NiSource Inc. — Form 10-Q summary
Business context and period. This unaudited report covers the three and nine months ended September 30, 2016. NiSource is a regulated natural gas and electric utility holding company serving customers in seven states. Its reportable segments are Gas Distribution Operations and Electric Operations. The former Columbia Pipeline Group business was separated on July 1, 2015 and is reported as discontinued operations; this makes some prior-period comparisons less directly comparable.
Financial performance and condition
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Gross revenues | $861.3 million | $817.2 million | $3,195.5 million | $3,554.0 million |
| Net revenues | $643.1 million | $608.1 million | $2,245.9 million | $2,246.7 million |
| Operating income | $113.7 million | $109.7 million | $633.3 million | $580.4 million |
| Income from continuing operations | $23.7 million | $14.8 million | $239.3 million | $134.2 million |
| Net income attributable to NiSource | $27.2 million | $(4.9) million | $242.7 million | $227.1 million |
| Diluted EPS | $0.08 | $(0.02) | $0.75 | $0.71 |
| Operating cash flow, continuing operations | Not stated for quarter | Not stated for quarter | $532.8 million | $906.3 million |
- Margins and drivers: Q3 net revenues rose $35.0 million and operating income rose $4.0 million year over year. Electric segment operating income increased to $112.8 million from $98.5 million, aided by rate and infrastructure investment and warmer weather. Gas Distribution operating income fell to $4.3 million from $20.0 million, as higher operating expenses more than offset higher net revenues. For nine months, Electric operating income increased $37.3 million; Gas Distribution operating income decreased $2.2 million. The filing does not present a consolidated operating-margin figure.
- Cash flow and investment: Nine-month capital expenditures were $1,083.4 million, versus $923.4 million. Management expected approximately $1.5 billion of 2016 capital expenditures. The decline in operating cash flow from continuing operations was attributed largely to weather, gas-price and regulatory working-capital timing, including refunds of previously over-collected gas costs.
- Debt and liquidity: At September 30, long-term debt including current maturities was $6,678.8 million; short-term borrowings were $1,059.0 million. Cash was $16.1 million. Net available liquidity was $677.4 million. The debt-to-capitalization ratio was 67.0%, below the 70% limit in the revolving credit facility and term loan agreement. Commercial paper outstanding was $824.0 million; the company had no borrowings on its $1.5 billion revolving facility.
- Dividends: Declared dividends were $0.165 per share for Q3 and $0.640 per share for the nine-month period, compared with $0.310 and $0.830, respectively, in 2015.
Material changes versus prior periods
- Nine-month income from continuing operations rose $105.1 million. Lower interest expense and the absence of the $97.2 million 2015 loss on early debt extinguishment were important contributors; 2016 results also included an $8.6 million expense related to NIPSCO transmission upgrade agreements.
- Nine-month net revenues were nearly unchanged overall. Gas Distribution net revenues declined $44.2 million, primarily from lower regulatory and tax trackers and warmer weather, partly offset by rate and infrastructure investments. Electric net revenues increased $47.2 million, reflecting investment-related revenues, trackers and weather.
- Q3 electric net revenues benefited by approximately $11.3 million from warmer weather. Gas Distribution territories were 61% warmer than normal in Q3, with an immaterial net-revenue effect for that quarter; warmer weather reduced Gas Distribution nine-month net revenues by approximately $29 million.
- Net cash from operating activities from continuing operations declined by $373.5 million year over year. The 2015 cash-flow comparison also included the effects of the 2015 separation, including substantial CPG-related cash flows and approximately $3.8 billion received from CPG in investing activities.
Outlook, management commentary, risks and unusual items
- Management described a long-term regulated infrastructure investment program of approximately $30 billion, with about $3.1 billion executed to date. The company said cash generation, credit facilities, receivables programs and capital-market access were expected to provide adequate funding for 2016 activities and capital expenditures.
- Rate-case outcomes supported or could support future revenues: NIPSCO’s electric base-rate settlement provides a $72.5 million annual revenue increase, effective October 1, 2016. Pennsylvania’s gas rate settlement provides a $35.0 million increase, with new rates expected in December 2016; Maryland’s $3.7 million increase took effect October 27, 2016. Virginia’s requested $37.0 million increase remained pending, and Kentucky’s settlement provided a proposed $13.4 million increase, subject to commission action.
- NIPSCO’s November 1, 2016 integrated resource plan identified retirement of Bailly generating units as soon as mid-2018 and two Schahfer units by the end of 2023 as its preferred long-term option. Bailly retirement remained subject to MISO approval. If approved, NiSource expected $26–$31 million of contract termination and severance charges. Failure to recover the units’ net book value could reduce future earnings and cash flows.
- Environmental compliance could require significant spending. Preliminary estimates included approximately $170 million for steam-electric effluent limitations requirements and $230 million for coal-combustion-residual requirements; NIPSCO expected these costs to be eligible for rate recovery, but actual costs could vary. Cooling-water compliance was estimated at $0–$35 million. Keeping the existing coal fleet operating was expected to involve more than $1 billion of operating, maintenance, environmental and other costs over seven years.
- Environmental remediation liabilities totaled approximately $116.9 million. The filing identified $108.3 million related to manufactured-gas-plant sites and stated costs could be as much as $25 million higher than that estimate. The company said certain environmental costs were expected to be recoverable through rates, but recovery and ultimate costs are uncertain.
- Other risks include pending regulatory and FERC matters, litigation, pipeline safety requirements, climate and emissions rules, weather variability, interest-rate exposure and the ability to recover infrastructure and environmental costs through rates. Management said ordinary-course legal matters were not individually material at the time, while noting adverse outcomes could affect results, financial position or liquidity.
- NiSource early adopted stock-compensation accounting guidance in Q3. The adoption added a $25.3 million adjustment to beginning retained deficit and $7.2 million of 2016 tax benefits; the company said other adoption effects were not material. A $3.6 million tax benefit from favorable separation-related estimate adjustments was recorded in discontinued operations in Q3.
- No formal earnings or EPS guidance is provided in the supplied filing text. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether approved and pending rate adjustments are implemented as expected and recover the planned infrastructure costs.
- MISO’s decision on Bailly retirement, the timing and amount of related charges, and recovery of any remaining plant book value.
- Final environmental compliance requirements, actual capital costs and the extent and timing of regulatory cost recovery.
- Liquidity, commercial-paper balances, refinancing needs and compliance with debt covenants as capital spending continues.
- Drivers of the operating-cash-flow decline and the impact of weather, gas-price and regulatory working-capital fluctuations.
- Comparability of 2015 results with 2016, given the CPG separation and discontinued-operations presentation.