NorthWestern Energy Group Inc (NWE) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the NorthWestern Corporation 2nd 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. If you should require assistance during the call, please press * and 0. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Dan Rausch.

Good morning, and welcome to NorthWestern Corporation's June 30, 2006 2nd Quarter Financial Results Conference Call and Webcast.

NorthWestern's results were released yesterday, and the release is available on our website, at www.NorthWesternEnergy.com. In addition, we also filed our quarterly report on Form 10Q before the market opened today. That report is also available on our website.

Joining us today from our offices in Sioux Falls, South Dakota are -- Mike Hanson, President and CEO -- Brian Bird, Chief Financial Officer -- Tom Knapp, General Counsel -- and Kendall Kliewer, Corporate Controller.

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 10K -- recent and forthcoming 10Qs, recent Form 8Ks, 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 joining us by teleconference will be able to ask questions. We ask that you limit your questions, so we can have broad participation.

A replay of today's call will be available beginning at 2.30 Eastern Time today, through September 3rd 2006. To access the replay, dial 800.475.6701 and then the access code is 836139. A replay of the webcast can also be accessed from our website.

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

Thank you, Dan. And thanks all, folks, for listening in on today's call.

Our business as an energy-delivery company -- is of course, very seasonal in nature, given the patterns of consumption for electricity and natural gas, and our service area. As a result of that, the 2nd quarter has historically been our weakest quarter.

For the past 3 years, we've experienced a net loss during the 2nd quarter each respective year, and the 2nd quarter of this year is no exception. The net loss for the 2nd quarter of 2006 did improve by $1.5 million from the 2nd quarter of '05.

The Company reported a consolidated net loss of 2.4 million for the 3 months ended June 30th '06, compared to a net loss of 3.9 million in the same period on 2005.

Brian Bird, our Chief Financial Officer, will discuss the financial results in more detail, in a few minutes. Before we turn to Brian, I'd like to highlight a few recent accomplishments.

In July, NorthWestern signed a 7-year power purchase agreement with PPL Montana -- which begins July 1st of 2007 -- at a significant discount to current market prices. This agreement will allow us to continue to assure adequate supply of electric energy in Montana, while giving us the flexibility to pursue long-term supply options.

NorthWestern reached a memorandum of understanding to settle a City of Livonia Employee Retirement System Shareholder Class Action and Derivative Suit, which was filed against the Company and Board in November of 2005.

Harbinger Master Capital Fund dismissed its intervention in the City of Livonia lawsuit, and dismissed its lawsuit filed in Delaware against the Company. The Company signed a settlement agreement with an insurance company this quarter, over a coverage dispute which arose in 2002. The settlement entitles NorthWestern payments of approximately $9.5 mil during the 3rd quarter of 2006. In fact, we've received the 1st payment of 3.1 million of that in July of this year. The Company expects to record the accounting benefit of the settlement during the 3rd quarter of '06.

In June, we signed a settlement agreement with the plaintiffs in the McGreevey Lawsuit. The claims against NorthWestern in this lawsuit will be dismissed with no financial impact to our Company, pending approval of the Bankruptcy Court and Federal District Court.

Let me turn briefly to our merger and approval process. As you all know, on April 25th, we announced that we reached a definitive agreement with Babcock & Brown Infrastructure Ltd, or BBI -- which is an infrastructure investment company listed on the Australian Stock Exchange -- under which BBI will acquire NorthWestern Corporation in an all-cash transaction at $37 a share.

Yesterday, our shareholders voted overwhelmingly to approve the proposal to merge with BBI. Over 63% of the outstanding shares voted to approve the merger. Of the ballots that were actually voted, 99.7% voted in favor of the transaction.

In addition to the shareholder approval yesterday, the Company filed for approval with the Federal Energy Regulatory Commission, the Montana Public Service Commission, the Nebraska Public Service Commission, and the South Dakota Public Utilities Commission.

We also made a voluntary notification under Exxon's [inaudible] which was submitted to the Committee on Foreign Investments in the US -- commonly called [CIPIUS]. We received approval from that committee on July 31st of this year.

Lastly, we do expect to make filings under the Hart-Scott Rodino Antitrust Act, with the Justice Department and Federal Trade Commission later this fall, as well as an application with the Federal Communication Commission, for transfer of some communication license. Those will be made -- as I said -- later this year.

The next steps are that each of the regulatory agencies will review our applications. While each of these agencies has a slightly different process, generally, they follow the same pattern, where we'll go into a period of information exchange.

There are data requests submitted to the Company and to BBI, to which we will respond. And after that exchange of information, the interveners are permitted to file testimony -- which triggers a new round of information exchanges.

After that process is completed, the applicants file a rebuttal testimony. A hearing takes place. Post-hearing briefs are filed, and the commissions enter a decision. We expect those approvals and closing to be completed by mid-2007.

Now, let me turn it over to Brian Bird, our Chief Financial Officer, to discuss our 2nd Quarter financial results in more detail. Brian?

Thanks, Mike.

I'll first talk about our consolidated operations. Our consolidated revenues for the 2nd quarter of 2006 decreased by 6.8% from the 2nd quarter of 2005. Since a significant portion of our revenues are a function of energy-supply costs -- which are passed through to customers -- we focus on gross margin as an important metric for the Company.

Consolidated gross margin the 2nd quarter of 2006 was 114.5 million -- compared with 118.2 million in the same period in 2005. Margins in the regulated electric segment increased 5.5 million -- due primarily to increased transmission revenue.

Our transmission volumes increased because strong hydrogenation in the Pacific Northwest increased electricity supply at significantly lower prices than States to the south of Montana. Therefore, suppliers realized more profit by transmitting electricity across our lines. These price differentials are the primary reason for the increase in transmission margin.

Regulated natural gas margin decreased 4.9 million -- primarily because the 2nd quarter of 2005 included the recognition of 4.6 million for the recovery of supply costs previously disallowed by the MTSC.

Margin in the unregulated electric segment decreased by 4.1 million, as strong hydrogenation Pacific Northwest during the 2nd quarter of 2006 increased electric supply -- resulting in lower demand for wholesale power from our coal-stripped unit.

In addition, we had less energy available to sell, due to scheduled maintenance during the 2nd quarter of 2006.

For the first 6 months of 2006, consolidated gross margins were 256.3 million, compared with gross margin of 262.9 million in the same period of 2005, for primarily the reasons mentioned above.

For the 3 months ended June 30, 2006, NorthWestern reported a consolidated net loss of 2.4 million -- compared to the 3.9 million net loss reported in the same period of 2005.

This improvement was primarily due to a 10 million loss from discontinued operations related to the net exit bankruptcy that was included in the 2005 results. In addition, a 2.3 million gain on the sale of partnership interest in oil and gas properties in 2006. And a decrease of 1.2 million in interest expense.

These improvements were offset by reduced gross margins of 3.7 million. And in addition, we had acquisition-related costs of 8 million -- and other -- 1.9 million -- in higher professional fees, primarily associated with addressing outstanding litigation, when compared to the prior quarter.

It's important to point out at this time that while an acquiring entity typically capitalizes to acquisition-related costs, those incurred by an acquiree are expensed-as-incurred.

For the 6 months ended June 30, 2006 -- NorthWestern reported consolidated net income of 18.6 million -- an increase of 3.6 million from the 15 million reported in the 1st half of 2005. This improvement was primarily related to the reasons I mentioned for the 2nd quarter. And a decrease in income tax expense.

Now a little more detail on our core operating segments' financial results. First, I'll discuss our regulated electric operation.

For of our regulated electric operations provide approximately 69% of our consolidated gross margin during the 2nd quarter of 2006. For the quarter ended June 30, 2006 -- regulated electric gross margins of 79.5 million -- compared with 74 million for the quarter ended June 30, 2005. Due primarily to strong hydrogenation at Pacific Northwest -- which, again, resulted in increased electricity supply and significant low prices from States to the south of Montana.

Regulated retail electric volumes increased by 3.3% for the 2nd quarter of 2006 over the same period of 2005 -- driven primarily by a 1.8% increase of customer growth, and warmer weather.

For the 6 months of 2006, gross margin from regulated electric utility operations was 158.5 million. Relatively flat, compared with 158.3 million in the same period of 2005.

An increase in margins, due primarily to increased transmission revenue and higher retail volumes, was offset by a 4.1 million loss relating to a stipulation with the Montana Consumer Council during the 1st quarter of 2006.

Results for the 6 months ended June 30, 2005 also included a 4.9 million gain related to a QF contract [inaudible].

Regulated retail electric volumes increased by 1.9% for the first 6 months of 2006 over the same period of 2005.

Now, let's turn our attention to our regulated natural gas operations -- which contributes 19% of our consolidated gross margins for the 2nd quarter of 2006.

Our regulated gas margin for the quarter ended June 30, 2006 was 22.1 million -- compared with 27 million for the quarter ended June 30 2005. The decrease was primarily because the 2nd quarter of 2005 included the recognition of 4.6 million -- recovery of supply costs previously disallowed by the MTS suit.

Regulated retail natural gas volumes declined 5.6% from the 2nd quarter of 2005. Our regulated gas margin for the 6 months ended June 30, 2006 was 61.4 million -- compared with 67.2 million in the same period of 2005. The decrease was due primarily to warmer winter weather and a 2005 recovery of 4.6 million of disallowed supply costs mentioned previously.

Regulated retail natural gas volumes declined 7.8% from the first 6 months of 2005. This decline was due primarily to warmer winter weather in all regulated markets.

Now, let's focus on our unregulated business. First, our unregulated electric operations -- which consists of the Company's lease of a 30% share of Colstrip Unit 4 -- a 750 megawatt capacity coal-fired power plant located in Southeastern Montana.

Sales of power from Colstrip contributed approximately 9% of our consolidated gross margin in the 2nd quarter of 2006. Unregulated electric gross margin was 10.7 million. For the quarter ended June 30, 2006, compared with 14.8 million for the same period of 2005.

An abundance of availability of hydrogeneration Pacific Northwest reduced the demand for our wholesale power Colstrip 4.

Unregulated electric volumes decreased 47.1% for the quarter ended June 30th compared to the same period of 2005.

For the 6 months ended June 30, 2006 unregulated electric gross margin was 32.1 million -- compared with 32.9 million for the same period of 2005. The reduction in gross margin for the 6 months of 2006 was due to reduced demand at the plant mentioned previously, offset by higher average prices in the 1st quarter of 2006 versus the prior year -- and a 1.3 million reduction in cost of sales related to the settlement of put options in the 1st quarter of 2006.

Lastly, I'd like to talk about our unregulated natural gas operations, which consist of our marketing of gas supplies to large-volume customers -- including ethanol plants, primarily in South Dakota -- and 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 margins for the 2nd quarter of 2006.

Gross margin was 2.5 million for the quarter ended June 30, 2006 -- compared with 2.7 million for the same period of 2005.

Unregulated wholesale natural gas volumes decreased by about 4% from the same period in 2005. This decrease was due primarily to unplanned outages at various ethanol facilities in South Dakota, and the transfer of certain customers to our regulated gas segment.

For the first 6 months of 2006, gross margin from unregulated natural gas operations was 5.2 million -- essentially the same amount as during the same period in 2005.

Unregulated wholesale natural gas volumes decreased by about 50% from the same period in 2005. Again, this decrease was due primarily to the reasons I just mentioned.

Now let's move our attention to the balance sheet as of June 30, 2006. We had cash and cash equivalents of 3 million, and revolver availability of 141.4 million.

Long-term debt -- including our current portion of 156.8 million at June 30, 2006 -- was at 703.2 million, compared with 743 million at year-end 2005.

The long-term debt to total capitalization ratio was less than 50% as of June 30, 2006.

Moving to our cash flow statement for the quarter ending June 30, 2006 -- cash provided by continuing operations totaled 96.4 million during the 6 months ended June 30, 2006 -- compared with 132.9 million during the same period of 2005. This decrease in operating cash flows was primarily related to increased gas injections in the inventory earlier in the season.

Also during the 6 months ended June 30, 2006 -- we used existing cash to repay 41.6 million of debt -- including repayments of 38 million on our revolver. In addition, during the first 6 months, we paid dividends on common stock -- 22 million. Property tax payments of approximately 35 million -- and our semi-annual Colstrip Unit 4 operating lease payment of approximate 60.1 million.

This decrease during the 6 months ended June 30, 2006 was offset by the receipt of net proceeds of 17.2 million from the sale of our Montana First Megawatts generation asset, and an additional 7.7 million related to our allowed claim in net exit bankruptcy.

Now I'd like to turn our attention to our earnings guidance. For 2006, the Company has forecasted basic earnings per share from continuing operations of between $1.70 and $1.90 for the year ending December 31st 2006 -- and excluded the impacts from non-ordinary course litigation and costs related to the strategic review process.

Due to the proposed transaction to sell the Company, we incurred approximately 8.5 million in acquisition-related costs during the 6 months ended June 30, 2006.

The Company estimates additional acquisition-related costs ranging between 5 and 10 million will be incurred during the remainder of 2006.

Portions of these costs are not tax-deductible -- magnifying the impact of the Company's financial results.

In addition, the Company incurred professional fees of approximately 3.4 million associated with shareholder litigation for the first 6 months of 2006.

As a result of these matters, in the financial results for the 6 months ended June 30, 2006, the Company expects to report basic EPS from continuing operations to range between $1.50 and $1.70 for the year ending December 31st 2006.

However, excluding the impact of the acquisition costs, the professional costs associated with shareholder litigation, and the 9.5 million insurance settlement recovery we received in the 3rd quarter mentioned above, the Company still expects our basic EPS from continuing operations to be between $1.70 and $1.90 per share -- assuming normal weather and the Company's service areas for the final 6 months of the year.

Now I'd like to turn the presentation back over to Mike.

Thanks, Brian.

Over the past several conference calls, you've heard me point out our focus on rededicating NorthWestern to its core utility business. We've stated our intent to exit the non-core businesses, return the Company to a stable financial footing, and dedicate ourselves to our goal of providing high-quality, safe and reliable service to our customers at reasonable prices. All while providing an attractive return to our owners.

So in assessing how we're doing against those goals, let me just recap that we have completed the divestiture of our non-core assets. During the 6 months ended June 30th, we received proceeds of 17.2 million from the sale of the Montana First Megawatts generating assets. We got an additional 7.7 million related to our allowed claim in the net exit bankruptcy -- bringing our total collections to 49 million, from the net exit bankruptcy.

Though not without cost, we've made tremendous progress in settling the legacy bankruptcy and shareholder litigations. We are now focused on managing our core utility-related businesses.

We recently signed a 7-year power purchase agreement with PPL Montana, beginning July 1st of 2007. This contract is consistent with our 2005 electric default supply resource plan that has been filed and reviewed by the Montana Public Service Commission -- and, as I said earlier, provides us with the flexibility to pursue other long-term electric-supply options.

And finally, in addition to the operational focus we've demonstrated, we've reached a definitive agreement with Babcock & Brown Infrastructure Ltd, under which BBI has agreed to acquire NorthWestern Corporation in an all-cash transaction valued at $37 a share.

As I stated earlier, the merger is conditioned upon the approval of a number of federal and state regulatory agencies. We are in the process of working with those agencies to answer information requests and work through the procedural schedules. We expect the transaction to be completed by mid-2007.

So as we assess how we're doing against our goals, we think we're doing a pretty good job of achieving each and every one of them. NorthWestern -- both before and after the sale to BBI -- will continue to dedicate itself to the goal of providing high-quality safe and reliable service to our customers at reasonable prices, and providing an attractive return to our owners.

With that, I'd like to turn it back to the operator to give instructions for comments and questions. Rachel?

Thank you. Ladies and gentlemen, if you wish to ask a question, please press *, then 1, on your touchtone phone. You will hear a tone indicating you have been placed in queue. You may remove yourself from queue at any time by pressing the # key.

Once again -- if you have a question, please press *1 at this time.

Mr. Rausch, there are no questions at this time. Please continue.

All right. We'll just close by again thanking everyone for listening in to our call today and participating.

Ladies and gentlemen, this conference will be available for replay after 1.30 pm today through September the 3rd 2006, at midnight. You may access the AT&T Teleconference Replay System at any time by dialing 1.800.475.6701 and entering the access code 836139. International participants, dial 320.365.3844.

Again, those numbers are 1.800.475.6701. And 320.365.3844 -- access code is 836139.

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