NorthWestern Energy Group Inc (NWE) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the NorthWestern Corporation second quarter 2009 financials. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

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

Good afternoon, and welcome to NorthWestern Corporation's June 30, 2009 quarter end financial results conference call and webcast. NorthWestern's results have been released, and that release is on our website at www.northwesternenergy.com. We also filed our 10-Q pre market open.

Joining us today on the call are Bob Rowe, President and CEO, Brian Bird, Chief Financial Officer, Dave Gates, Vice President of Wholesale Operations, 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 on certain expectations and speak only as of this date.

Our actual results may differ materially and adversely in performance in our forward-looking statements, due to various factors and uncertainties, including those listed in our Annual Report on Form 10-K, recent and upcoming 10-Qs, 8-Ks, and other filings with the SEC. We undertake no obligation to publicly update our forward-looking statements for any reason. Following the presentation those joining by conference call will be able to ask us questions.

A replay of today's call will be available beginning 4:30 Eastern Time today, through August 29, 2009. To access the replay dial (800)475-6702, and access code 107524. A replay of the webcast can also be accessed from our website.

With that, here is our President and CEO, Bob Rowe.

Thank you very much, Dan. I am completing my first full year with NorthWestern in just several weeks. I don't believe there is a direct relationship between me joining the Company, and the recession that hit the economy almost immediately thereafter, but we do take the economic situation very seriously.

We have been affected by the economy outside of our service territory, and I will come back and talk more about that later. And as a result, we are adjusting our earning guidance down to a range of $1.75 to $1.85 EPS, down from our original guidance of $1.85 to $2.00 EPS. Despite the national economy [inaudible-microphone inaccessible] we have seen some great things over the last [inaudible]. We have very good results on specific subjects, focusing on core opportunities, that will produce long term value, both for the Company and to our customers. We strengthened substantive relationships with key stakeholders, based on long term interests. And we have adopted [inaudible]. We have done so in advance [inaudible] beginning to hit our wholesale revenues, something I made a point on the last call.

During the second quarter, we were able to achieve a number of significant objectives. First the Montana Public Service Commission decided that our proposed Mill Creek Generation Station is in the public interest, and approved, preapproved construction of the plant. The Commission, the Montana Commission deserves real respect and recognition I think for making this farsighted decision, and the Commission will be as it should be, monitoring progress on the project. We want them to stay fully informed all along the way.

Construction on the project is now underway. The plant is expected to cost around $200 million, with an approved capital structure of 50/50, and an approved ROE of 10.25%. We expect the plant to come online by the end of 2010.

In addition in a tough economic environment [inaudible] extending to three years to mature on June 30, 2012, and adding $50 million of [inaudible] to make it a $250 million loan. We now have no significant maturities until 2014, and we have liquidity to [inaudible] generating plant. Earlier today the Board approved our third quarter dividend of [inaudible], payable on September 30, 2009. [inaudible].

Now I will hand it over to Brian, to discuss our financial results in more detail.

Thanks, Bob. For our consolidated operations, we reported diluted EPS of $0.17 per share during the quarter, compared to $0.24 per share in the second quarter of 2008. Consolidated net income was 6.9 million for the second quarter 2009, compared with consolidated net income of 9.5 million in the second quarter of 2008. Operating income was 27.5 million in the second quarter '09, compared to operating income of 31.5 million second quarter of 2008.

Gross margins increased by 1.7 million, primarily due to about a 6 million improvement in Colstrip Unit 4, due to rate basing the asset. In addition to last year's results in the second quarter include an unrealized loss on a forward power contract for 5.2 million. These two improvements were primarily offset by a 2.5 million decrease in transmission revenues in Montana, due to reduced demand outside our service territory. Also a 2.2 million decrease in South Dakota wholesale electric margins, due to lower power prices, and client availability. Also about a 2 million negative volume variance in natural gas in our natural gas segment, driven by mild weather.

And finally a loss in a natural gas capacity contract of 1.2 million, which is associated with our last remaining unregulated natural gas contract. Offsetting of 1.7 million gross margin increase was a 5.8 million increase in operating expenses. This increase was primarily due to a 3 million increase in labor and benefits, and a 2.9 million of higher pension expense. Below the operating expense line our interest expense for the three months ended June 30, 2009, increased 2.2 million from the second quarter of 2008, due to increased debt levels.

For the six months ended June 30, 2009, consolidated net income was 28.9 million, compared with consolidated net income of 33 million during the second quarter of 2008. This decrease in net income is primarily due to higher pension and benefit costs, higher insurance and claim damages, reduced off system transmission revenues, reduced natural gas margins due to mild weather, and finally, reduced South Dakota wholesale power prices. All of these negative variances outstrips the positive effect of adding Colstrip Unit 4 to rate base.

Now let's move to the balance sheet. Our balance sheet and cash flow remained strong. We have total liquidity of approximately 269 million, with cash of 23 million, and 246 million available under our corporate revolver. As Bob mentioned earlier, during the second quarter we amended our revolving credit facility by extending the maturity date to June 30, 2012. We also added 50 million of availability for a total of 250 million under that facility, and it carries an average interest rate of LIBOR plus 300 basis points.

Total debt at June 30, 2009 was 869 million, compared to 764 million at June 30, 2008, and 862 million at 12/31/2008. The Company maintains a strong long-term debt to total capitalization ratio at approximately 53% at June 30, 2009. Cash provided by operating activities totaled 85.5 million for the YTD June 30, 2009, compared with 124.7 million YTD June 30, 2008.

This decrease in operating cash flows is primarily related to increased pension funding of approximately 41.3 million year-over-year. We used 46.7 million for investment activities, or basically our capital expenditures. YTD June 30, 2009, compared to [inaudible]. The Company's financing activities used 27.2 million during the YTD June 30 '09, compared with financing activities using 70.1 million for the YTD June 30, 2008. In summary, our cash and liquidity positions and debt ratings continue to be strong.

Now I will talk about our 2009 earnings outlook. We are reducing our guidance for fully diluted earnings in 2009 to be between $1.75 and $1.85 per share. Originally we did provide EPS guidance of between $1.85 and $2.00 per share. And the primary differences to the midpoint of these estimates, are a reduction in the estimated 2009 transmission revenues of about 5 million before tax, or about $0.08 per share after tax, and also the YTD weather effect of about $0.04 per share after tax.

As we have said, we have noticed weakness in the off system transmission revenues. It's important to note that about half of our originally projected 28 million in annual revenue from the open access same-time information system, or transmission OASIS sales, is in the form of long-term firm, or annual revenue. Long-term firm transmission revenue has generally been very reliable over the years, and less subject to fluctuation. The other half of the revenue was originally projected to be 14 million this year, has always been in the form of shorter term firm hourly revenue, and has been subject to the economic conditions adjacent to our service territory.

YTD through June, we are approximately $2.5 million off the prior year, on OASIS revenue. This decrease in OASIS activity has been driven by demand destruction in regions in and around Montana, lower natural gas prices, which is in turn allowing some gas fired plants south and west of Montana, to compete with our Northwest Territory hydro.

We have not experienced extreme hot weather this spring and summer in the southwest and west, that usually causes heavy use of our transmission system for wheeling transactions, and the extended and continued outage of Colstrip Unit 4. We anticipate continued decreased wheeling transmission revenues related to the economic recession west and southwest of our service territory for the remainder of 2009, which is included in our reduced guidance range.

Let me speak to Colstrip Units 4, regarding Colstrip Unit 4's impact on 2009 net income, it would be an increase by approximately 9 million, or $0.25 per share, as a result of inclusion of this interest in that plant, into a regulated electric grid base. Gross margin will remain about as we expected. As a result of the repair, the O&M is expected to increase from 1.3 million from our original projections, due to the repairs of the low pressure rotors, but those increases are expected to be offset by a decrease in property taxes, due to lower assessments.

Some of our other primary assumptions include the following. 2009 pension expense assumes an 8% return on assets. Retail electric volumes will be flat compared to 2009 volumes. Wholesale electric revenues in South Dakota would decrease, due to pricing and volume reductions from 2008. Residential and commercial natural gas volumes will be relatively flat for 2009. Fully diluted average shares outstanding of 36.5 million, finally, normal weather in the Company's electric and natural gas service territories for the remainder of 2009.

Now let me turn it back over to Bob.

Thank you, Brian. Our financial management is focused on what we know best, really does put news a good position to weather the current economic situation. We continue to be confident in our ability to undertake initiatives announced, and this extends to all levels of the Company, and our employees are committed to, and are very much invested in our success. As I noted we are continuing to strengthen our relationship with policymakers and with key stakeholders, [inaudible] and explaining how our benefits, how our projects do produce long-term [benefits] for our customers, and to the region.

Concerning the impact of the economy, last quarter we discussed the economic environment in our service territories, and stated that our region is holding up better than the national averages. We also reported that we would be taking contingency plan cost control measures, in anticipation of the downturn affecting us, and that proved to be prudent. Our operating expenses have been lower than our plan for 2009, as a result of taking cost control measures.

We monitor a range of indicators, including electric and gas load, late payments on the retail levels, the activity of our customers, commodity and supply [inaudible] and, of course, weather events. This is what we are seeing, an update from [inaudible], South Dakota, Nebraska, and Montana, have all continued to perform on average much better than the national downturn. The unemployment rate in Nebraska in May was [4.4%], South Dakota had averaged 5%, these were the first and third lowest nationally. Montana, the rate has been around 6.3%, which again is among the seventh lowest in the nation.

Through June, the economic downturn has not caused measurable reduction in loads and margins, related to our retail customers in our service territory. At present, weather continues to be a bigger factor, affecting retail loads and usage than is the economy. We have seen a reduction in new connections in the Montana areas, and a slowing of customer growth.

For the Company as a whole, total electric customers were up 1.2% in June 2009 over June 2008 levels. And this is down slightly from the 1.4% increase, we saw from June 2007 to 2008. And a 1.6% average in prior years. Gas sites total Company gas customers were up 0.7% in June 2009, over the June 2008 levels. And again this is down from the [1% peak] growth between March of 2007 and 2008.

Our bad debt expense is very much in line with our expectations, and as a whole [inaudible] near the low end of the industry. The largest effect, as Brian described, concerns the economic side of our service territories. The national recession has had an impact on our transmission OASIS, as Brian said, open access same-time information wheeling sales starting in the second quarter. Driven by a lack of demand for power in states to the south and west of Montana, reduced manufacturing and industrial loads, coupled with lower gas prices that made gas-fired [generation] more economical, our short term and hourly OASIS wheeling sales down significantly.

OASIS sales are down about 2.5 million YTD from June 2008. Also in the regulated electric [segment, inaudible quota generation] wholesale prices in the [MAP] region is down from our expectations, and [transmissions] east of South Dakota. We expect [inaudible] around [$25] a Megawatt hour, and the actual price of around $30. The addition will [inaudible] experienced reduced availability [inaudible], due to these two factors wholesale electric sales have dropped approximately $1.3 million from plan.

We see the economic situation outside our service territory continuing through the rest of 2009, and as a result have modified our earnings estimate. We continue to work with our employees to take to actions now to focus on discretionary spending, to address the decline in revenue, and we continue to very actively monitor the situation affecting all lines of our business.

Turning now to growth projects. On May 19th, the Montana Public Service Commission issued its decision that the Mill Creek plant is in the public interest. The Commission approved the capital structure of 50% equity to debt, and an authorized ROE of 10.25%. The Mill Creek generating station provide a regulating asset, something we previously lacked, and it a generation plant designed to keep the system overall in balance, both conventional and new renewable resources.

The project is expected to have an installed capacity of approximately 150 megawatts, produces approximately [90] megawatts of [generation] capability. The capital cost of the project is estimated to be around $200 million. We have [inaudible] in the turbines, and the balance of the [inaudible] contractor, which represents about 65% of the cost of the facility. We have a high degree of confidence in meeting the capital estimates, and expect the plant to be online by December 1, 2010.

On the transmission side of the business, as we have 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 sources, to meet renewable portfolio standards in the west. Interest in new generation projects in Montana were strong, with over 5,000 megawatts of proposed generation, seeking to connect to our system. While not all of these projects will be built, there continues to be strong interest in developing new generation, and this is predominantly wind in Montana.

With any of these generation projects, construction of a new transmission line is critical for transporting power to loads outside of Montana, and to alleviate congestion that is already prevalent on existing platforms. In fact, we recently signed an interconnection agreement with [Naturaner] for 100 MW, on the second phase of their wind farm near [Cutler] Montana. We expect to begin to generate revenues from transmission service as a result of this interconnection by the end of 2009.

Also there is a real sense of urgency about transmission expansion, driven by national, regional, and even state policy. As you know, the three transmission projects proposed are FERC upgrades to our existing 500 kV Colstrip transmission system, second, the Montana collector system, third, the Mountain States transmission Intertie lines. I will give you an update on each of these, but before I do I want to as always, that we will only move forward with these projects as they make economic sense, and we will continue to be very disciplined in monitoring these projects. We do not intend to in any way force these projects to move along, at a pace that fails to demand for the particular project.

Turning first to the proposed upgrade to the Colstrip 500 kV line. Last year we announced that we and other ownership partners in the existing transmission system, would work together to identify and evaluate one or more potential system upgrades, to accommodate the transmission of wind and other renewable generation. The other partner, Portland General Electric, Peugeot Sound, PacifiCorp, Vista, and significantly BPA, the Bonneville Power Administration has also joined this effort. The parties agreed to share the cost in conducting an engineering review of the power transmission alternatives, that commence on the commercial aspects of the project as well. We have had several [inaudible meetings] recently, and are now in the advanced stages of discussions with BPA, as we continue forward in the year.

At this point we anticipate capital spend for the entire project to be between 200 million and 250 million. Our portion of the total project will depend on the ownership structure, that is determined in conjunction with the other current owners. But assuming that the ownership shares stay the same as in the current project, our portion would likely be between 50 million to $60 million. The partners have displayed varying degrees of interest. At a recent meeting, we began to develop so-called tag along rights for the project, in order to ensure that commercial development continues at a strong pace. So the project depending upon the outcome of the study, could be completed by the end of 2011.

In addition we are also looking into the construction of a collector system to gather wind resources in Montana. I discussed previously, again interest in Montana energy resources, wind in particular continues to grow. As many of you know, we recently filed with the FERC to conduct an open season collector system, which would include up to 5 new transmission [inaudible] in Montana. In June the Federal Energy Regulatory Commission, commented that project is appropriately classified as a series of generator lead lines.

Accordingly the Commission approved our proposal, to directly assign the cost of the project to the generators existing consistent with the FERC's policy. The FERC further found that the collector project is an innovative proposal, and that as they request interconnect waivers from our existing OATT, as may be required as the project continues to develop. This will have the effect of protecting or native load customers from the cost of the project, something that obviously is important to our regulators, and to us as well.

While the regional economy has slowed, facilities all around the west are still required to meet portfolio standards over the next several years, and there is a meaningful possibility of a national standard overlaid on top of that as well. The project is designed to again collect renewable energy from [BIDS] concentrated geographic areas, and provide those projects access to the transmission system, in order to facilitate reaching markets both in the Pacific northwest and in the southwest. We plan to phase the transmission build out to be discrete components of up to five lines.

So this is quite the opposite of an all or nothing proposition, the first phase of the collector system, we will be building lines that support generation developers that want to utilize [less] capacity created by the Colstrip upgrade. So the Colstrip upgrade and the initial phase of collector are very much compatible with one another.

The second phase of the collector would serve the portions, the renewable energy pockets that would feed the proposed MSTI line. And again due to the general economic conditions, we are currently evaluating the timing of the open season, possibly later this year, to help advance the collector system. The project is expected to cost between 150 million and $200 million. Assuming the market ready participants commit to the necessary quantity to move forward independently with each line, the first line could be completed by the end of 2012.

The second phase will move forward at the speed required of market participants, and would be expected to be completed by the end of 2014. Again to coincide with development of MSTI. Finally turning to the Mountain States Transmission Intertie, the proposed 500 kV will extend from a new substation, to be built near Townsend, Montana, to the existing or Midpoint Station located in Idaho. The transmission lines main purpose will be to meet requests for transmission service from customers, and to relieve constraints in high-voltage transmission network in the region. The MSTI line provides additional capacity in a historically constrained path, and connects expanding new markets to Idaho, Utah, and the southwestern United States.

Our environmental impact statement, or EIS application was deemed complete last fall, a milestone. Now we are working with both State and Federal agencies as they conduct their further review. So MSTI is currently undergoing environmental review, with a draft EIS due in the fourth quarter 2009. In June, as certainly some of you know, the FERC denied negotiated rate authority for MSTI.

However, importantly the FERC confirmed it's support of the Company's efforts to build new transmission on congested pathways. Moreover, the FERC encouraged the Company to develop MSTI on a cost of service basis, by requesting appropriate tariff wafers, to provide the flexibility to facilitate the development of the project. In support of the MSTI project, the FERC acknowledged the need for innovative proposals to develop the transmission project, especially in regions that are rich in the potential to deliver [inaudible].

Accordingly, we have decided to continue the development of the project without delay or interruption. So we have worked hard to understand the FERC order. We believe it is something we can comply with. We do not consider it to be the long [inaudible] project development.

Consistent with the collector system, due to the general economic situation, we are currently evaluating the timing for open season, to be run as early as later this year for MSTI. For both collector and MSTI, the open season will be used to size the project according to customer demands. The open season processes also ensure that the projects have sufficient contracts, credit worthy shippers to support the [plans]. The MSTI line would be approximately 430 miles in length, and would cost around 900 million to 1 billion to construct. Based on our current timeline, we anticipate that the line would be in service by 2014.

So the words you have all been waiting for, in conclusion, we are very pleased with our financial position given the economic environment. We continue to achieve and maintain solid ratings with the rating agencies. We are rated investment [grade] with S&P and Fitch. We successfully addressed our debt maturities for 2009, in what is obviously a tough market. And we have no significant debt maturities now through 2014. We are constructing the Montana Public Service Commission approved Mill Creek Generation plant. We plan to have that in service by the end of 2010.

As I said on the last call, and addressed again today, we are taking cost control steps now, to prevent the need for more drastic steps later, if the economy surrounding us if not in our core region continues to get worse, or does not approve in rapid order, and as we saw our transmission revenues affected over the last several months, this very much proved to have been a sound decision.

We are optimistic about the future prospects for the Company to enhance shareholder value. The utilities [industry inaudible] really is called on to help lead the nation out of their recession, and to address significant natural resources. We very much believe our transmission project and other efforts, are important contributors to this effort, and will produce significant value. We are working closely within the industry and with others, to address issues in any Federal legislation.

Because of our financial position, our execution ability, the characteristics of our region, we are well-positioned to contribute, and we are very excited to have the opportunities that we do as a company. We are pleased to be in a position to do our part, to do so responsibly, to do so prudently, and to produce value, both for our customers, and for our shareholders.

And with that, I will turn it over to the operator for instructions for comments and questions. Thank you.

Thank you. (Operator Instructions).

Our first question is from Paul Ridzon with [TLK Bank]. Please go ahead.

I guess I got a new job. Where do you foresee '09 O&M versus '08 given you are kind of tightening the belt?

Expectation is that you are still going to see an increase in O&M. The comment we made is versus our plan we reduced O&M from our original plan. I don't have specific numbers, nor have we shared the total dollars in the past call, but I would say, it is an expectation that we are going to continue to focus on that, and stay below our plan.

And the assumption around the pension costs, I think previously you said should be flat with '08, and now you are saying, assuming an 8% market return. Is there anything to read into that different language?

No, the issue there is any time, you can have an additional adjustment of course on a going forward basis, if your assets don't perform to the liabilities that you have for that particular year. One thing we would also tell you though, is the benefit of prefunding some of the pension expenses this year, you saw earlier that I mentioned, we provided 40 million in terms of incremental cash to pension funding this year versus last year, we have had an opportunity to earn on those investments, if you will, during this year.

So the risk of not getting to 8% is lessened as a result of that, but we still need to achieve an 8% return in order to maintain our level of pension expense, your basis. I would also point out Paul, whatever that increment is because of our accounting order, we can spread that increase out over a time period.

Would you make that determination in calendar '09, if had you to increase the expense?

Calendar '09, yes.

So it is not going to be a post-December decision, okay. And Colstrip, you have got a handle on the O&M piece. How much of the transmission is related to the loss of Colstrip, as opposed to the broad economy?

It is difficult to say. There are a lot of factors here, and we haven't broken it out by those things. From our perspective we tried to do that calculation, but it is very difficult to say. But we would tell you in the order that we laid those out, we expect that the impact from the Colstrip outage, is probably one of the lesser factors on the OASIS sale.

Then your neighbors to the west are now having an extreme heat wave. What are you seeing as far as opportunities to move electrons across your system to serve that?

Dave Gates. Obviously hot weather to the west [inaudible] transmission are [non from] transmission more attractive. So it is too early to [inaudible].

I'm sorry, you have broken up. I didn't hear that answer.

Yes, Paul, the answer is, it is a good trend. That newest heat wave is showing some signs of conditional use of our transmission. It is all good and from up in the desert, in the southwest that would help even more.

Okay. Thank you very much.

Thank you. The next question come from the line of Chris Ellinghaus with Shields & Company. Please go ahead.

Hi, guys, how are you? In the press release there is mention of a couple of insurance recoveries in the quarter and last year. Are those pretax or after tax numbers?

Those are pretax numbers.

Okay. And can you just walk through what the QF impact versus last year was?

I know that the number was less. Hang on one second. Let me gather that. Hey, Chris, I don't have the exact number from last year, but I can tell you that this year the amount is about $800,000 less. I had a handy note passed to me, the amount from last year was 3.9 million adjustment. And the amount this year is 3.1 million.

Okay. And just thinking about the guidance for the year, if I just look at the consensus numbers for the remainder of the year, I don't think it would get you to the low end of your guidance range. Is there something positive that we haven't imagined so far? I know that there is some unusual timing between the pension in the third and fourth quarters, and you had some Colstrip transaction costs, and what not. But are we missing something that wouldn't get numbers back to your guidance range?

I assume people picked up property tax assessment. That is certainly something of an adjustment in the second quarter. And will continue through the remainder of the year. But other than that, I can't speak to where people are coming out with their numbers, and why they would be different from what we have provided today.

Do you have any remaining insurance or tax issues for the rest of the year, that you know about?

We continue to work on insurance recoveries. I don't want to tell you in terms of any expected amounts at this point in time. But I also would say, that all of our capital spend this year is associated with, expected to achieve some benefit from bonus depreciation, that can have a favorable benefit. I would also say we did disclose an expectation of a $1.4 million insurance recovery, and we continue to work on obviously getting that, and hopefully in the August timetable, but even more so than that, we will continue to work on it, but no other further developments at this point in time.

Thanks a lot, guys.

Thank you.

Thank you. The next question comes from the line of Brian Russo of Ladenburg Thalmann. Please go ahead.

Good afternoon.

Hey, Brian.

Sorry if you mentioned this earlier, but there was some static on the phone. The revision in guidance from the middle of your previous range, to the middle of this range is about $0.13. Did I hear you correct by saying that lower transmission revenues was $0.08, and weather was about $0.04?

Yes, exactly.

And then roughly $0.02 for the incremental O&M at CS4, or was that already assumed in the guidance?

No, I looked at it this way. It really is $1.92 the midpoint. And we showed $1.80 in the new range as the midpoint. That $0.12 was $0.08 for OASIS, $0.04 for weather YTD, and the $1.3 million that you are talking about, the increase in O&M, our expectation there is that will be offset by property tax decreases that impact Colstrip 4. So again Colstrip as we originally projected, is our plan for the remainder of the year for Colstrip.

Thanks. And we have been hearing from other companies, that expected installed capacity of wind is slowing, as a function of a challenging PPA market, and just some tight credit markets and ability to finance. I am just wondering, if you don't see the results, or the demand for any of these development projects, I mean, at what point will you reevaluate uses of cash, and then with that, what are the other uses of cash?

Sure. I will speak to this, and Dave may want to as well. First in terms of what we are seeing in the wind market it is a tough market [inaudible]. There is in addition to merchant, significant interest among utilities in facility owned and rate based, we have actually spent a lot of time in the western United States meeting with load serving entities, with regulators to better understand what the market is.

And I think that the state level interest coupled with the challenges building conventional resources, coupled with a strong national push for increased renewables, does suggest that there will continue to be a strong renewable generation sector, as we come out of the current economic situation. In terms of what other investment opportunities we have, I am personally am excited about continuing to invest [inaudible] gas [inaudible] system.

Some of you know, we have an opportunity as a result of change in Montana law, to invest in gas [inaudible]. Interested in execution and production. [inaudible] current storage capacity. This and rate based gas to serve our gas customers, and also to fuel Mill Creek.

Dave, anything to add to that?

I would just say, Bob, we have a couple of market ready participants, [inaudible] what we described as our transmission development. [inaudible]. Near term things look good, and longer term maybe we will recover standards [inaudible].

Okay. Thanks. Just remind us, do you get [AFUDC] on Mill Creek?

Yes.

Okay. Great. Thank you very much.

(Operator Instructions). The next question comes from Ryan Rosenthal, Sidoti & Company.

Hey, good morning, everyone. First concerning MSTI and collection system projects I believe you may have spoken about this previously, I want to do get an idea of the timing would have the open season would be held, and when given the result there, how you may move forward with initial construction?

Our current plan for the open season is probably later this year. But we are mindful of the economic situation, and we want to make sure that we run those open seasons at an appropriate time, but before the end of 2009 is our plan.

Okay. And then if the open season doesn't go as well as planned, is there a possibility of reorganizing the plan and pursuing it again at another time, or would it just just a one-off deal?

I think there are a number of possibilities, because we organized in the beauty of transmission planned with the three projects, is we can take it piece by piece. It is not an all or nothing project. MSTI could be looked at at a lower voltage level, or could be some kind of an [inaudible] uncommitted capacity facility, to make sure we build on the right side of the project.

There are a lot of possibilities [inaudible] for these projects Sequentially, [inaudible] come online, with capital [inaudible] difficulty obviously upgrade the existing Colstrip line is a very compelling proposition, a strong amount of interest, and effectively no [gillatory] barriers beyond doing the engineering. So that is very compelling.

Next in the queue [inaudible] is the western end of the collector system, that will have to go through an environmental regulatory process. We are getting strong interest in that. I think that is [inaudible].

And the furthest out is MSTI. In addition to the economy. Again, we have to factor in Federal policy as at least one element that will shape decisions in the market, and potentially economically as well. Hopefully [inaudible] I should say also it is [inaudible] Some of you may be aware that [MOPA], has technically agreed to assist with finance in the MATL line, the Montana Alberta Transmission Line, to the north of where MSTI will be located, and is also working with LS Power, on its development project immediately to the south of MSTI. So there is one notable gap between these two projects, and we are there to help.

And I have one question concerning the electric transmission business. Essentially was wondering if you could give us some more details on who are the typical end use customers, and also what factors in order of importance affect the margins that NWE is able to earn, and also the volume that they are able to achieve for the business?

Could you restate the question? We are having a hard time on our end, I understand some of the people listening to the call are also having difficulty. I apologize, could you give that another try?

Sure. I was looking for some more detail perhaps on your wholesale electric business, specifically who the typical end use customers are, and also what factors affect NorthWestern's margins for the business, as well as the volume they are able to sell in a given period?

Dave, you want to put on your supply hat?

From a transmission perspective, the typical end use customers are going to be [LS and some inaudible] serving entities ultimately, or someone else that has an RPS obligation. That may be done through power marketers, or others, or generation. Some are looking at selling into the market on a more merchant basis. We also have someone else to go to wholesale opportunities that we are looking at, from the South Dakota side of the business. And I guess I am not sure if I have completely answered your question.

Sure, that is certainly helpful. I was also trying to determine what factors affect the margin you are able to earn for that business, and kind of who you are competing against?

The South Dakota business?

Right.

Well that is simply the price of the market, and end demand. If we have lower than anticipated high temperatures in South Dakota, then the demand falls off. Obviously that has had an effect on, typically the [inaudible] an agreement with [WAPA].

Thanks for your time everybody.

Thank you. The next question comes from the line of Leon Duval from Catapult. Please go ahead.

Hi, can you guys hear me? I just wanted to kind of come back to the timing of some of these transmission lines? I guess FPL yesterday talked about their wind builds possibly getting delayed. I am wondering how that plays into some of your decisions, in when to run the open season, and possibly when will we could see these projects actually unwind?

Of course, FPL is not a factor for us. Timing will be driven I think really by what we see from a perspective when shippers, the development market is certainly changing, but there are significant shippers out there that predict [inaudible] against what happens in the economy generally, and then clarity around Federal policy.

I would say that we haven't seen any weakening in the RPS standards in the west, and that is really what is driving the market for our transmission. It is not [inaudible] energy standpoint. We believe leaves our project [inaudible].

Thank you very much.

Thank you. Ladies and gentlemen, (Operator Instructions). Next question is from Vidula Merke with [CDP US]. Go ahead.

Good afternoon.

Good afternoon.

When you were talking about the property tax adjustment that offsets the O&M costs relating to the Colstrip outage, one, was that property tax evaluation previously contemplated and included in 2009, or is this something that is more recent? And when Colstrip comes back, and those expenses go away, will the lower assessment remain in place?

No, let me answer that question. We had expectations of property taxes in our plan, and now it is based upon receiving our evaluation from the state, and understanding what that impact is going to be on expense, we believe expenses are going to come in less than we originally planned. That offsets the expected increase in O&M expense from the rotor repair. Those two effectively net each other out. So from our perspective we still are on plan for Colstrip for the year.

How much is the rotor repair then?

1.3 million is our share of that repair.

Okay. So then next year, that expense will not be there, but the benefit of the assessment will continue going forward?

I don't know what my assessment is for next year as far as property taxes. If it is the same on a year-over-year basis, you are correct.

Okay. All right. Thank you very much.

Thank you.

The next question comes from the line of [Jonathan Reader] with Wells Fargo. Please go ahead.

Good afternoon, gentlemen. Could you talk maybe a little more directionally on 2009 full year O&M? YTD it looks like it is about an 11% increase on the nonfuel portion. With the expense measures that you guys are undergoing, do you expect that to at least trim down to the mid single-digit range on a full year basis?

Jonathan, it is Brian, hi, by the way. I would say, remember that increase, that 11% increase you talked about, a lot of that is pension is included in that number. Remember in the second quarter 2008 we didn't have an impact on pension, that we had of course since the third quarter of '08 through today. That is a big piece.

Obviously labor is up. I can't tell you exactly what kind of level they would be in, but our expected increase if you will, or pays of increase in O&M will be less than 11% is my expectation by the end of the year. And some of the cost contingencies that Bob mentioned, are certainly going to drive that number lower than we initially planned.

Can you remind me what the first half '08 pension, there was zero pension expense during that portion?

I wouldn't say zero. I would say, I don't remember exactly for the first half of '08 what our pension expense would be. But remember in the third quarter of '08 last year, we had a significant increase to pension expense, which we carried forward with us in the fourth quarter obviously, and the first two quarters of 2009. So on a YTD '09 versus a YTD '08 comparison, our pension expense is quite a bit higher.

Okay. Got you. And then could you maybe repeat it, I think I might have heard that you said of the $0.08 reduction from transmission revenues, the majority was actually not Colstrip related?

Yes, and Jonathan, I will do it again, and we are sorry again for the line, I understand there is static on the line. The $0.08, or that $0.08 after tax, or $5 million pretax, is our view on OASIS sales, transmission sales for the full year effect for '09. So that is $0.08 of the $0.12 that we talked about between the two midpoints of the guidance range. The other $0.04 is the weather impact we have experienced YTD through 2009. Those two numbers together, $0.12 again that is the difference between the two midpoints of the previous earnings guidance, and our earnings guidance going forward.

Okay. Thank you.

Last question comes from the line of Paul Ridzon again from [TKL Bank]. Please go ahead.

You mentioned you are looking at potential natural gas opportunities. I am wondering how you are envisioning that type of investment, and what level of potential production risk you would be taking there, or how would you structure that type of an asset?

There are a number of different products that we have looked at, a number of different stations, we have had informal discussions with Montana [Commission], and we were not on the same page. Dave, do you want to provide a little more detail?

Yes, there are a couple of things, Paul, but the Montana Gas Transmission System had done in years past. They owned [Worano], one of the few vertically integrated gas utility companies in the US. So what we are looking at are a combination of perhaps some proven reserves within or adjacent to our transmission service territory, perhaps a VPP type of contract, that would secure known reserves. We are not at all interested in any kind of exploration. Our gas transmission and storage business is actually in depleted gas fields, so we could be picking up assets somewhere around our system there, and assuring ourselves of no basis risk, and no exploration risk.

And this would all be kind of a rate based structure?

Absolutely. With prior approval.

And can you ballpark the magnitude that you would be willing to invest in something like this?

I would say I think it is premature at this point in time. I would say that from an annual need, we are looking at kind of a 20 Bcf type need. Obviously we have locked up a significant portion of that. But we haven't nailed out exactly what we need from that perspective, nor are we willing to talk about sizing from a dollar perspective at this time, again we are preliminary thoughts on this.

Just back to property taxes, are Montana taxes going to be down, God forbid, or are they just going to go up less than you thought?

Just, they are going to go up less than we thought, Paul.

I didn't think Montana taxes ever went down, okay.

I wouldn't say that, Paul, just a smaller increase than we had initially expected.

We ended up actually having a pretty good outcome of negotiations with Montana Department of Revenue last year. We settled the dispute we had. A big part of that, was getting some comfort around the direction of taxes going forward.

Just lastly, when do you plan to file in Montana?

File the cost of service and revenue requirement case?

Yes.

It should be the end of September.

Okay. Thank you.

Thank you.

Thanks, Paul.

Thank you. There are no other questions in queue. Please go ahead.

Thank you all very much for the good call. We look forward to visiting with you at visiting with you at future conferences, and next quarter.

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