NorthWestern Energy Group, Inc. Q3 FY2023 Earnings Call

Good afternoon, and thank you for joining NorthWestern Energy Group's Financial Results Webcast for the quarter ended September 30, 2023. My name is Travis Meyer. I'm the Director of Corporate Development and Investor Relations Officer for NorthWestern. Joining us today to walk you through the results and provide an overall update are Brian Bird, President and Chief Executive Officer; and Crystal Lail, Chief Financial Officer. All participant lines are currently muted. After the presentation, we have allotted time for a Q&A session. I'll provide instructions for asking questions at that time. However, if you intend to ask a question or join us by computer, please set your Zoom identity to your first and last name and firm so we can call on you by name and let you know when your line is open. NorthWestern's results have been released and the release is available on our website at northwesternenergy.com. We also released our 10-Q pre-market this morning. Please note that this company's press release, this presentation, comments by presenters and responses to your question may contain forward-looking statements. As such, I will direct you to the disclosures contained within our SEC filings and safe harbor provisions included in the second slide of this presentation. Please also note, this presentation includes non-GAAP financial measures. Please see the non-GAAP disclosures, definitions, and reconciliations also included in the presentation today. The webcast is being recorded. The archived replay of today's call will be available for one year beginning at 6 p.m. Eastern today, and can be found in the financial results section of our website. With that, I'll turn the presentation over to NorthWestern CEO, Brian Bird.

Thanks, Travis. First of all, we just completed our Board meetings for the third quarter here in South Dakota. Last night, we celebrated the 100th birthday of NorthWestern Public Service. Many of you may remember that in 2012, we celebrated the 100th birthday of the Montana Power Company. Now, all of our businesses have achieved their 100th birthday. In fact, the actual date will be November 27, because back on 11/27/1923, three employees from the Albert Emmanuel Company incorporated NorthWestern Public Service Corporation. This company owned many utilities in Ohio, Pennsylvania, and other Midwestern states. The name NorthWestern Public Service Company was chosen because it represented the group of assets that were most Northwestern of all the assets they owned. So, a little bit of history to start. For the quarter, the highlights certainly have to do with providing guidance for both '23 and '24. From '23's perspective, our diluted earnings per share are projected to be $3 to $3.10 per share, and for 2024, $3.42 to $3.62. Crystal will provide more detail on the guidance for each of these and also on our long-term growth rates. Regarding those long-term growth rates, we are increasing our five-year rate base and earnings per share growth rate targets to 4% to 6%. Much of this hinges upon the unanimous approval of a constructive multi-party settlement in the Montana rate review, resulting in electric and natural gas increases of $67.4 million and $14.1 million, respectively, as rates go into effect November 1, 2023. Crystal will discuss this further, but I want to highlight that we had a very constructive settlement among all the intervening parties that provided revenue requirement testimony in the rate review. The way the commission handled this case was certainly impressive. If you had the chance to listen to the meeting on Wednesday or have access to the link, you should do so. We were very impressed with the presentation to the commission and the comments from the commissioners regarding their sincerity in balancing customer needs and the financial health of the utility, noting that there are federal and state statutes that come into play in their decision-making. This was very well done, and we feel very good about it. As I've mentioned before, I feel positive about the alignment with the governor's office, the legislature, and the commission. Everyone understands the importance of the service we provide our customers, and the challenges we face in providing that service in the future regarding capacity and other needs. I think that the outcome from Wednesday resonated strongly with us; the vote was unanimous, which contributes to our positive outlook. Earlier in the year, we also received approval to move forward with the holding company from all our jurisdictions, including Montana. During the quarter, we executed the first phase of the holding company reorganization, which I will discuss later. We also concluded our ATM program, issuing $63 million of the remaining $75 million under our Equity Distribution Agreement, and we declared a dividend of $0.64 per share payable December 29, 2023, for shareholders of record as of December 15, 2023. Now, I'll turn it over to Crystal to discuss the financial matters.

Thank you, Brian. I echo your sentiments on reaching the 100-year anniversary. I've been with NorthWestern for about 20 years, and it has been a privilege to work here with this team. So, that was a wonderful celebration last night. In my comments today, I will discuss our third quarter results, provide commentary on our 2023 and 2024 earnings guidance, and a bit of detail on our financing plans. For the quarter, on a GAAP basis, we had an improvement of $1.9 million or a $0.01 increase. On a non-GAAP basis, that was a $4.2 million improvement, or $0.05, which was an 11.4% increase compared to the same quarter in 2022. If you look at the major drivers for the quarter, you'll see margin improvement contributing $0.11, offset by trends in depreciation and interest expense, along with $0.03 dilution from our share issuance. For the quarter, we had a $0.10 improvement driven by interim rates in Montana, although we did experience a cooler and wetter summer, which varied across our service territories compared to last year's warm weather. We believe this variance drove year-over-year results. On a silver lining note, the cooler weather provided tailwinds on our PCCAM. Last year, it was a drag on our performance, but in Q3, we noticed improvement. We also saw less demand for transmission services, contributing to a $0.06 drag on earnings. Moving forward, operating costs remained relatively flat versus the prior year, which aligns with our expectations. We adjusted our net income, resulting in $29.3 million GAAP earnings, up to $30 million on a non-GAAP basis. Our cash flows show significant improvement corresponding with adjustments to our PCCAM and interim rates. Regarding the Montana rate review, we expect that final rates will be effective November 1. We've made a compliance filing to trigger that, adjusting interim rates to base rates totaling $81.5 million. We're very pleased with this outcome, although we acknowledge that we do not receive a true-up back to the date of interim rates. I can confirm our commitment to moving forward effectively regarding our South Dakota rate review filed earlier this year, and we look forward to settlement discussions in Q4. Lastly, we are initiating earnings guidance for 2023 in the range of $3 to $3.10 and for 2024 a range of $3.42 to $3.62, also revising our long-term growth outlook to 4% to 6%. We will focus on capital deployment to support our customers while improving earned returns for shareholders. So, with that, I'll turn it back to Brian.

Thanks, Crystal. To highlight our capital investment history, we've ramped up our investment over the last five years, totaling over $2.1 billion, representing nearly a 16% CAGR. The forecast for the five-year period 2023 through 2027 is $2.4 billion, with two-thirds in the T&D sector. We're also updating our '24 to '28 capital plan at the EEI Conference. Proceeds from this capital will not require equity, consistent with our long-term growth targets. We see the holding company structure as beneficial for flexibility in financing options and aligning assets and debt obligations with our legal structure. Our goal is to provide solid returns for shareholders while maintaining a strong financial health. We are committed to executing well in 2024, prioritizing both our shareholders and customers. I will now open the floor for questions.

Thank you, Brian and Crystal. We will take our first question from Jonathan Reeder at Wells Fargo. Jonathan, you should be unmuted.

All right, can you hear me okay then?

Sure, can.

Yeah, there was a new dialog box that popped up this time. So... Yeah, thanks for taking my questions, team. In terms of equity, is it safe to assume that the new five-year plan that you'll presumably rollout at EEI will be self-funded as well? In other words, no equity absent larger projects such as new generation or something coming into the fold?

Hey, Jonathan, and happy Friday afternoon. I'll take that one. Yes, it is safe to assume we're sizing our capital plans consistent with no equity as we think about those current plans.

Okay. Figured that'd be the case that you wouldn't say no equity today and then two weeks later change it. So...

I feel like that would not be a good move from an industry perspective, so no.

Great. Moving on to some regulatory stuff, I think you've typically reached settlements in South Dakota. Do you expect that, that will be the case again this time around? Or is the size of the request large enough that the key parties will want to fully litigate it?

I would certainly expect that we will continue to work with staff from an advocacy perspective and would expect that we would reach a settlement there.

Great. And then, last one for me is, I know you just completed the Montana rate case and congratulations on that outcome, but just wanted to see if you're still thinking that the rate case cadence could be every two years or does the one-time adjustment for Yellowstone County under the settlement allow you to push out the next Montana filing a little longer?

Yeah, Jonathan, I think I'd say this. To me, we have to evaluate what's the best way to start getting recovery of our costs of Yellowstone. Obviously, we'll continue construction into 2024 with the hopes of having it done before the summer peak, certainly in the third quarter. But we must look at the best way to recover our costs, and if that means filing a rate review, that would have to come into play. However, what we just had an outcome on Wednesday was a 2021 test year, and we're approaching 2024. Our investment continues to go up, and with it, our cost including interest expense. There is continued pressure here. We believe we should earn as close to our authorized returns as we can. Therefore, we need to stay on top of that. However, there are alternative methods to recover costs on Yellowstone we can consider.

Okay. No, great. Again, congrats on the outcome and look forward to seeing you guys at EEI.

Thanks, Jonathan.

Thanks, Jonathan. We will take our next question from a telephone line with the last four digits of 5805. Hello?

Hi, good afternoon. This is Tanner James stepping in for Julien of Bank of America. How are you guys doing?

Good. Good to hear you, I guess, Tanner.

Thanks. Given the pretty constructive rate increase outcome, you're guiding, you upgraded the guide from the low end of your long-term EPS CAGR. What are the different factors you observed that could help you get to the top end of your stated annual growth range? Is the growth rate fairly linear, or is it more lumpy perhaps depending on rate case filings?

Tanner, this is Crystal. I'll take a shot at it, and then Brian can pile on here. But we recognize that we've been lumpy in the past; when you have a historic test period across our jurisdictions, lack of a formulary or future outlook, we will likely continue to be lumpy. The timing of how recovery occurs will play a role, as will any other incremental opportunities.

I would add that we demonstrated lumpiness this year. We used 2022 as a base year, and our guidance for 2024 shows that we are experiencing that. The cadence of rate reviews will affect the timeline, and we could offset findings in other jurisdictions.

Understood. Thank you. You stated in your investment program that it sides for no equity issuance unless there's future generation capacity additions or other strategic opportunities. What could other strategic opportunities look like? Is there anything you guys would actively consider on that front?

That's a great question. We continue to look at transmission investment opportunities. Something along those lines could come into play. We must also consider the ability to recover those costs promptly as well.

Understood. Great. Thank you very much, guys.

Thanks, Tanner. All right, we'll take our next question from Jamieson Ward at Guggenheim. You should be unmuted, Jamieson.

Yeah, can you hear me?

Yeah.

Yeah, we can hear you, Jamieson. How are you doing?

Perfect. I did the star-nine, and the unmute on the screen, and I think I dialed in the code correctly, and you guys have made it simpler than it has been in the past while, so thank you for that. First of all, just quickly congratulations on a great result there. I wanted to ask specifically about the HoldCo. Now that you have a HoldCo, should we read anything into the zero equity issuance plan associated with your current capital plan as implying that HoldCo leverage like many or all of your peers will be a source of funding that will allow you to go from being an equity issuer in recent years to no longer being one while still maintaining the same CapEx profile, or is there something else to read into there?

Jamieson, it's Crystal; I'll take that one. No, there's nothing to read into that. Our structure remains the same in terms of capital structure. We still anticipate carrying a degree of debt on our revolver to finance the program. We will continue to do that, but have no intention to change the capital structure. Issuing equity in the current environment must be in pursuit of accretive growth. We will size our capital plan to keep customer bills in mind while maintaining a strong balance sheet.

Got you. Thank you for that. And should you leverage the HoldCo, do you have any concerns around the commission eventually imputing double leverage?

You're ahead of me, Jamieson. Our message to the commission and the ring-fencing we set up is the same company. Other utilities operate similarly, and we have no plans to change that structure. All unsecured borrowings are not in our capital structure, and none of this change the message we deliver to the commission.

Got you. Thank you. Very clear. And that's it for HoldCo questions. I just had two more quick ones here. One was just, how many years does the no equity commitment last? I know the question was asked earlier about whether when you roll forward to the five-year plan, would you be changing the messaging, and you said you wouldn't be doing that. But just wondering if you can give us any additional color on how long that might hold for.

Jamieson, I think your question is a bit like Jonathan's. It will hold for three weeks until EEI. However, every year we will assess our plans, financing opportunities, and other developments. No equity in the current five-year plan is our intention as long as the environment remains favorable. We will keep you updated annually as usual.

Got it. Thank you. And then, the timing of rate cases was already answered, lumpiness was addressed. Last one I have is, were there any asks that you had in this case, which in hindsight it might not have been the right time for, but anything that you might potentially reincorporate into your next rate filing to achieve or add to your regulatory tools at that point?

That's a good question, Jamieson. We experimented with some methods; we deviated from the historical test year. We believe three of those methods make sense. We obtained deferral on our wildfire program, allowing us to allocate more funds there. We will continue to explore those types of trackers and other mechanisms for quicker cost recovery in future rate filing.

Got it. Thank you very much. Appreciate the answers.

Thanks, Jamieson.

Hey, Jamieson, one other thing for you, you guys ask the hard questions, so we want to make it a bit difficult for you to get in with yours. Just a joke.

No worries.

Thank you, Jamieson. With that, we've exhausted all of our questions. Any closing comments, Brian?

From my perspective, Crystal mentioned 20 years; it'll be my 20 years on December 3, 2023. Travis has also been with us for 20 years. Collectively, the executive team has a wealth of experience. It's the people at this company that contribute to its greatness, and I want to extend my appreciation to all employees. It is a great company.

Thank you, Brian. With that, you may disconnect. If there are any other questions, please feel free to reach out. Have a good day and a great weekend.