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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(mark one) | | | |
☒ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended | September 30, 2022 |
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OR |
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☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-10499
NORTHWESTERN CORP
(Exact name of registrant as specified in its charter)
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Delaware | | 46-0172280 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
3010 W. 69th Street | Sioux Falls | South Dakota | | 57108 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: 605-978-2900
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock | NWE | Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non- accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer | ☒ | Accelerated Filer | ☐ | Non-accelerated Filer | ☐ | Smaller Reporting Company | ☐ | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, Par Value $0.01, 57,778,743 shares outstanding at October 21, 2022
NORTHWESTERN CORPORATION
FORM 10-Q
INDEX
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
On one or more occasions, we may make statements in this Quarterly Report on Form 10-Q regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events. All statements other than statements of historical facts, included or incorporated by reference in this Quarterly Report, relating to our current expectations of future financial performance, continued growth, changes in economic conditions or capital markets and changes in customer usage patterns and preferences are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Words or phrases such as “anticipates," “may," “will," “should," “believes," “estimates," “expects," “intends," “plans," “predicts," “projects," “targets," “will likely result," “will continue" or similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. We caution that while we make such statements in good faith and believe such statements are based on reasonable assumptions, including without limitation, our examination of historical operating trends, data contained in records and other data available from third parties, we cannot assure you that we will achieve our projections. Factors that may cause such differences include, but are not limited to:
•adverse determinations by regulators, as well as potential adverse federal, state, or local legislation or regulation, including costs of compliance with existing and future environmental requirements, could have a material effect on our liquidity, results of operations and financial condition;
•the impact of extraordinary external events and natural disasters, such as the COVID-19 pandemic, geopolitical events, earthquake, flood, drought, lightning, weather, wind, and fire, could have a material effect on our liquidity, results of operations and financial condition;
•acts of terrorism, cybersecurity attacks, data security breaches, or other malicious acts that cause damage to our generation, transmission, or distribution facilities, information technology systems, or result in the release of confidential customer, employee, or Company information;
•supply chain constraints, recent high levels of inflation for product, services and labor costs, and their impact on capital expenditures, operating activities, and/or our ability to safely and reliably serve our customers;
•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 operating costs 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.
We have attempted to identify, in context, certain of the factors that we believe may cause actual future experience and results to differ materially from our current expectation regarding the relevant matter or subject area. In addition to the items specifically discussed above, our business and results of operations are subject to the uncertainties described under the caption “Risk Factors” which is part of the disclosure included in Part II, Item 1A of this Quarterly Report on Form 10-Q.
From time to time, oral or written forward-looking statements are also included in our reports on Forms 10-K, 10-Q and 8-K, Proxy Statements on Schedule 14A, press releases, analyst and investor conference calls, and other communications released to the public. We believe that at the time made, the expectations reflected in all of these forward-looking statements are and will be reasonable. However, any or all of the forward-looking statements in this Quarterly Report on Form 10-Q, our reports on Forms 10-K and 8-K, our other reports on Form 10-Q, our Proxy Statements on Schedule 14A and any other public statements that are made by us may prove to be incorrect. This may occur as a result of assumptions, which turn out to be inaccurate, or as a consequence of known or unknown risks and uncertainties. Many factors discussed in this Quarterly Report on Form 10-Q, certain of which are beyond our control, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of any of our forward-looking statements in this Quarterly Report on Form 10-Q or other public communications as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made on related subjects in our subsequent reports filed with the Securities and Exchange Commission (SEC) on Forms 10-K, 10-Q and 8-K and Proxy Statements on Schedule 14A.
Unless the context requires otherwise, references to “we,” “us,” “our,” “NorthWestern Corporation,” “NorthWestern Energy,” and “NorthWestern” refer specifically to NorthWestern Corporation and its subsidiaries.
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PART 1. FINANCIAL INFORMATION |
ITEM 1.FINANCIAL STATEMENTS
NORTHWESTERN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenues | | | | | | | |
Electric | $ | 292,270 | | | $ | 287,473 | | | $ | 807,415 | | | $ | 798,984 | |
Gas | 42,798 | | | 38,482 | | | 245,139 | | | 225,991 | |
Total Revenues | 335,068 | | | 325,955 | | | 1,052,554 | | | 1,024,975 | |
Operating expenses | | | | | | | |
Fuel, purchased supply and direct transmission expense (exclusive of depreciation and depletion shown separately below) | 108,920 | | | 98,659 | | | 338,994 | | | 311,137 | |
Operating and maintenance | 54,654 | | | 56,002 | | | 160,785 | | | 159,317 | |
Administrative and general | 28,146 | | | 24,946 | | | 87,010 | | | 79,596 | |
Property and other taxes | 46,466 | | | 43,572 | | | 140,209 | | | 138,337 | |
Depreciation and depletion | 48,588 | | | 47,112 | | | 145,705 | | | 140,896 | |
Total Operating Expenses | 286,774 | | | 270,291 | | | 872,703 | | | 829,283 | |
Operating income | 48,294 | | | 55,664 | | | 179,851 | | | 195,692 | |
Interest expense, net | (25,332) | | | (23,283) | | | (73,081) | | | (70,266) | |
Other income, net | 4,157 | | | 5,326 | | | 11,791 | | | 13,932 | |
Income before income taxes | 27,119 | | | 37,707 | | | 118,561 | | | 139,358 | |
Income tax benefit (expense) | 249 | | | (2,511) | | | (2,297) | | | (3,854) | |
Net Income | $ | 27,368 | | | $ | 35,196 | | | $ | 116,264 | | | $ | 135,504 | |
| | | | | | | |
Average Common Shares Outstanding | 56,311 | | | 51,892 | | | 54,901 | | | 51,175 | |
Basic Earnings per Average Common Share | $ | 0.48 | | | $ | 0.68 | | | $ | 2.12 | | | $ | 2.65 | |
Diluted Earnings per Average Common Share | $ | 0.47 | | | $ | 0.68 | | | $ | 2.09 | | | $ | 2.64 | |
Dividends Declared per Common Share | $ | 0.63 | | | $ | 0.62 | | | $ | 1.89 | | | $ | 1.86 | |
| | | | | | | |
See Notes to Condensed Consolidated Financial Statements
NORTHWESTERN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net Income | $ | 27,368 | | | $ | 35,196 | | | $ | 116,264 | | | $ | 135,504 | |
Other comprehensive income, net of tax: | | | | | | | |
Foreign currency translation adjustment | (4) | | | (1) | | | (5) | | | (56) | |
Postretirement medical liability adjustment | (158) | | | (159) | | | (474) | | | (476) | |
Reclassification of net losses on derivative instruments | 113 | | | 113 | | | 339 | | | 339 | |
Total Other Comprehensive Loss | (49) | | | (47) | | | (140) | | | (193) | |
Comprehensive Income | $ | 27,319 | | | $ | 35,149 | | | $ | 116,124 | | | $ | 135,311 | |
See Notes to Condensed Consolidated Financial Statements
NORTHWESTERN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
ASSETS | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 9,069 | | | $ | 2,820 | |
Restricted cash | 19,656 | | | 15,942 | |
Accounts receivable, net | 149,149 | | | 198,671 | |
Inventories | 129,254 | | | 80,614 | |
Regulatory assets | 136,329 | | | 115,541 | |
Prepaid expenses and other | 29,346 | | | 24,207 | |
Total current assets | 472,803 | | | 437,795 | |
Property, plant, and equipment, net | 5,533,601 | | | 5,247,232 | |
Goodwill | 357,586 | | | 357,586 | |
Regulatory assets | 701,771 | | | 690,686 | |
Other noncurrent assets | 48,452 | | | 47,144 | |
Total Assets | $ | 7,114,213 | | | $ | 6,780,443 | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
Current Liabilities: | | | |
Current maturities of finance leases | $ | 3,040 | | | $ | 2,875 | |
Current portion of long-term debt | 144,467 | | | — | |
Accounts payable | 148,451 | | | 115,237 | |
Accrued expenses and other | 300,702 | | | 233,351 | |
Regulatory liabilities | 21,781 | | | 28,179 | |
Total current liabilities | 618,441 | | | 379,642 | |
Long-term finance leases | 9,602 | | | 11,897 | |
Long-term debt | 2,409,002 | | | 2,541,478 | |
Deferred income taxes | 518,076 | | | 499,634 | |
Noncurrent regulatory liabilities | 656,467 | | | 638,760 | |
Other noncurrent liabilities | 365,296 | | | 369,319 | |
Total Liabilities | 4,576,884 | | | 4,440,730 | |
Commitments and Contingencies (Note 10) | | | |
Shareholders' Equity: | | | |
Common stock, par value $0.01; authorized 200,000,000 shares; issued and outstanding 61,317,609 and 57,776,740 shares, respectively; Preferred stock, par value $0.01; authorized 50,000,000 shares; none issued | 613 | | | 576 | |
Treasury stock at cost | (98,578) | | | (98,248) | |
Paid-in capital | 1,900,992 | | | 1,716,227 | |
Retained earnings | 741,752 | | | 728,468 | |
Accumulated other comprehensive loss | (7,450) | | | (7,310) | |
Total Shareholders' Equity | 2,537,329 | | | 2,339,713 | |
Total Liabilities and Shareholders' Equity | $ | 7,114,213 | | | $ | 6,780,443 | |
See Notes to Condensed Consolidated Financial Statements
NORTHWESTERN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
OPERATING ACTIVITIES: | | | |
Net income | $ | 116,264 | | | $ | 135,504 | |
Items not affecting cash: | | | |
Depreciation and depletion | 145,705 | | | 140,896 | |
Amortization of debt issuance costs, discount and deferred hedge gain | 4,044 | | | 3,951 | |
Stock-based compensation costs | 4,324 | | | 5,850 | |
Equity portion of allowance for funds used during construction | (9,983) | | | (7,829) | |
Loss on disposition of assets | 524 | | | 6,536 | |
Deferred income taxes | (12,127) | | | (681) | |
Changes in current assets and liabilities: | | | |
| | | |
Accounts receivable | 49,522 | | | 28,901 | |
Inventories | (48,639) | | | (23,400) | |
Other current assets | (5,139) | | | (8,442) | |
Accounts payable | 36,064 | | | (12,472) | |
Accrued expenses and other | 67,636 | | | 85,015 | |
Regulatory assets | (20,788) | | | (67,672) | |
Regulatory liabilities | (6,398) | | | (32,941) | |
Other noncurrent assets | 8,968 | | | 610 | |
Other noncurrent liabilities | (20,707) | | | (32,216) | |
Cash Provided by Operating Activities | 309,270 | | | 221,610 | |
INVESTING ACTIVITIES: | | | |
Property, plant, and equipment additions | (386,339) | | | (311,160) | |
| | | |
Investment in equity securities | (914) | | | (655) | |
Cash Used in Investing Activities | (387,253) | | | (311,815) | |
FINANCING ACTIVITIES: | | | |
Proceeds from issuance of common stock, net of issuance costs | 179,903 | | | 121,066 | |
Dividends on common stock | (102,980) | | | (95,148) | |
Issuance of long-term debt, net | — | | | 99,915 | |
Line of credit borrowings, net | 12,000 | | | 73,000 | |
Repayments on long-term debt | — | | | (955) | |
Repayments of short-term borrowings | — | | | (100,000) | |
Other financing activities, net | (977) | | | (550) | |
Cash Provided by Financing Activities | 87,946 | | | 97,328 | |
Increase in Cash, Cash Equivalents, and Restricted Cash | 9,963 | | | 7,123 | |
Cash, Cash Equivalents, and Restricted Cash, beginning of period | 18,762 | | | 17,096 | |
Cash, Cash Equivalents, and Restricted Cash, end of period | $ | 28,725 | | | $ | 24,219 | |
Supplemental Cash Flow Information: | | | |
Cash paid during the period for: | | | |
Income taxes | $ | 9,060 | | | $ | 3,630 | |
Interest | 60,610 | | | 57,473 | |
Significant non-cash transactions: | | | |
Capital expenditures included in accounts payable | 26,184 | | | 23,500 | |
| | | |
See Notes to Condensed Consolidated Financial Statements
NORTHWESTERN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| Number of Common Shares | | Number of Treasury Shares | | Common Stock | | Treasury Stock | | Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders' Equity |
Balance at June 30, 2021 | 55,118 | | | 3,558 | | | $ | 551 | | | $ | (98,578) | | | $ | 1,575,159 | | | $ | 707,598 | | | $ | (7,415) | | | $ | 2,177,315 | |
| | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 35,196 | | | — | | | 35,196 | |
Foreign currency translation adjustment, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
Reclassification of net losses on derivative instruments from OCI to net income, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | 113 | | | 113 | |
Postretirement medical liability adjustment, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | (159) | | | (159) | |
Stock-based compensation | — | | | — | | | — | | | — | | | 1,301 | | | — | | | — | | | 1,301 | |
Issuance of shares | 1,039 | | | (6) | | | 11 | | | 154 | | | 64,930 | | | — | | | — | | | 65,095 | |
Dividends on common stock ($0.620 per share) | — | | | — | | | — | | | — | | | — | | | (32,327) | | | — | | | (32,327) | |
Balance at September 30, 2021 | 56,157 | | 3,552 | | $ | 562 | | | $ | (98,424) | | | $ | 1,641,390 | | | $ | 710,467 | | | $ | (7,462) | | | $ | 2,246,533 | |
| | | | | | | | | | | | | | | |
Balance at June 30, 2022 | 59,697 | | 3,548 | | $ | 597 | | | $ | (98,765) | | | $ | 1,820,531 | | | $ | 749,558 | | | $ | (7,401) | | | $ | 2,464,520 | |
| | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 27,368 | | | — | | | 27,368 | |
Foreign currency translation adjustment, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
Reclassification of net losses on derivative instruments from OCI to net income, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | 113 | | | 113 | |
Postretirement medical liability adjustment, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | (158) | | | (158) | |
Stock-based compensation | — | | | — | | | — | | | — | | | 2,080 | | | — | | | — | | | 2,080 | |
Issuance of shares | 1,621 | | | (7) | | | 16 | | | 187 | | | 78,381 | | | — | | | — | | | 78,584 | |
| | | | | | | | | | | | | | | |
Dividends on common stock ($0.630 per share) | — | | | — | | | — | | | — | | | — | | | (35,174) | | | — | | | (35,174) | |
Balance at September 30, 2022 | 61,318 | | 3,541 | | $ | 613 | | | $ | (98,578) | | | $ | 1,900,992 | | | $ | 741,752 | | | $ | (7,450) | | | $ | 2,537,329 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| Number of Common Shares | | Number of Treasury Shares | | Common Stock | | Treasury Stock | | Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders' Equity |
Balance at December 31, 2020 | 54,145 | | | 3,558 | | | $ | 541 | | | $ | (98,075) | | | $ | 1,513,787 | | | $ | 670,111 | | | $ | (7,269) | | | $ | 2,079,095 | |
| | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 135,504 | | | — | | | 135,504 | |
Foreign currency translation adjustment, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | (56) | | | (56) | |
Reclassification of net losses on derivative instruments from OCI to net income, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | 339 | | | 339 | |
Postretirement medical liability adjustment, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | (476) | | | (476) | |
Stock-based compensation | 93 | | | 17 | | | 1 | | | (970) | | | 5,811 | | | — | | | — | | | 4,842 | |
Issuance of shares | 1,919 | | | (23) | | | 20 | | | 621 | | | 121,792 | | | — | | | — | | | 122,433 | |
Dividends on common stock ($1.860 per share) | — | | | — | | | — | | | — | | | — | | | (95,148) | | | — | | | (95,148) | |
Balance at September 30, 2021 | 56,157 | | 3,552 | | $ | 562 | | | $ | (98,424) | | | $ | 1,641,390 | | | $ | 710,467 | | | $ | (7,462) | | | $ | 2,246,533 | |
| | | | | | | | | | | | | | | |
Balance at December 31, 2021 | 57,606 | | 3,546 | | $ | 576 | | | $ | (98,248) | | | $ | 1,716,227 | | | $ | 728,468 | | | $ | (7,310) | | | $ | 2,339,713 | |
| | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 116,264 | | | — | | | 116,264 | |
Foreign currency translation adjustment, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | (5) | | | (5) | |
Reclassification of net losses on derivative instruments from OCI to net income, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | 339 | | | 339 | |
Postretirement medical liability adjustment, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | (474) | | | (474) | |
Stock-based compensation | 87 | | | 16 | | | 1 | | | (911) | | | 6,056 | | | — | | | — | | | 5,146 | |
Issuance of shares | 3,625 | | | (21) | | | 36 | | | 581 | | | 178,709 | | | — | | | — | | | 179,326 | |
| | | | | | | | | | | | | | | |
Dividends on common stock ($1.890 per share) | — | | | — | | | — | | | — | | | — | | | (102,980) | | | — | | | (102,980) | |
Balance at September 30, 2022 | 61,318 | | 3,541 | | $ | 613 | | | $ | (98,578) | | | $ | 1,900,992 | | | $ | 741,752 | | | $ | (7,450) | | | $ | 2,537,329 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
See Notes to Condensed Consolidated Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Reference is made to Notes to Financial Statements included in NorthWestern Corporation’s Annual Report)
(Unaudited)
(1) Nature of Operations and Basis of Consolidation
NorthWestern Corporation, doing business as NorthWestern Energy, provides electricity and/or natural gas to approximately 753,600 customers in Montana, South Dakota, Nebraska and Yellowstone National Park.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires us to make estimates and assumptions that may affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from those estimates. The unaudited Condensed Consolidated Financial Statements (Financial Statements) reflect all adjustments (which unless otherwise noted are normal and recurring in nature) that are, in our opinion, necessary to fairly present our financial position, results of operations and cash flows. The actual results for the interim periods are not necessarily indicative of the operating results to be expected for a full year or for other interim periods. Events occurring subsequent to September 30, 2022 have been evaluated as to their potential impact to the Financial Statements through the date of issuance.
The Financial Statements included herein have been prepared by NorthWestern, without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations; however, we believe that the condensed disclosures provided are adequate to make the information presented not misleading. We recommend that these Financial Statements be read in conjunction with the audited financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Reclassification
In 2021, we renamed the line item "Cost of sales" as previously shown on the Consolidated Statements of Income, and used elsewhere within our filing, to "Fuel, purchased supply and direct transmission expense." Additionally, we disaggregated the line item "Operating, general and administrative" as previously shown on the Consolidated Statements of Income, and used elsewhere within our filing, to two line items, "Operating and maintenance" and "Administrative and general." These reclassifications were done in an effort to better convey the nature of these costs and did not impact reported operating income or net income.
Supplemental Cash Flow Information
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows (in thousands):
| | | | | | | | | | | | | | |
| September 30, | December 31, | September 30, | December 31, |
| 2022 | 2021 | 2021 | 2020 |
Cash and cash equivalents | $ | 9,069 | | $ | 2,820 | | $ | 8,577 | | $ | 5,811 | |
Restricted cash | 19,656 | | 15,942 | | 15,642 | | 11,285 | |
Total cash, cash equivalents, and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | $ | 28,725 | | $ | 18,762 | | $ | 24,219 | | $ | 17,096 | |
Goodwill
We completed our annual goodwill impairment test as of April 1, 2022 and no impairment was identified. We calculate the fair value of our reporting units by considering various factors, including valuation studies based primarily on a discounted cash flow analysis, with published industry valuations and market data as supporting information. Key assumptions in the determination of fair value include the use of an appropriate discount rate and estimated future cash flows. In estimating cash flows, we incorporate expected long-term growth rates in our service territory, regulatory stability, and commodity prices (where appropriate), as well as other factors that affect our revenue, expense and capital expenditure projections.
(2) Regulatory Matters
Montana Rate Review
On August 8, 2022, we filed a Montana electric and natural gas rate review with the Montana Public Service Commission (MPSC) requesting an annual increase to electric and natural gas utility rates of $171.0 million and $23.0 million, respectively, detailed as follows:
| | | | | | | | |
Requested Revenue Increase (in millions) |
| Electric | Natural Gas |
Base Rates | $91.8 | $20.2 |
Power Cost & Credit Mechanism (PCCAM)(1) | $68.1 | n/a |
Property Tax (tracker true-up)(1) | $11.1 | $2.8 |
Total | $171.0 | $23.0 |
(1) These items are flow-through costs, which represent approximately 42% of the requested electric and natural gas revenue increase.
Our electric request is based on a return on equity of 10.60% with a forecasted 2022 rate base of $2.8 billion and a capital structure of 51.98% debt and 48.02% equity. Our natural gas request is based on a return on equity of 10.60% with a forecasted 2022 rate base of $575.3 million and a capital structure of 51.98% debt and 48.02% equity.
Within this rate review filing we requested an increase to the Power Cost and Credit Mechanism (PCCAM) base rate (PCCAM Base) of $68.1 million, as well as structural revisions to the PCCAM mechanism to provide customers with prices that better reflect the cost of services received. We also proposed to implement a revised electric only pilot for the Fixed Cost Recovery Mechanism (FCRM) beginning July 1, 2023, or alternatively to terminate the FCRM. Our rate review filing also includes proposals for more timely cost recovery beyond the test period, including critical reliability resources, such as the Yellowstone Generating Station, our Enhanced Wildfire Mitigation plan, and business technology maintenance costs.
On September 28, 2022, the MPSC approved the recommendations of the MPSC Staff for interim rates, subject to refund, which increased base electric rates $29.4 million, PCCAM Base rates $61.1 million, and base natural gas rates $1.7 million, effective October 1, 2022.
Montana Community Renewable Energy Projects (CREPs)
As further discussed in Note 3 - "Regulatory Matters" of our Annual Report on Form 10-K for the year ended December 31, 2021, we have been involved in litigation associated with our past progress towards meeting obligations to acquire renewable energy projects, as mandated by the recently repealed Montana CREP requirement. Although we had been granted waivers by the MPSC and the CREP requirement was subsequently repealed by the Montana legislature, on May 9, 2022, the Montana District Court imposed a $2.5 million penalty against us, payable to the Universal Low Income Assistance Fund in Montana, in connection with the petition filed by the Montana Environmental Information Center (MEIC) challenging the MPSC's decision granting our waiver requests from CREP compliance in 2015 and 2016. The expense associated with this penalty was accrued for within our second quarter 2022 results. We filed an appeal with the Montana Supreme Court.
Federal Energy Regulatory Commission (FERC) Financial Audit
We are subject to FERC’s jurisdiction and regulations with respect to rates for electric transmission service in interstate commerce and electricity sold at wholesale rates, the issuance of certain securities, and incurrence of certain long-term debt, among other things. The Division of Audits and Accounting in the Office of Enforcement of FERC initiated a routine audit of NorthWestern Corporation for the period of January 1, 2018 to October 31, 2021 to evaluate our compliance with FERC accounting and financial reporting requirements. In May 2022, we received the final audit report from FERC and the resolution of the identified audit findings and recommendations did not have a material financial impact on our Financial Statements.
(3) Income Taxes
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 due to the regulatory impact of flowing through the federal and state tax benefit of repairs deductions, state tax benefit of accelerated tax depreciation deductions (including bonus depreciation when applicable) and production tax credits. The regulatory accounting treatment of these deductions requires immediate income recognition for temporary tax differences of this type, which is referred to as the
flow-through method. When the flow-through method of accounting for temporary differences is reflected in regulated revenues, we record deferred income taxes and establish related regulatory assets and liabilities.
The following table summarizes the differences between our effective tax rate and the federal statutory rate (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2022 | | 2021 |
Income before income taxes | $ | 27,119 | | | | | $ | 37,707 | | | |
| | | | | | | |
Income tax calculated at federal statutory rate | 5,697 | | | 21.0 | % | | 7,918 | | | 21.0 | % |
| | | | | | | |
Permanent or flow-through adjustments: | | | | | | | |
State income tax, net of federal provisions | 145 | | | 0.5 | | | 397 | | | 1.1 | |
Flow-through repairs deductions | (3,374) | | | (12.4) | | | (3,473) | | | (9.2) | |
Production tax credits | (1,668) | | | (6.2) | | | (1,877) | | | (5.0) | |
Income tax return to accrual adjustment | (926) | | | (3.4) | | | 389 | | | 1.0 | |
Amortization of excess deferred income tax | (246) | | | (0.9) | | | (126) | | | (0.3) | |
Share-based compensation | — | | | — | | | (62) | | | (0.2) | |
Plant and depreciation of flow-through items | 266 | | | 1.0 | | | (288) | | | (0.8) | |
Other, net | (143) | | | (0.5) | | | (367) | | | (1.0) | |
| (5,946) | | | (21.9) | | | (5,407) | | | (14.4) | |
| | | | | | | |
Income tax (benefit) expense | $ | (249) | | | (0.9) | % | | $ | 2,511 | | | 6.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Income before income taxes | $ | 118,561 | | | | | $ | 139,358 | | | |
| | | | | | | |
Income tax calculated at federal statutory rate | 24,897 | | | 21.0 | % | | 29,265 | | | 21.0 | % |
| | | | | | | |
Permanent or flow through adjustments: | | | | | | | |
State income, net of federal provisions | 976 | | | 0.8 | | | 674 | | | 0.5 | |
Flow-through repairs deductions | (13,488) | | | (11.4) | | | (15,553) | | | (11.2) | |
Production tax credits | (8,050) | | | (6.8) | | | (8,446) | | | (6.1) | |
Income tax return to accrual adjustment | (926) | | | (0.8) | | | 389 | | | |