Why did NiSource's earnings decline in 2005?

The filing attributes the decline primarily to $82.8 million of pre-tax restructuring and transition costs from the IBM outsourcing agreement, a $108.6 million pre-tax loss on early debt extinguishment, and $21.8 million of asset impairment charges. Higher depreciation, lower gas usage driven by higher gas prices, and MISO-related costs also weighed on results, partly offset by favorable weather and tracker revenues.

How much debt does NiSource carry and what has it done to manage it?

NiSource had approximately $6.61 billion of total consolidated indebtedness at December 31, 2005. During 2005 it refinanced $2.4 billion of long-term debt, which it expects to yield about $43 million in annual interest savings starting in 2006. It also entered a $1.25 billion five-year revolving credit agreement and a $300 million short-term facility, leaving $626.5 million of unused credit available at year-end. The company must keep its debt-to-capitalization ratio at or below 70% under its credit facilities.

What is the outlook for 2006?

NiSource projects 2006 basic earnings per share from continuing operations in the range of $1.42 to $1.52, assuming normal weather and achievement of expected IBM outsourcing savings. It expects roughly $14 to $15 million of additional IBM transition costs, or 3 cents per share, and plans capital expenditures of $638.2 million, funded primarily from operating cash flow. Higher natural gas prices may continue to affect 2006 usage.

What are the main risks highlighted in the filing?

The filing cites substantial indebtedness with covenants tied to debt-to-capital ratios, significant environmental compliance costs including an EPA Notice of Violation at Northern Indiana, weather and commodity price sensitivity, regulatory rate reviews (including a Columbia of Virginia filing due May 1, 2006), and the risk that the IBM agreement's savings fall short. It also notes that the Whiting Clean Energy facility is expected to run at a loss near term, and that pending litigation such as royalty class actions and the Grynberg False Claims Act case could affect results.

NI 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 10, 2006. Cited figures are marked; the original filing is the authoritative source.

NiSource Inc. reported 2005 net income of $306.5 million^a, or $1.13 per basic share, compared with $436.3 million, or $1.65 per basic share, in 2004.

Income from continuing operations before the cumulative effect of an accounting change was $283.6 million^b, or $1.05 per basic share, versus $431.0 million, or $1.63 per basic share, in 2004. The filing attributes the decline mainly to $82.8 million of pre-tax restructuring and transition costs tied to a 10-year outsourcing agreement with IBM, a $108.6 million pre-tax loss on early extinguishment of long-term debt, and $21.8 million of asset impairment charges. Gross revenues rose to $7.90 billion from $6.66 billion, while net revenues were $3.15 billion.

Operating income fell to $952.8 million^c from $1,077.5 million. NiSource describes itself as an energy holding company with about 3.8 million customers along a corridor from the Gulf Coast to New England, and states that virtually 100% of its operating income comes from rate-regulated businesses. Total consolidated indebtedness was approximately $6.61 billion at December 31, 2005, and the company refinanced $2.4 billion of long-term debt during the year, which it expects to yield about $43 million in annual interest savings beginning in 2006.

Management guided to 2006 basic earnings per share from continuing operations of $1.42 to $1.52^d, and expects capital expenditures of $638.2 million for 2006. The filing also highlights ongoing risks, including the Whiting Clean Energy merchant facility, which the company anticipates will operate at a loss in the near term after an after-tax loss of approximately $21.5 million in 2005.

Several legal proceedings are pending, including royalty class actions, the Grynberg False Claims Act case, and an EPA Notice of Violation at Northern Indiana. Millennium Pipeline development depends on partner agreements and regulatory approvals.

02—Key points

Key Highlights

Net income declined to $306.5 million ($1.13 per basic share) in 2005 from $436.3 million ($1.65 per basic share) in 2004.
Operating income fell to $952.8 million from $1,077.5 million, driven by $82.8 million of IBM outsourcing restructuring and transition costs.
A $108.6 million pre-tax loss on early extinguishment of long-term debt was recorded in 2005, versus $4.1 million in 2004.
Gross revenues increased to $7.90 billion from $6.66 billion, while net revenues rose to $3.15 billion from $3.05 billion.
Total consolidated indebtedness was approximately $6.61 billion at December 31, 2005; the company refinanced $2.4 billion of long-term debt, expected to save about $43 million in annual interest from 2006.
2006 guidance projects basic EPS from continuing operations of $1.42 to $1.52, with capital expenditures planned at $638.2 million.
Whiting Clean Energy, a merchant facility, lost approximately $21.5 million after tax in 2005 and is expected to operate at a loss in the near term.

03—Questions

Frequently Asked Questions

Why did NiSource's earnings decline in 2005?
The filing attributes the decline primarily to $82.8 million of pre-tax restructuring and transition costs from the IBM outsourcing agreement, a $108.6 million pre-tax loss on early debt extinguishment, and $21.8 million of asset impairment charges. Higher depreciation, lower gas usage driven by higher gas prices, and MISO-related costs also weighed on results, partly offset by favorable weather and tracker revenues.
How much debt does NiSource carry and what has it done to manage it?
NiSource had approximately $6.61 billion of total consolidated indebtedness at December 31, 2005. During 2005 it refinanced $2.4 billion of long-term debt, which it expects to yield about $43 million in annual interest savings starting in 2006. It also entered a $1.25 billion five-year revolving credit agreement and a $300 million short-term facility, leaving $626.5 million of unused credit available at year-end. The company must keep its debt-to-capitalization ratio at or below 70% under its credit facilities.
What is the outlook for 2006?
NiSource projects 2006 basic earnings per share from continuing operations in the range of $1.42 to $1.52, assuming normal weather and achievement of expected IBM outsourcing savings. It expects roughly $14 to $15 million of additional IBM transition costs, or 3 cents per share, and plans capital expenditures of $638.2 million, funded primarily from operating cash flow. Higher natural gas prices may continue to affect 2006 usage.
What are the main risks highlighted in the filing?
The filing cites substantial indebtedness with covenants tied to debt-to-capital ratios, significant environmental compliance costs including an EPA Notice of Violation at Northern Indiana, weather and commodity price sensitivity, regulatory rate reviews (including a Columbia of Virginia filing due May 1, 2006), and the risk that the IBM agreement's savings fall short. It also notes that the Whiting Clean Energy facility is expected to run at a loss near term, and that pending litigation such as royalty class actions and the Grynberg False Claims Act case could affect results.

04—Continue

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