Business context and reporting period
NiSource Inc. is a regulated energy holding company serving approximately 3.8 million customers across seven states. Its principal businesses are gas distribution, gas transmission and storage, and electric generation and distribution in Indiana. This Form 10-K reports the fiscal year ended December 31, 2012; the fourth-quarter figures are included below where relevant. The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective.
Financial performance and position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Gross revenues | $5.061 billion | $5.975 billion |
| Net revenues | $3.520 billion | $3.429 billion |
| Operating income | $1.043 billion | $890.1 million |
| Income from continuing operations | $410.6 million | $294.8 million |
| Net income | $416.1 million | $299.1 million |
| Diluted EPS | $1.39 | $1.03 |
| Net cash from operating activities | $1.276 billion | $870.2 million |
| Capital expenditures | $1.585 billion | $1.125 billion |
Operating margin was approximately 29.6% of net revenues. Fourth-quarter 2012 gross revenues were $1.410 billion, operating income $306.5 million, continuing-operations income $132.0 million, and diluted EPS $0.43. The comparable fourth quarter of 2011 reported gross revenues of $1.479 billion, operating income of $182.2 million, continuing-operations income of $15.6 million, and diluted EPS of $0.04.
At year-end, total assets were $21.845 billion, common equity $5.554 billion, and total consolidated indebtedness approximately $8.103 billion. Long-term debt, excluding current maturities, was $6.819 billion; current debt was $507.2 million and short-term borrowings were $776.9 million. Cash and cash equivalents were $36.3 million. Management reported net available liquidity of approximately $974.4 million. Current assets of $2.352 billion were below current liabilities of $3.302 billion. The debt-to-capitalization ratio was 59.3%, against applicable covenant limits of 70% and 75%. The company paid $0.94 per share in dividends during 2012.
Material changes versus the prior comparable period
- Net revenues rose $90.8 million and operating income rose $152.6 million year over year. Electric net revenues increased $130.0 million, primarily reflecting the electric rate case; gas distribution net revenues declined $53.6 million, including the effects of unusually warm weather; gas transmission and storage net revenues decreased $5.2 million, largely due to a customer settlement.
- Continuing-operations income increased $115.8 million. Contributing factors included stronger electric results, $53.9 million less debt-extinguishment loss than in 2011, and higher equity earnings. Higher interest expense of $41.5 million partly offset gains.
- Gross revenues fell despite higher net revenues. Columbia of Ohio’s standard-choice offer reduced reported gross revenues and cost of sales without affecting net revenues; the wind-down of unregulated gas marketing also reduced reported revenue.
- Operating cash flow increased $405.3 million, principally because pension and postretirement contributions fell to $51.0 million from $447.1 million in 2011. Capital expenditures rose materially, with spending focused on infrastructure replacement, pipeline modernization and growth projects.
- Shares outstanding increased to 310.3 million from 281.9 million, including 24.265 million shares delivered to settle forward agreements for $339.1 million in proceeds.
Outlook, management commentary, risks and unusual items
- Management expected 2013 capital expenditures and other investing activities of $1.813 billion, up $228.0 million from 2012, chiefly for pipeline modernization, integrity work and gas transmission growth. Management stated that operating cash generation, borrowing facilities and capital-market access were expected to provide adequate funding for 2013; the filing provides no clear numerical earnings or EPS guidance.
- Columbia Transmission’s FERC-approved modernization settlement supports approximately $1.5 billion of investment over five years and provides a capital cost recovery mechanism, subject to stated annual and program caps. The settlement also includes a $50 million customer refund and base-rate reductions. In 2012, the company recorded the refund obligation and retroactive rate effects; refunds were expected in March 2013.
- Major growth projects target Marcellus and Utica production. Big Pine was expected to enter service by April 2013; other disclosed projects were planned for 2013–2015. Construction timing, cost, customer commitments and the realization of anticipated production and revenues remain risks.
- Environmental remediation reserves totaled approximately $160.6 million at year-end. NiSource identified potential additional environmental compliance costs, including estimated $820–$855 million capital improvements for Northern Indiana’s generating fleet; recovery from customers is expected by management but is not assured. Certain remediation costs and penalties remain uncertain.
- Operational incidents included a December 2012 Columbia Transmission pipeline rupture in Sissonville, West Virginia, and a November 2012 gas explosion in Springfield, Massachusetts. The company said related costs were substantially covered by insurance and uncovered amounts were not expected to be material; investigations were ongoing.
- Other exposures include substantial debt and refinancing needs, near-minimum investment-grade credit ratings, pension and postretirement underfunding, regulatory recovery and rate-case outcomes, weather and demand variability, commodity and counterparty risk, aging infrastructure, cyber threats, and changing environmental rules. Pension plans were underfunded by $631.0 million and other postretirement plans by $462.5 million.
- The Retail Services service-plan and leasing businesses were sold in January 2013; the company expected to record a $36.3 million after-tax disposal gain in the first quarter of 2013. The sale is a post-year-end event, not 2012 earnings.
Important facts for investors to verify
- Whether the 2012 earnings improvement is sustained, particularly the contribution from electric rate changes, and how regulatory trackers affect reported net revenues and expenses.
- Actual 2013 capital spending, project completion costs and timing, and the extent and timing of regulatory recovery for modernization and environmental investments.
- Liquidity, debt maturities, borrowing costs, covenant headroom and possible collateral requirements if credit ratings fall below stated triggers.
- Changes in pension and postretirement funding needs, assumptions and expense, alongside planned 2013 contributions.
- Final costs, insurance recoveries and regulatory findings for the Sissonville and Springfield incidents, and developments in environmental remediation and compliance matters.
- The realized disposal gain from the January 2013 Retail Services sale and the effect of the transaction on ongoing results and cash flows.