NiSource Inc. — Q2 2020 Form 10-Q
Business context and reporting period. NiSource is a regulated natural gas and electric utility holding company serving customers in seven states. This unaudited filing covers the quarter and six months ended June 30, 2020; comparisons are to the corresponding 2019 periods.
Financial results and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $962.7 million | $1,010.4 million | $2,568.2 million | $2,880.2 million |
| Operating income | $91.7 million | $463.5 million | $239.9 million | $837.7 million |
| Net income (loss) | $(4.7) million | $296.9 million | $70.9 million | $515.8 million |
| Net income (loss) available to common shareholders | $(18.5) million | $283.1 million | $43.3 million | $488.2 million |
| Basic EPS | $(0.05) | $0.76 | $0.11 | $1.31 |
- Cash flow: For the first half, operating cash flow was $707.7 million, versus $926.2 million; capital expenditures were $819.3 million, versus $843.5 million. Investing cash outflow was $886.6 million and financing cash inflow was $184.1 million. Cash, cash equivalents and restricted cash ended the period at $153.6 million.
- Margins: Operating margin was approximately 9.5% in Q2 and 9.3% for the first half, compared with approximately 45.9% and 29.1%, respectively, in 2019. These comparisons are heavily affected by the held-for-sale loss and prior-year Greater Lawrence incident insurance recoveries and costs.
- Debt and liquidity: At June 30, long-term debt, including current maturities, was $8.826 billion and short-term borrowings were $1.164 billion. Net available liquidity was $1.982 billion. The debt-to-capitalization covenant ratio was 63.8%, against a 70% limit. The $850 million term loan matures March 31, 2021.
- Balance sheet: Total assets were $22.437 billion and stockholders’ equity was $5.662 billion. Current assets were $2.860 billion and current liabilities were $3.228 billion.
Material changes versus the prior comparable periods
- Q2 common earnings fell from $283.1 million to a loss of $18.5 million; first-half common earnings fell from $488.2 million to $43.3 million.
- The Massachusetts Business held-for-sale charge was $84.4 million in Q2 and $364.6 million for the first half. The sale-related measurement includes an expected $56 million payment in lieu of penalties.
- Comparisons were also affected by 2019 Greater Lawrence incident insurance recoveries, net of related claims and costs. COVID-19 reduced commercial and industrial demand, late-payment and reconnection fee revenue, and increased bad-debt and response-related expenses. Management estimated first-half lower usage revenue of $17.8 million, partly offset by $6.9 million of higher residential usage revenue.
- First-half Gas Distribution Operations revenue fell $209.0 million, with warmer weather and lower pass-through gas costs among the drivers; Electric Operations revenue fell $103.7 million, including lower industrial and commercial demand. Segment operating income was $80.2 million for Gas Distribution and $165.4 million for Electric Operations in the first half.
Outlook, risks, contingencies and unusual items
- Management expects 2020 capital expenditures of approximately $1.7–$1.8 billion, reduced by $145 million from its prior expectation to conserve cash. NiSource also describes approximately $30 billion of projected long-term regulated utility infrastructure investments.
- Management stated it believes liquidity is adequate for the next 12–24 months, relying in part on financing capacity and expected proceeds from the Massachusetts sale. It warned of possible lower revenue and cash flow, rising bad debt, delayed customer payments and higher COVID-related costs. No specific earnings or EPS guidance is provided in the filing text.
- The planned sale to Eversource has a stated cash purchase price of $1.1 billion, subject to adjustment. Regulatory approval and other closing conditions remained outstanding; the company targeted closing by the end of Q3 2020 or shortly thereafter. The $56 million settlement payment would be withheld from sale proceeds. The assets and liabilities held for sale were reported at $1.542 billion and $455.4 million, respectively.
- The Greater Lawrence Incident has resulted in approximately $1.039 billion of recorded third-party claims, fines, penalties and settlements, with estimated total costs in that category of $1.039–$1.055 billion. NiSource has collected the full $800 million of available third-party liability insurance; incident expenses have exceeded that coverage. The estimate excludes certain unquantified claims and other specified costs.
- Columbia of Massachusetts pleaded guilty to a pipeline-safety violation and was sentenced to a $53.0 million criminal fine, probation and monitoring requirements. NiSource’s deferred prosecution agreement includes obligations tied to the Massachusetts sale and compliance with safety recommendations. A separate Massachusetts settlement, including the $56 million payment, required regulatory approval and was conditional on the transaction closing.
- Other risks include COVID-19 impacts and regulatory moratoriums, the pending sale and incident-related claims, construction and renewable project execution, market access and interest rates, potential pension funding increases, environmental obligations, and regulatory recovery. The company recorded a $70.3 million increase in its asset retirement obligation related to coal ash compliance estimates.
- NIPSCO plans to retire specified R.M. Schahfer coal units in 2023 and Michigan City Unit 12 by 2028. MISO approved the Schahfer retirement plan; replacement resources include renewable projects and power purchase agreements, subject to approvals and completion risks.
Important facts for investors to verify
- Whether and when the Massachusetts Business sale closed, final proceeds and working-capital adjustment, and final transaction loss.
- Final approval and implementation of the Massachusetts settlement, including the $56 million payment and related releases.
- Actual cash costs and remaining liabilities for the Greater Lawrence Incident, including excluded or unresolved claims and any property-insurance recovery for the pipeline replacement.
- COVID-19 effects on customer collections, bad debt, demand, regulatory deferrals and operating cash flow as customer protections expire.
- Funding and refinancing of the $850 million term loan due March 2021, and maintenance of covenant headroom and available liquidity.
- Whether 2020 capital spending and planned coal replacement and renewable projects remain on schedule and within expected cost.