NorthWestern Reports First Quarter 2018 Financial Results

SIOUX FALLS, S.D., April 24, 2018 /PRNewswire/ -- NorthWestern Corporation d/b/a NorthWestern Energy (NYSE: NWE) reported financial results for the quarter ended March 31, 2018.  Net income for the period increased 3.4% to $58.5 million, or $1.18 per diluted share, as compared with net income of $56.6 million, or $1.17 per diluted share, for the same period in 2017. This $1.9 million increase in net income in 2018 is primarily due to colder winter weather, higher Montana natural gas rates and increased demand for transmission on our system and lower operating, general and administrative expense in 2018. Additional information regarding this release can be found in the earnings presentation found at www.northwesternenergy.com/our-company/investor-relations/presentations-and-webcasts.

"Colder weather and cost controls during our first quarter of 2018 were partially offset by higher property tax and depreciation expense.  We also spent a considerable amount of time, along with the rest of the industry, supporting the implementation of the new federal income tax law," said Bob Rowe, President and Chief Executive Officer. "NorthWestern has submitted proposals to its regulators that ensures the new tax law provides an opportunity to pass benefits on to customers, through lower utility bills, and allow us make important incremental expenditures on our system to continue to improve safety and reliability."

Significant Earnings Drivers

Gross Margin
Consolidated gross margin for the three months ended March 31, 2018 was $245.4 million compared with $247.5 million for the same period in 2017.  This $2.1 million decrease was a result of a $4.1 million increase to items that have an impact on net income and $6.2 million decrease 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 $4.1 million, including:

• $1.9 million increase in our Montana gas rates effective September 1, 2017;
• $1.5 million increase in electric and natural gas retail volumes due primarily to colder winter weather and customer growth; and
• $1.5 million increase due to higher demand to transmit energy across our transmission lines due to market conditions and pricing; partially offset by an
• $0.8 million decrease in other miscellaneous margin items.

The change in consolidated gross margin for items that had no impact on net income represented a $6.2 million decrease primarily due to the following:

• $7.3 million decrease due to the deferral of revenue as a result of the Tax Cuts and Job Act (TCJA), offset by a decrease in income tax expense;
• $0.6 million increase in revenues for property taxes included in trackers, offset by increased property tax expense; and
• $0.5 million increase in revenue due to the decrease in production tax credit benefits passed through to customers in our tracker mechanisms, which are offset by increased income tax expense.

Operating, General and Administrative Expenses
Consolidated operating, general and administrative expenses for the three months ended March 31, 2018 were $74.3 million compared with $78.3 million for the same period in 2017. The $4.0 million decrease was primarily due to:

• $2.3 million decrease due to the change in value of non-employee directors deferred compensation due to changes in our stock price (offset by changes in other income with no impact on net income);
• $1.5 million lower maintenance costs at our Dave Gates Generating Station and Colstrip Unit 4 facilities;
• $1.3 million decreased labor costs due primarily to more time being spent by employees on capital projects rather than maintenance projects (which are expensed);
• $0.9 million lower Distribution System Infrastructure Project related expenses, which concluded at the end of 2017; and
• $0.9 million other miscellaneous decreases.

These decreases were partially offset by a $2.9 million increase in employee benefit expense associated with the regulatory treatment of pension expense, which is primarily offset in other expense below.

Property and Other Taxes
Property and other taxes were $42.8 million for the three months ended March 31, 2018, as compared with $39.9 million in the same period of 2017. This increase was primarily due to plant additions and higher annual estimated property valuations in Montana. We estimate property taxes throughout each year, and update based on valuation reports received from the Montana Department of Revenue. 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 FERC-jurisdictional customers and net of the associated income tax benefit.

Depreciation and Depletion Expense
Depreciation and depletion expense was $43.8 million for the three months ended March 31, 2018, as compared with $41.5 million in the same period of 2017. This increase was primarily due to plant additions.

Operating Income
Consolidated operating income for the three months ended March 31, 2018 was $84.5 million as compared with $87.8 million in the same period of 2017. This decrease was primarily due to the decrease in gross margin (resulting from the $7.3 million TCJA deferral which is largely offset by reduced income tax expense) and increase in property taxes and depreciation and depletion expense, as discussed above.

Interest Expense
Consolidated interest expense for the three months ended March 31, 2018 was $23.0 million, as compared with $23.4 million in the same period of 2017. This decrease was primarily due to the refinancing of debt in 2017, partly offset by rising interest rates.

Other Expense
Consolidated other expense, net remained flat at $1.1 million for the three months ended March 31, 2018 as compared with the same period of 2017.  This includes a decrease in other pension expense, offset by an increase in expense associated with the change in the value of deferred shares held in trust for non-employee directors deferred compensation, both of which are offset in operating, general, and administrative expenses with no impact to net income.

Income Tax
Consolidated income tax expense for the three months ended March 31, 2018 was $1.9 million as compared with $6.7 million in the same period of 2017. Our effective tax rate for the three months ended March 31, 2018 was 3.2% as compared with 10.6% for the same period of 2017. We 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):

We compute income tax expense for each quarter based on the estimated annual effective tax rate for the year, adjusted for certain discrete items. Our effective tax rate typically differs from the federal statutory tax rate primarily due to the regulatory impact of flowing through federal and state tax benefits 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 for the three months ended March 31, 2018 was $58.5 million as compared with $56.6 million for the same period in 2017. This increase is primarily due higher Montana natural gas rates, colder winter weather, increased demand for electric transmission, and lower operating, general and administrative expense in 2018.

Liquidity and Capital Resources
As of March 31, 2018, our total net liquidity was approximately $206.7 million, including $4.7 million of cash and $202.0 million of revolving credit facility availability. This compares to total net liquidity one year ago at March 31, 2017 of $183.5 million.

In September 2017, we entered into an equity distribution in which we may offer and sell shares of our common stock from time to time, having an aggregate gross sales price of up to $100 million. During 2017, we received net proceeds of approximately $54 million from the sale of our common stock. There were no issuances during the first quarter of 2018. We expect to issue the remaining $46 million of shares under the agreement during 2018.

Dividend Declared
NorthWestern's Board of Directors declared a quarterly common stock dividend of $0.55 per share, payable June 29, 2018 to common shareholders of record as of June 15, 2018.

Significant Items Not Contemplated in Guidance
A reconciliation of items not factored into our 2018 and final 2017 adjusted non-GAAP earnings guidance of $3.35 - $3.50 and $3.30 - $3.45 per diluted share, respectively, are summarized below. The amount below represents a non-GAAP measure that may provide users of this data with additional meaningful information regarding the impact of certain items on our expected earnings. More information on this measure can be found in the "Non-GAAP Financial Measures" section below.