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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, 2022.
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, 2022 for further discussion of our regulated utility business segments.
Our goal is to develop strategies that benefit all stakeholders as we (i) focus 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. Serving as a guiding practice for our SMS, NiSource is certified in conformance to the American Petroleum Institute Recommended Practice 1173, which is the foundation to our journey towards operational excellence. 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, initiated through our 2018 Integrated Resource Plan ("2018 Plan"), is well underway, and we are continually adjusting to the dynamic renewable energy landscape. We achieved in service status in June 2023 and substantial completion in August 2023 for our first two solar BTA's. We have also taken contractual actions on a number of our other renewable projects to address the timing of these projects as well as consider the broad market issues facing the industry. We remain on track to retire R.M Schahfer's remaining two coal units by the end of 2025. On January 1, 2023, the provisions of the IRA became effective. As a result of the IRA, we have made a filing with the IURC to fully-own two BTA projects in lieu of utilizing tax equity partnerships, and we are evaluating the impact of this legislation on our remaining projects, with potential to drive increased value to customers as part of our expansion of renewable projects and generation transition strategy. For additional information, see "Results and Discussion of Segment Operations - Electric Operations," in this Management's Discussion.
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 by the end of 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 new 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. In September of 2023, we filed a request for issuance of a certificate of public convenience and necessity for an approximately 400 MW natural gas peaking generation unit with the IURC. The planned retirement of the two vintage gas peaking units at the R.M. Schahfer Generating Station is also expected to occur by the end of 2028. Final retirement dates for these units, as well as Michigan City, will be subject to MISO approval.
NIPSCO Minority Equity Interest Sale: On June 17, 2023, NiSource and our wholly-owned subsidiary, NIPSCO Holdings II, entered into the BIP Purchase Agreement with an affiliate of BIP, pursuant to which BIP will acquire an indirect 19.9 percent equity interest in NIPSCO. Refer to Note 14, "Other Commitments and Contingencies - D. Other Matters," in the Notes to the Condensed Consolidated Financial Statements (unaudited) for more information on this transaction.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Transformation: Our enterprise-wide transformation roadmap focuses on operational excellence, safety, operation and maintenance management, and unlocking efficiencies. We are currently executing on several initiatives that will enable us to streamline work and improve logistics company-wide. These efforts will include investments in proven technologies backed with standardized processes that will change the way we plan, schedule, and execute work in the field and how we engage and provide service to our customers. Taken together, all the initiatives under the Enterprise-wide Transformation Roadmap will prioritize safety and continue to optimize our long-term growth profile.
Economic Environment: We continue to monitor 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 continue to see 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. Additionally, for more information on global availability of materials for our renewable projects, see "Results and Discussion of Segment Operations - Electric Operations - Electric Supply and Generation Transition."
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 a competitive and attractive appeal for potential recruits. With a focus on workforce planning, we are evaluating our future talent footprint by creating flexible work arrangements where possible to ensure we have the right people, in the right role, and at the right time.
After decreasing for the first three months of 2023, the market price of natural gas has stabilized at low levels, compared to 2022 prices, with little volatility. Changes in gas prices do not have a material impact on our results of operations, however higher natural gas prices can impact our cash flows and liquidity. For more information on our commodity price impacts, see "Results and Discussion of Segment Operations - Gas Distribution Operations," and "Market Risk Disclosures."
Due to rising interest rates, we experienced higher interest expense for the three and nine months periods ended September 30, 2023 compared to the same periods in 2022 associated with short-term borrowings. We continue to evaluate our financing plan to manage interest expense and exposure to rates. For more information on interest rate risk, see "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 and nine months ended September 30, 2023 and 2022 are presented below:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| (in millions, except per share amounts) | 2023 | 2022 | Favorable (Unfavorable) | 2023 | 2022 | Favorable (Unfavorable) | |||||||||||||||||||||||||||||
| Operating Revenues | $ | 1,027.4 | $ | 1,089.5 | $ | (62.1) | $ | 4,083.4 | $ | 4,146.0 | $ | (62.6) | |||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||||||||
| Cost of energy | 181.3 | 330.8 | 149.5 | 1,198.3 | 1,421.2 | 222.9 | |||||||||||||||||||||||||||||
| Other Operating Expenses | 613.1 | 602.0 | (11.1) | 1,952.2 | 1,824.5 | (127.7) | |||||||||||||||||||||||||||||
| Total Operating Expenses | 794.4 | 932.8 | 138.4 | 3,150.5 | 3,245.7 | 95.2 | |||||||||||||||||||||||||||||
| Operating Income | 233.0 | 156.7 | 76.3 | 932.9 | 900.3 | 32.6 | |||||||||||||||||||||||||||||
| Total Other Deductions, Net | (130.8) | (81.5) | (49.3) | (346.7) | (229.8) | (116.9) | |||||||||||||||||||||||||||||
| Income Taxes | 3.8 | 11.7 | 7.9 | 103.7 | 119.9 | 16.2 | |||||||||||||||||||||||||||||
| Net Income | 98.4 | 63.5 | 34.9 | 482.5 | 550.6 | (68.1) | |||||||||||||||||||||||||||||
| Net income (loss) attributable to noncontrolling interest | 13.3 | (2.3) | (15.6) | 5.6 | (9.0) | (14.6) | |||||||||||||||||||||||||||||
| Net Income Attributable to NiSource | 85.1 | 65.8 | 19.3 | 476.9 | 559.6 | (82.7) | |||||||||||||||||||||||||||||
| Preferred dividends | (8.1) | (13.8) | 5.7 | (40.8) | (41.4) | 0.6 | |||||||||||||||||||||||||||||
| Net Income Available to Common Shareholders | 77.0 | 52.0 | 25.0 | 436.1 | 518.2 | (82.1) | |||||||||||||||||||||||||||||
| Earnings Per Share | |||||||||||||||||||||||||||||||||||
| Basic Earnings Per Share | $ | 0.19 | $ | 0.13 | $ | 0.06 | 1.05 | $ | 1.28 | $ | (0.23) | ||||||||||||||||||||||||
| Diluted Earnings Per Share | $ | 0.17 | $ | 0.12 | $ | 0.05 | $ | 0.98 | $ | 1.18 | $ | (0.20) | |||||||||||||||||||||||
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 for the three months ended September 30, 2023 was primarily due to higher revenues, net of cost of energy, driven by rate increases from regulatory initiatives.
The decrease in net income available to common shareholders for the nine months ended September 30, 2023 is driven by the receipt of the insurance settlement related to the Greater Lawrence Incident received in 2022, as well as increased other deductions, partially offset by higher net revenues driven by rate increases from regulatory initiatives.
The decrease in preferred dividends for the three and nine months ended September 30, 2023 was due primarily to the redemption of Series A Preferred Stock in the second quarter 2023. See Note 5, "Equity," 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
The change in Other deductions, net for the three and nine months ended September 30, 2023 compared to the same period in 2022 is primarily driven by higher long-term and short-term debt interest in 2023 and higher non-service pension costs. See Note 12, "Long-Term Debt," Note 13, "Short-Term Borrowings," and Note 10, "Pension and Other Postemployment Benefits," in the Notes to the Condensed Consolidated Financial Statements (unaudited) for additional information.
Income Taxes
Refer to Note 9, "Income Taxes," in the Notes to the Condensed Consolidated Financial Statements (unaudited) for information on income taxes and the change in the effective tax rates for the periods presented.
We continue to monitor risks related to the implementation of any final or proposed tax regulations related to the IRA.
On April 14, 2023, the IRS issued Revenue Procedure 2023-15 which provides a safe harbor method of accounting that taxpayers may use to determine whether expenses to repair, maintain, replace, or improve linear property and non-linear natural
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
gas transmission and distribution property must be capitalized as improvements or are allowable as deductions. We continue to analyze the provisions of the safe harbor method of accounting which we expect to adopt.
RESULTS AND DISCUSSION OF SEGMENT OPERATIONS
Presentation of Segment Information
Our operations are divided into two primary reportable segments, the Gas Distribution Operations and the Electric Operations segments. The remainder of our operations, which are not significant enough on a stand-alone basis to warrant treatment as an operating segment, are presented as "Corporate and Other" within the Notes to the Condensed Consolidated Financial Statements (unaudited) and primarily are comprised of interest expense on holding company debt, and unallocated corporate costs and activities.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Gas Distribution Operations
Financial and operational data for the Gas Distribution Operations segment for the three and nine months ended September 30, 2023 and 2022 are presented below.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| (in millions) | 2023 | 2022 | Favorable (Unfavorable) | 2023 | 2022 | Favorable (Unfavorable) | |||||||||||||||||||||||||||||
| Operating Revenues | $ | 531.5 | $ | 575.5 | $ | (44.0) | $ | 2,731.8 | $ | 2,759.6 | $ | (27.8) | |||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||||||||
| Cost of energy | 72.1 | 158.0 | 85.9 | 823.1 | 1,000.5 | 177.4 | |||||||||||||||||||||||||||||
| Operation and maintenance | 241.0 | 237.0 | (4.0) | 789.5 | 774.1 | (15.4) | |||||||||||||||||||||||||||||
| Depreciation and amortization | 118.1 | 104.3 | (13.8) | 343.8 | 307.2 | (36.6) | |||||||||||||||||||||||||||||
| Gain on sale of fixed assets and impairments, net | — | — | — | — | (105.0) | (105.0) | |||||||||||||||||||||||||||||
| Other taxes | 48.1 | 42.8 | (5.3) | 160.9 | 158.0 | (2.9) | |||||||||||||||||||||||||||||
| Total Operating Expenses | 479.3 | 542.1 | 62.8 | 2,117.3 | 2,134.8 | 17.5 | |||||||||||||||||||||||||||||
| Operating Income | $ | 52.2 | $ | 33.4 | $ | 18.8 | $ | 614.5 | $ | 624.8 | $ | (10.3) | |||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Residential | $ | 352.7 | $ | 332.3 | $ | 20.4 | $ | 1,828.7 | $ | 1,772.7 | $ | 56.0 | |||||||||||||||||||||||
| Commercial | 108.9 | 115.5 | (6.6) | 627.4 | 634.3 | (6.9) | |||||||||||||||||||||||||||||
| Industrial | 46.4 | 42.9 | 3.5 | 169.6 | 159.3 | 10.3 | |||||||||||||||||||||||||||||
| Off-System | 9.8 | 72.7 | (62.9) | 49.9 | 150.5 | (100.6) | |||||||||||||||||||||||||||||
| Other | 13.7 | 12.1 | 1.6 | 56.2 | 42.8 | 13.4 | |||||||||||||||||||||||||||||
| Total | $ | 531.5 | $ | 575.5 | $ | (44.0) | $ | 2,731.8 | $ | 2,759.6 | $ | (27.8) | |||||||||||||||||||||||
| Sales and Transportation (MMDth) | |||||||||||||||||||||||||||||||||||
| Residential | 12.4 | 13.6 | (1.2) | 145.6 | 169.8 | (24.2) | |||||||||||||||||||||||||||||
| Commercial | 17.9 | 17.7 | 0.2 | 114.2 | 126.1 | (11.9) | |||||||||||||||||||||||||||||
| Industrial | 126.2 | 115.6 | 10.6 | 384.2 | 365.6 | 18.6 | |||||||||||||||||||||||||||||
| Off-System | 7.0 | 10.6 | (3.6) | 25.6 | 23.2 | 2.4 | |||||||||||||||||||||||||||||
| Other | — | — | — | 0.2 | 0.2 | — | |||||||||||||||||||||||||||||
| Total | 163.5 | 157.5 | 6.0 | 669.8 | 684.9 | (15.1) | |||||||||||||||||||||||||||||
| Heating Degree Days | 41 | 87 | (46) | 2,898 | 3,493 | (595) | |||||||||||||||||||||||||||||
| Normal Heating Degree Days | 60 | 60 | — | 3,428 | 3,428 | — | |||||||||||||||||||||||||||||
| % Colder (Warmer) than Normal | (32) | % | 45 | % | (15) | % | 2 | % | |||||||||||||||||||||||||||
| % Warmer than prior year | (53) | % | (17) | % | |||||||||||||||||||||||||||||||
| Gas Distribution Customers | |||||||||||||||||||||||||||||||||||
| Residential | 2,980,246 | 2,952,458 | 27,788 | ||||||||||||||||||||||||||||||||
| Commercial | 251,642 | 250,919 | 723 | ||||||||||||||||||||||||||||||||
| Industrial | 4,794 | 4,860 | (66) | ||||||||||||||||||||||||||||||||
| Other | 3 | 3 | — | ||||||||||||||||||||||||||||||||
| Total | 3,236,685 | 3,208,240 | 28,445 | ||||||||||||||||||||||||||||||||
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 and nine months ended September 30, 2023 compared to the same periods in 2022 are presented below.
| Favorable (Unfavorable) | |||||||||||||||||
| Changes in Operating Revenues (in millions) | Three Months Ended September 30, 2023 vs 2022 | Nine Months Ended September 30, 2023 vs 2022 | |||||||||||||||
| New rates from base rate proceedings and regulatory capital programs | $ | 42.3 | $ | 185.4 | |||||||||||||
| Increased customer usage | 1.0 | 1.5 | |||||||||||||||
| The effects of customer growth | 1.8 | 4.3 | |||||||||||||||
| The effects of weather in 2023 compared to 2022 | (2.6) | (41.3) | |||||||||||||||
| Other | 1.3 | 10.0 | |||||||||||||||
| Change in operating revenues (before cost of energy and other tracked items) | $ | 43.8 | $ | 159.9 | |||||||||||||
| Operating revenues offset in operating expense | |||||||||||||||||
| Lower cost of energy billed to customers | (85.9) | (177.4) | |||||||||||||||
| Lower tracker deferrals within operation and maintenance, depreciation, and tax | (3.1) | (1.9) | |||||||||||||||
| Increase (Reduction) in gross receipts tax, offset in operating expenses | 1.2 | (8.4) | |||||||||||||||
| Total change in operating revenues | $ | (44.0) | $ | (27.8) |
Weather
In general, we calculate the weather-related revenue variance based on changing customer demand driven by weather variance from normal heating degree days, net of weather normalization mechanisms. Our composite heating degree days reported do not directly correlate to the weather-related dollar impact on the results of Gas Distribution Operations. Heating degree days experienced during different times of the year or in different operating locations may have more or less impact on volume and dollars depending on when and where they occur. When the detailed results are combined for reporting, there may be weather-related dollar impacts on operations when there is not an apparent or significant change in our aggregated composite heating degree day comparison.
Throughput
The increase in total volumes for the three months ended September 30, 2023, compared to the same period in 2022, is primarily attributable to increased industrial usage.
The decrease in total volumes for the nine months ended September 30, 2023 compared to the same period in 2022, is primarily attributable to the effects of warmer 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 and nine months ended September 30, 2023 compared to the same periods in 2022 are presented below.
| Favorable (Unfavorable) | |||||||||||||||||
| Changes in Operating Expenses (in millions) | Three Months Ended September 30, 2023 vs 2022 | Nine Months Ended September 30, 2023 vs 2022 | |||||||||||||||
| Higher employee and administrative related expenses | $ | (8.2) | $ | (11.5) | |||||||||||||
| (Higher) lower materials and supplies expense | (3.1) | 1.6 | |||||||||||||||
| Property insurance settlement related to the Greater Lawrence Incident received in 2022 | — | (105.0) | |||||||||||||||
| Higher depreciation and amortization expense | (14.1) | (38.5) | |||||||||||||||
| Higher property tax | (2.0) | (11.8) | |||||||||||||||
| Lower environmental expenses | — | 5.4 | |||||||||||||||
| Impacts from Columbia of Ohio's rate case | (4.2) | (9.3) | |||||||||||||||
| Lower outside services expenses | 7.7 | 10.7 | |||||||||||||||
| Other | (1.1) | (11.8) | |||||||||||||||
| Change in operating expenses (before cost of energy and other tracked items) | $ | (25.0) | $ | (170.2) | |||||||||||||
| Operating expenses offset in operating revenue | |||||||||||||||||
| Lower cost of energy billed to customers | 85.9 | 177.4 | |||||||||||||||
| (Reduction) Increase in gross receipts tax, offset in operating revenues | (1.2) | 8.4 | |||||||||||||||
| Lower tracker deferrals within operation and maintenance, depreciation, and tax | 3.1 | 1.9 | |||||||||||||||
| Total change in operating expense | $ | 62.8 | $ | 17.5 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Electric Operations
Financial and operational data for the Electric Operations segment for the three and nine months ended September 30, 2023 and 2022 are presented below.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| (in millions) | 2023 | 2022 | Favorable (Unfavorable) | 2023 | 2022 | Favorable (Unfavorable) | |||||||||||||||||||||||||||||
| Operating Revenues | $ | 499.1 | $ | 516.5 | $ | (17.4) | $ | 1,360.9 | $ | 1,384.1 | $ | (23.2) | |||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||||||||
| Cost of energy | 109.2 | 172.8 | 63.6 | 375.3 | 420.8 | 45.5 | |||||||||||||||||||||||||||||
| Operation and maintenance | 122.2 | 126.5 | 4.3 | 374.7 | 367.3 | (7.4) | |||||||||||||||||||||||||||||
| Depreciation and amortization | 82.3 | 88.1 | 5.8 | 275.0 | 267.0 | (8.0) | |||||||||||||||||||||||||||||
| Gain on sale of assets | — | — | — | (0.1) | — | 0.1 | |||||||||||||||||||||||||||||
| Other taxes | 9.6 | 5.8 | (3.8) | 28.7 | 33.9 | 5.2 | |||||||||||||||||||||||||||||
| Total Operating Expenses | 323.3 | 393.2 | 69.9 | 1,053.6 | 1,089.0 | 35.4 | |||||||||||||||||||||||||||||
| Operating Income | $ | 175.8 | $ | 123.3 | $ | 52.5 | $ | 307.3 | $ | 295.1 | $ | 12.2 | |||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Residential | $ | 176.0 | $ | 178.7 | $ | (2.7) | $ | 449.2 | $ | 454.3 | $ | (5.1) | |||||||||||||||||||||||
| Commercial | 156.6 | 158.9 | (2.3) | 437.6 | 428.1 | 9.5 | |||||||||||||||||||||||||||||
| Industrial | 116.0 | 152.1 | (36.1) | 363.3 | 421.0 | (57.7) | |||||||||||||||||||||||||||||
| Wholesale | 15.4 | 4.1 | 11.3 | 25.5 | 10.6 | 14.9 | |||||||||||||||||||||||||||||
| Other | 35.1 | 22.7 | 12.4 | 85.3 | 70.1 | 15.2 | |||||||||||||||||||||||||||||
| Total | $ | 499.1 | $ | 516.5 | $ | (17.4) | $ | 1,360.9 | $ | 1,384.1 | $ | (23.2) | |||||||||||||||||||||||
| Sales (GWh) | |||||||||||||||||||||||||||||||||||
| Residential | 1,034.6 | 1,080.6 | (46.0) | 2,540.5 | 2,745.2 | (204.7) | |||||||||||||||||||||||||||||
| Commercial | 1,011.0 | 1,044.7 | (33.7) | 2,743.7 | 2,845.3 | (101.6) | |||||||||||||||||||||||||||||
| Industrial | 2,023.7 | 2,076.3 | (52.6) | 5,955.3 | 6,078.8 | (123.5) | |||||||||||||||||||||||||||||
| Wholesale | 0.2 | 4.9 | (4.7) | 0.9 | 37.0 | (36.1) | |||||||||||||||||||||||||||||
| Other | 17.6 | 17.9 | (0.3) | 58.2 | 67.5 | (9.3) | |||||||||||||||||||||||||||||
| Total | 4,087.1 | 4,224.4 | (137.3) | 11,298.6 | 11,773.8 | (475.2) | |||||||||||||||||||||||||||||
| Cooling Degree Days | 475 | 592 | (117) | 681 | 934 | (253) | |||||||||||||||||||||||||||||
| Normal Cooling Degree Days | 573 | 573 | — | 820 | 820 | — | |||||||||||||||||||||||||||||
| % (Colder) Warmer than Normal | (17) | % | 3 | % | (17) | % | 14 | % | |||||||||||||||||||||||||||
| % (Colder) than prior year | (20) | % | (27) | % | |||||||||||||||||||||||||||||||
| Electric Customers | |||||||||||||||||||||||||||||||||||
| Residential | 426,054 | 423,764 | 2,290 | ||||||||||||||||||||||||||||||||
| Commercial | 58,556 | 58,196 | 360 | ||||||||||||||||||||||||||||||||
| Industrial | 2,126 | 2,133 | (7) | ||||||||||||||||||||||||||||||||
| Wholesale | 708 | 711 | (3) | ||||||||||||||||||||||||||||||||
| Other | 3 | 3 | — | ||||||||||||||||||||||||||||||||
| Total | 487,447 | 484,807 | 2,640 |
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.
The underlying reasons for changes in our operating revenues for the three and nine months ended September 30, 2023 compared to the same periods in 2022 are presented below.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Electric Operations
| Favorable (Unfavorable) | |||||||||||||||||
| Changes in Operating Revenues (in millions) | Three Months Ended September 30, 2023 vs 2022 | Nine Months Ended September 30, 2023 vs 2022 | |||||||||||||||
| New rates from regulatory capital and DSM programs | 45.5 | 51.0 | |||||||||||||||
| Increased (Decreased) customer usage | 6.4 | (9.7) | |||||||||||||||
| FAC over earnings reserve | 5.2 | 5.2 | |||||||||||||||
| Renewable Joint Venture revenue, fully offset by Joint Venture operating expense and noncontrolling interest net income (loss) | 4.4 | 7.8 | |||||||||||||||
| The effects of weather in 2023 compared to 2022 | (16.8) | (27.6) | |||||||||||||||
| 2022 FAC refund | — | 8.0 | |||||||||||||||
| Other | 3.0 | (3.3) | |||||||||||||||
| Change in operating revenues (before cost of energy and other tracked items) | $ | 47.7 | $ | 31.4 | |||||||||||||
| Operating revenues offset in operating expense | |||||||||||||||||
| Lower cost of energy billed to customers | (63.6) | (45.5) | |||||||||||||||
| Reduction in gross receipts tax, offset in operating expenses | — | (11.5) | |||||||||||||||
| Higher (lower) tracker deferrals within operation and maintenance, depreciation and tax | (1.5) | 2.4 | |||||||||||||||
| Total change in operating revenues | $ | (17.4) | $ | (23.2) |
Weather
In general, we calculate the weather-related revenue variance based on changing customer demand driven by weather variance from normal cooling degree days. Our composite cooling degree days reported do not directly correlate to the weather-related dollar impact on the results of Electric Operations. 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 cooling degree day comparison.
Sales
The decrease in total volumes sold for the three and nine months ended September 30, 2023 compared to the same period in 2022 was primarily attributable to decreased usage by industrial and residential 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 nine months ended September 30, 2023 compared to the same periods in 2022 are presented below.
| Favorable (Unfavorable) | |||||||||||
| Changes in Operating Expenses (in millions) | Three Months Ended September 30, 2023 vs 2022 | Nine Months Ended September 30, 2023 vs 2022 | |||||||||
| Lower depreciation and amortization expense excluding the regulatory deferral adjustment associated with the Joint Ventures | 9.6 | 1.3 | |||||||||
| Lower (higher) outside services expenses primarily related to higher generation-related maintenance | $ | 3.8 | $ | (8.6) | |||||||
| Lower employee and administrative expenses | 2.0 | 4.9 | |||||||||
| Renewable Joint Venture operating expenses, offset by Joint Venture operating revenues | (11.2) | (14.4) | |||||||||
| Other | 0.6 | (2.4) | |||||||||
| Change in operating expenses (before cost of energy and other tracked items) | $ | 4.8 | $ | (19.2) | |||||||
| Operating expenses offset in operating revenue | |||||||||||
| Lower cost of energy billed to customers | 63.6 | 45.5 | |||||||||
| Reduction in gross receipts tax, offset in operating revenues | — | 11.5 | |||||||||
| Lower (higher) tracker deferrals within operation and maintenance, depreciation and tax | 1.5 | (2.4) | |||||||||
| Total change in operating expense | $ | 69.9 | $ | 35.4 |
Electric Supply and Generation Transition
NIPSCO continues to execute on an electric generation transition consistent with the 2018 Plan and 2021 Plan, which outlines the path to retire the remaining two coal units at R.M. Schahfer by the end of 2025 and the remaining coal-fired generation at Michigan City by the end of 2028, to be replaced by lower-cost, reliable and cleaner options. See "Project Status" discussion, below, and "Liquidity and Capital Resources" in this Management's Discussion for anticipated barriers to the success of our electric generation transition and additional information on our capital investment spend.
NIPSCO continues to work with the EPA to obtain an administrative approval associated with the operation of R.M. Schahfer’s remaining two coal units until 2025. In the event that the approval is not obtained, future operations could be impacted. We cannot estimate the financial impact on us if this approval is not obtained.
The current replacement plan primarily includes renewable sources of energy, including wind, solar, battery storage, and flexible natural gas resources to be obtained through a combination of NIPSCO ownership and PPAs. NIPSCO has sold, and may in the future sell, renewable energy credits from its renewable 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.
Three wind projects and two solar projects have been placed into service, totaling approximately 1,269 MW of nameplate capacity. NIPSCO has executed commercial agreements for each of the nine remaining identified projects. Dunns Bridge II, Cavalry, Fairbanks, Indiana Crossroads II, GreenRiver, Appleseed, Carpenter and Templeton have received IURC approval. Additional approvals by the IURC may be required to obtain recovery for increases in projects costs. NIPSCO has recently filed with the IURC seeking approval for the Gibson project, and has filed for a new gas peaking resource to be located at Schahfer generating station. NIPSCO also filed with the IURC for a project cost update and full ownership of the Cavalry and Dunns Bridge II projects as a result of the option to use tax credit transferability under the IRA. Our current replacement program includes a diverse portfolio of resources detailed in 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
Project Status. Our contract amendments to certain solar agreements will result in the majority of our remaining projects and investments being placed in service in 2024 and 2025. These amendments also formally address inflationary cost pressures communicated from the developers of our solar and storage projects that are primarily due to (i) limited supply of solar panels and other uncertainties related to the 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./Uyghur Forced Labor Prevention Act, (iii) Section 201 Tariffs and (iv) persistent general global supply chain and labor availability issues. We are also monitoring our other renewable projects as upcoming project milestones related to permitting and obtaining interconnection rights are expected to occur. Final findings from the DOC Investigation were released on August 18, 2023 affirming the preliminary determination made in December 2022. At this time, we do not believe any significant panel tariffs will impact our projects.
| Project Name | Transaction Type | Technology | Nameplate Capacity (MW) | Storage Capacity (MW) | |||||||||||||||||||
| Cavalry(1) | BTA | Solar & Storage | 200 | 60 | |||||||||||||||||||
| Dunns Bridge II(1) | BTA | Solar & Storage | 435 | 75 | |||||||||||||||||||
| Fairbanks(1) | BTA | Solar | 250 | — | |||||||||||||||||||
| Gibson(1) | BTA | Solar | 200 | — | |||||||||||||||||||
| Indiana Crossroads II | 15 year PPA | Wind | 204 | — | |||||||||||||||||||
| Green River | 20 year PPA | Solar | 200 | — | |||||||||||||||||||
| Templeton | 20 year PPA | Wind | 200 | — | |||||||||||||||||||
| Carpenter | 20 year PPA | Wind | 200 | — | |||||||||||||||||||
| Appleseed | 20 year PPA | Solar | 200 | — |
(1)Ownership of the facility will be transferred to JVs whose members are expected to include NIPSCO and an unrelated tax equity partner. Alternatively, NIPSCO is evaluating the optionality related to the transferability of credits afforded by the passage of the IRA. NIPSCO has filed with the IURC for direct ownership of Dunns Bridge II and Cavalry and may seek direct ownership of the Fairbanks and Gibson 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 December 20, 2022 we entered into a $1.0 billion term credit agreement with a maturity date of December 19, 2023. On October 5, 2023, we entered into an amendment to, among other things, extend the maturity date of the agreement to March 15, 2024. On March 24, 2023, we completed the issuance and sale of $750.0 million of 5.25% senior unsecured notes maturing in 2028, which resulted in approximately $742.2 million of net proceeds after discount and debt issuance costs. On June 8, 2023, we completed the issuance and sale of a reopening of $300.0 million of 5.25% senior unsecured notes maturing in 2028 and $450.0 million of 5.40% senior unsecured notes maturing in 2033, which resulted in approximately $742.5 million of net proceeds after discount and debt issuance costs. On June 15, 2023, we redeemed all 400,000 shares of Series A Preferred Stock for a redemption price of $1,000 per share, or $400.0 million in total. We maintain an ATM equity program that provides an opportunity to issue and sell shares of our common stock up to an aggregate issuance of $750.0 million through December 31, 2023. As of September 30, 2023, the ATM program 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," Note 12, "Long-Term Debt," and Note 13, "Short-Term Borrowings," in the Notes to the Condensed Consolidated Financial Statements (unaudited) for more information.
On June 17, 2023, NiSource and our wholly-owned subsidiary, NIPSCO Holdings II, entered into the BIP Purchase Agreement with an affiliate of BIP, pursuant to which BIP will acquire an indirect 19.9 percent equity interest in NIPSCO for a purchase price of $2.150 billion in cash, subject to adjustments based on the timing of closing and the amount of capital contributions made by NiSource prior to closing. NiSource intends to use the proceeds from the purchase price and BIP's capital contribution to support NIPSCO’s capital expenditure plans for serving customers, reduce NiSource’s debt and fund ongoing capital needs associated with the renewable generation transition. Refer to Note 14, "Other Commitments and Contingencies - D. Other Matters," in the Notes to the Condensed Consolidated Financial Statements (unaudited) for more information on this transaction.
We believe these sources provide adequate capital to fund our operating activities and capital expenditures in 2023 and beyond.
The following table summarizes our cash flow activities:
| Nine Months Ended September 30, | |||||||||||||||||
| (in millions) | 2023 | 2022 | Change in 2023 vs 2022 | ||||||||||||||
| Cash from (used for): | |||||||||||||||||
| Operating Activities | $ | 1,535.9 | $ | 1,036.2 | $ | 499.7 | |||||||||||
| Investing Activities | (2,503.3) | (1,682.7) | (820.6) | ||||||||||||||
| Financing Activities | 998.6 | 630.2 | 368.4 |
Operating Activities
The increase in cash from operating activities was primarily driven by year over year change in accounts receivable collections and inventory driven by the implementation of new rates and the impact of lower gas prices, partially offset by higher accounts payables.
Investing Activities
The increase in cash used for investing activities was due to increased capital expenditures related to system growth and reliability and payments to renewable generation asset developers related to milestone payments for certain of our BTA projects in 2023, as well as the property insurance settlement related to the Greater Lawrence Incident received in the prior year.
As we evaluate adjustments to renewable generation project timing, we remain on track to make capital investments totaling $3.3 billion to $3.6 billion during the 2023 period. We also expect to invest approximately $16.0 billion during the 2024-2028 period, including capital investments to support our generation transition strategy. These forecasted capital investments and
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
those included in our Annual Report on Form 10-K for the year ended December 31, 2022, are subject to continuing review and adjustment. Actual capital expenditures may vary from these estimates. 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 are in the process of upgrading and modernizing our gas infrastructure to enhance safety and reliability by reducing leaks. An ancillary benefit of these programs is the reduction of GHG emissions. In 2023, 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 as well as other federally mandated compliance investments currently in rates or pending commission approval:
| (in millions) | ||||||||||||||||||||
| Company | Program | Incremental Revenue | Incremental Capital Investment | Investment Period | Costs Covered(1) | Rates Effective | ||||||||||||||
| Columbia of Ohio | IRP - 2023 | $ | 38.4 | $ | 316.3 | 1/22-12/22 | Replacement of (1) hazardous service lines, (2) cast iron, wrought iron, uncoated steel, and bare steel pipe. | May 2023 | ||||||||||||
| Columbia of Ohio | CEP - 2023 | $ | 31.0 | $ | 265.6 | 1/22-12/22 | Assets not included in the IRP. | September 2023 | ||||||||||||
| NIPSCO - Gas | TDSIC - 7 | $ | 10.1 | $ | 207.1 | 3/23-8/23 | New or replacement projects undertaken for the purpose of safety, reliability, system modernization or economic development. | March 2024 | ||||||||||||
| NIPSCO - Gas | TDSIC 6 | $ | (2.5) | $ | 149.8 | 1/22-2/23 | New or replacement projects undertaken for the purpose of safety, reliability, system modernization or economic development. | September 2023 | ||||||||||||
| NIPSCO - Gas(2)(3) | FMCA 2 | $ | 4.2 | $ | 38.2 | 4/22-9/22 | Project costs to comply with federal mandates. | April 2023 | ||||||||||||
| NIPSCO - Gas(3) | FMCA 1 | $ | (4.0) | $ | 13.4 | 10/22-3/23 | Project costs to comply with federal mandates. | October 2023 | ||||||||||||
| Columbia of Virginia | SAVE - 2024 | $ | 7.9 | $ | 69.0 | 1/24-12/24 | Replacement projects that (1) enhance system safety or reliability, or (2) reduce, or potentially reduce, greenhouse gas emissions. | January 2024 | ||||||||||||
| Columbia of Virginia(4) | SAVE - 2023 | $ | 4.5 | $ | 45.9 | 1/23-12/23 | Replacement projects that (1) enhance system safety or reliability, or (2) reduce, or potentially reduce, greenhouse gas emissions. | January 2023 | ||||||||||||
| Columbia of Kentucky | SMRP - 2024 | $ | 5.2 | $ | 40.2 | 1/24-12/24 | Replacement of mains and inclusion of system safety investments. | January 2024 | ||||||||||||
| Columbia of Kentucky | SMRP - 2023 | $ | 1.6 | $ | 41.6 | 1/23-12/23 | Replacement of mains and inclusion of system safety investments. | January 2023 | ||||||||||||
| Columbia of Maryland(5) | STRIDE - 2023 | $ | 1.3 | $ | 18.0 | 1/23-12/23 | Pipeline upgrades designed to improve public safety or infrastructure reliability. | January 2023 | ||||||||||||
| Columbia of Maryland(5) | STRIDE - 2024 | $ | 1.3 | $ | 15.4 | 1/24 -12/24 | Pipeline upgrades designed to improve public safety or infrastructure reliability. | January 2024 | ||||||||||||
| NIPSCO - Electric | TDSIC - 2 | $ | 6.6 | $ | 143.5 | 2/22-7/22 | New or replacement projects undertaken for the purpose of safety, reliability, system modernization or economic development. | February 2023 | ||||||||||||
| NIPSCO - Electric(6) | TDSIC - 3 | $ | 21.2 | $ | 144.8 | 8/23-9/24 | New or replacement projects undertaken for the purpose of safety, reliability, system modernization or economic development. | August 2023 |
(1)Programs do not include any costs already included in base rates.
(2)On March 1, 2023, incremental tracker revenue was updated as certain investments are now being recovered through base rates.
(3)NIPSCO received approval for a new certificate of public convenience and necessity on December 28, 2022 for an additional Pipeline Safety III Compliance Plan, including $235.3M in capital and $34.1M in operation and maintenance expense project investments.
(4)Columbia of Virginia received a final order on November 1, 2022 modifying the SAVE filing incremental revenue and investments.
(5)Columbia of Maryland’s current STRIDE expires December 31, 2023. On June 23, 2023, CMD filed an application for approval of a new five-year STRIDE. A final order is anticipated Q4 2023.
(6)NIPSCO Electric TDSIC-3 is for a 14-month billing period due to the rate case order received in August 2023 and a subsequent 9 month hold-out period. Coincident with the implementation of Step-1 base rates and in August 2023 in Cause No. 45772, TDSIC-3 incremental revenue decreased from that originally filed for and approved as a result of $554.7 million of in service capital moving out of this tracker into base rates.
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. On November 2, 2022, NIPSCO Electric filed a petition with the IURC seeking approval of NIPSCO's federally mandated costs for closure of R.M. Schahfer Generation Station's multi-cell unit. The project includes a
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
total estimated $53.0 million of federally mandated retirement costs. Due to the NIPSCO electric settlement agreement filed on March 10, 2023, both FMCA cases were stayed pending the outcome of NIPSCO’s electric base rate case, which proposed these pond closure costs be recovered through base rates, rather than the FMCA Tracker. NIPSCO received an order approving its electric base rate case settlement on August 2, 2023. Upon the expiration of the time for appeals of this order, NIPSCO will file to dismiss the independent requests for CCR ash pond recovery, as that recovery has been approved within electric base rates under the terms of the settlement. Refer to Note 14, "Other Commitments and Contingencies - C. Environmental Matters," in the Notes to the Condensed Consolidated Financial Statements (unaudited) for further discussion of the CCRs.
Columbia of Ohio filed an application on February 28, 2023, to establish a new PHMSA IRP Rider in order to recover costs incurred to comply with the PHMSA Mega rule. An unopposed settlement was filed on September 8, 2023. The record of the case is submitted for a decision by the PUCO. It is anticipated that the PUCO will rule on this Application and settlement by the end of 2023.
Financing Activities
Common Stock, Preferred Stock and Equity Units. Refer to Note 5, "Equity," in the Notes to the Condensed Consolidated Financial Statements (unaudited) for information on common and preferred stock and equity units activity.
Long-Term Debt. Refer to Note 12, "Long-Term Debt," in the Notes to the Condensed Consolidated Financial Statements (unaudited) for information on long-term debt activity.
Short-Term Debt. Refer to Note 13, "Short-Term Borrowings," in the Notes to the Condensed Consolidated Financial Statements (unaudited) for information on short-term debt activity.
Noncontrolling Interest**.** Refer to Note 11, "Variable Interest Entities," in the Notes to the Condensed Consolidated Financial Statements (unaudited) for information on contributions from noncontrolling interest activity.
NIPSCO Minority Equity Interest Sale. Refer to Note 14, "Other Commitments and Contingencies - D. Other Matters," in the Notes to the Condensed Consolidated Financial Statements (unaudited) for information on the BIP Purchase Agreement and use of proceeds from this transaction.
Sources of Liquidity
The following table displays our liquidity position as of September 30, 2023 and December 31, 2022:
| (in millions) | September 30, 2023 | December 31, 2022 | ||||||
| Current Liquidity | ||||||||
| Revolving Credit Facility | $ | 1,850.0 | $ | 1,850.0 | ||||
| Accounts Receivable Programs(1) | 295.6 | 447.2 | ||||||
| Less: | ||||||||
| Commercial Paper | 935.0 | 415.0 | ||||||
| Accounts Receivable Programs Utilized | 285.0 | 347.2 | ||||||
| Letters of Credit Outstanding Under Credit Facility | 9.9 | 10.2 | ||||||
| Add: | ||||||||
| Cash and Cash Equivalents | 56.0 | 40.8 | ||||||
| Net Available Liquidity | $ | 971.7 | $ | 1,565.6 |
(1)Represents the lesser of the seasonal limit or maximum borrowings supportable by the underlying receivables.
Debt Covenants**.** We are subject to financial covenants under our revolving credit facility and term credit agreement, which require us to maintain a debt to capitalization ratio that does not exceed 70.0%. As of September 30, 2023, the ratio was 63.1%.
Credit Ratings. The credit rating agencies periodically review our ratings, taking into account factors such as our capital structure and earnings profile. The following table includes our and NIPSCO's credit ratings and ratings outlook as of September 30, 2023. 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.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
| S&P | Moody's | Fitch | ||||||||||||||||||
| Rating | Outlook | Rating | Outlook | Rating | Outlook | |||||||||||||||
| NiSource | BBB+ | Stable | Baa2 | Stable | BBB | Stable | ||||||||||||||
| NIPSCO | BBB+ | Stable | Baa1 | Stable | BBB | Stable | ||||||||||||||
| Commercial Paper | A-2 | Stable | P-2 | Stable | F2 | Stable |
Certain of our subsidiaries have agreements that contain ''ratings triggers'' that require increased collateral if our credit rating or the credit ratings of certain of our subsidiaries are below investment grade. These agreements are primarily for insurance purposes and for the physical purchase or sale of power. As of September 30, 2023, the collateral requirement that would be required in the event of a downgrade below the ratings trigger levels would amount to approximately $89.5 million. In addition to agreements with ratings triggers, there are other agreements that contain ''adequate assurance'' or ''material adverse change'' provisions that could necessitate additional credit support such as letters of credit and cash collateral to transact business.
Equity. Our authorized capital stock consists of 620,000,000 shares, $0.01 par value, of which 600,000,000 are common stock and 20,000,000 are preferred stock. As of September 30, 2023, 413,324,607 shares of common stock and 902,500 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, 2022. Except for our March and June 2023 debt issuances, there were no additional material changes from year-end during the nine months ended September 30, 2023. Refer to Note 12, "Long-Term Debt," in the Notes to the Condensed Consolidated Financial Statements (unaudited) for additional information regarding the debt issuances.
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 14, "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 Operations 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 offer 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) | 11.20 | % | None specified | $ | 82.2 | $ | 44.5 | March 18, 2022 | Approved December 8, 2022 | December 2022 | |||||||||||||
| Columbia of Maryland | 10.85 | % | 9.65 | % | $ | 5.8 | $ | 3.5 | May 13, 2022 | Approved November 17, 2022 | December 2022 | ||||||||||||
| Columbia of Maryland | 10.95 | % | None specified | $ | 6.5 | $ | 3.9 | May 12, 2023 | Approved October 26, 2023 | December 2023 | |||||||||||||
| 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) | 10.75 | % | None specified | $ | 40.5 | $ | 25.8 | April 29, 2022 | Approved May 15, 2023 | October 2022 | |||||||||||||
| Columbia of Ohio | 10.95 | % | 9.60 | % | $ | 221.4 | $ | 68.3 | June 30, 2021 | Approved January 26, 2023 | March 2023 | ||||||||||||
| NIPSCO - Gas(4) | 10.50 | % | 9.85 | % | $ | 109.7 | $ | 71.8 | September 29, 2021 | Approved July 27, 2022 | September 2022 | ||||||||||||
| NIPSCO - Electric(5) | 10.40 | % | 9.80 | % | $ | 291.8 | $ | 261.9 | September 19, 2022 | Approved August 2, 2023 | August 2023 | ||||||||||||
| Active Rate Cases | |||||||||||||||||||||||
| NIPSCO - Gas(6) | 10.70 | % | In process | $ | 161.9 | In process | October 25, 2023 | Order Expected Q3 2024 | September 2024 |
(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.
(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 and filings other than base rates.
(4)New rates are implemented in 2 steps, with implementation of Step 1 rates in September 2022. The Step 2 rates were filed on February 21, 2023, with rates effective March 2023.
(5) New rates will be implemented in 2 steps, with implementation of Step 1 rates to be effective in August 2023 and Step 2 rates to be effective in March 2024. The order reflects incremental revenue of $261.9 million plus an estimated additional $29.9 million for recovery of costs associated with a new Environmental Cost Tracker (replacing the VCT).
(6) New rates expected to be implemented in 2 steps, with implementation of Step 1 rates to be effective in September 2024 and Step 2 Rates in March 2025.
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 and repair technologies that enable the location and categorization of all leaks that are hazardous, or potentially hazardous, to human safety or the environment.
In May 2023, PHMSA proposed numerous regulatory revisions under the PIPES Act of 2020 to minimize methane emissions and improve public safety. Under these proposed revisions, NiSource's subsidiaries would be required to detect and repair an increased number of gas leaks, reduce the time to repair leaks, increase leak survey frequency, and expand its existing advanced leak detection program. We continue to evaluate the proposed rule for impacts on our business.
CCR Regulation
In May 2023, EPA proposed changes to the CCR regulations for inactive surface impoundments at inactive facilities, referred to as “legacy CCR surface impoundments.” EPA is also proposing to extend a subset of requirements in the CCR regulations to areas not previously subject to the CCR regulations, referred to as “CCR management units.” NIPSCO potentially has areas that could become subject to the proposed changes. We continue to evaluate the proposed rule for impacts on our business.
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.
Transition Climate Risks. 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.
Regarding federal policies, we continue to monitor the implementation of any final and proposed climate change-related legislation and regulations, including the Infrastructure Investment and Jobs Act, signed into law in November 2021; the IRA, signed into law in August 2022; and the EPA's proposed methane regulations for the oil and natural gas industry, but we cannot predict their impact on our business at this time. We have identified potential opportunities associated with the Infrastructure Investment and Jobs Act and the IRA and are evaluating how they may align with our strategy going forward. The energy-related provisions of the Infrastructure Investment and Jobs Act 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. The IRA contains climate and energy provisions, including funding to decarbonize the electric sector.
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.
In May 2023, EPA released a package of proposed regulatory actions to reduce carbon dioxide emissions from new natural gas-fired electric generating units (EGUs), existing natural gas-fired EGUs, and existing coal-fired EGUs. We are reviewing the potential impacts of the proposed rules but we are unable to estimate impacts on our business at this time.
We also continue to monitor the implementation of any final and proposed 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, 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 (PSC) 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. In May 2023, the Maryland Department of the Environment issued draft Building Energy Performance Standards (BEPS), which would require net-zero direct greenhouse gas emissions from large buildings by 2040. On September 11, 2023, updated draft BEPS were presented to, and adopted, with amendments, by the Maryland Air Quality Control Advisory Council (AQCAC). The draft regulations will now undergo formal public notice and comment rulemaking. Columbia of Maryland is advocating for compliance pathways that use RNG, hydrogen, and emissions offsets. Separately, the PSC has also initiated a proceeding related to Near-Term, Priority Actions and Comprehensive, Long-Term Planning for Maryland's Gas Companies. Columbia of Maryland will continue to monitor these matters, but we cannot predict their final impact on our business at this time.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Regulatory, Environmental and Safety Matters
NIPSCO, Columbia of Maryland, Columbia of Pennsylvania, Columbia of Virginia and Columbia of Kentucky 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. The program was approved by the IURC at NIPSCO in November 2022 with a January 2023 start date. After reaching settlement with other parties in September 2022, NIPSCO agreed to add a third tier to offset 25% of customer usage. Columbia of Maryland’s filing was denied by the PSC in January 2023. Columbia of Virginia received a final order in May 2023, approving the Green Path Rider and began enrolling customers in September 2023. Columbia of Pennsylvania filed a Joint Petition for Nonunanimous Settlement with the Bureau of Investigation and Enforcement (I&E) and the Office of Small Business Advocate (OSBA) in March 2023, in support of the Commission’s adoption of the Green Path Rider. Columbia of Pennsylvania received an order in June 2023 that rejected the settlement agreement and denied implementation of the Green Path Rider. On September 19, 2023, Columbia of Kentucky filed a motion for a decision with the PSC on its Green Path filing. The motion is still pending with the commission. Additionally, NIPSCO has a voluntary Green Power Rider program in place that allows customers to designate a portion or all their monthly electric usage to come from power generated by renewable energy sources.
Net-Zero Goal. In response to these transition risks and opportunities, on November 7, 2022, we announced a goal of net-zero greenhouse gas emissions by 2040 covering both Scope 1 and Scope 2 GHG emissions ("Net-Zero Goal"). Our Net-Zero Goal builds on greenhouse gas emission reductions achieved to-date and demonstrates that continued execution of our long-term business plan will drive further greenhouse gas emission reductions. We remain on track to achieve previously announced interim greenhouse gas emission reduction targets by reducing fugitive methane emissions from main and service lines by 50 percent from 2005 levels by 2025 and reducing Scope 1 GHG emissions from company-wide operations by 90 percent from 2005 levels by 2030. We plan to achieve our Net-Zero Goal primarily through continuation and enhancement of existing programs, such as retiring and replacing coal-fired electric generation with low- or zero-emission electric generation, ongoing pipe replacement and modernization programs, and deployment of advanced leak-detection technologies. In addition, we plan to advance other low- or zero-emission energy resources and technologies, such as hydrogen, renewable natural gas, and/or deployment of carbon capture and utilization technologies, if and when these become technologically and economically feasible. Carbon offsets and renewable energy credits may also be used to support achievement of our Net-Zero Goal. As of the end of 2022, we had reduced Scope 1 GHG emissions by approximately 67% from 2005 levels.
Our greenhouse gas emissions projections, including achieving a Net-Zero Goal, are subject to various assumptions that involve risks and uncertainties. Achievement of our Net-Zero Goal by 2040 will require supportive regulatory and legislative policies, favorable stakeholder environments and advancement of technologies that are not currently economical to deploy. Should such regulatory and legislative policies, stakeholder environments or technologies fail to materialize, our actual results or ability to achieve our Net-Zero Goal, including by 2040, may differ materially.
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.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
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 the Condensed Consolidated Financial Statements (unaudited) for further information on our commodity price risk assets and liabilities as of September 30, 2023 and December 31, 2022.
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, term credit agreement 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 $4.8 million and $12.4 million for the three and nine months ended September 30, 2023 and $2.3 million and $5.0 million for the three and nine months ended September 30, 2022, 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.
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 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, 2022. There were no material changes made as of September 30, 2023.
Recently Issued Accounting Pronouncements
Refer to Note 2, "Recent Accounting Pronouncements," in the Notes to the Condensed Consolidated Financial Statements (unaudited) for additional information about recently issued and adopted accounting pronouncements.
NiSource Inc.
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