NiSource Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2015. NiSource is now a regulated natural-gas and electric utility holding company serving seven states. On July 1, 2015, it completed the spin-off of Columbia Pipeline Group (CPG); CPG’s historical results are presented as discontinued operations, affecting year-over-year comparisons.
Financial performance and condition
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Gross revenues | $817.2 million | $838.2 million | $3,554.0 million | $3,879.1 million |
| Net revenues (gross revenues less cost of sales) | $608.1 million | $575.8 million | $2,246.7 million | $2,109.5 million |
| Operating income | $109.7 million | $71.1 million | $580.4 million | $562.2 million |
| Continuing-operations income (loss) | $14.8 million | $(17.2) million | $134.2 million | $176.7 million |
| Net income (loss) attributable to NiSource | $(4.9) million | $31.4 million | $227.1 million | $375.8 million |
| Basic EPS from continuing operations | $0.05 | $(0.05) | $0.42 | $0.56 |
Calculated operating income as a percentage of net revenues was about 18.0% in Q3 2015 versus 12.3% in Q3 2014, and 25.8% for the 2015 nine-month period versus 26.7% in 2014. The filing does not present these margins as reported measures.
- Cash flow: Nine-month cash from operating activities was $1,193.9 million, including $906.3 million from continuing operations and $287.6 million from discontinued operations. Capital expenditures were $923.4 million. Investing cash flow was $2,406.2 million, including $3,798.2 million of cash contributions from CPG in connection with the separation. Financing cash flow was $(3,593.8) million. Cash and cash equivalents ended the period at $31.7 million.
- Debt and liquidity: Long-term debt, including current maturities, totaled $6,576.1 million, down from $8,422.5 million at December 31, 2014. Short-term borrowings were $107.2 million, consisting of receivables-securitization borrowings; there were no commercial-paper or revolving-credit-facility borrowings. The company reported $1,584.9 million of aggregate credit available under the facility and receivables programs, and a 63.7% debt-to-capitalization ratio.
- Balance sheet: Total assets were $17,055.9 million and total common stockholders’ equity was $3,800.3 million at September 30, 2015. The substantial reduction from year-end reflects, in significant part, the CPG separation and distribution.
Material changes versus the prior comparable period
- Q3 net revenues increased $32.3 million and operating income increased $38.6 million. Management attributed the improvement mainly to electric and gas distribution revenue growth, including rate and regulatory programs, environmental-investment recovery and weather effects; lower operating and maintenance costs also contributed.
- For the first nine months, net revenues increased $137.2 million and operating income increased $18.2 million. Gas distribution net revenues rose $120.5 million, primarily from rate and regulatory programs. Electric operating income declined $4.5 million, with higher expenses partly offsetting revenue growth.
- Continuing-operations income for the nine months fell $42.5 million year over year, principally because of a $97.2 million loss on early debt extinguishment in 2015. The company retired $1,075 million of bank term loans and tendered for $750 million of notes in May, using proceeds received from CPG.
- Reported net income fell in both comparison periods; the Q3 2015 loss includes $19.7 million of discontinued-operations loss, including separation-related costs and tax effects. Nine-month discontinued-operations income was $108.5 million in 2015 versus $199.1 million in 2014.
- Quarterly gross revenues declined despite higher net revenues, reflecting lower cost of sales. The separation also makes consolidated gross-revenue comparisons less directly comparable.
Outlook, management commentary, risks and unusual items
- Management projected approximately $1.3 billion of 2015 capital expenditures and described approximately $30 billion of long-term regulated utility infrastructure investment opportunities. It said it believed available operating income, financing facilities and capital-market access were adequate to fund 2015 operations and investment.
- NIPSCO filed an electric base-rate case on October 1, 2015, seeking an annual revenue increase of approximately $148 million; a decision was anticipated in the second half of 2016. Columbia of Massachusetts received approval after quarter-end for annual increases of $32.8 million beginning November 1, 2015, and a further $3.6 million beginning November 1, 2016. A Pennsylvania rate-case settlement providing an approximately $28 million annual increase was pending regulatory approval.
- Key regulatory and environmental uncertainties include the Clean Power Plan and other emissions requirements, coal-combustion-residual rules, and water-treatment requirements. The company could not estimate Clean Power Plan compliance costs or future CCR-related capital expenditures; estimated cooling-water compliance costs ranged from $4 million to $35 million.
- Environmental remediation accruals were approximately $125.4 million. The estimated liability for identified manufactured-gas-plant sites was $112.6 million, with costs considered reasonably possible to vary by as much as a further $25 million. Management expects a significant portion of certain environmental costs to be recoverable through rates, but recovery and ultimate costs are uncertain.
- NiSource reported ordinary-course legal matters that were not individually material, while noting litigation outcomes could affect results, financial position or liquidity. Fitch affirmed NiSource’s BBB- rating with a positive outlook; the filing noted a Fitch downgrade could take the rating below investment grade. Ratings-trigger agreements could require approximately $26.8 million of additional collateral if specified downgrade thresholds were crossed.
- Other unusual items include the $97.2 million debt-extinguishment loss and the CPG spin-off. The filing states disclosure controls were effective and reports no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How post-separation operating results, costs and continuing service arrangements with CPG develop, and whether transition services end within the expected 18 months.
- Whether pending rate cases and regulatory trackers are approved as expected, and the timing and realized returns of planned utility investment.
- The ultimate cost, customer-rate recovery and schedule for environmental compliance, especially Clean Power Plan, CCR and water requirements.
- Debt, credit ratings, covenant headroom and seasonal liquidity needs; short-term cash was modest despite substantial reported credit availability.
- How much of reported cash flow and earnings reflects recurring continuing utility operations rather than separation-related, discontinued-operation or working-capital effects.