filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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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 six months ended June 30, 2022 and 2021 are presented below.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (in millions) | 2022 | 2021 | Favorable (Unfavorable) | 2022 | 2021 | Favorable (Unfavorable) | |||||||||||||||||||||||||||||
| Operating Revenues | $ | 437.3 | $ | 403.7 | $ | 33.6 | $ | 867.6 | $ | 806.4 | $ | 61.2 | |||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||||||||
| Cost of energy | 130.4 | 99.3 | (31.1) | 248.0 | 197.1 | (50.9) | |||||||||||||||||||||||||||||
| Operation and maintenance | 124.2 | 127.3 | 3.1 | 240.8 | 246.4 | 5.6 | |||||||||||||||||||||||||||||
| Depreciation and amortization | 96.0 | 83.7 | (12.3) | 178.9 | 167.1 | (11.8) | |||||||||||||||||||||||||||||
| Other taxes | 14.1 | 13.8 | (0.3) | 28.1 | 28.3 | 0.2 | |||||||||||||||||||||||||||||
| Total Operating Expenses | 364.7 | 324.1 | (40.6) | 695.8 | 638.9 | (56.9) | |||||||||||||||||||||||||||||
| Operating Income | $ | 72.6 | $ | 79.6 | $ | (7.0) | $ | 171.8 | $ | 167.5 | $ | 4.3 | |||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Residential | $ | 137.1 | $ | 131.9 | $ | 5.2 | $ | 275.6 | $ | 261.1 | $ | 14.5 | |||||||||||||||||||||||
| Commercial | 134.7 | 129.9 | 4.8 | 269.2 | 252.8 | 16.4 | |||||||||||||||||||||||||||||
| Industrial | 138.9 | 119.2 | 19.7 | 268.9 | 242.3 | 26.6 | |||||||||||||||||||||||||||||
| Wholesale | 3.9 | 3.1 | 0.8 | 6.5 | 6.5 | — | |||||||||||||||||||||||||||||
| Other | 22.7 | 19.6 | 3.1 | 47.4 | 43.7 | 3.7 | |||||||||||||||||||||||||||||
| Total | $ | 437.3 | $ | 403.7 | $ | 33.6 | $ | 867.6 | $ | 806.4 | $ | 61.2 | |||||||||||||||||||||||
| Sales (GWh) | |||||||||||||||||||||||||||||||||||
| Residential | 845.4 | 821.0 | 24.4 | 1,664.6 | 1,625.6 | 39.0 | |||||||||||||||||||||||||||||
| Commercial | 915.3 | 904.2 | 11.1 | 1,800.6 | 1,772.1 | 28.5 | |||||||||||||||||||||||||||||
| Industrial | 1,994.7 | 2,150.8 | (156.1) | 4,002.5 | 4,214.1 | (211.6) | |||||||||||||||||||||||||||||
| Wholesale | 27.7 | 12.4 | 15.3 | 32.1 | 44.5 | (12.4) | |||||||||||||||||||||||||||||
| Other | 24.5 | 20.3 | 4.2 | 49.6 | 47.6 | 2.0 | |||||||||||||||||||||||||||||
| Total | 3,807.6 | 3,908.7 | (101.1) | 7,549.4 | 7,703.9 | (154.5) | |||||||||||||||||||||||||||||
| Cooling Degree Days | 342 | 318 | 24 | 342 | 318 | 24 | |||||||||||||||||||||||||||||
| Normal Cooling Degree Days | 247 | 239 | 8 | 247 | 239 | 8 | |||||||||||||||||||||||||||||
| % Warmer than Normal | 38 | % | 33 | % | 38 | % | 33 | % | |||||||||||||||||||||||||||
| % Warmer than 2021 | 8 | % | 8 | % | |||||||||||||||||||||||||||||||
| Electric Customers | |||||||||||||||||||||||||||||||||||
| Residential | 423,365 | 420,347 | 3,018 | ||||||||||||||||||||||||||||||||
| Commercial | 58,156 | 57,637 | 519 | ||||||||||||||||||||||||||||||||
| Industrial | 2,133 | 2,148 | (15) | ||||||||||||||||||||||||||||||||
| Wholesale | 712 | 719 | (7) | ||||||||||||||||||||||||||||||||
| Other | 3 | 2 | 1 | ||||||||||||||||||||||||||||||||
| Total | 484,369 | 480,853 | 3,516 |
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 and six months ended June 30, 2022 compared to the same periods in 2021 are presented below.
| Favorable (Unfavorable) | |||||||||||
| Changes in Operating Revenues (in millions) | Three Months Ended June 30, 2022 vs 2021 | Six Months Ended June 30, 2022 vs 2021 | |||||||||
| FAC adjustment(1) | $ | (8.0) | $ | (8.0) | |||||||
| Decreased customer usage | (1.9) | (5.1) | |||||||||
| PPA revenue from renewable joint venture projects, mostly offset by JV operating expenses | 6.2 | 14.7 | |||||||||
| The effects of weather in 2022 compared to 2021 | 2.0 | 3.5 | |||||||||
| The effects of customer growth | 1.2 | 2.5 | |||||||||
| New rates from regulatory capital and DSM programs | 1.1 | 2.2 | |||||||||
| Other | 1.8 | 2.8 | |||||||||
| Change in operating revenues (before cost of energy and other tracked items) | $ | 2.4 | $ | 12.6 | |||||||
| Operating revenues offset in operating expense | |||||||||||
| Higher cost of energy billed to customers | 31.1 | 50.9 | |||||||||
| Higher (lower) tracker deferrals within operation and maintenance, depreciation and tax | 0.1 | (2.3) | |||||||||
| Total change in operating revenues | $ | 33.6 | $ | 61.2 |
(1)See Note 6, "Regulatory Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information.
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 and six months ended June 30, 2022 compared to the same periods 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 and six months ended June 30, 2022 compared to the same periods in 2021 are presented below.
| Favorable (Unfavorable) | |||||||||||
| Changes in Operating Expenses (in millions) | Three Months Ended June 30, 2022 vs 2021 | Six Months Ended June 30, 2022 vs 2021 | |||||||||
| Expenses related to the accelerated retirement of the R.M. Schahfer Generating Station's coal Units 14 and 15 in 2021 | $ | 8.6 | $ | 8.6 | |||||||
| Lower NiSource Next program expenses | 2.9 | 4.3 | |||||||||
| Lower outside services expenses | 0.5 | 6.4 | |||||||||
| Higher depreciation and amortization expense driven by the joint venture depreciation adjustment(1) | (10.1) | (6.9) | |||||||||
| Renewable joint venture project expenses, offset by JV operating revenues | (6.1) | (13.0) | |||||||||
| Effects of environmental recoveries in 2021 | (1.3) | (6.5) | |||||||||
| Other | (3.9) | (1.2) | |||||||||
| Change in operating expenses (before cost of energy and other tracked items) | $ | (9.4) | $ | (8.3) | |||||||
| Operating expenses offset in operating revenue | |||||||||||
| Higher cost of energy billed to customers | (31.1) | (50.9) | |||||||||
| Lower (higher) tracker deferrals within operation and maintenance, depreciation and tax | (0.1) | 2.3 | |||||||||
| Total change in operating expense | $ | (40.6) | $ | (56.9) |
(1)See Note 6, "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 2026-2028, 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 "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 to offset customer costs. 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, three wind projects have been placed 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 below have received IURC approval. Amendments are subject to additional IURC approval, as discussed in Note 15, ''Other Commitments and Contingencies - D. Other Matters,'' in the Notes to the Condensed Consolidated Financial Statements (unaudited).
| 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.
In June 2022, the U.S. Department of Homeland Security published its Uyghur Forced Labor Prevention Act Entity List (the "List"). None of the developers or suppliers of our renewable energy projects were named on the List. Additionally, the Biden Administration announced a 24-month tariff relief on solar panels subject to the ongoing U.S. Department of Commerce investigation and authorized the use of the Defense Production Act, to accelerate domestic production of clean energy technologies, including solar panel parts.
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.
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. On June 10, 2022, we completed the issuance and sale of $350.0 million of 5.00% senior unsecured notes maturing in 2052, which resulted in approximately $344.6 million of net proceeds after discount and debt issuance costs. We intend to disburse an amount equal to the net proceeds of the notes to finance, in whole or in part, the acquisition of our 302 MW Indiana Crossroads Wind project and 102 MW Rosewater Wind project from the project developer. 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 June 30, 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 six months ended June 30, 2022 was $907.2 million, an increase of $204.2 million compared to the six months ended June 30, 2021. This increase was primarily driven by year over year increased cash inflows related to the collection in 2022 of under-recovered gas and fuel costs from the prior year. We also received a refund in 2022 from a gas supplier that will be passed back to customers through the GCA mechanism in each affected jurisdiction.
Investing Activities
Net cash used for investing activities for the six months ended June 30, 2022 was $951.1 million, an increase of $88.7 million compared to the six months ended June 30, 2021. Our current year investing activities were comprised of increased capital expenditures related to system growth and reliability and a payment to a renewable generation asset developer related to the Dunn's Bridge I construction milestone payment, which were offset by insurance recoveries in the current year.
As we evaluate adjustments to renewable generation project timing, we remain 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. To partially compensate for delays in renewable generation projects, we are accelerating other gas and electric infrastructure capital investments into 2022 and 2023. These forecasted capital investments and those included in our 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.
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(3) | FMCA 1 | 8.4 | 14.1 | 10/21-3/22 | Project costs to comply with federal mandates. | October 2022 | ||||||||||||||
| Columbia of Virginia(4) | 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(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 | ||||||||||||
| NIPSCO - Electric(6) | 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)NIPSCO filed a new CPCN on April 1, 2022 for an additional Pipeline Safety III Compliance Plan, including $235.3M in capital and $34.1M in O&M expense project investments.
(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. The Commission approved the Company's application in its December 6, 2021 Order Approving SAVE Rider.
(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 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.
(6)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 was received and approved on July 27, 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 - C. 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.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Financing Activities
Common Stock, Preferred Stock and Equity Units. Refer to Note 5, ''Equity,'' in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on common and preferred stock activity.
Long-Term Debt. Refer to Note 13, ''Long-Term Debt,'' in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on long-term debt.
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 June 30, 2022 and December 31, 2021:
| (in millions) | June 30, 2022 | December 31, 2021 | ||||||
| Current Liquidity | ||||||||
| Revolving Credit Facility | $ | 1,850.0 | $ | 1,850.0 | ||||
| Accounts Receivable Programs(1) | 285.0 | 251.2 | ||||||
| Less: | ||||||||
| Commercial Paper | 270.0 | 560.0 | ||||||
| Accounts Receivable Programs Utilized | 285.0 | — | ||||||
| Letters of Credit Outstanding Under Credit Facility | 14.7 | 18.9 | ||||||
| Add: | ||||||||
| Cash and Cash Equivalents | 77.8 | 84.2 | ||||||
| Net Available Liquidity | $ | 1,643.1 | $ | 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 June 30, 2022, the ratio was 57.3%.
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 June 30, 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 June 30, 2022, the collateral requirement that would be required in the event of a downgrade below the ratings trigger levels would amount to approximately $65.8 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.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
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 June 30, 2022, 405,878,297 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. Except for our June debt issuance, there were no additional material changes from year-end during the six months ended June 30, 2022. Refer to Note 13, "Long-Term Debt," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information regarding the debt issuance.
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 | Pending | Pending | ||||||||||||||
| NIPSCO - Gas(5) | 10.50 | % | 9.85 | % | $ | 109.7 | $ | 71.8 | September 29, 2021 | Approved July 27, 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 | Order Expected Q1 2023 | October 2022 | ||||||||||||||
| Columbia Gas of Maryland | 10.95 | % | In process | $ | 5.5 | In process | May 13, 2022 | Order Expected Q4 2022 | December 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. Changes to the timeline for the Columbia Gas of Ohio rate case have been modified in light of the needed additional time for settlement negotiations and the litigation process to come to completion.
(5) New rates will 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.
(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
Physical Climate Risks. 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, the draft Inflation Reduction Act of 2022, 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.
Federal Policy. 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.
On June 30, 2022, the Supreme Court of the United States ruled for the petitioners in West Virginia v. EPA, which examined the authority of the EPA to regulate GHG emissions from the power sector. We will continue to evaluate this matter, but we remain committed to our previously stated carbon reduction goals.
State Policy. 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.
NIPSCO, Columbia of Maryland, 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.
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
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Regulatory, Environmental and Safety Matters
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. 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.
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. Additionally, as discussed above in this Management's Discussion within "Liquidity and Capital Resources - Regulatory Capital Programs," our natural gas distribution companies are lowering methane emissions by replacing aging infrastructure, which also increases safety and reliability for customers and communities.
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 7, "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 June 30, 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 $1.2 million and $2.7 million for the three and six months ended June 30, 2022, and $0.2 million and $1.4 million for the three and six months ended June 30, 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 7, "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 June 30, 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 as of June 30, 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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