Earnings Call: Q1 2021

May 5, 2021

Good day and thank you for standing by and welcome to the Q1 2021 Ninesource Earnings Conference Call. At this time, all participants are in a listen only mode. After this previous presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand today's conference over to your speaker for today, Randy Hulen, Vice President of Investor Relations and Treasurer. Thank you, and good morning, everyone, and welcome to the 9Source First Quarter 2021 Investor Call. Joining me today are Joe Hamrock, our Chief Executive Officer Donald Brown, our Chief Financial Officer and Sean Anderson, our Chief Strategy and Risk Officer. As well as provide an update on our operations, growth drivers and financing plans. Following Before turning the call over to Joe, Donald and Sean, just a quick reminder. Some of the statements made during this presentation will be information concerning such risks and uncertainties is included in the MD and A and Risk Factors 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 GAAP measure and a reconciliation of these measures, Please refer to the supplemental slides and segment information, including our full financial schedules available at nisource.com. With all that out of the way, I'd like to turn the call over to Joe. Thanks, Randy. Good morning, everyone, and thank you for joining us. As well as our electric generation transition strategy. In Indiana, we kicked off our 2021 integrated resource plan process, which will inform our strategy beyond 2023. And we initiated 4 new renewable energy projects. We continue to expect that our infrastructure and generation investments will drive compound annual growth of 7% to 9% In diluted net operating profit, we expect to reduce greenhouse gas emissions 90% by 2,030. Let's turn now to Slide 3 and take a closer look at our key takeaways. In the Q1, we delivered non GAAP diluted net cents per share. These results include increased earnings from our safety and modernization investments and reflects the profile of our business without Columbia Gas of Massachusetts. As you saw in our release, today we narrowed our 20 21 non GAAP diluted net operating earnings guidance to $1.32 to $1.36 per share, which represents the upper half of the previous range. This narrowed range reflects lower than previously expected COVID impacts And more certainty with regulatory outcomes, offset by slightly higher diluted share count resulting from the equity unit issuance. We To make approximately $10,000,000,000 in capital investments through 2024. These include annual investments of 1.9 to total approximately $2,000,000,000 over this period. As we outlined at our 2020 Investor Day, Nisource expects to grow Its diluted net operating earnings per share by 7% to 9% on a compound annual growth rate basis From 2021 through 2024, including near term annual growth of 5% to 7% through 2023. Columbia Gas of Pennsylvania received an order in its 2020 rate case and it has filed a new rate case to support its safety and modernization which I will discuss in more detail later in this call. In addition, we have continued to successfully execute on our renewable energy strategy, adding 4 new renewable energy projects as part of our Your Energy, Your Future initiative. Now I'd like to turn the call over to Donald, who will discuss our Q1 financial performance in more detail. Thanks, Joe, and good morning, everyone. Looking at our Q1 2021 results on Slide 4, we had non GAAP net operating earnings of about 30 $5,000,000 or $0.77 per diluted share compared to non GAAP net operating earnings of about $291,000,000 or 0.7 $0.06 per diluted share in the Q1 of 2020. I would note that 2021 results exclude earnings related to Columbia Gas of Massachusetts, or CMA, due to the sale closing in October of 2020. Looking more closely at our segment 3 month Non GAAP results on Slide 5. Gas Distribution operating earnings were about $374,000,000 for the quarter, representing were down about $84,000,000 due to the sale of CMA, partially offset by increased infrastructure program revenues and customer growth. Operating expenses, also net of the cost of energy and track expenses, were lower by about $66,000,000 mostly due to the CMA sale and lower employee related costs, partially offset by increased depreciation and amortization expense. In our electric segment, 3 month non GAAP operating earnings were about $91,000,000 which was approximately $9,000,000 increase in operating revenues, 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 tax expenses were slightly lower due to environmental and employee related costs. Now turning to Slide 6, I'd like to briefly touch on our debt and credit profile. Our debt level as of March 31 was about $9,800,000,000 of which about 9 consisting of cash and available capacity under our credit facility and other accounts receivable securitization program. Our credit ratings from all 3 major rating agencies are investment grade, and we remain committed to maintaining our current investment grade ratings. Taken together, this represents a solid financial foundation to support our long term safety and infrastructure investments. Let's take a quick look at Slide 8, which highlights our updated financing plan. I would just note that following last month's Equity unit issuance, we no longer expect to issue block or discrete equity through 2024. This issuance that receives 100 percent equity credit from all 3 agencies allows NiSource to capitalize on the balance sheet and provides timely proceeds for our renewable investments. Most importantly, this issuance significantly de risks our financing plans and is consistent with All of our earnings include an annual revenue increase of $63,500,000 in the rate case we filed in 2020. This reflects our investments to modernize and upgrade our natural gas. In addition, the company filed another base rate case in March to support its ongoing safety and modernization program. In Kentucky, we received an order on April 30 from the Public Service Commission In our safety modification and replacement program tracker filing, this order approves $40,000,000 in upgrades and replacements Under way in $600,000 of incremental revenue. In Indiana, NIPSCO continues its long term gas modernization program. Nearly $950,000,000 in capital investments are planned through 2025 to be recovered through semi annual to the existing gas transmission distribution and storage improvement charge or T DISC tracker. Rates approved in our 2020 filing became effective in January of this year. In Virginia, we implemented rates approved in 2020 steps to advance Virginia Energy or SAVE tracker filing. Now let's look at our electric operations on Slide 10. NIPSCO has filed notice to terminate its current electric transmission distribution and storage improvement charge or We expect to file a new 5 year plan on or soon after June 1. The updated plan will include newly identified projects aimed at enhancing service and reliability for customers, as well as some previously identified projects. As mentioned earlier, we have begun our 2021 Integrated Resource Plan or IRP process. Similar to our 2018 IRP, the process will include an RFP for new resources. We plan to receive input from customers and a wide variety of other stakeholders throughout the year and expect to submit our plan to the Indiana Utility Regulatory Commission by November. I would now like to ask Sean to provide more on the significance of the IRP and an update about our renewable generation projects. Thank you, Joe. We continue to make strong progress on our renewable generation transition. In total, we have announced 14 renewable projects, which will likely fill the balance of capacity necessary to replace the retiring units at our Schafer generating station, which continues to track for retirement by May 2023. Four new projects have been announced in 2021. They include 2 projects with EDP Renewables, Indiana Crossroads Solar Park, which is a build transfer agreement and is expected to enter service in 2022 And Indiana Crossroads 2, which is a wind project announced as a power purchase agreement or PPA, and is expected to enter service in 2023. We also announced Fairbank Solar, a build transfer agreement with Invenergy for a 2 50 Megawatt project expected to be online in 2023 and finally, We signed a build transfer agreement with Capital Dynamics for a 200 megawatt project expected to be operational in 2023 named Elliott Solar. We've already begun the regulatory approval process for these projects. Upcoming shortly in the Q2 of 2021, we expect an order from the IURC on 4 previously filed projects, Our Duns Bridge 12, Cavalry Solar Energy Center and Green River Solar Projects. 80% of our remaining coal fired generation by 2023 and retire all coal generation by 2028 to be replaced by lower cost, reliable and cleaner options. The plan is expected to drive a 90% reduction in our greenhouse gas emissions By 2,030, and is expected to save our electric customers an estimated $4,000,000,000 over 30 The executed agreements we've announced are also within budget, representing approximately $2,000,000,000 of renewable generation investments. The projects these agreements support represent NIPSCO's investment interest in the replacement capacity, which equates half of the total capacity needed. The remaining new capacity is in the form of power purchase agreements. Finally, as Joe has highlighted, in the Q4 of 2021, NIPSCO plans to submit a new integrated resource plan to the IURC that will continue to outline its long term generation plans, including the planned retirement of Michigan City Generating Station. The preferred plan that emerges from the 2021 IRP could create additional capital investment opportunities. We are excited about the significant progress in executing our plan, and we look forward to more updates in the future quarters. Now, I'd like to turn the call back over to Joe. Thank you, Sean. I'd like to turn to our foundational commitment, safety. Our Safety Management System, SMS, is an established operating model within NiSource. Recent advances in SMS include expanded quality management and achieving gold shovel standard certification. We are continuously enhancing process safety capabilities and ensuring effective asset management to reduce risk. I'd also like to note that we've begun a 3rd party validation of our SMS implementation, and we are working toward accreditation in 2020 Before turning to the Q and A portion of today's call, I'll share and reiterate a few key takeaways. With last month's convertible issuance, NiSource is well positioned to execute the next stage of our growth plan, driven by continued execution of our safety and asset modernization programs as well as our electric generation transition We are narrowing our 2021 non GAAP diluted net operating earnings guidance to $1.32 to $1.36 per share, which represents the upper half of the previous guidance. We expect to make approximately $10,000,000,000 in capital investment through 2024. These include annual investments of $1,900,000,000 to $2,200,000,000 Total approximately $2,000,000,000 over this period. As we outlined at our 2020 Investor Day, NiSource continues to expect to Grow its diluted net operating earnings per share by 7% to 9% on a compound annual growth rate basis From 2021 through 2024, including near term annual growth of 5% to 7% through 2023. In addition, we now have a total of 14 renewable energy projects as part of our Your Energy, Your Future initiative. Thank you all for participating today and for your ongoing interest in and support of NiSource. We're now ready to take your questions. And your first question is from the line of Shahriar Farooza of Guggenheim. Hey, good morning, guys. Hey, good morning, Sean. So just a couple of quick questions here, Joe and Donald. So obviously, the block Equity needs are solved, but maybe curious how you're sort of thinking about further asset optimization, especially with some of the healthy prints we've seen with CenterPoint and Duke, I guess, Joe, do you see value maybe to further simplify Your jurisdictional footprint maybe shrink your balance sheet, shut off the ATMs and internal programs and Keep some incremental dry powder, especially as we're seeing additional opportunities on the renewable side ramp up over the next few years. It's a little bit of a strategic start question. Yes. Thanks, Shar. And as we've said consistently, we're always exploring opportunities To drive and sustain long term shareholder value, and that's really the underpinning of the question. And options for shaping Print and our business mix are a key part of that, and we objectively and thoroughly evaluate those on an ongoing basis. The key backdrop for us is the current Plan that has 10% or higher rate based growth in each of our utility companies. And that comprises the $40,000,000,000 of identified investments over 20 years that I think is uniquely well balanced and supported by constructive regulatory And policy environments across our jurisdiction. So that all adds up to a strong hand with options and time to So very open minded, very deliberate and thoughtful about that. And as we work through particularly this year our electric IRP, as we've talked about today, and we refine other long range investment plans, Particularly beyond 2023, it's pretty clear plan out through 'twenty three. These options will all remain on the table. We'll continue to look at those And then on the point about LDC values, we're all seeing that LDC value indicators in the private markets appear to be really Strong. And these are more aligned with the fundamentals and the sustainable growth that we see in the business. And so I think it's important to take that as an input that And then maybe even extending that perspective just a bit in a clean energy transition supporting a modern We think the natural gas system has a key role in that transition. So we're looking at all of that with a long term shareholder value perspective. And it will always be an alternative to traditional. Nansen was done. It really does put us in a place of having more flexibility, Because it firmly puts us in our target range of 14% to 15% FFO to debt, which gives us some flexibility about how we grow the business. And certainly, as we continue to look at the long term plan, we'll look at portfolio, but we'll also look at what are those growth opportunities in our business And the timing of those growth investments and how we finance those. Terrific. Thanks, Donald. And then just on sort The uptick in renewable spend, good to see that there. And obviously, you guys highlighted that could be incremental spend coming from the new IRP. Can you just remind us if these the incremental spend that can come about, Is that sort of embedded in your current trajectory as we think about rate based growth or earnings, especially as you guys extend through 'twenty four, right? Or potential new opportunities that come about from the IRP potentially accretive So how you guys currently guide? So extend the runway or accretive and assuming that you guys are embedding a fifty-fifty PPA versus JV structure On any new opportunities, any way Doug, here's? Yes. If you think about the if you're referring to the new IRP that we just That's really going to look at what that generation strategy is post 2024, so Michigan City replacement Opportunities. So it will be an extension of that. And so we'll get through that of what that portfolio would look like beyond 2024 and Potentially provide some insight on what investment opportunities there might be for us. Yes. And so just to bring that back around, Even as we speak, the Indiana Commission approved 3 more renewable projects and another PPA. So really four Those being the Duns Bridge project and the Cavalry project. So with those now approved, approximately 2 thirds of the $2,000,000,000 that we've Talked about is already approved by the commission. Sure. Your next question is from the line of Charles Fishman of Morningstar. Good morning, Charles. Charles, if your phone is muted, please unmute. I'm sorry. Joe, you said that You had more certainty with respect to regulatory outlook and you just had a decision or recently had a decision in Is that what you based that statement on? Is it because you have a ROE In that decision, we had a settlement the time before or is there any more color you can provide to that statement you made? Yes. Thanks, Charles. Good to hear from you this morning. That's a big part of the 'twenty one regulatory agenda, but also a number of our trackers Our already approved and ambulatory calendar for 2021. And so that total picture is The basis for the revision to our guidance. Okay. And then if I could just ask just a couple of housekeeping things probably from Donald. On the guidance now, when you say the 7% to 9% based off of 'twenty one guidance, is that the original guidance $1.28 to $1.36 or the revised guidance this morning? It would be the revised guidance, the narrowed guidance. The growth is off the narrow guidance? That's right. Okay. And then I certainly had a discussion with Randy and Chris on these equity units. But just I guess a question I forgot to ask them is, Can you give us any guide to weighted average shares in 'twenty one? Weighted average shares in 'twenty one. Yes. That's 4 year EPS. Our expectations I don't know if Randy, if you've got why don't we follow-up with you? No, that's Fine. That's just a modeling question. Thank you. Just thank you. That's all I have. If I can insert just for a second. If you just take Where we ended 2020, Charles, which was about $392,000,000 and you assume the equity units at even the price They were issued at 2,451, that would be approximately 35,000,000 shares, but of course, you'd only take 7 12ths of that, if you will, from a weighted average stand And then, of course, then you would add in an assumption around the ATM, which we've guided toward there. But Usually, we settle on those shares in December, so they won't have a huge impact from a weighted average standpoint, That should give you a good indication for modeling on where the share count is. Fantastic. That's exactly what I needed. Thank you. Sure. Your next question is from the line of Julien Dumoulin Smith with Bank of America. Hey, good morning team. Thanks for the time and the opportunity to connect here. Hey, good morning, Julien. Good morning. Thank you. Hey, Brett, we're front footed and thinking strategically here after raising the latest liquidity and improving your metrics. Can you elaborate what those Criteria might be as to how you're thinking about things. I mean, is it about having a certain critical mass in certain states? Is it about being weighted electric Gus, are there other factors? I just want to if you don't mind elaborating a little bit. Yes, sure. I mean, it goes back to risk adjusted growth And strong balance sheet, so the cash generation. But among the factors that you mentioned, business mix, I would characterize the scale in the jurisdiction as one of those factors as well. All of those things go into The way we look at the portfolio, and we'll continue to look at those as we go forward. But you put in front of that, the $40,000,000,000 of identified investment in the growth rate that's driven off of the current footprint. And then it's Really, that's kind of your base case for evaluation of strategic alternatives. Excellent. Thank you, guys. Your next question is from the line of Richard Sunderland of JPMorgan. Hi, good morning. Thanks for taking my questions. Maybe just starting off with the narrow guidance range. What are your COVID assumptions baked into that over the balance of the year and realized on the quarter? Yes. Thanks for the question. So for the quarter, overall, COVID did not have a material impact on us, really had some Setting items in terms of higher residential sales, offsetting continued lower sales from our Small commercial and some industrial. And so as we think so what we've done is we've removed that $0.05 that we had in our guidance With the expectation that it's not going to be material for the balance of this year, certainly, we've got some risk from bad debt But even with that, we think that won't be material for us for the balance of this year. Got it. That's very clear. And then just turning back to the optimization discussion. I can appreciate that the financing strategy has been derisked materially following the equity units. But just Curious as a financing tool specifically, how you view that as a piece of the toolset, meaning You've removed these discrete equity needs for the renewables through 2024. So does that kind of push out The financing driven timing of any elements there, or is it maybe Tied to that longer term look around the 2021 IRP that we should be getting later this year. I know it's kind of a specific angle here, but curious for any thoughts. Yes. Certainly, as Jill talked about, we're always evaluating the plan and there's growth in each of our operating companies. So we'll continue to do that. As we look at portfolio, that's an ongoing analysis as we look at what's the Best alternative is to finance the plan. So I would not say that we have to wait for any other In terms of our business plan changing, including that IRP, it's something that we'll continue to Use the data points from those transactions and others to update our analysis. And if it makes sense to do something with portfolio, we would absolutely We do that. Again, it's always against evaluating our plan with significant growth, 8 10% to 12% rate based growth in all of our businesses and financing that in the most effective way. Great. Thank you for the color there. And your next question is from the line of David Peters with Williams Research. Yes. Hey, good morning, guys. Good morning. Good morning, David. Just on the TDISC filing in Indiana in June, I guess, What prompted the determination of the old program? And I guess what should we sort of expect kind of in this new filing? Is it more of the same? Yes. For the T DISC program, yes, there's opportunity driven off of the legislation from a couple of years ago to enhance The investment mix in a T DISC filing, so that's certainly one of the opportunities we'll be looking at. In the areas of Grid modernization, even technology footprint, all of those are in the mix of consideration for the next And then you also have an interplay between your TDISC timing and your rate cases. So that's another driver of the timing for this filing. Great. And then the second question just with respect to potential legislation out there at the federal level. If you were to see some form of direct payment for PTCs or ITCs come across, have you looked at how that might impact your renewable strategy, Current or future projects, just given that you guys are using a good amount of tax equity? Yes, that's something we're paying attention to. There's not a lot of Tell you on how that might happen and from a timing of where we are in our plan, how it could impact that plan. So I think current expectations are our plan won't change, but certainly direct payments could provide Some upside, but we've got to get more information on what that means. And again, it's also Based upon the timing of that legislation with our financing of our current projects. And then strategically longer term, while we're on that topic of the Tax credits that we'd like to see that concept expanded to support renewable natural gas and or hydrogen Because in the clean energy transition, there's not only a room for, but a need for alternative energy across the spectrum. So we think there's At this time, there are no further questions. I'll turn the call over to Joe Hinrich, Chief Executive Officer, for any closing remarks. Thanks, Stephanie. Appreciate it. And thanks again to all of you for joining us today. We appreciate your interest and your support. We look forward to more updates in the future. Our plan is dynamic, a number of things moving at any given time, so it's always a good opportunity and we appreciate catching up with Look forward to seeing many of you at the upcoming AGA Financial Conference. So until then, make every day a safe day. Take care. Thank you. This does conclude today's conference call. You may now disconnect.