NiSource Inc (NI) 2006 Q1 法說會逐字稿

Good morning. My name is Luanne and I will be your conference operator. At this time, I would like to welcome everyone to the NiSource first-quarter analyst 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 session. (Operator Instructions). I will now turn the call over to Mr. Glen Kettering, Senior Vice President of Corporate Affairs.

Thank you, Luanne, and good morning to everyone. On behalf of NiSource, I would like to welcome you to our quarterly analyst call. We 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; Mike O'Donnell, Executive Vice President and Chief Financial Officer and Randy Hullen, Director of Investor Relations.

As you know, the focus of today's call is to review our first-quarter 2006 financial performance as well as to provide an update on progress on our four-point business plans and 2006 net operating earnings guidance. Bob will discuss our results and our outlook and then we will open the call to your questions.

I would like to remind you that some of the statements made on this conference 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 the 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 2005, which was filed March 10, 2006 with the SEC. With that, I would like to now turn the call over to Bob Skaggs.

Thanks, Glen. Welcome everyone, we're pleased to be with you. Let's go directly to our results.

Overall, our first quarter perform was solid. Our fundamentals remain strong and we're making real progress on the key elements of our four-point platform for long-term sustainable growth.

To briefly reiterate, the four-point platform for growth we launched during 2005 is focused on, one, expansion and commercial growth in the Gas Transmission and Storage business; two, commercial and regulatory initiatives across our utilities; three, management of the balance sheet and four, process and expense management. As you see in our news release this morning, we're reaffirming our 2006 guidance for net operating earnings in the range of $1.45 to $1.55 per share. Just as a reminder, we focus on net operating earnings, a non-GAAP measure, because we believe that it better represents the fundamental earnings strength and performance of the Company. This measure does normalize for whether as well as for other items such as restructuring charges related to the implementation of our outsourcing contract with IBM.

As you saw in this morning's press release, conservation in gas usage, particularly among our residential customers, does remain a serious concern. This issue is of course not unique to NiSource. Conservation among residential customers in particular is something facing most of us in the North American gas utility industry, particularly during periods like we saw this winter of unprecedented high gas prices. We have assumed about 2% of additional conservation for the balance of the year and today's guidance assumes no further material usage decline beyond that additional amount.

Also noted in our news release, we continue to focus on NiSource's core assets and our core capabilities. These include strong opportunities for marketing short-term services in our Gas Transmission and Storage business, capacity and supply optimization opportunities in gas distribution operations, robust market interest for expansion capacity on our extensive natural gas storage and transmission network, steady growth in the Electric business and across-the-board continued cost control. I will discuss these areas further as we detail the first quarter financial results.

Now let's drill down into our first quarter performance. On a non-GAAP basis, net operating earnings for the quarter ended March 31, 2006 were $203.6 million, or $0.75 per share. This was virtually flat to net operating earnings of $202.4 million, also $0.75 per share for the first quarter of 2005. On a GAAP basis, taking into account the effect of record-setting warm weather across our gas distribution markets, income from continuing operations for the first quarter of 2006 was $171.8 million, or $0.63 per share, compared with $208.7 million, or $0.77 per share for the year-ago period.

I would note that weather was 13% warmer than normal and 15% or warmer than a year ago during the first quarter of 2006. This caused an unfavorable weather impact of $39.5 million during the quarter compared to a favorable impact of $8.7 million in the year-ago period as you can see from schedule one of the news release.

Schedule one also shows the impact on a GAAP basis of one other significant item -- $8.3 million in restructuring and transition charges related to the IBM outsourcing initiative.

Returning now to the non-GAAP measures, positive impacts to our net operating earnings in the first quarter compared with the year-ago period were led by successful sales of shorter term transportation and storage services, so-called optimization initiatives in our Gas Transmission and Storage business. We also saw growth in the Electric business and as planned, a decrease in interest expense $8.2 million for the quarter due to last year's refinancing of $2.4 billion in long-term debt at lower rates.

These positive impacts were offset by the continuing decline in usage by gas utility customers that I mentioned a few minutes ago. Also, losses at Whiting Clean Energy increased compared with the year-ago period due to planned maintenance. You will recall from our January discussion that we built greater losses for Whiting into our plan for 2006.

We will now provide an overview of the first quarter operating earnings for each of our core business segments. Starting with our Gas Distribution business, we reported operating earnings of $251.3 million, which was a decrease of $15 million for 2005. The decrease was primarily due to the residential usage issue. Residential usage was down by 5%, about 7 Bcf for the quarter, representing an impact to operating earnings of about $11 million.

However, this past winter was far from typical for residential usage. Number one, market commodity prices were the highest customers have ever experienced; two, the winter was preceded by extensive and bad publicity of upcoming high heating bills that would place an additional burden on consumers' household budgets which are already burdened with other increased costs, such as record high gasoline prices. We believe customers entered the winter prepared to conserve on home heating and the usage levels reflect they did so. We, like other utilities, believe that regulatory initiatives are needed to address conservation while continuing to advocate supply development policies that will help mitigate high prices over the long term. So we are working in our various markets to fashion appropriate mechanisms to deal with the usage challenge.

On a more positive note, our gas distribution business continues to grow. Residential customer additions increased revenues by approximately $2 million for the quarter. In addition, our gas supply team was able to capitalize on short-term market opportunities and use our distribution business's extensive supply and storage portfolio to increase revenues. These revenues also benefit our customers through regulatory sharing mechanisms.

The Gas Distribution segment also reported the first full quarter of benefit from the new rates at Bay State Gas. And on the cost side, O&M expenses were down slightly in this segment, excluding expenses that are recovered through regulatory drivers.

Moving to our Gas Transmission and Storage Operations segment, operating earnings were $111.7 million, an increase of $2.2 million over the first quarter of last year. The growth in our Transmission and Storage business is emerging as a real success story. Our Houston-based commercial team has capitalized on near-term market opportunities to optimize the value of our extensive network of pipeline and storage assets. More specifically, the commercial team has signed new agreements that we expect to result in more than $25 million in net revenue for 2006 with about 3.4 million of that amount recorded during the first quarter. This compares with revenues of 4.1 million for all of 2005.

Columbia Gulf Transmission also experienced a 16.5% increase year-over-year in mainline throughput directly related to those optimization activities. Meanwhile, the Gas Transmission and Storage segment continues to make real progress on asset expansion projects that are driven both by the market and by producers. Construction of the Hardy Storage project in West Virginia began during the first quarter and the first phase of the project is on target to be in service in the second quarter of 2007. We have executed binding customer agreements for Columbia Gas Transmission's eastern market expansion, another combined storage and transportation project designed to meet core market growth in the mid-Atlantic region.

We're also evaluating the very strong market response we've received to a number of recently completed open seasons on both major pipelines. Meanwhile, the Millennium pipeline, as well as companion upstream and downstream projects, are proceeding with the regulatory approval process. As it has been previously reported, Millennium is anchored by long-term agreements with ConEd and KeySpan.

During the first quarter, we also completed the redistribution of equity among the Millennium partners with Colombia Gas Transmission now holding a 47.5% equity stake.

The Electric Operations segment had a strong first quarter as well, reporting operating earnings of $71.2 million, an increase of $4.6 million from the year-ago period. This segment reported increases in net revenues from lower revenue credits, improved industrial usage, increased customer growth and trackers associated with ongoing expenses in capital investments. These increases were partially offset by unrecoverable cost associated with the Midwest Independent System Operator -- MISO. As we reported in January, when the moratorium under the NIPSCO Electric rate review settlement expires, we have the right to begin deferring MISO costs in August for future recovery.

We also continue to work with other MISO members to control cost levels and on cost recovery issues.

O&M expenses in the Electric Operations segment were down by about $2 million. Finally, I'd mention that we continue to see steady growth in the northern Indiana residential electric market and a solid expansion of margins in our large industrial market.

Moving to the segment we refer to as Other Operations, we reported an operating earnings loss of $11.7 million for the first quarter compared with an operating earnings loss of 7.8 million for the year-ago period. The increased operating earnings loss was primarily due to increased losses compared with last year at Whiting Clean Energy which was factored into our 2006 net operating earnings outlook. The increased losses at Whiting during the 2006 period resulted from primary costs associated with scheduled maintenance.

Finally, in the Corporate segment, we reported an operating earnings loss of $6.4 million compared with an earnings loss of $6.9 million in the 2005 period. The decreased operating earnings loss resulted from lower employee and administrative expenses.

To briefly touch on a few additional factors that affect our consolidated net operating earnings, interest expense for the first quarter of 2006 decreased by $8.2 million compared with the first quarter of 2005 due to the refinancing of $2.4 billion in long-term debt at lower rates than we completed in 2005. Net other expense was $3.4 million for the quarter compared to $500,000 in the previous year due primarily to increased costs associated with the factoring of accounts receivable.

Focusing now on liquidity, net cash from operating activities for the quarter was $726.2 million, a decrease of 269.1 million from the comparable 2005 period. The decrease was primarily due to the impact in 2006 of reducing relatively high accounts payable balances, partially offset by the collection of underrecovered gas costs. High gas costs in December 2005 resulted in unusually high year-end balances in accounts payable and underrecovered gas costs. In addition, mild weather in the first quarter of 2006 resulted in less inventory being withdrawn and converted to cash than in the previous year. We closed the quarter with short-term debt of $379 million and total debt of just under 6.1 billion. That equates to a 54.7% debt to equity capitalization ratio.

As you can see, we had a solid first quarter, even while grappling with the challenges of usage and pricing dynamics. We remain focused on meeting our 2006 objectives and delivering on our net operating earnings guidance. As I stated earlier, we're on track with our 2006 business plan and we're comfortable with our guidance range of $1.45 to $1.55 in net operating earnings for the year.

In addition, we believe the progress we're making on each of the four key elements of our business plan will continue building a platform for long-term sustainable growth. Our Gas Transmission and Storage team is off to a great start in 2006 with growing both the physical assets and capitalizing on market opportunities to optimize our system by selling shorter-term transportation and storage services. Our Gas Distribution team is working hard to mitigate the impact of conservation. We continue to see customer growth across our markets. We've also capitalized on short-term market opportunities and used our extensive supply and storage portfolio to increase revenues. Our Electric business continues to provide steady growth and solid returns. We're realizing the expected savings and interest from the refinancing of our balance sheet completed in 2005 and we continue to partner with IBM to transform the way we operate our business process and support services through the outsourcing agreement entered into last year, and we're seeing the cost savings benefit of that relationship.

Having said all of that, we believe that NiSource is currently undervalued. Hopefully, many of you have had a chance to read my recent letter to stockholders distributed along with our 10-K with our 2005 annual report in which I discuss this issue. As I said in that letter, we're leaving no stone unturned in our review of ways in which to unlock the value of our assets. We're equally committed to reporting on the progress of our efforts to you as we moved forward. We look forward to keeping investors and all interested stakeholders updated on our progress throughout the year, and as always, these updates will be provided through our quarterly analyst calls and through press releases that will be posted promptly on www.NiSource.com.

Thanks again for participating today and for your continued interest and support in NiSource. At this time, Glen and Luanne, we're open for questions.

(Operator Instructions) Carl Kirst, Credit Suisse.

Good morning everybody. I just wanted to start by touching on the conservation issue that is out there. And Bob, you made the mention, I caught a 2% number earlier and I just wanted to clarify, on a quarter-over-quarter weather normalized basis, are you saying baked into the guidance range is a 5% decrease conservation trending upward to only a 2%? I just want to make sure I understand that.

Carl, hopefully I can me clean on this. Quarter-over-quarter, residential usage normalized for weather was down about 5%, 7 Bcf, $11 million. So that is the first quarter-to-quarter comparison. The balance of the year, our earnings outlook reaffirmation reflects another 2% of usage erosion and the impact on revenues about half of what we have seen in the first quarter. So that is baked into the reaffirmation.

Great, I think I got that. Just with respect to what you were referring to as far as obviously looking at initiatives out there because of the regulatory -- or the conservation issue, you guys obviously are exposed to wide swath of PUCs and I was wondering if in this early stage if you can comment -- have the utility commissioners our staff shared any initial reactions to the growing trend of decoupling mechanisms? Are they generally supportive, or are you finding you have to do a lot of education? Is there any additional detail you can share with us there?

It's going to be more generic detail, as you can appreciate. We're in a number of conversations in a number of states that, generically speaking, commissions and staffs and other consumer interests are listening, they are engaging in the discussion. I would say the level of receptivity does vary from jurisdiction to jurisdiction. And as it stands today in our states, we have not seen any significant adoption of decoupling. And having said that, though, our sales and other utilities are working on this intently. I would add that AGA has been working on this issue consistently over the past couple of years. They have been working with NARUC in fact on this and have received a favorable NARUC resolution or endorsement. So we think the environment is primed to have this sort of discussion and make inroads.

Great.

One thing I want to make clear on this usage, because I know it is a sensitive issue for everybody taking a look at our results and other gas utilities. I don't want to lead you down the road to believe that the 5% that I mentioned for the quarter and the 2% adds up to 7%. You can appreciate the first quarter, we have more usage. That's where the usage on the residential end is weighted and we have less usage in the fall and winter periods. So it's not necessarily additive.

No, I hear you and I agree with you, and hopefully we will see that trend a little bit better now that it's a little bit out of the political headlines. Just one other quick area. Regarding the IBM initiative, the $40 million of O&M and capital savings that we should be seeing roughly on an annual basis. Have you guys parsed apart what component of that is O&M savings and what component of that is capital savings? I guess what I'm trying to look at is, there have been some nice results as far as lower O&M here in the first quarter and I'm just trying to link that. Is that a direct result of the IBM initiative, or have we yet to see the IBM initiative really kick in?

I'm going to ask Mike to provide a little bit more detail. We have seen the benefits of the IBM agreement. I would say though, in terms of O&M, it's across the board aggressive management of cost. So it covers the entire company, every group and every function within NiSource. I would also refer you back to our original guidance and the waterfall chart in particular where we suggested that the outsourcing savings would range from $0.03 to $0.04, and that sort of savings on the O&M side still looks good. But again, I will defer to Mike on more detail.

That's right, Bob. The $40 million we talked about was really the average overage a 10-year period, and it turns out that it's about 40 million a year. But on the front-end, about half it's capital and half of it's O&M, and that is where we are right now. But as you go through time, avoiding those capital expenditures becomes reduced operating expenses through lower depreciation. So as we do go through time, the total operating expense impact will grow towards $40 million.

Great. Thanks for the color and all the best.

Ashar Khan, SAC Capital.

Can I just ask you -- I know the difference, the [better] normalization difference, but is that having any change in your cash flow forecast because the weather is lower, or I'm just trying to understand how the cash flow forecast is working for the Company for the year?

The way it's working, where we find ourselves now, we're a little bit behind the cash forecast for the whole year that we had earlier because of the reduced sales and the increased inventory. But as we move through the next two quarters, that is going to catch up because we will be buying less gas over the next few months to put into storage and for current sales. So by the time we get around to June of this year, we will be back on plan in terms of cash flow from working capital.

Okay, I appreciate it. Bob, I just wanted to get -- can you just mention the usage thing -- is it all based on the residential side? I'm just trying to see how you came up with those matrices, in terms of the anticipation.

Ashar, it is primarily a residential issue and concern. Having said that, we have seen some relation in volumes on our large industrial. And in fact, if you look at the data that is included in the press release, you will see some of that erosion on the industrial. I would note on the industrial though, margins have firmed up and our commercial team has done a great job of maintaining margins in gas and electric. So while we are concerned about that industrial point, the real issue is residential. And maybe just to give you a bit more flavor -- prior to 2000, we saw residential usage due to efficiency, that sort of thing, 0.5% to %1, and has risen steadily 2000 to 2004 and as prices have risen, that percentage has risen.

Okay. Thank you very, very much. I appreciate it.

Sam Brothwell, Wachovia Securities.

Just a couple of quick things. Did I hear you say something about, there was a charge this quarter associated with the IBM agreement, or did I misunderstand that?

No, Sam, there was. It was a small amount this quarter and you can see it schedule one. It was $8.3 million for the IBM contract and things related to it.

So that's the sort of thing we're probably not going to see repeat going forward?

I think there's only about 2 or 3 million of that for the rest of the year, and then that should pretty much take care of this for about two years. I think there is going to be additional transmission when we make some changes in Indiana a couple years down the road.

Got it. And, Bob, your closing comments regarding leaving no stone unturned, can you maybe elaborate that on a little bit and give us some ideas of some of the things that are under consideration? Are you looking at possibly restructuring the Company over time?

Let me give you a little bit more flavor. Obviously we are intent on improving shareholder value, we're sensitive to the point on being undervalued and a discount to our peers in really two dimensions. One is, we have to execute on this four-point growth plan. We recognize that and we think that in and of itself is going to create value as we execute and deliver the results.

The second point is, in a very disciplined, measured way, we're trying to consider all of our options. And just to give you a couple of examples, we certainly want to come to terms with Whiting. So we're taking a full, fresh look at our range of options to address Whiting, commercial and otherwise. We're also taking a fresh look at our CapEx spend, both sustaining growth. We want to spend that money in an optimal and responsible way, so we're taking a fresh look at capital spending over the next several years. We're also taking a full, complete look at our financial options, alternatives, strategies and approach. We are all aware there are an array of tools and adjustments and directions we can take, and we're just trying again to be disciplined, thorough, focused and we're doing this in a deliberative process with the Board.

Okay, thank you very much.

Mike Heim, A.G. Edwards.

If I remember you right, you guys have been pretty active using fixed- to floating-rate swaps in the past. Can you update me? I think there are maybe three swaps that are in place. Are those still in place?

Mike, there's about 1.1 billion of our fixed-rate long-term debt that has swapped back to floating. There's a number of swaps doing that. I think it's more than three actually. But where they are right now, they're about a push with the cost of fixed and the cost of the floating -- it's about equal.

Excuse me -- They're all against LIBOR?

They're all against LIBOR, that's right. And then keep in mind also, we have floating-rate debt of $450 million and some pollution control bonds that float also. It's a small amount, but it floats.

Okay just in terms of a general thought process on that variable debt, that's a level you're comfortable with, or do you see that changing?

We see the portfolio effect of that, Mike, and I think it works pretty well with about 25% of our long-term debt floating and about 75% fixed. That is about where we are and we feel pretty comfortable with that.

One last more general question on Millennium. As we start to talk about the Rockies express pipeline, how does that affect Millennium? Is that something you see as a positive bringing supply in, or is that a competing project if it goes all the way as all three legs as projected?

Our current view on Rocky Mountain express is a positive, and maybe I can talk in terms of eastern market expansion and our core system, core NiSource transmission and storage system. We feel like it brings attractive Rocky Mountain gas to the east. We think we play a key role in moving that gas from the Ohio-Pennsylvania border into our markets, into the Northeast, into the east. So we think we are well positioned to be a key transmission and storage conduit downstream of the Rockies express.

Alright, thank you.

Faisel Khan, Citigroup.

Good morning. I just wanted to touch on the natural gas pipeline. You've talked about a 16.5% year-over-year increase in mainline throughput on Gulfstream, on Columbia Gulf. What is the opportunity there in terms of turning some of those volumes into firm transportation?

You may recall that my comment around that increase, that most of that was driven by increased optimization activity. So from our perspective, a little bit distinct. We had an opportunity, we capitalized on that opportunity as the market gave us the optimization business. Having said that, we have been actively marketing our mainline capacity on Columbia Gulf, and you will see in the release, we talk about improvements in contract demand activities on the pipelines. That does reflect increased firm agreements on Columbia Gulf. They tend to be somewhat shorter than our entire portfolio. But having said that, they are valuable arrangements that are going to be here for the next couple of years. And you will also note that many of our projects in the supply area, interconnect activities are all intended to maintain and grow business on Colombian Gulf, and that is a key part of this strategy.

Okay. If I were to look at your storage, what you're charging your customers for storage rates, what -- how far -- how close are you to max rates in your storage facilities?

On the Colombian transmission, firm storage is sold out at max rates. That is the short answer on that. Now Hardy's a recent market test and Hardy cleared the market at about $1.50 compared to an embedded storage rates of about $0.70.

Okay and have you been approached at all by the Pennsylvania PUC or the New York PUC about their rates at all?

No.

(MULTIPLE SPEAKERS) companies have in the past but, no? Okay. Fair enough, thanks for your time.

(Operator Instructions). [Josh Golden], J.P. Morgan Asset Management.

Good morning. Just a quick question following up on some of the comments on enhanced shareholder value. From a fixed income standpoint point of view, are you still committed to investment-grade ratings? And the agencies have put forth some credit (indiscernible) achieve. Do you plan on being there towards the end of this year?

The answer to the first part of question is (technical difficulty) maintain investment-grade credit rating. The second part of the question, you may have to repeat because I'm not sure I completely understood it.

The agencies have put forth some credit metrics for you to achieve, such as some paying down of debt. Do you plan to deleverage the balance sheet any further this year?

We don't have plans this year to do any material deleveraging, any material additional paydown of long-term debt. (MULTIPLE SPEAKERS). And we believe we are within the parameters laid out by the credit rating agencies.

Okay, and you are committed to investment-grade rating?

The answer to that is yes.

There are no further questions at this time. I would now like to turn the call back over to management for any closing remarks.

Again, we thank you for your interest and your support and we appreciate it. Half a good day.

This concludes today's conference call. You may now disconnect.