Q3 2021 NorthWestern Corp Earnings Call
Net income of $35 2 million compared with $29 5 million in the prior quarter of $5 7 million or 19, 3% improvement with diluted earnings per share of <unk> 68 versus <unk> 58 in the prior quarter with that I'll take you to slide five to give you a bit more color from a gross margin perspective, $227 3 million.
As compared with $212 6 million in the prior quarter, that's an improvement of $14 7 million or six 9%.
Of that the drivers really are a continuation of what we spoke about in Q2 with transmission revenue being higher by $10 1 million that really reflects market conditions or those who are using our lines to transmit power.
And it's a reflection of both higher loads and rates with the continuing warm and dry conditions to both the west and south of US. The other thing is solid retail volumes as well $8 $4 million of improvement at that line that reflects both.
Weather in particular July was awfully warm in our service territories in Montana, and South Dakota, along with customer growth and then continued both residential and improved commercial loads for the quarter those were offset a bit by one.
The 10% sharing in our Montana supply recovery mechanism, that's a $2 $1 million detriment again, we just spoke about the conditions of the summer with hot and dry weather with that power prices were higher and we took a charge of $2 1 million during the quarter, reflecting again that 10% sharing in our mechanism in Montana, We also had a.
$1 3 million detriment related to.
QF adjustment that we had discussed in Q2, and Thats really a mark to market of that position.
Without the next slide shows you weather again.
I've already alluded to the the conditions driving our margin improvement and ongoing fact pattern or as it relates to transmission with that we estimate favorable weather in Q3 resulted in a $3 $4 million pretax benefit as compared to normal and then a $4 million pretax benefit as compared to Q3 2020 as weather was not favorable.
In that quarter.
Slide seven gives you a bit more detail on our operating expenses for the quarter operating general administrative expenses were $80 9 million as compared with $73 3 million in the prior year. That's an increase of $7 6 million I would call out a couple of items and again continuing themes from what we discussed with you at Q2, which is $3 $3 million or higher.
Employee benefits costs that covers both compensation and medical costs.
Seeing a bit of a rebound in that trend from the prior quarter also higher technology implementation and maintenance costs of $1 8 million $1 3 million related to generation maintenance and then we also took a charge related to the initial.
Preliminary cost associated with the Aberdeen facility that we have proposed to construct during the quarter and we'll talk about that a little bit later at the not moving forward with the facility at that location those were offset in part a bit by lower uncollectible accounts or bad debt expense, you've seen that trend throughout this year as you think about the prior year a COVID-19 impact.
That period to this year resuming the normal.
Collectible accounts overall, that's a $5 million change in O G&A.
It falls to the bottom line of an increase there.
I would also mentioned property and other taxes $43 6 million compared to $45 3 million that is a decrease and that has driven a bit by lower valuation in Montana, while we still have higher plant investment.
With that I'll move to the next page.
Slide eight operating income of $55 7 million as compared with $49 7 million in 2020, that's a $6 million improvement or 12, 1% again that the medically overall margin improvement offset by higher operating costs.
I would also mentioned some improvement in interest expense and other income those favorable are really driven by the debt and equity portion of the M. D C.
Moving to slide nine cash flow again in continuing our themes here, you'll see their operating cash flows are significantly lower than the prior period, we talked about those in Q2, having been impacted primarily by supply costs that trend continued while we're collecting some of the gas cost that we incurred in the firm.
Quarter of 2021, we did continue to see under recovery of electric supply cost and you see that impact reflected in our $106 9 million dollar increase overall year to date and electric supply our overall energy supply costs and you can see the break out with the bottom between electric and natural gas from our core.
For perspective, Thats about a $20 million.
Continuing to trend as we think about it year to date.
Slide 10.
The non-GAAP earnings slide.
I would point you to a couple of things here again, we've already talked about the impact ongoing of favorable weather and youll see for the quarter five cents of favorable weather that we removed that compares to <unk> of unfavorable weather in the prior quarter their their item I would mention here is again that mark to market of the QF liability adjustment there with <unk>, but when you look at the COO.
<unk> 68 on a diluted EPS basis, adjusted $2 65 on a non-GAAP basis compared to the prior period of 58 cents of earnings adjusted the 50 965 on a non-GAAP basis compared to 59 cents again, driven by margin improvement offset by some higher operating costs.
Slide 11, I would mentioned that the quarter again was in line with our expectations I'll remind you that in Q2, we narrowed in our guidance event. We had had a wider range. It's been a year of 'twenty, we narrowed that down to 15 cents and have reaffirmed our guidance for 'twenty, one at $3 43 to $3 58 per <unk>.
Diluted share.
At Q2, we also discussed that.
We expect proceeds of $200 million in 'twenty, one from our equity offering and that's driven by higher capital, but also remind you we had delayed equity from 'twenty to 'twenty and in 'twenty. One are executing on that we are on track for $450 million of capital in 2021, which is a higher number than we've been at in prior years. So what.
That expect to say consistent with our guidance for 2021, and then broadly where close to <unk> here in a couple of weeks and with that we're looking forward to discussing with you our plans in 2022, including both guidance.
Capital program, and also where we will be going from an equity need perspective.
Back to you crystal it sounded like you were selling tickets.
Good job.
A couple of regulatory items first conservatively repower cost credit adjustment mechanism.
We had requested.
We requested approval to increase the base forecast.
Given that the existing fleet can really as energy driven capacity driven.
We implemented an interim.
And.
About $17 billion.
So lots of pleasure pardon me.
We implemented the interim subsequently then the consumer counsel filed a motion.
Arguing that the <unk> could only be adjusted in a general rate case.
We're disappointed that the commission granted that motion to dismiss however, we have not seen a written order when we do see that we will evaluate.
And certainly have the opportunity to request reconsideration review is that under the tariff the P. Chem base, maybe reset outside of a rate case.
Second concerning our the coupling mechanism as you know we requested that.
That would be suspended early on in Covid.
Disparate.
Direction of their residential and C&I sector is really.
Highlighted that the mechanism was a mismatch to its intended purpose.
And the commission voted to.
Grant our request to suspend we.
Consider that.
A real positive the consumer counsel requested reconsideration.
That was denied so thats a very good outcome and then finally I know, we'll come back and talk about this.
On May 19.
<unk> filed a request.
For approval of three capacity resources, including our.
Laurel plant.
We withdrew.
<unk>.
Request.
Simply to manage the supply chain issues and we're very much going ahead with the Laurel plant, Brian will come back and talk about that a couple of other.
Regulatory matters greatly below the radar FERC.
<unk> has initiated a routine audit.
Covering the years 2018 to present, we've responded to quite a few data requests haven't yet we're seeing a report but that is expected within the next six months, we can't really speak to the outcome of that and then just a couple of weeks ago work Western electricity Coordinating Council.
<unk> one of their audits, Brian Vice President for transmission My cash alone idle participated in the kickoff with our work Odyssey.
Tim we consider those to be constructive and important processes and we're looking forward to the results there.
Now moving on to the.
To the capital plan as Christal mentioned, we will be updating our.
Plans and discussing that with you at EI.
But as is reflected here. We currently have a $2 1 billion overall capital plan over the next five years, which we expect to finance with cash flows from operations.
First mortgage bonds and equity issuances and then as always.
Financing plans are subject to change.
Two important highlights too for this current plan.
First of all.
The plan is depicted here does include about $60 million for $30 to 40 megawatts flexible generating plant near Aberdeen, and we decided to discontinue our plans there as a result of significant increases in estimated construction costs.
The overall supply chain challenges.
We will obviously continue to monitor our customers' needs in South Dakota and Mick.
Appropriate decisions to address those on the other hand these.
These projections do not include about $275 million of anticipated investments in the 175 megawatt generation facility to be constructed.
Near Laurel. So this overall level of capital is anticipated to result in an annualized rate base growth of 4% to 5%.
With the acceleration of the Laurel project and the discontinuation of the Aberdeen project, we anticipate.
Anticipated, providing you an update.
Coming up in <unk>.
Just a few weeks.
And then I will turn it over to Chief operating Officer, Brian Bird for an update on the generation portfolio and also to report our progress on ESG matters. Thanks, Bob as Bob pointed out obviously, we withdrew our filing associated with a lower project, but we're certainly moving ahead with the project and in fact, we want to take advantage of the fixed price contract and.
Our customers for rising costs and everyone's seeing and also to get moving as quickly as we can on the project in case unforeseen supply chain issues arise.
Addition to that.
The Beartooth battery contract since the time period to build that facility is much much shorter than the Laurel plant. We do plan to bring that in front of the commission as a stand alone pre approval filing.
In fact, we plan to file that relatively soon in addition to that the power contract, which will actually go into effect in early 2022.
We'll be available to provide protection to our customers coming up.
In the coming winter season.
In regards to South Dakota.
We are in construction of a 60 megawatt plant and its going relatively well with COVID-19 and some other supply chain issues has been pushed out to early <unk>.
'twenty two.
But we're excited about seeing that come online here relatively soon as we pointed out as Bob pointed out in terms of the Aberdeen plant. We looked at the rising costs. We did not have an opportunity to lock in prices associated that project are still in the development phase.
And we were negotiating those prices, but it was we saw those prices go up.
I think that's the prudent thing and talked with the South Dakota Commission and talked about the expected increase in the price of that project.
And collectively agreed with the folks we discussed the matter decided to put a hold of the project and come back with.
Hope is a more reasonable pricing and then possibly with different alternatives.
Sometime down the road.
Moving on.
To ESG I guess I would say one of the big advantages of being a member of NASDAQ as they have services one of which is one report.
The tool that we could.
<unk> all of our ESG related information.
Certainly use that tool in the first half of the year recorded everything that we can capture today and loaded into one report we've now disseminate that information to those.
Folks that rate is from an ESG perspective, and we also dovetail that into the release of our brand new webpage, which is youll see that ESG is very very prominent in that we're already seeing some improvement in some of our scores and we expect to see a bit more as people continue there.
<unk> is looking at our information and with that I'll send it back to Bob.
Okay and with that we're ready for your questions.
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It looks like we have our first question in the queue from Ryan Greenwald of Bofa, Brian.
Okay.
Ryan is your line on mute.
Hey can you hear me.
Okay.
Awesome I appreciate the time good afternoon, everyone.
Hey, Ron can you talk can you talk a bit about latest conversations with the rating agencies. Following withdrawal of the pre approval application in the P. Chem order out of the commission.
It sounds like we're going to get some more information at UGI here, but anything preliminary you can say just in terms of potential equity needs into 'twenty, two and initial thoughts around timing and cadence whether it'd be a block or another ATM.
Okay.
Ryan Crystal here, Thanks for the question.
First I will take the first part of your questions. We did speak with each of the ratings agencies as we made.
We made the decision to move forward with the Laurel project and the importance of that given as Brian alluded to having fixed price contract on the table being able to progress quickly and be able to execute on that from a customer perspective, I think the ratings agencies understand the perspective of that side of it moving forward for our business side of it we also understand the other piece.
So that as you are looking for us to get recovery in win rates and that'll be chief of mind for us as to how we progressed with the Montana Commission and work together to accomplish that with your question with regard to 'twenty two happy to talk about that and Im looking forward to it.
One footnote on the ratings agencies, just a couple of weeks ago. Moody's did an excellent presentation to the Montana Commission, they're laying the foundation for what the ratings agencies do how they looked specifically at utilities and then how they evaluate northwestern energy.
Was really well received by the commission a lot of good discussion presentation at least.
The video is available online.
Dakota Commission is very interested in having a similar presentation of course, our view is the more our regulators understand the better for all.
Understood. Thank you and then can you help quantify the magnitude of inflationary pressures that you guys saw with Aberdeen before opting not to move forward with the project was the balance sheet, a limiting factor at all or was where the concerns religious oriented around elevated rates with the higher costs.
No I think we were saying prices upwards of 50% higher than we originally scene.
And Thats why based upon that news, if we thought it made sense to sit down and chat and collectively made a good decision. We believe the balance sheet, certainly obviously, we want to invest as much capital as we need but that was not the factor as to why we decided not to move forward.
Understood. Thank you and then maybe just lastly, I know you alluded earlier in terms of the fixed costs for Laurel here, but is there anything that's open in terms of that contract in terms of the $2 75 that could be subject to.
Price movement.
Not that I can think of Ryan.
Great I'll leave it there thank you guys.
Thanks, Brian Thank you.
We'll take our next call from Jameson or is his friends column James Ward from Guggenheim.
James.
Okay.
You guys have triple immune to think here can you hear me now.
Alright, perfect I had I dialed star six hit.
Hit the mute button on the screen and then another one popped up in the bottom corner.
Three factor also.
Identification I guess I love it as extra secures cyber security is a big advantage.
A layer of security for the equity analysts I love It when I was saying there to Travis comment I said boy Count you among those friends so feel free to call me a Jewish so.
The question on iodine was already asked and answered.
50% higher is very clear.
2022, EPS guidance I understand Capex and.
Presumably how youre going to finance that.
In some way shape or form will be part of the discussion.
Will 2022 EPS guidance come at the same time.
Or will that come later, absolutely we'll be talking about both 22 EPS guidance, along with capital plans, obviously with with things shifting with both Laurel accelerating in Aberdeen, moving will be updating capital EPS and all financing plan.
So you got to be there.
Well certainly will be.
The final question I have is on Laurel.
You mentioned in the release that towards the end of last week there was.
Unfortunately, another lawsuit filed.
I mentioned the potential for that to delay construction, how should we think about the timing on when you could start construction.
How this could impact.
Well, maybe I'll just start up there.
How could this affect timing and then.
The start date and the financing.
I will I'll say, a couple of things and turn it over to our COO.
Obviously, we were disappointed by the litigation it seem to be on timely in terms of the administrative process followed we were encouraged to hear.
Today from the Governor that we will be side by side with the department and defending.
The lawsuit, but obviously this is Monday we.
<unk> that just several days ago. So our legal team is evaluating Brian yes, what I would add is the biggest time factor at this point in time is getting the engines manufactured.
From a site preparation standpoint in permitting there are certain things that we're working on will continue to work on that during this process, but it's the engine that will take time and so I think there'll be a lot of time that can transpire. If you will via the lawsuit that we can be working on some other things.
Got you well it sounds like you've got.
Some good allies there.
Which is very nice to hear it last question would be just on those the construction of those engines, where would that be taken place summarized units or European in origin.
Others, rather than just assuming I figured I'd just ask the question.
Where we have had.
Engines in the past for Bgs produced in Germany, and shipped and we'll be doing the same here for Laurel beautiful. Thank you very much guys look forward to seeing you at EI.
Yes.
Thanks James.
We'll take our next question from the line of Jonathan Reeder at Wells Fargo Jonathan.
Don't forget the triple on mute.
Yes.
Alright can you hear me now.
Yes, sure Ken Jonathan Yes, it takes a while for that on mute button pop ups.
Apologies for that.
Just kind of piggybacking on that last question just to be clear you've given I guess the contractors for Laurel. The notice to proceed then right where we're definitely moving forward, it's not that you intend to do it before.
Sometime in the future when it's when you have to execute upon the fixed price.
We were in the final stages on final notice to proceed I'll leave it at that.
Okay.
And then Matthew.
Front run the Capex refresh, but it sounds like despite this environmental lawsuit you are going to be rolling that Laurel plant them into the forecast, even though I guess that has the potential to derail it.
Absolutely.
Okay is it safe to assume these global supply chains and inflationary pressures are also impacting kind of the base Capex budget.
So if you want to accomplish the same amount of work as contemplated in the current budget.
It costs more to do so.
Yes, it's a good good question matter of fact, a question that was raised by the board yesterday and when we got the capital budget approved.
I would say it two ways at the time that capital budget is put together in July and we considered increase.
The increase in cost from an inflationary standpoint, but I'd argue that since July even we're seeing a bit more change there. So it's something that we certainly want to keep our eyes on I think what what might be an offsetting factor to some increased cost as concerns about supply chain concerns about other things that could slow construction too. So we kind of felt that we probably will end.
Up about where we planned initially.
And Youre, saying you planned initially from a dollar perspective, but.
So from a dollar perspective.
From a dollar perspective.
Okay, and then I guess in terms of though like getting.
Certain amount of work actually done.
Going forward you will have to look at what it's going to cost to get that done bounce not against here.
Expect a great impact in and figure out what the sweet spot is there.
Correct.
Okay and then.
Your comment on supply chain is.
The board management is paying a lot of attention to supply chain issues, both sides costs and availability.
As the entire industry and we're participating in the industry effort too.
To manage through the certainly the challenges don't seem transitory in the sense that they will.
Operating in a period of weeks or months.
And I guess just to be a bit more clear from my perspective, obviously that the supply chain issues and other issues that could cause work to slow.
Thanks.
I think it's an essence of cutting of projects as much as pushing projects out into the future.
Gotcha that makes sense.
Okay.
And then.
I'm trying to.
Follow up on that I lost my train of thought.
Just two housekeeping.
One housekeeping item the $2 $7 million pre tax reversal of the previously written off uncollectible accounts was that anticipated in the 'twenty, one guidance or was that kind of a.
An upside surprise.
I would say that was with in line with our expectations.
Okay, alright, well, thanks, I'll leave it there I appreciate the time.
Thanks, Jonathan.
And with that we are I think our Monday morning call has felt we did just have one come into the queue here.
It is the last four digits three four to five.
Hey, guys can you hear me.
Yes, we can who do we have hey, this is Eric Peterson from Millennium.
For taking my question.
Just just real quick on the project up in Aberdeen.
Can you give us any flavor on weather.
Capacity it'll still be there in the next generation of <unk>.
<unk> next year.
At Antelope.
You too.
I think.
Sorry, I didn't interrupt if you had a further question ill pause and let you keep going.
Okay.
Was that charge offs adjusted out in your non-GAAP earnings this quarter.
No I have well I will let the CFO answer that question I'll take the first question.
I think the capacity need still exists in South Dakota, I think we just want it will continue to manage that and use other means to close that gap and.
In the short term, but continue to evaluate what we want to do longer term, there and again understanding what pricing has done in the future.
Come back at some point in time, the next RFP and make a decision here.
And Eric This is a quick follow the second part of your question is what's the charge offs related to those initial costs at Aberdeen non gapped out it was not it is in our earnings.
Earnings.
Got it okay. Thank.
Thank you guys very much.
Thank you Sir.
Good morning.
Yes.
Yeah.
It looks like we have one more question in the queue that we're trying to get through here.
See if this works it is from the line of Matt Davis I believe.
Matt We just allowed you to speak if.
If you guys can you hear me yes.
So I just had a question on the Aberdeen project I mean, I understand that pricing has gone up roughly 50%, but what based on what.
You are seeing in the energy market as well as in the capacity market in your region would be extreme.
Cost as well as the probably believe that project was expected to come online sometime in 2024, so a little bit later in the.
The planning Horizon why go ahead and make that decision now.
And how do you and this includes a 50% increase in the project cost enough to kind of outweigh what youre seeing in the energy and capacity markets.
Yes, I think the main thing was when you sit down with the commission as talent you wanted to give them a heads up as we move forward. This project at this point in time.
This is what we expect to see and we've talked about alternatives and we collectively agree that probably makes sense to wait and we added aster for certain other things. We can do in the short term. We did say we had alternatives and we would collectively look at that in the next RFP.
You might remember we initially Aberdeen was something you didn't necessarily contemplate in the first IOP.
We adopt from an expeditious standpoint, we could forge ahead with that and we were.
We were certainly planning to head that direction.
But again the good dialogue, we have with the commission. It just was a collective decision to not move forward.
And then just one other one in terms of thinking about the moving pieces around the capital program I get that your your base plan probably has some inflationary measures but is it just is simply is thinking about.
Putting in Laurel and subtracting out <unk>.
Burdine or are there other other pieces to the puzzle.
We'll be discussing the updated capital plan in great detail.
Honestly excited.
About the good and important work ahead of us.
So it's not simple matter of trading out one for one.
Okay. Thank you.
Thanks, Matt Thanks, Matt It looks like we have one more question in the queue from Andy Levy.
Andy we're opening your line.
Yeah.
On mute.
At work.
That works.
Yep Yep.
The old Guy and I can figure it out quicker than the other guys.
[laughter].
Youre and technologically adept.
Hey, Yeah, I can push a button.
Doing all right everything good.
Very good.
Good good good.
Okay. So just two questions.
First just on a natural gas in general.
If I remember correctly right you guys made several acquisitions.
On the.
Natural gas side as far as resources is that correct and are there still flowing gas.
Are those still flowing gas.
Yes, okay.
<unk>.
And so.
Could you just I have a couple of questions around that but could you kind of just explain how significant that is as far as helping you. This winter.
On supply priced.
Pricewise.
Okay.
Say, a couple of things and then turn it over to again, Brian our COO.
Montana in particular think about the integrated system that does have some.
Owned supply that has a lot of storage and transmission and storage at <unk>.
Both ends of the system, so that gives us flexibility in terms of bringing gas in <unk>.
Several points on the system store in purchasing in store and gas.
In the off season, when prices are relatively more attractive.
And then moving gas around the system, so that puts us in heidrick, a much better position than if we were.
Simply.
Local delivery system. So that's a real positive Brian Yes, I would say two things first of all we thought that buying gas reserves made sense to some rules were changed at the commission that made it difficult for us to do more of that we would liked to have done more particularly for events like this with higher prices, but I would say were about 10 to 15 <unk>.
Percent.
Of that purchase gas is available to us.
At this point in time and the nice thing Bob mentioned stores that we have in our system, we're able to use that storage and fill it up and save it for peak periods in the winter season, and that provides about 50% of the gas that we use. So we certainly is that that's a nice advantage of our system.
When you when you say, 10% to 15% that that's your total supply not what you're using from the <unk>.
George that you have that correct total supply total supply Andy right. Okay.
I don't know that it's been a while since we discussed this.
What do you have as far as reserves like what's the total amount.
Or that you actually.
Produce on an annual basis.
You know I am Andy years ago, we used to have those slides in our deck and we've talked a lot.
Okay. Okay. Okay. So okay. So that's fine you don't have it right now thats about what we can discuss that.
And then and then I have like a bigger picture question about that I understand this.
Okay.
It's a rate base type of private project product okay.
The same time, you need equity and obviously equity effects.
In our rates and effects the customer as well.
Are there any thoughts again, you know, it's kind of paying its dividends. This year, but also the price of gas has gone up so.
So dramatically and the price for assets have gone up so dramatically.
Have you ever thought of monetizing those assets in lieu of doing equity.
That would be a no.
Okay fair enough stuff the Pops in my head.
It is good we always appreciate your ideas.
Well some people do I don't know about my family.
Right.
It depends it depends on the family member and then and then the last quite often as a hero of home.
That's true and then the last question I have.
It's just again around the amount of equity that you need not not the actual dollar amount.
But just to get your thinking on because I truly believe that the ATM is affected your stock price.
On a relative basis, and so any thoughts kind of around that versus just.
Someone like myself for the other people you know since kind of buying the shares from yet.
All at once and then taking that pressure off the stock since it doesn't trade that much by same question I ask every quarter.
Crystal.
We appreciate your rebounding interest in our stock we think its a good holding do we hear you on the.
My comments on technical execution would be the only thing I have to say about that we hear you.
I Hope you are Andy on your previous question.
You asked the amount of Bcf.
If my math serves me kind of on that 10% to 15% I would argue it's about three three bcf.
Okay, that's great Oh I see.
Okay I'll see you guys soon in Florida, and look forward to seeing you in person.
Can you hear me, yes, yes.
Thank you Eric Yeah, Okay, Hey, guys. Thank you bye bye.
All right looks like we have another call coming in from the line of Paul Patterson, Paul We are opening up your line now.
Hey can you hear me.
Yes.
Okay.
Okay.
We lost you know.
Sure.
Barely.
I'd say your tax.
Yes.
Yes.
Yeah.
Second area.
My question is basically.
With the Aberdeen increase of 50.
<unk>, 50% it sounds.
Like hyperinflation was there any.
Specific driver.
Drivers or can you just give a little more Colorado.
Apologize if I missed it.
No I didn't give any is there any specific drivers I'm thinking about the total cost and it wasn't just one particular component.
But from a total cost perspective, it was upwards of 50% increase all in.
Okay.
Okay. So it's just everything is pretty much came together that it seems so big.
Yes, it does.
Okay.
Thanks, so much I really appreciate it.
Thank you thanks Paul.
Alright with that I think we have now exhausted our queue I'll hand, it back to Bob for a quote okay. Thank you all for your interest in a very good discussion and the theme here is we're all going to have lots to talk about.
So we're looking forward to seeing most of you many of you in person and some of you probably online.
Take care and be safe.