NiSource Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. NiSource is an energy holding company whose operations are primarily regulated natural gas distribution, pipeline and storage, and electric utility businesses. Results are seasonal and may be affected by weather.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total net revenues | $852.4 million | $800.0 million | $1,959.0 million | $1,820.8 million |
| Operating income | $193.5 million | $205.0 million | $621.6 million | $602.0 million |
| Income from continuing operations | $72.1 million | $68.3 million | $287.5 million | $260.4 million |
| Net income | $71.7 million | $69.4 million | $332.2 million | $262.8 million |
| Basic EPS, continuing operations | $0.23 | $0.25 | $0.92 | $0.92 |
| Basic EPS, total | $0.23 | $0.25 | $1.06 | $0.93 |
| Cash from operating activities | — | $894.5 million | $771.8 million | |
| Capital expenditures | — | $801.7 million | $617.9 million |
Margins: Operating income was approximately 22.7% of net revenues in Q2, versus 25.6% a year earlier; for the first half, approximately 31.7% versus 33.1%. These ratios are calculated from reported figures.
Segment trends: First-half operating income rose in Gas Distribution ($284.1 million, up $31.1 million) and Electric Operations ($124.7 million, up $8.2 million), but declined in Columbia Pipeline Group ($222.3 million, down $7.8 million). Q2 operating income decreased in Electric Operations and Columbia Pipeline Group, partly offset by improvement in Gas Distribution.
Balance sheet, debt and liquidity
- At June 30, 2013, cash and cash equivalents were $44.5 million; total assets were $21.62 billion and stockholders’ equity was $5.70 billion.
- Long-term debt, including current maturities, was $7.69 billion; short-term borrowings were $377.7 million. Combined debt was approximately $8.07 billion, compared with approximately $8.10 billion at December 31, 2012.
- NiSource reported approximately $1.406 billion of net available liquidity. It had a $1.5 billion revolving facility with no borrowings outstanding and $1.362 billion of available credit under the facility. Commercial paper outstanding was $117.6 million.
- First-half operating cash flow increased $122.7 million year over year, primarily reflecting a $124.3 million improvement related to income-tax receivables, including an IRS refund. Cash used for investing was $718.1 million, including $801.7 million of capital expenditures; financing activities used $168.2 million. Cash at period-end was $44.5 million.
Material changes and unusual items
- First-half continuing income increased by $27.1 million, while basic continuing EPS was unchanged at $0.92; average basic shares rose to 311.7 million from 283.6 million.
- Management attributed first-half improvement principally to colder weather, adding an estimated $37.0 million to continuing income; distribution regulatory and service programs; electric environmental cost recovery; and higher other income, including insurance proceeds and AFUDC. Higher employee and administrative expense partly offset these benefits.
- Q2 operating income fell $11.5 million year over year despite higher net revenues. Management cited increased operating and maintenance expense, including regulatory-tracker costs and employee and administrative costs, as well as weaker electric results.
- The January 2013 sale of Retail Services’ service-plan and leasing businesses generated a $36.4 million after-tax gain in the first quarter. First-half discontinued operations also included $8.3 million of income; these items lifted reported net income above continuing income.
- NiSource issued $750 million of 4.80% senior notes due 2044, redeemed $420.3 million of 6.15% notes, and extended and increased a bank term loan to $325 million, due 2016 at LIBOR plus 125 basis points.
- A pension settlement charge was recorded in the first half: $20.7 million in Q1 and an additional $3.6 million in Q2. Management reported that plan remeasurements reduced net periodic pension cost by $4.6 million.
Outlook, risks and contingencies
- Management projected approximately $2.0 billion of 2013 capital expenditures and stated that operating cash flow, credit facilities, commercial paper and access to capital markets should provide adequate funding. No consolidated earnings guidance was stated in the provided filing text.
- Growth and modernization plans include a Columbia Transmission program expected to invest approximately $1.5 billion over five years under a FERC-approved settlement, with broader modernization spending of $4 billion to $5 billion over 10 to 15 years. The filing also describes pipeline expansion and shale-related gathering projects, as well as major electric environmental investments.
- Columbia Transmission’s customer settlement included $88.1 million of refunds paid in March 2013, lower depreciation rates, and a further annual base-rate reduction of approximately $25 million beginning in 2014. A capital cost recovery mechanism is expected to begin in February 2014, subject to its terms and qualifying investment.
- NiSource recorded $156.4 million of environmental remediation reserves. Its MGP remediation liability was $134.6 million; management said remediation costs could vary by as much as $25 million above that estimate. Environmental rules, including air, water and coal-combustion-residual requirements, could require additional investment; some costs and recoverability were not estimable.
- Potential risks include weather, regulatory decisions and cost recovery, environmental compliance, commodity and interest-rate movements, counterparty credit, pension funding, and litigation. Management said the Massachusetts gas explosion’s costs were substantially covered by insurance and any uncovered amounts were not expected to be material. The filing reported no material changes to previously disclosed risk factors or legal proceedings.
- Credit ratings were investment grade with stable outlooks as disclosed; certain agreements could require additional collateral following a downgrade. Management reported no material internal-control changes during the quarter and concluded disclosure controls were effective.
Investor verification points
- Separate recurring continuing earnings from the discontinued-operations gain and settlement income when assessing first-half net income growth.
- Track whether planned capital spending, pipeline expansions and electric environmental projects remain on schedule and within budget, and how much investment is recovered through rates.
- Monitor regulatory outcomes and timing for pending rate cases, infrastructure trackers and the Columbia Transmission settlement’s future rate reductions and recovery mechanism.
- Assess liquidity and refinancing needs against the seasonal cash-flow profile, capital program, debt maturities and credit-rating-triggered collateral exposure.
- Review updates to environmental remediation estimates, compliance spending and potential recovery from customers, along with the status of the Massachusetts incident investigation and insurance recoveries.