NiSource Inc (NI) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 NiSource's earnings conference call. My name is Erica and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). I would now like to turn the presentation over to your host for today, Mr. Glen Kettering, Senior Vice President of Corporate Affairs. You may proceed, sir.

Thank you, Erica, and good morning to everyone. On behalf of NiSource I would like to welcome you to our quarterly analyst call. Joining me this morning are Bob Skaggs, President and Chief Executive Officer, Steve Smith, 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 NiSource's fourth quarter and year-end 2008 financial performance and provide a general business update. During the course of the call, we will be referring to certain supplemental materials which are available to those accessing our call via webcast and which have been posted on the NiSource website at NiSource.com. Following Bob's prepared remarks, we will open the call to your questions.

I would like to remind you that some of the statements made on this call will be forward-looking statements within the meaning of the Safe Harbor Provision 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 and risk factors sections of our periodic SEC filings. And now, I will turn the call over to Bob Skaggs.

Thanks, Glen, and good morning. Thanks for joining us today as we report NiSource's fourth quarter 2008 year-end earnings, provide a summary of the progress we are making on our balanced plan to enhance long-term shareholder value, and update you on the positive concrete steps we are taking to maintain NiSource's financial flexibility in the current market environment. On this latter subject in particular, I know there's a significant level of interest within the financial community and elsewhere. And although I'll discuss this in a bit more detail later in my remarks, I wouldn't to make a few key points at the outset.

As our 2008 results attest, the NiSource team has demonstrated the ability to develop a disciplined transparent plan and then execute against it. Looking to 2009, I can assure you that working with our Board of Directors, we have a solid detailed plan in place to effectively manage through the current environment. And as we execute the plan which is happening as we speak, I'm confident that we will be successful in advancing our core business strategy, meeting the Company's financing needs and maintaining both our investment grade credit ratings and our dividend.

With that, let's turn for a few minutes to 2008 which was a very solid year for NiSource. Across virtually every key dimension of our business, our teams made excellent progress. We hit key financial and business targets, and continued building a foundation for sustainable investment driven growth. Although it's understandable that these achievements can be obscured somewhat by the challenging economic and financial conditions that we and other companies face, I believe that by almost any measure, the progress our team made in 2008 was truly exceptional.

As you can see from today's news release, NiSource delivered net operating earnings nonGAAP of $348.5 million, or $1.27 per share for the 12 months ended December 31, 2008. Those results were in line with our 2008 guidance of $1.25 to $1.35 per share, and compare with net operating earnings of $363.5 million or $1.33 per share for year-end 2007. Our consolidated operating earnings, again nonGAAP for 2008, were $917.5 million, compared to $979.7 million in 2007. Please refer to Schedule II of our earnings release for reconciliation of GAAP operating income to operating earnings. For the fourth quarter of 2008, our net operating earnings were $126 million or $0.46 per share compared with $111 million or $0.41 per share for the same period in 2007.

On a business segment basis, we continue to see solid core business results combined with high quality execution on a number of key initiatives. In our gas distribution segment, NiSource teams advanced an extensive array of infrastructure enhancement programs, and complementary, regulatory and commercial initiatives. Columbia Gas of Pennsylvania achieved a unanimous $41.5 million rate case settlement which became effective in late October. That case, is synchronized with a $1.4 billion 20-year gas distribution replacement program.

Columbia Gas of Ohio received regulatory approval in December of its landmark rate case settlement that provides for an additional $47 million in annual base revenues. That settlement also establishes an enhanced rate structure and provides new demand side management and low income customer support programs. Notably, the settlement also contains a tracking mechanism that is closely linked with Columbia of Ohio's $2 billion long-term infrastructure enhancement program. Columbia of Ohio also received approval to recover costs associated with its three-year, $150 million riser replacement program. We also advanced our regulatory plans in Maryland where we expect resolution of a rate case in the second quarter of this year. And at Columbia Gas of Kentucky and Bay State Gas, we are moving forward with first quarter and second quarter rate case filings respectively. Our gas distribution team was also active on the commercial front where we landed an agreement to service Dominion's plan 580 megawatt Bear Garden electric generating station in Virginia.

From an earnings standpoint, gas distribution operations reported operating earnings of $326.9 million for 2008, compared to $345.2 million in 2007. Net revenues, excluding the impact of regulatory trackers, increased $25.7 million, primarily attributable to regulatory and service programs including impacts from rate cases. Operating expenses were somewhat higher year-over-year reflecting increases in employee and administrative costs, depreciation costs and other taxes. Shifting to NiSource's electric segment, our Indiana team made progress on a number of fronts as we continue to advance our plan to rebuild and reposition ourselves for the future.

One of the most significant achievements was the acquisition of the $330 million, 535 megawatt Sugar Creek combined cycle generating facility. As I've noted in past updates, the purchase of Sugar Creek was a key step in addressing NIPSCO's near-term generating capacity needs. As we've also reported last year, a NIPSCO team was successful in crafting an arrangement to dispatch the Sugar Creek facility into the Midwest Independent Transmission System Operator or MISO, commencing December 1, 2008, thereby allowing the plant to begin directly serving NIPSCO's nearly 0.5 million electric customers.

The Sugar Creek dispatching into MISO, NIPSCO amended it's previously announced two-step electric base rate filing; it's first in over 20 years I might add, to incorporate a more streamlined implementation proposal. Under the current proposal, NIPSCO is seeking a single rate adjustment of almost 10% or about $85 million annually. On the procedural front, hearings in the rate case began early last month, and the proceeding is expected to be completed and new rates placed into effect late 2009 or early 2010.

I know that many of our stakeholders are keenly interested in the outcome of the NIPSCO rate case and we will certainly provide updates as we move through the year. Without question, successfully revolving the NIPSCO proceeding is one of the key priorities for me and the entire Indiana team in 2009. Lastly, I'd like to note that NIPSCO also filed a proposal to expand energy efficiency programs available to its electric customers. Among other approaches, these programs may take the form of direct load control programs, energy efficiency rebates, and advanced metering.

From an earnings standpoint, electric operations reporting operating earnings of $220.2 million for 2008, compared with $283.1 million in 2007. Lower net revenues and hiring operating expenses both contributed to the lower operating earnings. Net revenues decreased by $21.6 million, due to lower wholesale residential and commercial margins and nonrecoverable purchase power in MISO-related costs. These decreases were partially offset by incremental revenues from the new Sugar Creek plant, increased industrial margins and the impact from last year's settlement relating to purchase power. Operating expenses were up $41.3 million due to higher employee and administrative costs, electric generation and maintenance expenses, including expenses associated with the Sugar Creek facility, and higher depreciation costs. The higher depreciation costs included a one-time $8.3 million adjustment recorded by NIPSCO during the second quarter of this year.

Shifting to NiSource's gas transmission and storage or NGTS segment, we continue to see good progress on our pipeline and storage strategy of developing new growth projects while maximizing value from our existing assets. NGTS' market close of 2008 with the launch of the 182-mile millennium pipeline jointly owned by units of NiSource, National Grid and [DT] Energy. Millennium immediately began playing a key role in meeting the energy needs of New York and United States Northeast. NGTS also increased overall system throughput during 2008. We saw increased transportation deliveries on Columbia Gas transmission from the first full year of [Hardy] storage field operations, as well as incremental demand revenues from new interconnects along the Columbia Gulf and Columbia Gas transmission systems.

NGTS also renewed several key long-term contracts during 2008. In terms of new growth projects, construction is continuing on the Eastern Market Expansion. That project is slated to add nearly 100,000 dekatherms per day of fully described storage and transportation services by this spring.

We also received Federal Energy Regulatory Commission, or FERC approval, for the construction of the fully-subscribed Appalachian Expansion project, which likewise will add 100,000 dekatherms per day of transportation capacity in the fourth quarter of 2009. Planning is continuing for the Ohio storage project which would add about seven million dekatherms of storage capacity and 100,000 dekatherms per day of deliverability to the Columbia Gas transmission system. We are targeting 2009 in service on that project as well, pending FERC approval.

I'd also note that the NGTS team is continuing to work on its inventory of projects designed to leverage our unparalleled pipeline and storage footprint in the Appalachian Basin's Marcellus Shale development areas. One final note which you might expect, the pace of pipeline project development has been affected by the recent economic downturn. Although we are seeing some near term softening in the development cycle, I'd emphasize that our NGTS team remains very active in the market and we will be well-positioned to originate and advanced new projects as market conditions improve.

I would be remiss if I didn't also point out that our NGTS team notched an impressive year while confronting a series of unprecedented challenges including hurricanes, massive flooding and the catastrophic destruction of an entire mainline compressor station by a tornado. The response of our team to these challenges was truly exceptional.

Looking at the 2008 financial results, gas transmission and storage operations delivered $376.7 million in operating earnings for 2008, up from $371.8 million for 2007. This increase was primarily from lower operating expenses which were down $4.1 million due to lower legal reserves and insurance costs, partially offset by higher employee and administrative expenses. Overall, NGTS net revenues were $2.1 million lower, due to a $9 million legal settlement that reduced net revenues in the fourth quarter of 2008.

Excluding this settlement, net revenues were up due to increases in firm capacity reservation fees, higher Columbia Gas transmission storage revenues, new Appalachian supply interconnects and incremental revenue from transportation agreements on both Columbia Gulf transmission and Columbia Gas transmission. Those revenue increases were partially offset by lower short-term transportation and storage services, and commodity margins. Equity earnings were up $2.9 million, due to increased earnings from millennium pipeline, partially offset by increased interest expense from Hardy Storage.

Earnings in NiSource's other operations category for 2008 were $1.8 million, essentially flat with prior years results. These results primarily include commercial and industrial gas marketing activities and they no longer include earnings associated with the Whiting Clean Energy facility which we sold to BP Alternative Energy last June. In our other items category, interest expense decreased by $27 million during 2008 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 facility. Other net income of $0.9 million, compared to a loss of $6.4 million last year, due to lower costs related to the sale of accounts receivable. The effective tax rate of net operating earnings for 2008 is 35.8%, compared to the 2007 rate of 36.3%.

Before moving to a discussion of 2009, I'd point out additional steps we took during 2008 to strengthen NiSource's financial foundation by divesting certain nonstrategic assets and addressing remaining legacy issues. In particular, I'd highlight the sale of Northern Utilities and Granite State Gas transmission to Unitil Corporation for about $200 million including working capital, the disposition of certain nonstrategic Columbia Gulf assets in the Gulf of Mexico. As I mentioned earlier, we also successfully completed the sale of the Whiting Clean Energy facility to BP Alternative Energy for approximately $217 million, including working capital. And last but not least, we resolved the Tawney class action litigation which involved natural gas royalty claims against Columbia Natural Resources, a former NiSource subsidiary.

We also took important steps during 2008 to secure financing and strengthen NiSource's liquidity position. During the second quarter, we successfully issued $700 million of senior unsecured debt at favorable rates. In September, we supplemented our $1.5 billion revolving credit facility that extends to July 2011, with a new six-month $500 million credit facility. That facility helped ensure ample liquidity to accommodate the Company's seasonal cash flow requirements and to provide near-term funding flexibility related to the Tawney settlement. As mentioned in this morning's earnings release, as of year-end 2008 approximately $750 million of aggregate credit capacity was available under these facilities. We also successfully refinanced approximately $250 million in NIPSCO pollution control bonds in August 2008 and renewed a $200 million accounts receivable facility in December.

In terms of year-end liquidity, as reflected on the cash flow statement included as page 21 of today's earnings release, our net cash from operating activities for the 12 months ended December 31, 2008, was $563.8 million, a decrease of nearly $200 million from year-end 2007. A number of working capital items contributed significantly to our ending cash flow balances for 2008, including higher average prices of gas, as well as the effective colder than normal weather in late 2008 on year-end receivable balances. As we look forward to 2009, we expect the Company's working capital requirements to return to more normal levels, thereby materially enhancing our liquidity position.

Turning now to our 2009 agenda, in a nutshell, our plan for 2009 is to proactively and aggressively address the issues created by the global financial and economic downturn while continuing to advance our core business plan. As I've mentioned in prior updates and again this morning, NiSource's executive team and the Board of Directors have been closely monitoring developments, assessing potential impacts on our business, and developing plans to effectively manage through this period. As would you expect, a key focal points relates to continued access to credit markets on reasonable terms. We are also concentrating on the impacts of the economic decline on the industrial and other markets we serve, and increases in pension expense and funding requirements.

Although these issues certainly aren't unique to NiSource, they represent a set of challenges that we need to and we will thoughtfully and proactively manage. First and foremost, maintaining financial flexibility and adequate liquidity is a key near-term priority and we've developed a range of strategies to effectively address NiSource's liquidity needs. The combined effects of these initiatives has been to reduce the Company's total projected 2009 financing requirements from nearly $1 billion to approximately $500 million.

These strategies include reducing planned capital spending for 2009 from slightly in excess of $1 billion to $800 million. I would refer you to slide one of the supplemental materials for a summary of our capital expenditures for 2008 and a breakdown of our planned expenditures for 2009. You'll note that our 2009 investments are split roughly evenly between growth for revenue generating projects and maintenance projects.

As I alluded to earlier, we also expect significantly reduced working capital requirements in 2009. These reductions are expected to generate at least $250 million in additional liquidity for the year, a reduction that quite frankly, we regard as somewhat conservative. We've also repurchased about $33 million of the $450 million of debt scheduled to mature in November, 2009, as well as $67 million of debt scheduled to mature in November, 2010. And we are planning to adopt an expanded dividend reinvestment plan which is expected to reduce cash requirements by $15 million to $20 million annually.

I'd also note that while not reflected in our forecast, we are closely watching the process surrounding the Federal stimulus legislation. In particular, we estimate that the bonus depreciation measure which was included in the bill passed by the House is included -- and is included in the proposed Senate bill, would generate approximately $100 million of incremental cash for NiSource in 2009. I'd point out that the projected $500 million financial requirement for 2009 includes the refinancing of outstanding debts scheduled to mature in November 2009 and all payments associated with the Tawney settlement. I would direct you to slide two of the supplemental materials for a summary of our sources and uses of funds for 2009.

I'm pleased to report this morning that we are well along in meeting the $500 million financing requirement for 2009. First, we plan to issue unsecured corporate debt in an amount of up to $500 million. We already have commitments in hand from a syndicate of banks for the issuance of approximately $265 million in two-year term debt maturing in 2011.

I'd add that this term debt is on attractive terms. The initial closing for this facility is targeted for later this month. The arrangement will include a so-called accordion feature, pursuant to which additional banks can elect to participate through April of this year. We expect the facility will eventually be up to $350 million. We will of course provide you with details on the ultimate level of this facility in future updates.

Second, we are working towards issuing up to an aggregate of $350 million of additional secured and unsecured debt at a number of our utilities and at Columbia Gas Transmission. Based on these and other steps we are taking, I'm confident that we will be successful in maintaining NiSource's financial flexibility and adequate liquidity going forward. With the steps we've taken and the measures in process, we are well on our way to meeting this year's financing requirements. At the same time, we are also actively focused on our 2010 financing requirements and we will take advantage of market conditions to address those needs on an aggressive and opportunistic basis. We've undertaken a number of additional initiatives to mitigate the effect of the current economic downturn including reducing O&M expenses, limiting the hiring and replacement of employees, freezing base compensation for NiSource's senior executives, and postponing most exempt employee pay increases.

Finally, let's shift to NiSource's 2009 earnings outlook. Slide three in the supplemental materials contains a high level of waterfall charts, showing key earnings drivers from 2009 to -- from 2008 to 2009. You can see that the 2009 earnings will be positively impacted by a number of items including increased revenue from customer growth and pipeline projects totaling $0.11 per share and favorable regulatory outcomes in Pennsylvania and Ohio which are expected to contribute about $0.16 per share.

On the other side of the ledger, like many of our peers in the utility industry and indeed large employers in general, we are seeing a significant increase in pension expense due primarily to the deterioration in global securities markets. For 2009, pension expenses are expected to be about $100 million higher than they were in 2008, reducing forecasted earnings by $0.24 per share. I would add parenthetically that our pension asset while historically has been quite strong, we entered 2008 in a fully funded position. For 2008, our plan assumed asset performance of 9% while actual returns, like those of many companies, were down about a third.

Yet another additional note, our regulatory teams are actively developing plans to ensure appropriate treatment of these much higher pension numbers. Back to the waterfall chart, as a result of the Tawney settlement payments and other factors, we expect a year-over-year increase in interest expense of approximately $0.12 per share. Lastly, we expect that the economic downturn will negatively affect 2009 earnings by about $0.05 per share, and increased property taxes and other costs will amount to about $0.08 per share.

As a result of these factors, NiSource's net operating earnings, again nonGAAP, are expected to fall within a range of $1.00 to $1.10 per share for 2009. One footnote, on a GAAP basis, the range for basic earnings per share from continuing operations is expected to be the same as net operating earnings. The decline in expected earnings from 2008 to 2009 effectively resets our earnings baseline in our path towards achieving long-term sustainable growth; something we remain committed to delivering for our many stakeholders.

Having said that, and although we must deal with the reality of the one-two punch of increased pension expense and the pressures resulting from the weak economy, items largely out of control, I'd hasten to add that our core business remains sound and our progress real. To that point, but for a few extraordinary items such as pension expense and interest associated with the Tawney settlement, we would be right on top of the three-year earnings trajectory that we shared with you in late 2007. If anything, I'm even more convinced that NiSource's portfolio of low risk regulated businesses can deliver 3% to 5% earnings growth over the long-term.

In closing, I'd like to revisit a point I made at the beginning of my remarks. Although somewhat obscured by today's financial and economic conditions and the headwinds they present for the coming year, 2008 was indeed a strong year for NiSource. We executed against an aggressive, highly visible plan in a tough environment.

Going forward we remain strongly committed to maintaining a solid foundation -- financial foundation and to executing against our core business agenda, synchronizing infrastructure investments with appropriate regulatory and commercial activities. If we can do that, and I'm confident we can do that, we will generate long-term sustainable value for NiSource's shareholders. As always, we remain committed to communicating with our investors in a transparent and timely manner regarding these and ongoing efforts. Ongoing updates will be provided through our analyst calls and news releases posted on NiSource.com. Thank you for participating today and for your continued interest in and support of NiSource. At this point, Erica, I would like to open the call to questions.

Yes, sir. (Operator Instructions). First question comes from the line of Shneur Gershuni. You may proceed.

Good morning, guys. House the weather?

Frigid. It is absolutely frigid. We had a -- as you know, a very, very cold January. And February has started like gangbusters.

That should help cash flow from operations for next year.

That's right, and the system is holding up well so you're absolutely correct.

Okay. Just had a couple of quick questions here. Thanks for putting out the slides that you've got this morning. I just want to reconcile some of the sources and so forth that you had put out. In your comments, you just described a potential $265 million facility with an accordion feature to $350 million and then also talked about another $350 million of secured and unsecured debt being raised at the utilities as well as, too. That totals about $700 million. Where does that come into sources? Is that part of the $500 million?

That's correct. I would just again footnote that the bank term loan that we discussed this morning, we do have firm commitments of $265 million. Again those are firm and the expectation is that it will indeed expand to $350 million. But, you're right, that as well as the unsecured and secured financing at the subsidiary level would be reflected in the $500 million.

If I'm reading this correctly -- if you take everything off the way you'd like to, your sources is really not $1.7 billion, but really could be as high as $1.9 billion?

It could be and again, what we said in the release and my prepared remarks, up to $500 million unsecured at corporate, up to $350 million at the subsidiaries. We'll look at this as the situation unfolds. We are also mindful that we are financing that would be required in 2010 and so again, we'll factor that into the calculous.

Great. You had mentioned in your prepared remarks that you had entered 2008 with a fully funded pension plan. There had been some talk I think in the past about converting the plan to a 401(k) at some point. Where do you sit on your funding status right now? Do you pass the 94% test? How does that impact plans for the future to convert it to -- a from a defined benefit to a 401(k)?

Let me start with the last part of the question and then I'm going to ask Steve Smith, our Chief Financial Officer, to talk a little bit more detail, give you a little bit more flavor about the pension fund and where it stands. We've not announced any plans to convert from a defined pension plan to a 401(k) plan at this point. Like every other company in the United States, we continue to look at our pension benefits.

We are committed to ensuring our employees have competitive wages and benefits. We've not made any decision to move in that direction at this point. We continue to review everything very, very closely. With that, Steve, maybe you can provide a little bit more color and flavor on our pension fund.

Thanks, Bob. I'd also point out that we are moving to 100% cash balances, post 2010 on our baseline pension. Our PBO estimated at the end of 2008 is around $2.1 billion. And our current funding balance is estimated at around $1.5 billion. We are around 70% funded. And we target by the end of the year through our funding requirements that we calculate with the help of our actuaries, that we will be shooting for over 80% funded by the end of the year.

Did that require you to make a contribution to the fund this year?

That's correct. We are anticipating about $100 million of funding requirement for the pension plan, which is included in the slides that we showed you for the sources and uses of cash for 2009. $100 million is what we estimate we will contribute for 2009 to get our pension over 80% funded.

And this is separate from the pension expense that you are taking to amortizing the difference, right?

There are two aspects of the pension. One is the expense piece which the Bob mentioned in the earnings waterfall. And the delta between 2008 and 2009 is approximately $100 million or (inaudible) per share. There is also a funding piece which is expected to be $100 million in 2009.

Great. Thank you for the clarity and if I can just ask one last question.

Certainly.

Given the economic environment right now, if you can talk a little bit about bad debt expense track customers and so forth, given that we've got heating bills coming in and people without money and so forth.

Very good question and just a couple of overview comments and a little bit more detail. Number one, and you and others are probably aware that we do have a bad debt tracking mechanism in Ohio. We also have a form of tracking mechanism in Pennsylvania for so-called customer assistance payments and programs. We also have an array of low income programs to help our challenged customers in dealing with their bills.

And I'd also note that the Federal [Light/Heat] program is funded in excess of $5 billion. That's also a source for helping our customers manage these bills. We have seen some upward pressure on uncollectibles over the past 12 months or so, but quite frankly, it has been at a manageable level. It has not been at a spike like we saw in 2005. Again there's a bit of pressure, but it's a pressure that we cannot -- it's a pressure that we believe is manageable in the current environment.

Great. Thank you very much.

Your next question comes from the line of Carl Kirst from BMO Capital. You may proceed.

Good morning, everybody.

Good morning, Carl.

Actually two questions, [almost near], I just want to make sure I'm understanding this correctly. First on the financing, with respect to the verbiage of looking to issue unsecured corporate debt up to $500 million, that is inclusive of this two-year facility that we are negotiating right now?

That is correct.

If we are then looking at the $350 million of secured unsecured, I'm not looking to parse words here. But should we be thinking about that as $150 million in unsecured and $200 million in senior mortgage bonds? Or just, gee, if $350 million is done, we only really need $150 million more left to do for the charts.

It would be the latter, Carl.

Okay.

Our requirement for 2009 is $500 million. We are already $265 million towards our way there. And we anticipate getting up to $350 million out of this bank term loan that we've got in hand. That would leave $150 million of additional financing required for the balance of 2009 to deal with our maturity in November of 2009 of approximately $450 million. But we have paid back and bought back some of that so it's closer to $430 million. And that would also include the amounts required for Tawney.

Great, appreciate the clarification.

A little bit of editorial. Obviously, we are still focused on 2010. We will be watching conditions very, very closely to see where we might opportunistically act on 2010. We think this bank term loan, to say the obvious, goes a long, long way in addressing the need. We think it also provides flexibility to use the other tools opportunistically to deal with the balance of 2009 and 2010.

Bob, can you say, is that going to be floating, fixed?

I'm glad you asked that. I mentioned in the prepared remarks attractive terms and the all-in cost of the facilities is about 6%.

Much better than your debt.

Your silence was disconcerting. I didn't know if you were still there or what.

That's just a smile. That's just a smile.

We are very pleased with the terms.

Moving back to the pension, a few things here. One, I did not catch the numbers, Steve, you throughout as far as the year ending assets in PBO. If you could reiterate that both on the pension, as well as if you have it for the welfare plan?

I don't have it for the welfare plans off the top of my head, but we can certainly get that for you. With respect to the base pension, our PBO is estimated to be around $2.1 billion at the end of '08. And our total funded balance is estimated around $1.5 billion so that puts us about 70% funded.

That's much different than last year, right?

Yes. Last year, we were essentially fully funded.

Last year, okay. I'll follow up with the welfare. The last question and then I will jump back in queue, is looking at NIPSCO and understanding we have the rate filing underway and it's a 2007 test year. And you look at the difference between -- on the electric utility, the 2007 and 2008 EBIT line and recognizing 2009 is going to be even more of a challenge. Does there get to be a point where it becomes unpalatable enough that you are almost pancaking a rate filing right after the current one is resolved?

I think it's premature to get to that point. I would just add that we feel good where the case is currently positioned. As you know, we are in hearings. We certainly believe that bringing Sugar Creek into MISO helps the outlook for the case. We are not uncomfortable where the case stands at this point.

If anything, I'd say it's consistent with our general outlook for the case. Clearly, industrial volumes will be under pressure. Clearly, we have we have a dated number for pension expense. And those things could -- could indicate the need for another case at some point, but we are no where near that point as we stand here today, Carl.

Appreciate the thoughts. Thank you.

Your next question comes from the line of Mark [Finch] from T. Rowe Price. You may proceed.

Hi, guys.

Hi, Mark. Thanks for all your hard work. We appreciate that. Thank you.

I just wanted to go into three separate items. In the past, you mentioned that you may be thinking about doing some budget billing initiatives as things go forward.

Yes.

Is there potential there and could you elaborate on that a little bit?

Yes. With regard to working capital in general, we have a host of strategies, a host of tactics that the team is pursuing to manage cash working capital. As you and others recognize, the drop in gas prices is a huge help to cash and cash working capital. But very much related to that is appropriate management of our gas costs recovery mechanisms, proper management of our monthly and budget billing to get those more in sync with gas prices and to ensure that we minimize under collections. And so Jimmy [Statement and Ilene Odem] and the gas team are working diligently to ensure that they optimize all of those. Not only budget billing, but the whole array of gas cost management techniques, the team is trying to pull those levers. And as you know, they've had success in the past in managing things of that nature.

In your assumptions regarding your working capital, what did you guys assume as the cost of injection -- gas injection for the spring, summer? What gas prices are you thinking about?

Appreciate the question.

Yes, thanks, Mark. This is Steve. With respect to 2008, our weighted average cost of gas was around the $10.50 level per Mcf. And if you look at our forward thinking with respect to 2009, it's closer to the $7.50 level per Mcf so a benefit of about $3.00 per Mcf. I would point out --

Currently, the -- it's quite a bit lower, right?

Right. I was just going to mention that. The strip is closer to $6.50. That would provide additional benefit to us with respect to our working capital contribution through the balance of 2009.

And then one last thing, you guys have -- when you've been building the storage up and around the -- in the region of the Marcellus Shale, you guys own the mineral rights to some property in and around your storage. Is that correct?

That's correct. It is, and we have been evaluating those positions. Certainly one of the options that we've been considering is monetizing those positions. Chris Helms and team continue to work on that as a potential opportunity.

Have you guys disclosed the acreage -- the rough acreage that is -- that you have? I can't recall whether I saw it.

We have not disclosed that, Mark, at this point.

Okay. All right. Thanks a lot, guys. Thanks again for your hard work. Good progress.

We feel very good about the progress the team has made in relatively short order. Again, we believe that we have enhanced flexibility.

Great. Thanks. Bye.

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

Good morning. Just want to make sure I want to understand the sources and uses. What would be the ending liquidity at year end -- at year end '09, given these sources and uses and given your anticipated financing?

I think in terms of our facility -- our primary liquidity facility, the $1.5 billion that we have in place through July 2011, probably be around $1 billion borrowed.

And again, that's going to largely track gas in inventory at year-end. That's what drops that number and again, it peeks out November and begins to decline thereafter.

By December '09, you guys would expect to have $0.5 billion of ending liquidity?

Or thereabouts, yes.

Thereabouts.

Just to point out, we haven't included that in the sources and uses. We believe we have adequate liquidity to manage that through our primary revolver. We haven't included that in the bar charts that we showed you.

And do you think that that's enough or do you want to try to maybe add a little bit more to that ending liquidity just to give yourself a little bit of insurance?

We believe that we are in good shape at that level. I'll remind you that one of the primary reasons for the six-month facility that we entered into in September of last year was specifically designed to deal with Tawney. At the time we entered into it in September, we did not know whether or not we were going to be successful in achieving the settlement with Tawney. The amounts that could have potentially been required to be paid were approaching $450 million. We want to do create enough flexibility through this six-month facility to deal primarily with the Tawny issue. With that behind us, we feel we are in an adequate position with our existing working capital facility.

Okay. Remind us of what the restricted cash on the balance sheet is for at the end of the year?

That's largely for the marketing activities at TPC Energy U.S.A.

A TPC margin.

Okay. Got you. And then in terms of when you guys repurchased some of the debt outstanding more recently, did you -- were you purchasing it at markets prices or did you have to purchase at par?

No, we purchase at market prices which were below par.

Okay. Got you. And in terms of the pension expense of $0.24, assuming that the plan assets over the next, call it two years, returns back up to 100% funded through better market conditions, would that $0.24 completely unwind over time?

It's a function of a number of items that we work with the actuaries on every year, and recalculate what we believe the funding requirements will be and what the expense impacts would be, relative to performance in the market based on our assumptions of what we think the plan assets are going to return over the balance of the year. Historically, we assume 9% return on plan assets. Going forward, we are assuming 8.75% return on assets for 2009. If the market does substantially better than that, it will favorably impact the actuarial calculations that come up with your expense for 2010. If the market does significantly worse than that, that would also have a negative impact on the actuarial calculations for 2010.

Faisel, as you noted and I noted in my prepared remarks, our regulatory teams are busy addressing this issue.

Do you guys think you will be able to get recovery of some of these -- some of this higher pension expense?

We certainly believe that these costs are recoverable. They've historically been recoverable. They are clearly [cost] prudent and reasonable. We believe ultimately, again, it's going to be a question of timing and how you affect the recovery. 'veI mentioned that at Bay State, we do track pension expense. I also mentioned again this morning that we are in the process of developing another rate case at Bay State and in Kentucky.

Okay. Got you. In terms your storage levels right now for the utilities, where do you guys stand right now for the storage?

Our storage remains in good shape. As you know, we manage it very carefully. We tend to husband it for late season peaks. We are within the storage guidelines and tariffs that our upstream pipeline suppliers require so we are in good shape at this point.

Is there away you can gauge it? Are you 50% full, 40% full, anything like that or is that something you just --?

I can get those numbers and Randy can certainly provide those, but I can't recall, Faisel. We're right on the curve, but we typically plan for a February peak.

Thanks, guys. Appreciate the time.

Thank you, Faisel.

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

Good morning, guys. Had a quick question on the interest expense component of your guidance at $0.12 negative impact. What -- does that assume this 6% financing cost on the new facility for example, something more conservative than that? What are the other -- broadly, what are the other factors pushing that up considering that you are probably going to have less borrowings outstanding, as you pointed out on the term facilities?

Very good question. It does reflect the pricing that we suggested earlier so about all-in 6%. We've assumed about $300 million, $350 million facility. We've also assumed, as you would expect, additional financing in the year; again, consistent with what we laid out this morning. Those rates were higher than what we have embedded in the current capital structure.

I would also point out that last year in May, we issued approximately $700 million of debt. What you are going to see in 2009 is the full-year run rate for that bad debt issuance and you didn't see the full-year run rate in 2008 because it was issued in May.

Yes, a bit higher on the pollution control bonds and -- another example.

Those two, three items are the primary drivers behind the increase of $0.12 in interest expense year-over-year.

Then I think you mentioned that you thought you would have about $500 million of capacity under the revolvers available by year-end.

That's correct.

That that was based on an assumption of injections at around the $7 level?

That's correct.

If we move that more to a market level of where these injections might come, how much higher could that number be based off of current market?

It depends on a lot of factors Jonathan. The rule of thumb we have is that for every dollar increase or decrease in the [way cogs] over the balance of the year, it can generate -- to the extent it's $1.00 lower, approximately $50 million of working capital benefit. To the extent that it's $1.00 higher, it would be a use of an incremental $50 million. That's a rule of thumb we have. But again, I will caveat that with there's a lot of ins and outs associated with that calculation.

Thank you. If I may on the regulatory initiatives, obviously you have -- I'm guessing that's mainly the cases that were resolved in 2008. I missed the prepared remarks so my recollection is that the NIPSCO rate case was going to get resolved sometime between the fall and spring of 2010. Have you made an assumption of any new rates at NIPSCO in this guidance?

No. Again, we've assumed consistent with what you just mentioned, late 2009 resolution or first quarter 2010.

There's no up or down in these numbers for NIPSCO?

That's correct.

With respect to the $0.16 that Bob spoke of in the waterfall for EPS, of that $0.16, approximately $0.06 is related to the Pennsylvania rate outcome in 2008 and approximately $0.10 is related to the Ohio outcome which was finalized in December of '08.

And finally if I could just ask one more. Obviously with the earnings level we are talking about this year, we are going to get to a pretty high dividend pay out ratio. How should we -- with some hope that you can recover some of the earning pressures like pension as we move forward, how should we think about the dividend -- timing of when you will next deliberate on it in that context?

We remain committed to the current dividend level. We certainly feel like we can support it. As we mentioned in the prepared remarks, we believe the business supports a growth rate of 3% to 5%. We believe that the overall business supports the current dividend.

Thank you very much, guys.

Thank you, Jonathan.

Your next question comes from the line of Brad [Linguini] from Fidelity. You may proceed.

Good morning, guys. I appreciate all the details you guys provided today on how you are going to address liquidity in '09. But I was just wondering if you've already shared these plans with S&P and -- because it seems like if you do execute on these, it would alleviate some of their concerns and stabilize possibly your rating?

Great question, again we appreciate the comments about the clarity and the information. We are glad it's useful. We've been in more or less constant communicate with Standard & Poors and Moody's and Fitch. To answer your question directly, yes, we are shared these plans as well as a six-year financial plan with all three of the agencies.

Like you, we are hopeful that they will receive this as a positive. They clearly are watching execution and we will leave it to them to discuss their views of the current situation, but we've been in very, very close communication with them.

Okay. On the $350 million on the op co-issuances or possibility thereof, just wondering if you could provide a little bit more color on possibly the timing you could see those? Also what is the total debt capacity you could see at some of these subs?

We are working on a variety of issues with regard to the subs. Clearly, we need to go through the process of indentures. We are going to have to obtain regulatory approvals in all cases, but -- for the pipeline. We need to do quite a bit of work and we've been doing that work since last year.

Second quarter -- late second quarter, we would be in a position we believe to move forward on these in a more formal way. That's the directional timing of when we would go about this. And in terms of capacity, I am going to defer to Steve on that and ask him to provide a comment or color around that.

With respect to secured financing, we believe that we have about -- up to $350 million of capacity across our utilities and at the pipeline. As a rule of thumb, we believe we could issue up to $350 million of secured financing.

It would be through a handful of smaller deals?

That's correct, yes.

And the last question I want to touch upon is the $800 million in CapEx, I was just wondering if that for a model sake, I would assume that would be a good run rate for the next few years? Or how do you guys think about that for the next couple of years?

We believe that it's a representative run rate for the neck couple of years. I would say, we are going to continue to evaluate that very, very carefully in light of liquidity, financial flexibility, and also the general economic conditions that we are. We think that's a reasonable assumption.

Great. Thanks, guys.

Thank you.

Your next question comes from the line of Steve Fleishman from Catapult Capital. You may proceed.

Hi, guys.

Good morning, Steve.

I think pretty much my questions were answered. The one thing -- this was asked, but I wanted to clarify. It seems like a lot of the issues that are pressuring 2009, are issues that are recoverable in rates ultimately? Such as pension in particular. It would be helpful to get a little bit better path of your plan on how to do that. It's not like you are a merchant company that doesn't have a way to recover your cost of service.

We certainly agree and I did touch on it a bit in a prior response. We believe that the pension expenses -- cash contributions are recoverable. We certainly have a good track record on recovering those costs and we see no reason why they shouldn't be recovered in a timely manner.

As you can appreciate though, Steve, it is literally a state-by-state review and a state-by-state process. The teams are carefully thinking through how best to approach it in each of the jurisdictions. And again, it is case by case and we just completed a couple of large cases. We've got to, again, think very carefully about how we approach this. But as would you expect, the teams do have a sense of urgency. They understand the pressures that this is presenting and they are going to go at it in an aggressive, but disciplined fashion.

Great. Thank you.

Thank you.

Your next question comes from the line of Robin [Linaie] from JP Morgan. You may proceed.

A lot of my questions have been answered already, but I just have a few things I want to do clarify.

All right.

The two-year term loan, that's on a fully unsecured basis?

That's correct.

Now, assuming you get to $350 million on that facility, you will be looking to come to the bond market to bring the difference up to the $500 million so $150 million, $200 million?

That's correct, yes.

Okay. Now, in terms of your ratings, you mentioned you've been in constant communication with them. Does adding secured debt at the subsidiaries here, at what level does that begin to jeopardize your ratings?

We don't believe that this level puts any pressure on the ratings. We certainly haven't had any indication of that and this is a relatively modest level of financing at the subsidiaries. The term structural subordination has not really been mentioned to us and we feel relatively comfortable at this level.

Is that $350 million capacity that you mentioned before, is that a guideline set out by the agency?

No.

Okay.

In fact, I do believe there's a bit of a split of opinion on the agencies about subsidiary financing, whether it really does constitute structural subordination or not. There's not a bright line that we're aware of.

Okay. Thank you.

Your next question comes from the line of [Bill] Arnold from King Street.

Hi, guys. Just, one on the rating agencies. S&P, I believe, laid out the FFO to total debt metric that they were really focused on. From what yo'u've laid out, I don't think any of that really improves FFO or total debt. Could you just talk about that --if I'm understanding that wrong?

Again, the agencies have been looking at projections that we've provided for some time. They are looking at a bit of a different data set because they've had the benefit of looking at long-term plans that provide a lot of detail. In our discussions, our impression was that they viewed this current approach as being an overall improvement and being responsive to the concerns that they've laid out in their published reports. Again, they are going to have to speak to the current situation, but our impression has been that they can consider this responsive and a step in the correct direction.

Okay. Then on the $350 million of capacity, is the bound -- the secured debt carved out of net percent intangible assets? Or is there another bound that you've referenced to go get to the $350 million of capacity?

That's a complicated calculation obviously,y but just a quick answer would be that we have room under that cap test of 10%.

Right. What I'm getting at is, say we get to 2010 and you've got the $1 billion of maturity, assuming you don't have the rating agencies just saying to you, if you do this we are going to downgrade you. Excluding that event, within your indentures, do you have the ability to refinance the entire $1 billion and make that secured debt?

I would say that's a bit of a stretch to do the whole $1 billion on a secured basis. But we have lots of tools available to us other than secured debt as well, private placements, unsecured.

I was just going to inject that as well. We believe that we have a broad array of tools to use. Again, we feel like the announcement today is a significant step forward and demonstrates that we have access and have flexibility. As conditions unfold, we are going to use that flexibility to address this in a thoughtful way.

And I would also point out that with respect to the $1 billion maturity in 2009, based on the purchases of debt, it's $933 million that will be maturing for 2010, sorry.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of [Natalie Petrie] from Allstate Investments. You may proceed.

Hi, guys.

Hi, Natalie.

How are you?

Fine, thank you.

Most of my questions have been answered on the call, but I just have a few follow ups. Does the term loan that you are talking about, the $350 million, that's at NiSource Finance, correct?

That's correct.

That would be the issuer. Then with respect to issuing at the subs, at the [op-cos], will you then lend those proceeds to the parent via cash sweep or will that be kept down at the op-cos?

It will be kept down primarily at the op-cos.

Just to clarify, because it says here that the op-cos will be in a number of utilities in Columbia Gas Transmission, do you think NIPSCO is the leading other op-co or is it spread across all the other LDCs?

I think it's spread pretty evenly across all the other LDCs, Natalie.

Would you be hitting the private placement market for these or -- just given the small deal size?

Potentially, yes. That's one of the options we have open to us. We've been exploring those opportunities in parallel as we move forward.

Okay. I know you mentioned that when someone asked a question regarding pensions, that you are possibly preparing rate cases for Bay State and Kentucky. Outside of NIPSCO, you are pretty much done with the large rate cases though -- the large rate cases that you've been looking for?

Generally speaking, that's correct. We did mention and we've mentioned consistently, in Pennsylvania, we've been working on legislation that would enable tracking mechanisms for infrastructure investments. And that if legislation was not enacted, we would be carefully considering yet another case in Pennsylvania.

And then still, there's no decoupling in any of your LDCs, right?

A significant move in Ohio to what's called levelized rate making over -- levelized rate structure over a two-year period in Ohio. That was a significant part of the settlement resolution we just structured in Ohio. (multiple speakers)

So that --

Very significant, yes.

That has some rate design to it.

Yes, very much so. Randy can provide you details on that significant movement there. In Massachusetts, the commission has been actively considering decoupling rate design proposals. We will be filing in Bay State during the second quarter and as would you expect, we will address rate design in Massachusetts.

In Pennsylvania, the last settlement that we had there -- the most recent settlement we had in Pennsylvania, a significant amount of that increase was reflected in the customer charge. In a form, rate design, decoupling, however you want to characterize it, it was reflected in Pennsylvania. I'm sorry to be jumping all over the board. Our prior rate case in Kentucky, the entire rate increase was also reflected in the customer charge. That rate case which will be filed at the end of the first quarter, we'll be talking once again about rate design.

Okay. All right. Thank you so much.

Thank you.

Your next question comes from the line of Raymond Lee from Goldman Sachs. You may proceed.

Thank you. Most of my questions have been answered, particularly related to op-co debt. A couple of things high up. In terms of the $0.5 billion dollars bank line that expires in March, is that your assumption that that goes away at the end or do you -- ?

That's correct.

That's correct.

Okay. And then the other thing, if you could help elaborate a little bit more is -- particularly the industrial road. I know you do have exposure to the steel sector. Can you talk a little bit about what you are hearing from them and maybe provide us a little bit more color on what's going on there? Particularly as I recall, I think some of the steel mills, there are more state-of-the-art or more recent vintage if my memory recollection is good.

Your recollection is good. The northwest Indiana steel facilities generally speaking are competitively well-positioned, back to your point. We think they will compete and we will compete favorably. Having said that, as you've read and seen, fourth quarter those plans dial back significantly. We expect them to remain at low levels throughout at least the first half of 2009.

Our outlook does reflect much slower demand on the industrial side. Even at gas side, we are showing reduced volumes. We are mitigating some of the reduced volumes with higher rates, higher margins, both on the gas and the electric side?

What's embedded in your outlook for '09, in terms of demand from the industrial side?

Just generally speaking, and again, you almost have to go company by company and industry by industry, at least a 10% to 20% reduction in volumes?

Okay. Great. Thank you.

This concludes the question-and-answer portion of the call. I would now like to turn it over to Mr. Bob Skaggs for closing remarks.

Thanks very much, Erica, and thanks to everyone that participated in this morning's call. We certainly appreciate the interest. We hope that the call was helpful and provided additional clarity. We certainly believe that we've made significant progress in ensuring that we have adequate liquidity and financial flexibility. Once again, thank you for your participation, your ongoing interest and have a good day. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a wonderful day.