NiSource Inc (NI) 2008 Q2 法說會逐字稿

Good day ladies and gentlemen. And welcome to the second quarter 2008 NiSource earnings conference call. My name is Shanelle and I'll be your coordinator for today. At this time all participants are in listen-only mode. We'll be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I'd like to turn the presentation over to your host for today's conference, Mr. Glen Kettering, Senior Vice President of Corporate Affairs. Please proceed.

Thank you, Shanelle. Good morning to everyone on behalf of NiSource, I'd 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 Hulen, Director of Investor Relations. Also joining us is Steve Smith, who is as we reported a few months ago, will be assuming the CFO position responsibilities going forward As you know the focus of today's call is to review our second quarter 2008 performance and to provide a business update. We then will 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 US 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 2008 first quarter 10Q which was filed on May the 2nd with the SEC. Now, I'd like to turn the call over to Bob Skaggs.

Thanks, Glen. Good morning. Thanks for joining us today as we report NiSource's second quarter earnings and provide an update on the continuing tangible progress we're making on our balance plan to deliver long-term sustainable growth. As noted in our earnings release, NiSource remains on track to achieve 2008 financial results that are in line with our business plan and our outlook. Our team continues to execute a broad array of important initiatives to cross each of our business units. These accomplishments delivered during the pivotal year for our company are key elements of our path forward strategy for achieving long-term sustainable earnings growth.

Turning first to our earnings report. As you can see from our earnings release, NiSource reported net operating earnings from continuing operations nonGAAP of $24.3 million or $0.09 per share for the three months ended June 30, 2008, compared to $28.3 million or $0.10 per share for the second quarter of 2007. Operating earnings were $121.9 million compared to $143.5 million for the same period in 2007. On a GAAP basis, NiSource reported income from continuing operations for the three months ended June 30, 2008, of $21 million or $0.08 per share, compared with $28.9 million or $0.11 per share in the same period a year-ago. Operating income was $116.6 million for the second quarter of 2008 compared with $143.9 million in the year-ago period.

Second quarter net operating earnings compared with the year-ago period were affected by anticipated higher employee and administrative costs, as well as a one-time adjustment to electric operations depreciation expense relating to prior periods which impacted operating earnings by about $0.02 per share. These impacts were mostly offset by higher total net revenues and lower taxes in interest expense. As a reminder, we focus on net operating earnings and operating earnings, both nonGAAP measures because we believe these measures better represent the fundamental earnings strength and performance of the company. These measures normalize for weather and certain other items such as restructuring charges, asset sales, impairments, and significant reserve changes. For reconciliation of net operating earnings and operating earnings to GAAP, please see schedules one and two of earnings release, which is also available at NiSource.com.

As I indicated earlier, we're maintaining our operating earnings guidance of $1.25 to $1.35 per share for the 2008 to 2010 period. On a GAAP basis for 2008, the lower end of the range for basic earnings from continuing operations is $1.23 per share due to transition costs associated with NiSource's amended business service agreement with IBM. For 2009 and 2010, we reflect no differences between GAAP and nonGAAP measures. As I've noted in our past communications, 2008 represents an important year for NiSource as we continue to establish a platform for achieving long-term sustainable growth. More specifically, we are taking a number of fundamental steps this year to put in place sustainable drivers of long-term earnings and cash flow growth. On all fronts, our team is focused on advancing a broad array of regulatory, commercial and growth investment initiatives.

And I'm pleased to report that we're continuing to successfully execute our plan. We're delivering solid brick by brick progress. Several examples of the progress we're making are in our gas distribution segment, where the focus is on synchronizing unprecedented infrastructure replacement and enhancement projects with thoughtful, collaborative regulatory initiatives. On July 2nd, Columbia Gas Pennsylvania filed a unanimous $41.5 million rate case settlement with an administrative law judge at the Pennsylvania Utility Public Commission. Subject to approval by the PUC new rates under that sum are expected to become effective October 28th. We also continue to see solid progress in Ohio where Columbia Gas of Ohio continued to advance its base rate case filed in March.

The Columbia of Ohio case seeks an annual revenue increase of 6% or nearly $80 million with new base rates expected to become effective in the fourth quarter of this year. The Ohio filing is also closely integrated with a long-term $2 billion plus system infrastructure investment strategy. Our Ohio team also logged a victory in late July when the Public Utilities Commission of Ohio will approved the company's new Comprehensive Energy Conservation Program which will offer a wide range of services to residential and small commercial customers. Columbia of Ohio will seek to recover the three year $24.9 million cost of the DSM conservation program through a rider that would be added to residential and small commercial customer bills. Notably the commission's approval is subject to the resolution of the cost recovery process in Columbia of Ohio's rate case. We're confident that the recovery mechanism can be worked out successfully with stakeholders so that this important program can proceed and begin providing real benefits to all our customers.

Moving to our electric business unit, as you know NIPSCO took a major step forward this quarter in meeting its long-term electric generation capacity needs when it acquired $330 million Sugar Creek power plant. The 535 megawatt combined cycle gas fired generating unit located in West Tarahote, Indiana. The plants acquisition was approved on May 28th by the Indiana Utility Regulatory Commission. Although that order denied the cost deferral and rate treatment proposed by NIPSCO, the Indiana commission indicated that NIPSCO could seek such rate treatments through a so-called alternative regulatory plan which NIPSCO filed on June 6th.

NIPSCO also took steps during the quarter to diversify its electric supply portfolio with the addition of renewable energy options. On July 24th, the Indiana commission issued an order approving a NIPSCO purchase power agreement with renewables, one of the world's leading producers of power from wind and other renewable sources. The agreement provides NIPSCO the opportunity to purchase 100 megawatts of wind power commencing in early 2009. Looking forward, our Indiana team will continue to review additional opportunities to address NIPSCO's long-term generating capacity needs. And as we speak, our NIPSCO team is engaged in the final preparations for its first electric rate case in 20 years. As many of you know, the rate case filing, which we'll be making by the end of this month as part of an agreement NIPSCO made is an early agreement with regulatory stakeholders. As I've mentioned before, this is a landmark case marking the first time in two more than decades NIPSCO sought comprehensive review of its electric services, cost levels and rates, and our team is looking forward to exploring those changes in a collaborative fashion with all our key stakeholders in Indiana.

Shifting now to our gas transmission and storage unit. Our team continued to advance a steady stream of growth projects during the second quarter. On June 25th, NGT&S filed with the Federal Energy Regulatory Commission its $65 million Ohio storage expansion project, an expansion of Columbia Gas Transmissions Ohio natural gas storage facilities, to meet growing demand in the company's mid-Atlantic markets. If approved by the FERC, the project will increase Columbia transmission storage capacity by 6.7 billion cubic feet and enhance its daily storage delivery by 100,000 dekatherms per day. We anticipate placing the project in service in November 2009, pending FERC approval. Also pending regulatory approval is the $40 million Appalachian expansion project which will deliver natural gas from the Appalachian supply basin in southern West Virginia and eastern Kentucky. This project will add a new 9,500 horsepower compressor station to Columbia Gas Transmission's existing system in West Virginia, enabling the company to transport an incremental 100,000 dekatherms of natural gas per day. This project is underpinned by 15 year contracts with CNX Gas, equitable production and Chesapeake. Subject to approval by the FERC, we expect the project to be in service during the fourth quarter of 2009. Meanwhile, construction is continuing on several other important pipeline and storage expansion projects. Those include the Eastern Market Expansion Project, a nearly 100,000 dekatherms per day expansion of Columbia Gas Transmission's pipeline, compression and storage facilities and the Millennium Pipeline which is targeted to begin operations during the fourth quarter of the year.

Turning to pipeline operations, on July 1st, Columbia Gulf Transmission received permission fr the United States Department of Transportation to restore operating pressure on the company's line 100 pipeline which as you may recall, was damaged during an incident near Delhigh, Louisiana, in 2007. With the restoration of line 100 and the temporary restoration of service, Columbia Gulf's Hartsville, Tennessee, compressor station, which was destroyed by a tornado in February, the Columbia Gulf system is now capable of meeting its full contracted transportation capacity level of approximately 2.2 billion cubic feet per day. Our gas transmission and storage team has done nothing short of an incredible job in managing these operating challenges and enabling us to fully meet our customer's ongoing capacity needs. As you can see, our NGT&S team continues to make significant progress executing on a steady stream of growth projects to meet the increasing needs of customers and suppliers alike. I would note that in addition to the projects announced to date, the team continues to work on developing an extensive inventory of additional opportunities which will play a key role in growing NGT&S business in the years to come.

Finally I'd mention that due to the ongoing recovery work at Columbia Gulf's Hartsville compressor station as well as overall financial market conditions, we now anticipate public offering of units in NiSource Energy Partners LLP, our new limited master partnership is not likely to occur during 2008. As noted in our earnings release, we also have continued to take steps to focus on core regulated businesses and divest certain nonstrategic assets. In that regard, on June 30th, NiSource closed on the sale of its Whiting Clean Energy unit to BP Alternative Energy of North America. BPAE purchased the Whiting facility for approximately $217 million including working capital. Also in June, Columbia Gulf Transmission and Tennessee gas pipeline closed on the sale of Columbia Gulf's offshore Louisiana assets and operations in the Gulf of Mexico. These assets which don't comprise a significant portion of Columbia Gulf's assets or earnings base are not considered strategic to Columbia Gulf which as you know is focused on growth in its onshore transportation businesses.

Progress continued to the sale of Northern Utilities and Granite State Transmission, to [Unitel] Corporation for $160 million plus an estimated $25 million in natural gas inventory and other working capital items. That sale is expected to close late this year. In other discontinued operations matters, I would note a number of developments related to the Tawney class-action litigation in West Virginia, which involves claims against Columbia Natural Resources. A former subsidiary for which we retained primary financial responsibility. As we previously reported in May of this year, the West Virginia Supreme Court of Appeals declined to review the trial court judgment in that case. The court granted our request for stay of the judgment pending United States Supreme Court on a petition for writ of [sertiary] which we plan to file later this month. We expect the United States Supreme Court to rule to decide whether to accept the appeal later this year or in early 2009. Although we believe Columbia Natural Resources has meritorious arguments in that case, particularly in regard to the punitive damages awarded, we obviously cannot predict the outcome of the appellate process. As a result in the second quarter we increased our reserve related to the Tawney litigation to reflect the portion of the trial court judgment for which NiSource would be responsible inclusive of interest.

Now let me shift to an overview of NiSource's second quarter operating earnings. NiSource's consolidated second quarter 2008 operating earnings nonGAAP were $121.9 million compared to $143.5 million for the same period in 2007. I would refer you to schedule two of our earnings release for the items included in 2008 and 2007 GAAP operating income, but excluded from operating earnings. Gas distribution operations reported an operating earnings loss of $3.9 million versus operating earnings of $8.9 million in the second quarter of 2007. The decrease resulted primarily from higher operating expenses which were $9.6 million greater than the prior year. The increase was mainly due to higher employee and administrative expenses on collectible accounts and higher depreciation costs.

Net revenues were $3.2 million lower than the same period in 2007 as increases from rate proceedings and other service programs were more than offset by the anticipated reductions in nontraditional revenues as a result of a regulatory stipulation entered into by the Columbia Gas -- by Columbia Gas of Ohio and its regulatory stakeholders in late 2007. Gas transmission and storage operations reported operating earnings of $75.5 million versus operating earnings of $74.6 million in the second quarter 2007. Increased net revenues were mostly offset by higher operating expenses and lower equity earnings. Net revenues increased by $6.4 million primarily due to increased subscriptions for firm transportation services related to new interconnects along the Columbia Gulf pipeline system, delivers from the Hardy storage field and incremental demand revenues on the Columbia Gas Transmission system.

Operating expenses at GT&S increased by $3.4 million for the quarter mainly due to higher employee and administrative expenses and the impact from adjustment to reserve balance that favorably impacted last year's second quarter results by $2.8 million. That impact was partially offset by lower outside services and uncollectible accounts. Equity earnings decreased by $2.1 million due to lower AFUDC earnings from Millennium Pipeline and operating earnings from Hardy Storage. Electric operations reported operating earnings $52.1 million versus operating earnings of $61.8 million from the same quarter last year. Operating expenses increased by $10.7 million due primarily to higher employee and administrative costs and higher depreciation costs. The higher depreciation costs included an $8.3 million adjustment recorded by northern Indiana during the second quarter. This one-time adjustment, which reducing quarter net earnings by approximately $0.02 per share was noncash and will not materially impact depreciation charges in future periods.

Net revenues increased by $1million as a result of other, of higher industrial volumes, timing of revenue credits, incremental revenues from the new Sugar Creek plant, partially offset by lower, nonrecoverable purchase power costs. Other operations reported operating earnings of $.8 million in the second quarter 2008, compared with an operating earnings loss of $.3 million in the prior period. The improvement resulted from higher net revenues from commercial and industrial gas marketing activities. These operating earnings results no longer include earnings associated with the Whiting Clean Energy facility which noted earlier was sold to BPAE on June 30th. Earnings associated with Whiting's operations have been reclassified to discontinued operations for the current and comparable periods. Other operations primarily include commercial and industrial gas marketing activities.

In other items, interest expense decreased by $11 million due to lower short-term interest rates and credit facility fees and the retirement late in 2007 of high cost debt associated with the Whiting Clean Energy Facility. NiSource's consolidated operating earnings for nonGAAP for the six months ended June 30th 2008 were $516.6 million compared to $572 million for the same period in 2007. I'd refer you to schedule two in our earnings release for the items included in the 2008 and 2007 GAAP operating income, but excluded from operating earnings. On a GAAP basis, NiSource reported income from continuing operations for the three months ended June 30th of $21 million or $0.08 per share compared with $28.9 million or $0.11 per share in the same period a year ago. Operating income was $116.6 million for the second quarter of 2008 compared with $143.9 million in the year-ago period. In addition to the impacts already discussed in the segment discussions, the decrease in earnings was primarily due to unfavorable weather in NiSource's gas distribution and electric markets during the quarter compared to same period a year ago.

Also on a GAAP basis, NiSource reported income from continuing operations for the six months ended June 30th, 2008, of $210.4 million or $0.77 per share compared with $235.4 million or $0.86 per share last year. Operating income was $511.4 million for the first six months of the 2008 versus $574.3 million in the year-ago period. And again, in addition to the impacts already discussed, the decrease in earnings for the first half of 2007 was due to unfavorable weather at NiSource's gas distribution and electric markets compared to 2007. Again, please refer to the news release for a complete list of the items included in 2008 and 2007 GAAP income from continuing operations, but excluded from net operating earnings. Shifting to discontinued operations, as I noted earlier in the second quarter, NiSource recorded an additional accrual related to the Tawney lawsuit in West Virginia which is reflected in discontinued operations.

In addition, in the first quarter of 2008, NiSource began accounting for the operations of Northern Utilities, Granite State Gas and Whiting Clean Energy as discontinued operations. In the first quarter we recorded an estimated after-tax loss of $96.1 million, $0.35 per share for the disposition of these operations. In the second quarter, we recorded an additional after-tax loss of $2.8 million, about $0.01 per share for the Whiting Closing and the adjustments for estimated disposition of Northern Utilities in Granite State Gas that are expected to close later this year. All results of operations in these businesses and all periods presented are classified as net income from discontinued operations.

Focusing on liquidity. Net cash flows from operating activities for the six months ended June 30, 2008, were $638.4 million, an increase of $50.5 million from the first six months of 2007. The $69.6 million increase in deferred taxes was offset by net changes in assets and liabilities. The weather in gas prices significantly impact working capital. There were sources of cash generated from favorable weather in certain jurisdictions and pricing impacts on inventory and accounts payable. These sources of cash were mostly offset by increases in unrecovered gas costs and also driven by gas price increases.

To wrap up, NiSource's overall financial performance for the quarter is consistent with our business plan. As I mentioned earlier in line with our outlook for net operating earnings of $1.25 to $1.35 per share. Although we have much more to accomplish before the year's over, I'm pleased with the solid progress our team is making and delivering on our aggressive growth plan which includes executing on our major infrastructure programs, successfully concluding our rate proceedings and advancing pipeline and storage growth agenda. I can assure you that all of us are intently focused on continuing to advance these critical initiatives and position the company for long-term sustainable growth. As always, we remain committed to communicating with our investors in a transparent and timely matter regarding these and all of our efforts. Ongoing updates will be provided through our analyst calls and news releases posted on NiSource.com. Thanks again for participating today and for your ongoing interest and support of NiSource.

Just a personal comment before I open the call to questions. I just want to thank Mike O'Donnell for his years of service as our CFO. Mike's been at my side for every one of these calls. Mike, thank you, congratulations. We appreciate your service and commitment to growing NiSource.

Bob, thank you very much. It's been my great pleasure to serve NiSource. And hopefully to contribute to the shareholder value increase that we're going to see here. Thank you very much for everything.

Thanks, again, Mike. And to Steve Smith, welcome, good to have you on board.

Thanks, Bob.

And with that, Shanelle, we'll open up the phone call to questions.

(OPERATOR INSTRUCTIONS) All questions must be submitted at this time in order for it to be registered. (OPERATOR INSTRUCTIONS) And we'll pause for a moment to compile a list of questions. And your first question comes from the line of Shneur Gershuni of UBS. Please proceed.

Hi. Good morning guys.

Good morning.

Just a couple of quick questions. I was wondering if you could comment on your views with respect to conservation and bad debt expenses giving the high commodity prices we're seeing now. And just sort of the impact that you expect it to have with respect to earnings since you left your guidance flat.

Yes, let me start with with bad debt first. As you would expect, we are seeing increased pressure on bad debt, uncollectible expenses and we did see during the quarter, upward pressure on those numbers. Having said that, I would say it's manageable, it's relatively modest and we've been served well by bad debt track, particularly in Ohio and bad debt relief that we have in Massachusetts and ongoing programs that we have in Columbia, Pennsylvania. So we've dampened the impact but have seen some upward pressure.

With regard to conversation, first and second quarters have been good in terms of customer usage. We've not seen any notable jump in conservation, certainly nothing like we saw in 2005, 2006, we'll have to see. Much of the impact from the elevated costs have not rippled through. As you're generally aware, we found a round of record high GCRs. But quite frankly those prices have not yet hit the bulk of our customers. So like others in the industry going to be watching fourth quarter in particular very carefully.

Okay. Just if I can just switch to gas transmission storage, you've got Millennium, you've got Hardy, you've got a bunch of products you're looking to green light and so forth as well as the most recent one. Just trying to understand your impact with respect to earnings over the next two years at that segment and if you can talk in context of how it drives your guidance, which segment is actually pulling you down to maintain flat guidance the entire time.

Yes. Let me just kind of go through the inventory of NGT&S project. As you know Hardy is on stream, we mentioned interconnects that have boosted throughput on Columbia Gulf, but many of the products that we noted in the press release and talked to you previously, really don't come online until later in 2009. Just to give you an example, eastern market expansion, the Appalachian expansion, the Ohio Storage project, all of those tend to be the latter part of 2009. Millennium doesn't come on until later this year. So full run rate doesn't begin until the 1st of 2009. So we are really still in the ramp-up phase of our gas pipeline growth project and really to begin seeing full up and running impacts, it's going to be late 2009, 2010 before we see those impacts.

Again, I've mentioned the team continues to work on developing an inventory of projects and we remain optimistic that we're going to see ongoing strong growth from this segment going forward. Beyond the gas transmission and storage segment, we're clearly in the rate mode. Particularly bell weather cases in the gas and distribution segment in Pennsylvania, that settlement doesn't become effective until later this year full run rate 2009. The team is working hard in Ohio, another bell weather rate case. Again, we don't expect new rates to be effective until, for the most part, calendar year 2009. And then last but not least on the electrics, we're literally in the throughs of that case and we won't even have the filing submitted until late August. So I think you can factor all that into the guidance and the reason why we haven't seen a lot of lift at least at this point.

Okay, is it safe to say that 2010 you expect to be towards the upper end of the guidance, and '09 the middle end of the guidance? Clearly there should be earnings drivers that should be kicking in of some sort.

Yes, I think we tried to be very clear and transparent that for this year we feel we're going to be at the lower end of the range, and then over the course of the next couple years, we start walking upward through that range in 2009 and 2010.

Okay, great. Thank you very much.

Thank you.

Your next question comes from the line of Carl Kirst of BM Capital.

Hey, guys. It's Carl Kirst of BMO.

Hey, Carl.

Actually, Bob, let me go back to Shneur's question. Only because I was looking from the OEC standpoint, $40 million settlement in Pennsylvania, $80 million out there for Ohio, maybe we get a half settlement on that, Millennium, there do seem to be some things out there that would actually really help 2009, especially if we're thinking that the NIPSCO rate case is going to be litigated through the year and that doesn't really kick in until the end of '09. So is there something from an O&M standpoint or are we being conservative, or am I looking at the possible rate increases from Ohio and Pennsylvania as essentially going down to the bottom line when I shouldn't be?

Well, go back to the prior response, Carl. We indicate we expect to step through the range over the next two years. And so if we're at the lower part of the range this year, you are going to see possible impacts from the Columbia, Pennsylvania, and hopefully the Columbia of Ohio rate cases as well as the GT&S earnings lift. We tried to capture that in a range that covers three years. And I think what you're saying is correct.

Okay. Okay. Just actually if I can clarify on NIPSCO for a second, by your comments we should be expecting sort of a fully litigated case here in which case if the hearings I guess are starting in January, is this something where we might actually have a decision by summer or is this going to be kind of a full year type of 2009 event?

More of the latter, Carl, from our perspective. In fact the procedural schedule was just agreed to, as you suggested the initial round of hearings begin in January, but the final round of hearings don't commence until July of 2009. So if we remain on that track, you can see that the case would wrap mid-year, briefing would then follow next, time for deliberations and like could easily take you through 2009. Now, again we approach all our cases looking for opportunities to settle and resolve, but this case hasn't, there hasn't been a case in Indiana for over two decades. We do expect, one way or the other, case is going to be fully ventilated.

Fair enough. And just last question, noticing in your queue and understand everything with the FERC is serious but perhaps trying to get a sense from a dollar standpoint, shareholder standpoint, there was a statement in the queue about some nature of some informal discussions with the FERC on the two major Columbia lines. Was just kind of wondering exactly what that was and if that's something that could become material?

Yes, we do not believe it will become material. It relates to prior periods, legacy issues. It's been an ongoing discussion and we don't expect an impact on the outlook we provided.

Great, thanks. Thanks, good luck, and, Mike, you too, especially.

Thanks Carl.

Thanks Carl.

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

Good morning, guys. Quick question on -- originally as you've sort of been scoping out the NIPSCO case, there's been talk of a need for 1,000 megawatts and you obviously has Whiting that was going to be part of the filing. I think I remember at the time you hinted that you'd potentially bring another asset forward to fill that gap at some point in time. As you see the demand outlook today, has there been any change in your sense of the timing of the need for the second asset and on what sort of basis and timeframe would you be looking to see that introduced into the mix?

Yes, fundamentally our outlook has not changed. You'll recall and others will recall that we filed a comprehensive integrative resource plan last year and showed over time the need for upwards of 1,000 megawatts. Sugar Creek goes a long way to filling that need and that's relatively immediate, but there is little doubt in our mind that we need an additional 500 megawatts plus to add to the portfolio. We, on an ongoing basis, are seeking to add that capacity through a build or a buy. Clearly that will not be captured in the current rate case, but we think over the next number of years, we'll be adding additional capacity to the system.

So, we'd be thinking, it's kind of out in time, beyond this next rate case.

That's correct. It cannot be captured in the current rate case, but again, the need is relatively near term and our intent is to satisfy the need.

Okay. And then, I have one sort of more numbers question. Looking at the income statement, you had $36 million continuing operations pretax, and then income taxes of $11.5 million, yet you're release says that the tax rate was 36.7%. It sounds like it's more like 32%. I'm just wondering how you explain that difference?

One last test for Mike O'Donnell.

Give me a second. How about we come back to that?

You can come back to that.

We'll be responsive on that.

-- what seems to be on the tax and on the income statement.

We'll run that down and get back to you, hopefully before the call is completed.

Thank you.

And your next question comes from the line of Leon Dubov of Catapult Capital.

Hey, Good morning.

Good morning.

I just wanted to double check, you guys said you took a reserve for the rest of this West Virginia royalty litigation. How much was the reserve in the second quarter?

We haven't disclosed the specific reserve -- legal reserves. As a practice of fact, we don't do that. We haven't given definition around the reserves on Tawney.

Are you now more or less fully reserved for the original decision? I think it was $400 million of which $270 was punitive.

We would say that we're fully reserved given the trial court verdict. Fully reserved for our portion of the exposure.

Got you, thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Faisel Khan of Citi. Please proceed.

Hi, guys. It's Faisel. Just a question on the customer account -- residential customer account distribution, was down about 10,000 customers, the residential side and then looking at the electric utilities side, equation, residential customer count up about 1,000. Can you describe or give us a little more insight on what's going on in your jurisdiction?

Yes, across the company, on the gas side in particular, new customer additions are down dramatically. They're probably off 20% against our projections for this year and this year's projections were down near historic lows, if not at historic lows and it's all a reflection of economic conditions and the housing industry in particular. In our outlook, it's certainly not going to pick up this year and it's going to be slow next year, but we are off dramatically on new customer adds. I think we've been pretty consistent about seeing it. I would say the it is very consistent with the entire natural gas industry and again the economy.

Bob, is it a particular territory that's hurting you? On the electric side, customer accounts actually up. Trying to figure, what's the divergence there?

It's up modestly, but on the gas side, we're seeing a slow down across the entire footprint. You'll recall our overall growth rate historically has been about 1%, which is a little below the natural average, and just really reflects this mid-Atlantic, mid-western economy that we're in. Historically our largest areas for growth have been the northern Virginia area, central Ohio, and both of those areas have slowed.

Okay. And then, assuming that this is coming also out of your Ohio gas jurisdiction unit, I mean, is there, does that mean that when you guys sign up for new storage capacity and new pipeline capacity on Columbia Gas of Ohio and the gas transmission and storage system for utilities, does that mean there'll be incremental capacity available for the open market --for the utility?

Hard to translate it quite that way. Historically we've seen growth in peak day requirements, even with reduced annual consumptions, even with customer accounts that slow, we historically have seen it. We may see a slowing in the growth of peak day but we still have a considerable need for peak capacity and at least it's my view as I sit here today that I don't see any material impact on Columbia Gas transmission and other pipeline suppliers that would either free up strand capacity or provide capacity for marketing elsewhere. I think by and large, the portfolio remains as it is.

And then for the renewable power contract that you signed with (aberajola), is that in capacity or is that a, what type of contract is that? Is that an energy contract where you're paying a fixed dollar per megawatt hour delivered?

It's a PPA for capacity up to 100 megawatts.

How does that, what are you guys paying them, how does that competition work --

I'm going to have to get back to you on that. I don't have that detail at my fingertips, but we can provide you the details.

Okay, great, thanks guys.

And I'd just suggest, if you want to learn more, commission approval, there's an order on the website I'm sure you could obtain or we could provide it.

Okay. Thanks, I'll pull that.

Your next question comes from the line of Elvira Scotto with Bank of America.

Hi, guys. For your gas transmission and storage, all the projects you have outlined, can you give us a sense for what's your view here on cost escalation, what's -- how much of that can be passed on through your customers, and what's been locked in, and what are some of the things you've done to potentially mitigate some of this?

Yes. Like others, we've used a variety of techniques to try to manage. We have seen cost pressures and they've varied depending on the type of the project and location, but we have used a variety of techniques, arrangements with contractors, cost sharing and the like. Trying to ensure we manage the project properly, but we also have worked on the shipper side to structure contracts to try to pass along or share increases that we might incur on projects. So each one of these tends to vary both on the construction and the commercial side.

And what are you seeing in terms of labor, availability for projects?

I think we're seeing general availability, but again the demand for specialized labor and resources has increased significantly.

Okay, thank you.

I would mention that on Millennium Pipeline, that we're currently constructing -- actually the partnership is currently constructing , there are probably over 1,000 workers on that project alone this summer. Just to give you an order of magnitude of the effort and how many folks are involved

Right. Right. Okay, thank you very much.

Thank you. Hey, we do have a bit of a clarification or response for Mike O'Donnell on the question that Jonathan Arnold asked about taxes.

Thanks, Bob, Jonathan if you're still on, the 36.7% effective tax rate relates to the six month period. The calculation you did was for the quarter, and it was only 32% because the second quarter included about $1.5 million of AFUDC equity income, which is not taxable, and therefore not included in the effective tax rate. So hopefully that will clarify that for you.

Thanks, Mike

And your final question comes from the line of Carl Kirst of BMO Capital.

Hey, guys, just two quick follow-ups.

Sure.

The first, and this kind of goes back to the customer count we were talking about earlier. But with respect to meter shut-offs, is, is that running about the same rate it has historically, or was that picking up year-over-year as somewhat of kind of a leading indicator, or no?

Yes. That number is up as you might expect, given the economic conditions. So it has ticked up. We have seen higher shut-off rates, but they have ticked up. And I don't have the number at my fingertips, but it is up.

Okay, okay. And then just really a clarification with respect to Ohio, the conservation program, the demand side management, I think, you mentioned it was something around the order of $25 million that we're hoping to get a rider put on. Is that $25 million the cost outlay from NiSource's side that we're just going to be getting back in, or is there a return of capital component on that, or is there kind of an estimation of, as you go out and spend perhaps usage continues to decline and there's somehow a true-up to it? I'm trying to get a better sense of what that is.

It's more along the lines of the first point you mentioned. It's a $25 million three-year program. So we spend it over three years. We then effectively collect it from the customers through the rider. We don't earn a return on the expenditures, though there is a carrying charge, cost of carry, cost of money component that would be reflected in the rider.

So I'm sorry, Bob, but just to make sure I understand, there's not an equity return component on that $25 million, I mean what --

That's correct.

-- in as much as you guys are going out to spend money to promote conservation, granted you'll get back what you spent, but it would still seem to me we have an issue of, if usage continues to decline, how does that get resolved?

You're probably aware of the Ohio rate case, in fact, all our rate cases reflect proposals to adjust rate design.

The rate design? Okay. So that's --

That's right and in Ohio, Columbia of Ohio along with other companies have been pursuing what we call [straight fixed variable] rate resign.

Okay, so in the Ohio settlement or otherwise, we should be looking for hopefully a rate resign change in that as well?

Exactly. That's a key component of the case. If you're interested, you can look at recent precedent for Duke's Gas Company in Ohio where there's been a shift to straight fixed variable like rate design. You've also seen that issue proposed in Dominion East Ohio case, currently being litigated.

Appreciate the clarification, thank you.

Yes.

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

Again, we thank you for your participation, your interest and ongoing support. We'll be back at you with news and developments as they occur. So thanks so much. Have a great day.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have an excellent week.