NISOURCE INC. quarterly report, Q1 FY2011

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Business context and reporting period

NiSource Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2011, with comparison to the first quarter of 2010. The company operates regulated natural gas distribution, gas transmission and storage, and electric businesses. Results are seasonal; management cautions that interim income may not indicate full-year results.

Financial performance and position

  • Revenue: Gross revenues were $2.232 billion, down from $2.359 billion. Total net revenues, after cost of sales, were $1.061 billion versus $1.072 billion.
  • Earnings: Operating income was $399.2 million, down from $403.4 million. Continuing-operations income was $204.8 million, up from $197.4 million; net income was $205.2 million versus $197.3 million. Basic EPS was $0.73 versus $0.71; diluted EPS was $0.72 versus $0.71. The declared dividend was $0.46 per share in both periods.
  • Cash flow and investment: Operating cash flow was $422.1 million versus $83.3 million, reflecting in part the collection of $190.4 million in previously under-recovered gas costs; the prior-year period included $251.1 million of gas-cost refunds. Capital expenditures were $209.4 million versus $138.8 million. Cash and cash equivalents were $62.5 million at quarter-end, compared with $9.2 million at year-end 2010.
  • Debt and liquidity: Total debt was approximately $7.2 billion, including $5.928 billion of long-term debt, $36.4 million current maturities, and $1.263 billion of short-term borrowings. The $1.5 billion revolving facility had $788 million drawn and $697.8 million available. Restricted cash was $164.9 million. Current assets were $1.985 billion and current liabilities were $3.096 billion.
  • Margins: Operating income was about 37.6% of net revenues, approximately unchanged from the prior-year quarter. This is a simple calculation from reported figures; the filing does not present it as a company-defined margin.

Material changes versus the prior comparable period

  • Gas Distribution operating income rose to $241.6 million from $235.1 million, helped by lower depreciation and operating expenses; net revenues fell $21.6 million, partly due to lower regulatory trackers and the timing impact of Northern Indiana’s revised fixed-charge rate design.
  • Gas Transmission and Storage operating income declined to $118.5 million from $125.9 million, mainly due to lower equity earnings and the absence of a prior-year deferred gain; throughput increased to 523.1 MMDth from 459.5 MMDth.
  • Electric operating income decreased to $43.2 million from $45.1 million despite net revenues increasing $12.4 million, as expenses rose. Improved industrial demand supported higher electric sales.
  • Interest expense declined by $9.0 million, principally following debt maturities and a 2010 tender offer. Operating expenses overall fell $11.3 million, but employee, administrative, outside-service and other-tax costs increased.

Outlook, management commentary, risks and unusual items

  • NiSource projected 2011 capital expenditures of approximately $1.1 billion. It also expected pension contributions of about $149.7 million and postretirement medical and life contributions of about $49.3 million in 2011; $90.7 million and $10.8 million, respectively, had been contributed through March 31. No consolidated earnings guidance is provided in the supplied filing text.
  • Management cited continued infrastructure investment, regulatory initiatives and Marcellus-related transmission expansion as priorities. Several pipeline projects were under construction or scheduled to enter service in 2011; a proposed transmission expansion for a gas-fired power plant was targeted for 2014.
  • Northern Indiana’s electric rate case sought $75.7 million of additional annual gross revenue, with an order then anticipated in early 2012. Columbia of Pennsylvania sought about $37.8 million of annual revenue in its gas rate case. Columbia Gulf’s proposed FERC rate increase was about $50 million, subject to refund; settlement discussions were ongoing.
  • Environmental requirements are a material investment and regulatory risk. A proposed consent decree for Northern Indiana coal plants included a $3.5 million fine, $9.5 million for mitigation, and estimated related capital improvements of $570 million to $840 million through 2018; recovery from ratepayers was considered likely by the company, not assured. Environmental remediation reserves were $79.7 million.
  • Other risks identified include weather, commodity prices, regulatory and legislative changes, environmental rules, litigation, pension funding, counterparty credit and capital-market conditions. Credit ratings were investment grade but at the lower end: BBB- at S&P and Baa3 at Moody’s; a downgrade could increase collateral needs and affect receivables programs.
  • NiSource expected to settle its 2010 forward equity agreements by delivering shares; at March 31, 2011, physical settlement would have provided approximately $375.4 million for 24.265 million shares. The agreements contributed incremental shares to diluted EPS.
  • The Tawney royalty settlement was substantially funded: $337.5 million of NiSource’s maximum $338.8 million share had been contributed, with $1.3 million unpaid at quarter-end; management did not expect further payments to be material. Disclosure controls were reported effective, with no material change in internal control over financial reporting.

Important facts for investors to verify

  1. Track whether operating cash flow remains strong after the seasonal and gas-cost recovery effects that materially benefited this quarter.
  2. Monitor rate-case outcomes and timing, particularly Northern Indiana electric rates, Columbia of Pennsylvania’s gas case, and Columbia Gulf’s FERC proceeding.
  3. Assess the funding, schedule, regulatory recovery and customer-bill impact of the planned $1.1 billion 2011 capital program and major environmental projects.
  4. Review debt maturities, short-term borrowing costs, revolver availability, ratings and potential collateral requirements.
  5. Confirm the final cost and obligations under environmental matters, including the coal-plant consent decree and remediation sites.
  6. Check the timing and dilution effects of the forward equity settlement and compare full-year results with the company’s stated capital and pension funding plans.