NiSource Inc (NI) 2005 Q4 法說會逐字稿

Good morning. At this time I would like to welcome everyone to NiSource's fourth quarter financial results conference call. [OPERATOR INSTRUCTIONS] At this time I would like to turn the conference over to Dennis Senchak, Vice President of Investor Relations for NiSource. Please go ahead, sir.

Thank you and good morning to everyone, on behalf of NiSource, I'd like to welcome you to our quarterly 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 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 fourth quarter and annual 2005 financial performance as well as to discuss our 2006 earnings guidance. Bob Skaggs and Mike O'Donnell will discuss our results and our outlook and then we will open the call to your questions.

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 Provision 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 managements discussion and analysis section of our Form 10(Q) quarterly report for the quarter ended September 30, 2005, that was filed on November 4, 2005 with the SEC. And now I would like to turn the call over to Bob Skaggs.

Thanks, Dennis, and welcome everyone. We're pleased to be with you today. As we anticipate 2005 was indeed a challenging year. It was a year to establish new base earnings level for NiSource and to launch our four part platform for growth. To briefly reiterate four areas of which we remain focused are, One; fiscal expansion and commercial growth in the pipeline and storage business. Two; regulatory and commercial initiatives. Three; management of the balance sheet, and, four; process and expense management.

Today we will be reporting on progress in each of these areas as we highlight our 2005 financial results. Later in the call we will discuss our 2006 earnings guidance of $1.45 to $1.55 per share and net operating earnings.

At the outset I would also mention that we are working hard to sharpen our communication both externally and internally on the key business drivers impacting NiSource and our growth outlook. To that point just a reminder that we adopted two nonGAAP financial measures last quarter to explain our financial results. That operating earnings and operating earnings. If you need a refresher on the definitions of these measures they are explained in our earnings release, also Mike will be reviewing schedules one and two of the earnings release which provided straight forward, clear reconciliation of net operating earnings and operating earnings to GAAP.

As I mentioned a moment ago we are providing this nonGAAP information to focus on the fundamental earnings strength of the company. In that context we'll explain our key issues and sensitivities, our fundamentals and our key business drivers. Again we believe that reporting these nonGAAP measures greatly enhances our transparency both externally and internally. To that point we used these nonGAAP measures internally for budgeting and performance management purposes and for reporting to our Board of Directors and, of course, we use them externally and in addition to the required GAAP reporting measures. We welcome your feedback on these enhancements. Now let's drill down into our 2005 earnings results.

You will recall that our revised 2005 net operating earnings guidance issued last November was $1.32 to $1.37 per share. We exceeded that revised guidance by a penny. Our actual net operating earning for the year ended December 31, 2005, came out at 37 - $375.4 million or $1.38 per share. This compared to net operating earnings of 405.8 million, or $1.54 per share for 2004. As we said this establishes a new earnings base line for NiSource.

Now let me highlight for you the four primary business reasons behind the decline in 2005 net operating earnings compared to 2004 and this comparison will be on an annual basis.

Starting on the revenue side. First, customer usage, about a $0.07 per share decline. Like most gas utilities we've experienced ongoing customer usage reductions as a result of conservation due to high gas prices and more efficient heating equipment. We saw volume declines of 47 BCF across all customer classes excluding the impacts of weather which decreased operating earnings by about $28 million. I will elaborate on that usage impact when I discuss our gap distribution segment in some detail in a few minutes.

Second, we experienced lower net revenues, about $0.05 per share in the gas transmission and storage business primarily due to the 2004 renegotiation of contracts with NiSource's pipelines, major customers after remarketing efforts.

Then on the cost side and our third business reason, higher depreciation, a $37 million impact, about $0.08 per share to net operating earnings from higher depreciation. This mainly resulted from the 2004 exploration of the prior regulatory stipulation for Columbia Gas of Ohio.

Four, licensee and charge about $0.05 per share. As we discussed in past quarters our Northern Indiana Public Service Company, NIPSCO, subsidiary operates under the relatively new Midwest Independent System Operator for MISO framework As such, NIPSCO is assessed a variety of charges by the MISO. The impact operating earnings during 2005 was roughly $19 million.

Recall that currently NIPSCO can recover some costs associated with MISO under the Company's electric rate review settlement agreement. Under that agreement a rate moratorium ends on July 31, 2006, and at that point we have the right to begin deferring for future recovery those costs beginning August 1 of this year. These four negative effects on net operating earnings were partially offset by improved results from aggressive cost management and Whiting Clean Energy. Whiting sold significant amounts of power into the Midwest wholesale market last summer.

Two other rea; positives included one, solid top line growth in our electric business and, two, ongoing improvements from regulatory initiatives, particularly trackers and our gas distribution business. The company had a solid fourth quarter. We made good strides throughout 2005 in every segment of our business and I will provide an overview of that 2005 performance for each of our four business segments.

Starting with our gas distribution business. We reported operating earnings of $394.2 million which was a decrease of $34.6 million from 2004. The decrease was primarily due to two drivers. Number one, $30 million in higher depreciation mainly resulted from the 2004 exploration prior COH regulatory stipulation that I previously mentioned. Two, significant decrease in usage per residential customer. This residential usage decrease impacted sales and transportation by reducing throughput by about nine BCF, roughly 4% and reducing operating earnings by approximately $20 million, again excluding any weather impact.

This steeper anticipated decline in customer usage is, as you know is an industry-wide issue and is largely due to higher wholesale natural gas commodity prices. And I would add this is a much steeper decline than we've seen in the past. Typically our annual residential usage decline has ranged from 0.50% to 1% and that's what we are expecting going forward. Again depending on commodity prices. On a more positive note our gas distribution business continues to grow, NiSource had 28,000 net customer additions over the past year which is consistent with our growth over the past several years. This contributed about $9 million of operating earnings in 2005.

Our gas distribution business also continues to benefit from regulatory initiatives such as trackers. Trackers allow for the recovery of certain costs such as bad debt and increased net revenues in tandem with rising operating expenses. If the numbers reflect an addition to the positive impact of trackers, our distribution team did an outstanding job of limiting the impact of higher depreciation expenses and declining customer usage by holding the line on O&M costs.

Moving to our gas transmission and storage operations segment, operating earnings were $349.6 million which was a $16.9 million decrease from last year. The decrease was primarily due to a $31.9 million decrease in net revenues caused primarily by the 2004 renegotiation of contracts with major pipeline customers, again net of remarketing activities. This decrease was expected and notably our pipeline team offset nearly half of the revenue reduction by aggressively marketing available capacity and lowering O&M expenses by $15.6 million. Our pipeline and storage business continues to show great potential for growth with expanded commercial activities and new revenue producing projects scheduled to come on line as early as 2007.

On that note we achieved several milestones during 2005. The Hardy Storage project in West Virginia received its FERC certificate in November and this is on track to take storage injections by customers in the spring 2007. The Millennium Pipeline announced in August that it signed consolidated Edison and Key Span as anchor customers and continues to move through the FERC process.

Columbia Gas transmission eastern market expansion is moving forward to a 2009 inservice date based on definitive agreements with four east coast customers. This eastern market expansion is a development project to expand our existing Mid Atlantic storage and transmission assets to provide almost 100 million dekatherms a day of storage for our eastern growth markets.

As for our electric operations segment we reported operating earnings for the year of $292.1 million. This was a decrease of $8.3 million from last year. The decrease was primarily due to MISO costs of $19.2 million and higher electric production expenses of $7.2 million. Much of those decreases were offset by increased net revenues which went up by approximately $18 million excluding the impact of MISO cost and trackers that increased both net revenues and expenses. As I mentioned earlier, as the moratorium under the NIPSCO electric rate review, gentlemen, expires we have the right to begin deferring MISO costs beginning on August 1 for future recovery. Also, as I mentioned earlier, the good news at NIPSCO is that net revenues for the electric segment increased primarily due to environmental trackers to help recover the cost of certain solution control equipment, increased customer usage and customer growth. NIPSCO added about 4,400 net electric customers during 2005, residential electric usage and commercial usage increased by approximately $0.04 cents.

We saw some weakness in the industrial market and our wholesale sales also were down. However, margins for both of these markets remain relatively solid so the impact on revenues was tempered.

Moving to the segments we refer to other operations, we reported an operating earning loss of $13.2 million during 2005 which was an improvement of 26.2 million over 2004. The lower loss in 2005 was mainly due to decreased losses of approximately $16 million associated with Whiting Clean Energy which sold power into the Midwest, wholesale energy markets. Also our energy USA - TPC unit earned $7.5 million of increased revenues from commercial, industrial gas marketing activities.

Finally in the corporate segment we reported an operating earnings loss of $19.2 million, $3.3 million improvement over 2004. The decreased operating earnings loss in 2005 resulted from lower employee and administrative expenses.

As you can see we had to grapple with an array of market dynamics, usage, MISO, and and more challenging regulated environment plus the ongoing Whiting issue. Clearly sustained growth will continue to be our primary challenge. However, our basic businesses continues to perform well and our team remains committed to our long-term business strategy, a plan that has registered several notable successes throughout the year.

I've already mentioned the pipeline expansion opportunities with Hardy Storage, Millennium Pipeline, now the eastern market expansion that has recently firmed up with four east coast customers. I'd add regulator in Massachusetts approved an $11.1 million annual revenue increase for our Bay State Gas subsidiary.

We completed major refinancing of our corporate balance sheet that will yield approximately $43 million in annual interest expense savings beginning in 2006 as well as a new five-year, $1.25 billion revolving credit agreement.

We implemented sweeping process and cost management initiatives by transforming back office processes and systems in conjunction with our outsourcing contract with IBM. We also initiated a corporate streamlining effort later last year. That effort will include reducing office locations, realigning executive compensation and reducing executive positions. Looking ahead the business plan will keep us on track to continue to create value. High gas costs in the wholesale market which have passed through without mark up to utility customers has started to drop and we hope that trend will continue. We will continue to positively affect customers demand for natural gas going forward.

I will now ask Mike to discuss our GAAP results and a few other important points about our overall financial picture and then I'll close with a discussion of our 2006 earnings guidance. Mike.

Thanks, Bob. Bob has covered the main business reasons for the change in net operating earnings and operating earnings by segment. I will briefly discuss factors that affect consolidated net operating earnings and after that I will review the reconciliation of nonGAAP and GAAP results and I will discuss liquidity before turning the call back to Bob for a discussion of the outlook for 2006.

First interest expense for 2005 increased $17.1 million to $421 million compared to 2004. Due mainly to the impact of higher short term interest rates on variable rate debt and higher average long-term balances.

Net other income was $14 million for the year, up $6.7 million over the $7.3 million of net other income in the previous year. This was due to increased interest income on short term investments which in turn was caused by higher amounts of short term cash invested.

The second net operating EPS were diluted by $0.04 for the full year 2005. NiSource had a greater number of shares outstanding mainly due to the issuance during the fourth quarter of 2004 of 6.8 million shares of common stock on the settlement of the forward stock purchase contracts comprising the sales which were the stock appreciation income linked securities issued with the Columbia merger in late 2000.

Turning to GAAP reporting measures, NiSource's reported income from continuing operations for the 12 months of 2005 of $283.6 million or $1.05 per share. This compares with income from continuing operations of $431 million or $1.63 per share for calendar year 2004. The difference is detailed on schedule one which is page 14 of the release.

If you turn to that you can see that the major reconciling items are cost related to the IBM outsourcing arrangement, cost incurred for the retirement of the Columbia Energy Group debt and the impact of weather. The first of these was $82.8 million in restructuring and transition charges related to the outsourcing initiative.

Second was $108.6 million book loss on the early extinguishment of the Columbia long-term debt. I point out it's a book loss only about $15 million of that was cash.

Third was a favorable impact of weather which equated to $27 million for 2005 compared to an unfavorable weather impact of $23.9 million in 2004. Schedule II which is on pages 15 and 16 shows the GAAP reconciliation of operating earnings by segment for 2004 and 2005.

Net income reflecting the inclusion of results from discontinued operations for 2005 was $306.5 million, or $1.13 per share, compared with $436.3 million or $1.65 per share for 2004. Operating income was $952.8 million in 2005, compared with $1077.5 million in 2004.

Turning to liquidity, net cash from operating activities for the year end was $712.3 million, a decrease of $343.6 million from the comparable 2004 period. This decrease was due primarily to the increase in accounts receivable, about $450 million, caused by higher gas costs and increased deliveries of gas because of the cold weather in late 2005. In addition cash was required for deferred tax payments due mostly to the expiration in 2004 of bonus tax depreciation which was enacted under the Job Creation and Worker Assistance Act of 2002. This bonus depreciation expired at the end of 2004.

The increase in the price of natural gas and the colder than normal weather at the end of 2005 resulted in an increase in 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 were the effect.

While NiSource's $1.25 billion revolving credit agreement was projected to adequately cover these cash needs, to be on the safe side we put in place a new $300 million short term credit facility during December, 2005. This new facility has significantly bolstered our liquidity position and at the same time lowered our borrowing cost. We ended the year 2005 with $652 million of unused credit facilities and have about $800 million of liquidity, as we speak.

We will require no major refinancing until 2010 and finally we met with the rating agencies late last month and I am pleased to report that both Standard & Poor's and Moody's have affirmed our ratings with a stable outlook.

Bob, with that bit of good news I'll turn the call back to you for your 2006 guidance.

Thanks, Mike. As we stated previously NiSource is in the midst of an unprecedented dynamic and we expect choppy conditions will extend into 2006. Our outlook for 2006 of $1.45 to $1.55 per share in net operating earnings, again, nonGAAP, reflect several sensitivities and challenges.

First our standard planning assumptions. Normal weather, customer growth out stripping usage declines and customary increases in costs such as depreciation, taxes, and employee and administrative expenses.

Second, the more notable business sensitivities that can move our results. First is a successful completion of a wide array of key regulatory and commercial initiatives including the deferral of MISO costs beginning on August 1. And achieving expected savings from the outsourcing arrangement with IBM.

We also want to be clear about our assumption on Whiting Clean Energy. Specifically the 2006 outlook reflects Whiting performing at a net operating earnings level that is modestly below its 2005 results. You recall that during 2005 Whiting was bolstered by strong market conditions.

We provided as an attachment to this morning's earnings release a waterfall chart that shows the assumptions on which we base our 2006 guidance. We are doing this to be more transparent about our business plan. We will return to these assumptions each quarter to update you on our progress. Again, we hope this approach improves transparency and understanding and we welcome your feedback.

In closing, we have a solid plan to manage through the challenges we expect in 2006 while remaining focused on our four part balanced platform for growth. We have some aggressive objectives on the revenue side. We also have a strong record for managing our expenses.

We are convinced with our seasoned NiSource team focusing on doing what it takes to execute on our hard asset based business model and our solid low risk business plan we will continue to build on our strong portfolio of regulated assets to deliver long-term sustainable growth for our shareholders. We look forward to keeping investors and all interested stakeholders updated on our progress and press releases throughout the year. Those will be posted promptly on www.NiSource.com. We will also be holding quarterly analyst calls as well. I thank you for participating today and for your continued interest and support in NiSource. We now would like to open up the call to questions.

[OPERATOR INSTRUCTIONS]. Your first question comes from Paul Ridzon with KeyBanc.

Could you give an update on your strategy for the Mitchell plan and how that interplays with Whiting.

We will address that. Paul, you are aware that we received an order from the commission just recently on Mitchell that did not recognize the settlement we struck with the City of Gary and other stakeholders. Clearly we are disappointed with that outcome. I note that it doesn't have any financial impact on our results now or into the future. At this point we are unlikely to the seek commission or court review of that order. Our more likely course of action is to work with the city, work with the stakeholders, to shape a reasonable, acceptable agreement.

It's cleared up and I think the city and the state that Mitchells site is going to be required for the expansion of the Gary International Airport and that's clearly a plan of the Governor and the region and also the development of the [inaudible], so ultimately we are going to have to address that Mitchell situation and we think ultimately it is going to go on to be raised and rehabilitated. And again the strategy is to the, the approach is to work with the city and the other stakeholder to shape an acceptable agreement.

On a somewhat separate track, I mentioned that NIPSCO does in fact need additional power and recently we thought an integrated resource plan, the plan showed that we needed intermediate power, which is not the sort of power that Mitchell supplied or could supply going forward. We think that Whiting is a potential fit for that need for intermediate power and we are currently working with our stakeholders to explore different approaches including the use of Whiting on a long-term basis and that's what we intended to do is to work with those stakeholders and shape the right answer for Whiting. And Nipsco.

And your guidance that you issued today, does that contemplate the fact that we've had a pretty mild January?

Again, the guidance is based on normal weather. So the range that we are presenting to you does not reflect the unfavorable weather that we've had to date. We have not made an adjustment. Normal weather.

Thank you.

Your next question comes from Jay Yannello with Pali Capital.

Good morning. Bob, going back to the guidance, if we assume, I think you said that, you're assuming customer growth outstrips usage decline and I think you are implying on the call and in the press release that maybe aggressive. If had you a 1 %, for every 1% uptick in conservation what does that mean per share, roughly?

I want to give you a good response here. It's about $5 million is the impact on 1% usage change.

Okay.

Again this year we - I'm sorry 2005 usage change was about 4% across all of NiSource. Going forward in this plan that you have in front of you. It's about a half a percent or a percent -- the one thing I would mention, though, Jay, you comment about being aggressive, that assumption is built on the usage reduction that we experienced in 2005 so we are not assuming a bounce back of usage and then reduction. We are assuming that we are starting from a lower base.

That's a very fair point. My next question is I have a micro question and than macro question I guess for you. Can you give us some tangible benefits you are seeing so far with the IBM contract and then if you can just comment on what you are seeing, if anything, with regard to M and A in the sector. Thank you.

Okay. Starting with the IBM agreement. ust putting it in context, the IBM agreement in many respects is about completely rebuilding our administrative support infrastructure from G and L systems, payroll systems, procurement systems, work management systems to actually doing work. And again from our perspective it's rebuilding, totally transforming our entire system. That work is going along at a very, very good clip. It's about a 24 month project to change out all those major systems and I would say at this point so far so good on those major projects.

We also have a an array of day-to-day activity from answering phones to processing payments and the like. As you would expect we have good days and we have bad days but within the zone of expectation it clearly the arrangement is delivering.

On the cost savings side we also feel comfortable that we are receiving the benefits that we projected. Again you will see in our earnings outlook we've got a range of savings and again it's on target with our business plan, our expectations. I remind you part of it in O and M and part of it's in capital and we will see reduced depreciation over the next four to five years from the arrangement. So hopefully that's responsive on IBM and outsourcing and certainly can expand on it if you need it.

That's fine.

Your other question, the M and A outlook could you -

Yes, there's some assets transferring. We've had some deals in the distribution sector and utilities sector. I realize you recently took the helm and I respect that but what are you seeing going on or what's your view going forward here?

Yes, it's hard for me to really respond. We are seeing a little bit of movement. We saw the thug announcement on the disposition of L DC assets. We know other folks are exploring either disposition or acquisition. I'm not sure at this point I see a prevailing or dominant trend on that sort of activity. I guess I'm of the view that things will continue to be somewhat situational, particularly in the area that we operate, pipeline, gas L DCs and the like and I just have not yet seen a way if you will of M and A activity that's going to consolidate the industry. I know other folks have different views but I just don't see, I think it's very situational and I will go back to the point particularly with regard to L DCs, it's a state by state business in many respects and the state approval process can have a huge bearing as you know Jay on transactions.

Okay. Thank you.

Your next question comes from [Anatall Fagan] with Banc of America Securities.

If I can bother you for an update on the millennium project it does seem to be once again taking a little bit longer than we expected especially with such a successful kind of shipper commitment; it does seem to be slipping into 2008. Can you just comment on the process there?

Well, Anto, we are still committed to 2007 and we are working every hour of every day to hit that 2007 target. It is a bit of a test of perseverance but as you know we are well on our way to hit the FERC. There has been a recent round of interventions at the FERC level and we were gratified to see the New York Commission weighing in on very positive fashion. So we feel good about the millennium process at the FERC.

I would say that we have downstream links. That will be more than notable ones they are in the preFERC process and we certainly would like to see that move along at a faster clip. In a macro sense I'm probably more concerned at the moment about some of the downstream links and about their ability to complete the process quickly but millennium itself I feel pretty good and we just going to stay - stay after it and try to hit the 2007 date.

Great. Thanks. To go back to conservation and some of the comments made. Can you give us a little bit more detail on how that has played out sort of throughout the year because I guess one of the concerns is that as people become so acutely aware of prices and as they finally start getting bills for the heating season we were expecting to perhaps see an acceleration in conservation as we move through winter which has perhaps been even further accelerate by this very warm January. Any color you can provide on kind of trends throughout the year and if you guys are seeing anything that's perhaps more alarming since December?

Not more alarming since December. In fact December usage came in about where we expected it, maybe a bit better than we expected it. I have to go back to history. We certainly saw greater usage erosion first quarter 2005 than we had anticipated clearly. So that's a historical point but December was reasonably okay.

Obviously we haven't seen January yet but we are accumulating that data as we get into the first quarter report and we reconcile again our outlook to actuals we will be able to give you a much better read on what the usage is. Great points, though. We're sensitive to it and predicting consumer behavior in this sort of market is pretty gosh darn challenging.

Absolutely. Thanks very much, Bob.

Take care.

: Your next question comes from Mike [Time] with A.G.Edwards.

Good morning, Mike.

Good morning. A couple of questions if I could. The first going to the reconciliation chart, Schedule I and Schedule II, would you remind us what the line gas cost and other changes refers to.

Mike, we had a settlement at Bay State on a gas cost item that came through as a positive and that's what that is.

Okay. All right. Looking at what you refer to as the waterfall chart and specifically the item, regulatory and commercial incentives the $0.09 to $0.14, I assume that includes the Bay State increase and also a half a year of the MISO.

It does.

If I add those up, though, that's still maybe only $0.03 Can you talk about what the other factors that get us up to 9 to $0.14.

Yes, maybe just as a predicate, Mike, these commercial regulatory initiatives across both the pipeline and the distribution and the electric segments. And the primary components would include system optimization both at the pipeline L DC level. A couple of examples, exchange activities, parking lot activity and the like. We also include margin expansion. We are continually in the process of negotiating, dealing with tariffs on our larger industrial and commercial customers. So we are always negotiating price and attempting where appropriate to expand margins. And then beyond what you mentioned Bay State and MISO we got just a basket of initiatives across all nonstates, particularly not formal rate cases, certainly not in 2006 but we are always pursuing miscellaneous cost deferrals, improving customer assistance, low income programs that could enhance the bottom line and also looking for the right opportunities to pursue trackers. We have all of that bundled into the sensitivities that you got on the waterfall chart.

Okay, very good. Shifting over to Mitchell, I guess I don't understand fully the opposition. Could you kind of talk about that a little bit?

Well, what opposition if any on Mitchell is that in the bigger scheme of things it could be considered to be at the lower cost source of energy or power that could be put back into the portfolio. Now, our view, the view of many of our stakeholders is its in a spot that is much better for economic development and to restart, meet the increasing, ever increasing environmental standards that is cost prohibitive and I go back to the point I made earlier and didn't do it very artfully. When you look at the NIPSCO integrated resource plan, the need isn't for a Mitchell like facility, the need is for intermediate dispatchable power on a long-term basis. We don't think it fits and even if it did we think it's cost prohibitive and inappropriate for environmental and economic development reasons.

So it's really not a cost issue. It's not the city taking out some of the environmental recovery costs or anything like that. It's just a supply issue.

Well, the background, I hate to bore you with it is we struck a settlement with the city and many of our stakeholders for the city to take this. Working with the city we would work on environmental remediation and the like. And basically we are moving out of the rate paying customers hands and we did receive some challenges on it for the other reasons that I mentioned and a commission ruled that the contract, the agreement we had with the city was not really a satisfactory agreement under the laws of Indiana. And so the messages go back to the drawing board, set up an agreement that's a firm and forceable contract and proceed to do what you need to do to put this into the city's hands.

Okay. Shifting gears again to some of the IBM outsourcing you talked about another 24 months of installing stuff. I guess I'm kind of curious on the non-recurring cost side. Do you get a sense, is that going to be continuing for 24 months or do you get a sense of how long these non-recurring costs are going to continue?

We really just have another [slug] in 2006 and it's relatively modest and then we do not see material implementation transition costs beyond that.

Okay.

It's over.

And finally on the weather in 2006, I understand guidance is on a continuing basis excluding weather but for those of us that are not going to exclude weather can you make some general comments about what January's temperatures were and if you are able to make some sense of the potential earnings impact, that would be appreciated?

Think of desert like conditions when I think about January.

[Inaudible] do you have exact day heating degree data?

Yes, it's been across the company give or take about 30% warmer than normal and I'm talking now for the L DCs and I'm talking for the pipeline as well. So we have just been, we have never seen anything quite like this in January. You read in some reports in our area the fifth warmest in history and I'm not sure how ancient that history is but a solid 30% off.

And you said you didn't have the months usage, is it too early to the talk about a potential earnings impact?

Well we certainly have an indication of what that reduced weather impact would be. It would approach pretax about $30 million dollars, it's a very, very rough estimate. Again, that is for the weather impact. It does not go to the guidance we have given you which is again based on normal weather.

Understood. Okay. Thank you.

Your next question comes from Josh Golden of JP Morgan Asset Management.

Good morning. Quick question about the balance sheet. Looking forward to 2006 are there any plans to further deleverage it?

Josh, this is Mike. 2006 looks like about a push for us in terms of debt reduction and it will really depends on what happens with working capital but we are not anticipating any significant debt reduction in 2006 nor any major transactions that would take it one way or the other.

Okay. Thank you.

Your next question comes from VisCon with Citigroup.

Good morning.

Good morning, how ya doing.

Good.

On the eastern market expansion can you just give us a little color in terms of how large the project is in terms of CapEx? I know it's fairly far out, trying to get a litmus test here.

We can give you a sense -- at this early stage the estimates would suggest that the total CapEx spend, storage, and transmission anywhere from 130 to $160 million. Again, a very rough number but that's a pretty good frame for the estimate.

Okay. And going back to [Antall's] question for a second on conservation and how that looks over the 2005 period. If you had to pull out the fourth quarter what would the conservation be in terms of BCF? Had you nine BCF for the year; what would it be for the quarter?

We better get back to you on that. I don't want to give you a misleading comment and frankly I didn't really look at it in detail by quarter.

As we go forward in 2006 what should we look at as kind of a maintenance CapEx number versus growth CapEx?

Again it's very ballpark number would be roughly $500 million. I will have Mike give you a more firm number on that. You say maintenance CapEx, again, some of this, we certainly attempt to track revenue producing even though it might be considered sustaining.

I think that's a good number, Bob. It's about $500 million for age of condition, maintenance type CapEx and then about $140 million in 2006 for growth CapEx. Total program is about 640.

Okay. Great. And then on the Whiting, on the, IURC kind of putting their, giving their blessing on that contract, what did they, what's the timing on that, when do they need to vote on making that an interim contract or approving that interim contract that you have with the utility?

Well, you'll recall that we had a settlement for interim purchases from NIPSCO, NIPSCO purchasing from Whiting. That interim arrangement expired in December. I alluded in my earlier response that we are talking with stakeholders about more permanent solutions, permanent arrangements for NIPSCO to purchase from Whiting. That's the primary approach and emphasis right now is attempting to structure an approach with those stakeholders as opposed to formal commission action.

In terms of on the regulatory side, what's the likelihood or what's the indications from some of the commissions you are dealing with on trying to get conservation trackers put into your rate structures?

It varies, let me back up and address it nationally. We are certainly on a national scale we are seeing commissions more receptive to conservation, decoupling trackers, dealing with rate design, stabilizing revenues. So that is a national thing - national trend that we have seen. Having said that in our states we have not seen an on point conservation tariff or tariffs accepted. We have seen several companies make a run at it but ultimately for either settlement purposes or commission order purposes those haven't gone forward. We as a company, NiSource group of companies, we continue to talk and explore those in our state and it's likely in 2006 that at least in one jurisdiction we will in fact try to do something on a more formal basis. Having said that again if we have the right opportunity and right situation we would certainly be exploring it.

Okay. Fair enough. Thank you for your time.

Your next question comes from Carl Kirk with Credit Suisse.

Actually most of my questions have been answered but just to clarify a couple of quick things and the conservation tracker was one of the bigger ones. Do you have a time frame, when you say 2006, is that a second half or a first half issue?

Probably closer to a SEC half issue and again it's, it's going to be somewhat opportunistic and selective. Probably closer to a second half issue and again it's, it's going to be somewhat opportunistic and selective.

Okay. Fair enough.

We're at various stages in regulatory dealings and every stage you can appreciate.

Absolutely. And again just a clarifying question on the regulatory initiatives, you mentioned a basket. So we can take from that kind of off Mike's question that there really is no one single initiative that's encompassing the bulk of that outside of the MISO and the other ones you mentioned?

Outside of MISO, Bay State, system optimization, no, there is not one single huge driver if you will. It's a variety of things across all nine states.

Great. And then lastly just also on Whiting, the issue I guess with the financial guidance into '06, is that predicated on the settlement.

It is not.

Okay.

It is not. This would reflect effectively what we did this year and really in terms of NIPSCO contribution, regulatory contribution, not much impact. Whiting made good inroads in the MISO market and we also benefited from a contract amendment with BP so that provides the bulk of the mitigation supposed to any sort of regulatory for NIPSCO sort of activity.

Originally, and correct me if I'm wrong here, if indeed there was a settlement or Whiting contracted to NIPSCO we had looked at Whiting at that point being basically neutral to earnings. Is that kind of the upside if something like that happens?

The upside -- all things being equal, if an arrangement was provided, if an arrangement provided additional fixed cost recovery there could be scenarios where you would dramatically mitigate the operating loss of Whiting.

Fair enough. Thank you very much.

Your next question question is from [Mishare Chan] with [S. A.C. Capital].

Good morning. I was just comparing I don't know if you can help me directionally, when we had the last time you provided this flow chart was nearly a year ago in your investor conference here in New York and in that period of time the savings from I guess the cost management program, of course IBM was not identified in that period of time, was around %0.05 to $0.10 and I guess you guys had mentioned that you achieved, you expected to achieve that level when you signed IBM. So now the range is $0.04 to $0.06. I'm just trying to understand how, if you could elaborate, had the savings moved into outer years or are savings just lesser, a year down the road as you are doing your planning?

Great question. I kind of touched around the fringes on an earlier response. Obviously when we did the estimate that you saw last February, that was a fairly [inaudible] approach and it was not nearly as refined as we are today. The savings amounts are equivalent. They are now divided between ongoing current O and M costs and capital savings. And ultimately they will all flow through the balance sheet but the capital piece would be effectively amortized if you will over roughly a five-year period. So total cost savings the same, they are dividing O and M capital and you will have bit of a lag if you will as the capital portion of the savings is amortized.

Okay: The second question, I was just trying to get a generic growth rate for the business as you look onwards beyond '06, of course '06 is being helped by the refinancing costs. So could you just elaborate on what you see the normal business growth rate going forward in terms of, is it two to three, three to five or what do you think is the organic growth rate of what the business would grow going forward?

On a smooth basis I would say it's more in 2 to 3% annual growth range. Obviously with a large pipeline projects there may be some lumpiness but I think it's in that range. Organically.

Okay.

All things being equal.

And the third thing was you guys had mentioned that you would address the question in terms of any rumored dividend policy at the end of this year. I guess there was an inclination. Could you address where the board, where the management stands or have things moved backwards with I guess a little bit of provision in terms of earnings and all that for any kind of dividend [inaudible] as you look forward into your planning horizon?

Well, clearly the team is striving to increase the dividend. That's certainly our intent and commitment but let me start with the policy point. Our policy is 55 to 60% pay out ratio. The board is comfortable with that as well as the team. I noticed that the current level we are probably north of 65%. So that just gives you a marker. We and the board are going to continue to actively consider increasing the dividend as we continue to demonstrate increased growth. So the focus clearly the focus is grow earnings, then grow dividends and we got to establish that track record now ability and as we do that I'm confident we are going to be in a position to increase dividends.

Okay. And if I can end up, Mike, do you know what projected CapEx numbers are for 2006 and re you in a free cash flow position or not after payment of dividends?

In 2006 we are looking at CapEx program being about $640 million including maintenance and growth CapEx and that really puts us in about a balance point. The question before about the debt change from year to year, the debt level is going to be about the same as the end of '06 as it was at the end of '05 so that means in 2006, living within our cash flow but not paying down any debt.

So it's zero cash flow after payment of common dividends, correct?

After payment - after the CapEx program income and dividends and assuming no significant working capital changes from year to year.

Thank you very, very much.

Thank you.

Your next question comes from [Li Shing] with AIG Global Investment Group.

My question has been answered. Thank you.

Your final question is a follow-up question from Mike Heim with A.G Edwards.

Thanks. I was wondering if you would be willing to comment on what you are seeing in terms of gas use among industrial customers that can switch fuels? As the drop in gas prices relative to oil helped you out or is that really a Henry [inaudible] that really doesn't translate into the pricing that customers see in your service territory.

At this point we're not seeing a lot of price switching or fuel switching based on price, Mike. It's more related to production of what the economy is doing, what individual manufacturers are doing. So we are not seeing a lot of price switching due to price. We think we've seen most of that just maybe a qualitative point or two on the gas side. The volumes are relatively strong. Clearly we are in that GM, forward sort of market but we are hanging in there with that and the other car makers like Honda, Toyota and their supplier continued to do reasonably well. So the volumes on the gas side are holding up.

On the larger electric customers in Indiana on the steel side in particular, we are hopeful to see an uptick, I mentioned volumes were off, deliveries were off a bit last year. We are hoping that we are going to see a bit of a rebound. And across both the margins have been reasonably strong.

Okay. Thank you.

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

No, other than to thank everyone that has participated this morning. Again, we welcome your input both on the content and the approach on our presentation and again thank you for your participation and your support.

Ladies and gentlemen, this completes today's conference. You may now disconnect.