NorthWestern Corp

NASDAQ:NWE

Earnings Call Transcript 2022-Q1

[Travis Meyer, Director of Corporate Finance & IR Officer]

Good afternoon, and thank you for joining NorthWestern Corporation's financial results webcast for the quarter ending March 31, 2022. My name is Travis Meyer. I'm the Director of Corporate Finance and Investor Relations Officer from NorthWestern.

Joining us today to walk through the results and provide an overall update are Bob Rowe, Chief Executive Officer; Brian Bird, President and Chief Operating Officer; Crystal Lail, Vice President and Chief Financial Officer; as well as other members of management in the room with us. [Operator Instructions].

NorthWestern's results have been released, and this release is available on our website at northwesternenergy.com. We also released our 10-Q premarket this morning. Please note that the company's press release, this presentation, comments by presenters and responses to your questions may contain forward-looking statements. As such, I'll direct you to the disclosures contained within our SEC filings and safe harbor provisions included on the second slide of this presentation.

Also note this presentation includes non-GAAP financial measures. Please see the non-GAAP disclosures, definitions and reconciliations also included in the presentation.

This webcast is being recorded. The archived replay of the webcast will be available for one year beginning at 6 p.m. Eastern today and can be found in the Financial Results section of our website.

With that, I'll hand it over to NorthWestern CEO, Bob Rowe.

[Robert Rowe, CEO]

Thank you, Travis, and thank you all for joining us. We are meeting this week in Butte America, where we're having yet another good heavy late season snowstorm, very much needed. We're continuing to build up snowpack across 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, our local distribution center, grid control, the new distribution operations center that we've been standing up in stages now for a number of years and also real-time trading desk, our cybersecurity team.

And then we had a fantastic community reception as well. As you know, we had an online Annual Shareholders Meeting earlier this morning, and there were a lot of good questions as part of that, which we also very much appreciated.

In terms of recent highlights, our financial results are in line with expectations for the quarter. Net income of $59.1 million, which is $1.08 diluted EPS and the non-GAAP EPS of $59.5 million or $1.09 diluted EPS. Our expected long-term annual 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 of ESG. And that's, I think, been very well received across the board. A significant milestone there has been releasing our commitment to net zero carbon emissions by 2050 and really thank Brian for taking the lead on that. It's a serious plan. It's one we believe we can achieve. And it's notable because it is a company-wide commitment for Scope 1 and Scope 2, 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 will really provide value to our customers. And site work is now underway at 175-megawatt generating station near Billings, Montana, again, a very important project came out of an RFP that also identified a hydro-based contract and our first supply-level battery investment. So good work being done there.

And we are -- our ongoing commitment to a sustainable dividend will be reflected this year in a quarter -- this quarter and a dividend $0.63 per share payable on June 30 for owners as of 6/15/22.

And with that, I will turn it over to Crystal, and she will then pass the hot potato on to Brian.

[Crystal Lail, VP and CFO]

Thank you, Bob. I'll cover our financial results for the first quarter here. I'm looking at Slide 4 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 of $63.1 million; diluted earnings per share of $1.08 versus $1.24 in the prior period, and on a non-GAAP basis, $1.09.

If 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 OA&G, 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 for '22 in that regard of $0.09. You can see that 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 OA&G in the next couple of slides.

Margin, Slide 6, a couple of key elements on that. This slide lays out the drivers of improvement on that line. Overall, a $2.8 million improvement and falls to the bottom line. We've continued to see strong residential and commercial and industrial growth. Overall, 1.6% on the electric side and 1.2% 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 in that you really see reflected 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, a $2.8 million improvement at the margin line that falls to net income.

From an operating expense perspective, we have laid out our expectations for the year of a bit of increase of that line. Overall, you'll see here a $5.8 million increase and 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 key 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 and reduced by 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 in the system. You'll see that there, higher labor and benefit costs and some pressure on the insurance costs, offset a small amount by property taxes being slightly lower. Again, this gives you the detail a bit consistent with our guidance range and consistent with our expectations for the quarter, again, $5.8 million on the operating side.

Next slide, Slide 8, 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 $1.08 on the left-hand side of the slide on a GAAP basis. The only adjustment here that adjusts on a net income basis is the unfavorable weather add-back of about $600,000 for the quarter, getting us to $59.5 million on a non-GAAP basis or $1.09.

You see how this compares to prior years. I mentioned that weather was overall warmer than normal but a little bit colder than last year. You see the equivalent of last year. We added back $1.3 million of unfavorable weather, getting us to $64.1 million or $1.26. And again, I would mention the diluted share impact of our equity issuance and where that's driving performance from a comparable quarter-over-quarter basis.

Slide 9. From a cash flow perspective, we saw a 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 Uri occurred, and we had significant gas costs in the South Dakota and Nebraska side. That continued to see higher 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 to see favorable cash flows from that perspective.

Also in the first quarter of '21, we had a couple of refunds in there, totaling around $30 million. The absence of those, obviously, to improve cash flow performance for quarter-over-quarter as well.

With that, I'll take you to Slide 10, which is we are reaffirming '22 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 was driving a down year from a guidance perspective as to your performance from '21 to 2020, really driven by some improvement at the margin line, offset by a little bit higher operating costs and then, of course, the impact of that equity dilution. So we continue to see a direct path to our guidance for '22, with no changes noted in this slide.

And with that, I will turn it over to Brian for an operating update.

[Brian Bird, President and COO]

Thanks, Crystal. On Slide 11, we're 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 5 years has resulted in a 12% CAGR, if you will. Looking forward, the next 5 years, we're increasing that investment to $2.4 billion, so a substantial increase, approximately about $500 million a year of an investment.

I would 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 to just maintaining our system, we're making investment to increase capacity, think grid modernization and obviously things that we need to do with, thinking AMI meters and other ways to improve the customer experience. So a significant investment in those coming years. That will result in an annualized rate base growth of approximately 4% to 5% on a going-forward basis and financed really with a targeted 14% to 15% FFO to debt.

Bob mentioned early on the call, on Slide 12 with hydro conditions. We've been watching this closely. As a matter of fact, day to day, we saw a rerun of this report even this morning, and it's getting even a bit greener. We had some good snow here in Butte overnight. And so we're keeping an eye on this. I think many of you on the call know Montana is experiencing a drought, and all of this is helping us really on two fronts: one, are helping our hydro facilities that we're really demonstrating here with the red dash line, but also to help us from a fire perspective in 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 have been very, very helpful.

Looking forward, we're talking a matter of days now. In early May, we'll be completing the testing of the Bob Glanzer 58-megawatt, Bob Glanzer generating station in South Dakota and 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 in the annual meeting talking about in over 10 years of not adding any fossil fueled resources in Montana, over 700 megawatts of carbon-free resources added during that time. It's now time to provide a capacity research to help offset that intermittent resources and provide the needed capacity. He talked about the Billings area and the Yellowstone County plant will do just that. We just began construction here in April and look forward to completing that in the '23, '24 winter season.

Last on this page, we are going to be filing 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, expect to file for a midyear 2022 on a 2021 test year with some other adjustments accordingly.

Bob mentioned earlier in terms of net zero on Page 14. As we point out on the slide, our utilities part together under NorthWestern Energy have been around for 100 years and obviously very, very proud of the environmental stewardships we've provided over the years.

But as we point out in our document, more must be done. And we've committed to achieving a net zero by 2050 for Scope 1 and 2 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, electric and gas utility, really wanted to get comfortable with the ability to deliver on this. So we feel much, much more comfortable as we move forward.

We also want to acknowledge that time line might seem longer than others, but we do need to balance affordability, reliability and 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, technologies that are non-carbon-emitting that we believe will be not only available to a more cost-effective in that 2035-time line.

In addition to committing to Scope 1 and 2 emissions are on a net zero standpoint, we will also try to help both upstream and downstream Scope 3 emissions, help our customers in that regard and dealing with our suppliers as well to help in that regard as we move forward.

With that, I'll pass it back over to Mr. Meyer.

[Travis Meyer, Director of Corporate Finance & IR Officer]

Thank you, Brian.

[Operator Instructions] With that, we will take our first question from a Guggenheim line. It's either Shar or Jamieson. Your lines are open.

[Shar Pourreza, Guggenheim Securities]

It's Shar in for the famous Jamieson. That’s good to see you guys are getting very technological on the Friday afternoon. So it's a -- so just a couple of quick ones here. Obviously, first, looking ahead to the IRP, you said you plan to file either, I guess, later this year or early next year. How 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?

[Robert Rowe, CEO]

I'll jump in on the arbitration. We -- at one point or another, each of the owners has filed requesting arbitration but never at the same time or in the same venue. There was oral argument in front of a federal magistrate just earlier this week in which one of the questions was should the magistrate advice the federal judge to require arbitration. So that's the technical answer.

What I would say beyond that is all of the IOU owners at Colstrip are concerned to serve their customers and comply with state policy and legal requirements, a challenge that is just figuring out how to do that. I'm sure Brian will want to speak more to the upcoming IRP.

What I would say is simply we've 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 is of the next planning process. And part of that certainly will be reacting to whatever more we know about Colstrip at that time. But I think we're in an overall good position, and we've really made an awful lot of progress over the last couple of years. Brian?

[Brian Bird, President and COO]

Yes. Thanks, Bob. I think, first of all, we have to get ourselves to an IRP, and that's going to be in the latter half of '22, and that puts pressure same folks working on these plans kind of late '22, early '23, as you know, in the Montana IRP.

And Shar, to your point, obviously, it'd be really helpful to us if we had some clarity on the Colstrip situation by the time we release that IRP. And I think you may know that it's with the intent of putting additional capacity in the 2026-time table. If we do not have that clarity by that point in time, obviously, we'll have to provide some sensitivities with or without Colstrip generation.

[Shar Pourreza, Guggenheim Securities]

Got it. Perfect. And then maybe just turning to your upcoming rate case filing in June. Sort of with 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 there's 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 they're going to be surprised.

[Robert Rowe, CEO]

Yes. Well, first, we haven't announced a June filing date. We do expect to file in the summer, it'll be an electric and gas case. The internal work being done to develop the filing is really impressive. It's a great team. We're well along. There absolutely will be discussions, letting people know what we are filing and why. And there's certainly been some good substantive discussions at the commission staff just around the process of managing a major rate filing.

Fundamentally, the two questions are covering -- recovering our current costs but also bringing in the -- bringing into rate base the substantial capital investments we've made over the last few years. And as you said, a number of, I think, valuable specific proposals. Crystal's in the middle of all that and can speak to a little more detail, I think.

[Crystal Lail, VP and CFO]

Yes. Shar, the only thing I would probably add there is just it has been five years between test period. So you alluded to the inflation comment and with stakeholders. Our key plank of that rate case is certainly going to be the amount of infrastructure investment we've made over that time period and recovering those costs. So 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 staff and others and giving them a heads up on where we see the case on.

[Robert Rowe, CEO]

I'm going to answer the question -- go ahead.

[Shar Pourreza, Guggenheim Securities]

No, I'm sorry. Bob, you go, please.

[Robert Rowe, CEO]

I was going to answer the question you didn't ask, which is that if we have been able to be more aggressive about investing in owned generation earlier and if we had a better ability to hedge, I absolutely believe our customers would have been -- would be much better off and much more protected 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've kept investing in that. That 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 wrong lessons. But I interrupted you, I'm sorry.

[Shar Pourreza, Guggenheim Securities]

No, Bob, you just asked the question I was going to ask, and then you answered it. So I appreciate it. Thank you so much guys, have a great weekend. Appreciated.

[Travis Meyer, Director of Corporate Finance & IR Officer]

Okay. We'll take our next call from the line of Sophie Karp at KeyBanc. Sophie, your line should be open.

[Sophie Karp, KeyBanc]

Hi, guys, can you hear me?

[Travis Meyer, Director of Corporate Finance & IR Officer]

We sure can, Sophie.

[Sophie Karp, KeyBanc]

Thank you for taking my question. So I just wanted to see if you could help us with the total number of capital investment recovery that you would be speaking in this rate case, appreciate that you are in the weed and actually plan in the filing, but should we look at it as more statistic prior year CapEx? What's a good approximation for that?

[Crystal Lail, VP and CFO]

I think a couple of things, and I'm looking to Travis. I think in the appendix, we have Slide 23 that gives you an overall look at an ending rate base figure, which would be somewhat of a proxy for what we'd be going in to ask to recover, but we'll have more updates when we actually file through the ending rate base number we'll be requesting. But I think that's where I'd point you for the best indicator of what we'll be going into from a revenue requirement perspective.

[Sophie Karp, KeyBanc]

Got it. Got it. And then -- so that would not be including the subsidies that you are expecting to commission this year, right? So the Bob Glanzer and the Yellowstone County project?

[Crystal Lail, VP and CFO]

So that wouldn't -- Bob Glanzer in South Dakota, so we haven't announced any rate case timing on that one yet. With regard to Yellowstone, we're expecting that to be in service sometime in the '23, '24 that winter season. And so we'll be looking at ways to bring that in. But obviously, from a test period basis, the '21 test period with no measurable adjustment in '22.

[Sophie Karp, KeyBanc]

Thank you. Very helpful. Maybe a philosophical question, if I may? Do you think that there's been any evolution in Montana on the attitude towards kind of utility generation ownership [Multiple Speakers] it’s a complicated topic I know in the state?

[Robert Rowe, CEO]

Great question. And I think what I said just in response to Shar is right on target there. Being on the market is fantastic when the market is going your way and all those savings can be exacerbated in just a couple of days. Another good data point there is last July, and looking at Crystal, and correct me, but we had budgeted about a $6 million, $7 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 in -- including a substantial portion of owned generation. And they figured that out, obviously, and 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 stable rates.

[Sophie Karp, KeyBanc]

Thank you. Appreciate the color. And last one, if I may. Now that Talen is filed, is there any implications from that to the Colstrip process that you know?

[Brian Bird, President and COO]

I would say this, we've been in contact with Talen, and we're thinking through the implications. I think make sure it's clear to understand that Talen is an owner in Unit 3. We're an owner in Unit 4. And though, we have a reciprocate 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. And at this point in time, we do not believe it will have an impact on the operations at the plant.

[Sophie Karp, KeyBanc]

Thank you. That’s all I had.

[Travis Meyer, Director of Corporate Finance & IR Officer]

Thanks, Sophie. We'll take our next question from the line of Ryan Greenwald at BofA. Ryan, your line should be open.

[Unidentified Analyst]

Did that work? It's Ryan and Julien. Hey, afternoon guys.

[Robert Rowe, CEO]

Hey Julien. Good afternoon.

[Unidentified Analyst]

Team, just to get straight to it. Just following up on Shar's line of conversation earlier, how do you think about introducing more of a conversation on trackers here, both -- not just capital tracker and the context of Laurel, but also just O&M in the context of a more inflationary environment? Conceivably, that might be more of -- there might be more understanding as of the need, but I'm curious where you are in those conversations, preliminary stakeholders and otherwise, but specifically on the ability to track costs. Obviously, you guys have done a good job, past tense, but perhaps we're in a different era of cost inflation today?

[Crystal Lail, VP and CFO]

Julien, it's not lost on me that I step into the CFO suite here where -- the different era. I think as you work the inflationary going forward, it's nice of Brian to hand that off to me after it's no longer transitory, I guess. But good time to [multiple speakers]

[Unidentified Analyst]

You're just in time.

[Crystal Lail, VP and CFO]

You're just in time. So first, your question to trackers. So base rate case, that's an important piece. Importantly, I wouldn't call our PCCAM 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 to make it hopefully more tracker-like and certainly where the power market prices and Sophie's questioning that went to are people thinking about generation differently, I certainly think pricing can lead to a different thought process.

And so from that tracker perspective, we'll certainly be making a proposal for something that gets more fair in this environment. We're certainly using our measurable structure in the rate case a bit differently than we has 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 costs on a more timely basis and to show that adjustment for them.

And so maybe I'll be asking for everything in the kitchen sink or we will be. But I think different times call for different measures, and so we'll be making that case both on the capital side as we think about Yellowstone, revising the current mechanisms we have with the PCCAM tracker and also just how we look at the test period and adjust that to more reflect our current costs.

[Robert Rowe, CEO]

Just to pile on. I think the observation that PCCAM is in the trackers are really good one. It's more of an anchor than a tracker. And it doesn't -- it does a lot of things really badly. It's complicated and convoluted. The lag is extraordinary. It's incredibly asymmetrical. The fact -- it needs to be not just reset, but probably realigned.

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 PCCAM doesn't do that. Instead, it just delivers a shock at some point. So again, this is -- it's an opportunity to really learn some things about what works and what doesn't work, and this is in the latter category.

[Unidentified Analyst]

Yes. No, I hear what you're saying. I mean, actually, maybe we could speak specifically to Laurel here a little bit more. Just what is your confidence level in being going to zero in on cost on that asset here? Where are you in kind of fixing and nailing down those related capital costs at this point in time?

[Brian Bird, President and COO]

Yes. As you know, one of the reasons to move forward with the Yellowstone project itself is a -- we had a fixed price contract and moving forward. And obviously, there's inflationary pressures throughout -- on 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.

[Unidentified Analyst]

Yes. That makes a lot of sense. I mean it does make a lot of sense. I hear you. And just sort of to go back on what you said a second ago and clarify, your conversations with stakeholders, how has this resonated in having a relook at maybe PCCAM as you characterize it or, frankly, anything beyond PCCAM?

[Crystal Lail, VP and CFO]

I think one thing on the PCCAM side, 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 could see in our filing last year the amount of outsized costs above the base in that filing. And so it clearly shows that we need to reset. I think conversations with staff and others is something that's a bit more formulaic, and quite frankly, a little less convoluted to manage, is something we can all get behind.

And so I would like to think that a proposal that -- obviously, we 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. So I certainly think it's right for conversation.

[Unidentified Analyst]

Bye guys. I’ll leave it there. Thank you.

[Travis Meyer, Director of Corporate Finance & IR Officer]

With that, it looks like we've exhausted our queue. So I'll hand it back to Bob for any closing remarks.

[Robert Rowe, CEO]

Great. Thank you very much for the good questions and support throughout the year. And we are looking forward to seeing a number of you in person here before too long. Have a great weekend, and let's keep the snow coming.