NorthWestern Reports First Quarter 2019 Financial Results

BUTTE, Mont. and SIOUX FALLS, S.D., April 23, 2019

"The winter weather we experienced in the first quarter was challenging for our customers and reminded us how important our infrastructure and service are," said Bob Rowe, President and Chief Executive Officer. "Arctic air that settled across the plains and Pacific Northwest pushed temperatures 20 to 30 degrees below normal for weeks at a time and set several new electric and natural gas system peaks during the quarter. The blistering cold truly showcased the mettle of our crews and highlighted the importance of a robust and reliable energy system."

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

		Three Months Ended March 31,
(in thousands, except per share amounts)		2019				2018 ARIVA.DE Börsen-Geflüster Kurse NorthWestern Corp. 46,60 € -0,43%
Revenues		$	384,220			$	341,502
Cost of sales		115,735				96,077
Gross Margin (1)		268,485				245,425
Operating, general and administrative expense		81,092				74,345
Property and other taxes		44,789				42,813
Depreciation and depletion		45,584				43,755
Total Operating Expenses		171,465				160,913
Operating income		97,020				84,512
Interest expense, net		(23,790)				(22,970)
Other income (expense), net		1,149				(1,129)
Income before income taxes		74,379				60,413
Income tax expense		(1,573)				(1,914)
Net Income		72,806				58,499
Basic Shares Outstanding		50,381				49,416
Earnings per Share - Basic		$	1.45			$	1.18
Diluted Shares Outstanding		50,729				49,484
Earnings per Share - Diluted		$	1.44			$	1.18
Dividends Declared per Common Share		$	0.575			$	0.550

Significant Trends and Regulation

Montana General Electric Rate Case
In September 2018, we filed an electric rate case 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 approximately 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. In March, 2019, the MPSC issued an order approving an increase in rates of approximately $10.5 million on an interim and refundable basis effective April 1, 2019. On April 5, 2019, we filed rebuttal testimony, which responded to intervenor testimony and included certain known and measurable adjustments. This testimony reflects a request for an annual increase of $30.7 million, an approximately $4.2 million reduction from our original request.

A hearing is scheduled to commence on May 13, 2019. Interim rates will remain in effect on a refundable basis until the MPSC issues a final order.

We expect to file a Federal Energy Regulatory Commission (FERC) rate case for our Montana transmission assets in the second quarter of 2019. The revenue requirement associated with our Montana FERC assets is reflected in our MPSC jurisdictional rates as a credit to retail customers.

Montana Legislative Session
There are several potentially significant bills currently being considered by the Montana Legislature. In addition to many other less substantive bills, we are monitoring potential impacts of the following:

• Legislation that would allow us to acquire up to an additional 150 MW of generation from Colstrip Unit 4 for $1 and would facilitate our placing in rates a certain amount of capital investment over the following ten years. Linked to this transaction is also a requirement to obtain a greater ownership share of the Colstrip transmission line and pay no more than the depreciated book value;
• Legislation that would remove the +/- $4.1 million "deadband" sharing provision from the PCCAM as imposed by the MPSC's January 2019 order; and
• Legislation that would prohibit the MPSC from applying a maximum contract length of 15 years to our future owned and contracted electricity supply resources as required in the MPSC's November 2017, QF order.

While the Montana legislative session is expected to end around May 1, 2019, it is premature to state how these pieces of legislation will ultimately be drafted, and how, or whether, they will be passed and / or signed into law by the Montana Governor.

Electric Supply Resource Plans
Montana - In March 2019, we issued our draft 2019 Electricity Supply Resource Procurement Plan (Montana Resource Plan). The Montana Resource Plan supports the goal of developing resources that will address the changing energy landscape in Montana to meet our customers' electric energy needs in a reliable and affordable manner. The draft is available for public comment until May 5, 2019. We expect to finalize the plan by the end of June 2019.

We are currently 630 MW short of our peak needs, which we procure in the market. We forecast that our energy portfolio will be 725 MW short by 2025 with a modest increase in customer demand. Based on our customers' future energy resource needs as identified in the Montana Resource Plan, in late 2019 we expect to solicit competitive proposals for peaking capacity available by 2022. An independent evaluator will be used to assess the proposals. We expect the process will be repeated in subsequent years to provide a resource-adequate energy and capacity portfolio by 2025.

The proposed solicitation process will allow us to consider a wide variety of resource options. These options include power purchase agreements and owned energy resources comprised of different structures, terms and technologies that are cost-effective resources. The staged approach is designed to allow for incremental steps through time with opportunities for different resource type of new technologies while also building a reliable portfolio to meet local and regional conditions and minimizing customer impacts.

South Dakota - During the second quarter 2019, we anticipate issuing a request for proposals for 60 MW of flexible capacity resources to begin serving South Dakota customers by the end of 2021. Responses will be due in July 2019, with evaluation of the proposals during the second half of 2019.

Colstrip Coal Supply
Colstrip Units 3 and 4 are supplied with fuel from adjacent coal reserves under coal supply and transportation agreements with Western Energy Company (WeCo). The current contract expires at the end of 2019. WeCo filed for Chapter 11 bankruptcy protection in October 2018. An auction was held for the core assets in January 2019, including the mine adjacent to Colstrip, with no qualified bids received. As a result, in March 2019 a lenders group acquired the core assets. Immediately prior to that acquisition, WeCo assumed the existing coal supply and transportation agreements. We are working with WeCo and the joint owners to negotiate a new arrangement and at the same time exploring alternative sources for a coal supply. Any new arrangements, whether with WeCo or others, may have higher costs than the existing coal supply and transportation agreements.

Significant Earnings Drivers

Gross Margin
Consolidated gross margin for the three months ended March 31, 2019 was $268.5 million compared with $245.4 million for the same period in 2018. This $23.1 million increase was a result of a $20.2 million increase to items that have an impact on net income and $2.9 million increase 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 $20.2 million, including:

• $13.4 million increase in electric and gas retail volumes due primarily to colder winter weather and customer growth;
• $7.3 million improvement resulting from a 2018 reduction in revenue due to the impact of the TCJA one-time settlements for customer refunds; and
• $3.5 million other miscellaneous improvements.

These increases were partially offset by:

• $1.7 million decrease in Montana natural gas rates associated with the annual step down for our Montana gas production assets and the TCJA settlement;
• $1.6 million decrease from under recovery of Montana electric supply costs; and
• $0.7 million of lower demand to transmit energy across our transmission lines due to market conditions and pricing.

The change in consolidated gross margin for items that had no impact on net income represented a $2.9 million increase primarily due to the following:

• $1.7 million increase in revenues for property taxes included in trackers, offset by increased property tax expense;
• $0.8 million increase in revenues for operating costs included in trackers, offset by increased operating expense; and
• $0.4 million increase in revenue due to the decrease in production tax credit benefits passed through to customers in our tracker mechanisms, which are offset by increased income tax expense.

Operating, General and Administrative Expenses
Consolidated operating, general and administrative expenses for the three months ended March 31, 2019 were $81.1 million compared with $74.3 million for the same period in 2018. This $6.8 million increase was a result of a $3.7 million increase to items that have an impact on net income and $3.1 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 $3.7 million, including:

• $0.9 million higher hazard tree line clearance costs;
• $0.9 million higher pension funding;
• $0.4 million higher labor expense due primarily to compensation increases;
• $0.3 million higher plant operator and maintenance at electric generation facilities; and
• $1.2 million higher other miscellaneous expenses.

The change in consolidated operating, general and administrative expenses for items that had no impact on net income increased $3.1 million primarily due to the following:

• $3.9 million change (increase) in value of non-employee directors deferred compensation due to changes in our stock price, offset in other income;
• $1.0 million higher operating expenses included in trackers recovered through revenue; and
• $1.8 million lower expense due to the regulatory treatment of the non-service cost components of pension and postretirement benefit expense, which is offset in other income.

Property and Other Taxes
Property and other taxes were $44.8 million for the three months ended March 31, 2019, as compared with $42.8 million in the same period of 2018. This increase was primarily due to plant additions and higher estimated property valuations in Montana. We estimate property taxes throughout each year, and update 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
Depreciation and depletion expense was $45.6 million for the three months ended March 31, 2019, as compared with $43.8 million in the same period of 2018. This increase was primarily due to plant additions.

Operating Income
Consolidated operating income for the three months ended March 31, 2019 was $97.0 million as compared with $84.5 million in the same period of 2018. This increase was primarily due to higher gross margin partially offset by higher operating expenses.

Interest Expense
Consolidated interest expense for the three months ended March 31, 2019 was $23.8 million, as compared with $23.0 million in the same period of 2018, due primarily to higher borrowings.

Other Income and Expense
Consolidated other income was $1.1 million for the three months ended March 31, 2019 as compared to consolidated other expense of $1.1 million during the same period of 2018. This $2.2 million improvement includes a $3.9 million increase in the value of deferred shares held in trust for non-employee directors deferred compensation, partly offset by a $1.8 million increase in other pension expense, both of which are offset in operating, general, and administrative expense with no impact to net income. Higher capitalization of Allowance for Funds Used During Construction also contributed to the increase.

Income Tax
Consolidated income tax expense for the three months ended March 31, 2019 was $1.6 million as compared with $1.9 million expense in the same period of 2018. Our effective tax rate for the three months ended March 31, 2019 was 2.1% as compared with 3.2% for the same period of 2018. We expect our 2019 effective tax rate to range between 0% - 5%.

The following table summarizes the differences between our effective tax rate and the federal statutory rate for the periods:

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