NorthWestern Energy Group Inc (NWE) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the NorthWestern Corporation first quarter 2010 financial results conference call. 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 to turn the conference over to our host, Mr. Dan Rausch. Please go ahead, sir.

Good morning. Welcome to NorthWestern Corporation's March 31, 2010, quarter end financial results conference call and webcast. Northwestern's results have been released, and that release is available on our website at www.northwesternenergy.com. We're also -- We also filed our 10-K after the market -- or, 10-Q after the market closed yesterday. Joining us today on the call are Bob Rowe, President and CEO, Brian Bird, Chief Financial Officer, Dave Gate, Vice President of Wholesale Operations, and Kendall Cleaver, 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 this presentation, those who are joining us by teleconference will be able to ask questions. A replay of today's call will be available beginning at noon Eastern time today through May 23, 2010. To access the replay, dial 800-475-6701, and then access code of 152578. That number again is 800-475-6701 and then 152578.

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

Thank you, as always, Dan.

As we end another quarter, we're pleased with where we are and I think that puts us in a good position looking forward to the balance of the year. Our net income improved to $28.7 million for the first quarter of 2010. That's compared with $22.8 million in the first quarter of 2009. Improvement in net income was approximately $5.9 million, or $0.16 per share. We announced our second quarter dividend of $0.34 per share, payable on June 30, of this year for shareholders of record on June 15. During 2009, our quarterly dividends were $0.335 per share each quarter.

Also, just two weeks ago, we were added to the Standard & Poor's small cap group of 600 stocks. The inclusion is a good, clear signal of the market's appreciation for our going-forward prospects. Last week, Fitch upgraded both our secured and unsecured senior debt. As a result, our senior secured is now rated low single A by Moody's, S&P, as well as by Fitch. Our unsecured senior is rated at least BBB by the three rating agencies that I just mentioned Finally, and I'll come back to this, Forbes.com has included us on their list of the 100 most trustworthy companies, which is a huge testament to the integrity of our employees at our Board.

Brian is now going to discuss our 2010 financial results in more detail and I would suggest that the theme is that the, the good actions we took in 2009 have put us in a strong position for 2010, even as the economy is only beginning to turn around. So with that, I'll turn it over to Brian.

Thanks, Bob.

We reported diluted earnings per share of $0.79 per share during the first quarter of 2010 compared to $0.63 per share in the first quarter of 2009. So our earnings increased 16% -- $0.16 per diluted share on a year-over-year basis. Let me give you a quick overview of the largest drivers. The carry-over benefit of the repairs tax deduction increased net income by about $0.09 per share compared with the first quarter of 2009, reduced labor and benefits including post-retirement benefits and pension costs contribute about $0.06 per diluted share compared to the first quarter of 2009. A decrease in insurance expenses primarily due to lower claims added about $0.05 per diluted share compared to the first quarter of 2009, and offsetting those increases to the first quarter 2010 earnings was a decrease of about $0.05 per fully diluted share in our gross margins due primarily to a decrease in natural gas volumes because of mild winter -- mild weather in Montana, and decreased electric volumes from lower industrial demand related to the weaker economic conditions. As you can tell from our press release and our 10-Q filing, there were other increases and decreases to earnings year-over-year, but these were the largest drivers.

Now, let me talk about our 2010 earnings outlook. We are reaffirming our fully diluted earnings per share for 2010 in the range of $1.95 to $2.10 per fully diluted share. From that, let's move to the balance sheet. We have total liquidity of approximately $215 million, with cash of $7 million and $208 million availability from our revolver. Total debt at March 31, 2010, was $954 million compared with $987 million at December 31, 2009. The Company maintains a long-term debt to total capitalization ratio of approximately 54% at March 31, 2010, which is back within our stated range of 50% to 55%.

Though not in the first quarter of 2010, just last week we priced a financing of our $225 million of first mortgage bonds through private placement, at an interest rate of 5.01% and pushed the maturity date from 2014 to 2025. We expect to close on this refinancing around the end of May. Interest rate is 86 basis points lower than the previous rate. We've reduced our interest expense on that portion of our long-term debt by about $1.8 million annually. In addition, the Company will now have no significant long-term debt maturities until 2016. With this refinancing, and over the last five years, we have reduced our weighted average coupon approximately 200 basis points to about 5.6%. And at the same time, extended our average debt maturities from 10 years to approximately 12 years.

Moving to the cash flow statement, cash provided by operating activities totaled $106.3 million for the three months ended March 31, 2010, as compared with $65 million during the three months ended March 31, 2009. This increase in operating cash flows is primarily related to contributions of $43.2 million to our pension plans during the first quarter of 2009. By comparison, we haven't yet made any contributions to our pension plans in 2010. Because of our substantial payments in 2009 to our pension, we expect future pension contributions to be approximately $10 million annually in 2010 and beyond. Cash used in investing activities increased by approximately $39.6 million as compared to the first quarter of 2009, due primarily to increased property, plant and equipment additions, related to the Mill Creek Generating Station Project.

Cash used in financing activities total approximately $45.7 million in the first quarter 2010 as compared with cash provided by financing activities, or approximately $25 million, during the first three months ending March 31, 2009. During the first quarter of 2010, the Company made debt repayments of $33.4 million and paid dividends on common stock of $12.2 million.

Now, let me turn it back over to Bob.

Thank you, Brian.

This week we held very successful annual and Board meetings at our operations center in Huron, South Dakota. This was the first time the Board meeting had been held in Huron since 1998. As part of the week's events, we were joined by the Governor of South Dakota, Lieutenant Governor, a member of the South Dakota PUC, and other dignitaries. One real treat for me was being joined by the former CEO of Northwestern Public Service, Al Schmidt, who retired leaving behind a very strong Company in 1990. It was just a great opportunity to recognize our employees, our retirees, and really to strengthen our ties with our entire South Dakota service territory.

Earlier, I mentioned that we made the Forbes.com list of 100 most trustworthy companies. This is something, given the challenging environment that I think really means quite a lot. If you're not familiar with the Forbes list, it is used by an independent company, named Audit Integrity, and they use a quantitative analysis to reach their list. Audit Integrity was founded in 2002 to develop risk management tools based on the statistical analysis of corporate integrity. Audit Integrity's evaluation penalizes companies for unusual or excessive executive compensation, for high levels of management turnover, for substantial insider trading relative to their corporate peers, or for high levels of short-term executive compensation, which encourages management to focus on short-term results. They go on to say that good housekeeping practices leave companies better prepared to handle the economic downturn, especially one as severe as what we are experiencing now. In conducting the analysis, the absence of negative events counts as much as the existence of positive events, in getting businesses on the list. So to create the list, Audit Integrity scans more than 8,000 companies traded on US exchanges every three months, it assigns each company an accounting and governance risk score, or AGR, based on proprietary modeling designed to identify practices that historically have had a high correlation with increasing shareholder risk. So, again, from an investor perspective, from a stakeholder perspective, generally we were very pleased with that recognition.

Now I'll give you a brief update on our Montana rate case. As you know, in October of last year we filed a request with the Montana PSC for an annual electric transmission and distribution revenue increase of $15.5 million and an annual natural gas transmission, storage and distribution increase of $2 million. That request was based on a 2008 test year with a proposed return on equity of 10.9% and an equity ratio of 49.45%, a rate base of $632.2 million on the electric side and $256.6 million on the natural gas side. The procedural schedule had been temporarily suspended pending resolution of confidential treatment of our responses to various data requests that was resolved in April several weeks ago, expect the procedural schedule to be reinstated in the near future, and we're looking forward to an order from the commission during the fourth quarter. Final rate adjustments, we anticipate, would become effective upon issuance of the final order, and we are of course also waiting for a decision on our request for an interim rate and do hope to hear about that still during the second quarter.

Now I'll update you on our prospects for continuing to invest in the Company. As you know, we are in the middle of a constructive (inaudible) regulating plant in Montana and are also proposing three transmission projects, as well as a number of other supply-related initiatives. Concerning Mill Creek, we kicked off construction in June 2009. As of March 31, we had capitalized approximately $119.8 million in construction work in progress related to the project. During the first quarter alone, we capitalized about $33 million in construction work in progress for Mill Creek. The plant is on schedule for all construction aspects of the plant and on budget. We're planning to make the appropriate regulatory filing to have -- filings to have rates and tariffs in place by January 1, 2011. Total capital costs of the project is to -- is expected to be approximately $202 million upon completion and the plant is scheduled to be operational by December 31, 2010.

On the transmission side, again, as everyone on the call knows we have three active projects upgrade to the 500 KV Colstrip line, the Montana Collector, and the Mountain States Transmission Intertie, or MSTI. First, concerning the Colstrip 500 KV upgrade, the current focus is the Colstrip transmission agreement and the Montana Intertie agreement. Transmission customers would very much like to see the Montana Intertie rolled into the Bonneville Power Authority's transmission network during the BPA rate case, which starts this year and will culminate, or conclude, in 2011. And that would allow them to deal with the multiple rate issue.

A kickoff for the BPA rate case was held in Portland on April 14. In fact, BPA did advance that proposal. The study participants finalized an enabling agreement in February for the remaining development work on the project. The technical studies will determine the plan of service, the impacts of series compensation on generation, the RAS, or remedial action schemes, and will satisfy the REC rating process. That will determine the capacity increase that's ultimately assigned to the upgrades. It's anticipated that the remaining study work will be completed within this year. We are negotiating a funding agreement directly with Bonneville for the additional study work. Our capital costs for the project is estimated to be approximately $38 million. That's down slightly from a prior estimate of $41 million, with a total project cost of approximately $125 million. And as we've indicated to you, previously, we would take the pro rata share of any of the Colstrip partners who might decline to participate in the upgrade. Commencement of construction is planned for the summer of 2011. The upgrade to the system will be completed by the end of 2012.

Turning to Collector, we held an informational meeting to kickoff an open season on March 25, in Helena, Montana. The open season results will be posted around the end of the year. The Joint System Impact Facility Study is expected to be completed by the end of the third quarter and we expect FERC filings related to procedural aspects of Collector by early next year. Our assumed capital on the first several -- of the first identified lines, several potential lines is approximately $200 million, and of course the actual cost would depend on the ultimate route that is selected. Potentially there could be up to 5 Collector lines envisioned for the entire system. Again, the number of lines, the location, would be determined based on a developer interest. Pending a positive outcome of the open season, the line is currently scheduled to be operational by the second quarter of 2014.

Now, turning to the Mountain States Transmission Intertie, as with Collector, we held an informational meeting to initiate the open season process on March 25, in Helena. We had initiated the open season process -- we formally initiated the open season process in April and results will be posted, again, around the end of the year. The draft environmental impact study is planned to be released now by the Bureau of Land Management around the end of the second quarter of 2010, and a record of decision on the EIS is expected in the fourth quarter. We expect FERC filings concerning MSTI also by early 2011. We continue to talk with potential strategic partners about coinvesting in the MSTI project and as we have announced before, we will decide on a strategic partner before any major capital commitment. We capitalized about $12.3 million in costs related to MSTI through March 31, and MSTI is expected to be placed in service sometime by the first quarter of 2015.

Turning to the supply side, first, I would like to address some missions reductions that we expect will be required at the Big Stone Plant in South Dakota. As many of you are aware, the clean air visibility rule was issued by the EPA in June 2005 to required that certain electric generating units achieve emissions reductions from designated sources that are deemed to contribute to visibility impairment in class 1 air quality areas. We have a 23.4% interest in Big Stone, which is a coal fired plant located in northeastern South Dakota. We estimated capital expenditures for BART, or best available retrofit technologies, to accomplish the work based on the department of -- the South Dakota Department of Environmental and Natural Resources proposal, are in the range of $200 million to $300 million for Big Stone, and our share of that would be approximately 23.4%, (inaudible) 4.4%. This is a new issue triggered by the termination of the Big Stone 2 proposal. Had Big Stone 2 gone forward, remediation would have been undertaken for all of the facilities with no incremental costs for the Big Stone 1 owners. Any improvements need to be installed and operating as expeditiously as practicable, but no later than five years from the EPA's approval of the South Dakota regional haze SIP, or state improvement plan, and that is expected to be no later than June 15, 2011. If the emissions reduction technology is required, we will, of course, seek to recover these costs through the rate making process in South Dakota and the South Dakota PUC has previously allowed recovery on a timely basis, on the costs of environmental improvements. However, we do note there's no precedent in South Dakota for a project of this size.

Turning to renewable supply. For electric supply in Montana, we have out a request for information to add up to 75-megawatts of renewable power. In South Dakota, we have a request for information out to add 25-megawatts of renewable power. We're looking for cost effective renewable projects to help us meet increasing customer demand that also allow us to further diversify our resource portfolios and to comply with state requirements, in the case of Montana, guidelines in the case of South Dakota. We prefer to purchase the projects outright, but are, of course, willing to consider other options, including equity interests, or long-term power purchase agreements. Currently we have reduced both RFIs to a short list of sound finalists. Also in South Dakota, related to supply, as we've mentioned previously, we're looking to add peaking facilities of about 60-megawatts in 2012.

Turning to natural gas reserves, in Montana we now have the opportunity to own and rate base our natural gas supply. We're interested in purchasing gas reserves to provide price stability for our customers into the future. The volatility of gas prices over the past several years has, of course, created significant changes in our customers monthly bills, and we want to be clear, as I've said before, that we are only looking at proven reserves that can be rate based and we are not considering getting into the exploration business.

Concerning our core distribution business, we have generally been investing in capital expenditures each year in excess of current depreciation. This has been true since 2002. Consistently with that, we plan to invest about $124 million in the core distribution business in 2010. That's up from $109 million in 2009. We're investing in automation, outage prevention, and monitoring throughout our system. To that end, we're also participating in a regional working group that will be evaluating various smart grid applications over the next several years in order to better understand how we can deploy this new technology affordably and effectively to customers in our service territories. Northwestern plans to test the operational efficiencies in customer service enhancements that may be gained by the installation technology to enhance communication between the utility and the meter. Our total project cost is expected to be up to approximately $4.2 million, of which half will be funded by a Department of Energy grant.

So, in summary, our good financial results provide us a strong start to the year. Mill Creek is on budget and on time. We are pursuing opportunities to provide our retail customers with long-term price stability. We've reaffirmed our guidance for 2010 to be in the range of $1.95 to $2.10 per fully diluted share, and also we've had recent non-operational achievements, including being added to the S&P small cap group of 600 stocks, receiving an upgrade on our long-term debt from Fitch, pricing and refinancing of $225 million first mortgage bonds, which will save about $1.5 million annually on future interest expense, and push the maturity on that debt from 2014 to 2025. So we're very excited as we progress into 2010 and again, building on the hard work in 2009.

And with that, I would like to now open the call and look forward to your question and comments. Thank you.

Thank you, sir. (Operator Instructions) And we go to the line of Ryan Rosenthal of Sidoti & Company. Please go ahead.

My question concerns the drivers for the specific reduction of your operating costs. Can you guys hear me?

Yes.

Concerning your operating cost trends and the favorable trend we saw year over year, can you discuss your assumptions for the remainder of the year and if you see that trend continuing?

Brian?

Yes, we have mentioned that we had reduced some pension costs and some other post-retirement costs. We expect that will continue through the year. We gave some thoughts, if you will, for the year in terms of where we thought some of those costs were going to go. I think I would continue the trend based upon what we've seen through the first quarter.

Then turning to energy demands, looks like year-over-year you continue to see decline to both the electric and gas utility. Can you discuss your outlook for both the residential and commercial volume for the remainder of 2010?

Yes.

Dave Gates on the supply side.

Well, I, I would just simply say that it's a, it's a function of weather, which is, what you expect typical weather to be and we would plan for normal weather. But--

Yes, I would say, what happened the first quarter, we were off $2 million, as you know, from milder weather on the gas side of the business. That was weather related. We haven't seen much of an impact on volume other than that. On the electrical side, our residential volumes are pretty much right on line, except for our industrial load, which was off by 12%, and we did mention that the Smurfit-Stone closure impacted about half of that change. So we do expect some of that industrial decline to continue into the year.

Okay, great. And one final question concerning electric transmission. At the beginning of the year, you're looking for a -- slight rebound in that -- in the earnings stream from the transmission capacity. Is that something you're still looking for for the remainder of the year?

Yes, Ryan, I would say in that regard, we expect some of that to be more second and third quarter impact, is where we expect to see some of that.

Great. Thanks for your time, everybody.

And next we go to the line of Chris Ellinghaus of Wellington Shields. Please go ahead.

How are you?

Hi, Chris.

Can you give us a little more detail on the compensation item other than pension?

Sure. There is a couple things in that, Chris. We had, head count was lower than we expected for the year. We did have lower severance costs also. Those are the two biggest drivers for compensation.

Okay. And what was the electric reclamation settlement?

On the -- Chris, this is Dave Gates. Is this on the coal recovery?

It's just from your line item on your sort of changes for the quarter.

Yes, it's -- that was the settlement of the WECO, Western Energy Coal, royalty issues, and we settled that at about $900,000 for us, $600,000 and some in cash this year, with the remainder coming due in 2011.

And Bob, can you give us a little more detail in terms of your RFPs for wind and what your expectations are and when you think we might hear something about them?

Sure, we expect to have outcomes within the next several months, particularly on the Montana side. What we're working through right now, again, with a short list on both sides, is particularly the trade-off between rate basing and the other alternatives, but again, we're looking at good solid proposals on both sides.

And you're hoping for sort of turn key arrangements?

Not necessarily, but certainly a good possibility.

Okay. Thanks a lot, guys.

Okay, thank you.

And next we go to the line of Brian Russo, Ladenburg Thalmann. Please go ahead.

Good morning.

Hey, Brian.

Could you comment maybe on the quarterly dispersion of the tax benefits that you expect in 2010? I guess $0.09 in the first quarter, and I think it's maybe $0.21 or $0.22 for the entire year?

Yes, Brian, I would tell you, as you know, we didn't make any tax adjustments until third quarter last year, so on a year-over-year basis, you know, the $0.9 is just -- this is a continuation, if you will, from the 2009 adjustment in September. Obviously that year-over-year impact. I would think you look at a full year basis for tax, I would just assume around a 30% tax rate, effective tax rater for the year.

Right, but as to the quarterly dispersion, should we -- got $0.09 in the first quarter. Should we expect, you know, an additional tax bene -- benefit in the third quarter, or should we spread out that Delta for the following three?

No, you're going to -- I would do this. You're going to have a benefit again in the second quarter. And again, it depends on our income, of course, for the second quarter, which is a lower quarter than the first, so you have to take that into consideration. The third quarter, actually you should have a smaller -- you should actually have a negative variance because we had such a large impact in third quarter last year, if that makes sense.

Yes, it does. Got you. And then, just looking at the 2009 to '10 earnings bridge that you laid out, I guess, last quarter versus some of the drivers that you've reported in the first quarter? It looks like your lower labor benefits of plus $0.06 in the first quarter '10, it looks like that has exceeded your $0.01 to $0.02 full year impact, if I'm reading this correctly, and it looks like the same goes for the lower insurance claims, which was a $0.05 benefit in this first quarter versus your $0.02 to $0.04 for the full year. Can you just kind of comment on that?

You're spot-on from the insurance reserve perspective. I'll start there. I would tell you that there's one item in there we would deem -- $0.01 of that deem as kind of a one-time item. But you're -- we're right in line with our full-year expectations from the insurance reserve standpoint, so you're spot-on there. I think we're, we're better than we had thought, particularly on the labor side. But, and we knew about the pension and the other benefit savings, but labor's been better than we anticipated.

Okay, and just in terms of the new projects and these, the renewables that you're pursuing. Can you give us a time line of when these -- if you were to build, or purchase, you know, what time line are we looking at in terms of contribution to your portfolio?

Dave, do you want to say a little bit more about time line?

Sure. As we mentioned, the -- on the short list, we had hoped to have agreements negotiated sometime yet this year and then probably in service in 2011.

Okay, and then just the potential upgrades for the, the Big Stone Coal Plant. Did I -- Could you just remind, or reiterate, what you said earlier in terms of the timing? I think you said by June 15, 2011?

No. This is Dave. The Big Stone emissions control, or air quality systems, would be up in service sometime in 2015. It's about a five-year project. The steady work is ongoing right now.

Okay. Okay, and then lastly, the South Dakota Peaker Plant, what is kind of the procedural schedule, or the approval process that you need to keep that consistent with your commercial operation date?

Sure. That would be a traditional regulatory process. What we'll do in South Dakota as we do consistently, is visit with the Commission, talk about timing options for, for rate recovery. We are mindful of customer impacts and have a good relationship with the South Dakota Commission, so we're relatively comfortable there. There are a number of options we're looking at in terms of how you could layer in rate adjustments. In fact, I started visiting with one of the South Dakota Commissioners about that subject yesterday.

Now, it's my understanding that this Peaker Plant is to replace an existing contract that's expiring?

That's correct. We have a current capacity contract with Mid-American that expires 2012, so this plant would be online and in service for the summer of 2013, but we would anticipate getting it completed in 2012 such that it wold be in our 2012 test year.

Okay, thank you very much.

Thanks Brian.

And next we go to the line of James Bellessa, D.A. Davidson and Company. Please go ahead, sir.

Good morning.

Good morning, Jim.

The Q talks about your annual interest expense for 2010 being comparable with 2009, due to an increase in AFUDC. Now, you've also in the narrative today, you indicated that you refinanced $225 million at a lower rate of expense. So are you still holding to the fact that the 2010 should be comparable to 2009? In interest expense?

Yes, I --Jim, I would tell you, I think the statement as a whole still holds true, but we do expect our interest expense to come down. We'll get a partial year benefit, of course, from this refinancing. But I think, all in all, it's relatively going to be close.

Okay. The -- was it anticipated that you were going to get this favorable arbitration decision on some type of insurance issue?

No. We -- we didn't certainly plan it in our guidance, if you will. We didn't know what the outcome would be and we don't typically include those things in our guidance.

And did you say it was $0.01? Or the full amount was $0.05 for the insurance swings?

Yes, for that particular -- that's a good catch, Jim. That particular item for insurance reserves was $0.01. The other $0.04 was associated with the prior year. We had some claims in the first quarter that we didn't have this year.

Now, in your guidance statement, you removed the assumption that you would get some benefit from a rate case in Montana, but you did change your guidance. So some of the things that you saw in the first quarter on the strength in the first quarter's earnings, is that filling in for the removal of the rate case benefits that may or may not occur in 2010?

Jim, on that point, when we put out our guidance, you may not recall, since we don't know what the outcome was there, we did not include any rate case in our guidance. So this delay doesn't impact our guidance.

I see. I was wrong then, on my -- let me go back and check.

Smurfit-Stone, you mentioned that coming out. There was talk at one time that you might be considering a biomass activity at that existing site. Is that still something that's reasonable? Or is it way out of probability, and just this low probability of occurrence?

I really can't comment on Smurfit-Stone specifically. What I can say is that we are exploring the feasibility of biomass as a part of our overall portfolio and we certainly have taken a look at Smurfit-Stone and would continue to do so if the opportunity might present itself.

Thank you very much.

Thanks, Jim.

And next we go to Lori Johnstone of Pacific Life. Please go ahead.

Thanks. I was just wondering if you could talk about your outlook for industrial demands for the rest of the year? I was wondering if you were expecting it to be, to continue to be as weak as it looks like it was in the first quarter and what you see for the rest of the year?

Starting out, I think it's important to emphasize that on both the electric side and particularly on the gas side, we're relatively heavily weighted towards consumer and commercial. And on the Montana side, we are, of course, a distribution provider to, to the industrial. Not a supply provider. So we have a pretty good buffer between ups and downs on the industrial side. Across the system, we actually monitor the large customers really one by one and I would say it's a kind of a question of puts and takes. We're not making unrealistic, or rosy assumptions going into the year. By coincidence, I met with the economic development officers across our entire South Dakota service territory on Monday, and they were really surprisingly upbeat about the level of activity including large scale commercial and light industrial that they expect to see over the next several years. So we're being cautious, but we are not as affected by ups and downs on the industrial side, as are many of our peers.

Okay. All right. Thank you.

And next, we go to Scott [Reiter], Wells Fargo. Please go ahead.

Good morning, gentlemen. Could you remind us, I guess, under the current schedule, at least Montana, when the intervener testimony is, or was due?

The schedule has been suspended soon and that was part of the discovery process. Discovery issues have been resolved and that information now is going to interveners and will be under a protective order as necessary. Based on that, we expect to see, under the reinstated schedule, we expect to see intervener testimony in the relatively near future.

Okay, and then at that point, your interim rate increase will be addressed? Is there an actual decision made on it, or are they either choose to take it up or just kind of I guess ignore it?

Typically what will happen is as soon as the Commission staff has had an opportunity to look at the intervener testimony, they will bring a recommendation into the Commission to take a decision.

Okay, but will we actually get a decision on it, or there could just be no decision as their decision?

No, there will be a decision.

Okay, and then how might, I guess the pushback, in the -- or the potential pushback in the Montana rate schedule potentially intertwine with the Mill Creek interim rate request? Is there any chance to kind of roll those together or anything?

No. And we've had good discussions with the Commission staff about how best to process Mill Creek. As we've discussed before, the Commission has an independent consultant that's helping them with the evaluation going forward. So I don't see, other than a scheduling matter, the process of setting dates for hearings and decision. I don't see a direct correlation shift between the rate case schedule and the Mill Creek schedule.

Okay, so you wouldn't anticipate that the potential pushback in the Montana rate case could, I guess, cause a delay in the Mill Creek portion beyond the January 1 expected?

No, they are separate dockets, separate processes.

Okay, and then could you just I guess discuss what sort of milestones we might look for during this open season process for MSTI and the Collector system? I think there's kind of like two parts to the open season, like -- what sort of data points might we. might we get as we're going along as to the level of interest you're seeing?

Dave Gates?

Well, we've got, as you mentioned, two data points throughout this process where potential shifters will have to make stage commitments. From a practical standpoint, as far as moving forward with the projects, it will probably be later this year when they have to sign transmission service agreements that would give us the best assurety of what the market demand is, and it would probably be at that point that we would be able to make some further refinement on schedule for those projects.

Okay, and then could you kind of discuss what you're hearing from, I guess, the potential end demand, you know, users, you know, Western Utilities, customers of that nature, as far as like maybe what their thinking process is with the demand reductions, you know, due to the economy, as well as, I guess, you know, RPSs in the state where they stand there? And then I guess the uncertainty and at the federal level regarding renewable legislation and/or carbon?

Dave, why don't you speak to what you were actually hearing at the informational meetings.

Sure. Well, we had -- I should mention that we had all of the expected participants in the informational meetings, plus a couple of others. Related to the demand for renewable energy, against the RPS standards haven't changed in the West and irrespective of kind of the conventional demand, or economic destruction, they still have to provide RECs and Clean Energy. The decision in California, if there's a slightly downside to the story, is that it's uncertain what the California PSC intended with their most recent order related to tradable RECs and some of the, some of the provisions of that bill. But, it hasn't, it hasn't slackened the interest from, from what we've seen on our projects at this point.

Just to add to that, we've become increasingly active in the West and in various (inaudible) with other utilities and direct discussions. What we're seeing, we've talked about this before, but we continue to see increased interest in the project from others in the western United States who see it as part of a potential solution to some of the supply problems that they are facing. So, there certainly is a market proof of interest in the project.

Yes, Bob, I know previously you discussed that you weren't wanting to go ahead with the open season until you felt really comfortable, you didn't want to incur those costs. So, I mean, is it fair to assume that the fact that you're even moving forward at this point in time, that you guys, I guess, feel pretty comfortable that the interest level is sufficient out there?

Yes, striking the balance, and you talked about some uncertainty around where federal policy might go, but striking the balance between all of the factors, this was a good time to move ahead. I want to say one thing about Dave Gates and his team. They got feedback at their informational meeting, that the approach we're taking to working with potential customers, was very positive compared to what they might have seen in some other cases.

All right, I appreciate the additional commentary today.

Thanks, John.

And next we go to the line of Timothy (inaudible), KeyBanc Capital Markets. Please go ahead.

-- Asked, but just one more on the incremental renewable investments you're considering. Are there any type of, I guess, recovery mechanisms in place for those investments? Or is that something you would have to file for?

You're talking about on the state side?

Yes, the state side.

In Montana, we do have the advanced approval, pre-approval statute, that we're using with Mill Creek. We expect, on something, where in fact there is a meaningful project lead time, we would be able to do the same thing on a project such as this. That has the twin advantages of dealing with regulatory risk or uncertainty as it did in Mill Creek, but also with the problem of regulatory lag, where, as we discussed, exploring with the Montana Commission ways to eliminate lag probably by using an interim approach to begin earning as soon as the plant goes online. There isn't that kind of a formal process in South Dakota, but South Dakota Commission does a very nice job of efficiently processing dockets. And as I mentioned previously, we're already talking to the South Dakota Commission and staff about what we see coming up over the next several years.

All right. Thank you very much.

Thanks, Tim.

Next we go to John [Ollie], [Dakid] Capital. Please go ahead.

I apologize if this has already been asked, but there's some concurring calls this morning. If, you could just give me what some of the drivers are for the Peaking Plant in South Dakota?

Dave?

Sure. The Peak-- the need for the Peaking Plant in South Dakota, is we have summer demand, or capacity, that far exceeds our current own generation in South Dakota and we meet that need today, that growing need by a capacity contract with Mid-American that expires in 2012. But the Peaking unit is being designed to meet that need, to replace that contract. And then, just as an aside, will be designed such that it could be expanded for other uses out, out in time.

Can you get recovery for that without any generate rate case?

No, well, we would pass to file for recovery. That's the subject that, in fact, we did just discuss. We started to talk to the South Dakota Commission about investments over the, over the next several years, but we would have to go in and file for recovery.

In a rate case setting, not a single asset kind of, or single issue?

Depending on what else we have going on in South Dakota, we would have to, have to make that decision, but there are probably a number of options.

Okay, and if you could just give me an idea for the, I guess, the size and the timing of the natural gas reserves? You guys were talking about? The investments?

It's difficult to say much, given that we are talking to counter parties, and size, timing, price, would all depend on those specific negotiations.

Understood, but maybe just generally a little more color about what you're thinking there? That is, you're not going to get into E&P, but you're, kind of, what , what stage of the, the stream do you, do you want to be involved

We're interested in firing proven reserves that would be put into rate base. We'd earn a regulated return on those reserves. And that would be a, a way to, to partially meet our overall Montana obligations.

Got it, okay. Great. Thank you, guys.

Thank you.

(Operator Instructions) We'll go to the line of Leon Duval, Catapult Capital Management. Please go ahead.

Hi, good morning.

Hi, Leon.

You guys kind of pointed to a couple of, a couple of projects that might be above and beyond kind of CapEx that you laid out in the most recent presentations. Can you talk about funding for some of these? Would you need additional equity, or would this all be done with debt?

Sure, our general thinking, we can cover maintenance CapEx and the primary near-term projects without issuing additional equity. MSTI does assume equity. Other projects that might, taken together, require equity would include some of the ones that we just haven't assigned a dollar figure to, that would include, for example, distribution system, investments beyond what we have identified currently, could include gas supply investments, things of that nature.

Leon, I would add to that, obviously, we want to maintain long-term basis to our 50% to 55% debt to Cap, so that gives you an idea of what kind of --

Okay.

-- debt we'd want to maintain.

Great, okay. Thank you very much.

And we have a follow-up question from Chris Ellinghaus, Wellington Shields. Please go ahead.

Just as a follow-up to the gas discussion, Bob, I just want to get a clarification or enhancement. You're talking about producing properties, not just reserves, right?

Correct.

Okay. And can you say, have you talked to MDU, given that they are the largest reserves in Montana?

Probably shouldn't say who we talked to.

Okay.

Good try, though.

Brian, can you elaborate just a little bit. You have had some additions to what your CapEx needs might be including Big Stone 2 -- Big Stone 1 and things like that. Are you starting to push the envelope at all in terms of equity needs for all of these miscellaneous smaller projects?

The -- Big Stone particularly could be an impact, but I would tell you the capital associated with Big Stone, it's going to be lumped in the latter three years for 2015. And so, again, it's going to depend on what happens with MSTI to a great extent.

Right. So the timing might sort of coordinate with MSTI needs anyway.

Right.

Okay

That's one of the issues with some of these projects again, not knowing the timing and the amount, as Bob pointed out, if -- but if some of those were to break through and don't show up in our capital plan and materials you've seen publicly, you know, then we should be okay. But if they do happen, and of a significant size, we could be issuing equity, even without a decision on MSTI at that point in time.

Sure. And one more clarification on gas, do you guys have any kind of timeframe that you would like to make, to have some kind of accomplishment on that front? And, you know, does it need to be a real substance? Or would you consider just sort of dipping your toe into something smaller just to get some experience with it and maybe show the legislature a little bit of success on that front?

Two points. First, on the Montana side, we have a tremendous amount of experience. Montana Power Company was one of the QLDCs in the country that actually did own substantial gas properties. And, of course, we already have significant storage on the Montana side.

As to the size, what we did initially was kind of a broad screen of different kinds of projects, geographic location, looked at size. There isn't a particular size that we're looking at now and could, again, over time incrementally increase the amount of gas production that we own, just as overtime we'll incrementally increasing the amount of electric distribution. There isn't a particular size that we're, we're focused on.

Great, thanks a lot.

Thanks, Chris.

And there is no one else in queue at this time. Please continue.

Well, if there are no further questions, thank you, as always. As I said, we are very pleased that the steps we've taken to date, put us in a good solid position for 2010. We always appreciate your interest and support.

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