NiSource Inc (NI) 2006 Q4 法說會逐字稿

Good morning. My name is Crystal and I will be your conference operator today. At this time, I would like to welcome everyone to the NiSource fourth quarter financial results and business update conference call. [OPERATOR INSTRUCTIONS]

I will now turn the conference over to Mr. Glen Kettering, Senior Vice President of Corporate Affairs. Please go ahead, sir.

Thank you, Crystal, and good morning to everyone. On behalf of NiSource, I would like to welcome you to our year-end 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 Hulen, Director of Investor Relations. As you know, the focus of today's call is to review our annual and fourth quarter 2006 financial performance and provide an update on progress on our four-point business plan. We will then open the call to your questions.

I would like to remind all of 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 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 10q quarterly report for the third quarter, which was filed November 2, 2006 with the SEC. Now I would like to turn the call over to Bob Skaggs.

Thank you, Glen. Good morning, everyone. Today I'm pleased to report that NiSource's core operating companies delivered solid performance during 2006, and more importantly, our team successfully put in place key strategic elements that will advance our long-term plan to deliver sustainable growth. In 2006, we continue to make significant progress on our efforts to strategically expand and optimize our extensive natural gas transmission and storage system. Although challenged during 2006 by declines in customer usage in the gas distribution business, we nonetheless advanced our regulatory agenda. There was encouraging news on the customer attrition front. Our electric business continued to grow during the year in terms of number of customers, volumes and operating earnings. In addition, we had good news late in the year on two key long standing projects, the Millennium Pipeline project and Whiting Clean Energy, which I'll elaborate on in a few moments.

Now, before I get into the details and the financial update, let me first address the topic that I know is on most of your minds. As you undoubtedly know, there have been recent media reports speculating about a potential sale of a portion of our assets. In reading those reports, you know that our Company policy is that we don't comment on market rumors or speculation that form the basis of those articles. We've stated on numerous occasions that we're in the latter stages of a methodical and comprehensive strategic and financial review process. That process began nearly a year ago with the goal of unlocking the underlying value of our asset base and positioning NiSource for the future. That process continues to move forward at a steady pace and it continues to be a major focus for our senior management and our board. However, we're not yet in a position to communicate decisions or results of those deliberations. As I've indicated during previous conversations with the financial community, we expect to be in a position to communicate the results of our process and NiSource's path forward early this year.

I reiterate our standing commitment to share information with all stake holders in a transparent and timely fashion when decisions are made. Although I'll be happy to answer your questions at the end of this call, I'm unable to further elaborate on this topic and I won't respond to speculation. On the subject of the strategic financial review, I would also note that NiSource does not intend to issue 2007 earnings guidance at this time. Once we're in a position to share the outcome of our strategic review process, we anticipate providing additional information concerning our going forward plan and our outlook for the future. I'd also like to take a moment to address a significant jury verdict in the West Virginia class action lawsuit that was issued against NiSource and our co-defendant Chesapeake Energy this past weekend. This is a legal case involving royalty payments by our former subsidiary Columbia Natural Resources, which is now owned by Chesapeake.

By now, you've likely seen the news release that we issued late Sunday, January 28th. If not, you can see the release on our website at nisource.com. Without restating the contents of that release, I would simply emphasize that this case is far from being over. The jury's verdict, its calculation of damages, which we believe are seriously flawed, are subject to review by the trial court, which could result in the verdict being set aside or reduced. I can assure you that we plan to aggressively appeal any adverse judgment that may be entered at the trial court level. Having said that, we've increased our litigation accrual for this matter. The charge will be reflected in discontinued operations and will impact the Company's GAAP results for 2006. Now, turning to the 2006 full year results. As you see from this morning's news release, several factors drove the improvement in net operating earnings for 2006. These included -- strong results in the electric business; optimization of transportation and storage services in the Gas Transmission and Storage business; and a $33 million decrease in net interest expense due to the refinancing of $2.4 billion in long-term debt during 2005 at lower rates.

These improvements were partially offset by -- reduced residential and natural gas usage and increased customer attrition in the Gas Distribution segment; increased losses at Whiting Clean Energy , as results are expected to improve beginning this year; and higher operation and maintenance expenses. On a non-GAAP basis, NiSource's net operating earnings increased to $388.5 million or $1.43 per share for 2006, compared with $375.9 million or $1.38 per share for 2005. Operating earnings, also non-GAAP, were just over $1 billion for 2006, essentially flat with 2005. As I've noted during previous calls, we focus on net operating earnings and operating earnings, both non-GAAP measures, because we believe these measures better represent the fundamental earnings strength and performance of the Company. Net operating earnings and operating earnings do normalize for weather as well as for other items, such as restructuring and transition costs related to the implementation of our outsourcing agreement with IBM, gains and losses on the sale or impairment of assets, certain reserve adjustments and other items.

For a complete reconciliation of net operating earnings and operating earnings to GAAP, please see schedules one and two of our news release available at nisource.com. Our 2006 financial results reflect continued progress on the Company's four-point plan for long-term sustainable growth. Just a brief reminder, this balanced plan serves on NiSource's portfolio of regulated assets and includes -- commercial growth and expansion of the gas transmission and storage business; commercial and regulatory initiatives at our utilities; management of our balance sheet in process and expense management. I'd now like to highlight some of the significant milestones achieved during 2006. As I noted earlier, we took a significant step forward on our Whiting Clean Energy unit during the fourth quarter. Whiting and BP, whose Wayne, Indiana oil refinery is the host facility for the Whiting Clean Energy plant, signed a definitive agreement redefining terms under which Whiting Clean Energy will provide steam to BP for its oil refining process. The terms should improve the financial performance of Whiting Clean Energy beginning 2007 and will enable the plant to operate more competitively going forward.

In addition, by the end of 2009, BP intends to develop alternative solutions to meet the refinery's steam needs, which will then position Whiting to operate as a competitive merchant power plant. I also mentioned earlier some good news about the Millennium project. In late December, the Federal Energy Regulatory Commission, the FERC, granted approval to Millennium to construct its proposed 182-mile system. Millennium filed its acceptance of the certificate on January 19. These developments keep Millennium on track to begin construction during 2007 and begin service in November, 2008. Millennium is one of several pipelines comprising the northeast project that's anticipated to ease the pipeline constraints in the northeastern United States. During 2006, Standard & Poor's, Moody's and Fitch all reaffirmed NiSource's investment grade credit ratings with a stable outlook.

On the regulatory front, our Columbia Gas and Virginia unit reached a comprehensive settlement agreement with its commercial and regulatory stake holders on a performance-based rate plan. The agreement, which has been approved by the Virginia State Corporation Commission, became effective January 1 and provides rate stability, new service options for customers, increased financial certainty for Columbia Gas of Virginia and supports the Company's plans to make infrastructure investments to meet Virginia's growth needs. NiSource has -- I'm sorry, NIPSCO has made a filing with the Indiana Utility Regulatory Commission to address reduced usage by natural gas customers and the Company anticipates that an order on its filing could be issued by the Commission during the second quarter of the year. NIPSCO's proposal, called Rate Simplification, would provide funding for weatherization and other customer programs while also providing relief to the Company for reduced customer usage. Now, let's turn to an overview of 2006 operating earnings for each of our core business segments, including a discussion of gas usage and attrition.

In our Gas Distribution business we reported operating earnings of $373.8 million compared with $394.2 million in 2005. The $20.4 million decline was primarily due to reductions in residential customer usage, which we continue to see across our industry. Residential gas usage among the NiSource LDC customers declined by about 4% during 2006 compared with historic declines of 0.5% to 1%. We believe the escalated rate of decline experienced during 2006 was in response to higher market prices for natural gas, particularly in the aftermath of the 2005 hurricane season. As prices decreased during the latter part of 2006, we did see some moderation in the levels of usage erosion. For 2007, we're projecting usage declines of 2% to 3%. As I've discussed during previous calls, we continue to believe that the best long-term solution to the usage issue is through innovative regulatory programs and we've stepped up our efforts to pursue regulatory initiatives to address conservation. In addition, we are participating in American Gas Association's study designed to look at the root causes of usage declines across our industry and address potential solutions. The study's expected to be completed within the next several months and we look forward to reviewing its conclusions and recommendations.

Our Columbia Gas of Pennsylvania unit is participating in a working group formed by Pennsylvania's Public Utility Commission to address issues relating to residential customer demand, including potential changes in rate design. Similarly, Indiana regulators recently began a process that could lead to a generic approach to rate design and customer conservation in the state. NIPSCO will be an active participant in that process. On the issue of customer attrition, we said we were looking to our fall light-up season for some indication of customer return to our LDC systems and I'm pleased to report that the results were relatively encouraging. Our data shows that residential customer attrition for 2006 was approximately 0.8%. Although this is somewhat above the historic levels of about 0.5%, it's well below the more elevated levels that were signalled earlier in the year. Again, we believe moderating gas prices played a role in the relatively strong return of customers to our gas distribution systems. We'll continue to closely monitor this issue over the coming months.

I'd also like to note that our Gas Distribution segments energy supply team capitalized on short-term market opportunities throughout 2006 to use our extensive supply and storage portfolio to increase revenues. These revenues are shared with customers under various regulatory mechanisms. Turning now to the Gas Transmission and Storage Operations segment. Operating earnings in this business were $357.6 million, an increase from $349.6 million during 2005. Net revenues increased by $48.9 million, primarily due to increased demand services and sales of shorter term transportation and storage services. As I've been noting throughout the past year, our commercial team did an outstanding job of optimizing our market-leading storage and pipeline platform. During 2006, this team's work resulted in more than $45 million in new revenue. Operating expenses in this segment increased by $41.4 million, mainly due to higher legal reserves, pipeline integrity expenses, property insurance premiums and employee administrative expenses as we built up a commercial resources to drive that revenue growth.

At the same time, the transmission business continues to make progress on important asset expansion projects. In addition to Millennium, which I've already talked about, construction began during 2006 on a Hardy Storage project in West Virginia. Hardy is a joint venture between Columbia Gas Transmission and a subsidiary of Piedmont Natural Gas Company, with service scheduled to begin in April of this year. Columbia Gas Transmission will file a certificate application with the FERC during the first half of 2000 for its fully subscribed Eastern Market Expansion project. This project is supported by binding preceding agreements with four anchor customers, services on target to begin during the second quarter of 2009. Other projects are at various stages of the development cycle. These projects are driven by continuing core demand growth in Mid-Atlantic and east coast markets, as well as projects designed to capitalize on opportunities created by changing supply patterns across the country.

We look forward to sharing information about these projects as they continue to develop. As I mentioned earlier, the electric operations segment had a strong year reporting operating earnings of $314.1 million up from $292.1 million during 2005. Driving this improvement were lower unrecoverable costs from the Midwest Independent System Operator, MISO, the timing of revenue credits, increased industrial volumes and customer growth. The lower unrecoverable MISO costs resulted mainly from a second quarter 2006 Indiana commission ruling, as well as the deferral of certain costs for future recovery which began August 1, 2006. These increases were partially offset by higher electric generation and maintenance expenses. Steady residential and commercial customer growth in northern Indiana and continued strength in industrial sales volumes helped drive the solid performance. Sales volumes to NIPSCO's largest electric customers were up 4.1% in 2006 compared with year-end 2005 levels.

Moving to the segment we refer to as Other operations, we reported an operating earnings loss of $24.3 million for 2006 compared with an operating earnings loss of 13.3 million during 2005. The change was due primarily to increased losses at Whiting Clean Energy. Going forward, Whiting's operating results are expected to improve under the revised agreement with BP that I discussed earlier. Reflecting this improvement, we expect the Other operations segment to approach operating earnings neutrality in 2007. Now a brief touch on a few additional factors that affect our consolidated net operating and earnings. Interest expense decreased by $32.7 million during 2006 compared with 2005, due to the refinancing of $2.4 billion in long-term debt at lower rates that we completed in 2005. Other net expense was $6.5 million for the year compared to Other net income of $14 million in 2005. The change was due primarily to lower interest income and higher fees due to increased interest costs related to the sale of accounts receivable.

Focusing now on liquidity. Net cash flow from continuing operations for the 12 months ended December 31st was $1.2 billion, an increase of $424 million from year-end 2005. Unusually high gas prices in late 2005 and a colder than normal December that year resulted in high accounts receivable and unrecovered gas costs in December 2005. Collecting these amounts in 2006 created significant positive cash flow. We closed the year with short-term debt of $1.2 billion and total debt of $6.4 billion. This equates to a 56.1% debt to capitalization ratio. As I mentioned earlier, schedules one and two to our news release provide a reconciliation of operating earnings to GAAP. I would note that unfavorable weather impacted our GAAP results by approximately $83 million in 2006.

In addition, we recorded two charges that impacted our GAAP earnings from continuing operations. First, we accrued a $17 million liability in connection with the BP contract amendment, as well as a $13 million charge related to capitalized Millennium costs no longer recoverable under the current project plan approved by the FERC. To wrap up, NiSource made notable progress during 2006 in generating strong financial and operating results and in positioning NiSource for long-term sustainable growth. Our team remains focused on bolstering our core business plan and completing and executing on our comprehensive financial and strategic initiative. I look forward to speaking with you again when we have further updates on these or other efforts. Ongoing reports will be provided through our analyst's calls and through press releases that will be posted promptly on nisource.com. I thank you for participating today and for your continued interest and support in NiSource. At this point we would like to open the call to questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Ashar Khan with SAC Capital.

Good morning, Ashar.

This question has been withdrawn.

Okay.

Your first question comes from the line of Josh Golden with J.P. Morgan.

Hi, good morning.

Good morning, Josh.

I know this is something that we discussed in the past, but I just wanted to touch base again and has anything changed with respect to the investment -- the commitment to investment grade ratings at NiSource finance and the utility?

No. We remain committed to the investment grade credit rating.

At both the --

Yes.

Okay. Thank you.

Yes. Absolutely.

Thank you.

Your next question comes from the line of Tom [Machler] with GE Asset Management..

Good morning, how are you?

Good morning, we're fine, thanks.

Good. Listen, I understand there are a number of things you can't talk about and I respect that. But there's been a lot of concern in the capital markets that whatever you're planning for the strategic review might involve a considerable increase in debt leverage. Can you give us any comfort that we're not going to be confronted with something of that nature?

As I that suggested in the earlier response, we have a commitment to credit quality, investment grade credit quality, both at the parent and the utility level. That's certainly been factored in as we developed and evaluate our plans going forward.

Should we be thinking that the percentage of debt might be going down? I'm just trying to get some sense because as you might expect, uncertainty breeds fear, and we're just trying to get a sense for whether debt leverage might be going up or going down. Can you give us any direction there?

I think we're just going to have to go back to this overriding principle that we're indeed committed to maintaining investment grade credit quality, improving credit quality if at all possible, and that is a key underpinning to the strategic review and the plane going forward.

Thank you.

Your next question comes from the line of Andrew Levi from Brencourt.

Hi, guys, actually it's Scott [Sincheck]. How are you?

Hey, Scott. We're doing well.

Good. Just wondering since starting the strategic review process, have you guys seen any changes in the marketplace that have maybe changed the way you are thinking about creating the value?

Scott, I can't think of anything in particular that has changed our perspective. We're certainly like you and everyone else carefully looking at the market, and for that matter everything else that we have to deal with, and I can't say that anything has materially changed our perspective. I'll repeat, comprehensive review. We've attempted to take in all of the relevant factors and we continue to do that as we review the process and as we engage the board in discussions.

Okay. Thank you very much.

Your next question comes from the line of David Grumhaus with Copia Capital.

Good morning, guys.

Good morning.

Couple questions for you. What were the Whiting losses for 2006? Is that Other all Whiting or is there other stuff in there as well?

There's a little bit more in Other than just Whiting. We have a relatively small but profitable non-regulated marketing Company and a few other companies. Mike -- .

That's correct. It's mostly Whiting.

Mike, when you all say that you're going to get that to basically breakeven for '07, is that just -- I mean 'cause when you talked about the Whiting contract adjustment with BP, it seemed like it was going to be a little better in '07, a little better in '08 and then go away in '09. Now it seems you seem to be saying that it's all going to go away in '07.

What we're trying to do, and Bob mentioned, we're trying to get the segment to operating earnings neutrality as soon as we can. We think we'll get close in 2007. It'll be a stretch to get the whole way there. That means the Whiting loss itself has to be pretty close to zero to accomplish that. The other things in the segment, the small marketing Company has a slight positive. There's a couple things that are slight negative. They about offset each other. To get to neutrality, Whiting is going to have to be close to breakeven on an operating earnings basis. Keep in mind there's also interest expense but that's below the line.

That's not in that 24.3 million negative number?

That's correct.

Okay. Second question for you. When you take -- make your weather adjustment, are you using 30-year weather normalized or ten-year?

We use 30-year weather norm.

Okay. As the comparison. Okay.

Yes.

And then your 4% drop in usage, is that weather normalized or does that include the weather?

That is absolutely normalized.

Okay. So it was obviously a lot lower than that given the weather?

Oh, yes. Absolutely. We cited the weather impact on the GAAP discussion, about $83 million, roughly 12% warmer than normal in 2006.

That's very helpful. Thanks for all of those clarifications.

Your next question comes from the line of Mike Heim with A.G. Edward.

Thanks. Good morning. Did you say you've made accruals for the West Virginia decision but not for the punitive?

That's accurate. We've added to the accrual. We have not reflected anything for punitives. We believe we've acted in good faith and with appropriate intention and we've not accrued for those.

Can you expand upon the comment in the press release saying that you think you are primarily responsible for your primary responsibility?

I can expand on it in this respect. When we disposed of CNR in I want to say 2003, we retained liability, lion's share of the liability for this exposure. There is some exposure that resides with Chesapeake, but we clearly under the terms of the disposition retain the lion's share.

Okay. So when you say you've made an accrual, are you saying that you've covered most of the 134 million or an estimated potential outcome?

You can respect we really try not to detail legal reserves. I will say that we believe that we're adequately reserved.

Okay. Not to get into the touchy asset sale and I'm certainly not asking you for a comment of what you're doing, but for those of us who want to make our own assumptions, are you able to give us some general indication of the potential cost basis for NIPSCO, the electric operations?

We're really not prepared to go into detail on any particular Company asset or underlying assumption for that matter, Mike, at this point. Clearly if anyone has any specific questions that are detailed oriented, Randy will be more than happy to entertain those questions. He'll attempt to be responsive, and if he can't be, he'll try to point folks in the proper direction to get information.

Okay. Fair enough. That's all my questions. Thanks.

Thank you.

Your next question comes from the line of Ashar Khan with SAC Capital.

I had a line cut. I apologize.

Yes, one more chance.

I missed a little bit that came, but Bob, am I just going back to the strategic plan, just timing before the first quarter or when can we expect something? Is it like March, April, I'm just trying to get a more precise timing?

Yes, we, at this point, have only indicated early 2006. We've been reasonably disciplined at not setting a definitive date, putting a line in the sand. I can assure that you the process continues to unfold at a steady clip. We're making good progress. The board is engaged, And I'm just going to have to stick with early 2006 -- 2007, thank you. Early 2007 and that's as definitive as I can get at this point.

Okay. Just going back to basic operations. Could you just discuss what are the positives and the negatives '07 to '06, I guess you mentioned Whiting as a positive. But could you just generally discuss for the Company as a whole what are the kind of growth aspects '07 versus '06 as we look at the whole Company in trying to estimate earnings for 2007?

As you know at this point, we're really not providing guidance on 2007. What we've tried to do in the press release is provide inside flavor, color on the key sensitivities that will impact 2007. So at this point, I'll refer you to the press release and the transcript of the discussion that we have. I think it does a fairly good job of giving you the key sensitivities and the insight on where we think those sensitivities might go in 2007.

Okay. But Bob, is it fair that you're -- I guess, the way to look at it is that as you do these earnings, right, that this weather if it's normal, this negative just reverses itself, correct, in 2007?

Yes. We base 2007 on normalized weather so if it was at or about normal, there'd certainly be a reduction in that $83 million weather hit that you saw in 2006.

Okay.

We've gone on and added that we still see usage as being a significant issue, attrition being a significant issue. Again, we tried to give you a sense of that in the earnings release and my prepared comments.

So those could still be negative as those continue on?

Oh, yes.

As things stand today?

Yes, absolutely.

So those are like a leakage number from, I guess, the base business, those factors?

There's certainly sensitivities.

Okay. Thank you, sir. I apologize.

No, that's fine. Thank you.

Your next question comes from the line of Shneur Gershuni with UBS.

Good morning, guys.

Good morning.

Just a couple quick questions. With respect to this strategic review, is it under consideration to possibly place Hardy once it is completed into an MLP? Is that sort of like tax gearing, is that part of the strategic review at all?

Literally, we're reviewing the whole array of potential options, tactics and the like and things of the nature that you suggest are certainly part of the ongoing discussion.

Okay. And then, I guess just taking gearing a little further with respect to leverage, I know previous caller had asked about it, but is it something that's on the table just as sort of target in optimum leverage as part of the ongoing review as well?

Certainly including debt, credit metrics into the calculus. Again, an underlying principal commitment of the entire process has been maintaining investment grade, if possible, improving credit profiles.

Okay. And then just two last little tidy up questions. With respect to Millennium, has the pipe been ordered and/or delivered at this point right now?

The pipe itself has been ordered. It was contracted for, I want to say, 12, 18 months ago. It has not yet been delivered.

And just one final question, I know that interest expense is down year-over-year just due to the re-fi and so forth, but in the fourth quarter it tracked a little bit higher than it's been tracking the rest of the year. Is that due to the typical seasonality of the business or is there something else that we should be aware of?

Shneur, this is Mike. That's almost exclusively due to higher short-term rates in the fourth quarter of this year compared to the fourth quarter of last year. The debt balance itself was slightly lower.

Great. Thank you very much. I really appreciate it.

Your next question comes from the line of Jonathan Arnold with Merrill Lynch.

Good morning, guys.

Good morning, Jonathan.

One kind of detail question on the schedule one adjustments of operating earnings to GAAP. You have this total items excluded from operating earnings, 44 million, and then it says tax affect of above items and other income tax adjustments of 20 million, which provides a pretty high rate. So I'm guessing there must have been other tax adjustments embedded in that number. Could you be a little more specific about what those would have been and how much?

I'll have to dig it out to get the exact number, but there was a state income tax adjustment included in that that would have the -- would change the effective tax rate.

The difference between a kind of more normalized tax rate and what that drops out to roughly would be the state income?

That's correct. If memory serves it was on the order of magnitude of $6 million to $8 million.

Which would have been additive to GAAP earnings respectively?

Not sure about that.

Okay. Thank you.

We'll get back to you on that particular question. Thanks.

Your next question comes from the line of Raymond Leung with Bear Stearns.

Asking it a slightly different way. I don't mean to beat a dead horse but leverage, you talk about investment grade ratings. What's maintaining the ratings? Is a low-triple B or mid-triple B the right target to think about or is it more would you like to be a mid-triple B at the end of the day at the parent Company?

We publicly stated in the past mid-triple B would be where we would be aiming for. Clearly this comprehensive view would suggest we might aim even higher than that, but I think for discussion purposes as we sit here today, mid-triple B is a good point to focus on.

Okay. Then that sort of parent Company?

Yes.

Okay. Could you talk a little bit about short-term debt balance? It's getting a little high here, 1.2 billion, 1.3 billion and what you're thinking about financing or is that all tied into the strategic review? Finally, can you talk a little bit about the litigation and what happens next and maybe key next steps?

Yes. Why don't you go with the --

On the debt balance, the -- we had some current maturities last year that we floated into the short-term debt balance pending the outcome of the strategic review. We wanted to leave that debt floating short-term.

Okay. All right. Would you consider hybrid?

We have looked at that, and we will consider that, yes.

Okay. Thank you.

Turning to the what we call the Tawney litigation, the class action in West Virginia, the next steps, this is generally speaking. Because punitive damages were part of this verdict, the trial court, circuit court in West Virginia, is obligated to hold a due process hearing to consider the propriety of those punitive damages. They'll make a ruling on those punitive damages at that level. Subsequently, the judge will have to entertain a host of post trial motions. Assuming the outcomes are not favorable, then we would have to petition the Supreme Court of West Virginia. There's not an intermediate step for appeal and it's a discretionary appeal. We think they will consider the appeal. Assuming they grant the petition, then we begin the appeal process in West Virginia. So it's essentially a two-step process from this point forward.

Your next question comes from the line of Carl Kirst with Credit Suisse.

Good morning, everyone.

Good morning, Carl.

The last question was one of my first here, but just a few others if I could. With respect to the ongoing conservation and what data you picked out from the fourth quarter, are you still seeing this what you might call systemwide. You guys have, obviously, quite a few LDCs, or are you seeing it more concentrated, i.e. if there's one that could really be fixed? Is there one that's more material than the others?

Well, the customer behavior we're seeing is systemwide. We have not seen anything to suggest it's a one state, one geographic area as opposed to another. So it's relatively consistent across all of the states. In terms of fixing it with rate design modifications, adjustments and the like, that is state by state and it depends, as you know, Carl, on the regulatory climate and where we're at in rate case cycles and the like.

Right. No. That's fine. I was just trying to make sure if it was system or one in particular.

Yes, system.

With respect to, because you gave what your expectations are for perhaps continued conservation into 2007 and then I think this question was asked a little bit in a different way earlier, but clearly in 2006, obviously there was, I think, some aggressive cost control given the leakage that had been going on. With 2% to 3%, do you think you can still keep and is there still more O&M, perhaps, to take out that you could keep sort of segment LDC earnings flat or are you expecting, without rate design, that we will still probably be eroding into that number?

Again, we're not providing guidance as you recognize. I would say this, that large chunks of O&M are not in the offing in any of our operations. We continue to grind away on our IBM outsourcing arrangement. We continue to make day-to-day adjustments in operations. We continue to look at overhead. Having said that, we do not have large chunks of O&M that we're going to be removing from the business. It's also fair to say that we do not have material rate activity or new rate levels that are being implemented during 2007. We are launching rate cases in 2008/2009. But full year impacts just aren't there in 2007.

Fair enough. That's very helpful. Lastly, more of a question for Mike. Can you bring me up to speed on where we are with the whole pension accounting issue and sort of a carry on is, is if there is a charge that has to be taken here, would this be something that would create a net operating loss or potentially a gain in the future?

Carl, the booking of FAS 158 was done in the fourth quarter, so the numbers here, in particular the balance sheet, reflect that accounting.

Okay.

So if you look at the equity ratio, it's reflective of that change in accounting.

But it does not go through the income statement?

It goes to OCI on the balance sheet. And parts of it, if you look at the regulatory asset, it's increased during this period. Part of the accounting was establishing regulatory assets for a portion of the amount of the liability.

Great. I appreciate the clarification.

Thanks.

Thanks, guys.

Your next question comes from the line of Tom [O'Neal] with Highbridge.

Good morning. How are you doing?

Good morning, Tom.

I was just wondering if you could clarify in the 2006 number how much was related to short-term optimization on the gas pipeline business and how much was in there in terms of what conservation costs you had? I think I remember from earlier in the year roughly 40 million on each of those? I just was curious how they landed.

Yes, for Gas Transmission and Storage optimization, about $45 million is the number. On residential customer usage loss, it was about $20 million, 4%.

Okay. So the 20 million was the hit from conservation and attrition?

No, attrition on a gross basis was about another $10 million hit due to attrition. So the first number I gave you was purely residential usage.

Okay. So then that 30 million impact has not been reversed out in the operating number. Is that correct?

That's right. That flows through what we call OE, operating earnings, as I described it.

Okay. And then the optimization number, the 45 million, I know you'd hired a number of people to reinvigorate that business. Is that a number that you think is in any part anomalistic given the volatility that we saw in gas or is it more of a sustainable run rate?

Good question. The team's done a terrific job. We continue to bolster that team and we continue to build systems to ensure we can capture ongoing value. And we think that we can sustain that. I think your observation about market conditions is right on, but again, we're adding talent, we're adding systems. We're going to be adding to the portfolio we hope over time and so we think it's certainly achievable number.

Okay. And last question. Is there anything in the revised BP agreement that restricts your ability to sell the plant?

For the next three, three and a half years, the contractual provisions provide BP with the right to consent or to decline agreement during that period. So until now and through 2009, BC does have that right.

Great. Thank you.

[OPERATOR INSTRUCTIONS] And your next question comes from the line of Terran Miller with UBS.

Good morning.

Good morning.

Two quick questions. Number one is, when we think about the prospects of the West Virginia Supreme Court taking this case, are there a number of other similar cases where this has some generic implications for gas -- the gas business in West Virginia?

I'm not familiar with specific cases but we believe as a general matter that yes, this has precedential implications for other gas producers in West Virginia, and I think you've seen some of the media coverage around this. You certainly can draw the conclusion that there's a lot of interest because of that precedent.

Okay. And the second is, I know you don't want to get tied up, but what is your definition of early when you talk about early 2007?

Sooner rather than later.

Okay.

As you can appreciate, we really have not said a definitive time. We want this process to be operated thoughtfully, thoroughly, and we've shied away from saying an arbitrary date. Clearly we want to move with dispatch. We understand that all of the stake holders are very interested and the ambiguity and uncertainty is unsettling. I can just assure everyone we're moving at a steady clip, but thoughtful and we want to avoid unintended consequences from this effort, even from talking about this effort.

Okay. Thank you.

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

Good morning. I just have a couple of questions on the Gas Distribution operations.

Yes.

When I'm looking at operation and maintenance expense, year-over-year in the quarter 197 million versus 175 million, up kind of 20, you know, 22 million or so. What's driving that increase year-over-year? That looks like a pretty high ramp up in O&M.

By and large, for the gas held DCs, it's the impact of trackers, primarily uncollectibles.

Collectibles were down, right? Your bad debt expense, I guess, was down, but -- .

It's what we call percentage of income plan and Ohio was one of the big things. It doesn't show up per se as an uncollectible but it comes through on the revenue side and it comes through on the expense side.

Okay. Because your net revenues are adjusted for weather in that -- on that table, but your O&M is -- I mean, is this what we should model going forward, 720 million on a yearly -- on an annual basis or -- ?

You're right Faisel. The net revenues are adjusted for weather but they're not adjusted for the trackers. So the trackers are in both numbers, the net revenue and the O&M expense.

Okay. But how should we look at O&M going forward then? Is this the new level?

I think you should -- the way we do it, I think you should look at it as the adjusted O&M less trackers. We can provide that.

Okay. I can get that from Randy later. On Whiting, you guys took a, I guess, a charge on the BP steam contract. What's the rationale for taking the charge exactly? Is there some sort of economic deterioration of the contract? Why does that accrual take place?

Faisel, that accrual is a termination charge for 2009 in effect. It's a payment to BP to replace Whiting with other sources of steam. You might recall that originally in the negotiations, we were going to build boilers --

Right.

As our contribution to exit from the contract. That got really complicated so instead of that, we decided to let Whiting build the boilers and this $17 million is our economic contribution to that program.

Okay. And if I remember right for Whiting, because it's tied to -- was tied to supplying steam to BP, the average heat rate of the plant was a little bit higher than it would be under normal combined cycle situations. Is that correct?

Well, the average heat rate is lower, I think. It's about 8,000 heat rate, which I think is pretty good. It might be slightly higher because of the steam requirements, but not -- .

Meaning it's not 7,000 heat rate, it's not a 7,000 heat rate plan?

No, it's more like high 7000s, about 8,000.

By taking this plant away from the steam commitments, would that reduce -- would that reduce the heat rate?

I can't answer that. I think we'll have to get back to you on that. As far as I know, it would stay the same.

What's the book value of Whiting?

The book value of Whiting, the long-term plan is a little under $300 million.

Okay. And is there debt at Whiting, also?

Whiting is actually a lease, so there is debt underlying that lease. At some point in time, we will probably retire that debt. That debt, by the way, is included in the NiSource numbers for total debt and the implicit interest rate is included in interest expense.

In terms of the case going on right now with the class action lawsuit, is the case at the circuit court, meaning it's not at the appeals court, right? It's at the district court. Is that correct?

This is West Virginia State legal system. The circuit court is the local court, if you will, in West Virginia. There's not an intermediate court or an appeal court between that the trial court and the Supreme Court in West Virginia.

Okay. So if you appeal it, it would go straight to the state Supreme Court?

If the appeal is granted it would go directly to the state Supreme Court, that's right.

Okay. When you sold CNR, did you indemnify any sort of royalty issues after the sale in terms of volumes? How does that work? Is your liability kind of fixed at when you sold it or does it continue as production goes on?

I'm going to defer to Mike on that one.

Generally it's fixed as of the date of the sale. The one exception to that is the forward sales, the royalty owner obligation under that continued with Columbia.

Okay. Got you. Thanks for the time, guys.

Okay. Thank you.

Your next question comes from the line of Robert Petrosino with Barclays Capital.

Hi, thank you. Questions around liquidity, short-term debt outstanding, credit facilities, cash, how much of this is attributable to seasonal needs and any financing plans for this year?

Okay. The short-term debt outstanding just excuse me while I look it up here. I'll give you a later number. It's about 1.1 billion and probably all except maybe $300 million of that is for short-term working capital. That cycles through the year. So by the time you get to around the middle of the year that number will approach zero. The $300 million is left over from last year. There were current maturities in the fourth quarter that we decided not to refinance long-term at this point in time. Does that help?

Yes. What about any plans for additional financings needed this year? Will that just be to that 300 million?

We've got that, but I think we'll roll all that into the strategic review and we'll make our long-term financing plans when we decided what to do on the strategy.

Okay. Thank you much.

Your next question comes from the line of Brooke Glenn Mullin with JP Morgan.

Good morning.

Good morning, Brooke.

Could you give us a little bit of a time line on when the trial, I guess the judge and the trial court is going to come back with a decision regarding the punitive damages? Is there a time frame on that?

I'm not aware of the specific time frame. I want to say that you can expect between 45 and 90 days, in and around that, but don't hold me to that, Brooke.

Also, you saw increased industrial volumes on the electric side, could you give us a little color on that? Is that coming from a specific segment and do you know if that's sustainable?

Yes. It's driven by the steel industry and steel related industries. We said throughout 2006, and I'm sure you've read this in the general business media, that the steel folks were having a strong year. And so for us Middle, U.S. Steel, Praxair, who provides gases for those facilities, they all had a very strong year and a strong book. Towards the end of the year, they indicated that they felt, and I'm talking now about the steel manufacturers, felt like that there might be some softening in the market. We saw a little bit of that. They have indicated they feel like 2007 will be relatively strong. Some have indicated the first quarter might be a bit soft, but I think speaking generally, as opposed to specifically at this point, they felt like 2007 was going to be a strong year, somewhat similar to '06.

Thank you.

Your next question comes from the line of Gary Herbert with Morgan Stanley.

Good morning. When you consider strategic options to increase, rather, share hold value it sounds like preserve it actually for bond holders, the important part of the process is obviously going to be shielding value from the federal government in the form of taxes. I guess my question is what ability do you have to defer or avoid taxation when you consider strategic alternatives?

Just in a general way, certainly tax efficiency is a key consideration for us as we look through all of our alternatives. So as you go through the check list of the key elements that we've got to deal with, manage and consider, regulatory tax, shareholder, debt holder value, those are right there. As you can imagine, many of the techniques, tools or directions could trigger significant tax concerns.

All right. But you're looking -- you're considering ways to avoid them obviously or do you have -- ?

We're trying to be as efficient as we possibly can be.

Can you clarify for us at least on the call what kind of ability, though, a number, for instance, in terms of the ability to shield taxes or is it more from a transactional perspective that you would be seeking to avoid the taxation?

We really can't give you much more color or detail at this point. Again, our objective is going to be as tax efficient as we possibly can.

Okay. Fair enough. Thank you.

Your next question comes from the line of Ashar Khan with SAC Capital.

Just going back, I might have missed this earlier. You said usage hurt you on the Gas Distribution side. You said it was 4% and, Michael, if I'm right, if I read it, there's a 20 million delta in net income. You said it's primarily related to usage. Is that a way to do that, that the 4% usage cost you 20 million in net income? Is that the right variance to use?

Ashar, I think you should keep in mind it's pretax. It's operating earnings variance at $20 million.

Okay, but is that the right number to use?

Yes.

Okay. So if you're looking at 2% to 3%, that would imply 10 to 15 million this year? Is that the ballpark?

That's ballpark.

Okay. Okay. I appreciate it. Thank you.

At this time there nor further questions. Are there any closing remarks?

No, we just thank everyone for your participation, your interest and ongoing support. Thank you and we'll be in touch.

This concludes today's NiSource fourth quarter financial results and business update. You may now disconnect.