NorthWestern Energy Group, Inc. Q4 FY2025 Earnings Call

My name is Jordan, and I will be your conference operator today. At this time, I would like to welcome everyone to Northwestern Energy Group Inc 2025 Year-End Financial Results Webinar. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, if you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. And if you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Travis Meyer. Please go ahead.

Good afternoon, and thank you for joining Northwestern Energy Group Inc's financial results webcast for the full year ended 12/31/2025. As Jordan said, my name is Travis Meyer. I am the Director of Corporate Development and Investor Relations Officer for Northwestern Energy Group Inc. Joining us on the call today are Brian Bird, President and Chief Executive Officer, and Crystal Lail, Chief Financial Officer. They will walk you through our financial results and provide an overall update on progress this quarter. Northwestern Energy Group Inc's results have been released, and the release is available on our website at northwesternenergy.com. We also released our 10-K premarket this morning. Please note that the company's press release, this presentation, comments by presenters, and responses to your questions may contain forward-looking statements. As such, I will direct you to the disclosures contained in our SEC filings and the safe harbor provisions included on the second slide of this presentation. Also note that this presentation includes non-GAAP financial measures and information regarding the pending merger transaction. Please see the non-GAAP disclosures, definitions, and reconciliations and the merger-related disclosures included in the appendix of the presentation material. This webcast is being recorded. The archived replay will be available shortly after the event and remain active for one year. Please visit the financial results section of our website to access the replay. With that behind us, I will hand the presentation over to Brian Bird for his opening remarks.

Thanks, Travis. Speaking about 2025, first and foremost, I want to talk about how we have done in terms of executing on our strategic initiatives. First and foremost, we announced our agreement with Black Hills Corporation, an all-stock merger of equals. We patiently waited and ultimately closed our acquisition of the Avista and 1126. We recently submitted a $300,000,000 or 131 megawatt South Dakota natural gas project to SPP's expedited resource adequacy study, and we are now including that project in our ongoing capital plan. And we acquired the Energy West and Cutbank Gas natural gas distribution assets. On the legislative and regulatory front, we have very, very good outcomes in 2025. On the legislative front, Montana Senate Bill 301 was signed into law, providing greater confidence for transmission investment in Montana, and Montana House Bill 490, signed into law, which clarifies and limits wildfire-related risks, protecting our customers, communities, and investors. So, again, a very good legislative outcome in 2025. On the regulatory front, speaking of wildfire, we also, as part of that legislation, we needed to get our wildfire plan approved, and we did get that approval from the Montana Commission in 2025. Additionally, we completed our Montana Electric and Natural Gas general rate reviews. Moving forward, thinking about the data center growth opportunities, during the year we signed our third letter of intent with Fonica for over 500 megawatts of data center capacity, and we progressed with Sebi from a letter of intent to a development agreement. So that is 2025. More recently, in talking about financial results, and Crystal will get into that here shortly, but we reported GAAP diluted EPS of $2.94 and our non-GAAP diluted EPS of $3.58. We are increasing our quarterly dividend by 1.5% to $0.67 per share. We are initiating our 2026 earnings guidance range of $3.68 to $3.83, and we are updating our five-year capital plan to $3,210,000,000, a 17% increase over our prior plan. Speaking of the merger with Black Hills, which we anticipate closing in 2026, we filed joint requests for merger approval in the states of Montana, Nebraska, and South Dakota, and we also filed with FERC. We recently filed our Form S-4 and joint proxy. Regarding the Montana IRP, we submitted our draft 2026 Integrated Resource Plan about a month ago. From a Montana data center perspective, as of yesterday, we advanced our friends at Atlas Power from a letter of intent perspective to a development agreement. I will speak to all of these topics a bit more after Crystal's presentation. With that, Crystal.

Thank you, Brian. In my comments today, I will cover our fourth quarter and year-to-date results. I will also cover, as Brian mentioned, our outlook for 2026 and our updated capital and financing plan. After listening to Brian, it has been a really, really busy 2025 with many accomplishments, and our team has worked incredibly hard to deliver on our results in 2025, achieving 5.3% growth off of 2024 on a non-GAAP basis. We delivered GAAP earnings of $2.94, which included impacts of merger-related costs, the regulatory outcome of the rate case in Montana, and a very warm fourth quarter. I will describe those adjustments in a bit further detail on a later slide. Adjusting for those items, as I mentioned, we delivered $3.58, representing our efforts after quite a few headwinds during the year to deliver upon our commitments to our shareholders. Moving on to the adjusted basis for the fourth quarter, we delivered $1.17. Our improved margin reflects new rates, a lot of regulatory execution involved in getting to those numbers, which were offset a bit by mild weather in the fourth quarter and impacts of market prices in our Montana PCCAM mechanism. That margin improvement was offset by a one-time charge in the Montana rate review, higher operating costs, which certainly included merger-related costs, and then depreciation and interest expense increases as well. Moving to discuss some of the adjustments for the quarter, weather for the quarter was unfavorable by $0.03, particularly compared to the mild 2024, and when compared to normal conditions, weather represented a $0.13 impact to us in Q4. The quarter was also impacted by $0.03 of merger costs, while the one-time charge for the Montana rate review outcome related to the Yellowstone County generating station and the disallowance of certain costs was $0.38, and $0.03 related to the PCAM reflecting the final order there. This was offset by a $0.12 tax benefit, which resulted in the $1.17 of adjusted earnings compared to $1.13 in 2024. On a year-to-date basis, our performance is driven by that improved margin, which was driven by regulatory execution, offset by a detriment of PCAM within of $0.09 from a full-year basis. From an O&M perspective, we certainly incurred higher costs associated with new maintenance at the Yellowstone County generating facility, maintenance at our other electric generation facilities, including significant spending on wildfire mitigation, as well as increased insurance costs and labor benefits. We also incurred higher depreciation expense of $0.27 and interest expense of $0.23. On slide 11, the weather was again unfavorable by $0.05 compared to normal, while in 2024, it represented a $0.18 detriment to our results. The second half of 2025 was particularly mild compared to the first quarter, which began with favorable weather. The merger-related costs were $0.15, while the Montana rate review disallowance I spoke to earlier was $0.38. We have sought reconsideration of that disallowance, but we do not have a clear timeline for any potential impact, which would likely occur in 2026 if applicable. As mentioned, there was also $0.12 in discrete tax items in 2025 when compared to 2024, which had $0.28 in benefits. Consequently, this brings us to $3.58 of adjusted earnings for our 2025 number, representing a 5.3% increase over 2024. Notably, given the headwinds we faced, the headwinds from our PCAM mechanism indicated that we will potentially suspend the sharing portion of that ongoing. Property taxes also increased significantly, which were collected through our rates, and we only recover a certain portion between rate cases, contributing to our challenges this year. With these challenges in mind, we are pleased to deliver $3.58 for 2025. Looking forward, we are initiating earnings guidance in the range of $3.68 to $3.83 per share, representing 5% growth at the midpoint from our 2025 results and remains anchored to our 2024 base. A significant part of this is tied to our updated capital plan, which Brian referenced in terms of the 131 megawatt generating facility in South Dakota. We also included incremental full strip ownership, and we are proud of closing those transactions effective 01/01/2026 to ensure resource adequacy for our customers. These drivers result in a 17% increase in our overall capital plan. You may recall our dedication to self-funding and only issuing equity when it is accretive. On an ongoing basis, the base capital plan underpinned by the $3,200,000,000 remains self-funded. However, with the incremental South Dakota generation investment represented here, we expect to need equity beyond 2026 to fund that investment. We anticipate managing it on a 50/50 debt-to-equity basis, which aligns with our commitment to maintaining high credit quality in our ongoing plan.

Thanks, Crystal. On slide 16, we focus on the merger with Black Hills and the benefits it offers to all stakeholders. This strategic combination represents a highly attractive value creation opportunity for both companies. It will increase scale and growth for shareholders, moving from 4% to 6% EPS growth to an expected 5% to 7%. It will double each company's rate base, totaling approximately $11,000,000,000, and provide significant growth opportunities. As a larger company, we will also be able to expand our investment opportunities and reduce risks, such as those posed by wildfires. Our customers will benefit through enhanced service and cost-effectiveness. The strategic combination enhances operational diversity, ensuring no single entity has control over more than a third of ownership from any jurisdiction. I will remind you that both organizations are committed to excellent customer service and operational efficiency. Also, as announced, we filed joint applications for approval in Montana, Nebraska, and South Dakota in Q4, with hearings expected in the second quarter of 2026. We are also advancing the integration planning effort, anticipating approvals and closure of this merger in 2026. Regarding large load customers, we are closely watching progress with data centers in Montana, particularly with Sadie, who has faced property concerns but continues to make headway. We expect to finalize a development agreement soon.

Thank you, Brian. As we analyze the data center landscape, we see significant interest in South Dakota. Many new large load customers that require internal capacity will find our infrastructure riders beneficial in assisting with generation cost recovery. The South Dakota PUC also has a well-established process in place for large load customers with a deviated rate tariff. Furthermore, we are awaiting progress on sales tax reform during this legislative session in South Dakota, which is crucial for attracting data centers. Our focus remains on moving our development agreements forward to further our initiatives in 2026.

We are happy to report that we have closed two portions of Colstrip. Additionally, our ownership has increased from 15% to 30%. This positions us not only to achieve resource adequacy in Montana but also grants us greater operational control. Moreover, with the acquisition from Puget, we bolstered our ownership from 30% to 55%. This also allows us to serve larger load customers more effectively. I feel more secure knowing we have both Avista and Puget as part of our operations, especially with unpredictable cold weather in Montana and South Dakota. The acquisition of these units was made at zero cost, significantly benefiting our customers in terms of reliability without imposing burdensome costs. We've generated a strong operational foundation for our customers in the future, with continued investments in necessary infrastructure.

In summation, as we move forward, we remain confident in our operational and financial future. Our ability to adapt and overcome recent obstacles positions us well for continued growth, especially through our merger and the execution of our strategic initiatives. I appreciate everyone's support as we continue our journey to serve our customers and shareholders effectively.

A reminder, if you would like to ask a question during the question and answer session, simply press star followed by the number 1 on your telephone keypad. Your first question comes from the line of Shar Pourreza from Wells Fargo. Your line is live.

Previously, you indicated that you would file a large load tariff in 4Q to address the cost for new data center loads. Can you update us on the timing and scope? What has changed versus the previous expectations?

Yes. Whitney, you are cutting out a little bit, but I will take the question. We had said we would file a large load tariff, but I would note that this was tied to signing an ESA. So we want to go hand-in-hand to file a tariff with a specific contract. Part of that conversation includes an existing GS2 tariff that we believe we could serve customers off of, but we want to strengthen that tariff to ensure that data centers are paying their fair share. We expect to file that once we have a signed ESA so that we can clearly outline the mechanics with the Montana Commission and demonstrate the benefits to customers.

Yes. The only thing I would add to that is, as I mentioned in the presentation, we expect to file it by the end of the second quarter when I hope we will have an ESA. The tariff is ready to go; we are waiting for the ESA.

Okay, sounds good. Hopefully, I am more audible now. Just for another follow-up, regarding the merger, there has been a focus on large load data center cost causation. Can you give us an update on the education plan to stakeholders to demonstrate no harm and affordability?

I think you are talking about the public process perspective. Yes, data centers have gained significant attention nationwide, and particularly in Montana, much discussion revolves around the utilities' role in supporting those developments. The community has voiced support for data centers, which offers a positive outlook on their potential contributions. The utility will actively participate in public meetings to support these efforts and ensure that we address any concerns regarding customer impact. We aim to provide transparency that reflects the benefits while protecting our existing customers within the tariff structure.

I wanted to discuss the load fund. It seems we have been waiting for an ESA for several quarters. Brian, you mentioned friction on land considerations with Sabie possibly lengthening that timeline. Are these issues affecting other prospective loads like Atlas? What do you think will drive these agreements towards completion?

I'll take a bit of a mea culpa here. Sometimes we have been the holdup for getting ESAs finalized. However, we've been ready from our perspective, while developers like Sabie struggle with land issues. It is important to understand that not only utilities but developers also need to find customers before they can sign ESAs. Atlas is moving toward a development agreement, and I am confident that progress will be made with all three potential data centers.

We have repeatedly emphasized the importance of cash flow availability when sizing our base capital plan. Despite the challenges in 2025 that resulted in lower cash flow, we are focused on maintaining robust credit metrics. With regards to our incremental capitalization, we have planned a disciplined approach with expectations consistent to our existing framework, especially when considering new loads.

Your next question comes from Nicholas Joseph Campanella from Bank of America. Your line is live.

I wanted to clarify the overall ESA strategy. I understand the system is seen as long, so dedicated frameworks for depreciation and other costs might not be necessary for the first few deals. How does the ESA fit into your overall tariff proposals?

Yes, our primary goal is to protect customers while we explore developing agreements. Our plan is to ensure that data centers contribute fairly to the system and assist in covering associated costs. We aim to work with regulators to nurture understanding of the value data centers bring to the grid and to clarify that they are paying their share.

Every data center has unique requirements based on their location, which will influence our approach. While we have an existing tariff, we must ensure that large load facilities are paying a fair share of costs, which is crucial to obtaining regulatory approval.

Finally, I want to address the environmental upgrades at Colstrip. We intend to ensure the plant remains economically viable but will act on any required upgrades to comply with regulations. We have hopes for technological advancements that can replace Colstrip efficiently in the future.

Thank you very much. That concludes the question and answer session. I will now turn the call back to Brian Bird for closing remarks.

In conclusion, I want to reiterate the positive outcomes of 2025. We may have encountered some issues regarding the rate review, but we continue to work diligently to secure a successful merger and ensure resource adequacy while maintaining service reliability and affordability for our customers. I am extremely grateful for the team's hard work throughout the year, and I appreciate our shareholders' support. Thank you all for your ongoing involvement with Northwestern Energy Group Inc.

That concludes today's meeting. You may now disconnect.