NorthWestern Reports 2012 Financial Results

SIOUX FALLS, S.D., Feb. 14, 2013 /PRNewswire/ -- NorthWestern Corporation, d/b/a NorthWestern Energy (NYSE: NWE), reported financial results for the year ended December 31, 2012.  Net income was $98.4 million, or $2.66 per diluted share, for the year ended December 31, 2012, compared with net income of $92.6 million, or $2.53 per diluted share, for the year ended December 31, 2011.  

"Our net income and cash flows from operations improved in 2012, compared with 2011.  Those results were driven by higher gross margin, primarily due to a favorable arbitration decision, partially offset by higher operating expenses, an impairment charge related to our decision to shelve the Mountain States Transmission Intertie (MSTI) project and higher income taxes," said Bob Rowe, Chief Executive Officer.  "Our continued focus is to remain committed to funding our distribution system infrastructure project and transmission infrastructure improvements while we seek additional regulated energy supply resources to provide our customers long-term price stability and resource adequacy." 

Significant items during 2012

• Improvement in net income of approximately $5.9 million as compared with 2011, due primarily to:
  • Higher gross margin of $52.2 million, largely due to a $47.9 million pre-tax gain associated with a favorable arbitration decision;
  • Higher operating expenses of $40.5 million, primarily due to:
    • a charge of approximately $24.0 million in the third quarter of 2012 for the impairment of substantially all of the capitalized preliminary survey and investigative costs associated with the MSTI project; and
    • higher other operating expenses of $16.5 million, primarily related to property taxes and depreciation;
  • a reduction of interest expense of $1.8 million due to lower rates on debt outstanding and higher capitalization of accumulated funds used during construction on projects; and
  • higher income tax expense of $8.0 million.
• Purchased and placed into service the 40 MW Spion Kop wind project in Montana for approximately $84 million.
• Received approval from the MPSC to include our Battle Creek production assets in natural gas rate base.
• Purchased natural gas production interests in northern Montana's Bear Paw Basin for approximately $19 million.
• Successfully accessed the capital markets to fund growth projects and extend debt maturities by:
  • Entering into an equity distribution agreement with UBS Securities LLC. Under this agreement we have received net proceeds of approximately $28.5 million from the sale of 815,416 common shares, after commissions and other fees; and
  • Issuing $90 million of first mortgage bonds at 4.15% and $60 million of first mortgage bonds at 4.30%, maturing in 2042 and 2052, respectively.

For more information see www.northwesternenergy.com/documents/investor/Q412.pdf

Significant Drivers

Gross Margin

Consolidated gross margin for the year ended December 31, 2012 was $674.9 million compared with $622.7 million for the same period of 2011.  Consolidated gross margin increased $52.2 million primarily due to:

• A $47.9 million pre-tax gain associated with a favorable arbitration decision related to a dispute over energy and capacity rates on a QF contract;
• An increase in demand side management lost revenues recovered through our supply trackers related to efficiency measures implemented by customers;
• An increase in Montana property taxes included in a tracker as compared to 2011;
• An increase in gas production margin due to the inclusion of Battle Creek in rates, including approximately $1.1 million that we had deferred in prior periods based on the difference between our cost of service and current natural gas market prices. The acquisition of the Bear Paw Basin assets in the third quarter of 2012 also contributed to the higher gas production margin;
• An increase in transmission capacity revenues due to higher demand to transmit energy for others across our transmission lines; and 
• An increase in South Dakota natural gas rates implemented in December 2011.

These increases were partly offset by the following:

• A decrease in natural gas retail volumes, and to a lesser extent electric residential retail volumes, due primarily to warmer winter and spring weather;
• Lower Dave Gates Generating Station (DGGS) related revenues primarily due to the deferral of an additional $13.7 million of DGGS FERC jurisdictional revenues, offset in part by higher DGGS Montana Public Service Commission (MPSC) jurisdictional revenues of approximately $7.2 million due to the regulatory flow-through treatment of the state bonus depreciation deduction during 2011 and approximately $2.7 million that we had deferred in 2011 pending outcome of allocation uncertainty in Montana; and
• Lower revenues for operating expenses recovered in trackers, primarily due to lower environmental remediation costs, partly offset by increases in costs for customer efficiency programs.

Operating, General and Administrative Expenses

Consolidated operating, general and administrative expenses were $270.0 million for the year ended December 31, 2012 as compared with $267.2 million during the same period of 2011.  The increase in operating, general and administrative expenses of $2.8 million was primarily due to:

• An increase in legal and professional fees due in part to the DGGS FERC proceeding, the QF arbitration matter and asset acquisitions discussed above; and
• Higher employee benefits and labor expenses primarily due to increased medical costs in 2012.

These increases were partly offset by the following:

• Lower plant operator costs at Colstrip Unit 4 and Big Stone offset in part by higher plant operator costs at Coyote due to the timing of scheduled maintenance;
• Non-employee directors deferred compensation decreased as compared to the prior year, primarily due to changes in our stock price. Directors may defer their board fees into deferred shares held in a rabbi trust. If the market value of our stock goes up, deferred compensation expense increases; however, we  account for the deferred shares as trading securities and their increase in value is reflected in other income with no impact on net income; and
• Lower operating expenses recovered from customers primarily due to lower environmental remediation costs, partly offset by increases in costs for customer efficiency programs. These costs are included in our supply trackers and have no impact on operating income.

MSTI

We recorded a pre-tax charge of approximately $24.0 million in the third quarter of 2012 for the impairment of substantially all of the capitalized preliminary survey and investigative costs associated with MSTI.

Property and Other Taxes

Consolidated property and other taxes were $97.7 million for the year ended December 31, 2012 as compared with $89.1 million during the same period of 2011.  This increase was due primarily to higher assessed property valuations in Montana and plant additions. 

Depreciation Expense

Consolidated depreciation expense was $106.0 million for the year ended December 31, 2012 as compared with $100.9 million during the same period of 2011.  This increase was due primarily to plant additions.

Interest Expense

Consolidated interest expense was $65.1 million for the year ended December 31, 2012 as compared with $66.9 million during the same period of 2011.  The decrease was primarily due to lower interest rates on debt outstanding and higher capitalization of AFUDC.

Income Tax Expense

Consolidated income tax expense for the year ended December 31, 2012 was $18.1 million as compared with $10.1 million in same period of 2011.  The effective tax rate for the year ended December 31, 2012 was 15.5% as compared with 9.8% for the same period of 2011.  The increase in income tax expense for 2012 was primarily due to higher taxable income.  The effective tax rate differs from the federal statutory tax rate of 35% primarily due to repairs and state tax bonus depreciation deductions.

The following table summarizes the significant differences from the Federal statutory rate, which result in reduced income tax expense:

Regulated Operations

In the regulated operations for the year ended December 31, 2012, electric gross margin improved by $57.4 million, due primarily to the $47.9 million pre-tax gain related to the favorable arbitration decision related to the QF dispute and an increase in demand side management lost revenues recovered in supply trackers. 

Natural gas gross margin declined by $5.1 million, due primarily to reduced retail volumes driven by warmer winter and spring weather. 

Fourth Quarter Financial Results

Consolidated net income for the fourth quarter ended December 31, 2012, was $58.7 million, or $1.57/diluted share, compared with $34.1 million, or $.93/diluted share for the fourth quarter in 2011.

The increase was primarily due to an increase in gross margin, driven by the pre-tax gain on the favorable arbitration decision related to the QF dispute, offset by increases in operating expenses and income tax expense, when compared with the prior fourth quarter.

Liquidity and Capital Resources

As of December 31, 2012, cash and cash equivalents were $9.8 million compared with $5.9 million at December 31, 2011.  The Company had $173.6 million available from its revolving credit facility at December 31, 2012, compared with $130.1 million at December 31, 2011. 

Dividend Increase

NorthWestern's Board of Directors declared a quarterly common stock dividend of $0.38 per share, an increase from $.37 per share, payable March 31, 2013, to common shareholders of record as of March 15, 2013. 

Significant Items Not Contemplated in 2012 Guidance

A reconciliation of items not factored into our 2012 earnings guidance of $2.30 to $2.40 per diluted earnings per share is as follows (net of tax). The amount calculated below represents a non-GAAP measure that may provide users of this financial information with additional meaningful information regarding the impact of certain items on the Company's expected earnings.  The Company believes the following presentation is more representative of our ongoing earnings than the GAAP EPS, also represented below.  Non-GAAP financial measures should be viewed in addition to, and not as an alternative to, the reported operating results or cash flows from operations or any other measure of performance prepared in accordance with GAAP.  In addition, the presentation of these measures may not be comparable to similarly titled measures other companies use.

2013 Earnings Outlook

NorthWestern expects its 2013 earnings to be $2.40 - 2.55 per diluted share.

Basic assumptions include the following expectations:

• A consolidated income tax rate of approximately 12% - 16% of pre-tax income;
• Colstrip Unit 4, Big Stone, and Coyote generation plants are scheduled for routine maintenance during second quarter of 2013
• Diluted average shares outstanding of 38.1 million; and
• Normal weather in the Company's electric and natural gas service territories for 2013.

Company Hosting Investor Conference Call

NorthWestern will host an investor conference call today at 4:00 pm Eastern Time to review its financial results for the year ended December 31, 2012.

The conference call will be webcast live on the Internet at http://www.northwesternenergy.com under the "Investor Information" heading.  To listen, please go to the site at least 10 minutes in advance of the call to register.  An archived webcast will be available shortly after the call.

A telephonic replay of the call will be available beginning at 6:00 p.m. ET on February 14, 2013 through March 14, 2013, at (888) 203-1112 access code 7514599.

Annual Meeting

The Company's Annual Meeting of Stockholders will be held on Thursday, April 25, 2013, in Huron, South Dakota. The record date for the annual meeting is February 25, 2013. The annual meeting notice, proxy statement, annual report to stockholders and voting instructions will be provided approximately 40 days prior to the meeting date to stockholders as of the record date.

About NorthWestern Energy

NorthWestern Energy is one of the largest providers of electricity and natural gas in the Upper Midwest and Northwest, serving approximately 673,200 customers in Montana, South Dakota and Nebraska.  More information on NorthWestern Energy is available on the Company's Web site at www.northwesternenergy.com.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, including, without limitation, the information under "2013 Earnings Outlook".  Forward-looking statements often address our expected future business and financial performance, and often contain words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," or "will."  These statements are based upon our current expectations and speak only as of the date hereof.  Our actual future business and financial performance may differ materially and adversely from those expressed in any forward-looking statements as a result of various factors and uncertainties, including, but not limited to:

• potential adverse federal, state, or local legislation or regulation or adverse determinations by regulators could have a material effect on our liquidity, results of operations and financial condition;
• changes in availability of trade credit, creditworthiness of counterparties, usage, commodity prices, fuel supply costs or availability due to higher demand, shortages, weather conditions, transportation problems or other developments, may reduce revenues or may increase operating costs, each of which could adversely affect our liquidity and results of operations;
• unscheduled generation outages or forced reductions in output, maintenance or repairs, which may reduce revenues and increase cost of sales or may require additional capital expenditures or other increased operating costs; and
• adverse changes in general economic and competitive conditions in the U.S. financial markets and in our service territories.

Our Annual Report on Form 10-K, recent and forthcoming Quarterly Reports on Form 10-Q, recent Current Reports on Form 8-K and other Securities and Exchange Commission filings discuss some of the important risk factors that may affect our business, results of operations and financial condition. 

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Non-GAAP Financial Measure

This press release includes financial information prepared in accordance with GAAP, as well as other financial measures, such as Gross Margin and adjusted EPS, that are considered a "non-GAAP financial measures." Generally, a non-GAAP financial measure is a numerical measure of a company's financial performance, financial position or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. Gross Margin (Revenues less Cost of Sales) is a non-GAAP financial measure due to the exclusion of depreciation from the measure. The presentation of Gross Margin is intended to supplement investors' understanding of our operating performance. Gross Margin is used by us to determine whether we are collecting the appropriate amount of energy costs from customers to allow recovery of operating costs. Our Gross Margin measure may not be comparable to other companies' Gross Margin measure. Furthermore, this measure is not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance.

SOURCE NorthWestern Corporation