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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, 2021.
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, 2021 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 Safety Management System ("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, as described in our 2018 Integrated Resource Plan ("2018 Plan"), is well underway, but we are facing challenges as described below. As of March 31, 2022, 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 2018 Plan. Further, we have placed three wind projects into service and completed the retirement of R.M. Schahfer Generating Station Units 14 and 15. We anticipate delays on our previously announced solar and storage projects due to several factors, including a recently announced U.S. Department of Commerce investigation. In connection with these delays, we currently expect to retire R.M. Schahfer's remaining two coal units by the end of 2025. For additional information, see "Results and Discussion of Segment Operations - Electric Operations," in this Management's Discussion and Part II, Item 1A. Risk Factors.
In 2021, we announced and filed with the IURC the Preferred Energy Resource Plan associated with our 2021 Integrated Resource Plan ("2021 Plan"). The 2021 Plan lays out a timeline to retire the Michigan City Generating Station to occur between 2026 and 2028. The 2021 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 2021 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 our 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 are continuing to evaluate potential projects under the 2021 Plan.
NiSource Next: Starting in 2021, we optimized our workforce by redefining roles to sharpen our focus on safety and risk mitigation, operational rigor, and adherence to process and procedures, as well as implemented consistent span of control for leadership to increase individual responsibility and clear accountability. Additionally, we began to make advancements across our operations to improve safety, operational efficiencies, and customer satisfaction through continued standardization of work processes, the implementation of new mobile technology to provide real-time access to information while serving our customers and enhanced customer self-service options to better meet customer expectations. These enhancements set the
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
foundation for 2022 and beyond, to continue improving safety and customer experience through analytics and significant technology investments.
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. For more information on supply chain impacts to our electric generation strategy, see "Results and Discussion of Segment Operations - Electric Operations," in this Management's Discussion and Part II, Item 1A. Risk Factors.
NIPSCO is experiencing a rail service shortage in deliveries of coal, particularly to its Michigan City Generating Station, and the primary rail carrier for that generating station is unable to provide assurance of adequate future service to maintain coal inventory. If the lack of adequate coal deliveries to any of our coal-fired generating facilities continues for an extended period into the summer, inventories could be depleted to a level that prevents the generating station from running, and NIPSCO would need to rely on market purchases of replacement power, which could increase the cost of electricity for NIPSCO's customers.
We are faced with increased competition for employee and contractor talent in the current labor market, which has resulted in increased costs to attract and retain talent. We are ensuring that we use all internal human capital programs (development, leadership enablement programs, succession, performance management) to promote retention of our current employees along with having competitive and attractive appeal for potential recruits. With a focus on workforce planning, we are creating flexible work arrangements where we can, and being anticipatory in evaluating our talent footprint for the future to ensure we have the right people, in the right role, and at the right time. To the extent we are unable to execute on our workforce planning initiatives and experience increased employee and contractor costs, our business operations, results of operations, cash flows, and financial condition could be materially adversely affected.
We have seen an increase in natural gas costs as the spot market for natural gas has substantially increased since the start of 2022. Low levels of gas in storage, continued liquified natural gas demand to ship U.S. supplies to Europe, and the slow ramp up in domestic production have contributed to the steep rise in gas commodity costs, which we expect to have an effect on customer bills through 2022. For the quarter ended March 31, 2022, we have not seen this increase 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."
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 months ended March 31, 2022 and 2021 are presented below:
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| (in millions, except per share amounts) | 2022 | 2021 | Favorable (Unfavorable) | ||||||||||||||||||||||||||||||||
| Operating Revenues | $ | 1,873.3 | $ | 1,545.6 | $ | 327.7 | |||||||||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||||||||
| Cost of energy | 706.7 | 476.8 | (229.9) | ||||||||||||||||||||||||||||||||
| Other Operating Expenses | 566.3 | 635.6 | 69.3 | ||||||||||||||||||||||||||||||||
| Total Operating Expenses | 1,273.0 | 1,112.4 | (160.6) | ||||||||||||||||||||||||||||||||
| Operating Income | 600.3 | 433.2 | 167.1 | ||||||||||||||||||||||||||||||||
| Total Other Deductions, net | (72.8) | (74.1) | 1.3 | ||||||||||||||||||||||||||||||||
| Income Taxes | 96.2 | 62.6 | (33.6) | ||||||||||||||||||||||||||||||||
| Net Income | 431.3 | 296.5 | 134.8 | ||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interest | 4.5 | 1.0 | (3.5) | ||||||||||||||||||||||||||||||||
| Net Income Attributable to NiSource | 426.8 | 295.5 | 131.3 | ||||||||||||||||||||||||||||||||
| Preferred dividends | (13.8) | (13.8) | — | ||||||||||||||||||||||||||||||||
| Net Income Available to Common Shareholders | 413.0 | 281.7 | 131.3 | ||||||||||||||||||||||||||||||||
| Earnings Per Share | |||||||||||||||||||||||||||||||||||
| Basic Earnings Per Share | $ | 1.02 | $ | 0.72 | $ | 0.30 | |||||||||||||||||||||||||||||
| Diluted Earnings Per Share | $ | 0.94 | $ | 0.72 | $ | 0.22 | |||||||||||||||||||||||||||||
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.
The increase in net income available to common shareholders during 2022 was primarily due to higher revenues from outcomes of gas base rate proceedings and regulatory capital programs, as well as an insurance settlement related to the Greater Lawrence Incident, offset by higher costs of energy and income taxes in 2022 compared to the 2021. For additional information on the insurance settlement see Note 15, "Other Commitments and Contingencies - C. Other Greater Lawrence Incident Matters" in the Notes to the Condensed Consolidated Financial Statements (unaudited) for additional information.
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 in 2022 is comparable to the same period in 2021. 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.
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. 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 months ended March 31, 2022 and 2021 are presented below:
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| (in millions) | 2022 | 2021 | Favorable (Unfavorable) | ||||||||||||||||||||||||||||||||
| Operating Revenues | $ | 1,439.8 | $ | 1,138.9 | $ | 300.9 | |||||||||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||||||||
| Cost of energy | 589.1 | 379.0 | (210.1) | ||||||||||||||||||||||||||||||||
| Operation and maintenance | 277.3 | 248.8 | (28.5) | ||||||||||||||||||||||||||||||||
| Depreciation and amortization | 100.7 | 92.9 | (7.8) | ||||||||||||||||||||||||||||||||
| Loss (gain) on sale of fixed assets and impairments, net | (105.0) | 8.1 | 113.1 | ||||||||||||||||||||||||||||||||
| Other taxes | 66.9 | 63.2 | (3.7) | ||||||||||||||||||||||||||||||||
| Total Operating Expenses | 929.0 | 792.0 | (137.0) | ||||||||||||||||||||||||||||||||
| Operating Income | $ | 510.8 | $ | 346.9 | $ | 163.9 | |||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Residential | $ | 977.6 | $ | 782.3 | $ | 195.3 | |||||||||||||||||||||||||||||
| Commercial | 357.5 | 272.9 | 84.6 | ||||||||||||||||||||||||||||||||
| Industrial | 68.1 | 58.2 | 9.9 | ||||||||||||||||||||||||||||||||
| Off-System | 18.7 | 14.4 | 4.3 | ||||||||||||||||||||||||||||||||
| Other | 17.9 | 11.1 | 6.8 | ||||||||||||||||||||||||||||||||
| Total | $ | 1,439.8 | $ | 1,138.9 | $ | 300.9 | |||||||||||||||||||||||||||||
| Sales and Transportation (MMDth) | |||||||||||||||||||||||||||||||||||
| Residential | 122.9 | 118.4 | 4.5 | ||||||||||||||||||||||||||||||||
| Commercial | 79.9 | 74.3 | 5.6 | ||||||||||||||||||||||||||||||||
| Industrial | 135.1 | 136.4 | (1.3) | ||||||||||||||||||||||||||||||||
| Off-System | 4.3 | 5.4 | (1.1) | ||||||||||||||||||||||||||||||||
| Other | 0.2 | 0.2 | — | ||||||||||||||||||||||||||||||||
| Total | 342.4 | 334.7 | 7.7 | ||||||||||||||||||||||||||||||||
| Heating Degree Days | 2,841 | 2,703 | 138 | ||||||||||||||||||||||||||||||||
| Normal Heating Degree Days | 2,824 | 2,854 | (30) | ||||||||||||||||||||||||||||||||
| % Colder (Warmer) than Normal | 1 | % | (5) | % | |||||||||||||||||||||||||||||||
| % Colder than 2021 | 5 | % | |||||||||||||||||||||||||||||||||
| Gas Distribution Customers | |||||||||||||||||||||||||||||||||||
| Residential | 2,980,965 | 2,965,004 | 15,961 | ||||||||||||||||||||||||||||||||
| Commercial | 254,876 | 254,188 | 688 | ||||||||||||||||||||||||||||||||
| Industrial | 4,920 | 4,965 | (45) | ||||||||||||||||||||||||||||||||
| Other | 3 | 3 | — | ||||||||||||||||||||||||||||||||
| Total | 3,240,764 | 3,224,160 | 16,604 |
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
The underlying reasons for changes in our operating revenues for the three months ended March 31, 2022 compared to the same period in 2021 are presented below.
| Favorable (Unfavorable) | |||||||||||
| Changes in Operating Revenues (in millions) | Three Months Ended March 31, 2022 vs 2021 | ||||||||||
| New rates from base rate proceedings and regulatory capital programs | 61.1 | ||||||||||
| The effects of colder weather in 2022 compared to 2021 | 10.5 | ||||||||||
| Higher revenue related to off system sales | 2.7 | ||||||||||
| The effects of customer growth | 2.3 | ||||||||||
| Higher revenue due to the effects of resuming common credit mitigation practices | 1.8 | ||||||||||
| Decreased customer usage | (4.8) | ||||||||||
| Other | 2.7 | ||||||||||
| Change in operating revenues (before cost of energy and other tracked items) | $ | 76.3 | |||||||||
| Operating revenues offset in operating expense | |||||||||||
| Higher cost of energy billed to customers | 210.1 | ||||||||||
| Higher tracker deferrals within operation and maintenance, depreciation, and tax | 14.5 | ||||||||||
| Total change in operating revenues | $ | 300.9 |
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
The increase in total volumes for the three months ended March 31, 2022 compared to the same period in 2021 is primarily attributable to the effects of colder weather.
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 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.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Gas Distribution Operations
The underlying reasons for changes in our operating expenses for the three months ended March 31, 2022 compared to the same period in 2021 are presented below.
| Favorable (Unfavorable) | |||||||||||
| Changes in Operating Expenses (in millions) | Three Months Ended March 31, 2022 vs 2021 | ||||||||||
| Property insurance settlement related to the Greater Lawrence Incident(1) | 105.0 | ||||||||||
| The loss on sale and expenses related to the Massachusetts Business in 2021 | 12.2 | ||||||||||
| Lower NiSource Next program expenses | 4.6 | ||||||||||
| Higher employee and administrative related expenses | (12.7) | ||||||||||
| Higher depreciation and amortization expense | (7.8) | ||||||||||
| Higher outside services expenses | (5.3) | ||||||||||
| Higher materials and supplies expense | (3.4) | ||||||||||
| Other | (5.0) | ||||||||||
| Change in operating expenses (before cost of energy and other tracked items) | $ | 87.6 | |||||||||
| Operating expenses offset in operating revenue | |||||||||||
| Higher cost of energy billed to customers | (210.1) | ||||||||||
| Higher tracker deferrals within operation and maintenance, depreciation, and tax | (14.5) | ||||||||||
| Total change in operating expense | (137.0) |
(1)See Note 15, ''Other Commitments and Contingencies,'' in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information.
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 months ended March 31, 2022 and 2021 are presented below:
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| (in millions) | 2022 | 2021 | Favorable (Unfavorable) | ||||||||||||||||||||||||||||||||
| Operating Revenues | 430.3 | $ | 402.7 | $ | 27.6 | ||||||||||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||||||||
| Cost of energy | 117.6 | 97.8 | (19.8) | ||||||||||||||||||||||||||||||||
| Operation and maintenance | 116.6 | 119.1 | 2.5 | ||||||||||||||||||||||||||||||||
| Depreciation and amortization | 82.9 | 83.4 | 0.5 | ||||||||||||||||||||||||||||||||
| Other taxes | 14.0 | 14.5 | 0.5 | ||||||||||||||||||||||||||||||||
| Total Operating Expenses | 331.1 | 314.8 | (16.3) | ||||||||||||||||||||||||||||||||
| Operating Income | $ | 99.2 | $ | 87.9 | $ | 11.3 | |||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Residential | $ | 138.5 | $ | 129.2 | $ | 9.3 | |||||||||||||||||||||||||||||
| Commercial | 134.5 | 122.9 | 11.6 | ||||||||||||||||||||||||||||||||
| Industrial | 130.0 | 123.1 | 6.9 | ||||||||||||||||||||||||||||||||
| Wholesale | 2.6 | 3.4 | (0.8) | ||||||||||||||||||||||||||||||||
| Other | 24.7 | 24.1 | 0.6 | ||||||||||||||||||||||||||||||||
| Total | $ | 430.3 | $ | 402.7 | $ | 27.6 | |||||||||||||||||||||||||||||
| Sales (GWh) | |||||||||||||||||||||||||||||||||||
| Residential | 819.2 | 804.6 | 14.6 | ||||||||||||||||||||||||||||||||
| Commercial | 885.3 | 867.9 | 17.4 | ||||||||||||||||||||||||||||||||
| Industrial | 2,007.8 | 2,063.3 | (55.5) | ||||||||||||||||||||||||||||||||
| Wholesale | 4.4 | 32.1 | (27.7) | ||||||||||||||||||||||||||||||||
| Other | 25.1 | 27.3 | (2.2) | ||||||||||||||||||||||||||||||||
| Total | 3,741.8 | 3,795.2 | (53.4) | ||||||||||||||||||||||||||||||||
| Electric Customers | |||||||||||||||||||||||||||||||||||
| Residential | 423,177 | 419,582 | 3,595 | ||||||||||||||||||||||||||||||||
| Commercial | 58,092 | 57,538 | 554 | ||||||||||||||||||||||||||||||||
| Industrial | 2,135 | 2,156 | (21) | ||||||||||||||||||||||||||||||||
| Wholesale | 712 | 720 | (8) | ||||||||||||||||||||||||||||||||
| Other | 2 | 2 | — | ||||||||||||||||||||||||||||||||
| Total | 484,118 | 479,998 | 4,120 |
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
The underlying reasons for changes in our operating revenues for the three months ended March 31, 2022 compared to the same period in 2021 are presented below.
| Favorable (Unfavorable) | |||||||||||
| Changes in Operating Revenues (in millions) | Three Months Ended March 31, 2021 vs 2021 | ||||||||||
| PPA revenue from renewable joint venture projects | $ | 8.5 | |||||||||
| The effects of customer growth | 1.3 | ||||||||||
| New rates from regulatory capital and DSM programs | 1.1 | ||||||||||
| Decreased fuel handling costs | 1.1 | ||||||||||
| Decreased customer usage | (3.2) | ||||||||||
| Other | 1.4 | ||||||||||
| Change in operating revenues (before cost of energy and other tracked items) | $ | 10.2 | |||||||||
| Operating revenues offset in operating expense | |||||||||||
| Higher cost of energy billed to customers | 19.8 | ||||||||||
| Lower tracker deferrals within operation and maintenance, depreciation and tax | (2.4) | ||||||||||
| Total change in operating revenues | $ | 27.6 |
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
The decrease in total volumes sold for the three months ended March 31, 2022 compared to the same period in 2021 was primarily attributable to decreased usage primarily by industrial customers.
Commodity Price Impact
Cost of energy for the Electric Operations segment is principally comprised of the cost of coal, natural gas purchased for internal generation of electricity at NIPSCO, and the cost of power purchased from generators of electricity. NIPSCO has a state-approved recovery mechanism that provides a means for full recovery of prudently incurred costs of energy. The majority of these costs of energy are passed through directly to the customer, and the costs of energy included in operating revenues are matched with the cost of energy 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.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Electric Operations
The underlying reasons for changes in our operating expenses for the three months ended March 31, 2022 compared to the same period in 2021 are presented below.
| Favorable (Unfavorable) | |||||||||||
| Changes in Operating Expenses (in millions) | Three Months Ended March 31, 2022 vs 2021 | ||||||||||
| Lower outside services expenses | $ | 6.1 | |||||||||
| Lower depreciation and amortization expense driven by the joint venture depreciation adjustment(1) | 3.2 | ||||||||||
| Lower materials and supplies expenses | 2.5 | ||||||||||
| Renewable joint venture project expenses | (6.9) | ||||||||||
| Effects of environmental recoveries in 2021 | (5.2) | ||||||||||
| Other | 1.4 | ||||||||||
| Change in operating expenses (before cost of energy and other tracked items) | $ | 1.1 | |||||||||
| Operating expenses offset in operating revenue | |||||||||||
| Higher cost of energy billed to customers | (19.8) | ||||||||||
| Lower tracker deferrals within operation and maintenance, depreciation and tax | 2.4 | ||||||||||
| Total change in operating expense | $ | (16.3) |
(1)See Note 7, "Regulatory Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information.
Electric Supply and Generation Transition
NIPSCO continues to execute on an electric generation transition consistent with the 2018 Plan, which outlines plans to retire its remaining coal-fired generation by 2028, to be replaced by lower-cost, reliable and cleaner options. We expect to have capital investment requirements of approximately $2.0 billion, primarily between 2022 and 2024, with any remainder expected in 2025, to replace the generation capacity of 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 coal units are currently expected to be retired by the end of 2025. See additional discussion in Part II, Item 1A. Risk Factors. See "Expected Project Delays" discussion, below, for anticipated barriers to the success of our electric generation transition.
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
Under our current replacement plan, we have placed three wind projects into service, totaling approximately 804 MW of nameplate capacity. The following table summarizes the remaining executed PPAs and BTAs from our generation transition that have yet to begin commercial operations. All announced projects have received IURC approval.
| Project Name | Transaction Type | Technology | Nameplate Capacity (MW) | Storage Capacity (MW) | Original Targeted Construction Completion | Estimated Construction Completion | |||||||||||||||||
| Dunn's Bridge I(1) | BTA | Solar | 265 | — | Q4 2022 | 2023 | |||||||||||||||||
| Indiana Crossroads(1) | BTA | Solar | 200 | — | Q4 2022 | 2023 | |||||||||||||||||
| Dunn's Bridge II(1) | BTA | Solar & Storage | 435 | 75 | Q4 2023 | 2023 - 2024 | |||||||||||||||||
| Cavalry(1) | BTA | Solar & Storage | 200 | 60 | Q4 2023 | 2023 - 2024 | |||||||||||||||||
| Fairbanks(1) | BTA | Solar | 250 | — | Q3 2023 | 2024 - 2025 | |||||||||||||||||
| Elliott(1) | BTA | Solar | 200 | — | Q2 2023 | 2024 - 2025 | |||||||||||||||||
| Indiana Crossroads II | 15 year PPA | Wind | 204 | — | Q4 2023 | 2023 | |||||||||||||||||
| Brickyard | 20 year PPA | Solar | 200 | — | Q4 2022 | 2024 | |||||||||||||||||
| Greensboro | 20 year PPA | Solar & Storage | 100 | 30 | Q4 2022 | 2023 - 2024 | |||||||||||||||||
| Gibson | 22 year PPA | Solar | 280 | — | Q2 2023 | 2024 | |||||||||||||||||
| Green River | 20 year PPA | Solar | 200 | — | Q2 2023 | 2024 |
(1)Ownership of the facility will be transferred to joint ventures whose members include NIPSCO and an unrelated tax equity partner.
Expected Project Delays. Compared to the previously disclosed targeted construction completion dates in our Annual Report on Form 10-K for the year ended December 31, 2021, we estimate delays for most projects to range from six to 18 months, resulting in the majority of our projects, and investment, being in service in 2023 and 2024. We do not currently anticipate any delays to the 2023 in-service date of our outstanding wind energy project. The expected delays and inflationary cost pressures communicated from the developers of our solar and storage projects are primarily due to (i) unavailability of solar panels and other uncertainties related to the pending U.S. Department of Commerce investigation on Antidumping and Countervailing Duties petition filed by a domestic solar manufacturer (the "DOC Investigation"), (ii) the U.S. Department of Homeland Security's June 2021 Withhold Release Order on silica-based products made by Hoshine Silicon Industry Co., Ltd., (iii) Section 201 Tariffs and (iv) persistent general global supply chain and labor availability issues. We are also monitoring potential delays communicated by the developers of our renewable energy projects related to local permitting processes and obtaining interconnection rights. Preliminary findings from the DOC Investigation, including potential tariff amounts, are expected to be released in August 2022, with a final decision expected between January 2023 and March 2023. We have received and are evaluating several notices of possible force majeure from developers in connection with solar panel availability. The resolution of these issues, including the final conclusion of the DOC Investigation will determine what additional costs or delays our solar projects will be subject to as a result of any tariffs imposed. If any of these impacts result in cost increases for certain projects, such potential impacts are expected to result in the need for us to seek additional regulatory review and approvals. Additionally, significant changes to project costs and schedules as a result of these factors could impact the viability of the projects.
We, along with the developers of these generation projects, are continuously evaluating potential impacts to the targeted completion date of each project. Delays to the completion dates of our projects could also include delays in the financial return of certain investments and impact the overall timing of our electric generation transition. Although we are not currently expecting delays to extend the completion dates of our six solar and storage BTA projects beyond the currently planned sunset of investment tax credits at the end of 2025, if such delays occur, they could impact the economic viability of the projects.
For additional discussion on the foregoing matters, see Part II, Item 1A. Risk Factors.
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. On February 18, 2022, we amended our revolving credit agreement to, among other things, extend its term to February 18, 2027. 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 March 31, 2022, the ATM program (including the impact of the forward sale agreement) had approximately $300.0 million of equity available for issuance. We also expect to remarket the Series C Mandatory Convertible Preferred stock prior to December 1, 2023, which could result in additional cash proceeds. 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 2022 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 three months ended March 31, 2022 was $579.8 million, an increase of $131.5 million compared to the three months ended March 31, 2021. This increase was primarily driven by year over year increased cash inflows related to the collection of under-recovered gas and fuel costs.
Investing Activities
Net cash used for investing activities for the three months ended March 31, 2022 was $370.4 million, a decrease of $31.4 million compared to the three months ended March 31, 2021. Our current year investing activities were comprised of increased capital expenditures related to system growth and reliability, offset by the property insurance settlement related to the Greater Lawrence Incident.
As we evaluate adjustments to renewable generation project timing, the company remains on track to make capital investments totaling approximately $8 billion during the 2022-2024 period. We expect to have capital investment requirements of approximately $2.0 billion, primarily between 2022 and 2024, with any remainder expected in 2025, to replace the generation capacity of R.M. Schahfer Generating Station's coal-fired units. We have flexibility in the timing of other gas and electric infrastructure capital investments that can allow adjustments to compensate for delays in renewable generation projects. These forecasted capital investments and those included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 are subject to continuing review and adjustment. Actual capital expenditures may vary from these estimates. For example, the timing and ultimate cost associated with solar and battery storage capital expenditures may vary due to the U.S. Department of Commerce's investigation into an Antidumping and Countervailing Duties circumvention claim on solar cells and panels supplied from Malaysia, Vietnam, Thailand and Cambodia. For additional information, see "Results and Discussion of Segment Operations - Electric Operations," in this Management's Discussion and Part II, Item 1A. Risk Factors.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
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 2022, 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(2) | IRP - 2022 | $ | 25.0 | $ | 232.9 | 1/21-12/21 | 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 2022 | ||||||||||||
| Columbia of Ohio(2) | CEP - 2022 | 32.2 | 253.5 | 1/21-12/21 | Assets not included in the IRP. | September 2022 | ||||||||||||||
| NIPSCO - Gas | TDSIC 4 | 17.2 | 77.5 | 7/21-12/21 | New or replacement projects undertaken for the purpose of safety, reliability, system modernization or economic development. | July 2022 | ||||||||||||||
| NIPSCO - Gas | FMCA 7 | 0.4 | 32.8 | 4/21-9/21 | Project costs to comply with federal mandates. | April 2022 | ||||||||||||||
| Columbia of Virginia(3) | SAVE - 2022 | 4.0 | 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 Maryland | STRIDE - 2022 | $ | 1.3 | $ | 17.5 | 1/22-12/22 | Pipeline upgrades designed to improve public safety or infrastructure reliability. | January 2022 | ||||||||||||
| NIPSCO - Electric(4) | 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 | ||||||||||||
| NIPSCO - Electric(5) | TDSIC - 1 | $ | 10.4 | $ | 148.5 | 6/21-1/22 | New or replacement projects undertaken for the purpose of safety, reliability, system modernization or economic development. | August 2022 | ||||||||||||
(1)Programs do not include any costs already included in base rates.
(2)The January through March 2021 investments included in these filings are also included in the pending Columbia of Ohio rate case. The infrastructure filings will be adjusted to reflect the final rate case outcome.
(3)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. The Commission approved the Company's application in its December 6, 2021 Order Approving SAVE Rider.
(4)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 the TDSIC-9 petition on September 28, 2021, with capital investment through the plan termination date of May 2021, and received an order on January 26, 2022 approving TDSIC-9.
(5) NIPSCO filed for a new electric TDSIC plan on June 1, 2021. An order approving NIPSCO's new electric TDSIC plan was received on December 28, 2021. NIPSCO filed its first tracker, TDSIC – 1, on March 30, 2022. An order is expected in July 2022 with rates requested to be effective August 2022.
In 2022, NIPSCO filed additional petitions associated with the FMCA program to recover federally mandated compliance investments.
On March 30, 2022, NIPSCO Electric filed a petition with the IURC seeking approval of NIPSCO's federally mandated costs for closure of Michigan City Generating Station's CCR ash ponds. The project includes a total estimated $40.0 million of federally mandated retirement costs. NIPSCO is requesting all associated accounting and ratemaking relief, including establishment of a periodic rate adjustment through the FMCA mechanism. Refer to Note 15, ''Other Commitments and Contingencies - D Environmental Matters,'' in the Notes to the Condensed Consolidated Financial Statements (unaudited) for further discussion of the CCRs.
On April 1, 2022, NIPSCO Gas filed a petition with the IURC seeking approval of NIPSCO's federally mandated costs for a Pipeline Safety III Compliance Plan. The federally mandated costs include a total estimated $228.7 million of capital costs as well as $34.1 million of operation and maintenance programs. NIPSCO Gas is requesting all associated accounting and ratemaking relief, including establishment of a periodic rate adjustment mechanism.
Financing Activities
Common Stock, Preferred Stock and Equity Unit Sale. Refer to Note 5, ''Equity,'' in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on common and preferred stock activity.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
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.
Noncontrolling Interest. Refer to Note 12, "Variable Interest Entities," in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on contributions from noncontrolling interest activity.
Sources of Liquidity
The following table displays our liquidity position as of March 31, 2022 and December 31, 2021:
| (in millions) | March 31, 2022 | December 31, 2021 | ||||||
| Current Liquidity | ||||||||
| Revolving Credit Facility | $ | 1,850.0 | $ | 1,850.0 | ||||
| Accounts Receivable Programs(1) | 480.0 | 251.2 | ||||||
| Less: | ||||||||
| Commercial Paper | 165.0 | 560.0 | ||||||
| Accounts Receivable Programs Utilized | 355.0 | — | ||||||
| Letters of Credit Outstanding Under Credit Facility | 14.4 | 18.9 | ||||||
| Add: | ||||||||
| Cash and Cash Equivalents | 114.5 | 84.2 | ||||||
| Net Available Liquidity | $ | 1,910.1 | $ | 1,606.5 |
(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 March 31, 2022, the ratio was 56.4%.
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 March 31, 2022. There were no changes to the below credit ratings or outlooks since February 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 March 31, 2022, the collateral requirement that would be required in the event of a downgrade below the ratings trigger levels would amount to approximately $58.1 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 March 31, 2022, 405,734,408 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, 2021. There were no material changes from year-end during the three months ended March 31, 2022.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Guarantees, Indemnities and Other Off Balance Sheet Arrangements. 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. Such agreements include guarantees and stand-by letters of credit. Refer to Note 15, ''Other Commitments and Contingencies,'' in the Notes to the Condensed Consolidated Financial Statements (unaudited) for additional information about such arrangements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Regulatory, Environmental and Safety 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.
We recognize that energy efficiency reduces emissions, conserves natural resources and saves our customers money. Our gas distribution companies offers programs such as energy efficiency upgrades, home checkups and weatherization services. The increased efficiency of natural gas appliances and improvements in home building codes and standards contributes to a long-term trend of declining average use per customer. While we are looking to expand offerings so the energy efficiency programs can benefit as many customers as possible, our 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 future growth in per customer usage as a result of 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, Environmental and Safety 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 | ||||||||||||||||
| Currently Approved in Current or Future Rates | |||||||||||||||||||||||
| Columbia of Pennsylvania(1) | 10.95 | % | None specified | $ | 98.3 | $ | 58.5 | March 30, 2021 | Approved December 16, 2021 | December 2021 | |||||||||||||
| Columbia of Maryland | 10.85 | % | 9.65 | % | $ | 4.8 | $ | 2.4 | May 14, 2021 | Approved December 3, 2021 | December 2021 | ||||||||||||
| Columbia of Kentucky(2) | 10.30 | % | 9.35 | % | $ | 26.7 | $ | 18.3 | May 28, 2021 | Approved December 28, 2021 | January 2022 | ||||||||||||
| Columbia of Virginia(3) | 10.95 | % | None specified | $ | 14.2 | $ | 1.3 | August 28, 2018 | Approved June 12, 2019 | February 2019 | |||||||||||||
| Columbia of Ohio | 11.50 | % | 10.39 | % | $ | 87.8 | $ | 47.1 | March 3, 2008 | Approved December 3, 2008 | December 2008 | ||||||||||||
| NIPSCO - Gas | 10.70 | % | 9.85 | % | $ | 138.1 | $ | 105.6 | September 27, 2017 | Approved September 19, 2018 | October 2018 | ||||||||||||
| NIPSCO - Electric | 10.80 | % | 9.75 | % | $ | 21.4 | $ | (53.5) | October 31, 2018 | Approved December 4, 2019 | January 2020 | ||||||||||||
| Active Rate Cases | |||||||||||||||||||||||
| Columbia of Ohio(4) | 10.95 | % | In process | $ | 221.4 | In process | June 30, 2021 | Order Expected Q3 2022 | Q3 2022 | ||||||||||||||
| NIPSCO - Gas(5) | 10.50 | % | In process | $ | 109.7 | In process | September 29, 2021 | Order Expected Q3 2022 | September 2022 | ||||||||||||||
| Columbia of Pennsylvania | 11.20 | % | In process | $ | 82.2 | In process | March 18, 2022 | Order Expected Q4 2022 | December 2022 | ||||||||||||||
| Columbia of Virginia(6) | 10.75 | % | In process | $ | 40.6 | In process | April 29, 2022 | Pending procedural schedule | October 2022 |
(1)No approved ROE is identified for this matter since the approved revenue increase is the result of a black box settlement under which parties agree upon the amount of increase without specifying ratemaking elements to establish the Company's revenue requirement. Pursuant to the settlement, for purposes of calculating its DSIC, Columbia of Pennsylvania shall use the equity return rate for gas utilities contained in the Pennsylvania Commission’s most recent Quarterly Report on the Earnings of Jurisdictional Utilities, including quarterly updates thereto.
(2)The approved ROE for natural gas capital riders (e.g. SMRP) is 9.275%.
(3)Columbia of Virginia's rate case resulted in a black box settlement, representing a settlement to a specific revenue increase but not a specified ROE. The settlement provides use of a 9.70% ROE for future SAVE filings.
(4)A proposed Incremental Revenue of $212.3M is reflected in the update filed with the PUCO on March 31, 2022.
(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. A proposed ROE of 9.85% and Incremental Revenue of $71.8M are reflected in the Settlement and Stipulation Agreement filed with the IURC on March 2, 2022.
(6)The revenue request including the SAVE tracker related amount is $58.2 million. Beginning October 2022, interim rates will be billed subject to refund, pending a final commission order.
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 and utilize advanced leak detection technologies that enable the location and categorization of all leaks that are hazardous, or potentially hazardous, to human safety or the environment. Natural gas companies, including NiSource 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, Environmental and Safety 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. We continue to monitor the implementation of any final and proposed climate change-related legislation and regulations, including the Infrastructure Investment and Jobs Act, passed in November 2021, and the EPA's proposed methane regulations for the oil and natural gas industry, but we cannot predict their final form or impact on our business at this time. We have identified potential opportunities associated with the Infrastructure Investment and Jobs Act and are evaluating how they may align with our strategy going forward. The energy-related provisions include new federal funding for power grid infrastructure and resiliency investments, new and existing energy efficiency and weatherization programs, electric vehicle infrastructure for public chargers and additional LIHEAP funding over the next five years.
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.
The Virginia Clean Economy Act was signed into law in 2020. While the Act does not establish any new mandates on Columbia of Virginia, certain natural gas customers may, over the long-term, reduce their use of natural gas to meet the 100% renewable electricity requirement. Columbia of Virginia will continue to monitor this matter, but we cannot predict its final impact on our business at this time. Separately, the Virginia Energy Innovation Act ("the Act"), enacted into law in April 2022, and effective July 1, 2022, allows natural gas utilities to supply alternative forms of gas that meet certain standards and reduce emissions intensity. The Act also provides that the costs of enhanced leak detection and repair may be added to a utility’s plan to identify proposed eligible infrastructure replacement projects and related cost recovery mechanisms, known as the SAVE Plan. Furthermore, under the Act, utilities can recover eligible biogas supply infrastructure costs on an ongoing basis. The provisions of these laws may provide opportunities for Columbia of Virginia as it participates in the transition to a lower carbon future.
The Climate Solutions Now Act of 2022 requires Maryland to reduce GHG emissions by 60% by 2031 (from 2006 levels), and it requires the state to reach net zero emissions by 2045. The Maryland Department of the Environment is required to adopt a plan to achieve the 2031 goal by December 2023, and it is required to adopt a plan for the net zero goal by 2030. The Act also enacts a state policy to move to broader electrification of both existing buildings and new construction, and requires the Public Service Commission to complete a study assessing the capacity of gas and electric distribution systems to successfully serve customers under a transition to a highly electrified building sector. 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 and opportunities, we continue to actively implement our plans to reduce Scope 1 GHG emissions by 90% from 2005 levels by 2030, and to significantly reduce methane emissions, a component of Scope 1 GHG emissions. These plans include the retirement of coal-fired electric generation, increased sourcing of renewable energy, and methane reductions from priority pipeline replacement, traditional leak detection and repair, and deployment of advanced leak detection and repair. As of the end of 2021, we had reduced Scope 1 GHG emissions by approximately 58% from 2005 levels.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Regulatory, Environmental and Safety Matters
Additionally, we are active in several efforts to accelerate the development and demonstration of lower-carbon energy technologies and resources, such as hydrogen and RNG, to enable affordable pathways to economy-wide decarbonization.
In April 2022, Columbia of Pennsylvania and Columbia of Virginia each filed petitions to implement the Green Path Rider, which will be a voluntary rider that allows customers to opt in and offset either 50% or 100% of their natural gas related emissions. To reduce the emissions, the utilities will purchase RNG attributes and carbon offsets to match the usage for customers opting into the program.
As discussed above in this Management's Discussion within "Results and Discussion of Segment Operations - Electric Operations," and Part II, Item 1A. Risk Factors, NIPSCO continues to execute on an electric generation transition consistent with the preferred pathways identified in its 2018 and 2021 Integrated Resource Plans.
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
Our Gas and Electric Operations have commodity price risk primarily related to the purchases of 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 and does not bear signification exposure to earnings risk, since our current regulatory mechanisms allow recovery of prudently incurred purchased power, fuel and gas costs through the rate-making process, including gains or losses on these derivative instruments. These changes are included in the GCA and FAC regulatory rate-recovery mechanisms. If these mechanisms were to be adjusted or eliminated, these subsidiaries may begin providing services without the benefit of the traditional rate-making process and may be more exposed to commodity price risk. For additional information, see "Results and Discussion of Segment Operations" in this Management's Discussion.
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 March 31, 2022 and December 31, 2021.
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 and accounts receivable programs, 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 $1.5 million and $1.2 million for the three months ended March 31, 2022 and 2021, 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 long-term debt issuances. From time to time we may enter into forward interest rate instruments to lock in long term interest costs and/ or rates.
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 March 31, 2022 and December 31, 2021.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
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 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.
Other Information
Critical Accounting Estimates
A summary of our critical accounting estimates is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. There were no material changes made in the three months ended March 31, 2022.
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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