NorthWestern Energy Group Inc (NWE) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the NorthWestern Corporation year-end 2009 financial results. 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, today's call is being recorded. I would now like to turn the conference over to Dan Rausch. Please go ahead.

Good afternoon and welcome to NorthWestern Corporation's December 31, 2009 year-end financial results conference call and webcast. NorthWestern's results have been released and the release is available at our website at www.NorthWesternEnergy.com. We also filed our 10-K after the market closed yesterday.

Joining us today on the call are Bob Rowe, President and CEO; and Brian Bird, Chief Financial Officer. This presentation contains forward-looking statements within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These 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-Q's, 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 the presentation, those joining by teleconference will be able to ask questions. A replay of today's call will be available beginning at five-thirty Eastern Time today through March 12, 2010. To access the replay, dial 800-475-6701 and then access code 144451. The number again is 800-475-6701 and access code 144451. A replay of today's webcast will also be available on our website, and with that I'll turn it over to President and CEO Bob Rowe.

Thank you, Dan. Net income improved to $73.4 million for 2009 compared with $67.6 million in 2008, and the improvement in net income of approximately $5.8 million is due primarily to two factors. First, obtaining IRS approval of a tax accounting method change to deduct repairs that would have previously been capitalized, and this results in an income tax benefit of $16.6 million during 2009. And secondly, the transfer of Colstrip Unit 4 to utility rate base, resulting in improved gross margin of $13.8 million.

During 2009, we successfully accessed the capital markets to refinance existing maturities and also to finance the Mill Creek generating station and capital expenditures. In March, we issued $250 million at 6.34% of Montana First mortgage bonds for the tenure term. In October we issued $55 million at 5.71% of Montana First mortgage bonds with a 30 year term. In June, we admitted our revolving credit facility to increase the availability to $250 million from the previous $200 million and extended the maturity date to June 30, 2012.

During 2009, we received approval from the Montana Public Service Commission to construct the 150-megawatt Mill Creek generating station project with a 50% debt and 50% equity capital structure, a return on equity of 10.25%, and debt at 6.5%. During the year, we received upgrades of the Company's senior secured and unsecured credit ratings by both Moody's and Fitch. And finally, we increased our 2010 first quarter dividend to $0.34 per share, payable on March 15, 2010 for shareholders of record on March 15. During 2009, our quarterly dividends were $0.335 per share each quarter. And now let me turn it over to Brian Bird, our Chief Financial Officer, to discuss our 2009 financial results in more detail.

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 $16.6 million during 2009. Since we are not currently a federal taxpayer, we will be able to extend the life of our NOL carryforwards approximately two years to 2014 as a result of this change. We reported diluted EPS of $2.02 a share during 2009 compared to $1.77 per share in 2008. So earnings increased $0.25 a diluted share, or 14%.

Now let me give you a quick overview of the largest drivers. Tax benefit added about $0.43 a diluted share and moving Colstrip Unit 4 into rates added approximately $0.23 a share to earnings in 2009 over 2008. Offsetting those increases in 2009 earnings were an $0.18 per share reduction to an insurance environmental recoveries when compared to those received in 2008. Approximately $0.12 a share combined reduction on lower wholesale electric revenues in South Dakota and transmission revenues in Montana, and lastly a $0.10 per share increase in insurance reserves for general liability and workers compensation matters. As you can tell from our press release and our 10-K filing, there were other increases and decreases to earnings year-over-year, but these were the biggest drivers.

So now for a quick look at the fourth quarter. Consolidated net income for the fourth quarter ended December 31, 2009 was $25.6 million or $0.70 a share, an increase of $4.3 million over $21.3 million or $0.59 a share for the fourth quarter of 2008. The increase was primarily due to a decrease in income tax expense mentioned above. However, consolidated gross margin increased in the fourth quarter, primarily due to placing our interest in Colstrip Unit 4 into regulated electric rate base and colder winter weather in our service territories compared with the fourth quarter 2008. These increases in margin were offset by an increase in consolidated operating general and administrative expenses, primarily caused by lower insurance recoveries and litigation settlements, increased post-retirement healthcare costs due to plan asset market losses and changes in actuarial assumptions, and increased insurance reserves due to general liability and worker compensation matters.

Now I'll talk about our 2010 earnings outlook. Our estimate for fully diluted earnings per share in 2010 is a range of $1.95 to $2.10 per fully diluted share. The major driver of earnings from 2009 to 2010 include an increase in AFUDC income next year as we construct the Mill Creek generation station, increased electric and natural gas volumes due to an assumption of normal weather and some economic recovery in 2010. We expect increasing volumes for Montana transmission and South Dakota wholesale electric because there are no planned outages in 2010 related to Colstrip Unit 4 or the South Dakota plants. In fact, in 2009 there were outages in both South Dakota and Montana. A reduction in insurance claims in 2010 compared with 2009, and we expect employee costs to be flat in 2010. Primarily labor cost increases will be offset by benefit cost saving initiatives that we've already implemented.

Offsetting the positive drivers I just noted for 2010, the negative drivers include -- will in fact only receive half of the tax repairs deduction benefit in 2010 that we received in 2009. The 2009 benefit that we accrued was for both years 2008 and 2009. The 2010 benefit will relate only to 2010's repairs. The overall tax rate for 2010 will approximate 30%. In addition, we expect an increase in property taxes in 2010, and finally depreciation will continue to increase as we continue our CapEx additions. The primary assumptions included in our 2010 guidance are the fact that we've excluded any impact from the requested rate increase in the Montana jurisdiction for electric and natural gas customers because the expected decision will not occur until some time in the fourth quarter of 2010. Our fully diluted average shares outstanding will be about 36.5 million and aligns with assumptions of normal weather in the Company's electric and natural gas service territories for 2010.

Now I'll move to the balance sheet and cash flow statement. On the balance sheet, we have total liquidity of approximately $185 million with cash of $4 million and $181 million available from our revolver. Total debt at December 31, 2009, is $987 million compared with $862 million at December 31, 2008. The Company maintains a long term debt to total capital ratio of approximately 56% at December 31, 2009.

On the cash flow statement, cash provided by operating activities totaled $117.6 million for the year-ended December 31, 2009 as compared with the $198.3 million during the nine months ended December 31, 2008. This decrease in operating cash flows is primarily related to a pension funding of approximately $93 million, which was an increase of nearly $60 million as compared with 2008. Also a payment of the Ammondson verdict in the fourth quarter of 2009 of approximately $27 million. Cash used in investing activities for the year ended December 31, 2009 increased by approximately $65 million as compared with 2008 due to increased property plant and equipment additions, including $81 million related to the Mill Creek generation station. Cash provided by financing activities totaled $65.3 million during the year ended December 31, 2009 as compared with cash used for financing activities of $75.4 million during the year ended December 31, 2008. During 2009, the Company successfully accessed the capital debt markets twice, as Bob explained earlier, and also during 2008, we used cash to repurchase shares under a then announced share buyback plan of approximately $77.7 million.

Now I'd like to mention the most significant matter affecting our cash flows for 2009. The Company made about $92 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 in 2009. Second, we wanted to take advantage of the drop the stock market experienced at the end of 2008 and into the first part of 2009.

We have made significant progress in our underfunded portion of our pension plan as a result of this decision. In 2008, we were underfunded by approximately $150 million. In 2009, we are now underfunded by less than $25 million. We anticipate funding approximately $10 million into the pension plan in 2010. As you can see, despite the considerable pension funding, our balance sheet and cash flows remain strong. With that, let me turn it back over to Bob.

Thank you, Brian. Brian just provided you with the estimated earnings per share for 2010, and now I'd like to provide you with our view of next year, this year. From a macro point of view, South Dakota, Nebraska, and Montana have continued to perform on average better than the overall national economy. The unemployment rates in Nebraska, South Dakota, and Montana were the second, third, and fourth lowest rates nationally as of December 31. Weather continues to be a significant factor affecting our loads and usage. The weather during both 2009 and 2008 had similar heating degree and cooling degree days, so the year-over-year comparison was similar. However, both years were milder than what we would consider normal. Accordingly now, we now expect some increase in volumes for 2010 for both electric and natural gas due to the assumption of more normal weather patterns.

During the second and third quarter of 2009, we experienced a decrease in our transmission revenues in Montana, and then in the fourth quarter, the transmission revenues recovered somewhat. I'd like to provide you some additional detail about how we derive our transmission revenues in Montana. We have transmission customers in the following four categories. First, retail load embedded in Montana rates. Second, wholesale choice customers on the system who are served by our FERC Open Access Transmission Tariff, or OATT. Third, on system generators selling to off-system customers served under our OATT. And finally, from other customers that purchased transmission capacity under our OATT and move energy through and out of our transmission system.

The retail loads, the first category, are part of the regulated builds of the customers, so those revenues are included in retail rates. Our total transmission revenues from the other three categories were as follows. $23 million from wholesale choice customers on the system, $14 million from on system generators selling to off system customers with long term contracts, and finally, $8 million from our through and out customers for a total of about $45 million in transmission revenues for 2009 reflected in the financial statements. Most of the $3.2 million decrease in our transmission revenues in 2009 compared with 2008 was from the through and out group, from which we derive the smallest portion of our revenues. The through and out customers represent the biggest risk for transmission revenues, but they also represent less than 20% of the non-retail transmission revenues. Most of the through and out revenue is driven by economic conditions outside of Montana.

The wholesale choice customers on the system and the off system customers with long term contracts represent more than 80% of our transmission revenues in Montana, and they show little variability year-over-year. In 2010, we expect a slight recovery in the revenue from on system generators selling to off system customers. This is primarily due to Colstrip Unit 4 being online for the entire year compared with being down for repair a number of months in 2009, and it's also due to the [Natural Interglacier 2] wind farm coming online in late 2009. We're also reporting in 2009 that our South Dakota wholesale electric margins declined when compared with 2008, and that was due in part to a decrease in plant availability related to scheduled maintenance. We estimate our South Dakota wholesale volumes will increase by approximately 53 megawatt hours and margin will increase by approximately $1.8 million in 2010 due primarily to lower plant maintenance. We note that the market price remains soft, so most of the expected increase is due to the additional volumes expected in 2010.

Also, we amended our post retirement healthcare plan during the fourth quarter of 2009, and we anticipate that 2010 costs will decrease by approximately $4.7 million to approximately $1 million while still providing a good industry competitive benefit. During 2009, our interest expense trended higher because of the additional debt outstanding to construct the Mill Creek generating station. Also, in December 2009 we made a payment on the Ammondson verdict of approximately $26.7 million and we've been accruing about $2 million per year in interest expense as that verdict was appealed. So that is now behind us, we'll have no need to accrue interest on that matter. With that development and combined with capitalizing a portion of the interest on the debt during construction at Mill Creek, the result is no expected increase in interest expense in 2010.

Before I update you on the growth projects I'd like to give a review of our core operations. Over the last several years, we've had substantially -- we've substantially improved our employee safety record, culminating with 2009 having the fewest lost time incidents in the last five years. And this is really an extraordinary success and accomplishment by our employees from across our service territory. Next in 2009, lost time incidents were less than one-third of the 2006 level, and again this is a striking outcome. In terms of reliability, our system performs very well as measured against industry benchmarks. In fact, we ranked in the first quartile measured against the standards of the International Electric and Electronic Engineers, the IEEE. We also showed significant improvement in the J.D. Power & Associates customer satisfaction utility rankings this year, and this at a time when many of our peers were experiencing declines or stayed relatively flat in customer satisfaction. Results from another third party independent survey by RKS Research showed our customer perception of our reliability, our friendliness of our employees, and the value per price paid saw significant improvement in 2009. So our core operations are strong as we look ahead with larger projects, and all of our initiatives are really about providing great service to our retail and our wholesale customers.

Now, I'll update the prospects for growing our Company. As many of you know, we're constructing the Mill Creek plant in Montana and are proposing three transmission projects. I'll give you a quick update on each of those initiatives starting with Mill Creek. We kicked off construction at Mill Creek near Anaconda in June 2009. Winter construction continues, and we recently had more than 120 workers on the project site. In November, we filed a quarterly update report with the Montana PSC, and the next quarterly update is due in February. In December, the MPSC's consultant visited the site and reported back to the PSC on progress to date. We're currently on schedule for all aspects of the plant. We've capitalized approximately $86.3 million in construction work and progress related to this project to date. We're planning to make the appropriate regulatory filings to have rates and tariffs in place on January 1, 2011. Total capital cost of the project is expected to be approximately $202 million upon completion and the plant is on schedule to be operational by December 31, 2010.

Turning to the transmission side of the business, we have three transmission projects that have been proposed. First, an upgrade to our existing 500 KV Colstrip transmission system. Second, the Montana collector system. And third, the Mountain States Transmission Intertie, or MSTI. First, turning to the proposed upgrade to the existing Colstrip 500 KV. The Company and the Colstrip transmission system owners are conducting technical studies to determine the range of the improvements. The initial phases of the studies are in fact nearly completed and the second phase of the studies are expected to continue throughout the year. We're in discussions with Bonneville Power Authority and a partner participation agreement, which is expected to be completed in the first half of the year. The total expected cost of the upgrade is anticipated to be about $200 million. Our capital cost on the project is expected to be about $41 million, assuming that all the partners to the Colstrip transmission system participate in the upgrade. Commencement of construction is planned for the summer of 2011, and the upgrades to the system would be completed by the end of 2012.

Now we're also evaluating construction of a collector system to gather renewable energy in Montana. We're planning to conduct an open season process by the end of the first half of the year, and informal meetings to initiate the open season will be held March 25 in Helena, Montana. Information on the meeting can be found on the OASIS website as well as on our own website. In the open season, results would be posted around the end of 2010. I do note that wind development has slowed from many expectations of a year ago, as the timing of the development is determined by the health of the economy, by the pace of investment in renewable sector directly and available financing, and also of course by public policy. The joint system impact facility study on collector is expected to be completed by the end of the third quarter of 2010 and we expect FERC filings on the collector process by early 2011. Our assumed capital on the first identified line of the system is approximately $200 million, and pending a positive outcome of the open season, the line would be scheduled to be operational by the second quarter of 2014.

And then our third transmission initiative is MSTI, Mountain States Transmission Intertie. Public meetings educating communities, and effective land owners occurred throughout the fourth quarter 2009 and are continuing in 2010. We're planning to conduct a second open season process by the end of the first half of the year. Consistent with the approach to the collector system, informal meetings to initiate the open season process will be held March 25, also in Helena, Montana. And additionally, information on that meeting can be found on the OASIS website and on our website. Pending a positive outcome of the open season, the results would be posted around the end of the year. The draft environmental impact study is planned to be released by the agencies around the end of the first quarter of 2010 and a record of decision on the EIS is expected in the fourth quarter of 2010. We expect FERC filings for MSTI by early 2011, and we continue to talk with potential strategic partners about co-investing in the project. And we'll decide on a strategic partner before any major capital commitment is made. We've capitalized $11.2 million in costs related to MSTI through December 31, 2009, and MSTI is expected to be placed in service by the first quarter 2015.

I'd like also to discuss some of our supply needs over the next several years. For electric supply in both Montana and South Dakota, we have requests for information out to add between 25 and 75 megawatts of renewable power in each state. We're looking for cost effective renewable energy projects to help us meet increasing customer demand and also allow us to further diversify our resource portfolio, given the uncertainty associated with climate change and energy legislation. We prefer to purchase projects outright, but we'll certainly consider other options including equity interests and long term power purchase agreements. We will only consider projects that deliver both renewable energy and the associated REC, the renewable energy credits, for both of these requests for information.

With respect to natural gas reserves, we are interested purchasing gas reserves to provide price stability for our customers into the future. The volatility of gas prices over the year has created significant changes in our customers' monthly bills over time and challenges for many customers. We want to be clear the Company is only looking at proven reserves that can be rate base. We are not considering getting into the E&P or exploration and production business. We have nothing specific to announce or discuss as part of this call concerning gas reserves, but we are seeking ways to invest in long term stability with our customers. With respect to our core distribution business, since 2006 we've been investing more in CapEx each year than current depreciation. We're seeking greater automation outage prevention and monitoring throughout our system. And toward that end we are participating in a regional working group that will be evaluating various smart grid applications over the next several years to better understand how we can deploy this new technology and make all of its manifestations affordably and effectively to customers in our service territories. We plan to test the operational efficiencies and Customer Service enhancements that may be achieved by the installation of smart grid technology, focusing particularly on communication between the utility and the meter. Our total project cost for participation in the pilot is expected to be approximately $4.2 million, from which half will be funded from a Department of Energy grant.

In summary, 2009 was anything but a smooth ride. But we did end the year with approximately similar earnings than we had expected at the start of the year, and the process we substantially improved our employee safety record and we continue to invest in our core distribution business. We showed significant improvement in our customer satisfaction rankings in 2009, at a time when many of our peers were experiencing declines or at best staying flat. And finally, we produced total shareholder return of 17.6% to large shareholders, exceeding both the Philadelphia Utility Index and the Dow Jones Utility Index as well as our peer group, and we're excited as we look forward to 2010.

With that, I look forward to your questions and I think we're ready to open the call.

(Operator Instructions). Our first question comes from Rob [Grace]. Please go ahead. Mr. Grace, your line is open. Well, we'll move on to the line of Igor Grinman.

On O&M, I might have missed on the call, but the bridge from 2009 to 2010 shows a year-over-year net benefit of a couple of cents. Can you just please talk about what's driving the expected benefit? And I assume it's some cost cutting measures, and how is it spread out between your jurisdictions?

We aren't talking about necessarily how it's spread out between the jurisdictions, per se but on the O&M side, we talk about -- obviously we aren't going to have the rotor repair. We don't anticipate as much in terms of insurance claims during the year. We did have some increase in benefits cost this year. We expect going forward that our increase in labor will be widely offset by some changes we had in benefit costs and then those are the biggest drivers we do expect an increase in property taxes and depreciation as we discussed and some other cost increases you'd expect. So that summarized I don't know, particularly if you have any more detailed questions on those.

Are they sustainable going forward?

I think of each one of those I've talked about, obviously the pension benefit that we put in place for 2010 -- that's going to be, that benefit will continue, but we would expect rising labor costs in years after that. So it's a one-time benefit of keeping our people costs flat, but that pension benefit should stay the same assuming we don't have any drastic decline in the stock market for that matter. That could impact our pension expenses. But again, since we spread those costs over a substantial period of time, we don't expect a lot of volatility around pension costs on a going forward basis. I think the other things we talked about, assuming we don't have any significant claims like we had in 2009, that improvement we believe would be sustainable as well.

Got it and just one last question. The bridge also shows a $0.05 to $0.07 of the load coming back you guys talked about in some normal weather. How much of it for each item? Can you speak a little bit about that, is it split evenly or so?

My guess is that the biggest impact would be attributed to the economy. Weather was an impact of course, but the economy was a much bigger driver for us in terms of our actual results versus our planned results for 2009. So my expectation is the lion's share of that is going to be from the economy.

Okay, got it. Thanks guys.

Are we still on? Gloria? Hello? Hello? This is the Company. There's silence on the phone. I don't know if we lost our question and answers or not. Gloria, are you out there?

Yes, sir, I'm sorry, my mute was on. Next we'll go to the line of Brian Russo. Please go ahead.

Hi, Brian, you out there? Gloria, are you still there? Have we lost the Q&A line?

Yes, sir, I do apologize. One moment, please.

Brian, are you there?

Hello, can you hear me?

Yes.

Okay, sorry about that, I guess. Just in terms of your 2010 guidance of $1.95 to $2.10, you noted earlier that excludes any impact from the rate request. Can we then assume that you're earning a suboptimal ROE based on that estimate range? Assuming the rate lag until new rates go into effect?

I would say that you can say that today -- until we have the rate increase, we would be earning a sub optimal ROE. That's why we're asking for a rate increase, so I think that's a fair assumption.

Could you guesstimate how many hundred basis points you're falling short of your allowed ROE?

No, I'd be speculating what that line would be.

Okay, also on the increased loads and the economy and the weather, what retail sales growth are you assuming in 2010 versus 2009?

We typically have seen between around 2% growth -- our growth rate's between 1% and 2% on a going forward basis for our base business, but we do see some recovery in the transmission side. That rebound would be a much larger increase, but again that's for a smaller part of our transmission business as Bob pointed out for the shorter term sales. So in terms of quantifying that recovery in terms of dollars or increases, it's difficult to do, Brian.

Gloria, you out there?

Yes, sir.

Okay.

(Operator Instructions). We'll go to the line of Ryan Rosenthal.

Good afternoon, everyone.

Hi, how you doing?

Good. A couple questions on your transmission projects. Based on the summary you guys reviewed for us, it sounds like you're pushing back some of the open seasons for both the collector system and MSTI. However, you expect they could still become or go online in time for your previous range or guidance range. Was there some flexibility previously built into the scheduling, and is that why you expect you could still have them in place by the previous timeframes?

Sure. The open seasons -- your question is right on target. The open seasons really were not a critical path item as opposed to going through the siting process, so we've moved ahead as I've described very successfully with the siting process on MSTI, and are timing the open season process to respond to developments in the economy. And so we will be getting the informational meetings here very shortly now.

Great, and related to that question, you'd mentioned one of the components of your transmission revenue you considered through and out transmission. Would that be a proxy for overall demand that would apply to the projects you're looking at as well as -- is it something we can get a sense of whether there's enough demand to move forward with those projects?

No. I'd say really there's little or no relationship.

Okay.

And many times, Ryan, the through and out is derived by pricing differentials in different markets, people trying to take advantage of that and we just didn't see that much this year on a year-over-year basis.

So looking forward into 2010, you expect that will be roughly flat, is that correct, compared to this year?

We expect somewhat of a rebound there. We're not prepared today to provide a lot of detail in terms of where we think our economic recovery is going to be by which category, but we do expect some rebound. What we've said before in terms of transmission as well, we don't anticipate to be back to 2008 levels, but we certainly do expect a rebound from where we were in 2009.

Is that rebound based primarily on weather or was there an economic benefit from it looks like GDP growth next year?

You've got multiple factors affecting the short-term transmission revenue. That includes weather, availability of hydro, economic activity on the coast, whether or not the Colstrip plants are up and running.

What we had said earlier Ryan is that we do expect some more revenue or more electrons to flow because Colstrip Unit 4 will be up the entire year so that will help the on system generators with the off system customers and we also had that Glacier 2 Wind Farm coming online late in 2010.So those are the two drivers we see driving the transmission a little bit higher in the bridge that you see to 2010.

Okay, great. Thanks for your time, everybody.

We do have a question from the line of Jonathan [Roiter]. Please go ahead.

Good afternoon, gentlemen. Can you hear me?

Yes, we can, Jonathan.

Okay, I guess it goes to show not to have a late Friday afternoon call before a long weekend. Some strange things happen on the call. But first question I have is related to the tax item and what's embedded in 2010 guidance. Can you just clarify that? There's what, about $0.20 benefit in 2010?

Yes, the benefit, if you think about a $0.43 benefit in 2009, it's almost half of -- the benefit in 2010 is almost half of that. And the reason for that is in 2009, the benefit was associated with both years 2008 and 2009, but for 2010, the benefit will only be for 2010. So you have a one year benefit that you're calculating into your tax rate versus the two year benefit that we were able to accrue in 2009. Does that make sense?

Yes, and then if we look forward to 2011, that benefit is going to be absorbed by the rate payers following this rate case. Is that correct?

Yes, the benefit -- our tax rate will still stay at that low level, but our expected ask if you will for a rate increase as we noted before was reduced because of the flowthrough benefit that we provided to customers.

Okay, so the incremental, is it like that $0.20 goes away for 2011, is that how we should look at it?

I'd look at it this way, Jonathan. I would assume about 30% effective tax rate and that tax rate will start to -- over the next five year period will move back towards a normal effective tax rate that you've seen for the Company in the past.

Okay, that makes sense, and then can you go into a little more detail like your reasoning for not including any rate impact in the guidance if my math is correct? I mean Montana has a nine month calendar, so we should have a rate order in mid October. I would think there would be a little bit of a pick up in the last half of the year.

There certainly could be, given that the amount of the increase is quite moderate because of the flowthrough, and given that it is so late in the year, we did not speculate about an adjustment.

Okay, and what are your current thoughts as far as interim rates? Is that request still on the table now that the case has been accepted as complete?

The request remains in place, yes.

Any thoughts about the prospects of getting that approved? Or when we might be able to gain more knowledge on it?

Sure. I would rather not speculate about what the Commission will do. Typically, interims are addressed after the intervener testimony has come in and that is still late April.

Okay, and then last question I have, you're talking about the challenges that wind development is facing right now and we've been hearing that as well. With that, and then the lack of just I guess clarity on the federal level around carbon and renewables, what impact do you think that could have on the demand for MSTI and the in service date? Is that something you guys have been contemplating? I know you said the open season you're still looking to complete that before the end of the first half of this year, but do you see that potentially getting pushed back to closer to meet demand?

We'll make decisions based on what we learned. Let me make a one correction. The intervener testimony will come in in late March, not in late April. Certainly there is uncertainty around federal policy on renewables, although there's I think a strong interest in greater support for renewables, greater support for transmission. Independently, though, of what happens on the federal side, states throughout the West have renewable portfolio standards in place. In fact, states such as California have increased their requirements recently. So there is at a regional level a very strong policy directing utilities to look towards renewable resources, and that need, from what we see talking to other utilities really needs to be met in significant part from remote locations -- there's particularly a very strong interest in wind out of this region.

Okay, and then depressed gas prices? Is that having any impact or is it really just the state RPSs that you think are going to drive the MSTI need?

Well, I think it's RPSs plus a general concern for resource diversity. Most planners would be very reluctant to build a portfolio comprised entirely of incremental gas.

Okay, so you don't think they're taking a short-term view there? They are taking in account, I guess the longer term view and historical volatility in the commodity?

There is certainly -- I would not want to be a resource planner because there is uncertainty around certainly coal. But that said, I think planners are definitely looking out to determine an appropriate place for renewables, and again that raises challenges.

All right, thank you very much for the additional insight.

You have a question from the line of Jay Dobson. Please go ahead.

Hi, thanks. Can you hear me?

Hi, Jay.

Hi, Brian how are you?

Good.

Great. Thanks a lot for the detail on the tax question. That's sort of the direction I wanted to go in. For clarity though, so your 30% and we should assume over five years you moved back toward what sort of like a 37%?

36.5% to 37%, that would be about the right range.

Fair enough and that won't be ratable every year, that will really follow something like CapEx or so? I'm forgetting how exactly that works.

I think the guidance I'd want to share today is I think it's going to trend up towards that level. I'm certainly not going to try and do it by year or give you a slope of the curve if you will. I think you're probably best to think of that in a straight line manner.

Fair enough. And then Bob, any thoughts on gas cases in South Dakota or Nebraska this year?

Well, certainly we'll be looking at when we need to file in both states, but we're not really ready to say anything today.

Okay, great. That's all I have, thanks so much.

Thank you.

We'll go to the line of Paul Ridzon. Please go ahead.

How much capital did the renewables soak up as far as rate base?

Capital for what? We broke up there a little bit.

Renewables.

Oh, in the supply?

Yes.

Portfolio? We're looking at a -- well, we have an RFI out right now. We're evaluating possible plants, and the answer to that question really depends on the outcome of the RFI, but we're looking at a number of facilities.

And Brian, you said that you're earning suboptimal returns. Is that -- are you still earning suboptimally if you include the benefit of retention of this tax benefit?

Well, again, what we did is had we not had this tax benefit, of course we would have asked for a larger rate increase. Because of the fact we're still asking for a rate increase means that we believe we're not earning our authorized rate of return.

Okay, that makes sense, and then the ramp up from a 30% to 37% tax rate, that doesn't imply that the shareholder benefit ramps down. That will be a step function in 2011, right?

Paul, that's a good way to look at it. The benefit we look at is more a dollar amount. There's a certain amount of repairs that you have. And we look at it as a dollar amount thing more than an effective tax rate item. And so as you continue to increase your capital spend, the amount of repairs deduction in that -- over your total spend declines. And it's just over time that effective tax rate is going to climb because a lot of your capital is not going to be on repairs. So just over time, that starts to trend back to a base rate level. But to your point, I think you were saying that because -- until a rate effect goes into, we're actually flowing through to customers who are earning on that benefit today, I think that's what you're saying, that comes into effect in 2011.

And then on the potential for natural gas reserves, what's the magnitude around that opportunity just to bracket it?

We're looking at measured additions to our gas portfolio that we would own if there's a range of possible options.

And this is something that legislature has supported pretty strongly, correct?

Yes. The legislature first authorized the Company to own electric generation and subsequently authorized us to own and rate base gas. And again, we're looking at opportunities, but doing so very prudently.

Okay, thank you very much.

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

Yes, hello. Thanks for taking my follow-up.

Hi, Brian.

Just in terms of a partner for MSTI, if I heard you correctly, you've had discussions with some parties?

We have had discussions, yes.

And is there any kind of development milestone that would be a more ideal time to sign some definitive agreement with a partner to maybe share in the rest of the development costs?

Clearly before we commit significant capital associated to construction.

Any idea when that ramp up begins?

I would say when you follow along with our capital plans, certainly within the late 2011 timetable you start to see that capital increase and certainly in 2012. So to Bob's point, some time by 2011 is certainly when you want to be far along in that process.

Okay, great. One last question. Just to reiterate, you guys -- do you need any external capital in 2010?

Brian, I think in terms of our capital plans, we think a lot of things will happen in 2010 and we'll be able to better answer that question. First of all, the open season will provide some guidance around needs in terms of MSTI and the collector. We'll also have a better understanding in 2020 in terms of size of our investment in the 500 KV upgrade. We'll have a better idea in terms of the RFI. So until we have answers on those questions, it's difficult to see what our debt or equity needs are going to be in 2010.

Going up for equity is pretty clearly going to be associated with one or more projects, not necessarily driven by just one project.

Right, it's my understanding that obviously you would need external equity for MSTI, but can the other transmission projects you just discussed be financed with internal cash and external debt?

I think if we were only to do those other projects, my expectation is you could do that with very little equity. But the fact that we're looking at other opportunities in terms of renewables, potentially gas reserve and other things I think to Bob's earlier point, there could be a situation where you're issuing equity with or without MSTI.

Okay, thank you.

We'll go to the line of Chris Ellinghaus. Please go ahead.

Hi guys, now are you?

Hi, Chris.

Relative to the earnings bridge I just have a couple questions on this. Does the line item for Colstrip 4, is that just the O&M expenditures for 2009?

Yes, we were just saying we don't anticipate seeing that again.

Okay. Is there, have you rolled into some of the other line items maybe the increasing loads, the revenue benefit from having higher availability from Colstrip 4?

That would be up in the increasing loads, correct. The South Dakota wholesale revenues recovery is a separate line item and that's for better loads in that regard, but increasing loads from the economy [weathered].

And that would include better availability for Coyote?

Right. But one thing I should point out on Colstrip -- the fact that's in rate base, we didn't see a decline if you will in terms of revenues per se associated with that. What we'll see in terms of reflection of recovery from Colstrip is really going to flow through to the transmission benefit that Bob talked about earlier. So that's captured in the Montana transmission recovery as part of that.

Okay, I also don't see, did you roll the gas contract expense from last year into one of the line items?

No, that would be netted against your other cost increases. We do not anticipate any incremental write-offs from that particular contract.

Do you have any figures on heating degree days for the fourth quarter?

I don't have those with me, Chris.

They aren't in the K either, Brian.

Is there any, were there any legal insurance recoveries of any meaningful nature in the fourth quarter?

We did -- in terms of insurance recoveries in the fourth quarter, I don't, there was nothing that was material.

Okay. Super, thanks a lot. Have a great weekend.

You too, Chris.

(Operator Instructions). We will go to the line of Michael Bates, please go ahead.

Hi, guys. Most of our questions have already been answered, and we appreciate the detail. One thing I will ask is we noticed a few months back there was some back and forth between the Company and a regulator in Montana about the MSTI project, and whether it would ultimately result in increased rates for your Montana customer base as they competed for wholesale power. Has there been any other movement on that issue, or anything you've seen as far as possible pushback or support from legislators with regard to that question?

Sure. There is a concern around MSTI by affected landowners -- we've talked about that, and that's an important part of going through the siting process -- is that a significant amount of support for MSTI or for other projects by policy makers, by communities that are eager to see development of renewable resources. The best answer to the concern about possible effect on prices in Montana would probably include the following elements. First, we are moving back towards cost of service rate based supplies to serve our own customers, so that takes the market out of the equation. Second, because we have been on market, we are already -- and our customers are already effectively paying a western market price in Montana, so that's nothing new. Third, the load serving entities in the West are not interested in purchasing coal generated electricity from Montana or from anywhere else. They are very much focused on acquiring renewables to meet the standards that we discussed or to diversify their own portfolios. Fourth, even in renewable development, there are some significant economies of scale, most developers will say. And as a result of that, it's not unlikely that project could be brought in more cost effectively that in fact could benefit Montana customers that would not be developed otherwise.

All right, great, I appreciate those clarifications. One other question that I had with regard to the collector. I didn't see the comment in the K that you're expecting -- well, you have a target date for the first of those lines to come online in 2014. Is there any color that you can give with regard to when other collector lines might be brought online?

No. At this point, and we've previously shared our assessment of various parts of the state that have very strong win potential, obviously a lot of literature now around wind potential in Montana and South Dakota for that matter as well. But the open season process would provide more clarity about additional areas where there might be a specific demand.

I see. Thanks, guys.

Thanks.

There are no additional questions in queue. Please continue.

Well, thank you all very much for spending your Friday afternoon with us. We were certainly pleased with the way 2009 ultimately resolved itself and we really are looking forward to moving ahead on what are some exciting initiatives to provide value for our investors and continually improving service for our customers. Have a great weekend and a good holiday.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.