Earnings Call Transcript - NWE Q4 2022

Travis Meyer, Director of Corporate Finance and Investor Relations Officer

Good Friday afternoon, and thank you for joining NorthWestern Corporation's financial results and webcast for the year ending December 31, 2022. My name is Travis Meyer, and I am the Director of Corporate Finance 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, joining us to discuss the results. NorthWestern's results have been released and can be found on our website at northwesternenergy.com. We also released our 10-K this morning. Please be aware that the company's press release, this presentation, comments from the presenters, and responses to your questions may include forward-looking statements. I encourage you to refer to the disclosures found in our SEC filings and the safe harbor provisions noted on the second slide of this presentation. Additionally, this presentation contains non-GAAP financial measures; please see the relevant disclosures, definitions, and reconciliations included today. The webcast is being recorded, and the archived replay will be available for one year starting at 6:00 p.m. Eastern today in the financial results section of our website. Now, I will turn it over to NorthWestern's President and CEO, Brian Bird.

Brian Bird, President and Chief Executive Officer

Thanks, Travis. I think many of us would agree, 2022 was a challenging year on many fronts, but we also had some very good outcomes in '22. From an operational performance standpoint, we maintained a safe and reliable service while reaching new all-time system peaks for both our electric and gas businesses in 2022. We also had significant storm response, both in South Dakota, with two that occurred during May and with substantial flooding in both Montana and Yellowstone National Park. Our employees did a great job responding to that. We were acknowledged by EEI for our response. We are also one of the few utilities with improved JD Power Customer Satisfaction scores in 2022 and most improved for both electric and gas among the West Midsized peers. We were recognized by Newsweek as one of America's most responsible companies, one of the 13 of the EEI companies acknowledged by Newsweek. We also had very good regulatory execution. The rate case continues to progress well in Montana, and we received interim rates in October. We had our largest capital investment year ever at $580 million invested in 2022, and most importantly, we did that safely. We announced our Net Zero by 2050 at the beginning of 2022 and have since published our TCFD and SASB aligned Sustainability Report. Regarding Colstrip, I would say reliability, affordability, and sustainability were important factors for this acquisition. It's a known asset to us and has been a hugely reliable resource for Montana customers in the past. It's going to help us avoid lengthy planning, permitting, and construction of any new facility, thereby reducing our reliance on imported power and exposure to volatile markets. We negotiated an agreement with Avista to transfer our Colstrip ownership of 222 megawatts effective December 31, 2025, for a zero purchase price. This is a substantial win for our customers and will help us fill in gaps when we need it most. The variable and fixed operating costs to run Colstrip are approximately $2 million, compared to $12 million on the market in the same week. Our existing ownership in Colstrip saves customers $10 million. So it's quite clear why we would love to have more of Colstrip to provide continued value. With that, I'll pass it over to Crystal.

Crystal Lail, Vice President and Chief Financial Officer

Thanks, Brian. And before I walk you through the '22 financial results, we acknowledge it is a Friday afternoon before a holiday weekend, so we appreciate your interest in joining us this afternoon, and we'll keep our comments brief. Brian just covered the key things we executed upon in '22, which was crucial for laying the groundwork for a strong rate case that we're working on with staff and the commission, along with continuing regulatory execution. From a credit metrics perspective, we resolved our negative outlook with Moody's and laid a strong foundation for growth as we move forward. On Slide 6, I'll begin with our fourth quarter results, which we closed out for Q4 of '22 at $1.16 on a GAAP basis and on a non-GAAP basis, that's $1.13. Compared to 2021, our GAAP basis increased by $0.20 and on a non-GAAP basis, $0.09. For the full year, we came in slightly at the low end of our guidance range, concluding on a GAAP basis at $3.25 and $3.18 on a non-GAAP basis. On Slide 7, I'll highlight some significant drivers for the year, which impacted us, especially the storms Brian laid out that were critical to our customers. We did expect to see some higher O&M, which amounted to a $0.20 headwind. We faced increased interest expenses and encountered volatility in the market, including $7.2 million detrimental impacts from PCCAM, where 90% of those costs are passed to customers. Overall, despite challenges from extreme weather impacting our balance sheet, we saw a solid performance for the fourth quarter, finishing with $66.7 million compared to $51.3 million in the prior period, an improvement of $15.4 million or 30%. On Slide 11, we see our full-year net income, finishing the year with $183 million compared to $186.8 million, a decrease of $3.8 million or 2% on a GAAP basis, resulting in $3.25 compared to $3.60 for the prior year. Our focus remains on improving credit metrics, and while we are not offering '23 earnings guidance until we conclude our rate case, we will continue a significant capital program consistent with previous guidance. With that, I'll hand it back to Brian.

Brian Bird, President and Chief Executive Officer

From a capital investment perspective, over the last five years, we invested about $2.1 billion, and now we're forecasted to invest approximately $2.4 billion in the next five years. This investment will address generation and transmission capacity constraints as Montana continues to grow. We are focusing on grid modernization on the distribution side, renewable energy integration, and addressing capacity constraints. Yellowstone County construction began in early '22, and we are on track for commercial operation in the first half of 2024. We've also filed for our integrated resource plan in Montana, which will consider changes under the IRA and our acquisition of Colstrip. We'll share more details during the April earnings call. Lastly, I want to emphasize our strong position for 2023 and the future, even amidst industry headwinds such as inflation and increases in costs. I believe we have significant tailwinds supporting our company moving forward.

Travis Meyer, Director of Corporate Finance and Investor Relations Officer

Thank you, Brian and Crystal. We will take our first call from Jamieson Ward from Guggenheim. Jamieson, your line should be unmuted.

Jamieson Ward, Analyst

Perfect. Yes, it is. You got a little pop-up there now that actually says stay muted or unmute. That's quite helpful. I think that should make the call go smooth. Thank you for taking my question here. I appreciate it. I understand that you're not going to be issuing '23 guidance until after the rate case. However, you opted to put out a full five-year capital plan, which was great. I'm curious about the base year and if you are soft signaling to reevaluate what an appropriate base would be and potentially unveil that after the rate case.

Crystal Lail, Vice President and Chief Financial Officer

Jamieson, you have great attention to detail. Correctly, we will evaluate what our base year is as 2020 is quite dated. Expect to see an updated base when we come out with guidance.

Jamieson Ward, Analyst

Got you. That's clear. The second question pertains to rate base and comparing the CapEx year-by-year. It's still looking comparable from a dollar standpoint. How do you get rate base growth of 4% to 5% if the dollar amount being invested stays the same?

Crystal Lail, Vice President and Chief Financial Officer

Great questions, Jamieson. We opted to give CapEx guidance knowing you would inquire about it. The roll-forward represents a steady approach with a CAGR perspective. We're focused on our FFO metrics while ensuring to drive affordability for our customers. It's indeed a balancing act between capital investment and managing costs.

Brian Bird, President and Chief Executive Officer

The concern with some regarding capital needs associated with Colstrip is valid; however, we believe that acquiring it reinforces our commitment to reducing risks for our customers. Our existing capital plan demonstrates consistency in our investment approach, addressing the growing needs of our communities.

Jamieson Ward, Analyst

Very helpful insights. One last question on FFO, with the previous target being 14% to 15%, is it now greater than 14% the new normal, or should we resume to the previous target in the future?

Crystal Lail, Vice President and Chief Financial Officer

Great attention to detail. Above 14% is our current target, indicating we're unlikely to target significantly above that. However, we're not changing our strategic approach regarding our credit metrics.

Anthony Crowdell, Analyst

Hi. Good afternoon. Can you hear me?

Brian Bird, President and Chief Executive Officer

Hi, Anthony, we could hear you.

Anthony Crowdell, Analyst

Just a few questions regarding the Colstrip acquisition. Does it flow into rates as you acquire it for zero?

Brian Bird, President and Chief Executive Officer

The acquisition will not have upfront capital costs, but we plan to ensure recovery of operating costs starting January 1, 2026. We have strong support from local stakeholders, which should aid in our recovery efforts.

Anthony Crowdell, Analyst

Can you use Colstrip as a merchant facility to help offset the volatility you are seeing?

Brian Bird, President and Chief Executive Officer

We can operate it as a regulated resource and do not necessarily need to operate it as a merchant. We're focused on managing the asset to buffer against market volatility. Our acquisition strategy is to alleviate risks for our customers.

Anthony Crowdell, Analyst

What about the FFO to debt ratio? When do you anticipate reaching 14%?

Crystal Lail, Vice President and Chief Financial Officer

We are targeting to reach that number based on the outcome of the rate case. If the outcome aligns with our expectations, we could reach 14% by year-end.

Sophie Karp, Analyst

Hi, good afternoon. I have a question regarding the filing of the IRP, which is slightly delayed. How are you evaluating options under the IRA framework with the acquisition of Colstrip?

Brian Bird, President and Chief Executive Officer

The new capacity accreditation and our need for resources are being assessed in light of Colstrip's transfer. We are also considering the impacts of inflation and supply chain challenges on costs, which require comprehensive evaluations for our resource plan.

Sophie Karp, Analyst

Can you comment on the broadview decision and how interconnect facilities might impact power supply costs?

Brian Bird, President and Chief Executive Officer

While we are disappointed with the broadview decision, Colstrip's presence helps reduce capacity requirements. New contract additions may add costs which could hinder operational flexibility. We strive to balance our resource mix effectively.

Crystal Lail, Vice President and Chief Financial Officer

Thanks, Sophie.

Travis Meyer, Director of Corporate Finance and Investor Relations Officer

Thanks, Sophie. I think with that, we've exhausted our queue of questions. I hand it back to Brian for any closing remarks you might have.

Brian Bird, President and Chief Executive Officer

We are excited about the future and the opportunity ahead of us. Despite industry challenges like inflation and rising costs, we are confident in our strategic direction and optimistic about what 2023 holds for NorthWestern Corporation.

Travis Meyer, Director of Corporate Finance and Investor Relations Officer

Thanks again for joining us on a Friday afternoon before a holiday call. Please feel free to reach out to me personally if you have any questions following the call. And with that, you may now disconnect.