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NiSource Inc Reports Operating Results (10-Q)

May 04, 2010 | About:

NiSource Inc (NYSE:NI) filed Quarterly Report for the period ended 2010-03-31.

Nisource Inc has a market cap of $4.62 billion; its shares were traded at around $16.67 with a P/E ratio of 17.4 and P/S ratio of 0.7. The dividend yield of Nisource Inc stocks is 5.5%.NI is in the portfolios of Brian Rogers of T Rowe Price Equity Income Fund, Jeremy Grantham of GMO LLC, Jim Simons of Renaissance Technologies LLC, Bruce Kovner of Caxton Associates, Steven Cohen of SAC Capital Advisors.

Highlight of Business Operations:

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 quarters of 2010 and 2009, the amount of purchased power costs exceeding the benchmark amounted to $0.1 million and $0.8 million, respectively, which was recognized as a net reduction of revenues.

Restructuring In September 2009, NiSource announced the restructuring of Northern Indiana which aims to redefine business and operations strategies and achieve cost reductions. During 2009, NiSource recorded a pre-tax restructuring charge related to this initiative, net of adjustments, of $5.4 million to Operation and maintenance expense on the Statement of Consolidated Income, which primarily includes costs related to severance and other employee related costs for approximately 43 employees and outside services costs. Of the $5.4 million restructuring charge, net of adjustments, approximately $3.7 million was recorded to Electric Operations. As of March 31, 2010, the restructuring liability for Northern Indiana was $1.0 million of which $0.7 million related to Electric Operations. Northern Indiana expects this initiative to be completed this year. Refer to Note 4, Restructuring Activities, in the Notes to Condensed Consolidated Financial Statements for additional information regarding restructuring initiatives.

Net Revenues Net revenues were $203.4 million for the first quarter of 2010, an increase of $25.0 million from the same period in 2009, primarily due to increased off system sales of $10.5 million, including an adjustment of $9.0 million to reduce off system sales revenues in 2009 resulting from a FAC settlement, increased industrial and residential margins of $11.9 million, and $4.4 million of environmental trackers that are partly offset in operating expense.

At Northern Indiana, sales revenues and customer billings are adjusted for amounts related to under and over-recovered purchased fuel 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 months ended March 31, 2010 was a revenue increase of $11.3 million, compared to a reduction of $12.9 million for the three months ended March 31, 2009.

Operating Income Operating income for the first quarter of 2010 was $45.1 million, an increase of $27.8 million from the same period in 2009, due to the increase in net revenues described above and lower operating expenses. Operating expenses decreased $4.3 million, net of trackers, due to lower employee and administrative costs and electric generation costs. The lower employee and administrative costs were primarily due to decreases in pension and other postretirement expenses. The decrease in operating expenses was partially offset by an increase in environmental expenses primarily related to the impact of an insurance settlement recorded during the first quarter of 2009, and higher depreciation from the capital expenditure program.

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 Courts 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. NiSources 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 March 31, 2010, NiSource had contributed a total of $304.7 million into the qualified settlement fund, $277.3 million of which was contributed prior to December 31, 2009. As of March 31, 2010, $34.1 million of the maximum settlement liability had not been paid. NiSource has since contributed an additional $4.9 million. 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.

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About the author:

Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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