NorthWestern Reports Third Quarter 2010 Financial Results

SIOUX FALLS, S.D., Oct. 28 /PRNewswire-FirstCall/ -- NorthWestern Corporation d/b/a NorthWestern Energy (NYSE: NWE) reported financial results for the quarter ended Sept. 30, 2010.

Significant achievements for the quarter include:

• Improvement in income before income taxes of approximately $9.0 million compared with 2009;
• The Company was granted an interim rate increase by the Montana Public Service Commission ("MPSC"), subject to refund, effective July 8, 2010.  In September, the Company reached a proposed Stipulation with the Montana Consumer Counsel ("MCC"), which, if approved, by the MPSC would result in a $6.7 million annual net increase in our Montana rates; and
• Completed the purchase of a majority interest in the Battle Creek Natural Gas Field on the Sweetgrass Arch in Blaine County, Montana (Battle Creek Field) for $11.4 million.

Financial Results

Consolidated net income was $14.4 million or $.40 per diluted share for the quarter ended Sept. 30, 2010, compared with consolidated net income of $18.9 million or $.52 per diluted share for the quarter ended Sept. 30, 2009.  Consolidated income tax expense for the three months ended September 30, 2010 was $4.7 million, an increase of $13.5 million, as compared with an $8.8 million income tax benefit in the same period of 2009. The increase in income tax expense was primarily due to lower tax benefits recognized for repair costs compared with the third quarter of 2009.  During the third quarter of 2009, we received the notification from the IRS for a tax accounting method change for repair costs and recognized approximately $12.4 million of income tax benefit related to repair cost deductions for 2008 and the first three quarters of 2009.

Consolidated net income for the nine months ended Sept. 30, 2010, was $54.8 million or $1.51 per diluted share, an increase of $7.0 million from $47.8 million or $1.32 per diluted share for the same period in 2009.  

"Income before taxes improved significantly in the third quarter of 2010 due primarily to an increase in gross margins, continued focus on cost control, and the capitalization of allowance for funds used during construction related to the Mill Creek Generating Station," said Bob Rowe, President and CEO.  "In addition, we made significant progress on the rate case in Montana during the third quarter of 2010."

The following tables reconcile the primary changes from 2009 to 2010:

For more information see www.northwesternenergy.com/documents/investor/Q310.pdf

Consolidated gross margin for the third quarter of 2010 was $134.9 million compared with $127.7 million for the third quarter of 2009.  The improvement in consolidated gross margin was substantially due to an increase in electric volumes related to warmer summer weather in South Dakota, improved transmission capacity revenues, and an interim increase in Montana electric rates (subject to refund).  Partially offsetting this increase were lower average wholesale electric prices.

Consolidated gross margin for the nine months ended Sept. 30, 2010, increased $8.9 million to $428.4 million compared with $419.5 million in the same period of 2009.  

Consolidated operating, general and administrative expenses increased to $58.5 million for the quarter ended Sept. 30, 2010, as compared with $57.9 million for the quarter ended Sept. 30, 2009.  The increase was due primarily to increased operating and maintenance costs, increased labor costs, and increased plant operations costs at our Colstrip plant, offset by lower insurance claims, lower postretirement health care costs and lower pension expense.

Consolidated operating, general and administrative expenses decreased $10.3 million to $173.9 million for the nine months ended Sept. 30, 2010, as compared with $184.2 million in same period of 2009.

Property and other taxes were $20.5 million for the three months ended Sept. 30, 2010, as compared with $20.8 million in the third quarter of 2009.  For the nine months ended Sept. 30, 2010, property and other taxes were $68.5 million compared with $63.4 million in the same period of 2009.  The increase was primarily due to higher assessed property valuations in Montana.

Depreciation expense was $22.8 million for the three months ended Sept. 30, 2010, as compared with $22.0 million in the third quarter of 2009.  For the nine months ended Sept. 30, 2010, depreciation expense was $68.7 million compared with $67.0 million in the same period of 2009.  These increases were primarily due to plant additions.    

Interest expense for the three months ended Sept. 30, 2010, was $16.3 million, a decrease of $1.0 million from the third quarter of 2009.  This decrease was primarily due to $0.9 million capitalized for the debt portion of allowance for funds used during construction ("AFUDC"), that was primarily related to the Mill Creek Generating Station.   Consolidated interest expense was $49.4 million for the nine months ended Sept. 30, 2010, a decrease of $1.0 million for the same period in 2009.  The decrease in interest expense for the nine months is due primarily to $2.7 million capitalized for AFUDC, partially offset by increased interest expense due to higher outstanding debt.

Consolidated other income for the three months ended Sept. 30, 2010, was $2.3 million, as compared with $0.4 million in the third quarter of 2009.  This includes approximately $1.5 million capitalized for the equity portion of AFUDC, that was primarily related to the Mill Creek Generating Station.  The Company expects to capitalize an additional approximately $1.9 million of AFUDC related to the Mill Creek Generating Station through the remainder of the year.  Consolidated other income for the nine months ended September 30, 2010 was $4.9 million, as compared with $1.2 million in the same period of 2009. This includes an increase of approximately $3.8 million capitalized for the equity portion of AFUDC.

Consolidated income tax expense for the three months ended Sept. 30, 2010, was $4.7 million, as compared with an $8.8 million income tax benefit in the same period of 2009. The effective tax rate in 2010 was 24.7 percent as compared with (87.1) percent for the same period of 2009. The increase in the effective tax rate was primarily due to lower tax benefits recognized for repair costs.  For the three months ended September 30, 2010, we recognized approximately $2.3 million of income tax benefit related to repair cost deductions. Consolidated income tax expense for the nine months ended Sept. 30, 2010 was $18.0 million as compared with $7.9 million in the same period of 2009.  The effective tax rate in 2010 was 24.7% as compared with 14.1% for the same period of 2009, and we expect our effective tax rate for 2010 to be approximately 25%.  The reduction in effective tax rate versus the statutory rate in 2010 is primarily due to a tax benefit of $6.9 million recognized for repair costs.

Results from Operations

Electric gross margin for the quarter ended Sept. 30, 2010, was $110.9 million, compared with $106.1 million for the same period of 2009.  The increase in margin is due largely to a weather-related increase in South Dakota retail volumes and to a lesser extent increased average usage in Montana, higher demand to transmit energy for others across our lines, and an interim increase in Montana rates (subject to refund).   These increases were offset in part by a decrease in property taxes included in a tracker as compared with the same period in 2009 and lower average wholesale prices in South Dakota

Retail electric volumes for the quarter ended Sept. 30, 2010, totaled 2,522,000 megawatt hours compared with 2,487,000 megawatt hours for the quarter ended Sept. 30, 2009.  Retail residential and commercial volumes increased from favorable weather and customer growth, while industrial volumes declined in Montana due primarily to the weaker economy.  Wholesale electric volumes were 258,000 megawatt hours for the quarter ended Sept. 30, 2010, an increase from 190,000 megawatt hours for the same period in 2009.  Wholesale volumes increased in Montana due to higher plant availability, while wholesale volumes decreased in South Dakota with lower plant utilization due to market conditions.

Electric gross margin for the nine months ended Sept. 30, 2010, was $326.2 million compared with $321.2 million for the same period of 2009.  

Retail electric volumes for the nine months ended Sept. 30, 2010 totaled 7,390,000 megawatt hours compared with 7,448,000 megawatt hours for the nine months ended Sept. 30, 2009.  Wholesale electric volumes were 779,000 megawatt hours for the nine months ended Sept. 30, 2010, an increase from 587,000 megawatt hours for the same period in 2009.  

Natural gas gross margin was $23.7 million for the quarter ended Sept. 30, 2010, compared with $21.9 million during the third quarter of 2009.  This increase in margin is primarily due to an increase in Montana property taxes included in a tracker as compared with the same period in 2009 and increased retail gas volumes in Montana due to higher average usage per customer. Revenues related to property taxes fluctuate depending upon volumes and estimated property tax expense.

Retail natural gas volumes were 2,318,000 dekatherms for the quarter ended Sept. 30, 2010 compared with 2,163,000 dekatherms for the same period in 2009.  

Natural gas gross margin was $101.3 million for the nine months ended Sept. 30, 2010 compared with $100.2 million during the same period of 2009.  

Retail natural gas volumes were 21,405,000 dekatherms for the nine months ended Sept. 30, 2010, compared with 21,450,000 dekatherms for the same period in 2009.  The decline in volumes is primarily due to warmer winter weather in Montana during the first quarter of 2010.

Liquidity and Capital Resources

As of Sept. 30, 2010, our total net liquidity was approximately $147.1 million, including $6.6 million of cash and $140.5 million of revolving credit facility availability.  Revolver availability was $142.5 million as of Oct. 22, 2010.  

Cash provided by operating activities totaled $188.3 million for the nine months ended Sept. 30, 2010, as compared with $129.3 million during the nine months ended Sept. 30, 2009. This increase in operating cash flows is primarily related to a decrease in contributions to the qualified pension plans of $64.4 million, as compared with the same period in 2009, and an increase in deposits received related to transmission interconnection requests of approximately $12.0 million, which were offset in part by a $10.8 million prepayment of a power purchase agreement in 2009.

Cash used in investing activities increased by approximately $62.6 million as compared with the nine months ended September 30, 2009 due primarily to increased property, plant and equipment additions related to the Mill Creek Generating Station project and Battle Creek Field acquisition.

Cash used in financing activities totaled approximately $8.0 million during the nine months ended Sept. 30, 2010, as compared with $19.1 million during the same period in 2009. During the nine months ended Sept. 30, 2010, we made net debt repayments of $6.1 million, received proceeds from net revolver borrowings of $43.0 million, paid deferred financing costs of $8.0 million and paid dividends on common stock of $36.7 million.  During the nine months ended Sept. 30, 2009, we received net proceeds from the issuance of debt of $249.8 million, made net debt repayments of $221.8 million, paid deferred financing costs of $10.4 million and paid dividends on common stock of $36.1 million.

Rate Case Update

In October 2009, the Company filed a request with the MPSC for an annual electric transmission and distribution revenue increase of $15.5 million, and an annual natural gas transmission, storage and distribution revenue increase of $2.0 million.  In September 2010, the Company and the MCC filed a joint Stipulation and Settlement Agreement ("Stipulation") regarding the rate filing.  Specific terms of the Stipulation, which is subject to MPSC approval, include:

• An increase in base electric rates of $7.7 million;
• A decrease in base natural gas rates of approximately $1.0 million; and
• An authorized overall rate of return of 7.92 percent, using an authorized rate of return on equity of 10.25 percent, cost of long-term debt of 5.76 percent and a capital structure of 52 percent debt and 48 percent equity.

A hearing on the rate case was held in September 2010, and the Company expects the MPSC to issue a final order during the fourth quarter of 2010.  The MPSC approved interim rates, subject to refund, that went into effect on July 8, 2010.  The Company recognized $1.6 million in revenues during the third quarter, consistent with the proposed Stipulation.

2010 Earnings Outlook

NorthWestern reaffirms its earnings outlook for 2010 to be $1.95 - $2.10 per fully diluted share.  

The major assumptions include, but are not limited to, the following expectations:

• Excludes approximately $.06/share for the 2010 estimated effect of the Montana rate increase proposed by the Stipulation, which is pending approval by the MPSC;
• The release of the second quarter 2010 valuation allowance of approximately $.06/share against certain state NOL carryforwards is excluded from the earnings outlook;
• The tax benefit associated with the IRS approval of a tax accounting method to deduct repairs is included in the earnings outlook;
• Fully diluted average shares outstanding of 36.5 million; and
• Normal weather in the Company's electric and natural gas service territories for the remainder of 2010.

Dividend

NorthWestern's Board of Directors declared a quarterly common stock dividend of 34 cents per share, payable on Dec. 31, 2010, to common shareholders of record as of Dec. 15, 2010.

Company Hosting Investor Conference Call

NorthWestern will host an investor conference call today at 4:00 p.m. Eastern Time to review its financial results for the quarter ended Sept. 30, 2010.

The conference call will be webcast live on the Internet at http://www.northwesternenergy.com under the "Investor Information" heading.  To listen, please go to the site at least 10 minutes in advance of the call to register.  An archived webcast will be available shortly after the call.

A telephonic replay of the call will be available beginning at 5:00 pm Eastern Time today through Nov. 28, 2010, at 800-475-6701, access code 174792.

About NorthWestern Energy

NorthWestern Energy is one of the largest providers of electricity and natural gas in the Upper Midwest and Northwest, serving approximately 661,000 customers in Montana, South Dakota and Nebraska.  More information on NorthWestern Energy is available on the Company's Web site at www.northwesternenergy.com.

SPECIAL NOTE REGARDING FORWARD—LOOKING STATEMENTS

This press release contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, including, without limitation, the information under "2010 Earnings Outlook".  Forward-looking statements often address our expected future business and financial performance, and often contain words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," or "will."  These statements are based upon our current expectations and speak only as of the date hereof.  Our actual future business and financial performance may differ materially and adversely from those expressed in any forward-looking statements as a result of various factors and uncertainties, including, but not limited to:

• potential adverse federal, state, or local legislation or regulation or adverse determinations by regulators could have a material adverse effect on our liquidity, results of operations and financial condition;
• changes in availability of trade credit, usage, commodity prices, fuel supply costs or availability due to higher demand, shortages, weather conditions, transportation problems or other developments, may reduce revenues or may increase operating costs, each of which would adversely affect our liquidity;
• unscheduled generation outages or forced reductions in output, maintenance or repairs, which may reduce revenues and increase operating costs or may require additional capital expenditures or other increased operating costs; and
• adverse changes in general economic and competitive conditions in the U.S. financial markets and in our service territories.

Our Annual Report on Form 10-K, recent and forthcoming Quarterly Reports on Form 10-Q, recent Current Reports on Form 8-K and other Securities and Exchange Commission filings discuss some of the important risk factors that may affect our business, results of operations and financial condition. 

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

SOURCE NorthWestern Corporation