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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NiSource Inc.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
EXECUTIVE SUMMARY
This Management’s Discussion and Analysis of Financial Condition and Results of Operations ("Management’s Discussion") includes management’s analysis of past financial results and certain potential factors that may affect future results, potential future risks and approaches that may be used to manage those risks. See "Note regarding forward-looking statements" at the beginning of this report for a list of factors that may cause results to differ materially.
Management’s Discussion is designed to provide an understanding of our operations and financial performance and should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
We are an energy holding company under the Public Utility Holding Company Act of 2005 whose utility subsidiaries are fully regulated natural gas and electric utility companies serving customers in six states. We generate substantially all of our operating income through these rate-regulated businesses, which are summarized for financial reporting purposes into two primary reportable segments: Gas Distribution Operations and Electric Operations.
Refer to the ''Business'' section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for further discussion of our regulated utility business segments.
Our goal is to develop strategies that benefit all stakeholders as we (i) embark on long-term infrastructure investment and safety programs to better serve our customers, (ii) align our tariff structures with our cost structure, and (iii) address changing customer conservation patterns. These strategies focus on improving safety and reliability, enhancing customer service, ensuring customer affordability and reducing emissions while generating sustainable returns. The safety of our customers, communities and employees remains our top priority. The SMS is an established operating model within NiSource. With the continued support and advice from our Quality Review Board (a panel of third parties with safety operations expertise engaged by management to advise on safety matters), we are continuing to mature our SMS processes, capabilities and talent as we collaborate within and across industries to enhance safety and reduce operational risk. Additionally, we continue to pursue regulatory and legislative initiatives that will allow residential customers not currently on our system to obtain gas service in a cost effective manner.
Your Energy, Your Future: Our plan to replace our coal generation capacity by the end of 2028 with primarily renewable resources is well underway. As of September 30, 2021, we have executed and received IURC approval for BTAs and PPAs with a combined nameplate capacity of 1,950 MW and 1,380 MW, respectively, under the plan. On October 21, 2021, we announced the Preferred Energy Resource Plan associated with our 2021 Integrated Resource Plan, which refines the timeline to retire the Michigan City Generating Station to occur between 2026 and 2028. The plan calls for the replacement of the retiring units with a diverse portfolio of resources including demand side management resources, incremental solar, stand-alone energy storage and upgrades to existing facilities at the Sugar Creek Generating Station, among other steps. Additionally, the plan calls for a natural gas peaking unit to replace existing vintage gas peaking units at the R.M. Schahfer Generating Station to support system reliability and resiliency, as well as upgrades to the transmission system to enhance its electric generation transition. The planned retirement of the two vintage gas peaking units at the R.M. Schahfer Generating Station is expected to occur between 2025 and 2028. Final retirement dates for these units, as well as Michigan City, will be subject to MISO approval. We intend to file our 2021 Integrated Resource Plan with the IURC in November 2021. For additional information, see "Results and Discussion of Segment Operations - Electric Operations," in this Management's Discussion.
NiSource Next: We are executing on a defined, comprehensive, multi-year program designed to deliver long-term safety, sustainable capability enhancements and cost optimization improvements. This program is advancing the high priority we place on safety and risk mitigation, further enabling our SMS, and enhancing the customer experience. NiSource Next is designed to (i) leverage our current scale, (ii) utilize technology, (iii) define clear roles and accountability with our leaders and employees, and (iv) standardize our processes to focus on operational rigor, quality management and continuous improvement.
COVID-19: The safety of our employees and customers, while providing essential services during the COVID-19 pandemic, is paramount. We continue to take a proactive, coordinated approach intended to prevent, mitigate and respond to COVID-19 by utilizing our Incident Command System (ICS). The ICS includes members of our executive council, a medical review professional, and members of functional teams from across our company. The ICS monitors state-by-state conditions and determines steps to conduct our operations safely for employees and customers.
We have implemented procedures designed to protect our employees who work in the field and who continue to work in operational and corporate facilities, including social distancing, wearing face coverings and more frequent cleaning of
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
equipment and facilities. We have also implemented work-from-home policies and practices. We continue to employ physical and cybersecurity measures to ensure that our operational and support systems remain functional. Our actions to date have mitigated the spread of COVID-19 amongst our employees and principal field contractors. We are also continuously evaluating changes to CDC guidance, and updating our safety measures accordingly, in order to ensure employee and customer safety during this pandemic. We are following federal, state, and local laws, regulations and guidelines related to the COVID-19 vaccinations.
Since the beginning of the COVID-19 pandemic, we have been helping our customers navigate this challenging time. We plan to continue our payment assistance programs and customer education and awareness of energy assistance programs such as the Low Income Home Energy Assistance Program (LIHEAP) to help customers deal with the impact of the pandemic. Regulatory deferrals for certain costs have been allowed by all of our state regulatory commissions.
We continue to monitor how COVID-19 is affecting our workforce, customers, suppliers, operations, financial results and cash flow. The extent of the impact in the future will vary and depend on the duration and severity of the impact on the global, national and local economies. For information on the impacts of COVID-19 for the three and nine months ended September 30, 2021, the state-specific suspension of disconnections, and COVID-19 regulatory filings see Note 3, ''Revenue Recognition,'' and Note 7, ''Regulatory Matters,'' in the Notes to Condensed Consolidated Financial Statements (unaudited).
Economic Environment: We are monitoring risks related to increasing order and delivery lead times for construction and other materials, increasing risk of unavailability of materials due to global shortages in raw materials, and risk of decreased construction labor productivity in the event of disruptions in the availability of materials. We are also seeing increasing prices associated with certain materials and supplies. To the extent that delays occur or our costs increase, our business operations, results of operations, cash flows, and financial condition could be materially adversely affected.
We have also seen an increase in forecasted gas costs for the coming heating season that we expect to have an effect on customer bills. We do not expect this increase to have a material impact on our results of operations. For more information on our commodity price impacts, see " - Results and Discussion of Segment Operations - Gas Distribution Operations," and " - Market Risk Disclosures."
For more information on global availability of materials for our renewable projects, see " - Results and Discussion of Segment Operations - Electric Operations - Electric Supply and Generation Transition."
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Summary of Consolidated Financial Results
A summary of our consolidated financial results for the three and nine months ended September 30, 2021 and 2020 are presented below:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| (in millions, except per share amounts) | 2021 | 2020 | Favorable (Unfavorable) | 2021 | 2020 | Favorable (Unfavorable) | |||||||||||||||||||||||||||||
| Operating Revenues | $ | 959.4 | $ | 902.5 | $ | 56.9 | $ | 3,491.0 | $ | 3,470.7 | $ | 20.3 | |||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||||||||
| Cost of energy | 208.3 | 143.1 | (65.2) | 913.4 | 793.9 | (119.5) | |||||||||||||||||||||||||||||
| Other Operating Expenses | 604.0 | 666.6 | 62.6 | 1,855.1 | 2,344.1 | 489.0 | |||||||||||||||||||||||||||||
| Total Operating Expenses | 812.3 | 809.7 | (2.6) | 2,768.5 | 3,138.0 | 369.5 | |||||||||||||||||||||||||||||
| Operating Income | 147.1 | 92.8 | 54.3 | 722.5 | 332.7 | 389.8 | |||||||||||||||||||||||||||||
| Total Other Deductions, net | (70.1) | (330.6) | 260.5 | (216.3) | (508.6) | 292.3 | |||||||||||||||||||||||||||||
| Income Taxes | 14.8 | (64.9) | (79.7) | 90.6 | (73.9) | (164.5) | |||||||||||||||||||||||||||||
| Net Income (Loss) | 62.2 | (172.9) | 235.1 | 415.6 | (102.0) | 517.6 | |||||||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | (1.0) | — | 1.0 | (3.4) | — | 3.4 | |||||||||||||||||||||||||||||
| Net Income (Loss) Attributable to NiSource | 63.2 | (172.9) | 236.1 | 419.0 | (102.0) | 521.0 | |||||||||||||||||||||||||||||
| Preferred dividends | (13.8) | (13.8) | — | (41.4) | (41.4) | — | |||||||||||||||||||||||||||||
| Net Income (Loss) Available to Common Shareholders | 49.4 | (186.7) | 236.1 | 377.6 | (143.4) | 521.0 | |||||||||||||||||||||||||||||
| Earnings (Loss) Per Share | |||||||||||||||||||||||||||||||||||
| Basic Earnings (Loss) Per Share | $ | 0.13 | $ | (0.49) | $ | 0.62 | $ | 0.96 | $ | (0.37) | $ | 1.33 | |||||||||||||||||||||||
| Diluted Earnings (Loss) Per Share | $ | 0.12 | $ | (0.49) | $ | 0.61 | $ | 0.91 | $ | (0.37) | $ | 1.28 | |||||||||||||||||||||||
The majority of the cost of energy in both segments are tracked costs that are passed through directly to the customer, resulting in an equal and offsetting amount reflected in operating revenues.
On a consolidated basis, we reported a net income available to common shareholders of $49.4 million, or $0.12 per diluted share for the three months ended September 30, 2021, compared to a net loss available to common shareholders of $186.7 million, or $0.49 per diluted share for the same period in 2020. The increase in income was primarily due to the loss on sale of the Massachusetts business in 2020, as well as a favorable change in total other deductions for the three months ended September 30, 2021 compared to the same period in 2020. See below for the primary drivers of this change.
For the nine months ended September 30, 2021, we reported net income available to common shareholders of $377.6 million, or $0.91 per diluted share compared to net loss available to common shareholders of $143.4 million, or $0.37 per diluted share for the same period in 2020. The primary driver for this increase was the loss on sale of the Massachusetts business in 2020.
For additional information on operating income variance drivers see "Results and Discussion of Segment Operations" for Gas and Electric Operations in this Management's Discussion.
Other Deductions, net
Other deductions, net reduced income by $70.1 million during the three months ended September 30, 2021 compared to a reduction in income of $330.6 million in the same period in 2020. This change was primarily driven by the loss on early extinguishment of debt in 2020, lower long-term and short-term debt interest in 2021 and higher non-service pension benefits in 2021. The lower interest in 2021 was due to lower rates on long-term debt and lower balances on short-term debt during the three months ended September 30, 2021 compared to the same period in 2020. The higher non-service pension costs were driven by a decrease in the pension benefit obligations. See Note 13, "Long-Term Debt," Note 14, "Short-Term Borrowings," and Note 11, "Pension and Other Postretirement Benefits," in the Notes to the Condensed Consolidated Financial Statements (unaudited) for additional information.
Other deductions, net reduced income by $216.3 million during the nine months ended September 30, 2021 compared to a reduction in income of $508.6 million in the same period in 2020. The drivers for this change were consistent with that of the quarter-to-date period.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Income Taxes
Refer to Note 10, "Income Taxes," in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on income taxes and the change in the effective tax rate.
RESULTS AND DISCUSSION OF SEGMENT OPERATIONS
Presentation of Segment Information
Our operations are divided into two primary reportable segments: Gas Distribution Operations and Electric Operations. We primarily evaluate segment results based on operating income. The remainder of our operations, which are not significant enough on a stand-alone basis to warrant treatment as an operating segment, are presented as "Corporate and Other" within the Notes to the Condensed Consolidated Financial Statements (unaudited) and primarily are comprised of interest expense on holding company debt, and unallocated corporate costs and activities.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Gas Distribution Operations
Financial and operational data for the Gas Distribution Operations segment for the three and nine months ended September 30, 2021 and 2020 are presented below:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| (in millions) | 2021 | 2020 | Favorable (Unfavorable) | 2021 | 2020 | Favorable (Unfavorable) | |||||||||||||||||||||||||||||
| Operating Revenues | $ | 475.3 | $ | 473.1 | $ | 2.2 | $ | 2,191.5 | $ | 2,313.3 | $ | (121.8) | |||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||||||||
| Cost of energy | 89.0 | 63.0 | (26.0) | 597.0 | 559.6 | (37.4) | |||||||||||||||||||||||||||||
| Operation and maintenance | 232.4 | 275.2 | 42.8 | 725.1 | 868.4 | 143.3 | |||||||||||||||||||||||||||||
| Depreciation and amortization | 96.9 | 88.4 | (8.5) | 283.4 | 271.7 | (11.7) | |||||||||||||||||||||||||||||
| Loss (gain) on sale of fixed assets and impairments, net | (0.1) | 35.6 | 35.7 | 8.0 | 400.2 | 392.2 | |||||||||||||||||||||||||||||
| Other taxes | 46.1 | 53.1 | 7.0 | 158.9 | 175.4 | 16.5 | |||||||||||||||||||||||||||||
| Total Operating Expenses | 464.3 | 515.3 | 51.0 | 1,772.4 | 2,275.3 | 502.9 | |||||||||||||||||||||||||||||
| Operating Income (Loss) | $ | 11.0 | $ | (42.2) | $ | 53.2 | $ | 419.1 | $ | 38.0 | $ | 381.1 | |||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Residential | $ | 309.8 | $ | 310.1 | $ | (0.3) | $ | 1,472.9 | $ | 1,544.0 | $ | (71.1) | |||||||||||||||||||||||
| Commercial | 101.3 | 93.2 | 8.1 | 501.6 | 491.3 | 10.3 | |||||||||||||||||||||||||||||
| Industrial | 41.4 | 42.9 | (1.5) | 144.0 | 166.2 | (22.2) | |||||||||||||||||||||||||||||
| Off-System | 14.6 | 6.0 | 8.6 | 46.0 | 32.7 | 13.3 | |||||||||||||||||||||||||||||
| Other | 8.2 | 20.9 | (12.7) | 27.0 | 79.1 | (52.1) | |||||||||||||||||||||||||||||
| Total | $ | 475.3 | $ | 473.1 | $ | 2.2 | $ | 2,191.5 | $ | 2,313.3 | $ | (121.8) | |||||||||||||||||||||||
| Sales and Transportation (MMDth) | |||||||||||||||||||||||||||||||||||
| Residential | 12.4 | 15.5 | (3.1) | 161.5 | 173.8 | (12.3) | |||||||||||||||||||||||||||||
| Commercial | 17.3 | 17.7 | (0.4) | 118.8 | 119.8 | (1.0) | |||||||||||||||||||||||||||||
| Industrial | 123.3 | 131.9 | (8.6) | 384.4 | 402.9 | (18.5) | |||||||||||||||||||||||||||||
| Off-System | 4.1 | 3.7 | 0.4 | 15.7 | 19.0 | (3.3) | |||||||||||||||||||||||||||||
| Other | — | 0.1 | (0.1) | 0.2 | 0.3 | (0.1) | |||||||||||||||||||||||||||||
| Total | 157.1 | 168.9 | (11.8) | 680.6 | 715.8 | (35.2) | |||||||||||||||||||||||||||||
| Heating Degree Days | 44 | 91 | (47) | 3,353 | 3,259 | 94 | |||||||||||||||||||||||||||||
| Normal Heating Degree Days | 70 | 71 | (1) | 3,475 | 3,531 | (56) | |||||||||||||||||||||||||||||
| % Colder (Warmer) than Normal | (37) | % | 28 | % | (4) | % | (8) | % | |||||||||||||||||||||||||||
| % Colder (Warmer) than 2020 | (52) | % | 3 | % | |||||||||||||||||||||||||||||||
| Gas Distribution Customers | |||||||||||||||||||||||||||||||||||
| Residential | 2,942,031 | 3,232,785 | (290,754) | ||||||||||||||||||||||||||||||||
| Commercial | 250,931 | 281,316 | (30,385) | ||||||||||||||||||||||||||||||||
| Industrial | 4,904 | 5,967 | (1,063) | ||||||||||||||||||||||||||||||||
| Other | 3 | 3 | — | ||||||||||||||||||||||||||||||||
| Total | 3,197,869 | 3,520,071 | (322,202) |
Comparability of operation and maintenance expenses, depreciation and amortization, and other taxes may be impacted by regulatory, depreciation and tax trackers that allow for the recovery in rates of certain costs.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Gas Distribution Operations
Three and Nine Months Ended September 30, 2021 vs. September 30, 2020 Operating Income
For the three months ended September 30, 2021, Gas Distribution Operations reported operating income of $11.0 million, an increase of $53.2 million from the comparable 2020 period. For the nine months ended September 30, 2021, Gas Distribution Operations reported operating income of $419.1 million, an increase of $381.1 million from the comparable 2020 period.
Operating Revenues
Operating revenues for the three months ended September 30, 2021 were $475.3 million, an increase of $2.2 million from the same period in 2020. Operating revenues for the nine months ended September 30, 2021 were $2,191.5 million, a decrease of $121.8 million from the same period in 2020.
| Favorable (Unfavorable) | |||||||||||
| Changes in Operating Revenues (in millions) | Three Months Ended September 30, 2021 vs 2020 | Nine Months Ended September 30, 2021 vs 2020 | |||||||||
| Revenues associated with the Massachusetts Business in 2020 | $ | (40.4) | $ | (218.6) | |||||||
| The effects of colder (warmer) weather in 2021 compared to 2020 | (1.3) | 12.2 | |||||||||
| New rates from base rate proceedings and regulatory capital programs | 18.8 | 79.4 | |||||||||
| Higher revenue due to the effects of resuming common credit mitigation practices | 0.8 | 3.9 | |||||||||
| The effects of customer growth | 0.1 | 5.1 | |||||||||
| Other | 2.7 | 1.2 | |||||||||
| Change in operating revenues (before cost of energy and other tracked items) | $ | (19.3) | $ | (116.8) | |||||||
| Operating revenues offset in operating expense | |||||||||||
| Higher cost of energy billed to customers | 32.3 | 145.5 | |||||||||
| Cost of energy associated with the Massachusetts Business in 2020 | (6.3) | (108.1) | |||||||||
| Operation and maintenance trackers associated with the Massachusetts Business in 2020 | (5.2) | (36.4) | |||||||||
| Higher (lower) tracker deferrals within operation and maintenance, depreciation, and tax | 0.7 | (6.0) | |||||||||
| Total change in operating revenues | $ | 2.2 | $ | (121.8) |
Weather
In general, we calculate the weather-related revenue variance based on changing customer demand driven by weather variance from normal heating degree days, net of weather normalization mechanisms. Our composite heating degree days reported do not directly correlate to the weather-related dollar impact on the results of Gas Distribution Operations. Heating degree days experienced during different times of the year or in different operating locations may have more or less impact on volume and dollars depending on when and where they occur. When the detailed results are combined for reporting, there may be weather-related dollar impacts on operations when there is not an apparent or significant change in our aggregated composite heating degree day comparison.
Throughput
Total volumes sold and transported for the three months ended September 30, 2021 were 157.1 MMDth, compared to 168.9 MMDth for the same period in 2020. This decrease is primarily attributable to the sale of the Massachusetts Business and the effects of warmer weather during the three months ended September 30, 2021 compared to the same period in 2020.
Total volumes sold and transported for the nine months ended September 30, 2021 were 680.6 MMDth, compared to 715.8 MMDth for the same period in 2020. This decrease is primarily attributable to the sale of the Massachusetts Business, offset by the effects of colder weather during the nine months ended September 30, 2021 compared to the same period in 2020.
Commodity Price Impact
Cost of energy for the Gas Distribution Operations segment is principally comprised of the cost of natural gas used while providing transportation and distribution services to customers. All of our Gas Distribution Operations companies have state-approved recovery mechanisms that provide a means for full recovery of prudently incurred gas costs. These are tracked costs that are passed through directly to the customer, and the gas costs included in revenues are matched with the gas cost expense
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Gas Distribution Operations
recorded in the period. The difference is recorded on the Condensed Consolidated Balance Sheets (unaudited) as under-recovered or over-recovered gas cost to be included in future customer billings. Therefore, increases in these tracked operating expenses are offset by increases in operating revenues and have essentially no impact on net income.
Certain Gas Distribution Operations companies continue to offer choice opportunities, where customers can choose to purchase gas from a third-party supplier, through regulatory initiatives in their respective jurisdictions.
Operating Expenses
Operating expenses were $51.0 million lower for the three months ended September 30, 2021 and $502.9 million lower for the nine months ended September 30, 2021 compared to the same respective periods in 2020.
| Favorable (Unfavorable) | |||||||||||
| Changes in Operating Expenses (in millions) | Three Months Ended September 30, 2021 vs 2020 | Nine Months Ended September 30, 2021 vs 2020 | |||||||||
| Operating expenses associated with the Massachusetts Business in 2020 | $ | 62.0 | $ | 188.8 | |||||||
| Decrease (increase) in the loss on sale of the Massachusetts Business of $0.1 million and $(6.8) million in 2021 compared to $(35.6) million and $(400.2) million in 2020, respectively | 35.7 | 393.4 | |||||||||
| Lower (higher) expense related to the NiSource Next initiative | 12.3 | (6.7) | |||||||||
| Lower (higher) corporate insurance costs | 1.8 | (1.7) | |||||||||
| Higher employee and administrative related expenses | (23.4) | (33.0) | |||||||||
| Higher depreciation and amortization expense | (8.2) | (21.2) | |||||||||
| Higher outside services expenses | (5.1) | (7.9) | |||||||||
| Higher property tax expense | (2.5) | (7.1) | |||||||||
| Higher environmental costs | (1.6) | (4.2) | |||||||||
| Other | 1.5 | (2.5) | |||||||||
| Change in operating expenses (before cost of energy and other tracked items) | $ | 72.5 | $ | 497.9 | |||||||
| Operating expenses offset in operating revenue | |||||||||||
| Higher cost of energy billed to customers | (32.3) | (145.5) | |||||||||
| Cost of energy associated with the Massachusetts Business in 2020 | 6.3 | 108.1 | |||||||||
| Operation and maintenance trackers associated with the Massachusetts Business in 2020 | 5.2 | 36.4 | |||||||||
| Lower (higher) tracker deferrals within operation and maintenance, depreciation, and tax | (0.7) | 6.0 | |||||||||
| Total change in operating expense | $ | 51.0 | $ | 502.9 |
Columbia of Massachusetts Asset Sale
On October 9, 2020, we completed the sale of our Massachusetts Business. In March 2021, we reached an agreement with Eversource regarding the final purchase price, including net working capital adjustments, which resulted in a decrease (increase) in the pre-tax loss for the three and nine months ended September 30, 2021 of $0.1 million and $(6.8) million, respectively. The total loss on the sale as of September 30, 2021 is $419.2 million based on asset and liability balances as of the close of the transaction on October 9, 2020, transaction costs and the final purchase price. The pre-tax loss is presented as "Loss (gain) on sale of assets, net" on the Condensed Statements of Consolidated Income (Loss) (unaudited).
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Electric Operations
Financial and operational data for the Electric Operations segment for the three and nine months ended September 30, 2021 and 2020 are presented below:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| (in millions) | 2021 | 2020 | Favorable (Unfavorable) | 2021 | 2020 | Favorable (Unfavorable) | |||||||||||||||||||||||||||||
| Operating Revenues | 479.1 | $ | 432.3 | $ | 46.8 | 1,285.5 | $ | 1,166.2 | $ | 119.3 | |||||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||||||||
| Cost of energy | 119.3 | 80.1 | (39.2) | 316.4 | 234.3 | (82.1) | |||||||||||||||||||||||||||||
| Operation and maintenance | 120.5 | 126.9 | 6.4 | 366.9 | 355.8 | (11.1) | |||||||||||||||||||||||||||||
| Depreciation and amortization | 83.3 | 80.8 | (2.5) | 250.4 | 240.3 | (10.1) | |||||||||||||||||||||||||||||
| Other taxes | 15.6 | 14.5 | (1.1) | 43.9 | 40.4 | (3.5) | |||||||||||||||||||||||||||||
| Total Operating Expenses | 338.7 | 302.3 | (36.4) | 977.6 | 870.8 | (106.8) | |||||||||||||||||||||||||||||
| Operating Income | $ | 140.4 | $ | 130.0 | $ | 10.4 | $ | 307.9 | $ | 295.4 | $ | 12.5 | |||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Residential | $ | 178.7 | $ | 168.3 | $ | 10.4 | $ | 439.8 | $ | 411.5 | $ | 28.3 | |||||||||||||||||||||||
| Commercial | 151.6 | 135.4 | 16.2 | 404.4 | 365.4 | 39.0 | |||||||||||||||||||||||||||||
| Industrial | 126.0 | 105.8 | 20.2 | 368.3 | 301.4 | 66.9 | |||||||||||||||||||||||||||||
| Wholesale | 4.8 | 3.9 | 0.9 | 11.3 | 9.9 | 1.4 | |||||||||||||||||||||||||||||
| Other | 18.0 | 18.9 | (0.9) | 61.7 | 78.0 | (16.3) | |||||||||||||||||||||||||||||
| Total | $ | 479.1 | $ | 432.3 | $ | 46.8 | $ | 1,285.5 | $ | 1,166.2 | $ | 119.3 | |||||||||||||||||||||||
| Sales (GWh) | |||||||||||||||||||||||||||||||||||
| Residential | 1,159.4 | 1,145.3 | 14.1 | 2,785.0 | 2,734.8 | 50.2 | |||||||||||||||||||||||||||||
| Commercial | 1,057.0 | 996.0 | 61.0 | 2,829.1 | 2,706.5 | 122.6 | |||||||||||||||||||||||||||||
| Industrial | 2,081.0 | 1,909.1 | 171.9 | 6,295.1 | 5,447.7 | 847.4 | |||||||||||||||||||||||||||||
| Wholesale | 37.2 | 5.3 | 31.9 | 81.7 | 81.6 | 0.1 | |||||||||||||||||||||||||||||
| Other | 36.1 | 24.4 | 11.7 | 83.7 | 74.1 | 9.6 | |||||||||||||||||||||||||||||
| Total | 4,370.7 | 4,080.1 | 290.6 | 12,074.6 | 11,044.7 | 1,029.9 | |||||||||||||||||||||||||||||
| Cooling Degree Days | 658 | 599 | 59 | 976 | 891 | 85 | |||||||||||||||||||||||||||||
| Normal Cooling Degree Days | 556 | 556 | — | 795 | 795 | — | |||||||||||||||||||||||||||||
| % Warmer than Normal | 18 | % | 8 | % | 23 | % | 12 | % | |||||||||||||||||||||||||||
| % Warmer than 2020 | 10 | % | 10 | % | |||||||||||||||||||||||||||||||
| Electric Customers | |||||||||||||||||||||||||||||||||||
| Residential | 421,074 | 417,703 | 3,371 | ||||||||||||||||||||||||||||||||
| Commercial | 57,860 | 57,241 | 619 | ||||||||||||||||||||||||||||||||
| Industrial | 2,140 | 2,160 | (20) | ||||||||||||||||||||||||||||||||
| Wholesale | 719 | 723 | (4) | ||||||||||||||||||||||||||||||||
| Other | 2 | 2 | — | ||||||||||||||||||||||||||||||||
| Total | 481,795 | 477,829 | 3,966 |
Comparability of operation and maintenance expenses and depreciation and amortization may be impacted by regulatory and depreciation trackers that allow for the recovery in rates of certain costs.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Electric Operations
Three and Nine Months Ended September 30, 2021 vs. September 30, 2020 Operating Income
For the three months ended September 30, 2021, Electric Operations reported operating income of $140.4 million, an increase of $10.4 million from the comparable 2020 period. For the nine months ended September 30, 2021, Electric Operations reported operating income of $307.9 million, an increase of $12.5 million from the comparable 2020 period.
Operating Revenues
Operating revenues for the three months ended September 30, 2021 were $479.1 million, an increase of $46.8 million from the same period in 2020. Operating revenues for the nine months ended September 30, 2021 were $1,285.5 million, an increase of $119.3 million from the same period in 2020.
| Favorable (Unfavorable) | ||||||||||||||
| Changes in Operating Revenues (in millions) | Three Months Ended September 30, 2021 vs 2020 | Nine Months Ended September 30, 2021 vs 2020 | ||||||||||||
| The effects of warmer weather in 2021 compared to 2020 | $ | 11.5 | $ | 15.7 | ||||||||||
| Increased (decreased) customer usage | (2.7) | 13.5 | ||||||||||||
| New rates from regulatory capital and DSM programs | 1.5 | 7.5 | ||||||||||||
| The effects of customer growth | 1.5 | 3.6 | ||||||||||||
| Higher revenue due to the effects of resuming common credit mitigation practices | 1.5 | 1.9 | ||||||||||||
| Increased fuel handling costs | (3.9) | (10.4) | ||||||||||||
| Other | 0.1 | 2.5 | ||||||||||||
| Change in operating revenues (before cost of energy and other tracked items) | $ | 9.5 | $ | 34.3 | ||||||||||
| Operating revenues offset in operating expense | ||||||||||||||
| Higher cost of energy billed to customers | 39.2 | 82.1 | ||||||||||||
| Higher (lower) tracker deferrals within operation and maintenance, depreciation and tax | (1.9) | 2.9 | ||||||||||||
| Total change in operating revenues | $ | 46.8 | $ | 119.3 |
Weather
In general, we calculate the weather-related revenue variance based on changing customer demand driven by weather variance from normal heating or cooling degree days. Our composite heating or cooling degree days reported do not directly correlate to the weather-related dollar impact on the results of Electric Operations. Heating or cooling degree days experienced during different times of the year may have more or less impact on volume and dollars depending on when they occur. When the detailed results are combined for reporting, there may be weather-related dollar impacts on operations when there is not an apparent or significant change in our aggregated composite heating or cooling degree day comparison.
Sales
Electric Operations sales for the three months ended September 30, 2021 were 4,370.7 GWh, an increase of 290.6 GWh compared to the same period in 2020. This increase was primarily attributable to decreased usage by industrial and commercial customers during the three months ended September 30, 2020 due to COVID-19.
Electric Operations sales for the nine months ended September 30, 2021 were 12,074.6 GWh, an increase of 1,029.9 GWh compared to the same period in 2020. This increase was primarily attributable to decreased usage by industrial and commercial customers during the second and third quarter of 2020 due to COVID-19. There was no significant variance during the first three months of 2021 compared to the same period in 2020.
Commodity Price Impact
Cost of energy for the Electric Operations segment is principally comprised of the cost of coal, related handling costs, natural gas purchased for internal generation of electricity at NIPSCO, and the cost of power purchased from third-party generators of electricity. NIPSCO has a state-approved recovery mechanism that provides a means for full recovery of prudently incurred fuel costs. The majority of these fuel costs are passed through directly to the customer, and the fuel costs included in operating
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Electric Operations
revenues are matched with the fuel cost expense recorded in the period. The difference is recorded on the Condensed Consolidated Balance Sheets (unaudited) as under-recovered or over-recovered fuel cost to be included in future customer billings. Therefore, increases in these tracked operating expenses are offset by increases in operating revenues and have essentially no impact on net income.
Operating Expenses
Operating expenses were $36.4 million higher for the three months ended September 30, 2021 compared to the same period in 2020. Operating expenses were $106.8 million higher for the nine months ended September 30, 2021 compared to the same period in 2020.
| Favorable (Unfavorable) | |||||||||||
| Changes in Operating Expenses (in millions) | Three Months Ended September 30, 2021 vs 2020 | Nine Months Ended September 30, 2021 vs 2020 | |||||||||
| Higher employee and administrative expenses | $ | (8.9) | $ | (12.2) | |||||||
| Higher depreciation and amortization expense | (3.0) | (8.2) | |||||||||
| Increased operating expenses related to the accelerated retirement of the R.M. Schahfer Generating Station's coal Units 14 and 15 | (3.6) | (7.6) | |||||||||
| Lower (higher) expense related to the NiSource Next initiative | 5.6 | (4.3) | |||||||||
| Lower (higher) environmental costs | (2.2) | 6.9 | |||||||||
| Lower outside services expenses | 10.1 | 4.9 | |||||||||
| Lower materials and supplies expenses | 2.2 | 0.8 | |||||||||
| Other | 0.7 | (2.1) | |||||||||
| Change in operating expenses (before cost of energy and other tracked items) | $ | 0.9 | $ | (21.8) | |||||||
| Operating expenses offset in operating revenue | |||||||||||
| Higher cost of energy billed to customers | (39.2) | (82.1) | |||||||||
| Lower (higher) tracker deferrals within operation and maintenance, depreciation and tax | 1.9 | (2.9) | |||||||||
| Total change in operating expense | $ | (36.4) | $ | (106.8) |
Electric Supply and Generation Transition
NIPSCO continues to execute on an electric generation transition consistent with the preferred pathway from its 2018 Integrated Resource Plan, which outlines plans to retire its remaining coal-fired generation by 2028, to be replaced by lower-cost, reliable and cleaner options. The plan is expected to be a key element of a 90% reduction in our Scope 1 GHG emissions by 2030 compared with 2005 levels and to save NIPSCO electric customers more than $4 billion over 30 years. We expect to have capital investment requirements of approximately $2.0 billion, primarily in 2022 and 2023, to replace the generation capacity of all R.M. Schahfer Generating Station's coal-fired units. We retired R.M. Schahfer Generating Station Units 14 and 15 on October 1, 2021. The remaining two units are still scheduled to be retired in 2023. Refer to Note 6, "Property, Plant and Equipment," Note 15-E, "Other Matters," and Note 19, "Subsequent Event" in the Notes to Condensed Consolidated Financial Statements (unaudited) for further information.
The current replacement plan primarily includes renewable sources of energy, including wind, solar, and battery storage to be obtained through a combination of NIPSCO ownership and PPAs. NIPSCO has sold, and may in the future sell, renewable energy credits from this generation to third parties because this helps keep our energy more affordable for our customers. NIPSCO has executed several PPAs to purchase 100% of the output from renewable generation facilities at a fixed price per MWh. Each facility supplying the energy will have an associated nameplate capacity, and payments under the PPAs will not begin until the associated generation facility is constructed by the owner/seller. NIPSCO has also executed several BTAs with developers to construct renewable generation facilities. Our current replacement program will be augmented by the Preferred Energy Resource Plan outlined in our 2021 Integrated Resource Plan. See "Executive Summary - Your Energy, Your Future" in this Management's Discussion for additional information.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Electric Operations
The following table summarizes the executed PPAs and BTAs from our generation transition:
| Project Name | Transaction Type | Technology | Nameplate Capacity (MW) | Storage Capacity (MW) | Submitted to IURC | IURC Approval | Targeted Construction Completion | |||||||||||||||||||
| Jordan Creek | 20 year PPA | Wind | 400 | — | 02/01/2019 | 6/05/2019 | In Service (12/10/2020) | |||||||||||||||||||
| Rosewater(1) | BTA | Wind | 102 | — | 02/01/2019 | 8/07/2019 | In Service (12/29/2020) | |||||||||||||||||||
| Indiana Crossroads I(2) | BTA | Wind | 300 | — | 10/22/2019 | 2/19/2020 | Q4 2021 | |||||||||||||||||||
| Greensboro | 20 year PPA | Solar & Storage | 100 | 30 | 7/17/2020 | 1/27/2021 | Q4 2022 | |||||||||||||||||||
| Brickyard | 20 year PPA | Solar | 200 | — | 7/17/2020 | 1/27/2021 | Q4 2022 | |||||||||||||||||||
| Cavalry(2) | BTA | Solar & Storage | 200 | 60 | 11/30/2020 | 5/5/2021 | Q4 2023 | |||||||||||||||||||
| Dunn's Bridge I(2) | BTA | Solar | 265 | — | 11/30/2020 | 5/5/2021 | Q4 2022 | |||||||||||||||||||
| Dunn's Bridge II(2) | BTA | Solar & Storage | 435 | 75 | 11/30/2020 | 5/5/2021 | Q4 2023 | |||||||||||||||||||
| Green River | 20 year PPA | Solar | 200 | — | 12/23/2020 | 5/5/2021 | Q2 2023 | |||||||||||||||||||
| Gibson(3) | 22 year PPA | Solar | 280 | — | 01/29/2021 | 6/29/2021 | Q2 2023 | |||||||||||||||||||
| Fairbanks(2) | BTA | Solar | 250 | — | 03/03/2021 | 6/29/2021 | Q3 2023 | |||||||||||||||||||
| Indiana Crossroads(2) | BTA | Solar | 200 | — | 03/19/2021 | 7/28/2021 | Q4 2022 | |||||||||||||||||||
| Elliott(2)(3) | BTA | Solar | 200 | — | 03/31/2021 | 7/28/2021 | Q2 2023 | |||||||||||||||||||
| Indiana Crossroads II | 15 year PPA | Wind | 204 | — | 04/30/2021 | 9/1/2021 | Q4 2023 |
(1)Refer to Note 12, "Variable Interest Entities," for additional information.
(2)Ownership of the facility will be transferred to joint ventures whose members include NIPSCO and an unrelated tax equity partner.
(3)See below for additional information related to the targeted construction completion time of this project.
On October 27, 2021, we received notice of a potential force majeure event under the BTA for our Elliott solar generation project related to the supply of solar panel modules to be installed by the seller developing the project under the BTA. The notice states that shipments for the Elliott project will be delayed because solar panel modules currently being imported by a certain supplier, including those to be delivered to the Elliott project, have been, or are reasonably likely to be, detained by U.S. Customs and Border Protection (“CBP”) in connection with the June 24, 2021 Withhold Release Order ("WRO") on silica-based products made by Hoshine Silicon Industry Co., Ltd. The supplier of the solar panel modules has advised the sellers that the delivery of any additional similar solar panel modules has been delayed indefinitely. We have been informed that the supplier is taking actions to avoid detention of any future similar shipments, but even if these actions are successful, the delivery of solar panel modules will likely be delayed by several months. At this time, no claim of an actual force majeure has been provided by the seller under the BTA. Further, no additional details have been provided on the extent or expected duration of the potential detainment or the ability to obtain substitute solar panel modules that are not subject to the WRO, or the expected impact, if any, to the timely performance of the seller's obligations under the BTA. We have been informed that the seller is working diligently to determine whether and how to mitigate the effects of the potential detainment in order to minimize potential delays or failure to perform under the BTA.
Also on October 27, 2021, we received a substantially similar notice of a potential force majeure event from the same seller claiming a potential force majeure under our PPA for the Gibson solar project.
NIPSCO and the seller are evaluating options to mitigate delays and maintain the original project schedules, including various alternative power supply options in the event either or both of the Elliott and Gibson projects were to become delayed. We cannot currently predict what, if any, impact these notifications of potential force majeure or general availability of solar panels will have on NIPSCO or on our results of operations.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Liquidity and Capital Resources
We continually evaluate the availability of adequate financing to fund our ongoing business operations, working capital and core safety and infrastructure investment programs. Our financing is sourced through cash flow from operations and the issuance of debt and/or equity. External debt financing is provided primarily through the issuance of long-term debt, accounts receivable securitization programs and our $1.5 billion commercial paper program, which is backstopped by our committed revolving credit facility with a total availability from third-party lenders of $1.85 billion. The commercial paper program and credit facility provide cost-effective, short-term financing until it can be replaced with a balance of long-term debt and equity financing that achieves our desired capital structure. We utilize an ATM equity program that allows us to issue and sell shares of our common stock up to an aggregate issuance of $750.0 million through December 31, 2023. As of September 30, 2021, the ATM program (including the impact of the forward sale agreements) had approximately $300.0 million of equity available for issuance. On April 19, 2021, we completed the sale of 8.625 million Equity Units, which provided net proceeds of $835.5 million, after underwriting and issuance costs. We intend to use the net proceeds from the offering for renewable generation investments and general corporate purposes, including additions to working capital and repayment of existing indebtedness. See Note 5, ''Equity,'' in the Notes to Condensed Consolidated Financial Statements (unaudited) for more information on our ATM program and Equity Units.
We believe these sources provide adequate capital to fund our operating activities and capital expenditures in 2021 and beyond.
Greater Lawrence Incident: As discussed in Note 15, ''Other Commitments and Contingencies,'' in the Notes to the Condensed Consolidated Financial Statements (unaudited), due to the inherent uncertainty of litigation, there can be no assurance that the outcome or resolution of any particular claim related to the Greater Lawrence Incident will not continue to have an adverse impact on our cash flows. Through income generated from operating activities, amounts available under the short-term revolving credit facility, and our ability to access capital markets, we believe we have adequate capital available to settle remaining anticipated claims associated with the Greater Lawrence Incident.
Operating Activities
Net cash from operating activities for the nine months ended September 30, 2021 was $939.3 million, an increase of $80.7 million compared to the nine months ended September 30, 2020. This increase was primarily driven by a year over year decrease in net payments related to the Greater Lawrence Incident. During 2021, we paid approximately $13.0 million compared to $221.8 million of payments during the same period in 2020. This was offset by $131.8 million of decreased cash inflows related to the under collection of gas and fuel costs
Investing Activities
Net cash used for investing activities for the nine months ended September 30, 2021 was $1,394.2 million, a decrease of $5.7 million compared to the nine months ended September 30, 2020. We project total 2021 capital expenditures to be approximately $2 billion.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Liquidity and Capital Resources
Regulatory Capital Programs. We replace pipe and modernize our gas infrastructure to enhance safety and reliability by reducing leaks, which subsequently reduces GHG emissions. In 2021, we continue to move forward on core infrastructure and environmental investment programs supported by complementary regulatory and customer initiatives across all six states of our operating area.
The following table describes the most recent vintage of our regulatory programs to recover infrastructure replacement and other federally mandated compliance investments currently in rates or pending commission approval:
| (in millions) | ||||||||||||||||||||
| Company | Program | Incremental Revenue | Incremental Capital Investment | Investment Period | Costs Covered(1) | Rates Effective | ||||||||||||||
| Columbia of Ohio | IRP - 2021 | $ | 22.2 | $ | 212.6 | 1/20-12/20 | Replacement of (1) hazardous service lines, (2) cast iron, wrought iron, uncoated steel, and bare steel pipe, (3) natural gas risers prone to failure and (4) installation of AMR devices. | May 2021 | ||||||||||||
| Columbia of Ohio | CEP - 2021 | 18.0 | 177.2 | 1/20-12/20 | Assets not included in the IRP. | September 2021 | ||||||||||||||
| NIPSCO - Gas | TDSIC 3 | 0.2 | 52.1 | 1/21-6/21 | New or replacement projects undertaken for the purpose of safety, reliability, system modernization or economic development. | January 2022 | ||||||||||||||
| NIPSCO - Gas(2) | FMCA 6 | (2.1) | 20.7 | 10/20-3/21 | Project costs to comply with federal mandates. | October 2021 | ||||||||||||||
| Columbia of Pennsylvania(3) | DSIC - Q4 2020 | 0.8 | 25.0 | 9/20-11/20 | Eligible project costs including piping, couplings, gas service lines, excess flow valves, risers, meter bars, meters, and other related capitalized cost, to improve the distribution system. | January 2021 | ||||||||||||||
| Columbia of Virginia(4) | SAVE - 2022 | 15.8 | 63.0 | 1/22-12/22 | Replacement projects that (1) enhance system safety or reliability, or (2) reduce, or potentially reduce, greenhouse gas emissions. | January 2022 | ||||||||||||||
| Columbia of Kentucky | SMRP - 2021 | 2.6 | 40.0 | 1/21-12/21 | Replacement of mains and inclusion of system safety investments. | May 2021 | ||||||||||||||
| Columbia of Maryland | STRIDE - 2022 | $ | 1.4 | $ | 17.5 | 1/22-12/22 | Pipeline upgrades designed to improve public safety or infrastructure reliability. | January 2022 | ||||||||||||
| NIPSCO - Electric(5) | TDSIC - 9 | $ | 0.2 | $ | 42.7 | 2/21-5/21 | New or replacement projects undertaken for the purpose of safety, reliability, system modernization or economic development. | February 2022 |
(1)Programs do not include any costs already included in base rates.
(2)Decrease in incremental revenue due to lower O&M expenses as compared to the prior filing.
(3)Effective January 23, 2021, Columbia of Pennsylvania's DSIC rate was set to zero due to the inclusion of the incremental capital and revenue in base rates following the Pennsylvania PUC's Final Order in the 2020 rate case.
(4)Columbia of Virginia filed its application to amend and extend its SAVE program with the Virginia SCC on August 12, 2021, requesting approval of a two-year SAVE program for calendar years 2022-2023 that includes incremental capital investments of $63.0 million and $72.0 million, respectively. Commission action is expected on or before December 10, 2021.
(5)On April 1, 2021, NIPSCO filed a notice with the IURC that it intended to terminate its current Electric TDSIC plan effective May 31, 2021. NIPSCO filed for a new electric TDSIC plan on June 1, 2021. An order is expected by the end of 2021. NIPSCO filed the TDSIC-9 petition on September 28, 2021, and an order is expected in January 2022.
Financing Activities
Common Stock and Preferred Stock. Refer to Note 5, ''Equity,'' in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on common and preferred stock activity.
Short-term Debt and Sale of Trade Accounts Receivables. Refer to Note 14, ''Short-Term Borrowings,'' in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on short-term debt activity, including sale of trade accounts receivable.
Equity Unit Sale. Refer to Note 5, ''Equity,'' in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on equity units activity.
Non-controlling Interest. Refer to Note 12, "Variable Interest Entities," in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on contributions from non-controlling interest activity.
Net Available Liquidity. As of September 30, 2021, an aggregate of $1,698.3 million of net liquidity was available, including cash and credit available under the revolving credit facility.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Liquidity and Capital Resources
The following table displays our liquidity position as of September 30, 2021 and December 31, 2020:
| (in millions) | September 30, 2021 | December 31, 2020 | ||||||
| Current Liquidity | ||||||||
| Revolving Credit Facility | $ | 1,850.0 | $ | 1,850.0 | ||||
| Accounts Receivable Program(1) | 203.9 | 273.3 | ||||||
| Less: | ||||||||
| Commercial Paper | 380.0 | 503.0 | ||||||
| Letters of Credit Outstanding Under Credit Facility | 14.1 | 15.2 | ||||||
| Add: | ||||||||
| Cash and Cash Equivalents | 38.5 | 116.5 | ||||||
| Net Available Liquidity | $ | 1,698.3 | $ | 1,721.6 |
(1)Represents the lesser of the seasonal limit or maximum borrowings supportable by the underlying receivables.
Debt Covenants**.** We are subject to financial covenants under our revolving credit facility, which require us to maintain a debt to capitalization ratio that does not exceed 70%. As of September 30, 2021, the ratio was 59.7%.
Credit Ratings. The credit rating agencies periodically review our ratings, taking into account factors such as our capital structure and earnings profile. The following table includes our and NIPSCO's credit ratings and ratings outlook as of September 30, 2021. There were no changes to the below credit ratings or outlooks since December 31, 2020.
A credit rating is not a recommendation to buy, sell, or hold securities, and may be subject to revision or withdrawal at any time by the assigning rating organization.
| S&P | Moody's | Fitch | ||||||||||||||||||
| Rating | Outlook | Rating | Outlook | Rating | Outlook | |||||||||||||||
| NiSource | BBB+ | Stable | Baa2 | Stable | BBB | Stable | ||||||||||||||
| NIPSCO | BBB+ | Stable | Baa1 | Stable | BBB | Stable | ||||||||||||||
| Commercial Paper | A-2 | Stable | P-2 | Stable | F2 | Stable |
Certain of our subsidiaries have agreements that contain ''ratings triggers'' that require increased collateral if our credit rating or the credit ratings of certain of our subsidiaries are below investment grade. These agreements are primarily for insurance purposes and for the physical purchase or sale of power. As of September 30, 2021, the collateral requirement that would be required in the event of a downgrade below the ratings trigger levels would amount to approximately $46.7 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.
Equity. Our authorized capital stock consists of 620,000,000 shares, $0.01 par value, of which 600,000,000 are common stock and 20,000,000 are preferred stock. As of September 30, 2021, 392,628,625 shares of common stock and 1,302,500 shares of preferred stock were outstanding.
Contractual Obligations. A summary of contractual obligations is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Other than the purchase contract liability related to our Equity Units, discussed in Note 5, "Equity," in the Notes to the Condensed Consolidated Financial Statements (unaudited), there were no material changes from year-end during the nine months ended September 30, 2021.
Guarantees and Indemnities. We and certain of our subsidiaries enter into various agreements providing financial or performance assurance to third parties on behalf of certain subsidiaries as a part of normal business. Refer to Note 15, ''Other Commitments and Contingencies,'' in the Notes to the Condensed Consolidated Financial Statements (unaudited) for information on guarantees.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Regulatory and Other Matters
Cost Recovery and Trackers
Comparability of our line item operating results is impacted by regulatory trackers that allow for the recovery in rates of certain costs such as those described below. Increases in the expenses that are subject to approved regulatory tracker mechanisms generally lead to increased regulatory assets, which ultimately result in a corresponding increase in operating revenues and, therefore, have essentially no impact on total operating income results. Certain approved regulatory tracker mechanisms allow for abbreviated regulatory proceedings in order for the operating companies to quickly implement revised rates and recover associated costs.
A portion of the Gas Distribution revenue is related to the recovery of gas costs, the review and recovery of which occurs through standard regulatory proceedings. All states in our operating area require periodic review of actual gas procurement activity to determine prudence and to confirm the recovery of prudently incurred energy commodity costs supplied to customers.
Increased efficiency of natural gas appliances and improvements in home building codes and standards has contributed to a long-term trend of declining average use per customer. As a result, Gas Distribution Operations have pursued changes in rate design to more effectively match recoveries with costs incurred. Columbia of Ohio has adopted a straight fixed variable rate design that closely links the recovery of fixed costs with fixed charges. Columbia of Maryland and Columbia of Virginia have regulatory approval for weather and revenue normalization adjustments for certain customer classes, which adjust monthly revenues that exceed or fall short of approved levels. Columbia of Pennsylvania continues to operate its pilot residential weather normalization adjustment and also has a fixed customer charge. This weather normalization adjustment only adjusts revenues when actual weather compared to normal varies by more than 3%. Columbia of Kentucky incorporates a weather normalization adjustment for certain customer classes and also has a fixed customer charge. In a prior gas base rate proceeding, NIPSCO implemented a higher fixed customer charge for residential and small customer classes moving toward recovering more of its fixed costs through a fixed recovery charge, but has no weather or usage protection mechanism.
A portion of the Electric Operations revenue is related to the recovery of fuel costs to generate power and the fuel costs related to purchased power. These costs are recovered through a FAC, which is updated quarterly to reflect actual costs incurred to supply electricity to customers.
While increased efficiency of electric appliances and improvements in home building codes and standards has similarly impacted the average use per electric customer in recent years, NIPSCO expects a future trend with increases in per customer usage driven by increasing electric applications. Further growth is anticipated as electric vehicles become more prevalent. These ongoing changes in use of electricity will likely lead to development of innovative rate designs, and NIPSCO will continue efforts to design rates that increase the certainty of recovery of fixed costs.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Regulatory and Other Matters
Rate Case Actions
The following table describes current rate case actions as applicable in each of our jurisdictions net of tracker impacts:
| (in millions) | |||||||||||||||||||||||
| Company | Proposed ROE | Approved ROE | Requested Incremental Revenue | Approved Incremental Revenue | Filed | Status | Rates Effective | ||||||||||||||||
| Columbia of Pennsylvania(1) | 9.86 | % | 9.86 | % | $ | 76.8 | $ | 63.5 | April 24, 2020 | Approved February 19, 2021 | January 2021 | ||||||||||||
| Columbia of Pennsylvania(2) | 10.95 | % | In process | $ | 98.3 | In process | March 30, 2021 | Order Expected Q4 2021 | December 2021 | ||||||||||||||
| Columbia of Maryland(3) | 10.85 | % | In process | $ | 4.8 | In process | May 14, 2021 | Order Expected December 2021 | December 2021 | ||||||||||||||
| Columbia of Kentucky(4) | 10.30 | % | In process | $ | 26.7 | In process | May 28, 2021 | Order Expected Q1 2022 | January 2022 | ||||||||||||||
| Columbia of Ohio | 10.95 | % | In process | $ | 221.4 | In process | June 30, 2021 | Order Expected Q3 2022 | July 2022 | ||||||||||||||
| NIPSCO - Gas(5) | 10.50 | % | In process | $ | 115.3 | In process | September 29, 2021 | Order Expected Q3 2022 | September 2022 | ||||||||||||||
(1)The 9.86% ROE and the $76.8 million requested incremental revenue stated above reflect compromise positions taken by Columbia of Pennsylvania during the briefing stages of its 2020 base rate case. In its initial filing on April 24, 2020, Columbia of Pennsylvania proposed an ROE of 10.95% and requested incremental revenue of $100.4 million. A Final Order from the Pennsylvania PUC was received on February 19, 2021 for rates effective retroactive to January 23, 2021. On March 8, 2021, the Pennsylvania Office of Consumer Advocate filed a Petition for Reconsideration, seeking to have the Pennsylvania PUC modify its February 19 Final Order. On April 15, 2021, the Pennsylvania PUC issued an Opinion and Order denying the Office of Consumer Advocate’s Petition. Parties have 30 days in which to file an appeal. The OCA did not file a Notice of Appeal by the Commission’s May 17, 2021 due date. CPA began back billing customers for usage from January 23, 2021 at the new rates beginning March 20, 2021.
(2)CPA filed a Joint Petition for Settlement on September 7, 2021 for an annual revenue increase of $58.5 million. On October 5, 2021 a Recommended Decision was issued by the Administrative Law Judge (ALJ) that recommended approval of this amount without modification.
(3)On October 29, 2021, the Public Utility Law Judge issued a proposed order which, if approved by the Maryland PSC, will authorize $2.6 million in incremental annual revenue. The proposed order will become a final order on December 10, 2021, unless modified or reversed by the Maryland PSC.
(4)Columbia of Kentucky filed a Joint Stipulation, Settlement Agreement and Recommendation on October 27, 2021 for an annual revenue increase of $18.6 million.
(5)Proposed new rates would be implemented in 2 steps, with implementation of step 1 rates to be effective in September 2022 and step 2 rates to be effective in March 2023.
COVID-19 Regulatory Deferrals
In addition to the cost deferred to a regulatory asset as noted in Note 7, "Regulatory Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited), certain states have permitted us to track lost late and disconnect fee revenues due to the pandemic. While these costs do not qualify as regulatory assets under ASC 980, we will consider seeking recovery of these costs in future regulatory proceedings.
PHMSA Regulations
On December 27, 2020, the Protecting Our Infrastructure of Pipelines and Enhancing Safety (PIPES) Act of 2020 was signed into law, reauthorizing funding for federal pipeline safety programs through September 30, 2023. Among other things, the PIPES Act requires that PHMSA revise the pipeline safety regulations to require operators to update, as needed, their existing distribution integrity management plans, emergency response plans, and operation and maintenance plans. The PIPES Act also requires PHMSA to adopt new requirements for managing records and updating, as necessary, existing district regulator stations to eliminate common modes of failure that can lead to overpressurization. PHMSA must also require that operators implement leak detection and repair programs that meet safety needs and protect the environment, require the use of advanced leak detection practices and technologies, and require operators to be able to locate and categorize all leaks that are hazardous to human safety or the environment, or that can become hazardous. Natural gas companies, including us and our subsidiaries, may see increased costs depending on how PHMSA implements the new mandates resulting from the PIPES Act.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Regulatory and Other Matters
Climate Change Issues
Increased frequency of severe and extreme weather events associated with climate change could materially impact our facilities, energy sales, and results of operations. We are unable to predict these events. However, we perform ongoing assessments of physical risk, including physical climate risk, to our business. More extreme and volatile temperatures, increased storm intensity and flooding, and more volatile precipitation leading to changes in lake and river levels are among the weather events that are most likely to impact our business. Efforts to mitigate these physical risks continue to be implemented on an ongoing basis.
Future legislative and regulatory programs, at both the federal and state levels, could significantly limit allowed GHG emissions or impose a cost or tax on GHG emissions. Revised or additional future GHG legislation and/or regulation related to the generation of electricity or the extraction, production, distribution, transmission, storage and end use of natural gas could materially impact our gas supply,financial position, financial results and cash flows.
On July 8, 2019, the EPA published the final ACE rule, which establishes emission guidelines for states to use when developing plans to limit carbon dioxide at coal-fired electric generating units based on heat rate improvement measures. The U.S. Court of Appeals for the D.C. Circuit vacated and remanded the rule on January 19, 2021. On October 29, 2021, the U.S. Supreme Court agreed to review the scope of the EPA’s authority to impose GHG emission standards under the Clean Air Act. We will continue to monitor this matter.
In February 2021, the United States rejoined the Paris Agreement, an international treaty through which parties set nationally determined contributions to reduce GHG emissions, build resilience, and adapt to the impacts of climate change. Subsequently, the Biden Administration released a target for the United States to achieve a 50%-52% GHG reduction from 2005 levels by 2030, which supports the President's goals to create a carbon-free power sector by 2035 and net zero emissions economy no later than 2050. There are many pathways to reach these goals.
There is also increasing interest at the federal level to legislate GHG reductions related to the production, storage, transmission and use of electricity and natural gas. There is a proposal in draft Build Back Better legislation that contemplates a new methane fee. If enacted, certain NiSource gas storage facilities may be affected unless emissions are reduced, but the impact is not expected to be material, and any federally mandated costs are potentially recoverable through rates. On November 2, 2021, the EPA proposed methane regulations for the oil and natural gas industry. We continue to monitor all proposed legislation and regulations, but we cannot predict their final form or impact on our business at this time.
In October 2021, a work group of the Maryland Commission of Climate Change published a Building Energy Transition Plan. Policy proposals included in this draft plan, such as the adoption of an all-electric construction code, are supported by the Commission but do not necessarily reflect current state policy. The report is intended to guide Maryland policy makers on decisions related to reducing GHG emissions from buildings in pursuit of achieving targets in Maryland's 2030 Greenhouse Gas Reduction Act Plan and the Commission's recommendation that Maryland achieve net-zero emissions by 2045. Columbia of Maryland will continue to monitor this matter, but we cannot predict its final impact on our business at this time.
In response to these transition risks, we continue to actively implement our plans to reduce Scope 1 GHG emissions by 90 percent from 2005 levels, by 2030 through the retirement of coal-fired electric generation, increased sourcing of renewable energy, priority pipeline replacement, and leak detection and repair. As discussed above in this Management's Discussion within "Results and Discussion of Segment Operations - Electric Operations", NIPSCO continues to execute on an electric generation transition consistent with the preferred pathways identified in its 2018 and 2021 Integrated Resource Plans. We expect to have capital investment requirements of approximately $2.0 billion, primarily in 2022 and 2023, to replace the generation capacity previously supplied by R.M. Schahfer. NIPSCO has sold, and may in the future sell, renewable energy credits from this generation to third parties because this helps keep our energy more affordable for our customers.
Additionally, we joined the Low-Carbon Resources Initiative (LCRI) in 2021, a five-year initiative to accelerate the development and demonstration of low-carbon energy technologies. LCRI's Research Vision focuses on technologies such as clean hydrogen, bioenergy and renewable natural gas needed to enable affordable pathways to economy-wide decarbonization.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Off-Balance Sheet Arrangements
We, along with certain of our 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 15, ''Other Commitments and Contingencies,'' in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information about such arrangements.
Market Risk Disclosures
Risk is an inherent part of our businesses. The extent to which we properly and effectively identify, assess, monitor and manage each of the various types of risk involved in our businesses is critical to our profitability. We seek to identify, assess, monitor and manage, in accordance with defined policies and procedures, the following principal market risks that are involved in our businesses: commodity price risk, interest rate risk and credit risk. We manage risk through a multi-faceted process with oversight by the Risk Management Committee that requires constant communication, judgment and knowledge of specialized products and markets. Our 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 may 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, our risk management process, policies and procedures continue to evolve and are subject to ongoing review and modification.
Commodity Price Risk
We are exposed to commodity price risk as a result of our subsidiaries' operations involving natural gas and power. To manage this market risk, our subsidiaries use derivatives, including commodity futures contracts, swaps, forwards and options. We do not participate in speculative energy trading activity.
Commodity price risk resulting from derivative activities at our 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.
Our 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, some of which are reflected in our restricted cash balance, may fluctuate significantly during periods of high volatility in the energy commodity markets.
Refer to Note 8, "Risk Management Activities," in the Notes to Condensed Consolidated Financial Statements (unaudited) for further information on our commodity price risk assets and liabilities as of September 30, 2021 or December 31, 2020.
Interest Rate Risk
We are exposed to interest rate risk as a result of changes in interest rates on borrowings under our revolving credit agreement, commercial paper program, accounts receivable programs and now-settled term loan, which have interest rates that are indexed to short-term market interest rates. 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 $0.4 million and $1.8 million for the three and nine months ended September 30, 2021, and $3.2 million and $10.9 million for the three and nine months ended September 30, 2020, respectively. We are also exposed to interest rate risk as a result of changes in benchmark rates that can influence the interest rates of future debt issuances.
Refer to Note 8, "Risk Management Activities," in the Notes to Condensed Consolidated Financial Statements (unaudited) for further information on our interest rate risk assets and liabilities as of September 30, 2021 and December 31, 2020.
Credit Risk
Due to the nature of the industry, credit risk is embedded in many of our business activities. Our 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 us at a future date per execution of contractual terms and
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
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.
We closely monitor the financial status of our banking credit providers. We evaluate the financial status of our 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.
Certain individual state regulatory commissions instituted regulatory moratoriums in connection with the COVID-19 pandemic that impacted our ability to pursue our credit risk mitigation practices for customer accounts receivable. Following the issuances of these moratoriums, certain of our regulated operations have been authorized to recognize a regulatory asset for bad debt costs above levels currently in rates. We have now resumed our common credit mitigation practices in all jurisdictions as all moratoriums have expired. Refer to Note 7, "Regulatory Matters" in the Notes to Condensed Consolidated Financial Statements (unaudited) for state-specific regulatory moratoriums.
Other Information
Critical Accounting Estimates
For our annual goodwill impairment analysis performed as of May 1, 2021, we performed a qualitative "step 0" assessment and determined that it was more likely than not that the estimated fair value of the reporting unit substantially exceeded the related carrying value of our reporting unit. For this test, we assessed various assumptions, events and circumstances that would have affected the estimated fair value of the reporting units as compared to their baseline May 1, 2020 "step 1" fair value measurement. There have been no impairments to the carrying value of our goodwill during the periods presented.
Refer to Note 3, "Revenue Recognition," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information about management judgment used in determining allowance for credit losses.
Refer to Note 12, "Variable Interest Entities," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information about management judgement used in determining how to account for our VIE.
Recently Issued Accounting Pronouncements
Refer to Note 2, "Recent Accounting Pronouncements," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information about recently issued and adopted accounting pronouncements.
NiSource Inc.
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