NiSource Inc. — Q3 2022 Form 10-Q
Business context and period. NiSource is a regulated natural gas and electric utility holding company serving six states. This unaudited report covers the quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Interim results may vary with weather and other factors.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $1,089.5m | $959.4m | $4,146.0m | $3,491.0m |
| Operating income | $156.7m | $147.1m | $900.3m | $722.5m |
| Net income | $63.5m | $62.2m | $550.6m | $415.6m |
| Net income available to common shareholders | $52.0m | $49.4m | $518.2m | $377.6m |
| Diluted EPS | $0.12 | $0.12 | $1.18 | $0.91 |
- Revenue rose 13.6% in Q3 and 18.8% for the nine-month period. Higher gas costs passed through to customers contributed to revenue and expense growth, generally without material earnings impact. New rates, regulatory capital programs and weather also supported gas revenue.
- Operating margin, calculated as operating income divided by revenue, was approximately 14.4% in Q3 versus 15.3% a year earlier, and 21.7% for the nine months versus 20.7%. Nine-month operating income benefited from a $105.0m insurance settlement related to the Greater Lawrence Incident, as well as rate-related gains.
- Q3 operating income increased $9.6m year over year. Gas segment operating income increased $22.4m, while electric segment operating income declined $17.1m. For the nine months, gas operating income increased $205.7m and electric operating income decreased $12.8m.
- Cash from operations was $1,036.2m for the nine months, up from $939.3m. Capital expenditures were $1,523.0m; operating cash flow less capital expenditures was negative $486.8m, before other investing items. Investing cash outflow was $1,682.7m.
- At September 30, cash and restricted cash totaled $78.6m. Reported net available liquidity was $919.6m, down from $1,606.5m at year-end 2021. Short-term borrowings were $1,274.2m, including $956.0m of commercial paper and $318.2m under receivables programs. Long-term debt, including the current portion, was $9,549.8m; total debt including short-term borrowings was approximately $10.8bn.
- Nine-month net interest expense was $259.8m versus $253.5m. The company issued $350m of 5.00% senior unsecured notes due 2052 in June. Its $1.85bn revolving facility had no borrowings outstanding; the facility was extended to February 2027. The debt-to-capitalization covenant limit is 70%; the reported ratio was 59.1%.
Material changes and outlook
- Management expects 2022 capital investment of $2.4bn–$2.7bn and approximately $15bn over 2023–2027, subject to review and adjustment. Nine-month capital expenditures were $1.523bn.
- NiSource reported that most solar and storage projects faced estimated delays of six to 18 months, primarily from solar-panel availability, trade investigations and tariffs, supply-chain constraints, labor availability and permitting/interconnection. The company said cost increases could require further regulatory review and could affect project viability. It expected the majority of projects and investment to be in service during 2023–2025.
- NIPSCO’s generation transition includes replacing coal generation with renewable resources. Three wind projects totaling approximately 804 MW were in service. Management expected the remaining two Schahfer coal units to retire by the end of 2025, earlier than the previously discussed 2026–2028 timeframe, amid delays to solar and storage projects. Retirement timing and replacement plans remain subject to approvals and project execution.
- Management cited higher natural-gas prices, inflation, supply-chain and labor pressures, and rising interest rates. It noted higher interest costs on short-term borrowings and warned that further rate increases could negatively affect cash flows and financial condition. Most prudently incurred commodity costs are recovered through regulatory mechanisms.
- Regulatory matters include pending rate cases. An October 31, 2022 joint stipulation in the Columbia of Ohio case proposed a $68.2m annual revenue increase and extension of capital investment riders through 2026; it remained subject to PUCO approval. Other pending cases and requested increases are detailed in the filing.
- On November 7, 2022, after quarter-end, NiSource announced plans to pursue a sale of a minority interest in NIPSCO and announced a goal of net-zero Scope 1 and Scope 2 emissions by 2040. These are forward-looking plans, not completed transactions or achieved outcomes. The company identified dependence on supportive policies, stakeholder conditions and technology as risks to its emissions goal.
Risks, contingencies and unusual items
- The Greater Lawrence Incident remains subject to the company’s Deferred Prosecution Agreement, which runs through February 26, 2023, subject to possible extension. The company continues discussions with remaining claimants; outcomes and cash-flow effects are uncertain.
- A FERC investigation involving an industrial customer’s alleged manipulation of the MISO demand-response market could expose NIPSCO to an estimated maximum $9.7m disgorgement claim; NIPSCO intends to seek indemnification from the customer.
- Recorded environmental remediation liabilities were $93.7m at September 30, 2022. The filing notes uncertainty around ultimate remediation costs and that some future costs cannot currently be estimated. Management expects a majority of environmental and asset-retirement costs to be recoverable through rates.
- Guarantees for renewable-project build-transfer agreements totaled $788.0m, compared with $288.9m at year-end 2021. These amounts may fluctuate as project milestones are completed.
- For nine months, a $105.0m insurance settlement was a material favorable item. Higher depreciation, operating costs, interest expense and taxes partly offset operating and rate-related improvements.
- Management identified disclosure controls as effective and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the $105.0m insurance settlement and other favorable items are nonrecurring, and how underlying earnings compare after these effects.
- Final regulatory outcomes and timing for rate cases and infrastructure cost recovery, including the proposed Columbia of Ohio settlement.
- Actual project delays, costs, approvals and financing needs for NIPSCO’s renewable transition, and the timing of coal-unit retirements.
- Liquidity and borrowing trends, interest-rate exposure, and funding for planned capital investment and dividends.
- Developments in the Greater Lawrence DPA and remaining claims, the FERC investigation, and environmental remediation exposure.
- Any terms, approvals and proceeds related to the proposed minority sale of NIPSCO, and the assumptions and execution risks behind the 2040 net-zero goal.