NiSource said improvements in its short-term gas transportation and storage sales and its electric business in the second quarter overcame the negative factors of continuing gas demand declines and customer attrition at its gas utility operations due to high gas prices. However, those negative factors probably will prevent NiSource from meeting its operating earnings guidance of $1.45-1.55/share for the year, said CEO Robert C. Skaggs Jr.

The company reported net operating earnings of $39.1 million, or 14 cents per share, compared to $24.4 million, or 9 cents per share, for the second quarter of 2005. Operating earnings rose to $157.4 million from $137.8 million in 2Q05.

Its gas transmission and storage operations segment reported operating earnings of $80.5 million for the quarter, an increase of $9.9 million over the year-ago period. “Our commercial team is delivering on the revenue growth we projected at the end of the first quarter,” Skaggs said, noting that the team this year has signed new agreements that are expected to result in more than $30 million in revenue for 2006. About $15.8 million of that revenue was recorded during the second quarter.

Skaggs added that NiSource’s transmission business continues to make progress on significant asset expansion projects. Construction of the Hardy Storage project in West Virginia is continuing, and the project remains on target to be in service in the second quarter of 2007. Meanwhile, pre-filing activities continue on Columbia Gas Transmission’s Eastern Market Expansion, a combined storage and transportation project designed to meet core market growth in the Mid-Atlantic region. The project is supported by binding customer agreements.

NiSource’s electric business reported operating earnings of $67 million, compared with $60.2 million in the second quarter of 2005. The increase was primarily due to lower Midwest Independent System Operator (MISO) costs, including the impact of a favorable regulatory ruling on the recoverability of certain MISO charges; the timing of revenue credits; and customer growth.

“The electric segment had another good quarter,” Skaggs said. “We are particularly encouraged by a 9% increase in industrial sales volumes. This uptick is due to increased demand by the strong steel market as well as by other industrial customers that service the steel industry.”

The company also reported decreased losses at Whiting Clean Energy and an $8.2 million decrease in interest expense for the quarter due to the refinancing of $2.4 billion in long-term debt at lower rates during the fourth quarter of 2005.

But those improvements were partially offset by continued declines in residential customer natural gas usage, which affected results in the gas distribution business and are expected to prevent the company from reaching its earnings guidance for the year. Skaggs said that for the full year, the projected impact of these issues will be a reduction in net revenues of nearly $40 million, or 10 cents per share, compared with the levels underlying NiSource’s initial earnings guidance for the year.

In addition, lower net interest savings are projected to increase interest expense and decrease other income by $12 million, or 3 cents per share, compared with the initial 2006 earnings guidance.

Skaggs said that largely because of the increased unpredictability of customer usage and customer attrition in the current environment, NiSource has elected to not provide a reforecast of earnings for 2006 at this time.

“Conservation among natural gas customers continues to affect companies throughout the North American natural gas industry,” he said. “Declining gas usage remains a major focus of our industry and certainly of our company.” He noted that when the company issued its guidance earlier this year, it assumed residential gas usage declines would return to historic levels of 0.5% to 1% compared with its current view that the decline could reach 5%.

“We are taking steps to address the issues that this presents, particularly through regulatory initiatives,” Skaggs added. “For example, in Indiana, we are working with regulatory stakeholders to adjust our gas rate structure to better reflect current conditions, and we hope to reach agreement later this year. We anticipate making additional filings in other jurisdictions during 2006 and 2007, either through broader rate proceedings or specific mechanisms.”

Skaggs said that in the face of high natural gas prices and increased shut-off levels, the company also has seen a softening in terms of the rate of overall customer additions as the year has progressed. “While our new customer additions are essentially on track for the year, residential customer attrition has increased significantly coming out of last winter, from historic levels of 0.5% to approximately 1.2%,” he said. While some customers may return to the system this fall and usage levels could rebound to some extent, he noted that it is very difficult to provide a meaningful earnings estimate in such a volatile environment.

Operating earnings for NiSource’s gas distribution operations segment were $12.5 million for the second quarter of 2006, compared with $14.6 million in the same period a year ago.

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