NiSource Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2022

There are 13 speakers on the call.

Operator

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the NiSource First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. Chris Turnure, Director of Investor Relations, you may begin your conference.

Speaker 1

Morning, and welcome to the NiSource First Quarter 2022 Investor Call. Joining me today are Lloyd Yates, our Chief Executive Officer Donald Brown, our Chief Financial Officer Shawn Anderson, our Chief Strategy and Risk Officer Pablo Vegas, our Chief Operating Officer and Randy Hulan, our VP of Investor Relations and Treasurer. The purpose of this presentation is to review NiSource's financial performance for the Q1 of 2022 as well as provide an update on our operations and growth drivers. Following our prepared remarks, we'll open the call to your questions. Slides for today's call are available on nisource.com.

Speaker 1

Before turning the call over to Lloyd, Donald and Sean, a quick reminder. Some of the statements made during this presentation will be forward looking. Call. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. Information concerning such risks and uncertainties is included in the MD and A and Risk Factors sections of our periodic SEC filings.

Speaker 1

Call. Additionally, some of the statements made on this call relate to non GAAP measures. For additional information on the most comparable GAAP measure and a reconciliation of these measures, please refer to the supplemental slides and segment information, including our full financial schedules available at nisource.com. With all of that out of the way, I'd like to turn the call over to Lloyd.

Speaker 2

Thanks, Chris. Good morning, everyone, and thank you for joining us. Hopefully, you've all had a chance to read our Q1's earnings release, which we issued earlier today. NiSource's Q1 shows continued strong execution on our plans for growth and sustainability while providing reliable service to our customers. The resiliency and flexibility of our business plan continues to support our commitment to deliver 79% compound annual growth in NOEPS non GAAP from 2021 through 2024.

Speaker 2

First of all, I want to thank the employees and contractors of NiSource for their continued commitment to safely serving our customers. Now let's turn to Slide 3 and take a closer look at our key takeaways. While we are committed to completing our generation transition from call by 2028, we expect delays in most of the solar and storage projects intended for completion in 20222023. These are due to the uncertainty hanging over the solar panel market as a result of the Commerce Department investigation. As a result of the projected delays, we now expect to retire the remaining 2 coal units at Schaeffer Generating Station by the end of 2025.

Speaker 2

Despite those delays, we are confident in reaffirming our 2022 guidance of 1.42 to $1.48 diluted non GAAP No EPS, and we are reaffirming our forecast for the 7% to 9% compound annual growth rate from 2021 through 2024, including near term annual growth of 5% to 7% through 2023. We will exercise flexibility in our business plan by pulling forward modernization projects in our gas and electric business and employee O and M expense agility to support our plan. NiSource will host an Investor Day in the fall where we expect to have more clarity on our business review and solar project completions. We intend to provide you with a definitive long term plan beyond 2024. We continue to make strong progress in our regulatory agenda with a settlement in NIPSCO's gas rate case and new cases filed in Pennsylvania and Virginia.

Speaker 2

And NiSource posted non GAAP diluted net earnings per share or NO EPS of $0.75 in the Q1 versus $0.77 last year. We have a lot to discuss this morning, but I would like to take a few moments to share some observations from our 1st few months here at NiSource. I've had the opportunity to meet with employees, leaders, customers, regulators, policymakers and many others. I see some real strength and I also see opportunities for improvement. Here are some areas we will be focusing on.

Speaker 2

1st and foremost, we will continue to focus on enhancing safely. This allows us to provide the best possible service to our customers. We are intent on maintaining our regulatory excellence. We have completed several rate cases in the past year. We have a number of cases pending.

Speaker 2

Together, they will provide additional visibility underpinning our rate base growth forecast. We'll relentlessly pursue operational excellence across the businesses to ensure safety, reliability and enhance customer experience and organizational productivity and efficiency. Our focus on these areas will help us build on the core strength of our business, our investment driven growth plan and the opportunities we see in the NiSource footprint. Now we want to update you on how the government solar panel investigation is affecting our renewable generation plan. I'd like to turn it over to Sean Anderson.

Speaker 2

Sean?

Speaker 3

Thank you, Lloyd, and good morning, everyone. As most of you are aware, The investigation by the U. S. Commerce Department related to the import of solar components from certain countries has brought uncertainty and delays to the solar panel market. We, along with others in the industry, continue to advocate for an expeditious resolution to this investigation.

Speaker 3

The uncertainty that this investigation has introduced underscores the need for continued development of the domestic clean energy supply chain, which NiSource is very much supportive of. The NiSource team has been in constant contact with our diverse renewable generation developers. We've worked hard to gain a better understanding the potential project delays might have on our plans and our generating portfolio. Our renewable generation plans include 10 solar projects, which are intended to replace the retiring capacity and Shafer Generating Station, including 2 projects currently under construction. Indiana Crossroads Solar and Dunn's Bridge 1 broke ground in Q4 2021.

Speaker 3

We are shifting the anticipated in service date from the end of 2022 to reflect a mid-twenty 23 targeted date reflective of an anticipated delay associated with the department's investigation. These projects and most of our other solar projects at various stages of the development process are expected to be delayed by approximately 6 to 18 months from the originally targeted completion across 20222023. It is important to note that this is a broad timeframe, given the uncertainty, but ultimately each project will be impacted differently. We are working with our developer partners to refine our assessments on the expected impact. Given these delays, we now expect to retire Schafer's remaining 2 coal units by the end of 2025.

Speaker 3

However, we continue to expect Michigan City Generating Station to retire on schedule between 20262028. These retirements project NiSource to eliminate all coal fired generation by 2028 and continue to track toward our targeted 90% reduction in greenhouse gas emissions by 2,030. It is important to underscore the potential unintended consequences for our customers. As we demonstrated in our 2018 and 2021 IRP. The renewable resources we are adding to the portfolio drive significant cost savings to our customers and help insulate them against high commodity and energy prices.

Speaker 3

Our focus has been to accelerate savings for our customers to benefit from the renewable transition and delays resulting from this investigation may ultimately delay the timing of when our customers could begin receiving these benefits, especially in the current energy cost inflationary environment. As the investigation relates to our capital investment plan, We believe the primary impact is timing and continue to expect renewable investments to total approximately $2,000,000,000 primarily between 2022 2024 with any remainder expected in 2025. At the beginning of our discussion today, Lloyd mentioned the flexibility in NiSource's financial plan. And this is where the diversification of our operating companies can support our long term commitments. We expect to adjust our modernization investments to account for the timing changes in renewable energy project investments to remain on track to make capital investments totaling approximately $10,000,000,000 during the 2021 2024 period.

Speaker 3

These capital investments are expected to drive compound annual base rate growth of 10% to 12% for each of the company's businesses through 2024. Now I'd like to turn the call over to Donald, who will discuss our Investor Day and financial performance in more detail.

Speaker 4

Thanks, Sean, and good morning, everyone. I'd like to start with that we have moved the timing to hold an Investor Day event to this fall. We believe shifting the timing of our Investor Day will allow us to gain a clearer line of sight into the solar project timing and provide more details around the business review, so that we can provide a definitive long term plan beyond 2024. During this fall event, We intend to provide an extension to our capital investment and growth plan, a detailed update on our generation transition and ESG profile, as well as give you an opportunity to hear from the leaders of our businesses. Now turning to our Q1 2022 results on Slide 4.

Speaker 4

We had non GAAP net operating earnings of about $329,000,000 or $0.75 per diluted share compared to non GAAP net operating earnings of about $305,000,000 or $0.77 per diluted share in the Q1 of 2021. These Q1 2022 results represent a solid start to the year. And as Lloyd mentioned a few minutes ago, We have reaffirmed our 2022 guidance of $1.42 to $1.48 in all of our long term diluted non GAAP net operating earnings per share growth rates. Taking a closer look at our segment non GAAP results on Slide 5, Gas Distribution operating earnings were about $405,000,000 for Q1 of 2022, representing an increase of approximately $31,000,000 versus the same quarter last year. Operating revenues Net of the cost of energy and traffic expenses were higher by approximately $66,000,000 mainly due to new rates resulting from base rate cases and regulatory capital programs.

Speaker 4

Operating expenses, again, net of cost of energy and tract expenses were hired by approximately $35,000,000 In our Electric segment, non GAAP operating earnings for the first quarter were about $99,000,000 which was about $8,000,000 higher than 2021. Operating revenues net of the cost of energy and tract expenses increased by approximately $9,000,000 due largely to revenue from regulated investments and other operating expenses were essentially flat to 2021 levels. Now turning to Slide 6, I'd like to briefly touch on our debt and credit profile. Our debt level as of March 31 was about $9,800,000,000 of which $9,200,000,000 was long term debt with a weighted average maturity of approximately 14 years and a weighted average interest rate of approximately 3.7 set. At the end of the Q1, we maintained net available liquidity of about $1,900,000,000 consisting of cash and available capacity under our credit facility and our accounts receivable securitization programs.

Speaker 4

We also continue our commitment to retaining our current investment grade credit ratings. And I would note that Fitch has completed their 2022 annual credit review with no change to our rating or outlook. Our debt and credit profile continue to represent a solid financial foundation to support our long term safety and infrastructure investments. As you can see on Slide 78, we are in the process of making some adjustments to our financial plan to reflect expected delays in solar generation projects that will help mitigate the earnings impact of these delays and enable us to maintain our 2024 EPS growth commitment. Both the long term visibility of our capital plan and the flexibility in our regulatory mechanisms illustrates the resiliency and strength of our business and provides us confidence to maintain all of our commitments, including EPS Growth.

Speaker 4

Taking a quick look at Slide 9, which highlights our financing plan, The only slight change to our financing plan is to extend the potential timing related to the debt financing of the renewable generation investments, which as we indicated on Slide 8 provides incremental interest savings to mitigate the renewable project delays. Again, this balanced financing plan is consistent with all of our earnings growth and credit commitments. Now I'll turn it over to Lloyd, who will discuss our utilities highlights.

Speaker 2

Thanks, Donald. Let's look at the NiSource gas distribution highlights for the Q1, starting on Slide 10. Columbia Gas at Virginia filed a rate case on April 29 to continue its safety and modernization investments. The case seeks an increase in annual revenues of approximately $58,000,000 Columbia Gas of Ohio is preparing its response to reports on the staff of the Public Utilities Commission of Ohio. Once that is filed, We look forward to beginning settlement discussions.

Speaker 2

Columbia Gas of Pennsylvania filed a rate case on March 18. It focuses on upgrading and replacing gas lines for the long term safety of customers and communities. The case requests additional revenues of $82,000,000 It also seeks to provide additional energy efficiency options while balancing costs. NIPSCO has filed a proposed settlement in its gas rate case. The agreement will provide a revenue increase of approximately $72,000,000 annually.

Speaker 2

In addition to infrastructure modernization, the proposal would enable NIPSCO to continue to serve customers with a safe, Reliable Supply of Natural Gas, While Remaining in Compliance With State and Federal Safety Requirements. NIPSCO also filed a petition on April 1, seeking approval of federally mandated pipeline safety costs, including nearly $229,000,000 of capital costs and about $34,000,000 of operating and maintenance programs. In addition, I'd like to mention that NiSource has joined the Coalition for Renewable Natural Gas. We believe natural gas infrastructure will play an important role in America's energy future, potentially carrying renewable natural gases as well as other low carbon fuels such as hydrogen. As NiSource explores opportunities to further decarbonize its natural gas system, its local distribution companies are pursuing programs that will allow customers to reduce the carbon intensity of their natural gas usage through the renewable natural gas and carbon offsets.

Speaker 2

Regulatory filings seeking approval of these programs are underway in Pennsylvania and Virginia, similar to NIPSCO Green Power Rate Program that's been in place for several years. Let's turn now to our electric operations on Slide 11. Analysis continues on new generation expansion resulting from the 2021 Integrated Resource Plan. NIPSCO filed a petition with the Indiana Utility Regulatory Commission seeking approval of those federally mandated calls for remediation of the coal combustion residual ash pond at Michigan City Generating Station. We will be removing coal combustion residuals and replacing them with clean fill.

Speaker 2

The federally mandated cost Including total estimate $40,000,000 of retirement calls. Before we take your questions, I'd like to highlight our safety progress. Safety continues to be the foundation of everything we do at NiSource. To give stakeholders a view of our strategy and achievements, We have published our inaugural annual safety report. Highlights include our risk management and continuous improvement activities, Continued Safety Investments and Technology Integration to Enhance Safety.

Speaker 2

The report is available on the NiSource website, And I would encourage everyone to take a look. One very significant item in the report is the launch of the Natural Gas Safety Management System Collaborative, an effort among safety focused energy companies. Its aim is to drive progress and maturity of safety management system at member companies. NiSource will benefit from sharing information and learning from the experiences of others. I want to thank you all for participating today and for your ongoing interest and support of NiSource.

Speaker 2

We're now ready to take your questions.

Operator

Your first question comes from the line of Nicholas Campanella from Credit Suisse. Your line is open.

Speaker 5

Hey, good morning, everyone. Thanks for taking my question. Lots of good detail in the deck. I guess just to kick it off, on the $1,000,000,000 of renewable investments in service by 2023. I know you talked about the 6 month to 13 month window.

Speaker 5

Can you just kind of give us a little bit more detail on what's given you confidence and being able to get these projects done in the 2023 window? I guess just the risk would be that The $1,000,000,000 was slipped to $24,000,000 And are these 23 projects just on that 6 month side of the window of the 6 to 13 month window? Or just What can you kind of tell us there?

Speaker 3

Thanks, Sean. Thanks, Lloyd. Appreciate that. Nick, appreciate the question. So first off, I think you said 6 to 30.

Speaker 3

I just want to make sure it's clear. We have are projecting a 6 to 18 month delay at this time for all projects. It will vary by project. And to your point, the reasons that we might see a different duration of delay for the projects that are currently under construction are because we began the construction process for those projects in 2021 and they're simply further along in the process to have a better understanding of the timing to complete, despite the disruption that we've witnessed more recently. So for these projects, we're comfortable advancing them to completion, giving The compelling economics and they provide great line of sight to what it would take to complete at this point.

Speaker 3

The team is very active in that process. For the 2023 projects, so the other projects, we said we haven't started the construction process yet, which gives us the ability to assess the impacts of the tariffs and the timing associated with the investigation to better inform what the timelines might be. So and to your other point, With the $1,000,000,000 we've got approximately $400,000,000 of that already constructed and operational. Those are operating assets today. Likewise, we see low risk in the transmission related projects, which is another $150,000,000 of high confidence projects.

Speaker 3

So The projects that are limited in scope here to the DOC investigated risks are just those two projects that amount for the balance Of the $1,000,000,000 so that $440,000,000 on the 2 projects currently under construction. I'd also note as well, we do have wind projects that you wouldn't be subject to the same DOC related risk. Some operational, of course, also included without a delay in 2023.

Speaker 5

So it's really just to clarify, it's really just the $400,000,000 to $500,000,000 that's in this 6 to 18 months delay window in terms of 23 Capital.

Speaker 3

No. It's $440,000,000 associated with the 2 existing projects projects, meaning most of our projects could experience a delay of 6 to 18 months. We would need clarity from the investigation to better inform the duration of delay associated with all of the other projects.

Speaker 5

Okay. That's helpful. I appreciate that. And then I guess just a question for Lloyd on strategy. You've been in the seat for a few months now.

Speaker 5

Last call, you kind of talked about being open to buying and selling assets. Just how has your kind of thinking evolved at all here? If you could just update us, please?

Speaker 6

So we're still in the

Speaker 2

midst of our strategic business review. We have a group of senior executives in the company and Board members And we're walking down a specific process to do those evaluations. We have an outline in terms of and the timeline we're operating on and I expect to reveal that information in the fall when we do our Investor Day.

Speaker 7

Thanks a lot. I'll get back in the queue.

Operator

Your next question comes from the line of Shar Pourreza from Guggenheim Partners. Your line is open.

Speaker 8

Hey, good morning guys.

Speaker 2

Good morning, Shahriar. Lloyd, let

Speaker 9

me just fine tune the prior question. Just as far as strategy, in the Analyst Day, Curious if since it was pushed off from obviously the tentative this month till the fall, Are you going to be in a position to actually announce some strategic moves of the utilities, meaning transactions with defined closing dates? Would you just sort of highlight which utilities could be under a strategic review and that you'll continue to update us as time goes on? So maybe taking a playbook from one of your Texas peers.

Speaker 2

I'm not far enough along in the process to determine that right now, Shar, of Specifically, what I'm going to announce, I think that I think question you're getting at will we have answers in the fall? The answer to that will be yes. I'm not going to foreshadow announcing any kind of transactions or anything on this phone call. What I want to foreshadow is we'll have answers in the fall and we expect definitive announcements in terms of where we're taking the business.

Speaker 9

Got it. That's helpful. And then just one more on the prior question is just on sort of the DOC investigations. I mean, hopefully, we'll get a proposed decision in August, but then there's going to be 150 day comment period. So I mean, you can actually have some pricing uncertainty that will carry beyond sort of what you guys are thinking.

Speaker 9

So what's the level of confidence that when you guys have the Analyst Day, you're going to have enough information to be able to provide A longer term CapEx number and we don't see incremental projects kind of being shifted out.

Speaker 2

I'll start it and I'll turn it over to Sean. I think by the time we get to Investor Day. We're running different scenarios and alternatives in our integrated resource plan. And those scenarios and alternatives do include further delay on this commerce investigation. Now we have, I'll say, a diverse set of utilities with Significant modernization projects and other capital opportunities that we believe we can pull forward and continue to execute our plan until this investigation is done.

Speaker 2

Prashant, you want to weigh on anything else there?

Speaker 3

Thanks, Lloyd. Appreciate it. Shar, thanks for the question. Good morning. I think that at a minimum, I'd expect we'd have a range or an idea of where the projects could potentially grow, if you will.

Speaker 3

Although I'd say that anything the DOC can do to help refine and narrow the scope would be helpful for us to understand how it could possibly apply to our specific projects. What seems to be unique about this investigation is that, it can be very component specific and how it's applied and thus how it impacts your specific supply chain. So it's hard to look at headlines, so to speak, and then apply it directly to your situation. You really have to look at things on a project by project basis, how it's financed and what efficiencies We might already have being somewhat earlier in the queue on some of these projects, like DUNS-one and Indiana Crossroads. So I think our focus for the next few months is going to be understanding from our developer partners the range of outcomes that could grow And also look to the Department of Commerce to hopefully refine the scope of the investigation to help us better inform the very answer to your question.

Speaker 9

Got it. Got it. And then just real quick lastly for me is on Slide 8, you guys show sort of the impacts The delayed renewable investment and how you're able to pull forward, track CapEx and sort of other investments in 2022 and 2023 to help offset the impact in 2024, right? But you also do kind of highlight that sort of that annual CapEx timing and amounts can shift. So for sort of thinking about your 7% to 9% CAGR, are you now kind of more back end loaded?

Speaker 9

So we should be modeling maybe bottom end in the near term. I guess, how do we think about the shaping in light of the CapEx shuffling? The delays Seem a little bit more impactful versus what you can track forward.

Speaker 4

No, I wouldn't do any shaping of that. You think about our capital programs and the tracker mechanisms we've got in place. It really does allow us to get earnings and cash flows, on average about 12 months after we make those investments. We'll start that in 2022 and go into 2023. And so it really does support our annual guidance as well as our long term CAGR.

Speaker 9

Terrific. Thanks, Donald. Thanks, Lloyd and Sean. Talk to

Speaker 6

you guys soon. Yes.

Operator

Your next question comes from the line of Richard Sunderland from JPMorgan. Your line is open.

Speaker 10

Hi, good morning. Thanks for the time today. Maybe turning to the Schafer update, Do you need any approvals whether MISO or Indiana on the extension there? Are there any EPA implications with the change in the retirement?

Speaker 2

I'll turn it to Sean for specifics, but we do not need any specific EPA approvals To move that retirement day along Schaefer.

Speaker 3

Yes, that's right, Lloyd. And we've begun discussions with key stakeholders, including MISO, the IURC, and as well as our team there to understand the ramifications with that.

Speaker 10

Understood. And then you've talked about timing around the renewables CapEx, but just curious on the cost side, if you're seeing any potential ramifications here. I know you Reiterating the $2,000,000,000 but just thinking about the risk maybe as you move further out, any considerations or thoughts there?

Speaker 2

I think, yes. The answer is that we do, I mean, especially around labor costs on some of these projects. I mean, just like the rest of the world, I mean, everybody is seeing inflation everywhere. So just like the labor cost on these projects are going up, I mean, those the price of our commodity, natural gas and the overall price of energy. So I think when you think about investing or continue to invest in renewable projects, I think you have to look at it holistically and understand how that compares with the price increases on other forms of energy and Decide which ones you want to continue to invest in to provide reliable service to the customers.

Speaker 4

I'd say a follow-up. It's too early. As we are in the process, we're working with our developers for us to update any estimates on the individual projects. As we get more clarity and negotiate and work with those developers, we'll update the amounts As appropriate, correct appropriate.

Speaker 10

That's very clear. Thanks for the time.

Operator

Your next question comes from the line of Brian Lee from Goldman Sachs. Your line is open. Brian Lee from Goldman Sachs. Your line is open. Your next question comes from the line of Travis Miller from Morningstar.

Operator

Your line is open.

Speaker 11

Good morning, everyone. Thank you. Just wanted to be crystal clear here. These are Anticipated or potential delays on those projects, right? Or have you actually heard from suppliers that they won't be able to deliver On those projects.

Speaker 11

Just want to be sure I understand that.

Speaker 2

The question are you asking Are these about projects that we have started, that Sean mentioned, started in 2021 or the projects that have not started at all?

Speaker 11

The ones that haven't. Yes, the ones that haven't. That's the 440 that you're referring to, right?

Speaker 2

Okay. That's correct. John? Yes. The projects

Speaker 3

that have not begun the construction process to your point are projected delays of 6 to 18 months and that's the updated in service date that we are estimating on the slide in the supplemental materials. The project is currently under construction is our best line of sight to what it would take to conclude construction and have those become COD. So those would be a little bit more definitive in the terms of how the delay would impact an in service date in contrast to the ones that haven't begun the construction process and are still just estimated.

Speaker 11

Okay. So something were to resolve quickly around Just any of this uncertainty, it's possible that you'd still be on track for the CapEx budget that you laid out before?

Speaker 1

Yes.

Speaker 11

Okay. Great. I just want to clarify that. And second, just thinking about where gas prices have gone and your cadence of rate increases and rate filings. Any thoughts on how customer bill might impact?

Speaker 11

I know you've got the 2 rate cases going here, but Any future, either later this year or next year.

Speaker 7

Yes.

Speaker 2

Thanks for asking that question. And we're always thinking about customer rate impact and customer bill. I think part of this is we try and put CapEx in the system to drive value for customers. We're also trying to drive productivity and efficiency to offset some of those customer increases. But I mean, in answer to your question, we are thinking about customer bill impact and continuously having, say, conversation with regulators about what that means.

Speaker 11

Okay, great. Thanks so much. That's all I had.

Operator

Your next question comes from the line of Brian Lee from Goldman Sachs. Your line is open.

Speaker 12

Hey, can you guys hear me okay?

Speaker 2

Yes, Brian. Good morning.

Speaker 12

Hey, apologies. This is Insoo. I don't know My colleague, I can put on the call, but it's been through here. Thanks for taking my question. My first question is Your commentary on how the solar installs in the shape of retirement, it's said that gone on the original timeline would have helped Meaningfully lower customer bills.

Speaker 12

Now that it's delayed and with the plan that you've laid out in place to replace owned CapEx with other items as well as O and M, just How confident are you that the customer bill impact from this revised plan won't face potential regulatory hurdles? I know Part of that is supported by tracker related CapEx, but just wanted to see your confidence, color on confidence If that 2024 earnings power should remain unchanged.

Speaker 2

Pablo, why don't you take that?

Speaker 8

Yes. Hi, Anshu. Great question. And I'd say that I'd point to the kind of the diverse portfolio across the companies that we're going to be leveraging. So it wouldn't necessarily fall wholly in the Indiana jurisdiction where we would be making investments to help pull forward some of those capital opportunities.

Speaker 8

So we would be spreading that To the extent that we can across our companies where we have those investment needs and we've got the capacity to do that. So that would help to moderate The impacts on any one customer group. And then of course, we'll continue to look for opportunities to refine efficiencies and productivity savings across all the jurisdictions to help offset that as well.

Speaker 12

Okay. Got it. That's helpful. My second question, just looking at

Speaker 4

the quarterly

Speaker 12

results, unless I missed something, it seems like on the gas O and M side, There was a meaningful a decent amount of increase there. And I think you've discussed you've laid out on the supplemental forms, the labor, materials inflation. I don't know if that was more directed towards gas only and I didn't see it really on electric, but is there anything on the gas side that was Having more of an inflationary impact and just related to that, how just commentary on how you think you'll be able to manage that And be at the at least in the middle of that 'twenty two guidance range for the year.

Speaker 2

Yes. So I'll start that and Pablo or Donald Donald can wait. When we look at our gas business, especially this winter, we had a very challenging winter. And when you do gas work, Now you're doing a lot of digging in the ground and you're dealing with weather incidents. Your productivity levels are typically not where you need them to be.

Speaker 2

The ground is harder, a lot harder to get to some of our leaks. Over time, as the weather clears up, we expect to gain get those productivity gains back. So I think it's more of a weather issue that we can turn around here in the near term. Pablo?

Speaker 8

Yes, I agree with that. It's been kind of a it's been an extremely wet start to the season, which delays some of our construction work, which then puts folks working on other types of compliance and operations work that shifts that capital O and M mix a bit. So we saw that shift happen in the Q1. We expect to see that shift back and have the ability with the work out there to make up that difference as we look at the balance of 2022.

Speaker 4

And then I have a follow-up on inflation. We are seeing higher inflation on materials and fleet and some outside services. We're seeing ranges of 6% to 10% this year. We're actively managing that and looking to lock in some multiyear contract so that we can limit those increases and at least have predictability around those increases. However, I'll go back to all of this is included in our guidance for this year in our long term plan.

Speaker 4

So we're comfortable With our guidance, we're uncomfortable with the expenses we're seeing, but we're also actively managing, going back to thinking about long term customer affordability of our programs.

Speaker 12

Okay, got it. So this was largely known. Okay, that's helpful. Thank you so much.

Operator

Your next question comes from the line of Julien Dumoulin Smith from Bank of America. Your line is open.

Speaker 7

Hey, good morning, team. Thanks for the time. Appreciate it.

Speaker 2

Good morning, Julien.

Speaker 7

Hey, I hope you guys are doing well. So So maybe just to kick things off a little bit here, going back to that last question on the 6% to 10% cost inflation, what metric were you quoting there on that 6% to 10% But more germane, if I can. The real question I wanted to throw in there was, can you touch on your cost reduction measures specifically in NiSource NEXT? What are the costs that are being pulled out against the backdrop of that inflationary environment? And maybe to be more specific, Are these sustainable cost cutting measures on the $0.03 to $0.04 or are they more one time ish in nature?

Speaker 7

And what is what kind of latitude are you team given this inflationary environment to potentially lean in and find more than $0.03 to $0.04 of opportunity here as we look at the business to more than offset some of these impacts.

Speaker 4

Yes. So you've got a couple of parts to your question.

Speaker 7

Take your time.

Speaker 4

So the first question was around inflation, what we're seeing. So we're tracking each, I'd say category of spend across the business, electric and gas, Looking at year over year impacts, looking at contracts and to really understand what we're seeing and how to best manage those. So that's where we're seeing kind of the 6 The 10 across certain categories. In some places, it's flat because we've got multiyear contracts already in place, but certainly seeing some inflation there. Other question, I think you were referring to the $0.04 to $0.05 in 2024.

Speaker 4

We've got line of sight to that. And we think about both from a, I'd say, NiSource Next to your point, those would be cost that would go out over time and it gets back to Lloyd and Pablo's point around productivity. NiSource Next really is designed To increase productivity across our business, especially in the field, and so that's the long term savings. But certainly we've got levers on a year over year basis to ensure that we're hitting our targets. So it's really all of the above.

Speaker 7

Just to clarify that $0.03 to $0.04 from the slides here on the O and M and that is an ongoing savings Infinity, but we still got to wait for what you guys have to say in the fall here for more?

Speaker 2

That's right. Yes, that is right. So part

Speaker 4

of this is we're

Speaker 2

developing, I'll say, an O and M agility methodology, where we build our O and M budgets every year, we'll have a plus or minus 2% agility in there that we can flex. And then the other part as Donald talked about with NiSource Next and gaining productivity is more structural focused on continuously building more productivity and efficiency into the business as we go along. And we'll have more detail in the fall on that on both of those.

Speaker 7

Got it. All right. Excellent. Thank you, guys. And then just super quick if I can on Ohio, I know that that's in flight here, but can you discuss a little bit more specifically the delta between your ask and staffs rec?

Speaker 7

Obviously, there's some obvious ones, but As a percent of ask was low, can you reconcile that a little bit, but more even more critically, not looking to front run the rebuttal here, What is the opportunity to potentially address some of these discrepancies here more formally?

Speaker 8

Hey, Julien, this is Pablo. So I'll say first off, we've had and expect to continue to have constructive regulatory outcomes in Ohio over the last many years between our Capital Expenditure Program and our IOP programs. And so we're working constructively on this issue as well. So certainly the staff report and the delta between our application and their recommendation is meaningful. We are taking the opportunity since we've seen that report to help clarify some of the elements inside of ours.

Speaker 8

And so some of the specific elements are certainly O and M assumptions. There are some plant In service assumptions that are drive some differences and there's some liabilities and items along those lines on environmental and such that we're working on. So we're working to clarify where we think some of the differences have been. We think that will in our response To their staff reporting our rebuttal, which we're going to file this week still, we'll have an opportunity to do that. And then we're going to file supplemental testimony, by Friday of next week.

Speaker 8

And during that time, we're going to also work to initiate settlement discussions. So we still fully expect that a settlement is possible. We'll be working towards that. We think that there's a reasonable settlement out there that's going to benefit all of the stakeholders in this and we're going to be tracking towards that Julien.

Speaker 7

Wish you the best of luck, Pablo. Talk to you guys soon, all right? Thanks.

Speaker 6

Thanks.

Operator

Your next question comes from the line of Steve Fleishman from Wolfe Research. Your line is open.

Speaker 10

Yes. Hi, good morning. Thanks for the details that you provided this morning on the solar issue and offsets and such. So One question following up on the cost, if there are cost increases for the projects. Can you give more clarity of how the relationship is between your developer partners And yourself in terms of who's kind of on the hook for cost increases?

Speaker 10

Is it? Yes.

Speaker 3

Yes, Steve. This is Sean. So the cost of the project itself is on the build transfer agreements fully contracted for at a known price. The cost increases themselves are on the side of the developer to construct those projects. To the extent that tariffs are applied, We'd have to evaluate what the application of those tariffs are to understand that cost pressure and risk and where that lives.

Speaker 10

Okay. So it's not clear where the tariffs if it's tariff related, Who's kind of got to deal with that issue? That's correct. Okay. And is it are the contracts consistent or do they vary on that topic?

Speaker 3

Each contract is unique, Steve, but certainly there's some components that are consistent. That particular element has the entire construct itself and how it's financed can vary and would come into consideration. So I describe it as each project or each contract unique, but the application of that itself, we'd have to evaluate as the project steps closer.

Speaker 10

Okay. And I know you just announced this today, but the idea that you in investigation is Causing delays in solar projects, forcing you to extend the life of a coal plant seems like kind of a meaningful policy issue for the same administration that's actually doing this investigation. I know it seems like it's been so far very technical process, but just what kind of there's obviously a political aspect to this. I'm just curious kind of if you're getting any sense whether that's resonating at all or not?

Speaker 3

Yes, Steve. I mean, I would highlight as I did in my comments that we're disappointed that A disruption in the solar chain is going to constitute potential delays for customers to realize benefits and some cost certainty related to fuel price volatility. That's the premise by which these projects really were born. And it's disappointing that that might occur. That said, we're optimistic Commerce can work expeditiously to provide some refinements in its investigation that can enable these projects to move through as quickly as possible.

Speaker 3

At the core of what we do, it's about reliability for our customers and the communities we serve. And that's a critical component that we are focused on, which is part of what Shafer can deliver and has delivered for many years, which is part of the decision that we've laid out here today. But we're optimistic that even with recent refinements the DOC has provided, it can give us enough information to get clarity through The conversations with our developers to advance our specific projects is expeditiously as practical to get to, I think, what you alluded to, which is Really a lower cost energy solution with more price certainty for customers.

Speaker 10

Great. Thank you very much.

Operator

Your next question comes from the line of Ryan Levine from Citigroup. Your line is open.

Speaker 6

Good morning. If there are any cost overruns for solar that NiSource is responsible for, Can you speak to the recovery mechanisms for these cost overruns? And if the delays trigger any legal rights for the company with its counterparties on these projects and then somewhat related, given the announced delay expectations, how are you looking at these delays impacting financing plans as it relates to the ATM and other sources of funds. I think you had a footnote in your slide deck on that front.

Speaker 3

I think the first part of your question, I think it's too early to speculate on if the tariffs would be applied, how it would be, what the circumstances would be. By nature, the CPCNs give us the regulatory approval to move forward. But these projects, we'd address that a cost variance from the projects That would be different than the existing CPCNs through the regulatory process with the IURC. So I think the question on that front end is addressed through the regulatory process itself with the IURC against the existing CPCNs to move forward.

Speaker 9

But let

Speaker 2

me ask a clarifying question. When you talk about cost overruns, you mean the cost Is general cost overruns of the project or cost overruns just with respect to the tariffs? Which question are you asking?

Speaker 6

We're the first, but it's both to apply.

Speaker 2

Okay. I think when you talk about general cost overruns, I think those are covered in the contract with the developer. With respect to the tariffs, I don't think those contemplated in the contracts. Therefore, we have to work with the developer and or the regulator to decide who bears that risk.

Speaker 4

And with regards to the financing plan, certainly we expect that if there's delays, It's going to impact it's going to delay the any debt financing that we do on the projects. That's where we expect we'd see some savings from deferring some of that debt issuance. As regards With regard to ATM, no changes to our financing plan now. You see the ranges that we've got outlined here. Certainly, no ATM in 2023 is possible.

Speaker 4

And that's certainly taking into account the both our overall business as well as those renewable projects.

Speaker 6

Thank you. And then one unrelated question Pro Lloyd with the business review process. Are there certain areas of the review that has been decided to evaluate more comprehensively? And is that part of the reason for the delay in timing of the Analyst Day? Any color you could share on that would be appreciated.

Speaker 2

Let me be clear, I was never the delay in the Investor Day is primarily focused on The delay in the solar projects, I was never I didn't believe I would be finished a review by May or Spring Investor Day. I think the level of review that we're taking, looking hard at Just each of the utilities, how they contribute to the overall business, what our corporate services are, what productivity looks like in the organization, how we benchmark, All that's ongoing. And it just so happens, I believe, in that target, making sure that we're finished in the fall in conjunction with these projects so that we can give what I'll call a comprehensive review of strategy at NiSource in terms of how it will grow after 2024.

Speaker 6

Appreciate the color. Thank you.

Operator

And there are no further questions at this time. Mr. Lloyd Yates, our CEO. I turn the call back over to you for some closing remarks.

Speaker 2

So first of all, thank you for your questions. And I'd like to close by reiterating a few key takeaways. 1, NiSource expects the Commerce Department Solar Panel investigation to delay solar projects. We are developing and implementing a mitigation plan to maintain our 2024 growth commitments. We're reaffirming our 2022 guidance of 1 point $0.42 to $1.48 diluted non GAAP No EPS.

Speaker 2

We are reaffirming our forecast for 7% to 9% compound annual growth rate from 2021 through 2024, including near term annual growth of 5% to 7% through 2023. We continue to make strong progress in our regulatory agenda with a settlement in IPSCO's gas rate case and new cases filed in Pennsylvania and Virginia. And NiSource will host the Investor Day in the fall. We intend to provide you with a definitive long term plan beyond 2024. Thank you.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
NiSource Q1 2022
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