NiSource Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; filed August 3, 2010. NiSource is an energy holding company whose income is generated primarily by regulated natural gas distribution, gas transmission and storage, and Indiana electric operations. Results are seasonal and may be affected by weather.
Financial performance
Amounts in millions except per-share data. Net revenues are gross revenues less cost of sales.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net revenues | $732.0 | $681.8 | $1,804.4 | $1,748.2 |
| Operating income | $139.2 | $111.7 | $542.6 | $459.9 |
| Income from continuing operations | $28.0 | $(4.0) | $225.4 | $155.2 |
| Net income (loss) | $28.1 | $(4.8) | $225.4 | $143.6 |
| Basic EPS | $0.10 | $(0.01) | $0.81 | $0.53 |
| Operating income / net revenues | 19.0% | 16.4% | 30.1% | 26.3% |
- Cash flow: Six-month operating cash flow was $402.5 versus $1,239.8 in 2009. Capital expenditures were $336.9; investing cash outflow was $393.9 and financing cash outflow was $17.6. Cash and cash equivalents were $7.4 at June 30, versus $16.4 at year-end 2009.
- Liquidity and debt: Current assets were $1,893.4 and current liabilities $2,717.4. Restricted cash was $212.7. Short-term borrowings totaled $212.8, including $139.3 tied to receivables securitization. Long-term debt was $5,977.3, with $718.8 due within one year. The $1.5 billion revolving facility had $1,385.0 available; $73.5 was drawn.
- Dividends: Declared dividends were $0.23 per share for Q2 and $0.69 for the first half, unchanged from 2009 comparable periods.
Changes and operating drivers
- Six-month net income rose to $225.4 from $143.6; operating income increased $82.7. Higher electric margins and volumes, gas transmission demand-margin revenue, and lower year-over-year restructuring expense contributed. The 2009 comparison also included an $11.4 discontinued-operations loss for the first half.
- Electric Operations led six-month net-revenue growth, up $57.1, with operating income of $94.7 versus $40.3. Industrial sales volumes improved from 2009; the company cited recovery in industrial activity, including steel production.
- Gas Transmission and Storage net revenues rose $22.5 for the first half, while throughput declined 89.2 MMDth to 691.1 MMDth, principally amid pipeline competition and shifts in supply flows. Segment operating income increased to $200.8 from $172.5, including the benefit of lower prior-year restructuring charges and higher equity earnings.
- Gas Distribution net revenues fell $14.0 for the first half and operating income rose $6.5 to $253.6. Warmer weather and lower trackers weighed on reported revenues; tracker-related expense changes largely offset revenue changes. Q2 gas distribution operating income rose to $18.5 from $3.9.
- Management is winding down unregulated gas marketing as part of a focus on core regulated operations; the former Other Operations segment is now included in Corporate and Other.
Outlook, risks and unusual items
- Management projected 2010 capital expenditures of approximately $900 million. It expected pension contributions of about $161.0 million and postretirement medical and life contributions of about $49.1 million, subject to market conditions.
- Gas transmission growth plans included an approximately $80 million Majorsville project expected to enter service in Q3 2010, and anticipated Marcellus-region investment of about $200 million annually over the next several years. The Cobb expansion entered service in May 2010.
- Rate matters included pending Northern Indiana electric and gas cases; a proposed $13 million annual increase by Columbia of Virginia; and a Pennsylvania settlement proposal for a $12 million annual increase, subject to regulatory approval. New Virginia rates were targeted for January 2011 and Pennsylvania rates for October 2010.
- Environmental exposure is significant and uncertain. Northern Indiana estimated $560–$800 million of potential air-quality capital improvements, dependent on future rules and timing; some or all may be recoverable from customers. Proposed coal-ash rules could require up to $70 million in capital improvements in the first five years under one scenario. The filing states that several regulatory impacts cannot yet be estimated.
- The EPA’s 2004 New Source Review notice alleges permit violations at Northern Indiana generating stations; resolution could involve additional capital and operating costs and substantial penalties. A reserve is recorded, but outcome is uncertain. Environmental remediation reserves were $73.3 million at June 30.
- The Tawney royalty settlement has a maximum NiSource share of $338.8 million. As of June 30, $318.2 million had been contributed and $20.6 million remained unpaid, with the remaining letter of credit sufficient to cover it.
- New receivables-transfer accounting treated transfers as secured borrowings from January 1, 2010. The change reduced reported operating cash flow by $241.9 million and added $139.3 million of short-term debt at June 30; management reported no change in program operations.
- After quarter-end, Millennium priced $725 million of fixed-rate notes on July 20; the filing expected issuance, repayment of interim financing, termination of NiSource’s sponsor guarantee, and cash settlement of hedges on August 26.
- Key risks identified include weather, economic and customer-collection conditions, interest rates and refinancing access, regulatory outcomes, commodity and counterparty risks, pension funding, litigation, and environmental requirements. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor verification priorities
- Reconcile the sharp year-over-year operating-cash-flow decline, especially gas-cost working-capital swings and the receivables-accounting change.
- Track liquidity, debt maturities, ratings, and renewal of the $1.5 billion revolving facility, which was scheduled to terminate in July 2011.
- Monitor decisions and implementation timing for the Northern Indiana rate cases and other pending rate settlements.
- Assess whether environmental compliance spending and related costs are recoverable from customers, and follow the EPA and coal-ash proceedings.
- Confirm completion of Millennium’s permanent financing and release of NiSource’s guarantee as described in the post-quarter update.