NorthWestern Energy Group Inc (NWE) 2006 Q4 法說會逐字稿

Ladies and Gentlemen, through for standing by and welcome to the NorthWestern Corporation year-end financial results conference came. [OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Mr. Dan Rausch. Please go ahead.

Thanks, Paul. Good morning, and welcome to NorthWestern Corporation's December 31, 2006, year-end 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. We plan to file our Annual Report on Form 10K in the next couple of days.

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, 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 and recent 8Ks and other files with the SEC. We undertake no obligation to revise or publicly update our forward-looking statements for any reason.

Following our presentation those who joining us by teleconference will be able to ask questions. A replay of today's call will be available beginning at 3:30 PM eastern time today through March 26, 2007. To access the replay, dial 800-475-6701, and then access code 860806. A replay of the webcast can also be accessed from our website.

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

Thank you, Dan, and thanks again for joining us this morning.

Consolidated net income for 2006 was $37.9 million or $1.07 per basic share.

Those year-end results were impacted by a number of items totaling $0.61 a share that were not included in our guidance, including an adverse jury verdict that was handed down just last week. Excluding those items, our earnings per share would have been $1.68 per basic share.

Brian Bird, our Chief Financial Officer will discuss the financial results in more detail later on the call, but before we do that I'd like to highlight some of our accomplishments in 2006.

We signed a seven-year power purchase agreement with PPL Montana beginning July 1, 2007. This agreement provides for about 33% of our Montana electric supply requirements. In addition, in November of 2006, we conducted our first energy supply auction and have secured a portion of our electric supply needs over a three-year period, starting in July 1, 2007.

So with those items for the period of July 1, 2007 through June 30, 2008, we have approximately 83% of our projected load requirements under contract.

In August, our secured debt rating was upgraded and is now investment grade on a secured basis with all three of the rating agencies that rate NorthWestern's debt. In the fall, we refinanced some of our Montana pollution control obligations and our Montana First Mortgage bonds reducing annualized interest expense by approximately $4.3 million.

In December, a shareholder class action lawsuit related to the proposed transaction with BBI was dismissed.

Looking at our operations, for the third year in a row NorthWestern has been awarded the Service One Award for exceptional customer service from PA Consulting Group, one of the nations leading utility benchmarking and management firms. This is a strong testament to the success of our 24 hour a day, seven day a week customer care program.

We also recently received from the Edison Electric Institute their annual EEI Emergency Recovery Award for outstanding efforts and restoring service that was disrupted in South Dakota during and after a major ice storm in November of 2005. These awards are an honor to each and every one of our employees in the Company and I'm very grateful to all of our employees for their continued hard work.

Now I'd like to give you an update on our pending merger with BBI and the approval process.

As you know, on April 25, 2006, NorthWestern reached a definitive agreement with Babcock and Brown Infrastructure Limited, or BBI, under which BBI will acquire NorthWestern's outstanding stock in an all cash transaction valued at $37 per share. We received shareholder approval of the transaction in August 2006.

The Company and BBI have received the necessary approvals from the Department of Justice, the committee on foreign investments in the U.S., The Federal Energy Regulatory Commission, and the Nebraska Public Service Commission. The South Dakota Public Utility Commission determined that under South Dakota State law, it does not give them jurisdiction over the proposed merger.

On February 16, 2007, we received approval from the Federal Communications Commission. Therefore, the only remaining approval that we need is from the Montana Public Service Commission. The Company and BBI have submitted filings that MPSC which is currently reviewing the transaction. They have set a date of March 14, 2007, to commence a hearing on the transaction.

The Company anticipates receiving the Montana Commission's decision during the first half of this year. If we get MPSC approval we expect a transaction to be completed, including all contractual closing conditions by the end of the second quarter of 2007. Upon closing, NorthWestern's common stock will cease to be publicly traded.

And now I'd like to turn our attention to the jury verdict that I mentioned earlier. Just last week, we were disappointed by a jury verdict that was rendered against the Company to pay $21.4 million in compensatory and punitive damages to former Montana Power Company employees related to their supplemental retirement contracts.

The case is called Ammondson versus NorthWestern Corporation. It was held before the State Court of Montana in Butte, Montana. The case relates to 15 former Montana Power Company executives who had supplemental retirement contracts that provided additional payments above and beyond their qualified pension and 401(K) plans.

These 15 executives and seven other former executives of Montana Power who were not included in the suit were the only individuals that have been offered these supplemental contracts.

The supplemental payments were suspended during NorthWestern 's bankruptcy proceedings and later reinstated. These former MPC executives received all the funds that have previously been suspended and as of November 2005 were again receiving the monthly amount determined in their contracts. We believe that the verdicts are not supported by the evidence presented at the trial, or consistent with Montana law and are not warranted, and we do intend to seek relief from the verdict.

At this time, however, we cannot predict the outcome in connection with these proceedings.

Let me now introduce Brian Bird, our Chief Financial Officer to discuss the 2006 financial results in more detail. Brian?

Thank you, Mike.

Consolidated net income was $37.9 million or $1.07 per basic share, as Mike pointed out earlier for the year-ended December 31, 2006, compared with consolidated net income of of $59.5 million or $1.67 per basic share for the year-ended December 31, 2005. If you consider the fact the Company incurred $0.61 per share of unusual items that we did not include in our 2006 guidance, we would have achieved $1.68 per share or $0.01 per share higher than 2005.

Those items not included in 2006 guidance that total $0.61 per share are as follows: the jury verdict on the Ammondson case, $0.33; the BBI transaction related costs, $0.29; City of Livonia shareholder lawsuit legal costs, $0.06; bankruptcy related legal costs, $0.06; SEC investigation legal costs, $0.06. We had benefits that were also not included in guidance. We had an insurance recovery of $0.16, and also a D&O insurance recovery related to the legal matters mentioned above, $0.03.

Again, the total of those matters mentioned is $0.61 per share.

While our 2006 year-end GAAP financial results reflected decrease from 2005, we have improved the underlying core area of the business. Results for 2006 include an increase in operating income in the regulated businesses by more than 2% from the prior year.

Consolidated gross margin for 2006 was $519.1 million, a 1% decrease compared to $524 million for 2005. Our regulated electric segment performed well in 2006. Margin and the regulated electric segment increased $3.7 million in 2006, primarily due to increased transmission revenues and retail volumes.

Margin in the regulated natural gas segment decreased $3.8 million in 2006, primarily due to a $4.6 million recovery of previously disallowed gas costs in 2005, and warmer winter weather in our service territories this year. These were partially offset by higher transmission and storage revenue this year.

Gross margin in the unregulated electric segment decreased $3.2 million, due primarily to 16% lower volumes from our generation interest in Colstrip Unit 4, and reduced demand during second quarter as a result of strong hydrogeneration in the Pacific Northwest. Gross margin in the unregulated natural gas segment decreased to $1.5 million, primarily due to a renegotiated gas supply and management services contract and lower volumes at various customer ethanol plants in South Dakota for unplanned outages.

Consolidated operating general and administrative expenses were $240.2 million in 2006 compared with $225.5 million in 2005.

The increase was primarily due to $13.8 million in transaction-related costs pursuant to the proposed BBI merger, and $2.2 million in higher legal and professional fees associated with assessing our strategic alternatives and addressing outstanding litigation. A receipt of $9.3 million from an insurance settlement and a $3.1 million reduction in stock-based and short-term incentive compensation expense partially offset these increases.

Our core business experienced an increase in cost as well. Our operating general and administrative expense had increased pension expense of $3 million, bad debt expense of $1.9 million, and higher operating costs of approximately $1.8 million, primarily due to increased line clearance, maintenance and fuel costs.

In addition, we had a decrease in self-insurance reserves of $2.2 million less in 2006 than in 2005.

Related to the jury verdict on the former Montana Power Company employees, we have recorded a $19 million loss in our 2006 results of operations.

In addition to to the $2.3 million we had already recorded to reestablish for the present value of the amounts due under the terms of their contracts.

Consolidated net income was $37.9 million for the year-end December 31, 2006, compared with consolidated net income of $59.5 million for the year-ended December 31, 2005.

As previously discussed, results for 2006 included a slight decrease in gross margin, and we experienced an increase in operating costs primarily from the recent jury verdict and our proposed merger with BBI. Offsetting these increased costs is a decrease of $5.3 million in interest expense and a decrease of $12.6 million in income tax expense from 2005.

Now I'd like to provide a little more detail on our four operating segments operations. First the regulated electric operations, which provide approximately 63% of our consolidated gross margin during 2006. Regulated retail electric volumes for 2006 increased 1.5% over 2005, due primarily to a 1.8% increase in customer growth and warmer summer weather in our service territories.

Wholesale electric volumes for 2006 increased 13.2% compared to 2005, due primarily to increased availability in our jointly-owned plants with less down time for maintenance. Our regulated natural gas operations contribute approximately 23% of our consolidated gross margin for 2006. There -- the retail natural gas volumes for 2006 decreased 3.5% from 2005.

The decrease in volumes was primarily the result of warmer winter weather in our service territories as compared to 2005.

For our unregulated electric operations, which mainly consist 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 Unit 4, contribute approximately 13% of our consolidated gross margin for 2006.

Unregulated electric volumes in 2006 decreased 5.7% compared with 2005, and the decrease in volumes is due primarily to decrease in plant availability and reduced demand in 2006. Our unregulated natural gas operations contribute only -- approximately 1% of our consolidated gross margin for 2006.

We have determined to consolidate the pipeline assets of this business into the regulated business and sell the commodity supply and management services contracts to third parties. Upon completion of these actions, we will have exited the nonregulated natural gas business.

Now moving to the balance sheet, as of December 31, 2006, we had cash and cash equivalents of $1.9 million, compared with $2.7 million at December 31, 2005. Availability under the revolver was $134.7 million, as of December 31, 2006, compared with $91.4 million as of December 31, 2005.

Long-term debt, including the current portion of $5.6 million at December 31, 2006, was $704 million, compared with $738.5 million at year-end 2005. Our long-term debt to total capitalization ratio was less than 50% as of December 31, 2006.

Regarding our cash flow statement for the year-ending December 31, 2006, cash provided by continuing operating activities total $165.1 million during 2006, compared with with $146.7 million during 2005. This improvement in operating cash flows was primarily due to the timing of our semi-annual Colstrip Unit 4 lease payment of $16.1 million, which was not paid until January 2 , 2007.

Other positive operating cash flow impacts were: increased collection of supply costs, proceeds received from hedging activities in 2006, and decreases in pension funding requirement 2006 versus 2005. These positive working capital impacts were offset by a decreased consolidated operating income and increases in natural gas held in storage.

The Company paid dividends on common stock of $44.1 million during 2006, compared to $35.6 million during 2005. Also, the Company paid down long-term debt by a $37.5 million and contributed $23.1 million to employee pension funds during 2006.

Capital expenditures were $101 million during 2006 compared with $80.9 million in 2005.

Let me now turn it back over to Mike.

Well, thanks, Brian.

In summary, excluding the recent jury verdict and the costs related to our sale transaction, NorthWestern Energy continues to perform well. The Company has improved its core-regulated 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 to gain its approval, and if we receive MPSC approval we expect a transaction to be completed by mid 2007.

As I've stated in past calls and continue to state, providing high-quality, safe, and reliable service to our customers at reasonable prices has always been and will remain our focus. Our employees are meeting that objective as is demonstrated by the two recent national awards, and those employees deserve a great deal of thanks and gratitude for a job well done.

With that, I'll turn it back over to the Operator to give you instructions for your comments and questions.

Thank you. Thank you very much. [OPERATOR INSTRUCTIONS] And sir, at this time, I'm showing no questions in queue.

Okay, very good, Paul. Thank you, again, everyone, for your participation in today and your interest in NorthWestern.

Alright. If anyone does come up with any questions later on just call Dan Rausch at the Company. My number is 605-978-2902, and with that, that concludes this call.

Great. Thank you, and ladies and gentlemen, this conference will be available for replay starting today, Monday, that's February 26, at 2:30 p.m., that's 2:30 p.m. looking at central time and it will be available through March 26, also at midnight, central time.

You may access the AT&T executive playback service by dialing 1-800-475-6701 and then enter the access code of 860806. That number once again is 1-800-475-6701, and again, enter the access code of 860806. And that does conclude our conference for today. Thanks for your participation and for using AT&T's executive teleconference. You may now disconnect.