NiSource Inc. — Q2 2014 Form 10-Q Summary
Business context and reporting period
NiSource is a regulated energy holding company operating natural gas distribution, gas transmission and storage, and electric businesses. The filing covers the quarter and six months ended June 30, 2014; financial statements are unaudited. Results are seasonal, particularly for gas distribution, and interim results may not indicate full-year performance.
Key financial results
| Metric | Three months ended June 30, 2014 | Six months ended June 30, 2014 | Prior-year comparison |
|---|---|---|---|
| Gross revenues | $1,335.1 million | $3,655.6 million | Up 11% and 23%, respectively |
| Net revenues | $963.4 million | $2,222.6 million | Up $111.2 million and $264.2 million |
| Operating income | $219.6 million | $753.3 million | Up $25.6 million and $130.4 million |
| Income from continuing operations | $78.5 million; $0.25 per basic share | $344.9 million; $1.10 per basic share | Up from $72.4 million and $288.4 million; prior-year EPS was $0.23 and $0.92 |
| Net income | $78.2 million; $0.25 diluted EPS | $344.4 million; $1.09 diluted EPS | Prior-year net income was $71.7 million and $332.2 million |
| Operating cash flow | Not separately reported here | $651.0 million | Down from $894.5 million |
| Capital expenditures | Not separately reported here | $852.9 million | Up from $801.7 million |
Segment operating income, Q2 / first half: Gas Distribution was $59.8 million / $361.6 million; Columbia Pipeline Group was $103.7 million / $262.6 million; Electric Operations was $62.9 million / $141.8 million. Across the first half, reported net income included a $36.4 million after-tax gain on discontinued-operations disposals in 2013; 2014 recorded a $0.5 million discontinued-operations loss.
Balance sheet, debt and liquidity
At June 30, 2014, cash and cash equivalents were $18.0 million and total assets were $23.26 billion. Long-term debt, including current maturities, was $8.17 billion; short-term borrowings were $1.10 billion, comprising $801.1 million of commercial paper and $300.0 million of receivables-securitization borrowings. Total borrowings on this basis were approximately $9.27 billion. Debt to capitalization under the applicable covenant was 60.6%, versus a 70% limit.
NiSource reported no borrowings under its $2.0 billion revolving credit facility and $1,184.6 million of aggregate credit available. The $1.5 billion commercial-paper program is supported by the facility. The declared dividend was $0.26 per share for Q2. On July 15, 2014, after quarter-end, NiSource redeemed $500 million of 5.40% notes at maturity.
Material changes and management commentary
- First-half operating income growth reflected higher gas-distribution regulatory and service revenues, colder weather, pipeline growth-project revenue, and recognized mineral-interest gains. Management attributed $26.4 million of the increase in first-half continuing-operations income to colder weather.
- Net revenues rose across all three segments. Pipeline growth projects and higher throughput supported Columbia Pipeline Group; rate and infrastructure programs and colder weather supported Gas Distribution; higher industrial usage and environmental-investment recovery supported Electric Operations.
- First-half O&M expense increased $127.6 million, including $81.3 million of higher regulatory trackers that were offset in net revenues, as well as higher employee, administrative, generation and outside-service costs. Interest expense increased $17.6 million year over year.
- Management projected approximately $2.2 billion of 2014 capital expenditures and said operating cash, financing facilities and capital-market access should provide adequate funding. Planned pension and postretirement contributions for 2014 were approximately $38.3 million and $39.1 million, respectively.
- Management cited ongoing system modernization and growth plans, including approved seven-year NIPSCO gas and electric investment plans of approximately $710 million and $1.1 billion, respectively, and Columbia Transmission modernization spending of approximately $300 million annually.
Risks, contingencies and unusual items
- Environmental compliance could require significant future spending. NIPSCO estimated $860 million of environmental capital improvements, with approximately $195.2 million remaining; recovery from customers is expected but not assured. The filing says costs of several proposed or pending air, water and waste rules cannot yet be estimated.
- Environmental remediation accruals totaled approximately $132.9 million. The estimated MGP-site liability was $123.7 million, and remediation costs could vary by as much as $25 million above the estimate.
- Appeals are pending concerning IURC approval of NIPSCO’s electric TDSIC plan; an industrial group also appealed approval of the gas TDSIC plan. Other regulatory matters include proposed rate cases and FERC complaints involving transmission returns and transmission-upgrade agreement charges. Management could not estimate certain potential impacts.
- The 2014 first-half effective tax rate was 37.0%, versus 34.4% in 2013. The Indiana corporate tax-rate reduction resulted in a $7.1 million first-quarter tax expense.
- NiSource recognized $17.8 million of previously deferred mineral-interest gains in the first half; approximately $21.8 million of gains remained deferred pending future obligations.
- Management said the Springfield, Massachusetts gas explosion costs were substantially covered by insurance and amounts not covered were not expected to materially affect consolidated results. Management also stated that currently asserted legal claims were not expected to have a material impact.
Important facts for investors to verify
- Whether projected 2014 capital spending of approximately $2.2 billion is funded while operating cash flow remains below the prior-year level.
- Progress and regulatory recovery of the gas, electric and pipeline modernization and environmental investment programs, including pending appeals and rate proceedings.
- Changes in commercial-paper borrowings, available revolving-credit capacity, debt maturities and covenant headroom.
- Environmental remediation estimates and the eventual compliance costs of pending emissions, water and coal-residual rules.
- The durability of earnings growth after considering weather effects, regulatory trackers, the mineral-interest gain and the prior-year discontinued-operations disposal gain.