NorthWestern Energy Group Inc (NWE) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the NorthWestern third 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. (OPERATOR INSTRUCTIONS) This conference is being recorded. I would now like to turn the conference over to your host, Dan Rausch. Please go ahead.

Good morning. And welcome to NorthWestern Corporation's September 30, 2007 quarter-end financial results conference call and webcast. NorthWestern's results were released Wednesday, and the release is available on our website at www.northwesternenergy.com. We also filed our quarterly report on form 10-Q, Wednesday.

Joining us today on the call are Mike Hanson, President and CEO, Brian Bird, Chief Financial Officer, Tom Knapp, General Counsel and Paul Evans, Treasurer.

This presentation contains forward-looking statements within the meaning of the Safe Harbor Provisions Act 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 this presentation, those joining us by teleconference will be able to ask questions. A replay of today's call will be available beginning at 2:30 Eastern Time today through December 2nd, 2007. To access the replay, dial 800-475-6701, then hit access code 892085. I'll now turn it over to President and CEO, Mike Hanson.

Thank you, Dan. Thanks to all of you for joining us on the call this morning.

We've had another solid quarter and certainly strong performance for the first nine months of 2007. Net income for the third quarter of '07 improved by 15.6% or $0.04 a share over the same period in 2006. Our year-to-date net income has improved by 15.9% or $0.12 per share over the same period in 2006. Operating income for the third quarter of 2007 was $33.2 million. Our year-to-date operating income has improved by 14% to $95.8 million over the same period last year.

Brian Bird, our CFO, will go through the financial highlights in a little more detail shortly. But I would like to add a couple other comments. As we talked about on the last two or three calls, our company's been focusing on operating the company very well. We have better than national average reliability. In fact, we're ranked in the first quartile for reliability in South Dakota. That's as ranked by the IEEE benchmark. We're in the high second quartile for reliability in Montana as ranked by IEEE.

In addition to that, our rates to our customers are lower than the national average. We recently won the ServiceOne Award for fourth year in a row. The ServiceOne award is given annually for companies that demonstrate excellence in customer service. We're the only utility in the U.S. to be honored four years in a row.

Moving to dividends, the board announced earlier this week we will be paying dividend of $0.33 a share for the quarter ending December 30, 2007. This computes to an annual dividend of $1.32.

So, with that, let me introduce Brian Bird our Chief Financial Officer to discuss our third quarter results in more detail. Brian?

Thanks, Mike. Let me first talk about the quarter.

Consolidated net income for the quarter, ended September 30, 2007, was $13.2 million compared with $11.4 million for the third quarter of 2006. Gross margin was up $3.1 million, primarily from stronger performance from our regulated electric business as a result of higher volumes due to warmer weather, customer growth, and implementation of interim rates for our FERC-regulated electric transmission business. This improvement was partially offset by our nonregulated electric business, which is impacted by lower average contract prices year-over-year.

Our operating general administrative costs were flat for the quarter with reductions in unregulated lease expense and lower BBI transaction-related costs versus last year, offset by a $9.3 million insurance recovery in the third quarter of 2006. Property taxes increased $1.5 million over third quarter last year and depreciation was up $1.9 million over third quarter 2006. As a result of the improvements in gross margin, the higher costs, consolidated operating income for the quarter was relatively flat.

Below operating income line, the company experienced lower income taxes year-over-year as previously nondeductible BBI transactions costs became deductible upon the termination of the agreement.

Now , for the nine months, ended September 30. Consolidate net income was $34.8 million, an increase of $4.8 million or 16% over $30 million for the same period in 2006. This improvement was primarily related to higher margins, decreased operating general and administrative expenses, offset by increased property taxes and depreciation expenses and a reduction in other income. Consolidated operating income for the nine months, ended September 30, 2007, was $95.8 million as compared with $84 million for the same period of 2006.

On a segment basis, the regulated electric and gas businesses's stronger margins contribute to this improvement. Whereas, the unregulated business operating income has been relatively flat for the nine months year-over-year. This is mainly attributable to lower margins and higher coal costs offset by lower lease expense.

Now let's move our attention to cash flows. Cash flow for the company continues to be strong. For the nine months, ended September 30, 2007, cash flow from operating activities was $173.9 million, a $38 million increase over the same period last year. This strong cash flow has allowed us to maintain a high level investment in our utility business as well as to continue to pay down debt. In order to increase earnings in cash flows, the company earlier this year, acquired the the Mellon ownership interest in the Colstrip lease impacting our nonregulated business.

Also earlier this week, we signed a purchase-and-sale agreement to purchase the remaining ownership interest. This reduced lease expense by $14.2 million annually, but increased interest expense by about $10.5 million and increased depreciation expense by $3.4 million. The bottom line is that the lease buy out is earnings and cash accretive in 2008 and improves each year after as the debt amortizes.

Regarding our credit ratings, our senior secured notes are now rated mid-'BBB 'by two of the three rating agencies thats rate our debt. And, recently, S&P changed the company's long-term corporate credit outlook to 'positive' from 'stable.' Regarding our 2007 earnings outlook, we estimate our basic earnings for 2007 to be between $1.45 and $1.55 per share. The guidance anticipates normal weather in each of our service territories for the rest of 2007.

The warrants that impact our share count expired yesterday, and according to our preliminary estimate, it appears the number of shares outstanding is now 39 million shares. In addition, we believe we will still be within our EPS range on a basic-share basis with the impact of the warrant exercise. We anticipate the number of shares used to calculate our basic earnings per share to be 36.7 million shares and to calculate our fully diluted earnings per share to be 37.3 million shares.

Now let me turn it back over to

Thanks, Brian. I would like to briefly discuss our outlook for the future.

NorthWestern will be proceeding as a stand-alone company. We are processing delivery-rate cases that is the transmission and distribution of our rates in each of our jurisdictions. This will enable us to to better align our rates with current operating and capital costs. In South Dakota, we have a natural gas delivery case filed requesting $3.7 million annual revenue increase. In Nebraska, we have a natural gas case pending, which requests $2.8 million annual revenue increase. In Montana, we have both electric and natural gas case pending with the Montana Public Service Commission, which requests a total of approximately $42 million in an annual revenue increase. We also have a FERC transmission-rate case pending, which requests the revenue increase of approximately $8 million. We have not filed a delivery rate case in any of our jurisdictions since 2002-- Or excuse me, 2000.

We expect the final decision on the South Dakota and Nebraska rate cases later in 2007. We expect a final decision on the FERC transmission case, probably in the first quarter of 2008, but I would point out that we have been collecting the FERC rate increase on an interim basis since June 1st of this year, 2007 . For the Montana electric and natural gas cases we expect a final order from the Montana commission in late April, 2008. As I mentioned earlier, our customer rates are better than the national average in each of our jurisdictions, and they will remain there even after the rate cases.

In the area of investment opportunities, our current customer base and loads continue to grow, creating an opportunity to invest in our existing service territory. We have steadily increased our capital expenditures in our service territory over the past three years to meet these increased customer and load demands and to maintain reliability.

In addition to that, ethanol plants continue to be built in our South Dakota and Nebraska service territories, and we are investing in gas pipelines to serve these ethanol plants. The capital opportunity, we estimate to be up to about $40 million of capital investment over the the next couple of years. We protect our equity investment in these pipelines by securing letters of credit sponsored by the owners against the investment in those pipelines.

We previously mentioned two areas that dry the growth transmission development and generation that are well beyond the ordinary growth of our territory. Let me speak to each of those briefly. With respect to transmission, we've announced two projects-- We're continuing our efforts to develop what we call the Mountain States Transmission Inter-tie Line, which is a 400-mile, approximately $800 million capital project to extend a 500 kV electric transmission line from Southwest Montana to Idaho. This line would be FERC-regulated. The return on equity is expected to range between 9 and 13%, and it assumes that's it will be financed with the 50/50 debt and equity capital structure. The line is expected to be in service during 2013.

We also plan to pursue the upgrade of the existing 500-line associated with Colstrip Generation in Montana. That is a jointly-owned facility. The partners are evaluating participation. Our portion of the upgrade should be at least $100 million. The return on equity associated with that is expected to range between 10 and 11% and again assumes a 50/50 debt equity capital structure. This project is currently expected to be completed in 2010 and should be online sometime in 2011.

In addition to transmission, we're evaluating building a natural gas generating plant in Montana. This past year, the Montana legislature passed a bill which would allow NorthWestern to own generation and rate base provided that it is part of a commission-approved supply plan. We're evaluating approximately a 100 to 150 megawatt gas-fired generation facility to be used for firming of wind power and to meet customer demands during high periods. Montana Public Service Commission must approve the proposed generation facility in advance of our construction. We expect the commission to make a decision on whether to approve the project during 2009. Our current estimate is a plan like that would cost approximately $100 to $125 million to be put in service and if that plan is built, it's expected to be online in 2010.

In summary, we're very excited about our future prospects. We have very good growth opportunity in capital deployment and earnings expected from our existing territory, and we have great growth prospects in terms of new transmission and generation development.

Finally, we will be attending the EEI financial conference next week. We're going to be presenting on Tuesday, November 6th at 9:00 a.m. Eastern Time and the presentation will be webcast. In addition, we will be filing the slides related to that presentation on an 8-K with the SEC and we'll place the presentation on our website. We thank you for listening today and look forward to seeing some of you at the EI conference next week. With that, I'll turn it back to operator to give instructions for questions and

Thank you. (OPERATOR INSTRUCTIONS) One moment, please. Your first question comes from the line of Paul Ridzen from KeyBanc. Please go ahead.

Good morning, how are you?

Good morning, Paul.

Good morning, Paul.

Do you have any sort of dividend re-investment that could move your diluted share count around at all?

We don't at this time, Paul. But in terms of the dilution from warrant exercise, things that-- Point out that our board is well aware of that issue. We've been thinking about alternatives for dealing with it. In part, we needed to see what warrants were exercised with cash or cashless. We'll monitor that situation.

Is 39 a good share count to use for '08 or could you do something to lower that?

I think to Mike's point, There are some things we could do to lower that, but I think where we stand today-- I think that could be a good share count to use.

And, beyond the plant you've identified, is there incremental generation investment opportunity?

Well there could be going back to the default supply. There could be longer-term opportunities for other types of supply that would be owned by NorthWestern, but again it's got to be part of a commission-approved supply plan.

Our focus right now, and most immediate need, is gas-fired generation in South Dakota. We don't foresee the need for significant additional base load plans in the foreseeable future, but we may have a need for some peaking facilities in a three or four-year timeframe.

And just lastly, when do we get testimony in Montana that could potentially allow the commission to approve interim?

Well, the intervenor testimony. That's the other parties, is due on November 9th. And again, that will just state their position and we'll have an opportunity to rebut and respond to that in December. I would expect the commission to address the question of interim rates sometime in late November or, more likely, in December.

Thank you very much.

Your next comes from the line of John Alli from Zimmer Lucas. Please go ahead.

Good morning, guys.

Good morning, John.

Congrats on the quarter. A quick question-- If you could just go over the lease buy out at Colstrip? Is that incremental to the one you completed earlier this year?

Yes, if you remembered, John, there were really two ownership interests, Mellon was for approximately a third of the megawatts and the GE component was for the other approximate two-thirds. As you know, we bought out the Mellon interest earlier in the year. This is for the remaining. So we will have the full-ownership participant interest.

How much is this?

In terms of total megawatts?

No, I mean how much did you pay for it ?

We paid approximately $128 million. That includes some debt of approximately $128 million.

Alright. Thank you very much.

Your next question comes from the line of Diego Lozada from Fortress Investments Group.

Hi, Dan, and hi, guys. Congratulations on the quarter. A couple of questions-- If you could, please, provide an update on your CapEx program and if you-- You've provided some guidance in the past-- Wondering if you have any changes to that guidance, in light of the acquisition of the remaining stake in Colstrip-- As well as your updated view on CapEx, if you could do that. And also, if you could just give us an update on the situation on the open season and anything related to the permitting of the new transmission line project?

I'll start with the guidance question. The GE ownership participant buy out is expected to be completed approximately at year-end, so it will not have an impact on this year. Regarding 2008 guidance, we are not prepared to provide 2008 guidance at this point in time. Mainly because of the large range of possible outcomes on the rate cases. If we have more certainty around the rate cases, we will be prepared to talk about 2008 guidance. And also, we'll be able to incorporate any growth projects into that plan at that time.

Regarding the CapEx information, we provided, most recently in the the Morgan Stanley presentation we released, we've given an idea in term of where we're going with CapEx spending. We'll do some more of that at EEI, but our expectation is, 2008, to spend approximately $150 million, and then it ratchets up from there. If you need more details, then I can't provide that at this point in time.

Can I follow up on that? If your original estimate for '08 was in range of $95-$98 million. What's the difference attributable to?

In essence, what we're going to spend in '08 is approximately just over 100-- Around $77 million in your CapEx for our existing service territory for our utility business. The incremental difference above that is going to be associated with the development of the transmission and generation projects that Mike mentioned earlier. I would tell you that going into 2009 and 2010, that's where the capital dollars ramp up considerably. In fact, you're going to spend approximately 250 and approximately 350 in those two years respectively.

Your next comes from the line of Steve Fleishman from Catapult Partners. Please go ahead.

Hi, guys.

Hi, Steve.

Hi. Couple of questions. First, on the additional lease buy out. The numbers that you gave for the lease savings and then the higher interest in DNA , it looked like it was about break even. Is that like the first full year of those

Yes. It's an approximated $300,000 benefit in the first year, but if that [debt amortizes], Steve, it gets significantly better. And this is on top of, by the way, the benefits that exist at Colstrip for us in the 2011 time period. As you know, the cash payment associated on an annual basis drops significantly in that time period. So this is incremental to that.

Okay. That's the cash associated with the lease payment that drops down. Right. Okay. But just to clarify, when did this get implemented? So, this would be as of this past week?

We just announced the signing of a PSA in our press release, so--

Okay. When was that-- Is that-- Did that close, then?

No, we expect that this will close at the end of year.

Okay, so this is the '08, and then, every year it will get a little better if you pay off debt and the interest component goes down?

Correct.

Got you. Okay. . kay. Second question is on the share count. On the share count, what you said is that the basic is 36.7 That's for this year and fully diluted to 37.3. That's for this

That'll be-- For the end of this year, correct. Okay.

But going into '08, you're now at 39. However, maybe you'll try and get that share count down.

We talked about that. That's something that we'll continue to look at and will be evaluating.

I'll just tell you, Steve, and maybe I could make this a little more clear. The board has been discussing this. As we said, we're aware of that and we're certainly going to look out for our customers' interest. We've been taking the proceeds for those-- Exercise for cash, and then, and investing those and earning assets but as far as options including a share repurchase or under consideration. We do not have a final decision or anything to announce today. The board will continue to monitor the share count and the implications of it.

Okay. Yeah, because I was thinking it was going to be a little bit lower. Okay. And just on the Montana rate case, when we get the intervenor testimony in a couple of weeks, what do you think the key issues will be that the intervenors will bring up in the case?

Well, like all cases, they're going to look at our costs and expenditures and the like during the test year. Don't expect significant issues there but they traditionally might challenge some of them. But the bigger issues that are almost always present are cost of capital, capital structure, working capital or cash impact.

Okay. One issue that I was curious on just on goodwill in the case. Have you guys asked for the goodwill to be put in rates or not?

No, under Montana rules you're not allowed to include intangibles in your rate base or earn a goodwill. It's only on the intangible assets.

So you've excluded goodwill from your filing ?

Yes.

Okay. Thank you.

And at this time there are no further-- Oh, I am sorry you do have a question from Tom Wolf from Sawtooth Investment Management.

Al right. Just a couple of quick questions. First of all, you have told us previously that your long-term ratio goal is 60 to 70%. I'm curious how you see that being in the near to midterm with the CapEx growth plans ramping up here over the next few years?

We anticipate that as our earnings grow, we could continue to stay in that band even with the CapEx program that we're laying out for you today.

Excellent, and second question. I understand and appreciate the fact that you are focusing on managing and running the company at a stand-alone basis. At this point, I think that's the right thing to do. But down the road, how big of an impediment do you think it is if a buyer came to you down the road given the Montana regulators fast approach with Babcock and Brown?

I would just say, Tom, as always-- Well, let me just put this- Going forward, we think we can meet the needs of the business and create shareholder value as a stand-alone. These large expansion projects we're talking about--They're economically viable we can fund those and so on. If there is a buyer out there that comes forward with an expression of interest, the board, as always will take a look at it and evaluate it and consider whether that's in the best interest of the company and it's shareholders or not. At this point, we're not counting on that. We're not looking for it. We're going forward and creating shareholder value through operating the company well and growing it.

Okay. I appreciate that and I think that's great, but do you think that it's even feasible that Montana regulators would approve any type of deal in the next two years if that were to come up.

I would encourage anybody. You really have to look at the order that they issued. I can't say that's feasible or not. I do believe that it would be difficult for someone to put together an offer that would meet the regulators' expectation while bringing a fair value to our shareholders, but if someone wants to-- Has an idea and a different look at it,, they certainly may make the proposal.

Okay. Thanks guys, appreciate your efforts.

And you have a follow up from Paul in Ridzen of KeyBanc. Please go ahead.

Wondering if you had any follow up on your expectations for unregulated electric gross margin other then what you've put in your K?

In terms of gross margin, I would say that now the plant is heavily contracted. We have continued to see rising coal costs at the facility, but I'd also say that's at the gross margin level. But I would also tell you that at the operating income as our lease expense has improved there. I expect that over the next couple of years will be relatively flat at that -- at Colstrip. The big benefit in the future years. Now again, talking about the lease buy out from GE and expect the EBITDA to actually improve at Colstrip in the next several years.

Thank you.

And at this time there are no further questions.

All right, well thank you, again, everyone for your interest in NorthWestern and joining us today. Hope to see most of you or many of you that are there at the EEI this coming week.

That concludes our call. Greg, if you could regive the replay instructions things like that.

Thank you, ladies and gentlemen, this conference will be available for replay after 1:30 central time today through December 2nd. (Operator Instructions) That does conclude your conference today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.