e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| |
|
|
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
or
| |
|
|
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-16189
(Exact name of registrant as specified in its charter)
| |
|
|
|
| Delaware
|
|
35-2108964 |
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.) |
| |
|
|
| 801 East 86th Avenue |
|
|
| Merrillville, Indiana
|
|
46410 |
|
|
|
| (Address of principal executive offices)
|
|
(Zip Code) |
(877) 647-5990
(Registrant’s 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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files.)
Yesþ 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.
| |
|
|
| Large accelerated filer þ
|
|
Accelerated filer o |
| |
|
|
| Non-accelerated filer o
|
|
Smaller reporting company o |
| (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 issuer’s classes of common stock, as of
the latest practicable date: Common Stock, $0.01 Par Value:
277,974,738 shares outstanding at July
30, 2010.
1
NISOURCE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 2010
Table of Contents
2
DEFINED TERMS
The following is a list of frequently used abbreviations or acronyms that are found in this report:
| |
|
|
|
NiSource Subsidiaries and Affiliates
|
|
|
Bay State
|
|
Bay State Gas Company |
Capital Markets
|
|
NiSource Capital Markets, Inc. |
CER
|
|
Columbia Energy Resources, Inc. |
CGORC
|
|
Columbia Gas of Ohio Receivables Corporation |
CNR
|
|
Columbia Natural Resources, Inc. |
Columbia
|
|
Columbia Energy Group |
Columbia Gulf
|
|
Columbia Gulf Transmission Company |
Columbia of Kentucky
|
|
Columbia Gas of Kentucky, Inc. |
Columbia of Maryland
|
|
Columbia Gas of Maryland, Inc. |
Columbia of Ohio
|
|
Columbia Gas of Ohio, Inc. |
Columbia of Pennsylvania
|
|
Columbia Gas of Pennsylvania, Inc. |
Columbia of Virginia
|
|
Columbia Gas of Virginia, Inc. |
Columbia Transmission
|
|
Columbia Gas Transmission, LLC |
CPRC
|
|
Columbia Gas of Pennsylvania Receivables Corporation |
Crossroads Pipeline
|
|
Crossroads Pipeline Company |
Granite State Gas
|
|
Granite State Gas Transmission, Inc. |
Hardy Storage
|
|
Hardy Storage Company, L.L.C. |
Kokomo Gas
|
|
Kokomo Gas and Fuel Company |
Millennium
|
|
Millennium Pipeline Company, L.L.C. |
NARC
|
|
NIPSCO Accounts Receivable Corporation |
NDC Douglas Properties
|
|
NDC Douglas Properties, Inc. |
NiSource
|
|
NiSource Inc. |
NiSource Corporate Services
|
|
NiSource Corporate Services Company |
NiSource Development Company
|
|
NiSource Development Company, Inc. |
NiSource Finance
|
|
NiSource Finance Corp. |
Northern Indiana
|
|
Northern Indiana Public Service Company |
Northern Indiana Fuel and Light
|
|
Northern Indiana Fuel and Light Company |
Northern Utilities
|
|
Northern Utilities, Inc. |
PEI
|
|
PEI Holdings, Inc. |
Whiting Clean Energy
|
|
Whiting Clean Energy, Inc. |
|
|
|
Abbreviations |
|
|
2010 Health Care Act
|
|
The Patient Protection and Affordable Care Act and the Health Care and Education
Reconciliation Act of 2010 signed into law by the President on March 23, 2010 and March
30, 2010, respectively |
ACES
|
|
American Clean Energy and Security Act of 2009 |
AFUDC
|
|
Allowance for funds used during construction |
Ameren
|
|
Ameren Services Company |
AMRP
|
|
Accelerated Main Replacement Program |
AOC
|
|
Administrative Order by Consent |
AOCI
|
|
Accumulated other comprehensive income |
ARRs
|
|
Auction Revenue Rights |
ASC
|
|
Accounting Standards Codification |
BBA
|
|
British Banker Association |
Bcf
|
|
Billion cubic feet |
Board
|
|
Board of Directors |
BPAE
|
|
BP Alternative Energy North America Inc |
BTMU
|
|
The Bank of Tokyo-Mitsubishi UFJ, LTD. |
CAA
|
|
Clean Air Act |
CAIR
|
|
Clean Air Interstate Rule |
CAMR
|
|
Clean Air Mercury Rule |
CARE
|
|
Conservation and Ratemaking Efficiency |
3
DEFINED TERMS
| |
|
|
|
CCGT
|
|
Combined Cycle Gas Turbine |
CERCLA
|
|
Comprehensive Environmental Response Compensation and Liability Act (also known as
Superfund) |
Chesapeake
|
|
Chesapeake Appalachia, L.L.C. |
Day 2
|
|
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
|
|
Department of Public Utilities |
DSM
|
|
Demand Side Management |
Dth
|
|
Dekatherm |
ECRM
|
|
Environmental Cost Recovery Mechanism |
ECT
|
|
Environmental cost tracker |
EERM
|
|
Environmental Expense Recovery Mechanism |
EPA
|
|
United States Environmental Protection Agency |
EPS
|
|
Earnings per share |
FAC
|
|
Fuel adjustment clause |
FASB
|
|
Financial Accounting Standards Board |
FERC
|
|
Federal Energy Regulatory Commission |
FTRs
|
|
Financial Transmission Rights |
GAAP
|
|
U.S. Generally Accepted Accounting Principles |
GCR
|
|
Gas cost recovery |
GHG
|
|
Greenhouse gases |
gwh
|
|
Gigawatt hours |
IDEM
|
|
Indiana Department of Environmental Management |
IFRS
|
|
International Financial Reporting Standards |
IRP
|
|
Infrastructure Replacement Program |
IURC
|
|
Indiana Utility Regulatory Commission |
LDCs
|
|
Local distribution companies |
LIBOR
|
|
London InterBank Offered Rate |
LIFO
|
|
Last in first out |
Mcf
|
|
Million cubic feet |
MISO
|
|
Midwest Independent Transmission System Operator |
Mitchell
|
|
Dean H. Mitchell Coal Fired Generating Station |
MMDth
|
|
Million dekatherms |
mw
|
|
Megawatts |
NAAQS
|
|
National Ambient Air Quality Standards |
NOV
|
|
Notice of Violation |
NO2
|
|
Nitrogen dioxide |
NOx
|
|
Nitrogen oxide |
NYMEX
|
|
New York Mercantile Exchange |
OCI
|
|
Other Comprehensive Income (Loss) |
OPEB
|
|
Other Postretirement and Postemployment Benefits |
OUCC
|
|
Indiana Office of Utility Consumer Counselor |
PADEP
|
|
Pennsylvania Department of Environmental Protection |
Piedmont
|
|
Piedmont Natural Gas Company, Inc. |
PIPP
|
|
Percentage of Income Plan |
PJM
|
|
PJM Interconnection is a regional transmission organization (RTO) that coordinates the
movement of wholesale electricity in all or parts of 13 states and the District of
Columbia. |
PM
|
|
particulate matter |
PSC
|
|
Public Service Commission |
PUC
|
|
Public Utility Commission |
PUCO
|
|
Public Utilities Commission of Ohio |
RBS
|
|
Royal Bank of Scotland PLC |
RCRA
|
|
Resource Conservation and Recovery Act |
4
DEFINED TERMS
| |
|
|
|
RSG
|
|
Revenue Sufficiency Guarantee |
SEC
|
|
Securities and Exchange Commission |
SIP
|
|
State Implementation Plan |
SO2
|
|
Sulfur dioxide |
VaR
|
|
Value-at-risk and instrument sensitivity to market factors |
VIE
|
|
Variable Interest Entities |
VSCC
|
|
Virginia State Corporation Commission |
5
PART I
ITEM 1. FINANCIAL STATEMENTS
NiSource Inc.
Condensed Statements of Consolidated Income (Loss)
(unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
June 30, |
| (in millions, except per share amounts) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
| |
Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Distribution |
|
$ |
454.3 |
|
|
$ |
444.7 |
|
|
$ |
1,795.4 |
|
|
$ |
2,161.6 |
|
Gas Transportation and Storage |
|
|
264.3 |
|
|
|
260.2 |
|
|
|
634.8 |
|
|
|
656.3 |
|
Electric |
|
|
340.5 |
|
|
|
285.4 |
|
|
|
658.4 |
|
|
|
582.2 |
|
Other |
|
|
112.0 |
|
|
|
278.3 |
|
|
|
441.2 |
|
|
|
590.4 |
|
| |
Gross Revenues |
|
|
1,171.1 |
|
|
|
1,268.6 |
|
|
|
3,529.8 |
|
|
|
3,990.5 |
|
Cost of Sales (excluding depreciation and amortization) |
|
|
439.1 |
|
|
|
586.8 |
|
|
|
1,725.4 |
|
|
|
2,242.3 |
|
| |
Total Net Revenues |
|
|
732.0 |
|
|
|
681.8 |
|
|
|
1,804.4 |
|
|
|
1,748.2 |
|
| |
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation and maintenance |
|
|
377.1 |
|
|
|
365.2 |
|
|
|
816.7 |
|
|
|
844.7 |
|
Depreciation and amortization |
|
|
151.6 |
|
|
|
148.2 |
|
|
|
301.4 |
|
|
|
291.9 |
|
Impairment and loss/(gain) on sale of assets, net |
|
|
- |
|
|
|
0.8 |
|
|
|
0.1 |
|
|
|
(1.2 |
) |
Other taxes |
|
|
64.5 |
|
|
|
53.3 |
|
|
|
151.4 |
|
|
|
156.7 |
|
| |
Total Operating Expenses |
|
|
593.2 |
|
|
|
567.5 |
|
|
|
1,269.6 |
|
|
|
1,292.1 |
|
| |
Equity Earnings (Loss) in Unconsolidated Affiliates |
|
|
0.4 |
|
|
|
(2.6 |
) |
|
|
7.8 |
|
|
|
3.8 |
|
| |
Operating Income |
|
|
139.2 |
|
|
|
111.7 |
|
|
|
542.6 |
|
|
|
459.9 |
|
| |
Other Income (Deductions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(98.4 |
) |
|
|
(105.3 |
) |
|
|
(197.2 |
) |
|
|
(195.8 |
) |
Other, net |
|
|
2.6 |
|
|
|
(0.5 |
) |
|
|
5.2 |
|
|
|
(4.7 |
) |
Gain/(Loss) on early extinguishment of long-term debt |
|
|
- |
|
|
|
(0.7 |
) |
|
|
- |
|
|
|
2.5 |
|
| |
Total Other Deductions |
|
|
(95.8 |
) |
|
|
(106.5 |
) |
|
|
(192.0 |
) |
|
|
(198.0 |
) |
| |
Income from Continuing Operations before Income Taxes |
|
|
43.4 |
|
|
|
5.2 |
|
|
|
350.6 |
|
|
|
261.9 |
|
Income Taxes |
|
|
15.4 |
|
|
|
9.2 |
|
|
|
125.2 |
|
|
|
106.7 |
|
| |
Income/(Loss) from Continuing Operations |
|
|
28.0 |
|
|
|
(4.0 |
) |
|
|
225.4 |
|
|
|
155.2 |
|
| |
Income/(Loss) from Discontinued Operations - net of taxes |
|
|
0.1 |
|
|
|
(0.7 |
) |
|
|
(0.1 |
) |
|
|
(11.4 |
) |
Gain (Loss)
on Disposition of Discontinued Operations - net of taxes |
|
|
- |
|
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
(0.2 |
) |
| |
Net Income (Loss) |
|
$ |
28.1 |
|
|
$ |
(4.8 |
) |
|
$ |
225.4 |
|
|
$ |
143.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.10 |
|
|
$ |
(0.01 |
) |
|
$ |
0.81 |
|
|
$ |
0.57 |
|
Discontinued operations |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.04 |
) |
| |
Basic Earnings (Loss) Per Share |
|
$ |
0.10 |
|
|
$ |
(0.01 |
) |
|
$ |
0.81 |
|
|
$ |
0.53 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.10 |
|
|
$ |
(0.01 |
) |
|
$ |
0.81 |
|
|
$ |
0.56 |
|
Discontinued operations |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.04 |
) |
| |
Diluted Earnings (Loss) Per Share |
|
$ |
0.10 |
|
|
$ |
(0.01 |
) |
|
$ |
0.81 |
|
|
$ |
0.52 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Dividends Declared Per Common Share |
|
$ |
0.23 |
|
|
$ |
0.23 |
|
|
$ |
0.69 |
|
|
$ |
0.69 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Average Common Shares Outstanding |
|
|
277.6 |
|
|
|
274.7 |
|
|
|
277.3 |
|
|
|
274.4 |
|
Diluted Average Common Shares |
|
|
278.4 |
|
|
|
274.7 |
|
|
|
278.0 |
|
|
|
277.0 |
|
| |
The accompanying Notes to Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
6
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Condensed Consolidated Balance Sheets
(unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
|
December 31, |
|
| (in millions) |
|
2010 |
|
|
2009 |
|
| |
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Property, Plant and Equipment |
|
|
|
|
|
|
|
|
Utility Plant |
|
$ |
19,314.2 |
|
|
$ |
19,041.1 |
|
Accumulated depreciation and amortization |
|
|
(8,547.3 |
) |
|
|
(8,387.1 |
) |
| |
Net utility plant |
|
|
10,766.9 |
|
|
|
10,654.0 |
|
| |
Other property, at cost, less accumulated depreciation |
|
|
33.1 |
|
|
|
34.0 |
|
| |
Net Property, Plant and Equipment |
|
|
10,800.0 |
|
|
|
10,688.0 |
|
| |
|
|
|
|
|
|
|
|
|
Investments and Other Assets |
|
|
|
|
|
|
|
|
Assets of discontinued operations and assets held for sale |
|
|
8.8 |
|
|
|
14.6 |
|
Unconsolidated affiliates |
|
|
141.8 |
|
|
|
165.8 |
|
Other investments |
|
|
128.0 |
|
|
|
129.2 |
|
| |
Total Investments and Other Assets |
|
|
278.6 |
|
|
|
309.6 |
|
| |
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
7.4 |
|
|
|
16.4 |
|
Restricted cash |
|
|
212.7 |
|
|
|
174.7 |
|
Accounts receivable (less reserve of $60.5 and $39.6, respectively) |
|
|
568.9 |
|
|
|
808.6 |
|
Income tax receivable |
|
|
26.4 |
|
|
|
24.9 |
|
Gas inventory |
|
|
230.6 |
|
|
|
384.8 |
|
Underrecovered gas and fuel costs |
|
|
110.3 |
|
|
|
40.2 |
|
Materials and supplies, at average cost |
|
|
99.4 |
|
|
|
102.3 |
|
Electric production fuel, at average cost |
|
|
52.9 |
|
|
|
59.9 |
|
Price risk management assets |
|
|
188.9 |
|
|
|
173.3 |
|
Exchange gas receivable |
|
|
109.1 |
|
|
|
72.5 |
|
Regulatory assets |
|
|
168.2 |
|
|
|
238.3 |
|
Assets of discontinued operations and assets held for sale |
|
|
- |
|
|
|
1.4 |
|
Prepayments and other |
|
|
118.6 |
|
|
|
126.3 |
|
| |
Total Current Assets |
|
|
1,893.4 |
|
|
|
2,223.6 |
|
| |
|
|
|
|
|
|
|
|
|
Other Assets |
|
|
|
|
|
|
|
|
Price risk management assets |
|
|
240.2 |
|
|
|
237.6 |
|
Regulatory assets |
|
|
1,696.2 |
|
|
|
1,644.1 |
|
Goodwill |
|
|
3,677.3 |
|
|
|
3,677.3 |
|
Intangible assets |
|
|
314.1 |
|
|
|
319.6 |
|
Postretirement and postemployment benefits assets |
|
|
22.9 |
|
|
|
19.8 |
|
Deferred charges and other |
|
|
125.4 |
|
|
|
152.1 |
|
| |
Total Other Assets |
|
|
6,076.1 |
|
|
|
6,050.5 |
|
| |
Total Assets |
|
$ |
19,048.1 |
|
|
$ |
19,271.7 |
|
| |
The accompanying Notes to Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
7
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Condensed Consolidated Balance Sheets
(unaudited) (continued)
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
|
December 31, |
|
| (in millions, except share amounts) |
|
2010 |
|
|
2009 |
|
| |
CAPITALIZATION AND LIABILITIES |
|
|
|
|
|
|
|
|
Capitalization |
|
|
|
|
|
|
|
|
Common Stockholders’ Equity |
|
|
|
|
|
|
|
|
Common stock
- $0.01 par value, 400,000,000 shares authorized;
277,818,711 and 276,638,021 shares issued and outstanding,
respectively |
|
$ |
2.8 |
|
|
$ |
2.8 |
|
Additional paid-in capital |
|
|
4,080.4 |
|
|
|
4,057.6 |
|
Retained earnings |
|
|
899.5 |
|
|
|
865.5 |
|
Accumulated other comprehensive loss |
|
|
(60.4 |
) |
|
|
(45.9 |
) |
Treasury stock |
|
|
(27.4 |
) |
|
|
(25.9 |
) |
| |
Total Common Stockholders’ Equity |
|
|
4,894.9 |
|
|
|
4,854.1 |
|
Long-term debt, excluding amounts due within one year |
|
|
5,977.3 |
|
|
|
5,969.1 |
|
| |
Total Capitalization |
|
|
10,872.2 |
|
|
|
10,823.2 |
|
| |
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
|
718.8 |
|
|
|
719.7 |
|
Short-term borrowings |
|
|
212.8 |
|
|
|
103.0 |
|
Accounts payable |
|
|
278.9 |
|
|
|
502.3 |
|
Dividends payable |
|
|
64.1 |
|
|
|
0.2 |
|
Customer deposits and credits |
|
|
196.5 |
|
|
|
301.2 |
|
Taxes accrued |
|
|
227.8 |
|
|
|
212.9 |
|
Interest accrued |
|
|
130.6 |
|
|
|
125.4 |
|
Overrecovered gas and fuel costs |
|
|
38.1 |
|
|
|
220.4 |
|
Price risk management liabilities |
|
|
206.9 |
|
|
|
190.1 |
|
Exchange gas payable |
|
|
207.1 |
|
|
|
222.2 |
|
Deferred revenue |
|
|
10.1 |
|
|
|
27.3 |
|
Regulatory liabilities |
|
|
83.6 |
|
|
|
43.8 |
|
Accrued liability for postretirement and postemployment benefits |
|
|
7.6 |
|
|
|
23.6 |
|
Liabilities of discontinued operations and liabilities held for sale |
|
|
- |
|
|
|
0.6 |
|
Temporary LIFO liquidation credit |
|
|
6.4 |
|
|
|
- |
|
Legal and environmental reserves |
|
|
83.9 |
|
|
|
146.1 |
|
Other accruals |
|
|
244.2 |
|
|
|
310.8 |
|
| |
Total Current Liabilities |
|
|
2,717.4 |
|
|
|
3,149.6 |
|
| |
|
|
|
|
|
|
|
|
|
Other Liabilities and Deferred Credits |
|
|
|
|
|
|
|
|
Price risk management liabilities |
|
|
177.9 |
|
|
|
170.2 |
|
Deferred income taxes |
|
|
2,074.3 |
|
|
|
2,018.2 |
|
Deferred investment tax credits |
|
|
36.6 |
|
|
|
39.6 |
|
Deferred credits |
|
|
75.4 |
|
|
|
72.4 |
|
Deferred revenue |
|
|
0.2 |
|
|
|
8.5 |
|
Accrued liability for postretirement and postemployment benefits |
|
|
1,190.5 |
|
|
|
1,134.2 |
|
Liabilities of discontinued operations and liabilities held for sale |
|
|
- |
|
|
|
6.2 |
|
Regulatory liabilities and other removal costs |
|
|
1,591.8 |
|
|
|
1,558.8 |
|
Asset retirement obligations |
|
|
136.8 |
|
|
|
138.2 |
|
Other noncurrent liabilities |
|
|
175.0 |
|
|
|
152.6 |
|
| |
Total Other Liabilities and Deferred Credits |
|
|
5,458.5 |
|
|
|
5,298.9 |
|
| |
Total Capitalization and Liabilities |
|
$ |
19,048.1 |
|
|
$ |
19,271.7 |
|
| |
The accompanying Notes to Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
8
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Condensed Statements of Consolidated Cash Flows
(unaudited)
| |
|
|
|
|
|
|
|
|
| Six Months Ended June 30, (in millions) |
|
2010 |
|
|
2009 |
|
| |
Operating Activities |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
225.4 |
|
|
$ |
143.6 |
|
Adjustments to Reconcile Net Income to Net Cash from Continuing Operations: |
|
|
|
|
|
|
|
|
Gain on Early Extinguishment of Debt |
|
|
- |
|
|
|
(2.5 |
) |
Depreciation and Amortization |
|
|
301.4 |
|
|
|
291.9 |
|
Net Changes in Price Risk Management Assets and Liabilities |
|
|
4.4 |
|
|
|
(10.8 |
) |
Deferred Income Taxes and Investment Tax Credits |
|
|
38.6 |
|
|
|
36.4 |
|
Deferred Revenue |
|
|
(17.2 |
) |
|
|
5.1 |
|
Stock Compensation Expense |
|
|
6.0 |
|
|
|
4.9 |
|
(Gain) Loss on Sale of Assets |
|
|
0.1 |
|
|
|
(2.0 |
) |
Loss on Impairment of Assets |
|
|
- |
|
|
|
0.8 |
|
Income from Unconsolidated Affiliates |
|
|
(7.8 |
) |
|
|
(3.8 |
) |
(Gain) Loss
on Disposition of Discontinued Operations - Net of Taxes |
|
|
(0.1 |
) |
|
|
0.2 |
|
Loss from
Discontinued Operations - Net of Taxes |
|
|
0.1 |
|
|
|
11.4 |
|
Amortization of Discount/Premium on Debt |
|
|
5.4 |
|
|
|
6.2 |
|
AFUDC Equity |
|
|
(3.7 |
) |
|
|
- |
|
Distributions of Earnings Received from Equity Investee |
|
|
7.9 |
|
|
|
- |
|
Changes in Assets and Liabilities: |
|
|
|
|
|
|
|
|
Accounts Receivable |
|
|
245.1 |
|
|
|
494.4 |
|
Income Tax Receivable |
|
|
24.8 |
|
|
|
- |
|
Inventories |
|
|
147.6 |
|
|
|
219.3 |
|
Accounts Payable |
|
|
(235.4 |
) |
|
|
(431.4 |
) |
Customer Deposits and Credits |
|
|
(104.7 |
) |
|
|
(111.2 |
) |
Taxes Accrued |
|
|
6.2 |
|
|
|
84.2 |
|
Interest Accrued |
|
|
5.3 |
|
|
|
5.3 |
|
(Under) Overrecovered Gas and Fuel Costs |
|
|
(252.3 |
) |
|
|
566.8 |
|
Exchange Gas Receivable/Payable |
|
|
(51.3 |
) |
|
|
(16.0 |
) |
Other Accruals |
|
|
(30.5 |
) |
|
|
(103.9 |
) |
Prepayments and Other Current Assets |
|
|
28.1 |
|
|
|
38.5 |
|
Regulatory Assets/Liabilities |
|
|
98.3 |
|
|
|
52.2 |
|
Postretirement and Postemployment Benefits |
|
|
1.7 |
|
|
|
19.2 |
|
Deferred Credits |
|
|
(3.6 |
) |
|
|
(7.7 |
) |
Deferred Charges and Other Non Current Assets |
|
|
4.6 |
|
|
|
(1.2 |
) |
Other Non Current Liabilities |
|
|
2.9 |
|
|
|
12.2 |
|
| |
Net Operating Activities from Continuing Operations |
|
|
447.3 |
|
|
|
1,302.1 |
|
Net Operating Activities used for Discontinued Operations |
|
|
(44.8 |
) |
|
|
(62.3 |
) |
| |
Net Cash Flows from Operating Activities |
|
|
402.5 |
|
|
|
1,239.8 |
|
| |
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Capital Expenditures |
|
|
(336.9 |
) |
|
|
(385.8 |
) |
Insurance Recoveries |
|
|
0.5 |
|
|
|
54.6 |
|
Proceeds from Disposition of Assets |
|
|
0.3 |
|
|
|
2.1 |
|
Restricted Cash Deposits (Borrowings) |
|
|
(38.0 |
) |
|
|
31.1 |
|
Contributions to Equity Investments |
|
|
(0.3 |
) |
|
|
(20.2 |
) |
Other Investing Activities |
|
|
(19.9 |
) |
|
|
(9.2 |
) |
| |
Net Investing Activities used for Continuing Operations |
|
|
(394.3 |
) |
|
|
(327.4 |
) |
Net Investing Activities from Discontinued Operations |
|
|
0.4 |
|
|
|
7.5 |
|
| |
Net Cash Flow used for Investing Activities |
|
|
(393.9 |
) |
|
|
(319.9 |
) |
| |
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Issuance of Long-Term Debt |
|
|
- |
|
|
|
963.5 |
|
Retirement of Long-Term Debt |
|
|
(5.2 |
) |
|
|
(364.9 |
) |
Change in Short-Term Borrowings, Net |
|
|
109.8 |
|
|
|
(1,163.5 |
) |
Issuance of Common Stock |
|
|
6.8 |
|
|
|
0.4 |
|
Acquisition of Treasury Stock |
|
|
(1.4 |
) |
|
|
(0.9 |
) |
Dividends
Paid - Common Stock |
|
|
(127.6 |
) |
|
|
(126.2 |
) |
| |
Net Cash Flow used for Financing Activities |
|
|
(17.6 |
) |
|
|
(691.6 |
) |
| |
Change in cash and cash equivalents from continuing operations |
|
|
35.4 |
|
|
|
283.1 |
|
Cash contributions to discontinued operations |
|
|
(44.4 |
) |
|
|
(54.8 |
) |
Cash and cash equivalents at beginning of period |
|
|
16.4 |
|
|
|
20.6 |
|
| |
Cash and Cash Equivalents at End of Period |
|
$ |
7.4 |
|
|
$ |
248.9 |
|
| |
The accompanying Notes to Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
9
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Condensed Statements of Consolidated Comprehensive Income
(unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| (in millions, net of taxes) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
| |
Net Income (Loss) |
|
$ |
28.1 |
|
|
$ |
(4.8 |
) |
|
$ |
225.4 |
|
|
$ |
143.6 |
|
Other comprehensive (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (loss) gain on available-for-sale securities(a) |
|
|
(0.1 |
) |
|
|
1.5 |
|
|
|
0.4 |
|
|
|
0.2 |
|
Net unrealized (losses) gains on cash flow hedges(b),(c) |
|
|
(10.4 |
) |
|
|
111.1 |
|
|
|
(13.3 |
) |
|
|
96.6 |
|
Unrecognized pension benefit and OPEB costs(d) |
|
|
0.5 |
|
|
|
0.6 |
|
|
|
(1.6 |
) |
|
|
1.2 |
|
| |
Total other comprehensive (loss) income |
|
|
(10.0 |
) |
|
|
113.2 |
|
|
|
(14.5 |
) |
|
|
98.0 |
|
| |
Total Comprehensive Income |
|
$ |
18.1 |
|
|
$ |
108.4 |
|
|
$ |
210.9 |
|
|
$ |
241.6 |
|
| |
| (a) |
|
Net unrealized (loss) gain on available-for-sale securities, net of $0.2 million tax benefit and $1.1 million tax expense in the second
quarter of 2010 and 2009, respectively, and $0.1 million and $0.3 million tax expense for the first six months of 2010 and 2009,
respectively. |
| |
| (b) |
|
Net unrealized (losses) gains on derivatives qualifying as cash flow hedges, net of $6.6 million tax benefit and $74.9 million tax expense
in the second quarter of 2010 and 2009, respectively, and $8.4 million tax benefit and $64.7 million tax expense for the first six months
of 2010 and 2009, respectively. |
| |
| (c) |
|
Net unrealized (losses) gains on cash flow hedges includes losses of $11.2 million and $14.3 million
related to the unrealized losses of interest rate swaps held by NiSource’s unconsolidated
equity method investments
for the three and six months ended
June 30, 2010, respectively. |
| |
| (d) |
|
Unrecognized pension benefit and OPEB costs, net of $0.3 million and $0.4 million tax expense in the second quarter of 2010 and 2009,
respectively, and $1.1 million tax benefit and $0.7 million tax expense for the first six months of 2010 and 2009, respectively. |
The accompanying Notes to Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
10
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 NiSource’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2009. Income for interim periods may not be indicative of results for the
calendar year due to weather variations and other factors.
The 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.
At December 31, 2009, certain assets totaling $61.5 million were recorded in “Other property at
cost less accumulated depreciation.”
NiSource has corrected the classification of these assets as
“Utility Plant” in the Condensed Consolidated Balance
Sheets as of June 30, 2010 (unaudited) and December 31, 2009.
2. Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Fair Value Measurements and Disclosures. In January 2010, the FASB issued authoritative guidance
that amends the disclosures about transfers into and out of Levels 1 and 2 and requires separate
disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements.
This guidance also clarifies existing fair value disclosures about the level of disaggregation and
about inputs and valuation techniques used to measure fair value. This guidance is effective for
the first reporting period, including interim periods, beginning after December 15, 2009, except
for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on
a gross basis, which will be effective for fiscal years beginning after December 15, 2010. Early
adoption is permitted. NiSource adopted the guidance on January 1, 2010 with the exception of the
requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross
basis. NiSource is currently reviewing the additional Level 3 disclosure requirements to determine
the impact on the Condensed Consolidated Financial Statements (unaudited) and Notes to Condensed
Consolidated Financial Statements (unaudited). Refer to Note 10, “Fair Value Disclosures,” for
additional information.
Transfer of Financial Assets. In June 2009, the FASB issued authoritative guidance to amend
derecognition criteria guidance in ASC 860 to improve the relevance, representational faithfulness,
and comparability of the information that a reporting entity provides in its financial statements
about a transfer of financial assets; the effects of a transfer on its financial position,
financial performance, and cash flows; and a transferor’s continuing involvement, if any, in
transferred financial assets. NiSource adopted the guidance on January 1, 2010. This guidance
requires transfers of accounts receivable that previously qualified for sales accounting to be
accounted for as secured borrowings resulting in the recognition of short-term debt on the
Condensed Consolidated Balance Sheets (unaudited). Refer to Note 11, “Transfers of Financial
Assets,” for additional information.
Consolidation of Variable Interest Entities. In June 2009, the FASB issued authoritative guidance
to amend the manner in which entities evaluate whether consolidation is required for VIEs. The
model for determining which enterprise has a controlling financial interest and is the primary
beneficiary of a VIE has changed significantly under the new guidance. Previously, variable
interest holders were required to determine whether they retained a controlling financial interest
in a VIE based on a quantitative analysis of the expected gains and/or losses of the entity. In
contrast, the new guidance requires an enterprise with a variable interest in a VIE to
qualitatively assess whether it has a controlling financial interest in the entity, and if so,
whether it is the primary beneficiary.
11
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Furthermore, this guidance requires that companies
continually evaluate VIEs for consolidation, rather than assessing based upon the occurrence of
triggering events. This revised guidance also requires enhanced disclosures about how a company’s
involvement with a VIE affects its financial statements and exposure to risks. NiSource adopted the
guidance on January 1, 2010. Refer to Note 15, “Variable Interests and Variable Interest
Entities,” for additional information.
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 includes the incremental
effects of the various long-term incentive compensation plans. The calculation of diluted earnings
per share for June 30, 2010 and 2009 excludes out-of-the-money stock options that had an
anti-dilutive effect. The numerator in calculating both basic and diluted EPS for each period is
reported net income. The computation for the three months ended June 30, 2009 is not presented
since NiSource had a loss from continuing operations and net loss on the Condensed Statements of
Consolidated Income (Loss) (unaudited) during the period. The computation of diluted average
common shares follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
| (in thousands) |
|
2010 |
|
|
2010 |
|
|
2009 |
|
| |
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
Basic average common shares outstanding |
|
|
277,566 |
|
|
|
277,258 |
|
|
|
274,446 |
|
Dilutive potential common shares |
|
|
|
|
|
|
|
|
|
|
|
|
Shares contingently issuable under employee stock plans |
|
|
300 |
|
|
|
300 |
|
|
|
2,400 |
|
Shares restricted under employee stock plans |
|
|
511 |
|
|
|
480 |
|
|
|
108 |
|
| |
Diluted Average Common Shares |
|
|
278,377 |
|
|
|
278,038 |
|
|
|
276,954 |
|
| |
4. Restructuring Activities
During the first quarter of 2009, NiSource began an organizational restructuring initiative in
response to the decline in overall economic conditions.
In February 2009, NiSource announced the restructuring of the Gas Transmission and Storage
Operations segment. NiSource has eliminated positions across the 16 state operating territory of
Gas Transmission and Storage. The reductions have occurred through voluntary programs and
involuntary separations. In addition to employee reductions, the Gas Transmission and Storage
Operations segment took steps to achieve additional cost savings by efficiently managing its
various business locations, reducing its fleet operations, creating alliances with third party
service providers, and implementing other changes in line with its strategic plan for growth and
maximizing value of existing assets. During the first quarter of 2009, NiSource recorded a pre-tax
restructuring charge of $19.8 million to “Operation and maintenance” expense on the Condensed
Statement of Consolidated Income (Loss) (unaudited), which primarily includes costs related to
severance and other employee related costs. No additional material charges have been recorded since
the initial restructuring charge in the first quarter of 2009. The restructuring program was
substantially completed in 2009. The remaining employees impacted by the restructuring will be
severed and will receive benefits in 2010.
In September 2009, NiSource announced the restructuring of Northern Indiana, which aims to redefine
business and operations strategies and achieve cost reductions, and impacts both Electric
Operations and Gas Distribution Operations. During 2009, NiSource recorded a pre-tax restructuring
charge related to this initiative, net of adjustments, of $5.4 million, which primarily includes
costs related to severance and other employee related costs and outside services costs. The initial
restructuring charge consisted of a $3.7 million and $1.7 million expense to the Electric and Gas
Distributions Operations’ segments, respectively. During 2010, NiSource recorded a pre-tax
restructuring charge related to this initiative of $1.1 million to “Operation and maintenance”
expense on the
12
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Condensed Statements of Consolidated Income (Loss) (unaudited), which primarily
includes costs related to outside service costs. The restructuring program is expected to be
completed in 2010.
Changes in the restructuring reserve, included in “Other accruals” on the Condensed Consolidated
Balance Sheets (unaudited), were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
| (in millions) |
|
December 31, 2009 |
|
|
Additions |
|
|
Benefits Paid |
|
|
Adjustments |
|
|
June 30, 2010 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Initiative: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Transmission and Storage |
|
$ |
1.5 |
|
|
$ |
- |
|
|
$ |
(1.4 |
) |
|
$ |
- |
|
|
$ |
0.1 |
|
Northern Indiana |
|
|
1.1 |
|
|
|
1.1 |
|
|
|
(1.9 |
) |
|
|
- |
|
|
|
0.3 |
|
| |
Total |
|
$ |
2.6 |
|
|
$ |
1.1 |
|
|
$ |
(3.3 |
) |
|
$ |
- |
|
|
$ |
0.4 |
|
| |
5. Gas in Storage
Gas Distribution Operations price natural gas 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 or debit
within the Condensed Consolidated Balance Sheets (unaudited). Due to seasonality requirements,
NiSource expects interim variances in LIFO layers to be replenished by year-end. Changes between
the temporary LIFO liquidation credits in the amounts of $6.4 million and $8.3 million during the
first six months of 2010 and 2009, respectively, are considered non-cash activities for the
Condensed Statements of Consolidated Cash Flows (unaudited). In addition to the temporary LIFO
liquidation credit described above, NiSource also has a temporary LIFO liquidation debit of $15.6
million recorded for the first six months of 2010 for certain gas distribution companies recorded
within, “Prepayments and other,” on the Condensed Consolidated Balance Sheets (unaudited).
6. Discontinued Operations and Assets and Liabilities Held for Sale
The assets and liabilities of discontinued operations and held for sale on the Condensed
Consolidated Balance Sheet (unaudited) at June 30, 2010 were:
(in millions)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Property, plant and |
|
|
|
|
|
|
|
| Assets of discontinued operations and held for sale: |
|
equipment, net |
|
|
Other assets |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
NiSource Corporate Services |
|
$ |
6.2 |
|
|
$ |
- |
|
|
$ |
6.2 |
|
Columbia Transmission |
|
|
2.6 |
|
|
|
- |
|
|
|
2.6 |
|
| |
Total |
|
$ |
8.8 |
|
|
$ |
- |
|
|
$ |
8.8 |
|
| |
There were no liabilities of discontinued operations and held for sale at June 30, 2010.
13
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, 2009 were:
(in millions)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Property, plant and |
|
|
|
|
|
|
|
| Assets of discontinued operations and held for sale: |
|
|
|
|
|
equipment, net |
|
|
Other assets |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NiSource Corporate Services |
|
|
|
|
|
$ |
6.2 |
|
|
$ |
- |
|
|
$ |
6.2 |
|
NDC Douglas Properties |
|
|
|
|
|
|
5.8 |
|
|
|
1.4 |
|
|
|
7.2 |
|
Columbia Transmission |
|
|
|
|
|
|
2.6 |
|
|
|
- |
|
|
|
2.6 |
|
| |
Total |
|
|
|
|
|
$ |
14.6 |
|
|
$ |
1.4 |
|
|
$ |
16.0 |
|
| |
| |
| Liabilities of discontinued operations and held for sale: |
|
Debt |
|
|
Accounts payable |
|
|
Other liabilities |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NDC Douglas Properties |
|
$ |
6.6 |
|
|
$ |
0.2 |
|
|
$ |
- |
|
|
$ |
6.8 |
|
| |
Total |
|
$ |
6.6 |
|
|
$ |
0.2 |
|
|
$ |
- |
|
|
$ |
6.8 |
|
| |
Assets classified as discontinued operations or held for sale are no longer depreciated.
NiSource Corporate Services continues its effort to sell its Marble Cliff facility. A third party
appraisal was performed in December 2009 with an estimated market value of the property slightly
higher than the book value. NiSource has accounted for this facility as assets held for sale.
In 2009, NDC Douglas Properties, a subsidiary of NiSource Development Company, began the process of
exiting some of its low income housing investments. Based on the expected proceeds from the sale
of the five properties being less than the net book value, an impairment charge of $2.7 million,
net of tax, was included in Loss on Disposition of Discontinued Operations in the Statement of
Consolidated Income for the year ended December 31, 2009. Three of these properties were sold
during the first quarter of 2010 and two of these properties remained classified as assets and
liabilities held for sale. Results of operations and cash flows for these properties were
classified as discontinued operations. Upon sale of three of the properties in the first quarter of
2010, a gain on sale of $0.1 million, net of taxes, was recorded in Discontinued Operations.
During the second quarter of 2010, it was determined that the remaining properties no longer meet
the criteria as “assets held for sale” as NiSource could no longer assert that a sale would take
place within the next twelve months. As such, the assets and liabilities were reclassified to
assets held and used. Additionally, the results of operations and cash flows were reclassified to
continuing operations for all periods presented. These reclassifications did not have a
significant impact on overall results of NiSource.
On June 18, 2009, Columbia Transmission received approval from the FERC to abandon by sale to an
unaffiliated third party its Line R System in West Virginia, which includes certain natural gas
pipeline and compression facilities. These assets held for sale have a net book value of $2.4
million. The sale transaction is currently in negotiation. Columbia Transmission filed an
application with FERC to abandon by sale the remaining portion of the assets held for sale and
expects to receive an order by the end of 2010.
14
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Results from discontinued operations from Granite State Gas, Northern Utilities, NDC Douglas
Properties low income housing investments, and reserve changes for NiSource’s former exploration
and production subsidiary, CER, are provided in the following table:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
June 30, |
|
June 30, |
| (in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
| |
Revenues from Discontinued Operations
|
|
$ |
- |
|
|
$ |
0.1 |
|
|
$ |
0.7 |
|
|
$ |
0.3 |
|
| |
Income (Loss) from discontinued operations
|
|
|
0.2 |
|
|
|
(1.1 |
) |
|
|
(0.1 |
) |
|
|
(18.5 |
) |
Income tax expense (benefit)
|
|
|
0.1 |
|
|
|
(0.4 |
) |
|
|
- |
|
|
|
(7.1 |
) |
| |
Income (Loss) from Discontinued Operations - net of taxes
|
|
$ |
0.1 |
|
|
$ |
(0.7 |
) |
|
$ |
(0.1 |
) |
|
$ |
(11.4 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gain (Loss) on Disposition of Discontinued Operations -
net of taxes
|
|
$ |
- |
|
|
$ |
(0.1 |
) |
|
$ |
0.1 |
|
|
$ |
(0.2 |
) |
| |
7. Asset Retirement Obligations
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 (unaudited).
Changes in NiSource’s liability for asset retirement obligations for the first six months of 2010
and 2009 are presented in the table below:
| |
|
|
|
|
|
|
|
|
| (in millions) |
|
2010 |
|
2009 |
| |
Balance as of January 1,
|
|
$ |
138.2 |
|
|
$ |
126.0 |
|
Accretion expense
|
|
|
0.4 |
|
|
|
0.3 |
|
Accretion recorded as a regulatory asset
|
|
|
3.7 |
|
|
|
3.6 |
|
Settlements
|
|
|
(5.5 |
) |
|
|
(2.4 |
) |
| |
Balance as of June 30,
|
|
$ |
136.8 |
|
|
$ |
127.5 |
|
| |
8. Regulatory Matters
Gas Distribution Operations Regulatory Matters
Significant Rate Developments.
On May 3, 2010, Northern Indiana filed a natural gas rate case with the IURC, the first since 1987,
proposing enhanced low income assistance and extending energy-efficiency programs for customers, as
well as a change in rate design. Among other things, the filing also proposes a mechanism for the
deferral of certain pension and other postretirement costs and for adjustments to depreciation
rates and expense. In a Prehearing Conference Order issued June 16, 2010, the IURC established the
procedural schedule. Evidentiary hearings are scheduled to begin on November 1, 2010. New rates
are targeted to be effective by early 2011 or sooner.
On May 3, 2010, Columbia of Virginia filed a base rate case with the VSCC seeking an annual revenue
increase of $13.0 million to recover an updated level of costs upon the expiration of its
Performance Based Regulation Plan on December 31, 2010. Columbia of Virginia also seeks a Weather
Normalization Adjustment, cost recovery of certain gas related items through its Purchased Gas
Adjustment mechanism rather than base rates, and forward looking accounting adjustments predicted
to occur during the rate year ending December 31, 2011. New rates are scheduled to become
effective January 1, 2011.
15
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
On February 26, 2010, Columbia of Ohio filed an application to adjust rates associated with Riders
IRP and DSM. Rider DSM tracks and recovers costs associated with Columbia of Ohio’s energy
efficiency and conservation programs. On April 14, 2010, Columbia of Ohio filed a Joint Stipulation
and Recommendation that settled all issues. On April 28, 2010, the PUCO issued an Order approving
the Stipulation. Rates associated with Riders IRP and DSM were increased by approximately $17.8
million annually, beginning April 29, 2010.
On January 28, 2010, Columbia of Pennsylvania filed a base rate case with the Pennsylvania PUC,
seeking a revenue increase of approximately $32.0 million annually. On June 25, 2010, Columbia of
Pennsylvania filed a Joint Petition for Settlement that, if approved, would result in an annual
revenue increase of $12 million. Columbia of Pennsylvania anticipates that the Pennsylvania PUC
will issue a final order approving the Settlement and that new rates will go into effect on October
1, 2010.
On January 28, 2010, Columbia of Maryland filed a base rate case with the Maryland PSC, seeking a
revenue increase of $2.2 million annually in order for Columbia of Maryland to earn the rate of
return authorized by the PSC in its 2008 rate case. On May 10, 2010, the parties filed a Joint
Motion for Approval of Stipulation and Settlement Agreement that would result in an annual revenue
increase of approximately $1.7 million. The Maryland PSC issued a final order approving the
Settlement, and new rates went into effect on May 28, 2010.
On December 9, 2009, Northern Indiana filed a Petition with the IURC to extend its alternative
regulatory programs which were scheduled to expire on May 1, 2010. On February 12, 2010, Northern
Indiana, the OUCC and gas marketers supplying gas to residential and small commercial customers
filed a Joint Stipulation and Agreement proposing an extension to the programs through March 31,
2012, which was approved by the IURC on March 31, 2010.
On October 26, 2009, the Kentucky PSC approved a mechanism for recovering the costs of Columbia of
Kentucky’s AMRP. In the same Order the Kentucky PSC also approved a mechanism for the recovery of
Columbia of Kentucky’s uncollectible expenses associated with the cost of gas. On March 31, 2010,
Columbia Gas of Kentucky made its annual filing related to the AMRP Rider and requested an
adjustment of those rates related to the Rider. On July 12, 2010, the Commission entered an Order
approving the requested annual amount of $1.1 million. The new rates associated with the AMRP Rider will
go into effect for bills rendered on or after July 29, 2010.
On October 21, 2009, the IURC issued an Order in the proceeding concerning Northern Indiana’s
annual gas recovery, rejecting the use of a four-year average to compute unaccounted for gas.
This Order requires Northern Indiana to refund an estimated $5.8 million to customers based on
a calculation utilizing a one-year average of unaccounted for gas for the twelve month periods
ended July 31, 2008 and July 31, 2009. A reserve has been provided for the full amount of the
refund, which Northern Indiana began returning to customers in March 2010.
On June 8, 2009, Columbia of Virginia filed an Application with the VSCC for approval of a CARE
Plan for a three-year period beginning January 1, 2010. The CARE Plan included incentives for
residential and small general service customers to actively pursue conservation and energy
efficiency measures, a surcharge designed to recover the costs of such measures on a real-time
basis, and a performance-based incentive for the delivery of conservation and energy efficiency
benefits. The CARE Plan also included a rate decoupling mechanism designed to mitigate the impact
of declining customer usage. On October 28, 2009, Columbia of Virginia and other parties to the
proceeding presented a unanimous settlement to the Hearing Examiner, which provided for approval of
the CARE Plan Application with modifications. The settlement was approved by the VSCC on December
4, 2009, with mechanisms becoming effective January 1, 2010.
In March 2009, Indiana Governor Daniels signed Senate Bill 423 into law giving the Indiana
Finance Authority the ability to contract, on behalf of gas customers in the state of Indiana,
with developers capable of building facilities that manufacture Substitute Natural Gas from
coal. The Indiana Finance Authority received one bid, from Indiana Gasification, by the April
9, 2009 deadline to initiate a Substitute Natural Gas plant in Southern Indiana under a 30
year contract. Current law requires that all Indiana gas utilities, including Northern
Indiana, deliver a portion of Substitute Natural Gas from this facility, once it is built.
The IURC must approve the final contract between the Indiana Finance Authority and Indiana
Gasification.
16
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
On January 30, 2009, Columbia of Ohio filed an application with the PUCO to implement a gas supply
auction. The auction replaced Columbia of Ohio’s current GCR mechanism for providing commodity gas
supplies to its sales customers. By order dated December 2, 2009, the PUCO approved a stipulation
that resolved all issues in the case. Pursuant to the stipulation, Columbia of Ohio will conduct
two consecutive one-year long standard service offer auction periods starting April 2010 and April
2011. On February 23, 2010, Columbia of Ohio held the first standard service offer auction which
resulted in a final retail price adjustment of $1.93 per mcf. On February 24, 2010, the PUCO
issued an Entry that approved the results of the auction and directed Columbia of Ohio to proceed
with the implementation of the standard service offer process.
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 GCR
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 have completed rate proceedings involving
infrastructure replacement or are embarking upon regulatory initiatives to replace significant
portions of their operating systems that are nearing the end of their useful lives. Each LDC’s
approach to cost recovery may be unique, given the different laws, regulations and precedent that
exist in each jurisdiction.
On October 30, 2009, the Massachusetts DPU approved a mechanism for the recovery of costs
associated with the replacement of Bay State’s infrastructure. Bay State filed an application to
increase its Targeted Infrastructure Replacement Factor Rider on April 30, 2010.
On April 30, 2009, Columbia of Ohio filed an application with the PUCO to defer pension and other
postretirement benefits expenses above those currently subject to collection in rates, effective
January 1, 2009. On July 8, 2009, the PUCO issued an Order approving Columbia of Ohio’s
application, although the deferred balances will not accrue carrying charges and Columbia of Ohio
may not seek recovery of pension and other postretirement benefits deferrals in a base rate
proceeding for a period of five years from the date of the Order. Approximately $4.2 million has
been deferred in 2010 and $13.0 million was deferred for the year 2009.
17
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Gas Transmission and Storage Operations Regulatory Matters
Majorsville, PA Project. The Gas Transmission and Storage Operations segment is in the process of
executing three separate projects totaling approximately $80.0 million in the Majorsville, PA
vicinity to aggregate Marcellus Shale gas production for downstream transmission. Precedent
Agreements were executed by anchor shippers in the fourth quarter of 2009. In 2010, Columbia
Transmission filed with the FERC two applications to transfer certain pipeline facilities to a
newly formed affiliate, NiSource Midstream, LLC, that, once approved, will be part of the
facilities providing non-FERC jurisdiction gathering services to producers in the Majorsville, PA
vicinity. The Majorsville, PA project is expected to begin service during the third quarter of
2010.
Incentive Fixed Fuel Mechanism. On November 9, 2009, Columbia Gulf filed an application before the
FERC for approval to replace Columbia Gulf’s existing Transportation Retainage Adjustment tracker
mechanism that Columbia Gulf currently relies upon to recover fuel with a proposed Incentive Fixed
Fuel mechanism. The Incentive Fixed Fuel Mechanism would establish a fixed fuel rate and includes
incentives to improve pipeline infrastructure and reduce pipeline fuel requirements. The FERC
issued an Order July 2, 2010 that included modifications to Columbia Gulf’s proposal. Columbia Gulf
is unable to implement the proposal given the modifications and formally withdrew its proposal on
July 16, 2010.
Electric Operations Regulatory Matters
Significant Rate Developments. On June 27, 2008, Northern Indiana filed a petition for new
electric base rates and charges. Northern Indiana filed its last electric base rate increase in
1986. The filing requested an increase in base rates calculated to produce additional gross margin
of $85.7 million. Several stakeholder groups have intervened in the case, representing customer
groups and various counties and towns within Northern Indiana’s electric service territory.
Evidentiary hearings concluded on August 6, 2009, and the briefing schedule concluded in January
2010. Northern Indiana is awaiting an IURC Order.
Northern Indiana received a favorable regulatory order on February 18, 2009 related to its actions
to increase its electric generating capacity and advance its electric rate case. Acting on a
settlement reached among Northern Indiana and its regulatory stakeholders, the IURC ruled that
Northern Indiana’s Sugar Creek electric generating plant was in service for ratemaking purposes as
of December 1, 2008. The IURC also approved the deferral of depreciation expenses and carrying
costs associated with the $330.0 million Sugar Creek investment. Northern Indiana purchased Sugar
Creek on May 30, 2008 and effective December 1, 2008, Sugar Creek was accepted as an internal
designated network resource within the MISO.
Northern Indiana anticipates filing another electric base rate case during 2010. Among other
things, the filing is expected to include the effect of increased pension expense, as well as usage
levels based on more recent operating experience.
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 certain 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 new rates take effect based
on an IURC order in the 2008 electric rate case. Credits amounting to $29.0 million and $26.3
million were recognized for electric customers for the first six months of 2010 and 2009,
respectively.
On December 9, 2009, the IURC issued an order in its generic DSM investigation proceeding
establishing an overall annual energy savings goal of 2% to be achieved by Indiana jurisdictional
electric utilities in 10 years, with interim savings goals established in years one through nine.
Northern Indiana and other jurisdictional electric utilities must file DSM plans on July 1, 2010,
2013, 2016, and 2019, with annual updates in the interim periods. The IURC requires that certain
core programs be established and administered by an independent third party. The IURC did not make
any specific findings with respect to cost recovery issues. In compliance with the December 9,
2009 Order, on March 16, 2010 Northern Indiana filed a proposal for a mechanism to recover the
costs associated with
18
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
these energy efficiency programs, including lost revenue. On June 17, 2010,
Northern Indiana filed for approval of its energy efficiency programs, recovery of program costs
and lost revenue, and its proposed performance incentive level and methodology.
MISO. As part of Northern Indiana’s participation in the MISO transmission service, wholesale
energy and ancillary service markets, 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 certain non-fuel related costs incurred after Northern Indiana’s rate
moratorium, which expired on July 31, 2006. In its pending base rate case, Northern Indiana
proposes recovery of the cumulative amount of net non-fuel charges that were deferred as of
December 31, 2008, and to recover, through a tracker, charges deferred between December 31, 2008
and the date of effective rates in this case. During the first half of 2010, MISO costs of $4.8
million were deferred, while net credits of $0.2 million were deferred in the first half of 2009. As of
June 30, 2010, Northern Indiana has deferred a total of $31.2 million of MISO costs.
On November 7, 2008, the FERC issued an Order clarifying the RSG First Pass calculation and
requiring the MISO to resettle the RSG market using the correct calculation and to pay refunds, or
assess surcharges, to market participants, as appropriate, to correct a misinterpretation of an
order issued by FERC in April 2006. Northern Indiana believes that the original Order would have
entitled Northern Indiana to a refund, with the amount subject to calculation by MISO. On June 12,
2009, however, FERC issued an Order on rehearing in which it affirmed its prior order clarifying
the method to calculate the RSG First Pass rate, but reversed its ruling requiring the MISO to pay
refunds, and collect surcharges, on equitable grounds. Northern Indiana has asked FERC to
reconsider its decision to deny refunds and that request remains pending. MISO’s implementation of
FERC’s April 2006 Order on the RSG First Pass calculation resulted in several million dollars of
surcharges to Northern Indiana through market resettlements implemented during the summer of 2007.
As a result, Northern Indiana and Ameren jointly filed a complaint with FERC on August 10, 2007,
contending that the RSG rates in effect were unjust and unreasonable. On November 10, 2008, the
FERC issued an Order granting these complaints and ordering the MISO to calculate refunds and
surcharges, as appropriate, back to the date of the complaint filed by Northern Indiana and Ameren,
as authorized by Section 206 of the Federal Power Act. On May 6, 2009, however, the FERC issued an
Order that upheld its decision granting the complaint, but largely reversed its directive requiring
MISO to pay refunds, and collect surcharges, on equitable grounds. The FERC affirmed the refund
and surcharge requirement only for those transactions that occurred after the date of the November
10, 2008 Order, instead of August 10, 2007, as it had previously required. Northern Indiana and
Ameren have requested rehearing of the FERC’s May 6, 2009 Order, and that request remains pending.
MISO and PJM Interconnection undertook a joint effort in April and May 2009 to identify a source of
unaccounted for flows on several coordinated flowgates. The analysis found that certain PJM
Interconnection generating units that were once associated with unit-specific capacity sales were
erroneously excluded from PJM Interconnection’s market flows, which significantly affected the
congestion price on reciprocally coordinated flowgates on Northern Indiana systems. Higher PJM
Interconnection market flows on congested flowgates would have resulted in higher payments to MISO
by PJM Interconnection during market to market coordination since April 1, 2005. The model was
fixed on June 18, 2009 and MISO and PJM Interconnection are currently in settlement discussions
with the FERC that began on October 19, 2009 to determine the financial impact of any
resettlements. Initial amounts calculated by PJM Interconnection approximated $78.0 million, while
MISO has performed a preliminary estimate of $125.0 to $150.0 million. The impact to Northern
Indiana cannot be reasonably estimated until a settlement is reached between MISO and PJM
Interconnection, and MISO receives approval from the FERC on an allocation methodology to its
market participants. Any adjustment will be neutral or favorable to operations.
Cost Recovery and Trackers. A significant portion of Northern Indiana’s 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. Various intervenors, including the OUCC, had taken issue with the allocation of costs
included in Northern Indiana’s FAC-80, FAC-81 and FAC-82, which cover the reconciliation of April
– December 2008. The IURC granted a sub-docket to consider such issues in those filings. The
intervening parties and Northern Indiana discussed procedures to eliminate these concerns and to
resolve them for the historical periods. On November 4, 2009 the IURC approved a settlement
agreement which
19
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
calls for a credit of $8.2 million to be provided to FAC customers beginning in
November 2009, less any amount for attorney’s fees and expenses.
On May 28, 2008, the IURC issued an order approving the purchase of Sugar Creek, and on May 30,
2008 Northern Indiana purchased the 535 mw CCGT for $330.0 million in order to help meet capacity
needs. On February 18, 2009, the IURC issued an order approving a settlement agreement filed in
this proceeding allowing Northern Indiana to begin deferring carrying costs and depreciation,
pending inclusion in rates, on Sugar Creek effective on December 1, 2008, when Sugar Creek was
dispatched into MISO, at the agreed to carrying cost rate of 6.5%. The annual deferral for Sugar
Creek is reduced by the annual depreciation on the Mitchell plant of $4.5 million, pursuant to the
FAC-71 settlement. The terms of recovery of the deferral and inclusion of Sugar Creek in rates will
be resolved in Northern Indiana’s current rate proceeding.
As part of a settlement agreement which resolved issues surrounding purchased power costs, 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 ratepayers. The benchmark is based upon the costs of power
generated by a hypothetical natural gas fired unit using gas purchased and delivered to Northern
Indiana and a set sharing mechanism. The agreement also contemplated Northern Indiana adding
generating capacity to its existing portfolio by providing for the benchmark to be adjusted as new
capacity is added. The dispatch of Sugar Creek into MISO on December 1, 2008 triggered a change in
the benchmark, whereby the first 500 mw tier of the benchmark provision was eliminated. During the
first six months of 2010 and 2009, the amount of purchased power costs exceeding the benchmark
amounted to $0.2 million and $1.0 million, respectively, which was recognized as a net reduction of
revenues.
Northern Indiana has approval from the IURC to recover certain environmental related costs through
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 IDEM’s NOx SIP and CAIR and CAMR
compliance plan projects through an ECRM and (2) related operation and maintenance and depreciation
expenses once the environmental facilities become operational through an EERM. On July 7, 2010 the
IURC approved the revised capital expenditure cost estimate of approximately $361.0 million. On
June 18, 2010, Northern Indiana filed for a certificate of public convenience and necessity and
associated ratemaking and accounting relief to construct flue gas desulfurization technology on
Schahfer Unit 14 with a current estimated construction cost of approximately $154.0 million.
Northern Indiana is seeking authority to recover construction and ongoing operating and maintenance
costs through the ECT.
9. Risk Management Activities
NiSource is exposed to certain risks relating to its ongoing business operations. The primary
risks managed by using derivative instruments are commodity price risk and interest rate risk.
Derivative natural gas contracts are entered into to manage the price risk associated with natural
gas price volatility and to secure forward natural gas prices. Interest rate swaps are entered
into to manage interest rate risk associated with NiSource’s fixed-rate borrowings. NiSource
designates some of its commodity forward contracts as cash flow hedges of forecasted purchases of
commodities and designates its interest rate swaps as fair value hedges of fixed-rate borrowings.
Additionally, certain NiSource subsidiaries enter into forward physical contracts with various
third parties to procure or sell natural gas or power. Certain forward physical contracts are
derivatives which qualify for the normal purchase and normal sales exception which would not
require mark-to-market accounting.
Accounting Policy for Derivative Instruments. The ASC topic on accounting for derivatives and
hedging requires an entity to recognize all derivatives as either assets or liabilities on the
Consolidated Balance Sheets at fair value, unless such contracts are exempted as a normal purchase
and normal sale contract under the provisions of the ASC topic. The accounting for changes in the
fair value of a derivative depends on the intended use of the derivative and resulting designation.
NiSource uses a variety of derivative instruments (exchange traded futures and options, physical
forwards and options, basis contracts, financial commodity swaps,
interest rate swaps, and FTRs) to
effectively manage its commodity
20
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
price risk and interest rate risk exposure. 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. In order for a
derivative contract to be designated as a hedge, the relationship between the hedging instrument
and the hedged item or transaction must be highly effective. The effectiveness test is performed
at the inception of the hedge and each reporting period thereafter, throughout the period that the
hedge is designated. Any amounts determined to be ineffective are recognized currently in
earnings. For derivative contracts that qualify for the normal purchase and normal sales
exception, a contract’s fair value is not recognized in the Consolidated Financial Statements until
the contract is settled.
Unrealized and realized gains and losses are recognized each period as components of accumulated
other comprehensive income (loss), regulatory assets and liabilities or earnings depending on the
designation of the derivative instrument. For subsidiaries that utilize derivatives for cash flow
hedges, the effective portions of the gains and losses are recorded to accumulated other
comprehensive income (loss) and are recognized in earnings concurrent with the disposition of the
hedged risks. If a forecasted transaction corresponding to a cash flow hedge is no longer probable
to occur, the accumulated gains or losses on the derivative are recognized currently in earnings.
For fair value hedges, the gains and losses are recorded in earnings each period together with the
change in the fair value of the hedged item. As a result of the rate-making process, the
rate-regulated subsidiaries generally record gains and losses as regulatory liabilities or assets
and recognize such gains or losses in earnings when both the contracts settle and the physical
commodity flows. These gains and losses recognized in earnings are then subsequently recovered or
paid to customers through rates. When gains and losses are recognized in earnings, they are
recognized in cost of sales for derivatives that correspond to commodity risk activities and are
recognized in interest expense for derivatives that correspond to interest-rate risk activities.
Commodity Price Risk Programs. NiSource and NiSource’s utility customers are exposed to
variability in cash flows associated with natural gas purchases and volatility in natural gas
prices. NiSource purchases natural gas for sale and delivery to its retail, commercial and
industrial customers, and for most customers the variability in the market price of gas is passed
through in their rates. Some of NiSource’s utility subsidiaries offer programs where variability
in the market price of gas is assumed by the respective utility. The objective of NiSource’s
commodity price risk programs is to mitigate this gas cost variability, for NiSource or on behalf
of its customers, associated with natural gas purchases or sales by economically hedging the
various gas cost components by using a combination of futures, options, forward physical contracts,
basis swap contracts or other derivative contracts. Northern Indiana also uses derivative
contracts to minimize risk associated with power price volatility. These commodity price risk
programs and their respective accounting treatment are described below.
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 programs must be marked to
fair value, but because these derivatives are used within the framework of the companies’ GCR
mechanisms, regulatory assets or liabilities are recorded to offset the change in the fair value of
these derivatives.
Northern Indiana, Columbia of Virginia and Columbia of Pennsylvania offer a fixed price program as
an alternative to the standard GCR mechanism. These services provide customers with the
opportunity to either lock in their gas cost or place a cap on the gas costs that would be charged
in future months. In order to hedge the anticipated physical purchases associated with these
obligations, forward physical contracts, NYMEX futures and NYMEX options have been used to secure
forward gas prices. The accounting treatment elected for these contracts is varied whereby certain
of these contracts have been accounted for as cash flow hedges while some contracts are not. The
normal purchase and normal sales exception is elected for forward physical contracts associated
with these programs whereby delivery of the commodity is probable to occur.
Northern Indiana offers a DependaBill program to its customers as an alternative to the standard
tariff rate that is charged to residential customers. This 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
21
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
purchases associated with these
obligations, forward physical contracts, and NYMEX options are used to secure forward gas prices.
The normal purchase and normal sales exception is elected for forward physical contracts associated
with these programs whereby delivery of the commodity is probable to occur.
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, Northern Indiana records the related gains and losses associated
with these transactions as a regulatory asset or liability.
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. The Columbia LDCs defer a portion of the change in the fair value of the options as
either a regulatory asset or liability based on the regulatory customer sharing mechanisms in
place, with the remaining changes in fair value recognized currently in earnings.
As part of the MISO Day 2 initiative, Northern Indiana was allocated or has purchased FTRs. These
FTRs help Northern Indiana offset congestion costs due to the MISO Day 2 activity. The FTRs are
marked to fair value and are not accounted for as a hedge, 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 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. ARRs are not derivatives and are
convertible to FTRs. Northern Indiana purchased FTRs in May 2010 for a 12 month period starting
June 1, 2010.
NiSource is in the process of winding down its unregulated natural gas marketing business, where
gas derivatives are utilized to hedge expected future gas purchases and sales. Prior to the
decision to wind down this business in the second quarter of 2009, the financial derivatives
associated with commercial and industrial gas sales were accounted for as cash flow hedges.
NiSource also has corresponding forward physical sales contracts of natural gas with customers.
These forward physical sales contracts are derivatives that have generally qualified for the normal
purchase and normal sales exception, which NiSource had elected prior to the decision to wind down
the business in 2009. As a result of the decision to wind down the business, certain forecasted
transactions were no longer probable to occur, which triggered the mark-to-market treatment of
certain forward sales contracts that were previously exempt under the normal purchase and normal
sale exception. In addition, the mark-to-market gains and losses deferred in accumulated other
comprehensive income (loss) related to certain financial derivatives accounted for as a cash flow
hedge were recognized in income. NiSource established reserves of $6.8 million at June 30, 2010 and
$9.2 million at December 31, 2009, against certain of these physical sale contract derivatives.
These amounts represent reserves related to the creditworthiness of certain customers, the fair
value of future cash flows, and the cost of maintaining significant amounts of restricted cash.
The physical sales contracts marked-to-market had a fair value of approximately $149.9 million at
June 30, 2010
and $126.9 million at December 31, 2009, while the financial derivative contracts marked-to-market
had a fair value loss of $143.6 million at June 30, 2010 and $114.6 million at December 31, 2009.
22
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Commodity price risk program derivative contracted gross volumes are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
June 30, 2010 |
|
|
December 31, 2009 |
|
| |
Commodity Price Risk Program: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas price volatility program derivatives (MMDth) |
|
|
29.9 |
|
|
|
26.4 |
|
|
|
|
|
|
|
|
|
|
Price Protection Service program derivatives (MMDth) |
|
|
0.6 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
DependaBill program derivatives (MMDth) |
|
|
0.4 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
Regulatory incentive program derivatives (MMDth) |
|
|
5.2 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
Gas marketing program derivatives (MMDth)(a) |
|
|
57.1 |
|
|
|
74.7 |
|
|
|
|
|
|
|
|
|
|
Gas marketing forward physical derivatives (MMDth)(b) |
|
|
59.2 |
|
|
|
79.6 |
|
|
|
|
|
|
|
|
|
|
Electric energy program FTR derivatives (mw)(c) |
|
|
16,859.8 |
|
|
|
1,343.7 |
|
| |
(a) Basis contract volumes not included in the above table were 60.5 MMDth and 82.3 MMDth as of June 30, 2010 and December 31, 2009, respectively.
(b) Basis contract volumes not included in the above table were 62.1 MMDth and 85.4 MMDth as of June 30, 2010 and December 31, 2009, respectively.
(c) Northern Indiana purchases FTR derivatives in May for use over the next twelve months.
Interest Rate Risk Activities. NiSource recognizes that the prudent and selective use of
derivatives may help it to lower its cost of debt capital and manage its interest rate exposure.
NiSource Finance has entered into various “receive fixed” and “pay floating” interest rate swap
agreements which modify the interest rate characteristics of its outstanding long-term debt from
fixed to variable rate. These interest rate swaps also serve to hedge the fair market value of
NiSource Finance’s outstanding debt portfolio. As of June 30, 2010, NiSource had $6.9 billion of
outstanding debt, of which $1,050 million is subject to fluctuations in interest rates as a result
of the fixed-to-variable interest rate swap transactions. These interest rate swaps are designated
as fair value hedges. NiSource had no net gain or loss recognized in earnings due to hedging
ineffectiveness.
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
receives 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. On September 15, 2008, NiSource Finance terminated a
fixed-to-variable interest rate swap agreement with Lehman Brothers having a notional amount of
$110 million. NiSource Finance elected to terminate the swap when Lehman Holdings Inc., guarantor
under the applicable International Swaps and Derivatives Association agreement, filed for Chapter
11 bankruptcy protection on September 14, 2008, which constituted an event of default under the
swap agreement between NiSource Finance and Lehman Brothers Special Financing Inc. The
mark-to-market close-out value of this swap at the September 15, 2008 termination date was
determined to be $4.8 million and was fully reserved in the third quarter of 2008. The termination
of this swap did not impact NiSource’s ability to assert hedge accounting for its remaining
fixed-to-variable interest rate swap agreements.
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
receives 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.
Contemporaneously with the issuance on September 16, 2005 of $1 billion of its 5.25% and 5.45%
notes, 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 from accumulated other comprehensive loss to interest expense over the term of the
underlying debt, resulting in an effective interest rate of 5.67% and 5.88%, respectively. As of
June 30, 2010, accumulated other comprehensive loss includes $13.6 million
23
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
related to forward starting interest rate swap settlement. These derivative contracts are
accounted for as a cash flow hedge.
As of June 30, 2010 NiSource holds a 47.5% interest in Millennium Pipeline Company, L.L.C
(Millennium). During 2008 Millennium entered into various interest rate swap agreements in order to
protect against the risk of increasing interest rates. These interest rate swap derivatives are
primarily accounted for as cash flow hedges by Millennium. As an equity method investment, NiSource
is required to recognize a proportional share of Millennium’s OCI.
On July 20, 2010, Millennium completed pricing on two tranches of fixed-rate notes in the private
placement market totaling $725.0 million and the associated
interest rate swaps were terminated.
Millennium will issue the notes, settle the interim financing, terminate the sponsor guarantee and
cash settle the interest rate hedges on August 26, 2010.
NiSource’s location and fair value of derivative instruments on the Condensed Consolidated Balance
Sheets (unaudited) were:
| |
|
|
|
|
|
|
|
|
| |
| |
|
June 30, |
|
|
December 31, |
|
| Asset Derivatives (in millions) |
|
2010 |
|
|
2009 |
|
| |
Balance Sheet Location |
|
Fair Value |
|
|
Fair Value |
|
| |
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
Interest rate risk activities |
|
|
|
|
|
|
|
|
Price risk management assets (current) |
|
$ |
11.3 |
|
|
|
— |
|
Price risk management assets (noncurrent) |
|
|
63.9 |
|
|
|
68.2 |
|
| |
Total derivatives designated as hedging instruments |
|
$ |
75.2 |
|
|
$ |
68.2 |
|
| |
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
Commodity price risk programs |
|
|
|
|
|
|
|
|
Price risk management assets (current) |
|
$ |
177.6 |
|
|
$ |
173.3 |
|
Price risk management assets (noncurrent) |
|
|
176.3 |
|
|
|
169.4 |
|
| |
Total derivatives not designated as hedging instruments |
|
$ |
353.9 |
|
|
$ |
342.7 |
|
| |
Total Asset Derivatives |
|
$ |
429.1 |
|
|
$ |
410.9 |
|
| |
| |
|
|
|
|
|
|
|
|
| |
| |
|
June 30, |
|
|
December 31, |
|
| Liability Derivatives (in millions) |
|
2010 |
|
|
2009 |
|
| |
Balance Sheet Location |
|
Fair Value |
|
|
Fair Value |
|
| |
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
Commodity price risk programs |
|
|
|
|
|
|
|
|
Price risk management liabilities (current) |
|
$ |
1.0 |
|
|
$ |
1.0 |
|
Price risk management liabilities (noncurrent) |
|
|
0.1 |
|
|
|
0.5 |
|
| |
Total derivatives designated as hedging instruments |
|
$ |
1.1 |
|
|
$ |
1.5 |
|
| |
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
Commodity price risk programs |
|
|
|
|
|
|
|
|
Price risk management liabilities (current) |
|
$ |
205.9 |
|
|
$ |
189.1 |
|
Price risk management liabilities (noncurrent) |
|
|
177.8 |
|
|
|
169.7 |
|
| |
Total derivatives not designated as hedging instruments |
|
$ |
383.7 |
|
|
$ |
358.8 |
|
| |
Total Liability Derivatives |
|
$ |
384.8 |
|
|
$ |
360.3 |
|
| |
24
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
The effect of derivative instruments on the Condensed Statements of Consolidated Income (Loss)
(unaudited) was:
Derivatives in Cash Flow Hedging Relationships
Three Months Ended, (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amount of Gain (Loss) |
|
|
|
|
Amount of Gain (Loss) |
| |
|
Recognized in OCI on |
|
|
|
|
Reclassified from AOCI |
| |
|
Derivative (Effective |
|
|
Location of Gain (Loss) |
|
into Income (Effective |
| |
|
Portion) |
|
|
Reclassified from AOCI |
|
Portion) |
| Derivatives in Cash Flow |
|
June 30, |
|
|
June 30, |
|
|
into Income (Effective |
|
June 30, |
|
|
June 30, |
|
| Hedging Relationships |
|
2010 |
|
|
2009 |
|
|
Portion) |
|
2010 |
|
|
2009 |
|
| |
Commodity price risk programs |
|
$ |
0.4 |
|
|
$ |
110.7 |
|
|
Cost of Sales |
|
$ |
0.3 |
|
|
$ |
19.0 |
|
Interest rate risk activities |
|
|
0.4 |
|
|
|
0.4 |
|
|
Interest expense, net |
|
|
(0.7 |
) |
|
|
(0.4 |
) |
| |
Total |
|
$ |
0.8 |
|
|
$ |
111.1 |
|
|
|
|
$ |
(0.4 |
) |
|
$ |
18.6 |
|
| |
Six Months Ended (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amount of Gain (Loss) |
|
|
|
|
Amount of Gain (Loss) |
| |
|
Recognized in OCI on |
|
|
|
|
Reclassified from AOCI |
| |
|
Derivative (Effective |
|
|
Location of Gain (Loss) |
|
into Income (Effective |
| |
|
Portion) |
|
|
Reclassified from AOCI |
|
Portion) |
| Derivatives in Cash Flow |
|
June 30, |
|
|
June 30, |
|
|
into Income (Effective |
|
June 30, |
|
|
June 30, |
|
| Hedging Relationships |
|
2010 |
|
|
2009 |
|
|
Portion) |
|
2010 |
|
|
2009 |
|
| |
Commodity price risk programs |
|
$ |
0.2 |
|
|
$ |
95.8 |
|
|
Cost of Sales |
|
$ |
0.8 |
|
|
$ |
(24.8 |
) |
Interest rate risk activities |
|
|
0.8 |
|
|
|
0.8 |
|
|
Interest expense, net |
|
|
(1.3 |
) |
|
|
(0.8 |
) |
| |
Total |
|
$ |
1.0 |
|
|
$ |
96.6 |
|
|
|
|
$ |
(0.5 |
) |
|
$ |
(25.6 |
) |
| |
Three Months Ended, (in millions):
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Amount of Gain (Loss) Recognized |
| |
|
|
|
in Income on Derivative |
| |
|
Location of Gain (Loss) |
|
(Ineffective Portion and Amount |
| |
|
Recognized in Income on |
|
Excluded from Effectiveness |
| |
|
Derivative (Ineffective Portion |
|
Testing) |
| Derivatives in Cash Flow Hedging |
|
and Amount Excluded from |
|
|
|
|
|
|
| Relationships |
|
Effectiveness Testing) |
|
June 30, 2010 |
|
|
June 30, 2009 |
|
| |
Commodity price risk programs |
|
Cost of Sales |
|
$ |
- |
|
|
$ |
- |
|
Interest rate risk activities |
|
Interest expense, net |
|
|
- |
|
|
|
- |
|
| |
Total |
|
|
|
$ |
- |
|
|
$ |
- |
|
| |
25
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Six Months Ended, (in millions)
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Amount of Gain (Loss) Recognized |
| |
|
|
|
in Income on Derivative |
| |
|
Location of Gain (Loss) |
|
(Ineffective Portion and Amount |
| |
|
Recognized in Income on |
|
Excluded from Effectiveness |
| |
|
Derivative (Ineffective Portion |
|
Testing) |
| Derivatives in Cash Flow Hedging |
|
and Amount Excluded from |
|
|
|
|
|
|
| Relationships |
|
Effectiveness Testing) |
|
June 30, 2010 |
|
|
June 30, 2009 |
|
| |
Commodity price risk programs |
|
Cost of Sales |
|
$ |
- |
|
|
$ |
- |
|
Interest rate risk activities |
|
Interest expense, net |
|
|
- |
|
|
|
- |
|
| |
Total |
|
|
|
$ |
- |
|
|
$ |
- |
|
| |
Derivatives
in Fair Value Hedging Relationships
Three Months Ended, (in millions)
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Amount of Gain (Loss) Recognized |
| Derivatives in Fair Value Hedging |
|
Location of Gain (Loss) Recognized in |
|
in Income on Derivatives |
| Relationships |
|
Income on Derivatives |
|
June 30, 2010 |
|
|
June 30, 2009 |
|
| |
Interest rate risk activities |
|
Interest expense, net |
|
$ |
4.0 |
|
|
$ |
8.2 |
|
| |
Total |
|
|
|
$ |
4.0 |
|
|
$ |
8.2 |
|
| |
Six Months Ended, (in millions)
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Amount of Gain (Loss) Recognized |
| Derivatives in Fair Value Hedging |
|
Location of Gain (Loss) Recognized in |
|
in Income on Derivatives |
| Relationships |
|
Income on Derivatives |
|
June 30, 2010 |
|
|
June 30, 2009 |
|
| |
Interest rate risk activities |
|
Interest expense, net |
|
$ |
6.1 |
|
|
$ |
15.3 |
|
| |
Total |
|
|
|
$ |
6.1 |
|
|
$ |
15.3 |
|
| |
Three Months Ended, (in millions)
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Amount of Gain (Loss) Recognized |
| Hedged Item in Fair Value Hedge |
|
Location of Gain (Loss) Recognized in |
|
in Income on Related Hedged Items |
| Relationships |
|
Income on Related Hedged Item |
|
June 30, 2010 |
|
|
June 30, 2009 |
|
| |
Fixed-rate debt |
|
Interest expense, net |
|
$ |
(4.0 |
) |
|
$ |
(8.2 |
) |
| |
Total |
|
|
|
$ |
(4.0 |
) |
|
$ |
(8.2 |
) |
| |
Six Months Ended, (in millions)
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Amount of Gain (Loss) Recognized |
| Hedged Item in Fair Value Hedge |
|
Location of Gain (Loss) Recognized in |
|
in Income on Related Hedged Items |
| Relationships |
|
Income on Related Hedged Item |
|
June 30, 2010 |
|
|
June 30, 2009 |
|
| |
Fixed-rate debt |
|
Interest expense, net |
|
$ |
(6.1 |
) |
|
$ |
(15.3 |
) |
| |
Total |
|
|
|
$ |
(6.1 |
) |
|
$ |
(15.3 |
) |
| |
26
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Derivatives not designated as hedging instruments
Three Months Ended, (in millions)
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Amount of Realized/Unrealized Gain |
| |
|
|
|
(Loss) Recognized in Income on |
| |
|
|
|
Derivatives * |
| |
|
Location of Gain (Loss) |
|
|
|
|
|
|
| Derivatives Not Designated as Hedging |
|
Recognized in |
|
|
|
|
|
|
| Instruments |
|
Income on Derivatives |
|
June 30, 2010 |
|
|
June 30, 2009 |
|
| |
Commodity price risk programs |
|
Gas Distribution revenues |
|
$ |
4.2 |
|
|
$ |
(0.1 |
) |
Commodity price risk programs |
|
Other revenues |
|
|
(4.5 |
) |
|
|
20.8 |
|
Commodity price risk programs |
|
Cost of Sales |
|
|
(1.0 |
) |
|
|
0.4 |
|
| |
Total |
|
|
|
$ |
(1.3 |
) |
|
$ |
21.1 |
|
| |
* For the amounts of realized/unrealized gain (loss) recognized in income on derivatives disclosed
in the table above, gains of $4.4 million and $0.1 million for the second quarter of 2010 and
2009, respectively, were deferred as allowed by regulatory orders. These amounts will be amortized
to income over future periods of up to twelve months as specified in a regulatory order.
Six Months Ended, (in millions)
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Amount of Realized/Unrealized Gain |
| |
|
|
|
(Loss) Recognized in Income on |
| |
|
|
|
Derivatives * |
| |
|
Location of Gain (Loss) |
|
|
|
|
|
|
| Derivatives Not Designated as Hedging |
|
Recognized in |
|
|
|
|
|
|
| Instruments |
|
Income on Derivatives |
|
June 30, 2010 |
|
|
June 30, 2009 |
|
| |
Commodity price risk programs |
|
Gas Distribution revenues |
|
$ |
(16.8 |
) |
|
$ |
(46.0 |
) |
Commodity price risk programs |
|
Other revenues |
|
|
72.7 |
|
|
|
20.8 |
|
Commodity price risk programs |
|
Cost of Sales |
|
|
(72.2 |
) |
|
|
(1.0 |
) |
| |
Total |
|
|
|
$ |
(16.3 |
) |
|
$ |
(26.2 |
) |
| |
* For the amounts of realized/unrealized gain (loss) recognized in income on derivatives disclosed
in the table above, losses of $16.2 million and $47.4 million for the first six months of 2010 and
2009, respectively, were deferred as allowed by regulatory orders. These amounts will be amortized
to income over future periods of up to twelve months as specified in a regulatory order.
During the second quarter of 2010 no amounts were reclassified related to NiSource’s cash flow
hedges from accumulated other comprehensive income (loss) to Cost of Sales due to the probability
that certain forecasted transactions would not occur. During the second quarter of 2009, NiSource
reclassified $126.4 million ($75.1 million, net of tax) related to its cash flow hedges from
accumulated other comprehensive loss to income (loss) from discontinued operations due to the
probability that certain forecasted transactions would not occur related to the unregulated natural
gas marketing business that NiSource had planned to sell.
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 (loss) of approximately $0.7 million of loss, net of taxes.
NiSource’s derivative instruments measured at fair value as of June 30, 2010 do not contain any
credit-risk-related contingent features.
Certain NiSource affiliates have physical commodity purchase agreements that
contain “ratings traggers” that require increases in
collateral if the credit rating of NiSource or certain of its
affiliates are rated below BBB- by Standard and Poor’s or below
Baa3 by Moody’s. As of June 30, 2010, there were no accounts
payable under physical commodity purchase agreements containing
ratings traggers.
27
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
NiSource had $207.9 million and $173.2 million of cash on deposit with brokers for margin
requirements associated with open derivative positions reflected within, “Restricted cash,” on the
Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2010 and December 31, 2009,
respectively.
10. Fair Value Disclosures
A. Fair
Value Measurements. NiSource adopted the provisions of ASC Topic 820 – Fair Value
Measurements and Disclosures for financial assets and liabilities on January 1, 2008 and
non-financial assets and liabilities on January 1, 2009. There was no impact on retained earnings
as a result of the adoption.
Recurring Fair Value Measurements. The following tables present financial assets and liabilities
measured and recorded at fair value on NiSource’s Condensed Consolidated Balance Sheet (unaudited)
on a recurring basis and their level within the fair value hierarchy as of June 30, 2010 and
December 31, 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quoted Prices in |
|
|
Significant |
|
|
|
|
|
|
|
| |
|
Active Markets |
|
|
Other |
|
|
Significant |
|
|
|
|
| |
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
| Recurring Fair Value Measurements |
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Balance as of |
|
| June 30, 2010 (in millions) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
June 30, 2010 |
|
| |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Price risk management assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physical price risk programs |
|
$ |
- |
|
|
$ |
157.5 |
|
|
$ |
- |
|
|
$ |
157.5 |
|
Financial price risk programs |
|
|
192.6 |
|
|
|
3.0 |
|
|
|
- |
|
|
|
195.6 |
|
Other |
|
|
- |
|
|
|
- |
|
|
|
0.8 |
|
|
|
0.8 |
|
Interest rate risk activities |
|
|
- |
|
|
|
75.2 |
|
|
|
- |
|
|
|
75.2 |
|
Available-for-sale securities |
|
|
38.1 |
|
|
|
33.7 |
|
|
|
- |
|
|
|
71.8 |
|
| |
Total |
|
$ |
230.7 |
|
|
$ |
269.4 |
|
|
$ |
0.8 |
|
|
$ |
500.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Price risk management liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physical price risk programs |
|
$ |
- |
|
|
$ |
4.0 |
|
|
$ |
- |
|
|
$ |
4.0 |
|
Financial price risk programs |
|
|
374.9 |
|
|
|
5.3 |
|
|
|
- |
|
|
|
380.2 |
|
Other |
|
|
- |
|
|
|
- |
|
|
|
0.6 |
|
|
|
0.6 |
|
| |
Total |
|
$ |
374.9 |
|
|
$ |
9.3 |
|
|
$ |
0.6 |
|
|
$ |
384.8 |
|
| |
28
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quoted Prices in |
|
|
Significant |
|
|
|
|
|
|
|
| |
|
Active Markets |
|
|
Other |
|
|
Significant |
|
|
|
|
| |
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
| Recurring Fair Value Measurements |
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Balance as of |
|
| December 31, 2009 (in millions) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
December 31, 2009 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Price risk management assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physical price risk programs |
|
$ |
- |
|
|
$ |
141.7 |
|
|
$ |
- |
|
|
$ |
141.7 |
|
Financial price risk programs |
|
|
187.5 |
|
|
|
11.4 |
|
|
|
- |
|
|
|
198.9 |
|
Other |
|
|
- |
|
|
|
- |
|
|
|
2.1 |
|
|
|
2.1 |
|
Interest rate risk activities |
|
|
- |
|
|
|
68.2 |
|
|
|
- |
|
|
|
68.2 |
|
Available-for-sale securities |
|
|
34.5 |
|
|
|
37.4 |
|
|
|
- |
|
|
|
71.9 |
|
| |
Total |
|
$ |
222.0 |
|
|
$ |
258.7 |
|
|
$ |
2.1 |
|
|
$ |
482.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Price risk management liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physical price risk programs |
|
$ |
- |
|
|
$ |
9.6 |
|
|
$ |
- |
|
|
$ |
9.6 |
|
Financial price risk programs |
|
|
343.8 |
|
|
|
6.9 |
|
|
|
- |
|
|
|
350.7 |
|
| |
Total |
|
$ |
343.8 |
|
|
$ |
16.5 |
|
|
$ |
- |
|
|
$ |
360.3 |
|
| |
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. These financial
assets and liabilities are secured with cash on deposit with the exchange; therefore nonperformance
risk has not been incorporated into these valuations. 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. NiSource 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. Credit risk is considered in
the fair value calculation of derivative instruments that are not exchange-traded. Credit exposures
are adjusted to reflect collateral agreements which reduce exposures.
To determine the fair value of derivatives associated with NiSource’s unregulated natural gas
marketing business, certain reserves were calculated. These reserves were primarily determined by
evaluating the credit worthiness of certain customers, fair value of future cash flows, and the
cost of maintaining restricted cash. Refer to Note 9, “Risk Management Activities” for additional
information on price risk assets.
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. Credit risk is considered in the fair value calculation of
the interest rate swap.
29
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Available-for-sale securities are investments pledged as collateral for trust accounts related to
NiSource’s wholly-owned insurance company. Available-for-sale securities are included within “Other
investments” in the Condensed
Consolidated Balance Sheets (unaudited). 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 available-for-sale securities are
included in other comprehensive income (loss). The amortized cost, gross unrealized gains and
losses, and fair value of available-for-sale debt securities at June 30, 2010 and December 31, 2009
were:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
| (in millions) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
| |
Available-for-sale debt securities, June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
37.0 |
|
|
$ |
1.1 |
|
|
$ |
- |
|
|
$ |
38.1 |
|
Corporate/Other bonds |
|
|
31.5 |
|
|
|
2.2 |
|
|
|
- |
|
|
|
33.7 |
|
| |
Total Available-for-sale debt securities |
|
$ |
68.5 |
|
|
$ |
3.3 |
|
|
$ |
- |
|
|
$ |
71.8 |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
| (in millions) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
| |
Available-for-sale debt securities, December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
34.6 |
|
|
$ |
0.2 |
|
|
$ |
(0.3 |
) |
|
$ |
34.5 |
|
Corporate/Other bonds |
|
|
35.2 |
|
|
|
2.2 |
|
|
|
- |
|
|
|
37.4 |
|
| |
Total Available-for-sale debt securities |
|
$ |
69.8 |
|
|
$ |
2.4 |
|
|
$ |
(0.3 |
) |
|
$ |
71.9 |
|
| |
For the three months ended June 30, 2010 and 2009 the net realized gain on the sale of available
for sale U.S. Treasury debt securities was $0.1 million and $0.1 million, respectively. For the
three months ended June 30, 2010 and 2009 the net realized gain on sale of available-for-sale
Corporate/Other bond debt securities was $0.3 million and $0.2 million, respectively.
For the six months ended June 30, 2010 and 2009 the net realized gain on the sale of available for
sale U.S. Treasury debt securities was $0.1 million and $1.0 million, respectively. For the six
months ended June 30, 2010 and 2009 the net realized gain on sale of available-for-sale
Corporate/Other bond debt securities was $0.7 million and $0.2 million, respectively.
The cost of maturities sold is based upon specific identification. At June 30, 2010, approximately
$2.8 million of U.S. Treasury debt security bonds have maturities of less than a year while the
remaining securities have maturities of greater than one year. At June 30, 2010, approximately $0.3
million of Corporate/Other bonds have maturities of less than a year while the remaining securities
have maturities of greater than one year.
The following tables present the fair value reconciliation of Level 3 assets and liabilities
measured at fair value on a recurring basis for the three and six months ended June 30, 2010 and
2009:
30
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Financial |
|
|
|
|
|
|
|
| |
|
Transmission |
|
|
Other |
|
|
|
|
| Three Months Ended June 30, 2010 (in millions) |
|
Rights |
|
|
Derivatives |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2010 |
|
$ |
0.9 |
|
|
$ |
(0.1 |
) |
|
$ |
0.8 |
|
| |
Total gains or (losses) (unrealized/realized) |
|
|
|
|
|
|
|
|
|
|
|
|
Included in regulatory assets/liabilities |
|
|
(3.2 |
) |
|
|
- |
|
|
|
(3.2 |
) |
Purchases, issuances and settlements (net) |
|
|
2.3 |
|
|
|
0.3 |
|
|
|
2.6 |
|
| |
Balance as of June 30, 2010 |
|
$ |
- |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains/(losses) relating to instruments still
held as of June 30, 2010 |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Financial |
|
|
|
|
|
|
|
| |
|
Transmission |
|
|
Other |
|
|
|
|
| Three Months Ended June 30, 2009 (in millions) |
|
Rights |
|
|
Derivatives |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2009 |
|
$ |
0.9 |
|
|
$ |
(0.2 |
) |
|
$ |
0.7 |
|
| |
Total gains or losses (unrealized/realized) |
|
|
|
|
|
|
|
|
|
|
|
|
Included in regulatory assets/liabilities |
|
|
(0.3 |
) |
|
|
0.2 |
|
|
|
(0.1 |
) |
Purchases, issuances and settlements (net) |
|
|
2.1 |
|
|
|
(0.7 |
) |
|
|
1.4 |
|
| |
Balance as of June 30, 2009 |
|
$ |
2.7 |
|
|
$ |
(0.7 |
) |
|
$ |
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains/(losses) relating to instruments still
held as of June 30, 2009 |
|
$ |
- |
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Financial |
|
|
|
|
|
|
|
| |
|
Transmission |
|
|
Other |
|
|
|
|
| Six Months Ended, June 30, 2010 (in millions) |
|
Rights |
|
|
Derivatives |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2010 |
|
$ |
1.9 |
|
|
$ |
0.2 |
|
|
$ |
2.1 |
|
| |
Total gains or (losses) (unrealized/realized) |
|
|
|
|
|
|
|
|
|
|
|
|
Included in regulatory assets/liabilities |
|
|
(4.2 |
) |
|
|
- |
|
|
|
(4.2 |
) |
Purchases, issuances and settlements (net) |
|
|
2.3 |
|
|
|
- |
|
|
|
2.3 |
|
| |
Balance as of June 30, 2010 |
|
$ |
- |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains/(losses) relating to instruments still
held as of June 30, 2010 |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Financial |
|
|
|
|
|
|
|
| |
|
Transmission |
|
|
Other |
|
|
|
|
| Six Months Ended, June 30, 2009 (in millions) |
|
Rights |
|
|
Derivatives |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2009 |
|
$ |
2.6 |
|
|
$ |
1.6 |
|
|
$ |
4.2 |
|
| |
Total gains or losses (unrealized/realized) |
|
|
|
|
|
|
|
|
|
|
|
|
Included in regulatory assets/liabilities |
|
|
(0.3 |
) |
|
|
0.4 |
|
|
|
0.1 |
|
Purchases, issuances and settlements (net) |
|
|
0.4 |
|
|
|
(2.7 |
) |
|
|
(2.3 |
) |
| |
Balance as of June 30, 2009 |
|
$ |
2.7 |
|
|
$ |
(0.7 |
) |
|
$ |
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains/(losses) relating to instruments still
held as of June 30, 2009 |
|
$ |
- |
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
| |
As discussed in Note 9, as part of the MISO Day 2 initiative, Northern Indiana obtains FTRs,
which help to offset congestion costs due to the MISO Day 2 activity. These instruments are
considered derivatives and are classified as Level 3 and reflected in the table above. FTRs are
valued using a valuation model based on the value of allocated ARRs and forecasted congestion
costs. 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. Northern Indiana also writes options for regulatory incentive purposes which
are also considered Level 3 valuations. Realized gains and losses for these Level 3 recurring items
are included in income within Cost of Sales on the Statements of Consolidated Income (Loss).
Unrealized gains and losses from Level 3
31
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
recurring items are included within Regulatory assets or
Regulatory liabilities, on the Condensed Consolidated Balance Sheets (unaudited).
Non-recurring Fair Value Measurements. There were no non-recurring fair value measurements
recorded during the first six months of 2010.
B. Other Fair Value Disclosures for Financial Instruments. NiSource has certain financial
instruments that are not measured at fair value on a recurring basis but nevertheless are recorded
at amounts that approximate fair value due to their liquid or short-term nature, including cash and
cash equivalents, restricted cash, accounts receivable, accounts payable, customer deposits and
short-term borrowings. NiSource’s long-term borrowings are recorded at historical amounts unless
designated as a hedged item in a fair value hedge.
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate fair value.
Investments. NiSource has corporate owned life insurance which is measured and recorded at cash
surrender value. NiSource’s investments in corporate owned life insurance at June 30, 2010 and
December 31, 2009 were $23.2 million and $23.7 million.
Long-term Debt. The fair values of these securities are estimated based on the quoted market
prices for the same or similar issues or on the rates offered for securities of the same remaining
maturities. Certain premium costs associated with the early settlement of long-term debt are not
taken into consideration in determining fair value.
The carrying amount and estimated fair values of financial instruments were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Carrying |
|
|
Estimated Fair |
|
|
Carrying |
|
|
Estimated Fair |
|
| |
|
Amount as of |
|
|
Value as of |
|
|
Amount as of |
|
|
Value as of |
|
| (in millions) |
|
June 30, 2010 |
|
|
June 30, 2010 |
|
|
Dec. 31, 2009 |
|
|
Dec. 31, 2009 |
|
| |
Long-term investments |
|
$ |
24.0 |
|
|
$ |
23.9 |
|
|
$ |
24.5 |
|
|
$ |
23.2 |
|
Long-term debt
(including current
portion) |
|
|
6,696.1 |
|
|
|
7,282.7 |
|
|
|
6,688.8 |
|
|
|
7,094.9 |
|
| |
11. Transfers of Financial Assets
Beginning January 1, 2010, transfers of accounts receivable that previously qualified for sales
accounting no longer qualify and are accounted for as secured borrowings resulting in the
recognition of short-term borrowings on the Condensed Consolidated Balance Sheets (unaudited). The
maximum amount of debt that can be recognized related to NiSource’s accounts receivable programs is
$550 million.
Prior to January 1, 2010, NiSource’s accounts receivable programs qualified for sale accounting
based upon the conditions met in ASC Topic 860 – Transfers and Servicing.
All accounts receivables sold to the commercial paper conduits are valued at face value, which
approximate fair value due to their short-term nature. The amount of the undivided percentage
ownership interest in the accounts receivables sold is determined in part by required loss reserves
under the agreements. Below is information about the accounts receivable securitization agreements
entered into by NiSource’s subsidiaries.
On October 23, 2009, Columbia of Ohio entered into an agreement to sell, without recourse,
substantially all of its trade receivables, as they originate, to CGORC, a wholly-owned subsidiary
of Columbia of Ohio. CGORC, in turn, is party to an agreement with BTMU and RBS, also dated
October 23, 2009, under the terms of which it sells an undivided percentage ownership interest in
its accounts receivable to commercial paper conduits sponsored by BTMU and RBS. The maximum
seasonal program limit under the terms of the agreement is $275 million. CGORC’s agreement with
the commercial paper conduits has a scheduled termination date of October 22, 2010, and can be
renewed if mutually agreed to by all parties. As of June 30, 2010, $46.2 million of accounts
receivable had
32
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
been transferred by CGORC. CGORC is a separate corporate entity from NiSource and
Columbia of Ohio, with its own separate obligations, and upon a liquidation of CGORC, CGORC’s
obligations must be satisfied out of CGORC’s assets prior to any value becoming available to
CGORC’s stockholder. Under the agreement, an event of termination occurs if NiSource’s debt rating
is withdrawn by either Standard and Poor’s or Moody’s or falls below BB- or Ba3 at either Standard
and Poor’s or Moody’s, respectively.
On October 23, 2009, Northern Indiana entered into an agreement to sell, without recourse,
substantially all of its trade receivables, as they originate, to NARC, a wholly-owned subsidiary
of Northern Indiana. NARC, in turn, is party to an agreement with RBS, also dated October 23,
2009, under the terms of which it sells an undivided percentage ownership interest in its accounts
receivable to a commercial paper conduit sponsored by RBS. The maximum seasonal program limit
under the terms of the agreement is $200 million. NARC’s agreement with the commercial paper
conduit has a scheduled termination date of October 22, 2010, and can be renewed if mutually agreed
to by both parties. As of June 30, 2010, $87.9 million of accounts receivable had been
transferred by NARC. NARC is a separate corporate entity from NiSource and Northern Indiana, with
its own separate obligations, and upon a liquidation of NARC, NARC’s obligations must be satisfied
out of NARC’s assets prior to any value becoming available to NARC’s stockholder. Under the
agreement, an event of termination occurs if Northern Indiana’s debt rating is withdrawn by either
Standard and Poor’s or Moody’s, or falls below BB or Ba2 at either Standard and Poor’s or Moody’s,
respectively.
On March 15, 2010, Columbia of Pennsylvania entered into an agreement to sell, without recourse,
substantially all of its trade receivables, as they originate, to CPRC, a wholly-owned subsidiary
of Columbia of Pennsylvania. CPRC, in turn, is party to an agreement with BTMU, also dated March
15, 2010, under the terms of which it sells an undivided percentage ownership interest in its
accounts receivable to a commercial paper conduit sponsored by BTMU. The maximum seasonal program
limit under the terms of the agreement is $75 million. CPRC’s agreement with the commercial paper
conduit has a scheduled termination date of March 14, 2011, and can be renewed if mutually agreed
to by both parties. As of June 30, 2010, $5.2 million of accounts receivable had been transferred
by CPRC. CPRC is a separate corporate entity from NiSource and Columbia of Pennsylvania, with its
own separate obligations, and upon a liquidation of CPRC, CPRC’s obligations must be satisfied out
of CPRC’s assets prior to any value becoming available to CPRC’s stockholder. Under the agreement,
an event of termination occurs if NiSource’s debt rating is withdrawn by either Standard and Poor’s
or Moody’s, or falls below BB- or Ba3 at either Standard and Poor’s or Moody’s, respectively.
The following table reflects the gross and net receivables transferred as well as short-term
borrowings related to the securitization transactions as of June 30, 2010 and December 31, 2009 for
Columbia of Ohio, Northern Indiana and Columbia of Pennsylvania:
| |
|
|
|
|
|
|
|
|
| (in millions) |
|
June 30, 2010 |
|
|
December 31, 2009 |
|
| |
Gross Receivables |
|
$ |
332.4 |
|
|
$ |
437.8 |
|
Less: Receivables not transferred |
|
|
193.1 |
|
|
|
249.4 |
|
| |
Net receivables transferred |
|
$ |
139.3 |
|
|
$ |
188.4 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Short-term debt due to asset securitization |
|
$ |
139.3 |
|
|
$ |
- |
|
| |
Consistent with sale accounting treatment, at December 31, 2009 the $188.4 million of receivables
shown above are not recorded on the Condensed Consolidated Balance Sheets (unaudited). During the
three and six months ended June 30, 2009, NiSource received proceeds from receivables sold of
$593.6 million and $1,689.8 million, respectively, and remitted collections to the commercial paper
conduits of $1,043.6 million and $1,945.4 million, respectively. This resulted in a net use of
operating cash flows of $450.0 million and $255.6 million, respectively. Additionally, during the
three and six months ended June 30, 2009, $4.8 million and
$7.6 million of fees associated with the
securitization transactions were recorded as other, net expense, respectively.
Beginning January 1, 2010, transfers of accounts receivable that previously qualified for sale
accounting no longer qualify and are accounted for as secured borrowings. As such, at June 30,
2010, the entire gross receivables balance
33
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
remains on the Condensed Consolidated Balance Sheets
(unaudited) and short-term borrowings are recorded in the amount of proceeds received from the
commercial paper conduits involved in the transactions. During the first half of 2010, $139.3
million has been recorded as cash from financing activities related to the change in short-term
borrowings due to the securitization transactions. Although there have been no changes in the
operation of the accounts receivable securitization programs, the application of the new accounting
guidance resulted in a reduction in cash from operations of $241.9 million. During the three and
six months ended June 30, 2010, $1.8 million and $3.7 million of fees associated with the
securitization transactions were recorded as interest expense in accordance
with the new accounting guidance, respectively. Columbia of Ohio, Northern Indiana and Columbia of
Pennsylvania remain responsible for collecting on the receivables securitized and the receivables
cannot be sold to another party.
12. Goodwill Assets
In accordance with the provisions for goodwill accounting as issued by the FASB, NiSource tests its
goodwill for impairment annually as of June 30 each year unless indicators, events, or
circumstances would require an immediate review. Goodwill is tested for impairment at a level of
reporting referred to as a reporting unit, which generally is an operating segment or a component
of an operating segment as defined by the FASB. In accordance with the provision, certain
components of an operating segment with similar economic characteristics are aggregated and deemed
a single reporting unit. Goodwill is generally allocated to the reporting units based upon the
amounts allocated at the time of their respective acquisition. The goodwill impairment test is a
two-step process which requires NiSource to make estimates regarding the fair value of the
reporting unit. The first step of the goodwill impairment test, used to identify potential
impairment, compares the fair value of the reporting unit with its carrying value, including
goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not impaired, thus the second step of the impairment test is not
required. However, if the carrying amount of the reporting unit exceeds its fair value, the second
step of the goodwill impairment test is performed to measure the amount of impairment loss (if
any), which compares the implied fair value of reporting unit goodwill with the carrying amount of
that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value,
an impairment loss is recognized in an amount equal to that excess.
NiSource has four reporting units that carry or are allocated goodwill. NiSource’s goodwill assets
at June 30, 2010 were $3.7 billion pertaining primarily to the acquisition of Columbia on
November 1, 2000. Of this amount, approximately $2.0 billion is allocated to Columbia
Transmission Operations (which is comprised of Columbia Transmission and Columbia Gulf) and
$1.7 billion is allocated to Columbia Distribution Operations (which is comprised of Columbia
of Kentucky, Columbia of Maryland, Columbia of Ohio, Columbia of Pennsylvania and Columbia of
Virginia). In addition, the goodwill balances at June 30, 2010 for Northern Indiana Fuel and Light
and Kokomo Gas were $13.3 million and $5.5 million, respectively.
In estimating the fair value of the Columbia Transmission Operations and Columbia Distribution
Operations reporting units for the June 30, 2010 test, NiSource used a weighted average of the
income and market approaches. The income approach utilized a discounted cash flow model. This
model is based on management’s short-term and long-term forecast of operating performance for each
reporting unit. The two main assumptions used in the models are the growth rates, which are based
on the cash flow from operations for each of the reporting units, and the weighted average cost of
capital, or discount rate. The starting point for each reporting unit’s cash flow from operations
is the detailed five year plan, which takes into consideration a variety of factors such as the
current economic environment, industry trends, and specific operating goals set by management. The
discount rates are based on trends in overall market as well as industry specific variables and
include components such as the risk-free rate, cost of debt, and company volatility at June 30,
2010. Under the market approach, NiSource utilized three market-based models to estimate the fair
value of the reporting units: (i) the comparable company multiples method, which estimated fair
value of each reporting unit by analyzing EBITDA multiples of a peer group of publicly traded
companies and applying that multiple to the reporting unit’s EBITDA, (ii) the comparable
transactions method, which valued the reporting unit based on observed EBITDA multiples from
completed transactions of peer companies and applying that multiple to the reporting unit’s EBITDA,
and (iii) the market capitalization method, which used the NiSource share price and allocated
NiSource’s total market capitalization among both the goodwill
34
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
and non-goodwill reporting units
based on the relative EBITDA, revenues, and operating income of each reporting unit. Each of the
three market approaches were calculated with the assistance of a third party valuation firm, using
multiples and assumptions inherent in today’s market. The degree of judgment involved and
reliability of inputs into each model were considered in weighting the various approaches. The
resulting estimate of fair value of the reporting units, using the weighted average of the income
and market approaches, exceeded their carrying values, indicating that no impairment exists under
Step 1 of the annual impairment test.
Certain key assumptions used in determining the fair values of the reporting units included planned
operating results, discount rates and the long-term outlook for growth. NiSource used discount
rates of 4.76% and 4.74% for Columbia Transmission Operations and Columbia Distribution Operations, respectively. Management
also performed a sensitivity analysis using discount rates of 5.78% and 5.76% for Columbia
Transmission Operations and Columbia Distribution Operations, respectively. Using the discount
rates of 4.76% and 4.74% for Columbia Transmission Operations and Columbia Distribution Operations,
respectively, the excess fair values were approximately
$2.6 billion and $4.2 billion,
respectively. If the discount rates were increased to 5.78% and 5.76% for Columbia Transmission
Operations and Columbia Distribution Operations, respectively, the excess fair value of the
reporting units would be approximately $1.2 billion and
$1.2 billion, respectively. Under
either discount rate scenario, the impairment test indicated that each of the reporting units
passed step one of the impairment test.
Goodwill related to the acquisition of Northern Indiana Fuel and Light and Kokomo Gas of $13.3
million and $5.5 million, respectively, was also tested for impairment as of June 30, 2010 using an
income approach to determine the fair value of each of these reporting units. A discount rate
range of 4.74% to 5.76% and growth rates factoring in the regulatory environment and growth
initiatives for each reporting unit were the significant assumptions used in determining the fair
values using the income approach. The step 1 goodwill impairment test resulted in the fair value
of each of these reporting units exceeding the carrying value.
13. Income Taxes
NiSource’s interim effective tax rates reflect the estimated annual effective tax rates for 2010
and 2009, adjusted for tax expense associated with certain discrete items. The effective tax rate
for the quarter ended June 30, 2010 was 35.5% compared to 176.9% for the quarter ended June 30,
2009 due to reasons discussed below. The effective tax rates for the six months ended June 30, 2010
and June 30, 2009 were 35.7% and 40.7%. 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 second quarter of 2009 effective tax rate was significantly impacted by an adjustment to the
rate used to measure certain deferred state income taxes as a result of the decision to dispose of
unregulated natural gas marketing business assets to assets and liabilities of discontinued
operations, as well as by an increase in tax expense due to certain non-deductible expenses
recorded in the quarter.
The 2010 Health Care Act includes a provision eliminating, effective January 1, 2013, the tax
deductibility of retiree health care costs to the extent of federal subsidies received under the
Retiree Drug Subsidy program. When the Retiree Drug Subsidy was created by the Medicare
Prescription Drug, Improvement and Modernization Act of 2003, NiSource recorded a deferred tax
asset reflecting the exclusion of the expected future Retiree Drug Subsidy from taxable income. At
the same time, an offsetting regulatory liability was established to reflect NiSource’s obligation
to reduce income taxes collected in future rates. ASC Topic 740 – Income Taxes requires the
impact of a change in tax law to be immediately recognized in continuing operations in the income
statement for the period that includes the enactment date. In the first quarter of 2010, NiSource
reversed its deferred tax asset of $6.2 million related to previously excludable Retiree Drug
Subsidy payments expected to be received after January 1, 2013, which was completely offset by the
reversal of the related regulatory liability. There was no impact on income tax expense recorded
in the Condensed Statements of Consolidated Income (Loss) (unaudited) for the first six months of
2010.
35
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
There were no material changes recorded in the second quarter of 2010 to NiSource’s uncertain tax
positions as of December 31, 2009.
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.
NiSource expects to make contributions of approximately $161.0 million to its pension plans and
approximately $49.1 million to its postretirement medical and life plans in 2010, which could
change depending on market conditions. For the six months ended June 30, 2010, NiSource has
contributed $1.7 million to its pension plans and $28.0 million to its other postretirement benefit
plans.
The following table provides the components of the plans’ net periodic benefits cost for the three
and six months ended June 30, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
| |
|
Pension Benefits |
|
Benefits |
| Three Months Ended June 30, (in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
| |
Components of Net Periodic Benefit Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
9.8 |
|
|
$ |
9.0 |
|
|
$ |
2.4 |
|
|
$ |
2.2 |
|
Interest cost |
|
|
31.4 |
|
|
|
35.8 |
|
|
|
10.9 |
|
|
|
11.9 |
|
Expected return on assets |
|
|
(35.9 |
) |
|
|
(30.4 |
) |
|
|
(5.8 |
) |
|
|
(4.2 |
) |
Amortization of transitional obligation |
|
|
- |
|
|
|
- |
|
|
|
0.3 |
|
|
|
2.0 |
|
Amortization of prior service cost |
|
|
0.5 |
|
|
|
1.0 |
|
|
|
0.8 |
|
|
|
0.3 |
|
Recognized actuarial loss |
|
|
14.5 |
|
|
|
16.4 |
|
|
|
1.5 |
|
|
|
1.9 |
|
| |
Net Periodic Benefit Costs |
|
$ |
20.3 |
|
|
$ |
31.8 |
|
|
$ |
10.1 |
|
|
$ |
14.1 |
|
| |
| |
| |
|
|
|
|
|
|
|
|
|
Other Postretirement |
| |
|
Pension Benefits |
|
Benefits |
| Six Months Ended June 30, (in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
| |
Components of Net Periodic Benefit Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
19.5 |
|
|
$ |
18.0 |
|
|
$ |
4.8 |
|
|
$ |
4.4 |
|
Interest cost |
|
|
62.8 |
|
|
|
71.6 |
|
|
|
21.3 |
|
|
|
23.8 |
|
Expected return on assets |
|
|
(71.8 |
) |
|
|
(60.9 |
) |
|
|
(11.7 |
) |
|
|
(8.4 |
) |
Amortization of transitional obligation |
|
|
- |
|
|
|
- |
|
|
|
0.6 |
|
|
|
4.0 |
|
Amortization of prior service cost |
|
|
1.0 |
|
|
|
2.0 |
|
|
|
0.7 |
|
|
|
0.6 |
|
Recognized actuarial loss |
|
|
29.0 |
|
|
|
32.8 |
|
|
|
3.0 |
|
|
|
3.8 |
|
| |
Total Net Periodic Benefit Costs |
|
$ |
40.5 |
|
|
$ |
63.5 |
|
|
$ |
18.7 |
|
|
$ |
28.2 |
|
| |
For the quarters ended June 30, 2010 and 2009, pension and other postretirement benefit cost of
approximately $4.0 million and $12.3 million, respectively, was capitalized as a component of plant
or recognized as a regulatory asset or liability consistent with regulatory orders for certain of
NiSource’s regulated businesses. For the six months ended June 30, 2010 and 2009, pension and
other postretirement benefit cost of approximately $7.1 million and
36
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
$24.6 million, respectively,
was capitalized as a component of plant or recognized as a regulatory asset or liability consistent
with regulatory orders for certain NiSource’s regulated businesses.
A provision of the 2010 Health Care Act requires the elimination, effective January 1, 2011, of
lifetime and restrictive annual benefit limits from certain medical plans. The NiSource Life and
Medical Benefits Program covers both active and retired individuals and caps lifetime benefits to
certain retirees. NiSource examined the provisions of the 2010 Health Care Act and determined the
enactment of the law in the first quarter of 2010 qualified as a significant event requiring
remeasurement of the other postretirement benefit obligation and plan assets as of March 31, 2010.
The remeasurement resulted in an increase to the other postretirement benefit obligation, net of
plan assets, of $39.7 million and corresponding increases to regulatory assets and AOCI of $35.7
million and $4.0 million, respectively. Net periodic postretirement benefit cost for 2010 will
increase by approximately $4.0 million, $1.3 million of which was recognized during second quarter
2010. All significant actuarial assumptions used in the remeasurement remained the same as the
December 31, 2009 valuation. During second quarter 2010 the Department of the Treasury, the
Department of Labor, and the Department of Health and
Human Services provided clarification of the provisions of the 2010 Health Care Act which indicated
the legislation does not apply to retiree-only medical plans. NiSource continues to evaluate the
structure of its medical plan in light of the new guidance. See Note 13, Income Taxes, for a
discussion of the legislation’s impact on NiSource’s accounting for income taxes.
15. Variable Interests and Variable Interest Entities
In June 2009, the FASB issued authoritative guidance to amend the manner in which entities evaluate
whether consolidation is required for VIEs. NiSource adopted the guidance on January 1, 2010. See
Note 2, Recent Accounting Pronouncements, regarding the consolidation of variable interest
entities.
In general, a VIE is an entity which (1) has an insufficient amount of at-risk equity to permit the
entity to finance its activities without additional financial subordinated support provided by any
parties, (2) whose at-risk equity owners, as a group, do not have power, through voting rights or
similar rights, to direct activities of the entity that most significantly impact the entity’s
economic performance or (3) whose at-risk owners do not absorb the entity’s losses or receive the
entity’s residual return. A VIE is required to be consolidated by a company if that company is
determined to be the primary beneficiary of the VIE.
NiSource consolidates those VIEs for which it is the primary beneficiary. Prior to the adoption of
the new FASB guidance on consolidation of variable interest entities, the prevalent method for
determining the primary beneficiary was through a quantitative method. With the adoption of the
guidance, NiSource also considers qualitative elements in determining the primary beneficiary.
These qualitative measures include the ability to control an entity and the obligation to absorb
losses or the right to receive benefits.
NiSource’s analysis under this standard includes an assessment of guarantees, operating leases,
purchase agreements, and other contracts, as well as its investments and joint ventures. For items
that have been identified as variable interests, or where there is involvement with an identified
variable interest entity, an in-depth review of the relationship between the relevant entities and
NiSource is made to evaluate qualitative and quantitative factors to determine the primary
beneficiary, if any, and whether additional disclosures would be required under the current
standard.
At June 30, 2010, consistent with prior filings, NiSource consolidated its low income housing real
estate investments from which NiSource derives certain tax benefits. Based on the newly adopted
guidance on the consolidation of variable interest entities, these investments met the definition
of a VIE. NiSource is a 99% limited partner with a net investment of approximately $1.8 million.
NiSource evaluated the nature and intent of the low income housing investments when determining the
primary beneficiary. NiSource concluded that it continues to be the primary beneficiary. Subject
to certain conditions precedent, NiSource has the contractual right to take control of the low
37
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
income housing properties. At June 30, 2010, gross assets of the low income housing real estate
investments in continuing operations was $28.7 million. Current and non-current assets were $1.1
million and $27.6 million, respectively. As of June 30, 2010, NiSource recorded long-term debt of
approximately $10.5 million as a result of consolidating these investments. However, this debt is
nonrecourse to NiSource and NiSource’s direct and indirect subsidiaries. Approximately $0.4
million of the assets are restricted to settle the obligations of the entity.
Northern Indiana has a service agreement with Pure Air, a general partnership between Air Products
and Chemicals, Inc. and First Air Partners LP, under which Pure Air provides scrubber services to
reduce sulfur dioxide emissions for Units 7 and 8 at the Bailly Generating Station. Services under
this contract commenced on July 1, 1992, and Northern Indiana pays for the services under a
combination of fixed and variable charges. The agreement provides that, assuming various
performance standards are met by Pure Air, a termination payment would be due if Northern Indiana
terminated the agreement prior to the end of the twenty-year contract period. NiSource has made an
exhaustive effort to obtain information needed from Pure Air to determine the status of Pure Air as
a VIE. However, the request for such information has been denied and as a result, it is unclear
whether Pure Air is a VIE and if NiSource is the primary beneficiary.
16. Long-Term Debt
On December 4, 2009, NiSource Finance issued $500.0 million of 6.125% senior unsecured notes that
mature March 1, 2022.
During November 2009, NiSource Finance redeemed $417.6 million of its floating rate notes.
On April 9, 2009, NiSource Finance closed a $385.0 million senior unsecured two-year bank term loan
with a maturity of February 11, 2011. Borrowings under the bank term loan had an effective cost of
LIBOR plus 538 basis points. Previously, on February 16, 2009, NiSource announced the initial
closing of the bank term loan at the level of $265.0 million. Under an accordion feature, NiSource
was able to increase the loan by $120.0 million prior to final closing. On December 7, 2009, this
term loan was repaid with proceeds from the December 4, 2009, $500.0 million debt offering.
On March 31, 2009, NiSource Finance commenced a cash tender offer for up to $300.0 million
aggregate principal amount of its outstanding 7.875% notes due 2010. On April 28, 2009, NiSource
Finance announced that $250.6 million of these notes were successfully tendered.
On March 9, 2009, NiSource Finance issued $600.0 million of 10.75% unsecured notes that mature
March 15, 2016.
During January 2009, NiSource repurchased $32.4 million of the $450.0 million floating rate notes
that were scheduled to mature in November 2009 and $67.6 million of the $1.0 billion 7.875%
unsecured notes scheduled to mature in November 2010.
17. Short-Term Borrowings
NiSource Finance maintains a $1.5 billion five-year revolving credit facility with a syndicate of
banks which has a termination date of July 7, 2011. This facility provides a reasonable cushion of
short-term liquidity for general corporate purposes including meeting cash requirements driven by
volatility in natural gas prices, as well as provides for the issuance of letters of credit. At
June 30, 2010, NiSource had $73.5 million outstanding borrowings under this facility.
As of June 30, 2010 and December 31, 2009, NiSource had $45.5 million and $87.8 million,
respectively, of stand-by letters of credit outstanding of which $41.5 million and $85.0 million
were under the five-year revolving credit facility. 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.
38
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Beginning January 1, 2010, transfers of accounts receivable that previously qualified for sales
accounting no longer qualify and are accounted for as secured borrowings resulting in the
recognition of short-term debt on the Condensed Consolidated Balance Sheets (unaudited) in the
amount of $139.3 million as of June 30, 2010.
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
|
December 31, |
|
| (in millions) |
|
2010 |
|
|
2009 |
|
| |
Credit facilities borrowings weighted average interest rate of 0.73% and 0.59% at June 30, 2010
and December 31, 2009, respectively |
|
$ |
73.5 |
|
|
$ |
103.0 |
|
Accounts receivable securitization facility borrowings |
|
|
139.3 |
|
|
|
- |
|
| |
Total short-term borrowings |
|
$ |
212.8 |
|
|
$ |
103.0 |
|
| |
18. Share-Based Compensation
Prior to May 11, 2010, NiSource issued 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.
The Stockholders approved and adopted the NiSource Inc. 2010 Omnibus Incentive Plan (the “Omnibus
Plan”), at the Annual Meeting of Stockholders held on May 11, 2010. The Omnibus Plan provides that
the number of shares of common stock of the Company available for awards is 8,000,000 plus the
number of shares subject to outstanding awards granted under either the 1994 Plan or the Director
Plan (described below) that expire or terminate for any reason and no further awards are permitted
to be granted under the 1994 Plan or the Director Plan. The types of awards authorized under the
Omnibus Plan do not significantly differ from those previously allowed under the 1994 Plan. At
June 30, 2010, there were 7,997,583 shares reserved for future awards under the Omnibus Plan.
NiSource recognized stock-based employee compensation expense of $6.0 million and $4.9 million
during the first six months of 2010 and 2009, respectively, as well as related tax benefits of $2.1
million and $2.0 million, respectively.
As of June 30, 2010, the total remaining unrecognized compensation cost related to nonvested awards
amounted to $17.5 million, which will be amortized over the weighted-average remaining requisite
service period of 2.0 years.
Stock Options. As of June 30, 2010, approximately 4.3 million options were outstanding and
exercisable with a weighted average strike price of $22.50. The strike price of all issued options
was above the market price of NiSource stock as of June 30, 2010.
Restricted Awards. In the first quarter of 2010, NiSource granted 209,629 restricted stock units,
subject to service conditions. The total grant date fair value of the restricted units was $2.7
million, based on the average market price of NiSource’s common stock at the date of each grant
less the present value of dividends not received during the vesting period, which will be expensed,
net of forfeitures, over the vesting period of approximately three years. The service conditions
for all units lapse in January 2013 when 100% of the shares vest. If before January 2013, 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 as of the
employee’s date of termination. Employees will be entitled to receive dividends upon vesting. As
of June 30, 2010, 734,722 nonvested restricted stock units were granted and outstanding.
Contingent Stock Units. In the first quarter of 2010, NiSource granted 651,777 contingent
stock units subject to performance conditions. The grant date fair-value of the awards was $8.5
million, based on the average market price of NiSource’s common stock at the date of each grant
less the present value of dividends not received during
39
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
the vesting period which will be expensed, net of forfeitures, over the three
year requisite service period. The performance conditions are based on achievement of
non-GAAP financial measures. The service conditions lapse on January 31, 2013 when
100% of the shares vest. If the employee terminates employment before January 31, 2013 (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 units on the date of termination. Termination due to any other reason will result in all contingent units awarded being forfeited
effective the employee’s date of termination. Employees will be entitled to receive dividends upon vesting. As of June 30, 2010, 1,975,785 nonvested contingent stock units were granted and outstanding.
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 in January
2004. The total shareholder return measures established were not met; therefore these grants did
not have an accelerated vesting period. During the first quarter of 2010 all awards with
time-accelerated vesting provisions vested due to the lapse of service conditions.
Non-employee Director Awards. The Amended and Restated Non-employee Director Stock Incentive
Plan
(“Director Plan”) provides for awards of restricted stock, stock options and restricted stock
units, which vest immediately. The plan requires that restricted stock units be distributed to the
directors after their separation from the Board. As of June 30, 2010, 89,860 restricted shares and
346,166 restricted stock units had been issued under the Plan.
19. 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, 2010 and the years in which they expire were:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions) |
|
Total |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
After |
|
| |
Guarantees of subsidiaries debt |
|
$ |
6,135.8 |
|
$ |
681.8 |
|
$ |
- |
|
$ |
315.0 |
|
$ |
545.0 |
|
$ |
500.0 |
|
$ |
4,094.0 |
|
Guarantees supporting commodity
transactions of subsidiaries |
|
|
368.7 |
|
|
172.9 |
|
|
193.7 |
|
|
- |
|
|
- |
|
|
- |
|
|
2.1 |
|
Letters of credit |
|
|
45.5 |
|
|
13.3 |
|
|
31.2 |
|
|
- |
|
|
- |
|
|
1.0 |
|
|
- |
|
Other guarantees |
|
|
718.9 |
|
|
- |
|
|
2.8 |
|
|
13.7 |
|
|
224.0 |
|
|
32.2 |
|
|
446.2 |
|
| |
Total commercial commitments |
|
$ |
7,268.9 |
|
$ |
868.0 |
|
$ |
227.7 |
|
$ |
328.7 |
|
$ |
769.0 |
|
$ |
533.2 |
|
$ |
4,542.3 |
|
| |
Guarantees of Subsidiaries Debt. NiSource has guaranteed the payment of $6.1 billion of debt
for various wholly-owned subsidiaries including NiSource Finance, and through a support agreement,
Capital Markets, which is reflected on NiSource’s Condensed Consolidated Balance Sheets
(unaudited). The subsidiaries are required to comply with certain financial covenants under the
debt indenture and in the event of default, NiSource would be obligated to pay the debt’s 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 $368.7 million of commodity-related payments for its current
subsidiaries involved in energy marketing activities. These guarantees were provided to
counterparties in order to facilitate physical and financial transactions involving natural gas.
To the extent liabilities exist under the commodity-related contracts subject to these guarantees,
such liabilities are included in the Condensed Consolidated Balance Sheets (unaudited).
40
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Lines and Letters of Credit and Accounts Receivable Advances. NiSource Finance maintains a $1.5
billion five-year revolving credit facility with a syndicate of banks which has a termination date
of July 7, 2011. This facility provides a reasonable cushion of short-term liquidity for general
corporate purposes including meeting cash requirements driven by volatility in natural gas prices,
as well as provides for the issuance of letters of credit. At June 30, 2010, NiSource had $73.5
million in borrowings under its five-year revolving credit facility and $139.3 million outstanding
under its accounts receivable securitization agreements. At June 30, 2010, NiSource issued
stand-by letters of credit of approximately $45.5 million for the benefit of third parties. See
Note 17, Short-term Borrowings.
Other Guarantees or Obligations. On June 30, 2008, NiSource sold Whiting Clean Energy to BPAE for
$216.7 million which included $16.1 million in working capital. The agreement with BPAE contains
representations, warranties, covenants and closing conditions. NiSource has executed purchase and
sales agreement guarantees totaling $220 million which guarantee performance of PEI’s 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 (unaudited) as of June 30, 2010. These guarantees are due to expire in
June 2013.
NiSource has additional purchase and sales agreement guarantees totaling $30.0 million, which
guarantee performance of the seller’s 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 (unaudited).
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.
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 credit agreement up until such time as the amounts payable under the agreement are paid
in full. As of June 30, 2010, Millennium owed $798.9 million under the financing agreements, of
which NiSource guaranteed $379.5 million. The interim bank credit agreement expires August 29,
2010. NiSource recorded an accrued liability of approximately $7.6 million related to the fair
value of this guarantee. On July, 20, 2010, Millennium completed pricing on two tranches of
fixed-rate notes in the private placement market totaling $725.0 million and the associated
interest rate swaps were terminated. Millennium will issue the notes, settle the interim financing,
terminate the sponsor guarantee, and cash settle the interest rate hedges on August 26, 2010.
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 December 31, 2009, Hardy Storage had outstanding borrowings of $123.4 million under the
temporary financing agreement, for which Columbia Transmission had 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. Hardy Storage satisfied the terms and conditions of
its financing agreement on March 17, 2010, when Hardy Storage secured permanent financing,
facilitating Columbia Transmission’s release from its underlying guarantee and therefore, the
accrued liability of $1.2 million was relieved as of March 31, 2010.
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. In the opinion of management, the
ultimate disposition of these currently asserted claims will not have a material adverse impact on
NiSource’s consolidated financial position.
41
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
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 in the West
Virginia Circuit Court for Roane County, West Virginia (the “Trial Court”) 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. Plaintiffs also claimed that Defendants
fraudulently concealed the deduction of post-production charges. In December 2004, the Trial Court
granted Plaintiffs’ motion to add NiSource and Columbia as Defendants. The Trial Court later
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. Although NiSource sold CNR in 2003, NiSource remained obligated to
manage this litigation and was responsible for the majority of any damages awarded to Plaintiffs.
On January 27, 2007, the jury hearing the case returned a verdict against all Defendants in the
amount of $404.3 million inclusive of both compensatory and punitive damages; Defendants
subsequently filed their Petition for Appeal, which was later amended, with the West Virginia
Supreme Court of Appeals (the “Appeals Court”), which refused the petition on May 22, 2008. On
August 22, 2008, Defendants filed Petitions to the United States Supreme Court for writ of
certiorari. Given the Appeals Court’s earlier refusal of the appeal, NiSource 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 was included in “Legal and environmental
reserves,” on the Consolidated Balance Sheet as of December 31, 2008. On October 24, 2008, the
Trial Court preliminarily approved a Settlement Agreement with a total settlement amount of $380
million. The settlement received final approval by the Trial Court on November 22, 2008.
NiSource’s share of the settlement liability is up to $338.8 million. NiSource complied with its
obligations under the Settlement Agreement to fund $85.5 million in the qualified settlement fund
by January 13, 2009. Additionally, NiSource provided a letter of credit on January 13, 2009 in the
amount of $254 million and thereby complied with its obligation to secure the unpaid portion of the
settlement which has since been drawn down as settlement payments have been made. The Trial Court
entered its Order discharging the judgment on January 20, 2009 and is supervising the
administration of the settlement proceeds. As of June 30, 2010, NiSource had contributed a total
of $318.2 million into the qualified settlement fund, $277.3 million of which was contributed prior
to December 31, 2009. As of June 30, 2010, $20.6 million of the maximum settlement liability had
not been paid. The remaining balance of the letter of credit is sufficient to cover any remaining
payments under the Settlement Agreement. NiSource will be required to make additional payments not
expected to exceed the amount accrued, pursuant to the settlement, upon notice from the Class
Administrator.
John Thacker, et al. v. Chesapeake Appalachia, L.L.C., U.S. District Court, E.D. Kentucky
Poplar Creek Development Company v. Chesapeake Appalachia, L.L.C., U.S. District Court, E.D.
Kentucky
On February 8, 2007, Plaintiff filed the Thacker case, a purported class action alleging that
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.,
Chesapeake’s predecessor in interest (“Stock Purchase Agreement”). 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 a Motion by Defendants to Dismiss and 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.
In June 2009, the parties to the Thacker litigation presented a Settlement Agreement to the Court
for preliminary approval. The court granted the Motion for Preliminary approval and held a
fairness hearing on November 10, 2009. On March 3, 2010 the Court granted final approval of the
settlement and on March 31, 2010 Poplar Creek filed a notice of appeal of that approval with the
Sixth Circuit.
On October 9, 2008, Chesapeake tendered the Poplar Creek case to Columbia and Columbia
conditionally assumed the defense of this matter pursuant to the provisions of the Stock Purchase
Agreement. Poplar Creek also purports to be a class action covering royalty owners in the state of
Kentucky and alleges that Chesapeake has improperly
42
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
deducted costs from the royalty payments; thus there is some overlap of parties and issues between
the Poplar Creek and Thacker cases. Chesapeake filed a motion for judgment on the pleadings in
December 2008, which was granted on July 2, 2009. Plaintiffs appealed the dismissal to the
6th Circuit Court of Appeals.
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 Indiana’s generating stations between the years 1985 and 1995 without
obtaining appropriate air permits for the modifications. The ultimate resolution could
require additional capital expenditures and operations and maintenance costs as well as
payment of substantial penalties and development of supplemental environmental projects.
Northern Indiana is currently in discussions with the EPA regarding possible resolutions to
this NOV. Although penalties have been proposed and a reserve has been recorded for the
matter, Northern Indiana is unable to predict the outcome of this matter at this time.
C. Environmental Matters.
NiSource operations are subject to environmental statutes and regulations related to air quality,
water quality, hazardous waste and solid waste. NiSource believes that it is in substantial
compliance with those environmental regulations currently applicable to its operations and believes
that it has all necessary permits to conduct its operations.
It is management’s continued intent to address environmental issues in cooperation with regulatory
authorities in such a manner as to achieve mutually acceptable compliance plans. However, there
can be no assurance that fines and penalties will not be incurred. Management expects a
significant portion of environmental assessment and remediation costs to be recoverable through
rates for certain NiSource companies.
As of June 30, 2010 and December 31, 2009, NiSource had recorded reserves of approximately $73.3
million and $76.4 million, respectively, to cover environmental remediation at various sites.
NiSource accrues for costs associated with environmental remediation obligations when the
incurrence of such costs is probable and the amounts can be reasonably estimated. The original
estimates for cleanup can differ materially from the amount ultimately expended. The actual future
expenditures depend on many factors, including currently enacted laws and regulations, the nature
and extent of contamination, the method of cleanup, and the availability of cost recovery from
customers. NiSource periodically adjusts its reserves as information is collected and estimates
become more refined.
Air
The actions listed below could require further reductions in emissions from various emission
sources. NiSource will continue to closely monitor developments in these matters.
Climate Change. Future legislative and regulatory programs could significantly restrict emissions
of GHGs or could impose a cost or tax on GHG emissions. Recently, proposals have been developed to
implement Federal, state and regional GHG programs and to create renewable energy standards.
On June 26, 2009, the United States House of Representatives passed a climate change bill called
ACES. The comprehensive bill proposes a GHG cap and trade system starting in 2012 for electrical
suppliers, 2014 for natural gas transmission companies, and 2016 for natural gas distribution
companies. The cap and trade system would establish economy-wide reduction targets of 3% by 2012
and 83% by 2050. ACES would allocate natural gas distribution companies and electric suppliers a
certain number of emission allowances without charge, but these allocations would decrease over
time, phasing out entirely by 2030. Gas transmission companies would not receive any emission
allowances under ACES. ACES also contains renewable energy standards, which would require retail
electric suppliers to provide a portion of their power from renewable sources and mandates
performance standards for particular sources. The Senate has been considering its own renewable
energy standard and climate change bills.
43
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
If ACES or other Federal comprehensive climate change bills were to pass both Houses of Congress
and be enacted into law, the impact on NiSource’s financial performance would depend on a number of
factors, including the overall level of required GHG reductions, the renewable energy targets, the
degree to which offsets may be used for compliance, the amount of recovery allowed from customers,
and the extent to which NiSource would be entitled to receive free CO2 allowances.
Federal or state climate change legislation could result in additional expense or compliance costs
that may not be fully recoverable from customers and could materially impact NiSource’s financial
results.
The EPA is also taking action to regulate GHGs under the CAA. On December 7, 2009, the EPA made
the following findings: (a) that GHGs in the atmosphere endanger the public health and welfare
within the meaning of the CAA and (b) that emissions from new motor vehicles contribute to the mix
of GHGs in the atmosphere. It is the EPA’s position that this “endangerment” finding, along with
some other recent regulatory developments, will trigger permitting requirements for large
industrial sources of GHGs. On June 3, 2010, the EPA issued final regulations, commonly called the
“tailoring rule,” applicable to the two CAA programs, New Source Review and Title V. Beginning in
2011, the rule would impose new GHG permitting requirements on facilities with existing Title V
permits. The rule would also regulate very large sources of GHGs without existing Title V permits
and projects that cause sizable increases in GHG emissions. New and modified sources could be
required to apply Best Available Control Technology. Regulation of smaller GHG sources could begin
as early as 2016. The total cost impact of EPA regulation of GHG under the CAA cannot be
determined at this time.
The EPA on April 12, 2010, proposed an expansion of the GHG reporting rule to include natural gas
systems. The rule in the proposed form could have a material impact on the company. NiSource will
continue to closely monitor developments in these matters and cannot estimate the impact of these
rules at this time.
National Ambient Air Quality Standards. The CAA requires EPA to set national air quality standards
for particulate matter and five other pollutants (the NAAQS) considered harmful to public health
and the environment. Periodically EPA imposes new or modifies existing NAAQS. States that contain
areas that do not meet the new or revised standards must take steps to maintain or achieve
compliance with the standards. These steps could include additional pollution controls on boilers,
engines, turbines, and other facilities owned by electric generation, gas distribution, and gas
transmission operations.
The following NAAQS were recently added or modified:
Particulate Matter: In 2006, the EPA issued revisions to the NAAQS for particulate matter. The
final rule (1) increased the stringency of the current fine particulate (PM2.5) standard, (2) added
a new standard for inhalable coarse particulate (particulate matter between 10 and 2.5 microns in
diameter), and (3) revoked the annual standards for coarse particulate (PM10) while retaining the
24-hour PM10 standards. These actions were challenged in a case before the DC Court of Appeals,
American Farm Bureau Federation et al. v. EPA. In 2009, the appeals court granted portions of the
plaintiffs’ petitions challenging the fine particulate standards but denied portions of the
petitions challenging the standards for coarse particulate. State plans implementing the new
standard for inhalable coarse particulate and the modified 24-hour standard for fine particulate
are expected in 2012. The annual and secondary PM2.5 standards have been remanded to the EPA for
reconsideration.
Ozone (eight hour): On March 12, 2008, the EPA announced the tightening of the eight-hour ozone
NAAQS. EPA has yet to announce the classification structure and the corresponding attainment dates
for the new standard. On September 16, 2009, the EPA announced it would reconsider the March 2008
tightening of the ozone NAAQS and if needed promulgate more stringent standards by August 2010. If
the standards are tightened and area designations subsequently changed, new SIPs will need to be
developed by the states by December 2013 to bring the nonattainment areas into compliance.
NiSource will continue to closely monitor developments in these matters and cannot estimate the
impact of these rules at this time.
Nitrogen Dioxide (NO2): The EPA revised the NO2 NAAQS by adding a one-hour standard while
retaining the annual standard. The new standard could impact NiSource combustion sources such as
coal-fired electric generation
44
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
and natural gas compressor stations. EPA will designate areas that do not meet the new standard
beginning in 2012. States with areas that do not meet the standard will need to develop rules to
bring areas into compliance within five years of designation. Additionally, under certain
permitting circumstances emissions from existing compressor stations or generating stations may
need to be assessed and compared to the revised NO2 standards before areas are designated.
Petitions challenging the rule have been filed by various parties. NiSource will continue to
closely monitor developments in these matters and cannot estimate the impact of these rules at this
time.
National Emission Standard for Hazardous Air Pollutants. On February 25, 2009, the EPA proposed
national emission standards for hazardous air pollutants for stationary reciprocating internal
combustion engines that are not already covered by earlier EPA regulation. The proposed rule is
scheduled to be finalized in 2010, with compliance generally required three years later. NiSource
will continue to closely monitor developments in this matter and cannot estimate the actual cost of
compliance at this time.
Waste
Several NiSource subsidiaries are potentially responsible parties at waste disposal sites under the
CERCLA (commonly known as Superfund) and similar state laws. Additionally, a program has been
instituted to identify and investigate former Manufactured Gas Plant sites where Gas Distribution
Operations subsidiaries or predecessors may have liability. The program has identified up to 84
such sites and initial investigations have been conducted at 56 sites. Follow-up investigation
activities have been completed or are in progress at 50 sites and remedial measures have been
implemented or completed at 31 sites. Remedial actions at many of these sites are being overseen
by state or federal environmental agencies through consent agreements or voluntary remediation
agreements. The final costs of cleanup have not yet been determined. As site investigations and
cleanups proceed reserves are adjusted to reflect new information.
Additional Issues Related to Individual Business Segments
The sections above describe various regulatory actions that affect Gas Transmission and Storage
Operations, Electric Operations, and certain other discontinued operations for which we have
retained a liability. Specific information is provided below.
Gas Transmission and Storage Operations.
Waste
Columbia Transmission continues to conduct characterization and remediation activities at specific
sites under a 1995 EPA AOC. The AOC covered 245 facilities, approximately 13,000 liquid removal
points, approximately 2,200 mercury measurement stations and about 3,700 storage well locations.
Obligations under the AOC have been completed at the mercury measurement stations, liquid removal
point sites, storage well locations and all but 50 of the 245 facilities.
One of the facilities subject to the AOC is the Majorsville Operations Center, which was remediated
under an EPA approved Remedial Action Work Plan in summer 2008. Pursuant to the Remedial Action
Work Plan, Columbia Transmission completed a project that stabilized residual oil contained in
soils at the site and in sediments in an adjacent stream. On April 23, 2009, PADEP issued an NOV
to Columbia Transmission, alleging that the remediation was not effective. The NOV asserts
violations of the Pennsylvania Clean Streams Law and the Pennsylvania Solid Waste Management Act
and contains proposed penalty of $1 million. Columbia Transmission is unable to estimate the
likelihood or cost of potential penalties or additional remediation at this time.
Electric Operations.
Air
Northern Indiana expects to become subject to a number of new air-quality mandates in the next
several years. These mandates may require Northern Indiana to make capital improvements to its
electric generating stations. The cost of these improvements is estimated to be $560 to $800
million, although this estimate and the timing of
45
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
expenditures is dependant on future regulatory actions that cannot be fully predicted at this time.
Northern Indiana expects that some or all of these costs may be recoverable from ratepayers.
NOx and Ozone Compliance: Indiana’s rule to implement the EPA’s NOx SIP call requires reduction
of
NOx levels from several sources, including industrial and utility boilers, to reduce regional
transport of ozone. In response, Northern Indiana developed a NOx compliance plan, which included
the installation of Selective Catalytic Reduction and combustion control NOx reduction technology
at its active generating stations and is currently in compliance with the NOx requirements. In
implementing the NOx compliance plan, Northern Indiana has expended approximately $316.7 million as
of June 30, 2010.
Sulfur dioxide: On December 8, 2009, the EPA revised the SO2 NAAQS by adopting a new 1-hour
primary NAAQS for sulfur dioxide (SO2). EPA expects to designate areas that do not meet the new
standard by mid 2012. States with such areas would have until 2014 to develop attainment plans
with compliance required by 2017. Northern Indiana will continue to closely monitor developments
in these matters but does not anticipate a material impact.
Clean Air Interstate Rule (CAIR) / Transport Rule: On July 6, 2010, the EPA released its new
Transport Rule proposal, which would replace CAIR upon finalization. The EPA anticipates the rule
will become effective in summer 2011. The proposal contains three different approaches to govern
emissions of sulfur dioxide and nitrogen oxides from electric generating units. The cost impact of
the Transport Rule would depend upon the specific requirements enacted. Northern Indiana will
continue to monitor this matter but believes the cost of compliance will be material.
Utility Hazardous Air Pollutants: On February 8, 2008, the United States Court of Appeals for the
District of Columbia Circuit vacated two EPA rules that are the basis for the Indiana Air Pollution
Control Board’s Clean Air Mercury Rule (CAMR) that established utility mercury emission limits in
two phases (2010 and 2018) and a cap-and-trade program to meet those limits. In response to the
vacatur, the EPA is pursuing a new Section 112 rulemaking to establish MACT standards for electric
utilities. Northern Indiana will continue to monitor this matter but believes the cost of
compliance may be material.
New Source Review: 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 Indiana’s generating stations between the years 1985 and 1995
without obtaining appropriate air permits for the modifications. The ultimate resolution could
require additional capital expenditures and operations and maintenance costs as well as payment of
substantial penalties and development of supplemental environmental projects. Northern Indiana is
currently in discussions with the EPA regarding possible resolutions to this NOV. Although
penalties have been proposed and a reserve has been recorded for the matter, Northern Indiana is
unable to predict the outcome of this matter at this time.
Water
The Phase II Rule of the Clean Water Act Section 316(b), which requires all large existing steam
electric generating stations to meet certain performance standards to reduce the effects on aquatic
organisms at their cooling water intake structures, 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. Various court challenges and EPA responses ensued. As a result of the litigation, the EPA
will propose a revised Section 316(b). The Bailly Generating Station is the only Northern Indiana
generating station that does not utilize closed cycle cooling. Northern Indiana will continue to
closely monitor this activity and cannot estimate the costs associated with the ultimate outcome at
this time.
Waste
On March 31, 2005, the EPA and Northern Indiana entered into an AOC under the authority of Section
3008(h) of the RCRA for the Bailly Station. The order requires Northern Indiana to identify the
nature and extent of releases of hazardous waste and hazardous constituents from the facility.
Northern Indiana must also remediate any release of
46
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
hazardous constituents that present an unacceptable risk to human health or the environment. The
process to complete investigation and select appropriate remediation activities is ongoing. The
final costs of cleanup could change based on EPA review.
On June 21, 2010, EPA published a proposed rule for coal combustion residuals. The proposal
outlines multiple regulatory approaches that EPA is considering. These proposed regulations could
affect Northern Indiana’s ongoing byproduct reuse programs and would impose additional requirements
on its management of coal ash wastes. Northern Indiana will monitor developments in this matter
and cannot estimate the potential financial impact at this time but believes that the cost of
compliance under one of the scenarios could be as much as $70 million of capital improvements in
the first 5 years. Northern Indiana expects that some or all of these costs may be recoverable from
ratepayers.
Other Operations.
Waste
NiSource affiliates have retained environmental liabilities, including cleanup liabilities
associated with some of its former operations. Four sites are associated with its former propane
operations and ten sites associated with former petroleum operations. At one of those sites, an
AOC has been signed with EPA to address petroleum residue in soil and groundwater.
20. Accumulated Other Comprehensive Loss
The following table displays the components of Accumulated Other Comprehensive Loss.
| |
|
|
|
|
|
|
|
|
| (in millions) |
|
|
June 30, 2010 |
|
|
|
December 31, 2009 |
|
| |
Other comprehensive income (loss), before tax: |
|
|
|
|
|
|
|
|
Unrealized gains on securities |
|
$ |
4.8 |
|
|
$ |
4.2 |
|
Tax expense on unrealized gains on securities |
|
|
(1.7 |
) |
|
|
(1.6 |
) |
Unrealized losses on cash flow hedges |
|
|
(56.8 |
) |
|
|
(35.0 |
) |
Tax benefit on unrealized losses on cash flow hedges |
|
|
22.4 |
|
|
|
14.0 |
|
Unrecognized pension and OPEB costs |
|
|
(47.2 |
) |
|
|
(44.4 |
) |
Tax benefit on unrecognized pension and OPEB costs |
|
|
18.1 |
|
|
|
16.9 |
|
| |
Total Accumulated Other Comprehensive Loss, net of taxes |
|
$ |
(60.4 |
) |
|
$ |
(45.9 |
) |
| |
Equity Investment
During 2008, Millennium, in which Columbia Transmission has an equity investment, entered into
three interest rate swap agreements with a notional amount totaling $420 million with seven
counterparties. These interest rate swap derivatives are primarily accounted for as cash flow
hedges by Millennium. The unrecognized after-tax loss of $20.0 million and $5.7 million as of June
30, 2010 and December 31, 2009, respectively, was a decrease in Columbia Transmission’s investment
in Millennium and a corresponding increase in accumulated other comprehensive loss, representing
its ownership portion of the fair value of these swaps.
On July 20, 2010, Millennium completed pricing on two tranches of fixed-rate notes in the private
placement market totaling $725.0 million and the associated
interest rate swaps were terminated.
Millennium will issue the notes, settle the interim bank financing, terminate the sponsor
guarantee, and cash settle the interest rate hedges on August 26, 2010.
47
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
21. Business Segment Information
Operating segments are components of an enterprise for which separate financial information is
available and evaluated regularly by the chief operating decision maker in deciding how to allocate
resources and assess performance. The NiSource Chief Executive Officer is the chief operating
decision maker.
At June 30, 2010, NiSource’s operations are divided into three 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.
In prior period filings, NiSource reported Other Operations, which primarily included ventures
focused on its unregulated natural gas marketing business and distributed power generation
technologies, including fuel cells and storage systems, as a reporting segment. In the first
quarter of 2010, NiSource made a decision to wind down the unregulated natural gas marketing
activities as a part of the Company’s long-term strategy of focusing on its core regulated
businesses. As a result, Other Operations no longer met the definition of a reporting segment and,
accordingly, has been included within Corporate and Other in the table below beginning in 2010 and
for all periods presented.
48
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.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| (in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
| |
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Distribution Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated |
|
$ |
552.0 |
|
|
$ |
560.4 |
|
|
$ |
2,097.4 |
|
|
$ |
2,509.7 |
|
Intersegment |
|
|
2.7 |
|
|
|
(2.9 |
) |
|
|
8.5 |
|
|
|
3.1 |
|
| |
Total |
|
|
554.7 |
|
|
|
557.5 |
|
|
|
2,105.9 |
|
|
|
2,512.8 |
|
| |
Gas Transmission and Storage Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated |
|
|
185.6 |
|
|
|
163.5 |
|
|
|
380.1 |
|
|
|
345.5 |
|
Intersegment |
|
|
31.7 |
|
|
|
45.6 |
|
|
|
93.8 |
|
|
|
105.9 |
|
| |
Total |
|
|
217.3 |
|
|
|
209.1 |
|
|
|
473.9 |
|
|
|
451.4 |
|
| |
Electric Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated |
|
|
342.3 |
|
|
|
286.7 |
|
|
|
662.1 |
|
|
|
584.9 |
|
Intersegment |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.4 |
|
| |
Total |
|
|
342.5 |
|
|
|
286.9 |
|
|
|
662.5 |
|
|
|
585.3 |
|
| |
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated |
|
|
91.2 |
|
|
|
257.9 |
|
|
|
390.2 |
|
|
|
550.3 |
|
Intersegment |
|
|
103.1 |
|
|
|
102.8 |
|
|
|
209.9 |
|
|
|
202.9 |
|
| |
Total |
|
|
194.3 |
|
|
|
360.7 |
|
|
|
600.1 |
|
|
|
753.2 |
|
| |
Eliminations |
|
|
(137.7 |
) |
|
|
(145.6 |
) |
|
|
(312.6 |
) |
|
|
(312.2 |
) |
| |
Consolidated Revenues |
|
$ |
1,171.1 |
|
|
$ |
1,268.6 |
|
|
$ |
3,529.8 |
|
|
$ |
3,990.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Operating Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Distribution Operations |
|
$ |
18.5 |
|
|
$ |
3.9 |
|
|
$ |
253.6 |
|
|
$ |
247.1 |
|
Gas Transmission and Storage Operations |
|
|
74.9 |
|
|
|
79.6 |
|
|
|
200.8 |
|
|
|
172.5 |
|
Electric Operations |
|
|
49.6 |
|
|
|
23.0 |
|
|
|
94.7 |
|
|
|
40.3 |
|
Corporate and Other |
|
|
(3.8 |
) |
|
|
5.2 |
|
|
|
(6.5 |
) |
|
|
- |
|
| |
Consolidated Operating Income |
|
$ |
139.2 |
|
|
$ |
111.7 |
|
|
$ |
542.6 |
|
|
$ |
459.9 |
|
| |
49
ITEM 1. FINANCIAL STATEMENTS (continued)
NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
22. Supplemental Cash Flow Information
The following table provides additional information regarding NiSource’s Condensed Statements of
Consolidated Cash Flows (unaudited) for the six months ended June 30, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
| Six Months Ended June 30, (in millions) |
|
2010 |
|
|
2009 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|
Non-cash transactions: |
|
|
|
|
|
|
|
|
Accrued capital expenditures |
|
$ |
19.8 |
|
|
$ |
(8.0 |
) |
Change in equity investments related to unrealized (losses) gains |
|
|
(23.5 |
) |
|
|
34.2 |
|
Stock issuance to employee saving plans |
|
|
10.1 |
|
|
|
- |
|
Schedule of interest and income taxes paid: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
188.2 |
|
|
$ |
186.1 |
|
Interest capitalized |
|
|
1.6 |
|
|
|
1.8 |
|
Cash paid for income taxes |
|
|
49.9 |
|
|
|
- |
|
| |
50
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
NiSource Inc.
Note regarding forward-looking statements
The Management’s Discussion and Analysis, including statements regarding market risk sensitive
instruments, contains “forward-looking statements,” within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Investors and prospective investors should understand that many factors govern whether
any forward-looking statement contained herein will be or can be realized. Any one of those
factors could cause actual results to differ materially from those projected. These
forward-looking statements include, but are not limited to, statements concerning NiSource’s plans,
objectives, expected performance, expenditures and recovery of expenditures through rates, stated
on either a consolidated or segment basis, and any and all underlying assumptions and other
statements that are other than statements of historical fact. From time to time, NiSource may
publish or otherwise make available forward-looking statements of this nature. All such subsequent
forward-looking statements, whether written or oral and whether made by or on behalf of NiSource,
are also expressly qualified by these cautionary statements. All forward-looking statements are
based on assumptions that management believes to be reasonable; however, there can be no assurance
that actual results will not differ materially.
Realization of NiSource’s objectives and expected performance is subject to a wide range of risks
and can be adversely affected by, among other things, weather, fluctuations in supply and demand
for energy commodities, growth opportunities for NiSource’s businesses, increased competition in
deregulated energy markets, the success of regulatory and commercial initiatives, dealings with
third parties over whom NiSource has no control, actual operating experience of NiSource’s assets,
the regulatory process, regulatory and legislative changes, the impact of potential new
environmental laws or regulations, the results of material litigation, changes in pension funding
requirements, changes in general economic, capital and commodity market conditions, counterparty
credit risk, and the matters set forth in the “Risk Factors” section of NiSource’s 2009 Form 10-K,
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. NiSource expressly disclaims a duty to update any of the
forward-looking statements contained in this report.
The following Management’s Discussion and Analysis should be read in conjunction with NiSource’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
CONSOLIDATED REVIEW
Executive Summary
NiSource is an energy holding company under the Public Utility Holding Company Act of 2005 whose
subsidiaries are engaged in the transmission, storage and distribution of natural gas in the
high-demand energy corridor stretching from the Gulf Coast through the Midwest to New England and
the generation, transmission and distribution of electricity in Indiana. NiSource generates
virtually 100% of its operating income through these rate-regulated businesses. A significant
portion of NiSource’s operations is subject to seasonal fluctuations in sales. During the heating
season, which is primarily from November through March, net revenues from gas sales are more
significant, and during the cooling season, which is primarily from June through September, net
revenues from electric sales and transportation services are more significant than in other months.
For the six months ended June 30, 2010, NiSource reported income from continuing operations of
$225.4 million, or $0.81 per basic share, compared to $155.2 million, or $0.57 per basic share
reported for the same period in 2009.
Increases in income from continuing operations were due primarily to the following items:
| • |
|
Electric Operations’ net revenues increased $57.1 million due to higher margins of $31.9
million primarily from increased industrial and residential margins, an increase in off-system
sales of $11.8 million, and an increase of $9.5 million in environmental trackers that are
partly offset in operating expense. |
51
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(continued)
NiSource Inc.
| • |
|
Gas Transmission and Storage Operations’ net revenues increased $22.5 million primarily due
to a $13.7 million increase in demand margin revenue and $8.3 million related to recognition
of revenue for a previously deferred gain for native gas contributed to Hardy Storage Company
from Columbia Transmission following Hardy Storage securing permanent financing. |
| |
| • |
|
Operation and maintenance expenses decreased $28.0 million due mainly to the impact of
$19.8 million of restructuring charges that were recognized in the first quarter of 2009 and
lower maintenance and outside service expenses of $8.3 million. |
| |
| • |
|
The effective tax rate decreased to 35.7% compared to 40.7% for the comparable period last
year. The decrease is due to an increase in estimated electric production tax deductions as a
result of higher projected taxable income in 2010 versus 2009, a decrease in tax expense
related to AFUDC – Equity and the regulatory treatment of certain depreciation differences,
and the impact of state income tax adjustments. |
These factors and other impacts to the financial results are discussed in more detail within the
following discussions of “Results of Operations” and “Results and Discussion of Segment
Operations.”
Four-Point Platform for Growth
NiSource’s four-part business plan will continue to center on commercial and regulatory
initiatives; commercial growth and expansion of the gas transmission and storage business;
financial management of the balance sheet; and process and expense management.
Commercial and Regulatory Initiatives
NiSource is moving forward on regulatory initiatives across several distribution company markets
and progress continues with Northern Indiana’s current electric base rate case. Whether through
full rate case filings or other approaches, NiSource’s goal is to develop strategies that benefit
all stakeholders as it addresses changing customer conservation patterns, develops more
contemporary pricing structures, and embarks on long-term investment programs to enhance its
infrastructure.
NiSource’s Indiana utilities are focused on a number of initiatives to enhance customer service and
reliability, modernize rate structures, and position the company for future growth. In February
2010, Jimmy D. Staton, group CEO of NiSource’s gas distribution businesses, assumed the added
responsibility for the company’s Indiana gas and electric utility businesses. Following are the
key initiatives for Northern Indiana in 2010:
| |
• |
|
On June 28, 2010, NIPSCO filed a proposal with the Indiana Utility Regulatory Commission
(IURC) to expand the array of energy efficiency programs available to its electric
customers, providing customers additional ways to manage their energy bills. Among other
things, the proposal includes appliance rebates and recycling, low-income weatherization,
air conditioning cycling, energy audits, and new construction incentives. |
| |
| |
• |
|
Significant stakeholder outreach continues in connection with NIPSCO’s natural gas rate
case, filed with the IURC in early May of this year. Settlement discussions among NIPSCO
and the various regulatory stakeholders are actively underway. New rates, reflecting a
modest impact on customer bills and an improved earnings profile for the company, are
targeted to be effective in early 2011 or sooner. |
| |
| |
• |
|
NIPSCO’s 2008 electric rate case remains pending before the IURC, with a decision in the
case expected in the third quarter. The company’s previously discussed 2010 electric rate
case, which will be designed to reflect current operating conditions as well as modernize
rates to meet its customers’ ongoing needs, is on track to be filed in the fall of this
year. |
On February 26, 2010, Columbia of Ohio filed an application to adjust rates associated with Riders
IRP and DSM. Rider DSM tracks and recovers costs associated with Columbia of Ohio’s energy
efficiency and conservation programs. On April 14, 2010, Columbia of Ohio filed a Joint Stipulation
and Recommendation that settled all issues.
52
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(continued)
NiSource Inc.
On April 28, 2010, the PUCO issued an Order approving the Stipulation. Rates associated with Riders
IRP and DSM were increased by approximately $17.8 million annually, beginning April 29, 2010.
On January 28, 2010, Columbia of Pennsylvania filed a base rate case with the Pennsylvania PUC,
seeking a revenue increase of approximately $32 million annually. On June 25, 2010, Columbia of
Pennsylvania filed a Joint Petition for Settlement that, if approved, would result in an annual
revenue increase of $12 million. Columbia of Pennsylvania anticipates that the Pennsylvania PUC
will issue a final order approving the Settlement and that new rates will go into effect on October
1, 2010.
On January 28, 2010, Columbia of Maryland filed a base rate case with the Maryland PSC, seeking a
revenue increase of $2.2 million annually in order for Columbia of Maryland to earn the rate of
return authorized by the PSC in its 2008 rate case. On May 10, 2010, the parties filed a Joint
Motion for Approval of Stipulation and Settlement Agreement that would result in an annual revenue
increase of approximately $1.7 million. The Maryland PSC has issued a final order approving the
Settlement, and new rates went into effect on May 28, 2010.
On May 3, 2010, Columbia of Virginia filed a base rate case with the VSCC seeking an annual revenue
increase of $13.0 million to recover an updated level of costs upon the expiration of its
Performance Based Regulation Plan on December 31, 2010. Columbia of Virginia also seeks a Weather
Normalization Adjustment, cost recovery of certain gas related items through its Purchased Gas
Adjustment mechanism rather than base rates, and forward looking accounting adjustments predicted
to occur during the rate year ending December 31, 2011. If approved, new rates are scheduled to
become effective January 1, 2011.
Columbia of Virginia has entered into an agreement with Dominion Virginia Power to install
facilities to serve a 580 mw combined cycle generating station in Buckingham County, VA, known as
the Bear Garden station. The project requires approximately 13.3 miles of 24-inch steel pipeline
and associated facilities to serve the station. In March 2009, the VSCC approved Dominion Virginia
Power Company’s planned Bear Garden station. Bear Garden station went into service in July 2010
and the project was on schedule and under budget.
Refer to the “Results and Discussion of Segment Operations” for a complete discussion of regulatory
and commercial matters.
Commercial Growth and Expansion of the Gas Transmission and Storage Business
NiSource’s Gas Transmission & Storage Operations continues to identify and advance a number of
near-term, low-risk growth projects that leverage its geographic footprint throughout the Marcellus
Shale production areas.
| |
• |
|
NGT&S’ Cobb compressor expansion project went into service in May 2010. The $15 million
project was built – on budget and on schedule – to provide producers with 25,500
dekatherms per day of long-term, firm transportation service. |
| |
| |
• |
|
Progress continues on NGT&S’ $80 million Majorsville expansion in southwestern
Pennsylvania, slated for service during the third quarter of this year. This series of
separate projects will aggregate Marcellus gas production for downstream transmission with
a total capacity of 325,000 dekatherms per day. |
| |
| |
• |
|
Additional Marcellus-area growth projects are expected to be announced during the next
several months. Over the course of the next several years, NGT&S anticipates making growth
project investments of approximately $200 million per year in the Marcellus region. |
Financial Management of the Balance Sheet
On March 15, 2010, Columbia of Pennsylvania entered into an agreement to sell, without recourse,
substantially all of its trade receivables, as they originate, to CPRC, a wholly-owned subsidiary
of Columbia of Pennsylvania. CPRC, in turn, is party to an agreement with BTMU, also dated March
15, 2010, under the terms of which it sells an undivided percentage ownership interest in its
accounts receivable to a commercial paper conduit sponsored by
53
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(continued)
NiSource Inc.
BTMU. The maximum seasonal program limit under the terms of the agreement is $75 million. CPRC’s
agreement with the commercial paper conduit has a scheduled termination date of March 14, 2011, and
can be renewed if mutually agreed to by both parties. As of June 30, 2010, $5.2 million of
accounts receivable had been transferred by CPRC.
Process and Expense Management
Refer to Note 4, “Restructuring Activities,” in the Notes to Condensed Consolidated Financial
Statements (unaudited) for information on process and expense management.
Ethics and Controls
NiSource has had a long-term commitment to providing accurate and complete financial reporting as
well as high standards for ethical behavior by its employees. NiSource’s senior management takes
an active role in the development of this Form 10-Q and the monitoring of the company’s internal
control structure and performance. In addition, NiSource will continue its mandatory ethics
training program for all employees.
Refer to “Controls and Procedures” included in Item 4.
Results of Operations
Quarter Ended June 30, 2010
Net Income (Loss)
NiSource reported net income of $28.1 million, or $0.10 per basic share, for the three months ended
June 30, 2010, compared to a net loss of $4.8 million, or $0.01 per basic share, for the second
quarter of 2009. Income from continuing operations was $28.0 million, or $0.10 per basic share,
for the three months ended June 30, 2010, compared to loss from continuing operations of $4.0
million, or $0.01 per basic share, for the second quarter of 2009. Operating income was $139.2
million, an increase of $27.5 million from the same period in 2009. All per share amounts are
basic earnings per share. Basic average shares of common stock outstanding at June 30, 2010 were
277.6 million compared to 274.7 million at June 30, 2009.
Comparability of line item operating results between quarterly periods is impacted by regulatory
and tax trackers that allow for the recovery in rates of certain costs such as bad debt expenses.
Therefore, increases in these tracked operating expenses are offset by increases in net revenues
and had essentially no impact on income from continuing operations.
Net Revenues
Total consolidated net revenues (gross revenues less cost of sales) for the quarter ended June 30,
2010, were $732.0 million, a $50.2 million increase from the same period last year. This increase
in net revenues was primarily due to increased Electric Operations’ net revenues of $32.1 million,
increased Gas Distribution Operations’ net revenues of $17.3 million, and increased Gas
Transmission and Storage Operations’ net revenues of $8.2 million. Electric Operations’ net
revenues increased due primarily to increased industrial and residential margins of $21.7 million.
Additionally, there was a $5.1 million increase in environmental trackers that are partly offset in
operating expense. Gas Distribution Operations’ net revenues increased due primarily to an
increase of $23.2 million for regulatory and service programs and an increase of $13.4 million from
higher off-system sales. These increases in net revenues were partially offset by $8.5 million due
to the effects of warmer weather, a $5.7 million reserve related to a prior period contract, and
lower net regulatory and tax trackers of $3.4 million, which are offset in expense. Within Gas
Transmission and Storage Operations, net revenues increased primarily due to a $5.4 million
increase as a result of
54
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(continued)
NiSource Inc.
fees received from a contract buy-out, a $3.0 million increase from demand margin revenues, and a
$2.9 million increase from mineral rights leasing revenue. These were partially offset by a
decrease of $4.6 million due to shorter term transportation and storage services.
Expenses
Operating expenses for the second quarter 2010 were $593.2 million, an increase of $25.7 million
from the 2009 period. This increase was mainly due to higher employee and administration costs of
$13.0 million, higher other taxes of $11.2 million, primarily related to increased property tax,
and increased maintenance and outside service costs of $7.5 million.
Other Income (Deductions)
Interest expense decreased by $6.9 million primarily due to the December 2009 term loan repayment,
the maturity of November 2009 floating rate notes, and the tender offer repurchase of long-term
debt in April 2009 coupled with lower short-term interest rates, partially offset by incremental
interest expense associated with the issuance of December 2009 long-term debt and the effect of the
adoption of new accounting requirements related to the accounts receivable facilities. Other, net
increased $3.1 million for the second quarter of 2010 compared to the second quarter of 2009
primarily due to favorable AFUDC rates and a reclassification of interest expense related to the
adoption of new accounting requirements noted above.
Income Taxes
Income taxes for the second quarter of 2010 were $15.4 million, an increase of $6.2 million from
the second quarter of 2009, mainly attributable to higher pre-tax income. The effective tax rates
for the quarters ended June 30, 2010 and June 30, 2009 were 35.5% and 176.9%, 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
change in the effective tax rate in the second quarter of 2010 versus the second quarter of 2009 is
due to the second quarter of 2009 effective tax rate being significantly impacted by an adjustment
that increased deferred state income taxes as a result of the decision to wind down the unregulated
natural gas marketing business assets, as well as by an increase in tax expense due to certain
non-deductible expenses recorded in the second quarter of 2009. Refer to Note 13, “Income Taxes,”
in the Notes to the Condensed Consolidated Financial Statements (unaudited) for more detail about
income taxes.
Discontinued Operations
There was a $0.1 million gain in net income in the second quarter of 2010 from discontinued
operations compared to a net loss of $0.7 million in the second quarter of 2009. The loss in 2009
is primarily attributable to an adjustment to the reserve for litigation and adjustments from
businesses disposed of during 2008, including the dispositions of Northern Utilities and Granite
State Gas.
Results of Operations
Six Months Ended June 30, 2010
Net Income
NiSource reported net income of $225.4 million, or $0.81 per basic share, for the six months ended
June 30, 2010, compared to net income of $143.6 million, or $0.53 per basic share, for the first
six months of 2009. Income from continuing operations was $225.4 million, or $0.81 per basic
share, for the first six months ended June 30, 2010, compared to income from continuing operations
of $155.2 million, or $0.57 per basic share, for comparable 2009 period. Operating income was
$542.6 million, an increase of $82.7 million from the same period in 2009. All per share amounts
are basic earnings per share. Basic average shares of common stock outstanding at June 30, 2010
were 277.3 million compared to 274.4 million at June 30, 2009.
Comparability of line item operating results between quarterly periods was impacted by regulatory
and tax trackers that allow for the recovery in rates of certain costs such as bad debt expenses.
Therefore, increases in these tracked
55
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(continued)
NiSource Inc.
operating expenses are offset by increases in net revenues and had essentially no impact on income
from continuing operations.
Net Revenues
Total consolidated net revenues (gross revenues less cost of sales) for the six months ended June
30, 2010, were $1,804.4 million, a $56.2 million increase from the same period last year. This
increase in net revenues was primarily due to increased Electric Operations’ net revenues of $57.1
million and increased Gas Transmission and Storage Operations’ net revenues of $22.5 million. These
were partially offset by a decrease in Gas Distribution Operations’ net revenues of $14.0 million.
Electric Operations’ net revenues increased due to higher margins of $31.9 million primarily due to
increased industrial and residential margins. Additionally, there was an increase in off-system
sales of $11.8 million, including an adjustment of $9.0 million to reduce off-system sales in 2009
resulting from a FAC settlement. The remaining increase in net revenues is a result of a $9.5
million increase in environmental trackers that are partly offset in operating expense. Gas
Transmission and Storage Operations, net revenues increased due to a $13.7 million increase in
demand margin revenue and by $8.3 million related to recognition of revenue for a previously
deferred gain for native gas contributed to Hardy Storage Company from Columbia Transmission
following Hardy Storage securing permanent financing. Net revenues were also favorably impacted by
a $5.4 million increase due to fees received from a contract buy-out during the period. These
increases in net revenue were partially offset by a decrease of $5.7 million due to shorter term
transportation and storage services. Gas Distribution Operations’ net revenues decreased due
primarily to the impact of warmer weather of $14.2 million and decreases in net regulatory and tax
trackers of $13.5 million, which are offset in expense. Additionally, there was an approximately
$10.4 million decrease due to Columbia of Ohio’s change from a volumetrically based rate design to
one based on fixed monthly charges for certain customer classes. The revenue variance will be
offset in future periods as the change in rate design creates timing differences which spreads the
recovery of costs throughout the year. Net revenues were also negatively affected due to a $5.7
million reserve from a prior period contract, $5.1 million due to decreased commercial and
residential margins, and $5.0 million in forfeited discounts and late payments. The decreases in
net revenues were partially offset by an increase of $27.9 million for other regulatory and service
programs, including impacts from rate cases at various other utilities and the implementation of
new rates under Columbia of Ohio’s approved infrastructure replacement program. Additionally, there
was in increase in off-system sales of $12.1 million.
Other Income (Deductions)
Interest expense increased $1.4 million primarily due to incremental interest expense associated
with the issuance of $600 million in long-term debt in March of 2009, $500 million of long-term
debt in December of 2009 and the adoption of the new accounting requirements related to the
accounts receivable facilities. These items were partially offset by the $250.6 million tender
offer repurchase of long-term debt in April 2009, the floating rate maturity in November 2009 and
the term loan repayment in December 2009 coupled with lower short-term interest rates and
borrowings. Other, net, increased $9.9 million primarily due to favorable AFUDC rates and a
reclassification of interest expense related to the adoption of new accounting requirements noted
above.
Income Taxes
Income taxes for the first six months of 2010 were $125.2 million, an increase of $18.5 million
compared to the first six months of 2009, mainly attributable to higher pre-tax income. The
effective tax rates for the first six months of 2010 were 35.7% compared to 40.7% for the
comparable period last year. 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 decrease of 5.0% in the effective tax rate in 2010 versus
2009 is due to an increase in estimated Section 199 deductions as a result of higher projected
taxable income in 2010 versus 2009, a decrease in tax expense related
to AFUDC – Equity and the
regulatory treatment of certain depreciation differences, and the impact of state income tax
adjustments.
56
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(continued)
NiSource Inc.
Discontinued Operations
There was no impact to net income in 2010 from discontinued operations compared to a net loss of
$11.6 million in 2009. The loss in 2009 is primarily attributable to an adjustment to the reserve
for litigation and adjustments from businesses disposed of during 2008, including the dispositions
of Northern Utilities and Granite State Gas.
Liquidity and Capital Resources
A significant portion of NiSource’s operations, most notably in the gas distribution, gas
transportation and electric distribution businesses, are 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 and perform necessary maintenance of
facilities.
Operating Activities
Net cash from operating activities for the six months ended June, 2010 was $402.5 million, a
decrease of $837.3 million compared to the first six months of 2009. Gas price fluctuations and the
related approved rates for recovery significantly impacted working capital when comparing the two
periods. During the first six months of 2010 over-collected gas costs at December 31, 2009 were
returned to the customer and the six months ended in an under-recovered position resulting in a
$252.3 million use of working capital. Conversely, during the first six months of 2009,
under-collected gas costs at December 31, 2008 were collected from the customer resulting in a
$566.8 million source of working capital. Additionally, beginning January 1, 2010, transfers of
accounts receivable that previously qualified for sales accounting no longer qualify and are
accounted for as secured borrowings. Although there have been no changes in the operation of the
accounts receivable securitization programs, the application of the new accounting guidance
resulted in a reduction in cash from operations of $241.9 million.
Income Tax Refunds. In the third quarter of 2009, NiSource filed its consolidated federal income
tax return reflecting a significant tax loss primarily due to its change in method of accounting
related to capitalizing certain costs. Under the new tax accounting method, NiSource recorded
federal and state income tax receivables of $295.7 million. In 2009, $267.6 million of these
refunds were received. The majority of the remaining balance was received in the first six months
of 2010.
Tawney Settlement. NiSource’s share of the settlement liability is up to $338.8 million.
The Trial
Court entered its Order discharging the judgment on January 20, 2009 and is supervising the
administration of the settlement proceeds. As of June 30, 2010, NiSource had contributed a total
of $318.2 million into the qualified settlement fund, $277.3 million of which was contributed prior
to December 31, 2009. As of June 30, 2010, $20.6 million of the maximum settlement liability had
not been paid. The remaining balance of the letter of credit is sufficient to cover any remaining
payments under the Settlement Agreement. NiSource will be required to make additional payments,
pursuant to the settlement, upon notice from the Class Administrator. Refer to Part II, Item 1,
“Legal Proceedings,” for additional information.
Pension and Other Postretirement Plan Funding. NiSource expects to make contributions of
approximately $161.0 million to its pension plans and approximately $49.1 million to its
postretirement medical and life plans in 2010, which could change depending on market conditions.
For the six months ended June 30, 2010, NiSource contributed $1.7 million to its pension plans and
$28.0 million to its other postretirement benefit plans.
Investing Activities
NiSource’s capital expenditures for the six months ended June 30, 2010 were $336.9 million,
compared to $385.8 million for the first six months of 2009. Capital expenditures were delayed
somewhat during the first half of 2010 due primarily to weather. NiSource continues to project
2010 capital expenditures to be approximately $900 million.
57
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(continued)
NiSource Inc.
Restricted cash was $212.7 million and $174.7 million as of June 30, 2010 and December 31,
2009,
respectively. The increase in restricted cash was due primarily to the change in forward gas
prices which resulted in increased net margin deposits on open derivative contracts used within
NiSource’s risk management and energy marketing activities.
NiSource received insurance proceeds for capital repairs of $0.5 million and $54.6 million for the
first six months of 2010 and 2009, respectively, related to hurricanes and other incidents.
Financing Activities
Long-term Debt. Refer to Note 16, “Long-term debt,” in the Notes to Condensed Consolidated
Financial Statements (unaudited) for information on long-term debt.
Credit Facilities. NiSource Finance maintains a $1.5 billion five-year revolving credit
facility
with a syndicate of banks which has a termination date of July 7, 2011. NiSource currently intends
to negotiate a new credit facility prior to March 2011. This facility provides a reasonable cushion
of short-term liquidity for general corporate purposes including meeting cash requirements driven
by volatility in natural gas prices, as well as provides for the issuance of letters of credit.
During September 2008, NiSource Finance entered into an additional $500 million six-month revolving
credit agreement with a syndicate of banks led by Barclays Capital that was originally due to
expire on March 23, 2009. However, on February 13, 2009, the six-month credit facility was
terminated in conjunction with the closing of a new two-year bank term loan. The two year term
loan was subsequently repaid in December 2009 with proceeds from the December 4, 2009, $500.0
million debt offering.
NiSource Finance had $73.5 million in outstanding borrowings on its five-year revolving credit
facility at June 30, 2010, at a weighted average interest rate of 0.73%, and borrowings of $103.0
million at December 31, 2009, at a weighted average interest rate of 0.59%.
As of June 30, 2010, NiSource had $139.3 million of short-term borrowings recorded on the Condensed
Consolidated Balance Sheets (unaudited) and cash from financing activities in the same amount
relating to its accounts receivable securitization facilities. See Note 11, Transfers of Financial
Assets.
As of June 30, 2010 and December 31, 2009, NiSource had $41.5 million and $85.0 million,
respectively, of stand-by letters of credit outstanding under its five-year revolving credit
facility. 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.
As of June 30, 2010, an aggregate of $1,385.0 million of credit was available under the credit
facility.
Sale of Trade Accounts Receivables. Refer to Note 11, “Transfers of financial assets,”
in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on the
sale of accounts receivable.
All accounts receivables sold to the commercial paper conduits are valued at face value, which
approximates fair value due to their short-term nature. The amount of the undivided percentage
ownership interest in the accounts receivables sold is determined, in part, by required loss
reserves under the agreements.
Credit Ratings. On March 30, 2010, Standard and Poor’s affirmed its senior unsecured
ratings for
NiSource and its subsidiaries at BBB-. Standard and Poor’s outlook for NiSource and all of its
subsidiaries is stable. On December 15, 2009, Fitch affirmed the senior unsecured ratings for
NiSource at BBB-, and the existing ratings of all other subsidiaries. Fitch’s outlook for NiSource
and all of its subsidiaries is stable. On November 24, 2009, Moody’s Investors Service affirmed
the senior unsecured ratings for NiSource at Baa3, and the existing ratings of all other
subsidiaries, and revised the outlook to stable from negative. Although all ratings continue to be
investment grade, a downgrade by Standard and Poor’s, Moody’s or Fitch would result in a rating
that is below investment grade.
58
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(continued)
NiSource Inc.
Certain NiSource affiliates have agreements that contain “ratings triggers” that require increased
collateral if the credit ratings of NiSource or certain of its subsidiaries are rated below BBB- by
Standard and Poor’s or Baa3 by Moody’s. These agreements are primarily for insurance purposes and
for the physical purchase or sale of electricity. The collateral requirement from a downgrade
below the ratings trigger levels would amount to approximately $21.1 million. In addition to
agreements with ratings triggers, there are other agreements that contain “adequate assurance” or
“material adverse change” provisions that could necessitate additional credit support such as
letters of credit and cash collateral to transact business. Under Northern Indiana’s trade
receivables sales program, an event of termination occurs if Northern Indiana’s debt rating is
withdrawn by either Standard and Poor’s or Moody’s, or falls below BB or Ba2 at either Standard and
Poor’s or Moody’s, respectively. Likewise, under Columbia of Ohio’s and Columbia of Pennsylvania’s
trade receivables sales programs, an event of termination occurs if NiSource’s debt rating is
withdrawn by either Standard and Poor’s or Moody’s, or falls below BB- or Ba3 at either Standard
and Poor’s or Moody’s, respectively.
Contractual Obligations. There were no material changes recorded in the first half of
2010 to NiSource’s uncertain tax positions recorded as of December 31, 2009.
Market Risk Disclosures
Risk is an inherent part of NiSource’s 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 NiSource’s 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. NiSource’s 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, NiSource’s 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 NiSource’s 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, NiSource’s 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 NiSource’s 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 NiSource’s 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.
Interest Rate Risk
NiSource is exposed to interest rate risk as a result of changes in interest rates on borrowings
under its revolving credit agreement and accounts receivable programs, 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
59
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(continued)
NiSource Inc.
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 $3.3 million and $6.6 million for the quarter and six months ended June 30, 2010,
respectively, and $4.5 million and $10.0 million for the quarter and six months ended June 30,
2009, respectively.
Credit Risk
Due to the nature of the industry, credit risk is embedded in many of NiSource’s business
activities. NiSource’s extension of credit is governed by a Corporate Credit Risk Policy. In
addition, Risk Management Committee guidelines are in place which document management approval
levels for credit limits, evaluation of creditworthiness, and credit risk mitigation efforts.
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 related contracts, credit risk arises when counterparties are
obligated to deliver or purchase defined commodity units of gas or power to NiSource at a future
date per execution of contractual terms and conditions. Exposure to credit risk is measured in
terms of both current obligations and the market value of forward positions net of any posted
collateral such as cash, letters of credit and qualified guarantees of support.
As a result of the ongoing credit crisis in the financial markets, NiSource has been closely
monitoring the financial status of its banking credit providers and interest rate swap
counterparties. NiSource continues to evaluate the financial status of its banking partners
through the use of market-based metrics such as credit default swap pricing levels, and also
through traditional credit ratings provided by the major credit rating agencies.
The parent company of one of NiSource’s interest rate swap counterparties, Lehman Brothers Holdings
Inc., filed for Chapter 11 bankruptcy protection on September 14, 2008, which constituted an event
of default under the swap agreement between NiSource Finance and Lehman Brothers Special Financing
Inc. As a result, on September 15, 2008, NiSource Finance terminated the fixed-to-variable
interest rate swap agreement with Lehman Brothers having a notional value of $110 million. The
mark-to-market close-out value of this swap at the September 15, 2008 termination date was
determined to be $4.8 million and was fully reserved in the third quarter of 2008.
NiSource also reviewed its exposure to all other counterparties including the other interest rate
swap counterparties and concluded there was no significant risk associated with these
counterparties. NiSource will continue to closely monitor events in the credit markets, as well as
overall economic conditions in the nation and the markets it serves.
Fair Value Measurement
NiSource measures certain financial assets and liabilities at fair value. The level of the fair
value hierarchy disclosed is based on the lowest level of input that is significant to the fair
value measurement. NiSource’s financial assets and liabilities include price risk assets and
liabilities, available-for-sale securities and a deferred compensation plan obligation.
Exchange-traded derivative contracts are generally based on unadjusted quoted prices in active
markets and are classified within Level 1. These financial assets and liabilities are secured with
cash on deposit with the exchange; therefore nonperformance risk has not been incorporated into
these valuations. 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.
NiSource 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
60
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(continued)
NiSource Inc.
instrument is categorized in Level 3. Credit risk is considered in the fair value calculation of
derivative instruments that are not exchange-traded. Credit exposures are adjusted to reflect
collateral agreements which reduce exposures.
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. Credit risk is considered in the fair value
calculation of the interest rate swap.
Refer to Note 10, “Fair Value Disclosures,” in the Notes to the Condensed Consolidated Financial
Statements for additional information on NiSource’s fair value measurements.
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 utilizes a variance/covariance methodology. The
daily market exposure for the gas marketing portfolio on an average, high and low basis was $0.1
million, $0.1 million and zero for the second quarter of 2010, 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.
Refer to “Critical Accounting Policies” included in this Item and Note 9, “Risk Management
Activities,” in the Notes to Condensed Consolidated Financial Statements (unaudited) for further
discussion of NiSource’s 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 $368.7 million of commodity-related
payments for its current and former subsidiaries involved in energy marketing activities. 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 (unaudited).
NiSource has purchase and sales agreement guarantees totaling $30.0 million, which guarantee
performance of the seller’s 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 (unaudited). 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 other guarantees outstanding. Refer to Note 19-A, “Guarantees and Indemnities,” in
the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information
about NiSource’s off balance sheet arrangements.
61
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(continued)
NiSource Inc.
Other Information
Critical Accounting Policies
Goodwill. NiSource’s goodwill assets at June 30, 2010 were $3,677.3 million, most of
which resulted from the acquisition of Columbia on November 1, 2000. The goodwill balance also
includes $13.3 million for Northern Indiana Fuel and Light and $5.5 million for Kokomo Gas. As
required, NiSource tests for impairment of goodwill on an annual basis and on an interim basis when
events or circumstances indicate that a potential impairment may exist. NiSource’s annual goodwill
test takes place in the second quarter of each year and was most recently finalized as of June 30,
2010. The fair value of each reporting unit substantially exceeded the carrying value based on
this impairment test. Refer to Note 12, “Goodwill Assets,” in the Notes to Condensed Consolidated
Financial Statements (unaudited) for additional information concerning NiSource’s annual goodwill
test.
Recently Adopted Accounting Pronouncements
Refer to Note 2, “Recent Accounting Pronouncements,” in the Notes to Condensed Consolidated
Financial Statements (unaudited).
International Financial Reporting Standards
On November 14, 2008, the SEC issued a proposed IFRS “road map” which outlined several milestones
that need to be addressed prior to making the adoption to IFRS mandatory by U.S. filers. In
February 2010, the SEC released a statement supporting a single set of high quality globally
acceptable accounting standards, but acknowledged issues raised in the road map comment process.
The SEC is expected to provide an update on progress towards IFRS adoption preconditions and to
make a determination in 2011 about whether to require mandatory adoption of IFRS for all U.S.
issuers. According to the SEC’s recent announcements, large accelerated filers, including NiSource,
could be required to file IFRS financial statements in 2015.
The accounting differences between U.S. GAAP and IFRS are complex and significant in many aspects,
and conversion to IFRS would have broad impacts across NiSource. In addition to financial
statement and disclosure changes, converting to IFRS would involve changes to processes and
controls, regulatory and management reporting, financial reporting systems, and most areas of the
organization. NiSource began a comprehensive evaluation in the third quarter of 2010 to analyze
the requirements and impacts of converting to IFRS.
2010 Health Care Act
The 2010 Health Care Act includes a provision eliminating, effective January 1, 2013, the tax
deductibility of retiree health care costs to the extent of federal subsidies received under the
Retiree Drug Subsidy program. When the Retiree Drug Subsidy was created by the Medicare
Prescription Drug, Improvement and Modernization Act of 2003, NiSource recorded a deferred tax
asset reflecting the exclusion of the expected future Retiree Drug Subsidy from taxable income. At
the same time, an offsetting regulatory liability was established to reflect NiSource’s obligation
to reduce income taxes collected in future rates. ASC Topic 740 — Income Taxes requires the
impact of a change in tax law to be immediately recognized in continuing operations in the income
statement for the period that includes the enactment date. In the first quarter of 2010, NiSource
reversed its deferred tax asset of $6.2 million related to previously excludable Retiree Drug
Subsidy payments expected to be received after January 1, 2013, which was completely offset by the
reversal of the related regulatory liability. There was no impact on income tax expense recorded
in the Condensed Statements of Consolidated Income (unaudited) for the second quarter of 2010.
A provision of the 2010 Health Care Act requires the elimination, effective January 1, 2011, of
lifetime and restrictive annual benefit limits from certain medical plans. The NiSource Life and
Medical Benefits Program covers both active and retired individuals and caps lifetime benefits to
certain retirees. NiSource examined the provisions of the 2010 Health Care Act and determined the
enactment of the law in the first quarter of 2010 qualified as a significant event requiring
remeasurement of the other postretirement benefit obligation and plan assets as of March 31, 2010.
The remeasurement resulted in an increase to the other postretirement benefit obligation, net of
plan assets, of $39.7 million and corresponding increases to regulatory assets and AOCI of $35.7
million and $4.0 million, respectively. Net periodic postretirement benefit cost for 2010 will
increase by approximately $4.0 million, $1.3 million of which was recognized during second quarter
2010. All significant
62
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(continued)
NiSource Inc.
actuarial assumptions used in the remeasurement remained the same as the December 31, 2009
valuation. During second quarter 2010 the Department of the Treasury, the Department of Labor, and
the Department of Health and Human Services provided clarification of the provisions of the 2010
Health Care Act which indicated the legislation does not apply to retiree-only medical plans.
NiSource continues to evaluate the structure of its medical plan in light of the new guidance.
63
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(continued)
NiSource Inc.
RESULTS AND DISCUSSION OF SEGMENT OPERATIONS
Presentation of Segment Information
NiSource’s operations are divided into three primary business segments; Gas Distribution
Operations, Gas Transmission and Storage Operations, and Electric Operations.
In prior period filings, NiSource included a fourth segment, Other Operations, which primarily
included ventures focused on its unregulated natural gas marketing business and distributed power
generation technologies, including fuel cells and storage systems. In 2009, NiSource made a
decision to wind down the unregulated natural gas marketing activities which is a part of the
company’s long-term strategy of focusing on its core regulated businesses. As this segment’s
business activities continue to decrease, the chief operating decision maker no longer views it
separately. As such, the business activities for Other Operations have been included within
Corporate and Other for all periods presented, and are no longer reported as a separate segment and
therefore not discussed in this Management’s Discussion and Analysis of Financial Conditions of
Operations.
64
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(continued)
NiSource Inc.
Gas Distribution Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| (in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
| |
Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Revenues |
|
$ |
554.7 |
|
|
$ |
557.5 |
|
|
$ |
2,105.9 |
|
|
$ |
2,512.8 |
|
Less: Cost of gas sold
(excluding depreciation and
amortization) |
|
|
255.5 |
|
|
|
275.6 |
|
|
|
1,197.5 |
|
|
|
1,590.4 |
|
| |
Net Revenues |
|
|
299.2 |
|
|
|
281.9 |
|
|
|
908.4 |
|
|
|
922.4 |
|
| |
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation and maintenance |
|
|
184.8 |
|
|
|
187.4 |
|
|
|
443.0 |
|
|
|
456.7 |
|
Depreciation and amortization |
|
|
63.4 |
|
|
|
62.9 |
|
|
|
125.9 |
|
|
|
123.3 |
|
Other taxes |
|
|
32.5 |
|
|
|
27.7 |
|
|
|
85.9 |
|
|
|
95.3 |
|
| |
Total Operating Expenses |
|
|
280.7 |
|
|
|
278.0 |
|
|
|
654.8 |
|
|
|
675.3 |
|
| |
Operating Income |
|
$ |
18.5 |
|
|
$ |
3.9 |
|
|
$ |
253.6 |
|
|
$ |
247.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues ($ in Millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
295.7 |
|
|
|
337.7 |
|
|
|
1,193.5 |
|
|
|
1,753.1 |
|
Commercial |
|
|
88.9 |
|
|
|
112.4 |
|
|
|
405.1 |
|
|
|
610.8 |
|
Industrial |
|
|
37.6 |
|
|
|
44.9 |
|
|
|
114.6 |
|
|
|
144.1 |
|
Off System |
|
|
87.3 |
|
|
|
57.4 |
|
|
|
171.9 |
|
|
|
132.8 |
|
Other |
|
|
45.2 |
|
|
|
5.1 |
|
|
|
220.8 |
|
|
|
(128.0) |
|
| |
Total |
|
|
554.7 |
|
|
|
557.5 |
|
|
|
2,105.9 |
|
|
|
2,512.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Transportation (MMDth) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
25.9 |
|
|
|
32.6 |
|
|
|
155.2 |
|
|
|
165.2 |
|
Commercial |
|
|
23.2 |
|
|
|
23.4 |
|
|
|
96.0 |
|
|
|
101.4 |
|
Industrial |
|
|
85.1 |
|
|
|
74.0 |
|
|
|
186.0 |
|
|
|
170.6 |
|
Off System |
|
|
27.2 |
|
|
|
13.9 |
|
|
|
43.1 |
|
|
|
30.1 |
|
Other |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.7 |
|
|
|
0.5 |
|
| |
Total |
|
|
161.6 |
|
|
|
144.1 |
|
|
|
481.0 |
|
|
|
467.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating Degree Days |
|
|
408 |
|
|
|
574 |
|
|
|
3,298 |
|
|
|
3,524 |
|
Normal Heating Degree Days |
|
|
608 |
|
|
|
608 |
|
|
|
3,508 |
|
|
|
3,508 |
|
% (Warmer) Colder than Normal |
|
|
(33%) |
|
|
|
(6%) |
|
|
|
(6%) |
|
|
|
0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
|
|
|
|
|
|
|
|
3,003,035 |
|
|
|
2,987,144 |
|
Commercial |
|
|
|
|
|
|
|
|
|
|
275,246 |
|
|
|
274,871 |
|
Industrial |
|
|
|
|
|
|
|
|
|
|
7,707 |
|
|
|
7,861 |
|
Other |
|
|
|
|
|
|
|
|
|
|
81 |
|
|
|
80 |
|
| |
Total |
|
|
|
|
|
|
|
|
|
|
3,286,069 |
|
|
|
3,269,956 |
|
| |
NiSource’s 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.
65
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(continued)
NiSource Inc.
Gas Distribution Operations (continued)
Bear Garden Station
Columbia of Virginia has entered into an agreement with Dominion Virginia Power to install
facilities to serve a 580 mw combined cycle generating station in Buckingham County, VA, known as
the Bear Garden station. The project requires approximately 13.3 miles of 24-inch steel pipeline
and associated facilities to serve the station. In March 2009, the VSCC approved Dominion Virginia
Power Company’s planned Bear Garden station. Bear Garden station was placed into service in July
2010 and the project was on schedule and under budget.
Regulatory Matters
Refer to Note 8, “Regulatory Matters,” in the Notes to Condensed Consolidated Financial Statements
(unaudited) for information on significant rate developments and cost recovery and trackers
for the Gas Distribution Operations segment.
Customer Usage. The NiSource distribution companies have experienced declining usage by customers,
due in large part to the sensitivity of sales to volatility in commodity prices, as well as
general economic conditions. 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.
During times of unusually high gas prices, throughput and net revenue have been adversely
affected as customers may reduce their usage as a result of higher gas cost or other economic
conditions. Columbia of Ohio restructured its rate design through a base rate proceeding and
has adopted a “de-coupled” rate design which more closely links the recovery of fixed costs
with fixed charges. In regulatory proceedings in 2009, Bay State and Columbia of Virginia
received approval of decoupling mechanisms which adjust revenues to an approved benchmark
level through a volumetric adjustment factor. Each of the states in which the NiSource LDCs
operate have different requirements regarding the procedure for establishing such changes and
NiSource is considering similar changes through regulatory proceedings for its other gas
distribution utilities.
Environmental Matters
Various environmental matters occasionally impact the Gas Distribution Operations segment. As of
June 30, 2010, a reserve has been recorded to cover probable environmental response actions. Refer
to Note 19-C, “Environmental Matters,” in the Notes to Condensed Consolidated Financial Statements
(unaudited) for additional information regarding environmental matters for the Gas Distribution
Operations segment.
Restructuring
Refer to Note 4, “Restructuring Activities,” in the Notes to Condensed Consolidated Financial
Statements (unaudited) for information on restructuring activities for the Gas Distribution
Operations segment.
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 65
degrees. NiSource composite heating degree-days reported do not directly correlate to the weather
related dollar impact on the results of Gas Distribution operations. Heating degree-days
experienced during different times of the year or in different operating locations may have more or
less impact on volume and dollars depending on when and where they occur. When the detailed
results are combined for reporting, there may be weather related dollar impacts on operations when
there is not an apparent or significant change in the aggregated NiSource composite heating
degree-day comparison.
Weather in the Gas Distribution Operation’s territories for the second quarter of 2010 was 33%
warmer than normal and 29% warmer than the second quarter in 2009.
Weather in the Gas Distribution Operation’s territories for the first six months of 2010 was 6%
warmer than normal and 6% warmer compared to the same period in 2009.
66
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(continued)
NiSource Inc.
Gas Distribution Operations (continued)
Throughput
Total volumes sold and transported of 161.6 MMDth for the second quarter of 2010 increased by 17.5
MMDth from the same period last year. This increase in volume was primarily due to higher
industrial usage and off-system sales, partially offset by a decrease in residential usage.
Total volumes sold and transported of 481.0 MMDth for the first six months of 2010 increased by
13.2 MMDth from the same period last year. This increase in volume was primarily due to higher
industrial usage and off-system sales, partially offset by a decrease in residential usage.
Net Revenues
Net revenues for the second quarter of 2010 were $299.2 million, an increase of $17.3 million from
the same period in 2009, due primarily to an increase of $23.2 million for regulatory and service
programs, including approximately $10.4 million due to the impact for Columbia of Ohio’s change
from a volumetrically based rate design to one based on fixed monthly charges for certain customer
classes. The favorable impact experienced in the current quarter from the change in the rate design
partially offsets the unfavorable impact from the first quarter of 2010. The remaining increase for
regulatory and service programs relates to impacts from rate cases at various utilities and the
implementation of new rates under Columbia of Ohio’s approved infrastructure replacement program.
Net revenues also increased $13.4 million from higher off-system sales. These increases in net
revenues were partially offset by $8.5 million due to the effects of warmer weather, $5.7 million
for a reserve related to a prior period contract, and lower net regulatory and tax trackers of $3.4
million, which are offset in expense.
At Northern Indiana, sales revenues and customer billings are adjusted for amounts related to under
and over-recovered purchased gas costs from prior periods per regulatory order. These amounts are
primarily reflected in the “Other” gross revenues statistic provided at the beginning of this
segment discussion. The adjustment to Other gross revenues for the three and six months ended June
30, 2010 was a revenue decrease of $6.9 million and an increase of $113.9 million, respectively,
compared to a decrease of $26.6 million and $209.0 million for the three and six months ended June
30, 2009, respectively.
Net revenues for the six months ended June 30, 2010 were $908.4 million, a decrease of $14.0
million from the same period in 2009, due primarily to the impact of warmer weather of $14.2
million and decreases in net regulatory and tax trackers of $13.5 million, which are offset in
expense. Additionally, there was an approximately $10.4 million decrease due to Columbia of Ohio’s
change from a volumetrically based rate design to one based on fixed monthly charges for certain
customer classes. The revenue variance will be offset in future periods as the change in rate
design creates timing differences which spreads the recovery of costs throughout the year. Net
revenues were also negatively affected due to a $5.7 million reserve from a prior period contract,
$5.1 million due to decreased commercial and residential margins, and $5.0 million in forfeited
discounts and late payments. The decreases in net revenues were partially offset by an increase of
$27.9 million for other regulatory and service programs, including impacts from rate cases at
various other utilities and the implementation of new rates under Columbia of Ohio’s approved
infrastructure replacement program. Additionally, there was an increase in off-system sales of
$12.1 million.
Operating Income
For the second quarter of 2010, Gas Distribution Operations reported operating income of $18.5
million, an increase of $14.6 million from the comparable 2009 period. Operating Income increased
as a result of higher net revenues described above, partially offset by higher operating expenses.
Operating expenses increased $2.7 million due to an increase in other taxes, primarily property
tax, of $4.8 million and an increase in employee and administration costs of $3.9 million. These
increases in operating expenses were partially offset by a
$4.9 million decrease in regulatory trackers, which
are offset in revenues, and a $3.1 million decrease in uncollectible accounts.
67
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(continued)
NiSource Inc.
Gas Distribution Operations (continued)
For the six months ended June 30, 2010, Gas Distribution Operations reported operating income of
$253.6, an increase of $6.5 million from the comparable 2009 period. The increase in operating
income was primarily attributable to lower operating expenses which was partially offset by the
decrease in revenue described above. Operating expenses decreased $20.5 million due primarily to
lower tax and regulatory trackers, offset in net revenues, of $13.5 million, a decrease in
uncollectible accounts of $3.9 million, and lower environmental costs of $2.8 million.
68
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Gas Transmission and Storage Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| (in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
| |
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation revenues |
|
$ |
161.7 |
|
|
$ |
159.8 |
|
|
$ |
358.9 |
|
|
$ |
354.3 |
|
Storage revenues |
|
|
49.7 |
|
|
|
48.2 |
|
|
|
99.1 |
|
|
|
93.4 |
|
Other revenues |
|
|
5.9 |
|
|
|
1.1 |
|
|
|
15.9 |
|
|
|
3.7 |
|
| |
Total Operating Revenues |
|
|
217.3 |
|
|
|
209.1 |
|
|
|
473.9 |
|
|
|
451.4 |
|
| |
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation and maintenance |
|
|
96.4 |
|
|
|
82.8 |
|
|
|
188.2 |
|
|
|
195.3 |
|
Depreciation and amortization |
|
|
31.5 |
|
|
|
30.2 |
|
|
|
63.0 |
|
|
|
59.6 |
|
Gain on sale of assets |
|
|
- |
|
|
|
- |
|
|
|
(0.1 |
) |
|
|
(2.0 |
) |
Other taxes |
|
|
14.9 |
|
|
|
13.9 |
|
|
|
29.8 |
|
|
|
29.8 |
|
| |
Total Operating Expenses |
|
|
142.8 |
|
|
|
126.9 |
|
|
|
280.9 |
|
|
|
282.7 |
|
| |
Equity Earnings in Unconsolidated Affiliates |
|
|
0.4 |
|
|
|
(2.6 |
) |
|
|
7.8 |
|
|
|
3.8 |
|
| |
Operating Income |
|
$ |
74.9 |
|
|
$ |
79.6 |
|
|
$ |
200.8 |
|
|
$ |
172.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput (MMDth) * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Columbia Transmission |
|
|
171.5 |
|
|
|
170.1 |
|
|
|
559.0 |
|
|
|
578.5 |
|
Columbia Gulf |
|
|
197.1 |
|
|
|
244.1 |
|
|
|
400.0 |
|
|
|
513.2 |
|
Crossroads Gas Pipeline |
|
|
5.6 |
|
|
|
8.8 |
|
|
|
13.7 |
|
|
|
17.4 |
|
Intrasegment eliminations |
|
|
(142.6 |
) |
|
|
(156.6 |
) |
|
|
(281.6 |
) |
|
|
(328.8 |
) |
| |
Total |
|
|
231.6 |
|
|
|
266.4 |
|
|
|
691.1 |
|
|
|
780.3 |
|
| |
* Represents billed throughput for all periods presented
NiSource’s Gas Transmission and Storage Operations segment primarily consists of the operations of
Columbia Transmission, Columbia Gulf, Crossroads Pipeline, and Central Kentucky Transmission. In
total, NiSource owns a pipeline network of approximately 16,000 miles extending from 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 Gas Transmission and Storage Operations segment operates one of the nation’s
largest underground natural gas storage systems.
During 2010, Gas Transmission and Storage Operations most significant projects are as follows:
Cobb Compressor Station Project. This project continues the Gas Transmission and Storage
Operations segment strategy to meet producers’ near-term, incremental transportation demand in the
Appalachian Basin. Shippers have also executed precedent agreements for a total of approximately
25,500 Dth per day of long-term firm transportation service associated with a facility expansion at
Cobb Compressor Station in Kanawha County, West Virginia. The Cobb Expansion was placed into
service on May 17, 2010.
Majorsville, PA Project. The Gas Transmission and Storage Operations segment is in the process of
executing three separate projects totaling approximately $80 million in the Majorsville, PA
vicinity to aggregate Marcellus Shale gas production for downstream transmission. Precedent
agreements were executed by anchor shippers in the fourth quarter of 2009. In 2010, Columbia
Transmission filed with the FERC two application to transfer certain pipeline facilities to a newly
formed affiliate, NiSource Midstream, LLC, that, once approved, will be part of the facilities
providing non-FERC jurisdiction gathering services to producers in the Majorsville, PA vicinity.
The Majorsville, PA project is expected to begin service during the third quarter 2010.
Clendenin Project. Construction is currently under way to modify existing facilities in the
Clendenin area in West Virginia to move Marcellus production to liquid market centers. The
Clendenin project allows Gas Transmission
and Storage to meet incremental demand of up to 150,000 Dth per day. Long term firm transportation
contracts for
69
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Gas Transmission and Storage Operations (continued)
130,000 Dth have been executed to begin third quarter 2010 and second quarter 2011.
Total capital required for the Clendenin project is approximately $18 million.
East Lateral Project. Gas Transmission and Storage is in the process of executing a $4.2 million
project that, with modification of existing facilities on the Columbia Gulf East Lateral, allows it
to provide firm transportation services for up to 300,000 Dth per day. Firm transportation
contracts to transport up to 250,000 Dth per day of unprocessed gas to a processing plant in
Centerville, Louisiana have been executed for five-year terms. Gas Transmission and Storage
requested FERC approval to complete this project in an application filed in May 2010 and service is
expected to commence by the third quarter 2010.
During 2009, Gas Transmission and Storage Operations placed a number of projects into service. The
Line 1570 project allowed Columbia Transmission to gather and transport phased in gas volumes of up
to 150,000 Dth per day in October 2008 and March 2009, with facilities substantially completed and
incremental volumes delivered in fourth quarter of 2009 and during 2010. The Columbia Penn project
provided phased in access to pipeline capacity in conjunction with production increases in the
Marcellus Shale formation that underlies Columbia Transmission’s transmission and storage network
in the region in February and November 2009. The Eastern Market Expansion project allowed Columbia
Transmission to expand its facilities to provide additional storage and transportation services and
to replace certain existing facilities, adding 97,000 Dth per day of storage and transportation
deliverability beginning on April 1, 2009. The Ohio Storage project expanded two Ohio storage
fields, adding capacity of nearly 7 Bcf and 103,400 Dth per day of deliverability beginning in May
2009 with full service achieved during the fourth quarter of 2009 under FERC authorized
market-based rates. The Appalachian Expansion project included a new compressor station and added
100,000 Dth per day of transportation capacity beginning on July 1, 2009. The Easton Compressor
Station project increased delivery capacity of 30,000 Dth per day commencing in the fourth quarter
of 2009. The Eastern Market Expansion, Ohio Storage, and Appalachian Expansion projects are all
fully subscribed on a firm basis.
Equity Investments
Millennium Pipeline. Columbia Transmission owns a 47.5% interest in Millennium Pipeline Company,
L.L.C., which operates approximately 247 miles of pipeline granted under the authority of the FERC.
Columbia Transmission acts as operator for the pipeline in partnership with DTE Millennium Company
and National Grid Millennium LLC, which each own an equal remaining share of the company. The
Millennium pipeline has the capability to transport up to 525,400 Dth per day of natural gas to
markets along its route, which lies between Corning, New York and Ramapo, New York, as well as to
the New York City market through its pipeline interconnections.
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. As of June 30, 2010, Millennium owed $798.9 million under the interim bank credit
agreement, which expires August 29, 2010. During construction in 2008, Millennium entered into
interest rate swap agreements with seven counterparties for a notional amount totaling $420 million
in order to protect against the risk of increasing interest rates prior to the issuance of
permanent financing. These interest rate swap derivatives are primarily accounted for as cash flow
hedges by Millennium, with ineffectiveness recorded in earnings. On July 20, 2010 Millennium
completed pricing on two tranches of fixed-rate notes in the private placement market totaling $725
million, and the associated interest rate swaps were terminated. Millennium will issue the notes,
settle the interim financing, terminate the sponsor guarantee, and cash settle the interest rate
hedges on August 26, 2010. Additional information on the guarantee is provided in Note 19-A,
“Guarantees and Indemnities,” in the Notes to Condensed Consolidated Financial Statements.
70
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Gas Transmission and Storage Operations (continued)
Columbia Transmission contributed cash and property to Millennium of $0.7 million and $20.2 million
for the six months ended June 30, 2010 and 2009, respectively.
Hardy Storage. Hardy Storage is a joint venture between subsidiaries of Columbia Transmission and
Piedmont that manages an underground storage field in Hardy and Hampshire counties in West
Virginia. Columbia Transmission
serves as operator of the company, which is regulated by the FERC. Hardy Storage has a working
storage capacity of 12 Bcf and the ability to deliver 176,000 Dth of natural gas per day.
During the first quarter 2010, Hardy Storage converted its outstanding borrowings of $123.4 million
under its temporary financing agreement to a secured permanent financing. As a result, Columbia
Transmission was released from its underlying guarantee. Additional information on this guarantee
is provided in Note 19-A, “Guarantees and Indemnities,” in the Notes to Condensed Consolidated
Financial Statements.
Hardy Storage distributed $7.9 million of earnings to each of its partners during the second
quarter 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, 2010, approximately 91.7% of the
transportation revenues were derived from capacity reservation fees paid under firm contracts and
4.7% of the transportation revenues were derived from usage fees under firm contracts. This is
compared to approximately 89.7% of the transportation revenues derived from capacity reservation
fees paid under firm contracts and 4.8% of transportation revenues derived from usage fees under
firm contracts for the six months ended June 30, 2009.
Interruptible transportation service includes park and loan service and 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, 2010 and 2009,
approximately 3.6% and 5.5%, respectively, of the transportation revenues were derived from
interruptible contracts.
Regulatory Matters
Refer to Note 8, “Regulatory Matters,” in the Notes to Condensed Consolidated Financial Statements
(unaudited) for information on regulatory matters for the Gas Transmission and Storage
Operations segment.
Environmental Matters
Various environmental matters occasionally impact the Gas Transmission and Storage Operations
segment. As of June 30, 2010, a reserve has been recorded to cover probable environmental response
actions. Refer to Note 19-C,
71
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Gas Transmission and Storage Operations (continued)
“Environmental Matters,” in the Notes to Condensed Consolidated
Financial Statements (unaudited) for additional information regarding environmental matters for the
Gas Transmission and Storage Operations segment.
Restructuring
Refer to Note 4, “Restructuring Activities,” in the Notes to Condensed Consolidated Financial
Statements (unaudited) for information on restructuring activities for the Gas Transmission and
Storage Operations segment.
Throughput
Columbia Transmission’s throughput consists of city gate deliveries of transportation and storage
services for LDCs and other customers within its market area, which covers portions of
Northeastern, mid-Atlantic, Midwestern, and Southern states and the District of Columbia.
Throughput for Columbia Gulf reflects mainline transportation
services delivered to Leach, Kentucky and short-haul transportation services for gas delivered
south of Leach, Kentucky. Crossroads Pipeline serves customers in Northern Indiana and Ohio.
Intra-segment eliminations represent gas delivered to another affiliated pipeline within this
segment.
Throughput for the Gas Transmission and Storage Operations segment totaled 231.6 MMDth for the
second quarter of 2010, compared to 266.4 MMDth for the same period in 2009. The decrease of 34.8
MMDth for the three-month period was attributable to impacts of competition driven from other
pipelines constructed near Columbia Gulf’s south Louisiana onshore lateral system partially offset
by increased transportation of production from the
Haynesville and Barnett shale areas. Columbia Transmission also had slightly higher deliveries to
power generation plants to satisfy cooling demand during a warmer than normal spring and early
summer.
Throughput for the Gas Transmission and Storage Operations segment totaled 691.1 MMDth for the
first six months of 2010, compared to 780.3 MMDth for the same period in 2009. The decrease of
89.2 MMDth was primarily due to a significant level of competing pipelines constructed over this
timeframe near Columbia Gulf’s system. Increased production in the Marcellus shale region as well
as increasing capacity for LNG to reach the Northeast have contributed to Columbia Gulf’s
throughput decline by displacing gas previously transported by Columbia Gulf to Columbia
Transmission. These decreases have been partially offset by increased transportation of production
from the Haynesville and Barnett shale areas and favorable spring and early summer weather.
Net Revenues
Net revenues were $217.3 million for the second quarter of 2010, an increase of $8.2 million from
the same period in 2009, primarily due to a $5.4 million increase as a result of fees received from
a contract buy-out, a $3.0 million increase from demand margin revenue, and a $2.9 million increase
from mineral rights leasing revenue. These were partially offset by a
decrease of $4.6 million due to
shorter term transportation and storage services.
Net revenues were $473.9 million for the first six months of 2010, an increase of $22.5 million
from the same period in 2009, primarily due to a $13.7 million increase in demand margin revenue
and by $8.3 million related to recognition of revenue for a previously deferred gain for native gas
contributed to Hardy Storage Company from Columbia Transmission following Hardy Storage securing
permanent financing. Net revenues were also favorably impacted by $5.4 million of fees received
from a contract buy-out during the period. These increases in net revenue were partially offset by
a decrease of $5.7 million due to shorter term transportation and storage services.
Operating Income
Operating income was $74.9 million for the second quarter of 2010, a decrease of $4.7 million from
the second quarter of 2009. This decrease is primarily due to increased operating expenses of
$15.9 million. Operating expenses increased as a result of increased employee and administration
costs of $7.4 million, higher maintenance and outside service expenses of $7.0 million, and
increased materials and supplies expenses of $2.2 million. These decreases to operating income were
partially offset by the increase in net revenues described above and $2.9 million in increased
investment earnings in Millennium due primarily to lower interest charges in 2010.
72
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Gas Transmission and Storage Operations (continued)
Operating income was $200.8 million for the first six months of 2010, an increase of $28.3 million
from the comparable period in 2009. Operating income increased as a result of the increase in net
revenues, as described above, as well as lower operating expenses and higher equity earnings.
Operating expenses decreased $1.8 million primarily due to restructuring charges of $19.8 million
recorded in the first quarter of 2009 and lower legal reserves of $2.3 million. These were
partially offset by increases of $9.0 million in maintenance and outside service expenses, $8.7
million in employee and administration expenses, and $3.3 million in materials and supplies. Equity
earnings increased as a result of $3.9 million in increased investment earnings in Millennium due
primarily to lower interest charges in 2010.
73
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Electric Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| (in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
| |
Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenues |
|
$ |
342.5 |
|
|
$ |
286.9 |
|
|
$ |
662.5 |
|
|
$ |
585.3 |
|
Less: Cost of sales (excluding depreciation and amortization) |
|
|
130.9 |
|
|
|
107.4 |
|
|
|
247.5 |
|
|
|
227.4 |
|
| |
Net Revenues |
|
|
211.6 |
|
|
|
179.5 |
|
|
|
415.0 |
|
|
|
357.9 |
|
| |
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation and maintenance |
|
|
94.7 |
|
|
|
96.2 |
|
|
|
186.0 |
|
|
|
191.0 |
|
Depreciation and amortization |
|
|
52.9 |
|
|
|
51.2 |
|
|
|
105.2 |
|
|
|
101.6 |
|
Other taxes |
|
|
14.4 |
|
|
|
9.1 |
|
|
|
29.1 |
|
|
|
25.0 |
|
| |
Total Operating Expenses |
|
|
162.0 |
|
|
|
156.5 |
|
|
|
320.3 |
|
|
|
317.6 |
|
| |
Operating Income |
|
$ |
49.6 |
|
|
$ |
23.0 |
|
|
$ |
94.7 |
|
|
$ |
40.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues ($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
88.0 |
|
|
|
85.6 |
|
|
|
177.0 |
|
|
|
180.7 |
|
Commercial |
|
|
89.9 |
|
|
|
90.7 |
|
|
|
175.2 |
|
|
|
185.9 |
|
Industrial |
|
|
125.4 |
|
|
|
104.7 |
|
|
|
241.8 |
|
|
|
221.6 |
|
Wholesale |
|
|
6.1 |
|
|
|
3.8 |
|
|
|
11.1 |
|
|
|
6.0 |
|
Other |
|
|
33.1 |
|
|
|
2.1 |
|
|
|
57.4 |
|
|
|
(8.9 |
) |
| |
Total |
|
|
342.5 |
|
|
|
286.9 |
|
|
|
662.5 |
|
|
|
585.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales (Gigawatt Hours) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
810.5 |
|
|
|
758.8 |
|
|
|
1,657.5 |
|
|
|
1,601.6 |
|
Commercial |
|
|
952.0 |
|
|
|
934.5 |
|
|
|
1,887.3 |
|
|
|
1,903.1 |
|
Industrial |
|
|
2,111.0 |
|
|
|
1,789.9 |
|
|
|
4,141.8 |
|
|
|
3,778.9 |
|
Wholesale |
|
|
172.3 |
|
|
|
118.7 |
|
|
|
305.7 |
|
|
|
176.3 |
|
Other |
|
|
39.8 |
|
|
|
44.0 |
|
|
|
81.2 |
|
|
|
79.1 |
|
| |
Total |
|
|
4,085.6 |
|
|
|
3,645.9 |
|
|
|
8,073.5 |
|
|
|
7,539.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cooling Degree Days |
|
|
277 |
|
|
|
197 |
|
|
|
277 |
|
|
|
197 |
|
Normal Cooling Degree Days |
|
|
230 |
|
|
|
230 |
|
|
|
230 |
|
|
|
230 |
|
% Warmer (Colder) than Normal |
|
|
20% |
|
|
|
(14% |
) |
|
|
20% |
|
|
|
(14% |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
|
|
|
|
|
|
|
|
399,856 |
|
|
|
398,097 |
|
Commercial |
|
|
|
|
|
|
|
|
|
|
53,656 |
|
|
|
53,386 |
|
Industrial |
|
|
|
|
|
|
|
|
|
|
2,426 |
|
|
|
2,452 |
|
Wholesale |
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
11 |
|
Other |
|
|
|
|
|
|
|
|
|
|
742 |
|
|
|
752 |
|
| |
Total |
|
|
|
|
|
|
|
|
|
|
456,695 |
|
|
|
454,698 |
|
| |
NiSource generates and distributes electricity, through its subsidiary Northern Indiana, to
approximately 456.7 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.
74
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Electric Operations (continued)
Electric Supply
On October 29, 2009, Northern Indiana filed its 2009 Integrated Resource Plan with the IURC. The
plan evaluates demand-side and supply-side resource alternatives to reliably and cost-effectively
meet Northern Indiana customers’ future energy requirements over the next twenty years. With the
effects of the present economy, existing resources are projected to be sufficient through 2012 to
serve customers’ needs. Therefore, Northern Indiana’s two requests for proposals to secure
additional new sources of electric power issued on October 24, 2008 were not acted upon. With
numerous variables contributing to uncertainty in the near-term outlook, Northern Indiana continues
to monitor and assess economic, regulatory and legislative activity, and will update its resource
plan as appropriate.
Regulatory Matters
Refer to Note 8, “Regulatory Matters,” in the Notes to Condensed Consolidated Financial Statements
(unaudited) for information on significant rate developments, MISO, and cost recovery and
trackers for the Electric Operations segment.
Environmental Matters
Various environmental matters occasionally impact the Electric Operations segment. As of June 30,
2010, a reserve has been recorded to cover probable environmental response actions. Refer to Note
19-C, “Environmental Matters,” in the Notes to Condensed Consolidated Financial Statements
(unaudited) for additional information regarding environmental matters for the Electric Operations
segment.
Restructuring
Refer to Note 4, “Restructuring Activities,” in the Notes to Condensed Consolidated Financial
Statements (unaudited) for information on restructuring activities for the Electric Operations
segment.
Sales
Electric Operations sales quantities for the second quarter of 2010 were 4,085.6 gwh, an increase
of 439.7 gwh compared to the second quarter of 2009. The increase occurred primarily from higher
industrial volumes as a result of improvement in overall economic conditions. Within the
industrial customer base, the major steel companies’ production bottomed near 50% in May 2009.
Since then, NiSource has seen sequential growth in its power sales to these customers.
Electric Operations sales quantities for the first six months of 2010 were 8,073.5 gwh, an increase
of 534.5 gwh compared to the first six months of 2009. The increase occurred primarily from higher
industrial volumes as a result of improvement in overall economic conditions. Within the
industrial customer base, the major steel companies’ production bottomed near 50% in May 2009.
Since then, NiSource has seen sequential growth in its power sales to these customers.
Net Revenues
Net revenues were $211.6 million for the second quarter of 2010, an increase of $32.1 million from
the same period in 2009, primarily due to increased margins of $21.7 million. The increase in
margins primarily relates to industrial and residential margins. Additionally, there was a $5.1
million increase in environmental trackers that are partly offset in operating expense. The
remaining increase in net revenues is a result of warmer weather resulting in an increase of $2.8
million and an increase in off-system sales of $1.3 million.
At Northern Indiana, sales revenues and customer billings are adjusted for amounts related to under
and over-recovered fuel and purchased power from prior periods per regulatory order. These amounts
are primarily reflected in the “Other” gross revenues statistic provided at the beginning of this
segment discussion. The adjustment to Other gross revenues for the three and six months ended June
30, 2010 was a revenue decrease of $6.9 million and an increase of $113.9 million, respectively,
compared to a decrease of $26.6 million and $209.0 million for the three and six months ended June
30, 2009, respectively.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Electric Operations (continued)
Net revenues were $415.0 million for the first six months of 2010, an increase of $57.1 million
from the same period in 2009. This increase was due higher margins of $31.9 million primarily due
to increased industrial and residential margins. Additionally, there was an increase in off-system
sales of $11.8 million, including an adjustment of $9.0 million to reduce off-system sales in 2009
resulting from a FAC settlement. The remaining increase in net revenues is a result of a $9.5
million increase in environmental trackers that are partly offset in operating expense and $2.0
million as a result of slightly warmer weather.
Operating Income
Operating income for the second quarter of 2010 was $49.6 million, an increase of $26.6 million
from the same period in 2009, due to the increase in net revenues described above which was
partially offset by higher operating expenses. Operating expenses increased $5.5 million due to
higher property tax of $5.0 million, $3.2 million in increased costs related to storm damage,
increased employee and administration costs of $2.6 million, and higher depreciation costs of $1.7
million. These increases in expense were partially offset by a decrease of $6.4 million for a legal
reserve, which was recorded in 2009.
Operating income for the first six months of 2010 was $94.7 million, an increase of $54.4 from the
same period in 2009, due to higher net revenues discussed above, partially offset by an increase in
operating expenses. Operating expenses increased $2.7 million due to higher environmental costs of
$4.7 million and property taxes of $4.2 million. Additionally, depreciation increased by $3.6
million and there was an increase of $2.2 million in costs related to storm damage. These increases
in expense were partially offset by a decrease of $6.4 million for a legal reserve, which was
recorded in 2009, lower electric generation costs of $3.7 million, and a decrease of $2.6 million
in employee and administration costs.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NiSource Inc.
For a discussion regarding quantitative and qualitative disclosures about market risk see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Market
Risk Disclosures.”
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
NiSource’s Chief Executive Officer and its Principal Financial Officer, after evaluating the
effectiveness of NiSource’s 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,
NiSource’s disclosure controls and procedures are considered effective.
Disclosure controls and procedures include, without limitation, controls and procedures designed to
provide reasonable assurance that information required to be disclosed by NiSource in the reports
that it files or submits under the Exchange Act is accumulated and communicated to NiSource’s
management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure.
Changes in Internal Controls
There have been no changes in NiSource’s internal control over financial reporting during the
fiscal period covered by this report that has materially affected, or is reasonably likely to
affect, NiSource’s internal control over financial reporting.
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PART II
ITEM 1. LEGAL PROCEEDINGS
NiSource Inc.
1. 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 in the West
Virginia Circuit Court for Roane County, West Virginia (the “Trial Court”) 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. Plaintiffs also claimed that Defendants
fraudulently concealed the deduction of post-production charges. In December 2004, the Trial Court
granted Plaintiffs’ motion to add NiSource and Columbia as Defendants. The Trial Court later
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. Although NiSource sold CNR in 2003, NiSource remained obligated to
manage this litigation and was responsible for the majority of any damages awarded to Plaintiffs.
On January 27, 2007, the jury hearing the case returned a verdict against all Defendants in the
amount of $404.3 million inclusive of both compensatory and punitive damages; Defendants
subsequently filed their Petition for Appeal, which was later amended, with the West Virginia
Supreme Court of Appeals (the “Appeals Court”), which refused the petition on May 22, 2008. On
August 22, 2008, Defendants filed Petitions to the United States Supreme Court for writ of
certiorari. Given the Appeals Court’s earlier refusal of the appeal, NiSource 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 was included in “Legal and environmental
reserves,” on the Consolidated Balance Sheet as of December 31, 2008. On October 24, 2008, the
Trial Court preliminarily approved a Settlement Agreement with a total settlement amount of $380
million. The settlement received final approval by the Trial Court on November 22, 2008.
NiSource’s share of the settlement liability is up to $338.8 million. NiSource complied with its
obligations under the Settlement Agreement to fund $85.5 million in the qualified settlement fund
by January 13, 2009. Additionally, NiSource provided a letter of credit on January 13, 2009 in the
amount of $254 million and thereby complied with its obligation to secure the unpaid portion of the
settlement, which has since been drawn down as settlement payments have been made. The Trial Court
entered its Order discharging the judgment on January 20, 2009 and is supervising the
administration of the settlement proceeds. As of June 30, 2010, NiSource had contributed a total
of $318.2 million into the qualified settlement fund, $277.3 million of which was contributed prior
to December 31, 2009. As of June 30, 2010, $20.6 million of the maximum settlement liability had
not been paid. The remaining balance of the letter of credit is sufficient to cover any remaining
payments under the Settlement Agreement. NiSource will be required to make additional payments,
pursuant to the settlement, upon notice from the Class Administrator.
2. 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 Indiana’s generating stations between the years 1985 and 1995 without obtaining
appropriate air permits for the modifications. The ultimate resolution could require additional
capital expenditures and operations and maintenance costs as well as payment of substantial
penalties and development of supplemental environmental projects. Northern Indiana is currently in
discussions with the EPA regarding possible resolutions to this NOV. Although penalties have been
proposed and a reserve has been recorded for the matter, Northern Indiana is unable to predict the
outcome of this matter at this time.
3.
Majorsville Operations Center – PADEP Notice of Violation
In 1995, Columbia Transmission entered into an AOC with the EPA that requires Columbia Transmission
to characterize and remediate environmental contamination at thousands of locations along Columbia
Transmission’s pipeline system. One of the facilities subject to the AOC is the Majorsville
Operations Center, which was remediated under an EPA approved Remedial Action Work Plan in summer
2008. Pursuant to the Remedial Action Work Plan, Columbia Transmission completed a project that
stabilized residual oil contained in soils at the site and in sediments in an adjacent stream.
On April 23, 2009, however, the PADEP issued Columbia Transmission an NOV, alleging that the
remediation was not effective. The NOV asserts violations of the Pennsylvania Clean Streams Law
and the Pennsylvania Solid Waste
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Management Act and contains a settlement demand in the amount of $1 million. Columbia Transmission
is unable to estimate the likelihood or cost of potential penalties or additional remediation at
this time.
ITEM 1A. RISK FACTORS
There are many factors that could have a material adverse effect on NiSource’s operating results,
financial condition and cash flows. New risks may emerge at any time, and NiSource cannot predict
those risks or estimate the extent to which they may affect financial performance. In addition to
the risks listed in the “Risk Factors” section of NiSource’s 2009 Form 10-K filed with the SEC on
February 26, 2010, the risks described below could adversely impact the value of NiSource’s
securities.
Continued adverse economic and market conditions or increases in interest rates could reduce net
revenue growth, increase costs, decrease future net income and cash flows and impact capital
resources and liquidity needs.
The credit markets and the general economy have been experiencing a period of large-scale turmoil.
While the ultimate outcome of these events cannot be predicted, it may have an adverse material
effect on NiSource.
A continued decline in the economy impacting NiSource’s operating jurisdictions could adversely
affect NiSource’s ability to grow its customer base and collect revenues from customers, which
could reduce net revenue growth and increase operating costs. An increase in the interest rates
NiSource pays would adversely affect future net income and cash flows. In addition, NiSource
depends on debt to finance its operations, including both working capital and capital expenditures,
and would be adversely affected by increases in interest rates. The current economic downturn and
tightening of access to credit markets, coupled with NiSource’s current credit ratings, could
impact NiSource’s ability to raise additional capital or refinance debt at a reasonable cost. Refer
to Note 16, “Long-Term Debt,” in the Notes to Condensed Consolidated Financial Statements
(unaudited) for information related to outstanding long-term debt and maturities of that debt.
NiSource’s costs of compliance with environmental laws are significant. The costs of compliance
with future environmental laws and the incurrence of environmental liabilities could impact cash
flow and profitability.
NiSource’s subsidiaries are subject to extensive federal, state and local environmental
requirements that, among other things, regulate air emissions, water usage and discharges,
remediation and the management of chemicals, hazardous waste, solid waste, and coal combustion
residuals. Compliance with these legal obligations requires NiSource to make expenditures for
installation of pollution control equipment, remediation, environmental monitoring, emissions fees
and permits at many of NiSource’s facilities. These expenditures are significant, and NiSource
expects that they will continue to be significant in the future.
If NiSource’s subsidiaries fail to comply with environmental laws and regulations or cause harm to
the environment or persons, even if caused by factors beyond NiSource’s control, that failure or
harm may result in the assessment of civil or criminal penalties and damages against NiSource and
its subsidiaries. In September 2004, the EPA issued an NOV to Northern Indiana alleging violations
of the new source review provisions of the CAA. 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.
Existing environmental laws and regulations may be revised and new laws and regulations seeking to
protect the environment may be adopted or become applicable to NiSource’s subsidiaries. Revised or
additional laws and regulations could result in significant additional expense and operating
restrictions on NiSource’s facilities or increased compliance costs, which may not be fully
recoverable from customers and would therefore reduce net income.
Because NiSource operations deal with natural gas and coal fossil fuels, emissions of GHGs are an
expected aspect of the business. While NiSource attempts to reduce GHG emissions through
efficiency programs, leak detection, and other programs, GHG emissions cannot be entirely
eliminated. Future legislative and regulatory programs could significantly restrict emissions of
GHGs or could impose a cost or tax on GHG emissions. Recently, proposals have been developed to
implement state and regional GHG programs, to create federal legislation to limit GHG emissions
(such as the Waxman-Markey bill, which passed the U.S. House of Representatives), and to create
national renewable portfolio standards. The EPA is also taking action to regulate GHGs under the
CAA. Imposing statutory or regulatory restrictions and/or costs on GHG emissions could increase
NiSource’s cost of producing energy, which
79
could impact customer demand or NiSource’s profitability. Compliance costs associated with these
requirements could also affect NiSource’s cash flow. The cost impact of any new or amended GHG
legislation or regulations would depend upon the specific requirements enacted and cannot be
determined at this time.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
NiSource Inc.
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(10.1)
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NiSource, Inc. 2010 Omnibus Incentive Plan (Incorporated by reference to Exhibit B to the
NiSource, Inc. Definitive Proxy Statement dated April 12, 2010). |
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(31.1)
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Certification of Robert C. Skaggs, Jr., Chief Executive Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
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(31.2)
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Certification of Stephen P. Smith, Chief Financial Officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
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(32.1)
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Certification of Robert C. Skaggs, Jr., Chief Executive Officer, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
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(32.2)
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Certification of Stephen P. Smith, Chief Financial Officer, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished 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.
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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.
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NiSource Inc.
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(Registrant) |
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Date: August 3, 2010
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By:
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/s/ Jon D. Veurink |
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Jon D. Veurink |
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Vice President and Chief Accounting Officer |
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(Principal Accounting Officer |
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and Duly Authorized Officer) |
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