NiSource(US:NI)2020-05-06 15:39PART I FINANCIAL INFORMATION Item 1. Financial Statements NiSource reported a significant decline in Q1 2020 operating revenues and net income, primarily due to a $280.2 million pre-tax loss from classifying its Massachusetts business as held for sale Condensed Statements of Consolidated Income (unaudited) | Indicator | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Total Operating Revenues | $1,605.5 million | $1,869.8 million | | Operating Income | $148.2 million | $374.2 million | | Net Income | $75.6 million | $218.9 million | | Net Income Available to Common Shareholders | $61.8 million | $205.1 million | | Diluted Earnings Per Share | $0.16 | $0.55 | Condensed Consolidated Balance Sheets (unaudited) | Indicator | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $22,592.7 million | $22,659.8 million | | Total Liabilities | $16,851.3 million | $16,673.1 million | | Total Stockholders' Equity | $5,741.4 million | $5,986.7 million | Condensed Statements of Consolidated Cash Flows (unaudited) | Indicator | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net Cash Flows from Operating Activities | $369.9 million | $399.1 million | | Net Cash Flows used for Investing Activities | ($484.6) million | ($375.4) million | | Net Cash Flows from Financing Activities | $179.3 million | $16.0 million | Notes to Condensed Consolidated Financial Statements (unaudited) Key notes include the adoption of new accounting standards, the classification of the Massachusetts business as held for sale, ongoing legal proceedings, and NIPSCO's coal-fired capacity retirement plan - The company adopted ASU 2016-13 (ASC 326) regarding credit losses on January 1, 2020, which did not have a material impact on the financial statements37 - The company agreed to sell its Massachusetts Business for $1.1 billion in cash, resulting in a $280.2 million pre-tax loss in Q1 2020 as assets were classified as held for sale54 - The company faces legal proceedings related to the September 2018 Greater Lawrence Incident, including a $53 million fine and a $143 million class action settlement115132138 - NIPSCO plans to retire all coal-fired generating capacity by 2028, replacing it with lower-cost, cleaner energy resources, including renewables160161 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial impacts of the Massachusetts business sale and Greater Lawrence Incident, outlines COVID-19 responses, and confirms sufficient liquidity for the next 12-24 months with projected 2020 capital expenditures of $1.7 to $1.8 billion Executive Summary The executive summary details the company's COVID-19 response, potential negative impacts, and the financial implications of the Greater Lawrence Incident and the Massachusetts business sale - In response to the COVID-19 pandemic, NiSource activated its Incident Command System, implemented work-from-home policies, suspended non-essential work inside customer premises, and offered flexible payment plans190191192 - Potential negative impacts from COVID-19 include reduced commercial/industrial demand, increased bad debt, supply chain disruptions, and delays in capital projects, with a 1% annual decrease in commercial and industrial sales estimated to decrease operating income by approximately $10.0 million in 2020196197 Greater Lawrence Incident Costs (Incident to Date as of March 31, 2020) | Category | Amount (in millions) | | :--- | :--- | | Third-party claims | $1,041 | | Other incident-related costs | $429 | | Total Costs | $1,470 | | Insurance recoveries recorded | ($800) | | Total Net Costs Incurred | $670 | - The company entered into an agreement to sell its Columbia of Massachusetts business to Eversource for $1.1 billion in cash, expected to close by the end of Q3 2020205 Summary of Consolidated Financial Results Consolidated net income significantly decreased in Q1 2020, primarily due to the Massachusetts Business sale classification loss, lower industrial revenue, and warmer weather, despite increased capital expenditures - Consolidated net income available to common shareholders for Q1 2020 was $61.8 million ($0.16/share), a significant decrease from $205.1 million ($0.55/share) in Q1 2019207 - The decrease in net income was primarily due to a $280.2 million loss on the classification of the Massachusetts Business as held for sale, lower industrial revenue, and warmer weather, partially offset by new rates and lower income taxes207209210 - Capital expenditures for Q1 2020 were $452.1 million, with the full-year 2020 capital investment expected to be between $1.7 billion and $1.8 billion214215 Results and Discussion of Segment Operations Segment operating income saw significant declines in both Gas Distribution and Electric Operations for Q1 2020 Segment Operating Income (Three Months Ended March 31) | Segment | 2020 (in millions) | 2019 (in millions) | Change (in millions) | | :--- | :--- | :--- | :--- | | Gas Distribution Operations | $78.5 | $275.4 | ($196.9) | | Electric Operations | $78.5 | $95.0 | ($16.5) | Gas Distribution Operations Gas Distribution operating income significantly decreased to $78.5 million, primarily due to a $280.2 million loss from the Massachusetts business classification and unfavorable weather, partially offset by lower Greater Lawrence Incident expenses and new rates - The segment's operating income decreased by $196.9 million, primarily due to the $280.2 million loss recorded on the classification of the Massachusetts Business as held for sale223225 - Operating revenues decreased by $211.1 million, driven by lower pass-through gas costs ($172.7 million) and unfavorable weather ($36.1 million), partially offset by new rates ($14.7 million)226 - Weather in Q1 2020 was approximately 16% warmer than normal and 16% warmer than Q1 2019, leading to a decrease in operating revenues of $36.1 million227 Electric Operations Electric Operations' operating income decreased by $16.5 million due to lower industrial revenue and higher depreciation, partially offset by new residential and commercial rates - Operating income decreased by $16.5 million compared to the prior year period235236 - The decrease was primarily driven by lower industrial revenue ($12.5 million) and higher depreciation expense ($15.1 million) from a recent rate case237 - New residential and commercial rates from the recent base rate proceeding partially offset negative impacts, adding $13.2 million to revenue237 Liquidity and Capital Resources The company maintains adequate capital for the next 12 to 24 months, supported by operating cash flow, credit facilities, and recent debt issuances, while adhering to its debt-to-capitalization ratio - The company believes it has adequate capital for the next 12 to 24 months, supported by operating cash flow, credit facilities, and access to capital markets, enhanced by a new $850.0 million term loan and a $1.0 billion senior unsecured notes issuance216217 Net Available Liquidity | Component | March 31, 2020 (in millions) | December 31, 2019 (in millions) | | :--- | :--- | :--- | | Revolving Credit Facility | $1,850.0 | $1,850.0 | | Less: Borrowings & Letters of Credit | ($510.2) | ($10.2) | | Less: Commercial Paper | ($237.0) | ($570.0) | | Accounts Receivable Program Utilized | $0.0 | $0.0 | | Add: Cash and Cash Equivalents | $203.8 | $139.3 | | Net Available Liquidity | $1,306.6 | $1,409.1 | - The company is required to maintain a debt-to-capitalization ratio below 70% under its credit facilities, with the ratio at 63.2% as of March 31, 2020257 - Credit ratings from S&P, Moody's, and Fitch remain investment grade, and S&P revised the company's outlook from Negative to Stable in February 2020259261 Market Risk Disclosures The company's primary market risks include commodity price, interest rate, and credit risks, with active oversight by the Risk Management Committee and anticipated increases in customer bad debt due to COVID-19 - The company's principal market risks are commodity price risk, interest rate risk, and credit risk, actively overseen by the Risk Management Committee266 - Commodity price risk at rate-regulated subsidiaries is limited as prudently incurred fuel and gas costs are generally recovered through rates269 - A 100 basis point (1%) increase in short-term rates would have increased Q1 2020 interest expense by approximately $4.3 million due to exposure to interest rate risk on variable-rate debt272 - As a result of COVID-19, the company anticipates an increase in customer bad debt due to the suspension of shutoffs and customers' potential inability to pay277 Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the 'Market Risk Disclosures' section within Management's Discussion and Analysis for information regarding the company's exposure to commodity price, interest rate, and credit risks - The report directs readers to the "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk Disclosures" section for details on market risk281 Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2020, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of the end of the period, the company's disclosure controls and procedures were effective at a reasonable assurance level281 - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls282 PART II OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 18-B in the Notes to Condensed Consolidated Financial Statements for a detailed description of the company's legal proceedings, primarily related to the Greater Lawrence Incident - For a description of legal proceedings, the report refers to Note 18-B, "Legal Proceedings," in the Notes to Condensed Consolidated Financial Statements285 Item 1A. Risk Factors The company has added a new risk factor concerning the COVID-19 pandemic, highlighting its potential material adverse impact on business operations, financial condition, and cash flows through various channels - A new risk factor has been added to supplement the 2019 Form 10-K, specifically addressing the potential material adverse impact of the COVID-19 pandemic on the business286287 - Potential impacts from COVID-19 include prolonged reduction in economic activity, disruptions to supply chains and capital markets, reduced labor availability, increased bad debt, and fluctuations in demand for gas and electric services287 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None reported for the period288 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the Asset Purchase Agreement for the sale of the Massachusetts business, the Columbia Gas of Massachusetts Plea Agreement, the NiSource Deferred Prosecution Agreement, a new Term Loan Agreement, and various officer certifications