NiSource Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Financial statements are unaudited. Results include Columbia Pipeline Group (CPG), which was separated on July 1, 2015; beginning with Q3 2015 reporting, CPG is classified as discontinued operations. Accordingly, these consolidated results are not directly representative of NiSource’s post-separation utility company.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenues | $950.4 million | $963.4 million | $2,294.1 million | $2,222.6 million |
| Operating income | $165.1 million | $219.6 million | $695.2 million | $753.3 million |
| Net income attributable to NiSource | $(36.4) million | $78.2 million | $232.0 million | $344.4 million |
| Basic EPS | $(0.11) | $0.25 | $0.73 | $1.10 |
| Operating margin on net revenues | 17.4% | 22.8% | 30.3% | 33.9% |
- Cash flow: Six-month operating cash flow was $1,115.6 million, versus $651.0 million a year earlier. Capital expenditures were $991.1 million, compared with $852.9 million. Cash at June 30 was $496.6 million, up from $25.4 million at year-end 2014.
- Debt and liquidity: Long-term debt, including current maturities, was $9,323.7 million; total consolidated indebtedness was reported as $9,485.6 million, including $2,765.9 million attributable to CPG. Short-term borrowings were $161.8 million. NiSource reported $2,604.2 million of aggregate available credit under facilities and receivables programs, and a 56.0% debt-to-capitalization ratio against a 70% revolving-credit covenant limit.
- Equity and dividends: Total equity was $7,455.9 million, including $950.0 million of noncontrolling interest related to CPPL. NiSource declared $0.52 per share in dividends for the first six months; no dividend was declared for Q2 in the income statement. After the separation, the company declared a $0.155-per-share dividend payable August 20, 2015.
Material changes and operating drivers
- Q2 net income fell to a loss, driven chiefly by a $97.2 million debt-extinguishment loss and higher operating expenses. Six-month net income declined 33% year over year; operating income decreased $58.1 million.
- Six-month operating expenses rose $137.8 million, including $62.7 million of higher outside-service costs primarily associated with the separation, $41.6 million of increased employee and administrative costs, and $27.1 million of additional depreciation and amortization.
- Gas Distribution Operations’ six-month operating income increased to $374.9 million from $361.6 million, supported by rate and regulatory-program revenues. Q2 operating income declined to $49.7 million from $59.8 million, with higher expenses and warmer-than-normal weather weighing on results.
- Electric Operations’ six-month operating income fell to $115.7 million from $141.8 million. Industrial electricity sales were lower, primarily reflecting reduced steel production amid high import levels; environmental and depreciation costs also increased.
- CPG Operations’ six-month operating income rose to $271.6 million from $262.6 million. Higher transportation demand margins and equity earnings partly offset lower regulatory trackers and mineral-rights royalty revenue.
- Six-month cash from operations improved largely due to working-capital movements, including accounts receivable and overrecovered gas and fuel costs; it should not be assumed to represent a recurring earnings improvement.
Outlook, management commentary, and risks
- Management projected approximately $2.4 billion of 2015 capital expenditures before the separation, including about $1.1 billion for CPG; utility investment was expected to be approximately $1.3 billion in 2015. Management stated that operating cash flow, financing access, and capital markets should provide adequate funding for 2015 needs.
- NiSource described a long-term regulated-utility infrastructure investment opportunity of approximately $30 billion. Significant programs include pipeline modernization and electric system improvements; recovery and timing depend on regulatory approvals.
- Pending rate matters included requested annual revenue increases of $46.2 million in Pennsylvania and approximately $49.0 million in Massachusetts. A Virginia rate-case outcome remained pending. NIPSCO’s electric TDSIC plan was remanded, with a settlement calling for a base rate case and a new plan.
- Environmental exposure includes a $136.3 million recorded remediation accrual and a $119.7 million estimated liability for identified manufactured-gas-plant sites. CCR compliance costs and several potential air- and water-rule costs were not fully estimable; certain costs may be recoverable through rates.
- Other risks include substantial indebtedness, interest-rate and credit risks, weather variability, industrial-demand weakness, environmental and regulatory changes, aging infrastructure, project execution, cybersecurity and the possibility that the separation fails to deliver expected benefits. The separation’s tax-free treatment could be challenged by tax authorities.
- Credit ratings remained investment grade at quarter-end. Fitch’s BBB- rating was at the threshold identified by the company; a downgrade below specified rating triggers could require approximately $41.3 million of additional collateral.
Most important facts for investors to verify
- Post-separation financial statements, including the allocation of debt, costs, cash flows, tax attributes, and continuing intercompany arrangements between NiSource and CPG.
- Whether separation-related expenses and the debt-retirement charge are nonrecurring, and the underlying trend in operating costs and earnings.
- Progress and regulatory approval of pending rate cases and infrastructure cost-recovery programs.
- Actual 2015 capital spending and funding needs compared with management’s pre-separation estimates.
- Updates to environmental remediation and CCR obligations, including recoverability from customers and final compliance costs.
- Confirmation of the separation’s intended tax treatment and any resulting changes to deferred taxes or tax attributes.