NiSource Inc (NI) 2004 Q1 法說會逐字稿

Good morning. Welcome everyone to the NiSource Incorporated first quarter 2004 results conference call.

(OPERATOR INSTRUCTIONS)

Thank you. Mr. Senchak, you may begin your conference.

Thank you. Good morning to everyone. On behalf of NiSource I would like to welcome you to our first quarter analyst call. We really appreciate the opportunity to be with you today. And thanks for taking the time to join us. Joining me this morning are Gary Neale, Chairman, President and Chief Executive Officer and Mike O'Donnell, Executive Vice President and Chief Financial Officer.

As you know, the focus to today's call is to review our first quarter 2004 financial performance. The format is to briefly discuss our results and then open the call to your questions. We expect this call to last about 45 minutes. I would like to remind all of you that some of the statements made on this call will be forward-looking statements within the meaning of the safe harbor provisions of the US federal securities laws.

These forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Information concerning factors that could cause actual results to differ materially is included in the management's discussion and analysis section of our form 10-k annual report for 2003 filed with the SEC. And now it's my pleasure to turn the call over to Gary Neale.

Thank you, Dennis. And welcome to all of you. We appreciate your being with us today and we are pleased to share with you the results of our first quarter 2004 financial performance. Before I begin the discussion, though, I would like to make a comment.

Due to the sensitivity of the impending commission decision we will not comment on the on the Columbia Pipeline reading during this call. We think sufficient comments will now press in the press of this calling and we think it's time for to us wait and see what the Ohio commission actually has to say which we expect next week. The one comment I would like to make is that we are very pleased at the successful customer choice program will continue in Ohio. And such a large group of collaborative parties have been so active in support of the application of this rehearing. Now let me tune to you are financial results. Income for continuing operations for the three months ended March 31st, 2004, was 216.5 million or 83 cents per share.

This compares with income from continuing operations of 222.3 million or88 cents per share for the first quarter of 2003. Net income was 213.5 million or 81 cents per share for the first quarter of 2004 compared to 254.9 million, or $1 per share for the year ago period. Net income of 2003 reflects the impact of discontinued operations.

As you recall, last year we sold the remaining unregulated non-core assets to improve our business risk profile, focus on our core business and pay down debt. A strong portfolio of regulated utility and pipeline businesses delivered stable earnings taking into consideration the variables of weather and customer usage. Our first quarter earnings were within one cent per share of our 2004, operating plan.

Our new corporate structure that targets revenues and growth opportunities within our regulated utility and pipeline businesses while maintaining our highest priorities of providing customer service and reliability is already paying dividends in the form of new regulatory initiatives and certainly cost containment.

Contributing factors to our first quarter financial results, as you can see, were close to normal weather, which was actually 6% warmer than 2003, and lower pipeline interruptible revenues and lower commercial customer usage in the distribution segment. We have seen lower interruptible transmission service revenues both in this quarter and the first quarter of 2003 than we have historically realized in our pipeline business.

Our valuation of the operational and market conditions of this part of the business indicates that there will be fewer opportunities for interruptible revenues such as park and lending on an ongoing basis in this business. On the expense side you will note that our operating and maintenance expenses are essentially flat. I am pleased to report that our employee's efforts to continue holding the line on costs while focusing on meeting customer expectations are reflected in these strong quarterly results.

At the same time, our ongoing efforts to reduce debt have resulted in significant improvements to the company's balance sheet and lower interest costs. At the end of this quarter the capital structure reflects a total debt to capitalization ratio of 58%. That's compared to 60% at year-end 2003. Interest expense for the first quarter was 20.3 million lower than last year.

Whiting Clean Energy continued to experience losses due to market for wholesale power and the contract requirements to run the plant at a level to produce steam required by the BP Refinery in whiting. This contract requirements, is being re-negotiated and we are now anticipating slightly improving market conditions in the Midwest power markets for this summer. Now I would like turn the call over to Mike O'Donnell, our Chief Financial Officer. Mike will provide you with a more detailed review of our operating segments first quarter results

Thanks, Gary and good morning, everybody. I am going to provide an overview of our first quarter of 2004 results and discuss our current liquidity position. As Gary mentioned previously, income from continuing operations was $216.5 million or 83 cents per share in the first quarter of 2004 compared to 222.2 million - I am sorry 222.3 million or 88 cents per share in the year ago period.

Note that there were 13.1 million more shares of stock outstanding in the current period. These were shares issued in February 2003 for the settlement of a forward equity agreement under the NiSource premium income securities. These shares diluted per share earnings when comparing 2004 with 2003.

If the shares issued in February 2003 had been outstanding for the entire first quarter of 2003, the per share results for that quarter would have been reduced by about three cents. NiSource's net income for the quarter ending March 31, 2004, was $213.5 million compared with 254.9 million for the first quarter of 2003. Net income, of course, includes the impact of discontinued operations.

In the first quarter of 2003 discontinued operations included a $41.4 million gain from the sale of the company's interest in certain natural gas, exploration and production assets in New York State. Weather in the markets served by NiSource's natural gas utility and pipeline companies was 3% colder than normal during the first quarter of 2004, but 6% warmer than the year ago period.

Warmer weather, lower pipeline interruptible revenues and lower commercial usage in the distribution segment contributed to a $37.6 million decrease in net revenues compared with the same period last year. Now I would like to discuss our operating income results by segment of the business. Starting with NiSource on a consolidated basis, operating income was $442.6 million compared with $472.3 million for the same period in 2003, largely reflecting the revenue decrease I discussed previously. The decrease in operating income was due to the -- mostly due to the warmer weather offset to some extent by lower operating expenses of about $8 million.

Gas distribution through put for the first quarter of 2004 decreased by 7.1 MMDth to 353.5, largely due to reduced residential and commercial sales as a result of warmer weather during first quarter of 2004 compared with same period in 2003.

Operating income for the gas distribution business was $285 million, a decrease of 29.2 million compared to the first quarter of 2003. This decrease was mainly attributed to lower net revenues as a result of warmer weather.

Gas transmission and storage operations reported operating income of $111.4 million for first quarter of 2003, which is essentially unchanged from the year ago period. The year ago period was unfavorable impacted by higher costs to meet customer demand during a period of sustained cold weather in the northeast market areas during the first quarter of 2003. Lower interruptible revenues for our transmission business are also reflected in the current quarter's results.

Operating and maintenance expenses for the transmission and storage business were slightly higher on a quarter-over-quarter basis taking into consideration reserve changes, which increased 2003 O&M expenses by $2.8 million. Our electric operations reported operating income of $58.8 million, an increase of 6.2 million from the comparable period last year, primarily resulting from customer settlements that reduced net revenues in the 2003 period.

The other segment reported an operating loss of $18.2 million in the first quarter of 2004 versus an operating loss of $13.9 million in the first quarter of 2003. The change was largely due to increased losses associated with Whiting Clean Energy. Corporate operating income was $5.6 million, a decrease of 2.5 million from the comparable 2003 period. The decrease was a result of a reduction of a litigation reserve relating to a lawsuit that was settled in the first quarter of 2003.

Slightly offset by a settlement in 2004 related to a lawsuit. Interest expense was $102.7 million for the 2004 quarter. This represents a decrease of $20.3 million or 16.5% compared to the same period in 2003. This is due to lower interest rates on long-term debt and a reduction in the average debt balance.

The 2003 recent re-financing reduced the interest rate on the NiSource finance corps debt from almost 7% in the first quarter of 2003 to about 6.42% in the first quarter of 2004. Income taxes for the first quarter of 2004 were $125.6 million, a $1.8 million decrease from 2003 mainly resulting from lower pre-tax income. The effective tax rate was about 36.5% for those periods.

Turning to liquidity, we ended the first quarter with $222.6 million of short-term debt outstanding versus $685.8 million at the end of 2003. The short-term debt balance as we speak is below $100 million and we expect to have all short-term debt paid off for most of the month of May before the storage injection cycle begins for the next heating season. As Gary mentioned, the total debt - the total capitalization ratio is currently 58%, down from 60% at the end of 2003.

And finally, last month we successfully re-negotiated our $1.25 billion bank credit facility on somewhat better terms than the expiring facility. $750 million of the new facility has a three-year term. The remaining $500 million has a 364-day term. And now I will turn it back to Gary for his wrap-up.

Thanks, Mike. In conclusion, I want to take this opportunity to emphasize that we ae pleased with the first quarter results. But as always, we know we can improve even further in coming years. We are optimistic that the industrial economy continues to improve in all of our markets in the Midwest all the way to the east coast.

However, this recovery is being partially offset by extremely high gas price that may lead to some long-term demand erosion in both the industrial and the commercial sector. We have an experienced management team in place focused on a low-risk business model and a solid business strategy in these changing market conditions. We will continue to extract and create long-term shareholder value by building on our strong portfolio regulated assets. Now we would like to turn it open for question at this point.

(OPERATOR INSTRUCTIONS)

Your first question comes from Andrew Levy with Bear Wagner.

Funny how that works out. How are you guys doing?

Good.

Just two quick questions. One, can you give us any idea what the second, third and forth quarters may look like just as far as ranges. And then Gary, can you talk about your plans for the future as far as personal plans?

My personal plans?

Not what you are doing this weekend, but this month?

Whether am I going fly fishing or what I am doing?

Your long-term plans as far as remaining CEO. I know we are getting to the point where maybe or maybe not.

Well, on the first question - the first part of your question, Andy, we have a range forecast for the year that we produced in December. At this point we see no ranges for changes in that range forecast. And the second part of your question, I have made no definite plans right now. We feel that the company is well staffed with a management team that in all respects could replace me at any given time.

The board has looked at this plan, is very comfortable with it. And so we will probably make decisions in a period of time I think that's responsible from the standpoint of the shareholders.

Great. Thank you very much.

Your next question comes from Ashir Khan (ph) with Pat Capital (ph).

Good morning. Gary, can you tell us I believe there were comments or hearings yesterday on your the plan that came out in Ohio and Columbia gas. Can you tell us what occurred in those hearings and are there any chances of any changes to your rehearing that you have asked on these issues and I guess the commission issues in order next week on it.

Ashir, as I said at the beginning of our comments, we are not going to comment on the Ohio situation. I think that the public hearings yesterday are a matter of public record. So, we are not going comment at this time on how we think the hearings went or what we expect other than what's been in the public environment at this time.

Can I just differently ask -- I know you came out and you said the stipulation I guess has been approved in its current format for current 2.5%. If you had similar weather like you had this quarter, I guess which was down, would that bad weather increases those five cents loss to be a higher number?

No. We had normal weather this quarter.

OK. So -

That's how we forecast as normal weather.

OK. So, under the current situation, if similar weather were to occur next year in the first quarter and throughout the year, the five-cent forecast would stand?

Correct.

OK. Thank you.

Your next question comes from Paul Ridzon with Key McDonald.

Just a couple of questions. Can you tell us how bad debt is tracking? What's driving the up tick in industrial sales? And what kind of margin is associated with those sales? What you estimate the weather impact was versus last year. And then, Gary, strategically, what's your focus? What are you going to be look at for the next couple of years? Other than fly-fishing.

Yes, Paul, this is Mike. I will do the first part and then Gary will answer the second part. Bad debt is much improved over last year for two reasons. One, the experience is better. I think we are doing a better job on the follow-up and the collection process. And also, we have the new tractor in Ohio and better treatment in Pennsylvania. In total, add all of that up, it's about $10 million better than it was this quarter last year.

Yes, Paul. The industrial pickup really is the pickup in the economy. I think if you have been tracking the economic data over the last six months, the strength in the steel industry, for instance, with higher prices, our steel mills are probably running at near all-time records in northern Indiana and certainly in parts of Ohio and Pennsylvania. Now, we are seeing a strong automotive production, which means part, which is all. Parts manufacturing which is also part of our system, so, it's across the board in what we call small industrial as well as large industrial.

What we are looking at in the next two to three years, our big issue, really, as I think I have talked to most of the analysts and our large holders is that we are looking to be more creative on our regulatory side of our business. We formed a new regulatory team under Bob Skaggs that is responsible for our state activities as well as our federal activities.

We hope to bring opportunities to our regulators that offer chances for improved customer service for a reduction in cost to our customers and at the same time, an improvement to our shareholders. So, we intend to take a number of creative initiatives in our individual jurisdictions. The other side of the coin for us is looking at our cost structure and looking at ways to improve through standardization, improved customer service but also hold our costs flat for the long-term.

And the third area for us is to look at our growth opportunities, which will be primarily centered around pipeline growth such as millennium, storage projects and other areas where we believe there is bottlenecks in the system, which will allow to us, improve our revenue.

Is that increasing the efficiency of the existing systems? Is that what you are getting at?

It is. It's of course increasing the efficiency of the existing system. But it's also taking advantage to market opportunities that tie to or are within our system that we are not currently serving.

And what was the weather hit?

The weather hit?

What was the percent -- cent per share?

We were 6% warmer than normal. Excuse me, warmer than last year. And this year was normal so last year was 6% colder than normal.

What do you estimate that it's earnings?

The total, if you add everything up distribution and a little on the electric side is about $18 million or $19 million.

Pre-tax?

Pre-tax. Yes.

Thank you very much.

Your next question comes from David Bremner with Copia Capital.

Good morning, guys.

Good morning.

Can you talk a little more about the interruptible revenue? Obviously last year in the first quarter I think you even had to pay some penalties. So I think the expectation at least for a lot of us was that - that number would rebound. Obviously it didn't. A little bit of what's driving that, what's changed in the market? And then I am also gathering if there wasn't much opportunity to take advantage of the price spikes in and around New York and the east coast during the quarter?

That's right, David. Let me take the last part first. If we would have the millennium project finished, we would have taken a big advantage of those price spikes obviously. But we don't exactly serve the New York City market. And the New York City market through Connecticut was where the price spikes were. And our pipe lines to date to do not serve that. We expect to have - by the fall of 2006 with the completion of the millennium that we will be serving that market. What was the first part of the question?

The interruptible revenue.

Well the interruptible revenue. What happened this year and we think it's going to happen in the future is, people got frightened to death, if you remember, about storage. And so everyone pumped more storage in than they have ever pumped in. We were at near all-time records on storage. Either that or they signed up for capacity because they were frightened to not be able to have it available in those high-priced gas markets. Which means that there was no room left for park and lending, for instance. Because traditionally people hedged their risk by saying, you know, we can always do a little park and lending.

We don't have to just buy all of that capacity either storage or pipeline. So we are thinking that people will be in the future are going to be a little more reluctant to leave anything out on the edge which park and lending really handles. So, the interruptible revenue, there will be interruptible revenue there. But it won't be at the same levels we believe as it was during a three-year to four-year period up until last year.

And there's no opportunity to get more out of your storage?

Well, there's opportunity to get more out of the storage. To get more returns. But it might not be in the same vain as we have done in the past through just park and lending it may mean just more turns to the storage.

Second question. On whiting. Can you specifically quantify what the losses were in the first quarter of last year, the first quarter of this year? And then whether or not you are still thinking that you will be able to keep the losses there equal with last year or whether we should be thinking they will be higher?

Well, we will give you the numbers. We think whiting will be somewhat the same as last year based on where we see the markets now. For this summer, the price of power is up over what we budgeted for this year. And we were into the must-run conditions this year with whiting where we weren't must-run conditions last year. But we think the markets will offset that this summer. And the re-negotiation of the contract will also improve that. So, we don't see that whiting will be an increase over last year.

David, this is Mike. The loss at whiting for the quarter was $11.3 million this quarter. And that's the increase of 3.8 million over last period.

OK. But what I am hearing is you will be able to make up that 3.8.

We think at this point, we'll be able to make it up.

Thanks for the time.

Your next question comes from Anatol Vegan with Bank of America Securities.

Good morning. Couple of quick questions. Can you give us a sense for future cost savings. You had mentioned, Gary and I remember from first quarter of 2003 that the pipelines had some incremental costs, because of the weather patterns. And this quarter O&M was a little bit higher in the pipeline business and roughly flat for the company overall. Is kind of the era of you guys cutting out costs substantially behind you or is there more opportunity ahead?

There's always opportunity. Each one of these business units will reflect certain things into pipeline area. We're into pipeline safety issues. So you'll see a slight increase in the pipeline area. But through standardization and other areas, we think we can minimize that so we stay flat throughout the whole corporation.

Can you give us some color on progress perhaps bringing Mitchell back on line and also on this highly over subscribed PPA that you guys put out for 500 mega Watts? When do you expect those two issues to kind of get to the next level and have some more clarity on that?

We expect to make a decision on that by the end of May.

On the PPA?

Yes.

And one last one in terms of millennium, what sort of the last hurdle you guys have to overcome before you can break ground?

We are in the process now of signing up contracts for capacity on millennium. We've got a number of shippers that are stepping up for contracts. Then we'll have a 30-day open season for those smaller contracts. So we expect that by the end of May, we'll have a wrap-up on that for commencement.

Terrific. Thanks very much.

Your next question comes from Teresa Hogue with Salomon Brothers Asset.

Yes. Good morning. I was just wondering, in terms of your flat outlook for whiting, does that assume any higher capacity revenues that you are expecting to flow through from the PPA?

No.

No? It doesn't include that?

No.

OK. So that would be up side for that?

Just up side in the wholesale mart market.

Thank you.

Next from Matt Brider (ph) with Millennium Partners.

Good morning. Can you give us an idea what you're seeing in the coal markets, given anecdotally from other people in the quarter. I realize it's not an issue for you guys as far as earnings. But it would be interesting to hear -

I don't quite understand your question. Oh, coal markets.

Yes.

Well, the coal markets -- all I can tell you is that price of coal is going up a little bit. Relatively large purchaser of coal, over eight million tons a year. We buy a lot of coal in spot market. That market is firming up price wise. That's about all I can tell you.

You don't have any inventory issues for the summer?

No.

OK.

Next question comes from Scott Ingstrom with Hamilton Investment Management.

I was just going to follow up on your comments, Gary, about the demand instruction and a couple of questions. One in sort of a larger strategy question, what is this strategic response to that set of circumstances that you may run into some? And two, obviously, one of the legs of the high gas prices is on the supply side but the other side does seem to be a little lack of demand destruction. Are you guys anticipating it? Are you actually seeing demand of destruction right now and maybe put a little more meat on the bone.

It's hard to calculate. You think there's demand destruction, then you look at weather issues and so on. We think there's some softness in the commercial side of the business that we're trying to evaluate right now. We think we can attack that with combined heat and power units, as an off set indescat cooling. We're going after that market, on the commercial side to see if we can offset any inroads that the electric business is trying to have right now into the gas business because of higher gas prices.

If you're pure electric right now, I'm sure you're licking your chops trying to go after commercial bids that have tried to pay $5 gas prices, for instance. So our offset to that is combine heat and power units, which we put a number of those in. And the indescat cooling and we have teams of people out there combing our marketplaces for those opportunities to offset that.

The demand destruction, we certainly see it in the chemical industry. We see it in the fertilizer industry. We see it in any of the areas where in the process people can substitute natural gas in their process with something else. We hear talk that the steel mills are talking about using less natural gas utility in -less natural gas in their furnace. All of these things are issues that we're looking at, working with and trying to find ways to substitute or do things for.

So is it fair to say that the examples you've given is what you've seen to date or you're expecting more?

This is what we've seen to date. And, you know, I think it's everyone guess. We can see some good economic data. But you have to make some assumptions about the future and we're assuming that if gas prices stay at these high rates, we're going to see a readjustment of usage. Fortunately, for us a lot of these areas are low margin areas for us, because in the high transport businesses, we're not making much margin. But it still concerns us.

Thank you very much.

[OPERATOR INSTRUCTIONS] Your next question comes from Neal Stein with John Levin and Company.

My question was answered. Thank you.

Your next question comes from Paul Ridzon with Key McDonald.

Hi, Paul.

A quick follow-up. Do you primarily burn eastern or western coal.

About 65% western coal, potter river basin. Then a lot of Illinois basin coal.

Use Appalachian?

Very little Appalachian.

Thank you.

Next question from Anatol Vegan with Bank of America Securities.

Just a quick follow-up. Again on that and Matt's question. Is the increase in coal prices roughly offset by the decrease in NOx costs, NOx credits year over year or do you expect fuel costs to go up?

Remember that fuel costs go up are covered by fuel cost adjustment.

Sure.

So it's not a bottom line event for us. And there's no relationship between the fuel costs and the NOx issues. You know, the costs.

Say it again.

There's no direct relationship between the cost of coal and NOx.

Right. But you passed the NOx costs along as well? That's a part of --

Under a tracker. Yes.

OK, thanks very much.

Your next question comes from Ved Hastert with Alliance Capital.

Yes, good morning. You've done a good job of paying down debt. I'm curious as to what the plan is at this point going forward.

Well, we continue to believe that at this point our free cash flow will go towards debt repayment. And you know that we have over $1 billion in free cash flow, if you do the calculations, there is about $1.4 billion available.

What kind of cash structure do you think is ideal for you guys?

Mike?

We're at 58% now. This is the low point on the short-term debt cycle. We'd like to be at about 58% at the end of the year, including the short-term debt for working capital. Then moving forward, I think we'd like that number to get to about 55%. It will probably take us a couple of years to do that.

OK, great. Thanks.

Your next question comes from Devin Dioga (ph) with Zuma Lucas (ph).

Thanks. Just wanted to go back to the -- the question really is, did you anticipate this in your guidance and what sort of head wind on an earnings basis do you think this creates going forward?

We anticipate a portion of that in our guidance. And, but there's a portion of it that we did not anticipate. So we're going to have to make it up someplace else.

OK, and do you think this is a problem that's go -- or an issue that's going to affect most of the pipelines in the northeast and south? Or is this mostly a regional issue?

Anytime you have that kind of storage most of the pipelines won't have as much opportunity for park and lending, too. So, I think it's an industry wide issue.

OK. Thank you very much.

Your final question from Esher Collin(ph) with Sach Capital(ph).

Guys, could you just repeat what kind of organic growth you're seeing in your businesses going forward?

In the form of a number of customers?

Percentage. Yes. If you could just say a number of, you know -- in terms of your sales growth and unit terms on the gas side or on the electric side.

It's about 1% on customer growth.

OK.

And, you know, the revenues -- it's hard to look at revenue growth, because as you know in a regulated business, it's changed.

But you're seeing 1% kill yo watt hour and 1% growth in the electric and gas business going forward?

Electric is a little higher than that.

1% more than the gas.

The gas is 1%. Yes.

OK, electric -- OK.

Electric is a little higher. We're getting a lot of spillover from Chicago land area into our electric market. With new homes becoming a big bedroom community to Chicago. We're seeing a little more rapid growth on the electric side of the business than we are on the total gas business.

And could you just share with us what kind of earned ROE you're earning on the electric and gas right now on a 12-month basis?

It varies by regulatory -- by state. We're in nine different states.

Right, if you can just talk on the electric side I guess what's the regulatory ROE over there?

13.5.

OK. Thanks.

OK.

At this time, there are no further questions. Are there any closing remarks?

No. Thank you all for attending. We look forward to talking to you probably at the end of the second quarter.