NISOURCE, INC. NiSource Inc. Index Page Executive Summary 50 Summary of Consolidated Financial Results 52 Results and Discussion of Segment Operations 54 Gas Distribution Operations 55 Electric Operations 59 Liquidity and Capital Resources 63 Off Balance Sheet Arrangements 65 Market Risk Disclosures 65 Other Information 66 49
-------------------------------------------------------------------------------- Table of Contents 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) analyzes our financial condition, results of operations and cash flows and those of our subsidiaries. It also 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 endedDecember 31, 2019 . We are an energy holding company under the Public Utility Holding Company Act of 2005 whose subsidiaries are fully regulated natural gas and electric utility companies serving customers in six states, following the sale of our Massachusetts Business, which closed onOctober 9, 2020 . See "Columbia of Massachusetts Asset Sale" below for additional information. 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 endedDecember 31, 2019 for further discussion of our regulated utility business segments. Our goal is to develop strategies that benefit all stakeholders as we address changing customer conservation patterns, develop more contemporary pricing structures and embark on long-term investment programs. These strategies are intended to improve reliability and safety, enhance customer service and reduce emissions while generating sustainable returns. Additionally, we continue to pursue regulatory and legislative initiatives that will allow residential customers not currently on our system to obtain gas service in a cost effective manner.Columbia of Massachusetts Asset Sale: OnFebruary 26, 2020 ,NiSource andColumbia ofMassachusetts entered into an Asset Purchase Agreement with Eversource (the "Asset Purchase Agreement"). Upon the terms and subject to the conditions set forth in the Asset Purchase Agreement, we sold theMassachusetts Business to Eversource for net proceeds of$1,112.6 million in cash, subject to adjustment for the final working capital amount. The sale was approved by the Massachusetts DPU onOctober 7, 2020 , and closed onOctober 9, 2020 . As a result of the sale, we have transitioned to executing theTSA with Eversource. For additional information, see Note 6, "Assets and Liabilities Held for Sale," and Note 18-D, "Other Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited). Your Energy, Your Future: Our plan to replace 80% of our coal generation capacity by the end of 2023 and all of our coal generation by the end of 2028 with primarily renewable resources is well underway. InOctober 2020 , we executed three BTAs for 900 MW solar nameplate capacity and 135 MW of storage capacity. The three projects were selected following a comprehensive review of bids submitted through the RFP process that NIPSCO underwent in late 2019. The projects complement previously executed BTAs and PPAs with a combined nameplate capacity of 400 MW and 1,300 MW, respectively. For additional information, see Note 18-D, "Other Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited). NiSource Next: We have launched a comprehensive, multi-year program designed to deliver long-term safety, sustainable capability enhancements and cost optimization improvements. This program will advance the high priority we place on safety and risk mitigation, further enable our safety management system ("SMS"), and enhance the customer experience. NiSource Next is designed to leverage our current scale, utilize technology, define clear roles and accountability with our leaders and employees, and standardize our processes to focus on operational rigor, quality management and continuous improvement. An initial step in this program is the voluntary separation program that was announced inAugust 2020 . Total severance expense for employees who were accepted under the voluntary separation program offered inAugust 2020 is approximately$38.0 million . The majority of these separation costs will be expensed in 2020. For additional information, see Note 18-D, "Other Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited). One of the expected benefits of the NiSource Next initiative, along with the sale of the Massachusetts Business, is a projected reduction in ongoing operation and maintenance costs by approximately 8% in 2021 compared to 2020. COVID-19: The safety of our employees and customers, while providing essential services during the COVID-19 pandemic, is paramount. SinceMarch 2020 , we have taken a proactive, coordinated approach intended to prevent, mitigate and respond to 50 -------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. COVID-19 by utilizing our Incident Command System (ICS). The ICS includes members of our executive council, a medical review professional, and members of functional teams from across our company. The ICS monitors state-by-state conditions and determines steps to conduct our operations safely for employees and customers. We have implemented procedures designed to protect our employees who work in the field and who continue to work in operational and corporate facilities, including social distancing, wearing face coverings, temperature checks and more frequent cleaning of equipment and facilities. We have also implemented work-from-home policies. We have minimized non-essential work that requires an employee to enter a customer premise and limited company vehicle occupancy to one person, where possible. We continue to employ physical and cyber-security measures to ensure that our operational and support systems remain functional. Our actions to date have mitigated the impact of COVID-19 on our employees. We have had a limited amount of known COVID-19 cases within our company. We will continue to follow CDC guidance and implement safety measures intended to ensure employee and customer safety during this pandemic. Since the beginning of the COVID-19 pandemic, we have been helping our customers navigate this challenging time. We suspended disconnections soon after this outbreak began. While the suspension of disconnections has been lifted in some states, suspensions are likely to continue in other states through the end of the year. In all states, we plan to continue our payment assistance programs to help customers deal with the impact of COVID-19. Additionally, we continue to have dialogue with the state regulatory commissions for each of our operating companies regarding COVID-19. Regulatory deferrals have been allowed by the state regulatory commissions in all states in which we operate. For information on the state specific suspension of disconnections and COVID-19 regulatory filings, see Note 9, "Regulatory Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited). The CARES Act was enacted onMarch 27, 2020 and provides monetary-relief and financial aid to individuals, business, nonprofits, states and municipalities. We are continuing to promote multiple resources available to customers including benefits from the CARES Act, such as additional funding for both theLow-Income Home Energy Assistance Program and the Community ServicesBlock Grant to help support income-qualified customers. We are sharing energy efficiency tips to help customers save energy at home and promoting our budget plan program, which allows customers to pay about the same amount each month. While we have experienced lower revenue, higher expenses for personal protective equipment and supplies, and higher bad debt expense, COVID-19 has not materially impacted our results of operation as ofSeptember 30, 2020 . Refer to "Results and Discussion of Segment Operation" in this Management's Discussion for additional segment specific information. We did experience lower cash flows from operations for the nine months endedSeptember 30, 2020 in comparison to the same period in 2019 due, in part, to slower collections of customer accounts receivable; however, we believe we have sufficient liquidity as a result of the issuance of$1.0 billion notes inApril 2020 , the remaining cash proceeds received from the sale of the Massachusetts Business inOctober 2020 , the available capacity under our short-term revolving credit facility and accounts receivable securitization facilities, and our anticipated ability to access capital markets. Additionally, we have reduced our expected 2020 capital investments by$145 million . We do not anticipate any other material changes to our capital construction programs or our renewable generation projects. While we have not experienced any significant issues in our supply chain, we are actively managing the materials, supplies, and contract services for our generation, transmission, distribution, and customer services functions. Our future operating results and liquidity may be impacted by COVID-19, but the extent of the impact is uncertain as we approach the winter months and experience fluctuations in the number of confirmed COVID-19 cases. Such ongoing impact of COVID-19 includes, but is not limited to: •Lower revenue and cash flow during the fourth quarter of 2020, in comparison to the fourth quarter of 2019, resulting from the decrease in commercial and industrial gas and electric demand as businesses comply with re-opening plans in each state and as businesses experience negative economic impact from COVID-19, potentially offset by higher residential demand. •Lower revenue and cash flow during the fourth quarter of 2020, in comparison to the fourth quarter of 2019, due to the continuing suspension of late payment and reconnection fees in some jurisdictions. •A decline in revenue in 2021 due to an increase in customer attrition rates, as well as lower revenue growth if customer additions slow due to a prolonged economic downturn. •A continued increase in bad debt and decrease in cash flows in the fourth quarter of 2020 and into 2021 resulting from the suspension of shut-offs and the inability of our customers to pay for their gas and electric service due to job loss or other factors, partially offset by regulatory deferral. •A continued delay in cash flows in 2020 as customers utilized the more flexible payment plans. 51 -------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. •An increase in internal labor costs from higher overtime in the fourth quarter of 2020. •The impact of the employer payroll tax credit and payroll tax payment deferral under the CARES Act. We believe the deferral of payroll tax payments could provide a cash flow benefit in 2020 by delaying about$30.0 million of payroll tax payments. TheIRS continues to provide additional guidance related to the employer tax credit. We do not expect the impact of employer payroll tax credits to be material. Greater Lawrence Incident: For the three and nine months endedSeptember 30, 2020 , we have incurred$2.0 million and$16.0 million of third-party claims and other incident-related costs associated with the Greater Lawrence Incident, respectively. For additional information, see Note 18-B and D, "Legal Proceedings" and "Other Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited). We have invested approximately$258 million of capital spend for the pipeline replacement; this work was completed in 2019. We maintain property insurance for gas pipelines and other applicable property.Columbia ofMassachusetts has filed a proof of loss with its property insurer for the pipeline replacement. InJanuary 2020 , we filed a lawsuit against the property insurer, seeking payment of our property claim. We are currently unable to predict the timing or amount of any insurance recovery under the property policy. This pipeline replacement cost is part of the Massachusetts Business that is classified as held for sale atSeptember 30, 2020 . The assets and liabilities of the Massachusetts Business have been recorded at fair value, less costs to sell, which has resulted in a loss being recorded as ofSeptember 30, 2020 . The sale of theMassachusetts Business was completed onOctober 9, 2020 . See Note 6, "Assets and Liabilities Held for Sale," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information. Refer to Note 18-B and D, "Legal Proceedings" and "Other Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited), "Summary of Consolidated Financial Results," and "Results and Discussion of Segment Operation - Gas Distribution Operations," in this Management's Discussion for additional information related to the Greater Lawrence Incident. Summary of Consolidated Financial Results A summary of our consolidated financial results for the three and nine months endedSeptember 30, 2020 and 2019 are presented below: Three Months Ended September 30, Nine Months Ended September 30, (in millions, except per share 2020 vs. amounts) 2020 2019 2019 2020 2019 2020 vs. 2019 Operating Revenues$ 902.5 $ 931.5 $ (29.0) $ 3,470.7 $ 3,811.7 $ (341.0) Operating Expenses Cost of sales (excluding depreciation and amortization) 143.1 196.7 (53.6) 793.9 1,130.5
(336.6)
Other Operating Expenses 666.6 643.8 22.8 2,344.1 1,752.5
591.6
Total Operating Expenses 809.7 840.5 (30.8) 3,138.0 2,883.0 255.0 Operating Income 92.8 91.0 1.8 332.7 928.7 (596.0) Total Other Deductions, net (330.6) (94.6) (236.0) (508.6) (285.3) (223.3) Income Taxes (64.9) (10.2) (54.7) (73.9) 121.0 (194.9) Net Income (Loss) (172.9) 6.6 (179.5) (102.0) 522.4 (624.4) Preferred dividends (13.8) (13.8) - (41.4) (41.4) - Net Income (Loss) Available to Common Shareholders (186.7) (7.2) (179.5) (143.4) 481.0
(624.4)
Basic Earnings (Loss) Per Share
$ (0.47) $ (0.37) $ 1.29 $
(1.66)
Basic Average Common Shares
Outstanding 383.8 374.1 9.7 383.5 373.8 9.7
Our operations are affected by the cost of sales. Cost of sales (excluding
depreciation and amortization) for the Gas Distribution Operations segment is
principally comprised of the cost of natural gas used while providing
transportation and distribution services to customers. Cost of sales (excluding
depreciation and amortization) for the Electric Operations segment is comprised
of the cost of coal, related handling costs, natural gas purchased for the
internal generation of electricity at NIPSCO and the cost of power purchased
from third-party generators of electricity. The majority of the cost of sales
(excluding depreciation and amortization) are tracked costs that are passed
through directly to the customer, resulting in an equal and offsetting amount
reflected in operating revenues.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
On a consolidated basis, we reported a net loss available to common shareholders
of $186.7 million , or $0.49 per basic share for the three months ended
September 30, 2020 , compared to a net loss available to common shareholders of
$7.2 million , or $0.02 per basic share for the same period in 2019. The increase
in loss was primarily due to a loss on early extinguishment of debt in 2020.
This was partially offset by higher income tax benefit in the third quarter of
2020 (see "Income Taxes" below).
For the nine months ended September 30, 2020 , we reported a net loss available
to common shareholders of $143.4 million , or $0.37 per basic share compared to
net income available to common shareholders of $481.0 million , or $1.29 per
basic share for the same period in 2019. The drivers for this decrease were
consistent with that of the quarter-to-date period, with the addition of higher
operating expenses due to insurance recoveries recorded in 2019, net of
third-party claims and other costs, related to the Greater Lawrence Incident and
a loss recorded for the classification as held for sale of the Massachusetts
Business during 2020 (see Note 6, "Assets and Liabilities Held for Sale," in the
Notes to the Condensed Consolidated Financial Statements (unaudited) for
additional information).
Operating Income
For the three months ended September 30, 2020 , we reported operating income of
$92.8 million compared to operating income of $91.0 million for the same period
in 2019.
For the nine months ended September 30, 2020 , we reported operating income of
$332.7 million compared to operating income of $928.7 million for the same
period in 2019. The decrease in operating income was primarily due to the loss
recorded for the classification as held for sale of the Massachusetts Business
(see Note 6, "Assets and Liabilities Held for Sale," in the Notes to the
Condensed Consolidated Financial Statements (unaudited) for additional
information) and higher operating expenses due to insurance recoveries recorded
in 2019, net of third-party claims and other costs, related to the Greater
Lawrence Incident. In addition, COVID-19 impacted our results of operation as we
have experienced a decrease in the commercial and industrial demand for gas and
electric and incremental COVID-19 related expenses. We also experienced an
increase in severance and outside services expenses related to the NiSource Next
initiative. These expense increases were partially offset by new rates from
regulatory proceedings, as well as an increase in the residential demand for
electric primarily due to COVID-19.
Other Deductions, net
Other deductions, net reduced income by $330.6 million in the third quarter of
2020 compared to a reduction in income of $94.6 million in the prior year. This
increase was primarily driven by a loss on early extinguishment of debt in 2020,
partially offset by income from the sale of emission reduction credits in 2020.
See Note 16, "Long-Term Debt," in the Notes to the Condensed Consolidated
Financial Statements (unaudited) for additional information on the loss on early
extinguishment of debt.
Other deductions, net reduced income by $508.6 million during the nine months
ended September 30, 2020 compared to a reduction in income of $285.3 million in
the prior year. The drivers for this change were consistent with that of the
quarter-to-date period, partially offset by lower non-service pension costs
driven by a decrease in the pension benefit obligations.
Income Taxes
For the three months ended September 30, 2020 , the increase in income tax
benefit from 2019 to 2020 is primarily attributable to the increased loss before
income taxes in the third quarter of 2020, as well as a lower effective tax rate
in 2020 due to the relative impact of permanent differences on lower pre-tax
loss in 2019 compared to 2020.
For the nine months ended September 30, 2020 , the change from an income tax
expense to an income tax benefit from 2019 to 2020 is primarily attributable to
the change from income before income taxes in 2019 to loss before income taxes
in 2020, offset by a higher effective tax rate in 2020 due to increased
amortization of excess deferred federal income tax liabilities, as specified in
the TCJA in 2020 compared to 2019.
Refer to Note 14, "Income Taxes," in the Notes to Condensed Consolidated
Financial Statements (unaudited) for information on income taxes and the change
in the effective tax rate.
Capital Investment
For the nine months ended September 30, 2020 , we invested $1,292.2 million in
capital expenditures across our gas and electric utilities. These expenditures
were primarily aimed at furthering the safety and reliability of our gas
distribution system, system modernization projects and maintaining our existing
electric generation fleet.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
We continue to execute on an estimated $40 billion in total projected long-term
regulated utility infrastructure investments and expect to invest a total of
approximately $1.7 to $1.8 billion in capital during 2020 as we continue to
focus on growth, safety and modernization projects across our operating area.
Liquidity
A primary focus of ours is to ensure the availability of adequate financing to
fund our ongoing safety and infrastructure investment programs, which typically
involves the issuance of debt and/or equity. During 2020, we took certain
actions to enhance our liquidity. In April 2020 , we terminated and repaid in
full our existing $850.0 million term loan agreement and entered into a new
$850.0 million term loan agreement. On October 14, 2020 , this term loan was
repaid in full with proceeds from the sale of the Massachusetts Business. Also,
in April 2020 , we completed the issuance and sale of $1.0 billion of senior
unsecured notes resulting in approximately $987.8 million of net proceeds.
Through income generated from operating activities, amounts available under our
short-term revolving credit facility, commercial paper program, accounts
receivable securitization facilities, long-term debt agreements, remaining cash
proceeds received from the sale of the Massachusetts Business in October 2020 ,
and our ability to access the capital markets, we expect to have adequate
capital available to fund our operating activities, capital expenditures, and
the effects of COVID-19 through 2020 and beyond. As of September 30, 2020 and
December 31, 2019 , we had $1,591.4 million and $1,409.1 million , respectively,
of net liquidity available, consisting of cash and available capacity under
credit facilities. These factors and other impacts to the financial results are
discussed in more detail within the following discussions of "Results and
Discussion of Segment Operations" and "Liquidity and Capital Resources."
RESULTS AND DISCUSSION OF SEGMENT OPERATIONSPresentation of Segment Information Our operations are divided into two primary reportable segments: Gas Distribution Operations and Electric Operations.
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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 nine months ended September 30, 2020 and 2019 are presented below:
Three Months Ended September 30, Nine Months Ended September 30,
(in millions) 2020 2019 2020 vs. 2019 2020 2019 2020 vs. 2019
Operating Revenues $ 473.1 $ 466.9 $ 6.2 $ 2,313.3 $ 2,516.1 $ (202.8)
Operating Expenses
Cost of sales (excluding
depreciation and amortization) 63.0 73.0 (10.0) 559.6 759.8 (200.2)
Operation and maintenance 275.2 289.9 (14.7) 868.4 680.9
187.5
Depreciation and amortization 88.4 102.6 (14.2) 271.7 299.4
(27.7)
Loss on classification as held for sale 35.6 - 35.6 400.2 - 400.2 Gain on sale of assets - - - - (0.1) 0.1 Other taxes 53.1 50.0
3.1 175.4 170.3 5.1
Total Operating Expenses 515.3 515.5 (0.2) 2,275.3 1,910.3 365.0 Operating Income (Loss)$ (42.2) $ (48.6) $ 6.4$ 38.0 $ 605.8 $ (567.8) Revenues Residential$ 310.1 $ 289.7 $ 20.4$ 1,544.0 $ 1,645.3 $ (101.3) Commercial 93.2 91.6 1.6 491.3 545.9 (54.6) Industrial 42.9 45.5 (2.6) 166.2 181.5 (15.3) Off-System 6.0 16.9 (10.9) 32.7 60.4 (27.7) Other 20.9 23.2 (2.3) 79.1 83.0 (3.9) Total$ 473.1 $ 466.9 $ 6.2$ 2,313.3 $ 2,516.1 $ (202.8) Sales and Transportation (MMDth) Residential 15.5 13.6 1.9 173.8 186.5 (12.7) Commercial 17.7 17.4 0.3 119.8 131.8 (12.0) Industrial 131.9 133.0 (1.1) 402.9 406.5 (3.6) Off-System 3.7 8.5 (4.8) 19.0 24.6 (5.6) Other 0.1 - 0.1 0.3 0.3 - Total 168.9 172.5 (3.6) 715.8 749.7 (33.9) Heating Degree Days 91 13 78 3,259 3,409 (150) Normal Heating Degree Days 71 71 - 3,531 3,498
33
% Colder (Warmer) than Normal 28 % (82) % (8) % (3) %
Gas Distribution Customers
Residential 3,232,785 3,167,742 65,043
Commercial 281,316 277,701 3,615
Industrial 5,967 5,974 (7)
Other 3 3 -
Total 3,520,071 3,451,420 68,651
Cost of sales (excluding depreciation and amortization) for the Gas Distribution
Operations segment is principally comprised of the cost of natural gas used
while providing transportation and distribution services to customers. The cost
of sales (excluding depreciation and amortization) are tracked costs that are
passed through directly to the customer resulting in an equal and offsetting
amount reflected in operating revenue. In addition, 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. 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.
Gas Distribution Operations
Three Months Ended September 30, 2020 vs. September 30, 2019 Operating Income
For the three months ended September 30, 2020 , Gas Distribution Operations
reported an operating loss of $42.2 million , a decrease of $6.4 million from the
comparable 2019 period.
Operating revenues for the three months ended September 30, 2020 were $473.1
million , an increase of $6.2 million from the same period in 2019. The change in
operating revenues was primarily driven by:
•New rates from infrastructure replacement programs and Columbia of Ohio's CEP
of $16.7 million .
•The effects of customer growth of $5.3 million .
Partially offset by:
•Lower cost of sales (excluding depreciation and amortization) billed to
customers, which is offset in operating expense, of $10.0 million .
•The effects of decreased commercial and industrial usage primarily related to
COVID-19 of $2.6 million .
•The effects of decreased late payment and reconnection fees primarily related
to COVID-19 of $1.2 million .
Operating expenses were $0.2 million lower for the three months ended
September 30, 2020 compared to the same period in 2019. This change was
primarily driven by:
•Lower third-party claims and other costs related to the Greater Lawrence
Incident of $18.9 million .
•Lower employee and administrative expenses of $16.1 million .
•Lower depreciation and amortization of $14.1 million due to a $15.0 million
decrease in depreciation and amortization as a result of classifying the
Massachusetts Business as held for sale, offset by a $0.9 million increase in
depreciation and amortization primarily due to higher capital expenditures
placed in service.
•Lower cost of sales (excluding depreciation and amortization) billed to
customers, which is offset in operating revenue, of $10.0 million .
•Lower outside service costs of $5.1 million primarily related to decreased
consulting costs in 2020.
Partially offset by:
•Loss on classification as held for sale related to the Massachusetts Business
of $35.6 million .
•Severance and outside services expenses related to the NiSource Next initiative
of $18.8 million .
•Third-party consulting costs incurred for the separation and transition of the
Massachusetts Business to Eversource of $11.0 million .
Nine Months Ended September 30, 2020 vs. September 30, 2019 Operating Income
For the nine months ended September 30, 2020 , Gas Distribution Operations
reported operating income of $38.0 million , a decrease of $567.8 million from
the comparable 2019 period.
Operating revenues for the nine months ended September 30, 2020 were $2,313.3
million , a decrease of $202.8 million from the same period in 2019. The change
in operating revenues was primarily driven by:
•Lower cost of sales (excluding depreciation and amortization) billed to
customers, which is offset in operating expense, of $200.2 million .
•Lower revenues from the effects of warmer weather in 2020 of $29.4 million .
•Lower regulatory, tax and depreciation trackers, which are offset in operating
expense, of $10.9 million .
•The effects of decreased commercial and industrial usage primarily related to
COVID-19 of $7.0 million .
•The effects of decreased late payment and reconnection fees primarily related
to COVID-19 of $4.3 million .
Partially Offset by:
•New rates from base rate proceedings, infrastructure replacement programs and
Columbia of Ohio's CEP of $42.5 million .
•The effects of customer growth of $14.7 million .
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Gas Distribution Operations
Operating expenses were $365.0 million higher for the nine months ended
September 30, 2020 compared to the same period in 2019. This change was
primarily driven by:
•Loss on classification as held for sale related to the Massachusetts Business
of $400.2 million .
•Insurance recoveries recorded in 2019, net of third-party claims and other
costs, related to the Greater Lawrence Incident of $190.8 million .
•Severance and outside services expenses related to the NiSource Next initiative
of $18.8 million .
•Third-party consulting costs incurred for the separation and transition of the
Massachusetts Business to Eversource of $16.2 million .
•Increased property taxes of $7.8 million due to higher capital expenditures
placed in service.
•Increased bad debt expense primarily related to COVID-19 of $6.7 million .
•Increased expenses primarily due to the impact of COVID-19 related materials &
supplies, outside services, and sequestration expenses of $5.6 million .
Partially offset by:
•Lower cost of sales (excluding depreciation and amortization) billed to
customers, which is offset in operating revenue, of $200.2 million .
•Lower depreciation and amortization of $27.4 million due to a $35.0 million
decrease in depreciation and amortization as a result of classifying the
Massachusetts Business as held for sale, offset by a $7.6 million increase in
depreciation and amortization primarily due to higher capital expenditures
placed in service.
•Lower employee and administrative expenses of $26.0 million .
•Lower regulatory, tax and depreciation trackers, which are offset in operating
revenue, of $10.9 million .
•Lower outside service costs of $10.9 million primarily related to decreased
consulting costs in 2020.
Weather
In general, we calculate the weather-related revenue variance based on changing customer demand driven by weather variance from normal heating degree days. 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. Weather in the Gas Distribution Operations service territories for the third quarter of 2020 was about 28% colder than normal and about 600% colder than 2019, leading to increased operating revenues of$2.3 million for the quarter endedSeptember 30, 2020 compared to the same period in 2019. Weather in the Gas Distribution Operations service territories for the nine months endedSeptember 30, 2020 was about 8% warmer than normal and about 4% warmer than 2019, leading to decreased operating revenues of$29.4 million for the nine months endedSeptember 30, 2020 compared to the same period in 2019. Throughput Total volumes sold and transported for the three months endedSeptember 30, 2020 were 168.9 MMDth, compared to 172.5 MMDth for the same period in 2019. This decrease is due to decreased usage by industrial customers primarily due to COVID-19. Total volumes sold and transported for the nine months endedSeptember 30, 2020 were 715.8 MMDth, compared to 749.7 MMDth for the same period in 2019. This decrease is primarily attributable to warmer weather in 2020 compared to 2019 and decreased usage by commercial and industrial customers primarily due to COVID-19. Economic Conditions All of our Gas Distribution Operations companies have state-approved recovery mechanisms that provide a means for full recovery of prudently incurred gas costs. Gas costs are treated as pass-through costs and have no impact on operating income recorded in the period. The gas costs included in revenues are matched with the gas cost expense recorded in the period and the 57 -------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Gas Distribution Operations 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. 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. These programs serve to further reduce our exposure to gas prices. Greater Lawrence Incident Refer to Note 18-B, "Legal Proceedings," and D. "Other Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited) and "Executive Summary."Columbia of Massachusetts Asset Sale OnFebruary 26, 2020 , we entered into an Asset Purchase Agreement with Eversource that provided for the sale of the Massachusetts Business to Eversource subject to terms and conditions set forth in the agreement. The sale of the Massachusetts Business was completed onOctober 9, 2020 . For additional information, see Note 6, "Assets and Liabilities Held for Sale," in the Notes to Condensed Consolidated Financial Statements (unaudited). 58 -------------------------------------------------------------------------------- Table of Contents 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 nine months endedSeptember 30, 2020 and 2019 are presented below: Three Months Ended September 30, Nine Months Ended September 30, 2020 vs. 2020 vs. 2019 (in millions) 2020 2019 2019 2020 2019 Operating Revenues 432.3$ 467.9 (35.6) 1,166.2$ 1,305.5 $ (139.3) Operating Expenses Cost of sales (excluding depreciation and amortization) 80.1 123.7 (43.6) 234.3 370.7 (136.4) Operation and maintenance 126.9 118.4 8.5 355.8 363.9 (8.1) Depreciation and amortization 80.8 70.4 10.4 240.3 207.8 32.5 Other taxes 14.5 14.7 (0.2) 40.4 41.7 (1.3) Total Operating Expenses 302.3 327.2 (24.9) 870.8 984.1 (113.3) Operating Income$ 130.0 $ 140.7 $ (10.7) $ 295.4 $ 321.4 $ (26.0) Revenues Residential$ 168.3 $ 148.7 $ 19.6 $ 411.5 $ 373.4 $ 38.1 Commercial 135.4 136.3 (0.9) 365.4 370.8 (5.4) Industrial 105.8 151.8 (46.0) 301.7 471.2 (169.5) Wholesale 3.9 3.5 0.4 9.9 9.0 0.9 Other 18.9 27.6 (8.7) 77.7 81.1 (3.4) Total$ 432.3 $ 467.9 $ (35.6) $ 1,166.2 $ 1,305.5 $ (139.3) Sales (Gigawatt Hours) Residential 1,145.3 1,103.2 42.1 2,734.8 2,628.7 106.1 Commercial 996.0 1,077.3 (81.3) 2,706.5 2,862.7 (156.2) Industrial 1,909.1 2,145.5 (236.4) 5,447.7 6,525.7 (1,078.0) Wholesale 5.3 0.3 5.0 81.6 7.9 73.7 Other 24.4 29.6 (5.2) 74.1 86.4 (12.3) Total 4,080.1 4,355.9 (275.8) 11,044.7 12,111.4 (1,066.7) Cooling Degree Days 599 720 (121) 891 940 (49) Normal Cooling Degree Days 556 556 - 795 795 - % Warmer (Colder) than Normal 8 % 29 % 12 % 18 % Electric Customers Residential 417,703 413,363 4,340 Commercial 57,241 56,906 335 Industrial 2,160 2,264 (104) Wholesale 723 729 (6) Other 2 2 - Total 477,829 473,264 4,565 Cost of sales (excluding depreciation and amortization) for the Electric Operations segment is principally comprised of the cost of coal, related handling costs, natural gas purchased for internal generation of electricity at NIPSCO, and the cost of power purchased from third-party generators of electricity. The majority of the cost of sales (excluding depreciation and amortization) are tracked costs that are passed through directly to the customer resulting in an equal and offsetting amount reflected in operating revenue. In addition, 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. Therefore, increases in these tracked operating expenses are offset by increases in operating revenues and have essentially no impact on net income. 59 -------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Electric Operations Three Months EndedSeptember 30, 2020 vs.September 30, 2019 Operating Income For the three months endedSeptember 30, 2020 , Electric Operations reported operating income of$130.0 million , a decrease of$10.7 million from the comparable 2019 period. Operating revenues for the three months endedSeptember 30, 2020 were$432.3 million , a decrease of$35.6 million from the same period in 2019. The change in operating revenues was primarily driven by: •Lower cost of sales (excluding depreciation and amortization) billed to customers, which is offset in operating expense, of$43.6 million . •Lower regulatory and depreciation trackers, which are offset in operating expense, of$5.0 million . •The effects of decreased commercial and industrial usage primarily related to COVID-19 of$4.4 million . Partially offset by: •New rates from the recent base rate proceeding and electric transmission projects of$12.4 million . •The effects of increased residential usage primarily related to COVID-19 of$5.8 million . Operating expenses were$24.9 million lower for the three months endedSeptember 30, 2020 compared to the same period in 2019. This change was primarily driven by: •Lower cost of sales (excluding depreciation and amortization) billed to customers, which is offset in operating revenue, of$43.6 million . •Lower regulatory and depreciation trackers, which are offset in operating revenues, of$5.0 million . •Lower employee and administrative costs of$4.0 million . Partially offset by: •Increased depreciation of$15.5 million primarily attributable to higher depreciation rates from the recent rate case proceeding. •Severance and outside services expenses related to the NiSource Next initiative of$7.4 million . •Higher outside service costs of$3.3 million primarily related to higher generation-related maintenance. •Increased materials and supplies costs of$1.7 million primarily related to higher generation-related maintenance. Nine Months EndedSeptember 30, 2020 vs.September 30, 2019 Operating Income For the nine months endedSeptember 30, 2020 , Electric Operations reported operating income of$295.4 million , a decrease of$26.0 million from the comparable 2019 period. Operating revenues for the nine months endedSeptember 30, 2020 were$1,166.2 million , a decrease of$139.3 million from the same period in 2019. The change in operating revenues was primarily driven by: •Lower cost of sales (excluding depreciation and amortization) billed to customers, which is offset in operating expense, of$136.4 million . •Lower regulatory and depreciation trackers, which are offset in operating expense, of$20.1 million . •The effects of decreased commercial and industrial usage primarily related to COVID-19 of$17.5 million . Partially offset by: •New rates from the recent base rate proceeding and electric transmission projects of$20.7 million . •The effects of increased residential usage primarily related to COVID-19 of$12.0 million . •The effects of customer growth of$3.1 million .
Operating expenses were
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Table of Contents
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NiSource Inc.
Electric Operations
•Lower cost of sales (excluding depreciation and amortization) billed to
customers, which is offset in operating revenue, of $136.4 million .
•Lower regulatory and depreciation trackers, which are offset in operating
revenues, of $20.1 million .
•Lower outside services costs of $18.3 million primarily related to lower
generation-related maintenance.
•Lower employee and administrative costs of $8.5 million .
Partially offset by:
•Increased depreciation of $46.0 million primarily attributable to higher
depreciation rates from the recent rate case proceeding.
•Severance and outside services expenses related to the NiSource Next initiative
of $7.4 million .
•Increased expenses primarily due to the impact of COVID-19 related materials
and supplies, outside services, and sequestration expenses of $5.2 million .
•Increased materials and supplies costs of $3.8 million
•Higher insurance expense of $2.4 million primarily driven by increased
premiums.
•Increased environmental costs of $1.3 million .
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. Weather in the Electric Operations' territories for the third quarter of 2020 was about 8% warmer than normal and about 17% cooler than in 2019, which had an immaterial impact on operating revenues for the quarter endedSeptember 30, 2020 compared to the same period in 2019. Weather in the Electric Operations' territories for the nine months endedSeptember 30, 2020 was about 12% warmer than normal and about 5% cooler than in 2019, which had an immaterial impact on operating revenues for the nine months endedSeptember 30, 2020 compared to the same period in 2019. Sales Electric Operations sales for the third quarter of 2020 were 4,080.1 GWh, a decrease of 275.8 GWh compared to the same period in 2019. This decrease was primarily attributable to decreased usage by industrial and commercial customers due to COVID-19 and higher self-generation by industrial customers, partially offset by increased usage by residential customers primarily due to COVID-19. Electric Operations sales for the nine months endedSeptember 30, 2020 were 11,044.7 GWh, a decrease of 1,066.7 GWh compared to the same period in 2019. This decrease was primarily attributable to decreased usage by industrial and commercial customers due to COVID-19 and higher self-generation by industrial customers, partially offset by increased usage by residential customers primarily due to COVID-19. Economic Conditions NIPSCO has a state-approved recovery mechanism that provides a means for full recovery of prudently incurred fuel costs. Fuel costs are treated as pass-through costs and have no impact on operating income recorded in the period. The fuel costs included in revenues are matched with the fuel cost expense recorded in the period and 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. Electric Supply NIPSCO 2018 Integrated Resource Plan. Multiple factors, but primarily economic ones, including low natural gas prices, advancing cost effective renewable technology and increasing capital and operating costs associated with existing coal plants, 61 -------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Electric Operations have led NIPSCO to conclude in itsOctober 2018 Integrated Resource Plan submission that NIPSCO's current fleet of coal generation facilities will be retired earlier than previous Integrated Resource Plan's had indicated. The Integrated Resource Plan evaluated demand-side and supply-side resource alternatives to reliably and cost effectively meet NIPSCO customers' future energy requirements over the ensuing 20 years. The preferred option within the Integrated Resource Plan retires theR.M. Schahfer Generating Station by the end of 2023 and theMichigan City Generating Station by the end of 2028. These stations represent 2,080 MW of generating capacity, equal to 72% of NIPSCO's remaining capacity and 100% of NIPSCO's remaining coal-fired generating capacity. In the second quarter of 2020, the MISO approved NIPSCO's plan to retire theR.M. Schahfer Generating Station in 2023. The planned replacement by the end of 2023 of approximately 1,400 MW of retiring coal-fired generation station could provide incremental capital investment opportunities of approximately$1.8 to$2.0 billion , primarily in 2022 and 2023. Refer to Note 7, "Property, Plant and Equipment" and Note 18-D, "Other Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited) for further information. The current replacement plan includes lower-cost, reliable, cleaner energy resources to be obtained through a combination of NIPSCO ownership and PPAs. We expect to secure additional agreements with counterparties and initiate regulatory compliance filings into 2021. Refer to Note 18-D, "Other Matters," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information on the NIPSCO Integrated Resource Plan. 62 -------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Liquidity and Capital Resources Greater Lawrence Incident: As discussed in the "Executive Summary" and Note 18, "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 fund the estimated future incremental costs associated with the Greater Lawrence Incident. Previous costs in excess of insurance recoveries were primarily funded through short-term borrowings. The sale of the Massachusetts Business was completed onOctober 9, 2020 . OnOctober 14, 2020 , we used a portion of the proceeds from the Massachusetts Business sale to pay down these short-term borrowings. For more information, see Note 6, "Assets and Liabilities Held for Sale," in the Notes to the Condensed Consolidated Financial Statements (unaudited). Operating Activities Net cash from operating activities for the nine months endedSeptember 30, 2020 was$858.6 million , a decrease of$373.2 million compared to the nine months endedSeptember 30, 2019 . This decrease was primarily driven by year over year increase in net payments related to the Greater Lawrence Incident. During 2020, we paid approximately$222 million compared to insurance recoveries of$242 million , net of payments, during 2019. Additionally, we had lower accounts receivable collections in 2020 compared to 2019 due to the impact of COVID-19. Offsetting these cash outflows are lower spend on gas inventory due to warmer weather and lower usage in 2020, and an increase in cash from the recentNIPSCO Electric base rate proceeding. Investing Activities Net cash used for investing activities for the nine months endedSeptember 30, 2020 was$1,399.9 million , an increase of$6.1 million compared to the nine months endedSeptember 30, 2019 . This increase was driven by increased net available-for-sale debt security purchases in 2020. Our capital expenditures for the nine months endedSeptember 30, 2020 were$1,292.2 million compared to$1,310.0 million for the comparable period in 2019. The decrease was driven primarily by 2019 spend related to the Greater Lawrence Pipeline Replacement and a year-over-year reduction in Electric TDSIC investments, partially offset by an increase in customer growth,NIPSCO Gas tracked investments and IT modernization projects. We project total 2020 capital expenditures to be approximately$1.7 to$1.8 billion . Our cost of removal expenditures for the nine months endedSeptember 30, 2020 were$102.1 million compared to$84.5 million for the comparable period in 2019. The increase was driven by additional cost of removal projects completed by NIPSCO andColumbia ofOhio . Financing Activities Common Stock and Preferred Stock. 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 16, "Long-Term Debt," in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on long-term debt activity. Short-term Debt. Refer to Note 17, "Short-Term Borrowings," in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on short-term debt activity. Net Available Liquidity. As ofSeptember 30, 2020 , an aggregate of$1,591.4 million of net liquidity was available, including cash and credit available under the revolving credit facility. 63 -------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. The following table displays our liquidity position as ofSeptember 30, 2020 andDecember 31, 2019 : (in millions) September 30, 2020 December 31, 2019 Current Liquidity Revolving Credit Facility $ 1,850.0 $ 1,850.0 Accounts Receivable Program(1) 231.2 353.2 Less: Commercial Paper 307.0 570.0 Accounts Receivable Program Utilized 231.2 353.2 Letters of Credit Outstanding Under Credit Facility 10.2 10.2 Add: Cash and Cash Equivalents 58.6 139.3 Net Available Liquidity $
1,591.4 $ 1,409.1
(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 and term loan agreement, which require us to maintain a debt to capitalization ratio that does not exceed 70%. As ofSeptember 30, 2020 , the ratio was 66.2%. Sale of Trade Accounts Receivables. Refer to Note 12, "Transfers of Financial Assets," in the Notes to Condensed Consolidated Financial Statements (unaudited) for information on the sale of trade accounts receivable. 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 certain of our subsidiaries' credit ratings and ratings outlook as ofSeptember 30, 2020 . InFebruary 2020 , S&P changed the outlook of us and certain of our subsidiaries from Negative to Stable. There were no other changes to the below credit ratings or outlooks sinceDecember 31, 2019 . 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 Columbia of Massachusetts BBB+ Stable Baa2 Stable Not rated Not rated 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 ofSeptember 30, 2020 , the collateral requirement that would be required in the event of a downgrade below the ratings trigger levels would amount to approximately$74.6 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. 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 ofSeptember 30, 2020 , 383,114,130 shares of common stock and 440,000 shares of preferred stock were outstanding. Contractual Obligations. Aside from the previously referenced issuances and repayments of long-term debt and payments associated with the Greater Lawrence Incident, there were no material changes during the nine months endedSeptember 30, 2020 to our contractual obligations as ofDecember 31, 2019 . Guarantees and Indemnities. 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. Refer to Note 18, "Other 64 -------------------------------------------------------------------------------- Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NiSource Inc. Commitments and Contingencies," in the Notes to the Condensed Consolidated Financial Statements (unaudited) for information on guarantees. Off Balance Sheet Arrangements We, along with certain of our subsidiaries, enter into various agreements providing financial or performance assurance to third parties on behalf of certain subsidiaries. Such agreements include guarantees and stand-by letters of credit. Refer to Note 18, "Other Commitments and Contingencies," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information about such arrangements. 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 We are exposed to commodity price risk as a result of our subsidiaries' operations involving 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, since regulations allow recovery of prudently incurred purchased power, fuel and gas costs through the ratemaking process, including gains or losses on these derivative instruments. If states should explore additional regulatory reform, these subsidiaries may begin providing services without the benefit of the traditional ratemaking process and may be more exposed to commodity price risk. 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 is reflected in our restricted cash balance, may fluctuate significantly during periods of high volatility in the energy commodity markets. Refer to Note 10, "Risk Management Activities," in the Notes to Condensed Consolidated Financial Statements (unaudited) for further information on our commodity price risk assets and liabilities as ofSeptember 30, 2020 orDecember 31, 2019 . 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, accounts receivable programs and term loan, 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$3.2 million and$10.9 million for the three and nine months endedSeptember 30, 2020 , and$4.7 million and$14.7 million for the three and nine months endedSeptember 30, 2019 , 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 debt issuances. Refer to Note 10, "Risk Management Activities," in the Notes to Condensed Consolidated Financial Statements (unaudited) for further information on our interest rate risk assets and liabilities as ofSeptember 30, 2020 andDecember 31, 2019 . 65 -------------------------------------------------------------------------------- Table of Contents 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. Although certain individual state regulatory commissions have instituted regulatory moratoriums in connection with COVID-19 that continue to impact our ability to pursue our credit risk mitigation practices for customer accounts receivable, we believe this to be temporary, and we expect to reinstate our common credit mitigation practices upon expiration of the state specific moratoriums. See the COVID-19 discussion in the introduction to the "Executive Summary" for risks that have been identified related to COVID-19 and refer to Note 9, "Regulatory Matters" in the Notes to Condensed Consolidated Financial Statements (unaudited) for state specific regulatory moratoriums. Other Information Critical Accounting Estimates Refer to Note 3, "Revenue Recognition," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information about management judgment used in determining allowance for credit losses related to COVID-19. Refer to Note 13, "Goodwill ," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information about management judgment used in the annual goodwill impairment analysis performed as ofMay 1, 2020 . Refer to Note 18, "Other Commitments and Contingencies," in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information about management judgment used in the development of estimates related to the Greater Lawrence Incident. 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. 66
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