Good day, and welcome to the NorthWestern Corporation's Second Quarter 2020 Financial Results Conference Call and Webcast. Today's event is being recorded. At this time, I would like to turn the conference over to NorthWestern's Investor Relations Officer, Travis Meyer. Please go ahead, sir.

Thank you, Sarah. Good afternoon, and thank you for joining NorthWestern Corporation's financial results conference call and webcast for the quarter ending June 30, 2020. NorthWestern's results have been released, and the release is available on our website at northwesternenergy.com. We also released our 10-Q pre-market this morning. Joining us on the call today are Bob Rowe, President and Chief Executive Officer; Brian Bird, Chief Financial Officer, and we have several other members of management team in the room with us to address your questions if needed. Before I turn the call over for us to begin, please note that the Company's press release, this presentation, comments made by presenters and responses to your question may contain forward-looking statements and non-GAAP financial information. 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 the 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 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 and 10-Q, along with other public filings with the SEC. Today's presentation also includes non-GAAP financial measures. Please refer to the definitions and reconciliations of these measures that are included in our webcast materials. Following the presentation, we'll open the phone lines to allow those who are dialed into the teleconference to ask questions. The archived replay of today's webcast will be available for one year beginning at 6:00 p.m. Eastern Time today and can be found at our website at northwesternenergy.com under the Our Company, Investor Relations, Presentations and Webcast link. With that, I'll hand it over to our President and CEO, Bob Rowe.

Thank you, Travis. Good afternoon everyone and thank you very much for joining. Travis included a total on the cover of the deck from the Grand Canyon of the Yellow Stone. He did that because yesterday we were in the park meeting with FERC management. We serve there on a contract basis. It’s a privilege obviously to serve the nation’s oldest and number one national park. The park and the gateway communities in Montana are crowded. What’s exciting about serving the park is, we do it on a contract basis we design our service to meet the customers’ expectations in terms of affordability, environmental sensitivity and sustainability and reliability and at their location where we have the opportunity to try some of the exciting new distributed technologies that we are looking at. So it’s a small, but important part of who we are and the area we serve. Second quarter highlights. Net income for the second quarter decreased $26.2 million, compared to the same period last year. This was driven primarily by an income tax benefit received in 2019, by lower gross margin due to impacts of COVID-19 as we’ve discussed last quarter and then by higher depreciation expenses. These are offset impart by a decrease in operating general administrative and by some customer growth. Diluted EPS decreased $0.51 as compared to the same period last year. Diluted non-GAAP EPS decreased $0.08 per share after adjusting for income tax benefits noted in the normal weather. The Board declared a quarterly dividend of $0.60 per share payable September 30 to shareholders of record as of September 15th. I will get a chance to come back and talk about customer engagement and employee health and safety as part of our COVID response in the Q&A. But we continue to be doing very, very well on both of those fronts. And with that, I’ll turn it over to Brian

Thanks, Bob. On Page 4 of the presentation is the summary financial results for the second quarter. As Bob pointed out, our net income is down $26.2 million. As I look at this slide, there are really three themes jump out, gross margin is down $6.7 million on a year-over-year basis. All of that negative variance could be reflected by two 2019 favorable impacts. The second thing I am – the theme I point out is, the reduction in OG&A expenses that we had during the quarter more than offset the increases in property tax, depreciation and interest expense. And the third theme is the $21.5 million negative variance in income taxes is all attributed to the 2019 favorable impact, of course on a year-over-year basis. So, taking those things in consideration, we feel we actually had a very good quarter in line with our expectations from a COVID perspective. And with that, I will turn you to the following page on gross margin. Gross margin was off $6.7 million or about 3% as I pointed out. All of that really attributed to our electric business. You look at the primary drivers of the $8.2 million of change in gross margin actually impacts net income, the very first two items Montana electric supply cost recovery, that item is after some favorable legislation we received. We were able to treat our PCAM slightly different and we had a favorable adjustment in 2019 associated with that, that’s $4.4 million. And then, this year our QF gain was $3.3 million less than the QF gain we had in 2019. Those two items together are 8. – excuse me – 7.7 of the full 8.2 change in gross margin. I guess, the other item that would get fully to the 8.2 is lower electric…

Thank you, Brian. Actually, just to reinforce Brian’s discussion for the last three minutes in terms of margin and expense, recall, that we cannot relatively early at the end of the first quarter and certainly relatively early in the new COVID world and the ability to come in really quite closely to where we expected to be at that time with so many unknowns on expense and awful lot turning into the capital forecast, the health learning of course over on the left, we are comfortable with – about $1.8 billion of total capital over the next five years. Financing with a combination of cash from operations with NOLs available into 2021. First mortgage bonds and equity issuances and based on what we know now, what we expect now any additional equity would be this year or early next year and it would be really focused on maintaining current credit ratings. That said, significant capital beyond what’s identified in the latter to the right put us at those capital projections. as: And very importantly of course, this does not include investment necessary to identify the generation capacity challenges in Montana and we are unique in being – our customers are unique and that on a good way and being exposed to the market 46% at peak out of Montana. So, this is an important investment program to continue to share by customers in the growth in our territory and we are very comfortable with all those control and everywhere else this year. We’ve been able to execute and we are comfortable and we will continue to be able to execute. Looking forward, obviously, always a lot of activity on the regulatory front. The Montana Commission approved the fixed cost recovery mechanism or decoupling. We talked about this last quarter, of…

[Operator Instructions] And we’ll go ahead and take our first question from Shar Pourreza with Guggenheim Partners.

Hey. Good afternoon. This is actually [Indiscernible] on for Shar. Thanks for taking the question.

Hey, Cody.

Hey, so, you guys got it down to – weather and the expected impact of COVID-19 and you’ve had another somewhat challenging quarter with the virus. Obviously, so in the approval to defer on collectible costs and your commission. I was wondering if you are still confident in the midpoint of guidance are you tracking more towards the lower-end of the range?

Yes, I would like to – we don’t ever try to give anybody where we are in the range. I would just say this, we feel good about where we sit today. Obviously, we need to get recovery from the commission that’s an important part of our range if you will as whole. But actually Q2 came really in line with our expectations. We do expect that things are going to improve over time and Q3 and Q4 from a COVID-related perspective that was in our guidance range initially. But we also expected to kind of pull off the gas a little bit on OG&A savings in the second half of the year either and if in fact things continue to stay difficult with the COVID on the margins side, we will be that much attune to it on the OG&A expense. And so, we feel very confident in our earnings guidance as we sit here today.

Got it. Thank you. And stuck in – can you give us any more thought on outsizing the current Montana RFP given Talen outside the sulfur? I know it somewhat relies on the internal valuation, but just wondering your updated thoughts there.

That’s certainly is something that we will take a look at for exactly the reason that you said. It depends on seeing what comes in. But as I mentioned, we have a pretty big hole to fill on the half of our customers and same – I think we don’t do that. So that certainly is a possibility.

All right. Thanks. That’s all I have. Stay safe.

Thanks, Cody.

We’ll take our next question from Michael Weinstein with Credit Suisse.

Hi. Good afternoon guys.

Hi, Mike.

You said that the OG&A expense of – cuts of $0.08 to $0.11 you are expecting in the second half of the year. That depends on what – what does that depend on exactly? I think you mentioned COVID continuing and COVID expense cuts continuing or I think the travel ..

What we did is – I am sorry Mike. As we thought about Q3 and Q4, we expected things to over time slow the version to near normal by the end of the year, right. And so, if we had expectation on OG&A cuts for the full year, we would be backing off that a little bit as well. So, you noticed that quite early, we had $0.14 of improvement on a year-over-year basis on the OG&A line just in the second quarter alone. And obviously, the range for Q3 and Q4 is less than that. And so, if in fact, my point was, if in fact we don’t see the margin improvement in which we do expect that we will get that. That we will need to do more on the OG&A side, but feel confident that we could.

Got you. And also, could you characterize what the opportunity maybe in South Dakota in terms of – versus the current CapEx plan?

It’s probably early to say too much beyond the fact that there are additional opportunities and in the context of our South Dakota operation if there is a significance.

Bob, I would share that, we had historically shown our South Dakota what we were going to do over time and initially if you think back, there is a number of units spread across South Dakota than we talked about this 60 megawatts in Huron and possibly something at Aberdeen and South Dakota. And so, I think at that point of time, we talked about our total opportunity of 90 megawatts and being at 60 today it would be an incremental 30 and hope we will get after that sooner, rather than later.

Okay. Fair enough. And regarding the equity issuance, what’s the thinking on how the timing might come out? I know you said later this year or maybe early 2021. Is it more likely to be a 2021 timeframe? Or is there some reason why you are not be earlier than that?

Mike, I think at this way, I think it’s a 2021 item. We’ll continue the dialogues with the rating agencies, it’s for some reasons concerns are raised there. We could do something sooner than that. But right now, we are planning that as a 2021 item.

Okay. Great. Thank you very much.

We’ll take our next question from Julien Dumoulin-Smith with Bank of America.

Hey. Can you hear me?

Yes.

Excellent. Hey, thank you. So, first off, let me start with the numbers here, as we think about the back half of the year, what’s driving the $0.11 to $0.17 gross margin uptick in your expectations? And I want to recognize, I know you talk through some of the gross margin dynamics already, but perhaps at a high level, what’s driving that uptick in the back half here? And then, can you maybe secondarily and I know you alluded this a little bit already, what other levers you have to go to the extent you wish that things don’t materialize COVID – except for COVID or otherwise?

Yes, I think if you focus on Page 14 in terms of the bridge, one of the biggest reasons for the increase in gross margin in the second half of the year is, our property taxes are going up and we get recovery of 75% of that, 70% of that. So that’s the biggest driver from a margin perspective. But we are – from our perspective, we are seeing – we’ll expect to see better irrigation. We are going to obviously have customer growth and I mentioned earlier that we expected some – in the first quarter we mentioned some unbilled timing associated in the second half of the year. So, again – but, in looking just at this page, you can see that the primary benefit, $0.09 of that gross margin is associated with property tax. So, you really need $0.02 to $0.08 of the remainder and we feel very good about that. And I think, to your question Julie on levers, I think I would just focus on the comment about the $0.14 in Q2. We did better from an expense standpoint and we do show backing off, I just think that we continue to stay on top of expenses because of COVID, we can do better than we show there if in fact we need to.

Awesome. Thank you. On the RFP in Montana, I know you’ve alluded this – [Technical Difficulty] than in terms of determining the wind is there. Any data points that we should look to in the back half here?

I would say no.

Okay. Alright. Fair enough. That’s – I’ll leave it there guys.

Thank you.

Hey, Bob, one thing I think we shared in last call is, if in fact, the one thing we did say is if we’ve ever found that we are not participating or we are not in the final rounds, we are going to let you know that as soon as we can. And if there is some information incrementally that can be shared, we will share it.

We’ll take our next question from Chris Ellinghaus with Siebert Williams Shank.

Sorry guys. I forgot to unmute. How are you guys?

Hey, Chris.

I am not sure if this is for you, Bob or not, but what is it that gives you confidence in incremental third to fourth quarter improvement? Are you not believers of the possibilities of the flu season being more aggressive than what we are going to see in the second and third quarter relative to what it was like, in say March or April? What is your sort of general view of the COVID outlook for the fourth quarter?

First of all, I would say, is this is a company we take COVID extremely, extremely seriously and adopted measures to keep our employees safe and healthy as possible well before the states took action. And we expect that those measures are going to continue in place certainly well into the fall. That said, we also know a great, great deal more about safe practices. We know that wearing masks, social distancing are extremely effective, are key on the frontline. The states we serve have three of the lowest unemployment rates in the nation. Nebraska, the lowest, Montana the sixth lowest and South Dakota, the 11th lowest. In South Dakota, what’s notable is there was never a government order to shutdown and actually the virus reproduction rate in South Dakota despite that is really quite, quite low. If the virus certainly continues, we take it as seriously as possible. We supported the actions that states has taken around masks, states and communities and businesses have taken around masks. But we see consistent with that, a tremendous amount of activity coming back in our service territory. On a daily basis for example, we are all very multiple examples of people from out of state buying property, site and things for at or above the sale price or in some cases before it’s even non-American. So, an awful lot of activity in our service territory. We want all that to be faced, but it certainly is as encouraging to see. That doesn’t in anyway minimize the real hardship being faced by the folks who are still out of work to needing to work with them. But on balance, what we see is a region that is coming back and arguably, we are all beyond the end of this year could end up being much, much stronger as people look around and ask for where they want to be.

Hey, Bob, and just a last two quick things on top of that. Two data points. Bob talked about activity being up. We have new connections are up in five of our largest six cities in Montana. People are buying homes in our service territory. So, I wouldn’t have guessed that. Second thing I’d point out, in our two states, our two largest states, Montana and South Dakota the total number of COVID cases in those two states combined, is about approximately 2200. And so, our parts of this country and other service territory doing extremely well relative to the rest of the country. Yes, do we expect COVID to be top in the third and fourth quarter? It should be. But our expectations are we will be able to manage through that if in fact it is through what we’ve been doing thus far in cost control.

Okay. As far as your offsets to the bad debt expense, did the labor and the medical costs, are you starting to see behaviors change a little bit where that benefits being easing off more of late?

That sort of as now sort of what we have seen through the second quarter and what I have seen into July, I’d say, no. I’d say it’s pretty consistent.

Okay. And should if those behaviors stay similar, would you expect that to continue into the later part of the year as well if the economy is, so – economy is improving locally would not there would be more customer contact and/or more utilization of medical services that would change that direction a little bit?

Chris, I think that’s a possibility. We commonly are using the words levers here. Again, if in fact, we see COVID being more sustained through this time period, we are going to – we are probably going to continue to see medical costs staying low. We are going to probably see our labor costs staying lower as a result to lower than we are projecting.

Okay.

We are glad to be show deep in the near that those kinds of changes are really going to be on the margin.

Okay. Thanks for the color guys. Appreciate it.

We’ll take our next question from Brian Russo with Sidoti.

Hi, good afternoon.

Hey, Brian.

Hey. With the shadow accounting that you are required to do that the way FCRM in your slide, any thoughts on what the avoided impact was of not implementing the FCRM on July 1st?

No, no. No thoughts there.

Okay. And in terms of the deferral accounting and the procedural schedule, what’s next that we should be looking for or what filing testament whatever?

Two items. First in South Dakota looking for a staff recommendation and in Montana, looking to see whether or not parties file a testimony and that could be either consumer counsel or large customer group. Comments or testimony, we didn’t filed that we do on July 31.

Okay, July 31st. Got it. And you mentioned a short list in the Montana RFP. When might that be expected?

The analysis of going on now, we’ll start to see more information about projects. And again, I would really focus on the first quarter, Brian’s qualification to that is a good one if then if we are in the running, we’ll let you know.

Okay. So, if you are in the running, you will let us know. My guess is the way that we can get that as well.

There is a double negative there, even there. But yes.

Got it. So, just, if you don’t mind, just a clarification, what was the bad debt or uncollectables as of June 30th? And what might we expect throughout the year to ultimately seek recovery of X dollars amount. Just trying to get a sense of what the magnitude of that could possibly be?

Brian?

Yes. I mentioned the increase is $3 million for the quarter. I know what’s in rates is approximately $2 million. And so, we need to continue anything above what’s in rates during the year. That’s what we are going to have to have be put in the reg asset for the year. So, we’ll see how things play out for Q3 and Q4 and as long as we still have a moratorium on disconnects for non-payment, we expect to have that bad debt continue to increase.

Okay. And just remind me, was this an individual NorthWestern filing with the Commission for COVID recovery? Or is this likely seen in other states where it’s more of a generic filing where various in state pure utilities all file for the same type of structure and recovery?

It’s really yes to both. In South Dakota, there is a filing by NorthWestern in the [Indiscernible] Within that filing, various companies are requesting different kinds of relief. We are not requesting a make-whole we are requesting an accounting order for bad debt. In Montana, it’s a standalone filing addressing bad debts and also pension contributions. There is a parallel filing by MDU as well the broader on the COVID side.

Hey, Bob the – go ahead, go ahead. Well, I did Bob – hey, Brian, I do want to point out my fact checkers here pointed something out to me. What’s in rates is actually $1.1 million. So, the increase thus far in the second quarter is $2 million. I think I said that wrong.

Okay. And what percentage of our dollar amount of the O&M and SG&A savings this year are sustainable? Obviously, travel, et cetera is – that should revert back to the norm going forward. But any idea of what level of cost cuts can be sustainable into 2021 and beyond?

Bob, I’ll grab that.

Well, that there – why don’t I set up the question and then later I’ll leave it to you. Certainly, their expenses that are going to change. There will be more travel, there will be more medical expenses. But will travel look like it did before? Probably not. So there is certainly some element that will be carried forward, but remember, when you benchmark us against any of our peers or even against larger companies on the expense per customer, expense per employee, again in that Montana property taxes, we are already just about as willing as anyone out there.

Bob, that was great. I only had to add that, you spot on is that, this budget season is a little bit different in a sense is that we have to think about COVID and there are things that are different than that we would want to capture those benefits and we are focused on that here right after this earnings call effectively that something we have to be focused on thinking about how this is going to impact 2021 when we can do to take advantage of COVID help us going forward.

Okay. Great. Thanks guys.

We’ll take our next question from Jonathan Reeder with Wells Fargo.

Hey, good afternoon gentlemen. How is everyone doing?

Good. Thanks.

Good. Good. Just kind of piggy backing on the last topic. If for some reason Montana, South Dakota don’t grant your request to pro accounting, do you still estimate that it’s going to be like a $0.05 EPS hit for the full year if you are already at $2 million thus far?

Yes. We are still effecting $0.05. So, I think, some of that is we do expect and we hope to expect to have reinstated ability to disconnect customers before we get into the heating season. And so, we are going to make – we are having discussions around that in South Dakota very soon, in Montana, little bit later. But it’s something I think it’s important task at handle, but that should help offset some of these obviously, increases we’ve seen thus far in the second quarter to kind of slow that rate if you will.

Okay, great. And then, Bob, in your comments, regarding being comfortable with the point, $400 million of CapEx annually going forward. Did you say that would be before adding any potential Montana generation additions or like, in other words, Montana generation would be incremental to that $400 million per year?

Yes. The capital ladder is built up with projects that are identified and that we are confident about sort of as always, the out years will increase as our specific capital plans to serve our customers become more known.

Okay. Thanks for clarifying that. And then the last one, just kind of curious what your thoughts are on that MPSC’s comments filed in late June regarding your Montana Electric Supplies brand and how if at all that impacts beyond going generation RFP and whether you did a selection criteria?

To my mind, the key thing was that the commission acknowledges the exposure that our customers’ face and take it seriously. So, we thought that that the comment on balance. And very, very positive and probably deferred in – might have been the case just a couple of years ago. And again, the conversations that the commission had with – for the end of NorthWest Power pool, just last week did indicate a real appreciation for the situation that customers in Montana face.

Okay. So, their concerns express around, I guess, maybe the inputs or assumptions you guys are making there and here is the reciting around that. That doesn’t overly concern you given the overarching being that they recognize a short and everything like – just kind of seem like that the thought that I guess, it had to be natural gas to fulfill the person potential to other types of resources to maybe meet the need effectively as well.

The way I look at the plan is the key is the plan identified a need. Subsequently then there were a whole range of scenarios using different resource combinations and those scenarios were just that that when we made the decision not to identify a specific preferred resource in the plan, and then, commit to the path to let essentially all resources compete. That’s a very different direction. Now, couple of comments that are interesting. First of all, the analyses underlying the South Dakota and Montana plan, it’s the same model. It’s the same kind of work. The environments in the two states are in many ways quite different, obviously, but the same kind of analysis in what we’ve received back in South Dakota was real support for the plan. I would certainly think that our plan grew in Montana over time will continue to address and you’ll find the Montana plan to speak to the concerns if there are questions that were raised by the consultants to the commission which is really the source for many of the comments. It’s a significant process plan to plan, but again the RFP is structured in three tiers of opportunities for projects to bid in at 20 hours, 10 hours and 5 hours. We should see some real diversity and the viability – cost-effective viability if there is technology that is going to be proven in what’s submitted.

Okay. Great. Thanks for that clarity.

Jonathan, I wanted add just a clarification, I think on the capital plan. The capital plan we are showing on Page 17 is our capital plan for the year. Obviously, as we go through the process and go through our budgeting process, in the outer years, they typically tend to be a bit higher than we had originally planned. So, if there is an expectation as Bob points out, that we are going to be close to 400. I think we should be guaranteeing anybody that there will be 400 out there as outer years. I would say this though, if in fact, we are doing any Montana generation, we are likely to be at, at least 400 if not likely higher. If that’s helpful clarification.

No, it is. Thank you.

There appears to be no further questions at this time.

Okay. Well, thank you for joining us. Thank you for the very good questions and discussion. Look forward to visiting with you probably online over the coming months and online and in person maybe by the end of the year. Take care everybody.

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