NiSource Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; unaudited. NiSource is an energy holding company whose results are generated largely by regulated gas distribution, gas transmission and storage, and electric operations. Results are seasonal and can be affected by weather.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Gross revenues | $1,138.1 million | $974.9 million | $4,667.9 million | $4,965.5 million |
| Net revenues | $718.1 million | $657.0 million | $2,522.5 million | $2,405.3 million |
| Operating income | $123.3 million | $93.6 million | $665.9 million | $553.5 million |
| Income from continuing operations | $33.4 million | $(13.2) million | $258.8 million | $142.0 million |
| Net income (loss) | $33.2 million | $(15.4) million | $258.6 million | $128.2 million |
| Basic EPS | $0.12 | $(0.05) | $0.93 | $0.47 |
| Operating margin on net revenues | 17.2% | 14.2% | 26.4% | 23.0% |
Q3 net revenues rose $61.1 million, chiefly from electric operations, including warmer weather and stronger industrial margins; operating income increased $29.7 million. For the first nine months, net revenues grew $117.2 million and operating income rose $112.4 million. Electric operations led the improvement; gas distribution operating income was slightly lower year over year, while gas transmission and storage operating income was higher for the nine-month period but lower in Q3.
Cash flow and investment: Nine-month operating cash flow was $332.5 million, down from $1,120.9 million. Continuing-operations operating cash flow was $387.4 million. Capital expenditures were $553.7 million; investing cash use was $761.1 million. Financing provided $423.1 million, including a $621.6 million net increase in short-term borrowings. NiSource paid $191.4 million in common dividends.
Balance sheet and liquidity: At September 30, cash and cash equivalents were $10.9 million and restricted cash was $276.5 million. Current assets were $2,195.5 million and current liabilities $3,251.2 million. Long-term debt, including current maturities, was $6,691.2 million; adding $724.6 million in short-term borrowings gives total debt of approximately $7.4 billion. The $1.5 billion revolving facility had $578.0 million drawn and $892.9 million of credit available. Common equity was $4,877.9 million.
Material changes and unusual items
- Nine-month net income doubled approximately year over year, with higher electric margins and warmer weather among the main contributors. The nine-month effective tax rate fell to 31.6% from 43.9%; a $15.2 million discrete tax benefit tied to a Pennsylvania rate settlement contributed to the change.
- Operating cash flow declined substantially. Management attributed much of the comparison to $289.9 million of previously over-collected gas costs returned to customers in 2010, versus $589.4 million of under-collected gas costs received in 2009. A new accounting rule for receivables securitizations also reduced reported operating cash flow by $241.9 million, although the programs’ operations did not change.
- In September, NiSource entered forward sale agreements covering 24.265 million common shares at an initial forward price of $15.9638 per share. Settlement is expected no later than September 2012; the company had not received proceeds or recorded an amount for the agreement at quarter-end.
- NiSource retired specified generating units in Q3 following an Indiana rate order. Associated construction work in progress, materials and coal totaling $4.3 million were expensed.
- The 2010 Health Care Act-related plan changes increased the other postretirement benefit obligation, net of plan assets, by $31.0 million, with corresponding regulatory asset and accumulated comprehensive loss adjustments; 2010 periodic benefit cost increased about $2.2 million.
Outlook, management commentary and risks
- Management projected approximately $950 million of 2010 capital expenditures. It expected 2010 pension contributions of about $161.0 million and postretirement medical and life contributions of about $49.1 million; $152.7 million and $38.7 million, respectively, had been contributed through September.
- No consolidated earnings guidance is provided in the supplied filing text. Management described its strategy as focused on regulated businesses, infrastructure investment, regulatory initiatives, gas transmission growth, balance-sheet management, and expense control.
- Gas transmission expansion projects target Marcellus and Appalachian production. The approximately $80 million Majorsville project entered service in August; other projects were under construction or awaiting regulatory approvals. Columbia Gulf filed a FERC rate case seeking a $50 million revenue increase, subject to refund.
- Regulatory outcomes remain important: Northern Indiana’s electric rate order was subject to tariff compliance proceedings and appeals; several gas rate cases and a proposed utility merger were pending. Rate recovery and timing may affect earnings and cash flows.
- Environmental exposure is a significant uncertainty. Electric generation environmental improvements were estimated at $560–$800 million, with recovery from customers uncertain; proposed coal-ash rules could require up to $70 million of capital improvements in five years. NiSource also estimated $20–$25 million to comply with a hazardous-air-pollutant rule. Environmental reserves were approximately $73.6 million.
- The Tawney royalty settlement liability was capped at $338.8 million; $328.2 million had been contributed by September 30, leaving $10.6 million unpaid. The EPA notice concerning alleged air-permit violations at Northern Indiana generating stations and the Majorsville remediation dispute remained unresolved; outcomes and costs were not clear.
- Other risks identified include economic weakness, customer usage and collections, interest rates and access to capital, commodity and counterparty risks, pension funding, weather, and possible climate and other environmental regulation. Credit ratings were investment grade but at the lower end of that category (BBB-/Baa3).
Investor verification priorities
- Confirm the drivers and sustainability of electric earnings growth, particularly weather, industrial demand, and rate changes.
- Reconcile the sharp operating-cash-flow decline, including gas-cost settlements and receivables-securitization accounting, and monitor short-term borrowing and available credit.
- Track settlement timing and dilution implications of the 24.265 million-share forward equity agreement.
- Assess the timing, approvals, and customer cost recovery for planned capital spending, rate cases, and environmental compliance projects.
- Monitor the remaining Tawney settlement payment and developments in the EPA and remediation matters.