NiSource Inc (NI) 2007 Q2 法說會逐字稿

Good morning. My name is Kara, and I will be your conference operator today. At this time I would like to welcome everyone to the NiSource second quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS) Thank you.

I will now turn the call every on Mr. Kettering, Senior Vice President of Corporate Affairs. Sir, you may begin your conference.

Thank you Kara, 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 can 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 second quarter 2007 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 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-Q quarterly report for the first quarter of 2007, which was filed May 4, 2007, with the SEC.

And now I would like to turn the call over to Bob Skaggs.

Thanks Glen. Good morning everyone. As you can see in this morning's news release, NiSource today reported second quarter results that are consistent with our earnings outlook for 2007, and reflect continued solid performance from each of our business segments.

On a non-GAAP basis net operating earnings for the quarter ended June 30, 2007, were 27.8 million, or $0.10 per share, compared with 38.4 million, or $0.14 per share for the second quarter of 2006. Operating earnings were $142.7 million for the second quarter, compared with 157.3 million for the the same period in 2006.

Looking at the first six months of the year, NiSource's consolidated operating earnings on a non-GAAP basis were $575.4 million, an increase from $571.8 million for the same period in 2006. Just as a reminder, we focus on net operating earnings and operating earnings, both non-GAAP measures, because we believe these measures better represent the fundamental earning strength and performance of the Company. These measures normalize for weather and certain other items, such as restructuring charges and significant reserve changes. For a reconciliation of net operating earnings and operating earnings to GAAP, please see Schedules one and two of our news release available at NiSource.com.

Overall our net revenues were up in the second quarter when compared with the prior year. Driven primarily by solid fundamentals, such as increased electric and gas distribution revenues, and improved performance from our Whiting Clean Energy unit. However these improvements were more than offset by three factors. Increased operating and maintenance expenses, higher interest expenses, and lower optimization revenues in our GT&S business.

As we pointed out in our previous reports moderation of our optimization revenues is not surprising, given the relative lack of volatility in gas prices during the first half of the year. It is notable that higher capacity demand, and commodity margins largely offset the revenue declines in GT&S. The increased operating and maintenance expenses for the quarter were primarily related to employee administrative expenses, including typical year-to-year payroll and benefits increases, as well as corporate services increases. The corporate services cost increases were related to NiSource's business services arrangement with IBM. As we have noted earlier NiSource is assessing our comprehensive services arrangement, to develop adjustments that can enable NiSource to achieve its business objectives going forward.

Now, before reviewing the segment results in more detail, I would like to quickly highlight several examples of continued progress on key elements of NiSource's four part business plan. As a reminder, our business strategy centers on expansion of commercial growth in the natural gas pipeline storage business, regulatory and commercial initiatives and its utilities, financial management and process and expense management.

First our stream of new projects in the gas transmission and storage segment continues to advance during the second quarter. Hardy Storage Company completed its first full quarter of operations receiving initial customer injections into its new $175 million underground natural gas storage facility in West Virginia.

You will recall that Hardy is a joint venture subsidiary of NiSource's Columbia Gas Transmission and Piedmont Natural Gas. Our Columbia transmission, the operator party is now constructing a $60 million expansion of its pipeline system, to provide the downstream capacity needed to deliver Hardy Storage supplies to market. That expansion is expected to be in service this fall.

In May we filed with the Federal Energy Regulatory Commission for our eastern market expansion project, $140 million expansion of two Columbia Gas Transmission storage fields, as well as transmission assets necessary to move the supplies to market. That project's entire capacity has been subscribed under firm 15-year service contracts, service is slated to begin in 2009.

In June, construction began on the Millennium Pipeline. When completed in November, 2008 the project will transport more than 500,000 dekatherms per day of natural gas to markets in New York's Southern Tier, and the Lower Hudson Valley, as well as to the New York City markets through its downstream pipeline interconnections. Our partners in that project are KeySpan Corporation and DTE Energy.

Also during the second quarter our GT&S group successfully conducted open seasons to test customer interest in the expansion of our Crawford Storage Field in central Ohio of 10 to 15 billion cubic feet of working gas, and 175,000 to 250,000 dekatherms of daily deliverability. We anticipate in converting that strong customer response in binding contractual commitments over the next several months. Those facilities are targeted to be in service in 2009. NiSource's GT&S business has also successfully tested shipper support for expansions of our system in the Appalachian region. Several potential projects in excess of $50 million have been identified.

Now, let me address what we are calling our rate case [wave]. During the second quarter our planned array of utility reg cases and regulatory initiatives moved forward, with progress on many fronts. In May, Northern Indiana Public Service Company received approval from the Indiana Utility Regulatory Commission, for its rate simplification program, which will simplify residential natural gas rates, mitigate the impact of usage reductions, and implement an energy conservation program.

Columbia Gas Kentucky's $12.6 million general rate proceeding also moved forward during the quarter. Our CKY team is engaged in constructive discussions with key stakeholders, and a decision is expected in this case by year end. In Massachusetts, Pennsylvania and Ohio NiSource Utilities continued work necessary to engage stakeholders, regulators and customers in connection with comprehensive rate proceedings being staged for yet this year, and in 2008.

Third, let me address NIPSCO, in the electric business significant scheduled maintenance work was completed on NIPSCO's Bailly Generating Station to improve reliability. This included cyclone burner replacement and other work, an investment of $13 million. Construction also continued during the quarter on installation of about $53 million in new emission control equipment at the station, which qualifies for recovery under the NIPSCO environmental tracker.

NIPSCO also took steps during the quarter to address its long-term need for electric power capacity. Our team is evaluating the results of NIPSCO's recently completed RFP process. We would characterize the response of the RFP process as encouraging. Last but certainly not least, our team is also continuing the external and internal work necessary to prepare for NIPSCO's electric rate case, with initial filings anticipated at mid-year 2008.

So, across the board brick-by-brick, our team is building the foundations to grow. As you know our organic growth projects, regulated infrastructure investments, and regulatory initiatives of this type require time and thoughtful effort to bear fruit. But it is notable that these broad-based initiatives are real. They are well underway and they are gaining traction. And we believe successful outcomes will enable us to achieve stable and sustainable 3 to 5% annual earnings growth rate for NiSource beginning in 2010.

One additional item I would like to touch on before moving into the segment results is an update on a topic mentioned during our late May report on NiSource's strategic and financial review. I indicated at that time that NiSource would be accelerating our review of options related to Master Limited Partnerships, or MLP's in connection with a portion of our gas transmission and storage assets and prospective growth projects.

We have indeed accelerated that process, and it's apparent that an MLP structure has the potential to provide additional financial flexibility, and access to low cost capital, which would compliment our GT&S strategy. However we are not yet in a position to announce definitive conclusions at this point, and I would ask for your forbearance during the Q&A session, as we are limited to what we can say about the MLP option at this point in time.

Now, let's turn to an overview of second quarter operating earnings for each of our business segments. Our gas distribution operations reported operating earnings of $8.7, million versus operating earnings of $12.5 million in the second quarter of 2006. The decrease resulted primarily from higher operating expenses, partially offset by increased net revenues.

Operating expenses excluding the impact of trackers were $11.1 million higher than the prior year, mainly due to typical year-to-year payroll and benefit increases, as well as corporate services increases, outside services cost, and environmental reserves. Notably key fundamentals were strong. Net revenues excluding the impact of trackers were $6.0 million higher than the same period in 2006, primarily as a result of regulatory initiatives and other service programs, and usage attrition levels continue to moderate.

NiSource's gas transmission and storage operations reported operating earnings of $74.4 million, versus operating earnings of $80.5 million in the second quarter of 2006. As I mentioned earlier, the decrease resulted from lower shorter term transportation services and optimization revenues, and higher operating expenses. Partially offset by $3.0 million increase in equity earnings, due to Hardy Storage going in service in April, 2007, and higher AFUDC earnings from Millennium Pipeline. While stabilization in the natural gas market did moderate optimization revenues during the second quarter, we had solid fundamentals, robust capacity contracting activities, and strong throughput drove demand and commodity revenue increases compared to last year.

Operating expenses increased by $4.7 million for the quarter, mainly due to typical year-to-year payroll and benefit increases, as well as corporate services increases, and offshore property insurance premiums. Our electric operations reported operating earnings of $61.8, million versus operating earnings of $67 million from the same quarter last year. Operating expenses increased by $11.8 million due primarily to higher employee and administrative costs, and like the other segments, NIPSCO electric demonstrated strong fundamentals. Net revenue increased by $6.6 million as a result of higher wholesale volumes and margins, residential volumes, and overall customer growth.

Finally we saw significant improvement in our other operations segment, which reported an operating loss of $0.6 million in the second quarter of 2007, compared with an operating earnings loss of $3.1 million in the prior year period. Again, stronger fundamentals as the improvement came from higher net revenues from the Whiting Clean Energy facility, partially offset by increased planned turbine maintenance costs at that facility.

To briefly touch on a few additional factors that affect our consolidated net operating earnings. Interest expense for the second quarter increased by $4.7 million compared to the second quarter of 2006, due primarily to the cancellation of credit facility associated with our strategic and financial review.

Focusing on liquidity, net cash flows from operating activities for the six months ended June 30, 2007, were $587.9 million, a decrease of $437.1 million from the comparable six months of 2006. Changes in assets, liabilities, reduced net cash flows from operating activities by $562.9 million. The impact of gas prices and weather significantly impact working capital changes. To that point, higher gas prices, and 5% colder than normal weather in the fourth quarter of 2005, drove significantly higher normal accounts receivable, and unrecovered gas cost balances that were subsequently collected in 2006.

Conversely, the fourth quarter of 2006 was 18% warmer than normal, leading to relatively low accounts receivable and unrecovered gas cost balances at December 31st, 2006, and therefore less cash to be collected in 2007. Increases in net income and changes in deferred taxes totaling $143.7 million, reduced the impact from the changes in assets and liabilities.

We closed the quarter with short-term debt of approximately $1 billion, and total debt of $6.2 billion. That equates to a 55% debt to capitalization ratio, and compares to a 56.2% debt to capitalization ratio at year-end 2006. Just a reminder, about $500 million of that short-term debt is expected to be refinanced on a longer term basis prior to year's end.

To wrap up, overall NiSource's performance for the second quarter continued to be solid. Our team has made notable progress on new growth projects and and regulatory initiatives that advance our four-part plan for growth. And our fundamentals such as usage, customer additions, demand for pipeline capacity, and Whiting's operating results are showing notable improvement. And we have advanced our work on the MLP option, which has the potential to provide additional flexibility and access to capital to fuel growth.

As always, we remain committed communicating with our investors and all of our 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 today. For your continued interest and support in NiSource. At this time, I would like to open the call to questions.

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Ashar Khan.

Hi, good morning, how are you doing?

Good morning, how are you.

Pretty good. I wanted to ask, what were optimization revenues in the quarter versus last year?

Yes, Ashar they were down. I don't have it at my fingertips the absolute number for the quarter.

Okay.

We will get you that exact number. Give or take down about 9 or $10 million.

9 or 10 million.

Quarter to quarter.

Bob, I guess you referred to something in the press release, the O&M is going, is going really high and I wanted to understand that. And you referred to the IBM agreement, and its impact going forward. Could you just update us what is happening over there, and why the O&M is going up so much?

Well, we don't believe we have a systemic O&M issue, Ashar. We cited through each segment normal typical increases in wage and benefits. We don't see an increase in staffing. It is what I would term cost of living and typical benefit increases. I would also point out that in that category we are beginning to accrue for broad-based incentive plans for employees. We did not do that last year. So we don't really see a fly up per se, it is normal creep, if you will.

Turning to Corporate Services, the key driver there is the IBM agreement. We have alerted the entire financial community that we were reviewing that comprehensive agreement, both for opportunities to improve service delivery, improve cost and benefits from that agreement. It has been a concerted effort.

We have now engaged IBM at the highest levels. We are in the midst of what I would characterize as sensitive discussions with the IBM folks. And really can't add anything more in respect to those conversations, but when we have something to share with you we certainly will.

But Bob, the objective is to, can I just ask you what the objective is from those discussions?

To improve service delivery.

Okay.

Improve pricing, achieve savings benefits over term. We have about eight years remaining on the current agreement.

Okay. And Bob, looking from the numbers it seems like the gas distribution business is now the usage problem, and leaving of accounts, am I right is no longer there? I don't know whether it is being masked by the weather, or it seems like there seems to be healthy growth in the distribution side. I am just going back from a year ago when you, you know, had all these problems, is it fair to say all those problems seem to have gone away, or there is a positive trend?

I would say that the trend is positive. Usage reductions have moderated. I think you are well aware that inherently we have annual residential customer usage reductions. Historically it has been in the ballpark of 1%. This year it appears that it will be 2% or less, again it is improving over the past two years where we saw usage losses that were as high as 5%. So definitely moderation in the usage losses, likewise moderation in attrition.

If you look at the quarter-to-quarter comparison, our customer adds net residential customer adds are approaching 25,000. That is still not as high as it has been historically, but you and everyone is well aware that the housing market, new construction has slowed. So again, encouraged, not back to historic levels on either usage loss or customer adds, but as I indicated, strengthening, improving fundamentals.

Thank you sir.

Your next question comes from the line of Faisel Khan.

Hi Faisel. Good morning.

Sir, your line is open.

Sorry about that, trying to deal with multiple conference calls at the same time.

There you go, you are juggling.

Can you go through the aggregate amount of CapEx your current pipeline projects would require? Millennium I understand it's 50%, right?

Yes, it is 47.5%.

And then what would be the cost to build Crawford storage up?

We haven't landed on a definitive number, but I will give you a couple of proxys. You know where Hardy is, it's north of 150. Eastern market expansion is a similar like project, and that is in the same zip code. So this is multi-hundred million dollar sort of project that we are looking at. Again, we are working with potential customers to configure the size of that project, and the like, but that gives you I think a sense of what it would be.

Okay. And I mean, what is the, there has been a lot of incremental announcements by other players in the area for new storage. Like at what point do you think we reach a saturation point, how much more demand for storage is there in the area?

Well, I can't give you a definitive figure. I would just say this, we continue to feel like that demand is there. We don't see peak days abating dramatically. All these LDC's including ourselves all along the East Coast, mid-Atlantic region continue to add customers at a fairly healthy clip. By definition, you will see peak day continue to increase.

So as long as peak day increases the need for storage will continue to increase?

Absolutely. I'd just also add, we like everyone else are studying the supply flows into the market area. Again, LNG as we know is going to have a certain amount of storage requirements. We know that we are going to get big volumes from the mid-Continent area. Again, we think that is going to support the storage market.

So certainly not everything that has been an announced will ultimately be built or be built as announced, but we think the demand is inherently there. As you know we have 39 give-or-take storage fields in that market area, and we think we are as well positioned, better positioned than probably anybody to take advantage of that long term.

Do those storage fields have the capability to be expanded?

I wouldn't say that they all have the ability to be expanded. Clearly we are looking at those very, very carefully. I would say this again we are going to study how gas comes in and hits that Columbia gas transmission market.

Today it might not be a viable project, may again be, maybe in the future depending on how gas hits the system. And I will also say as you have seen on Hardy, you have seen on eastern market expansion, a critical component is taking gas away from storage. So that is an opportunity, that is a need, and that impacts the viability if you will, of those storage fields.

Okay. And on the electric business, I missed the amount of CapEx you said you were spending on that new burner that you are putting in place, is that 13 million you said? For Bailly?

Oh, for Bailly. It was in $20 million give-or-take range. I have to look at my notes here, I apologize.

Okay. Then also the construction you said is in progress on the SCRs, what is the aggregate CapEx for that equipment?

Well, the SCR is going to be about $50 million. I misspoke, Bailly is about 13 to $15 million on the burner, but the SCR is about $53 million. You recall that entire SCR program, 350 to $400 million program. We have done quite a bit of that.

Okay. What have you guys entered into a kind of long-term planning, your long-term plans for resources for NIPSCO, in terms of long-term power requirements and stuff like that, have you guys --?

Yes, we touched on that in the prepared remarks. Not to belabor, you recall that we are in the midst of an integrated resource plan, that plan suggested we add long-term need to add considerable capacity. And just recently within the past six weeks, we issued an RFP to acquire give-or-take 500 megawatts of capacity. This could be capacity we would acquire, or it could be in the form of purchase agreements. We have received responses, we are just beginning the process of analyzing those responses, but I would characterize the responses as encouraging on that front. Again, we want to try to add this capacity as early as 2008.

And this is intermediate capacity or is it base load?

It is intermediate-like capacity.

So a combined cycle plant.

CCGT was targeted in this RFP

Okay, fair enough, thanks for the time guys.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Julie.

Yes, this is actually Brooke Glenn Mullin with JPMorgan. Could you just give us an update on where you stand right now with the West Virginia royalty litigation?

Yes, we are still at the trial court level in West Virginia. And bear with me, I am losing track of time, I want to say two weeks, three weeks, four weeks ago, but it has been recent, the Trial Court Judge issued a 100-page plus ruling that affirmed the jury's verdict on punitive damages. So that was one step in several steps that still must unfold at the Trial Court level to deal with post Trial motions, issues and considerations. So the Judge still has more work, more rulings to issue at the Trial Court level, before this is right for an appeal.

Our current belief that the matter will be ready for appeal late October or November. And procedurally in West Virginia we have to petition for appeal, so we have to request an appeal to the West Virginia Supreme Court, which is the highest court in the state and discretionary. We think it is highly likely given the amount of the award, given the amount of punitive damages, that the court will grant that petition for appeal. So it still looks like fourth quarter before we get to that stage.

And in terms of a reserve for the punitive portion of that, would you wait until the appeals process is underway or completed?

We just can't comment at this point, but we have indicated we have not established a reserve for punitive damages.

Thank you.

Thank you.

Your next question comes from the line of [Chris Shelton].

Good morning.

Mr. Shelton, your line is open.

Hi, sorry this is [Mark Caruso], I apologize for the confusion. Bob, I'm sorry, I was in and out of the call. I had a quick question on the MLP, I am sure it is very limited on what you can say.

That is correct.

But I know going through the strategic review, no stone left unturned, is it right to assume that you guys took a hard look at what could go in there, and can you kind of give, I apologize if you have already said this, just some color, should we think about some of the newer stuff versus the older stuff given the tax issue?

Yes, I would ask for your forbearance on this, and I did mention that in the prepared remarks. We mentioned that we have accelerated the work on the MLP. We have identified that it does have potential, but on the advice of our SEC counsel, we just need to be circumspect around details, color, and texture at this point. I hope you can understand and respect that need right now.

Okay. So I guess along those lines then you have already kind of in your own minds identified what you think makes sense?

Yes, I am going to go back to the previous answer, good try, but I really do have to be circumspect.

Okay, thanks guys.

Thank you.

It appears there are no further questions. Do you have any closing remarks?

No, again we just want to that can the entire financial community for your interest and your support. We appreciate it. And thanks again! Have a good day!

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