NiSource Inc (NI) 2002 Q4 法說會逐字稿

Good morning. My name is Teresa and I will be your conference facilitator. At this time I would like to welcome everyone to the NiSource Incorporated 2002 financial review conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question press star then the number 2 on your telephone keypad. As a reminder today's call is being recorded. This call will be available for replay beginning at 12p.m. eastern standard time today through 11:59p.m. eastern standard time on Thursday, February 6th 2003. The conference ID number for the replay is 7941615. The number to dial in for the replay is 1-800-642-1687 or 706-645-9291. Thank you. I will now turn the call over to Mr. Dennis Senchak, Vice President of Investor Relations for NiSource. Sir you may begin your conference.

Thank you very much and good morning everybody. We really appreciate the opportunity to be with you today and thank you for taking the time to join us.

Along on this conference call today are Gary Neale, Chairman, President and CEO of NiSource and also Michael O'Donnell our Executive Vice President and Chief Financial Officer.

As you already probably know the focus of today's call is to review our yearend performance of 2002, as well as the entire year, and our business outlook. The format will be that we'll make a brief presentation and then we'll follow it up with your questions, and we anticipate the call will last just about an hour. One thing I would like to do, I would like to remind all of you that some of the statements made on this call will be forward-looking statements within the meeting of the safe harbor provisions of the U.S. federal securities laws. These forward looking statements are subject to risk, uncertainties that could cause results to differ materially from those expressed in the forward-looking statements. Now it's my pleasure to turn this call over to Gary Neale.

Thanks, Dennis. Let me add my welcome to everyone, this morning. Thank you for being on this call as we present our strong results for 2002. Before I get in to the details of our press release and the discussion today, I would like to start by apologizing for any confusion caused by last Tuesday's news released about our E&P business. I want to make it clear as we did in the earnings press release this morning that we are actively seeking opportunities to monetize the remaining E&P business. Our intent on the news release Tuesday was to inform the marketplace that with this sale we were no longer investing in exploratory drilling. Which really lowers the risk profile of this unit. We are now focusing on maximizing our production from existing assets, while we continue to seek opportunities to monetize the value of these assets.

I understand this was confusing in the marketplace and we just want to straighten that out before we got in to the body of our discussion this morning. We will continue to try to demonstrate our ongoing commitment to strengthening the balance sheet, sustaining the current dividend and I hope we establish that fact as we go through this morning's press conference.

Now let me turn our attention to our 2002 results. In spite of all the challenges we faced throughout the year of 2002, I'm delighted to report 2002 was a strong year for NiSource. We earned $2.02 a share from continuing operations which we believe is above street estimates. In addition as you noted from our earnings release, our 2002 results also included a non-cash charge of $51 million. Due to our decision to exit the Telecom business. As you all know, we acquired these assets as part of the merger with Columbia Energy group, after two years of operating the business, we have determined by a study by a third party that it's just not a viable business due to overcapacity the current fiber market, it was prudent at this time to write off and take a non-cash charge to earnings in 2002. Our earnings also included restructuring charges of $28 million for, in the fourth quarter for the elimination of positions and facilities consolidation involved with our Dellarian project.

Now let me highlight how our actions enables us to strengthen our company in 2002. We refocused energy on our core regulated asset base businesses, and reduced our overall company risk profile, we saw again 95% of operating income being generated from regulated businesses. And we strengthen our balance sheets, specifically as Mike will go through in detail, we reduced our debt by $1.4 billion after completing one of the most successful equity offerings in the industry generating $735 million from the sale of 41.4 million shares of common stock. We restructured our operations leadership during the year, and created the position of chief operating officer with the responsibility to further consolidate and integrate our business operation. As a result we reduced operating and maintenance expenses by approximately $150 million, 10% decrease compared to 2001 and all the while sustaining customer satisfaction. We significantly scaled back our merchant functions, selling our TPC selling book and exiting the gas trading activities, in February. We increased productivity by eliminating layers of management, increasing management span of control throughout the entire organization. We successfully settled the NIPSCO electric rate investigation with the Indiana utility regulatory commission for settlement of 55 million in annual credits to NIPSCO customers through 2006. We received approval from the Indiana regulators for environmental tracker to recover projected expenses of approximately $234 million in our electric business over the next three years.

As you can see from these examples, we have delivered on our promises. And they have therefore created a stronger platform in NiSource for 2003. I would like to turn it to Mike O'Donnell to provide you with more detailed review of our financial results.

Thanks, Gary. As a preliminary matter I want to point out that we have changed our segment presentation to eliminate what used to be called the merchant segment due to the reduced activity in that segment. Both power and wheeling operations are now included in the electric segment and everything else has been moved to the other segment. This is mostly made up of primary energy and the small power trading operation we have here in northwest Indiana. Turning to the earnings, as announced earlier today, earnings per share for the year 2002 were $2.02 from continuing operations, compared to $1.10 per share for the same period last year, for an increase of 92 cents per share or about 84%. Net income for 2002 was $425.7 million from continuing operations, compared to $226.4 million in 2001, an increase of $199 million over last year or about 88%.

Taking into account the $53.2 million loss from discontinued operations, and this is on an annual basis, includes the loss from the year, the number Gary mentioned before was for the fourth quarter, most of this is the cost of exiting the dark fiber business, net income for 2002 was $372.5 million, or $1.77 per share, compared to $216.2 million or $1.05 per share in 2001. This considerable improvement in operating results compared to 2001 was caused by weather in the heating season which while 7% warmer than normal, was 6% cooler than it was last year. Also by significantly lower operating and maintenance expenses, and by lowered depreciation, amortization and depletion, caused in part by the elimination of the amortization of goodwill. O&M expenses for full year were 150 million lower than last year and total operating expenses were $247 million lower in 2002 than they were in 2001. Primarily reflecting these expense reductions, operating income was $170 million higher in 2002 than it was in the prior period.

Briefly by segment, distribution operating income in 2002 was $459.1 million, compared to $380.8 million in 2001. An increase of $78 million. The improvement in distribution results was caused by the cooler weather in 2002 compared to 2001, the elimination of amortization of goodwill and by lower O&M expenses. Transmission and storage operations had operating income of $398.3 million, compared to $349 million last year, an increase of $49 million primarily reflecting the elimination of the amortization of goodwill. Electric operations had operating income of $322.3 million, compared to $340.7 million in 2001, a decrease of $18 million, reflecting the rate credits resulting from the settlement of the Indiana rate proceeding, and reduced revenues from both power sales and wheeling, offset by cooler weather in the summer cooling season. The exploration and production segment had operating income of $41.7 million, compared to $51.9 million in 2001. The $10 million reduction in operating income reflects lower prices in effect for production, $3.45 on average this year, versus $4.04 in 2001, offset by lower O&M expenses of approximately $18 million, which includes reduced dry hole and geological expenses reflecting the new focus of the company. The other segment, which now includes the former merchant operations had an operating loss of $34.3 million compared to operating loss of $53.8 million in 2001.

The $20 million improvement reflects lower costs at TPC, former gas trading operation in Houston, which was closed during the year, and several other items related to the wind down of merchant operations. O&M expenses for NiSource in total for the year were as I said before, $150 million lower than they were in 2001. While every operating segment had lower operating expenses than in the previous year, the most significant decreases were in the distribution segment, the E&P segment and any other segment. These reductions were caused by lower labor, benefit costs, lower corporate overhead expenses, lower expenses at TPC, former trading operation, lower un-collectibles expense, and lower expenses at the E&P unit. During the year, headcount was reduced by about 1200, as a result of the de-layering and other activities Gary discussed earlier. Depreciation, depletion expense of $574 million was $67 million less than it was in 2001. The impact of not amortizing goodwill reduced DD&A by $93 million. This amount was offset by increased depreciation at primary energy, as a result of bringing the leases on balance sheet and accounting for the leases as owned assets and/or capital leases resulting in higher depreciation charges and increased interest expense offset by lower lease expense. Interest expense of $526 million was $72 million lower than it was in 2001, as a result of the significant reduction in the amount of debt outstanding, as Gary mentioned, $1.4 billion, and lower interest rates on short-term debt. Short-term debt interest was reduced $58 million during the year, about $41 million that decrease was due to the reduced average debt balance outstanding, and about $17 million was due to lower short-term interest rates.

Bringing primary interest on balance sheet had the effect of increasing interest expense by about $27 million. If it were not for this, the reduction in interest expense during 2002 would have been significantly higher. Income taxes were $233.9 million in 2002, versus $190.8 million in 2001. Most of this increase was caused by the increased amount of pretax income, but you should also note that the effective tax rate in 2002 was about 36% versus about 46% for 2001. The effective tax rate in 2001 was significantly higher because of the amortization of goodwill during the year, which was not a tax deductible expense. During the 2002, during 2002 NiSource had 211 million average shares outstanding versus $205.3 million in 2001. The 2002 amount reflects the two-month impact on the average of the 41.4 million common shares issued in November of 2002. Net income from continuing operations for the fourth quarter of 2002 was 133.9 million, or 59 cents per share, versus 67.7 million or 33 cents per share in the fourth quarter of 2001. Net income for the fourth quarter of 2002, after taking in to account discontinued operations, was $82.1 million or 36 cents per share, compared to $66.9 million or 33 cents per share in the comparable 2001 quarter. Gary also asked me to address our liquidity situation, and I will do that now. In addition to the strong earnings performance during 2002, NiSource also made significant progress improving its balance sheet and liquidity position. We ended the year with $913 million of short-term debt outstanding, compared to $1.85 billion outstanding at the end of 2001, and $2.5 billion outstanding at the end of 2000. That's a significant improvement and key contributor to the reduction in interest expense which I discussed earlier. We presently maintain bank credit facilities totaling $1.75 billion.

At the end of 2002, we had available liquidity under these facilities of about $750 million. Since the end of the year, our short-term debt balance has been reduced on to about $700 million, and as a result our available liquidity as we speak is approximately $1 billion. We are in the cash generating part of the year for us and expect short-term debt balance to be reduced to at or near zero by the end of May 2003. We ended the year to 02 with total debt of 7.164 billion dollars, or 60.9% of total capitalization. This compares with total debt of $8.579 billion at the end of 2001, or 68.5% of total capitalization. The reduction in Deb outstanding was as Gary mentioned before, $1.5 billion, or about 7.6% of capitalization.

Just one final note, as part of the transition to Deloitte & Touche as our new auditor, Deloitte went back and audited, re-audited the years 2000 and 2001 which were previously audited by Arthur Andersen. The signoff by Deloitte on January 28, 2003 reflects their opinion on all three years. I'm pleased to report that the re-audit was accomplished without in den. Now I'll turn it back to Gary for closing remarks.

Thanks, Mike. Before we open the call for your questions, let me make a couple closing remarks. First of all, I think as you're all aware, we're off to a really about start in 2003, experiencing what we consider to be normal winter weather in the month of January for the first time in over six years. NiSource, as you know, is primarily a gas company, so winter, normal winter weather means we're in our strongest position. The normal winter weather that gives us the opportunity to grow earnings and pay down our short-term cash lines as Mike mentioned. And we believe we're off to a very strong start this year and that's why Mike is forecasting we would be out of the credit line probably in may, before we start again to build our inventories and storage for the next year. Our board recently declared a quarterly common dividend payment of 29 cents per share, equivalent to $1.16 on an annual basis.

With the strong liquidity position that Mike just went through, we are confident we can sustain this current dividend level. In 2003 we will continue to focus on what he do best, optimizing revenue opportunities and managing our expenses of our regulated asset based businesses. This is our focus, this is our purpose. We believe this focus will produce a strong balance sheet, earnings in line with current analysts consensus estimates of $1.67 for the year, and a stable dividend. I think most importantly, we will try to continue to strive to deliver attractive return to shareholders. That's what this corporation is all about. NiSource today is one of the S&P gas index companies, as I think you all know, but it trades on a P-E basis below the peer group average of this index. We believe there's room for increased shareholder value from this new streamline gas company and would underline, opportunity. At this point let me turn it open for questions.

As a reminder to participants, if you do have a question, please press star then the number 1 on your telephone keypad. If your question has been answered and would you like to withdraw your question, press star, then the number 2 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Will Maze of Banc of America.

Good morning, folks. Just a couple quick questions. Just maybe if you could, I appreciate the update on E&P, clarity from news release, I wonder if you could give us color, where you stand with interested parties, maybe if there's any time frame you might be able to help us with.

We are currently talking to parties as we speak, the issue, when you're selling E&P especially Appalachian E&P is trying to find people who offer fair value and have sufficient credit to back them up. Sometimes we get offers that appear to be good values to shareholders but they're from organization that's just don't have the credit standing that we need to back up the commitments that are there. So we're trying to match fair value offers with credit, and so we're still in that process.

Okay Okay. That's helpful. Also I was wondering, I remember on the recent road show you had talked about the working capital changes as an event of the change in the park and loan business. I was wondering if you might be able to provide an update there. Is that still expected to be a substantially positive swing in cash flow?

I would like to turn to Mike for that.

Actually, will, it's going to be a slightly negative swing as we go to next year him I think you'll recall that the park and loan activity supply cash in 2002, and as those transactions roll off early next year, we will replace the gas and in effect increase our use of working capital by a couple hundred million dollars. So the net effect during the whole year will depend on what new transactions we put in place for 2003 and it's just too soon to tell what that is.

But we have taken those in to consideration in Mike's forecast that says we think we will have the credit line down to near zero in may, we have taken those requirements in to consideration.

Okay, great. Lastly, we're obviously experiencing a pretty good first quarter so far, as far as weather goes. I was wondering if you could give a little comment on maybe the first quarter or outlook for '03.

Well, as I mentioned, outlook for '03, we said we are still reiterating that we can be within consensus figures for '03. And remember that we build our plans based on normal weather and so right now although people don't believe it, the month of January was a normal weather period for us. It's the first time anybody has seen any cold weather in five, six years but also the first time we have had any normal weather. So we think we're right on plan right now, based on January. And it might be slightly ahead of plan in some of the areas which we serve, but we think overall, you know, we feel very comfortable that we're on plan and a large portion of our earnings come out of the winter weather. So we're pretty optimistic.

Okay. That's great. Thank you very much.

Your next question comes from Tom Mackler of General Electric.

Thanks for the update. I was wondering if you could share insight in to the thinking of the rating agencies, particularly moody's vis-a-vis recent asset sale activity, is it enough to stay investment grade? What do you think?

Let Mike answer that, because he's been handling it.

Yeah, that's really for them to say. But we have been working with them for the past year, strengthening our balance sheet in a program that included the equity sale last year. We, the way we looked at it originally, we thought the E&P sale would get us to where we need to be, so what we're looking at now is a series of thing not knowing exactly where E&P will come out, we're looking at a series of things we could use to supplement that in the event it doesn't develop the proceeds that we thought of before. It's really too soon to tell what those things are. We have several things in mind that we could sell and we're working on that as we speak.

And Mike is going to be working directly with the rating agencies, you know, in short-range to go through these options and make sure we do what they feel needs to be done.

Excellent. Would another equity sale be a possibility? Or another type of equity, perhaps?

I think we would go through these other options that Mike, that we're looking at prior to any thoughts on an equity sale.

All right. Thank you very much.

Your next question comes from Devon [Inaudible] of Loomis Asset Management.

Hi, guys, this is Devon. Congratulations on a good year, seemed to go pretty well for you guys.

Thank you.

A couple of questions around the E&P segment going forward and a couple other things. But can you update me our hedges for '03 and anything for '04 you might have in place? Production hedges?

I don't have the exact numbers in front of me, Devon, this is Mike. But the big thing, I think if you look back at the q in the third quarter, we listed what, there's a table in there that showed the commitments under the forward sales and the prices related to that. That is at this point, it's probably about 75% or so of the production. I think you can use that as a good guide for '03 and the balance, use the current price.

Current spot or something?

Yes.

That makes sense. And then last year you guys produced about 54. How much do you think it will be this year? Like 50 or -- I'm trying to figure out how much went away with the sale.

Steve?

The joint venture was approximately 7 bcf.

So not very much.

Right.

Two last questions. What kind of tax rate do you think we should be using for '03? And how much cash did you guys have at the end of the '02.

On the tax rate question, our natural tax rate is probably in the 37 to 38%.

Okay.

Range on a go-forward basis. Cash at the end of the year, we do what we can to minimize the cash balances, but let me look it up here. We closed the career with about $56 million of cash. That's down from $127 million the year before. What we have been doing as part of our working capital project is trying to have as little cash tied up as possible. That's a number we're happy with.

That sounds good. You guys don't think there will be any problems with the 1.2 billion you need to refinance in two chunks, you still have a good feeling that go okay?

Yes, we have real good feelings about that. The one market that's really strong out there is the bond market and we're looking forward to getting to it. One thing that's a little bit, that we have to think through is the timing of that, because we are really flush with cash for the first half of the year, and we really don't need the money until a little bit later. So we're looking at ways to deal with negative carry situations to take advantage of the strong market that's out there right now.

That makes sense. Great. Thanks so much and congratulations again.

Thank you.

Your next question comes from Paul Ridzon of McDonald Investment.

It seems like there was a lot of confusion regarding the E&P that you cleared up today. I think some of the negative action in your price we saw was some fear of an imminent equity, but sounds like that is not really in the near term plans. Is that correct?

Paul, it's not part of our plans right now. Obviously it's always a fallback position if, you know, if we couldn't get anything else done and we had to meet the requirements to keep our ratings. But we believe that we have some other alternatives in the event we don't get sufficient funds out of the sale of CNR. We have other alternative that's we will sit down and talk to Moody's about. We would like to make the equity piece the last piece, we believe we have ways of going about it before we get further equity.

Could you give any flavor at all? I know you touched on this, but what the options could possibly be?

I would rather not because when you get in to sales of assets, I don't like to tip it off ahead of time. We are a long ways there, you know, but this sale and so, on we were talking about raising a billion dollars and we're up at $825 million already. So we don't have very far to go. It doesn't take much to get to the billion dollar level. So, you know, it's not, we're not looking at any big sale.

We got a little flavor out of the agency yesterday, but could you give your thoughts on where their patience stands and how flexible they are?

Mike has been dealing with the agencies. Let me just say for the record that the agencies have been very patient with us, and we're very pleased with our relationship with both Moody's and Standard & Poor's on this and we're working together with them, you know, hand in hand and talking to them on a regular basis. Mike?

I think that says it all. Not much more you can say. Thank you.

Thank you very much.

Your next question comes from Teron Miller of U.S. Warburg.

I was wondering if you could run through sources and usesfor 2003 and whether or not you can give us some idea what your target capital structure might be at year end '03 and possibly a look in to '04.

Mike is digging through some papers here quickly.

Here is the last part first. Target capital structure, I don't know that we have a specific target in mind, but we want to have the debt ratio to the point where it's consistent with the mid-triple B BAA 2 rating at moody's, probably puts it mid-50s over a long-term basis. The sources and uses of funds, I think the best way to look at it is the sources are net income and we have at our guidance, the number we have out there that would be $400 million plus, add depreciation and depletion and then you have plus or minus working capital and then this year, coming through, we're going to have the repayment of the parks and loans, so working capital might be a slight negative. Not a big number. Then to that you compare the capital expenditures, which without E&P, about $572 million, but we're still working on what the results would be at E&P. Subtract the dividend from that, I know I'm not giving you exact numbers but we're dealing with this conceptually, the number of shares we have outstanding, about $300 million and you should get a slight positive number to pay down debt. Is that helpful?

Yes, it is. Thank you.

Your next question comes from Jay Dobson of Deutsche Bank.

Gary, I was wondering if you could talk about O&M trends, you obviously did good work here in '02 but what we could be looking out in '03, continued efforts, probably won't be as big as this year but maybe a relative side of O&M?

Well, Jay, what you're going to see is more impact of what we did in the fourth quarter. This de-layering project took out about 700 people. High Sal rid people, as a matter of fact, at the manager level all the way up to president's level. So the full impact of that O&M reduction will come in 2003 and we hope it offsets some of the increased spent that's we see coming in 2003, which are pension expenses, insurance expenses, taxes, and the second half of the rate reduction. So we believe that we have more than covered those increases expenses for next year, with reductions in O&M to cover it.

Do you have any sense how big the pension swing will be in '03?

Mike?

Yes, it's about $35 million, Jay.

Great. Gary, back to the E&P sale or I should say options around the E&P sale, is electric transmission something you would consider selling? And maybe you could also talk about how Indiana regulators might react to that.

Well, electric transmission is, you know, I don't think it's a 2003 item, but clearly as these rTos start getting formed and we start seeing them operate, I don't think that anyone should necessarily own an asset that they don't manage or, you know, can't effect the growth in or something like that. So I think down the road, many of the distribution companies with generation still have generation and distribution on both sides of it, will probably look to monetizing that transmission. But I don't see it happening in 2003. I don't think that we're ready until we find out more about SMD how it's going to effect rTos and how individual states make their decision, that customers are bidding in for transmission rights and generation is bidding in for transmission rights and so we have a defacto deregulation going on with SMD and I think we have to see how individual states will handle it.

Last question, I think you said first quarter here so far, sort of normal weather first time in six years. Could you characterize the fourth quarter?

Fourth quarter was a strong quarter, weather-wise. As you see, I think we listed that in the press release. It was colder, slightly colder than normal primarily in November. In fact, it was 22% on degree days.

Thanks a lot.

Excuse me, 22% over 2001 and 7% better than normal, overall, in 20026789 I'm looking at the press release. It's on the press release, Jay, on summary of financial, operating data.

Your next question comes from Regive [Inaudible] from capital market.

On the refinancing of the March credit facility, the 500 million?

What's the question about it?

The 500 million dollar credit facility maturing in March, whether or not you will refinance that.

We're working through the numbers on that right now. That is the question, is whether or not we will need that, I think for sure we can get by with a smaller amount. But we're still doing the math on just how much of that we want to continue in to next year.

Okay. And second question is, when do you think you'll have a definite answer as to whether or not you will sell those E&P assets or monetize them?

We are working as we speak on, you know, on various openings with that and I think it's going to take, you know, a little bit more time to know exactly where we stand on it. I don't want to try to forecast because we're in to negotiations, so I don't think it's proper at this time to say what will happen and when. We'll try to keep the market abreast of it and if it's not sufficient, we will let the market know what our alternatives are and where we're going.

Okay. Thanks.

Your next question comes from Tom O'Neil of Lehman Brothers.

Good morning.

Hi, Tom.

Just a couple of questions. On the fourth quarter, did I hear you mention that there were delay or charges of about 28 million included in the 59 cents or are those pulled out?

Those are included.

If I wanted to consider those one-time, it would be about 7 cents to add back?

Correct.

Okay. And then is there any ongoing earnings benefit from exiting the Telecom business? I think it used to carry a slight drag.

There's a slight improvement, probably 4, $5 million in O&M.

Okay. And then on E&P, curious based on your discussions with interested parties, do you expect that we'll see more pieces, if it ends up as a sale? Or would this go to one party in one final chunk?

Tom, I don't want to answer that right now while we're talking to people.

Okay. And then last question, could you give a number for the equity that's invested in primary energy at yearend?

Michael O'Donnell This is Mike. I'm hesitating because the equity number is very small. Since they were originally financed, all those projection originally financed with operating leases, and they were brought on balance sheet as debt, most of the investment in that operation is in the form of debt.

Thank you.

You're welcome.

Your next question comes from Jessica Rutledge of Lazard Asset Management.

Hi, Jessica.

Hi. Can you walk us through your gains on sale net number that you have in your income statement here? And help us figure out what are the components of that?

Okay.

You had a 27.2 --

That's primarily the sale of SM&P, in the first quarter and that --

That's most of it, that's 20-some million. There's a very small asset sale at the pipeline company, I think 2, $3 million.

Okay. And when we're looking at the segment allocation, that 20 million is allocated to corporate, that's why we don't see it broken out?

That's a 20-some million in corporate, that's right. You'll see a small gain in pipeline.

Okay. And if we're tax adjusting that, what is that net of taxes?

Well, I would take the effective tax rate off of that, yeah, that 36%.

Okay. Also, you mentioned in your segment disclosure that there was a net negative change in the value of your trading portfolio this year. Could you talk about how much that is year on year?

Actually what I meant to say was that there was a reduction in the operating expense, realized a benefit of closing down that trading operation.

Okay.

There were some small gains and losses in the book of that, but net-net I think it came down to about zero.

Okay.

Remember, that was stalled and closed down in August.

Right. Okay. Thank you.

Your next question comes from Andy Levi of Bear Wagner.

Hi, guys, how you doing? Just two quick questions. What's the timing, do you think, as far as kind of giving up on a sale versus having to issue some sort of equity type security?

Andy, I just answered that question. You know, we're going to work our way through this and we have other openings we're going to get to before we get to any equity offering.

Would it be fair to say that you probably have a 6-month window or something like that? Or can you give us any guidance?

Andy, I think the window is determined by our meetings with the credit rating agencies.

When is that? Those meetings?

They're not scheduled yet, but they will be probably in the next six weeks.

Okay. One last question: How much debt do you have left associated with the E&P? I don't think it's a lot, is it?

We don't have any third party debt with the E&P company. The only debt is in fact to the holding company.

For some reason if you were to hole it or not be able to sell it, have to issue equity, there's no big, there's no debt implication where there was additional debt had you to get rid of associated with the P&L, so it's really just that $150 million hole that you have to fill?

That's correct.

Okay, great. Thank you very much, good luck.

You're welcome, Andy.

Your next question comes from Craig Lucas of Zimmer Lucas Partners.

Thank you very much. I had a couple balance sheet related questions. I guess starting just trying to understand what's happened to the balance sheet by the end of '03, without this talk of equity for '03, is it fair to say that you should be able to get to something like 42% common equity to capital, about 56% debt to capital? By the end of '03, just under the current business plan?

56 might be a little aggressive. I think it's in the high 50s.

Because in materials of the big moving parts, you have the pie that converts.

That's correct.

That adds 345 million to equity account in '03?

It adds to the common equity account but subtracts from preferred equity account.

Exactly. Exactly. And have you announced your intention to remarket the preferred already?

Yes, we have.

So then you also then pick up $345 million, or like 3% preferred to capital, isn't that correct had.

We hope it's 3%. 3%. But I think we need to stop there for a second. That's going to be two-year paper and I think it has more debt-like characteristics than equity-like characteristics.

In bankruptcy, it has equity characteristics.

We're talking about the rate -- rating agencies.

So why does it have to be remarketed on two years? Why don't you change the terms somehow?

Well.

Issue a different preferred-like security had.

We may do something like, that but there are tax reasons for the remarketing as well.

So, now, when you talk about being shy of like $150 million from your plan, or whatever, is that under the assumption of remarketing the equity? Remarketing the preferred?

It is, and again, we're not considering the remarketed pieces equity. We're considering that as debt. And because of the nature of the two-year paper and it doesn't have a conversion feature like the original issuance did, I think that's how the agencies --

In my model I get to your guidance as you have reiterated it today, but I also, it's fairly expensive, this preferred. Why not do a regular preferred and get the same, get the preferred treatment as opposed to this weird treatment for two-year piece of preferred?

We are looking at that. It's a very complex equation on how much equity credit you get from the rating agencies for different kinds of preferred stock.

That's one of the reasons why before we do any of these kind of things we will meet with Standard & Poor's and talk to them about it.

I was saying the cost of it is similar to previous costs so, might as well get equity credit if they give you Deb.

You're right on some of the analysis we're doing.

Okay. Just one last little additional question. My understanding is that the rating agencies take some of these forward, you know, take your E&P book, not worth a billion dollars, it's worth $300 million or some lesser amount because of the forward sales, is it true that the rating agencies are taking the present value of those forward sales and they impute some amount of debt in there, on your balance sheet, like an off-balance sheet adjustment to your capital structure?

In what's commonly called a kitchen sink ratio they make adjustment for forward sales. I'm not sure you've described exactly how they do it.

Is it also fair to say if you go ahead and successfully exit the E&P they will remove that calculation from your balance sheet as well?

That's correct.

So then --

That's assuming you get a credit worthy buyer.

Right. So basically, it's like a double whammy. You get cash proceeds plus they take like $400 million of something like debt they're imputing on to your balance sheet, off.

It would have both effects, correct.

Thanks again.

You're welcome.

Your next question is a follow up question from Devon of Loomis Asset Management.

Hi, guys. How you doing again?

Good.

a Couple questions around the Mahoney thing and working capital. Your liquidity numbers make a lot of sense. I was trying to get a better handle on working capital and while it's difficult to identify the positives just in terms of accounts receivable getting paid, is it fair to say probably about, I guess you said 75% of your production was related to Mahoneya, so is 75% of revenue is a non-cash function? Does that make sense?

That's correct. I think the way to look at that is we were paid for that production three years ago.

So that will be a drag on working capital, plus the payment of the parking and storage, but can you just conceptually, what sorts of things are you guys expecting will offset those drags to help get working cap back to slightly zero?

Yes, just kind of a technical point, but the deferred revenue adjustment, if you picture the cash flow statement, that takes place above the working capital lines.

Got you.

And on the other part, we have had a process underway here for a couple years, drilling in to all of our working capital operations and doing what we can to speed up the mobilization of current assets. Things like we call it a meter to cash program, looking at the whole process of reading the meters, sending out the bills, collecting the cash, following up on late payments and things like that. And we saw pretty good impact from that in 2002, and we expect continued improvement in that as we get to 2003. But you have to keep in mind with working capital, there are always external factor that's have a lot to do it with, things like gas prices going up and down, the gas costs recovery mechanisms can speed up or slow down the collection of cash, so there's a lot of variables that go in to play there, but we're very aggressively working on all of those variables to try to maximize amount of working capital cash we can mobilize at any given time.

Two follow-ups. About 400 million in net income, I think your DD&A was 575 for '02. Let's just say you get 975 or a billion of cfo, not including the working capital or the storage and parking in Mahonia, does a billion minus 100 million for Mahonia and minus parking and storage, am I getting in the right range?

I think you're in the right range. From that we have to add back depreciation, which you did. Then subtract out the CAPEX, and then subtract the dividend. You should have a small remainder left over because the business is basically in eke live up, we're not borrowing to pay the dividend or run the business.

One last thing I was looking at synergy, getting plants moved in to rate base. Do you guys, have you pursued any of that with iron side in terms of hoping to move those in to rate obeys, offsets of the losses?

It wouldn't be, the only one that's possible is whiting, because it's the only one that has excess capacity that's outside the fence. All the other units of primary energy, remember, it's 100% consumption inside the fence. Whiting is a possibility and we are certainly looking at those alternatives and, you know, I don't think synergy has full approval yet, and that hasn't been finalized. We have had discussions with the commission already in that regard.

Okay. So that will probably be, just looking at growth, opportunities for positive improvement, that's more like a '04 item.

Correct.

Thanks so much and congratulations again on a great year.

Thank you.

Once again, if you do have a question, please press star, then the number 1 on your telephone keypad. Your next question is a follow-up question from Paul Ridzon of McDonald investment.

Have you thought about your options in the event that something doesn't happen with E&P, would you pursue things that might improve your profile in the eyes of the agency, much in the way the E&P sale did?

Absolutely.

Thank you.

I'm showing no further questions at this time, sir.

We will sign off by thanking everyone for their participation, we look forward to this kind of communications, once again, we're very optimistic about 2003, and thanks to January weather, we're off to a great start. Thank you all.

Thank you once again for participating in today's NiSource incorporated 2002 financial review conference call. This call will be available for replay beginning at 12:00 p.m. Eastern standard time today, through 11:59 p.m. Eastern standard time on Thursday, February 6, 2003. The conference id must be for the replay is 7941615. Again, conference id number for the replay is 7941615. The number to dial in for the replay is 1-800-642-1687, or 706, 645-9291. Thank you once again.