NorthWestern (NWE) - 2023 Q2 - Quarterly Report

Special Note Regarding Forward-Looking Statements The report contains forward-looking statements about future financial performance, economic conditions, capital markets, and customer usage patterns, identified by words like "anticipates," "expects," "intends," and "plans" - The report contains forward-looking statements about future financial performance, economic conditions, capital markets, and customer usage patterns, identified by words like "anticipates," "expects," "intends," and "plans" These statements involve risks and uncertainties that could cause actual results to differ materially[10][11] - Key factors that may cause differences include adverse regulatory determinations, extraordinary external events (pandemics, geopolitical events, natural disasters), cybersecurity attacks, supply chain constraints, inflation, changes in commodity prices, unscheduled generation outages, and adverse changes in general economic conditions[13] Part I. Financial Information This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial performance Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including statements of income, comprehensive income, balance sheets, cash flows, and shareholders' equity, along with detailed notes explaining the company's accounting policies, regulatory matters, income taxes, financing activities, segment information, revenue disaggregation, earnings per share, employee benefits, and commitments and contingencies Condensed Consolidated Statements of Income This chapter details the company's revenues, expenses, operating income, and net income for the three and six months ended June 30, 2023 and 2022 Three Months Ended June 30, 2023 vs. 2022 (in thousands) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $290,502 | $323,004 | $(32,502) | -10.1% | | Total Operating Expenses | $244,882 | $270,663 | $(25,781) | -9.5% | | Operating Income | $45,620 | $52,341 | $(6,721) | -12.8% | | Net Income | $19,124 | $29,786 | $(10,662) | -35.8% | | Basic EPS | $0.32 | $0.55 | $(0.23) | -41.8% | | Diluted EPS | $0.32 | $0.54 | $(0.22) | -40.7% | | Dividends Declared per Common Share | $0.64 | $0.63 | $0.01 | 1.6% | Six Months Ended June 30, 2023 vs. 2022 (in thousands) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $745,044 | $717,486 | $27,558 | 3.8% | | Total Operating Expenses | $603,382 | $585,929 | $17,453 | 3.0% | | Operating Income | $141,662 | $131,557 | $10,105 | 7.7% | | Net Income | $81,654 | $88,896 | $(7,242) | -8.1% | | Basic EPS | $1.37 | $1.64 | $(0.27) | -16.5% | | Diluted EPS | $1.37 | $1.62 | $(0.25) | -15.4% | | Dividends Declared per Common Share | $1.28 | $1.26 | $0.02 | 1.6% | Condensed Consolidated Statements of Comprehensive Income This chapter presents the company's comprehensive income for the three and six months ended June 30, 2023 and 2022 Comprehensive Income (in thousands) | Period | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | $19,069 | $29,742 | $(10,673) | | Six Months Ended June 30 | $81,543 | $88,805 | $(7,262) | Condensed Consolidated Balance Sheets This chapter outlines the company's financial position, including total assets, liabilities, and shareholders' equity as of June 30, 2023, and December 31, 2022 Balance Sheet Highlights (in thousands) | Item | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Total Assets | $7,294,242 | $7,317,783 | $(23,541) | | Total Liabilities | $4,607,518 | $4,652,600 | $(45,082) | | Total Shareholders' Equity | $2,686,724 | $2,665,183 | $21,541 | Condensed Consolidated Statements of Cash Flows This chapter summarizes the company's cash flows from operating, investing, and financing activities for the six months ended June 30, 2023 and 2022 Cash Flow Summary (Six Months Ended June 30, in thousands) | Activity | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Cash Provided by Operating Activities | $294,065 | $232,893 | $61,172 | | Cash Used in Investing Activities | $(265,788) | $(235,352) | $(30,436) | | Cash (Used in) Provided by Financing Activities | $(26,720) | $9,777 | $(36,497) | | Increase in Cash, Cash Equivalents, and Restricted Cash | $1,557 | $7,318 | $(5,761) | Condensed Consolidated Statements of Shareholders' Equity This chapter details changes in the company's shareholders' equity, including net income, stock-based compensation, and dividends, for the six months ended June 30, 2023 and 2022 Shareholders' Equity Changes (Six Months Ended June 30, in thousands) | Item | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Balance at December 31 | $2,665,183 | $2,339,713 | | Net income | $81,654 | $88,896 | | Stock-based compensation | $4,672 | $3,066 | | Issuance of shares | $11,411 | $100,742 | | Dividends on common stock | $(76,085) | $(67,806) | | Balance at June 30 | $2,686,724 | $2,464,520 | Notes to Condensed Consolidated Financial Statements This chapter provides detailed explanations of the company's accounting policies, regulatory matters, income taxes, financing activities, and commitments (1) Nature of Operations and Basis of Consolidation This chapter describes NorthWestern Corporation's utility services across four states and its annual goodwill impairment test findings - NorthWestern Corporation provides electricity and/or natural gas to approximately 764,200 customers across Montana, South Dakota, Nebraska, and Yellowstone National Park[30] - The company completed its annual goodwill impairment test as of April 1, 2023, concluding no further testing was necessary as the fair value of its reporting units was not less than its carrying amount[34] (2) Regulatory Matters This chapter discusses ongoing Montana and South Dakota rate reviews, a proposed corporate restructuring, and their potential financial impacts - A Montana electric and natural gas rate review was filed on August 8, 2022, with interim rates effective October 1, 2022, subject to refund A settlement agreement was filed on April 3, 2023, and a decision from the MPSC is expected in Q3 2023[36][40] Montana Rate Review - Requested Revenue Increase Through Settlement Agreement (in millions) | Service | Base Rates (in millions) | PCCAM (in millions) | Property Tax (in millions) | Total (in millions) | | :--- | :--- | :--- | :--- | :--- | | Electric | $67.4 | $69.7 | $14.5 | $151.6 | | Natural Gas | $14.1 | n/a | $4.2 | $18.3 | - The settlement agreement includes an update to the Power Cost & Credit Adjustment Mechanism (PCCAM) base costs from $138.7 million to $208.4 million, allowing for more timely quarterly recovery of deferred balances[39] - A South Dakota electric rate review was filed on June 15, 2023, requesting an annual increase of approximately $30.9 million, based on a 10.7% ROE and 50.5% equity capital structure[42] - The company plans a legal corporate restructuring to separate its Montana utility business from its South Dakota and Nebraska utility business, establishing a holding company All necessary regulatory approvals have been received, with effectuation expected by early 2024[43] (3) Income Taxes This chapter analyzes the company's effective tax rates, the impact of regulatory benefits, and unrecognized tax benefits for the periods presented Effective Tax Rate (Three Months Ended June 30) | Item | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Income before income taxes | $21,271 | $31,221 | | Income tax expense | $2,147 | $1,435 | | Effective Tax Rate | 10.1% | 4.6% | Effective Tax Rate (Six Months Ended June 30) | Item | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Income before income taxes | $94,042 | $91,442 | | Income tax expense | $12,388 | $2,546 | | Effective Tax Rate | 13.2% | 2.8% | - The effective tax rate differs from the federal statutory rate primarily due to the regulatory impact of flowing through federal and state tax benefits from repairs deductions, accelerated tax depreciation, and production tax credits[44] - Unrecognized tax benefits totaled approximately $29.5 million as of June 30, 2023, with $27.8 million potentially impacting the effective tax rate if recognized The company accrued $2.1 million for interest and penalties on uncertain tax positions[47][48] (4) Comprehensive (Loss) Income This chapter details the components of accumulated other comprehensive loss, including derivative instruments and postretirement medical plans Accumulated Other Comprehensive Loss (AOCL) (in thousands) | Component | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Foreign currency translation | $1,432 | $1,435 | | Derivative instruments designated as cash flow hedges | $(9,599) | $(9,825) | | Postretirement medical plans | $208 | $542 | | Total AOCL | $(7,959) | $(7,848) | Changes in AOCL (Three Months Ended June 30, 2023, in thousands) | Item | Interest Rate Derivative Instruments (in thousands) | Postretirement Medical Plans (in thousands) | Foreign Currency Translation (in thousands) | Total (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Beginning balance | $(9,712) | $375 | $1,433 | $(7,904) | | Net current-period other comprehensive income (loss) | $113 | $(167) | $(1) | $(55) | | Ending balance | $(9,599) | $208 | $1,432 | $(7,959) | (5) Financing Activities This chapter outlines recent debt issuances, amendments to the equity distribution agreement, and the issuance of pollution control revenue bonds - In March and May 2023, the company issued $300.0 million in Montana and South Dakota First Mortgage Bonds with fixed interest rates between 5.42% and 5.57%, maturing in 2033 Proceeds were used to repay revolving credit facilities and for general corporate purposes[53] - The Equity Distribution Agreement was amended in June 2023, allowing the company to sell up to $200.0 million of common stock through an At-the-Market (ATM) offering program During Q2 2023, 188,682 shares were issued under this program for net proceeds of $10.8 million[54] - On June 29, 2023, $144.7 million of Pollution Control Revenue Refunding Bonds were issued on the company's behalf at a fixed interest rate of 3.88% maturing in 2028, to redeem existing bonds[55] (6) Segment Information This chapter presents the company's net income by its electric and natural gas segments, with performance evaluated based on utility margin - The company's reportable business segments are electric and natural gas, with performance evaluated based on utility margin[56][57] Net Income by Segment (Three Months Ended June 30, in thousands) | Segment | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Electric | $27,274 | $29,866 | | Gas | $(7,656) | $1,192 | | Other | $(494) | $(1,272) | | Total | $19,124 | $29,786 | Net Income by Segment (Six Months Ended June 30, in thousands) | Segment | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Electric | $73,096 | $67,902 | | Gas | $19,156 | $22,406 | | Other | $(10,598) | $(1,412) | | Total | $81,654 | $88,896 | (7) Revenue from Contracts with Customers This chapter disaggregates total revenues by electric and natural gas segments for retail, wholesale, and regulatory amortization - The company provides retail electric and natural gas services to residential, commercial, and industrial customers across Montana, South Dakota, and Nebraska[61][62][63] Total Revenues by Segment (Three Months Ended June 30, in millions) | Segment | 2023 (in millions) | 2022 (in millions) | | :--- | :--- | :--- | | Electric | $229.3 | $243.4 | | Natural Gas | $61.2 | $79.6 | | Total | $290.5 | $323.0 | Total Revenues by Segment (Six Months Ended June 30, in millions) | Segment | 2023 (in millions) | 2022 (in millions) | | :--- | :--- | :--- | | Electric | $524.6 | $515.1 | | Natural Gas | $220.4 | $202.4 | | Total | $745.0 | $717.5 | (8) Earnings Per Share This chapter provides average common shares outstanding for basic and diluted EPS calculations and details antidilutive share exclusions Average Common Shares Outstanding (in thousands) | Period | Basic (2023, in thousands) | Diluted (2023, in thousands) | Basic (2022, in thousands) | Diluted (2022, in thousands) | | :--- | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | 59,804 | 59,850 | 54,272 | 55,141 | | Six Months Ended June 30 | 59,790 | 59,820 | 54,185 | 54,981 | - As of June 30, 2023, 21,890 shares from performance and restricted share awards were antidilutive and excluded from EPS calculations, compared to 36,296 shares as of June 30, 2022[68] (9) Employee Benefit Plans This chapter details the net periodic benefit cost for pension and other postretirement plans and outlines company contributions Net Periodic Benefit Cost (Credit) (Six Months Ended June 30, in thousands) | Component | Pension Benefits (2023, in thousands) | Pension Benefits (2022, in thousands) | Other Postretirement Benefits (2023, in thousands) | Other Postretirement Benefits (2022, in thousands) | | :--- | :--- | :--- | :--- | :--- | | Service cost | $2,916 | $5,112 | $166 | $175 | | Interest cost | $13,047 | $9,393 | $337 | $179 | | Expected return on plan assets | $(13,357) | $(12,086) | $(548) | $(523) | | Amortization of prior service credit | — | — | $58 | $(946) | | Recognized actuarial loss (gain) | $137 | $191 | $36 | $(24) | | Net periodic benefit cost (credit) | $2,743 | $2,610 | $49 | $(1,139) | - The company contributed $0.6 million to its pension plans during the three and six months ended June 30, 2023, and expects to contribute an additional $10.6 million during the remainder of 2023[69] (10) Commitments and Contingencies This chapter addresses environmental liabilities, ongoing legal proceedings, and other significant commitments and potential financial impacts Environmental Liabilities and Regulation This chapter details environmental reserves for former gas plant sites and potential impacts of new EPA rules on coal-fired plants - The company's environmental reserve, primarily for former manufactured gas plant sites, is estimated to range between $20.9 million and $32.0 million, with a reserve of approximately $25.7 million as of June 30, 2023[73] - New EPA proposed rules in May 2023 for GHG emissions standards and an April 2023 amendment to the Mercury Air Toxics Standard (MATS) could materially impact coal-fired plants, potentially requiring expensive upgrades or early retirement of Colstrip Units 3 and 4[75] Legal Proceedings This chapter outlines ongoing lawsuits regarding riverbed rents, Colstrip operations, coal dust litigation, and the Yellowstone County Generating Station - The State of Montana is suing for riverbed rents for 10 hydroelectric facilities If the Federal District Court finds six remaining facilities navigable and awards damages, annual rents could be approximately $3.8 million starting November 2014[80][82] - An arbitration was initiated in March 2021 regarding operational funding and closure consent for Colstrip Units 3 and 4, with a stay through September 29, 2023, to explore resolution[84] - The company is a defendant in a coal dust litigation related to Colstrip operations, seeking economic and punitive damages, and an injunction[85] - BNSF Railway Company is demanding indemnity for environmental investigation and remediation costs at the Anaconda Copper Mining Superfund Site, with estimated costs for the Railroad Corridor at $4.1 million and other areas at $1.8 million[89] - A lawsuit regarding the Yellowstone County Generating Station's air permit led to a vacatur of the permit, pausing construction Construction recommenced in June 2023 after a stay was granted, and a final revised permit is expected in Q3 2023 Total costs incurred are $203.6 million, with expected total costs of $275.0 million[90][91][114] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and operational results, including a reconciliation of non-GAAP financial measures, an overview of business strategy, analysis of quarterly and year-to-date performance, significant trends, regulatory updates, and a detailed discussion of liquidity and capital resources Non-GAAP Financial Measure This chapter defines Utility Margin as a key non-GAAP financial measure used to analyze performance by excluding energy cost volatility - Utility Margin is defined as Operating Revenues less fuel, purchased supply, and direct transmission expense, and is used to analyze financial performance by excluding volatility in energy costs and associated regulatory mechanisms[94][95] Overview This chapter introduces NorthWestern Energy's customer base, strategic goals for grid investment, resource integration, and commitment to net-zero carbon emissions - NorthWestern Energy serves approximately 764,200 customers across Montana, South Dakota, Nebraska, and Yellowstone National Park, focusing on safe, reliable, and innovative energy solutions[97] - The company aims to deliver long-term shareholder value through infrastructure investment for a stronger grid, integrating supply resources for reliability and cost predictability, and continually improving operating efficiency[98] - NorthWestern is committed to a carbon-free future, expanding efforts in 2022 with a goal to achieve net zero carbon emissions by 2050[99] How We Performed Against Our Second Quarter 2022 Results This chapter compares consolidated net income for Q2 2023 to Q2 2022, highlighting decreases due to lower volumes and higher expenses - Consolidated net income for the three months ended June 30, 2023, decreased to $19.1 million from $29.8 million in 2022, primarily due to lower electric and natural gas retail volumes, lower transmission revenues, and higher operating, maintenance, administrative, depreciation, and interest expenses[100] - Partially offsetting the decrease were higher Montana interim rates (subject to refund), increased Montana property tax tracker collections, and lower non-recoverable Montana electric supply costs[100] Significant Trends and Regulation This chapter discusses ongoing rate reviews, a corporate restructuring plan, energy supply cost recovery, and the Yellowstone plant construction status - The Montana Public Service Commission (MPSC) approved interim rates effective October 1, 2022, subject to refund, as part of an ongoing rate review A settlement agreement was filed on April 3, 2023, with a decision expected in Q3 2023[103][107] - The settlement agreement updates the Power Cost & Credit Adjustment Mechanism (PCCAM) base costs from $138.7 million to $208.4 million, allowing for more timely quarterly recovery of deferred balances[106] - A South Dakota electric rate review was filed on June 15, 2023, requesting a $30.9 million annual increase based on a 10.7% ROE and 50.5% equity capital structure[108] - The company plans a legal corporate restructuring to separate its Montana utility business from its South Dakota and Nebraska utility business, establishing a holding company, expected to be effective by early 2024[109] - As of June 30, 2023, the company had approximately $18.5 million in uncollected energy supply costs for the July 2022 - June 2023 PCCAM period, which are expected to begin collection in October 2023[110] - Construction of the Yellowstone County 175 MW plant, paused due to an air quality permit vacatur, recommenced in June 2023 after a stay was granted The plant is expected to be operational by the end of Q3 2024, with total costs incurred of $203.6 million and expected total costs of $275.0 million[113][114] - Proposed EPA rules on GHG emissions and MATS amendments could significantly impact coal-fired plants, potentially requiring expensive upgrades or early retirement of Colstrip Units 3 and 4[117] Results of Operations This chapter analyzes the factors affecting the company's revenues, expenses, and overall consolidated results for both electric and natural gas segments Factors Affecting Results of Operations This chapter explains how revenues, fuel costs, and operating expenses are influenced by supply costs, customer usage, weather, and regulatory approvals - Revenues fluctuate with supply costs, which are generally recovered from customers, and are impacted by customer growth, usage (affected by weather and energy efficiency), and regulatory approvals[121][122] - Fuel, purchased supply, and direct transmission expenses are directly tied to electricity and natural gas procurement and generation, fluctuating with market prices and customer usage[123] - Operating and maintenance expenses, including labor, repairs, and contract services, are generally stable and do not significantly change with short-term volume fluctuations[124] Overall Consolidated Results This chapter provides a consolidated analysis of the company's financial performance for the three and six months ended June 30, 2023 and 2022 Three Months Ended June 30, 2023 Compared with the Three Months Ended June 30, 2022 This chapter compares the company's consolidated net income, utility margin, and operating expenses for the three months ended June 30, 2023 and 2022 - Consolidated net income decreased by $10.7 million to $19.1 million, primarily due to lower electric and natural gas retail volumes, reduced transmission revenues, and higher operating, maintenance, administrative, depreciation, and interest expenses[125] - Consolidated utility margin decreased by $5.1 million (2.2%) to $222.9 million, driven by lower retail volumes and transmission revenue, partially offset by Montana interim rates and property tax tracker collections[129][132] - Operating expenses (excluding fuel, purchased supply, and direct transmission) increased by $1.7 million (1.0%) to $177.3 million, mainly due to higher labor and benefits, depreciation, and other state and local taxes[134][135] - Interest expense increased to $28.4 million from $24.0 million due to higher borrowings and interest rates, while income tax expense rose to $2.1 million from $1.4 million, with the effective tax rate increasing to 10.1% from 4.6%[138][140] Six Months Ended June 30, 2023 Compared with the Six Months Ended June 30, 2022 This chapter compares the company's consolidated net income, utility margin, and operating expenses for the six months ended June 30, 2023 and 2022 - Consolidated net income decreased by $7.2 million (8.1%) to $81.7 million, primarily due to lower natural gas retail volumes, higher depreciation, operating, maintenance, administrative, and interest expenses, and a one-time charge for alternative minimum tax credits[142] - Consolidated utility margin increased by $24.7 million (5.1%) to $512.0 million, driven by Montana interim rates, higher electric retail volumes, and lower non-recoverable Montana electric supply costs[146][149] - Operating expenses (excluding fuel, purchased supply, and direct transmission) increased by $14.5 million (4.1%) to $370.3 million, mainly due to higher depreciation, labor and benefits, and electric generation facility expenses[151][152] - Interest expense increased to $56.4 million from $47.7 million due to higher borrowings and interest rates Income tax expense rose to $12.4 million from $2.5 million, including a $3.2 million charge for alternative minimum tax credits, resulting in an effective tax rate of 13.2% (vs 2.8% in 2022)[154][156] Electric Segment This chapter analyzes the electric segment's revenues and utility margin performance for the three and six months ended June 30, 2023 and 2022 Three Months Ended June 30, 2023 Compared with the Three Months Ended June 30, 2022 This chapter compares the electric segment's revenues and utility margin for the three months ended June 30, 2023 and 2022, highlighting key drivers Electric Segment Revenues (Three Months Ended June 30, in thousands) | Category | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Retail Electric | $246,033 | $214,379 | $31,654 | 14.8% | | Regulatory amortization | $(36,254) | $7,741 | $(43,995) | -568.3% | | Transmission | $18,352 | $20,005 | $(1,653) | -8.3% | | Wholesale and Other | $1,135 | $1,293 | $(158) | -12.2% | | Total Revenues | $229,266 | $243,418 | $(14,152) | -5.8% | | Utility Margin | $186,903 | $185,723 | $1,180 | 0.6% | - Electric utility margin increased by $1.2 million (0.6%) to $186.9 million, primarily due to Montana interim rates, lower non-recoverable Montana electric supply costs, and property tax tracker collections, despite lower retail volumes and transmission revenue[164] - Lower retail volumes were driven by unfavorable weather in Montana affecting residential demand and lower commercial demand, partially offset by customer growth and favorable weather in South Dakota[165] Six Months Ended June 30, 2023 Compared with the Six Months Ended June 30, 2022 This chapter compares the electric segment's revenues and utility margin for the six months ended June 30, 2023 and 2022, highlighting key drivers Electric Segment Revenues (Six Months Ended June 30, in thousands) | Category | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Retail Electric | $546,102 | $460,057 | $86,045 | 18.7% | | Regulatory amortization | $(61,551) | $14,281 | $(75,832) | -531.0% | | Transmission | $37,245 | $37,695 | $(450) | -1.2% | | Wholesale and Other | $2,778 | $3,112 | $(334) | -10.7% | | Total Revenues | $524,574 | $515,145 | $9,429 | 1.8% | | Utility Margin | $404,077 | $379,827 | $24,250 | 6.4% | - Electric utility margin increased by $24.3 million (6.4%) to $404.1 million, driven by Montana interim rates, higher retail volumes (customer growth and increased residential demand), lower non-recoverable Montana electric supply costs, and property tax tracker collections[173][174] Natural Gas Segment This chapter analyzes the natural gas segment's revenues and utility margin performance for the three and six months ended June 30, 2023 and 2022 Three Months Ended June 30, 2023 Compared with the Three Months Ended June 30, 2022 This chapter compares the natural gas segment's revenues and utility margin for the three months ended June 30, 2023 and 2022, highlighting key drivers Natural Gas Segment Revenues (Three Months Ended June 30, in thousands) | Category | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Retail Gas | $53,995 | $71,630 | $(17,635) | -24.6% | | Regulatory amortization | $(3,369) | $(1,204) | $(2,165) | -179.8% | | Wholesale and other | $10,610 | $9,160 | $1,450 | 15.8% | | Total Revenues | $61,236 | $79,586 | $(18,350) | -23.1% | | Utility Margin | $36,021 | $42,281 | $(6,260) | -14.8% | - Natural gas utility margin decreased by $6.3 million (14.8%) to $36.0 million, primarily due to lower retail volumes driven by unfavorable weather in Montana, partially offset by customer growth and higher Montana natural gas transportation[182][183] Six Months Ended June 30, 2023 Compared with the Six Months Ended June 30, 2022 This chapter compares the natural gas segment's revenues and utility margin for the six months ended June 30, 2023 and 2022, highlighting key drivers Natural Gas Segment Revenues (Six Months Ended June 30, in thousands) | Category | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Retail Gas | $226,638 | $211,332 | $15,306 | 7.2% | | Regulatory amortization | $(28,770) | $(27,774) | $(996) | 3.6% | | Wholesale and other | $22,602 | $18,783 | $3,819 | 20.3% | | Total Revenues | $220,470 | $202,341 | $18,129 | 9.0% | | Utility Margin | $107,897 | $107,585 | $312 | 0.3% | - Natural gas utility margin increased by $0.3 million (0.3%) to $107.9 million, driven by higher Montana natural gas transportation, property tax tracker collections, and Montana interim rates, partially offset by lower retail volumes due to unfavorable weather in Montana[190][191] Liquidity and Capital Resources This chapter discusses the company's liquidity, cash flows, capital requirements, credit facilities, long-term debt, equity, and credit ratings Liquidity This chapter details the company's net liquidity, including cash and revolving credit facility availability, and its debt-to-capital ratio target - As of June 30, 2023, total net liquidity was approximately $366.8 million, comprising $7.8 million in cash and $359.0 million in revolving credit facility availability[194] - The company aims to maintain a 50-55% debt to total capital ratio (excluding finance leases) and a long-term dividend payout ratio of 60-70% of EPS[193] Cash Flows This chapter analyzes cash flows from operating, investing, and financing activities, highlighting changes and key drivers for the period - Cash provided by operating activities increased to $294.1 million for the six months ended June 30, 2023, from $232.8 million in 2022, primarily due to a $62.1 million improvement in collections of energy supply costs and interim rates[196][197] - Cash used in investing activities increased to $265.8 million from $235.3 million, with plant additions totaling $263.4 million, including $142.2 million for maintenance and $121.2 million for capacity-related capital expenditures[199] - Cash used in financing activities was $26.8 million, reflecting $259.0 million in net repayments under revolving lines of credit and $76.1 million in dividends, partially offset by $300.0 million from debt issuance and $10.8 million from common stock issuance[200] Cash Requirements and Capital Resources This chapter assesses the sufficiency of the company's cash flows and capital resources to meet short-term and long-term financial obligations - The company expects cash flows from operations, existing borrowing capacity, debt and equity issuances, and future rate increases to be sufficient for short-term and long-term cash requirements, including operations, debt service, dividends, and capital expenditures[201] - Material cash requirements are linked to the capital expenditure program, with no material changes to estimated capital expenditures as of June 30, 2023[202] Credit Facilities This chapter outlines the company's various credit facilities, their maturities, and current outstanding balances and availability - The company has a $425 million Credit Facility maturing May 18, 2027, and a $25 million Swingline Facility maturing March 27, 2025 An additional $100 million Credit Facility matures April 28, 2024[204][205][207] - Outstanding balances on credit facilities were $191.0 million as of June 30, 2023, down from $352.0 million in 2022 Availability under revolving credit facilities was approximately $368.0 million as of July 21, 2023[206] Long-term Debt and Equity This chapter details recent debt and equity issuances, including first mortgage bonds and ATM common stock offerings - The company issued $300.0 million in Montana and South Dakota First Mortgage Bonds in March and May 2023 to refinance debt and fund capital investments[209] - An Equity Distribution Agreement allows for the sale of up to $200.0 million in common stock through an ATM program, with $10.8 million in net proceeds from shares issued in Q2 2023[210] - The City of Forsyth issued $144.7 million in Pollution Control Revenue Refunding Bonds on the company's behalf in June 2023 to redeem existing bonds[211] - The company anticipates issuing $63.6 million of common stock through its ATM program for the remainder of 2023 to support its debt-to-capital ratio target[213] Credit Ratings This chapter presents the company's current credit ratings from Fitch, Moody's, and S&P, including senior secured and unsecured ratings Credit Ratings (as of July 21, 2023) | Agency | Senior Secured Rating | Senior Unsecured Rating | Outlook | | :--- | :--- | :--- | :--- | | Fitch | A- | BBB+ | Stable | | Moody's | A3 | Baa2 | Stable | | S&P | A- | BBB | Stable | Contractual Obligations and Other Commitments This chapter provides a detailed table of the company's contractual cash obligations and other commitments as of June 30, 2023 Contractual Cash Obligations and Commitments (as of June 30, 2023, in thousands) | Obligation | Total (in thousands) | 2023 (in thousands) | 2024 (in thousands) | 2025 (in thousands) | 2026 (in thousands) | 2027 (in thousands) | Thereafter (in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | $2,670,660 | $0 | $100,000 | $325,000 | $105,000 | $166,000 | $1,974,660 | | Finance leases | $10,405 | $1,606 | $3,338 | $3,596 | $1,865 | $0 | $0 | | Estimated pension and other postretirement obligations | $57,160 | $11,392 | $11,667 | $11,367 | $11,367 | $11,367 | N/A | | Qualifying facilities liability | $342,296 | $39,234 | $74,110 | $60,360 | $55,393 | $56,665 | $56,534 | | Supply and capacity contracts | $2,748,013 | $219,539 | $289,237 | $237,647 | $248,875 | $232,176 | $1,520,539 | | Contractual interest payments on debt | $1,581,732 | $54,698 | $113,075 | $103,748 | $97,658 | $89,133 | $1,123,420 | | Commitments for significant capital projects | $118,908 | $45,399 | $63,434 | $10,075 | $0 | $0 | $0 | | Total Commitments | $7,529,174 | $371,868 | $654,861 | $751,793 | $520,158 | $555,341 | $4,675,153 | - The company provided surety bonds of approximately $15.7 million as of June 30, 2023, for Colstrip's remedial and closure actions[219] Critical Accounting Policies and Estimates This chapter identifies the company's critical accounting estimates, including regulatory assets, benefit plans, income taxes, and qualifying facilities liability - Critical accounting estimates include regulatory assets and liabilities, pension and postretirement benefit plans, income taxes, and qualifying facilities liability No material changes to these policies occurred as of June 30, 2023[222] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section addresses the company's exposure to various market risks, including interest rates, energy commodity price volatility, and counterparty credit exposure, and confirms that there have been no material changes to these risks since the last annual report - The company is exposed to market risks such as interest rates, energy commodity price volatility, and counterparty credit exposure Comprehensive risk management policies are in place to manage these risks[224] - There have been no material changes in the company's market risks as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022[224] Item 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting - As of June 30, 2023, the company's disclosure controls and procedures were evaluated and deemed effective by the principal executive officer and principal financial officer[226] - There have been no material changes in the company's internal control over financial reporting during the most recent fiscal quarter[227] Part II. Other Information This section provides additional information, including legal proceedings, risk factors, and a list of exhibits filed with the report Item 1. Legal Proceedings This section refers to Note 10 - Commitments and Contingencies in the Financial Statements for detailed information regarding legal proceedings - Information regarding legal proceedings is provided in Note 10 - Commitments and Contingencies of the Financial Statements[230] Item 1A. Risk Factors This section directs readers to the Annual Report on Form 10-K for a comprehensive disclosure of risk factors and confirms no material changes since that disclosure - Risk factors that could significantly impact the business, financial condition, results of operations, or cash flows are disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[231] - These risk factors have not materially changed since the disclosure in the Annual Report on Form 10-K[231] Item 6. Exhibits This section lists all exhibits filed with the 10-Q report, including supplemental indentures, loan agreements, and Sarbanes-Oxley Act certifications - Exhibits include various supplemental indentures (4.1-4.4, 4.7), a Loan Agreement (4.5), a Bond Delivery Agreement (4.6), and Amendment No 1 to Equity Distribution Agreement (10.1)[232][233][234][235][236][237][238][239] - Certifications from the chief executive officer and chief financial officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included as Exhibits 31.1, 31.2, 32.1, and 32.2[241] Signatures This chapter confirms the official signing of the report by the company's Vice President and Chief Financial Officer on July 25, 2023 - The report was signed on July 25, 2023, by Crystal Lail, Vice President and Chief Financial Officer of NorthWestern Corporation[245]