NorthWestern Energy Group, Inc.

Good Friday afternoon, and thank you for joining Northwestern Corporation's financial results and webcast for the year ending December 31st, 2022. My name is Travis Meyer. I'm the Director of Corporate Finance and Investor Relations Officer for Northwestern. Joining us on the call today to walk you through the results are Brian Byrd, President and Chief Executive Officer, and Crystal Lael, Vice President and Chief Financial Officer. All participant lines are currently muted. After the presentation, we have allowed time for a question and answer session. I will provide instructions for asking questions at that time. However, if you do intend to ask a question and are joining us by computer, please set your Zoom identity to your first and last name so that we can call on you by name to let you know when your microphone is open. Northwestern's results have been released, and the release is available on our website at northwesternenergy.com. We also released our 10K pre-market 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 in our SEC filings and the safe harbor provisions included on the second slide of this presentation. Please also note this presentation includes non-GAAP financial measures. Please see the non-GAAP disclosures, definitions, and reconciliations also included in the presentation today. The webcast is being recorded. The archive replay of today's 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 the microphone over to Northwestern's president and CEO, Brian Byrd.

Thanks, Travis. I think many of us would agree 2022 was a challenging year on many fronts, but we also had some very good outcomes in 22 from an operational performance standpoint. We maintain a safe and reliable service while reaching new all-time system peaks for both our electric and gas businesses in 2022. We also had a significant storm response both in South Dakota with two derechoes that occurred during in May and with substantial flooding in both Montana and Yellowstone National Park. Our employees did such a great job responding to that. We were acknowledged by EEI for our response there. We were also one of the very few utilities with improved J.D. Power customer satisfaction scores in 2022 and most improved for both electric and gas among the West midsize peers. We were recognized by Newsweek as one of America's most responsible companies, one of the 13 of the EEI companies acknowledged by Newsweek there. We also had very good regulatory execution. The Ray case continues to progress well in Montana and we received interim rates in October. We also had our largest capital investment year ever at 580 million invested in 2022. And most importantly, we did that safely. We announced our net zero by 2050 at the beginning of 2022 and have since published our TCFD and SASB Alliance sustainability report. And lastly, from a reliability and affordability standpoint, and I'd argue sustainability standpoint, we negotiated an agreement with Avista to transfer our coal strip ownership to us of 222 megawatts effective December 31, 2025 for a zero purchase price. And regarding coal strip, why coal strip? When I think about that, again, I would say from reliability, affordability, and sustainability, it was an extremely important acquisition, or I'd say transfer of ownership. Reliable is a known asset to us. We've been in Cold Strip for decades. It's been a hugely reliable resource for Montana customers in the past. It's going to help us avoid lengthy planning, permitting, and construction of any new facility. It's going to reduce our reliance on imported power and exposure to volatile markets. It's an in-state and on-system asset, mitigating any transmission constraints to import power. And it adds critical long-duration, 24-7, on-demand generation when we need it most. It's affordable. 222 megawatts of capacity for zero, no upfront costs. And we know it has stable operating costs. If we had to build an equivalent new build today of 222 megawatts, it would be approximately $500 million. This is a substantial win for our customers. and an operating cost that we are known and reasonable and certainly have been the discount to market prices we've seen as of late. And lastly, sustainable. We are certainly committed to our net zero goal by 2050, and one could argue, yes, but you're procuring more coal here. But from our perspective, with the addition of the Yellowstone County plant and this incremental coal strip ownership, we have actually closed that capacity deficit through the end of this decade. And that'll help us think positively think through from a longer-term perspective, what can we do in the future at the Coal Strip site or nearby from a non-carbon long-duration alternatives? And so we and our partners that are moving forward with Coal Strip are already speaking about those potential opportunities. And another reason Coal Strip, obviously our transmission assets are there, and we have a highly skilled labor force in Coal Strip. So not only is it sustainable in essence from a clean, transitioning to a clean resource at some point in the future, it also is very sustainable for the community of Coal Strip. And lastly, I'd say just the action itself of taking on incremental ownership in Coal Strip protects our existing 222 megawatts in Coal Strip. That's extremely important to us. When I speak about Coal Strip on the next slide, slide five, I'd want to demonstrate the value to you of our existing Coal Strip. This chart, which you can find on our webpage, will show you our generation portfolio on a weekly basis, you can see it on our webpage. This is for the Christmas week in Montana. The gray bars at the top, it represents our thermal, think coal and natural gas. The blue is our hydro, and you can see between those two types of resources, very consistent throughout the week. The green represents wind, and you can see in the back half of the wind, that green was higher than the black line, which is our load. So wind's great. When the wind's blowing, we'll have excess energy we can sell in the market and reduce our costs to our customers. But earlier in that week, particularly during high pressure systems, we had no wind whatsoever. And so we were sorely in the need of a capacity resource to fill in that time period. We do not have that today. But as you can see, it's perfectly supply and demand. That red dotted line, which is a little more difficult to see on this chart, when we had no wind during that time period, we had to procure 41% of our power on the market. And on the 22nd, we saw power prices as high as $900 a megawatt hour. The bottom of this chart shows just the value of our existing 222 megawatts on the week of December 20 to 26. The variable and fixed operating costs to run Cold Strip, our existing ownership, approximately $2 million. To acquire that amount of market purchases that we needed during that week, same amount, 222 megawatts, 12 million bucks on the market. So our existing ownership in Coal Strip saved customers 10 million bucks. It's quite clear why we'd love to have more of Coal Strip to fill in days like this and can provide continued value to our customers. And with that, I'll pass it over to Crystal.

Thanks, Brian. And before I... walk you through the 22 financial results. I'll acknowledge it is a Friday afternoon before a holiday weekend. So we appreciate your interest in joining us this afternoon. And we'll keep our comments not too lengthy. The other thing I will mention is Brian just covered the key things that we executed upon in 22 is how important that 22 was from a base and foundation for us of laying the groundwork for a strong rate case that we're working with staff, the commission and interveners on and continue on regulatory execution and but also importantly from a credit metrics perspective, resolving our negative outlook with Moody's and continuing to enable a strong foundation for growth as we go forward. So with that, I'll speak to our results for 22 on slide six, beginning with our fourth quarter results, which we closed out the Q4 of 22 at $1.16 on a gap basis and on a non-gap basis, that's $1.13. In comparison to 2021 on a gap basis, that's a 20% increase. And on a non-GAAP basis, $0.09. From a full-year perspective, however, we did come in just slightly to the low end or outside of our guidance range. Our guidance range was $3.20 to $3.40 initially. We did lower that as we went into closing out the year, but concluded on a GAAP basis at $3.25 as compared on a GAAP basis and $3.18 on a non-GAAP basis. So with that on slide seven, I'll give you a bit of how we think about the significant drivers for the year and what we expected and what we didn't expect. You'll see our guidance range on the left-hand side of this and to the right, the things that significantly impacted us for the year. So what was it that drove us outside of our expectations and importantly toward the latter part of the year? And I'll speak to the storm that Brian just laid out, the criticality of supply for us, the criticality of that to our customers and the work that we do, but also how that impacts us. is while we did expect to see some higher O&M, and if you recall in our bridge, we had four to six cents from a full year basis. That was a 20 cents headwinds to us. And you see higher interest expense, us and our other SMIT cap peers and others are seeing impacts of that. But importantly, the things that happen to us when you see volatility in the market is things like PCAM from a 22 basis, that's $7.2 million of detriment to us. or 10 cents. And I would tell you that's sharing 90% of those costs to go to customers, but importantly, the volatility, the impact on bill headroom, the impact on our balance sheet and what we see in those small moments where we have extreme weather. And you just heard what Brian mentioned as to the price of power during those times has significant impacts to our results. And importantly, the latest of which occurred right before Christmas and at your end, when we don't have room to adjust from a results perspective, As you also know and have followed over time, we have adjusted weather and non-gapped that out to give you an indication of our earnings power and what fundamental earnings do below that. So we adjust our revenues to normal to remove weather impacts. However, we don't adjust the broader impacts to our results. Importantly, I just mentioned 10 cents of PCAM for the year that impacted our results. But the further detriments of that is when we see severe weather like that, we not only see market prices are high, but the strain on our system and the overall operating costs of both transmission, distribution, and the supply side all go up. And I would just remind you again, we take out the favorable, which would be the revenue side of that, but we don't adjust out all the things I just mentioned that also drive and impact our results. Slide eight gives you a look at fourth quarter financial results from a net income basis. 66.7 million compared to 51.3 million in the prior period, an improvement of 15.4 million, or 30%. Slide nine gives you a bit more detail into that look from Q4. Again, a solid performance for the quarter. We did see October, November really offset themselves and be neutral from a broader weather impact and outsized impact of weather in December, as I just alluded to. And we talked about key critical days that we saw there. So you did see higher volumes driving improved margin. The other thing, and the slide before we show that, and we included in our guidance this year, but the outsized impact of interim rates, that's very solid for us. And back to the regulatory execution of the ability to actually earn our returns and work with the commission, that's certainly a key piece there. And you see the positive side of that in margin. And you see the offsets here of operating costs driving up and also interest expense and property taxes, the general things that we've discussed as headwinds for us. and a bit of favorable income tax from a quarter perspective, closing that out at $1.16 on a gap basis, and again, $1.13 on an adjusted non-gap basis. Slide 10 gives you a look at how we approach that non-GAAP adjustment. And again, as you think about our performance year over year, this year, we are adjusting out favorable weather. So see the left-hand side of this to the right-hand side. Last year, we had unfavorable weather. So we had an add back. So on a GAAP adjusted basis for non-GAAP, 65 million compared to 55.6 million in the prior quarter. With that, I'll move to full year results with slide 11. From a net income basis, closing out the year at $183 million of net income as compared with $186.8 million, which is a decrease of $3.8 million or 2% on a gap basis. That's $3.25 compared to $3.60 for the prior year. And again, as a reminder, that was... you know, our expectation of having a down year based off the equity that we had transacted upon late in 21 and the dilutive effect of that. And in addition, setting a solid base for our rate case filing that we made in 2022. So with that on slide 12, you see a bridge again at the key drivers there of margin being an improvement that includes both interim rates, but also some strong results from our electric and gas business continued customer growth and usage trends on that on top of weather offset by higher operating and general expenses. And again, the thing that impacted us in 22, no different than most of our peers, but things like fuel expenses, material expenses, insurance, all of those things seeing inflationary impacts that are flowing through to us and ultimately to our customers. Also, you see the higher depreciation and then ultimately higher interest expense. I think I commented at Q3 that our PCAM is the gift that keeps on giving because not only Do we not recover those costs fully? They impact our balance sheet by carrying higher average revolving balances for those under-collected supply costs that we don't have a carrying charge for. So cost of capital is no longer free, as we saw the unprecedented increase in interest rate last year, driving pressure to us ultimately at the interest expense line. You see nine cents of headwinds. in our bridge here. And then again, our property taxes, we don't recover our full amount of property taxes till we come in for a rate case, which you all know we're in the middle of. So we still continue to see drag there. And that drag was even higher than we expected initially for the year. All of that resulting in a $3.25 gap basis results for the year, again, adjusted at $3.18. Slide 13 speaks to the margin impacts. I would remind you or highlight just a couple of things here. I've mentioned, you know, solid sales and volumes across our customer classes. The other thing being interim rates, which are crucial to us in closing out 22 and offsetting some of the detrimental impact that we saw in those other areas, but obviously not enough given the amount of headwinds we saw versus the impact of those interim rates. The other thing I would just highlight here is the lower electric transmission revenue. If you'll recall last year, we had an item of a deferral release there. And absent that, we were about neutral on electric transmission. That's been a key part of our businesses. I would highlight that our rate actually decreased there, but demand actually went up. So solid results there too. And then the PCAM impacts last year, 5.4 million to detriment to us this year, 7.2. And that would be year over year, 1.8 million impact. I would also remind you that in 2021, we have filed and requested to reset the base early or outside of a rate case, the commission had denied that request. So of course we didn't see that base reset until October 1st. The other thing that I would highlight from a Q4 perspective that I didn't mention above is even with that base reset of interim rates, the application of PCAM to us in Q4 was a significant detriment. With that, closing out the year on a utility margin with an overall improvement. But again, adjusting out some of the things with interim rates and property taxes on the slide to give you additional detail. Slide 14, again, shows you our gap to non-gap adjustments. Same story for the year to date as it is for the quarter in the sense of favorable weather that we're adjusting out. Also adjusting out the correct penalty that we had talked about in Q2. And prior year, that was unfavorable weather. So an add back with that $178.9 million or $3.18 for 2022, as compared with net income of $182.4 million or $3.51 in 2021. From a cash flow perspective, the other thing that we remain focused on is working to improve our credit metrics and our FFO. And I would tell you, we had a really strong year From a cash flow perspective, and you can see that in the numbers on this page, a significant improvement of cash from operating activities versus the prior year. And think about that as collecting some of those deferred costs from the prior period. The challenge is we continue to have significant deferred costs as it relates to mostly, primarily our Montana PCAM. So you see an improvement there, but still an under-collected position that we're working to recover from customers. With that, the other thing I would just mention, and that's takes me right to the guidance slide. But as you all know, when we talked about at EEI in Q3, we are not giving 23 earnings guidance until we conclude our rate case and have an outcome from that. And from our commissioners as we're working through that, because that has outsized impact as to how we think about our growth going forward. We expect coming out of that to refresh both our long-term guidance rate and also our financing plans. But in the near term, we do expect, most of you recall, we have $75 million remaining on our ATM equity program. We do expect to issue that during 2023. We also have manageable debt issuances, but one piece that we need to refinance of $144 million late in the year, but all that consistent with our long-term guidance that we've given before. We also have a continued significant capital program. Brian talked about the execution in 2022, and I would commend our teams in what was a challenging year of supply chain challenges and the ability to get their work done to continue to execute upon what we think is critical for the system and also to continue to execute on the Yellowstone program. So all of that, a significant amount of capital in 22 closed out and a continued plan for 23 in line with what you've seen from us before. And with that, I will turn it over to Frank.