NiSource Inc (NI) 2005 Q2 法說會逐字稿

Good morning. My name is Crystal, and I will be your conference facilitator. At this time I would like to welcome everyone to the NiSource earnings release conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Mr. Dennis Senchak. Sir, you may begin your conference.

Thank you and good morning to everyone. On behalf of NiSource, I would like to welcome you to our second-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 Bob Skaggs, President and CEO, and Mike O'Donnell, Executive Vice President and Chief Financial Officer. As you know, the focus of today's call is to review our second-quarter 2005 financial performance. Bob Skaggs and Mike O'Donnell will briefly discuss our results, and then we will open the call to your questions. We expect this call to last about 30 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 U.S. federal securities laws. These forward-looking statements are subject to risks 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 2004 filed with the SEC.

And now it is my pleasure to turn this call over to Bob Skaggs.

Thanks, Dennis, and welcome to all. We appreciate your participation. This morning we will discuss our second-quarter results that were released earlier today, and we will update you on the notable progress we've made on our comprehensive business plan.

Stepping back a moment from the numbers, we had a good quarter, albeit with some predictable noise from our extensive outsourcing initiatives. Across the board you will see terrific progress on our game plan that we announced to you in February. For example, the IBM outsourcing arrangement proceeded. Good progress has been made on the CEG, Columbia Energy Group, debt refinancing initiative. Our Pipeline Group plan continues to unfold. We are hammering away at the Bay State rate case, and this morning we will resume negotiations on the NIPSCO Whiting situation.

We continue to show solid fundamentals, strong cash flow. Our balance sheet continues to improve. Core O&M has essentially been held flat since 2002. Our key business indicators look good. Increased usage in key electric market sectors are high margin, residential and commercial sectors. Throughput on the Columbia Gulf pipeline and transmission line ticks up, and we continue to add customers at a steady clip. Again, we are on track with a game plan, and we're sticking to that four-point growth plan that we first outlined to you in February.

Now let's turn to our financial results for the second quarter. Income from continuing operations for the second quarter of 2005 was $7.9 million or $0.03 per share compared to 35.5 million or $0.13 per share for the second quarter of 2004. The dime difference quarter-over-quarter was due in large measure to restructuring charges and an impairment charge which together amounted to about $0.11 for the quarter. Of that $0.11, $0.07 per share or 31.2 million was attributable to charges for restructuring expenses, consulting fees and obsolete software systems in connection with the outsourcing agreement with IBM and other business transformation activities.

As you know, we signed a broad ranging services agreement with IBM on June 21st to transform key business processes. This was a significant accomplishment during the quarter, and we are right on track with this process as we outlined earlier this year.

We had said in announcing the IBM agreement that we expected to take restructuring charges this year and perhaps into 2006. During the second half of the year, we expect additional charges for the outsourcing activities to be in the range of $40 to $45 million. This will include non-cash charges for pension and other retirement items, as well as additional IBM transition fees.

Also, during the second quarter, our annual analysis of goodwill found that a non-cash impairment charge of 10.9 million or $0.04 per share was required for goodwill related to an early 1990's purchase of Kokomo Gas & Fuel. Kokomo is one of our small Indiana natural gas distribution companies. The key reason for the impairment is that Kokomo has bumped against a regulatory earnings cap.

As a note, all of our other distribution and transmission properties with goodwill successfully passed the goodwill test by a wide margin.

Beyond those charges, we also have a greater number of shares outstanding primarily due to the issuance during the fourth quarter of 2004 of 6.8 million shares of common stock upon the settlement of the forward stock purchase contracts comprising a component of our stock appreciation income linked securities -- the so-called SAILS. This accounts for about another $0.01 of the decline in the quarterly per share results.

Net income was $39 million or $0.15 per share for the second quarter of 2005 compared to $34.6 million or $0.13 per share for the year ago period. The 2005 results include 31.1 million of income from discontinued operations.

As I mentioned earlier, and both Mike and I will explain further, our business fundamentals continue to remain strong. Operating results from our core utility and pipeline assets remain solid, our cash flow is strong, our balance sheet continues to improve, and our customer base continues to grow. We have said since the beginning of this year that 2005 will be a base year from which we will build a platform for long-term sustainable growth.

In February we outlined our business plan with you which centers on four key initiatives -- pipeline growth and expansion, regulatory and commercial initiatives, ongoing financial management of our balance sheet, and ongoing cost and process management. Our team continues to work hard on all of these initiatives.

In a few minutes, I am going to further detail the key developments and progress since we last talked with you in the first quarter. But first I would like to turn the call over to Mike O'Donnell to provide you with a more detail review of our operating segments and second-quarter results. Mike?

Thank you, Bob. Bob has already reviewed the consolidated results for the quarter and explained the impact of restructuring and impairment charges to operating income and net income. I will discuss the consolidated results in somewhat greater detail and also discuss the operating income by segment.

Net revenues for the second quarter of 2005 were up $39.7 million as a result of revenue trackers, cooler weather in our gas markets during the quarter, higher usage by residential and commercial customers in the electric segment as a result of the hot weather in June in the Midwest, and the sale to a third-party of a bankruptcy claim relating to one of our gas transmission customers. These factors were partially offset by the pipeline recontracting we told you about previously which was about $8 million this quarter.

Operation and maintenance expenses were up $34.2 million, mostly due to the restructuring charges, regulatory trackers and higher costs in the electric segment that I will explain further when I discuss that segment. Total operating expenses were up $78.1 million, mostly due to the restructuring and impairment charges as well as a 2004 property tax accrual reduction which improved income last year.

Reflecting on the net revenue and operating expense numbers just discussed, NiSource's consolidated second-quarter 2005 operating income was $119.4 million, a decline of $38.4 million compared to the same period in 2004.

Note the table of significant items on page three of the earnings release. You will see there that weather had a positive impact on the operating income comparison between the two periods. Weather in the markets served by NiSource's natural gas distribution companies was 1% colder than normal and 12% colder than the year ago period. We also had 23% warmer than normal weather in our Indiana electric market during the quarter and 37% warmer than the second quarter of 2004.

These weather factors had a positive impact to operating income of $5.8 million during the second quarter compared with an unfavorable weather impact of $6.7 million in the year ago period. Staying with that table, the change in the line labeled "Gas Costs and Other Changes" was primarily due to the sale of a bankruptcy claim relating to one of our pipeline customers and the reversal of a customer reserve.

The rest of the table shows the impact of the restructuring charges related to the IBM agreement, the impairment charges for obsolete software and goodwill at Kokomo Gas as Bob has discussed and the adjustment to sales and property tax accruals.

Now I would like to provide some detail on our operating results by segment. The Gas Distribution business reported operating income of $5.7 million for the quarter compared with operating income of $15.1 million in the first quarter of 2004. The decrease is mainly due to the impact of restructuring expenses and the $10.9 million impairment charge taken against goodwill associated with Kokomo Gas & Fuel. These factors were partially offset by cooler weather during the second quarter of 2005 and lower sales tax accruals compared to the prior period.

Net revenues in our Gas Distribution business increased by $28.1 million largely due to favorable weather, as well as regulatory trackers that allow for the recovery in rates of certain costs such as bad debt expenses and the reversal of a reserve for regulatory issue. These trackers increased both operating expenses and net revenues, but essentially had no impact on total operating income results.

In addition, the exploration of the 1999 stipulation for Columbia Gas of Ohio resulted in the recognition of additional revenue offset by an increase in depreciation expense for the second quarter of 2005. Under the previous regulatory stipulation in Ohio, we had been deferring depreciation that is now being expensed.

As Bob noted, our Gas Distribution business continues to grow. We have added 29,000 new customers over the past year.

Gas Distribution throughput decreased by 13.4 million dekatherms to 162 million dekatherms. But you'll notice that this decline was primarily in our transportation and all systems sales areas where the margins are very low. Sales to higher margin residential and commercial customers were up.

Operating income in the Gas Transmission and Storage segment was $76.8 million in the quarter, an increase of 3.3 million compared to the same period last year. The increase resulted from an $8.9 million sale to a third-party of a bankruptcy claim relating to the rejection of a shipper's long-term contract. This factor was partially offset by lower revenue due to the recontracting with the pipeline's customers, net of remarketing activities and the impact of restructuring charges.

The electric segment reported operating income of $61 million, a decrease of $21 million from the comparable period last year. Some key factors in this decline include a 2004 property tax accrual reduction of $18.1 million, the impact of restructuring charges, incremental costs of $5.6 million related to the implementation of the Midwest Independent System Operator or MISO and increased electric production expenses of $3 million due to outages at two of our generating units. These factors were partially offset by favorable weather.

Again, as in our Gas Distribution business, sales of electricity to high margin, residential and commercial customers increased as the weather heated up, particularly in June. So far July has also been hot here in Indiana.

The other segment recorded an operating loss of $8.9 million in the second quarter versus an operating loss of $7.8 million in the second quarter of 2004. This change reflects higher property tax accruals and the impact of restructuring charges partially offset by decreased losses associated with Whiting Clean Energy.

The corporate segment recorded an operating loss of $15.2 million compared with an operating loss of $5 million during the second quarter of 2004. The increase in the operating loss was primarily due to the $10.9 million impairment charge for obsolete software and the impact of restructuring and consulting charges associated with the IBM agreement.

Just to note a few other key line items on the income statement, interest expense increased by $2.6 million due to higher short-term interest rates. Interest income was also up by $3.5 million as a result of higher short-term investment amounts. But these two in effect offset each other during the quarter.

Income taxes for the second quarter of 2005 were $12.3 million, a $9.9 million decrease from 2004 mainly reflecting the lower pretax income during the quarter. The effective tax rate was about 60.9% this quarter, a significant jump because no tax benefit was recorded for the goodwill impairment charge since that is not deductible for tax purposes.

Turning to liquidity, we ended the second quarter with a 55% net ratio and $250 million of cash invested and no borrowings under the $1.25 billion credit facility. Cash flow from continuing operations for the first six months of the year was very strong at $953.9 million. The decrease of $131.8 million from the same period last year was caused by short-term factors, primarily decreases in deferred taxes caused by the timing of gas purchase expenses and working capital changes.

We have mentioned previously that we have been considering a refinancing opportunity on the $1.1 billion of Columbia Energy Group debt that becomes callable on November 28, 2005. I'm pleased to tell you that we are now moving forward with this opportunity in the private placement market. We have received offers to purchase an aggregate of $900 million of unregistered senior notes with maturities between seven and 20 years at a weighted average interest rate of 5.52% with settlement scheduled for November 28, 2005.

The transaction is subject to purchaser's final due diligence and completion of definitive agreements. We expect to finalize documentation by mid-August, and we will be able to provide more specific details after the definitive agreements are executed.

And now I will turn it back to Bob for some further discussion about the progress on our business plan.

Thanks, Mike. As I mentioned, our four-part growth plan is premised on pipeline growth and expansion, regulatory and commercial initiatives, ongoing cash management and aggressive cost and process management. We have made significant strides on each component of our plan.

Let me turn to those milestones. First, our new landmark agreement with IBM that began July 1st. Under that agreement IBM will be providing a broad range of business transformation and outsourcing services that will be important from an expense management standpoint, but also will advance our operational and administrative capabilities as well as enhancing our ability to serve our customers.

Over the course of the 10-year agreement, we expect to save upwards of $530 million in gross savings in both operating and capital costs, or about 396 million after cost to achieve across 15 of our primary operating subsidiaries.

Our transition of work to IBM is going well. IBM is now on site and working with us in many of our key operating centers and has developed strong transformation plans for each of the functions covered under the agreement.

We also continued to make progress on several important regulatory issues since the beginning of the year. In our electric business, NIPSCO continues to work with the Indiana Office of Utility Consumer Counselor, the OUCC, and the utilities key industrial customers to explore various options for NIPSCO to acquire additional power to ensure reliability and to meet customer needs. We remain optimistic that we can collaborate to reach an agreement that is acceptable to all the parties that will ensure reliable supplies of power for NIPSCO's customers and that will at the same time serve the interests of NiSource's shareholders.

As you know, NIPSCO previously selected EnergyUSA TPC to supply power via Whiting Clean Energy. Both EnergyUSA, TPC and Whiting Clean Energy are also NiSource subsidiaries. Notably on July 1st the Indiana Utility Regulatory Commission issued an interim order that recognizes NIPSCO's need for intermediate dispatchable power to meet reliability criteria and allows NIPSCO to make purchases from Whiting Clean Energy. The order also allows NIPSCO to recover the fuel costs associated with any such purchases through the normal fuel adjustment cost process.

Although we wish this regulatory process was advancing more expeditiously, we are nonetheless encouraged that the OUCC and other key parties remain committed to finding a constructive approach. The OUCC and our key industrials remain engaged, and we remain focused on shaping an agreement that properly balances the interests of all of our stakeholders including our customers, our regulators, as well as our shareholders. We remain convinced that Whiting Clean Energy can provide the most reliable, best cost, environmentally friendly response to NIPSCO's reliability needs.

As you would expect, Whiting Clean Energy is selling power on the wholesale market this summer. The robust market for power due to the Midwestern heat wave should help us continue to see improved results from this plant.

In our Gas Distribution business, our Bay State Gas Company continues to make progress on its rate case. As we announced last quarter, Bay State is seeking a 22.2 million or 4.7% increase in base rates. The Massachusetts Department of Telecommunications and Energy is currently conducting hearings on the case and is expected to issue an order in November with new rates going into effect in December. The rate case includes a request for a performance-based rate plan and recovery of the costs to replace their steel pipes which will improve the gas infrastructure in Massachusetts.

As Mike mentioned, we continue to see good growth in our distribution business, both in numbers of customers and volumes of gas and electricity sold. We have now passed a 3.3 million threshold in Gas Distribution customers and continue to add residential and commercial customers in our Indiana electric business.

We also continue to see great opportunity for growth in our Gas Transmission and Storage businesses, particularly in the Northeast, East and mid-Atlantic markets. Our Columbia Gas transmission recently launched an open season for a proposed expansion of its pipeline in the Tidewater, Virginia area. We continue to pursue an array of potential opportunities to expand our storage and transmission network throughout our footprint.

Hardy Storage Company, which is a joint development of Columbia Gas transmission and a unit of Piedmont Natural Gas, has a formal project application pending with FERC. Hardy Storage plans to develop a 12 Bcf natural gas storage field from the depleted gas production field in West Virginia. An open season conducted last year resulted in full subscription of the project's storage capacity. As I mentioned, the FERC application is in the hopper and proceeding. We continue to be on track for full operation in the spring of 2007.

We also continue to make progress with Millennium Pipeline. On August 1st, Millennium plans to file an amendment to its certificate with the Federal Energy Regulatory Commission. Millennium is targeting a November 1st, 2007 in-service date. Companion-related upstream and downstream projects will also be making FERC filings on or about August 1st.

Again, across the board we are making demonstrable progress on our strategic business plan. We have an experienced management team in place. They are focused on working hard to execute on a low-risk business model and a solid plan to deliver long-term sustainable growth for our shareholders.

Again, thank you for participating today and for your continued interest and support in NiSource. With that, we would like to open it up for questions.

(OPERATOR INSTRUCTIONS). Faisel Khan, Smith Barney.

Hey, guys. It is actually Sebastian (ph). I have two questions for you. First with the derailment issues out of the Powder River Basin, can you give us a sense for coal inventories at your power plants and whether you have seen any promising coal deliveries?

We have been impacted. Our deliveries out of the PRB region are down about 30%, but we still are receiving deliveries and we feel like our inventories are adequate to get us through the balance of the year. We have been making those representations to the Indiana Commission, the NERC. So at this point it seems to be going as well as we could be expected.

The way we are attempting to manage it is with blending, picking up other supplies when we can and just very very carefully managing the inventory. But so far so good. But we're working at it.

Thanks. And second, can you give us a sense for the capacity factor at Whiting during the quarter and possibly during July? It seems like spark spreads were pretty good so you should have pretty good utilization out of that asset?

Yes, it has been running quite good over the past four to six weeks. During the weekdays, we have probably been operating 16 to 18 hours a day. We ran this past weekend for part of the weekend. So we have been operating at a fairly high load factor. We can get you more precise data off-line.

Okay that is fine. And are you hedging it near the fuel supply at Whiting?

As a practical matter, no. We have some very small hedges in place to work some of the future requirements, but not major amounts.

Okay, great. Thanks.

(OPERATOR INSTRUCTIONS). At this time I'm showing there are no further questions. Are there any closing remarks?

No, we again appreciate your participation, interest and support, and we will certainly stay in touch. Thank you. Have a good morning.

This concludes today's teleconference. You may now disconnect.