NorthWestern Energy Group Inc (NWE) 2004 Q4 法說會逐字稿

Welcome to the NorthWestern year end financial results call. Now at this time, all lines are in a listen-only mode. Later there will be a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder this conference is being recorded. At this time I'd like to turn the conference over to your host, Mr. Roger Schrum. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone, and welcome to NorthWestern Corporation's 2004 financial results conference call and Webcast. NorthWestern's results were released pre-market this morning and the release is available on our website at NorthWesternEnergy.com. In addition, we filed our annual report on Form 10-K with the SEC this morning. That report is also available on our website. Joining us today from our offices in Sioux Falls, South Dakota are Gary Drook, President and CEO; Mike Hanson, Chief Operating Officer; Brian Bird, Chief Financial Officer; and Tom Knapp, General Counsel.

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 listed in our press release and disclosed in the Company's public filings with the SEC. Following our 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 at a time. With one follow-up question to allow for as much broad participation as possible. A replay of today's call will be available beginning at 7:30 p.m. eastern time today, through April 14th, 2005. To access the replay dial 800-475-6701, access code 771764. A replay of the Webcast also can be accessed from our website. I will now turn it over to our President and Chief Executive Officer, Gary Drook.

Thanks, Roger. In 2004, we took significant steps to create the new NorthWestern Energy. I'll plan to summarize some of the highlights of our '04 results, Mike Hanson is with us, our Chief Operating Officer, and Mike's going to go through our business unit results. And Brian Bird, our CFO, will go into more detail on the-- on the financials for '04.

Now, following our emergence from Chapter 11 back on November 1st, we became a much stronger company financially, and much better positioned to serve customers and grow our utility focused business. We emerged from bankruptcy as a solid company, with a strong balance sheet, and a reliable cash flow. During the reorganization, we were able to divest non-core businesses and assets, which we're going to discuss in much more detail in just a few minutes. We've significantly reduced our debt, both during the bankruptcy and subsequent to that. And we're continuing to focus on additional debt reduction in '05, as we continue to strive to regain our investment grade rating.

We have renegotiated new energy supply contracts and vendor agreements during bankruptcy. Many of which were able to help us with our cost structure, and we've also just reduced operating costs in general. In addition, we have successfully resolved most of the outstanding major legal proceedings that were pending against the Company.

Let me just talk briefly about financial results for '04. Brian'll dig into them in a lot more detail in just a moment. But our '04 financial highlights are reported using fresh start reporting. Fresh start reporting, which you use when you emerge from bankruptcy requires us to revalue our assets and liabilities, as if they were purchased or assumed on our date of emergence from bankruptcy, November 1st of '04. As a result of that, we reported consolidated earnings on common stock of almost $545 million compared with a loss of about 129 million in '03. Much of this earnings improvement stems from the reorganization items that were the result of fresh start reporting. The results in '04 are not indicative of the actual underlying performance of the Company, because of the impact of Fresh Start reporting. However, again, Brian'll get into that in more detail.

At-- in addition, today we announced that the Board of Directors has approved a new quarterly cash dividend on the Company's common stock of $0.22 a share, payable March 31st to holders of record of March 24th. When -- in approving the new dividend the Board took a hard look at our projected financial performance for '05, the sustainability of the dividend and our ability to grow that dividend in the future, from-- from the beginning point that we picked. The Board believes that an indicated annual dividend of $0.88 a share, with a payout ratio in the range of 60 to 65 percent of net income is comparable to other utilities. Going forward, the Board is committed to periodically review the dividend to ensure that we provide a competitive return. Now, with that, let me ask Mike Hanson just to talk a little bit about results of operations. Mike?

Thank you, Gary. Let me start by reviewing our regulated utility operations, which are our largest business segments. Our regulated electric utility provides approximately 51 percent of the Company's consolidated revenues and approximately 63 percent of our consolidated gross margin. In 2004, regulated electric revenues were 571.9 million, compared to 601.6 million in 2003. That decrease in revenue was due primarily to a decrease in sales for resale revenue, commonly known as wholesale sales.

Regulated electric gross margin was 299.3 million, compared with 314.5 million in 2003. That gross margin decreased year-over-year in 2004 primarily as a result of higher out-of-market costs associated with qualifying facility contracts, or QFs, in Montana. Our QF costs can differ from year to year depending on the actual output of the plants, as compared to the estimates that were used in recording the QF liability. For 2004, the actual output of the QFs were higher than the estimate, which resulted in a negative impact on gross margin of about $1.8 million. In contrast, in 2003, we recognized a gain of approximately $9 million because the QF outputs was much lower than the estimates. The reason the QF output was much lower than the estimates in 2003, was due to a prolonged outage -- an unplanned outage at one of the QF facilities.

Our regulated natural gas business provides approximately 28 percent of our annual consolidated revenue, and 22 percent of our annual consolidated gross margin. In 2004 the regulated gas revenues were 311.7 million, compared with 279.1 million in 2003. This increase was due to the increase in gas supply revenue as a result of higher average commodity rates. Also, there was a modest increase in sales for resale and increased transportation revenue.

Gross margin from the regulated gas business was 106.5 million in 2004, compared to 104.1 million in 2003, and much of that gross margin increase was the result of increased transportation revenues. Other items that reduced the gross margin in 2004 were a $2.8 million loss on a fixed-priced gas sales contract, as well as a decrease in general business sale margin of 2.3 million. Those two items were offset by a decrease in disallowed gas costs of 5.2 million, as compared to 2003.

Turning to our unregulated energy operations, the unregulated electric business the Company has consists primarily of two items. First is the leasehold interest we have in Colstrip Unit 4. We have a 30 percent interest in a 750-megawatt coal-fired plant that's located in southeastern Montana. We also have a small 2 megawatt hydro-electric facility, the Mill Town Dam, near Missoula, Montana. These unregulated electric operations provide approximately 8 percent of the Company's consolidated revenues and 13 percent of our consolidated gross margin.

In 2004, the unregulated electric revenues were 88.7 million, compared to 69.9 million in 2003. The increase in revenue is due primarily to the renegotiation of a power purchase agreement that Colstrip 4 has with one of its wholesale customers. Under the PPA we buy back energy at-- below-market fixed prices and in turn sell it to another wholesale customer under a favorable fixed-price sales contract. The unregulated electric gross margin was 61.8 million in 2004, compared with 47.1 million in 2003. And, again, this increase is due primarily to the renegotiated PPA at our Colstrip Unit 4, partially offset by an increase in supply costs.

Our unregulated natural gas operations consist of marketing of natural gas to large volume customers in South Dakota, as well as the operation of about 87.5 miles of intrastate natural gas pipeline in eastern South Dakota. The unregulated natural gas operations provide approximately 12 percent of the Company's consolidated revenues and 2 percent of its consolidated gross margin. The unregulated gas revenues in 2004 were $137 million, compared with 100.7 million in 2003. The revenue increase was due to increased volumes sold primarily to new ethanol plants in South Dakota as well as higher average commodity prices.

Gross margin from the unregulated natural gas business was 8.8 million in 2004, compared to 12.1 million in 2003. The decrease in gross margin in 2004 was primarily due to higher supply costs and a $2.3 million loss that we recognized on an out-of-market fixed-price sales contract.

Lastly I'd like to address, briefly, our capital spending forecast. The capital spending in 2005 is estimated to be approximately $76 million, which is about the same as it was in 2004. Included in the capital forecast for 2005, is a completion of a 30-mile transmission line, which we call the Three Rivers-Jack Rabbit line. This is a $12.5 million project which was started in the fourth quarter of 2004 which will allow the Company to meet growing demand in the Gallatin Valley just outside of Bozeman, Montana. I'd now like to turn the discussion over to Brian Bird, our Chief Financial Officer.

Thanks, Mike. I'll provide some additional comments on our financial results for 2004. As Gary mentioned, our results in 2004 are reported using fresh start reporting as of the close of business on October 31, 2004. You will see in our financial statements that we refer to predecessor company, which refers to the Company prior to emergence from bankruptcy, and successor company, which refers to the Company following emergence. Due to the application of fresh start reporting, our consolidated financial statements have not been prepared on a consistent basis with and, therefore, generally are not comparable to those of the predecessor company and have been presented separately. We have combined the successor company results with the results of the predecessor company for comparison and analysis purposes.

Our consolidated revenues were approximately 1.-- 1.039 billion in 2004, compared to 1.013 billion in 2003. Since a significant portion of our revenues are a function of pass-through energy supply costs, I tend to focus on gross margins as an important metric for the Company. In 2004, gross margin was 475.2 million, which was down slightly versus 2003 gross margin of 476.8 million. For both electric and natural gas businesses, as Mike explained, our out-of-market costs on QF contracts grew by approximately 10.8 million compared to 2003. Ad the Company recorded losses on fixed-rate contracts of approximately 5.1 million. In order to eliminate future losses on fixed-rate contracts, the Company has been working on improving policies, procedures, and control activities over regulated and unregulated energy procurement, throughout 2004 and continuing into 2005. And we anticipate these activities will be fully implemented in 2005.

The company reported operating income of 638.1 million for 2004 versus $78.7 million for 2003. The main reasons were 532.6 million in reorganization items, and an 18 million decrease in operating expenses from the prior year. Further detail on the reorganization items include a 558 million gain in cancellation of indebtedness income, a 13.9 million gain on discharge of other liabilities through fresh start reporting. These were partially offset by a 39.3 million increase in professional fees and expenses.

Since filing for bankruptcy on September 14, 2003, we present reorganization, professional fees and expenses separately from operating, general & administrative expenses on the income statement. While all reorganization-related expenses during 2004 are presented separately, there were approximately 6.1 million for legal and other professional fees included in operating, general & administrative expenses during 2003, due to our efforts to restructure the Company prior to filing for bankruptcy. Additionally, 2003 included an 8.4 million increase to our environmental reserves based on results of a third-party evaluation.

Interest expense was 83.8 million, a decrease of approximately 83 million from what it was in 2003. These decreases were primarily attributed to the Company stopping the paying of interest expense on our unsecured debt and our preferred securities due to our bankruptcy filing. Also contributing to our increase in consolidated earnings were an improvement year-over-year from discontinued operations 44.2 million and a tax benefit of 6.3 million.

Now I'd like to shift our attention over to the balance sheet. Unrestricted cash at 12/31/04 was $17.1 million compared to 15.2 million at year end 2003. The only other significant changes in the assets on the balance sheet were the changes in working capital accounts that significantly contributed to the cash flow from operations improvement year-over-year, and our goodwill account. Goodwill increased by 59.3 million, at 12/31/04 due to fresh start reporting. In accordance with fresh start reporting, and based on certain regulatory considerations, our property, plant and equipment is maintained at historical book value less adjustments, which reduce these assets to the amount included in the utility rate base; therefore, management has applied the entire excess reorganization value to goodwill.

Long-term debt decreased during 2004 as the Company utilized excess cash to pay down approximately 83 million of-- of secured debt. We have approximately 73 million in debt maturities in 2005 which we -- which we will satisfy using available cash, cash flow from operations and borrowing capacity.

Now switching our attention to the cash flow statement. Cash provided by continuing operations totaled 150.-- 150.9 million during 2004 compared with cash used of 105.7 million in 2003, which is approximately a 250 million change year-over-year. 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 and preferred while in bankruptcy, plus a drastic improvement in our working capital accounts during 2004.

During 2003 we saw significant tightening of vendor terms, as a result of our deteriorating credit profile, resulting in significant deposits and prepayments being posted with these vendors. In 2004, however, we were able to decrease these deposits of prepayments considerably and are now receiving normal credit terms from many of our vendors. The Company has 125 million five-year revolving credit facility which is currently undrawn on a cash basis. We do, however, have 26 million in letters of credit posted against this facility. The cash provided by continuing operations during 2004 was used to invest 80 million in capital expenditures and to pay down long-term debt, as previously mentioned.

Now I'd like to mention our status of our non-core asset sales. First, regarding CornerStone. In December 2004, NorthWestern monetized an allowed secure claim in CornerStone's Propane Partners bankruptcy proceedings for 15 million in cash under the terms of our previously agreed to settlement. As of year end 2004, the Company has no remaining interest in or receivables from CornerStone. Regarding Blue Dot. In December 2004, NorthWestern received 10 million in cash from Blue Dot in partial satisfaction of its dividends payable on preferred stock.

In addition, an insurance company returned approximately 9 million to NorthWestern that they had been holding as collateral for performance and other obligations of Blue Dot Netexit. Blue Dot has one remaining operation business location with annual revenues of approximately $4 million.

Regarding Netexit, in order to wide down its affairs in an orderly manner, Netexit and its subsidiaries filed for bankruptcy protection on May 4, 2004. Netexit currently holds approximately 65 million in cash. Claims aggregating approximately 212 million, excluding equity-related claims for approximately 94 million, have been filed against Netexit. Of those 212 million in total claims, NorthWestern's unsecured claims represent 185.2 million. Netexit filed a proposed liquidating plan of reorganization in February, 2005, which provides for distribution to unsecured creditors of approximately 25 percent of they're allowed claim. As a result, NorthWestern anticipates receiving 40 to 50 million upon an ultimate effective date of Netexit's liquidating plan of reorganization. Pending the resolution of open claims by Netexit creditors, the proceeds from the sale remain at Netexit, and distributions to NorthWestern could be delayed until the effective date of Netexit's liquidating plan.

Regarding Montana First Megawatts, on February 17, 2005 a NorthWestern subsidiary entered into a non-binding letter of intent to sell all of the member interest of Montana Megawatts LLC-- I LLC MMI, an indirect wholly-owned subsidiary that owns the Montana First Megawatts generation project, a partially constructed 260-megawatt natural gas, combined-cycle electric generation facility located in Great Falls, Montana. Under the terms of the letter of intent, MMI will sell all generation equipment and the buyer will acquire MMI and all remaining assets held by the entity. In anticipation of the letter of intent, NorthWestern entered an exclusive arrangement with an electric generation broker to market MMI's generation assets. NorthWestern anticipates the sale of this equipment will be completed on or before, June 30, 2005 and expects to receive proceeds of 20 to 25 million. Based upon the evaluation of the generation equipment market, we recorded a 10 million impairment charge to reduce the estimated realizable value in December, 2004.

Lastly, I'd like to have you focus on what we provided in the press release regarding earnings guidance. For 2005, the Company's projecting basic EPS of $1.30 to $1.45 per share. We are basing our 2005 guidance assuming normal weather. We also exclude any potential impact from unforseen bankruptcy expenses and gains or losses from previously discussed sales. With that, first of all I'd like to thank you for participating today and I'll pass it over to the operator to handle any questions.

[Operator Instructions]. Steve Velgot, Cathay Financial.

Yes, my question has to do with the gross margin. Brian, you came in, you mentioned, around the same level as last year, a little bit below; and you described the QFs and the fixed-rate contracts, I think, as working against you on the gross margin side. What is it that you can assume happens in 2005, as far as the QFs or the fixed-rate contracts to get to something like the 500 million that's in the POR?

Well, I think from a QF perspective, we expect -- we plan that the QFs operate as we expect them to. We don't expect that they're going to have any down time or that they're going to run over. So we wouldn't expect to see the fluctuations you see in the QFs. Regarding on a going-forward basis, in terms of losses we've seen on contracts, we have not planned for any losses on future contracts.

Okay. Then just a follow-up. I know that you had to restate some revenue numbers for the first three quarters based on accounting treatment. How can I allocate the 103.9 revenue number to, you know, electric versus gas, and regulated versus unregulated. I mean, is that possible? Because if I look at it now, it's kind of got those gross numbers. It looks like the revenues add to about 1109.

Well, one--one thing I'd like to you focus on here is, first of all this was a reclass of the financial information. And the issue there was, this impact did not have any -- or this change did not have any impact on gross margin and that's where we'd like to you focus. The revenues there were associated with energy supply procurement which is a pass-through, as you know. So that's why we'd like you to focus on the gross margin side.

Okay. And it was both, I guess, in the gas and electric business?

It was mainly on the electric side.

Mainly in the electric. Okay.

Andrew Shirley, Ivory Capital.

I was wondering if you could clarify your NOL position? Based on the footnote in the 10-K, it looks like you have expect to have remaining NOLs close to 100 million after cancellation of debt income. Is that correct?

Yeah, that's approximately correct. And we anticipate being able to use those NOLs on a going-forward basis.

And maybe a little clarification on cash taxes. In the -- and I know it's not necessarily still valid at these points, but in the disclosure statement projection, it showed the Company not paying cash taxes for five years, essentially. Is that due to NOLs or is that due to accelerated depreciation and building a deferred tax liability?

It's a little of both. Immediately it's more associated with the accelerated depreciation, but on a going-forward basis it's certainly associated with the NOLs. And I would just say that we're expecting very little cash taxes.

Okay. And when you use accelerated depreciation, does the growth of a deferred tax liability reduce your rate base for future regulatory purposes?

Yes.

[Operator Instructions]. James Bellessa, D.A. Davidson & Co.

The earnings guidance notes that it's-- there's an assumption of historic weather-- normal historic weather. And so far in the first couple of months of this year, it doesn't seem like it's been normal weather. So are you assuming normal weather for the whole year or already factored in the abnormal weather of the first quarter?

We assume normal weather for the full year.

And how has first quarter's weather impacted your results?

We're not ready to discuss that at this time.

And the First-- Montana First Megawatt situation, it seems to me like you've entered into a wind power project, 135 to 150-megawatts, and there was a need to have some fill-in power and yet I think there was a hope that maybe you would use this Montana First Megawatt generation project to be that power. But it doesn't sound like that's the case anymore. So how are you going to satisfy your fill-in needs?

Jim, there is a proposal still pending for dispatchable resource to provide firming, as we call it, for the wind. The point is simply that that firming proposal may not use this equipment. There's a long lead time on the sale, and the process has begun to sell that equipment. But that firming need can be met without utilizing this equipment.

And I'm assuming you're selling that equipment and will no longer be a project here in Great Falls, Montana?

It does not mean that a project will not be built in Great Falls, Jim, if the firming proposal is finalized, presented to the commission, and accepted.

[Operator Instructions]. Steve Fleishman, Merrill Lynch.

Could you comment if you-- if you have a flavor from the rating agencies on what they need to see executed to potentially get investment grade ratings at the Company?

Yes, Steve, I think it's a number of things but I think first and foremost is the track record by this management team. Though we've had people running the operations of this utility for many years, and the same people; they want to see as a reorganized entity, that we can have a track record, I think, and they want to see a couple quarters. That I think is the most important thing. I think they also want to see us resolve some of this litigation and the claim cleanup that we need to take care of post-bankruptcy. I think they also expect that we'll continue to pay down debt in '05 and as we plan to do so.

Okay. And is there a certain level that you need to be at in terms of paying down debt or is it more--

I would -- I think it's fair to say, Steve, that versus our peers we're at a level that's acceptable as investment grade already. I think in '05 we'll get down to approximately 50% and I don't expect that we would go less than that.

Okay. And do you have -- are you providing, in addition to earnings guidance, any kind of EBITDA guidance for the year?

No, we have historically not shared a lot of guidance on EBITDA, and as of this point in time we have decided not to provide EBITDA guidance.

Okay. On the comment on the periodic review of the dividend, does periodic mean every year or is that to be determined?

I think -- this is Gary. I think that'll be determined. I think this board would be receptive to looking at it more frequently than annually, but we're still a new board and getting our feet; and I think that remains yet to be seen.

Okay. So it -- it would be more likely every year or potentially a little less, I guess as you're executing?

Yes, well, what do you think, Brian?

I'd say absolutely, on an annual basis if not more periodically, as Gary mentioned. I would just say that the Board took this decision very seriously and took a lot of time to think about it. And-- and I think we're-- from a conservative standpoint and coming out of bankruptcy, I think where we sit is a very attractive dividend.

Okay. One last question on the -- and I may have missed this at the beginning but could you comment on the status of the bidding for power needs in, I guess, 2007? And I guess you weren't too happy with the bids to date, and just where that process stands and what happens next?

The bids received, we-- we have entered into a wind contract, Steve, and that has been presented to the Montana commission for what's called advanced approval of the price, term and quantity. We've also proposed a base load contract out of the Colstrip 4 unit. They're still working on the dispatchable gas proposal, and there are no other proposals that were submitted that the default supply has been able to reach terms on at this point in time. And so, if what you're referring to are the PPL base and heavy-load contracts that expire in 2007, we have not come to terms with PPL; and unless and until that happens, they'll either be rebid or some other proposal in the future brought forth to the commission.

We have two follow-up questions at this time. Andrew Shirley, Ivory Capital.

I was wondering if you could clarify on the QF obligation, I think there's a note in the 10-K that suggests you expect the 2005 expense to be comparable at 1.8 million. Does the QF run through the interest expense line item on the income statement as relates to 2005 guidance, as well?

There is a chart. First of all, I will just clarify in terms of the QF. The QF interest expense this year will not be 1.8 million. I'm just saying that the-- the variance associated with the QF was the 1.8 million. But to answer your question regarding interest expense for QF, there is a charge of interest expense on the QF liability that goes to the interest expense line on the P&L.

And can you tell me approximately what that is going to be in 2005, or what the methodology is?

One second here. We're digging up that number. It would be approximately 10 million.

10 million. Okay. So that's on ton of whatever runs as a hit against gross margins?

In essence, if, in fact we either have to buy more power or less power, based upon the performance of the QF, correct. We're assuming a normal operations from the QF would be a 10-- a 10 million expense to interest expense for '04.

Okay. And one other question, if you don't mind. Just curious on Colstrip 4, I see that the -- the lease expense is going to decline materially in 2011, and I'm curious what dynamic-- is the in-place lease above market? Is that essentially the issue?

No what happened there is we extended the lease on our Colstrip 4 unit, and as a result of that, we are straight lining at the amortization of that lease and that resulted in a reduction in lease expense.

But is it -- I guess what I was wondering --

Oh, you're talking about in '11. I thought you were talking about this coming year.

No, that part of the note I understood on how the straight lining impacts. But I'm more curious-- and I think the current payments are in the 32 million range and when the lease renews in 2011, it's going to be 14.5 million.

That is correct.

Just curious how you're able to get such a lower payment in 2011.

That's how the lease was initially structured that you could-- would extend at those rates.

Okay. I see.

Steve Velgot, Cathay Financial.

Yes, just in terms of timing on the Netexit bankruptcy, is that something that you think would be completed in the next several months or what's kind of the outlook on timing?

I would say that we're trying to get things wrapped up there by mid-year; but certainly, it's difficult to anticipate the timing. It's certainly could go through the remainder of the year.

We'd like to get it resolved, obviously, as soon as possible.

[Operator Instructions]. And we have no additional questions at this time. Please continue.

Okay. Well, listen, again, thanks, everybody, for dialing in. We appreciate the support. We appreciate the early coverage we've gotten, and we hope to live up to your expectations. We're working hard to do it every day and I'm very proud of the team we've put together here, very pleased with where this company is at the moment. So we would ask for your continued support, as we wrap up the last few items of reorganization and move into '05. Thanks again, and we'll be talking to you later.

And thank you, sir. At this time, ladies and gentlemen, we ask that you please remain connected for a few moments for some important replay information. As this conference will be available for digitized replay from 6:30 p.m. central time today, through Thursday April 14th, at midnight. Now you can access the AT&T Executive playback service at any time, by dialing 1-800-475-6701 and entering the access code 771764. Once again that number is 1-800-475-6701, access code 771764. Now, this does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference service. You may now disconnect.