NorthWestern Energy Group, Inc. Q1 FY2023 Earnings Call

Good afternoon and thank you for joining NorthWestern Corporation's financial results webcast for the quarter ending March 31, 2023. My name is Travis Meyer, and I am the Corporate Development and Investor Relations Officer for NorthWestern. Today, we have Brian Bird, President and Chief Executive Officer, and Crystal Lail, Vice President and Chief Financial Officer, with us to discuss the results and provide an overall update. NorthWestern's results have been released and are available on our website at northwesternenergy.com. We also issued our 10-Q report earlier today. Please be aware that the company's press release, this presentation, comments by the presenters, and responses to your questions may include forward-looking statements. I encourage you to review the disclosures in our SEC filings and the safe harbor provisions found on the second slide of this presentation. This presentation also includes non-GAAP financial measures, and you can find the relevant disclosures, definitions, and reconciliations included in today's presentation. The webcast is being recorded, and an archived replay will be available for one year starting at 6 p.m. Eastern today in the Financial Results section of our website. Now, I will hand the presentation over to Brian Bird, NorthWestern's CEO.

Thanks, Travis. We're speaking to you today from Billings, Montana, where we hold our Board meetings primarily in our service territory. This trip to Billings has allowed us to meet with our employees and visit the Elliston County Generation Station, which is about two-thirds completed. While the project is currently on hold, the Board, management team, and employees recognize the value this plant will bring not just to Billings, but to Montana overall, and we will continue to show our support for it. In terms of the first quarter, we reached a constructive multiparty settlement on the Montana rate review and are currently awaiting commission approval, which we are hopeful will be granted. We also received the necessary final approval for our holding company formation and successfully executed our capital plan, investing nearly $150 million in the first quarter, with plans to invest a total of $510 million in 2023. Despite delays in Yellowstone County, we expect the plan there to be ready to serve our customers by the end of 2024. To enhance reliability and affordability, we've announced an agreement with Avista to transfer its Colstrip ownership of 222 megawatts effective December 31, 2025, at no upfront cost. Additionally, our service territory continues to grow with a 1.4% increase in customers, outperforming the industry average for the first quarter. We also have the lowest unemployment rates in the nation; South Dakota ranks number 1, Nebraska is number 2, and Montana is number 4. Lastly, I want to commend our employees for their remarkable response to storms in our areas. Last May, we faced derecho events and high winds in South Dakota, as well as storms and flooding in southern Montana and Yellowstone National Park. Our team's excellent response led to recognition from EEIs and our peers for emergency response, and I am very proud of their dedication to serving our customers. With that, I'll pass it over to Crystal.

Thank you, Brian. I'll start my comments on Page 4. As Brian mentioned, we experienced significant execution on both the operational side and regulatory front as we began 2023. We faced notable weather challenges in Q1, but this was complemented by effective regulatory execution, resulting in a strong financial performance for the first quarter. Being here in Billings, I can see the essential infrastructure of our system, including substations and the ongoing construction of the Yellowstone facility, which highlights our efforts. In terms of our financials for Q1, we saw an improvement in net income of $3.4 million, or 5.8%, compared to Q1 of last year. This improvement is reflected in both GAAP and non-GAAP measures, with gains of just under 6% versus 2022. However, on an earnings per share basis, there was a reduction of $0.03 due to the impact of shares outstanding from our prior equity issuance. Quarter-over-quarter, this equates to about a $0.09 drag compared to last year, indicating a strong financial performance overall. I'll provide more details on Slide 5 regarding the factors that contributed to this. We experienced an 11.4% improvement in margin, with figures of $289 million compared to $259.4 million in the first quarter of 2022. This was somewhat offset by rising operating costs, including those related to operations, maintenance, property taxes, and depreciation, leading to a net income of $62.5 million for the first quarter of 2023, compared to $59.1 million in 2022, reflecting the previously mentioned increase of $3.4 million or just under 6%. Slide 6 outlines the key overall drivers. The major quarter-over-quarter improvements came from the margin growth I just mentioned, which was driven by strong customer growth, weather conditions, and interim rates, but these were countered by operating costs. The most significant pressures on the operating side were from generation and maintenance expenses, as well as labor and benefits. Cold weather in Q1 required our generation facilities to run more frequently, incurring costs that were not passed through a tracker. We are also facing inflationary pressures on labor and benefits. Additionally, interest expenses were higher compared to the first quarter of last year, and depreciation reflects the assets benefiting our customers. I should also emphasize the tax impact here, with about $0.06 of detriment stemming from a notice we received from the IRS in the first quarter regarding a previously claimed AMT credit, resulting in an adjustment of around $3.2 million. All of this leads to the previously mentioned $0.03 reduction compared to last year’s Q1, but we still see an overall improvement in net income from the prior period. On Slide 7, you'll see I just mentioned tax impact. It is an out-of-period impact. And so we've adjusted that out from a non-GAAP adjustment perspective. You'll see the $3.2 million on that slide. Also, we adjusted out favorable weather on a net income basis of $2.7 million. You'll see that brings our non-GAAP earnings to $63 million. That compares with the first quarter of last year where we had a small amount of unfavorable weather, resulting in $59.5 million in the prior period as compared on a non-GAAP basis. Slide 8 provides more detail about margin, which I was alluding to earlier as the most significant driver in Q1. You'll see higher retail and natural gas volumes, those 2 taken together are approximately $13.5 million of improvement against solid customer growth. Weather in our jurisdictions and a lot of the country was warmer. I can tell you from where we sat, it was definitely colder. And so that was across Montana, South Dakota, and Nebraska. So you see that impact in your first and third columns there. The other thing I would highlight in the middle there is the impact of Montana interim rates. And we'll talk a bit about the settlement that we've reached, but the interim rates were related to the settlement related to our base rates are certainly what's reflected in our financial statements here are lower than that settlement, but still a significant driver in Q1 of the impact of that of approximately $8.5 million. The other thing I will note here, and for those of you who have followed. So in fleet, we talk about the PCCAM, and I will say I generally negatively speak about the PCCAM. If you're in the first quarter, we actually have a favorable experience. You'll see that last year, there was about $800,000 of expense recognition related to the sharing portion of that PCCAM. During Q1 of '23, we actually have $5 million of favorable associated with that PCCAM. So quarter-over-quarter, that's a $1.3 million favorable adjustment. What drove that payroll adjustment? I would point out the increase in base of the PCCAM amount that we received on an interim basis in October is the key piece of that. I think most of you who are familiar with that mechanism also know it's a non-calendar year basis, so it begins July 1 and goes through June 30. So where we were at through December was a significant detriment to both our earnings, over $7 million last year, and our customers. And what happened in Q1 is a bit of a reduction to that deferred balance and certainly a reduction to the debt that we have taken. And so I would highlight that as a positive moment because I haven't had a chance to say that very often. The other thing I would comment here is the continuing trend in the next column of transmission revenues where we see a favorable impact to our loads and our systems that, I think, position of strength with regard to transmission revenues in the future. And you can see a favorable impact of transmission revenues quarter-over-quarter of $1.2 million as well, all leading to what I alluded to, which is strengthened margin line versus last year of Q1. So concluding at $285.1 million of gross margin in the business. The next page, I would refer you to cash flow impacts. Again, here, this all comes back to both the combination of the items I just mentioned from a margin perspective, being customer growth and weather and then also interim rates, resulting in solid improvement in our cash flows. And the interim rates contributing to collecting our supply cost on a more timely basis, driving stronger cash flows for the quarter. This improvement is noted here. The other thing I would note is we did issue first mortgage bonds, all of that leading to significant liquidity as we close out Q1 here. The other thing I would mention is consistent with our prior comments is that we do expect to issue the remaining $75 million on our after-market equity program that's offsetting currently, and we'll do that in the back part of 2023. Having discussed the financial results, I will now focus on the Montana rate review. We successfully reached a constructive settlement with the main interveners regarding the revenue requirement and submitted our debt in early April, following the rebuttal testimony we filed in early March. As I mentioned earlier, the interim rates had a significant positive impact on our cash flow and margins, and they establish the effective dates that we expect the settlement outcome to be retroactive to, leading to improved metrics. The details on Slide 10 show our rebuttal revenue request compared to what we received from the interim rates, with the impacts of the settlement outlined in the far-right column. We believe the base rate settlement offers a reasonable revenue requirement outcome, including adjustments for various policy items associated with the settlement, such as the capability to recover some costs for the Yellowstone generating station once it is operational and deferring certain costs related to our enhanced Wildfire program. The crux of this settlement, as presented to the commission over the past weeks, reflects what we view as a fair outcome based on our cost of service and the assets already serving customers, while updating our rates accordingly. The commission's process involved a well-managed hearing with contributions from all sides. We anticipate the briefing will continue following that hearing, which wrapped up last week. Briefing is expected throughout May and June, with a final decision from the commission anticipated around July or August. From a financial outlook perspective, I think you're all familiar with us not issuing guidance for 2023 due to the significant impact of the Montana rate review. With that, we still are not issuing guidance for the year, but I would point you to Slide 10 as to the impacts of that most significant item, again pending approval by the Montana Commission. Once we do have an outcome there, we will issue guidance for the period. The other thing I would note is each year in Q1, we announce whether we expect to file a rate review. We do expect to file in our South Dakota jurisdiction on the electric side. And that, as many of you know, we closed out the Bob Glanzer generating station last year, and we'll be coming in to request recovery of that in our other assets. In addition, we remain on plan for our capital plan for 2023. You heard Brian mention some of the challenges with the construction at Yellowstone County, but we expect to remain on course for that to be in service in 2024. Our overall targets from an EPS and rate base have remained unchanged. And with that, I will turn it back to Brian.

Thanks, Crystal. Slide 12, speaking about capital investment, I think it's quite impressive when you look at the capital. The growth in our capital over the 5-year time period shown nearly 16% CAGR over that time period, a total of $2.1 billion. That high level of investment is going to need to continue on as we think about investment necessary for capacity, asset-light reliability, and compliance. Much of that investment is in the transmission and distribution. Crystal just mentioned Yellowstone, but there are some other generation investments that are included in that plan. Any other new resources brought on is not included in that $2.4 billion. Until those assets are identified, they are not included in our plan. But nonetheless, our forecast going forward is an increase in investment over where we were over the last 5 years. That investment level should continue to provide a rate base growth of approximately 4% to 5%. The next slide, speaking to our supply update. Crystal also mentioned the Bob Glanzer station, a 58-megawatt facility that was put in place in May of 2022 for a total cost of approximately $83 million. That plan has been dispatched even more than we anticipated. So we're extremely pleased with our ability to provide customer capacity to our South Dakota customers. Speaking of capacity, that's exactly what we're trying to do with our Montana Yellowstone County Generating Station. The 175-megawatt facility started construction in April of '22. We're about two-thirds of the way in terms of the investment at investing $173.5 million of the $275 million anticipated. As I mentioned earlier, we anticipate that the plant will be in service during 2024. Regarding IRPs. We did file our South Dakota IRP in September '22. That plan identified 43 megawatts of need, some of which is due to retirements and just incremental capacity, and we will be running a competitive solicitation in the '23-'24 time period associated with that IRP. In Montana, we'll be filing our IRP here at the end of April. So stay tuned. You'll get a chance to look at that very, very soon. And with that, I guess we'll turn it back over to Travis to help us handle any questions.

Thank you, Brian. I think we'll take our first question from Julien at BofA.

Can you hear me now?

There we go.

All right. Sweet. Sorry about that. I apologize. You got to hit Accept when you unmute me here. I got excited. So just coming back to Yellowstone here in the timeline, obviously, reaffirm, but can you talk a little bit about the legislative angle here, 971? Just what that could portend for the project and ultimately, maybe some of the construction-related items?

Yes. I would say this: two pieces of legislation were introduced late in the session as a result of the decision regarding the air quality permit. People looked at that, and while some were thinking about Yellowstone County, many were also considering how this could impact other construction happening in the state. The legislature moved quickly. I believe that one piece is already on its way to the governor, and the other is in its third reading this afternoon. I'm cautiously optimistic that it will complete its third reading and ultimately reach the governor. I hope the state understands the potential impact of that ruling on the growth of Montana. I would argue that our ability to serve that growth is important for meeting our customers' needs. Overall, we feel positive about it. These two pieces of legislation, together, should allow us to expedite the process of obtaining a renewed or reissued air quality permit.

Right. And either way, the timeline is looking like 2024. And do you want to be any more precise than that?

Yes. I guess what I'd say is I'm hopeful that if things could move quickly, we might be able to meet our summer peak, which is really what was our intent with the plant. Obviously, we want to be able to meet the winter peak in 2024. So our hope is to be able to achieve both of those. But I'm cautiously optimistic that those things happen and it helps us expedite. But either way, we feel confident that we'll get this construction going again and having it in service by the end of '24.

Excellent. And Brian, just if I can follow up on this. I mean, we've talked at various times about a new baseline for an outlook, and you reaffirmed here this 4% to 5% rate base outlook. Can you talk a little bit about EPS CAGR and maybe kind of the timeline for adjusted net considering the newfound settlement and visibility coming on the Montana?

Well, Julien, I appreciate you asking me that question, but I believe that question is really appropriate for Crystal. I'm looking at her now to answer your question.

Sure. Julien, a happy Friday afternoon. The question, I think, on everyone's mind is certainly our long-term outlook and EPS growth. The key, I would say, there is the settlement we reached in the Montana case is critical to providing us visibility as to where we're headed, but I also don't want to front run the Montana Commission. You see in the materials here what you've heard from us in the past. Once we receive an outcome from the Montana commission, we will certainly be updating everyone at where we think that growth looks like coming out of that rate review.

Okay. By next quarter, we could have an updated baseline for what that would look like, not just an update of the unclear points.

Indeed, I think what you're referring to is the question of what our base period is that we would be driving that growth off of. I can tell you it won't still be 2020. We will refresh what the growth period is off of. I think that most likely looks like 2022.

Excellent. Sorry, one last one. On the outlook, I mean your core retail sales looking quite solid here. Any commentary? I mean, Crystal, you alluded to it in your remarks here, but any further thoughts about just what supported the outlook here in the first quarter on the gas electric side?

It was a really strong first quarter, and we experienced solid customer growth in our service area. We noticed significant usage trends during the winter, and we will be closely monitoring how these trends develop moving forward.

Excellent. Certainly, I don't want to jinx it. All right. I'll leave it there, guys. Have a good one.

Thanks, Julien.

We'll take our next question from Alex Mortimer at Mizuho.

Beautiful. So you highlight the need for kind of increased generation, or I guess the generation shortfall kind of multiple times during the call and in your Q. So how do you look at potential upside on the CapEx side above what's in your forecast just given the additional need for generation that you've highlighted?

I don't want to reveal too much about our Integrated Resource Plan, but I can share that we have been discussing the capacity deficit for years. The addition of incremental capacity from Colstrip and the Yellowstone County Generating Station will provide us with sufficient capacity for several years. However, we will still need to consider additional capacity in the near term. As part of our commitment, we must also explore opportunities to invest in noncarbon-emitting resources and pledge not to invest in carbon-emitting resources starting in 2035 and beyond. We will plan beyond that timeframe as well, but there will still be a need for capacity investment in the latter half of this decade.

Okay. Understood. And then quickly just to sort of round out the question on Yellowstone. Can you give some detail on sort of the scale of cost that you might be currently incurring with construction currently being halted? And then is there any concern that they could potentially be disallowed when you do eventually go to get this project into rates?

Yes, 2 things. First of all, Alex, I should have finished my first thought on your first question. I should remind you that in South Dakota, there will be incremental investment there from a capacity standpoint. I think we're looking at approximately 40-ish megawatts there. And then we're looking at long-term solutions in that state as well. Back to what's happening at Yellowstone County from a delay perspective and how that could impact costs. Yes, there were going to be some costs of demobilization and the like. From our perspective, we don't anticipate that's going to be for a very long time. We certainly hope not. If there are incremental costs here, I hope the commission would understand that this was based upon a judge's decision that I think we had very little control over, and I hope that's how they look at it. So I will say there's always risk. They're going to be looking at any project that we have and think about it from a prudence perspective. But I'd like to think, particularly in the response we've seen in the legislature associated with the decision that I think they won't look upon this delay very harshly towards NorthWestern at least. That's my hope and my view.

Okay. Understood. Congrats on the quarter.

Thank you.

Thanks, Alex. Appreciate it. Our call from Chris Ellinghaus at Siebert Williams Shank.

Question about the rate case. I just wanted to sort of get your perception of this. There certainly were some disagreements from the interveners in their cross-examination and testimony. But the commissioners seem to be less contentious and maybe less voluminous in their line of questioning. Would you agree with that sort of perception?

I wouldn't say this. Chris, I believe that I've been through quite a few rate cases at the commission. I thought the commission handled this extremely well. They allowed a significant amount of public input. They conducted a good hearing. I thought the process was really well done throughout. I feel good about how the case has been managed.

Okay. Great. Outside of the potential legislation, can you just sort of walk through what you would envision the Yellowstone process being in terms of reviewing or re-examining the air permit?

Yes, if we're talking about excluding the legislation, then yes, we will need to consider that. The DEQ also has to deliberate on this. It’s important to note that the DEQ has already issued the air quality permit. There will be time required for us to evaluate the situation, particularly regarding greenhouse gas emissions. Once that evaluation is complete, a reissued permit will go through a public comment period before it is finalized. This timeframe will need to be accounted for if they need to conduct that analysis once more, without considering the legislation.

Okay. The South Dakota filing, I might have missed this, what Crystal was talking about, but what's your anticipation of that filing time frame? And what do you see that process thereafter looking like?

So from a timing perspective, Chris, I would say we'll file it sometime over the summer here. We're working through that. We'll turn our attention from the Montana rate review, which has been a little bit all encompassing to finalizing that filing. The South Dakota Commission, in the past, has run a very efficient process, and they've been very good to work with. I would think that we'll be able to work with them on interim rates sometime in the latter part of the year and then progress the filing along.

All right. We'll take our next question from a line that ends in 2528.

Thanks. I have a quick question. Just to clarify the timeline, if the legislation is passed, when do you estimate you would be able to restart construction on Yellowstone?

Yes, I'm not exactly sure. I believe the legislation has passed, which means greenhouse gas considerations may not be necessary. However, we still need to address the lighting issue. The Department of Environmental Quality will need to evaluate that and provide a comment period. I'm uncertain about the duration of that comment period, but I hope it lasts only a couple of months rather than several months. That's what I'm expecting as I speak today.

Got it. And then when the plant goes into commercial operations, do you have to wait for it to go into commercial operation to file for rate relief on the plant? Or what would be the timing of when you would file for rate relief?

From a rate perspective, we do receive AFUDC on the plant while under construction. Once that plant is in service and part of the settlement that we reached, we had asked for, I think most of you know, all reliability rider; we settled for something less than that. We agreed that once the plant is serving customers, we could ask for a reset on our PCCAM base because, of course, the cost today, we're buying the service on that Yellowstone will provide in the market. We've reset that base but at the same time, get some recovery of the operating costs. At that same time, work through the prudency evaluation of that plant if we choose to make that filing. This would coincide with about the timing of the in-service to provide core recovery across on a timely fashion as it relates to the operating side, but importantly, recovery of the rate base would be subject to another rate filing.

So the operating cost would somehow be incorporated into the PCCAM proceeding or?

Yes.

Okay. And then last question. Can you talk at all about sort of equity need beyond this year?

We haven't given guidance beyond this year as to our financing plans. We mentioned, as I noted earlier, we'll finish out the ATMs planned. The thing I would note overall is that we're looking to fund our capital plans on a self-funded basis absent when we have additional growth, things like Yellowstone or other opportunities that aren't based into our current capital plan. Those are the types of things that would push us into more equity needs.

So should we not assume sort of continuing equity beyond this year? I'm not understanding what you're trying to say?

Sure. I'll say it this way. We haven't given guidance past 2023 as to our equity needs.

And with that, I think we've exhausted our Friday afternoon queue. I'll turn it back over to Brian for any closing remarks.

I am pleased to start with the settlement. We hope the commission carefully considers it, and we can gain approval to proceed with our investments in the Montana system and its growth. Additionally, we need to build the Yellowstone County plant to support our customers and increase capacity from Colstrip. We are confident we will reach that goal, and our customers will value our efforts. Thank you all, and have a great weekend. See you.