NiSource Inc. — Q1 2018 Form 10-Q
Business context and period: Regulated natural gas and electric utility holding company serving customers in seven states. This unaudited report covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. Interim results may not indicate full-year performance, in part because of weather and seasonality. Dollar amounts below are in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenues | $1,750.8 | $1,598.6 | +$152.2 |
| Net revenues (non-GAAP) | $1,026.4 | $1,046.3 | -$19.9 |
| Operating income | $400.6 | $415.4 | -$14.8 |
| Income before taxes | $338.8 | $332.5 | +$6.3 |
| Net income | $276.1 | $211.3 | +$64.8 |
| Diluted EPS | $0.81 | $0.65 | +$0.16 |
| Operating cash flow | $388.2 | $411.1 | -$22.9 |
| Capital expenditures | $370.0 | $312.0 | +$58.0 |
- Revenue rose, but cost of sales increased by $172.1; management’s non-GAAP net revenues declined. Operating income also fell, primarily reflecting a customer-refund reserve related to lower federal tax rates, partly offset by colder weather and infrastructure-related rates.
- Net income increased despite lower operating income, mainly because income tax expense fell to $62.7 from $121.2 and other income included a $21.2 interest-rate-swap settlement gain. The effective tax rate was 18.5%, versus 36.5%.
- Gas Distribution Operations operating income decreased $17.1 to $321.7; Electric Operations operating income increased $5.5 to $83.1. Gas results included a $47.6 tax-related regulatory revenue reserve; electric results included a $12.5 reserve.
- Cash and cash equivalents were $35.0 at March 31. Net available liquidity was $820.4, down from $998.9 at December 31, 2017.
- Long-term debt, including current maturities, was $7,549.5; short-term borrowings were $1,567.3. The reported debt-to-capitalization ratio was 66.9%, within the applicable 70% covenant limit. Short-term borrowing consisted mainly of $1,053.9 commercial paper and $513.4 receivables-program borrowings.
- Dividends declared were $0.39 per common share, versus $0.35. Common shares outstanding were approximately 337.6 million at March 31.
Material changes and unusual items
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21% from 35%, lowering tax expense but also prompting state regulatory reviews and expected customer rate reductions or refunds. NiSource recorded $49.7 of additional tax-related regulatory liabilities in Q1 for collections considered probable of being refunded. The filing also reports approximately $1.5 billion of excess deferred taxes recorded as a regulatory liability at December 31, 2017; the amount and customer pass-back timing remain subject to regulatory review.
- A $21.2 gain from settling $250.0 of forward-starting interest-rate swaps was recognized in earnings after the associated forecast borrowing was considered no longer probable. The company reported $750.0 of aggregate notional forward-starting swaps at March 31.
- NiSource reclassified approximately $142 of Bailly Unit 8 net book value to noncurrent regulatory assets as the unit is being converted to a synchronous condenser; the amounts continue to be amortized consistent with customer rates. Retirement of Bailly Units 7 and 8 was expected by May 31, 2018.
- NiSource adopted ASC 606 revenue guidance on January 1, 2018 using the modified retrospective method, with no material opening-balance adjustment. Prior-year amounts were not restated. It also reclassified $9.5 of stranded tax effects from accumulated other comprehensive loss to retained deficit.
Outlook, management commentary, and risks
- Management expected 2018 capital expenditures of approximately $1.7–$1.8 billion and described roughly $30 billion in projected long-term regulated utility infrastructure investment. These are investment plans, not earnings guidance; the filing text does not provide a clear full-year earnings or EPS forecast.
- Management said funding was adequate for operations and planned capital spending through operating cash flow, credit facilities, commercial paper, receivables programs, debt agreements, and capital-market access. An April 18, 2018 term-loan agreement provided for up to $600 million, with an initial $150 million borrowing and a possible additional $450 million draw before June 15, 2018.
- Key rate matters included a proposed NIPSCO gas-rate settlement seeking a $107.3 annual revenue increase, pending an expected second-half 2018 order; a proposed new seven-year NIPSCO gas infrastructure plan of about $1.25 billion; and pending rate cases and tax-related tariff changes in several service territories. Regulatory outcomes and timing are uncertain.
- NIPSCO’s resource plan anticipates retiring two Schahfer generating units by the end of 2023, in addition to the planned Bailly retirements. Management cited more than $1 billion in potential operating, maintenance, environmental, and other costs if the existing coal fleet remained operational. Estimated capital compliance costs were about $193 for coal-combustion-residual requirements and approximately $170 for effluent-limitations requirements, with regulatory developments affecting timing and estimates.
- Other risks include environmental remediation, litigation, weather and customer demand, infrastructure construction and operating risks, commodity and interest-rate exposure, credit ratings, and regulatory recovery. Environmental remediation liabilities were approximately $109.9 at March 31; the filing says actual costs may differ and some future costs are not estimable.
Important facts for investors to verify
- Whether and when regulators approve rate cases, infrastructure trackers, and customer refunds or credits arising from the tax-law changes.
- Whether the $1.7–$1.8 billion 2018 capital plan and longer-term infrastructure investments proceed on schedule and receive expected rate recovery.
- How NiSource funds investment needs and manages short-term borrowings, liquidity, debt maturities, and interest-rate exposure.
- Whether planned generation retirements and environmental compliance costs, including CCR and ELG requirements, change in scope, timing, or recoverability.
- How weather, customer usage, and the BP/WCE petition affecting NIPSCO electric demand influence future operating results.