NiSource Inc. — 2011 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2011, NiSource operated regulated natural gas distribution, transmission and storage, and electric businesses, serving approximately 3.8 million customers across seven states. The company emphasized its regulated infrastructure businesses and continued winding down unregulated natural gas marketing.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Gross revenues | $6,019.1 million | $6,414.6 million |
| Net revenues | $3,462.7 million | $3,440.5 million |
| Operating income | $905.1 million | $905.7 million |
| Income from continuing operations | $303.8 million; $1.08 basic EPS | $285.2 million; $1.03 basic EPS |
| Net income | $299.1 million; $1.06 basic EPS | $282.6 million; $1.02 basic EPS |
| Cash from operating activities | $870.2 million | $725.4 million |
| Capital expenditures | $1,125.2 million | $803.8 million |
| Total assets | $20,708.3 million | $19,913.4 million |
| Common stockholders’ equity | $4,997.3 million | $4,897.5 million |
- Gross revenue fell 6.2%, chiefly reflecting lower commodity-related revenues and the wind-down of natural gas marketing. Net revenues, which exclude cost of sales, increased 0.6%.
- Operating income was essentially flat. Continuing-operations income rose about 6.5%; diluted EPS was $1.05 versus $1.02.
- Cash from operating activities includes $920.3 million from continuing operations and $50.1 million used by discontinued operations. Working-capital movements, including receivables and gas-cost recoveries, materially affected cash generation.
- Year-end consolidated indebtedness was $7,953.8 million, including $6,267.1 million of long-term debt excluding current maturities and $1,359.4 million of short-term borrowings. Debt-to-capitalization was 61.4%, below the 70% revolving-credit covenant ceiling.
- Cash and cash equivalents were $11.5 million; restricted cash was $160.6 million. The $1.5 billion revolving facility had $353.1 million of available credit at year-end. Credit ratings remained investment grade with stable outlooks.
- Quarterly dividends totaled $0.92 per share, unchanged from 2010. The board declared a $0.23-per-share dividend payable in February 2012.
Material changes versus the prior year
- Gas Transmission and Storage revenue increased $56.4 million, driven mainly by new growth projects and the Columbia Gulf rate case; operating income nevertheless declined $16.6 million as expenses, particularly pension-related costs, rose.
- Gas Distribution operating income increased $60.5 million, primarily due to lower depreciation following approved rate changes, despite net revenues decreasing $21.3 million. The service area experienced weather about 4% warmer than normal.
- Electric operating income decreased $11.3 million. Industrial demand improved, but higher operating expenses more than offset the increase in net revenues.
- Operation and maintenance expense rose $59.2 million. NiSource recorded $35.5 million of environmental remediation expense not considered probable of recovery from customers, and a $14.7 million impairment related to Lake Erie Land.
- The 2011 debt tender and refinancing generated a $53.9 million early-extinguishment loss, versus $96.7 million in 2010. The company issued $900 million of long-term notes during 2011 and repurchased portions of higher-coupon notes.
Outlook, risks, contingencies and unusual items
- Management projected 2012 capital expenditures and other investing activities of $1.4 billion, funded through operating cash flow, equity and short-term debt. Major drivers include gas-pipeline integrity and replacement work and electric environmental upgrades.
- Environmental compliance is a substantial investment and recovery risk. Northern Indiana estimated required generation environmental capital improvements of $620 million to $1.1 billion; recovery is expected to depend on regulatory approval. A $500 million first phase of projects was approved, while further project phases remained in process.
- Environmental remediation reserves rose to $173.5 million from $79.8 million. The filing reports a $71.1 million increase in MGP remediation estimates and a separate $25.6 million increase for Columbia Transmission sites. Management noted that additional MGP remediation costs could vary by as much as $25 million.
- Defined-benefit pension and other postretirement plans were underfunded by $472.9 million and $456.5 million, respectively. 2011 contributions were $393.5 million to pensions and $53.6 million to postretirement plans; management expected 2012 contributions of approximately $3.3 million and $51.7 million, respectively.
- Key exposures include regulation and timely cost recovery, environmental rules, weather, energy demand and prices, aging infrastructure, construction execution, pension funding, credit and refinancing access, and counterparty risk. A downgrade below specified ratings triggers could require additional collateral; the filing estimates about $21 million for identified triggers.
- NiSource made correcting adjustments to 2011 and prior-period results, which management deemed immaterial. 2010 net income was corrected from $292.0 million to $282.6 million; the filing describes deferred revenue, environmental and postretirement-benefit accounting items among the corrections. The auditor issued unqualified opinions on the financial statements and internal controls.
- Other notable items include a $22.6 million reserve on assets associated with the marketing-business wind-down and a $1.2 million loss contingency related to MF Global’s bankruptcy. A Pennsylvania environmental notice of violation included a $1 million settlement demand; the company could not estimate potential penalties or additional remediation costs.
Most important facts for investors to verify
- Whether 2012 capital spending, environmental projects and pipeline growth plans proceed on schedule and within budget, and how much cost regulators permit the company to recover.
- Debt maturities, short-term borrowing levels, available revolving-credit capacity, and compliance with financial covenants and credit-rating triggers.
- Whether remediation estimates and pension assumptions change, including the extent of potential costs not recoverable from customers.
- Underlying operating trends by segment, separating regulated rate changes and trackers from weather, industrial demand, commodity pass-throughs and nonrecurring items.
- The effects of the disclosed correcting adjustments on comparisons and the resolution of outstanding regulatory, tax and environmental proceedings.