NorthWestern Energy Group Inc (NWE) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and a welcome to the NorthWestern Corporation third-quarter financial results conference call. At this time all participants are in a listen-only mode, and later we will conduct a question-and-answer session with instructions given at that time. (OPERATOR INSTRUCTIONS). And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Vice President of NorthWestern Corporation, Mr. Roger Schrum. Please go ahead.

Thank you, Chuck. Good afternoon, everyone, and welcome to NorthWestern Corporation's third-quarter 2004 earnings conference call and webcast. NorthWestern Corporation's earnings were released pre-market this morning, and the release is available on our website at www.NorthWesternenergy.com. In addition, we filed our third-quarter report on Form 10-Q with the SEC. That report is also available on our website.

With me today in our offices in Sioux Falls or on by phone are Gary Drook, our President and Chief Executive Officer; Brian Bird, our Chief Financial Officer; Mike Hanson, our Chief Operating Officer; Tom Knapp, our General Counsel; and Jess Austin (ph), who is our lead outside Counsel with Paul Hastings.

During the course of this presentation today, we will be discussing certain subjects including those pertaining to our strategy. And our discussions may contain forward-looking information. Although our expectations and beliefs are based on reasonable assumptions, actual results may differ materially. These factors are also listed in our press release and disclosed in the Company's public filings with the SEC.

Following this presentation those who are joining us by teleconference will be able to ask questions. However, due to time limitations we would like to limit each person to one question with one follow-up question to allow for broad participation. A replay of today's call will be available beginning at 7:00 this evening through December 8, 2004. To access the replay dial 800-475-6701. The access code is 75441. The conference can also be accessed from our website.

I will now turn it over to NorthWestern Corporation's President and CEO, Gary Drook.

Thank you, Roger. Welcome, everybody. I'm sure, as you know now, the new NorthWestern Energy emerged with a strong financial base. But maybe more importantly, a great history of leading reliability and customer service. Our reorganization was completed a week ago today on November 1st, about 13 1/2 months from our filing last September 14th. And I'm told it's one of the fastest and really most efficient restructurings that have occurred in our industry.

Our professional costs through September 30th were 25 million, which is significantly less than other long-term restructurings, because of the expediency with which we got it done. Although it is still a large chunk of money. In addition, and maybe most importantly, our restructuring had no impact on our customer rates. We have not adjusted customer rates in any of our jurisdictions. And it has had no impact on our customer service levels.

Last Monday we issued 35.5 million new common shares, including 4.4 million shares or 13.5% of our common stock, which was held in reserve for pending litigation and remaining claims that are yet to be settled. Our new Board is in place; they have met now. Linn Draper, the former Chairman of AEO was elected as our new Chairman, non-executive Chairman. And in fact, Linn will be here this week to just spend a little time with the management team.

We have had a busy October. Brian Bird, our Chief Financial Officer, and his team successfully closed three new financings that we thought were critical to our future. The first one of those was a $125 million revolver, which we closed at LIBOR plus 175. We needed this facility to replace the DIP that was in place with Bank One. As you know, we never drew against the DIP facility, although we did post about 15 million in letters of credit against it. Our new revolver will be the same way; it will be undrawn, but we will move those letters of credit over to the new revolver.

We also put in place a $100 million term loan B, at the same rate of LIBOR plus 175. And we issued 225 million in new senior secured notes that priced at 5 and 7/8. At emergence, we used the proceeds of that senior secured facility plus cash on hand to take out the 390 million CSFB term facility that we'd had in place.

We are now left, as we emerge from bankruptcy, with 853 million in debt, down from the 2.2 billion we had when we went in. And a book value of 710 million in equity. This puts us with about a 55 to 45 debt-to-equity ratio. It's a little bit higher than we would like to have long-term. We have plans to reduce that even further, and I think Brian will probably talk about that more later.

Let me talk just a little bit about our strategic focus. Although we have been focused on getting out of bankruptcy as quickly as possible, the team has already started to think about how we prepare ourselves for the future and what we focus on strategically. Clearly, in the short-term, our goal is to improve the brand -- is the way I say it in shorthand. And by that I mean we want to continue to integrate our Montana and South Dakota and Nebraska operations and optimize them to the degree possible. We want to continue to maintain, or in some cases improve, our reliability and service levels to our customers. And you may not have seen in, but we were recently one of three major power companies to receive the Service One award from PA Consulting for best customer care. We shared that honor with Duke Power and Kansas City P&L.

And finally in the short-term, we want to continue to work with our regulators to address their concerns that may remain, any questions they may have about the future. And we want to continue to reduce the business risk that we have from a regulatory standpoint. In the intermediate term, it's important that we regain our investment-grade rating. And we know to do that we need some further debt reduction. We have asset sales that are pending, and we have other available cash that we'll be utilizing to that end over the next 12 to 14 months.

Finally, we will want to grow this business, but we want to do it in a very focused way. We will be using our cash to maintain and protect our core operations. We can't move our product to other areas, so it's important that we reconnect with and grow with the communities that we serve. And we do have some areas that have exhibited some growth in the last two or three years. We want to support that.

When the right time comes along, we will evaluate other business opportunities. We want them focused in the energy sector and in the utility business in particularly, if we can find them. But we will address that as the opportunities arise.

Now, let me turn it over to Brian and let him talk in more specifics about our third-quarter results.

All right. Thank you, Gary. I really want to talk about three topics today. The first, to give you a brief overview of our third-quarter results. Second, I'll dig a little bit deeper into our year-to-date September results. And finally, some other comments I will discuss at the end.

First and foremost regarding the third quarter, the significant items for the quarter, from a gross margin perspective, we had 113 million of gross margin, which was flat versus the prior-year period. We did experience an operating loss of 5.2 million for the quarter versus a 17.5 million operating income for the third quarter of '03. The two main reasons for our loss in '04 in the third quarter was a 19.5 million in reorganization cost as a result of a claim provided to CornerStone within our bankruptcy. In addition to that, we had a 10.5 million in reorganization professional fees in the third quarter, which it was 25 million for the full year -- nine months through September.

Interest expense for the quarter was 21.5 million, nearly half of what it was for the third quarter of 2003. The decrease in '04 was attributable to the fact we stopped paying interest on unsecured debt during our bankruptcy filing. Or discontinued operations showed a loss of 4.4 million for the quarter versus a loss of 23.1 in the third quarter of '03. Taking all these things into consideration, the net loss for the quarter was 29.6 million versus a net loss in the third quarter of '03 of 52.7 million.

Jumping over to the balance sheet, our cash will continue to be strong with a cash balance at the end of the third quarter of 111 million. As Gary noted, we did use some of that cash to pay down debt upon emergence. And we will continue to, as we have cash in our business, pay down debt until we get to around a 50/50 debt to cap ratio.

Now, I'd like to turn our attentions to the year-to-date September results, starting with the income statement. Our gross margin for year-to-date September '04 was 348.8 million or 2.8 million less than the same period the prior year. Our electric margin fir year-to-date September was 266 million or 4.6 million less than the same period in '03. The decrease in margin was primarily attributed to increased costs of 5.2 million associated with our QF facilities contracts. This negative impact on margin was partially offset by our wholesale electric business which had stronger margins by locking in contracts at higher prices than the prior year.

Our gas margin for year-to-date September was 77.8 million or 2.2 million better than the same period for the prior year. The main reason for this favorable variance was that we had lower MPSC gas costs disallowance than the prior year. That favorable variance was offset by a 2.8 million loss on a gas supply contract. Our all-other margin was 4.8 million for year-to-date September, relatively flat versus the same period in '03.

Jumping down to operating expenses, year-to-date nine months '04 was 314 million, or 24.3 million higher than the 289.7 million for the first nine months of '03. The majority of the variance can be attributed to the following -- 19.5 million of reorganization expenses in '04 associated with the CornerStone claim settlement discussed earlier; 25 million of year-to-date reorganization or professional fees associated with our bankruptcy. Those two things offset by a 12.4 million asset impairment in '03 associated with MFM (ph). And also in '03, 6.0 million in higher professional fees due to our efforts to restructure the Company prior to filing for bankruptcy in September of '03.

Operating income for year-to-date nine months was 34.8 million or 27.1 million less than the 61.9 million year-to-date, the nine months '03 period. The electric segment had operating income of 67 million, the gas segment had operating income of 16 million, and the all-other segments, which really is carrying the reorganization expenses that I discussed earlier, had an operating loss of 48.1 million during this time period.

Loss on continuing operations for year-to-date nine months '04 was 27.4 million or 38.4 million better than the year-to-date nine months of 2003, loss of 65.8 million. This variance is nearly all attributed to the operating income mentioned previously and the interest expense the Company incurred due to its debt load. Since the Company stopped paying interest on its unsecured debt, its interest expense for year-to-date '04 was 65.5 million or 60.5 million better than the 126 million for the same period of '03.

Loss on common stock was 17.4 million for the nine months period in '04 or 83.2 million better than the 100.6 million lost year-to-date '03. Discontinuing operations showed a gain of 10.1 million in '04, primarily due to the gain of 11.5 million Netexit recorded upon the settlement with Avaya during the second quarter, and also associated with the gains on the sale of Blue Dot locations. These two things were offset by operating losses of our Netexit and Blue Dot businesses. This was 29.9 million better than the 19.8 million lost year-to-date in the nine months of '03, mainly as a result of the loss on Netexit disposal recorded in '03. The other impact on loss on common stock was the result of a 14.9 million minority interest on trust preferred securities, or TOPrS, in 2003. No interest was accrued or paid on the trust preferred securities in 2004.

Now I'd like to turn our attentions to the balance sheet. As I mentioned earlier, cash at 9/30/04 was 111.2 million, up from 15.2 million at year-end 2003. The only other significant changes in the balance sheet during this time period were the changes in the working capital accounts that contributed to the improvement in the cash position.

We should also point out that the balance sheet as of 9/30/04 was while we were still in bankruptcy. We will show our balance as the newly-emerged NorthWestern Corporation as of November 1st, and will incorporate fresh start accounting to reflect our new capital structure and other significant changes as of November 1st, 2004. The proposed entries for fresh start accounting are shown in footnote 17 of our 10-Q.

Regarding the cash-flow statement, the significant improvement in our cash balance was demonstrated in our cash flows from operations. For the nine months ended September 30, '04 our cash flows provided by operations was 160.1 million. This was a 263.4 million improvement versus the nine months ended September '03 where we showed cash flows used in operations of 103.3 million. This significant improvement was attributed to the reduction in our net losses, due mainly to the fact that we stopped paying interest on our unsecured debt while in bankruptcy. Plus, the drastic improvement in our working capital accounts during the first nine months of '04.

During this same period in '03, we saw a significant tightening of vendor terms as a result of our deteriorating credit profile, which resulted in significant deposits and prepayments being posted with our vendors. In '04 we were able to decrease these deposits and prepayments considerably as we worked with our vendors and demonstrated our improving credit profile. This improvement for year-to-date nine-month period of '04 allowed us on to fund our investment in capital, 54 million for the year-to-date nine months period, as well as service our debt amortization during that period of 10 million. The balance of cash flow was used to increase our cash balances by 96 million for the nine-month period.

The last thing I want to talk about is some closing comments. One thing I wanted to point out -- there has been discussion about earnings guidance. We are not in a position to provide any earnings guidance for '04 or '05 at this time because of several issues. First and foremost, I mentioned fresh start accounting. We have a significant amount of entries associated with that. And we want to make sure we capture all of those. We do have a pro forma in the Q, but that may not capture all the actual entries that are made. We also have some bankruptcy-related costs still to be cleaned up in the fourth quarter of '04. And finally, we have not discussed the issue of guidance with our new Board. In fact, our new Board hasn't officially met as a Board yet. And we haven't talked about guidance with the Board at this time, and until we do that, we don't feel it's in our best interest to provide guidance at this time. In fact, the next call that we will probably have would be upon the filing of our 10-K, which would also lay out the actual audited fresh start accounting entries.

Those are my comments. I'll turn it back over to Roger.

Thank you, Brian. Chuck, why don't you go ahead and take us through the protocol for the Q&A.

(OPERATOR INSTRUCTIONS). Ross Haberman (ph), Haberman Fund.

Quick questions. You had 100 and some odd million of asset sales. I was wondering what the status of that is. When do you expect them to close? And will they all go to paying down debt?

Well, let me just touch base on it. Brian may have some adders -- this is Gary Drook. There's really four large assets that we're working on bringing cash in. Netexit is in its own separate bankruptcy, which will probably conclude, I guess, in the first half of next year. We expect to bring up to the parent -- our projection is about $40 million from Netexit. We, at one time, had 65 Blue Dot locations. We have sold 63 of those. We have a letter of intent, I think, on one more, and we're down to kind of the last location. Blue Dot is setting on cash. We would expect to bring up some of that cash before the end of the year and the final amount next year. We expect to bring between 13 and $15 million up from Blue Dot to the parent. We have the gas fired plant in Great Falls, Montana that we refer to as Montana First Megawatts. We are working on a letter of intent to sell that asset. Expect to close that before the end of the year and bring some of that cash up yet this year, and some of it next year, in the first half of next year.

And then finally, we have a note with CornerStone, which we're trying to sell. At the moment, we think we'll get about 15 million for that note. If you add that all up, it's about 100 million. And I don't think Brian will let any of us do anything with the cash except pay off debt at the moment. I'll let Brian add to that if there is anything else.

Gary's final comment, I will say in CornerStone I think we projected to see that money come in, in '05. We may actually see that yet this year on CornerStone.

Good.

Just one follow-up -- are there any other superfluous assets which we could expect to be sold over the next calendar '05?

Nothing of significance that I can think of.

Richard Rolloff (ph), Luminus Management.

Quick question, I was wondering if you could explain the preference for paying down the debt. You seem to have a pretty decent capital structure in place now, and I'm wondering what the decision-making was behind that -- paying down the debt versus increasing the dividend.

I think the dividend that we laid out in our plan, I think was in line with what our peers -- and I can talk about that a bit more. But regarding debt, in terms of the many discussions we've had with the rating agencies, we think that being around a 50/50 debt to cap is where we need to be on a going-forward basis as a utility, a T&B (ph) utility.

Thank you.

Remember our intermediate goal is to get back to investment grade as fast as we can.

Peter Park (ph), Park West.

Can you tell us what kind of changes are going to be made to the balance sheet as a result of the fresh start accounting? Anything that radically changes how operating income might look like at the utilities -- do I just go back to the past few years?

I think in terms of how operating income is impacted at the utility, I don't think there will be material changes there. The biggest changes to the balance sheet effectively will be the debt for equities swap. So we'll show the 850 that Gary mentioned in debt, the 710 of book equity -- that's the biggest change. There are some other changes that will affect our deferred taxes and things like that. But in terms of affecting the operating income of the business, I don't see any changes that will be material there.

In terms of working capital, is there an opportunity to squeeze out more working capital? Or are you pretty much down to where you are now?

I would say in terms of working capital, we've done a very good job, even while we were in bankruptcy. You can see it in the changes in our working capital balances today. We continue to make strides in working with folks, not only to minimize prepayments and deposits, but to actually get terms from folks. And we're actually doing that at this point in time. You can still see some changes in working capital, but I think the lion's share of those are already achieved.

In terms of your regulatory picture over the next few years -- given that you're going to have a brand new investor base, can you lay out what your regulatory hurdles are opportunities might look like over the next the years, in just very broad-brush strokes?

Could you clarify a little bit what you mean regulatory opportunities to be?

Just rate cases coming up, rate increase filings, coal costs, gas costs -- if you could start painting the landscape of what your regulatory picture looks like. Is that clear?

Sure. We've got on the call with us Mike Hanson, our chief operating officer. Mike is, I think, probably the closest to the regulatory environment. Are you there Mike?

Yes I am, Gary.

Why don't you try and address that just quickly.

Certainly. In terms of rate reviews, the only rate review that we anticipate is a filing in Montana. Part of our settlement agreement with the Montana Public Service Commission and Montana Consumer Counsel requires us to file rate information by the fall of '06, based on our 2005 actual performance. To be clear, that does not mean there will be a rate change our a rate case; it simply means they have a chance to look at it and see if they are comfortable with our current rate levels. If there is a rate change, it would not occur until sometime in '07. We don't anticipate any rate filings in our other jurisdictions.

In terms of coal costs, recall that we only own generation for our South Dakota service area. Our fuel costs are a pass-through in that state.

So, the answer is -- not much going on.

James Bellessa, D.A. Davidson.

Earlier in a response to one of your questions you alluded to your dividend. Would you go through that and your expectations for that? And then second, can you go through the pay-off of that Credit Suisse First Boston note?

First of all, the dividend -- we believe what we provided in the plan of reorganization in terms of the dividend policy was consistent with what our peers were doing, and was appropriate for attracting equity to our story. That was approximately a 60 to 65% dividend payout ratio, which attracted a dividend yield of around 5%. We have yet to speak to the Board about that. We plan to bring that up as a topic in December. And after we have a decision what our actual dividend policy will be, we will make sure that we communicate it.

Jumping to the CSFB facility, as Gary pointed out, we used the proceeds of the term loan B and the 225 million note offering to pay off that facility. And we also used cash on hand to pay off a portion of that as well.

How much of the cash -- we know the proceeds from the two offerings there; how much cash did you have to --

To actually pay down debt, it was around 60 million, Jim. And then there were some fees associated on top of that.

Nick O'Grady (ph), Sandhill (ph) Asset Management.

A couple questions in regards to regulation, in Montana specifically. First one is -- has the Commission, whether through the bankruptcy or through just contact in general, talked about the integrity of the T&B system at all? Are they concerned about it? Is there concern about your capital spending may need to be higher than expected?

Mike, why don't you just touch on the Liberty Report, because they expressed those concerns early in '04, and Mike will tell you how we addressed those concerns.

Certainly, and thank you Gary. We had an independent third-party review by Optical Liberty consulting who concluded that our gas and electric systems are generally in good working order, our maintenance practices are generally consistent with good utility practice. They made a number of recommendations for improvements to our processes and things we should plan for in the future that we are working into our capital and operating plans. But we think we are maintaining the system pretty well, and will continue to do so in the future.

And the only other question is just -- in terms of cost of debt, you're planning on paying down a significant amount of debt. From a rate base perspective, or from a cost perspective, will your cost of debt be significantly lower than it was in that last rate case in Montana? Is that something that the Commission essentially take away; that savings that you're capturing?

Do you want me to answer that, Gary?

Go ahead, Mike. You got it.

Well, they look at all cost elements, I would just say. So while that one may shift a little bit from the prior Montana Power, we're certainly going to have other cost items that move in the other direction. You really can't conclude from just the cost of debt that that's going to produce a change in rates.

Andrew Shirley (ph), Ivory Capital.

I was wondering if you could tell us what your total debt in cash numbers were as of the November 1st effective date?

Total debt?

In cash numbers?

As of November 1st, it should be around 853 million.

And the cash number as of that date?

We are not providing the cash. We provide the cash as of October 31st, and I did provide some information on how much of that cash we used to pay down debt. That's about as far as I want to go.

And lastly, you mentioned you might have some fourth-quarter reorg cleanup expenses. Can you quantify that?

Brian Bird. I really can't quantify at this point in time what that amount would be.

And lastly, any opportunities for you guys to recapture some of your restricted cash?

Indeed. Some of that cash, like I mentioned, are in prepayments and deposits. We look at that. But we also have restricted cash that is tied up with insurance companies for some of our other businesses. We continue to work with those folks, reducing our obligations there, which ultimately will free up some of that cash. We expect in '05 to get some of that back. I really can't quantify how much at this point in time, but we will continue to work on restricted cash. And all of our assets, if you will, to free those up and turn them into cash in the '05 period.

(OPERATOR INSTRUCTIONS). Ross Haberman, Haberman Fund.

Gentlemen, I was wondering if you could talk, I guess not in general terms, where you are seeing squeezing out better efficiencies on your two lines of business. I'm not asking you to make projections for '05, but if you can talk in generalities and where we can expect more efficient operating results in both the electric and the national natural gas side over the coming year of two.

Yes. Mike, why don't you talk a little bit about some of the things you are looking at from an integration standpoint.

Sure. We integrated the management of utility functions across the three states. We've consolidated our control centers, for example, that actually operate the electric and gas systems into our control center in Butte. The major remaining items relate to main IT systems, computer systems that we need to implement, and also taking a look at integrating our call center operations. Those are the two largest areas of opportunities yet remaining.

And you expect these efficiencies to be achieved over the next year or two?

That is correct.

I'll save the numbers, I guess, for next quarter. Thank you.

Jim Godfrey, A.G. Edwards.

Could you explain specifically the terms of the warrants that are out there? How many there are, and are there triggers in place to force conversion and/or equity base?

Is Jess Austin on the phone yet?

Yes.

Jess, I think you're probably the best person to try and describe the warrants.

All right. The warrants are relatively simple, Jim. This is Jess Austin. I'm the primary bankruptcy counsel for the company. The warrants are ultimately convertible into an additional 5.3 million shares of new common stock. I believe this strike price on the warrant is $28.48 a share, so to the extent -- obviously they're in the money once the stock is trading at or above that number. And they're fairly simple because they have a three-year term. And that's pretty much the term of the warrants.

And there is nothing that can trigger an early exercise of those?

No.

They are not options; they are actual warrants. If you own a warrant and you decide to exercise it -- at what price, Jess, $28? You have to write a check out to the company for $28, and then we issue you a share of stock.

For example, if there was an offer for the company at $25 a share, there's nothing that triggers any value of payment to the warrants?

Right.

Mark Lawrence, Tyndall Management.

I was wondering if you could provide an update of the tax status of the company, including the size of NOLs that are retained in the time period over which they are likely to be used.

We've shared some of this information in the final reorganization, so I'll feel comfortable sharing that. Effectively, after the cancellation of debt income that NOLs are used against, we'll have approximately 200 million of NOLs to be used on the going-forward basis. Those NOLs will be used after we've taken a look at our book to tax differences, if you will. For instance, tax depreciation and that. So we don't have a lot of taxable income, let's say in '05, as a result that shows in the plan. We start using those NOLs mainly in '06 through '08. We do have a balance after that. One thing you can do -- it mentions in the valuation of the company, the value of the NOLs used over that time period has a net present value of 45 million. So you can gauge how many NOLs are used over that time period, and can pretty much calculate the value after the horizon. I will leave that up to you.

Gentlemen, there are no further questions at this time. Please continue.

Well, let me just thank everybody for joining us today. This has been a historic month for our company, for the management team that I'm extremely proud of, for Jess Austin and Paul Hastings, who sort of led us through this legal quagmire and did a phenomenal job. We're just all feeling pretty good at the moment, and we appreciate you joining us. We are glad to be back, and we are glad to be able to have a call like this. So, hopefully you'll all rejoin us for our next one after we get the K out. So with that, we will end it. Thank you very much.

Thank you. Ladies and gentlemen, once again, this conference will be available for replay after 7:00 PM Central time today through Midnight Central Time on Wednesday December, 8th. You may access the AT&T Executive playback service at any time by dialing 1-800-475-6701 and entering the access code of 754471. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.