NiSource Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. NiSource is a regulated energy holding company with gas distribution, gas transmission and storage, and electric operations. Results are seasonal and interim results may not indicate full-year performance.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net revenues | $739.8 million | $745.6 million | $2,575.8 million | $2,572.1 million |
| Operating income | $137.2 million | $147.4 million | $745.2 million | $719.3 million |
| Income from continuing operations | $20.0 million | $36.3 million | $284.0 million | $286.2 million |
| Net income | $19.3 million | $34.7 million | $282.1 million | $284.4 million |
| Basic EPS | $0.06 | $0.12 | $0.99 | $1.01 |
| Diluted EPS | $0.06 | $0.12 | $0.95 | $0.99 |
- Q3 net revenues were nearly flat year over year, but operating income declined $10.2 million and net income declined $15.4 million. For the first nine months, net revenues increased $3.7 million and operating income increased $25.9 million, while net income decreased $2.3 million.
- Operating income as a proportion of net revenues was approximately 18.5% in Q3 2012 versus 19.8% in Q3 2011, and 28.9% versus 28.0% for the nine-month periods.
- Operating cash flow was $941.8 million for the first nine months, versus $794.1 million. Capital expenditures were $1,024.3 million, versus $774.2 million; operating cash flow less capital expenditures was therefore negative $82.5 million.
- At September 30, cash and cash equivalents were $12.3 million; restricted cash was $65.1 million. Total debt, including current long-term debt and short-term borrowings, was approximately $7.87 billion. Long-term debt including its current portion was $7.64 billion. Short-term borrowings were $225.3 million, down from $1.36 billion at year-end 2011.
- Management reported net available liquidity of approximately $1.44 billion. The $1.5 billion revolving facility had no borrowings and $1.426 billion of available credit; commercial paper outstanding was $55 million.
- Common dividends declared were $0.24 per share in Q3, versus $0.23 a year earlier. Average basic shares rose to 290.3 million from 280.8 million.
Material changes and drivers
- Management attributed the nine-month decline in continuing income primarily to the Columbia Transmission customer settlement, which reduced Gas Transmission and Storage net revenues by $72.9 million, warmer weather, which reduced income by $42.6 million, and $34.5 million of higher interest expense. These pressures were partly offset by higher electric revenues following a rate case, gas distribution regulatory and service programs, and increased equity earnings, mainly from Millennium.
- In Q3, Gas Transmission and Storage operating income fell to $38.8 million from $68.2 million, primarily reflecting the settlement. Electric operating income rose to $83.6 million from $78.8 million, and Gas Distribution operating income rose to $16.2 million from $7.9 million.
- For the first nine months, Electric operating income increased to $200.2 million from $169.7 million; Gas Distribution declined to $275.1 million from $296.0 million; and Gas Transmission and Storage was $268.9 million versus $271.2 million.
- NiSource settled its forward equity agreements on September 10, delivering 24.265 million shares and receiving $339.1 million. The filing reports 309,755,140 common shares outstanding on October 24, 2012.
Outlook, management commentary and risks
- Management projected 2012 capital expenditures of approximately $1.575 billion and stated that operating cash generation, credit facilities, debt financing and capital-market access were expected to provide adequate funding for 2012 operations and capital spending. No specific earnings guidance is provided in the filing text.
- Growth and modernization plans include a Columbia Transmission pipeline modernization settlement filed with FERC, featuring a proposed $300 million annual capital-recovery mechanism and customer refunds and rate adjustments; approval was being sought before year-end 2012. The filing describes an initial five-year program with a $1.5 billion cap. Other projects include the West Side and East Side pipeline expansions, the Big Pine gathering system, and the Pennant Midstream joint venture.
- Electric environmental compliance could require estimated capital investment of $777 million to $827 million; management said these costs were likely to be recoverable from ratepayers. A separate engine-emissions rule was estimated to cost $20 million to $25 million. Regulatory outcomes and cost recovery remain important uncertainties.
- Environmental remediation reserves were $162.8 million at September 30, 2012. The estimated liability for the company’s MGP remediation sites was $134.3 million; management said costs could be as much as $25 million higher. Potential additional remediation and penalties at the Majorsville site could not be estimated; EPA complaints concerning West Virginia road work proposed total penalties of $0.2 million.
- NiSource identified weather, commodity markets, regulatory and environmental changes, capital-market conditions, pension funding, counterparty credit and litigation as risks. Ratings were investment grade with stable outlooks; a downgrade below specified thresholds could require additional collateral. The filing estimates approximately $27 million of collateral requirements from relevant rating triggers.
- Management expected possible IRS guidance within 12 months that could reduce unrecognized tax benefits by $80.9 million, but stated it did not expect a significant income-statement effect. The Q3 pension settlement generated a $1.9 million charge. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Most important facts for investors to verify
- FERC disposition and actual financial effects of the Columbia Transmission settlement, including refunds, base-rate changes and recovery of modernization investment.
- Whether planned capital spending and environmental investment receive timely regulatory approval and cost recovery, and whether project schedules and budgets remain on track.
- How weather, customer usage and gas transmission volumes affect earnings as the business enters the heating season.
- Debt and liquidity trends, refinancing needs, credit ratings and potential collateral requirements.
- Changes in environmental remediation estimates, potential penalties, pension costs and the timing and impact of IRS guidance.
- Comparability of 2011 results: the filing identifies immaterial corrections to certain 2011 income-statement items; the corrected nine-month 2011 net income was $284.4 million, with no net effect on reported operating cash flow.