NORTHWESTERN ENERGY GROUP, INC. OVERVIEW
NorthWestern Corporation , doing business asNorthWestern Energy , provides electricity and natural gas to approximately 734,800 customers inMontana ,South Dakota andNebraska . For a discussion ofNorthWestern's business strategy, see Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . We are working to deliver safe, reliable and innovative energy solutions that create value for our customers, communities, employees and investors. This includes bridging our history as a regulated utility safely providing low-cost and reliable service with our future as a globally-aware company offering a broader array of services performed by highly-adaptable and skilled employees. We seek to deliver value to our customers by providing high reliability and customer service, and an environmentally sustainable generation mix at an affordable price. We are focused on delivering long-term shareholder value by continuing to invest in our system including: • Infrastructure investment focused on a stronger and smarter grid to improve the customer experience, while enhancing grid reliability and safety. This includes automation in distribution and substations that enables the use of changing technology.
• Integrating supply resources that balance reliability, cost, capacity, and
sustainability considerations with more predictable long-term commodity
prices.
• Continually improving our operating efficiency. Financial discipline is
essential to earning our authorized return on invested capital and
maintaining a strong balance sheet, stable cash flows, and quality credit
ratings.
We expect to pursue these investment opportunities and manage our business in a manner that allows us to be flexible in adjusting to changing economic conditions by adjusting the timing and scale of the projects.
As you read this discussion and analysis, refer to our Condensed Consolidated Statements of Income, which present the results of our operations for the three months endedMarch 31, 2020 and 2019. 22 --------------------------------------------------------------------------------
HOW WE PERFORMED AGAINST OUR FIRST QUARTER 2019 RESULTS
Three months
ended
Income Before Income Income Tax (Expense)
Taxes Benefit Net Income
(in millions)
First Quarter 2019 $ 74.4 $ (1.6 ) $ 72.8
Items (decreasing) increasing net income:
Lower electric retail volumes (8.7 ) 2.2 (6.5 )
Lower natural gas retail volumes (8.4 ) 2.1 (6.3 )
Higher operating, general, and administrative
expenses impacting net income (1.8 ) 0.5 (1.3 )
Lower Montana electric transmission revenue (1.2 ) 0.3 (0.9 )
Lower Montana natural gas rates (0.6 ) 0.2 (0.4 )
Higher Montana electric retail rates 1.6 (0.4 ) 1.2
Lower depreciation and depletion 0.3 (0.1 ) 0.2
Other (6.7 ) (1.4 ) (8.1 )
First Quarter 2020 $ 48.9 $ 1.8 $ 50.7
Change in Net Income $ (22.1 ) Consolidated net income for the three months ended
Following is a brief overview of significant items for 2020.
SIGNIFICANT TRENDS AND REGULATION
COVID-19 Pandemic
We are one of many companies providing essential services during this national emergency related to the COVID-19 pandemic. We implemented a comprehensive set of actions to help our customers, communities, and employees, while maintaining our commitments to provide reliable service and to continue to monitor and adapt our financial business plan for the evolving COVID-19 challenges. In addition to announcing an incremental$300,000 in charitable contributions and aid to assist the communities we serve, we have taken extra precautions for our employees who work in the field and for employees who continue to work in our facilities, and we have implemented work from home policies where appropriate. Currently, we do not anticipate any employee layoffs and are continuing to hire for critical positions to maintain our high level of reliability and customer service. We continue to implement strong physical and cyber-security measures to ensure that our systems remain functional in order to serve our operational needs with a remote workforce and to keep our operations running to ensure uninterrupted service to our customers. We have informed both our retail customers and state regulators that disconnections for non-payment will be temporarily suspended. Our level of service to our 734,800 customers remains uninterrupted. In response to COVID-19, PresidentDonald Trump signed into law the CARES Act onMarch 27, 2020 . The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion ofSocial Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. We evaluated the provisions of the CARES Act and do not anticipate the associated impacts, if any, will have a material effect on our financial position or liquidity. 23 -------------------------------------------------------------------------------- 2020 Outlook - This is a rapidly evolving situation that could lead to extended disruption of economic activity. We have not experienced major declines in customer usage across our business related to COVID-19. Nonetheless, as a result of the spread of COVID-19 in our service territories, business curtailments, 'shelter in place' or 'stay at home' orders and travel restrictions, we may experience impacts to our financial results going forward. In addition, while we have not experienced significant supply chain issues, so far, we continue to closely manage and monitor developments in our supply chain. There may also be material delays in scheduling proceedings and hearings, and in obtaining orders from federal and state courts and regulatory agencies; these delays could negatively affect us financially. An extended slowdown ofthe United States' economic growth, demand for commodities and/or material changes in governmental policy could result in lower economic growth and lower demand for electricity and natural gas as well as the ability of various customers, contractors, suppliers and other business partners to fulfill their obligations, which could have a material adverse effect on our results of operations, financial condition and prospects. If the situation leads to an extended disruption of economic activity in our service territories, we would expect to be negatively impacted by lower sales volumes, increased operating expenses due primarily to an increase in uncollectible accounts, and higher interest expense offset in part by cost control. At this time, we cannot predict the ultimate impact of COVID-19 on our results of operations, financial condition and prospects. The likelihood these events would materially impact our future financial results will increase the longer business curtailments, 'shelter in place' or 'stay at home' orders and travel restrictions remain in place. We remain on track for our approximately$400 million capital investment as disclosed in our annual report on Form 10-K. However, the progression of and global response to the COVID-19 outbreak increases the risk of delays in construction activities and equipment deliveries related to our capital projects, including potential delays in obtaining permits from government agencies, resulting in a potential deferral of capital expenditures. Given the rapid and evolving nature of the COVID-19 matter, the extent of any such impacts is uncertain. Liquidity - We continue to maintain adequate liquidity to operate our business and fund our ongoing capital program. As ofMarch 31, 2020 , our total net liquidity was approximately$186.4 million , including$56.4 million of cash and$130.0 million of revolving credit facility availability. Our$400 million revolving credit facility, which expiresDecember 12, 2021 , contains an accordion feature that allows us to increase our liquidity another$25 million under certain conditions. We also have a$25 million credit facility that provides swing-line borrowing capability, which expiresMarch 27, 2022 . Subsequent to the three months endedMarch 31, 2020 , as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of uncertainty in the markets, we accessed the capital markets in two transactions:
• On
Agreement (Term Loan), with two of our relationship banks, and borrowed the
full amount under the Term Loan. Borrowings from this facility allow us to
meet our temporarily increased targeted minimum liquidity threshold of
million, up from our long-standing
• On
first mortgage bonds and expect to complete the bond issuance in
For further discussion of these transactions see the Liquidity and Capital Resources discussion. As previously disclosed, we are contemplating an equity issuance in late 2020 or early 2021 to maintain and protect our current credit ratings in balance with our current capital expenditure plans. Potential business disruptions and deterioration of the capital markets stemming from the COVID-19 pandemic could delay our contemplated equity issuance into 2021.
Proposed Colstrip Unit 4 Capacity Acquisition
InFebruary 2020 , we filed an application with the MPSC for pre-approval to acquirePuget Sound Energy's (Puget) 25% interest, 185 MW of generation, in Colstrip Unit 4 forone dollar . In addition, we sought approval to sell 90 MW of energy to Puget through a Power Purchase Agreement for roughly 5 years at a price indexed to hourly prices at the Mid-Columbia power hub, with a price floor reflecting the recovery of fixed operating and maintenance costs and variable generation costs. Our proposal included zero net effect on customer bills while setting aside benefits from the transaction - estimated to be$4 million annually - to address environmental compliance, remediation and decommissioning costs associated with our existing 222 MW ownership interest in Colstrip Unit 4. Puget remains responsible for its presale 25% ownership share of all costs for remediation of existing environmental conditions and decommissioning regardless of the proposed acquisition or when Colstrip Unit 4 is retired. 24 -------------------------------------------------------------------------------- Under the Ownership and Operation Agreement to which each of the Colstrip Units 3 and 4 co-owners are a party, each co-owner has a right of first refusal to our transaction with Puget. OnApril 8, 2020 and onApril 15, 2020 , Talen provided notices of its exercise of its right of first refusal to acquire a proportionate share of Puget's interest in Colstrip Unit 4, which would reduce our proposed transaction to 92.5 MW, and the sale of energy to Puget to 45 MW. We expect to supplement our application with the MPSC by the end ofApril 2020 to reflect this development. Should the MPSC decline to grant our application in all material respects, then we have the right, under the purchase and sale agreement with Puget, to terminate the transaction. We expect the MPSC to establish a procedural schedule in this docket in the second quarter of 2020. If this capacity acquisition is approved and we acquire 92.5 MW from Puget, this is expected to reduce our need for capacity identified in our resource plan by 80 MW, which is based on resource adequacy requirements. We also entered into an agreement with Puget to acquire an additional 95 MW interest in the 500 kilovolt (kV) Colstrip Transmission System for net book value at the time of the sale. The net book value is expected to range between$2.5 million to$3.8 million . After the roughly 5-year power purchase agreement with Puget, we will have the option to acquire another 90 MW interest in the 500 kV Colstrip Transmission System for net book value at that time. These transmission acquisitions are conditioned upon approval and closing of the Colstrip Unit 4 acquisition. Talen, while not a co-owner of theColstrip Transmission System, has asserted that its right of first refusal as to the Colstrip Unit 4 transaction extends to the transmission portion of the transaction. We disagree with the assertion in this regard and will oppose Talen's efforts to obtain an interest in the Colstrip Transmission System.
Recovery of the additional rate base from these transactions, if completed, will
be subject to review in the next
RESULTS OF OPERATIONS
Our consolidated results include the results of our divisions and subsidiaries constituting each of our business segments. The overall consolidated discussion is followed by a detailed discussion of gross margin by segment.
Non-GAAP Financial Measure
The following discussion includes financial information prepared in accordance with GAAP, as well as another financial measure, Gross Margin, that is considered a "non-GAAP financial measure." Generally, a non-GAAP financial measure is a numerical measure of a company's financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. We define Gross Margin as Revenues less Cost of Sales as presented in our Condensed Consolidated Statements of Income. The following discussion includes a reconciliation of Gross Margin to Operating Revenues, the most directly comparable GAAP measure. Management believes that Gross Margin provides a useful measure for investors and other financial statement users to analyze our financial performance in that it excludes the effect on total revenues caused by volatility in energy costs and associated regulatory mechanisms. This information is intended to enhance an investor's overall understanding of results. Under our various state regulatory mechanisms, as detailed below, our supply costs are generally collected from customers. In addition, Gross Margin is used by us to determine whether we are collecting the appropriate amount of energy costs from customers to allow for recovery of operating costs, as well as to analyze how changes in loads (due to weather, economic or other conditions), rates and other factors impact our results of operations. Our Gross Margin measure may not be comparable to that of other companies' presentations or more useful than the GAAP information provided elsewhere in this report.
Factors Affecting Results of Operations
Our revenues may fluctuate substantially with changes in supply costs, which are
generally collected in rates from customers. In addition, various regulatory
agencies approve the prices for electric and natural gas utility service within
their respective jurisdictions and regulate our ability to recover costs from
customers.
Revenues are also impacted by customer growth and usage, the latter of which is
primarily affected by weather. Very cold winters increase demand for natural gas
and to a lesser extent, electricity, while warmer than normal summers increase
demand for electricity, especially among our residential and commercial
customers. We measure this effect using degree-days, which is the difference
between the average daily actual temperature and a baseline temperature of 65
degrees. Heating degree-days
25
--------------------------------------------------------------------------------result when the average daily temperature is less than the baseline. Cooling degree-days result when the average daily temperature is greater than the baseline. The statistical weather information in our regulated segments represents a comparison of this data.
OVERALL CONSOLIDATED RESULTS
Three Months Ended
Consolidated net income for the three months ended
Consolidated operating revenues for the three months endedMarch 31, 2020 were$335.3 million as compared with$384.2 million for the same period in 2019. This decrease was primarily due to lower volumes from warmer winter weather, partly offset by customer growth. Consolidated gross margin for the three months endedMarch 31, 2020 was$244.0 million as compared with$268.5 million for the same period in 2019, a decrease of$24.5 million . Electric Natural Gas Total 2020 2019 2020 2019 2020 2019 (dollars in millions) Reconciliation of operating revenue to gross margin: Operating Revenues$ 244.6 $ 273.0 $ 90.6 $ 111.2 $ 335.2 $ 384.2 Cost of Sales 63.8 77.0 27.4 38.7 91.2 115.7 Gross Margin(1)$ 180.8 $ 196.0 $ 63.2 $ 72.5 $ 244.0 $ 268.5
(1) Non-GAAP financial measure. See "Non-GAAP Financial Measure" above.
Three Months Ended March 31,
2020 2019 Change % Change
(dollars in millions)
Gross Margin
Electric $ 180.8 $ 196.0 $ (15.2 ) (7.8 )%
Natural Gas 63.2 72.5 (9.3 ) (12.8 )
Total Gross Margin(1) $ 244.0 $ 268.5 $ (24.5 ) (9.1 )%
(1) Non-GAAP financial measure. See "Non-GAAP Financial Measure" above.
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--------------------------------------------------------------------------------Primary components of the change in gross margin include the following (in millions):
Gross Margin 2020 vs. 2019
Gross Margin Items Impacting Net Income
Electric retail volumes $ (8.7 )
Natural gas retail volumes (8.4 )
Electric transmission (1.2 )
Montana natural gas rates (0.6 )
Montana electric retail rates 1.6
Other (4.9 )
Change in Gross Margin Impacting Net Income (22.2 )
Gross Margin Items Offset Within Net Income
Production tax credits flowed-through trackers (1.9 )
Operating expenses recovered in trackers (0.7 )
Property taxes recovered in trackers 0.3
Change in Gross Margin Items Offset Within Net Income (2.3 ) Decrease in Consolidated Gross Margin(1) $
(24.5 )
(1) Non-GAAP financial measure. See "Non-GAAP Financial Measure" above.
Consolidated gross margin for items impacting net income decreased
• A decrease in electric volumes for our residential and commercial
customers due to warmer winter weather, primarily in our Montana
jurisdiction;
• A decrease in gas volumes due primarily to warmer winter weather and lower
customer usage, offset in part by customer growth;
• Lower demand to transmit energy across our transmission lines due to
market conditions and pricing;
• A decrease in
down for our
• A decrease in other due primarily to nonrecurring items.
These decreases were partly offset by an increase in
The change in consolidated gross margin also includes the following items that had no impact on net income:
• A decrease in revenue due to the increase in production tax credit
benefits passed through to customers in our tracker mechanisms, which are
offset by decreased income tax expense;
• A decrease in revenues for operating costs included in trackers, offset by
a decrease in associated operating expense; and
• An increase in revenues for property taxes included in trackers, offset by
increased property tax expense.
Three Months Ended March 31,
2020 2019 Change % Change
(dollars in millions)
Operating Expenses (excluding cost of sales)
Operating, general and administrative $ 79.0 $ 81.1 $ (2.1 ) (2.6 )%
Property and other taxes 44.5 44.8 (0.3 ) (0.7 )
Depreciation and depletion 45.3 45.6 (0.3 ) (0.7 )
$ 168.8 $ 171.5 $ (2.7 ) (1.6 )%
27-------------------------------------------------------------------------------- Consolidated operating, general and administrative expenses were$79.0 million for the three months endedMarch 31, 2020 , as compared with$81.1 million for the three months endedMarch 31, 2019 . Primary components of the change include the following (in millions): Operating, General & Administrative Expenses 2020 vs. 2019 Operating, General & Administrative Expenses Impacting Net Income Generation costs $ 1.4 Other 0.4 Change in Items Impacting Net Income
1.8
Operating, General & Administrative Expenses Offset Within Net Income Pension and other postretirement benefits
1.7
Operating expenses recovered in trackers (0.7 ) Non-employee directors deferred compensation
(4.9 ) Change in Operating, General & Administrative Expense Items Offset Within Net Income
(3.9 )
Decrease in Operating, General & Administrative Expenses $ (2.1 )
Consolidated operating, general and administrative expenses for items impacting net income increased$1.8 million , which includes increased costs associated with ourMontana generation resource plan request for proposal process and other maintenance.
The change in consolidated operating, general and administrative expenses also includes the following items that had no impact on net income:
• The regulatory treatment of the non-service cost components of pension and
postretirement benefit expense, which is offset in other income;
• Lower operating expenses included in trackers recovered through revenue; and
• A change in value of non-employee directors deferred compensation due to
changes in our stock price, offset in other income.
Property and other taxes were$44.5 million for the three months endedMarch 31, 2020 , as compared with$44.8 million in the same period of 2019. This slight decrease was due primarily to lower MPSC tax and invasive species tax, offset in part by an increase inMontana state and local taxes. We estimate property taxes throughout each year, and update those estimates based on valuation reports received from theMontana Department of Revenue . UnderMontana law, we are allowed to track the increases in the actual level of state and local taxes and fees and adjust our rates to recover the increase between rate cases less the amount allocated toFERC -jurisdictional customers and net of the associated income tax benefit. Depreciation and depletion expense was$45.3 million for the three months endedMarch 31, 2020 , as compared with$45.6 million in the same period of 2019. This slight decrease was primarily due to a depreciation adjustment consistent with the final order in ourMontana electric rate case, partly offset by plant additions.
Consolidated operating income for the three months ended
Consolidated interest expense for the three months ended
Consolidated other expense was$2.0 million for the three months endedMarch 31, 2020 as compared to other income of$1.1 million during the same period of 2019. This change includes a$4.9 million decrease in the value of deferred shares held in trust for non-employee directors deferred compensation, partially offset by a decrease in other pension expense of$1.7 million , both of which are offset in operating, general, and administrative expense with no impact to net income. Consolidated income tax benefit for the three months endedMarch 31, 2020 was$1.8 million as compared with income tax expense of$1.6 million in the same period of 2019. Our effective tax rate for the three months endedMarch 31, 2020 was 28 --------------------------------------------------------------------------------
(3.7)% as compared with 2.1% for the same period in 2019. We expect our effective tax rate to range between (5)% to 0% in 2020.
The following table summarizes the differences between our effective tax rate and the federal statutory rate (in millions):
Three Months Ended March 31,
2020 2019
Income Before Income Taxes $ 48.9 $ 74.4 Income tax calculated at federal statutory rate 10.3 21.0 % 15.6 21.0 %
Permanent or flow-through adjustments:
State income tax, net of federal provisions - - 0.9 1.2
Flow-through repairs deductions (7.4 ) (15.2 ) (7.9 ) (10.7 )
Production tax credits (3.6 ) (7.4 ) (4.4 ) (6.0 )
Share-based compensation (0.6 ) (1.2 ) 0.2 0.3
Amortization of excess deferred income tax (0.4 ) (0.7 ) (1.4 ) (1.8 )
Plant and depreciation of flow-through items 0.1 0.3 (1.5 ) (2.0 )
Recognition of unrecognized tax benefit - - 0.4 0.5
Other, net (0.2 ) (0.5 ) (0.3 ) (0.4 )
(12.1 ) (24.7 ) (14.0 ) (18.9 )
Income tax (benefit) expense $ (1.8 ) (3.7 )% $ 1.6 2.1 %
We compute income tax expense for each quarter based on the estimated annual effective tax rate for the year, adjusted for certain discrete items. Our effective tax rate typically differs from the federal statutory tax rate primarily due to the regulatory impact of flowing through federal and state tax benefits of repairs deductions, state tax benefit of accelerated tax depreciation deductions (including bonus depreciation when applicable) and production tax credits.
Consolidated net income for the three months ended
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--------------------------------------------------------------------------------ELECTRIC SEGMENT
We have various classifications of electric revenues, defined as follows:
• Retail: Sales of electricity to residential, commercial and industrial
customers.
• Regulatory amortization: Primarily represents timing differences for
electric supply costs and property taxes between when we incur these costs
and when we recover these costs in rates from our customers.
• Transmission: Reflects transmission revenues regulated by the
• Wholesale and other are largely gross margin neutral as they are offset by
changes in cost of sales.
Three Months Ended March 31, 2020 Compared with the Three Months Ended March 31,
2019
Results
2020 2019 Change % Change
(dollars in millions)
Retail revenues
Total retail revenues 230.5 257.8 (27.3 ) (10.6 ) Transmission 12.6 13.5 (0.9 ) (6.7 ) Wholesale and Other 1.5 1.7 (0.2 ) (11.8 ) Total Revenues 244.6 273.0 (28.4 ) (10.4 ) Total Cost of Sales 63.8 77.0 (13.2 ) (17.1 ) Gross Margin(1)$ 180.8 $ 196.0 $ (15.2 ) (7.8 )%
(1) Non-GAAP financial measure. See "Non-GAAP Financial Measure" above.
Revenues Megawatt Hours (MWH) Avg. Customer Counts
2020 2019 2020 2019 2020 2019
(in thousands)
Montana $ 88,639 $ 94,096 734 807 305,969 302,158
South Dakota 18,918 18,015 180 196 50,642 50,670
Residential 107,557 112,111 914 1,003 356,611 352,828
Montana 86,005 86,710 791 816 69,691 68,263
South Dakota 26,495 23,160 291 284 12,735 12,770
Commercial 112,500 109,870 1,082 1,100 82,426 81,033
Industrial 8,759 11,581 675 701 78 77
Other 5,249 5,147 21 23 4,805 4,799
Total Retail Electric $ 234,065 $ 238,709 2,692 2,827 443,920 438,737
Heating Degree Days 2020 as compared with:
2020 2019 Historic Average 2019 Historic Average
Montana 3,128 4,062 3,209 23% warmer 3% warmer
South Dakota 4,029 4,661 4,060 14% warmer 1% warmer
30--------------------------------------------------------------------------------
The following summarizes the components of the changes in electric gross margin
for the three months ended
Gross Margin 2020 vs. 2019
Gross Margin Items Impacting Net Income
Retail volumes $ (8.7 )
Transmission (1.2 )
Montana electric rates 1.6
Other (4.9 )
Change in Gross Margin Impacting Net Income (13.2 )
Gross Margin Items Offset Within Net Income Production tax credits flowed-through trackers (1.9 ) Operating expenses recovered in trackers (0.8 ) Property taxes recovered in trackers
0.7
Change in Gross Margin Items Offset Within Net Income (2.0 ) Decrease in Gross Margin(1) $ (15.2 )
(1) Non-GAAP financial measure. See "Non-GAAP Financial Measure" above.
Gross margin for items impacting net income decreased
• A decrease in electric volumes for our residential and commercial
customers due to warmer winter weather, primarily in our
jurisdiction;
• Lower demand to transmit energy across our transmission lines due to
market conditions and pricing; and
• A decrease in other due primarily to nonrecurring items.
These decreases were partly offset by an increase in
The change in gross margin also includes the following items that had no impact on net income:
• A decrease in revenues due to the increase in production tax credit
benefits passed through to customers in our tracker mechanisms, which are
offset by decreased income tax expense;
• A decrease in revenues for operating costs included in trackers, offset by
a decrease in associated operating expense; and
• An increase in revenues for property taxes included in trackers, offset by
increased property tax expense.
The change in regulatory amortization revenue is due to timing differences
between when we incur electric supply costs and when we recover these costs in
rates from our customers, which has a minimal impact on gross margin. Our
wholesale and other revenues are largely gross margin neutral as they are offset
by changes in cost of sales.
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NATURAL GAS SEGMENT
We have various classifications of natural gas revenues, defined as follows:
• Retail: Sales of natural gas to residential, commercial and industrial
customers.
• Regulatory amortization: Primarily represents timing differences for
natural gas supply costs and property taxes between when we incur these
costs and when we recover these costs in rates from our customers, which
is also reflected in cost of sales and therefore has minimal impact on
gross margin.
• Wholesale: Primarily represents transportation and storage for others.
Three Months EndedMarch 31, 2020 Compared with the Three Months EndedMarch 31, 2019 Results 2020 2019 Change % Change (dollars in millions)
Retail revenues
Total retail revenues 81.0 101.5 (20.5 ) (20.2 ) Wholesale and other 9.6 9.7 (0.1 ) (1.0 ) Total Revenues 90.6 111.2 (20.6 ) (18.5 ) Total Cost of Sales 27.4 38.7 (11.3 ) (29.2 ) Gross Margin(1)$ 63.2 $ 72.5 $ (9.3 ) (12.8 )%
(1) Non-GAAP financial measure. See "Non-GAAP Financial Measure" above.
Revenues Dekatherms (Dkt) Customer Counts
2020 2019 2020 2019 2020 2019
(in thousands)
Montana $ 38,295 $ 45,638 5,637 6,875 176,607 174,470
South Dakota 10,271 13,042 1,584 1,747 40,589 40,302
Nebraska 7,687 9,640 1,295 1,497 37,622 37,634
Residential 56,253 68,320 8,516 10,119 254,818 252,406
Montana 19,154 23,017 2,923 3,599 24,464 24,199
South Dakota 7,294 9,207 1,592 1,605 6,917 6,841
Nebraska 4,061 5,300 889 1,050 5,000 4,922
Commercial 30,509 37,524 5,404 6,254 36,381 35,962
Industrial 340 482 53 77 233 241
Other 343 440 62 78 152 165
Total Retail Gas $ 87,445 $ 106,766 14,035 16,528 291,584 288,774
Heating Degree Days 2020 as compared with:
2020 2019 Historic Average 2019 Historic Average
Montana 3,136 4,052 3,302 23% warmer 5% warmer
South Dakota 4,029 4,661 4,060 14% warmer 1% warmer
Nebraska 3,074 3,634 3,370 15% warmer 9% warmer
The following summarizes the components of the changes in natural gas gross
margin for the three months ended
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Gross Margin 2020 vs. 2019
(in millions)
Gross Margin Items Impacting Net Income
Retail volumes $ (8.4 )
Montana rates (0.6 )
Change in Gross Margin Impacting Net Income (9.0 )
Gross Margin Items Offset Within Net Income Property taxes recovered in trackers (0.4 ) Operating expenses recovered in trackers
0.1
Change in Gross Margin Items Offset Within Net Income (0.3 ) Decrease in Gross Margin(1) $ (9.3 )
(1) Non-GAAP financial measure. See "Non-GAAP Financial Measure" above.
Gross margin for items impacting net income decreased
• A decrease in volumes due to warmer winter weather, offset in part by
customer growth; and
• A reduction of rates from the step down of our
The change in gross margin also includes the following items that had no impact on net income:
• A decrease in revenues for property taxes included in trackers, offset by
lower recoverable property tax expense; and
• An increase in revenues for operating costs included in trackers, offset
by increased operating expense.
Our wholesale and other revenues are largely gross margin neutral as they are offset by changes in cost of sales.
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LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Funds
We require liquidity to support and grow our business, and use our liquidity for working capital needs, capital expenditures, investments in or acquisitions of assets, and to repay debt. We believe our cash flows from operations, existing borrowing capacity, and issuance of debt securities should be sufficient to fund our operations, service existing debt, pay dividends, and fund capital expenditures (excluding strategic growth opportunities). The amount of capital expenditures and dividends are subject to certain factors including the use of existing cash, cash equivalents and the receipt of cash from operations. In addition, a material change in operations or available financing could impact our current liquidity and ability to fund capital resource requirements, and we may defer a portion of our planned capital expenditures as necessary. We issue debt securities to refinance retiring maturities, fund construction programs and for other general corporate purposes. To fund our strategic growth opportunities, we utilize available cash flow, debt capacity and equity issuances that allow us to maintain investment grade ratings. We plan to maintain a 50 - 55 percent debt to total capital ratio excluding finance leases, and expect to continue to target a long-term dividend payout ratio of 60 - 70 percent of earnings per share; however, there can be no assurance that we will be able to meet these targets. Subsequent to the end of our first quarter, and as discussed above in the Significant Trends and Regulation section of Management's Discussion and Analysis, in response to the COVID-19 pandemic and as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of current uncertainty in the markets, we entered into a$100 million Term Loan. OnApril 3, 2020 we borrowed the full amount under the Term Loan and used the proceeds to pay down a portion of outstanding revolving credit facility borrowings and for general corporate purposes. The Term Loan bears interest at available rates tied to the Eurodollar rate plus a credit spread of 1.50%. All principal and unpaid interest under the Term Loan is due and payable onApril 2, 2021 . The Term Loan provides for prepayment of the principal and interest; however, amounts prepaid may not be reborrowed. The Term Loan requires us to maintain a consolidated indebtedness to total capitalization ratio of 65 percent or less. Failure to comply with this covenant would entitle the banks to terminate their lending commitments and to accelerate the maturity of all amounts outstanding. As ofApril 17, 2020 , we were in compliance with this covenant. In addition, inApril 2020 , we priced$100 million principal amount ofMontana First Mortgage Bonds and$50 million principal amount of SouthDakota First Mortgage Bonds, at a fixed interest rate of 3.21% maturing in 2030. We expect these transactions to close inMay 2020 . Liquidity is provided by internal cash flows and the use of our credit facilities. We have a$400 million revolving credit facility, a$25 million revolving credit facility to provide swingline borrowing capability, and as discussed above entered into a$100 million Term Loan inApril 2020 . We utilize availability under our revolvers to manage our cash flows due to the seasonality of our business, and utilize any cash on hand in excess of current operating requirements to invest in our business and reduce borrowings. As ofMarch 31, 2020 , our total net liquidity was approximately$186.4 million , including$56.4 million of cash and$130.0 million of revolving credit facility availability. As ofMarch 31, 2020 , there were no of letters of credit outstanding and$295.0 million in borrowings under our revolving credit facilities. Availability under our revolving credit facilities was$265.0 million as ofApril 17, 2020 . We remain on track for our approximately$400 million capital investment as disclosed in our annual report on Form 10-K. However, the progression of and global response to the COVID-19 outbreak increases the risk of delays in construction activities and equipment deliveries related to our capital projects, including potential delays in obtaining permits from government agencies, resulting in potential deferral of capital expenditures. Given the rapid and evolving nature of the COVID-19 pandemic, the extent of any such impacts is uncertain. We continue to monitor the disruption in capital markets caused by COVID-19. If conditions further deteriorate and we need to access the capital markets there can be no assurance that we will be able to obtain such financing on commercially reasonable terms or at all. In addition, as previously disclosed, we are contemplating an equity issuance in late 2020 or early 2021 to maintain and protect our current credit ratings in balance with our current capital expenditure plans. Potential business disruptions and deterioration of the capital markets stemming from the COVID-19 pandemic could delay our contemplated equity issuance into 2021. 34 --------------------------------------------------------------------------------
Factors Impacting our Liquidity
Supply Costs - Our operations are subject to seasonal fluctuations in cash flow. During the heating season, which is primarily from November through March, cash receipts from natural gas and electric sales typically exceed cash requirements. During the summer months, cash on hand, together with the seasonal increase in cash flows and utilization of our existing revolver, are used to purchase natural gas to place in storage, perform maintenance, and make capital improvements. The effect of this seasonality on our liquidity is also impacted by changes in electric and natural gas market prices. We recover the cost of our electric and natural gas supply through tracking mechanisms. The natural gas supply tracking mechanism in each of our jurisdictions, and electric supply tracking mechanism inSouth Dakota are designed to provide stable recovery of supply costs, with a monthly adjustment to correct for any under or over collection. TheMontana electric supply tracking mechanism implemented in 2018, the PCCAM, is designed for us to absorb risk through a sharing mechanism, with 90% of the variance above or below the established base revenues and actual costs collected from or refunded to customers. Our electric supply rates were adjusted monthly under the prior tracker, and under the PCCAM design are adjusted annually. In periods of significant fluctuation of loads and / or market prices, this design impacts our cash flows as application of the PCCAM requires that we absorb certain power cost increases before we are allowed to recover increases from customers. Due to the lag between our purchases of electric and natural gas commodities and revenue receipt from customers, cyclical over and under collection situations arise consistent with the seasonal fluctuations discussed above; therefore we typically under collect in the fall and winter and over collect in the spring. Fluctuations in recoveries under our cost tracking mechanisms can have a significant effect on cash flows from operations and make year-to-year comparisons difficult. As ofMarch 31, 2020 , we have under collected our costs recovered through tracking mechanisms by approximately$21.5 million . We under collected our costs by approximately$32.5 million as ofDecember 31, 2019 and under collected our costs by approximately$26.1 million as ofMarch 31, 2019 .
Credit Ratings
In general, less favorable credit ratings make debt financing more costly and more difficult to obtain on terms that are favorable to us and our customers, may impact our trade credit availability, and could result in the need to issue additional equity securities. Fitch Ratings (Fitch), Moody's Investors Service (Moody's), and S&P Global Ratings (S&P) are independent credit-rating agencies that rate our debt securities. These ratings indicate the agencies' assessment of our ability to pay interest and principal when due on our debt. As ofApril 17, 2020 , our current ratings with these agencies are as follows: Senior Secured Rating Senior Unsecured Rating Commercial Paper Outlook Fitch A A- F2 Negative Moody's A3 Baa2 Prime-2 Stable S&P A- BBB A-2 Stable A security rating is not a recommendation to buy, sell or hold securities. Such rating may be subject to revision or withdrawal at any time by the credit rating agency and each rating should be evaluated independently of any other rating. 35 --------------------------------------------------------------------------------
Cash Flows
The following table summarizes our consolidated cash flows (in millions):
Three Months Ended March 31,
2020 2019
Operating Activities
Net income $ 50.7 $ 72.8
Non-cash adjustments to net income 48.7 48.7
Changes in working capital 62.2 (6.5 )
Other noncurrent assets and liabilities (3.5 ) (3.6 )
Cash Provided by Operating Activities 158.1 111.4
Investing Activities
Property, plant and equipment additions (78.4 ) (65.6 )
Cash Used in Investing Activities (78.4 ) (65.6 )
Financing Activities
Line of credit borrowings (repayments), net 6.0 (22.0 )
Dividends on common stock (30.1 ) (28.8 )
Financing costs (0.1 ) (0.1 )
Other (2.5 ) 0.8
Cash Used in Financing Activities (26.7 ) (50.1 )
Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash
$ 53.0
$ 12.1 $ 15.3 Cash, Cash Equivalents, and Restricted Cash, end of period$ 65.1 $ 11.0
Cash Provided by Operating Activities
As ofMarch 31, 2020 , cash, cash equivalents, and restricted cash were$65.1 million as compared with$12.1 million atDecember 31, 2019 and$11.0 million atMarch 31, 2019 . Cash provided by operating activities totaled$158.1 million for the three months endedMarch 31, 2020 as compared with$111.4 million during the three months endedMarch 31, 2019 . This increase in operating cash flows is primarily due to improved collections of energy supply costs in the current period, as compared with higher procured supply costs and credits toMontana customers of approximately$20.5 million in the first quarter of 2019. These improvements were offset in part by reduced net income.
Cash Used in Investing Activities
Cash used in investing activities increased by approximately$12.8 million as compared with the first three months of 2019. Plant additions during the first three months of 2020 include maintenance additions of approximately$54.5 million and capacity related capital expenditures of$23.9 million . Plant additions during the first three months of 2019 included maintenance additions of approximately$43.4 million , and capacity related capital expenditures of approximately$22.2 million .
Cash Used in Financing Activities
Cash used in financing activities totaled$26.7 million during the three months endedMarch 31, 2020 as compared with$50.1 million during the three months endedMarch 31, 2019 . During the three months endedMarch 31, 2020 , cash used in financing activities reflects payment of dividends of$30.1 million , offset in part by net issuances under our revolving lines of credit of$6.0 million . During the three months endedMarch 31, 2019 , net cash used in financing activities reflects net repayments under our revolving lines of credit of$22.0 million and the payment of dividends of$28.8 million . 36 --------------------------------------------------------------------------------
Contractual Obligations and Other Commitments
We have a variety of contractual obligations and other commitments that require payment of cash at certain specified periods. The following table summarizes our contractual cash obligations and commitments as ofMarch 31, 2020 . See our Annual Report on Form 10-K for the year endedDecember 31, 2019 for additional discussion. Total 2020 2021 2022 2023 2024 Thereafter (in thousands) Long-term debt (1)$ 2,251,637 $ -$ 295,000 $ -$ 144,660 $ -$ 1,811,977 Finance leases 19,319 1,880 2,668 2,875 3,098 3,338 5,460 Estimated pension and other postretirement obligations (2) 64,187 11,614 13,491 13,209 13,097 12,776 NA Qualifying facilities liability (3) 611,660 57,400 78,356 80,226 82,320 79,726 233,632 Supply and capacity contracts (4) 1,881,142 132,908 154,081 155,990
154,901 147,293 1,135,969 Contractual interest payments on debt (5) 1,498,770 66,137 84,043 77,602 76,397 74,709 1,119,882
Environmental remediation obligations (6) 4,323 2,265 912 720 213 213 NA Total
Commitments (7)
_________________________
(1) Represents cash payments for long-term debt and excludes$12.2 million of debt discounts and debt issuance costs, net.
(2) We estimate cash obligations related to our pension and other postretirement
benefit programs for five years, as it is not practicable to estimate
thereafter. Pension and postretirement benefit estimates reflect our
expected cash contributions, which may be in excess of minimum funding
requirements.
(3) Certain QFs require us to purchase minimum amounts of energy at prices
ranging from $63 to $136 per MWH through 2029. Our estimated gross
contractual obligation related to these QFs is approximately
A portion of the costs incurred to purchase this energy is recoverable
through rates authorized by the MPSC, totaling approximately
(4) We have entered into various purchase commitments, largely purchased power,
electric transmission, coal and natural gas supply and natural gas
transportation contracts. These commitments range from one to 24 years.
(5) Contractual interest payments includes our revolving credit facilities,
which have a variable interest rate. We have assumed an average interest
rate of 2.27% on the outstanding balance through maturity of the facilities.
(6) We estimate environmental remediation obligations for five years, as it is
not practicable to estimate thereafter. Our environmental reserve relates
primarily to the remediation of former manufactured gas plant sites owned by
us.
(7) Potential tax payments related to uncertain tax positions are not
practicable to estimate and have been excluded from this table.
Other Obligations - As a co-owner of Colstrip , we provided surety bonds of
approximately $22.8 million and $13.2 million
as of March 31, 2020 and December 31, 2019 , respectively, on behalf of the
operator to ensure the operation and maintenance of remedial and closure actions
are carried out related to the Administrative Order on Consent Regarding Impacts
Related to Wastewater Facilities Comprising the Closed-Loop System at Colstrip
Steam Electric Stations, Colstrip Montana (the AOC) as required by the MDEQ. It
is currently anticipated that each co-owner of Colstrip will be required to post
an additional amount of financial assurance to support additional performance by
the operator of closure and remediation actions under the AOC. As costs are
incurred under the AOC, the surety bonds will be reduced.
37
--------------------------------------------------------------------------------CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's discussion and analysis of financial condition and results of operations is based on our Financial Statements, which have been prepared in accordance with GAAP. The preparation of these Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that are believed to be proper and reasonable under the circumstances. We continually evaluate the appropriateness of our estimates and assumptions. Actual results could differ from those estimates. We consider an estimate to be critical if it is material to the Financial Statements and it requires assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate are reasonably likely to occur from period to period. This includes the accounting for the following: regulatory assets and liabilities, pension and postretirement benefit plans, income taxes and qualifying facilities liability. These policies were disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the year ended
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