NiSource Q1 2024 Earnings Call Transcript

Thank you, Chris, and good morning, everyone. I'll begin on Slide 3. The NiSource investment thesis is simple. We serve our customers by delivering safe and reliable energy at an affordable price. Affordable energy delivery requires deployment of capital and operating assets efficiently because operating in jurisdictions which have regulatory mechanisms. The byproduct of these fundamentals generates competitive regulated returns for our shareholders while maintaining and improving our balance sheet position. Capital deployment comes from a $16.4 billion base CapEx plan projected over the next 5 years, plus over $1.5 billion upside projects as well as substantial opportunity for investment beyond 2028. Stable policy and rate making in our states across multiple election and regulatory appointment cycles, has been crucial to efficient capital allocation and recovery to support our communities.

Our balance sheet is derisked and more flexible than ever before and enables industry-leading sustainable organic investment. As part of this flexibility, we are more disciplined and return-focused with our internal allocation decisions than ever. We recognize the competitive environment for capital, and we do not take your investment for granted. Our total year-end 2023 rate base was $18.8 billion, consisting of $9 billion in Indiana, $4 billion in Ohio, $3 billion in Pennsylvania and over $1 billion in Virginia. Our nearly 4 million customers contribute to gross domestic product of over $3.8 trillion across our six states of operation, or approximately 14% of U.S. GDP. We expect our system to see substantial low growth over the next 5 years due to data centers and reshoring of manufacturing.

Northern Indiana offers constructive fundamentals for data center development through robust electric transmission, overall energy system capacity, clinical land, limited physical disaster risk tax incentives and a pro-business policy environment. During the last 5 years, NIPSCO and the Columbia Gas family of companies have contributed over $1.4 billion in property taxes in their local communities. This funding goes to schools, parks, rose, emergency and other essential services and keeps our communities moving in the right direction. Each and every day of the year, we provide safe, reliable, sustainable and cost-effective service for our customers.

Slide 4 shows our key priorities. Today, we reported first quarter 2024 adjusted EPS of $0.85, 10% above the $0.77 reported 1 year ago. We are reaffirming 2024 adjusted EPS guidance of $1.70 to $1.74. We are also reaffirming annual 2023 to 2028 guidance for adjusted EPS of 6% to 8% and rate base of 8% to 10%. We continue to target FFO-to-debt of 14% to 16% in all years of the client. Our superior regulatory and stakeholder foundation is differentiated. We have a long history of working collaboratively to deliver value across diverse constituencies. The most recent example is our NIPSCO gas general rate case settlement announced in March. Late in the quarter, we also filed CPC and amendments for full ownership of the Fairbanks and Gibson solar projects. This follows CPD and amendment approvals from the IURC for Calgary and Dunebridge [Phonetic] 2 in January.

Our intention has been to layer projects into our base plan during the course of the year. Consistent with our pending request at the IURC, today, I am pleased to announce we are adding full ownership of the Fairbanks and Gibson projects to our base capital plan. This incremental NiSource investment simplifies the project structure and reduces cost to customers when compared to the prior tax equity configuration. Reliability and efficiency remain core elements of our operational excellence culture as seen on Slide 5.

In 2022, we began the process of upgrading outdated technology that, in some cases, predated the Columbia Gas merger in 2000. Our multiyear technology investment initiative is continuing to take shape with work and asset management program addressing the scheduling, dispatch and execution of work and the management of underlying assets, an upfront investment can drive decades of both reliability improvement and cost savings for customers. In March, NIPSCO requested a regulatory deferral mechanism for these investments, seeking to align ratemaking with long-term customer value realization. Amid increasing weather extremes and natural disaster frequency throughout the country, customers are benefiting from energy resiliency more than ever. NiSource delivered this through multiple channels with both major gas and electric systems.

Our electric generation mix includes renewables and on-demand natural gas, balancing intermittency and fuel price volatility risk. Meanwhile, our gas system is insulated from harsh weather and can deliver dependable energy for our customers and even the most extreme conditions. I want to wrap up my comments by acknowledging each of our over 11,000 employees and contractors without their tireless effort on behalf of our customers, none of this work will be possible.

I'll now turn things over to Melody.

Thanks, Melody. Let's begin on Slide 8. We are steadfast in our commitment to deliver safe and reliable energy to our customers at an affordable price. Growing our investment opportunity is a crucial element to this, and our base capital plan is now comprised of a portfolio of projects projected at $16.4 billion through 2028. The plan is driven by programmatic and enduring investments necessary to maintain safe, reliable and sustainable energy infrastructure that our customers deserve..

These investments are diversified across renewable electricity, gas and electric customer growth, distribution modernization and system hardening for both the electric and gas businesses. Importantly, there is limited large individual project execution risk in our plan. Moving ahead to Slide 9, I'd like to provide an update on our renewable development program. The table shows base plan amounts, and reflects incremental capex from the full ownership of the Fairbanks and Gibson solar projects, which Lloyd just highlighted.

By displacing tax equity investor capital and removing the associated joint venture structure, we are able to reduce customer bills relative to our prior plan and be more resilient in our operations over the energy generated for our customers. In the aggregate, our billions of dollars of renewable generation investments negotiated since 2019 remains significantly cheaper and lower risk for our customers compared to the alternative status quo scenario across their useful life. NIPSCO's final coal retirements continue to project to [ conclude ] 2028. And in each of the remaining 4 owned and 4 PPA renewable projects remain on schedule for in-service. On Slide 10, you'll see an overview of additional investment opportunities.

We continue to identify capital investment opportunities to enhance service for our communities beyond the capital projected in the base plan. Generation investments, gas distribution and transmission system modernization Advanced metering and renewable natural gas investments all represent potential upside investments compared to our current base plan. The long-term plan does not currently include any data center load growth assumptions or significant infrastructure investments and upgrades.

However, we are receiving robust inquiries from potential customers looking to invest in our Northern Indiana electric service territory due to the attractive business climate we know and appreciate in Indiana. We are focused on developing accretive projects across all utility companies to support our stakeholders and we intend to move projects from the upside category into our base capital plan as they meet our threshold of stakeholder alignment and execution visibility just as we've done this quarter. As Melody highlighted, NIPSCO has commenced its triennial electric integrated resource planning process.

The process will provide a point of view on generation and capacity required to serve customers beyond the retirement of our last existing coal units by 2028. It builds on generation already included in our 5-year base capital plan and will analyze energy demand projected across the next 2 decades associated with economic development including potential data center development, electrification, electric vehicle utilization as well as incorporating changing policy and resource adequacy requirements. The process will conclude with a filing at the IURC this fall.

We'll focus next on Slide 11. And I'd like to point out 2 changes to our financial disclosures this quarter: First, with the completion of the NIPSCO minority interest transaction, we have realigned segments to reflect the new ownership structure; second, to simplify presentation and better align our performance metrics with peer companies, we are changing the name of our primary financial metric to adjusted EPS from net operating earnings per share, as previously referenced.

This refers to non-GAAP fully diluted earnings per share, and there are no changes to the underlying calculation of this metric. First quarter adjusted EPS was $0.85, a 10% increase over the $0.77 reported last year. Positive results from regulatory activity and other income were partly offset by higher O&M and depreciation. Normalized customer usage drove an $8 million and $4 million pretax benefit at the Columbia and NIPSCO segments, respectively.

Interest expense and preferred interest netted to roughly no change following the NIPSCO minority interest transaction and the redemption of the last tranche of our preferred equity securities issued in 2018. For years, NiSource has adjusted GAAP net income and EPS to present a weather-adjusted figure for our investors to project comparable performance periods. While following the mild weather experienced this quarter, I also want to remind you of the underlying regulatory mechanisms insulating both shareholder cash flow and customer bill volatility.

All of our gas jurisdictions will have weather decoupling mechanisms should our gas settlement be approved later this year. The mechanisms apply to select customer classes and a range from a full decoupling to partial decoupling and provide more stable customer bills and cash receipts in volatile weather periods. Our long-term financial guidance commitments are shown on Slide 12. As Lloyd mentioned, we are reaffirming the current guidance of $1.70 to $1.74 in adjusted EPS for 2024. All of our 5-year commitments are reaffirmed today as well.

This includes the year-over-year adjusted EPS growth rate delivered at 6% to 8% annually off of the achieved results in 2024. We remain confident in achieving our 2024 guidance and our long-term growth rate in all remaining years of the plan. Increased visibility of the return of capital through highly constructive regulatory mechanisms enhanced visibility into the financial results for 2025 and beyond. Our internal forecasts incorporate continued use of long-established capital trackers in nearly all our jurisdictions, and are based on what we believe are realistic regulatory outcomes.

O&M discipline also remains a key assumption and a flexible part of achieving our 5-year commitments. Our cost of capital assumptions are resilient and reflect the rate environment from third quarter 2023. And most importantly, we're still able to deliver our $16.4 billion base investment plan to customers while keeping average annual residential total build growth at or below 4% during the 5-year period.

Stable and low commodity prices available in our region support our unwavering focus on customer value, allowing us to maintain this commitment. Slide 13 details our financing plan. We are reaffirming our 14% to 16% FFO-to-debt in all years of the plan. In March, S&P completed their annual review with no change to our BBB+ rating and stable outlook. Our expected equity issuances for 2024 are on track to be completed by year-end through the use of our ATM with approximately 1/3 executed to date, and we continue to have the option to use a forward structure to align proceeds with our flow of work, a flexible financing plan such as utilizing our ATM, the NIPSCO minority interest transaction, potential use of hybrid securities and senior unsecured debt are examples of our plans diverse funding sources and balance sheet flexibility, enabling us to navigate the balance between growth and credit quality.

The figures shown on this page support our base. I'd like to conclude by highlighting another quarter plan without modifying the need for external equity demonstrates our balance sheet flexibility. And finally, our revised base and upside CapEx figures demonstrate the programmatic and enduring nature of our plan. The value proposition NiSource continues to offer investors is a diversified and fully regulated utility with the opportunity to invest in both programmatic gas infrastructure and the long-term energy transition story for a fully integrated electric business. While this fundamental has previously been the case, the emerging opportunity to support unprecedented energy development and power demand resulting from robust economic development onshoring as well as new data center development truly differentiates the value proposition relative to many alternatives in the marketplace today.

And now I'd like to turn the call back to the operator for Q&A.