Q4 2022 NorthWestern Corp Earnings Call
Speaker 1: Significant storm response both in South Dakota with two derechos that occurred during in May and with substantial flooding in both Montana and Yellowstone National Park. Our employees did such a great job responding to that. We were acknowledged by EEI for our response there.
Speaker 1: We're also one of the very few utilities with improved JD Power customer satisfaction scores in 2022. And most improved for both electric and gas among the West mid-sized peers. We were recognized by, newsly, as one of America's most responsible companies.
Speaker 1: One of the 13 of the EEI companies acknowledged by Newsweek there. We also had very good regulatory execution. The rate case continues to progress well in Montana and we received interim rates in October . We also had our largest recruiters solution and operations T nn sightings
Speaker 1: and 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 since published our TCSD and SASB Alliance sustainability report.
Speaker 1: And lastly, from a reliability and affordability standpoint, and I'd argue a sustainability standpoint, we negotiated an agreement with Avista to transfer our culture of ownership to us of 222 MW effective December 31, 2025 for a zero purchase price.
Speaker 1: Regarding coal strip, why coal strip? When I think about that, again, I would say reliability, affordability, and sustainability was an extremely important acquisition. I'd say transfer of ownership. Reliable is a known asset to us. We've been in coal strip for decades. We've been in coal strip for decades.
Speaker 1: and on-system asset mitigating any transmission constraints to import power. It adds critical long duration, 24-7, on-demand generation when we need it most.
Speaker 1: It's affordable, 222 megawatts of capacity for zero, no upfront costs.
Speaker 1: And we know it has stable operating costs. We had to build an equivalent new build today of 222 megawatts, it would be approximately $500 million. This is a substantial win for our customers. And an operating cost that we are known and reasonable and certainly have been the discount to market prices we've seen as of late.
Speaker 1: And lastly, sustainable. We are certainly committed to our Ned Zero Gold by 2015. One could argue we ask for true procuring more coal here, but from our perspective, with the addition of the Yellowstone County plant and this incremental coal strip ownership, we have actually closed that capacity deficit through the end of this decade, and that will help us think.
Speaker 1: think through from a longer-term perspective, what can we do in the future at the coal strip site or nearby from a non-carbon long-duration alternatives. And so we and our partners that are moving forward with coal strip are already speaking about those potential opportunities. And another reason coal strip, obviously our transmission assets are there.
Speaker 1: we have a highly skilled labor force in Colstra. So not only is it sustainable in essence from a clean, transitioning to a clean resource at some point in the future, it also is very sustainable for the community of Colstra.
Speaker 1: And lastly, I'd say just the action itself of taking an incremental ownership and cost of protects our existing 222 megawatts in cost of that's extremely important to us. And when I speak about cost of on the next slide, slide five, I want to demonstrate the value to you, our existing cost of
Speaker 1: This chart, which you can find on our web page, will show you our generation portfolio on a weekly basis. You can see that on our web page. This is for the Christmas week in Montana. The gray bars at the top represent our thermal, think coal and natural gas.
Speaker 1: The blue is our hydro and you can see between those two types of resources very consistent throughout the week.
Speaker 1: The green represents wind and you can see in the back half of the wind that green was higher than the black line, which is our load. So wind's great. When the wind's blowing, we'll have excess energy we can sell on the market and reduce our costs to our customers. But earlier in that week, particularly during high pressure systems, we had a lot of wind
Speaker 1: We had no wind whatsoever. And so we were sorely in the need of a capacity resource to fill in that time here. You do not have that today. But as you can see, it's all perfectly supply and demand that red dotted line, which is a little more difficult to see on this chart. When we had no wind during that time here, we had to procure 41% of our power on the market.
Speaker 1: existing ownership approximately 2 million to acquire that amount of market purchases that we need during that week.
Speaker 1: Same amount, 222 megawatts, 12 million bucks on the market. So our existing ownership in coal strip saved customers 10 million bucks. It's quite clear why we'd love to have more coal strip to fill in days like this and can provide continued value to our customers.
Speaker 1: And with that, I'll pass it over to Crystal.
Speaker 2: Thanks, Brian . And before I walk you through the 22 financial results, I'll acknowledge it isn't Friday afternoon before a holiday weekend. So we appreciate your interest in joining us this afternoon. And we'll keep our comments not too lengthy. The other thing I will mention is Brian just covered the key things that we executed upon in 22 is how important that 22 is.
Speaker 2: and continuing to enable a strong foundation for growth as we go forward. So with that, I'll speak to our results for 22 on slide six, beginning with our fourth quarter result, which we pulled out the Q4 of $22 at $1.16 on a gap basis and on a non-gap basis of the $1.13. And comparison to 2021 on a gap basis, that's a 20 cent increase.
Speaker 2: And on the non-gap basis, nine cents. From a full year perspective, however, we did come in just slightly to the low end or outside of our guidance range or guidance range with 320 to 340. Initially, we did lower that as we went into closing out the year, but concluded on a gap basis that $3.25 has compared on a gap basis.
Speaker 2: $3.18 on a non-gap basis.
Speaker 2: So with that on slide seven, I'll give you a bit of how we think about the significant drivers for the year and what we expected and what we didn't expect. You'll see our guidance range on the left-hand side of this, the right, the things that significantly impacted us for the year. So what was it that drove us outside of our expectations and importantly towards the latter part of the year? And I'll speak to the storm that Brian just...
Speaker 2: laid out the criticality of supply for us, the criticality of that for our customers and the work that we do, but also how that impacts us. As well, we did expect a deep environment. If you recall in our bridge, we had four to six cents from a full year basis. That was a 20 cents headwind to us.
Speaker 2: And you see higher interest expense us and our other smith cap years and others are seeing impacts of that. But importantly, the things that happen to us when you see volatility in the market is things like PICAM from a 22 basis, that's $7.2 million of detriment to us or 10 cents. And I would tell you that's sharing 90% of those costs go to customers, but it's important.
Speaker 2: right before Christmas and at your end when we don't have room to adjust from a results perspective. As you also know and have followed over time we have adjusted weather and non-gap that out to give you an indication of earning far more fundamental earnings to below that we adjust our revenues to normal.
Speaker 2: But the strain on our system and the overall operating cost of both transmission, distribution, and the supply side all go up. And I would just remind you again, we take out the favorable, which would be the revenue side of that, but we don't adjust out all the things I just mentioned that also drive and impact our results. Go!
Speaker 2: Slide eight gives you a look at fourth quarter financial results from a net income basis, $66.7 million compared to $51.3 million in the prior period and an improvement of $15.4 million for 30%. Slide nine gives you a bit more detail into that look from Q4, again, a solid performance for the quarter.
Speaker 2: We did see October and November offset themselves and be neutral from a broader weather impact and outside impact of weather in December . They just alluded to. We talked about key critical days that we saw there. You did see higher volumes driving improved margins. The other thing, and the slides before we show that and we included in our guidance this year.
Speaker 2: driving up and also interest expense and property taxes, the general things that we've discussed as headwinds for us, and a bit of favorable income tax from a quarter perspective closing that out at $1.16 on a GAAP basis and again $1.13 on an adjusted non-GAAP basis.
Speaker 2: So I think here's your look at how we approach that non-gap adjustment. And again, as you think about our performance year over year, this year we are adjusting out favorable weather. So see the left hand side of this. So the right hand side, last year we had unfavorable weather. So we had an addback on a gap adjusted basis. We're not gaped 65 million compared to 55.6 million in the park.
Speaker 2: dollars and twenty five cents compared to three dollars and sixty cents for the prior year and again as a reminder that was you know our expectation of having a down year based off the equity that we had transacted upon late in 21 and the diluted effect of that and in addition setting the solid base for our rate case
Speaker 2: filing that we made in 2022. So with that on Black 12, you see a bridge again at the key drivers there of margin being an improvement. That includes both interim rates, but also some strong results from our electric and gas business continued customer growth and usage trends on that on top of weather.
Speaker 2: and again, the thing that impacted us in 22, no different than most of our peers, but things like fuel expenses, material expenses, insurance, all of those things being inflationary impacts that are flowing through to us and ultimately to our customers. Also, you see the higher depreciation and then ultimately higher interest expense by employees and we still are.
Speaker 2: the Catholic, no one would agree as we saw the unprecedented increase in interest expense or interest rates last year driving pressure to us ultimately at the interest expense lining the 9th sense of headwinds in our bridge here. And then again, our property taxes, we don't recover our full amount of property taxes until we come in for a rate case which you all know were the middle of.
Speaker 2: So we continue to see drag there and that drags is even higher than we expected initially for the year. All of that resulting in a $3.25 gap basis results three year again adjusted at $3.18.
Speaker 2: Slide 13, speak to the margin impact.
Speaker 2: I would remind you or highlight just a couple of things here. I mentioned, you know, solid cells and volumes across our customer classes. The other thing being interim rates, which were crucial to us in closing out 22 and offsetting some of the detrimental impact that we saw in those other areas, but obviously not enough given the amount of headlines we saw.
Speaker 2: Versus the impact of those interim rates. The other thing I would just highlight here is the lower electric transition revenue. If you recall last year, we had an item of a deferral release there and absent that we were about neutral on electric transition. That's been a key part of our business is I would highlight that our rate actually decreased there.
Speaker 2: but demand actually went up. So, it's all the results there too. And then the PQM impact last year, $5.4 million to detriment to us. This year, $71.2 million. And that would be year over year, $1.8 million impact. I would also remind you that in 2021, we have filed and requested to reset the base early or outside of a written case.
Speaker 2: The commission has denied that request. So, of course, we didn't see that base reset until October 1st. The other thing that I would highly from a 2, 4 perspective that I didn't mention above is even with that base reset of interim rate. The application of P cam to up in Q4 was a significant detriment.
Speaker 2: With that, closing out the year on a utility margin with an overall improvement, but again, adjusting out some of the things with interim rates and property taxes on the slide to give you additional detail. Thank you for listening.
Speaker 2: Slide 14 again shows our gap to non-gap adjustments. Same story for the year-to-date as it is for the quarter in the sense of favorable weather that we're adjusting out. Also adjusting out the correct penalty that we had talked about in Q2 and prior year. That was unfavorable weather.
Speaker 2: main focus on is working to improve our credit metrics and our FFO and I would tell you this kind of really strong year from a cash flow perspective and you can see that in the numbers on this page of significant improvement of cash from operating activities versus the prior year and think about that as collecting some of those deferred costs from the prior period. The challenges.
Speaker 2: and that's taking right to the guidance side. But as you all know, when we talked about at EI and Q3, we are not giving 23 earnings guidance until we conclude our break-case and have an outcome from that. And from our commissioners, we're working with that that has outsized impact as to how we think about our growth going forward. We expect coming out of that too.
Speaker 2: refresh both our long-term guidance rate and also our financing plans, but in the near term, we do expect most of you recall we have $75 million remaining on our ATM equity program. We do expect to issue that during 2023. We also have manageable debt issuances, but one piece that we need to refinance of $144 million.
Speaker 2: late in the year, but all that consistent with our long-term guidance that we've given before. We also have a continued significant capital program. Brian talked about the execution in 2022 and I would commend our teams in what was a challenging year of supply chain challenges.
Speaker 2: and the ability to get their work done to continue to execute upon what we think is critical for the system and also to continue to execute on the Yellowstone development. So all of that is a significant amount of capital and 22 goes out and continues to plan for 23 in line with what you've seen for a month before and with that I will turn it over to Frank.
Speaker 1: And from my capital investment perspective, I think from the last five years we invested about 2.1 billion over those buyers and obviously heavily weighted in the back years we embarked on building Yellowstone County flat. We're still going up about another 15% approximately, 15% going up to 2.4 billion. And then...
Speaker 1: Modernization is important and from a generation standpoint, renewable energy integration and just continue to deal with the capacity constraints that we have as a company. This 2.4 billion it does include the Yellowstone County generating station and it does include some hydro operators that we plan to do and some maintenance of our generation, but it does not include any
Speaker 1: Early in 2022, we're already in great progress there over from a STEM perspective over halfway and the current schedule anticipates commercial operation during the first half of 2024. And so we're excited about the continued progress on the Yellowstone County plan. We'll have to actually take the board for a tour.
Speaker 1: candidate up at Aberdeen, somewhere in that 30 to 40-ish megawatts, continue to have a dialogue in terms of appropriate size there. So the thoughts about moving forward, building the plan there is exciting for us. And again, those numbers are not in the capital we just shared.
Speaker 1: Lastly, as a result of certain changes participating in RAP, thinking about IIAJ, IRA, we decided to hold off filing our Integrated Resource Plan in Montana until the end of March. We're still on track to do that at the end of March. And we also, of course,
Speaker 1: incorporated our news regarding poll strip into that plan. So feel good about progress we're making there and we'll look forward to sharing that with you and speaking with that view during the April earnings call. And with that we'll conclude and I'll hand it back over to Mr. Meyer.
Speaker 1: Thank you, Brian and Crystal. If you are joining us by computer today, and would like to ask your questions, please signal your intent by using the raise hand button, found within the bottom toolbar of your screen. You can also simultaneously press Alt-Y on a PC or Option-Y on a Mac to raise your hand.
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Speaker 3: If you have not provided your name or in your Zoom ID.
Speaker 3: or are dialed in by phone, please be listening for us to announce your Zoom ID or last four digits of your telephone number to notify you that your line is open.
Speaker 3: With that, we will take our first call from Jamison Ward from Guggenheim. Jamison, your line should be unmuted.
Speaker 4: perfect. Yep, it is. And I like you got a little pop up there now that actually says stay muted or unmute. That's that's quite helpful. I think that should make the call go smooth. Hey, I thank you for taking your question here. I appreciate it.
Speaker 4: Just got a couple for you understanding that of course you're not going to be issuing 23 guidance until after the rate case standard procedures you've done prior years. You did go to or opt to put out not just 23 but a full five-year capital plan which was great, it's helpful for modeling.
Speaker 4: Some questions around both of those and then just some differences in the slides.
Speaker 4: So you reiterated the 3-6% long-term EPS growth today.
Speaker 4: But looking back at the third quarter deck and last year's 4Q deck
Speaker 4: The base year of 2020 is missing.
Speaker 4: So I'm just wondering is that sort of soft signaling that you're kind of reevaluating what an appropriate base would be and that that might be one of the things that gets unveiled after the rate case when you roll forward and put out your official guidance.
Speaker 4: Or was it just missing in the slide deck in 2020 stance?
Speaker 2: Jason, you have great attention to detail. That's my first comment. An excellent job on figuring out how to unmute yourself. I know we make that challenging for a Friday afternoon. But your comment is a good catch and correct. We will evaluate what is our base year. Obviously, 2020 is pretty dated at this point. And so when we do come out with updated guidance, I would expect to see a new base for a month.
Speaker 4: Gotcha totally makes sense just want to check and run it by you. The second one is on rate base and the first part of it you've answered there it just had to do with the four billion in 2020 as a base. The second part of it though so I think that that's dealt with. The second part was
Speaker 4: When I looked at the CAPEX year by year, summed them up and pulled out the Yellowstone component from last year's 22 to 26 plan and then this year's 23 to 27 plan.
Speaker 4: it still kind of looked
Speaker 4: pretty comparable from a dollar standpoint. So I'm just wondering if maybe I should be looking at it differently, but essentially 2.2 x Yellowstone
Speaker 4: for the 22 to 26 plan and 2.240 for X yellowstone in the current plan. How do you get rate-based growth of 4 to 5% If they dollars amount
Speaker 4: dollar amount being invested stays the same, but yeah, of course of depreciation and so on. Or is it more that it's a kegger rather than an annual growth rate and it's sort of more back-end loaded weighted towards more transmission opportunities just trying to get some color on how to best sort of understand the path you guys might see going forward since you've opted to give.
Speaker 4: CAPEX guidance and roll the five-year plan today.
Speaker 2: Great question, Seamus. And we did have to give CapEx guidance because we knew if we didn't, you would all have the questions. So we might as well write and how we think about that. And as the CFO sitting here managing our credit metrics versus the CEO over there saying we need to get after capacity, there's plenty of capital to be done.
Speaker 2: So what I would say this role board represents is one, you are rolling off Yellowstone. There are some slides in the exhibit sounds like you've already been there that really give you that exact math of Yellowstone and cremental to what we would say is their normal run of the mills capital spend. And then secondly, you know, the key piece years were focused on our SFO metrics. So plenty of capital will be done.
Speaker 2: but how can we do that and maintain our FFO metrics and importantly drive affordability? You know again there's I would call it as almost an unlimited amount of capital if you can get the folks to get the work done. The question is what can we do and maintain affordability to customers? How do we think about that and then how do we think about our FFO metrics? So the Capital World Board you would see here is
Speaker 1: for zero and this is an opportunity you may miss if you will from a generation investment perspective. One of the reasons we're certainly comfortable obviously we address that issue because we're concerned for our customers we're going to do this in essence to reduce risk for us on our end in terms of owning coal strip also for our customers and keep sufficient build headroom.
Speaker 1: as an organization for our growing communities.
Speaker 4: Gotcha, that's very helpful, Color. It makes a lot of sense why you opted to go the route that you did there. It definitely seems like that was the right approach to take. Last question from me and then I'll pass it off to others in the queue. On FFO, prior to the
Speaker 4: metric target had been 14 to 15%. Now it's greater than 14. Just wanted to get a sense of A is that for a certain period of time and then it's back to the 14 to 15. Is 14 just the new normal going forward? Is it dependent on whether you get things like the capital rider?
Speaker 4: How should we think about what moved you from the 14 to 15 down to the 14 and decided to keep it there as the new standard single level there in Guads?
Speaker 4: Sorry, and then that's it for me. That's all I got.
Speaker 2: Again, great attention to detail. I don't know that I overthought changing it from 14 to 15 to just being over 14. I would tell you that's where we're targeting as being and to your point, it's unlikely that we would target to be well above that number. So, 14 to 15 is probably fair to think about that, but we continue to be focused on making sure that we're maintaining.
Speaker 2: Moving our credit master's factor that will acknowledge this year both out a little lower FFO than we were anticipated because the pressures we thought you're in against the black off and how that effects are debt level but no intent of change in tone or were redded between saying above 14 versus saying 14 to 15.
Speaker 4: Thank you. Very helpful.
Speaker 3: Okay, we will take our next.
Speaker 5: Oh.
Speaker 3: All right, we'll take our next call from line of Anthony Crawdell at Mizzoujo, Anthony.
Speaker 6: Hey, good afternoon.
Speaker 3: We can hear you Anthony. Hey Anthony.
Speaker 5: We could.
Speaker 6: Good, I don't know what's... A box keeps popping up.
Speaker 6: A box keeps popping up to unmute multiple times, but unlike Jameson, I'll try to keep it brief. Just quickly, thoughts, you're acquiring poll strip for zero.
Speaker 6: I'm just curious does that slow into rates or
Speaker 1: Well, the issue is we're acquiring bolster for zero. Obviously there's no upfront capital cost, but that is effective in 1.126. It's our intent, of course, by the time we get to 1.126, we want to make sure that we get recovery of our operating costs that will start on 1.126.
Speaker 1: And if there's any incremental capital from a maintenance perspective, we want to have certainty of that on a going forward basis. I think the feedback we've seen in Montana from the governor, our U.S. representatives and total delegation, the state legislature, and even a former commissioner at least, is a good example of the studied population.
Speaker 1: Tremendous support for coal strip. We feel good about where we sit on this particular issue. Ultimately, whatever costs we associate with coal strip on a going forward basis, high chance of recovery. They are going to find ways to improve the overall power and just ensure that we can
Speaker 6: Do you have the option of using coal strip as a merchant facility to help offset some of the volatility that you're seeing in the P camp?
Speaker 6: as like a natural hedge that is
Speaker 1: Well, Anthony, I'd say this. We don't attack the operators as a merchant to offset the volatility in the P-can. We can operate as a regulated resource to do that, right? Because we can use that instead of calling on the marketplace, we can operate our existing asset.
Speaker 1: My biggest complaint about this coal strip acquisition is we have to wait until 1-1-26 to get it. I think another thing I just say on PCAM, I think what Crystal's done in terms of trying to adjust what's a proper way to treat the PCAM and how we should get proper recovery and hopefully that gets captured in this raid case, that's going to certainly help us too.
Speaker 6: And my last one on the FFO debt, when do you get to 14%?
Speaker 2: That's a great question. And, you know, as I said, we're not giving long-term guidance, but we definitely, the key determinant of driving our FFO improvement is this right case outcome.
Speaker 6: If the rate case outcome is within expectation, do we hit 14 by year end?
Speaker 7: Yeah.
Speaker 6: Okay, thanks so much. I'll leave it there.
Speaker 8: All right, thanks, and thanks, Anthony.
Speaker 3: We'll take our next call from the Lion of Sophie Carpet Key Bank.
Speaker 9: Hello. Hi.
Speaker 3: It's Sophie, we can hear you.
Speaker 10: Hey, good afternoon. Thanks for taking my questions
Speaker 10: So the first question is on the IRP, which you, I guess, slightly delayed the filing of it, and you alluded in your prepared remarks that you were evaluating options.
Speaker 10: given the IRA and the coal strip. Just curious to maybe if you could discuss what those new options are that you are seeing, given the new reality under the IRA framework and your acquisition or transfer of ownership of coal strip.
Speaker 1: I think really the three things that come to mind on there is there's new capacity accreditation associated with rap width taking consideration. Obviously having cold strip in the mix impacts the amount of capacity that we need and the type of resources potentially. And I lastly just.
Speaker 1: thinking about what the cost of resources would be. IRA is one factor, but obviously we've seen increased inflation and other things, supply chain issues, impact costs in other ways. So just trying to consider those things into the mix.
Speaker 1: And it's requiring us to do quite a bit of work to change and update this. And Sophie, it's too soon for us to tell you what we expect to see from a change perspective. And the resource plan will be out here in about a month and a half.
Speaker 10: Okay, all right, we'll wait. And then my other question was, would you care to comment about the Broadview decision? And I guess the broader question I have is what kind of an impact
Speaker 10: would interconnect in such facilities.
Speaker 10: have on your already challenged, I guess, power supply costs and I guess with the calculation of the avoided cost is that going to change in your favor maybe with additional cost shape, other resources, how should we think about this moving forward?
Speaker 1: I think, I argue, culture certainly helps as we close that gap and reduce capacity requirements. Obviously, the Broadridge decision we're disappointed in. From our perspective, at the end of the day, this is a very important part of the conversation.
Speaker 1: from an energy perspective, some of these resources we believe as customers, it's energy our customers don't necessarily need and certainly at the prices that they're helping them to pay over the life of these contracts. And it certainly gives us less flexibility as a company to operate our portfolio of resources when more and more of these QF contracts are part of the mix.
Speaker 5: All right.
Speaker 10: All right. Thank you. That's all for me.
Speaker 7: K Milvow Coffee.
Speaker 3: And I think with that we've exhausted our queue of questions. I'd hand it back to Brian for any closing remarks you might have.
Speaker 1: It's my first time with closing remarks. I should have been prepared to say some traps. Actually, I would just say this. I think we're very excited about, from a tailwind perspective, I know as an industry we've got a tremendous amount of headwinds in front of us, higher inflation, higher interest costs, higher commodity costs.
Speaker 1: But as an individual company, I think from the rape case, from how we're handling our capacity issues with Yellowstone County and Colestrip, and I think the reception we've received from the state in terms of some of these decisions we made, I feel as an individual company we've got a lot of tailwinds as well. So extremely excited about 2023 and where this company can go.
Speaker 3: 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, follow on the call. And with that, you may now disconnect.
Speaker 11: The recording has stopped.