Start Time: 09:00 End Time: 09:18 NiSource Inc. (NYSE: NI ) Q2 2015 Earnings Conference Call August 03, 2015, 09:00 AM ET Executives Joseph Hamrock – President and CEO Donald Brown – EVP, CFO and Treasurer Randy G. Hulen – VP of IR Analysts Paul Ridzon – KeyBanc Capital Markets Operator Good day, ladies and gentlemen, and welcome to the NiSource Q2 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference maybe recorded. I would like to introduce your host for today’s conference, Mr. Randy Hulen, Vice President of Investor Relations. Sir, please go ahead. Randy G. Hulen Thank you, Michelle, and good morning, everyone. I’d like to welcome you to our NiSource quarterly investor call. Joining me this morning is Joe Hamrock, CEO; and Donald Brown, CFO. As you know, the primary focus of today’s call is to review NiSource’s second quarter 2015 financial performance as well as provide an overall business update. Following our prepared comments, we will open the call to your questions. At times during the call, we will refer to supplemental slides available on our Web site. Just a reminder, on July 1, NiSource successfully completed the separation of Columbia Pipeline Group or CPG into an independent publicly traded company. As a result, NiSource no longer maintains any ownership interest in either CPG or Columbia Pipeline Partners. However, the financial information presented today does include CPG’s segment results, as it was part of NiSource through June 30. I would note future NiSource financial results will report CPG as discontinued operations. Therefore, our business segment discussion today will focus solely on NiSource utilities. As an independent company, CPG is hosting its quarterly call later this morning at 10 AM Eastern. And finally, before I turn the call over to Joe, I’d like to remind everyone that some of the statements made on this call will be forward-looking. And these statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in these statements. Information concerning such risks and uncertainties is included in the MD&A and Risk Factors sections of our periodic SEC filings. Having covered all those reminders, I’d like to now turn the call over to Joe. Joseph Hamrock Thanks, Randy. Good morning, everyone, and thank you for joining us for this first NiSource call since the separation of CPG. Today, we’ll briefly cover our second quarter results and earnings drivers before discussing execution highlights at our utilities. And we’ll close with an overview of our investment proposition and our future business plan as a premier pure-play utility company. And we’ll leave plenty of time for your questions. Before we get into the details though, let me just say how excited I am about the path ahead for NiSource. We’ve set a solid foundation for continued long-term growth and enhanced customer value, guided by an experienced management team with a proven record of execution. And it’s a privilege to represent our team today in sharing some of the highlights of our performance as well as our outlook for the future. As Randy noted, I’ll be referencing a few slides in the supplemental deck that was posted online this morning. First, a few key takeaways for the quarter. For the second quarter, results were solidly in line with our plan. The NiSource team delivered $0.18 per share non-GAAP in the recently completed quarter versus $0.25 per share in 2014. Across the board, we had continued solid execution of our infrastructure investments, customer programs and regulatory initiatives. As Randy mentioned, we finalized the tax-free separation of CPG on July 1. After the market closed on July 1, shareholders received one share of CPG common stock for each share of NiSource common stock. Our commitments through the separation were met, including disciplined cost effective execution, our ongoing focus on customer service and our commitment to investment grade credit. In fact, following the separation, our credit ratings at the three major agencies have either remained the same or improved. Standard & Poor’s upgraded our credit rating to BBB plus from BBB minus. Fitch Ratings revised its outlook to BBB minus with a positive outlook from BBB minus with a stable outlook. And Moody’s reaffirmed its rating of Baa2. These ratings set a strong foundation for us as a pure-play utility with significant long-term infrastructure investment opportunities. One of the key value drivers NiSource will continue to offer investors is a solid and growing dividend, which we expect to increase by 4% to 6% annually. We announced our first post separation quarterly dividend of $0.155 per share on July 2, which is consistent with the company’s intention announced in May to increase the initial combined NiSource and CPG dividend by nearly 8%. As we also announced in May, we expect to deliver non-GAAP earnings per share of $1 to $1.10 in 2016 with planned infrastructure enhancement investments of approximately $1.4 billion. Now, let me turn the call over to Donald to review our second quarter financial results highlighted on Page 4 of our supplemental slides. Donald Brown Good morning, everyone, and thanks for joining us. As Joe mentioned, we delivered non-GAAP net operating earnings of about $57 million or $0.18 per share, which compares to about $78 million or $0.25 per share in the second quarter of 2014. On an operating earnings basis, NiSource was down about $7 million. As a reminder, these results include CPG reportable segment financials. Two factors impacted our net operating earnings compared to 2014. One was additional interest expense related to Columbia Pipeline Group long-term debt issuance prior to the separation. The other was NiSource’s non-controlling interest in Columbia Pipeline Partners, which was formed in February 2015. Combined, these items add up to nearly $0.06 for the quarter. On a GAAP comparison, our loss from continuing operations was about $36 million for the second quarter versus income of about $79 million for the same period in 2014. This decrease was primarily as you would expect attributable to a loss on early extinguishment of long-term debt and separation costs. At the segment level, each of the three pre-separation business segments delivered financial results well in line with our expectations during the second quarter. Full details of our results are available in our earnings release issued and posted online this morning. Now, turning to Slide 5, I’d like to briefly touch on our debt and credit profile following the separation, which as you’ll see is consistent with our May 14 webcast. Following the recapitalization, our total debt level was reduced to $6.7 billion with the weighted average maturity of approximately 14 years and average coupon of approximately 5.86%. On the liquidity front, our $1.5 billion revolving credit facility went into place at separation. And as of July 1, we maintained net available liquidity of about $2 billion. Our financial foundation for our continued growth as a pure-play utility is solid, on track and consistent with our commitments. Now, I’ll turn the call back to Joe to discuss a few customer infrastructure investment and regulatory highlights across our utilities. Joseph Hamrock Thanks, Donald. Our teams remain on track to invest approximately $1.3 billion during 2015, which is part of our $30 billion of long-term regulated utility infrastructure investment opportunities. These investments further improve reliability and safety, enhanced customer service and reduced emissions, all while generating sustainable long-term growth. Let’s turn to a few highlights in our gas operations business segment on Slide 6. We’re continuing our disciplined execution on core infrastructure investment and modernization programs supported by complementary regulatory and customer initiatives. In fact, just last week, Columbia Gas of Massachusetts reached a settlement in principle with the Massachusetts Attorney General in its base rate case. The settlement agreement is expected to be finalized and filed for approval with the Massachusetts Department of Public Utilities later this month. The case, as you’ll recall, seeks to recover costs to support CMA’s multiyear modernization plan to maintain the safety and reliability of natural gas service for customers. Columbia Gas of Pennsylvania’s base rate case is progressing on schedule. The $46 million request supports continued investment in our well-established modernization programs that enhance safety and reliability. A decision in that case is expected by the end of this year. Turning to the pending base rate case at Columbia Gas of Virginia, on June 30, the hearing examiner recommended specific fixed customer charges for each rate class, addressing the final outstanding issue in the case. The commission had previously found that the stipulated annual revenue increase of $25.2 million is reasonable. A final order in the case is expected later this year. And back to Massachusetts, as an update to what we shared in our first quarter call, we received Department of Public Utilities approval of the 2015 Gas System Enhancement Plan on April 30. Cost recovery began on May 1 and is projected to increase annual revenues by approximately $2.6 million. And at NIPSCO gas, we continue executing on our seven-year natural gas system modernization program. Our 2015 projects, which include enhancement of existing infrastructure and extension of gas service to rural customers, are well underway and we expect to file our program and tracker update by September 1. Now, let’s turn to our electric operations on Slide 7. On May 26, NIPSCO, the Indiana Office of Utility Consumer Counselor and some of NIPSCO’s largest industrial customers reached a settlement agreement resolving all concerns raised by the parties in an Indiana Court of Appeals proceeding surrounding the company’s long-term Electric Infrastructure Modernization Plan. As part of the agreement, NIPSCO will file a base rate case, followed by a new seven-year plan. We expect to file the base rate case on or about October 1 of this year. The FGD unit under construction at NIPSCO’s Michigan City Generating facility is on schedule to be placed in service by the end of 2015. Following the completion of the Michigan City unit and with those we placed in service over the past two years, all of NIPSCO’s coal-burning facilities will be fully scrubbed. NIPSCO’s two major electric transmission projects are also progressing as planned. Right-of-way acquisition, permitting and substation construction are underway for both projects. You’ll recall these projects involve an investment of about $500 million for NIPSCO and are anticipated to be in service by the end of 2018. As you can see, our teams continue to execute on a well-established infrastructure, customer and regulatory plans. Before turning to your questions, I’d like to reaffirm the value proposition that we believe differentiates NiSource. Following the separation of CPG, we are well aligned with our aspiration to be a premier regulated utility company. Our plan represents a best-in-class risk adjusted total return proposition with $30 billion of long-term 100% regulated utility infrastructure investment opportunities, significant scale across seven states, transparent earnings drivers and constructive regulatory environments. We’re focused on leading in the areas that matter most in our industry, those are enhancing value to our customers and community, stewarding our assets to ensure safe, reliable, affordable and efficient service, engaging and investing in the communities we serve and ensuring through disciplined execution that we deliver on our financial and other stakeholder commitments. This transparent sustainable growth is expected to drive shareholder value. As we first announced in May, we expect to deliver non-GAAP earnings per share between $1 and $1.10 per share in 2016. We expect our capital program will grow to about $1.4 billion annually starting next year. And finally, we expect to grow our non-GAAP EPS and our dividend by 4% to 6% per year. Thank you all for participating today and for your ongoing interest in support of NiSource. We look forward to sharing continued updates on our progress. Now, Michelle, let’s open the call to questions. Question-and-Answer Session Operator Thank you. [Operator Instructions]. Our first question comes from the line of Paul Ridzon with KeyBanc. Your line is open. Please go ahead. Paul Ridzon Good morning. How are you? Joseph Hamrock Good morning, Paul. I’m doing fine. How are you? Paul Ridzon Good. When do you expect Massachusetts rates to take effect? Is that calendar tolerated at all? Joseph Hamrock The settlement details will be filed later this month and you could look for some potential changes in the timing of the rate implementation in that settlement, but I don’t want to get ahead of the actual settlement itself, the filing of the settlement. Paul Ridzon Understood. And can you just share a little bit what’s going on with electric road in Indiana, how much of that was weather? NIPSCO industrial was down. Is that all steel related? Joseph Hamrock Yes, we are certainly seeing the steel industry weather some very tough conditions relative to imports, and that – on the industrial side in that particular zone we’re encouraged to see some sign of support from Washington related to the import issues although the recovery looks like it will be prolonged. And on the other side of the coin, we see economic development opportunities emerging, which will provide a nice boost and hopefully a modest offset to the industrial decline in our territory over time. But altogether, the key point here is our outlook factors in those conditions and the effect of that downturn and we remain confident in our guidance for 2016. Paul Ridzon And then maybe I’m getting ahead of my skis here, but can you talk about the Indiana rate case and your strategy there with regards to rate base? Is it a – I guess filed under fair value or historic rate base? Joseph Hamrock We’re working out the details of that filing as we speak, Paul. The key element for us is to reposition the modernization efforts allowing for the deferral of the tedious investments we’ve made in ’14 and ’15 rolling those into that rate case and then filing a new tedious plan afterwards. And again, we’ll file that case around October 1. Paul Ridzon Okay. Thank you very much, guys. Joseph Hamrock Thanks, Paul. Operator Thank you. [Operator Instructions]. I’m showing no further questions at this time. I would like to turn the conference back to Mr. Joe Hamrock for any further remarks. Joseph Hamrock Thank you, Michelle, and thank you all for joining us this morning. As you can see, NiSource is very well positioned for execution as a premier pure-play utility. Our regulatory efforts continue to play out across the stakes and we’re very encouraged by the opportunities we see in the future. Until next time, I look forward to talking to you then. Operator Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone, have a great day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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