NiSource Inc (NI) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Q3 2012 NiSource earnings conference call. My name is Leann and I will be your operator today. During this presentation your lines will remain on listen-only. But we will conduct a question-and-answer session towards the end of the conference.

(Operator Instructions)

I would like to advise the parties that the conference if being recorded. And now, I would like to hand over to Glen Kettering, Senior Vice President of Corporate Affairs. Please go ahead.

Thank you and good morning. On behalf of NiSource I would like to welcome you to our quarterly analyst's call. Joining us this morning are Bob Skaggs President and Chief Executive Officer; Steve Smith, Executive Vice President and Chief Financial Officer; and Randy Hulen, Managing Director of Investor Relations.

As you know, the focus of today's call is to review our financial performance for the third quarter of 2012 and to 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 nisource.com.

I would like to remind all of you that some of the statements made on the call will be forward-looking. These statements are subject to risks and uncertainties and 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.

And now I would like to turn the call over to Bob Skaggs.

Thanks, Glen, and good morning and thanks for joining us.

Before diving into the details of NiSource's third quarter, we wanted to take a moment to extend our thoughts and sympathies to everyone affected by hurricane Sandy. Our teams were on high alert during the storm and aside from some minor disruptions our operations and team members fared well. In fact, there are no major issues with our facilities to report.

A big thank you to all of our teams for their focus on safety and to the emergency workers and first responders that braved the storm and are involved in the ongoing recovery efforts. And a special thank you to our crews from NIPSCO and Columbia Gas of Massachusetts that have mobilized to assist with the restoration efforts. And thank you to our financial stakeholders for understanding our decision to reschedule our earnings announcement from Tuesday to this morning.

Now to the business at hand. Our agenda today is focused and straightforward with plenty of time for questions. We will first touch on financial highlights from yet another strong quarter. As you will see our earnings continue to be on track with our 2012 outlook. We will also cover the strong progress we have made across each of our business units which demonstrates our team's continued execution on NiSource's well established infrastructure investment driven growth strategy. And, finally, we will field your questions.

Let's start with a few key take-aways which you will find on slide 3 of the supplemental deck posted online this morning. If there is one theme for the quarter, and the year for that matter, it is strong progress. Strong progress on our business plan and financial results, strong progress across each of our business units, and strong progress on our robust capital investment program.

As noted in this morning's release, NiSource's earnings are squarely in line with our 2012 guidance of $1.40 to $1.50 per share non-GAAP. Notably, our gas transmission and storage team filed a comprehensive, near unanimous customer settlement in support of its groundbreaking, excuse the pun, infrastructure modernization program. We also advanced our midstream and minerals game plan by virtue of a couple strategic arrangements with Hilcorp Energy in the heart of liquids rich Utica shale play. In addition we continue to execute on a broad array of utility infrastructure modernization and environmental investments across our markets.

These investments are the foundation of our discipline, infrastructure focused business strategy, and drive sustainable earnings quarter after quarter, all the while delivering value for our customers, communities, and other key stakeholders. For 2012, we expect these infrastructure investments to exceed $1.5 billion.

And those of you who attended virtually, or in person, our September Investor Day know that we have an extremely deep inventory of value adding infrastructure investment opportunities spanning the next 20 plus years and totaling $25 billion to $30 billion. On an annual basis that opportunity will translate into a capital investment run rate of $1.5 billion to $1.8 billion.

And last, but certainly not least, we have the financial foundation and demonstrated discipline to support this enhanced investment strategy. So, with that backdrop, let's take a closer look at our third-quarter results starting with our financial progress on slide 4. As you can see, NiSource delivered net operating earnings non-GAAP of almost $16 million or $0.05 per share for the three months ended September. That compares with about $33 million or $0.11 per share for the third quarter 2011.

Our operating earnings for the quarter decreased from about $142 million to approximately $130 million. It is important to note that these results reflect approximately $50 million in previously disclosed anticipated costs associated with our pipeline modernization customer settlement. Again, even with this expense, we remain on track to deliver on our financial commitments for 2012.

On a GAAP basis our income from continuing operations for the quarter was about $20 million compared to about $36 million in 2011. Schedules 1 and 2 to our earnings release show the GAAP to non-GAAP reconciling items. Let's turn now to our individual business unit results, starting first with the strong progress we've made at NiSource Gas Transmission and Storage, or NGT&S, highlighted on slide 5.

As I mentioned, the highlight for the quarter is the comprehensive and, I might add, unprecedented customer settlement filed with the FERC in early September. The settlement represents a key step forward in support of our pipeline modernization initiative, a long-term program that, ultimately, is expected to involve roughly $4 billion in investment to enhance the safety, reliability, and flexibility for our Columbia Gas transmission system.

The agreement has an initial five-year term covering investments placed into service during the 2013 through 2017 time frame with provisions for potential extensions. It provides an adjustment to base rates and a predictable annual cost recovery mechanism for our projected $300 million annual investment. Notably, the settlement is now ripe for action by the FERC, and the parties have asked the Commission to grant its approval prior to December 1.

Moving on, NGT&S's core operating earnings continue to be solid and benefited from a number of growth projects placed in service since last year, as well as the Columbia Gulf rate case which was settled in November of 2011. Our NGT&S team also continues to develop and execute on infrastructure investment opportunities in existing and new markets, as well as midstream projects to serve the Utica and Marcellus shale regions.

Specifically, during the quarter, Millennium Pipeline received FERC approval to add more than 12,000hp of compression in Orange County, New York. We will fund nearly half of that partnership investment of about $43 million. Construction has started on the project with a targeted in-service date in the first quarter of 2013.

We are also moving ahead on a couple of other significant projects that will help provide market access for new shale gas production. Our $200 million West Side Expansion project has binding preceding agreements in place and is on track for an FERC filing in the first half 2013. That project is set for in-service in late 2014.

And just last week, we announced that we have binding preceding agreements with customers of our East Side Expansion project. That approximately $200 million project will add up to 300,000Dth per day of capacity to meet increasing demand by moving Marcellus Gas from Northern Pennsylvania to markets along the East Coast and Mid-Atlantic regions. We are targeting an in-service date in the third quarter of 2015.

On the minerals and midstream front, we previously announced two strategic agreements with Hilcorp Energy for hydrocarbon and infrastructure investment in the heart of the liquids rich portion of the Utica. Our 50/50 infrastructure JV with Hilcorp, called Pennant Midstream, we'll invest $300 million in its first phase with in-service targeted during the second half of 2013.

NiSource will construct and operate the facilities, contribute half of the capital required. Once construction of the first phase is complete, the system will provide about 400 million cubic feet per day of gathering capacity and approximately 200 million cubic feet per day of processing capabilities. I would note that the first phase of the gathering system is anchored by Hilcorp's production, and that the network is being engineered and built with expansion in mind. This includes additional processing capacity and pipeline facilities, as producer demand in the area develops.

Ultimately, the total Pennant investment opportunity could exceed $1 billion. A separate joint agreement with Hilcorp is focused on developing the hydrocarbon potential on approximately 100,000 combined acres in Northeast Ohio and Western Pennsylvania. NiSource will participate in the development of the acreage, owning both a working and overriding royalty interest, with all acreage dedicated to the Pennant Midstream project. These interests could amount to over 5% of the combined acreage. Test wells are currently being drilled and, based on the results from those wells, a full drilling program will be launched in 2013.

So, to say the least, these joint arrangements are significant for NiSource. They provide near and long term earnings growth opportunities, primarily by means of core infrastructure investment, but also by capitalizing on our mineral interest position. They also provide a model for our remaining acreage position as delineation, development, and producer activity in the Utica region continues.

Also in our midstream business, work is continuing on the $150 million Big Pine Gathering System in Western Pennsylvania. This project provides customers with alternative outlets from Marcellus shale production with transportation capacity of 425 million cubic feet per day, and the flexibility to deliver to three interstate pipelines. Anchored by a long-term agreement with XTO Energy, this project is on budget and on schedule and will be fully in service by early 2013.

As a reminder, to help you track our many NGT&S projects, we have added a map and projects slide in the appendix of our supplemental slides. Please take a look at slide 9. Clearly, our NGT&S team continues to advance a broad array of initiatives to meet the needs of customers, assure continued system reliability, and leverage our own paralleled strategic position in shale production regions. We anticipate investing $500 million to $700 million annually in this business going forward.

Let's now shift to Indiana and our Electric business summarized on slide 6. NIPSCO's quarter was solid and squarely in line with our plan. Operating earnings came in at about $78 million, compared to about $73 million for the same period last year. Revenues were up about $27 million due to increased margins as a result of NIPSCO's 2011 electric rate case. With our new Executive Vice President and group CEO Jim Stanley now on board, the team notched significant wins in a variety of areas. First, NIPSCO received Indiana Commission approval to move forward with an FGD scrubber unit at our Michigan City plant. Construction of the unit will begin in 2013 with an investment of approximately $250 million.

I'd note that construction of the FGD units at our Schaeffer facility remain on schedule and on budget. All totaled, our environmental investments will approach $900 million over the next few years. NIPSCO also received FERC approval to move forward on two significant electric transmission enhancement projects.

One, which we announced on our last quarterly call, is the 100 mile Reynolds to Hiple transmission project. It will involve a total investment of about $300 million. The second project is a partnership with Pioneer, LLC called the Reynolds to Greentown project. The 50/50 partnership will invest about $330 million in this 66 mile line. Both projects are expected to be placed in service during the latter part of the decade. The cost of these projects will go to all MISO customers was only a small percentage recovered from NIPSCO's customers.

Looking further ahead, the NIPSCO team will continue taking steps to improve reliability and spur continued economic development in Northern Indiana. That effort will include modernization of our core electric system, the replacement of transformers, polls, lines and other vital equipment. In going forward, we expect to invest $400 million to $450 million annually in our NIPSCO electric infrastructure.

Let's turn now to our Gas Distribution operations, or NGD, summarized on slide 7. Our NGD team continues to deliver strong and steady results from its core business plan. That well established strategy centers on aligning long-term infrastructure and enhancement programs with complementary customer programs and regulatory initiatives. For the quarter, NGD's net revenues were up about $13 million, primarily reflecting regulatory and infrastructure programs. Since the start of 2012, these programs have generated nearly $30 million in incremental revenues.

On the regulatory front, just last night we received in order from the Massachusetts Department of Public Utilities for our base rate case. Although we are continuing to evaluate the full scope of the 500 page order, which will increase annual revenues by about $8 million, we believe the outcome is generally in line with our expectations.

In Pennsylvania, our team recently filed a rate case with the Commission consistent with Pennsylvania's recently enacted Act 11. The case reflects a fully projected test year and includes improved infrastructure investment recovery mechanisms. The case, which we expect to be resolved in the second half of 2013, proposes to increase annual revenues by approximately $77 million, largely driven by our significant ongoing infrastructure investments in the Commonwealth.

Meanwhile, we continue to advance infrastructure enhancement programs, as well as a broad array of new customer programs, in Ohio, Virginia, and our other states. And a prospective scope of these programs continues to grow. In fact, as Joe Hamrock outlined at our September Investor Day, our long-term infrastructure replacement program opportunity at NGD can top $10 billion over the next 20 plus years. We expect that opportunity to translate into an investment run rate of between $600 million and $650 million annually at NGD.

Before moving to your questions, let me briefly reiterate a few things we shared at our recent Investor Day. I'd note that you can still take a look at the full presentation and review the webcast. Both are available in the Investor Relations section of nisource.com. First and foremost, we have a robust inventory of infrastructure focused investment opportunities across each of our businesses.

The total inventory amounts to $25 billion $30 billion over the next couple of decades, and supports a sustainable annual capital investment of $1.5 billion to $1.8 billion going forward. Through those investments, we anticipate growing net operating earnings per share non-GAAP by an average of 5% to 7% per year on a long-term basis. We also plan to continue to provide an attractive and growing dividend. One that we expect to increase at 3% to 5% annually.

And we are unconditionally committed to accomplishing all of this, while maintaining our solid investment grade credit ratings and strong liquidity. These commitments, coupled with the team's established track record of discipline execution, continue to make NiSource a compelling investment proposition for all our financial stakeholders.

As always, we will communicate with you and our stakeholders in a transparent and timely manner through our analyst calls and news releases posted on nisource.com. Our next formal communications with the market is scheduled for mid-February when we will release our full year 2012 earnings and provide a business update. Consistent with the practice followed by many of our peers, we will issue our year-end earnings contemporaneously with our 10-K filing. At that time, I will also outline our 2013 earnings guidance and capital investment plans.

Thank you for participating this morning and for your ongoing interest in, and support of, NiSource. Leann, we can now open the call to questions.

(Operator Instructions)

Paul Ridzon from KeyBanc.

Good morning. Congratulations on a solid quarter.

Hey Paul, thank you very much. A strong quarter and the team has done an outstanding job as you mentioned this morning in your report.

Hilcorp. I just may have missed it. Did you say the opportunity, currently $300 million, could grow to $1 billion?

That is right. We believe that the downstream infrastructure opportunity, continuing robust drilling and activity in that region and the Utica, could approach $1 billion for the entire partnership. So, our share would be about $0.5 billion.

Have a sense of the time frame?

Yes, we think this is a five year, seven year sort of proposition. Again, it is going to depend on the pace of drilling activity in the region.

And your third-quarter report indicated some positive preliminary drilling results. Can you just elaborate?

Well, Hilcorp has been active in the area of interest. They drilled a number of test wells. They are looking at fracking approaches, tracking approaches. We don't have IP information at this point, but the initial results and tests indicate that we are in the sweet spot of the region.

And where is that exactly?

It is a four county area, two counties in Ohio and two counties bordering in Pennsylvania.

Thank you.

Thanks.

Your next question comes from the line of Charles Fishman from Morningstar.

Good morning. On the filing last month in Pennsylvania, Columbia Gas filing, is there anything in the filing that is not consistent with Act 11? Or is this pretty much, I guess it is not a formality, but, certainly, your expectations would be that everything would be approved on that? Or is there something that is a little different?

No, it is fully consistent with Act 11, but I would make this key observation, we are the first out of the gate so this is going to be the first case that the Commission will consider under Act 11. We will be, to a degree, precedent setting and breaking new ground in that respect.

Okay. And going to NIPSCO, on the transmission you said FERC approved your joint venture line with Pioneer, the whole thing has been approved not just your 50%, is that correct? I'm not misunderstanding that?

That is correct.

Okay. And then with respect to the transmission, is there anything on the horizon that additional projects with Pioneer are on your own in that transmission?

The team, the electronic transmission team in NIPSCO, continues to do a lot of work with projects. In particular, in consultation with MISO, so stay tuned for additional opportunities as the months and years unfold. We believe we certainly have the opportunity to increase the portfolio and the investment opportunity as we look at decongesting MISO and providing increased reliability and increased ability to move electrons from the West to the East.

And then, finally, on your dividend policy of the 3% to 5% annually, since it looks like your CapEx is running, maybe, a little ahead of what you have outlined previously, which is, obviously, good if it's good projects, how will the board look at that next year? Will they, just because the CapEx is running higher, do you think they might be at the lower end of that dividend growth range or was that not an issue?

Well, let me put the policy in perspective. We have said that the payout ratio should be between 60% and 70%. This year we are going to be right in the middle of that range and going forward we would like to continue to be, give or take, well within the range.

So, the board is going to look at where we stand with regard to the payout ratio, they're going to look at our intention to consistently grow the dividend, and they're going to look at that 3% to 5% guideline that we provide. So, they're going to take all those factors in along with where we stand on CapEx, where we stand with the credit rating agencies, and I think they're going to base their decision on those factors.

And that decision would be made mid-year next year?

More likely than not. Last year we announced our dividend action at the annual meeting in May and, again, not speaking for the board but I believe that would tend to be the period we'd gravitate to.

Okay, thank you. Nice quarter.

Thank you.

We have no further questions waiting at this time.

( Operator Instructions )

All right, Leann, and to the folks that have participated, we certainly appreciate your interest. Thanks for your support. Have a good weekend and a safe weekend. Thanks so much.

Thank for your participation in today's conference. This concludes the call for today. You may now disconnect. Have a great day.