NiSource Inc. (NI) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 NiSource Earnings Conference Call. My name is Carissa, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host, Mr. Glen Kettering, Senior Vice President of Corporate Affairs. Please proceed.

Thank you, Carissa, and good morning, everyone. On behalf of NiSource, I'd like to welcome you to our quarterly analyst call. Here 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. The focus of today's call is to review our financial performance for the fourth quarter and full year 2012 and to provide a business update. We'll then open the call 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 statements. Information concerning those 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, and thanks for joining us. For today's agenda, first and foremost, we'll review another year of strong performance. Our 2012 highlights reflect the continued strength of our strategy, as well as our team's proven ability to execute on that strategy and build shareholder value. We'll also update you on more recent accomplishments and ongoing initiatives. And finally, we'll discuss our 2013 financial outlook and key commitments. We'll also have plenty of time for your questions. Let's start on Slide 3 in the supplemental deck that was posted online this morning. As we noted in this morning's release, 2012 was yet another year of disciplined execution across all facets of our business strategy. As you know, that strategy is anchored by a deep and growing inventory of infrastructure-focused capital investments that generate significant value for our customers, shareholders and other key stakeholders. For the sixth year in a row, our team's execution of that strategy generated earnings growth squarely in line with our guidance, and for the fourth consecutive year, it produced total shareholder returns that outperformed the utility indices. Specifically, NiSource generated non-GAAP earnings of $1.46 per share, well within our guidance range of $1.40 to $1.50 per share, and strong year-over-year growth of more than 10%. We also generated total shareholder return [Technical Difficulty]

Ladies and gentlemen, please standby. Your conference will resume momentarily. You may proceed.

We apologize. Dreaded glitch, our phone was obviously disconnected for some reason. In any way, we apologize. And let me just go back to the performance, financial performance for 2012, and I'll begin the narrative at that point, we'll just carry on. Again, we apologize. NIPSCO generated non-GAAP earnings of $1.46 per share, well within our guidance range of $1.40 to $1.50 per share, and strong year-over-year growth of more than 10%. We also generated total shareholder return of approximately 8.5% and increased our dividend for the first time in more than a decade. That strong momentum has continued in 2013, as earlier this month, our stock price reached a 10-year high. As I noted, the foundation of NiSource's success over the last several years has been the team's demonstrated ability to execute on our inventory of infrastructure-focused capital investment opportunities. In 2012, those capital investments reached nearly $1.6 billion. Over the balance of the call, I'll discuss how we are continuing to enhance and expand that investment portfolio which will produce a record capital investment program of about $1.8 billion in 2013. Many of you may recall that we outlined key elements of NiSource's elevated investment strategy at our 2012 Investor Day last September. In particular, we identified and expanded inventory of accretive infrastructure investment opportunities for the next 2 decades totaling $25 billion to $30 billion. Those opportunities will drive an annual capital investment run rate of $1.5 billion to $1.8 billion, sustainable annual earnings growth of between 5% and 7% and an annual dividend growth rate of between 3% and 5%. You may also recall that we emphasized that we would fund our enhanced program in a balanced fashion and we would religiously guard our investment-grade credit rating. By way of an update, we are well on our way in executing that elevated plan. I'll touch on several of our team's recent advances this morning including, of course, a watershed event for us, the FERC's January 24 approval of Columbia Gas Transmission's landmark infrastructure modernization settlement. I'll speak more to the implications of that settlement in a moment. But suffice it to say that our Columbia pipeline team is now poised to make significant and ongoing investments that will modernize our system and benefit our customers and other key stakeholders for decades to come. At our gas utilities, we also continue to see strong execution on our industry-leading infrastructure modernization programs and in our Indiana electric business, solid progress on our significant environmental investments. In a snapshot, yet another very strong year for NiSource. We added to our growing track record for delivering results, and we have a well-established, highly-visible plan to continue building shareholder value through long-term, sustainable investment and earnings growth. So with that backdrop, let's take a closer look at our 2012 results starting with our financial progress on Slide 4. As you can see, NiSource delivered net operating earnings non-GAAP of about $427 million or $1.46 per share in 2012. That compares with about $369 million or $1.32 per share for 2011. Our operating earnings for the year increased by about $125 million over 2011. On a GAAP basis, our income from continuing operations for the year was about $411 million or $1.41 per share compared to about $295 million or $1.05 per share in 2011. Schedules 1 and 2 to our earnings release shows the GAAP to non-GAAP reconciling items. Turning to our individual business unit results, let's start with our pipeline business summarized on Slide 5. Prior to highlighting the results, I want to mention a naming change you'll notice going forward. We're rebranding our NiSource Gas Transmission and Storage group as the Columbia Pipeline Group, or CPG. This leverages the historic strength of our Columbia Gas Transmission and Columbia Gulf brands in the tradition of service and reliability they represent. From an earnings standpoint, our pipeline group's performance continue to be solid, benefiting from growth projects placed into service, as well as Columbia Gulf rate case that we settled in November 2011. We generate operating earnings of about $398 million in 2012 compared to $360 million in 2011. As I mentioned a few moments ago, the most significant highlight is the landmark system modernization agreement that the team completed in 2012 and was approved by the FERC last month. That approval establishes a clear path forward. With an identified project stream and a balanced transparent recovery mechanism, this long-term program ultimately is expected to involve roughly $4 billion to $5 billion in investment to ensure the ongoing safety, reliability and flexibility for Columbia Gas Transmission system. Under the settlement, beginning immediately, we'll invest about $1.5 billion in the first 5 years in addition to $100 million in annual maintenance investment. The program truly is a win-win for our customers, the company and all our key stakeholders. Our pipeline and midstream project development teams also are continuing to develop and execute on infrastructure investment opportunities in existing and new markets and midstream projects to serve the Utica and Marcellus Shale regions. As a side, I'll note that as part of our supplemental slides, we've outlined the various infrastructure projects currently in flight and plan. By the way, you'll find similar slides for each of our business units. In our midstream business, our Big Pine Gathering System will be placed fully into service by April of this year. Supported by a long-term gathering agreement with XTO Energy, the $160 million project will transport up to 425 million cubic feet per day of Marcellus production. Also in midstream, Pennant Midstream, LLC, our joint venture with Hilcorp, continues to make progress with its pipeline and processing facilities and remains on schedule to be completed and in-service by the end of 2013. NiSource is responsible for $150 million of the total investment in the project's first phase. In connection with our other resource development-based arrangement with Hilcorp, test wells were drilled in 2012 to support the development of the hydrocarbon potential on more than 100,000 combined acres in the Utica/Point Pleasant Shale formation. Although the evaluation process continues, preliminary results are quite encouraging and indicate liquids content consistent with active wells in the area. Delineation and additional test wells will continue in 2013 with a full development program launched later this year. We anticipate the 2013 development program will include the drilling of 10 to 20 wells. Recall, NiSource will invest alongside Hilcorp in the development of the acreage, owning both the working and overriding royalty interest, all of the Hilcorp NiSource acreage is dedicated to the Pennant Midstream project. On our regulated pipelines, the team also is moving ahead on several projects that will help provide liquidity and market access for new shale gas production. These include the East Side and West Side Expansion project, combined investments of more than $400 million, which in aggregate will add approximately 800,000 decatherms per day of new transportation capacity on our systems. Also in late December, Columbia Gulf initiated a nonbinding, open season for its proposed Cameron Access Project in South Louisiana. With access to various supply basins, the project would improve reliability for shippers by transporting natural gas supplies directly into the Cameron LNG terminal via new pipeline from Columbia Gulf System. With a projected in-service date of mid-2017, initial capacity and investment will be determined based on the results of the open season. As you can see, our pipeline team is maintaining a sharp focus on both the core growth and modernization projects, while pursuing complementary and accretive midstream projects. This balanced approach is designed to meet the evolving needs of the marketplace, ensuring the reliability, integrity and modernization of our infrastructure and leveraging our assets and mineral position in the shale basins. For 2013 capital spending, we'll invest at least $700 million in our pipeline storage and midstream assets, and we'll certainly consider additional investments for the right projects. Let's now shift to Indiana and our electric business as summarized on Slide 6. For NIPSCO, 2012, the company's 100th anniversary was right in line with our plan to deliver on our core customer, reliability and environmental initiatives, while focusing on long-term investment and growth. During the year, NIPSCO delivered strong operational and financial performance and advanced several near- and long-term growth in modernization investments. Operating earnings came in at about $238 million in 2012 compared to about $202 million in 2011. In addition, NIPSCO continued to introduce an array of new customer programs, including an air-conditioning cycling program, a recently improved green power rate program and a program offering customer incentives for those who drive electric vehicles. And most notably, NIPSCO continues to stay on track with significant environmental investments at its electric generation facilities. The company's more than $500 million FGD project at its Schahfer generating station remains on schedule and on budget. These new units will be placed into service in the fourth quarter of this year and in 2014. At the company's Michigan City generating station, preconstruction engineering and design work has begun for another $250 million FGD project. Construction will start during March of this year. NIPSCO also is moving forward with an overall investment of up to $0.5 billion for 2 fully-approved electric transmission projects in Northern Indiana that will go into service during the latter part of the decade. These projects will strengthen the Midwest electrical infrastructure, while supporting economic development and providing new jobs. The 2 approved projects are in process, and we'll see additional planning and outreach activities in 2013. On the legislative front, our NIPSCO team, together with other state utilities, is working tirelessly to advance legislation that would improve the efficiency of the regulatory process, as well as establish a framework for recovery of costs associated with ongoing infrastructure investments. And that initiative is progressing. Last week, Senate Bill 560 was passed by the Indiana Senate, and we expect the House to pick up the bill in March. Parallel with these efforts, we're developing a long-term modernization program for NIPSCO's electric transmission and distribution infrastructure. That effort will include modernization of our core electrical system, including replacement of transformers, poles, lines and other vital equipment. Stay tuned for more information related to this initiative later in 2013. You can find additional information about these and other planned investments at NIPSCO in our supplemental slides. All told, in 2013 we'll invest more than $430 million at NIPSCO, primarily focused on environmental investments and maintenance of our existing electric infrastructure. Let's turn now to our Gas Distribution Operations, or NGD, discussed on Slide 7. Our NGD team continues to deliver strong, steady results from its core business strategy, which is centered on aligning long-term infrastructure enhancement programs with complementary customer programs and regulatory initiatives. For the year, NGD operating earnings came in at about $441 million compared to about $425 million in 2011. Net revenues were up about $37 million, excluding trackers, primarily reflecting regulatory and infrastructure programs. The broad array of modernization projects across NGD continues to generate value for stakeholders and sustainable earnings growth. Part of a more than $10 billion long-term modernization program, NGD invested nearly $400 million in these infrastructure programs in 2012. In the regulatory arena, on February 8, Columbia Gas of Pennsylvania reached a unanimous settlement in principle with parties in its rate case. The parties will submit a joint petition for approval to the PUC by March 18. At that time, we'll provide additional details about the settlement terms. But what we can say at this time is that we're very pleased with the settlement, which is in line with our expectations. You'll recall the case is tailored after Pennsylvania's recently enacted Act 11, which reflects fully projected future test year under which the company proposes to recover its infrastructure investments through June 2014. Rates are anticipated to be placed into service in July of this year. On the legislative front, on February 14, the Virginia General Assembly passed legislation allowing natural gas utilities to defer required O&M costs for distribution integrity management plans, or DIMP, for recovery in future rate cases. And in Maryland, on February 7, Senate Bill 8 and its companion, House Bill 89, passed. The 2 identical bills will now go to the opposite chamber and be assigned to committee. The bills permit gas utilities to file a pipeline replacement plan to qualify for a fixed annual surcharge to recover associated costs. If passed and signed by the Governor, the act will take effect June 1, 2013. Once again, our Gas Distribution game plan is well established, straightforward and transparent. Sustained earnings growth through long-term investment -- infrastructure investments supported by customer programs and progressive regulatory models. Total capital investment in NGD reached nearly $650 million in 2012, similar level as targeted for 2013. Like our other 2 business units, we've added additional information about our infrastructure investments at NGD in our supplemental slides. Now a few comments on our 2013 earnings guidance and a bit more perspective on our record capital program, summarized on Slide 8. First and foremost, we're maintaining our commitment to long-term and sustainable earnings growth in the range of 5% to 7% per year. NiSource's non-GAAP earnings outlook for 2013 is $1.50 to $1.60 per share with the midpoint representing 6% growth over 2012 EPS. Again, fueling this will be our record $1.8 billion capital investment program, the lion's share of which is comprised of value-adding growth and modernization investments. The NiSource plan reflects yet another well-designed step-up in investment with the largest increase for 2013 being our modernization and growth initiatives of our pipeline group, the great addition to the foundation of accretive, value-adding growth in environmental investments at our other 2 businesses. These and other investments will serve to enhance the long-term value of our assets for the benefit of our customers, shareholders and other important constituencies. Again, as we continue to execute our investment-driven business strategy, I can assure you that we'll remain balanced, disciplined and transparent in how we fund our capital requirements. I might add parenthetically that our funding efforts received a number of recent boosts in the form of the $120 million in proceeds from the sale of our noncore retail services business, and we expected $150 million to $200 million benefit from the availability of bonus depreciation in 2013. Finally, we remain true to our unwavering financial commitments, sustainable earnings growth, a strong and growing dividend, strong liquidity and investment-grade credit. So as our 2012 results and 2013 outlook attest, the NiSource team is continuing to build on a strong track record of delivering collaborative regulatory and commercial solutions, while making disciplined investments that will grow earnings on a sustainable basis. With the full support of our Board of Directors, I'm convinced that we have a compelling game plan and the resources and capabilities to continue to deliver on our commitments. As always, we'll communicate with you and all of our stakeholders 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 support of NiSource. Now, Carissa, let's open the call to questions.

[Operator Instructions] And your first question comes from the line of Faisel Khan of Citigroup.

It's Faisel from Citi.

Sorry about the glitch.

No, no, that's pretty -- we've heard it all, so there's no problem at all. On the -- a couple of things. First on the Gas Transmission and Storage business, I know you guys talked about it in the press release and you talked about it in your prepared remarks, the other revenue credit category grew quite substantially year-over-year in the quarter. Can you just go into a little more granularity in terms of what was in that number so we get a better idea of how this is going to kind of move going forward?

Hey, Faisel, just to be clear in the question, you're talking about the other revenue category for 2012?

Yes, fourth quarter 2012.

Yes.

You have a big number in the other revenue category. And I think you described it as the royalty revenue and all the stuff that's going on in some of the midstream business, but maybe I'm wrong.

It's actually a FERC tracker that relates to the purchase and sale of incidental gas on the system. And I believe that the acronym is OTRA, but it's a tracker that just goes in and out of revenue.

And it's offset in O&M, so there is no net benefit.

Okay. So then where does all the gathering and royalty revenue and all those sort of deals show up then?

It would show up in the transmission segment, in demand and commodity revenues, for example.

Yes.

If you look year-over-year, the transmission segment increased its revenues, net revenues by approximately $28 million or so, and that's where the midstream activities would reside.

And new projects and midstream activities.

Sure, I understand. Okay. And then on the test wells you guys talked about in the joint venture, can you give us any sort of update on what those wells came up with? Was it dry gas, liquids? I mean, what are you guys looking at?

Yes. The gasses -- the gas is wet. We're not going to disclose specifics on flow rates and the like, but it's high gas, about 1,200 BTU. And we've said in the past that it's about 6 GPM, and that continues to be representative of what we're seeing in the test wells.

Is it liquids component? Is it condensate, or is it NGLs?

NGLs.

Okay, all right, understood. And then on the reversal of Columbia Gulf, what is part of the line, we've seen the Columbia full pricing versus Henry Hub pricing kind of come pretty close to parity. Your reversal doesn't come online till 2014. I'm just wondering if you can give us any sort of idea of how you think basis is going to move over the next -- in the next 12 months or so until your reversal comes online. Do you expect the pricing in the Marcellus area to get the disconnect from the rest of the market? Or do you expect to still trade at parity or premium to Hub?

Yes. I just really can't give you a good sense on price. My crystal ball is not that good. What I can say is the team continues to explore opportunities to optimize Columbia Gulf, and that includes moving gas from north to south. And so you'll continue to see us prospecting along those lines, and the West Side project is a great example of what we're going to continue to try to do.

Okay. And last question from me. You mentioned that you're changing the name of natural -- the name of the Natural Gas Transmission group back to Columbia Gas Transmission. Is there anything we should read into that besides branding? I mean, is this...

No, purely branding. The marketplace has always considered Columbia Gas pipeline, TICO, Columbia Gulf, and so we're just going to leverage what's a well-established brand in the market.

Okay. So there's no -- there's nothing here that would be a precursor to naming of another company or a subsidiary of the company or anything like that?

No, no. No, don't read anything else into it.

And your next question comes from the line of Carl Kirst of BMO Capital Markets.

Just on the FERC approval of the Columbia settlement, were there any modifications? Or was there any couching language that they put out there? And I asked that in the sense that as we look 5 years down the road, we'll be re-upping this basically be just commercial, essentially, for FERC? Or was there any kind of regulatory reticence at all?

Carl, you broke up at the very end, but let me begin at the first part of your question. The order is absolutely clean. There was some language about providing guidance on how to package settlements, but that was FERC discussion as opposed to point on our transaction or our agreements. So very, very clean, without condition. And then I think you asked about re-upping the settlement after the initial 5-year term. And clearly, that's our intent. We're going to have to execute the program efficiently and work with our customers and other stakeholders closely. But the settlement provides us the opportunity to renew, and that's what we intend to do.

Great. No, no, you answer that. Sorry, I broke up there. The second question is really on Cameron Access, and understanding that it's early days. I'm not sure if there's any framework as far as our book ending of investment potential, but -- that could be done. Or if not, should we be thinking about this in a sense of basically a lateral pipeline off of Columbia Gulf? Or could this be a larger project for instance, embedding kind of an upsized West Side Expansion, where we're taking more gas form Marcellus?

For Cameron Access, think of it the way you described it as a lateral of Columbia Gulf System. And we're not at a point to provide book-ins on the amount of investment. We just make the observation that we tend to go for singles and doubles and bite-size projects, and leave it at that.

Great. And then last question, if I could, and this is just more on NIPSCO, and very much appreciate the legislative update with Senate Bill 560. And I think last time we spoke in December, you didn't seem to kind of get a sense if there was any big critical mass of opposition developing in the House. Is that still a fair statement? Or as we've gotten closer to it, has anything -- an opposition emerged from that?

Well, I'll just say it's the legislative process, Carl. The Senate passed the Bill 37,13, so a very healthy margin. We do believe that there is good support for the legislation in the direction of infrastructure in Indiana.

And your next question comes from the line of Paul Ridzon of KeyBanc.

What did the retail business contribute in '12, the business that was sold to AGL?

Paul, this is Steve. Approximately $0.03 a share.

And how many -- you spoke of encouraging results. How many wells were drilled?

We had handful of test wells being drilled. We're bringing online 2 production wells, and we're in the process of drilling 2 production wells. And when I say we, Hilcorp is actually doing all of that.

Okay. And any update for plans on the second cryo plant you have an ups on?

No update at this point. We're still bullish and optimistic about phases 2 and 3 of Pennant, but it's just too early to provide any specificity around timing, size and that sort of thing.

Your next question comes from the line of John Edwards of Credit Suisse. John Edwards - Crédit Suisse AG, Research Division: Just real quick. I take it the year-over-year lower volumes on Columbia Gulf, that's because of the growing production up in the Marcellus?

Also weather. Really warm weather conditions in 2012, so that, too, had an impact. It was not trivial, I would add. John Edwards - Crédit Suisse AG, Research Division: Okay. And then okay, similar -- I guess, similar for the lower wholesale electricity sales? The reason why I'm asking because it looks like -- on the weather, it looked like this year wasn't as cold as last year. I mean, it was a little bit colder than last year, excuse me, at least, on the Columbia Gulf thing. So I guess -- I mean, you are having pushback from going production in the Northeast, correct?

Oh, yes. Oh, sure. We're seeing the impact of Marcellus on the Columbia Gulf volumes. And I mentioned earlier, that's why the team continues to look at opportunities to optimize Columbia Gulf and move gas north to south, and the West Side Expansion is a good example and the team pursues other opportunities. John Edwards - Crédit Suisse AG, Research Division: Okay. And then, I'm sorry, and then on the wholesale electricity sales, those were down. Is that a weather issue also? Or...

Yes, we're going to have to get back to you with specificity around that. Frankly, I don't track it that much because it's just not a big part of the business. But it could be a variety of factors. And we'll have to ask Randy to provide that detail.

[Operator Instructions] And your next question comes from the line of Charles Fishman of Morningstar.

On Senate Bill 560, what came out of the Senate? Is that -- does that address generation and distribution? Or was that trim down coming out of the Senate?

It's primarily T and D sort of investment opportunities, as well as natural gas and in particular expansion of gas, natural gas service to rural areas or underserved portions of Indiana.

Okay. So this would be a tracker that would emulate like the gas tracker pipeline?

Yes. Modernization investments and transmission distributions, storage, natural gas, rehabilitation and the like. That's what the tracker is designed to promote those sorts of investments. Legislation also provides for future-looking test year, statutory deadline to deal with rate cases, things like are included in the legislation as it currently is drafted.

Okay. And it's now going to the House?

Yes, the bills will cross over from the Senate to the House and vice versa in March.

Okay. And then you mentioned an AC cycling program. Is that one of these programs with the smart thermostats?

Yes. For the most part, it is.

And who owns those? Do you? Or is that something that can go into rate base or not material?

Yes, we own those. And by the way, they're not material to the overall investment opportunity, very small program.

And there are no further questions. At this time, I'd like to turn the call over to Mr. Skaggs for closing remarks.

Thank you. And thanks for everyone participating this morning. Again, we appreciate your interest and your support. Have a good day. Thanks.

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.