NiSource Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited results; comparisons are with the corresponding 2010 periods. NiSource is a regulated energy holding company with gas distribution, gas transmission and storage, and Indiana electric operations. Results are seasonal and can vary with weather.
Financial performance
| Metric ($ millions, except per-share data) | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Gross revenues | 1,068.7 | 1,138.1 | 4,529.2 | 4,667.9 |
| Net revenues (gross revenues less cost of sales) | 745.6 | 718.1 | 2,572.7 | 2,522.5 |
| Operating income | 147.5 | 123.3 | 710.0 | 665.9 |
| Income from continuing operations | 36.3 | 33.4 | 280.6 | 258.8 |
| Net income | 34.7 | 33.2 | 278.8 | 258.6 |
| Basic EPS | $0.12 | $0.12 | $0.99 | $0.93 |
| Diluted EPS | $0.12 | $0.12 | $0.97 | $0.93 |
- Operating margin on net revenues was approximately 19.8% in Q3 2011 versus 17.2% in Q3 2010, and 27.6% for the nine months versus 26.4%.
- Q3 net revenues increased $27.5 million, while gross revenues fell $69.4 million; lower cost of sales more than offset the gross-revenue decline. Nine-month net revenues rose $50.2 million.
- For the nine months, operating income increased $44.1 million and continuing-operations income rose $21.8 million. Lower depreciation and interest expense contributed; higher operating and maintenance costs and taxes partly offset the gains.
- Dividends declared were $0.23 per share in Q3 and $0.92 per share for the nine months, unchanged from 2010 comparable periods.
Cash flow, debt and liquidity
- Nine-month net cash from operating activities was $794.1 million, versus $332.5 million in 2010. The company attributed much of the increase to timing of gas-cost recoveries and related working capital.
- Capital expenditures were $774.2 million, up from $553.7 million. Operating cash flow less capital expenditures was approximately $19.9 million before other investing and financing items.
- Cash and cash equivalents were $22.2 million at September 30, 2011; restricted cash was $180.1 million. Current assets were $1.86 billion and current liabilities $2.89 billion.
- Long-term debt, excluding current maturities, was $6.34 billion; short-term borrowings were $1.23 billion. Reported borrowings including current long-term debt totaled approximately $7.58 billion. Stockholders’ equity was $4.99 billion.
- Borrowings included $615.0 million under the $1.5 billion revolver and $425.8 million of commercial paper; $193.2 million related to receivables securitization. NiSource reported $440 million of available revolver capacity and approximately $462 million of net available liquidity.
- NiSource issued $400 million of 5.95% senior notes due 2041 in June 2011. The revolver expires March 2015; ratings were investment grade with stable outlooks at S&P, Moody’s and Fitch.
Material changes and operating drivers
- Gas Transmission and Storage nine-month net revenues increased $31.0 million, principally from demand-margin revenue on growth projects and Columbia Gulf rate-case effects. Operating income nevertheless declined $5.6 million, as environmental and other operating costs rose.
- Gas Distribution nine-month operating income increased $84.8 million, substantially reflecting lower depreciation following approved Northern Indiana gas depreciation rates, alongside higher net revenues.
- Electric Operations nine-month net revenues increased $8.3 million, including improved industrial usage, but operating income declined $28.8 million due to higher operating costs, generation outages, and other adjustments.
- Q3 gas distribution territories were 27% colder than normal; the first nine months were 3% colder than normal. Electric cooling degree days were 12% above normal for the nine months.
- Environmental remediation reserves increased to $105.7 million from $79.8 million at year-end 2010. Columbia Transmission increased its estimate for remediation under an EPA agreement by $25.6 million in Q3.
Outlook, risks and unusual items
- Management projected 2011 capital expenditures of approximately $1.1 billion and said it believed funding was available through operating cash flows, credit facilities, commercial paper, debt markets and other financing. It was evaluating financing options that could be executed as early as Q4 2011. No specific earnings or EPS guidance is provided in the filing text.
- Gas distribution modernization spending was expected to exceed $300 million in 2011, within a longer-term program described as more than $4 billion over approximately 25 years. Management also highlighted gas transmission expansion opportunities tied to Marcellus and Utica production and gas-fired generation demand.
- Northern Indiana’s electric rate-case settlement remained subject to IURC approval; management anticipated new rates could take effect in late 2011 or early 2012. Columbia Gulf’s rate-case settlement was pending FERC approval. Columbia of Pennsylvania’s approved $17 million annual revenue increase took effect October 18, 2011.
- Northern Indiana’s EPA consent decree requires emissions controls, a $9.5 million environmental mitigation investment, allowance surrenders and emissions limits. Estimated NSR capital improvements were $570–$845 million through 2018; the company said costs were likely recoverable from ratepayers. Broader potential electric environmental capital needs were estimated at $620–$995 million, including possible future mandates.
- Other environmental uncertainty includes potential new air and water rules, coal-combustion waste requirements and cleanup at legacy sites. Management noted that some future costs cannot yet be estimated and rate recovery is not assured.
- The Tawney royalty class-action settlement administration was being concluded; NiSource had funded all claims tendered and did not expect additional material payments. A separate Pennsylvania environmental notice of violation carries a proposed $1 million penalty; likelihood and cost were not estimable.
- NiSource had a forward equity agreement covering 24.265 million shares, expected to be settled no later than September 2012. It anticipated physical settlement; estimated proceeds at the September 30 forward price were approximately $363.3 million, with potential share dilution.
- Other notable items: Q3 2011 included a $3.5 million executive separation cost in Gas Transmission and Storage; the 2010 comparison included a $15.2 million income-tax benefit. The company recorded a $6.8 million tax expense in Q2 2011 for Indiana’s enacted corporate tax-rate reduction.
- Management cited weather, commodity supply and demand, regulatory outcomes, environmental requirements, litigation, pension funding, capital-market conditions and counterparty credit as risks to forward-looking results. The filing reported no material changes to 2010 Form 10-K risk factors and no material internal-control changes.
Investor facts to verify
- Progress and final approval of the Northern Indiana electric rate settlement and Columbia Gulf FERC settlement, including timing and customer-rate impacts.
- Actual 2011 capital spending, financing actions and liquidity after seasonal working-capital needs; monitor short-term borrowings and credit-rating status.
- Whether environmental control costs remain within estimates and are approved for recovery from customers, particularly the Northern Indiana projects and Columbia Transmission remediation.
- Settlement timing and proceeds, share issuance or cash alternative under the forward equity agreement.
- How weather, gas-cost recovery timing, operating expenses and segment mix affect full-year results; interim results may not indicate full-year performance.