Business context and reporting period
NiSource Inc.’s unaudited Form 10-Q covers the three months ended March 31, 2015, compared with the first quarter of 2014. The company operates regulated gas distribution, Columbia Pipeline Group (CPG) transportation and storage, and electric businesses. Results are seasonal; interim results may not indicate full-year performance.
NiSource expected to separate CPG on July 1, 2015, distributing CPG shares pro rata to NiSource shareholders. Completion remained subject to conditions, including a tax opinion and final board approval; no shareholder vote was required. CPPL, a CPG partnership, completed an IPO in February.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Gross revenues | $2,149.7 million | $2,320.5 million |
| Total net revenues | $1,343.7 million | $1,259.2 million |
| Operating income | $530.1 million | $533.7 million |
| Net income attributable to NiSource | $268.4 million | $266.2 million |
| Basic and diluted EPS | $0.85 | $0.85 |
| Operating cash flow | $604.3 million | $394.0 million |
| Capital expenditures | $407.5 million | $386.3 million |
- Net revenues rose $84.5 million, largely as lower gas and fuel costs reduced cost of sales. Operating income was down $3.6 million as operating expenses increased, including higher separation-related service costs.
- Net income attributable to NiSource increased $2.2 million; per-share earnings were unchanged. The effective tax rate declined to 35.4% from 37.9%.
- Cash from operations increased $210.3 million, primarily reflecting working-capital changes, including gas/fuel cost recoveries and receivables. Investing cash outflow was $388.9 million; financing cash outflow was $198.8 million. Ending cash was $42.0 million.
- At March 31, total assets were $24.899 billion and total equity $7.470 billion, including $946.2 million of noncontrolling interest following the CPPL IPO. Long-term debt, including current maturities, was $8.421 billion; short-term borrowings were $314.0 million. Cash and cash equivalents were $42.0 million.
- NiSource had a $2.0 billion revolving credit facility with no borrowings and $1.946 billion of available credit; commercial paper outstanding was $39.0 million. The debt-to-capitalization covenant ratio was 53.9%, below the 70% limit. The company stated it expected adequate capital for 2015 operations and investment.
- Dividend declared per common share was $0.52, versus $0.50 a year earlier. Q1 common dividends paid were $82.1 million.
Material changes and segment results
- Gas Distribution: Operating income rose to $325.2 million from $301.8 million. Net revenues increased $91.1 million, including $50.6 million from trackers (largely offset in expenses) and $33.2 million from regulatory and service programs. Throughput rose 1.1%; the quarter was 18% colder than normal, versus 19% colder than normal a year earlier.
- Columbia Pipeline Group Operations: Operating income rose to $163.0 million from $158.9 million. Net revenues declined $5.8 million as lower regulatory trackers and other items outweighed $30.7 million of higher demand-margin revenue from projects and contracts. Throughput increased to 619.4 MMDth from 588.5 MMDth.
- Electric: Operating income declined to $70.0 million from $78.9 million. Net revenues were essentially flat; electric sales fell 8.4%, including lower resale sales and industrial usage. Higher operating expenses drove the income decline.
- Short-term borrowings declined from $1.577 billion at December 31, 2014 to $314.0 million at quarter-end, principally reflecting repayment of borrowings after CPPL’s $1.168 billion net IPO proceeds. The IPO also introduced noncontrolling interest into consolidated results.
Outlook, commentary, risks and unusual items
- Management projected 2015 capital expenditures of approximately $2.4 billion. The spending plan includes utility modernization, environmental compliance, and pipeline growth projects. Pension contributions were estimated at $3.5 million and other postretirement benefit contributions at $34.8 million for 2015.
- Management cited continued infrastructure replacement, regulatory initiatives and pipeline expansion as business priorities. Planned projects include approximately $300 million of pipeline modernization investment in 2015; the longer-term modernization program is expected to exceed $4 billion. Several major expansion projects were scheduled for service from 2015 onward.
- Before the proposed separation, CPG expected to issue long-term debt and use proceeds to repay intercompany debt and pay NiSource a special dividend, with NiSource intending to use much of the proceeds to reduce net debt. The filing gives no clear amount for the planned debt issuance or special dividend.
- Standard & Poor’s affirmed NiSource’s BBB- senior unsecured rating and A-3 commercial paper rating, with a Watch Positive outlook. Moody’s and Fitch ratings were also investment grade; the filing notes that a downgrade below specified thresholds could trigger approximately $39.7 million of collateral requirements.
- Regulatory matters include Pennsylvania and Massachusetts gas rate requests, a Virginia rate case remanded for further proceedings, and an Indiana Court of Appeals ruling remanding NIPSCO’s electric TDSIC plan to the IURC. Management said the TDSIC decision’s impact was not expected to be material, but the appeal process and potential rate recovery remain relevant.
- Environmental remediation accruals totaled approximately $128.3 million. The estimated liability for identified manufactured-gas-plant sites was $120.3 million, with costs potentially varying by as much as an additional $25 million. Potential future air, water and coal-ash compliance costs were not estimable in the filing.
- Other disclosed exposures include guarantees of subsidiary debt totaling $7.961 billion and a FERC proceeding concerning the multiplier in NIPSCO transmission upgrade agreements; management did not expect a material financial statement impact from the latter. A $171,500 civil penalty resolved a Pennsylvania Clean Streams Law and permit notice of violation. Management reported no material changes to risk factors from its 2014 Form 10-K.
- Forward-looking results could be affected by weather, commodity markets, regulation, environmental requirements, litigation, financing conditions and the timing or completion of the separation. Management said disclosure controls were effective and reported no material internal-control changes during the quarter.
Important facts for investors to verify
- Whether the separation was completed as planned, and the final terms, tax treatment, capital structure and allocation of debt between NiSource and CPG.
- Whether requested gas and electric rate increases and infrastructure cost recovery were approved, and the outcome of the NIPSCO TDSIC remand and appeals.
- Whether the $2.4 billion capital plan and major pipeline and environmental projects remain on schedule and within budget, and how much spending is recoverable through rates or supported by contracts.
- How environmental rules, remediation estimates and potential collateral triggers may change costs, liquidity or financing needs.
- Whether higher first-quarter operating cash flow is sustainable, given its significant working-capital contribution and the company’s seasonal cash-flow pattern.