Good day, everyone, and welcome to the NorthWestern Corporation Third Quarter 2017 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to you Investor Relations Officer, Mr. Travis Meyer.

Thank you, Tony. Good afternoon, and thank you for joining NorthWestern Corporation's Financial Results Conference Call and Webcast for the quarter ended September 30, 2017. NorthWestern's results have been released, and the release is available at our website at northwesternenergy.com. We also released our 10-Q premarket this morning. On the call with us today are Bob Rowe, President and Chief Executive Officer; Brian Bird, Vice President and Chief Financial Officer. In addition, we also have a few other members of the management team with us in the room to address your questions today if needed. 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 remind 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 will often contain words such as expects, anticipates, intends, plans, believes, seeks or will. The information in this presentation is based upon our current expectations. 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 or publicly update our forward-looking statements or this presentation for any reason. Although our expectations and beliefs are based on 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 and 10-Q along with other public filings with the SEC. Following our presentation, we'll open the phone lines to allow those dialed into the teleconference to ask questions. The archived replay of today's webcast will be available beginning at 6:00 p.m. Eastern today and can be found on our website, again, northwesternenergy.com, under the Our Company, Investor Relations, Presentations and Webcasts link. To access the audio replay of the call, dial 888-203-1112 then access code 8578548, again that's access code 8578548. I'll now hand the presentation over to our CEO, Bob Rowe.

Thank you. Good afternoon. We know this is a very busy week for all of you and we greatly appreciate you joining us. We just completed our board meeting in Yankton, South Dakota, which is a beautiful and growing community along the banks of the Missouri River at the southern border of South Dakota. As we typically do, we had a great community meeting last night and then a very lively enthusiastic employee meeting this morning. Net income for the third quarter was $36.4 million, or $0.75 per diluted share, as compared with net income of $44.6 million, or $0.92 per diluted share for the same period in 2016. And this $8.2 million decrease in net income is primarily due to the inclusion, in our 2016 results, of a $15.5 million income tax benefit, which was due to the adoption of a tax accounting method change related to the cost to repair generation assets, that was partially offset by an increase in gross margin driven by favorable weather, and to a lesser extent, by customer growth. Meanwhile, non-GAAP adjusted earnings per share increased $0.06, or 8.8% to $0.74 and that is as compared to $0.68 for the same period in 2016. And the board did approve a quarterly stock dividend of $0.525 per share, payable December 29. And with that, I'll turn it over to Brian.

Thanks, Bob. On Page 4, we provide the summary financial results for the third quarter. As Bob pointed out, net income is $36.4 million for the 3 months ended September 30, 2017 compared to $44.6 million, an $8.2 million decrease on a year-over-year basis. What I'd point out in addition to that, on a pretax standpoint, we got $39.2 million for the quarter versus $34.9 million in the prior-year period, a $4.3 million increase, or 12% increase on a year-over-year basis. That was driven primarily from nice increase in gross margin of 3.7%, I'll speak about that in a moment; good cost control with only operating expenses going up 1.3%, with operating income up almost 10% on a year-over-year basis. On gross margin for the third quarter, gross margin was up $7.6 million on a year-over-year basis and equally contributions at least on a percentage basis from both electric side of our business, up $6.6 million year-over-year primarily driven by improvements in our electric retail volumes; and up $1 million in our natural gas business primarily driven by improvements in our natural gas rates and in retail volumes. Moving forward from a weather perspective, the second quarter - excuse me, the third quarter is really focused on cooling degree days, and it was much hotter in Montana than the prior year, 68% warmer and 29% warmer than our historic average. That was partially offset by certainly colder weather in our South Dakota business. Net-net that improvement contributed a $4 million pretax benefit versus normal - $0.4 million versus normal and a $1.8 million pretax benefit versus the prior year. Moving forward to operating expenses on Page 7. Our operating expenses increased $2 million, or 1.3% for the quarter. Operating, general administrative expenses were up $1.9 million, or just under 3%…

Thank you very much, Brian. I will cover off on a few regulatory and legal matters. To begin with, first, turning to the pending appeal of the Federal Energy Regulatory Commission's decision, essentially cost allocation decisions between our retail and our FERC jurisdictional wholesale customers at the Dave Gates Generating Station. As most of you who've been with us over the last few years know, we did - we received an adverse ruling from FERC after a successful outcome in Montana. FERC denied our request for rehearing in May of 2016, required us to make refunds, which we did over $27 million in June of that year. We promptly filed a petition for review with the D.C. Circuit Court of Appeals. And after waiting about a year and a half, I'm pleased to say that we now do have an oral argument scheduled for December 1 of this year. We obviously can't predict precisely when we might receive a decision, but we are hopeful that we will receive that in the first quarter of 2018. So again, a milestone we and you have been waiting for. Concerning Colstrip matters in May of 2016, the Montana Commission issued an order disallowing recovery of certain costs particularly including tracker costs related to a 2013 outage in Unit 4. And appeals there have been filed coming out of 2 different proceedings in 2 Montana district courts regarding the disallowance and we expect to receive orders from each of the courts within the next 12 months. Again, courts run their own schedules. Third item, property tax tracker. As you know, one of our largest expenses is Montana property taxes. And in recognition of that, the legislature a number of years ago adopted a statute allowing for a recovery 60% of the change in state…

[Operator Instructions] And we will go first to Michael Weinstein with Credit Suisse.

Hey Bob, Brian, how you doing?

Hi Michael. Good, thanks.

A question on the rate case filing that you're planning for the fall of next year. Is that going to include - I know it's a 2017 test year, but is that going to include known and measurable changes for 2018 test year as well? Specifically, I mean would it include expenses from - expense levels from 2018 in the filing when you do make it?

We certainly will look at known and measurable changes. The nature of those changes is probably something we would decide much closer to the filing, when we know what they are.

So, you mean it does include kind of a known and measurable change and it will go beyond 2017 is what I'm trying to get at, right?

The extent to which it will is far from being decided. Yes, there is a known and measurable change component to the filing.

Okay. And leaving aside other issues for the moment, is a 15-year contract length enough to reinstate the RFP? Is that enough, on its own, to reinstate the RFP?

We really do need to look at that the commission's order when it comes out. And on the one hand, we are extremely concerned to that were identified in the plan, that's what the RFP was designed to do. My - I'm going to go just a little bit beyond in trying to give you the more fulsome answer. In the first instance, the discussion of the commission was consistency between tripping of QF and utility resources for a number of reasons that really is apples and oranges. Utility has no obligation to serve. Utility resources do, just like other resources, have to meet and avoid the cost test. And that test is consistent across resources and we have to compare as we are through the RFP our resources to other resources. A difference between - and a key difference between owned resources and non-owned resources is that resources we own are priced on the basis of cost, not on the basis of market and those resources are depreciated over time. So, whenever they are brought back in, as part of a rate case for example, the cost to customers reflect that depreciation, that doesn't occur with third-party or QF resources. So how you thread that needle is a significant question. But in terms of what we would or would not be able to do under a 15-year threshold, it remains to be seen, and we look forward to seeing the commission's order.

And just a final question, what level of generation investment does the forecast for the low end of 7% to 10% total return include in it?

It's a good question. I think you know our plans were $1.3 billion was the number that was in our resource plan. Lot of that investment was certainly on the back end. During the periods of time that we were including those assets, if you will, in the rate base, I feel very confident we would be well within that range. I can't necessarily specifically answer that question on a year-by-year basis between now and the end of that plan. But once we're executing our generation investment, I see - expect to see us well within that range.

So, the - and the low end include some investments not no investment, is that a fair statement?

I would tell you that our expectation to be on low end is ultimately making some investment, but on the low end.

Okay, I got you. Alright, thank you very much.

Thank you.

And we go next to Nicholas Campanella with Bank of America Merrill Lynch.

Hey, good afternoon.

Hey Nicholas.

I was just curious on the equity program. Once that's complete, where would that put you guys on your FFO to debt versus kind of where you want to be and where the rating agencies want you?

Nick, we'd see ourselves moving up closer to that 18% FFO to debt. I think the focus on that number was lessened when the rating agencies felt that a regulatory environment was more positive. They've certainly put more focus on those coverage ratios and that would move us closer to that 18%, that's where they'd like us to be.

Got it, okay. And then just to go back to the resource procurement, do you think it would be possible to acquire generation instead of building your own potentially to address some of the regulatory concerns here?

Could you flush out your question a bit more? By acquired, do you mean entering the PPAs, do you mean purchase generation...

Either a bilateral contract or purchase generation rather than construction?

I think from our perspective, if the resources are already built and they meet our needs and they are more cost effective than building, we certainly would consider those effects answering your question.

Yes. And the RFP was again designed to identify that whole range of options. The concern we have in the Western market certainly is there are an awful lot of straws potentially in the same drink and we don't know how deep that market is.

We go next to Paul Ridzon with KeyBanc Capital Markets.

Good afternoon.

Hey Paul.

Brian, you said 4Q drivers talk about flat SG&A. Is that just for 4Q, is that for the full year?

I think from - I would argue flattish for the full year. I think when I'm looking at total OG&A and talking about that particular category is certainly going to be tough for the property taxes and those types of things, but from an OG&A perspective, we'd like to think that will be flattish for a full year basis.

And then on the PCCAM retroactive to July 1, do you have a sense of how much that is?

That is again - Bob talked about the 90%/10% sharing concept. Until an appropriate basis is determined, and we can ultimately see where final numbers come, it's very difficult to understand. I think the hypothetical that we provided gives a good indication in terms of the range of impact.

Really, we haven't even seen our intervener testimony yet, so we don't know the amount of that issue.

And then what level of discussions have you had with the commissioner on the fall '18 DRC filing in Montana?

Really no direct discussions at all. We have told them what our plans are. You've seen, for example, the letter we sent earlier this year and we took it as a positive sign that the - that commission decided not to include that in the PCCAM docket.

Okay, thank you very much.

Thank you.

Thanks Paul.

[Operator Instructions] Next to Chris Ellinghaus with Williams Capital.

Good morning, guys or good afternoon, sorry.

Good morning.

It feels like morning to me. Bob, can you elaborate a little bit more on the fires issue? And was there any kind of material impact in the quarter?

No. And we - we're very vigilant and very concerned. It was an extraordinary summer for the State of Montana, but no, we did not experience any kind of significant impairment at all.

Spot on from a fire perspective is what's playing out that the Havre storm that Bob did talk about, there will be expense associated with that, but most of the dollars spent there because we had significant damages really in the capital side of our business. And so again to your early question about our expense control, flattish still comes into the play even taking that into consideration.

Okay. And Bob, as far is the filing goes, at one point, you were talking about a spring or it offered, I guess, a spring filing bumping up the time frame. Is that off the table at this point?

We're focused on a filing in fall of '18, and all of our planning and preparation is going in that direction.

Okay. Would it be fair vis-à-vis your compliance filing earlier in the year to expect at the time of that filing that your ROE should diminish somewhat?

No.

Okay. And do you have any idea when you expect the QF order to come out?

It should be any day now. We look at the - pardon me, there will be a 30-day extension on completion of the order, but it is again eminent.

Okay. And when you designed your PCCAM, I presume you were looking at Oregon's history when you were designing that concept. Do you feel like it - your concept avoids some of the significant volatility, let's say, Portland had experienced early on in there sort of earnings in the way that you designed yours?

We certainly did look at other models, but we focused on the MDU approach, which has been workable for MDU and that was where the commission seem to be really laser focused at the legislature. And of course, we'll have to see what other parties say in their testimony. But to the degree that there are deviations from the MDU proposal, one would think that those would be supported by differences between the companies. And we highlighted, for example, treatment of QF but we focused on MDU.

Okay. And has there been any updates recently?

Brian will jump in there too, but first...

One thing I'd just add to that, I mean until the legislation was passed, we didn't evaluate any type of change to our supply tracker. It wasn't until the legislation is passed that we evaluate anything. And to Bob's point, based upon what we heard from the testimony perspective, we focused on MDU.

It is worth reminding to that under the statutory mechanisms for - in the last several years, we have had significant disallowances. So, there was risk associated with the statutory model as well.

Okay. Speaking of the legislature, has there been any other notable movement in the legislative committee since the big hearing a month or 2 ago?

The interim committee has a number of meetings going into next year. Some of the areas it's focused on are very tactical. So, I wouldn't say there's any significant development there.

Do you think that the interim committee hearing day had any impact on the commission?

I won't comment on that.

Then I would love to talk to you about that next week.

I think we won't comment it next week either.

No, the commission - we respect to commission, want to work with them whenever we can, and that really is a question for them. I think the important thing is that in the PCCAM docket, they made a decision that we can work with, so that's where we're focused.

Moving next to Doug Christopher, D.A. Davidson.

Great, thank you very much for taking my question. Just on the updated earnings guidance, I wonder if I heard you correctly, you said you were moving the 5% to 7% outlook, is that what you said, or can you clarify that again, please?

No, I think what - Doug what we - what was pointed out, sell side pointed out that we didn't have our 7% to 10% long term total shareholder return view on the document, and so I just reiterated what we had said on a previous call associated with that.

And what was that again?

That we reiterated that we expect to be on the low end of that guidance, in light of the regulatory headwinds we currently face.

And then lastly, just with regard to the sense of the - your relationship with the regulators, you guys seem to be doing all the right things, you're invested - you have the hydro and the renewables a significant portion, you're widely spread out that you're relatively challenging to control your costs. Just wondering are the relationships with the regulators trending positive, neutral, negative?

What I can say, from our perspective, we want positive constructive respectful relations with all of our regulators, federal and state. And I think for the most part, we have that in Montana. The commission's decision so far in the PCCAM docket has been positive. We have concerns. We are eager to see addressed in the QF related dockets. But again, in terms of QF pricing the commission, we think, took a step forward and we have supported that. And then lastly, as I mentioned, the commission's public meeting in Havre on Monday was very positive, and that reflects the comments that you're making about the quality of our operations.

Now you're making all the right investments, it would seem that that would be honored by the regulators?

We hope so. And obviously the concerns from the credit rating agencies as well as from equity analysts are significant. We hope those are heard. But the metrics that we hope they're focusing on would include safety of our employees, safety of the public, customer satisfaction, diversity of supply resources and our ability to maintain and invest in the overall system. This is the most critical infrastructure in an extraordinary part of the country and that's our stewardship responsibility. And to be able to meet that responsibility really does depend on regulatory decisions.

Thanks for talking my call.

Thank you.

Moving next to Jonathan Reeder with Wells Fargo.

Hey, good afternoon, gentlemen. All my questions have been answered. Just curious Brian, is the plan to offer the initial '18 outlook at EEI per usual for you guys?

Yes, we didn't want to give you all the goodies today, Jonathan.

Because nobody would come to see us next week.

I just want to make sure I was going to get the goodies at all.

We plan to talk about 2018 next week.

Okay, perfect. Looking forward to seeing that and seeing you guys down in Orlando.

[Operator Instructions] Returning to Christopher Ellinghaus with Williams Capital.

Sorry. Brian, you were talking about FFO to debt subsequent to issuance and credit rating agencies. Can you talk about where do they rank Montana in terms of regulatory jurisdiction and how do you see that influencing your credit requirements?

Yes. Chris, they don't necessarily come out with a ranking from 1 to 50, if you will, the rating agencies. I'm sure you're aware of that. But certainly, from the feedback you've seen in reports and certainly feedback we've gotten from them directly, they're quite concerned about the regulatory environment that we have in Montana and obviously the impact it has on the significant share of our earnings and cash flows.

I would add to that and you know this of course, but perhaps 50% of the rating of a regulated utility is driven by regulatory, part of that has to do with the presence or absence of various mechanisms, part of it has to do with more direct observations.

Do you - have you estimated, or do you have the sense of, given what the credit rating agencies have communicated to you from a subjective standpoint, if not a numerical rating, what Montana's regulatory jurisdictional - I don't know where it is. Would the view of the credit rating agencies vis-à-vis Montana would that might cost you in terms of cost to capital or credit perspective security? Have you gotten any sense of what Montana's cost to the company in terms of capital?

It's a good question, Chris. We haven't necessarily quantified that for public consumption at this point in time. I would just say that we've thought about an impact on a going forward basis. Obviously, our debt that's out there is First Mortgage Bonds, it's set. But the next time when it becomes an issue debt, obviously from a rating agency perspective, that debt is likely to be cost more than it would had we had a better regulatory environment, and it's difficult to quantify that without thinking about on a forecasted perspective. I do worry about short term debt, and just overall the viewpoint of investors, vendors, everyone we deal with in terms of a - from a rating perspective. But we've looked at the most recent refinancing here that we dealt with. And one could argue there was based upon the participation in the rates that were done there from a credit spread perspective, that was a 5 to 10 basis point impact from that issue alone.

What we've - your question is important and what we have been able to do, and you've seen this over the years is, go to the debt market longer term and lower cost, and that's produced a real benefit. We've been able to lean relatively more on debt in the capital structure. That's produced a significant benefit and that's allowed us to deliver overall RORs that often are much, much lower than you're seeing among our peers. Moody's was very direct in what they had to say, and you've seen the actions we've taken in response to that. So, their - the costs are tangible. And I do think that regulators should be in ROR.

And the best point, and I think this will be fair on a going forward basis, if this continues, customers' costs are going to go up from an ROR perspective in 2 fronts, right? The debt costs are going to go up and you're going to have more equity in your capital structure, and obviously equity costs more than debt.

I certainly would make the argument even if it's maybe not quantifiable that you could certainly make the case that the cost of equity has risen certainly versus a few years ago from the recent docket activity, certainly the QF docket, but do you think you'll maybe try to demonstrate to the commission the rising cost of debt and/or equity, when you make your filings in the fall?

I think it's fair [Technical Difficulty] cost of capital in any particular rate case. But to your point, obviously if the company is exposed to more risk, it should require a higher ROE, and you can go back as far as the removal of LRAM, the exposure we have on existing trackers let alone reducing our ability to get full recovery of our costs from our trackers, all of these things add to property taxes. If we're not able to, as we're statutory allowed to get 60% recovery and those increases, all of those risks, increasing risks, should be increasing the cost of our equity.

I couldn't agree more. One last thing, vis-à-vis the QF docket quarter, are you aware of any place else in the country that has anything remotely like that similar standard that the commission is attempting to set?

No.

And we're standing by with no further questions at this time.

Well, again thank you all for the good discussion, and it sounds like we will be getting to see many of you in just a few days and we look forward to that. Take care.

This does conclude today's conference. We do thank you for your participation. You may now disconnect.