NiSource Inc. — Q2 2019 Form 10-Q
Business context and reporting period: Unaudited results for the quarter and six months ended June 30, 2019. NiSource is a regulated utility holding company serving customers in seven states through gas distribution and electric operations.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $1,010.4m | $1,007.0m | $2,880.2m | $2,757.8m |
| Operating income | $463.5m | $118.4m | $837.7m | $519.0m |
| Net income | $296.9m | $24.5m | $515.8m | $300.6m |
| Net income available to common shareholders | $283.1m | $23.2m | $488.2m | $299.3m |
| Basic EPS | $0.76 | $0.07 | $1.31 | $0.86 |
- Revenue increased 0.3% in Q2 and 4.4% for the six-month period. Six-month operating income rose 61.4%; basic EPS increased from $0.86 to $1.31.
- Margins expanded substantially, but reported earnings were strongly affected by insurance recoveries related to the Greater Lawrence Incident (see below).
- Operating cash flow was $926.2m for the six months, versus $809.5m. Capital expenditures were $843.5m, versus $832.5m. Investing cash outflow totaled $898.0m.
- At June 30, cash and cash equivalents were $23.7m. Long-term debt, including current maturities, was approximately $7.12bn; short-term borrowings were $2.08bn. Short-term borrowings included $911m commercial paper, $850m term loan and $320m receivables-program borrowings.
- Net available liquidity was $952.5m, compared with $974.6m at December 31, 2018. The debt-to-capitalization ratio was 60.6%, within the stated covenant limit of 70%.
- Stockholders’ equity was $5.98bn. Common dividends declared were $0.60 per share for the first six months; preferred dividends were $27.6m.
Material changes and operating performance
- The principal driver of the earnings increase was a $435m insurance recovery recorded in Q2 for the Greater Lawrence Incident. The quarter’s operation and maintenance expense was $49.2m, down from $365.2m a year earlier; the filing attributes the reduction largely to incident-related insurance recoveries.
- Gas Distribution Operations’ six-month operating income rose to $654.4m from $360.8m, mainly reflecting new base rates and infrastructure-replacement program revenues and incident-related insurance recoveries. Q2 gas throughput fell 10% year over year, primarily due to lower industrial usage; Q2 weather was about 11% warmer than normal.
- Electric Operations’ six-month operating income increased to $180.7m from $165.5m. Q2 sales declined 6.7% year over year, with cooler weather and customer usage contributing to the decrease.
- Interest expense for the six months was $189.7m, compared with $181.8m. The prior-year period included a $21.2m interest-rate-swap settlement gain and a $12.5m debt-extinguishment loss.
Outlook, risks and unusual items
- Management expected 2019 capital expenditures of approximately $1.6bn–$1.7bn and described approximately $30bn of projected long-term regulated utility infrastructure investment. It stated that available operating cash flow, borrowing facilities and capital-market access should provide adequate funding.
- NIPSCO’s resource plan calls for retiring 2,080 MW of coal capacity: Schahfer units by 2023 and Michigan City Unit 12 by 2028. Replacement plans include renewables and storage. Two 20-year renewable power-purchase agreements totaling approximately 700 MW were approved by the IURC; a roughly 100 MW build-transfer project remained subject to approval.
- The Greater Lawrence Incident remains a material uncertainty. Through June 30, incident-to-date third-party claims and other incident-related costs totaled $1.362bn; recorded insurance recoveries were $670m, leaving a $692m net impact on operation and maintenance expense. Management estimated total third-party claim costs of $994m–$1.020bn and other incident-related costs of $430m–$440m, excluding pipeline replacement capital costs estimated at $250m–$260m.
- Available third-party liability insurance coverage was $800m, and the filing said incident expenses had exceeded the coverage amount. Some insurer claims remained under review; the amount ultimately unrecovered was not estimable and could be material. Government fines, penalties or settlements also could not be reasonably estimated.
- On July 26, 2019, after quarter-end, NiSource and related entities entered a term sheet to pay $143m into a proposed class-action settlement fund. It remained subject to a final agreement and court approvals and did not cover certain bodily-injury, wrongful-death, insurance-subrogation and appliance-related claims.
- Pipeline replacement investment recovery through insurance or future customer rates was uncertain; a regulatory disallowance could materially affect earnings, financial position and cash flows. Federal and state investigations, lawsuits, and Massachusetts regulatory scrutiny were ongoing.
- NiSource planned enhanced pipeline safety measures, including over-pressurization protection and remote monitoring on low-pressure systems. Management also cited debt, ratings, regulatory outcomes, weather, commodity, operating, environmental and cyber risks. No material changes to the previously reported risk factors were identified.
Important facts for investors to verify
- Whether the $143m proposed class settlement receives final approval, and the potential exposure from excluded bodily-injury and wrongful-death claims.
- Actual incident costs, insurance collections and coverage disputes; $125m of insurance proceeds was received after June 30, while a $260m insurance receivable remained recorded at quarter-end.
- Whether pipeline replacement costs are recovered through insurance and rates, and the outcome of related regulatory proceedings and investigations.
- Execution and funding of the 2019 capital program, NIPSCO coal retirements and renewable replacement projects.
- Short-term borrowing levels, refinancing of the $850m term loan due in April 2020, liquidity and credit-rating outlooks.