NISOURCE INC. quarterly report, Q1 FY2020

NiSource Inc. — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020. NiSource is a regulated natural gas and electric utility holding company serving customers in seven states. Results are unaudited; interim results may be affected by seasonal weather.

Financial performance and liquidity

Metric	Q1 2020	Q1 2019 / comparison
Operating revenue	$1,605.5 million	$1,869.8 million, down $264.3 million
Operating income	$148.2 million	$374.2 million
Net income	$75.6 million	$218.9 million
Net income available to common shareholders; diluted EPS	$61.8 million; $0.16	$205.1 million; $0.55
Operating cash flow	$369.9 million	$399.1 million
Capital expenditures	$452.1 million	$353.7 million

• Revenue and earnings fell year over year. Management cited warmer weather, lower industrial revenue, and a $280.2 million pre-tax loss from classifying the Massachusetts business as held for sale. New rates partly offset these effects. Reported operating income also benefited from lower Greater Lawrence Incident expenses, net of insurance recoveries.
• Operating cash flow was below capital spending by $82.2 million, calculated from the reported figures. Cash, cash equivalents and restricted cash totaled $213.0 million at quarter-end.
• At March 31, long-term debt was $7.818 billion, current long-term debt was $7.9 million, and short-term borrowings were $2.046 billion. Short-term borrowings increased from $1.773 billion at year-end 2019. The company reported $1.307 billion of net available liquidity and a 63.2% debt-to-capitalization ratio, against a 70% revolving-credit and term-loan covenant limit.
• The effective tax rate was negative 24.5%, versus 21.2% in Q1 2019, primarily reflecting tax effects of the held-for-sale loss and amortization of excess deferred federal income tax liabilities.

Segments and material changes

• Gas Distribution Operations: Revenue was $1.231 billion versus $1.442 billion; operating income was $78.5 million versus $275.4 million. Weather was about 16% warmer than normal and than the prior-year quarter, reducing revenue by an estimated $36.1 million. Segment operating income included the $280.2 million held-for-sale loss.
• Electric Operations: Revenue was $377.5 million versus $431.0 million; operating income was $78.5 million versus $95.0 million. Lower industrial revenue and usage contributed to the decline.
• Other comprehensive loss was $138.0 million, mainly reflecting losses on cash-flow hedges; accumulated other comprehensive loss increased to $230.6 million from $92.6 million at December 31, 2019.

Outlook, risks and unusual items

• Massachusetts sale: NiSource agreed to sell substantially all of the Massachusetts business to Eversource for $1.1 billion in cash, subject to working-capital adjustment and regulatory and other closing conditions. The company expected closing by September 30, 2020. The reported $280.2 million estimated pre-tax loss may change before closing. Proceeds were expected to reduce short-term borrowings.
• Greater Lawrence Incident: NiSource had recorded approximately $1.041 billion for third-party claims and government fines, penalties and settlements, with estimated total costs in that category of $1.041–$1.055 billion. Other incident-related costs were estimated at $450–$460 million, of which $429 million had been recorded. The company had collected the full $800 million of available third-party liability insurance; total incident expenses exceeded that coverage. A separate $258 million pipeline replacement was completed, and recovery under property insurance remained uncertain. The Massachusetts DPU and other proceedings, unresolved injury and property claims, and potential additional liabilities remained risks. Columbia of Massachusetts pleaded guilty under an agreement providing for a $53.0 million criminal fine, subject to sentencing, and NiSource entered a deferred prosecution agreement with ongoing obligations.
• COVID-19: Management said the pandemic had not materially affected Q1 operating results or liquidity, but reported early declines in commercial and industrial demand and uncertainty about customer collections, bad debt, labor, supply chains, capital projects and regulatory recovery. The company suspended service shutoffs and late-payment charges and offered flexible payment plans. Management estimated a 1% annual decrease in commercial and industrial gas and electric sales volumes could reduce 2020 operating income by about $10 million.
• Management expected 2020 capital expenditures of approximately $1.7–$1.8 billion and cited roughly $30 billion of projected long-term regulated utility infrastructure investment. It reduced expected 2020 capital investment by $100 million to conserve cash. Management stated it believed liquidity was sufficient for the next 12–24 months, while noting that conclusion depended in part on capital-market access and the anticipated Massachusetts sale.
• After quarter-end, NiSource refinanced its $850 million term loan with a new loan maturing March 31, 2021, and issued $1.0 billion of 3.60% senior notes due 2030, receiving approximately $987.8 million net proceeds.
• NIPSCO continued plans to retire 2,080 MW of coal capacity: Schahfer units by 2023 and Michigan City by 2028, with replacement resources expected to include renewables, joint ventures and power-purchase agreements. COVID-19 could delay projects.

Important facts for investors to verify

• Whether the Massachusetts sale closes on expected terms and timing, and the final proceeds, working-capital adjustment and held-for-sale loss.
• Final outcomes and cash costs of Greater Lawrence investigations, sentencing, remaining claims and property-insurance recovery.
• Effects of COVID-19 on customer demand, collections, bad debt, operating cash flow, construction schedules and access to financing.
• Debt refinancing and liquidity needs, including short-term borrowing levels, covenant headroom and the 2021 term-loan maturity.
• Progress and costs of NIPSCO’s coal retirements and replacement-generation projects, including potential COVID-19 delays.