NiSource Assembles Capital Project Inventory of More than $25 Billion

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--NiSource Incorporated (NYSE:NI) (Merrillville, Indiana) plans to significantly increase its annual capital spending program to improve and expand its regulated electric and gas businesses, as well as take advantage of the development of the Marcellus and Utica shales, the company told investors recently.

"NiSource has a well-defined and substantial inventory of accretive infrastructure investment and growth opportunities spanning each of our core business units," Robert C. Skaggs Jr., the company's president and chief executive, told an investor conference in New York last month. "This broad array of opportunities, combined with our strong track record of disciplined financial management and project execution, has enabled us to enhance our annual capital investment, earnings and dividend growth outlook."

NiSource, a Fortune 500 company, operates an electric utility in Indiana, Northern Indiana Public Service Company (NIPSCO) (Merrillville, Indiana). NiSource also has a well-situated gas pipeline, distribution and storage business that spans the Mid-Atlantic, Midwest, and Gulf Coast regions--largely sitting atop the Marcellus and Utica shales. Tucked in that business unit is a minerals development business that is starting to develop a business footprint in the Utica Shale.

Over the next 20 years, NiSource has an inventory of potential business investments of between $25 billion and $30 billion, Skaggs told investors September 12. He said NiSource will invest between $1.5 billion and $1.8 billion per year in capital projects, basically doubling its spending from 2009 and 2010.

Skaggs and other NiSource executives emphasized the difference between the company's inventory of capital projects and its actual capital spending plans. Capital spending could speed up or slow down in response to market conditions. NiSource's different business units presented their inventory of potential capital projects over a slightly different time horizon. Still, it is clear the company is seeking to capitalize on dramatic gains in gas production from the Marcellus shale, and future production from the Utica shale, which lies under and next to the Marcellus.

NiSource's long-term inventory of capital programs includes:

• Up to $10 billion to maintain and modernize its gas distribution networks in Indiana, Ohio, Kentucky, Virginia, Maryland, Pennsylvania and Massachusetts over the next 20-plus years. These local gas distribution companies serve more than 3.3 million customers. The company's annual capital spending plans total $600 million to $650 million per year. The state markets garnering the largest percentage of this capital spending will be Ohio ($200 million to $210 million per year) and Pennsylvania ($170 million to $180 million per year).
• $8 to $10 billion to expand its natural gas storage and transmission business over the next 10 to 15 years. This business unit includes regulated gas pipelines and storage, which has an inventory of potential investment totaling $7 billion to $9 billion over the next 10 to 15 years. This segment also includes an unregulated minerals and midstream business, which has a capital project inventory of $1 billion to $1.5 billion over the next five to 10 years. The gas storage and transmission business plans to spend $500 million to $700 million annually on capital projects.
• Between $6 billion and $8 billion of investment opportunities in its electric utility, NIPSCO, over the next 10 to 15 years. One of these projects, currently under way, calls for constructing wet flue gas desulphurization (FGD) system at units 14 and 15 of its Rollin M. Schahfer Power Station. That project, representing about $500 million in total investment value (TIV), is scheduled to be completed in late 2015. A second project, scheduled to kick off in 2015, involves installing a dry FGD system at Unit 12 of its Michigan City Generating Station. That project has a TIV of $277 million. Two transmission projects, Reynolds to Hiple and Reynolds to Greentown, also are planned. Those two projects represent an investment of $400 million to $500 million. Overall, the electric business sees annual capital spending of $400 million to $450 million.

Most of NiSource's planned capital investments, as well as its overall inventory of potential projects, are regulated businesses where profits are set by state or federal regulators. However, within its natural gas and storage business are three segments--natural gas marketing, midstream infrastructure, and minerals development--that are far less regulated compared to NiSource's monopoly electric and gas utility businesses. These three less-regulated businesses all operate in or around the Marcellus and Utica shales, and thus offer the potential for higher returns and greater capital spending as those shales are developed.

NiSource's gas marketing strategy rests on linking new supplies to growing markets. On the west side of its system, it plans to bring shale gas from the Marcellus formation to the southeastern U.S. The eastern side of its gas marketing business will focus on bringing gas from the Marcellus to Mid-Atlantic and Northeastern markets, partly to meet a surge in gas-fired electric generation. The company also plans to try to supply gas to liquefied natural gas (LNG) export terminals in Cove Point, Maryland, and a planned export terminal in Louisiana. Farther down the road, perhaps by year-end 2015, NiSource also has plans to market gas from the Utica shale.

In its midstream segment, NiSource is developing gathering and processing projects to bring gas to market from the Marcellus and Utica shales. NiSource and its partner, Hilcorp Energy Company (Houston, Texas), are investing about $300 million to build a new gathering pipeline infrastructure and natural gas liquids (NGL) processing facility on the Pennsylvania/Ohio border.

The NiSource-Hilcorp joint venture Pennant Midstream LLC will initially invest in the construction of 50 miles of 20-inch gathering pipeline facilities in northeast Ohio and western Pennsylvania. The gathering system will initially be able to gather and process up to 400 million cubic feet per day (MMCF/d) of wet and dry gas. The company said it anticipates "significant" expansion beyond that initial level, based on local gas production levels. The investment also includes construction and installation of a natural gas liquids (NGL) cryogenic processing plant in Ohio with initial capacity of 200 MMCF/d. The gathering lines and NGL processing facility are expected to be in service by the third quarter of 2013.

In a statement, NiSource CEO Skaggs said: "This joint venture, involving one of America's most respected and successful independent energy production firms, leverages NiSource's extensive asset base and operating experience in the Utica Shale region to create near-term value, as well as long-term sustainable growth for our customers and shareholders. This is a tangible example of the various upstream and midstream growth options available to NiSource across the shale energy region. We will continue to build our inventory of growth and investment projects as development and delineation of the shale play unfolds."

NiSource's minerals business segment also is working with Hilcorp to develop acreage in the Utica Shale for possible hydrocarbon production. "This project reinforces our leadership position in the Utica and our ability to quickly respond to the critical needs of our producer customers," Jimmy D. Staton, NiSource's executive vice president, said in a statement. "We continue to evaluate a variety of options focused on leveraging our additional acreage holdings and asset position in the Utica Shale, and we expect the timing of future projects to correspond generally to the producer activity in those areas."

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