Good day and welcome to the NorthWestern Corporation Fourth Quarter 2017 Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to your Investor Relations Officer, Mr. Travis Meyer. Please go ahead, sir.

Thank you, Evan. Good afternoon and thank you for joining NorthWestern Corporation’s financial results conference call and webcast for the full year ending December 31, 2017. NorthWestern’s results have been released and the release is available on 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, along with several other members of the management team in the room with us today to address your questions. 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 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 will open up 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, that’s northwesternenergy.com under the Our Company, Investor Relations, Presentations and Webcasts link. To access the audio replay of the call, please dial 888-203-1112 then access code 5682232, again that’s 5682232. I will now hand the presentation over to our CEO, Bob Rowe.

Thank you and good afternoon, everyone and thank you for joining us. And we just completed successful board meeting and are enjoying a crisp, clear wintry day in South Dakota. First, recent significant activities, 2017 operating income increased $15.5 million as compared to 2016 due primarily to improved gross margin driven by favorable weather as well as customer growth. 2017 net income was down $1.5 million as compared to 2016 and that is due primarily to a $17 million tax benefit that was included in our 2016 results. GAAP diluted earnings per share was $3.34 in 2017 and that’s converted to $3.39 in 2016, a 1.5% decline. Non-GAAP adjusted EPS was $3.30 in 2017, which remains flat with 2016 and Brian will cover off more on GAAP to non-GAAP comparisons and disclosures. The Board declared a quarterly dividend of $0.55 per share, a 4.8% increase payable on March 30 to shareholders of record as of March 15. And on February 5, Fitch, on one hand, affirmed Northwestern debt ratings, but revised its outlook from stable to negative writing at a series of unfavorable rulings by the Montana Public Service Commission have weighed on Northwestern Energy’s credit quality. And with that, I will turn over to Brian to begin with the summary of financial results.

Thanks Bob. Net income for 2017 was $162.7 million, which was approximately $1.5 million or just under 1% less than 2016. As you see on Page 4 the primary driver for that decline was in the income tax expense line. We had over $21 million of incremental income taxes on a year-over-year basis. As a result, as you look at the income before taxes we had a nice improvement approximately $19.5 million improvement or 12.5% improvement on a year-over-year basis on a pretax standpoint. What drove that was a $39 million improvement in gross margin. Also we had favorable interest expense and other income that helped in that regard. And also another positive development even though it was an increase in operating general administrative expenses in 2017, we kept it at a very reasonable increase of just over $2 million or 0.7% increase. Primary negative impacts for – on a year-over-year basis was property taxes up $14.5 million or nearly 10% and depreciation was up 6.8 and a reasonable 4.3% to round out the results. If I move forward to gross margin on Page 5, the full year gross margin was $895 million versus $856 million from the previous year or improvement of $39 million and almost a 5% increase year-over-year. That benefit came from both our electric business which was up $24.3 million, 3.6% increase in natural gas up $14.8 million or up 8.3%. Of that $39.1 million, $30.9 million of that is a change in gross margin that actually impacts net income. And the two primary drivers were as Bob pointed out earlier we had improvement in both our electric and gas retail volumes from weather and customer growth those things adding to over $26 million. All the $30.9 million we also had – increased our gross margin…

Thank you very much, Brian. I will start with a regulatory and legal update, but before I do that just a couple of points following up on Brian’s remarks. First is that this company really has at all levels tremendous people and there are people who were skilled at executing in whatever environments they are called upon to execute and continuing to invest in and grow the companies. Brian described we had a couple of curveballs thrown at us, essentially in the last 6 weeks to 2 months with the Montana property tax mill rates coming in high, most recently the Montana Commission’s decision changing methodology in the tax tracker docket and then also obviously the changes in federal tax law. And starting from the executive management level all through the company, people have just done a tremendous job doing what you are called on to do and continuing to execute for our shareholders and for our customers. Secondly and related to the to the regulatory area, some of you know that our very Senior Vice President for Regulation and Government Affairs, Pat Corcoran retired in January after quite a remarkable career and we use that as an opportunity to make some changes at the executive level. We have consolidated our operations with the remaining executive team and for these purposes most particularly the regulatory responsibilities have been taking over by our General Counsel, Heather Grahame and we have added some resources, some new people to support the great veterans we have in our regulatory area and they are across legal and regulatory, really working as an extraordinary team with full support of the rest of senior management and of the entire company. So, we really like where we stand right now just a lot of appreciation for the people…

[Operator Instructions] Our first question comes from Michael Weinstein from Credit Suisse. Please go ahead.

Hi Brian, how are you doing?

Alright. Thank you.

It’s interesting that I guess that the lower generation CapEx in the current forward plan you were able to make up that with more grid modernization CapEx and which I assume is kind of an acceleration of previous plans into the current 5 years. Just looking forward, you lowered the total return target 1% to 6% to 9%, does that mean – I am just wondering what’s the push and pull in that, there used to be about $1.3 billion of potential generation CapEx over like almost a 10-year period assuming that this lowering of the targeted range by 1% accounts for that being significantly reduced I am presuming...

I am sorry Mike I didn’t mean to interrupt you that.

I am just wondering how much of that is offset by grid CapEx going forward?

Yes. I think as you think about the midpoint of our guidance even for 2018 that means if we are able to achieve our plan, we should be able to perform within that return profile and the thought processes that I did demonstrate earlier on the slide when we are able to grow our business with investment in generation, we were able to perform at a high range at the high end of our 7% to 10%. And I think kind of look at the 6% to 9% as the same point if in fact we are able to reinvest in supply on a going forward basis particularly to deal with our capacity shortfall, I expect that we would be at the high end of our range. Until that becomes a reality in some form or fashion, I expect that we are going to be in the low to midpoint of that range. And I would add – I just add as we point out here if we see continued regulatory headwinds, it’s going to be difficult to even achieve in the near-term that 6% to 9% range.

And I would just add a bit of a friendly amendment to your question in both electric supply and transmission and distribution, we are really thinking about orderly sensible investment plans. So as to AMI, for example, the question is what’s the thoughtful sequence to proceed with our deployment strategies. And I think that’s what’s reflected in the plan. Obviously, lot of work has been done by our asset management and automation folks over the month to get more clarity there. The same thing is really true on the supply side. And what we had just to Montana electric supply specifically in the 5-year capital of coming out of the 2015 plan was relatively small bet in terms of the overall identified need. And as we have discussed in response to regulatory concerns in Montana, we have pulled those investments out of the plan. There is some risk associated with that very clearly and then we will see where we are coming out of the plan that we will file this year, obviously, there have been policy market developments as well that we will factor in, into that plan, but the world that we are looking at still have some of the basic characteristics in whatever comes out of the Montana South Dakota plans to the degree that it requires capital that’s going to be reflected in our future capital forecast.

Right, understood. This next long-term procurement plan, how is that going to differ from the last one in terms – what conditions would you want to see before you reinitiate another RFP, I mean, am I correct in inferring that you need at least 20-year contracts to be approved or at least 20 years of security behind rate base?

It’s really early to say what we would be looking for at this point. As part of the plan in South Dakota, we are going to be building on our experience integrating into the Southwest power pool and changing operations there. We are also looking at the no offense to our supply folks, the antiquity of some of our fleet and evaluating the efficient operation of those units. So, that’s a study going on that will be included in South Dakota. In Montana, we are again looking at the same kinds of challenges that we did in the 2015 plan, but as regional developments move forward and as we look at how we are going to interact with the larger region that will be a factor, the concern to say that in responding to the region you have got to bring something to the table in order to participate.

Hey, one last question for Brian and then I will see the floor. Could you explain how much of the property tax hit is an ongoing figure, is it just that $1.7 million a year, is the ongoing hit into 2019, 2020 and beyond unless you are successful in getting FERC recovery for that portion of the allocation?

Yes, I think what you need to do from the portion that’s going to Montana think of the 1.7 in ‘18 – the ‘17 that will continue on a prospective basis and going forward basis, but we also have to get recovery on a going forward basis in FERC. And by the way when we go in for a rate case in Montana we will reset the base for property taxes as a whole and start over again. One of the things to probably point on property taxes is that from a recovery standpoint the amount that we are able to recover on a going forward basis is kind of one minus the tax rate. So, since the tax rate has come down ability to recover through the tracker should go up as well. So, this is moving parts there.

Got it. Okay, thank you very much.

Thank you.

Our next question comes from Nick Campanella from Bank of America/Merrill Lynch. Please go ahead.

Hi, good afternoon.

Hi, Nick.

Hey, before tax reform you talked about upward pressure on the tax rate, sorry if I missed it in your remarks, but do you still – is that still going to happen with this new guidance on your tax rate now. Should we expect it to slightly increase through your forecast period?

Actually, Nick thanks for pointing that out. I didn’t share that on a long-term basis and solely focused on 2018 with 0% to 5% for 2018. And on our long-range plan, in fairness, we do expect some upward trajectory there, but as a result of this tax reform that increase will be much less and the range that we would show over the next 4 years would be in that 3% to 8% range if that’s helpful to everyone.

Very helpful. Thank you. And then just your comments on cash flow given tax reform how should we think about FFO to debt if you can maybe tell us what you’re targeting in ‘18?

Well, what we are targeting is we want to be – we would like to be certainly even higher than this, but we certainly want to be in that 15% to 16% range on a going forward basis and obviously over time we would like to be a little bit higher, but we certainly need to be in that range I think from maintaining our ratings. And again, that’s a only portion of the ratings, the regulatory environment is another portion of the ratings. So, I want to make very, very clear even if we can maintain those ratings, we have a difficult regulatory environment – excuse me, maintain those types of FFO to debt numbers other things could impact our ratings, I know you are aware of that.

I would add to that the metrics including FFO to debt are in significant part driven by regulatory outcome.

Fair enough, Bob. Good point.

Fair enough. That’s all from me. Thanks.

Thanks Nick.

Thanks.

Our next question comes from Chris Ellinghaus from Williams Capital. Please go ahead.

Hey, good afternoon Bob, Brian and all the relevant traverses out there.

Hi, Chris.

Bob, you are talking about it’s little too early to talk about what’s your thought processes on the terms required for new supply resources, is part of your thought process going to be – it’s pretty traditional for utilities to use 30-year financing. Is that going to be part of your sort of calculus in determining what you think those terms need to be?

Yes, it really is too early to say. The driver is going to be in the planning side of a plan that identifies what our customers’ needs are and then you look at what the options are that best meet those needs usually do that through an RFP. What – it’s not so much a financing question has as it is a cost effectiveness and a recovery question. Typically including in Montana regulators have wanted long asset lives for owned resources to feather the cost impact to customers and to provide some generational equity for resources that are going to have the greatest value in the out years. So as we looked at this 15-year period for to essentially show a benefit, but it’s contrary to what typically regulators expect and it’s hard to imagine how you would do if you were to make a commitment to a resource and then essentially doing a re-look in 15 years, the customers will have been receiving the benefit of depreciation for the first 15 years, would you then if it turned out there is even greater value in the resources of what the market was doing with customers we expected to payback some kind of a dividend to the company that doesn’t make sense. So the 15-year notion is just so at odds with other parts of the regulatory method that we need clarity to understand how it would apply and we can’t realistically make resource decisions until that is addressed. In a specific situation with the RFPs we asked for resources on a 20-year basis, so right out of the gate for 5 years past what the commission has required. But most importantly we are now well into the next planning cycle, so we will just see where that goes and what the commission will work over the rest of the year to try to get more clarity.

All I would add to that, I think your point Chris early on is fair. I mean obviously long lived assets historically have been able to allow us to track 30-year financing and it will be difficult to look to those tenors if in fact 15 years is – as a debt investor I would be concerned of course to the lending beyond the risk period if you will. So it’s something we ought to factor that in as we develop a plan this year.

Mismatches is what’s troubling us and to the degree that regulatory actions create risk that otherwise exist, that risk needs to be compensated. And what we are saying unfortunately now is a series of actions just triggering concern both on the equity and debt side that from the view of investors is creating risk that’s not compensated.

Right. Along the same lines, Brian you have included the supply request in the guidance range, is there some obviously you have got some concern about credit ratings that should the supply docket results in a less favorable outcome. It seems like you have some risk to your guidance and to credit ratings, is the commission aware of those risks to the equity side and the credit side as far as what the outcome of that docket will be?

I would like to think that they are I know various sell-side reports have been shared with commission staffing and commissioners. I know the recent Fitch rating and the negative outlook and therefore report was shared with the commission staff. And so I believe there is an awareness, but I can’t speak for the commissioners.

I will add to that, I did mention John Quackenbush’s testimony in the docket, it is first rate, it is professional. And he does attend to his testimony most of the relevant reports.

Okay. Couple of quick questions on the ATM. Do you expect to fulfill the 2018 portion throughout the year, early in the year? Can you give us some clarity on that?

Yes, I can at this point in time, Chris I am not sure myself when we will do that, I just believe we were committed to get it done by the end of the year.

Okay. Can you give us a little color on the weather year-to-date so far?

Yes, I would tell you that we would have wished it was a little colder in January.

Okay. Thanks.

With the hydro system, we pay a lot of attention to moisture content and snowpack and we are having a very good year. Interestingly, last year was a little bit light, but with the diversity in [indiscernible], we were still pretty close to the overall targeted capacity factor for the system and this year things look great.

Yes, February is a bit colder, so that’s been helping too.

Okay. And on the economic development front, if you are skier, come to Montana.

I will not.

Chris maybe I wasn’t talking to you.

Thanks so much, guys. I appreciate it.

Thanks, Chris.

Our next question comes from Paul Ridzon from KeyBanc. Please go ahead.

Bob, did I hear you say that maybe the market was improving for potential gas reserves?

From a customer perspective, I would say the market continues to be positive, I certainly wouldn’t say it’s improving though.

Okay. And then Brian, you said that in the next several years tax rate should increase, but is that uplift smaller than it was before tax reform?

Yes, I think it is. You heard my 3% to 8%, I think we were looking some for something closer as approaching 20% as we spoke about in the past and obviously as tax reforms put downward pressure on, you could argue that on a percentage basis going to 0 to 5 to 3 to 8 might be similar to percentage basis, but other thing to keep in mind, a lot of these investments that we are making continue to get repairs deductions, things like meters get those types of deductions too as we continue to focus on means to keep our taxes down in addition to the benefits of tax reform and so that will help keep downward pressure on those rates. So, again, ultimately all of those benefits captured for the benefit of customers and rate cases and obviously for 2018 as a result of tax reform through the process that we are going through our dockets now.

In that 3% to 8% uplift is over what time period?

However, that’s 4 years beyond. So over the 5-year time horizon you could argue 0 to 8 correct 0 to 5 if you are talking about for ‘18, but so I was saying over the next 4 years past ‘18. Is that helpful?

Yes. And then just to clarify on your ‘17 to ‘18 earnings bridge, some big moving pieces there, but that’s really just the impact of tax reform here in the revenue line?

Yes, that’s the biggest impact on gross margin. There are a couple of other things that we have learned obviously since we provided this last guide, but tax reforms is the biggest drivers moving things here.

And when would you expect the discussion in Nebraska to take place about what to do about tax reform?

That’s a good question, I think as you know it’s a very, very small part of our business. I think we will likely be seeing as we need to do the math even what that impact would be to Nebraska customers and think about that from a rate case perspective and it will continue to have a dialogue there as well.

But in the interim, you will just kind of reserve for all three jurisdictions?

Correct. And I think that the thing to point out here I just want to be very, very clear that $15 million to $20 million is a consolidated number.

Understood. Thank you very much.

Thanks, Paul.

Our next question comes from Jonathan Reeder from Wells Fargo. Please go ahead.

Hi, good afternoon. It’s revised Montana and South Dakota IRPs again determine the new generation capacity if needed. What’s kind of the earliest possible timeframe we could see some CapEx materialize?

I would be very careful getting too far ahead of that question will have the plans done by the end of the year and then any action capital or otherwise will flow out of that.

Maybe asking another way, I mean do you expect like some of the $123 million of CapEx that you pulled out could come back into the forecast over this 5-year period?

Yes. I think in fairness, Jonathan, certainly over that 5-year period as you rollout anything we do from a generation perspective, I believe there would be dollars within that 5-year plan, but we have to wait and see what those plans – ultimate what plans will show and keeping the skiing analogy going we certainly don’t want to get ahead of our skis at this point in time.

Okay, that’s fair enough. And then remind us what’s driving the expectations for the lower OG&A in ‘18 versus ‘17 I think like half of it relates to the end of deferred DSIP expensing amortization?

You hit the major one right out of the blocks right there just for everyone’s knowledge there. We were amortized the upfront costs for DSIP and that last year was the final year of that. So, that’s going away as the significant portion. We have scheduled maintenance that’s schedule over let’s say a 3-year period. We do not have any significant maintenance associated with that as well. We are making a significant amount of investment in technology obviously as our plans continue to show that and all of the work we have done on DSIP continues to help reduce reactive expenses. But lastly, I want to say as an overall company, we are trying to manage headcount we are trying to manage costs, because it’s difficult in this particular environment to continue to provide the earnings growth and ultimately we are trying to do what we especially can in terms of returns for our shareholders and we also do understand that reduction in these costs ultimately alter the benefit of customers and we think that’s important on the lung run as well.

Okay, so the major one, it’s just a lot of other kind of ways that you are trying to run the business more efficiently in realizing some of the benefits of those investments made in DSIP?

Yes.

Okay. And then Brian, we need to issue long-term debt this year to kind of permanently finance the outstanding revolver balance?

We typically have – each year we typically have some debt issuance in our plans. They have been mitigated to an extent by the ATM issuance, but I guess I am not prepared to speak to exactly what our issuance would be, but I would argue it’s going to be less than we have done in prior years. If you consider the fact that our CapEx is relative to the same on a year-over-year basis and we are doing again finishing up the ATM program it’s going to – you will see lower debt amounts than have been in our plans in the past. And again, that’s kind of continuing output downward pressure on our debt to capital also help our coverage ratios on a going forward basis.

Okay. I just thought the revolver is kind of carrying a higher balance where you may have to kind of clear that out? Is that not the case or…

Anytime that we issue long-term debt that there is the ability to reduce obviously your short-term debt at that time.

Okay. And then last, can you kind of briefly walk us through how I guess you plan to utilize all the $420 million of federal NOLs by 2020 given just the 8% effective tax rate expectations?

Yes. I think obviously you have got a lower tax rate of course that helps, but you also have no bonus which certainly hurts. And so even though we have kind of pulled in that NOL benefit is a net result of all that really 1 year from 2021 into 2020, we won’t actually be a full cash taxpayer until 2022, because we still have some AMT and PTCs that we have benefit of for those 2 years as well, so significantly continue to stay focused on tax in terms of trying to maintain the non-cash status.

Okay, thanks. I appreciate the color.

Thanks Jonathan.

There appears to be no other questions at this time.

Okay. Well, thank you for the good questions and discussion. We look forward to seeing many of you over the coming months and visiting with hopefully all of you in April. Take care.

This does conclude our conference for today. Thank for your participation. You may disconnect.