NorthWestern Energy Group Inc (NWE) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the NorthWestern Corporation's First Quarter 2008 Financial Results. At this time, all participants are in a listen-only mode, later we will conduct a question and answer session.

(OPERATOR INSTRUCTIONS)

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

Good morning, and welcome to NorthWestern Corporation's March 31, 2008 quarter-end financial results conference call and webcast. NorthWestern's results have been released and the release is available on our website at www.northwesternenergy.com. We also filed our 10-Q after the market closed yesterday. Joining us today in our offices in Sioux Falls are Mike Hanson, President and CEO, Brian Bird, Chief Financial Officer, and also on the phone is Tom Knapp, our 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 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 of you who are joined us by teleconference will be able to ask questions. A replay of today's call will be available beginning at noon Eastern time today through May 24, 2008. To access the replay, dial 800-475-6701, then access code 919615. That access code again is 919615. 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 to all of you for taking time to join us today. I'd like to start out by telling you we had a good quarter and we're off to a solid start for the year. Highlights for the quarter include that our net income improved to $23.5 million for the first quarter of 2008, compared to $19.1 million for the first quarter of 2007.

Our gross margin improved to $156.9 million for the first quarter of this year, compared to $147.3 million for the first quarter of '07. And operating income improved to $52.1 million in the first quarter of this year, compared to $44.4 million in the first quarter of last year.

Standard & Poor's rating group has upgraded the Company's senior secured, senior unsecured and long term corporate credit ratings, resulting in a decrease in interest rate, commitment fees and removal of certain covenants associated with the Company's revolver. And finally, we have filed an application to list on the New York Stock Exchange Euronext under the ticker symbol NWE, and we'll begin trading on that index on May 1st of 2008.

Let me turn it over to Brian Bird, our Chief Financial Officer, to discuss our first quarter 2008 financial results in more detail, and then I'll come back and talk a little bit more about our plans for the future. Brian?

Thanks, Mike. I'll first talk about our consolidated operations. Consolidated net income was $23.5 million, or $0.59 per diluted share, for the first quarter of 2008, compared with consolidated net income of $19.1 million, or $0.51 per diluted share, during the first quarter of 2007. So our net income grew a little more than $4 million quarter-over-quarter.

The main drivers to our earnings increase during the first quarter of 2008 were gross margins were increased by $9.6 million. That was led by our regulated businesses which experienced an increase in rates, increased volumes due to customer growth and colder weather. These improvements were offset by a lower contracted pricing and increased fuel costs in the unregulated electric segment.

In the first quarter of 2008, we experienced an increase in total operating expenses of about $2.2 million, due to increased property taxes in Montana, and higher depreciation mainly due to the Colstrip Unit 4 lease buyouts. These were offset by a decrease in our operating, general and administrative expenses, primarily due to decreased operating lease expense related to the purchase of our previously leased interest in Colstrip Unit 4 during 2007.

Our interest expense increased approximately $2.9 million, primarily due to additional debt incurred with the purchase of our previously leased interest in Colstrip Unit 4. Income tax expense increased approximately $800,000, due to an increase in pretax income. And in addition, we had a higher tax rate in the first quarter of 2007 because portions of our professional fees and transaction related costs were nondeductible for tax purposes.

Finally, I'm pleased with our income this quarter but it would have been even better if not for the following two items. We had a pretax $1.8 million attorneys fee judgment related to the City of Livonia shareholder litigation. The impact of that outcome is pending an appeal and mediation, and a lawsuit against our D&O insurance carrier for the amount of the judgment.

Also, in the unregulated electric we recorded a pretax unrealized loss of $1.2 million during the first quarter of 2008 related to forward contracts executed to economically hedge a portion of our Colstrip Unit 4 output through 2009. These contracts do not qualify for hedge accounting, and market value adjustments will be included in cost of sales on a quarterly basis. However, these were reversed as [powers delivered], so this is basically a timing issue.

Moving on to our balance sheet and cash flow, cash flow remains strong. The balance sheet is also strong. As of March 31, 2008, cash and cash equivalents were $33.8 million, compared with $12.8 million at December 31, 2007.

The Company had revolver availability of $173.9 million at March 31, 2008, compared with $158.7 million at December 31, 2007. Long term debt at March 31st was $757 million compared with $787 million a year-end 2007. During the three months ended March 31, 2008, we repaid $30 million of debt, including $12 million on our revolver. The long term debt to total capitalization ratio was approximately 48% at March 31, 2008.

Cash provided by continuing operating activities totaled $78 million during the first quarter of 2008, compared with $104.1 million during the first quarter of 2007. This reduction was primarily due to a contribution of $21.9 million to the Company's pension plan in the first quarter of 2008, while our pension contribution in 2007 was done in the second quarter. The Company used $14 million for investment activities during the first quarter of 2008, compared with $60.6 million for the first quarter of 2007.

Capital expenditures for the first quarter of 2008 were $14 million, compared with $20.5 million for the first quarter of 2007. We also used $40.2 million in the first quarter of last year to purchase a previously leased interest in Colstrip Unit 4.

The Company used $43 million in financing activities during the first quarter of 2008, compared to $43.9 million for the first quarter of 2007. Uses of cash included dividends paid on common stock of $12.9 million during the first quarter of 2008, compared with $11.1 million during the first quarter of 2007, and long term debt payments of $30 million in the first quarter of 2008.

Now I'll move on to our 2008 earnings outlook. We estimate our fully diluted earnings for 2008 to be between $1.60 and $1.75 per share. Primary assumptions include an improvement of about $0.28 per share year-over-year related to the impact of rate cases in the Company's service territories, assuming we get regulatory approval on the proposed rate settlements with the MPSC and FERC.

Also, in the unregulated electric we see about a net $0.04 per share decrease, which is comprised of lower average pricing on forward sales contracts, offset by a positive impact of 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 in 2008, and assume normal weather in the Company's electric and natural gas service territories for the remainder of 2008.

Now, let me turn it back over to Mike.

Thanks, Brian. I'd like to talk a bit now about how we intend to grow the Company going forward. We continue to make significant investments in maintenance capital in our electric and gas systems, which are driven by our steady organic growth, which is increasing our rate base.

In addition to our base level of capital investment, we have several other significant investment opportunities. Our Montana transmission assets are strategically located to take advantage of the potential transmission grid expansion in the northwest part of the United States. Interest in new generation projects in Montana remain strong, with over 4,000 megawatts of proposed generation seeking to connect to our system.

In the last year there's been a significant increase in proposed wind projects, and a corresponding decrease in proposed coal generation projects in that region, indicative of a current national sentiment against fossil fuel generation and favoring lower carbon emitting forms of energy such as wind, solar and geothermal. So the macro drivers create a strong demand for generation in Montana but the mix is shifting more toward renewables.

Most states in the West have adopted increased renewable portfolio standards which are driving this change. And since February of 2007, potential wind generation in Montana has increased from 579 megawatts to 1,526 megawatts while coal projects have decreased from 1,578 megawatts to 722 megawatts. While not all of these projects will get built, there continues to be strong interest for developing new generation, predominantly wind, in Montana.

With any of these projects, construction of new transmission lines is critical for transporting the power to the loads within and outside Montana and to alleviate congestion issues that are prevalent on existing lines.

I'd like to start with an update on our proposed upgrade to the Colstrip 500 kV line, which as many of you may know is a jointly owned facility. But it now appears that we may be the only equity partner on the upgrade. This project would provide a very low cost per unit of additional transmission capacity and would reduce congestion to the northwest part of the U.S.

In 2008, our planning area will embark on a more detailed study of the forms of generation being proposed in the area, the impact on the transmission system, and the investment needed to accommodate this market trend. This extensive study is expected to take about four to six months to complete and once complete, information for final decision-making will be available. But at this point in time, we anticipate the capital spend to upgrade our 500 system, and associated components will range between $200 million and $250 million, with an expected in-service date of about 2013.

We also have proposed a project called the Mountain States Transmission Intertie, or MSTI line, which is also a 500 kV line that would run from a new substation to be built near either Townsend or Garrison, Montana to the existing Borah or Midpoint substation located in Idaho. The transmission line's main purpose is to meet requests for transmission service from customers and to relive constraints in the high voltage transmission network in this region.

The MSTI line provides additional capacity on a historically constrained path, and connects expanding generation to new markets in Idaho, Utah and the southwest United States. An initial siting study identified several reasonable alternative pathways for the project. We're in the process of selecting a preferred route, as well as identifying two alternative routes.

We currently have 639 megawatts of expressed interest in the project. The 500 kV configuration that we are going forward with permitting would have a 1,500 megawatt of transport capability. Form the inception of the project we have evaluated various voltage levels, configurations and other alternatives with respect to the full 1,500 megawatt subscription level, and that's why we plan for a 500 kV project.

However, as we've said, this project is scalable and in the end will be built to accommodate the demand. We are prepared to consider either 230 kV line, a 345 kV line, if the projects that express interest -- or, excuse me, the contracts and the final committed capacity does not approach a 1,500 megawatt level. In short, we will size the line to fit the need and we do not intend to build significant uncommitted capacity.

We're evaluating options to phase in segments of the line over time that could mitigate costs and pricing issues, depending on subscription level and voltage [selected]. Based on our current projections, we anticipate the line to be in service by 2013.

Moving to our proposed Mill Creek Generating Plant, this station is designed as a facility that will serve as a regulating resource that provides balancing services to our transmission control area. As a transmission control area operator, NorthWestern must adhere to stringent federal regulations to balance the moment-to-moment variations between load and supply. These regulating services are becoming increasingly scarce and more expensive in the northwest.

In addition, the integration of significant wind generation into the transmission system requires additional regulation services due to the variability of wind generation, and therefore we've identified the need for a facility that'll provide regulating services as the most critical near term generation need in Montana.

We expect to file a complete proposal with the Montana Public Service Commission by the end of the second quarter 2008. The capital cost of the project is estimated to be around $150 million. It's expected to have a capacity of about 125 megawatts, and we would expect the plant to be in service by January of 2011.

Now turning our attention to South Dakota, due to low growth and the tightening of capacity in the mid-continent area power pool region, we're evaluating the need to add electric peaking and base load generation at our South Dakota service territory. Currently we estimate our peaking capacity needs to be in the range of 50 to 75 megawatts by 2010. We don't have a specific project to announce yet, but we continue to evaluate the need for additional electric capacity as we have reached a new peak demand level of 317 megawatts in South Dakota.

Load growth continues to be robust in our South Dakota service territory and we see the need to acquire additional base load energy resources somewhere in the 2013 to 2015 time frame. In addition, in South Dakota and Nebraska we expect to deploy up to $20 million in capital over the next three years to continue pipeline extensions to serve new and expanded ethanol and biodiesel facilities in the region.

Our investment in these pipeline extension projects are protected by letters of credit to mitigate our financial exposure to the operations of those plants. We invest in the pipeline to provide natural gas supply to these plants and not in the liability of the plant itself.

Finally, moving to our evaluation of strategic alternatives concerning Colstrip 4, in the first quarter of this year we announced that we have commenced a review of strategic alternatives regarding our ownership in that plant. We've retained Credit Suisse to help us in this endeavor.

The alternatives under consideration would include possibly selling our 30% ownership interest in the plant. Another possibility is putting our ownership interest in that plant in rate-base in Montana. And of course, we could consider contracting future sales of the output out of the plant as well. We would anticipate this strategic review to conclude sometime in the first half of 2008.

So in summary, NorthWestern Energy is pleased with the results of the first quarter. Our earnings and cash flow are solid and improving. We continue to make progress with growth projects within our core business that enhance shareholder value. And finally, we realize that we are a very important part of our local economies, and our commitment to our employees, our customers and the communities we serve will continue to be our focus.

So with that, I'd like to turn it back to the operator to give instructions for comments and questions. Robert?

Thank you.

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of Brian Russo from Ladenburg Thalmann. Please go ahead.

Good morning.

Morning, Brian.

Could you talk a little bit more about the backup power for wind generation? Does the 125 megawatt gas plant you're being -- being proposed at Mill Creek, does that satisfy all of the backup power needs? Because it seems like you've got quite a bit of wind projects on the table.

Brian, as you're probably aware, we have a 15% renewable portfolio standard in Montana by 2015 and we need to meet most of that with wind generation. It's sufficient to provide the regulating reserve frequency and voltage control, a certain amount of load following.

I couldn't tell you if it is entirely adequate to serve all of the firming needs of that full 15%, but we think it is for at least the portion that we see today and adequate to provide those kind of regulating reserves in our control area.

Okay. And I noticed property taxes are up, as expected, about [50%]. Is that kind of a trend we should assume for the rest of the year?

I would say that property taxes, if you might remember, at the end of '07 property taxes were up because of a display change. We used to show property taxes on a net basis, netted into the tracker. We now show it on a gross basis. So on a year-over-year basis, '07 versus '06 is a bit higher. So again, first quarter it's going to be up slightly higher as well but I would say that that trend would continue.

Okay. And then if I heard you guys correctly earlier on the call, it looks like there's $3 million of pretax kind of non-cash or onetime items embedded in the $0.59 per share of earnings.

Yes, I talked about that, Brian. There's really a couple of things that occurred. We talked about the $1.2 million in terms of the mark to market and we also talked about the Livonia settlement issue. And that's about $1.8 million.

Okay, so to be clear, those two are included in the $0.59 you reported?

Yes, that is correct.

Okay. And lastly, you had mentioned in previous slide presentations that you may pursue a strategic partner for MSTI. Any developments on that?

We don't have any developments to announce, Brian. But we would consider a strategic partner, especially if it's going to be a larger end of that spectrum of possibilities.

Okay. And if I remember correctly, it looks like PG&E was granted FERC approval for I guess north to south transmission line. I'm wondering does that make your MSTI more desirable or less desirable, or it has no impact?

I haven't seen an announcement, Brian, or [looked at our] planning engineers. But as a general proposition, they're all good because what you -- I mean, basically what you're looking at is new generating resources and the need to get that power to the population centers where it is. So one highway connects to another is a way to look at it.

Okay, great. Thanks a lot, guys.

Thank you. We now go to the line of John Alli from ZLP. Please go ahead.

Morning, guys.

Morning, John.

Morning, John.

Sorry if I missed this. I've been hopping around on calls this morning. One of the things I guess the issue in your stock is potential Colstrip alternatives. And I guess if you do proceed with this, with the sale alternative, what do you think are some uses of cash?

Well, I think obviously, since we haven't made a decision in terms of where we go with Colstrip today, we haven't made any decisions about how we'd use the cash. But obviously the alternatives that one could consider is to use the cash as equity for our growth projects we've discussed. We could also use the cash in terms of potentially doing a share repurchase and also any other opportunities that may be provided to us.

[And you will] provide a fair amount of tax shields?

Indeed.

Thank you.

Thank you. We have a question now from the line of Tom Wolfe from Sawtooth Investment Management. Please go ahead.

Hey, guys. Great quarter, and thanks for taking the call. Regarding the Magten settlement, I understand that there are potentially a good number of shares that maybe come to market pending approval from the bankruptcy judge on May 7th. Have you given consideration as to how you might manage those shares coming to market so that it doesn't become an overhang? And can you tell us -- can you give an indication as to how you may be leaning in that regard?

I would just say at this point in time we're aware of that and we're evaluating some thoughts on how we can deal with that issue.

Okay, appreciate that. Thank you.

Thank you. We have a question from the line of Timothy Yee from KeyBanc Capital Markets. Please go ahead.

Hi. Just trying to get a better sense on the Colstrip strategic alternatives. Are you still -- given the state of the current markets, are you kind of getting a sense that there's still interest out there in these kinds of assets?

There is, Timothy. And while there's growing concern over carbon emissions and fossil plants, the reality of it it's existing plant and there's also growing demand. So I think there's solid interest.

Okay, thanks.

Thank you. You have a question now from the line of Steve Fleishman from Catapult Capital. Please go ahead.

Hi. Can you hear me?

Yes, we can, Steve.

Okay, thanks. I had a question. I saw a story a week ago or so that Montana commission is doing some review of your filings related to the Colstrip lease purchases. It seems kind of -- I don't really understand what they're trying to get at. But could you go through what this review is?

Sure. In a nutshell, Steve, in our bankruptcy stipulation and settlement with the commission, which was included in a consent order, there were limitations on the ability of the Company to invest in non-regulated assets. It's called an investment basket provision. We believe that we've complied with that both in spirit and intent.

But based on the limited information available, the consumer council actually asked to have the commission review to make sure we have indeed complied with that provision of the bankruptcy stipulation. So they've opened a docket to look into it. We're providing information to show them how it works and what we've done in acquiring -- we've been buying out the leases.

Does this have any relevance for the pending transaction or whatever you're going to do with Colstrip, or is it something that could just get resolved separately? [Or it's kind of irrelevant].

I don't believe so, Steve. I mean, the question is really did we comply with those investment parameters that were in that bankruptcy order. We believe we did and we'll establish that. But we did and I'm not sure what the -- I think the issue is what is the level of the limitation. It's a floating scale depending on criteria and how would the commission expect that provision to be implemented in the future is how we look at it.

All right. Okay.

Thank --

--- demand users of MSTI.

I'm sorry?

Who are the likely off-takers of the MSTI --

Well, there's --

-- for MSTI?

Sure. There's three categories essentially of people that are putting reservations or expressing interest in reservations on the line. First, is load serving entities in Idaho and further southwest that are looking for power to come into their region. The other category is the other end. We see generators that had reservations. I already pointed out the change is some of these coal plant projects that were announced in Montana have been cancelled.

Their associated reservations have come out. What we're seeing is more wind generation and other supply. [For most of] Montana they have yet to progress to the point where they're making transmission reservations but eventually that power has to go somewhere. So it's generators, load serving entities and then of course there are a number of marketers in the region that -- brokers that effectively match up the two buyers and sellers that at times make transmission reservations as well.

Okay. Thank you very much.

Thank you. Next we'll go to the line of Robert Howard from Prospector Partners. Please go ahead.

Morning.

Morning, Robert.

Morning.

I guess just going back to that last question there for a second, those non-investment provisions, I assume those are all finished now or how would the Colstrip leases be different than some of your other projects you're talking about?

I'm not sure I'm quite tracking the question, Robert. Are you talking about the investment basket provisions --

Yes.

-- [bankruptcy ]? Those provisions, as well as ring-fencing provisions we call it, continue on. Now, in the case of the investment basket, there is a graduated scale. The dollar limit goes up as our bond ratings go up -- or our debt ratings, and at some point you reach high enough debt ratings actually the limitation is lifted and goes away. We have, to my -- I don't know if we've quite gotten there, Brian, but so to answer your question there are -- that particular provision does have a termination not based on time but based on certain credit quality.

The only thing I'd add to that is the Company has certainly exited non-regulated businesses and certainly don't have plans today to invest in those with the limited investment basket. So less of an issue.

Okay, so that's solely for non-regulated, outside of anything that would be put directly into the regulated utilities?

That's correct.

Okay. And with the Colstrip line and you were saying that you guys were the only interested party in terms of investing for an upgrade, is there any particular reason why the other parties aren't showing interest, or why it appears that you have more interest than some of the other participants there?

Most of the existing partners, as you know they're utilities to the west, their interest initially was premised on new coal expansion. And they're not looking so much for new coal now, alternative sources. In our case, because that is part of the backbone system, as we look to integrate more wind power that you may be aware a proposal to bring more power from Alberta into Montana and our desire to monitor and manage the flow, we end up having a transmission need and an interest, at least on a section of that line, that we're still interested in. So the change is predominantly the other partners interest in new coal or the prospects that new coal plants would be built in Montana.

And if a lot of these wind projects that have been proposed in Montana, if they are built, would that be primarily to serve Montana or is there opportunities for that to be exported? And I guess in an export scenario, would those other utilities who weren't interested in upgrading the line, would they have interest in that wind power and maybe would that be something that would change their mind?

The answer to your question is some of each, although the majority of it is in excess of Montana's needs and effectively gets exported. There are some of those entities that have expressed interest in buying renewable resource that may have that. But they may be faced with an option now of buying the service rather than investing in the project.

Okay. That's it for me. Thanks.

Thank you. And next we'll go to the line of Jim Bellessa from Davidson & Co.

Good morning.

Hi, Jim.

This $1.8 million judgment with the City of Livonia, why were they shareholders in your company?

We're not sure why they were shareholders. They were shareholders. I'm not sure. We didn't ask them necessarily why they were shareholders in the Company. But they effectively brought the suit against the Company as a result of us not taking a particular offer for the Company some time ago.

I think the full name, Jim, is the City of Livonia Michigan Employee Pension Fund. So it's the pension fund for their municipal employees --

Okay.

--- taken some stock in our company.

Very good. The weather impact on EPS basis was what in the quarter?

I would tell you that weather -- we talked about the change in margin in terms of volumes is approximately $6 million for the quarter. And I would tell you approximately $4 million of that was associated with weather, and the lion's share of that associated with our gas business.

Okay. And then I see in the press that one of the commissioners in Montana is talking about wanting the Colstrip 4 being on a rate-based, but what are they willing to pay for that electricity in our state?

We don't know that, Jim. I've seen the comments. I'm sure they're basing that based on certain assumptions and premises. But we have been talking to commission staff and consumer council about what the terms would need to be in order to keep the Company whole and what that would like to customers. And I don't have a sense at this point about what people are willing to pay. In fact, it could be the customers are frankly not better off economically doing that than they would be to look at other alternatives.

So you aren't very close in what you expect from that and the cost of that electricity versus selling it off and redeploying those assets back into the Company elsewhere?

No, I don't think I said that, Jim. The evaluation process continues. Part of that is looking at what the rate-based alternative would look like to the Company, but also the impact on customers. And I'm just saying that it's not a given that the customers are better off and the evaluation process continues. So we are going to continue that and would expect to have a decision reached by midyear certainly.

Thank you.

And there are no further questions at this time. Please continue.

Okay, folks, again I want to thank you for taking time to allow us to update you today, and we appreciate your continuing interest in NorthWestern.

Robert, if you could just repeat the playback instructions, that would be great, but that concludes our portion of the call.

Thank you. Ladies and gentlemen, this conference will be made available for replay after noon today until May 24th at midnight. You can access the AT&T teleconference replay system by calling 1-800-475-6701 and entering the access code 919615. Once again, those numbers are 1-800-475-6701, access code is 919615.