NorthWestern Energy Group Inc (NWE) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Northwestern Corporation's Second Quarter Financial Results Conference Call. (OPERATOR INSTRUCTIONS). I would like to turn the conference over to your host, Mr. Roger Schrum. Please go ahead.

Thank you, Greg. Good morning, everyone, and welcome to Northwestern Corporation's second quarter 2005 financial results conference call and Web cast. NorthWestern's results were released pre-market this morning, and the release is available on our Web site, at "www.northwesternenergy.com." In addition, we will file our quarterly report on Form 10-Q with the SEC later this week. That report will also be available on our Web site.

Joining us today from our offices in Sioux Falls are Mike Hanson, President and Chief Executive Officer; Brian Bird, Vice President and Chief Financial Officer; and Tom Knapp, Vice President and General Counsel.

During the course of this presentation today, we will be discussing certain subjects, including those pertaining to our strategy, and discussions may contain forward-looking information. Although our expectations and beliefs are based on reasonable assumptions, actual results may differ materially. These factors also 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 broad participation.

A replay of today's call will be available beginning, at 2:30 PM, Eastern Time, today through September 2, 2005. To access the replay, dial 800-475-6701, and the access code is 790679. A replay of the Web cast also can be accessed from our Web site. I will now turn it over to our President and Chief Executive Officer, Mike Hanson.

Thanks, Roger, and thank you folks for listening in today. We're very pleased with our second quarter and first half of 2005 results. I'm going to summarize some of the highlights and our achievements during the second quarter of this year, and then Brian Bird will go through the financial results in more detail following that.

Our second quarter income from continuing operations is $6.4 million versus a loss of $14.4 million for the same period in 2004. Three of our four operating segments increased their gross margins for the second quarter of 2005 compared to second quarter of '04 and for the first six months of this year versus last year. We've continued to reduce our debt, and we've gained improved credit ratings during the quarter.

On June 30th of this year, we entered into an amended and restated credit agreement that replaced our existing $225 million credit facility with an unsecured $200 million senior revolving line of credit with lower borrowing cost. Because the amended line of credit is unsecured, the $225 million of first mortgage bond collateral securing that facility was released by the lenders.

In addition, during the quarter, we successfully resolved a number of outstanding legal proceedings. I'll go through just a few of those. On June 28th, we announced an agreement in principle to settle the Netexit bankruptcy claims. In May, we had entered into a settlement with PPL Montana to settle all claims and counterclaims that are pending in a case out in the District Court in Montana and PPL's claims filed against NorthWestern in its bankruptcy proceeding.

That litigation and claims arose from a dispute concerning an asset purchase agreement between the parties, wherein PPL was to buy our interest in the 500KV transmission assets, located in East Central Montana. Under the terms of our settlement agreement in principal, NorthWestern will retain those transmission assets, and PPL will pay NorthWestern $9 million in cash.

Our financial results for the quarter were not impacted by the PPL settlement, although once approved by the court, we will recognize a gain based on the settlement, and we expect to receive the cash -- the $9 million -- later this year. That agreement also covers cancellation of indemnity obligations that were contained in the asset purchase agreement between PPL and Montana Power for PPL's purchase of the generating plants. Those indemnity obligations will be terminated as part of this settlement agreement.

Also, in May, we announced that the Montana Public Service Commission had unanimously agreed to enter into a stipulation to settle a dispute over the recovery of natural gas costs that had been disallowed for the 2001-2002 time period. That settlement allows for a recovery of approximately $4.6 million of previously disallowed natural gas costs. Lastly, we were added to the Russell 2000 and Russell 3000 indexes as of June 24, 2005.

As most of you know, the company recently announced that its board had declared a $0.25 (ph) per share cash dividend on the company's stock. This is an increase of $0.03 per share, or 14% increase, from the dividend that had been paid in the second quarter. The new dividend is payable on September 30 of 2005 to shareholders of record as of September 15. Further review of the dividend by the Board is expected, as the Company prepares its 2006 earnings guidance, which will be available later this year.

With those comments, I'd like to turn it over to Brian Bird, our Vice President and Chief Financial Officer, to go through the financial results in more depth. Brian?

Thanks, Mike. First of all, our second-quarter results from continuing utility operations showed significant year-over-year improvement, due primarily to higher gross margins from our regulated electric and natural gas segments and from our unregulated electric segment.

Our second quarter results of the unregulated natural gas segment were basically flat compared to 2004. Regarding consolidated operations, our consolidated revenues were $249.4 million for the quarter ended June 30, '05 compared to $217.8 million for the quarter ended June 30, '04.

Since a significant portion of our revenues is a function of passthrough energy supply costs, we tend to focus on gross margin as the important metric for the company. For the quarter, gross margin was $118.2 million up from the quarter ending June '04, with a gross margin of $103.3 million.

The company reported operating income of $24.3 million for the quarter versus $7.1 million for the quarter ended June 30, '04. The reasons were -- $14.9 million increase in margins were basically due to increased volumes in our regulated and non-regulated segments and the allowed gas cost settlement with the MPSC.

In addition, $2.3 million decrease in operating expenses, due mainly to a decrease in reorganization expenses of $7.5 million. These were offset by an increase in operating general and administrative expenses of $4 million from the quarter ended June 30, '04. The operating general and administrative expenses increased in the quarter due to severance payment to the former CEO and increased pension expenses.

Our income from continuing operations was $6.4 million, or $0.18 per share, for the quarter compared with a loss of $14.4 million for the quarter ending June 30, '05. The primary reasons for the improvement were as follows -- $17.2 million increase in operating income as described above; $6.3 million decrease in interest expense, and this decrease is attributable both to the repayment of approximately $113 million in secured debt, since June 30 of '04, as well as refinancing of debt at lower interest costs. In addition, a $1 million increase in investment income. And offsetting these improvements were higher taxes that are recorded at $3.2 million for the second quarter of '05 compared to a tax benefit of just $0.1 million in the second quarter of '04.

Due to a loss of $10.3 million from our Netexit settlement and our discontinued operations, we incurred a net loss in the second quarter of 2005 of $3.9 million compared with a $4.8 million loss for the second quarter of June 30, '04. We'll discuss the loss from the Netexit settlement more in a moment.

For the six months ending June 30, '05, our consolidated revenues were $585 million, an increase of $61 million over the same period in 2004. Gross margin for the six months ended June 30, was $263 million, an increase of $26.9 million over gross margin of $236 million in 2004.

Margins in our regulated electric segment increased $11.8 million, primarily due to $5.9 million higher volumes, sales to our transmission and distribution customers and decreases in our out-of-market costs of approximately $7.1 million associated with our Montana Qualifying Facility contracts and concluding a gain of approximately $4.9 million in the first quarter of 2005 due to a QF contract amendment.

In addition, a $2.5 million decrease in wholesale revenues and a $1.2 million decrease in transmission revenues partially offset these increases. Also, we recorded a $2.1 million loss in the second quarter of 2004, related to a dispute settlement with a wholesale power supply vendor.

Margins in our regulated gas segment increased $8.7 million, primarily due to the recovery of $4.6 million in the second quarter of 2005 of gas supply costs previously disallowed by the MPSC. In addition, during the first six months of 2004, we wrote off $2.8 million associated with the MPSC's disallowance of gas costs and $1.3 million related to a fixed-priced sales contract.

Our unregulated electric segment margins increased $6.8 million primarily due to higher market prices. Results from continuing operations for the first half of 2005 was $24.8 million compared with a loss of $2.3 million in the same period in 2004. Consolidated net income for the six months ended June 30, 2005, was $15 million, an improvement of $2.8 million over $12.2 million in 2004. This improvement was primarily related to higher margins and decreased operating and interest expenses, substantially offset by an increase in income taxes and a loss on discontinued operations discussed previously.

Now, I'll turn to the operating segments' financial results. First, on regulated electric utility operations. For our regulated electric utility operations, they provided approximately 58% of our consolidated revenues of the company and 63% of our consolidated gross margin for the second quarter 2005. Regulated electric gross margin was $74 million for the second quarter of 2005, compared to $69.8 million for the second quarter of 2004. The increase in gross margin was primarily due to $2.5 million higher volume sales to our transmission and distribution customers and due to decreases in out-of-market costs of approximately $1.1 million associated with our QF contracts.

Regulated retail electric volumes for the three months ended June 30 increased 3% over the same period in 2004, caused primarily by the increase in volume to residential customers. Regulated wholesale electric volumes in the second quarter of 2005 actually decreased 63% from the same period in 2004, due to lower generation plant availability from scheduled maintenance.

For the six months of 2005, gross margin from the regulated electric utility operations was $158.3 million compared to $146.5 million in the same period in 2004. Also for the first six months of 2005, regulated retail electric volumes increased 3% from the same period in 2004. Regulated wholesale electric volumes for the first six months of 2005 decreased 48% from the same period in 2004, again mainly due to scheduled generation plant maintenance.

Regarding our regulated natural gas business, it contributed approximately 26% of our consolidated revenues and 23% of our consolidated gross margin. Regulated natural gas gross margin was $27 million for the second quarter 2005 compared with $18.3 million for the second quarter of 2004. A large portion of the increase consisted of a recognition of $4.6 million for the recovery of supply costs previously disallowed by the MPSC. Regulated retail natural gas volumes increased 7% from the same period in 2004. The increase was generally due to cooler weather versus the prior period for all regulated markets.

During the three months ended June 30, 2004, our supply cost exceeded our supply revenues due to a $1.9 million disallowance by the MPSC, and a $1.3 million loss on a fixed price sales contract. For the six months of 2005, regulated natural gas gross margin was $67.1 million compared with $58.4 million in the same period in 2004. Also for the first six months of 2005, regulated retail gas volumes were flat compared to the same period in 2004.

For our unregulated electric operations, the gross margin here was $14.8 million for the second quarter compared to $13 million for the second quarter of 2004. The volume at this segment increased by 23% from the same period in 2004. This increase in volumes was due primarily to increased generation of plan availability with less downtime for scheduled maintenance. The increased gross margins were primarily due to higher market prices and volumes. For the first six months of this segment, gross margin was $32.9 million compared with $26.1 million in the same period in 2004. Also for the first six months, unregulated electric volumes increased 17% from the same period in 2004.

Regarding our unregulated natural gas operations, the gross margin here was $2.6 million for the second quarter of 2005 compared with $2.5 million for the second quarter of 2004. For the first six months of 2005, unregulated natural gas gross margin was $5.2 million compared with $5.6 million for the same period in 2004 due to losses recorded on out-of-market fixed price sales contracts during the first quarter of 2005. As Mike pointed out earlier, both in the first quarter and the first six months, this business is relatively flat. For the first six months of 2005, unregulated wholesale natural gas volumes though did increase 6% from the same period in 2004. This increase in volumes is due primarily to volumes sold to ethanol facilities in South Dakota.

Now let's move to the balance sheet. Unrestricted cash at June 30 was $49.7 million compared to $17.1 million at year-end 2004. Accounts receivable at 6/30/05 was $91 million compared with $141 million at year-end 2004. This decrease is common due to the seasonality of our business. Our accounts payable at the end of June was $53.3 million compared to $85 million at year-end 2004. Likewise, this decrease is also common due to the seasonality experienced by our business.

Long-term debt at the end of the quarter was $79.6 million compared to $83.6 million at year-end 2004. Also, as of June 30, 2005, we borrowed $74.75 million and issued letters of credit of $19 million under the amended line of credit to repay in full and terminate our existing obligation under the previous facility.

Moving to the cash flow statement for six months ending June 30, as of that date, cash and cash equivalents was $49.7 million compared with $17.1 million at December 31, 2004, and 51.6 at June 30, 2004. Cash provided by continuing operations totaled $123.8 million during the six months ended June 30, compared with $117.1 million during the six months ended June 30, 2004. During the six months ended June 30, 2005, we used existing cash to repay $37.5 million of debt, including an early principle payment of $25 million on our senior secured term loan B. In addition these repayments, we also paid dividends on common stock of $15.7 million.

In regards to capital spending, capital spending was approximately $31.6 million for the second quarter of 2005 compared with $30.5 million for the second quarter of 2004. Capital spending in 2005 is estimated to be approximately $80 million or about what it was in 2004. In terms of capital resources, as Mike previously mentioned, we entered into an amended and restated credit agreement that replaced our existing $225 million credit facility with an unsecured $200 million senior revolving line of credit with lower borrowing costs.

As I mentioned earlier, on June 30, we borrowed $74.75 million and issued letters of credit totaling $19 million under the amended and restated line of credit to repay in full and terminate our obligation on the previous facility. Since the end of the second quarter we have paid down an additional $40 million in debt from available cash. And yesterday we utilized the amended and restated unsecured line of credit to repay $60 million of secured term debt that matured. In moving the $60 million debt from the line of credit, the company further lowered borrowing cost and released an additional $60 million in secured first mortgage collateral. Our availability under the line of credit is approximately $85 million.

Now let's turn our attention to the status of our non-core asset sales. First of all, regarding Netexit, last week a hearing was held in the US Bankruptcy Court in the District of Delaware in which the court conditionally approved a disclosure statement and an amended and restated plan of reorganization for Netexit. As you may recall, Netexit is our subsidiary formed to wind down the former telecom operations in the company. Netexit and its subsidiaries filed for bankruptcy protection on May 4th, 2004.

Netexit currently holds approximately $66.8 million in cash, which is included in current assets of discontinued operations on our consolidated financial statements. Confirmation hearing has been set for September 13, 2005, to approve the disclosure statement and the amended and restated plan. If confirmed, the amended and restated plan will allow NorthWestern to recover approximately $40 million in cash by the end of the year.

Regarding Montana First Megawatts, we continue to work with equipment broker and numerous interested equipment buyers to sell generation equipment held by Montana First Megawatts. We anticipate that a sale of this equipment will be completed on or before December 31, 2005. We anticipate receiving approximately $20 million to $25 million from the sale of the generation equipment. The remaining non-equipment assets, including land, are also available for sale.

Now let me take a moment to give an update on the rating agencies. S&P, Moody's and Fitch are each credit rating agencies that rate our debt securities. Our credit ratings have improved during the second quarter at the secured level. As of August 1st, 2005, our ratings with these agencies at the secured level was -- S&P, BB+, which is a notch higher; Moody's, BA1; and Fitch, BBB-, also a notch higher. And so, from a secured level we became investment grade with one of those agencies during the quarter. Both Moody's and Fitch also have us positive regarding an outlook.

For earnings guidance, NorthWestern is reaffirming the range of adjustments for 2005 basic earnings of $1.30 to $1.45 per share from continuing operations.

Now let me turn it back over to Mike to summarize.

Thank you, Brian. Again, we are very pleased with the results of our second quarter. Our margins in income from continuing operations have outpaced the second quarter of 2004. We have since announced an increase in our dividends to shareholders for September of 2005. We have made significant strides in settling pending legal matters. We've continued to reduce debt as Brian went through. I may have misheard this, but our long-term debt, including the current portion as of June 30th, was $799.6 million compared to $836.9 million at year-end 2004, a difference of about $37 million.

As a result of that and other actions, our credit ratings have improved during the quarter. We're very proud of our recent operational accomplishments that we've mentioned throughout this call.

On June 30th of 2005, Montana Public Power Incorporated, a recently formed Montana nonprofit corporation, sent a letter to our Board of Directors offering to acquire 100% of NorthWestern's outstanding common stock for $32.50 per share in cash. On July 6th, our board formally rejected that offer as not in the best interest of our stockholders or the customers and communities we serve.

The specific reasons for the board's rejection had been communicated in various press releases and presentations that had been reported in Form 8-K and available on our Web site. Accordingly, I'm not going to repeat all of our concerns related to MPPI's proposal on this call, but what I will say is that we are continuing with our successful restructuring at the company by growing cash flow and earnings and improving the balance sheet as evidenced by a recent credit rating agency upgrade. We have progressed at a faster pace than we had anticipated when we emerged from bankruptcy in November of last year. We remain committed to serving the best interest of our shareholders, our customers, our employees and the communities in which we live and work, and we are very pleased with our progress to date.

With that, I'd like to turn it over to our operator, Greg, and we'll take some questions. Greg.

(OPERATOR INSTRUCTIONS). And our first question comes from the line of Stephen Velgot from Cathay Financial. Please go ahead.

Two questions, actually. There's a statement in your release about getting the debt-to-capitalization ratio down to approximately 50% and that you've achieved your planned debt reduction efforts. Could you talk a little bit about what the company's plans are relating to excess cash or free cash flow that it generates going forward?

And the second question is, I'm curious if you could describe how the relationship between the company and Montana Public Service Commission and whether or not that relationship has changed at all in the last three to six months and in part, I'm wondering if any of the, kind of, leftover feelings of ill will that are held by Montana Public Power are evident at all within the MPSC.

Steven, I'll take those questions. With respect to free cash flow, as we said a number of times, our objective for 2005 was to take free cash flow available to service debt and pay down debt to the target ratio. And as you pointed out, we have now achieved that. So clearly we will not need to use cash flow for further reductions of debt in the future.

The Board will consider what's the best use of that free cash flow. Obvious choices would include looking again at our dividend and they'll continue to monitor that, as I said, as we progress, would contemplate evaluating, perhaps, share or warrant buybacks as a possibility. And then, obviously, in an area of the country where it's an energy-rich resource and we may look at investing in transmission upgrades to improve earnings and cash flow in the future. And then lastly, we have a number of balance sheet long-term liabilities that we could look to pay down or restructure.

Among those are -- we have liability -- long-term liability on the books for unrecoverable QF costs. We will explore a restructuring of those contracts or buy out or buy down with our counter parties. And we also have a leasehold interest in Colstrip Unit 4, which we could buy out and own that asset. So those are examples of those long-term liabilities that we may manage with the cash. Any of those items -- and all of those are under evaluation at this time.

As far as the Montana Public Service Commission, I think the work that we've been doing with the commission on resolving the rules for default supply. Specifically, on natural gas, we're working on rules of how that will go forward to avoid any future disagreements over recoverability of cost. I think that's been constructive. I think other things we're doing on supply have been very constructive as well, as evidenced by their approval of a peaking contract with a plant to be built in Butte as well as a 150 megawatt wind contract that was approved by that commission. So whatever the past history was, I think our recent interactions with the commission and its staff have been constructive and we will try hard to keep it that way.

Thank you.

And your next question comes from the line of David Miyazaki from AG Edwards Asset Management. Please go ahead.

Hi, good morning.

Good morning, David.

Good morning, David.

Just a question about the reorganization expenses that you are having. Is it fair to say that the majority of them for '05 have been incurred, given the big drop off from '04 -- from Q1 to Q2?

Yes, that's a fair (ph) statement. I will say that professional fees in general, though, continue to be higher than we'd like to see them. But, to answer your question directly on reorganization expenses, we believe that to be the case.

Okay. And then the other -- I'm sorry, I didn't quite get all of the balance on your revolver now that you've refinanced some of the maturity here. What is the total outstanding on your revolver right now?

Well we have -- I mentioned we have $85 million of available capacity in the revolver, now, we have about in terms of cash -- we like to keep about $20 million of cash on hand. So we always want to keep about $100 million of liquidity. And the reason that amount is actually lower than we like to see in terms of the $85 million is we just took in the $60 million secured note - the South Dakota first mortgage bond that matured and we took that into our revolver. And as we build up cash, then we would continue to pay down the revolver to provide more availability there until we find means to invest that cash elsewhere.

And did you say that -- did you give a current balance or was that the 6/30 balance that you mentioned earlier?

No. That is the current balance, the $85 million that's available.

Okay. Okay. And did you, and I'm sorry if I missed this, provide what -- how does that float or what was the rate on that?

The rate is, it's LIBOR based, and it's approximately in terms of -- it's approximately 4.25 in terms of overall rate on the revolver at this time.

Okay. Okay, thank you very much.

Thank you.

And your next question comes from the line of Mitchell Spiegel from Credit Suisse First Boston. Please go ahead.

All my questions have been asked. Thank you.

Thanks, Mitchell.

And we'll move to the line of Andrew Shirley from Ivory Capital. Please go ahead.

Hi. I was wondering -- in your EPS guidance, does that include all of the reorg expense as well as the QF gain and the gas recovery that you made up?

Right now, in terms of the guidance, those things that are deemed non-recurring, and we did not include that in our guidance, in terms of the recovery that we had experienced in the first quarter and the MPSC, we did not include that in our guidance.

And are the reorg expenses in the guidance or no?

The reorg expenses that we currently have incurred are in our guidance.

But you are excluding the $4.9 million QF gain and the $4.6 million gas recovery, is that correct?

That is correct.

Okay. Great. Thanks.

And there are no further questions at this time.

Okay. If there are none other in the queue, thank you, Greg, and thank you for everyone for participating today.

Ladies and gentlemen, this conference will be available for replay after 1:30 central time today, through September 2nd. You may access the AT&T teleconference replay system at anytime by dialing 1-800-475-6701 and entering the access code 790679. Those numbers once again are 1-800-475-6701 with the access code 790679. That does concludes your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.