NiSource Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. NiSource is a regulated natural gas and electric utility holding company operating in seven states. Figures are unaudited and in millions of dollars except per-share data.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $895.0 | $917.0 | $3,652.8 | $3,506.3 |
| Operating income (loss) | $(315.9) | $111.2 | $203.1 | $650.6 |
| Net income (loss) | $(339.5) | $14.0 | $(38.9) | $180.9 |
| Net income (loss) available to common | $(345.1) | $14.0 | $(45.8) | $180.9 |
| Basic EPS | $(0.95) | $0.04 | $(0.13) | $0.55 |
- Quarterly revenue declined $22.0 million year over year; nine-month revenue increased $146.5 million. Nine-month net revenues, a company-presented non-GAAP measure, were $2,393.1 million versus $2,443.6 million.
- Q3 operating loss included $451.6 million of Greater Lawrence incident-related claims and other costs. Gas Distribution Operations reported a $455.2 million Q3 operating loss and a $94.4 million nine-month loss; Electric Operations operating income rose to $134.9 million for Q3 and $300.4 million for nine months.
- Operating cash flow was $927.2 million for nine months, versus $529.6 million. Capital expenditures were $1,296.6 million, versus $1,216.4 million; cash flow after capital expenditures was therefore negative $369.4 million, before other investing items.
- At September 30, cash and cash equivalents were $41.8 million. Net available liquidity was $1,135.6 million. Long-term debt was $7,094.5 million, current long-term debt $48.6 million and short-term borrowings $1,611.0 million. The debt-to-capitalization covenant ratio was 63.3%, against a 70% limit under the revolving facility and term loan.
- NiSource raised $599.6 million net from a common-stock private placement and $393.9 million net from preferred stock issuance. The 5.65% preferred shares have cumulative dividends and no stated maturity.
Material changes versus prior period
- The Greater Lawrence incident drove the sharp deterioration in Q3 and nine-month operating results. Excluding the incident, the filing does not present a single adjusted earnings figure.
- Lower federal tax rates under the 2017 Tax Cuts and Jobs Act reduced customer billings and prompted regulatory liabilities and probable customer-refund reserves. NiSource recorded $69.9 million of additional TCJA-related regulatory liabilities in the first nine months.
- NiSource recorded $45.5 million in nine-month losses on early extinguishment of debt, compared with $111.5 million in 2017; $33.0 million of the 2018 total was recorded in Q3.
- Short-term borrowings increased to $1,611.0 million from $1,205.7 million at year-end 2017, including a $600 million term loan maturing in April 2019.
Outlook, risks and unusual items
- Greater Lawrence incident: The September 13 gas distribution explosions and fires caused one fatality, injuries and service disruption to about 8,500 meters. The company recorded an approximately $460 million Q3 loss, including $415 million for estimated third-party claims and $45 million for other incident expenses. Estimated total third-party claims are $415–$450 million; expected total other incident-related costs are $180–$210 million. Business-interruption claims and potential government fines, penalties or settlements are not included because they cannot yet be reasonably estimated.
- The company has approximately $800 million of liability insurance but recorded no insurance recovery as of September 30; timing and amount remain uncertain. The affected 45-mile pipeline replacement is estimated to cost $135–$165 million, with recovery dependent on a future regulatory proceeding. Columbia of Massachusetts withdrew its pending base-rate case. Investigations, lawsuits and a state work moratorium add uncertainty; the NTSB investigation was ongoing.
- Management expected 2018 capital expenditures of approximately $1.7–$1.8 billion and described a projected $30 billion long-term regulated infrastructure investment program. Management said available funding sources were adequate for operations, capital spending and incident costs, while noting incident-related financing needs depend on payment timing and insurance recoveries.
- NIPSCO’s October 2018 resource plan proposed retiring the R.M. Schahfer units by 2023 and Michigan City Unit 12 by 2028, with replacement resources still being defined and currently expected to include wind, solar and battery storage. No consolidated earnings-per-share guidance is provided in the filing text.
- Other notable exposures include environmental remediation liabilities of $107.1 million, estimated CCR capital compliance costs of approximately $193 million, and possible future regulatory changes. S&P moved NiSource’s outlook to Negative in September, citing potential incident impacts.
Investor verification priorities
- Track changes in incident claim estimates, business-interruption exposure, government investigations and any fines or settlements.
- Verify insurance coverage, recognized recoveries and the timing of cash receipts against incident payments.
- Monitor regulatory approval and recoverability of the $135–$165 million pipeline replacement investment and the impact of the withdrawn Massachusetts rate case.
- Assess liquidity, refinancing needs for the April 2019 term loan, short-term borrowing levels and credit-rating developments.
- Review customer refunds and rate outcomes related to TCJA, including the treatment and passback schedule for excess deferred taxes.
- Follow NIPSCO’s resource-plan implementation, coal retirement assumptions, replacement power costs and future rate-case outcomes.