NiSource Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited results compare with the three months ended March 31, 2016. NiSource is a regulated natural gas and electric utility holding company serving customers in seven states; interim results are affected by weather and other seasonal factors.
Financial highlights
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Gross revenues | $1,598.6 million | $1,436.6 million |
| Total net revenues | $1,046.3 million | $940.1 million |
| Operating income | $416.5 million | $381.4 million |
| Net income | $211.3 million | $186.6 million |
| Diluted EPS | $0.65 | $0.58 |
| Cash from operating activities | $411.1 million | $303.2 million |
| Capital expenditures | $312.0 million | $301.0 million |
- Operating margin on net revenues was approximately 39.8%, compared with 40.6% in Q1 2016; net income was approximately 20.2% of net revenues, versus 19.8%.
- Gas Distribution Operations operating income rose to $340.7 million from $314.9 million. Electric Operations operating income rose to $77.0 million from $70.3 million.
- Cash and cash equivalents were $28.4 million at quarter-end. Long-term debt, including current maturities, was $6.400 billion; short-term borrowings were $1.514 billion. Net available liquidity was $788.5 million. The debt-to-capitalization ratio was 65.4%, within the stated 70% revolving-credit and term-loan covenant limit.
- Common dividends declared were $0.35 per share, compared with $0.31 a year earlier. The estimated fair value of long-term debt, including current maturities, was $7.041 billion versus a $6.400 billion carrying amount.
Changes versus prior year
- Net income increased $24.7 million and operating income increased $35.1 million. Higher revenues from base-rate decisions, infrastructure replacement programs, and electric transmission investment drove gains; warmer weather partly offset them.
- Gas Distribution net revenues increased $77.0 million, including $61.3 million from new rates and infrastructure programs. Weather was about 18% warmer than normal and reduced gas segment net revenues by $7.8 million. Gas throughput fell 5%.
- Electric net revenues increased $32.5 million, including new base rates and transmission investment; warmer weather reduced net revenues by $4.0 million. Electric sales fell 3%.
- Operating expenses rose $71.1 million, mainly from employee and administrative costs, outside services, materials and supplies, and depreciation. Net interest expense decreased $5.3 million, primarily due to debt maturities.
- Operating cash flow improved by $107.9 million, but the filing attributes much of the year-over-year change to timing of working capital and regulatory balances, including gas-cost recoveries. Cash flow from operations less capital expenditures was approximately $99 million.
Outlook, management commentary, and risks
- Management projected 2017 capital expenditures of approximately $1.6–$1.7 billion and described roughly $30 billion of projected long-term regulated utility infrastructure investment. The filing does not provide earnings guidance.
- Management said available operating cash, credit facilities, receivables programs, and capital-market access were expected to provide adequate funding for operations and investment. 2017 expected contributions were approximately $9.1 million to pension plans and $25.3 million to other postretirement plans.
- NIPSCO’s resource plan contemplates retiring Bailly units by May 31, 2018, and two R.M. Schahfer units by the end of 2023. Management cited more than $1 billion of projected operating, maintenance, environmental, and other costs over seven years if the current coal fleet remains operating.
- Estimated capital compliance costs were approximately $230 million for coal-combustion-residual requirements and $170 million for effluent-limitation requirements. Recovery petitions were pending; the EPA’s review and stay of future ELG compliance deadlines made the impact uncertain.
- Environmental remediation liabilities totaled approximately $109.3 million; the MGP portion was estimated at $103.9 million, with costs reasonably possible to vary by as much as $25 million. Management expected a significant portion of environmental assessment and remediation costs to be recoverable through rates, but recovery and ultimate costs remain subject to uncertainty.
- NiSource began a process to terminate its IBM services agreement and negotiate with other providers. A termination could trigger charges for breakage, unrecovered investment, and wind-down costs that may be material.
- Other risks include regulatory outcomes, extreme weather, commodity and interest-rate movements, aging infrastructure, environmental compliance, construction execution, credit ratings, and litigation. Ordinary-course legal matters were not individually material as of the filing, though adverse outcomes could affect results or liquidity.
- After quarter-end, NiSource announced a proposed merger of NiSource Finance and Capital Markets into NiSource, pending approvals, and entered additional $200 million forward-starting interest-rate swaps. Management did not expect the mergers to affect consolidated financial statements or debt ratings.
Important facts for investors to verify
- Progress and regulatory recovery for planned infrastructure and environmental spending, including the CCR and ELG programs.
- Execution and customer impacts of NIPSCO’s generation-retirement plan and the timing of the planned unit retirements.
- Whether projected 2017 capital spending and long-term investment plans are funded while preserving liquidity and covenant headroom.
- Outcome and potential cost of terminating the IBM agreement, and any material developments in environmental remediation or legal contingencies.
- How weather, customer usage, rate cases, and regulatory trackers affect segment earnings and cash flows in subsequent quarters.