NiSource Inc. 2012 Q2 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. NiSource is a regulated energy holding company operating natural gas distribution, transmission and storage businesses, and an electric utility in Indiana. Results are seasonal, particularly in gas distribution.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total net revenues | $807.6 million | $765.8 million | $1,836.0 million | $1,826.5 million |
| Operating income | $208.6 million | $165.5 million | $608.0 million | $571.9 million |
| Income from continuing operations | $70.5 million | $40.8 million | $264.0 million | $249.9 million |
| Net income | $69.4 million | $40.2 million | $262.8 million | $249.7 million |
| Basic EPS | $0.25 | $0.14 | $0.93 | $0.89 |
| Diluted EPS | $0.23 | $0.14 | $0.89 | $0.87 |
- Margins: Calculated operating margin on total net revenues was 25.8% in Q2 2012 versus 21.6% a year earlier, and 33.1% for the first half versus 31.3%. Calculated net income margin was 8.6% versus 5.3% in Q2 and 14.3% versus 13.7% for the first half.
- Segment performance, first half: Electric operating income rose to $116.6 million from $90.9 million; Gas Transmission and Storage rose to $230.1 million from $203.0 million. Gas Distribution operating income fell to $258.9 million from $288.1 million, reflecting warmer weather and lower regulatory and tax trackers.
- Cash flow, first half: Operating cash flow was $771.8 million, compared with $736.0 million. Capital expenditures were $619.5 million versus $445.0 million; investing cash outflow was $568.9 million. Financing cash outflow was $161.6 million. Cash at period-end was $52.8 million.
- Balance sheet at June 30: Total assets were $20.409 billion; common equity $5.105 billion. Long-term debt, including current maturities, was $7.574 billion, compared with $6.594 billion at December 31, 2011. Short-term borrowings were $327.6 million, down from $1.359 billion. Cash was $52.8 million and restricted cash $85.0 million.
- Liquidity: Management reported $1.399 billion of net available liquidity. The $1.5 billion revolving facility had no borrowings and $1.346 billion of available capacity; commercial paper outstanding was $134.4 million. The company also had $193.2 million of receivables-securitization borrowings.
Material changes and drivers
- Q2 net revenues increased $41.8 million and operating income increased $43.1 million year over year. First-half net revenues rose only $9.5 million, while operating income increased $36.1 million.
- Electric rate-case changes increased margins and ended certain customer bill credits, contributing to stronger electric results. Higher electric depreciation and MISO fees partly offset the gains.
- Gas Transmission and Storage benefited from growth projects entering service, higher demand-margin revenue, and increased equity earnings, particularly from Millennium.
- Gas Distribution was affected by materially warmer weather: 23% warmer than normal for the first half, versus 2% colder than normal in the comparable 2011 period. Management estimated the warmer weather reduced continuing-operations income by $42.9 million in the quarter.
- Interest expense increased by $22.3 million for the first half, primarily due to debt issuance and expiration of the Sugar Creek deferral; debt repurchases and lower short-term borrowing costs partly offset the increase.
- Reported gross revenues fell substantially, largely because lower gas costs and Ohio’s standard-choice-offer implementation also reduced cost of sales; management stated the Ohio change had no impact on net revenues.
Outlook, risks and unusual items
- NiSource projected 2012 capital expenditures of approximately $1.4 billion and said it expected operating cash flow, credit facilities and capital-market access to support operations and investment.
- Management expected to settle a forward equity agreement by delivering shares, with approximately $345.3 million of proceeds estimated at the June 30 forward price; settlement was expected no later than September 10, 2012. The company also said it remained on track to draw on a $400 million forward equity sale in Q3.
- The quarterly dividend was increased 4.3% in May, taking the annualized rate from $0.92 to $0.96 per share.
- Growth plans included the approximately $150 million Big Pine gathering system, a roughly $300 million Utica joint venture, and a West Side pipeline expansion expected to enter service in 2014. Management also described a potential approximately $4 billion Columbia Transmission modernization program over 10 to 15 years.
- Environmental compliance may require substantial investment. Northern Indiana estimated $925 million to $1.05 billion of electric-generation environmental capital improvements, believed likely recoverable from customers. A separate engine-rule compliance estimate was $20 million to $25 million. Regulatory outcomes and recoverability remain important uncertainties.
- Environmental remediation reserves were $168.0 million. Management noted that MGP remediation costs could vary by as much as $25 million above the recorded estimate; some other environmental compliance costs could not yet be estimated.
- NiSource disclosed a possible $80.9 million adjustment to unrecognized tax benefits when IRS guidance on repair-cost tax treatment is issued, which management did not expect to materially affect income. A 2011 comparative-period restatement corrected prior results; the company characterized the corrections as immaterial.
- Other risks include weather, regulation and rate recovery, commodity and interest-rate movements, counterparty credit, pension funding, and environmental rules. Standard & Poor’s, Moody’s and Fitch ratings were investment grade with stable outlooks; a downgrade could increase collateral needs. The filing reported no material change in previously disclosed risk factors.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether expected rate-case, infrastructure-replacement and environmental cost recovery is approved and timely, particularly for pending proceedings.
- Actual 2012 capital spending, project schedules, financing needs and the realized terms and dilution from forward-equity settlements.
- How weather, customer usage and regulatory trackers affect Gas Distribution earnings after the unusually warm first half.
- Debt maturities, borrowing costs, liquidity and credit-rating developments, including potential collateral requirements.
- Environmental remediation estimates and compliance spending, including the extent to which costs are ultimately recoverable from customers.
- Progress on the disclosed tax matter, environmental proceedings and other contingencies; the filing does not provide a clear estimate for certain potential penalties or future compliance costs.