Capex Execution Begins: Zachry Validates NiSource's Data Centre Pivot

Capex Execution Begins: Zachry Validates NiSource's Data Centre Pivot#

From Guidance to Contractor Commitment#

The announcement on October 30 that Zachry Group has secured the engineering, procurement, and construction contract for NiSource's Combined Cycle Generation Project would ordinarily represent routine infrastructure news, the kind of press release that equity market watchers might skim and discard within seconds. Yet in the context of NI's strategic transformation—a utility pivoting from regulated commodity operations to hybrid data centre operator—the Zachry award carries disproportionate significance. It represents the moment in which the company's capex guidance, announced just one day prior alongside third-quarter earnings, transitions from aspiration to executable reality. The speed with which NI moved from earning guidance to contractor engagement signals a level of operational preparation that few equity investors have fully appreciated. Major engineering and construction firms such as Zachry do not award contracts on whimsy; they conduct due diligence on project parameters, customer creditworthiness, and timeline feasibility before committing balance sheet and reputation. The Zachry award, therefore, implies that NI's undisclosed data centre customer—almost certainly one of the major hyperscalers such as Google, Microsoft, Amazon, Meta, or Nvidia—has satisfied Zachry's creditworthiness standards and that the project parameters are sufficiently mature to warrant contractor mobilization.

For investors who were sceptical about NI's ability to translate the announced $28.0 billion capital expenditure plan into reality, the Zachry contract provides crucial reassurance. The previous day's earnings release outlined the transformation: a $28.0 billion capex plan extending through 2033, with $7.0 billion allocated to data centre infrastructure and generation capacity—representing nearly 25 per cent of the total capital deployment and signalling the company's willingness to restructure its balance sheet around this opportunity. That announcement, while strategically significant, remained a projection, a management commitment subject to the vagaries of execution risk, regulatory approvals, and customer relationship stability. The Zachry contract award moves the needle decisively: it converts capital guidance into a binding commercial obligation with a tier-one engineering partner. This distinction is not semantic; it is a material reduction in execution risk, the very constraint that NI's management identified as the second-order risk in the company's multi-decade data centre growth thesis.

Zachry Group specialises in utility-scale power generation, with particular expertise in combined-cycle plants—the preferred technology for data centre power infrastructure. Combined-cycle units are prized for their efficiency, their ability to ramp capacity flexibly (essential for data centre workload variability), and their integration with modern control systems that meet the operational demands of hyperscaler customers. Zachry's track record on similar projects is unblemished by the cost overruns and timeline delays that have plagued many utility construction efforts in recent years. By selecting Zachry rather than a regional contractor or in-house engineering team, NI has signalled its commitment to capital discipline and its willingness to absorb EPC costs in exchange for de-risking execution. This choice, while more expensive in the near term, substantially reduces the probability of the multi-year delays and cost inflation that have historically constrained utility capex returns.

The Hybrid Utility Model Attracting Tier-One Partners#

The GenCo regulatory approval granted by the Indiana Utility Regulatory Commission in NI's third-quarter disclosures created the legal and regulatory architecture within which a hybrid utility model could flourish. However, regulatory permission is a necessary but insufficient condition for execution; the real test of the model's viability arrives when sophisticated counterparties—contractors, lenders, and customers—are willing to invest capital and reputation in the enterprise. Zachry's decision to contract with NI for the combined-cycle generation project provides that validation. The partnership signals that Zachry believes the regulatory framework is durable, the customer relationship is creditworthy, and the technology stack is proven. For NI, this vote of confidence from a tier-one contractor is as material as the contract itself.

The GenCo model operates on a elegant economic principle: NI establishes a regulated subsidiary (GenCo LLC) that owns and operates generation assets dedicated to serving data centre customers. Unlike traditional independent power producers, which must compete in open markets and bear demand risk, GenCo can contract directly with the hyperscaler customer on a take-or-pay basis. This contract structure de-risks the utility's cash flows and allows for capital deployment at scales that conventional rate-base expansion could never support. Once the generation asset is constructed, the regulated utility recovers the capital investment through either the long-term customer contract (if the hyperscaler is willing to bear the capex risk) or through rate recovery (if the state regulatory commission permits GenCo to include the asset in the rate base). Either way, NI's capital deployment is substantially de-risked relative to traditional utility capex, which is subject to regulatory approval, rate-base inclusion, and the uncertain timing of cost recovery.

The dual-track guidance that NI introduced in its October 29 earnings release reflects this structural shift. The company now provides "base plan adjusted EPS" guidance (excluding data centre operations), expected to grow at 6 to 8 per cent annually from 2026 through 2030, driven by traditional regulated utility levers: rate-base growth, capital cost recovery, and operational efficiency. Simultaneously, NI provides "consolidated adjusted EPS" guidance, projecting 8 to 9 per cent compound annual growth from 2026 through 2033—a material uplift attributable entirely to data centre operations and long-term customer contracts. The 2026 consolidated guidance of $2.02 to $2.07 per share represents approximately 7 to 10 per cent growth from the 2025 upper-half guidance of $1.85 to $1.89 per share, a pace of earnings expansion that commands institutional investor attention in the utility sector. Zachry's willingness to partner with NI adds credibility to this consolidated guidance framework; it signals that the company has de-risked the execution pathway to achieving these targets through selective engagement with proven construction partners.

The timeline implicit in Zachry's contract mobilization is equally important. Major EPC contractors stage their projects in phases: mobilisation of site personnel and equipment, procurement of long-lead items, construction of the power plant structure, installation of generation machinery, integration testing, and final commissioning. If Zachry mobilises in the fourth quarter of 2025 or first quarter of 2026—which the speed of the contract award suggests is plausible—then the company is on pace to reach initial generation capacity in 2026 or early 2027. This timeline is consistent with NI's 2026 guidance of $2.02 to $2.07 per share, which implicitly assumes that data centre operations will contribute modestly to near-term earnings as capex deployment accelerates. The Zachry contract, therefore, provides independent validation that management's timeline assumptions are credible.

Customer Concentration Risk Persists, Yet Mitigants Emerge#

The Creditworthiness Implicit in Contractor Selection#

The thorniest aspect of NI's data centre strategy remains customer concentration: the company has not disclosed the identity of the hyperscaler customer that prompted the $28.0 billion capex escalation and the extended guidance through 2033. This silence is commercially prudent—data centre operators routinely demand confidentiality in public utility contracts—but it creates a material information asymmetry for equity investors. If the customer is a strong, credit-worthy hyperscaler such as Google, Microsoft, Amazon, Meta, or Nvidia, then the risk profile is manageable; these firms have investment-grade credit ratings and multi-decade track records of stable operations. If, conversely, the customer is a smaller, more speculative data centre operator or a private equity-backed entity with higher leverage and execution risk, then NI's earnings thesis becomes substantially riskier. The company's silence on the customer's identity makes it impossible to quantify this downside analytically.

However, the Zachry contract award provides an indirect but meaningful signal of the customer's creditworthiness. Zachry, as a tier-one EPC contractor, has reputational and financial incentives to partner only with creditworthy counterparties whose projects have high probability of success. If Zachry believed that the hyperscaler customer was financially fragile or that the project parameters were uncommercial, the contractor would likely demand higher fees, extended timelines, or explicit performance bonds to mitigate its exposure. The fact that Zachry was willing to contract on standard commercial terms (based on the speed and apparent straightforwardness of the announcement) implies that the contractor's due diligence on the customer uncovered no disqualifying risks. This inference is not definitive, but it is material: Zachry's willingness to engage effectively serves as a third-party validation of the customer's creditworthiness.

Furthermore, Zachry's involvement signals that the project contract includes detailed performance milestones and take-or-pay provisions that protect both NI and the contractor. Standard EPC contracts in utility-scale generation define specific deliverables (generation capacity, efficiency ratings, uptime standards), completion timelines, penalty provisions for delays, and performance guarantees. If the hyperscaler customer were not creditworthy or was unwilling to commit to take-or-pay terms, Zachry would likely decline the engagement or demand significantly enhanced protections. The contractor's apparent comfort with the project parameters suggests that these protections are in place and that the customer has committed to long-term capacity commitments and associated payments. For NI shareholders, this implicit validation of the contract structure is a material de-risking factor that was not available when the $28.0 billion capex guidance was first announced.

Optionality and the Path to Diversification#

NI's extended guidance through 2033 and Chief Executive Lloyd Yates's confidence in the company's ability to execute on the multi-decade capex plan imply that management anticipates either exceptional stability from the initial hyperscaler customer or the ability to diversify the customer base over time. The silence on customer identity and the concentration of the capex plan around data centre infrastructure suggest that the initial phase of the strategy is heavily dependent on a single customer. However, the multi-year guidance timeline offers a pathway for diversification: once the generation and transmission infrastructure is in place, incremental data centre customers can be added at relatively lower capex intensity. A second hyperscaler customer, for example, might require only 20 to 40 per cent of the incremental infrastructure that the first customer demanded, because the core generation and transmission backbone would already be in place.

This optionality creates a subtle but important upside to the current guidance framework. If NI successfully executes on the Zachry-led generation project and achieves the 2026 guidance targets, the company will have demonstrated proof of concept for the data centre business model. This track record would substantially ease the company's ability to attract additional hyperscaler customers and to negotiate more favourable contract terms. Conversely, if NI stumbles on execution—if Zachry encounters delays, if the initial customer pivots or renegotiates terms, if regulatory complications emerge—then the path to diversification narrows considerably, and the company's growth profile reverts to the constrained base plan trajectory of 6 to 8 per cent annual EPS growth. The binary nature of the execution risk is one reason why institutional investors should track quarterly disclosures intensely for evidence of management commentary on additional data centre customer acquisition or the potential for contract diversification.

The competitive moat embedded in the Zachry infrastructure strategy deserves emphasis. Once NI has built and operationalized the generation and transmission infrastructure for the initial hyperscaler customer, the company becomes the natural, lowest-cost counterparty for incremental data centre customers in the region. Subsequent customers would avoid the need to finance and construct parallel infrastructure; they could plug into NI's existing generation and transmission backbone and negotiate transmission and distribution rates that are lower than the cost of building alternative infrastructure. This switching-cost advantage—a classic utility moat—becomes more pronounced the more data centre customers NI accumulates. For a utility, this represents a rare opportunity to build durable competitive advantage in an emerging, high-margin segment of the power market. Zachry's partnership is the first step in materializing that moat.

Capital Intensity and the Investment-Grade Preservation Constraint#

Stage-Gated Capital Deployment and Credit Rating Discipline#

The $28.0 billion capex plan extending through 2033 translates to approximately $3.5 billion in average annual capital deployment—a marked escalation from NI's historical capex trajectory and one that will test management's ability to preserve the company's investment-grade credit rating. For a utility with a market capitalisation in the $40 to $50 billion range, this capex intensity requires careful financing discipline and strategic optionality. NI must fund this capex through a combination of retained earnings, debt capital markets issuance, and potentially equity raises. The regulatory framework—in particular, the GenCo model's de-risked cash flows—provides substantial flexibility on the financing mix, but the company remains constrained by credit rating agency expectations and the broad institutional investor base that requires investment-grade status as a precondition for portfolio inclusion.

Management has implicitly committed to preserving an investment-grade credit rating throughout this capex cycle, a constraint that will discipline both the magnitude and timing of capital deployment. Utilities that lose investment-grade status—dropping to speculative grade or "junk" status—face material increases in funding costs, with borrowing rates potentially rising by 300 to 500 basis points. This cost inflation creates a negative feedback loop: higher funding costs reduce project returns, constraining growth optionality, and potentially forcing further cuts to discretionary capex. By anchoring its capex plan to credit rating preservation, NI is effectively signalling that it believes the data centre contracts will generate sufficient cash flows to manage the debt load over time while maintaining leverage ratios acceptable to credit rating agencies.

The Zachry contract award provides independent validation that management's financing assumptions are realistic. An EPC contractor of Zachry's stature will have conducted independent due diligence not only on the project itself but also on NI's financial capacity to fund the project through completion. If Zachry believed that NI faced material refinancing risk or was likely to encounter credit rating downgrades that would impair its ability to fund the project, the contractor would likely demand enhanced protections or stage payments more conservatively. The fact that Zachry was willing to engage on what appears to be standard commercial terms suggests that the contractor's financial advisors are confident in NI's funding capacity and credit trajectory.

The stage-gated nature of EPC project execution provides additional flexibility on the capital deployment timeline. Major generation projects are typically structured in phases: mobilisation and initial procurement during the first 6 to 12 months, main construction during the subsequent 12 to 24 months, and testing and commissioning during the final 6 to 12 months. This phasing allows NI to spread capital deployment across multiple fiscal years and to adjust the pace based on project milestones, market conditions, and customer demand signals. If Zachry encounters supply chain constraints or delays in long-lead procurement, the company has the option to slow mobilisation without incurring penalty. Conversely, if the project progresses ahead of schedule, NI can accelerate capex deployment to bring revenue online earlier. This flexibility is a material advantage relative to utilities that commit to fixed, upfront capex budgets with no recourse to project velocity adjustments.

The 2026 Earnings Inflection and Multi-Year Visibility#

The 2026 consolidated adjusted EPS guidance of $2.02 to $2.07 per share—representing 7 to 10 per cent growth from the 2025 upper-half guidance of $1.85 to $1.89—represents the near-term execution hurdle that NI must clear to validate the multi-decade capex thesis. This target is achievable but not trivial; it requires that the base plan delivers 6 to 8 per cent growth (roughly $1.91 to $1.95 in adjusted EPS) and that early-stage data centre operations contribute $0.11 to $0.16 in incremental EPS. The Zachry contract award supports this pathway: if mobilisation begins in late 2025 or early 2026, the project could reach operational milestones (partial generation capacity, initial customer loading) by late 2026 or early 2027, allowing NI to record incremental revenue in the back half of 2026 and full-year 2027.

If NI successfully executes on the 2026 guidance, the investment thesis enters a validation phase that should support a meaningful equity re-rating. Utilities with visible, multi-decade earnings growth and de-risked capex typically command premium valuations relative to peers with constrained growth profiles. The current NI valuation likely reflects scepticism about execution risk and the durability of the data centre customer relationship. As NI progresses through milestones—Zachry mobilisation, initial generation capacity commissioning, evidence of additional customer interest—the equity market should progressively de-rate the execution risk premium and re-rate the stock toward peers with similar visibility and growth profiles. This re-rating dynamic is a material upside factor for long-term investors who can tolerate the near-term volatility inherent in any major strategic pivot.

Conversely, if NI stumbles on the 2026 guidance, the thesis unravels. A miss on 2026 consolidated EPS—whether due to project delays, customer renegotiation, or base plan operational challenges—would force a material revision of the multi-year guidance and likely trigger a sharp repricing of the stock to reflect heightened execution risk. This binary outcome is one reason why credit rating agencies and institutional equity investors will scrutinise quarterly earnings updates and management guidance revisions with particular intensity over the next 6 to 12 months. The October 2025 earnings cycle has positioned NI as a critical execution test; Zachry's contract award has raised the stakes by moving from guidance to contracted reality.

Outlook#

Execution Pace, Not Just Terminal Guidance#

The immediate narrative surrounding NI has shifted decisively from "ambitious capex guidance" to "execution begins." The Zachry contract award, arriving within hours of the October 29 earnings release, confirms that the company is not merely projecting a strategic transformation but is actively operationalizing it through engagement with tier-one contractors and credible customers. Over the next 12 to 24 months, the critical questions for equity investors will centre on execution pace: Is Zachry mobilising on schedule? Are long-lead procurement items arriving on time? Is the initial customer loading aligned with project timelines? Are credit rating agencies maintaining stable ratings despite the elevated capex intensity? The answers to these questions will determine whether the 2026 guidance is achievable and whether the multi-decade growth thesis retains credibility.

For equity investors and credit analysts, the execution timeline embedded in the Zachry contract is the critical variable. Major EPC contractors do not accelerate mobilisation on whimsy; the speed with which Zachry moved from announcement to award signals that the project parameters, timelines, and customer commitments are sufficiently defined to warrant immediate action. If Zachry begins site mobilisation in late 2025 or early 2026, as the press release timing suggests is plausible, then the trajectory toward initial generation capacity in 2026-2027 becomes credible. Management's 2026 consolidated adjusted EPS guidance of $2.02 to $2.07 per share will hinge on whether early-stage data centre operations contribute modestly to earnings during the back half of 2026 and ramp in 2027. The market will scrutinize management's quarterly updates for evidence of project progress, capex spending pace, and any commentary on the pace of customer loading. Institutional investors who have been sceptical about NI's ability to execute should begin to recalibrate their risk assessments as tangible evidence of project advancement materializes.

Near-Term Catalysts and Risk Factors#

The near-term catalysts for NI are clear. First, evidence of Zachry project mobilisation in late 2025 or early 2026 would signal that the company is on track for the 2026 guidance. Management's quarterly earnings calls over the next 6 to 12 months will be scrutinised for commentary on project progress, spending pace, and timeline milestones. Second, any indication of additional data centre customer acquisition or contract discussions would substantially elevate the long-term growth thesis by demonstrating that the initial hyperscaler is not a one-off opportunity but rather the foundation for a diversified customer base. Management has historically been silent on customer development pipelines, but equity investors should press for qualitative guidance on the multi-customer potential. Third, the absence of cost overruns, force majeure events, or regulatory complications would reinforce confidence in the execution pathway. Utility construction is notoriously subject to delays and cost inflation; a disciplined, on-schedule, on-budget performance by Zachry would be exceptional and would warrant re-rating of the stock.

The primary downside risks centre on execution failure and customer concentration. If the Zachry project encounters significant delays or cost overruns, NI would face pressure to revise 2026 guidance downward, potentially triggering a sharp equity repricing. Similarly, if the undisclosed hyperscaler customer renegotiates contract terms, withdraws its commitment, or faces financial distress, the entire data centre thesis collapses. Management's silence on the customer's identity creates an irreducible information asymmetry that investors must accept as a cost of the investment thesis. The Zachry contract provides some reassurance that the customer is creditworthy, but it is not a guarantee against future complications. Additionally, credit rating agencies may view the elevated capex intensity with scepticism; a downgrade to sub-investment-grade status would substantially increase funding costs and potentially force a material deceleration of the capex plan.

The Multi-Decade Growth Runway, Now in Motion#

For institutional investors, the October 30 Zachry contract award represents confirmation that NI's multi-decade data centre growth thesis is not theoretical but is entering the execution phase. The company has moved beyond the commodity utility paradigm into a hybrid model in which contract-backed capital deployment and operational discipline will drive earnings expansion for the next decade and beyond. The quarterly earnings miss that initially appeared to validate investor scepticism about NI's operational performance now reads as a temporary headwind offset by an exceptional strategic opportunity. The Zachry partnership validates that management's capex acceleration is credible and that the company has access to tier-one contractors willing to stake their reputation on the project's viability. Investors who can tolerate the execution risks inherent in a major utility transformation have found a compelling opportunity in NI—one that is transitioning from guidance to reality.

The path forward for NI is clear but not without peril. Success requires flawless execution by Zachry and NI over the next 18 to 24 months—mobilisation, long-lead procurement, construction, and initial commissioning must proceed on schedule and within budget. Success also requires that the undisclosed hyperscaler customer remains stable, committed, and willing to honour its take-or-pay contract commitments. Should these conditions hold, the market should progressively recalibrate its valuation of NI to reflect the multi-decade earnings visibility embedded in the data centre contracts. Failure on any dimension—execution delays, cost overruns, customer instability—would create a sharp negative reset for the stock and force management to revise guidance materially downward. The binary nature of this outcome is precisely why the Zachry contract award matters so profoundly: it transforms NI from a utility with theoretical growth potential into a utility where execution is now underway, measurable, and subject to near-term validation.