NorthWestern Energy Group Inc (NWE) 2007 Q4 法說會逐字稿

Thank you for standing by and welcome to the NorthWestern Corporation Year-End Financial Results Call. At this time, all participants are in a listen-only mode. Following the presentation, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to your host, Dan Rausch. Please go ahead.

Good morning and welcome to NorthWestern Corporation December 31, 2007 year-end financial results conference call and Webcast. NorthWestern's results have been released and the release is available at our Web site at www.northwesternenergy.com. We also filed our 10-K on Tuesday. Joining us today in our offices in Sioux Falls, South Dakota are Mike Hanson, President and CEO; Brian Bird, Chief Financial Officer; Kendall Kliewer, Controller; and Tom Knapp, General Counsel.

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 day. 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 forth coming 10-Qs, recent Form 8-Ks and other fillings 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.

A replay of today's call will be available beginning noon Eastern Time today through March 28, 2008. To access the replay, dial 800-475-6701 and hit access code 912551, and that code again is 912551. A replay of the webcast can also be accessed from our Web site. I will now turn it over to President and CEO, Mike Hanson.

Thank you, Dan and thank you all for joining us here this morning. I would like to give you first some highlights for 2007. Our net income, gross margin and operating income all significantly improved over 2006. Brian Bird, our Chief Financial Officer will go over the financial results in more detail in just a minute. But I would like to point out that we are very well positioned for further improvement and growth in 2008.

Some of the highlights for '07 include that we have reached rate settlements in all three of our state jurisdictions. In South Dakota, we have received approval for a natural gas rate increase of $3.1 million annually. In Nebraska, we received approval for a natural gas rate increase of $1.5 million annually. We have reached and signed a proposed stipulation with the Montana Consumer Council that, if it is approved would result in a rate increase for Montana electric and gas rates of a total of $15 million annually. That stipulation is pending the approval of the Montana Public Service Commission. But we began collecting this increase on an interim basis on January 1st.

Just last week we announced that we have a filed a rate case settlement with the Federal Energy Regulatory Commission. The annualized gross margin increase from this settlement will be approximately $3 million. We have been collecting interim rates under the federal jurisdictions since May 18th of 2007 and recognized about $1.6 million in gross margin during the year consistent with that filed settlement. We expect a decision from FERC in the second quarter. The rates in all these jurisdictions will be in place for all of 2008 assuming that we do receive the pending regulatory approvals of the Montana Public Service Commission and the FERC. During '07 we also completed the purchase of the lease interest in Colstrip Unit 4, a coal plant in Montana, which resulted in a pre-tax earnings accretion of approximately $4.8 million annually and immediately increased our cash flows as well.

And finally, the Company's credit outlook was upgraded to positive by Standard & Poor's rating group and Moody's Investor Services is in the process of reviewing a possible upgrade for our unsecured debt. Now let me turn it over to Brian to discuss our financial results in more detail. Brian?

Thanks, Mike. Consolidated income was $53.2 million or $1.45 per basic share and $1.44 per diluted share for 2007 compared with the consolidated net income of $37.9 million during 2006. So our net income grew by about $15.3 million. We experienced a number of positive impacts to our earnings during 2007.

First, the largest impact was the absence of approximately $12 million after-tax, negative impact that the Ammondson verdict had on our 2006 result. Also in 2007, we experienced lower costs versus 2006 of about $7.5 million after-tax related to the now terminated merger with BBI.

In 2007, our South Dakota natural gas rate case resulted in an after-tax reduction and expense of about $7.7 million in cleanup costs related to various manufactured gas plants. Also in 2007, we were able to reduce our legal costs by about $3 million on an after-tax basis. Earlier Mike highlighted that we have reached a tentative settlement on the FERC rate case. During 2007, we recorded about $1 million on an after-tax basis related to that anticipated rate increase. Conversely, there were negative earnings impacts during 2007 when compared with the results of 2006.

During the third quarter of 2006, we received an insurance recovery of about $5.7 million after-tax, reducing operating expenses in the third quarter of 2006 that did not carry over into 2007. During 2007, we experienced pay increases, lower capitalized labor and had a full year effective increase in stock-based compensation, all of which amounted to about a $6.7 million on an after-tax basis when compared with 2006.

In 2007, we experienced an increase of about $3.5 million after-tax and property taxes when compared with 2006. Obviously, there are other factors affecting net income in 2007, but all of those net to an amount less than $0.5 million on an after-tax basis when compared with 2006.

Our balance sheet and cash flow remains strong. At year end, cash and cash equivalents were $12.8 million compared with $1.9 million last year and we ended the year with revolver availability of $158 million.

Long-term debt at year-end 2007 was $806 million compared with $706 million at year-end 2006. This increase was due primarily to $100 million loan at our Colstrip lease holdings subsidiary for an acquisition of a former lease interest in the Colstrip Unit for a generating facility.

The long-term debt to total capitalization ratio for the Company was approximately 49% at year-end. Cash provided by continuing operating activities totaled about $202 million during 2007 compared with $165 million during 2006.

This increase was due mainly to an increase in net income over 2006 and timing of our electric tracker collection. We used about $256 million of net cash for investing activities in 2007. We had capital expenditures of $117 million during 2007 compared with $101 million in 2006 as we continue to experience organic growth. Also the Company completed the purchase of its leased interest Colstrip Unit 4 for $145.2 million.

Financing activities provided us with $65.4 million in 2007. This included $68.8 million in proceeds from the exercise of warrants and the issuance of $100 million by a subsidiary in connection with the purchase of a leased interest in Colstrip Unit 4. These were offset by dividend payments of $47.3 million and other debt repayments of $53.5 million.

Now let us turn our attention to 2008 earnings outlook.

NorthWestern estimates our fully diluted earnings for 2007 to be between $1.60 and $1.75 per share. The primary assumptions include an improvement of about $0.32 per share year-over-year related to the impact of the rate cases in the Company's service territories assuming we get a regulatory approval on proposed rate settlement with the MPSC and FERC. Other assumption, unregulated electric, we see about a $0.9 per share decrease related to lower average pricing on forward sales contracts. That is somewhat offset by a $0.5 share increase in our unregulated electric segment related to the buyout of the former leased interest in Colstrip Unit 4. Lastly, we assume approximately 39.5 million shares outstanding on a fully diluted basis for 2008 and normal weather in the Company's electric and natural gas service territories in 2008.

Now let me turn it back over to Mike.

Thanks, Brian. I would like to talk a little bit about our outlook for the future and how we intend to grow the Company. We continue to make significant capital investments to maintain our existing systems and which is driven by our steady organic growth and is increasing our rate base and earnings potential for the future.

In addition to our base level of capital investment, we have several other very significant investment opportunities that I would like to update you on. I'll start with our opportunities in Montana. During 2007, the Montana legislature passed a bill called House Bill 25, which allows for utilities to again own generation in rate base. Up to that point, we were not allowed to own generating plants in traditional rate base.

We own and operate approximately 7000 miles of high voltage transmission lines in Montana, but we are one if not the only utility in the region lacking regulating resource generators within our transmission control area. Regulating resources encompass several kinds of electric production but basically are intended to cover ancillary services like voltage frequency regulation, reliability requirements, load following et cetera around the clock on a moment-by-moment basis.

Currently, NorthWestern Energy imports these resources from outside of our control area. But due to rising regional demand, those kinds of resources are becoming harder to obtain and therefore more expensive. As a result, we recently proposed a new natural gas [fired] generating plant in Montana, which we estimate to cost in excess of $100 million. The project will be located adjacent to our Mill Creek substation near Anaconda, Montana. This location was chosen because of its close proximity to electric and natural gas transmission facility. The plant would provide regulating reserve capacity for electric supply and with a system providing adequate regulation capacity to maintain the federal reliability standards within our balancing area. Assuming that this project is determined to be cost effective and beneficial, we will seek an air quality permit from the Montana Department of Environmental Quality and we will submit an application for approval from the Montana Public Service Commission prior to construction, which is allowed and contemplated under Montana regulation.

Both regulatory approvals are necessary prior to proceeding with construction. We would anticipate filing a request for Montana Public Service Commission approval for the plant in the second quarter of 2008. We anticipate completion of the project to be somewhere in mid to late 2010.

Another core service that we provide is transmission services. Our Montana Transmission assets are very strategically located to take advantage of the potential transmission grid expansion in the Northwest part of the United States. There are a number of potential transmission pathways and more than a dozen points of interconnection with major players in the Northwest. Regional load growth forecast remains strong, allowing us to leverage our strategic geographic advantage relative to transmission. Even with the uncertainties surrounding near-term coal development, which of course relates to environmental concerns, interest in our transmission system remains high. Driving this interest is that there are approximately 4000 megawatts of generation connection requests to our system pending in Montana. Of that, only about 20% relate to coal fired generation.

Natural gas generation represents about 20%, wind generation about 35% with the remaining 25% from various sources including power marketers. Most new generation in Montana will need to be exported since the state already produces more than what it uses. We will focus on the pass west out of Montana and Southwest out of Montana. We have begun citing and permitting work on two significant electric transmission projects, I will give you a quick update on each. We are planning an expansion of the existing Colstrip 500KV System that would increase capacity by 500 to 700 megawatts. That project is anticipated to require a capital investment of up to $250 million.

There is also a proposed new 400 mile 500 KV line from Southwestern Montana to Idaho with the potential capacity of 1500 megawatts, which is currently estimated to be about $800 million project. Let me provide an update first on the 500 line upgrade. That facility is owned by a number of participants. We are the only partner currently planning to move ahead with the upgrade. We can do part or all of this, the upgrade is not new line or does not require new rights of way but essentially is putting in some control equipment and substations that would increase capacity. It is scalable; we can do that in modular units to do part or all as I said, up to $250 million of investment.

During '08, we are going to be performing feasibility studies, continuing the planning process with the Western Electric Coordinating Council and we will be negotiating long-term firm transmission agreements. We would expect this facility to be completed in 2011. With respect to the 500KV transmission line we proposed to build from Southwestern Montana to Idaho, that project is known as the Mountain States Transmission Intertie, MSTI or MSTI as we refer to it. The MSTI line would extend from a new substation to be built near either Townsend or Garrison, Montana to the existing Borah, Brady or Midpoint substation located in Idaho. The transmission line's purpose is to meet request for transmission service from customers and relieve constraints in the high voltage network in the region.

The MSTI line provides additional capacity on what are historically constrained path and opens up new markets in Idaho, Utah and the Southwest U.S. An initial citing study identified a number of reasonable alternatives for the route and we are in a process of selecting a preferred route and are down to two alternative routes. Next steps for this project, we will continue to monitor the interest of participants for transmission reserve capacity, I would point out that this project is also scalable to match to demand and accordingly the final size of the facility will depend on the demand.

We are also evaluating the possibility of a phased in construction period to match the capacity and demand as those things ripen. During '08, we plan to file all appropriate regulatory and environmental permitting applications including an application at FERC for a tariff related to the facility. Based on our current timeline, we would expect the line to be in service by 2013.

Now, moving our attention to South Dakota, due to continuing low growth and the tightening of capacity markets in the MAPP region or Mid-Continent Area Power Pool region, we are evaluating the need for an addition of electric capacity, both peaking and base load additions within our South Dakota service territory.

We currently estimate the capacity need to be somewhere in the 50 to 75 megawatt range. We don't have a specific project to announce at this time, but we continue to evaluate the need for electric capacity and as we continue to set new peak demands in our South Dakota region during the summer.

Load growth continues to be robust in South Dakota. We see the need to acquire additional base load energy resources on the horizon as well. Our peaking needs would be somewhere in the vicinity of 2010. Base load, we would expect to be somewhere around 2013 or 2014. In addition, in South Dakota and Nebraska, we continue to see demand for industrial use mostly new ethanol and bio-diesel facilities coming into the region. We expect to deploy up to $20 million in capital over the next three years to continue natural gas pipeline extension to these projects. Just giving you an example, just two weeks ago, we began delivering natural gas to a new corn ethanol plant near Marion, South Dakota, which is projected to consume about 3.9 Bcf of gas a year. It will provide us with incremental new revenues of over $1.3 million and net income estimated to be about $600,000 from that project.

In May, we also anticipate completion of a line to new ethanol plant near Aberdeen, South Dakota. That project would consume about 3.1 Bcf and provide about $600,000 of annual revenue and net income of about $300,000. We are going to continue to monitor several additional proposed projects in the region, but this is a strong growth opportunity for us as well.

Moving to another announcement we recently made, we have retained Credit Suisse to help us review strategic alternatives regarding our investment and interest in Colstrip Unit 4. Credit Suisse will help us analyze all alternatives with respect to this asset and determine how to optimize the value of it. We expect the strategic review to conclude some time in the first half of 2008.

Touching on our dividend, we declared a quarterly common stock dividend of $0.33 per share payable on March 31, 2008 to common stock shareholders of record as of March of this year. So, in conclusion, a summary, NorthWestern Energy continues to show steady progress in improving and growing its core regulated business. Our earnings and cash flow are solid and continue to improve. We intend to deploy our cash to grow the Company with growth projects within our core business that enhance shareholder value. Lastly, we realized that as a regulated utility, we are a very important part of the local economies in our service area. Our commitment to our employees, our customers and the communities we serve will continue.

So, with that I would like to turn it over to the operator to give you instructions for questions and comments. Cindy?

(OPERATOR INSTRUCTIONS) Thank you and we will go to the line of Paul Ridzon from KeyBanc.

Good morning, can you hear me?

Good morning, Paul.

Good morning. Just wondering what you are seeing with regards to markets for generation assets given what's happening in the credit markets. Do you still feel as good as you did when you first initiated the process?

I think short answer, Paul, obviously everyone's monitoring the environmental issues, monitoring government action or proposed action relative to carbon emissions, but the reality of it is the reserve margins are shrinking in just about everywhere in the country. The demand continues to grow and remain high and so values for generating plants remain quite strong.

What did you see with regards to weather in '07 kind of relative to normal, do you have kind of any net income impacts or any of that sort of analysis?

No, Paul, we haven't. I would tell you though generally we did experience a hotter summer that impacted our electric business, but that was offset by still an overall, considering the total winter season, a mild, milder weather, which impacted negatively our gas business.

Do you think net-net just about neutral?

That's about right.

Great. And then lastly, I noticed your guidance is premised on 39.5 million shares. You're sitting on a pretty strong balance sheet. I know you want to get your unsecured debt up to investment grade, but what are the opportunities to kind of put more leverage on the business to the benefit of shareholders.

I think as we grow the business, Paul, we will put in place the appropriate capital structure and of course would utilize leverage to do that. Obviously, there is no reason [without] ability to deploy the cash today to increase our leverage at this point in time, but obviously we want to put in place the appropriate leverage to help grow the business, but also retain our investment grade rate.

Okay, thank you.

Next we have Brian Russo, Ladenburg Thalmann.

Good morning.

Good morning, Brian.

Could you talk a little bit more about the MSTI project, the major obstacles in the development stages and maybe talk about any other competing proposals that may potentially displace the need for MSTI?

The permits we need, Paul, we need to file a major facility citing act application in Montana. We will do that in 2008. Idaho does not have a corollary state filing, but there is a national energy policy act thing and we need then the coordinating agreements, if you will, with the Western Electric Coordinating Council. All of those will be filed in 2008 as well as the application at FERC for the tariff. We will set forth the pricing and terms of conditions of the service for the project and then those things will proceed. Obviously, we are in the routing phase at this point. For the most part, the right of way acquisition is progressing fine. There are a couple of locations along the 400 mile line that have raised some concerns about how close to their community or where, but those are normal and really for a line of this size and length, not anything or as much public concern over that as you might sometimes see. So, I think that is progressing, we think, in an orderly fashion.

In terms of competing projects, there is no direct competing project along that kind of a pathway, but every one of these pathways are interconnected and affect the electric flow in the region. Assuming that we are able to work out the coordinating agreements with WECC, it becomes a product of the growing demand for generation as well as continuing proposals for new generation. We are seeing strong interest in wind development in Montana. We are seeing strong interest in generation north of the border being brought through our system. As I outlined, there are additional gas generation proposed and some coal. The coal is not a big part of that. There would be projects in Wyoming for generation, trying to get there, that don't directly compete, but do affect the regional picture somewhat, but we think this one is pretty well positioned and the final project will be scaled and configured to meet the need and fit within that larger regional picture.

Alright, and secondly, could you talk more about the capital expenditures profile over the next several years, maybe first talk about your base CapEx for maintenance, and then, how we should view the incremental spending for these development projects?

Yes, Brain, I think if you recall we provided a slide that talked about our growth projects. As you know, between now and 2012, we talked about a baseline maintenance CapEx to maintain our existing system approximately of $100 million. We talked about the various CapEx projects and these growth projects above and beyond that, which would require a significant amount of capital, but most of that kind of backloaded in the 2011 through 2013 timetable and again most of that tied to the MSTI project.

Okay, and then lastly, you mentioned the Colstrip strategic alternatives earlier; could you talk about potential uses of the cash proceeds?

Well, Brain, we need to first determine what we are going to do with the plant and how to best optimize its value so that that would greatly affect cash receipts and the timing of it. So, I think it is premature to, I think you are assuming a sale which certainly is a possibility, but has not been determined and would not tell you the, some of the possible uses obviously are to use it to invest in our growth projects, reinvest in the business. Otherwise, apply it for shareholder value or invest it in other earning assets.

All right, thanks a lot guys.

Next in the queue is Steve Fleishman, Catapult Capital Management.

Hi can you hear me?

Hey, Steve.

Hi guys, a couple of questions. First on Colstrip, you mentioned you will conclude the review in the first half of '08, is that -- let's say, you decide to sell the plant, does that mean you actually sell it by the first half of '08 or does that mean you will conclude what you are going to pursue, could you just give us kind of likely run of how this would play out, I guess?

Yes, Steve, what we are saying is that we would except to conclude our analysis in the first half of the year, and then we would announce whatever decisions get made from that at that time, but not necessarily completing whatever actions that follow.

Okay, so you might, let's say the decision was to sell the stake, you might announce that that is the strategic decision by the first half and then go and actually execute on that?

I am not hypothesizing on what the decision might be, but the point is we except to complete our analysis and announce what that decision is within the first half of the year.

Got you, okay. And then, on MSTI with respect to generation, if you are not building coal, let's say, in Montana, is the value of this transmission that you can't build wind in other states? If the generation is not needed in Montana, why wouldn't the generation be built in the states where it is needed as opposed to adding on the transmission?

There are wind, gas and other types of projects going in upgrades to existing fossil and as I understand potentially even hydro facilities, so what you seeing is growing demand and growing interest in generation.

It is cheaper to build that in Montana and transmit it than it is to build it in some of the other states?

In a number of cases that could be in the people -- Montana has very strong wind resources, for example, wind patterns. They also have existing facilities that can be upgraded incrementally more economically than new build somewhere else. And so, in the total regional picture, I think you understand the variables are just that and in many cases the project proponents believe that they can have an advantage on the supply side and people looking at the load serving entities or other marketers whatever along the coast need to look outside of their state just to meet the demand.

Okay. Where you getting kind of firm commitments from users then for MSTI?

The process, when we go through the final citing and permitting, and we get the FERC tariff, Steve, so you know the pricing terms, we now know how we are going to configure the facility, what it will cost, what the prices will be and that point in time it is our intent to go out and negotiate firm long-term capacity contracts for the line.

Got you, okay. And then one last question, when would you be likely filing for additional labor lease in your state, I think Montana, you have agreed to stay out for a little bit?

Montana, actually we -- the agreement is that we will file again in 2009 based on our 2008 cost for both gas and electric. South Dakota agreement for natural gas is we had to -- we would not come back sooner than 2010 or 3 years from that particular process. That's it.

Do you have then some regulatory lag issues in 2009 or you can offset that with cost and [AFC] and all that stuff?

You know, using historic test years, you would have a regulatory lag effect, unless it is offset either through cost reductions or efficiency gains or otherwise mitigate it with regulatory. I would just remind you that our jurisdictions all use historic test years, but they do allow adjustments for known and measurable changes, which are post test year adjustments, so there can be regulatory mitigation of that as well.

Thank you very much.

(OPERATOR INSTRUCTIONS) And next in the queue we have Judd Arnold from King Street.

Thanks, all my questions have been answered.

And thank you, Judd.

(OPERATOR INSTRUCTIONS) And we have no more questions in the queue. Please continue.

Yes, thank you, Cindy, and I just want to thank all of you again for joining us today and your continued interest in NorthWestern.

Yes, Cindy, that concludes our part of it, so if you could re-read the -- read the playback instructions again, that would be great.

Thank you. The conference will be available for replay after 12 PM today until March 28, 2008 at midnight. To access the AT&T executive playback service, please dial 1-800-475-6701 and enter the access code 912551, that's 912551. That does conclude the call for today. Thank you for your participation and for using the AT&T executive teleconference service. Please disconnect at this time.