NiSource Inc (NI) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2010 NiSource Earnings Conference Call. My name is Latasha, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the call over to Mr. Glen Kettering, Senior Vice President of Corporate Affairs. Please proceed.

Thank you and good morning. On behalf of NiSource, I'd like to welcome you to our quarterly analyst call. We thank you for taking the time to join us. Joining me this morning are Bob Skaggs, President and Chief Executive Officer, Steve Smith, Executive Vice President and Chief Financial Officer, and Randy Hullen, Director of Investor Relations. As you know, the focus of today's call is to review our financial performance for the first quarter of 2010 and provide a business update. We'll then open the call to your questions. At times during the call, we will refer to supplemental slides available on our web site at NiSource.com. I'd like to remind all of you that some of the statements made on this conference call will be forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statement. Information concerning such risks and uncertainties is included in the MD&A and risk factors section of our periodic SEC filings. And now, I'd like to turn the call over to Bob Skaggs.

Thanks, Glen. Good morning, everyone, and thanks for joining us today. In the spirit of continuous improvement, our format for today's call will be somewhat different than our prior calls. Instead of simply reviewing the contents of our quarterly earnings release, which hopefully you've had an opportunity to read by now, we're going to streamline things and focus on our financial results and the progress the team is making on our 2010 business and regulatory priorities. As part of our new approach, you'll see we've added additional supplemental slides that you can refer to on NiSource.com. We hope that you find the new format helpful and we certainly welcome your feedback.

Referring to slide three, you can see that we've delivered first quarter net operating earnings, non-GAAP, of about $200 million or $0.72 per share, compared to $0.62 per share last year. Operating earnings for the quarter were almost $405 million compared to $370 million for the same period last year. We're encouraged by these results, and believe that they demonstrate the team's continuing success in executing our balanced, low risk, investment-driven strategy for building sustainable growth and shareholder value. With this solid start to the year, we remain on track to deliver our 2010 earnings outlook of $1.10 to $1.20 per share, again, non-GAAP. Prior to reviewing our business unit results, I'll take a moment to reiterate our four part strategy to position, build, and grow NiSource. The strategy, one we've been consistently articulating and pursuing for the last five years, is summarized on slide four. Specifically, we continued to expand our gas transmission in storage business, particularly in Marcellus Shale region of Appalachia. We continue to sink our long-term utility infrastructure programs with complimentary regulatory initiatives. We continue to manage our financials in a disciplined, thoughtful manner with an unwavering focus on delivering long-term value to our shareholders and other financial stakeholders. And finally, we continue to manage costs and processes across the Corporation.

Let's now take a look at our NiSource Gas Distribution unit, or NGD, on slide five. You'll see NGD delivered operating earnings for the quarter of nearly $235 million, essentially flat to 2009. I'd note this is a bit of an apples to oranges comparison, in particular, NGD's 2010 first quarter revenues were reduced by about $20 million compared to last year as the result of Columbia Gas of Ohio's full implementation of the so-called levellized rate design, or some might say straight fix variable. This change effectively means that all of COH's fixed costs will be recovered on a fixed monthly basis going forward, versus the traditional model under which a significant portion of its costs were recovered on a volumetric basis. Because the new methodology results in a more even spread of revenues over the course of the year, the revenue decrease experienced in the first quarter will be offset over the balance of the year. I'd also note that the increased revenue from our other utilities, including the impact of recent rate cases, helped offset some of the reduced Columbia of Ohio revenue in the quarter.

Looking forward, the remainder of 2010 will be quite active for NGD as we continue to synchronize our infrastructure programs with various customer and regulatory initiatives. Let's start with Indiana. As you know, Jimmy Staton is now also leading our Indiana utilities as group CEO. Jimmy has a strong track record of developing and executing regulatory and business strategies designed to benefit customers and other key stakeholders. In Indiana, he has literally hit the ground sprinting. Just yesterday, NIPSCO filed a gas base rate case which, among other things, proposes to restore the company's earnings to an appropriate level as well as to extend low income and energy efficiency programs for customers. Notably, the filing proposes a reduction and deferral of certain depreciation expenses, which will result in improved earnings profile with virtually no impact on customers. If the case were to be resolved by the formal hearing process, it could take up to a year to do so. That said, our objective is to resolve the case via settlement by early 2011 or perhaps even sooner.

More or less simultaneously with the Indiana filing, we filed a rate case for Columbia Gas of Virginia, which is seeking about $13 million in additional revenues. The anticipated effective date of new rates is January 1, 2011. As discussed in our last earnings call, Columbia Gas of Pennsylvania, Columbia Gas of Maryland both filed rate cases in late January. The Pennsylvania case seeks an increase in base rates of approximately $32 million, while the Maryland case is seeking an adjustment of $2.2 million. New rates for these two cases are expected to be in place in the fourth quarter of this year.

Let's now take a look at our NiSource Gas Transmission and Storage business, or NGT&S. That's on slide six. In the first quarter, our NGT&S team achieved operating earnings of $125 million, an increase of nearly $15 million over the first quarter of 2009. Net revenues increased about $15 million. A significant portion of the improvement is attributable to increased firm capacity reservation fees from previously announced capital projects, including the eastern market expansion, the Ohio storage expansion, and projects to provide transportation for new Appalachian productions. Net revenues also increased as the result of the recognition of NGT&S's transfer of certain native gas volumes to our Hardy Storage Partnership. NGT&S's Appalachian projects continue to advance, including the approximately $15 million Cobb compressor station expansion that's to be placed in service later this quarter, as well as a series of Majorsville growth projects totaling about $80 million, which are expected to have a total capacity of 325,000 dekatherms per day when they're placed into service during the third quarter. Beyond these specific projects, the NGT&S team continues to develop an extensive portfolio of additional growth projects in the Marcellus region designed to meet the needs of the market, at the same time delivering attractive returns on invested capital.

Turning to our electric business, on slide seven. As you know, this is a pivotal year for our electric operations as we develop and roll out important customer programs, continue to improve the reliability of our operations, and pursue our core regulatory agenda, which collectively will position this business for long-term growth. Our electric operations reported first quarter operating earnings of approximately $46 million, an increase of about $20 million over the same period in 2009. During the quarter, we experienced lower operating expenses, as well as increased net revenues from increased usage and all systems sales, reflecting an uptick in industrial and residential demand. Although this is certainly a welcome development, we believe it's too early to identify a definitive trend. Our plan reflects a gradual economic recovery.

Shifting to our rate cases, we expect to receive an order in our 2008 electric rate case in the next few months. As we have discussed in prior calls, the case has, in a sense, been overtaken by the impacts of the economic downturn. We, nevertheless, are eagerly awaiting the Indiana commission's order in the case, as it should resolve a number of cost allocation, rate design and other issues that we hopefully can incorporate in our second electric rate case. Speaking of which, the second electric rate case is expected to be filed in the third quarter of 2010. The following will reflect recent demand and cost levels and will propose energy, efficiency and customer assistance programs. I'd also note that we're investing more than $200 million during 2010 in our electric generating fleet and distribution infrastructure, to ensure the northwest Indiana region maintains reliable access to modern, environmentally compliant, and affordable energy. Without minimizing the challenge, I'm convinced we have the correct ingredients in place to execute on our Indiana business and regulatory agenda. I look forward to providing on-going updates on future calls.

Before we close, I would like to direct your attention to one slide in the supplemental package. It's slide eight entitled Building Investment-driven Growth. This slide provides a thumbnail sketch of the regulated low-risk, fee-based platform we're building here at NiSource. It summarizes the strategic approach and projected growth rates for each of our key business units. Again, all premised on a disciplined, long-term infrastructure investment program. As I've mentioned in past calls, we believe that the optimal investment level for our stable of companies is about $1 billion annually, perhaps a bit more in some years, and a bit less in others. The key consideration for us is how best to fund these compelling growth opportunities. Although we haven't reached a definitive conclusion, I can say we're committed to doing so in a manner that creates shareholder value, maintains the dividend and preserves our investment grade credit rating.

Track up to slide nine. Number one, NiSource's overall business and financial performance for the quarter was strong, and firmly in line with our business plan. We remain committed to our 2010 non-GAAP guidance and to a long-term growth rate of 3% to 5%. Second, our aggressive regulatory and business plan at NIPSCO, while it will take additional time and considerable effort, remains on track. Third, the infrastructure investment, our gas distribution operations continues as planned, with significant benefits for customers and shareholders alike. Fourth, we're focused on explaining our competitive advantage in the Marcellus Shale play, which includes identifying, developing, and deploying infrastructure investments to meet the needs of the producers who are developing this exciting new supply resource. And finally, we're focused on building the necessary balance sheet flexibility to fund an on-going capital investment level of roughly $1 billion per year.

Before turning to questions, I want to plug our plans to hold an investor day in New York on July 22. More details will be shared in the coming months. We hope that all of you can attend, in person or virtually, to learn more about our businesses, hear our executives discuss their near and long-term strategies, and review our exciting array of investment opportunities. As always, we remain committed to communicating with our investors in a transparent and timely manner regarding these and all of our efforts. Ongoing updates will be provided through our analyst calls and news releases posted on NiSource.com Thank you for participating today, and for your continued interest and support of NiSource. LaTasha, at this point we can open the call to questions.

Thank you. (Operator Instructions) And your first question comes from the line of Paul Patterson with Glenrock Associates. Please proceed.

Good morning, it's Paul Patterson, can you hear me?

Yes, good morning, Paul.

I wanted to touch base with you on the gas case that you filed yesterday. The NIPSCO gas case. Is there any -- I'm sorry if I missed this. Is there any rate increase you guys are asking for?

There is no increase in overall revenues for the Indiana gas case. There is a very modest increase on residential customers. It's a function of rate design and the like.

Okay. When we're looking at these businesses, what kind of ROE are you guys -- what is the last 12 month ROE that you guys are getting from these businesses, roughly speaking.

Well, for virtually all of our businesses, we are earning at or near or, in some cases, a bit above allowed returns. The two notable exceptions are in Indiana on the electric side and the gas side. And we'll start with the electric side, the ROE is in the mid single digits territory. So, clearly underperforming. On the gas side of our business, that ROE is effectively zero. So, nil. Consequently, the aggressive rate activity in Indiana reflects the need to improve the earnings power of these companies.

Sure. And then, with respect to the pension cost reductions and deferrals, could you elaborate a little bit more on that, what's driving that.

Yes, let me go on and defer to Steve Smith on pension in total and more specifically,

Yes, thanks, Paul. On pension, as you know, we had a deferral approved in Ohio which helped us defer some of the costs. When you look at pension expense for 2010, incorporating our guidance, in the February call, it was in the $85 million range, for all companies. And if you look at it now, currently what we're anticipating, it will be somewhat less than that, in the $75 million plus range. So, pension expense has improved somewhat relative to 2010 guidance.

Okay. And, in terms of other taxes, I notice there seems to be some benefit there. The other taxes. I'm not talking about the tracker ones, the non-tracker ones seem to have gone down a little, and I'm just wondering if you could elaborate a little bit on that.

Well, in terms of our effective tax rate, we had a much higher effective tax rate in the first quarter of 2009. That was around 38%. When you look at the effective tax rate for the first quarter of 2010, that's closer to 36%. So, we had some benefits there, mostly driven by higher state income tax benefits and some timing differences for depreciation.

Okay. Now, that -- so, when we're looking at your guidance that you guys have, what is the effective tax rate that you guys have for that?

It is around the 36% range.

Okay. And then the other taxes, which went down, looks like about $6 million, about $7 million I guess, in the income statement. Why did that go down?

We'll have to get that for you, Paul.

Okay. Thanks so much, guys.

Paul, I would suggest if you have detailed questions of that nature, maybe you could call Randy Hullen immediately after the call and he'll be more than happy to drill down on that sort of thing for you.

Okay. Thanks a lot, guys.

Okay, thank you.

Your next question comes from the line of Paul Ridzon with KeyBanc. Please proceed.

Good morning, Paul.

Good morning. How are you?

Doing well. We feel good about the quarter.

Excuse me?

We feel good about the quarter.

What are you asking for as far as the depreciation change in Indiana Gas?

The Indiana Gas's depreciation change is going to amount to about $50 million. About reduction. Right now, it is roughly $90 million. We would reduce that by about $50 million. $25 million of that give or take would be a deferral of depreciation expense for six years or so. And the balance of the reduction is a reduction of the depreciation rate from roughly 5% to roughly 1.5%. So, that's the way the reduction is layered.

That sounds like it should be pretty non-controversial.

Well, I think we're going to have to work through this. This is a bit unconventional, and we're going to have to work with the stakeholders to ensure there is good understanding of what we're proposing.

And, then, given what you see as your investment opportunities moving a little bit north, are you thinking about an MLP at this point?

Working with the board, we continue to review the MLP, a couple dimensions to that. On-going review is number one, what help it will provide, in the way of financing, And then secondly, what will it do for us commercially. So, we're taking a very thoughtful look. It is strategic in nature. And we're approaching it in that way. So, work continues, and, in fact, we'll be having board meetings next week and this will be a topic of conversation.

Then, where are industrial sales, relative to how you were thinking about the world back in February.

They're ticking up a bit. Both on the gas and on the electric side. But I'd emphasize the term ticking up. So, they are exceeding our expectations, but only marginally. And, we believe it is going to have to be proven out.

And then finally, what was the magnitude of the gain of transferring gas to Hardy?

Roughly $8 million pretax.

Thank you very much.

Okay. Maybe just an editorial note on the transfer of the native gas, Paul, I did see your report earlier today. Question whether it is in fact recurring. We've had a history of storage gas sales, transfers, dispositions, we've also done the same with gas reserves, right-of-ways and other core assets. So, we do consider it part of our on-going business, as opposed to being extraordinary, we're on continually seeking value from our core assets. I think that's just one good example of finding value and we'll continue to do so.

I understand. Thank you.

Yes.

Your next question comes from the line of Barry Klein. Please proceed.

Hey, guys.

Hey, Barry. How are you?

Hey, just one last -- one follow-up on the NIPSCO gas case. I figured everyone else asked it as their first question, so I might as well follow the trend. There's not much of an increase in rates, the depreciation change of about $50 million. As far as it rolls down to the operating income line, would the pretty much the $50 million would be the impact on EBIT?

Give or take, that's a good analysis.

Okay.

That's right.

Okay, great. Then, with the change in the Ohio rate structure, in the past, you've given a sensitivity I think to changes in weather and degree days. Is there a new sensitivity now on any changes in degree days?

Well, you know, it's very little sensitivity now, when you're on a levellized rate design, it effectively normalizes for weather and throughput.

Okay. So, if there -- if we see favorable or unfavorable weather from quarter to quarter, the impact on overall earnings from weather, is there -- there's still somewhat of an impact, right? From their service areas?

Somewhat but it is relatively nominal.

Okay.

Relatively nominal. We'll certainly give you those impacts and you'll see it in the reconciling schedule one in the earnings release. So, we'll give you that information. But it's -- we've really dampened the impact of weather and demand in Ohio.

Gotcha. And then with regard to -- I'm sorry?

I didn't say anything.

Okay. With regard to the electric operations, the net revenue, excluding the trackers, were up as a result of industrial and residential customer margins. On the residential side, it didn't look like there was a big tickup in volumes. Was there a change in the unit margins?

No. It was primarily driven by the increased deliveries and again, the uptick is relatively nominal. It is about $2 million quarter over quarter. It is not a big number.

From the residential side.

From the residential side.

And then the industrial makes up the --

About $10 million.

Okay. Thanks a lot.

Thank you.

Your next question comes from the line of Jonathan with Wells Fargo. Please proceed.

Good morning, guys. Nice quarter.

Yes, thank you.

We appreciate that.

Just I wanted to follow up on the MLP question, and I know you're very early stages looking at this, but perhaps you can maybe give us some color on what type of strategy, if you were to pursue it, would it be a drop down type strategy or would you follow more of the Williams type strategy? How do you see that unfolding?

Yes, too early to really give you much more color on that. We're certainly looking at the alternatives and you've kind of nailed the book ends but we could consider a small MLP that would be analogous, let's say to a spectra, or we could look at the bigger one that Williams has announced. Or frankly, something in between. Our prior experience with the MLP world was gosh, three or four years ago, when we did file an S1, you may recall that that S1 was predicated on a small, let's call it drop down, sort of MLP. So, that's been our history again. We'll give this a good, thorough look. But at this point, I don't have any bias to share with you or additional color other than we are going through that structured analysis.

So, would you see it more as a way to close the valuation gap, or would you see it as more of a financing vehicle.

Yes, that's what I meant to convey in my earlier comments. We're, again, considering those strategic or value considerations. What will it do for us financing-wise, what might it do for us valuation, and then also commercially, strategically, what will it do for us? So, those are sort of things that we're working toward our board's finance committee as we speak.

Okay, great. And, any type of time line where we think we might have more definitive answers around that?

Obviously the analysis will progress over the course of the summer and this call, AGA, certainly the investor day, we'll continue to give you an update and a progress report on the analysis.

Okay, thanks. I appreciate the time.

Yes, thank you.

(Operator Instructions) Your next question comes from the line of Carl Kirst with BMO Capital. Please proceed.

Thanks. Good morning, everybody. Nice quarter as well.

Hey, thank you.

Couple of questions, and why not start with NIPSCO Gas.

Right. As opposed to NIPSCO Electric?

Well, you know, Indiana gas. The question was just, as we change the depreciation, would that have any bearing as you -- as you look out over the next several years from a capital expenditure stance, would that change any of your thoughts of how much money we'd be spending there?

Oh, gosh, Carl, I think it's -- I think CapEx decision considerations stands on its own.

Okay.

We're going to look at the needs of that system and invest appropriately. I would just again give you an editorial. The NIPSCO Gas system is in exceedingly good shape. There is virtually no bare steel. So it's a very modern, safe, reliable system. So, just keep that in mind when you analyze that company.

Okay, I appreciate --

Currently, we're spending about -- between $35 million and $40 million annually, at NIPSCO gas. I think that's probably a pretty good representative spend.

So, that's essentially what the depreciation would be going down to?

Effectively, yes.

All right. So, that's sort of resynchronizing that. And, then, last question, if I could, what is the current state of the natural gas marketing effort.

You'll have to help me on that one, Carl. The disposition of our nonregulated units?

Correct.

We're in wind down mode for those units.

Okay. Was that a material contributor or detractor to the quarter? Just out of curiosity?

Nil. Virtually nothing.

All right. Thank you.

Yes, thank you.

I show no further questions in the queue. I would now like to turn the call over for any closing remarks.

Thank you and again, just to thank everyone for your participation, interest and supporting another plug for the upcoming investor day, which Glen, help me with the date again, it's July 22?

July 22.

July 22. So, again, thank you for your participation and support. Have a good day!

This concludes the presentation. You may all now disconnect.