NorthWestern Energy Group Inc (NWE) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the NorthWestern Corporation third quarter financial results conference call. [Operator Instructions] I would now like to turn the conference over to our host, Director of Investor Relations, Mr. Dan [Rausch]. Please go ahead.

Good morning and welcome to NorthWestern Corporation's September 30, 2006 third 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 10Q before the market opened today and 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.

I'll now read a quick safe harbor statement.

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 the 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 reasons.

Following our presentation, those joining us by teleconference will be able to ask questions. A replay of today's call will be available beginning 2:30 Eastern time today, through December 2, 2006. To access the replay, dial 800-475-6701 and then access code 845607. Those numbers again are 800-475-6701, then access code 845607. A replay of this webcast will also be accessed from our website at any time.

I will now turn over to President and CEO, Mike Hanson.

Thank you, Dan. Thank you for joining us this morning, folks.

The net income for the third quarter of 2006 improved by $6 million from the third quarter of 2005. The company reported consolidated net income of $11.4 million for the three months ending September 30, 2006, compared with $8.8 million net income reported in the same period in 2005. Brian Bird, our Chief Financial Officer, will discuss the financial results in more detail later on the call.

Let me point out some recent accomplishments. The company's secured debt was upgraded during the third quarter by Moody's and is now investment grade on a secured basis with all three rating agencies that rate NorthWestern's debt. The company refinanced 150 million first mortgage bonds, reducing future annual interest expense by approximately $1.9 million. During the third quarter, we also received payments of approximately $9.3 million related to a settlement agreement with an insurance company over a dispute that arose in 2002. In September, we received preliminary approval by the bankruptcy court in the [McGreevey] shareholder class action lawsuit, which was a lawsuit brought by shareholders of the former Montana Power Company. Once we get final approval from the bankruptcy court, the settlement will be sent to the Federal District Court for approval. And if approved by those two courts, the claims against NorthWestern in the McGreevey lawsuit will be dismissed.

We also announced that the board has declared a dividend for the fourth quarter of $0.31 per share consistent with our recent dividend amounts.

Now, I'd like to provide a brief update on our merger and approval process. On April 25, 2006, we announced that we had reached a definitive agreement with Babcock & Brown Infrastructure Limited and Infrastructure Investment Company, listed on the Australian stock exchange, under which BBI will acquire NorthWestern Corporation in an all-cast transaction at $37 per share.

The company has filed applications for merger approval with all regulatory bodies requiring approval, except for the Federal Communications Commission, whose approval is required to transfer some radio licenses. We plan to file the FCC application related to those radio frequency licenses to our- - for our operations within the next few months.

In early October of 2006, the Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, with respect to our merger with BBI. Also, in October of 2006, the Nebraska Public Service Commission and the Federal Energy Regulatory Commission approved the proposed transaction with BBI.

Therefore, we have received all approvals or clearances necessary, except for the Montana Public Service Commission, the South Dakota Public Utility Commission at the state level, and the Federal Communication Commission.

We have filed our application with the Montana Public Service Commission, who has revised their procedural schedule, which retains the original hearing date of March 14, 2007 on this matter.

With respect to the South Dakota Public Utility Commission, due to unclear statutory language in South Dakota, our filing requests that the South Dakota PUC determine if it has jurisdiction over our pending transaction with BBI. In October, we reached a settlement with the South Dakota PUC related to their opposition to the transaction at the Federal Energy Regulatory Commission level. The SDPUC has yet to make a decision on whether it has jurisdiction to approve the pending BBI transaction at the state level. We expect a decision on the jurisdictional matter with them in December.

Assuming we receive the remaining approvals, under the current anticipated schedules, we expect the transaction to be completed, including all contractual closing conditions met, by mid-2007.

So, now let me turn it over to Brian Bird, our Chief Financial Officer, to discuss our third quarter 2006 financial results in more detail. Brian.

Thanks, Mike. Regarding our consolidated operations, our operating income for the quarter increased by over 50%, compared with the third quarter of 2005. Operating income for the third quarter of 2006 was $33.5 million versus $22.2 million for the same period of 2005.

Our net income before tax for the third quarter of 2006 rose to $19.3 million, compared to $12.7 million in '05, a 52% increase year-over-year.

Other key items for the third quarter of 2006 were insurance settlement proceeds of $9.3 million and strong regulated electric gross margins.

Those positive impacts were offset by higher merger and litigation costs, a decline in output at our [shuttered] Ethan Four plant due to unplanned outages. And, in addition, we had an increase in pension costs due to the recently enacted Pension Protection Act.

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 for the third quarter of 2006 was $123.7 million, a 2% increase compared with $121.3 million in the same period in 2005.

Margins in the regulated electric segment increased $3.4 million. The increase was due primarily to a 2.4% increase in volumes due to warmer weather and a 1.8% growth in customers, as well as a 20% increase in transmission volume.

In addition, the regulated natural gas gross margin increased $900,000 due to higher transportation and storage revenue. This increase was primarily due to an increase in storage revenues collected from producers, as our storage facilities are closer to capacity than in 2005.

Regulated retail natural gas volumes declined slightly from the same period of 2005.

However, the unregulated electric margin decreased by $900,000 due to lower volumes resulting from unplanned outages at our shuttered Ethan Four plant.

The unregulated natural gas gross margin decreased by $1 million, due primarily to lower volumes and a restructured gas supply contract.

For the nine months of 2006, consolidated gross margin was $380 million, a decrease of 1.1% compared with consolidated gross margin of $384.2 million in the same period of 2005.

First, our regulated electric segments gross margin improved by $3.6 million for the first nine months of 2006, in spite of a $4.3 million loss in the first quarter of 2006 as a result of the stipulation with the MCC and a $4.9 million gain in the prior year related to a [QF] contract amendment.

However, our other segments experienced year-to-date declines in gross margin. In the regulated gas segment our gross margin declined by $5 million. First period of 2005 included a $4.6 million recovery for supply costs that had previously been disallowed by the MPSC.

Also, the unregulated electric gross margin declined by approximately $1.7 million due to lower volumes resulting from unplanned outages at the shuttered Ethan Four generation plant.

And the gross margin in our unregulated natural gas segment declined by $1 million due to lower volumes and a restructured gas supply contract.

Consolidated net income for the three months ended September 30, 2006 was $11.4 million or $0.32 per share, compared with $8.8 million net income reported in the same period of 2005. This improvement was primarily due to an $8.8 million decline in operating expenses. The operating expenses declined primarily to the receipt of $9.3 million insurance settlement and a $2.6 million reduction in legal fees and professional fees.

The improvements were offset by a payment of $4.3 million to our strategic advisor related to the proposed transaction with BBI.

In addition, we had a $2.4 million improvement in gross margin, mostly in the regulated electric, due to increased volumes, and also a $1.2 million decrease in interest expense, due to the company's reduction of debt and lower interest costs over the prior year.

The improvements were offset by a $5.8 million decline in investment income due primarily to a $4.7 million gain in the third quarter of 2005 and an increase in tax expense of $4.5 million due to an increase in pre-tax income for the quarter ended September 30, 2006.

Related to consolidated net income for the nine months ended September 30, 2006, we reported $30 million, or $0.83 cents per share, which is an increase of $6.2 million, or 25.8% from the $23.8 million reported for the nine months ended September 30, 2005. This improvement was primarily related to the fact that 2005 results included a $10.6 million loss within discontinued operations.

In addition, the 2006 results reflect a decrease in interest expense of $4.2 million, due to reduced debt and lower interest costs since the prior year.

Offsetting these improvements were increased operating expenses of $6.2 million, primarily related to acquisition-related costs and higher professional fees, and decreased gross margins of $4.2 million.

Now, I'm going to move to the balance sheet as of September 30, 2006.

Cash and cash equivalents were $1.7 million, compared with $2.7 million on December 31, 2005.

Availability under the revolving credit facility was $136.2 million as of September 30, compared with $91.4 million as of December 31, 2005.

Long term debt, including a current portion of $7.8 million at September 30, 2006, was $701.8 million compared with $740.2 million at year end 2005.

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

Regarding our cash flow statement for the quarter ending September 30, 2006, cash provided by continuing operations totaled $135.5 million during the nine months ended September 30, 2006, compared with $153.1 million during the nine months ended September 30, 2005. This decrease in operating cash flows was primarily related to increased natural gas held in storage in 2006.

Also, during the nine months ended September 30, 2006, we made debt payments of $32.1 million. In addition, during the nine months of 2006, we paid dividends on common stock of $33 million, compared with $24.6 million for dividends in the same period of 2005.

We also made approximately $75 million in capital expenditures in the first nine months of 2006, compared with approximately $54 million in CapEx in the same period of 2005.

Now, I'd like to turn our attention to earnings guidance for 2006.

The company had previously forecasted basic earnings per share from continuing operations of between $1.70 and $1.90 for the year ending December 31, 2006, which excluded the impacts from non-ordinary course litigation and costs related to the strategic review process and approval of the merger.

The performance of the company' unregulated electric segment has been lower than anticipated, primarily due to unplanned outages resulting in lower volumes to sell and higher operating costs. This is expected to impact the company's second half 2006 earnings results by approximately $0.06 a share.

In addition, the company's 2006 pension costs have increased due to the Pension Protection Act enacted in August of 2006. This is expected to impact the company's earnings results for the second half of 2006 by approximately $0.05 a share.

Based on the financial results for the first nine months of 2006, the company now expects basic earnings per share from continuing operations to be between $1.60 and $1.70 per share, assuming normal weather in the company's service areas for the final three months of the year and excluding the impacts of the acquisition-related costs, professional costs for shareholder litigation and the $9.5 million insurance settlement recovery mentioned earlier.

When including those items mentioned above, the company expects to report basic earnings per share from continuing operations between $1.35 and $1.45 for the year ending December 31, 2006.

Now, let me turn it back over to Mike.

Thanks, Brian. Well, in summary, the company has improved its third quarter results over the prior year. We continue to make progress on the pending BBI transaction to acquire NorthWestern Corporation. We're still working with the Montana Public Service Commission and the South Dakota Public Utility Commission to gain their respective approvals.

Assuming that those approvals are received and those- - according to the schedules that have been established, we expect the transaction to be completed by mid-2007.

Providing high quality, safe and reliable service to our customers at reasonable prices has always been and will remain in the future the company's focus.

With that, I'd like to turn it back to our operator, Lisa, to give instructions for comments and questions.

Thank you. [Operator Instructions] We do have a question from the line of Nicos Pannos from [Sandal]. Please go ahead.

Hi, good morning. It's actually Nicolas [Inaudible] and I abbreviated my last name. I wanted to ask you about the Montana PUC process. In the past in other jurisdictions, we've seen issues when a foreign private equity or sort of structure finance acquirer is refused to provide information on its investor identities or on returns promised. I was wondering if you had any issues like that come up so far in your Montana review?

Nicos, thank you for the question. We've been proceeding with Montana and I believe we have responded, as BBI has, to all the information that has been requested by the interveners and the Commission staff in Montana. They are still within the discovery period, have an opportunity to continue to ask questions, which we will respond to and provide information as requested. But, I think everything that's been requested to date has been provided.

Thank you.

Thank you. [Operator Instructions] And it looks like we have no questions from the phone lines, please continue.

Okay, thanks for joining the call today. If you do have any more questions, you can call Dan Rausch at 605-978-2902, and with that, I'll turn it back to Lisa.

Thank you, ladies and gentlemen. This conference will be available for replay after 1:30 p.m. today through December 2, 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 845607. International participants dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844 with the access code 845607.

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