Strategic Overview and Plan Extension

Lloyd M. Yates

President, Chief Executive Officer & Director, NiSource, Inc.

Thank you, Chris. Good afternoon, everyone, and welcome. We're delighted to be here with you today at the New York Stock Exchange to update you on the NiSource story. On your way in, I hope you had a chance to meet our employees stationed in front of the building with one of our advanced leak detection vehicles. They'll be happy to tell you how it enhances our ability to provide safe and reliable service while reducing greenhouse gas emissions. That's part of our vision, to be an innovative and trusted energy partner.

 

Our industry is going through massive change as technologies evolve and as customer expectations evolve. So we've refreshed our mission, vision, and values. As I said, our vision is to be an innovative and trusted energy partner. Our mission, what our employees focus on every day. We exist to deliver safe, reliable energy that drives value for our customers, but not just for our customers. We exist to drive value for all of our stakeholders, from regulators to investors, to employees, suppliers, and our communities.

 

And finally, our updated values guide us on how we're going to make this journey together, be safe, look for a better way, act with care and take accountability. Our vision, mission, and values ground us in what's possible and what we need to do to turn that into a reality. Together, our mission, visions, and values represent the why and how of what we do every day.

 

During the rest of this presentation, we will focus on what we do, our business strategy, which is our aspirations, objectives and key results, plus our strategic initiatives to drive the business forward.

 

Let's go to slide 5. NiSource is a 100% regulated gas and electric utility service six states with a focus on safety, reliability, and a commitment to maximizing shareholder value. This map illustrates our significant scale. We operate over a large and diverse footprint in the United States. The proximity of our six companies provides critical mass.

 

Taking a closer look at our operating companies, are located in constructive regulatory jurisdictions. These states recognize the value of natural gas and electric service, and they provide very efficient regulatory mechanisms to recover and earn on our investments. NiSource serves more than 3 million gas customers across six states, as well as nearly 500,000 electric customers in Northern Indiana. We expect the updated growth plan was the plan we will share today to drive a compelling total shareholder return of 9% to 11% annually. We believe that is a premium utility performance.

 

Go to slide 7. We're driving to become a premium utility. But what exactly does that mean? A premium utility provides safety above all else, as we do. At NiSource, our team's focused on the safe and reliable service through our customers, employees and communities second to none. And the resilience and reliability of our systems has never been more important than they are today. Premium utilities are also long-term infrastructure investors.

Every day they make investment decisions on assets, plan to deliver value to stakeholders up to 40 years into the future.

 

To successfully execute on these investments requires premium utilities to have constructive regulatory backdrops. This underpins their ability to make those investment decisions that benefit their customers and provide a return to their investors.

 

At NiSource, there is a deep inventory of investment opportunities that enhance the safety and reliability for our customers. This opportunity represents approximately $3 billion of infrastructure investments annually. Regulatory trackers and rate case flexibility across all six states optimize cash flow, minimize regulatory lag, both of which

allows us to deliver consistent returns on invested capital. Additionally, premium utilities are committed to creating value for all stakeholders.

 

At NiSource, we are building diversity in our employee population with our suppliers. We are focused on the regions which we serve to help them be great places to work and to do business. This is critical and underpins a healthy economy which attracts organic growth, industry, manufacturing, and that's the need for even more infrastructure.

 

People are at the heart of this. None of these investments come to fruition without someone turning a wrench or standing up a pole or relentlessly being there for our customers and our communities when they need us the most. When these factors come together, premium utilities become the integrator for the community. They multiply the economic value they create. They support all customers of all sizes and economic means and relentlessly work to keep people safe. They improve the value of the communities they serve and they bring capabilities, jobs, taxes at a rate which leads the community much better than before. That is a premium utility at work.

 

Switching gears to ESG, our strategy is aligned with a commitment to be best-in-class ESG principles. NiSource has been a leader in reducing greenhouse gas emissions. Building on the progress we've already made, today we are announcing a new goal, net zero Scope 1 and 2 emissions by 2040. We'll need to drive supportive regulatory and legislative policies, favorable stakeholder environments, and advances in technologies that are not currently economical to achieve this, but we are optimistic.

 

Shawn will have additional details in his presentation. We are committed to progress on social factors with a transformation focused on safety, reliability, and affordability. And we are enhancing our diversity, equity, and inclusion efforts. Finally, our commitment to governance begins with our diverse, skilled, and independent board of directors.

 

The board has been refreshed and an updated committee structure provides for a robust framework for strategy, risk management, and oversight. You'll find more information about our fundamentals and our ESG profile in the Appendix to today's presentation.

 

So now that we've taken a look at NiSource's strong fundamentals, let's get to the heart of the presentation, the strategy that supports an extension of our top-tier growth plan and a premium utility valuation.

 

What you'll hear today begins with an overview of our NiSource strategy and direction, including the findings of our Strategic Business Review. Shawn Anderson will discuss our sustainable gas and generation transition, Donald Brown will give us the financial overview, and finally I will wrap up our presentation and open the floor for your questions.

 

When I became CEO at NiSource in February, I announced a strategic business review with a goal of ensuring NiSource is well-positioned to drive long-term value for all stakeholders. It was important to bring the right people to the table, building a review team with a deep background in finance, operations, and strategy. We are very fortunate to have board members with decades of utility experience: Mike Jesanis, Bill Bunting, and Bill Johnson. Donald Brown, Shawn Anderson, and I participated from our leadership team. We also brought in strategic advisors from Lazard and Goldman Sachs to provide additional expertise. This is a strong and seasoned team focused on continually enhancing long-term shareholder value.

Over the course of the last seven months, this group met in person and virtually more than 15 times. That is in addition to the countless hours of work behind the scenes by everyone involved to do the analysis, evaluate the options, progress the conversations, and everything else. I want to thank everyone for their hard work.

 

Let me take a step back because I've been in this business a long time, 40-plus years. As I have observed in my career and I'm sure you all appreciate, the best way to drive long-term value in the utility industry is do some combination of following, all of the following in a best-in-class way: first, run a safe system and be committed to safe operations above all else; continuously identify investment opportunities that can grow rate base in a way that is sustainable for our customers; relentlessly manage cost; finance the business in a way that optimizes the cost of capital, maintains financial health, and enables additional rate-based investment opportunities; and finally flawless execution.

 

In other words, the best opportunities for us to drive stakeholder value exist within our business. Now, that doesn't mean we shouldn't look for other possibilities. But getting these things right is the key for success, and we are executing on those opportunities. For example, we've invested significantly in our safety initiatives and we will continue to do so. We have more than $30 billion of investment opportunities in our six operating businesses, all of which we can invest at one times rate base.

 

We have a cost profile and approach and an approach to work that presents efficiency opportunities to better manage customer bill pressures. For example, our wrench time in the field needs significant improvement. Our customer contacts centers need to be optimized and management of our contractors needs to be enhanced. This focus will help us keep our commitment to US investors to significantly grow the bottom line through capital investment. We also leverage the scale of our operations and essential services to create efficiency for our stakeholders.

 

Beyond simply focusing on cost structure, we have an opportunity to focus on working smarter, doing things more safely and more efficiently. I brought a number of those observations of what I've seen at NiSource to the review. As I've traveled across the footprint, it became obvious to me that NiSource has some great strengths. These include our team's regulatory execution in the legislative environment in the states we serve.

 

We have a long runway of investment of opportunities and the ability to grow over a long time horizon, and we have great people. Our employees are flexible, they're committed, and they have a strong focus on serving our customers. They're living the mission statement I mentioned a few minutes ago.

 

I have also found some significant weaknesses. NiSource balance sheet has been constrained for some time, more than 20 years. We've had to issue a lot of equity to fund our investments, and that's led to dilution. We need to fix that to provide the returns that reflect a premium utility valuation. Our cost profile is another substantial weakness and many of our key technology systems are inefficient and they're outdated.

 

We feel very fortunate to have a long list of opportunities. They include creating efficiencies and taking advantage of our vast scale. We can reach industry-leading environmental goals. There's also an opportunity to streamline the organization and an opportunity for investment and leadership in the energy transition and grid modernization on both the electric and gas sides. As I scan the horizon beyond managing the near-term supply chain issues, the core threats I see that affect everyone in our industry, I think we all understand them well. High commodity prices have raised customer bills, high interest rates driving higher capital investment costs. And while the energy transition presents great opportunities, there's a threat to those who don't continue to move forward in a way that creates value. The actions we are taking help insulate NiSource from these threats.

This slide clearly shows the impact of our constrained balance sheet. Since NiSource and the Columbia Pipeline Group separated in 2016, NiSource has grown its rate base by about 70%. Net operating earnings have grown about 60%, a compound annual growth rate of more than 10%. That's outstanding. However, the picture changes when we look at net operating earnings per share, growth of just 25%. Despite the strength NiSource enjoys, a constrained balance sheet has resulted in the dilution of shareholder value. That became an important gap we need to address. These observations helped to frame the scope of the strategic business review. The team kept an open mind towards avenues that would help us deliver maximum value to stakeholders.

 

We began with our best-in-class high growth base case. How could we optimize it to produce maximum value? Financing was carefully considered. We look for options in alignment with our long-term strategy that would strengthen our balance sheet, a problem that we've been dealing with for a long time. The review team conducted a thorough analysis of our options for optimizing our portfolio. We conducted extensive scenario analysis to assess how each might be accretive. We looked at all sorts of M&A things we could sell in part, in whole, things we could buy, other companies we could partner with, et cetera. We even had various forms of conversation with potential counterparties. I'm not going to get into the specifics, but I am telling you so that you can appreciate how robust our process has been.

 

To better understand NiSource's position and potential outcomes, the team did robust benchmarking of all of our OpCos against other utility OpCos.

 

When people talk about benchmarking, O&M usually comes to mind. However, we expanded the definition significantly. We believe a comprehensive benchmarking analysis sheds light on the strengths and weaknesses of our strategic positioning. We included such items as long-term investment, inventory, operational efficiencies, and instructiveness of regulatory environments, including historic ability to deliver strong returns in the energy transition in a constructive manner, and importantly, visibility to short- and long-term growth drivers. This provided valuable perspective and a stimulant for running the business better, more efficiently, and at a lower cost.

 

We also looked at NiSource's culture and talent, which are foundational for our long-term success, along with organizational structure to help drive accountability. And we looked at our corporate overhead and all other elements of how we spend money, including those that are behavioral and work management-related.

 

In total, the review considered many avenues for maximizing shareholder value, backed by robust and impactful information. And so here's what we concluded and the actions we are taking. First, the review confirmed that the scale and diversity of our current portfolio of operating companies adds value, scale offers opportunities to manage cost in our operations and across our supply chain, something that's particularly important in this inflationary environment. Diversification across multiple states helps mitigate financial risk, and the seasonal nature of gas and electric businesses help smooth annual cash flow needs.

 

Second, we clearly see our industry-leading recovery programs drive top line growth. We began earning on 75% of our investments within 18 months, and we believe that's a significant advantage. The review identified an opportunity to remove the balance sheet constraint. And in a moment, we'll talk about a significant action we're taking. And finally, we conclude that we must improve our cost profile to help maintain customer affordability over the long term.

 

We're taking action on these conclusions. First, we're announcing today an intent to sell up to 19.9% interest in NIPSCO in a tax-efficient transaction. NiSource remains committed to our NIPSCO business. Our customers, employees, and the communities we serve in Northern Indiana will continue to execute and enhance our business strategy there as we have before. However, the proceeds from this minority interest sale will immediately

strengthen our balance sheet. We'll be able to fully leverage our portfolio of investment opportunities to enhance shareholder value. Shawn and Donald will tell you more about the impacts of this transaction in a few minutes.

 

Our second and third actions are tied together. We will focus on optimizing our cost profile and enhancing operational efficiency. NiSource has great hardworking employees, but outdated systems in work processes are a big drag on our productivity. Updating systems and focus on operational excellence will have far reaching impacts. This change will make us safer operators and help us to maintain affordable rates for our customers.

And this is key to that effort. You'll see more detail in the next slide.

 

Our review was thorough. I'd like to thank the review team and those supporting them for the countless hours they spend on this work. The opportunities the team uncover will drive our long-term growth and maximize value for all stakeholders. Our work will be built on a foundation of operational excellence, is the key to increasing productivity, controlling cost, and protecting public safety. We intend to keep O&M costs flat through the life of this plan. Doing that is essential to customer affordability, and it gives us the ability to invest in better service and reliability.

 

We see broad opportunities to standardize work and apply industry best practices. Of course, operational excellence goes hand in hand with our enhanced focus on safety. Our team has worked tirelessly to advance the safety of our customers, communities, and employees.

 

Here are some stats from our safety report that are responsive or representative of the progress we're making. While having zero significant safety events is an important headline number, the other numbers show we're focused on the details working to prevent problems in responding properly to incidents.

 

NiSource reached a major milestone this year in our safety journey through our Safety Management System. We became only the second US company recognized as being in compliance with the American Petroleum Recommended Practice 1173. That's the document that defines the Safety Management System. One innovation that shows how we've changed our approach to safety is our risk-based capital allocation strategy. This ensures we're getting capital where it's needed to address risk. We've built a culture where every employee can report risk, and where risks are systemically addressed. We'll continue to advance safety through a culture of operational excellence.

 

Strengthening our balance sheet and building a culture of excellence enhances our ability to execute on our investment plan. NiSource has a deep portfolio of investment opportunities. We've identified about $30 billion worth of investment opportunities over the next ten years. The largest share of those investments are on the gas side of the business.

 

We'll continue to replace and modernize our infrastructure. That activity is essential, where continuing to provide safe and reliable aging gas lines has helped us achieve significant reductions in methane emissions. You also see large chunks of the pie going to electric infrastructure as well as the generation transition and renewables. And we expect to make significant investments in customer growth. Having several buckets of investment opportunities gives us significant flexibility to move investments where we can drive the greatest benefit for our stakeholders.

 

I'll close my presentation with a look at the NiSource value proposition, all in one slide. I'll give you a moment to take it all in, because I believe these numbers tell a great story. We offer a very attractive total shareholder return proposition of 9% to 11%, more de-risked customer rate sensitive, 6% to 8% annual growth in net operating earnings per diluted share; our 8% to 10% growth in rate base; our targeted 60% to 70% dividend payout ratio;

add to that more than $30 billion of investment opportunities and a strengthened balance sheet. This is what we believe a premium utility looks like.

 

I want to thank you for your attention. And now we'll turn it over to Shawn Anderson.

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