Second quarter financial results from several eastern gas and combination utilities were mixed with Vectren reporting a 20% drop in net income, NiSource reporting lower than expected results yet improvements compared with 2Q2003 and AGL Resources posting higher than expected earnings.

NiSource Inc. Chairman Gary L. Neale said the company missed Wall Street estimates mainly for weather-related reasons. Its earnings were much improved from the second quarter of 2003. NiSource, which is the parent company for the Columbia pipelines and multiple gas and electric utilities that serve 3.7 million customers from the Gulf Coast to the Midwest and Northeast, reported net income of $34.6 million, or 13 cents/share, compared to a $324.9 million loss (-$1.23/share) in the second quarter of 2003, during which it took several large write downs associated with the sale of Columbia Energy Resources, Inc., and certain assets of NiSource’s former subsidiary, Primary Energy, Inc.

NiSource reported income from continuing operations of $35.3 million (13 cents/share), compared with $39.3 million, or 15 cents per share, for the same period in 2003 and Wall Street estimates of 17 cents/share.

“Weather during the second quarter of 2004 in our gas distribution service territories was 10% warmer than normal and 11% warmer than the year-ago period, reducing sales of natural gas to our residential and commercial customers,” said Neale. “Second quarter degree days indicated that weather in our electric service territory was 10% cooler than normal, but favorable compared to the same quarter last year, which resulted in increased usage by our electric customers. In addition, our employees continued to hold the line on operation and maintenance expenses.”

However, Credit Suisse First Boston analyst Faisel Khan said he was disappointed in NiSource’s results, which were a full 7 cents/share lower than he expected. He said weather doesn’t entirely explain the poor performance. “Fifty-two heating degree-days do not explain the $0.16 per share shortfall at the gas distribution business compared to last year,” he said. “While some corporate allocation of expenses may explain some of the difference, we believe that residential gas usage is displaying price elasticity to higher commodity prices on a weather-normalized basis.”

Khan said weather contributed to only about 2 cents/share to the downside. “The bulk of the downside from our estimate was higher [operation and maintenance expenses] at all three business units.”

NiSource’s gas distribution operations’ operating income was $15.1 million, a decrease of $41.7 million versus the second quarter of 2003. However, throughput for the period increased by 22.5 MMDth to 176.4 MMDth, largely due to increased lower margin off-system sales, partially offset by reduced residential sales as a result of warmer weather. Gas transmission and storage reported operating income of $73.5 million, a $13.8 million decrease mainly resulting from a reversal of a litigation reserve relating to a lawsuit that was settled in the second quarter of 2003.

Electric operations reported operating income of $82 million, an increase of $17.9 million from the comparable period last year due to higher customer usage and favorable weather. The “Other Operations” segment reported an operating loss of $26.3 million in the first half of 2004, versus an operating loss of $24.3 million in the first half of 2003, mainly due to ongoing losses associated with Whiting Clean Energy and lower power trading revenues during the first half of 2004 as compared the same period in 2003.

AGL Resources, parent company of Georgia gas utility Atlanta Gas Light, beat Wall Street estimates by 2 cents/share. The company reported net income of $21 million, or 33 cents/share, compared to $19 million, or 29 cents/share. Results reflect improved earnings in its distribution operations and energy investments segments, which offset lower earnings in the wholesale services segment during the quarter.

“We’re pedaling hard, but our results put us right where we expected to be at mid-course,” said CEO Paula G. Rosput. “Despite encountering a few hills along the way, we’re demonstrating our record of repeatable performance.”

Distribution operations contributed earnings before interest and taxes (EBIT) of $49 million, compared with $44 million in second quarter 2003. The increase was partly due to an increase in the average number of connected customers (to 1.862 million from 1.852 million in the second quarter 2003). Atlanta Gas Light contributed to the EBIT results due to higher pipeline replacement revenue and additional carrying charges for gas stored for marketers. Total operating expenses for the quarter of $92 million were roughly equal to second quarter 2003.

Wholesale services EBIT declined $5 million relative to the second quarter 2003. Despite a 17% increase in volumes (to 2 Bcf/d from 1.7 Bcf/d in 2003), Sequent’s margins were compressed as a result of lower volatility in the natural gas market, resulting in fewer storage arbitrage opportunities in the second quarter of 2004 relative to the same period in 2003. Operating expenses at Sequent were relatively flat year-over-year.

Energy investments contributed EBIT of $9 million compared with $7 million in the second quarter of 2003. The segment’s results were driven primarily by the sale of a residential and retail development located in Savannah. Lower retail margins at SouthStar Energy Services resulted in a decline in EBIT contribution from that business during the quarter, from $9 million in 2003 to $7 million in 2004. The decline was the result of unusually strong margins and higher usage due to colder weather during April 2003 that were not achieved at the same level in the second quarter 2004.

Vectren earnings were down 20% to $3.3 million, or 4 cents/share, which was well short of the 14 cents/share expected by Wall Street. During last year’s second quarter, Vectren reported earnings of $4.1 million, or 6 cents/share. The Evansville, IN-based utility company said its utility earnings doubled to $2.8 million. Electric margins increased 15% but were partially offset by lower earnings from wholesale power marketing operations. Weather favorably impacted its results. But its nonregulated group reported much lower earnings of $0.7 million for the quarter, compared to $3.4 million in the prior period, mainly because of a write-down of the company’s share of an investment held by Haddington Energy Partners (Nations Energy Holdings).

The company also reduced its earnings guidance for the year. Based on the current expected timing for the receipt of rate relief for the Vectren North and Vectren Ohio gas rate cases and the recent write-down of the investment in Nations Energy, the company cut earnings guidance for 2004 to $1.43-1.58/share from $1.60-1.75/share. However, it still believes the Street consensus estimate of $1.78 for fiscal year 2005 is “very achievable.”

“We believe that we have made significant progress this year in executing our plans to improve returns in our utility operations and focus our nonregulated business on activities that can produce attractive growth,” said CEO Niel C. Ellerbrook. “We were able to reach an agreement in our $5.7 million Vectren South gas rate case, which allowed us to implement new rates on July 1 of this year. On March 19, we filed our petition requesting $47 million in rate relief for our Vectren North territory with the Indiana Utility Regulatory Commission and presented our case at hearings during the week of July 19.

“On April 16, we issued a pre-filing notice requesting approximately $25 million in rate relief for our Ohio operations with the Public Utilities Commission of Ohio,” he said. “While we would like to reach an earlier negotiated resolution in both cases and will work toward that end, we have decided to revise our 2004 guidance assuming both rate cases are fully litigated and completed late in the first quarter of 2005.”

Ellerbrook added that the company plans to “critically evaluate” its nonregulated activities and “take actions to reduce or eliminate our involvement in businesses that do not fit our objectives. We are pleased that our primary nonregulated businesses continue to meet expectations, and we believe they provide a stable platform for future growth.”

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