NiSource Inc. (NYSE:NI) Q3 2023 Earnings Call Transcript

NiSource Inc. (NYSE:NI) Q3 2023 Earnings Call Transcript November 1, 2023

NiSource Inc. beats earnings expectations. Reported EPS is $0.19, expectations were $0.14.

Operator: Thank you for standing by. And welcome to the Q3 2023 NiSource Earnings Conference Call. I would now like to welcome Chris Turnure, Director of Investor Relations to begin the call. Chris, over to you.

Christopher Turnure: Good morning, and welcome to the NiSource Third Quarter 2023 Investor Call. Joining me today are President and Chief Executive Officer, Lloyd Yates; Executive Vice President and Chief Financial Officer, Shawn Anderson; Executive Vice President of Strategy and Risk and Chief Commercial Officer; Michael Luhrs, Executive Vice President and Group President, NiSource Utilities, Melody Birmingham; and Vice President of Investor Relations and Treasurer, Randy Hulen. The purpose of this presentation is to review NiSource’s financial performance for the third quarter 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.

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&A sections of our periodic SEC filings. Additionally, some of 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.

Lloyd Yates: Thanks, Chris. Good morning and thank you for joining us. I’ll start with an overview of our value proposition on slide three. At year-end 2022, we had $16.6 billion of rate base deployed for our customers, and today are outlining a refreshed base plan to invest another nearly $16 billion of capital over the next five years. We plan to execute on our resilient financial commitments supported by a superior regulatory and stakeholder foundation and balance sheet flexibility. Assuming a constant PE ratio, our plan can deliver a total shareholder return of 10% to 12%. Slide four shows our four key priorities. First, today we are reiterating our expectation of achieving the upper half of our $1.54 to $1.60 EPS range this year.

We are introducing 2024 EPS guidance of $1.68 to $1.72, over 8% growth midpoint to midpoint versus our current 2023 range. We are extending our 6% to 8% long-term EPS growth guidance to the 2023 to 28 period. This is supported by a five-year base capital plan of $16 billion and an 8% to 10% annual 2023 to 28 rate-based growth. We are confident our commitments are resilient to periods of rapidly changing business conditions such as those seen by the utility industry over the last 12 months. We continue building a track record of execution and growth, and our commitment to investors, employees, and customers is central to everything we do. Second, our superior regulatory and stakeholder foundation differentiates us from peers. In early August, the Indiana Utility Regulatory Commission approved NIPSCO’s electric rate case settlement.

This case represented the culmination of years of investment and stakeholder engagement, beginning with our 2018 integrated resource plan. In October, the public utility law judge of Maryland’s recommendation to approve Columbia Gas of Maryland’s rate case settlement became a final order. Last week, we filed a new gas general rate case in Indiana seeking recovery of $1.1 billion estimated cumulative investment to be completed through the end of 2024. Third, our balance sheet flexibility allows us to both optimize cost of capital for customers and ultimate return on capital for our shareholders. The transaction announced in June with Blackstone Infrastructure Partners is an example of the diverse funding sources embedded in our plan, raised at an attractive relative value while preserving the scale of our business.

Fourth, our company is experiencing a record investment cycle driven by safety, reliability, regulatory mandates, decarbonization, and modernization. Investment is constrained primarily by normal operational constraints and our desire to manage the impact on customer bills. The surplus of investment opportunity puts us in a favorable position to prioritize the deployment of capital in the investments in jurisdictions generating the highest risk adjusted returns. Slide five details our annual capital expenditures across our six state service territory. In the five-year period through 2028, we plan to invest $16 billion. Every single one of these dollars is a real investment in our communities. For example, at Columbia Gas of Virginia, we replaced over 8,000 feet of main and over 10,000 feet of service line infrastructure as part of a $4 million investment in our system in the town of Culpeper.

As part of this project, Columbia Gas updated several multimeter set and 130 individual customer connections, improving the quality and reliability of service to our customers within Culpeper County. Slide six shows key rate case and select capital rider activity since 2021. Our leading regulatory execution continues with no less than 10 cases filed in seven jurisdictions across six states during this period. 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 of our investments. A dialogue with our Pennsylvania stakeholders starting late last year is an example of this.

An approved long-term infrastructure improvement plan and the state is a prerequisite to recovering investments through a distractor. Columbia Gas, Pennsylvania sought the authority to replace infrastructure based on risks rather than a prior focus on bare steel and with a granted approval this spring. This change enables inclusion of an additional first generation assets such as first-generation plastic pipe for expedited replacement, enhancing the safety and reliability of our system. All of this activity is built on a foundation of robust economic activity for our states. 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 nonutility infrastructure and low tax rates in the states we serve.

In Southwestern Pennsylvania, one of the largest titanium melting companies in the world have advanced plans for a planned expansion in our service territory. Columbia Gas of Pennsylvania engaged the business in the Department of Community and Economic Development to enable the extension of a gas infrastructure and support job creation and economic development in the region. Moreover, this extension will present greater access to low-cost natural gas throughout the surrounding community while enhancing energy diversification and energy resilience. Slide seven shows how our operational excellence model is incorporated into decision-making in all areas of the company. Project Apollo is on track, generating efficiencies by doing things safer, better, more efficiently and with less cost.

This will keep non-tracked O&M flat through the duration of our 5-year plan. NiSource has continued to invest in technology that will drive risk reduction across gas and electric assets and increased customer value by ensuring reliable service, advanced mobile leak inspection is one example. Our historical practice of addressing leaks one by one is transforming into a process of clustering large-volume leaks into small replacement projects. This project brings visibility to large volume leaks and prioritization repair, reduces methane emissions and improve efficiency. We are focused on affordability for our customers every day. All of this is expected to contribute to keeping total customer bills in line with inflation over the 5-year financial plan.

These achievements would not be possible with our dedicated employees and their commitment to our customers, communities and all ISO stakeholders. With that, I’ll turn the call over to Michael.

Michael Luhrs: Thank you, Lloyd. I’ll begin on Slide eight. NIPSCO’s generation transition continues to advance as we optimize the new portfolio to benefit customers and retire all coal-fired generation by the end of 2028. Our first four renewable projects and the associated electric transmission are in service and represent approximately $1 billion of investment in economic, sustainable, zero fuel cost new generation for NIPSCO’s Northern Indiana customers. Also, our Indiana Crossroads II wind PPA is advancing and is expected in service late this year. Construction on Calvary Solar and Storage and Dunns Bridge II Solar and Storage continues and both projects have expected in-service dates in 2024. The Fairbank Solar project is expected to be in service in 2025 and is in the early stages of construction.

The Gibson project is also expected to be in service in 2025 and construction is anticipated to begin in early 2024. Our plans have included these four owned renewable projects under tax equity structures. However, based on our evaluation of the Inflation Reduction Act and the benefits to customers with tax credit monetization, we have filed a modification with the IURC for approval of full ownership of Calvary Solar and Storage and Dunns Bridge II Solar and Storage. Full ownership of these projects provide a lower cost to customers than tax equity supporting affordability and enhances our base plan. We continue to assume tax equity structures in our plan for the other two projects, Fairbanks and Gibson. However, we are actively evaluating the potential benefits to customers of inflation reduction act provisions related to these projects.

NIPSCO has several generation-related filings under review at the IURC, a CPCN for conversion of the Gibson project into a BTA, a bill transfer agreement modification for Calvary and Dunns Bridge II filed in August, which includes the aforementioned customer beneficial proposal of switching to NIPSCO’s full ownership of the projects instead of tax equity financing and a CPCN for our planned gas peaker project. In addition, NIPSCO has recently received orders approving several PPA projects, Apple Seed Solar, Templeton Wind and Carpenter Wind. For the gas peaker, in September, we filed a CPCN for an approximately 400-megawatt brownfield gas peaker project on our Schahfer site in Indiana. The project utilizes a combination of technologies, including aero derivatives for quick start capability and is a key enabler of our generation transition system performance and the full retirement of coal-fired generation by 2028.

Our in-service renewable projects are performing in line with expectations and are reducing fuel costs for our customers. Since our first project went commercial in late 2020, we have been passing back both excess generation and renewable energy credits revenues to customers from this and subsequent projects. In the third quarter alone, this amount totaled $5.3 million for a year-to-date total of $19.9 million. As we look forward, Slide nine shows additional CapEx opportunities not included in our base financial plan through 2028. These include potential items such as continued employment of the IRA to benefit customers and reduce tax equity financing, long-term incremental generation investment opportunities, PHMSA gas infrastructure spending and multiple additional opportunities.

The 2020 federal pipe back 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. The pipeline of opportunities listed on this page and the approximately $2 billion 2024 to 2028 upside CapEx opportunities continue to be evaluated to determine the most beneficial actions to deliver safe, reliable and cost-effective energy for our communities. As we look beyond 2028, we think a regulated gas and electric integrated utilities, such as NiSource has the potential to access even more investment.

This is particularly true as we think about the landscape of further decarbonization. As Nascent technology develops into practical applications, NiSource will look to work these investments into our capital expenditure plans in a customer beneficial manner. These potential and current investments across our electric and gas business support our clean energy transition, further our Scope 1 emissions reduction goals and enhance customer value in a balanced way. In early October, we announced the launch of a multiphase hydrogen blending project. It is one of the first in the United States use a blending skid in a controlled setting to mix hydrogen and natural gas at precise levels. Columbia Gas of Pennsylvania partnered with EN Engineering to construct a skid at our training facility allowing for the controlled blending of hydrogen into our isolated and controlled natural gas system to blend levels ranging from 2% to 20% hydrogen.

Throughout the blending project, NiSource will continue to evaluate the viability of hydrogen natural gas plans for other applications such as factories and power plants. As we consider the benefits and potential uses of hydrogen in the future, this project is one step that helps NiSource to determine the most beneficial and viable opportunities. Finally, last month, we issued our first sustainability report. For years, we have published an integrated annual report incorporating both financial and sustainability metrics. This year marks our first stand-alone report of key sustainability topics. The report details the incorporation of E, S and G policies throughout the organization and how these actions support and align with our mission, vision and values.

I’m proud of the company-wide efforts captured in this report that demonstrate how we strengthen and support our communities through our business activities. And I encourage everyone with an interest in sustainability to review the report. I’ll now turn things over to Shawn.

Shawn Anderson: Thanks, Michael, and good morning, everyone. Slide 10 reviews our financial results from the third quarter. Non-GAAP net operating earnings were $84 million or $0.19 per share compared to $45 million or $0.10 per share in the third quarter of 2022. Year-to-date results continue to track in line with our plan. Visibility from constructive regulatory outcomes and execution on O&M initiatives support our continued guidance to the upper half of the $1.54 to $1.60 EPS guidance provided last quarter. Turning to Slide 11, you’ll find segment details and key drivers of our results. Gas Distribution operating earnings were $53 million in the third quarter an increase of $21 million versus the same quarter last year. New rates and capital investment programs drove $42 million of incremental revenue including general rate case contributions in Ohio, Pennsylvania, Indiana, Virginia and Maryland.

Capital trackers in Ohio, Kentucky and Virginia provided additional return of capital investment for the segment as well. Offsetting these revenue increases we’re spending activities in non-tracked gas O&M for the quarter of $8 million and depreciation from infrastructure programs, which increased $14 million on a year-over-year basis. Electric operating earnings were $184 million in the third quarter, an increase of $69 million versus the same quarter last year. New rates as well as improved weather-normalized commercial and residential customer usage increased revenue by $7.3 million. Non-tracked electric O&M decreased $4 million, and depreciation increased $6 million. Lastly, Corporate and Other contributed $5 million due primarily to lower overall costs across several activities.

Now I’d like to briefly touch on our debt and credit profile on Slide 12. Our debt level, as of September 30 was $13.3 billion, $11 billion of which was long-term debt with a weighted average maturity of 12 years and a weighted average interest rate of 3.9%. At the end of the third quarter, we maintained net available liquidity of $1 billion, consisting of cash and available capacity under our credit facility our accounts receivable securitization programs. All three credit agencies have affirmed NiSource ratings and outlooks for the year. We remain committed to our current investment-grade credit ratings and remain on track to achieve our stated 14% to 16% FFO to debt range for this year upon closing of the minority interest sale transaction by the end of 2023.

Slide 13 details our refreshed long-term financial commitments. We are extending our 6 to 8 long-term EPS growth guidance to the 2023 to 2028 period. This is supported by a 5-year base capital plan of $16 billion, which fuels 8% to 10% annual 2023 to 2028 rate base growth. The enhanced base capital expenditure plan builds on our 5-year plan by switching from tax equity to full ownership of our next two renewables project in 2024. It also assumes additional capital for PHMSA-related gas infrastructure requirements and electric transmission investments in 2027 and 2028. These investments support incremental $1 billion of CapEx we have now moved into our base capital forecast over the next 5-year horizon. Additionally, we are highlighting $2 billion of upside CapEx not included in the base plan.

As Michael indicated, this includes investments to switch from tax equity to full ownership for our last two renewables projects in 2025, long-term incremental generation investment opportunities, electric and gas distribution enhancement opportunities and PHMSA driven investments. We’ll be sharing more about these upside capital expenditure opportunities as we engage with stakeholders and develop better line of sight to make these investments for our customers and we’ll continue to update and guide our annual capital expenditures plans to reflect the full scope of activities NiSource is engaging upon to deliver safe and reliable service for our customers. Next, I’d like to focus on our financing plan and make four key points on Slide 14. First, we intend to remarket our equity units later this month for proceeds of $863 million.

Second, this continues to be the only equity required in our base plan in 2023 and 2024, and is consistent with our prior financing plan for these years. Third, we expect to issue $200 million to $300 million of annual maintenance equity in the 2025 to 2028 periods using an ATM to maintain our capital structure and our current base case capital expenditures plan. Due to the strengthening of our balance sheet in 2023, we believe further enhancements to the capital plan and access to our upside CapEx and can be funded constructively by growth in cash from operations and requires minimal incremental equity from this base financing plan. Fourth, all of these financing costs have been included in our guidance ranges and continue to be reflected fully in the growth rate of our business, which we have projected today.

This plan supports both an annual 6% to 8% NOEPS growth rate and 14% to 16% FFO to debt annually for 2023 and the entire 2024 to 2028 period reflected in this planned refresh. As we sit here today, we’ve been able to increase our capital plan by $1 billion compared to the plan a year ago, while requiring limited incremental equity. This is due in part to higher expected deferred taxes driven by larger solar CapEx and the full ownership of select assets, generating more accelerated depreciation as well as modest amounts of tax transferability proceeds and some timing associated with monetization of credits. One final note on this slide. While the financing plan shared on Slide 14 is projected to support the $16 billion base capital plan. We expect minimal changes when we access capital investment opportunities within the upside plan.

This is due in part to the strengthening of the balance sheet projected to be executed in 2023. These activities as well as improvements in cash from operations as a result of selecting those investments continue to support our commitment for all years of our plan to remain within the 14% to 16% FFO to debt which we are positioned to deliver upon once we close the minority sale transaction at NIPSCO this year. I also want to be clear that the NiSource team has been and will continue to be thoughtful about the risks of elevated leverage. One year ago, we recognized the value of financing flexibility and diversity of capital and announced our intention to proceed with an alternative source of financing via our NIPSCO minority transaction. Capital markets remain volatile and expensive versus historical levels for both utility equity and debt.

Our base plan continues to carefully take these risks into consideration and builds in balance sheet flexibility, cushion and realistic financing assumptions accordingly. We’ve also updated our plan to reflect the current interest rate environment, which extends the higher short-term interest rate longer into our planned horizon than before and reflects the current outlook of the credit curve for our projected long-term debt issuances. I’ll conclude on Slide 15. Today, we introduced a refreshed long-term financial plan that builds and enhances upon the prior 5-year plan introduced this time last year. Since our Investor Day in 2022 and in just one year, we have outperformed our 2022 NOEPS guidance range by exceeding our $1.44 to $1.46. And with actual NOEPS of $1.47.

We’ve enhanced our 2023 NOEPS guidance range from $1.50 to $1.57. And up to the upper half of $1.54 to $1.60. We’ve received approval for an agreement to raise $2.15 billion of diversified capital while preserving the scale of our business for our customers’ benefit. We’ve enhanced our projected capital expenditures outlook by $1 billion and we’ve identified $2 billion more of capital expenditures, we believe, are important to delivering safe and reliable energy for our communities. We continue building a track record of execution and growth, and our commitment to investors, employees and customers is central to everything we do. We’d now like to open up the line for your questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Shah Pourreza with Guggenheim Partners. Please go ahead.

Jamieson Ward: Good morning. It’s Jamieson Ward on for Shah. Just building on your prepared remarks, as we think about the four remaining renewable projects at NIPSCO, the potential to replace tax equity with increased ownership, you obviously mentioned having filed the two and then day two you hadn’t yet. As we think particularly about the amount, which is not already part of the base capital plan, could you remind us of how we should think about how much capital at a high level that could represent?

Lloyd Yates: Michael Luhrs will handle that question, Mike.

Michael Luhrs: Yes. So thank you. So when we think about the remaining two projects, as you mentioned, the first two associated with Calvary and Dunns Bridge have been included, and we evaluated that and filed to that from the tax transferability. We continue to evaluate the second two. And if those are customer beneficial, then we’ll look at how to move forward with those. But effectively, you would be looking in a neighborhood of about $400 million of incremental capital associated with those projects. If they were to be included under full ownership with tax transferability.

Jamieson Ward: Got it. Perfect. Thank you. And second question, to bring some concerns and rumblings out there among some — we’ve been seeing some supply chain issues to do with renewables. Specifically, have you guys been seeing any issues in terms of getting panels from the two developers that you’re working with?

Michael Luhrs: So at this point in time, honestly, we feel very strong and confident in our dates and in-service dates with our projects, and we think that’s evidenced by how we brought the recent projects into schedule. I think there were a lot of benefits to us in how we exercise the generation transition earlier and plan for that. And at this point, we do not see significant supply disruptions. We do pay attention to that. We are always wary of it. There continues to be the need for long lead time equipment with certain items, but we’ve addressed those.

Jamieson Ward: Perfect. That’s all I have. Thank you very much. And looking forward to seeing you guys at the EI [Ph] in a couple of weeks.

Michael Luhrs: Thank you. You too.

Operator: Our next question comes from the line of Durgesh Chopra with Evercore ISI. Please go ahead.