Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 NiSource Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Nick Drew, Director of Investor Relations. Thank you. Please go ahead.

Thank you. Good morning, and welcome to the NiSource first quarter 2020 investor call. Joining me today are Joe Hamrock, our Chief Executive Officer; and Donald Brown, our Chief Financial Officer. The purpose of this presentation is to review NiSource's financial performance for the first quarter of 2020 as well as provide an update on our operations, growth drivers and financing plans. Following our prepared remarks, we'll open the call to your questions. Slides for today's call are available on nisource.com. Before turning the call over to Joe and Donald, just a quick reminder. Some of the statements made during this presentation will be forward-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 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 of that out of the way, I'd like to turn the call over to Joe.

Thanks Nick. Good morning, everyone, and thank you for joining us. Before I summarize our performance in the first quarter, I want to take a moment to comment on the current global crisis and to thank our dedicated employees for the critical and tremendously important work they do every day to keep America running in our service areas. This pandemic has highlighted just how critical the NiSource team's work is to the communities we serve. Early on in the crisis, the states we serve designated us as a central service providers, recognizing that we provide an essential service to millions of end user customers across our service area. This also reflects the critical support we provide to the other essential service providers, hospitals, emergency responders, food providers and key supply chain operators on the front lines of this crisis. Those essential service providers are depending on us and our peers across the utility industry to continue to deliver a safe and uninterrupted supply of gas and electric power, so they can continue their critical work. We are deeply grateful for the dedication and selflessness of those on the front lines of this crisis and for the opportunity we have to support their important and lifesaving work. We have activated our incident command structure to coordinate strategy, execution and communication across our seven-state operating area. To protect our employees, we have encouraged all those who can work from home to do so. For those employees who must report to a work location, we have implemented social distancing protocols, temperature checks for people entering critical company buildings, more frequent cleaning of facilities and equipment and allowing only one person at a time in vehicles while doing our work. Also, certain critical functions have activated sequestration plans to prevent any outbreak among employees…

Thanks Joe, and good morning, everyone. Looking at our first quarter results on Slide 4. We had non-GAAP net operating earnings of about $291 million or $0.76 per share compared to net operating earnings of about $308 million or $0.82 per share in 2019. The year-over-year decline was driven primarily by increased safety O&M costs and reduced industrial demand in the electric business offset somewhat by increased revenue from base rate proceedings, our Infrastructure Replacement Programs and the effects of gas segment customer growth. As a reminder, most of the first quarter played out prior to the pandemic related shutdowns and stay-at-home orders in our states, so these results really do not reflect any meaningful COVID impact. Now turning to Slide 5, I like to briefly touch on our debt and credit profile. Our debt level as of March 31st was about $9.9 billion, of which about $7.7 billion was long-term debt. The weighted average maturity on our long-term debt was approximately 17 years and the weighted average interest rate was approximately 4.4%. At the end of the first quarter, we maintained net available liquidity of about $1.3 billion, consisting of cash and available capacity under our credit facility and our accounts receivable securitization programs. Our credit ratings from all three major rating agencies are investment grade and we're committed to maintaining our current investment grade ratings. I'd now like to turn to Slide 6, which covers our financing plan for a long-term growth investments. As we mentioned on our fourth quarter call, as a result of the CMA asset sale transaction, we no longer expect to pursue our previously planned 2020 block equity issuance. In April, we refinanced our $850 million term loan and issued $1 billion of 10-year notes at a 3.6% coupon. We expect these transactions will…

Thank you, Donald. Now let's turn to some highlights for the first quarter and early second quarter of 2020 from our gas operations on Slide 7. In Pennsylvania, we filed a base rate case last month with the Public Utility Commission seeking an annual revenue increase of $100.4 million to invest in, modernize and upgrade our existing natural gas distribution system as well as maintain the continued safety of the system. And order and new rates are expected to become effective in January 2021. The same day as our Pennsylvania rate case, we filed a petition with the PUC requesting authority to implement a temporary program that would make grants to residential customers who are experiencing a loss of income due to the COVID-19 pandemic, but who are not eligible to participate in our existing assistance programs. We proposed to use a portion of pipeline penalty credits that the PUC has previously approved for hardship funds, matched by a contribution from the NiSource Charitable Foundation to fund the grants. This is an example of how we're looking for ways to help our most vulnerable customers weather this pandemic financially, which is a priority for us across all of our states. In Ohio, the Public Utilities Commission approved our annual Infrastructure Replacement Program tracker adjustment. This order allows us to begin recovery of approximately $234 million in safety and infrastructure investments made in 2019. This well-established pipeline replacement program, authorized through 2022, covers replacement of priority mainline pipe and targeted customer service lines. New rates from this most recent filing went into effect this month. The Ohio Commission is also reviewing our latest annual adjustment request for our Capital Expenditure Program rider. This rider allows us to recover capital investments and related deferred expenses that are not recovered through the IRP.…

[Operator Instructions] Your first question comes from Shar Pourreza with Guggenheim Partners. Your line is open.

This is [Rob Porter] on for Shar. I know you guys obviously pulled 2020 guidance because of the pending sale base rate gas. But as we think 2021, prior language seems to allude 2021 should be at least as good as 2020, is that still the case and what are the drivers we should think about?

Thanks for the question. As we think about COVID and we're early on into trying to understand what this could mean to our business and the economies. I think it's little early to provide specific guidance on 2021. As we stated earlier, we haven't seen a significant impact in the first quarter, because of COVID on - from an expense standpoint or - as well as a revenue standpoint, but we do expect we will see lower customer demand and some higher bad debt expense. So I think as we get - go through the quarters, we'll be able to provide more guidance and insight as we learn what the impacts COVID will have on our business going forward. Again, we don't think it affects our long-term growth drivers, but we do want to understand how it may impact our financials this year and our starting point next year.

And your next question comes from Julien Dumoulin-Smith with Bank of America. Your line is open.

If I could follow-up on the last question - just the level set here on '21 expectation. You all talked about being largely flattish versus '20 earlier and some of that seems to be predicated on cost cuts to offset some of the - for earnings loss as part of the sale. How are you thinking about that today given - and I'm going to presuppose the certain amount of incremental cost cut as you think about '21 to offset some of the lost demand that might spill over into '21 from '20 here?

Yes, no, that's right. We continued to work on the separation plan with Eversource and for our own purposes and understanding what the dissynergies are and what are those mitigation steps to help offset some of the impact of the loss earnings from Massachusetts. Certainly COVID provide some incremental pressure as we think about operating expenses as well as cash flows and so we're working through that. At this point, not having any specifics on what the revenue impacts will be, it's - I'd say it's difficult to give any specific direction, but as we do our scenario analysis and look at potential impacts to our customers, we are taking into - we are taking that information into our analysis as we look at our own operating expenses and capital programs.

And Julien, let me just...

So just to be clear you kind of missed....

Talk a little bit of about - yeah, let me add just a little about of differentiation. When you think about the cost profile related to the CMA sale and the actions that we're taking there, those are really in the realm of changing cost structures on a permanent basis related to ongoing operations and largely across the shared enterprise platforms and in enterprise cost pools. Very different from what you might do to manage on a short-term basis through a downturn like this. Some of the discretionary spending that largely often comes back in future spending, it's timing of spending that you often look at for those kind of efforts. So I would differentiate the two efforts and highlight that our focus is on maintaining core strength for 2021 and beyond. So any cost shaping actions we'll take at the edge of this year will be to manage, as Donald said, through the tight spots here, but our core focus remains on execution capabilities and lean operating platforms for '21 and beyond. So there is a distinction there. They're - they maybe co-mingle at times but largely they're separate and distinct efforts.

Yes, I think the opportunity to...

I appreciate that.

Because we are...

If I can just clarify that. Sorry, go for it Donald. I apologize.

Yes, I'd say that because we've got a team that's focused on looking at the core operations and how we can change structure even looking at some of the temporary levers that we may be able to execute goes hand-in-hand with that work.

Got it. So if - but just to clarify, with respect to that earlier expectation of flattish guidance, you're not necessarily restating that at this point in time, given the various puts and takes here. Just want to be clear about that.

I would say that it's too early to provide that guidance for 2021, not knowing what the impact of COVID will be on the business.

Understood. And then, if I can just go quickly, how are you seeing the April sales trend thus far? I know you sort of talked here on the 1Q impact thus far, but curious, what are you currently seeing if you can, just to give us a little bit of a sense of the flavor of the order of magnitude.

Yes, we're actually closing the books this week and so I don't have any specifics I can give you just yet. We'll have that, I'd say, over the next week and as we get more information and can provide that to investors, we will do so. Yeah, the one thing that...

Okay.

That we are thinking about though, and I've said it on the - our investor fireside chat a couple of weeks ago, this part of the year is a shoulder season and so it's a lower supply and demand season. And so it's also little bit hard to translate what we'd see from an April standpoint into a long-term impact on the business as well as just understanding what businesses our customers are doing temporarily versus what they do long-term.

Your next question comes from David Peters with Wolfe Research. Your line is open.

Hope you and your families are doing well. On the RFP in Indiana, when should we expect an update on incremental CapEx opportunities and how do you guys see that shaping kind of the long-term growth trajectory of the company?

Yes, let me about the timing as we view it now and Donald can talk about the longer-term view to the extent it's coming into view at this point. So we're - as we noted earlier, we're in the negotiations phase with the bidders into the RFP. We expect to come through that here in the next few months. So I would expect to see the regulatory filings associated with that, CPCN is associated with that with the mix of PPAs and the JV tax equity structures later this summer, maybe around our Q2 call, we'll see. We'll just see how that plays out, but later this summer, we should have a lot more to talk about in terms of the mix and that would obviously lay out the timetable for investments on both sides of that equation. As it relates to the longer term CapEx and growth profile, let me ask Donald to talk about current outlook on that.

Yes, I think it's - that guidance in terms of long term growth and the 2021 base that we've talked about likely be in the third quarter, so that we can talk about, here is what we're seeing for 2021, here's what the investment plan looks like over the next horizon. And again, we expect to extend that beyond 2022 to take into account the generation investments.

Great. And then another question I had just on the 2020 CapEx. Is that $100 million being deferred until say, next year or soon after or how should we just think about that $100 million?

I'd look at it as - it's a reduction this year, but obviously, it's work that we need to do. We will have to find - determine when we would make those investments in the future. We haven't looked that far out to say what - how that might impact 2021 or 2022, but ultimately, it's long-term investments that we're making in the business.

Your next question comes from Insoo Kim with Goldman Sachs. Your line is open.

My first question is on NIPSCO electric, could you just give a little bit more color on the types of commercial and industrial business - customers that you serve?

Yes, sure, let me touch on it. I think probably, the most notable part of the profile from a low perspective is the concentration of energy intense industrials, the steel and petrochem profile that we have there. And those customers, as you may recall, are under a new rate structure that was implemented with the rate case from last year that essentially shifts the capacity commitment profile for us to the firm portion of the load and allows them to buy through to the market on a ongoing basis. A novel approach to derisk that for us and for them and for our other customers, and you will note, if you look at industrial sales, Q1 of '20 versus Q1 of '19, you'll note a decline in industrial sales, a significant portion of which is related to that buy through. So it's by design that we have some of that decline in there and we did see about a 6.5% decline on industrial electric Q1 '20 versus Q1 '19. The remainder is a pretty diverse set of sectors, the remainder of our commercial and industrial loads, pretty diverse set of sectors across a growing part of the state and so we see good diversity and good economic development there as well. We saw load and I would just highlight the load profile. If you look at the results for the quarter, on the electric side, residential load down quarter one versus quarter one of last year, same for commercial and that's been a bit of a continuing trend on use per customer. On - by contrast, on the gas side of the business, residential sales were up about 3% across our footprint year-on-year and commercial up close to 5%, all of which, as we noted before, was pre-COVID impact. So we're not really seeing COVID impacts in that. And then industrial, slightly down on the gas side. So - and we continue to see our customer count increase as we've gone through the first quarter here. We added a little more insight than you asked for, but I want to make sure the whole picture was in focus there.

That's really good color. And my other question is, can you just give an update on the latest timing of the Massachusetts DPU's investigation into the Merrimack incident and is a final outcome on that required at all to close on the utility sale?

That all remains on track. We're, as you would expect, engaged right now with stakeholders in the early phases of that process. People continue to work through that even it with the COVID implications for work from home. We've seen very good progress on that. We expect that to close, as we noted earlier on the call, by the end of the third quarter of this year, would note that there is the possibility of some slight delay just from the workload issues and the way COVID might impact just working conditions, but we're confident in that. And we are viewing that and approaching that as a combined effort to resolve all matters related to Massachusetts, including the pipeline safety investigation. So it's all essentially on the table and in the mix together.

And also just, is that outcome required for the completion of the sale to Eversource?

Well, again, it's - again we've put all of the matters together into the sale. It's an opportunity for a comprehensive package to - for NiSource to exit the state and Eversource to take the ongoing operations.

Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.

Just to be clear about the long term guidance of 5% to 7%. You indicated a base year of 2021, that base year would include - you're expecting that all of these cost savings to offset the synergies from the sale of Massachusetts, will be in that 2021 base year at that point right? There is not going to be an additional savings which would flow into 2022 and beyond?

I'd actually expect that there would be savings that are ongoing. There is timing to some of the change in operations. If you think about doing a transaction, part of the work that we've got to do to separate will take multiple years. What we've got in this agreement is a transaction services agreement that lasts up to 30 months. And so as we analyze what that TSA looks like, we expect that we'll have some savings immediately, because we won't have to do that work and we can take the advantage of those savings opportunities. But over time, as the TSA comes off as well as we make other structural changes to our cost profile, that will take a couple of years.

Got you. And you're still saying it's about a $0.05 or so of ETS synergies that you're expecting after the sale is completed?

I could see it in the range - that being in the range of savings.

On the - on generation, the new generation investments that you're expecting, you indicated there will be some financial partners involved non-related to NIPSCO. Are we talking about tax equity partners on wind projects or are we talking about something else here and what kind of an arrangement is that?

That's right, that's right. We are looking at tax equity partners to be able to take advantage of the tax credits related to those renewable investments and support the utility being able to re-base those investments.

So does that mean that at the end of the five-year period, recapture period that those tax equity partners would want to exit the investment and NIPSCO would gain more of the investment at that point, re-base would increase?

Yes. The way it's structured that over time it's a build-own-transfer arrangement. So over time, there would be steps where we would pick up more of the overall joint ventures.

Your next question comes from Chris Sighinolfi with Jefferies. Your line is open.

Maybe a follow up on that last question, Joe. Just had a - you talked about with the IRP having a combination of partners, but also things that you'd be investing yourself. I'm just wondering, how you think about the allocation of that or the breakdown of that? Is that the attributes of a particular project? Is that just the capital budget constraints of NiSource in any particular period of time? Can you just give us a sense of how you think about that component through time?

It's really about optimizing the mix and starting with cost to customer as the key driver. When we analyze the RFP and the bids, we had a mix of PPA bids, bids that could go either PPA or JV and some straight JV and as we optimize that portfolio, the 50%-ish blend is what looks like the solution set that balances best cost to customer with the right ownership structure for us and opportunities for us, all subject to continuing negotiation and continuing evaluation, but that's a - that's kind of the target zone we're operating in right now.

So I guess, as we think about the profile through time that's - that mix shift is something that could be something that's fairly constant or do you expect to have more NIPSCO participation earlier in the IRP process or later or can you give any color on that?

Yes. I think we'll take a one step at a time as we go through. We certainly want to look for ownership opportunities and investment opportunities and I would say we have a preference for that, but we want to do that in a balanced way that reflects the best interest of all of our stakeholders. And so we'll take each step in this, each tranche on a kind of an independent basis and look at the portfolio needs at a point in time.

Okay, great. I also had two other questions. I was just - clearly, there's an earlier question about and you kind of talked about the change in the NIPSCO customer set and rate dynamic maybe certainly since the last recession...

Right.

And clearly Columbia has been spun off since - Columbia Pipeline since that time, but I'm just curious, if there is any other things that you maybe have gone back through and looked at the performance of the company in '08-'09 just as like a proxy set and maybe just some of the things, if we were to do that, that you would point out that are quite a bit different this time versus that time or maybe any learnings from that time that inform how you and Donald think about the business. I know you're not giving guidance and I know you're still assessing COVID impacts and the dynamic this time is different, but there is still obviously an economic component, just curious, any thoughts on that.

Yes. It's a good, good question, because it's a reference case, but you almost use it as a reference from which you adjust what's different about today and what's different about this particular set of circumstances. And the one thing that, as we've said and Donald highlighted is difficult and you're seeing it all around is sector-by-sector, you could see very different depths and duration. Some that might bounce right back and might actually bounce back stronger, some that are likely to see a little bit slower recovery and maybe don't recover back to where they were prior to this. And it's that blend of almost sector-by-sector and across our seven states or six-states as we go into 2021, the unique blend of those different sectors that we are analyzing very carefully and trying to get indicators, if you will, of what recovery looks like. And so we're early in trying to get to the next level of detail on that, but I think ultimately, when you start to look at that, it's a very different profile than what we experienced in '08, '09 and as you noted, our mix is different. We now have, without the Pipeline Group as you noted and with the different rate structure for our large industrials more protections in place, so to speak. We're better positioned or better hedged against some of the risks we faced here. So it's really - starts to become more of a duration question I think, ultimately and that's why as we step through Q2, I think we're going to get a much better sense of what we're seeing both in April as Donald noted, we'll see that pretty soon. And then by the end of Q2, even being shoulder months for our whole business for the most part, it's more of the economic recovery that will give you the leading indicators for Q3, Q4 and beyond when we'll be out of the shoulders. So looking forward to having more depth and detail on that, I want to be careful not to try to either be overly optimistic or overly pessimistic. I think we just have to step through this with eyes wide open.

Sure. That's helpful. We'll pay attention to those data points as well. I guess, the final question from me, Joe, is just with regard to Massachusetts, I know you guys have given in your Qs the updates in terms of insurance recoveries and I know you've been somewhat cautious about anticipating any on the asset front. I'm just curious where that stands and what those discussions look like.

Yes, we're still in the midst of having discussions with our property insurer. The litigation was filed last quarter but we're - continue to have conversations. It's still too early to give any guidance on what any type of recovery might be there or the - even the timing, but I'd say that we are in constructive conversations with them.

Is there a normal like length of time that you'd anticipate, Donald, for that process to take or is it just everyone's unique in and the range is too wider to even speculate?

Yes, it is. It's - every situation is very unique in terms of the information that you're providing as well as the negotiations.

[Operator Instructions] Your next question comes from Charles Fishman with Morningstar. Your line is open.

Joe, just one maybe point of clarification on the $100 million CapEx reduction for this year. It sounded like it was more of a decision to delay some projects timing because of rate cases, the appetite of customers or regulators to take incremental rate increase, things like that rather than a supply chain issue. Is my read of that correct?

It's really neither. It's more managing cash flow through this year and recognizing we're likely in a tight spot for a little while here and want to make sure we're prudent - taking prudent steps as we go. And as noted earlier, Donald talked about it, just by the nature of our capital portfolio, it's long dated and when we take a step like this, which by the way puts us on the same profile we've been on for the last couple of years, 17 to 18 is consistent with where we've been. This year, it was elevated a bit. So it's really just timing of key initiatives and probably blended across both tracked capital, growth capital and our maintenance capital. So likely to just have a very modest effect on the future.

And then another question related to CapEx. Slide 17, which shows a recovery of those investments. Every time I look at that slide, the upper two bars seem to go higher, which is good. In other words, your recovery keeps getting shorter and more within the 18 months, you're up to, on this chart now, 80% yet down at the bottom, it says, greater than 75%, should I expect those two upper bars to come down a little or are you just little, I mean the some - greater than 75% is obviously correct, but where should we - over time, we've seen those go up, but what should we expect in the future?

Yes, it's a good insight and a good question and you may notice that we've moved 2020 into roughly $10 million, roughly $70 million, roughly $20 million, because it's the nature of the $100 million pullback and how that ultimately lands, that will move a little bit across those different categories, but your question about the long term. If you look backwards, we had some larger generation projects and larger electric transmission projects that were in the mix and that's why you'd see the more pronounced shift in the mix back a few years. As you go forward, the next couple of years, what you see here is likely to be what we'll continue to see until and unless we get to the generation investments that we've been talking about, the replacement portfolio. We'd see a couple of years there of an excursion on what we view as the periodic rate cases or the maintenance and other. We would likely see those show up in that category for a short period of time, but obviously, we'd have that combined with a regulatory strategy for those kind of investments.

There are no further questions at this time. I will now turn the call back over to Joe Hamrock for closing remarks.

Thanks, Mariyama, and thanks to all of you for your continued interest in and support of NiSource. As is the case for all of us, around the communities we serve and all of our stakeholders, we're navigating through this COVID crisis carefully and thoughtfully and we'll continue to stay transparent and talk with you about any implications we see and share any outlook on our business. We appreciate the time today and look forward to the next opportunity. Please stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.