Le Lézard
Classified in: Oil industry, Business
Subjects: ERN, CCA, ERP, DIV, FVT

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."

Summary Results

Three Months Ended
December 31,


Year Ended
December 31,

(in thousands, except per share amounts)

2017


2016


2017


2016

Total Revenues

$

344,548



$

330,590



$

1,305,652



$

1,257,247


Cost of Sales

109,025



107,690



410,349



400,973


Gross Margin(1)

235,523



222,900



895,303



856,274










Operating, general and administrative

78,743



82,163



305,137



302,893


Property and other taxes

44,094



36,796



162,614



148,098


Depreciation and depletion

41,656



39,785



166,137



159,336


   Total Operating Expenses

164,493



158,744



633,888



610,327


Operating Income

71,030



64,156



261,415



245,947


Interest Expense

(22,306)



(22,991)



(92,263)



(94,970)


Other Income

2,506



1,372



6,919



5,548


Income Before Income Taxes

51,230



42,537



176,071



156,525


   Income Tax Benefit (Expense)

(3,336)



1,594



(13,368)



7,647


Net Income

$

47,894



$

44,131



$

162,703



$

164,172


Basic: Average Shares Outstanding

48,902



48,329



48,558



48,299


           Earnings per Share - Basic

$

0.98



$

0.91



$

3.35



$

3.40


Diluted: Average Shares Outstanding

49,003



48,502



48,655



47,643


           Earnings per Share - Diluted

$

0.98



$

0.91



$

3.34



$

3.39










Dividends Paid per Common Share

$

0.525



$

0.50



$

2.10



$

2.00



(1) Gross Margin is a non-GAAP financial measure.  See "Non-GAAP Financial Measures" section below for more information.

Significant Developments in 2017

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:

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:

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:

These increases were partly offset by:

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):



Year Ended December 31,



2017


2016

Income Before Income Taxes


$

176.1




$

156.5










Income tax calculated at 35% Federal statutory rate


61.6


35.0

%


54.8


35.0

%








Permanent or flow through adjustments:







State income tax, net of federal provisions


(3.3)


(1.9)

%


(3.7)


(2.4)

%

Flow through repairs deductions


(30.5)


(17.3)

%


(41.1)


(26.3)

%

Production tax credits


(11.0)


(6.3)

%


(10.9)


(7.0)

%

Plant and depreciation of flow through items


(2.2)


(1.3)

%


(4.6)


(2.9)

%

Share based compensation


(0.4)


(0.2)

%


(1.6)


(1.1)

%

Prior year permanent return to accrual adjustments


(0.6)


(0.3)

%


(0.1)


(0.1)

%

Other, net


(0.2)


(0.1)

%


(0.4)


(0.1)

%



(48.2)


(27.4)

%


(62.4)


(39.9)

%








Income tax (benefit) expense


$

13.4


7.6

%


$

(7.6)


(4.9)

%

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.

Reconciliation of Primary Changes from 2016 to 2017






Twelve Months Ended
December 31,







($millions, except EPS)

Pre-tax
Income

Net
Income (1)

Diluted
EPS


2016 reported

$156.5


$164.2


$3.39







Gross Margin





Electric retail volumes

15.7


9.7


0.20



Natural gas retail volumes

10.5


6.5


0.13



2016 MPSC disallowance

9.5


5.8


0.12



Montana natural gas rates

1.8


1.1


0.02



2016 Hydro generation rates

1.5


0.9


0.02



South Dakota generation rates

1.2


0.7


0.01



Electric transmission

0.6


0.4


0.01



Electric QF adjustment

0.4


0.2


0.01



2016 Lost revenue adjustment mechanism

(14.2)


(8.7)


(0.18)



Other

3.9


2.4


0.05



Subtotal: Margin Items Impacting Net Income

30.9


19.0


0.39








Property taxes recovered in trackers

6.7


4.1


0.08



Operating expense recovered in trackers

1.5


0.9


0.02



Subtotal: Margin Items Not Impacting Net Income (2)

8.2


5.0


0.10








Total Gross Margin

39.1


24.0


0.49


OG&A Expense





Bad debt expense

(1.9)


(1.2)


(0.03)



Operating expense recovered in trackers

(1.5)


(0.9)


(0.01)



Maintenance costs

(1.2)


(0.7)


(0.01)



Employee benefit and compensation costs

1.5


0.9


0.02



Insurance reserves

1.0


0.6


0.01



Other

(0.1)


(0.1)


(0.01)



Total OG&A Expense

(2.2)


(1.4)


(0.03)


Other items





Depreciation and depletion expense

(6.8)


(4.2)


(0.09)



Property and other taxes

(14.5)


(8.9)


(0.18)



Interest expense

2.7


1.7


0.03



Other income

1.4


0.9


0.02



Permanent and flow-through adjustments to income tax

?


(13.6)


(0.28)



Impact of higher share count

?


?


(0.01)



Total Other items

(17.2)


(24.1)


(0.51)








Total impact of above items

19.6


(1.5)


(0.05)








2017 reported

$176.1


$162.7


$3.34



(1) Income Tax Benefit (Expense) calculation on reconciling items assumes federal and state composite rate of 38.5%.

(2) These items have offsets in operating expenses or income tax expenses that result in no impact to net income.

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.

Twelve Months Ended

December 31, 2017


Pre-tax
Income

Net
Income (1)

Diluted
EPS

2017 Reported GAAP

$176.1

$162.7

$3.34





Non-GAAP Adjustments:




Remove favorable weather

(3.4)

(2.1)

(0.04)

2017 Adjusted Non-GAAP

$172.7

$160.6

$3.30






Pre-tax
Income

Net
 Income (1)

Diluted
EPS

2016 Reported GAAP

$156.5

$164.2

$3.39





Non-GAAP Adjustments:




Add back unfavorable weather

15.2

9.3

0.19

Electric tracker disallowance of prior period costs

12.2

7.5

0.16

Remove prior period LRAM revenue recognized

(14.2)

(8.7)

(0.18)

Remove prior period generation repairs income tax benefit

?

(12.5)

(0.26)

2016 Adjusted Non-GAAP

$169.7

$159.8

$3.30


(1) Income Tax Benefit (Expense) calculation on reconciling items assumes federal and state composite rate of 38.5%.

2018 Earnings Guidance Affirmed

NorthWestern affirms its 2018 earnings guidance range of $3.35 - $3.50 per diluted share based upon, but not limited to, the following major assumptions and expectations:

Company Hosting Investor Conference Call

NorthWestern will host an investor conference call and webcast tomorrow, February 13, 2018, at 3:30 p.m. Eastern time to review its financial results for the year ending December 31, 2017.  The conference call will be webcast live on the Internet at www.northwesternenergy.com under the "Our Company / Investor Relations / Presentations and Webcasts" heading or by visiting www.webcaster4.com/Webcast/Page/1050/24037.  To participate, please go to the site at least 10 minutes in advance of the webcast to register.  An archived webcast will be available shortly after the call and remain active for one year.

A telephonic replay of the call will be available for one month, beginning at 6:00 p.m. Eastern time on February 13, 2018, at (888) 203-1112 access code 5682232.

About NorthWestern Energy

NorthWestern Corporation, doing business as NorthWestern Energy, provides electricity and / or natural gas to approximately 718,300 customers in Montana, South Dakota and Nebraska. More information on NorthWestern Energy is available on the company's Web site at www.northwesternenergy.com.

Non-GAAP Financial Measures

This press release includes financial information prepared in accordance with GAAP, as well as other financial measures, such as Gross Margin and Adjusted Non-GAAP Diluted EPS, that are considered "non-GAAP financial measures."  Generally, a non-GAAP financial measure is a numerical measure of a company's financial performance, financial position or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP.  Gross Margin (Revenues less Cost of Sales) is a non-GAAP financial measure due to the exclusion of depreciation and depletion from the measure.  Gross Margin is used by us to determine whether we are collecting the appropriate amount of energy costs from customers to allow recovery of operating costs.  Adjusted Non-GAAP Diluted EPS is another non-GAAP measure.  The Company believes the presentation of Adjusted Non-GAAP Diluted EPS is more representative of our normal earnings than the GAAP EPS due to the exclusion (or inclusion) of certain impacts that are not reflective of ongoing earnings.

The presentation of these non-GAAP measures is intended to supplement investors' understanding of our financial performance and not to replace other GAAP measures as an indicator of actual operating performance.  Our measures may not be comparable to other companies' similarly titled measures.

Special Note Regarding Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, including, without limitation, the information under "Significant Items Not Contemplated in Guidance" and "2018 Earnings Guidance Affirmed".  Forward-looking statements often address our expected future business and financial performance, and often contain words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," or "will."  These statements are based upon our current expectations and speak only as of the date hereof.  Our actual future business and financial performance may differ materially and adversely from those expressed in any forward-looking statements as a result of various factors and uncertainties, including, but not limited to:

Our 2017 Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, reports on Form 8-K and other Securities and Exchange Commission filings discuss some of the important risk factors that may affect our business, results of operations and financial condition.   We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

SOURCE NorthWestern Corporation


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