NorthWestern Energy Group Inc (NWE) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the NorthWestern Corporation third quarter financial earnings call. (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 September 30, 2008 quarter-end financial results conference call and webcast. NorthWestern's results have been released, and the release is available on our website at northwesternenergy.com. We also filed our 10-Q after the market closed yesterday.

Joining us today from our offices in Sioux Falls, South Dakota, are Bob Rowe, President and CEO; Brian Bird, Chief Financial Officer; Kendall Kliewer, Controller; Paul Evans, Treasurer; and from the road, Miggie Cramblit, General Counsel for the Company, is also on the call.

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 joining 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 November 30, 2008. To access the replay, dial 800-475-6701 and then access code 965194. I'll give you that number again. (Operator Instructions). A replay of the webcast can also be accessed from our website.

With that, I will turn it over to President and CEO, Bob Rowe.

Thank you very much, Dan. And thank you all for joining the call.

I'd like to start by saying that we're really quite happy with the quarter, especially considering the net income included an $11.4 million charge for increased pension funding.

Our highlights include the following. Our net income improved slightly to $13.4 million in the third quarter of this year compared with $13.2 million in the third quarter of 2007. We completed a share buyback program for approximately 3.1 million shares in September, amounting to approximately $78 million. We've increased our earnings guidance for 2008 to now be between $1.65 and $1.80 per fully diluted share, and Brian of course will come back and speak to this in more detail.

In August, we filed a request with the Montana Public Service Commission for advanced approval of a proposed $206 million, 200 megawatt Mill Creek generating station. In addition, we've filed the Major Facility Siting Act, or MFSA, and environmental report with the Montana Department of Environmental Quality for the proposed Mountain States Transmission Intertie project, also known as MSTI. I'll be returning to the growth initiatives later in this presentation.

In July, the Delaware Bankruptcy Court approved the global settlement agreement related to the Magten matter in the bankruptcy case, and we also received about $4 million in July to reimburse us for our past legal fees as part of the global settlement.

The Board has approved a quarterly dividend for $0.33 per share declared for shareholders of record on December 15, 2008, that amount to be paid on December 31, 2008.

Now let me turn it over to our Chief Financial Officer, Brian Bird, to discuss our third-quarter financial results in more detail. Brian?

Thanks, Bob. Consolidated net income was $13.4 million, or $0.35 per diluted share, for the third quarter of 2008 compared with consolidated net income of $13.2 million, or $0.35 per diluted share, during the third quarter of 2007.

Operating income was $35.3 million compared with operating income of $33.2 million from the third quarter of last year. The main drivers to our operating income and earnings increase during the third quarter of 2008 were as follows. Gross margins increased $14.9 million, primarily due to a $10.2 million unrealized gain on forward contracts due to changes in forward prices of electricity related to our Colstrip Unit 4 plant, which reduced our unregulated electric cost of sales. Also, approximately $3.8 million of regulated electric and gas rate increases also contributed to the improvements in gross margin.

These improvements were partially offset by lower volumes due to weather-related net decrease in customer usage in our regulated and unregulated electric segments, and higher wholesale electric supply costs.

In the third quarter of 2008, we experienced an increase in total operating expense of about $12.8 million, mainly due to higher pension expense of $11.4 million related to the pension plan for our Montana employees, and increased labor and benefit costs mainly due to a combination of compensation increases and higher severance costs.

Below the operating expense line, our interest expense increased approximately $1 million, primarily due to the additional debt incurred with the purchase of our previously leased interest in Colstrip Unit 4.

I would like to provide a little more detail on the pension expense increase. Based on pension plan asset values through September 2008, we have increased our 2009 cash funding projections for our Montana plant from $17 million to approximately $47 million. For accounting purposes, this $30 million increase in pension funding will be spread over 2008 and 2009. Now obviously, the market has deteriorated significantly since the end of September, and while our goal is to keep our pensions at an 80% funded status, we will continue to evaluate our funding projections for the remainder of the year.

Our employees are a vital part of our success, and we think it is important to maintain reasonable pension funding levels going forward. Accordingly, our total company-wide estimated pension funding level for 2009 will be about $54 million, or about -- again, about $30 million more than we had originally projected.

We plan to adjust downward our 2009 capital expenditure projections related to growth projects, specifically for one of the South Dakota peaking units, due to lower anticipated capacity reserve requirements, which coincidentally will approximate the amount of the increase in the 2009 pension contribution.

Our year-to-date net income for 2008 has increased by $11.5 million over the same period in 2007. Gross margin has increased about $17 million over the first nine months of 2004 due to colder winter weather earlier in 2008, increased plant availability at Colstrip Unit 4, and a modest amount of customer growth.

Rate increases have added about $14.4 million over the same period of 2007, and we were reimbursed about $7 million from insurance companies related to bankruptcy-related matters in 2008, which was netted against our legal and professional fees. Offsetting these improvements, again, were an increase in pension expense of about $11 million, and approximately $10 million for a combination of reduced pricing and increasing fuel supply costs at Colstrip Unit 4.

Now let's move to the balance sheet and cash flow. Our balance sheet and cash remain strong. As of September 30, 2008 cash and cash equivalents were $8.6 million compared with $4.8 million at that same time last year; the Company and revolver availability approximately $120 million at September 30, 2008 compared with $156 million at 9-30-07.

Long-term debt at September 30, 2008 was $825 million compared with $806 million for the same period last year. The Company maintains a strong, long-term debt to total capitalization ratio at approximately 52% at September 30, 2008.

Cash provided by operating activities totaled $176.7 million during the first nine months of 2008 compared with $173.9 million during the first nine months of 2007. The Company used $80.9 million for investment activities during the nine months ended September 30, '08 compared with $116.7 million during the same period last year.

Capital expenditures for the nine month -- first nine months of '08 were $81 million compared with $78 million for last year. The primary difference from last year is the Company used about $40 million in the third quarter of last year to purchase a previously leased interest in Colstrip Unit 4.

The Company used $100 million in financing activities during the nine months ended September 30, 2008 compared to about $54 million for the nine months ended September, 2007. The increase here was mainly due to cash used to repurchase 3.1 million shares under our previously announced plan during the nine months ended September 30, '08, which was approximately $78 million. The repurchases occurred from July to September, and the average repurchase price was $24.83. In addition, we paid dividends on common stock of $38 million so far this year.

In summary, our cash and liquidity positions are strong. We have two debt facilities maturing at the end of 2009. The first is for our $200 million unsecured revolving line of credit and matures on November 1, 2009. Current balance on that line is approximately $52 million. Also, a $100 million non-recourse loan for the purchase of a previously leased interest in Colstrip Unit 4, which matures on December 31, 2009.

The decision by the MPSC relating to rate basing Colstrip Unit 4 will impact what happens with this debt. If the MPSC decides not to rate base to Colstrip Unit 4, we plan to sell the asset to Bicent, and the proceeds of the sale will pay off this debt. If we rate base Colstrip Unit 4, we'll look to procure a longer-term loan secured by the Colstrip Unit 4 asset.

Also, the Company is rated investment grade by Moody's, S&P, and Fitch.

Now, let me talk about our 2008 earnings outlook. We're increasing our guidance of our fully diluted earnings for 2008 to be between $1.65 to $1.80 per share. Basic assumptions include the Company's year-to-date actual results of operations, an after-tax increase for all of 2008 in pension expense of approximately $9.4 million, the impact of rate relief in the Company's service territories, decreased lease expense -- and offset by increased depreciation interest expense -- as a result of the purchase of our previously leased interest in Colstrip Unit 4, lower average pricing on forward sales contracts, and anticipated output volumes of 1.7 million megawatt-hours at Colstrip Unit 4, an assumption that there will be no after-tax unrealized gain or loss in the 2008 earnings for the forward contracts to hedge forward prices of electricity at Colstrip Unit 4.

The guidance also includes an after-tax impact of additional insurance proceeds ranging between $3 million and $5 million we anticipate receiving related to various matters that would reduce our operating general administrative expenses during the fourth quarter of 2008, fully diluted average shares outstanding of $38 million, and finally, normal weather in the Company's electric and natural gas service territories for the fourth quarter of 2008.

We are not providing 2009 guidance at this time for the following two reasons. First, we are awaiting a decision from the MPSC on whether our interest in Colstrip Unit 4 will be rate-based; and second, we would like to have a better understanding of our pension funding position at year end.

With that, let me now turn the discussion back over to Bob.

Thank you, Brian, for that good report.

I'll start if I could with some further discussion of the Colstrip Unit 4 matter that is pending in front of the Montana PSC. On June 10 of this year, we announced a proposed sale of our portion of the Colstrip 4 plant to Bicent Power. Bicent Power proposes to purchase our 30% interest in the total of 740 megawatt plant for $404 million.

The agreement notably included an option to work with the Montana PSC to explore the viability of placing the asset into rate base to serve the regulated electric customers in Montana. It's worth noting that currently there is no supply in rate based in Montana, so depending on what the Commission does, this would be the first rate-based resource.

On June 27, we filed with the PFC to initiate a review of the process. During the first quarter of this year, separately from that, the Montana Consumer Counsel filed with the Commission a complaint that we allegedly violated an earlier Montana Commission order when we purchased our previously leased interest in the Colstrip 4 Unit. The allegation was that we violated the ring fencing stipulation that was entered into as part of the bankruptcy.

In discussing these dockets, it's also important to note that the Consumer Counsel in Montana is an independent agency. Its positions are presented to the Commission, but the Consumer Counsel is not part of the Commission. And it is our position of course that the Company did not violate the Commission's ring fencing order or the bankruptcy stipulation, and in fact, we have carefully and thoroughly complied with those requirements.

The Commission conducted evidentiary hearings related to both of the cases. The rate-base filing and the Consumer Counsel initiated investigation in September of 2008 and is currently deliberating both matters, and we are awaiting a decision. We anticipate a ruling by the Montana Commission on both matters by the middle of November.

If our interest in Colstrip 4 is placed into rate base -- into regulated rates -- the transaction with Bicent is terminated. The conclusion of either scenario, however, is in keeping with our strategy to become a purely regulated utility, regulated either in one of the three states that we serve, or by the Federal Energy Regulatory Commission. We expect either to consummate the transaction with Bicent or to place the asset into rate base by the end of 2008.

Now, if I could turn to our growth initiatives -- and these are previously announced initiatives. Our service territory, as you know, is located in parts of the United States that are relatively insulated from large economic fluctuations in areas with strong commitments to economic development including in the energy sector. As a result, even with the national economic downturn, we expect to see customer load growths to continue in the 1% annual growth range.

We've previously discussed several growth projects that we believe will have the potential to increase our rate base significantly. First, on the generation side, we have two dockets in front of the Montana Commission at this time, and previously mentioned the possibility of our interest in Colstrip 4 being included in rate base. If that occurs, we will not incur any near-term costs to add that $400 million to our rate base. The other generation project currently in front of the Montana Commission is the Mill Creek facility to provide a regulating asset designed to keep the grid in overall balance.

On the transmission side of the business, as we have stated previously, our Montana transmission assets are strategically located to take advantage of potential transmission grid expansion in the northwestern part of the United States. Interest in our new generating projects in Montana remained very strong with over 6,600 megawatts of proposed generation currently seeking to connect to our system.

Obviously, not all of these generation projects we -- will be built. However, there continues to be very strong interest for developing new generation, predominantly wind, in Montana. As you are aware, all states in the western United States effectively have some kind of renewable portfolio standard. Compliance with those standards dictates our continued development in the wind sector.

With any of these generating projects, construction of new transmission lines is critical for transporting power to load within and outside of Montana in order to alleviate congestion issues that are prevalent on existing lines. So these are essential highways, in effect.

We're looking at three transmission projects in Montana. These are complementary to one another, but they are independent. First, is an upgrade to our existing 500 kV Colstrip transmission line that runs generally east to west. The second is a Montana collector system within the state of Montana. Third, is the MSTI, or Mountain States Transmission Intertie line that runs generally north to south. I'll come back and speak about these with more specificity.

I do want to emphasize that we will move forward on these projects when and if they make economic sense. We have absolutely no appetite at this Company to force projects to move along at a pace that fails to match the demand for the particular project.

Let me expand on the Mill Creek plant first, briefly. Mill Creek will be designed as a facility that will serve as a regulating resource that will provide balancing services to our transmission balancing area. As a transmission balancing area operator, NorthWestern must adhere to very stringent federal regulations to balance the moment-to-moment variations between load and supply.

We filed the air quality permit and request for advance approval of the Mill Creek generating plant with the Montana Commission in August of 2008. This is the first application under a statute that was collaboratively developed and advanced between the Commission and the Company in the last legislative session, that does allow for advanced approval of projects such as these and their inclusion in rate base.

The capital cost of the project is estimated to be around $200 million. The project is expected to have a capacity of between 125 megawatts and 150 megawatts, which equates to approximately 85 megawatts a regulation capacity. The Montana Commission has 270 days from the filing date to issue a determination whether the plant will be allowed into rate base. The Commission has scheduled a hearing for after the first of the year. We're currently in the discovery phase. The entire filing can be found on our website.

If the Commission determines to allow the plant in rate base, we expect the plant to be in service by January of 2011. If the Commission determines the plant is not required, it will not be built.

Now, if I could move to the proposed upgrade in the Colstrip 500 kV line and the collector system. In August we announced that we and three other ownership partners in the existing Colstrip transmission system will work together to identify and evaluate one or more potential transmission system upgrades to accommodate the transmission of wind and other renewable generation, again generally from east to west.

The other partners are Portland General Electric, Puget Sound Energy, and PacifiCorp. The parties have agreed to share the cost of conducting an independent review of power transmission alternatives and of potential ownership structures. Each party has agreed to contribute $100,000 towards the review. The ownership structure will be determined once projects are identified and agreed to buy the participating utilities. Once complete, the information developed during the review will be available for decision making.

At this point, we anticipate the capital spend for the entire project could range between $200 million and $250 million with an expected in-service date no earlier than 2015. Our portion of total capital of the project will be dependent on the ownership structure determined once the independent review has concluded.

Turning to the collector system, as I mentioned earlier, there's strong interest in Montana energy resources, particularly renewables and wind. Our generation queue currently includes nearly 50 projects with a combined potential of over 6,600 megawatts. This represents an increase of approximately 60% since only February of this year. The system would be designed to collect renewable energy generation projects from various concentrated geographic areas, providing them access to the transmission system to facilitate access to markets. So hence, the concept of the collector system.

Moving next if I could to the MSTI project, the Mountain States Transmission Intertie is a proposed 500 kV line that would extend from a new substation -- to be built near either Townsend or Garrison, Montana -- to the existing Borah or Midpoint substation located in Idaho. The MSTI line's main purpose will be to meet requests for transmission service from customers, and relieve constraints in the high-voltage transmission network in the region. MSTI provides additional capacity on an historically constrained path, and also connects expanding new markets in Idaho, Utah, and the southwest United States.

An initial sighting study identified several reasonable alternative pathways for the project. Significantly, we recently filed the Montana Major Facility Siting Act application, and we will be submitting the federal application soon.

We've selected a preferred route as well as two alternative routes, which will be reviewed in the environmental reviews, both federal and state. The line would be approximately 400 miles in length, again, of course depending on final siting, and would cost around $800 million to $1 billion to construct.

NorthWestern currently has 639 megawatts of expressed interest in the project. We are permitting the line as a 500 kV transmission line, but of course, ultimately we'll match the capacity to the market demand at the time of construction. Based on our current time line, we anticipate the line could be in service by 2013.

And now, turning our attention to our South Dakota territory. Even though certainly some of the US economy is slowing, we're still experiencing load growth and tightening of capacity markets in the map region, the Midwest. We're evaluating the need for electric peak- and base-load generation additions in our South Dakota territory. Currently we estimate the peaking capacity need in our South Dakota territory is in the 80 megawatt to 90 megawatt range by 2010.

We anticipate constructing two 45 megawatt combustion turbines, one in Aberdeen, South Dakota, and one in Mitchell, South Dakota. The capital expenditure associated with both turbines would be in the $70 million to $90 million range. We will likely construct one in 2009, and push one back to 2010. And again, any one of these projects will move forward when and only when the demand and the economics make sense. We're moving forward with all these projects while keeping the current state of economic affairs very much in mind.

So by way of summary, first, we're very pleased with the results of our quarter and our financial position. Second, the Company is rated investment-grade by Moody's, S&P, and by Fitch. Third, we have modest debt maturities in the next year and no need to raise capacity for capital currently. Fourth, we operate in a stable part of the United States that typically avoids the highs and lows of other regions of the US economy. Finally, we're optimistic about future prospects of the Company to enhance shareholder value.

With that, I will turn it over to the operator to give instructions for comments. And we look forward to your questions.

(Operator Instructions). Paul Ridzon, KeyBanc.

Just looking for more clarity on the pension. You said '09, pension increase should be up $30 million, but part of that will be expensed in '09. Is that the $11 million we saw?

The $11 million is through the first three months of the year. It's going to be a total of $15 million approximately for all of '09. The $30 million is an increase that we're spreading over two years -- 2008 and 2009. That's the results, Paul, of an accounting order that we have to take our pension expense through 2005, through 2009, and spread those expenses over that time period.

So you will fund half of it in '08, half in '09; and the $30 million is not even firm yet; is that correct?

I think in light of where we were at the end of the third quarter, I think that's pretty firm. I think what we will be looking at in the fourth quarter is, if the market stays where it is today, we'll be funding at 80%. If that's so, we'd increase significantly. We're more apt to probably fund less than 80% in light of the current market conditions.

But it's important for us to continue to fund our pension at appropriate levels, but we'll be evaluating the marketplace as we go forward, and we expect that this is going to be our forecast for forecasted pension expense at the end of the year.

Is there a firm date on the calendar for a Colstrip decision?

The Montana Commission is currently deliberating. They had their first work session on Monday, will continue on Friday. The goal is an order by mid November.

Brian Russo, Ladenburg Thalmann.

Can you just elaborate a little bit on the increase in the 2008 guidance? I think previously it was $1.60 to $1.75. So you increased it -- increased in range by $0.05 since the last guidance given back in late July. But I'm wondering, it looks like you've got this negative delta on the pension. What are the positive drivers since July that has led you to increase the '08 guidance?

Well, the first and foremost, the share repurchase certainly came into play. I would also tell you that we do have anticipated additional insurance recoveries in the fourth quarter. To me and in light of the performance of the Company to date, those are the biggest drivers in terms of where we're at, and that includes our expected forecast for pension expense this year.

Right. So I guess what you're saying is, the share repurchase and the insurance recoveries more than offset the pension expense forecast?

Correct.

Then when looking to 2009, it looks like you're going to have, like you said earlier, $15 million incremental year-over-year expense for pension, and I don't think we are assuming any rate relief in 2009. So are there any initiatives you can undertake to help mitigate the earning -- negative earnings impact of that $15 million pension expense?

Well, I would tell you we're going to have the kind of wait on 2009, Brian. It's too early for us to talk about that. We will be prepared to talk about that hopefully at the end of the year, when we have more clear -- clarity on Colstrip.

Okay. Then just lastly, you mentioned hearings were completed both on Colstrip for rate basing, and the bankruptcy stip hearing. Can you just share some thoughts as to what are the major issues on CS 4? Is it just price, or what else?

And then on the bankruptcy stip, could you just remind us of what the MCC's position is on that versus what the Company's position is?

Sure. First again, the Commission is in the middle of deliberations, and we want to be very careful to respect that process, and be somewhat circumspect in our comments.

From the Company's perspective, a primary goal was to present a proposal, either rate base or not, that was concrete, that was actionable, and that kept shareholders indifferent. And obviously, we necessarily had to honor the terms of the Bicent agreement.

Issues in front of the Commission raised by one or other party included the value at which Colstrip should be rate-based, whether or not there were risks associated with the rate-base alternative, comparison of rate basing to not rate basing based on anticipated power supply. The Company requested a declaratory ruling concerning net operating losses that would be consumed in the event of a sale. And a number of other ancillary issues, but I would say that those were the biggest ones. Consumer Counsel raised a number of additional issues concerning the amount at which the plan should be rate based if it was rate based.

In the investigation, the broad question was whether or not the process that the Company went through in consolidating the interest in Colstrip through two transactions, in some way violated the ring fencing stipulation in the bankruptcy. Consumer counsel argued that it did. We obviously argued that it did not; that we'd provided really quite fulsome information from the start of the ring-fencing regime; and that most importantly, the Company had complied with the letter and the spirit of the stipulation; the stipulation had been successful in terms of achieving its objectives for shareholders and for customers and in reinforcing the Company focus on being a very much utility-focused operation.

Probably, again, given the sensitivity, the most prudent thing would be to refer you to each party's briefs in the investigation. We would be happy to get those out to you.

All right. And this one follow-up. Would an unfavorable ruling on this investigation disrupt the rate basing and/or sale of Colstrip? Or are they two separate dockets and shouldn't have relevance on each other?

They are separate dockets. They were heard separately. They were briefed separately. The Commission is deliberating them jointly. I -- the investigation, in our view -- whatever the results happen to be should not affect an outcome in the other docket concerning the rate-based option. Again, I want to be very careful not to speak too specifically or to assume any particular outcomes, because the deliberations are ongoing.

James Bellessa, D.A. Davidson & Co.

Your guidance for 2008 includes the assumption that no after-tax unrealized gain or loss on these forward contracts. And then in the most recent quarter, you did have $10.2 million unrealized gain. So is there a reversal in the fourth quarter of that (technical difficulty) or were there losses in the earlier part of the year?

We're at, on a year-to-date basis, just shy of $4 million in terms of the impact of those unrealized -- we're now in a gain position. I think it's around $3.8 million. And just our expectation -- we don't know where that will be at the end of the year. So we've just excluded that from our guidance.

You indicated that your CapEx budget for '09 I believe was coming down a little due to the fact that you didn't need to do something on a peaking unit in South Dakota due to lower reserve requirements. Why lower reserve requirements?

We're looking at -- we had a profile, if you will, in terms of our expected reserve margins in the year, and we reevaluated that and just -- we made the determination that we could delay one of those peaking projects into 2010.

Your June 10th agreement with Bicent calls for a time line of 120 days. Is that already expired, or is this starting at some other point in time so that it's still (technical difficulty) open time line?

No. We anticipate that we have until the end of November to make a determination on this issue.

The Commission has been constructive in working its schedule to ensure that we can meet that deadline, whatever its decision may be.

If the agreement was assigned in June, that's -- 120 days would be four months -- three months. So when does the 120 days expire, or has it started, or what? I'm not understanding that.

Well, if you would read through the agreement more closely, we have to the end of November.

Okay. So the 120 days is not really applicable here.

It's applicable, but there is a -- further provisions in the document, if you will. So (multiple speakers)

We were required under the agreement to make the request, and we have done that. But there is a -- the window finally closes at the end of November. So we've -- obviously, with everything we've done procedurally, we've had the agreement in front of us and have been scrupulous about compliance.

And with the contagion in the current markets since you entered into this contract, is Bicent hopeful that they won't -- that the Colstrip 4 is rate based rather than having them purchase at this -- purchase it at this time?

We're satisfied that Bicent is able to complete the transaction, and obviously there are break-up fees in both directions. The Bicent fee would be $20 million, and that's -- there's a line of credit in place to ensure that.

But if the Commission said, we'll allow the rate basing of Colstrip 4, will Bicent be gleeful that they didn't have to go ahead and complete the transaction?

We have no idea.

Leon Dubov, Catapult Capital Management.

You said that Bicent has a credit agreement in place. But is that just to meet the $20 million break-up fee if they have to make that, or do they have financing in place to buy the plant for $400 million?

Leon, to make sure I -- this is Brian. I just want to make sure I understand your question. Bob mentioned the letter of credit. We have a letter of credit equal to $20 million. If for whatever reason they terminate the agreement, we can draw upon that letter of credit.

Do you know if they have the financing lined up to buy the plant if that option (multiple speakers)

You know what, Leon, I don't know. I will ask my Treasurer. He is sitting here. He may know.

This is Paul Evans. They have a preliminary financing arrangement at Union Bank of California. We have no indication that they've had any problems with that financing at this point.

Tom Wolfe, Sawtooth Investments.

To what extent do you expect recovery of the additional pension funding through the regulatory process, and what would be the timing for that?

We will be filing a rate case in 2009 based upon a 2008 test year. The increase in pension expense will be obviously one of the considerations in our rate filing. We will not be able to get recovery on that until I expect at the end of 2009, early 2010 time period. That's the expected timetable for determination of that rate case.

It's worth noting in addition that we have kept the Commission staffs informed of the pension situation and our actions, and obviously the Commissions are I think concerned and supportive of actions to ensure pension adequacy -- fund adequacy.

Okay. Thank you very much, and congratulations again on the very solid quarter.

Paul Ridzon, KeyBanc.

Just a clarification. Do you expect that you will recover in future rates the entire $30 million you have to expense?

Paul, one thing that we have to consider is, we may look at -- because of the accounting order that was put in place, there may be an averaging. We're not set here to determine what we'll actually file from our pension expense standpoint today. But obviously, we're going to try and get as much back as we can in terms of what we're funding from a pension expense standpoint.

Can you just review the genesis of these insurance recoveries, kind of what they are related to?

Most of them is coverage from our insurance carriers for various legal matters that we've entered into. Or that we've been a party to. One -- and also Magten, for instance, we talked about that. That's a recovery from insurance carriers for our legal costs associated with those particular issues.

So this is a lot of bankruptcy stuff?

That one I would categorize as a bankruptcy step, yes. The Touch America settlement that was also noted, that was associated with their bankruptcy settlement with all parties in that regard.

We have no further questions. Please continue.

That's the end of our prepared remarks. So I guess, Robert, if you could just go through and give the instructions on how to do the replay instructions. And with that, we'll be done with the call.

Thank you all very much.

Thank you. And ladies and gentlemen, this conference will be available for replay starting at noon today, Eastern Time until November 30, 2008. You can access the AT&T teleconference replay system by dialing 1-800-475-6701, or 320-365-3844 and entering the access code 965194. (Operator Instructions).

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