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MarketScreener Homepage  >  Equities  >  Nasdaq  >  NorthWestern Corporation    NWE

NORTHWESTERN CORPORATION

(NWE)
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NORTHWESTERN : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW (form 10-Q)

10/22/2020 | 06:03am EST
NorthWestern Corporation, doing business as NorthWestern Energy, provides
electricity and natural gas to approximately 734,800 customers in Montana, South
Dakota and Nebraska. For a discussion of NorthWestern'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 ended December 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
and nine months ended September 30, 2020 and 2019.

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                   HOW WE PERFORMED AGAINST OUR THIRD QUARTER 2019 RESULTS


                                                                             Three Months Ended
                                                                         September 30, 2020 vs. 2019
                                                                                     Income Tax
                                                             Income Before           (Expense)
                                                             Income Taxes             Benefit              Net Income
                                                                                  (in millions)
Third Quarter 2019                                          $       22.2$        (0.5)$      21.7
Items (decreasing) increasing net income:
Lower operating, general, and administrative expenses
impacting net income                                                 3.1                   (0.8)                 2.3
Higher electric retail volumes and demand                            2.4                   (0.6)                 1.8

Lower Montana natural gas rates                                     (0.1)                     -                 (0.1)
Lower Montana electric transmission revenue                         (0.3)                   0.1                 (0.2)
Lower Montana natural gas volumes                                   (0.3)                   0.1                 (0.2)
Lower Montana electric supply cost recovery                         (0.5)                   0.1                 (0.4)
Higher depreciation and depletion                                   (1.1)                   0.3                 (0.8)
Other                                                                1.4                    4.0                  5.4
Third Quarter 2020                                          $       26.8          $         2.7          $      29.5
Change in Net Income                                                                                     $       7.8


Consolidated net income for the three months ended September 30, 2020 was $29.5
million as compared with $21.7 million for the same period in 2019. This
increase was primarily due to higher gross margin, lower operating expenses and
lower income taxes, offset in part by higher depreciation and depletion expense.
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 the national
emergency related to the COVID-19 pandemic. Our level of service to our 734,800
customers remains uninterrupted. 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 pandemic challenges. In March,
we voluntarily informed both our retail customers and state regulators that
disconnections for non-payment would be temporarily suspended, and we have
provided an incremental $400,000 in charitable contributions and aid to assist
the communities we serve. Our CEO made an official declaration of emergency in
accordance with our continuity of operations plan and emergency standard
operating procedures, implementing an incident command structure that remains in
effect. We have taken extra precautions for our employees who work in the field
and for employees who continue to work in our facilities. This includes
implementation of work from home policies, social-distancing protocols,
face-covering directives, and travel restrictions 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
enable our systems to remain functional to serve our operational needs with a
remote workforce and to keep our company running to provide high quality service
to our customers. In August we advised customers that we would resume the
disconnection process for customers whose accounts are in arrears.

In response to the COVID-19 pandemic, President Donald Trump signed into law the
CARES Act on March 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 of Social Security taxes,
technical corrections from prior tax legislation for tax depreciation of certain
qualified improvement property, and the creation of certain refundable
                                       28
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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.

2020 Outlook - The COVID-19 pandemic has impacted our financial results with
lower gross margin driven by a reduction in our commercial and industrial
revenue, offset in part by an increase in usage by residential customers. We
also experienced an increase in certain operating expenses including an increase
in uncollectible accounts and interest expense offset in part by lower operating
expenses as detailed below. COVID-19 continues to be an evolving situation and
we expect to continue to experience impacts to our financial results in the
fourth quarter of 2020.

                                                       Estimate of Covid Impacts (millions)

                                                   Three Months Ended June 30, 2020                                                  Three Months Ended September 30, 2020
                                                 Low                              High                       Low                     High
Gross Margin                                   ($3.0)                            ($4.0)                    ($2.0)                   ($3.0)

Operating expenses
Medical, labor, and travel &
training                                        (2.8)                             (2.8)                     (1.2)                    (1.2)
Uncollectible Accounts                           3.1                               3.1                       2.4                      2.4
Total Operating Expense                          0.3                               0.3                       1.2                      1.2

Operating Loss                                  (3.3)                             (4.3)                     (3.2)                    (4.2)
Interest expense                                (0.7)                             (0.7)                       -                        -
Pretax Loss                                     (4.0)                             (5.0)                     (3.2)                    (4.2)
Income tax benefit                               1.0                               1.3                       0.8                      1.1
Net Loss                                       ($3.0)                            ($3.7)                    ($2.4)                   ($3.1)
                            ETR                 25.3%                             25.3%                     25.3%                    25.3%



We submitted accounting order requests in Montana and South Dakota to allow for
the deferral of uncollectible accounts expense in excess of amounts currently
recovered from customers and to determine ratemaking treatment in a future
proceeding.

•The SDPUC issued an order in August 2020, authorizing deferral of costs for
possible recovery through future rates. In the third quarter of 2020, we
deferred approximately $0.4 million of uncollectible accounts expense in South
Dakota.

•The MPSC held a work session in October 2020 and voted to allow tracking of
uncollectible accounts expense. We expect a final written order during the
fourth quarter of 2020. We cannot determine the impact of the MPSC's decision,
if any, until a final order is issued.

We are working with customers who have been unable to pay during the COVID-19
pandemic, including offering extended payment arrangements. In each of our
jurisdictions, we resumed disconnection procedures for non-payment during the
third quarter of 2020 and expect normal winter disconnection procedures to apply
effective November 1st.

While we have not experienced significant supply chain challenges, so far, we
continue to closely manage and monitor developments in our supply chain. We
remain on track for our approximately $400 million capital investment as
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2019. The continued progression of and global response to the COVID-19 pandemic
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.

The ongoing impacts of the COVID-19 pandemic remain uncertain. Further extension
of the slowdown of the United States' economic growth, demand for commodities
and/or material changes in governmental policy may continue to result in lower
economic growth with 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. These impacts could have a material
adverse effect on our results of operations, financial condition and prospects.
                                       29
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Liquidity - We continue to maintain adequate liquidity to operate our business
and fund our ongoing capital program. As of September 30, 2020, our total net
liquidity was approximately $357.5 million, including $3.5 million of cash and
$354.0 million of revolving credit facility availability. During the second
quarter of 2020, as precautionary measures 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 April 3, 2020, we entered into a $100 million 364-Day Term Loan Credit
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 $200 million, up
from our long-standing $100 million level; and
•On May 15, 2020, we issued $150 million principal amount 10-year, 3.21% first
mortgage bonds.

In addition, on September 2, 2020, we entered into a new $425 million Credit
Facility increasing the capacity of our revolving credit facility by $25 million
to $425 million and extending the maturity date to September 2, 2023 (from
December 12, 2021).

For further discussion of these transactions, see the Liquidity and Capital Resources discussion. We expect to issue equity in 2021 to maintain and protect our current credit ratings in balance with our current capital expenditure plans.

Proposed Colstrip Unit 4 Capacity Acquisition


In February 2020, we filed an application with the MPSC for pre-approval to
acquire Puget Sound Energy's (Puget) 25% interest, 185 MW of generation, in
Colstrip Unit 4 for one dollar. As part of the application, we sought approval
to sell 90 MW of energy to Puget through a Power Purchase Agreement (PPA) for
roughly five 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 application includes zero
net effect on customer bills and proposes to establish a reserve fund with
benefits from the PPA and market purchase savings. If approved, the reserve fund
will be used 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.

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
purchase Puget's interest. In April 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 associated five-year PPA to Puget to 45 MW. We supplemented our
application with the MPSC to reflect this development and file the amended the
purchase and sale agreement with Puget, reducing the size of the transaction.

A hearing on our application to the MPSC is scheduled for December 2020. We
expect a decision from the MPSC in the first quarter of 2021.Should the MPSC
decline to grant our application in all material respects, we have the right,
under the purchase and sale agreement with Puget to terminate the transaction.
Closing the transaction is also contingent upon approval of Puget's application
to the Washington Utilities and Transportation Commission (WUTC). A hearing on
Puget's application before the WUTC is scheduled for November 2020.

Colstrip Transmission System - We also entered into a separate 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 PPA 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 the Colstrip
Transmission System, has claimed that its right of first refusal as to the
Colstrip Unit 4 transaction extends to the separate transmission transaction and
initiated arbitration under the Ownership and Operation Agreement. We disagree
with Talen's claim in this regard and have opposed Talen's efforts to obtain an
interest in the Colstrip Transmission System. We expect a decision from the
arbitrator in October 2020.

Electric Resource Planning - Montana


We are currently 630 MW short of our peak needs, which we procure in the market.
We forecast that our portfolio will be 725 MW short by 2025, considering
expiring contracts and a modest increase in customer demand. We issued an
all-source competitive solicitation request in February 2020 for up to 280 MWs
of peaking and flexible capacity to be available for commercial operation in
early 2023. We expect to repeat the process in subsequent years to provide a
resource-adequate energy and capacity portfolio by 2025.
                                       30
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Initial bids from the February 2020, 280 MW competitive solicitation were submitted in July 2020. Engineering, procurement and construction bids were submitted on our behalf for generating facilities providing long-duration flexible capacity in excess of 200 MWs. The bids are under evaluation by an independent party, and we expect the successful project(s) to be selected and announced by the first quarter of 2021.

If the transaction with Puget for additional capacity discussed above is approved and we acquire 92.5 MW from Puget, we expect the transaction to reduce our need for capacity in future competitive solicitations by 85 MW based on resource adequacy requirements.



                                    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 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 September 30, 2020 Compared with the Three Months Ended September 30, 2019


Consolidated net income for the three months ended September 30, 2020 was $29.5
million as compared with $21.7 million for the same period in 2019. This
increase was primarily due to higher gross margin, lower operating, general and
administrative expenses and lower income taxes, offset in part by higher
depreciation and depletion.
                                       31
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Consolidated operating revenues for the three months ended September 30, 2020
were $280.7 million as compared with $274.8 million for the same period in 2019.
Consolidated gross margin for the three months ended September 30, 2020 was
$212.6 million as compared with $210.6 million for the same period in 2019, an
increase of $2.0 million.
                                                       Electric                                        Natural Gas                                 Total
                                                 2020             2019            2020            2019             2020             2019
                                                                                  (dollars in millions)
Reconciliation of operating revenue to gross
margin:
Operating Revenues                            $ 244.2$ 241.2$ 36.5$ 33.6$ 280.7$ 274.8
Cost of Sales                                    61.2             58.7             6.9             5.5             68.1             64.2

Gross Margin(1)                               $ 183.0$ 182.5$ 29.6$ 28.1$ 212.6$ 210.6

(1) Non-GAAP financial measure. See "Non-GAAP Financial Measure" above.

                                        Three Months Ended September 30,
                                   2020                 2019        Change      % Change
                                              (dollars in millions)
Gross Margin
Electric                $      183.0$ 182.5$  0.5          0.3  %
Natural Gas                     29.6                     28.1         1.5          5.3

Total Gross Margin(1)   $      212.6$ 210.6$  2.0          0.9  %

(1) Non-GAAP financial measure. See "Non-GAAP Financial Measure" above.

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 and demand                                       $                       2.4
Montana electric supply cost recovery                                                           (0.5)
Electric transmission                                                                           (0.3)

Natural gas retail volumes                                                                      (0.3)
Montana natural gas rates                                                                       (0.1)
Other                                                                                            1.7
Change in Gross Margin Impacting Net Income                                                      2.9
Gross Margin Items Offset Within Net Income
Property tax revenue offset in property tax expense                                              1.1

Operating expenses recovered in revenue, offset in operating expense

                     (1.0)

Production tax credits reducing revenue, offset in income tax expense

                     (1.0)
Change in Gross Margin Items Offset Within Net Income                                           (0.9)
Increase in Consolidated Gross Margin(1)                                 $                       2.0


(1) Non-GAAP financial measure. See "Non-GAAP Financial Measure" above.

Consolidated gross margin increased $2.0 million, including a $2.9 million increase from items impacting net income and a $0.9 million decrease from items offset within net income.

The change in consolidated gross margin for items impacting net income includes the following:


•An increase in electric retail volumes and demand driven by warmer weather and
customer growth, partly offset by lower industrial demand unrelated to the
COVID-19 pandemic. Impacts of the COVID-19 pandemic offset this improvement by
approximately $2 - $3 million driven by lower commercial and industrial demand,
partly offset by a slight increase in residential usage.
•Higher Montana electric supply costs as compared with the prior period;
•Lower demand to transmit energy across our transmission lines due to market
conditions and pricing, including the closure of Colstrip units 1 and 2;
                                       32
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•Lower natural gas commercial and industrial loads as a result of reduced
demand, offset in part by customer growth; and
•A decrease in Montana natural gas rates associated with the annual step down
for our Montana gas production assets.

                                                                           

Three Months Ended September 30,

                                                         2020                 2019              Change               % Change
                                                                                (dollars in millions)
Operating Expenses (excluding cost of sales)
Operating, general and administrative               $       73.3$    77.0$    (3.7)                    (4.8) %
Property and other taxes                                    45.3               44.1                1.2                      2.7
Depreciation and depletion                                  44.3               43.2                1.1                      2.5
                                                    $      162.9$   164.3$    (1.4)                    (0.9) %



Consolidated operating, general and administrative expenses were $73.3 million
for the three months ended September 30, 2020, as compared with $77.0 million
for the three months ended September 30, 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
Employee benefits                                                               $                 (2.0)
Hazard trees                                                                                      (1.3)
Labor                                                                                             (1.2)
Generation maintenance                                                                            (0.9)
Travel and training                                                                               (0.8)
Uncollectible accounts                                                                             2.4
Other                                                                                              0.7
Change in Items Impacting Net Income                                                              (3.1)

Operating, General & Administrative Expenses Offset Within Net Income Pension and other postretirement benefits, offset in other income

                                  2.4
Operating expenses recovered in trackers, offset in revenue                                       (1.1)

Non-employee directors deferred compensation, offset in other income

                       (1.9)

Change in Operating, General & Administrative Expense Items Offset Within Net Income

                                                                                            (0.6)
Decrease in Operating, General & Administrative Expenses                        $                 (3.7)



Consolidated operating, general and administrative expenses decreased $3.7 million, including a $3.1 million decrease from items impacting net income and a $0.6 million decrease from items offset within net income.

The change in consolidated operating, general and administrative expenses for items impacting net income includes the following:


•Lower employee benefit costs primarily due to a decrease in employee incentive
compensation expense;
•Lower hazard tree line clearance costs. As previously disclosed, we finalized
our plan to address hazard tree clearance in 2018 and accelerated the program in
2019. We expect costs in 2020 to reflect a normal level, which is lower than
2019;
•Decreased labor costs including approximately $0.4 million of in-home customer
work which was limited by the COVID-19 pandemic and more time being spent by
employees on capital projects than maintenance projects (which are expensed);
•Lower maintenance costs at our electric generation facilities;
                                       33
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•A reduction in travel and training costs due to the impacts of the COVID-19
pandemic; and
•Increased uncollectible accounts. In March 2020, we voluntarily suspended
service disconnections for non-payment, to help customers who may be financially
impacted by the COVID-19 pandemic. We resumed standard disconnection processes
in all of our operating jurisdictions during the third quarter. As a result of
the South Dakota accounting order, we deferred approximately $0.4 million of
uncollectible accounts expense during the third quarter of 2020.

Property and other taxes were $45.3 million for the three months ended September
30, 2020, as compared with $44.1 million in the same period of 2019. This
increase was due primarily to an increase in Montana state and local taxes
offset in part by lower MPSC tax and invasive species tax. We estimate property
taxes throughout each year, and update those estimates based on valuation
reports received from the Montana Department of Revenue. Under Montana 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 to FERC-jurisdictional customers and net of the associated
income tax benefit.

Depreciation and depletion expense was $44.3 million for the three months ended
September 30, 2020, as compared with $43.2 million in the same period of 2019.
This increase was primarily due to plant additions.

Consolidated operating income for the three months ended September 30, 2020 was
$49.7 million as compared with $46.4 million in the same period of 2019. This
increase was primarily due to the increase in gross margin and lower operating
expenses, offset in part by higher property tax and depreciation expense.

Consolidated interest expense remained flat for the three months ended September
30, 2020 as compared with the same period of 2019. Borrowings during the second
and third quarter of 2020 were primarily utilized to repay balances on our
revolver, increasing our liquidity and preserving financial flexibility in light
of recent uncertainty in the markets. This was offset by lower interest on our
revolving credit facilities.

Consolidated other income was $0.8 million for the three months ended September
30, 2020 as compared to consolidated other expense of $0.4 million during the
same period of 2019. This change includes a decrease in other pension expense of
$2.4 million, partially offset by a $1.8 million decrease in the value of
deferred shares held in trust for non-employee directors deferred compensation
(both of which are offset in operating, general, and administrative expense with
no impact to net income), and higher capitalization of Allowance for Funds Used
During Construction (AFUDC).

Consolidated income tax benefit for the three months ended September 30, 2020
was $2.7 million as compared with income tax expense of $0.6 million in the same
period of 2019. Our effective tax rate for the three months ended September 30,
2020 was (10.1)% as compared with 2.5% 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 September 30,

                                                                     2020                                            2019
Income Before Income Taxes                               $   26.8$ 22.2

Income tax calculated at federal statutory rate               5.6              21.0  %          4.7                 21.0  %

Permanent or flow-through adjustments:
State income tax, net of federal provisions                     -               0.2             0.1                  0.3
Flow-through repairs deductions                              (4.2)            (15.7)           (2.6)               (11.7)
Production tax credits                                       (2.2)             (8.2)           (1.4)                (6.3)

Prior year permanent return to accrual adjustments           (1.7)             (6.5)            0.6                  2.5
Amortization of excess deferred income tax                   (0.2)             (0.8)           (0.4)                (1.7)
Plant and depreciation of flow-through items                  0.1               0.4            (0.3)                (1.2)
Other, net                                                   (0.1)             (0.5)           (0.1)                (0.4)
                                                             (8.3)            (31.1)           (4.1)               (18.5)

Income tax (benefit) expense                             $   (2.7)            (10.1) %       $  0.6                  2.5  %


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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.
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Nine Months Ended September 30, 2020 Compared with the Nine Months Ended September 30, 2019


Consolidated net income for the nine months ended September 30, 2020 was $101.7
million as compared with $142.1 million for the same period in 2019. This
decrease was primarily due to an income tax benefit in 2019, lower gross margin
in 2020 due to warmer winter weather and impacts of the COVID-19 pandemic and
higher depreciation expense, offset in part by a decrease in operating, general
and administrative expenses.

Consolidated operating revenues for the nine months ended September 30, 2020
were $885.2 million as compared with $929.8 million for the same period in 2019.
This decrease was primarily due to lower volumes from warmer winter weather and
impacts of the COVID-19 pandemic, partly offset by customer growth. Consolidated
gross margin for the nine months ended September 30, 2020 was $664.8 million as
compared with $694.1 million for the same period in 2019, a decrease of $29.3
million.


                                                       Electric                                          Natural Gas                                 Total
                                                 2020             2019             2020             2019             2020             2019
                                                                                   (dollars in millions)
Reconciliation of operating revenue to gross
margin:
Operating Revenues                            $ 706.7$ 733.9$ 178.5$ 195.9$ 885.2$ 929.8
Cost of Sales                                   173.3            178.4             47.1             57.3            220.4            235.7

Gross Margin(1)                               $ 533.4$ 555.5$ 131.4$ 138.6$ 664.8$ 694.1

(1) Non-GAAP financial measure. See "Non-GAAP Financial Measure" above.

                                       Nine Months Ended September 30,
                                 2020               2019        Change       % Change
                                            (dollars in millions)
Gross Margin
Electric                $     533.4$ 555.5$ (22.1)        (4.0) %
Natural Gas                   131.4                 138.6         (7.2)        (5.2)

Total Gross Margin(1)   $     664.8$ 694.1$ (29.3)        (4.2) %

(1) Non-GAAP financial measure. See "Non-GAAP Financial Measure" above.

Primary components of the change in gross margin include the following (in millions):

                                                                           Gross Margin 2020 vs. 2019
Gross Margin Items Impacting Net Income
Natural gas retail volumes                                               $                      (8.3)
Electric retail volumes and demand                                                              (6.5)
Lower electric QF liability adjustment                                                          (3.3)
Montana electric supply cost recovery                                                           (3.2)
Electric transmission                                                                           (1.8)
Montana natural gas rates                                                                       (0.8)
Montana electric retail rates                                                                    1.6
Other                                                                                           (5.3)
Change in Gross Margin Impacting Net Income                                                    (27.6)
Gross Margin Items Offset Within Net Income
Production tax credits reducing revenue, offset in income tax expense                           (4.0)

Operating expenses recovered in revenue, offset in operating expense

                     (1.2)
Property tax revenue, offset in property tax expense                                             3.5
Change in Items Offset Within Net Income                                                        (1.7)
Decrease in Consolidated Gross Margin(1)                                 $                     (29.3)


(1) Non-GAAP financial measure. See "Non-GAAP Financial Measure" above.

                                       36
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Consolidated gross margin decreased $29.3 million, including a $27.6 million
decrease from items impacting net income and a $1.7 million decrease from items
offset within net income.

The change in consolidated gross margin for items impacting net income includes the following:


•A decrease in gas volumes due primarily to warmer winter weather and lower
customer usage, offset in part by customer growth;
•A decrease in electric retail volumes due to warmer winter weather in Montana
and lower industrial demand unrelated to the COVID-19 pandemic, partly offset by
customer growth and warmer summer weather. In addition, impacts of the COVID-19
pandemic drove a decline of approximately $5 - $7 million as a result of lower
commercial and industrial demand, partly offset by higher residential usage;
•A less favorable adjustment of our electric QF liability (unrecoverable costs
associated with PURPA contracts as a part of a 2002 stipulation with the MPSC
and other parties) as compared with the same period in 2019 due to the
combination of:
•A net $1.1 million lower favorable adjustment due to actual price escalation,
which was less than estimated ($2.2 million in the current period as compared
with $3.3 million in the prior period); and
•Higher costs of approximately $2.2 million, due to a $0.9 million reduction in
costs for the adjustment to actual output and pricing for the current contract
year as compared with a $3.1 million reduction in costs in the prior period.
•A prior year recovery of Montana electric supply costs as a result of changes
in the associated statute, offset in part by lower supply costs in 2020;
•Lower demand to transmit energy across our transmission lines due to market
conditions and pricing, including the closure of Colstrip units 1 and 2;
•A decrease in Montana natural gas rates associated with the annual step down
for our Montana gas production assets;
•An increase in Montana electric retail rates; and
•A decrease in other due primarily to nonrecurring items.

                                                                           

Nine Months Ended September 30,

                                                         2020                2019              Change               % Change
                                                                                (dollars in millions)
Operating Expenses (excluding cost of sales)
Operating, general and administrative               $     224.0$   238.9$   (14.9)                    (6.2) %
Property and other taxes                                  136.8              133.2                3.6                      2.7
Depreciation and depletion                                134.3              129.8                4.5                      3.5
                                                    $     495.1$   501.9$    (6.8)                    (1.4) %


                                       37
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Consolidated operating, general and administrative expenses were $224.0 million
for the nine months ended September 30, 2020, as compared with $238.9 million
for the nine months ended September 30, 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
Employee benefits                                                               $                (5.7)
Labor                                                                                            (3.0)
Hazard trees                                                                                     (2.5)
Generation maintenance                                                                           (2.1)
Travel and training                                                                              (2.0)
Uncollectible accounts                                                                            5.5
Other                                                                                            (1.2)
Change in Items Impacting Net Income                                                            (11.0)

Operating, General & Administrative Expenses Offset Within Net Income Non-employee directors deferred compensation, offset in other income

                             (8.2)
Operating expenses recovered in trackers, offset in revenue                                      (1.3)

Pension and other postretirement benefits, offset in other income

                       5.6

Change in Operating, General & Administrative Expense Items Offset Within Net Income

                                                                                           (3.9)
Decrease in Operating, General & Administrative Expenses                        $               (14.9)



Consolidated operating, general and administrative expenses decreased $14.9 million, including an $11.0 million decrease from items impacting net income and a $3.9 million decrease from items offset within net income.

The change in consolidated operating, general and administrative expenses for items impacting net income includes the following:


•Lower employee benefit costs primarily due to a decrease in medical expense and
employee incentive compensation expense. Medical costs includes approximately
$0.9 million of reductions due to the COVID-19 pandemic;
•Decreased labor costs including approximately $1.1 million of in home customer
work limited due to the COVID-19 pandemic during the second and third quarters
of 2020 and more time being spent by employees on capital projects than
maintenance projects (which are expensed);
•Lower hazard tree line clearance costs. As previously disclosed, we finalized
our plan to address hazard tree clearance in 2018 and accelerated the program in
2019. We expect costs in 2020 to reflect a normal level, which is lower than
2019;
•Lower maintenance at our electric generation facilities;
•A reduction in employee travel and training costs due to the impacts of the
COVID-19 pandemic; and
•Increased uncollectible accounts. In March 2020, we voluntarily suspended
service disconnections for non-payment, to help customers who may be financially
impacted by the COVID-19 pandemic. We resumed standard disconnection processes
in all of our operating jurisdictions during the third quarter. As a result of
the South Dakota accounting order, we deferred approximately $0.4 million of
uncollectible accounts expense during the third quarter of 2020.

Property and other taxes were $136.8 million for the nine months ended September 30, 2020, as compared with $133.2 million in the same period of 2019. This increase was primarily due to plant additions and higher estimated property valuations in Montana.


Depreciation and depletion expense was $134.3 million for the nine months ended
September 30, 2020, as compared with $129.8 million in the same period of 2019.
This increase was primarily due to plant additions.

                                       38
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Consolidated operating income for the nine months ended September 30, 2020 was
$169.7 million as compared with $192.2 million in the same period of 2019. This
decrease was primarily due to lower gross margin, partly offset by lower
operating expenses and higher property and other taxes and depreciation expense.

Consolidated interest expense for the nine months ended September 30, 2020 was
$72.3 million as compared with $71.0 million in the same period of 2019,
reflecting borrowings issued as a precautionary measure in order to increase our
cash position and preserve financial flexibility in light of the uncertainty in
the markets, partly offset by lower interest on our revolving credit facilities.

Consolidated other expense was $1.0 million for the nine months ended September
30, 2020 as compared to other income of $0.9 million during the same period of
2019. This was primarily due to a $8.2 million decrease in the value of deferred
shares held in trust for non-employee directors deferred compensation that was
partly offset by a $5.6 million decrease in other pension expense (both of which
are offset in operating, general, and administrative expense with no impact to
net income), and higher capitalization of AFUDC.

Consolidated income tax benefit for the nine months ended September 30, 2020 was
$5.2 million as compared with $20.1 million in the same period of 2019. The
income tax benefit for 2019 reflects the recognition of approximately $22.8
million of unrecognized tax benefits, including approximately $2.7 million of
accrued interest and penalties, due to the lapse of statutes of limitation in
the second quarter of 2019. Our effective tax rate for the nine months ended
September 30, 2020 was (5.4)% as compared with (16.5)% for the same period of
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):

Nine Months Ended September 30,

                                                                     2020                                             2019
Income Before Income Taxes                               $   96.4$ 122.0

Income tax calculated at federal statutory rate              20.3              21.0  %          25.6                 21.0  %

Permanent or flow-through adjustments:
State income, net of federal provisions                       0.1               0.1              1.2                  1.0
Flow-through repairs deductions                             (14.9)            (15.4)           (12.7)               (10.4)
Production tax credits                                       (7.6)             (7.8)            (7.3)                (5.9)
Prior year permanent return to accrual adjustments           (1.7)             (1.8)             0.6                  0.4
Amortization of excess deferred income taxes                 (0.7)             (0.8)            (1.9)                (1.6)
Share-based compensation                                     (0.6)             (0.6)             0.2                  0.2
Recognition of unrecognized tax benefit                         -                 -            (22.8)               (18.7)
Plant and depreciation of flow-through items                  0.3               0.3             (2.5)                (2.0)
Other, net                                                   (0.4)             (0.4)            (0.5)                (0.5)
                                                            (25.5)            (26.4)           (45.7)               (37.5)

Income tax benefit                                       $   (5.2)             (5.4) %       $ (20.1)               (16.5) %



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.



                                       39
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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 FERC.
•Wholesale and other are largely gross margin neutral as they are offset by
changes in cost of sales.


Three Months Ended September 30, 2020 Compared with the Three Months Ended
September 30, 2019
                                               Results
                             2020         2019        Change      % Change
                                        (dollars in millions)
Retail revenues            $ 235.0$ 221.4$ 13.6          6.1  %
Regulatory amortization       (5.5)         4.6       (10.1)      (219.6)
   Total retail revenues     229.5        226.0         3.5          1.5
Transmission                  12.9         13.3        (0.4)        (3.0)
Wholesale and Other            1.8          1.9        (0.1)        (5.3)
Total Revenues               244.2        241.2         3.0          1.2
Total Cost of Sales           61.2         58.7         2.5          4.3
Gross Margin(1)            $ 183.0$ 182.5$  0.5          0.3  %

(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                             $  78,549$  68,469               633                 569                        307,892            303,263
South Dakota                           18,912             15,987               160                 141                         50,584             50,596
  Residential                          97,461             84,456               793                 710                        358,476            353,859
Montana                                89,082             87,754               794                 807                         70,320             69,217
South Dakota                           27,373             26,295               284                 291                         12,870             12,873
Commercial                            116,455            114,049             1,078               1,098                         83,190             82,090
Industrial                              9,212             10,523               621                 766                             78                 78
Other                                  11,910             12,324                86                  90                          8,193              8,140
Total Retail Electric$ 235,038$ 221,352             2,578               2,664                        449,937            444,167




                                                    Cooling Degree Days                                                                                    2020 as compared with:
                                2020                    2019                 Historic Average               2019               Historic Average
Montana                          340                     332                       351                    2% warmer                3% cooler
South Dakota                     755                     606                       639                   25% warmer               18% warmer
                                                    Heating Degree Days                                                                                    2020 as compared with:
                                2020                    2019                 Historic Average               2019               Historic Average
Montana                          255                     319                       276                   20% warmer                8% warmer
South Dakota                     71                      37                         86                   De minimis               De minimis


                                       40
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The following summarizes the components of the changes in electric gross margin for the three months ended September 30, 2020 and 2019 (in millions):

                                                                           Gross Margin 2020 vs. 2019
Gross Margin Items Impacting Net Income
Retail volumes and demand                                                $                       2.4
Montana electric supply cost recovery                                                           (0.5)
Transmission                                                                                    (0.3)
Other                                                                                              -
Change in Gross Margin Impacting Net Income                                                      1.6

Gross Margin Items Offset Within Net Income
Operating expenses recovered in revenue, offset in operating expense                            (1.0)

Production tax credits reducing revenue, offset in income tax expense

                     (1.0)
Property tax revenue, offset in property tax expense                                             0.9
Change in Gross Margin Items Offset Within Net Income                                           (1.1)
Increase in Gross Margin(1)                                              $                       0.5

(1) Non-GAAP financial measure. See "Non-GAAP Financial Measure" above.

Gross margin increased $0.5 million, including a $1.6 million increase from items impacting net income and a $1.1 million decrease from items offset within net income.

The change in gross margin for items impacting net income includes the following:


•An increase in electric retail volumes and demand driven by warmer weather and
customer growth, partly offset by lower industrial demand unrelated to the
COVID-19 pandemic. Impacts of the COVID-19 pandemic offset this improvment by
approximately $2 - $3 million driven by lower commercial and industrial demand,
partly offset by a slight increase in residential usage.
•Higher Montana electric supply costs as compared with the prior period; and
•Lower demand to transmit energy across our transmission lines due to market
conditions and pricing, including the closure of Colstrip units 1 and 2.

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.


                                       41
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Nine Months Ended September 30, 2020 Compared with the Nine Months Ended
September 30, 2019
                                                Results
                             2020         2019        Change       % Change
                                         (dollars in millions)
Retail revenues            $ 673.3$ 658.9$  14.4          2.2  %
Regulatory amortization       (9.3)        30.0        (39.3)      (131.0)
   Total retail revenues     664.0        688.9        (24.9)        (3.6)
Transmission                  38.4         40.2         (1.8)        (4.5)
Wholesale and Other            4.3          4.8         (0.5)       (10.4)
Total Revenues               706.7        733.9        (27.2)        (3.7)
Total Cost of Sales          173.3        178.4         (5.1)        (2.9)
Gross Margin(1)            $ 533.4$ 555.5$ (22.1)        (4.0) %

(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                             $ 237,777$ 225,392             1,944              1,898                        306,886            302,687
South Dakota                           52,427             47,444               463                459                         50,629             50,606
  Residential                         290,204            272,836             2,407              2,357                        357,515            353,293
Montana                               252,514            257,284             2,269              2,380                         69,949             68,723
South Dakota                           77,057             71,218               818                828                         12,812             12,822
Commercial                            329,571            328,502             3,087              3,208                         82,761             81,545
Industrial                             27,162             32,368             2,026              2,192                             78                 78
Other                                  26,400             25,228               157                150                          6,467              6,336
Total Retail Electric$ 673,337$ 658,934             7,677              7,907                        446,821            441,252



                                                     Cooling Degree Days                                                                                     2020 as compared with:
                                 2020                     2019                 Historic Average               2019               Historic Average
Montana                          395                      370                        403                    7% warmer                2% cooler
South Dakota                     844                      660                        699                   28% warmer               21% warmer
                                                     Heating Degree Days                                                                                     2020 as compared with:
                                 2020                     2019                 Historic Average               2019               Historic Average
Montana                         4,610                    5,540                      4,654                  17% warmer                1% warmer
South Dakota                    5,564                    6,350                      5,686                  12% warmer                2% warmer


                                       42
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The following summarizes the components of the changes in electric gross margin for the nine months ended September 30, 2020 and 2019 (in millions):

                                                                           Gross Margin 2020 vs. 2019
Gross Margin Items Impacting Net Income
Retail volumes and demand                                                $                      (6.5)
QF liability adjustment                                                                         (3.3)
Montana supply cost recovery                                                                    (3.2)
Transmission                                                                                    (1.8)
Montana retail rates                                                                             1.6
Other                                                                                           (7.0)
Change in Gross Margin Impacting Net Income                                                    (20.2)

Gross Margin Items Offset Within Net Income
Production tax credits reducing revenue, offset in income tax expense                           (4.0)

Operating expenses recovered in revenue, offset in operating expense

                     (1.2)
Property tax revenue, offset in property tax expense                                             3.3
Change in Items Offset Within Net Income                                                        (1.9)
Decrease in Gross Margin(1)                                              $                     (22.1)

(1) Non-GAAP financial measure. See "Non-GAAP Financial Measure" above.


Gross margin decreased $22.1 million, including a $20.2 million decrease from
items impacting net income and a $1.9 million decrease from items offset within
net income.

The change in gross margin for items impacting net income includes the following:


•A decrease in volumes due to warmer winter weather in Montana and lower
industrial demand unrelated to the COVID-19 pandemic, partly offset by customer
growth and warmer summer weather. In addition, impacts of the COVID-19 pandemic
drove a decline of approximately $5 - $7 million, as a result of lower
commercial and industrial demand, partly offset by higher residential usage;
•A less favorable adjustment of our electric QF liability (unrecoverable costs
associated with PURPA contracts as a part of a 2002 stipulation with the MPSC
and other parties) as compared with the same period in 2019 due to the
combination of:
•A net $1.1 million lower favorable adjustment due to actual price escalation,
which was less than estimated ($2.2 million in the current period as compared
with $3.3 million in the prior period); and
•Higher costs of approximately $2.2 million, due to a $0.9 million reduction in
costs for the adjustment to actual output and pricing for the current contract
year as compared with a $3.1 million reduction in costs in the prior period.
•A prior year recovery of Montana electric supply costs as a result of changes
in the associated statute, offset in part by lower supply costs in 2020;
•Lower demand to transmit energy across our transmission lines due to market
conditions and pricing, including the closure of Colstrip units 1 and 2;
•An increase in Montana electric rates; and
•A decrease in other due primarily to nonrecurring items.

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.


                                       43
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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 Ended September 30, 2020 Compared with the Three Months Ended
September 30, 2019
                                              Results
                             2020        2019       Change      % Change
                                       (dollars in millions)
Retail revenues            $ 20.8$ 20.3$  0.5          2.5  %
Regulatory amortization       7.3         5.4         1.9         35.2
   Total retail revenues     28.1        25.7         2.4          9.3
Wholesale and other           8.4         7.9         0.5          6.3
Total Revenues               36.5        33.6         2.9          8.6
Total Cost of Sales           6.9         5.5         1.4         25.5
Gross Margin(1)            $ 29.6$ 28.1$  1.5          5.3  %

(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                           $  9,896$  8,909                956                945                 177,410             174,550
South Dakota                         1,702             1,676                114                112                  40,437              39,795
Nebraska                             1,698             1,833                156                141                  37,467              37,173
Residential                         13,296            12,418              1,226              1,198                 255,314             251,518
Montana                              5,598             5,490                611                675                  24,412              24,094
South Dakota                         1,030             1,283                170                216                   6,864               6,740
Nebraska                               684               900                143                156                   4,945               4,872
Commercial                           7,312             7,673                924              1,047                  36,221              35,706
Industrial                              51                79                  6                 11                     231                 239
Other                                   92                97                 12                 14                     153                 166
Total Retail Gas$ 20,751$ 20,267              2,168              2,270                 291,919             287,629



                                                    Heating Degree Days                                                                                   2020 as compared with:
                                2020                    2019                Historic Average               2019               Historic Average
Montana                          306                     353                       336                  13% warmer                9% warmer
South Dakota                     71                      37                        86                   De minimis               De minimis
Nebraska                         40                      17                        46                   De minimis               De minimis




                                       44
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The following summarizes the components of the changes in natural gas gross margin for the three months ended September 30, 2020 and 2019:

Gross Margin 2020 vs. 2019

                                                                              (in millions)
Gross Margin Items Impacting Net Income
Retail volumes                                                        $                      (0.3)
Montana rates                                                                                (0.1)
Other                                                                                         1.7
Change in Gross Margin Impacting Net Income                                                   1.3

Gross Margin Items Offset Within Net Income


Property tax revenue, offset in property tax expense                                          0.2

Change in Gross Margin Items Offset Within Net Income                                         0.2
Increase in Gross Margin(1)                                           $                       1.5

(1) Non-GAAP financial measure. See "Non-GAAP Financial Measure" above.


Gross margin increased $1.5 million, including a $1.3 million increase for items
impacting net income and a $0.2 million increase from items offset within net
income.

The change in gross margin for items impacting net income includes the following:


•Lower commercial and industrial loads as a result of reduced demand, offset in
part by customer growth; and
•A reduction of rates from the step down of our Montana gas production assets.

Our wholesale and other revenues are largely gross margin neutral as they are offset by changes in cost of sales.

                                       45
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Nine Months Ended September 30, 2020 Compared with the Nine Months Ended
September 30, 2019
                                                Results
                             2020         2019        Change       % Change
                                         (dollars in millions)
Retail revenues            $ 146.9$ 171.1$ (24.2)       (14.1) %
Regulatory amortization        5.0         (1.7)         6.7       (394.1)
   Total retail revenues     151.9        169.4        (17.5)       (10.3)
Wholesale and other           26.6         26.5          0.1          0.4
Total Revenues               178.5        195.9        (17.4)        (8.9)
Total Cost of Sales           47.1         57.3        (10.2)       (17.8)
Gross Margin(1)            $ 131.4$ 138.6$  (7.2)        (5.2) %

(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                           $  65,674$  73,295               8,937              10,025                 177,036             174,555
South Dakota                         16,697             20,376               2,310               2,545                  40,509              40,019
Nebraska                             12,908             15,678               1,984               2,181                  37,542              37,373
Residential                          95,279            109,349              13,231              14,751                 255,087             251,947
Montana                              32,988             37,987               4,674               5,458                  24,455              24,171
South Dakota                         11,213             14,074               2,360               2,481                   6,889               6,789
Nebraska                              6,284              8,294               1,394               1,612                   4,973               4,894
Commercial                           50,485             60,355               8,428               9,551                  36,317              35,854
Industrial                              503                672                  75                 101                     231                 240
Other                                   612                746                 104                 124                     152                 166
Total Retail Gas$ 146,879$ 171,122              21,838              24,527                 291,787             288,207



                                                     Heating Degree Days                                                                                    2020 as compared with:
                                 2020                     2019                Historic Average               2019               Historic Average
Montana                         4,707                    5,604                      4,863                 16% warmer                3% warmer
South Dakota                    5,564                    6,350                      5,686                 12% warmer                2% warmer
Nebraska                        4,250                    4,866                      4,678                 13% warmer                9% warmer


                                       46
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The following summarizes the components of the changes in natural gas gross margin for the nine months ended September 30, 2020 and 2019:

                                                        Gross Margin 2020 

vs. 2019

                                                               (in 

millions)

Gross Margin Items Impacting Net Income
Retail volumes                                         $                      (8.3)
Montana rates                                                                 (0.8)
Other                                                                          1.7
Change in Gross Margin Impacting Net Income                                 

(7.4)

Gross Margin Items Offset Within Net Income


Property tax revenue, offset in property tax expense                        

0.2


Change in Items Offset Within Net Income                                       0.2
Decrease in Gross Margin(1)                            $                      (7.2)

(1) Non-GAAP financial measure. See "Non-GAAP Financial Measure" above.

Gross margin decreased $7.2 million, including a $7.4 million decrease from items impacting net income and a $0.2 million increase from items offset within net income.

The change in gross margin for items impacting net income includes the following:

•A decrease in gas volumes due primarily to warmer winter weather and lower customer usage, offset in part by customer growth; and •A reduction of rates due to the step down of our Montana gas production assets.

Our wholesale and other revenues are largely gross margin neutral as they are offset by changes in cost of sales.

                                       47
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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.

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. On April 3, 2020, we borrowed the full amount
under the Term Loan. We used the proceeds to pay down a portion of our
outstanding revolving credit facility borrowings and for general corporate
purposes. The Term Loan bears interest at variable 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 on April 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 under the Term Loan. As of
October 16, 2020, we were in compliance with this covenant.

In May 2020, we issued $100 million principal amount of Montana First Mortgage
Bonds and $50 million principal amount of South Dakota First Mortgage Bonds,
each at a fixed interest rate of 3.21% maturing on May 15, 2030. We issued these
bonds in a transaction exempt from the registration requirements of the
Securities Act of 1933. Proceeds were used to repay a portion of our outstanding
borrowings under our revolving credit facilities and for other general corporate
purposes. The bonds are secured by our electric and natural gas assets in
Montana and South Dakota.

On September 2, 2020, we entered into a new $425 million Credit Facility to
replace our current facility. The Credit Facility increased the capacity from
that of the prior facility by $25 million to $425 million and extended the
maturity date to September 2, 2023 (from December 12, 2021), with uncommitted
features that allow us to request up to two one-year extensions to the maturity
date and increase the size by an additional $75 million with the consent of the
lenders. The Credit Facility does not amortize and is unsecured. Borrowings may
be made at interest rates equal to the Eurodollar rate, plus a margin of 112.5
to 175.0 basis points, or a base rate, plus a margin of 12.5 to 75.0 basis
points. A total of ten banks participate in the facility, with no one bank
providing more than 16% of the total availability.

Liquidity is provided by internal cash flows and the use of our credit
facilities. This includes the $425 million Credit Facility, a $25 million
revolving credit facility to provide swingline borrowing capability, and the
$100 million Term Loan discussed above. We utilize availability under our
revolving credit facilities 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 of
September 30, 2020, our total net liquidity was approximately $357.5 million,
including $3.5 million of cash and $354.0 million of revolving credit facility
availability. As of September 30, 2020, there were no letters of credit
outstanding and $96.0 million in outstanding borrowings under our revolving
credit facilities. Availability under our revolving credit facilities was $376.0
million as of October 16, 2020.

We remain on track for our approximately $400 million capital investment as
disclosed in our annual report on Form 10-K for the year ended December 31,
2019. We continue to monitor the disruption in capital markets caused by the
COVID-19 pandemic. 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. We expect to issue equity
in 2021 to maintain and protect our current credit ratings in balance with our
current capital expenditure plans.
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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
in South Dakota are designed to provide stable recovery of supply costs, with a
monthly adjustment to correct for any under or over collection. The Montana
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 of September 30, 2020, we have under collected our costs recovered through
tracking mechanisms by approximately $8.1 million. We under collected our costs
by approximately $32.5 million as of December 31, 2019 and under collected our
costs by approximately $28.2 million as of September 30, 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 of
October 16, 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.

                                       49
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Cash Flows

The following table summarizes our consolidated cash flows (in millions):

                                                                             Nine Months Ended
                                                                               September 30,
                                                                          2020                2019
Operating Activities
Net income                                                           $     101.7$    142.1
Non-cash adjustments to net income                                         135.0               117.4
Changes in working capital                                                  99.1                 2.4
Other noncurrent assets and liabilities                                    (13.3)               (8.0)
Cash Provided by Operating Activities                                      322.5               253.9

Investing Activities
Property, plant and equipment additions                                   (283.0)             (242.9)

Cash Used in Investing Activities                                         (283.0)             (242.9)

Financing Activities

Issuance of long-term debt                                                 150.0               150.0
Issuance of short-term borrowings                                          100.0                   -
Line of credit repayments, net                                            (193.0)              (76.0)
Dividends on common stock                                                  (90.3)              (86.3)
Financing costs                                                             (2.6)               (1.1)
Other                                                                       (1.7)                1.2
Cash Used in Financing Activities                                          (37.6)              (12.2)

Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash

  1.9                (1.2)
Cash, Cash Equivalents, and Restricted Cash, beginning of period            12.1                15.3
Cash, Cash Equivalents, and Restricted Cash, end of period           $      

14.0 $ 14.1

Cash Provided by Operating Activities


As of September 30, 2020, cash, cash equivalents, and restricted cash were $14.0
million as compared with $12.1 million at December 31, 2019 and $14.1 million at
September 30, 2019. Cash provided by operating activities totaled $322.5 million
for the nine months ended September 30, 2020 as compared with $253.9 million
during the nine months ended September 30, 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 payments
reducing cash flows in 2019 including credits to Montana customers of
approximately $20.5 million and transmission generation interconnection refunds.
These improvements were offset in part by reduced net income.

Cash Used in Investing Activities


Cash used in investing activities increased by approximately $40.1 million as
compared with the first nine months of 2019. Plant additions during the first
nine months of 2020 include maintenance additions of approximately $192.4
million and capacity related capital expenditures of $90.6 million. Plant
additions during the first nine months of 2019 included maintenance additions of
approximately $177.1 million, and capacity related capital expenditures of
approximately $65.8 million.

Cash Used in Financing Activities


Cash used in financing activities totaled $37.6 million during the nine months
ended September 30, 2020 as compared with $12.2 million during the nine months
ended September 30, 2019. During the nine months ended September 30, 2020, cash
used in financing activities reflects net repayments under our revolving lines
of credit of $193.0 million and dividends of $90.3 million, offset in part by
proceeds from the issuance of debt of $150.0 million and short-term borrowings
of $100.0 million. During the nine months ended September 30, 2019, net cash
used in financing activities reflects payment of dividends of $86.3
                                       50
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million and net borrowings under our revolving lines of credit of $76.0 million, offset in part by proceeds from the issuance of debt of $150.0 million.

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 of September 30, 2020. See our
Annual Report on Form 10-K for the year ended December 31, 2019 for additional
discussion.
                                   Total                2020               2021               2022               2023               2024             Thereafter
                                                                                         (in thousands)
Long-term debt (1)             $ 2,202,637          $       -          $       -          $       -          $ 240,660          $       -          $ 1,961,977
Finance leases                      18,082                642              2,668              2,875              3,098              3,338                5,461
Short-term borrowings              100,000                  -            100,000                  -                  -                  -                    -
Estimated pension and other
postretirement obligations (2)      55,959              3,386             13,491             13,209             13,097             12,776                      NA
Qualifying facilities
liability (3)                      571,011             19,055             77,722             79,572             81,646             79,384              233,632
Supply and capacity contracts
(4)                              1,808,019             55,897            169,277            150,265            150,776            145,560            

1,136,244

Contractual interest payments
on debt (5)                      1,481,855             21,415             85,367             82,417             81,212             79,524            

1,131,920

Environmental remediation
obligations (6)                      3,880              1,822                912                720                213                213               

NA

Total Commitments (7) $ 6,241,443$ 102,217$ 449,437$ 329,058$ 570,702$ 320,795$ 4,469,234

_________________________

(1)Represents cash payments for long-term debt and excludes $13.7 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 $571.0 million. A portion of
the costs incurred to purchase this energy is recoverable through rates
authorized by the MPSC, totaling approximately $463.5 million.
(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 1.39%
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 September 30, 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. As
costs are incurred under the AOC, the surety bonds will be reduced.


                                       51
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                          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 December 31, 2019 . As of September 30, 2020, there have been no material changes in these policies.

                                       52

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