NorthWestern Reports 2017 Financial Results

SIOUX FALLS, S.D., Feb. 12, 2018 /PRNewswire/ -- NorthWestern Corporation d/b/a NorthWestern Energy (NYSE: NWE) reported financial results for the year ended December 31, 2017.  Net income for the period was $162.7 million, or $3.34 per diluted share, as compared with net income of $164.2 million, or $3.39 per diluted share, for 2016 primarily due to the inclusion of a $17.0 million tax benefit related to costs to repair generation property in our 2016 results. However, pretax income increased $19.6 million in 2017 primarily due to improved gross margins (favorable weather and customer growth) partially offset by higher operating expenses (primarily property taxes and depreciation). Additional information regarding this release can be found in the webcast presentation found at www.northwesternenergy.com/our-company/investor-relations/presentations-and-webcasts.

"Given the challenges we've seen on the regulatory front, we're happy to add 2017 to a history of delivering results within our announced expectations. Operationally, financially or otherwise - meeting the expectations of our customers, investors and regulators can only be accomplished with the absolute commitment of our nearly 1,600 employees," said Bob Rowe, President and Chief Executive Officer.  "We have a busy regulatory calendar for 2018 - all items of consequence. We look forward to working with our regulators on implementation of the new federal tax law, early in 2018. This will be an opportunity to use these anticipated tax savings to benefit our customers and the long-term safety and reliability of our complex utility system."

Significant Developments in 2017

• Received proceeds of approximately $53.7 million after commissions and other fees from the sale of 888,938 common shares under our equity distribution agreement, and
• Refinanced $250 million of Montana First Mortgage Bonds, reducing the fixed interest rate from 6.34% to 4.03% and extending the maturity from 2019 to 2047.

Gross Margin

Consolidated gross margin for the twelve months ended December 31, 2017 was $895.4 million compared with $856.3 million for the same period in 2016.  This $39.1 million increase was a result of a $30.9 million increase to items that have an impact on net income and $8.2 million increase to items that are offset in operating expenses and income tax expense with no impact to net income.

Consolidated gross margin for items impacting net income increased $30.9 million, including:

• $15.7 million increase in electric retail volumes due primarily to colder winter and warmer summer weather in our Montana jurisdiction and customer growth, partly offset by cooler summer weather in our South Dakota jurisdiction and milder spring weather overall;
• $10.5 million increase in natural gas retail volumes due primarily to colder winter and spring weather and customer growth, partly offset by warmer summer weather;
• $9.5 million inclusion in our 2016 results of the MPSC disallowance of both replacement power costs from a 2013 outage at Colstrip Unit 4 and portfolio modeling costs;
• $1.8 million increase in our Montana gas rates effective September 1, 2017;
• $1.5 million inclusion in our 2016 results of a reduction in hydro generation rates due to the MPSC order in the hydro compliance filing;
• $1.2 million increase in South Dakota electric rates due to the timing of the change in customer rates in 2016;
• $0.6 million higher demand to transmit energy across our transmission lines due to market conditions and pricing;
• $0.4 million decrease in QF related supply costs based on actual QF pricing and output: and
• $3.9 million other miscellaneous increases.

These increases were partly offset by the inclusion in our 2016 results of $14.2 million of deferred revenue as a result of a MPSC final order in our tracker filings regarding prior period lost revenues.

The change in consolidated gross margin for items that had no impact on net income (due to offsets in operating expenses) represented a $8.2 million increase primarily due to the following:

• $6.7 million increase in revenues for property taxes included in trackers is offset by increased property tax expense; and
• $1.5 million increase in operating expenses included in our supply trackers is offset by an increase in operating, general and administrative expenses.

Operating, General and Administrative Expenses

Consolidated operating, general and administrative expenses for the twelve months ended December 31, 2017 were $305.1 million compared with $302.9 million for the same period in 2016. The $2.2 million increase was primarily due to:

• $1.9 million higher bad debt expense due to an increase in revenues as a result of colder winter and warmer summer weather;
• $1.5 million higher operating expenses recovered through our supply trackers; and
• $1.2 million higher maintenance costs at our Dave Gates Generating Station and Colstrip Unit 4.

These increases were partly offset by:

• $1.5 million decrease in employee benefits due primarily to lower pension costs, offset in part by higher medical costs and more time spent by employees on maintenance projects (which are expensed) rather than capital projects; and
• $1.0 million decrease in insurance reserves primarily due to the amount recorded in 2016 related to the Billings, Montana refinery outage.

Property and Other Taxes

Property and other taxes were $162.6 million in 2017 as compared with $148.1 million in 2016. This increase was primarily due to plant additions and higher estimated property valuations in Montana. Under Montana law, we are allowed to track the increases in the actual level of state and local taxes and fees and adjust our rates to recover the increase between rate cases less the amount allocated to Federal Energy Regulatory Commission (FERC) jurisdictional customers and net of the associated income tax benefit. In January 2018, the MPSC issued an order in our 2017 filing reducing our recovery of these taxes by approximately $1.7 million by applying an alternate allocation methodology. This results in a lower allocation to our Montana electric retail customers and a higher property tax allocation to FERC transmission customers (we do not have a property tax tracker for FERC jurisdictional purposes).

Depreciation and Depletion Expense

Depreciation and depletion expense was $166.1 million in 2017 as compared with $159.3 million in 2016. This increase was primarily due to plant additions.

Operating Income

Consolidated operating income in 2017 was $261.4 million, as compared with $245.9 million in 2016. This increase was primarily due to the increase in gross margin as discussed above, offset in part by higher operating expenses.

Interest Expense

Consolidated interest expense in 2017 was $92.3 million, as compared with $95.0 million, in 2016. This decrease was primarily due to the full year benefit of refinancing of debt in 2016.

Other Income

Consolidated other income in 2017 was $6.9 million as compared with $5.5 million in 2016. This increase was primarily due to higher capitalization of allowance for funds used during construction (AFUDC).

Income Tax

Consolidated income tax expense in 2017 was $13.4 million as compared with an income tax benefit of $7.6 million in 2016. Our effective tax rate for the twelve months ended December 31, 2017 was 7.6% as compared with (4.9)% for the same period of 2016. During the twelve months ended December 31, 2016, we recorded an income tax benefit of approximately $17.0 million due to the adoption of a tax accounting method change related to the costs to repair generation assets, which allowed us to take a current tax deduction for a significant amount of repair costs that were previously capitalized for tax purposes. Approximately $12.5 million of this deduction related to 2015 and prior tax years. This is reflected in the flow-through repairs deductions line due to the regulatory treatment. We currently expect our 2018 effective tax rate to range between 0% - 5%.

The following table summarizes the differences between our effective tax rate and the federal statutory rate (in millions):

Our effective tax rate typically differs from the federal statutory tax rate of 35% primarily due to the regulatory impact of flowing through the federal and state tax benefit of repairs deductions, state tax benefit of accelerated tax depreciation deductions (including bonus depreciation when applicable) and production tax credits.

Net Income

Consolidated net income in 2017 was $162.7 million as compared with $164.2 million in 2016. This decrease was primarily due to the inclusion in our 2016 results of a $17.0 million income tax benefit due to the adoption of a tax accounting method change related to the costs to repair generation assets, and higher operating expenses as discussed above, offset in part by improved gross margin as a result of favorable weather, and to a lesser extent, by customer growth.

Liquidity and Capital Resources

As of December 31, 2017, our total net liquidity was approximately $88.9 million, including $8.5 million of cash and $80.4 million of revolving credit facility availability.  This compares to total net liquidity one year ago at December 31, 2016 of $104.3 million.

Dividend Declared

NorthWestern's Board of Directors declared a quarterly common stock dividend of $0.55 per share (a 4.8% increase), payable March 30, 2018 to common shareholders of record as of March 15, 2018.

Significant Items Not Contemplated in Guidance

A reconciliation of items not factored into our final 2017 and 2016 Non-GAAP Adjusted earnings guidance of $3.30 - $3.45 and $3.20 - $3.35 per diluted share, respectively, are summarized below. The amount below represents an after-tax (using a 38.5% effective tax rate) non-GAAP measure that may provide users of this financial information with additional meaningful information regarding the impact of certain items on our earnings.  More information on this measure can be found in the "Non-GAAP Financial Measures" section below.