Q1 2022 NorthWestern Corp Earnings Call
Website with that I'll hand, it over to northwestern CEO , Bob Rowe. Thank.
Thank you Travis and thank you all for joining us.
Meeting this week in Butte America, where we're having yet another good heavy late season snow storm very much needed.
We're continuing to build up snowpack across cross, Montana, which is great.
The board came in a day early which was an opportunity to.
Get them out meeting quite a lot of our employees and visiting some key facilities in the Butte area local distribution.
Center grid control, the new distribution operation Center that we've been standing up in stages now for a number of years and then also real time trading desk or cyber security team and then we had a fantastic community reception as well.
We had an online annual shareholders meeting earlier this morning, and there were a lot of good.
<unk> is part of that which we also very much appreciate it in terms of recent highlights our financial results are inline with expectations for the quarter with net income of $59 1 million, which.
Which is $1 eight diluted EPS and the non-GAAP EPS of <unk>, $59 5 million or $1 nine diluted EPS.
Our expected long term annual EPS EPS growth rate is in the 3% to 6% range and we are reaffirming full year non-GAAP guidance of $3 20 to $3 40.
Per diluted share.
We've been doing a tremendous amount of work and seeing real results in the whole area.
ESG and Thats been very well received across the board.
Significant milestone there has been.
Releasing our commitment to net zero carbon emissions by 2050 and really thank Brian for taking taking the lead on that gets a serious player and that's when we believe we can achieve and thats notable because it is a company wide.
Commitment for scope, one and scope two whereas previously we had focused on our Montana.
Electric supply.
We're nearing completion of the 58 megawatt generating station project in South Dakota, that's been a great project and we will really provide value to our customers and site work is now underway at the 175 megawatt generating station near near Billings, Montana again, very important project came out of an RFP that also.
<unk> identified.
A hydro based contract and our first supply level battery.
Investments so good work being done there and we are.
Our ongoing commitment to a sustainable dividend will be reflected this year and our quarterly this quarter and a dividend.
63 per share payable on June 30 for owners as of $6 $15 22, and with that I'll turn it over to Crystal and she will then pass the.
Hot potato onto Brian .
Thank you Bob I'll cover our financial results for the first quarter here I am looking at slide four of the deck that you should have available to you as Bob mentioned net income for the quarter of $59 1 million, which is lower than the prior year first quarter was $63 1 million.
Diluted earnings per share of $1 eight versus $1 24 in the prior period and on a non-GAAP basis $1 nine.
You take a look at the EPS Bridge I'll walk you through some of the key elements of that really favorable performance at the margin line offset by higher <unk>, which was as expected for US and then of course, the equity dilution that we've talked about before and the headwinds that we see firstly do you in that regard at night.
You can see that in there.
Laid out on this slide as well, but importantly, these are in line with our expectations for the quarter and I'll provide a little bit more detail on margin and OE AMG in the next couple of five.
Margin.
Slide six a couple of key elements on that.
Slide lays out the drivers of improvement at that line overall at $2 8 million improvement that falls to the bottom line, we continue to see strong.
Residential and commercial and industrial growth overall, one 6% on the electric side and one 2% on natural gas, but really kind of flat customer usage from a first quarter basis versus prior year from an overall winter weather perspective, it was warmer than normal. However, it was just a tiny bit colder than the prior year and that you really see <unk>.
Collected in kind of the flat performance here.
I would note that we continue to see a bit of incremental improvement on the transmission revenue side here as well overall $2 8 million improvement at the margin line at all too.
Net income.
From an operating expense perspective, we have laid out our expectations for the year of a bit of increase at that line overall youll see here, a $5 $8 million increase in operating costs that fall to the bottom line.
Again these are in line with our expectations that we've laid out with our 2022 guidance, you'll see elements there higher depreciation of course, reflecting the amount of infrastructure investment we've made in the system and we'll be looking to recover.
Higher uncollectible accounts I would remind you that last year's that prior year number was reflected by collecting.
The amounts we were collecting from the prior period before so a bit of that is returning back to a more normal level of uncollectible accounts, we continue to invest in technology and the system, you'll see that they're higher labor and benefits costs and some pressure on the insurance costs offset a small amount by property taxes being slightly lower.
This gives you the detail, but consistent with our guidance range and consistent with our expectations for the quarter again $5 $8 million on the operating side.
Next slide slide eight and this is where we walk you through the non-GAAP adjustments. So you can see $59 1 million of net income as I alluded to a $1 eight on the left hand side of the slide on a GAAP basis.
The only adjustment here that adjusts on a net income basis as the unfavorable weather add back of about 600000 for the quarter.
So $59 5 million on a non-GAAP basis or a $1 nine you can see how this compares to prior year I mentioned that.
Weather was also overall warmer than normal, but a little bit colder than last year you'd see the equivalent of last year. We added back $1 3 million of unfavorable weather getting up to $64 1 million or a $1 26, and again I would mentioned the diluted share impacted our equity issuance and where thats driving performance from a comparable quarter over quarter.
<unk>.
Slide nine from a cash flow perspective, we saw significant improvement in operating cash flows and working capital really that's driven by the collection of prior year supply costs I'll remind you in Q1 last year I think you all know that winter storm Yuri occurred and we had significant gas costs in the South Dakota, and Nebraska side that continues to see high.
Overall costs on the supply front, both electric and gas as the year continued into Q3 and Q4. So we are collecting some of those back in favor.
Favorable cash flows from that perspective also in the first quarter of 'twenty. One we had a couple of refunds in there with totaling around $30 million. The absence of those obviously leads to improved cash flow performance for quarter over quarter as well.
With that I'll take you to slide 10, which is we are reaffirming 'twenty two.
Guidance of $3 20 to $3 40, again with performance coming out of Q1 here in line with our expectations, we've talked about before and whats driving a down year from a guidance perspective as to our performance from 2001 to 2020 really driven by some profit.
Improvement at the margin line offset by a little bit higher operating costs, and then of course, the impact of that equity dilution, but we continue to see.
Direct pass through our guidance for 'twenty two with no changes noted in this slide and with that I will turn it over to Brian for an operating update thanks Crystal on Slide 11, we are talking about our capital investment on the left hand side of the page you can see the investment of approximately $1 $8 million over the last five years have resulted in a 12% CAGR.
Or if you will looking forward. The next five years, we're increasing that investment to $2 4 billion. So substantial increase approximately about $508 million a year of an investment.
Tell you that if you look at it you can see that two thirds of that is primarily from a T&D perspective and in addition, just maintaining our system.
We're making investments to increase capacity.
Good modernization and obviously things that we need to do I think ami meters and other ways to improve the customer experience.
Significant investment in those coming years that will result in an annualized rate based growth of approximately 4% to 5% on a going forward basis, and financed really with a targeted 14% to 15% <unk> to debt.
Bob mentioned earlier on the call on slide 12, with hydro conditions, we've been watching this closely that matter of fact day to day, we saw a rerun of this.
Report, even this morning, it's getting even a bit greener, we started to have some good snow here in beauty.
Overnight and so we're keeping an eye on this I think many of you on the call know Montana's.
Has it been experiencing a drought and all of this is helping us really on two fronts. One are helping our hydro facilities that were really demonstrating here with the red Dash line, but also to help us from a fire perspective.
Our business and so keeping on this we're feeling certainly much much better here at the end of April than we did at the end of March and the late snows in Montana has been very very helpful.
Looking forward.
I think we're talking a matter of days now.
In early May we will be completing the testing of the <unk> plans are 58 megawatt Bob lands are generating station in South Dakota.
And I hope to be having that online and helping us meet needed capacity in South Dakota speaking about capacity you may have heard Bob speak today earlier today with the annual meeting talking about in over 10 years of not adding any fossil fuel resources in Montana over.
The 700 megawatts of carbon free resources added during that time, it's now time to.
To provide a capacity resource to help offset that intermittent resources and provide the needed capacity.
You talked about the billings area and the <unk> will do just that we just began construction here.
In April and look forward to completing that.
In the 'twenty three 'twenty four winter season.
Last on this page.
We are going to be filing of both electric and natural gas.
Rate review this year and I would argue that's primarily just to recover the substantial investment.
And other costs that we've incurred since our last rate case, we expect to file in kind of midyear 2022 on a 2021 test year.
Some other adjustments accordingly.
Bob mentioned earlier in terms of net zero.
Page 14.
As we pointed out on the slide.
Our utilities part together under northwestern energy have been around for 100 years.
And obviously, we're very proud of the environmental stewardship, we've provided over the years, but as we pointed out in our document more must be done and we've committed to achieving a net zero by 2050 for scope, one and two emissions and we may have been a little later to the game, but I think one of the things we had to consider as being a combo of electric and gas utility really wanted to get.
Comfortable.
With the ability to deliver on this will be very feel much much more comfortable.
We move forward, we also want to acknowledge that timeline might seem longer than others, but we do need to balance.
<unk> ability reliability sustainability in that transition. We also committed in that document that we would be adding no new carbon emitting generation additions after 2035 and what's the magic with 2035, we are following closely as Bob pointed out on the call earlier today <unk> technologies that are non carbon emitting that we believe will be.
<unk> not only available to us, but more cost effective and that 2035 timeline. In addition to committing to scope one and two emissions around net zero standpoint, we will also try to help both upstream and downstream scope three emissions help our customers in that regard and dealing with our suppliers as well to help.
In that regard as we move forward and with that I'll pass it back over to Mr. Meyer.
Thank you Brian .
So joining us by computer to get today and I'd like to ask a question. Please signal your intent by using the raise hand button. That's typically found within the tool bar at the bottom of your screen. You can also simultaneously press Alt and why on a PC or option why on a map to raise your hand please.
Please ensure your microphone is on mute.
If you dialed in by phone you can also press star nine to raise your hand and star six to mute. Your line to ask the question again that is star nine to raise your hand and star sixth on mute your line.
Now provided your name and resume idea dialed in by phone please be listening for us to announce your zoom IV or last four digits. Your telephone number to notify you that your line is open and ready for your questions.
With that we will take our first question from a Guggenheim line, it's either Shar or Jameson your line should be open.
Yeah.
Hey, guys.
It's Sharon for the famous Jamison.
Okay.
That's good.
Technological on Friday.
That's right.
Alright.
Couple of questions here.
Obviously first.
To the IRB you said you plan to file either I guess later this year early next year.
Should we think about the timing in terms of the arbitration efforts around colstrip and at a high level, where does arbitration progress stand today.
Ill jump in on the arbitration.
We at one point or another each of the owners, who file requesting arbitration, but never at the same time.
In the same venue.
There was oral arguments in front of a federal magistrate.
Just earlier this week and which one of your questions was should the magistrate advised for federal judge too.
Require arbitration.
So that's the technical answer what I would say beyond that is all of the.
Okay.
<unk> owners at Colstrip.
Concern to serve their customers.
And comply with state policy and legal requirements and the challenge that is just figuring out how to do that.
Sure, Brian a lot to speak more to the upcoming IRB.
What I would say is simply you have done a really good job managing risk for customers and for shareholders over the next few years with what we have in place that provides a very good foundation for whatever the outcome of the next planning process.
And.
Part of that certainly will be reacting to whatever the whatever more we know about colstrip at that time.
But I think we are in overall good position and have really made an awful lot of progress over the last couple of years, Brian Yeah. Thanks, Bob I think first of all we have to get our South Dakota, IRB Dawn and Thats going to be in the latter half of 'twenty, two and that puts pressure same folks working on these plans kind of late 'twenty two early 'twenty three as you know on the Montana.
And Shar to your point, obviously, it would be really helpful to us if we had some clarity on the colstrip situation by.
By the time, we released that ERP.
And I think you may know that with the intent of putting additional capacity in the 2026 timetable. If we do not have that clarity by that point in time, obviously, we'll provide some sensitivities with our with or without colstrip generation.
Got it perfect. Thank you and then maybe just turning to your upcoming rate case filing in June sort of width.
Rising inflation and supply chain issues, I mean, you guys called out 2% on the Capex and sort of the regulatory lag pressures that come with a large construction project you want to make changes to the test period. Among other things it seems like Theres a lot of moving pieces.
Maybe Brian have you had any sort of preliminary dialogue.
With key stakeholders in anticipation of the filing kind of curious if theyre going to be surprised.
First we haven't announced a June filing date, we do expect to file in the summer it will be an electric and gas case.
The internal work being done to develop the filing is really impressive. It's a great team we are well along there absolutely will be discussions.
Letting people know.
What we are filing and why and there certainly been some good substantive discussions at the commission staff just around the.
The process of managing up.
A major rate filings fundamentally the two questions are covering a recovery are.
Current costs.
But also.
Bringing in the bringing into rate base the substantial capital investments we've made over the last few years, but as you said remember I think valuable.
Specific proposals crystals in the middle of all of that.
Speak to a little more detail I think.
Yes, Sara the only thing I would probably add there is just it has been five years between tough periods. So you alluded to the inflation comment and with stakeholders.
Our key plank of that rate case is suddenly going to be the amount of infrastructure investment we've made over that time period and recovering those costs, though.
We're not under a rock there's pricing changes everywhere and we're going to be in that same bucket of asking for a price increase we're certainly talking to stakeholders.
With <unk>, and others and giving them a heads up on where we think the breakpoint.
So go ahead Jeff.
I am sorry, I was going to say.
Did I answer the question you didn't ask which is that if we had been able to be more aggressive about investing in owned generation earlier, and if we'd have a better ability to hedge I absolutely believe our customers would have been would be much better off and much more protect.
<unk>.
From those volatile market costs than they are right now a good example of that is hydro system came into rate base. Just a few years ago, we have kept investing and that the cost of the hydro system to our customers is already starting to go down through depreciation. So I hope people are in the right lessons and not the long run.
At her up to do I am sorry.
No. Bob you just asked the question I was going to ask and you answered it. So I appreciate it. Thank you so much guys.
Right weekend I appreciate it thanks Shar thanks, Sir.
We will take our next call from the line of Sophie Karp of Keybanc Sophie Your line should be open.
Yes.
Hi, guys can you hear me we share counts.
Thank you for taking my question.
Well I just have a clue.
If you could help us.
With the total number of capital investments recovery that you think you misread case I appreciate that you already know, we didnt actually Bryan Bryan, but should we look at it as most logistics.
With Capex will give you the approximation for that.
I think a couple of things.
Looking at Travis I think in the appendix we have slide 23 that gives you an overall look at ending rate base figure, which would be somewhat of a proxy for what we'd be going into act to recover but we will have more updates that will be when we actually file lets say that the ending rate base number will be requesting but I think that's where I point yet for the best indicator.
Of what will be going into from a revenue requirement perspective.
Got it and then.
That would not be including the precluded.
The commission this year right.
<unk>.
Bob lender and Yolo County project.
So that wasn't a Bob lenders in South Dakota.
Haven't announced any our next rate case timing on that one yet with regard to Yellowstone, we're expecting that to be in service sometime in the 'twenty three 'twenty four.
Winter season, and so we will be looking at ways to bring that Ann but obviously from a test period basis, 21 test period, with known and measurable adjustments in 'twenty two.
Thank you. Thank you very helpful.
Maybe a quick clinical question Assembly.
Do you think.
Is there any evolution in Montana on the attitude towards utility generation ownership.
Brian .
Great question, Joe the topic I know in the fleet.
Great Great question.
I think what I said just in response to <unk> is right on target there be.
On the market is fantastic when the market is going your way.
And all of those savings can be.
<unk> and <unk>.
A couple of days another good data point, there as well.
Last July and look in the Crystal So correct me, but we had budgeted about $67 million for.
Electric supply purchases in Montana and spent right around $28 million. So that's just another data point under any scenario, we're obviously going to be participating in the market on behalf of our customers.
Short term and long term deploy there is.
Incredible value to customers over the long term.
Including a substantial portion of owned generation and they figure that out obviously that was never a question in South Dakota, where we do own most of our generation and participate in an organized market and deliver our customers very favorable rates.
Thank you I appreciate the color and last one if I may.
Now the talent is.
<unk>.
Yeah.
Is there any implications from that to the colstrip.
Thank you Noah.
I would say this.
<unk> been in contact with talent and we're thinking through the implications I think make sure it's clear to understand that talent as an owner in.
Unit, three where an owner and unit four though when you have a reciprocal sharing agreement between the two units Nonetheless.
How that bankruptcy could impact the operations at the plant. They are the operator, we're certainly keeping our eyes on at this point in time, we do not believe it will have an impact on the operations at the plant.
Please go ahead.
Thank you Sophie.
We'll take our next question from the line of Ryan Greenwald at Bofa, Ryan Your line should be open.
Did that work.
Okay.
Hey, Ryan.
Hey.
It's Ryan and Julien.
Afternoon, guys. Thanks.
Thanks Julien.
Good afternoon.
Thank you guys.
Okay.
Got it thanks, Jeff.
Thank you for the thoughts thus far.
Tim just to get to.
Sorry to just following up on John's line of.
Conversation earlier, how do you think about introducing more of a conversation on trackers here.
Not just capital tracker in the context of Loral, but also just O&M in the context of a more inflationary environment conceivably that might be more of.
Sure.
There might be more understanding as of the need but I'm curious where you are in those conversations preliminary with stakeholders and otherwise, but specifically on the ability to track costs.
Obviously, you guys have done a good job past tense, but perhaps we are in a different era of cost inflation today.
Julian it's not lost on me that I step into the CFO the fleet here, where the <unk>.
A different era, I think as Youre working to use inflationary going forward is nice of Brian to hand that off to me after its no longer transitory I guess, but.
Thanks Todd.
Yeah Jonathan.
So first your question to trackers, though.
Rate case, that's an important piece.
Accordingly, I Wouldnt call RP Cam a tracker I would call. It a mechanism that doesn't work very much at all like a tracker and so we will certainly be going in and asking for a different design of that mechanism.
Hopefully more tracker like and certainly where you have the power market prices and Sophie your line of questioning that went through.
Are people thinking about generation differently, I, certainly think pricing can lead to a different thought process, though for that tracker perspective will certainly be making a proposal for something that I think is more fair and this environment. We're certainly using our known and measurable structure in the rate case, a bit differently than we have in the past and certainly we'll be making the case and again I think.
It should be a pretty straightforward case to make that we are in an inflationary environment and need to have some mechanism to recover cost on a more timely basis and to show that adjustment for them and so.
Maybe I'll be asking for everything in the kitchen banker, we will be but I think different times call for different measures that we will be making that case, both on the capital side as we think about Yellowstone revising the current mechanisms we have with the PJM tracker and also just how we look at the tough period and adjust that to more reflect our current call to just to.
Pile on.
The observation that <unk> isn't a tracker is a really good when it's more of an anchor then a tracker.
It doesn't it does a lot of things really badly.
It's complicated and convoluted.
The lag is extraordinary.
It's incredibly asymmetrical.
In fact, if it needs to be not just reset, but probably realign and then if you think about.
What the implications are on the customer side to the degree that you want.
Pricing to give some kind of a signal to customers. The P. Chem doesn't do that instead of just delivers a shock at some point.
So again this is it's an opportunity to.
Youre really learned some things about what works and what doesn't work and this is in the latter category.
Yes no.
I hear what you're saying I mean actually maybe we could.
Specifically to Laurel here, a little bit more just what is your confidence level in being a zero in on cost on that asset here.
Where are you in kind of fixing.
Fixing in nailing down those related capital costs at this point in time.
Yes, as you know.
One of the reasons to move forward with the Yellowstone project itself was was we had a fixed price contract and moving forward and obviously there is inflationary pressures throughout the.
The project itself, but being locked in feels much better where we sit today some aspects of that could have an increased cost, but we think it's very very manageable, particularly because of that fixed price contract.
Yes that makes a lot of it.
It does make a lot of sense and I hear you and Jim.
Sorry to go back on what you said, a second ago and clarify.
Your conversations with stakeholders. How is this resonated in having a re look at maybe PJM as you characterize it or frankly anything beyond PK plus.
I think one thing on the <unk>, if you looked at our filing and Bob alluded to earlier, what we saw in higher prices and of course, we are on the market more than our.
Mid cap peers are you can see in our filing last year the amount of outside costs above the base and that filing and so it clearly shows that we need to reset I think conversations with the App and others is something that's a bit more formulaic.
Quite frankly, a little.
Less convoluted to manage is something we can all get behind and so I would like to think that our proposal that obviously, we've made the proposal outside of a rate case last year to adjust that base and look at how that function that got kicked to the rate case, though I certainly think it's ripe for conversation.
Excellent alright, guys I'll leave it there thank you.
Thank you.
With that it looks like we've exhausted our queue. So I'll hand, it back to Bob for any closing remarks, great. Thank you very much for the good questions.
Support throughout the year and we're looking forward to seeing a number of you in person here before too long have a great weekend.
Let's keep the snow coming.