NorthWestern Energy Group, Inc.

Good afternoon and thank you for joining Northwestern Corporation's financial results webcast for the March 31st, 2023 quarter ending. My name is Travis Meyer. I'm the Corporate Development and Investor Relations Officer for Northwestern. Joining us today to walk you through the results and provide an overall update are Brian Byrd, President and Chief Executive Officer, and Crystal Ale, Vice President and Chief Financial Officer. All participant lines are currently muted. After the presentation, we have a lot of time for a question and answer session. I will provide instructions for asking questions at that time. However, if you intend to ask a question and are joining us by computer, please set your Zoom identity to your first and last name and firm name so we can call you by name to let you know when your line is open. Northwestern's results have been released and the release is available on our website at northwesternenergy.com. We also released our 10Q 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 safe harbor provisions included in 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 archived 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 presentation over to Northwestern CEO Brian Byrd.

Thanks, Travis. We're actually speaking to you today from Billings, Montana. We have our board meetings in our service territory primarily and This particular trip to Billingsby is also an opportunity not only to meet with our employees, but also to visit the Yellowstone County Generating Station. And it's approximately two-thirds completed as we've built that project. You know it's certainly in the pause at this point in time. But the board, the management team, and the employees, matter of fact, certainly understand the value that plant will have, not just for the Billings area, but for Montana as a whole. and demonstrate, will continue to demonstrate our support. We'll talk about that more in a minute. Regarding the first quarter, from a regulatory execution standpoint, we reached a constructive multi-party settlement on the Montana Rate Review. And I think you all know we're currently pending a commission approval. We're hopeful that the settlement will be approved. We also did receive final approval necessary for our holding company formation. We also safely executed on our capital plan. During the first quarter, we invested nearly 150 million and then we're on track to invest a total of 510 million of capital this year in 2023. We also pointed out in the 10Q that even with the delay in Yellowstone County, we do expect that that plan will be ready to serve our customers by the end of 2024. Driving reliability and affordability. We have announced an agreement with Avista to transfer its coal strip ownership 222 megawatts effective December 31st, 2025. And I think as we conveyed that transfer will be for $0 upfront. And lastly, a strong and growing service territories where overall 1.4% customer growth, that's better than industry average. That's for the first quarter. And we also have the lowest unemployment rates in the nation, not just better than the national average we have from a national perspective. South Dakota is number one, Nebraska is number two, and Montana is number four for lowest unemployment in the U.S. The last thing I would just note, I'm very proud of our employees and their response to storms in our respective jurisdictions. In May of last year, Our response in South Dakota to derechoes, we had two of those during the month. High, very high wind experience. And then in Montana, storms and flooding that occurred in various parts of Southern Montana and Yellowstone National Park. And our response to that was so phenomenal that we did receive an award from EEIs and our peers from an emergency response perspective. So I was very, very proud in terms of our employees' reactions to serve our customers. And so with that, I'll pass it over to Crystal.

Thank you, Brian. I'll begin my comments on page four, but as Brian started us off with significant, I think as we start off 2023, significant execution on both the operational side of doing what we do in a service territory that you'll hear me say we had a significant weather in Q1, but also significant regulatory execution, driving a strong first quarter financially. And then also the opportunity to conclude that first quarter sitting here in Billings and seeing that the key backbone of our system related to substations and also the under construction Yellowstone facility brings those things to a finer point. From a Q1 execution, from a financial statement perspective, you see an improvement and net income versus Q1 of last year of 3.4 million or 5.8%. That improvement on both the gap and non-gap basis of just under 6% versus 2022. However, on an EPS basis, you'll see a reduction of 3 cents. And that's really the effect of shares outstanding from our prior equity issuance. When you compare quarter over quarter, that's about a 9 cent drag or impact versus last year. So really strong financial performance. And I'll give you a bit more color on slide five as to What drove that? You can see the margin line, an improvement of 11.4% over first quarter of 2022, $289 million versus $259.4 million. And then you'll see that's offset by some pressure in operating costs, both at the OANG level and then property taxes and depreciation, resulting in net income of $62.5 million for the first quarter of 2023, compared with $59.1 million in 2022 or 3.4 million or the just under 6% that I have referenced right in my prior comments. Slide six gives you the key drivers overall. Significant impacts quarter over quarter are improvement at the margin line that I just referenced. I'll give you some more color on that a couple of slides later. Certainly driven by strong customer growth, weather and interim rates, and an offset by operating costs I would mention that the biggest drivers really on the OANG side of that were generation maintenance costs and labor and benefits. A bit on the generation maintenance side, certainly we saw colder weather in Q1 and that asks our generation facility, some of them to run more and those costs are not passed through in trackers. So we see an impact from that. And then certainly the inflationary pressures on labor and benefits, we're seeing some of that. You'll also see certainly us and everyone else, the interest expense line being higher than it was in the comparable first quarter of last year, and then depreciation reflecting the assets that are serving customers. The other thing I would highlight here is the tax line. You will see about six cents of detriment related to, we received a notice from the IRS in first quarter related to a previously claimed AMT credit and had a resulting adjustment out of that of approximately 3.2 million. All of that resulting in what I mentioned earlier, which is a three cent reduction versus last year Q1, but an overall improvement at the net income line versus the prior period. On slide seven, you'll see, I just mentioned that tax impact. It is an out of period impact. And so we've adjusted that out from a non-gap adjustment perspective. You'll see the 3.2 million on that slide. Also, we adjusted out favorable weather. On a net income basis of 2.7 million, you'll see that brings our non-GAAP earnings to 63 million. That compares with the first quarter of last year where we had a small amount of unfavorable weather, resulting in 59.5 million in the prior period as compared on a non-GAAP basis. Slide eight provides more detail about margin, which I was alluding to earlier as the most significant driver in Q1. You'll see higher retail and natural gas volumes. Those two taken together are approximately 13.5 million of improvement against solid customer growth. And then weather in our jurisdictions, you know, a lot of the country was warmer. I can tell you from where we sat, it was definitely colder. And so that was across Montana, South Dakota, and Nebraska. So you see that impact in your first and third columns there. The other thing I would highlight in the middle there is the impact of our Montana interim rates and We'll talk a bit about the settlement that we've reached, but the interim rates related to the settlement related to our base rates are certainly what's reflected in our financial statements here are lower than that settlement, but still a significant driver in Q1 of the impact of that of approximately 8.5 million. The other thing I will note here, and for those of you who have followed us closely, we talk about the PCAM, and I will say I generally negatively talk about the PCAM, but here in first quarter, we actually have a Favorable variance, you will see that last year there was about $800,000 of expense recognized related to the sharing portion of that PCAM. Here in Q1 of 23, we actually have $500,000 of favorable associated with that PCAM. So quarter over quarter, that's a $1.3 million favorable adjustment. What drove that favorable adjustment? I would point out the increase in base of the PCAM amount that we received on an interim basis in October. is the key piece of that. I think most of you who are familiar with that mechanism also know that it's a non-calendar year basis. So it begins July 1, goes through June 30. So where we were at through December was a significant detriment to both our earnings, over $7 million last year, and our customers. And what happened in Q1 is a bit of reduction to that deferred balance and certainly a reduction to the hit that we've taken. And so I would highlight that as a positive moment because I haven't had a chance to say that very often. The other thing I would comment here is a continuing trend in the next column of transmission revenues, where we see a favorable impact to our loads and our system sits in, I think, position of strength with regard to transmission revenues in the future. And you can see a favorable impact of transmission revenues quarter over quarter of 1.2 million as well, all leading to what I alluded to, which is strength in the margin line. versus last year, Q1, so concluding at $285.1 million of gross margin in the business. The next page, I would refer you to cash flow impacts. Again, here, this all comes back to both the combination of the items I just mentioned from a margin perspective, being customer growth and weather, and then also interim rates, resulting in solid improvement in our cash flows, and the interim rates contributing to collecting our supply costs on a more timely basis, driving stronger cash flows for the quarter, and that improvement is noted here. The other thing I would note is we did issue first mortgage bonds, all of that leading to significant liquidity as we close out Q1 here. The other thing I would mention is consistent with our prior comments is that we do expect to issue the remaining $75 million on our at-the-market equity program that's outstanding currently, and we'll do that in the back part of 2023. So having covered the financial results, I'll turn my attention to the Montana Rate Review. We were able to reach a constructive settlement with the primary interveners from a revenue requirement standpoint and filed that in early April. That was after filing rebuttal testimony in early March. And the comments I made earlier is that the interim rates were a significant positive to us from a cash flow perspective and margin perspective, but also as a reminder, those set the dates of which we would expect the settlement outcome to be retroactive to. And it's certainly driving improved metrics already. You'll see the detail provided on slide 10 gives you a view of our rebuttal revenue request versus what we had received through interim rates. And then the impacts of the settlement are noted in the far right column. The base rate settlement provides what we believe is a reasonable revenue requirement outcome with also adjustments for a variety of policy items as it relates to this settlement, including the ability to recover some degree of cost for the Yellowstone Generating Station once it is placed into service and also to defer certain costs related to our enhanced wildfire program. Again, the key of this settlement and what was presented to the Commission over the last couple weeks is what we believe is a fair outcome based off our cost of service and assets already serving customers and updating our rates to reflect that. The process with the Commission was a well-run hearing, a hearing from all sides. We expect briefing to continue from that hearing, which concluded, I believe that was last week, but my days are running together with briefing going through the months of May and June and hopefully a hearing or a final decision on the commission sometime in the July, August timeframe. From a financial outlook perspective, I think you're all familiar with us not issuing guidance for 2023 due to the significant impact of the Montana rate review. With that, we still are not issuing guidance for the year, but I would point you to slide 10 as to the impacts of that most significant item. Again, pending approval by the Montana Commission. And once we do have an outcome there, we will issue guidance for the period. The other thing I would note is each year in Q1, we announced whether we expect to file a rate review. And we do expect a file in our South Dakota jurisdiction on the electric side. And that, as many of you know, we closed out the Bob Glancer generating station last year and we'll be coming in to request recovery of that and our other assets. In addition, we remain on plan for our capital plan for 2023. You heard Brian mention some of the challenges with the construction at Yellowstone County, but we do expect to remain on course for that to be in service in 2024. And then our overall targets from an EPS and rate base have remained unchanged. And with that, I will turn it back to Brian.