NiSource Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2023 NiSource Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Operator's speakers' remarks.

Operator

There will be a question and answer session. Thank you. It's now my pleasure to turn today's call over to Chris Turnure, Director of Investor Relations. Please go ahead.

Speaker 1

Good morning, and welcome to the NiSource Second Quarter 2023 Investor Call. Joining me today are President and Chief Executive Officer, Lloyd Yates Executive Vice President and Chief Financial Officer, Sean Henderson Executive Vice President of Strategy and Risk and Chief Commercial Officer, Michael Lures Executive Vice President and Group President, NiSource Utilities, Melody Birmingham and Vice President of Investor Relations and Treasurer, Randy Hulan. The purpose of this presentation is to review NiSource's financial performance for the Q2 of 2023 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 in the Investor Relations section of our website.

Speaker 1

We would like to remind you that some of the statements made during this presentation will be forward looking. 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 Risk Factors and MD and A sections of our periodic SEC filings. Additionally,

Speaker 2

some of

Speaker 1

the statements made on this call relate to non GAAP measures. Please refer to the supplemental slides, segment information and full financial schedules for information on the most directly comparable GAAP measure and a reconciliation of these measures. I'd now like to turn the call over to Lloyd.

Speaker 3

Thanks, Chris. Good morning, everyone, and thank you for joining us. Hopefully, you've all had a chance to read our 2nd quarter earnings release issued earlier today. I'll begin on Slide 6 to provide you with an update on our 3 key priorities. First, we are raising our 2023 non GAAP NOEPS guidance to the upper half of $1.54 to 1.60 We are also reaffirming our annual non GAAP NOEPS growth of 6% to 8% through 2027 annual rate base growth of 8% to 10%.

Speaker 3

Meanwhile, our non track O and M target is to remain flat in 2023 PS discrete guidance of $1.50 to $1.57 was introduced at our Investor Day in November. In February, we raised and narrowed our estimate to $1.54 to $1.60 And today, We are again raising to the upper half of this range. In the approximately 9 months since November, our superior operations, regulatory and financing execution have enabled this increase in earnings expectations. For our customers, commodity market conditions have been improving. However, inflation and interest rate headwinds continue to persist.

Speaker 3

Despite this, we remain focused on delivering value to our customers and highly visible de risk financial results for our investors. Second. Our leading regulatory execution continued this quarter in both the electric and gas businesses. May was a particularly busy month for our gas distribution business as the Columbia Gas of Maryland filed a request with the Maryland Public Service Commission seeking approval to adjust base rates. The request seeks to recover approximately $40,000,000 of capital investment.

Speaker 3

Additionally, the Virginia State Corporation Commission approved a settlement among Columbia Gas of Virginia parties in this base rate case originally filed in April 2022. The base rate adjustment approval authorizes recovery of approximately $390,000,000 of capital investment. Columbia Gas of Ohio's infrastructure replacement program Ryder rates went into effect in May, initiating the recovery of $316,000,000 of capital investment. At the electric business, the record is closed in the Northern Indiana Public Service Company's electric rate case. We believe the settlement reached back in March represents a balanced outcome for stakeholders as the company invests 1,000,000,000 of dollars in our customers communities in the state.

Speaker 3

A final order is anticipated today from the Indiana Utility Regulatory Commission with rates anticipated to be effective InSteps by September 2023 March 2024. At FERC, we received approval for incentives on 2 new MISO MTEP electric transmission projects last month, supporting our rate base investment and customer reliability beyond our current financial plan through 2027. Lastly, in June, we announced a definitive agreement to sell a minority stake Envisco to Blackstone Infrastructure Partners. The transaction strengthens our balance sheet and financial flexibility Mark yet another example of NiSource's steadfast execution for stakeholders. More importantly, It enables us to support ongoing investments in Indiana and our 1,300,000 electric and gas customers in the state.

Speaker 3

Slide 7 details our annual capital expenditures across our 6 state service territory. In the 5 year period through 2027, we plan to invest $15,000,000,000 in our customers and communities. At Columbia Gas of Pennsylvania, we are currently replacing 21,000 feet of pipe in Fredericktown in Washington County. Nearly half of the small towns residents will have their service lines upgraded with the remaining customers to be upgraded in the next 2 years. As part of this project, Columbia Gas is converting a low income housing authority system from a master meter to individual meters, helping to lower the authority's maintenance obligations.

Speaker 3

This $6,000,000 project is part of the company's $110,000,000 capital investment gas service into rural areas, including Steuben, Allen and Lake Counties in Northern Indiana. Our major projects and local operating area teams have installed over 24 miles of rural gas main install 11 70 new services year to date through June as part of this plan. On the other side of our footprint, crews at Columbia Gas of Maryland are installing new pipe in the city of Cumberland to improve safety by abandoning 3 low pressure regulator stations along with abandoning a significant amount of bare steel pipe. This is part of an investment of nearly $8,000,000 total capital in the state during the Q2. Turn to Slide 8 shows key rate case in select capital rider activity since 2021.

Speaker 3

Our leading regulatory execution continues with no less than 9 cases 5 7 jurisdictions across 6 states in the last 3 years. Our state regulatory teams are in a constant cycle of communication and engagement with key interveners, regulators and customer groups. In addition to general rate cases, regular capital tracker filings allow timely recovery on and up our investments. All of this activity is built on a foundation of robust economic activity in our states. For example, At NISCO, the Northern Indiana Commuter Transportation District provides idle transportation links to Chicago and Cook County, Illinois and is constructing the Double Track Northwest Indiana project.

Speaker 3

The project is anticipated to expand service, improve mobility and accessibility Stimulate job creation for Southern Lake County, and we are in the process of constructing substations to support this major transportation investment in the region. In Ohio, the new Intel chip factory has been under construction since mid-twenty 22 in Licking County on the outskirts of Columbus. It is estimated to be a $20,000,000,000 investment in the state And Intel will be a new Columbia Gas of Ohio customer. In Virginia, the Norfolk Naval Shipyard is the Navy's primary East Coast repair, overhaul and modernization facility and one of the 4 public shift yards That play a critical role in maintaining America's fleet. The shipyard is installing a combined heat and power plant expected to be complete later this year that will significantly improve energy security and efficiency with expected consumption of 1,700,000 dekatherms annually for Columbia Gas of Virginia.

Speaker 3

Customer count across our territories has been growing on average by 0.5% to 1% annually for years, Including 2023 to date. Favorable demographic trends have driven inbound migration, thanks to a stable and growing manufacturing base, robust utility and non utility infrastructure and low tax rates in the states we serve. Turning to another foundational element of value for our 4,000,000 customers, our internal teams continue to advance on all aspects of our operational excellence initiative. Project Apollo is on track, generating efficiencies by doing things safer, better, more efficiently and for less calls. One recent example is establishing standard buffer zones around our underground infrastructure indicate areas where digging can safely occur, especially for 3rd party excavators.

Speaker 3

Before instituting a standard zone, field crews are being called out to excavation sites to locate underground facilities when it wasn't needed. We've eliminated more than 10,000 unnecessary trips the last 3 months, allowing more time to be spent on value added work. Technology investments are also key to our operational excellence This year, we began our 5 year approximately $1,000,000,000 transformation with an initial $300,000,000 investment in SAP and Salesforce technology platform implementation that will standardize work practices and drive efficiencies for our field employees to improve service to our customers. All of this is expected to contribute to keeping total customer bill levels in line with inflation over the 5 year financial plan. These achievements would not be possible without our dedicated employees and their commitment to our customers, communities and all NiSource stakeholders.

Speaker 3

With that, I'll turn the call over to Michael Lures. Thank you, Lloyd.

Speaker 4

I'll begin on Slide 9. Nisko's generation transition is continuing to advance as we optimize the new portfolio to benefit customers and retire all coal fired generation by the end of 2028. Crossroads and Dunn's Grid 1 solar projects have advanced their in service space and are serving customers over the peak summer season. NISCO has now placed 4 utility owned renewable investments into service 2018 Integrated Resource Plan process. In total, these four projects represent an approximately $800,000,000 investment 8 70 Megawatts of Economic Sustainable 0 Fuel Cost New Generation for NISCO's Northern Indiana customers.

Speaker 4

Construction on Calgary Solar Plus Storage and Dunsbridge 2 Solar Plus Storage continues. Both projects have expected in service dates in 2024, and we are in the very early stages of construction of the Fairbanks Fuller project, which has an expected in service date of mid-twenty 25. Additionally, our work on Indiana Crossroads 2 wind PPA is advancing and is expected in service late this year. Today, we are announcing several adjustments for our remaining portfolio projects That together address development challenges and better align the portfolio with recent changes to MISO rules surrounding the seasonal capacity construct. The The first is the conversion of the Gibson PPA project to a build transfer agreement.

Speaker 4

We have filed a CPCN seeking approval from the IURC. And if approved, this project will replace the Elliott project in our portfolio. 2nd, we have sought regulatory approval for several recently executed PPAs, Apple Sea Solar, Templeton Wind. Finally, the agreements for the Elliott BTA and the Brickyard and Greensboro PPAs have been mutually terminated by Avisco and the developers these projects. Four key points related to these projects.

Speaker 4

1st, These economical and 0 fuel cost resources continue to support customer affordability. 2nd, These changes support our current co retirement schedule of all co retired by the end of 2028. 3rd, the renewable generation in service by the end of 2025 will continue to consist of 8 build transfer agreements N6 PPAs. And 4th, the revised portfolio project is consistent with our current 5 year CapEx, rate base, financing and other prior commitments to the investment community. Beyond these projects, our 2021 IRP and 2022 RFP processes lay the groundwork for the balance of projects needed to replace the Michigan Generating Station by 2028.

Speaker 4

NISCO is implementing an upgrade at the Sugar Creek gas generating station this year, And we are finalizing our analysis of gas peaking alternatives identified in our 2022 RFP, which we We will be conducting the triennial integrated resource planning process with stakeholders in 2024. 0 fuel cost resources reduce customer bill volatility and create substantial value for our customers, Especially as they experience elevated economy wide inflation. Since our first project went commercial in late 2020, We have been passing back both excess generation and renewable energy credits revenue to customers from this and subsequent projects. In the Q2 alone, this amount totaled $8,400,000 or over $2 per residential customer For a year to date total of $14,600,000 As we look forward, Slide 10 shows additional CapEx opportunities not included in our financial plans through 2027. Multiple items on this list, both near term and longer term, are progressing well in their evaluation work streams.

Speaker 4

Prior to the Inflation Reduction Act, we've beneficially employed tax equity financing on the 4 owned renewable projects in service to date, And our financial guidance incorporates tax equity financing for the remaining 4 projects in 2024 2025. However, given the new pathways for utilizing tax credits included in the IRA, We are evaluating the benefits of direct ownership for each of the remaining 4 build transfer projects, potentially adding incremental CapEx to the plan, We are also working through our long term investment plans stemming from the proposed rules around the 2020 Federal Types Act, which will require incremental investment in our system for various leak reduction, safety and other operational requirements. These requirements would build on the investments we have been making on our advanced leak detection and repair program. We will continue to be active in this area to support the best outcome for customers in terms of safety, emissions and infrastructure investment. These potential and current investments across our electric and gas businesses support our clean energy transition, furthering our Scope 1 emission reduction goals and enhancing customer value in a balanced way.

Speaker 4

At year end 2022, NiSource achieved a 67% reduction in Scope 1 GHG emissions from 2,005 baseline levels, and we remain on track to achieve an industry 90% reduction in Scope 1 GHG emissions by 2,030 and are advancing our goal of net 0 Scope 1 and 2 emissions by 2,040. At NiSource, we are very proud of our track record of decarbonization and focus on sustainability. In addition to being named to the Dow Jones Sustainability Index, we are rated as AAA by MSCI for ESG and have been recognized as one of America's Most Responsible Companies for 2023 by Newsweek and by Ford's Best Employers for Diversity in 2023. Our passion is to create value for our customers and communities through investment in and operation of our electric and gas system that drive customer benefits and reliability, safety, sustainability and customer offering. I'll now turn things over to Sean.

Speaker 5

Thank you, Michael, and good morning, everyone. Slide 11 reviews our financial results from the Q2 of this year. Non GAAP net operating earnings achieved $50,300,000 or $0.11 per share compared to $53,900,000 or $0.12 per share in the Q2 of 2022. Year to date results continue to track in line with our plan. Visibility from constructive regulatory outcomes, completion of financing transactions and execution on O and M initiatives Have supported our raising our range to the upper half of the $1.54 to $1.60 range provided.

Speaker 5

As we indicated last quarter, key regulatory and O and M drivers will continue to build value into our financial results for 2023 as they layer into our actual results across the full year and drive greater impact in the second half of the fiscal year. Turning to Slide 12, you'll find segment detail and key drivers of our 2Q results. Gas distribution operating earnings were $120,000,000 in the 2nd quarter, an increase of $39,000,000 versus the same quarter last year. New rates and capital investment programs drove $61,000,000 of incremental revenue, Including general rate case contributions in Ohio, Pennsylvania, Indiana, Virginia and Maryland. Capital trackers in Ohio, Kentucky and Virginia positively impacted the segment as well.

Speaker 5

Non tracked gas O and M was flat year over year. In the electric segment, operating earnings were $51,000,000 in the 2nd quarter, decrease of $22,000,000 versus the same quarter last year. Lower weather normalized customer usage across all three customer classes, attributes to this variance and is related to industrial outages and a return to more normal long term demand the commercial and residential segments. Higher non tracked O and M was also a headwind, primarily due to the timing of generation maintenance expenses and increased reliability spend related to vegetation management. And finally, corporate and other was favorable by $14,000,000 due primarily to lower benefit and insurance costs and reduced third party expenditures.

Speaker 5

Now I'd like to briefly touch on our debt and credit profile on Slide 13. Our debt level as of June 30, 2023 was $12,600,000,000 of which $11,000,000,000 was long term debt with a weighted average maturity of 12 years weighted average interest rate of 3.9%. At the end of the second quarter, we maintained net available liquidity securitization programs. We remain committed to our current investment grade credit ratings. I'm happy to share all 3 agencies have reaffirmed NiSource ratings with stable outlooks following their annual reviews and the minority interest announcement.

Speaker 5

Slide 14 addresses our financing strategy and credit commitments. In June, we issued $450,000,000 of 10 year notes at 5.4 percent and an additional $300,000,000 of our March 5 year 5.25 percent notes. We plan to use a portion of these proceeds from the sale of the notes to fund our capital plan. As previously indicated, we also plan on completing the equity units transaction launched in 2021 By remarketing the units this fall, we are reaffirming our long term financing plan originally disclosed at Investor Day in November. This includes 0 discrete equity issuances through 2027 and 0 ATM Equity In 2023 2024 and all financing costs are reflected in our earnings growth and credit commitments.

Speaker 5

This balanced financing plan is anticipated to help us deliver on our 14% to 16% annual FFO to debt ratio anticipated for all years of the plan when considering the proceeds of the minority sale. This affords us adequate flexibility to execute on rate based investment opportunities as they arise in any given year. Central to our financing plan is the sale of a minority stake in NIPSCO. The transaction enables 1,000,000,000 of dollars of investment for our customers and communities planned in Indiana over the coming years. It also strengthens our balance sheet and enhances flexibility in diversification from traditional capital markets.

Speaker 5

Our transaction announcement in June followed a period of capital market headwinds for utilities. Interest rates are generally higher and utility equity valuations are flat or down as a group since we originally stated our intention to sell the interest in November. We believe our decision to pursue this financing transaction optimized and derisked our cost of capital versus alternative path. We are very optimistic about the growing strength of our balance sheet and credit metrics as we look ahead. Supportive rate structures and regulatory activity coupled with the proceeds coming in later this year from the minority sale and the remarketing of our equity units position us strongly in the 14% to 16% FFO to debt range.

Speaker 5

Later this year, we expect to provide an update and roll forward of our long term financial commitments. This will enable us to complete our annual planning period and refresh of all of our capital expenditure and regulatory plans As we look forward to 2024 and the outer years of our financial forecast. Both at NIPSCO and our Columbia Gas Operating Companies, Our customers are core to everything we do. We remain sensitive to the overall inflationary pressures impacting many parts of consumer expenses, Even as falling energy commodity prices have helped our customer bills in the first half of this year. Our fuel cost adjustment mechanisms update every quarter and therefore quickly begin to pass back savings as prices fall.

Speaker 5

These have been a critical tool to help our customers during the extreme swings in commodity prices seen over the last 2 years. 2nd quarter gas fuel charges on residential customer bills declined $31,000,000 versus the Q2 of 2022. This is translated into an average decline of $6.50 per month for the commodity portion of customer bills across our gas utility businesses. Weather normalization mechanisms also insulate both investors and customers across the substantial portion of our meters. Residential customers across our Columbia Gas Companies benefit from constructs ranging from full straight fixed variable rate design in Ohio to a normalization band in Pennsylvania utilized during heating season, among other mechanisms.

Speaker 5

The impact of weather is excluded from our adjusted EPS. However, it's worth noting the actual cash flow impact versus normal in 2Q and year to date was only $6,000,000 $38,000,000 pretax respectively or 1% and 3% of our cash flow from operations for those periods. Scale is another factor we believe can drive greater affordability for our customers. The scale of NiSource's 6 operating companies Senate Central Services operating model supports approximately 4,000,000 customers and presents opportunities to flatten our operations and maintenance expenditures. And as we grow our customer base across all of our companies, those costs can be shared across the broader base.

Speaker 5

This also benefits our investors as scale and diversity enable traditional rate based investment flexibility across multiple jurisdictions and multiple energy systems. Finally, I'd like to conclude where Lloyd started today. We are reiterating our long term annual non GAAP, NOEPS growth commitment of 6% to 8% through 2027, Driven by annual rate base growth of 8% to 10%. We are raising 2023 non GAAP, no EPS guidance to the upper half of the $1.54 to $1.60 range. This follows our guidance range raising and narrowing in February from our original 2023 guidance range offered last November.

Speaker 5

This further demonstrates our growing track record of execution, including exceeding our 1.44 $1.46 guidance range in 2022 with actual NOEPS of 1.47 and exceeding our $1.32 to $1.36 guidance range in 2021, while achieving a $1.37 We remain confident in our plan despite persistent inflationary, supply chain and interest rate headwinds. We continue building a track record of execution and growth and our commitment to our investors, employees and customers essential to everything we do. Thank you for your support of NiSource. And with that, I'll turn things over to Lloyd for final comments.

Speaker 3

Thanks, Sean. And before we take questions, I'd like to share some late breaking news with the investor community. We just received an order from the Indiana Utility Regulatory Commission for the NIPSCO electric rate case. And upon initial review, It appears the settlement in the NIPSCO's case has been approved without modification. The team is reviewing the details of the order and if we see anything different, we'll let you know as soon as possible.

Speaker 3

And just let me give you a couple of highlights. Revenue increase of $292,000,000 return on equity of 9.8 percent and an increase rate base increase of slightly over $1,800,000,000 I want to publicly thank the IURC for their diligence review of this quarter, the team and all the stakeholders that contributed to what we believe is a very balanced solution. And with that, we'll open the floor for questions. Thank you.

Operator

Your first question is from the line of Shahriar Pourreza with Guggenheim Partners. Your line is open.

Speaker 6

Hey, guys. Good morning. Good morning, Lloyd.

Speaker 3

Good morning, Shahriar.

Speaker 6

Good morning. So just Lloyd, it's good to see that you guys actually increased your guidance for the year when since it appears lowered obviously this morning. Could we get maybe Just to share a little bit of what's driving the level of confidence for 2023, especially with kind of the key part of the year still in front of us and whether there is anything to read into there as we're thinking about the 6% to 8% growth rate.

Speaker 3

So I'll let Sean handle the details. But when you think about the second half of the year. I think the thing to contemplate is all of the great regulatory execution we had, including the order from Indiana today and continue to drive savings by Apollo. And with that, I'll turn it over to Sean for details of that comment. Sean?

Speaker 3

Yes.

Speaker 5

Thanks, Lloyd, and good morning, Shar. Appreciate the question. Just as Lloyd said, you may observe the track record of success on Slide 8, which demonstrates consistent execution of rate case and tracker filings across all of our businesses. Most notably, if you bring your attention to Q4 2022 and all of the 2023 outcomes, that specifically gives us enhanced line of sight to regulated revenue drivers across the balance of this year. That's somewhere in the neighborhood of $0.35 per share in total regulatory programs over the second half, which have already been approved or implemented and which will support growth in revenues in the second half of the year.

Speaker 5

Obviously, we've had some successful execution of financing transactions required to execute the robust capital expenditure program in 2023. Those really have concluded our long term debt issuances for the year. Thus, we've got pretty good line of sight to the interest expense that we're going to be paying for the rest of this year to support capital programs. Lloyd mentioned Project Apollo. We're definitely seeing some success as those programs are starting to launch here in the middle of this year.

Speaker 5

That will give us some tailwinds on the O and M front that we can use to enhance performance. But the other piece I'd note, just simply, we remain confident in the 6% to We project that growth rate off of year end results for each year of the plan. So while we're now targeting the upper half of the current year guidance range, this flows through into the annual 6% to 8% NOEPS across the remainder of the plan period.

Speaker 6

Okay, perfect. That's what I was trying to Okay, good. And then the near term CapEx slide through 27 on slide 10 That could be incremental. I mean, can you just, Sean, help us size that for us, even a range and the timing and how we should think about when that could actually hit the plan? Is EEI maybe the right podium to update?

Speaker 6

Is it year end results? Like how do we think about when we can get additional disclosures there?

Speaker 5

Yes. Maybe I'll start and then I'll pass things to Michael to touch on a couple of components that might be interesting in there. But we plan to update all of the long term the Including growth rate capital expenditures in that November timeframe. So I think you hit the nail on the head. We'll look at all factors and provide as much visibility as we can into our business.

Speaker 5

As you know, we've got a backlog of identified and high quality investment opportunities, which support system reliability, sustainability, customer service. And our focus is really how can we efficiently access those investments at one times rate base and convert that into NOEPS for our shareholders. The The teams are studying that right now. We're going through that annual planning process. The results of that we'll be able to share in the November timeframe.

Speaker 5

Michael, do you want to hit any interesting ideas on that slide?

Speaker 4

Yes. The only thing I'll add to that, Sean, is we continue to work through the different elements They are progressing well in the work streams of those items, but also in more real terms when we think about the 2022 RFP and the work on that As we finalize it and as we mentioned before, that's going to come back relative to a potential brownfield associated with the Shafer site. Continue to evaluate the remaining options in the portfolio that would allow us to meet the commitments that we've set associated with the generation transition.

Speaker 6

Okay. Got it. And then just lastly for me, Lloyd, maybe just a strategic question, if I may. I mean, obviously, you guys executed a fantastic transaction with NIPSCO. So that was good.

Speaker 6

But I know obviously some of the local media And some of the banker rags are highlighting maybe NiSource's acquisitive nature as you're thinking about potential deals. Without obviously going into specifics, unless you want to go into specifics, I guess, can you just highlight what your appetite is To grow the business further, especially in states that you already operate in.

Speaker 3

So that was a really good way to ask that question, Shar. Let me start there. Thank you. Randy's talking well. And I don't want to comment on specific details.

Speaker 3

Like most companies, our policies, we don't comment on marker room, of course, specific details. What I will comment on though is back in November on Investor Day, we laid out what I thought and I think this team and our board thinks is a really, really good plan. We're going to grow our earnings 6% to 8% annually off end of year results, 8% to 10% rate base growth. We put forth a transaction, 19.9 percent of the NISCO utility to strengthen our balance sheet. And what I will tell you is as we did the business review last year, That was the only transaction we contemplated, and we are laser focused on getting that done.

Speaker 3

So you mentioned we haven't finished that transaction yet. That transaction schedule to be finished by the end of this year. We're laser focused on that transaction, investing $15,000,000,000 capital, making sure we operate in an excellent way and growing earnings. And that is where the whole NiSource team is zeroed down.

Speaker 6

Okay, great. I'm sure someone asked that question in a different way. Appreciate it, guys. Thanks.

Speaker 3

Yours is good.

Operator

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

Speaker 7

Hi, good morning. Am I coming through clearly?

Speaker 3

Yes, you are. Good morning.

Speaker 2

Great. Thank

Speaker 7

you. Circling back to the renewables project changes outlined in one of the earlier slides there, Could you give a little bit more color to the backdrop and process underpinning all of that? I mean, it seems like it worked out in a way effectively neutral to you on ownership versus PPA basis, but just curious if there's anything more you can highlight out of how those changes were contemplated became about?

Speaker 4

Sure. Happy to do so. Thank you. When we look at it, just to reinforce, I mean, we will continue to consist of 8 build transfer agreements 6 PPAs and the revised portfolio projects is consistent with our current 5 year CapEx rate base financing and other prior commitments. But to get a little bit more into your question, we're consistently looking through the portfolio and making sure that we're eliminating risk associated with delivery and providing the best options for customer costs associated with those projects.

Speaker 4

So we're always looking to optimize them. So as we go through site development and different activities with it, We look to how to best optimize that portfolio and that's what you're seeing being done here. So by doing these projects and the way we've set them up, It gives us a lot of confidence in being able to execute on those plans and deliver those commitments as well as being able to provide the customers the benefits and meet MISO changes as well in the rules.

Speaker 7

Understood, understood. Very helpful there. It's sticking with renewables, Thinking about that Slide 10 with the additional investment opportunities, the ownership uplift that is under evaluation, Is that an item you expect to have resolved or mapped out in time for the fall update? And anything else that you could point out from the list is likely candidate for at least an update in that fall outlook revision.

Speaker 4

So I would say as we go through the projects And as we continue to provide information with IURC and other parties, we will provide updates to those projects as we go through each stage, just like we did with Gibson and the filing associated with that. But relative to the full ownership, We're finishing our evaluation of the IRA. And as mentioned before, there are significant benefits with the IRA, both in tax policy and the ability to maintain the full ownership, Which benefits project and portfolio optimization. This gives the capability to remove administrative burden, complexity, As well as to optimize the asset and we're finishing that analysis now and expect to be able to conclude that. But in doing so, if we look at that right now, our plan assumes tax equity for the remaining four projects.

Speaker 4

If we pending regulatory approval, if all 4 were included under full ownership that would require up to $1,000,000,000 in additional CapEx.

Speaker 7

Understood. So to be clear, that's $1,000,000,000 incremental to the current placeholder under a full ownership scenario. Is that what

Speaker 2

we're saying?

Speaker 4

Yes. So when you look at the current plan, the current plan assumes tax equity. If full ownership was done for all 4 projects pending any regulatory approvals, it would be up to $1,000,000,000 in additional CapEx.

Speaker 7

Got it. Got it. And one final quick one for me. Just Project Apollo, as you get further along in the kind of the initial launch Tier. Any new learnings relative to what you laid out in the spring around this initiative or anything to highlight in terms of what you're seeing from employees and other stakeholders as you roll this out?

Speaker 3

Yes. So thanks for asking that question. I think what we're seeing is employees getting excited In finding better and more ideas for cost savings, I think when you drill down into the organization, employees know what holds them up in getting more work done and we're getting after it. I think This will be a continuous improvement mindset. We're driving it throughout the company to do things safer, better, Faster and More Efficient League.

Speaker 3

But again, this is employee driven ideas, this process driven, and we're finding significant savings, and I This to continue on for a really long time. In fact, I expect it to start accelerating in 2024 and beyond. But Delivering the savings now, looking forward to acceleration process next year for even more savings.

Speaker 7

Great to hear and thanks for the time today.

Operator

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

Speaker 2

Yes, Lloyd. Good morning to you. Just apologize to repeat this, but just Could you maybe go through the changes in the renewables program from the prior program? Again, Just kind of what has actually changed in terms of adjustments and cancellations.

Speaker 4

Michael? Sure. Happy to do so, Steve. So when you look at it, Elliot was originally included as a BTA that is being replaced by Gibson, assuming approved by the IARC that was filed. In addition to that, we terminated several PPAs and also added several PPAs, which have been filed with the IURC.

Speaker 4

So you look at it, Templeton Wind, Carpenter Wind, Appleseed Solar are all filed with the IURC now. And those are really the fundamental changes. So we had 8 BTAs before, we have 8 BTAs now, It's just Elliot to Gibson, and we had 6 PPAs before, we have 6 PPAs now, and it's Temple and Carpenter Wind and Appleseed Solar in those versus like Brickyard and Greensboro and Gibson, those were terminated.

Speaker 2

The 3 new PPAs.

Speaker 4

Sorry. Just real quick, Steve.

Speaker 5

The only thing I'd add would be with those changes, the NIPSCO investment forecast of $2,000,000,000 to $2,200,000,000 is unchanged.

Speaker 2

Got it. And the new PPAs have you announced who they're with?

Speaker 4

We've done the filings associated with them. And in those filings, I believe that we have said who they are with.

Speaker 2

Okay. Do you have that just off the top of your head or

Speaker 4

We will get back to you on that. Yes.

Speaker 3

Randy and team will get back to you with those names.

Speaker 2

Okay. But overall, the message is same CapEx program, same amount of PPAs remixing everything. And then obviously there's this upside opportunity if you're able to use not have to use tax equity In terms of your capital program.

Speaker 8

Okay.

Speaker 3

That's correct.

Speaker 2

Okay. And then just the overall IURC support The program remains strong like are they How much of these have they kind of approved already?

Speaker 6

Yes. May I ask how much you go ahead.

Speaker 3

No, the IURC, I think the state of Indiana in general, there's very good support this renewables program. And I think what drove it, the amount of stakeholder engagement that got done upfront, I think What we're seeing is the benefit of stakeholder engagement with the IURC, the industrial customers, the commercial customers, the legislators and I think there has been settlement, rate case approval, filings. So we believe We continue to not believe we know we have very good support from the IURC in the state of Indiana. And we think that we're doing this transition in a way that really makes sense from a clean energy perspective and a reliability perspective.

Speaker 2

Okay, great. Thank you.

Operator

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

Speaker 9

Hey, good morning, team. Thanks very much for the time. Appreciate it. Look, we just wanted to follow-up on a few of the last tidbits you guys Just on the generation upside you talked about a moment ago. Just want to clarify this.

Speaker 9

First off, you've seen incremental load across your service territories. To what extent does that $1,000,000,000 upside contemplate that angle as well as any potential shifts here in MISO capacity needs? And then in turn, just on the tax equity bit, can you clarify just the status with the credit rating agencies? I know there's been some conversation on that front amongst others out there, if

Speaker 6

you can update us on that front.

Speaker 5

Yes. The first piece of the question, Julien, this is Sean. The first piece of the question, the incremental load that you're alluding to is not captured in the $1,000,000,000 Said differently, The 2021 IRP projected capacity requirements and the load necessary for us to serve our communities, And it provided that with the existing footprint of assets that we are currently engaged commercially to construct. Incremental load would be captured in the next IRP and factored into any future generation planning. That next IRP would be 2024.

Speaker 5

So we would capture that upside as we rerun the scenarios around load factors next year. And then the second part of your question, We expect that for purposes of calculating FFO, the treatment of tax credit transfers would be consistent with GAAP accounting. That should result in tax credit transfers flowing to the tax line and increasing FFO. And we understand that our credit rating agencies are evaluating that. That methodology consistent with GAAP accounting seems to track with us and we'll continue to stay engaged with the credit rating agencies as they continue their evaluation.

Speaker 9

Got it. Excellent. And then Lloyd, just to come back and open that can again, if we can. Just on the strategic front here, I mean, obviously, the plan is very good as is. Any commentary as 2 thresholds that you would think to.

Speaker 9

I mean, obviously, you laid out a pretty stark one earlier. Any further commentary on that front? I mean, obviously, you've got a very Nice running start here on the planet, Stan.

Speaker 3

But any further questions, we're

Speaker 9

talking about the one times rate base.

Speaker 3

Right. So we're I mean, we're investing $15,000,000,000 of capital one times rate base. Someone wants to sell us an asset that creates significant shareholder value at less than that. I think the probability that is really low, but our focus is our plan.

Speaker 9

Awesome. All right. Sorry, I'll leave that be. Good luck, guys. Thank you.

Speaker 9

See you soon.

Operator

Your next question comes from the line of Durgesh Chopra with Evercore ISI. Your line is open.

Speaker 10

Hey, guys. Thanks for giving me time. Hey, I just wanted to go back and clarify the tax equity to the $1,000,000,000 CapEx upside. So if I follow this correctly, the 8 BATs that you have currently in the plan. There is tax equity in it and there is a potential with the IRA that tax equity results in a $1,000,000,000 more CapEx or rate base upside.

Speaker 10

Of those within those 8 projects, am I thinking about this correctly?

Speaker 4

It would be for the remaining 4 projects. Of the 8, all 8 projects right now in the plan assume tax equity. So it would be for the remaining 4 projects, Calvary Solar and Storage, Dundee Bridge, 2 Solar and Storage, Fairbanks and Gibson, pending regulatory approval associated with those that if those projects were under full ownership, it would be up to an incremental $1,000,000,000 in CapEx. And The only thing I'd want to add to that is, when we look at them, obviously from the customer side and the benefits, we're making sure that we do full due diligence on that. And the follow-up on the previous question, just to make sure I got the mix right.

Speaker 4

It is NextEra for Templeton and Appleseed and Carpenter is EDPR.

Speaker 10

Got it. Okay. So remaining 4. That makes a lot of sense. And maybe just can you Sean, maybe this is maybe you can answer this one.

Speaker 10

But just how should we think about financing of that incremental CapEx? I think at the Investor Day, Right. What you laid out was ATM in 2025 and beyond, which was 15% equity, 85% debt On growth opportunities, is that a good rule of thumb still as we think about this incremental $1,000,000,000 CapEx? That's part 1 of the question. And part 2, do you see like depending on the timeframe of these projects, the potential equity or ATM next year and before the 2025 timeframe.

Speaker 5

Thanks, Serge. Appreciate the question. So at this point, there's no change to the financing plan we shared at our Investor Day in November. So just to reiterate, this includes no new equity until 2025, no discrete equity issuances through the life of the plan, with ATM maintenance equity beginning towards the latter half of the plan horizon. As we complete the equity units for marketing transaction that we entered into 2021, we'll receive some additional proceeds there.

Speaker 5

As We'll receive proceeds when we close the transaction with Blackstone. That will provide us a credit cushion relative to the 14% to 16% FFO to debt will be in the 14% to 16% FFO to debt range, but a credit cushion that we could use to What we're currently doing right now is evaluating what those capital opportunities could look like inclusive of tax equity and how that will create incremental cash flow as you'd coming out of our business and then how that would impact the financing plan throughout the entire horizon. All of that we expect to be able to step through in the November timeframe. So it's a bit too early to tell you exactly how that works, but the financing plan and the commitments we've made are still consistent with what we made in Investor Day.

Speaker 10

Got it. Thanks so much.

Speaker 3

You bet.

Operator

Your next question is from the line of Ryan Levine with Citi. Your line is open.

Speaker 11

Good morning. I appreciate all the details on solar. But I guess a couple of follow-up. What drove the changes for your project portfolio that you outlined and why make these changes now?

Speaker 4

Well, as we go through the projects and we work through just the normal process of developing the projects, sign develop, negotiating the agreements. We're always looking as to how to make sure that we're eliminating risk and bringing in the benefits. So On these individual projects, you combine that with also how we're able to provide the best benefit to customers, And that's what fundamentally led to the changes associated with the projects. That had to do with sub components associated with whether it be development costs or certain costs associated with the each individual site and we try to maintain a robust portfolio of development opportunities That enables us to have that flexibility associated with it. We know no plan goes exactly as planned.

Speaker 4

So therefore, we want to have flexibility in that plan. And really it's just working through that normal process of project development, construction, siting, etcetera.

Speaker 3

Thanks. And then what's the

Speaker 11

timeline or milestones you're working on to the better sense of the SIMSA related transmission investment opportunity? When do you think you'll have a better some numbers to point to around that upside?

Speaker 4

I'm sorry, can you repeat that for which opportunity?

Speaker 11

For the CIMS CapEx upside that you identified in your slide?

Speaker 4

Yes. So we're continuing to do the analysis associated with the FEMSA. We know that looking at it that there would be significant additional requirements. We have not laid out a specific timeline associated with those activities yet or what that would mean relative to our CapEx or financial plans, But the team is well engaged, well underway and working through those as well as we're engaged on how those rules are promulgated and what the and how we can best benefit customers.

Speaker 3

Nikhil will be able to have a

Speaker 11

plan in next year or is this this year decision point or any color you can share around Time Life?

Speaker 3

I think we're working through that process in November, Whether it be a EEI or VR earnings call, we'll have those plans more formalized and laid out. We'll get them to you as soon as we have them.

Speaker 11

Appreciate the color. Thank you.

Operator

Your next question is from the line of Travis Miller with Morningstar. Your line is open.

Speaker 8

Good morning, everyone. Thank you.

Speaker 3

Good morning, Travis.

Speaker 8

Just a high level, if you go back to November and think about the outlook you gave for this year and then forward to today. What's been the biggest surprise? I know you mentioned a couple of different variables, but what's the big surprise that has come about this year that is leading to that higher earnings outlook.

Speaker 3

So I would say to you, As I sit in the seat, a little over a year and a half, more confidence in our ability to execute on the regulatory front. I think that we have just really superior regulatory execution capabilities. As I spend more time on the operating side and look at the cost savings O and M here and savings without taking additional risk, but really becoming a better operational excellence. I'm seeing a lot more momentum gain. So I think and I have a lot of confidence in this management team.

Speaker 3

I mean, we've put this management team in place. We're really working well together. They're the best management teams in the industry, and it's working really well. So it's given us more confidence to deliver our own earnings to investors. I think we're doing better on the customer side and better in our communities and our employees like working here better.

Speaker 3

So I think it's an overall confidence rising across all of NiSource.

Speaker 8

Okay. That's great. And then on the Renewable Energy and Coal retirements. With what you have in the pipeline right now, regardless of whether it's PPA or ownership, How much more in your projections are you looking at to be able to execute that full coal retirement, Whether it's renewables or some other type of capacity, how much more outside of what you've announced is necessary, do you think?

Speaker 4

So we haven't completed the work associated with that. As we mentioned, there's additional CapEx included in the placeholder in the plan. We have significant work done from the 2022 RFP associated with that, which is concluding. But beyond that initial work, we will continue to look at opportunities around diverse mix of assets that fill that $1,000,000,000 of CapEx, which is what we have targeted relative to the retirement of the 2028 all coal units in 2028. So work is continuing.

Speaker 4

We'll have more updates as we go through the next Q and we're continuing to work the 22 RFP associated with it to finalize that.

Operator

There are no further questions at this time. Ladies and gentlemen, thank you for your participation. This concludes today's call. You may now disconnect.

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Earnings Conference Call
NiSource Q2 2023
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