NiSource Inc. 2017 Q2 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. NiSource is a regulated energy holding company, with natural gas distribution operations across seven states and electric operations in northern Indiana. Financial statements are unaudited.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total net revenues | $713.9 million | $662.7 million | $1,760.2 million | $1,602.8 million |
| Operating income | $124.5 million | $138.2 million | $541.0 million | $519.6 million |
| Net income (loss) | $(44.4) million | $28.9 million | $166.9 million | $215.5 million |
| Basic EPS | $(0.14) | $0.09 | $0.51 | $0.67 |
Cash flow and investment: First-half operating cash flow was $651.4 million, compared with $487.1 million a year earlier. Capital expenditures were $732.2 million; investing activities used $791.2 million. Financing activities provided $131.3 million. Cash and cash equivalents ended the period at $17.9 million.
Debt and liquidity: At June 30, long-term debt excluding current maturities was $6.78 billion; current long-term debt was $561.2 million and short-term borrowings were $901.3 million. Net available liquidity was $1.252 billion, including cash and available credit capacity. The debt-to-capitalization ratio was 66.7%, below the 70% covenant limit. Credit ratings were investment grade with stable outlooks, as reported. The estimated fair value of long-term debt, including current maturities, was $8.06 billion versus a $7.34 billion carrying amount.
Dividends and equity: Dividends declared were $0.175 per share for Q2 and $0.525 per share for the first half. Under a new at-the-market program, NiSource issued about 1.32 million shares in the first half for net proceeds of $33.8 million; approximately $465.9 million of capacity remained at quarter-end.
Changes versus comparable periods
- Q2 net revenues increased 7.7%, but operating income declined $13.7 million. The quarter’s net loss primarily reflected a $111.5 million loss on early debt extinguishment and lower operating income.
- First-half operating income rose $21.4 million, while net income fell $48.6 million, primarily because of the debt-extinguishment loss.
- Gas Distribution operating income fell $28.4 million in Q2 and $2.6 million in the first half. Warmer-than-normal weather reduced net revenues by $7.0 million in Q2 and $14.8 million in the first half; higher operating costs also weighed on results.
- Electric Operations operating income increased $16.5 million in Q2 and $23.2 million in the first half, supported by new rates, infrastructure trackers and transmission investment recovery.
- On May 11, NiSource issued $2.0 billion of senior notes due 2027 and 2047, with stated rates of 3.49% and 4.375%. It tendered approximately $990.7 million of existing notes, recording the early-extinguishment loss, primarily from redemption premiums. First-half long-term debt issuance and repayment cash flows were $2.0 billion and $1.08 billion, respectively.
Outlook, commentary and material risks
- Management projected 2017 capital expenditures of approximately $1.6 billion to $1.7 billion and described a long-term regulated utility infrastructure investment plan of approximately $30 billion. It reported $732.2 million of first-half capital spending.
- Management stated available operating cash flow, credit facilities, debt markets and other financing sources were expected to provide adequate funding for operations and capital expenditures. The filing does not provide an earnings or EPS forecast.
- Regulatory-approved rates and infrastructure replacement programs supported revenue; weather, higher employee and administrative costs, outside services, environmental costs and depreciation affected operating results. Gas and fuel costs are generally recovered through regulatory mechanisms, subject to prudence review and applicable approvals.
- NIPSCO’s resource plan anticipates retiring Bailly Units 7 and 8 by May 31, 2018, and two R.M. Schahfer units by the end of 2023. Management stated keeping the existing coal fleet operating could entail more than $1 billion of operating, maintenance, environmental and other costs over seven years. The plan and related recovery remain subject to regulatory and operational developments.
- Estimated NIPSCO compliance capital costs were approximately $193 million for coal-combustion-residual requirements and approximately $170 million for effluent-limitation guidelines. The latter rule was stayed during EPA reconsideration; actual requirements and costs remain uncertain. Cost recovery proceedings were pending.
- Environmental remediation liabilities totaled approximately $115.7 million at June 30, 2017. The estimated liability for 64 identified manufactured-gas-plant sites was $108.9 million; remediation costs at those sites could vary by as much as $25 million above the estimate. The filing says a significant portion of environmental assessment and remediation costs is expected to be recoverable through rates, but recovery is not assured.
- NiSource began transitioning technology services from IBM to new providers; potential IBM termination charges had not been recorded because the amount, if any, remained under discussion. Transition was expected to be substantially complete by year-end 2017.
- Other disclosed risks include regulatory outcomes, environmental compliance, weather, commodity and interest-rate exposure, infrastructure reliability, cyber risks, financing and credit conditions, and litigation. Ordinary-course legal matters were not individually considered material; the filing cautions outcomes could affect results, financial position or liquidity.
Important facts for investors to verify
- How the $111.5 million debt-extinguishment charge and the new debt issuance affect subsequent-period earnings, interest expense and refinancing needs.
- Whether forecast 2017 capital spending remains within the $1.6 billion to $1.7 billion range and how it is funded, including further ATM equity issuance.
- Progress and final outcomes of pending rate, infrastructure tracker and environmental cost-recovery proceedings.
- Actual compliance costs and schedules for CCR and ELG requirements, and decisions on planned coal-unit retirements.
- Operating cost trends and the effects of weather on gas distribution and electric demand, alongside the durability of rate-driven revenue growth.
- Liquidity, short-term borrowings and covenant headroom; the company reported a 66.7% debt-to-capitalization ratio against a 70% limit.