NiSource Inc. — Q2 2023 Form 10-Q
Business context and reporting period. NiSource is a regulated natural gas and electric utility holding company serving six states. This unaudited report covers the quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Interim results can be affected by weather and other seasonal factors.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenues | $1,090.0 million | $1,183.2 million | $3,056.0 million | $3,056.5 million |
| Operating income | $168.9 million | $143.3 million | $699.9 million | $743.6 million |
| Net income | $46.3 million | $55.8 million | $384.1 million | $487.1 million |
| Net income available to common shareholders | $39.9 million | $53.2 million | $359.1 million | $466.2 million |
| Diluted EPS | $0.09 | $0.12 | $0.80 | $1.06 |
| Operating margin (operating income / revenue, approximate) | 15.5% | 12.1% | 22.9% | 24.3% |
Q2 operating income rose despite lower revenue; six-month operating income and earnings declined. Gas Distribution Operations operating income was $115.4 million in Q2 (up from $80.6 million) and $562.3 million for six months (down from $591.4 million). Electric Operations operating income was $49.6 million in Q2 (down from $72.6 million) and $131.5 million for six months (down from $171.8 million). Energy costs are largely passed through to customers under regulatory mechanisms, generally limiting their direct effect on earnings.
Cash flow, capital spending and financial position
- Six-month operating cash flow was $1.191 billion, versus $907.2 million in 2022. Investing cash outflow was $1.376 billion, including $1.162 billion of capital expenditures and $137.4 million paid to renewable project developers. Financing cash flow was $300.3 million. Operating cash flow less capital expenditures was approximately $29 million.
- Cash and cash equivalents were $151.3 million at June 30, 2023, compared with $40.8 million at year-end 2022. Restricted cash was $39.8 million.
- Long-term debt, excluding current maturities, was $11.003 billion; short-term borrowings were $1.590 billion; current long-term debt was $29.4 million. Long-term debt had a reported fair value of $10.080 billion, versus a carrying amount of $11.032 billion including current maturities.
- Net available liquidity was $1.773 billion. The debt-to-capitalization covenant ratio was 62.5%, against a maximum of 70%. NiSource reported investment-grade ratings with stable outlooks.
- Capital spending guidance was $3.3–$3.6 billion for 2023 and approximately $15 billion over 2023–2027; management cautions actual spending may vary.
Material changes versus comparable periods
- Q2 revenue decreased $93.2 million year over year, primarily reflecting lower customer revenue, including warmer-weather effects and reduced gas off-system revenue. Six-month revenue was essentially unchanged.
- Six-month common earnings fell $107.1 million. Management attributed the decline primarily to the prior-year Greater Lawrence Incident insurance settlement and higher other deductions, including increased interest expense and non-service pension costs.
- Higher interest rates and borrowings contributed to higher interest expense. Six-month net interest expense was $219.4 million, compared with $168.2 million in 2022.
- NiSource issued $1.5 billion of senior notes in March and June: $1.05 billion of 5.25% notes due 2028 and $450 million of 5.40% notes due 2033. It redeemed all 400,000 Series A preferred shares for $400 million and recorded a $6.2 million redemption premium.
- Capital spending and renewable project investment increased. Consolidated property, plant and equipment, net, rose to $21.175 billion from $19.843 billion at year-end.
Outlook, risks and contingencies
- NIPSCO minority-interest sale: NiSource agreed to sell an indirect 19.9% interest in NIPSCO to a Blackstone Infrastructure Partners affiliate for $2.150 billion in cash, subject to adjustments. NiSource expects to retain 80.1% control. Closing was expected by year-end 2023, subject to customary conditions including FERC approval. Proceeds are intended to support NIPSCO investment, reduce debt and fund renewable transition needs. Closing, timing and expected benefits are uncertain; NIPSCO and its holding company may not pay dividends to NiSource before closing.
- Generation transition: NiSource intends to retire the remaining two R.M. Schahfer coal units by the end of 2025 and remaining coal-fired generation by the end of 2028, replacing capacity primarily with renewables and other resources. Project timing and costs face supply-chain, labor, inflation, permitting, interconnection and solar-tariff uncertainties. The company is pursuing administrative approval to operate the remaining Schahfer units until 2025; the impact if approval is not obtained is not estimated.
- Regulatory matters: NIPSCO Electric’s rate case settlement was awaiting an order, expected in August 2023; other rate and infrastructure recovery proceedings are described in the filing. Proposed PHMSA pipeline rules, EPA emissions proposals and proposed coal ash rule changes could increase compliance costs, but impacts were not estimable.
- Legal and environmental exposure: Claims related to the 2018 Greater Lawrence gas incident remain unresolved. In an ongoing FERC investigation concerning a customer’s demand-response activity, NIPSCO estimated maximum disgorgement exposure of $7.7 million, expected to be returned to customers, and expected to recover more than half. Environmental remediation liabilities were $84.5 million; the MGP portion was $79.5 million, with reasonably possible additional variation of up to $15 million. Some potential CERCLA costs remain unestimable.
- Other risks: Management cited severe weather and climate impacts, cybersecurity and operational risks, supply and workforce constraints, interest-rate exposure, regulatory outcomes, and the execution and financing of major capital projects. A 100-basis-point change in short-term rates would have changed six-month 2023 interest expense by approximately $7.6 million, based on the filing’s sensitivity analysis.
- NiSource’s stated goal is net-zero Scope 1 and Scope 2 emissions by 2040, with interim targets for methane and Scope 1 emissions. Achievement depends on supportive policy, stakeholder conditions and technologies that may not become economically feasible.
Investor verification priorities
- Confirm whether the NIPSCO minority-interest transaction received FERC approval, closed on the anticipated schedule, and delivered the expected proceeds and debt reduction.
- Track subsequent earnings and cash flow, particularly the effect of higher financing costs, weather, and the prior-year insurance settlement comparison.
- Compare actual 2023 capital expenditures with the $3.3–$3.6 billion outlook and monitor renewable project costs, timing and regulatory recovery.
- Review liquidity, debt maturities, short-term borrowing costs and covenant headroom, including the $1.0 billion term credit agreement maturing in December 2023.
- Follow developments in the Greater Lawrence claims, FERC investigation, environmental remediation and pending regulatory proceedings.