NorthWestern Energy Group Inc (NWE) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to NorthWestern Corporation's second quarter earnings release conference call. At this time, all participants are in a listen-only mode mode. Later we will conduct a question and answer session. Instructions will be given at that time. If you require assistance, please press zero, then star. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Vice President of External Communications, Roger Schrum. Please go ahead.

Thank you, and welcome everyone. With us today are Dick Hylland, president and Chief Operating Officer, and Kipp Orme, Vice President and Chief Financial Officer. Also with us this morning is Mike Hanson, President and Chief Executive Officer of NorthWestern Energy, John Charters, Chief Executive Officer of NorthWestern Communications, and Dan Newell, President and Chief Executive Officer of Blue Dot.

We will begin with Kick Hylland review ing NorthWestern's 2nd quarter results from our energy and communications businesses. Then Kipp Orme will discuss second quarter financial results. After they are finished with their presentations, we would be happy to respond to your questions.

In case you have not seen our news release about our second quarter earnings, it is posted on the Internet at www NorthWestern.com. An online replay of this conference call also will be available today at 3:30 p.m. Central time.

The 2nd quarter earnings report does include comments on NorthWestern's business outlook, and contains forward-looking statements. These forward-looking statements, and all other statement that is 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 the risk factors.

Now I will turn the conference call over to Dick Hylland, our Chief Operating Officer.

Thank you Roger, and welcome, everyone. It's great to have everyone here on the call today. Obviously, based on the press release that you've seen, we're very excited about the performance of the second quarter. We'll be going through that with you this morning.

In addition to Kipp and I, we're also happy to have our CEOs that Roger mentioned on the line to answer any questions of a more detailed basis, realitive to our operations.

Additionally this quarter, I want to review a couple of items at the outset realitive to the format of the information that you've been provided. In addition to the press release writeup that you've typically gotten, we have expanded the financial statements section to include not only the operating statement, but also the cash flow and the balance sheet and the segment reports which will be filed as part of the 10-Q. With feedback from many of you realitive to our calls, we think that's good information to be getting out at this point, rather than waiting for the 10-Q, so we've done that for you today on August 8th.

That has been supplemented also by flowcharts and different power point graphs realitive to certain aspects of our business , for your highlights and easy review. In addition to our financial staff accelerating some of what they've done to be prepared for today, Deloitte & Touche has been involved, and we're happy to have all that information in front of you.

Like Roger said, I'll make some overall comments on the operations and the status of our operations, and then turn the presentation over to Kipp for the financial performance review, as well as our financial and capital markets programs. And then we'll turn it over to the entire group with Q&A for the group here in Sioux Falls.

Those of you that have followed NorthWestern for sometime and over the last several quarters, have seen us continue our business-building process of our businesses, ranging from our energy operations at NorthWestern Energy and Blue Dot, and Expanets, our communications and data services business. If we look at that evolution and where we are today, you can see through some of the release items, the strong foundations that we're building. Those foundations really begin with the strong performance of NorthWestern Energy, which as though of you know, comprises over 70% of our operating income and our cash flow.

You will also see, as we discuss in more details, the dramatic transformation that, as anticipated, has been occuring at Expanets. I will go over that in very much detail today. As well as we look beyond NorthWestern Energy and Expanets, we'll talk about Blue Dot and the building that we're providing there for the improvement for the second half of the year.

As well, if you think about those foundations that is we've been building, those fundamentals, our operational excellence programs continue to go in strong force. We have, as part of those programs, reached a level of savings in our operating costs and expenses and efficiencies of over $110 million.

So it's -- supporting all of that is our program to enhance cash flow as well. You can see during the quarter that our cash flow increased to $52 million in the first half of the year, coming off a cash flow statement.

And as we also described in the press release, supported by that cash flow, the Board of Directors declared the quarterly dividend. And that dividend, just for those of you looking on an annual basis, is at $1.27 annual payout level.

If we then move into the performance of the overall businesses, I would like to first start with NorthWestern Corporation operating summary. Many of the comments that we will in going through the operations will track the slides that you've seen in addition to the financial statements.

If you look at revenues over the first half of this year, we've grown revenues over the first half of 2001. 2001 level of revenues were $954 million for the six months ended June. If we look at the first half of this year, our revenues are $995 million. You'll see that in the financial statements.

In addition to the revenue growth, which includes also the Montana Power acquisition, and supporting at revenue growth, you'll see our gross margins as a percentage of revenue, which is very important and growing substantially as well. If you look at the chart that we've provided you, the six months ended June 30th, 2001, our gross margins as a percent of revenue were 36%. If we look at our first quarter ended March 2002, they were 43%. And if we look at now, the second quarter ended June, the three months, we see gross margins growing to 49% of revenues.

At the same time, we've grown revenues, increased our gross margin percentage, we have also reduced our percentage of SG&A as a percent revenue. We've talked extensively with you about our operational excellence programs going back to the 4th quarter of last year, to the 1st quarter and now on to the 2nd quarter of this year.

If we compare SG&A as a percent of revenue, the performance of NorthWestern from an operational standpoint, the six-months ended June 30, 2001 was 36%, and we've declined that ratio to 32.2% as of June 30th, 2002, the 6 months ended. I'll talk further about our operational excellence programs here after we go through each individual business operation.

Now, if we further delve into the second quarter accomplishments in terms of numbers. The 2nd quarter revenue base of the NorthWestern Corporation group increased from $476 million to $515 million.

The net income level increased from $12.8 million to 20.9.

EPS from 47 cents a share to 49 cents a share.

More importantly, if you looking at operating income. From 2001, which is the second quarter number of actually a operating loss of $3.2 million, this second quarter of 2002 ended June produced $48.8 million of operating income. And we'll get into the components of that shortly.

In addition to operating income, EBITDA increased during the quarter from $18.1 million In Q2 of '01, to $81.1 million in the 2nd quarter of 2002. And those numbers are highlighted in the financial statements.

If we then focus in on the first half, and talk about revenues. If we look at net income, it's gone from $26 million to $44 million.

Earnings per share from 95 cents a share to $1.13 a share.

And operating income, again, from a negative $40 million in the first 6 months of 2001, to a $83 million level, which was highlighted in the outset of the press release this morning.

In addition to operating income, EBITDA, which is essentially break even at about $400,000, was increased to $143 million during the first half of 2002.

And we would remind you that again, as we talked about in the first quarter, the first half of 2002 excluded the Montana operations with the Montana Power acquisition, which was concluded as of February 1. And in January, with their winter peaking situation in Montana, is their largest month.

So all the numbers I've just highlighted for you from the operations of the consolidated group, exclude those numbers. I'll get into that shortly.

We've also provided to you, in terms of a chart accompanying your information, is the breakdown of our business performance and the contribution by each segment. And if you look at that, you can see the growth of the EBITDA from about $400,000 up to a level of $143 million. Obviously largely made up of NorthWestern Energy at over 70%. And Expanets, and to a lesser extent, Blue Dot and our other operations

As I stated earlier, from a corporation standpoint, cash flow, and the cash flow from operating activities, is the key metric we use in building our business, building our financial foundations. And if you look at that cash flow statement that was provided, you can see as of June 30th, 2001, the six months ended, we produced cash flow from operating activities of $37.5 million.

And as we then look at this year, our performance has been enhanced to where that same comparable number for the 6 months ended June 30, 2002, is $52.2 million dollars.

So on an overall basis, the corporation on a consolidated level has produced some outstanding results. And those have been highlighted through the charts that you have got in front of you.

Now I'd like to turn to each one of the individual businesses, starting with NorthWestern Energy.

Again, NorthWestern Energy comprises over 70% of our operating income and EBITDA. If we start from revenue, you can see the revenues for the three months ended June 30 -- the quarter, increased to $175 million, from $59 million last year. For the 6 months ended June 30, 2002, revenues were $348 million. That's an increase over the $165 million last year. Those increases largely coming from now, the addition of the Montana Power acquisition, as we combine our Montana, South Dakota, and Nebraska operations.

As we look at operating income, likewise you see a substantial increase from $13 million last year for the 2nd quarter to $35 million this year. Also, on a 6 month basis, from $31 million first half last year to over $78 million this year.

EBITDA is a similar trend, with 78 -- $17 million last year 2nd quarter last year up to $51 million. And for the first half, $39 million in the fist 6 months 2001 versus over $107 million in the first half of 2002.

Those strong results are supported by several accomplishments by NorthWestern Energy and the team that has been doing a great job, most importantly with their core operations and in integrating the Montana Energy operations with South Dakota and Nebraska. That has gone smoothly, ahead of planned and your seeing that in the numbers that we're providing to you today.

We're on target to hit our EBITDA targets for the year that are in the range of 225 to 235 of EBITDA. And again, that excludes January, which is at a level of $22 million for Montana only. So that current level of 11-month information from Minnesota, plus the full year for South Dakota and Nebraska, gives us comfort in those levels.

It also gives us comfort in the level of the annualized EBITDA that we're projecting being able to produce from our energy operations of over $250 million. And when you look at our maintenance capital requirements of $65 million in that business, strongly supports the cash flow projections and the stability and the growth of NorthWestern.

If we turn to some of the operating performance metrics at NorthWestern Energy, it's very important that in addition to just the financial and operating statistics that we will quote you at different points in time, that you as a group of our shareholders understand the kind of performance and superior operating capabilities this business has. We have over 1500 team members that do a tremendous job in delivering this level of performance and have over some period of time. But if we look at this chart on service reliability, you can see, as it relates to customer outage duration, we're substantially better than any industry average.

Our system interruption duration is substantially lower than others in the energy business. If we turn to customer satisfaction, you can see, whether it's related to ease in arranging servicings, or responding to outages, that our people do a great job at NorthWestern Energy at serving our customers.

In addition to the reliability and customer satisfaction, our operating performance and metrics, as the slide that has been provided to you shows, in the indication of electric distribution operation and maintenance expense per mile of our line. And basically looking at that against industry average, you can see we have a very superior level of operating performance and capability within that business.

A couple of specifics on the NorthWestern Energy business, beyond the numbers and beyond the overall charts that we've provided, we want update you briefly on the default supply. As you know, that activities been ongoing with substantial progress during the quarter, and up to today.

If you look at April 25th, the Montana PUC approved NorthWestern Energy's cost recovery mechanism, as expected, under the rules provided. June 21st, the Public Utilities Commission issued their order approving over 80% of the default supply portfolio as a total package that was put in place to provide the default supply mechanism for our customers.

In addition to those key items, there continues to be a short-term -- actually an annual tracker that is in place, both on the electric and gas side, to pass our costs on to customers. And in addition to that, over 80% of our base load default supply portfolio is approved, we're supplementing that with short term purchases and meeting the needs of our customers. And as we go forward, we'll be developing the process and procedures for building the remainder of that supply.

As we turn to the remainder of that supply, we've got some very significant opportunities to roll out the final plan, to basically put in place the entire default supply. If we look at our Montana First Megawatts project, we want to update you as well on that. To date, those of you that have tracked the numbers, see that we've got $69 million spent on that project, primarily in hard assets. It's the only new plant that's been permitted and under construction at this current time in Montana.

Right now, we're submitting the restructured contract for the default supply portfolio for Montana First. And as we've talked to you many times before, that project fits nicely into rounding out our default supply portfolio for our customers, and the benefit of our customers over the short and long-term.

Just as an update, and Kipp will probably get into this later. From a financial standpoint, we have extended the -- through the [INAUDIBLE] Ambro leadership of that financing facility, we have extended that facility for one year, as we go forward on a financial basis as we continue to build the Montana First megawatts project.

I'd like to turn now then to Expanets. Those of you who have looked through the Expanets numbers have seen just a very substantial and dramatic performance in the second quarter.

As we talked to you at the end of the first quarter, we really highlighted the March performance of both revenues at about a $70 million level and EBITDA in the 8 to $10 million range, we expected, and as you've seen in the numbers with the release this quarter, that that run rate would continue into the second quarter, and beyond the second quarter for the remainder of the year, which is a strong performance you're seeing in the numbers.

If we start with the revenue basis for Expanets, you can see that quarter over quarter, our revenues actually declined from $300 million to $210 million. That $210 million, you know, divided by three months, essentially gets you on our $70 million run rate on a broad basis. And at that run rate, as you can see from our numbers, we're producing substantial operating income and substantial EBITDA and profitability, as expected as we've built the business of Expanets.

our operating income, if you look at those numbers quarter over quarter for the June quarter, went from a negative $14 million in the 2nd quarter of 2001 to a positive $11 million here in the second quarter of 2002. Additionally, if we look at the first six months, it's an even more dramatic improvement. Where you've seen the six months ended last year was a negative $63 million, and on an overall basis the six months operating income was $8.3 million for Expanets.

Likewise, on the EBITDA, for the second quarter last year, you saw a negative $2 million, transcend up to a positive $24.8 million for the second quarter of 2002. And we'll highlight this, but basically, as we've talked about previously, our targets for 2003 have been $100 million in EBITDA on an annual basis. And you can see with this performance, that we're at that run rate as early as the second quarter of June 2002. So we're excited about that.

Likewise, for the six months, we saw a $39.7 million EBITDA loss in the six months last year, increase to a $33 million EBITDA positive this year.

We've provided some of these charts for you in the financial area as part of the press release. One of the significant charts you'll see quarter over quarter is this EBITDA trend, going from the first quarter of last year '01, up to the second quarter. We're proud of the accomplishments of the Expanets team across the businesses to be performing at these levels.

Behind that performance from a financial standpoint, if we dig deeper, you can see there's a chart provided to you on gross margins as a percent of revenue. Last year for the entire year 2001, we produced gross margins of 37.2%. And if we look at the first quarter -- or excuse me, actually the three months ended June 30th, 2002, you can see we're at 44.5%. So a tremendous improvement there.

Likewise, just like on a consolidated basis, SG&A as a percent of revenue has become significantly more efficient. Last year, the entire year 2001, we had 41.8% of our SG&A as a percentage of revenue. If we look at the three months ended June 30, 2002, we're at 32.7% rate at Expanets. Just a tremendous accomplishment.

This chart you have seen before regarding our break-even analysis has supported all of that. We have taken, as you know, our break-even analysis from well over $120 million in previous periods in the early stages of 2001, now to a number of somewhere between 50 and $55 million. That allows us to produce very robust EBITDA and profitability, even at the revenue level that we've seen at $70 million a month, through the second quarter of 2002.

So it has been a very outstanding perform at Expanets. If we look at going forward, we see the ability to continue to improve both our cost structure and demonstrate the communications service model benefits that we have. We're focusing our sales efforts on higher margin value added services in growing the business as we move forward.

Now, if we look at the remainer of 2002 as it relates to Expanets, we continue stand behind the forecast as being on track with a EBITDA of 80 to $87 million. In fact, we think there's upside to those numbers. And if we look at a run rate basis, as I discussed earlier, we're still confirming our run rate in 2003 of over $100 million. And if you do the math, obviously on our quarter -- second quarter of this year, that is virtually at a run rate of $100 million as we speak today.

As we move forward, you've seen our revenues grew 4% in the second quarter versus fourth quarter. And we do expect modest growth through the second half. In our first quarter call, as we went into the year this year, we had targeted $920 million in revenue. As we went to the first quarter call, we didn't come off that number. Right now, given the level of revenue performance that we do see, we're going to create a broad revenue target at Expanets in the $825 million to $875 million range.

As we've discussed in the quarterly numbers, we're very profitable at a level of $70 million in revenue. We see that being a minimally achievable over the rest of the year, and growing somewhat. As you can see, that produces somewhere between $7 million and $10 million of EBITDA a month, which is an outstanding level of performance.

As we think about the level of performance in some of the things we've done at NorthWestern Energy and Expanets, it might be helpful at this point in time to turn to our philosophy of how we are operating and winning in an environment that is not very strong in terms of economic growth. Whether you're one of those that believe there's going to be a double-dip recession, or other factors that keep the economy sluggish, whether it's the business or consumer sectors, NorthWestern's philosophy continues to be that we are not counting on economic growth to drive our business improvement, not only for 2002, but for our planning processes which are beginning for 2003.

We've talked about that for some time, and if you think about the examples that we're highlighting for you today, whether it's NorthWestern Energy's strong recurring revenues businesses, and the integration of Montana, and growing that business. That's a very strong proof point in this environment of our total consolidated picture being very positive.

Likewise, at Expanets, we have put together a cost structure in a very sluggish market that has become significantly profitable. Now we've got the opportunity through our systems that are in place and the infrastructure and all the things we're doing for customers, to now turn the scenarios into growing the top line as well, through the addition of sales resources and programs that will also focus on top line, in addition to the strong bottom line and cost structure improvement that we have had.

As well as Blue Dot, which I'll talk about here in a minute, we are targeting in the second half stronger performance, and have looked at comprehensive programs that will be executed in the 3rd quarter, 4th quarter, and into 2003, that will enhance sales, improve our performance, and so forth.

As we round out our operating business discussion and turn to Blue Dot, you can see that our revenue base is provided to you in the charts, increased from the first quarter of $94 million to $117 million in the quarter ended June. Likewise, you saw operating incomes go from a negative $3.7 million, which is a seasonal number coming out of the 1st quarter, up to a positive $2.4 million.

And as we look at the EBITDA number for similar periods, March over June, we saw March, on a seasonal basis, with a negative $900,000 in EBITDA, growing to $4.2 million for the 2nd quarter ended June 30, 2002.

If we further delve behind the numbers of Blue Dot. In the second quarter, we saw June's EBITDA at a level of $2.8 million, which is a seasonal pickup from the earlier parts of the year. As we saw in May, we had cooler temperatures throughout the U.S. in May. As we saw more supportive seasonal temperatures in June, you that that EBITDA pickup occurred.

There's also been improvements in the June period of time for our operational excellent initiatives. Whether it's our relocation of our corporate office to Souix Falls from a cost production stand point, to other things like leveraging our purchasing opportunities and other initiatives. As we move forward for the remainder of the second half of the year, we're continuing to develop comprehensive initiatives to improve the performance of Blue Dot, including the acceleration of the turn around of our underperforming locations, looking at revising our pricing methodology to capture further market share, and growth and profitability, as well as other initiatives for Blue Dot.

As we look at Blue Dot for the remainder of the year, we see continued revenue growth. And that's before the acquisitions that we may undertake for the second half of the year, if they are undertaken.

And as we look at our EBITDA performance, we're taking those targets to a level of 15 to $20 million, versus $10 million last year in 2001. However, we expect stronger performance in 2002 through these comprehensive initiatives we have got, to build all aspects of Blue Dot's business as we move forward.

And the last point from the operations, before I turn it over to Kipp to talk about the financial aspects of the business, and the capital markets activities that we have, I want to just comment on our operational excellence initiatives. As we've talked to you over the last nine months, those initiatives have been substantial, and you've isn't evidence of those initiatives in each one of the businesses, as well as our consolidated analysis that we've just talk about.

We're at a level now, where we've achieved for the first half of this year over $110 million of operational excellence efficiencies throughout our businesses. And that is has been a tremendous accomplishment on the part of our team. And that is phase one of the operational excellence.

As we move forward to our planning process for the second half of year and into 2003, we're beginning a second phase as envisioned at the start of this operational excellence program, where we would now be looking at opportunities to gain efficiencies and additional enhancements to operations, starting with our customer facing enhancements, operating process, information systems reengineering, and other activities.

Our current targets now for the year are to achieve over $170 million of SG&A reductions and savings from these programs, as well as taking our SG&A as a percentage of revenues below the 30% mark by year end 2002. Those are our targets.

In the mean time, as we build and continue to build our customer service capabilities, as we've talked about with NorthWestern Energy, as we've talked about with the Expanets operation and the new system that has gone into place there, and as we're building into the Blue Dot operation through the building processes that we have, we see our ability to serve customers at ever higher levels through this process, and do it more efficiently.

So with that as a bit of an operating summary, what I'd like to do now is turn the presentation over to Kipp Orme, our Chief Financial Officer, to talk further about financial performance, and our capital market activity, among other matters.

Thanks Dick. Given that Dick has gone into a fair degree of commentary on the financial results, I'll just hit a few highlights, as well as talk about some of our financing plans and liquidity. And then I'll turn it over to Roger to open up for questions.

First of all, from a financial results, I'd just echo some of the comments that Dick made. You know, as you look at our 2nd quarter results, for the most part they really mirror the first quarter, in as much as both quarters demonstrated very strong enhancements and improvements in our operating income and margins.

As witness to that, you saw operating income for the second quarter increase some $52 million from the second quarter of last year. That was pretty radically driven between our utility group and Expanets. And that $52 million increase, combined with $72 million improvement in the first quarter, gets you to the $124 million improvement six-month this year versus last.

Similar metrics and results on the EBITDA line. Where you see EBITDA increasing $63 million for the artery versus last year's second quarter, combined with the $80 million increase for the 1st quarter. Again, that's $143 million improvement. And that's pretty radically driven between our utility group and Expanets.

So in summary, we're very pleased with the results today. I think it sets us in a good position as we look to the balance of the year.

We turn to a liquidity discussion, or perspective. If you look at our cash flows statement, you'll see that for the 1st half of the year, our cash flow from operate -- continuing operations was $52.2 million as compared to 37.5 for the first half of last year.

More importantly, as we look to the balance of the year, we see cash flow from continuing operations being in excess of $100 million for the balance of the year, so that would be in combination with or in addition to the $52 million year to date.

And furthermore, we see that cash flow from continuing operations being in excess of our CAP-X and dividend requirements for the balance of the year. So more than self-sustaining.

In addition to that, we do have a $280 million resolving credit facility. As of August 7th, $35 million was drawn on that, so $255 million of -- $245 million, excuse me, of excess capacity, through the balance of the year. And then at the termination date of that facility, to the extent we haven't issued a new working capital facility by then, the facility itself expires mid-February of '03. We have the ability to term that out up to $225 million. So we've got, in my view, great backup support for all of our liquidity needs.

If you look at some of our maturing facilities, Dick spoke to the facility that supports the Montana First megawatts facility, the other two facilities we have are debts that mature over the next sort of six months or so. We do have a $150 million floating rate note that matures September 21. We -- at a minimum, we can draw down on our working capital facility to fund that. We also -- I'll talk in a minute about some of our other incremental cash sources that can be utilized or maybe utilized to in part to retire the floating rate notes as well.

Expanets does have a $80 million working -- or $75 million working capital facility provided by Avia, that matures by the end of the year. We're in negotiation with a number of lenders, and have received preliminary term sheets. And during the balance of the year, hopefully sooner then later, we'll be working toward putting a new facility in place there to take that out.

We do also intend, within the next two to three weeks, to put a $20 million asset batch credit facility at Blue Dot. We're in the final stages of closing that facility.

And then finally, we've talked before about the cold strip transmission sale. We do intend to close on that transaction within the next couple of months, and that would bring in $90 million in proceeds.

From an equity perspective, we've talked before -- First I would say that , we are -- we've said this before, and I'll certainly reiterate it again today, we're absolutely committed to maintaining the strength of our balance sheet, commiserate with our current investment grade ratings.

And we are certainly -- and we've talked before about wanting to issue upwards of $200 million of equity to maintain the strength of our balance sheet. And while we are still committed to issuing that much of a targeted equity, in light of today's market conditions and todays stock price, it would not be prudent to try to issue that in fell one swoop.

Accordingly, we're looking at alternatives in which we will try to issue smaller tranches of equity. We're looking at a number of alternatives in that regard, such as some potential private placements of our common -- of our registered common stock. We've been approached by a couple of funds, and we've having discussions with them. We're also considering a sort of one-day offering, similar to what we did last October, in which we were able to raise $78 million of equity in a one-day offering, primarily focused toward the retailer shareholders. And there are other, other alternatives we're considering as well.

I guess the point being that we are still committed to issuing equity over time. We want to on that in a reasonable amount of time. We also want to be sensitive to the current market conditions. So we'll look to do that over smaller tranches, and to make some meaningful progress toward that target during the balance of the 3rd quarter and then 4th quarter.

From a -- you have seen some recent press releases regarding CornerStone. In fact, we issued a press release last week to that regard. During the first quarter, we reiterated that CornerStone fundamentally is not core to our strategies. And we were Certainly supportive of CornerStone's decision and their announcement back in January to pursue strategic alternatives, including the potential sale or merger of the business.

You would have seen on August 6th that CornerStone elected not to pay the interest payment on their OLP debt. During the third quarter, we will -- in light of this being a third quarter activity, during the third quarter, we will be evaluating the impact of the financial operational restructuring alternatives that they are considering. That's still very much an activity that is under way at CornerStone. We'll take this on board during the third quarter. And then at the end of the third quarter, evaluate the reserves that we have realitive to CornerStone, and to the extent that further reserves are necessary, we'll take that at that time.

During our press release last week, we started what remaining investments we have that could potentially be impacted by the CornerStone activities. And of that I would remind you that the only exposure that we have that could potentially require any cash support on our part is our guarantee of their working capital facility. That working capital facility, which is [INAUDIBLE] with the other bond holders, in terms of the asset security, is about $18 million drawn, and about $8 million of LC. So in total, about $26 million.

And that's really the extent of any sort of cash draw that would be -- that could potentially be required of NorthWestern. Any other exposures we have are really more of a noncash write-off in nature. And again, by the end of the third quarter, we'll have a much clearer view where that sits.

Finally, as we noted in the press release, we are completing the transition of Deloitte & Touche as our new auditors. We announced back in May that we had put them in -- that we had elected Deloitte & Touche. We're very happy with the transition that has occurred. It's been very seamless.

In conjunction with the transition, you may recall back in March, we sold $720 million worth of bonds on a 144-A transaction, with a commitment to register -- to subsequently register those bonds. We're in the process of registering those bonds, and file that registration with the SEC. The SEC, as a matter of course, is reviewing that registration statement. They have sent us a list of comments and questions, we responded to the initial set, and filed an amended S-4 a couple of weeks ago. They have followed up with a much shorter list of comments. We hope to respond to those comments within the next day or two, and hopefully complete the clearance of the registration sometime in the very near future. Deloitte has certainly been working hand in hand with us on that, as we work through the clearance of that registration statement.

Finally again, as we announced in the press release, we have -- we hired an independent appraisal company to perform a FAS-142 statement of both Expanets and Blue Dot. They have completed that analysis, and their analysis states that there is no impairment in the goodwill of either of those businesses. That has been reviewed by Deloitte & Touche. So at this time, there's no impairment of the goodwill of either Blue Dot or Expanets in conjunction with our adoption of FAS-142.

Finally, I would say that we will be signing off -- or obviously submitting our 10-Q on August 14th. At that time, Merle Lewis, our CEO, and myself will be signing the certificate on our financial statements for the second quarter.

With that, I'd like to turn it over to Roger, who can open up for questions.

Thank you, Kipp and Dick. Now we'll open this call to your questions. So Roseanne, if you would take us through the procedures, please.

Certainly, thank you. Ladies and gentlemen, if you wish to ask a question, please depress the 1 on your touch-tone phone. You will hear a tone indicating that you have been placed in queue. You may remove yourself from queue at anytime by depressing the pound key. If you're using a speaker phone, please pick up your handset before depressing the number.

One moment please.

The first question comes from the line of Scott Pearl with Credit Suisse First Boston. Please go ahead.

Hi, good afternoon.

How are you doing Scott?

Pretty good. Could just update for us your investment balances for Expanets and Blue Dot, and then just break out the $8 million between the two.

Sure. Well, as of June 30th, our preferred stock investment balance in Blue Dot was $367 million.

And then for Expanets, our preferred stock investment balance was $415 million, which is consistent with what it was at the end of 3-31.

And then we also have, again consistent with -- well, let me back up. On Expanets, I said it's 415, which is true, that includes a $51 million operating loan. So the preferred stock balance would therefore be $364 million. Those balances are the same as what they were on 3-31.

And I guess the $8 million, does that belong to one or the other?

The $8.1 million is reflected on the income statement as minority interest. During the second quarter of '02, Expanets -- or excuse me, Blue Dot completed three acquisitions, and they issued about $17 million of consideration. And of that, $8.1 million was issued in stock of Blue Dot, and then because that stock sits on a subordinated basis with the other capital structure there, then the losses of $8.1 million were allocated to those share holders.

Okay. And then I guess you would -- you had said there's potential for additional acquisitions at Blue Dot throughout the remainder of the year. Does your guidance incorporate an assumption for any other additional acquisitions at Blue Dot, or is it just with what you've done so far?

Well of course, our guidance has a range in it. And the upper end of the range would assume some amount of it, of acquisition activity, certainly less than the second quarter, but some amount.

I mean it's difficult to say, because we're certainly being -- within Blue Dot, we're certainly being very selective in the acquisitions we do. They need to make strong strategic sense. So with that in mind, because we're being very selective, it's difficult to predict how much acquisition activity we might do over a three to six-month period of time. Other then I'll tell you it's going to be fairly limited in any event, and certainly less than what you saw in the second quarter.

And I guess just -- I think this was out in the press release. But as far as the total NorthWestern exposure to CornerStone.

Right. I can go through the amounts if you'd like.

Again, from a working capital facility, they have $26 million drawn on their facility. We do support that facility.

There is a entity, it's a special general partner, called Sin, Inc. Sin Inc. has about $26 million of liquid assets on their books. And I will tell you that on NorthWestern's consolidated financial statements, that $26 million balance is reflected in discontinued operations -- you know, assets of discontinued operations. Of that $26 million of liquid assets, we own 82% of Sin, Inc., and so our ownership of that is about $20 million.

By virtue of them being a special general partner, to the extent that there is a liquidation within CornerStone, and there is a shortfall and recovery of amounts, the creditors of CornerStone could potentially look to Sin, Inc. And so, I guess what I would tell you is that our investment in Sin Inc., by virtue of that, is exposed. To the extent that Sin Inc is required to fund any of the losses that may be incurred, or the shortfalls incurred at CornerStone, that would be a write-off on our part. But again, it would be a noncash write-off.

There are no further obligations at Sin, Inc. There are no further requirements on our part to fund SIn Inc incrementally.

Finally, we do have on our books -- well, we have about $15 million of receivables from CornerStone. We have that reserved to the tune of -- we have about $6 million reflected on our books. To the extent that the general creditors are not fully satisfied, that's exposure on our part of $6 million. But again, that would be a noncash write-off.

And then there are $6.5 million of LCs outstanding on some insurance tails on prior insurance policies.

So that's really the extent of our exposure.

Then the $26 million, is it fully drawn? Or is that --

Well, it's a $50 million facility. But there are --

They can't draw anymore?

They can't draw anymore. So, $26 million is all that's drawn.

Alright. Thank you.

Your next question comes from the line of Bill Bund. One moment please.

Your line is now open, from Fort Washington Investment.

Good morning.

Good morning, Bill!.

How are you today?

Great.

Alright. Is either Expanets or Blue Dot paying cash dividends at this point?

Expanets did pay $5 million dividend in June. During the balance of the year when you look at the projections, they will certainly be paying their dividends in cash. And in fact, we would look for payments in excess of the actual dividend, so we can work back down the preferred stock investment.

Blue Dot, during the balance of the year, we would see them having an ability to pay roughly half of their dividends in cash.

Roughly how much will those amounts be for both entities?

The total dividends for the year for Expanets would be -- actually for both entities, it's about $40 million apiece. So we on look for Expanets to pay all of their dividends in cash, plus some return of the original investment. And Blue Dot, during the balance of the year, to pay sort of $10 million of their $20 million balance of year dividends.

Could update us on what's going on in Montana with that First megawatts project? Is that on schedule, as far as construction goes?

It is Bill. Basically, what you're seeing now, the construction is gone to a phase, it's a good breaking point. On site are the turbines, they're mounted on concrete slabs. We've had other equipment coming in.

We've suspended further construction while we work out the balance of the supply portfolio. Basically, it's an issue of cash flow. They can and will ramp up construction again, and meet the online schedule for next year, when the time comes.

So I gather that negotiations with the [INAUDIBLE, bad audio on speakers end] is Montana looking at stock market prices, and trying to project the board, or where is the problem there?

You're slipping a bit?

Are they determining how much to pay on current stock market prices, and therefore they're dragging their feet [INAUDIBLE]?

No. basically Bill, if you follow the default supply proceeding, the Commission had reviewed the default supply, it approved specifically base load contracts, which are 80% of the energy, and therefore the dollars, and gave a specific guidance on both process and specific resources. What they -- how they view that, you know, filling out the balance of the portfolio needs. We are filling in the short-term market right now, which is, thankfully relatively low, but the forward prices indicate that's going to rebound. We're aware of that, as is the commission out there. So we're taking their guidance, their very detailed guidance. We're going back, and we're going to reassemble resources to fill out the balance of the supply needs and move forward and submit that to the commission.

With respect to Montana First, it's a unique facility in Montana, there's no other variable load generator like that in the state. It's already permitted, and has capacity -- gas supply capacity on the pipeline and transmission outlet, so it's got a good site. It is a variable load resource that can ramp up and down as need to balance out the load. It's available on 10 minute call, and can be used to not only supply economically in it's own right, intermediate and peaking load, it can back stop, you know, base load for a contingent contract, so on and so forth.

So my point to that is, that's recognized by the commission as a very important need the default supply has, a valuable resource. And we believe as we work through this process, that that project is very favorable and critical to the supply needs. We'll get that issue resolved in the next 30 days, in terms of what the proposal will be, and proceed from there.

CornerStone seems to have been on the block for sometime now. And over the last couple of years we've seen a number of other propane companies sold. What keeps this company from finding a new home? Is it broken in some way? Is it somehow deficient realitive to the other companies that have been sold?

Bill, as we've discussed, we've been involved in sale process for some time here over the last bunch of months here. The process, as we talked about publicly at the last call, is into the final phases, where there was a handful of bidders still interested. As we look at the opportunity to close the transaction, we looked to the working capital needs. Those all really provided to the Board of CornerStone the need to take the action that they took.

As far as the scenario of the sale process, that sale process does continue through the activities that are ongoing. And we'd be hopeful to continue that process to conclusion. But at this point in time, we have nothing further to report, other than the actions that we have taken.

Are we at the point that it seems apparent you'll have to pay someone to take it off your hands, in effect?

Bill, I wouldn't comment at this point in time, relative to culmination of the sale process, in your statement there. But as Kipp described, we have got the balances on our account, as Kipp just laid out. We laid out in the press release kind of the impact on NorthWestern. What we are doing as a Board of Directors -- the Board of Directors at CornerStone are taking the actions that we've taken to attempt to move the CornerStone assets, move the CornerStone customer service capabilities to the appropriate party, and through the process we have in front of us.

Alright, thank you.

Your next question comes from the line of David Reynolds from Morgan Stanley. Please go ahead.

Good morning gentlemen. A couple of questions. Kip, you mentioned that you were considering a couple other avenues for some equity issuance. Could you update us on where you are with the rating agencies in terms of timing, and what their expectations are for deleveraging the balance sheet?

Sure. Well, we've certainly met with each of the three agencies, discussed with them much of what we've discussed today. We've presented to them our performance year to date, and on the balance, it is certainly in excess of what we had originally committed to them.

We have discussed with them the alternatives that we're pursuing, the fact that the $200 million will likely come in smaller trenches, and that we expect to make meaningful progress during the end of the third quarter. And we will keep them apprised as we have all along. From there, I'm not really sure how to address your question, David I mean, in terms of their positions, that's really more for them to respond to.

With the bond coming due in September, and NOR's debt trading out below the current investment grade level, is the expectation that you will use the working capital facility at least temporarily to retire that position?

Yes, it is. We've talked about some of our incremental potential cash sources, so to the extent, as those come true, then that would enable us to pay back down the facility. But we certainly have the facility as a backstop.

I think past conversations have indicated that there were expectations of roughly $100 million in cash flow after the dividend. Just trying to do the math here. $52 million year to date, expectations of another $100 million. Backing out maintinance CAP-X and the dividend. I'm getting a number closer to 70 to $75 million for this year, does that sound correct?

Yes, that's not too far off. As I said earlier, the balance of the year, we would look for operating cash flows to be in excess of $100 million.

Then you look to the year after that, so for a full year 2003, and now you ever also the benefit of the January operations of Montana Power, you've got Expanets at a full run rate, and of course we've always been talking about $100 million plus of incremental cash flow. Certainly for 2003, if you take our cash flows from operations, so you take what we've talked about already for this year, add on the and annualization of January and Expanets, then you back off maintenance CAP-X, and we've talked in the past about that being $75 million or less, and then back off dividends, you would still have in excess of $100 million of cash flow for the full year next year.

Alright. A couple of quick questions at the subsidiary level. Expanets, we're now looking at reducing the guidance on the revenue side anywhere from 50 to $100 million, down from the 920 level. But the EBITDA expectations are in fact intact , if not thought to be conservative at this point. This is all the ability to reduce SG&A and other cost reduction measures?

Yeah, David, this is John Charters. That's basically what we've done. We've gotten ourselves to a cost basis that we can manage to the EBITDA targets. You know, 7 to $10 million, as Dick mentioned, on a monthly basis. And that essentially, you know, assured the pace that we've set for ourselves.

So obviously, we still have a strong pipeline and strong opportunities of business to close before the end of the year. And we're certainly not coming off of our ability to close and manage at that level, but we thought it was prudent to give that guidance.

And I think David, just to add to that as well. Some of the number [INAUDIBLE] we've seen in the EBITDA number will allow us to, as I've discussed earlier, add additional sales resources, additional programs in place as we position ourselves for 2003. SO we're in a very good position to be able to both meet our short term EBITDA targets as potentially upsided later in the year, and make those investments in expenses to position ourselves for 2003.

As we talk about -- and that's where I was going with it -- as we talk about 2003 and your feelings that $100 million run rate for Expanets EBITDA is realistic, what should we be thinking about in terms of 2003 revenue projections? What does that correlate to?

Should we be using the 7 to $10 million off of the $70 million in revenues? Or should we be expecting that margin to improve further?

I think that at this point, David, we're still doing the '03 planning process. And whether or not we'll be providing any guidance today I think would be somewhat premature. But let me talk more specifically about where we think the opportunity to grow incrementally.

As Dick stated, and as we've reiterated, we've built ourselves a cost structure to grow off of. We're now kind of at the cost floor, if you will, for operating profitably in a somewhat difficult marketplace. We're outperforming most of our -- you know, the efficiencies of our sales force are far above most of our competition in terms of revenue per employee and profitability per sale. So we think all of our metrics and key business indicators are at the right levels. And frankly we can continue to see some efficiency gains on them.

So, as Dick mentioned, we're in the process now of taking that performance and investing in additional resources and programs in the field. And where we're having success, we'll continue to invest with sales resources there.

We're seeing, with our expert system cut now, a good six, seven months into the process, continued efficiency and productivity, relative to evaluating our sales capability. So we see productivity enhancements.

We have also now introduced and are continuing to work in bringing the NEC product into the midmarket channel, and mixing our by-product into our NEC channel, where we believe we can do better, and take more share in the midmarket space with those product mixes being blended throughout the entire organization.

So we think we have a number of investments under way, you know, in Q3 and Q4 this year that set us up well for growth into '03. And as we go through our buying processes this year, we have a good base to build off of.

Ok, just two more quick questions. I'll try and move on here.

Blue Dot, the expectation was EBITDA 30 or $35 million for the year. Clearly we're short of that in the first half of this year. Is it realistic for us to expecting that that to be made up in the first two quarters, or should we be thinking of a lower of EBITDA for that unit?

Well, as we talked about, David, with our guidance here just a bit ago, and I'll restate what I said earlier. We're expecting EBITDA to be in the 15 to $20 million range, as compared -- for the year, compared to $10 million in 2001.

And I think that's it.

One other quick question on CornerStone. You mentioned that you think that only $26 million of that is a cash impact, and that's the $18 million on the working capital in cash, and then the receivable. But there was also mentioned that there's $6.5 million in other LCs related to insurance policies. If those were to have to be made good by NorthWestern, is that not a cash outlay somehow? Or should I add that to the $26 million?

Well, I suppose there's certain scenarios where that's a possibility, yeah. I mean, you're talking about obviously a dramatic situation in terms of when there's recoveries by the creditors. Okay, that's it.

Thanks guys. I appreciate you taking the time for the questions.

Your next question comes from the line of Walter Herschberger from UBS Warburg LLC. Please go ahead.

Yeah, good morning.

Good morning, Walter.

This is kind of a quick question, but in the -- on the balance sheet, the goodwill and other intangible asset line. The first quarter jumped up a couple hundred million, and then second quarter jumped back down a couple hundred million. Can you go through how that happens?

Sure. That all has to do with the opening balance sheet realitive to the Montana Power acquisition.

You know, as you can appreciate, at the end of the first quarter, we had to make some estimates on that in terms of the PP&E and goodwill. We've now had a chance to progress the analysis and evaluations that being done by a third party, in terms of purchase price allocation.

What it's resulted in, it appears the $200 million of goodwill that was originally recorded will now in fact be assigned to PP&E. The PP&E values have come in such that that supports the purchase price.

Okay, great. Thank you very much.

Your next question comes from the line of Tony Campbell from Dorsett Asset Management. Please go ahead.

Good morning gentlemen. I'm wondering if you could share with us the name of the firm that did the independent analysis on the goodwill, as it related to Blue Dot and Expanets.

Sure. It's American Appraisal.

Okay. And the other thing is, could you perhaps tell me -- if I recall from the first quarter, that you wouldn't have any more minority interest. And I note on page 7, that the $8.1 million kicked in, and I wondered what I was missing.

Right. Well, what we said at the end of the first quarter was that there was no remaining minority interest basis for which losses could be allocated against, which is a true statement.

What we also said at the end of the first quarter, is that to the extent that the further acquisitions were done, and it's much more likely to be at Blue Dot, that those acquisitions may in fact create new minority interest basis, and that's what happened here in the second quarter.

Again, Blue Dot did about -- did three acquisitions, total consideration of about $17 million, of which $8 million of the consideration was common stock of Blue Dot. And then that's what you see losses being allocated against, in terms of the minority interest line.

Very good.

And ladies and gentlemen, that does conclude our Q&A session. Mr. Hylland, please continue with any closing remarks.

We'd like to thank you you for joining us today. We encourage you to call the Investor Relations Department with any further questions you may have. And Roseanne, we'll let you conclude with the call back instructions.

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