NiSource Inc

Good morning. My name is RJ and I will be your conference operator today. At this time, I would like to welcome everyone to the NYSource second quarter 2021 investor call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would like to turn it all over to Chris Turner, Director of Investor Relations. Please go ahead.

Good morning and welcome to the NYSOR's second quarter 2021 investor call. Joining me today are Joe Hamrock, our Chief Executive Officer, Donald Brown, our Chief Financial Officer, Sean Anderson, our Chief Strategy and Risk Officer, and Randy Hewlin, our VP of Investor Relations and Treasurer. The purpose of this presentation is to review NYSource's financial performance for the second quarter of 2021, 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 NYSource.com. Before turning the call over to Joe, Donald, and Sean, just a quick reminder, 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 MD&A and risk factor sections of our periodic SEC filings. Additionally, some of the statements made on this call relate to non-GAAP measures. For additional information on the most directly comparable gap measure and a reconciliation of these measures, please refer to the supplemental slides and segment information included in our full financial schedules, available at NYSource.com. With all of that out of the way, I'd like to turn the call over to Joe.

Thanks, Chris. Good morning, everyone, and thank you for joining us. Hopefully, you've all had a chance to read our second quarter earnings release, which we issued earlier today. We made significant progress in our generation transition and the current renewable replacement plan with Indiana Commission approval now received for all of our joint venture renewable projects. In addition, we have received more than 180 proposals in our 2021 integrated resource plan or IRP process, which will inform our generation replacement strategy in Indiana beyond 2023. We continue to expect that our infrastructure programs and generation investments will drive compound annual growth of seven to nine percent in diluted net operating earnings per share from 2021 through 2024, while reducing greenhouse gas emissions 90 percent by 2030, compared to 2005 levels. Let's turn now to slide three and take a closer look at our key takeaways. In the second quarter, we delivered non-GAAP diluted net operating earnings of 13 cents per share. Results reflect safety and modernization investments, COVID impacts, and they reflect the profile of our business without Columbia Gas of Massachusetts. We are reaffirming our earnings guidance and long-term financial commitments. We expect 2021 earnings of $1.32 to $1.36 per share in non-GAAP diluted net operating earnings. We continue to expect annual growth, safety, and modernization investments of $1.9 to $2.2 billion, plus approximately $2 billion in renewables and associated transmission investments through 2023. NYSORS expects to grow its diluted net operating earnings per share by 7 to 9 percent on a compound annual growth rate basis from 2021 through 2024, including near-term annual growth of 5 to 7 percent through 2023. As I mentioned, the Indiana Utility Regulatory Commission has approved 13 of our 14 proposed renewable energy projects, And the new RFP for electric capacity and energy associated with NIPSCO's 2021 IRP that is currently underway has drawn strong engagement from the vendor community. In other parts of our business, we filed rate cases in Ohio, Kentucky, and Maryland during the quarter, in addition to the case filed during the first quarter in Pennsylvania, where we are in advanced settlement discussions. Safety advancements continue across NYSource, guided by our implementation of the industry's safety management system, which serves as our core operating model. Recent advancements include the accelerated integration of contractors into our safety plans and deployment of PICARO advanced leak detection technology in two more states. Our environmental performance targets represent another vital commitment. I'm pleased to say that we remain on target. We expect to reduce total greenhouse gas emissions 90% by 2030 from 2005 levels. That includes a 50% reduction in methane emissions from gas mains and services by 2025. On that commitment, NYSource has already achieved an estimated 39% reduction in pipeline methane emissions compared to 2005 levels. Our infrastructure replacement programs are driving these improvements. Also, last year, more than one million of our customers participated in our energy efficiency programs. On that note, let's look at some NYSource Utilities highlights for the second quarter, starting with our gas operations on slide nine. The Ohio rate case is one of three new rate cases filed in the second quarter. we're requesting an annual revenue increase of approximately $221 million net of the trackers being rolled into base rates. Pending a decision from the PUCO, new rates would be effective in mid-2022. In Kentucky, we filed a request for an approximately $27 million annual revenue increase net of trackers. And in Maryland, we filed a case on May 14th, once again, net of trackers requesting about a $5 million annual revenue increase. New rates are proposed to go into effect in December of this year. In Pennsylvania, we filed a case just before the end of the first quarter requesting an annual increase in revenue of approximately $98 million. Now let's look at our electric operations on slide 10. I'll touch on NIPSCO's Electric T-Disc Plan. We filed a new five-year plan in June. The $1.6 billion plan includes newly identified projects aimed at enhancing service and reliability for customers, as well as some previously identified projects. We expect to receive an order from the IURC in December of this year. The other items on this slide relate to our transition out of coal generation And I'll turn it over to Sean Anderson to give more detail.

Thank you, Joe. We continue to be encouraged by the strong progress advancing our renewable generation projects stemming from NIPSCO's 2018 IRP. Over the course of the last three months, eight renewables projects informed by the 2018 IRP Preferred Pathway received approval from the Indiana Utility Regulatory Commission. This brings NIPSCO to the verge of an important milestone with 13 of 14 renewables projects approved to advance and replace the retiring capacity of the Schaefer Generating Station. Importantly, this includes all joint venture projects and leaves Crossroads 2 Wind, a power purchase agreement, as the only project awaiting approval. Combining these new generating facilities With a number of transmission projects to support system reliability across the new footprint, NYSource continues to track toward approximately $2 billion of renewable generation investments through 2023. We are excited these projects will produce clean, reliable power for our communities while saving NIPSCO customers approximately $4 billion over the long term. While the commercial and regulatory processes have advanced to support the preferred pathway from the 2018 IRP, NIPSCO's 2021 IRP process is well underway and continues to track within its timeline. As noted in our release, in second quarter, we completed a request for proposal solicitation, similar to the process deployed in 2018. We are pleased with the response in terms of both the quality and the quantity of the proposals, which continues to show high levels of engagement in the vendor community as we advance our generation transition. Furthermore, with these more than 180 proposals covering a wide range of technologies and ownership constructs, it continues to point to a robust market across generation technologies, which will drive value for our customers and stakeholders. A few notes about the process and timing. The IRP analysis that we are currently stepping through will utilize data from the RFP to help inform the broad resource portfolio options for NIPSCO in terms of Michigan City retirement timing, choices of replacement technologies, and ownership constructs. we will share directional findings with stakeholders at public advisory meetings in the third quarter, incorporating stakeholder feedback along the way. We expect to develop a stakeholder supported preferred resource path within the 2021 IRP, which will be submitted to the IURC on or before November 1st. Once the preferred plan is finalized and communicated, execution activities could commence, which may include commercial negotiations and further due diligence on specific assets or projects. Any specific projects then identified which support this preferred plan would represent incremental projects beyond the 14 highlighted earlier and in addition to the approximately $2 billion in renewable investments NIPSCO has already filed. These are significant steps within NYSource and are part of our energy transition, which we are calling Your Energy, Your Future, as we work with stakeholders to create a dependable, affordable, and sustainable energy model, delivering the reliability our customers can trust. Now, I'd like to turn the call over to Donald, who will discuss our second quarter financial performance in more detail.

Thanks, Sean, and good morning, everyone. Looking at our second quarter 2021 results on slide four, we had non-GAAP net operating earnings of about $53 million or 13 cents per diluted share compared to non-GAAP net operating earnings of about $50 million or 13 cents per diluted share in the second quarter of 2020. I would note the 2021 results exclude earnings related to Columbia Gas of Massachusetts due to the sale closing in October of 2020. Looking more closely at our segment three-month non-GAAP results on slide five, GAAP distribution operating earnings were about $66 million for the quarter, representing a decline of approximately $8 million versus last year. Operating revenues net of the cost of energy and tract expenses were down about $28 million due to the sale of CMA and partially offset by increased infrastructure program revenues and customer growth. Operating expenses, also net of the cost of energy and tract expenses, were lowered by about $20 million, mostly due to the CMA sale, offset by higher employee-related costs and outside services spending. In our electric segment, three-month non-GAAP operating earnings were about $85 million, which was nearly $5 million lower than the second quarter of 2020. Operating revenues rose about $11 million, net of the cost of energy and tract expenses, due to infrastructure investments and increased customer usage. Operating expenses, net of the cost of energy and tract expenses, were up about $16 million due to generation-related maintenance and employee-related costs. Now, turning to slide six, I'd like to briefly touch on our debt and credit profile. Our debt level as of June 30th was about $9.2 billion, of which about $9.1 billion was long-term debt. The weighted average maturity on our long-term debt was approximately 15 years, and the weighted average interest rate was approximately 3.7%. At the end of the second quarter, we maintained net available liquidity of about $2.2 billion, consisting of cash and available capacity under our credit facility and our accounts receivable securitization programs. With Moody's recently concluding their latest credit review, All three major rating agencies have reaffirmed our investment-grade credit ratings with stable outlooks in 2021. Taken together, this represents a solid financial foundation to continue to support our long-term safety and infrastructure investments. Let's take a quick look at slide 8, which highlights our financing plan. There are no changes to our plan since last quarter's equity unit issuance. Last quarter's issuance has significantly de-risked our financing plans and is consistent with all of our earnings and credit commitments. As Joe mentioned in our key takeaways, we are reaffirming our 2021 earnings guidance and long-term financial commitments. I should remind everyone that we're stating the guidance in diluted earnings per share due to last quarter's equity issuance. Thank you all for participating today and for your ongoing interest and support of NYSource. We're now ready to take your questions.

As a reminder, to ask a question over the phone line, please press star, then the number one on your telephone keypad. Again, that is star one. To withdraw your question, press the pound or the hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Insoo Kim from Goldman Sachs. Your line is open.

Thank you. Good morning. My first question is on, I think, the topic of the potential asset monetization that we have been talking about the past few months. It seems like just on these slides that language is no longer on there. I just wanted to get your color. and latest thoughts on any potential for that in your planning period and whether in the near term, it's just that given the equity units and other funding that's already planned for the base CapEx, whether there is no immediate need to raise that type of cash for other CapEx.

Yeah, good morning, Instu, and thanks for joining us. You should not read anything into that slide update. We remain focused on long-term shareholder value. That hasn't changed. And we're evaluating market conditions in our portfolio as an ongoing part of that process. And so, though it's related to the financing, as you noted, we continue to view any asset sale as primarily a strategic decision based on long-term shareholder value. more than as a way to satisfy any near-term financing need. And that's really, I mean, we've stated it over and over, but that's underpinned by our plan that drives 7% to 9% long-term growth, inclusive of all financing in the current planning horizon, and without any asset sales. So clearly a strategic shift would need to enhance what's already a strong plan. That said, given our exceptionally large known CapEx cycle, and potential future investment opportunities that will unfold as we go forward. And continued modest equity funding needs that go along with that, meaning our ATM program, shouldn't be surprising that we're not taking those options off the table. Just because it's not on a slide doesn't mean it's not continuing to be on the table. And those factors can converge with strategic alternatives at any point in time. So I appreciate the question.

Got it. That makes a lot of sense. My other question is just on the electric demand growth that you've seen this quarter and year to date in Indiana. It seems like a pretty robust rebound, especially in the commercial and industrials. How does that trend compare versus your expectations, I guess, earlier in the year? And are you seeing momentum that that's continuing as we head into the second half?

I'll take that. Good morning. I think what you're seeing on the CNI sales and electric business really is the impact of COVID last year in the second quarter. That second quarter where you had the businesses shut down and certainly our largest customers shut down operations, you know, had the biggest financial impact on us in that second quarter. So that's the recovery, what you're seeing. And it's certainly as we expected and what we planned for. So very good outcome, and I'd say on the smaller commercial, we'll continue to see a recovery there. Again, that's expected and part of our plan, and we'll continue to monitor and manage that.

Got it. And just going forward, I guess when we think about normal low growth overall, what's a good rule of thumb type of level we should be thinking there?

On the electric side, taking out the industrials, the largest industrials, which is pretty stable for the other customer classes, we're seeing in the 1% range, maybe a little less than 1%.

Understood. Thank you so much.

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

Hey, good morning, team. Thanks for taking my question. Just on the 2021 IRP, I'm just thinking about, you know, first, can you confirm for us that any incremental capital spend coming out of that 2021 IRP in Indiana, that would be sort of above and beyond your current capex plan? Am I thinking about this the right way?

Yeah, that's right. I think you said that right, Dagesh. Anything that emerges from that from the IRP process would set up our planning cycle for next year and would allow us to roll forward our CapEx plan. But it's too early to predict how that will play out, given where we are in the IRP.

That's great. And then just thinking about, so you obviously had a lot of success in the 2018 IRP, $2 billion in CapEx. Should we think about the upside directionally? I mean, I guess... If I were to handicap CapEx opportunities, is the 2018 IRP a sort of a good starting point to make that assessment?

Yeah, I think it's a little too early to say that because the IRP itself sets up the plan. There are other factors outside of the IRP, notably MISO's continuing evolution of capacity credits and how to think about that, the evolving picture that we see through the RFP that we're running here. So I think of it as an envelope that you'll see when we file the IRP, an envelope of opportunity. And all else being equal, our bias being to seek the investment opportunities that come through that plan. So we'll know a lot more as we get through the coming stages of the IRP and then beyond that into the final stages of planning for the replacement of Michigan City, which the timing of which is also part of the question in the IRP process.

Understood. Thanks. And just one last one, just along the, in terms of timing, sort of your Q4 call sets up pretty nicely with the filing of the IRP. Is that sort of for us to kind of look at what your forward-looking plans are going to be and what you might be able to accomplish in this IRP? Is that a good sort of date for us to watch for an update from an IRP perspective?

Yeah, just the overall timelines, the way they overlay, it'll be our Q3 call will be pretty close to the timing of of the filing of the IRP. So there'll be plenty to talk about there. That'll be a little early to roll forward our CapEx plan because there's a lot of other parts of the business that go into the ultimate long-range plan. And our business planning cycle will push that out to first half of next year sometime before we'd likely be in a position to extend CapEx and growth rate guidance.

And of course, half of next year. Thank you so much. Appreciate the time. Sure. Thank you.

Your next question comes from the line of David Peters from Wolf Research. Your line is open.

Hey, good morning, guys. A couple questions for me. First, nice to see that you have the CPCNs for all the JV projects. Obviously, I know third parties are developing those, but just wondering, are they all currently on schedule and budget, just given some of the inflationary pressures and kind of supply chain bottlenecks we've seen in the market. Have you guys seen any impact to your projects?

Yeah, good morning. This is Sean. I'll take that question. Yes, is the answer to your question. Everything remains on time, on schedule, on budget. We're confident in that schedule. We're in constant communication with our developers and everything continues to track, including even one project, which we expect to be concluding construction here in fourth quarter 2021. So much to look forward to as we sequence through that.

Great. Thank you. And then, The other one, just on the ATM, can you guys share how much you have done year-to-date within your $200 million to $300 million target?

Yeah, good morning. You know, we have satisfied this year's equity need of, you know, $200 million to $300 million. So we're pretty good this year. Certainly, as we've outlined, it's $200 million to $300 million annually through 2022, and then we expect in 2023 up to $150 million of ATM.

Okay. Great. Thank you, guys.

As a reminder, to ask a question, please press the star, then the number one on your telephone keypad. Again, that is the star one. Your next question comes from the line of Travis Miller from Morningstar. Your line is open.

Good morning, everyone. Thank you. Good morning. Thinking back to one of the questions about CapEx, as you've gone through the early stages here of replacing the coal with new renewables and thinking about your target out to 2028 and 2030, what does that trajectory look like in terms of more renewables that will be needed? If you get the sense of my question. learn kind of what the investment need is relative to retiring coal plants and what that trajectory would look like going out.

Yeah, good morning. This is Sean. So to take you back to the 2018 preferred plan, it did, as you noted, have the retirement of Michigan City by 2028 with the replacement solution at that time pointing towards renewables. And so then you step into the current time where we're at with the 2021 IRP. We're putting all those assumptions back in to reevaluate to ensure that that continues to path or if there's any changes. And Joe highlighted some of those as you think about MISOs changes or resource adequacy requirements, how that factors in into the blend of components that produce a plan, an integrated resource plan with the reliability that's necessary. as well as the affordability that's necessary, the compliance that's necessary, and all the other factors that you would use to measure in an entire fleet, an entire portfolio. So the current plan is still that plan, which would be the retirement of Michigan City by 2028 with the replacement of renewables. And then the RFP process that we just stepped through helps to inform the actionable bids or technology and portfolio solutions that could come online to help support that build-out. And as you know, we did an all-source RFP, which allows other technology to come in and compete. And then we can evaluate all those different factors back within the context of the IRP itself and then the affordability as well as the reliability and compliance, et cetera.

Okay. So then that run rate that you've been looking at just in terms of dollars, nothing material that you've learned new since the last two, three years going through that whole process? Cool retirement replacing with renewables, if that's what I'm kind of thinking about.

That's accurate, yeah. The existing plan would still be the plan of reference, and I'd point you maybe towards the September stakeholder meeting within the context of the IRP itself. That will help to inform more of the existing fleet analysis, which speaks more to the timing question related to Michigan City or the retirement of existing assets, as well as understanding how the replacement technology could sequence in to support that.

okay great thanks so much appreciate it your next question comes from the line of ryan levin from the city your line is open okay good morning um this might be for for sean what level of transparency do you have in the status of the solar development solar projects developments, given the third-party nature, and given the supply chain challenges, could it be in NYSERDA's interest to encourage the delay of some of these projects?

Thanks, Ron. I appreciate it. As I said, we regularly speak with our developers, and we have ongoing dialogue and discussion with our developers to ensure that we remain part of the dialogue through the process. Of course, when those projects operationalize, that takes a significant amount of work on our team side as well And so there's constant communication to ensure that we're pacing alongside one another. Our counterparties have track records of being on time and on budget. This combined with the long lead time of the contracts themselves give us the confidence that these projects continue to pass.

To the extent that there were price escalations or bottlenecks in the logistics of delivery, Could that conversation take place that would encourage Nisource to push these projects to be delayed, given it may result in a better net outcome? Or how do you think about the puts and takes that would underwrite such a decision?

Yeah, it's a great question, and maybe I'd point you to the beginning of the process, because we worked hard to build in contractual protections for our customers and our shareholders in the event of a delay. And we feel our developer partners are also strongly incentivized to execute on time and on budget. So we have multiple tools available to protect customers and shareholders from any delay. And we're confident in the discussions, the level of transparency, as well as the construction timelines.

Okay. And then last question for me, in terms of the new technologies that are being proposed through the RFP, is there any that weren't being anticipated and may change the direction that you think the outcome could be in Indiana? Okay.

Yeah, great question. So we did receive two actionable proposals related to hydrogen. So not having a bias entering the process, using the RFP results themselves to give an indication of where market developments and technology developments have come together. We were interested and are interested to learn how those two proposals will stack up against all the other technology that we're probably more familiar with, as you can imagine. The fact that there were only really two actionable proposals might point to the nascency of the technology itself, but that's not necessarily all that surprising. There might need to be some more depth in the market to make those actionable, but we'll see. It's exciting to see that there's two on the horizon that could be actual within our window. And we'll see what the results are as the third party starts to evaluate the quality of those bids and all the other components of the IRP itself. Thanks for the update. You bet. Thank you.

As a reminder, to ask a question over the phone line, please press star followed by the number one on your telephone keypad. Again, that is star one. We have a follow-up question coming from the line of Institute Kim from Goldman Sachs. Your line is open.

Thanks for taking the additional question. I did have one just on your latest thoughts on the safety management system program. After implementing that and as the program continues to mature, how do you think about you know, what the ultimate impact of those different actions and plans have on your operations, and maybe just financially, whether it's on O&M. Do we think about it, continue to add a constant layer of cost, or do some of those actions actually help, you know, reduce some of the costs going forward?

No, yeah, thanks, Insu, for that question. Very insightful framing, too. We're at what I would call a full implementation now of the SMS framework across our business. And the way it's translating into the financial results that you pointed out are in a couple different ways. It's broadening on a risk basis the portfolio of investments that we're making and ultimately that we're reflecting in our regulatory proceedings. And so think about the different asset classes, transmission pipe, distribution pipe, measurement regulation, even in our case, non-jurisdictional programs beyond the meter. So that we put all those side by side, evaluate the risk profile of each asset class and prioritize investments accordingly. That's a much more sophisticated model than has been the case historically. And so it's shifting the investment mix. And in some cases, we've seen the regulatory support for those follow along with tracker programs, for example, expanding to include differentiated programs. So it's been sort of a net broadening of the investment plan. And then from an O&M standpoint, you've seen the O&M trajectory here. We're down, and it's actually driving efficiencies in some ways because of the nature of how the programs are designed. So the actual program level cost is fully embedded in our current run rate, and I wouldn't expect to see an increasing layer of cost associated, O&M cost associated with the SMS program itself. And then finally, I think maybe the most important point is the de-risking that's happening as a result of those programs, both in terms of asset programs and process safety, where we've implemented incremental process controls across risk areas in the business or critical tasks that might have high consequence risks associated with them, and we've been implementing those. We'll continue to do that, but those generally are reconfiguration versus incremental capacity in the business model. So feel very good about where we are from a financial profile related to SMS and safety and a lot of opportunity in front of us for further de-risking of the business.

That makes a lot of sense. Thank you so much.

Thank you.

There are no further questions over the phone line at this time. I would now like to turn the call back to Mr. Joe Hamra for closing remarks.

Thank you, RJ, and thank you all for your questions. Let me close by just reiterating a few key points. One, that we're confident in our growth plan. We've executed a number of key stages in the current growth plan, notably the renewable generation projects, 13 to 14 now with regulatory approval. or CPCN approval, and the related transmission projects that go with that now underscores and underpins the $2 billion in renewable transition investments through 2023. And then the RFP that's underway for the 2021 IRP, as Sean noted, includes 180 new proposals and giving us an updated picture of the opportunities for the future. Add to that four of our gas utilities are in base rate cases now, all aligned with investments in modernization and safety that our customers value. And then finally, we've reaffirmed our 2021 guidance and our long-term growth rate commitments. So pleasure to be with you today and have an opportunity to share that story. We appreciate you joining us, and we appreciate your interest in support of NYSource. Please stay safe.

This concludes today's conference call. We thank you all for participating.

You may now disconnect.