NiSource Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. NiSource is an energy holding company whose principal businesses are regulated natural gas distribution, gas transmission and storage, and electric service in Indiana. Results are seasonal and can be materially affected by weather.
Key financial results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Gross revenues | $1,658.7 million | $2,231.6 million |
| Total net revenues | $1,028.4 million | $1,060.7 million |
| Operating income | $399.4 million | $406.4 million |
| Income from continuing operations | $193.5 million | $209.1 million |
| Net income | $193.4 million | $209.5 million |
| Basic / diluted EPS | $0.68 / $0.66 | $0.75 / $0.73 |
| Operating cash flow | $480.0 million | $422.1 million |
| Capital expenditures | $292.6 million | $209.4 million |
| Dividends declared per share | $0.46 | $0.46 |
Net income and diluted EPS declined year over year. The filing does not present a consolidated operating-margin figure; operating income was $399.4 million on total net revenues of $1,028.4 million.
Balance sheet and liquidity
- At March 31, 2012, cash and cash equivalents were $38.5 million and restricted cash was $149.7 million. Current assets were $1.970 billion versus current liabilities of $3.718 billion.
- Long-term debt, including current maturities, was $6.585 billion; short-term borrowings were $1.264 billion. Long-term debt fair value was estimated at $7.421 billion.
- Management reported approximately $632 million of net available liquidity. The $1.5 billion revolving credit facility had $593.2 million of available credit; commercial paper outstanding was $496.6 million.
- Stockholders’ equity was $5.081 billion. Total assets were $20.446 billion.
Material changes and management commentary
- Warmer weather reduced continuing-operations income by an estimated $45.7 million versus Q1 2011. Gas distribution territory weather was 23% warmer than normal and 25% warmer than the prior-year quarter; gas distribution throughput fell 11.4%.
- Higher interest expense—up $13.5 million—and depreciation and amortization—up $11.8 million—also pressured earnings. The company cited recent debt issuance, higher average short-term borrowings and rates, and expiration of the Sugar Creek deferral.
- Gas Transmission and Storage operating income rose to $138.6 million from $118.4 million, supported by growth projects, the Columbia Gulf rate case, and higher equity earnings. Electric operating income declined to $46.2 million from $50.6 million despite higher net revenues, as operating expenses increased.
- Operating cash flow increased by $57.9 million, with the filing attributing the increase primarily to lower pension and postretirement funding and working-capital changes. Cash flow from operations exceeded capital expenditures by $187.4 million for the quarter.
- Management projected approximately $1.4 billion of 2012 capital expenditures and stated that operating cash flow, credit facilities, commercial paper, debt markets, and capital-market access were expected to fund operating needs and investment. No earnings guidance was provided in the supplied filing text.
Outlook, risks, contingencies and unusual items
- Investment plans: NiSource described a long-term gas distribution infrastructure program exceeding $4 billion and a possible gas transmission modernization program of about $4 billion over 10–15 years. The Big Pine gathering project was expected to cost approximately $150 million and enter service in late 2012; the West Side Expansion was planned at approximately $220 million, with service targeted for 2014.
- Environmental exposure: Northern Indiana estimated $620 million–$1.1 billion of potential electric-generation environmental capital improvements and stated that costs are likely recoverable from ratepayers. The filing also described an approximately $850 million environmental investment program over six to eight years. Environmental remediation reserves were $168.8 million; management noted that remediation estimates may change. Potential costs for certain air rules were not yet estimable.
- Other contingencies: A Pennsylvania environmental notice of violation includes a $1 million settlement demand; the company could not estimate the likelihood or cost of penalties or further remediation. Management said asserted legal claims were not expected to have a material consolidated impact. The filing identifies regulatory, weather, commodity, credit, interest-rate, environmental, pension, and litigation risks.
- Tax item: If expected IRS guidance is issued and adopted, NiSource said it could recognize an $80.9 million tax benefit related to repair-cost tax accounting; management did not expect a significant income-statement effect.
- Unregulated gas marketing wind-down: The company settled most contracts related to a prior reserve, wrote off $43.8 million of price-risk assets, and recorded $20.7 million of notes receivable. A $1.2 million reserve remained for the MF Global bankruptcy-related margin shortfall.
- Equity forward: Settlement was expected by September 10, 2012, and NiSource anticipated delivering shares. At the March 31 forward price, physical settlement would have produced approximately $351.2 million of proceeds.
- Comparative restatement: Q1 2011 figures were corrected for deferred revenue, environmental asset recovery, and OPEB over-reimbursement. NiSource described the adjustments as immaterial; corrected Q1 2011 net income was $209.5 million, $7.2 million above the previously reported amount.
Important facts for investors to verify
- Whether 2012 capital spending and the large planned infrastructure and environmental programs proceed on schedule, and how much is ultimately recoverable through rates.
- Whether warmer weather, customer usage trends, and regulatory rate mechanisms continue to affect gas distribution earnings and cash flow.
- Debt maturities, interest costs, available liquidity, and the effect of any credit-rating change on collateral requirements or receivables programs.
- Progress on the $80.9 million potential tax benefit, the equity-forward settlement, and recovery of the remaining MF Global-related amount.
- Changes in environmental remediation estimates, permitting requirements, and unresolved regulatory or legal proceedings.