2008 was 36.6% compared to 37.0% for the comparable period last
year.
Discontinued Operations
For the six months ended June 30, 2008, NiSource recognized a $214.5 million loss from discontinued
operations compared to income from discontinued operations of $2.2 million in the comparable 2007
period. This loss is primarily attributable to an adjustment to the reserve for the Tawney
litigation discussed previously. In addition, in the first quarter of 2008, NiSource began
accounting for the operations of Northern Utilities, Granite State Gas and Whiting Clean Energy as
discontinued operations. As such, net income of $4.6 million from continuing operations was
classified to net income (loss) from discontinued operations for the six months ended June 30,
2008, and net
47
ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
income of $1.9 million was reclassified for the six months ended June 30, 2007, respectively. For
the six months ended June 30, 2008, NiSource recorded an estimated after-tax loss of $98.9 million
for the dispositions of Northern Utilities, Granite State Gas and Whiting Clean Energy.
Liquidity and Capital Resources
A significant portion of NiSources operations, most notably in the gas distribution, gas
transportation and electric businesses, is subject to seasonal fluctuations in cash flow. During
the heating season, which is primarily from November through March, cash receipts from gas sales
and transportation services typically exceed cash requirements. During the summer months, cash on
hand, together with the seasonal increase in cash flows from the electric business during the
summer cooling season and external short-term and long-term financing, is used to purchase gas to
place in storage for heating season deliveries, perform necessary maintenance of facilities, make
capital improvements in plant and expand service into new areas.
Increased costs for natural gas placed in storage during the first half of 2008 and the increase in
unrecovered gas costs have required larger amounts of working capital than in previous years. While
we believe the credit facilities currently in place to finance our operating and capital
requirements are adequate, we will continue to monitor our liquidity position over the next few
months.
Operating Activities
Net cash flows from operating activities for the six months ended June 30, 2008 were $638.4
million, an increase of $50.5 million from the first six months
of 2007. A $69.8 million increase in deferred taxes was offset
by net changes in assets and liabilities. The weather and gas prices
significantly impact working capital. There were sources of cash generated from favorable weather
in certain jurisdictions and pricing impacts on inventory and
accounts payable. These
sources of cash were mostly offset by increases in unrecovered gas cost also driven by gas price increases.
Investing Activities
Cash capital expenditures of $422.8 million during the first six months of 2008 were $98.9 million
higher than the comparable 2007 period. The spending for the first six months primarily reflected
on-going system improvements and upgrades to maintain service and reliability. Capital spending is
expected to continue to increase in 2008 compared to last year, mainly for increased
integrity-management improvements in the Gas Transmission and Storage Operations segment and
expenditures to replace key components within the Electric Operations segment. Additionally,
growth projects in the Gas Transmission and Storage Operations segment as well as bare steel
replacement programs in the Gas Distribution Operations segment will contribute to higher capital
expenditures in 2008 relative to 2007 expenditures.
Capital spending, including ongoing infrastructure investments, is projected to be more than $1
billion annually, beginning in 2008 and for the foreseeable future.
On May 30, 2008, Northern Indiana purchased the Sugar Creek generating facility for $329.7 million.
Proceeds from disposition of assets primarily included the Whiting Clean Energy sale proceeds of
$217.2 million.
Restricted cash activity was $136.5 million and $73.5 million for the first six months of 2008 and
2007, respectively, due to volatility in forward gas contracts, which resulted in decreased margin
deposits on open derivative contracts at June 30, 2008.
Financing Activities
Long-Term Debt. On May 15, 2008, NiSource Finance issued $500.0 million of 6.80% unsecured notes
that mature January 15, 2019 and $200.0 million of 6.15% unsecured notes that mature on March 1,
2013. The notes due in 2013 constitute a further issuance of the $345.0 million 6.15% notes issued
February 19, 2003, and will form a single series having an aggregate principal amount outstanding
of $545.0 million.
48
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Jasper County Pollution Control Bonds. Northern Indiana has seven series of Jasper County
Pollution Control Bonds with a total principal value of $254 million currently outstanding. Prior
to March 25, 2008, each of the series bore interest at rates established through auctions that took
place at either 7, 28, or 35 day intervals. Between February 13, 2008 and March 5, 2008, Northern
Indiana received notice that six separate market auctions of four series of the Jasper County
Pollution Control Bonds had failed. As a result, those series representing an aggregate principal
amount of $112 million of the Jasper County Pollution Control Bonds bore interest at default rates
equal to 15% or 18% per annum. Subsequent auctions were successful, but resulted in interest rates
between 5.13% and 11.0%, which are in excess of historical rates. These auction failures were
attributable to the recent lack of liquidity in the auction rate securities market, largely driven
by the recent turmoil in the bond insurance market. The Jasper County Pollution Control Bonds are
insured by either Ambac Assurance Corporation or MBIA Insurance Corporation.
Northern Indiana converted all seven series of Jasper County Pollution Control Bonds from the
auction rate mode to a variable rate demand bond mode between March 25, 2008 and April 11, 2008 and
repurchased the bonds as part of the conversion process. As of April 11, 2008, all of the Jasper
County Pollution Control Bonds were purchased and are held in Northern Indianas treasury.
Northern Indiana is currently evaluating its options for reoffering the debt to the public.
Northern Indiana has recorded the repurchased bonds as an offset to long-term debt in the
Consolidated Balance Sheet as the debt is considered extinguished per SFAS No. 140. Unamortized
debt expense previously recorded under deferred charges and other qualifies for regulatory
treatment and has been reclassified as a regulatory asset. The repurchase of the bonds will be
included in the financing activities section in the Condensed Statements of Consolidated Cash Flow.
Credit Facilities. During July 2006, NiSource Finance amended its $1.25 billion five-year
revolving credit facility increasing the aggregate commitment level to $1.5 billion, extending the
termination date by one year to July 2011, and reduced the cost of borrowing. The amended facility
will help maintain a reasonable cushion of short-term liquidity in anticipation of continuing
volatile natural gas prices.
NiSource Finance had outstanding credit facility borrowings of $506.0 million at June 30, 2008, at
a weighted average interest rate of 2.90%, and borrowings of $1,061.0 million at December 31, 2007,
at a weighted average interest rate of 5.43%.
As of June 30, 2008 and December 31, 2007, NiSource Finance had $94.3 million and $110.4 million of
stand-by letters of credit outstanding, respectively. At June 30, 2008, $8.0 million of the $94.3
million total outstanding letters of credit resided within a separate bi-lateral letter of credit
arrangement with Barclays Bank that NiSource Finance obtained during February 2004. Of the
remaining $86.3 million of stand-by letters of credit outstanding at June 30, 2008, $83.0 million
resided under NiSource Finances five-year credit facility and $3.3 million resided under an
uncommitted arrangement with another financial institution.
As of June 30, 2008, $911.0 million of credit was available under the credit facility.
Sale of Trade Accounts Receivables. On May 14, 2004, Columbia of Ohio entered into an agreement to
sell, without recourse, substantially all of its trade receivables, as they originate, to CORC, a
wholly-owned subsidiary of Columbia of Ohio. CORC, in turn, is party to an agreement with Dresdner
Bank AG, also dated May 14, 2004, under the terms of which it sells an undivided percentage
ownership interest in the accounts receivable to a commercial paper conduit. On July 1, 2006, the
agreement was amended to increase the program limit from $300 million to $350 million. The
agreement currently expires on June 26, 2009. As of June 30, 2008, $100 million of accounts
receivable had been sold by CORC.
Under the agreement, Columbia of Ohio acts as administrative agent, by performing record keeping
and cash collection functions for the accounts receivable sold by CORC. Columbia of Ohio receives
a fee, which provides adequate compensation, for such services.
49
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
On December 30, 2003, Northern Indiana entered into an agreement to sell, without recourse, all of
its trade receivables, as they originate, to NRC, a wholly-owned subsidiary of Northern Indiana.
NRC, in turn, is party to an agreement with Citibank, N.A. under the terms of which it sells an
undivided percentage ownership interest in the accounts receivable to a commercial paper conduit.
The conduit can purchase up to $200 million of accounts receivable under the agreement. NRCs
agreement with the commercial paper conduit has a scheduled expiration date of December 19, 2008,
and can be renewed if mutually agreed to by both parties. As of June 30, 2008, NRC had sold $156.5
million of accounts receivable. Under the arrangement, Northern Indiana may not sell any new
receivables if Northern Indianas debt rating falls below BBB- or Baa3 at Standard and Poors or
Moodys, respectively.
Under the agreement, Northern Indiana acts as administrative agent, performing record keeping and
cash collection functions for the accounts receivable sold. Northern Indiana receives a fee, which
provides adequate compensation, for such services.
Contractual Obligations. As of June 30, 2008, NiSource has $4.2 million of estimated federal and
state income tax liabilities, including interest, recorded on its books in accordance with FIN 48.
If or when such amounts may be settled is uncertain and cannot be estimated at this time. NiSource
does not anticipate any significant changes to its liability for unrecognized tax benefits over the
next twelve months.
Market Risk Disclosures
Risk is an inherent part of NiSources energy businesses. The extent to which NiSource properly
and effectively identifies, assesses, monitors and manages each of the various types of risk
involved in its businesses is critical to its profitability. NiSource seeks to identify, assess,
monitor and manage, in accordance with defined policies and procedures, the following principal
risks that are involved in NiSources energy businesses: commodity market risk, interest rate risk
and credit risk. Risk management at NiSource is a multi-faceted process with oversight by the Risk
Management Committee that requires constant communication, judgment and knowledge of specialized
products and markets. NiSources senior management takes an active role in the risk management
process and has developed policies and procedures that require specific administrative and business
functions to assist in the identification, assessment and control of various risks. In recognition
of the increasingly varied and complex nature of the energy business, NiSources risk management
policies and procedures continue to evolve and are subject to ongoing review and modification.
Various analytical techniques are employed to measure and monitor NiSources market and credit
risks, including VaR. VaR represents the potential loss or gain for an instrument or portfolio from
changes in market factors, for a specified time period and at a specified confidence level.
Commodity Price Risk
NiSource is exposed to commodity price risk as a result of its subsidiaries operations involving
natural gas and power. To manage this market risk, NiSources subsidiaries use derivatives,
including commodity futures contracts, swaps and options. NiSource is not involved in speculative
energy trading activity.
Commodity price risk resulting from derivative activities at NiSources rate-regulated subsidiaries
is limited, since regulations allow recovery of prudently incurred purchased power, fuel and gas
costs through the rate-making process, including gains or losses on these derivative instruments.
If states should explore additional regulatory reform, these subsidiaries may begin providing
services without the benefit of the traditional rate-making process and may be more exposed to
commodity price risk. Some of NiSources rate-regulated utility subsidiaries offer commodity price
risk products to its customers for which derivatives are used to hedge forecasted customer usage
under such products. These subsidiaries do not have regulatory recovery orders for these products
and are subject to gains and losses recognized in earnings due to hedge ineffectiveness.
Prior to the sale of the Whiting Clean Energy facility to BPAE, TPC entered in to power and gas
derivative contracts on behalf of WCE in order to manage the commodity price risk associated with
the WCE operations. As of June 30, 2008, there were no derivative contracts outstanding associated
with managing price risk for Whiting Clean Energy.
50
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS (continued)
NiSource Inc.
Interest Rate Risk
NiSource is exposed to interest rate risk as a result of changes in interest rates on borrowings
under revolving credit agreements, variable rate pollution control bonds and floating rate notes,
which have interest rates that are indexed to short-term market interest rates. NiSource is also
exposed to interest rate risk due to changes in interest rates on fixed-to-variable interest rate
swaps that hedge the fair value of long-term debt. Based upon average borrowings and debt
obligations subject to fluctuations in short-term market interest rates, an increase (or decrease)
in short-term interest rates of 100 basis points (1%) would have increased (or decreased) interest
expense by $5.2 million and $11.6 million for the quarter and six months ended June 30, 2008,
respectively.
Credit Risk
Due to the nature of the industry, credit risk is a factor in many of NiSources business
activities. NiSources extension of credit is governed by a Corporate Credit Risk Policy. Written
guidelines approved by NiSources Risk Management Committee document the management approval levels
for credit limits, evaluation of creditworthiness, and credit risk mitigation procedures.
Exposures to credit risks are monitored by the Corporate Credit Risk function which is independent
of commercial operations. Credit risk arises due to the possibility that a customer, supplier or
counterparty will not be able or willing to fulfill its obligations on a transaction on or before
the settlement date. For derivative contracts such as interest rate swaps, credit risk arises when
counterparties are obligated to pay NiSource the positive fair value or receivable resulting from
the execution of contract terms. Exposure to credit risk is measured in terms of both current
obligations and the market value of forward positions. Current credit exposure is generally
measured by the notional or principal value of obligations and direct credit substitutes, such as
commitments, stand-by letters of credit and guarantees. In determining exposure, NiSource
considers collateral that it holds to reduce individual counterparty credit risk.
Market Risk Measurement
Market risk refers to the risk that a change in the level of one or more market prices, rates,
indices, volatilities, correlations or other market factors, such as liquidity, will result in
losses for a specified position or portfolio. NiSource calculates a one-day VaR at a 95%
confidence level for the gas marketing group that utilize a variance/covariance methodology. The
daily market exposure for the gas marketing portfolio on an average, high and low basis was $0.1
million, $0.2 million and $0.1 million during the second quarter of 2008, respectively.
Prospectively, management has set the VaR limit at $0.8 million for gas marketing. Exceeding this
limit would result in management actions to reduce portfolio risk. Power and gas derivative
contracts entered into to manage price risk associated with Whiting Clean Energy are limited to
quantities surrounding the physical generation capacity of Whiting Clean Energy and the gas
requirements to operate the facility.
Refer to Note 10, Risk Management and Energy Marketing Activities, in the Notes to Condensed
Consolidated Financial Statements for further discussion of NiSources risk management.
Off Balance Sheet Arrangements
As a part of normal business, NiSource and certain subsidiaries enter into various agreements
providing financial or performance assurance to third parties on behalf of certain subsidiaries.
Such agreements include guarantees and stand-by letters of credit.
NiSource has issued guarantees that support up to approximately $549.1 million of commodity-related
payments for its current subsidiaries involved in energy marketing to satisfy requirements under
forward gas sales. These guarantees were provided to counterparties in order to facilitate
physical and financial transactions involving natural gas and electricity. To the extent
liabilities exist under the commodity-related contracts subject to these guarantees, such
liabilities are included in the Condensed Consolidated Balance Sheets.
NiSource has purchase and sales agreement guarantees totaling $77.5 million, which guarantee
performance of the sellers covenants, agreements, obligations, liabilities, representations and
warranties under the agreements. No amounts related to the purchase and sales agreement guarantees
are reflected in the Condensed Consolidated Balance Sheets. Management believes that the
likelihood NiSource would be required to perform or otherwise incur any significant losses
associated with any of the aforementioned guarantees is remote.
51
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS (continued)
NiSource Inc.
NiSource has other guarantees outstanding. Refer to Note 17-A, Guarantees and Indemnities, in
the Notes to Condensed Consolidated Financial Statements for additional information about
NiSources off balance sheet arrangements.
Other Information
Recently Adopted Accounting Pronouncements
SFAS No. 157 Fair Value Measurements. In September 2006, the FASB issued SFAS No. 157 to define
fair value, establish a framework for measuring fair value and to expand disclosures about fair
value measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. SFAS No. 157 does not change the
requirements to apply fair value in existing accounting standards.
Under SFAS No. 157, fair value refers to the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants in the market in
which the reporting entity transacts. The standard clarifies that fair value should be based on
the assumptions market participants would use when pricing the asset or liability.
To increase consistency and comparability in fair value measurements, SFAS No. 157 establishes a
fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value
into three levels. The level in the fair value hierarchy disclosed is based on the lowest level of
input that is significant to the fair value measurement. The three levels of the fair value
hierarchy defined by SFAS No. 157 are as follows:
|
|
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical asset or
liabilities that the company has the ability to access as of the reporting date. |
|
|
|
|
Level 2 inputs are inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly through corroboration
with observable market data. |
|
|
|
|
Level 3 inputs are unobservable inputs, such as internally developed pricing models for
the asset or liability due to little or no market activity for the asset or liability. |
SFAS No. 157 became effective for NiSource as of January 1, 2008. The provisions of SFAS No. 157
are to be applied prospectively, except for the initial impact on the following three items, which
are required to be recorded as an adjustment to the opening balance of retained earnings in the
year of adoption: (1) changes in fair value measurements of existing derivative financial
instruments measured initially using the transaction price under EITF Issue No. 02-3, (2) existing
hybrid financial instruments measured initially at fair value using the transaction price and (3)
blockage factor discounts. The adoption of SFAS No. 157 did not have an impact on NiSources
January 1, 2008 balance of retained earnings and is not anticipated to have a material impact
prospectively.
In February 2008, the FASB issued FSP FAS 157-2, which delays the effective date of SFAS No. 157
for all nonrecurring fair value measurements of non-financial assets and liabilities until fiscal
years beginning after November 15, 2008. NiSource has elected to defer the adoption of the
nonrecurring fair value measurement disclosures of non-financial assets and liabilities.
See Note 11, Fair Value of Financial Assets and Liabilities, in the Notes to Condensed
Consolidated Financial Statements for additional information regarding the adoption of SFAS No.
157.
SFAS No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans.
In September 2006, the FASB issued SFAS No. 158 to improve existing reporting for defined benefit
postretirement
52
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS (continued)
NiSource Inc.
plans by requiring employers to recognize in the statement of financial position the overfunded or
underfunded status of a defined benefit postretirement plan, among other changes.
In the fourth quarter of 2006, NiSource adopted the provisions of SFAS No. 158. Based on the
measurement of the various defined benefit pension and other postretirement plans assets and
benefit obligations at September 30, 2006, the pretax impact of adopting SFAS No. 158 decreased
intangible assets by $46.5 million, decreased deferred charges and other assets by $1.1 million,
increased regulatory assets by $538.8 million, increased accumulated other comprehensive income by
$239.8 million and increased accrued liabilities for postretirement and postemployment benefits by
$251.4 million. In addition, NiSource recorded a reduction in deferred income taxes of
approximately $96 million. With the adoption of SFAS No. 158 NiSource determined that for certain
rate-regulated subsidiaries the future recovery of pension and other postretirement plans costs is
probable in accordance with the requirements of SFAS No. 71. These rate-regulated subsidiaries
recorded regulatory assets and liabilities that would otherwise have been recorded to accumulated
other comprehensive income.
On January 1, 2007, NiSource adopted the SFAS No. 158 measurement date provisions requiring
employers to measure plan assets and benefit obligations as of the fiscal year-end. The pre-tax
impact of adopting the SFAS No. 158 measurement date provisions increased deferred charges and
other assets by $9.4 million, decreased regulatory assets by $89.6 million, decreased retained
earnings by $11.3 million, increased accumulated other comprehensive income by $5.3 million and
decreased accrued liabilities for postretirement and postemployment benefits by $74.2 million.
NiSource also recorded a reduction in deferred income taxes of approximately $2.6 million. In
addition, 2007 expense for pension and postretirement benefits reflects the updated measurement
date valuations. Refer to Note 14, Pension and Other Postretirement Benefits, in the Notes to
Condensed Consolidated Financial Statements for additional information.
SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities Including an
amendment of FASB Statement No. 115. In February 2007, the FASB issued SFAS No. 159 which permits
entities to choose to measure certain financial instruments at fair value that are not currently
required to be measured at fair value. Upon adoption, a cumulative adjustment would be made to
beginning retained earnings for the initial fair value option remeasurement. Subsequent unrealized
gains and losses for fair value option items will be reported in earnings. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007 and should not be applied
retrospectively, except as permitted for certain conditions for early adoption. NiSource has
chosen not to elect to measure any applicable financial assets or liabilities at fair value
pursuant to this standard when SFAS No. 159 was adopted on January 1, 2008.
FSP FIN 39-1 FASB Staff Position Amendment of FASB Interpretation No. 39. In April 2007, the
FASB posted FSP FIN 39-1 to amend paragraph 3 of FIN 39 to replace the terms conditional contracts
and exchange contracts with the term derivative instruments as defined in SFAS No. 133. This FSP
also amends paragraph 10 of FIN 39 to permit a reporting entity to offset fair value amounts
recognized for the right to reclaim cash collateral or the obligation to return cash collateral
against fair value amounts recognized for derivative instruments executed with the same
counterparty under a master netting arrangement. This FSP became effective for NiSource as of
January 1, 2008. NiSource has not elected to net fair value amounts for its derivative instruments
or the fair value amounts recognized for its right to receive cash collateral or obligation to pay
cash collateral arising from those derivative instruments recognized at fair value, which are
executed with the same counterparty under a master netting arrangement. This is consistent with
NiSources current accounting policy prior to the adoption of this amended standard. NiSource
discloses amounts recognized for the right to reclaim cash collateral within Restricted cash and
amounts recognized for the right to return cash collateral within current liabilities on the
Consolidated Balance Sheets.
FIN 48 Accounting for Uncertainty in Income Taxes. In June 2006, the FASB issued FIN 48 to
reduce the diversity in practice associated with certain aspects of the recognition and measurement
requirements related to accounting for income taxes. Specifically, this interpretation requires
that a tax position meet a more-likely-than-not recognition threshold for the benefit of an
uncertain tax position to be recognized in the financial statements and requires that benefit to be
measured at the largest amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement. The determination of whether a tax position meets the more-likely-than-not
recognition threshold is based on whether it is probable of being sustained on audit by the
appropriate taxing
53
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS (continued)
NiSource Inc.
authorities, based solely on the technical merits of the position. Additionally, FIN 48 provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.
On January 1, 2007, NiSource adopted the provisions of FIN 48. As a result of the implementation
of FIN 48, NiSource recognized a charge of $0.8 million to the opening balance of retained
earnings. Refer to Note 13, Income Taxes, in the Notes to Condensed Consolidated Financial
Statements for additional information.
Recently Issued Accounting Pronouncements
SFAS No. 161 Disclosures about Derivative Instruments and Hedging an amendment of SFAS No. 133.
In March 2008, the FASB issued SFAS No. 161 to amend and expand the disclosure requirements of
SFAS No. 133 with the intent to provide users of the financial statement with an enhanced
understanding of how and why an entity uses derivative instruments, how these derivatives are
accounted for and how the respective reporting entitys financial statements are affected. SFAS
No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008, and
earlier application is encouraged. NiSource is currently reviewing the provisions of SFAS No. 161
to determine the impact it may have on its disclosures within the Notes to Condensed Consolidated
Financial Statements.
SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB
No. 51. In December 2007, the FASB issued SFAS No. 160 to improve the relevance, comparability,
and transparency of the financial information that a reporting entity provides in its consolidated
financial statements regarding non-controlling ownership interests in a business and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008 and earlier adoption is
prohibited. NiSource is currently reviewing the provisions of SFAS No. 160 to determine the impact
it may have on the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated
Financial Statements.
SFAS No. 141R Business Combinations. In December 2007, the FASB issued SFAS No. 141R to improve
the relevance, representational faithfulness, and comparability of information that a reporting
entity provides in its financial reports regarding business combinations and its effects, including
recognition of assets and liabilities, the measurement of goodwill and required disclosures. SFAS
No. 141R is effective for fiscal years, and interim periods within those fiscal years, beginning on
or after December 15, 2008 and earlier adoption is prohibited. NiSource is currently reviewing the
provisions of SFAS No. 141R to determine the impact on future business combinations.
54
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS (continued)
NiSource Inc.
RESULTS AND DISCUSSION OF SEGMENT OPERATIONS
Presentation of Segment Information
NiSources operations are divided into four primary business segments; Gas Distribution Operations,
Gas Transmission and Storage Operations, Electric Operations, and Other Operations.
55
ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Gas Distribution Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
(in millions) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Revenues |
|
$ |
1,029.4 |
|
|
$ |
858.8 |
|
|
$ |
3,476.9 |
|
|
$ |
2,913.9 |
|
Less: Cost of gas sold
(excluding depreciation and amortization) |
|
|
765.3 |
|
|
|
583.5 |
|
|
|
2,593.9 |
|
|
|
2,032.3 |
|
|
Net Revenues |
|
|
264.1 |
|
|
|
275.3 |
|
|
|
883.0 |
|
|
|
881.6 |
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation and maintenance |
|
|
182.7 |
|
|
|
175.0 |
|
|
|
422.5 |
|
|
|
405.4 |
|
Depreciation and amortization |
|
|
57.6 |
|
|
|
55.5 |
|
|
|
114.3 |
|
|
|
111.5 |
|
(Gain) loss on sale of assets |
|
|
2.1 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.4 |
) |
Other taxes |
|
|
31.7 |
|
|
|
31.6 |
|
|
|
101.3 |
|
|
|
97.7 |
|
|
Total Operating Expenses |
|
|
274.1 |
|
|
|
262.0 |
|
|
|
638.1 |
|
|
|
614.2 |
|
|
Operating Income (Loss) |
|
$ |
(10.0 |
) |
|
$ |
13.3 |
|
|
$ |
244.9 |
|
|
$ |
267.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues ($ in Millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
490.7 |
|
|
|
433.7 |
|
|
|
1,919.5 |
|
|
|
1,716.7 |
|
Commercial |
|
|
173.4 |
|
|
|
154.7 |
|
|
|
670.0 |
|
|
|
594.0 |
|
Industrial |
|
|
69.1 |
|
|
|
65.4 |
|
|
|
171.4 |
|
|
|
160.9 |
|
Off System |
|
|
275.9 |
|
|
|
179.2 |
|
|
|
609.9 |
|
|
|
307.2 |
|
Other |
|
|
20.3 |
|
|
|
25.8 |
|
|
|
106.1 |
|
|
|
135.1 |
|
|
Total |
|
|
1,029.4 |
|
|
|
858.8 |
|
|
|
3,476.9 |
|
|
|
2,913.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Transportation (MMDth) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
33.7 |
|
|
|
39.4 |
|
|
|
171.1 |
|
|
|
173.6 |
|
Commercial |
|
|
26.5 |
|
|
|
29.2 |
|
|
|
104.5 |
|
|
|
103.6 |
|
Industrial |
|
|
89.3 |
|
|
|
82.1 |
|
|
|
192.5 |
|
|
|
187.3 |
|
Off System |
|
|
23.0 |
|
|
|
22.5 |
|
|
|
60.4 |
|
|
|
41.1 |
|
Other |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.7 |
|
|
|
0.5 |
|
|
Total |
|
|
172.7 |
|
|
|
173.4 |
|
|
|
529.2 |
|
|
|
506.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating Degree Days |
|
|
451 |
|
|
|
501 |
|
|
|
3,130 |
|
|
|
3,124 |
|
Normal Heating Degree Days |
|
|
475 |
|
|
|
475 |
|
|
|
3,140 |
|
|
|
3,111 |
|
% Colder (Warmer) than Normal |
|
|
(5 |
%) |
|
|
5 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
|
|
|
|
|
|
|
|
2,990,223 |
|
|
|
2,999,874 |
|
Commercial |
|
|
|
|
|
|
|
|
|
|
275,937 |
|
|
|
275,484 |
|
Industrial |
|
|
|
|
|
|
|
|
|
|
8,019 |
|
|
|
8,047 |
|
Other |
|
|
|
|
|
|
|
|
|
|
72 |
|
|
|
73 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
3,274,251 |
|
|
|
3,283,478 |
|
|
NiSources natural gas distribution operations serve approximately 3.3 million customers in seven
states: Ohio, Indiana, Pennsylvania, Massachusetts, Virginia, Kentucky and Maryland. The
regulated subsidiaries offer both traditional bundled services as well as transportation only for
customers that purchase gas from alternative suppliers. The operating results reflect the
temperature-sensitive nature of customer demand with 73% of annual residential and commercial
throughput affected by seasonality. As a result, segment operating income is higher in the first
and fourth quarters reflecting the heating demand during the winter season.
56
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Gas Distribution Operations(continued)
Regulatory Matters
Significant Rate Developments. 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. The case is currently pending, and is expected to
be resolved by the fourth quarter 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.
If approved, the settlement authorizes Columbia to increase revenues by $41.5 million annually, and
make certain other accounting, tariff and service changes. The Pennsylvania Public Utilities
Commission is expected to issue an order in this case by the third quarter of 2008, with new rates
expected to take effect during the fourth quarter.
On October 17, 2007, Bay State petitioned the DPU to allow the company to collect an additional
$7.5 million in annual revenue related to usage reductions occurring since its last rate case. Bay
State also requested approval of a steel infrastructure tracker that would allow for recovery of
ongoing infrastructure replacement program investments. The DPU held hearings on this matter in
the first quarter of 2008 and issued an order denying Bay States petition on April 30, 2008.
NiSource has decided not to appeal this case, and is weighing other options at this time. On July
16, 2008, the DPU issued an order in its generic decoupling proceeding for gas utilities. NiSource
is still reviewing the order, but considers the DPUs action favorable and will evaluate the order
in light of the order in Bay States recent case.
Cost Recovery and Trackers. A significant portion of the distribution companies revenue is
related to the recovery of gas costs, the review and recovery of which occurs via standard
regulatory proceedings. All states require periodic review of actual gas procurement activity to
determine prudence and to permit the recovery of prudently incurred costs related to the supply of
gas for customers. NiSource distribution companies have historically been found prudent in the
procurement of gas supplies to serve customers.
Certain operating costs of the NiSource distribution companies are significant, recurring in
nature, and generally outside the control of the distribution companies. Some states allow the
recovery of such costs via cost tracking mechanisms. Such tracking mechanisms allow for
abbreviated regulatory proceedings in order for the distribution companies to implement charges and
recover appropriate costs. Tracking mechanisms allow for more timely recovery of such costs as
compared with more traditional cost recovery mechanisms. Examples of such mechanisms include gas
cost recovery adjustment mechanisms, tax riders, and bad debt recovery mechanisms.
Comparability of Gas Distribution Operations line item operating results is impacted by these
regulatory trackers that allow for the recovery in rates of certain costs such as bad debt
expenses. Increases in the expenses that are the subject of trackers result in a corresponding
increase in net revenues and therefore have essentially no impact on total operating income
results.
Certain of the NiSource distribution companies are embarking upon plans to replace significant
portions of their operating systems that are nearing the end of their useful lives. Those
companies are currently evaluating requests for increases in rates in order to allow recovery of
the additional capital expenditures required for such plans. Each LDCs approach to cost recovery
may be unique, given the different laws, regulations and precedent that exist in each jurisdiction.
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 Commission 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
57
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Gas Distribution Operations(continued)
from the Staffs investigation; Columbias 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: Columbias 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.
On December 28, 2007, Columbia of Ohio entered into a Stipulation with the Ohio Consumers Counsel
and PUCO Staff and other stakeholders resolving litigation concerning a pending Gas Cost Recovery
audit of Columbia of Ohio. The Stipulation calls for an accelerated pass back to customers of
$36.6 million that will occur from January 31, 2008 through January 31, 2009, generated through
off-system sales and capacity release programs, the development of new energy efficiency programs
for introduction in 2009, and the development of a wholesale auction process for customer supply to
take effect in 2010. Approximately $19.2 million was passed back through June 2008. The
Stipulation also resolves issues related to pending and future Gas Cost Recovery Management
Performance audits through 2008. The PUCO approved this agreement on January 23, 2008.
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 Ohios 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 Ohios 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.
Customer Usage. The NiSource distribution companies have experienced declining usage by customers,
due in large part to the sensitivity of sales to increases in commodity prices. A significant
portion of the LDCs operating costs are fixed in nature. Historically, rate design at the
distribution level has been structured such that a large portion of cost recovery is based upon
throughput, rather than in a fixed charge. Many of NiSources LDCs are evaluating mechanisms that
would de-couple the recovery of fixed costs from throughput, and implement recovery mechanisms
that more closely link the recovery of fixed costs with fixed charges. Each of the states in which
the NiSource LDCs operate has different requirements regarding the procedure for establishing such
changes.
Environmental Matters
Currently, various environmental matters impact the Gas Distribution Operations segment. As of
June 30, 2008, a reserve has been recorded to cover probable environmental response actions. Refer
to Note 17-C, Environmental Matters, in the Notes to Condensed Consolidated Financial Statements
for additional information regarding environmental matters for the Gas Distribution Operations
segment.
Restructuring
Payments made for all restructuring initiatives within Gas Distribution Operations amounted to $0.9
million for the second quarter and first six months of 2008, respectively, and the restructuring
liability remaining at June 30, 2008 was zero. Refer to Note 4, Restructuring Activities, in the
Notes to Condensed Consolidated Financial Statements for additional information regarding
restructuring initiatives.
Sale of Northern Utilities
On February 15, 2008, NiSource reached a definitive agreement under which Unitil Corporation will
acquire NiSource subsidiaries Northern Utilities and Granite State Gas for $160 million plus net
working capital at the time of closing. Northern Utilities is a local gas distribution company
serving 52 thousand customers in 44 communities in Maine and New Hampshire. In the first quarter
of 2008, NiSource began accounting for the operations of Northern Utilities as discontinued
operations. As such, net income of $0.6 million and $6.3 million from continuing operations for
Northern Utilities, which affected the Gas Distribution Operations segment, was classified to net
income from discontinued operations for the three months and six months ended June 30, 2008,
respectively, and there was no income and $4.6 million reclassified for the three months and six
months ended June 30, 2007, respectively. Refer to Note 6, Discontinued Operations and Assets
Held for Sale, in the Notes to Condensed Consolidated Financial Statements for additional
information.
58
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Gas Distribution Operations(continued)
Weather
In general, NiSource calculates the weather related revenue variance based on changing customer
demand driven by weather variance from normal heating degree-days. Normal is evaluated using
heating degree days across the NiSource distribution region. While the temperature base for
measuring heating degree-days (i.e. the estimated average daily temperature at which heating load
begins) varies slightly across the region, the NiSource composite measurement is based on 62
degrees.
Weather in the Gas Distribution Operations territories for the second quarter of 2008 was 5%
warmer than normal and 10% warmer than the comparable quarter in 2007.
Weather in the Gas Distribution Operations territories for the first six months of 2008 was normal
and comparable to the same period in 2007.
Throughput
Total volumes sold and transported of 172.7 MMDth for the second quarter of 2008 decreased slightly
by 0.7 MMDth from the same period last year. Decreases in residential and commercial volumes
resulting primarily from warmer weather were mostly offset by increased industrial usage in the
current period compared to the same period last year.
Total volumes sold and transported of 529.2 MMDth for the first six months of 2008 increased 23.1
MMDth from the same period last year. This increase in volume was primarily due to higher
off-system sales and increased industrial usage in the first six months of 2008 compared to the
same period last year.
Net Revenues
Net revenues for the three months ended June 30, 2008 were $264.1 million, a decrease of $11.2
million from the same period in 2007, due primarily to warmer weather of approximately $8 million
and decreased revenues from the implementation of the Columbia of Ohio Stipulation entered into
with the Ohio Consumers Counsel and PUCO at the end of 2007, partially offset by regulatory
increases from rate proceedings and other service programs.
Net revenues for the six months ended June 30, 2008 were $883.0 million, an increase of $1.4
million from the same period in 2007, due primarily to increased residential usage of $8.6 million,
increased net revenues of $5.2 million from regulatory and service programs and a $2.8 million gas
cost adjustment, mostly offset by warmer weather of approximately $14 million.
Operating Income
For the second quarter of 2008, Gas Distribution Operations reported an operating loss of $10.0
million compared to operating income of $13.3 million for the same period in 2007. The decrease in
operating income was attributable to higher operating expenses of $12.1 million and lower net
revenues described above. Operating expense increases were primarily due to higher employee and
administrative expenses of $6.0 million, higher uncollectible accounts of $2.5 million, a $2.1
million loss on the disposition of a building and $2.0 million in increased depreciation.
For the first six months of 2008, Gas Distribution Operations reported operating income of $244.9
million compared to operating income of $267.4 million for the same period in 2007. The decrease
in operating income was primarily attributable to increased operating expenses of $23.9 million.
Operating expense increases were primarily due to higher employee and administrative expenses of
$9.0 million, increased property and other taxes of $2.1 million, higher depreciation expense of
$2.8 million and increased rent and lease expense of $2.1 million.
59
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Gas Transmission and Storage Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
(in millions) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation revenues |
|
$ |
150.8 |
|
|
$ |
144.1 |
|
|
$ |
335.6 |
|
|
$ |
326.2 |
|
Storage revenues |
|
|
44.5 |
|
|
|
44.5 |
|
|
|
90.1 |
|
|
|
90.4 |
|
Other revenues |
|
|
0.7 |
|
|
|
1.3 |
|
|
|
1.6 |
|
|
|
2.3 |
|
|
Total Operating Revenues |
|
|
196.0 |
|
|
|
189.9 |
|
|
|
427.3 |
|
|
|
418.9 |
|
Less: Cost of gas
sold (excluding
depreciation and
amortization) |
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
|
196.0 |
|
|
|
189.6 |
|
|
|
427.3 |
|
|
|
418.9 |
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation and maintenance |
|
|
78.8 |
|
|
|
75.8 |
|
|
|
163.6 |
|
|
|
156.2 |
|
Depreciation and amortization |
|
|
29.4 |
|
|
|
29.2 |
|
|
|
58.7 |
|
|
|
58.0 |
|
Impairment
and gain on sale of assets |
|
(3.0) |
|
|
6.4 |
|
|
|
(4.0 |
) |
|
|
6.4 |
|
Other taxes |
|
|
14.5 |
|
|
|
14.1 |
|
|
|
29.9 |
|
|
|
29.1 |
|
|
Total Operating Expenses |
|
|
119.7 |
|
|
|
125.5 |
|
|
|
248.2 |
|
|
|
249.7 |
|
|
Equity Earnings in Unconsolidated Affiliates |
|
|
1.6 |
|
|
|
3.7 |
|
|
|
3.6 |
|
|
|
5.2 |
|
|
Operating Income |
|
$ |
77.9 |
|
|
$ |
67.8 |
|
|
$ |
182.7 |
|
|
$ |
174.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput (MMDth) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Columbia Transmission |
Market Area |
|
|
166.8 |
|
|
|
186.8 |
|
|
|
553.2 |
|
|
|
572.0 |
|
Columbia Gulf |
Mainline |
|
|
166.4 |
|
|
|
178.9 |
|
|
|
326.1 |
|
|
|
326.0 |
|
Short-haul |
|
|
70.1 |
|
|
|
50.7 |
|
|
|
145.1 |
|
|
|
91.2 |
|
Columbia Pipeline Deep Water |
|
|
0.7 |
|
|
|
0.7 |
|
|
|
0.9 |
|
|
|
1.5 |
|
Crossroads Gas Pipeline |
|
|
9.0 |
|
|
|
9.2 |
|
|
|
19.1 |
|
|
|
19.4 |
|
Intrasegment eliminations |
|
|
(137.3 |
) |
|
|
(161.8 |
) |
|
|
(269.3 |
) |
|
|
(290.0 |
) |
|
Total |
|
|
275.7 |
|
|
|
264.5 |
|
|
|
775.1 |
|
|
|
720.1 |
|
|
NiSources Gas Transmission and Storage Operations segment consists of the operations of Columbia
Transmission, Columbia Gulf, Columbia Deep Water, Crossroads Pipeline, and Central Kentucky
Transmission. In total NiSource owns a pipeline network of approximately 16 thousand miles
extending from offshore in the Gulf of Mexico to New York and the eastern seaboard. The pipeline
network serves customers in 16 northeastern, mid-Atlantic, midwestern and southern states, as well
as the District of Columbia. In addition, the NiSource Gas Transmission and Storage Operations
segment operates one of the nations largest underground natural gas storage systems.
NiSource Energy Partners, L.P.
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 NiSources
gas transmission and storage growth strategy, and should provide NiSource access to competitively
priced capital to support future growth investment. Due to the damage sustained at Columbia Gulfs
Hartsville, Tennessee, compressor station, following the tornados at the facility as described
previously, as well as overall financial market conditions, the timing of the initial public
offering is not likely to occur during 2008.
Millennium Pipeline Project
Millennium received FERC approval for a pipeline project, in which Columbia Transmission is
participating, which will provide access to a number of supply and storage basins and the Dawn,
Ontario trading hub. The reconfigured project, which was approved by the FERC in a certificate
order issued December 21, 2006, will begin at an
60
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Gas Transmission and Storage Operations(continued)
interconnect with Empire, an existing pipeline that originates at the Canadian border and extends
easterly towards Syracuse, New York. Empire will construct a lateral pipeline southward to connect
with Millennium near Corning, New York. Millennium will extend eastward to an interconnect with
Algonquin at Ramapo, New York. The Millennium partnership is currently made up of the following
companies: Columbia Transmission (47.5%), DTE Millennium (26.25%), and KeySpan Millennium (26.25%).
Columbia Transmission is the operator.
The reconfigured Millennium project relies on completion of some or all of several other related
pipeline projects proposed by Empire, Algonquin, and Iroquois collectively referred to as the
Companion Pipelines. The December 21, 2006 certificate order also granted the necessary project
approvals to the Companion Pipelines. Construction began on June 22, 2007 with a projected
in-service date in the fourth quarter of 2008.
On August 29, 2007, Millennium entered into a bank credit agreement to finance the construction of
the Millennium Pipeline project. As a condition precedent to the credit agreement, NiSource issued
a guarantee securing payment for its indirect ownership interest percentage of amounts borrowed
under the financing agreement up until such time as the amounts payable under the agreement are
paid in full. The permanent financing is expected to be completed in the first quarter of 2009.
Additional information on this guarantee is provided in Note 16-A, Guarantees and Indemnities, in
the Notes to Condensed Consolidated Financial Statements.
Hardy Storage Project
Hardy Storage completed its first full year 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 billion cubic feet, 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, is expanding 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 has been completed with the
facilities being placed into 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 Gulfs system
for delivery to Florida Gas Transmission was held in late 2007 and contracts for 100,000 Dth per
day of capacity were executed. The remaining 80,000 Dth per day of capacity is expected to be sold
under firm contracts during the fourth quarter of 2008. 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 a favorable order which granted a
certificate to construct the project and the project is expected to be in service by spring 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. 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 6,900,000 Dth and 103,400 Dth per day of
daily deliverability. If
61
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Gas Transmission and Storage Operations(continued)
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 a successful 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.
Centerville Expansion Project
An open season to solicit interest and contracts for expanded capacity on Columbia Gulfs system
for delivery to Southern Natural Gas and the Louisiana intrastate pipeline market was held during
the first quarter of 2008, and contracts for 60,000 Dth per day of capacity were executed. 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.
Sales and Percentage of Physical Capacity Sold
Columbia Transmission and Columbia Gulf compete for transportation customers based on the type of
service a customer needs, operating flexibility, available capacity and price. Columbia Gulf and
Columbia Transmission provide a significant portion of total transportation services under firm
contracts and derive a smaller portion of revenues through interruptible contracts, with management
seeking to maximize the portion of physical capacity sold under firm contracts.
Firm service contracts require pipeline capacity to be reserved for a given customer between
certain receipt and delivery points. Firm customers generally pay a capacity reservation fee
based on the amount of capacity being reserved regardless of whether the capacity is used, plus an
incremental usage fee when the capacity is used. Annual capacity reservation revenues derived from
firm service contracts generally remain constant over the life of the contract because the revenues
are based upon capacity reserved and not whether the capacity is actually used. The high
percentage of revenue derived from capacity reservation fees mitigates the risk of revenue
fluctuations within the Gas Transmission and Storage Operations segment due to changes in near-term
supply and demand conditions. For the six months ended June 30, 2008 approximately 90.4% of the
transportation revenues were derived from capacity reservation fees paid under firm contracts and
5.5% of the transportation revenues were derived from usage fees under firm contracts. This is
compared to approximately 89.0% of the transportation revenues derived from capacity reservation
fees paid under firm contracts and 5.5% of transportation revenues derived from usage fees under
firm contracts for the six months ended June 30, 2007.
Interruptible transportation service is typically short term in nature and is generally used by
customers that either do not need firm service or have been unable to contract for firm service.
These customers pay a usage fee only for the volume of gas actually transported. The ability to
provide this service is limited to available capacity not otherwise used by firm customers, and
customers receiving services under interruptible contracts are not assured capacity in the pipeline
facilities. Gas Transmission and Storage Operations provides interruptible service at competitive
prices in order to capture short term market opportunities as they occur and interruptible service
is viewed by management as an important strategy to optimize revenues from the gas transmission
assets. For the six months ended June 30, 2008 and 2007, approximately 4.1% and 5.5% of the
transportation revenues were derived from interruptible contracts, respectively.
Significant FERC Developments
Columbia Gulf and Columbia Transmission are cooperating with the FERC on an informal, non-public
investigation of certain operating practices regarding tariff services offered by those companies.
Although the companies are continuing to cooperate with the FERC in an effort to reach a
consensual settlement, it is likely that any settlement will require the payment of fines or
refunds.
Hartsville and Delhi Compressor Stations
On February 5, 2008, tornados struck Columbia Gulfs Hartsville Compressor Station in Macon County,
Tennessee. The damage to the facility forced Columbia Gulf to declare force majeure because no gas
was flowing through this portion of the pipeline system while a facility assessment was being
performed and the current contractual
62
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Gas Transmission and Storage Operations(continued)
transportation agreements of 2.156 Bcf per day could not be met. Since that time Columbia Gulf has
constructed both temporary and permanent facilities at Hartsville and has restored gas flow to
2.156 Bcf per day. During the next 12 to 18 months the temporary facilities that were constructed
to restore system capabilities will be replaced with a permanent solution. This capacity would
remain in place while the permanent solution is implemented. NiSource expects the majority of the
reconstruction costs during the 18 to 24 month period for the compressor station and ancillary
facilities plus business interruption losses during the twelve month period from the event will be
recoverable through insurance.
On December 14, 2007, Columbia Gulfs Line 100 ruptured approximately two miles north of its Delhi
Compressor Station in Louisiana. The damage to the pipeline forced Columbia Gulf to declare force
majeure because no gas was flowing through this portion of the pipeline system on Lines 100, 200
and 300 while a facility assessment was performed. As a result the current contractual
transportation agreements of 2.156 Bcf per day could not be met. By December 15, 2007 Lines 200
and 300 were returned to service and gas flow was restored to 2.0 Bcf per day on December 16, 2007.
On December 19, 2007, the U.S. Department of Transportation issued a Corrective Action Order which
was applicable to Line 100 from the Rayne, LA Compressor Station to Leach, KY. The Order required
Columbia Gulf to develop a remedial work plan, which included assessments on Line 100 using in-line
inspection tools. The Order also required a 20% reduction in pressure on Line 100 from the Rayne
Compressor Station to the Corinth Compressor Station which resulted in a reduction in gas flow on
December 21, 2007 to 1.6 Bcf per day. The next day the capacity was increased to 1.75 Bcf per day.
Between December 22, 2007 and February 5, 2008 the capacity varied between 1.6 and 1.75 Bcf per
day as a result of remediation work on Line 100. On July 1, 2008, Columbia Gulf received
permission from the U.S. Department of Transportation to restore full pressure on Line 100
pipeline. NiSource expects to recover a portion of the pipeline replacement costs plus business
interruption losses through insurance.
Sale of Columbia Gulfs Offshore Assets
On June 27, 2008, Columbia Gulf sold a portion of Columbia Gulfs offshore assets to Tennessee Gas
Pipeline Company for $7.5 million. A receivable was recorded in June 2008 and the payment was
received on July 1, 2008. A gain of $2.9 million was recorded on the sale during the second quarter
of 2008.
Sale of 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 for $160 million plus net
working capital at the time of closing. Granite State Gas is an 86-mile FERC regulated gas
transmission pipeline primarily located in Maine and New Hampshire. In the first quarter of 2008,
NiSource began accounting for the operations of Granite State Gas as discontinued operations. As
such, net income of $0.3 million and $0.5 million from continuing operations for Granite State Gas,
which affected the Gas Transmission and Storage Operations segment, was classified to net income
from discontinued operations for the three months and six months ended June 30, 2008, respectively,
and a net loss of $0.3 million and zero was reclassified for the three months and six months ended
June 30, 2007, respectively. Refer to Note 6, Discontinued Operations and Assets Held for Sale,
in the Notes to Condensed Consolidated Financial Statements for additional information.
Environmental Matters
Currently, various environmental matters impact the Gas Transmission and Storage Operations
segment. As of June 30, 2008, a reserve has been recorded to cover probable environmental response
actions. Refer to Note 17-C, Environmental Matters, in the Notes to Condensed Consolidated
Financial Statements for additional information regarding environmental matters for the Gas
Transmission and Storage Operations segment.
Restructuring
Payments made for all restructuring initiatives within Gas Transmission and Storage Operations
amounted to $0.2 million and $0.5 million for the second quarter and first six months of 2008,
respectively, and the restructuring liability remaining at June 30, 2008 was $0.8 million. Refer
to Note 4, Restructuring Activities, in the Notes to Condensed Consolidated Financial Statements
for additional information regarding restructuring initiatives.
63
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Gas Transmission and Storage Operations(continued)
Throughput
Throughput for the Gas Transmission and Storage Operations segment totaled 275.7 MMDth for the
second quarter of 2008, compared to 264.5 MMDth for the same period in 2007. The increase of 11.2
MMDth is due primarily to incremental volumes transported from new interconnects along the Columbia
Gulf pipeline system.
Throughput for the Gas Transmission and Storage Operations segment totaled 775.1 MMDth for the
first six months of 2008, compared to 720.1 MMDth for the same period in 2007. The increase of
55.0 MMDth is due primarily to incremental volumes transported from new interconnects along the
Columbia Gulf pipeline system.
Net Revenues
Net revenues were $196.0 million for the second quarter of 2008, an increase of $6.4 million from
the same period in 2007, primarily due to increased subscriptions for firm transportation services
of $6.3 million 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.
Net revenues were $427.3 million for the first six months of 2008, an increase of $8.4 million from
the same period in 2007, primarily due to increased subscriptions for firm transportation services
of $11.3 million 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.
These increases in net revenues were partially offset by insurance proceeds from a business
interruption claim that improved last years results by $2.6 million.
Operating Income
Operating income was $77.9 million for the second quarter of 2008 compared to $67.8 million in the
second quarter of 2007. Operating income increased $10.1 million as a result of higher net
revenues described above and a decrease in operating expenses of $5.8 million. Operating expenses
decreased as a result of a $6.6 million impairment charge recognized in the comparable 2007 period
related to base gas at a storage field, a $2.9 million gain recognized on the sale of certain
Columbia Gulf offshore assets, $1.3 million in lower uncollectible accounts and lower outside
service cost. These decreases in operating expenses were partially offset by higher employee and
administrative costs of $3.4 million and a $2.8 million reversal of a reserve in the comparable
2007 period for a legal matter. Equity earnings decreased by
$2.1 million due to lower AFUDC and operating earnings
from Hardy Storage.
Operating income was $182.7 million for the first six months of 2008 compared to $174.4 million in
the first quarter of 2007. Operating income increased $8.3 million as a result of higher net
revenues described above and a decrease in operating expenses of $1.5 million, partially offset by
a decrease in equity earnings of $1.6 million. Operating expenses decreased as a result of a $6.6
million impairment charge recognized in the comparable 2007 period related to base gas at a storage
field, a $2.9 million gain recognized on the sale of certain Columbia Gulf offshore assets, $1.3
million in lower uncollectible accounts and lower insurance cost. These decreases in operating
expenses were partially offset by higher employee and administrative costs of $5.2 million and a
$2.8 million reversal of a reserve in the comparable 2007 period for a legal matter. Equity
earnings decreased by $1.6 million due to higher interest
expense associated with Millennium.
64
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Electric Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June, 30 |
|
Ended June 30, |
(in millions) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenues |
|
$ |
341.3 |
|
|
$ |
334.5 |
|
|
$ |
674.3 |
|
|
$ |
661.6 |
|
Less: Cost of sales (excluding depreciation and amortization) |
|
|
139.9 |
|
|
|
129.8 |
|
|
|
289.5 |
|
|
|
258.5 |
|
|
Net Revenues |
|
|
201.4 |
|
|
|
204.7 |
|
|
|
384.8 |
|
|
|
403.1 |
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation and maintenance |
|
|
78.1 |
|
|
|
77.9 |
|
|
|
161.1 |
|
|
|
139.7 |
|
Depreciation and amortization |
|
|
58.4 |
|
|
|
46.6 |
|
|
|
105.8 |
|
|
|
94.6 |
|
Other taxes |
|
|
14.2 |
|
|
|
15.4 |
|
|
|
28.8 |
|
|
|
31.0 |
|
|
Total Operating Expenses |
|
|
150.7 |
|
|
|
139.9 |
|
|
|
295.7 |
|
|
|
265.3 |
|
|
Operating Income |
|
$ |
50.7 |
|
|
$ |
64.8 |
|
|
$ |
89.1 |
|
|
$ |
137.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues ($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
80.4 |
|
|
|
86.8 |
|
|
|
167.3 |
|
|
|
179.8 |
|
Commercial |
|
|
88.7 |
|
|
|
94.3 |
|
|
|
167.1 |
|
|
|
184.1 |
|
Industrial |
|
|
126.6 |
|
|
|
127.4 |
|
|
|
269.6 |
|
|
|
256.4 |
|
Wholesale |
|
|
17.9 |
|
|
|
13.0 |
|
|
|
26.8 |
|
|
|
24.3 |
|
Other |
|
|
27.7 |
|
|
|
13.0 |
|
|
|
43.5 |
|
|
|
17.0 |
|
|
Total |
|
|
341.3 |
|
|
|
334.5 |
|
|
|
674.3 |
|
|
|
661.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales (Gigawatt Hours) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
745.8 |
|
|
|
793.8 |
|
|
|
1,552.6 |
|
|
|
1,639.0 |
|
Commercial |
|
|
952.5 |
|
|
|
1,005.7 |
|
|
|
1,896.5 |
|
|
|
1,933.7 |
|
Industrial |
|
|
2,376.2 |
|
|
|
2,331.6 |
|
|
|
4,890.2 |
|
|
|
4,673.4 |
|
Wholesale |
|
|
185.2 |
|
|
|
207.8 |
|
|
|
329.9 |
|
|
|
345.1 |
|
Other |
|
|
29.8 |
|
|
|
32.3 |
|
|
|
64.6 |
|
|
|
59.0 |
|
|
Total |
|
|
4,289.5 |
|
|
|
4,371.2 |
|
|
|
8,733.8 |
|
|
|
8,650.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cooling Degree Days |
|
|
201 |
|
|
|
313 |
|
|
|
201 |
|
|
|
313 |
|
Normal Cooling Degree Days |
|
|
230 |
|
|
|
232 |
|
|
|
230 |
|
|
|
232 |
|
% Warmer (Colder) than Normal |
|
|
(13 |
%) |
|
|
35 |
% |
|
|
(13 |
%) |
|
|
35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
|
|
|
|
|
|
|
|
399,276 |
|
|
|
398,073 |
|
Commercial |
|
|
|
|
|
|
|
|
|
|
53,095 |
|
|
|
52,299 |
|
Industrial |
|
|
|
|
|
|
|
|
|
|
2,498 |
|
|
|
2,516 |
|
Wholesale |
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
4 |
|
Other |
|
|
|
|
|
|
|
|
|
|
754 |
|
|
|
757 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
455,629 |
|
|
|
453,649 |
|
|
NiSource generates and distributes electricity, through its subsidiary Northern Indiana, to
approximately 456 thousand customers in 20 counties in the northern part of Indiana. The operating
results reflect the temperature-sensitive nature of customer demand with annual sales affected by
temperatures in the northern part of Indiana. As a result, segment operating income is generally
higher in the second and third quarters, reflecting cooling demand during the summer season.
Electric Supply
On November 1, 2007, Northern Indiana filed its bi-annual IRP with the IURC. The plan showed the
need to add approximately 1,000 mw of new capacity. Additionally, during November 2007, Northern
Indiana filed a CPCN as
65
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Electric Operations(continued)
well as contracts to purchase power generated with renewable energy, specifically with wind. The
CPCN requested approval to purchase two CCGT power plants the Whiting Clean Energy facility owned
by PEI, a wholly-owned subsidiary of NiSource, and the Sugar Creek facility located in west central
Indiana and owned by LS Power Group. On December 22, 2007, BPAE indicated it would exercise a
contractual right of first refusal to purchase the Whiting Clean Energy facility and subsequently
purchased the facility on June 30, 2008. As a result, on January 25, 2008, Northern Indiana filed
an amended CPCN to address just the Sugar Creek CCGT facility. On May 30, 2008, Northern Indiana
purchased the facility for $329.7 million.
Regulatory Matters
Significant Rate Developments. Northern Indiana filed a petition for new electric base rates and
charges on June 27, 2008 and will file its detailed case on or before August 29, 2008. The
prehearing conference to establish the procedural schedule for the electric rate case was held on
July 29, 2008. Initial hearings are anticipated in January 2009.
During 2002, Northern Indiana settled certain regulatory matters related to an electric rate
review. On September 23, 2002, the IURC issued an order adopting most aspects of the settlement.
The order approving the settlement provides that electric customers of Northern Indiana will
receive bill credits of approximately $55.1 million each year. The credits will continue at
approximately the same annual level and per the same methodology, until the IURC enters a base rate
order that approves revised Northern Indiana electric rates. The order included a rate moratorium
that expired on July 31, 2006. The order also provides that 60% of any future earnings beyond a
specified earnings level will be retained by Northern Indiana. The revenue credit is calculated
based on electric usage; therefore, in times of high usage the credit may be more than $55.1
million. Credits amounting to $25.1 million and $27.7 million were recognized for electric
customers for the first half of 2008 and 2007, respectively.
MISO. As part of Northern Indianas participation in the MISO transmission service and wholesale
energy market, certain administrative fees and non-fuel costs have been incurred. IURC orders have
been issued authorizing the deferral for consideration in a future rate case proceeding of the
administrative fees and certain non-fuel related costs incurred after Northern Indianas rate
moratorium, which expired on July 31, 2006. During the first half of 2008 non-fuel cost of $1.5
million were deferred in accordance with the aforementioned orders. In addition, administrative,
FERC and other fees of $3.4 million were deferred. In the first half of 2008 and 2007, MISO costs
of $4.9 million and $6.3 million, respectively, were deferred.
On April 25, 2006, the FERC issued an order on the MISOs Transmission and Energy Markets Tariff,
stating that MISO had violated the tariff on several issues including not assessing revenue
sufficiency guarantee charges on virtual bids and offers and for charging revenue sufficiency
guarantee charges on imports. The FERC ordered MISO to perform a resettlement of these charges
back to the start of the Day 2 Market. The resettlement began on June 9, 2007 and ended in January
2008. Certain charge types included in the resettlement were originally considered to be non-fuel
and were recorded as regulatory assets, in accordance with previous IURC orders allowing deferral
of certain non-fuel MISO costs. During the fourth quarter 2007, based on precedent set by an IURC
ruling for another Indiana utility, Northern Indiana reclassified these charges, totaling $16.7
million, as fuel and included them in the fuel cost recovery mechanism in its latest FAC filing.
Prior to the hearing for FAC-78 on April 17, 2008, several intervenors objected to a portion of the
$16.7 million and Northern Indiana agreed to remove $7.6 million from the FAC filing. This amount
represents the portion of the resettlement costs related to periods prior to December 9, 2005. The
$7.6 million was recorded as a reduction to net revenues in the first quarter of 2008.
Northern Indiana is an active stakeholder in the process used in designing, testing and
implementing the ASM and in developing the surrounding business practices. On January 18, 2008,
Northern Indiana as part of a Joint Petition among several other Indiana utilities, filed a request
to the IURC to participate in ASM and seek approval of timely cost recovery for the associated
costs of participating. The evidentiary hearing is planned for September 4, 2008. At this time,
Northern Indiana is unable to determine what impact the ASM will have on its operations or cash
flows.
66
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Electric Operations(continued)
Cost Recovery and Trackers. A significant portion of the Northern Indianas revenue is related to
the recovery of fuel costs to generate power and the fuel costs related to purchased power. These
costs are recovered through a FAC, a standard, quarterly, summary regulatory proceeding in
Indiana.
On May 30, 2008, Northern Indiana purchased the Sugar Creek facility for $329.7 million. 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. The purchase was in response to Northern
Indianas need to add approximately 1,000 mw of new capacity, as filed in its bi-annual IRP with
the IURC on November 1, 2007.
The IRP included a commitment to using renewable energy, and a subsequent filing was made with the
IURC, requesting approval for Northern Indiana to enter into power purchase contracts for
wind-generated power in Iowa and South Dakota, and requesting full recovery of all associated
costs. On July 24, 2008, the IURC issued an order approving Northern Indianas proposed purchase
power agreement with Iberdrola Renewables. The agreement provides Northern Indiana the opportunity
to purchase 100 mw of wind power commencing in early 2009.
The IURC had issued an order on May 28, 2008 approving the purchase of Sugar Creek, but denied
Northern Indianas request for deferral of depreciation expense and carrying costs related to the
plant, beginning with the acquisition date, on the basis that the facility would not be used and
useful property under traditional regulation until the facility was operating inside of MISO. The
order also denied Northern Indianas request for alternative regulatory treatment of the plant,
based on incomplete presentation of evidence, but allowed for the establishment of a subdocket to
allow for the proper presentation and consideration of alternative regulatory treatment. On June
6, 2008, Northern Indiana filed its (A) Verified Petition for Rehearing; (B) Request for
Establishment of a Subdocket for Presentation and Consideration of an Alternative Regulatory Plan;
and (C) Motion for Consolidation (a single document) in Cause No. 43396. The subdocket requests
the same deferral accounting treatment that was requested for depreciation expense and carrying
costs associated with the Sugar Creek facility. An order in the subdocket proceeding is expected in
the third quarter of 2008.
On January 30, 2008, the IURC approved a settlement agreement which was reached in October 2007
with the OUCC, LaPorte County and a group of Northern Indiana industrial customers to resolve
questions relating to purchased power costs in the period from January 1, 2006 through September
30, 2007. The terms of the settlement called for Northern Indiana to make a one-time payment of
$33.5 million. A reserve for the entire amount was recorded in the third quarter of 2007 and the
refund was made to customers via the FAC in the periods of February through July 2008. As part of
this agreement, Northern Indiana implemented a new benchmarking standard, that became effective
in October 2007, which defines the price above which purchased power costs must be absorbed by
Northern Indiana and are not permitted to be passed on to customers. The benchmark is based upon
the costs of power generated by a hypothetical natural gas fired CCGT using gas purchased and
delivered to Northern Indiana. During the first half of 2008, the amount of purchased power costs
exceeding the benchmark amounted to $6.5 million, which was recognized as a net reduction of
revenues. The agreement also contemplated Northern Indiana adding generating capacity to its
existing portfolio and that the benchmark would be adjusted as new capacity is added. It was
anticipated that the addition of the Sugar Creek capacity would trigger a change in the benchmark
beginning in June 2008. However, based on the IURC order in the CPCN as described above, the Sugar
Creek capacity will not be considered until the plant is operating inside of MISO and therefore the
benchmark is unchanged.
On November 26, 2002, Northern Indiana received approval from the IURC for an ECT. Under the ECT,
Northern Indiana is permitted to recover (1) AFUDC and a return on the capital investment expended
by Northern Indiana to implement IDEMs NOx State Implementation Plan through an ECRM and (2)
related operation and maintenance and depreciation expenses once the environmental facilities
become operational through an EERM. Under the IURCs November 26, 2002 order, Northern Indiana is
permitted to submit filings on a semi-annual basis for the ECRM and on an annual basis for the
EERM. In December 2006, Northern Indiana filed a petition with the IURC for appropriate cost
treatment and recovery of emission control construction needed to address the Phase I CAIR
requirements of the Indiana Air Pollution Control Boards CAIR rules that became effective on
February 25, 2007. On July 3, 2007, Northern Indiana received an IURC order issuing a CPCN for the
CAIR and CAMR Phase I
67
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Electric Operations(continued)
Compliance Plan Projects, estimated to cost approximately $23 million. Northern Indiana will
include the CAIR and CAMR Phase I Compliance Plan costs to be recovered in the semi-annual and
annual ECRM and EERM filing six months after construction costs begin. On December 19, 2007, the
IURC approved Northern Indianas latest compliance plan with the estimate of $338.5 million. On
April 2, 2008, the IURC approved ECR-11 for $252.6 million in capital expenditures (net of
accumulated depreciation) and EER-5 for $14.1 million in expenses, for which billing began in May
2008. In July 2008, Northern Indiana filed ECR-12 for $265.2 million in capital expenditures (net
of accumulated depreciation), requesting approval for new billing factors beginning November 2008.
On October 27, 2006, Indiana Gasification, LLC, Vectren Energy Delivery of Indiana, Citizens Gas &
Coke Utility and Northern Indiana filed a joint petition at the IURC seeking approval for Indiana
Gasification, LLC to construct a coal gasification facility and the respective utilities to enter
into long-term contracts to purchase the energy output of the plant, both gas and electricity.
This filing was based upon a Letter of Intent that was entered into by the parties, but subject to
finalization of a contract and regulatory approval. On December 12, 2007, Citizens Gas & Coke
Utility filed a Motion with the IURC to withdraw from the petition. The parties have had frequent
negotiations during the two year period, but have not reached a definitive agreement. Northern
Indiana anticipates filing a notice with the IURC on the status of the project in the third quarter
of 2008.
Environmental Matters
Currently, various environmental matters impact the Electric Operations segment. As of June 30,
2008, a reserve has been recorded to cover probable environmental response actions. Refer to Note
17-C, Environmental Matters, in the Notes to Condensed Consolidated Financial Statements for
additional information regarding environmental matters for the Electric Operations segment.
Sales
Electric Operations sales quantities for the second quarter of 2008 were 4,289.5 gwh, compared to
4,371.2 gwh in the second quarter of 2007. The decrease was primarily due to lower residential,
commercial and wholesale volumes partially offset by higher industrial volumes for the second
quarter of 2008 compared to the same period last year. The lower volumes were partially the result
of cooler weather compared to last year.
Electric Operations sales quantities for the first half of 2008 were 8,733.8 gwh, compared to
8,650.2 gwh in the first half of 2007. The increase was primarily due to higher industrial volumes
for the first six months of 2008 compared to the same period last year partially offset by lower
residential, commercial and wholesale volumes. The lower volumes were partially the result of
cooler weather compared to last year.
Net Revenues
In the second quarter of 2008, Electric Operations net revenues of $201.4 million decreased by $3.3
million from the comparable 2007 period. This decrease was primarily due to the impact of cooler
weather of approximately $4 million, $2.7 million of non-recoverable purchased power and lower
emission allowance sales, partially offset by higher industrial margins of $1.6 million, the timing
of revenue credits of $1.5 million and incremental revenues from the new Sugar Creek plant of $1.3
million.
In the first half of 2008, Electric Operations net revenues of $384.8 million decreased by $18.3
million from the comparable 2007 period. This decrease was due to $14.1 million of non-recoverable
purchased power and non-recoverable MISO charges, lower residential and commercial margins of
approximately $13 million and the impact of cooler weather of approximately $4 million. These
decreases in net revenues were partially offset by higher industrial usage and margins of
approximately $8 million and the timing of revenue credits of $2.7 million.
Operating Income
Operating income for the first quarter of 2008 was $50.7 million, a decrease of $14.1 million from
the same period in 2007. The decrease in operating income was due to lower net revenues described
above and increased operating expenses of $10.8 million. Operating expenses increased primarily
due to an $11.8 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 employee and administrative costs of $3.8 million. The depreciation expense
non-cash adjustment will not materially impact depreciation charges in future periods.
68
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Electric Operations(continued)
Operating income for the first half of 2008 was $89.1 million, a decrease of $48.7 million from the
same period in 2007. The decrease in operating income was due to lower net revenues described
above and increased operating expenses of $30.4 million. Operating expenses increased primarily
due to higher employee and administrative costs of $17.2 million, an $11.8 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 expenses of $6.2 million. Part of the increase in employee and
administrative costs were due to adjustments that reduced benefit expenses by $5.7 million during
2007. The higher generation and maintenance expenses were primarily attributable to a planned
turbine and boiler maintenance and a generator overhaul.
69
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Other Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June, 30 |
|
Ended June, 30 |
(in millions) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and services revenue |
|
$ |
285.3 |
|
|
$ |
242.7 |
|
|
$ |
644.6 |
|
|
$ |
564.4 |
|
Less: Cost of products purchased (excluding
depreciation and amortization) |
|
|
277.2 |
|
|
|
235.9 |
|
|
|
629.3 |
|
|
|
549.4 |
|
|
Net Revenues |
|
|
8.1 |
|
|
|
6.8 |
|
|
|
15.3 |
|
|
|
15.0 |
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation and maintenance |
|
|
5.4 |
|
|
|
5.6 |
|
|
|
10.8 |
|
|
|
11.5 |
|
Depreciation and amortization |
|
|
0.7 |
|
|
|
0.6 |
|
|
|
1.4 |
|
|
|
1.2 |
|
Loss on sale of assets |
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
0.1 |
|
Other taxes |
|
|
1.3 |
|
|
|
0.9 |
|
|
|
2.9 |
|
|
|
2.4 |
|
|
Total Operating Expenses |
|
|
7.4 |
|
|
|
7.2 |
|
|
|
15.1 |
|
|
|
15.2 |
|
|
Operating Income (Loss) |
|
$ |
0.7 |
|
|
$ |
(0.4 |
) |
|
$ |
0.2 |
|
|
$ |
(0.2 |
) |
|
The Other Operations segment participates in energy-related services including gas marketing, power
and gas risk management and ventures focused on distributed power generation technologies,
including fuel cells and storage systems. Additionally, the Other Operations segment is involved
in real estate and other businesses.
Lake Erie Land Company, Inc.
Lake Erie Land, which is wholly-owned by NiSource, is in the process of selling real estate over a
10-year period as a part of an agreement reached in June, 2006 with a private real estate
development group. Part of the sale transaction included the assets of the Sand Creek Golf Club,
and NiSource began accounting for the operations of the Sand Creek Golf Club as discontinued
operations at that time. NiSource estimates the property to be sold to the private developer
during the next twelve months and classifies these assets as assets of discontinued operations and
held for sale.
NDC Douglas Properties
NDC Douglas Properties, a subsidiary of NiSource Development Company, is in the process of exiting
some of its low income housing investments. One of these investments was disposed of during 2007
and two other investments are expected to be sold or disposed of during 2009. NiSource has
accounted for the investments to be sold as assets and liabilities of discontinued operations and
held for sale.
Net Revenues
Net revenues of $8.1 million for the second quarter of 2008 increased by $1.3 million from the
second quarter of 2007, as a result of higher commercial and industrial gas marketing revenues.
Net revenues of $15.3 million for the first half of 2008 increased by $0.3 million from the first
half of 2007, as a result of increased commercial and industrial gas marketing revenues.
Operating Income (Loss)
Other Operations reported operating income of $0.7 million for the second quarter of 2008, versus
an operating loss of $0.4 million for the comparable 2007 period. The increase in operating income
resulted from higher net revenues described above.
Other Operations reported operating income of $0.2 million for the first half of 2008, versus an
operating loss of $0.2 million for the comparable 2007 period. The increase in operating income
resulted primarily from increased net revenues described above.
70
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NiSource Inc.
For a discussion regarding quantitative and qualitative disclosures about market risk see
Managements Discussion and Analysis of Financial Condition and Results of Operations Market
Risk Disclosures.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
NiSources chief executive officer and its principal financial officer, after evaluating the
effectiveness of NiSources disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)), have concluded based on the evaluation required by paragraph (b) of
Exchange Act Rules 13a-15 and 15d-15 that, as of the end of the period covered by this report,
NiSources disclosure controls and procedures are considered effective.
Changes in Internal Controls
In the fourth quarter of 2007, Northern Indiana detected an error in its unbilled revenue
calculation and revised its estimate for unbilled electric and gas revenues. Over a period of
several years, Northern Indiana used incorrect customer usage data to calculate its unbilled
revenue and effective controls from both a design and operating effectiveness perspective were not
in place to ensure the appropriate calculation and recording of unbilled revenues. As a result,
this correction reduced net revenues by $25.5 million in the fourth quarter of 2007. The unbilled
revenue estimates were never billed to customers. This error resulted in a material weakness and
internal controls were determined to be ineffective for the fourth quarter of 2007.
During the first quarter of 2008, management designed and implemented internal controls to ensure
the adequate calculation and recording of Northern Indianas unbilled revenues. Management tested
the operating effectiveness of these controls during the second quarter and found them to be
effective in preventing a material error going forward. Management has concluded that the material
weakness has been remediated as of the second quarter, 2008.
Other than the internal control changes referenced above, there have been no other changes in
NiSources internal control over financial reporting during the fiscal period covered by this
report that has materially affected, or is reasonably likely to affect, NiSources internal control
over financial reporting.
71
PART II
ITEM 1. LEGAL PROCEEDINGS
NiSource Inc.
1. |
|
Stand Energy Corporation, et al. v. Columbia Gas Transmission Corporation, et al., Kanawha
County Court, West Virginia |
On July 14, 2004, Stand Energy Corporation filed a complaint in Kanawha County Court in West
Virginia. The complaint contains allegations against various NiSource companies, including
Columbia Transmission and Columbia Gulf, and asserts that those companies and certain select
shippers engaged in an illegal gas scheme that constituted a breach of contract and
violated state law. The illegal gas scheme complained of by the plaintiffs relates to the
Columbia Transmission and Columbia Gulf gas imbalance transactions that were the subject of
the FERC enforcement staff investigation and subsequent settlement approved in October 2000.
Columbia Transmission and Columbia Gulf filed a Motion to Dismiss on September 10, 2004. In
October 2004, however, the plaintiffs filed their Second Amended Complaint, which clarified
the identity of some of the select shipper defendants and added a federal antitrust cause of
action. To address the issues raised in the Second Amended Complaint, the Columbia companies
revised their briefs in support of the previously filed motions to dismiss. In June 2005, the
Court granted in part and denied in part the Columbia companies motion to dismiss the Second
Amended Complaint. The Columbia companies have filed an answer to the Second Amended
Complaint. On December 1, 2005, Plaintiffs filed a motion to certify this case as a class
action. The Columbia companies filed their opposition to this motion in March 2008. All
briefing has been completed. Oral argument was heard on June 3, 2008, and the parties are
awaiting a decision by the Court. Discovery continues on the merits.
2. |
|
United States of America ex rel. Jack J. Grynberg v. Columbia Gas Transmission Corporation,
et al., U.S. District Court, E.D. Louisiana |
The plaintiff filed a complaint in 1995, under the False Claims Act, on behalf of the United
States of America, against approximately seventy pipelines, including Columbia Gulf and
Columbia Transmission. The plaintiff claimed that the defendants had submitted false royalty
reports to the government by mismeasuring natural gas produced on Federal land and Indian
lands. The Plaintiffs original complaint was dismissed without prejudice for misjoinder of
parties and for failing to plead fraud with specificity. In 1997, the plaintiff filed over
sixty-five new False Claims Act complaints against over 330 defendants in numerous Federal
courts. One of those complaints was filed in the Federal District Court for the Eastern
District of Louisiana against Columbia and thirteen affiliated entities (collectively, the
Columbia defendants). This complaint repeats the mismeasurement claims previously made and
adds valuation claims alleging that the defendants undervalued natural gas for royalty
purposes in various ways, including sales to affiliated entities at artificially low prices.
This case was transferred, along with most of the other new Grynberg cases, to Federal court
in Wyoming in 1999.
On October 20, 2006, the Federal District Court issued an Order granting the Columbia
defendants motion to dismiss for lack of subject matter jurisdiction. The Plaintiff has
appealed the dismissal of the Columbia defendants to the United States Court of Appeals for
the Tenth Circuit. All briefing has been completed and oral argument is scheduled for
September of 2008.
3. Tawney, et al. v. Columbia Natural Resources, Inc., Roane County, WV Circuit Court
The Plaintiffs, who are West Virginia landowners, filed a lawsuit in early 2003 against CNR
alleging that CNR underpaid royalties on gas produced on their land by improperly deducting
post-production costs and not paying a fair value for the gas. In December 2004, the court
granted plaintiffs motion to add NiSource and Columbia as defendants. Plaintiffs also
claimed that the defendants fraudulently concealed the deduction of post-production charges.
The court certified the case as a class action that includes any person who, after July 31,
1990, received or is due royalties from CNR (and its predecessors or successors) on lands
lying within the boundary of the state of West Virginia. All claims by the government of the
United States are excluded from the class. Although NiSource sold CNR in 2003, NiSource
remains obligated to manage this litigation and for the majority of any damages ultimately
awarded to the plaintiffs. On January 27, 2007, the jury hearing the case returned a verdict
against all defendants in the amount of $404.3 million; this is comprised of $134.3 million in
compensatory damages and $270
72
ITEM 1. LEGAL PROCEEDINGS (continued)
NiSource Inc.
million in punitive damages. In January 2008, the Defendants filed their petition for appeal, and
on March 24, 2008, the Defendants filed their amended petition for appeal with the West Virginia
Supreme Court of Appeals. On May 22, 2008, the West Virginia Supreme Court of Appeals refused the
Defendants petition for appeal. The Defendants are preparing a petition to the United States
Supreme Court for a writ of certiorari; the petition to the United States Supreme Court is due
August 20, 2008. Given the West Virginia Courts refusal of the appeal, NiSource has adjusted its
reserve in the second quarter of 2008 to reflect the portion of the trial court judgment for which
NiSource would be responsible, inclusive of interest. This amount is included in Legal and
environmental reserves, on the Condensed Consolidated Balance Sheet as of June 30, 2008.
4. |
|
John Thacker, et al. v. Chesapeake Appalachia, L.L.C., U.S. District Court, E.D. Kentucky |
On February 8, 2007, Plaintiff filed this purported class action, alleging that Chesapeake
Appalachia, L.L.C. (Chesapeake) has failed to pay royalty owners the correct amounts
pursuant to the provisions of their oil and gas leases covering real property located within
the state of Kentucky. Columbia has assumed the defense of Chesapeake in this matter pursuant
to the provisions of the Stock Purchase Agreement dated July 3, 2003, among Columbia,
NiSource, and Triana Energy Holding, Inc., Chesapeakes predecessor in interest. Plaintiffs
filed an amended complaint on March 19, 2007, which, among other things, added NiSource and
Columbia as defendants. On March 31, 2008, the Court denied the Defendants Motions to
Dismiss; the Defendants filed their answers to the complaint on April 25, 2008. On June 3,
2008, the Plaintiffs moved to certify a class consisting of all persons entitled to payment of
royalty by Chesapeake under leases operated by Chesapeake at any point after February 5, 1992,
on real property in Kentucky. Defendants response was filed on July 18, 2008. The court has
scheduled oral argument on class certification for August 14, 2008.
5. |
|
Environmental Protection Agency Notice of Violation |
On September 29, 2004, the EPA issued an NOV to Northern Indiana for alleged violations of the
CAA and the Indiana SIP. The NOV alleges that modifications were made to certain boiler units
at three of Northern Indianas generating stations between the years of 1985 and 1995 without
obtaining appropriate air permits for the modifications. Northern Indiana is currently in
discussions with the EPA regarding possible resolutions to this NOV.
6. |
|
Pennsylvania Department of Environmental Protection Proposed Consent Order and Agreement |
On February 21, 2007, Pennsylvania Department of Environmental Protection provided
representatives of Columbia Transmission with a proposed Consent Order and Agreement covering
an unmanned equipment storage site located in rural southwest Pennsylvania. The site in
question is also subject to the EPAs AOC (Refer to Note 17-C, Environmental Matters, in the
Notes to Condensed Consolidated Financial Statements for additional information regarding the
AOC). Pennsylvania Department of Environmental Protections proposed order alleges that
Columbia Transmission has violated the states Clean Streams Act and Solid Waste Management
Act by discharging petroleum products onto the property and into the waters of the state. In
addition to requiring remediation and monitoring activities at the site, the state has
proposed penalties for these violations. Columbia Transmission plans to engage in further
discussions with the agency regarding the proposed order, including the rationale for the
proposed penalty. The site is currently undergoing remediation via an EPA approved Remedial
Action Work Plan. The Pennsylvania Department of Environmental Protection has provided
written notification that it will not attempt to stop the EPA approved work and will seek the
aforementioned Order after the remedy is completed.
73
ITEM 1A. RISK FACTORS
NiSource Inc.
There were no material changes from the risk factors disclosed in NiSources 2007 Form 10-K filed
on March 5, 2008.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 13, 2008, NiSource held its annual meeting of stockholders. On March 17, 2008, there were
274,177,301 shares of common stock outstanding and entitled to vote in person or by proxy at the
meeting.
The number and percentage of votes received for, and the number of votes withheld, from each
nominee for director are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Votes FOR as a |
|
|
|
|
|
Votes AGAINST |
|
|
votes |
|
percent of Votes |
|
Number of votes |
|
as a percent of |
Name |
|
FOR |
|
Cast |
|
AGAINST |
|
Votes Cast |
Richard A. Abdoo |
|
|
227,457,226 |
|
|
|
97.72 |
% |
|
|
5,310,090 |
|
|
|
2.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven C. Beering |
|
|
225,880,296 |
|
|
|
97.04 |
% |
|
|
6,887,020 |
|
|
|
2.96 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deborah S. Coleman |
|
|
227,393,788 |
|
|
|
97.69 |
% |
|
|
5,373,528 |
|
|
|
2.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dennis E. Foster |
|
|
220,517,360 |
|
|
|
94.74 |
% |
|
|
12,249,956 |
|
|
|
5.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael E. Jesanis |
|
|
222,175,946 |
|
|
|
95.45 |
% |
|
|
10,591,370 |
|
|
|
4.55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marty R. Kittrell |
|
|
220,430,113 |
|
|
|
94.70 |
% |
|
|
12,337,203 |
|
|
|
5.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
W. Lee Nutter |
|
|
222,486,390 |
|
|
|
95.58 |
% |
|
|
10,280,926 |
|
|
|
4.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ian M. Rolland |
|
|
213,602,680 |
|
|
|
91.77 |
% |
|
|
19,164,636 |
|
|
|
8.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert C. Skaggs, Jr. |
|
|
222,143,560 |
|
|
|
95.44 |
% |
|
|
10,623,756 |
|
|
|
4.56 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard L. Thompson |
|
|
220,611,428 |
|
|
|
94.78 |
% |
|
|
12,155,888 |
|
|
|
5.22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carolyn Y. Woo |
|
|
215,061,890 |
|
|
|
92.39 |
% |
|
|
17,705,426 |
|
|
|
7.61 |
% |
Accordingly, each of the nominees for director were elected to serve as director for a term of
one year until 2009.
The following votes were cast at the Annual Meeting on Proposal II to ratify the appointment
of Deloitte & Touche LLP as the Companys independent registered public accountants for the year
2008.
74
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (continued)
NiSource Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes FOR as a percentage of Votes |
|
|
|
|
Number of votes FOR |
|
present at the meeting |
|
Votes AGAINST |
|
Votes ABSTAIN |
229,485,620 |
|
|
98.59 |
% |
|
|
876,747 |
|
|
|
2,405,349 |
|
Accordingly, the ratification to appoint Deloitte & Touche LLP as the Companys independent public
accountants for the year 2008 was approved.
The following votes were cast at the Annual Meeting on Proposal III to consider the board of
directors proposal to amend the Companys Certificate of Incorporation to eliminate all
supermajority voting requirements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes FOR as a percentage of shares |
|
|
|
|
|
|
entitled to vote at the |
|
|
|
|
Number of votes FOR |
|
Meeting |
|
Votes AGAINST |
|
Votes ABSTAIN |
226,058,315 |
|
|
82.45 |
% |
|
|
3,563,307 |
|
|
|
3,146,094 |
|
Accordingly, the proposal to amend the Companys Certificate of Incorporation to eliminate all
supermajority voting requirements was approved.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
|
(3.1) |
|
Amended and Restated Certificate of Incorporation, as amended. |
|
|
(3.2) |
|
Bylaws of NiSource Inc., as amended and restated through May 20, 2008 (incorporated by
reference to Exhibit 3 to the NiSource Inc. Current Report on Form 8-K filed on May 22,
2008). |
|
|
(31.1) |
|
Certification of Robert C. Skaggs, Jr., Chief Executive Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. * |
|
|
(31.2) |
|
Certification of Michael W. ODonnell, Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. * |
|
|
(32.1) |
|
Certification of Robert C. Skaggs, Jr., Chief Executive Officer, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (furnished herewith). * |
|
|
(32.2) |
|
Certification of Michael W. ODonnell, Chief Financial Officer, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (furnished herewith). * |
|
* |
|
Exhibit filed herewith. |
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, NiSource hereby agrees to furnish the SEC, upon
request, any instrument defining the rights of holders of long-term debt of NiSource not filed as
an exhibit herein. No such instrument authorizes long-term debt securities in excess of 10% of the
total assets of NiSource and its subsidiaries on a consolidated basis.
75
SIGNATURE
NiSource Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
NiSource Inc.
|
|
|
(Registrant) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: August 4, 2008 |
By: |
/s/ Jeffrey W. Grossman
|
|
|
|
Jeffrey W. Grossman |
|
|
|
Vice President and Controller (Principal Accounting Officer
and Duly Authorized Officer) |
|
|
76