In a presentation to the commission, Al Brogan, the PSC attorney who has closely followed NorthWestern's bankruptcy, raised a number of concerns over the company's filings last week.
Brogan said it's premature to say if NorthWestern's proposed rates under the plan would be just and reasonable and whether its proposed increases in capital spending and maintenance are adequate.
He also discussed NorthWestern's restated financial results it filed with the Securities and Exchange Commission on Monday. NorthWestern originally reported $3.5 million in net profits for December 2003, but restated the results to show a $22.3 million net loss for a negative swing of $25.8 million.
Here, by topic, are some of Brogan's concerns, with responses from NorthWestern spokesman Roger Schrum.
Rates
NorthWestern said it doesn't expect to raise utility rates for at least five years. That does not include actual increases in the costs of electricity and natural gas supply, which NorthWestern buys on the open market. These commodity price increases are passed on to consumers.
Brogan said the PSC wants NorthWestern's rates to be just and reasonable but the company's plan doesn't change current, which were set in the 1999 case filed by its predecessor, Montana Power Co. Brogan said it's impossible to conclude based on information in its filings whether rates will be just and reasonable.
Said Schrum: "Our plan does not include any rate change, despite a significant increase in costs for pensions, employee benefits, property taxes and just general operating costs."
Corporate finances
Brogan said the PSC staff wants to see NorthWestern's capital structure mirror that of a well-run utility, with 40 percent to 45 percent equity (stock) and 55 percent to
60 percent debt. NorthWestern's plan, he said, proposes 30 percent equity and 70 percent debt, with
63 percent of the assets deemed "goodwill or other intangible assets."
Schrum said NorthWestern proposed a capital structure of 47 percent equity and
53 percent debt, with the clearly stated goal of reducing debt over five years to improve that ratio.
Service quality
NorthWestern, which operates utilities in Montana, South Dakota and Nebraska, said it intends to increase its capital spending in 2004 to
$77 million and wants to spend $287 million more from 2005 to 2008. The company is in the process of hiring a third-party engineering firm to evaluate its utility system's integrity and reliability, Brogan said. The PSC staff will need to determine whether this spending is enough to ensure that service quality in Montana won't deteriorate, he said.
Schrum and other NorthWestern officials have said the reason the company is hiring the third party is to get an independent evaluation of the quality of its system.
"Ring fencing"
Brogan said the PSC wants a "ring-fenced" Montana utility that would separate the Montana assets from those of the rest of NorthWestern to protect finances. NorthWestern's Montana utility has been profitable, while the corporation's non-utility assets - some of which have been sold off - have lost money.
Brogan said NorthWestern has proposed ring-fencing its regulated energy and utility businesses and assets so they are owned by the reorganized parent company. Its non-regulated energy and utility businesses would be held in wholly owned subsidiaries. Brogan said this would not protect the utility business from the non-utility operations, adding: "If it did, we would not now be in this predicament."
In response, Schrum said NorthWestern doesn't believe the ring-fencing arrangement advocated by the PSC is legal under the U.S. Public Utility Holding Company Act.
Board of directors
Brogan said the commission wants to see NorthWestern have a board with adequate expertise and the PSC staff believes some directors should have experience with a regulated utility. NorthWestern is proposing that its new seven-member board be made up of the company's chief executive officer and six people appointed by the creditors' committee, but Brogan said there are no requirements for expertise.
Schrum said NorthWestern and the creditors' committee share a desire to have some regulatory expertise on the board. The plan, he said, says that the company hopes to have a Montana resident on the board.
Poison pill
Brogan said NorthWestern is proposing a so-called "poison pill" to discourage a takeover of the company not endorsed by the board of directors. If any stockholder acquires 10 percent of the company's stock and proposes a merger or acquisition without board approval, Brogan said, the poison pill requires a two-thirds majority approve the takeover but doesn't allow the shareholder with 10 percent of the stock and his allies to vote.
In response, Schrum said these poison-pill provisions are "fairly common." The proposal is similar to what Montana Power had, he said, and MDU Resources Group requires approval by an 80 percent vote. NorthWestern's charter now requires a 75 percent vote of approval, so the 67 percent proposed is actually lower, he said.
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