NorthWestern Energy Group Inc (NWE) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the NorthWestern First Quarter Financial Results Conference Call. [OPERATOR INSTRUCTIONS.]

As a reminder, today's conference is being recorded.

At this time, I'd like to turn the conference over to your host, Dan Rausch. Please go ahead.

Good morning, and welcome to NorthWestern Corporation's March 31, 2006 First Quarter Financial Results Conference Call and webcast. NorthWestern’s results were released this morning, and the release is available on our website at www.northwesternenergy.com. In addition, we also filed our quarterly report on form 10-Q after the market closed yesterday. That report is also available at our website.

Joining us today from our offices in Sioux Falls, South Dakota, are Mike Hanson, President and CEO, Brian Bird, Vice President and CFO, Tom Knapp, Vice President and General Counsel, Kendall Kliewer, Corporate Controller, and Paul Evans, Treasurer.

This presentation contains 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 as 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, 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.

In connection with the proposed transaction with Babcock & Brown Infrastructure Limited, NorthWestern Corporation will file a proxy statement with the SEC. Before making any voting or investment decisions, investors and security holders of NorthWestern Corporation are urged to carefully read the entire proxy statement when it becomes available and any other relevant documents filed with the SEC, as well as any amendments or supplements to those documents because they will contain important information about the proposed transaction. A definitive proxy statement will be sent to the shareholders of NorthWestern Corporation in connection with the proposed transaction.

Investors and security holders may obtain a free copy of the proxy statement when it becomes available, and any other documents filed by NorthWestern operation, at the SEC's web site at www.sec.gov. The proxy statement and other such documents may also be obtained for free from NorthWestern by directing such requests to NorthWestern Corporation, 125 South Dakota Ave, Sioux Falls, South Dakota, 57104, Attn: Dan Rausch, Director of Investor Relations, telephone number 605-978-2902.

NorthWestern Corporation, its directors, executive officers and other members of its management, employees and certain other persons may be deemed to be participants in the solicitation of proxies from NorthWestern Corporation stockholders in connection with the proposed merger. Information about the interest of NorthWestern Corporation participants in this solicitation is set forth in NorthWestern Corporation's proxy statement and annual reports on form 10-K previously filed with the SEC, and in the proxy statement relating to the transaction when it becomes available.

Following our presentation, those of you joining us by teleconference will be able to ask questions. We ask you to limit your questions to allow for broad participation. A replay of today's call will be available beginning 2:30 Eastern time today through June 4, 2006. To access the replay, dial 1-800-475-6701, access code 826088. A replay of the webcast can also be accessed from our website.

With that, I'll turn it over to President and CEO Mike Hanson.

Thank you, Dan, and thanks to all of you for joining us on the call today. We're very pleased with our financial results for the first quarter of this year. Our consolidated income from continuing operations for the quarter ended March 31, 2006 was $21 million, or $0.59 per basic share, and $0.58 per diluted share, an increase of 2.6 million, or $0.07 per basic share over the quarter ended March 31, 2005. Brian Bird, our Chief Financial Officer, will discuss the financial results in a little more detail later on in the call.

I'd like to highlight a couple of other accomplishments this quarter. We have received the proceeds from the Netexit bankruptcy case and the sale of the Montana First Megawatts equipment during the first quarter of 2006. With the receipt of those proceeds, the divestiture of our non-core assets is complete. On March 15, 2006, an arbitration panel concluded that we are entitled to a payment of approximately 9.5 million from the insurance carrier. This result relates to an insurance coverage dispute over a settlement that occurred back in 2002. The insurance carrier has agreed to pay us during the third quarter of 2006, and we expect to record a pretax gain of about 9.5 million after we receive payment from the insurance carrier.

Now I'd like to add a few comments on our strategic review process. As most of you know, in 2005 we received informal proposals from a number of parties who were interested in buying us. In keeping with its fiduciary duties, our Board of Directors directed the senior management and the company's financial adviser to commence an evaluation of strategic alternatives to maximize value for all shareholders. The Board also established a Merger and Acquisition Committee of the Board to oversee the process. In connection with the review, we identified and invited interested parties to submit formal acquisition proposals. All interested parties were invited to perform due diligence, subject to appropriate confidentiality agreements, and the Board's financial adviser and senior management actively engaged with the bidders as we considered their final offers.

On April 25, we announced that we have reached a definitive agreement with Babcock & Brown Infrastructure, Limited, or BBI, an infrastructure investment company listed on the Australian Stock exchange, under which BBI will acquire NorthWestern Corporation in an all-cash transaction valued at $37 per share. Based on the April 25, 2006 shares outstanding, the transaction would be valued at approximately $2.2 billion, including the assumption of existing debt. This transaction is conditioned upon approval by the shareholders of NorthWestern, as well as receipt of the number of federal and state regulatory approvals and, subject to such approvals, is expected to be completed in 2007.

Now let me introduce Brian Bird, our Chief Financial Officer, to discuss our first quarter financial results in more detail. Brian?

Thanks, Mike. Consolidated revenues for the first quarter of 2006 increased by 8.9% over the first quarter of 2005. Since a significant portion of our revenues are a function of energy supply costs, which are passed through to our customers, we focus on gross margin as the important metric for the company.

Our consolidated gross margin for the first quarter of 2006 was 141.8 million, a decrease of 2.9 million, or 2% compared to the first quarter of 2005. Regulated electric gross margin for the quarter ended March 31, 2006 was 79 million, down 6.3% compared with 84.3 million for the quarter ended March 31, 2005. This decrease primarily resulted from the fact the first quarter of 2005 included a 4.9 million gain related to a QF contract amendment.

In addition, during March 2006, the company signed a stipulation with the Montana Consumer Council to settle various issues raised relative to our 2005 and 2006 electric tracker filing. That settlement led to a 4.1 million charge to cost of sales during the first quarter of 2006.

Our regulated natural gas gross margin was 39.2 million for the quarter ended March 31, 2006 compared with 40.2 million for the quarter ended March 31, 2005. This decrease was primarily due to a reduction in transportation, distribution and storage revenue caused by warmer weather during the winter in our service territories. Gross margin from unregulated electric operations was 21.4 million for the quarter ended March 31, 2006 compared with 18.1 million for the quarter ended March 31, 2005. This was primarily due to higher average rates.

In addition, an increase in supply costs in the current year was partially offset by a 1.3 million gain on the settlement of put options. Regarding our unregulated natural gas gross margin for the quarter ended March 31, 2006, increased to 2.7 million as compared with 2.5 million for the quarter ended March 31, 2005.

Now regarding our consolidated operating income, we reported 42.2 million for the quarter ended March 31, 2006 as compared with 47.8 million for the quarter ended March 31, 2005. One of the drivers of the reduced operating income was the reduction in consolidated gross margin of 2.9 million I mentioned previously, as well as consolidated operating expenses increased 2.7 million to 99.6 million for the three months quarter ended March 31, 2006 as compared with 96.9 million during the same period in 2005. This was primarily due to 1.3 million in higher property taxes due to a higher valuation assessment and increased mill levies in our Montana service territory, and also a 1.7 million increase in our allowance for uncollectible accounts due to increases in past due customer account balances.

We also experienced 2.9 million in higher professional fees associated with assessing our strategic alternatives in addressing outstanding litigation. This was offset by a reduction in reorganization expenses of 3.4 million compared to the same period in 2005. While we continue to incur professional fees during 2006 associated with various legal proceedings that must be resolved before our bankruptcy case can be closed, these costs are included in our operating, general administrative expenses and not in the account called reorganization expenses.

The company reported consolidated net income of 21 million for the first quarter of 2006 compared with 18.9 in the first quarter of 2005. Our consolidated interest expense for three months ended March 31, 2006 was 14.4 million, a decrease of 1.9 million, or 11.7%, from 2005. This decrease was primarily attributable to a 94 million decrease in debt in 2005. We anticipate additional reductions in interest expenditure in 2006 as we repay borrowings on our unsecured revolver and refinance existing debt at lower rates.

Consolidated investment and other income for the three months ended March 31, 2006 was 5.3 million, an increase of 4.7 million from 2005. This increase was primarily due to a $3.8 million gain related to an interest rate swap. Consolidated provision for income taxes for the three months ended March 31, 2006 was 12 million as compared to 13.7 million in 2005. While we reflect an income tax provision in our financial statements, we expect our cash payments for income taxes will be minimal through at least 2010 based on our anticipated use of net operating losses.

Now I'd like to provide a little more detail on our four operating segments financial results. First, let's start with our regulated electric operations. These operations provided approximately 56% of our consolidated gross margin during the first quarter of 2006. For the quarter ended March 30 1, 2006, gross margin from our regulated electric utility operations was 79 million compared with 84.3 million in the same period of 2005. Regulated retail electric volumes increased by .5% for the first quarter of 2006 over the same period of 2005, driven primarily by a 1.7% increase in customer growth.

Operating income from regulated electric utility operations was 18.3 million for the quarter ended 2006 compared with 27.3 million for the same quarter of 2005. The operating income decreased year-over-year due to margin decrease mentioned earlier, and the increase in property taxes and an increase in operating, general and other costs in this segment.

Regarding our regulated natural gas operations, these operations contributed approximately 28% of our consolidated gross margin for the first quarter of 2006. Our regulated gas margin for quarter ended March 31, 2006 was 39.2 million compared with 40.2 million for the same period of 2005. The decrease was primarily due to decrease in transmission, distribution and storage revenue.

Regulated retail natural gas volumes declined 8.6% from the same period in 2005. This decline was due primarily to warmer weather in all regulated markets. Our regulated gas operating income for the quarter ended March 31, 2006 was 13.8 million compared with 16.6 million for the same period of 2005. The operating income in the regulated gas area decreased from the same period of 2005 due to the margin decrease mentioned earlier, the increase in property taxes, and an increase in operating, general and other costs in this segment.

As for our unregulated electric operations, which mainly consist of the company's lease of a 30% share of [coal strip] unit four, a 750-megawatt capacity coal-fired power plant located in southeastern Montana. Sales of power from coal strip four contributed approximately 50% of our consolidated gross margin for the first quarter of 2006. Unregulated electric gross margin was 21.4 million for the quarter ended March 31, 2006 compared with 18.1 million for the same period of 2005. Unregulated electric volumes decreased 5.6% due primarily to increased downtime for plant maintenance in 2006. Gross margin increased primarily due to higher average rates.

In addition, an increase in fuel supply costs in the current year was partially offset by a 1.3 million gain on the settlement of put options. Unregulated electric operating income was 10.3 million for the quarter ended March 31, 2006 compared with 7.5 million for the same period of 2005. Operating income improved over last year primarily due to higher gross margin mentioned previously.

Regarding our unregulated natural gas operations, which consist of our marketing of gas supply to large volume customers, including ethanol plants primarily in South Dakota in the operation of 87.5 miles of intrastate natural gas pipeline in eastern South Dakota. The unregulated natural gas operations contributed approximately 2% of our consolidated gross margin for the first quarter of 2006. Gross margin was 2.7 million for the quarter ended March 31, 2006 compared with 2.5 million for the same period of 2005. The increase was primarily due to losses of approximately $.5 million recorded on out of market fixed-price sales contracts, which were recorded in the first quarter of 2005. Unregulated wholesale natural gas volumes decreased by about 21% from the same period in 2005. This decrease was due primarily to the transfer of certain customers to our regulated gas segment and to unplanned outages at various ethanol facilities in South Dakota.

Now moving to the balance sheet as of March 31, 2006. As of March 31, we had cash and cash equivalents of $12 million and revolver availability of 151.4 million. Our long-term debt, including the current portion of 156.9 million at March 31, 2006, was 693.9 million compared with 743 million at year-end 2005. The long-term debt to total capitalization ratio was less than 50% as of March 31, 2006.

Regarding our cash flow statement for the quarter ending March 31, 2006, cash provided by continuing operating activities totaled 77.6 million during the three months ended March 31, 2006 compared to 104.5 million during the three months ended March 31, 2005. This decrease in operating cash flow was primarily related to the recovery lag between the time we pay for the commodity and the time we collect from customers, and the situation is compounded by higher commodity prices versus the prior year.

In addition, our cash flows from operations during the first quarter of 2005 include cash provided at 13.3 million due to improved credit terms reflected in the reduction of prepaid energy supply. Regarding the uses of cash flow provided by continuing operations, mainly from capital expenditures of our system of 21.2 million compared to 13.4 million for the same period in 2005. We also used the existing cash to repay nearly $50 million of debt, including repayments of 46 million on our revolver. In addition to these repayments, we paid dividends on common stock of 11 million.

During the first quarter of 2006, we also received proceeds of 17.2 million from the sale of our Montana First Megawatts generation assets and 5 million related to our loss claim in Netexit’s bankruptcy. The common stock repurchase program announced during the fourth quarter of 2005 allows us to repurchase up to 75 million of common stock. We have repurchased approximately 3 .9 million and 6.5 million of common stock as of March 31, 2006 and April 30, 2006 respectively. The company has recently canceled the common stock repurchase program.

Regarding our capital resources, we have an unsecured 200 million senior revolving line of credit. As of April 30, 2006, our revolver availability was approximately 185 million compared to the revolver availability of approximately 90 million as of December 31, 2005. On May 9, 2006 we expect to close in escrow 170.2 million of pollution control obligations, lowering the interest rate from 6.125% and 5.9% to 4.65%. The actual redemption of these obligations is scheduled for May 30, 2006. These obligations, which mature in August 2023, are secured by certain Montana electric and natural gas assets. In addition, we anticipate refinancing our 150 million 7.3 first mortgage bond set to mature on December 1, 2006. Those two refinancing activities should reduce our annual cash interest expense by approximately $5 million.

Now, I'd like to turn our attention to our earnings guidance. We are reaffirming the range of basic EPS guidance to be from $1.70 to $1.90 from continuing operations. We expect cash flow provided from continuing operations for 2006 to be in the range of 175 million to 200 million. That guidance assumes normal weather for the remainder of the year in the company's electric and national gas service territories, and excludes any potential impact from non-ordinary course litigation and costs related to the strategic review process, and the BBI transaction. Also, our guidance estimates for 2006 do not include the impact of the 75 million share repurchase program, which has now been canceled.

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

Thanks, Brian.

As we stated, we are very pleased with the quarterly results and our prospects for the remainder of this year. Our consolidated income for continuing operations for the first quarter increased 2.6 million, or $0.07 a share, over the same quarter of 2005 and, as I stated earlier, we expect to record a pretax gain in the third quarter of about $9.5 million after we receive payment from an insurance carrier resolving a dispute.

Last week, we announced that we had reached the agreement with BBI, under which they will acquire the corporation in an all-cash transaction for $37 a share. This transaction is about $2.2 billion total value, including the assumption in a long-term debt and, of course, is conditioned on approval by NorthWestern’s shareholders as well as necessary federal and state regulatory approvals. We do expect the transaction to be completed in 2007.

Our company continues to show improvement in our financial performance, which has been recognized in the marketplace by the rating agencies and by the interested buyers in our strategic review process, which culminated in an all-cash offer that we feel is a great value for our shareholders.

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

[Operator instructions.]

[Tom Wolfe] from Sawtooth Investment Management.

I remember last week you mentioned that you'd be meeting with regulators in the next few days. Can you give us any update on discussions that went on with regulators in regards to the sale of the company?

Certainly, Tom. We of course notified not only our regulators but all of our interested stakeholders of the announcement. We have had the ability to meet with the regulatory staffs in South Dakota and Montana, and are planning to schedule presentations from both NorthWestern and BBI collectively, the Montana Public Service Commission and the Nebraska Public Service Commission later this month.

[OPERATOR INSTRUCTIONS.]

Paul Patterson from Glenrock Associates.

I just wanted to touch base with you on the discussions about re-regulation in Montana, and the most recent filing by the Montana Public Service Commission with respect to the market power case and at FERC and your needs to start the contracting process for the contract that’s expiring at the middle of 2007.

In terms, Paul, first of all, there is a growing interest by a number of people in Montana of looking at the different regulatory construct, if you will. Been a lot of public discussion about that, but that, of course, would require a legislative action. The next legislative session in Montana is in 2007, opening in the beginning of January. So, at this point, I think what you’ve seen is various people expressing their views, and I don’t know how that is going to transpire.

The Montana Consumer Council has been active in the proceeding at FERC, looking at the question of whether PPL, the owner generation, has market power. That proceeding is still underway. We have been providing information to help the Commission out there analyze the market conditions in Montana, but final decision has not been made. Notwithstanding that, of course, we are continuing the process of procuring electricity and gas for our consumers. We are planning to do a auction process for power beginning in July 1 of 2007 after the PPL contracts expire.

In addition to the PPL, what we call base and heavy load contracts, we have long-term power supply arranged from some QFs. We have a long-term commitment out of coal strip four, and we recently announced the completion of a wind power contract. And so, what we’ll be going out for is a big portion of our base load needs, but it’s certainly not the entirety of the electric needs in Montana.

Right. I guess what I was trying to get some clarity on was that both this joint emergency filing app for an expedited ruling--and the Montana Public Service Commission, as you know, and the Consumer Council I guess last week filed this expedited review because they said that--it seemed that their reasoning was was that you guys had to start to undergo the contracting process, and because this issue is hanging out there, that it had a potential for impacting that. And I guess what I was trying to get was an idea as to whether or not you thought, (A), the FERC was probably going to actually expedite the rulemaking, if you have any insight on that, maybe you don’t.

And then also, I guess that’s what I was sort of asking about is how that FERC ruling actually impacts your proposed procurement mechanism. That’s the question I guess I’d have. And the second question that I have is I know that the re-regulation has to involve legislation, but do you see that as an opportunity, or do you guys have any thought about what re-regulation might bring about in terms of your company?

On the first question, Paul, of course we’re aware of the request by the Commission and Consumer Council for expedited process at FERC and, in fact, support that request because it would be very beneficial to have a decision out of FERC sooner than later as we proceed ever so closer to June 30th of next year. FERC has yet to make a final decision, and so the second part of that question, what impact would that have, it depends on how FERC would rule.

Do you think they’ll rule soon?

Well, we certainly hope so, and think that they have all the necessary information to make their ruling. But, of course they have a calendar with a lot going on, as well, but we certainly hope they will act soon. If they are to find that PPL does indeed have market power, the question is going to be how do they mitigate that, and there may be an opportunity to work with PPL to help them mitigate that situation while helping us meet the needs of our customers.

As far as a change where you effectively re-regulate or vertically re-integrate the company, we’re certainly participating in those discussions, and open to the idea where the company could own generation that’s used to supply part of the customer load under reasonable terms if the economics of that make sense, both for the company and for the customers.

[Nikos Panangiotopoulos] from [Sandell Asset Management].

I have a couple of questions. The first one is, since you announced the transaction with BBI, have you had a chance to sound off the reaction of your oil and gas customers at the high line region?

We have announced it publicly. We’ve gotten some public feedback. I haven’t tried to sort that down by location, but have heard nothing specific from customers along the high line of Montana.

I noticed in your merger agreement that there’s a limited set of things that BBI would be required to do to secure regulatory approvals and, at the same time, I notice that the transaction could drag on as much as two years. Does that reflect an expectation on your part that this could be a really drawn-out process on the regulatory front?

No, our expectation is we should be able to complete this in 9 to 18 months.

[OPERATOR INSTRUCTIONS.]

At this time, we have no other questions in queue. Please continue.

Thanks for your participation on this call. If in the future you have questions that you have or didn’t get answered, you can call me, Dan Rausch, at 605-978-2902.

And with that, that concludes our remarks, and I’ll turn it back over to John.

Thank you. Ladies and gentlemen, this conference will be made available for replay starting today at 1:30 and ending at midnight on June 4th. If you wish to hear this replay, you can dial 1-800-475-6701. International parties can dial 320-365-3844, and the access code for this call today is 826088.

This does conclude our conference for today. Thank you for your participation, and thank you for using AT&T Executive Teleconference. You may now disconnect.