NiSource Q3 2007 Earnings Call Transcript

NiSource Inc. (NI)

Q3 2007 Earnings Call

November 2, 2007 9:00 am ET

Executives

Glen Kettering - SVP, Corporate Affairs

Bob Skaggs - President and CEO

Mike O'Donnel - EVP and Chief Financial Officer

Randy Hulen - Director, Investor Relations

Analysts

Faisel Khan - Citigroup

Shneur Gershuni - UBS

Carl Kirst - Credit Suisse First Boston

Jonathan Arnold - Merrill Lynch

Sam Brothwell - Wachovia Securities

Mark Caruso - Millennium Partners

Carrie Saint Louis - Fidelity

Paul Ridzon - KeyBanc

Josh Golden - JP Morgan

Ashar Khan - SAC Capital

Presentation

Operator

Welcome to the third quarter 2007 NiSource earnings conference call. (Operator Instructions) I will now turn the call over to Mr. Glen Kettering, Senior Vice President of Corporate Affairs. Please proceed, sir.

Glen Kettering

Thank you, Tuwanda. Thank you and good morning to everyone. On behalf of NiSource I would like to welcome you to our quarterly analyst call. We appreciate the opportunity to be with you today and thank you for taking the time to join us.

Joining me this morning are Bob Skaggs, President and Chief Executive Officer, Mike O'Donnel, Executive Vice President and Chief Financial Officer, and Randy Hulen, Director of Investor Relations.

As you know, the focus of today's call is to review our third quarter 2007 financial performance and provide an update on progress on our four-point business plan. We will then open the call to your questions.

I would like to remind 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 Law.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Information concerning factors that could cause actual results to differ materially is included in the Management's Discussion and Analysis section of our Form 10Q quarterly report for the second quarter of 2007, which was filed August the 3rd of 2007 with the SEC. Our third quarter Form 10Q will be filed later today.

And now, I'll turn the call over to Bob Skaggs.

Bob Skaggs

Good morning and thanks for joining us today. In addition to our third quarter earnings report, I will be sharing an expansive update on a number of significant business initiatives that are key to NiSource's long-term path forward business strategy.

Based on those initiatives and continued execution on our four part business plan, I'll also be reaffirming our 2007 operating earnings guidance and providing a longer-term 2008 through 2010 view of our earnings profile.

As you can see in this morning's news release, NiSource today reported net operating earnings, non-GAAP of $21.5 million or $0.08 per share for the three months ended September 30, 2007 compared with $29.6 million or $0.11 per share for the third quarter of 2006.

Operating earnings, non-GAAP were $132.4 million for the third quarter compared to $142.9 million for the same period in 2006. The operating earnings reduction is the result of a onetime $16.2 million reserve associated with the Northern Indiana Public Service Company, NIPSCO regulatory settlement discussed later in the news release.

Looking at the first nine months of the year, NiSource's consolidated operating earnings on a non-GAAP basis were $707.8 million a decrease from $714.3 million for the same period in 2006. As we've done in prior calls, we're focusing on net operating earnings and operating earnings, both non-GAAP measures because we believe these measures better represent the fundamental earnings strength and performance of the Company.

These measures normalize for weather and certain other items, such as restructuring charges and significant reserve changes. Schedules for one and two in the news release provide a detailed reconciliation of net operating earnings and operating earnings to GAAP.

From an earnings standpoint, our third quarter performance was largely in line with expectations and consistent with our earnings outlook for the year. In a moment, I will speak more to the specifics of the quarter results.

More notable from a long-term standpoint, the NiSource team has made significant progress on several threshold business initiatives. These initiatives involve each of our major business units and are designed to advance NiSource's ongoing efforts to reposition the Company for long-term sustainable earnings growth.

In many respects, these are watershed events that will help us unlock the underlying value of our assets, address legacy issues and set the stage for future earnings growth. The most recent of these accomplishments happened yesterday when NIPSCO filed a comprehensive Integrated Resource Plan or IRP with the Indiana Utility Regulatory Commission.

The IRP identifies NIPSCO's plans for addressing its customers electric generating capacity needs. More specifically the IRP shows that NIPSCO will need approximately a 1000-mega watts of additional capacity by 2014 and concludes that the best alternative to meeting that need would be the acquisition of gas fired combined-cycle generating capacity.

The IRP also suggested that NIPSCO add winds generate electric purchases and energy efficiency programs to its portfolio. Based on the direction of the IRP, NIPSCO has finalized purchase and sales agreements to acquire two gas-fired generating facilities with a combined capacity of 1060 mega watts.

In late November, NIPSCO asked the IURC to grant a certificate of public convenience and necessity authorizing the purchase of the Sugar Creek Power Plant a 535-mega watt combined cycle gas cogeneration facility owned by the LS Power Group in West Terre Haute, Indiana.

And NiSource's Whiting Clean Energy facility, a 52-mega watts combined cycle gas cogeneration facility in Whiting, Indiana. Both facilities were successful bidders in the request for proposal process. The acquisitions are targeted to be completed in the second quarter of 2008 and represent a NIPSCO rate base investment in excess of $500 million.

In addition to meeting NIPSCO's long-term customer needs the outcomes of the IRP process support and align with the state of Indiana's Hoosier Homegrown Energy Plan, which calls for growing Indiana jobs and incomes by producing more of the energy Indiana needs from its own natural resources, while encouraging consumers to use energy wisely.

Closely related to the IRP and NIPSCO's efforts to add generating capacity to its portfolio is an important settlement that NIPSCO announced on October 16^th. The agreement with regulatory stakeholders and large industrial customers addresses the cost of electric power the Company has been required to purchase to meet growing market demands.

This so-called fuel adjustment clause or FAC settlement, which the IURC is expected to rule on by year's end will resolve the purchase power matter and notably contains provisions addressing NIPSCO's need to add to its electric generation portfolio.

To that point, the settling parties also agreed to NIPSCO's deferral of depreciation expense and carrying charges associated with its acquisition of combined cycle generating facilities.

The settlement includes a onetime refund of $33.5 million and as noted earlier, third-quarter operating and earnings for electric operations reflect a $16.2 million charge related to that settlement.

Beyond Indiana, on October 26 2007, Columbia Gas of Ohio and the staff of the Public Utilities Commission of Ohio filed a joint stipulation that clarifies the Company's operational responsibilities for customer owned service lines and risers.

If approved by the Commission, the agreement will establish a recovery mechanism to collect certain costs associated with repair or replacement of customer owned service lines and risers and also would resolve outstanding issues related to this important customer safety program.

On October 30th, Columbia Gulf Transmission Company and Tennessee Gas Pipeline Company entered into a blinding purchase sale agreement whereby Tennessee Gas Pipeline will buy the majority of Columbia Gulf's offshore Louisiana assets and operations in the Gulf of Mexico.

The agreement, which is subject to regulatory approvals, also provides settlement of all pending litigation between the parties at closing. I would note these facilities don't comprise a significant portion of Columbia Gulf's overall asset base and are not considered to be strategic to Columbia Gulf.

As most of you know, Columbia Gulf is focused on growing its extensive onshore business. Both companies currently anticipate making the necessary regulatory filings by year-end with a closing during the first half of 2008.

Finally, on October 22nd, NiSource and IBM reached an agreement in principal on the restructuring of their business services agreement. This proposed restructuring, which is expected to be finalized by year end will put NiSource in the position to be more effectively manage its administrative expenses while ensuring delivery of services required to meet NiSource's needs.

As you can see, this extensive list of recent accomplishments unequivocally shows that we are moving aggressively and thoughtfully to clear the deck of distractions, engage our stakeholders, and make investments so that we can better position our team to execute on NiSource's growth strategy.

As stated previously, our investment-driven strategy is premised on enhancing and expanding NiSource's core strategic assets, executing on an array of promising growth prospects, and synchronizing our investments with complementary commercial and regulatory initiatives.

Another important development to share regarding our path-forward strategy is our intention to proceed with the formation of Master Limited Partnership for certain of our Gas Transmission and Storage assets.

NiSource intends to file a registration statement with the Securities and Exchange Commission later this year for the offer and sale of a limited partnership interest in a new subsidiary. We believe the formation of a Master Limited Partnership is a natural complement to our Gas Transmission and Storage growth strategy and to provide access to competitively priced capital to support future growth investment.

During the question-and-answer session, please bear with me. I'm limited to what I can say regarding our intent to proceed with the formation of the MLP, due to SEC rules. In addition to these key business initiative accomplishments, I want to update you on the day-by-day, brick-by-brick actions our teams are taking to execute on fundamental elements of our four-part business plan.

As a reminder, that plan includes commercial growth and expansion of our transmission and storage business, investment-driven regulatory and commercial initiatives and strong financial process and expense management.

On October 31st 2007, the Massachusetts Department of Public Utilities, DPU approved a $5.9 million increase in Bay State Gas Company's base rates effective November 1. The increase was made by Bay State under the terms of its existing performance-based rate mechanism.

In a separate filing, Bay State Gas on October 17th petitioned the DPU to allow the company to collect an additional $7.5 million in annual revenue. Bay State also requested approval of a steel infrastructure tracker that would allow for recovery of ongoing infrastructure replacement investment.

As I've mentioned previously, both NIPSCO and Columbia Gas of Ohio are fully focused on preparations for significant rate proceedings during 2008. Columbia Gas of Ohio is conducting outreach and planning efforts necessary to follow traditional cost of service base rate case in early 2008 while NIPSCO is preparing to file its electric rate case as scheduled by July 1st, 2008.

In fact, the initiatives I mentioned earlier help to provide a clear line of sight for both of these milestone proceedings. Likewise, Columbia Gas of Pennsylvania is in the advanced stages of preparing a base rate case filing to be made in January 2008.

CPA also launched a 20-year natural gas infrastructure enhancement project that will replace approximately 600,000 feet of gas distribution lines each year while synchronizing those investments with regulatory recovery.

Our CPA team is intensely focused on advancing legislative initiatives in Pennsylvania to provide for regulatory mechanisms that will enable the state's utilities to recover investments in natural gas infrastructure improvement programs on a timely basis.

Notably, the Chairman of the Pennsylvania Public Utility Commission as well as two state legislative leaders is calling on the Pennsylvania general assembly to pass such legislation. And on August 29, Columbia Gas of Kentucky received approval of a rate case settlement that increases total annual revenues by $7.25 million about a 4.5% increase.

Turning to NiSource Gas Transmission & Storage, their expansion projects are continuing to advance in various stages of development. Construction continues on the Millennium Pipeline, scheduled to begin service in November 2008 while the Federal Energy Regulatory Commission in October issued a favorable environmental assessment for Columbia Gas Transmission's a $140 million Eastern Market Expansion Project.

A proposal to expand natural gas storage and pipeline facilities in Ohio, West Virginia, and Virginia that assessment is subject to public comment. Also in response to growing demand to connect the diverse supply mix sourced by NiSource's Gas Transmission and Storage assets with growing markets in the Southeast our Gas Transmission and Storage team announced a blinding open season for an expansion of our Columbia Gulf system for delivery to Florida Gas Transmission.

That open season ends today and the project is planned to go in service by the summer of 2008. I look forward to providing a report on this exciting opportunity in future business updates.

And finally, on the financial management front in late August, NiSource successfully issued $800 million of senior unsecured notes that mature in 2018. The proceeds were used to repay short-term bank borrowings and for capital expenditures and general corporate purposes.

The fact that our finance team was able to successfully complete this plan placement despite choppy market conditions is a testament to NiSource's strong capital access and liquidity.

As you can see, across the board, our teams are continuing to execute against all elements of our four-part growth strategy. In fact, based on that continued solid performance we are affirming that NiSource remains on track to achieve our 2007 net operating earnings guidance of approximately $1.35 per share non-GAAP.

Looking ahead, we believe net operating earnings per share, non-GAAP from continuing operations for the 2000 to 2010 period will fall within a range of $1.25 to $1.35 per share. Thereafter, NiSource expects its ongoing capital investment program of more than $1 billion per year to produce meaningful annual growth in earnings per share.

This outlook is consistent with my comments in late May concerning our so-called flattish earnings outlook for the next several years. Particularly, as we navigate a number of milestone, regulatory and rate proceedings, which will again put us on solid footing for long-term sustainable growth.

Now, let me shift to an overview of NiSource's third-quarter operating earnings.

During the quarter after the NIPSCO regulatory settlement mentioned earlier, increased revenues from NiSource's core business units along with improved performance from NiSource's Whiting Clean Energy unit, more than offset operating expenses.

Gas Distribution Operations reported an operating earnings loss of $41.9 million versus an operating earnings loss of $30.8 million in the third quarter of 2006. The increased loss resulted primarily from higher operating expenses, partially offset by increased net revenues.

Operating expenses, excluding the impact of trackers were $14.7 million higher than the prior year, mainly due to higher employee and administrative expenses, property taxes, depreciation costs, and notably a reversal of a restructuring charge that benefited last year's results by $5.1 million.

The employee and administrative costs include normal payroll benefits in corporate services. Net revenues, excluding the impact of trackers were $3.3 million higher than the same period in 2006, primarily as the result of regulatory initiatives and other service programs.

Gas Transmission and Storage operations reported operating earnings of $75.4 million versus operating earnings of $69.4 million in the third quarter of 2006. The increase resulted primarily from higher net revenues from firm capacity reservation fees.

A key driver behind this improvement is that Columbia Gulf's mainline throughput has increased as a result of storage injections, gas-fired electric generation demands, and increased marketing activities.

Operating expenses, excluding the impact of trackers were slightly lower than the comparable period last year. Electric operations reported operating earnings of $102 million versus operating earnings of $113.1 million in the same quarter last year.

Net revenues decreased by $5.3 million due to primarily to the accrual that was reported for this settlement relating to power purchase by NIPSCO that we discussed earlier, partially offset by higher wholesale and commercial margins and lower unrecoverable MISO costs.

Operating expenses increased by $5.8 million due primarily to higher employee and administrative costs and restoration costs associated with severe storms experienced during the quarter.

Other operations reported operating earnings of $5.5 million in the third quarter of 2007 compared with an operating earnings loss of $0.1 million in the prior-year period. The improvement resulted from higher net revenues from the Whiting Clean Energy facility.

As you will recall, we restructured Whiting's steam contract with BP late last year, which has delivered the intended effect of significantly improving the overall economics of that arrangement.

Other items, interest expense increased by $4.6 million due to higher short-term interest rates. Other net improved to $1.4 million income compared to a loss of $0.8 million last year. The improvement resulted primarily from higher interest income in the current period.

Focusing on liquidity, net cash flows from operating activities for the nine months ended September 30 2007, were $398.3 million a decrease of $472.9 million from the $871.8 million of cash flow in the first nine months of 2006. The 2006 cash flow amount was unusually high because of working capital changes beginning in late 2005 that stemmed from colder weather and higher natural gas prices.

Beyond the changes in working capital increases in net income and changes in deferred taxes totaling $141.9 million improved net cash flow from operating activities relative to last year.

To wrap up, overall, NiSource's performance for the third quarter was solid and most importantly, our team has made significant process in resolving legacy issues, moving forward with new growth projects and regulatory initiatives and in advancing our four-part plan for growth.

Plus our fundamentals, such as usage, customer attrition, and demand for pipeline capacity are showing notable improvement. And we've advanced our work on the MLP option, which has the potential to provide additional flexibility and access to capital to fuel growth.

I'll make just one final comment on our outlook for the next several years. In providing the $1.25 to $1.35 earnings per share range, we're trying to be as open as possible with visible and realistic estimates.

Specifically for 2008, we anticipate earnings to be toward the lower end of the range, particularly in light of the NIPSCO capacity situation and the so-called FAC settlement. For example, our planned acquisition of the new generating facilities will place some pressure on earnings prior to the effectiveness of our 2008 rate case.

To add to that, I give you the assurance that the entire team is poised to go all out in 2008 to reach successful closure on the NIPSCO situation, as well as, successfully complete our other watershed rate activities in Ohio, Pennsylvania, Bay State, and accelerate our GT&S growth projects.

Assuming strong outcomes in 2008, we'd expect the earnings trajectory in 2009, 2010 to trend toward the upper end of the range. Again, I would emphasize that these broad array of bellwether initiatives, coupled with our unprecedented capital investment program, will position NiSource for meaningful growth in earnings in 2011 and beyond.

As always, we remain committed communicating with our investors and of all of our stakeholders in a transparent and timely manner regarding these and all of our efforts. Ongoing updates will be provided through our analyst calls and news releases, posted promptly on nisource.com.

Thanks again for participating today and for your continued interest and support in NiSource. And at this point, let's open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Faisel Khan with Citigroup. Please proceed.

Faisel Khan - Citigroup

In terms of the new investments at NIPSCO, how does that affect your long-term guidance? Is that baked into your long-term guidance already that these plans will make it into rate base?

Bob Skaggs

Those are baked into the estimates.

Faisel Khan - Citigroup

Okay. I mean do you think that this -- that these investments kind of offset the last few years of under-investment in the generation part of that business?

Bob Skaggs

We feel that the process that we have gone through with, in the IRP, the thoroughness, the extensive study and the involvement of the stakeholders certainly points to the need for over 1,000 megawatts of capacity near term, right now.

And so we think that process has established it and we are prepared to go through the certificate process to thoroughly vet that, and then move on to the rate case process. So we think that we will have that showing and the need will be justified.

Faisel Khan - Citigroup

So most of the interveners are pretty much on board with this IRP plan? Are there any potential adverse type of movements from other interveners?

Bob Skaggs

It has been an open process; we've tried to be inclusive. We've tried to keep folks current on the studies and the process. And we do expect a consensus to develop around this solution. Having said that, as you know, in regulatory proceedings, different points of view surface and issues are vigorously debated.

We are prepared for that and again, we feel like that our work with stakeholders and the process that we have followed position us for a good decision.

Faisel Khan - Citigroup

What does -- in your guidance then, what does it assume in terms of any sort of rate -- any sort of impact from a NIPSCO rate case? Do you believe that post of this investment that you will be earning a fair return on equity as a business?

Bob Skaggs

Yes. That's right. We are expecting a fair return on rate base in NIPSCO proceeding and for that matter, all the rate proceedings that we have teed up in 2008.

Faisel Khan - Citigroup

Okay.

Bob Skaggs

Again, the basis of the strategy is good, quality investments in infrastructure, reliability, safety, good strong organic growth and to that, we expect fair returns.

Faisel Khan - Citigroup

But if I add up all -- if I add up kind of a fair return at NIPSCO with this recent investment you are talking about, and I look at your other gas utilities and their rate cases you filed there, including the return in Massachusetts. Shouldn't that help drive earnings growth kind of past 2009, 2010 above kind of your guidance? Or is there -- are you seeing larger cost pressures in your business overall that are eroding some of that rate release?

Bob Skaggs

Again, I believe that the guidance we're giving between now and 2010 is consistent with fair returns, a well-managed cost structure.

Faisel Khan - Citigroup

Okay. How would you pay for these plants at NIPSCO? How will they be capitalized?

Mike O'Donnell

This is Mike. The Whiting plan, of course, is already financed.

Faisel Khan - Citigroup

Right.

Mike O'Donnell

On NiSource's balance sheet, the other plan we would start by borrowing the money for that. But then eventually, it would be funded along the lines of NIPSCO's capital structure for rate-making purposes.

Faisel Khan - Citigroup

But there's no reason to go to the outside markets then?

Mike O'Donnell

We don't think so. Not for that, no.

Faisel Khan - Citigroup

So then would this be like a complete equity contribution to NIPSCO?

Mike O'Donnell

Not sure about that. That gets into some internal capital structure issues, which really are kind of internal. I think for the way you think about it is NiSource would probably finance it with debt, but on NIPSCO's books, it would be a blend of debt and equity.

Faisel Khan - Citigroup

Okay. And how would be the BP contract be affected by this as a purchase by NIPSCO at Whiting?

Bob Skaggs

We see NIPSCO stepping in the shoes of Whiting and honoring, upholding our agreement with BP. So NIPSCO effectively would be providing any steam demand that BP has.

Faisel Khan - Citigroup

Okay. And the gas utility, the $6 million rate increase in Massachusetts, is that -- you said that's a base rate increase but it's related to the PBR? I was trying to connect the two.

Bob Skaggs

No. You're right. The adjustment was under the terms of our PBR mechanism and it does adjust base rates.

Faisel Khan - Citigroup

Okay.

Bob Skaggs

It's not a rider. It goes into base rates and treated that way.

Faisel Khan - Citigroup

And how does the PBR work on that? It raises base rates based on new investment and new plant? Is that how it works or the conservation?

Bob Skaggs

It's an index and a series of measures and a fairly involved formula that we follow to adjust the rates. We can give you the details on how that mechanism works.

Faisel Khan - Citigroup

Okay. And you said on the -- have you identified assets to put into the MLP? I know you said you are constrained in terms of what you can talk about but I'm just wondering if you have actually identified the assets.

Bob Skaggs

We feel like we are limited on what we can say and we're just not going to be able to go much further than what we've already done.

Faisel Khan - Citigroup

Okay. Is there -- on the pipeline system, is there any excess capacity or any uncontracted capacity on the pipelines?

Bob Skaggs

Effectively, the pipelines are sold out.

Faisel Khan - Citigroup

Okay. And that --?

Bob Skaggs

Now again, we optimize on a daily, hourly basis to ensure that we are optimizing the system. But effectively, Columbia Gas Transmission is sold out; effectively, mainline gulf is sold out.

Faisel Khan - Citigroup

Okay. And on your expansion projects, is there room to increase volumes or increase potential earnings on the existing projects you have in place or that are going in place, meaning --? Or are they fully 100% contracted and to expand earnings on those systems you would have to invest more capital?

Bob Skaggs

It's more the latter. Certainly, adding facilities also provides opportunities for additional optimization but these are fully certificated, fully contracted facilities when we put them in service.

Faisel Khan - Citigroup

Okay. Great. Thanks for the time, guys.

Bob Skaggs

Thank you.

Operator

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

Shneur Gershuni - UBS

Good morning guys. Busy quarter. I'm going to try and keep my questions short to give other people an opportunity. Just with respect to the NIPSCO filing and so forth, you basically, you've, taken this charge for $33.5 million on an operating income basis to reflect the short power issues and some of the issues the interveners had with respect to Mitchell.

That said, with the filing that you've done with NIPSCO now and the fact that you are going to add Whiting and so forth, does this address these issues so that these interveners that have created those challenges in the past will basically bless this deal and not -- I guess file friendly briefs with respect to the rate case?

Bob Skaggs

We've certainly entered into that settlement. We've been working with the stakeholders through that process, the IRP process, discussions with Mitchell to build a consensus, develop support for addressing the capacity needs, and for that matter, the ongoing rate structure. So it's a very integrated, sequential, global process and repositioning NIPSCO to be one of the best utilities in the country, and that's what we're working on and that's what the process is designed to lead us through.

I emphasize it's a process and we're going to do this in the open with the stakeholders and reach the best answers as quickly as we can.

Shneur Gershuni - UBS

Okay. Two other short, quick questions. With respect to Whiting in the RFP process, did you use the current book value or did you use an estimated book value?

Bob Skaggs

Well. To determine the selection of Whiting and Sugar Creek, we, as you may recall, had a competitive RFP that went out in the summer and was a very, very competitive process. The bids were submitted and evaluated in a very competitive dynamic environment. So it was a market-driven process.

Shneur Gershuni - UBS

Okay. I guess my final question is just with respect to the IBM contract. What exactly has changed with -- what has IBM agreed to make this contract work a little better than it has in the past?

Bob Skaggs

Again, you're going to have to bear with me. I'm a bit limited on the details that I can share at this point with regard to the IBM agreement. We've entered into an MoU. It is contingent on a definitive agreement that we intend to reach prior to the end of the year.

I can say this that the focus of the restructured agreement is going to be on information technology services. That was the largest piece of this outsourcing arrangement. We think it is certainly IBM's strongest area of competency expertise and that's going to be the focus of the agreement.

Other areas, day-to-day operations of F&A, HR, supply chain, metered cash, things like that, NiSource will be focusing on. So that gives you the essence of where the relationship is headed. And we think it will provide better services, particularly better IT services and allow us to focus on what we need to focus on as NiSource.

Shneur Gershuni - UBS

Okay. I have some more questions but I'm going to jump back in the queue. Thank you, Bob.

Bob Skaggs

Okay. Thanks.

Operator

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

Carl Kirst - Credit Suisse First Boston

Hey, good morning everybody.

Bob Skaggs

Hey Carl.

Carl Kirst - Credit Suisse First Boston

Just a few cleanups. Bob, is the MLP specifically baked into the guidance? I just wanted to clarify that since I know it doesn't technically have board approval and so I'm just trying to…

Bob Skaggs

The answer is effectively it is baked into the guidance.

Carl Kirst - Credit Suisse First Boston

Okay. Fair enough. Can you just give us a sense for what if Chris is there, this refresh my memory what the maintenance cap is for the pipelines? And also on the pipes, I was hoping, and I know it's not material but if we could actually, if you can disclose it both a sale amount to GDP and what the associated EBITDA is?

Bob Skaggs

Just on the ongoing capital maintenance levels, this is a ballpark, Carl. It's between $100 million and $120 million.

Carl Kirst - Credit Suisse First Boston

And that's for the entire system?

Bob Skaggs

Yes. What we call GT&S, Gas Transmission and Storage; and that is a ballpark number. Chris and team are working hard on cost structure issues and the like. And again, that's a ballpark number that will continue to be focused on rigorously by the team. Your next question was about the Tennessee transaction?

Carl Kirst - Credit Suisse First Boston

Correct.

Bob Skaggs

And I'm sorry, you're asking about the value of the facilities?

Carl Kirst - Credit Suisse First Boston

Well I was just wondering what the sale price was and what any associated EBITDA?

Bob Skaggs

Give or take book value, $8.5 million of the assets and in terms of EBITDA, very little.

Carl Kirst - Credit Suisse First Boston

All right. Okay. And this basically goes back to the FERC interconnect issue, what this clears?

Bob Skaggs

Yes. It does and we made the point about the strategic nature of the assets from our perspective, nonstrategic. And we think this represents a win-win and albeit very small, nominally accretive to us.

Carl Kirst - Credit Suisse First Boston

Fair enough. And last question and I want to be cognizant of what you can say and what you can't say about the MLP but as you look at it from a NiSource standpoint, is there -- previously we were looking at because of some of the tax issues, getting over that hump would be a challenge. Did something change there to allow you to be able to better digest whatever tax hurdle might be out there?

Bob Skaggs

Carl, I'm going to have to just drop back to the party line that we continue to believe it's a valuable tool. It's going to be a good complement and we intend to proceed.

Carl Kirst - Credit Suisse First Boston

Fair enough. I appreciate the color and good luck.

Bob Skaggs

Thanks.

Operator

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

Jonathan Arnold - Merrill Lynch

Good morning.

Bob Skaggs

Good morning Jonathan.

Jonathan Arnold - Merrill Lynch

Just a kind of conceptual question, Bob. In terms of the growth rate and absence of growth over this period. From listening to what you said, my sense is that this is largely around the electric utility and the costs of funding the acquisitions as you move into the rate case and then obviously the rate case itself.

If you were to look at the company ex-NIPSCO, do you have a sense of what we might be seeing in terms of underlying growth just trying to hit a focus on the pieces that are outside of the electric utility and is that something you could do?

Bob Skaggs

Look. Well, I can just give you a point of view that these are regulated stable of assets growth is going to be investment driven. We think we have a healthy stream of growth projects at all segments. And given that, we think the inherent growth of 3% to 5% is what we think is there inherently and I'm now talking conceptually and at 50,000 feet.

Near-term, you identified we do need to deal with the NIPSCO situation but I just always add and we are talking about NIPSCO. We're on the threshold of a series of bellwether rate cases and these are significant cases again, infrastructure driven, rate design, certainly a big issue but that's Ohio, Pennsylvania and Bay State.

So that's a bit of I guess a macro view of the earnings power of the company, as well as, what we need to navigate through over the next 12 months.

Jonathan Arnold - Merrill Lynch

Okay. Thank you.

Operator

Your next question comes from the lien of Sam Brothwell with Wachovia. Please proceed.

Sam Brothwell - Wachovia Securities

Hi. Good morning.

Bob Skaggs

Hi, Sam.

Sam Brothwell - Wachovia Securities

Bob, I know you haven't disclosed numbers around the power plant purchase and obviously, the contemplated transfer of Whiting. But in your settlement discussions, did you kind of give these guys an idea of what the numbers would look like?

Bob Skaggs

I can't answer that specifically, but I would say that the stakeholders are knowledgeable folks and they know generally speaking, the cost levels, directionally what the cost levels are for facilities of this size in the Midwest.

Sam Brothwell - Wachovia Securities

Okay.

Bob Skaggs

And again, we've indicated that this is $0.5 billion of rate base investment, $0.5 billion plus.

Sam Brothwell - Wachovia Securities

Okay.

Bob Skaggs

For NIPSCO.

Sam Brothwell - Wachovia Securities

Okay.

Bob Skaggs

So that won't be a surprise if that's really what you are driving at. I think folks certainly expect dollars of that magnitude, investment levels of that magnitude.

Sam Brothwell - Wachovia Securities

Okay. And as you contemplate that, I mean, your guidance through ‘10 is flat and you're looking at $0.5 billion rate base investment in that kind of neighborhood.

I think you alluded to seeing an optic post 2010, is that the time period in which you think this rate base investment will start to bear fruit in your earnings?

Bob Skaggs

Yes. Again, I think that's an accurate way to say it. I did mention in the prepared remarks, in my closing effectively what I said was that 2008 is a significant year because of the NIPSCO rate case, Ohio Pennsylvania. There are scenarios where we work through all of those cases to closure in 2008 and you see a trajectory beginning in 2009.

That's effectively what I said. But to be candid, straightforward open as possible we all know that traversing that many cases effectively, favorable outcomes in 12 months or less is a tall order, one that the teams are poised to tackle. They are after it and it's an all out effort to reach closure by the end of '09.

Sam Brothwell - Wachovia Securities

Okay. Thank you very much.

Operator

And your next question comes from the line of Mark Caruso with Millennium. Please proceed.

Mark Caruso - Millennium Partners

Good morning, Bob.

Bob Skaggs

Good morning, Mark.

Mark Caruso - Millennium Partners

So, I guess just a few clarifications here. As far as, the MLP goes I imagine throughout this whole process, the board has kind of been getting steady updates and involved with what's going on and it's just a matter of you guys getting together and finalizing what you guys think are the right things. Is that the right way to think about it?

Bob Skaggs

Yes. The board and in particular our finance committee has been engaged from day one in and around this consideration, much like they were in the strategic review.

Mark Caruso - Millennium Partners

Got it.

Bob Skaggs

Totally engaged.

Mark Caruso - Millennium Partners

And then as far as, the guidance of 2010 goes and with what's going on with NIPSCO, is it right to assume that as you move along all these different rate cases, you guys will be updating us once you find out the outcomes, as far as, the guidance and reassessing the guidance based on the outcomes there?

Because I guess one of the things I'm confused about and it sounds like others is we've got flat, but you also do have big things on the horizon. I know it's very sensitive and there's a lot going on there as far as trying to make a prediction there would be very tough and you don't want to be held to that.

But at the same time I would think that as you work your way through it, we will get updates on that and this is just kind of a matter of trying not to step in front of all of what's coming?

Bob Skaggs

Well said. And hopefully we've built a track record that our communication, it's an ongoing process. We try to be as expansive, complete as we possibly can and hopefully this morning is a prime example of being expansive and complete in providing the sorts of updates you have noted.

Mark Caruso - Millennium Partners

That’s it. Thanks.

Operator

Your next question comes from the line of Carrie Saint Louis with Fidelity. Please proceed.

Carrie Saint Louis - Fidelity

Hi. Good morning.

Bob Skaggs

Good morning, Carrie.

Carrie Saint Louis - Fidelity

I have two questions. First, I was curious what the use of proceeds from the MLP offering would be? How would you take those proceeds and how would you apply them?

Bob Skaggs

We see using those to support growth and investment, the infrastructure that we are investing in.

Carrie Saint Louis - Fidelity

So keeping it all with NGT&S business or would it go up to the parent at all?

Bob Skaggs

Well, not necessarily. I don't think we've engineered it that precisely at this point.

Carrie Saint Louis - Fidelity

Okay.

Bob Skaggs

But certainly, again, we're teeing up an aggressive infrastructure investment program and we think equity-like financing, not common, but equity-like financing that could be provided by a vehicle like an MLP is going to support that sort of investment.

Carrie St. Louis - Fidelity Management and Research

Okay. And then you mentioned the funding for the IRP. I guess you said it would be through debt markets and I was curious if you had figured out if that would be just straight debt or if you are still examining the hybrid option?

Mike Donnell

Carrie, this is Mike. We have not figured out the exact financing plan yet. Keep in mind that the purchases will take place probably May, June of next year. The cash will flow and we probably won't need to do any financing until sometime after May or June of next year. So we haven't really noted down the specifics yet.

Carrie Saint Louis - Fidelity

Okay. But it would look like you would be financing in the back half of next year in debt financing?

Mike Donnell

I think that's a good assumption, yes.

Carrie Saint Louis - Fidelity

Okay. Great. Thank you.

Bob Skaggs

Thank you.

Operator

Your next question comes from the line of Paul Ridzon with KeyBanc. Please proceed.

Paul Ridzon - KeyBanc

Good morning. In the spring, you talked about a flattish earning trajectory and in the interim you seem to have found a good number of value-enhancing opportunities. But it seems as other trajectory has perhaps even worsened because it's now flat to down. What are the offsets you're seeing to these opportunities that you've discovered?

Bob Skaggs

Well, just to clarify. We did suggest that in '08 we have issue to deal with in and around the NIPSCO capacity situation and the FAC settlement; indicated that that puts pressure in particular on 2008.

We also suggested looking beyond 2008, assuming favorable outcomes NIPSCO rate case, Ohio, Pennsylvania, Bay State, GT&S growth projects, we see the trajectory going to the Northeast and growing.

So that's the way we look at that range and again, it's going to be driven by the investments and successfully working through these rate cases. Those are the near-term variables.

Paul Ridzon - KeyBanc

Aside from the Gulf assets, are you reviewing any other potential assets for monetization or was that pretty well vetted out in your strategic review process?

Bob Skaggs

Pretty well vetted out in the strategic review process. We continue to look at the portfolio, but we love the assets and as I said in the prepared remarks, we're focused on this core portfolio of assets.

Paul Ridzon - KeyBanc

Okay. Thank you very much.

Operator

Your next comes from the line of Josh Golden with JP Morgan. Please proceed.

Josh Golden - JP Morgan

Yes. Good morning.

Bob Skaggs

Good morning, Josh.

Josh Golden - JP Morgan

I'm curious if the creation of the MLP changes your commitment to investment grade ratings and also just curious given the tax base on some of these assets will the assets that are moved to the MLP be relatively new assets that are coming on stream or will you work to transition older assets into the MLP?

Bob Skaggs

Yes. Josh, I apologize. Again on the last part of your question, the latter part of your question around specifics on the MLP. I'm going to have to pass on that because of the SEC restrictions and I just can't get that detailed, so I apologize for that.

On the first part of your question we are committed to maintaining investment grade credit and that's with or without the MLP.

Josh Golden - JP Morgan

Okay. So there's been no change there.

Bob Skaggs

No change.

Josh Golden - JP Morgan

Thank you.

Operator

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

Ashar Khan - SAC Capital

My questions have been answered. Thank you.

Bob Skaggs

Okay. Thanks.

Operator

(Operator Instructions) At this time, there are no additional questions. I would now like to turn the call over to Mr. Bob Skaggs for the closing remarks.

Bob Skaggs

Well again, we appreciate your participation, your support, your ongoing interest. We will continue to keep you posted. Thanks. Have a good weekend.

Operator

Ladies and gentlemen, that concludes the presentation. You may now disconnect and have a wonderful day.

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