NiSource Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. NiSource is a regulated natural gas and electric utility holding company serving customers in seven states. Its former Columbia Pipeline Group business was spun off on July 1, 2015 and is presented as discontinued operations in prior-period comparisons; therefore, revenue and net-income comparisons are not fully like-for-like.
Financial performance
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 |
|---|---|---|
| Gross revenues | $897.6 million, versus $884.6 million | $2,334.2 million, versus $2,736.8 million |
| Net revenues | $662.7 million, up 4.4% | $1,602.8 million, down 2.2% |
| Operating income | $138.2 million, versus $84.4 million | $519.6 million, versus $470.7 million |
| Continuing-operations income (loss) | $28.7 million, versus a loss of $73.1 million | $208.4 million, versus $119.4 million |
| Net income (loss) attributable to NiSource | $28.6 million, versus a loss of $36.4 million | $208.3 million, versus $232.0 million |
| Basic EPS from continuing operations | $0.09, versus a loss of $0.23 | $0.65, versus $0.38 |
| Operating margin on net revenues | 20.9%, versus 13.3% | 32.4%, versus 28.7% |
Q2 operating income improved in both segments: Gas Distribution Operations reported $73.5 million, up $23.8 million, and Electric Operations reported $68.4 million, up $22.7 million. For the first half, segment operating income was $388.4 million for gas, up $13.5 million, and $138.7 million for electric, up $23.0 million. The Q2 2015 continuing-operations loss included a $97.2 million loss on early extinguishment of debt. First-half 2015 net income also included $128.2 million of discontinued-operations income from the former pipeline business.
Cash flow and investment: First-half net cash from continuing operating activities was $487.8 million, down from $819.3 million; total operating cash flow was $487.1 million versus $1.116 billion. Capital expenditures were $672.5 million, compared with $554.7 million. Operating cash flow less capital expenditures was negative $185.4 million. Management attributed the operating-cash-flow decline principally to working-capital and regulatory recovery timing; 2015 investing cash flow included approximately $3.8 billion received in connection with the separation.
Debt and liquidity: At June 30, long-term debt including current maturities was $6.169 billion; short-term borrowings were $1.101 billion. Cash and cash equivalents were $15.7 million. Reported net available liquidity was $619.5 million, including available revolving-credit and receivables-program capacity. The revolving facility was undrawn; commercial paper outstanding was $881.5 million. The company’s debt-to-capitalization ratio for covenant purposes was 65.6%, below its stated covenant limits of 70% and 75%. Moody’s and Fitch affirmed or upgraded specified ratings in June, with stable outlooks; S&P ratings were reported as BBB+ for senior unsecured debt and A-2 for commercial paper, with stable outlooks.
Material changes and drivers
- Q2 net revenues increased $28.1 million. Gas benefited from new rates and infrastructure investment and from colder weather; electric benefited from investment-related revenues and trackers.
- First-half net revenues decreased $35.8 million. Gas was affected by lower regulatory and tax trackers and warmer weather, partly offset by investment-related rate increases. Electric net revenues increased on investment-related revenues.
- Operating expenses fell in both the quarter and first half, including lower environmental costs, other taxes, and employee and administrative expenses. Some tracker-related expense changes were offset in revenues and had little effect on operating income.
- First-half 2016 total net income was lower than in 2015 despite higher continuing-operations income, principally because 2015 included the former CPG business in discontinued operations.
- Other comprehensive loss was $121.2 million for the first half, largely reflecting a $124.2 million after-tax loss on cash-flow hedges; accumulated other comprehensive loss reached $156.3 million.
Outlook, regulation, and risks
- Management expected approximately $1.5 billion of 2016 capital expenditures and described a long-term regulated utility investment opportunity of approximately $30 billion; approximately $2.7 billion had been executed to date. No quantified earnings or EPS guidance is provided in the filing text.
- After quarter-end, the IURC approved NIPSCO’s electric base-rate settlement, providing a $72.5 million annual revenue increase effective October 1, 2016, and approved a seven-year electric infrastructure plan with approximately $1.25 billion of eligible investments. The gas infrastructure plan approved in June covers approximately $779 million of eligible investment over seven years.
- Pending gas distribution rate cases sought annual increases of $55.3 million in Pennsylvania, $37.0 million in Virginia, and $25.4 million in Kentucky. A Maryland settlement proposed a $3.7 million annual increase, subject to regulatory approval.
- Environmental and compliance exposure includes estimated future capital costs of $225–$315 million for electric effluent-limitation requirements, $130–$182 million for coal-combustion-residual requirements, and $4–$35 million for cooling-water intake compliance. Management expects these costs to be eligible for recovery through rates, but actual requirements and recoveries remain subject to regulation. Clean Power Plan compliance costs could not be estimated.
- Recorded environmental remediation liabilities were $120.9 million. For 64 identified former manufactured-gas-plant sites, the estimated liability was $109.2 million; remediation costs could vary by as much as $25 million in addition. The filing notes ordinary-course litigation and regulatory uncertainty, and says adverse outcomes could affect results, financial position, or liquidity.
- NiSource recorded an $8.6 million liability related to amounts collected under transmission upgrade agreements after a Treasury notice concerning tax treatment. The company also had $1.5 billion of forward-starting interest-rate swaps; changes in expected debt-issuance timing or rates may affect results and accumulated other comprehensive income.
- Management identified risks including weather, interest rates, regulation, environmental rules, infrastructure execution, commodity and supply conditions, pension funding, cyber threats, and access to capital. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of continuing-operations income growth reflects durable rate-base and rate changes versus weather, tracker timing, and expense fluctuations.
- Whether the planned $1.5 billion of 2016 capital spending and longer-term investment program proceed on schedule and earn timely regulatory recovery.
- Actual funding needs and refinancing costs, including commercial-paper levels, interest-rate exposure, liquidity, and compliance with debt covenants.
- Final costs, regulatory treatment, and recoverability of environmental, pipeline-safety, and other compliance spending.
- Outcomes and effective dates for pending rate cases and transmission-related regulatory matters, including any resulting customer refunds or rate adjustments.
- Whether cash flow improves as working-capital and regulatory recovery timing normalizes; first-half operating cash flow was below capital expenditures.