NorthWestern Energy Group Inc (NWE) 2005 Q3 法說會逐字稿

Welcome to the NorthWestern Corporation third quarter financial results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. [OPERATOR INSTRUCTIONS] As a reminder, today's call is being recorded.

I would now like turn the call over the our host, Dan Rausch.

Thank you. Good morning and welcome to NorthWestern Corporation's third quarter 2005 financial results conference call and webcast. NorthWestern's result were released yesterday, and the release is available at our website at www.NorthWesternEnergy.com. In addition, we filed our quarterly report on Form 10-Q with the SEC yesterday. That report is also available on our website. Joining us to today are Mike Hanson, President and CEO, Brian Bird, Vice President and Chief Financial Officer and Tom Knapp, Vice President and General Counsel.

Our presentation today will contain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based upon our current expectations, and speak only of this date. Our actual results may differ materially and adversely from those expressed in our forward-looking statements, as a result of various factors and uncertainties, including those listed in our Annual Report on Form 10-K, our recent and forthcoming 10-Qs, recent Form 8-Ks, and other filings with the SEC. We undertake no obligation to revise or publicly update our forward-looking statements for any reason.

Following our presentation, those who are joining us by teleconference will be able to ask questions. Due to time limitations, we'd like to limit each person to one question at a time with one follow-up question. A replay of today's call will be available beginning 2:30 eastern time today, through December 10th, 2005. To access that replay, dial 1-800-475-6701, access code 800177. A replay of the webcast will also be accessed from our website.

I'll now turn it over to Mike Hanson.

Thank you, Dan. Thank you for everyone participating today. November 1st, was the one-year anniversary of our Company emerging from bankruptcy. We are very pleased with the progress our Company has made over this last year. Today we're going to update you on the financial results for the third quarter of the year. We're also going to update on you operational strategic accomplishments, as well as giving you our outlook for the future.

Let's turn to the third quarter results. We're very pleased with our third quarter and year-to-date results through September 30th. Our revenues and gross margin increased by 4.2% and 7.5% respectively, this quarter over the same quarter 2004. Our operating income was 22.3 million this quarter, compared to a loss of 5 million in the same quarter of 2004. Our net income from continuing operations was $9.3 million this quarter, compared to a loss of $25.2 million in the same quarter of 2004.

The main reasons for these improvements were higher sales volumes to our transmission and distribution customers, decreased bankruptcy and related costs, and reduced interest expense. Our CFO, Brian Bird, will discuss the financial results in more detail later on in the call. I'd like turn attention to some of our non-financial accomplishments during the quarter. We recently finalized a settlement with PPL, to settle all claims and counterclaims pending in U.S. District Court in Montana, as well as PPL's claims file against NorthWestern in it's bankruptcy proceedings.

This litigation involved a dispute over an asset purchase agreement, relating to NorthWestern's 500-KB assets coming out of the coal strip generating plant in east central Montana. Under the terms of the settlement agreement, NorthWestern will retain the coal strip transmission assets, and PPL has paid the NorthWestern $9 million in cash. That cash was not received in the third quarter, so the effect of this settlement agreement will be reflected in our fourth quarter results. The agreement also covers the cancellation of certain indemnity obligations, stemming from the asset purchase agreement, as well as PPL's withdrawal of its claims in our bankruptcy proceeding. The Company has also settled claims with nearly all other claimants in our bankruptcy reorganization proceeding. Mag 10 is the only remaining significant Class 9 claimant. Also during the third quarter, we sold the last blue dot operating location, We are currently reviewing our tax position as it relates to blue dot, and we anticipate completing our assessment of that during the fourth quarter.

Work on a new transmission line near Bozeman, Montana, which we call the Jack Rabbit line, continues on schedule. We've added transition assets and substations to serve load growth in the area of Bozeman and the Gallivant Valley. The line is more than 75% complete, roughly 23 out of 30 miles of transmission lines are completed. We expect to complete the entire project before the end of the first quarter in 2006. The final system interconnections and project completion will come in the second quarter to make that operational. Total project cost is about $15 million.

Another achievement during the quarter is for the second year in a row, NorthWestern has been awarded the Service One award for exceptional customer service from PA Consulting Group, which is one of the nation's leading utility benchmarking and management consulting firms. In addition to NorthWestern, only three other utilities in the United States received the Service One award. It's a very strong testament to the success of our 24x7 customer care program.

Yesterday we announce that our Board of Directors approved an increase in the quarterly cash dividend on the Company's common stock, $0.31 a share. The dividend is payable on December 31st, 2005 to shareholders of record as of December 15th. This is a 24% increase in the dividend from last quarter. The dividends paid for 2005 then, will be $1.00 per share, and the [$31] per share dividend will annualize to $1.24 per share for 2006.

In approving the new dividend level, the Board considered the Company's projected financial performance, the sustainability of the dividend, and the ability to grow the dividend in the future. Going forward, the Board will continue to review our dividend policy, to ensure that we provide a competitive return for our shareholders. We expect our dividend payout ratio to range between 60 and 70% of our earnings per share from continuing operations in the future. Also at our last Board meeting, the Board approved a share repurchase program for up to $75 million, and we'll discuss that in a little more detail later in this call.

Now let me introduce Brian Bird, our Vice President and Chief Financial Officer to discuss our financial results in a little more detail.

Thanks, Mike. Regarding our consolidated operations as Mike mentioned, our revenues for the third quarter increased by 4.2% over the same quarter in 2004. Since a significant portion of our revenues are a function of pass through energy costs, we focus on gross margin as an important metric for the Company. Our consolidated gross margin for the third quarter of 2005 was $121.3 million, an increase of $8.5 million over the third quarter of 2004.

Margin in our regulated electric segment increased $6.3 million, primarily due to higher volume sales to our transmission and distribution customers. Margin in our regulated gas segment increased $2.2 million, primarily because of a reported $1.6 million loses on a fixed price sales contract in the third quarter of 2004. The Company reported consolidated operating income of $22.3 million for the quarter, versus a loss of $5 million for the quarter ended September 30, 2004. The reasons for the increase were the $8.5 million increase in margins I discussed earlier, our O&M costs increased by approximately $6 million, primarily due to pension expense of approximately 2.5 million, property tax costs of approximately $1.6 million, approximately $2.9 million in a broad based stock grant to employees.

In addition, reorganizations cost were down for the quarter ended September 30, 2005, compared to 2004 by approximately $26 million, due primarily to reduction of restructuring expenses from '04, when the Company was still in bankruptcy. The Company reported consolidated income from continuing operations of $9.3 million for the quarter, compared to a loss of $25.2 million for the same period in 2004. The differences relate to the aforementioned matters, in addition our interest expense dropped approximately $6.6 million for the quarter, compared to the same quarter in 2004.

Also there was an increase due to a $4.7 million gain on the sale of excess sulfur dioxide emission allowances, SO2 allowances. The market value of these SO2 emission allowances, increased significantly during the third quarter 2005, and we sold our excess allowances covering the years 2011 through 2016. Offsetting that was a 3.4 million increase of income taxes that were booked by the Company this year, as opposed to no tax accrual for the same quarter in 2005. I point out that the Company does not currently pay Federal taxes due to NOL carry forwards, but records a tax provision for GAAP purposes at the full federal rate.

Now, let's take a little more time to talk about our operating segments financial results. First, the regulated electric operations. Our regulated electric utility provides approximately 69% of our consolidated revenues, and 68% of our consolidated gross margin for the third quarter of 2005. For the quarter ended September 30, 2005, gross margin from a regulated electric utility was $83 million, compared with $76.7 million in the same period in 2004. Regulated retail electric volumes for the same month ended September 30, 2005, increased 7.1% over the same period in 2004, caused primarily by increases in volumes to retail customers, driven by warmer weather in our service territories. Also our retail electric customer comp has increased 1.7% since September 2004, which is slightly higher than we anticipated.

For the quarter, operating income from regulated utility operations was $23.1 million, compared to $23.2 million in the same period in 2004. The operating income was relatively flat quarter-over-quarter, due to the margin increase being offset by higher increased property tax costs, the broad based stock grant to employees, and an increase in pension costs mentioned earlier. Our regulated wholesale electric volumes in the third quarter 2005 decreased 36% from the same period in 2004.

Regulated wholesale electric volumes decreased during the third quarter 2005 resulting from increased retail demand, and lower generation plant availability due to scheduled maintenance. The gross margin impact of the decreased wholesale electric volumes was minimal, due to higher average prices largely offset by the decrease in volume sold in the secondary markets.

Our regulated natural gas operations contributed approximately 14% of our consolidated revenue, and 14% of our consolidated gross margin. Our regulated gas margin for the quarter was 17.3 million, compared with 15.1 million for the third quarter of 2004, primarily due to slightly higher transportation revenue, and a write-off of 1.6 million during the third quarter of 2004, related to a fixed price sales contract.

Regulated retail natural gas volumes decreased 4% from the same period in 2004. Our regulated gas operating loss for the quarter was $4.9 million, compared with a loss of $4.1 million for the third quarter of 2004. The operating loss in regulated gas is relatively flat quarter-over-quarter, due to margin increase being offset by higher increased property taxes, the broad base stock grant to employees, and an increase in pension costs mentioned earlier. The decrease in volumes was generally due to warmer weather than in prior year period for all regulated markets.

As for our unregulated electric operations, it mainly consist of our Company's lease of a 30% share of coal strip unit 4, a 750-megawatt capacity coal-fired power plant, located in southeastern Montana. It contributed approximately 11% of our consolidated revenues, and 15% of our consolidated gross margin.

Unregulated gross margin was 17.9 million for the third quarter compared with $17.9 million for the third quarter of 2004. The volume of this segment increased 10.6% from the same period in 2004. The 2005 increase in volumes is due primarily to increased generation plant availability, with less downtime for scheduled maintenance. The gross margin was flat due to a combination of factors including less favorable pricing under existing agreements, offset by increased market prices for additional volumes generated, as compared to the third quarter 2004. Unregulated electric operating income was $6.8 million for the third quarter of 2005, compared with $3.8 million for the third quarter or 2004. Operating income improved over the same quarter last year, due to the restructuring of the operating lease at the coal strip facility.

Our unregulated natural gas operations consist of our marketing of gas supply to large volume customers, primarily in South Dakota, and the operation of 87.5 miles of intrastate natural gas pipeline in eastern South Dakota. We also run a small unrelated retail propane operation in Montana. The unregulated natural gas operations contributed approximately 13% of our consolidated revenues, and 3% of our consolidated gross margin. Gross margin was 3.3 million for the third quarter of 2005, compared with 3.3 million for the third quarter of 2004. Operating income was 2.1 million for the third quarter 2005, compared with 2.3 million for the third quarter of 2004.

Unregulated wholesale natural gas volumes increased by about 2.5% from the same period in 2004. The increase in volumes in the third quarter of 2005, is due primarily to increased sales to ethanol facilities in South Dakota.

Let's move on to the balance sheet. Our unrestricted cash at the end of the September '05 was $20.3 million, as compared with $17.1 million at year end 2004. The Company has experienced an increased in open credit from our suppliers, and the Company has been able to secure lines of credit from energy suppliers at approximately 1.5 times expected commodity purchases required for the winter season. That combined with the Company's strong liquidity position, puts the Company in a strong position to handle the impact of higher natural gas prices for the winter.

Our long-term debt including the current portion at September 30, was $737.4 million, compared to $836.9 million at year end 2004. The long-term debt to total capitalization ratio is approximately 51% as of September 30, 2005. By the way, the balance of long-term debt at the end of October 2005 is approximately $722 million, providing a long-term debt to total cap of approximately 50%.

Moving on to the cash flow statements for nine months ending September 2005, our cash provided by continuing operations total 146.4 million during the nine months ended September 30, 2005. Compared to $155 million during the nine months ended September 30, 2004. Our amount for 2005 included a 31 million amount, that we voluntarily contributed to our pension fund. Other uses of cash were provided by continuing operations were spending was $56.3 million for the first nine months of 2005, compared with $54.2 for the same period during 2004. The Company paid down a net $100 million in debt in the first nine months of 2005. We also paid dividends of approximately $25 million for the first nine months of 2005.

Moving on to our capital resources, we have an unsecured 200 million senior revolving line of credit. The Company has drown 75 million on the facility, and has issued letters of credit of approximately $41 million as of September 30, 2005. Our current capital resource availability is $104 million, comprised of 84 million of availability on the revolver, and 20 million in cash as of September 30, 2005.

Let's move on to our non-core asset sales. First and foremost, net exit. In order to wind down its affairs in an orderly manner, Netexit and subsidiaries filed for bankruptcy protection on May 4, 2004. On September 14, 2005, we reached an agreement in principal with Net exit's official Committee of unsecured creditors, and another Netexit claimant, in an attempt to resolve outstanding issues related to NetExit's liquidity plan and reorganization.

NorthWestern received an initial 20 million distribution as a creditor to NetExit in September. The Company expects the cash distributions to be made to all unsecured creditors as addressed in the settlement agreement, and consistent with the Bankruptcy Code soon after the effective date of such plan. Which date is expected to be sometime in the fourth quarter of 2005. As a result, we anticipate receiving additional distributions of approximately 20 million we the end of 2005.

Regarding Montana First Megawatts, we continue to work with equipment broker and numerous interested equipment buyers, to sell generation equipment held by MMI. The remaining non-equipment assets, including land are also available for sale. We anticipate receiving approximately $20 million from the sale of MMI's generation equipment during the first quarter of 2006.

Now let's move our attention to earnings guidance. I'd like to discuss our outlook for the rest of 2005, and also for the year 2006. The Company previously had placed guidance for basic EPS for GAAP purposes at between $1.30 to $1.45 per share for 2005 on continuing operations. We expect to be at the high end of that range. Our recurring basic EPS and continuing operations approximates what we expect to report for basic EPS for GAAP purposes, on continues operations in 2005.

The reason for that is our 2005 results will include significant nonrecurring items, such as the benefits on the PPL settlement, the QF gain earlier in the year, the sulfur dioxide credit sales, and the gain on the recovery of the gas disallowance earlier this year. These positives are essentially offset by the increase in restructuring expenses associated with winding up our bankruptcy affairs, the executive severances, the extinguishment of debt, and the recording of loss on supplement retirement contracts for former Montana Power employees.

Regarding 2006, we are estimating the range of basic EPS for GAAP purposes for 2006 to be from $1.70 to $1.90 for continuing operations. We expect cash flow provided from continuing operations for 2006, to be in the range of $175 million to $200 million. Let's talk about the key bridges from our recurring 2005 to our 2006 guidance for basic EPS from continuing operations. The bridge for that first and foremost, is that we expect lower interest expense in 2006, due to lower debt levels and lower rates on refinances. That positive impact is expected to have approximately half of our year-over-year increase, on an after-tax net income from continuing operations for 2006 over 2005.

We expect the other half of our improvement to come from improved margins in our electric operations in 2006 as well. First for unregulated electric division, we expect improved margins on coal strip unit 4, due to our hedging activities on the 2006 output. Coal strip unit 4 is a low cost cogeneration plant, and we have been selling portions of our outfit at higher prices than we received in 2005. The improved margins in our regulated electric operations, we expect improved margins in our regulated electric operations, in both the wholesale and retail segments. We expect our overall recurring expensing to be up modestly, due to property taxes and labor increases. Our guidance estimates for 2006 do not include the impact of the $75 million share repurchase program.

Now I'll turn it back over to Mike to discuss our outlook and strategies in more detail.

Thanks, Brian. Brian has given you our 2006 guidance for basic EPS from continuing operations. I'd like to discuss a little further our outlook for the business in the future. Over the last year, our Company had said that it's goal was to maintain stable operations, provide good reliability, good customer service, and pay down debt. That is what we've accomplished in 2005.

As we go forward, we will continue to create free cash flow, while providing a competitive yield to our investors, relative to our industry peers. We have several opportunities to use our excess cash flow to the benefit of our shareholders. I'd like to highlight four of those key opportunities. First is to initiate a share repurchase program. Second is to buy down the qualifying facility contract liability. Third to buy out the coal strip for lease. Fourth to invest in utility transmission and distribution assets to grow earnings and cash flow into the future.

We are initiating a share repurchase program of up to $75 million. The repurchase program would result in a repurchase of approximately 7% of the shares outstanding at the current stock prices. We do not anticipate using debt to fund this program, but rather we will use the cash from the asset sales that Brian mentioned earlier of approximately $40 million, to initiate the program, as well as cash flow from operations in 2006. In light of the share repurchase program, it is important to note our intent to maintain our debt to total capitalization level of around 50% to continue our progress towards achieving investment grade ratings. In addition in 2006, we will continue to the evaluate the most prudent uses of our excess cash, including reducing our QF liability, and buying out our coal strip lease.

Beyond 2006, we will continue to focus on generating and enhancing free cash flow, through reduced operating costs, and investing in additional utility transmission and distribution assets. Our Montana assets are strategically located to take advantage of the potential transmission grid expansion in the northwest part of the United States. We feel that investments in transition infrastructure is an opportunity to provide stable and reliable returns regulated by the Federal Energy Regulatory Commission.

We have mentioned in past the number of potential paths, and the fact that there are more than a dozen points of interconnection with major players in the northwest. An example of this is the transmission pathway from southwest Montana to Idaho, which we believe to have a very high market interest in expansion. We've performed a market test on this project, and are in the process of completing an open season.

We completed the first phase of the market test in 2004. Participants indicated an interest for up to 2,250 megawatts of increased transmission capacity. A cross section of these participants included new and existing power plants, coal and wind projects, power marketers, and load serving entities. The initial study work is completed, and indicated that a new transmission line would be needed to meet these requests.

We just recently completed the second phase of the project which is a process requiring participants to sign a facility studies agreement, and to make a transmission revenue deposit, equal to one month of the anticipated revenue. That's what we refer to as the open season. Market interest remains strong, and participants have made deposits representing 975 megawatts in transmission reservations. The next step is to complete the detailed engineering studies, to determine what type of facility is required for this project, and we are beginning those studies as we speak.

There are several other pathways that the Company is examining. I've discussed this pathway just as an example, to highlight the viability of these types of projects. With this description of our strategic and operating plan, and our 2006 guidance as a backdrop, I'd like to discuss the unsolicited offers we received on June 30 and September 29 from Montana Public Power. There have been numerous reports and rumors concerning the MPPI situation, which we believe continues to create some confusion.

We wanted to discuss our views of the MPPI's offers. The Board of Directors carefully reviewed both offers, consulted with outside legal counsel and financial advisers, considered the Company's financial condition, the results of operations and future prospects, and the interest of its shareholders. And concluded that the offers were inadequate, and were not in the best interest of the Company and its shareholders. Therefore our Board of Directors rejected both offers. There are several compelling reasons why we believe the transaction is not in the best interest of the Company and its shareholders.

MPPI is a newly created not for profit shell corporation. It has no assets, no capital, no employees, and no track record. It's proposed transaction is 100% debt financed, and secured against NorthWestern Energy's assets. MPPI simply has a commitment letter from a bank. which says if it meets a specified list of criteria and preconditions, then the bank will provide it with the capital to finance the transaction.

Some of these criteria and preconditions are as follows. First to obtain an investment grade rating from Fitch, and one of either Moody's or Standard & Poors. Another criteria is that no law or regulation be in existence, which imposes a materially adverse condition upon the transaction. And also the electric and gas rates approved by all applicable Public Service Commissions and municipalities, must be acceptable to the bank and to the rating agencies. It must obtain all governmental board, shareholder, and thirty party consents and approvals without the imposition of any conditions that are not acceptable to the lenders and their sole discretion. And there are many more.

These criteria and preconditions are complicated, and would be extremely difficult for MPPI to obtain. In the course of MPPI attempting to meet the criteria and preconditions, we NorthWestern Energy, would not be able to pursue other alternatives to create value for our shareholders. The amount of the commitment itself does not provide MPPI with enough capital to consummate the transaction, and MPPI has no other assets.

Given the closing risks to the MPPI transaction, our ability to pursue remedies is critical. If the transaction failed, we would have little or no recourse against MPPI, because it is a shell entity. The MPPI offer, the most recent offer, does contain a small breakup fee of $700,000, payable to NorthWestern in the event that MPPI willfully breaches its obligations to acquire us. However that amount is wholly inadequate. Therefore we would essentially have little or no recourse, and would run a very substantial risk of not only failing to create shareholder value, but in fact decreasing shareholder value.

Second, MPPI has offered to acquire us for $32.50 a share. Our Board has taken concrete steps to increase shareholder value. We have provided 2006 guidance, outlined our dividend policy, and announced a significant share buyback program. We believe these actions demonstrate our Board's confidence in our standalone value proposition, and underscore the Board's view that the MPPI offer is financially inadequate. We do not believe that MPPI's offer would in actuality result in our shareholders receiving $32.50 per share. MPPI's offer requires that the transaction be treated as the sale of assets for tax purposes.

This requirement would generate a substantial taxable gain, and therefore a substantial liability for NorthWestern, even if we utilize our available net operating loss carry forwards. Because MPPI also conditioned its offer on no material tax liability occurring as a result of the transaction, NorthWestern and its shareholders would be forced to absorb the tax liability. We and our tax advisers have conducted a preliminary analysis, and have calculated that the resulting tax liability would be between $2.00 and $3.00 per share, which could reduce the per share amount received by our shareholders, in a transaction with MPPI.

Third, we believe that a significant regulatory and execution risk exists, because the transaction involves several different municipalities, and the regulatory agencies of three states. Among these risks are the following. That all regulatory agencies failing to agree with MPPI's fundamental proposition that it is sound public policy, to substitute a financially stable tax paying entity, with a 100% leveraged not for profit corporation with no operating experience. The regulatory agencies failing to approve a rate structure at the level and for the duration required by MPPI to repay the $2 billion of debt, that will be created in this transaction.

Another risk that the applicable laws of Montana, South Dakota, and Nebraska fail to permit the transaction to proceed in those states. Any one state by itself, can delay the approval process, or even deny approval. In fact, the chairman of the Montana Public Service Commission issued a press release in a newspaper editorial, urging caution to MPPI, in it's predictions of quick and favorable regulatory treatment. Therefore, due to the substantial risks associated with, and the inadequate price of MPPI's offer, we do not believe it is in the best interest of the Company or its shareholders, to enter into a transaction with MPPI at this time.

I'd like to offer some concluding remarks and then we'll open it up for questions. This is our fourth call since emerging from bankruptcy in November of 2004. Since emerging from Chapter 11, we have taken our restructuring further by focusing on improvement in cash flow and earnings, our balance sheet, and the performance of our regulated operations. As I said earlier, we've continued to provide good service, good reliability, and paid down debt.

We are very proud of our accomplishments since exiting bankruptcy. As a result of our strong cash flow, we've reduced our debt by approximately $185 million since emergence, we've concluded nearly all of the litigation left over from bankruptcy, including the settlement with PPL, and we have settle the dispute with the Montana Public Service Commission to enter into a stipulation for recovery of 2002 natural gas costs. Our restructuring effort is nearly complete. Going forward, we will continue to provide industry-leading customer service, at stable and affordable prices, while providing a very attractive return to our shareholders.

With that, I'll turn it over the to the operator to give instructions for questions.

Ladies and gentlemen, [OPERATOR INSTRUCTIONS] We'll go first to the line of Steve Velgot with Cathay Financial. Go ahead.

Yes, a question for Brian. Does the $1.70 to $1.90 in EPS guidance contemplate any sales similar to the sale you had on the sulfur dioxide emission allowances, or any other one-time items?

No, Steve. It is our basic EPS. We would deem those types of transactions as nonrecurring. It is deemed our recurring guidance for $1.70 to $1.90.

What tax rate does that contemplate because you are down a bit in tax rate, are you at 37.5 for this year, and then next?

We contemplate a 38.5 tax rate.

Is that the same for '05?

Yes. Approximately.

Our next question comes from Alex Kania with Merrill Lynch. Go ahead.

Good morning. Two quick questions. The first is on 2006 guidance, it seems like you're not implying any accretive uses of cash flow in that net earnings guidance? Beyond the CapEx, and things like that.

Alex, I'm not sure, can you repeat the question?

I was wondering if the 2006 guidance of $1.70 to $1.90 assumes any accretive uses of cash flow, beyond the stuff you've already done, with respect to debt repayment and everything this year?

In terms, it doesn't take into consideration share repurchase, but it does take into consideration we have looked at opportunities, both on the QF, and on CU 4, and we have considered some benefit associated with one of those transactions in 2006.

Got it. Okay. On the coal strip lease, what's the current buyout costs right now?

I'm going to ask our Treasurer here, Paul Evans, I'll let him answer that question.

The provisions of the buyout are as follows. It's tied to the higher of the cash to value, or fair market value. And currently we believe the cash to value, is the higher of the value.

Got it. Okay. So I think I remember hearing from you guys, that you thought it was previously around 95 to $100 million, is that fairly accurate to say?

I'd say I'd have to go back and look at the numbers, and come back on you on that to be more specific.

Got it. Great. Thank you very much.

Thanks.

Our next question comes from the line of John [Alley] with Zimmer Lucas. Go ahead.

Morning.

Morning.

Quick questions. CapEx guidance for 2006, 2007?

Yes, as a matter of fact, because of our strong cash flow and our needs, we've got a catch up a bit on our fleet program, and we've got 2 large gas [blue] projects we're actually increasing our CapEx to $90 million in 2006.

Can I assume about that level in '07?

At this point in time, I think that would be a fair assumption.

Can you give a little more color as to what the assumptions are for coal strip in 2006, and how much availability do you guys have outside of your existing for this, and future contracts, and what the market price is you are assuming?

Well, I mentioned in the guidance portion of our prepared statement that we are expecting a portion of our benefit in '06 associated with locking-in available capacity with coal strip, and that's all we're going to talk about today, in terms of the amount.

Okay. Can you give any, I guess, market price assumption?

We have layered in prices, so I'm not sure what our all-in price would be.

Okay. Just a last one, you talked interest savings, making a good portion of the uptick from '05 to '06. How much of that would be the non-cash QF interest?

I talked about our total interest expense savings, I don't necessarily want to break it out between cash and non-cash interest at this time.

Sure. Okay. Thank you.

Our next question comes from the line of David Miyazaki with A.G. Edwards Asset Management. Go ahead.

Good morning. Just a quick question given that most of the margin improvement, as you said is driven by lower interest expense, and the absence of certain reorganizational costs you've incurred this year, if you took those items out, how generally would you describe the margins?

Let me correct you if I could. What we were talking about is guidance from 2005 recurring. I had already taken those items out.

Okay.

And in essence, about half was from interest expense, and half were margins, and then our costs were slightly up, mainly due to property taxes and labor costs. We had already taken out the restructuring items for that comparison, or bridge if you will.

Okay. Thank you. I've asked you this before, but could you clarify how long do you expect your tax benefit is going to remain in place?

Our guidance remains on that issue, that we'll be able utilize NOLs through 2008.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go to the line of Paul Ridzon with Key McDonald. Go ahead.

What is the absolute level of the NOLs?

I'll just tell you, there is disclosure in our Q, expanded disclosure in our Q on NOLs, I'd just point you to that.

In your '06 guidance, is that the assumption that you earned your allowed ROEs, is that a good way of thinking about the utility business?

I would just respond to that, Paul, that the guidance that we've given you is the total company, including both its regulated and non-regulated operations.

Do you have an existing bank of EAs, that you could further sell, what is your EA position at this point?

It's really the two that we've been selling, especially with the MFM project that we're in the process of trying to sell.

Lastly, are you targeting a long-term growth rate?

We're certainly looking to grow the business over time, Paul, but we have not indicated what we expect that growth rate to be.

Thank you very much.

Our next question comes from line of Steve Velgot with Cathay Financial. Please go ahead.

I was just curious if you've received any reaction from shareholders concerning your updated guidance, or announcement, that the Board had rejected the MPPI proposal again, and whether or not you could share any of that with us?

Steve, we haven't spoken to any of them since the earnings release yesterday and this call.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] We have no additional questions. Please continue.

All right. Thanks everyone for joining our call, and if you have any other questions, you can just call the Company or call me, 605-978-2902, and thanks for your participation today.

Today's call will be available for replay beginning at 1:30 p.m. central time today, and will be running through the 10th of the December at midnight. You may access AT&T's Playback system by dialing 1-800-475-6701 with the access code 800177. That concludes our conference for today. Thank you for your participation, and for using AT&T's Executive Teleconference service. You may now disconnect.