NiSource Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. NiSource is a regulated energy holding company operating natural gas and electric utilities in seven states. Amounts below are in U.S. dollars; financial statements are unaudited.
Financial results and key metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $1,007.0 million | $990.7 million | $2,757.8 million | $2,589.3 million |
| Operating income | $118.4 million | $124.0 million | $519.0 million | $539.4 million |
| Net income (loss) | $24.5 million | ($44.4 million) | $300.6 million | $166.9 million |
| Net income available to common shareholders | $23.2 million | ($44.4 million) | $299.3 million | $166.9 million |
| Basic EPS | $0.07 | ($0.14) | $0.86 | $0.51 |
| Operating margin | 11.8% | 12.5% | 18.8% | 20.8% |
Operating margins are calculated as operating income divided by operating revenue. Six-month operating cash flow was $809.5 million, versus $651.4 million. Capital expenditures were $832.5 million, compared with $732.2 million, leaving cash flow after capital expenditures of approximately negative $22.9 million before other investing items.
At June 30, 2018, cash and cash equivalents were $68.2 million. Long-term debt was $7.09 billion, with $597.7 million current; short-term borrowings were $600.0 million. The reported debt-to-capitalization covenant ratio was 60.3%. Net available liquidity was $2.228 billion, including available credit capacity.
Changes versus the prior comparable period
- Q2 revenue increased $16.3 million, but operating income declined $5.6 million. For the first half, revenue rose $168.5 million while operating income fell $20.4 million.
- Q2 returned to net income from a prior-year loss; first-half net income increased $133.7 million. Much of the year-over-year improvement reflects the prior-year $111.5 million loss on early debt extinguishment, lower income taxes following the Tax Cuts and Jobs Act (TCJA), and lower operating expenses—not stronger operating income.
- Gas Distribution Operations’ first-half operating income fell $21.7 million to $360.8 million, largely reflecting TCJA-related customer refund reserves. Electric Operations’ first-half operating income rose $2.3 million to $165.5 million, despite lower net revenues, as operating expenses declined.
- First-half common dividends declared were $0.585 per share, up from $0.525. Average basic shares outstanding increased to 346.2 million from 324.4 million, partly following a May private placement of 24.96 million common shares.
Outlook, management commentary, risks and unusual items
- Management expected 2018 capital expenditures of approximately $1.7–$1.8 billion and described approximately $30 billion of projected long-term regulated utility infrastructure investment. The filing does not provide a specific earnings or EPS forecast.
- Management said liquidity was adequate to fund operations and planned capital spending, while noting the TCJA would reduce customer billings and operating cash collections. Regulators were still determining how and when tax savings and excess deferred taxes would be returned to customers.
- TCJA-related regulatory liabilities increased $65.0 million in the first half for collections considered likely to be refunded. Approximately $1.5 billion of excess deferred taxes had been recorded as regulatory liabilities at December 31, 2017; the amount and customer passback timing remained subject to regulatory review.
- NiSource issued $350 million of 3.65% notes due 2023 and raised $599.6 million net from common stock and $394.4 million net from perpetual preferred stock. It recorded a $12.5 million Q2 loss on early debt extinguishment. After quarter-end, it redeemed another $551.1 million of notes and anticipated a further $33.0 million extinguishment loss in Q3.
- Q2 included a $62.5 million increase in the asset retirement obligation following revised coal-ash compliance cost estimates. The retirement of Bailly Units 7 and 8 resulted in about $245 million being reclassified to regulatory assets.
- NIPSCO’s gas TDSIC recovery faced an adverse Indiana Supreme Court decision on project specificity. NiSource recorded a $2.5 million liability for potential customer passback and filed a revised recovery request. Separately, a pending BP/Whiting Clean Energy petition could reduce NIPSCO electric demand and revenue beginning in May 2019; the impact was not yet determined.
- Environmental remediation liabilities were approximately $109.7 million. The estimated MGP-site liability was $105.5 million, with costs reasonably possible to vary by as much as $25 million above that estimate. NIPSCO estimated about $193 million of coal-ash compliance capital costs; estimates and regulatory requirements may change. Ordinary-course legal matters were not individually considered material, but outcomes remain uncertain.
- Key risks identified include regulatory decisions and cost recovery, utility infrastructure and construction execution, environmental compliance, weather and customer demand, commodity and interest-rate exposure, access to capital, and potential changes in credit ratings. Credit ratings and outlooks were stable at quarter-end; Fitch upgraded the commercial paper rating to F2.
Important facts for investors to verify
- Whether pending gas and electric rate cases and infrastructure recovery plans are approved, and how TCJA savings and deferred-tax balances will be returned to customers.
- The final financial effect of the TDSIC court ruling, including customer refunds and the revised recovery filings.
- Actual 2018 capital spending, financing needs, debt maturities and the Q3 debt-extinguishment charge; also monitor dilution and the 5.65% preferred dividend obligations.
- The size and timing of any revenue loss from the BP/Whiting Clean Energy petition and the impact of NIPSCO’s generation transition and environmental compliance costs.
- Whether environmental, asset-retirement and remediation estimates change, and whether liquidity, covenant headroom and credit ratings remain adequate.