NorthWestern Energy Group Inc (NWE) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the NorthWestern Corporation's third quarter conference call. At this time, all participants are in a listen only mode and later we will conduct a question and answer session. Instructions will be given at that time. Should you require any assistance during the call today, please press '0' then '*'. As a reminder, this conference is being recorded, but I would now like to turn the conference over to our host Vice President of External Communications, Roger Schrum. Please go ahead.

Thank you, Mary. I want to welcome and thank everyone for participating in today's call. With me today, are Richard Hylland, President and Chief Operating Officer; Kipp Orme, Chief Financial Officer; Michael Hanson, President and CEO of NorthWestern Energy; John Charters, CEO of NorthWestern Communications and Expanets; Daniel Newell, President and CEO of Blue Dot. We will begin with an Operating and Financial overview of NorthWestern's Energy and Communication businesses by Richard Hylland. Kipp Orme will then discuss the third quarter financial results. We would then like to respond to your questions.

For the benefit of anyone who hasn't already seen our third quarter earnings release it is available on the Internet at www.northwestern.com. The third quarter earnings release and comments from this conference call may contain forward-looking statements. These forward-looking statements and all other statements 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 News Release or the company's documents filed with the Securities and Exchange Commission for more information on these risk factors. I will now turn this call over to Richard Hylland.

Thank you Roger and welcome everyone to our third quarter earnings call. Similar to a process that we started last quarter we have gotten out not only our press release and the verbiage that you see there, but also a full set of our financial statements, including our income statement, our balance sheet, our cash flow statement, along with that press release. And our segment information breaking down each one of our operations. In addition to that what we have provided to you as materials also include the analytical slide that should have gone out with the press release as well. It should be available in Webcast form. As we talk through our discussion today, we'll refer to many of those materials.

I guess starting then with the press release. I'll try to give an overview of not only some of the press release highlights as well as some of the operating summary points but some overall comments and then I'll be turning the presentation over to Kipp, as Roger just discussed, to talk about our financial matters. Available also again as with last quarter are our three CEO's of our businesses who will be available not only for comments, but as well for the Q&A session which will follow the prepared remarks.

So, starting then with the press release. If we look at the banner headlines that you saw released this morning, NorthWestern's third quarter earnings were reported at $0.25 per share. That compares with $0.52 a share last year. As important as net income, if you look at the operating income line for the nine months ended, September 30, operating income was reported at $129m and that is an increase to that $129m. Importantly, cashflow from continuing operations rose to a level of $109m. We will get back into that breakdown here in a bit and as you also saw released this morning, the Board declared the normal quarterly dividend at $31.75 a share, which is unchanged from previous quarters.

Highlighting further down the press release, you see a discussion of the operating income for the quarter. For the third quarter we reported operating income of $45.5m compared to an operating loss third quarter of last year of $12m. For the nine months the operating income number of $129m I've just laid out, is compared actually to an operating loss last year of $52.5m.

Also during the quarter, for those of you who were maybe unfamiliar with our capitalization we completed an offering of 10 million shares for net proceeds of $83.1m. That leaves us, as Kipp will talk about later, in a position where we have an excess of $165m of cash. Cash equivalent and availability on our revolving credit facilities and also then, since September 30th with the completion of that offering in October, we have then paid debt down to a like amount of about $85m.

As we look forth for the remainder of the year, and Kipp will get into this certainly in more detail, we are projecting now with both the equity offering on the table as well as certain items that Kipp will talk about, earnings per share in a $1.50 to $1.60 range. And throughout the call today, we will give further guidance as the attribution to that range is our projections currently.

Stepping back from some of the press release verbiage and getting in now into the operations. We look at NorthWestern's operating and financial focus as it currently is and has been over the last several quarters and as we look forward. You've heard us talk quite a bit about our focus on maximizing free cashflow. Our operational excellence initiatives are performance improvements have all enhanced our free cashflow as well as our operating income along those lines of that strategy. We think we're making great progress in our three businesses and will talk about each one of those today from an operating income standpoint.

We also, as you saw released in the press release, are continuing to focus on a return on invested capital in our businesses, our asset optimization, and are looking at a handful of completed certain non-strategic asset liquidations and so forth to enhance our overall liquidity position and pointing towards the target that we have of reducing debt with our cashflow over time. Many of those operational efficiencies you've seen built into our 2002 planning process. Of course, you've seen that success as we've built that into our operations and the numbers of 2002, but likewise as we are in the midst of completing our 2003 activities and planning, we see further operational and organizational efficiencies we will build into the operations.

Now turning specifically to the consolidated numbers and then into some of the specific operations of each of three partner entities. If we look at our consolidated third quarter numbers, you can see revenues grow from $398m last year during the quarter to $509m this year in the third quarter.

Our operating income, as I mentioned earlier, went from -$12m to $45m and our EBITDA went from $9.4m to over $77m quarter-over-quarter in the third quarter. Behind that as you see on some of the analytical slides and attributing to particularly the bottom line performance of operating income, was an improvement in gross margins going from 41.5% in the three months ended September 30, 2001 to 48.8% this year during the third quarter. And that is a significant improvement in gross margins, both due to the mix of our businesses as well as the substantial improvement in margins that I will talk about in each one of our operations. Likewise and kind of going down the income statement, to get to operating income, our SG&A efficiencies have continued to perform well. If you look at the three-month period ended September at 39.2% last year, we now have a run rate in the third quarter of about 33%. So, a great improvement there. Continuing into our operations and it has really been attributed from our operational advancement and all of our initiatives throughout the organizations.

For the nine-month period, I will also highlight for you the nine-month numbers. Revenues increased from $1.3b to about $1.5b.

Operating income likewise, went from -$52m to $129m and EBITDA, as we will talk about that breakdown for each one of our businesses, went from right around $10m to a number north of $220m in the nine month period 2002 over 2001.

Likewise, if we also breakdown for the nine month period gross margins as a percent of revenues, gross margins went during the nine month period from 37% last year to over 47% this year. A substantial improvement as well as SG&A efficiencies going from over 36% of revenue last year down to in the 32% range this year during a nine month period. So you're seeing flow through both at the gross margin line item as well as the SG&A and of course, that all falls to this operating income increase that we have had.

We highlight just some takeaways from the quarter for each one of our operations before getting into the details. You'd really kind of have three bullet points. Continued strong performance from NorthWestern Energy. Our operating income as you see there is for the quarter over $37m and we are very pleased with the NorthWestern Energy and I'll talk further about that in a minute.

Our Expanets for the third consecutive quarter had substantial year-over-year improvement in operating income as well as its EBITDA and you have seen that through the second quarter of this year. You've also seen it continue in the third quarter and then Blue Dot had posted year-over-year third quarter improvement in operating income by about $4m and we will talk about each one of those businesses now.

Before getting into the specific businesses, I guess one last point is on cashflow from operating activities. As we have discussed with you in numerous times, our focus is very much on cashflow and free cashflow and if you look at cashflow from operating activities, we had a very good quarter in the third quarter. Our third quarter, if you look at the slide. The bar chart that was provided in the information, you can see that the third quarter cashflow from operating activities was $52m and importantly that was compared to $57m for the first six months of the year. So on the third quarter we virtually replicated the entire cashflow from the first six months and as you look at our nine month, the cashflow from operating activities, that number is over $109m.

Now then to breakdown each one of our specific businesses. We have provided slides on each one of the businesses and I'll try to just summarize comments relative to each business. If we look at revenues from our NorthWestern Energy business first, you can see revenues for the quarter have gone from $38m up to $182m for the nine-month period. Going from $204m to 531m. So obviously the growth there is related to the Montana Power acquisition which occurred effective February 1 as you all know. So we're seeing strong obviously revenue growth there relative to that acquisition and the revenue initiatives we have there.

As you look also then following through the operating income line going from the quarter, $10m last year to $37m this year and operating income for the nine period going from $41m to over $116m at the operating income level.

At the EBITDA level, you saw a number last year in the third quarter of $14m going now this year for the September quarter to $52m and the nine month period ended 2001, September 30, was 54m. And EBITDA for the nine-month period now this year from NorthWestern Energy operations is strongly at $160m.

Just to highlight the strong performance. You saw strong retail electric volumes during the quarter. Michael Hanson is here on the call for Q&A and what Michael will tell us is that we are very pleased with the successful integration of Montana, South Dakota and our Nebraska operations that has gone very well. Both with the organizations coming together as well as the operating performance and so forth and I'll highlight that in just a minute.

NorthWestern Energy, just to remind everybody on the call, provided more than 70% of our consolidated operating income and EBITDA from our stable regulated electric and natural gas businesses. So, providing NorthWestern with great stability of cashflow and particularly with those strong performances out of those team members and the organization that we have at NorthWestern Energy.

One of the real hallmarks of NorthWestern Energy in addition to great operating performance has been their best practices as it relates to service reliability in terms of customer satisfaction, in terms of outage performance, in terms of system interruption and we are very pleased to report as we talked about in the conference call earlier as well as we also talked about in the press release, the Reliability [One] Award again this year for NorthWestern Energy having achieved the winning of that award for the most reliable electric system in our region and that is no small task. We think about the tremendous efforts on the part of all of our team members under Michael's leadership and throughout our over 1,000 team members that operated NorthWestern Energy. That is a tremendous accomplishment.

Now, what it really lays out is that not only are we performing very well financially and operationally, but we are also performing great for customers. And in that business the real winning proposition is being able to provide affordable energy at reasonable rates and reliability and providing that with great operating performance. So, our congratulations goes out to those team members with the tremendous award again this year with NorthWestern Energy receiving that award.

Also, you have got a slide on the operating performance as it relates to electric distribution per line mile and of course, again you can see those kind of statistics lay out very favorably with NorthWestern Energy.

A quick update on the Montana First Megawatts Project. In addition to the base operations, the transmission and distribution operations, Montana First Megawatts did sign to the default supply contract with NorthWestern Energy October. There are other contracts that are being signed as well. Currently the project has over 64% of capacity in long-term signed contracts that begin in the year 2003 and we continue to talk to additional capacity buyers. We anticipate that number going over 80% fairly quickly here as we continue to build up the project and also talk with not only our power buyers, but as well our partners, both from a financial standpoint and as we round out the strategy of Montana First Megawatts.

Moving forward with the Expanets discussion. You can see Expanets again had a great quarter-over-quarter performance as it related to operating income and EBITDA.

If you look at first of all revenues, you see revenues actually decline from the September quarter last year of $2.44 down to $1.83 this quarter. For the nine month period that number went from $8.14 to $5.95 through softer market conditions on a top line basis, but also a focus from a proactive standpoint higher margin business as a mix of our business at Expanets. That focus on higher margin business and our operating efficiencies were really shown in the operating income performance where you can see operating income at $17m for the nine months versus -$82m for the last year. And for the quarter an operating income a number of $8.7m versus an operating loss of $18.8m last year. So, a great up in the income performance. That is obviously also depicted in EBITDA here on the slide going from the third quarter of last year of $6.1m up to $22.6m this year in the third quarter.

For the nine month period as you also see depicted from a -$45m up to an EBITDA of $56m for the nine months ended September 2002. So, again a great performance for the quarter from Expanets.

That is depicted in some of the trends here. If you look at EBITDA trend slide, you can see that quarter-over-quarter and substantially, the breakeven production that has occurred at Expanets. We have talked quite a bit and we have talked last quarter about Expanets performing up in that $60m to $75m revenue range and in doing so are producing between $6m and $10m EBITDA a month and that has been nicely performing as well through the third quarter.

If you look at their performance in the form of gross margins as a percentage of revenue, you can see what we are talking about relative to the progress on higher margin revenue. From the nine months ended September 30, 2001 at 36% to the nine months ended September 30, 2002 to 42% and if you look at this quarter ended September 30, 2002 at over 44%. So, it has been nice progression. It is a gross margin line item and then very significantly as we highlighted last quarter and continuing now this quarter is the SG&A as a percentage of revenue creating higher profitability as well.

If we look at those metrics, you can see for the nine months ended September 30, 2001 we had 42% SG&A as a percent of revenue. For the nine months ended this year it is 32% and importantly, if you look at this quarter we are now at a run rate in this quarter actual at 31.7% as an SG&A as a percentage of revenue.

So, all of those speak to the significant efforts of the Expanets management team and their field group in creating great efficiencies and performance. If we look at some of the third quarter highlights, you can see the EBITDA margins increase to 13% of revenues. In our nine months EBITDA increased, as I have just discussed earlier, over $102m. Gross margins as a percentage of revenues increased and so we're very pleased with the performance there. That has flown through all the way to the bottom line.

In wrapping up our third operation with Blue Dot. You can see in the slides, we increased revenues quarter-over-quarter from $111m to $131m. Operating income, quarter-over-quarter, third quarter of last year a -$1.1m going to $2.9m and then if you look at EBITDA going from $3.2m last year during the quarter to $4.3m this year.

So improvement at Blue Dot with year-over-year operating income and EBITDA performance and a couple of other updates relative to Blue Dot that are important. Number one, we closed the $20m working capital facility in September. Strategically with Blue Dot, where we see ourselves is continuing to build its cashflow performance, its operational improvements and having success there. What we have is a Board of Directors at NorthWestern indicated that we will not be supporting any further acquisitions at Blue Dot. We think as we cashflow the business and continue to grow the business internally, that we will plan no further acquisitions and of course as you see then, going after the September 30 period there will be no further additions in the acquisition accounts.

What that has done as well then as Kipp will talk about here in our earnings forecast, is with the strategy of no further acquisitions there will be no additional minority interests that are created through those acquisitions. And if you look at our third quarter numbers, while there were acquisitions, you will see no minority interest recorded for those acquisitions as well as throughout the fourth quarter in 2003. So, as we indicated in previous periods, we would be moving towards those kinds of steps.

Lastly, I'll just comment on the CornerStone discontinued operations, and Kipp will give us further color on that. But as you saw on the press release, with CornerStone, basically we took steps at the CornerStone Board Level to amend the partnership agreement and really sever NorthWestern's relationship from an economic standpoint with the partnership in the form of contributing all of our interest to the partnership. All of our equity interest in the partnership back to the partnership and so forth and what that results in is two things. One, is NorthWestern will no longer consolidate CornerStone in our financial reports in Q4 of this year after that activity. As well as then with those actions taken, we have also then written off the remaining investment largely in CornerStone including all related tax items and anything else in our tax planning activities related to that. That resulted in during the third quarter, given that activity all occurred in the third quarter, a charge of $55.9m and of course that went through the discontinued operations line item and you see that on our income statement below operating income. Kipp will get into that further.

Lastly before turning the presentation over to Kipp for the financials. There was a second press release that went out today about Lionel Mo. Lionel, due to his additional responsibilities as Senior Vice President and Treasurer of PepsiCo and those additional responsibilities that are taxing on his time and resources, Lionel has basically resigned from the Board and left the Board. What we want to do this morning is congratulate Lionel on the increased responsibilities as well as thank Lionel for his value added contributions to our Board during the time, however, short with NorthWestern. And as we move forward, thank him certainly for that activity and the involvement with our Board. So, we appreciate that very much.

So, Kipp what I would like to do is turn over to you to talk about the financial aspects of the business and then we will open up to Q&A.

Yes, Thank you Richard. I will make a few comments then I will turn it back to Roger and we will open it up for questions.

As Richard noted, the third quarter really was a continuation of what you saw in the second quarter as much as when you do a quarter-on-quarter comparison with the prior year you see a continued improvement at the gross margin line where gross margins increased another $83m for the quarter versus last year. The same similar story when you look at EBITDA or operating income. Again, in comparison with last year, continued strong performance. The performance also, when you look at the prior quarters of this year again continues. That trend is very consistent and we are very pleased with the operating performance of our business.

Richard also noted a cashflow from operations that for the quarter was $52.2m which then puts us at a $109.5m for the third quarter year-to-date. So, we start to see the base level if you will of cashflow from operations that we have in our businesses that puts us in a strong position going forward.

Richard mentioned the CornerStone discontinued operations and the activity for the quarter. As we announced at the end of July in recognition of CornerStone's announcement that they were going to be seeking financial restructuring alternatives, we acknowledged at that time or reiterated our remaining financial arrangements with CornerStone. We said that during the third quarter in recognition of their activity that we would evaluate these arrangements and ultimately make an adjustment during the third quarter subsequent to the completion of this review.

We also again, in recognition of our strategy of focusing on our Energy and Communications business and the de-emphasis of CornerStone, we have completed the deconsolidation process of CornerStone wherein, in subsequent periods you will no longer see the assets and the liabilities of CornerStone reflected on our financials. So, while they are reflected for the third quarter due to the fact that the deconsolidation didn't occur until after quarter end, in subsequent financials you will no longer see their assets or liabilities reflected. As Richard mentioned we took approximately a $56m charge during the third quarter to write off our remaining financial arrangements and put us in a position where going forward we do not anticipate any further financial charges related to CornerStone.

In terms of liquidity and debt reduction, Richard mentioned earlier that we, as we see here today, we had an excess of $165m in cash and availability on our credit facilities. When you look at post September 30 we have been able to decrease our debt a further $85m in conjunction with the proceeds received on the common stock offering that we accomplished in October to further strengthen our balance sheet and improve our ratios. I will remind you that in 2003 there really are no significant debts remaining to come due in 2003. Richard mentioned that in Blue Dot, we did complete a $20m working capital facility. That is non-recourse to NorthWestern. We have mentioned that on our earnings call during the second quarter that we are in the process of putting that in place.

With Expanets we are also in the process of putting in place a non-recourse working capital facility there and we would anticipate being able to provide further information and update on that hopefully in the near future. We are making progress towards that and further news to follow there.

Finally, as it relates to the 2002 forecast. If we look at the entities. NorthWestern Energy, we have previously talked about EBITDA targets somewhere in the $225m to $235m range. Certainly, given strong performance in the third quarter we definitely see NorthWestern Energy hitting those targets somewhat comfortably within those targets.

Within Expanets and Blue Dot we are lowering the targets to $73m to 80m for Expanets. We are certainly still targeting internally and certainly we still hope to hit at the top end of that. But we thought in terms of providing the market with an updated view of our forecast for the balance of the year, in light of our current view of the trading conditions, particularly, at Expanets, we felt it appropriate to provide a more conservative range on the EBITDA targets. And then for Blue Dot we would adjust our targets to somewhere in the $13m to $17m range. Again, we would you know, certainly hope for Blue Dot to come in somewhere within the original range that we laid out of $15m to $20m, but again, we would offer up a little more conservative range as it pertains to Blue Dot.

Richard mentioned earlier that strategically we've made the decision that we will not be pursuing further acquisitions in Blue Dot in the foreseeable future. We did complete two acquisitions that were previously committed to during the third quarter. Those acquisitions, and we did use as consideration stock for Blue Dot, in following our historical minority interest accounting for those two acquisitions we would have recorded about $5.4m of minority interest. However, in light of our intent to not do further acquisitions in the near term, we have elected within our 9/30 financials to not record the minority interest. We would have in our original forecasting anticipated some other smaller acquisitions in the fourth quarter, which we will not be doing.

So, I bring that to light. One as you look at our financials going forward you will not be seeing further minority interest reflected in our income statement. It has also had an impact on our full year forecast.

Speaking to the full year forecast, we are now projecting EPS of somewhere in the neighborhood of $1.50-$1.60. Again there are really three principle drivers of the decrease in the forecast. First and foremost the change in minority interest accounting policy as well as the reduced targets at Expanets and Blue Dot. And finally, the October offering that the dilution that that had on our EPS was greater and what was originally anticipated so we factored that into our revised full year forecast.

Finally I would note in the third quarter results, you'll see in the press release that during the third quarter we've adjusted our tax reserves by $5.8m. It was a benefit that is reflected in our third quarter results. What that has to do with is during the current year, during 02, we engaged outside resources to perform a comprehensive review of all of our tax reserves and all of our tax positions. That work was completed during the third quarter. The conclusions reached as a result of that exercise was that a $5.8m adjustment in our tax reserves was appropriate and so that's what we have reflected in our third quarter results. I do not expect, anticipate, any further adjustments in the balance of this year but that's generally the nature behind that adjustment.

Finally before I turn it over to Roger, we will be conducting a live webcast on December 3rd, further details to follow. During that webcast we will update you further on 2002 activities through that date in our projections. More importantly we'll devote the majority of that conference call to discuss our 2003 outlook, our plans and projections. We are completing our planning process as we speak so by December 3rd we should be in a solid position to discuss our outlook for 2003 and we'll be prepared to do so. Again, further details on that meeting will be announced in the next couple of weeks. So, with that I'd like to turn it over to Roger.

Thank you Kipp. We'll now open the calls to questions and I'll ask Mary to describe the question and answer format.

Thank you ladies and gentlemen. If you wish to ask a question, please press the '1' on your touch-tone phone. You will hear a tone indicating you've been placed in a queue. If you've pressed '1' prior to this announcement we ask that you please do so again at this time. You may remove yourself at any time from the queue by pressing the '#' key. Also, if you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question please press the '1' at this time.

And our first question is from the line of Wilson Yen with Morgan Stanley, please go ahead.

Good morning gentlemen.

Good morning.

Just wondering if you could talk about the plans on the dividend and fourth quarter expectations of EBITDA at the utility that's $65-75m, is that right?

Yes on the utility that would be about right.

And then maybe you could talk a little bit about you know, plans going forward on dividends.

That's a great question. As you know we've declared a dividend as a board actually at our board meeting this week and the board will look at the dividend every quarter as we do, as we did this quarter and have done every other quarter. So, moving forward we've had the board evaluate each quarter, our dividend policy as you know and we've paid a dividend this quarter and have paid the dividend actually for the last I think, 55 years. So, our track record of dividend certainly stands and that is a quarterly determination that we would make at the board level.

Okay, great. Also could you comment on maybe you know, discussions with rating agencies and plans for further equity issuances?

Well as you would expect we have on going discussions with rating agencies as do all the other companies. We do intend to meet with the rating agencies during November, now that we've had a chance to bring our 2003 planning processes to completion to update them on our outlook for 2003 just as we will with the broader audience on December 3rd. So, we will be meeting with them sometime in November and in terms of our equity intent, while we don't want to get into specifics or the timings, certainly we have an ongoing commitment to enhancing our balance sheet. As Richard spoke earlier, you know we are focusing on free cashflow. We are focusing on reducing our debt and we will certainly execute equity offerings as appropriate over time to again further enhance our balance sheet.

I just have a couple more questions I'll follow up offline rather than you guys fitting me in.

Thank you.

Thank you and our next question is from the line of Walter Kirchberger with UBS Warburg. Please go ahead.

Good morning.

Good morning Walter.

I noticed a brief comment in the press release talking about monatizing non-strategic assets. I'm not sure I recall seeing that before or I may have or we've had discussions. Could you kind of give us some indication as to what might be non-strategic?

Walter that's a great question. As we look forward on the theme of our direction of not only enhancing free cashflow but maximizing our return on invested capital and maximizing our asset optimization. We have identified certain non-strategic assets that we have. It will provide additional liquidity both for reduction of debt and further liquidity standpoint, as we would look at those. Examples of those include obviously we've had in front of the market for some time. The divestiture of the Cold Strip transmission properties. As you look at that $97m transaction.

You've seen us sell certain of our vehicles. We're in the business of serving customers we're not in the business necessarily of running a vehicle fleet so certainly those sorts of things are going to enhance our liquidity.

Other activities that certainly we're looking at, we have a substantial amount of for example, own buildings that provide us no necessary value to our customers but have certain opportunities for us to monatize those assets. For example Walter also, we're one of the few utilities that does not sell our receivables immediately having over $58m on a recurring basis in receivables investment. You know, those sorts of things are available to us in substantial amounts to enhance our liquidity.

There are other non-strategic asset items that we would be probably announcing over the coming weeks and months. And so we wouldn't comment on those today Walter but that's really the basis of our comment as you picked up in this press release that we do have a substantial value in non-strategic assets that will provide us further liquidity as we move forward over the coming months.

Okay thank you.

Thank you and our next question is from the line of Scott Pearl, Credit Suisse First Boston, please go ahead.

Hi good afternoon.

Good morning Scott.

Congratulations on the Reliability One award.

Thank you.

I guess quick question on the quarter, can you just give an indication as far as the electric business whether sort, of where it came out relative to normal.

I'm sorry Scott can you say your question again?

Whether relative to normals for the percent. Just trying to get a sense for that part of the country.

It's Mike Hanson here. Are you talking about the third quarter?

That's right third quarter whether relative to normal.

Okay, it was you know, net, net pretty even for the third quarter. There is month by month variations but you know over the quarter its right about what we consider normal, it's the average of long-term.

Okay, normal whether for the quarter. Second question is on the, on the tax valuation adjustment. What was the off setting balance sheet adjustment for that for the year on the income statement?

Well we were able to reduce our differed tax payable for that amount.

Excellent, and then can you update as to where you stand as far as outstandings on the, on your line of credit facility.

Sure, as we said here today we have $175m drawn on our line and we have about $21m of LCs.

Okay, thank you very much.

Thank you and our next question is from the line of Bill Bunn, Port Washington Investment Advisors, please go ahead.

Good morning.

Good morning Bill.

Could you tell me please how much cash you've been able to get out of Expanets and Blue Dot through dividends or other means and how much you would expect to get out of those guys in the future?

Okay.

In other words are you dividending up stream to the parent.

Well if you take Expanets for starters Bill, during the current year they have a working capital facility, really an equipment financing facility with [Avia](pf) that have scheduled pay down requirements. Certainly those have been funded. There were also revisions in the payment terms on the equipment to [Avia](pf) that was further reduced. So the cashflow generated at Expanets, quite frankly, has been used to service the debt requirements and the trade payables there. And we have supplemented that as that facility has gone down.

As we talked earlier, we are in a process of hopefully putting in a new trade, a new working capital facility with a commercial lender. That will then free up capacity there and so going forward we will certainly see Expanets in an ability to more than pay the dividends as they come due going forward.

As pertains to Blue Dot, we talked earlier about the fact that we have now discontinued acquisitions going forward. Quite frankly, today, Blue Dot's cashflow was going toward acquisitions. You know that the remaining free cashflow and we were supplementing that. Going forward again as two things happened. One is now we no longer do acquisitions we no longer have the requirement for that. As well as we continue to improve their operational performance which is clearly the focus there that will generate further free cashflow. So, we'll see Blue Dot having an ability to also service their dividends going forward.

Bill as you look at our, also on the cashflow statement, you'll see that even in generating $109m of cashflow continuing operations for the nine months, you'll see a number about five lines up in accounts payable that shows a -$66m. It's a working capital burden. That's where you're seeing a lot of that. That's virtually all Expanets with the pay down and more currency in the accounts payable related to [Avia](pf) and others. So, the cash flow at Expanets has been substantial and if as you've seen the debt, which I think Kipp started at $125m at the beginning of the year, will be essentially zero by the end of the year. Cashflow from operations went for that and then as Kipp has described the working capital facility that we had hoped to put in place earlier now will be put in place through these current negotiations. That cash is unavailable to be upstreamed to NorthWestern so, really it's from a financing standpoint, that we could have put that in earlier and upflowed that cash rather than just pay down the debt at, in the equipment financing at Expanets.

I assume that going forward we are going to be looking for dividend payments from these entities to help you pay down the debt at the parent?

Absolutely.

Do you have a sense at this point what you expect in 2003?

Well really as it pertains to 2003 Bill we would really like to differ our comments for the December 3rd webcast so we can give a more comprehensive view.

I think if you want to work your own numbers Bill, you know what the EBITDA projections are for this year. You know what our preferred dividend is relative to our investment and those are certainly things we will be pointing to you to calculate what those cashflows would be.

Alright, thank you.

Thank you.

Thank you our next question, comes from the line of Steve Ridell of Barney Brown, please go ahead.

Yes, can you give us any further update on the PT&L Cold Strip asset sale and when you think that will be resolved?

Steve this is Mike Hanson and as you know, we did file suit to enforce our agreement with PPL to purchase the generator outlet transmission from Cold Strips Unit form two and three for $97m. We filed that suit to protect our interest in and prior to bring a close. We recently is about 10 days ago, if I recall, amendeded our complaint to add additional counts seeking damages for their wrongful conduct in refusing to close.

So, the next steps of that are discovery and the typical pre-trial motions. I really can't predict how long it's going to take to resolve. But depending of course on the outcome of the pre-trial motions, which could be ruled upon in a January timeframe, perhaps later. Who knows how the courts scheduled them. We would hopefully resolve that as quickly as possible but in the end we remain very confident in our position that PPL has a firm obligation to buy those assets for $97m and we believe we will prevail.

Also, with Expanets working capital facility, about how big a facility are you looking to get?

We'll be targeting similar in the neighborhood of $65-$75m somewhere in that neighborhood.

Okay. Thank you.

Thank you. And we have time for one more question and that will be from the line of Kevin Roach with Barclays, please go ahead.

Good morning gentlemen.

Good morning Kevin.

A couple questions if I could, one Richard I think you said on the Montana First Megawatts that you're expecting to get maybe 80% contract cover on the capacity, is that correct?

That's right Kevin.

What terms should be think about in terms of average duration of contract?

Kevin this is Mike Hanson. The majority of the contracts are running out long-term in the 15-20 year range. A couple of smaller ones. Shorter term. But as we complete that would tell you that there are requests for proposals from people seeking power that total hundreds of megawatts. Far more than we have to offer in a region we are going through those and our preference will be to look at those looking for long-term arrangements.

And is the contract with Bank of Montana power is that still pending approval by the regulators there?

Not really Kevin, the procedures at the Montana commission had set up and reviewing the default supply. They made it clear that they don't intend to review and approve individual contracts. They gave us very specific guidance as to the process that we should use to fill out the balance of the portfolio. We carefully followed that process with respect to Montana first put a proposal out that met their requirements for cost based power from an affiliate of the utility and compared that with a very robust request for proposal in the market place. So they we knew that this was the best offer. So the way the process works, we sign the contract. We'll go forward. That project will get completed, come on line and we will begin purchasing power. The only remaining procedure at the commission is their annual review of our tracker and cost recovery.

So we should assume that that contract is in effect a financeable contract?

It will be financeable as we go forward and we complete some more of the power sales agreements. One of the things that we are working on is finalizing the financing. We will resume construction only after the financing is complete.

Okay and should, can you give us an expected timeframe for that?

We hope to have all that completed before the end of the year in terms of project financing and resumption of construction.

Okay thank you. One other question if I might. Following up I think on Bill Bunn's question, Richard I think you said that the cashflow of Expanets was directed at paying down some of working capital facility?

Yes.

And I just want to be sure I understand how the numbers move, second quarter versus third quarter. I have that in the second quarter you had approximately $173m of total non-recourse debt reported and in the third quarter that dropped to about $129m. Is the difference that pay down that you're talking about?

Yes.

And then it looks at though that the recourse debt rose let's say $50 or $60m quarter-over-quarter and I think some of that's probably the maturity that came due with the rest of it working capital or CAPEX.

Well, most of it is maturing of debts that we drew on our line to pay. Also included in that would be with CornerStone. We had agreed to, as you know previously, we supported their working capital facility when CornerStone defaulted on their interest payments. The lenders of that group looked to us to assume that position, that $26m. So we drew on our line to make good on that. So, that's, that's a principle component of the increase.

Okay, final question just on that issue, so, that number, that draw has already been accounted for in the CornerStone, all the CornerStone accounting actions you've taken so far.

Yes.

Okay, thank you gentlemen.

Thank you and with that Mr. Schrum please continue.

We want to thank everybody for joining us this morning and we also invite you to call NorthWestern directly if you have any further questions. I will turn the call over to Mary for some final information.

Thank you ladies and gentlemen. This conference will be available for replay after 3:15pm today through December 7th, 2002 at midnight. You may access the AT&T teleconference replay system at any time by dialing 1 800 475 6701 and entering the access code 656328. That number again is 1 800 475 6701 and the access code 656328. And that does conclude our conference for today. Thank you for your participation and for using the AT&T executive teleconference and you may now disconnect.