Portfolio Review and Sustainability

Shawn Anderson

Senior Vice President-Strategy & Chief Risk Officer, NiSource, Inc.

Thank you, Lloyd. Good afternoon and thank you all for being with us today. As Lloyd just described, the strategic business review process we embarked upon included a thorough and rigorous evaluation of our businesses focused on creating long-term shareholder value. We incorporated all ideas into this process, aided by the diverse perspectives of all of the stakeholders involved. As this slide lays out and as Lloyd touched upon, we studied a wide range of different ideas and alternatives for NiSource.

I'd like to focus a bit here on our approach during the process, which began with looking at ways to optimize our best-in-class, high-growth proposition within the NiSource business plan. Importantly, our plan includes the operation of our premium utilities, situated across six highly constructive jurisdictions with approximately 4 million customers, who we are so fortunate to have the opportunity to serve. We'll talk more about these companies and why they are premium utilities, and importantly how they fit and contribute to NiSource's strategy in growth.

We looked hard at different ways to finance the business. Over the last five years, our operating companies have averaged rate base growth of 13% on an annualized basis, and are projected to grow rate base at approximately 8% to 10% on a forward-looking basis. So financing solutions that maximize balance sheet health, minimize dilution, are always going to be something we study and evaluate thoroughly.

Priorities such as flat O&M, leveraging efficient regulatory mechanisms, which deliver a return on capital expenditures inside 18 months, help to de-risk and streamline cash flows from our investments and leverage the premium fundamentals of the NiSource business plan. All of this translates directly into a compelling total shareholder return proposition, which is accretive annually, and will drive value creation for years to come.

Throughout the review, one of our core goals was to make our base case business plan and growth outlook as strong as it could be, because that underlying execution will maximize long-term shareholder value in all scenarios. Another key area of evaluation was inorganic options, namely portfolio optimization pathways and M&A opportunities, as ways for us to enhance the already strong foundation crafted in our base case.

As Lloyd referenced, we reviewed a variety of options and held discussions with prospective counterparties and spent a good amount of time to get a sense of the marketplace. Some of the observations and learnings from these evaluations are similar to what we've observed in the past. Our evaluation concluded, it's difficult to realize accretion through full OpCo sales, as NiSource and its customers benefit from scale, diversity, and centralized service costs.

Selling an OpCo or OpCos creates dyssynergies that take time to mitigate and put pressure on the remaining company and customers. Doing so is also tax-inefficient and is dilutive as a result of lost earnings and cash flow. Likewise, it can be difficult to create incremental value through outbound M&A. It's hard for us to create value by paying market premiums, when we have a massive inventory of opportunity that can be invested in at 1 times rate base.

Thus we landed on the minority interest sale as the best path forward. It achieved several goals. It allows us to strengthen our balance sheet. It's tax-efficient. It avoids dyssynergies. It maintains the scale of our business.

There's a good precedent in the industry of this type of transaction being completed successfully, and it's a very efficient means of financing our business. I'll talk to more about this in a few slides. But before we head that direction, as we look across our jurisdictions, first and foremost, we make long-term investment decisions designed to deliver value to stakeholders.

The regulatory support in these areas that help us to prioritize safety and execute on our investments is of critical importance. We spent a lot of time on this concept in the review of our business. Understanding the investment parameters are necessary and what it would take for each business to be a successful investment story, consistent with the premium business plan such as ours.

As you can see on this slide, we have forward-looking capital mechanisms in nearly every operating company, reducing regulatory lag. The exception of this is Ohio which is unique in its ability to track 100% of our related capital expenditures and begin recovery within 12 months. Strong rate base growth, [indiscernible] (00:32:14) constructive regulatory environments is even more impactful when you realize that approximately 90% of our capital spend is within Ohio, Indiana and Pennsylvania, where you have the benefit of these regulatory mechanisms.

Meanwhile, Virginia has historically experienced strong organic customer growth which we expect to continue into the future. Just last week, Virginia was ranked number one by Site Selection magazine in terms of constructive business climate. Maryland exhibits a stable economic environment, zero lag due to forward-looking infrastructure replacement programs and growing communities attracting from the Washington, D.C. area. And Kentucky is one of three of our LDC businesses operating within states which have passed legislation to preserve customer choice of energy fuel diversity. All of these regulatory and legislative fundamentals underpin a balanced growth rate across all of our jurisdictions, each of which have achieved a five-year average ROE in the mid-9% and 10% range.

In summary, what makes us so bullish on the investment thesis for NiSource is the quality and strength of each of our jurisdictions as we see significant economic development and growth opportunities both as a whole and when independently reviewing each jurisdiction. We are so fortunate to serve and support communities amongst the most constructive in the United States.

Early in our process, we observed that the company's balance sheet constraints created an impediment to achieve many of the goals set out for in the Strategic Business Review. In some ways, this is the missing link which enables us to convert our rate base growth opportunities into net operating earnings per share in an efficient manner. Historical circumstances coupled with the demand for significant amounts of rate base to be deployed required external capital market solutions as a funding source for our business. As we look toward the future and recognize even more investment opportunity on the horizon, we see more demand for capital, not less. We also recognize the state of the external capital markets today as more volatile than in years in the past. Higher interest rates and the overall cost of capital has an impact on our company's plans which creates a dependence on these marketplaces being available at a low cost each and every year of our plan.

These observations contributed to focus on accelerating the strengthening of our balance sheet and de-risking our future capital markets' needs. Our evaluation demonstrated that diversifying our capital raise could strengthen our credit and financing flexibility while stabilizing both our earnings power and our financing plan, especially when coupled with a minority interest sale of our business. We evaluated a range of potential outcomes and we are confident that we will be able to execute the sale with a transaction that delivers relative value to the NiSource standalone plan for EPS metrics, our credit metrics and our overall valuation.

We've looked at a range of industry precedents, many of which have attracted significant investor interest and have driven premium valuations in all types of market conditions. And we've heard from interested parties on the merit and value to invest in a minority interest at NIPSCO and how that would align with their investment thesis over the long-term horizon. Indiana has also been one of the most constructive states to execute minority interest transactions with multiple precedents in the marketplace already. We do not expect any tax leakage or meaningful dis-synergies with this type of transaction and thus it is a much more efficient capital raise than any full OpCo disposition potentially considered.

Finally, NiSource retains long-term, strategic flexibility across all of our scale of six operating companies focused on gas and electric utility operations and can still leverage the vast array of investment potential fueled by our growing businesses.

We believe this transaction will reposition the NiSource balance sheet to a position of strength and eliminate the need for all equity -- discrete equity issuances through 2027 while relying only upon traditional debt and ATM equity to simply maintain the capital structure on a go-forward basis in 2025 and beyond.

I will wrap up this portion of my presentation with a look at a different slice of our benchmarking data. We thought it was important to share the fundamentals of the NiSource business plan which are premium when compared to many of our peers, as well as how this shifts as a result of the transaction process we will commence in Q1 2023. We continued to commit to our 100% regulated business mix across six jurisdictions, retaining diversification of operating territory as well as fuel source with our gas and electric businesses.

We maintain a premium rate-based investment opportunity of 8% to 10% annually shaped by a risk-informed capital allocation process. And we're able to translate these investments into 6% to 8% net operating earnings per share annually in large part due to our streamlined cost commitment, the reduction on external equity needs and, importantly, the strength of our cash flow recovery mechanisms across each of our high-quality, regulated jurisdictions. We continue our commitment to a dividend payout ratio of 60% to 70%, an investment yield opportunity to complement our growth rate and help target double-digit annual returns for our investors.

Finally, our business plan sets up to deliver these enhancements, all while realizing the step change in credit quality through the balance sheet strengthening anticipated with the minority interest transaction. As we noted, this transaction de-risks the external financing needs over the duration of this plan and allows our team to focus on execution of the high-quality capital allocation opportunities we have in front of us and maximize the value creation across all of our projects. Taken together, we believe these strengths show NiSource should be considered a premium utility investment.

Now, let's turn to the long-term sustainability of our business plan. NiSource is committed to enabling an equitable energy transition for our stakeholders [ph] through investments (00:39:11) that will drive safety, systems reliability and resiliency and significant greenhouse gas emissions reductions. While these efforts will support broader decarbonization in our communities, we're also focused on doing so in a way that is affordable as well. An equitable energy transition will look different from state to state and community to community. And we're taking a collaborative, supportive and stakeholder-centric approach to truly understand the perspectives which inform the long-term plans and support in each of the communities we serve.

The energy transition creates significant economic benefit to our communities by way of regulated investments of which we have approximately $30 billion already identified over the next 10 years. These investments are critical to community safety and reliability, but many of these investments are integral to enhancing the sustainability of our communities as well. Along with driving down greenhouse gas emissions and protecting local environments, these investments support thousands of jobs, generate hundreds of millions in tax proceeds for state and local government and allow us to drive long-term, premium returns for our shareholders.

Customer affordability is of critical focus during this energy transition. And through 2027, we anticipate low-single- digit annual growth in customer bills supported by reduced commodity prices, energy efficiency, O&M discipline and additional benefits of scale as our customer base expands. Even if you eliminate the impact of commodity costs, we expect distribution rates to grow less than 5% on an annualized basis. We have seen natural gas prices moderate from recent highs and expect pricing to return to the [ph] 450 to 550 (00:41:00) range during this plan horizon in line with broader market expectations.

We are also advantageously located close to the Marcellus and Utica shale formations, allowing us to access supply from basins which trade at a historical discount, the Gulf and East Coast markets. Our electric business is also able to benefit from geographic advantages derived from the transmission efficiency of our central Midwest location and optimize grid access facilitating regional energy movement.

NIPSCO's generation transition is well underway and upon conclusion will support customer affordability through an increase of zero commodity generation resources and we remain on track to deliver the execution of the projects identified from the 2018 IRP.

And lastly, our own commitment to flat O&M leveraging an enhanced focus on operational excellence is contributing to low customer bill growth. This discipline will directly benefit customers and allow headroom for continued investments driving safety, reliability and sustainability. In the regions we operate, natural gas has a clear economic advantage versus competing alternatives. Emerging higher efficiency gas technologies have the potential to expand this advantage even further.

We are seeing continued demand growth for natural gas across all customer segments and several of our states are in the midst of a manufacturing and industrial resurgence that is being fueled by natural gas. Natural gas remains a critical component of a diverse clean energy portfolio. Its role allows for accelerated decarbonization through a more cost-effective approach as compared to pure electrification by leveraging existing infrastructure, zero to low carbon fuels such as RNG and hydrogen and utilizing more efficient end-use equipment. Blending RNG and hydrogen with natural gas and delivering it through our existing infrastructure will require limited changes to customers' end use thereby speeding up access to low carbon energy. When looking at large industrial customers, these fuels will also allow for decarbonizing applications which are not well-suited for electrification.

Our modeling across our service territory demonstrates an electrification-focused pathway is 44% more costly on an NPV basis than an optimized portfolio which combines some electrification with natural gas, renewable natural gas, hydrogen and the use of existing gas infrastructure. The additional benefit is that much of the infrastructure required for the optimized portfolio is already in place, thereby accelerating the rate of decarbonization in the near term. NiSource has taken an active role in directly advocating for and advancing federal and state policies that support a clean and equitable energy transition. Impactful policies such as the Infrastructure Investment Jobs Act and the Inflation Reduction Act are helping to champion innovation and foster tangible outcomes that can drive affordable decarbonization.

Supportive policy and regulatory frameworks are necessary to reach our long term decarbonization goals. And NiSource is focused on key areas such as alternative fuels legislation, delivery of energy efficiency programs, advancement of accelerated leak detection, continued gas system modernization and renewable energy investments. NiSource is also taking an active role in supporting the development of technologies that will enable decarbonization through the natural gas system. Across our states, we are deploying Picarro advanced leak detection vehicles like the one out front today. And innovations like these have the potential to greatly influence utilities visibility into their emissions inventory and transform how the industry identifies, prioritizes and repairs leaks.

NiSource is also committed to supporting the growth of RNG across our service territories. Over the past year, we've established common RNG gas quality standards across all of our gas LDCs and streamlined our processes to facilitate RNG producers connecting to our systems. NiSource currently has RNG producers injecting close to 2 Bcf per year into our system and expect that figure to grow based on pending demand and our engineering queue. We recently launched a hydrogen blending pilot at our Columbia Gas of Pennsylvania training center. The first phase will allow our pilot to study the impacts on the development -- on the different blends of hydrogen and natural gas in a controlled environment on our distribution system and on end use equipment.

We're also participating in several regional hydrogen hub proposals that are seeking DOE funding within the IIJA's Clean Hydrogen Hub program. Under our electric business, as you know, the NiSource generation transition started in 2018 when our portfolio was about three-fourths coal. By the end of this decade, we will have retired all of our coal generation and transition the majority of our portfolio to renewables and storage assets with natural gas continuing to play an important role, providing reliable base load and peaking load generation.

We are on track to deliver on the projects that will replace the capacity from Schahfer Generating Station, eight owned and joint ventures and the remaining in PPA contracts. And over the last few months, we've worked tirelessly to address and mitigate the supply chain issues the industry has faced earlier in the year and are confident in our current project timelines.

Rosewater in Indiana Crossroads Wind 1 are both in service and providing clean energy to our customers today. Our project is expected to be complete next year. Dunns Bridge 1 and Indiana Crossroads Solar are in a strong position with respect to panels and other key inputs and are in the final stages of construction.

These projects represent a tremendous first step into our solar portfolio and are among a small subset of projects across the country to only face minor delays. Also Dunns Bridge 2 and Cavalry Solar have both started construction and the last two projects, Fairbanks and Elliott, are continuing in commercial negotiations. Our advancement, despite recent market constraints, reflects highly of our relationships with our developer partners as we leverage creative solutions to address market pressures. All told, CapEx to support the retirement of Schahfer is projected to be approximately $2.2 billion. CapEx to support the next wave of investments beyond Schahfer is currently estimated at approximately $1 billion to support the future portfolio through 2028.

Driving these costs are increased capacity needs as a result of the MISO seasonal construct and thus in the supply chain ramifications observed for a recent RFP. Incremental generation resources and transmission upgrades will support future retirements and grid reliability. We are also on track to retire the remaining Schahfer coal units by the end of 2025 and retire legacy gas peaking units in Michigan City by 2026 to 2028. Timing of construction for the post- Schahfer projects will drive the exact retirement of these units. As mentioned, we expect Dunns Bridge I and Crossroads Solar to be online in the first half of 2023 with Dunns Bridge II Cavalry, Fairbanks and Elliott coming online in 2024 and 2025.

The RFP we issued this summer through robust interest from bidders. However, we saw less participation than in past RFPs. There are several potential reasons for this as there have been a numerous RFPs issued in Indiana in the last 18 months. And solar supply chain issues may have slowed developer pipelines. But this dynamic also suggests a high value for all of the projects we've completed and are underway to be delivered to our customers. We received 54 projects in the RFP, representing about 9 gigawatts of capacity across a range of technologies. Overall, we're seeing pricing for projects much higher than last year across all technologies and deal structures. We're still evaluating the bids and conducting additional portfolio analysis using the refreshed RFP data, but we see no material departure from the 2021 IRP preferred plan which called for an upgrade to Sugar Creek, a new gas peaking resource and energy storage to fill the required capacity of our portfolio.

Definitive agreements are expected in early to mid-2023. And we expect to execute on our industry setting IRP, RFP combination with similar success in the past in terms of transaction count and [indiscernible] (00:50:20) agreements. We've also observed that the IRA provides incremental tax credit. Some of our existing projects can take advantage of these opportunities and provide credits back to our customers.

As we move forward, today, we have announced a net zero goal targeting a 2040 timeframe more on that in a moment. But first, I just wanted to highlight the outstanding progress we've already made. We remain well on track to achieve an industry-leading 90% reduction in Scope 1 greenhouse gas emissions by 2030. Reductions have been made driven by core utility and infrastructure investments and are supported across the spectrum of key drivers. Remaining coal will be retired by 2026 to 2028. We are making significant advancements in methane reduction through our modernization programs and deployment of advanced leak detection and repair. This represents one of the fastest reductions in coal utilization across the sector and facilitates one of the most significant drops in carbon intensity across all of our peer set. Strong stakeholder engagement and support maintaining affordability, capturing investment opportunities and aligning with state and federal policy continue to be foundational for our success.

With the demonstrated ability to achieve robust reductions, we are extending our decarbonization goal to achieve net zero Scope 1 and 2 emissions by 2040. The pathway to net zero builds on well-established programs while continuing to maintain affordability, reliability and resiliency. At the core is both the continuation and the enhancement of existing programs, maintaining a balanced mix of low to zero emission electric generation, ongoing pipe replacement and modernization programs, and deployment of advanced leak detection and repair technologies. In addition, NiSource plans to advance other low or zero emission energy resources and technologies such as hydrogen, renewable natural gas, and support the deployment of carbon capture and utilization technologies if and when these become technologically and economically feasible.

Carbon offsets and other renewable energy credits may also support us in this net zero goal. And while this goal reflects what we believe is achievable by 2040, it does require regulatory support and legislative policies, constructive stakeholder environments and the advancement of emerging technology. But we are excited about being a leader in this space. And we are confident this represents a tremendous opportunity for our gas and electric businesses and the communities we serve. As this transition continues to [ph] involve (00:53:08), we expect additional investment opportunities to arise in which our businesses can participate.

For example, we've touched on the importance of electric transmission projects in today's session, but that opportunity set alone could range from $400 million to $900 million not currently captured in our current capital allocation plan. Additionally, we have not rejected any infrastructure investment opportunities in our capital allocation related to enabling biofuels supply and delivery on the gas side of the business which we believe will only increase as a result of tax credits and support at the federal and state levels. As we continue to work with stakeholders to create supportive policies and mechanisms consistent with the optimal pathways to decarbonize, we expect these areas to increase investment opportunities across all of our operating companies.Finally, this slide presents the many ways NiSource is leading the clean energy transition. We're making the fastest transition away from coal, 74% coal to zero in a single decade. A 90% reduction in emissions by 2030, including the 58% reduction we've already achieved. And now, a goal of net zero by 2040.

We plan to invest up to $2.2 billion in renewable investment opportunities through 2025, that's about $1 billion in additional capacity-focused investments. This amazing progress also brings the potential for additional investments. That is premium performance. Thank you for your support of NiSource.

Now, I'll turn the mic over to Donald.