NiSource Inc

Q4 2022 Earnings Conference Call

2/22/2023

spk12: Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Q4 2022 Night Force earnings conference 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'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. Chris Turner, Director of Investor Relations. You may begin.
spk01: Good morning and welcome to the NYSOR's fourth quarter 2022 investor call. Joining me today are Chief Executive Officer Lloyd Yates, Chief Financial Officer Donald Brown, Senior Vice President Strategy and Chief Risk Officer Sean Anderson, and Vice President of Investor Relations and Treasurer Randy Ulin. The purpose of this presentation is to review NYSOR's financial performance for the fourth quarter of 2022, as well as provide an update on our operations and growth drivers. Following our prepared remarks, we'll open the call to your questions. Slides for today's call are available 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 full and 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 factors sections of our periodic SEC filings. Additionally, some of the statements made on the 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 Lori. Thanks, Chris.
spk08: Good morning, everyone, and thank you for joining us. By the end of the call, we want to leave you with three takeaways about our business and our future. I'd like to reiterate our competence, progress, and focus. Our confidence in our strategic plan and our strong progress in delivering on our commitments. Our progress on our regulatory initiatives, including pursuing a potential settlement in the NISCO electric rate case. And our focus on realizing the upside potential beyond our existing plan. We will touch on some of these incremental investment opportunities later in today's presentation turn to our performance 2022 was a year of relentless and consistent execution by our team among the keys to our success in 2022 was our comprehensive business review we believe the goals we laid out at our investor day are both significant and achievable and we will measure our progress against our premium utility growth plan each quarter Our results this quarter and in 2022 were strong and demonstrate that we are also a great start in the execution of our plan. We delivered earnings above our 2022 guidance and are raising our 2023 guidance. We also grew our dividends 6.4%. We remain on track to drive shareholder value through a compelling 9 to 11% total shareholder returns. At Investor Day, we committed to optimizing our cost profile and enhancing operational efficiency. We're doing that by transforming both our IC systems and the work processes they support. Behind processes and technology are people. I want to thank each of our employees for their performance throughout 20.2 and their deep commitment to serving our customers. Let's turn to slide five of the presentation and take a closer look at our 2022 key achievements. NYSource's 2022 earnings exceeded our guidance range. We delivered $1.47, nine guests, diluted NOEPS. That's up more than 7% from last year. It reflects our continued investment in safety, reliability, customer affordability, and sustainability. Looking to 2023, we've increased our guidance range to $1.54 to $1.60 per share. This reflects our outperformance in 2022 and confidence in 2023 execution. We're reaffirming our expectation of a 6% to 8% annual NOE EPS growth through 2027, as well as our annual 8% to 10% rate-based growth. Slide six illustrates 2023 guidance and our commitment to grow six to 8% annually through 2027. Driving this top tier growth are investments of $15 billion in regulated CapEx from 2023 through 2027. A high level summary of which you can see on slide seven. Looking out further, we continue to expect to invest $30 billion from 2023 to 2032. As I alluded to earlier, execution by regulatory teams continues to be a strength. In 2022, we filed four rate cases and resolved three in Pennsylvania, Maryland, and the Indiana gas case. In addition, the Ohio rate case concluded last month. These cases represent balanced outcomes supporting all stakeholders. Turning to page eight, we have the following key priorities for 2023. First, continue to enhance our focus on safety and operational excellence. Second, the successful sale of our minority interest in NIPSCO to strengthen our balance sheet. Next, a balanced outcome in the NIPSCO elected race case, which we will cover in a few moments. Fourth, driving efficiencies to achieve flat O&M spending to enhance customer affordability. These efforts will keep our customer rates sustainable with expected total annual rate increases that are in line with inflation. And finally, our commitment to delivering on our 2023 guidance. These are the priorities that we will keep top of mind throughout the year. On slide nine, you will see the additional investment opportunities NYSource may pursue in both near and long term. NYSource's investment opportunities include replacing pre-1985 plastic gas pipes, as well as gas transmission replacements and reconfirmations to comply with PHMSA regulations. In addition, Electric generation tax credit transferability and advanced gas nearing infrastructure also represent attractive opportunities for NISOs in the near term. Beyond 2027, we see the need to add electric generation capacity in the marketplace and to enhance electric grid hardening. Microelectric long-range transmission projects, electric transportation renewable gas infrastructure, And hydrogen production hubs also make up long-term and large-scale projects we will seek to participate in to enhance our investment portfolio and drive greater value for our customers. Now, let's turn to page 10 to review some fourth quarter and recent highlights from gas distribution operations. Columbia Gas of Ohio receives an order accepting the settlement in its rate case on January 26th. The order includes a revenue increase of $68.2 million net of riders. New rates will be affected on March 1st. The settlement in our Pennsylvania rate case was approved in December. It enables continuing investments in replacement of aging pipes and system upgrades needed to ensure service reliability and pipeline safety. New rates went into effect December 17th. Finally, Columbia Gas of Maryland receives an order in November approving this rate-based settlement. The settlement supports the company's continuing investments in infrastructure replacement and system upgrades. Now, for updates on our electric operations and renewables projects, I'd like to turn it over to Sean Anderson.
spk06: Thank you, Lloyd, and good morning, everyone. You'll find information about our electric operations on slide 11. NIPSCO is actively working with stakeholders toward a settlement in its electric rate case, its first since 2018. New rates are anticipated to take effect in September 2023, with an incremental rate step applied in 2024. Meanwhile, the company remains on track to support a reliable generation portfolio and to retire all coal-fired generation by the end of 2028 with new assets, predominantly wind and solar facilities, coming online. All of the renewable generation projects remain on target with previously revised in-service dates. The construction underway at Indiana Crossroads Solar and Dunsbridge Solar 1 is nearing completion, with both facilities projected to be in service in the first half of 2023. Also under construction, the Indiana Crossroads 2 wind project continues to pace to start of commercial operations by the end of 2023. We have entered into contract amendments for our Dunn's Bridge 2, Cavalry, and Fairbanks projects to address our previously communicated project completion dates and to reflect market pressures on pricing. Both Dunn's Bridge 2 and Cavalry projects have begun initial construction with activities ramping into full construction this spring. we continue to evaluate the provisions of the Inflation Reduction Act and its applicability to the projects in our generation portfolio, including the potential application of tax transferability. Along with the enhanced tax credits provided for in the Act, we believe the legislation has enabled opportunities to drive greater value to both our customers and shareholders while advancing our remaining projects. It is important to note that the application of all tax credits is analyzed on a project-by-project basis and is impacted by various factors such as capital costs and the expected production of the asset. Meanwhile, NPSCO is in active commercial negotiations with potential counterparties to fulfill the preferred portfolio outlined in its 2021 Integrated Resource Plan. Project agreements resulting from the All Sources RFP, as well as the Targeted Gas Peaking RFP at Schaefer Generating Station, are expected to be announced this summer. Additional work continues around capturing direct and indirect funding opportunities from all of the federal legislation passed recently, most notably the nearly $500 billion generated from the Infrastructure Investment and Jobs Act and the Inflation Reduction Act. We've been active in several Hydrogen Hub proposals across our territory, each of which have received encouragement from the DOE to submit a full application for the Regional Clean Hydrogen Hub Funding Opportunity Announcement as designated in the Bipartisan Infrastructure Investment and Jobs Act. I'd like to close by confirming we are on track to achieve our industry-leading environmental impact targets namely a 90% reduction in Scope 1 greenhouse gas emissions from 2005 levels by 2030. This progress is consistent with the reductions needed to achieve our goal of net zero Scope 1 and Scope 2 emissions by 2040, which we announced in November. Now, I'd like to turn the call over to Donald, who will discuss our financial performance in more detail.
spk09: Thanks, John, and good morning, everyone. Turning to our fourth quarter 2022 results from slide 13. Fourth quarter non-GAAP net operating earnings were $221 million, or 50 cents per share, compared to $167 million, or 39 cents per share, in the fourth quarter 2021. Full year earnings were $648 million or $1.47 per share compared to $571 million or $1.37 per share in 2021. Taking a closer look at our fourth quarter segment, non-GAAP results from slide 14. GAAP distribution operating earnings were $288 million in the fourth quarter, an increase of $72 million versus the same quarter last year. Operating revenues, net of the cost of energy and track expenses, were higher by $66 million, mainly due to new rates resulting from base rate cases and regulatory capital programs. Operating expenses, again, net of the cost of energy and track expenses, were lower by $6 million due primarily to lower O&M and other taxes. In our electric segment, non-gas operating earnings for the fourth quarter were $68 million, $14 million lower than in the same quarter last year. Operating revenues, net of the cost of energy and traffic expenses, were lower by $4 million, mainly due to slightly lower weather normalized customer usage. Operating expenses, once again excluding the cost of energy and traffic expenses, were higher by $10 million primarily due to increased depreciation and amortization. Now I'd like to briefly touch on our debt and credit profile. Our debt level as of December 31, 2022, was $11.3 billion, of which $9.6 billion was long-term debt with a weighted average maturity of 14 years and a weighted average interest rate of 3.7%. At the end of the fourth quarter, we maintain net available liquidity of over $1.6 billion, consisting of cash and available capacity under our credit facility and our accounts receivable securitization programs. We remain committed to our current investment grade credit ratings. Slide 16 highlights our financing strategy and credit commitments. We issued a $1 billion one-year term loan in December and used the proceeds to reduce our commercial paper balances. And the loan bridges the gap into our equity unit we're marketing in the fall. Our financing plan includes no block or ATM equity issuances in 2023 or 2024. It's consistent with all of our earnings growth and credit commitments through 2027. and remains unchanged from industrial day in November. I'd like to highlight that the recent drop in natural gas prices directly reduces our customers' bills over time and reduces the natural gas impact on working capital and financing charges. A year in 2022, deferred fuel amounted to roughly 54 basis points of SFO to debt versus 76 basis points a year in 2021. For some context of the impact of higher gas prices over the last two years, a year in 2020, deferred fuel only had a six basis point impact on our efforts over the day. In summary, we reported 2022 EPS of $1.47, exceeding our $1.44 to $1.46 guidance range. We have raised our 2023 guidance to $1.54 to $1.60, an increase of over 3 cents versus our prior midpoint. We're also reiterating our long-term growth commitment of 6% to 8% annual NOEPS growth through 2027. Despite persistent macroeconomic headwinds and volatility, we are advancing key elements of our five-year plan, and we remain focused on safety, reliability, affordability, and sustainability. Before we open up the lines to answer your questions, I'd like to reiterate our confidence, progress, and focus. Our confidence in our strategic plan and our strong progress in delivering on those commitments, our progress on our regulatory initiatives, including pursuing a potential settlement in the Nisko Electric rate case, and our focus on realizing the upside potential beyond our existing plan. Thank you all for participating today and for your ongoing interest in and support of NYSOS. We're now ready to take your questions.
spk12: Thank you. If you'd like to ask a question, please press stars and one on your telephone keypad. The first question is from Nicholas Campanella with Credit Suisse. Your line is open.
spk04: Hey, good morning, everyone. Thanks for taking my question.
spk05: So I guess just on the NPSCO rate case and the timeline for potential settlement, Would you prospectively want to have that done before the March 13th hearings, or just how do we kind of think about the timeline there if you can move to settlement? Thanks.
spk08: Good morning, Nick. Lloyd Yates here. So when we think about the Nipskill rape case, you know, we filed our rebuttal testimony February 16th, and we've already started discussions with the various parties on that rape case. I'm optimistic about settling that red case. I think that you start thinking about a timeline on February 27th. The hearings are starting March 13th. I think that the timeline is you should expect to see something around the end of February. If things are progressing, we could. History has been to extend those a week or so to get settlement discussions complete. But I think that's the track we're on right now.
spk05: That's really helpful. Thanks. And then I guess just on the minority interest sale, can you kind of just give us a sense, you know, I know in the prepared remarks you said you're on track. You know, what type of demand are you kind of seeing from either financials or strategics? And then how are you kind of framing the timeline for an announcement here? You know, do you expect to have something by next quarter or just any additional color would be helpful? Thanks.
spk08: For Sean's lead in that initiative for the company, I want to let Sean Anderson answer that one.
spk06: Yeah, thanks, Nick. Appreciate the question. We've observed a broad range of qualified partners which are positioned to help NIPSCO and NYSource realize its strategic goals. We're confident this is the right audience to evaluate a partnership with NYSource, as we laid out in November. We're also confident the process we've launched will lead us to a successful outcome this year.
spk04: All right. Thank you very much. The next question is from Char Pereza with Grunheim Partners.
spk12: Your line is open.
spk02: Hey, guys. Good morning. Hey, Woods. Good morning, Char. Well, just on, you know, starting with the CapEx, when you shifted sort of a fair amount of the generation spending from 24 to 23, it looks like you also slightly increased the overall CapEx plan at the same time as sort of the 2023 range moved up more than the 24 CapEx reduction. Can you maybe just elaborate on this, whether we should treat this as incremental to sort of your overall planning assumptions?
spk08: So I would not treat that as incremental. That shift was really for progress payments for our renewable projects. I mean, I think our plan is still as is, spending around $3 billion a year in CapEx is what we're committed to. We feel like we can execute that really, really well But there's no increase in CapEx at all. Those are just progress payments for the projects.
spk02: Got it. And then just to follow up on the next question on the GRC, I guess how are you sort of thinking about the potential for the coal plant cost recovery mechanism to get approved?
spk08: So we're in the middle of conversations. There's been some debate about that mechanism. We think that mechanism is really good for customers. You know, as we check those coal plants down, that cost goes back to customers immediately. We're in conversations with the various parties about how to make that work. I'm optimistic that we can do that because I think that's good for customers and passing that cost back immediately. But I think those are an integral part of the settlement discussions right now.
spk02: Got it. Okay, perfect. And then just real quick, last week, Donald, I know you sort of mentioned equity, but you threw out the word block in there as well. So just not ATM, but you also mentioned the word block. post-25, is there any reason to believe, like, you would come to market with block equity, especially post this minority sale?
spk09: No, and let me correct. I certainly didn't say block. Our financing plan has not changed. It still is that we expect to enter into ATM post-2025, and that's really to keep us in that 14% to 16%. as opposed to that range, but no blocks planned or expected at this point.
spk12: Okay, perfect. Thank you guys so much. Appreciate it. The next question is from Dragesh Chopra with Evercore ISI.
spk04: Your line is open. Hey, team. Good morning. Can you hear me okay?
spk07: Good morning, Dragesh. We hear you fine. Okay, perfect. Thanks. Sorry. Hey, just Donald, thank you for sharing details on the on the deferred fuel and impact to your credit metrics. But maybe can you talk about the customer bill implications and when could we sort of see the lower gas prices flow through your customer bills? And I know it's different states are different, but just at a very high level, can you discuss that?
spk09: Yeah, no, great question. Certainly seeing favorable natural gas prices, including today we're seeing 9X March price around $2 or below $2. So that's great impact for our customers. As we look at it, we're expecting probably a 20% to 25% decrease in customer bills, 23% versus 2022. So really good outcome.
spk07: That's super helpful. Thank you. And then just maybe, I just want to switch gears and see if you could give us any additional color. On the updated, this is slide nine now, I'm on the near-term opportunities on CapEx. Any way that you can size the overall CapEx dollars we are talking about here in terms of your overall capital plan? How should we think about that? Any other color you can share there, whether it's Increased ownership of the generation assets, EMIs, et cetera, et cetera.
spk08: So, I guess we realize, I mean, those opportunities are out there. We don't have a size for those opportunities yet. I think as we get closer to those opportunities and know more about, you know, pre-1985 plastic pipe or MISO issue and new transmission opportunities, we'll be able to size it then. But as soon as we can size it, we'll let you guys know about it. Thanks.
spk07: I understand it. Thank you. And maybe just one quick one real quick. On the timing itself, Sean, at Analyst Day last year, you guys might have suggested a mid-year announcement on the assets. Is that still on track? Or, you know, we've seen some of your peers were trying to tell some renewable assets to shift their timelines.
spk06: Yeah, thanks for the question. The timeline has not changed. We still expect to be able to complete this in 2023, and as you can imagine, we're still early days in the process itself, but we'll be able to provide updates along the way when it's appropriate to do so.
spk04: Thanks, guys. I appreciate the time. The next question is from Travis Miller with Morningstar. Your line is open.
spk11: Good morning, everyone. Thank you. Morning. Good morning. Just following up on that, the idea of the timing on the sale, I imagine you have to get the rate case either settled or concluded before that sale. Is that correct? Is that a gating factor, essentially, for making that financing move?
spk06: These are really two separate processes, and we believe both can proceed as we've laid out today.
spk11: Okay, so not necessarily a conclusion on the rate case before you could have a transaction done. That's correct. Okay. And then separately, obviously some good moves on the gas side. What's your thought in terms of cadence given the different regulatory mechanisms you have in the CapEx plan in terms of general rate cases or base rate cases at the gas businesses, which depends on timing of that going forward?
spk09: Great question. If you look at our history, we're typically in every two to three years in most jurisdictions. We're actually coming off a pretty heavy year last year where we were in five rate cases. Ohio Indiana had new rates in 2022, Virginia, Kentucky, and Maryland. So last year was a pretty heavy year, but if you look at our history, you know, Maryland almost every year, PA is almost every year, and then the other states typically every two to three years.
spk11: Okay, and that cadence to continue.
spk09: Right, right. Yeah, we're evaluating Pennsylvania, but I'd say otherwise it's every two to three years on other states. Okay.
spk04: Great. I appreciate it. That's all I have. The next question is from Ryan Levine with Citi. Your line is open.
spk03: Good morning. In your prepared remarks, if I heard correctly, there was some mention of revised contracts for select renewable projects. Can you unpack the materiality of these changes? and what remaining risks you see from a timeline execution standpoint?
spk06: Yeah, thanks, Ryan. Appreciate the question. As you can imagine, we're still working through the process, so we still consider these contract amendments confidential. But the one thing I'd say is that we will work forward with our partners and the appropriate filers with the commission to move these forward. We're talking about the four remaining projects that are not substitutively under construction, apart from those that are already in service. The market's seen increases in costs in the 10% to 25% range. What we've seen is consistent with that, and we've also been able to benchmark that off of the most recent RFP in August of 2022. So we feel good about the value proposition that these projects still provide to our customers in Northwest Indiana, and we'll proceed accordingly.
spk03: In terms of the timeline on slide 12, you highlighted potential changes to kind of the cadence around execution. Are those amendments reflective of future potential changes in timeline, or could you see further adjustments if the timeline's left?
spk06: No, great question. Thanks for that. Let me clarify. The contract amendments that were made are to support the timelines that we disclosed in 2022. and support the timelines that you see on that slide, which place those remaining projects in service in 24 and 25. Okay.
spk03: And then one follow-up on the NISCO sale process. Have data rooms been formed, and have you seen any initial rounds of bids? Any color you could share around how early in the process you may be?
spk06: Yeah, unfortunately, there isn't additional color I can offer at this time. We're focused on advancing the process, and we'll just have to come back with updates around these topics when it's appropriate to do so.
spk04: Thank you. I appreciate it. The next question is from Richard Sunderland with J.P. Morgan.
spk12: Your line is open.
spk00: Hey, good morning. I joined the positive segments earlier. Just curious, what are you seeing on O&M trends coming out of 4Q? relative to what you discussed the whole analyst day. Curious if there are any moving pieces here relative to the latest 2023 outlook versus initial.
spk08: Good morning, Richard. This is Lloyd. First of all, I would say we're on track for flat O&M year over year. And I like to characterize it. We are really developing our O&M muscle. We have something going on in the company called Project Apollo. We've outlined various processes and projects that we have teams working on to target doing things safer, better, more efficiently, and for lower cost. And we're on track to achieve those.
spk04: Got it. Very clear. That's all for me. Thank you. Again, let's start one.
spk12: If you'd like to ask a question, the next question is from Julian Smith with Bank of America. Your line is open.
spk10: Hey, good morning, Keith. Thanks for the time. So just to stick with Richard's question, cost reduction seems to be a focus in the narrative with the case. How do you think about effectively settling that issue here and how that marries up with the timeline that you've already been doing here with Project Apollo and wider O&M savings? Again, I'm not trying to ask you to negotiate the settlement on the call here, per se, but how does that line up in the timeline here with some of these efforts that you have underway. You talked about holding it flat for this year in particular. And then I suppose the related question following up on the earlier one, but from Nick, is if you're looking at the next couple weeks, potentially trying to double-task, is there anything that you really need to get out there in the record in a hearing context, or is it all sufficiently hashed out at this point as far as you're concerned?
spk08: Let me handle both those questions. Starting with the O&M and the timeline, I think that we try to align those with our rate cases, but I think our strategy here is any O&M that we can take out of the system, that we can lean out of the system on any given day is better for our customers. Our O&M is about keeping our customers or keeping our rates affordable, so We're not necessarily trying to line that up with rate cases. If it lines up fine, if not, I think we're okay, too. Ultimately, we're going to have that element coming out of the system, and it's going to be good for customers, and we're going to continue down that path and not try to be cute there. I think when you look at the NIPSCO rate case and if you look at the intervener testimony, what you see is there's no argument over the capital investments. All the capital investments, you know, Renewable projects, primary renewable projects, and TIDIS, all that's been agreed to. So we're debating over O&M and ROE, which I think is really positive. And typically when you have that, when those two limited subject matters, you can typically come to some reasonable settlement on those two issues. So I think we're in a good spot. with respect to the initial rate case, with respect to O&M, and I'm optimistic the next two weeks are going to pan out real well for all involved stakeholders. You got it.
spk04: Excellent.
spk10: And then just going back to the related question on the minority asset sale and the equity that you brought up. Given the indications that you see today, I mean, so the question is, do you have equity needs in that longer-term period? How do you think about the early indications in the process relative to the quote beyond 25 balance sheet needs again clearly you're trying to take out a lot of those cumulative capital needs here with this asset sale the question is to what extent can you you know more meaningfully address it yeah I'd say our financing plan has been changed and as Sean stated that the process is going as expected when we get more details that we can communicate on the
spk09: sale transaction, we'll do that. But no change to the financing plan at this point.
spk04: Excellent.
spk10: And just lastly here, I heard that you said you reaffirmed the timeline for the various, I believe, the four solar projects, the solar storage projects. Just on that point on timeline, again, obviously you're paying to have these on a timely manner. Do you see them as broadly on track, you know, given some of these interconnection issues and given some of the deliverability, specifically in the interconnect back here? I'm just curious what your level of confidence on that part is.
spk06: Yeah, as we shared, our projects are all continuing on schedule with the revised in-service dates we updated in 2022. Dunn's Bridge 1 and Crossroads Solar specifically are at the stage of construction. We're each receiving panels on a regular basis to support the in-service dates within the first half of this year. And we're continuing to work in good faith with our developer partners and all the other remaining projects to advance accordingly.
spk04: Got it. Excellent. Nice to be done. See you soon.
spk12: There are no further questions at this time. I'll turn it over to Lloyd Yates, Chief Executive Officer, for any closing remarks.
spk08: So thank you for your questions. And as we close, I want to reiterate what Donald and I have said about our confidence, progress, and focus. Our confidence in our strategic plan and our strong progress in delivering on our commitments. our progress on our regulatory initiatives, including pursuing a potential settlement in the NPSCO electric rate case, and our focus on realizing the upside potential beyond our existing plan. I believe the future is bright for NYSOR, and we're confident in the execution of the five-year plan we have unveiled at Investor Day. We appreciate you joining us this morning, and I hope all of you stay safe. Thank you.
spk12: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer

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Q4NI 2022

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