NiSource Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. NiSource is a regulated natural gas and electric utility holding company operating in seven states. The Columbia Pipeline Group separation was completed July 1, 2015; its results are reported as discontinued operations for prior periods, limiting year-over-year comparability.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Gross revenues | $1,436.6 million | $1,852.2 million |
| Net revenues | $940.1 million | $1,004.0 million |
| Operating income | $381.4 million | $386.3 million |
| Income from continuing operations | $179.7 million | $192.5 million |
| Continuing-operations diluted EPS | $0.56 | $0.61 |
| Cash from operating activities | $302.9 million total; $303.2 million from continuing operations | $604.4 million total; $448.2 million from continuing operations |
| Capital expenditures | $301.0 million | $243.5 million |
Operating margin on net revenues was approximately 40.6%, compared with 38.5%. Net income attributable to NiSource was $179.7 million, down from $268.4 million; the prior-year figure included $75.9 million of discontinued-operations income attributable to NiSource. The company declared dividends of $0.31 per share, versus $0.52 in Q1 2015.
Management attributed lower continuing income mainly to warmer weather and higher income taxes, partly offset by increased revenue from regulatory and service programs. Gas Distribution Operations operating income fell to $314.9 million from $325.2 million; Electric Operations operating income was $70.3 million versus $70.0 million.
Financial position and liquidity
- At March 31, 2016, cash and cash equivalents were $23.7 million. Total short-term borrowings were $845.3 million, including $460.0 million of commercial paper and $385.3 million of receivables-securitization borrowings.
- Long-term debt, including the current portion, was $6,169.3 million; total borrowings including short-term borrowings were approximately $7.0 billion.
- Available liquidity was $1,049.0 million, including cash and available capacity under revolving credit and receivables programs. A separate $500 million delayed-draw term loan was available but undrawn at quarter-end.
- Debt-to-capitalization was 64.4%, below the 70% covenant limit under the revolving facility and term loan agreement.
- Cash from continuing operations declined year over year, reflecting working-capital and regulatory-account timing differences. Capital expenditures were higher than the prior-year quarter.
Outlook, management commentary, and risks
- Management expected approximately $1.4 billion of 2016 capital expenditures and described a long-term regulated utility investment opportunity of approximately $30 billion. It reported approximately $2.3 billion executed to date.
- Pending or recently settled rate matters include proposed annual revenue increases of $55.3 million in Pennsylvania, $37.0 million in Virginia, and $6.5 million in Maryland; NIPSCO’s electric rate settlement proposed a $72.5 million annual increase. These amounts require regulatory action and are not assured.
- NIPSCO’s proposed electric infrastructure plan included approximately $1.25 billion of eligible investment over seven years; its gas modernization plan is approximately $800 million over seven years.
- Environmental compliance remains a significant uncertainty. NIPSCO estimated capital costs of $225–$315 million for effluent-limit rules, $130–$182 million for coal-ash requirements, and $4–$35 million for cooling-water intake compliance. Costs and timing depend on regulatory requirements and selected compliance approaches; the company expects qualifying costs to be recoverable through rates.
- NiSource recorded approximately $122 million for environmental remediation. It estimated MGP remediation liabilities of $109.7 million and said costs could vary by as much as $25 million. Climate-plan and other emissions compliance costs were not estimable.
- Interest-rate swaps hedging forecast debt issuances had $132.5 million of derivative liabilities at quarter-end. The quarter included a $70.7 million after-tax unrealized loss on cash-flow hedges in other comprehensive income, not current-period earnings.
- Management cited weather, regulatory outcomes, environmental obligations, interest rates, credit ratings, construction execution, aging infrastructure, cyber risk, and customer demand among factors that could cause results to differ from expectations. No material changes to the previously disclosed risk factors were reported.
Most important facts for investors to verify
- How the Columbia Pipeline Group separation affects comparability of revenue and earnings, especially against Q1 2015 discontinued-operations results.
- Whether pending rate cases and infrastructure cost-recovery mechanisms receive approval, and when approved rates take effect.
- Whether the $1.4 billion 2016 capital-spending plan and long-term investment program remain on schedule and can be funded without materially increasing leverage.
- The ultimate cost and rate recoverability of environmental compliance and remediation obligations.
- Liquidity and refinancing needs as commercial paper, securitization facilities, and other borrowings change; confirm compliance with debt covenants and investment-grade ratings.