NiSource Inc. — FY2018 Form 10-K
Reporting period: Year ended December 31, 2018; the filing also reports fourth-quarter results. NiSource is a regulated natural gas and electric utility holding company serving approximately 4.0 million customers across seven states.
Financial performance and position
- Revenue: $5.11 billion, up 4.9% from $4.87 billion in 2017. Net revenues, a company-defined non-GAAP measure, were $3.35 billion, essentially flat year over year.
- Profit: Operating income was $124.7 million, down from $921.2 million; net loss available to common shareholders was $65.6 million, or $0.18 per share, versus income of $128.5 million, or $0.39 per share, in 2017. Operating margin was approximately 2.4%, versus 18.9%.
- Cash flow and investment: Operating cash flow was $540.1 million, down $202.1 million. Capital expenditures were $1.81 billion, substantially exceeding operating cash flow. NiSource paid $731 million in incident-related operating cash costs during 2018.
- Segment results: Gas Distribution Operations recorded an operating loss of $254.1 million, versus income of $550.1 million, primarily due to Greater Lawrence Incident expenses. Electric Operations income rose to $386.1 million from $367.4 million.
- Debt and liquidity: Total consolidated indebtedness was $9.13 billion, including $7.16 billion of long-term debt and $1.98 billion of short-term borrowings. Net available liquidity was $974.6 million, including cash and available credit. Debt-to-capitalization was 61.4%, below the 70% revolving-credit covenant limit.
- Equity and dividends: The company issued common and preferred stock in 2018, raising $599.6 million net from a common-stock private placement and $880.0 million net from preferred issuances. Common dividends declared were $0.78 per share, up from $0.70.
Material changes versus 2017
- Greater Lawrence Incident expenses drove a sharp deterioration in operating results: NiSource recorded approximately $757 million for estimated third-party claims and $266 million for other incident-related costs.
- Revenue growth was offset by higher gas costs passed through to customers, tax-related rate reductions and other revenue changes. Colder gas-service-area weather supported gas revenues; warmer electric-service-area weather supported electric revenues.
- The company issued additional common and preferred equity, increasing shares outstanding and introducing preferred dividend commitments. It also redeemed debt and recorded a $45.5 million loss on early extinguishment, compared with $111.5 million in 2017.
Outlook, commentary and key risks
- Management projected $1.6–$1.7 billion of capital investment in 2019 and approximately $30 billion of long-term regulated utility infrastructure investment. Priorities include pipeline modernization, safety and reliability, and electric transmission.
- NIPSCO’s 2018 resource plan proposed retiring 2,080 MW of remaining coal capacity: Schahfer units by 2023 and Michigan City by 2028. The replacement strategy includes renewables and battery storage; proposed 20-year renewable power agreements and a build-transfer arrangement remained subject to regulatory approval.
- For Greater Lawrence, estimated third-party claims were $757–$790 million and other incident-related costs were expected to total $330–$345 million. The company recorded $135 million of insurance recoveries, of which $5 million had been collected by year-end. Total incident expenses exceeded available liability insurance coverage. Pipeline replacement was estimated at $220–$230 million, with recovery of uninsured capital costs dependent on a future regulatory proceeding.
- Investigations and litigation remained unresolved, including NTSB, federal and Massachusetts inquiries, private claims and a U.S. Department of Justice criminal investigation. The SEC notified NiSource in February 2019 of an investigation into disclosures made before the incident. Potential fines and penalties could not be estimated.
- NiSource committed approximately $150 million to install over-pressurization protection and remote monitoring on low-pressure systems. Regulatory recovery of incident-related capital spending and other costs is uncertain.
- Other material risks include substantial indebtedness, access to capital, regulatory rate outcomes, environmental compliance, weather and commodity exposure, aging infrastructure, pension funding, and execution of the coal-replacement strategy. S&P maintained a negative outlook on NiSource ratings after the incident; Moody’s and Fitch outlooks were stable.
Important facts for investors to verify
- Progress and final findings from the NTSB, DOJ, Massachusetts authorities and SEC investigations, and the resulting claims, penalties or settlements.
- Actual insurance collections versus the $135 million receivable recorded, and final incident-related claims and restoration costs.
- Regulatory decisions on recovery and returns for the $220–$230 million Greater Lawrence pipeline replacement, and any effects on earnings or credit ratings.
- 2019 liquidity, short-term borrowing and capital-spending needs, including the impact of common-stock dilution and preferred dividends.
- Regulatory approvals, costs and implementation timing for NIPSCO’s renewable contracts and planned coal retirements.