NiSource Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. NiSource is a regulated natural gas and electric utility holding company serving approximately 3.9 million customers in seven states, through its Gas Distribution Operations and Electric Operations segments.
Financial performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenue | $4,874.6 million | $4,492.5 million | +8.5% |
| Net revenues (non-GAAP) | $3,355.9 million | $3,102.3 million | +8.2% |
| Operating income | $910.6 million | $858.2 million | +6.1% |
| Income from continuing operations | $128.6 million | $328.1 million | −60.8% |
| Net income attributable to NiSource | $128.5 million | $331.5 million | −61.2% |
| Basic EPS from continuing operations | $0.39 | $1.02 | −$0.63 |
| Cash from continuing operating activities | $742.1 million | $804.1 million | −$62.0 million |
| Capital expenditures (cash flow statement) | $1,695.8 million | $1,475.2 million | +$220.6 million |
Operating margin was approximately 18.7% and net margin approximately 2.6%, based on reported operating revenue. Operating income increased as new base rates, infrastructure investment trackers, transmission project rates and customer growth lifted revenues. Higher operating and maintenance, depreciation, tax and environmental expenses partly offset those gains. Gas Distribution operating income fell to $545.6 million from $574.0 million, while Electric Operations operating income rose to $364.8 million from $291.4 million.
Cash from operations was below capital expenditures, before other investing and financing activity. The company reported total assets of $19,961.7 million and common stockholders’ equity of $4,320.1 million at year-end. Consolidated indebtedness was $9,002.2 million, including $7,796.5 million of long-term debt and $1,205.7 million of short-term borrowings. Net available liquidity was $998.9 million. The debt-to-capitalization ratio was 67.6%, against a 70% limit under the revolving credit facility. Dividends declared were $0.70 per share for 2017; the board declared a $0.195 quarterly dividend in January 2018.
Material changes and unusual items
- The Tax Cuts and Jobs Act (TCJA) drove a $161.1 million income-tax charge, primarily from remeasuring deferred tax assets, contributing substantially to the decline in earnings. The effective tax rate was 71.0%, versus 35.7% in 2016. Management expected the lower federal tax rate to reduce the annual effective tax rate, while customer rate adjustments and tax-related cash effects remained under evaluation.
- A $111.5 million loss on early debt extinguishment followed a 2017 tender offer for $990.7 million of notes. NiSource also issued $3.25 billion of senior notes during the year and used financing to refinance or retire debt.
- Operating cash flow declined partly because of $282.3 million of pension contributions, including a $277 million discretionary contribution. Pension plans were underfunded by $32.6 million at year-end, compared with $414.9 million in 2016; other postretirement plans remained underfunded by $293.8 million.
- Fourth-quarter 2017 income from continuing operations was a loss of $52.4 million, primarily reflecting the TCJA tax impact. Second-quarter continuing-operations loss was $44.3 million, primarily reflecting the debt-extinguishment charge.
- The company issued approximately 11.9 million shares under its at-the-market equity program, generating net proceeds of $314.7 million. A forward sale agreement could add further share dilution upon settlement.
Outlook, management commentary and risks
- NiSource projected approximately $1.7–$1.8 billion of 2018 capital investment and described approximately $30 billion of projected long-term regulated utility infrastructure investment. Management said it expected available operating cash, credit facilities, commercial paper, receivables programs and capital-market access to fund 2018 operations and investment, while noting that the TCJA would adversely affect liquidity beginning in 2018.
- Priority programs include gas pipeline modernization, electric transmission and distribution upgrades, and environmental work. The company continued to pursue rate proceedings and cost-recovery mechanisms; outcomes and timing depend on regulators. A NIPSCO gas base-rate order was expected in the second half of 2018.
- NIPSCO planned to retire Bailly coal units 7 and 8 by May 31, 2018, and two R.M. Schahfer units by the end of 2023. The company stated that its resource plan was intended to provide reliable, flexible and cleaner power at lower long-term cost than maintaining and upgrading the units. Unit 8 began an outage in February 2018 for conversion to a synchronous condenser.
- The TCJA created approximately $1.5 billion of excess deferred-tax regulatory liabilities expected to be returned to customers over periods subject to tax normalization rules and regulatory decisions. The amount and timing remain subject to commission review.
- Environmental exposures include a recorded $111.4 million remediation liability and estimated NIPSCO capital compliance costs of approximately $193 million for coal-combustion residuals and approximately $170 million for effluent limitations guidelines. The latter requirements were subject to postponement and further regulatory action. Management said a significant portion of some environmental costs was expected to be recoverable through rates, but recovery is not assured.
- Other key risks include substantial debt and refinancing needs, rate-case and cost-recovery uncertainty, pension funding and settlement charges, weather-sensitive demand, dependence on steel-sector electric sales, aging infrastructure, construction execution, fuel and transportation availability, cyber incidents, and evolving environmental rules. Ordinary-course legal claims were not individually considered material, but adverse outcomes could affect results or liquidity.
Most important facts for investors to verify
- How much of the 2017 earnings decline was nonrecurring tax and debt-refinancing expense, and whether the lower statutory tax rate translates into improved ongoing earnings.
- Regulatory decisions on customer rate reductions and the timing and method for returning the approximately $1.5 billion of excess deferred taxes.
- Whether planned capital spending earns timely regulatory recovery and supports the projected investment program without further equity dilution or material deterioration in credit metrics.
- Progress, costs and reliability impacts from the Bailly retirement and broader NIPSCO generation transition, as well as remaining coal-compliance obligations.
- Liquidity and debt-covenant headroom: year-end net available liquidity was $998.9 million, and the debt-to-capitalization ratio was 67.6% against a 70% facility limit.
The auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of December 31, 2017.