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NiSource Takes a Hit on Nonoperating Earnings

Due to an adjustment in reserves to cover its potential liability in an ongoing royalties lawsuit, NiSource Inc. last week reported a net loss of more than $200 million for the second quarter. The company's net earnings from continuing operations were on the plus side but they were below year-ago results for the quarter, with natural gas and power distribution down and transmission and storage showing an increase.

In a 10-Q filing with the Securities and Exchange Commission (SEC), the Merrillville, IN-based energy company reported a net income loss of $202.3 million (73 cents/share) for the second quarter, down significantly from a profit of $26.7 million (10 cents/share) for the comparable period in 2007. Net revenues for the quarter were $670 million, almost flat with the $677 million posted in the second quarter last year. Gross revenues were $1.79 billion for the three-month period, up from $1.56 billion a year ago.

NiSource said it plans to petition the U.S. Supreme Court later this month to review a $404 million verdict against a former exploration and production subsidiary. The petition is due by Aug. 20, NiSource told the SEC.

The company's decision to petition the high court comes after West Virginia's Supreme Court of Appeals declined to review a lower court decision, but granted NiSource's request to stay the judgment, pending action by the Supreme Court on the company's petition [Tawney, et al. v. Columbia Natural Resources] (see NGI, July 2). In 2007 a Roane County, WV, circuit court judge refused to set aside a $270 million punitive damage award and $134 million in compensatory damages against NiSource for underpayment by a then-subsidiary of natural gas royalties in West Virginia (see NGI, Feb. 5, 2007).

The case was filed in 2003 against former NiSource subsidiary Columbia Natural Resources, which was sold to Chesapeake Energy Corp. in 2005 (see NGI, Nov. 21, 2005). NiSource has primary responsibility in the case, but Chesapeake also was named as a defendant. NiSource said it adjusted its reserve in the second quarter to reflect the portion of the trial court judgment for which it would be responsible, including interest.

Excluding the set-aside reserve for the court case, NiSource posted net operating earnings from continuing operations (non-generally accepted accounting principles, GAAP) of $24.3 million (9 cents/share) for the second quarter, down from $28.3 million (10 cents/share) for the year-ago period. Net revenues for the three-month period rose to $673 million from $668 million for the second quarter of 2007.

Second quarter net earnings from continuing operations, compared with the year-ago period, were affected by anticipated higher employee and administrative costs, as well as a one-time adjustment to electric operations depreciation expense in the amount of $8.3 million, or approximately 2 cents/share, the company said.

Taking into account the reserve set-aside for the lawsuit, NiSource reported a net income loss of $103 million (37 cents/share) for the first six months, down from a profit of $243 million (89 cents) for the same period last year, according to the SEC report. Net revenues for the six-month period were $1.71 billion compared to $1.72 billion for the first half of 2007.

Net operating earnings from continuing operations for the six-month period were $213.6 million compared to $233.3 million for the first half of 2007, the company reported.

NiSource CEO Robert C. Skaggs said the company was maintaining its net operating earnings (non-GAAP) outlook of $1.25 to $1.35/share for the 2008-2010 time period. On a GAAP basis, the lower end of the range for basic earnings from continuing operations is $1.23 per share primarily due to transition costs associated with NiSource's amended business service agreements with IBM, it noted.

"For this year, we feel that we're going to be at the lower end of the range" and then move up in ensuing years, Skaggs told analysts during a teleconference. "We're going to see positive impacts" from various rate cases, involving Columbia Gas of Ohio, Columbia Gas of Pennsylvania and Northern Indiana Public Service Co., as well as the company's proposed pipeline and storage projects.

As for the company's debt situation, Skaggs acknowledged that there's been "upward pressure on bad debt," but added that "it's manageable; it's modest." He said the company had seen a drop in its projections for new customers, particularly in gas distribution. He attributed it to general economic conditions which are being seen across the country.

On a segment basis, NiSource reported that second quarter earnings for its gas distribution operations fell to $3.9 million from $8.9 million in the year-ago period. The decline resulted mostly from operating expenses that were $9.6 million higher than the prior year, the company said.

Gas transmission and storage operations posted earnings of $75.5 million, up slightly from $74.6 million for the second quarter in 2007. Operating earnings for electric operations fell to $52.1 million from $61.8 million in the same quarter last year. Other operations reported operating earnings of $0.8 million in the second quarter, compared with $0.3 million in the year-ago period. The improvement came from higher net revenues from commercial and industrial gas marketing activities, NiSource said.

NiSource provided a progress update on its pipeline expansion and storage projects. It said it expects to have its Eastern Market Expansion Project (which will add 97,000 Dth/d of storage and transportation deliverability to its pipeline subsidiary, the Columbia Gas Transmission system) operational by spring 2009; the Appalachian Expansion Project (which will add a 9,470 hp compressor station in West Virginia on the Columbia Gas system) to be in service by the fourth quarter of 2009; and the Hardy Storage Project in West Virginia to be fully operational in 2009, with a working storage capacity of 12 Bcf. The company also said the reconfigured Millennium Pipeline Project, in which Columbia Gas is participating, is making substantial progress toward completion.

On the regulatory front, NiSource said pipeline subsidiaries Columbia Gulf Transmission and Columbia Gas are cooperating with the Federal Energy Regulatory Commission (FERC) in an informal, nonpublic investigation of certain operating practices involving tariff services offered by the pipelines. Although the companies are continuing to cooperate with FERC to reach a consensual settlement, NiSource said it is likely that any settlement will require the payment of fines or refunds.

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