NiSource Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; unaudited. NiSource is a regulated natural gas and electric utility holding company operating in six states. Its reportable segments are Gas Distribution Operations and Electric Operations.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $959.4 million | $902.5 million | $3,491.0 million | $3,470.7 million |
| Operating income | $147.1 million | $92.8 million | $722.5 million | $332.7 million |
| Net income (loss) attributable to NiSource | $63.2 million | $(172.9) million | $419.0 million | $(102.0) million |
| Net income (loss) available to common shareholders | $49.4 million | $(186.7) million | $377.6 million | $(143.4) million |
| Diluted EPS | $0.12 | $(0.49) | $0.91 | $(0.37) |
| Operating margin | 15.3% | 10.3% | 20.7% | 9.6% |
Q3 revenue increased 6.3%; nine-month revenue increased 0.6%. Management attributed the substantial year-over-year earnings improvement chiefly to prior-year losses on the Massachusetts Business sale and debt extinguishment. The Massachusetts sale was completed in October 2020; the nine-month 2020 results included a $399.8 million loss on asset sales, versus $6.9 million in 2021. Higher electric-segment revenue and lower operating costs also contributed. Gas and electric energy costs are generally recovered from customers through regulatory mechanisms, substantially offsetting their effect on earnings.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $939.3 million, versus $858.6 million a year earlier. Capital expenditures were $1,292.8 million; net cash used in investing was $1,394.2 million.
- Cash and restricted cash totaled $56.3 million at September 30. Net available liquidity was $1,698.3 million, including revolving-credit availability and receivables capacity, net of commercial paper and letters of credit.
- Long-term debt, including current maturities, was $9,243.9 million; commercial paper outstanding was $380.0 million. The company had no borrowings under its $1.85 billion revolving credit facility. Its debt-to-capitalization covenant ratio was 59.7%, against a 70% maximum.
- NiSource raised $835.5 million net from April 2021 Equity Units. The units include a future common-stock purchase contract and Series C mandatory convertible preferred stock. The ATM program had approximately $300 million of issuance capacity remaining.
Segment results and material changes
- Gas Distribution: Q3 operating income was $11.0 million, up from a $42.2 million loss; nine-month operating income was $419.1 million, versus $38.0 million. Results reflect, in significant part, the absence of Massachusetts operations and the prior-year sale loss. Nine-month revenue fell $121.8 million, largely because Massachusetts revenue was no longer included.
- Electric Operations: Q3 operating income was $140.4 million, up $10.4 million; nine-month operating income was $307.9 million, up $12.5 million. Revenue rose $46.8 million in Q3 and $119.3 million year to date, supported by higher usage, warmer weather and customer growth; much of the increase in energy costs is passed through to customers.
- Compared with 2020, interest expense was lower. The prior-year periods included a $243.4 million debt-extinguishment loss and the Massachusetts disposal-related loss.
Outlook, management commentary and risks
- Management projected approximately $2 billion of total 2021 capital expenditures. The company expects approximately $2 billion of investment, primarily in 2022 and 2023, to replace capacity from the R.M. Schahfer coal units.
- NiSource plans to replace coal generation by the end of 2028, primarily with renewables, and targets a 90% reduction in Scope 1 greenhouse-gas emissions by 2030 versus 2005. Executed and approved projects included 1,950 MW of build-transfer agreements and 1,380 MW of power purchase agreements as of September 30.
- Schahfer Units 14 and 15 retired October 1, 2021. Their estimated net book value, with associated plant, was approximately $600 million; the applicable rate order permits recovery through 2032 and provides for a customer revenue credit pending new base rates.
- After quarter-end, the same seller notified NiSource of potential force majeure events affecting the Elliott solar build-transfer agreement and Gibson solar PPA, citing delayed solar-panel shipments following U.S. import detentions. Timing and financial effects were undetermined; NiSource and the seller were assessing mitigation and alternative supply options.
- Management cited increasing construction-material prices, longer lead times, potential supply shortages and labor-productivity disruption as risks to project schedules, costs, cash flows and results. Higher forecast gas costs were expected to affect customer bills, but not materially affect company earnings.
- Greater Lawrence Incident matters remain a significant uncertainty. Columbia of Massachusetts completed its probation terms in June 2021; the company remains subject to a three-year Deferred Prosecution Agreement. A $143 million class settlement was approved, but bodily-injury and wrongful-death claims are outside that settlement and some remained unresolved. A property-insurance dispute concerning approximately $258 million of pipeline replacement costs was ongoing; recovery timing and amount were uncertain.
- Environmental remediation liabilities totaled $92.3 million; the estimated MGP-site liability was $86.3 million, with remediation costs at some sites not fully estimable. Other risks include changing regulation, extreme weather and climate policy, COVID-19 impacts, interest rates, credit ratings, and legal and regulatory proceedings. No specific full-year EPS guidance is stated in the provided filing text.
Investor verification priorities
- Separate recurring utility performance from the prior-year Massachusetts sale and debt-extinguishment losses; confirm the underlying drivers of segment earnings.
- Track rate-case outcomes, cost-recovery mechanisms and regulatory treatment of the retired Schahfer plant and associated customer credits.
- Assess renewable-project schedules, solar-panel availability, potential force majeure claims and the scale and funding of planned capital spending.
- Review debt, commercial-paper usage, equity-unit dilution and future financing needs alongside liquidity and covenant headroom.
- Monitor remaining Greater Lawrence claims and insurance recovery, as well as environmental estimates and other material contingencies.