NiSource long-term growth plan includes $6bn to $8bn investment in NIPSCO

Executives of Indiana-based NiSource (NYSE:NI) said the company’s enhanced long-term growth strategy, which centers on more than $25bn in infrastructure modernization and growth investment opportunities across the company, will include investments of between $6bn and $8bn in Northern Indiana Public Service Company (NIPSCO), the company’s electric generation and distribution unit, over the next 10 to 15 years.

At NiSource’s 2012 Investor Day meeting in New York Sept. 12, a meeting officals said was “well attended” despite competing with the launch of Apple’s iPhone 5, company president and CEO Bob Skaggs called the company’s utility layer “the foundation for NiSource,” adding that NIPSCO’s $6bn to $8bn investment inventory is expected to lead to a 7% to 9% annual earnings growth for that business.

NIPSCO group CEO Jimmy Staton said the business unit has turned the corner. “In 2009 and 2010, we were still focused on fixing [the company]. Starting in 2011 and now in 2012, we’ve been making significant tracked investments to continue to grow NIPSCO.”

The utility’s growth plan, he said, is straightforward: “Strong operations and customer service, growth fueled by infrastructure investments synched with timely regulatory recovery, and de-risking our earnings through innovative rate designs.”

Staton said funds will be invested at a rate of $400m to $450m annually, and will generate returns on invested capital in the 11% range.

Investments will be made in four “waves”: environmental investments to ensure compliance with what he termed “ever-increasing EPA rules”; transmission system enhancements to reduce congestion in NIPSCO’s region; modernizing its transmission and distribution infrastructure; and adding more gas-fired generation to NIPSCO’s fleet.

Environmental investments will include spending approximately $800m to install scrubbers on the three NIPSCO coal-fired generation plants that don’t already have them, Staton said. In addition, the business unit anticipates spending $200m across its fleet to comply with EPA’s mercury and air toxics standards (MATS). It also plans to invest $400m to comply with EPA regulations on water and ash that are anticipated to be issued after the November general election.

Transmission system investments

NIPSCO’s service area straddles the seam between the PJM Interconnection (PJM) and Midwest ISO (MISO) service areas, which Staton said gives the company a strategic advantage.

“We believe there’s going to be an electric superhighway built to move electrons from the west to the east,” he said. “We don’t want to build that superhighway … but we do want to build the on-ramps, the off-ramps, and the loops that are going to reduce congestion.”

Projects that will help reach that goal include two multi-value projects (MVPs) approved by MISO, the Reynolds to Hiple and Reynolds to Greentown projects. They represent about $500m of “solid investments for us because they earn FERC-allowed returns that are north of 12%, and the costs are borne by all of the MISO’s customers,” Staton said. Regional cost-sharing means only about 3% of the costs are paid by NIPSCO customers.

In addition to the two approved MVPs, Staton said another six projects are working their way through the MISO process.

Modernizing infrastructure was the third wave Staton detailed. That initiative, he said, will include systematically replacing poles, power lines, transformers and circuit breakers, and other substation equipment,

The modernization initiative will also include upgrades on the distribution side.

“We’re also taking about undergrounding some of the more vulnerable areas of our system so that we can continue to provide the kind of service that our customers are expecting because, quite honestly, their expectations continue to grow,” he said.

Staton said rebuilding the infrastructure was the right thing to do for a number of reasons: “To create jobs, to create opportunities, and to prepare northwest Indiana for a higher-tech future.”

The fourth wave will be adding gas-fired generation to NIPSCO’s fleet.

“As our coal plants continue to age and as the electric usage continues to grow, we will need to add generation to our fleet as we close out this decade and begin the next decade,” Staton said. “You can expect to see us spend between $600m and $1bn adding new gas-fired generation to our fleet.” Currently, the utility’s generation derives from 78% coal and 22% natural gas. 

NIPSCO’s investments will be tracked to ensure compliance with legislative mandates, so that the expenditures are recoverable without resorting to a rate case.

The planned NIPSCO investments are part of a larger growth strategy that has NiSource investing $1.5bn this year, and between $1.5bn and $1.8bn per year “for as long as the eye can see,” Skaggs said.

In addition to NIPSCO, NiSource business units include NiSource Gas Distribution, and NiSource Gas Transmission and Storage businesses.

Skaggs outlined three commitments that are part of the overall growth strategy: increase the earnings-per-share growth rate 5% to 7%, increase the dividend rate 3% to 5% annually, and maintain NiSource’s current investment-grade credit rating. That is “sacrosanct; it’s not in question,” he said. “We’ll do whatever it takes to maintain that.”