NiSource Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Financial statements are unaudited. NiSource is a regulated natural gas and electric utility holding company. The Massachusetts business was sold to Eversource on October 9, 2020, after quarter-end.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenues | $902.5 million | $931.5 million | $3,470.7 million | $3,811.7 million |
| Operating income | $92.8 million | $91.0 million | $332.7 million | $928.7 million |
| Net income (loss) | ($172.9 million) | $6.6 million | ($102.0 million) | $522.4 million |
| Net income (loss) available to common shareholders | ($186.7 million) | ($7.2 million) | ($143.4 million) | $481.0 million |
| Basic EPS | ($0.49) | ($0.02) | ($0.37) | $1.29 |
| Operating margin | 10.3% | 9.8% | 9.6% | 24.4% |
Q3 revenue declined 3.1%, while operating income was slightly higher. The common-shareholder loss widened, primarily due to a $243.4 million loss on early debt extinguishment. Nine-month results were sharply lower year over year, reflecting the $400.2 million Massachusetts held-for-sale loss and the absence of 2019 net insurance recoveries related to the Greater Lawrence Incident. Comparisons also reflect lower gas and electric demand in some customer classes and changes in weather.
- Cash flow: Nine-month operating cash flow was $858.6 million, down from $1,231.8 million. Capital expenditures were $1,292.2 million, so operating cash flow less capital expenditures was negative $433.6 million. Investing cash outflow was $1,399.9 million; financing cash inflow was $460.5 million.
- Debt and liquidity: At September 30, long-term debt including current maturities was $9,230.3 million and short-term borrowings were $1,388.2 million. Cash and cash equivalents were $58.6 million. Reported net available liquidity was $1,591.4 million. The debt-to-capitalization ratio was 66.2%, against a 70% covenant limit.
- Sale proceeds: NiSource received $1,112.6 million net proceeds for the Massachusetts business on October 9, including working-capital estimates and net of closing costs and a $56 million payment in lieu of penalties. NiSource repaid its $850 million term loan on October 14 using sale proceeds.
- Other measures: Common dividends declared were $0.21 per share in Q3 and $0.84 per share year to date. The allowance for customer credit losses was $39.3 million at September 30.
Material changes and business developments
- Gas Distribution Operations reported Q3 operating loss of $42.2 million, versus a $48.6 million loss a year earlier; its nine-month operating income fell to $38.0 million from $605.8 million. The held-for-sale loss, 2019 incident-related insurance recoveries, and warmer year-to-date weather were major factors.
- Electric Operations operating income declined to $130.0 million in Q3 from $140.7 million and to $295.4 million for nine months from $321.4 million. Commercial and industrial usage weakened, primarily in connection with COVID-19, while residential electric usage increased.
- NiSource issued $1.0 billion of 3.60% senior notes due 2030 in April and $2.0 billion of notes due 2025 and 2031 in August. Debt tenders and redemptions generated the $243.4 million extinguishment loss, primarily from early redemption premiums.
- NIPSCO is progressing with its plan to retire the R.M. Schahfer generating station by 2023 and Michigan City by 2028, replacing coal generation primarily with renewables. In October 2020 it executed three solar build-transfer agreements for approximately 900 MW of solar capacity and 135 MW of storage, subject to approvals and other conditions.
Outlook, risks and unusual items
- Management outlook: NiSource expected 2020 capital expenditures of approximately $1.7–$1.8 billion and described about $40 billion of projected long-term regulated utility infrastructure investment. It reduced expected 2020 capital investment by $145 million. Management projected ongoing operation and maintenance costs to decline approximately 8% in 2021 versus 2020, associated with the Massachusetts sale and NiSource Next program.
- COVID-19: Management said the pandemic had not materially affected results through September 30, but cited reduced commercial and industrial demand, higher bad debt and slower customer collections, potential customer attrition, and uncertainty around future cash flows. Regulatory deferrals and payment assistance may offset some effects; recovery of deferred costs depends on future regulatory proceedings.
- Greater Lawrence Incident: NiSource had recorded approximately $1.036 billion of third-party claims and government fines, penalties and settlements, and estimated these costs at $1.036–$1.050 billion. It had collected the full $800 million of available third-party liability insurance, and incident expenses exceeded that coverage. It separately estimated other incident-related costs at $445–$455 million. Some bodily-injury and other claims remained unresolved, and outcomes could materially affect results or cash flows.
- Other contingencies: The sale settlement included a $56 million payment to an energy relief fund. Columbia of Massachusetts had paid a $53.0 million federal criminal fine; the company remained subject to obligations under a deferred prosecution agreement. Environmental remediation liabilities were $93.4 million. The filing notes that actual remediation and litigation costs may differ from estimates.
- One-time and accounting items: The Massachusetts held-for-sale loss was $400.2 million for nine months, including estimated transaction-related amounts and the payment in lieu of penalties. The final sale working-capital adjustment remained subject to determination. NiSource also recorded $23.4 million of severance expense through September 30 under a program with approximately $38 million total expected severance costs.
Important facts for investors to verify
- Final Massachusetts sale working-capital adjustments, proceeds, and any remaining sale-related obligations.
- Resolution and ultimate cost of outstanding Greater Lawrence claims, including claims not covered by the class-action settlement and potential insurance recovery for pipeline replacement costs.
- Customer arrears, bad-debt trends, regulatory recovery of COVID-19-related costs, and resulting operating cash flow.
- Execution, regulatory approval, cost, and timing of NIPSCO’s generation replacement and renewable projects, along with planned coal retirements.
- Capital spending and financing needs, debt covenant headroom, and the effect of debt issuance and repayment on interest expense and liquidity.