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

NorthWestern Corp. (NYSE:NWE)

Q1 2009 Earnings Call

April 23, 2009 11:00 AM ET

Executives

Dan Rausch - Investor Relations

Robert C. Rowe - President and Chief Executive Officer

Brian B. Bird - Vice President and Chief Financial Officer

Christopher Ellinghaus - Shields & Company

Kendall G. Kliewer - Vice President and Controller

Analysts

Brian Russo - Ladenburg Thalmann & Co.

Timothy Yee - KeyBanc Capital Markets

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the NorthWestern Corporation's First Quarter 2009 Financial Results. Today's conference is being recorded. All lines are in a listen-only mode. (Operator Instructions).

I would now like to turn the conference over to our host, Mr. Dan Rausch. Please go ahead sir.

Dan Rausch

Thank you. Good morning and welcome to NorthWestern Corporation's March 31, 2009 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 and also this morning we filed our 10-Q pre-market. Joining us today on the call are Bob Rowe, President and CEO; Brian Bird, Chief Financial Officer; Miggie Cramblit, 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 listed in our annual report on Form 10-K, recent and forthcoming 10-Q, 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 reasons.

Following our 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 April 22 through May 22, 2009. To access the relay, dial 1800-475-6701 and then access code 996081. That information will be also be restated at the end of this call. A replay of the web cast can also be accessed from our website.

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

Robert C. Rowe

Thank you, Dan. While we had a busy and really very good first three months of 2009. Moody's rating service upgraded our debt rating and at the same time kept us on positive outlook. We issued 250 million of First Mortgage Bonds at 6.34% with a ten year maturity, while liquidity has increased in access of the 260 million as we reported as of the end of March of this year. But we also took the last significant step towards our goal of being a fully regulated utility.

In Montana we placed our interest in Colstrip Unit 4 into rate base as of January first at the value of 470 million and that was pursuant to a 2008 Montana PSC order. In South Dakota of course our electric business is already vertically integrated.

Also in Montana the Public Service Commission held a hearing on our application requesting the commission to approve construction of the 150 megawatt Mill Creek Generating Station to meet our regulated needs. We expect a decision concerning Mill Creek in the second quarter of this year. If approved, the plant could come online by the end of 2010.

Looking forward, we are reaffirming our guidance for 2009 of $1.85 to $2 per fully diluted share. And with that, Brian would you please discuss the financial results in more detail.

Brian B. Bird

Thanks Bob. We reported diluted EPS of $0.63 per share, compared to $0.59 per share in the first quarter of 2008. Consolidated net income was 22.8 million for the first quarter of 2009, compared with consolidated net income of 23.5 million during the first quarter of 2008. The increase in EPS was driven mainly by the share buyback completed in the third quarter of 2008.

Operating income was 50.5 million, compared with operating income of 52.1 million during the first quarter of 2008. The main drivers to our operating income and earnings during 2009 were as follows: Gross margins increased by 6 million, primarily due to transferring our interest in Colstrip Unit 4 to a Montana utility rate base, and that represent our return on rate base for the quarter.

Offsetting the gross margin increase was an increase 7.6 million in operating expenses. The increase is fairly evenly split between increases in insurance reserves, pension expense, labor and benefits and a combined increase in property taxes and depreciation.

Of this increase, only the 2.6 million increases in insurance reserves was not anticipated in the first quarter. The 2.1 million pension expense increased over the prior quarter is because our 2008 pension adjustment did not occur until the third quarter of 2008.

Below the operating expense line, our interest expense for the three months ended March 31, 2009 decreased 1 million for the first quarter of 2008. This decrease was primarily related to lower interest rates on our variable rate debt.

Now moving over to the balance sheet; our balance sheet and cash flow remained strong. Our total liquidity at the end of the first quarter of approximately 216 million, with cash of 83.2 million and 176 million available from our credit facility. The increase in credit revolver availability was due primarily to the issuance of 250 million of Montana First Mortgage Bonds in March of 2009. The proceeds were used to redeem the 100 million Colstrip lease holdings term loan and to repay outstanding borrowings on the credit facility.

Long-term debt at March 31 was 900 million, compared with 862 million at 12/31/08. The company maintained a strong long-term debt to total capital ratio of approximately 54% at March 31, 2009. Cash provided by operating activities totaled 65.1 million during the quarter ended March 31, 2009, compared with 78 million during the quarter ending March 31, 2008. This decrease in operating cash flow is primarily related to increased pension funding of approximately 21.3 million. Offset by improvements associated with the timing of energy supply cost collections in the first quarter of 2009, this compared with 2008.

We used 18.3 million for investment activities, or basically our capital expenditures during the first quarter of 2009 compared with 14 million for the first quarter of 2008. The company's financing activities provided 25.1 million during the first quarter of 2009, compared with using 43 million for the first quarter of 2008.

During the first quarter of 2009 the company issued 215 million, made debt payments of 211 million and paid dividends on common stock of 12 million. We've plan to enter into a new credit facility with availability between 200 and 300 million to replace our existing revolver, which matures in November of 2009.

And finally in the first quarter of 2009 both Fitch and Moody's upgraded both our secured and unsecured debt by another notch. And in addition Moody's still have us on positive watch.

In summary our cash and liquidity positions are strong and our debt ratings continue to improve.

Now let's talk about our 2009 earnings outlook. We are reaffirming our guidance for a fully diluted earnings in 2009 expected to be between $1.85 and $2 per share. Our assumptions include the following; Colstrip Unit 4 impact, 2009 net income will be increased by approximately 9 million or $0.25 per share as a result of the inclusion of our interest in that plan into a regulated electric rate base.

Pension expense will be flat with 2009 pension expense and assumes an 8% return on assets during 2009. Plant insurance recoveries in the second quarter will offset our Q1 insurance reserve expense increase. Retail electric volumes will be flat compared to 2009 and actually wholesale electric volumes in South Dakota will actually decrease due to planned outage in 2009.

Residential and commercial natural gas volumes will be relatively flat, compared to 2009 volumes. Fully diluted average shares outstanding of 36.5 million and lastly normal weather in the company's electric and natural gas service territories for the remainder of 2009.

So basically we expect 2009 earnings to grow between 5 and 13% over 2008 earnings of $1.77 per share. With that let me turn it back over to Bob.

Robert C. Rowe

Thank you, Brian for that good report. I've rounded the turn on my first year with the company and despite the economy it's been an exciting and a very positive time. This is a good company, great people and this is sort of wonderful part of the country. We're making progress on many fronts, both internally and externally.

Our financial management and focus on what we know best puts us in a good position to weather the current economic situation as has our ability to time and capital commitments in way that companies in the middle of the building cycle do not enjoy.

We have solid execution ability to undertake the initiatives that we've announced, and this extends through all levels of the company as our employees are committed to and very much invested in our success.

We're strengthening our relationships with policy makers, customers and other stakeholders in our region and we're explaining how our investments will benefit them. We're refining our distribution system planning and our asset management and we're undertaking supply planning that benefits our customers. For any company, a top of mind question obviously concerns the general effects of the economy on that company's performance and prospects.

At NorthWestern, we monitor a range of indicators, including electric and gas loads, late payment, non-payments on the retail level, the activity of our largest customers, commodity and supply prices, and of course for a utility, weather effects.

Our service territory is located in parts of the United States that are generally more insulated from large economic fluctuations, and in fact our service areas held up much better than has the national average. Over our entire service area foreclosures are low and local financial institutions are generally quite strong.

As of March 2009 data, the national unemployment rate is 8.5% but Nebraska's unemployment rate is the second lowest in the country at 4.2. South Dakota's unemployment rate is fourth lowest in the country at 4.6 and Montana's is 12th lowest at 6%. And indeed the part of Montana that has been hit hardest which is generally the Northwest part is for the most not in our service territory, with be exception of the flat area Southeast area (ph) where we do provide natural gas.

In Montana, the effects of operational curtailments in the industrial sector is dampened for us because these firms tend to be P&D customers, but are not supply customers of ours.

Concerning South Dakota, last week I meet with the managers from throughout our service territory and almost all of the local economic development leaders in our territory. And the economic development officials continue to be very positive about the heath of their economy. And indeed there are actually several major employers at South Dakota areas are actively hiring. We have seen a fall-off in new construction demands and as a result we have fewer contractors on our premises then in previous years.

We have seen an increase in retail late payments, but again at much slower rates, much lower levels then for many other utilities. Most of the change in consumption compared to previous years appears to be weather related. The largest effect as Brain described is the need to increase pension funding due to the market downturn. In our previous call we described the Montano Commission's very positive action in issuing an accounting order to allow us to smoothly affect the (ph) increased pension expenditures we undertook in the first quarter of 2008. Nonetheless, despite the relatively good situation, we take the economy seriously.

I am now actively working with our executives, our employees to take modest but appropriate action now, focused mainly on discretionary spending for going and filling certain positions that are vacant and some travel expenses and material deferrals, so that we can be reasonably assured of a successful year and avoid having take drastic action later in the year, at the end of the year.

So we continue to monitor the economy, but so far our service territories have really held up quite well.

Turning to growth prospects; I'll discuss our prospects for growing the company in a number of aspects. As many of you know, we've previously announced three significant transmission related projects that I'll turn to those after first discussing our Mill Creek regulating filing.

The Mill Creek generating station will provide a regulating assets, essentially let's say generating plants are designed to keep the system in balance. This is a resource, all almost all the utilities would have. NorthWestern Energy has not had that kind of the resource on its Montana system for a very long time. The project is expected to have a capacity of approximately 150 megawatts, which would equal approximately 85 megawatts of regulation capability. Hearings related to Mill Creek were held before the Public Service Commission in February. The hearing at that case was very well presented by our team and all briefs are now in (ph).

We requested an authorized ROE of 10.75% with a capital structure of 50% equity and 50% debt. We expect the Public Service Commission to issue its decision during the second quarter of 2009. And the capital cost of this project is estimated to be around 200 million. I was actually lost in the pricing on the turbines which represents about 40% of the price. We're negotiating a risk sharing arrangement with the contractor for the balance of funds. So as a result we have a high degree of confidence being able to meet the capital estimate for this project.

On the transmission side of the business, as we've stated previously, our Montana transmission assets are strategically located to contribute to the expansion of the transmission grade in the Western United States. This expansion will be driven, in particular, by demand for wind and other renewable resources to meet renewable portfolios, which are already in place throughout the Western United States. And as you're aware there is a strong interest in movement towards a national standard in urban relay (ph).

Interest in new generating projects in Montana continues to remain strong with over 5,000 megawatts of proposed generation seeking to connect to our system. Now obviously not all of these generation projects will be built, but there continues to be very strong interest in developing new generation, predominantly wind in Montana. With any of these generation projects construction of new transmission lines is critical for transporting power for loads, both within and outside of Montana and to alleviate congestion that is prevalent on existing lines.

It's significant that the typically development time for wind farm is much less in our transmission project and again that confirms the real need for transmission projects to move ahead. So there is a sense of urgency about transmission expansion driven by national policy, by regional consideration and by state policy.

The three transmission projects we have proposed are, an upgrade to our existing 500 KV Colstrip transmission line; Second, the Montana collector system and the third, the Mountain States Transmission Intertie or MSTI. I'll speak more specifically about all three of these projects, but before I do I need to emphasize that we'll move forward with these projects as they make economic sense.

We have no appetite at this company to force these projects move along at a pace that fails to match the demand for the particular project.

So turning first to the proposed upgrade to the Colstrip 500KV line; in August of 2008 we announced, we and the other ownership partners in the existing Colstrip transmission system will worked together to identify and evaluate one or more potential transmission system upgrade to accommodate the transmission of wind and other renewable generation into the Pacific Northwest.

The other partners are Portland General Electric, Puget Sound Energy, PacifiCorp, and Avista. And BPA has now also joined in this effort. The parties have agreed to share the cost of conducting an independent review of the power transmission alternatives and the potential ownership structures. Each party has agreed to contribute up to $100,000 towards the engineering review.

The ownership structure will be determined once the project if any are identified and agreed to by the participating utilities. At this point, we anticipate that the capital spend for the entire project could range between 200 million and 250 million. Since we last spoke, we've met with the other coastal partners and also BPA to advance this project's progress. And we're very much pleased with the dialogue and good interest coming out of those meetings.

Our portion of the total capital on the project will depend on the ownership structure determined once the independent review is concluded. Now assuming that all five partners build the project, our portion would likely be between 50 and $60 million. The project, again depending on the outcome of the study, could be completed by the end of 2011.

Second we're also designing a collector system to gather wind resources in Montana. And again as we've discussed interest in Montana renewable energy resources, particularly wind continues to grow. We recently filed with the Federal Energy Regulatory Commission to conduct an open season on this proposed collector system, the collector system would be comprised of up to five new transmission lines in Montana, that would connect new generation, primarily wind farms into our proposed MSTI line.

Most of the new proposed wind generation, that would be served by the collector system will be located in North-central, Central, South-central and Eastern Montana. And while the regional economy has slowed as I've discussed utilities across the west are still required to meet renewal portfolio standards for their customers over the next several years and again with the possible national standard as an overlay.

This project will be designed to collect renewable energy generation from various concentrated geographic areas and provide this project access -- essential access to the transmission to facilitate regionally the markets where the output is demanding. In January we filed a petition for the territory order with some modifications to our existing approach to allow for an open season to be run later in the year to advance the collector system model.

Since our last call we participated with FERC in a technical conference that from our prospective went very well. This project is expected to cost between 115 million and 200 million and would be completed by the end of 2014. Specific design of the lines would be obviously configured to meet the needs of the shippers.

Third then moving onto the Mountain States Transmission Intertie or MSTI; the proposed MSTI of 500 KV line would extend from a new substation to be built on our system at Townsend, Montana to the existing bora midpoint substation located in Idaho.

The transmission line's main purpose will be to meet requests for transmission service from customers and to relieve constraints in the high voltage transmission network in the region. The MSTI line provides additional capacity on a historically constrained path and connects expanding new markets in Idaho, Utah, and the Southwest United States.

Our EIS application was being complete and we're working with both the states and Federal agencies as they conduct their review. MSTI is currently undergoing environmental review with the draft EIS now due out in mid-2009. The line will be approximately 400 miles in length and will cost around 800 million to 1 billion to construct. As with the collector we recently filed with FERC to conduct a second open season on the MSTI lines to allow new primarily renewal of participants, the opportunity to reserve capacity on their line and to provide existing participants an opportunity to reaffirm their current reservations.

Since we last updated you, we have participated in the FERC technical conference on the MSTI line as well. It was combined with the collector system contracts that I mentioned.

And we also began a very structured road show to surrounding states meeting with load serving entities or local IOUs, with state energy offices and with Public Utility Commissions. So far we taken those trips to Oregon and Idaho. Next week we will be in California and Washington. Those have been really very successful. And also we responded to a WACO (ph) request for statements of interest and are actively evaluating how the regional and national environmental policies might affect and potentially benefit really all three of these projects.

NorthWestern currently have 539 megawatts of expressed interest in the MSTI project. We are permitting the line, the 500 KV transmission line. We will ultimately 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 2014.

Now turning to South Dakota, ITC Holdings recently announced that it is working to develop a 765 KV line, known as the Green Power Express. And this is a network of transmission lines that would facilitate the movement of approximately 12,000 megawatt of power from wind abundant areas to populated areas. The Green Power Express will traverse portions of North Dakota, South Dakota, Minnesota, Iowa, Wisconsin and Indiana and would ultimately include approximately 3000 miles of extra high-voltage transmission and end near Chicago.

This project addresses a recognized lack of electric transmission infrastructure needed to integrate wind. Portions of the Green Power Express will be in South Dakota serviced territory. The project is in its preliminary stages, will be evolving over the next several years. The path and the miles will obviously determinant total cost of the project and those have not yet been determined. Very encouragingly ITC recently received an order from the FERC for an authorized ROC of -- ROE of 12.38%, that's inclusive of about a 160 basis points of adders (ph) and an ability to collect construction work in progress or equip.

We want to be part of any energy solution that is in our backyard providing renewable energy solution and economic development in our service territories. We very much appreciated working with ITC over the recent months.

So in summary we are pleased with the results for the quarter with our financial position.

The company has achieved and maintained solid ratings with the rating agencies. We are rated investment grade now by Moody's, S&P and Fitch. And other than renewing our corporate revolver we have no significant debt maturities until 2014. We expect 2009 earnings to grow between 5% and 13% over 2008. We are monitoring the economy. We are taking focused steps just now to prevent any -- more aggressive steps later if the economy in our region does get worse.

And as I said so far the economy in our regions has continued to be relatively strong compared to much of country.

We're optimistic about the future prospects of NorthWestern in terms of our ability to enhance share holder value. The utility industry, nationally is being called on to help lead the country out of recession and to address multiple natural resource issues. Because of our financial health, because of our execution ability, because of the characteristics of our region we are very well positioned to contribute to this important effort and we are very exited to have the opportunity.

We are pleased to be in a position to do our part and to do so responsibly and prudently, producing value for our customers and for our shareholders.

And with that I'll turn it over to the operator, who will give instructions for your comments and questions. Thank you all very much.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first question comes from Chris Ellinghaus with Shields & Company. Please go ahead.

Christopher Ellinghaus

Hi everybody. How are you, fellas?

Robert Rowe

Fine Chris.

Christopher Ellinghaus

Brain, can you go over the first quarter insurance reserve again?

Brian Bird

Yeah. The insurance reserve, totaled insurance reserve adjustment was 2.6 million and the lions shares of that's associated with the Bonneville (ph) venture.

Christopher Ellinghaus

Okay. Is that after tax?

Brian Bird

That's pretax.

Christopher Ellinghaus

Okay. And can you guys just discuss a little bit one of the things that I am expecting that you didn't sort of talk about. In your list of growth drivers there's wind, can you talk about what your internal plans are at this point?

Robert Rowe

Sure. We interact with wind in a number of ways. One thing I should say is that we do not intend to be a merchant wind developer. We currently have wind on our system in Montana at over 8%. So we're working very hard with (ph) regional leader on the challenges of integrating wind. Obviously Mill Creek is an important part of that.

In South Dakota we have a wind turbine project, moving along and that's a purchase with an option to buy the project. And then we are as a transmission provider we intend to provide the critical infrastructure for other wind developers to reach the Western market.

A general comment about the somewhat changed nature, the companies in that business, we tend to see more activity from companies that do have strong balance sheets and execution ability. I would say that generally, that industry is maturing, obviously given the direction of national policy. It's an important and an exciting time to be in the renewal development business as they are in the transmission development business as we are.

Moving back to the Montana supply situation, we're doing a lot of work internally on supply. Generally, we've got a good supply team. And taking advantage of the state policy direction to move with a thoughtful way for 100% dependence on purchased power and past through in the direction of rate based resources. With the development of Mill Creek, we will be again better able to integrate wind and renewable resources into the portfolio.

I certainly expect that we will be actively working to rate base wind and other renewables going forward as part of general move toward a more rate based portfolio.

Christopher Ellinghaus

Okay. Any comments about new South Dakota generation and changes in any of your timing and cost expectations?

Robert Rowe

No, I think we're steady as we go in South Dakota.

Christopher Ellinghaus

Okay. One last thing, Brian, do you have any sense of the economic impact of lower or the milder temperatures in the quarter?

Brian Bird

Yeah. We've had about 700,000 units of pretax numbers, in fact on our gas business because of warmer weathers for the quarter in total. And Chris, I look at it this way, weather was the biggest impact on volumes versus the economic impacts for the first quarter. We did see some industrial load fall off in terms of changes by some of our customers. But we did have an increase in customers themselves in total. And so those things relatively washed and as we forecasted, if you will things were relatively flat, other than the weather impact.

Christopher Ellinghaus

Okay, all right. Thanks a lot.

Robert Rowe

Thank you, Chris.

Operator

Thank you. Our next question comes from Brian Russo with Ladenburg Thalmann. Please go ahead.

Brian Russo - Ladenburg Thalmann & Co.

Hi, good morning.

Robert Rowe

Good morning, Brian.

Brian Bird

Hey Brian.

Brian Russo - Ladenburg Thalmann & Co.

Could you quantify the number of megawatts of capacity for these when purchase power agreements that you have currently? And how much of your portfolio is derived from renewables right now?

Robert Rowe

The percentage of the portfolio is a little bit over 8% at this time. And that's best in region.

Brian Russo - Ladenburg Thalmann & Co.

Okay.

Robert Rowe

In Montana. And 135 megawatts.

Brian Russo - Ladenburg Thalmann & Co.

Okay. And then secondly, could you discuss your upcoming or expected next Montana rate case filing?

Robert Rowe

Sure. At this point the plan is to combine the allocated cost of service filing with the rate case. That would be filed by the end of September. Staying with allocated cost of service the commission has supported our proposal to spend the next few months meeting with parties to identify and if we can narrow issues.

In terms of the rate case, we'll be dealing with all of the standard issues. We're not going to make an extravagant filing with the commission by any means. But should make the minor issues in terms of capital structure, cost of capital. We think we have over the last year probably narrowed the range of dispute there, have a lot more clarity around those issues as well as treatment of net operating losses in the event that, that issue is raised again by another party.

We do expect a number of policy initiatives tied with both the commissions interest and the stakeholders interest in efficiency investment. So we're looking at decoupling obviously or other initiatives the way I would bring that issue is I want us to be in a better position where we can legitimately be excited about the efficiency as a line of business as you would expect strong interest among the commissionaires in those initiatives.

Also we continue to be concerned with regulatory lag as a result of the historic test year regime, there are a number of ways to address that. My view is that to the degree that the commission is concerned to see infrastructure investment in our distribution system, we all have to work together to identify ways to ameliorate the right problem.

Brian Russo - Ladenburg Thalmann & Co.

If you file -- assuming you filed other rate cases in September '09 when would you expect new rates to go into effect?

Robert Rowe

It would be a nine months short call.

Brian Russo - Ladenburg Thalmann & Co.

Okay. And also could you just remind us what your multi-year CapEx is and how that might change if the Mill Creek plan gets approved?

Robert Rowe

I actually would direct you to our IR presentation on the webpage to see a good layering of our capital projects. Generally, we have base, CapEx investment in our distribution system of around $100 million relatively flat. On top of that we would have Mill Creek CapEx in '09 and 010, as well as, CapEx associated with the collector systems starting in '010 and then going out through 2014.

The South Dakota futures are currently anticipated for '012 and '013. And then the biggest CapEx obviously will be associated with MSTI. We have relatively small CapEx for the next several years and getting much more significant in 2011 through 2013.

A couple of important points there; non-discretionary CapEx is funded entirely by free cash flow. The MSTI project CapEx will be really shaped by demand for the project and progress on project planning. We don't anticipate meeting equity unless and until we do proceed with MSTI. And then the critical disclaimers said they are already on this call and say every time we discuss our capital budget we will move forward as these projects make economic sense.

Concerning MSTI specifically, we are open to partnering on that project. We have a sense of the kind of partner that might be the most appropriate. So again, as I mentioned we have very, very good situation of being able to manage our capital commitments in ways that many other companies in this sector cannot.

Brian Russo - Ladenburg Thalmann & Co.

Okay, great. And one last question on MSTI, you mentioned you're interested in partnering and it looks like you guys have done a bit of tour in Northwest meeting with other IOUs and our entities. Do you know when we might expect an announcement on a potential partner?

Robert Rowe

That side generally not the sort of thing that we would comment on.

Brian Russo - Ladenburg Thalmann & Co.

All right, thank you very much.

Robert Rowe

Thank you.

Brian Bird

Thanks Brain.

Operator

Thank you. And the next question in queue comes from Timothy Yee with KeyBanc. Please go ahead.

Timothy Yee - KeyBanc Capital Markets

Hi, good morning. Can you hear me?

Robert Rowe

Yes Tim.

Timothy Yee - KeyBanc Capital Markets

Good. In your 10-Q you discussed a $4.5 million gas sales capacity contract exposure in the second quarter. Wondering if you could elaborate on that and what are the alternatives you are considering to mitigate this?

Robert Rowe

I am going to let our controller Mr. Kliewer take that one.

Kendall Kliewer

Yes. This is a capacity contract we've previously disclosed that we had basis risk because we've fulfilled the supply contract with our customer using the gas that come down on Northern border and the supply contract was based on the insurer pricing points.

The customer has filed for bankruptcy and given us indication that they aren't going to adjust the supply contract. The capacity is not worth or may not be worth a whole lot from what we're paying right now. And so our operations works are continuing to evaluate that and see if we can reduce that exposure during this quarter.

Timothy Yee - KeyBanc Capital Markets

Okay. So I guess would you be able to replace that -- those lost sales?

Robert Rowe

It's not likely we have a new supply contract come on. It would be evaluating whether we can release this capacity to someone else.

Timothy Yee - KeyBanc Capital Markets

Okay. All right and then you mentioned earlier the NOL, what's the current balance on that, and what's the plan on using those going forward?

Brian Bird

The current balance is approximately 300 million. And as we stated elsewhere on a non-reserve basis, we'll be able to utilize those NOLs through 2012 on a reserved basis, we'll be able to utilize those through 2010.

Timothy Yee - KeyBanc Capital Markets

And then the insurance recovery, I know you're kind of expecting, you're expecting the recovery to kind of offset the reserves you took this quarter. What's the timing on that?

Brian Bird

Our expectation is that disclosure associated with the insurance recoveries we expect to have that in the second quarter.

Timothy Yee - KeyBanc Capital Markets

And then lastly your electric filings in the quarter were up, I think due to residential and commercial customer growth. And you are expecting flat volumes for '09. So I'm just wondering if you could comment on the customer growth projects -- customer growth prospects in your region.

Robert Rowe

We've said growth projects are essentially flat or modest for the year and are managing accordingly.

Timothy Yee - KeyBanc Capital Markets

Is that customer -- even customer growth?

Robert Rowe

Relatively slight customer growth projections for the year, about 1%.

Brian Bird

Yeah and I think as Bob said that a bit by some decline in some volume again, particularly we're seeing some industrial decline, but again offsetting customer growth with some useful customer decline offsetting to flat.

Timothy Yee - KeyBanc Capital Markets

Okay. Thank you very much.

Robert Rowe

Thank you.

Operator

Thank you. The next question comes from Leon Dupont with Cadet 12 Capital (ph). Please go ahead.

Unidentified Analyst

Hi. Good morning.

Robert Rowe

Good morning Leon.

Unidentified Analyst

Can we just come back to this 4.5 million gas sales contract exposure. Is there some way how this would be recovered in rates, or is this something that you actually take a head on?

Brian Bird

This is something that we would take a loss on, and this was in the last remaining revenant of our unregulated natural gas business in South Dakota.

Unidentified Analyst

So is it 4.5 million a one time kind of loss or I'm just trying to understand what this really means for earnings?

Brian Bird

Yes. It would be and at this point that's the maximum exposure that we have. We do believe we can mitigate that but at this point we don't know by how much.

Unidentified Analyst

Okay one other thing on the MSTI, EIS that's too mid-09 is there a way to narrow that down a little bit better. Is this something you're expecting in June, July kind of timeframe or it can vary a lot?

Robert Rowe

If there is some variation in the EIS process is driven significantly by other parties, what we can do is first of all be active in as many issues as possible. And as a result of that effort try to bring it earlier then otherwise be the case. We have some ability to do that the best evidence of that is that we've got a certification of a complete application quickly and smoothly. We know how to manage that process and turn things around quite well internally.

Secondly, we are actively working to address the concerns of affected parties who typically are active in these processes. So, we're doing everything we can to insure that it comes in on time obviously we love to see it coming here in time as well.

Unidentified Analyst

Okay. And on the 500 kb upgrade, what's the mix kind a date to look for, when you said you are in the engineering review stage, if there like a milestone that we should think about in terms of seeing whether this project goes forward and at what size?

Robert Rowe

Brian?

Brian Bird

Well, we are in the process of continue to looking at partners and doing the studies would expect to have more to report mid to the third quarter of 2009 on those studies.

The important thing with the upgrade project is that it doesn't require significant regulatory review. So, it really is driven by the outcomes of the studies that will then lead to discussions among the partners about their degree of interest in the portion of the project. We'd see it as being very, very high value. And again are working to move that ahead as quickly as we can.

Unidentified Analyst

Okay, thank you very much.

Brian Bird

Thank you.

Operator

And currently there are no additional questions in queue. Please continue.

Robert Rowe

All right. Well thanks for everyone for your participation on the call and for your support of the company and Beverly if you could give the replay instructions one more time, I guess that will conclude our call.

Operator

Absolutely. Ladies and gentlemen this conference will be available for replay after 12 PM Central and running through May 22 at midnight. You may access the replay service by dialing 1800-475-6701 and using the access code 996081. Once again that number is 1800-475-6701 using the access code 996081.

That does conclude our conference for today. Thank you for your participation and 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 Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts