NorthWestern Reports 2018 Financial Results

BUTTE, Mont. and SIOUX FALLS, S.D., Feb. 12, 2019

Non-GAAP Adjusted diluted earnings per share for the period were $3.39; within the $3.35 - $3.50 guidance range communicated for the year.  See "Significant Items Not Contemplated in Prior Period Guidance" and "Non-GAAP Financial Measures" sections below for more information on adjustments.

Additional information regarding this release can be found in the earnings presentation found at www.northwesternenergy.com/our-company/investor-relations/presentations-and-webcasts.

"2018 was a busy year. We had another great year of safety, reliability, and customer satisfaction while delivering on our financial commitment to investors.  It was also a year in which we addressed significant matters that required thoughtful consideration from regulators, intervenors, and our employees to ensure the balance between customer and investor interests. We can all look back on 2018 with a sense of accomplishment," said Bob Rowe, President and Chief Executive Officer. "With our first Montana general electric rate review in nearly a decade to be decided in 2019, and our issuance of updated electric supply plans in both South Dakota and Montana, we hope all of our stakeholders are looking forward to this year with a similar collaborative spirit."

	Year Ended December 31,
(in thousands, except per share amounts)	2018 ARIVA.DE Börsen-Geflüster Kurse NorthWestern Corp. 52,58 $ +0,10%				2017 (2)
Revenues	$	1,192,009			$	1,305,652
Cost of sales	272,883				410,349
Gross Margin (1)	919,126				895,303
Operating, general and administrative expense	307,119				294,803
Property and other taxes	171,259				162,614
Depreciation and depletion	174,476				166,137
Total Operating Expenses	652,854				623,554
Operating income	266,272				271,749
Interest expense, net	(91,988)				(92,263)
Other income (expense), net	3,966				(3,415)
Income before income taxes	178,250				176,071
Income tax benefit (expense)	18,710				(13,368)
Net Income	196,960				162,703
Basic Shares Outstanding	49,985				48,558
Earnings per Share - Basic	$	3.94			$	3.35
Diluted Shares Outstanding	50,237				48,655
Earnings per Share - Diluted	$	3.92			$	3.34
Dividends Declared per Common Share	$	2.20			$	2.10

Significant Regulatory Updates

Montana General Electric Review
In September 2018, we filed an electric rate review with the Montana Public Service Commission (MPSC) requesting an annual increase to electric rates of approximately $34.9 million, which represents an approximate 6.6% increase in annual base revenues. Our request is based on a return on equity of 10.65% and an overall rate of return of 7.42% (except for Colstrip Unit 4 which the MPSC previously set for the life of the facility at a 10% return on equity and an 8.25% rate of return), based on approximately $2.35 billion of electric rate base and a capital structure of 51 percent debt and 49 percent equity.

We also requested that approximately $13.8 million of the rate increase be approved on an interim basis effective November 1, 2018. We expect to receive a decision on our interim request after intervenor testimony is filed. If the MPSC does not issue a final order within nine months of the filing, the new requested rates may be placed into effect on an interim and refundable basis.

Key dates in the procedural schedule are expected to be as follows:

• Intervenor testimony - February 12, 2019
• NorthWestern rebuttal testimony and cross-intervenor testimony - April 5, 2019
• Hearing commences - May 13, 2019

We expect to file a FERC rate case for our Montana transmission assets by the end of the first quarter of 2019. The revenue requirement associated with our Montana FERC assets is reflected in our MPSC jurisdictional rates as a credit to customers.

Tax Cuts and Jobs Act
In December 2017, the Tax Cuts and Jobs Act was signed into law, which enacts significant changes to U.S. tax and related laws. The primary impact to us is a reduction of the federal corporate income tax rate from 35% to 21% effective January 1, 2018. Dockets were opened in each of our jurisdictions to investigate the customer benefit of this reduction in the federal corporate income tax rate. During 2018, we received approval of settlement agreements regarding the customer benefit of the Tax Cuts and Jobs Act, as described below.

• In Montana the settlement provides a one-time credit of approximately $20.5 million to customers in early 2019. This includes a $19.2 million credit to electric customers and $1.3 million credit to natural gas customers.
• In addition to eligible customers receiving a one-time bill credit, the settlement also reduces rates for all natural gas customers by approximately $1.3 million annually beginning January 1, 2019, and provides funds for low-income energy assistance and weatherization programs.
• The settlement also reflects the agreement of the intervening parties not to oppose our request to include up to $3.5 million of costs to address hazard tree removal in our current Montana rate case.
• Issues related to the revaluation of deferred income taxes will be addressed in our current Montana rate case.
• In South Dakota we credited electric and natural gas customers approximately $3.0 million in the fourth quarter of 2018, and agreed to a two-year rate moratorium until January 1, 2021.

Our 2018 results include a net benefit related to the impact of the Tax Cuts and Jobs Act, which includes:

• An income tax benefit of approximately $19.8 million due to the finalization of the revaluation of deferred income tax liabilities upon completion of the associated regulatory dockets; offset by
• A net loss of approximately $6.1 million including a reduction in revenue of approximately $23.5 million, due to customer credits in the above regulatory settlements, offset in part by a reduction in income tax expense, of approximately $17.4 million due to the reduction in federal tax rate.

In addition, we reflected the costs of our hazard tree program in the consolidated income statement as we agreed in our Montana settlement to request recovery of these costs in base customer rates in our 2018 filing, as discussed above, rather than using a portion of the reduction in customer rates associated with the change in tax rate as proposed in our Montana Tax Cuts and Jobs Act filing.

We expect a consolidated reduction in our cash flows from operations ranging from $20 million to $22 million in 2019, as a result of the customer credits discussed above while we are not a cash taxpayer. We currently estimate that our effective income tax rate will range from 0% to 5% in 2019.

Cost Recovery Mechanisms
Effective July 1, 2017 the Montana legislature granted the MPSC discretion whether to approve an electric supply tracking mechanism. After considering our application in a contested case proceeding, the MPSC issued a final order in January 2019 approving a Power Cost and Credit Adjustment Mechanism (PCCAM) with the following provisions:

• A baseline of power supply costs;
• Annual adjustment of customer prices to reflect a portion of the difference between the established base revenues and actual costs, to the extent such difference is outside a +/- $4.1 million "deadband" from the base, with 90 percent of the variance above or below the deadband collected from or refunded to customers; and
• Retroactive implementation to the effective date of the new legislation (July 1, 2017).

Our 2018 results include a net reduction in the recovery of supply costs from customers of approximately $1.5 million in the Consolidated Statements of Income, which includes the following:

• For the 2017/2018 period, actual costs were below base revenues by approximately $3.4 million, resulting in no refund to customers.
• For the 2018/2019 period, actual costs were above base revenues by approximately $11.8 million, resulting in a regulatory asset for collection from customers of approximately $6.9 million as of December 31, 2018 and an approximately $4.9 million reduction in recovery of supply costs for the first six months of the period.

Significant Earnings Drivers

Gross Margin
Consolidated gross margin for the twelve months ended December 31, 2018 was $919.1 million compared with $895.4 million for the same period in 2017.  This $23.7 million increase was a result of a $30.0 million increase to items that have an impact on net income and $6.3 million decrease to items that are offset in operating expenses, property tax expense and income tax expense with no impact to net income.

Consolidated gross margin for items impacting net income increased $30.0 million, including:

• $25.1 million increase due to the reduction in the electric QF liability due to the combination of (i) a periodic adjustment of the liability for price escalation, which was less than modeled resulting in a liability reduction of approximately $17.5 million; and (ii) the annual reset to actual output and pricing resulting in approximately $7.6 million in lower QF related supply costs due to outages at two facilities;
• $6.2 million increase due to higher demand to transmit energy across our transmission lines due to market conditions and pricing;
• $3.6 million increase due to higher electric and natural gas retail volumes due primarily to customer growth and favorable weather in South Dakota;
• $0.4 million increase in our Montana natural gas rates effective September 1, 2017; and
• $2.3 million increase related to other miscellaneous margin items.

These increases were partly offset by a $6.1 million reduction in revenue due to the impacts of the Tax Cuts and Jobs Act jurisdictional settlements and a $1.5 million reduction in recovery of Montana electric supply costs (PCCAM), as discussed in the Cost Recovery Mechanisms section above.

The change in consolidated gross margin for items that had no impact on net income represented a $6.3 million decrease primarily due to the following:

• $17.4 million reduction in revenue in 2018 to reflect the pass-through of the Tax Cuts and Job Act related benefits to customers, which is offset by a decrease in income tax expense;
• $0.5 million decrease in natural gas gathering fees which are offset by reduced operating expenses;
• $0.4 million decrease in natural gas production taxes which are offset by reduced property and other taxes;
• $11.7 million increase in revenues for property taxes included in trackers, which are offset by increased property tax expense; and
• $0.3 million increase in revenue due to decreased production tax credit benefits passed through to customers in our tracker mechanisms, which is offset by increased income tax expense.

Operating, General and Administrative Expenses
Consolidated operating, general and administrative expenses for the twelve months ended December 31, 2018 were $307.1 million compared with $294.8 million for the same period in 2017. This $12.3 million increase was a result of a $2.1 million increase to items that have an impact on net income and $10.2 million increase to items that are offset in gross margin and other income (expense) with no impact to net income.

Consolidated operating, general and administrative expenses for items impacting net income increased $2.1 million, including:

• $7.2 million increase in employee benefit costs, primarily due to higher medical and employee incentive expense;
• $3.3 million increase to costs incurred in 2018 to remove hazard trees outside of our electric transmission and distribution lines rights of way; and
• $1.2 million increase to other miscellaneous expense items.

These increases were partly offset by the following:

• $3.7 million lower expenses related to the Distribution System Infrastructure Project, which concluded in 2017;
• $3.3 million reduction in labor costs due primarily to fewer employees and more time being spent by employees on capital projects rather than maintenance projects (which are expensed); and
• $2.6 million lower maintenance costs at electric generating facilities.

The change in consolidated operating, general and administrative expenses for items that had no impact on net income increased $10.2 million primarily due to the following:

• $10.3 million increase due to the regulatory treatment of the non-service cost components of pension and postretirement benefit expense, which is offset in other income;
• $1.1 million higher operating expenses included in trackers and recovered in revenue;
• $0.7 million decrease in the value of non-employee directors deferred compensation due to the change in our stock price, which is offset in other income; and
• $0.5 million decrease in gas gathering fees and production taxes, which is offset by lower margin discussed above.

Property and Other Taxes
Property and other taxes were $171.3 million for the twelve months ended December 31, 2018, as compared with $162.6 million in the same period of 2017. This increase was primarily due to plant additions and higher estimated property valuations in Montana. Under Montana law, we are allowed to track the changes in the actual level of state and local taxes and fees and recover 74% of the increase in taxes and fees, which is net of the associated income tax benefit.

Depreciation and Depletion Expense
Depreciation and depletion expense was $174.5 million for the twelve months ended December 31, 2018, as compared with $166.1 million in the same period of 2017. This increase was primarily due to plant additions.

Operating Income
Consolidated operating income for the twelve months ended December 31, 2018 was $266.3 million as compared with $271.7 million in the same period of 2017. This decrease was primarily due to the overall increase in operating expenses offset in part by higher gross margin, as discussed above.

Interest Expense
Consolidated interest expense for the twelve months ended December 31, 2018 was $92.0 million, as compared with $92.3 million in the same period of 2017.

Other Income and Expense
Consolidated other income was $4.0 million for the twelve months ended December 31, 2018 as compared to consolidated other expense of $3.4 million during the same period of 2017. This $7.4 million improvement includes a $10.3 million decrease in other pension expense (which is offset in operating, general, and administrative expenses), partly offset by lower capitalization of AFUDC (allowance for funds used during construction).

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