Business context and reporting period
NiSource Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. Its regulated businesses provide natural gas distribution, transmission and storage, and electric generation and distribution. Results are seasonal, and management cautions that interim results may not indicate full-year performance.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Gross revenues | $1,076.8 million | $956.2 million | $4,060.5 million | $3,637.3 million |
| Net revenues | $833.8 million | $729.0 million | $2,792.2 million | $2,547.0 million |
| Operating income | $176.4 million | $131.5 million | $799.3 million | $733.5 million |
| Continuing-operations income | $49.5 million | $16.6 million | $337.9 million | $276.7 million |
| Net income | $48.1 million | $19.3 million | $380.3 million | $282.1 million |
| Basic EPS | $0.16 | $0.06 | $1.22 | $0.99 |
Operating margin, calculated as operating income divided by net revenues, was approximately 21.2% in Q3 2013 versus 18.0% in Q3 2012, and 28.6% for the first nine months of 2013 versus 28.8% in 2012. Q3 declared dividends were $0.25 per common share; nine-month dividends were $0.98 per share.
- Operating cash flow was $1,078.6 million for the first nine months, compared with $941.8 million in 2012. Capital expenditures were $1,297.3 million, up from $1,022.2 million; operating cash flow was therefore about $219 million below capital expenditures before other investing activity.
- Cash and cash equivalents were $14.9 million at September 30, 2013, versus $36.3 million at December 31, 2012. Management reported net available liquidity of approximately $1,381.1 million. The amended $2.0 billion revolving credit facility had no borrowings and $1,366.2 million of aggregate credit available.
- Long-term debt, including current maturities, was $7,630.3 million; short-term borrowings were $820.8 million. Balance-sheet total debt on those stated categories was approximately $8.45 billion. Shareholders’ equity was $5,700.9 million.
- Current assets were $1,745.5 million and current liabilities were $3,005.6 million. Liquidity also relies on seasonal operating cash flows and external financing, as management describes.
Material changes and segment performance
- Nine-month continuing-operations income rose $61.2 million. Management attributed the increase principally to the Columbia Transmission customer settlement, gas distribution regulatory and service programs, colder weather compared with 2012, and electric environmental investment recovery. Higher labor and administrative costs and depreciation partly offset these gains.
- Columbia Pipeline Group operating income increased to $321.0 million for nine months from $268.9 million. The segment benefited from the customer settlement and higher regulatory trackers, while throughput declined. Q3 operating income was $98.7 million versus $38.8 million.
- Gas Distribution operating income increased to $279.1 million for nine months from $263.4 million, but the segment recorded a Q3 operating loss of $5.0 million, versus income of $10.4 million. The quarterly decline reflected higher operating expenses, including environmental, outside-service and labor costs.
- Electric Operations operating income increased to $212.2 million for nine months from $200.2 million and to $87.5 million in Q3 from $83.7 million. Nine-month net revenues were nearly flat year over year.
- Average basic shares outstanding rose to 312.1 million for the nine months from 285.9 million. The filing attributes the prior-year diluted-share comparison in part to forward agreements settled in Q3 2012.
Outlook, commentary, risks and unusual items
- NiSource projected 2013 capital expenditures of approximately $2.0 billion; it did not provide a full-year earnings or EPS forecast in the supplied filing text. Management stated that operating cash, credit facilities, commercial paper and capital-market access were expected to provide adequate funding for 2013 activities and capital spending.
- Infrastructure plans include a seven-year Northern Indiana gas investment plan of approximately $710 million and an electric plan of approximately $1.1 billion, both subject to regulatory review. Gas Distribution replacement and enhancement investment was expected to reach approximately $750 million in 2013. Columbia Transmission’s modernization settlement supports approximately $1.5 billion of investment over five years, within a broader 10-to-15-year program estimated at $4 billion to $5 billion.
- NiSource sold its unregulated commercial and industrial natural gas marketing portfolio on September 1, 2013, recording a $1.5 million after-tax disposition loss in Q3. The January sale of Retail Services’ service-plan and leasing businesses contributed to a $34.9 million nine-month after-tax gain on discontinued-operations dispositions. These transactions make reported net income less comparable with continuing operations.
- Environmental remediation reserves were $149.5 million at September 30. Management identified possible future costs from evolving air, water and waste rules; some compliance costs cannot yet be estimated, and recovery from customers is not assured in every case. Northern Indiana estimated $860 million of air-compliance capital improvements, with approximately $350 million remaining, and considered recovery likely.
- Other key exposures include weather and seasonality, regulatory approvals and rate recovery, project execution and costs, pension funding, interest rates, commodity and counterparty risks, and potential environmental regulation. Management said risk factors were not materially changed from the 2012 Form 10-K. It reported effective disclosure controls; the first phase of a financial-ledger migration changed some processes and controls, with further phases planned through 2015.
Important facts for investors to verify
- Whether the filed Northern Indiana infrastructure plans and pending rate proceedings are approved on terms and timing that support the expected investment recovery.
- How much of the planned capital spending is funded by operating cash versus additional debt or equity, and the effect on leverage and liquidity.
- Whether Columbia Pipeline Group’s settlement-related revenue benefits and modernization investment translate into sustained earnings and cash generation.
- The final costs, schedule and rate recovery for electric environmental projects and remediation obligations, including uncertainties not yet estimable.
- Continuing-operations earnings and per-share trends excluding discontinued-operation gains and losses, while accounting for the increased share count and seasonal results.