Randy Hulen - VP, IR Joseph Hamrock - CEO, President and Director Donald Brown - CFO and EVP

Paul Ridzon - KeyBanc Capital Markets Christopher Turnure - JPMorgan Chase & Co. Charles Fishman - Morningstar Inc. Michael Lapides - Goldman Sachs Group Gregg Orrill - Barclays PLC Brian Russo - Ladenburg Thalmann & Co.

Welcome to the Second Quarter 2017 NiSource Earnings Conference Call. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to introduce your host for today, Randy Hulen, Vice President of Investor Relations. You may begin.

Thank you, Sonya and good morning, everyone. Welcome to the quarterly investor call. This morning, our -- Joe Hamrock, Chief Executive Officer; and Donald Brown, Chief Financial Officer. The purpose of today's call is to review NiSource's financial performance for the second quarter of 2017 as well as provide an update on our operations and our growth drivers. We'll open up the call to your questions, we will also be referring to our supplemental earnings slides during this call. These slides are available on our website. Before turning the call over to Joe, just a quick reminder. 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 sections of our periodic SEC filings. Additionally, some of the statements made on this conference call relate to non-GAAP measures. For additional information on the most directly comparable GAAP measure and a reconciliation of these measures, please refer to the supplemental slides and additional segment and financial information available on nisource.com. In that document, you'll also find our full financial schedules that have historically been available in our earnings release. With all that out of the way, the call is now yours, Joe.

Thanks, Randy. Good morning, everyone and thanks for joining us. During the second quarter, the NiSource team built on the strong foundation established at the start of 2017 and continued to drive value for our customers and investors by executing on our infrastructure investments, regulatory initiatives and customer programs. And on the financial front, successfully refinancing debt to capture interest expense savings opportunities. Let's look at Slide 3 of our supplemental deck and highlight our financial position and some of our significant achievements so far this year. We delivered second quarter net operating earnings per share non-GAAP of $0.10 compared to $0.08 during the same period in 2016. We remain on track to invest $1.6 billion to $1.7 billion in our gas and electric utility infrastructure this year with more than $820 million invested through the second quarter. These program investments are part of our more than $30 billion of identified long term investment opportunities. And we refinanced about $1 billion in debt during the quarter which will drive interest expense savings over the next several years. As we announced in this morning's press release, the team's effective execution and the strong financial results in the first half of the year combined with the successful outcome of our financing activities have led us to increase our 2017 non-GAAP net operating earnings guidance range to $1.17 to $1.20 per share. Taking into account this increased 2017 guidance range, we continue to expect, as we shared with you at our Investor Day in March, to grow our net operating earnings per share and dividend by 5% to 7% each year through 2020. We're also continuing to execute on our investment and regulatory programs. In Indiana, we reached a settlement agreement related to the CCR environmental upgrades we've proposed for certain generating stations and we received approval of the latest semi-annual tracker update associated with our gas modernization program. We also filed our second electric modernization tracker update request and our electric transmission projects remain on track to be in service in the second half of 2018. In Ohio, we're working with stakeholders on our application for a 5-year extension of our long term gas Infrastructure Replacement Program and we've reached a settlement in our base rate case in Maryland. On the customer growth front, we're slightly ahead of our plan. Now I'd like to turn the call over to Donald who will discuss our financial performance in more detail. Donald?

Thanks Joe and good morning, everyone. As Joe noted earlier, our results for the first half of 2017 were quite strong and we have raised our 2017 non-GAAP net operating earnings guidance range to $1.17 to $1.20 per share. Now turning to Slide 4. We delivered non-GAAP net operating earnings of about $33 million or $0.10 per share in the second quarter compared with about $27 million or $0.08 per share for the same period in 2016. Through the first half of 2017, our net operating earnings are up about $40 million or $0.11 per share compared with the same period in 2016. The biggest driver of our solid financial performance continues to be the impact of our long term infrastructure modernization investments supported by solid regulatory outcome and established infrastructure trackers. I would add that we've built additional momentum during the quarter by successfully refinancing about $1 billion of near term maturity debt with lower rate debt, accelerating interest expense savings over the next several years. In addition to our refinancing activities, we issued another $1 billion in new debt which we'll use to finance investments in our infrastructure modernization programs. During our first quarter update, we noted that we had filed with the Securities and Exchange Commission an at-the-market or ATM, equity issuance program. During the quarter, we issued about 1.3 million shares, receiving proceeds of nearly $34 million. As outlined at Investor Day, the ATM, combined with debt offerings and our well-established dividend reinvestment program, is intended to provide a balanced financing approach for NiSource's capital investments. And all financing costs, including equity dilution, are included in our 2017 earnings guidance and our growth rate commitments through 2020. Let's turn now to our segment level results. Our Gas Distribution Operations segment delivered operating earnings of about $56 million in the quarter, a decrease of about $18 million compared with the same period in 2016. Net revenues were up about $22 million, driven primarily by new rates from base rate cases and Infrastructure Replacement Programs. This increased revenue was offset by an approximately $40 million increase in operating expenses related to higher employee and administrative costs, increased outside service cost, depletion expenses -- depreciation expenses, property taxes and environmental costs. Our Electric Operations segment reported operating earnings of about $84 million in the quarter, an increase of about $20 million from the second quarter of 2016. Net revenues were up about $42 million, driven by new rates from the base rate case, increased investment in the transmission projects and increased industrial and commercial usage. This increased electric revenue was partially offset by higher operating expenses of approximately $22 million, primarily due to increased generation-related maintenance and vegetation management costs; increased employee administrative costs and higher growth receipts taxes. Before moving on from our results, I'd like to add a little context around the increase in non-tracked O&M expenses. In the gas segment, we've made commitments in recent rate case settlements to make certain investments in safety, reliability and customer service enhancements. In our electric business, we've increased the plant maintenance and vegetation management activities to boost our reliability. We're managing these expenses closely and as we shared at Investor Day, we remain confident that our performance transformation process will lead to a flattening of O&M expenses after 2017. Full details of our second quarter results are available in our earnings release and supplemental financial information posted this morning at nisource.com. Now turning to Slide 5. I'd like to briefly touch on our debit and credit -- debt and credit profile. Our debt level as of June 30 was about $8.2 billion, of which, about $7.3 billion was a long term debt. The weighted average maturity on our long term debt was approximately 16 years and weighted average interest rate was approximately 4.9%. I would note that we've made significant progress to reduce our weighted average interest rate by nearly 100 basis points since separation. This reduced cost of capital will help provide long term sustainability to our infrastructure investment programs. At the end of the second quarter, we maintained net available liquidity of about $1.3 billion, consisting of cash and available capacity under our credit facility. It's worth mentioning again that our credit ratings at the 3 major agencies are investment grade. Standard & Poor's rates NiSource at BBB+, Moody's at BAA2 and Fitch at BBB, all with stable outlooks. Going forward, our financial foundation is solid and poised for continued growth. Now I'll turn the call back to Joe to discuss a few customer infrastructure investment and regulatory highlights.

Thanks, Donald. Before getting into those details, I'd like to highlight 2 milestones which connect with our stakeholder commitment of being recognized by all in our communities as the best place to work. First, in May, NiSource was included in Forbes magazine's list of America's Best Large Employers for 2017. We ranked 61st overall, a significant jump from last year's rankings and I'm proud to say that we were the top-rated utility company. Recognition like this reinforces and helps spread the word that our 8,000 employees are creating a great place to work, grow and build a career. And in June, I joined more than 150 CEOs of some of the world's leading companies to sign the CEO Action For Diversity & Inclusion pledge, the largest CEO-driven business commitment to advancing diversity and inclusion in the workplace. It was an easy decision to sign this pledge because at NiSource, we're committed to building and maintaining an inclusive culture in a diverse workforce. Our teams understand that diversity is important in order for us to deliver on the expectations of our customers. So we're proud to join with other leading organizations to affirm our commitment to diversity and inclusion. We believe that if we provide our employees the right training and development opportunities and the right tools and technology, they will better serve our customers and communities. A great example of that is our continued modernization of our training program for our field operations employees. In May, we opened the second of 4 new state-of-the-art field employee training centers in suburban Columbus. Our first center opened near Pittsburgh last summer and another is expected to open later this year in Virginia. Construction has also begun on a facility in Massachusetts that will open in 2018. Now let's turn to some specific highlights for the second quarter from our gas operations on Slide 6. We continue to execute on our infrastructure modernization programs across all states and to advance key regulatory initiatives, all while growing our customer base. As I mentioned earlier, in Indiana, we received approval of our latest semi-annual tracker update covering approximately $61 million of investments that were made in the second half of 2016 which is part of a 7-year $845 million program to further improve system reliability and safety. In Ohio, our application for a 5-year extension of our Infrastructure Replacement Program remains pending before the Public Utilities Commission. Discussions with stakeholders continue following the PUCO staff's recommended approval with modifications last month. This well-established program authorized through the end of 2017 covers accelerated replacement of priority mainline pipe and immediate replacement of targeted customer service lines. A PUCO order in the new filing is expected by the end of the year. On the rate case front, last week, we reached a settlement with all parties to our request in Maryland. The case supports expedited replacement of aging pipe and adoption of additional pipeline safety upgrades. If approved by the Maryland Public Service Commission, the settlement would result in an annual revenue increase of $2.4 million effective in late October. In May, new rates took effect with tracker updates in our Ohio Infrastructure Replacement Program and our Massachusetts Gas System Enhancement Plan which combined, include more than $300 million of investments. Columbia Gas of Pennsylvania continues to execute on its robust modernization program as well with plans on track to invest more than $200 million in 2017. Now let's turn to our Electric Operations on Slide 7. In June, NIPSCO, along with the Indiana Office of Utility Consumer Counselor, the Citizens Action Coalition and a group of NIPSCO industrial customers submitted a settlement agreement seeking, among other things, approval and cost recovery for investments related to limiting coal ash emissions from certain units at our Michigan City and Schahfer generating stations. The settlement also calls for moving additional investments designed to reduce these units' impact on local waterways to a later proceeding. An IURC order on the CCR settlement is expected before the end of this year. We continue to execute on our 7-year electric infrastructure modernization program which includes enhancements to electric transmission and distribution infrastructure designed to improve system safety and reliability. Approximately $1.25 billion of investments are planned through 2022. We filed our second semi-annual tracker update request in June, covering about $134 million in investments made from May 2016 through April 2017. Our two major electric transmission projects remain on schedule with anticipated in-service dates in the second half of 2018. The 100-mile 345 kV and 65-mile 765 kV projects are designed to enhance region-wide flexibility and reliability. Substation line and tower construction are well underway for both projects. On the electric customer service front, I'm happy to report that last month, NIPSCO was recognized by J.D. Power as one of the most improved brands in the nation with a 59-point or 9%, improvement in its score. This strong performance helps demonstrate that our electric modernization program is benefiting customers and that our Indiana team, like all our teams, is focused on delivering the value our customers expect. As we wrap up today, just some key takeaways before opening the call to your questions. NiSource's long term utility infrastructure modernization programs continue to create value for customers and communities, while also driving solid financial performance for our shareholders. Our successful refinancing efforts will result in interest expense savings and our recent debt and equity issuances have generated low-cost capital to invest in our high-value modernization programs. We now expect to deliver 2017 non-GAAP net operating earnings in the range of $1.17 to $1.20 per share and we remain on track to complete $1.6 billion to $1.7 billion in capital investments this year, continuing to execute our more than $30 billion in identified long term investment opportunities. With our robust investment plans and taking into account our increased earnings guidance range, we continue to expect to grow both operating earnings and our dividend by 5% to 7% annually through 2020, while maintaining our investment grade credit ratings. So thank you all for participating today and for your ongoing interest in and support of NiSource. Now let's open the call to your questions. Sonya?

[Operator Instructions]. And our first question comes from Paul Ridzon of KeyBanc.

Glad you've continued to break out kind of the growth you're seeing from the customer growth initiatives. Can you just give some -- an update on that and kind of the trajectory there? And then secondly, just some more detail around the employee costs. Particularly, the net gas segment were up pretty high. Is that a timing issue or should we think about that as a new run rate?

Sure, Paul. Thanks. Both insightful questions. Let me touch on the growth update first. As we laid out at our investment -- Investor Day back in March, we have plans in place and expect to reach a run rate of 1% annual growth in customer additions by 2020. And this year is a pretty significant step for us in building and implementing capabilities to market those opportunities differently, to build the policy arena, to support that and to build the capabilities to execute. And we're ahead of plan through the second quarter in terms of the additions we've seen and feel very confident that our progress toward that ultimate goal of 1% sustained run rate is well on hand and well in sight for us. So I'd say encouragement confidence continues to grow. No significant change in our outlook for how these capabilities will ultimately fill in on the plan for us, but very good results so far. On the O&M side, I would say we're on plan through the second quarter and that's important to note. The mix of factors drive that year-on-year change that you see led by the things Donald touched on earlier in the call, the commitments to safety, reliability and training that we made in the last round of rate cases. And on top of that, transformation initiatives that we've been talking about that have some front-end investment required in customer service, in value-creating initiatives and then ultimately also growing our capabilities to execute at the new higher capital investment levels you're seeing this year. Ultimately, all of that we expect to level off after 2017. So not so much timing issues within the year as it is about the build of capabilities and execution driven by all of those factors so far this year.

And our next question comes from Chris Turnure of JPMorgan.

Can you just give us an update on the potential need for equity, both internal plans and the ATM program this year going forward. As well how we can think about your need there, given the fact that guidance is now higher for 2017 and you've done the big refi, you've had some regulatory success year-to-date, et cetera?

Chris, this is Donald. I'll take that question. From an equity standpoint, we're still on plan with what we talked about and discussed at our Analyst Day of $200 million to $300 million a year. We think that it will be a consistent plan through 2020 of equity from ATM in that amount as well as $50 million to $60 million from the DRIP program. So no changes yet. I think our goal really is to have a stable predictable financing program. And again, all of that is included in our guidance for this year as well as through 2020.

Okay. And then do you know what your earned ROE is on, let's say, a trailing 12-month basis or the earned ROE that you plan for underneath your updated guidance for the full year 2017 on a kind of consolidated basis at the utility level? Also, kind of earned ROE, excluding any kind of corporate impact?

I'd say when you think about it from -- we've tend to look at each individual state as well as the overall returns. And each of our states, think about last year coming through 4 base rate cases. We're pretty close to our allowed ROE from -- in each of those cases, but we'll continue to monitor returns and determine when is the best time to go back in for base rate cases.

Okay. So if we're kind of sitting here today looking forward coming out of a bunch of regulatory activity, there's no particular jurisdiction that's underperforming versus your expectations?

No, not at all.

And our next question comes from Charles Fishman of Morningstar.

Just to make sure I understand this correctly on Slide 3. The -- I understand your operating earnings per share increased in your guidance and that the new base will now be 2017 guidance. But the dividend, am I reading this correctly? The -- that really doesn't change. Your 5% to 7% growth off the, what, $0.70 dividend we have for this year and that's still the guidance for dividend growth, correct?

Yes. Consistently have laid out a plan for 5% to 7% growth in net operating earnings per share and dividend and that's guided predominantly by our policy of 60% to 70% payout on the EPS -- off of the EPS guidance.

Okay. If memory serves me, actually, the dividend increase this year was actually above that range, but that's not -- - I shouldn't read anything into that.

Yes. I mean, think about it this way, the earnings in dividend commitment is 5% to 7%. If we were to outperform that range like we have in the past, we would also set the dividend so it's in the 60% to 70% payout range.

Okay. Second question on the Ohio infrastructure replacement extension. Is anything changing on that? I mean, are we -- are you increasing the projected amounts or?

Yes. Charles, thanks for that question. The key change, if you will or update in the 5-year plan that we put in front of the commission and stakeholders is an increase in the level of investment and acceleration from the plan that we're in right now. So the current plan, this is year 5 of the 5-year plan, runs at a -- little over $1 billion across the 5 years. The proposal we put in front of stakeholders escalates that to about $1.3 billion, but it's the same mix of investments, the same program, the same risk profile that drives the recommended investments.

And how's the ROE set on that tracker?

That's look back at the last rate case.

And our next question comes from Michael Lapides of Goldman Sachs.

Easy question for you, what has to happen for you to hit the high end of your multiyear EPS guidance range or even to be in a position to raise that range a bit?

Yes. As we've looked at our plan and how much it's driven by the investment programs that are here and the regulatory cadence, probably the most significant driver of any variation would be the mix of regulatory outcomes. We tend to be a portfolio of regulatory initiatives in any given year, so there's a range of potential outcomes that you might anticipate in this year. Last year was a peak on the base rate case cycle. This year is a little bit lower level of activity. That's the key driver. Behind that, you could have a load and O&M savings or O&M profile spending, but those are pretty stable, relative to the regulatory drivers in our plan.

Got it. And when we think about 2018 O&M as a growth rate relative to what you're kind of booking in 2017, how -- we're still talking 2018 is higher than 2017. It's just at a more inflationary type of rate versus the big uptick in '17? Or is there a scenario where 2018 and '19 are even down from '17?

I think the way to think about it at this point is really a flat off of 2017 through the rest of the plan. We made, as Joe mentioned earlier, we started our transformation efforts last year in building the program and started making investments this year that really will drive efficiency and higher performance for the company. And expect that after 2017, our expenses really will be more, I'd say, flat versus inflationary at a inflation level.

[Operator Instructions]. And our next question comes from Gregg Orrill of Barclays.

It looks like a couple of the transmission projects that you're working on, you expect to complete them in '18. Is there anything -- does that mean that we should sort of conclude that, that would drive you toward the lower part of the CapEx range that you're looking for, for '19 and '20? Or are there other things that would replace that?

Yes. Thank you, Greg. Thanks for the -- well, the transmission projects are -- are we still live? Well, the transmission projects are expected to be completed next year. Our mix of investments does shift throughout the 2020 planning horizon and I'd note that the CCR settlement that we filed, we ramp into that spending beginning yet this year and then you'd see some of that come on. So that mix is different over time. But generally, all expected to be in that $1.6 billion to $1.8 billion range that we set out on our Investor Day pro forma through 2020.

Can you talk a little bit more about the details of the CCR settlement?

Yes, sure. That is a retrofit to the units that we proposed continuing to run for compliance with the CCR rules, the coal ash rules. It's $193 million proposal supported -- that's not to exceed number in the settlement, supported by stakeholders for retrofits at both Schahfer and Michigan City. Fairly tried-and-true technology and high confidence in the efficacy of those investments. And the other small piece of that settlement is some of the front-end engineering and design for the Water Rule, just a few million dollars set up in that settlement to allow us to continue evaluating technologies for compliance with the ELG provisions as well. That would be deferred until a future rate case. But on the CCR side, it follows the federally mandated cost adjustment statute in Indiana which is an 80-20, 80% recovered, 20% deferred, much like our Titus program.

And that would be the 9.75% ROE?

That's correct.

And our next question comes from Brian Russo of Ladenburg Thalmann.

I'm sorry if I missed this earlier, but what specifically drove the $0.04 increase in the midpoint of your guidance?

Sure. Let me let Donald talk through some of the moving pieces in that.

Yes. I think if you remember from our first quarter call, we did raise our guidance of -- our initial guidance for the year was $1.12 to $1.18. At the first quarter, we did narrow that guidance to the upper half of that range. And the only change that's really happened in the second quarter is the refinancing of the $1 billion which provides about $0.02 incremental earnings through interest savings. And so we did raise our guidance $1.17 to $1.20 to account for that savings.

Okay, understood. So you exceeded your expectations on the refinancing and...

Well, I guess, the way I'd answer is the -- in our initial guidance, the refinancing was not contemplated. So it was not part of our original plan.

Okay, understood. So the new base is 2017. So in theory, the earnings outlook has increased by whatever, the $0.04 versus the prior guidance?

That's correct.

And our next question comes from Joe Zhou of Avon Capital.

Joe, we can't hear you.

[Operator Instructions]. And this does conclude our question-and-answer session. I would now like to turn the call back over to Joe Hamrock for any further remarks.

Thank you, Sonya and thanks again to all of you for joining us and your continued interest in and support of NiSource. Knowing it's a busy morning here in the market, turn the day back over to you, make it a great and safe day. Thanks for joining us.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.