Northwestern Energy Group Inc (NWE) Q3 2010 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the NorthWestern Corporation third 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.

Good afternoon and welcome to the NorthWestern Corporation's September 30, 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. In addition, we have also filed our 10-Q. Joining us today on the call are Bob Rowe, President and CEO, Brian Bird, Chief Financial Officer, Dave Gates, Vice President of Wholesale Operations, Heather Grahame, General Counsel and Kendall Kliewer, Controller. This presentation contains forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based upon our current expectations and speak only as of this date. Our actual results may differ materially and adversely, from those expressed in our forward-looking statements, as a result of various factors and uncertainties, including those 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 5:00 pm Eastern Time today, through November 28. To access the replay, dial 800-475-6701 and then access code 174792. The numbers again are 800-475-6701 and then the code 174792. 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, I will start by summarizing some recent highlights. We are very happy with our results for the third quarter, our income before income tax has improved by approximately $9 million compared with 2009 and due recall that the third quarter of 2009 included a $12.4 million benefit related to a tax accounting method change for repair cost deductions for 2008 and the first three quarters of 2009. Thus our net income decreased from the third quarter of 2009 this year. In September we reached a stipulation with the Montana Consumer Council or in MCC, in our general rate case in Montana. If the stipulation is approved by that commission, that would result in an overall increase in our electric rates. We also completed the purchase of a majority interest in the Battle Creek Natural Gas Field in Montana for $11.4 million. And finally we announced our fourth quarter dividend of $0.34 per share which is consistent with last quarter, payable on December 30 2010 for shareholders of record on December 15th. Now I will turn it over Brian Bird to discuss our third quarter financial results in more detail right, Brian?

Thanks Bob. We reported diluted EPS of $0.40 a share during the third quarter of 2010 compared to $0.52 a share in the third quarter of 2009. So our earnings decreased $0.12 per diluted share on a year-over-year basis and that was due primarily to the absence of a $12.4 million tax benefit we experienced in the third quarter of 2009. On our pre-tax income basis we actually increased $9 million from the third quarter of 2009. So let me give you a quick overview of the largest drivers to our per-tax income. First, electric volumes contributing about $2.7 million additional gross margin in the same quarter of 2009 due primarily to warmer weather in South Dakota. We recognized approximately $1.6 million in revenues related to the Montana general rate case, consistent with the terms of the proposed stipulation which is still subject to approval by the MPSC. Our Montana transmission capacity revenues improved during the third quarter of 2010 by about $1.3 million over the third of 2009 and allowance for funds used during construction AFUDC, benefited our earnings by about $2.4 million primarily related to the Mill Creek Generating Station between decreasing interest expenses and adding to other income. As you can tell from our press release and our 10-Q filing, there are other increases and decreases in earnings year-over-year, but these were the most significant drivers. So let me turn our discussion over to the 2010 earnings outlook. We are re-affirming our fully diluted earnings per share for 2010 in the range of $1.95 to $2.10 per fully diluted share. Major assumptions include, but are not limited to the following expectations. Our guidance excludes approximately $0.06 a share for the 2010 effect of the rate increase proposed by the stipulation which is pending approval by the MPSC.…

Thank you Brian, I will start by saying that we just completed a successful board meeting in Helena, Montana which some other things mean that I got to speak to my own Dad. In addition to the Board's formal business, we had a great meeting last night of very large group of community leaders from state and local private sector and had several opportunities for good meetings with employees, both last night and this morning. I will start by giving you a brief update on the Montana rate case. As you know in October 2009, 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 distribution revenue increase of $2 million. In September we and the Montana Consumer Council filed a joint stipulation and settlement agreement regarding the revenue requirements issues in the case. Specific terms included an increase in base electric rates of $7.7 million, a decrease in base natural gas rates of about $1 million. Stipulation very importantly is transparent as the key terms, the key terms were laid out and reached after all testimony was submitted and discovery was concluded. Stipulation as an authorized overall rate of return of 7.92% with an authorized rate of return on equity of 10.25, cost of long-term debt of 5.76% and a capital structure of 52% debt and 48% equity. A hearing was held on the complete rate case including the revenue requirement stipulation and other matters in September, we expect the commission to issue a final order sometime during the fourth quarter. We did recognize $1.6 million in revenues during the third quarter and that was consistent with the proposed situation. As you know we did receive an interim rate increase in July…

(Operator Instructions) And our first question is from Paul Ridzon from KeyBanc. Please go ahead. Paul Ridzon – KeyBanc: Good afternoon. How are you?

Hey, Paul. Paul Ridzon – KeyBanc: So, you are going to have new Montana rates January 1, Mill Creek gets in rates January 1 and then Battle Creek will – once you probably next gas case, so that should maybe later '11, is that the right way you think about it?

No. You are right on the first two, starting on November 1, Battle Creek will be flowing through the tracker and our return on that investment will be part of that cost flowing to the tracker. Paul Ridzon – KeyBanc: Okay, so that’s November of…

This year.

This year. Paul Ridzon – KeyBanc: Okay. Okay. Thank you.

Thank you.

And our next question is from Ryan Rosenthal from Sidoti & Company. Please go ahead. Ryan Rosenthal – Sidoti & Company: Good afternoon, everybody.

Hey, Ryan. Ryan Rosenthal – Sidoti & Company: My first question is regarding the South Dakota Peaking facility and was curious where you are in the regulatory process and what steps we should look forward in order to be in place by 2012?

Sure. There isn't a pre-approval process in South Dakota. So that will be more of the traditional approach. What we do intend to do over the next several months is that meet formally with the South Dakota Commission to go over many of our plans in detail but there isn't an analog to the pre-approval process we used in Montana from Mill Creek. Ryan Rosenthal – Sidoti & Company: Okay. And then if I understand correctly, you essentially built the facility ahead of a filing and then request that the expenditure is added to your rate base afterwards?

Essentially, yes. Ryan Rosenthal – Sidoti & Company: Okay. And then concerning the gas reserves and if any purchase done, 2.5% of your annualized capacity needs for Montana. Can you discuss the opportunity to purchase at this small reserves and the timing that we should think of there as well?

Okay. This was a relatively small acquisition, but does a number of things for us. First, it gets us back into rate based natural gas, gives us some hands on experience, will give us an opportunity to take this particular resource through the regulatory process and get greater clarity around any regulatory issues and expectations. We continue to actively look at the gas market and exploring for example other incremental purchases of generally similar size. We had initially been fairly broad in what we are looking for, but we’re really focused in – on gas properties that are in or adjacent to our existing facilities and that have reasonably long asset lives. Ryan Rosenthal – Sidoti & Company: Okay. And considering the rate case will be necessary to add it into rates, would you likely wait to make any larger produces until that's decided or is there potentially you could – you see something attractive purchase that more quickly?

Never say never, of course, but our focus really is on taking this acquisition and again potentially other small acquisitions through the regulatory process, get a degree of comfort there and then continue to look out. But again the commission and the policy makers in Montana have been very supportive of moving back towards vertical integration on the natural gas side as well. Ryan Rosenthal – Sidoti & Company: Okay. Great and then just one final question concerning the renewable generation, any opportunity to potentially purchase some of those facilities and add them to your rate base as well. Could you provide us a little more insight for us into your discussions with the commission and kind of the feeling that you have currently on the potential at those rate base first thing versus PPA agreements?

Sure. Well, again at a high level, the commission and for that matter again, our policy maker have supported moving overtime towards the stability that owned rate base resources provide and there is a strong policy direction in favor of a diverse portfolio of resources. What we are focused on in the next year is a series or several relatively small projects and then doing the analysis that would support additional larger projects going forward. Ryan Rosenthal – Sidoti & Company: Great. Thank you for your time, Bob.

Next, we have Brian Russo from Ladenburg Thalmann. Please go ahead. Brian Russo – Ladenburg Thalmann: Hi. Good afternoon.

Hey, Brian. Brian Russo – Ladenburg Thalmann: Just on – just to clarify on the South Dakota peaker plant, it's to replace a contract with Mid-Am, that's expiring, correct?

Essentially yes. Brian Russo – Ladenburg Thalmann: So I mean, is there kind of like a deadline as to when this plan needs to be up and running to fill in the void for that contract exploration?

Yeah. Midyear in 2013. Brian Russo – Ladenburg Thalmann: Okay. Mid '13, so it – so there's enough kind of time to develop this project, if you're comfortable with South Dakota regulation and on approving this and having it commercially available in mid '13?

Well said. Brian Russo – Ladenburg Thalmann: Okay. And you can get AFUDC on that, right?

Yes. Brian Russo – Ladenburg Thalmann: Okay. Thank you very much.

Thank you.

(Operator Instructions). Our next question is from Chris Ellinghaus from Wellington Shields. Please go ahead. Chris Ellinghaus – Wellington Shields: Hey, guys. Congratulations on a nice quarter.

Thank you.

Thanks, Chris.

From a tough critic. Chris Ellinghaus – Wellington Shields: Yeah, I am a tough critic. It looks like you had about $2 million of pre-tax insurance recoveries in the quarter, is that right?

Yeah. We did indeed, it was a settlement actually from a grieve issue occurred during the quarter Chris Ellinghaus – Wellington Shields: Okay. Were there any other unusual items in the quarter, I didn't see much?

No, not that I would deem as unusual, Chris. Chris Ellinghaus – Wellington Shields: Okay. Can you just talk about your – what you see as headwinds in the fourth quarter. You have already made by my calculation 214 in the last 12 months and what kind of things are in the fourth quarter that might lead us to more like your guidance range.

Brian, is grabbing for the microphone here.

Hey Chris, on that score, you may have been watching October. It's been a very mild October. You know our assumptions for the quarter is normal weather, but we already know to an extent that October is going to be pretty mild. We haven't determined what the financial impact of that is yet. But just a bit of caution, if you were looking at the quarter, we see October's results based upon weather as a headwind. Chris Ellinghaus – Wellington Shields: Okay. And then last year was actually a pretty decent quarter for weather, if I recall correctly?

Yeah. Somewhat. Chris Ellinghaus – Wellington Shields: Okay. And – but you should have some benefit for some absence of some serious maintenance outage last year in the fourth quarter and also probably a nice step down related to the repairs deduction as sort of offsetting issues?

That's correct. If you are looking at a quarter-over-quarter basis, you know, our guidance though is based upon our view for the year. I have done a comparison on a year-over-year basis. Chris Ellinghaus – Wellington Shields: Okay. And lastly as far as excluding from the guidance, I think you said $0.06 related to the Montana case. How are you calculating that $0.06 differentially you are excluding?

I believe that is the third quarter component, that's the third quarter component only. It's third and fourth quarters, $1.6 million for the third quarter and then in the queue, we said we get somewhere around $2 million that we expect in the fourth quarter. So it's the two of those combined and then to abide by the shares outstanding. Chris Ellinghaus – Wellington Shields: Okay. Okay. Thanks a lot. See you later.

And your next question is from Jonathan Reeder with Wells Fargo. Please go ahead. Jonathan Reeder – Wells Fargo: Good afternoon, gentlemen. One line kind of jumped out of me in the release in the liquidity section. You talk about an increase in deposits received for transmission interconnection request. Can you kind of expand upon that?

Okay. Sure we received some deposits for transmission reservations looking at Montano westbound from a couple of parties and those have to be booked properly. But there's some larger players in Montano that are taking some actions. Jonathan Reeder – Wells Fargo: Is that wind development that you are referring to?

It's renewable development. Yes. Jonathan Reeder – Wells Fargo: Okay. So, I mean, realistically we could say that bodes well for the collector project as well as potential MSTI?

Certainly, adding some deposits is a positive step. It's a long ways from having a solid project that it is certainly positive. Jonathan Reeder – Wells Fargo: Right. And then you are kind of talking about the four, I guess headwinds on getting the commitments for MSTI, what kind of timeframe are we looking at getting clarity, do you think your end is realistic? I mean, will the mid-term elections clear up some of the logjam, I guess, in California. What sort of timing should we be looking at?

I think probably the key gating factor will be the traditional action around citing in Montana. And again we really need clarity there in order to get certainty around a route that will allow us to come in with a cost estimate. So I think that's probably what I would focus on as much as anything at this point. Jonathan Reeder – Wells Fargo: Okay. And when does the citing supposed to be wrapped up?

Well, in Montana, there is a district court decision. It is likely that that will go to the state Supreme Court. In Montana, there is lot of heavy backlog at the state Supreme Court and appeals are directly risen in intermediate appellate court but still that pushes a decision out, sometime unless there is during the interim some kind of a collateral resolution through negotiations or otherwise. Jonathan Reeder – Wells Fargo: So, when would it be that the supreme court even hear on it. I mean are – to me that sounds like a long process but I am not familiar with it.

It would be realistically sometime next year. Jonathan Reeder – Wells Fargo: Okay. All right. Thank you.

Our next question is from Lori Johnson [ph] from Pacific Life [ph]. Please go ahead. Lori Johnson – Pacific Life: Hi, thanks. I just wanted to ask about the Big Stone coal fire plant and your – of the environmental costs there. Is there a chance that – maybe what's the order there, it sounds like costs are going up, is there a chance that you wouldn't be allowed to recover the costs or not a given, but is it fairly likely that you accept you incur them or is there a point where you say, it's just too much. Again I'm trying to get a sense of how risky that investment is for you?

I guess there are probably two parts to your question, one part is cost recovery and the second part is, are we considering other alternatives. Is that correct? Lori Johnson – Pacific Life: Yeah, yeah.

Yeah, there is a fairly clear cost recovery mechanism about Dakota commission, obviously the size of this kind of an investment is significant, is bigger than the process as been used for previously, but there is a clear path. Secondly, we and the joint owners certainly will be considering a range of alternatives. This is a necessary resource and again, we have not discussed with the other owners specific alternatives, but in a broad sense, if you look what other parties are considering that would be remediation, re-powering or some kind of an alternative facility. And at this point, we are really focusing on the cost and strategies for compliance but as we get more clarity on those costs that is easier too also do a comparison with alternatives. Lori Johnson – Pacific Life: Okay. Thanks. And then just maybe overall in your larger region, I know wholesale is not huge for you but maybe to think that it would effect at all. Do you anticipate other coal facilities having to close down because the cost of remediation is just too high?

We don't have. Lori Johnson – Pacific Life: I know, not Europe last but...

I take the question not to be to our facility Lori Johnson – Pacific Life: Right.

Others in the area, we don't have any basis to speculate, but there is certainly analysts who are writing about that possibility in the Midwest generally in (inaudible) but what others who were writing about and thinking about the area have to say, I don't think we have anything more to add. Lori Johnson – Pacific Life: Okay. Thanks

(Operator Instructions) Our next question is from James Bellessa from D.A. Davidson. Please go ahead. Michael Bates – D.A. Davidson: Hey guys, you’ve actually got Michael Bates [ph] filling in for Jim today. Couple of questions for you. We were curious about why the decision was made to exclude the interim rate release boost from your guidance?

Michael, it' Brian. The reason, we did that is just from a comparison – apples-to-apples comparison from the beginning when we provided that guidance, we made it very clear at that point in time. We had no idea of an outcome on a rate case. And so we excluded guidance from that and just for comparison purposes to that guidance, we haven't excluded it. And also I’d that there hasn't been a decision, where our booking interim rates until we have a final decision on that, we felt this prudent to exclude that. Michael Bates – D.A. Davidson: Okay. Fair enough. One other kind of nitpicky kind of question is in your guidance you have the assumption here that you will have average shares of 36.5 million for the full year, you have been at 36.2 for the first nine months and to get at 36.5 for the full year, I have to assume that your share count goes up by like a 0.5 million shares in the fourth quarter?

I think Michael we want to make sure we need to be clear, one of us is speaking basic and one is speaking fully diluted in terms of that analysis, I think is the difference. Michael Bates – D.A. Davidson: All right. That could be it. Thanks guys

And we have no further questions at this time.

Good. Well, thank you all very much. We expect we will see a number of you next week and visit with the rest of you next quarter.

Right now, we're done with our remarks. So you can give the replay instructions.