NorthWestern Energy Group, Inc. Q2 FY2024 Earnings Call

Good afternoon, and thank you for joining NorthWestern Energy Group's Financial Results webcast for the Quarter Ended June 30, 2024. My name is Travis Meyer. I'm the Director of Corporate Development and Investor Relations Officer for NorthWestern. Joining us today to walk through the results and provide an overall update are Brian Bird, President and Chief Executive Officer; and Crystal Lail, Chief Financial Officer. NorthWestern's results have been released and the release is available on our website at northwesternenergy.com. We also released our 10-Q premarket this morning. Please note that this company's press release, this presentation, comments by presenters and responses to your questions may contain forward-looking statements. As such, I'll direct you to the disclosures contained in our SEC financials and safe harbor provisions included in the second slide of this presentation. Also, please note this presentation includes non-GAAP financial measures. Please see the non-GAAP disclosures, definitions and reconciliations also included in the presentation. The webcast is being recorded. The archived replay of today's webcast will be available for 1 year beginning at 6:00 p.m. Eastern today and can be found in the Financial Results section of our website. With that, I'll hand the presentation over to Brian Bird for opening remarks.

Thanks, Travis, and greetings to all of you from Great Falls, Montana. We have a Board meeting here this week, and we had an opportunity to tour some of our hydro facilities. That was great fun, and I had the opportunity to meet with Energy West employees this morning here in Great Falls. Our recent highlights as noted on Page 3: we reported GAAP diluted EPS of $0.52 and non-GAAP diluted EPS of $0.53. We're affirming our 2024 diluted EPS guidance of $3.42 to $3.62. We're affirming our long-term 5-year rate base and earnings per share growth rate targets of 4% to 6%, and we declared a dividend for the quarter of $0.65 per share payable September 30, 2024, to shareholders of record as of September 13, 2024. I'm sure that you've seen that we filed rate reviews in Montana Electric & Gas and South Dakota Natural Gas and Nebraska Natural Gas; those 3 jurisdictions within 2 months. It's the first time since we’ve had the Montana Power assets in the NorthWestern public service assets certainly since that merger that we filed in all jurisdictions in this short period of time. It's an effort we continue to invest high levels in all jurisdictions. In a rising cost environment, we need to make these rate review filings. We need to earn closer to our authorized rate of return. I will get an opportunity to talk about 2 strategic transactions, and the first being, we've entered an agreement to acquire Energy West Montana's natural gas distribution system, serving 33,000 customers for $39 million. We've also entered an agreement to acquire Puget Sound's 370-megawatt ownership interest in Colstrip Units 3 and 4 at no cost. Take a look at our NorthWestern value proposition. We are still providing a 5% dividend yield today. When you consider just our base capital plan, you'll see a 4% to 6% EPS growth on top of that, providing a 9% to 11% total growth. When you can take into consideration incremental opportunities for transmission, incremental generating capacity, QFs or other power purchase agreement buyouts, electrification supporting economic development, and like these 2 transactions today, we are endeavoring to grow this business and provide a better value proposition for our shareholders and much like these acquisitions provide better outcomes for our customers as well. With that, I'm going to hand it over to Crystal to talk about the second quarter financial results.

Thank you, Brian. In my comments today, I will discuss our financial performance for the first half of the year, with a focus on Q2 here and also discuss our outlook for the remainder of the year. Additionally, my comments will address the rate reviews that Brian alluded to, to give you a bit more detail on those and how we're thinking about them. Being here in Great Falls is fortuitous timing; our Board likes to be out with our employees and our management team. You'll see the results that Brian alluded to, a strong financial performance in Q2 with earnings per share of $0.52, compared to $0.32 in Q2 of 2023 — a significant improvement in performance there. GAAP net income of $31.7 million gave a $12.6 million improvement or 66% since 2023 on an adjusted basis. The only adjustment in Q2 here is weather. On an adjusted basis, that's $11.8 million or 58% improvement. You see our results for the quarter and the details as to what's really driving those. The key driver here is really that focus on regulatory execution and outcomes, driving $0.26 of improvement from a margin perspective. These were offset in part by some operating cost pressures, including labor and some cyclical planned generation maintenance. You also see some offsets with depreciation and interest expense, leading to $0.52 on a GAAP basis and $0.53 on a non-GAAP diluted basis. Overall, we are pleased with our financial performance for the first half of the year and on track to deliver solid results for 2024, driven by those constructive regulatory outcomes.

Before I do that, I just want to reiterate the point. Filing in all our jurisdictions within the last 2 years is important to send the appropriate price signals to our customers, making sure we're investing the right amount of capital to serve our customers, while also earning closer to our authorized rate of return. This is different than what we've done in the past. We haven't been this quick to turn around rate reviews to improve our recovery. I want to give a shout out to Crystal and her finance team and others involved who have worked hard to get to this point. On the strategic update, I am very pleased to report the acquisition of Energy West and Cut Bank Natural Gas. We believe this should fit nicely into our business. We always wished we could own these Montana resources. This acquisition adds 33,000 customers, approximately 15% of the gas customers we have in Montana today. We are also excited about our ability to acquire an incremental ownership in Colstrip, which adds more ownership in a reliable resource that we've had for decades. This resource provides crucial grid support when our customers need it most, allowing for less exposure to market volatility on peak days with high energy prices. This transaction is essential because it allows us to guide future investments at Colstrip for our customers. We see Colstrip as a bridge to cleaner alternatives down the road while maintaining reliability and affordability for our customers. We understand the potential for the rate impacts of that, and the recovery of this facility is offset by a reduction in costs. The next best alternative to providing 370 megawatts of dispatchable capacity is a natural gas plant, which would cost over $700 million and would not be available for at least 5 years. We’re excited about this opportunity. It’s fantastic for customers and also provides a great opportunity for our shareholders as we look to invest in our business. Regarding Montana wildfire mitigation, we have recently released Version 2.0 of our wildfire mitigation plan. I’m extremely impressed with the response from our company over the last 6 months. We are monitoring our system better than before and feel much more prepared than even a year ago to address significant problems for our industry.

Great. Thank you, Brian. And thank you, Crystal. It looks like we're going to take our first question from Jeremy Tonet at JPMorgan.

Can you hear me?

I can hear you, Robin.

With the Yellowstone County Generating Station on track for 3Q and now 2 no-cost Colstrip acquisitions in the pipeline, any updated thoughts on the timeline for a potential type of incremental CapEx opportunities that you may opt for?

I would tell you this. We've been making a tremendous amount of investment in our T&D business and are looking at investing even more in our transmission business. There’s been a tremendous amount of opportunity above and beyond generation in Montana. We need to continue to grow and make future investments to serve our customers.

To follow up on the generation piece, how specifically does the second Colstrip transaction influence your timeline for closing the generation capacity deficit in the state?

This certainly helps us get to around the end of 2029 from a capacity standpoint. It allows us to grow our portfolio that we need to replace with investments on a longer-term basis and helps in serving incremental load in Montana for economic development.

We're going to take our next call from Jamieson Ward now at Jefferies.

How should we think about the timing delay between when you will likely stop AFUDC and when it will enter rates?

We requested a bridge rate to cover costs as we transition to final rates. This bridge will ensure customers see reductions, and the process will help us work through the details with interveners and the commission.

I appreciate that. Just a final question regarding the upcoming changes to the Montana PSC.

Regardless of who wins the elections, having some consistency will be helpful. Our goal is to educate the new commissioners on the energy space in a short period of time. We will be there to help as needed.

Next in the queue comes from Alex Mortimer at Mizuho.

Can you quantify the costs associated with potential pollution control equipment for Colstrip?

For the full plant, the estimate is approximately $400 million; for our 55% ownership in the overall complex, we're thinking in the $200 million to $250 million range.

Is there a desire for an additional cushion above the 14% FFO to debt ratio?

We believe having a cushion is significant in serving customers and providing liquidity. We feel good about where we're at while maintaining that cushion for adverse events. As we look toward 2025 guidance, we will be updating you following Q3, as regulatory outcomes will be critical in reducing the lumpiness of earnings.

I want to thank you all for your participation today. Take care.