NiSource Inc (NI) 2005 Q3 法說會逐字稿

Good morning. Name is Janice and I will be your conference operator. At this time I would like to welcome everyone to the NiSource Third Quarter Financial Results and Business Update 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. [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 out third quarter analyst call. We really appreciate the opportunity to be with you today and thank you for taking the time to join us. Joining me this morning are Bob Skaggs, President and Chief Executive Officer, and Mike O'Donnell, Executive Vice President and Chief Financial Officer.

As you know, the focus of today's call is to review our third 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 45 minutes. I'd 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 the 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-Q quarterly report for the quarter ending September 30, 2005, that was filed earlier this morning with the SEC.

Now, I'd like to turn the call over to Bob Skaggs.

Thank you, Dennis. Good morning, everyone.

At the outset, I'm going to address our news item, which is this morning we're announcing a downward revision in our 2005 earnings outlook. Both Mike and I will drill down into the basis for the revision in considerable detail. We'll also highlight that in many respects we had a solid third quarter and that we continue to make steady progress on our four-part growth plan. Prior to those important drill downs, there's a necessary preface that frames our discussions, specifically it goes to enhancing our transparency, both externally and internally.

Today we're into introducing two non-GAAP financial measures. The first one is net operating earnings and related operating earnings to explain our financial results. This information will help focus on the fundamental earnings strength of the Company. Also in that context we'll better explain our key issues, our fundamentals and our business drivers. This approach will be used internally for budgeting, performance management and reporting to our Board of Directors and of course it will be used externally in addition to our required GAAP reporting.

Today, as Dennis mentioned, we also began the practice of filing our 10-Q simultaneously with the issuance of our earnings press release. The Q is detailed and expansive and a terrific supplement to today's report. Again, all of this is about continuing to improve transparency and understanding of our business. We welcome your feedback on these changes. With that preface, in our new op reporting approach in hand, let's drill down in the revised 2005 earnings guidance.

On a consistent basis or 2005 guidance is being reduced from the $1.47, $1.53 earnings per share to $1.32 to $1.37 range. Again, this is on a comparable basis, and I would urge you to focus in particular on Schedules 3 and 1 of our press package for a straightforward clear reconciliation. The basis for the revision are issues that we've been dealing with for some time and that we've been keeping in front of you for an extended period. Again, Schedule 3 identifies and quantifies the impact of the issues for the full year and I'll provide elaboration on our expectations for the full year.

The first basis for the revision, Whiting Clean Energy. As most of the you know we've been dealing with Whiting for several years. Simply put, in February of this year we out lined of objective of making Whiting operating income neutral for the entire calendar year. As you know, our earnings estimate reflected that full-year objective.

Most of us also know the Whiting litigation efforts had three distinct components. The first one is relief from the must run provisions of the energy agreement with Whiting Steam Host, BP's large refinery located in northwest Indiana. The second component, improved margins from energy sales into a more robust power market. Third, establish of a power sales agreement to NIPSCO.

As previously disclosed we made progress in renegotiating the BP steam contract earlier this year and indeed margins and demand from economic dispatch of Whiting have improved. However, we're still about $12 million, $0.04 earnings per share short of our original guidance largely due to the regulatory process. Since mid-2005, NIPSCO has been working with its regulatory stakeholders to fashion an acceptable agreement to purchase intermediate dispatchable power from Whiting. After starts, stops, and turns in the regulatory process, considerable progress was made in the latter part of the summer. In fact, in NIPSCO has been purchasing power from Whiting since mid-August.

However, that arrangement is interim in nature and doesn't provide full cost coverage. Work remains. Regulatory stake holders are in fact resuming discussions in the next several weeks and to resume an effort to structure a longer term agreement. We're hopeful that process will advance, however, history has shown this is a challenges and time-consuming effort.

The second basis for our revision, MISO fees and charges. Most of us know NIPSCO operating under the relatively new Midwest Independent System Operator framework, MISO. As such, NIPSCO is assessed a variety of charges by the MISO.

Generally speaking the recoverability of these MISO charges have been subject to Indiana Regulatory Commission rulings and even core litigation for the past year or so. NIPSCO currently recovers MISO charges that are considered energy costs, however, NIPSCO's recovery of those MISO charges considered more administrative in nature have been in controversy, largely because of a comprehensive regulatory settlement that NIPSCO has in place through mid-2006. Unfortunately, after protracted litigation and after attempts to deal with the recovery issue in NIPSCO's negotiations with the Whiting matter, it has been concluded that the current comprehensive NIPSCO regulatory arrangement precludes recovery or cost deferral until mid-2006. That amount, that impact is about $8 million or $0.03 per share. We now believe that beginning in mid-2006, NIPSCO has the right to cost deferral or recovery of these MISO administrative charges.

The third basis for the revision, customer usage. Like the entire gas utility industry, we've experienced ongoing customer usage reductions as a result of conservation, more efficient equipment, and better construction of buildings. We, like virtually all other LDCs, have also seen accelerated decreases in usage when gas prices spike. The $14 million, $0.05 per share impact of incremental usage loss, as an estimate of the full year is attributable to higher gas prices as well as softness in the northwest Indiana steel industry that has temporarily weakened the demand for NIPSCO power.

The fourth base for the revision, regulatory initiatives. As most of us know, we've always been a very aggressive proponent of a wide array of regulatory commercial initiatives in all of our jurisdictions and markets. In fact, each of our groups has a comprehensive five-year regulatory commercial plan. Although we've had considerable success such as advancing the base day rate case, a multi-year extension of NIPSCO's gas regulatory arrangement, an extension of Kentucky Choice program, the unprecedented turmoil in the gas market has momentary dampened stakeholders receptivity for several of these sorts of innovative, regulatory commercial initiatives. The impact is about $7 million or $0.03 per share.

Now, shifting gears a bit, although not a direct driver in our earnings revision, Hurricane Rita did inflict damage on our Columbia Gulf facilities and greatly affected many our people. We sustained about $15 to $20 million in damage. Fortunately almost the entire amount is covered by insurance and the repairs will capitalized. We have seen a drop in our Columbia Gulf volumes. The impact is about $20.5 million pretax. At one point after Rita we were running at 20% of pre-hurricane through put level on our Columbia Gulf systems. Thanks to our pipeline team's heroic efforts, facilities are being restored and recently volumes on Columbia Gulf have grown to pre-hurricane levels, but still are only about 75% of normal through-put.

Storage levels on our market area pipeline, Columbia gas transmission, are at or about targeted inventory levels for this time of year. In fact, our affiliated LDC storage positions are at 100% plus of targeted levels. Our pipeline team has executed its recovery plan and has developed a comprehensive plain to deal with a potentially challenging winter season, challenging but we feel that we're prepared.

As our press release indicated, we're in the midst of an unprecedented dynamic, particularly on the gas side of our business. We expect choppy conditions for the balance of 2005 and that situation could well extend into 2006. Having said that, we'll continue to aggressive deal with those four issues that have led to our downward revision and the impact stemming from Katrina and Rita. I would emphatically add that despite the obvious challenges we had a solid third quarter. We continue to make good strides on four-part growth plans.

I'd ask Mike to deal with the detail on third quarter performance and I'll close with a progress report on our growth plan. Mike.

Thanks, Bob. Bob mentioned the non-GAAP financial measures. We will, of course, continue to report traditional GAAP financial measures as well. The reconciliation of net operating earnings and operating earnings to income from continuing operations and operating income can be found on Schedules 1 and 2, pages 11, 12, and 13 of our earnings release. This information is also available on our website at www.NiSource.com.

We define operating earnings as number from continuing operations determined in accordance with GAAP, adjusted for certain items. These excluded items in the current period are primarily weather, restructuring charges associated with the outsourcing contract with IBM, and impairment charges.

Net operating earnings for the third quarter of 2005 were $16.5 million or $0.06 per share, and this is on page 8 of the earnings release. This compares to net operating earnings of 26.9 million or $0.10 per share for the third quarter of 2004. For the nine months ended September 30, net operating earnings were $251.4 million or $0.93 per share. This compares with $268.5 million or $1.03 per share for the same period last year.

The decrease in net operating earnings for the nine months and three-month periods compared to 2004 were primarily the result of the same three factors. The first was lower net revenues in the gas transmission and storage business, due primarily to the renegotiation of contracts with pipeline customers in late 2004, net of remarketing activities. The second was costs associated with the Midwest Independent System Operator, which Bob discussed in our Indiana electric market. These costs are not recoverable under current regulatory agreements that are set to expire in mid-2006. Third, was higher depreciation resulting mainly from the exploration of the 1999 regulatory stipulation for Columbia Gas of Ohio.

These factors were partially offset in both the three and nine-month periods by improved results from Whiting Clean Energy. Reflected in these financial result are the effect of several issues that NiSource expects to continue to face for the remainder of 2005 and possibly into 2006. These issues include lower customer natural gas usage, continued losses from Whiting Clean Energy, and the unrecoverable costs associated with the MISO.

These are the main business reasons for the change in net operating earnings. I'd like to mention three additional factors that affected our consolidated net operating earnings. Then I'll focus on a discussion of our business segments, and after that I'll discuss GAAP results and liquidity before turning the call back to Bob for a report on the progress of the business plan.

First, net interest expense for the quarter increased $7.6 million due mainly to the impact of higher short-term interest rates on variable rate debt and higher average long-term debt balances due to the prefunding of the November 2005 debt maturities. Net other income was $3.3 million for the quarter compared to $1 million of income in 2004 due to increased interest income on short-term investments.

Second, the income tax rate of 31% for the quarter ended September 30, 2005, compares to an income tax rate of 27% for the year-ago quarter. The 2004 period was favorably impacted by a reversal of $5.7 million tax reserve, offset by a $1.3 million increase if tax expenses to reflect the regulatory treatment of depreciation differences. The third quarter of 2005 was favorably impacted by a $1.1 million tax benefit recorded upon the filing of NiSource's 2004 consolidated federal income tax return. These are minor dollar amounts that caused large swings in income tax rate during the third quarter because of the small amount of income during the quarter. The effective income tax rate for the full year is expected to be 37%, about the same as last year.

Third, earnings per share were diluted by $0.03 for the nine-month period ended September 30, 2005, because of the increased number of shares outstanding. This is mainly 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 component of the sales, which were the stock appreciation income linked securities.

Now I'd like to provide some detail on our operating earnings by business segment. Operating earnings are the pretax version of net operating income. Segment operating earnings are shown on pages 9 and 10 of the release.

Starting on page 9, the Gas Distribution business had an operating earnings loss of $44 million compared with an operating earnings loss of $31.1 million in the third quarter of 2004. The increase in this year's loss was due to higher depreciation of $7.5 million that mainly resulted from the expiration of the 199 Columbia gas of Ohio stipulation. Other factors were higher employee and administrative expenses of 3.3 million and lower customer usage of about 1.8 million. Our Gas Distribution business continues to grow, and we added almost 26,000 customers over the past year. Still on page 9 operating earnings in the gas transmission and storage segment were $69.8 million, which is essentially flat with the prior period.

Lower net revenues of $5.4 million were primarily due to pipeline recontracting net of remarketing activities, which were offset by lower operating and maintenance expenses. This was primarily the result of decreased pension expense.

Moving to page 10, electric operations reported operating earnings of $103.6 million. This was a decrease of $3.7 million from the year-ago period. The decrease was the result of the MISO costs of $6.1 million partially offset by increased sales to commercial and residential customers due to both increased usage and to customer growth.

Other operations reported operating earnings of $2.8 million in the third quarter of 2005 versus an operating earnings loss of $5.8 million in the same quarter last year. The $8.6 million increase in operating earnings resulted from decreased losses of $8.7 million associated with Whiting Clean Energy. The corporate segment reporting an operating earnings loss of $3.5 million down slightly from the comparable period last year.

Turning now to the GAAP reporting measures, page 15 shows the GAAP income statement. NiSource's reported a loss from continuing operation for the third quarter of 2005 of $5.8 million or $0.02 per share. This compares with income from continuing operations of $21.7 million or $0.08 per share for the same period in 2004.

The net loss in the third quarter of 2005, which includes the results from discontinued operations, was $6.8 million or $0.03 per share. This compares with net income of $28.8 million or $0.11 per share for the third quarter of 2004.

Operating income for the third quarter of 2005 was $93.2 million compared with $128.1 million in the same period in 2004. The major cause of the difference was restructuring charges associated with the IBM contracts, which totaled $49 million in the quarter.

For the nine months ending September 30, 2005, income from continuing operations was $210.8 million or $0.78 per share. This compares with $274 million or $1.04 per share the same period in 2004. The main causes for this decrease were the IBM charges previously mentioned, the impairment charges taken earlier this year, and the weather. Net income for the nine months of 2005 was $238.5 million or $0.88 per share which compared with $276.9 million or $1.06 per share for the same period last year.

Turning now to liquidity, we ended the quarter with $932.5 million of short-term cash investments. Net cash from operating activities for the nine-month period was $756.9 million, a decrease of $53.2 million from the comparable 2004 period. This decrease was due primarily to the additional cash required for deferred tax payments that was due to the expiration in 2004 of bonus tax depreciation enacted under the Job Creation and Workers Assistance Act of 2002.

The recent increase in the price of natural gas will result in an increase of working capital requirements to fund the cost of gas placed in storage, the cost of gas flowing directly to our customers, and the related increase in accounts receivable. While NiSource's $1.25 billion revolving line of credit is projected to adequately meet these needs, we are reviewing several options to increase available liquidity for the future. This fall NiSource completed it's 2005 refinancing plan with a $1 billion issue of notes in a public offering. The notes consist of $450 million of 12-year notes at a 5.25% interest rate and $550 million on 15-year notes at a 5.45% interest rate. Proceeds will be used in part to redeem the $900 million of NiSource's finance corp notes due November 15, 2005 which carry an interest of 7 and 5/8%. The new notes, factoring in the impact of forward starting swaps, put into place in November 2004, will have an effective borrowing cost of 6.7% and 5.88% respectively, and will save the Company approximately $16 million in interest expense annually beginning in 2006.

In addition, earlier this year we reached a definitive agreement with private placement investors providing for the sale of $900 million of the company's unregistered senior notes. We will use the proceeds from this transaction to refinance a portion of the Columbia Energy Group's senior unsecured note that become callable on November 28, 2005. These notes carry an average weighted interest rate of 7.3%. The $900 million in senior notes will be issued on November 28th and carry a weighted average interest rate of 5.52%. Once we complete these transactions, we will have no major required refinancings until 2010.

With that, I'll turn it back to Bob for his discussion on the business plan.

Thanks, Mike. As you can see, we did indeed have a solid quarter. Our basic businesses continue to perform well, and our fundamentals are good. With that, let's address our long-term business plan.

We remain committed to the business strategy we outlined for you earlier this year. I'd like to take a moment to reiterate four key elements of that strategy. We remain focused on these key initiatives to build a platform for long-term sustain growth.

The four planks of the plan are, one, expansion, in commercial growth in our pipeline and storage business. Secondly, regulatory and commercial initiatives. Third, management of our balance sheet, and four, expense and process management.

During the third quarter we continued to make excellent progress on this plan.

The pipeline group's Harding storage project just received [INAUDIBLE] approval on November 1st. Full speed ahead, construction will begin yet this year. This is indeed a milestone for our pipeline development program and is is the model for proceeding forward with our pipeline growth.

Beyond Harding, Columbia gas transmission conducted two successful open seasons for system expansions. The expansions are planned for the tidewater area of southeastern Virginia, the mid-Atlantic and Eastern markets.

On the regulatory commercial front, Bay State Gas Company expects to receive an order on its $22 million base rate case by the end of November.

On the final financial dimension of our plan, as Mike mentioned, NiSource has finalized the terms of the plan refinancing of our balance sheet. We expect interest expense savings of more than $43 million annually beginning next year.

Last and not least on the cost process management dimension, NiSource continued with the implementation of our contract to outsource mini-back office processes with IBM. A ten-year agreement is expected provide approximately $395 million after costs to achieve and operating and capital cost savings across our 15 primary operating subsidiaries. It also will provide new tools and project enhancements and enhanced service capabilities. During the third quarter IBM began assuming responsibility for information technology, human resources and supply chain procurement functions across NiSource, as well as some key processes in meter-to-cash function and the customer contact centers.

Looking ahead, we're convinced the business plan will continue to create value. Undeniably we have near-term challenges and the catastrophic hurricane season and resulting natural gas price volatility have created an unprecedented dynamic for the energy industry. But as I mentioned earlier, we're dealing with these issues. We have an experienced and strong management team in place focused on doing what it takes to execute on a low risk, hard asset based business model and our solid four part growth plan. Thank you for participating today, thank you for your continued interest and support for NiSource. And with that, we'll open the call to questions.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Paul Ridzon of Key McDonald.

Good morning. I was looking for just kind of a little more detail on the status of Whiting discussions.

Paul, as you know, we've been -- we -- NIPSCO has been purchasing power from Whiting since August. We're currently looking at the impact that Whiting has had on NIPSCO's reliability measures. We're also looking at the impact of changes that were recommended by a third-party consultant on the way we operate. We're going to be sitting down in the next several weeks with the consumer council, other key stakeholders, to review those results and to begin -- literally begin negotiating and discussing how we proceed with the permanent plan.

In addition, we recently filed an integrated resource plan, NIPSCO filed an integrated resource plan that demonstrates the long-term need for dispatched intermediate power such as that that's provided by Whiting. We expect that to be a significant part of the ongoing discussions with the stakeholders.

Okay. Thank you.

Your next question comes from the line of Faisel Khan at Citigroup.

Good morning.

Good morning.

I just wanted to drill down into the guidance. You gave '06 guidance at the beginning of the year, and I just wanted to make sure I understood that. Many of the costs that you are experiencing, the higher costs you're experiencing right now are not something that you contemplated in your '06 and long-term guidance. Is that true?

Just a clarification. We haven't provided '06 guidance. Are you referring to '06 guidance or '05 guidance?

Sorry. The -- you talked about these type of costs that you've had -- that you have in your '05 guidance right now, and these are costs you hadn't contemplated going into the future. Is that fair, the lower customer usage, the higher energy costs -- or the higher fuel costs at Whiting and the MISO charges? Are those costs you didn't contemplate kind of going into the future, or is that something that you've been kind of working towards?

This is Mike. Let me clarify a bit. The MISO fees and charges were in the plan originally, but we were assuming at that time that we would recover them this year or at least be able to defer them, so that's that $8 million. The regulatory initiatives were increased revenues that we had in the plan that didn't come through in the full amount that we had planned originally.

Whiting is really a mixed bag. The cost is pretty much what we had in the plan originally, but the decrease in the guidance is due to a delay in our ability to recover some of the costs that we had thought we could do when we put the guidance out originally. And the decrease in customer usage, most of this is on the gas side, is really from the observance of that has the years progressed that people are using less natural gas, and we think that's because of the higher prices that are in effect. Does that help?

Yeah, that helps. When I was talking about '06 guidance, I was refer to go your '06 drivers you guys had kind of disclosed in your analyst presentation where you had '05, an '05 number and then you had the drivers kinds moving into '06.

That's right.

So there's an embedded '06 number we were looking at. I wanted to make sure that the costs you're seeing now -- these are costs that is we should kind of -- that could impact your '06 drivers that you previously mentioned.

It's a for sure thing -- the customer usage is something you need to carry over to '06. Whiting, we continue to work on that, and we'll give you updates on how that will progress. That will probably be kind of a mixed bag somewhere between here and full recover recovery. The regulatory initiatives, we'll have to keep you posted on that. The MISO fees, we're expecting by mid-year 2006 that they'll be recoverable or at least deferrable.

Okay.

Certain sensitivities, as Mike suggested, on Whiting and other notable issues we will keep you posted on progress and where we're headed.

Okay.

Just as an addendum we're currently working on our budgets for 2006. We're slated to review that information with our board at its November meeting, which is late November. So we're currently trying to assess all these sensitivities with that financial plan.

And then have you looked at on a -- on a weather normalized usage basis what the actual decline is in customer usage? If you were to take the weather and normalize it and look at all your residential consumers, what do you expect in kind of the year-over-year volume impact?

On a normalized basis we're expecting about one-half of 1% decrease.

And that's including any potential customer growth also in your system?

No. That stands alone by itself. That's by customer groups.

Okay.

And then one thing to keep in mind. That's based on prices historically, including the current prices, that could go up battle with the higher prices this winter.

Okay.

Again, the numbers we're quoting today are normalized numbers.

Okay. Got you. In terms of the balance sheet with a lot of your refinancing almost complete here, as you go forward, is there anything we need to look at in terms of where you could -- where your free cash flow is going to be deployed to? The way I understand it is there's no more debt from now until next few years that you'll have to refinance or pay down. Is that true?

That's correct. The next big maturity is in 2010.

Okay.

Otherwise, the free cash flow as always is going to come used for the construction program and dividends.

Okay. And the -- on the regulatory front with the higher costs you're seeing in your territories, is there any need to look at any rate cases in some of your territories or maybe ask for margin trackers or further bad debt trackers like you've done in Ohio?

Yeah. It's a general sort of statement. Across the board we'll continue to be aggressive in the regulatory arena. We have formal plans, but as you recognize, some of this is going to have been opportunistic. Where we find the opportunity, the appropriate opportunity for a tracker, be it uncollectible, an infrastructure tracker, the so-called de-coupling or conservation tracker, we're certainly going to pursue that.

Okay. Thank you for your time.

Your next question comes from the line of Steve Fleishman of Merrill Lynch

Hi, guys. I don't mean to beat these four dead horses of issues, but if I could go through a little bit again. On the customer usage you're now assuming half of a percent for 2005? Is that --

On a weather normalized basis, yes.

On a weather normalized basis. So is that that usage or is that total growth in sales on a weather normalized basis?

It's usage.

Usage. Okay. And --

Steve we feel like customer additions will continue to be at or about historic levels. We've not seen a significant slowdown. In fact, we've not seen any slowdown in customer additions, residential customer additions.

Okay.

Steve, just for the sake of clarity, we also mentioned that on the Indiana steel market, we've seen some softness this year. We're certainly hoping that's going to rebound and hopefully it's temporary, but we have seen some softness there, a little bit south of $10 million pretax.

This is before we're actually going to see the big price increase this winter, that we still need to review what that does?

I think certainly we're going to be continually reviewing that. We're believing that the market is beginning already to react to the higher prices. We feel like on deep analysis of first quarter we saw some reaction to prices, and we're attempting to reflect some of the additional impacts for the balance of the year. Unchartered territory for us all.

Okay. And then on the MISO, as you get to -- what is that on a -- so you mentioned what it is in '05. In '06 you say at mid-year you will either defer or recover. Is that just automatic, or what has to happen to be able to defer recovery mid-year next year?

Steve, not being overly technical, it's quasi-automatic. We feel like we have the right to defer, whether our regulatory team will actually have to get the Commissions Executive Secretary Director's permission to get that deferral. In any event, we feel like it's a relatively straightforward move.

You don't need to do a new Indiana rate case or anything?

No. In fact, you may recall that the current agreement that we have with the regulatory stakeholders pushes out any rate activity until effectively 2008.

Okay. Okay. I think we've been through Whiting. Then on these regulatory initiatives, was there any particular one that you were hoping to get that --

Steve, good question. We literally have 30 to 40 different regulatory commercial initiatives, because some of the initiatives did, in fact, involve trying to increase margins on commercial industrial loads. So there is not a single one or two or three or even a handful of initiatives. It's a variety across all of the states. The big cases, Bay State, the effort to extend the Indiana gas alternative regulatory plan, you're familiar with those. Those are the big ones. The rest of them are relatively minor on a stand-alone basis.

Okay. Okay. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Mike Heim of A.G. Edwards.

Thanks. My questions were largely along the gas usage, and I think they've been addressed. Let me rephrase the question this way. Would you talk a little bit about timing issues regarding the fuel adjustment clauses and the use of gas storage to help us get a little indications how much of the gas price increase is hitting this winter verse perhaps flowing into '06?

Mike, let me start with regulatory recovery, timely recovery of our gas prices and the like. In our largest gas jurisdiction, Ohio, we have a monthly GCR mechanism. We also have a monthly mechanism in Indiana. Pennsylvania currently has an annual mechanism that can be adjusted on an as-needed basis. So on a macro basis we have good, virtually realtime mechanisms to recover gas prices. Right now we have not seen any indication, hard indication from any commission that would suggest extended recovery periods, or for that matter, anything in terms of moratoriums or shutoffs or changes in collection mechanisms. All of our jurisdictions are talking about low income, troubled payment programs and we're participants in those sorts of discussions and those sorts of programs.

In terms of gas storage, our LDCs are large, large users of gas storage. So we have that natural physical hedge built into our rates. The gas storage is drawn November through March. We typically attempt to husband that storage until January, February, and March, and clearly with the impacts of Katrina and Rita on southwest gas supply, we're going to try and husband that storage as long as we can. So most of it, we hope, will come out during the first quarter of the year.

The various impacts do depend on the gas recovery treatment. Some use different accounting or rate conventions to reflect that. But most of the impact would be reflected during the first quarter.

Can you give us any indication what the typical cost of gas held in storage might be?

Mike, the total cost of current gas inventory you'll see on the balance sheet is $666 million, and that applies to about 110 BCFs. So the average cost of all of that is around $6. Keep in mind there's light of earlier vintage gas there included in inventory.

Okay.

Mike, just a meat-axe kind of impact, we expect our customers give or take with normal weather would see a 40% increase in their winter season bills. So we're at the -- a little bit at the lower end of the national numbers. You tend to see 40 to 60. We're a bit closer to her 40 than 60, again assuming natural weather for the winter season.

That's because of storage usage. Going forward, as you talk about operating income and net operating income, I guess, that's your attention -- intention to give us a number that excludes nonrecurring items and restructuring charges, but also weather adjustments in each quarter. Is that the idea?

For 2005, Mike, that's exactly what we're going to do. We're thinking about weather, whether that should be included or not included, but we won't make any change there because we started the year with weather excluded. We won't make any changes before 2006 for that.

All right. That makes sense. Thank you for your answer.

Thanks, Mike.

Your next question comes from the line of Anna Tal, Fagan.

Good morning. It's actually Zac Burger, pitch-hitting for Anna Tal. Two quick things. Sorry if I missed this and they were discussed already. The first is regarding the Indiana steel market. I assume the weaknesses is price-related, but can you just discuss how widespread it is and kind of what you're thinking in terms of how long the impact, whatever it may be, will last?

Yeah. Much of this is going to be speculation because we're relying on information that's publicly available. The market has seen a downturn, as you would expect, from big 3 auto demand, built-up inventories, and to your point, also some pricing. We expect the sluggish conditions to continue through the year. We're beginning to see reports published reports from the industry that would project an uptick in demand beginning in the first quarter. Your guess is probably as good as ours, but our intelligence certainly suggests that this is temporary in nature and that the steel industry is expecting to move forward.

Okay. And just secondly, what exactly are these MISO costs, and again, I joined the call late. Forgive me on this one. Did I hear correctly that they may be recoverable in 2006?

The MISO costs that we're dealing with are administrative in nature as opposed to energy in nature. The energy costs, we are, in fact, recovering primarily through our fuel adjustment clause at NIPSCO. The administrative costs, or administrative in nature, costs we've not been able to recover because of a pre-existing settlement that NIPSCO has. That is set to expire middle of 2006, and our position is that we will be in a position to either defer -- cost defer those charges or, in fact, affect cost recovery of those.

Great. You said by the way that pretax, the $10 million number that you associated with the impact of the the steel market, is that through year end?

It's south of 10. So I would discount that and probably use a number between 7 and 9. Net would be a full year sort of number.

Full year 2005?

I'm looking at Mike to get a confirmation.

That's correct. Keep in mind, there are other increases in usage in the electric segment, so that's largely offset within the total segment by increases in residential and commercial.

That's a good point. Again, all pretax dollars that we just used with you.

That's fine. Thanks, guys.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster. At this time there are no further questions. Mr. Senchak, are there any closing remarks?

This is Bob Skaggs. Again, we thank you for your participation and your support and again we welcome your feedback on our new presentation of the information. Thanks. Have a good weekend.

Thank you, ladies and gentlemen. That concludes today's conference call. You may now disconnect.