NiSource Inc. (NI) Q2 2008 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Second Quarter 2008 NiSource Earnings Conference Call. My name is Chynel, and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I'd now like to turn the presentation over to your host for today's conference, Mr. Glen Kettering, Senior Vice President of Corporate Affairs. Please proceed.

Thank you, Chynel [ph]. Good morning to everyone. On behalf of NiSource, I'd like to welcome you to our quarterly analyst call. We appreciate the opportunity to be with you today and thank you for taking the time to join us. Joining me this morning are; Bob Skaggs, President and Chief Executive Officer; Mike O'Donnell, Executive Vice President and Chief Financial Officer; and Randy Hulen, Director of Investor Relations. Also joining us today is Steve Smith, who as we reported a few months ago will be assuming the CFO position, responsibilities going forward. As you know, the focus of today's call is to review our second quarter 2008 performance and to provide a business update. We then will open the call to your questions. I'd like to remind all of you that some of the statements made on this conference call will be forward-looking statements within the meaning of the Safe Harbor provisions of the U.S federal securities laws. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Information concerning factors that could cause actual results to differ materially is included in the Management's Discussion and Analysis section of our 2008 first quarter 10-Q, which was filed on May the 2nd with the SEC. And now, I'd like to turn the call over to Bob Skaggs.

Thanks, Glen. Good morning. Thanks for joining us today as we report NiSource's second quarter earnings and provide an update on the continuing tangible progress we're making on our balance plan to deliver long-term sustainable growth. As noted in our earnings release NiSource remains on track to achieve 2008 financial results that are in line with our business plan and our outlook. Our team continues to execute a broad array of important initiatives across each of our business units. These accomplishments delivered during the pivotal year for our company are key elements of our path forward strategy for achieving long-term sustainable earnings growth. Turning first to our earnings report; as you can see from our earnings release NiSource reported net operating earnings from continuing operations non-GAAP of $24.3 million or $0.09 per share for the three months ended June 30, 2008 compared to $28.3 million or $0.10 per share for the same quarter of 2007. Operating earnings were $121.9 million compared to $143.5 million for the same period in 2007. On a GAAP basis NiSource reported income from continuing operations for the three months ended June 30, 2008 of $21 million or $0.08 per share compared with $28.9 million or $0.11 per share in the same period a year ago. Operating income was $116.6 million for the second quarter of 2008 compared with $143.9 million in the year ago period. Second quarter net operating earnings compared with the year ago period were affected by anticipated higher employee and administrative costs, as well as the one-time adjustment to Electric Operations depreciation expense relating to prior periods, which impacted operating earnings by about $0.02 per share. These impacts were mostly offset by higher total net revenues and lower taxes and the interest expense. As a reminder, we focused 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, asset sales, impairment, and significant reserve changes. For reconciliation of net operating earnings and operating earnings to GAAP, please see schedules one and two of our earnings release, which is also available at nisource.com. As I indicated earlier we are maintaining our operating earnings guidance of $1.25 to $1.35 per share for the 2008 through 2010 period. On a GAAP basis for 2008, the lower-end of the range for basic earnings from continuing operations is $1.23 per share due to transition costs associated with NiSource's amended business service agreement with IBM. For 2009 and 2010, we reflect no differences between GAAP and non-GAAP measures. As I have noted in our past communications 2008 represents an important year for NiSource, as we continue to establish a platform for achieving long-term sustainable growth. More specifically, we are taking a number of fundamental steps this year to put in place sustainable drivers of long-term earnings and cash flow growth. On all fronts, our team has focused on advancing broad array of regulatory, commercial, and growth investment initiatives. And I am pleased to report that we're continuing to successfully execute on our plan. We are delivering solid brick-by-brick progress. Several examples of progress we are making in our gas distribution segment with the focuses on synchronizing unprecedented infrastructure replacement and enhancement projects, with thoughtful, collaborative regulatory initiatives. On July 2nd, Columbia Gas of Pennsylvania filed a unanimous, $41.5 million rate case settlement with an Administrative Law Judge at the Pennsylvania Public Utility Commission. Subject to approval by the PUC, new rates under that settlement are expected to become effective October 28th. We also continue to see solid progress in Ohio, where Columbia Gas of Ohio continued to advance its best rate case filed in March. The Columbia of Ohio case seeks an annual revenue increase of approximately 6%, or nearly $80 million, with new base rates expected to become effective in the fourth quarter of this year. The Ohio filing is also closely integrated with the long-term $2 billion-plus system infrastructure investment strategy. Our Ohio team also logged a victory in late July when the Public Utilities Commission of Ohio will approve the company's new comprehensive energy conservation program, which will offer a wide range of services to residential and small commercial customers. Columbia of Ohio will seek to recover the three year 24.9 million costs of the DSM conservation program through a rider that would be added to residential and small commercial customer bills. Notably, the commission's approval subject to the resolution of the costs recovery process in Columbia of Ohio's rate case; we are confident that the recovery mechanism can be worked out successfully with the stakeholders, so that this important program can proceed and begin providing real benefits to all of our customers. Moving to our Electric business units, you know NIPSCO took a major step forward this quarter and meeting its long-term electric generation capacity needs when acquired the $330 million Sugar Creek Power Plant, a 535-megawatt combined cycle gas by our generating unit located in West Terre Haute, Indiana. The plants acquisition was approved on May 28th by the Indiana Utility Regulatory Commission. Although that order denied the cost deferral and rate treatment proposed by NIPSCO. The Indiana Commission indicated the NIPSCO could seek such rate treatment through so called Alternative Regulatory Plan, which NIPSCO filed on June 6th. NIPSCO also took steps during to quarter to diversify its electric supply portfolio with the addition of renewable energy options. On July 24th, the Indiana Commission issued an order approving NIPSCO's purchase power agreement with Iberdrola Renewables, one of the world's leading producers of power from wind and other renewable sources. The agreement provides NIPSCO the opportunity to purchase 100 megawatts of wind power commencing in early 2009. Looking forward, our Indiana team will continue to review additional opportunities to address NIPSCO's long-term generating capacity needs. And as we speak, our NIPSCO team is engaged in the final preparations for its first electric rate case in twenty years. As many of you know, the rate case filing which we'll be making by the end of this month is part of a commitment NIPSCO made in an earlier agreement with regulatory stakeholders. As I've mentioned before, this is a landmark case, marking the first time in more than two decades that NIPSCO has sort a comprehensive review of its electric services, cost levels and rates. And our team is looking forward to exploring those changes in a collaborated fashion with all of our key stakeholders in Indiana. Shifting now to our Gas Transmission and Storage unit, our team continued to advance the steady stream of growth projects during the second quarter. On June 25th, GT&S start with Federal Energy Regulatory Commission its $65 million Ohio Storage Expansion project and expansion of Columbia Gas Transmission's Ohio natural gas storage facilities to meet growing demand in the company's mid-Atlantic markets. If approved by the FERC, the project will increase Columbia Transmission's storage capacity by 6.7 billion cubic feet and the enhance its daily storage delivery by 100,000 dekatherms per day. We anticipate placing the project in service in November 2009, pending FERC approval. Also pending regulatory approval is the $40 million Appalachian Expansion Project, which will deliver natural gas from the Appalachian Supply Basin in southern West Virginia and eastern Kentucky. This project will add a new 9500-horsepower compressor station to Columbia Gas Transmission's existing system in West Virginia, enabling the company to transport an incremental 100,000 dekatherms of natural gas per day. This project is underpinned by 15-year contracts with CNX Gas, Equitable Production, and Chesapeake. Subject to approval by the FERC, we expect the project to be in service during the fourth quarter of 2009. Meanwhile construction is continuing on several other important pipeline and storage expansion projects. Those include, the Eastern Market Expansion project... a nearly 100,000 dekatherm-per-day expansion of Columbia Gas Transmission's pipeline, compression and storage facilities and the Millennium Pipeline, which is targeted to begin operations during the fourth quarter of the year. Turning to pipeline operations; on July 1st, Columbia Gulf Transmission received permission from the United States Department of Transportation to restore normal operating pressure on the company's Line 100 pipeline which, as you may recall, was damaged during an incident near Delhi, Louisiana in December 2007. With the restoration of Line 100 and the temporary restoration of service of Columbia Gulf's Hartsville, Tennessee Compressor Station which was destroyed by a tornado in February, the Columbia Gulf system is now capable of meeting its full contractual transportation capacity level of approximately 2.2 billion cubic feet per day. Our Gas Transmission and Storage team has done nothing short of an incredible job in managing these operating challenges and enabling us to fully meet our customers' ongoing capacity needs. As you can see our NGT&S team continues to make significant progress executing on a steady stream of growth projects to meet the increasing needs of customers and suppliers alike, I would note, in addition to the projects announced to-date, the team continues to work on developing an extensive inventory of additional opportunities, which will play a key role in growing our GT&S business in the years to come. Finally, I'd mention that due to the ongoing recovery work Columbia Gulf's Hartsville compressor station as well as overall financial market conditions, we now anticipate that an initial public offering of units and NiSource Energy Partners LLP, our new Master Limited Partnership is not likely to occur during 2008. As noted in our earnings release, we also have continued to take steps to focus on core regulated businesses to divest certain non-strategic assets. In that regard, on June 30th, NiSource closed on a sale of its Whiting Clean Energy unit to BP Alternative Energy of North America. BPAE purchased the Whiting facility for approximately $217 million, including working capital. Also in June, Columbia Gulf Transmission and Tennessee Gas Pipeline closed on the sale of Columbia Gulf's offshore Louisiana assets and operations in the Gulf of Mexico. These assets, which don't comprise a significant portion of Columbia Gulf's assets or earnings base, are not considered strategic to Columbia Gulf, which as you know is focusing on growth in its onshore transportation businesses. Progress also continued on the sale of Northern Utilities in Granite State Gas Transmission to Unitil Corporation for $160 million, plus an estimated $25 million in natural gas inventory and other working capital items. That sale is expected to close late this year. In other discontinued operations matters, I would note a number of developments related to the Tawney class-action litigation in West Virginia, which involves claims against Columbia Natural Resources, a former subsidiary for which we retain primary financial responsibility. As we previously reported in May of this year, the West Virginia Supreme Court of Appeals declined to review the trial court judgment in that case. The court subsequently granted our request for a stay of the judgment, pending action by the United States Supreme Court on a petition for a writ of certiorari, which we plan to file later this month. We expect the United States Supreme Court rule to decide whether to accept the appeal later this year or early in 2009. Although we believe Columbia Natural Resources has meritorious arguments in that case, particularly with regard to the punitive damages awarded, we obviously can not predict the outcome of the appellate process. As a result, in the second quarter, we increased our reserve related to the Tawney litigation to reflect the portion of the trial court judgment for which NiSource would be responsible, inclusive of interest. Now let me shift to an overview of NiSource's second quarter operating earnings. NiSource's consolidated second quarter 2008 operating earnings non-GAAP were 121.9 million compared to 143.5 million for the same period in 2007. I would refer you to Schedule 2 of our earnings release for the items included in 2008 and 2007 GAAP operating income but excluded from operating earnings. Gas Distribution Operations reported an operating earnings loss of 3.9 million versus operating earnings of 8.9 million in the second quarter of 2007. The decrease resulted primarily from higher operating expenses, which were 9.6 million greater than the prior year. The increase was mainly due to higher employee and administrative expenses, uncollectible accounts and higher depreciation costs. Net revenues were $3.2 million lower than the same period in 2007, as increases from rate proceedings and other service programs were more than offset by the anticipated reductions in non-traditional revenues as a result of a regulatory stipulation entered into by the Columbia Gas of Ohio and its regulatory stakeholders in late 2007. Gas Transmission and Storage Operations reported operating earnings of $75.5 million versus operating earnings of $74.6 million in the second quarter of 2007. Increased net revenues were mostly offset by higher operating expenses and lower equity earnings. Net revenues increased by $6.4 million, primarily due to increased subscriptions for firm transportation services related to new interconnects along the Columbia Gulf pipeline system, deliveries from the Hardy Storage field, and incremental demand revenues on the Columbia Gas Transmission system. Operating expenses at GT&S increased by $3.4 million for the quarter, mainly due to higher employee and administrative expenses and the impact from adjustment to a reserve balance that favorably impacted last year's second quarter results by $2.8 million. That impact was partially offset by lower outside services and uncollectible accounts. Equity earnings decreased by $2.1 million due to lower AFUDC earnings from Millennium Pipeline and operating earnings from Hardy Storage. Electric Operations reported operating earnings of $52.1 million versus operating earnings of $61.8 million from the same quarter last year. Operating expenses increased by $10.7 million due primarily to higher employee and administrative costs, and higher depreciation cost. The higher depreciation costs include an $8.3 million adjustment recorded by Northern Indiana during the second quarter. This one-time adjustment, which reducing quarter net earnings by approximately $0.02 per share was non-cash and will not materially impact depreciation charges in future periods. Net revenues increased by $1 million as a result of other... of higher industrial volumes, timing of revenue credits, and incremental revenues from the new Sugar Creek Plant partially offset by lower non-recoverable purchase power costs. Other operations reported operating earnings of $0.8 million in the second quarter of 2008 compared with an operating earnings loss of $0.3 million in the prior period. The improvement resulted from higher net revenues from commercial and industrial gas marketing activities. These operating earnings results no longer include earnings associated with the Whiting Clean Energy facility, which as noted earlier was sold to BPAE on June 30th. Earnings associated with Whiting's operations have been reclassified to discontinued operations for the current and comparable periods. Other Operations primarily include commercial and industrial gas marketing activities. In other items interest expense decreased by $11 million due to lower short-term interest rates and credit facility fees, and the retirement late in 2007 of high cost debt associated with the Whiting Clean Energy facility. NiSource's consolidated operating earnings non-GAAP for the six months ended June30, 2008 were $516.6 million compared to $572 million for the same period in 2007. I'd refer you to Schedule 2 in earnings release for the items included in the 2008 and 2007 GAAP operating income that excluded from operating earnings. On a GAAP basis NiSource reported income from continuing operations for the three months ended June 30th, $21 million or $0.08 per share compared with $28.9 million or $0.11 per share in the same period a year ago. Operating income was $116.6 million for the second quarter of 2008 and compared with a 143.9 million in the year ago period. In addition to the impacts already discussed in the segment discussions the decrease in earnings was primarily due to unfavorable weather in NiSource's Gas Distribution and Electric markets during the quarter compared to the same period a year ago. Also on a GAAP basis NiSource reported income from continuing operations for the six months ended June 30, 2008, of $210.4 million or $0.77 per share, compared with $235.4 million or $0.86 per share last year. Operating income was $511.4 million for the first six months of 2008, versus $574.3 million in the year ago period. And again, in addition to the impacts already discussed the decrease in earnings for the first half of 2007 was due to unfavorable weather in NiSource's Gas Distribution and Electric markets compared to 2007. Again please refer to the news release for a complete list of the items included in 2008 and 2007 GAAP income from continuing operations, but excluded from net operating earnings. Shifting to discontinued operations, as I noted earlier in the second quarter NiSource recorded an additional accrual related to the Tawney lawsuit in West Virginia in West Virginia, which is reflected in discontinued operations. In addition in the first quarter 2008, NiSource began accounting for the operations of Northern Utilities, Granite State Gas and Whiting Clean Energy as discontinued operations. In the first quarter we recorded an estimated after-tax loss of $96.1 million, $0.35 per share for the disposition of these operations. In the second quarter we recorded an additional after-tax loss of $2.8 million, about $0.01 per share for the Whiting closing and adjustments for the estimated deposition of Northern Utilities and Granite State Gas that are expected to close later this year. All results of operations for these businesses in all periods were presented are classified as net income from discontinued operations. Focusing on liquidity; net cash flows from operating activities for the six months ended June 30, 2008, were $638.4 million, an increase of $50.5 million from the first six months of 2007. $69.6 million increased in deferred taxes was offset by net changes and assets and liabilities. The weather in gas prices significantly impact working capital that were sources of cash generated from favorable weather and certain jurisdictions and pricing impacts on inventory and accounts payable. These sources of cash were mostly offset by increases and unrecovered gas costs and also driven by gas price increases. To wrap up, NiSource's overall financial performance for the quarter is consistent with our business plan, as I mentioned earlier in line with our outlook from net operating earnings $of 1.25 to $1.35 per share. Although we have much more to accomplish for the years ever, I'm pleased with the solid progress our team is making in delivering on our aggressive growth plan, which includes executing on a major infrastructure programs, successfully concluding our rate proceedings and advancing our pipeline and storage growth agenda. I can assure you that all others are intently focused on continuing to advance these critical initiatives, and position the company for long-term sustainable growth. As always, we remain committed to communicating with our investors in a transparent and timely matter regarding these and all of our efforts. Ongoing updates will be provided through our analyst calls and news releases posted on nisource.com. Thanks again for participating today for your ongoing interest and support of NiSource. And just a personal comment for open the call to questions, I just want to thank Mike O'Donnell for his years of services our CFO. Mike's been in my side for every one of these calls. Mike thank you, congratulations. We appreciate your service and commitment to growing NiSource.

Bob, thank you very much. It's been my great pleasure to serve NiSource, and hopefully to contribute to the shareholder of value increase that we are going to see here.

Thanks

Thank you very much for everything.

Thanks again Mike, and Steve Smith welcome good to have you on Board.

Thanks, Rob.

And with that Chynel [ph] we'll open up the phone call to questions. Question And Answer

[Operator Instructions]. And your first question comes from the line of [ph] Shneur Gershuni of UBS. Please proceed.

Hi, good morning guys.

Good morning.

Just a couple of quick questions. I was wondering if you can comment on your views with respect to conservations and bad debt expenses during the high commodity prices that we're seeing now, and just sort of the impact that you expected to have with respect to earnings since you left your guidance flat?

Yes, let me start with bad debt for us. As you would expect we are seeing increased pressure on bad debt uncollectible expenses and we did see during the quarter upward pressure on those numbers. Having said that, I would say it's manageable. It's relatively modest, and we've been served well by bad debt track particularly in Ohio, and bad debt relief that we have in Massachusetts and ongoing programs that we have in Columbia of Pennsylvania. So we've dampened the impact, but we have seen some upward pressure. With regards to conservation first and second quarters have been good in terms of customer usage. We've not seen any notable jump in conservation certainly, nothing like we saw in 2005, 2006. We'll have to see much of the impact from the elevated costs if not record [ph] through, as you're generally where we filed around record high GCRs, but quite frankly those prices have not yet hit the bulk of our customers. So like others in the industry were going to watching fourth quarter in particular very, very carefully.

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

Yes let me go through the inventory of NGT&S project. As you know Hardy is onstream. We motioned the interconnects that have boosted throughput on Columbian Gulf. But many other projects that we have noted in the press release and talked to you about previously really don't come online until later in 2009 and just to give you an example the Eastern Market expansion, the Appalachian expansion, the Ohio Storage project all of those tend to be a latter part of 2009. Millennium doesn't come on until later this year, so full run rate doesn't begin until the first of 2009. So, we are still in the ramp up phase of our gas pipeline growth project and really to begin seeing full up and running the impacts it's going to be late 2009-2010 before we see those impacts. David [ph] I mentioned the team continues to work on developing an inventory of projects and we remain optimistic that we are going to see ongoing strong growth from the segment going forward. Beyond the Gas Transmission and Storage segment, that we are clearly in the rate mode, particularly bellwether case in the Gas Distribution segment in Pennsylvania, that settlement doesn't become effective until late this year. Again full run rate in 2009, the team is working hard in Ohio another bellwether rate case. Again, we don't expect new rates to be effective until the for the most part of calendar year 2009. And then last but not at least, on the Electric segment, we are literally the close [ph] of that case and we won't even have the following submitted until late August. So I think you can factor all of that into the guidance and the reason that we haven't seen a lot lift at least at this point.

Okay. I mean is it safe to say that 2010 is expected to be towards the upper end of the guidance, and '09 the middle end of the guidance? I mean clearly there should be some earnings drivers [inaudible].

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

Okay great, thank you very much.

Your next question comes from the line of Carl Kirst of BM (sic) [BMO] Capital.

Hey guys it's Carl Kirst of BMO.

Hey Carl.

Hey actually, just going back to Shener's [ph] here, just to make we are understanding, only because I was kind of looking it from the LDC standpoint $40 million settlement in Pennsylvania, $80 million out there for Ohio, maybe we get a half settlement on net Millennium, reducing to be some things out there that would actually help 2009, especially if we are thinking that the Mexico rate case is going to be litigated through the year and that doesn't kick into the end of '09 so, is there something from an O&M standpoint or are we being conservative or am I just frankly looking at the possible rate increases in Ohio and Pennsylvania as essentially going at the bottom line, when I shouldn't be?

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

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

It's more of the latter call from our perspective. In fact the procedure of schedule was just agreed to. As you suggested the initial round of hearing begin in January but the final round of hearings don't commence until July of 2009. So if we remain on that track, you can see that the case would wrap midyear, rating [ph] would then follow next. Time for deliberations and like will easily take you through 2009. Now, again we approach all our cases looking for opportunities to settle and resolve that this case... there has not been a case in Indiana for over two decades. We do expect one way or the other, the case is going to be fully ventilated [ph].

Fair enough. And then just last question; noticing in your Q and understand everything that the FERC is serious but perhaps trying to get a sense from a dollar standpoint, shareholder standpoint. There was statement in the Q about nature of some informal discussions with the FERC that the major Columbia line was just kind of wondering exactly what that was and is that something that could become material?

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

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

Thanks Carl.

Thanks Carl.

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

Hey good morning guys.

Good morning Jonathan.

quick question on... originally, as it should have been scoping up in NIPSCO would be a talk of a need for 1000 megawatts and you obviously have rising [ph] that was going to be part of the filing. And I think I remember at the time you intended that you'd potentially bring another asset forward to fill that gap at some point in time. Can you... as you see the demand outlook today, there needs to be any change in your sense of the timing of the need for the second asset and on what sort of basis and timeframe would you be looking to see that introduced into the mix?

Yes, fundamentally our outlook has not changed up. You'll recall and others will recall that we've filed a Comprehensive Integrated Resource Plan last year and showed over time the need for upwards of a 1000 megawatts. Sugar Creek goes a long way to filling that need and that's relatively immediate but there is dominant [ph] amount that we needed an additional 500 megawatt plus add to the portfolio. We on an ongoing basis are seeking to add that capacity through build or buy. Clearly that will not be captured in the current rate case, but we think over the next number of years, we will be adding an additional capacity to the system.

So you are thinking that it's kind of out in time there will be on this next rate case.

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

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

One last test for Michael O'Donnell

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

You can come back to that.

Yes, we'll be responsive on that just give Mike and Tim a moment to run through the numbers.

...between what's in the text and what seems to be on the income statement.

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

Thank you.

And your next question comes from the line of Leone Dawulf of Catapult Capital [ph].

Hey, good morning.

Good morning.

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

We haven't disclosed the specific reserve... legal reserves, as a matter of fact we don't do that. We've not given definition around the reserves on timing.

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

We would say that we're fully reserved given the trope court verdict...

Okay.

Fully reserved of our portion of the expulsion [ph].

Got you. Thank you.

[Operator Instructions]. Your next question comes from the line of Faisel Khan of Citi. Please proceed.

Hi, good morning, guys. It's Faisel.

Good morning.

Just a question on the customer count the residential customer counts in for gas distribution down about 10,000 customers the residential side? And looking at the electric utility side equation, residential customers count up about 1,000, can you describe or gives us a little more inside on what's going on in the new jurisdictions?

Yes across the company on the gas side in particular, new customer additions are down dramatically. They are probably all 20% against our projections for this year. And this year's projections were down near historic close if not add historic close. And it's all the reflection of economic conditions in the housing industry in particular. And out outlook it's certainly not going to pick up this year and it's going to be slow next year, but we are off dramatically on new customer as and it could have been pretty consistent about saying. I would say that it's very consistent with the entire natural gas industry and again the economy.

Bob is it a particular territory that's hurting you because, I mean in the electric side the customer counts actually up, so I am just trying to figure what's the divergence there?

Yes it's up modestly, but on the gas that we are seeing a slowdown across the entire footprint, and you'd recall that, that our overall growth rate historically has been about 1% which is a little bit below the national average, and just really reflects this Mid-Atlantic, Mid-Western economies that were in. Historically, our largest area is for growth has been the Northern Virginia area, Central Ohio and both of those areas have slowed.

Okay. And I assuming that this is coming also at your Ohio gas jurisdiction unit, I mean is that mean that when you guys sign up for new storage capacity and new pipeline capacity on Columbia Gas of Ohio then on the and gas transmission and storage system, but the utility is that mean there will be an incremental capacity available for the open market that's blaming [ph] on any of the utility?

Yes, hard to translate it quite that way. Historically, we have seen growth in peak days, peak day requirements even with reduced annual consumptions even with customer counts that slow. We... historically we've seen it, we may see a slowing in the growth of peak day, but we still have a considerable need for peak capacity. And at least this is my view as I sit here today that I don't see any material impact on Columbia Gas transmission and other pipeline suppliers that would you free upstream capacity or provide capacity for marketing elsewhere.

Okay.

I think by and large the portfolio remains as it is.

Then for the renewable power contract that you've signed with Iberdrola is that a capacity or is that a... what types of contract, is that an energy contract where you're paying a $6 dollar per megawatt hours delivered?

It's a PPA [ph] for capacity up/down or megawatts.

And how does that... what are guys paying them while there a... because the competition work to...

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

Okay, great, okay. Thanks guys.

And I just suggest if you want to learn more commission approval so there is an order out there on the website I am sure that you can obtain or we can provide it.

Okay. Thanks, I pull that.

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

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

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

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

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

Okay. Thank you.

We'd mention that on Millennium Pipeline that we are currently constructing and actually the partnership is currently constructing. There are probably over a 1,000 workers deployed on that project alone this summer. Just given an order magnitude of the effort and how many folks were involved in it.

Right, right. Okay. Thank you very much.

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

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

Thanks Mike.

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

Hey guys, just two quick follow-ups if I could...

Okay.

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

Yes that number is up as you might expect given the economic condition. So it has tipped up. We have seen higher shut-off rates, but they have ticked up and I don't have the number at my finger tips, but it is up.

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

More of the along the lines that the first point you mentioned, $25 million three year program, so we spend it over three years. We've been effectively collected from the customers through the rider. We don't earn of return on the expenditures that there is a carrying charge cost of carry, cost of money component that would be reflected in the rider.

So, I am sorry about, but just to make sure I understand, so there is not an equity return on components on that $25 million, I mean what...

That's correct.

You guys are going out and spending money to promote conservation granted you will spend, but it would still seem to me that we have an issue of obviously if usage continues to decline how does that get erective result?

You probably where the rate case the Ohio rate case in fact all of our rate cases reflect proposals to adjust rate design.

The rate design, okay, so that...

That's right and in Ohio, Columbia of Ohio along with other companies have been presume we call straight fixed variable rate design.

Okay. So in the Ohio settlement to or otherwise we should be looking for hopefully a rate design change in that as well?

Exactly...

Right.

That's the key component of the case. If you are interested you can look at recent President for Dukes Gas Company in Ohio where there has been a significant ship to straight fixed variable like what you design. You've also seen that issue proposed in Dominion East Ohio case.

Great.

It's currently been litigated.

I appreciate the clarification. Thank you.

Yes.

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

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

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