NiSource Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited results; dollar amounts in millions except per-share data. NiSource operates regulated gas distribution, gas transmission and storage, and electric businesses. Management notes that results are seasonal and interim results may not indicate full-year performance.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Gross revenues | $1,228.3 | $1,171.1 | $3,460.5 | $3,529.8 |
| Net revenues | $765.8 | $732.0 | $1,827.1 | $1,804.4 |
| Operating income | $163.3 | $139.2 | $562.5 | $542.6 |
| Income from continuing operations | $39.5 | $28.0 | $244.3 | $225.4 |
| Net income | $38.9 | $28.1 | $244.1 | $225.4 |
| Diluted EPS | $0.14 | $0.10 | $0.85 | $0.81 |
| Operating margin on net revenues | 21.3% | 19.0% | 30.8% | 30.1% |
Operating margins above are calculated as operating income divided by net revenues. Q2 net revenues rose 4.6% and operating income rose 17.3%; six-month net revenues rose 1.3% and operating income rose 3.7%. The six-month increase in net income primarily reflected improved segment results, lower depreciation and lower interest expense. Interest expense was $184.2 for the half-year, down from $197.2.
Cash flow, debt and liquidity
- Six-month operating cash flow was $736.0, versus $402.5 in 2010. The improvement chiefly reflected the timing of gas-cost recovery: $220.7 of previously under-recovered gas costs was collected, compared with a $252.3 use of cash from returning over-recovered costs in 2010.
- Capital expenditures were $445.0, up from $336.9; management projected approximately $1.1 billion of 2011 capital expenditures. Operating cash flow less capital expenditures was approximately $291 million for the half-year.
- Cash was $59.9 at June 30, 2011; restricted cash was $154.6. Current assets of $1,745.1 were below current liabilities of $2,558.1.
- Long-term debt, excluding current maturities, was $6,340.0; short-term borrowings were $870.4 and current debt maturities were $30.0. Total debt on these balance-sheet categories was approximately $7.24 billion. Short-term borrowings had declined from $1,382.5 at December 31, 2010.
- NiSource had a $1.5 billion revolving credit facility maturing in March 2015, with $506.0 borrowed, and $180.5 of commercial paper outstanding. Management reported $793.8 of credit available under the facility. The company issued $400 million of 5.95% senior notes due 2041 in June and used proceeds to repay short-term facility borrowings.
- Common dividends declared were $0.23 per share for Q2, unchanged year over year. Six-month dividends paid were $128.7.
Segment results and changes
- Gas Distribution: Operating income was $46.4 in Q2 versus $18.5, and $288.0 for six months versus $253.6. Q2 performance benefited from colder weather, higher fixed customer charges and regulatory program revenues, as well as lower depreciation. Six-month net revenues declined $7.8, partly due to lower off-system sales and regulatory trackers; those tracker changes were largely offset in expenses.
- Gas Transmission and Storage: Operating income was $84.7 in Q2 versus $74.9, and $203.2 for six months versus $200.8. Growth-project demand margins and increased transportation activity supported results. Q2 included a $2.8 one-time settlement; the six-month comparison also reflected prior-year items, including an $8.3 gain-related revenue recognition and $5.4 of contract buy-out fees.
- Electric: Operating income declined to $39.8 in Q2 from $49.6 and to $83.0 for six months from $94.7. Higher industrial usage and net revenues were more than offset by higher generation costs, including more outage weeks, and increased operating expenses.
Outlook, management commentary and material risks
- Management described a strategy centered on regulated infrastructure investment, gas transmission growth and balance-sheet management. It cited more than $4 billion of gas distribution replacement investment over 20–25 years and ongoing Marcellus-related pipeline projects. Completed and planned transmission expansions are supported in significant part by long-term contracts or binding precedent agreements.
- A Northern Indiana electric rate-case settlement was filed July 18, 2011 and remained subject to IURC approval. The proposed settlement includes a 6.98% rate of return, a 10.2% return on equity and a limit on the proposed residential base-rate impact of 4.5%. Columbia of Pennsylvania’s proposed partial settlement would provide $17 million of annual revenue increases, also subject to regulatory action.
- Columbia Gulf’s FERC rate increase took effect May 1, 2011 subject to refund; settlement discussions were ongoing. Other rate and infrastructure-tracker proceedings also remained pending.
- A July 2011 consent decree concerning Northern Indiana’s coal plants requires emissions controls, permit and allowance actions, $3.5 million in fines and $9.5 million for mitigation. Estimated related capital improvements are $570–$840 million through 2018; the company believes these costs are likely recoverable from ratepayers. Additional potential environmental compliance requirements could add costs, and recovery is not assured in all cases.
- Environmental remediation reserves were $79.4 at June 30. The filing also discusses unresolved or uncertain environmental matters, including a Pennsylvania notice of violation for which potential penalties and remediation costs could not be estimated clearly.
- Indiana tax legislation caused a $6.8 Q2 tax expense from remeasurement of deferred tax items. Q2 effective tax rate was 43.2%, compared with 35.5% a year earlier; the six-month rates were 36.1% and 35.7%.
- NiSource expected 2011 pension contributions of approximately $149.7 and postretirement contributions of $49.3; it had contributed $111.0 and $21.2, respectively, by June 30. Management said available operating cash flow, credit facilities and capital-market access were adequate to fund 2011 operations and investment.
- The 2010 forward equity agreements covering 24.265 million shares were expected to settle by September 2012. NiSource anticipated physical settlement; estimated proceeds at the June 30 forward price were approximately $369.3 million, with potential share issuance and dilution.
- Principal risks cited include weather, energy prices and demand, regulation, environmental requirements, litigation, pension funding, capital-market conditions and counterparty credit risk. Management reported no material change to the risk factors in its 2010 Form 10-K. Disclosure controls were considered effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Outcome and timing of the pending Northern Indiana electric rate-case settlement and Columbia of Pennsylvania rate proceedings, including the effect on allowed returns and customer rates.
- Whether environmental capital spending of $570–$840 million is approved for recovery, and its timing, final cost and effect on financing needs.
- Settlement or refund exposure in the Columbia Gulf rate case and the status of other material regulatory trackers.
- Actual 2011 capital expenditures, pension and postretirement funding, and liquidity available after seasonal working-capital requirements.
- Settlement form and timing of the forward equity agreements, including resulting proceeds and share dilution.
- Progress, contracted capacity and in-service timing for transmission growth projects, and whether expected demand and margins materialize.