NorthWestern Energy Group Inc (NWE) 2009 Q3 法說會逐字稿

Welcome to the NorthWestern Corporation third quarter 2009 financial results. (Operator Instructions) As a reminder, today's call is being recorded. I would now like to the turn the conference over to Dan Rausch. Please go ahead, sir.

Good morning and welcome to NorthWestern Corporation's September 30, 2009 quarter end financial results conference call and webcast. Northwestern's results have been released and the release is available on our website at www.NorthWesternEnergy.com. And yesterday after the market closed we also filed our Form 10-Q. Joining us today on the call are Bob Rowe, the President and the CEO, Brian Bird, Chief Financial Officer, Miggie Cramblit, General Counsel, and Kendall Kliewer, the 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 reply of today's call will be available beginning at 4:30 Eastern Time today, through November 29, 2009. To access the replay, dial 800-475-6701, and then access code 118865. Numbers again are 800-475-6701, then 118865 for the access code. A replay of today's webcast will also be available on our website.

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

Thank you, Dan. Net income increased to $18.9 million in the third quarter of 2009. This is compared with $13.4 million in the third quarter of 2008. This was led by a tax benefit from a repairs expense deduction. At the end of September we obtained IRS approval of a tax accounting method allowing us to deduct repairs that would have previously been capitalized.

Operating income in the third quarter of 2009, however, declined by approximately $8.4 million from the same period in 2008. This was as a result of a $14 million decrease in gross margins partially offset by a $5.5 million improvement in operating, general, and administrative expenses. In August, we received an upgrade of our senior secured credit ratings by Moody's Investor Services. In September we priced $55 million of 30-year maturity Montana First mortgage bonds at a fixed interest rate of 5.71%.

Just after the end of the third quarter, we submitted a general rate filing to the Montana Public Service Commission seeking approval to change components of delivery charges for Montana and electric and natural gas customers. The filing was required pursuant to a stipulation approved by the Montana commission in 2008. We requested an increase of $15.5 million in electric revenues and an increase of $1.96 million in natural gas revenues. We requested an authorized rate of return of 10.9% and a weighted cost of capital of 8.3% for both the gas and electric businesses. We requested interim rates of about $12.4 million for electric and $1.7 million for natural gas.

There's no specific timetable for commission determination on -- or commission action on interim rate requests. They are at the discretion of the commission. The requested revenue increase was lower than originally planned as the tax repair benefit was included in the test year. We expect the commission to decide the entire case in or near July 2010.

Yesterday our Board of Directors approved our fourth quarter dividend of $0.335 per share and that is payable on December 31st, 2009 for shareholders of record on December 15th of this year. Now, let me turn the call over to our Chief Financial Officer Brian Bird to discuss in detail our third quarter 2009 financial results.

Thanks, Bob. As Bob mentioned, we obtained IRS approval of a tax accounting method change to deduct repairs that would have previously been capitalized, resulting in an income tax benefit of $12.4 million during the third quarter of 2009. For regulatory purposes we flow these current deductions through to our customers and, as a result, that is why we had a positive P&L impact for the quarter. Since we are not currently a federal taxpayer, we will be able to extend the life of our NOL carryforwards approximately two years. The IRS approval provides a benefit to our customers which allowed to us reduce the revenue request in our recently filed rate case.

Now, let me give you a quick overview of the quarter. In our press release, we included a reconciliation to attempt to schedule the differences on a year-over-year basis. To summarize further, if you remove the tax benefit I just discussed, the pension expense timing issue for 2008 to 2009, the prior year gain on a forward contract, and the net reduction in insurance recoveries on a year-over-year basis, after removing those our earnings were down about $0.04 a share, compared to the third quarter of 2008. Those $0.04 of reduction were primarily driven by mild weather and a generally weak economy, but partially offset by adding our interest at Colstrip Unit 4 into rates in 2009.

Now for some more detail on our consolidated operations. We reported diluted EPS of $0.52 a share during the quarter compared to $0.35 a share in the third quarter of 2008. Consolidated net income was $18.9 million for the third quarter of 2009, compared with consolidated net income of $13.4 million during the third quarter of 2008. The increase is due primarily to an income tax benefit. In addition, we had lower operating, general, and administrative expenses. These were partially offset by lower gross margins and higher interest expense.

Our gross margin declined approximately $14 million from the third quarter of 2008, due primarily to the following -- the absence of a 2008 unrealized gain of approximately $10.2 million, due to changes in forward prices of electricity as a result of a hedge on our Colstrip Unit 4 output; also decreased margin due to lower regulated electric retail volumes related to mild weather. We also had lower transmission capacity revenues due to less demand to transmit energy for others across our lines. We also continue to experience a decrease in wholesale electric margin in South Dakota, due to lower sales and prices. Offsetting these gross margin decreases was a benefit of approximately $3.7 million from the transfer of our interest in Colstrip Unit 4 to rate base.

As Bob previously stated our selling, general and administrative expenses were $5.5 million less than the third quarter of 2008. The biggest expense reduction was an $8.9 million reduction to the timing of our pension plan expenses. Due to market losses during the third quarter of 2008, we increased our pension funding estimates, which resulted in a significant increase in pension expense in the third quarter of 2009.

Offsetting these cost reductions on a year-over-year basis was a net decrease of about $6.3 million in net insurance recoveries and settlements from the third quarter of 2008. In the third quarter of 2009, we had $1.4 million insurance recovery related to previously incurred Montana generation-related environmental remediation costs, and in the same period of 2008, we received an insurance reimbursement and a litigation settlement totaling approximately $7.7 million.

Also, our interest expense for the three months ended September 30, 2009, increased $1.7 million from the third quarter of 2008, due to increased debt levels. For the nine months ended September 30, 2009 consolidated net income was $47.8 million compared with consolidated net income of $46.3 million for the nine months ended September 30, 2008. The increase was primarily due to lower income tax expense, offset by reduced gross margins, an increase in operating, general, and administrative costs, and higher interest expense, as discussed above.

Now I will move to the balance sheet. We have total liquidity of approximately $227 million with cash of $6 million and $221 million available from our revolver. Total debt at September 30, 2009 was $890 million, compared with $862 million at December 31st, 2008. The company maintains a strong long-term debt to total capitalization ratio of approximately 53% at September 30, 2009.

Cash provided by operating activities total $129.3 million for the nine months ended September 30, 2009, as compared with $176.7 million during the nine months ended September 30, 2008. This decrease in operating cash flows is primarily related to pension funding of $76.4 million, which was an increase of approximately $54.5 million as compared with the nine months ended September 30, 2008.

Cash used in investing activities for the nine months ended September 30, 2009 increased by approximately $34.6 million as compared with the same period of 2008 due to an increased property, plant, and equipment additions. Cash used in financing activities total approximately $19.1 million during the nine months ended September 30, 2009 as compared with $100 million during the nine months ended September 30, 2008. The decrease was due primarily to the share repurchase that occurred in the third quarter of 2008.

Now, I would like to mention the most significant item affecting our cash flows for 2009. By the end of the year, it is anticipated the company will make in excess of $90 million in contributions to its pension plan. We made a conscious decision to make significant contributions this year for two reasons. First, since most of our investment growth capital is in 2010 and beyond, we thought it prudent to increase the funding levels now. Second, we wanted to take advantage of the drop in stock market experienced at the end of 2008 and into the first part of 2009.

Since that time we have made significant progress in our underfunded portion of the pension plan. We have experienced a return of approximately 20% for the nine months ended September 30, 2009 and hope to end the year at about 90% funded on our pension plan assets. This may significantly reduce our funding level in future years to a range of about $10 million to $15 million annually going forward. As you can see, despite considerable pension funding our balance sheet and cash flows remain strong.

Now, I will talk about our 2009 earnings outlook. Our July estimate for earnings per share in 2009 had been in the range of $1.75 to $1.85 per fully diluted share. Due primarily to the IRS approval of the tax accounting method to deduct repairs expense that would have previously been capitalized, we are revising the estimate for earnings per share in 2009 to be in the range of $1.95 to $2.05.

The primary assumptions in this new guidance of $1.95 to $2.05 are as following. Our year-to-date results through September 30, 2009. The effect of a lower 2009 income tax is continuing into the fourth quarter with just under a 30% effective rate for the fourth quarter. That wholesale electric prices in South Dakota continue at the current third quarter levels. The lower transmission capacity demand continues. We expect to continue to experience relatively flat residential demand as well as reduced commercial and industrial demand during the remainder of 2009. We also are not anticipating any additional insurance recoveries for 2009. Our fully diluted average shares outstanding will be about 36.3 million, and normal weather in the company's electric and natural gas service territories for the fourth quarter of 2009.

Now, let me turn it back over to Bob.

Thank you, Brian. Brian just provided you with the estimated earnings per share for 2009. Now, I will provide you a general outlook for the rest of the year.

As we have discussed with you previously, the second and third quarters have been quite challenging due to mild weather and a slower economy in areas adjacent to our service territory. Last quarter we discussed the economic environment in our service territories and explained that while our region was holding up relatively better than the national averages, we were undertaking good, strong, contingency planning and cost control measures in anticipation of the downturn affecting us.

During the third quarter we have continued to experience weak economic conditions all around us. We believe that this will likely continue into 2010 and will result in weaker customer demand than normal. While customer counts increased, retail residential and commercial electric volumes were down 3%, and industrial volumes were down 9% for the third quarter as compared with the same quarter of 2008.

This volume reduction, while due in part to energy efficiency measures and milder weather, is also significantly due to weak economic conditions, and again particularly for commercial and industrial customers. I do point out that our margins are minimally impacted by changes in industrial demand due to our rate structures. We are primarily a T&D supplier in Montana.

I will update you on our prospects for growing the company going forward. As most of you know, we are constructing a natural gas-fired regulated plant in Montana and are proposing three transmission projects, and I will give you a quick update on each of those. As you know, we received preapproval for the Mill Creek plant from the Montana commission and we kicked off construction at Mill Creek in June of 2009. We had an official groundbreaking event on August 27th of this year with the governor of Montana, members of the legislature, members of the public service commission and other dignitaries all on hand and many wielding a shovel.

We have capitalized approximately $40.5 million in construction work in progress related to the project to date. The total capital cost on the project is expected to be approximately $202 million upon completion, and the plant is scheduled to be operational by December 31st of 2010.

Turning to the transmission lines of business, we have as you know three transmission projects that we have proposed. First, an upgrade to our existing 500 KV Colstrip Transmission System; second the Montana collector system, the feeder lines; and third the Mountain States Transmission Intertie.

First a quick update on the Colstrip 500 KV upgrade. We and the other owners of the Colstrip Transmission System are conducting a technical study to determine the range of our improvements. We expect that to be completed by the end of this year. We are working to complete the Partner Participation Agreement early in 2010 and are actively pushing that process forward. Our capital costs for the project is estimated --- our share of the capital cost is estimated to be approximately $41 million. This is if all of the partners in the Colstrip Transmission System participate proportionally to their participation in the system. Commencement of construction will be planned for the summer of 2011, and the upgrades to the system should be completed by the end of the third quarter of 2012.

In addition, we are also continuing to pursue the collector system to gather renewable resources in Montana. We anticipate conducting a second open season process by the end of the first half of 2010. The Joint System Impact and Facility Study is expected to be completed by the end of the first quarter of 2010. Our assumed capital on the first of the identified collector lines would be approximately $200 million, and that line would be scheduled to become operational by the second quarter of 2014.

Finally, the Mountain States Transmission Intertie or MISTI. Public community and education meetings, meetings with land owners are active. They are ongoing and will continue through the fourth quarter and into 2010. We are here as well planning to conduct a second open season process by the end of the first half of 2010. The draft Environmental Impact Study, very importantly, is planned to be released by the agency by the end of the first quarter of 2010. We have submitted Part I of the Department of Energy loan application for consideration under the Federal Loan Guarantees for Electric Power Transmission Infrastructure Investment Projects, and we would expect MISTI to be placed in service by the first quarter of 2015.

That concludes our prepared remarks. I would like to now open up the call for your questions. Thank you.

(Operator Instructions). And we'll go to the line of Paul Ridzon. Please go ahead.

Good morning or good afternoon.

Or good morning.

Good morning, I guess for you. How long do you now anticipate the NOLs to extend to?

They are pushing by two years. On a gross basis we move from 2012 to 2014.

And is there established yet a formal rate case calendar in Montana at this point?

No, there isn't a procedural order in place, but there's a nine-month shot clock.

So that puts us July you said?

That's correct.

Okay. Thank you very much.

Thank you.

We'll go to the line of Brian Russo. Please go ahead.

Yes. Hello.

Good morning.

Hi, Brian.

Just on your 2009 guidance, it looks like you've raised, including the IRS tax settlement, you have increased it $0.30 but the tax settlement looks like it was $0.34. So is there a $0.04 kind of negative driver somewhere in there? Or am I --

Weather would be a part of that, Brian.

Weather? Okay. Then you mentioned you are expecting below normal load growth in 2010. Can you be more specific? Are you assuming flat growth or, say, 1% growth?

I would say for today's purposes we'd be looking at flat.

And is that what's included in the Montana rate case filing?

Well, really -- we are looking at a 2008 historic test year.

Oh, got you. Okay. And is the MISTI project, commercial operation date of first quarter 2015, is that consistent with what you have said in the recent past or have there been any delays there?

It's pushed back slightly. What we have been discussing, I think pretty consistently, is the ability to time MISTI and time capital commitments to MISTI depending on developments, including the overall health of the economy, demand among wind and renewable developers or other developers, and then third, obviously, more definition around federal policy.

I have been encouraging people to think of our transmission projects sequentially, first, with the Colstrip upgrade, second with movement on collector, and then in the third slot would be MISTI in terms of timing and capital commitments.

And you have laid out some calendar of events or kind of events to watch on MISTI. When can we, you know, expect maybe you guys announce a partner on that? Is it tied to any stage of the development process that you have laid out here?

As I think most on the call know, we certainly have had a strong interest among prospective partners. We would need to make any decision about a possible partner, I think, before we are committing the large amounts of capital associated with active construction.

All right. Thank you very much.

Hey, Brian, Brian, one last thing to point out. You asked the questions about volumetrics. We will provide more detail of that in February when we talk about our earnings guidance for 2010.

Okay. Great. Thank you.

Thank you.

And next we'll go to the line of Chris Ellinghaus.

Hey, guys, how are you?

Hi, Chris.

Morning, Chris.

A couple questions. As far as the transmission sort of drag, do you anticipate that that's going to continue indefinitely into 2010?

Chris, we expect some recovery, but certainly not to the level of recovery we saw before the economy fell apart on us.

Okay. So is there something structural in addition to just the economic effect?

No. That's the most detail we can provide at this time.

Okay. Is it fair to impute from the guidance that you are expecting a tax benefit in the fourth quarter, something in the $0.06, $0.07, $0.08 range?

Actually, it would be slightly higher than that.

Okay. Going into the first half of next year, are we going to have continuing tax benefits from the ruling?

Yes. We'll have some tax benefits going in to 2010. Of course, with a rate case in terms of the filing, some of that benefit, of course, will flow back through to customers.

Okay. And did you get the $1.4 million insurance recovery that you had previously talked about?

Yes.

Okay. And that was a pre-tax number?

Correct.

Okay. And lastly, in the fourth quarter last year, you had a pretty sizable pension expense reversal. Do you remember the number for that?

Hang on one second, Chris. Let me find that for you. Yes, Chris, the --

Chris, are you looking for the pension expense number from last year?

Yes. There was a reversal of what you had done in the third --

It was like $5.6 million pre-tax.

I'm sorry, say that again.

$5.6 million pretax.

Okay.

I'd remind you, Chris, that we also had some other items that moved the opposite direction.

Right. I figured we would talk about that next week. Anyway, thanks. (multiple speakers) We'll see you.

Thanks.

Next we'll go to the line of Ryan Rosenthal. Please go ahead.

Hi, everyone.

Hi, Ryan.

Just following up on a couple questions already asked. In terms of the tax settlement agreement, how can we look at that going forward? I know it becomes part of the rate case likely, but into fiscal -- or into calendar 2010, absent any change in the rate case, what would the effective tax rate impact be?

Well. From an effective tax rate perspective, I would anticipate 2010 will have an effective tax rate of approximately 30%. And that's an annual number for 2010. And I would say that in terms of how this should work on a going forward basis, other than the difference of the timing of when the rate case goes into effect, but if the rate case went into effect at the beginning of the year, the tax benefit would be pretty inconsequential, particularly for our Montana business. Again we are going to flow this through to rate payers. But until we have a rate case in South Dakota and Nebraska, there will be some incremental benefit from taxes on a going forward basis.

Then in terms of the MISTI project and the current economic environment, and I guess we also have seen some movement towards renewable energy centers taking hold or, you know, with the current administration, has there been any movement that you can speak of regarding potential partners at this time or any kind of feeling on the direction of the project, give what's gone on recently?

As I mentioned, we continue to have very strong interest from potential partners. We're evaluating those. They each have their own strengths and weaknesses. And as there continues to be more definition around the western market, around federal policy, more certainty in the economy, then we'll be able to make a decision, but we don't need to make a decision about a partner at this time.

Okay. And then barring any change in rate case decisions into next year, could you give a forecast on what your pension expense might be directionally in 2010?

Yes, it's going to be -- Ryan, you may remember the accounting order. That's allowed to us smooth the pension expense on a going forward basis. It going to be approximately all-in about $30 million.

Okay. I think that wraps up what I have. Thanks, guys.

Thanks.

We'll go to the line of Eric Beaumont. Please go ahead.

Good morning, guys. Pretty much everything was asked and answered. I just wanted to touch one more on the tax benefit. So as I think about things, you know, you are going to get it rolled into the case and things are going to benefit from the flow-back to customers.

But just from kind of a normalization of '09 standpoint, you know, because of how the accounting order is and how things are going to be treated forward, how would I think about what portion of it would kind of be a recurring benefit to kind of normalize what, you know, a run rate of earnings would be? And understanding the rate case is going to throw things off, but, you know --

I would put it in this context. If, again, think about -- I will go to 2011, assuming that there will be an outcome on the rate case and, again, the benefits flowed through. Since you are in perfect timing in that regard, the benefit will, again, be flowed through. So there should be no real incremental benefit going on.

However, repairs, if you continue to have investment in your business and this repairs expense deduction, if you are investing greater than your depreciation, you will have more benefit in terms of this repair deduction. So that can help from an expense perspective and certainly from a cash perspective. It may allow you to continue to utilize your NOLs for a portion of time after we discussed.

Okay. So, I mean, on a going forward basis, it's really the cash benefit and the extension of the NOL; but near term, because -- until the case goes in you do get the earnings impact because of how it's being accounted for?

That's correct and, again, I would also emphasize the smaller piece associated with the South Dakota, Nebraska. That benefit will accrue to us until we ultimately pass that through to rate payers in a rate case in the future.

Okay. And even though it's going to go -- the tax benefit piece will end up going back to rate payers, there's going to be some prospective expense that goes into the rate case for this repair piece that balances with the revenue requirement and then gets offset by the tax benefit? Or is it just strictly the tax benefit that's going to (multiple speakers)?

Think of it this way, the reduction in tax expense results in a reduction in the revenue requirement that we'll receive.

Okay, but is there some associated increase to the expense side that you are getting trued up on for the expectation of the repairs expense?

No.

Okay. Great. Thanks, guys.

(Operator Instructions) And you do have a follow-up question from the line of Paul Ridzon. Please go ahead.

How big of a piece could the South Dakota and Nebraska be to kind of keep flowing until we file there?

Paul, I think in the grand scheme of things, it's relatively small compared to the Montana piece. I can't direct --

I couldn't be more precise.

I think I would probably, you know, $1 million to $2 million benefit.

And can we get an update on the Colstrip plant?

We should be back online very shortly.

Okay. And you said that 2010 pension expense should be $30 million. That's flat with this year, right? Just --

Yes.

And then Montana until you get the rate order, the benefit of expensing flows through to shareholders?

Well, until -- in essence, we are getting a benefit on a monthly basis for this reduction in tax expense, but obviously once the rate case goes into effect, whatever rate increase there is, that benefit again will flow through to customers.

Is there any impact on rate base? Because previously capitalized costs are now expensed. So is rate base lower now?

No.

No. Again, since this is flow through, there's no impact on rate base.

Got you. Okay. Thank you very much.

You have a question from the line of Jonathan Roiter. Please go ahead.

Good morning, gentlemen.

Hi, Jonathan.

Just on the tax item, is this just all for 2009, or does that $0.34 capture part of a previous year?

It's both '08 and '09, Jonathan.

Are you able to break it out?

You know what, I tell you, I think it's about -- for the quarter, it's about $8 million for '08 and $4 million for '09, again, those are round numbers. I think it was $12.4 million total.

Okay. And then --

And then obviously, Jonathan, we will have a benefit here in the fourth quarter, as well, as we discussed.

Right. You had provided kind of a reconciliation of kind some of nonrecurring items or one-time items on the quarter. Can you kind of go back over that real quickly? I think you said the net was $0.04, but I was kind of thinking it was something else.

Yes, Jonathan, I tried to go slow but I understand people trying to follow along might be tough. If you give me a moment. On the -- what we provided was, again, particularly focusing on margin and OA&G, a reconciliation of all the items. It shows the subtotal, we went from $0.35 up to $0.52 or a change of $0.17, but if you remove this tax accounting change --

Are you just removing the quarter piece, the $4 million for this year?

I'm removing the quarter piece. I was focused on the quarter going from $0.35 to $0.52.

Okay. So that's $4 million, is that right? $4 million for this year, for just third quarter. Is that what you said earlier?

No, I said $0.04. It's on an EPS basis.

Okay.

So instead of a $0.17 increase, if you remove those four items I talked about, we had a $0.04 decrease.

Okay.

You want me to go through them again?

No. That will probably work out for me. I was just using the full $0.34 before, as opposed to just the $0.04 for the tax item.

You should use all $0.34 for the -- all $12.4 million got booked in the third quarter.

Okay. So you have the $0.34 for the tax item, $0.15 for the pension and then the insurance of $0.11 and the unrealized gain of $0.17?

Right. I certainly don't necessarily want to call those one-time items. They were significant items during the quarter that --- if you want to get to our underlying business, removing those items, I tried to give you an idea. If you take those out, you had a $0.04 decline on a year-over-year basis, quarter over quarter.

And the point being -- the reason for that $0.04 decrease, again, if you think about weather and you think about the economy's impact on electric transmission, our electric and natural gas volumes, wholesale electric prices, partially offset by the fact Colstrip Unit 4 was in rate base, that's trying to drive what's happened with our underlying business. It was really a $0.04 decrease.

Right. Okay. I got you there. And then what is the year-to-date effect from weather, roughly? I don't know if you broke it out on this quarter but I think you had said at least at the midpoint of the year, it was about $0.04.

Yes, we said $0.04. Our expectation is that, you know, on a full-year basis, we are looking at $0.10 for weather.

On the full year?

Well, it's $0.10 through the third quarter.

Right.

And we expect it normal for the fourth quarter. So, yes.

Okay. That's all I have. Thanks.

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

Well, thank you all very much. I'm sure you have noticed that we did substantially revise the release to provide as much information as possible. We hope that was responsive to what we heard from a number of you. We look forward to seeing several of you next week.

Thanks.

And ladies and gentlemen, this conference will be available for replay starting today afternoon through November 29th at midnight. You may access the teleconference replay system at any time by dialing 800-475-6701, and entering the access code 118865. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.