NiSource Inc. — Q1 2019 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2019, compared with the first quarter of 2018. NiSource is a regulated utility holding company serving seven states through natural gas distribution and electric operations. Interim results are seasonal and may not indicate full-year performance.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenue | $1,869.8 million | $1,750.8 million | +$119.0 million |
| Operating income | $374.2 million | $400.6 million | −$26.4 million |
| Net income | $218.9 million | $276.1 million | −$57.2 million |
| Net income available to common shareholders | $205.1 million | $276.1 million | −$71.0 million |
| Basic / diluted EPS | $0.55 / $0.55 | $0.82 / $0.81 | Basic EPS −$0.27 |
| Cash flow from operations | $399.1 million | $388.2 million | +$10.9 million |
| Capital expenditures | $353.7 million | $370.0 million | −$16.3 million |
Operating margin was approximately 20.0%, versus 22.9% a year earlier. Revenue increased about 6.8%, but operating expenses rose $145.4 million. Management attributed lower earnings mainly to Greater Lawrence Incident costs, higher depreciation, the absence of a 2018 interest-rate-swap settlement gain, and preferred dividends introduced in 2019. The effective tax rate was 21.2%, compared with 18.5%.
Gas Distribution Operations operating income fell $46.3 million to $275.4 million, despite higher rates, infrastructure-recovery revenues, customer growth and colder weather. Electric Operations operating income rose $11.9 million to $95.0 million, supported by higher infrastructure-related rates and lower operating costs.
Cash, debt and liquidity
- Cash and cash equivalents were $151.0 million at March 31, 2019. Operating cash flow less capital expenditures was approximately $45.4 million; investing cash outflow was $375.4 million.
- Short-term borrowings totaled $2.080 billion, including $980 million of commercial paper, $500 million of receivables-facility borrowings and a $600 million term loan. Long-term debt, including the current portion, was approximately $7.162 billion; these amounts imply total debt of about $9.242 billion.
- Net available liquidity was $1.011 billion. The $1.85 billion revolving credit facility had no borrowings outstanding; its maturity was extended to February 2024. The debt-to-capitalization ratio was 61.5%, below the stated 70% covenant limit.
- After quarter-end, NiSource amended and increased its term loan to $850 million, with maturity extended to April 2020; it borrowed the full amount at LIBOR plus 60 basis points. NIPSCO also redeemed $41 million of bonds at maturity on April 1.
Material changes, outlook and risks
- Greater Lawrence Incident: Q1 included approximately $204 million of estimated third-party-claim expense and $32 million of other incident costs. Estimated total third-party claims were $961–$1,010 million; estimated total other incident-related costs were $360–$370 million. These estimates exclude pipeline replacement capital costs, estimated at $240–$250 million. Approximately $177 million of replacement capital had been spent through March 31.
- NiSource recorded $100 million of additional insurance recoveries in Q1, on top of $135 million recorded in 2018. The company said incident expenses had exceeded available policy coverage, insurers were asserting coverage defenses, and uninsured amounts could be material. At March 31, $122 million of insurance receivables remained outstanding; recovery timing and final amounts were uncertain. Government investigations, potential penalties and some claims could not be estimated.
- Management expects 2019 capital expenditures of approximately $1.6–$1.7 billion and cites approximately $30 billion of projected long-term regulated utility investment. Management stated that available operating cash flow, borrowing facilities and capital-market access should provide adequate funding, while noting that the Tax Cuts and Jobs Act adversely affects 2019 liquidity.
- NIPSCO’s preferred resource plan calls for retiring 2,080 MW of coal capacity: Schahfer units by 2023 and Michigan City Unit 12 by 2028. Renewable plans include two 20-year PPAs for approximately 700 MW and a build-transfer agreement for approximately 100 MW; regulatory approvals and project completion remain conditions.
- Other risks include regulatory rate-case outcomes, recovery of infrastructure and incident costs through rates, environmental obligations, weather and commodity exposure, interest rates, credit ratings and execution of the generation transition. No material changes to the previously reported risk factors were identified.
Most important facts for investors to verify
- Subsequent updates to Greater Lawrence claims, restoration costs, investigations, insurance recoveries and any potential regulatory disallowance of pipeline replacement investment.
- Actual 2019 capital spending, funding needs and short-term debt balances, including the post-quarter term-loan amendment and maturity.
- Progress and regulatory decisions on NIPSCO’s rate cases, renewable PPAs and build-transfer agreement, and planned coal-plant retirements.
- Whether operating earnings recover from the incident-related expense burden and whether estimated losses or insurance receivables require revision.