Welcome to the NorthWestern Corporation Fourth Quarter 2016 Financial Results Conference Call. Today's call is being recorded. And at this time I'd like to turn the conference over to Mr. Travis Meyer, Director of Investor Relations. Please go ahead, sir.

Thank you, Vicki. Good afternoon and thank you for joining NorthWestern Corporation's financial results and conference call and webcast for the year-ended December 31, 2016. NorthWestern's results have been released and the release is available on our website at NorthWesternEnergy.com. We also released our 10-K pre-market this morning. On the call with us today are Bob Rowe, President and Chief Executive Officer; Brian Bird, Vice President and Chief Financial Officer; and we also have several other members of management with us today in the room. Before I turn the call over for us to begin, please note that the Company's press release, this presentation, comments by presenters and responses to your questions may contain forward-looking statements. As such, I will mind you of our Safe Harbor language. 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-looking statements often address our expected future business and financial performance and may contain words such as expects, anticipates, intends, plans, believes, seeks or will. The information in this presentation is based upon our current expectations of the date hereof unless otherwise noted. Our actual future business and financial performance may differ materially and adversely from our expectations expressed in any forward-looking statements. We undertake no obligation to revise our publicly update our forward-looking statements with this presentation -- or this presentation for any reason. Although our expectations and beliefs are based upon reasonable assumptions, actual results may differ materially. The factors that may affect our results are listed in certain of our press releases and disclosed in the Company's Form 10-K, along with other public filings with the SEC. Following our presentation, those who are joining us by teleconference will be able to ask questions. The archived replay of today's webcast will be available beginning at 6:00 PM Eastern time today and can be found on our website, again at NorthWesternEnergy.com, under the Our Company, Investor Relations, Presentations and Webcast link. To access the audio replay of the call, dial 888-203-1112, then access code 5668902. I will now hand the presentation over to CEO, Bob Rowe.

Thank you, Travis and good afternoon, everyone. Thank you all for joining us. I hope your 2017 is off to a very good start. I'll touch on some of the highlights and then pass the ball off to Brian Bird. 2016 net income improved by 8.6% or $13 million, as compared to 2015 and the improvement was primarily due to a tax benefit related to costs to repair a generation property, along with improved gross margin which was driven by an increase in South Dakota electric rates. These benefits were partially offset by an insurance recovery that benefited earnings in 2015, as well as by higher property tax and depreciation expense in 2016. GAAP diluted EPS of $3.39 in 2016 is compared to $3.17 in 2015 which is a $0.22 or 6.9% improvement. On the other hand, non-GAAP adjusted EPS of $3.30 in 2016 is compared to $3.15 in 2015 and this is a $0.15 or 4.8% improvement. That puts us in the top half of our 2016 non-GAAP adjusted EPS guidance range of $3.20 to $3.35 and Brian will come back and provide a little bit more information about the non-GAAP to GAAP comparison. The Board has approved a 5% increase in our quarterly dividend. That will be $0.525 per share, payable on March 31 for shareholders of record as of March 15 of this year. Environmental stewardship is of concern to many of our shareholders and we're very proud to have published our first environmental report in September of 2016, highlighting our commitment to the stewardship of the wonderful natural resources across our service territory, as well as our sustainable business practices. Most of you are aware that our Board of Directors has added Tony Clark. You all know and admire Tony for his distinguished service as a…

Thanks, Bob. On slide 5, our summary financial results, Bob did mention that net income was up $13 million or an 8.6% increase, leading to diluted earnings per share of increase of $0.22 or 6.9%. Moving forward into the independent parts, from a gross margins perspective on the next page, our electric -- excuse me, our gross margin total is $856 million, an increase of $14.9 million or 1.8%. As you can see above, most of that increase was associated with, on the electric side of our business, $15.7 million or 2.4%, I'll talk about each of those in a minute. But the other variance was a slight decrease in natural gas margins, primarily driven to reductions in our natural gas production rates on our production assets, due to adjusting costs in those filings to actual costs. Turning over to the electric items in gross margin. The top of the page, as Bob mentioned early on, the biggest increase in margins of $33.5 million, increase in rates associated with our South Dakota electric rate increase. We also did have a $7.7 million benefit, net benefit from the lost revenue adjustment mechanism. You may recall we released just over $14 million of prior reserves we had held back since 2012 and that was offset by, on a going-forward basis, approximately $7 million that we will not receive in lost revenue adjustments, netting to $7.7 million for the year. You see a $6.1 million favorable item for electric QF adjustment. Effectively what that is, we did have that adjustment occur and a negative adjustment occur in 2015 associated with that amount. No adjustment in 2016, thus the favorable variance there. Some other electric variances which were negative, we did have the $9.5 million negative MPSC disallowance, primarily associated with the Colstrip outage.…

Thank you, Brian. Just a few things to highlight. First, safety truly is our number one priority and at every employee meeting, that's the first thing we discuss and 2016 was a great year on the safety front. We had the fewest OSHA recordable events of any year and we had the best year for lost time incidents. In fact, if you think of safety in terms of three-member crews, our lost time was low enough that it was less than one -- the equivalent of one crew for the year. That's a tremendous record, just in terms of people going home safe. Second, we recorded the best customer satisfaction scores ever with JD Power and that was for overall customer satisfaction and fundamentally that's what we're in business to do, serve our customers, provide essential service. Third, we have a strong and consistent record with corporate governance and clarity of disclosure and our 2016 proxy statement which by the way is prepared in-house, was recognized as a finalist by the Corporate Secretary Magazine for best proxy statement for small to mid cap companies. That's the award we won in 2014, but like the Patriots, we tend to go back every year. Finally, we were recognized for a strong dividend. In March, NorthWestern was added to the NASDAQ U.S. Broad Dividend Achievers Index which is designed to represent the country's leading stocks by dividend yield. Finally I would say, as Brian highlighted the very real challenges we had in 2016 and it was a real test for management discipline and I think the great management team I'm privileged to work with really did deliver. That wouldn't have happened if the entire team hadn't stepped up and been focused on efficiency, discipline and providing our customers the service that they all…

[Operator Instructions]. And we will take our first question today from Michael Weinstein with Credit Suisse. Please go ahead.

I was wondering if you could -- by the I way, thank you for a very detailed presentation. Just the first question I have is, maybe you could tie the lower CapEx forecast for generation to the RFP situation, because it sounds like you're moving forward with the RFP, but the lower CapEx forecast would indicate you have less confidence in the outcome or something? Maybe you could go over that and explain it a little better.

What primarily we did here, wasn't just Montana, we did push out South Dakota as well, based upon current rules in SPP and how they treated wind resources. And so we reduced a little bit in South Dakota and pushed the timing out there. Montana, we did it as well, we pushed out the timing and reduced some of the spend there. I think have you to remember though, the overall program we're talking $1.3 billion, the reduction here I think net-net is -- we're talking less than $100 million change here in our overall capital spend plan here. This is a long-term view and obviously to complete this program that we're talking about is going to be in a decade or so. So we're certainly very, very supportive of what we need to do here and ultimately we need to persuade the Commission and others that this makes sense to move forward. As Bob pointed out, there is a huge risk here in terms of being bare naked in terms of reserve margin.

One thing I would add to that, we talked heavily about Montana. But in South Dakota for the last several years, as we have discussed in prior calls, we put a lot of effort into integrating into the Southwest Power Pool. We've done that now. We're learning how that system operates. We're seeing some real benefits there for customers. I think that's reflected in the plans as well.

Right. And is the move towards the lower end of 7% to 10%, is that -- like at what point do you think you can mitigate that and get back into the middle of the range?

That's a great question, Michael. Once we're investing in a generation perspective mode, I think you start moving up within that range. Obviously, you can see that's a tremendous amount of capital on a going forward basis. We continue to evaluate our infrastructure needs, as we talk about DSIP is rolling off and though we do have capital spend here in transmission and others, we continue to evaluate the level of spend there. There could be upward movement there, but I see us moving upward within that range when we're taking on the generation investment in earnest.

Like in 2018 time frame or so, preparing for that?

Early to tell, Michael, I think is a fair answer.

What we're doing here obviously is trying to be as transparent as we can possibly can be with you and state what we think are realistic prospects.

I think, Bob, one of the other thing we want to might talk about too is, we have great resource profile in Montana and as you talked about hydro and wind. And looking at what we're doing in South Dakota from a reliability standpoint, in terms of our mix as well, there could be investment associated there that we're still in the planning process.

Specifically one of the tasks we've taken on in the South Dakota plan is doing an analysis of the existing facilities from a reliability perspective and trying to anticipate the vintage of the fleet.

My last question is, maybe you could talk a little about the upcoming filing for the annual report in April. What exact day is that going to happen? And what's your thought now on a Montana electric rate case?

The filing will be due on April 30. That is our annual report. It's hydro compliance order, the Montana Commission directed that we communicate our future plans concerning an electric rate case as part of the April 30 report and that is what we intend to do.

You intend to communicate your plan?

Correct.

And does the proceedings in the gas rate case give you any optimism in terms of how you might be treated, though?

It's too early to say. What we know obviously is we have filed our testimony and we've seen testimony from the two interveners and then of course discovery.

And the next question comes from Joe with Avon capital advisors.

Just a quick one on the potential tax reform. So how much is your repair tax deduction, after the accounting change, on a per-year basis?

Well, I think what you can do is you can go to our tax reconciliation that's in our slide deck and after the fact and what happened is you saw in generation repair is the increment from generation repairs of $17 million in 2016 versus 2015. If you looked at our T&D repairs, it was pretty much the same on a year-over-year basis. Our total flow-through repairs deduction in 2016 was $41.1 million. Is that helpful, Joe?

That's helpful. And what if in the upcoming tax reform, who knows what happens, but what if a portion of the tax -- of the repair tax deduction is eliminated, how would you look at that? Is there any way you can mitigate that?

I'll let Brian answer the specific question, but maybe I'll preface that and caution us to be careful about any what-ifs at this point and just speak generally to how we're engaging with the whole tax reform process. Obviously, we're very active members of EEI and also AGA. We're pleased that their positions are at this point quite closely aligned and we've been fully involved in development of those positions. We support them. Our Tax Director is exceptional, in his ability to run the analysis. What we're doing generally, recognizing that we've got at this point at least two very fluid targets, is being able to analyze first of all the House GOP plan and then secondly the administration plan and we're looking at a number of factors which include effective tax rate implications, earnings implications, very importantly, customer rate implications, both near term and long term and particularly long-term since that's how we invest cash flow and then NOL implications and availability. Brian?

I think, Joe and Bob's spot on in terms of -- it's certainly hard to talk about these plans. We've see proposals, of course from the GOP and I'll say the Trump plan. I think what we could tell you is the GOP plan as it's laid out today certainly would be negative from our perspective, in terms of the 20% tax rate and the fact that we would lose interest deductibility. Those are key issues with that particular plan. The Trump plan is what we'd argue slightly neutral to positive. Obviously the lower tax rate, 15% tax rate and the potential optionality of getting interest expense deductibility. I think, Joe, that's as far as we want to take you today.

We'll now go to Paul Ridzon with KeyBanc.

Is any of the pullback of the generation related to demand growth slowing or is it really just regulatory?

No, it really doesn't relate to demand growth slowing. The plans were obviously prepared very recently. But we're taking incremental you approaches in both South Dakota and Montana.

Next is Chris Ellinghaus with Williams Capital.

Brian, it sounds like maybe 2017, you've gotten through some of these adjustments that you've had to make. You got through the hydro and the Montana disallowances and those things. 2017 sounding like it might be a fairly clean year, is that true?

Well, Chris, I think every time we look at a particular year we might think that. But to your question, I feel a little bit better that we don't have a lot of prior-year type items that could creep up on us. I certainly don't want to say, without knocking on any wood, that there couldn't be issues. Obviously we know the gas rate case is a big item for us in 2017.

Right. Okay. The annual report filing for later in the year, does that preclude you from filing an electric case before April or is that just the deadline that the MPSC set for indicating your intentions?

By April 30, we'll file the report and in that report, we're instructed to tell them what our plans are.

Okay. As far as the supply plan in Montana, can you just give us a little color on what you've heard in terms of the concerns from the Commission?

Just a word about our planning philosophy. Our goal is long term, least cost, least risk. It's an iterative plan, updated every several years. Typically we have action items in terms of resource acquisition of some sort, action items in terms of operational issues, study issues, things like that. Many of the comments from third parties were from particular advocacy perspectives and that's entirely appropriate. We heard comments about the need to consult which we do and we agree. We heard comments about looking to a range of solution. There were questions about whether or not we had factored in full optimization of the hydro system. Questions about how we were looking at the shortfall, in relation to peak, being our own peak and not necessarily a system peak. And questions about whether or not we were making the right assumptions about capacity shortfall and questions about how we were thinking about timing of the introduction of new assets. As I mentioned, a question about whether or not the range of options looked at in the plan was too narrow And as I indicated, we've gone out with an RFP. Of course, the point of an RFP is to test real resources in the market and to identify that entire range of options. We think these are actually very good questions. Of course, we would have liked the opportunity to address those questions, when the plan was filed. But we're very, very appreciative that we will have the opportunity to discuss each of those with the Commission.

Do you have any participating project in the RFP?

No.

Okay. And lastly, can you just give us a little color on the South Dakota supply plan, how did you feel that was received?

First on the Montana side, we're certainly inviting build transfer options and the plan does identify values in utility ownership. We do expect to see that proposal, but we're not ourselves submitting a bid. The South Dakota plan, they don't file or they don't release a comment on the plan. But again, based on the third-party evaluation which concluded the methodology was reasonable, the conclusions were appropriate, we call that a very good reception.

We'll now go to Paul Patterson with Glenrock Associates.

I want to touch base on two things involving these news releases that have been coming out from the Commission which in my experience over the years is unusual. So first is the IRP that you discussed on the call. The other is this -- rather sharp statements regarding the property tax tracker and its impact on rates and their apparent frustration with that. As investors, what are we supposed to think when we see these comments? How would you describe the regulatory relationship? And that's how I'd ask the question. I don't know how else to put it. But they seem rather -- they seem to be taking you to task, both on the property tax tracker and on the IRP. You read the comments. You read the release. What do you make of that?

I cannot and should not speak for the Commission. We take responsibility for our part of the regulatory relationship. We respect the Commission and the Commissioners as public servants and we respect them individually. That's the approach that we want to take. We also and I think this is where your question is going, recognize that our regulators in all three states and at the federal level, but because of the portion of our investment that is in Montana, certainly in Montana, we recognize that their decisions are perhaps more important than anything else, in our ability to invest in serving our customers. We've got about $4.3 billion of assets, utility assets dedicated to serve our Montana customers. We're stewards of that. They are stewards of that as well. Our responsibility is to treat the Commission with respect which we do, to provide them as much information as we possibly can and we're human. We don't have access to every bit of information they might want, but to do the best job we possibly can. Beyond that, I'm very--

I'm not suggesting that you -- I know that you are definitely focused on communicating and working with your Commissioners in a constructive way. What I'm suggesting or not suggesting, what I'm asking is how should we think about the regulatory relationship and the ability to perhaps improve it? I mean, again, the reason why I say this is because it's remarkable. These are news releases. There's no nuanced statements. These are things they're putting in press releases which again, like I said, I've been doing this for a while. I've never seen really anything quite like it. I just, I'm just trying to get a feel for how we should think about these comments and also the recent press reports about customers being unhappy with their most recent bills and what have you. That's the context that I'm suggesting. I'm not suggesting that you are -- I would hope you that aren't just being cavalier about this or anything. But I just was trying to get a sense as to what the plan is, with respect to something like that?

Our approach has been, again, to try to be as forthcoming and constructive as possible. Where we make mistakes, we want to own that. I've certainly been in a position to apologize where we have or where I have made mistakes. We'll continue to do that. Couple of background items, obviously, Commissioners in our states are elected and we're just coming out of a campaign season. So they have all had to take positions, it's particularly a reality in Montana, you have to take positions as part of a campaign. Currently, we're in a legislative session and as is usually the case in Montana, there tend to be fairly significant utility-related issues and the Commission typically is quite involved, advocating its view, as are we. And again, we've tried to be very respectful and appropriate in how we've advanced our positions. Third, I mentioned that we had just a fantastic year last year, from a customer satisfaction perspective and that included in Montana. But we have had a winter the likes of which we have not seen, starting in late December into January in Montana, closer to what used to be a normal winter and that's a surprise. One of the challenges of course in the way investor-owned utility rates are set, is you're recovering all those $4.3 billion in primarily -- paying for those assets, primarily fixed cost, through volumetric prices. So as those meters spin more and more, that does have real impact. And we've tried to communicate to our customers that we understand their situation, try to work with customers individually and just across the board, to manage through that and that's the approach that we need to take consistently.

Just finally, the HB 189 that the Commissioners seem to be supportive of, how should we think about that, if that were to pass?

Which one is that?

I think it has to do with the property tax.

The property tax.

Let me -- I think there's HP 193 and 189. I think you have a better idea about that. One has to do with the controlling of purchase power cost or what have you and the other one I thinks has to do with the automatic increases.

The two areas that the Commission -- two of the areas the Commission has been quite interested in are the supply tax tracker on the electric side and the property tax tracker. As you know, around the country, tracker mechanisms, either statutory or in regulation or by order are very, very common and used for exactly this purpose. So we obviously strongly support continuation of the trackers. The tax tracker is important in Montana, simply because the centrally assessed property taxes that we pay are extremely high and we agree with the Montana Commission's concern about the level of those taxes. In fact, one of the things that the Commission has ordered us to do is to begin to break out the tax amount on our electric and gas bills, it's essentially a line item. And that actually adds -- it creates customer awareness about that impact, but I think that also adds to customer frustration. Our -- both electric and gas, as you saw this in the deck on the gas side, are significantly below national averages. That's something we're quite proud of. But as part of those rates, the tax bill in Montana is significant. But we do need to be able to track and recover. It's worth noting that essentially you, as shareholders, have some fairly significant skin in the game, because between rate cases, we only recover 60% of the change in that centrally assessed tax. Now, I mentioned, we've got a great tax department. They work very hard every year to manage that Montana tax bill and ultimately, that is a benefit. It's a benefit to you, it's a great benefit to our customers and that frees up other resources to commit to serving customers. It's a very important mechanism for us, particularly because the impact of Montana property taxes on the Company and on our customers is so great.

Okay. But if this HB 189 and for that matter 193 were to pass, how should we think that would impact the Company?

It will impact us quite negatively. Brian?

I think what it does is it's certainly likely to accelerate the need for rate cases.

Okay. HB 193 the same thing?

Indeed, same thing.

Okay.

Both cases.

We'll take the next question from Brian Russo with Ladenburg Thalmann.

I realize on slide 18 you note the reduced and delayed CapEx profile, to provide a more levelized annual spend. Does it have anything to do with the Montana Commission's rather sharp criticism of your IRP plan?

No.

And would you move forward without pre-approval on anything?

That's going to depend on the projects, size of the projects, nature of the projects. But we certainly -- and we want to communicate very, very closely with our regulators in all of our jurisdictions, about our plans.

I think just you may be aware moving forward with an RFP is a very small component of our overall needs for this. Again, we'll have to demonstrate it's in the best interest of customers, as we go through that process. But primarily here and you might remember, Brian, on previous calls we've always shown in this fifth year a big drop-off in our capital spend. You may have heard me talk about in the past we're going to try and smooth this out a bit. But we did decrease a bit, some of the spend in terms of generation, both in South Dakota and Montana and it has moved out a little bit, it's more a function of timing than anything.

Just to clarify, the House Bill 189, that's designed to repeal just the property tax adjustment mechanism or all adjustment mechanisms?

That's just the tax adjustment mechanism.

Okay. Got it. And then, I think you had some expenses related to the hydro compliance order. What was that?

We had a $1.5 million adjustment which was effectively an amount that was associated with A&G costs that ultimately the Commission felt should be incrementally removed with the removal of Kerr from our profile. So those costs wouldn't be able to allocated elsewhere.

Okay. Lastly, are there any pending or open regulatory dockets we should be aware of, outside of the gas case?

I think there are always lots of pending open dockets. I think we've talked about the key Montana dockets.

[Operator Instructions]. We'll go to Jonathan Reeder with Wells Fargo.

So I appreciate all the additional commentary you've been giving. Brian, the previous plan, I think, had $187 million related to the new fossil generation in Montana and South Dakota. How much generation spend is included in this new plan and then also, how much got delayed versus removed altogether?

We have $125 million that's in the plan. I believe that's approximately $100 million for Montana and $25 million for South Dakota. I think again, I reiterate the amount of spend we had in South Dakota was also reduced because of the amount of wind that -- it's getting more credit, if you will, in the SPP process. That's reduced the amount of spend in South Dakota. And also, think about this, that $100 million of spend, because you pushed some items out of 2021 into beyond, that's also why you've had a reduction in spend here, it's more of a timing issue. To answer your question directly, $ approximately $100 million of Montana spend to $25 million of South Dakota spend.

Was the South Dakota portion the only thing that got reduced, eliminated altogether if they had a 10 year plan or something like that?

I think that reduced in this plan, I think we had more than $100 million in Montana in this plan. One could argue that was either reduced or deferred.

Right. But it sounds like the Montana portion that isn't in the plan anymore, was more deferred than being eliminated.

Probably the best way to answer that, Jonathan is, we haven't reduced our $1.3 billion plan here.

And then do you think it's possible to get the PSC's blessing on the RFP that you issued, following your workshop next week? Or subsequent ones? Or is there no really way to get a pre-approval until the next supply plan is filed and accepted?

The goal for the workshop really is to gain, actually I would say a mutual understanding. We want to understand much more directly their questions and we want to be able to answer those questions, as best we can.

Okay. So pre-approval, that's likely not to come out of this process, it would just be when you file your next plan and it gets accepted, that you could pursue pre-approval for subsequent generation.

At this point there's no resource, no specific resource that we're planning to file a request for approval for.

Okay. And then Brian, your comment that you expect to be at the low end of the 7% to 10% range in the near term, does that at all take into account potential allowed ROE headwinds in Montana or is that completely separate?

Jonathan, that all comes into play in our consideration on a going-forward basis.

Okay.

Takes into consideration rate cases and rate case outcomes on a going forward basis. It takes into consideration the ability -- the amount of cost control we can put in place. It takes into consideration the growth in terms of these projects, primarily in this plan from the infrastructure standpoint and the T&D side of our business. It takes into consideration all of that.

Okay. Great. And then last question, following up on, I think it was Paul that was asking earlier. Do you believe that some of the recent adverse PSC rhetoric and orders will largely go away, once you file an electric rate case? Or in other words, is it all of this about lowering your earned ROE for Montana Electric and once that's been achieved, you'll be able to work constructively with the Commission again?

The best that I can say really is our goal very much is to work constructively with the Commission. I absolutely believe that Chairman Johnson has the same goal. Beyond that, I really can't speak for the Commission. We respect the office, respect the Commission.

Okay. I understand.

I'd add too, Jonathan, a lot of the questions asked today were questions that would be great questions for the Commissioners themselves. We can't answer them.

All right. We'll keep that in mind and looking forward to your comments in April and May.

And there are no other questions. I'd like to turn it back to Bob Rowe for any additional or closing remarks.

Thank you very much for the good discussion. We hope you have a great weekend, look forward to seeing many of you in person and visiting with most of you next quarter.