NorthWestern Energy Group Inc (NWE) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the NorthWestern Corporation first-quarter 2009 financial results. Today's conference is being recorded. All lines are in a listen-only mode. (OPERATOR INSTRUCTIONS.)

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

Thank you. Good morning and welcome to NorthWestern Corporation's March 31, 2009 quarter-end financial results conference call and webcast. NorthWestern's results have been released and that release is available on our website at www.northwesternenergy.com.

And also, this morning we filed our 10-K pre market. Joining us today are Bob Rowe, President and CEO; Brian Bird, Chief Financial Officer; Miggie Cramblit, General Counsel; and Kendall Kliewer, Controller.

This presentation contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based upon our current expectations and speak only as of this date.

Our actual results may differ materially and adversely from those expressed in our forward-looking statements as a result of various factors and uncertainties, including those listed in our Annual Report on Form 10-K, recent and forthcoming 10-Qs, recent Form 8-Ks, and other filings with the SEC. We undertake no obligation to revise or publicly update our forward-looking statements for any reason.

Following our 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 April 22 -- or through May 22, 2009. To access the replay, dial 1-800-475-6701 and then access code 996081. That information will also be restated at the end of this call. A replay of the webcast can also be accessed from our website.

And with that, I'll turn it over to President and CEO, Bob Rowe.

Thank you, Dan.

We had a busy and really a very good first three months of 2009. Moody's rating service upgraded our debt ratings and at the same time kept us on positive outlook.

We issued $250 million of first mortgage bonds at 6.34% with a 10-year maturity. Our liquidity has increased in excess of the $260 million that we reported as of the end of March of this year.

But we also took the last significant step towards our goal of being a fully regulated utility. In Montana we placed our interest in Colstrip Unit 4 into rate base as of January 1st at a value of $470 million (sic -- see Press Release). That was pursuant to a 2008 Montana PSC order. In South Dakota, of course, our electric business is already vertically integrated.

Also in Montana, the Public Service Commission held its hearing on our application requesting the Commission to approve construction of the 150 megawatt Mill Creek generating station to meet our regulating needs. We expect the decision concerning Mill Creek in the second quarter of this year. If approved, the plant could come on line by the end of 2010.

Looking forward, we are reaffirming guidance for 2009 of $1.85 to $2.00 per fully-diluted share. And with that, Brian, would you please discuss the financial results in more detail?

Thanks, Bob. We reported diluted EPS of $0.63 per share compared to $0.59 per share in the first quarter of 2008. Consolidated net income was $22.8 million for the first quarter of 2009 compared with consolidated net income of $23.5 million during the first quarter of 2008. The increase in EPS was driven mainly by the share buyback completed in the third quarter of 2008.

Operating income was $50.5 million compared with operating income of $52.1 million during the first quarter of 2008. The main drivers to our operating income and earnings during 2009 were as follows. Gross margins increased by $6 million, primarily due to transferring our interest in Colstrip Unit 4 to our Montana utility rate base. And that represents our return on rate base for the quarter.

Offsetting the gross margin increase was an increase of $7.6 million in operating expenses. The increase is fairly evenly split between increases in insurance reserves, pension expense, labor and benefits, and a combined increase in property taxes and appreciation. Of these increases, only the $2.6 million increase in insurance reserves was not anticipated in the first quarter. The $2.1 million pension expense increase over the prior quarter was because our 2008 pension adjustment did not occur until the third quarter of 2008.

Below the operating expense line, our interest expense for the three months ended March 31, 2009 decreased $1 million from the first quarter of 2008. This decrease was primarily related to lower interest rates on our variable rate debt.

Now moving over to the balance sheet, our balance sheet and cash flow remain strong. Our total liquidity at the end of the first quarter of approximately $260 million, with cash of $83.2 million and $176 million available from our credit facility. The increase in credit revolver availability was due primarily to the issuance of $250 million of Montana first mortgage bonds in March of 2009. The proceeds were used to redeem the $100 million Colstrip Lease Holdings term loan and to repay outstanding borrowings on the credit facility.

Long-term debt at March 31 was $900 million compared with $862 million at 12/31/08. The Company maintains a strong long-term debt to total capital ratio of approximately 54% at March 31, 2009.

Cash provided by operating activities totaled $65.1 million during the quarter ended March 31, 2009 compared with $78 million during the quarter ending March 31, 2008. This decrease in operating cash flows is primarily related to increased pension funding of approximately $21.3 million, offset by improvements associated with the timing of energy supply costs collections in the first quarter of 2009 as compared with 2008.

We used $18.3 million (sic -- see Press Release) for investment activities, or basically our capital expenditures, during the first quarter of 2009 compared with $14 million for the first quarter of 2008.

The Company's financing activities provided $25.1 million during the first quarter of 2009 compared with using $43 million for the first quarter of 2008. During the first quarter of 2009 the Company issued $250 million, made debt payments of $211 million, and paid dividends on common stock of $12 million.

We plan to enter into a new credit facility with availability between $200 million and $300 million to replace our existing revolver, which matures in November of 2009.

And finally, in the first quarter of 2009 both Fitch and Moody's upgraded both our secured and unsecured debt by another notch and, in addition, Moody's still has us on positive watch.

In summary, our cash and liquidity positions are strong and our debt ratings continue to improve.

Now, let's talk about our 2009 earnings outlook. We are reaffirming our guidance for our fully-diluted earnings in 2009, expected to be between $1.85 and $2.00 per share. Our assumptions include the following. Colstrip Unit 4's impact -- 2009 net income will be an increase of approximately $9 million, or $0.25 a share as a result of the inclusion of our interest in that plant into regulated electric rate base.

Pension expense will be flat with 2009 (sic -- see Press Release) pension expense and assumes an 8% return on assets during 2009.

Planned insurance recoveries in the second quarter will offset our Q1 insurance reserve expense increase.

Retail electric volumes will be flat compared to 2009 (sic -- see Press Release). And actually wholesale electric volumes in South Dakota will actually decrease due to a planned outage in 2009.

Residential and commercial natural gas volumes will be relatively flat compared to 2009 (sic -- see Press release) volumes.

Fully-diluted average shares outstanding of 36.5 million.

And, lastly, normal weather in the Company's electric and natural gas service territories for the remainder of 2009.

So basically we expect 2009 earnings to grow between 5% and 13% over 2008 earnings of $1.77 per share.

And with that, let me turn it back over to Bob.

Thank you, Brian, for that good report.

I've now rounded the turn on my first year with the Company and, despite the economy, it's been an exciting and a very positive time. This is a good company with great people and we serve a wonderful part of the country.

We're making progress on many fronts, both internally and externally. Our financial management and focus on what we know best puts us in a good position to weather the current economic situation, as does our ability to time capital commitments in ways that companies in the middle of a building cycle do not enjoy. We have solid execution ability to undertake the initiatives that we've announced, and this extends through all levels of the Company, as our employees are committed to, and very much invested in, our success.

We're strengthening our relationships with policymakers, customers, and other stakeholders in our region and we're explaining how our investments will benefit them. We're refining our distribution system planning and our asset management, and we're undertaking supply planning that benefits our customers.

For any company, a top-of-mind question obviously concerns the general effects of the economy on that company's performance and prospects. At NorthWestern we monitor a range of indicators, including electric and gas loads, late payments, non-payments on the retail level, the activity of our largest customers, commodity and supply prices, and, of course, for a utility, weather effects.

Our service territory is located in parts of the United States that are generally more insulated from large economic fluctuations and, in fact, our service areas have held up much better than has the national average. Over our entire service area foreclosures are low and local financial institutions are generally quite strong. As of March 2009 data, the national unemployment rate is 8.5%, but Nebraska's unemployment rate is the second lowest in the country at 4.2%. South Dakota's unemployment rate is fourth lowest in the country at 4.6%, and Montana's is 12th lowest, at 6%. And, indeed, the part of Montana that has been hit hardest, which is generally the northwest part, is for the most part not in our service territory, with the exception of the Flathead area, where we do provide natural gas. In Montana, the effect of operational curtailments in the industrial sector is dampened for us, because these firms tend to be P&D customers, but are not supply customers of ours.

Concerning South Dakota, last week I met with the managers from throughout our service territory, and almost all of the local economic development leaders in our territory. And the economic development officials continue to be very positive about the health of their economies. Indeed, there are actually several major employers in our South Dakota area who are actively hiring.

We have seen a falloff in new construction demands and, as a result, we have fewer contractors on our premises than in previous years. We have seen an increase in retail late payments but, again, at much lower rates, much lower levels than for many other utilities.

Most of the change in consumption compared to previous years appears to be weather related. The largest effect, as Brian described, is the need to increase pension funding due to the market downturn. In our previous call we described the Montana Commission's very positive action in issuing an accounting order to allow us to smooth the effective increased pension expenditures that we undertook in the fourth quarter of 2008.

Nonetheless, despite the relatively good situation, we take the economy seriously. I'm now actively working with our executives and our employees to take modest, but appropriate, action now, focused mainly on discretionary spending, foregoing filling certain positions that are vacant, and some travel expenses and materials deferrals, so that we can be reasonably assured of a successful year and avoid having to take drastic action later in the year, at the end of the year. So we continue to monitor the economy, but so far our service territories have really held up quite well.

Turning to growth prospects, I'll discuss our prospects for growing the Company in a number of aspects. As many of you know, we've previously announced three significant transmission-related projects, and I'll turn to those after first discussing our Mill Creek regulating plant.

The Mill Creek generating station will provide a regulating asset. Essentially, it's a generating plant designed to keep the system in balance. This is a resource all, or almost all, of the utilities would have. NorthWestern Energy has not had this kind of a resource on its Montana system for a very long time. The project is expected to have a capacity of approximately 150 megawatts, which would equal approximately 85 megawatts of regulation capability.

Hearings related to Mill Creek were held before the Public Service Commission in February. The hearing -- I thought the case was very well presented by our team and all briefs are now in. We requested an authorized ROE of 10.75% with a capital structure of 50% equity and 50% debt. We expect the Public Service Commission to issue its decision during the second quarter of 2009.

The capital cost of this project is estimated to be around $200 million. We've actually locked in the pricing on the turbines, which represents about 40% of the price. We're negotiating a risk-sharing arrangement with the contractor for the balance of plant. So, as a result, we have a high degree of confidence of being able to meet the capital estimate for this project.

On the transmission side of the business, as we've stated previously, our Montana transmission assets are strategically located to contribute to the expansion of the transmission grid in the western United States. This expansion will be driven in particular by demand for wind and other renewable resources to meet renewable portfolio standards that are already in place throughout the western United States. And, as you're aware, there's a strong interest and movement towards a national standard as an overlay.

Interest in new generating projects in Montana continues to remain strong, with over 5,000 megawatts of proposed generation seeking to connect to our system. Now, obviously, not all of these generation projects will be built, but there continues to be very strong interest in developing new generation, predominantly wind, in Montana. With any of these generation projects, construction of new transmission lines is critical for transporting power to loads both within and with outside of Montana, and to alleviate congestion that is prevalent on existing lines.

It's significant that the typical development time for a wind farm is much less than for a transmission project. And, again, that confirms the real need for transmission projects to move ahead. So there is a sense of urgency about transmission expansion, driven by national policy, by regional considerations, and by state policy.

The three transmission projects we have proposed are an upgrade to our existing 500 KV Colstrip transmission line; second, the Montana collector system; and third, the Mountain States Transmission Intertie, or MSTI. I'll speak more specifically about all three of these projects, but, before I do, I need to emphasize that we'll move forward with these projects as they make economic sense. We have no appetite at this company to force these projects to move along at a pace that fails to match the demand for the particular project.

So turning first to the proposed upgrade to the Colstrip 500 KV line, in August of 2008 we announced that we and the 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 into the Pacific Northwest. The other partners are Portland General Electric, Puget Sound Energy, PacifiCorp and Avista. And BPA has now also joined in this effort.

The parties have agreed to share the cost of conducting an independent review of the power transmission alternatives and the potential ownership structures. Each party has agreed to contribute up to $100,000 towards the engineering review. The ownership structure will be determined once the projects, if any, are identified and agreed to by the participating utilities. At this point, we anticipate that the capital spend for the entire project could range between $200 million and $250 million. Since we last spoke, we've met with the other Colstrip partners and also BPA to advance this project's progress. And we're very much pleased with the dialogue and good interest coming out of those meetings.

Our portion of the total capital on the project will depend on the ownership structure determined once the independent review is concluded. Now, assuming that all five partners build a project, our portion would likely be between $50 million and $60 million. The project, again, depending on the outcome of the study, could be completed by the end of 2011.

Second, we're also designing a collector system to gather wind resources in Montana. And, again, as we've -- I've discussed, interest in Montana renewable energy resources, particularly wind, continues to grow. We recently with the Federal Energy Regulatory Commission to conduct an open season on this proposed collector system. The collector system would be comprised of up to five new transmission lines in Montana that would connect new generation, primarily wind farms, into our proposed MSTI line.

Most of the new proposed wind generation that would be served by the collector system would be located in North Central, Central, South Central, and Eastern Montana. And while the regional economy has slowed, as I've discussed, utilities across the West are still required to meet renewable portfolio standards for their customers over the next several years and, again, with a possible national standard as an overlay.

This project will be designed to collect renewable energy generation from various concentrated geographic areas and provide these projects access, central access, to the transmission facil- -- to facilitate [regionally] the markets where their output is demanded. In January we filed the petition for Declaratory Order with FERC for some modifications to our existing [OTE] to allow for an open season to be run later in the year to advance the collector system model. Since our last call we've participated with FERC in a technical conference that, from our perspective, went very well.

This project is expected to cost between $150 million and $200 million and would be completed by the end of 2014. Specific design of the lines would be, obviously, configured to meet the needs of the shippers.

Third, then, moving on to the Mountain States Transmission Intertie, or MSTI -- the proposed MSTI 500 KV line would extend from a new substation to be built on our system near Townsend, Montana to the existing Borah or midpoint substation located in Idaho. The transmission line's main purpose will be to meet requests for transmission service from customers and to relieve constraints in the high-voltage transmission network in the region. The MSTI line provides additional capacity on an historically constrained path and connects expanding new markets in Idaho, Utah, and the Southwest United States. Our EIS application was deemed complete last fall and we're working now with both the state and federal agencies as they conduct their review.

MSTI is currently undergoing an environmental review with the draft EIS now due out in mid 2009. The line would be approximately 400 miles in length and would cost around $800 million to $1 billion to construct. As with the collector, we recently filed with FERC to conduct a second open season on the MSTI line to allow new, primarily renewable, participants the opportunity to reserve capacity on the line and to provide existing participants an opportunity to reaffirm their current reservations.

Since we last updated you, we have participated in a FERC technical conference on the MSTI line as well. That was combined with the collector system conference that I mentioned. And we've also begun a very structured road show to surrounding states, meeting with load-serving entities, or local IOUs, with state energy offices, and with public utility commissions. So far we've taken those trips to Oregon and to Idaho. Next week we will be in California and Washington. And those have been really very successful.

Also, we've responded to a WAPA request for statements of interest, and are actively evaluating on how the regional and national environmental policies might affect and potentially benefit really all three of these projects.

NorthWestern currently has 539 megawatts of expressed interest in the MSTI project. We are permitting the line as a 500 KV transmission line. We will ultimately 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 2014.

Now turning to South Dakota, ITC Holdings recently announced it is working to develop a 765 KV line known as the Green Power Express. And this is a network of transmission lines that would facilitate the movement of approximately 12,000 megawatts of power from wind-abundant areas to populated areas. The Green Power Express would traverse portions of North Dakota, South Dakota, Minnesota, Iowa, Wisconsin, and Indiana, and would ultimately include approximately 3,000 miles of extra high voltage transmission and end near Chicago. This project addresses a recognized lack of electric transmission infrastructure needed to integrate wind. Portions of the Green Power Express fall within our South Dakota service territory.

The project is in its preliminary stages, will be evolving over the next several years. The path and the miles will obviously determine the total cost of the project and those have not yet been determined. Very encouragingly, ITC recently received an order from the FERC for an authorized ROC of -- ROE of 12.38%. And that's inclusive of about 160 basis points of [adders] and an ability to collect construction work in progress, or CWIP. We want to be part of any energy solution that is in our backyard, providing renewable energy solutions and economic development in our service territories. And we've very much appreciated working with ITC over the recent months.

Well, in summary, we're pleased with the results of the quarter and with our financial position. The Company has achieved and maintained solid ratings with the ratings agencies. We're rated investment grade now by Moody's, S&P, and Fitch. Other than renewing our corporate revolver, we have no significant debt maturities until 2014. We expect 2009 earnings to grow between 5% and 13% over 2008. We're monitoring the economy and we're taking focused steps to prevent the need for more drastic steps later if the economy in our region does get worse. And, as I said, so far the economy in our region has continued to be relatively strong compared to much of the country.

We're optimistic about the future prospects of NorthWestern in terms of our ability to enhance shareholder value. The utility industry nationally is being called on to help lead the country out of recession and to address multiple natural resource issues. Because of our financial health, because of our execution ability, because of the characteristics of our region, we are very well positioned to contribute to this important effort and we're very excited to have the opportunity. We're pleased to be in a position to do our part, and to do so responsibly and prudently, producing value for our customers and for our shareholders.

And with that, I'll turn it over to the operator who will give instructions for your comments and questions. Thank you all very much.

Thank you. (OPERATOR INSTRUCTIONS.) Chris Ellinghaus with Shields & Company.

Hi, everybody. How are you? Brian, can you go over the first-quarter insurance reserve again?

Yes. The insurance reserve, total insurance reserve adjustment was $2.6 million and the lion's share of that is associated with the Bozeman incident.

Okay. Is that after-tax?

That's pre-tax.

And can you guys just discuss a little bit -- one of the things that I'm expecting that you didn't sort of talk about in your list of growth drivers is wind. Can you talk about what your internal plans are at this point?

Sure. We interact with wind in a number of ways. One thing I should say is that we do not intend to be a merchant wind developer. We currently have wind on our system in Montana at over 8%. So we're working very hard at it. We're actually a regional leader on the challenges of integrating wind. Obviously, Mill Creek is an important part of that. In South Dakota we have a wind turbine project moving along. And that's a purchase with an option to buy the project. And then we are, as a transmission provider, we intend to provide the critical infrastructure for other wind developers to reach the western market.

A general comment about the somewhat changing nature of the companies in that business -- we tend to see more activity from companies that do have strong balance sheets and execution ability. I would say that generally that industry is maturing. Obviously, given the direction of national policy, it's an important and an exciting time to be in the renewables development business, as they are in the transmission development business as we are.

Moving back to the Montana supply situation, we're doing a lot of work internally on supply. Generally we've got a good supply team and taking advantage of the state's policy direction to move, we think in a thoughtful way, from 100% dependence on purchased power and pass-through in the direction of rate-basing resources. With the development of Mill Creek we will be, again, better able to integrate wind and renewable resources into the portfolio. I'd certainly expect that we will be actively looking to rate base wind and other renewables going forward as part of our general move towards a more rate-based portfolio.

Okay. Any comments about new South Dakota generation or changes in any of your timing and cost expectations?

No. I think we're steady as it goes in South Dakota.

Okay. One last thing. Brian, do you have any sense of the economic impact of the lower, or the milder temperatures in the quarter?

Yes. We did get about a $700,000 -- again, these are pre-tax numbers -- impact on our gas business because of warmer weather for the quarter in total. And, Chris, I look at it this way. Weather was the biggest impact on volumes versus the economic impacts related to the first quarter. We did see some industrial load fall off in terms of changes by some of our customers. But we did have an increase in customers themselves in total. And so those things relatively washed. And as we forecasted, if you will, things were relatively flat, other than the weather impacts.

All right. Thanks a lot.

Brian Russo; Ladenburg Thalmann.

Good morning. Could you quantify the number of megawatts of capacity for these wind purchase power agreements that you have currently? I mean, how much of your portfolio comes -- is derived from renewables right now?

Oh, the percentage of the portfolio is a little bit over 8% at this time. And that's best in region.

Okay.

In Montana, 135 megawatts.

Okay. And then secondly, could you discuss your upcoming or expected next Montana rate case filing?

Sure. At this point the plan is to combine the allocated cost-of-service filing with the rate case. That would be filed by the end of September. Staying with allocated cost of service, the Commission has I think supported our proposal to spend the next two months meeting with the parties to identify and, if we can, narrow issues. In terms of the rate case, we will be dealing with, I assume, all of the standard issues. We're not going to make an extravagant filing with the Commission by any means. But certainly the [mine run] issues n terms of capital structure, cost of capital, we think we have over the last year probably narrowed the range of dispute there and have a lot more clarity around those issues as well as treatment of net operating losses in the event that that issue is raised again by another party.

We do expect a number of policy initiatives tied with both the Commission's interests and other stakeholders' interests in efficiency investment. So we're looking at a decoupling, obviously, or other initiatives. The way I frame that issue is I want us to be in a position where we can legitimately be excited about efficiency as a line of business. There's, as you would expect, strong interest among the commissioners in those initiatives.

Also, we are -- we continue to be concerned with regulatory lag as a result of the historic test year regime. There are a number of ways to address that. My view is that, to the degree that the Commission is concerned to see infrastructure investment in our distribution system, we all have to work together to identify ways to ameliorate the lag problem.

If you file -- assuming you file the rate case in September '09, when would you expect new rates to be in effect?

We'd be on a nine-month shot clock.

Okay. And also, could you just remind us of what your multi-year CapEx is and how that might change if the Mill Creek plant gets approved?

I actually would direct you to our IR presentations on the Web page to see a good layering in of our capital projects. Generally, we have base CapEx investment in our distribution system of around $100 million, relatively flat. On top of that we would have Mill Creek CapEx in '09 and '010, as well as CapEx associated with the collector systems starting in '010 and then going out through 2014. The South Dakota [peakers] are currently anticipated for '012 and '013. And then the biggest CapEx, obviously, would be associated with MSTI. We have relatively small CapEx for the next several years, then getting much more significant in 2011 through 2013.

A couple of important points there. Non-discretionary CapEx is funded entirely by free cash flow. The MSTI project CapEx will be really shaped by demand for the project and progress on project planning. We don't anticipate needing equity unless and until we do proceed with MSTI. And then the critical disclaimer, as I've said already on this call and I say every time we discuss our capital budget, we will move forward as these projects make economic sense.

Concerning MSTI specifically, we are open to partnering on that project. We have a sense of the kind of partner that might be the most appropriate. So, again, as I mentioned, we have -- we're in the very, very good situation of being able to manage our capital commitments in ways that many other companies in the sector cannot.

Okay, great. And one last question on MSTI -- you mentioned your interest in a partner and it looks like you guys have done a bit of a tour in the Northwest, meeting with those IOUs and other entities. Do you know when we might expect an announcement on a potential partner?

That's generally not the sort of thing that we would comment on.

All right. Thank you very much.

Timothy Yee; KeyBanc.

Good morning. In your 10-Q, you discuss a $4.5 million gas sales capacity contract exposure in the second quarter. I'm wondering if you could elaborate on that and what are the alternatives you're considering to mitigate this?

I'm going to let our Controller, Mr. Kliewer, take that one.

Yes, this is a capacity contract. We've previously disclosed that we had basis risk on -- because we fulfilled the supply contract with our customer using the gas that came down on northern border. And the supply contract was based on a Ventura pricing point. The customer has filed for bankruptcy and given us indication that they are going to reject the supply contract. The capacity's not worth, or may not be worth, a whole lot from what we're paying right now. And so our operations folks are continuing to evaluate that and see if we can reduce that exposure during this quarter.

Okay. So I guess -- would you be able to replace that --those lost sales or -- ?

It's not likely that we'd have a new supply contract come on. It would be evaluating whether we can release the capacity to someone else.

Okay. All right. And then, you mentioned earlier the NOLs. What's the current balance on that and what's the plan on using those going forward?

Well, the current balance is approximately $300 million. And as we've stated elsewhere, on a non-reserve basis we'd be able to utilize those NOLs through 2012. On a reserve basis we'd be able to utilize those through 2010.

And then, the insurance recovery, I know you're kind of expecting -- you're expecting the recovery to kind of offset the reserve you took this quarter. Any -- what's the timing on that?

Our expectation is the disclosure associated with the insurance recoveries we expect to have that in the second quarter.

And then, lastly, your electric volumes in the quarter were kind of, were up, I think due to residential and commercial customer growth. And you're expecting flat volumes for '09. So I'm just wondering if you could comment on the customer growth projects -- or customer growth prospects in your region.

We've said growth projects are essentially flat or modest for the year and are managing accordingly.

Even customer growth?

Relatively slight customer growth projections for the year.

Okay.

About 1%.

Yes, and I think I'd offset that a bit by some decline in some volume. Again, particularly we're seeing some industrial decline but, again, offsetting customer growth with some use-per-customer decline offsetting to flat.

Thank you very much.

Leon Dubov; Catapult Capital.

Good morning. Can we just come back to this $4.5 million gas sales contract exposure? Is there some way how this would be recovered in rates or is this something that you actually take a hit on?

This is something that we would take a loss on and this was kind of a last remaining remnant of our unregulated natural gas business in South Dakota.

So is this $4.5 million a one-time kind of loss or is -- I'm just trying to understand what this really means for earnings.

Yes, it would be and at this point that's the maximum exposure that we have. We do believe we can mitigate that, but at this point we don't know by how much.

Okay. And one other thing. On the MSTI EIS that's due mid-'09, is there a way to narrow that down a little bit better? Is this something you're expecting in June, July kind of time frame or it could vary a lot?

There is some variation. The EIS process is driven significantly by other parties. What we can do is first of all be active and [on top of] as many issues as possible and, as a result of that effort, try to bring it in earlier than would otherwise be the case. We think we have some ability to do that. The best evidence of that is that we got a certification of a complete application quickly and smoothly. We know how to manage that process and turn things around quite well internally.

Secondly, we are actively working to address the concerns of affected parties, who typically are active in these processes. So we're doing everything we can to ensure that it comes in on time. Obviously, we'd love to see it come in ahead of time as well.

Okay. And on the 500 KV upgrade, what's the next kind of date to look for? I mean, you said you're in the engineering review stage. Is there like a milestone that we should think about in terms of seeing whether this project goes forward, and at what size?

Brian?

Well, we're in the process of continuing to work with our partners and doing -- and these studies. We'd expect we'd have more to report the mid- to the third quarter of 2009 on those studies.

The important thing with the upgrade project is that it doesn't require significant regulatory review, so it really is driven by the outcomes of the study. That will then lead to discussions among the partners about their degree of interest and the apportionment of the project. We see it as being very, very high value and, again, are working to move that ahead as quickly as we can.

Okay. Thank you very much.

And currently there are no additional questions in queue. Please continue.

All right. Well, thanks everyone for your participation on the call and your support of the Company. And Beverly, if you could give the replay instructions one more time I guess that'll conclude our call.

Absolutely. Ladies and gentlemen, this conference will be available for replay after 12:00 p.m. Central and running through May 22nd at midnight. You may access the replay service by dialing 1-800-475-6701 and using the access code 996081. Once again, that number is 1-800-475-6701, using the access code 996081.

That does conclude our conference for today. Thank you for your participation and for using AT&T's Executive Teleconference service. You may now disconnect.