NISOURCE, INC.
Index Page
Executive Summary 37
Summary of Consolidated Financial Results 39
Results and Discussion of Segment Operations 39
Gas Distribution Operations 40
Electric Operations 43
Liquidity and Capital Resources 47
Regulatory, Environmental and Safety Matters 51
Market Risk Disclosures 54
Other Information 55
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc. EXECUTIVE SUMMARY This Management's Discussion and Analysis of Financial Condition and Results of Operations ("Management's Discussion") includes management's analysis of past financial results and certain potential factors that may affect future results, potential future risks and approaches that may be used to manage those risks. See "Note regarding forward-looking statements" at the beginning of this report for a list of factors that may cause results to differ materially.
Management's Discussion is designed to provide an understanding of our
operations and financial performance and should be read in conjunction with our
Annual Report on Form 10-K for the fiscal year ended
We are an energy holding company under the Public Utility Holding Company Act of 2005 whose utility subsidiaries are fully regulated natural gas and electric utility companies serving customers in six states. We generate substantially all of our operating income through these rate-regulated businesses, which are summarized for financial reporting purposes into two primary reportable segments: Gas Distribution Operations and Electric Operations.
Refer to the ''Business'' section of our Annual Report on Form 10-K for the
fiscal year ended
Our goal is to develop strategies that benefit all stakeholders as we (i) embark
on long-term infrastructure investment and safety programs to better serve our
customers, (ii) align our tariff structures with our cost structure, and (iii)
address changing customer conservation patterns. These strategies focus on
improving safety and reliability, enhancing customer service, ensuring customer
affordability and reducing emissions while generating sustainable returns. The
safety of our customers, communities and employees remains our top priority. The
Safety Management System ("SMS") is an established operating model within
NiSource . With the continued support and advice from our Quality Review Board (a
panel of third parties with safety operations expertise engaged by management to
advise on safety matters), we are continuing to mature our SMS processes,
capabilities and talent as we collaborate within and across industries to
enhance safety and reduce operational risk. Additionally, we continue to pursue
regulatory and legislative initiatives that will allow customers not currently
on our system to obtain gas and electric service in a cost effective manner.
Your Energy, Your Future: Our plan to replace our coal generation capacity by
the end of 2028 with primarily renewable resources, as described in our 2018
Integrated Resource Plan ("2018 Plan"), is well underway, but we are facing
challenges as described below. As of June 30, 2022 , we have executed and
received IURC approval for BTAs and PPAs with a combined nameplate capacity of
1,950 MW and 1,380 MW, respectively, under the 2018 Plan. Further, we have
placed three wind projects into service and completed the retirement of R.M.
Schahfer Generating Station Units 14 and 15. We anticipate delays on our
previously announced solar and storage projects due to several factors,
including the U.S. Department of Commerce investigation. In connection with
these delays, we currently expect to retire R.M. Schahfer's remaining two coal
units by the end of 2025. In June 2022 , the Biden Administration announced a
24-month tariff relief on solar panels subject to the ongoing U.S. Department of
Commerce investigation and authorized the use of the Defense Production Act of
1950, as amended (the "Defense Production Act"), to accelerate domestic
production of clean energy technologies, including solar panel parts. For
additional information, see "Results and Discussion of Segment Operations -
Electric Operations," in this Management's Discussion.
In 2021, we announced and filed with the IURC the Preferred Energy Resource Plan
associated with our 2021 Integrated Resource Plan ("2021 Plan"). The 2021 Plan
lays out a timeline to retire the Michigan City Generating Station which is
expected to occur between 2026 and 2028. The 2021 Plan calls for the replacement
of the retiring units with a diverse portfolio of resources including demand
side management resources, incremental solar, stand-alone energy storage and
upgrades to existing facilities at the Sugar Creek Generating Station , among
other steps. Additionally, the 2021 Plan calls for a natural gas peaking unit to
replace existing vintage gas peaking units at the R.M. Schahfer Generating
Station to support system reliability and resiliency, as well as upgrades to the
transmission system to enhance our electric generation transition. The planned
retirement of the two vintage gas peaking units at the R.M. Schahfer Generating
Station is expected to occur between 2025 and 2028. Final retirement dates for
these units, as well as Michigan City, will be subject to MISO approval. We are
continuing to evaluate potential projects under the 2021 Plan.
NiSource Next: Starting in 2021, we optimized our workforce by redefining roles
to sharpen our focus on safety and risk mitigation, operational rigor, and
adherence to process and procedures, as well as implemented consistent span of
control for leadership to increase individual responsibility and clear
accountability. Additionally, we began to make advancements across our
operations to improve safety, operational efficiencies, and customer
satisfaction through continued standardization of work
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
processes, the implementation of new mobile technology to provide real-time access to information while serving our customers and enhanced customer self-service options to better meet customer expectations. These enhancements set the foundation for 2022 and beyond, to continue improving safety and customer experience through analytics and significant technology investments.
Economic Environment: We are monitoring risks related to increasing order and delivery lead times for construction and other materials, increasing risk of unavailability of materials due to global shortages in raw materials, and risk of decreased construction labor productivity in the event of disruptions in the availability of materials. We are also seeing increasing prices associated with certain materials and supplies. To the extent that delays occur or our costs increase, our business operations, results of operations, cash flows, and financial condition could be materially adversely affected. For more information on supply chain impacts to our electric generation strategy, see "Results and Discussion of Segment Operations - Electric Operations," in this Management's Discussion. In the first half of 2022, NIPSCO experienced a rail service shortage in deliveries of coal, particularly to itsMichigan City Generating Station , and the primary rail carrier for that generating station was unable to provide assurance of adequate future service to maintain coal inventory. A lack of adequate coal deliveries to any of our coal-fired generating facilities for an extended period could deplete our inventories to a level that prevents the generating station from running, and NIPSCO would need to rely on market purchases of replacement power, which could increase the cost of electricity for NIPSCO's customers. NIPSCO believes these shortages have been resolved but continues to monitor deliveries of coal from its rail carriers. We do not expect this to have a material impact on our operations. We are faced with increased competition for employee and contractor talent in the current labor market, which has resulted in increased costs to attract and retain talent. We are ensuring that we use all internal human capital programs (development, leadership enablement programs, succession, performance management) to promote retention of our current employees along with having competitive and attractive appeal for potential recruits. With a focus on workforce planning, we are creating flexible work arrangements where we can, and being anticipatory in evaluating our talent footprint for the future to ensure we have the right people, in the right role, and at the right time. To the extent we are unable to execute on our workforce planning initiatives and experience increased employee and contractor costs, our business operations, results of operations, cash flows, and financial condition could be materially adversely affected. We have seen an increase in natural gas costs as the spot market for natural gas has substantially increased since the start of 2022. Low levels of gas in storage, continued liquified natural gas demand to shipU.S. supplies toEurope , and domestic production that has not increased commensurate with overall demand have contributed to the steep rise in gas commodity costs, which we expect to have an effect on customer bills through 2022. For the six months endedJune 30, 2022 , we have not seen this increase have a material impact on our results of operations. For more information on our commodity price impacts, see "Results and Discussion of Segment Operations - Gas Distribution Operations," and " - Market Risk Disclosures." 38
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc.
Summary of Consolidated Financial Results
A summary of our consolidated financial results for the three and six months
ended
Three Months Ended June 30, Six Months Ended June 30,
(in millions, except per share Favorable Favorable
amounts) 2022 2021 (Unfavorable) 2022 2021 (Unfavorable)
Operating Revenues $ 1,183.2 $ 986.0 $ 197.2 $ 3,056.5 $ 2,531.6 $ 524.9
Operating Expenses
Cost of energy 383.7 228.3 (155.4) 1,090.4 705.1 (385.3)
Other Operating Expenses 656.2 615.5 (40.7) 1,222.5 1,251.1 28.6
Total Operating Expenses 1,039.9 843.8 (196.1) 2,312.9 1,956.2 (356.7)
Operating Income 143.3 142.2 1.1 743.6 575.4 168.2
Total Other Deductions, net (75.5) (72.1) (3.4) (148.3) (146.2) (2.1)
Income Taxes 12.0 13.2 1.2 108.2 75.8 (32.4)
Net Income 55.8 56.9 (1.1) 487.1 353.4 133.7
Net income attributable to
noncontrolling interest (11.2) (3.4) 7.8 (6.7) (2.4) 4.3
Net Income Attributable to NiSource 67.0 60.3 6.7 493.8 355.8 138.0
Preferred dividends (13.8) (13.8) - (27.6) (27.6) -
Net Income Available to Common
Shareholders 53.2 46.5 6.7 466.2 328.2 138.0
Earnings Per Share
Basic Earnings Per Share $ 0.13 $ 0.12 $ 0.01 $ 1.15 $ 0.84 $ 0.31
Diluted Earnings Per Share $ 0.12 $ 0.11 $ 0.01 $ 1.06 $ 0.80 $ 0.26
The majority of the cost of energy in both segments are tracked costs that are
passed through directly to the customer, resulting in an equal and offsetting
amount reflected in operating revenues.
Net income available to common shareholders for the three months ended June 30,
2022 is comparable to the same period in 2021. The increase in net income
available to common shareholders during the six months ended June 30, 2022 was
primarily due to higher revenues from outcomes of gas base rate proceedings and
regulatory capital programs, as well as an insurance settlement related to the
Greater Lawrence Incident, offset by higher income taxes in 2022 compared to the
2021.
For additional information on operating income variance drivers see "Results and Discussion of Segment Operations" for Gas and Electric Operations in this Management's Discussion.
Other Deductions, net Other deductions, net for the three and six months endedJune 30, 2022 is comparable to the same periods in 2021. See Note 13, "Long-Term Debt," Note 14, "Short-Term Borrowings," and Note 11, "Pension and Other Postretirement Benefits," in the Notes to the Condensed Consolidated Financial Statements (unaudited) for additional information. Income Taxes Refer to Note 10, "Income Taxes," in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on income taxes and the change in the effective tax rate. RESULTS AND DISCUSSION OF SEGMENT OPERATIONS Presentation of Segment Information Our operations are divided into two primary reportable segments, the Gas Distribution Operations and the Electric Operations segments. The remainder of our operations, which are not significant enough on a stand-alone basis to warrant treatment as an operating segment, are presented as "Corporate and Other" within the Notes to the Condensed Consolidated Financial Statements (unaudited) and primarily are comprised of interest expense on holding company debt, and unallocated corporate costs and activities. 39
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc. Gas Distribution Operations Financial and operational data for the Gas Distribution Operations segment for the three and six months endedJune 30, 2022 and 2021 are presented below. Three Months Ended June 30, Six Months Ended June 30, (in millions) 2022 2021 Favorable 2022 2021 Favorable (Unfavorable) (Unfavorable) Operating Revenues$ 744.3 $ 577.3 $ 167.0$ 2,184.1 $ 1,716.2 $ 467.9 Operating Expenses Cost of energy 253.4 129.0 (124.4) 842.5 508.0 (334.5) Operation and maintenance 259.8 243.9 (15.9) 537.1 492.7
(44.4)
Depreciation and amortization 102.2 93.6 (8.6) 202.9 186.5
(16.4)
Loss (gain) on sale of fixed assets and impairments, net - - - (105.0) 8.1 113.1 Other taxes 48.3 49.6 1.3 115.2 112.8 (2.4) Total Operating Expenses 663.7 516.1 (147.6) 1,592.7 1,308.1 (284.6) Operating Income$ 80.6 $ 61.2 $ 19.4$ 591.4 $ 408.1 $ 183.3 Revenues Residential$ 462.8 $ 380.8 $ 82.0$ 1,440.4 $ 1,163.1 $ 277.3 Commercial 161.3 127.4 33.9 518.8 400.3 118.5 Industrial 48.3 44.4 3.9 116.4 102.6 13.8 Off-System 59.1 17.0 42.1 77.8 31.4 46.4 Other 12.8 7.7 5.1 30.7 18.8 11.9 Total$ 744.3 $ 577.3 $ 167.0$ 2,184.1 $ 1,716.2 $ 467.9 Sales and Transportation (MMDth) Residential 33.3 30.7 2.6 156.2 149.1 7.1 Commercial 28.5 27.2 1.3 108.4 101.5 6.9 Industrial 114.9 124.7 (9.8) 250.0 261.1 (11.1) Off-System 8.3 6.2 2.1 12.6 11.6 1.0 Other - - - 0.2 0.2 - Total 185.0 188.8 (3.8) 527.4 523.5 3.9 Heating Degree Days 565 606 (41) 3,406 3,309 97 Normal Heating Degree Days 544 551 (7) 3,368 3,405
(37)
% Colder (Warmer) than Normal 4 % 10 % 1 % (3) % % Colder (Warmer) than 2021 (7) % 3 % Gas Distribution Customers Residential 2,962,126 2,950,269 11,857 Commercial 252,591 252,235 356 Industrial 4,883 4,943 (60) Other 5 3 2 Total 3,219,605 3,207,450 12,155
Comparability of operation and maintenance expenses, depreciation and amortization, and other taxes may be impacted by regulatory, depreciation and tax trackers that allow for the recovery in rates of certain costs.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc. Gas Distribution Operations
The underlying reasons for changes in our operating revenues for the three and
six months ended
Favorable (Unfavorable)
Three Months Ended Six Months Ended
June 30, 2022 vs June 30, 2022 vs
Changes in Operating Revenues (in millions) 2021 2021
New rates from base rate proceedings and regulatory capital programs
$ 23.9 $ 85.0
Increased (decreased) customer usage 3.3 (1.5)
Higher revenue related to off system sales 1.4 4.1
The effects of customer growth 1.3 3.6
Higher revenue due to the effects of resuming common credit mitigation practices
1.2 3.0
The effects of weather in 2022 compared to 2021 0.2 10.7
Other 4.1 6.8
Change in operating revenues (before cost of energy and other tracked items)
$ 35.4 $ 111.7
Operating revenues offset in operating expense
Higher cost of energy billed to customers 124.4 334.5
Higher tracker deferrals within operation and maintenance, depreciation, and tax
7.2 21.7
Total change in operating revenues $ 167.0 $ 467.9
Weather
In general, we calculate the weather-related revenue variance based on changing customer demand driven by weather variance from normal heating degree days, net of weather normalization mechanisms. Our composite heating degree days reported do not directly correlate to the weather-related dollar impact on the results of Gas Distribution Operations. Heating degree days experienced during different times of the year or in different operating locations may have more or less impact on volume and dollars depending on when and where they occur. When the detailed results are combined for reporting, there may be weather-related dollar impacts on operations when there is not an apparent or significant change in our aggregated composite heating degree day comparison.
Throughput
The decrease in total volumes for the three months endedJune 30, 2022 compared to the same period in 2021 is primarily attributable to the effects of warmer weather.
The increase in total volumes for the six months ended
Commodity Price Impact Cost of energy for the Gas Distribution Operations segment is principally comprised of the cost of natural gas used while providing transportation and distribution services to customers. All of our Gas Distribution Operations companies have state-approved recovery mechanisms that provide a means for full recovery of prudently incurred gas costs. These are tracked costs that are passed through directly to the customer, and the gas costs included in revenues are matched with the gas cost expense recorded in the period. The difference is recorded on the Condensed Consolidated Balance Sheets (unaudited) as under-recovered or over-recovered gas cost to be included in future customer billings. Therefore, increases in these tracked operating expenses are offset by increases in operating revenues and have essentially no impact on net income.
Certain Gas Distribution Operations companies continue to offer choice opportunities, where customers can choose to purchase gas from a third-party supplier, through regulatory initiatives in their respective jurisdictions.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc. Gas Distribution Operations
The underlying reasons for changes in our operating expenses for the three and
six months ended
Favorable (Unfavorable)
Three Months Ended Six Months Ended
June 30, 2022 vs June 30, 2022 vs
Changes in Operating Expenses (in millions) 2021 2021
Higher employee and administrative related expenses $ (9.2) $ (21.9)
Higher depreciation and amortization expense (8.2) (16.0)
Higher materials and supplies expense (4.0) (7.4)
Higher outside services expenses (3.3) (8.6)
Higher environmental remediation costs (3.1) (3.6)
Lower NiSource Next program expenses 7.2 11.8
Lower other than income taxes primarily related to property tax expense
5.5 5.7
The loss on sale and expenses related to the Massachusetts Business in 2021
1.8 14.2
Property insurance settlement related to the Greater Lawrence Incident
- 105.0
Other (2.7) (7.6)
Change in operating expenses (before cost of energy and other tracked items)
$ (16.0) $ 71.6
Operating expenses offset in operating revenue
Higher cost of energy billed to customers (124.4) (334.5)
Higher tracker deferrals within operation and maintenance, depreciation, and tax
(7.2) (21.7)
Total change in operating expense $ (147.6) $ (284.6)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc. Electric Operations Financial and operational data for the Electric Operations segment for the three and six months endedJune 30, 2022 and 2021 are presented below. Three Months Ended June 30, Six Months Ended June 30, Favorable Favorable (in millions) 2022 2021 (Unfavorable) 2022 2021 (Unfavorable) Operating Revenues$ 437.3 $ 403.7 $ 33.6$ 867.6 $ 806.4 $ 61.2 Operating Expenses Cost of energy 130.4 99.3 (31.1) 248.0 197.1 (50.9) Operation and maintenance 124.2 127.3 3.1 240.8 246.4 5.6 Depreciation and amortization 96.0 83.7 (12.3) 178.9 167.1 (11.8) Other taxes 14.1 13.8 (0.3) 28.1 28.3 0.2 Total Operating Expenses 364.7 324.1 (40.6) 695.8 638.9 (56.9) Operating Income$ 72.6 $ 79.6 $ (7.0)$ 171.8 $ 167.5 $ 4.3 Revenues Residential$ 137.1 $ 131.9 $ 5.2$ 275.6 $ 261.1 $ 14.5 Commercial 134.7 129.9 4.8 269.2 252.8 16.4 Industrial 138.9 119.2 19.7 268.9 242.3 26.6 Wholesale 3.9 3.1 0.8 6.5 6.5 - Other 22.7 19.6 3.1 47.4 43.7 3.7 Total$ 437.3 $ 403.7 $ 33.6$ 867.6 $ 806.4 $ 61.2 Sales (GWh) Residential 845.4 821.0 24.4 1,664.6 1,625.6 39.0 Commercial 915.3 904.2 11.1 1,800.6 1,772.1 28.5 Industrial 1,994.7 2,150.8 (156.1) 4,002.5 4,214.1 (211.6) Wholesale 27.7 12.4 15.3 32.1 44.5 (12.4) Other 24.5 20.3 4.2 49.6 47.6 2.0 Total 3,807.6 3,908.7 (101.1) 7,549.4 7,703.9 (154.5) Cooling Degree Days 342 318 24 342 318 24 Normal Cooling Degree Days 247 239 8 247 239 8 % Warmer than Normal 38 % 33 % 38 % 33 % % Warmer than 2021 8 % 8 % Electric Customers Residential 423,365 420,347 3,018 Commercial 58,156 57,637 519 Industrial 2,133 2,148 (15) Wholesale 712 719 (7) Other 3 2 1 Total 484,369 480,853 3,516
Comparability of operation and maintenance expenses and depreciation and amortization may be impacted by regulatory and depreciation trackers that allow for the recovery in rates of certain costs.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc. Electric Operations The underlying reasons for changes in our operating revenues for the three and six months endedJune 30, 2022 compared to the same periods in 2021 are presented below. Favorable (Unfavorable) Three Months Ended Six Months June 30, 2022 vs Ended June 30, Changes in Operating Revenues (in millions) 2021 2022 vs 2021 FAC adjustment(1) $ (8.0)$ (8.0) Decreased customer usage (1.9) (5.1)
PPA revenue from renewable joint venture projects, mostly offset by JV operating expenses
6.2 14.7
The effects of weather in 2022 compared to 2021 2.0 3.5
The effects of customer growth 1.2 2.5
New rates from regulatory capital and DSM programs 1.1 2.2
Other 1.8 2.8
Change in operating revenues (before cost of energy and other tracked items)
$ 2.4 $ 12.6
Operating revenues offset in operating expense
Higher cost of energy billed to customers 31.1 50.9
Higher (lower) tracker deferrals within operation and maintenance, depreciation and tax
0.1 (2.3)
Total change in operating revenues $ 33.6 (1)See Note 6, "Regulatory Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information.
Weather
In general, we calculate the weather-related revenue variance based on changing customer demand driven by weather variance from normal heating or cooling degree days. Our composite heating or cooling degree days reported do not directly correlate to the weather-related dollar impact on the results of Electric Operations. Heating or cooling degree days experienced during different times of the year may have more or less impact on volume and dollars depending on when they occur. When the detailed results are combined for reporting, there may be weather-related dollar impacts on operations when there is not an apparent or significant change in our aggregated composite heating or cooling degree day comparison.
Sales
The decrease in total volumes sold for the three and six months ended
Commodity Price Impact
Cost of energy for the Electric Operations segment is principally comprised of
the cost of coal, natural gas purchased for internal generation of electricity
at NIPSCO, and the cost of power purchased from generators of electricity.
NIPSCO has a state-approved recovery mechanism that provides a means for full
recovery of prudently incurred costs of energy. The majority of these costs of
energy are passed through directly to the customer, and the costs of energy
included in operating revenues are matched with the cost of energy expense
recorded in the period. The difference is recorded on the Condensed Consolidated
Balance Sheets (unaudited) as under-recovered or over-recovered fuel cost to be
included in future customer billings. Therefore, increases in these tracked
operating expenses are offset by increases in operating revenues and have
essentially no impact on net income.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc. Electric Operations The underlying reasons for changes in our operating expenses for the three and six months endedJune 30, 2022 compared to the same periods in 2021 are presented below. Favorable (Unfavorable) Three Months
Ended Six Months Ended
June 30, 2022 vs June 30, 2022 vs
Changes in Operating Expenses (in millions) 2021 2021
Expenses related to the accelerated retirement of the
8.6 $ 8.6
Lower NiSource Next program expenses 2.9 4.3
Lower outside services expenses 0.5 6.4
Higher depreciation and amortization expense driven by the joint venture depreciation adjustment(1)
(10.1) (6.9)
Renewable joint venture project expenses, offset by JV operating revenues
(6.1) (13.0)
Effects of environmental recoveries in 2021 (1.3) (6.5)
Other (3.9) (1.2)
Change in operating expenses (before cost of energy and other tracked items)
$ (9.4) $ (8.3)
Operating expenses offset in operating revenue
Higher cost of energy billed to customers (31.1) (50.9)
Lower (higher) tracker deferrals within operation and maintenance, depreciation and tax
(0.1) 2.3
Total change in operating expense $ (40.6) $ (56.9)
(1)See Note 6, "Regulatory Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information.
Electric Supply and Generation Transition NIPSCO continues to execute on an electric generation transition consistent with the 2018 Plan, which outlines plans to retire its remaining coal-fired generation by 2026-2028, to be replaced by lower-cost, reliable and cleaner options. We expect to have capital investment requirements of approximately$2.0 billion , primarily between 2022 and 2024, with any remainder expected in 2025, to replace the generation capacity ofR.M. Schahfer Generating Station's coal-fired units. We retired R.M. Schahfer Generating Station Units 14 and 15 onOctober 1, 2021 . The remaining two coal units are currently expected to be retired by the end of 2025. See "Expected Project Delays" discussion, below, for anticipated barriers to the success of our electric generation transition. The current replacement plan primarily includes renewable sources of energy, including wind, solar, and battery storage to be obtained through a combination of NIPSCO ownership and PPAs. NIPSCO has sold, and may in the future sell, renewable energy credits from this generation to third parties to offset customer costs. NIPSCO has executed several PPAs to purchase 100% of the output from renewable generation facilities at a fixed price per MWh. Each facility supplying the energy will have an associated nameplate capacity, and payments under the PPAs will not begin until the associated generation facility is constructed by the owner/seller. NIPSCO has also executed several BTAs with developers to construct renewable generation facilities. Our current replacement program will be augmented by the Preferred Energy Resource Plan outlined in our 2021 Integrated Resource Plan. See "Executive Summary - Your Energy, Your Future" in this Management's Discussion for additional information. 45
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc. Electric Operations Under our current replacement plan, three wind projects have been placed into service, totaling approximately 804 MW of nameplate capacity. The following table summarizes the remaining executed PPAs and BTAs from our generation transition that have yet to begin commercial operations. All announced projects below have received IURC approval. Amendments are subject to additional IURC approval, as discussed in Note 15, ''Other Commitments and Contingencies - D. Other Matters,'' in the Notes to the Condensed Consolidated Financial Statements (unaudited). Estimated Original Targeted Construction Project Name Transaction Type Technology Nameplate Capacity (MW) Storage Capacity (MW) Construction Completion Completion Dunn's Bridge I(1) BTA Solar 265 - Q4 2022 2023 Indiana Crossroads(1) BTA Solar 200 - Q4 2022 2023 Dunn's Bridge II(1) BTA Solar & Storage 435 75 Q4 2023 2023 - 2024 Cavalry(1) BTA Solar & Storage 200 60 Q4 2023 2023 - 2024 Fairbanks(1) BTA Solar 250 - Q3 2023 2024 - 2025 Elliott(1) BTA Solar 200 - Q2 2023 2024 - 2025 Indiana Crossroads II 15 year PPA Wind 204 - Q4 2023 2023 Brickyard 20 year PPA Solar 200 - Q4 2022 2024 Greensboro 20 year PPA Solar & Storage 100 30 Q4 2022 2023 - 2024 Gibson 22 year PPA Solar 280 - Q2 2023 2024 Green River 20 year PPA Solar 200 - Q2 2023 2024
(1)Ownership of the facility will be transferred to joint ventures whose members include NIPSCO and an unrelated tax equity partner.
Expected Project Delays. Compared to the previously disclosed targeted construction completion dates in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , we estimate delays for most projects to range from six to 18 months, resulting in the majority of our projects, and investment, being in service in 2023 and 2024. We do not currently anticipate any delays to the 2023 in-service date of our outstanding wind energy project. The expected delays and inflationary cost pressures communicated from the developers of our solar and storage projects are primarily due to (i) unavailability of solar panels and other uncertainties related to the pendingU.S. Department of Commerce investigation on Antidumping and Countervailing Duties petition filed by a domestic solar manufacturer (the "DOC Investigation"), (ii) theU.S. Department of Homeland Security's June 2021 Withhold Release Order on silica-based products made by Hoshine Silicon Industry Co., Ltd., (iii) Section 201 Tariffs and (iv) persistent general global supply chain and labor availability issues. We are also monitoring potential delays communicated by the developers of our renewable energy projects related to local permitting processes and obtaining interconnection rights. Preliminary findings from the DOC Investigation, including potential tariff amounts, are expected to be released inAugust 2022 , with a final decision expected betweenJanuary 2023 andMarch 2023 . We have received and are evaluating several notices of possible force majeure from developers in connection with solar panel availability. The resolution of these issues, including the final conclusion of the DOC Investigation will determine what additional costs or delays our solar projects will be subject to as a result of any tariffs imposed. If any of these impacts result in cost increases for certain projects, such potential impacts are expected to result in the need for us to seek additional regulatory review and approvals. Additionally, significant changes to project costs and schedules as a result of these factors could impact the viability of the projects. InJune 2022 , theU.S. Department of Homeland Security published its Uyghur Forced Labor Prevention Act Entity List (the "List"). None of the developers or suppliers of our renewable energy projects were named on the List. Additionally, theBiden Administration announced a 24-month tariff relief on solar panels subject to the ongoingU.S. Department of Commerce investigation and authorized the use of the Defense Production Act, to accelerate domestic production of clean energy technologies, including solar panel parts. We, along with the developers of these generation projects, are continuously evaluating potential impacts to the targeted completion date of each project. Delays to the completion dates of our projects could also include delays in the financial return of certain investments and impact the overall timing of our electric generation transition. Although we are not currently expecting delays to extend the completion dates of our six solar and storage BTA projects beyond the currently planned sunset of investment tax credits at the end of 2025, if such delays occur, they could impact the economic viability of the projects. 46
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc. Liquidity and Capital Resources We continually evaluate the availability of adequate financing to fund our ongoing business operations, working capital and core safety and infrastructure investment programs. Our financing is sourced through cash flow from operations and the issuance of debt and/or equity. External debt financing is provided primarily through the issuance of long-term debt, accounts receivable securitization programs and our$1.5 billion commercial paper program, which is backstopped by our committed revolving credit facility with a total availability from third-party lenders of$1.85 billion . OnFebruary 18, 2022 , we amended our revolving credit agreement to, among other things, extend its term toFebruary 18, 2027 . The commercial paper program and credit facility provide cost-effective, short-term financing until it can be replaced with a balance of long-term debt and equity financing that achieves our desired capital structure. OnJune 10, 2022 , we completed the issuance and sale of$350.0 million of 5.00% senior unsecured notes maturing in 2052, which resulted in approximately$344.6 million of net proceeds after discount and debt issuance costs. We intend to disburse an amount equal to the net proceeds of the notes to finance, in whole or in part, the acquisition of our 302 MW Indiana Crossroads Wind project and 102 MW Rosewater Wind project from the project developer. We utilize an ATM equity program that allows us to issue and sell shares of our common stock up to an aggregate issuance of$750.0 million throughDecember 31, 2023 . As ofJune 30, 2022 , the ATM program (including the impact of the forward sale agreement) had approximately$300.0 million of equity available for issuance. We also expect to remarket the Series C Mandatory Convertible Preferred stock prior toDecember 1, 2023 , which could result in additional cash proceeds. See Note 5, ''Equity,'' in the Notes to Condensed Consolidated Financial Statements (unaudited) for more information on our ATM program and Equity Units.
We believe these sources provide adequate capital to fund our operating activities and capital expenditures in 2022 and beyond.
Greater Lawrence Incident. As discussed in Note 15, ''Other Commitments and Contingencies,'' in the Notes to the Condensed Consolidated Financial Statements (unaudited), due to the inherent uncertainty of litigation, there can be no assurance that the outcome or resolution of any particular claim related to the Greater Lawrence Incident will not continue to have an adverse impact on our cash flows. Through income generated from operating activities, amounts available under the short-term revolving credit facility, and our ability to access capital markets, we believe we have adequate capital available to settle remaining anticipated claims associated with the Greater Lawrence Incident. Operating Activities Net cash from operating activities for the six months endedJune 30, 2022 was$907.2 million , an increase of$204.2 million compared to the six months endedJune 30, 2021 . This increase was primarily driven by year over year increased cash inflows related to the collection in 2022 of under-recovered gas and fuel costs from the prior year. We also received a refund in 2022 from a gas supplier that will be passed back to customers through the GCA mechanism in each affected jurisdiction. Investing Activities Net cash used for investing activities for the six months endedJune 30, 2022 was$951.1 million , an increase of$88.7 million compared to the six months endedJune 30, 2021 . Our current year investing activities were comprised of increased capital expenditures related to system growth and reliability and a payment to a renewable generation asset developer related to the Dunn's Bridge I construction milestone payment, which were offset by insurance recoveries in the current year. As we evaluate adjustments to renewable generation project timing, we remain on track to make capital investments totaling approximately$8 billion during the 2022-2024 period. We expect to have capital investment requirements of approximately$2.0 billion , primarily between 2022 and 2024, with any remainder expected in 2025, to replace the generation capacity ofR.M. Schahfer Generating Station's coal-fired units. To partially compensate for delays in renewable generation projects, we are accelerating other gas and electric infrastructure capital investments into 2022 and 2023. These forecasted capital investments and those included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , are subject to continuing review and adjustment. Actual capital expenditures may vary from these estimates. For example, the timing and ultimate cost associated with solar and battery storage capital expenditures may vary due to theU.S. Department of Commerce's investigation into an Antidumping and Countervailing Duties circumvention claim on solar cells and panels supplied fromMalaysia ,Vietnam ,Thailand andCambodia . For additional information, see "Results and Discussion of Segment Operations - Electric Operations," in this Management's Discussion. 47
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc. Regulatory Capital Programs. We replace pipe and modernize our gas infrastructure to enhance safety and reliability by reducing leaks, which subsequently reduces GHG emissions. In 2022, we continue to move forward on core infrastructure and environmental investment programs supported by complementary regulatory and customer initiatives across all six states of our operating area. The following table describes the most recent vintage of our regulatory programs to recover infrastructure replacement and other federally mandated compliance investments currently in rates or pending commission approval: (in millions) Incremental Incremental Rates Company Program Revenue Capital Investment Investment Period Costs Covered(1) Effective Replacement of (1) hazardous service lines, (2) cast iron, wrought iron, uncoated steel, and bare steel pipe, (3) natural gas risers prone to failure and (4) Columbia of Ohio(2) IRP - 2022 $ 25.0 $ 232.9 1/21-12/21 installation of AMR devices. May 2022 Columbia of Ohio(2) CEP - 2022 32.2 253.5 1/21-12/21 Assets not included in the IRP. September 2022 New or replacement projects undertaken for the purpose of safety, reliability, system modernization or economic NIPSCO - Gas TDSIC 4 17.2 77.5 7/21-12/21 development. July 2022 Project costs to comply with NIPSCO - Gas(3) FMCA 1 8.4 14.1 10/21-3/22 federal mandates. October 2022 Replacement projects that (1) enhance system safety or reliability, or (2) reduce, or potentially reduce, greenhouse gas Columbia of Virginia(4) SAVE - 2022 4.0 63.0 1/22-12/22 emissions. January 2022 Pipeline upgrades designed to improve public safety or Columbia of Maryland STRIDE - 2022 $ 1.3 $ 17.5 1/22-12/22 infrastructure reliability. January 2022 New or replacement projects undertaken for the purpose of safety, reliability, system modernization or economic NIPSCO - Electric(5) TDSIC - 9 $ 0.2 $ 42.7 2/21-5/21 development. February 2022 New or replacement projects undertaken for the purpose of safety, reliability, system modernization or economic NIPSCO - Electric(6) TDSIC - 1 $ 10.4 $ 148.5 6/21-1/22 development. August 2022 (1)Programs do not include any costs already included in base rates. (2)The January throughMarch 2021 investments included in these filings are also included in the pendingColumbia ofOhio rate case. The infrastructure filings will be adjusted to reflect the final rate case outcome. (3)NIPSCO filed a new CPCN onApril 1, 2022 for an additional Pipeline Safety III Compliance Plan, including$235.3M in capital and$34.1M in O&M expense project investments. (4)Columbia ofVirginia filed its application to amend and extend its SAVE program with the Virginia SCC onAugust 12, 2021 , requesting approval of a two-year SAVE program for calendar years 2022-2023 that includes incremental capital investments of$63.0 million and$72.0 million , respectively. The Commission approved the Company's application in itsDecember 6, 2021 Order Approving SAVE Rider. (5)OnApril 1, 2021 , NIPSCO filed a notice with the IURC that it intended to terminate its current Electric TDSIC plan effectiveMay 31, 2021 . NIPSCO filed the TDSIC-9 petition onSeptember 28, 2021 , with capital investment through the plan termination date ofMay 2021 , and received an order onJanuary 26, 2022 approving TDSIC-9. (6)NIPSCO filed for a new electric TDSIC plan onJune 1, 2021 . An order approving NIPSCO's new electric TDSIC plan was received onDecember 28, 2021 . NIPSCO filed its first tracker, TDSIC - 1, onMarch 30, 2022 . An order was received and approved onJuly 27, 2022 .
In 2022, NIPSCO filed additional petitions associated with the FMCA program to recover federally mandated compliance investments.
OnMarch 30, 2022 ,NIPSCO Electric filed a petition with the IURC seeking approval of NIPSCO's federally mandated costs for closure ofMichigan City Generating Station's CCR ash ponds. The project includes a total estimated$40.0 million of federally mandated retirement costs. NIPSCO is requesting all associated accounting and ratemaking relief, including establishment of a periodic rate adjustment through the FMCA mechanism. Refer to Note 15, ''Other Commitments and Contingencies - C. Environmental Matters,'' in the Notes to the Condensed Consolidated Financial Statements (unaudited) for further discussion of the CCRs. OnApril 1, 2022 ,NIPSCO Gas filed a petition with the IURC seeking approval of NIPSCO's federally mandated costs for a Pipeline Safety III Compliance Plan. The federally mandated costs include a total estimated$228.7 million of capital costs as well as$34.1 million of operation and maintenance programs.NIPSCO Gas is requesting all associated accounting and ratemaking relief, including establishment of a periodic rate adjustment mechanism. 48
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc. Financing Activities Common Stock, Preferred Stock and Equity Units. Refer to Note 5, ''Equity,'' in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on common and preferred stock activity.
Long-Term Debt. Refer to Note 13, ''Long-Term Debt,'' in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on long-term debt.
Short-Term Debt and Sale of Trade Accounts Receivables. Refer to Note 14, ''Short-Term Borrowings,'' in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on short-term debt activity, including sale of trade accounts receivable.
Noncontrolling Interest. Refer to Note 12, "Variable Interest Entities," in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on contributions from noncontrolling interest activity. Sources of Liquidity The following table displays our liquidity position as ofJune 30, 2022 andDecember 31, 2021 : (in millions) June 30, 2022 December 31, 2021 Current Liquidity Revolving Credit Facility$ 1,850.0 $ 1,850.0 Accounts Receivable Programs(1) 285.0 251.2 Less: Commercial Paper 270.0 560.0 Accounts Receivable Programs Utilized 285.0 - Letters of Credit Outstanding Under Credit Facility 14.7 18.9 Add: Cash and Cash Equivalents 77.8 84.2 Net Available Liquidity$ 1,643.1 $ 1,606.5
(1)Represents the lesser of the seasonal limit or maximum borrowings supportable by the underlying receivables.
Debt Covenants. We are subject to financial covenants under our revolving credit facility, which require us to maintain a debt to capitalization ratio that does not exceed 70%. As ofJune 30, 2022 , the ratio was 57.3%. Credit Ratings. The credit rating agencies periodically review our ratings, taking into account factors such as our capital structure and earnings profile. The following table includes our and NIPSCO's credit ratings and ratings outlook as ofJune 30, 2022 . There were no changes to the below credit ratings or outlooks sinceFebruary 2020 . A credit rating is not a recommendation to buy, sell, or hold securities, and may be subject to revision or withdrawal at any time by the assigning rating organization. S&P Moody's Fitch Rating Outlook Rating Outlook Rating Outlook NiSource BBB+ Stable Baa2 Stable BBB Stable NIPSCO BBB+ Stable Baa1 Stable BBB Stable Commercial Paper A-2 Stable P-2 Stable F2 Stable Certain of our subsidiaries have agreements that contain ''ratings triggers'' that require increased collateral if our credit rating or the credit ratings of certain of our subsidiaries are below investment grade. These agreements are primarily for insurance purposes and for the physical purchase or sale of power. As ofJune 30, 2022 , the collateral requirement that would be required in the event of a downgrade below the ratings trigger levels would amount to approximately$65.8 million . In addition to agreements with ratings triggers, there are other agreements that contain ''adequate assurance'' or ''material adverse change'' provisions that could necessitate additional credit support such as letters of credit and cash collateral to transact business. 49
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc. Equity. Our authorized capital stock consists of 620,000,000 shares,$0.01 par value, of which 600,000,000 are common stock and 20,000,000 are preferred stock. As ofJune 30, 2022 , 405,878,297 shares of common stock and 1,302,500 shares of preferred stock were outstanding. Contractual Obligations. A summary of contractual obligations is included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 . Except for our June debt issuance, there were no additional material changes from year-end during the six months endedJune 30, 2022 . Refer to Note 13, "Long-Term Debt," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information regarding the debt issuance. Guarantees, Indemnities and Other Off Balance Sheet Arrangements. We and certain of our subsidiaries enter into various agreements providing financial or performance assurance to third parties on behalf of certain subsidiaries as a part of normal business. Such agreements include guarantees and stand-by letters of credit. Refer to Note 15, ''Other Commitments and Contingencies,'' in the Notes to the Condensed Consolidated Financial Statements (unaudited) for additional information about such arrangements. 50
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc. Regulatory, Environmental and Safety Matters Cost Recovery and Trackers Comparability of our line item operating results is impacted by regulatory trackers that allow for the recovery in rates of certain costs such as those described below. Increases in the expenses that are subject to approved regulatory tracker mechanisms generally lead to increased regulatory assets, which ultimately result in a corresponding increase in operating revenues and, therefore, have essentially no impact on total operating income results. Certain approved regulatory tracker mechanisms allow for abbreviated regulatory proceedings in order for the operating companies to quickly implement revised rates and recover associated costs. A portion of the Gas Distribution revenue is related to the recovery of gas costs, the review and recovery of which occurs through standard regulatory proceedings. All states in our operating area require periodic review of actual gas procurement activity to determine prudence and to confirm the recovery of prudently incurred energy commodity costs supplied to customers. We recognize that energy efficiency reduces emissions, conserves natural resources and saves our customers money. Our gas distribution companies offers programs such as energy efficiency upgrades, home checkups and weatherization services. The increased efficiency of natural gas appliances and improvements in home building codes and standards contributes to a long-term trend of declining average use per customer. While we are looking to expand offerings so the energy efficiency programs can benefit as many customers as possible, our Gas Distribution Operations have pursued changes in rate design to more effectively match recoveries with costs incurred.Columbia ofOhio has adopted a straight fixed variable rate design that closely links the recovery of fixed costs with fixed charges.Columbia ofMaryland andColumbia ofVirginia have regulatory approval for weather and revenue normalization adjustments for certain customer classes, which adjust monthly revenues that exceed or fall short of approved levels.Columbia ofPennsylvania continues to operate its pilot residential weather normalization adjustment and also has a fixed customer charge. This weather normalization adjustment only adjusts revenues when actual weather compared to normal varies by more than 3%.Columbia ofKentucky incorporates a weather normalization adjustment for certain customer classes and also has a fixed customer charge. In a prior gas base rate proceeding, NIPSCO implemented a higher fixed customer charge for residential and small customer classes moving toward recovering more of its fixed costs through a fixed recovery charge, but has no weather or usage protection mechanism. A portion of the Electric Operations revenue is related to the recovery of fuel costs to generate power and the fuel costs related to purchased power. These costs are recovered through a FAC, which is updated quarterly to reflect actual costs incurred to supply electricity to customers. While increased efficiency of electric appliances and improvements in home building codes and standards has similarly impacted the average use per electric customer in recent years, NIPSCO expects future growth in per customer usage as a result of increasing electric applications. Further growth is anticipated as electric vehicles become more prevalent. These ongoing changes in use of electricity will likely lead to development of innovative rate designs, and NIPSCO will continue efforts to design rates that increase the certainty of recovery of fixed costs. 51
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc. Regulatory, Environmental and Safety Matters Rate Case Actions The following table describes current rate case actions as applicable in each of our jurisdictions net of tracker impacts: (in millions) Requested Approved Incremental Incremental Rates Company Proposed ROE Approved ROE Revenue Revenue Filed Status Effective
Currently Approved in Current or Future Rates
Approved
Columbia of Pennsylvania(1) 10.95 % None specified $ 98.3 $ 58.5 March 30, 2021 December 16,
2021
Approved
Columbia of Maryland 10.85 % 9.65 % $ 4.8 $ 2.4 May 14, 2021 December 3, 2021 December 2021
Approved
Columbia of Kentucky(2) 10.30 % 9.35 % $ 26.7 $ 18.3 May 28, 2021 December 28, 2021 January 2022
Approved
Columbia of Virginia(3) 10.95 % None specified $ 14.2 $ 1.3 August 28, 2018 June 12, 2019 February 2019
Approved
Columbia of Ohio 11.50 % 10.39 % $ 87.8 $ 47.1 March 3, 2008 December 3, 2008 December 2008
Approved
NIPSCO - Gas 10.70 % 9.85 % $ 138.1 $ 105.6 September 27, 2017 September 19, 2018 October 2018
Approved
NIPSCO - Electric 10.80 % 9.75 %
$ 21.4
January 2020
Active Rate Cases
Columbia of Ohio(4) 10.95 % In process $ 221.4 In process June 30, 2021 Pending Pending
Approved
NIPSCO - Gas(5) 10.50 % 9.85 % $ 109.7 $ 71.8 September 29, 2021 July 27, 2022 September 2022
Columbia of Pennsylvania 11.20 % In process $ 82.2 In process March 18, 2022 Order Expected Q4 2022 December 2022
Columbia of Virginia(6) 10.75 % In process $ 40.6 In process April 29, 2022 Order Expected Q1 2023 October 2022
Columbia Gas of Maryland 10.95 % In process $ 5.5 In process May 13, 2022 Order
Expected Q4 2022
(1)No approved ROE is identified for this matter since the approved revenue increase is the result of a black box settlement under which parties agree upon the amount of increase without specifying ratemaking elements to establish the Company's revenue requirement. Pursuant to the settlement, for purposes of calculating its DSIC,Columbia ofPennsylvania shall use the equity return rate for gas utilities contained in thePennsylvania Commission's most recent Quarterly Report on the Earnings ofJurisdictional Utilities , including quarterly updates thereto. (2)The approved ROE for natural gas capital riders (e.g. SMRP) is 9.275%. (3)Columbia ofVirginia's rate case resulted in a black box settlement, representing a settlement to a specific revenue increase but not a specified ROE. The settlement provides use of a 9.70% ROE for future SAVE filings. (4)A proposed Incremental Revenue of$212.3M is reflected in the update filed with the PUCO onMarch 31, 2022 . Changes to the timeline for theColumbia Gas of Ohio rate case have been modified in light of the needed additional time for settlement negotiations and the litigation process to come to completion. (5) New rates will be implemented in 2 steps, with implementation of step 1 rates to be effective inSeptember 2022 and step 2 rates to be effective inMarch 2023 . (6)The revenue request including the SAVE tracker related amount is$58.2 million . BeginningOctober 2022 , interim rates will be billed subject to refund, pending a final commission order. PHMSA Regulations OnDecember 27, 2020 , the Protecting Our Infrastructure of Pipelines and Enhancing Safety (PIPES) Act of 2020 was signed into law, reauthorizing funding for federal pipeline safety programs throughSeptember 30, 2023 . Among other things, the PIPES Act requires that PHMSA revise the pipeline safety regulations to require operators to update, as needed, their existing distribution integrity management plans, emergency response plans, and operation and maintenance plans. The PIPES Act also requires PHMSA to adopt new requirements for managing records and updating, as necessary, existing district regulator stations to eliminate common modes of failure that can lead to overpressurization. PHMSA must also require that operators implement and utilize advanced leak detection technologies that enable the location and categorization of all leaks that are hazardous, or potentially hazardous, to human safety or the environment. Natural gas companies, includingNiSource and our subsidiaries, may see increased costs depending on how PHMSA implements the new mandates resulting from the PIPES Act. 52
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc. Regulatory, Environmental and Safety Matters Climate Change Issues Physical Climate Risks. Increased frequency of severe and extreme weather events associated with climate change could materially impact our facilities, energy sales, and results of operations. We are unable to predict these events. However, we perform ongoing assessments of physical risk, including physical climate risk, to our business. More extreme and volatile temperatures, increased storm intensity and flooding, and more volatile precipitation leading to changes in lake and river levels are among the weather events that are most likely to impact our business. Efforts to mitigate these physical risks continue to be implemented on an ongoing basis. Future legislative and regulatory programs, at both the federal and state levels, could significantly limit allowed GHG emissions or impose a cost or tax on GHG emissions. Revised or additional future GHG legislation and/or regulation related to the generation of electricity or the extraction, production, distribution, transmission, storage and end use of natural gas could materially impact our gas supply, financial position, financial results and cash flows. We continue to monitor the implementation of any final and proposed climate change-related legislation and regulations, including theInfrastructure Investment and Jobs Act, passed inNovember 2021 , the draft Inflation Reduction Act of 2022, and theEPA 's proposed methane regulations for the oil and natural gas industry, but we cannot predict their final form or impact on our business at this time. We have identified potential opportunities associated with theInfrastructure Investment and Jobs Act and are evaluating how they may align with our strategy going forward. The energy-related provisions include new federal funding for power grid infrastructure and resiliency investments, new and existing energy efficiency and weatherization programs, electric vehicle infrastructure for public chargers and additional LIHEAP funding over the next five years. Federal Policy. InFebruary 2021 ,the United States rejoined theParis Agreement, an international treaty through which parties set nationally determined contributions to reduce GHG emissions, build resilience, and adapt to the impacts of climate change. Subsequently, theBiden Administration released a target forthe United States to achieve a 50%-52% GHG reduction from 2005 levels by 2030, which supports the President's goals to create a carbon-free power sector by 2035 and net zero emissions economy no later than 2050. There are many pathways to reach these goals. OnJune 30, 2022 , theSupreme Court of the United States ruled for the petitioners in West Virginia v.EPA , which examined the authority of theEPA to regulate GHG emissions from the power sector. We will continue to evaluate this matter, but we remain committed to our previously stated carbon reduction goals. State Policy. The Virginia Clean Economy Act was signed into law in 2020. While the Act does not establish any new mandates onColumbia ofVirginia , certain natural gas customers may, over the long-term, reduce their use of natural gas to meet the 100% renewable electricity requirement.Columbia ofVirginia will continue to monitor this matter, but we cannot predict its final impact on our business at this time. Separately, the Virginia Energy Innovation Act ("the Act"), enacted into law inApril 2022 , and effectiveJuly 1, 2022 , allows natural gas utilities to supply alternative forms of gas that meet certain standards and reduce emissions intensity. The Act also provides that the costs of enhanced leak detection and repair may be added to a utility's plan to identify proposed eligible infrastructure replacement projects and related cost recovery mechanisms, known as the SAVE Plan. Furthermore, under the Act, utilities can recover eligible biogas supply infrastructure costs on an ongoing basis. The provisions of these laws may provide opportunities forColumbia ofVirginia as it participates in the transition to a lower carbon future. The Climate Solutions Now Act of 2022 requiresMaryland to reduce GHG emissions by 60% by 2031 (from 2006 levels), and it requires the state to reach net zero emissions by 2045.The Maryland Department of the Environment is required to adopt a plan to achieve the 2031 goal byDecember 2023 , and it is required to adopt a plan for the net zero goal by 2030. The Act also enacts a state policy to move to broader electrification of both existing buildings and new construction, and requires thePublic Service Commission to complete a study assessing the capacity of gas and electric distribution systems to successfully serve customers under a transition to a highly electrified building sector.Columbia ofMaryland will continue to monitor this matter, but we cannot predict its final impact on our business at this time. NIPSCO,Columbia ofMaryland ,Columbia ofPennsylvania andColumbia ofVirginia each filed petitions to implement the Green Path Rider, which will be a voluntary rider that allows customers to opt in and offset either 50% or 100% of their natural gas related emissions. To reduce the emissions, the utilities will purchase RNG attributes and carbon offsets to match the usage for customers opting into the program. In response to these transition risks and opportunities, we continue to actively implement our plans to reduce Scope 1 GHG emissions by 90% from 2005 levels by 2030, and to significantly reduce methane emissions, a component of Scope 1 GHG emissions. These plans include the retirement of coal-fired electric generation, increased sourcing of renewable energy, and 53
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc. Regulatory, Environmental and Safety Matters methane reductions from priority pipeline replacement, traditional leak detection and repair, and deployment of advanced leak detection and repair. As of the end of 2021, we had reduced Scope 1 GHG emissions by approximately 58% from 2005 levels. Additionally, we are active in several efforts to accelerate the development and demonstration of lower-carbon energy technologies and resources, such as hydrogen and RNG, to enable affordable pathways to economy-wide decarbonization. As discussed above in this Management's Discussion within "Results and Discussion of Segment Operations - Electric Operations," NIPSCO continues to execute on an electric generation transition consistent with the preferred pathways identified in its 2018 and 2021 Integrated Resource Plans. Additionally, as discussed above in this Management's Discussion within "Liquidity and Capital Resources - Regulatory Capital Programs," our natural gas distribution companies are lowering methane emissions by replacing aging infrastructure, which also increases safety and reliability for customers and communities. Market Risk Disclosures Risk is an inherent part of our businesses. The extent to which we properly and effectively identify, assess, monitor and manage each of the various types of risk involved in our businesses is critical to our profitability. We seek to identify, assess, monitor and manage, in accordance with defined policies and procedures, the following principal market risks that are involved in our businesses: commodity price risk, interest rate risk and credit risk. We manage risk through a multi-faceted process with oversight by the Risk Management Committee that requires constant communication, judgment and knowledge of specialized products and markets. Our senior management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. These may include, but are not limited to market, operational, financial, compliance and strategic risk types. In recognition of the increasingly varied and complex nature of the energy business, our risk management process, policies and procedures continue to evolve and are subject to ongoing review and modification. Commodity Price Risk Our Gas and Electric Operations have commodity price risk primarily related to the purchases of natural gas and power. To manage this market risk, our subsidiaries use derivatives, including commodity futures contracts, swaps, forwards and options. We do not participate in speculative energy trading activity. Commodity price risk resulting from derivative activities at our rate-regulated subsidiaries is limited and does not bear signification exposure to earnings risk, since our current regulatory mechanisms allow recovery of prudently incurred purchased power, fuel and gas costs through the rate-making process, including gains or losses on these derivative instruments. These changes are included in the GCA and FAC regulatory rate-recovery mechanisms. If these mechanisms were to be adjusted or eliminated, these subsidiaries may begin providing services without the benefit of the traditional rate-making process and may be more exposed to commodity price risk. For additional information, see "Results and Discussion of Segment Operations" in this Management's Discussion. Our subsidiaries are required to make cash margin deposits with their brokers to cover actual and potential losses in the value of outstanding exchange traded derivative contracts. The amount of these deposits, some of which are reflected in our restricted cash balance, may fluctuate significantly during periods of high volatility in the energy commodity markets. Refer to Note 7, "Risk Management Activities," in the Notes to Condensed Consolidated Financial Statements (unaudited) for further information on our commodity price risk assets and liabilities as ofJune 30, 2022 andDecember 31, 2021 . Interest Rate Risk We are exposed to interest rate risk as a result of changes in interest rates on borrowings under our revolving credit agreement, commercial paper program and accounts receivable programs, which have interest rates that are indexed to short-term market interest rates. Based upon average borrowings and debt obligations subject to fluctuations in short-term market interest rates, an increase (or decrease) in short-term interest rates of 100 basis points (1%) would have increased (or decreased) interest expense by$1.2 million and$2.7 million for the three and six months endedJune 30, 2022 , and$0.2 million and$1.4 million for the three and six months endedJune 30, 2021 , respectively. We are also exposed to interest rate risk as a result of changes in benchmark rates that can influence the interest rates of future long-term debt issuances. From time to time we may enter into forward interest rate instruments to lock in long term interest costs and/ or rates. Refer to Note 7, "Risk Management Activities," in the Notes to Condensed Consolidated Financial Statements (unaudited) for further information on our interest rate risk assets and liabilities as ofJune 30, 2022 andDecember 31, 2021 . 54
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NiSource Inc. Credit Risk Due to the nature of the industry, credit risk is embedded in many of our business activities. Our extension of credit is governed by a Corporate Credit Risk Policy. In addition, Risk Management Committee guidelines are in place which document management approval levels for credit limits, evaluation of creditworthiness, and credit risk mitigation efforts. Exposures to credit risks are monitored by the risk management function, which is independent of commercial operations. Credit risk arises due to the possibility that a customer, supplier or counterparty will not be able or willing to fulfill its obligations on a transaction on or before the settlement date. For derivative-related contracts, credit risk arises when counterparties are obligated to deliver or purchase defined commodity units of gas or power to us at a future date per execution of contractual terms and conditions. Exposure to credit risk is measured in terms of both current obligations and the market value of forward positions net of any posted collateral such as cash and letters of credit.
We closely monitor the financial status of our banking credit providers. We evaluate the financial status of our banking partners through the use of market-based metrics such as credit default swap pricing levels, and also through traditional credit ratings provided by major credit rating agencies.
Other Information Critical Accounting Estimates A summary of our critical accounting estimates is included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 . There were no material changes made as ofJune 30, 2022 . Recently Issued Accounting Pronouncements Refer to Note 2, "Recent Accounting Pronouncements," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information about recently issued and adopted accounting pronouncements. 55
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