NiSource Inc (NI) 2007 Q1 法說會逐字稿

I would like to welcome everyone to the NiSource first quarter financial results and business update conference call. (OPERATOR INSTRUCTIONS)

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

Thank you, Dennis. 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 2007 financial performance and provide an update on progress on our four-point business plan. We'll then open the call for 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 10-K annual report for 2006 which was filed March 1, 2007, with the SEC. With that, I would like to turn the call over to Bob Skaggs.

Thanks, Glen. Good morning, everyone. As you can see from today's news release, NiSource's net operating earnings increased for the first three months of this year compared with the first quarter of 2006. Once again, our balanced four-part business plan has continued to deliver solid results. Even as we take the steps necessary to chart a longer term path forward for NiSource.

For the first quarter, our improved performance was driven primarily by higher earnings from our Gas Distribution business and from the first full quarter of financial improvements from an agreement between NiSource's Whiting Clean Energy unit and BP. Before getting into details in the financial update, I will address a topic that I know is on many of your minds.

As you are no doubt aware, we are in the advanced stages of a methodical and comprehensive strategic and financial review. That process has been designed to unlock the underlying value of our asset base, enhance our financial flexibility, and position NiSource for long-term sustainable growth in the future. Our senior management team and Board of Directors remain fully engaged in this process. We aren't yet in a position to provide a report on outcomes of that effort. However, we do expect to provide an update for all key stakeholders on our review by the end of this month. In that report, we'll provide as much definition as possible, given where we're at in the process at this time. Although I will, of course, be happy to answer your questions at the end of this call, I can't elaborate further on this topic, nor can I respond to rumors and speculation. We deeply appreciate your ongoing patience and your sensitivity as we deal with this review in a thoughtful and rigorous manner.

Moving on to a broader discussion of our financial highlights, on the non-GAAP basis, net operating earnings for the quarter ended March 31, 2007, were $208 million, $0.76 per share. This is an increase from $204 million, or $0.75 per share for the first quarter of 2006. Operating earnings were $432.7 million for the first quarter of 2007, up from $416.3 million for the same period in 2006. Just a footnote, we focus on net operating earnings and operating earnings, both non-GAAP measures because we believe they better represent the fundamental earnings strength and performance of the Company. These measures normalize for weather and items such as restructuring charges, significant reserve changes, and tax adjustments. For a complete reconciliation of net operating earnings and operatings to GAAP, please see schedules 1 and 2 of our news release available at NiSource.com.

As I mentioned earlier our financial results for the quarter reflect ongoing progress on the Company's balanced plan for long-term sustainable growth. And as we move forward our team remains focused on the fundamental components of that four-part plan. Specifically, commercial growth and expansion of the gas transmission and storage business. Commercial and regulatory initiatives at our utilities, management of our balance sheet, and process and expense management.

Now, let's turn to an overview of first quarter operating earnings for each of our business segments. In our Gas Distribution business, operating earnings increased by $6.9 million to $258.2 million for the first quarter of 2007. The improved Gas Distribution earnings were driven by an increase in net revenues primarily attributable to commercial and industrial sales and margin increases. Regulatory initiatives and improved residential and commercial customer growth. These revenue increases were partially offset by higher operating expenses, primarily due to increased employee and administrative expenses.

The Gas Distribution segment also continued to capitalize on short-term market opportunities. Using our distribution businesses extensive contractual supply and storage portfolio the team has done a great job of increasing our stream of revenues that are shared with customers under various regulatory mechanisms. On the customer usage front, first quarter results are generally in line with what we projected earlier this year which was conservation in the 2 to 3% range for 2007. That's consistent with our belief that the 4 to 5% declines in customer usage during 2005, 2006 were a 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 both usage erosion and customer attrition began to moderate.

While local distribution companies are also continuing to advance a full agenda of regulatory initiatives designed to increase revenues, address changing customer conservation patterns, develop more contemporary pricing structures, and embark on long-term investment programs to enhance our infrastructure and expand our customer base. In February, Columbia Gas of Kentucky filed a rate case proposing its first base rate increase since 1996. In addition to pursuing a change in rate structure to help mitigate the impact of customer conservation, the following proposes an accelerated main replacement program. This initiative would enable the replacement of aging gas lines and enhance the overall safety and reliability of Columbia of Kentucky's Gas Distribution system over the next 20 years.

Rate case plan activities are also in full swing at Bay State Gas Company and Columbia Gas of Pennsylvania. We anticipate filing in mid-2007 at Bay State and early 2008 in a Pennsylvania. In Ohio we've started engaging all stakeholders in an effort to shape the future regulatory, commercial, and investment model for Columbia Gas of Ohio. Across all these efforts, whether full rate case filings or other approaches our goal is to cultivate win-win outcomes that benefit all stakeholders.

Moving to our gas transmission and stop, or GT&S segment, operating earnings were $107.7 million, down from $111.7 million during the first quarter of last year. Net revenues for the segment were slightly higher than the prior period, but higher property insurance premiums in the wake of 2005 Gulf Coast hurricanes, along with increased employee administrative and maintenance expenses as we continue to build commercial capabilities in our GT&S unit. These factors contributed to a 4 million overall decrease in GT&S earnings.

Our GT&S team is continuing to pursue a two-prong growth strategy that focuses on optimization of NiSource's strategically located natural gas pipeline and storage system combined with aggressive physical expansion of its pipeline and storage network. Although stabilization in the natural gas market did moderate our optimization revenues somewhat during the first quarter, demand and commodity revenues were up in our GT&S business compared to last year. Our team is also continuing to pursue a range of potential system expansions driven by continuing core demand growth in Midwest, Mid-Atlantic, and East Coast markets as well as supply access needs. A recent highlight was the April 1st start of customer injections into Hardy Storage, the new underground gas storage field in West Virginia. As you know, this project is a joint effort between subsidiaries of Columbia Gas Transmission and Piedmont Natural Gas. In addition, Columbia Gas Transmission is currently expanding its transmission system to accommodate the downstream gas transmission volumes associated with Hardy's fully subscribed 15-year contracts.

Progress also is continuing on Columbia Gas Transmission's Eastern market expansion project which, like Hardy is a combined storage and transmission project underpinned with binding customer commitments. In fact, in a bit of breaking news, we expect to file a certificate of application for the EME project later today with the Federal Energy Regulatory Commission. The project currently is targeted to be in service during the second quarter of 2009.

Also during the first quarter, Columbia Gulf Transmission held a successful open season to provide increased access to Southern Louisiana markets. With planned in-service dates in the third and fourth quarters of this year, Columbia Gulf will make firm deliveries in excess of 300,000 dekatherms per day at two expanded points of interconnection. And finally, with its FERC certificate approval in hand, the Millennium Pipeline project is preparing to break ground on construction this year with a targeted in-service date of November 2008. In fact, even as we speak, a shipment of steel pipe designated for the Millennium Project is in route from Italy to New York State.

In addition to these advanced project, the GT&S team is actively engaged in developing a full array of other potential investment opportunities. We expect this pipeline of new projects to help drive continued growth in this line of our business. NiSource's electric operation segment had another solid quarter reporting operating earnings of $73.3 million up from $71.2 million from the year-ago period. Several factors helped drive the improvement in operating earnings for the electric segment. Net revenues were up $7 million due to increased residential volumes and continued lower unrecoverable costs from the Midwest Independent System Operator, or MISO, when compared to the prior period. We also saw increased wholesale margins and customer growth during the quarter partially offset by decreased industrial sales and the timing of revenue credits. Partially offsetting these net revenue increases were operating expenses which were up $4.8 million compared to last year due to higher planned maintenance expenses in our electric generating stations.

Moving to the segment we refer to as "other operations" we reported an operating earnings loss of $3.2 million for the first quarter compared with an operating earnings loss of $11.5 million in the year-ago period. As I mentioned earlier, the $8.3 million improvement primarily was driven by improved results from Whiting Clean Energy. This is the first full quarter since an agreement was reached late last year between Whiting Clean Energy and BP. The agreement redefined the terms under which Whiting provides steam to BP for its oil refining process and allows the plant to operate more competitively. We expect the improved results from this agreement to continue through the remainder of 2007.

To briefly touch on a few additional factors that affect our consolidated net earnings, interest expense for the first quarter of 2007 increased by $3.3 million compared to the first quarter of 2006 due to higher short-term interest rates. Income taxes on net operating earnings of $123.3 million were $10.8 million higher than last year. The increase resulted from higher pretax earnings and a higher effective tax rate. Our effective tax rate for the first quarter of 2007 is 37.2% compared to last year's effective tax rate of 35.5%. Last year's rate was favorably impacted by state deferred income tax adjustments recorded during the first quarter of 2006.

Focusing now on liquidity, net cash from operating activities for the first quarter was $780 million, an increase of $51 million from the first three months of 2006. The increase was due mostly to an increase in net income compared to last year, higher gas sales due to the colder weather in the quarter caused increased cash flow from inventory reductions and accounts payable. These increases were largely offset by increases in accounts receivable and the normal lag in the gas cost recovery process. We closed the quarter with short-term debt of $620 million and total debt of 5.9 billion. That equates to a 53.3% debt to capitalization ratio and compares to a 56.2% debt to capitalization ratio at year-end 2006. Just as a reminder, about $500 million of that short-term debt is expected to be refinanced on a longer term basis.

To wrap up, overall NiSource's performance for the first quarter continued to be solid. Our team has remained focused on and made notable progress in advancing our four-part plan for growth even as our Board of Directors and management team near completion of a comprehensive strategic and financial review of NiSource's entire portfolio of business. Again, we appreciate your patience with, understanding of, that rigorous process. And as always, we remain committed communicating with our investors and all of our other stakeholders in a transparent and timely manner regarding these and all of our efforts. Ongoing updates will be provided through our analyst calls and news releases posted promptly on NiSource.com. Thank you for participating this morning. And for your continued interest and support in NiSource. At this point, we'd like to open the call to questions.

(OPERATOR INSTRUCTIONS) Your first question will come from the line of Shneur Gershuni with UBS.

Good morning, guys.

Good morning.

Just a couple of quick questions. I was wondering if you could talk to us about the progress of the IBM contract?

Okay. As we've disclosed, we're in the process of reevaluating, assessing the entire IBM agreement. We are teaming with IBM in that comprehensive review. We're nearing completion of the review phase. We're going to be reviewing results internally with IBM and with our Board, and if required, we're going to make adjustments going forward in that arrangement.

Bob, can you sort of comment on like how you feel it's going thus far? Is it living up to some of your expectations? All of your expectations?

On balance, it's been an uneven initiative. We understood fully going into such a comprehensive arrangement that encompassed not only day-to-day operations in many of our areas but also the implementation of new systems that we were going to be dealing with many, many execution challenges. And indeed we have encountered challenges. We've adjusted on a real-time basis many of the operations have smoothed out. Other operations have not smoothed out the way that we have hoped. We have implemented a suite of new systems at our gas transmission and storage system that focus has been on stabilizing those new systems, ensuring they perform to our specs. We have not implemented that suite of systems in the other segments at this point. We're waiting really the results of this study before we proceed with that effort.

Okay. If I could just switch over to the pipeline segment, you've kind of talked about pipeline optimization. Are there any low hanging fruit left that you can sort of look to capitalize on over the next year?

The team has done a terrific job capturing opportunities in the market, and last year I think the results spoke for themselves. We really did a good job. Chris Helms has built a team that is poised to capture what the market presents to us. Clearly the spreads have narrowed this year. So by definition the opportunity has shrunk a bit. But we still have the summer in front of us. And again I think the team is poised to capture what opportunities might be there in the market. In terms of low hanging fruit, candidly, we probably have captured our fair share of that, but I'd emphasize we now have a team in place up and operating with an expanded group of counter parties, and we're poised to capture opportunities as they arise.

If I can ask one last question, and I guess this is really more an opining type question, but this quarter is the first quarter in a long time that we've actually seen close to normal weather. Is this kind of the -- is the conservation experience that we're seeing at this point right now something that you kind of expected and would have modeled given all the outside factors?

Yes, this is really just about right where we expected. We had projected 2 to 3%. The indications are weather-normalized, that that's about where it's going to fall. I will just put the condition out there, it it's really driven by pricing. And with moderating prices, we think that did indeed dampen the usage loss.

Okay, great.

Thanks so much.

Thank you.

Your next question comes from the line of [Andrew Levi] with Brent Corp.

How you doing?

Doing well. I know you can't really answer any questions relative to your strategic outlook going forward, but obviously the process has been going on for awhile. Seems like it it's going to be resolved pretty soon. Is it safe to say, though, that something will change? We're not just going to get kind of a status quo thing. We should be looking for something different going forward. Is that fair question? Or something you can't answer?

Really something I can't answer. What I will repeat is what we've said consistently, and that it is an A to Z look at the entire business. We've considered a wide array of options, and I would just add one of the options would be to do nothing. And I'm not suggesting by mentioning that that that's the answer. But I just want to be clear that everything has been put on the table, and we've tried to be deliberate, balanced, thorough in the review, and just repeat those key principles that underlie the Board and management's approach to this.

And can you just give us your opinion on MLPs relative to the pipeline business?

We see MLPs as being a tool, a valuable tool that can be used going forward. Certainly in our particular situation with gas transmission and storage, our assets, current assets, legacy assets, have relatively low tax bases. We also have regulatory considerations. From new projects that are coming into the portfolio, those certainly have a potential of being considered for an MLP. So going forward, it's a tool. We certainly have some issues around our legacy aspects, but we think it's a tool that we could use going forward.

Okay, thank you very much. We'll eagerly await your outcome.

Thank you.

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

This is Barry Klein for Faisel. Regarding the West Virginia storage project, what type of earnings impact should we expect in the future? I guess your share of that?

Hardy -- and when I say Hardy, I'll say storage and the transmission downstream transmission bases, EBIT run rate is in the neighborhood of about 20, $21 million annually. It's in that zip code, that area code.

And we should start seeing that -- starting, I guess this quarter, Q2?

Well, really, a full run rate, when I include the second phase of Hardy and the downstream transmission piece, let's talk about 2008 run rate.

Okay. What portion of that should we see this year, do you think?

I would say about 50% of that would be a rough estimate.

Okay. All right. Well, that was it. Thanks a lot.

Your next question comes from the line of [Josh Golden] with JPMorgan.

Hi, good morning. I'm sorry if I missed this. I just joined the call. Can you give me an update on the lawsuits that was -- I think there was a class action lawsuit in West Virginia, if I'm not mistaken. It was the Tawney versus Columbia Natural Resources and there was a substantial punitive award that was rendered against the Company. Can you give me an update on that and where that stands?

Yes, I will, and really there's not a lot to update. But those motions are still pending in front of the trial court judge, the judge that actually presided over the trial. There's not a definitive date for him to rule on those motions, so we could see a ruling any time or could take an additional time for him to render those decisions.

Have you reserved at all anything for that?

We have provided a reserve for that litigation.

Just real quickly, how much was that?

This is Mike O'Donnell. We've -- given the status of the proceeding, we shouldn't reveal that, but we did say in the 10-K that a reserve is for the damages, and we did not take any reserve for punitive damages.

Okay, thank you.

Your next question comes from the line of Charles Sharett with UBS.

I know that you've stated before that the strategic review would end in a mid to strong BBB credit ratings. I wanted to know if your thoughts on that had changed.

They have not. Guiding principal, the overall study, effort, exercise, has been strong investment-grade credit.

And could you also update us on what the cap structure looked like at the end of the quarter, debt to equity?

This is Mike O'Donnell again. Bob mentioned that the debt ratio at the end of the quarter was about 53.3%. That compares to about 56.2% at the end of 2006. And that's probably a pretty good representative example of the high and the low during a typical year because of the seasonal nature of the working capital that we finance.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of [Josh Silversteyn] with High Bridge Capital.

Just wondering, at Columbia of Ohio is this going to be a decoupling case or is it going to be a full rate case? Then just wondering at Nitsco when we should expect the filing there?

For Columbia of Ohio as you'll recall, we have a current regulatory arrangement, comprehensive regulatory arrangement that's in place, due to expire at the end of October 2008. As I mentioned in the prepared remarks, we're beginning discussions with our stakeholder group to cover a broad range of issues from our choice program to merchant role to potential infrastructure investment programs. So these discussions are broad ranging. It's too soon to predict what the outcome of those discussions will look like, what filings might result, but we've had a good strong history of working with our stakeholders and developing creative win-win packages, and that's the approach we're going to be utilizing in this particular situation. In Indiana, we have an -- this is Indiana on the Nitsco Electric side -- we have an obligation to file a rate case by July of 2008, based on calendar year 2007 test period. And we're in the process of preparing for that case. We're also engaging stakeholders in a variety of discussions, so that process is well underway.

Got it. Thank you.

And at this time, there are no further questions.

Well, with that again, we thank everyone for your participation and your patience, and we look forward to speaking with you in the not too distant future. Thanks.

Ladies and gentlemen, this does conclude the NiSource first quarter financial results and business update conference call. You may now disconnect.