NiSource Inc (NI) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2014 NiSource earnings conference call. My name is Grant, and I will be your operator for today.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Randy Hulen, Vice President, Investor Relations. Please proceed.

Thank you, Grant, 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, and Steve Smith, Executive Vice President and Chief Financial Officer. As you know the focus of today's call is to review our financial performance for the second quarter of 2014, and to provide an overall business update. We will then open the call to your questions.

Also 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 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 statements. Information concerning such risks and uncertainties is included in the MD&A and risk factors section of our periodic SEC filings.

And finally prior to turning the call over to Bob Skaggs, I wanted to confirm that we have formally scheduled an Investor Day meeting in New York for September 29. This event will be webcast, so that all interested investors can participate. We look forward to your participation, so stay tuned for further details on timing and location. Now Bob, the call is yours.

Thanks, Randy. Good morning, everyone, and thank you for joining us. As we noted in this morning's release, the NiSource team delivered another quarter of solid execution and financial performance. On today's call we will touch on key highlights from the quarter, discuss how they position NiSource for continued growth in 2014 and beyond. Chief Financial Officer, Steve Smith, will review our financial results. We will also provide updates on key execution highlights across each of our businesses. And, of course, we will leave plenty of time for your questions.

So with that in mind, let's get started with some key takeaways from the quarter. You will see these listed on slide 3 in the supplemental deck that was posted online this morning. As I mentioned, our NiSource team once again delivered a solid quarter. Each of our business units continued to execute on our investment-driven business plan. This consistent execution has put us in a position to deliver earnings at the upper half of our non-GAAP earnings guidance of $1.61 to $1.71 per share. Our Columbia Pipeline Group unit continued to make steady progress on its expanding inventory of growth, modernization of midstream investment opportunities. Many of these initiatives are tied closely to the Company's strategic position in the Marcellus and Utica shales regions.

In our gas distribution business, Massachusetts Governor Deval Patrick signed landmark legislation authorizing accelerated recovery of infrastructure modernization investments. Columbia Gas of Massachusetts intends to file a construction plan with the DPU by October 31 of this year, and expects to begin recovering investments on May 1, 2015. In Indiana, our NIPSCO gas and electric business obtained regulatory approval of a $700 million natural gas modernization program, which will complement a $1.1 billion electric system modernization program. In addition to system modernization, the NIPSCO gas program provides for expansion of its gas distribution system into rural areas in northern Indiana. With those quick highlights, let me turn the call over to Steve Smith to take a closer look at our financial results on page 4 of our supplemental slides.

Thanks, Bob, and good morning, everyone. As Bob mentioned, the NiSource team delivered another solid quarter, and we are on track to deliver year end earnings of the upper half of our guidance range. We generated quarterly non-GAAP net operating earnings of about $78 million or $0.25 per share, which compares to about $73 million or $0.23 per share in 2013. On an operating earnings basis, NiSource was up about $24 million, when compared to the same period in 2013. On a GAAP comparison, our income from continuing operations was about $79 million for the second quarter of 2014 versus about $72 million in 2013.

At the segment level, you will see that each of our three core business units delivered solid financial results during the second quarter. Columbia Pipeline Group or CPG, delivered operating earnings of about $104 million, compared to about $89 million in 2013. CPG's net revenues excluding the impact of trackers were up about $22 million, primarily as the result of growth projects placed into service and increased mineral rights royalty revenue. Operating expenses again excluding the impact of trackers, increased by about $10 million, primarily due to an increase in employee and administrative costs and higher depreciation. NIPSCO's electric operations delivered about $60 million in operating earnings, compared to about $59 million for the prior year. Net revenues excluding trackers were up about $12 million, primarily due to higher industrial and commercial margins and increased environmental investment cost recovery. These increases were partially offset by a decrease in off-system sales.

Operating expenses excluding the impact of trackers increased by about $11 million, due primarily to higher electric generations costs. And finally, earnings for the quarter at our gas distribution business came in at about $63 million, compared with about $52 million for 2013. Net revenues again excluding the impact of trackers were up by nearly $26 million, primarily due to increases in regulatory and service programs. Operating expenses excluding the impact of trackers increased by about $15 million, due primarily to increased outside service costs, higher depreciation due to an increase in capital expenditures and increased employee and administrative costs. Overall, it was another solid quarter for the NiSource team. Full details are available in our earnings release posted online this morning.

Now turning to slide 5, I would like to quickly touch on our financing and liquidity highlights. As you can see, we retained a strong liquidity position with approximately $1.2 billion of net available liquidity at the end of the second quarter. I am also pleased to reiterate that our capital program for 2014 remains on track at about $2.2 billion. As we have indicated in the past, the majority -- actually more than three quarters of our investments are focused on tracked and other revenue-generating opportunities. Looking ahead, our financial strategy continues to be balanced, straightforward and fully-aligned with our robust long-term capital investment outlook, and we remain strongly committed to maintaining our investment-grade credit ratings, as well as sustainable earnings and dividend growth. With that, I will turn the call back to Bob to cover some of our business unit initiatives and execution highlights.

Thanks, Steve. Before opening the call to your questions, let me hit on some key execution highlights at each of our business units. Let's start with the CPG group on slide 6. Our CPG team originated and delivered significant customer-driven growth projects in the quarter, and continues to extend its already deep inventory of projects. From a growth project perspective, the team began engineering and planning for the Utica access project. This $50 million project will transport Utica Gas for Eclipse Resources to liquid trading points on the Columbia Gas transmission system in West Virginia. Additionally, Columbia transmission reached an agreement to provide firm transportation service to a natural-fired gas electric generation plant in Kentucky. The roughly 70 million cubic feet per day, $25 million project is expected to begin service in mid 2016.

Meanwhile CPG's 250 million cubic feet per day Warren County project is ready for service to support Pepco's new gas-fired electric generation plant in Virginia. CPG also continues to advance its Rayne Leach and WB Xpress projects, which we regard as being transformational in nature. The Rayne and Leach projects are in the latter stages of development, and we expect to have additional details to share on these projects in a matter of weeks. As a reminder, the two projects will provide additional transportation capacity of about 1.5 Bcf, and 800 million cubic feet per day on the Columbia transmission and Columbia Gulf transmission systems. The projects will go in service late 2017.

On the WB Xpress, this project is a bit further out, but we also expect to share additional details on this build later this quarter. This project would add another 1.3 billion cubic feet per day of transportation of Marcellus production to pipeline interconnects in East Coast markets. The WB Xpress project will go into service late 2018. Columbia transmission also remains on track, with the second year of its long-term system modernization program. Under the program, CPG is investing approximately $300 million annually in improvements to system reliability, integrity and flexibility. Settlement with the Company's customers addresses the initial five years of an expected 10 to 15 year program that will exceed $4 billion in investments.

At NiSource midstream services, the team has completed the facilities to support the first phase of its Hickory Bend gathering and processing project. In addition, our midstream team is begun executing on the approximately $120 million Washington County gathering project announced on our first quarter call. As a reminder, this project is anchored by a long-term agreement with Range Resources. This project is expected to be in service during the second half of 2015. The midstream team is also in advanced discussions with customers about 175 million cubic feet per day expansion of the Big Pine gathering system. As you can see, the CPG team continues to capitalize on it solid relationships, and strategic position to extend an already deep inventory of projects.

Next let's shift to our Indiana electric business summarized on slide 7. NIPSCO continues to advance a broad agenda of system modernization, reliability, and environmental improvements. On the projects front, NIPSCO is moving forward with its $1.1 billion electric modernization program approved in February by the IURC. The seven year program provides for the replacement and upgrade of underground circuits, transformers and poles, helping increase system reliability and deliver economic development benefits to the region. Progress also continued on two major NIPSCO electric transmission projects designed to enhance region-wide system flexibility and reliability. Both are on schedule and on budget.

Most recently, the route was selected for the Greentown Reynolds project, a roughly 70 mile, 765 kV line being constructed jointly with Pioneer transmission. Meanwhile, the 100 mile 345 kV Reynolds to Topeka project remains on schedule with right-of-way acquisition and permitting in process. These projects involve an investment of about $500 million from NIPSCO, and are anticipated to be in service by the end of 2018. And as we have discussed on prior calls, our NIPSCO PowerGen scrubber projects remain on schedule and on budget. With completion dates of year-end 2014 and year-end 2015, these investments are part of more than $850 million of environmental investments at NIPSCO.

Let's turn now to our gas distribution operations discussed on slide 8. Our gas distribution teams continued to steadily execute on their long-term and growing inventory of infrastructure replacement enhancement programs. We are on track to invest approximately $785 million in 2014 on system modernization and other capital improvements. And as you know, we have paired those investments with complementary legislative and regulatory initiatives, as well as customer programs. I already mentioned the landmark legislation signed into law in Massachusetts. This is a significant achievement, which provides a mechanism that better aligns the timing of investments with recovery, and paves the way for a sustained system modernization program. As I noted earlier, our CMA team will be submitting a construction plan under the new law later this year.

On the regulatory front, we filed our first rate case in four years at Columbia Gas of Virginia. The case is seeking a revenue increase of approximately $25 million, which would support CGV's ongoing efforts to accommodate growth, as well as cost recovery of CGV's multi-year distribution system modernization program. A decision is expected by the end of the year. Meanwhile, Columbia Gas of Pennsylvania's rate case remains on track. That is a $54 million request which would support continuation of CPA's ongoing modernization program. We expect a resolution later this year. As you can see our gas distribution companies continue to steadily execute on a well-established agenda of long-term investment and system reliability and customer programs.

To wrap up, given the team's strong execution of the plan, we are now positioned to achieve results at the upper half of our 2014 non-GAAP guidance range of $1.61 to $1.71 per share. I also want to reiterate that our team continues to execute against NiSource's robust investment-driven business strategy. And we are doing so, while staying true to our well-established core commitments. Those are maintaining stable investment-grade credit ratings, delivering stable and long-term dividend growth, delivering stable and long-term earnings growth.

And last but not least, as Randy mentioned in his introduction, we are hosting an Investor Day on Monday, September 29. Consistent with our past sessions, our team will be providing a detailed discussion of the NiSource investment proposition, supported by an in-depth review of our growth opportunities, and investment inventories across each of our business units. We are looking forward to that meeting and your participation. Again, thank you for participating today, and for your ongoing interest in, and in support of NiSource. Grant, we can now open the call for questions.

Thank you.

(Operator Instructions)

Paul Ridzon, KeyBanc

Good morning.

Good morning, Paul. How are you?

Good. Congratulations on another solid quarter.

Thank you. It was a nice quarter. Appreciate it.

Can we put bookmarks around the potential capital for Leach and Rayne?

Paul, I ask you to bear with me. In just a matter of weeks -- a mere matter of weeks, we are going to give you a lot of detail around both of those projects, and it will be a heck of a lot more than bookmarks.

Sounds good. And then, how should we think about the dividend going forward, just growing with earnings?

Continue to grow, on a robust basis. We will give you more of a sense at Investor Day about the way we think about it. But as you know, we are balancing a very, very strong investment program, strong earnings growth rate, and a strong dividend. So again, I ask you to bear with me, a little bit more color commentary when we see you in the end of September.

Okay. And do you have any -- pretty impressive backlog of projects. Could we look for you to revisit your growth rate in September?

We will talk about that in September, Paul. Again, we are going to cover the waterfront, and certainly earnings growth will be one of the key topics among many that we will touch on.

September can't get here soon enough, I guess. So I am looking forward to it. Thank you. (Laughter).

Take care. Thank you, Paul.

Charles Fishman, Morningstar

Good morning.

Hello, Charles.

Massachusetts. Can you just go over -- what was the key differences in the existing program -- prior program, and what -- under the new legislation? And I guess, the follow-up already would be, is the $25 million to $50 million that you are showing on -- actually what slide 16 -- of annualized investment, can we anticipate that to go up, or will that -- will the new legislation just put that in the upper range?

Yes, let me start with the question about then and now. The Massachusetts regulatory approach was a more traditional regulatory approach. It involved periodically rate cases. And because of that convention, there tended to be a significant lag, much greater than 12 months on CapEx investments. So again, a traditional rate case sort of mode that we followed, and all the other utilities followed in Massachusetts. What the new legislation would provide for, you file an annual construction plan for your modernization activities. We intend to file that plan by the end of October. The DPU has six months to consider the plan, and then you begin rate recovery on investments beginning in the spring of 2015. So the lag is effectively eliminated.

You will be recovering on your investments, as you make those investments during the period. So that is how the mechanism will work versus how it worked traditionally. Give or take, we are spending annually about $40 million in Massachusetts on modernization, ongoing maintenance and the like. Under the new program, again, we are developing our plan. We will file at the end of October. We anticipate our spending will tick up. But we have been spending at a very good clip in Massachusetts up to this point. By the way, I would add that there is a cap in the legislation on how large the programs can be. And I will have Randy and [Merritt] check this, but I believe it's 1.5% of your firm annual revenues is how the program is capped.

And the natural (inaudible) is an traditional type replacement type program?

Correct.

Thanks, Bob.

Yes. You're welcome.

Brian Lasky, Morgan Stanley

Hello, good morning, gentlemen.

Good morning.

Just was wondering whether or not you would have a decision on your MLP at the Analyst Day? Is that your expectation you would have one way or another there?

Well, again, I am just going to ask you to bear with me. I am going to pass on the question, and just repeat that the meeting on September 29 is intended to be exhaustive. So we are going to deep dive all of our businesses, and all the considerations that we have been working on.

Perfect. Thank you very much.

All right.

(Operator Instructions)

We have no further questions at this time. I would therefore like to turn the call over to Bob Skaggs for closing remarks.

All right, Grant. Thank you very much, and thanks to everyone for participating today, and your ongoing interest and support of the Company. We look forward to seeing you and speaking with you on September 29 in New York. So thanks, and have a good day.

Thank you ladies and gentlemen for your participation in today's conference. This now conclude your presentation. You may now disconnect. Enjoy the rest of your day.