Q1 2023 NorthWestern Corporation Earnings Call

Montana as a whole.

Speaker 1: the Billings area but for Montana as a whole and demonstrate, we'll continue to demonstrate our support. We'll talk about that more in a minute. Regarding the first quarter, from a regulatory execution standpoint, we reached a constructive multi-party settlement on the Montana rate review.

Speaker 1: I think you all know we're currently pending a commission approval. We're hopeful that the settlement will be approved. We also did receive final approval necessary for our holding company formation.

Speaker 1: We also safely executed our capital plan. During the first quarter we invested nearly 150 million and then we're on track to invest a total of 510 million of capital this year in 2023.

Speaker 1: We also pointed out in the 10Q that even with the delay in Yellowstone County, we do expect that that plan will be ready to serve our customers by the end of 2024.

Speaker 1: Driving reliability and affordability. We have announced an agreement with ADISTA.

Speaker 1: to transfer its culture of ownership 222 megawatts effective December 31st 2025 and I think as we conveyed that transfer will be for zero dollars upfront.

Speaker 1: And lastly a strong and growing service territories where overall 1.4 percent customer growth that's better than industry average. That's for the first quarter. And we also have the lowest unemployment rates in the nation not just better than the national average. We have a national perspective.

Speaker 1: South Dakota is number one, Nebraska is number two, and Montana is number four for the lowest unemployment in the U.S. And lastly, I would just note, I'm very proud of our employees and their response to storms in our respective jurisdictions. In May of last year, in Conditioning the States, in Th Heroes St,ck 2020, North Dakota began to talk about us changing the policies and the Hatt bourgeoisie to

Speaker 1: our response in South Dakota to derechos. We had two of those during the Montana very high wind experience. And then Montana...

Speaker 1: storms and flooding that occurred in various parts of southern Montana and Yellowstone National Park and our response to that was so phenomenal that we did receive an award from EEI's and our peers from the emergency response perspective so very very proud in terms of

Speaker 1: our employees reactions to serve our customers. And so with that, I'll pass it over to Crystal.

Speaker 2: Thank you, Brian . I'll begin my comments on page four, but as Brian started us off with significant, I think as we start off 2023, significant execution on both the operational side of doing what we do in a service territory that you'll hear me say we had significant weather in Q1, but also significant regulatory.

Speaker 2: From a Q1 execution from a financial statement perspective, you see an improvement in net income versus Q1 of last year of 3.4 million or 5.8%. That improvement on both a GAAP and non-GAAP basis of just under 6% versus 2022. However, on an EPS basis, you'll see a reduction of 3 cents and that's a lot of money that's been spent on the GAAP and non-GAAP .

Speaker 2: that you can see the margin line and improvement of 11.4% over first quarter of 2022, 289 million versus 259.4 million. And then you'll see that's offset by some pressure and operating costs, both at the OANG level and then property taxes and depreciation.

Speaker 2: resulting in net income of 62.5 million for the first quarter of 2023 compared with 59.1 million in 2022 or 3.4 million or the just under 6% that I have referenced right in my prior comments.

Speaker 2: Slide six gives you the key drivers overall.

Speaker 2: Significant impacts quarter over quarter are improvement at the margin line that I just referenced. I'll give you some more color on that a couple of slides later. Certainly driven by strong customer growth. Weather and interim rates and then offset by operating costs. I would mention that the biggest drivers really on the side of that were generation maintenance costs and labor and benefits a bit on the generation maintenance side.

Speaker 2: the interest expense line being higher than it was in the comparable first quarter of last year, and then depreciation reflecting the assets that are serving customers. The other thing I would highlight here is the tax line.

Speaker 2: You'll see about 6 cents of detriment related to we received a notice from the IRS in 1st quarter related to a previously claimed credit and had a resulting adjustment out of that of approximately 3.2Million. All of that resulting in what I mentioned earlier, which is a 3 cent reduction versus last year.

Speaker 2: Also, we adjusted out favorable weather on a net income basis of 2.7 million. You'll see that brings our non-GAAP earnings to 63 million. That compares with the first quarter of last year where we had a small amount of unfavorable weather resulting in 59.5 million.

Speaker 2: in the prior period as compared on a non-gas basis. Slide eight provides more detail about margin, which I was alluding to earlier as the most significant driver in Q1. You'll see higher retail and natural gas volumes. Those two taken together are approximately 13.5 million of improvement against solid customer growth and then weather in our jurisdictions.

Speaker 2: I know a lot of the country was warmer. I can tell you from where we sat, it was definitely colder. And so that was across Montana, South Dakota, and Nebraska.

Speaker 2: Do you see that impact in your 1st and 3rd column there? The other thing I would highlight in the middle of there is the impact of our Montana and our race and we'll talk a bit about the settlement that we've reached at the interim rates related to the settlement related to our base rates. There's certainly what's reflected in our financial statements here are lower than that, but still a significant driver into 1 of the impact of that of approximately 8.5M.

Speaker 2: The other thing I will note here, and for those of you who have followed us closely, we talk about the PCAM and I will say I generally negatively talk about the PCAM. But here in 1st quarter, we actually have a favorable variance. You will see that last year there was about 800,000 of expense recognized related to the sharing portion of that PCAM.

Speaker 2: Hearing to 1 of 23, we actually have 5 results in a favorable associated with that. So, quarter over quarter that's a 1.3M dollar favorable adjustment.

Speaker 2: What drove that payroll adjustment I would.

Speaker 2: Point out the increase in base of the amount that we received on an interim basis in October is the key piece of that. I think most of you who are familiar with that mechanism also know that the. A non calendar year basis, so begins July 1 go through June 30. so where we were at through December was a significant detriment to both our earnings.

Speaker 2: in the next column of transmission revenues where we see a favorable impact to our loads and our systems that I think position of strength with regard to transmission revenues in the future and you can see a favorable impact of transmission revenues quarter-quarter of 1.2 million as well.

Speaker 2: All leading to what I alluded to which is strength in the margin line versus last year Q1. So the concluding at $285.1 million of gross margin in the business.

Speaker 2: The next page I would refer you to cash flow impact. Again, here this all comes back to both the combination of the items I just mentioned from a margin perspective being customer growth and weather and then also interim rates resulting in solid improvement in our cash flows and the interim rates contributing to.

Speaker 2: Collecting our supply costs on a more timely basis, driving stronger cash flows for the quarter and that improvement is noted here. The other thing I would notice we did issue first mortgage bonds. All of that leading to significant liquidity as we close off Q1 here.

Speaker 2: The other thing I would mention is consistent with our prior comments is that we do expect to issue the remaining 75M dollars on our asset market equity program that's outstanding currently. And we'll do that in the back part of 2023.

Speaker 2: So having covered the financial results, I'll turn my attention to the Montana rate review.

Speaker 2: We were able to reach a constructive settlement with the primary interveners from our revenue requirements standpoint and filed that in early April .

Speaker 2: That was after filing rebuttal testimony and early March and the comments I made earlier is that the interim rates were a significant. Positive to us from a cash flow perspective and margin perspective, but also as a reminder, those set the dates of which we would expect the settlement outcome to be retroactive to.

Speaker 2: And it's certainly driving improved metrics already. You'll see the detail provided on slide. 10 gives you a view of our rebuttal revenue requests versus what we had received through interim rates. And then the impacts of the settlement are noted in the far right column.

Speaker 2: The base rate settlement provides what we believe is a reasonable revenue requirement outcome with also adjustments for a variety of policy items as it relates to the settlement, including the ability to recover some degree of cost for the ill-found generating station, ones that it is placed in the service, and also to defer certain costs related.

Speaker 2: to our enhanced Wildfire Program.

Speaker 2: Again, the key of this element, and what was presented to the commission over the last couple of weeks is what we believe is a fair outcome based off our cost of service and assets already serving customers and updating our rates to reflect that. The process with the commission was a well run hearing.

Speaker 2: Hearing from all sides, we expect briefing to continue from that hearing, which concluded. I believe that was last week. So my days are running together with briefing going through the month of May and June and hopefully a hearing or a final decision on the commission sometime in the July August timeframe.

Speaker 2: From a financial outlook perspective, I think you're all familiar with us not issuing guidance for 2023 due to the significant impact of the Montana rate review. With that, we still are not issuing guidance for the year, but I would point you to slide 10 as to the impact of that most significant item.

Speaker 2: Again, pending approval by the Montana commission, and once we do have an outcome there, we will issue guidance for the period. The other thing I would note is each year and in Q1, we announced whether we expect to file a rate review and we do expect to file in our South Dakota jurisdiction on the electric side. And that, as many of, you know, we closed out the box. We're generating station last year and we'll be coming into.

Speaker 2: and rate-based have remained unchanged. And with that, I will turn it back to Brian .

Speaker 1: Thanks, Bristol. Slide 12 speaking about capital investment, I think it's quite impressive when you look at the growth in our capital over the five-year time period shown, nearly a 16% CAGR over that time period, total of $2.1 billion. That high level investment's gonna need to continue on as we think about investment necessary for...

Speaker 1: And until those assets are ever identified, they don't, they're not included in our plan. But nonetheless, our forecast going forward is an increase of investment over where we were over the last five years. That investment level should continue to provide a rate-based growth of approximately 4 to 5%. The next slide speaking to our supply update.

Speaker 1: Crystal also mentioned the Bob Lanzer Station 58 megawatt facility that was put in place in May of 2022 for a total cost of approximately $83 million. That plan has been dispatched even more than we anticipated. So we're extremely pleased with our ability to provide capacity to our South Dakota customers. Speaking of capacity, that's exactly what we're trying to do with our Montana-Yellowstone County generator station.

Speaker 1: are a good IRP in September of 22. That plan identified 43 megawatts of need, some of which is due to retirements and just an incremental capacity and we will be running competitive solicitation in the 23, 24 time period associated with that IRP. In Montana, we'll be filing our IRP here at the end of April .

Speaker 1: And so stay tuned, you'll get a chance to look at that very, very soon. And with that, I guess we'll turn it back over to Travis to help us handle any questions.

Speaker 1: Thank you, Brian . If you're joining us by computer and would like to ask a question, please signal your intent by using the Raise Hand button that is typically found within the bottom toolbar of your screen. Please ensure that your microphone is unmuted if you're in the queue to ask a question. If you're dialed in by phone, you can press star 9 to raise your hand and star 6 to unmute your line and ask a question. Again, star 9 to raise your hand, star 6 to unmute.

Speaker 3: If you haven't provided your name, your Zoom ID, or are dialed in by phone, please be listening for us to announce your Zoom ID or the last four digits of your telephone number to notify you that your line is open. We'll give it just a moment to get some questions in the queue here.

Speaker 3: Looks like we'll take our first question from Julian at B of A.

Speaker 3: Julian your line should be open or Paul or

Speaker 3: Somebody on the team there?

Speaker 4: Hey, can you hear me now?

Speaker 4: go. All right, sweet. Sorry about that. I apologize. You got to hit accept when you unmute me here. I got excited. Hey, so good afternoon, you guys. Thank you very much. So just coming back to Yellowstone here in the timeline, obviously reaffirmed, but can you talk a little bit about the legislative angle here 971, just what what that could portend for the project and ultimately, maybe some of the construction related items.

Speaker 1: Yeah, I would say this that two pieces of legislation were introduced late in the session as a result of the decision regarding the air quality permit. And so I think what happened is people looked at that and I'm sure some were thinking about Yellowstone County, but many were thinking about how this could impact other construction going on in the state.

Speaker 1: third reading and ultimately be on its way to the governor.

Speaker 1: appreciate the state understanding what that ruling could have for the growth of Montana and from I would argue our ability to service that growth in terms of serving our customers. So we feel good about it. What does it do Julian those two pieces legislation in combination.

Speaker 1: effectively should be able to allow us to expedite our ability to get a renewed or reissued air quality permit. Right, and either way the timeline is looking like 2024.

Speaker 4: expedite our ability to get a renewed or reissued air quality permit. And either way that the timeline is looking like 2024 and you want to be more precise than that.

Speaker 1: Yeah, I guess I'd say this. I'm hopeful that if things could move quickly, we might be able to meet our summer peak, which is really what our intent is with the plant. And obviously we want to be able to meet the winter peak in 2024.

Speaker 1: Our hope is to be able to achieve both of those, but I, you know, cautiously optimistic that those things happen and it helps us expedite, but in either way, we feel confident that we'll get this thing construction going again and having it in service by the end of 24.

Speaker 4: Excellent. And Brian , if I can follow up on this, we've talked at various times about a new baseline for an outlook and you reaffirmed here this 4-5% rate-based outlook. Can you talk a little bit about EPS, CAGR, and maybe kind of the timeline for adjusting that considering the newfound...

Speaker 2: The question I think on everyone's mind is certainly our long-term outlook and EPS growth. And the key I would say there is the settlement we reached in the Montana case is critical to providing us visibility as to where we're headed.

Speaker 2: But I also don't want to front run the Montana commission. And so you see in the materials here what you've heard from us in the past. And once we receive an outcome from the Montana commission, we will certainly be updating everyone of where we think that growth looks like coming out of that review.

Speaker 4: Okay, and conceivably by next quarter we could get some updated baseline for what that would look like too, not just an update to the resets.

Speaker 2: Indeed, I think what you're referring to is the question of what is our base period that we would be driving that growth off of and I can tell you it won't still be 2020. We, we, we will refresh. Um, what the growth period is off of and I think that most likely looks like 2022.

Speaker 4: Excellent. Sorry, one last one. On the outlook, I mean, your core retail sales looking quite solid here. Any commentary? I mean, Crystal, you alluded to it in your remarks here. But any further thoughts about just what supported the outlook here in the first quarter on the gas and electric side? Certainly, other than don't jinx it, Julian, it was a really solid...

Speaker 2: I think we all know that there was a good solid customer growth in our service territory. We certainly saw that in, you know, we are both a winter and summer peaking utility, but certainly in the winter here we saw significant usage trends there. So we'll be paying close attention to how those roll forward.

Speaker 4: Excellent, certainly don't want to jinx it. All right, I'll leave it there guys. Have a good one. Thanks everyone. Thanks Julian. We'll take our next question from Alex Mortimer at Mizzoujo.

Speaker 5: Your line should be opening up. Alex, do you see the mirror? There we go.

Speaker 6: Sorry about that. I can hear you. Um.

Speaker 6: Beautiful. So you highlight the need for kind of increased generation or I guess the generation shortfall kind of multiple times during the call and in your queue. So how do you look at potential upside on the CAPEX side above what's in your forecast just given the additional need for generation that you've highlighted? Yeah I don't necessarily want to...

Speaker 1: front runner IRP here too much but I would tell you that one thing we've been talking about for years is just the deficit on capacity and and that you know the ability of incremental coal strip and the Yellowstone County Generating Station brings us to a level of sufficient capacity.

Speaker 1: for a number of years. That doesn't mean that we have to stop there. Obviously we're going to need incremental capacity in a relatively short term and also we have to

Speaker 1: for a number of years. That doesn't mean that we have to stop there. Obviously, we're going to need incremental capacity in the relatively short term. And also, we have to, as a commitment,

Speaker 1: start thinking about opportunities to invest in non-carbon emitting resources and committed as a company not to invest in carbon emitting resources in 2035 and beyond. And so we'll be doing planning beyond that too. But I think there's still going to be some needs for some capacity investment in the latter half of this decade.

Speaker 6: Okay, understood. And then quickly just to sort of round out the questioning on Yellowstone. Can you give a detail on sort of the scale of cost that you might be currently incurring with construction currently being halted and then is there any concern that they could potentially be disallowed when you do eventually go to get this project into rates?

Speaker 1: Yeah, two things. First of all, Alex, I should have finished my first thought on your first question. I should remind you that in South Dakota there will be incremental investment there from a capacity standpoint. I think we're looking at approximately 40-ish megawatts there, and then we're looking at long-term solutions in that state as well.

Speaker 1: Back to what's happening at Yellowstone County from a delay perspective and how that could impact costs. Yeah, there are going to be some costs of demobilization and the like. And from our perspective, we don't anticipate that's going to be for a very long time. We certainly hope not. But if there are no formal costs, I would hope that the commission would...

Speaker 1: they're going to be looking at any project that we have and think about it from a proves perspective but I'd like to think particularly in the response we've seen in the legislature associated decision that I think they won't look upon this delay and favorably towards northwestern at least that's my hope and my view

Speaker 6: Okay, understood. Thank you for the color and congrats on the quarter and enjoy your weekend.

Speaker 1: Thank you. Thanks Alex, appreciate it. Take our next call from Chris Elminghouse at Sieber William Shanks.

Speaker 7: Hey everybody, how are you?

Speaker 7: How are you?

Speaker 8: I'm good, thanks. Question about the rate case. I just wanted to sort of get your perception of this.

Speaker 8: Thanks. Question about the rate case. I just wanted to sort of get your perception of this.

Speaker 8: there certainly were some disagreements from the interveners in their cross-examination and testimony, but the commissioners seem to be less contentious and maybe less voluminous in their line of questioning. Would you agree with that sort of perception?

Speaker 1: I would say this, I believe that, and I've been through quite a few rare cases at the Commission, I thought the Commission handled this extremely well. They allowed public, tremendous amount of public commentary, they ran a good hearing, it was

Speaker 1: I thought the process is really well done throughout. I feel good about how the case has been handled.

Speaker 8: Okay, great. You know, outside of the potential legislation, could you just sort of walk through what you would envision the Yellowstone process being, you know, in terms of reviewing or re-examining the

Speaker 1: There's going to be some time associated with what we actually need to do from an evaluation standpoint from a greenhouse gas perspective. And after that's done, there's a reissue. And this is my expectation. There would be a reissued permit. They would have a comment period. And during that time period before the permits actually.

Speaker 8: that filing timeframe and what do you see that process thereafter looking like?

Speaker 2: So, from a timing perspective, Chris, I would say we'll file it sometime over the summer here. We're working through that. We'll turn our attention from the Montana rate review, which has been a little bit all in comes and things to finalizing that filing. You know, the. South Dakota Commission in the past has run a very efficient process and they've been very good to work with. So I would think that we'll be able to.

Speaker 3: Thanks. Quick question, just to understand the timeline, if the legislation is adopted, when would you be able to, in your question, only if it is adopted, if there is no

Best estimation be able to recommence construction on Yellowstone. Yeah, I don't I don't know exactly I think the legislation passed. Greenhouse gas wouldn't necessarily have to be a consideration. And so I think we still have to deal with the lighting issue.

Obviously DEQ would have to evaluate that and have a comment period, not knowing what that comment period is, but I hope it's a matter of a couple months instead of multi-months, if you will. So that's my expectation as I sit here today. A break is tomorrow afternoon inewater vision and Deere's

Obviously DEQ would have to evaluate that and have a comment period, not knowing what that comment period is, but I hope it's a matter of a couple months instead of multi-months, if you will. So that's my expectation as I sit here today. Great.

And then when the plant goes into commercial operations, you have to wait for it to go into commercial operation to file for rate relief on the plant or what would be the timing of. When you would file for rate relief.

Hey, Crystal here from a great perspective, we do receive on the plant while under construction. And so once that plant is in service, and part of the settlement that we reach, we had asked for us. I think most of, you know, a full reliability writer. We settle for something less than that, but.

We agreed that once that plant is serving customers, we could come in and ask for reset on our hand base because of course, the cost today we're buying the services that will provide in the market. So we reset that base, but at the same time get some recovery of the operating costs and at that same time.

Work through the prudency evaluation of that plan if we choose to make that filing. So that would coincide with about the timing of service to again, provide full recovery costs on a timely fashion as it relates to the operating side of that. But importantly, recovery of the rate base would be subject to another filing.

So the operating costs would somehow be incorporated into the PCAM proceeding or.

Yeah, and then last question.

Can you talk at all about sort of equity needs beyond this year?

We haven't given guidance beyond this year as to our financing plans. We mentioned, as I noted earlier, we'll finish off the. Atm plan, but the thing I would just note overall there is we're looking to find our. Our capital plans on a self funded basis, absence. When we have additional growth things like Yellowstone or other opportunities.

equity need.

Okay.

Thank you.

Thanks, Paul. And with that, I think we've exhausted our Friday afternoon queue.

I'll turn it back over to Brian for any closing remarks. I just Obviously, we're we're pleased again with the settlement again. We hope the Commission Gives it a good hard look and hopefully we get approval that settlement so we can continue to do as we must continue to Invest in the Montana system and help it grow and I think also

Thank you all and have a great weekend. See you.

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