Nwe 4Q19 CT

2/18/2020 NorthWestern Corporation (NWE) CEO Robert Rowe on Q4 2019 Results - Earnings Call Transcript | Seeking Alpha
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NorthWestern Corporation (NWE) CEO Robert Rowe on Q4 2019

Results - Earnings Call Transcript
Feb. 13, 2020 10:16 PM ET
by: SA Transcripts
Q4: 02-12-20 Earnings Summary
Press Release Slides
EPS of $1.19 beats by $0.02 | Revenue of $328.13M (6.26% Y/Y) misses by $-1.08M
Earning Call Audio Subscribers Only
0:00 / 1:06:09
NorthWestern Corporation (NYSE:NWE) Q4 2019 Earnings Conference Call February 13,

2020 3:00 PM ET
Company Participants
Travis Meyer - Investor Relations and Corporate Finance
Robert Rowe - President and Chief Executive Officer
Brian Bird - Chief Financial Officer
John Hines - Vice President of Supply and Montana Government Affairs
Conference Call Participants
Michael Weinstein - Credit Suisse AG
Julien Dumoulin-Smith - Bank of America Merrill Lynch
Shar Pourreza - Guggenheim Partners
Jonathan Reeder - Wells Fargo Securities, LLC
Vedula Murti - Millennium Management LLC
https://seekingalpha.com/article/4324149-northwestern-corporation-nwe-ceo-robert-rowe-on-q4-2019-results-earnings-call-transcript?part=single 1/28
Brian Russo - Sidoti & Company, LLC
Operator
Good day, and welcome to the NorthWestern Corporation's Year-End 2019 Financial
Results Conference Call and Webcast.
At this time, I would like to turn the conference over to NorthWestern's Investor Relation
Officer, Travis Meyer. Please go ahead, sir.
Travis Meyer
Thank you, Shelby. Good afternoon, and thank you for joining NorthWestern Corporation's
financial results conference call and webcast for the year ending December 31, 2019.
NorthWestern's results have been released, and the release is available on our website at
northwesternenergy.com. We have also released our 10-K pre-market this morning.
Joining us on the call today are Bob Rowe, President and Chief Executive Officer; Brian
Bird, Chief Financial Officer; and additionally we have other members of the management
team in the room with us to address your questions.
Before I turn the call over for us to begin, please note that the Company's press release,
this presentation, comments by presenters and responses to your question may contain
forward-looking statements and non-GAAP financial information. As such, I will remind
you of our safe harbor language. During the course of this presentation, there will be
forward-looking statements within the meaning of the Safe Harbor provisions of the
Private Securities Litigation Reform Act of 1995.
Forward-looking statements often address our expected future business and financial
performance and often contain words such as expects, anticipates, intends, plans,
believes, seeks or will. The information in this presentation is based upon our current
expectations. Our actual future business and financial performance may differ materially
and adversely from our expectations expressed in any forward-looking statements. We
undertake no obligation to revise or publicly update our forward-looking statements or this
presentation for any reason. Although our expectations and beliefs are based upon
reasonable assumptions, actual results may differ materially. The factors that may affect
our results are listed in certain of our press releases and disclosed in the Company's Form
10-K and 10-Q, along with other public filings with the SEC.
Today's presentation also contains non-GAAP financial measures. Please refer to the
definitions and reconciliation of these measures that are included in our webcast
materials.
Following our presentation, we'll open the phone lines to allow those dialed into the
teleconference to ask questions. The archived replay of today's webcast will be available
for one-year beginning at 6:00 p.m. Eastern Time today and can be found on our website
under Our Company, Investor Relations, Presentations and Webcast link.
With that, I'll hand it over to our President and CEO, Bob Rowe.
Robert Rowe
Good afternoon, thank you for joining us and we are calling in from our Sioux Falls Office,
where the temperatures have rocketed up over the last couple of hours, and it's now a
positive two degrees Fahrenheit.
I'll start as always with some recent highlights. Net income for 2019 was $202.1 million,
that's a $5.1 million or 2.6% increase, compared to last year. Diluted EPS was $3.98, a
$0.06 or 1.5% increase, compared to last year. Non-GAAP adjusted EPS was $3.42 and
that's a $0.03 or a 9% increase, compared to 2018. The Board declared a quarterly
dividend of $0.60 per share, that's a 4.3% increase and that's payable March 31 to
shareholders of record as of March 13.
Late last year, we issued a carbon reduction vision for our electric portfolio in Montana.
We are targeting a 90% reduction in carbon intensity by 2045 starting from a 2010
baseline. In December, we also announced our transaction to acquire an incremental 25%
or 185 megawatts of Colstrip Unit 4 from Puget Sound Energy for $1.
In February just this month, we filed a request for approval of the Colstrip acquisition with
the Montana Commission. In December, the Montana Commission issued a final order
approving our electric rate case settlement, and this month we've also issued an all-
source competitive solicitation or request for proposals for up to 220 megawatts of
peaking and flexible capacity to be available for commercial operation early in 2023.
And with that, I'll turn it over to our CFO, Brian Bird to walk through our financial results.
Brian Bird
Thanks, Bob. Slide 4 shows our summary of financial results. The takeaway there as Bob
talked about net income $202.1 million, a $5.1 million or 2.6% improvement on a year-
over-year basis. I’ll get into details, but generally the 2.3% improvement in gross margin
that increase was a higher increase than our operating expenses of about 1% resulting in
operating income improvement about 4% that ultimately drove our good results on a year-
over-year basis.
Turning to Slide 5. In terms of gross margin, gross margin of $939.9 million, a $20.8
million improvement or 2.3%. If you look into the major drivers there I would talk about two
things that really from 2018, the Tax Cuts and Jobs Act impact benefit this year $22.1
million versus the 2018 amount. That's offset also with a better electric qualified facilities
liability adjustment in 2018.
So kind of taking those two offsetting one another, what really drove the results to a great
extent. We had good retail volumes on the gas side and electric retail volumes. We also
saw some benefit from our rate increase, $4.4 million this year for a nine-month period, an
improvement in our electric supply cost recovery.
Offsetting that to a degree, we did see some reduction in our electric transmission
revenues during the year and also stepped out our natural gas production rates. That total
change in gross margin on those items that impact net income was $20.2 million. In
addition things that flow through trackers like property tax and production tax credits
netted to a $0.6 million increase in gross margin again netting to a total of $20.8 million
increase in gross margin.
Moving forward to weather on Page 6. Upper right, just to summarize, we did estimate
overall favorable weather in 2019 resulted in a $7.3 million pre-tax benefit as compared to
normal, and a $6 million benefit compared to 2018. The calendar months and the weather
maps reach month were very, very telling. All of the favorable weather benefit for the year
really came in the first quarter, really cold February and March helped drive the favorable
results that really impacted the gas side of our business.
When you look at the second and third quarter, we didn't have much cooling load at all. A
matter of fact, it's net unfavorable weather, if you will during that time period. And then the
fourth quarter though October was cold, it certainly didn't do enough to offset a pretty mild
December. And so, again, net-net, the first quarter drove our favorable weather results for
the year.
Moving on to Page 7, in terms of operating expenses. Operating expenses as a total $663

million, up $10.1 million or 1.5%. So keeping operating expenses low. The two primary
benefits there is property taxes appeared to level off, certainly level off in 2019. We hope
to see that as a trend going forward, certainly no certainty of that, but certainly a good step
in the right direction to see those leveling off, up $0.6 million or 0.4%.
Also, the depreciation and depletion, actually down $1.6 million or down approximately
1%. The reason there being obviously we've had increased depreciation as we continue to
invest in our assets, but the $9 million improvement in depreciation rates as a result of the
rate case settlement as the primary driver for the reduction on a net basis.
In terms of operating, general and administrative expenses, we've shared in the past that
we did and opened the first strings a bit, if you will on our expenses. We did note
throughout the year, we are going to be spending more on hazard trees and made really
good progress on that during the year. We did through both our generation and our T&D
business, increased maintenance expenses across the Board. Labor was up a bit during
the year. And then additional legal technology and benefits are other primary increases in
OG&A.
You may note that last quarter on a year-to-date basis, we did have a quite a big large
other there were questions associated with that. We did in the fourth quarter break that out
a bit more, so people could see that. That change there in those items impacting net
income from an OG&A perspective, $17.3 million.
When you take a look at items that certainly are in the OG&A category, but are offset
elsewhere in the P&L $7.8 million pension, some operating expenses recovered in
trackers and then $2.3 million in non-employee directors deferred comp. Both the pension
and deferred comp item you'll see in a moment offset in other income. Those changes
were a decreased OG&A of $6.2 million for a net increase in OG&A of $11.1 million.
On the next Page 8. Operating income, $276.9 million, up $10.6 million or 4%. Below that
interest expense, up primarily due to higher borrowings $3.1 million. Other income as I just
spoke the main decrease is really netting the pension item and the deferred comp item I
just spoke to in OG&A. But also that was also partly offset by $1.6 million, a higher
capitalization of AFUDC.
The net there that from an income before tax of $182.2 million, $3.9 million increase or
2.2%, and then following that we did have a slightly higher income tax benefit on a year-
over-year basis, I'll speak to that in a moment. To explain that difference giving to the net
income I spoke earlier of $5.1 million improvement.
On Page 9, income tax itself, the two biggest drivers we had a release of an unrecognized
tax benefit in 2019 of $22.8 million. That was offset by the impact of the Tax Cuts and
Jobs Act excess deferred taxes in 2018 of $19.8 million, that $3 million difference is the
primary difference, other things like the slight improvement in pre-tax income also drove
the net result of an income tax benefit – incremental benefit of $1.2 million for the year.
Moving onto the balance sheet that much to really say here on Page 10, obviously,
continue to see improvement in shareholders' equity, but ratio of debt to total capitalization
continued to see a downward trend as we continue to shore up our credit metrics and
always keyed in on our FFO to debt try and make sure we maintain our BBB flat
unsecured credit ratings.
Moving onto the cash flow statement on Page 11. We did see a falloff in cash provided by
operating activities of approximately $85 million on a year-over-year basis in the red box
to the right. We really identify five things that drove that. We did have an under collection
of supply cost during the year, not only to be a higher supply costs, but our method now to
collecting those are on an annual basis versus a monthly basis, and as a result of the
PCAM settlement that add some aspects to do with it as well, but that under supply we are
now collecting in 2020. So we do expect to see a bit better cash flow, certainly on a year-
over-year basis.
The Tax Cuts and Jobs Act, we had that settlement that we had in 2018. Actual refunds to
customers didn't start occurring until into 2019, there is the $20.5 million there. And then
the change year-over-year in terms of people providing deposits for generation
interconnections was actually net refund $22.1 million for the year, those are the three
biggest drivers of the $85.3 million.
Moving forward on to Page 12 from an adjusted non-GAAP earnings perspective, I think

people who follow the company come to understand this page on the far – to the far left to
the far right really is the GAAP numbers for 2019, and far right GAAP for 2018. And then
we work toward a non-GAAP numbers for both 2019 and 2018, the middle and the rest
you can compare those.
Starting from the far left, diluted EPS of $3.98 on a GAAP basis, we had two adjustments
this year, we took out $0.11 of favorable weather and we backed out $0.45 associated
with the unrecognized tax benefit getting us to $3.42.
On a comparison basis, last year's GAAP number in 2018 $392, we have three items that
we backed out of that number $0.02 of favorable weather, $0.26 associated with QF
liability adjustment, $0.25 associated with TCJA netting to a 339 – $3.39 non-GAAP EPS
in the 2018, a $0.03 improvement or just under 1%.
Comparing the middle columns through the P&L, gross margin up about 3%, also
operating expense is up about 3%. Even though property taxes and depreciation –
actually depreciate slightly down, we did have a higher amount in OG&A and we planned
to spend more, we talked about hazard trees. We talked about some other categories of
incremental spend, we wanted to have in 2019 that – though considering that
improvement in gross margin increase in operating expenses at 2.8% improvement in
operating income and net ultimately in a 2.2% increase in net income on a non-GAAP
basis.
Moving forward to Page 13. Diluted earnings per share over this time period, you see it
from both a GAAP perspective and a non-GAAP perspective. On a non-GAAP basis, our
EPS has grown on an average over 5% from 2013 to 2019. We will tell you that we do
also show in 2020 column. Our guidance range of $3.45 to $3.60 per diluted share, we do
note here really the three assumptions normal weather, we give you a consolidated
income tax rate of 2% benefit to 3% tax increase based upon pre-tax income and then
diluted shares outstanding of $50.9 million.
Lastly, regarding our 6% to 9% total return long-term. Look one thing I would mention here
is we do see our capital spend now getting up in 2020. In 2021 to $400 million should be
able to sustain that level on a going forward basis. I'd expect this to move toward the
middle of that 6% to 9% total return – total shareholder return range again assuming
reasonable recovery.
Moving forward, 2019 non-GAAP to 2020 EPS bridge to the right, I mentioned the $3.45 to
$3.60 range. How do we get there? Starting at $3.40 to $3.42 share we show kind of
some low and high points to get to that range.
What are some of the drivers on gross margin? Certainly, we expect the 1% plus of
organic growth. We expect higher industrial and commercial loads. We expect some
improvement in transmission revenues, and we expect to get a full-year benefit from the
rate case. And then lastly, we had a wet year from an irrigation perspective in 2019. We
expect to see some improvement in irrigation revenues in 2020. That should help on the
gross margin side.
And OG&A expense decreases really across the Board. We're looking at the business
trying to maintain cost control in 2020 after kind of – as I said, releasing some of the first
strings in 2019, certainly tightening up here again in 2020, we've made great progress on
hazard trees in 2019 expect to spend a little lees in that category in 2020. And that range
of $0.11 to $0.14, those are the two big drivers for improvement between gross margin
increase and OG&A decrease.
Thinking property tax, depreciation and interest expense for a growing company, we
expect to see those, each increasing year-over-year. Other income with the South Dakota
generation and increased capital spend, we'll speak to in a moment. We're expecting a bit
more AFUDC on a year-over-year basis.
And lastly, we continue to focus on repairs tax deductions and expected incremental tax
benefit associated with that. That nets us to $3.45 to $3.63 with – up to a range from zero
to $0.03 of potential dilution from equity needs likely late 2020 to possibly early 2021. We
see a net range of $3.45 to $3.60.
When you take in consideration, our mid-point of that at $3.53, when you look at the
dividend we announced today and annualize that that's $2.40, if you compare that to
$2.40 to the midpoint of the range or just provide a $3.53, that's about a 68% dividend
payout.
Lastly on this page, I'll speak to taxes. Some good news and regarding that, we did expect
to be going through our NOLs in 2020. Now that's 2021. And as a result of pushing that
back a year with AMI [indiscernible] credits and PTC credits being available now into 2023
that used to be 2022 to reduce cash taxes. And lastly, we anticipate our effective tax rate
to reach approximately 10% by 2023.
And with that I'll pass back to Bob.
Robert Rowe
Thanks, Brian. I'll start with a couple of words about our carbon statement in Montana.
And as you know that's targeted 90% reduction in carbon intensity by 2045, as compared
to a 2010 baseline – in the baseline is the result of effectively that's been Colstrip Unit 4
was able to be fully dedicated to serve our customers, the first resource that we had in
Montana after going through deregulation and divestiture of the Montana power days.
As you know, we are already over 60% carbon-free on a delivered basis in Montana and
that compares to 28% average nationwide. This is a Montana specific statement, although
it's notable that in South Dakota, we are – I think about 32% carbon-free right now.
We’ve referred to this as really a no BS, kind of a carbon statements are not a lot of
qualifications to it. It's driven by continued renewables coming on an actually very soon,
we'll have more wind on our Montana system. Then we have hydro and we'll have more
wind or hydro and then we have Colstrip even after we close on the additional acquisition
at Colstrip.
Energy efficiency continues to be important. Thermal resources will be very important in

meeting our customers’ demands in Montana dispatchable resources. But the frequency,
the range of dispatch at this point to diminish as other resources come online toward the
end of the decade. We expect there are thermal resources that will be retired.
So this is a glide path, it's also worth noting that this really is linked to the same modeling
assumptions as in our resource plan and just like the resource plan, this will be updated
on a regular basis and that will allow us to capture changes in economics, changes in
technology, changes in public policy.
One of the things I'm particularly excited about that will help us achieve this vision is
working with a group of communities that have their own sustainability goals, sustainability
programs in Montana to help them craft and implement solutions that makes sense for
them, while also recognizing our legal obligations to all of our customers that will be a
great opportunity to work directly with our customers.
Turning then to the announced acquisition of 25% of Colstrip Unit 4. On December 9, we

executed a purchase and sale agreement to acquire Puget Sound Energy's 25%
ownership in Unit 4. It's 185 megawatts that would bring our total ownership at Colstrip to
407 megawatts or 55% of Unit 4.
And as I mentioned, even without additional acquisition, we will have both more hydro and
more wind on our system. A brand that deep into his pockets and find a $1 to pay for the
resource, very importantly Puget Sound will retain responsibility for its current pro rata
ownership share for environmental of pension liabilities, as well as for ultimate closing
costs.
In tandem, we will enter into a purchase power agreement, under which we will sell 90
megawatts back to Puget for five years indexed to the Mid Sea index, but with a floor of
costs. And our proposal is to essentially put the profits from that PPA into a trust to pre-
fund pretty meaningful down payment on an eventual closing costs for Unit 4.
We think that's far sighted and responsible recognizing that all assets do have useful lives.
We filed for approval of the transaction in its various parts with the Montana Commission.
They are being responsible in setting a schedule interventions are due in the first few days
of March and we certainly don't see any reason why the transaction couldn't be reviewed
and approved by the end of the year, which we think is an important and being able to
implement the elements of the proposal and start achieving those benefits for our
customers.
And as you know, we are uniquely exposed to prices in the Western power market, 46%
reserve margin deficit at peak concerns about that, meaning deep requirements are now a
primary focus in Western United States and even sharper focus in the Pacific Northwest
and an acute focus in our Montana operation, again because in part of the legacy of
supply new regulation. So I mean, this is very important in addressing about a quarter of
our customers exposure to peak.
Turning on to the South Dakota and the Montana electric plants. First, South Dakota, it's
been a straightforward and efficient process, we published our plan in the fall of 2018,
really focused on modernizing our fleet to address reliability, flexibility and particularly to
maintain our compliance with Southwest Power Pool requirements to be able to
participate on behalf of our customers as effectively as possible in SPP. So we identified
90 megawatts of existing generation that should be retired and replaced over the next 10
years. I think we're running over a decade.
Then on April 15 2019, we issued a request for proposals for 60 megawatts of flexible
capacity resources to begin serving our South Dakota customers by the end of 2021 is a
very robust process, again administered by a third-party, lots of interest in the process, a
good variety of submissions. As a result of the competitive process, we do expect to
construct and own natural gas-fired reciprocating internal combustion engines or RICE
units at a Brownfield site in Huron.
And then dependent on manufacturer selection, we anticipate between 55 megawatts and

60 megawatts of new capacity should be online by late 2021 at a total investment of about
$80 million. And this election proposal is subject to execution of construction contracts and
then obtaining the applicable environmental and construction permits. So that South
Dakota, we're very excited to see that move forward.
Turning to the Montana plan. There the focus was on developing resources that will
address the – really dramatically changing energy landscape in Montana and in the West
to meet our customers' needs in a reliable and in affordable fashion.
As I referenced just a moment ago, we are severely exposed at peak, right now we're
about 630 megawatts short of our peak needs, and that's in a market in which traditional
resources are shuttering and original market that isn't where providers and planners are
increasingly concerned about loss of loan probability in the not terribly distant future.
Right now we are at market on behalf of our customers and being at market at peak with a
skinny set of resources is not a very good place to be for our customers. We forecast that
our portfolio will be about 725 megawatts short in just five years, considering expiring
contracts and then just very modest increase in customer demand. So this month, we've
issued a competitive all-source RFP for up to 280 megawatts of flexible peaking capacity
to be available for commercial operation in early 2023.
As the node indicates, the RFP is opened to all types of resources provided that they can
meet our needs for peak and flexible capacity. There will be an independent evaluator to
administer and then to evaluate proposals and the successful project or projects should be
selected by the first quarter of next year, and then we expect to kind of wash, rinse and
repeat and run a subsequent process in a future year.
Turning to some other matters, on the regulatory front, as you know, in December, the
commission issued a final order, most importantly approving the electric rate case
settlement in our Montana case effective April 1, 2019. And that would result in an annual
increase to electric revenue of about $6.5 million based on a 9.65% ROE and the capital
structure as we had proposed.
And then a $9.3 million decrease in depreciation expenses, several parties have filed
petitions for reconsideration of various parts of the order, particularly a request for
reconsideration by the Montana Consumer Council concerning the decoupling or
infrastructure funding mechanism that had been proposed by Natural Resources Defense
Council and that we're very strongly supported. We expect that the request for
reconsideration will be acted on – in the first quarter.
Parallel, in May of last year, we submitted a filing to FERC for our Montana transmission
assets. In June, FERC issued an order accepting the filing, granting interim rates effective
July 1, of course subject to refund, and then establishing settlement procedures and
terminating our related Tax Cuts and Jobs Act filing, settlement judge has been appointed
and then settlement negotiations and conferences are active. We expect to submit a
compliance filing with the Montana commission based upon eventual resolution of the
FERC case with an adjustment and proposed credit back to our Montana retail rates.
We're continuing to invest in our transmission and distribution infrastructure, and this has
been sometimes this work is not as visible, but is incredibly important fulfilling our
responsibilities to our customers. That includes continuing work on a comprehensive
staged approach to infrastructure addressing safety, capacity, reliability, really modernizing
the system. We've been talking about that, our progress along those lines actually since
I've been at NorthWestern.
On the natural gas side pipeline, investments or integrity verification, pipeline and
hazardous materials on a lot of good work there. And then grid modernization continues to
be our focus. We'd like to talk about deployment have the speed to value, learning what
works and then making decisions that are sensible for our system and for our customers.
One of the neat things actually just over the last couple of weeks, we've been on a multi-
year process to create a distribution operation control center and that started with geo
coding elements in the field, acquiring spectrum, attaching communications to devices in
the field that went live just in the last couple of weeks in the days after go-live, we had
wins in Montana actually had top of loan peak at Big Sky that hit 155 miles now, we had
several hundred outages, it was truly the most challenging shake down crews that the
distribution operations center could have had, they are folks in customer care and then
particularly our people in the field all this did an extraordinary job.
The functionality of the DOC is going to continue to improve – increase over the next
several years as we continue to turn on more technology and make investments there, but
a couple of minutes on that just because it's an example of how investments that we
consider to be very important, but that can be invisible to our customers, ultimately really
make a huge, huge difference.
As you know, we're planning to enter the Western Energy imbalance market in April of
2021 based on our experience in the Southwest Power Pool, out of South Dakota that will
produce some real benefits for our Montana customers. We'll allow more efficient use of
intermittent resources, greater power grid reliability, but then circling back to the Montana
RFP, we have to have resources to be able to participate in that market.
As we've talked about before, we continue to monitor costs including labor benefits,
property tax valuations. We consider ourselves, I think objectively to be one of the most
efficient companies in our peer group and really and post up well on most measures
against companies larger than us.
Last thing, I'll draw your attention to is our capital investment forecast and what you see
here over a five-year period is $1.8 billion of total capital. We anticipate financing this with
a combination of cash flows from operations aided by NOLs through 2021, first mortgage
bonds, equity issuances, based on what we know now, any equity issuance would be late
2020, early 2021 and would be size to maintain and predict and protect our current credit
ratings. The significant – potential significant capital investments that are not in these
projections or negative regulatory actions could necessitate additional equity.
Just a couple of things to highlight based on the results of the South Dakota RFP. This
does include $80 million of incremental investment for our South Dakota generation in
2020 and 2021, but does not include any investment identified it for generation capacity in
Montana, and those depending on the results of an RFP could be in excess of $200
million over the next five years.
One thing, I would highlight as you've heard us say before, as we work through any five-
year period, we identify more projects that are important to serve our customers. And
indeed, if you just look at the period 2020 through 2023 in this bar graph they're about –
actually $222 million of investment more than you would have seen last year, and that's a
result of the additional $80 million in generation in South Dakota.
Also an important Montana electric transmission initiative, some additional funding in

Montana AMI, gas transmission work in Montana, work at a billings substation, ongoing
upgrades to the hydro system and then like so many other utilities, the investment in the
SAP S4 HANA project. So the point being that as you work through the five years, again
you identify the work that's most valuable and important to continuing to be able to serve
our customers.
With that, we are open for questions.
Question-and-Answer Session
Operator
[Operator Instructions] We'll take our first question from Mike Weinstein with Credit
Suisse.
Michael Weinstein
Hi Bob, Brian.
Robert Rowe
Hey, Mike.
Michael Weinstein
Hey. Could you talk a little bit more about why the RFP, I guess final decision would be in
the first quarter of 2021, what are the – what's the extra, I guess time required for that?
Robert Rowe
It's going to be a very thorough process or through the pre-qualification process there will
probably be several stages of evaluation. So we believe in our supply folks, most
importantly, believe that's a realistic and prudent schedule.
Brian Bird
Yes. Our expectation is that by this call next year we'd be giving you an outcome.
Michael Weinstein
Got you. And have there been any other changes to the process there? Or is it the same
process, just seeing more time with it?
Robert Rowe
We are following the process outlined in legislation passed last year in Montana. So that
does include several steps that otherwise we wouldn't have – and the legislation actually
isn't in place. But for example there we filed the RFP with the commission before releasing
it for submission. So that's one extra step that does come in mind under the statute that
we'll be taking effect this year.
Michael Weinstein
Right. And I mean is the delay coming from you guys you initiate – you're saying that you
need more time, it's not that somebody else is saying they need more time like the
legislature or the commission itself or?
Robert Rowe
No, I would not. I did use the word delay at all. This as a reasonable schedule to work
through.
Brian Bird
We might have been aggressive on the front-end in terms of fully understanding the time
period, but working with the independent party revised our time period.
Michael Weinstein
Okay, got it. Hey, I was wondering if you could maybe talk a little bit more about the
energy imbalance market. I think, Bob, you mentioned that the additional assets are
required to join that. And you're planning on joining in next year, is there any timeline that
you have for additional assets that might need to be built? I mean what are we talking
about here? Is it any significant investments that are required?
Robert Rowe
Those would be the assets that come out of the RFP.
Michael Weinstein
Okay, so you need to see that before you can join?
Robert Rowe
No, we're actively going through the steps to join right now. It's a very significant
undertaking to get in place all the systems, hardware, software, people to be able to
participate in the market and that's a joint undertaking of our transmission department and
our supply department.
Brian Bird
Mike, I just add…
Michael Weinstein
Yes.
Brian Bird
Mike I just add, the capacity that we plan to build through 2025, certainly meets our needs
from an EIM perspective. We or others, obviously through PPA, depending on the
outcome of RFPs. But anything we don't have during the time that we're in EMI up until
the end of 2025, we'll have to enter into contracts in order to achieve that.
Michael Weinstein
Got it. Are there any transmission assets required that need to be built or any additional
upgrades there?
Robert Rowe
Not specifically for this. I mentioned, we do have a couple of transmission project under
way.
Michael Weinstein
Right. All right. Thank you.
Robert Rowe
Thank you.
Brian Bird
Thanks Mike.
Operator
We'll take our next question from Julien Dumoulin-Smith with Bank of America.
Julien Dumoulin-Smith
Hey, Team. How are you, Brian and Bob?
Robert Rowe
Julien, how are you?
Can you hear me?
Robert Rowe
Yes.
Good, pleasure. Absolutely, good to hear from you. So just following up on where Mike
was taking a second ago. Timing of equity here, you specifically talked about this upside
$200 million. You also put in the slides here 2020, 2021. Are you waiting to get some
clarity about that process before kind of the deciding definitively on equity needs? And
also when you talk about equity here, is that a definitive block equity or you think about
like an ATM process or something like that?
Robert Rowe
I put two answers to your first question, Bob walk through the $222 million of incremental
capital from the last time we talk from the slide. And when I talked about it on the last call,
I was specifically talking to the $80 million, not the full $222 million and talked about
having a need, the latter half of 2020 or into 2021 that's still the case. But again, we just
need to size that debt according to needs from a rating agency perspective, again FFO to
debt perspective. So that's really answering your first question.
Your second question, we've used ATMs in the past, like them, that's certainly a possibility,
but we'll evaluate other options as well.
Right. So basically whatever comes out of this current process in Montana that would be
incremental later on, as you say in the slides, so that's not going to dictate the timing
whether 2020 or to early 2021, right, et cetera?
Brian Bird
That's a fair point, Julien. I think, we'll need some equity prior to it outcome. I think in
terms of certainly building out anything, if we're fortunate enough to be successful in
Montana. That would be certainly beyond the end of 2020 early 2021 time period. So that
might be – hopefully that's an incremental amount of equity we're raising at sometime in
the future beyond it.
Got it, excellent. And then, Brian, did you say – you expect to move to the middle of the
6% to 9% TSR range? And then to the extent which I heard that right, can you clarify how
you think about like a base year or anything like that? Sorry, I don't mean to read more
into it than is necessary. But I also heard it, so I just want to make sure I heard it right
here?
Brian Bird
I appreciate you gave me an opportunity to clarify it again. The main thing here is in 2020
and 2021 we're now at about $400 million of capital investment. If we're able to sustain
that type of increase if you will to $400 million every year, I think you'd see our EPS growth
rate improve. Again assuming reasonable recovery and thus you'd see EPS plus a
dividend yield moving us more to the center of that 6% to 9% range. Is that make sense?
Excellent. Absolutely. No, thank you. I appreciate it, that's important. Sorry quick last little
detail here, maybe this is a Bob question. When you think about Colstrip and the various
owners, how do you think about consolidating up further your ownership in that plants
beyond what's contemplated today, broad-based?
Robert Rowe
Yes, through the RFP we are looking for flexible dispatchable capacity that would
complement our other resources, including the PSC portion of Colstrip. So I think what
we're looking for again is something that would – in terms of serving our retail customers,
something that would be complementary with a big emphasis on flexibility, dispatchability,
particularly on an intra-hour basis. And then beyond that we'll just see what's proposed in
the RFP.
Okay. Is that differently, you don't have a need for base-load coal like Colstrip?
Robert Rowe
I'm comfortable with what we've acquired and beyond that we'll just see what comes in the
RFP. But our focus is flexibility, dispatchability and risk management, I would add.
Absolutely. Thank you very much for the clarification.
Robert Rowe
Thank you.
Operator
We'll take our next question from Shar Pourreza with Guggenheim Partners.
Shar Pourreza
Hey guys.
Robert Rowe
Shar, how are you doing?
Shar Pourreza
Not good, not too bad. Can I just follow up on Julien's question, I guess, putting in a
different way, if you are presented with a similar structure as you received with Puget.
Would you take on additional interest in Colstrip especially as the partners kind of
decarbonize?
Robert Rowe
What I would…
Shar Pourreza
Can you hear me?
Robert Rowe
As we're focused on resources that are complementary to the resources we have now in
terms of ability to be flexible, operate on an intra-hour basis and then manage to diversify
our risk as well. And then if you can read into that, if you like.
Shar Pourreza
Okay, got it. And then obviously you did – you've got the Colstrip deal, you issued the RFP
for additional generation. Any sense on sort of the timing and the composition of the next
RFP as you think about the duration of your peaking needs?
Robert Rowe
No. I think we'll work through this RFP, see what comes out the other end focus on
implementing that, and based on conditions at that time, which will be obviously different
in terms of size of the need, the economics, the technology, that's available. But given the
exposure that our customers have right now, I don't think we can wait terribly long. The
first thing is we get through this process, whenever the results are – get those resources
engaged to serve our customers.
Shar Pourreza
Got it. And then lastly, it's helpful is – you sort of highlighted the complaint around the
FCRM pilot program. Is there any – just remind us if there is a statutory deadline, I know
you expect a decision, but is there a statutory deadline for Montana, PSC to issue a
decision on the petitions?
And then Brian, this is maybe a little bit for you. Even if you sort of get a scenario where
there is a 25 basis point reduction in the earnings and the ROE. Is there sort of an
earnings impact given the fact that you do under earn in Montana?
Brian Bird
Yes. First of all, I think, just to clarify that we spoke about earlier. I think just the MCC is
the only party that as far reconsideration associated with the FCRM and the 25 basis point
everyone else – I shouldn't say everywhere else, but most parties it's certainly comment
on that certainly support moving forward that without any impact on the ROE, and we
hope that's where the commission will come down again in that regard. So I'm pretty
confident we'll get there, but we'll see.
I think the other thing I'd say is, it would be an impact of course to our earnings and
regardless if we're earning or under earning, I think it's going to have an impact, if in fact
we're deemed in anyway, not an ROE perspective, and so I just leave it at that.
Shar Pourreza
Got it.
Robert Rowe
The proposal, I thought was maybe the best decoupling our fixed cost proposal I've seen
anywhere and was an extremely forward-looking step by the Montana commission. I think
that testimony really eviscerated any kind of an argument for an ROE adjustment, but then
beyond that said, if you really think this is something to look at that's something that can
be evaluated as part of the subsequent study. So I certainly hope the commission sticks to
its guns. And there were a number of very good responsive fleeting from other interveners
opposing the request for reconsideration.
Shar Pourreza
Got it. Thanks guys. That was helpful.
Brian Bird
I think one thing too, in terms of the timing. I think we're going to need to get an outcome
pretty soon on that, because we're supposed to implement that program by July 1, and so
we hope to hear something relatively soon on that.
Robert Rowe
Just one more little footnote following on to implementation of the order. There was also
good action by the commission approving, what we're referring to is our green pricing
stipulation. So Bobbi Schroeppel, our Vice President for Customer Care and quite a good
group of stakeholders are actively working on approaches to develop green products that
our customers actually want to buy and we think that's very responsive to what we're
hearing from both large and small customers and from some of our cities.
Operator
We'll take our next question from Jonathan Reeder with Wells Fargo.
Jonathan Reeder
Hey, good afternoon gentlemen. Just kind of following up on that comment there, Bob, in
your prepared remarks, it kind of sounded like in the RFP based on some of the desire for
kind of green products that we might expect some renewables to maybe clear this first
RFP? I mean, is that kind of fair?
Robert Rowe
Very honestly, we don't know what will come out the other end, and what will ultimately be
expected given the number of parties, who are bidding in. I expect we will see some real
diversity in proposals. And as we think about our resource needs, we think about it really
as a pyramid, and that's the base long duration, dispatchable resources, and then building
up the pyramid dispatchable resource at a shorter duration. So that potentially creates an
opportunity to acquire some diverse resources through the process, but the foundational
need is going to really be long duration dispatchable resources.
Jonathan Reeder
Okay that's helpful. And then Brian, just to confirm the FFO to debt ratio that you guys still
target that's 15%?
Brian Bird
We target 15%, I think the clearing is really 14%. We'd like to have some cushion in our
FFO to debt.
Jonathan Reeder
Okay. And then lastly, the higher T&D CapEx spend that's now in your budget. How does
that impact the potential cadence of rate case filings, as well as any rate affordability
concerns for your customers?
Brian Bird
Great question, Jonathan. I think twofold, we will obviously as that spend and that was a
$223 million that Bob talked about. That's spread across those four years. I would say this.
It could move things accelerate things a little quicker. As said in the past that we expect to
file bit more frequently certainly than we have in the past and we'll let you know that in
April in terms of our timeline, if you will, at least for 2020, if there's any filings. I think the
other thing too is we expect during this time period, particularly when we get into EIM,
that's going to help reduce any bill headwind. In any time we think about our long-range
plans. We're trying to increase the customers at less than inflation.
Robert Rowe
The one thing I'd add to that is, of the $222 million part of it is South Dakota, part of its
Montana, part of its electric, part of its gas. So on any one business segment, the
increased capital is just that much more modest.
Jonathan Reeder
Yes. No, I would like you guys to kind of spread it across the field pretty well so. Okay,
thanks so much. That's all for me.
Brian Bird
Thanks Jon.
Operator
We'll take our next question from Vedula Murti with Avon Capital.
Vedula Murti
Good afternoon.
Robert Rowe
Good afternoon.
Brian Bird
Hi, Vedula.
Vedula Murti
In terms of the pending RFP here in Montana, do you have – is there a rate – in the past
that it's been difficult for you to be able to come up with self-owned proposals that
managed to be able to effectively compete or be able to cross to finish line with the
Montana PSC and the independent evaluator. Yet in South Dakota, you were able with the
Brownfield site to have a unique situation where it actually did work that way. In this
current RFP, do you have any particular new opportunities or advantages that could
produce perhaps a better outcome or the likelihood of a self-owned option more so than
maybe it's been – then has been in the past?
Robert Rowe
Could you point me to the RFP you're referring to? I'm kind of a blank.
Vedula Murti
The ones in the past where you wanted to have your self-owned options and you haven't
been able to get the PSC or whoever to validate having your self-owned options in
Montana?
Robert Rowe
I truly can't think of an example. What I wonder, if you're referring to coming out of the
2015 plan, we undertook an RFP and we would drew it, because of noise at the
commission really unrelated. If you recall, that was when commissioner at the time, came
up with a reasonable idea that QF contracts ought to be limited to 15 years, but that under
a notion of symmetry resources coming out of the RFP, whether owned by us or anybody
else also ought to be limited to a 15-year period. So as a result of that separate action by
the commission, we ultimately ended up withdrawing the RFP because we requested 20-
year proposals. I wonder – could that be what you're thinking of?
Vedula Murti
Yes. Perhaps in this case, I guess maybe – just maybe ask a little differently then. Given
your success in South Dakota, do you feel like in this new process or things that you have
advantages in terms of what you will be able to propose, that may perhaps increase the
probability of being successful at least in terms of part of solicitation. In addition, does the
Colstrip acquisition per dollar actually perhaps influence at all the self-owned viewpoint,
given you're not going to be able to fine-tune too much more capacity for dollar?
Robert Rowe
Certainly, I agree with that statement. I think we will participate in the RFP. Obviously, we
think we are good at building and operating resources, and we think there are real
customer benefits to having us do that. So we're going to participate, but the proposals
from all parties will be evaluated on a neutral basis by a third-party, really through a blind
process.
In terms of relationship to Colstrip either the relationship, I would see is that we did at least
defer about a quarter of our customers exposure through that very cost effective
transaction. We think that was the right thing to do for our customers. And also we think
that was a pretty progressive move in terms of thinking about eventual closing costs and
creating a situation where the ultimate decision about disposition of Unit 4 is going to be
based either on the economics at that unit or on a public policy decision in Montana, and
not somewhere on the coast. Beyond that I really don't see a relationship between Colstrip
and the RFP. Brian, do you say anything else?
Brian Bird
No, I think, we obviously, know the service territory that we operate in and have built
resources and ask for pre-approval and received approval on resources we put into our
portfolio in the past and we plan to compete. That's all I guess I'd add, Bob.
Vedula Murti
Okay. And I want to make sure I clarify one thing as Julien asked the question in terms of,
when you're running and make sure I understand this probably the $400 million – if you
were to sustain a $400 million capital expenditure level, when we're talking about the
midpoint of the 6% to 9%, given that you're at a 3% yield, the inference is that the $400
million – at a $400 million CapEx run rate, but that would imply about a 4.5% earnings
CAGR as part of that as your 6% to 9%. Is that fair?
Brian Bird
That is the approximate math, if you use that 3% flat dividend yield, correct. And I think the
reason for sharing that is historically we have said in the past, in light of the lower growth
and investment in some of the outcomes we had been receiving, we expect it to be in the
lower end of that 6% to 9% range that we're certainly pleased in terms of being able to
invest capital, including the $80 million that we're investing in South Dakota, and Bob
pointed out, projects that we – throughout our service territories, both electric and gas
certainly to our customers benefit, but that higher level of investment allow us to move up
within that range.
Vedula Murti
And also to clarify also the equity question, given the timing you laid out toward early
2021, which also lines up with the outcome of the RFP process in Montana. Is there any
reason not to simply wait to find out what that outcome is in terms of figuring out whether
it'd be an ATM program or maybe whatever the sizing is and that type of thing and with the
agencies, do you feel like you have time to perpetuate that if you have an idea of what the
outcome is?
Brian Bird
Yes. I think – it's a fair question. I think, obviously, one of the benefits of an ATM program
you could size that if in fact you – let's say, you weighted into the first quarter and you
knew an outcome from that you could certainly size that and utilize that over time, it's
certainly something to think about. We just wanted to make sure we gave people the
impression of the timing that around an equity raise, and so something certain to think
about, Vedula.
Vedula Murti
Okay. And just in terms, if we're running at a $400 million CapEx program. Given your
cash flow profile in order to keep – maintain a balanced capital structure. Should we be
thinking at that point in time that something in the $100 million to $200 million kind of area
is what would be required to maintain the capital structure?
Brian Bird
Vedula, I think people all run their various models and I think they probably have in their
miles on FFO to debt calculation for us. That's what we're really trying to get you to do is
from your perspective in a modeling perspective for you to size that equity. We're not
going to provide you what we believe that is at this point in time.
Vedula Murti
All right. Thank you.
Operator
[Operator Instructions] We'll take our next question from Brian Russo with Sidoti.
Brian Russo
Hi, good afternoon.
Robert Rowe
Hey, Brian.
Brian Russo
Hey. Just on Slide 38, the rate base and authorized returns, just remind us your thought
process here. You're currently earning on $3.4 billion of rate base, but your actual
estimated rate base, if you kind of true it up outside the historical test years is $3.8 billion.
Is that the way to look at? So that delta will – that was roughly $400 million will be need to
– be recovered in future rate cases?
Brian Bird
That's correct. The $3.8 million is a future rate case perspective. If it all happened on a
particular date today, we would be earning on the $3.8 million, $7.3 million, currently
earning on the $3.4 million today.
Brian Russo
Okay, so – and the timing of these upcoming rate cases is to be determined and like you
said, maybe after your first quarter call in April?
Brian Bird
That's when we give you an indication, what we plan to do in 2020.
Brian Russo
And in South Dakota for recovery of the peaker plant, are you going to pursue the general
rate case route? Or file for a tracking mechanism?
Brian Bird
Yes. We're going to pursue that the rate case, Brian, I think the timing of that will
determine whether we can get a known and measurable adjustments. So the timing of that
will also require us to have some conversation with the commission and regardless, while
we're making an investment in that and we – I said, we don't have a rate case, we
certainly would have AFUDC during that time period.
Brian Russo
Okay. So would this be like a one-off rate case or would you seek recovery of the
difference between $606.6 million and $557.3 million, which was authorized back in
December of $15 million plus, the $80 million for the peaker? Is that...
Brian Bird
I think, it would be all in. It would be all in. And potentially if it was primarily, as you can
see from the schedule, you're looking at it's primarily on the electric side, where we have
that need and obviously the generation units on the electric side. So if we have a rate
case from a South Dakota electric perspective, we're not just going to do the $80 million of
investment in the plants. It's going to be for all of our South Dakota electric business.
Brian Russo
Got it. And then just to clarify, remind us the peaker plant in South Dakota being built in
Huron, South Dakota. Is that at an existing generation facility? Or is it just that some sort
of industrial site that has easier access to transmission?
Brian Bird
That is our site.
Brian Russo
It's your site. Okay. Got it.
Brian Bird
Correct.
Brian Russo
Thank you very much.
Brian Bird
Thank you, Brian.
Operator
We have no more questions in the queue at this time.
Robert Rowe
Okay, great. Thank you all very much for your interest and support. We'll see quite a few
of you over the next two months, and hopefully be visiting with all of you in April. Take
care.
Operator
This concludes today's call. Thank you for your participation. You may now disconnect.
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2/18/2020 NorthWestern Corporation (NWE) CEO Robert Rowe on Q4 2019 Results - Earnings Call Transcript | Seeking Alpha

NorthWestern Corporation (NWE) CEO Robert Rowe on Q4 2019

Q4: 02-12-20 Earnings Summary

Press Release Slides

Earning Call Audio Subscribers Only

NorthWestern Corporation (NYSE:NWE) Q4 2019 Earnings Conference Call February 13,

Travis Meyer - Investor Relations and Corporate Finance

Robert Rowe - President and Chief Executive Officer

Brian Bird - Chief Financial Officer

John Hines - Vice President of Supply and Montana Government Affairs

Conference Call Participants

Michael Weinstein - Credit Suisse AG

Julien Dumoulin-Smith - Bank of America Merrill Lynch

Shar Pourreza - Guggenheim Partners

Jonathan Reeder - Wells Fargo Securities, LLC

Vedula Murti - Millennium Management LLC

Brian Russo - Sidoti & Company, LLC

Moving on to Page 7, in terms of operating expenses. Operating expenses as a total $663

Moving forward on to Page 12 from an adjusted non-GAAP earnings perspective, I think

in the 2018, a $0.03 improvement or just under 1%.

And with that I'll pass back to Bob.

Energy efficiency continues to be important. Thermal resources will be very important in

Turning then to the announced acquisition of 25% of Colstrip Unit 4. On December 9, we

And then dependent on manufacturer selection, we anticipate between 55 megawatts and

Also an important Montana electric transmission initiative, some additional funding in

With that, we are open for questions.

Those would be the assets that come out of the RFP.

Okay, so you need to see that before you can join?

Mike, I just add…

Right. All right. Thank you.

Hey, Team. How are you, Brian and Bob?

Julien, how are you?

Can you hear me?

Absolutely. Thank you very much for the clarification.

Shar, how are you doing?

Can you hear me?

Got it. Thanks guys. That was helpful.

All right. Thank you.

Hi, good afternoon.

That's when we give you an indication, what we plan to do in 2020.

That is our site.

It's your site. Okay. Got it.

Thank you very much.

Thank you, Brian.

We have no more questions in the queue at this time.

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