NiSource Q2 2024 Earnings Call Transcript

Good morning, Shar.

I'm going to throw that ball to Shawn, yeah.

Yeah. Hey, Shar. Good morning. So tranche 1 projects. We began the process working with MISO and have estimated MISO's original estimate around $300 million of tranche 1 for the portfolio of projects that plan to be executed. We think that it will take a little bit more to be able to execute those projects safely and reliably the way MISO is expecting that energy to be able to be moved across the multi-state region. So we're engagement right now with MISO, sharing those plans and identifying what that will look like. We plan to have more of an update as we step towards our next call in the November refresh of our capital plans.

And then on tranche 2, it's still early on those. We haven't really formally put those estimates out. We do expect to see something at the very end of this year with MISO and plan to be able to estimate those thereafter once we've had a chance to, to really look at those plans. But reminder there, most of that is going to be beyond the planned horizon as it's in service dates or early 2030s.

Yeah. So a little bit of a long-winded answer here. Let me start by saying, we're really excited about the data center opportunity. We think it is a significant opportunity to grow the company. We also understand that Northern Indiana is just a very attractive location for data centers. So we're getting a lot of interest, as I talked about in my script, a great public policy. Indiana passed legislation for sales tax exemption for data centers in 2019. We have great infrastructure in terms of roads, access to energy, transmission. So people are very interested in putting data centers and really big data centers in the state of Indiana.

What we've been doing is meeting with various stakeholders, and I'm talking about the people from the governor's office, legislators, utility commissioners, and making sure that we understand in detail what their concerns are and what, what needs we need to meet. Now, let's say, probably three important things came up. One is, I think data centers have to work for the current customer base. Meaning that the customers, our current customer base can't absorb any excess risk or long-term, have any significant stand in investment as a result of this opportunity.

Second thing is no compromise in reliability. I think that's really important to all of our constituents and stakeholders. And then for NiSource, it has to work for our shareholders. I mean this is a big initiative. But if we're going to take risk, it has to be the appropriate amount of reward on the other side of that. So, if you think about all those things, you said and we talked earlier, we have a real strong plan. We're going to grow 6% to 8%. We've actually executed that growth over the past three years. So we feel good about the plan we have with our data center. So anything else, anything else we do has to be upside to that plan.

So with all that being said, Shar, we are in conversations with the various counterparties. I think we're really aligned on all the things that we kind of need to accomplish as a result of those conversations, as a result of trying to get various transactions out about data centers. I think as you start to look for EEI or later in the year, we'll put out a lot more clarity about what that looks like.

Good morning, Nick.

Shawn, why don't you take that one?

Yeah, sure. Nick, thanks. Good morning. So obviously the headwinds that we always face, a volatile capital markets environment, which we're all experiencing right now, brings uncertainty around financing and the costs associated with financing. So always a concern for us. Obviously, regulatory outcomes and making sure that we're passing these investments in line with our stakeholders and keeping customer affordability in mind is always top of mind in terms of how we'll be able to execute the sequencing of these, these programs.

As you said, one of the things that de-risks the execution of this plan is growth in our customer count, volumes, and helping to spread some of those costs across a larger base. So right now, experiencing some tailwinds. But hopefully, the economy continues on the path we're on. That's helping to enable that growth, and we'd love to see that play forward. We don't project that growth to always continue. So it ends up providing a bit of a tailwind, when it does continue to stick and move itself through the plan. Those are the major drivers of uncertainty.

I would say, we are still financing a lot of overall capex, especially when we think about the full ownership opportunity of projects at NIPSCO, and a lot of that financing will occur in 2025. And we'll need to be thoughtful about making sure we do that commensurate with the returns that would be required to get us into that 6% to 8% annual year-over-year growth rate.

Well, we haven't actually run those analyses just yet, as we haven't incorporated the load growth associated with data centers into any of the financial plans. We're still thinking thoughtfully about how that will be reflected in ramp on the customer side for these data centers will matter greatly into the timing of when we would need to incur capex or when the systems would come online in the first instance. So, we haven't actually run that.

But when we talk about that customer affordability, we're focused on the residential customer path, and we're focused on keeping residential customer bills at or below that 4%. We think that data centers can provide a bit of an upside to the way that our current plan is built in that, there will be a sharing of system cost in some level for us to be able to support data centers as they come online, but we haven't quantified what that looks like.

Yeah. Great question. No, there's no rule of thumb here simply, because the cash flow profile for each project really warrants how it would be financed, how much FFO can come off of any given project varies, especially when you think about when the opportunity could be something that has direct flow through at a higher rate than a regulated return just in the form of economic development compared to what we would have to put in to hook on those new customers. That's just an example of where you might be able to get a higher FFO relative to the way the rest of the base plan is, is financed.

Another example would be the tax profile associated with solar, which has created some tailwinds for us. So, we need to look at the projects before we can get to the financing, and how it would impact equity. It also matters where we're at within the range in any given year of the 14% to 16%. So our commitment is to be thoughtful about the financing and to focus on the lowest cost of capital we can achieve, while maintaining our commitment to 14% to 16% of all years of the plan.

All right. Thanks, Nick.

Good morning, Julien. Welcome back.

Michael?

Thank you, Julien. So yes, as Lloyd mentioned early, early on in his comments, the customer protection piece is a critical component associated with it. So, we are working through the mechanisms associated with tariffs and other regulatory components that would enable that and be able to do that to one, be able to provide the customer protections, being able to provide the appropriate allocation of the system associated with it, be able to help ensure the reliability due to the large loads that they, that come in with data centers and the high load factors.

We are looking at ways to help make sure that we're doing that in a timely and effective manner to be able to help accomplish the timelines that data centers want associated with our activities. So we want to be very customer-centric on that. But at the same time, as you mentioned, we have found innovative ways to do that in the past, and we continue to look at those innovative ways moving forward, and we will bring those both in the current activities and in future regulatory filings.

Yeah. And just to add a little bit to that. We're not sure whether or not this is something that we do in a rate case through the regulatory process or through the legislature process. So we're still evaluating those things.

Yeah. Thanks, Julien. I appreciate that question. Yeah. No, I see where you're going with that. I do think there's some offsets to that, right? We do see some O&M tailwinds that can come back to help moderate the bill impact associated with the infrastructure investments. Most notably, there's, there's much lower commodity prices as we move to a platform of 70%, if you will, renewables, which help stabilize some aspects of the bill for customers. I think as we shutdown our coal plants, we have two more units next year that will shutdown. That presents an opportunity for lower O&M to flow back to customers.

Project Apollo also continues to progress for us. It is achieving great results. That's helping us stabilize overall O&M. And while we target that flat O&M on an absolute basis, we have the potential to see higher O&M savings, if you will and associated with something like the Schahfer shutdown. It could be more specific in Indiana to the electric company in those circumstances. So, we're thoughtful about it.

I think there's opportunities for us to look across the system to grow, and the faster we can grow, obviously, the more we can bring down the cost of that flat O&M on a per customer basis across the broader network. And that scale across NiSource is something that becomes attractive for all customers and specifically customers in Indiana, which then benefits from the growth that we're seeing in a state like Ohio or Virginia, which is growing on the gas side and bringing down the cost on a per customer basis in Indiana.

Yes. Thank you for the question. We do monitor what is taking place within each of our states with the utilities and we understand some of the outcomes or the outcomes with the water utility. As far as our rate case, we are continuing to meet with the stakeholders, all of our intervenors. And we are working towards settlement discussion. We don't know if there will be a settlement, but our teams always try to work towards the win-win outcomes for our customers as well as our stakeholders. So, at this point, we, we continue in those discussions and we will determine if a settlement is possible.

Thank you.

Good morning, Richard.

Michael, why don't you take that one?

So, what I would say is, we continue to look at economic development opportunities across our regions. And when we look at those investments and opportunities, obviously, our partners were able to share that within the NIPSCO region associated with it. But really, it's the collaboration that we have with our communities that we have associated with our states, with our governmental entities, and bringing in that economic development that lead to that investment.

Maybe the one thing I would point to relative to potential is, as we're going through the current IRP process and working with the different stakeholders on that and walking that through, we have shown in our reference case, an incremental 2,600 megawatts of potential, as we look through to 2035 associated with that. And we are running through those scenarios and cases now, but that would represent basically a 100% increase to our peak low-dose system. So, I think that gives a perspective relative to the potential with it. And in that potential is obviously the opportunity for our partners to be able to share in that upside.

So we do, I think, this is Lloyd. We do see it as an opportunity. We'll work with our peer utilities and also with MISO. But we think there's a, there's a significant opportunity for efficiency between the various utilities. And I think what also makes the interconnection agreements on transmission a little bit easier.

Good morning, Steve.

That's Digital Dallas [Phonetic], Melody, why don't you take that one?

Yes, for Digital Dallas in Virginia, that's too provide power to the center directly.

So, that's correct.

Yeah. So, we don't talk a lot about that, Steve. But one of the opportunities we have, especially in Ohio and Virginia, is the opportunity to build more gas infrastructure to support data centers. So more gas infrastructure going to generators, provide energy to data centers, building a gas pipeline for us is another opportunity that doesn't show up on our capex plan right now. Like Digital Dallas was not in our capex plan.

Michael?

So when you look at the IRP, basically, what you see is our peak load right now is roughly about 2,300 megawatts associated with it. The 2,600 megawatts that you're seeing was included in the reference case. And the reason that was included in the reference case is, because as we're working through with multiple counterparties associated with our interest within the state, we feel like that is a reasonable expectation relative to qualified counterparties and potential, which we want to reflect in our scenarios.

Above that, we also then have another 6 gigawatts above that, that would be included in scenarios based on not only the potential for data centers that we've seen in interest within the areas, but also what we're seeing in additional economic development and growth just from baseload capabilities, what we're seeing being onshoring, what that continues to be developed within our system. So we will run through that reference case. We will run through that scenario case associated with it. And then we will do on top of that, honestly, additional scenarios that allow us to look at different potential outcomes. But the big chunks are that they, where we are today, 2,300 megawatts, 2,600 megawatts added to it and then 6,000 on top.

Yeah. So Steve, this is Michael. I'll hit that one as well. But, when you look at that Indiana territory, Lloyd hit on many of the attributes. But yes, I would say, when you look at the combination of the, how it's near to large areas such as Chicago and others that have great fiber runs. You look at our transmission capacity and infrastructure through that part of the territory, it has very strong characteristics associated with it. We have multiple sites that have 345 kV lines running through them and multiple 345 kV lines, so there's good transmission capacity and opportunity.

In addition, you add on top of that, there's accessibility of land as well as water roads, all those are positive characteristics. But then I would say one of the most beneficial is, is how the state, the governmental, the economic development activities of those bodies is helping to facilitate the opportunities in the state as well relative to the diversification of tax base load, et cetera.

Thanks, Paul. This is Shawn. I would, I would think about that as incremental to the $600 million. We're still expecting to issue up to $600 million of ATM equity in 2024, and continue to maintain that balance sheet with $200 million to $300 million of ATM equity for each year of the plan thereafter. The use of the junior subordinated notes for us is a diversifier that helps us raise credit quality, potentially giving us even more cushion relative to the downgrade threshold of 13%. It also helps us manage the overall maturity curve that we have long-term on the debt profile of the business.

Yeah, it's a great question. I think it's really more to enhance the cushion that we have in the current year. We've also seen other headwinds come through our plan such as weather, lower receipts, cash receipts coming from warmer-than-usual weather in the first quarter as an example. And you still need to incorporate that into the overall FFO to debt that the rating agencies are asking us to maintain. So, it gave us an opportunity to look across the curve and find a different way for us to source that equity content without having to go to a traditional equity marketplace.

Thank you.

So, thank you for your questions. We're excited about the opportunity with NIPSCO. Thank you for your interest and look forward to seeing you guys next quarter.