Northwestern Energy Group, Inc. · NASDAQ:NWE
Northwestern Energy — BAML Mini Conference 2020
65 slides from Northwestern Energy's conference presentation, May 28, 2020
Slide 1: BAML Mini Conference
Black Eagle dam – Missouri River – Montana BAML Mini Conference May 28, 2020 Originally 8-K’ed on May 14, 2020
Slide 2: Forward Looking Statements
2 Forward Looking Statements Forward Looking Statements O’Dell 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 Reform Act of 1995. Forward-l
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, EE, IDA, MGEE, NWN, OGE, 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 10 year period b
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: COVID-19: Liquidity
16 COVID-19: Liquidity Temporarily Increasing Liquidity Normal liquidity • April 3, 2020: Issued $100M 364 day Term Loan at Eurodollar rate plus 1.5%. minimum target is • April 14, 2020: Priced $150 million First Mortgage Bonds at 3.21% to be > $100 million issued in May 2020. • As previously disclo
Slide 17: Earnings Growth
17 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 lowering its 2020 earnings guidance range to $3.30 to $3.45 per diluted share (from $3.45 to $3.60) based upon, but not limited to, the following major
Slide 18: 2019 Non-GAAP to 2020 Revised EPS Bridge
18 2019 Non-GAAP to 2020 Revised EPS Bridge Gross Margin $0.27 reduction which approximately 1/3 is due $3.30-$3.45 to first quarter and the remainder $2.60 due to - $2.75 expected COVID related impacts on loads and volumes. OG&A $0.08 improvement due to incremental cost controls to help offset gros
Slide 19: COVID-19: Margin Expectations
19 COVID-19: Margin Expectations Applying our high-level estimated impacts above to customer loads results in the following overall impact to load by class: Updated gross margin guidance for Q2-Q4 2020: We anticipated ($0.03) to $0.03* of EPS impact as compared to the same period 2019. Based upon ou
Slide 20: COVID-19: Expense Expectations
20 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 21: Maintaining Capital Investment Forecast
21 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 22: Recent Significant Achievements
22 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 23: Looking Forward
23 Looking Forward Regulatory • In December 2019, the MPSC issued a final order approving our Montana electric rate case settlement, effective April 1, 2019, that results in an annual increase to electric revenue of approximately $6.5 million (based upon a 9.65% return on equity) and a $9.3 million
Slide 24: South Dakota Electricity Supply Resource Plan
24 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 25: Montana Electricity Supply Resource Plan
25 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 26: Environmental – Social – Governance (ESG)
26 Environmental – Social – Governance (ESG) Environmental Social Governance Environmental Report Community Works Report Annual Report http://www.northwesternenergy.com/ http://www.northwesternenergy.com/ http://www.northwesternenergy.com/our- environment/our-environment community-works/community-wo
Slide 27: ESG - Environmental
27 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 28: ESG - Environmental
28 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 29: ESG - Social
29 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 30: ESG - Governance
30 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 31: Our Carbon Reduction Vision for NorthWestern Energy in Montana
31 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 32: Proposed Colstrip Acquisition
32 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 33: Conclusion
33 Conclusion Best Attractive Pure Strong Solid Utility Practices Future Electric & Earnings & Foundation Corporate Growth Gas Utility Cash Flows Governance Prospects
Slide 34: Powering a bright future
Upetivering a bright future NorthWestern Energy
Slide 35: Customer & Community Considerations
Appendix 35 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 due to increased
Slide 36: Investor & Credit Considerations
Appendix 36 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 of Colstrip Units
Slide 37: NWE Capacity as compared to Regional Peers
Appendix 37 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 38: General Transaction Structure
Appendix 38 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 Approx. 5% of Colstrip
Slide 39: Proposed Post-Closing Structure
Appendix 39 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 no impact to custom
Slide 40: Existing Ownership
Appendix 40 Existing 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% 50% 30%
Slide 41: Significant Capacity Deficit in Montana
Appendix 41 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 42: A Recent Example
Appendix 42 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 43: Significant Capacity Retirements in the Pacific NW
Appendix 43 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 44: Capacity Cost Alternatives
Appendix 44 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 45: Summary Financial Results (First Quarter)
Appendix 45 Summary Financial Results (First Quarter) (1) (1) Gross Margin, defined as revenues less cost of sales, is a non-GAAP Measure See appendix for additional disclosure.
Slide 46: Gross Margin (First Quarter)
Appendix 46 Gross Margin (First Quarter) (dollars in millions) Three Months Ended March 31, 2020 2019 Variance Electric $ 180.8 $ 196.0 $ (15.2) (7.8%) Natural Gas 63.2 72.5 (9.3) (12.8%) Total Gross Margin(1) $ 244.0 $ 268.5 $ (24.5) (9.1%) Decrease in gross margin due to the following factors: $ (
Slide 47: Weather (First Quarter)
Appendix 47 Weather (First Quarter) A warm first quarter contributed approximately $4.0M pretax gross margin detriment as compared to normal and $18.0M pretax detriment as compared to first quarter 2019.
Slide 48: Operating Expenses (First Quarter)
Appendix 48 Operating Expenses (First Quarter) (dollars in millions) Three Months Ended March 31, 2020 2019 Variance Operating, general & admin. $ 79.0 $ 81.1 $ (2.1) (2.6%) Property and other taxes 44.5 44.8 (0.3) (0.7%) Depreciation and depletion 45.3 45.6 (0.3) (0.7%) Operating Expenses $ 168.8 $
Slide 49: Operating to Net Income (First Quarter)
Appendix 49 Operating to Net Income (First Quarter) (dollars in millions) Three Months Ended March 31, 2020 2019 Variance Operating Income $ 75.2 $ 97.0 $ (21.8) (22.5%) Interest Expense (24.3) (23.8) (0.5) (2.1%) Other (Expense) / Income (2.0) 1.1 (3.1) (281.8%) Income Before Taxes 48.9 74.4 (25.5)
Slide 50: Income Tax Reconciliation (First Quarter)
Appendix 50 Income Tax Reconciliation (First 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 51: Adjusted Non-GAAP Earnings (First Quarter)
Appendix 51 Adjusted Non-GAAP Earnings (First 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 dete
Slide 52: Balance Sheet
Appendix 52 Balance Sheet Improvement in debt to capitalization ratio; which is now closer to bottom end of 50%-55% targeted range. 50.8% Debt to Capitalization at March 31, 2019
Slide 53: Cash Flow
Appendix 53 Cash Flow Cash from operating activities increased by nearly $47 million primarily due to improved collections of energy supply costs in 2020 and TCJA credits to Montana customers of approximately $20.5 million in the first quarter of 2019. These improvements were offset in part by reduc
Slide 54: Qualified Facility Earnings Adjustment
Appendix 54 Qualified Facility Earnings Adjustment The gain in 2019 for our QF liability was $6.3 million in total, it was comprised of $3.3 million adjustment to the liability and $3.0 million lower actual costs over last 12 months (QF contract year). This $6.6 million benefit is $20.9 million less
Slide 55: Adjusted Non-GAAP Earnings (Full Year)
Appendix 55 Adjusted Non-GAAP Earnings (Full Year) 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 determin
Slide 56: Quarterly PCCAM Impacts
Appendix 56 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 57: NorthWestern Energy Profile
Appendix 57 NorthWestern Energy Profile Note: Data as reported in our 2019 10-K
Slide 58: 2019 System Statistics
Appendix 58 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 59: Experienced & Engaged Board of Directors
Appendix 59 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 60: Strong Executive Team
Appendix 60 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 61: Our Commissioners
Appendix 61 Our Commissioners
Slide 62: Non-GAAP Financial Measures (1 of 3)
Appendix 62 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 63: Non-GAAP Financial Measures (2 of 3)
Appendix 63 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 64: Non-GAAP Financial Measures (3 of 3)
Appendix 64 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 65: Powering a bright future
Upetivering a bright future NorthWestern Energy
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