filings.toolsItem 6. SELECTED FINANCIAL DATA
57K characters. Original on sec.gov · Markdown
Item 6. SELECTED FINANCIAL DATA
NISOURCE INC.
The selected data presented below as of and for the five years ended December 31, 2015, are derived from the Consolidated Financial Statements of NiSource. The data should be read together with the Consolidated Financial Statements including the related notes thereto included in Item 8 of this Form 10-K.
| Year Ended December 31, (dollars in millions except per share data) | 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||
| Statement of Income Data: | |||||||||||||||||||
| Gross Revenues | |||||||||||||||||||
| Gas Distribution | $ | 2,081.9 | $ | 2,597.8 | $ | 2,226.3 | $ | 1,959.8 | $ | 2,916.6 | |||||||||
| Gas Transportation | 969.8 | 987.4 | 820.0 | 692.4 | 531.9 | ||||||||||||||
| Electric | 1,572.9 | 1,672.0 | 1,563.4 | 1,507.7 | 1,427.7 | ||||||||||||||
| Other | 27.2 | 15.2 | 15.7 | 18.1 | 18.0 | ||||||||||||||
| Total Gross Revenues | 4,651.8 | 5,272.4 | 4,625.4 | 4,178.0 | 4,894.2 | ||||||||||||||
| Net Revenues (Gross Revenues less Cost of Sales, excluding depreciation and amortization) | 3,008.1 | 2,899.5 | 2,662.4 | 2,513.9 | 2,442.1 | ||||||||||||||
| Operating Income | 799.9 | 789.1 | 698.1 | 638.6 | 551.7 | ||||||||||||||
| Income from Continuing Operations | 198.6 | 256.2 | 221.0 | 171.0 | 108.9 | ||||||||||||||
| Balance Sheet Data: | |||||||||||||||||||
| Total Assets | 17,492.5 | 24,589.8 | 22,473.6 | 21,620.2 | 20,571.5 | ||||||||||||||
| Capitalization | |||||||||||||||||||
| Common stockholders’ equity | 3,843.5 | 6,175.3 | 5,886.6 | 5,554.3 | 4,997.3 | ||||||||||||||
| Long-term debt, excluding amounts due within one year | 5,948.5 | 8,151.5 | 7,588.2 | 6,813.7 | 6,261.1 | ||||||||||||||
| Total Capitalization | $ | 9,792.0 | $ | 14,326.8 | $ | 13,474.8 | $ | 12,368.0 | $ | 11,258.4 | |||||||||
| Per Share Data: | |||||||||||||||||||
| Basic Earnings Per Share from Continuing Operations ($) | $ | 0.63 | $ | 0.81 | $ | 0.71 | $ | 0.59 | $ | 0.39 | |||||||||
| Diluted Earnings Per Share from Continuing Operations ($) | $ | 0.63 | $ | 0.81 | $ | 0.71 | $ | 0.57 | $ | 0.38 | |||||||||
| Other Data: | |||||||||||||||||||
| Dividends declared per share ($) | $ | 0.83 | $ | 1.02 | $ | 0.98 | $ | 0.94 | $ | 0.92 | |||||||||
| Shares outstanding at the end of the year (in thousands) | 319,110 | 316,037 | 313,676 | 310,281 | 281,854 | ||||||||||||||
| Number of common stockholders | 30,190 | 25,233 | 26,965 | 28,823 | 30,663 | ||||||||||||||
| Capital expenditures ($ in millions) | $ | 1,367.5 | $ | 1,339.6 | $ | 1,248.5 | $ | 1,095.5 | $ | 812.6 | |||||||||
| Number of employees | 7,596 | 8,982 | 8,477 | 8,286 | 7,957 |
| • | On July 1, 2015, NiSource completed the Separation. The results of operations of the former Columbia Pipeline Group Operations segment have been classified as discontinued operations for all periods presented. See Note 3, "Discontinued Operations," in the Notes to the Consolidated Financial Statements for further information. |
| • | Prior to the Separation, CPG closed its placement of $2,750.0 million in aggregate principal amount of its senior notes. Using the proceeds from this offering, CPG made cash payments to NiSource representing the settlement of inter-company borrowings and the payment of a one-time special dividend. In May 2015, using proceeds from the cash payments from CPG, NiSource Finance settled its two bank term loans in the amount of $1,075.0 million and executed a tender offer for $750.0 million consisting of a combination of its 5.25% notes due 2017, 6.40% notes due 2018 and 4.45% notes due 2021. In conjunction with the debt retired, NiSource Finance recorded a $97.2 million loss on early extinguishment of long-term debt, primarily attributable to early redemption premiums. |
| • | On February 14, 2012, Columbia of Ohio held its first standard choice offer auction which resulted in a retail price adjustment of $1.53 per Mcf. On February 14, 2012, the PUCO issued an entry that approved the results of the auction with the new retail price adjustment level effective April 1, 2012. As a result of the implementation of the standard choice offer, Columbia of Ohio reports lower gross revenues and lower cost of sales. There is no impact on net revenues. |
| • | On November 14, 2011, NiSource Finance commenced a cash tender offer for up to $250.0 million aggregate principal amount of its outstanding 10.75% notes due 2016 and 6.15% notes due 2013. A condition of the offering was that all validly tendered 2016 notes would be accepted for purchase before any 2013 notes were accepted. On December 13, 2011, NiSource Finance |
ITEM 6. SELECTED FINANCIAL DATA
NISOURCE INC.
announced that approximately $125.3 million aggregate principal amount of its outstanding 10.75% notes due 2016 were validly tendered and accepted for purchase. In addition, approximately $228.7 million aggregate principal amount of outstanding 6.15% notes due 2013 were validly tendered, of which $124.7 million were accepted for purchase. NiSource Finance recorded a $53.9 million loss on early extinguishment of long-term debt, primarily attributable to early redemption premiums and unamortized discounts and fees.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NISOURCE INC.
Note regarding forward-looking statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations, including statements regarding market risk sensitive instruments, contains “forward-looking statements,” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Investors and prospective investors should understand that many factors govern whether any forward-looking statement contained herein will be or can be realized. Any one of those factors could cause actual results to differ materially from those projected. These forward-looking statements include, but are not limited to, statements concerning NiSource’s plans, objectives, expected performance, expenditures, recovery of expenditures through rates, stated on either a consolidated or segment basis, and any and all underlying assumptions and other statements that are other than statements of historical fact. From time to time, NiSource may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of NiSource, are also expressly qualified by these cautionary statements. All forward-looking statements are based on assumptions that management believes to be reasonable; however, there can be no assurance that actual results will not differ materially.
Factors that could cause actual results to differ materially from the projections, forecasts, estimates and expectations discussed in this Annual Report on Form 10-K include, among other things, NiSource’s debt obligations; any changes in NiSource’s credit rating; NiSource’s ability to execute its growth strategy; changes in general economic, capital and commodity market conditions; pension funding obligations; economic regulation and the impact of regulatory rate reviews; compliance with environmental laws and the costs of associated liabilities; fluctuations in demand from residential and commercial customers; economic conditions of certain industries; the price of energy commodities and related transportation costs; the reliability of customers and suppliers to fulfill their payment and contractual obligations; potential impairments of goodwill or definite-lived intangible assets; changes in taxation and accounting principles; potential incidents and other operating risks associated with our business; the impact of an aging infrastructure; the impact of climate change; potential cyber-attacks; risks associated with construction and natural gas cost and supply; extreme weather conditions; the ability of subsidiaries to generate cash; uncertainties related to the expected benefits of the Separation and the matters set forth in Item 1A, “Risk Factors” of this report, many of which risks are beyond the control of NiSource. In addition, the relative contributions to profitability by each segment, and the assumptions underlying the forward-looking statements relating thereto, may change over time.
CONSOLIDATED REVIEW
Executive Summary
NiSource is an energy holding company under the Public Utility Holding Company Act of 2005 whose subsidiaries are fully regulated natural gas and electric utility companies serving customers in seven states. NiSource generates substantially all of its operating income through these rate-regulated businesses. A significant portion of NiSource’s operations is subject to seasonal fluctuations in sales. During the heating season, which is primarily from November through March, net revenues from gas sales are more significant, and during the cooling season, which is primarily from June through September, net revenues from electric sales are more significant, than in other months.
NiSource reported lower income from continuing operations of $198.6 million or $0.63 per basic share for the twelve months ended December 31, 2015 compared to $256.2 million or $0.81 per basic share for the same period in 2014. The lower income
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NISOURCE INC.
from continuing operations during 2015 was due primarily to a $97.2 million loss on early extinguishment of long-term debt recorded as a result of the debt restructuring that occurred in 2015 as part of the Separation.
For the twelve months ended December 31, 2015, NiSource reported operating income of $799.9 million compared to $789.1 million for the same period in 2014. The slightly higher operating income was primarily due to increased net revenues from gas distribution regulatory and service programs, increased return on environmental capital investment at NIPSCO partially offset by lower net revenues due to warmer than normal weather and lower industrial customer usage. Operating expenses were higher due to increased employee and administrative expenses, higher environmental remediation costs and increased depreciation expense.
As part of our long-term regulated infrastructure investment program, NiSource invested $1,367.5 million in 2015 across our gas and electric utilities. Nisource expects to invest an additional $1,391.6 million during 2016.
NiSource believes that through income generated from operating activities, amounts available under its short-term revolving credit facility, commercial paper program, accounts receivable securitization facilities, long-term debt agreements and NiSource’s ability to access the capital markets, there is adequate capital available to fund its operating activities and capital expenditures in 2016. At December 31, 2015, NiSource had approximately $1,179.4 million of liquidity available, consisting of cash and available capacity under credit facilities.
These factors and other impacts to the financial results are discussed in more detail within the following discussions of “Results of Operations” and “Results and Discussion of Segment Operations.”
Platform for Growth
NiSource’s business plan continues to center on regulatory and customer initiatives.
Regulatory Initiatives
NiSource’s utilities continue to move forward on core infrastructure and environmental investment programs supported by complementary regulatory and customer initiatives across all seven states. NiSource invested approximately $1.4 billion across its gas and electric utilities in 2015. NiSource has now executed against approximately $2.0 billion of an estimated $30 billion in total projected long-term regulated utility infrastructure investments. NiSource expects to invest approximately $1.4 billion in capital during 2016 to continue to modernize and improve its system across all seven states. NiSource’s goal is to develop strategies that benefit all stakeholders as it addresses changing customer conservation patterns, develops more contemporary pricing structures, and embarks on long-term investment programs. These strategies will help improve reliability and safety, enhance customer services and reduce emissions while generating sustainable returns.
Gas Distribution Operations
| • | On December 3, 2015, the Pennsylvania PUC approved a settlement in Columbia of Pennsylvania’s base rate case. The settlement maintains Columbia of Pennsylvania's ability to continue replacing and upgrading its natural gas distribution system. The approved rate adjustment went into effect on December 18, 2015, and will increase Columbia of Pennsylvania’s annual revenues by $28.0 million. The settlement also included new incentives that will significantly reduce costs for customers converting to natural gas. |
| • | On November 1, 2015, Columbia of Massachusetts implemented new rates under its previously approved base rate case settlement. The settlement supports Columbia of Massachusetts’s continued effort to modernize its pipeline infrastructure and transform its operations to continue to serve customers safely and reliably. The approved settlement provides for increased annual revenues of $32.8 million starting November 1, 2015, with an additional $3.6 million annual increase in revenues starting November 1, 2016. |
| • | On August 21, 2015, Columbia of Virginia received final VSCC approval of its 2014 base rate case. The VSCC reaffirmed the $25.2 million annual revenue increase. The case supports continued capital investments by Columbia of Virginia to improve its system and accommodate customer growth, as well as initiatives to enhance safety and reliability. |
| • | NIPSCO continued executing on its seven-year, approximately $817 million natural gas system modernization program. NIPSCO filed its semi-annual tracker and program update on August 31, 2015, and expects an order from the IURC in the first quarter of 2016. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NISOURCE INC.
Electric Operations
| • | On December 16, 2015, the IURC approved a settlement between NIPSCO, the Indiana Office of Utility Consumer Counselor and NIPSCO’s largest industrial customers which resolved all outstanding issues raised by parties in an Indiana Court of Appeals proceeding related to NIPSCO’s previous long-term electric infrastructure modernization plan. The settlement agreement required NIPSCO to file an electric base rate case and a new seven-year electric TDSIC plan. |
| • | On December 31, 2015, NIPSCO filed a new $1.3 billion, seven-year electric infrastructure modernization plan with the IURC. The plan is focused on electric transmission and distribution investments made for safety, reliability, and system modernization. NIPSCO expects an order on its seven-year plan in the third quarter of 2016. |
| • | NIPSCO remains on schedule with its electric base rate case filed on October 1, 2015 with the IURC. The case seeks to update rates to reflect the current costs of generating and distributing power, plus ongoing investments which are delivering substantial benefits to customers, including programs that have reduced the duration of power outages by 40 percent. An IURC decision is expected in the third quarter of 2016. |
| • | Progress also continued on two major electric transmission projects designed to enhance region-wide system flexibility and reliability. Right-of-way acquisition, permitting and substation construction are under way for both projects. Line and tower construction is expected to begin in 2016. These projects involve an investment of approximately $450 million for NIPSCO and are anticipated to be in service by the end of 2018. |
| • | NIPSCO's Michigan City Unit 12 FGD was placed in service on December 15, 2015. The approximately $255 million project, supported with cost recovery, improves air quality and helps ensure NIPSCO’s generation fleet remains in compliance with current environmental regulations. The project also helps ensure that NIPSCO can continue offering low-cost, reliable and efficient generating capacity for its customers. |
Refer to Note 7, “Regulatory Matters,” in the Notes to Consolidated Financial Statements for a complete discussion of regulatory matters.
Ethics and Controls
NiSource is committed to providing accurate and complete financial reporting as well as high standards for ethical behavior by its employees. NiSource’s senior management takes an active role in the development of this Form 10-K and the monitoring of the company’s internal control structure and performance. In addition, NiSource will continue its mandatory ethics training program for all employees.
For additional information refer to Item 9A, “Controls and Procedures.”
Results of Operations
Income from Continuing Operations
For the year ended December 31, 2015, NiSource reported income from continuing operations of $198.6 million, or $0.63 per basic share, compared to $256.2 million, or $0.81 per basic share in 2014. Income from continuing operations for the year ended December 31, 2013 was $221.0 million, or $0.71 per basic share.
Comparability of line item operating results is impacted by regulatory and tax trackers that allow for the recovery in rates of certain costs such as bad debt expense. Therefore, increases in these tracked operating expenses are offset by increases in net revenues and have essentially no impact on income from continuing operations.
Net Revenues
NiSource analyzes its operating results using net revenues. Net revenues are calculated as revenues less the associated cost of sales (excluding depreciation and amortization). NiSource believes net revenues are a better measure to analyze profitability than gross operating revenues since the majority of the cost of sales are tracked costs that are passed through directly to the customer resulting in an equal and offsetting amount reflected in gross operating revenues.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NISOURCE INC.
Total consolidated net revenues for the year ended December 31, 2015, were $3,008.1 million, a $108.6 million increase compared with 2014. Net revenues increased primarily due to increased Gas Distribution Operations' net revenues of $82.4 million and higher Electric Operations' net revenues of $22.3 million.
| • | Gas Distribution Operations' net revenues increased primarily due to an increase in regulatory and service programs of $88.7 million, including the impact of new rates at Columbia of Pennsylvania, Columbia of Massachusetts and Columbia of Virginia, as well as the implementation of new rates under Columbia of Ohio's approved infrastructure replacement program. Additionally, there were higher net revenues due to increased rent billed to affiliates, offset in expense, of $8.4 million and higher regulatory and tax trackers, offset in expense, of $7.5 million. These increases in net revenues were partially offset by the effects of warmer weather of $30.6 million. |
| • | Electric Operations' net revenues increased primarily due to higher regulatory trackers, which are offset in expense, of $19.8 million, an increase in the return on the environmental capital investment recovery of $10.3 million due to an increased plant balance eligible for recovery and higher net revenues of $8.8 million as a result of two electric transmission projects. These increases were partially offset by lower industrial usage of $13.8 million. |
Total consolidated net revenues for the twelve months ended December 31, 2014 were $2,899.5 million, a $237.1 million increase compared with 2013. Net revenues increased primarily due to increased Gas Distribution Operations' net revenues of $197.1 million and increased Electric Operations' net revenues of $41.3 million.
| • | Gas Distribution Operations' net revenues increased primarily due to an increase of $93.4 million for regulatory and service programs, including the impacts of the rate settlement in 2013 at Columbia of Pennsylvania, the rate case at Columbia of Massachusetts, as well as the implementation of rates under Columbia of Ohio's approved infrastructure replacement program. Additionally, 2014 included an increase in regulatory and tax trackers, which are offset in expense, of $49.2 million, the effects of colder weather of $18.4 million, and higher commercial, residential and industrial usage of $14.6 million. |
| • | Electric Operations' net revenues increased primarily due to higher industrial usage of $21.9 million and an increase in the return on the environmental capital investment recovery of $19.8 million due to an increased plant balance eligible for recovery. |
Operating Expenses
Operating expenses were $2,208.2 million in 2015, an increase of $97.8 million from the comparable 2014 period. This increase was primarily due to higher operation and maintenance expenses of $58.8 million and increased depreciation and amortization of $37.5 million. The increase in operation and maintenance expenses was primarily due to increased regulatory trackers, which are offset in net revenues, of $19.3 million, higher employee and administrative expenses of $14.5 million, increased environmental costs of $14.3 million and higher electric generation costs of $6.0 million. The increase in depreciation and amortization is primarily due to higher capital expenditures placed in service in 2015.
Operating expenses were $2,110.4 million in 2014, an increase of $146.1 million from the comparable 2013 period. This increase was primarily due to higher operation and maintenance expenses of $112.9 million, increased depreciation and amortization of $16.5 million and higher other taxes of $14.8 million. The increase in operation and maintenance expenses was primarily due to increased regulatory trackers, which are offset in net revenues, of $40.3 million, higher employee and administrative expenses of $34.2 million, increased outside services of $17.2 million, higher electric generation costs of $15.2 million as a result of maintenance related outages and increased uncollectibles of $6.3 million. The increase in depreciation and amortization is primarily due to higher capital expenditures related to projects placed in service in 2014. The increase in other taxes is primarily attributable to tax trackers, which are offset in net revenues, of $9.2 million.
Other Income (Deductions)
Other Income (Deductions) in 2015 reduced income $460.0 million compared to a reduction of $366.1 million in 2014. The increase in deductions is primarily due to a loss on early extinguishment of long-term debt of $97.2 million. Refer to Note 14, "Long-Term Debt," in the Notes to the Consolidated Financial Statements for further information on long-term debt retired in May 2015.
Other Income (Deductions) in 2014 reduced income $366.1 million compared to a reduction of $368.5 million in 2013.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NISOURCE INC.
Income Taxes
The effective income tax rates were 41.6%, 39.4% and 32.9% in 2015, 2014 and 2013, respectively. The 2.2% increase in the overall effective tax rate in 2015 versus 2014 was primarily the result of a $17.8 million increase in federal income tax expense associated with write downs of charitable contribution carryovers, offset by a $10.5 million decrease in income tax expense related to state apportionment changes and permanent items as a result of remeasurement after the Separation. The 6.5% increase in the overall effective tax rate in 2014 versus 2013 was primarily a result of a $13.5 million increase in tax expense related to state apportionment changes and permanent items as a result of the Separation, a $7.1 million increase due to Indiana state taxes, a $5.4 million increase in tax expense due to Pennsylvania regulatory changes, and $4.1 million of additional state income tax expense related to corporate restructuring. Refer to Note 9, "Income Taxes," in the Notes to the Consolidated Financial Statements for further information on these changes.
Liquidity and Capital Resources
A significant portion of NiSource’s operations are subject to seasonal fluctuations in cash flow. During the heating season, which is primarily from November through March, cash receipts from gas sales and transportation services typically exceed cash requirements. During the summer months, cash on hand, together with the seasonal increase in cash flows from the electric business during the summer cooling season and external short-term and long-term financing, is used to purchase gas to place in storage for heating season deliveries and perform necessary maintenance of facilities. NiSource believes that through income generated from operating activities, amounts available under its short-term revolving credit facility, commercial paper program, accounts receivable securitization programs, long-term debt agreements and NiSource’s ability to access the capital markets, there is adequate capital available to fund its operating activities and capital expenditures in 2016.
Operating Activities
Net cash from operating activities from continuing operations for the year ended December 31, 2015 was $1,163.4 million, an increase of $402.2 million from 2014. The increase in net cash from operating activities from continuing operations was primarily due to the change in regulatory assets/liabilities, as well as the change in inventories and overrecovered gas and fuel costs working capital accounts as a result of lower gas prices and warmer weather in 2015 compared to 2014.
Net cash from operating activities from continuing operations for the year ended December 31, 2014 was $761.2 million, a decrease of $206.6 million from the prior year. The decrease in net cash from operating activities from continuing operations was primarily attributable to an income tax refund received in 2013.
Pension and Other Postretirement Plan Funding. In 2015, NiSource contributed $2.7 million to its pension plans and $25.8 million to its postretirement medical and life plans. In 2016, NiSource expects to make contributions of approximately $3.0 million to its pension plans and approximately $22.2 million to its postretirement medical and life plans. At December 31, 2015, NiSource’s pension and other postretirement benefit plans were underfunded by $459.6 million and $299.9 million, respectively.
Investing Activities
The tables below reflect actual capital expenditures and certain other investing activities by segment for 2015, 2014 and 2013, and estimates for 2016.
| (in millions) | 2016E | 2015 | 2014 | 2013 | |||||||||||
| Gas Distribution Operations | $ | 966.9 | $ | 917.0 | $ | 860.3 | $ | 790.8 | |||||||
| Electric Operations | 418.6 | 400.3 | 438.8 | 426.3 | |||||||||||
| Corporate and Other Operations | 6.1 | 50.2 | 40.5 | 31.4 | |||||||||||
| Total(1) | $ | 1,391.6 | $ | 1,367.5 | $ | 1,339.6 | $ | 1,248.5 |
(1) Amounts differ from those presented on the Statements of Consolidated Cash Flows primarily due to the inclusion of capital expenditures included in current liabilities and AFUDC Equity.
For 2016, the projected capital program and certain other investing activities are expected to be $1,391.6 million, which is $24.1 million higher than the 2015 capital program. This increased spending is mainly due to identified Gas Distribution Operations segment growth and betterment projects in 2016.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NISOURCE INC.
For 2015, the capital expenditures and certain other investing activities were $1,367.5 million, which is $27.9 million higher than the 2014 capital program. This increased spending is mainly due to increased TDSIC spend in the Gas Distribution Operations segment, partially offset by lower tracker program spend at the Electric Operations segment.
For 2014, capital expenditures and certain other investing activities were $1,339.6 million, an increase of $91.1 million compared to 2013. This increased spending is mainly due to continued spending on infrastructure replacement programs in the Gas Distribution Operations segment.
Restricted cash was $29.7 million and $24.9 million as of December 31, 2015 and 2014, respectively. The increase in restricted cash was primarily a result of higher margin requirements due to open derivative contracts.
Financing Activities
Long-term Debt. Refer to Note 14, “Long-Term Debt,” in the Notes to Consolidated Financial Statements for information on long-term debt.
Credit Facilities. NiSource Finance currently maintains a $1.5 billion revolving credit facility with a syndicate of banks led by Barclays Capital with a termination date of July 1, 2020. The purpose of the facility is to fund ongoing working capital requirements including the provision of liquidity support for NiSource Finance's $1.5 billion commercial paper program, provide for issuance of letters of credit and also for general corporate purposes.
NiSource Finance's commercial paper program has a program limit of up to $1.5 billion with a dealer group comprised of Barclays, Citigroup, Credit Suisse and Wells Fargo.
NiSource Finance had no borrowings outstanding under its revolving credit facility at December 31, 2015 and $500.0 million at December 31, 2014 at a weighted average interest rate of 1.44%. In addition, NiSource Finance had $321.4 million in commercial paper outstanding at December 31, 2015, at a weighted average interest rate of 1.00% and $792.6 million in commercial paper outstanding at December 31, 2014, at a weighted average interest rate of 0.82%.
As of December 31, 2015 and December 31, 2014, NiSource had $246.0 million and $284.3 million, respectively, of short-term borrowings recorded on the Consolidated Balance Sheets relating to its accounts receivable securitization facilities. See Note 17, “Transfers of Financial Assets” in the Notes to Consolidated Financial Statements.
As of December 31, 2015, NiSource had $14.7 million of stand-by letters of credit outstanding all of which were under the revolving credit facility. At December 31, 2014, NiSource had $30.9 million of stand-by letters of credit outstanding of which $14.7 million were under the revolving credit facility.
As of December 31, 2015, an aggregate of $1,163.9 million of credit was available under the credit facility and accounts receivable securitization programs.
Debt Covenants. NiSource is subject to a financial covenant under its revolving credit facility, which requires NiSource to maintain a debt to capitalization ratio that does not exceed 70%. A similar covenant in a 2005 private placement note purchase agreement requires NiSource to maintain a debt to capitalization ratio that does not exceed 75%. As of December 31, 2015, the ratio was 64%.
Refer to Note 14, “Long-Term Debt,” in the Notes to Consolidated Financial Statements for further information on debt covenants.
Sale of Trade Accounts Receivables. Refer to Note 17, “Transfers of Financial Assets,” in the Notes to Consolidated Financial Statements for information on the sale of trade accounts receivable.
All accounts receivable sold to the purchasers are valued at face value, which approximates fair value due to their short-term nature. The amount of the undivided percentage ownership interest in the accounts receivables sold is determined, in part, by required loss reserves under the agreements.
Credit Ratings. The credit rating agencies periodically review the Company’s ratings, taking into account factors such as our capital structure and earnings profile. In 2015, Moody’s affirmed the NiSource senior unsecured rating of Baa2 and its commercial paper rating of P-2, with stable outlooks. Moody’s also affirmed NIPSCO’s Baa1 rating and Columbia Gas of Massachusetts’s Baa2 rating, with stable outlooks. In 2015, Standard & Poor’s raised the senior unsecured ratings of NiSource and its subsidiaries to BBB+ and NiSource’s commercial paper rating to A-2, with stable outlooks. In 2015, Fitch affirmed the NiSource senior
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NISOURCE INC.
unsecured rating of BBB-, commercial paper rating of F3 and the existing ratings of its other rated subsidiaries. Fitch revised its outlook to positive.
The Company is committed to maintaining investment grade credit ratings, however, there is no assurance we will be able to do so in the future. The Company’s credit ratings could be lowered or withdrawn entirely by a rating agency if, in its judgment, the circumstances warrant. Any negative rating action could adversely affect our ability to access capital at rates and on terms that are attractive. A negative rating action could also adversely impact our business relationships with suppliers and operating partners.
Certain NiSource subsidiaries have agreements that contain “ratings triggers” that require increased collateral if the credit ratings of NiSource or certain of its subsidiaries are below investment grade. These agreements are primarily for insurance purposes and for the physical purchase or sale of power. As of December 31, 2015 the collateral requirement that would be required in the event of a downgrade below the ratings trigger levels would amount to approximately $26.9 million. In addition to agreements with ratings triggers, there are other agreements that contain “adequate assurance” or “material adverse change” provisions that could necessitate additional credit support such as letters of credit and cash collateral to transact business.
Contractual Obligations. NiSource has certain contractual obligations requiring payments at specified periods. The obligations include long-term debt, lease obligations, energy commodity contracts and service obligations for various services including pipeline capacity and IBM outsourcing. The total contractual obligations in existence at December 31, 2015 and their maturities were:
| (in millions) | Total | 2016 | 2017 | 2018 | 2019 | 2020 | After | ||||||||||||||||||||
| Long-term debt (1) | $ | 6,227.0 | $ | 421.5 | $ | 349.9 | $ | 476.0 | $ | 541.0 | $ | 550.0 | $ | 3,888.6 | |||||||||||||
| Capital leases (2) | 313.3 | 23.5 | 23.0 | 23.3 | 23.7 | 23.5 | 196.3 | ||||||||||||||||||||
| Interest payments on long-term debt | 4,947.1 | 355.5 | 329.2 | 296.5 | 263.1 | 244.9 | 3,457.9 | ||||||||||||||||||||
| Operating leases(3) | 62.1 | 18.4 | 11.1 | 8.8 | 7.0 | 3.5 | 13.3 | ||||||||||||||||||||
| Energy commodity contracts | 455.2 | 169.3 | 74.8 | 67.5 | 70.6 | 72.6 | 0.4 | ||||||||||||||||||||
| Service obligations: | |||||||||||||||||||||||||||
| Pipeline service obligations | 2,164.3 | 512.7 | 496.0 | 341.0 | 245.4 | 139.3 | 429.9 | ||||||||||||||||||||
| IBM service obligations | 410.1 | 90.9 | 82.8 | 80.1 | 78.6 | 77.7 | — | ||||||||||||||||||||
| Other service obligations | 165.8 | 72.0 | 67.2 | 19.7 | 4.6 | 2.3 | — | ||||||||||||||||||||
| Other liabilities | 25.2 | 25.2 | — | — | — | — | — | ||||||||||||||||||||
| Total contractual obligations | $ | 14,770.1 | $ | 1,689.0 | $ | 1,434.0 | $ | 1,312.9 | $ | 1,234.0 | $ | 1,113.8 | $ | 7,986.4 |
(1) Long-term debt balance excludes unamortized discounts and expenses of $45.5 million and non-recourse debt of $2.1 million related to NDC Douglas Properties.
(2) Capital lease payments shown above are inclusive of interest totaling $114.7 million.
(3)Operating lease balances do not include amounts for fleet leases that can be renewed beyond the initial lease term. The Company anticipates renewing the leases beyond the initial term, but the anticipated payments associated with the renewals do not meet the definition of expected minimum lease payments and therefore are not included above. Expected payments are $30.5 million in 2016, $30.9 million in 2017, $26.7 million in 2018, $20.3 million in 2019, $12.5 million in 2020 and $7.5 million thereafter.
NiSource calculated estimated interest payments for long-term debt as follows: for the fixed-rate debt, interest is calculated based on the stated coupon and payment dates; for variable-rate debt, interest rates used are those that are in place as of December 31, 2015. For 2016, NiSource projects that it will be required to make interest payments of approximately $359.6 million, which includes $355.5 million of interest payments related to its long-term debt outstanding as of December 31, 2015. At December 31, 2015, NiSource also had $567.4 million in short-term borrowings outstanding.
NiSource’s expected payments included within “Other liabilities” in the table of contractual commitments above contains employer contributions to pension and other postretirement benefits plans expected to be made in 2016. Plan contributions beyond 2016 are dependent upon a number of factors, including actual returns on plan assets, which cannot be reliably estimated at this time. In 2016, NiSource expects to make contributions of approximately $3.0 million to its pension plans and approximately $22.2 million to its postretirement medical and life plans. Refer to Note 10, “Pension and Other Postretirement Benefits,” in the Notes to Consolidated Financial Statements for more information.
NiSource cannot reasonably estimate the settlement amounts or timing of cash flows related to long-term obligations classified as “Other Liabilities and Deferred Credits” on the Consolidated Balance Sheets, other than those described above.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NISOURCE INC.
NiSource also has obligations associated with income, property, gross receipts, franchise, payroll, sales and use, and various other taxes and expects to make tax payments of approximately $287.5 million in 2016, which are not included in the table above.
Refer to Note 18, “Other Commitments and Contingencies,” in the Notes to Consolidated Financial Statements for further information on contractual obligations.
Off-Balance Sheet Arrangements
As a part of normal business, NiSource and certain subsidiaries enter into various agreements providing financial or performance assurance to third parties on behalf of certain subsidiaries. Such agreements include guarantees and stand-by letters of credit.
Refer to Note 18, “Other Commitments and Contingencies,” in the Notes to Consolidated Financial Statements for additional information about NiSource’s off balance sheet arrangements.
Market Risk Disclosures
Risk is an inherent part of NiSource’s energy businesses. The extent to which NiSource properly and effectively identifies, assesses, monitors and manages each of the various types of risk involved in its businesses is critical to its profitability. NiSource seeks to identify, assess, monitor and manage, in accordance with defined policies and procedures, the following principal market risks that are involved in NiSource’s energy businesses: commodity price risk, interest rate risk and credit risk. Risk management at NiSource is a multi-faceted process with oversight by the Risk Management Committee that requires constant communication, judgment and knowledge of specialized products and markets. NiSource’s senior management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. These include but are not limited to market, operational, financial, compliance and strategic risk types. In recognition of the increasingly varied and complex nature of the energy business, NiSource’s risk management process, policies and procedures continue to evolve and are subject to ongoing review and modification.
Commodity Price Risk
NiSource is exposed to commodity price risk as a result of its subsidiaries’ operations involving natural gas and power. To manage this market risk, NiSource’s subsidiaries use derivatives, including commodity futures contracts, swaps and options. NiSource is not involved in speculative energy trading activity.
Commodity price risk resulting from derivative activities at NiSource’s rate-regulated subsidiaries is limited, since regulations allow recovery of prudently incurred purchased power, fuel and gas costs through the ratemaking process, including gains or losses on these derivative instruments. If states should explore additional regulatory reform, these subsidiaries may begin providing services without the benefit of the traditional ratemaking process and may be more exposed to commodity price risk. Some of NiSource’s rate-regulated utility subsidiaries offer commodity price risk products to its customers for which derivatives are used to hedge forecasted customer usage under such products. These subsidiaries do not have regulatory recovery orders for these products and are subject to gains and losses recognized in earnings due to hedge ineffectiveness.
NiSource subsidiaries are required to make cash margin deposits with their brokers to cover actual and potential losses in the value of outstanding exchange traded derivative contracts. The amount of these deposits, which are reflected in NiSource’s restricted cash balance, may fluctuate significantly during periods of high volatility in the energy commodity markets.
There are no material commodity price risk assets or liabilities as of December 31, 2015 and 2014.
Interest Rate Risk
NiSource is exposed to interest rate risk as a result of changes in interest rates on borrowings under its revolving credit agreement, commercial paper program and accounts receivable programs, which have interest rates that are indexed to short-term market interest rates. NiSource manages interest rate risk by entering into forward starting interest-rate swaps that hedge the interest rate risk related to forecasted issuances of long-term-debt. Based upon average borrowings and debt obligations subject to fluctuations in short-term market interest rates, an increase (or decrease) in short-term interest rates of 100 basis points (1%) would have increased (or decreased) interest expense by $8.2 million and $20.0 million for the years 2015 and 2014, respectively.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NISOURCE INC.
In December 2015, NiSource Finance entered into two forward starting interest-rate swaps, each hedging the interest rate risk on coupon payments arising from $500 million of forecasted issuances of long-term debt in each of 2017 and 2018. Refer to Note 14, "Long-Term Debt," in the Notes to Consolidated Financial Statements for futher information on NiSource's forward starting interest-rate swaps.
Credit Risk
Due to the nature of the industry, credit risk is embedded in many of NiSource’s business activities. NiSource’s extension of credit is governed by a Corporate Credit Risk Policy. In addition, Risk Management Committee guidelines are in place which document management approval levels for credit limits, evaluation of creditworthiness, and credit risk mitigation efforts. Exposures to credit risks are monitored by the Risk Management function which is independent of commercial operations. Credit risk arises due to the possibility that a customer, supplier or counterparty will not be able or willing to fulfill its obligations on a transaction on or before the settlement date. For derivative related contracts, credit risk arises when counterparties are obligated to deliver or purchase defined commodity units of gas or power to NiSource at a future date per execution of contractual terms and conditions. Exposure to credit risk is measured in terms of both current obligations and the market value of forward positions net of any posted collateral such as cash and letters of credit.
NiSource closely monitors the financial status of its banking credit providers. NiSource evaluates the financial status of its banking partners through the use of market-based metrics such as credit default swap pricing levels, and also through traditional credit ratings provided by major credit rating agencies.
Fair Value Measurement
NiSource measures certain financial assets and liabilities at fair value. The level of the fair value hierarchy disclosed is based on the lowest level of input that is significant to the fair value measurement. NiSource’s financial assets and liabilities include price risk assets and liabilities, available-for-sale securities and a deferred compensation plan obligation.
Exchange-traded derivative contracts are generally based on unadjusted quoted prices in active markets and are classified within Level 1. These financial assets and liabilities are secured with cash on deposit with the exchange; therefore nonperformance risk has not been incorporated into these valuations. Certain non-exchange-traded derivatives are valued using broker or over-the-counter, on-line exchanges. In such cases, these non-exchange-traded derivatives are classified within Level 2. Non-exchange-based derivative instruments include swaps, forwards, and options. In certain instances, NiSource may utilize models to measure fair value. Valuation models utilize various inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability, and market-corroborated inputs, i.e., inputs derived principally from or corroborated by observable market data by correlation or other means. Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2. Certain derivatives trade in less active markets with a lower availability of pricing information and models may be utilized in the valuation. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 3. Credit risk is considered in the fair value calculation of derivative instruments that are not exchange-traded. Credit exposures are adjusted to reflect collateral agreements which reduce exposures.
Price risk management liabilities also include forward starting interest-rate swaps, which are designated as cash flow hedges. Each period the swap instrument will be measured assuming a hypothetical settlement at that point in time. Upon termination of the swap instruments, NiSource will pay or receive a settlement based on the current market value. Credit risk is considered in the fair value calculation of each interest-rate swap. As they are based on observable data and valuations of similar instruments, the interest-rate swaps are categorized in Level 2 in the fair value hierarchy.
Refer to Note 16, “Fair Value,” in the Notes to the Consolidated Financial Statements for additional information on NiSource’s fair value measurements.
Other Information
Critical Accounting Policies
NiSource applies certain accounting policies based on the accounting requirements discussed below that have had, and may continue to have, significant impacts on NiSource’s results of operations and Consolidated Financial Statements.
Basis of Accounting for Rate-Regulated Subsidiaries. ASC Topic 980, Regulated Operations, provides that rate-regulated subsidiaries account for and report assets and liabilities consistent with the economic effect of the way in which regulators establish
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NISOURCE INC.
rates, if the rates established are designed to recover the costs of providing the regulated service and if the competitive environment makes it probable that such rates can be charged and collected. Certain expenses and credits subject to utility regulation or rate determination normally reflected in income are deferred on the Consolidated Balance Sheets and are recognized in income as the related amounts are included in service rates and recovered from or refunded to customers. The total amounts of regulatory assets and liabilities reflected on the Consolidated Balance Sheets were $1,771.9 million and $1,433.7 million at December 31, 2015, and $1,731.9 million and $1,440.7 million at December 31, 2014, respectively. For additional information, refer to Note 7, “Regulatory Matters,” in the Notes to Consolidated Financial Statements.
In the event that regulation significantly changes the opportunity for NiSource to recover its costs in the future, all or a portion of NiSource’s regulated operations may no longer meet the criteria for the application of ASC Topic 980, Regulated Operations. In such event, a write-down of all or a portion of NiSource’s existing regulatory assets and liabilities could result. If transition cost recovery is approved by the appropriate regulatory bodies that would meet the requirements under GAAP for continued accounting as regulatory assets and liabilities during such recovery period, the regulatory assets and liabilities would be reported at the recoverable amounts. If unable to continue to apply the provisions of ASC Topic 980, Regulated Operations, NiSource would be required to apply the provisions of ASC Topic 980-20, Discontinuation of Rate-Regulated Accounting. In management’s opinion, NiSource’s regulated subsidiaries will be subject to ASC Topic 980, Regulated Operations for the foreseeable future.
Certain of the regulatory assets reflected on NiSource’s Consolidated Balance Sheets require specific regulatory action in order to be included in future service rates. Although recovery of these amounts is not guaranteed, NiSource believes that these costs meet the requirements for deferral as regulatory assets. Regulatory assets requiring specific regulatory action amounted to $262.7 million at December 31, 2015. If NiSource determined that the amounts included as regulatory assets were not recoverable, a charge to income would immediately be required to the extent of the unrecoverable amounts.
Pensions and Postretirement Benefits. NiSource has defined benefit plans for both pensions and other postretirement benefits. The calculation of the net obligations and annual expense related to the plans requires a significant degree of judgment regarding the discount rates to be used in bringing the liabilities to present value, long-term returns on plan assets and employee longevity, among other assumptions. Due to the size of the plans and the long-term nature of the associated liabilities, changes in the assumptions used in the actuarial estimates could have material impacts on the measurement of the net obligations and annual expense recognition. For further discussion of NiSource’s pensions and other postretirement benefits, see Note 10, “Pension and Other Postretirement Benefits,” in the Notes to Consolidated Financial Statements.
Goodwill. NiSource’s goodwill assets at December 31, 2015 were $1,690.7 million, most of which resulted from the acquisition of Columbia on November 1, 2000. As required, NiSource tests for impairment of goodwill on an annual basis and on an interim basis when events or circumstances indicate that a potential impairment may exist. NiSource’s annual goodwill test takes place in the second quarter of each year and was most recently finalized as of May 1, 2015.
NiSource completed a quantitative ("step 1") fair value measurement of its reporting units during the May 1, 2012 goodwill test. That test indicated the fair value of each of the reporting units that carry or are allocated goodwill substantially exceeded their carrying values, indicating that no impairment existed under the step 1 annual impairment test. A qualitative ("step 0") test was performed as of May 1, 2015 and 2014. NiSource assessed various assumptions, events and circumstances that would have affected the estimated fair value of the reporting units in its baseline May 1, 2012 test. The results of this assessment indicated that it is not more likely than not that its reporting unit fair values are less than the reporting unit carrying values and no impairments are necessary.
The Separation prompted changes in the way NiSource’s chief operating decision maker manages the business where, going forward, financial accountability is largely at the individual state operating company level. This change in management approach triggered an assessment of NiSource’s goodwill reporting units. Through this assessment, NiSource concluded each of the six state operating companies within the former Columbia Distribution Operations reporting unit are now operating segments. NiSource further concluded these operating segments represent goodwill reporting units as they do not contain components whose discrete financial information is regularly reviewed by segment management.
Goodwill previously allocated to the Columbia Distribution Operations reporting unit was reallocated to the six new reporting units on a relative fair value basis. In accordance with GAAP, and consistent with NiSource’s historical impairment testing of goodwill, fair value was determined based on a weighting of income and market approaches. The resulting fair values were substantially in excess of their respective reporting unit’s carrying values. NiSource’s remaining reporting unit, NIPSCO Gas
Previous: Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES · Next: Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS