NiSource outsource costs drive down income

Income from continuing operations for NiSource Inc. dropped sharply in the second quarter, due mainly to start-up costs for its $1.6 billion outsourcing deal with IBM.

Second-quarter income from continuing operations was $7.9 million, or 3 cents per share, as compared to $35.5 million, or 13 cents per share, for the second quarter of 2004.

"We have said since the beginning of 2005 that this will be a base year, from which we will build a platform for long-term, sustainable growth," said Robert Skaggs Jr., company president and chief executive officer in an 8:30 a.m. conference call with analysts on Thursday.

It was NiSource's first earnings release with Skaggs in the CEO's seat, following the retirement of former CEO Gary Neale at the end of June. Neale continues to serve as board chairman.

Skaggs also told analysts that Northern Indiana Public Service Co. has again begun negotiating with the Indiana Office of Utility Consumer Counselor over NIPSCO's need for purchased power.

Earlier this month, the OUCC walked away from an earlier memorandum of understanding that would have led to NIPSCO purchasing large amounts of electricity from Whiting Clean Energy, another NiSource subsidiary.

The OUCC did so after an engineering report ordered as part of the negotiations showed there may be other options for NIPSCO to pursue in filling its power needs.

"Although we wish this process was proceeding more expeditiously, we appreciate that the Office of Utility Consumer Counselor and other parties remain committed to reaching an agreement," Skaggs said.

He added NiSource remains convinced Whiting Clean Energy can provide the most reliable, lowest cost solution to NIPSCO's needs.

Consumer groups are resisting NIPSCO's plans to buy power from Whiting Clean Energy. LaPorte County has charged a deal for NIPSCO to buy Whiting Clean Energy power could hike customers' bills as much as 10 percent.

NiSource stock closed at $24.37 in trading on the New York Stock Exchange Thursday, up 7 cents per share on a very heavy trading volume of 2.8 million shares.

Earlier this year, NiSource had issued 2005 earnings guidance of $1.47 to $1.53 per share. On Thursday, NiSource spokeswoman Kris Falzone said the company was not commenting on its earlier guidance due to a number of pending issues.

Those include a rate case at Massachusetts subsidiary Bay State Gas and the negotiations between NIPSCO and the OUCC over its need for purchased power.

In addition to the $31.2 million in charges associated with the IBM outsourcing and restructuring, NiSource took a $10.9 million impairment charge for a reduction in goodwill at Kokomo Gas & Fuel, another of its Indiana subsidiaries.

Net income for the second quarter was $39 million, or 15 cents per share, as compared to $34.6 million, or 13 cents per share, for the year-ago period.

Industry analysts have been focusing on NiSource's income from continuing operations for several years now, believing it gives a fuller picture of NiSource's core operations than the net income figure.

The outsourcing deal with IBM will cost NiSource $40 million to $45 million over the rest of the year and some costs could continue into 2006, Skaggs said.

NiSource expects to transfer 572 workers to IBM and cut another 445 jobs as the restructuring proceeds.

NiSource expects the deal to provide $530 million in gross savings over the next 10 years.