NiSource Inc (NI) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Q2 2010 NiSource earnings conference call. My name is Katelyn and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today, 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 this morning. With me this morning are Bob Skaggs, President and Chief Executive Officer, Steve Smith, Executive Vice President and Chief Financial Officer, and Randy Huland, Managing Director of Investor Relations. As you know, the focus of today's call is to review our financial performance for the second quarter of 2010 and provide a business update. We will then open the call to your questions. At times during the call, we will refer to the supplemental slides available on our website at nisource.com. I'd like to remind all of you that some of the statements made on this call will be forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. Information concerning risk factors and uncertainties is included in the MD&A and risk factors sections of our periodic SEC filings. And now I'd like to turn the call over to Bob Skaggs.

Thank you Glen, good morning and thanks for joining us today. Prior to reviewing our Q2 financial results, I want to thank those of you who participated in person or virtually in NiSources July 22 investor day - our first in over five years. It was a privilege for the NiSource team, our business unit CEOs, Jimmy Staton and Chris Helms, and our CFO, Steve Smith to provide an in-depth profile of the Company and its business segment strategies and to detail the deep inventory of investment driven growth opportunities at each of our units. Again, we appreciate your interest and time invested to learn more about our business, our core strategy and ultimately, why we believe that NiSource presents a compelling investment proposition. As a reminder, if you weren't able to join us, you can access our investor day presentations in a full transcript at NiSource.com. In particular, I would suggest taking a look at our investor day fly deck. It provides a crisp 'why' NiSource is such an attractive investment.

Let's turn to our second quarter results in the supplemental slots that are available on NiSource.com. On slide three, you can see that we delivered second quarter net operating earnings, non-GAAP, of $37 million or $0.13 per share compared to $0.02 per share last year. Operating earnings for the quarter were $154 million, compared to $117 million for the same period last year. As these strong results demonstrate, the NiSource team continues to execute on our balanced, low risk infrastructure investment driven strategy for building sustainable growth and shareholder value. As we pass the halfway mark in 2010, I'm pleased to note that our financial performance is in line with our plan and we remain on track to deliver our non-GAAP 2010 earnings outlook of $1.10 to $1.20 per share.

Before drilling into our second quarter results, let's spend a moment on NiSource's strategic framework. Slide four of our supplemental package outlines NiSource's aspiration, our investment value proposition and our balanced, four part business strategy. Most of you have seen this, but I think it bears ongoing emphasis. This is the fundamental plan that has underpinned our business over the last five years and that drives our team's performance day in and day out, year after year. I would add that slide ten in the appendix, provides a good snapshot of how we think about each business unit going forward.

Let's now take a look at our second quarter results, starting with NiSource gas distribution or NGD, on slide five. You'll see NGD delivered operating earnings for the quarter of nearly $36 million, up from $7.5 million dollars in 2009. Revenues for the quarter were up about $35 million, primarily due to ongoing regulatory initiatives and infrastructure investments, as well as the effect of rate increases at a number of our utilities. Contributing to NGD's 2010 second quarter revenue increase was Colombia Gas of Ohio's full implementation of a levelized rate design provided for in its 2008 rate case settlement. This rate design change effectively means that CoH's fixed cost will be recovered as a fixed monthly charge, versus a volume metric rate design. This fundamental change is representative of similar steps we are taking at all of our gas distribution companies.

Turning to NGD's growth initiatives, a key milestone on the infrastructure investment front was Colombia Gas of Virginia's completion of the Bear Garden expansion project, the largest new business project in NGD's history. That project serves Dominion Virginia Power's 580 mega watt natural gas fire generating station in Buckingham County, Virginia. Demonstrating our team's ability to execute this construction project was completed on schedule and well within budget.

The NGD regulatory teams continue to make progress on the rate case front during the quarter. In Pennsylvania, we have a settlement on file, and late last week the administrative law judge issued a recommended decision, approving the settlement as filed. Pending Pennsylvania public utility commission approval, new rates are anticipated to be in place early in the fourth quarter. As you know, we also had a case pending in Virginia which we expect to resolve through settlement prior to year's end.

We also filed a gas rate case during the Q2 at Northern Indiana Public Service Company, or NIPSCO, and the NIPSCO regulatory team is actively pursuing settlement of that case with its stake holders. As we discussed during our first quarter earnings call in early May, this case proposes to restore NIPSCO's earnings to an appropriate level with virtually no impact on customers. The filing also contains a proposal to extend low income and energy efficiency programs providing customers with tools to reduce their energy consumption and manage costs. So our NGD team continues to deliver strong, balanced performance across the customer, operational, regulatory and financial dimensions. And because of this consistent execution, we remain confident that our investment driven strategy will deliver earnings growth at this segment of approximately 3% per year over the long-term.

Let's now take a look at NiSource gas transmission and storage or NGT&S, highlighted on slide six. In the second quarter, our NGT&S team achieved operating earnings of about $75 million, compared to $81 million in 2009. For the six months, the segment's operating earnings were about $201 million, or nearly $9 million over last year's level. Second quarter net revenues at NGT&S increased $7 million, driven by growth projects placed into service in 2009, as well as increased customer demand margins. I would note that the revenue increase is net of a reduction in short-term part and loan type businesses of about $5 million for the quarter, reflecting relatively modest seasonal price spreads and market volatility, compared to last year. Operating expenses were up in the second quarter, primarily due to the timing of expenditures, and increased spending in our pipeline integrity management program.

Turning to NGT&S's growth initiatives during the quarter, our NGT&S team continued to execute on expansion projects in the Marcellus Shale region where NGT&S's has one of the area's most, if not the most extensive pipeline and storage footprint. The team placed the Cobb compressor station project into service in May. This $15 million project, built on schedule and on budget, will provide Appalacian producers with over 25,000 dekatherms per day of long-term firm transportation service. The team also advanced a series of projects in the Majorsville, Pennsylvania area that supports increased production from the Marcellus region. Majorsville is an anchor project for us in southwestern Pennsylvania, representing an investment of nearly $80 million that will provide increased capacity of nearly 325,000 dekatherms per day when placed into service in the Q3.

These projects will be gathering gas from key Marcellus producers, including Range Resources and Chesapeake, into a processing plant being built by Mark West, which can provide 120 million cubit feet per day of processing capacity. Mark West also recently announced plans to more than double the plants capacity in 2011. As Chris Helms covered in his investor day presentation, over the course of the next several years, we anticipate making Marcellus area growth project investments of approximately $200 million annually, following the disciplined strategy of aggregating supply, transporting gas to and from market centers, as well as providing downstream transportation and storage services.

Turning now to NIPSCO's electric business on slide seven, NIPSCO Electric reported second quarter operating earnings of approximately $48 million, an increase of about $17 million over the same period in 2009. Consistent with the first quarter, NIPSCO saw an increase in its industrial and residential margins that helped drive a revenue increase of about $27 million. Operating expenses increased by about $10 million over last year's levels, due primarily to property taxes, and storm damage costs. Although much work remains to be done as we work to restore NIPSCO Electric's earns power and position it to grow on a long-term basis, we are encouraged by this year's progress made by Jimmy Staton and his team.

In addition to improved financial results, the NIPSCO team is dramatically improving its operating and customer service metrics, as well as advancing its key regulatory agenda. Notably generation reliability is improved by 40%, and now these duration times have been reduced by 35%. Another notable example of progress being made by the NIPSCO team is reflected in JD Powers's 2010 electric utility residential customer satisfaction study, which showed that NIPSCO was among the top performers in the nation driving improved residential customer satisfaction levels. I would also note that on the gas side, NIPSCO climbed to fourth place out of 17 utilities in JD Powers's Midwest large segment, residential natural gas satisfaction survey released this quarter. NIPSCO's focus on its customers sharpened yet again in June with the filing at the Indiana Utility Regulatory Commission, or IURC, to expand customer efficiency programs. The programs include appliance rebates and recycling, low income weatherization, air conditioning cycling,energy audits and new construction incentives, again, with the objective of helping customers actively manage their energy costs.

Turning to NIPSCO's regulatory agenda, on the rate case front as most of you are aware our 2008 rate case remains pending with the IURC. Our current expectation is we will see an order in the third quarter. Just a reminder as we discussed on a number of occasions, an additional NIPSCO Electric rate case is expected to be filed in the fall of this year. We are planning a very straightforward case, with the filing reflecting recent demand and costs levels, plus enhanced energy efficiency in customer assistance programs. The core objective of the second rate case is to restore NIPSCO Electric's earnings to an appropriate level and to do so in a manner that is responsive to the interests of its customers and its other key stake holders. Our goal is to have a resolution of that case in place by late 2011, or early 2012.

To wrap-up with slide a, NiSource's overall business and financial performance for the quarter was quite strong and firmly in line with our business plan. We remain committed to our 2010 net operating earnings guidance and to delivering on our outlook for the fourth consecutive year. Looking forward, our approach to infrastructure investment and growth opportunities will remain thoughtful and straightforward. Focused on meeting our customer needs and on making investments that create value for our shareholders. This disciplined development approach has served us well and it's one we'll continue to follow religiously.

Finally, as we emphasized during the course of our investment day discussions, one of NiSource's fundamental objections continues to be to increase the level of our infrastructure investments to about $1 billion annually, and to do so in a manner that is value added for shareholders and at the same time, supportive of our investment grade credit profile. And as we increase the annual capital spend toward that higher level, we would expect our annual earnings growth rate to fall in the upper end of the 3% to 5% range. 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. Katelyn, at this point let's open the call to questions.

(Operator Instructions) Your first question comes from the lane of Paul Patterson of Glenrock. Please proceed.

Good morning, can you hear me?

Yes, Paul. Good morning.

I wanted to touch base with you on the 2008 case. It seems to be taking considerably longer than you guys had expected. I was wondering why you think it is taking so much longer than you guys thought it would?

Just a couple of prefacing observations. Number one is you and virtually everybody else knows, it is the first case we have had at NIPSCO Electric in over 20 years. The case covers everything from A to Z and one central feature or issue in the case has been rate design and cost allocation, and again, that was litigated, as well as everything in the case was litigated. So to say the obvious, complex, involved case that the parties needed to go through in great detail. So that is an introductory of sorts. I would also make the observation that the Commission has only had the case now for about six months. And their typical deliberating process endures or continues for about six months. So I think we are still within the window of that decision making process. And as I said, in my prepared remarks, we expect more yet this quarter.

Right. But in the last quarter conference call, you expected something by the middle of 2010. We are now in August. I have been even seen it on the agenda. Has anything changed in this period of time?

No again, I tried to indicate. I think they are going through their normal deliberating process, a big, complex case. I think it is part of the normal process. We don't read anything into it negative or positive, and again, we expect a decision within the short-term.

Is this the third quarter filings, potentially?

Yes, we would like to get this case in hand. We'd like to be able to digest it and we would also like to preview the follow-up case with our stake holders. So it does, almost by definition, delay. We will not delay indefinitely. But again, we expect the Commission to act within a short period of time and the second case will follow-up closely thereafter.

Okay. Thank you.

Yes.

Next question comes from the line of Carl Kirst of NiSource.

Hey, Carl, welcome aboard.

I'm actually still with BMO last I checked.

That would have been the biggest surprise in today's call, wouldn't it?

I'm always glad there are options. Sorry. No a few questions here. First off on the LDC side. Nice bead. Nice results overall. I'm trying to get a better sense of we knew the levelized rates was certainly redistributing some of the winter periods earnings. But how much of second quarter where the increase in revenue came from, all system sales and perhaps how much operating income came from all systems sales? Just want to get a better sense of that.

About $10 million, give or take.

Is that just basically, you related to the increasing basis that we saw and sort of movement across the system? Or what did you attribute that to.

I'm sorry - I may have misunderstood the question. The gas distribution companies, just for clarity sake, about $10 million came from the rate design change at Colombia Gas of Ohio, okay?

Okay.

And we had a bit of an uptick in all system sales, between $10 million and $15 million at the gas distribution companies. I wouldn't attribute the basis per se, it was a bit opportunistic, so I would separate it from that.

Okay, the $10 million is what we might consider to be base foundation, if you will?

From the Colombia Gas of Ohio rate design change, that's correct.

Exactly. And then two other quick detailed questions. I noticed in the reconciliation, also in the LDC, there was a $5.7 million revenue adjustment but I didn't see any description for what that was.

Yes, that was a legal reserve reflected earlier in revenue and now we have taken a reserve on it. It's a legal reserve.

And then maybe just a broader question, I can get back in queue. Understanding we are in a situation of kind of underpromising and go overdelivering, you guys have put up excellent results in the first half of the year. I know we are staying with this $1.10 to $1.20 guidance. Certainly, though, when I look at what happened with the second half of last year, for instance, as far as year-over-year comparisons, in order to kind of stick even with the high-end of that guidance, you guys would be below second half 2009 results. Is this just out of an abundance of caution and wanting to see the NIPSCO ruling first or should we be expecting some negative year-over-year comps in the second half of the year?

Number one we try to give you our best shot on earnings outlook. We always try to shoot straight with that. But you really hit the nail on the head. We had this huge, and I'll say it again, huge rate case pending that as you know, has many, many, many moving parts. Now, we've tried to model and give the market our best take on that, but in all fairness to us and the process, again, it is a huge, complex case that is extremely difficult to model. And that's the primary reason we are staying with what we've given you so far on the outlook.

Understood. Appreciate the color. Thanks, guys.

Your next question comes from the line of Paul Ridzon of Key Banc. Please proceed.

Morning.

Hey, good morning, Paul.

You have some timing issues on expenses at NGT&S. Can you kind of quantify how big that was? And let me get that back?

Yes. Really, what we attempted to do is to take the opportunity to step up our maintenance and I highlighted in my remarks, our integrity management program. So that's what's really driving the bump in that spending. And give or take, it is between $7 million to $8 million, that is the bump that we've incurred.

And how big was the storm costs at NIPSCO?

They were about $3.5 million. And for everybody on the call, in Indiana, like much of the Midwest, there were a series of very, very heavy storms and so about $3.5 million to restore customer service in the aftermath of those storms.

That is not netted out in your weather adjustment, is it?

No, it's not. We went on and hit operating earnings as part of ongoing business.

Okay. Looks like industrial is really starting to accelerate. Any color on what thus far, you have July under your belt?

Yes. It's certainly better than what we had anticipated, better than what we reflected in our outlook. From our perspective, it's still slow. We even expect it to slow down a bit in the balance of the summer and the balance of the third quarter. So like many of our brother and sister utilities in this area, we are seeing flickers, but nothing that we would ever characterize as sustained uptick.

As we move into 2011, can you kind of talk about some of the impacts on earnings at the Ohio auction today?

We certainly expect the auction to reduce our off system sales capability in Ohio, and when we provide guidance and now look in 2011, we'll give you more color and detail, but that will be the key sort of impact to watch when we guide for 2011.

Finally to clarify your 3% to 5% growth aspiration is EPS not net income, correct?

It is earnings per share growth, you are correct.

Thank you very much.

Yes.

Next question comes from the line of Jonathan Lefebvre of Wells Fargo. Please proceed.

Good morning, guys. Nice quarter. Just on Carl's question, I wanted to clarify. Is it $10 million per quarter for the new rate design in Colombia, Ohio? Is that how we should be thinking about it for third quarter and fourth quarter?

I have to think about that for a minute. But no, because of when it was implemented in 2009. I can't recall exactly when it was implemented but I think you will see part of it in the third quarter and you'll certainly see quarter-to-quarter it was a definite end during the third quarter of 2009.

We should expect fourth quarter will be down a bit year-over-year, due to the levelizing mechanism?

It should be apples to apples. I can't recall when we implemented in 2009, quite frankly, I'm sure it was in toward the latter part of the year. By the way, we'll ask Randy to follow-up with you on that. Because we are relying on my memory and I just can't nail that.

Not a problem. In terms of the interest expense, you are running kind of below where we thought year-to-date on the second half, do you think this is a reasonable run rate?

Well, this is Steve. I think, vis-a-vis what we anticipated for the year in guidance, I would say interest rates have performed well in terms of they have been a lot lower for a whole host of reasons. So we have continued to see some upside on the interest expense line. And again that is largely driven by what's taken place in the broader economy at large. Treasury rates are pretty low and have been for quite some time.

The PA settlement, was that in the $1.10 or $1.20 can you refresh my memory there?

Yes, it was.

And finally, just in terms of the financing outlook. I know you touched on this on your analyst's day. But as you think about growing your transmission and storage business, I'm sure you have seen the recent storage IPOs and the MLP space and what they went out at. Care to comment on what you are seeing there? And if that is catching your eye at all, maybe rank that versus doing some type of equity versus MLP at this point, which you prefer?

Yes. At this point, we continue to monitor, closely, the MLP, IPO activity. But as I mentioned at the investor day on July 22, we have taken that off the table for the time being. Again, we continue to monitor. We see some advantages in the approach but for us, we are taking it off the table for the time being.

So I guess it would be more preferable to look at equity that continued growth at NGT&S, if that was the right thing to do?

Well, let me just talk a little bit about financing. Number one, I mentioned this during investor day. Our first and foremost consideration is do we have value enhancing, franchise enhancing investments? Is the inventory good? Is the inventory of investments compelling and as you know we have been striving to increase the annual spend to about $1 billion a year. That is first and foremost as we think about things. Then we moved to financing and literally, we have not made a decision on how, what, when, where, and the like. We continue to study that.

When we continue to consider our financing options. But we just made no decision in that regard. When we, though, begin the process of looking at financing and perhaps pulling the trigger on financing, there are certain key principles that we are going to measure against. Number one is what really, Paul mentioned earlier, 3% to 5% earnings per share growth, that's a commitment The second commitment isn't to our current dividend level of $0.92. The third point we are committed to is the investment grade credit rating. So that is where our thinking is and that is the process, and the standards we are going to measure any decision against.

I appreciate the color. Next quarter, guys.

Appreciate it.

There are no further questions in queue. (Operator Instruction)

All right Katelyn. Maybe we can make a few concluding comments.

You have a question from the line of Jay Dobson of Wunderlich Securities. Please proceed.

Right under the wire there, BOP.

You just made it.

Just a quick follow-up. I don't remember who asked it earlier but in talking about the Indiana rate case outcome, maybe just give us a little sense of your confidence level around a third quarter decision? And essential certainly understand the question is a really tough one to answer.

Yes.

Certainly not within your control but I guess in as much as you emphasize appropriately how important a rate case how important a complex rate case it is, it is certainly key on investors's minds. I would ask the question what's the probability where the third quarter earnings call and we don't have a decision?

Yes. It's very difficult to predict with Precision. I go back to the point that I made though, with Paul at the outset. That the commission has had this case now for, give or take, six months. And I think Indiana practice has been to decide major cases and proceedings within a six to nine month time frame. We know the Commission has held one executive session to consider the case, or to consider the decision making process in the case. We know that they are working hard on this case and have been working hard on that case. So, all indications, based on history, based on the flurry of activity we see, that this six to nine month decision making framework is probable.

Got you. You would still anticipate the next case coming sort of right on the heels of that so this does end up pushing into fourth quarter decision, then we'd be delaying and pushing that next case into the fourth quarter?

That's correct. That's correct. But we will move with dispatch. We'll give ourselves a bit of time to digest, socialize, and file the follow-on.

That is great. Thanks for the time.

Thank you.

This concludes the question and answer session of the call. I would like to turn the call over to Mr. Bob Skaggs for closing remarks.

Thank you, Katelyn and thanks again, everyone for your participation and interest and support of NiSource. Again I would just put a pitch in for our recent investor day working the materials available on NiSource.com. If you haven't had a chance to look at those, it would be worth looking at the materials, the transcript and the presentations. With that, thank you and have a good day.