NorthWestern Energy Group Inc (NWE) 2002 Q1 法說會逐字稿

Thank you John, thank you and welcome. With me today are Richard Dick R. Hylland, President and COO and Kipp D. Orme, Vice President and CFO. We will begin this morning with an operations and strategic update on Northwestern's energy and communications businesses by Dick Hylland. Kip Orme will then discuss the first quarter's financial results. We will then mind to respond to your question. As a result of the timing of this year's annual shareholders meeting, we also have with us today, Michael J. Hanson, CEO of Northwestern Energy, John C. Charters, CEO, Northwestern Communications, James R. Walker, CEO of Expanets and Daniel K. Newell, CEO of Blue Dot. They will all be available for questions following Kip's remarks. For the benefit of anyone who hasn't already seen our earnings press release, it is available on the Internet at www.northwestern.com. We would also like to invite you to listen to our annual meeting tomorrow which will be cybercast on our website on 10 a.m. Central. The first quarter earnings report does include comments on Northwestern's business outlook and contains forward-looking statements. These forward-looking statements and all other statements that may be made on this call that are not historical facts, are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Please refer to our press release or the company's documents filed with the Securities and Exchange Commission for more information on these risk factors. I would now like to turn it over to our Chief Operating Officer, Dick Hylland.

Thank you Liz and welcome everyone. As Liz mentioned we are very excited about our first quarter results and not only are we happy to have you on this call, but we also invite you to listen into our web cast of the annual report. We will be sharing further comments about the business, our first quarter and our outlook for the future. If we focus on the press release this morning, again we are extremely excited about our results for the first quarter for several reasons, not only are we excited about the financial results of the first quarter, but as we have talked with you many times, we are excited about the progress we are making towards the business building that Northwestern has been about for the last 3 to 5 years. As we have talked to you several times at business building classes this involved a building stage we are going out and build national platforms for businesses and growing in our service and solution sectors. Beyond the building phase, we are heavily into the development phase of our businesses where we are putting operational excellence and best practices in the investments. They have our investments perform at top performance levels as we move forward. Then lastly as we go forward into the growth phase of our business, we are looking at further financial results and transformations that we will be achieving as we look to the future. Today, Northwestern has 2 powerful growth platforms. Our energy markets and energy services businesses of Northwestern Energy and Blue Dot as well as our communications, operations at Expanets. Those 2 growth platforms provide significant promise for the future. In addition to our business-building platform that we have talked to you several times about, we also now continue to build record financial platforms as well. Our financial platforms are focused on strong recurring and free cash flow performance, growth and not only earnings, but dividends, and substantial balance sheet and liquidity positioning as we move forward with our businesses. As we have talked to you in the fourth quarter with our November 30th web cast as well as our fourth quarter earnings release from last year, 2002 is a substantial transformation that we are making in Northwestern. That transformation involves substantial financial results from a 2001 actual EBIDTA level of about 39 dollars to targeting in 2002 a level that we will get into more and more detail in Lip's comments of between a $335m and $355m. That transformation financially though starts with the business performance and the business building we continued to provide within our businesses. The first of our discussions this morning will focus on Northwestern Energy. As you know, we closed the Montana Power transaction effective February 1st and with Northwestern Energy and its South Dakota, Nebraska, and Montana operations combined. Those operations will provide over 70% of our operating income in 2002. That large established regional footprint of revenue performance, recurring cash flow, and earnings will provide the foundation for the performance that we see going forward. We are extremely pleased as well with the integration efforts between the Northwestern Energy South Dakota and Nebraska operations and Montana and as we move forward, the concentration of our operations and the capabilities we have, which earns from the areas of service for liability, customer satisfaction, and by virtually any operating efficiency metric you want to look a. We are very excited about Northwestern Energy's future as we move forward. If we look at Northwestern Energy that makes with the acquisition of Montana, that operation, one of the largest utilities in the upper Midwest, certainly in 2 power pools and those of you that aren't aware, we have now both a winter peaking electric operations, as well as a summer peaking operation, so very complimentary in that respect. It is important as the customer satisfaction, service for liability, and operating metrics would be the strong financial fundamentals that we see coming out of Northwestern Energy. As we have described, we saw a great 2001 actual performance from our utility operations and certainly 2002 will be a great success as well. We have regionally analyzed that our target annualized EBIDTA from our combined operations will be $250m going forward as we see stronger performance coming from our energy businesses. If we shift gears to our energy services business Blue Dot, Blue Dot is undertaking many critical initiatives to transform its business as well. Now, in the first quarter, Blue Dot's EBIDTA typically only makes up about 5% of its annual total. As we move forward through the year, the initiatives that Blue Dot is undertaking regarding the sales areas, the new operating structure by the centralization of its corporate head quarters to Sioux Falls, the flattening of its organizations, the efficiency of its expenses, the focus on under performing locations, and the operational excellence initiatives that Blue Dot is undertaking well positions that business to be successful in the seasonally peaking second and third quarters of the year. If we turn then to our Northwestern Communications business Expanets we have seen substantial building as we have gone through the year 2001, 2002, and beyond. That building as we have talked to you many times, has involved the acquisition of the growing and emerging markets division of Lucent, the building of those operations together with our 27 original businesses, the designing of infrastructure whether it be our expert computer system, whether it be the realigning and resizing of our businesses, the focus of our sales force, a variety of operational excellence opportunities to make Expanets' position very well to serve customers in the future. All have been undertaken in the year 2000, year 2001, and as we began 2002. We have also reconfigured our whole service operation called , our Expanets Technical Assistance Center which is a great opportunity now to provide even greater service to our customers. Importantly through that transition operationally we are also driving the bottom line growth and profitability. As we have talked to you about several times, we are not assuming that 2002 will be a stronger year economically, but in light of that, we have gone ahead and sized our revenue base at $920m conservatively. We have positioned our business to be successful with our EBIDTA targets of $80m to $87m this year assuming no economic recovery. We have done that through the tremendous strides that the Expanets' teams have made in focusing in not only on the cost side of their business, but the efficiency in the service delivery components. So, as Kip will get into a little further, you will see the reconciliation of the $135m improvement that we will be making at Expanets this year. It should be significant also for you to know that Expanets through these efforts has virtually halved its breakeven analysis. If you look at on a monthly run rate basis in the first quarter 2001, our breakeven analysis was a $125m in revenue. Now, on a monthly basis, as we look to March of this year, that number is very close to $50m and that's really what has provided a very strong first quarter performance that we have seen, but the first quarter performance of Expanets really doesn't tell the whole story because in March at a $70m revenue run rate at a 40 plus percent gross margin, we saw a very strong EBIDTA in March which will carry over to the other months of the year and that Etech performance that we saw with the March 1st entering of the Etech agreement effective March 1st only took hold for that one month. Beyond the 3 businesses that were having strong success in building as we go through this transformation process, we also want to make a couple of comments of our operational excellence initiatives. As you know in that development stage of our business we were really spending money to build infrastructure, being more efficient, and so forth. We have undertaken a project to reduce our SG&A expenses around a $50m. We are having great success with that in the areas of organizational modeling, leveraging our corporate structure, resizing our businesses, procuring our goods and services to serve our customers more efficiently and improving our business processes. We are very well along in that $150m target that we are suggesting for 2002. In fact, if you look at the validation of that just for the first quarter, our SG&A as a percentage of revenue quarter over quarter form the first quarter of 2001 where we were at 36.2%, we have reduced the SG&A percentage of revenue by over 5 points to a level of 30.9% in the first quarter of 2002. that great success through the development phases, we create more efficiencies with our business. Now turning the tides a little bit to our 2002 outlook and assumptions, as we told you very specifically we assume in all of our business plans that there will be no substantial economic recovery through the end of 2002. So, we built our businesses to be successful without any economic recovery. We also laid out that we assume the Montana operations will be included in our numbers effective on January 1 of 2002, while we closed the Montana power transaction effective February 1. So, we really lost as we described in the press release, $0.23 of earnings coming from Montana. However, given this success that we have had with our operational building, the success we see from Northwestern Energy, Expanets, and Blue Dot during the remainder of the year, we are not reducing our forecast and are remaining very strong with our EPS projections and guidance of 230 to 255 this year. That is well within the lines of our target of 10 to 15% earnings growth. So, if we think through those assumptions that we went into the year with, we still see those assumptions being relevant and our targets being relevant as well. Not only are we targeting as we described earnings growth and dividend growth, but our annualized free cash flow targets as we described in the press release are at a level of $100m. We think not only to build a great business do you have to provide earnings, but free cash flow provides the balance sheet strength, the future profitability, and the future ability to grow dividends in the future as a growth company. So, we think by targeting a free cash flow level of $100m, which is well more of $2 a share in free cash flow after the payment of capital expenditures, after the payment of dividends, after the payment of interests. We think that is a great position going forward allowing us to continue our track record of the top two dividend achiever as well as having a very strong balance sheet. So, as we conclude the comments of our businesses, we are very excited about the progress that we have made. We certainly think that at $20 range our stock is undervalued, given the level of cash flow, given the level of our comparable PE ratios in the marketplace, given our dividend yields and the prospectus for future dividend growth, our policy of being a 5 to 10% dividend grower into the future, is one that we think provides great upside to our stock. With those as introductory comments relative to the business, I would like to turn it over to now to Kip to talk about the numbers and further financial analysis for the quarter.

Thanks Dick and good morning everyone. As Dick said, we are extremely pleased with the overall first quarter results. We have talked about the transformation that is occurring within Northwestern, we were talking about that over the last number of quarterly calls. I think that the results of this transformation are now starting to become very apparent on our financial statements. Wherein, if you look at the first quarter consolidated results what you see is that even though revenues were essentially flat if you look underneath that, you will see such metrics as gross margin improving by absolute dollars of over $55m or as the percentage of revenue going from 32.5% to 43.8%. So, an improvement of over a 1000 basis points just on gross margin leverage percentage. Looking beyond that SG&A, you see that decreasing in absolute turns by nearly $25m or as a leverage point decreasing by over 500 basis points. Operating income, you see an increase of over $70m on operating incoming, you see an increase just shy of $80m in EBIDTA and finally income before minority interest you see a positive $13.7m for the first quarter of 2002 which is an improvement of a little over $46m, quarter on quarter. So, again throughout the income statement you see some very strong, very positive improvements there, which really is the manifestation of allowing of the transformation and business building efforts that have been under way over the last couple of years. Finally, if you look at net income from continuing operations again on a consolidated basis, you see $24m for the first quarter this year as opposed to 13.2 last year and finally diluted EPS is $0.65, it was $0.48 last year, again on a continuing operations basis. If we now start to look underneath the consolidated numbers, certainly our energy and communications businesses both posed a strong first quarter results from continuing operations. Michael Hanson and his team continue their strong track record of financial performance in South Dakota and Nebraska and these results were certainly further enhanced with the addition of the Montana operations effective February 1st. You also see substantial improvement in the results of Expanets and I will talk more specifically to both those energies here in a minute. Finally as Dick mentioned in his opening comments and as we highlighted in our press release, we are happy to reaffirm our previously announced EPS guidance through the full year of 230 to 255 earnings per share on continuing operations. I think it is worth noting that in the original guidance that we provided, that assumed that we would have the Montana Power acquisition effective January 1. Despite the loss of the January profitability, we are still reaffirming those targets based on the other opportunities that we see across our businesses and I think it speaks to the strength of the underlying base of businesses that we have.

We now turn to the various segments first looking at Northwestern Energy. Again a very strong quarter overall. We see total EBIDTA for the quarter of $56.5m, up some $34m from last year's $22m and EBIDTA certainly enhanced by the 2 marked addition of Montana operations. As we noted in the press release, another $22m of EBIDTA would have been added to that number to our first quarter of 2002 number had we had the benefit of the January results. Also from the revenue perspective you see an increase from an $106m last year to $174m this year and that would have been further improved by some $61m again with the addition of January Montana results. I think more importantly that on an annualized basis as Dick spoke to you earlier, when we look at our combined energy platform, our combined service territories across Montana, Nebraska, and South Dakota we see a business that on an annualized basis would deliver an excess of $250m of EBIDTA while requiring less than $65m in maintenance capital expenditures, therefore generating some substantial free cash flow for the business. I would also say that the integration is going well. Results today are definitively in line, if not ahead of expectations and as a personal note to all of our Montana co-workers listening in, I would like to personally say welcome aboard. You have already made a substantial contribution to Northwestern and we are thrilled to have you on the team.

Turning now to our communications business, Expanets. While the transformation of our energy business is obviously apparent, it is arguably even more so with our communications business Expanets. Throughout the last couple of years you have heard us speak about the tremendous efforts of the Expanets team, undergoing this transition and the integration of their previously acquired businesses onto a common business and IT platform. And while there is no substantial progress along the away, the results of these efforts are now starting to show themselves within the financial results as well as you see for the first quarter of 2002. Specifically if you look at the results, you will see positive EBIDTA of some $8.7m in the first quarters compared to a loss of almost $38m last year. So, an improvement of some $46m quarter on quarter and that is despite a reduction of revenue of some $67m. Clearly the story there as you look underneath it, is despite the reduction in revenues which was a focused effort, we are moving the revenues to a more higher compliment of services, higher margin, higher quality in terms of the recurring nature of those revenues and that is witnessed by the fact that when you look at the gross margin percentage, quarter on quarter you will see that last year we had a gross margin percentage of some 30.8%, this year some 38.2, so an improvement of some 740 basis points. I would also say that that gross margin is trending upward. We should definitively see gross margins in the second quarter and beyond in excess of 40%. I would also point you to the reduction in SG&A, where you see a reduction of some $52m in SG&A quarter on quarter in comparison. So, again we are starting to see definitive results of the transformation and integration that has been underway and also as Dick pointed out, while certainly we are pleased with the first quarter results, I think more importantly when you look at the results of the first quarter and the efforts that are underway and the progress that was made leading up to March, when we look at the annualization of the March performance and what we expect going forward, we feel very confident and as we look to our full year target of $80m to $87m of EBIDTA, we feel well positioned for that even in light of soft revenue conditions and we feel like we are positioned very well for future growth as well. A couple of other points that I would make regarding the first quarter results for the communications group, we talked earlier, we talked at the end of last year that they made the formal cut to the IT, their new IT platform in the November. Certainly, during the first quarter of this year, there were number of activities underway to complete that cut over. I am now pleased to say that our IT platform is fully operational and again given the efforts that were underway in the first quarter, lot of those, the efficiencies that are offered by the system aren't fully apparent in the first quarter results, but as we go forward you will soon see that in the second quarter and beyond. I think the other point to be made is that as we enter the second quarter and beyond, the fully operational system, IT system that we have will enable us to further our efficiencies and more effectiveness in sharing information across the company and thereby allowing for further margin enhancement and more target of sales activities that will further position our business for ongoing value creation going forward. Dick noted the 50% reduction or greater than 50% reduction in breakeven point again as witness of the ongoing efforts within Expanets. So, again a solid quarter and I think we are well positioned to deliver ongoing even greater performance and we certainly are very excited about that business.

So, we now turn to Blue Dot, our H sector or segment. I think the key point to be made there again, the first quarter of the calendar year is traditionally a very soft quarter, just based on the seasonality of that business. It is a very, very small contributor to the overall results. I would say also consistent with Dick's opening comments is, there are a number of initiatives underway in terms of matching the location's cost structure to reflect market conditions. Ongoing efforts within the, we have talked previously about a handful of under performing locations that do continue to mask the overall performance of the business. The majority of our businesses are performing very well and very much in line with the expectations. The efforts on the under performing locations, we are starting seasonal traction within, particularly within a couple of the markets. We think that we have made some very strong movements there in terms of the placement of personnel and other few initiatives and we are starting to see some performance, and I would also tell you that across the business we have made a conscious effort during the first quarter to retain some of our cost structures, some of our personnel in anticipation of the traditionally stronger summer months and so as we sit here today, we think that we are very well positioned going into the second quarter and beyond. So, in totality, we think we have made a lot of progress within Blue Dot. Not all of it is readily apparent within the financial results that you see, but again behind the scenes, we think, we are making a lot of progress. We think we are well positioned for the full year targets that we previously discussed. One other point on Blue Dot to make during the end of April actually we initiated and completed a sale-lease pack of a large number of the vehicles within Blue Dot. We talked earlier about the maintenance CAPEX requirements of Blue Dot. Overall it quite frankly has to do with advance, Blue Dot being a service business is not a capital-intensive business at all. The majority of that is with vehicles. We were able to do a sale-lease pack transaction on a large number of the vehicles. We were able to do that at cost of proceeds of less than 4% pre-tax. We received 20m in proceeds, which was a distribution backup to Northwestern. So effective releveraging of the business, cash backup into the business, more importantly from a bottom line perspective we see savings in the balance of the year of approximately $2m when we look at the bottom line results. And you will see as you track the results going forward, you will see some geographic differences in as much as we are now leasing a lot of the vehicles under operating leases. So you will see that reflect up as lease expense. Previously you would have seen that as depreciation and interest expense on the debt. So from a bottom line perspective again you will see a positive improvement, but from an EBIDTA perspective, which is the metric we typically talked about, technically you will see a reduction of some $6m or so from your previous targets. It doesn't change the bottom line impact, in fact actually it enhances it. But from an EBIDTA metric perspective, you will see a decrease of some $6m balance for the year from previous targets.

Finally, a couple of more comments and then I will turn it over to Liz for questions. You would have seen it in our press release in a consistent flow we talked about in the last couple of press releases and in fact in our last year-end's call. CornerStone in light of the January decision by the Board of Directors, CornerStone to pursue strategic alternatives, we have elected to account for CornerStone as a discontinued operation. and in conjunction to that we have also taken a non-cash charge of $40m after tax or $1.46 per share. The reflected in our 1Q results again on a one-line basis below continuing operations. You will also see consistent treatment on the balance sheet in our subsequent Q that we file in as much as the assets and liabilities of CornerStone will be reflected on a one-line basis. So, again it is very like a system with a strategic intent of divesting of CornerStone. We are also making note of the fact that during 1Q02 we have adopted FASB 142, which relates to goodwill and other intangible assets. Of course FASB 142 eliminates the requirements to amortize goodwill and limits amortization of other intangibles to instances where the assets have a finite determinable life. We will be completing the initial impairment testing as required by the financial accounting standard and we will be completing that target by the end of 2Q of this year. But I would tell you that our preliminary testing and announces suggest that there is no impairment to be expected when we complete the final impairment testing. Finally one last comment. I have to tell you that we have begun our interview, only backup, in light of the current situation with Arthur Anderson, we have

begun interviewing for a new public accounting firm. We have completed our first round of interviews and have had ongoing discussions within our committee and we would look to, based on the initial interviews we are going back to the leading candidates for the second round and some time in the near future, we would look to make an announcement in term s of our independent public accountant for the year 2002.

With that, again we are very pleased with the overall results and we think we are well positioned as we go down through the year. Hopefully you will start to see that the very tangible evidence of our transformation and w e are very excited about our prospects going forward. So with that I would like to turn over to Liz.

Ladies and gentleman, thank you for standing by and welcome to the Northwestern Corporation's first quarter 2002 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session with instructions given at that time. If you should require assistance during this call, please press 0 then star and as a reminder this conference is being recorded. I would now like to turn the conference over to our host Vice President of Banking and Investor Relations, Elizabeth A. Evans, please go ahead.

Thank you Kip. We would like to now open the call to your questions and I will ask the AT&T operator to please explain the procedure.

All right ladies and gentleman, if you wish to ask a question please do press the 1 on your touchtone phone. You will hear a tone indicating that you have been placed in queue. You may remove yourself from this queue at anytime by pressing the pound key. Once again, if you wish to ask a question press 1. One moment please for the first question, and our first question today comes from the line of the Dan from Apex . Please go ahead.

No question.

Okay, thank you. And we have a question from the line of Ryan Godfletch, from Capital Management, please go ahead. Hello Ryan, your line is open. Okay, we will move on. We have a question from Carl from Merrill Lynch. Please go ahead.

Good morning everybody and congratulations on showing some good headway here in telecom. It is actually I would like to kind of start just from some very, back of the end of analysis here. It looks like your March revenue run rate has just sustained and I think, kind of what you are saying, it is 70 million, I think were getting some indication that the very least revenues have sort of based out with respect to the coin, but it would seem that all being seen equal, your 2Q EBIDTA should be at least $15m for a $60 plus million run rate. One, I wanted to confirm that, then two, as you reiterated you rated 80 to 87 million EBIDTA target for the year, presumably that also means that we should expect to be seeing the dividend from paid kind to cash by year end and I didn't know if that would actually start in 4Q or will it be early 03?

Carl, this is Kip. I will take the first part of that question. Yes in terms of second quarter expectations and balance of the year, we would look for second quarter EBIDTA to be in the high teens, let us say, and in terms of the cash payment dividend, yes absolutely we would look for that to, particularly in the back half of the year, look for that to be paid in cash.

Okay, so by the end of this year. Okay great. Let me just switch to Blue Dot for a second, only because I think there is less of a line of sight, shall we say to the EBIDTA target. And understanding the first quarter seasonal issues, but I think Blue Dot has been somewhat of a challenge here for the last few quarters. Given that we have almost equal preferred investments between Blue Dot and Telecom and the different line of sights that we have there. How long, you know, do you give it for the problems of Blue Dot to work themselves out before may be other corrective measures need to happen?

I think, this is Dick Hylland, as you look to, you know, may be I will turn it over to Daniel as well, but you look to Blue Dot, our EBIDTA guidance with Blue Dot is to go from roughly $10m of EBIDTA in 2001 to this year $30-$35m of EBIDTA targeting for 2002. We have talked about many of the transformational items that we are going through at Blue Dot whether it be in the sales initiatives, the costs, those sorts of things. So we are confident our targets for 2002 as we move forward, but more importantly than the transition we are making for 2002, is the beyond that we are targeting this business to be a business that can do north of 10 to 12% in the EBIDTA margin over time and that will take place with longer term initiatives we have whether they be in the systems area and so forth. So right now we see that it is our pasture moving forward as well as, as we look at 2Q and 3Q as Kip mentioned earlier, we have purposely retained overhead technicians, service people to service our customers during a very significant peak that we always see obviously in that business in the second and third quarter.

Dick, with those goals in mind, when do you think like Telecom, Blue Dot can start paying its distribution to you guys in cash?

Well, as you think through just the numbers, the $30m - $35m in EBIDTA will be produced if we hit our targets in the year 2002. That cash will be available to pay partial to every increasing, as we hit our run rate, every increasing parts of that cash dividend on our prefered portfolio. If you look at the announcement that Kip just talked about, let us say a lease pack for example, that lease pack will take roughly about $10m to $12m out of the annual CAPEX requirement through the use of that very advantageous funding that we have got in the sale-lease pack as well as many of the cost side opportunities we see going forward. So, that amount of cash pay on the dividend would be increasing through the year and as we would hit our targets later in the year as well as in the 2003, then we would see the payment of that dividend in cash.

Okay, great and final question, Kip. Just wanted to touch the minority interest. Have you seen the last of the basis? Is there any more basis left? And I guess I would also ask other financial questions just on if you could dote where status is of the credit facilities on both Blue Dot and Expanets.

Sure. Take your first question first on the minority interest basis. Yes, as we sit here at the end of 1Q, there is no minority interest

basis left in either Expanets or Blue Dot. I will remind you Carl, to the extent that we do additional acquisitions, say Blue Dot, there is certainly the possibility that additional minority interest basis will be established. But as we sit here today, there is no minority interest basis and obviously we have considered all that when we provided the full year earnings guidance. So we have taken all that into consideration. In terms of the status of facilities, we are hopefully in the final stages of putting up in place of Blue Dot. We are hoping to put that in the next couple of weeks, we get that finalized and in place. As it pertains to the Expanets facility, we felt that it was important, in fact really imperative to complete the cut over the new IT system. That is so inter and all the discussions that you would want have with commercial vendors. we need to successfully complete that. As we talked earlier, that system is now operational and so as we sit here today, we are putting together the final package to then take out the prospective vendors. We will be starting those initial discussions and have it in the next couple of weeks and then we will let it work its course. So my best guess as I sit here today, you probably looking into to the end of 3Q or may be some time in the early 4Q, I would look for a commercial facility to be put in place.

Great. Thanks for the update. Best of luck.

Our next question comes from the line of Steve from Body . Please go ahead.

Hi, it is actually John , a couple of differnent questions. Just want to make sure the composition of the minority interest, is it the loses at the both Expanets and Blue Dot plus the preferred 6. what is it 6. some odd million preferred? Is that essentially the composition of the minority interest?

Now, if you look at the first quarter of 2002, you will see that the minority interest is fourteen million nine hundred and fourteen thousand dollars, lets us call 15 million in rounded numbers. What that is, that was the remaining minority interest basis that existed with Expanets and Blue Dot. It is the allocation of losses up to that amount. So, as I said earlier, there is no minority interest basis left for the purposes of loss allocation, as we sit here at the end of the first quarter 2002.

Okay, did you make any, so you made no acquisitions in Q1?

For Blue Dot? For either company for that matter, yes, that is correct.

Do you have any plans for Q2 for acquisitions for either company?

For Expanets probably not, we have a national platform there. For Blue Dot, I would anticipate yes, we will always be in the market looking for strategic acquisitions. I think, one of our strengths now as we sit here today as opposed to, if you look at the last couple of years because of the platform we now have in place, the national infrastructure and the markets we now sit in, we are in much stronger position to identify new acquisitions that more strategic in nature, to better leverage our existing locations. So, yeah I think that you can expect to see some limited amount of acquisition activities for the balance of the year, but it will certainly be less than what you have seen historically.

Okay. Could you also give us cash flow from operations in the quarter as well as free cash flow for the quarter?

Can you be more specific in your request please?

Sure, cash flow from operations as would be read on the casual statement when you file the Q and free cash flow, which I would take as, you can divide it either as EBIDTA minus interest expense in CAPEX or cash flow from operations minus interest expense in CAPEX.

Okay. Well, let us look at the second part. If you look at this, excuse me, if you look at the first quarter results, we have had some $62m in EBIDTA. If you look at , we had, you know, some $21m in interest expense. From a CAPEX perspective, Expanets and Blue Dot between them, they will generate some, you know, roughly $5m of maintenance CAPEX a quarter. If you look at our utility business, again on an ongoing basis, keep in mind, the EBIDTA number that I noted excludes January results, but we stay with that number as we said earlier, our utility business will generate a required, some roughly $65m of CAPEX on an ongoing basis. So, from a quarterly basis, that is about $15m, there is about $20m of maintenance CAPEX. Again, in EBIDTA some $62m, and that starts to give you a feel for the underlying free cash flow, then the interest expense of some $21m, although, some of that, you know, about $5m of that is at the Expanets level. So, it is not, if somebody want to do this on a only basis or full consolidated basis.

Can you give us CAPEX, what you spent in the first quarter?

Not sure if have that number in front of us.

Okay. So, when will you file the Q?

It will be filed certainly by May 15th.

Ok. Thanks very much.

Our next question comes from the line of Scott Pearl from Credit Suisse First Boston, Inc., please go ahead.

Could you give us the portfolio approval process in Montana, and I guess, relating to that, progress on the Montana first megawatts project?

Scott, this is Mike Hanson. I would be happy to do that. With respect to this the fall supplies, you may be aware that the company was required to file a recovery mechanism in the commission to address that by the end of March. That filing was made and approved and so the recovery mechanism, which is essentially a pasture for power costs to the effective July 1st, was approved and established. The proceedings for the portfolio of contracts himself has completed their technical hearings. The coming 3 or 4 weeks, there are a series of public meetings and briefing schedule and the Montana Commission has indicated an attempt to have the decision out by the end of May after which time depending on how they decide, because really what they are doing is, just looking at the portfolio, they may approve it in its entirety or they may ask us to modify aspects of its own. It will take that decision and work with it from there, but we will have supply arranged in between now and July 1st and as they said the recovery mechanism is established. The question on the Montana first plant, the construction is well underway, the foundations are on place, the are on site that is, again that being part of that, under a signed contract to supply the default supply assuming that the commission continues with that proposal, that plant will be online this fall as proposed. They determine that it is in the best interest to modify the schedule. We have that flexibility as well. The plant construction is underway and continuing.

I guess on the financials, you know you were kind enough to layout in a pretty explicit detail back in November, the EBIDTA for the different pieces and I am just trying to work out now with Propane and the electric and gas business increased from 225-235 range up to 250. I guess, this should the other pieces here, how they add up to the, I guess, number of, I think, 335 to 355. Could you sort of walk through that number?

Yes, you bet Scott, that is a good question. We published it and I have highlighted that earlier. Let us just go through specifically entity-by-entity and how we walk through each number. Let us start with the totals. In the totals, we will include Northwestern Energy, Expanets, and Blue Dot because we are considering CornerStone as a discontinued operations. We will exclude those numbers from CornerStone. Northwestern Energy, in 2001, we had actual EBIDTA of $68m and we are projecting now with the advent of the Montana Power transaction so forth, a target for 2002 of 225 to 235. Okay, it is that specific for Northwestern Energy 68 to 225 to 235, that is just for 2002. That is not the annualized total of $250m. That is just a kind of a trailing number in 2002, that is actually what we expect to report. At Expanets, we will go from an actual of a negative 48 in EBIDTA of 2001 to 80 to 87 million dollars for target 2002. Blue Dot, we expect to go from $10m in 2001 to 30 to 35 million dollars in 2002. So, in the totals, we should have probably started with the totals is $30m for actual 2001 for those 3 entities. When you net all those numbers to 335 to 355 million dollars actual as reported. Now, when we talk about run rate however, the run rate of the $250m of Northwestern Energy as well as the Expanets' run rate is obviously going to be higher at the end of the year than it is obviously at the beginning of the year. We have not given run rate expectations yet for Expanets. We are still working through that for 2003, but you could factor in that $250m comment in relation to the numbers that we just provided and that would be a full update to that same slide that you saw in our November 30th web cast and that is really the slide that we just updated with you at the current time.

Okay, so you consolidated that other into the other businesses?

Yes.

A question on the minority interest, if you could just break up the 50 million between Expanets and Blue Dot and I guess remind us of the current investment balances at those 2 companies currently?

Sure Scott. As we said earlier, the minority interest allocation was 14.9 million. Of that 11.2 million pertain to Expanets and the remaining 3.7 pertain to Blue Dot. In terms of the investment balances, at Expanets, there is a $364m for full stock investment. I would highlight that, that that is an increase of $50m from the beginning of the year, what that relates to is as Expanets completed the cut over of the IT system as they made that system fully operational, there were originally some billing issues, deficiencies within the billing system of the new IT system. Those issues have now been worked through. The billings are now current, but that did cause us delay in collections, some of the receivables. So as we sit here today, the receivables are higher than what they will be in the near future. So, we did make a, what we considered be a temporary advancement to Expanets, some $50m that we expect to be paid back surely within the next 3 to 4 months, if not sooner as they work down their working capital requirements related to the increase and that cash flow will be incremental to the underlying cash flow of business to pay the dividends that we talked about earlier. For Blue Dot, the, and then there is also at Expanets, just to complete the discussion, there is a $50m operating loan that continues there, it has been in place for where we had talked about previously. So that, that is not new. For Blue Dot, the investment balance at March 31, was $342m in terms of the full stock investment. There is no operating loan or anything like that, it is just that first stock investment. That is an increase of about $13m from the beginning of the year. However, I would tell you that with the proceeds from the sale-lease pack, we would look for that to be paid back.

I guess, one last question, while we have all the folks that represent the communications effort. If I could just ask, I think, it looks like you reported that you have finally restructured the last of the transition agreements with the and you know, back in November you were looking for a pretty good pick up in income related to structuring of that, I guess those last 3 agreements were really big, the big one. Could you maybe, give us a little bit more color around the, that restructuring and then while we have you here, if could just talk about on the revenue number, the contrast with the current run rate to, I think, you reiterated the year total of the 920 versus the 200 in the first quarter. Talk about how that plays out with the rest of the year and may be, you could just give us a little bit more flavor on that revenue as far as roughly some of the mix that you are seeing as it relates to new installations versus maintenance versus applications.

Sure, this is James, Scott. First of all, along the transition service payments, they are now removed, so that is good news. The expert us to remove the remaining transition service agreements. All of those are priced in such a manner that they were expensive and they never were long term, so they were temporary. The last 3 years you mentioned, related to repair and centralized call received and remote diagnostics. We entered into a new commercial agreement with a , that we placed the transition agreements on those 3. Very favorable terms in terms of costumer service improvement, metrics, management systems in place between the two businesses to improve service levels and then the cost of that was competitive. We did an and had 4 other bidders and the was competitive. We just liked to with the . So, a very good agreement for ourselves and the may I mention. Now, going on the revenue question, first of all let me get a little bit of context, we did in Expanets last year. We built a conservative plan this year looking at the fourth quarter, and almost taking the fourth quarter times four, in other words, we made the assumption without knowing any other information that the economy this year would stay outside, we will be cautious about it coming this year. So we stay conservative about that. Hopefully, if that will be the case, we will a get revenue pickup. But we have built this year on a conservative basis from or business accordingly. I continue to remain cautious about the overall economic outlook. In another context, we have actually moved 1200 total people, all last year from 4400 to 3200. They were actually 105 people under the budget we laid out for ourselves this year and we are under our operating expense and our discretionary spending targets for this year. We are doing that because I just continue to want to be cautious and conservative on the revenue front. As we go forward, I have not given up on the 920 for this year and we will see how this flows, but we also are in a position that is, there is a slight miss or some miss of revenue to meet our EBIDTA requirements. The of the revenue has dramatically improved, like 50% to 53% of our revenue now is services related as a percent of total mix and the margins of much higher. The quality of revenue is much, much better.

Our next question comes from the line of David Reynolds from Morgan Stanley, please go ahead.

Yes, good morning everyone. Most of my questions have been asked and answered. Do have one question. Is the $35m EBIDTA target for Blue Dot, does that now include the impact of the sale-lease pack that is gonna, which has no bottom line impact but is going to 6 million out of EBIDTA. Or should we be adjusting for that?

Well, I think, the previous guidance we provided was 30 to 40 on Blue Dot. You know the 6m will now lower the top end to that to roughly $35m. So, the 40 is now apples-to-apples to the 31.

Okay, yeah. All my other questions have been answered. Thank you.

And we have a question from the line of Eric from Capital, go ahead.

quick question, how much of the revenues and EBIDTA operating income, how are we going to break it out for the electric and natural gas segment, would have been attributable to the Montana Power acquisition?

Well, from a revenue perspective, roughly $105m of the revenues for the reported first quarter would have been pertaining to Montana.

Okay. And then on the interest expense for the year, you have had 21 in the first quarter, is that a good run rate for the year for interest expense or will it be higher for 02?

May be, it will be a little bit higher. Well, though there are a couple of moving parts, keep in mind that the 02 number, the first quarter number does not include the first month Montana as we have said before, so therefore it does not include the first month of the acquisition financing. So, that won't impact the run rate. We also, have some financing activities coming up, as well as when we talked about before, as part of the acquisition of the Montana Power, we assume their position in the sale of their cold strip transmission line, the proceeds of which will be $97m. We look to consummate that transaction and therefore get the proceeds. You know, toward the end of June or first of July somewhat in that period of time. So, that is 97 million of proceeds and then you know, as we said before, we do look to go to the equity capital market some time in the near future and because that would have the impact in lowering our interest expense as well.

Do you have a target for the year? Interest expense.

Well, on a, again if you look at, you know, parent so our recourse interest expense, which would therefore not include the working capital facilities we would have in place in Expanets and Blue Dot. On an ongoing annualized basis we would look at our recourse interest expense, now we are roughly $90m, annual number.

Okay, 90m roughly, and then the preferred interest. I think you did mention that, what are the preferred interest payments for the year?

Again on a run rate basis should be about 30 million dollars a year.

Okay, just two more quick questions. CAPEX, you said 65m maintenance CAPEX for the energy businesses and then roughly 20m for Blue Dot and Expanets. Why is that difference from the 10K where you outlined just over a 100m?

While some of the with Blue Dot, we talked about the sale-lease pack, the vehicles going for, we would also like to continue to lease vehicles, so that is going to certainly reduce their maintenance CAPEX. That is going to be the big difference, and then a 100m as our call also included CornerStone. We are reporting them on a discontinued basis so, in terms of the metrics, we would discuss with the public. We will tend to exclude CornerStone.

Okay, last question on the basis. In the 10K also, you had had noted that you had a 11.1m elective basis in Expanets and none in Blue Dot and we just broke out that of the minority interest attributed this quarter was for Blue Dot. Is that, you made no acquisitions in the quarter, how is that possible?

What they really had to do is, when we have number of shareholders you would appreciate each one with slightly different exchange rights and as we computed the year-end calculations of that, quite frankly we ran on the number and there was $3.89m of basis.

Okay. And then also you attributed 14.9 or roughly 15m between the two, but what happened when you look at the segments, is there combined loss of minority interest is about 12.5 million, how can you attribute more of the losses than you actually reported on the segments?

Well, again the way that will work is the losses will be allocated based on seniority rights. So, those, that is what we will do. We will also then our preferred dividends stand as a priority before the allocation of loses, so, to the extent the basis available. Then we will recognize our preferred dividends as income, and so the difference between what you see is income or loss for full minority interest and the allocation of minority losses represents the preferred dividends that we would have been allowed to recognize under GAAP.

That you were unable to recognize.

That we were able to.

And we have a question from the line of Phillip from Capital. Please go ahead.

Thank you very much. Gentlemen, congratulations on what, I guess, seems to be a pretty good quarter. I am trying to get, kind of a apples to apples comparison, this quarter versus last quarter, and you mentioned that revenue attributable to Montana Power is 105m for the quarter, is that correct?

Yes, it is.

And how much in EBITDA is that?

Well, I would say, going forward, we are really managing our utility businesses under one common platform. So, we really don't intend to provide guidance going forward on our individual businesses because again, one of the strategic benefits of that is the ability to combine these operations, capture the efficiencies and leverage the size of those two entities. So, as we go forward and that is why in the segments we present them as one. That is certainly exactly how we are managing it.

I can appreciate your, Chris, interest in providing that information, but since it is kind of a tough quarter, and it is really no, there is really no way for us to understand quarter to quarter, that is, this quarter versus same quarter last year, exactly what the impact was, probably would be helpful from an analytical standpoint, understand what EBITDA is attributable to the operations that were in place last year versus the operations that are in place this year, and just the same way that you took out the piece resulting in 48 cents, I believe, comparing to 48 cents last year. Just so we can understand exactly what it is, apples to apples?

For the first quarter of this year, included in the consolidated reported, EBITDA results for electric and natural gas, 56.5 million, 39 million, or actually 38.9 million dollars of that pertaining to Montana.

Then, next question, someone had asked previously about the dividend that will be attributable to Blue Dot, and it wasn't really clear to me when I was going to go cash pay, what I was going to be later this year or it is not expected until 2003?

Well, we would expect that to be partially cash pay ever increasing as we would hit our targets of the 30 to 35 and EBITDA and factoring in of course the CAPEX and sale lease back and some other things, that we would expect that to go in part, cash flow later in the year 2002 as well as on to 2003.

But its entirety, not until 2003.

That is correct.

And the interest amount. The question regarding interests was answered based on debt exponent level. Can you give us an indication what interest looks like on a fully consolidated basis? Expected interest. Did I presume, that is 21.6, 21.7 is on a consolidated basis, correct?

That is correct, if you look at the segments you can see the break up and for example, for the first quarter, you would have seen that our communications segment represented, just short of 6 million dollars interest expense. The w as actually quite insignificant about a 100, 000. Going forward you will see more interest expense of the as we put the facility in place, which near then we will, from the proceeds back up to the parent level, and then, at the communications level, that is probably not a bad run rate in terms of what you can expect going forward, overtime, that will go down as they execute against their plan and you know convert their levels there, their cash flow is, for now, that is not a bad run rate.

So, this is on how much in total debt done? Because what would be the, what rate are you paying at this juncture on a basis?

Debt, which level?

How much of debt is outstanding in total, on a consolidated basis?

Well, in a consolidated basis and totality at March 31, 2002, there was 1.7, almost 1.8 billion dollars of debt.

Ok, so you have to...

That included about 200, excuse me, 200 million dollars of non-recourse debt, you know debt at exponents of Blue Dot.

Right, but the interest payment would be still consolidated in this number, correct, the 21 million? I am just a little confused how we get 21 million of interest on 1.8 billion in debt even accounting for the fact that the first month of 720 million was not paid this year? I am trying to reconcile it, because basically, it seems like a relatively low number in that, perhaps you could just help, clarify for me?

It should be relatively

It was about 1.3 percent per quarter, right. So, given the interest rate of 5.2 percent on the entire block.

Well again, you have got to annualize the debt we have got and that is not insignificant number that was added during the first quarter. When you average on that, you know, you get to a pretty reasonable rate.

So, what ends up happening, to the extent that you believe that this 21 million, 21.7 million as a reasonable estimate for your annual interest payment?

Well, as we said earlier, as we take the proceeds from the coal strip sale which will happen in the first of July, as we execute against our equity financing, on a go forward basis at a parent level, on a basis we would see 90 million dollars of annualized interest expense.

But that was on the parent level only, right?

Yes.

Okay, again. So, on a consolidated basis, what we are expecting, because again this consolidation, interest expense is consolidated, so, how do I compare it to consolidated number?

Well, you know, the 90 million, then again at exponentially looking at some 25 million dollars of annualized interest expense at their level, and then the, that is how I break it down, if you are trying to get a total interest expense.

Okay, and the other subsidiary?

Blue Dot, there, I mean, that would be a fairly insignificant number, you know, you looking at its initial facility that would probably be in the neighborhood of 20 million dollars, now we look to grow that facility as Blue Dot, you know, forms against their plans. So, we are not looking at that as a significant amount of interest expense, and that is really a kind of difference in the ground scheme .

Okay, and with regards to the minor audience, just to clarify, from what I understood you are saying that you are preferred, pick payment had a priority in the allocation on the balance sheet, and that the remainder was then losses attributable to the subsidiaries, is that correct?

Yeah, what number are you trying to reconcile?

That this is the 14.9 million.

Right.

How much was the pick payment?

A preferred dividend that you received.

Well, if you look at, if you go to the segment, you will see that the loss acquired for minority interest for communications and H-Back in totality was 8.9 million dollars. The allocation of minority interest was 14.9 million dollars, so it is a difference of 6 million dollars, and that the 6 million dollars is the portion of deferred dividends that we recognized.

What would have been the portion that you didn't recognize?

Well, that would have been roughly 20 million dollars, were the dividends for the quarter, so, you know, the difference for this were dividends that we didn't recognize.

Okay, super, I have more questions, but I will go to the back of the queue, Thank you gentlemen.

We have a question from the line Chris Melendez, from Morgan Stanley, go ahead.

Hai, I have two questions. Could you give me an update on the plans of roll up the Montana Power assts into the parent company?

Yeah. Hai Chris, we have a work plan in place, you are going to appreciate it. So, it is not a small administrative task. There are over 2000 real estate leases to transfer and all that, and anyway we have the administrative plan in place. We have had a series of meetings internally across the Montana Power operations to finalize the work plans and we intend to start executing against that, you know, in the very near future. We certainly don't see any complications or real difficulties in executing that and so, certainly, relatively, in near future, you will see that completed.

Thanks. Can I ask you one more question? Can you give me a break down or roughly percentages by quarter of EBITDA for the energy, because now, you have a two-season peak, you know, I am curious as to what the first quarter is going to relative to the third quarter? So, that 230 number or your 250 run rate, you know, what kind of percentages, do you expect on a quarter basis, on averages?

I am sure you will bear with me.

Thanks.

And we have a question from the line of George Rubous from Angela Gordon, please go ahead

Once you go ahead with your question then I will come back to Chris's question, just to keep the flow of the queue going.

Sure, could you go over a little bit more detail on how the SG&A savings in the communications business have been achieved, because they are fairly significant?

I think that is a great question; we will turn that over to Jim Walker, CEO of Expanets. Of the 150 million dollars just to set the stage, virtually a 110 or north of 110 million dollars was at Expanets, so that is a great question. Jim can go through the detail.

Yeah If I could kind of take in broad buckets of this kind looking at some numbers. If you look at the whole kind of bridge from last year to this year and the cost reductions, we had one time transition of business last year of 36 million dollars, which do not repeat themselves. The transition service arrangements we have with Avaya, those were gone and the new arrangements we have in place either for our own sourcing or with other partners is 30 million delta there. We did reduce significant number of personnel, as mentioned we had 4400 people odd numbers last year on an average basis and this year of 3200 on payroll now. So that is a 1200 people reduction; that is 44 million in terms of reduction. Discretionary spinning down, is down 10 million dollars, aggregate, things like travel, entertainment, things like that and then if you look at gross margins not SG&A, but gross margins, there is an improvement there but because of mix of revenue primarily and then another elements that mixed into that of about 15 million. So that is how we get from the minus 48 million last year EBITDA up to a positive 87 million this year and those are the broad buckets that flow back into the SG&A.

Are you at all concerned in order to achieve your targeted revenue I mean you might have go back to start hiring people?

No, in fact one of the things we felt best about is last year was a big transition year for Expanets. We integrated 27 businesses, we acquired huge IT systems, Oracle, Siebel platforms, we did tremendous amount of resizing as I mentioned and then changing of cost structure, on top of that meaning management and support personnel. So of all the changes we put in place, we are actually under the turnover targets that I had in employee. To get a good employee turnover were a little bit under the expectations I had for the sales force there. So, that is good. We have been able to keep the business intact with all this resizing, keep the key personnel in place and then if you look at the revenue plans that we have this year we have planned in terms of our budgeted personnel and what we want to do. Now if you look at this platform, though when you look at the growth scenario as this economy rebounds and when it does, we will be in a position from a cost structure standpoint to produce quite nice margins and bottom line performance and obviously we want to be adding people at the right time but we are watching cautiously when that right time is location by location.

Did you have to take a one-time charge after all this?

There was a, there was small amount of for Expanet in the restructuring charge, I think that was in the fourth quarter earnings release, hold on just a second, we will get that number for you as we pull it out, but that was a very minor restructuring charge. Ya, it is 5.9 million dollars.

So there is no other cost associated with this program, either capitalizing or something?

Now, all of those were factored into the expense numbers and in the bottom line that you have seen in 2001 and 2002, all of that was expense.

Ok, my last question is, with regards to a new auditor that you are interviewing. Is there a risk of somebody coming in? If and when, and you are having to adjust your numbers based on their review?

What are you? You mentioned new orders? Could you clarify it? What are you.....

I though you had mentioned in the interim, a new accounting...

Oh, new auditor.

Yeah.

Well now, we certainly wouldn't anticipate any requirement for restatement. We feel very strongly that our are reporting in full compliance with GAAP and we certainly wouldn't anticipate any other independent auditor having a contrary review.

Thank you.

Before we take the next call. Chris, if I could get back to your question, I am sorry for the queue change, but if the question was what can, if I understood you right, what can you expect in terms of EBITDA balance of the year or the kind of the weighting of EBITDA given that we now have a winter peaker and a summer peaker. For this year, you can look in Q2 and Q3 that both the in the low 20s, low 20 percentile, the total target of, you know we have laid out 225 to 235 as our target for the year and then the Q4 would be in the upper 20s or as much as 30 percent. Now, on our annualized basis if you include the January operations from Montana, so, we are now on a go forward basis, the Q1 would then be, you know, roughly in the low-to-mid 30 percentile of the total 250 million dollars plus target. Your Q2 and Q3 therefore go into the very little 20s and then your Q4 would go into the upper 20s. So hopefully that is response to your question.

And sir, would you like to take a question at this time.

Sure.

Ok, my next one comes from Raphael Cohen from Silcaps , please go ahead.

Yeah, regarding the Expanets, you initially had a goal for revenue of 920 million dollars, you are a little bit shy of that, how might you make that up and a question on gross margin, I think, initially your were targeting at 41.3 percent goal for gross margin and you are little bit lower than that and how might you make that up goal going forward?

On the Expanets revenue question, we are a little bit under in first quarter from the plan that we laid out. We don't plan to make that revenue up with the addition of personnel, that kind of goes back to the earlier question, we are working with our account executives very closely and we work with all 600 plus of them, one by one, and looking at where they are against their plans, etc. So, we have all the initiatives to help them get back to plan to help . We also have some other initiatives that within our own cost structure generate more maintenance revenues, and etc. So, I think, I would answer that two ways, one as I mentioned earlier, I think we have a good chance to make that 920 or even achieve beyond that little bit, there is a possibility. We also have a chance of a minor deterioration debt against plan but I have already tried to make adjustments for that eventuality if it occurs with our current discretionary spending and head count, etc.

Yeah, just to add to that, so you are clear, we talked about the gross margin going up to a high 38 percent in the first quarter. If you look at just March alone that number was the number approaching 43 percent of the 70 million in revenues. So when we factor in the average of being 41.3, what we saw is that ETAC arrangement, which affected gross margin substantially with the efficiency that Jim has described, when an effective March 1st, they only saw 1 month of that into that 43 percent margin. It so as we move forward, that is what gives us confidence in the 41 percent as we go forward.

Very good. Thank you very much.

We have a question from James Lynn from Greenways , go ahead sir.

Hi, I want to go back to the question regarding the revenue mix at Expanets. You guys mentioned that the quality of revenue has improved. It is something at 50 to 52 percent of revenue that is not service related. What is that compared to in previous quarters?

Ahhh... this is Jim again. I don't, see have that number right in front of me, but it is at least at a 6. percentage, but we are 44 to 45 percent in that range, I will say, from the services revenue. So, that is kind of the improvement from 44-45 to 51 or so.

And is that how you view the new revenue within Expanets in terms of service related and nonservice related? Is that the way you kind of break it up and take a look at the breakdown?

We certainly have a focus on growing our services revenue, so lot of activity with that, so in general, yes, we would like to maintain roughly half our business being services related and the other half being more of a infrastructure or applications based business.

And you mentioned that the service-related revenues have higher margin. What is the, can you quantify what you meant by higher margins and give me the margins on the nonservice related or the application related businesses?

I will do it in kind of, I'm not looking at numbers but I don't like giving you directional statements. If you look at the infrastructure that we sell mean product, you know margins there, are from a data to voice anywhere from 25 to 34 percent, but it is weighted heavy towards the 34 because we have more of that type of products. And applications type revenues, those margins would be high 30s let's say, you know, the services, our maintenance services would in the mid 40s to the professional services up into the 55 and even higher at times. So those are ranges of margins that are related to our business.

And that is gross margins, any guidance on operating margins within Expanets along the same lines?

Well, on those product lines?

Yeah.

We haven't really captured it that way. If I could set the gross margin level, I have better information there.

Okay, right. You may have mentioned this already, but in terms of new contracts and new business lines versus existing contracts, that kind of continue on, have you given any guidance on that?

Not in past, looking, I think I don't really we haven't.

So you said, you have not.

No, we have not. In the past year, specifically, what is your question mean, maybe I can answer?

Well, I mean do you keep metric like backlog, and you said new contracts won

Sure.

Tell me what that has been in the last quarter versus maybe the historical quarters?

Well, if I look at, let me kind of say, the information I have in my head here. If you look at the bookings we have right now, let's say from January, actually go back into the fourth quarter and remember on September 11 the impact on this particular communications industry was quite severe and if you look into the fourth quarter and then look at the bookings going forward, we are increasing bookings by continued, month by month into May so that the positive look. If you look at new opportunities in terms of funnel management, that is an increasing number, so that is positive for us. So from the and bookings, we are on the positive trend and if you look at backlog right now, positive trend, but that is where I stay cautious I am going to watch this very close and watch our expenses and our spendings and until we actually recognize the revenue and see the work. We will be cautious there. So the trend for us, we do expect to improve throughout for year. It is really a matter of how much I think depending on the economy. And, back to the revenue question, the front market part of our revenue, the infrastructure and applications what we call front market is dependent on either our gaining share or the economy in general, improving. The other half of our business for services string is fairly stable, I mean very stable. So the revenue holds in there is quite well. So, that is the kind of general comment around your question.

And if your question was also around what type of, or do we capture proposals or no such things, won or lost in the percentage of those, we don't have those numbers and we don't really capture in that fashion that we would have those available today. Is that what also the second basically your question was?

Yeah, that was part of a kind of the percentage of contracts that you win versus, you know, what you did and what not but ok, I can follow, I guess, on a later time. Ok thank you.

Thank you.

Our next question comes from the line of Tony Campbell from Dorset , please go ahead.

Ah yes, I am wondering if you could give us an idea of what you kind of, maybe you are using a range which you might expect to receive from ConerStone properties, and then my second question is some really new to this story, is that I would like some further clarification about the comments about this private equity fund for top executives, I want to know if there is any, you know, other investments in either Expanets or Blue Dot, if there are any conflicts like that and the type of investments that you are making if you would want?

Okay. To your CornerStone question, first what we have done with our, certainly our discontinued operation, we have taken out 40 million dollars balance that was on the books of CornerStone and as Kip said earlier entirely written that balance off. So what we are really saying with that not only in terms what GAAP would provide, but the guidance to analysts would be not to attract any proceeds into any analysis, if there are certainly, if we do better than that which would be beyond foreseen, that could go to the discontinued operations line as well. So we wouldn't factor any of that into our future cash flow going forward just to be conservative. In terms of your question on private equity funds, if you go to our proxy statements what was disclosed and has been disclosed over the years has been an incentive plan that is related to our Blue Dot Expanets and actually our NGC operations, a little of history on that, when we formed Northwestern Growth Corporation, we put in place an incentive program for executives at NGC including the chairman of NGC all the way through the operating team, that would provide for incentives where if there is performance above plan of those entities and in connection with the building of those organizations, there could be payments that were earned as it relates to that. That was structured in the form of what is called the private equity fund, but essentially it is an incentive plan. Now the payments that were highlighted in the proxy, I believe that if you look at the payments for the chairman, it was about 1.3 million dollars as a total number, included in that 1.3 million dollars was several 100 thousands of a restricted stock plan payoffs, so you have to first go back into those numbers and then if you look at the payments that were made, those payments were actually for performance in building Blue Dot and Expanets over the 98 and 99 and year 2000. So as those payments occurred, those were actually deferred for 2 years to September of 2001 and you saw those numbers all float through with the proxy statement this year. So basically to your question, those items were part of the original foundation of NorthWestern Growth for building of Expanets and Blue Dot and those payments occurred for recognition of services for 98, 99, and the year 2000. It happened to be structured as part of the private equity fund and it was a performance based scenario where the executives actually could have a piece of performance over and above certain benchmarks that were established by the board of directors and that is what has occurred and those were the payments that were made in 2001.

Okay and then I guess my final question and maybe I have a different release, but I don't see a balance sheet or a cash flow statement is released that is available on Bloomberg, is that the complete release or it is there a release that includes the balance sheet and cash flow statements?

Consistent with prior practice, we have not released the balance sheet or the cash flow statement yet. We typically release that in conjunction with the filing of the Q or the K whichever the period may be.

Since there is a fair bit of controversy around your stock, I might add a positive suggestion, you might want to release that information when you have an earnings call.

I will take that on board, thank you.

And our next question comes from the line of Kyle Henderson from Imperium Capital Management, please go ahead.

Good morning everyone, I want to start here with a couple of our book-keeping questions, specifically regarding your merging with Montana Power, do you have for review the current capital structures?

I'm sorry, could you ask that question again, I am not sure I followed.

The capital structure for your two utilities, do you have your current numbers and what your target is going to be for those two? How much debt, how much equity on a percentage basis?

Alright, well what we talked about before is that if you look at our capital structure, once you factor in the proceeds from the coal strip that we talked about, the 97 million, and after we execute against our intended common stock offering that at that time, if you look at our recourse debt as a percentage of total equity and so now we are just talking about debt, that would put us in the range of about 55 percent and then as we start to enjoy the benefits of our 100 million dollars of annualized free cash flow, we will able to work that down, you know about, 2 to 3 percent a year such that you know within the next sort of 18 months or certainly within 2 years, our target would be to get our recourse debt as a percentage of total capital under 50 percent.

And that is for the utilities or is that for the entire corp?

That is for the Northwestern Corporate parent. I mean, please keep in mind our utilities, our divisional, so when you talk about Northwestern it is really one and the same, its infrastructure.

Okay and you are still targeting between 150 and 200 million and equity later on this year?

Yes we are.

Okay but that is sometime where the share end for that yet.

We have not announced anything now.

Okay, what kind of synergies and, can you balance that against integration costs can we expect regarding the merger here in 2002?

Well, if you look at the, in terms of synergy if you asking me for the utility, we have put that in the total of our whole operational excellence initiatives which would be a 150 million dollars annually and we have not laid out any specifics regarding any particular entity whether it be Blue Dot or Expanets or the utility as far as the integration of those things, so we would have you just put that into the 150 million dollars of SG&A efficiencies going forward.

Okay. Going back to the utilities, do you have any guidance on what your reserve margins might be for this summer and if not maybe you secured any of our requirements utilities this summer.

Responding to Kyle's, my count has been in the mid counting area of power failure, you are required to maintain a minimum of 15 percent reserves, we will have at least that much of in ourselves to cut our electric operations in Montana it is a little bit different rules in WSCC that reserve margins are included in the power supply portfolio mixture.

Okay. Lastly here, going back to your proxy filed April 1st, I want to if you could provide us with some sort of guidance for which businesses and what performances goals were actually achieved that triggered the awards and payoffs? You talked about then there being growth earlier, but I guess the question stands from this as your communications and your H-Back business, you are sort of struggling for profitability. I am trying to get better handle on what it is going forward, you are going to be to do?

Sure. If you go back to the comments, if you look at 98, 99, 2000 when we were building those businesses primarily, part of the private equity and the incentive program were surrounding the building of the business. I can't give you a specific numbers on how much was related to Blue Dot or how much related to Expanets at this time, but basically that was related to some of the acquisitions that were formed to build Expanets and to build Blue Dot into the businesses that they are. As those businesses, certain of them that were performing at the level of the acquisition as we were building, those would have qualified for above performance level bonuses and that is what was comprised of the 98, 99, and 2000 bonuses that came through in 2001. There were no bonuses related to CornerStone during that period of time, so it would have entirely have been Blue Dot and Expanets and it would have related to, primarily had been related to the building of those businesses and the performance of those acquisitions that helped build Blue Dot and Expanets during those periods of time and as you look forward in 2001, then certainly there was not a payment because of the performance in 2001 is related to specific EBITDA performance and those sorts of things. So again the bonuses went back to those periods.

Okay, so going forward we can expect that future paths and orders will be more targeted towards profitability in these 2 businesses?

Yes, you would see that and all the awards have been structured to that and that is why you have to go back in a 98, 99, and those periods where during the building phase, EBITDA was at or above targets for those certain acquisitions that were paid out in terms of the bonuses.

Okay, one more question. Do we have any sort of indication of what the actual officer investments were, that led to these payoffs and contributions?

Well again, these were incentive programs and what we required the officers to do in terms of these programs was the officers actually had to invest into the LLC from the structural standpoint and those investments didn't pay out unless those performance levels were there. So actually it was a form of an incentive plan where we actually made the and had the officers invest into the entities.

Right, what was the magnitude of these investments?

I think the numbers were somewhere in the, per officer, in the big round numbers, 100 thousand dollar range, something like that. But again, we had that capital put in, in the form of a private equity investment to structure it towards that type of plan that would also qualify for capital gains treatment and so forth for those officers. So it actually is opposed to private equity investment what we would direct you to do and understanding it, is that it is much more related to an incentive program concept then it is a certainly an investment.

Right, okay. So then we should understand that, and once again using your big round numbers termed at these 100 thousand per roughly officer investments, yield the kind of returns that we can expect on a year-to-year basis as we did, as filed in your recent proxy?

No, you wouldn't see that. That was, I am answering your question directly on the level of investment, which is a factual number, but again the way the payoffs, the way these plans work is that there is only payoff to the extent to the entities provide EBITDA performance over and above benchmarks. The benchmarks happen to be 10 percent or above the invested capital, when that occurs then there are those investments that would be incentives that are paid out. So the fact that we had certain officers make investments in those LLCs was only structural as opposed to the incentive plan construct itself creating those payoffs.

Okay. Very good. Thank you for your time.

Next question comes from line of Walter Kurt Berger from UBS Warburg.

Yes, hello, just a quick question on the SFAS 142 accounting for the first quarter, can you give us how much in cents per share after tax that effected the first quarter?

Yeah, if the first quarter of last year had been accounted for on the same basis, Walter, it would have impacted by 7 cents.

Seven cents, okay, is that the approximate rate you expect for the balance of this year per quarter?

Yeah.

Okay, thank you very much.

Our next question comes from Peter from Gem Co Capital, go ahead.

Hai, thank you, this is Peter of Gem co Capital, congratulations on a great quarter.

Thank you.

I just have a couple of quick questions. I think in the call you said that you will be generating 100 million dollars of free cash and you also gave per share number, could you please repeat that and also tell me what average shares outstanding are you using for that number?

Okay, you are back. We were conservative what that number represented as far as per share, but why don't we go ahead and go through the slide that was used in terms of our debt offering, one that is 100 million dollars never helped us reconcile that for you. If you look at Northwestern Energy's annualized EBITDA, we have already laid it out for you that is 250 million dollars.

Right.

When you then add to that, the 80 million dollars of preferred dividends from unregulated businesses, as we would pay those dividends, so that is 80 million dollars added to that. You take out of that recurring capital expenditure which we talk of being on a maintenance basis, 65 million dollars, take away from that number recourse interest expense that we just talked about the parent company of 90 million on run rate the Kip just described, the dividends on the trust preferred that Kip also highlighted earlier, 30 million, and our common dividends, even assuming that we would have the equity offering of that, Kip just described, of 45 million dollars, if you net all of those numbers you come down to roughly of exactly a 100 million dollars and that is the free cash flow, annualized target that we were talking about by the end of 2002 and that annualized free cash flow you can just take the 100 million dollars divide it by the numbers here. So if we divide it by 32 million shares roughly pro forma to the 100 million dollars, our current share outstanding is 27 million. If you look at just, Mike is writing some notes here for me now, If you look at 37 million shares proforma for the equity offering, you can divide the 100 million by anyone of those 3 numbers to get exactly what are trying. When I quoted north of 2 dollars a share earlier, it was to be conservative off the 37 million of pro forma.

Okay, I see that was, well I was getting confused a little bit, that helped a lot.

Yeah.

Okay, I have a question about the results of Expanets for the first quarter. It looks like things are going well and you actually broke down a couple of figures for us, the sales number and also the gross margin number. I was wondering if you might happen EBITDA number for just March and if you don't, if you could perhaps draw a trend for us how much of the EBITDA for Expanets came from the second half of the first quarter versus the first half?

Yeah, really, if you look at the March quarter and you break it down, as we described, the quarter itself does not tell the whole picture and you were getting at exactly what we were saying there. The EBITDA from March was roughly 8 million dollars. So, as you look at the run rate going forward, that is were Jim has got great confidence in telling us that as you start thinking about the 80 to 87 million dollar annual track, with the ETAC arrangements factored in, the margins from March and the efficiency is going forward, you would see that EBITDA then transcend through to the 80 to 87 million annually.

Okay great. Now your earnings guidance for the year is, I know you reiterated your earnings guidance, but having a quarter gone by and having I guess better visibility for the year, could you talk a little bit about what your assumptions are now for the lower end of the guidance and what might be for the higher end and I know your forecast has been pretty conservative and it has always been in the past, I know you are not assuming any economic growth, but if there is any growth in the economy, can we expect something at a higher end of the range or even some upside to the numbers?

Well if you look at in keeping in mind, we are keeping that range of 230 and 255 in place, even in light of not having 23 cents per share in January. So, we are already taking 23 cents that we had assumed and still retaining that range of 230 to 255 in terms of perspective, but as we would move forward, there are internal targets of course as an organization would target, you know, budgets towards the middle end of that range. We want to be conservative and lay out a range so that, you know, if we were softer than that, we are still within the range and if we have more success, we are at the upper end of the range. I think, the reason we are comfortable keeping that range at the current time is that we are seeing strength come out of obviously the energy businesses, you are seeing the transformation that is occurring at Expanets as well as we can't under-emphasize the progress that we have made throughout our businesses on all levels of our operational excellence programs that provide us the flexibility, even like you said during times of economic softness, so to speak in year 2002, to still hit our ranges and that is the way we are operating the businesses, are to aggressively target our energy business profitability or Blue Dot and Expanets businesses as well as looking at taking cost out being as efficient as we can during these times of soft markets.

Okay. Just one last question. Could you remind us what the rate base is at your utility and also the rate base at the Montana assets that you just bought including the equity and the allowed ROE?

Peter, it is Mike Hans and I don't know the, you know, probably, I will have it all looking up what the current rate base is. If I recall, in Montana the last allowed return on common equity figure was 10.75. I think there is a general understanding that it is going to take us little bit of time as we have told the commission, I have during the settlement proceedings that we need a little time to get our arms around the business, integrate it, Kip has explained what our financing plans and capital structure issues are, and so that takes time to sort out. I think the important thing from my perspective is that we know what the revenue levels are in that business, we built our plans around that, and we are comfortable that we can manage the business to meet our targets without any anticipated rate request or rate increase at this time.

I think Mike, our latest natural gas, I think it was in the 11 some percentage. What was the latest announcement?

If I recall, after subject to checking, about 11.1 or 11.25.

It is just to give a feel for what we are also seeing in the , jurisdictions.

Okay, that helps. Thank you all very much.

Thanks and we do have a question from Steven Cornen with Lords , please go ahead

Hai gentlemen, could you just clarify couple of points, 1) When you are talking about 100 million dollars in annualized free cash flow, is that with the assumption that the per dividends that are currently taking time to convert to actual cash dividend?

Yes, that is correct and if you look at, you know, the combined total of the EBITDA less CAPEX from our businesses and then being able to size our preferred investments, that is what that 80 million dollars exactly represents.

Ok, and then can you clarify, you said you made an additional 50 million dollar investments into Expanets for the quarter, due to some issues obviously with cutting of the systems. So did that imply that receivables, the receivable balance 50 million dollars or is there a correlation of bed debt expense? Could you give little bit a more clarification there?

Yeah, for the most part, you are exactly right, our receivable balances there are roughly 50 to 60 million dollars, higher than what we would normally expect on an ongoing basis, so, you know, as we get those back in line with historical levels, we would look at that cash to come back in Northwestern.

And as we went through the process of conversion, then going back to the late November or late December period, we would expect that obviously that as you go through our billing period there will be a billing lag, those billing lags were obviously been made up such that we are virtually reoccurring with our billing now from those periods of time as well as now the cash coming in as you bill now the collections are coming in and that is when we quoted earlier the next 2 to 3 months hopefully earlier for that cash to be coming back and as Kip said that cash coming back is incremental to any cash free flow we are talking about for the year.

Got it, so there is no, you are not expecting any additional bad debt expense with the increase of . Is it just the cut off in systems?

Yeah, we have factored in those bad debt expenses in.

This is a minor clarification, when we converted all the database; the commission from the volume that was over 500 gigabits took us a lot of the range announced system. That is what was the driver for the late billing. So, that is what being worked out now.

Thanks and we do have a question from David Stans on line with .

Sir, your line is open at this moment.

We will go on to a question from Eric Shaw with PSP , please go ahead.

Hai, I have a question about your exchange agreement basis. I know that it might not be based on but that is after exchange agreement. What is your exchange agreement for each unit, for each segment?

For Blue Dot the exchange agreement totaled 8 million dollars as of the end of the March and for Exponets they totaled about 6 million dollars.

Ok, Now in terms of your systems, is that fully implemented now?

Yes, it is and let me give a . When we acquired the 27 businesses; all of our customer data came from those 27 businesses. What we have converted is roughly 80 percent of all the database of our customers. The remaining 20 percent will be cut through the remainder of this year, but that stays with our own timing and our own plans. For the initial 80 percent we had a requirement with the Avaya that we needed to be offered those systems at a particular point, so they caused the initial 80 percent to move. So for all practical purposes the system is fully operational and they would convert the remaining parts of our customer database through the rest of this year.

But there were still some expenses associated with Exponets Systems implementation in the first quarter?

Yes.

How much of it was capitalized and how much of it was expense?

Well there would have been, you know, roughly 6 million dollar or so capitalized during the first quarter.

And how much was the expense?

A number that would be similar to that. There would have been 6 outputs of maybe 8 million dollars of expense during the first quarter specific to the implementation, you know specific to your question, you know, as we talked throughout the day. The first quarter, there was still a lot of implementation activity as we made the system fully operational and, you know, finished out really the cost structure for a go forward basis. So, you know, there are other expenses that are somewhat nonrecurring if you will, or at least go away on a go forward basis. But specific to your question there have been about 6 to 8 million dollars of system integration related expenses and then about 6 or maybe 5 million dollars of capitalized expenses.

You expect this to continue in the next quarters?

What is that?

You expect this run rate of expenses to continue in this fashion?

No.

Could it substantially decline?

No expenses of that nature will substantially decline, in fact it will essentially go away and that was specific to the point of of export across the businesses.

Just to give a feel as well as the annual IT budget for Exponets would be in the range of 30 to 35 million dollars of expense and then over and above that you start about the 6 to 9 million dollar first quarter capitalization, you know, depending on the implementation, and also the pay back of additional expenditures beyond that, that number could double throughout the year so that in total if you had 30 to 35 million of expense your could have roughly upwards of 10 to 12 million to 15 million of total capitalization in the year 2002 and those numbers all are baked into obviously the forecast for 2002.

We have a question from Steve Ruvall with Bobby Brown, please go ahead.

Hi, this is actually John Body, could you give us an account receivable number at Exponets at quarter end?

I am sorry, we don't, look for that unless we have that information, hold on. We are trying to dig that up that operator.

While you doing that let me ask you another question, am I correct that revenues went from 217 to about 201 million quarter to quarter December to March at Exponets, is that correct?

Yeah, that is correct.

And accounts receivables up by 50 million, you said 50 to 60 million?

That is correct, I have got the information in front of me now. As at the end of March our trade receivables were approximately 220 million dollars.

And are there any unbilled receivables or working progress receivables as well?

Unbilled receivables?

Unbilled work in progress for services or systems integration that your are doing.

Well as a matter of course Jim can speak to this more specifically as a matter of course, you know, certainly have projects each and every month that they will overlap. There is a time our projects were typically fairly short in duration but yeah, there will always be a working process component

But that is included in the 220 or is there something beyond the 220?

No that is included in the 220

Okay that is great. Thanks very much

Thank you we do have question from please go ahead.

Thanks they have been answered

and we do have a question in from Phillip please go ahead.

Couple of quick questions. First of all I am little confused getting back to the pick issue why all the dividends are recorded as income. There was a piece that was left out, there is a 14 million dollar stub piece I guess that was not recognized.

That is right, well if we can just go back to the example that we laid out, if we look at the first quarter segment for 2002 we had 8.9 million dollars of loss for minority interest between communications and we also had dividends for the period between the two entities of roughly 20 million dollars. Now the point that I was making is that in our income statement u will see that we recognize that there is a minority interest line of 14.9 million dollars that is reflected as a positive member on the income segment. What that represents is really two things. It represents the allocation of losses of based on the seniority rights of the equity holders were then and would also recognized to the extent possible the recognition of our dividends. The accounting works are such, the losses would allocated to minority interest holders to the extent basis and then with those losses will also include the preferred dividends that we get on our investment because of the seniority rights of our investments; however, again that is only to the extent of the basic so what I said was that there was as we entered the quarter we had 14.9 million dollars of minority interest basis. Now had there been adequate basis the allocation to them would have been the 8.9 million dollar loss we talked about as well as the approximate 20 million dollars of dividends so that 28.9 million dollars would have been allocated to the minority shareholders. Because there was only 14.9 million dollars of basis that ultimately what was reflected over.

I understand that, but I guess the question is then how do you recognize the rest of the 14 million not allowing you to recognize that?

That is right it is not recognized on our financial statements or our income statements. It sits as a preference right if you will so that in the future as execute against their plans and become more profitable that stands as preference items are recognized as income at that time. But at this point of time it is not recognized as income.

So just to be clear though, I just want to kind of figure out what is happening here, just to be clear the order those are not letting you recognize that dividend.

It is not an order issue it is a GAAP requirement. And with that allocation of the income comes straight out of GAAP, consolidation accounting, that is just the way you work and in terms of the allocation of the income that is only per GAAP. It is only allowed to the extent their basis and you know for this quarter you can see that, what we talked about, the remaining basis was depleted and therefore any remaining loss allocation to the minority shareholders would not be appropriate. So now it goes up the seniority line and now Northwestern with their preferred stock investment now stands next in line for loss allocation.

But your point is, well just to hit that, I think the other thing that you are getting at is even though we have an economic interest in that 14 million dollars of preferred, we have not yet been able to recognize under GAAP. That is still there and is an economic interest, but GAAP does not allow you to record that. So, there is a 14 million dollar economic interest that we have not and cannot record under GAAP on our financial statements.

So, what if Exponets and Blue Dot periodically just never had any earnings to be able to recognize that on an basis.

Then it would never be recognized per GAAP as far as income is concerned under GAAP. However, as Exponets and Blue Dot would turn in our turning then of course that economic interest is that is paid in cash or even can be recognized under the statement that would be. That economic interest would show up on our income statement in the future, but it cannot be shown in to our earning statement currently.

But if an only if and when the cash positive on an income basis.

Well, yeah as they go cash positive certainly the payment of that dividend will recognition but it is important to understand that there is a difference in these businesses between cash and earnings. Let me give an example on Exponets. At Exponets when we acquired the Jim , we acquired the Jim Group from Lucent and technically that wasn't a business per GAAP. So we actually have to expense the amortization of that entire 250 million dollar purchase price over roughly an average of 7 years because that value was assigned to contracts and certain other things. So as Exponets, for example it would have EBITDA, it would have cash to pay the dividends because if EBITDA is there, cash flow is there unless it is CAPEX. So there is certainly robust cash flow coming out of Exponets because per GAAP we will require to expense that amortization over in a very short period of time. That expense hits your income statement and it detracts from your earnings. So it is very important to understand the difference between cash and earnings at these entities because there is cash for example as 87 million dollars to be realized this year, there is cash to pay those dividends but if you look at that amortization that amortization puts a significant burden on the earnings of Exponets. For example, had we have been able to qualify for acquisition treatment of the business that acquisition amount would have been gone to goodwill instead of contracts which would have been amortized over 40 years until the advent of 142 and as you adopt 142 this year we wouldn't have had to amortize any of that. So it is important that we understand from Northwestern standpoint, the focus we got on cash flow as well as earnings because our earnings are being burdened particularly in the case of Exponets and in certain cases with the parts of Blue Dot that is not part of goodwill with the amortization expense.

I do understand but at the end of the day, however, how much you are able to up string, I guess the 87 number, the 87 number was a run rate number not an actual number. Right?

The 87 million dollars was an actual 2002 target that we have given you.

Given that the bottom line here is you need to able to have a positive cash flow which from what I am seeing you don't have to be able to recognize the pick that would basically be accruing . Is that correct?

Well. Let me clarify that. As we would have the 87 million dollars in cash flow we have the cash flow to pay the dividend. Because you take the 87 less the maintenance CAPEX that Kip talked about, there is an amount over and above. If we just take the 365 million preferred and a slap a 12 percent coupon on that and that is what it gains. purpose is that call that 42 million dollars. We need to start thinking about 87 and EBITDA less maintenance CAPEX, plus or minus working capital there is be cash to pay and there will be cash to pay in cash, that dividend. We need to clarify this, what is different is terms of GAAP is that GAAP does not allow you to recognize that preferred dividend unless there is earnings to cover it, or minority interest basis to cover it. So because of that amortization I just described to you there could be a situation where we are paid in cash and actually can't recognize that for work purposes. That is the other side of this that GAAP does not recognize the opportunity for us to get cash on those in that circumstance.

Presumably it will show up in the cash flow statement.

Absolutely in the cash flow statement but it wouldn't show up in the earnings statement and that is the point of discussion.

Well not entirely but any way I forward to see that 87 will be realized in this year's proxy. Can you tell us, this proxy did not tell what the holdings are and the are in the stock and we are little confused as to why can you tell me what that is?

I think the is a percentage of ownership. We don't have the proxy in front of us and we don't have the but I think that the itself is a holder somewhere between 4 and 6 percent of our total outstanding. Generally I think that would a fair range and that of course the is related to the entire group of employees.

Right

It has not changed in any appreciable amounts since prior disclosed numbers.

With regards to issues surrounding Anderson which is fortunate for all involved, can you give us and idea of when you expect to make a decision regarding an account. And I guess from what I am infer what you said, you are not even necessarily committed to change in accounting. Right, you are just interviewing to see if you are going to make a change.

Given Anderson's situation we are interviewing other accounts and we would expect to make a change from Anderson.

When do you expect that to happen?

Well our audit committee as we have gone through as to describe the first round of interviews of other outside firms, that first level process has taken place with both our audit committee and our general folks being informed and involved with the process. What we would do is, narrow that down to finalists and the audit committee would decide from there. We would expect over the next several weeks

And then a decision would be made by in what time?

Well that decision would be made over the next several weeks.

In the next several weeks.

So prior to any issuance of new stock?

Well yes. In terms of that we would expect that audit occur. Anderson has signed off along the 1999-2000-2001 financial statements and we would legistically use Anderson through our first quarter review and by the way we do have our outside auditors do outside, you know, first quarter or quarterly reviews in addition to their annual work. So, that would be transition timetable we would expect. As a new firm would come on board procedurally there would need to be worked on to actually get consents in those sorts of things for the registration statement, comfort letter, and things like that.

Right, okay. Then one final question. With regards to the free cash flow. The issue was brought up I guess in doing the calculation you had in there 80 million in dividends, the outgoing cash paid, is that a realistic number for this year?

Recently on the free cash flow targets were calling in an annualized level of performance i.e. by late this year, earlier next year those annualized levels of performance would provide that 100 million dollars in target. Now the 80 million dollars of preferred dividends we talked about Exponets and Blue Dot today, when you look at the ability for us to size preferred investments as we would have the ability to do that, on a total basis right now there is free cash flow amongst the two of them to pay the dividend on an annualized basis by year-end. As we would look forward we may either provide the liquidity or advance our preferred stock balances in different fashions but that would be an annualized run rate of 80 million we would expect later this year and early next year.

Annualized only and not actual. So this 100 million is probable but not definitive?

Well, it is not expected trailing 12 months as of December 31 2002.

Got it okay.

It is annualized going forward.

Is that why in your S4 that you filed the other day you mentioned you expect to have to have another equity offering next year?

Well as we look forward our equity offer, we publicly stated that we have got an equity offering that we would want to undertake this year. We publicly stated that is mid year issue at the 150 to 200 million-dollar level.

Right

As we would move forward you have seen the robust capabilities we have on our cash flow and earning basis to move forward with earnings growth. We will factor in equity offerings as would be prudent with the balance sheet and our capability to both grow earnings maintain a strong balance sheet and accomplish all of our goals including free cash flow going forward. So that may be the statement that you are picking up.

Well, I guess. What I pick up is that you expected to probably have to, I mean if I have the word incorrectly pardon me but is necessary but I guess just a couple of days ago you filed stating that the inference was that you seem likely you have to make another equity offering next year. I am just trying to get some comfort as to what the cash flow capabilities the operation really are actual not versus not actually expected?

Some of that have to do also, we have said this publicly before. We are absolutely committed to our current debt rating and maintaining that in fact enhancing that over time. So as we look to the future well certainly we are committed to applying our free cash flow as appropriate towards our debt levels. We would also looked to potentially access further common equity again to even further enhance our strengthen our balance sheet. In the interest fair disclosure we want to certainly make mission that our public documents that we are committed to the strength of our balance sheet and on an ongoing basis we will continue to address opportunities to further enhance that.

Would it be incorrect then to say that is probable, you have to have go back to the market next year?

Well, it is incorrect to say that we would have to go back to the markets.

I said probable.

I don't think it is probable that we will have to go back to the markets. It is very important to distinguishing your question that we don't have to go back to the equity markets necessarily in the year 2003. We may have as describing, we may choose to enhance balance sheet and those sorts of things but as you can see from these cash flow targets not only the annualized going forward but if you just look at our year over year performance in terms of raising capital with the current equity offering we have contemplated, that gives us balance sheet strength as well as free cash flow. So as we would go forward beyond that it would be discretionarily to the equity markets to enhance our balance sheet or to do other things that we see at the time and of course it would be dependent on value and other things. We want to send a strong message not only to our equity holders but to our debt holders as well that we are committed to balance sheet quality and if we have the flexibility with earnings, additional stock would enhance our balance sheet even further than where it is today. We wouldn't that opportunity.

So I would infer from that comment and there is a possibility you could go to the debt market as well.

We don't envision that currently.

Thank you gentleman. That is it

Thank you. We do have a question in from Stewart . Please go ahead.

Hai, I am John . Thank you so much guys for having this. I thought the point you guys made before about the importance of cash flow was really super on point. I know that we will see the number in few weeks but I was hoping you could give us some sense as to what the cash flow from operations number is going to look like and then there is one other question as well.

Well again we don't have that prepared for today's presentation.

May be range or . Will it be approximately in line with 60 million dollars of EBITDA?

Roughly. Roughly it will be directionally in line. Today unfortunately the questions have been asked twice and we don't have the cash flow from operations fully worked through the numbers and the auditing and things like that. We will have that for you at the date of 10-Q.

But you would take 20 million dollars somewhere in line with the 60 million of EBITDA?

Well, we would expect obviously strong free cash flow from operations. We just don't have that number currently.

Great and with respect to Exponets, I am just trying to understand what the leverage on Exponets at this point. I know there is, I believe there is a 125 million dollar lining with the rolls up at the end of this year and I think you guys have put in 50 million last year and another 50 million this year. Can you help us understand the cash and debt at Exponets and sort of what their ability is to handle equity in the course of next 12 months?

Sure, and there is couple of aspects to your question. We talked first about the facility itself. The equipment financing facility in place from as we publicly disclosed there was a 25 million dollar payment that was made in March, that went from a 125-dollar facility as they recently took it down to 100. You know at the end of April there would be another 20 million dollar requirement so that would take it down to 80. Another payment is due at the end of August and then the remaining balance would be due at the end of December. As I said earlier we are certainly working towards a commercial working capital facility. That is the long-term answer and always has been. We just need to be in a position from system perspective to support the asset-backed lenders' requirements. So now that is in place we can move aggressively towards that end. Then if you look at the cash flow capabilities of the Exponets, we talked about it at length already but just to , you are looking at 87 million dollars of EBITDA on a business that is not capital intensive. You know a sort of 15 million dollars of maintenance CAPEX. You are looking at 72 million dollars of cash flow just at that level and we have said this publicly before, as we look to 2003 we look at a business that is a 100 million plus and EBITDA that is pretty easy to get to that number just from the standpoint if you look at what we need to do the balance of the year to hit the targets we have laid out, the targets that we have reaffirmed, the targets that we were confident of, and that easily puts us on an EBITDA basis of 100 million plus. So going forward, you know, this business is more than self sufficient on a cash flow basis, more than capable of putting a very substantial working capital facility in place and we would look to do that as they execute against their plan.

Got. So we are really talking about a 100 million bucks of EBITDA eventually 20 million CAPEX, 80 million of free cash and we get into that now with 200 million dollars of debt and then our 400 million dollars of preferred is right there. So it may be 8 times free cash from a valuation standpoint here?

Actually I think your 200 million dollars of debt, I think, is high. I kept mentioning that there is

I was doing a 100 to and a 250 million loans that we put in.

We got 50 million dollars of loan and we have 365 in preferred stocks. So I think you double kind of one of the 50 million in there.

I thought there was 50 million for the last year, another 50 million in Q1 this year.

Well the 50 million is part of the preferred stock balance of 365.

Got you. Okay. Got you, so it is 400 plus a 100 and it is 500. So it may be 7 times.

Yeah. And I think as you go forward cash we use to pay down and then that working capital comes back we got a skewed working capital scenario because of the billing scenario we talked about. So while your analysis on a static case may be correct today, keep in mind that the 50 million is going to come in from the billing, is going to come in fairly quickly as well as the cash flow from operations. Just one another point what said on the working capital line, the only capitalization in the Exponets today in terms of capitalization is really largely our preferred stock investment and then some junior common stock behind us on the part of the owners that we talked about. So as you would move forward essentially we are unleveraged that 220 million dollars receivables that was answered to the question earlier is all unleveraged and that where we would bring in an outside lender to be able to use that significant in liquid collateral.

Got you. My question from the 10-K is that there was about a 60 or 70 million dollar accrued expense at for the export software to the software integrators. Has that been stated at this point?

A portion of it has.

And a portion of it still carries?

Yes

Again, can you break that down to about how much has been paid and how much still carries?

I am sorry. I am confused with your question did you say 60 million dollars of accrued.

That was my recollection. There was a 60 million dollar accrued expense that was actually at for the software integration that Anderson did.

No there would not have been any accrued 60 million dollars for anything. I don't know where there number is picked up and what seems to be .

Okay great. Thank you guys.

Next question comes form George Rubous from Angela Gordon.

Hi George.

Mr Rubous your line is open. Okay we will move along. We have Eric Sharp from . Go ahead.

Hai, just followup on the debt situation here. 1.8 million on the balance sheet but your expense is 22 million that is effective 1.2 million, which is 1.2 percent for the quarter. Just want to try to understand the low rate. Is that because you have some capitalized interest expense?

Well again keep in mind that the debt that we have at the end of the quarter isn't in a full quarter basis. The acquisition for Montana was done as of February 15 so you have only got a month and half worth of debt on that interest expense.

Do you have any capitalized interest expense?

Yes there is a couple of million dollars capitalized interest as it pertains to the final stages of export implementation.

Okay. Got it thank you.

And a followup from Steve from .

I guess, might be helpful as far as the debt questions. What is the kind of your weighted average cost of debt right now? That might help because obviously your debt balance has changed during the quarter and then also you mentioned that you have 65 million on maintenance CAPEX from your energy groups on I was wondering what your maintenance CAPEX for was and then your actual total capital expenditures through the year for each other groups?

So that would include maintenance plus investing CAPEX or grow CAPEX.

Okay you have asked a couple of questions on the debt itself. Again, I mean, you can look at our historical financials and see the stated rates but you are looking at in general our bonds, total effective rate or somewhere in the neighborhood of 7 and a quarter percent on the new bonds that we have just issued. You know, we issued 10-year bonds at 8 and 3-quarter percent and we issued 5-year bonds at 7 and 7.875 percent. Again those have been issued first of March. Another thing that keep in mind when you look at our effective interest rate, at the first 2 to 3 weeks after the acquisition, that was drawn on our acquisition facility which is a based rate, so certainly that is going to be lower rate than what is paid on our bonds on a go forward basis. All those factors are going to impact. The timing of acquisition and the form of financing are going to impact the effective rate.

Okay, and then just if you could give or kind of run through, what your or give in kind of what the maintenance CAPEX are at least for the two groups? You might have given it for Blue Dot. I didn't pick that up but what the total investments in CAPEX in each of the group for 2002?

Just finish up the maintenance CAPEX on Blue Dot after allowing for sale these back in intent to lease the vehicles going forward, you are now looking at 5 of the most of prime in the range of 2 to 3 million dollars of maintenance capital on an annualized basis. Mike you want to speak to growth CAPEX from energy perspective.

Sure, our 65 million of maintenance CAPEX includes what the organic growth of ordinary line extension connecting customer services to either that is embedded in that number. The only other place of growth at CAPEX might come up are proposals related to specific loads usually gas, you know the big ones are electric generation and ethanol plants production down here. And we don't have any of those currently firmed there are couple of letter under negotiation, but whenever we do that the arrangement in a contract with the recipient include consideration for cash flows as well as your life cycle analysis on the investment. So to the extent that any of those we would even break around so to speak this here. They would be relatively minimal. So essentially this 65 million is our CAPEX for the energy business.

Okay. Thank you.

And we have a followup from Eric Target . Go ahead.

Just one more further question on an interesting point. For 2003 if you have 1.8 billion in total consolidated debt and your average interest rate is roughly 8 percent, you have about an 140 millions in interest expense. Am I right?

Okay.

And then 30 million in preferred trustee. That is about a 170 million in total interest expense going forward annually?

Keep in mind that the debt number that you reference to, that 1.8 billion that includes the non-recourse debt that have the subsidiary levels, circulated level basis. It is much less. Further, you know, there will be a pay down as a result of sale. Further more there will be a pay down as a result of our intended equity offering and there will be further pay down as we leverage or utilize the free cash flows.

Okay, thank you.

And so that was the final question there is no one else in queue at this time.

Okay, so if there aren't any more questions, we would like to thank you for joining us this morning and we also invite you to call to Northwestern directly if you have any more questions. Thanks.

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