NiSource Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unaudited results. NiSource operates regulated natural gas distribution, pipeline and storage, and electric businesses; results are seasonal, with gas demand typically strongest in the heating season.
Financial results
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Gross revenues | $2,320.5 million | $1,782.2 million |
| Net revenues (gross revenues less cost of sales) | $1,259.2 million | $1,106.2 million; up 13.8% |
| Operating income | $533.7 million | $428.9 million; up 24.4% |
| Income from continuing operations | $266.4 million; $0.85 per basic share | $216.0 million; $0.69 per basic share |
| Net income | $266.2 million; $0.85 per basic share | $260.5 million; $0.84 per basic share |
| Operating cash flow | $394.0 million | $449.1 million |
| Capital expenditures | $386.3 million | $369.3 million |
| Cash and cash equivalents | $38.0 million at March 31 | $26.8 million at December 31, 2013 |
Operating income as a share of net revenues was approximately 42.4%, versus 38.8% a year earlier. Net income growth was modest partly because Q1 2013 included a $36.4 million after-tax gain on the disposition of discontinued operations; continuing-operations earnings rose materially. Q1 2014 also included a $7.1 million tax expense related to Indiana’s enacted corporate tax-rate reduction.
Balance sheet, debt and liquidity
At March 31, 2014, total assets were $23.1 billion and common stockholders’ equity was $6.0 billion. Long-term debt, including current maturities, was $8.169 billion; short-term borrowings were $812.5 million, comprising $297.5 million of commercial paper and $515.0 million of receivables securitization borrowings. Management reported a 59.9% debt-to-capitalization ratio, below the 70% revolving-credit-facility covenant. The $2.0 billion revolving facility had no borrowings outstanding, with $1.688 billion of credit available. Current assets were $2.320 billion versus current liabilities of $3.341 billion.
Changes and segment performance
- Gas Distribution operating income increased to $301.8 million from $234.1 million, reflecting regulatory and service programs, colder weather, and higher usage. Weather was 19% colder than normal and 18% colder than Q1 2013.
- Columbia Pipeline Group operating income rose to $158.9 million from $133.5 million. Drivers included higher demand and commodity revenue, royalties, equity earnings, and a $17.5 million gain on mineral-interest conveyances.
- Electric Operations operating income increased to $78.9 million from $65.2 million, supported by industrial usage, off-system sales, environmental-investment recovery, and colder weather.
- Operating cash flow declined by $55.1 million, primarily because NiSource received an income-tax refund in Q1 2013 but none in Q1 2014. Capital spending increased year over year.
Outlook, management commentary and risks
Management projected approximately $2.2 billion of 2014 capital expenditures and said operating cash generation, available credit, commercial paper, and access to capital markets should provide adequate funding. No specific earnings-per-share guidance was stated in the supplied filing text. Pension contributions expected for 2014 were approximately $38.3 million; other postretirement benefit contributions were approximately $39.1 million.
Major investment programs include an approved $1.1 billion, seven-year electric modernization plan; a proposed $710 million, seven-year gas modernization plan awaiting an IURC decision; and pipeline modernization and expansion projects. Columbia Transmission planned roughly $300 million of annual modernization investment, within a program expected to exceed $4 billion over 10 years or more. Management cited weather, commodity markets, regulation, environmental requirements, litigation, pension funding, economic conditions, and counterparty credit as risks to forward-looking results.
Environmental remediation accruals were $135.1 million at March 31, 2014. The filing estimates that costs for certain MGP sites could vary by as much as an additional $25 million. NIPSCO estimated $860 million of environmental capital improvements, with approximately $240 million remaining to be spent; recovery from ratepayers was considered likely, but certain emerging water and waste requirements had unestimated compliance costs. A Massachusetts gas explosion investigation continued; management said related costs were substantially covered by insurance and any uninsured amounts were not expected to be material. Management stated that currently asserted legal claims were not expected to have a material consolidated impact.
Important facts for investors to verify
- Whether planned infrastructure investment receives timely regulatory approval and cost recovery, including the pending gas modernization plan and Pennsylvania rate case.
- Execution, timing, cost, and customer commitments for pipeline, gathering, electric modernization, and environmental projects.
- Funding needs and liquidity as capital expenditures rise, including reliance on short-term borrowings and receivables securitization facilities.
- Potential changes in environmental remediation estimates and compliance costs, including the stated possible $25 million additional MGP-site variation.
- Weather sensitivity and the distinction between continuing-operations growth and reported net income affected by prior-year discontinued-operation gains.