NorthWestern Energy Group Inc (NWE) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the NorthWestern Corporation second-quarter financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer period. (OPERATOR INSTRUCTIONS). And as a reminder, today's conference call 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, 2007, quarter-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 also filed our Quarterly Report on Form 10-Q this morning.

Joining us on the call today 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 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.

Following the presentation today, those joining us by teleconference will be able to ask questions. A replay of today's call will be available beginning noon Eastern Time today through September 8, 2007. To access the replay, dial 800-475-6701, then access code 880662. A replay of the webcast can also be accessed from our website.

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

Thanks, Dan, and thanks, everyone, for listening in on our call this morning. Let me just start with a few highlights from the quarter. We had another very good quarter, in fact a good first half of 2007. Our gross margin, operating income and net income were up for both the second quarter of '07 compared to '06 and for the first half of the year compared to the same time last year.

The Company expects our earnings for 2007 to be in the range of $1.50 to $1.65 per share. The Board increased the dividend by $0.02 per share to $0.33 for the quarter ending September 30 or an annual rate of $1.32.

During the quarter, the Company announced plans to build and operate a 500kV transmission line between southwestern Montana and southeastern Idaho, which is estimated to be an $800 million project. Recently, we filed electric and natural gas distribution rate cases in South Dakota, Nebraska and Montana, where we are requesting a combined annual revenue increase of approximately $48 million.

Let me discuss just briefly the termination of our merger agreement with Babcock and Brown Infrastructure. As you know, in April of 2006, NorthWestern reached a definitive agreement with BBI under which BBI would have acquired NorthWestern in an all-cash transaction valued at $37 a share.

We received the necessary approvals from all the federal and state regulatory bodies except for the Montana Public Service Commission, which has denied the joint application. BBI has opted to terminate the merger agreement, so the deal is off. There will be no legal appeal, no refiling or anything like that. And the Company's going to move on as a stand-alone company.

Later on in the call, I'm going to discuss our near-term plans for us moving forward as a stand-alone, but before I do that, let me introduce Brian Bird, our Chief Financial Officer, to discuss our second-quarter 2007 financial results in more detail. own. Brian?

Thanks, Mike. I'm going to start with our consolidated operations. Consolidated net income for the quarter ended June 30, 2007, was $2.4 million compared with a $2.4 million net loss for the quarter ended June 30, 2006. Consolidated net income for the six months ended June 30, 2007, was $21.6 million, an increase of $3 million over the $18.6 million in 2006.

The improvement for both periods is primarily related to higher margins and lower operating costs. Lower other income and higher income taxes partially offset this increase.

Consolidated gross margin for the three months ended June 30, 2007, was $118.4 million, an increase of $3.9 million as compared with gross margin of $114.5 million in the second quarter of 2006.

(technical difficulty -- audio break) the higher volumes from colder weather in our Montana service territory. Offsetting these increases was a decrease of $1.4 million in unregulated natural gas margin primarily due to a renegotiated gas supply and management services contract and lower volumes. Gross margin in the unregulated electric business was flat, with higher volumes offset by an increase in fuel supply costs.

Consolidated gross margin for the six months ended June 30, 2007, was $265.6 million, an increase of $9.3 million over the first six months of 2006.

Consolidated operating, general and administrative expenses was $58.7 million for the three months ended June 30, 2007, as compared with $68.6 million in the second quarter of 2006. Transaction-rebated costs in 2006 pursuant to the proposed BBI acquisition accounted for approximately $7 million of the decrease. In addition, lease expense decreased by $3.1 million, mainly due to our purchase of the owner participant interest in a portion of the Colstrip Unit 4 generating facility in March of 2007.

Consolidated operating, general and administrative expenses were $121.1 million for the six months ended June 30, 2007, as compared with $130 million in the same period of 2006, again primarily due to lower transaction-related costs pursuant to the proposed BBI acquisition. The Company also incurred transaction-related costs of approximately $1.3 million during the six months ended June 30, 2007, versus $8.3 million for the six months ended June 30, 2006.

Now let's turn our attention to our balance sheet. Our balance sheet remains strong. The Company utilizes our revolver availability to manage cash flows of its seasonal business and deploys any cash on hand in excess of current operating requirements to reduce borrowings. As of June 30, 2007, the Company has revolver availability of $143.8 million.

Long-term debt at June 30 was $695 million compared with $706.7 million at year-end 2006. The long-term debt to total capitalization ratio was less than 48% as of June 30, 2007.

Regarding our cash flow statement, for the six months ending June 30, 2007, our cash provided by continuing operating activities totaled $136.2 million for the six months ended June 30, 2007, compared with $93.9 million during the six months ended June 30, '06. This improvement in operating cash flows was primarily due to an overcollection in the Montana electric tracker, decreased purchases of storage gas and higher net income, offset by an earlier pension contribution in 2007.

Capital expenditures were $52.6 million during the six months ended June 30, '07, compared with $45.3 million for the six months ended June 30, 2006. The Company paid dividends on common stock of $22.3 million during the six months ended June 30, 2007, compared with $22 million during the six months ended June 30, '06.

During the first six months of '07, the Company purchased an owner participant interest in a portion of the Colstrip Unit 4 generating facility for approximately $40.2 million and paid down long-term debt by approximately $33.9 million.

Now let's look at our 2007 earnings outlook. In light of the terminated merger with BBI, we are providing 2007 earnings guidance. NorthWestern estimates its basic earnings for 2007 to be between $1.45 and $1.60 per share. We expect to provide 2008 earnings guidance later this year.

Now let me turn it back over to Mike.

Thanks, Brian. It has been brought to my attention earlier in the call I misspoke, and I apologize -- our estimated earnings, as Brian just said, for the year for basic earnings per share are to be between $1.45 and $1.60 per share.

Talk a little bit about our plan going forward -- we are an operationally and financially solid company. We are fully capable of operating as a stand-alone organization. We are becoming stronger as our earnings and cash flow continue to grow. We are rated as investment-grade by the rating agencies that rate us -- Moody's, S&P and Fitch -- on our senior secured debt. Our total debt to capitalization is approximately 50%. And we have again increased our dividends.

Furthermore, we have growth opportunities. Those include investing in upgrades to our existing transmission and distribution systems; pipeline extensions to serve new ethanol plants in South Dakota and Nebraska; and investing in growth projects to provide transmission in the western part of the United States.

We're also continuing to bring supply stability to our Montana customers, including looking at owning rate-based regulated generation and adding renewables as part of our supply portfolio in all of the jurisdictions where we serve electricity.

The Company's near-term strategy will be to continue to focus on our operations, which are the lifeblood of the Company. Our operating and customer service decisions will continue to be made locally by the employees who know the customers and communities that we serve.

First and foremost in our operations is safety to our employees. Our accident incident rate is higher than that of our industry peers, but we are implementing a comprehensive safety program to improve our incident rates.

In the area of reliability, we do very well. Our electric reliability in South Dakota is in the top quartile of the industry, as ranked by IEEE benchmarking. Our electric reliability in Montana is in the second quartile, as ranked by IEEE.

In January, we received an award from the Edison Electric Institute for disaster recovery related to an ice storm and blizzard in South Dakota late in 2005. That award recognized companies that put forth outstanding efforts to restore service promptly to the public following a natural disaster. We were one of six utilities in the nation recognized with this award.

In customer service, we are the only combined gas and electric utility that has won the ServiceOne Award from PA Consulting three times. The ServiceOne Award recognizes utilities for providing exceptional service to their customers as determined by a set of 18 objective measures of excellence in customer care and identified by a panel of industry experts.

Regarding cost effectiveness, we constantly evaluate our cost structure, look for ways to improve that, and compare ourselves to our industry peers. We have been able to avoid rate increases for at least seven years in all of our regulated jurisdictions.

Obviously, over that time, our costs have increased, so recently we have filed rate cases in the appropriate jurisdictions to bring our rates in line with our current costs.

In the area of investment opportunities, we're strategically located in part of the U.S. for transmission expansion. We have opportunities to upgrade and provide replacement of our existing infrastructure to meet growing demand and increasing reliability expectations.

With respect to transmission, we have two projects already on the table. We will continue our efforts on the previously announced Mountain States Intertie Transmission Line, which is a 400-mile, approximately $800 million project to extend our 500kV electric system from southwest Montana to southeast Idaho. This line will be FERC-regulated. The return on equity is expected to be somewhere between 10% and 12%, and it assumes that we will have a roughly 50/50 debt to equity capital structure. The line is expected to be online in 2013.

We are also participating in a plan to upgrade the existing 500 system in Montana from Colstrip to the west. Our portion of this upgrade will be at least 75 million. It will add 500 to 700 megawatts of capacity to the line by adding some substations along the line and upgrading existing substations. It does not include the building of a new line. It's currently expected to be completed in late 2009 and online by early 2010. The return on equity for this project is expected to be somewhere between 10% and 11%.

These two transmission projects alone will require more than $875 million in capital expenditures in the next five years or so. We also plan to continue to evaluate opportunities for other FERC-regulated transmission projects in the west.

As I mentioned, we're proceeding with rate cases in each of our jurisdictions that will enable us to align our rates better with our current operating costs and capital programs. In South Dakota, we filed a natural gas case requesting an annual increase of $3.7 million in revenue. In Nebraska, we have a natural gas case filed requesting a $2.8 million annual revenue increase. And last week, we filed a combined electric and natural gas case with the Montana Public Service Commission requesting a total of approximately $42 million in annual revenue increase. We also have a FERC rate case pending which requests a revenue increase of approximately $8 million.

As I mentioned earlier, we have not filed a rate request since 2000 in any of our jurisdictions, and as a result we have been underearning our authorized return on equity in those jurisdictions and are applying to get that back in line.

Moving on to dividends, in recognition of our already-strong operating cash flows, the Board has increased our dividend this quarter by $0.02 a share. We will be paying a $0.33 per share dividend for the quarter ending September 30, 2007, which computes to an annual dividend of $1.32 per share.

And finally, as always, the Company continues to explore any and all practical ways to maximize shareholder value within the regulatory environment that we operate.

So in summary, NorthWestern Energy continues to show steady progress, improving its core regulated business. On July 24, 2007, BBI and NorthWestern terminated the previously proposed merger, so the deal is off. There will be no legal appeals or refiling or anything like that. We will proceed as a stand-alone company. And in the near term, we will continue to enhance our operations, get our rates in line with our costs, continue to invest in our transmission and distribution systems, and look at growing the transmission infrastructure in the west.

We are excited about the future of NorthWestern. We are a very important part of our local economies, and our commitment to our employees, customers and communities continues. With that, I will turn it back to the operator to give instructions for any comments or questions you may have.

(OPERATOR INSTRUCTIONS). John Alli, Zimmer Lucas.

Just a quick question -- if I can get a little more clarity on your transmission projects, just the path and size, and if you could -- would that be built inside one of your utilities or will that be a separate entity?

The upgrade to the existing 500 system, that is a jointly owned system. The investments are likely to be made by some number of the partners. And as I said, it is not a new line, but we are adding substation and control equipment, some serious capacitors and the like. And that would be included in the utility for use for both wholesale and retail service, as we have today.

Approximately how much capital is that?

It's about $75 million. The southwest Montana to Idaho project is in the permitting process. It has a possibility of a couple different routes, but it is approximately 400 miles long, a new 500kV transmission line estimated to cost in the range of $800 million. And it is likely that that would be separated from the existing asset base and held in its own entity.

Does that make you guys eligible for the bonus ROEs at FERC for such projects?

We will explore that. I don't know the answer to that right now, but we certainly will pursue it if we are eligible.

Steve Velgot, Cathay Financial.

Several questions, actually. Brian, in terms of the earnings guidance, could you just -- I know that was on basic shares, but give me an idea as to what factors could influence whether you come in at the high end or low end of that range and whether or not there could be anything in other income that might get you to the high end of the range.

I will start with your second question first in terms of other income. There is no anticipation that there is something in other income that will impact that. The range from the high to low end -- we did, as you know, file the rate increases. There is expectation in terms of the fourth quarter, some benefit of those rate increases. So we wanted to make sure the range was associated -- both the low and the high associated with the potential for rate increases. Also, obviously, in terms of our guidance, we assume normal weather.

And then I would like to better understand -- I know that the CapEx related to the 500kV transmission line is very back end loaded. But if you could just talk about the next several years in terms of increased CapEx with the Colstrip project and this 500kV line -- is that something that you could talk about?

And then I guess the last question was I wanted to know if there is any way you could put a timeframe or magnitude on this informal investigation that you informed FERC about issues in your gas business?

I will start with the capital expenditure piece. You're absolutely right, Steve, most of the CapEx associated with these growth projects are back ended. But we will be expecting to spend approximately $50 million in '08 and '09. '08 will certainly be more associated with the 500kV upgrade and then as we get into '09 portions of that will be shared between the two projects. Then from there, Steve, it goes up quite a bit in the back-ended years.

And then a question on either putting some sort of timeframe or magnitude on this informal investigation by FERC on your gas business -- it was just mentioned in your 10-Q.

We have self-reported a -- I will call it a technical violation of FERC rules. When and how they process that, there's no specific timeline that I can give you. The staff will look into it, review it, make some determination on how to proceed. And we are of course providing all the information and cooperating with it as necessary. But unfortunately, there is just not an established timeframe for those types of things.

Is the potential outcome of this that it could be some sort of one-time charge? Or is there the possibility that it could affect your earnings going forward in your gas business?

If there is a penalty assessed, which of course we don't know at this point if there will be, but if there is, that would be a one-time event.

Reza Hatefi, Polygon Investments.

I just want to clarify, from your 10-K, it seems like your normalized CapEx levels are in the $95 million range. So is it fair to assume that you would normally be spending about $95 million a year for the next four or five years and then incremental to that would be the $875 million?

Yes. In essence really this year we are spending approximately $90 million to $100 million in CapEx and maintenance CapEx. But we also did acquire the owner participant interest in the Colstrip lease this year -- is approximately $40 million additional CapEx for that. So again, you're getting up near the $150 million of CapEx spending.

If you take a look at next year in terms of the '08, and assume $90 to $100 million for that, and then the additional $50 million I talked about earlier, our total CapEx program is going to be approaching the $150 million range.

And just to clarify also on the transmission CapEx, would that be based -- would the bulk years of that CapEx be basically 2010, '11, '12 timeframe? Or is that a fair way to think about it?

Yes, I think actually it is going to be increasing in those years, 2010, and then higher in 2011 and the largest year is 2012.

And could you just go through some of the major issues in the rate cases besides ROE or a higher rate base? Are there any other sorts of interesting issues that we should think about?

Well, we just filed those and the process allows interested parties, intervenors and the staff to ask questions, perform discovery. They are just starting that process, so we don't know what issues might be raised. Obviously, we file based on the regulatory norms of what we think is reasonable and necessary. They are given a chance to look at it and they will state whatever positions they have, but we won't know the answer to that for some time yet.

Are there any sorts of true-up mechanisms or any major changes to depreciation or any sort of changes versus just the standard ROE rate base-type look?

We do have certain tracking or pass-through mechanisms in each of our jurisdictions. We're not proposing any new ones or changes to the ones that exist in these cases.

Ted Wagenknecht, DDJ.

(technical difficulty) being a stand-alone company going forward. I understand that you guys are frustrated after this long process. But it was a pretty competitive process when the Company was being sold. And I understand your desire to want to go ahead on a stand-alone basis after that. But are you saying that if MPPI comes back or similar would come back that you wouldn't entertain discussions?

As always, if someone makes a proposal on the Company, the Board in the exercise of its fiduciary duty will consider that, both in terms of what is fair for shareholders and in light of the regulatory expectations that have been -- we just at this point have determined that this deal has been terminated and our plan is to go forward as a stand-alone, operate this Company well and deliver value to shareholders over time that way.

(OPERATOR INSTRUCTIONS). Steve Fleishman, Catapult Partners.

You may have said this, but within your guidance for this year, how much one-time costs would you say are in there for merger-related costs and just other costs generally associated with that, one-time-ish in nature, so to speak?

In terms of the guidance we are providing, we are not reflecting any one-time costs. I think you've seen that our costs this year in terms of transactions that we laid out in the Q were not that significant. So there's really no one-time items in the numbers we provided.

And that obviously is a basic guidance. What is the fully diluted?

One thing we need to focus on, the reason we provided it in basic is, as you know, we have warrants that are going to be exercised here sometime in the future. So in light of where ultimately fully diluted will be, we're not necessarily sure in terms of how much of those warrants we exercise. So we provide it as basic.

And you had mentioned -- you obviously raised the dividend. You mentioned looking at ways to enhance shareholder value. Is that the kind of thing you would be looking at or are there other things you're looking at?

I think we have covered what we are looking at. I just wanted to highlight, we do have quite an investment opportunity both in existing infrastructure upgrades and new infrastructure development.

Does that make it unlikely you would do a share repurchase? Or is that still something that you could do?

The Board has not made any evaluation or determination of that at this point.

Mohsin Gadit, Fore Research.

My questions have been answered. Thank you.

John Alli, Zimmer Lucas.

Just one more follow-up question, actually two. One, could you speak a little bit more about your renewable opportunities and where you plan to go on that? Do you prefer to buy or build or contract?

Two things. In Montana, the state has adopted a 15% renewable portfolio standard by the year 2015. We currently get about 8% of our energy requirement from renewables, specifically wind power. We have been working on how to integrate more of that. Bear in mind those costs are passed through as supply costs and the Company under the current construct does not earn margin on supply costs.

In South Dakota, they haven't developed a specific portfolio standard, but the regulators are encouraging all the utilities to take a look at including of renewables. We are contemplating a pilot project to see what the interest is out there and at this point haven't determined whether we would be a purchaser from another developer or own that ourselves.

The other question is, in your guidance, what earned ROEs on a regulated basis are you assuming at each of your utilities, or each of the jurisdictions, rather?

I haven't calculated that for the range of the guidance at this point in time.

What were you earning in South Dakota and Nebraska this year?

In South Dakota and Nebraska, in terms of what we were earnings is more around the 5% in South Dakota and closer to 3% in Nebraska.

And Montana?

Around 6%.

Steve Velgot, Cathay Financial.

Just a question on -- back in your 10-K, Brian, you had given real specific guidance about your unregulated electric gross profit expectation. Is that the same expectation that you have in current guidance? Or is that unregulated electric looking a little better than the $52 million that you had in your 10-K?

I think we're still in line with what we provided in the 10-K.

There are no further questions in queue. Please continue.

Thank you, operator, and thanks to all of you for participating in the call today and for your interest in NorthWestern.

That concludes our call, so if there is any other questions, you can always call Dan Rausch. I am at 605-978-2902. With that, we will end this call.

Ladies and gentlemen, this conference will be available for replay at 12PM Central Time and will remain available through September 8. The dial-in number for the replay is 1-800-475-6701, access code 880662. (Repeats numbers).

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