NiSource Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; filed February 28, 2011. This is an annual report, not a standalone fourth-quarter report. NiSource is a regulated energy holding company serving approximately 3.8 million customers across natural gas distribution, gas transmission and storage, and electric operations. Management says virtually all operating income comes from regulated businesses.
Financial performance
| Metric | 2010 | 2009 | Change / context |
|---|---|---|---|
| Gross revenues | $6,422.0 million | $6,650.6 million | Down $228.6 million; lower gas commodity pass-through revenues and reduced unregulated marketing activity were significant factors. |
| Net revenues | $3,447.9 million | $3,332.6 million | Up $115.3 million, or about 3.5%. |
| Operating income | $921.3 million | $801.0 million | Up $120.3 million, or about 15.0%. |
| Income from continuing operations | $294.6 million | $230.5 million | Up $64.1 million; basic EPS rose to $1.06 from $0.84. |
| Net income | $292.0 million | $217.7 million | Basic EPS was $1.05 versus $0.79. |
| Cash flow from operating activities | $725.4 million | $1,666.2 million | Down $940.8 million, largely reflecting gas-cost working-capital timing and accounting for receivables transfers as secured borrowings. |
| Capital expenditures | $803.8 million | $777.2 million | Cash-flow statement amount; MD&A reports $911.6 million including certain other investing activities. |
| Operating margin | About 26.7% | About 24.0% | Calculated as operating income divided by net revenues. |
| Common dividend | $0.92 per share | $0.92 per share | Board declared a $0.23 quarterly dividend in January 2011. |
Segment trends: Electric net revenues increased $121.5 million and operating income rose to $235.5 million from $116.7 million, reflecting stronger industrial demand, warmer weather and higher off-system sales. Gas Transmission and Storage net revenues increased $18.5 million, but operating income declined to $377.1 million from $388.5 million as maintenance, labor and depreciation costs rose. Gas Distribution net revenues fell $6.9 million, while operating income edged up to $332.7 million from $327.8 million.
Debt, liquidity and financial position
- Consolidated indebtedness was approximately $7.35 billion at year-end, including $5.94 billion of long-term debt excluding current maturities and $1.38 billion of short-term borrowings. Total assets were $19.94 billion and common equity was $4.92 billion.
- Short-term borrowings increased from $103.0 million in 2009 to $1.38 billion, including $1.11 billion drawn under the revolving facility and $275 million related to receivables securitization. The $1.5 billion revolving facility was due to terminate July 7, 2011; management intended to negotiate a replacement.
- Cash and cash equivalents were $9.2 million; restricted cash was $202.9 million. The company reported $378.3 million of credit available under the revolving facility at December 31, 2010.
- The debt-to-capitalization covenant ratio was 59.9%, below the 70% revolving-credit limit. Fitch and Moody’s affirmed investment-grade ratings of BBB- and Baa3, respectively, with stable outlooks; S&P affirmed BBB- in February 2011. A downgrade below specified thresholds could trigger collateral requirements and affect liquidity.
- In 2010 NiSource issued $250 million of 6.25% notes due 2040, redeemed $681.8 million of 7.875% notes, and repurchased $273.1 million of 10.75% notes due 2016. The tender generated a $96.7 million early-extinguishment loss.
Material changes, outlook and notable items
- Net income improved from 2009, while operating cash flow declined sharply. The filing attributes much of the cash-flow drop to working-capital movements, including a $250.4 million use from refunding previously over-recovered gas costs and the accounting change for receivables programs.
- Effective January 2010, new accounting guidance required receivables transfers previously treated as sales to be recorded as secured borrowings. NiSource recorded $275 million of related short-term debt at year-end; management said the accounting change reduced reported operating cash flow by about $241.9 million.
- NiSource decided to wind down unregulated natural gas marketing in favor of its core regulated businesses. Other gross revenues decreased as a result.
- Outlook: The filing provides no specific consolidated earnings guidance. Estimated 2011 capital expenditures and certain other investing activities are $1.1 billion, funded through operating cash flow, equity and short-term debt. Management stated that available operating cash, credit facilities, debt agreements and capital-market access should provide adequate capital for 2011.
- Gas transmission growth is focused on Marcellus/Appalachian production; projects advanced or completed in 2010 were designed to provide market access for more than 500,000 Dth per day. Execution, construction costs and future production/customer demand remain relevant risks.
- Northern Indiana’s 2010 electric rate filing sought $75.7 million of additional gross revenue; an order was anticipated by year-end 2011, with new rates expected in early 2012. Columbia Gulf sought a roughly $50 million annual revenue increase, subject to refund. These requests were pending at filing.
- Environmental consent-decree work at Northern Indiana coal plants is estimated to require $550–$650 million of capital spending through 2018, plus $3.5 million in fines and $9.5 million for mitigation. The company believes capital costs are likely recoverable from customers, but recovery depends on regulatory approval. Broader generation environmental requirements could raise total estimated capital needs.
- The Tawney royalty settlement liability was capped at $338.8 million. NiSource had contributed $330.5 million by year-end; $8.3 million remained unpaid at December 31, with a further $2.7 million paid afterward.
- Pension and postretirement plans were underfunded by $578.4 million and $429.2 million, respectively. Expected 2011 contributions total approximately $199.0 million. Environmental remediation reserves were approximately $79.8 million.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Whether operating cash flow stabilizes after the 2010 working-capital effects, and how much of the reported decline reflects accounting classification rather than underlying cash generation.
- Refinancing and liquidity plans for the revolving credit facility maturing in July 2011, alongside the substantial short-term borrowing balance.
- Regulatory outcomes and timing for Northern Indiana’s electric rate case and Columbia Gulf’s rate request, including permitted returns and cost recovery.
- Actual environmental compliance spending, customer-rate recovery, and any additional requirements beyond the $550–$650 million consent-decree estimate.
- Delivery and customer commitments for Marcellus-related growth projects, and whether projected throughput and returns are achieved.
- Ongoing pension funding needs, environmental and legal exposures, and potential collateral demands if credit ratings deteriorate.
- How much of 2010 earnings growth is repeatable, given favorable electric usage/weather and the $96.7 million debt-extinguishment charge.