Good day, everyone, and welcome to the NorthWestern Corporation first quarter 2016 financial results conference call. Today's call is being recorded. And at this time, I would like to turn the conference over to Mr. Travis Meyer. Please go ahead, sir.

Thank you, Vikki. Good afternoon, and thank you for joining NorthWestern Corporation's financial results conference call and webcast for the quarter ended March 31, 2016. NorthWestern's results have been released and the release is available on our website at northwesternenergy.com. We also released our 10-Q, pre-market this morning. On the call with us today are Bob Rowe, President and Chief Executive Officer; Brian Bird, Vice President and Chief Financial Officer. And in addition, we have several other members of the executive team along with us in the room today to address your questions. Before I turn the call over for us to begin, please note that the company's press release, this presentation, comments by presenters and responses to your questions may contain forward-looking statements. As such, I will remind you of our Safe Harbor language. During the course of this presentation, there will be forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often address our expected future business and financial performance and will often contain words such as expects, anticipates, intends, plans, believes, seeks or will. The information in this presentation is based upon our current expectations of the date hereof, unless otherwise noted. Our actual future business and financial performance may differ materially and adversely from expectations expressed in any forward-looking statements. We undertake no obligation to revise or publicly update our forward-looking statements or this presentation for any reason. Although, our expectations and beliefs are based on reasonable assumptions, actual results may differ materially. The factors that may affect our results are listed in our press releases and disclosed in the company's Form 10-K and 10-Q, along with other public filings with the SEC. Following our presentation, those who are joining us by teleconference will be able to ask questions. The archived replay of today's webcast will be available, beginning today at 6:00 PM Eastern Time, and can be found on our website, again, at northwesternenergy.com, under the Our Company, Investor Relations, Presentations and Webcasts. To access the audio replay of the call, dial 888-203-1112, then access code 9488422. Again, that's 888-203-1112, access code 9488422. I will now turn it over to our President and CEO, Bob Rowe.

Thank you, and thank you all for joining us this afternoon. We are gathered at our new general office in Uptown Butte, Montana. Over the last several days, we've had our Board meeting, and then our Annual Meeting. This morning, if you happen to look at our deck from the Annual Meeting, you'd see that one of our most respected Directors, Louis Peoples, is not running for reelection of our Board though, and we've reduced the size of our Board by one. Louis is dealing with cancer. We'll very much miss him. He was able to participate in all events by phone though over the last two days. Last night we had a wonderful dedication for this new facility and folks from all across the community, and in fact from around Montana arrived to express their support and appreciation for the investments that we are making here. I'll start with recent significant activities. Net income for the quarter was $38.1 million or $0.79 per diluted share, that's as compared with net income of $51.4 million or $1.09 per diluted share for the same period in 2015. And this $13.4 million, which is a 26% decrease in net income, is primarily the result of lower revenue from recent regulatory decisions in Montana, combined with factors including higher property taxes and depreciation expense. Partially offsetting these unfavorable earnings impacts are higher revenues from increased electric rates in South Dakota. Non-GAAP adjusted earnings per share was $1.01 as compared to $1.18 for the same period last year. We filed our biennial Electric Supply Resource Procurement Plan with the Montana Public Service Commission just several weeks ago, tremendous amount of work went into that, and we'll come back and spend some time on that as well as other matters, that provides us a roadmap, actually a roadmap for all of our stakeholders, particularly including our regulators and customers, as to how we expect to respond to future Montana electric supply needs. The Board approved a quarterly stock dividend of $0.50 per share that is payable on June 30, 2016. I'll turn it over to Brian to start the financial results.

Thanks, Bob. For a summary of financial results, on Page 5. Our net income for the three months ended March 31, 2016, was $38.1 million or $13.4 million worse than the prior year results. Our earnings per share were $0.79 per diluted share compared to $1.09 per diluted share in the prior year or $0.30 lower on a year-over-year basis. Obviously, we're disappointed in our first quarter results and that disappointment really starts with gross margin. Our gross margin was $217.1 million, which was $16.5 million less than the prior year. It goes without saying the fact that we have higher guidance on a year-over-year basis. We expected our margins to be up on a year-over-year in this first quarter, and I'll get into the details in terms of what happened to margin in a moment. But not only did we expect gross margin to be up on a year-over-year basis, we expected net income to be up on a year-over-year basis. So, again, disappointed with our first quarter results. Regarding gross margin on Page 6, I mention the $16.5 million unfavorable variance versus the prior year. I'll go through each of those items certainly on the good news front. The South Dakota rate increase contributed $8.6 million improvement. We did see some slight improvement in Montana natural gas retail volumes that certainly helped. But offsetting that and first and foremost, the most detrimental thing to the quarter was the $10.3 million MPSC disallowance for replacement parts associated with the Colstrip 4 outage, based upon a recent MPSC decision was a primary driver for the quarter. Below that though, we did have other decisions in the fourth quarter of 2015 by the MPSC that resulted in a rate adjustment to our natural gas production. That was the primary driver for…

Thank you, Brian. And I'll walk through some of the things happening on the operational front. Obviously, we've talked a lot over the last several years about the hydro facilities. I mentioned to you in the past that one of the key initiatives for the last year has been an asset optimization study. And in fact that was completed and was a key driver going into the Montana Electric Supply Plan that I mentioned, and we'll come back and talk about that. We did successfully complete the conveyance of Kerr Dam to the confederated tribes, made a compliance filing in December 2015 to remove the Kerr project from the high growth cost of service in January of this year. The Montana Commission approved an interim adjustment to rates. They opened a separate contested case docket, noticed issues for parties to address, and the next major item likely to be any testimony from the Montana Consumer Counsel and we are looking forward final decision there in the second half of the year. Very importantly, and I mention this on earlier calls, last year, the system was stressed from a weather perspective, but nonetheless, and really thanks to the diversity of assets in essentially in four different basins, we came in right at capacity. So we are very pleased with the operation of the system. And then as I've noted before, we're also very pleased with the price we were able to negotiate for these assets, which was fairly significantly lower than what Talen had sold other assets to Brookfield Renewables for backing their home jurisdiction. A lot of activity in South Dakota over the last year, again, the Beethoven Wind Project came into our system in September of last year at 80 megawatt project that really has allowed us to significantly…

[Operator Instructions] And we'll take our first question today from Paul Ridzon with KeyBanc.

Can you just give a little more background on what is driving these oasis revenues down? Is this something fundamental that we expect for the rest of the year or is it just an unusual quarter?

We are assuming that the pattern will persist for the rest of the year. We can't guarantee that. And obviously, we would like to see that reverse. We think what's driving it down is basically relatively low power prices in the region, so less revenue, less reason to move power over the system. Certainly it could reverse and that would be a benefit. But as Brian said, we're being very, very serious about managing our expenditures over the rest of the year and we are not planning for that.

I recall there was a drop in oasis revenues a few years back, it was more related to economic activity, but this is more just pricing?

I think it's an excellent point, Paul. We talked about that here recently. We saw this back right after when the recession started, oasis looked like this, so we hope it's not some precursor to from an economic standpoint, but it's a similar look that we saw years ago.

And is it safe to say that you won't be looking to file another rate case on the electric side in Montana? The next update will be a year from now?

Yes.

And in this gas rate case, this should get your reserves kind of formally in rate base, correct?

Correct.

And then lastly, on the lower tax rate, how much of it is a continuation of the phenomenon we saw in the first quarter due to lower taxable income with constant flow-through items versus anything fundamentally changing the taxes.

No. I think in fairness, Paul, I would just say, we're looking at our full year forecast, and we gave you the new range in terms of what we look at. And I will tell you that we expect to be income tax to be plus than we originally forecasted, but I'm going to leave it at that.

The next question comes from Brian Russo with Ladenburg Thalmann.

Bob, maybe you could elaborate a little bit on the quote in the press release regarding significantly reducing capital expenditures in '16 due to regulatory decisions, yet on Slide 19 CapEx is still $308 million?

See, the quote refers to significantly reducing our expenditures, but doesn't refer to capital. So we will continue to focus on capital projects that are very important to serve our customers, but we are looking to manage expenses really across the board.

And then, just want to understand the $0.05 reduction to the 2016 guidance range. What are the positives and negatives? Because it seems like a big positive was the lower tax rate, so I would imagine that there were quite a bit of negative drivers to only net a $0.05 decline? Maybe you could just kind of dig a little deeper in that?

Yes, Brian, I would say, obviously, margin's the main reason for the cost reductions that are required, but we do not need to have as many cost reductions as reduction in margin, because of the tax benefit that you saw as a favorable. So net-net our expectation is we'll get back into this guidance range based upon where we think margins are going to go now and this expense control along with lower taxes.

And then the incremental $187 million over the five year capital plan, I mean, how do you seek recovery of some of these projects like the combustion units in Montana. Would that require a rate case filing?

Yes. To be included in rate base, they would have to go in through some kind of a rate filings, that's correct.

Sorry, if I missed this earlier, but post 2016 tax rate, should it start trending higher or should we kind of assume that this lower rate is sustainable?

Did you say post 26?

2016?

2016. Now, I think what we said here recently, and I don't expect this to change Brian, but we obviously mentioned that NOLs would go, we'd be able to utilize those into 2020 and we would expect our tax rate to creep back into 20s until 2020 as well. And there is nothing that I see that's happened after this first quarter to change that.

And then could you just elaborate a bit on the lower production bridge rates? And then what exactly was driving that?

Well, I think the issue is these are depleting assets that has an impact on those assets on a going forward basis. So the issue is they have been flowing through the tracker, it's fair to say that each year they're depleted. And so from a cost perspective, those costs have declined each and every year. And so based upon the way things are happening today that reduced cost being captured by the Commission and as a result, ultimately would be captured with this filing that will be making in 5 September, 2016.

And then lastly, the optimization opportunities for Dave Gates captured in the resource plan, is it captured in particular window of time or is it just kind of the more of a high level type of potential?

No, the operations are being modified directly according to the plan. The same time we're doing that there is a new transmission level protocol in the region, the liability based control. John Hines, our supply Vice President is here. He can probably provide some more flavor as to what's happening on the ground.

Bob, it's exactly correct. We are already running our entire fleet of resources in more optimal manner and we're using Dave Gates in both a regulation manner, ancillary services manner and a capacity manner as we speak. So it's providing multiple different values in many different pieces of the portfolio.

Next is Jim Von Riesemann with Mizuho.

Couple of questions for you. One is on Slide 14, can you help bridge the $0.29 year-over-year earnings improvement from Q2 to Q4, what that consists of? How much of its cost reduction? How much might be tax rates and other?

Well, Jim, I don't have that broken out myself for each of those quarters. That's at a very, very high level that we've shown it that way.

What's driving that increase of nearly $0.30 last year's second to fourth quarters and then this year's projected second to fourth quarters to get you into the range?

Good question. The primary impact in our original guidance, you would have seen obviously an increase on a year-over-year basis in our original guidance, that would have been primarily associated with margin increases. Now, what we're going to see for that is certainly still margin increases on a year-over-year basis, but we're going to see improvements in cost as well and improvement in taxes, but that's going to be --

Do you have any idea what that breaks down just roughly speaking, is it like $0.05 of that is taxes or $0.10 is taxes. $0.10 is the cost efforts and then the other delta is other margin improvement?

I don't at this time, Jim.

On the 7% to 10% total return proposition, how do you think about that going into 2017 and 2018?

It's a good question. I think in light of what we're seeing from, obviously, there is concern here with the most recent decisions here in the fourth quarter and the first quarter of 2016. I have to say it, I don't feel as good about it, but I know that this company continues to strive to do what we need to do from a shareholder perspective to deliver those results, and so I know that this management team is focused on delivering results that we shared with investors in terms of our guidance.

The next question comes from Jonathan Reeder with Wells Fargo.

I'm going to try to ask one of the earlier questions a little differently. So just to truly understand the guidance change drivers, I guess what exactly is new that's driving, I guess, the gross margin. You have the lower transmission revenues. You expect that to continue through the remainder of the year. You have the lower industrial volumes from one the large customer and then that's going to be partially offset from the cost reductions and the lower tax rate. Is that essentially it, because I mean, the MPSC stuff is either actions in 2015 or stuff that you're reversing out in ongoing in 2016, is that fair?

I think that's fair. I think though as you saw on the first quarter results, when you combined both the decisions by the Commission that's impacted our going forward results. And as I've pointed out the three things, I'll put out again, in oasis we think that persists, industrial loads being down we think that persists, and we just continue to se see retail weakness bit more than we expected. And Jonathan and whoever else for that matter, we've been seeing decent customer growth, we've been seeing decent new connections, we expected to see that turn into higher volume metrics, of course, for us, and not what we've seen. Obviously, we described some of the detriment in the first quarter due to weather, but there is more to it than that. So that would be the third thing, it's just that retail weakness -- and again, that's on top of, as you saw all of the things in the first quarter that impacted our business. But to your point about what's new, I think in fairness what you talked about those margin items will be offset to great degree by cost control and to a less degree by income tax.

And on the industrial one. Is that a temporary kind of -- is it some sort of outage at a facility or is it just weakness in the overall industrial sector?

Really, I think, the focus ought to be on the natural resources sector specifically. It's primarily mining at this point. And then reinforce a point that Brian made, we've seen really pretty impressive growth in residential commercial new connect. So in that sense, we're seeing an awful lot of activity and working hard to keep up with that, but the per customer volumes even backing out weather are down and John Hines and his folks in putting together the supply plan, we're mindful of that as well.

And then, Bob, on the 86 megawatts of hydro capacity addition, would that take the place of some of the gas fired capacities that you outlined at the bottom of Slide 18 rather than us viewing them as an incremental?

No. They're complementary. But the gas additions, particularly the internal combustion engines are required to meet very, very specific needs on the system. The hydro additions would potentially contribute at peak, at the capacity, but would also have a significant energy contribution. John, is that a fair statement?

Right. We're looking to provide around 2020 around 400 megawatts of additional capacity. That 86 megawatts are incremental hydro would be complementary, as Bob noted, to meeting both our base load and some peak load. But we will need the internal combustion engines to be specific for those following and our capacity requirements.

So the hydro could help meet the base, but you'd still need the gas for the peaking needs essentially.

Yes. It's an incremental addition. I would note though that we still need to prove out those. As we identified in the plan, that's going to be a key task for Q2 and Q3 of this year is identifying all the cost associated with those. We are expecting some of that to be able to address also our incremental renewable portfolio standard requirements. So we're very optimistic.

So really the increase in the CapEx budget, if hydro, that 86 is pursued that's potential upside.

Correct. And I think as you've seen in the past from capital perspective until we nail down again the timing and the dollar amount associated with that add-back, we have more specificity around the gas units that we're talking about in the plan. But until we have more specificity around the hydro in terms of the amount and timing, it's not going to show up in these plans.

And then last question. Brian you somewhat alluded to this with Jim, but the recent actions of the, how do you view them bigger picture, because historically Montana has been considered challenging from an investor perspective, but you've been able to reach reasonable outcomes over the past few years. With these latest outcomes is the tide shifting?

I'm so appreciated that you directed that question to Brian.

Bob, feel free to weigh in too.

The microphone is open. When we agree with the Commission, when we get our numbers wrong, when they see an issue, they want to have us address, we do it. And when they're right, we just ask how high to jump. There are questions where we have substantial concerns about direction. And obviously, LRAM and replacement power are two very important subjects. And we are concerned about predictability and stability in the environment where we make the preponderance of our investments. I want to be able to see the order. We'll address a number of issues. My expectation is that much of what the Commission has to say, we will agree with. We are especially concerned, especially concerned about the replacement power analysis, because in the home state for the Colstrip Units, the only Commission that looked to be issue, that actually found imprudence on the part of the owners is the Idaho Commission in the context of Avista, and then most notably, the Washington Commission, not considered a friend of coal, has specially made a determination that the replacement power costs were prudent. So again, everything we do with any regulatory body is first and foremost from a position of respect. We want to understand the directions that they're going. We want to understand their analysis. If we're wrong, we need to own that. And if we disagree, as we expect, we will in response to the final order here, we need to pursue that in an appropriate way.

Are those concerns at all factored into your decision not to file on the electric side this year?

Brian?

I think what I would say on that, as you might recall, we talked about this on previous calls, our 2014 Annual Report for Montana that we show actually by jurisdiction. The last year electric was at 11%. Again, there was some tax benefits associated with that, of course, that made that higher than our authorized rates. But nonetheless, it was at 11%. Our gas at that time was 8%. So if you would just assume, and my expectation and we'll come out with these reports at the end of April, but you just assume that those are going to be a lot less for the '15 reports than they were in the '14 reports. And it's going to be clear that from a gas perspective it's going to be necessary to file a case and the fact that we're required to come in anyway on the gas production assets. And you certainly were given the option to bring in a full blown gas case. I think once you see those annual reports, I think it will be clear to you in terms of the decisions we made.

We'll now go to Paul Patterson with Glenrock Associates.

Most of my questions have been answered. Just wanted to sort of double back, I think, Brian's question on the tax post 2016. I think you said that it was trending closer. You thought over time to 20%. How should we think about it in the more sort of 2017 sort of 2018 area? How should we think about taxes trending then?

I think the specificity I gave you was that you'd expect it to get in the 20s. I don't know that I tell you that it's exactly linear. But obviously, if your pre-tax earnings are going up, and let's just say, your permanent flow-through items are staying relatively the same, you'd expect your tax rate to go up. Does that make sense to you?

Yes, that makes sense. So I mean that's what's the driver on it. We shouldn't think of any change outside of an increase in net income as driving your effective -- driving this tax rate of 6% to 10%, is that right?

I think the main thing is just think about a pre-tax basis, as pre-tax increases and if your permanent flow-through stay relatively the same, expect that your tax rate is going to go up.

And then just in terms of O&M control, et cetera, how should we think about that post 2016?

I'd like to tell you that we're going to manage our business as we need to in order to provide the growth. Obviously, the decisions we've seen here recently and other impacts are forcing us to make some decision operationally. We hope that we wouldn't have to continue to do some of those things on a going-forward basis. But it's really difficult to tell, as we sit here in early 2016.

Just a little bit more flavor there. When we benchmark ourselves, we do quite well by most all measurements and we do that on a common size basis. So that's an important part of what we do and the commitment that we make to customers and to you to be cost effective that continues. But we are recognizing the need to go deeper and be disciplined, and I expect that clearly that will happen in 2016. There are things we will need to get back to in 2017 that are very important, but we expect that that discipline is just a part of life.

I'd only add to that. I think the company has done a phenomenal job over the years to control costs. And as a result of controlling costs, it's kept us out of rate cases for a number of years. And we like to think that's a good thing for customers.

And for shareholders.

And we'll now go to Chris Ellinghaus with Williams Capital.

Brian the decline in gas production gross margin, was that purely a depletion issue?

No. There were some other things we talked about, some other delivery charges I think in there. And I think that was probably a-third of the cost, slightly less than that. But the depletion was the primary driver.

As far as the change in Dave Gates dispatch plan, how do you see that affecting the return on that plan? And when do you expect to see benefits from that?

I think, it's too early to tell. I think now at some point in time there will ultimately need to be a rate case, the fact that we're using Dave Gates differently. I expect that there have to be a rate case both from a FERC and MPSC perspective at some time in the future. I mean, right now, we're in the optimization mode, certainly still testing how this works. We heard earlier about RBC and how that impacts things. And so as John talked about, we're still looking through that and ultimately get it resolved from a revenue requirement perspective. There will be rate cases in our future.

And Bob, as far as the natural gas filing in Montana, do you feel that there is any risk of sort of getting drawn into an electric rate case, as you go through those proceedings?

Certainly, there is that possibility. We acknowledge that. But the Montana Commission was I think quite direct in inviting us to file a natural gas case. And we think that it makes sense to focus there this year.

And there are no other questions. So I'd like to turn the conference back to Bob Rowe for any additional or closing remarks. End of Q&A

Well, thank you all for the good questions and for your support for the company throughout the quarter. We'll see a number of you, I know, over the next month or so down at AGA and elsewhere, and look forward to visiting with all of you next quarter. And this concludes the call.

Thank you very much. I'd like to thank everyone for your participation. And have a great rest of your day.