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Analyst: NiSource May Buy Gas Assets to Offset Gains on Electric Asset Sale

Although NiSource (NI) management would not confirm rumors that Northern Indiana Public Service Co. (NIPSCO) may be up for sale as part of an ongoing strategic review, the company did indicate that tax efficiency would be a key consideration in any divestiture. Capital gains from such a sale likely would be offset by purchasing gas distribution, pipeline or storage assets in the Midwest or Northeast, said AG Edwards analyst Michael Heim in a research report.

"We would not be surprised to see NI increase its ownership interest in the Millennium Pipeline as part of its strategic restructuring," Heim said.

In reporting earnings Tuesday, NiSource said it expects to reveal its restructuring plan soon. "Clearly we want to move with dispatch and we understand all the stakeholders are interested and that ambiguity and uncertainty are unsettling," said CEO Robert C. Skaggs Jr. "I can assure everyone we are moving at a steady clip."

Numerous analysts asked questions about a potential sale during a conference call with analysts Tuesday. Heim said NIPSCO's electric business might fetch $4 billion. The utility has 445,000 electric customers in northern Indiana.

NiSource did not release an earnings forecast for 2007. The company said it would hold the forecast until completion of the strategic review.

NiSource has been stuck in an earnings rut for several years now mainly because of gas customer conservation and attrition. It posted an 8% decline in fourth-quarter profit. Net income dropped to $62.5 million, or 22 cents per share, from $68 million, or 25 cents per share, in the year-earlier quarter. The company reported earnings from continuing operations of 34 cents per share compared to 27 cents in 4Q2005. Gross revenue slipped to $2.05 billion from $2.69 billion, as increased sales from the company's gas transportation and storage business and electric unit failed to offset a decline in gas distribution revenue. Meanwhile, the electric business saw growth in both volumes and number of customers.

"We believe the usage decline experienced during 2006 was in response to higher market prices for natural gas, particularly in the aftermath of the 2005 hurricane season," said Skaggs. "As prices decreased during the latter part of 2006, we did see some moderation in the levels of usage erosion. For 2007, we are projecting usage declines of 2-3%." He said that residential customer attrition for 2006 was 0.8%.

"We have stepped up our efforts to pursue regulatory initiatives that will address customer conservation," Skaggs added. "In addition, we are participating in an American Gas Association study that is designed to look at the root causes of this issue across our industry and address potential solutions. The study is expected to be completed within the next several months, and we look forward to reviewing its conclusions and recommendations."

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