NorthWestern Reports Third Quarter 2011 Financial Results

SIOUX FALLS, S.D., Oct. 26, 2011 /PRNewswire/ -- NorthWestern Corporation d/b/a NorthWestern Energy (NYSE: NWE) reported financial results for the quarter ended Sept. 30, 2011.

"Our third quarter 2011 earnings were in line with our expectations.  Although our operating, general and administrative expenses increased from the prior year, those expenses declined, as expected, from the second quarter of 2011.  In addition, we experienced lower income tax expense due to higher repairs and state tax bonus depreciation deductions," said Bob Rowe, President and CEO.  "Also, we have advanced several of our projects.  Recently, we broke ground on our Aberdeen, SD peaking plant and, over the past quarter, continued progress on our Distribution System Improvement Program in Montana,"

Financial Results

Consolidated net income was $14.9 million or $.41 per diluted share for the quarter ended Sept. 30, 2011, compared with consolidated net income of $14.4 million or $.40 per diluted share for the quarter ended Sept. 30, 2010.  

Consolidated net income for the nine months ended Sept. 30, 2011, was $58.4 million or $1.60 per diluted share, an increase of $3.6 million from $54.8 million or $1.51 per diluted share for the same period in 2010.  

The following tables reconcile the primary changes from 2010 to 2011:

For more information see www.northwesternenergy.com/documents/investor/Q311.pdf

Consolidated gross margin for the third quarter of 2011 was $146.0 million compared with $134.9 million for the third quarter of 2010.  The improvement in consolidated gross margin was substantially due to Dave Gates Generating Station ("DGGS") interim rates, an increase in electric retail volumes due primarily to warmer summer weather and to a lesser extent customer growth, the expiration in December 2010 of a power sales agreement related to Colstrip Unit 4,  an increase in Montana property taxes included in a tracker as compared to the same period in 2010, and gas production margin from the Battle Creek Field.  These increases were partly offset by lower transmission capacity revenues due to decreased demand and favorable hydro conditions, a decrease in natural gas retail volumes, and a decrease in Montana natural gas transmission and distribution rates implemented in January 2011.

Consolidated gross margin for the nine months ended Sept. 30, 2011, increased $35.1 million to $463.5 million compared with $428.4 million in the same period of 2010.  

Consolidated operating, general and administrative expenses increased to $66.3 million for the quarter ended Sept. 30, 2011, as compared with $58.5 million for the quarter ended Sept. 30, 2010.  The increase was due primarily to an increase in insurance reserves, which includes an increase of $2.3 million due to a dispute with a former employee and the inclusion in our third quarter 2010 results of a $2.0 million insurance recovery. We also experienced higher operating expenses primarily related to, higher plant operator costs at Colstrip Unit 4 and Big Stone for scheduled maintenance.

Consolidated operating, general and administrative expenses increased $29.4 million to $203.3 million for the nine months ended Sept. 30, 2011, as compared with $173.9 million in same period of 2010.  The increase is due primarily to the $2.3 million dispute mentioned above and the inclusion in our 2010 year-to-date results of insurance recoveries totaling $5.4 million; higher plant operator and partner costs; and higher operating and maintenance costs, including labor.

Property and other taxes were $22.6 million for the three months ended Sept. 30, 2011, as compared with $20.5 million in the third quarter of 2010.  The increase was primarily due to plant additions, including the addition of DGGS.  For the nine months ended Sept. 30, 2011, property and other taxes were $68.6 million compared with $68.5 million in the same period of 2010.

Depreciation expense was $25.2 million for the three months ended Sept. 30, 2011, as compared with $22.8 million in the third quarter of 2010.  For the nine months ended Sept. 30, 2011, depreciation expense was $75.6 million compared with $68.7 million in the same period of 2010.  The increases were primarily due to plant additions, including the addition of DGGS.

Interest expense for the three months ended Sept. 30, 2011, was $16.7 million, as compared with $16.3 million the third quarter of 2010.  Consolidated interest expense was $50.7 million for the nine months ended Sept. 30, 2011, an increase of $1.3 million for the same period in 2010.  The increases were primarily due to lower capitalization of AFUDC as DGGS began operating in January 2011, offset in part by lower rates on debt outstanding.

Consolidated other income for the three months ended September 30, 2011 was $0.3 million, as compared with $2.3 million in the third quarter of 2010.  Consolidated other income for the nine months ended September 30, 2011 was $2.3 million, as compared with $4.9 million in the same period of 2010.  The decreases were primarily due to lower capitalization of AFUDC as DGGS began operating in January 2011.

We had a consolidated income tax expense for the three months ended September 30, 2011 of $0.6 million as compared with $4.7 million in the same period of 2010.  We currently expect our effective tax rate for 2011 to range between 13% - 16%.

Our effective tax rate differs from the federal tax rate of 35% primarily due to the regulatory flow-through treatment of repairs and state tax depreciation deductions.

Consolidated income tax expense for the nine months ended September 30, 2011 was $9.3 million as compared with $18.0 million in the same period of 2010.  The effective tax rate in 2011 was 13.7% as compared with 24.8% for the same period of 2010.

The following table summarizes the significant differences from the Federal statutory rate, which result in reduced income tax expense:

Results from Operations

Electric gross margin for the quarter ended Sept. 30, 2011, was $121.4 million, compared with $110.9 million for the same period of 2010.  The improvement in margin is primarily due to DGGS interim rates, an increase in retail volumes due primarily to warmer summer weather and to a lesser extent customer growth, the expiration in December 2010 of a power sales agreement related to Colstrip Unit 4, and higher revenues for operating expenses recovered in supply trackers primarily related to customer efficiency programs. These increases were offset in part by a decline in transmission capacity demand and favorable hydro conditions.

Retail electric volumes for the quarter ended Sept. 30, 2011, totaled 2,602,000 megawatt hours compared with 2,522,000 megawatt hours for the quarter ended Sept. 30, 2010.  Wholesale electric volumes were 15,000 megawatt hours for the quarter ended Sept. 30, 2011, compared with 258,000 for the same period in 2010.  Retail volumes increased from warmer weather and customer growth.  Wholesale volumes decreased in South Dakota from lower plant utilization due to market conditions and scheduled maintenance.  We no longer have Montana wholesale volumes due to the expiration of a remaining wholesale supply contract associated with Colstrip. Beginning January 1, 2011 these volumes are used to supply our retail demand.

Electric gross margin for the nine months ended Sept. 30, 2011, was $355.4 million compared with $326.2 million for the same period of 2010.  

Retail electric volumes for the nine months ended Sept. 30, 2011 totaled 7,606,000 megawatt hours compared with 7,390,000 megawatt hours for the nine months ended Sept. 30, 2010.  Wholesale electric volumes were 88,000 megawatt hours for the nine months ended Sept. 30, 2011, as compared with 779,000 megawatt hours for the same period in 2010.  

Natural gas gross margin was $24.2 million for the quarter ended Sept. 30, 2011, compared with $23.7 million during the third quarter of 2010.  This increase in margin was primarily due to an increase in Montana property taxes included in a tracker as compared to the same period in 2010, higher revenues for operating expenses recovered in supply trackers primarily related to customer efficiency programs, and gas production margin from the Battle Creek Field. These increases were offset in part by a decrease in retail volumes and a Montana natural gas rate decrease.

Retail natural gas volumes were 2,100,000 dekatherms for the quarter ended Sept. 30, 2011 compared with 2,318,000 dekatherms for the same period in 2010.

Natural gas gross margin was $107.0 million for the nine months ended Sept. 30, 2011 compared with $101.3 million during the same period of 2010.  The increase in margin was primarily due to increased retail volumes from colder winter and spring weather, gas production margin from the Battle Creek Field, and higher revenues for operating expenses recovered in supply trackers primarily related to customer efficiency programs.  These increases were offset in part by a decrease in Montana natural gas rates and a decrease in Montana property taxes included in a tracker as compared to the same period in 2010.  

Retail natural gas volumes were 22,379,000 dekatherms for the nine months ended Sept. 30, 2011, compared with 21,405,000 dekatherms for the same period in 2010.  Retail residential and commercial volumes increased in Montana due to colder weather and customer growth, while industrial volumes declined in Montana due to a lower number of customers and lower usage per customer.  Retail residential volumes increased in South Dakota due to colder weather, while commercial volumes declined in South Dakota due primarily to lower usage for grain drying requirements during the first quarter of 2011 as compared with the same period of 2010.

Liquidity and Capital Resources

As of Sept. 30, 2011, our total net liquidity was approximately $192.8 million, including $6.0 million of cash and $186.8 million of revolving credit facility availability.  Revolver availability was $205.9 million as of Oct. 21, 2011.  

Cash provided by operating activities totaled $210.5 million for the nine months ended September 30, 2011 as compared with $188.3 million during the nine months ended September 30, 2010. This increase in operating cash flows is primarily due to improvements in the timing of collection of costs included in our supply and property tax trackers, as well as higher net income adjusted for higher non-cash depreciation.

Cash used in investing activities decreased by approximately $53.8 million as compared with the first nine months of 2010 due primarily to prior year additions related to the DGGS project.

Cash used in financing activities totaled approximately $86.4 million during the nine months ended September 30, 2011 as compared with approximately $8.0 million during the nine months ended September 30, 2010.  During the nine months ended September 30, 2011, net cash used in financing activities consisted of the net revolving credit facility repayments of $153.0 million, net issuance of commercial paper of $113.0 million, the repayment of long-term debt of $6.6 million and the payment of dividends of $38.9 million.  During the nine months ended September 30, 2010, we received proceeds from the issuance of debt of $225.0 million, made debt repayments of $188.1 million, paid deferred financing costs of $8.1 million and paid dividends on common stock of $36.8 million.

2011 Earnings Outlook

NorthWestern is modifying its earnings outlook for 2011 to be $2.30 - $2.40 per fully diluted share.  

"Our year-to-date earnings through September 30, 2011 are in line with our original expectations," said Brian Bird, Vice President–CFO and Treasurer.  "While our transmission revenues and wholesale volumes have lagged our original expectations, our income tax expense benefits have exceeded our projections.  As a result, we feel comfortable tightening our earnings range for the remainder of 2011."

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

• Gross margin will be positively impacted by approximately $6.0 million for the remainder of 2011, as compared with the fourth quarter of 2010, due to the inclusion of DGGS in rates;
• A fourth quarter 2011 increase in retail volumes due to modest customer growth, as compared with the fourth quarter of 2010;
• We expect our effective tax rate for 2011 to range between 13% - 16%;
• Normal weather in the Company's electric and natural gas service territories for the remainder of 2011; and
• Fully diluted average shares of 36.5 million.

South Dakota Natural Gas Rate Case Update

In June 2011, the Company filed a request with the South Dakota Public Utilities Commission ("SDPUC") for a natural gas distribution revenue increase of $4.1 million.  This request was based on a return on equity of 10.9%, an equity ratio of 56.0% and rate base of $67.5 million. Approximately $1.4 million of the requested increase relates to the annual estimated manufactured gas plant remediation costs.  In the event remediation costs are lower than estimated during the time period, the difference would be subject to a refund to customers. Accordingly, while gross margin and operating expenses will fluctuate based on actual results, this portion of the rate request would have no impact on operating income.  We expect to complete this rate case and implement new rates by December 31, 2011.

Dividend

NorthWestern's Board of Directors declared a quarterly common stock dividend of 36 cents per share, payable on Dec. 31, 2011, to common shareholders of record as of Dec. 15, 2011.

Company Hosting Investor Conference Call

NorthWestern will host an investor conference call today at 3:00 p.m. Eastern Time to review its financial results for the quarter ended Sept. 30, 2011.

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. 26, 2011, at 800-475-6701, access code 219704.

About NorthWestern Energy

NorthWestern Energy is one of the largest providers of electricity and natural gas in the Upper Midwest and Northwest, serving approximately 665,000 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 "2011 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;
• we have capitalized approximately $19.5 million in preliminary survey and investigative costs related to our proposed MSTI transmission project. If our efforts to complete MSTI are not successful we may have to write-off all or a portion of these costs which could have a material adverse effect on our results of operations;
• 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