Northwestern Energy Price Hike

MONTANA, Jun 26 2008 (Neo Natura) - As regulators decide soon whether to grant NorthWestern Energy a $15 million annual rate increase, they may look at another aspect of company finances: NorthWestern’s unusually high payouts to stockholders.

For the past two years, NorthWestern paid dividends to its shareholder-owners in an amount more than the company’s entire net earnings, according to its financial statements.

In 2006 and 2007, NorthWestern reported $91 million of net income, but paid out $91.3 million in dividends to owners of company stock.

A critic of the rate increase says if the company needs more operating cash, it should reduce these dividends, instead of raising rates on customers.

NorthWestern is “paying out way more dividends to its shareholders and creditors than anyone should allow,” says Owen Orndorff, a Boise attorney and independent power-plant owner.

NorthWestern says Orndorff’s arguments on the dividends are irrelevant and have nothing to do with whether the $15 million rate increase is “just and reasonable” or necessary.

The dividend-to-income ratio also looks abnormally high, company officials say, because NorthWestern had to reduce its income by $19 million in 2006 because of a court judgment that is on appeal.

NorthWestern says restricting its dividend payouts could harm the company and drive up its cost of capital, by making the company less attractive for investors.

Public Service Commission Chairman Greg Jergeson, D-Chinook, says the five-member PSC may consider the dividend issue when it rules on the rate increase in early July.

“I’m sure we can have something to say about that,” he says. “The concern is if they pay dividends beyond what net earnings can reasonably support, they are reducing their equity, and that can’t go on indefinitely.”

The $15 million annual rate increase would be a 2 percent hike in electric and natural gas rates for NorthWestern’s 320,000 Montana customers.

It’s part of a proposed deal negotiated by NorthWestern and the Montana Consumer Counsel, a state office that represents utility consumers in rate cases before the PSC.

As part of the deal, NorthWestern also agreed to provide to consumers some electricity that is slightly discounted from market prices for the next 6½ years, and to reduce rates or rate increases in the future.

Orndorff, who owns two independent power plants in Montana that sell electricity to NorthWestern, has been the deal’s most vocal critic.

His power plants in Billings and Colstrip also buy power from NorthWestern, and he says the rate increase isn’t needed. He also says by paying out abnormally high dividends to shareholders, NorthWestern is putting the company at financial risk.

Since coming out of bankruptcy reorganization in late 2004, NorthWestern has paid out 85 percent of its net income in dividends to shareholders — the bulk of which are large investment funds.

As in most publicly held companies, NorthWestern executives and board members also hold significant amounts of stock, thus benefiting from the dividends. For example, President and Chief Executive Officer Mike Hanson owns nearly 32,000 shares and has received $83,000 in dividends since the company emerged from bankruptcy.

The industry average for dividend payouts is 60 percent to 70 percent of net earnings, according to NorthWestern and industry financial analysts.

Hanson says the 100 percent dividend payout of the past two years is an aberration, skewed by the $19 million income write-down stemming from the court judgment. The company hasn’t paid that money and has appealed the award, he said.

“When we normalize our income, we’ll be within the (standard) range for dividend payout,” he says.

The ability to pay dividends also is related more to the company’s cash flow, rather than net income, Hanson says.

An attorney representing NorthWestern says the company’s credit ratings have been improving and that Orndorff has offered no proof that the dividend payouts have negatively affected company finances.

Without that showing, the issue is irrelevant, John Alke of Helena wrote in documents filed with the Montana Public Service Commission last month.

“NorthWestern Energy’s cost of providing electric and natural gas service is not determined by the dividends paid by the corporation to its stockholders,” Alke wrote. “The payment of dividends by an investor-owned utility to its stockholders is a matter committed to the soundly exercised discretion of its management.”

Orndorff says dividend payouts at 100 percent of net earnings can’t be sustained, and that the Montana Public Service Commission should restrict the practice.

“There has to be a policeman on the beat, and that policeman is the PSC,” he says. “They’ve got to lay down the rules. They may not like it, but that’s the way it is.”