NorthWestern Reports Second Quarter 2018 Financial Results

SIOUX FALLS, S.D., July 19, 2018 /PRNewswire/ -- NorthWestern Corporation d/b/a NorthWestern Energy (NYSE: NWE) reported financial results for the quarter ended June 30, 2018.  Net income for the period increased 100.6% to $43.8 million, or $0.87 per diluted share, as compared with net income of $21.8 million, or $0.44 per diluted share, for the same period in 2017. This $22.0 million increase in net income in 2018 is primarily due to a gain related to the adjustment of our Qualified Facilities (QF) liability, favorable weather, and to a lesser extent increased demand for electric transmission.

Additional information regarding this release can be found in the earnings presentation found at www.northwesternenergy.com/our-company/investor-relations/presentations-and-webcasts.

"A significant gain related to an old vintage of Qualified Facilities contracts complemented what was already a respectable quarter for NorthWestern - both operationally and financially," said Bob Rowe, President and Chief Executive Officer. "Annualized customer growth in excess of one percent across our service territory, slightly favorable weather as compared to the same quarter last year, and increased usage of our transmission system all contributed to a solid quarter."

Significant Earnings Drivers

Gross Margin
Consolidated gross margin for the three months ended June 30, 2018 was $229.6 million compared with $199.9 million for the same period in 2017.  This $29.7 million increase was a result of a $32.1 million increase to items that have an impact on net income and $2.4 million decrease to items that are offset in operating expenses, property tax expense and income tax expense with no impact to net income.

Consolidated gross margin for items impacting net income increased $32.1 million, including:

• $25.1 million reduction related to our electric QF liability due to the combination of (i) a periodic adjustment of the liability for price escalation, which was less than modeled resulting in a liability reduction of approximately $17.5 million; and (ii) the annual reset to actual output and pricing resulting in approximately $7.6 million in lower QF related supply costs due primarily to outages at two facilities. Our electric QF liability consists of unrecoverable costs associated with contracts covered under PURPA that are part of a 2002 stipulation with the MPSC and other parties;
• $4.0 million increase in electric and natural gas retail volumes due primarily to favorable weather and customer growth;
• $1.4 million higher demand to transmit energy across our transmission lines due to market conditions and pricing;
• $0.3 million due to an increase in our Montana gas rates effective September 1, 2017; and
• $1.3 million of other miscellaneous improvements to gross margin.

The change in consolidated gross margin for items that had no impact on net income represented a $2.4 million decrease primarily due to the following:

• $6.2 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;
• $0.4 million decrease in natural gas production gathering fees, offset by reduced operating expenses; partially offset by
• $3.5 million increase in revenues for property taxes included in trackers, offset by increased property tax expense; and
• $0.7 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.

Consolidated gross margin for the six months ended June 30, 2018 was $475.0 million compared with $447.4 million for the same period in 2017.  This $27.6 million increase was a result of a $36.2 million increase to items that have an impact on net income and $8.6 million decrease to items that are offset in operating expenses and income tax expense with no impact to net income.

Operating, General and Administrative Expenses
Consolidated operating, general and administrative expenses for the three months ended June 30, 2018 were $73.8 million compared with $72.6 million for the same period in 2017. This $1.2 million increase was a result of a $1.9 million decrease to items that have an impact on net income and $3.1 million increase to items that are offset in other income (expense) with no impact to net income.

Consolidated operating, general and administrative expenses for items impacting net income decreased $1.9 million, including:

• $2.0 million lower maintenance costs at generation facilities;
• $1.0 million lower labor costs due primarily to more time being spent by employees on capital rather than maintenance projects (which are expensed);
• $0.7 million lower Distribution System Infrastructure Project related expenses, which concluded in 2017;
• $0.4 million lower gas production gathering expense (offset by lower gathering fees discussed above); and
• $0.5 million of other miscellaneous expense reductions. These were partially offset by a
• $2.7 million increase in employee benefit costs primarily due to higher medical and pension expense; offset by

The change in consolidated operating, general and administrative expenses for items that are offset in other income (expense) and had no impact on net income represented a $3.1 million increase primarily due to the following:

• $2.6 million increase related to the regulatory treatment of pension and post-retirement benefit expense; and
• $0.5 million increase related to the change in value of non-employee directors deferred compensation due to changes in our stock price.

Consolidated operating, general and administrative expenses for the six months ended June 30, 2018 were $148.2 million compared with $150.9 million for the same period in 2017.  This $2.7 million decrease was a result of a $6.2 million decrease to items that have an impact on net income and $3.5 million increase to items that are offset in other income (expense) with no impact to net income.

Property and Other Taxes
Property and other taxes were $43.0 million for the three months ended June 30, 2018, as compared with $39.5 million in the same period of 2017. This increase was primarily due to plant additions and higher 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.

Property and other taxes were $85.9 million for the six months ended June 30, 2018, as compared with $79.4 million in the same period of 2017.

Depreciation and Depletion Expense
Depreciation and depletion expense was $43.5 million for the three months ended June 30, 2018, as compared with $41.5 million in the same period of 2017. This increase was primarily due to plant additions.

Depreciation and depletion expense was $87.3 million for the six months ended June 30, 2018, as compared with $83.0 million in the same period of 2017.

Operating Income
Consolidated operating income for the three months ended June 30, 2018 was $69.2 million as compared with $46.3 million in the same period of 2017. This increase was primarily due to the adjustment of our QF liability and favorable weather, partly offset by the overall increase in operating expenses, as discussed above.

Consolidated operating income for the six months ended June 30, 2018 was $153.7 million as compared with $134.1 million in the same period of 2017.

Interest Expense
Consolidated interest expense for the three months ended June 30, 2018 was $23.2 million, as compared with $23.4 million in the same period of 2017, with a decrease from the refinancing of debt in 2017 partly offset by rising interest rates.

Consolidated interest expense for the six months ended June 30, 2018 was $46.2 million, as compared with $46.8 million in the same period of 2017.

Other Income and Expense
Consolidated other income was $0.9 million for the three months ended June 30, 2018 as compared to consolidated other expense of $0.5 million during the same period of 2017. This improvement includes a decrease in other pension expense and an increase 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. These improvements were partly offset by lower capitalization of Allowance for Funds Used During Construction .

Consolidated other expense for the six months ended June 30, 2018, was $0.3 million, as compared with $1.6 million in the same period of 2017.

Income Tax
Consolidated income tax expense for the three months ended June 30, 2018 was $3.1 million as compared with $0.6 million in the same period of 2017. Our effective tax rate for the three months ended June 30, 2018 was 6.6% as compared with 2.6% for the same period of 2017. We expect our full year 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 for the three and six month periods:

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 June 30, 2018 was $43.8 million as compared with $21.8 million for the same period in 2017. This increase was primarily due to a gain related to the adjustment of our QF liability and favorable weather, partly offset by the overall increase in operating expenses and higher income tax expense, as discussed above.

Consolidated net income for the six months ended June 30, 2018 was $102.3 million as compared with $78.4 million for the same period in 2017.