MPSC Presentation
Finance Department
Five Year Progress Report
forward-looking statement…
During the course of this presentation, there will be forward-looking
statements within the meaning of the “safe harbor” provisions of the
Private Securities Litigation Reform Act of 1995. 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.”
The information in this presentation is based upon our current
expectations 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. 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 public filings with the SEC.
agenda…
Finance department overview
5 year progress
2009 June YTD update
finance department org chart…
Out of 161 Finance and Information Technology & Utility
Communication employees, 121 are Montana employees.
accounting…
Accounting
Financial reporting
SEC and FERC reporting
Annual
quarterly
MPSC reporting
Annual
Support Regulatory Affairs
Accounting
Accounts Payable
Payroll
Benefits Administration
Compensation and benefits
benchmarking
Administer benefits
Medical
Retirement
Incentive
Compliance reporting
5500’s
Plan documents
achievements over past 5 years…
Accounting
Made significant improvements in
controls over financial reporting
Increased compliance and
reporting requirements
Significantly reduced external
audit fees
Significantly reduced monthly
close and reporting cycles
Reduced annual reporting cycle
by 45 days
Reduced quarterly reporting cycle
by 15 to 20 days
Currently complete pre-tax close
within 4 business days
Consistent improvement in
accounts payable process related
to support of operations and
timeliness of vendor payments
Benefits Administration
Significantly improved timeliness
of compliance reporting
Filings were three years delinquent
in 2004—now all current
Continually evaluating
compensation and benefits to
ensure they are market
competitive to attract and retain
talent
Enhanced 401(k) Plan and closed
Pension Plan to new entrants to
reduce volatility risk to company,
yet provide a competitive
retirement benefit
Improvements were accomplished while reducing headcount over
the same time period.
audit…
Internal Audit
Independent, objective assurance and
consulting. Helps organization
accomplish its objectives.
Risk management
Internal controls
Governance
Authorized by, and reports directly to,
the Audit Committee
Annual approval of Internal Audit Plan and
Charter
At least quarterly reports
Key Responsibilities -
Support management’s assessment of
internal controls over financial reporting
Operational process and project audits
Compliance reviews of contracts
Evaluate fraud risks
IIA International Standards for the
Professional Practice of Internal
Auditing
Enterprise Risk Management (ERM)
A process designed to identify, assess
and respond to risks
Audit Committee oversight
ERM Committee
70 “Risk Identifiers” throughout the
company
Incorporated into strategic planning and
corporate goals
Ongoing monitoring of risk changes
Facilitates communication!
Business Continuity
Corporate Continuity of Operations Plan
Corporate Crisis Action Team
Departmental Emergency Response Plans
Coordinate with other public entities
COSO Enterprise Risk Management
Integrated Internal Control Framework
achievements over past 5 years…
Internal Audit
Led effort to implement the requirements
of Sarbanes-Oxley
Continually improving annual independent
review of key processes
Coordinated with external auditors to
reduce fees
Re-established department which
conforms to IIA Standards
ERM
Implemented program conforming to
COSO framework
Facilitated Development of Key
Emergency Response Plans
Work Force Emergency Plan (including
Pandemic Flu Preparation)
Facilities, IT, Communications
Company Internal Controls and Compliance
Remediated Material Weakness in Internal Control in Energy Supply
Energy Risk Management Policy
Energy Supply Board
Effective front, mid, and back offices
26 documented key business processes for internal controls over
financial reporting
Disclosure Committee for SEC reporting
Annual Management Fraud Risk Assessment
Corporate Risk Appetite Statement
financial planning…
Financial Planning and Analysis
Annual Budget and Operating Plan
Responsible for development of annual
operating and capital budget
Work with each area in the company for
development of annual plans
Review and approval by Board of
Directors
Monthly Internal Reporting
Responsible for timely reporting of
monthly results v budget and prior year
Numerous managerial reports by area
and activity to assist in managing
performance
Reports available by FERC level
SAP system development for reporting
Monthly Forecasting
Responsible for monthly forecasting
and expectations
External Reporting Support, Rate
Case Support, and Key Performance
Indicator development
Long-range financial modeling and
modeling of investment growth
opportunities
Provide financial modeling and analysis
for long-range planning
Provide individual financial models to
support growth initiatives
Capital Budgeting, Forecasting and
Reporting
Work with areas on annual and long-
term capital planning and needs
Provide timely monthly reporting and
capital forecasting
Mid-Office Energy Supply
Responsible for Company’s energy
risk management policies
Controlling agent on policies and
procedures between the front and mid-
office supply procurement
achievements over past 5 years…
Financial Planning and Analysis
Refined and enhanced annual budget
process
Develop budgets by operational
activities and work needs
Budget available by individual
segments, FERC level
Working to control costs to benefit all
stakeholders
Refined and enhanced monthly
forecast process
Working with all areas to provide more
accurate expectations of performance
Refined and enhanced monthly
reporting process
Developed key performance indicators
with peer comparisons reported
monthly
SAP system development and
refinement of monthly managerial
reports
Timely executive and Board reporting
of performance
Mid-Office Supply controls
Developed energy risk management
policies and controls
Minimized risk of supply function
Capital planning and reporting
Refined system to better enable timely
reporting and capital planning
Long-range planning and financial
modeling
Developed detailed models for 5-year
and 15-year financial planning needs
Developed individual financial models
and analysis for investment growth
projects
Education and training
Working with all areas of company to
understand financial basics and
expectations
Communicating stakeholders
expectations and overall balance
Local area economy expertise and
support
investor relations / corporate strategy…
Investor Relations
Inform potential shareholders
Press releases
Conference presentations
Face to face meetings
Company strategy
Updates on Company activities
Answer questions of the shareholders
Disclosure committee on SEC reports
Manage sell side research coverage
Currently 6 sell side firms cover the
Company
Corporate Strategy
Formulate the Company’s vision and
mission
Focus on relationships between
regulators, customers, communities,
employees and shareholders
Include key concepts such as
“sustainability” and future growth
concepts such as “renewable energy”
and “technology advancement”
Match current and desired cultural
values
Prioritize corporate initiatives
Ensure adequate resources to achieve
critical near-term goals
Promote management focus
Drive reporting structure
Quarterly reassessment with Senior
Management
Quarterly updates to Board
Goal is to communicate strategy and business operations to
attract a shareholder base that matches our philosophy
and investment time horizons
achievements over past 5 years…
Investor Relations
Shareholder base has morphed to
longer term holders
Hedge holdings after bankruptcy> 50%
of the shareholders
Hedge holdings now < 15% of
shareholder base
Emerged from bankruptcy with 2 sell
side coverage firms
Currently 6 sell side firms cover the
Company
Implementing Dividend Reinvestment
Plan and Employee Stock Purchase
Plan in 2009
Looking to increase the retail
shareholder base
Corporate Strategy
“Back to basic’s” company focus
“Unregulated” segment of financial
statements is gone
Future plans seek to rate base each
investment
Considering all stakeholders in key
business decisions
Improving rate stability for customers
Increasing community involvement in
spite of tough economic environment
Significant contributions to fund
employee’s pensions
Growth projects to add economic
development to service territories and
grow earnings
Advancing “renewable” initiatives for
resource rich service territories
NorthWestern’s has attracted longer term shareholders while
serving all stakeholders
tax…
Tax Department
Tax Returns
Income Tax Returns for Federal & State
Property Tax Returns by State
Sales & Use Tax Returns by State
Income Tax Accrual for Financial Statements for SEC, FERC,
& State Commissions
Tax Audits
Income Tax for Federal & State
Property Tax by State
Sales & Use Tax by State
Goal is to minimize corporate tax liabilities within the confines
of applicable federal and state tax laws.
achievements over past 5 years…
Tax Department
Reduced the effective tax rate from 41% to 36.5% and are
working to reduce it further.
Negotiated 4-year settlement in Montana achieving lower
property taxes.
Improvements in sales & use tax process has eliminated
unexpected adverse South Dakota tax audit assessments.
As of year-end 2008, NOL as filed is $350 million offset by IRS
tax audit reserve of $201 million yielding $149 million as
accrued.
Reduction in corporate tax liabilities will yield value for
NorthWestern’s customers and shareholders.
treasury…
Treasury
Cash Management
Bank account management
Cash forecasting
Investments
Short-term borrowing
Credit
Seek credit from counter parties
Counterparty credit evaluation / determination
Collateral management
Corporate Finance (Capital Management)
Debt financing / management
Equity financing
Cost of capital support
Rating Agency and Bank Relations
achievements over past 5 years…
Treasury
Refinanced all long term debt to all in cost less
than 6%
Provided persuasive case to rating agencies
that ratings should be higher
Successful outcome on Colstrip lease buyouts
and rate-basing efforts
Instrumental in selling many of non-core assets
Provided tremendous amount of credit capacity
with our energy supply partners
audit committee – role…
Quarterly –
Review and Certify 10-Q
Assessment of Internal Controls Over Financial Reporting
Review Earnings Press Release
Report from Deloitte
Recommend Dividend Payment
Internal Audit Update
General Counsel Update, including Compliance Line Report
Executive Sessions (management, auditor, internal audit)
Annually –
Review quality of auditor and engagement letter and fee proposal
Review ERM program and top priority risks
Review Management’s Annual Fraud Risk Assessment
Review Energy Supply Risk Management Quality Assurance
Review officer expenses and aircraft use
Review Charter and Code of Business Conduct and Ethics
Approve Internal Audit Charter and Annual Internal Audit Plan
Approve Audit Committee Report in proxy statement
Conduct self-evaluation
As necessary –
Approve non-audit services (tax)
Recommend approval of equity and debt financings
Audit Committee of the Board
Steve Adik
Phil Maslowe
Lou Peoples
Dana Dykhouse
5 year progress…
Improving controls
Stronger financial position
Investing in the business
Funding pension plan
Stock performance in-line with 11 peers
Credit ratings improving
Attractive refinancing & improved liquidity
net income…
return on average equity …
Authorized Return on Average Equity (ROAE) of 10-11% in utility
space
2008 NWE net income composition…
why does return on equity matter …
The Shareholders own our company
They elect a Board of Directors
The Board appoints a Chief Executive Officer – with his executive
team, they are responsible for the operation of the Company
Shareholders have expectations for return on equity
If we fail to provide a competitive rate of return on equity we may
have difficulty attracting future capital for the Company.
Underperforming share price may potentially attract non-utility type
investors.
These investors may require
a higher than utility average return
actions that provide short-term benefits to shareholders in exchange for
long-term stability for all stakeholders
balance sheet…
12/31/2008 Debt to Capitalization 53.0%
Target of 50 – 55%
cash flow…
Ample Cash Flow to reinvest in business
Cash Flow from Operations
capital spending…
As most companies nationally have cut back capital investments
NorthWestern Energy’s Capital spend continues to grow
Historic and 2009 Budget Utility Capital
-
20,000
40,000
60,000
80,000
100,000
120,000
2005 A
2006 A
2007 A
2008 A
2009 B
SD Regulated
MT Regulated
$109M
$82M
Avg Annual
increase
7.1%
OG&A expense…
Labor, Pension & Benefits alone comprise 63% of our total
OA&G expense.
people costs…
Compounded Annual Growth Rate (CAGR) of 4.8% in total due to
new hires, cost of living increases, and increased pension
expense.
pension expense vs funding…
Significant pension increases due to past market conditions.
Prefunding in 2009 to take advantage of low equity market
conditions.
stock performance…
shareholder mix…
Shareholder mix continues to morph
More mutual funds, which includes index funds
More bank management divisions and investment banker asset
management
12/31/2008
3/31/2009
6/30/2009
Ave of peers
@ 6-30-09
Institutional:
Investment advisor
37%
36%
36%
25%
Hedge funds
31%
24%
13%
5%
Mutual Fund
20%
24%
28%
27%
Brokers & Banks
2%
7%
16%
8%
Pension Fund
2%
2%
2%
2%
Other
1%
2%
1%
1%
Total Institutional
94%
95%
96%
68%
Retail
6%
5%
4%
32%
Total
100%
100%
100%
100%
Source: SNL
dividend history…
Long-term targeted Dividend Payout Ratio of 60-70%
improving credit ratings…
Secured Ratings
S&P A-
Moody’s A3
Fitch BBB+
NWE credit ratings
now better than
peer average
shown here.
declining interest rates…
1.) Interest rate does not include other costs of debt such as debt issuance expenses, discounts or premiums, and losses on
reacquired debt.
2.) $305 million of Montana Mortgage Bonds includes the $55 million 30 year new issue priced at 5.71% in September and
expected to close mid October 2009.
2
1
1
improving counterparty credit position…
Improving credit ratings has resulted in enhanced counterparty
credit and reduced collateral requirements.
ample liquidity…
$250MM unsecured revolving credit facility…
Maturity: June 30, 2012
Pricing: Grid based on credit ratings currently at Libor + 300bps
Financial Covenant: Maximum Debt to Cap = 65%
Relationship Banks:
Note: First 3-year revolver executed in the Utility sector in the current economic environment
2009 June YTD performance…
2nd quarter & YTD June financials poor
Reduced guidance from $1.85-$2.00 per share
to $1.75-$1.85 per share on second quarter
earnings call.
economic environment…
Our Country is in the worst national recession in the past
25 years
MT, SD, and NE fairing better than a lot of areas
NE, SD, and MT have the 2nd lowest, 3rd lowest, and 8 th lowest
unemployment respectively
Our Company has been impacted by:
reduced transmission OASIS sales,
lower SD wholesale pricing due to market demand,
increased pension funding and costs due to market
conditions, and
weather
Due to the current recession, many companies are:
reducing staff (# of unemployed nationally increased 5.5
million over the past year),
reducing capital spends,
freezing pensions,
reducing salaries, and
capital spending is being reduced as well across the nation
we are fairing better…
Overall company earnings behind prior year $4.0M or 12.3% through June
2009 June YTD financial performance …
2009 June YTD financial performance …
Earnings YTD impacted by:
Impacts of the economic downturn
Transmission OASIS sales – lack of demand in other states
SD wholesale loads – reduced pricing due to demand in MAPP
region
Slow down in customer growth and new connects
Write-offs growing but being managed – customers having
difficulty paying
Lower gas and electric loads due to weather
Bozeman gas incident and other claim costs
Increased benefit, compensation, and pension costs
Retail and Wholesale operating costs
Higher depreciation and interest expense
Reduced property tax expense
