Northwestern Energy Group, Inc. · NASDAQ:NWE
Northwestern Energy — Sidoti Fall 2020 Investor Conference
70 slides from Northwestern Energy's conference presentation, Sep 24, 2020
Slide 1: Sidoti Fall 2020 Investor Conference
Black Eagle Dam - Montana Sidoti Fall 2020 Investor Conference September 24, 2020 8-K’ed on September 24, 2020
Slide 2: Forward Looking Statements
2 Forward Looking Statements Forward Looking Statements Boulder RiverO’Dell in Montana Creek - Madison River Valley - Montana 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 Refor
Slide 3: NorthWestern Energy
3 NorthWestern Energy A pure electric and natural gas utility; serving as stewards of critical energy infrastructure; providing essential services - in times of trial and triumph; to our resilient customer base spanning a vast footprint over Montana, South Dakota, Nebraska & Yellowstone Nat’l Park.
Slide 4: COVID-19: Our Response
4 COVID-19: Our Response COVID-19 has consumed our everyday life. This rapidly evolving pandemic has affected all aspects of our operations. We implemented a comprehensive set of actions to help our customers, communities and employees, all while maintaining our commitment to provide safe and reliab
Slide 5: About NorthWestern
5 About NorthWestern South Dakota Operations Electric 63,800 customers 3,529 miles – transmission & distribution lines 404 MW nameplate owned power generation Natural Gas 47,500 customers 1,713 miles of transmission and distribution pipeline Montana Operations Electric 379,400 customers 24,781 miles
Slide 6: NWE - An Investment for the Long Term
6 NWE - An Investment for the Long Term • 100% pure electric & natural gas utility business Black Eagle dam Pure Electric & with over 100 years of operating history Gas Utility • Solid economic indicators in service territory • Diverse electric supply portfolio ~58% hydro, wind & solar • Residential
Slide 7: A Diversified Electric and Gas Utility
7 A Diversified Electric and Gas Utility (1) (1) NorthWestern’s ‘80/20’ rules: Approximately 80% Electric, 80% Residential and 80% Montana. Nearly $3.9 billion of rate base investment to serve our customers Data as reported in our 2019 10-K (1) Gross Margin, defined as revenues less cost of sales, i
Slide 8: Highly Carbon-Free Supply Portfolio
8 Highly Carbon-Free Supply Portfolio MT NWE Contracted energy from Colstrip Energy Limited Partners (CELP), Yellowstone Energy Limited Partners (YELP) as well as a majority of the contracted wind, hydro and solar are federally mandated Qualifying Facilities, as defined under the Public Utility Regu
Slide 9: Strong Utility Foundation
9 Strong Utility Foundation Solid and improving JD Power Overall Customer Satisfaction Scores Residential electric and natural gas rates below national average Solid electric system reliability Low gas leaks per mile – just outside 1st quartile
Slide 10: Solid Economic Indicators
10 Solid Economic Indicators Source: NorthWestern customer growth - 2008-2016 Forms 10-K Unemployment Rate: US Department of Labor via SNL Database 2/21/17 Electric: EEI Statistical Yearbook (published December 2015, table 7.2) Natural Gas: EIA.gov (Data table "Number of Natural Gas Consumers") Sour
Slide 11: A History of Growth
11 A History of Growth $3.30-$3.50 $3.10 - $3.30 $2.60$3.20-$3.40 - $2.75 2010-2019 CAGR’s: GAAP EPS: 7.1% - Non-GAAP EPS: 5.7% - Dividend: 6.0% See appendix for “Non-GAAP Financial Measures”
Slide 12: Track Record of Delivering Results
12 Track Record of Delivering Results * Peer Group: ALE, AVA, BKH, IDA, MGEE, NWN, OGE, OGS, OTTR, PNM, POR & SR Return on Equity on GAAP Earnings within 9.5% - 11.0% band over the last 8 years with average of 10.2%. Total Shareholder Return is better than our 12 peer average for the 1, 3 & 10 year
Slide 13: Investment for Our Customers' Benefit
13 Investment for Our Customers’ Benefit Over the past 8 years we have been reintegrating our Montana energy supply portfolio and making additional investments across our entire service territory to enhance system safety, reliability and capacity. We have made these enhancements with minimal impact
Slide 14: Balance Sheet Strength and Liquidity
14 Balance Sheet Strength and Liquidity Investment grade credit ratings, generally liquidity in excess of $100 million target, debt to cap within our targeted 50%-55% range and no long-term debt maturities until 2023. *Liquidity target increased to $200 million due to economic conditions impacted by
Slide 15: Strong Cash Flows
15 Strong Cash Flows While maintenance capex and total dividend payments have continued to grow since 2010 (11.3% and 10.0% CAGR respectively), maintenance capex and dividend payments have slightly exceeded Cash From Operations (CFO), on average, by approximately $10 million per year. Note: 2016 CFO
Slide 16: Earnings Growth
16 Earnings Growth Updated $3.30-$3.45 2020 $2.60 - $2.75 Guidance Range Non-GAAP Adjusted EPS Growth Averaged 5.4% from 2013 - 2019 NorthWestern is affirming its previously revised 2020 earnings guidance range of $3.30 to $3.45 per diluted share based upon, but not limited to, the following major a
Slide 17: 2019 Non-GAAP to 2020 Revised EPS Bridge
17 2019 Non-GAAP to 2020 Revised EPS Bridge $3.30-$3.45 $2.60 - $2.75 Since first quarter earnings, the primary change reflected in the earnings bridge above is increased property tax expense (based on Montana Dept. of Revenue’s valuation finalized in second quarter) partially offset by increased Se
Slide 18: COVID-19: Margin Expectations
18 COVID-19: Margin Expectations Applying our high-level estimated impacts above to customer loads results in the following overall impact to load by class: Second quarter gross margin was generally in line with our Covid assumptions. We experienced a decline in gross margin of approximately $3 - $4
Slide 19: COVID-19: Expense Expectations
19 COVID-19: Expense Expectations Expenses we expect to increase: • Bad debt expense • We assume significant recovery through a regulatory mechanism • COVID related charitable contributions Expenses we expect to decrease: • Distribution customer work • Contract services and material costs • Fleet fu
Slide 20: Maintaining Capital Investment Forecast
20 Maintaining Capital Investment Forecast $1.8 billion of total capital investment over five years We anticipate financing this capital with a combination of cash flow from operations (aided by NOLs available into 2021), first mortgage bonds and equity issuances. Based on current expectations, any
Slide 21: Recent Significant Achievements
21 Recent Significant Achievements Strong year for safety at NorthWestern • Industry Leader Accident Prevention Award from American Gas Association in 2019. • Continue to be a top performer among Edison Electric Institute member companies. Record best customer satisfaction scores with JD Power & Ass
Slide 22: Looking Forward
22 Looking Forward Regulatory • The MPSC recently approved a pilot Fixed Cost Recovery Mechanism (FCRM) effective July 1, 2020. We asked the MPSC to delay the start of the pilot for one year until July 1, 2021 due to the uncertainty created by the COVID- 19 pandemic. The MPSC granted the requested o
Slide 23: South Dakota Electricity Supply Resource Plan
23 South Dakota Electricity Supply Resource Plan South Dakota • Published fall of 2018, the plan focuses on modernization of our fleet to improve reliability and flexibility, maintain compliance in Southwest Power Pool, and lowering operating costs. The plan identifies 90MWs of existing generation t
Slide 24: Montana Electricity Supply Resource Plan
24 Montana Electricity Supply Resource Plan Montana • The draft plan was filed in early March 2019 followed by a 60 day public comment period. • The final plan, including responses to public comment, was filed August 20, 2020. • The plan demonstrates an urgent need for additional flexible capacity t
Slide 25: ESG Publications
25 ESG Publications Environmental Social Governance Code of Conduct Annual Report Environmental Report http://www.northwesternenergy.com/docs/default- http://www.northwesternenergy.com/our- source/documents/corporategovernance/code-of-conduct.pdf company/investor-relations/annual-reports http://www.
Slide 26: ESG - Environmental
26 ESG - Environmental NWE Montana & South Dakota combined Based upon 2019 MWH’s of owned and long-term contracted resources. 58% of NorthWestern Energy’s 2019 Electric Generation Portfolio Delivered was Carbon-Free (based on megawatt hours) Mystic Dam Beethoven Wind Farm 57% Carbon Free Nameplate P
Slide 27: ESG - Environmental
27 ESG - Environmental Environmental Stewardship Highlights of our Environmental Report LED Streetlights – plan to replace 43,000 company-owned streetlights in Montana with LED lights by 2022, with SD in planning stage. • Energy Conservation Solar Projects - Our Solar projects are focused Missoula S
Slide 28: ESG - Social
28 ESG - Social Community Customers Employees Typical Residential Bills Lower than $2.1 Billion Economic Output in National Average Safety Culture Transformation 2019 ($1.88B in Montana & $268M in SD/NE) $2.1 million Donations, Sponsorships & Economic Development in 2019 112 Number of nonprofits tha
Slide 29: ESG - Governance
29 ESG - Governance 5th Best Score Among 50 Publicly Traded North American Utility and Power Companies by Diverse Leadership Board of Directors Executive Team Moody’s Investment Services on Best Governance Practices Corporate Governance What We Do: • Annual election of all directors. • Majority vote
Slide 30: Our Carbon Reduction Vision for NorthWestern Energy in Montana
30 Our Carbon Reduction Vision for NorthWestern Energy in Montana 90% carbon reduction by 2045 NorthWestern Energy commits to reduce the carbon intensity of our electric energy portfolio for Montana 90% by 2045.* * As compared with our 2010 carbon intensity as a baseline Already over 60% carbon free
Slide 31: Proposed Colstrip Acquisition
31 Proposed Colstrip Acquisition On December 9, 2019 NorthWestern (NWE) executed a Purchase and Sale Agreement for the acquisition of Puget Sound Energy’s (PSE) 25% ownership interests in Colstrip Unit 4 (CU4). • Generating Capacity: 185 MW (bringing our total ownership to 407 MW, or 55% of CU4) • P
Slide 32: Conclusion
32 Conclusion Best Attractive Pure Strong Solid Utility Practices Future Electric & Earnings & Foundation Corporate Growth Gas Utility Cash Flows Governance Prospects
Slide 33: Upetivering a bright future NorthWestern Energy
Upetivering a bright future NorthWestern Energy
Slide 34: CU4 Acquisition - Customer & Community Considerations
Appendix 34 CU4 Acquisition - Customer & Community Considerations • Affordable Capacity: Acquiring a larger share of Colstrip will reduce exposure to market prices and keep energy & capacity affordable. Customer bills are expected to stay flat as a result of the transaction. Increased operating cost
Slide 35: CU4 Acquisition - Investor & Credit Considerations
Appendix 35 CU4 Acquisition - Investor & Credit Considerations • Protects Existing Ownership Interests: Increased ownership of CU4 provides greater say in future capital decisions to ensure the plant continues to operate and meet all environmental guidelines. Per the Joint Owners Agreement, closure
Slide 36: NWE Capacity as compared to Regional Peers
Appendix 36 NWE Capacity as compared to Regional Peers NWE’s capacity deficit exposes our customers to greater market exposure (price and availability) than any of our regional peers.
Slide 37: CU4 Acquisition - General Transaction Structure
Appendix 37 CU4 Acquisition - General Transaction Structure PSE retains environmental & pension liabilities as of transaction close and responsibility for decommissioning and remediation costs at time of eventual facility closure. 12.5% or 92.5MW of Colstrip Unit 4 NWE PSE $0.50 purchase price Appro
Slide 38: CU4 Acquisition - Proposed Post-Closing Structure
Appendix 38 CU4 Acquisition - Proposed Post-Closing Structure NWE Customers PSE 47.5 MW provided to NWE’s 45 MW PPA, ~5 Year, unit $ default supply customers. contingent, Mid-C day-ahead Resolves 12.5% of the index subject to an hourly price $ capacity deficit with floor. Price floor ensures fixed n
Slide 39: Existing Colstrip Ownership
Appendix 39 Existing Colstrip Ownership Colstrip Power Plant Colstrip Transmission System Facility Owner (%) Unit 1 Unit 2 Unit 3 Unit 4 AVISTA Corporation - - 15% 15% NorthWestern Energy - - - 30% PacifiCorp - - 10% 10% Portland General - - 20% 20% Puget Sound Energy 50% 50% 25% 25% Talen Energy 50
Slide 40: Significant Capacity Deficit in Montana
Appendix 40 Significant Capacity Deficit in Montana NorthWestern Energy’s current resources provide about 755 MW of peaking capacity, which is the energy available during periods of our customers’ highest demand. An additional 645 MW of peaking capacity must currently be purchased from the market to
Slide 41: A Recent Example
Appendix 41 A Recent Example In early February, 2019, NorthWestern experienced a nearly five day span* when the wind didn’t blow and the sun was scant. We were forced to rely upon an already strained market and transmission system for a significant amount of our required capacity (shown in red hatch
Slide 42: Significant Capacity Retirements in the Pacific NW
Appendix 42 Significant Capacity Retirements in the Pacific NW Planned retirements in the Pacific Northwest region exceed 3,600 MW and the Northwest Power and Conservation Council forecasts regional capacity shortfalls as early as 2021. NorthWestern’s continued reliance on the market to purchase ene
Slide 43: Capacity Cost Alternatives
Appendix 43 Capacity Cost Alternatives 92% The 185 MW Colstrip Unit 4 purchase would resolve 185,000 kW approximately 25% x 92% capacity credit 97% of our estimated 170,200 kW of capacity 725 MW capacity deficit for $1.00. 170,200 kW ÷ 97% capacity credit = 175,500 kW Alternative 175,500 kW need x $
Slide 44: Summary Financial Results (Second Quarter)
Appendix 44 Summary Financial Results (Second Quarter) (1) (1) Gross Margin, defined as revenues less cost of sales, is a non-GAAP Measure See appendix for additional disclosure.
Slide 45: Gross Margin (Second Quarter)
Appendix 45 Gross Margin (Second Quarter) (dollars in millions) Three Months Ended June 30, 2020 2019 Variance Electric $ 169.6 $ 177.0 ($ 7.4) (4.2%) Natural Gas 38.7 38.0 0.7 1.8% (1) Total Gross Margin $ 208.3 $ 215.0 ($ 6.7) (3.1%) Decrease in gross margin due to the following factors: ($4.4) Mo
Slide 46: Weather (Second Quarter)
Appendix 46 Weather (Second Quarter) We estimate favorable weather in Q2 2020 resulted in a $0.5M pretax benefit as compared to normal and $0.8M pretax benefit as compared to Q2 2019.
Slide 47: Operating Expenses (Second Quarter)
Appendix 47 Operating Expenses (Second Quarter) (dollars in millions) Three Months Ended June 30, 2020 2019 Variance Operating, general & admin. $ 71.7 $ 80.8 ($ 9.1) (11.3%) Property and other taxes 47.0 44.3 2.7 6.1% Depreciation and depletion 44.8 41.0 3.8 9.3% Operating Expenses $ 163.5 $ 166.1
Slide 48: Operating to Net Income (Second Quarter)
Appendix 48 Operating to Net Income (Second Quarter) (dollars in millions) Three Months Ended June 30, 2020 2019 Variance Operating Income $ 44.8 $ 48.8 $ (4.0) (8.2%) Interest Expense (24.3) (23.5) (0.8) (3.4%) Other Income 0.2 0.1 0.1 100.0% Income Before Taxes 20.8 25.5 (4.7) (18.4%) Income Tax B
Slide 49: Income Tax Reconciliation (Second Quarter)
Appendix 49 Income Tax Reconciliation (Second Quarter) We expect NOLs to be available into 2021 with alternative minimum tax credits and production tax credits to be available into 2023 to reduce cash taxes. Additionally, we anticipate our effective tax rate to reach approximately 10% by 2023.
Slide 50: Adjusted Non-GAAP Earnings (Second Quarter)
Appendix 50 Adjusted Non-GAAP Earnings (Second Quarter) The adjusted non-GAAP measures presented in the table are being shown to reflect significant items that are non- recurring or variance from normal weather, however they should not be considered a substitute for financial results and measures de
Slide 51: Balance Sheet
Appendix 51 Balance Sheet {dollars in millions) As of June 30, As of December 31, 2020 2019 Cash and cash equivalents $ TD, $ 5.1 Restricted cash 8.9 6.9 Accounts receivable, net i254. 167.4 Inventories 61.2 53.9 Other current assets 60.8 68.3 Goodwill 357.6 357.6 PP&E and other non-current assets 5
Slide 52: Cash Flow
Appendix 52 Cash Flow Cash from operating activities increased by ~$75M primarily due to the improved collections of energy supply costs in the current period, as compared with higher procured supply costs, credits to Montana customers of approximately $20.5 million in the first quarter of 2019, and
Slide 53: Summary Financial Results (Six Months Ended June 30)
Appendix 53 Summary Financial Results (Six Months Ended June 30) (1) (1) Gross Margin, defined as revenues less cost of sales, is a non-GAAP Measure See appendix for additional disclosure.
Slide 54: Gross Margin (Six Months Ended June 30)
Appendix 54 Gross Margin (Six Months Ended June 30) (dollars in millions) Six Months Ended June 30, 2020 2019 Variance(1) Electric $ 350.4 $ 373.0 ($ 22.6) (6.1%) Natural Gas 101.9 110.4 (8.5) (7.7%) (1) Total Gross Margin (1) $ 452.3 $ 483.4 ($ 31.1) (6.4%) Decrease in gross margin due to the follo
Slide 55: Weather (Six Months Ended June 30)
Appendix 55 Weather (Six Months Ended June 30) We estimate unfavorable weather through the first 6 months of 2020 has contributed approximately $3.5M pretax detriment as compared to normal and $17.2M pretax detriment as compared to the same period in 2019.
Slide 56: Operating Expenses (Six Months Ended June 30)
Appendix 56 Operating Expenses (Six Months Ended June 30) (dollars in millions) Six Months Ended June 30, 2020 2019 Variance Operating, general & admin. $ 150.7 $ 161.9 ($ 11.2) (6.9%) Property and other taxes 91.5 89.1 2.4 2.7% Depreciation and depletion 90.0 86.6 3.4 3.9% Operating Expenses $ 332.
Slide 57: Operating to Net Income (Six Months Ended June 30)
Appendix 57 Operating to Net Income (Six Months Ended June 30) (dollars in millions) Six Months Ended June 30, 2020 2019 Variance Operating Income $ 120.1 $ 145.8 ($ 25.7) (17.6%) Interest Expense (48.6) (47.3) (1.3) (2.7%) Other (Expense) / Income (1.8) 1.3 (3.1) (238.5%) Income Before Taxes 69.7 9
Slide 58: Income Tax Reconciliation (Six Months Ended June 30)
Appendix 58 Income Tax Reconciliation (Six Months Ended June 30) We expect NOLs to be available into 2021 with alternative minimum tax credits and production tax credits to be available into 2023 to reduce cash taxes. Additionally, we anticipate our effective tax rate to reach approximately 10% by 2
Slide 59: Adjusted Non-GAAP Earnings (Six Months Ended June 30)
Appendix 59 Adjusted Non-GAAP Earnings (Six Months Ended June 30) The adjusted non-GAAP measures presented in the table are being shown to reflect significant items that were non- recurring or variance from normal weather, however they should not be considered a substitute for financial results and
Slide 60: Qualified Facility Earnings Adjustment
Appendix 60 Qualified Facility Earnings Adjustment The gain in 2020 for our QF liability was $3.1 million in total, it was comprised of $2.2 million adjustment to the liability and $0.9 million lower actual costs over last 12 months (QF contract year). This $3.1 million benefit is $3.3 million less
Slide 61: Quarterly PCCAM Impacts
Appendix 61 Quarterly PCCAM Impacts In 2017, the Montana legislature revised the statute regarding our recovery of electric supply costs. In response, the MPSC approved a new design for our electric tracker in 2018, effective July 1, 2017. The revised electric tracker, or PCCAM established a baselin
Slide 62: NorthWestern Energy Profile
Appendix 62 NorthWestern Energy Profile Note: Data as reported in our 2019 10-K
Slide 63: 2019 System Statistics
Appendix 63 2019 System Statistics (1) (2) Note: Statistics above are as of 12/31/2019 except for electric transmission for others which is 2018 data (1) Nebraska is a natural gas only jurisdiction (2) Dave Gates Generating Station (DGGS) in Montana is a 150 MW nameplate facility but consider it a 1
Slide 64: Experienced & Engaged Board of Directors
Appendix 64 Experienced & Engaged Board of Directors Stephen P. Adik Anthony T. Clark Dana J. Dykhouse Jan R. Horsfall Britt E. Ide • Chairman of the • Committees: Governance, • Committees: Human • Committees: Operations • Committees: Governance, Board Human Resources Resources (chair), Audit (chair
Slide 65: Strong Executive Team
Appendix 65 Strong Executive Team Robert C. Rowe Heather H. Grahame Curtis T. Pohl • President and • General Counsel and Vice • Vice President - Chief Executive Officer President of Regulatory Distribution • Current position since and Federal Government • Current position since 2008 Affairs 2003 • C
Slide 66: Our Commissioners
Appendix 66 Our Commissioners
Slide 67: Non-GAAP Financial Measures (1 of 3)
Appendix 67 Non-GAAP Financial Measures (1 of 3) These materials include financial information prepared in accordance with GAAP, as well as other financial measures, such as Gross Margin and Adjusted Diluted EPS, that are considered “non-GAAP financial measures.” Generally, a non-GAAP financial meas
Slide 68: Non-GAAP Financial Measures (2 of 3)
Appendix 68 Non-GAAP Financial Measures (2 of 3) Disclaimer on Net Operating Net Operating Losses (NOL’s): The expected tax rate and the expected availability of NOLs are subject to significant business, economic, regulatory and competitive uncertainties and contingencies, many of which are beyond t
Slide 69: Non-GAAP Financial Measures (3 of 3)
Appendix 69 Non-GAAP Financial Measures (3 of 3) The data presented in this presentation includes financial information prepared in accordance with GAAP, as well as other Non-GAAP financial measures such as Gross Margin (Revenues less Cost of Sales), Free Cash Flows (Cash flows from operations less
Slide 70: Upetivering a bright future NorthWestern Energy
Upetivering a bright future NorthWestern Energy
NorthWestern Energy — Sidoti Fall 2020 Investor Conference on 6ix