Randy G. Hulen - Vice President-Investor Relations Joseph J. Hamrock - President, Chief Executive Officer & Director Donald E. Brown - Executive Vice President, Chief Financial Officer & Treasurer.

Christopher J. Turnure - JPMorgan Securities LLC Paul T. Ridzon - KeyBanc Capital Markets, Inc. Charles Fishman - Morningstar, Inc. (Research) Gregg Orrill - Barclays Capital, Inc. Andrew Levi - Avon Capital.

Good day, ladies and gentlemen, and welcome to the Q2 2016 NiSource 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 be given at that time. As a reminder, this call is being recorded. I would now turn the call over to Randy Hulen. You may begin..

Thank you, Michelle, and good morning, everyone. Welcome to the NiSource quarterly investor call. Joining me this morning are 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 2016 as well as provide an update on our utility operations and growth drivers. We'll then open the call up to your questions. Please note, we will be referring to supplemental earnings slides during this call. These slides are available on our website.

Also on our website is a document which contains segment and financial information to accompany this presentation. 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 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 supplemental 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 covered, I'd now like to turn the call over to Joe..

Thanks, Randy. And good morning, everyone. And thanks for joining us. Let's start on page three of our supplemental slides.

With 12 months of execution behind us since the separation of our interstate pipeline business, NiSource is well positioned as a premier pure-play regulated utility with a solid long-term business plan based on large-scale infrastructure modernization programs.

Since well before the separation, we've been building momentum, executing our electric and gas investment and regulatory programs, while enhancing our focus on customer service across our seven states.

I'm more confident than ever that we've got the right plan and the right team in place to deliver on the commitments we've outlined for customers and shareholders.

Reflecting that confidence on the strength of our first six months of performance in 2016 and recent execution highlights, we now expect to deliver non-GAAP net operating earnings for 2016 of $1.05 per share to $1.10 per share, a narrowing of our $1 per share to $1.10 per share guidance that we originally announced about 15 months ago.

And now to our results for the second quarter, the NiSource team delivered non-GAAP net operating earnings of $0.08 per share with strong execution of our construction program and in part taking advantage of favorable weather, we now expect to make nearly $1.5 billion of utility infrastructure investments in 2016.

These well-established programs across our footprint are improving safety, reliability, service and environmental performance for our customers and communities.

Highlighting our continued regulatory progress, in July, we received commission approval on both the NIPSCO electric base rate case and long-term electric infrastructure modernization program.

And our regulatory activity at our Columbia companies remains on schedule with rate cases in Kentucky, Maryland and Pennsylvania on track for expected commission orders by the end of the year, with Virginia to follow closely behind in early 2017. Notably, we reached a settlement in Maryland just last week.

We'll talk more about each of these in a few minutes. Supplementing the value delivered through our ongoing infrastructure strategy is a strong sustainable and growing dividend, which we continue to project will increase by 4% to 6% each year; and on May 11, we delivered on that commitment by increasing our annualized dividend by 6.5%.

Our credit ratings are stable and improving and our liquidity position remains solid at $619 million. And just last month Fitch upgraded its rating of NiSource from BBB minus to BBB, and we maintain our investment grade ratings of BBB plus and Baa2 with stable outlooks at Standard & Poor's and Moody's, respectively.

As you can see, strong performance continued in the second quarter with additional progress already in place for the third quarter. Let's turn the call to Donald to review our financial results in more detail.

You can find those on page four of our supplemental slides and in our segment and financial information available in the Investors section of NiSource.com.

Donald?.

Thanks and good morning, everyone. As Joe mentioned, we delivered second quarter non-GAAP net operating earnings of about $26 million, or $0.08 per share, compared with about $1 million, or $0.00 per share in 2015.

On an operating earnings basis, NiSource reported about $134 million for the quarter, which is an increase of about $32 million over the same period in 2015. On a GAAP basis, our income from continuing operations was about $29 million for the quarter versus a loss of about $73 million in the second quarter of 2015.

The biggest drivers of our performance continue to be the impact of our long-term regulatory program and infrastructure investments.

Our gas distribution operations delivered operating earnings of about $73 million, an increase of more than $17 million, primarily attributable to new base rate at Columbia Gas of Massachusetts and Columbia Gas of Pennsylvania as well as new rates under Columbia Gas of Ohio's infrastructure replacement program.

Our electric operations reported operating earnings of about $64 million, an increase of more than $7 million, primarily attributable to increased capital spend on electric transmission projects and environmental investments.

While Joe mentioned it earlier, I wanted to reiterate that we now expect to deliver non-GAAP net operating earnings of $1.05 per share to $1.10 per share for the year. Now turning to slide five, I'd like to briefly touch on our debt and credit profile.

Our debt level as of June 30 was about $7.3 billion, with a weighted average maturity on long-term debt of approximately 14 years and a weighted average interest rate of approximately 5.7%, down from 5.88% at the end of 2015.

At the end of the second quarter, we maintained net available liquidity of about $619 million consisting of cash and available capacity under our credit facilities. 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 wanted to flag for you our latest sustainability report, which was published in June. The report highlights how we're delivering on our commitments to safety, customer satisfaction, system enhancements and being recognized among the best places to work.

The report provides stakeholders with a glimpse into our continued sustainability efforts, a key component of our business plan. This report is available at NiSource.com. And a significant enhancement for our customers was introduced in May, a redesigned bill across our seven states.

The new bill format features user-friendly updates to make it easier to read and understand. Consistent with our efforts to collaborate with stakeholders, customer feedback was a key input into the design of the new bill. So, let's turn to some highlights from our gas operations on slide six.

At NIPSCO gas, the team continues to execute on its seven-year, approximately $800 million gas infrastructure modernization program to further improve system, reliability and safety. Supporting this investment, on June 22, the Indiana Utility Regulatory Commission or IURC approved the company's semi-annual tracker update.

This update covered an incremental $72 million of investments through the end of 2015 and will increase annual revenues by $6.7 million.

On May 27, Columbia Gas of Kentucky filed a request with the Kentucky Public Service Commission to adjust its base rates to recover investments and other costs associated with ongoing initiatives to improve system, safety and reliability. If approved as filed, this case would increase annual revenues by about $25 million.

Columbia Gas of Pennsylvania's base rate case is progressing on schedule with the Pennsylvania Public Utility Commission. The case seeks to adjust base rates in support of our continued upgrades and replacement of infrastructure, and to recover increases in safety-related operating and maintenance costs.

The case also includes enhanced provisions for customer growth. If approved as filed, the case would result in a $55 million annual revenue increase. I would note that productive settlement discussions are taking place in this case. Also in Pennsylvania, we opened our first of four centralized employee training centers.

The $10 million, 22,000-square-foot facility includes simulators, a safety town and other hands-on training designed to help develop our next generation of talent. This is an exciting investment that supports long-term sustainability by helping us attract and retain some of the best talent in the industry.

Other facilities are in the planning stages in Ohio, Virginia and Massachusetts. Columbia Gas of Virginia's base rate case remains pending before the Virginia State Corporation Commission.

The request, seeks to adjust base rates to recover investments and other costs associated with ongoing initiatives to improve the overall safety and reliability and to enable increasing demand for service. If approved as filed, the case would result in an annual revenue increase of $37 million.

At Columbia Gas of Maryland, the company on July 27 filed a joint settlement agreement in its base rate case with the staff of the Maryland Public Service Commission and the Maryland Office of People's Counsel. The proposed settlement includes an annual revenue increase of $3.7 million and provisions to encourage customer growth.

The case filed in April seeks to adjust base rates to support the continued replacement of aging infrastructure and the adoption of increased pipeline safety upgrades. New rates are expected to be in effect in November 2016. We expect commission decisions in Pennsylvania and Kentucky by the end of the year and again in Virginia in early 2017.

As you can see, our teams are successfully executing all phases of our plan, and you'll see similar themes at our electric business. Now let's turn to slide seven.

As I mentioned at the start of the call, the NIPSCO team reached significant milestones with commission approval of settlements in both its electric base rate case and its long-term electric infrastructure modernization program. On July 18, the IURC approved an agreement that NIPSCO reached with key stakeholders in its electric base rate case.

The approved settlement agreement provides a platform for continued investments and service improvements. New rates go into effect on October 1 and will increase annual revenues by $72.5 million. And on July 12, the IURC approved NIPSCO's seven-year electric infrastructure modernization program settlement.

With more than $1.2 billion of planned investments, the IURC's decision provides a clear path to continue making the necessary upgrades to our electric infrastructure in Northern Indiana now and into the future.

And last, but not least, NIPSCO's two major electric transmission projects remain on schedule with the anticipated in-service dates in the second half of 2018. Both projects are designed to enhance region-wide system flexibility and reliability.

Right away acquisition, permitting and engineering are well under way for both projects with line construction in its early stages. And before opening the call to questions, I'd like to touch on our ongoing commitments.

NiSource remains on track for sustained execution on our $30 billion of long-term regulated utility investments the company outlined in 2014. These system modernization plans continue to deliver value for all stakeholders across our seven states.

Our capital investment plan for 2016 has been updated from approximately $1.4 billion to nearly $1.5 billion, driven by our team's high-performance execution and supported by favorable weather conditions for construction so far this year.

As we continue to deliver on our financial commitments, we've focused our earnings guidance for the year and now expect to deliver non-GAAP net operating earnings per share of $1.05 to $1.10.

While we are not yet providing guidance or investment plans for 2017, this 2016 earnings guidance provides the starting point for NiSource's long-term annual earnings per share and dividend growth projections of 4% to 6%. I'm particularly proud of our employees.

Through their talent and dedication to serving our customers, we are delivering on our commitments, which are focused on industry-leading safety performance and top-tier customer service. Our balanced and constructive strategy is designed to sustain performance and continue delivering on these commitments well into the future.

Thank you all for participating today and for your ongoing interest in and support of NiSource. We look forward to sharing continued updates on our progress. Now, let's open the call to your questions.

Michelle?.

Our first question comes from Chris Turnure of JPMorgan. Your line is open..

Good morning, guys..

Good morning, Chris..

Joe, I was hoping you could kind of give us an update to your thinking on longer-term rate base growth now that we have the final decision in the general rate case on the electric side as well as the (16:45) program there.

And given the fact that you have had the confidence to up your CapEx number for 2016 at least, how has your kind of thinking and your confidence level changed, if at all, over the past, call it, six months?.

These updates for this year are unique to the momentum we've built through a fairly favorable weather conditions during the first half of the year are not intended to convey an outlook for the future years. We continue to remain committed to 4% to 6% earnings per share growth and dividend growth over the planning horizon.

But very confident in our execution, as we have been, and noting the orders that you pointed out, Chris, we've continued to invest even through the regulatory execution of the (17:40) proceeding and the rate case with real commitment to making those investments over the long-term.

So, if anything, just confidence in the support that we have for the investments we've long planned..

Okay.

And then on the potential for customer growth, can you kind of remind us where you are year-to-date, how that is tracking versus your expectations and kind of what you're thinking for the full-year 2016? I know you're in the relatively early stages of some of your customer growth initiatives there, but that's obviously an important part of the growth going forward, so an update, I think, would be helpful..

Yeah. Thank you for that, Chris. As you noted, we're at the very, very early stages of implementation of some of our enhanced growth strategies, recently having begun to implement some of our pilot programs in Indiana and Pennsylvania that represent enhanced focus on growth opportunities and outreach.

So not yet seeing any measurable impact of those enhanced strategies; probably more notably, as I said, in a number of the rate case updates, our regulatory strategy has been focused in part on enhancing the ability to attract new customers with programs that support the upfront – relief on the upfront cost for new customers or conversion customers.

We've seen support for that across most of the jurisdictions.

Year-to-date as we stand here, we're – on a gross basis, so we often talk of attrition on the customer count as well; but on a gross base, we're running about 10% ahead of where we were at this time last year, driven predominantly by – and this varies across our territory, but by strong housing starts in certain parts of the territory, notably in Virginia, we've seen strong surges in construction and opportunities for growth there and then fuel conversion again in Massachusetts where that's been strong.

Year-on-year about 10% gross, keeping in mind we have attrition that offsets that. We're just beginning to see a slight uptick in our growth rates. Too early to tell if that's going to carry on through the balance of the year, but I'm optimistic..

Great. Thank you..

Thanks, Chris..

And our next question comes from Paul Ridzon of KeyBanc. Your line is open..

Good morning..

Good morning, Paul..

Other taxes was down in both gas and electric operations.

Kind of, what's driving that and what should we expect going forward?.

Yes. Donald, can answer that..

Yeah. We've had some property tax appeals and true-ups this quarter that's probably a couple of pennies of the adjustments. That certainly stands out this quarter..

What should we expect going forward?.

I'd say, half of that is probably one-time, and some of that does go forward..

Got it.

And then, on the transmission project, does that earn cash during construction?.

Yes, it does..

And then, Joe, we've seen a lot of, I guess, re-ignition of the convergence scene that hit the late 1990s with a lot of these electrics buying gas companies.

Kind of, what are your thoughts around consolidation?.

Yeah. I won't comment, Paul, on other people's deals or strategies or speculate on M&A.

We're very focused on executing our plan, which, as you know, is not based on transaction but on executing – on serving our customers and our deep inventory of – and backlog of investments that we've identified – $30 billion, noting none of that has any premiums on it.

So I'm very focused on execution there, continue to monitor the trends in the marketplace, but not in focus for us..

Got it. And then you upped your CapEx for cash by $100 million.

Is that – should we think about that as pulling some 2017 spendings forward or just an acceleration of the whole program?.

Yeah. I wouldn't think of it as pulling any 2017 spending forward. As you think about – and that's predominantly on the gas side of the business – as you think about the $20 billion of identified investments on the gas side, we generally have flexibility within our regulatory programs to execute on that, as conditions are favorable.

I'd noted that we had favorable weather conditions during the first half of this year, meaning the ground wasn't frozen, and we could continue working through the early part of the year. So just continuing to work through that backlog of identified investments, not specifically pulling anything forward from next year into this year..

Okay. Thank you very much, and congrats on a solid quarter..

Thank you..

Thanks, Paul..

Our next question comes from Charles Fishman of Morningstar. Your line is open..

Thank you. Joe, Reynolds Topeka went up quite a bit on the CapEx forecast.

What drove that?.

The best way to think about that, Charles, is the early estimates were very much the high level estimates, and as we came into this year, we updated with our refined detailed estimates on that project, reflected changes in design – very prudent changes in design relative to the type of construction, the tower sizes and the spans on the construction, all very consistent with other designs that we've made in other projects and have seen in the marketplace.

So, really not even inflationary; just an update to the design..

do you have a partner on that one?.

Not on that one..

Okay.

And then, so the increase really – since it was just a very early estimate, there's no issues with the FERC recovery or anything like that, correct?.

We don't expect any..

Okay.

And then when you said the 2016 represents the base going forward, even though you have this higher dividend increase in May than we anticipated, that would be the new base for dividend increases, what we're at right now for the 4% to 6%?.

Yeah. That's correct. We're looking at both earnings and dividends as the base for this year..

Okay. That's all I had. Thank you..

Thanks, Charles..

Our next question comes from Gregg Orrill of Barclays. Your line is open..

Yes. Thank you.

Is there anywhere that you feel that you're not earning your allowed returns or there is some lag even within the mechanisms that you have?.

At any point in time, Gregg, we look at all the jurisdictions, we try to ensure that our regulatory strategy maintains pace with our investment strategy> that's a mix of base rate cases as well as the tracker programs that are up and running across electric and gas.

In general, the earnings profile ebbs and flows around 10% across the NiSource – ROE across the NiSource portfolio, and pretty close to allowed in most cases, so no significant concerns about under-earnings in a specific jurisdiction..

Okay.

And are you able to confirm CapEx spending for years beyond 2016?.

We are not updating previous guidance on outlook beyond 2016. We're updating 2016, again, based on strong momentum this year and an opportunity to work through favorable weather conditions. We continue to have reaffirmed the guidance of 4% to 6% EPS and dividend growth on notionally a $1.4 billion annual CapEx program..

Okay.

And what are your thoughts on – timing coming to the equity markets, do you need any funding there?.

Hi. This is Donald. No, at this point, we're still in great shape from balance sheet standpoint in the credit metrics; and as we reported, Fitch did upgrade us this last month or in June to BBB and stable. So, we feel really confident about the balance sheet and don't see any immediate need for equity..

Great. Thanks for the time..

Thanks, Gregg..

Our next question comes from Joe Zhou of Avon Capital. Your line is open..

Hey, it's Andy Levi. We're all set. Thank you..

Hi. Good morning, Andy..

I'm sorry. I don't know if you heard me. I said we're all set. Thank you very much..

Yeah, yeah, very good..

There are no further questions. I'd like to turn the call back over to Joe Hamrock for any closing remarks..

Thank you, Michelle. Again, I appreciate the interest and the support, and for joining us today. Hopefully, you see continued execution and continued momentum of the NiSource story as we reported our results on the second quarter. We look forward to sharing continued updates on our progress in the months ahead. Have a great day..

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..