NiSource Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed February 18, 2016. The filing also reports fourth-quarter results. NiSource is a regulated natural gas and electric utility holding company serving approximately 3.9 million customers in seven states.
Business context and comparability
On July 1, 2015, NiSource completed the spin-off of Columbia Pipeline Group (CPG), distributing one CPG share for each NiSource share. NiSource retained no ownership in CPG, and its former pipeline operations are presented as discontinued operations for all periods. Results therefore reflect a substantially changed company, and full-year comparisons—especially total income, assets and cash flow—are affected by the separation.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Gross revenues | $4.652 billion | $5.272 billion |
| Net revenues | $3.008 billion | $2.900 billion |
| Operating income | $799.9 million | $789.1 million |
| Income from continuing operations | $198.6 million; $0.63 basic EPS | $256.2 million; $0.81 basic EPS |
| Net income attributable to NiSource | $286.5 million | $530.0 million |
| Cash from continuing operating activities | $1.163 billion | $761.2 million |
| Capital expenditures and other investing activities | $1.368 billion | $1.340 billion |
- Net revenues increased 3.7%; operating income rose 1.4%. Operating margin, measured as operating income divided by net revenues, was approximately 26.6%, versus 27.2% in 2014.
- Continuing income declined 22.5%, mainly because of a $97.2 million loss on early debt extinguishment. Higher operating income partly offset increased operating costs, including depreciation, employee and administrative expenses, and environmental costs. The effective tax rate rose to 41.6% from 39.4%.
- Gas Distribution Operations net revenues rose $82.4 million and operating income increased $18.8 million. New rates and regulatory programs more than offset approximately $30.6 million of weather-related revenue impact; service territories were about 3% warmer than normal.
- Electric Operations net revenues increased $22.3 million, but operating income fell $18.3 million. Lower industrial usage, particularly among steel customers, contributed to a 7.9% decline in electricity sales.
- FY2015 net income includes $103.5 million from discontinued operations; the comparable 2014 amount was $273.8 million. Fourth-quarter 2015 income from continuing operations was $64.4 million, or $0.20 per basic share; net income attributable to NiSource was $59.4 million.
Liquidity, debt and capital
- At year-end, total consolidated indebtedness was $6.950 billion, including current and short-term borrowings. Long-term debt excluding amounts due within one year was $5.949 billion.
- NiSource reported approximately $1.179 billion of available liquidity, comprising cash and available capacity under credit facilities. Cash and cash equivalents were $15.5 million; credit available under the revolving facility and receivables programs was $1.164 billion.
- The $1.5 billion revolving credit facility had no borrowings outstanding. Commercial paper outstanding was $321.4 million; receivables-securitization borrowings were $246.0 million. Debt-to-capitalization was 64%, below the 70% revolving-facility limit.
- Cash from continuing operations was higher year over year, principally reflecting working-capital movements, including changes in regulatory balances and inventories. Total operating cash flow, including discontinued operations, was $1.457 billion.
- Total assets fell to $17.493 billion from $24.590 billion, and equity to $3.844 billion from $6.175 billion, largely reflecting CPG’s distribution. The company declared $0.83 per share in dividends for 2015; the post-separation quarterly dividend was $0.155 per share.
Outlook, material developments and risks
- Management expected 2016 capital spending and certain other investing activities of $1.392 billion, compared with $1.368 billion in 2015. NiSource described approximately $30 billion of projected long-term regulated utility infrastructure investment, with about $2 billion executed to date.
- NIPSCO filed a proposed $1.3 billion, seven-year electric modernization plan; a decision was expected in the third quarter of 2016. Its electric base-rate case sought an approximately $148 million annual revenue increase, also with a decision expected in the third quarter. Other pending matters included gas TDSIC and rate proceedings.
- Environmental compliance is a significant exposure. Recorded environmental remediation accruals were approximately $123.2 million. Estimated capital costs for coal-combustion-residual compliance were $100–$220 million; costs of Clean Power Plan compliance were not estimable in the filing. The company stated that recovery of many environmental and infrastructure costs through rates depends on regulatory approval.
- Other key risks include substantial indebtedness and refinancing needs, regulatory outcomes, pension and postretirement obligations, weather and industrial demand, aging infrastructure and project execution, cyber incidents, and environmental laws. The company cautioned that the tax-free treatment of the CPG distribution could be challenged by the IRS.
- NiSource recorded a $97.2 million debt-extinguishment loss associated with debt restructuring before the separation. CPG’s 2015 discontinued-operation results included approximately $55.4 million of separation transaction costs. Ordinary-course legal claims were not individually deemed material, but adverse outcomes could affect results or liquidity.
- Management concluded disclosure controls and internal control over financial reporting were effective; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How post-spin utility earnings and cash flows compare with prior periods on a continuing-operations basis, and the run-rate effects of losing CPG.
- Progress and regulatory approvals for the 2016 capital program, the $1.3 billion electric plan, and pending base-rate cases; confirm actual cost recovery and returns.
- Debt maturities, financing costs, liquidity availability and compliance with debt covenants as capital spending continues.
- Actual environmental compliance costs, remediation exposures and recoverability through customer rates, particularly for coal ash and emissions rules.
- Whether the $0.155 quarterly dividend remains supportable from utility subsidiary cash generation and subject to applicable restrictions.