Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

NorthWestern Corporation (NYSE:NWE)

Q3 2008 Earnings Call Transcript

October 30, 2008, 11:00 am ET

Executives

Dan Rausch – IR

Bob Rowe – President and CEO

Brian Bird – VP and CFO

Analysts

Paul Ridzon – KeyBanc

Brian Russo – Ladenburg Thalmann

James Bellesa – D.A. Davidson & Co.

Leon Dubov – Catapult Capital Management

Tom Wolfe – Sawtooth Investments

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Northwestern Corporation third quarter financial earnings 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) I would now like to turn the conference over to our host, Mr. Dan Rausch. Please go ahead.

Dan Rausch

Good morning, and welcome to NorthWestern Corporation’s September 30, 2008 quarter-end financial results conference call and webcast. NorthWestern's results have been released and the release is available on our Web site at www.northwesternenergy.com. We also filed our 10-Q after the market closed yesterday. Joining us today from our offices in Sioux Falls, South Dakota are Bob Rowe, President and CEO; Brian Bird, Chief Financial Officer; Kendall Kliewer, our Controller; Paul Evans, Treasurer; and from the road, Miggie Cramblit, General Counsel for the company is also on the call.

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 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 November 30th, 2008. To access the replay dial 800-475-6701, and then access code 965194. I’ll give you that number again, 800-475-6701, and then code 965194. A replay of the webcast can also be accessed from our Web site.

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

Bob Rowe

Thank you very much, Dan. And thank you all for joining the call. I’d like to start by saying that we’re really quite happy with the quarter, especially considering the net income included in $11.4 million charge for increased pension funding. Our highlights include the following, our net income improved slightly to the $13.4 million in the third quarter of this year, compared with $13.2 million in the third quarter of 2007. We completed a share buyback program for approximately $3.1 million shares in September amounting to approximately $78 million. We’ve increased our earnings guidance for 2008 to now be between $1.65 and a $1.80 for fully diluted share. And Brian, of course, will come back and speak to this in more detail.

In August, we filed a request with the Montana Public Service Commission for advanced approval of the proposed $206 million 200-megawatt Milk Creek generating station. In addition, we filed the major facility citing at OMFSA and environmental report with the Montana Department of Environmental Quality for the proposed Mountain States Transmission Intertie Project, also known as MSTI. And I will be returning to the growth initiatives later in this presentation.

In July, The Delaware Bankruptcy Court approved the global settlement agreement related to the Magten matter and the bankruptcy case. And we received also about $4 million in July to reimburse us for all our past legal fees as part of the global settlement. The Board has approved a quarterly dividend for $0.33 per share declared for shareholders of record on December 15th, 2008, that amount to be paid on December 31st, 2008.

And now, let me turn it over to our Chief Financial Officer, Brian Bird, to discuss our third quarter financial results in more detail. Brian?

Brian Bird

Thanks Bob. Consolidated net income was $13.4 million or $0.35 per diluted share for the third quarter of 2008, compared with consolidated net income of $13.2 million or $0.35 per diluted share during the third quarter of 2007. Operating income was $35.3 million, compared with operating income of $33.2 million from the third quarter last year.

The main drivers for our operating income and earnings increase during the third quarter of 2008 were as follows, gross margins increased $14.9 million, primarily due to a $10.2 million unrealized gain on forward contracts due to changes in forward prices of electricity related to our Colstrip Unit 4 plant, which reduced our unregulated cost of sales. Also, approximately $3.8 million of regulated electric and gas rate increases also contributed to the improvements in gross margin. These improvements were partially offset by lower volumes due to weather related net decrease and customer usage in our regulated and unregulated electric segments and higher wholesale electric costs.

In the third quarter of 2008, we have experienced an increase in total operating expense of about $12. 8 million, mainly due to higher pension expense of $11.4 million related to the pension plan for our Montana employees; and, increased labor and benefit costs, mainly due to a combination of compensation increases and higher severance costs. Below the operating expense line, our interest expense increased approximately $1 million, primarily due to the additional debt incurred with the purchase of our previously leased interest in Colstrip Unit 4.

I’d like to provide a little more detail on the pension expense increase. Based on pension plan asset values through September 2008, we have increased our 2009 cash funding projections for our Montana plant from $17 billion to approximately $47 million. For accounting purposes, this $30 million increase in pension funding will be spread over 2008 and 2009. Now obviously the market has deteriorated significantly since the end of September. And while our goal is to keep our pensions at an 80% funded status, we will continue to evaluate our funding projections for the remainder of the year. Our employees are a vital part of our success, and we think it is important to maintain reasonable pension funding levels going forward.

Accordingly, our total company wide estimated pension funding level for 2009 will be about $54 million or about, again, $30 million more than we had originally projected. We plan to adjust on with our 2009 capital expenditure projections related to growth projects, specifically, for one of the South Dakota peaking units due to lower anticipated capacity reserve requirements, which coincidentally will approximate the amount of the increase in the 2009 pension contribution.

Our year-to-date net income for 2008 has increased by $11.5 million over the same period in 2007. Gross margin has increased about $17 million over the first nine months of 2008 due to colder winter weather earlier in 2008, increased plant availability at Colstrip Unit 4, and a modest amount of customer growth. Rate increases have added about $14.4 million over the same period of 2007. And we were reimbursed about $7 million from insurance companies related to bankruptcy related matters in 2008, which was netted against our legal and professional fees.

Offsetting these improvements, again, were an increase in pension expense of $11 million, and approximately $10 million for a combination of reduced pricing and increase in fuel supply costs at Colstrip Unit 4.

Now let’s move to the balance sheet cash flow. Our balance sheet cash flow remains strong. As of September 30, 2008, cash and cash equivalents were $8.6 million, compared with $4.8 million at that same time last year. The company and revolver availability of approximately $120 million at September 30, 2008, compared with $156 million at 9/30/07. Long term debt at September 30, 2008 was $825 million, compared with $806 million for the same period last year. The company maintains a strong long term debt to total capitalization ratio at approximately 52% at September 30, 2008.

Cash provided by operating activities totaled $176.7 million during the first nine months of 2008, compared with $173.9 million during the first nine months of 2007. The company used $80.9 million for investment activities during the nine months ended September 30, ’08, compared to $116.7 million during the same period last year.

Capital expenditures for the nine – first nine months of ’08 were $81 million, compared with $78 million for last year. Primary difference from last year is the company used about $40 million in the third quarter of last year to purchase the previously leased interest in Colstrip Unit 4. The company used $100 million in financing activities during the nine-month ended September 30, 2008, compared to about $54 million for the nine months ended September 2007. The increase here was mainly due to cash used to repurchase 3.1 million shares under our previously announced plan during the nine months ended September 30, ’08, which was approximately $78 million. The repurchase has occurred from July to September, and the average repurchase price was $24.83. In addition, we paid dividends on common stock of $38 million so far this year.

In summary, our cash and liquidity positions are strong. We have two debt facilities maturing at the end of 2009. The first is for our $200 million unsecured revolving line of credit that matures on November 1st, 2009. The current balance on that line is approximately $52 million. Also, the $100 million non-recurs loan for the purchase of a previously leased interest in Colstrip Unit 4, which matures on December 31st, 2009. The definition by the NPSC relating to rate based in Colstrip Unit 4 will impact what happens with this debt. If the NPSC decides not to rate base to Colstrip Unit 4, we plan to sell the asset to Bicent, and the proceeds of the sale will pay off this debt. If we rate base Colstrip Unit 4, we’ll have to procure a longer term loan secured by the Colstrip Unit 4 asset. Also, the company is rated an investment grade by Moody’s, S&P, and Fitch.

Now let me talk about our 2008 earnings outlook. We are increasing our guidance of our fully diluted earnings for 2008 to be between $1.65 to $1.80 per share. Basic assumptions include the company’s year-to-date actual results of operations and after tax increase for all of 2008, and pension expense of approximately $9.4 million; the impact of rate relief in the company’s service territories; decreased lease expense and offset by increased depreciation interest expense as a result of the purchase of the previously leased interest in Colstrip Unit 4; lower average pricing on forward sales contracts, and anticipated output volumes of 1.7-megawatt hours at Colstrip Unit 4; and, assumption that there will be no after tax unrealized gain or loss in the 2008 earnings for the four contracts to hedge forward prices of electricity at Colstrip Unit 4.

The guidance also includes an after tax impact of additional insurance proceeds ranging between $3 million and $5 million. We anticipate receiving related to various matters that will reduce our operating general and administrative expenses during the fourth quarter of 2008. Forward diluted average shares outstanding of $38 million. And finally, normal weather in the company’s electric and natural gas service territories for the fourth quarter of 2008.

We are not providing 2009 guidance at this time for the following two reasons, first, we are awaiting the decision from the NTSC on whether our interest in Colstrip Unit 4 will be rate based; and second, we would like to have a better understanding of our pension funding position at year-end.

With that, let me now turn the discussion back over to Bob.

Bob Rowe

Thank you, Brian, for that good report. I’ll start, if I could, with some further discussion of the Colstrip Unit 4 matter that is pending in front of the Montana PSC. On June 10th of this year, we announced a proposed sale of our portion of the Colstrip 4 plant to Bicent Power. Bicent Power proposes to purchase our 30% interest in the total 740-megawatt plant for $404 million. The agreement, notably, included an option to work with the Montana PSC to explore the viability of placing the outfit into rate based as sort of the regulated electric customers in Montana. It’s worth noting that currently, there is no supply in rate based in Montana. So depending on what the commission, this would be the first rate based resource.

On June 27th, we filed with the PSC to initiate a review of the process. During the first quarter of this year, separately from the Montana Consumer Council, they filed with the commission a complaint that we allegedly violated an earlier Montana Commission order when we purchased our previously leased interest in the Colstrip 4 Unit. The allegation was that we violated the rating sensing stipulation that was entered into as part of the bankruptcy. In discussing these (inaudible), it’s also important to note that the Consumer Council in Montana is an independent agency. Its positions are presented to the commission, but the Consumer Council is not part of the commission. And it is our position, of course, that the company did not violate the commission’s rating sensing order or the bankruptcy stipulation. In fact, we had carefully and thoroughly complied with those requirements.

The commission conducted evidentiary hearings related to both the cases, the rate based filing and the Consumer Council initiated investigation in September of 2008, and is currently deliberating both matters. And we are awaiting a decision. We anticipate a ruling by the Montana Commission on both matters by the middle of November. If our interest in Colstrip 4 is placed into rate based, into regulated rates, the transaction with Bicent is terminated. The conclusion of either scenario, however, is in keeping with a strategy to become a purely regulated utility, regulated in either one of the three states that we serve or by the Federal Energy Regulatory Commission. We expect either to consummate the transaction with Bicent or to place the asset into rate based by the end of 2008.

Now, if I could turn to our growth initiatives, and these are previously announced initiatives. Our service territory, as you know, is located in parts of the United States with our relatively insulated from large economic fluctuations and areas with strong commitments to economic development, including in the energy sector. As a result, even with the national economic downturn, we expect to see customer and load growth to continue in the 1% annual growth range.

We have previously discussed several growth projects that we believe will have the potential to increase our rate based significantly. First, on the generation side, we have two dockets in front of the Montana Commission at this time. As previously mentioned, there’s a possibility of our interest in Colstrip 4 being included in rate based. If that occurs, we will not incur any near term costs to add that $400 million to our rate based. The other generation project currently in front of the Montana Commission is the Milk Creek facility to provide a regulating asset and designed to keep the grid in overall balance.

On the transmission side of the business, as we have stated previously, our Montana transmission assets are strategically located to take advantage of potential transmission grid expansion in the Northwestern part of the United States. Interest in our new generating projects in Montana remains very strong with over 6,600 megawatts of proposed of generation currently seeking to connect to our system. Obviously, not all of these generation projects will be built. However, there continues to be very strong interest for developing new generation, predominantly wind, in Montana. As you are aware, all states in the Western United States effectively have some kind of renewable portfolio standard. Compliance with those standards dictates our continued development in the wind sector.

With any of these generating projects, construction of new transmission lines is critical for transporting power to load within and outside of Montana in order to alleviate the congestion issue, with the prevalent on existing line. So these are essential highways, in effect. We’re looking at three transmission projects in Montana. These are complementary to one another, but they are independent. First, is an upgrade to our (inaudible) 500 kV Colstrip transmission line that runs generally East to West. The second is a Montana collector system within the state of Montana. Third is the MIST or Mountain States Transmission Intertie line that runs generally North to South.

And I’ll come back and speak about these with more specificity. I do want to emphasize that we will forward on these projects when and if they make economic sense. We have absolutely no appetite at this company to force projects to move along at a pace that fails to match the demand for the particular project.

Let me expand on the Milk Creek plant first briefly. Milk Creek will be designed as a facility that will serve as a regulating resource that will provide balancing services to our transmission balancing area. As a transmission balancing area operator, Northwestern must adhere to very stringent federal regulations to balance the moment to moment variations between load and supply.

We filed the air quality permit, and request for advanced approval of the Milk Creek generating plant with the Montana Commission on August of 2008. This is the first application under a statute that was collaboratively developed in advance between the commission and the company in the last legislative session that does a lot for advanced approval of projects such as these and their inclusion in rate based.

The capital costs of the project is estimated to be around $200 million. The project is expected to have a capacity of between 125 megawatts and 150 megawatts, which equates to approximately 85 megawatts of regulation capacity. The Montana Commission has 270 days from the filing date to issue a determination of whether the plant will be allowed into a rate based. The commission has scheduled for after the 1st of the year. We’re currently in the discovery phase. The entire filing can be found on our Web site. If the commission determines to allow the plant in rate based, we expect the plant to be in service by January of 2011. If the commission determines the plant is not required, it will not be built.

Now, if I could move to the proposed upgrade to the Colstrip 500 kV line and the (inaudible). In August, we announced that we and three ownership partners in the existing Colstrip transmission system will work together to identify and evaluate one or more potential transmission system upgrades to accommodate the transmission that we and another renewable generation, again, generally from East to West.

The other partners are Portland General Electric, Puget Sound Energy, and PacifiCorp. The parties have agreed to share the cost of conducting an independent review of power transmission alternatives and the potential ownership structures. Each party has agreed to contribute $100,000 towards the review. The ownership structure will be determined once projects are identified and agreed to by the participating utilities. Once complete, the information developed here in the review will be available for decision-making.

At this point, we anticipate that the capital expense for the entire project could range between $200 million and $250 million within an expected in service date no earlier than 2015. Our portion of the total capital of the project will be dependent on the ownership structure determined once the independent review has concluded.

Turning to the collector system, as I mentioned earlier, there’s strong interest in Montana energy resource, particularly renewables and wind. Our generation queue currently includes nearly 50 projects with a combined potential of over 6,600 megawatts. This represents an increase of approximately 50% since only February of this year. The system would be designed to collect renewable energy generation projects from various concentrated geographic areas, providing them access to the transmission system to facilitate access to markets, so hence, the concept of the collector system.

Moving next, if I could, to the MIST project, the Mountain States Transmission Intertie, is a proposed 500 kV line that would extend from a new substation to be built near either Townsend or Garrison, Montana to the existing Borah or midpoint substation located in Idaho. The MSTI line’s main purpose will be to meet requests for transmission service from customers and relieve constraints in the high voltage transmission network in the region. MSTI provides additional capacity on a historically constrained path, and also connects expanding new markets in Idaho, Utah, and the Southwest United States.

An initial citing study identified several reasonable alternative pathways for the project. Significantly, we recently filed the Montana Major Facility Citing Act application, and we’ll be submitting the federal application soon. We’ve selected a preferred route as well as two alternative routes, which will be reviewed in the environmental reviews, both federal and state. The line would be approximately miles in length, again, first depending on the final citing. And it would cost around $800 million to $1 billion to construct. NorthWestern currently has 639 megawatts of expressed interest in the project. We are permitting the line of a 500 kV transmission line. But of course, ultimately, we’ll match the capacity to the market demand at the time of construction. Based on our current timeline, we anticipate the line could be in service by 2013.

And now, turning our attention to our South Dakota territory, even though certainly some of the US economy is slowing, we’re still experiencing load growth and tightening of capacity markets in the map region Midwest. We’re evaluating the need for electric heat and base load generation addition in our South Dakota territory.

Currently, we estimate the peaking capacity need in our South Dakota is in the 80-megawatt to 90-megawatt range by 2010. We anticipate constructing two 45-megawatt combustion turbines, one in Aberdeen, South Dakota and one in Mitchell, South Dakota. The capital expenditure associated with both turbines would be in the $70 million to $90 million range. We will likely construct one in 2009, and push one back to 2010. And again, any one of these projects will move forward when, and only when, the demand and the economics makes sense. We’re moving forward with all of these projects while keeping the current state of the economic affairs very much in mind.

So by way of summary, first, we’re very pleased with the results of our quarter and our financial position; second, the company is rated investment grade by Moody’s, S&P, and by Fitch; third, we have modest debt maturities in the next year, and no need to raise capital currently; fourth, we operate in a stable part of the United States that typically overrides the highs and lows of other regions of the US economy; and finally, we’re optimistic about future prospects of the company to enhance shareholder value.

And with that, we’ll turn it over to the operator to give instructions for comments, and we look forward to your questions. Thank you.

Question-and-Answer Session

Operator

(Operator instructions) And we have a question from the line of Paul Ridzon from KeyBanc. Please go ahead.

Paul Ridzon – KeyBanc

I’m just looking for more clarity on the pension. You said ’09 pension increase should be up $30 million, but part of that will be expensed in ’09. Is that the $11 million we saw?

Bob Rowe

Brian?

Brian Bird

The $11 million is through the first three months of the year. It’s going to be a total of $15 million approximately for all of ’09. The $30 million is an increase that we’re spreading over two years, 2008 and 2009. And that’s the result, Paul, of an accounting order that we have to take our pension expense through 2005, through 2009, and spread those expenses over that time period.

Paul Ridzon – KeyBanc

So you’re saying half of it in ’08, half in ’09, and the $30 million is not even firm yet, is that correct?

Brian Bird

I think in light of where we were at the end of the third quarter, I think that’s pretty firm. I think what we will be looking at in the fourth quarter is it will – if the market stays where it is today, we’ll be refunding at 80%. If that’s so, we’d increase significantly or more out to probably fund less than 80% in light of the current market conditions. But it’s important for us to continue to fund our pension at appropriate levels that will be evaluated in the marketplace as we go forward. And we expect that this is going to be our forecast or forecasted expense at the end of the year.

Paul Ridzon – KeyBanc

And is there a firm date on the calendar for a Colstrip decision?

Bob Rowe

The Montana Commission is currently deliberating. They have their first work session on Monday. They will continue on Friday. And the goal is in order by mid November.

Paul Ridzon – KeyBanc

Okay. Thank you very much.

Operator

Thank you. We have a question now from the line of Brian Russo from Ladenburg Thalmann. Please go ahead.

Brian Russo – Ladenburg Thalmann

Good morning.

Bob Rowe

Good morning, Brian.

Brian Russo – Ladenburg Thalmann

Can you just elaborate a little bit on the increase in the 2008 guidance. I think previously, it was $1.60 to $1.75. So you increased it – increased the range by $0.05 since the last guidance given back in way July. But I’m wondering, it looks like you’ve got this negative delta on the pension. What are the positive drivers since July that has led you to increase the ’08 guidance?

Brian Bird

First and foremost, the share repurchase certainly came into play. I also tell you that we do have anticipated additional insurance recoveries in the fourth quarter. To me, in light of the performance of the company today, those are the biggest drivers in terms of where we’re at. And that includes expected forecast for pension expense this year.

Brian Russo – Ladenburg Thalmann

Right. So I guess what you’re saying is the share repurchase and the insurance recoveries more than offset the pension expense forecast.

Brian Bird

Correct.

Brian Russo – Ladenburg Thalmann

Okay. And then when looking to 2009, it looks like you’re going to have, like you said earlier, $15 million incremental year-over-year expense for pension. And I don’t think we’re assuming any rate release in 2009. So are there any – any initiatives you can undertake to help mitigate the negative earnings impact of that $15 million pension expense?

Brian Bird

Well, I would tell you, we’re going to have to kind of wait on 2009, Brian. It’s just too early for us to talk about that. We’ll be prepared to talk about that, hopefully, at the end of the year when we have more clarity on the Colstrip.

Brian Russo – Ladenburg Thalmann

Okay. Then just lastly, you mentioned hearings were completed both on the Colstrip 4 rate basing and the bankruptcy stip hearing. Can you just share some thoughts as to what are the major issues on CS4? Is it just price or what else? And then on the bankruptcy stip, could you just remind us of what the NCC’s position is on that versus what the company’s decision is?

Bob Rowe

Sure. First again, the commission is in the middle of deliberations. And we want to be very careful to respect that process and be somewhat circumspect in our comments. The company’s perspective – our primary goal was to present a proposal, either rate based or not, that was concrete, that was actionable, and that kept shareholders indifferent. And obviously, we necessarily had to honor the terms of the Bicent agreement.

Issues in front of that commission rated like, one other party included, being value at which Colstrip should be rate based, whether or not there were risks associated with the rate based alternative, comparison of rate basing to not rate basing based on anticipated power supply. The company requested a declaratory ruling concerning net operating losses that would be consumed in the event of the sale, and a number of other ancillary issues. But those were the biggest ones, Consumer Council rate, the number of additional issues concerning the amount at which the plant should be rate based if it was rate based.

In the investigation, the broad question was whether or not the process that the company went through when consolidating the interest in Colstrip through (inaudible) action in some way violated the rate sensing in the bankruptcy. Consumer Council argued that it did. We obviously argue that it did not, that we provided a really quite wholesome information on the start of the rate sensing regime. And that most importantly, the company had complied with the letter and the spirit of the stipulation. The stipulation had been successful in terms of achieving its objectives for shareholders and for customers, and in reinforcing the company’s focus on being a very much utility focused operation.

Probably, given the sensitivity, the most prudent thing would be to refer you to meet parties (inaudible) in the investigation. We’d be happy to get those out to you.

Brian Russo – Ladenburg Thalmann

All right. And this is one follow up, would an unfavorable ruling on this investigation disrupt the rate basing and/or sale of Colstrip? Are they two separate dockets and shouldn’t have relevance on each other?

Bob Rowe

They are separate dockets. They were heard separately. They were briefed separately. The commission is deliberating them jointly. The investigation in our view, whatever the results happen to be, should not affect an outcome in the other docket concerning the rate based option. Again, I want to be very careful not to speak to specifically or to assume any particular outcomes as deliberations are ongoing.

Brian Russo – Ladenburg Thalmann

Okay. Thank you very much.

Bob Rowe

Thank you.

Operator

Our next question comes from the line of James Bellesa from D.A. Davidson & Company. Please go ahead.

James Bellesa – D.A. Davidson & Co.

Good morning. Your guidance for 2008 includes the assumption that no after tax unrealized gain or loss on these forward contracts. And then in the most recent quarter, you did have $10.2 million unrealized gain. So is there a reverse in the fourth quarter of that or where there losses in the earlier part of the year?

Brian Bird

Yes. We’re at, in a year-to-date basis, just shy of $4 million of the impact of those unrealized. We’re now in a gain position. I think it’s around $3.8 million. And just on our expectation, we don’t know where that will be at the end of the year. So we’ve just excluded that from our guidance.

James Bellesa – D.A. Davidson & Co.

You’ve indicated that your CapEx budget for ’09, I believe, was coming down a little due to the stock that you didn’t need to do something at, and are peaking here in South Dakota due to lower reserve requirements. Why lower reserve requirements?

Brian Bird

We’re looking at – we had a profile, if you will, in terms of our expected reserve margins in the year. And we reevaluated that, and just made the determination that we could delay on those peaking projects into 2010.

James Bellesa – D.A. Davidson & Co.

Your June 10th agreement with Bicent calls for a timeline of 120 days. Is that already expired or is it starting at some other point in time so that it’s still open timeline?

Brian Bird

No. We anticipate that we have until the end of November to make a determination on this issue.

Bob Rowe

The commission has been constructive and working its schedule to ensure that we can meet that deadline, whatever its decision maybe.

James Bellesa – D.A. Davidson & Co.

If the agreement was assigned in June, that’s – 120 days would be four months, three months. So when do the 120 days expire or has started, or what? I’m not understanding that.

Brian Bird

Well, if you could read through the agreement more closely, we have until the end of November.

James Bellesa – D.A. Davidson & Co.

Okay. So the 120 days is not really applicable here.

Brian Bird

It’s applicable, but there is further provisions in the document, if you will.

Bob Rowe

We were required, under the agreement, to make the request. And we have done that. The window finally closes at the end of November. So we’ve, obviously, with everything we’ve done procedurally, we’ve had the agreement in front of us, and have been scrupulous about compliance.

James Bellesa – D.A. Davidson & Co.

And with the conclusion in the current markets, since you entered into this contract, is Bicent to go through that – they won’t – that the Colstrip 4 is rate based rather than having the purchase – purchase at this time.

Bob Rowe

We’re satisfied that Bicent is able to complete the transaction, and obviously, there are breakup fees in both directions. The Bicent fee would be $20 million, and there’s a line of credit in place to insure that.

James Bellesa – D.A. Davidson & Co.

But if the commission says we’re allowed the rate basing of Colstrip 4, will Bicent be grateful that they didn’t have to go ahead and complete the transaction?

Bob Rowe

We have no idea.

James Bellesa – D.A. Davidson & Co.

Thank you.

Operator

Thank you. I have a question from the line of Leon Dubov from Catapult Capital Management. Please go ahead.

Leon Dubov – Catapult Capital Management

Hi. Good morning.

Brian Bird

Good morning, Leon.

Leon Dubov – Catapult Capital Management

You said that Bicent has a credit agreement in place. Is that just to meet the $20 million breakup fees, they have to make that? Or do they have financing in place to buy the plant for $400 million?

Brian Bird

Leon, I’ll make sure – this is Brian. I just want to make sure I’m understanding your question. Bob mentioned the letter of credit. We have a letter of credit equal to $20 million. For whatever they reason they terminate the agreement, we can draw up on that letter of credit.

Leon Dubov – Catapult Capital Management

Okay. Do you know if they have the financing lined up to buy the plant if–?

Brian Bird

I don’t know. I’ll ask my treasurer sitting here. He may know.

Paul Evans

Hi there. This is Paul Evans. They have preliminary financing arrangements at Union Bank of California. We have no indications that they’ve had any problems with that financing at this point.

Leon Dubov – Catapult Capital Management

Okay. Thank you very much.

Operator

Thank you. We have a question now from the line of Tom Wolfe from Sawtooth Investments. Please go ahead.

Tom Wolfe – Sawtooth Investments

Hi. To what extent do you expect recovery of the additional pension plan through the regulatory process? And what would be the timing for that?

Brian Bird

We will be filing a rate case in 2009 based upon a 2008 test year. The increase in pension expense will be, obviously, one of the considerations in our rate filing. We will not be able to get recovery on that until – expect until the end of 2009 or the 2010 time period. That’s the expected timetable for determination of that rate case.

Bob Rowe

It’s worth noting, in addition, we have kept the commission staff informed of the pension situation and our actions. And obviously, the commission is, I think, concerned and supportive of our actions to ensure pension adequacy, fund adequacy.

Tom Wolfe – Sawtooth Investments

Okay. Thank you very much, and congratulations to you on a great third quarter.

Brian Bird

Thanks.

Operator

We have a follow up question from the line of Paul Ridzon from KeyBanc. Please go ahead.

Paul Ridzon – KeyBanc

Just a clarification, you expect that the – you will recover in future rates the entire $30 million you have to expense?

Brian Bird

One thing that we have to consider is, we may look at – because of the accounting order that’s put in place, there maybe an averaging. We’re not set here to determine what will actually fall from our pension expense standpoint today. But obviously, we’re going to try and get as much back as we can in terms of what we’re funding from our pension expense standpoint.

Paul Ridzon – KeyBanc

And can you just review the genesis of these insurance recoveries, kind of what they’re related to?

Brian Bird

Most of them, it’s coverage from our insurance carriers for various legal matters that we’ve ventured into or we’ve been a party to. And also, Magten for instance, we’ve talked about that. That’s recovery from insurance carriers for our legal costs associated with those particular issues.

Paul Ridzon – KeyBanc

This is a lot of bankruptcy stuff?

Brian Bird

That one I would categorize as a bankruptcy stuff, yes. The Touch America settlement that was also noted, that was associated with their bankruptcy settlement with all parties in that regard.

Paul Ridzon – KeyBanc

Okay. Thank you.

Operator

Thank you. And we have no further questions. Please continue.

Dan Rausch

So that’s the end of our prepared remarks. So I guess, Robert, if you could just go through and give the instructions on how to do the replay instructions. And with that, we’ll be done with the call.

Bob Rowe

Thank you all very much.

Operator

Thank you. And ladies and gentlemen, this conference will be available for replay starting at noon today, Eastern Time, until November 30th, 2008. You can access the AT&T teleconference replay system by dialing 1-800-475-6701 or 320-365-3844, and entering the access code 965194. Once again, those numbers are 800-475-6701 and 320-365-3844, access code 965194. That does conclude our conference for today. Thank you for your participation, and thank you for using AT&T executive teleconference service. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: NorthWestern Corporation Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts