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

NorthWestern Corporation (NYSE:NWE)

Q1 2014 Earnings Conference Call

April 24, 2014 4:00 PM ET

Executives

Travis Meyer – Director, IR

Bob Rowe – President and CEO

Brian Bird – VP and CFO

Mike Cashell – VP, Transmission

John Hines – VP, Energy Supply

Analysts

Paul Ridzon – Key Bank

Brian Russo – Ladenburg Thalmann

Jonathan Reeder – Wells Fargo

Paul Patterson – Glenrock Associates

Operator

Good day, and welcome to the NorthWestern Corporation first quarter 2014 financial results conference call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Travis Meyer. Please go ahead, sir.

Travis Meyer

Thanks, Stephanie. Good afternoon and thank you for joining us for NorthWestern Corporation’s financial results conference call and webcast for the quarter ended March 31, 2014. NorthWestern’s results have been released and the release is available on our website at www.northwesternenergy.com. We also released our 10-Q pre market this morning.

Joining us today on the call are Bob Rowe, President and CEO; Brian Bird, Vice President and Chief Financial Officer; Kendall Kliewer, Vice President and Controller; John Hines, Vice President of Energy Supply; Mike Cashell, Vice President of Transmission; and myself Travis Meyer, Director of Investor Relations.

Before I turn the call over for us to begin, please note that the company’s press release, this presentation, comments by presenters and responses to your questions may contain forward-looking statements. As such, I need to remind you of our Safe Harbor language.

During the course of this presentation, there will be forward-looking statements within the meaning of the Safe Harbor Act – excuse me, Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often addressed are expected future business results and financial performance and often contain words such as expects, anticipates, intends, plans, believes, seeks or will.

The information in this presentation is based upon our current expectations as of the date hereof unless otherwise noted. Our actual future business and financial performance may differ materially and adversely from our expectations expressed in any forward-looking statements. We undertake no obligation to revise or publicly update our forward-looking statements or this presentation for any reason. Although our expectations and beliefs are based on reasonable assumptions, actual results may differ materially. The factors that may affect our results are listed in certain of our press releases and disclosed in the company’s 10-Q which we filed with the SEC this morning and other public filings with the SEC.

Following our presentation, those who are joining us by teleconference will be able to ask questions. The archived repay of today’s webcast will be available beginning at 6.00 PM Eastern Time today and can be found on our website at www.northwesternenergy.com under Our Company, Investor Relations, Presentations and Webcasts. To access the audio replay of the call, dial (888) 203-1112 then access code 9765855, again, that’s (888) 203-1112, access code 9765855.

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

Bob Rowe

Good. Thank you, Travis. We’re joining you today from our general office in Butte, Montana. We’ve had a very successful Board meeting and annual meeting. Although we did have cool temperatures of light snow, but in Montana, it’s spring time is always just around the corner.

We also had, as we always do, a couple of meet side events. We have a great employee meeting this morning from folks who work in our grid control center and folks in our customer care center including some of the people who were leads on the customer information system project and we’ve continued to be pleased with the results that we’re seeing there.

And we had a tremendous community meeting over 200 folks that really turned into kind of a revival meeting with so much enthusiasm for a lot of things that we are doing, but particularly enthusiasm for the Hydro acquisition.

A couple of other highlights for the quarter. We saw an improvement in net income of approximately $7.7 million as compared with the same period last year. And that was due primarily to the impact of our acquisition of natural gas production assets in Montana and the colder winter weather.

We were very pleased in January to receive for Moody’s an upgrade on the secured side from A2 to A1 and unsecured from Baa1 to A3. And the Board declared a quarterly stock dividend to $0.40 per share that’s payable on June 30.

Now, I’ll turn it over to Brian for the financial results.

Brian Bird

Thanks, Bob. The summary of financial results on Page 5 shows at the bottom of the page on a diluted earnings per share basis for the first three months of 2014, we had a $1.17 per share versus $1.01 the prior year’s period, a $0.16 increase or approximately 16% increase on a year-over-year basis.

Moving to the next slide, as I speak to gross margin, from a gross margin perspective, the first quarter we had $202.3 million of gross margin compared to $180.8 in 2013 or $21.5 million increase or almost 12%.

As you can see above is, from an electric margin and gas margin that primary increase is really from the gas side of our business. As you look below for the increase in gross margin, natural gas production primarily the addition of the South Bear Paw asset really resulted in that increase on a year-over-year basis. Secondly, we have electric retail volume improvement. We did experience a benefit of our Montana gas rate increase that effective last year, but on a year-over-year basis certainly an increase. And then natural gas volume is of $3.2.

So all in all, $21.5 million, very, very good quarter and certainly on a year-over-year basis.

From an operating expense perspective, on Page 7, our operating expenses, we’re up 5.7% operating expenses in dollars, $130.9 million versus $123.8 in 2013, net increase of $7.1 million or 5.7%. As you can see by the percentage increases property taxes was a major driver from a percentage increase for the quarter.

As a matter of fact down below, you can see a $3.3 million increase in OG&A. Expense $2.2 million of that is natural gas production, so obviously with more natural gas production margin, we’ve had expenses and production expenses associated with that. $1.6 million in labor expenses, $0.8 million in Hydro Transaction costs.

One thing I would point out here, if you excluded the natural gas production costs and you excluded the Hydro Transaction costs, you can see that from an OG&A perspective, we are relatively flat on a year-over-year basis. That makes particular sense when you consider in 2013, we started our DSIP program. We had a pretty decent increase in expenses starting in 2013. As we continue that program, we’ve seen that our OG&A expenses level out.

Regarding property taxes, we talked about that, a $2.7 million increase there and a $1.1 million in depreciation expense. We certainly had an increase due to plant additions, but as a result of our depreciation study that we performed last year, that helped offset some of that increase from added plant additions.

Moving on to Page 8 operating income to net income. You can see operating income itself $71.4 million versus $57 million the prior year, a $14.4 million increase year-over-year. Interest expense below that was up $3.2 million, but $1.9 million of that increase was associated with the Hydro Transaction that was really a cost associated with the Bridge Facility that’s in place really as an insurance policy. If ultimately we’re able to close that transaction and capital markets aren’t available, we can utilize our Bridge Facility to close the transaction.

On other income. Other income actually was down $0.5 million for the year. We did a lower AFUDC. You might remember last year and completed the [indiscernible] Plant we had a big higher AFUDC year-over-year basis there.

And lastly, we did have higher income tax expense primarily due to higher pre-tax income, but we also did have a higher effective tax rate for the first quarter of ‘14 versus the first quarter of 2013.

Moving on to the balance sheet on Page 9, assets increased about $36 million. That was right in line with our growth in PP&E of about $40 million from the liabilities and equity. Isn’t this interesting? It also increased by $36 million as you expect, but that’s primarily related with the $44 million increase in shareholder’s equity.

So as we’d hope to an increasing growing business as we continue investing in our business, we’re seeing our PP&E grow with it.

On debt to capitalization basis, as we’ve seen each first quarter, we tend to see our ability to pay down debt and the seasonality that shows up in our debt to cap, we were at $53.6 for the first quarter versus $55.7 at year end. That’s primarily a result of cash flows that we’ve collected in the first quarter helped us pay down our short-term borrowings and that coupled with the increase in shareholder’s equity allowed for reduction of our debt to capital well within the range of our 50% to 55% targeted rate.

Page 10 is our cash flow statement. Cash provided by operating activities is relatively flat over $112 million. We did get some recovery of our accounts receivable in the first quarter. You may recall in the fourth quarter, we were lying a bit there. We’re seeing some recovery. We expect to see more of that in the second quarter.

But a bit of a rebound there, the primary reduction if you will from a comparison basis on changes in working capital is really primarily the result of under collection of supply costs. In terms of investing activities, we did have an increasing investment on a year-over-year basis and net, the excess cash flow remaining was used to pay down our short-term borrowings during the quarter.

On Page 11, our adjusted EPS schedule I’ve talked about $1.17 from a GAAP perspective is all for you, the participant in this call is to understand, we do try to equate back [ph] earnings based from a normalized weather. We did deduct by cents in weather, but we did also add back about $0.04 of Hydro-related costs both within our OG&A level and in our interest expense. But after those two adjustments, we have adjusted diluted EPS of $1.16, again versus $1.01 from the prior year.

Note, at the bottom of the page regardless if it’s on a GAAP basis or a non-GAAP adjusted basis, we had approximately a 15% improvement on the year-over-year basis for the quarter.

On Slide 12 is 2014 earnings guidance. We are affirming our guidance of $2.60 to $2.75 on an EPS basis. One thing I will point out in addition to normal weather, it’s very clear, it’s in bold that we do exclude any hydro-related transaction fees in our guidance and any potential income if in fact we are fortunate enough to close on the Hydro Transaction.

And then the next thing I point out, our guidance excludes any potential impact as a result of a FERC decision and what I point out here is primarily what we’re talking about there’s – if in fact there is any impairment determined between now and the end of the year, that would be excluded from our guidance as well.

And with that, I’ll hand it back over to Bob.

Bob Rowe

Thank you, Brian. We’ll deal with the bad news upfront. As you are aware, we did finally received a decision from the FERC, the Federal Energy Regulatory Commission affirming the ALJ’s decision.

A little bit of background for anyone who isn’t following this quite as closely, you can think of NorthWestern Energy, at that time the plant was built as neither fish nor a foul. We were essentially in Montana wires [ph] only company in an unorganized market and operating a large balancing authority have the obligation to provide regulation service for all customers, both retail, state jurisdictional and wholesale FERC jurisdictional.

Dave Gates Generating Station was built. It can be a specific need. We were not in a reliable way able to meet on the market. The Montana Commission did the right thing and granted us advanced approval before construction. We brought the project enacted $20 million under budget in December 2010 and then went in for an after-the-fact review at the Federal Energy Regulatory Commission, but based on significant discussion with FERC at the policy level including in commissioner’s offices.

[Indiscernible] of the Contested Case Process received what we considered to be a negative, very negative decision resulting in significant under collection in September of 2012. Notably, no party were in a [ph] dispute of either the need for the facility or the revenue requirement. Indeed even the FERC trial staff, the advocacy staff stipulated to a total revenue requirement.

We thought reconsideration in front of the whole FERC and 20 months later finally received a decision of this really for the most part with exception of a couple of paragraphs, a pro forma affirment. We are obviously most troubled by the outcome, but the process to me certainly is a dismay. I don’t say that about a regulatory body lightly.

We are reviewing our options. Obviously the decision was issued while we were preparing our quarterly SEC filing and did determine that no impairment was required at that time, but will continue to evaluate that on a quarter-by-quarter basis. And then as you can saw, we are reaffirming our guidance on an annual basis.

The legal and regulatory option that we’re focused on right now and we are on a 30-day shot clock is the decision of whether or not to request rehearing of and rehearing is a precedent then for appealing to a Federal Court of Appeals. So that is another important area of focus. I expect we will have interest in further discussion around that.

Moving on to – and I should add by the way that the plant is in fact working the way it is supposed to work. We believe operationally, the three-unit design has proven to be the right design, the smart design and our customers both retail and wholesale are receiving the service we’re obligated to provide them.

Moving on though to other projects and update on our environmental compliance projects at both Big Stone and Neal. Neal is basically through. We came in – that was essentially completed in 2013 and ahead of schedule. It is in service and that was a MATS compliance project or a share about $22 million.

Big Stone moving on very, very well, great relationship with the other owners there. We’ve capitalized so far about $49 million. We expect our total share to be about $95 million to $105 million and the project is on time for 2016 completion.

We’ve been talking about natural gas reserves for a number of years. We have made three acquisitions. The most recent was the largest which we refer to as Bear Paw South. That was folded into rate base through what we think is a really very effective process at the Montana Commission on December 1.

The employees who joined us as far the acquisition are great and adding a lot of value as well factoring in depletion which is an annual part of operating gas production, we’re able to provide about 32% of the gas requirements for Montana retail customers.

You see at the bottom of Page 15, what I refer to as the rollercoaster slide, the stable gas, T&D and storage costs and then a rollercoaster of natural gas supply costs are promised at the end of acquiring a long-asset lies none expected of gas [ph] production when the market was relatively low will provide real value. So our largest acquisition came on Board in December 1 and our customers have been enjoying the benefits of that price stability all winter long.

If they have any regrets and I’ve quoted Commissioner Chairman Gallagher to this point before when we made the first acquisition is that we did not, at that time own more. We do continue to be looking at the market obviously interested in optimizing our degree sources we own already and looking at what would be further cost effective acquisition.

So we are very pleased from a utility operation standpoint, a corporate standpoint and most especially from what we’re able to do for our customers with that part of ownership.

We’ve also talked overtime even with this as we’ve been developing the Distribution System Infrastructure Project or DSIP. This is really an exciting project. It touches many, many folks all across the company. The significant CapEx and O&M undertaking, after three years of planning and ramp up, we’re now turning [ph] our second year of full production.

Curt Pohl, our Head of Distribution, Mike Cashell, Head of Transmission and I just finished a tour of all of our Montana locations and that included all-hands meetings and then small group meetings. And when we asked the folks who have their hands on the system, are you seeing the results of what we’re doing. The answer is absolutely yes. So this is really exciting and it’s exactly the kind of thing that a responsible company needs to do.

Turning next to Hydro Transaction, I mentioned we did have a little bit of a revival meeting with customers and community leaders here in Butte a couple of nights ago. You’ve seen a number of these slides before.

When we look at a major project, we look at it in terms of our risk screening, our mission and vision, what’s the advantage to our customers, our communities, our employees and our investors. And this is obviously a very, very large project one that because of a lot of discipline and focus, we are able to execute on and one that does benefits all of our stakeholders.

As you know, we announced the transaction in late September at a pre-filing meeting with the Commission, arranged bridge financing, filed our applications who approved the purchase in late December, have been working through the discovery process ever since then actually making great strides on the bed roll as well as the state level.

In March, we received an order from FERC approving transfers for the facilities other than Kerr. Kerr is being treated separately because of the interest of the confederate sailors include any tribes there. I’ll come back and speak to that.

On the Montana side, one thing you might be interested in and in fact, the Commission has the ability under its conditional issues procedure to ask to instruct parties to address issues that the Commission believes or have note they aren’t addressed in the initial testimony.

So the Commission did issue a couple of additional issues primarily having to do with diligence and with future costs to maintain the facilities. Last Friday, we filed our testimony, supplemental issues testimony. It’s a concise filing. It’s available online. It’s a good read.

And I think the takeaway is that our diligence team did a very good job in these assets under any range of future scenarios provide tremendous value for our customers.

Turning back briefly to the issues at Kerr Dam. As you know the confederated tribes, to their credit, participated in the licensing procedure, relicensing procedure for Kerr in the mid 1980s and we were able to achieve a specified formula under which they could acquire ownership of Kerr Dam. That was anticipated at the time we entered into our transaction with PPL.

The arbitration process from between PPL and the tribes has completed. And the confederated tribes received a really favorable order. We are essentially neutral in that process. We have a good relationship with confederated tribes. And we are working with them on training and transition, but it certainly is good to have that peace kind of set aside we believe.

The Commission, Montana Commission is doing anything. They are holding 19 listening [ph] sessions all around our Montana service territory. They have been through the first eight or nine so far. And we are really gratified by the way community leaders and citizens and customers are turning out.

We’ve included on the bottom of Page 18 and again on the bottom of Page 19, some of the statements from the people who have participated at the hearing such as the first quote from Dr. Tom Power is from – he’s quite an outspoken activist to Montana, a well regarded economist and his filed testimony is very supportive of the transaction as an intervenor on behalf of a low-income group and the Natural Resources Defense Council. So again we’re very encouraged by that.

The listing sessions will continue into mid May. The technical hearing, the formal hearing is set at the Montana Commissions starting on July 8. Under the current schedule, we would hope to see an order on September 16 borrowing any extraordinary circumstance.

And I really appreciate the – first of all the Commission’s determination to stay with the procedural schedule and the care with which they are approaching this proceeding. And secondly the incredible amount of work that our employees who are now participating in this from regulatory, legal, finance and supply pulling together for the workload in a regulatory process and all other aspects of this transaction, operational and others are daunting. And everyone is rising to the occasion because they know how incredibly important this is to our customers, to the company and really for the state.

We talked before about financing. On approval, we do plan to close into permanent financing with up to $500 million of debt, $400 million of equity and $50 million of free cash flows. If capital market access is limited, we do have the option of closing into a $900 million committed Bridge Facility with Credit Suisse and BofA Merrill Lynch. And this is apparent directly both on the equity and the debt side, a very good time to afford a transaction like this.

And we are hopeful that we will be able to successfully close and again do something we think is really pretty great hall around. And with that, I’m going to stop talking and you can address your questions to Brian.

Are there questions?

Operator

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you’re using a speaking phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one at this time.

Question-and-Answer Session

Operator

And we’ll go first to Paul Ridzon with Key Bank.

Paul Ridzon – Key Bank

Good afternoon. How are you?

Bob Rowe

Good. How are you?

Paul Ridzon – Key Bank

I have one question, about the seasonality of the earnings, part of the gas assets of supplies, of how strong the contribution of the first quarter was. Is that biometrically tied to gas sales or you just want to do that?

Brian Bird

Yes, Paul, this is Brian. It is biometrically tried to that. But the first quarter should be the line share of the benefit from a gas production assets anyway particularly on a year-over-year basis.

As you might expect, our first and fourth quarter are going to be our strongest base upon our winter needs from a gas perspective. Second and third quarter are going to pretty much wash, not going to be much activity there.

But when you consider the fact that this asset closed in December 1 of last year, on a year-over-year basis, we’re not going to see as much of a benefit in the fourth quarter as we saw in the first quarter here.

So from a gas production benefit, it was no surprise to us that we saw the bulk of the benefit from a gas production assets in the first quarter on a year-over-year basis.

Paul Ridzon – Key Bank

So was it exactly even more because the weather was so cold?

Brian Bird

It is, it is because there’s a big more of a draw on the fields themselves, so yes.

Paul Ridzon – Key Bank

Okay, thank you very much.

Operator

And we move now to Brian Russo with Ladenburg Thalmann.

Brian Russo – Ladenburg Thalmann

Hi, good afternoon.

Bob Rowe

Good afternoon.

Brian Russo – Ladenburg Thalmann

In the 10-Q you guys filed today, you mentioned that you’re evaluating options to use DGGS in combination with other generation resources to ensure full cost recovery and therefore do not believe an impairment loss is probable. Can you elaborate on that?

Bob Rowe

Yes. And I’m going to be fairly general at this point. And you can think about what we’re doing in three areas, first obviously finance and accounting, second, legal and regulatory and then third operationally.

In terms of finance and accounting, we will be evaluating the need for any impairment on a quarter-to-quarter basis. But again at this point, we don’t believe an impairment is necessary.

On the legal and regulatory front, our focus right now is whether or not to file a request for rehearing at the FERC leading most probably to an appeal. On an operational level, first of all, we are providing essentially no matter what the FERC administrator or the [indiscernible] may say, we’re providing the amount of regulation service that we can provide with the facilities that we have available right now. There may be additional. We believe there probably are additional services and that that asset can provide as well.

The word that gets interesting is that in – on a going forward basis though we hope we will look really quite different a year from now than we did in 2008 when this project began. And we’ve been saying since the Hydro project we’ve announced that one of the things that we’re excited about is the ability to optimize an entire lead of resources than our Montana resources set.

We hope a year from now, we’ll include hydro, we’ll include wind, we’ll include our interest of coal strip [ph] and then Dave Gates Generating Stations. So we’re looking at a range of different services the plant could provide. And the challenge is we have the obligation to provide regulation. And we chose the most cost effective and from an adherent perspective, best approach to meet that obligation for this company.

Brian Russo – Ladenburg Thalmann

Correct me if I’m wrong, but you are uncertain whether you will ask FERC to rehear this case, I mean, why wouldn’t you?

Bob Rowe

There are expenses associated with the request for rehearing, but we’re actively – in fact, I can say, we’re actively preparing for that possibility, so we are doing everything necessary. But what we don’t want to do is just kind of in a knee-jerk way pursue one course, but don’t be surprised if we do file, let’s say [ph] that.

Brian Russo – Ladenburg Thalmann

Okay. And then throughout the FERC written order, it seems like one of the primary reasons why they upheld the DLJ decision was that they claim NorthWestern failed to provide evidence, why would be unable to utilize energy generated by the reserve regulation down capacity for non-regulation purposes?

Can you kind of explain in your own words why you disagree with that? Or why is this plant designed where you can’t sell into to the market that would offset the revenue requirement?

Bob Rowe

That goes to the core. And again, for those who aren’t following this quite as closely, we probably have three set submissions [ph]. The first is what we referred to as the numerator issue and that is essentially how much is available than the denominator than the fuel cost. But the concern about whether or not we can sell product into the market and provide grade down is kind of a one off product.

It has to do again with the fact we don’t have and did not have at this time an integrated large leap of assets into the degree – depending on what the product is, but to the degree that you’re selling most products into the market that you don’t have that assets available to provide grade down.

So we look – again, we’re fundamentally different from a vertically integrated company in an unorganized market providing a service, really kind of on the shoulder of a large fleet.

And Mike, would you add anything to [ph] that?

Mike Cashell

I’d add one thing. Back in 2008 when this project was conceived and then in 2010 when we filed with the FERC Commission, we were replicating the contracted service that we had purchased in the marketplace for years that have been approved by FERC which included 60 megawatts regulation capacity, up and down and recoveries of the cost associated with that as well as the recovery of the energy cost.

So we had no reason to believe that the – that technology that we proposed for recovery of the cost associated with DGGS would be handled any differently than the approved cost we have been recovering under the contracts prior to DGGS.

Bob Rowe

It’s Mike Cashell, our Vice President for Transmission. And again, we’re providing through our own assets essentially the same service that we were providing under contract.

Brian Russo – Ladenburg Thalmann

Okay. And on the Hydro Transaction, it looks like the agreed upon price for the curve project, PPL Montana will pay NorthWestern the difference of $11.7 million. How does that work? Is that accredited to customers?

Bob Rowe

Well you could – no, although there’s a sense in which you could look at the project netted out to customers. And again, I would – you could think of it as I opposed an $870 million project ultimately from a customer perspective. And again as from – as we were negotiating with PPL, we knew that there would be an event associated with Kerr. We knew there was a range of outcome somewhere between what the tribes advocacy position was near arbitration or what PPL’s position was.

And so we kicked to midpoint and then a mechanism to basically throw up [ph] so that we would be neutral. John Hines, our VP of Supply, anything to add there?

John Hines

No.

Brian Russo – Ladenburg Thalmann

Okay. And remind us of your dividend policy and when the Board is expected to review the dividend the next time?

Bob Rowe

Brian?

Brian Bird

Yes, we discuss dividends at every Board meeting. As you probably have been aware Brian, we typically make changes in our dividend in February after our annual results have been provided. And we discuss as a Board, our plans for the upcoming year in terms of guidance if you will.

So my expectation is if we are successful in closing the Hydro Transaction, we would discuss dividend policy, but I’d also say that it’s likely that we wouldn’t make a decision on dividend policy until February, the following year.

Brian Russo – Ladenburg Thalmann

Okay.

Brian Bird

And I think, just to be clear, to your earlier question, dividend policy currently is 60% to 70% payout ratio and we’ve been at the loan of that range in line of the amount of capital that we have. I don’t see at this point in time that that would change.

Brian Russo – Ladenburg Thalmann

Okay, thank you very much.

Bob Rowe

Thank you.

Operator

And we move now to Jonathan Reeder with Wells Fargo.

Jonathan Reeder – Wells Fargo

Good afternoon, Bob and Brian.

Bob Rowe

Good afternoon.

Jonathan Reeder – Wells Fargo

Brian, if you could, you showed that the weather was a $0.05 positive in the quarter, but that the electric and natural gas retail volumes had a $0.14 positive impact on gross margin. Does that imply that the non-weather related usage growth was a $0.09 positive?

Brian Bird

Yes. We had, from an electric standpoint, we anticipated in the electric side that weather didn’t have as big an impact on the electric side as it did in the gas side. We did see quite a bit of improvement in our commercial loads. They have been down the last two years and we saw a bit of recovery in commercial loads this year with primary that’s the primary reason for the increase from the electric side.

Jonathan Reeder – Wells Fargo

So the $0.05 is pretty much all weather on the gas side?

Brian Bird

Yes.

Jonathan Reeder – Wells Fargo

Okay. And then I guess what would be the other part on the gas side, for the gross margin increase [indiscernible] to the volumes?

Brian Bird

I think you have to take and consider obviously weather is a big part, but we did have increase in customer and volumetric growth from that increase in customers.

Jonathan Reeder – Wells Fargo

So we should look at that other $0.09 as kind of hopefully sustainable going forward?

Brian Bird

Correct. We are seeing a bit of recovery from the customer growth that’s impacting overall usage for customers as well in addition to what we think from the weather perspective.

Jonathan Reeder – Wells Fargo

Okay, great. And then on the DGGS, if you filed for recovery under Section 10 as FERC almost suggest in its order at least for a portion of those revenues, would that be separate from the appeal or would that be part of the appeal process?

Bob Rowe

I could ask Mike to speak to this. I think we could follow FERC’s suggestion there. Those are not necessarily easy task. For example Schedule 10 is a regulation service in intermittent [ph] resources. We don’t have customers taking under Schedule 10. Schedule 4 is another option, potentially separate filing, but there would be parties who likely would participate in that proceeding as well. So it’s not as if we simply pick the wrong door and other doors are going to be easy to pass through. Mike?

Mike Cashell

Really no additions to that other than to clarify that to answer the question either a Schedule 10 filing or a Schedule 4 filing would be separate from the request for rehearing.

Jonathan Reeder – Wells Fargo

Okay. And then Bob, do you see any impact on the timing of the MPSC’s, I guess, potential approval of the Hydro deal due to the recent determination that they wanted some more supporting rationale regarding the Hydro CapEx and O&M projections that you provided versus kind of what interveners and their consultants came up with?

Bob Rowe

So, again, the Commission has done, I think, a great job and the regulatory folks have done a great job staying with the schedule. The additional issues, process is kind of later than the initial schedule. We filed on time and we’re very comfortable with where we are. In fact actually I very much believe that the additional issues testimony really affirmed – very much affirmed the quality of the diligence that our team internally and our outside consultants did initially.

So that was a very real value added to the process I think. Parties have the opportunity to file discovery on that and there will be an opportunity for other parties to respond as well.

That’s coming up and then of course the next big gate to look at in the technical part of the hearing is when we file a rebuttal on May 9. And, again, we’re all working very hard on that.

Jonathan Reeder – Wells Fargo

So in your opinion, the hearings are on track still for, I think, it’s July 8 and you think the final decision can still come by the current deadline that the Commission won’t need to extend it?

Bob Rowe

Yes. At this point, again, there have been surprises and people have worked very, very hard to stay on schedule and so far so good.

Jonathan Reeder – Wells Fargo

Okay. And then just out of curiosity, if the Commission would determine that I guess your projections are too low and should actually be a little higher, how sensitive is I guess the economic benefits of the transaction to those current assumptions that are called into question?

Bob Rowe

What I do urge you to do is actually read the supplemental cover to cover first of all that includes our own professionals on staff speaking to the work that we did. Secondly, testimony from two outside experts one of whom, looking at the materials, is actually the go and forward cost could be a little bit lower than what we have projected.

And then ultimately testimony from in fact one won’t say his name, Travis Meyer, the testimony from two of our folks saying that under any scenario there is extraordinary positive value to our customers from this transaction. So we think it’s again the quote that Dr. Power a no brainer.

Jonathan Reeder – Wells Fargo

Okay. Thanks for additional comments.

Bob Rowe

Okay.

Operator

As a reminder, just star one to ask a question and we move next to Paul Patterson with Glenrock Associates.

Paul Patterson – Glenrock Associates

Good afternoon, guys.

Bob Rowe

Good afternoon.

Brian Bird

Good afternoon.

Paul Patterson – Glenrock Associates

Just to sort of follow up on the DGGS stuff, first of all, when you mentioned the alternative methods of the plant being dispatched I guess and what have you and the regulatory approval that you would need that [indiscernible].

What would that regulatory approval be, would that be from FERC?

Bob Rowe

They are both FERC and state responsibility. So depending on what you do, there will be future filing on both sides. And we’re pretty early to speculate too much from what those might look like.

Mike, do you want to speak to that anymore?

Mike Cashell

No, I think that’s right on with what we already described in terms of a couple of schedules available to us at FERC that you’re right on. We’re just a little too early in the process now to predict it.

Paul Patterson – Glenrock Associates

Okay. From your previous comments on Schedule 10 and Schedule 4 kind of suggested to me that those would not be necessarily likely pass. Is that referring to Schedule 10 and Schedule 4? Is there something else?

Bob Rowe

No. I think what you should know is, again, currently we don’t customers under Schedule 10. Schedule 4 certainly is a possibility, but there are other parties out there who take some certain set of services from us who would say, "No, we don’t think Schedule 4 is the proper door. We think Schedule 3 makes the most sense."

Brian Bird

And I guess I would say that the final order, that was the strongest indication from FERC that recovery of cost for our variable cost are fueled primarily the [indiscernible] would be schedule for. So we’re looking hard at that.

Paul Patterson – Glenrock Associates

Okay. And then when – the common thing is when you talk to Brian about – it’s a knee-jerk response to file for a hearing. Would filing for a hearing cause any issue with respect to – with respect to these filings or put it other way, I guess it’s just a general experience, it kind of often seems that rehearing a request, rehearing is kind of a knee-jerk response if you follow me.

So it’s a little bit noteworthy maybe or perhaps now that you guys add a little more cautious on that. I’m just wondering if you could elaborate a little bit on that I guess. Because like I said usually it seems like kind of a standard move in so many of these proceedings.

Bob Rowe

We’re just not a very major bunch [indiscernible] I guess is what I would say.

Paul Patterson – Glenrock Associates

Okay.

Bob Rowe

The day we received the order, again, we started doing a lot of work in all three of those areas that I’ve mentioned including very much, including doing the ground work for a rehearing with the understanding that could well be there precursor to an appeal.

Paul Patterson – Glenrock Associates

Okay. And would that have an impact on filing on the Schedule 4, Schedule 3 or what have you?

Bob Rowe

It should not based on the FERC decision.

Paul Patterson – Glenrock Associates

Okay, okay, thank you so much.

Bob Rowe

Thank you.

Operator

We have no further questions at this time.

Bob Rowe

Well it sounds like we’ll be getting as good then. Thank you very much for your support and interest this quarter. We look forward to visiting with you, again, next quarter and seeing a number of you in person between now and then.

Thank you very much.

Operator

And this concludes our conference. Thank you for your participation.

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's CEO Discusses Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts