NiSource Inc (NI) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the second quarter 2013 NiSource earnings conference call. My name is Jenada 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 conference over to Mr. Glen Kettering, Senior Vice President, Corporate Affairs. Please proceed.

Thank you, Jenada, and good morning everyone. On behalf of NiSource I would like to welcome you to our quarterly analyst call. Joining me 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 our call today is to review our financial performance for the second quarter of 2013 and to provide a business update. We'll then open the call up to your questions.

At times during the call we'll refer to the supplemental slides available on NiSource.com. I'd like to remind all of you that some of the statements made on this conference call will be forward-looking. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statement. Information concerning such risks and uncertainties is included in the MD&A and risk factors sections of our periodic SEC filings. Now I'll turn the call over to Bob Skaggs.

Thanks, Glen, and good morning. Thanks for joining us. For today's agenda we'll touch on key highlights from another solid quarter. I'll ask Steve Smith, our Chief Financial Officer, to summarize our financial results. I'll then touch on some key upcoming execution markers and initiatives across each of our business units, and then we'll open the call to your questions.

Let's start with key takeaways on Slide 3 in the supplemental deck that was posted online this morning. First and foremost, as we announced in our earnings release, NiSource's infrastructure focused investment strategy once again delivered financial results in line with our expectations, and consistent with our 2013 earnings guidance range of $1.50 to $1.60 per share non-GAAP. We also announced that, thanks to our robust and growing inventory of accretive infrastructure investment opportunities, we are enhancing our 2013 capital program. We are now targeting investment levels of about $2 billion for 2013, up from our original $1.8 billion plan. Virtually all of these additional capital investments are allocated to track infrastructure replacement and modernization programs and just a reminder, about 75% of our capital investments are focused on accretive growth and other revenue generating opportunities.

Another notable development during the quarter was the successful completion of our Pennsylvania rate case. We placed new, forward-looking rates into effect July 1 as part of a settlement that, in addition to other benefits, will increase annual revenues by about $55 million. Meanwhile, our team at the Columbia Pipeline Group, or CPG, is on track with the initial phases of our landmark system modernization program. With the number of projects currently in flight, we are on pace to make our first tracker filing by the end of the year with recovery slated to start in February 2014. And at NIPSCO we became the first Indiana utility to file an electric infrastructure modernization plan under recently enacted Senate Bill 560. NIPSCO's 7 year, $1 billion plus plan involves systematic replacement and modernization of our core electric utility infrastructure. We anticipate action by the commission and initiation of the investment early in 2014.

In a nutshell, we are pleased to report continued, steady, disciplined execution of our strategy during the second quarter with delivery on an expanding array of customer, regulatory and growth initiatives. Our team's performance has kept us squarely on target to deliver on our earnings commitments for 2013. So with that overview, I'll turn the call over to Steve Smith to take a closer look at our second quarter financial results referenced on Page 4 of our supplemental slides.

Thanks, Bob. And good morning everyone. As Bob mentioned, our team again delivered a very strong quarter. NiSource delivered net operating earnings, non-GAAP, of about $73 million, or $0.23 per share during the second quarter. That compares with about $64 million, or $0.22 per share, for the same period last year. Our operating earnings for the quarter came in at about $195 million. As we noted on our last quarterly call, our results reflect our $340 million forward sale equity issuance completed in the third quarter of 2012, which added approximately 24 million common shares compared to the same period last year. For 2013, we expect this to have about an $0.08 per share impact on earnings. On a GAAP basis, our income from continuing operations for the quarter was about $72 million, or $0.23 per share, compared to about $68 million, or $0.25 per share in the second quarter of last year. Schedules one and two to our earnings release show the GAAP to non-GAAP reconciling items.

Turning to our business units, Columbia Pipeline Group, or CPG, delivered operating earnings of about $89 million in the second quarter, compared to $92 million for the prior year. Net revenues, excluding trackers, were down about $8 million at CPG for the quarter due to reduced depreciation rates resulting from the Columbia transmission customer settlement. CPG remains on track to deliver earnings in line with our plan for the year. NIPSCO Electric delivered operating earnings of about $59 million, compared to $60 million for the prior year. Net revenues, excluding trackers, were up about $7 million for the quarter, partially as a result of increased recovery of environmental investments. And NiSource Gas Distribution, or NGD, delivered operating earnings of $52 million, compared to $51 million for 2012. NGD net revenues, again excluding trackers, were up about $21 million for the quarter, due primarily to our infrastructure replacement programs. As Bob noted, we are pleased to report that we are squarely on track to deliver earnings within our guidance range for the year.

Turning to Slide 5, let's quickly touch on our financing and liquidity highlights. Thanks to disciplined capital management practices, our liquidity position remains strong at approximately $1.4 billion as of the end of the second quarter. We expect this position to maintain its strength throughout the year. This is supported by a number of developments in the first half of the year, including the sale of our retail services business, proactive financing, and the extension of bonus depreciation. Finally, I will note that as of June 30, our debt to capitalization ratio was 58.6%, which is what we expect to effectively maintain on an ongoing basis, give or take a percent or so.

Before turning the call back to Bob, I would like to take the opportunity to reiterate NiSource's core financial commitments, which are -- maintaining our stable investment grade credit ratings; growing earnings by 5% to 7% annually; growing the dividend by 3% to 5% annually; and maintaining a strong liquidity position, all while supporting our approximately $2 billion investment program. With that, I'll turn the call back to Bob.

Thanks, Steve. Let's start with the CPG highlights on Slide 6. Jimmy Staton and his team are working over time to develop and deliver a diverse mix of value adding infrastructure investment opportunities. At the forefront, Columbia Gas Transmission is making good progress on its long-term system modernization program. As I noted earlier, we are on track to file our first year modernization tracker filing by the end of this year with recovery slated to start in February 2014. As you know, the settlement covers the initial 5 years of a projected modernization program of $4 billion to $5 billion over 10 to 15 years.

On the midstream front with the Big Pine Gathering System in service with XTO Energy, we are also scheduled to start providing long-term gathering services for PennEnergy later this year. Big Pine is capable of transporting more than 400 million cubic feet per day of Marcellus Shale gas. Phase I of our Pennant project, which we call the Hickory Bend Gathering System, is also tracking well. In fact, initial gathering services already in progress on part of the system to accommodate Hilcorp's early Utica Shale production. The processing and gathering facilities, 200 million cubic feet per day and 600 million cubic feet per day, respectively, are expected to start by the end of this year.

From a production standpoint, our resource development arrangement with Hilcorp is progressing according to plan. Although the development of the acreage is still in its early stages, six wells are now complete, five of those wells are currently producing and with each well drilling and stimulation techniques continue to be optimized. Notably, we remain encouraged as the initial production flows are consistent with some of the better flows reported in the area. Drilling activity will continue to accelerate, and we anticipate that by 2014 we will be completing 25 to 30 wells per year. All in all, very much in line with our expectations.

Our commercial team also is moving ahead on a new project to modernize and upgrade our existing LNG peaking facility in Chesapeake, Virginia. It's a $30 million three year upgrade. In sync with this upgrade, all existing customers signed new, long-term agreements at increased rates to support the projects. At Millennium Pipeline the partnership placed the approximately $45 million Minisink compressor station into service in the second quarter, and anticipates placing the Hancock compressor station into service by the end of this year or early 2014. This approximately $45 million project will increase the pipeline's delivery capacity to 850,000 dekatherms per day. As we discussed in prior calls, our East Side and West Side expansion projects are on schedule. These projects represent combined investment of more than $400 million and together will add about 800,000 dekatherms per day of new transportation capacity on our systems. An initial level of service has already begun on the West Side expansion.

Let's now shift to Indiana and our electric business as summarized on Slide 7. NIPSCO continued to deliver positive results on many, many fronts in the first half of the year. As I mentioned, earlier this month we were the first to follow a seven year electric infrastructure modernization plan with the Indiana Utility Regulatory Commission. Our plan, which will kick into gear in early 2014, includes investments in our core distribution and transmission systems which are good for the sustainability and reliability of infrastructure in northern Indiana, and support continued economic development and job creation in our service territory. I would also note that NIPSCO will file a similar infrastructure modernization plan for our gas operations later this year. The plan will address system modernization and expansion to rural areas of northern Indiana.

NIPSCO remains on track with the $0.5 billion plus FGD project at our Schahfer generating station. These new units will be placed into service in the fourth quarter of this year and in 2014. Construction is also moving ahead at our Michigan City generating station where NIPSCO is installing another $250 million FGD unit. On the electric transmission front, NIPSCO is moving forward with an overall investment of up to $0.5 billion for two electric transmission projects in northern Indiana. These projects will strengthen the Midwest electrical infrastructure while supporting economic development and providing new jobs. Planning and outreach activities are the key focus for those projects in 2013 within service targeted for the latter part of the decade. Final route selection is anticipated in August of this year for the first project, the so-called Reynolds-Topeka line. So as you can see, across many fronts, NIPSCO is generating long-term sustainable results for customers, communities and shareholders.

Let's turn now to our gas distribution operations discussed on Slide 8. Our NGD team continues to deliver strong results by aligning its long-term, $10 billion infrastructure replacement and enhancement program with a variety of complementary customer and regulatory initiatives. As I noted earlier, we placed new forward-looking rates into effect on July 1 at Columbia Gas in Pennsylvania. Also on the regulatory front, Columbia Gas Kentucky, Columbia Gas of Massachusetts and Columbia Gas of Maryland all have rate cases in front of their respective commissions.

In Kentucky, the case seeks an annual revenue increase of about $17 million. The case also includes a more modern rate design using a revenue normalization adjustment. In Massachusetts, the case is designed to support the Company's expanded infrastructure efforts with timely recovery. The case seeks increased annual revenues of about $30 million. And in Maryland, we are seeking an annual revenue increase of about $5 million. We expect a decision with rates effective in Kentucky in January 2014, in Massachusetts during the first quarter of 2014, and in Maryland in late September of this year.

Finally, in June, NIPSCO, along with the Indiana Consumer Counselor and other stakeholders, filed a unanimous agreement with the IURC to extend NIPSCO's 2010 natural gas customer rate settlement through 2020. The decision on the filing is expected by the end of this year. This is a great win-win settlement that will continue to deliver benefits for all our major stakeholders. In Virginia, Columbia Gas of Virginia received an order approving an amendment to its SAVE program for infrastructure replacement. The order authorized an annual spending level of $25 million, up from about $20 million. Consistent with our plan, our NGD team is continuing to execute on its established strategy of investing in safety and reliability, while providing innovative programs to customers and solid financial performance for shareholders.

To wrap up, teams across NiSource are continuing to deliver on our core investment and customer focused strategy and we are well positioned to meet our growth and other commitments on a disciplined, balanced and sustainable basis going forward. As always, we'll communicate with you and all our stakeholders about these and other matters of importance in a transparent and timely manner through our analyst calls and news releases posted on NiSource.com. Thank you for participating today and for your ongoing interest and in support of NiSource. Jenada, let's now open the call for questions.

(Operator Instructions)

Paul Ridzon, KeyBanc.

Good morning. Can you hear me?

Yes, Paul. Good morning.

Good morning. Can you just talk a little bit about year to date results are down the earnings trajectory for the balance of the year and the drivers there?

Yes, I'm going to toss that to Steve, Paul.

Sure thanks, Paul. The year to date results so far are right in line with our expectations for our guidance range of $1.50 to $1.60. I would note that we had a number of items that came in the first six months that will be benefiting the latter half of the year. For example, the Columbia Pennsylvania rate case is effective July 1, so that is going to contribute significantly to the latter half of 2013. We also had an IRP filing in Ohio in the May time frame. So we'll be enjoying those benefits throughout the balance of the year. In addition, we also had an environmental recovery mechanism tracker in Indiana filed at that time frame as well, which will benefit us going forward.

On the pipeline side, we also have a number of projects that will be coming up to speed for us in the latter part of the year. First is the Pennant project and Big Pine project, both of which that Bob mentioned and also the Millennium Minisink project for the latter half of the year. We feel very comfortable about where we stand year to date. We think we are squarely in line with where we expect to be and believe our guidance is appropriate and are reaffirming it.

You have also basically lapped to the new shares as well?

That's correct.

I would just say from our perspective a clean quarter. Again, what's notable are the accomplishments the team posted on the initiatives.

Is this Michigan City new capital? Or have we talked about that before?

It's been in the plan and we have talked about it fairly extensively. So it is reflected in the numbers.

Just with the increased capital this year, any updates on financing plans?

I would say, as you know, we did a $750 million, 30-year bond deal not too long ago at 4.8%. With respect to additional financing in 2013, we are looking at potentially tapping the markets in the late third quarter or early fourth quarter in the $300 million to $500 million range. We haven't yet determined what the appropriate maturity will be there, but we expect to do some capital markets activity on the debt side in late third quarter, early fourth quarter of this year.

Yes, Paul, and you'll recall that at our Analyst Day last year we suggested the need for equity in and around 2015 in an amount that would be similar to what we did a couple of years ago. We believe, for planning purposes and modeling, that continues to be a sound assumption. Steve can mention a couple of things that have enhanced our cash position. In fact he alluded to those in his prepared remarks but, Steve, maybe you can give a little more color around that.

Thanks, Bob. The other things that we were able to accomplish here in the first of the year was the sale of our NiSource retail services business for approximately $120 million. The other benefit that we are enjoying is the extension of bonus depreciation, which should contribute approximately $250 million of benefit to us. So that is in excess of $350 million of incremental cash that are helping us spend at a slightly higher rate this year.

You didn't have those items on the radar when you talked about equity in '15?

We did not.

Okay great. Thank you very much.

Thanks, Paul.

(Operator Instructions)

Charles Fishman, Morningstar.

Good morning. When I look at Slide 10, it looks like the 2013 CapEx for gas distribution is up about $100 million. Then when I go to Slide 16, I don't see any changes versus the slide in the last quarter. Is it an acceleration of these projects is what's going on? There is nothing that was added, that I see. Is that correct?

That's correct in part. It is an acceleration of some of the spending that we have inherently with the infrastructure replacement programs. It is also a bit of an uptick in new business. We are seeing some organic growth -- if that is the right term, in new customer additions and that's helped elevate the number.

Bob, what state is the growth coming from?

We are seeing it across all of the companies. Typically we see more in Virginia, relatively speaking. We are seeing a bit of an uptick across the board. Now having said that, it is not dramatic but over the past couple of years, we have seen the new adds come back. All told, across the gas distribution group, probably $100 million, $125 million is spent on new customer additions -- will be spent for new customer additions in 2013.

Okay so that would account for about 50% of the $200 million step up is natural gas. The rest of it was?

It was at CPG.

Again, that is just an acceleration. You added also the LNG project?

You are really going down the right track. It is a number of relatively small incremental projects that surfaced during the year. And we felt confident enough to launch those programs and increase the spend.

I noticed under Pennant the gas gathering went from 400 million cubic feet per day to 600 million cubic feet per day, is that part of that acceleration? Things are going better on the drilling?

No, it is still consistent with plan. We have talked about additional phases down the road for Pennant, we are not there yet but as I suggested in the prepared remarks, we are very encouraged by initial drilling results, we are encouraged by the additional -- or the drilling program for 2014. So Pennant remains on track.

Okay. Moving to Indiana on Senate Bill 560. If you take Senate Bill 560 and the trackers there and you combine that with the trackers you have for the environmental spend on the generation, it is -- it would appear to me that, that covers a good chunk of your CapEx and you might avoid a general rate case for quite awhile. Is that the correct way of looking at it?

Your first point is correct. Across NiSource about 75% of our spend is the tracking mechanisms or relatively frequent rate cases. A number like that, 75% is probably relatively good number to use at NIPSCO. The point on rate case, Senate Bill 560 requires a filing company, somebody participating in that program to file a rate case within that seven year period. Our current expectations -- and they are current, would suggest we would follow-up the latter stages of that seven year period. But that's as we stand here today.

Okay I realize it is a new program. On the gas distribution side, Senate Bill 560, that tracker is really, it appears to me very similar to the trackers you have in other states with respect to gas distribution. Is that correct?

Similar. There are some differences but it is very, very similar. It is akin to what we see in other states.

Thank you. That's it.

Thank you.

(Operator Instructions)

Charles Fishman, Morningstar.

I have another one but I wanted to give other people a chance. Effective tax rate, I noticed both first quarter and second quarter is down, do you see that going on for the second half and is there any guidance you can provide?

Charles, that is a deferred tax liability we had on the balance sheet we didn't need to carry any longer. That benefit was approximately $4 million in the quarter. We also had a few other items that contributed $1 million here or there. We don't expect that effective tax rate to continue at that rate. We anticipate that it will bounce back up.

Still looking maybe mid-30%s for the remainder of the year?

That's correct.

The only thing I had was just more out of a curiosity on the transmission, you said you are going to the second round of public hearings on those lines.

We just completed the second round.

I'm just curious, what is the difference between the second round and the first round? What else transpires?

It's a process so the first round you basically introduce the projects, you introduce the approximate routing. The second round you come back with more concrete information that begins to hone in or narrow down to a more specific route. Again, you give the opportunity to folks to vet that, to lodge their concerns, their interests and the like and we try to be responsive. So it is part of a comprehensive outreach plan.

Well good. Sounds like you are getting real close on that and I'm also glad I don't have to sit through those. I can imagine they are quite tedious.

It can be but it is a good process.

Yes, sounds like it. Thank you. That's it, thank you.

At this time, we have no further questions. I would now like to turn the call back over to Mr. Bob Skaggs for any closing remarks.

All right, Shenada. Thank you, everybody, again. We appreciate your participation, your interest and support, and we will see you in the not to distant future. Have a great day. Thanks.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.