Glen L. Kettering - Senior Vice President of Corporate Affairs Robert C. Skaggs - Chief Executive Officer, President, Director and Interim Chief Executive Officer for Gas Distribution Segment

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division Charles J. Fishman - Morningstar Inc., Research Division

Good day, ladies and gentlemen, and welcome to the Q3 2012 NiSource Earnings Conference Call. My name is Leanne, and I will be your operator for today. [Operator Instructions] I would like to advise the parties that the conference is being recorded. And now I'd like to hand over to Mr. Glen Kettering, Senior Vice President of Corporate Affairs. Please go ahead. Glen L. Kettering: Thank you, and good morning. On behalf of NiSource, I'd like to welcome you to our quarterly analyst 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'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 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'd like to turn the call over to Bob Skaggs. Robert C. Skaggs: Thanks, Glen, and good morning, and thanks for joining us. Before diving into the details of NiSource's third quarter, we want 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'll first touch on financial highlights from yet another strong quarter. As you'll see, our earnings continue to be on track with our 2012 outlook. We'll also cover the strong progress we've 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'll field your questions. Let's start with a few key takeaways, which you'll find on Slide 3 of the supplemental deck posted online this morning. If there's one theme for the quarter, and the year, for that matter, it's strong progress. Strong progress on our business plan and financial results, strong progress across each of our business units and strong progress on a robust capital investment program. As noted in this morning's release, NiSource's earnings are squarely in line with our 2002 -- 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 the 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 most 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 3 months ended September. That compares with about $33 million, or $0.11 per share, for the third quarter of 2011. Our operating earnings for the quarter decreased from about $142 million to approximately $130 million. It's important to note that these results reflect approximately $50 million in previously disclosed and 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 showed 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 & Storage or NGT&S highlighted on Slide 5. As I mentioned, the highlights of 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 of our Columbia Gas Transmission system. The agreement has an initial 5-year term covering investments placed into service during the 2013 through 2017 timeframe, 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 continued 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 12,000 horsepower of compression in Orange County, New York. We'll fund nearly half of that partnership investment of about $43 million. Construction has started on the project with the targeted in-service date in the first quarter of 2013. We're 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 precedent agreements in place and is on track for an FERC filing in the first half of 2013. That project is set for in-service in late 2014. And just last week, we announced that we have binding precedent agreements with customers of East Side Expansion project. That approximately $200 million project will add up to 300,000 dekatherms 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're targeting an in-service date in the third quarter of 2015. On the minerals and midstream front, we previously announced 2 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, will invest about $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'd 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 3 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've added a map and project slides -- 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 unparalleled 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 in our Michigan City plant. Construction of the unit will begin in 2013, with an investment of approximately $250 million. I note that construction of the FGD units at our Schahfer facility remain on schedule and on budget. All told, our environmental investments will approach $900 million over the next few years. NIPSCO also received FERC approval to move forward on 2 significant electric transmission enhancement projects. One, which we announced on our last quarterly call, is the 100-mile Reynolds to Hiple transmission project. It'll involve a total investment of about $300 million. The second project is a partnership with Pioneer LLC called 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, with only a small percentage recovered from NIPSCO's customers. Looking further ahead, the NIPSCO team will continue taking steps to improve reliability and spur a continued economic development in Northern Indiana. That effort will include modernization of our core electric system, the replacement of transformers, poles, lines and other vital equipment. And 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 an order from the Massachusetts Department of Public Utilities for our base rate case. Although we're 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 could 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 themes 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 to $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're 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 disciplined execution, continue to make NiSource a compelling investment proposition for all our financial stakeholders. As always, we'll 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'll release our full 2012 -- full year 2012 earnings and provide a business update. Consistent with the practice followed by many of our peers, we'll issue our year-end earnings contemporaneously with our 10-K filing. At that time, we'll 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. Leanne, we can open the call to questions.

[Operator Instructions] We already have a question waiting, and that comes on the line from Paul Ridzon from KeyBanc. Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division: Hilcorp. Did you -- I just kind of missed -- may have missed it. Did you say the opportunity, currently $300 million, could grow to $1 billion? Robert C. Skaggs: That's right. We believe that the downstream infrastructure opportunity, assuming robust drilling and activity in that region in the Utica, could approach $1 billion for the entire partnership. So our share would be about $0.5 billion. Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division: Can I have a sense of the timeframe? Robert C. Skaggs: Yes. We think this is a 5-year, 7-year sort of proposition. Again, it's going to depend on the pace of drilling activity in the region. Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division: And your third quarter report indicated some positive preliminary drilling results. Can you just elaborate? Robert C. Skaggs: Well, Hilcorp has been active in the area of interest. They drilled a number of test wells. They're looking at frac-ing approaches, tracking approaches. We don't have IP information at this point, but the initial results and tests indicate that we're in the sweet spot of the region. Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division: Where is that exactly? Robert C. Skaggs: It's a 4-county area, 2 counties in Ohio and 2 counties bordering in Pennsylvania.

And your next question comes from the line of Charles Fishman for Morningstar. Charles J. Fishman - Morningstar Inc., Research Division: On the filing last month in Pennsylvania, Columbia Gas filing, would -- is there anything in the filing that's not consistent with Act 11? Or is this pretty much a -- I won't -- I guess it's not a formality, but certainly your expectations would be that everything would be approved. On that matter, is there something that's a little different? Robert C. Skaggs: No. It's fully consistent with Act 11, but I'd make this key observation. We're the first out of the gate. So this is going to be the first case that the commission will consider under Act 11. So it will be, to a degree, precedent setting in breaking new ground in that respect. Charles J. Fishman - Morningstar Inc., Research Division: Okay. And then going to NIPSCO on the transmission. When you said FERC approved your joint venture line with Pioneer, the whole thing has been approved, not just your 50%. Is that correct? Am I misunderstanding that? Robert C. Skaggs: That's correct. Charles J. Fishman - Morningstar Inc., Research Division: Okay. And then with respect to the transmission, is there anything on the horizon that -- additional projects with Pioneer or on your own in that transmission? Robert C. Skaggs: Well, the team, the electric 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. Charles J. Fishman - Morningstar Inc., Research Division: And then finally, on your dividend policy, the 3% to 5% annually. Since -- it looks like your CapEx is running maybe a little ahead of what you 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? Robert C. Skaggs: Well, let me put the policy in perspective. We've said that the payout ratio should be between 60% and 70%. This year, we're going to be right in the middle of that range, and going forward, we'd like to continue to be, give or take, well within in the range. So the Board's 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 sorts of factors. Charles J. Fishman - Morningstar Inc., Research Division: And that decision will be made midyear next year? Robert C. Skaggs: 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.

We have no further questions waiting at this time. [Operator Instructions] Robert C. Skaggs: All right, Leanne. And to the folks that have participated, we certainly appreciate your interest. Thanks for your support, and have a good weekend and a safe weekend. Thanks so much.

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