NiSource Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited results are compared with the corresponding 2013 periods. NiSource operates regulated natural gas distribution, gas transmission and storage, and electric businesses; results are seasonal.
Financial results and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenues | $893.4 million | $833.8 million | $3,116.0 million | $2,792.2 million |
| Operating income | $157.8 million | $176.4 million | $911.1 million | $799.3 million |
| Income from continuing operations | $31.5 million | $49.5 million | $376.4 million | $337.9 million |
| Net income | $31.4 million | $48.1 million | $375.8 million | $380.3 million |
| Diluted EPS | $0.10 | $0.16 | $1.19 | $1.22 |
- Margins and cost trends: Q3 operating income fell despite higher net revenues, as operating expenses rose $79.7 million, led by operation and maintenance costs. For the nine months, operating income increased as revenue growth exceeded expense growth. The filing does not state operating margins; based on reported figures, operating income was approximately 17.7% of net revenues in Q3 and 29.2% year to date.
- Cash flow and investment: Nine-month operating cash flow was $886.5 million, down from $1,078.6 million. Capital expenditures were $1,441.7 million, versus $1,297.3 million; operating cash flow less capital expenditures was negative $555.2 million. Cash and cash equivalents were $17.7 million at September 30, 2014, versus $26.8 million at year-end 2013.
- Debt and liquidity: Long-term debt, including current maturities, was approximately $8.42 billion; short-term borrowings were $1.31 billion. The company reported $879.7 million of available credit under its revolving facility and a 61.8% debt-to-capitalization ratio, below its 70% facility covenant. Current assets were $2.01 billion and current liabilities $3.05 billion.
- Dividends: Dividends declared were $0.26 per share in Q3 and $1.02 per share for the nine months, compared with $0.25 and $0.98, respectively, in 2013.
Material changes versus prior periods
- Q3 net revenues increased $59.6 million, but operating income declined $18.6 million and net income declined $16.7 million. Q3 interest expense increased $5.9 million; operating and maintenance expense also rose substantially.
- Nine-month net revenues increased $323.8 million and operating income increased $111.8 million. Continuing-operations income rose $38.5 million. Reported net income declined $4.5 million, largely because 2013 included a $34.9 million after-tax gain on disposition of discontinued operations.
- Year-to-date growth reflected regulated rate and infrastructure programs, higher pipeline demand-margin and royalty revenues, increased industrial electric usage, and colder weather for gas distribution. Higher labor, maintenance, outside services, depreciation, and interest expense partly offset the gains.
- Short-term borrowings rose from $698.7 million at December 31, 2013 to $1,311.1 million at September 30, 2014, mainly reflecting higher commercial paper outstanding. Long-term debt increased, including a new $750 million floating-rate term loan; $500 million of notes matured in July.
Outlook, commentary, risks, and unusual items
- Proposed separation: NiSource announced plans to separate Columbia Pipeline Group into a publicly traded company, expected in mid-2015, with NiSource shareholders expected to receive shares pro rata. The transaction remained subject to conditions, including final board approval and a tax opinion; completion and timing were not assured. A related Columbia Pipeline Partners LP IPO was expected in Q1 2015, subject to market and other conditions.
- Investment plans: Management projected approximately $2.2 billion of 2014 capital expenditures. Major programs include gas and electric infrastructure modernization, pipeline growth projects, and environmental compliance investments. The company expected adequate funding from operating cash flow, credit facilities, commercial paper, and capital markets.
- Segment performance: Nine-month operating income increased in Gas Distribution ($362.4 million versus $279.1 million) and Columbia Pipeline Group ($357.0 million versus $321.0 million), and rose modestly in Electric Operations ($218.7 million versus $212.2 million). Q3 operating income declined in Columbia Pipeline Group and Electric Operations; Gas Distribution returned to a small operating profit.
- Regulatory and legal matters: Rate cases, infrastructure cost-recovery mechanisms, and appeals remain relevant. A FERC proceeding challenged the return on equity used for MISO transmission rates; NiSource could not estimate the impact. Upgrade sponsors also challenged the multiplier in transmission upgrade agreements, with financial impact not estimable. Management said currently asserted legal claims were not expected to materially affect consolidated financial statements.
- Environmental exposure: Environmental remediation accruals totaled approximately $130.9 million. Estimated MGP remediation liabilities were $122.8 million, with costs reasonably possible to vary by as much as $25 million above the estimate. Compliance costs for proposed or evolving greenhouse-gas, water, air-quality, and coal-combustion-residual rules were not fully estimable. NIPSCO estimated $860 million of electric environmental capital improvements, with approximately $155.8 million remaining to spend.
- Other risks and unusual items: A Springfield, Massachusetts gas explosion investigation continued; management believed damages were substantially covered by insurance and uncovered amounts would not be material. Ratings agencies affirmed investment-grade ratings after the separation announcement; a downgrade below specified thresholds could trigger approximately $38.9 million of collateral requirements. Q3 effective tax rate increased to 45.1% from 36.0%, primarily due to revised estimates of nontaxable income. Management identified weather, regulation, commodity and interest rates, project execution, credit conditions, and separation/IPO completion as risks.
Important facts for investors to verify
- Whether the Columbia Pipeline Group separation and Columbia Pipeline Partners LP IPO proceed, on what terms, and with what tax and credit consequences.
- Progress, committed funding, and expected returns for the $2.2 billion 2014 capital program and major pipeline and utility projects.
- Outcomes of pending rate cases, cost-recovery filings, FERC proceedings, and transmission-upgrade disputes.
- Changes in short-term borrowing, interest expense, available credit, and credit ratings as the separation plans advance.
- Whether environmental remediation estimates and future regulatory compliance costs remain within recorded accruals and planned investments.