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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(mark one)  
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSeptember 30, 2020
OR
 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
nwe-20200930_g1.jpg
NORTHWESTERN CORP
(Exact name of registrant as specified in its charter)
Delaware 46-0172280
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
3010 W. 69th StreetSioux FallsSouth Dakota 57108
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: 605-978-2900

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stockNWENasdaq 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.
Large Accelerated FilerAccelerated FilerNon-accelerated FilerSmaller Reporting CompanyEmerging 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, 50,581,973 shares outstanding at October 16, 2020
1


NORTHWESTERN CORPORATION
 
FORM 10-Q
 
INDEX
 Page
 
 
 
 
2


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 management's 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, management’s 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, such as the outbreak of the novel coronavirus (COVID-19) pandemic, on our liquidity, results of operations and financial condition;
changes in availability of trade credit, creditworthiness of counterparties, usage, commodity prices, fuel supply costs or availability due to higher demand, shortages, weather conditions, transportation problems or other developments, may reduce revenues or may increase operating costs, each of which could adversely affect our liquidity and results of operations;
unscheduled generation outages or forced reductions in output, maintenance or repairs, which may reduce revenues and increase cost of sales or may require additional capital expenditures or other increased operating costs; and
adverse changes in general economic and competitive conditions in the U.S. financial markets and in our service territories.

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.

3


PART 1. FINANCIAL INFORMATION
 
ITEM 1.FINANCIAL STATEMENTS (UNAUDITED)
 

NORTHWESTERN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
(Unaudited)
 
(in thousands, except per share amounts)
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Revenues  
Electric$244,155 $241,237 $706,718 $733,933 
Gas36,455 33,599 178,507 195,842 
Total Revenues280,610 274,836 885,225 929,775 
Operating Expenses 
Cost of sales68,038 64,227 220,353 235,706 
Operating, general and administrative73,322 76,998 224,042 238,916 
Property and other taxes45,306 44,089 136,786 133,188 
Depreciation and depletion44,289 43,166 134,336 129,766 
Total Operating Expenses230,955 228,480 715,517 737,576 
Operating Income49,655 46,356 169,708 192,199 
Interest Expense, net(23,677)(23,722)(72,298)(71,023)
Other Income (Expense), net785 (409)(973)864 
Income Before Income Taxes26,763 22,225 96,437 122,040 
Income Tax Benefit (Expense)2,703 (555)5,227 20,098 
Net Income $29,466 $21,670 $101,664 $142,138 
Average Common Shares Outstanding50,577 50,444 50,551 50,422 
Basic Earnings per Average Common Share$0.58 $0.43 $2.01 $2.82 
Diluted Earnings per Average Common Share$0.58 $0.42 $2.01 $2.80 
Dividends Declared per Common Share$0.60 $0.575 $1.80 $1.725 
See Notes to Condensed Consolidated Financial Statements
 
4


NORTHWESTERN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
(Unaudited)
 
(in thousands)
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Net Income $29,466 $21,670 $101,664 $142,138 
Other comprehensive income, net of tax:
  Foreign currency translation adjustment(3)42 90 18 
Reclassification of net losses on derivative instruments113 114 339 339 
Total Other Comprehensive Income110 156 429 357 
Comprehensive Income$29,576 $21,826 $102,093 $142,495 

See Notes to Condensed Consolidated Financial Statements
 
5


NORTHWESTERN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited)

(in thousands, except share data)
 September 30,
2020
December 31,
2019
ASSETS  
Current Assets:  
Cash and cash equivalents$3,512 $5,145 
Restricted cash10,497 6,925 
Accounts receivable, net133,115 167,405 
Inventories69,055 53,925 
Regulatory assets47,060 54,432 
Other18,089 13,895 
      Total current assets 281,328 301,727 
Property, plant, and equipment, net4,860,759 4,700,924 
Goodwill357,586 357,586 
Regulatory assets511,459 484,131 
Other noncurrent assets64,507 66,334 
      Total Assets $6,075,639 $5,910,702 
LIABILITIES AND SHAREHOLDERS' EQUITY  
Current Liabilities:  
Current maturities of finance leases$2,618 $2,476 
Short term borrowings100,000  
Accounts payable74,663 96,690 
Accrued expenses269,722 202,021 
Regulatory liabilities46,513 33,080 
      Total current liabilities 493,516 334,267 
Long-term finance leases15,463 17,439 
Long-term debt2,188,901 2,233,281 
Deferred income taxes456,735 447,986 
Noncurrent regulatory liabilities468,350 451,483 
Other noncurrent liabilities398,124 387,152 
      Total Liabilities 4,021,089 3,871,608 
Commitments and Contingencies (Note 10)
Shareholders' Equity:  
Common stock, par value $0.01; authorized 200,000,000 shares; issued and outstanding 54,144,775 and 50,581,098 shares, respectively; Preferred stock, par value 0.01; authorized 50,000,000 shares; none issued
541 541 
Treasury stock at cost(98,242)(96,015)
Paid-in capital1,514,820 1,508,970 
Retained earnings646,650 635,246 
Accumulated other comprehensive loss(9,219)(9,648)
Total Shareholders' Equity 2,054,550 2,039,094 
Total Liabilities and Shareholders' Equity$6,075,639 $5,910,702 

See Notes to Condensed Consolidated Financial Statements
6


NORTHWESTERN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 Nine Months Ended September 30,
 20202019
OPERATING ACTIVITIES:  
Net income$101,664 $142,138 
Items not affecting cash: 
Depreciation and depletion134,336 129,766 
Amortization of debt issuance costs, discount and deferred hedge gain3,604 3,482 
Stock-based compensation costs5,347 4,778 
Equity portion of allowance for funds used during construction(4,503)(4,118)
Gain on disposition of assets(26)(176)
Deferred income taxes(3,759)(16,350)
Changes in current assets and liabilities:
Accounts receivable34,290 36,000 
Inventories(15,130)(4,353)
Other current assets(4,194)(3,332)
Accounts payable(4,181)(13,942)
Accrued expenses67,553 24,945 
Regulatory assets7,372 (17,662)
Regulatory liabilities13,433 (19,265)
Other noncurrent assets(6,225)(5,366)
Other noncurrent liabilities(7,066)(2,684)
Cash Provided by Operating Activities322,515 253,861 
INVESTING ACTIVITIES:  
Property, plant, and equipment additions(282,987)(242,874)
Investment in equity securities(42) 
Cash Used in Investing Activities(283,029)(242,874)
FINANCING ACTIVITIES:  
Treasury stock activity(1,723)1,220 
Dividends on common stock(90,260)(86,343)
Issuance of long-term debt150,000 150,000 
  Line of credit repayments, net(193,000)(76,000)
Issuance of short-term borrowings100,000  
Financing costs(2,564)(1,074)
Cash Used in Financing Activities(37,547)(12,197)
Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash1,939 (1,210)
Cash, Cash Equivalents, and Restricted Cash, beginning of period12,070 15,311 
Cash, Cash Equivalents, and Restricted Cash, end of period $14,009 $14,101 
Supplemental Cash Flow Information:  
Cash paid during the period for:  
Income taxes$100 $68 
Interest55,220 55,515 
Significant non-cash transactions:  
Capital expenditures included in accounts payable15,986 15,508 
See Notes to Condensed Consolidated Financial Statements
7



NORTHWESTERN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(in thousands, except per share data)

Three Months Ended September 30,
Number  of Common SharesNumber of Treasury SharesCommon StockTreasury StockPaid in CapitalRetained EarningsAccumulated Other Comprehensive Loss Total Shareholders' Equity
Balance at June 30, 201953,996 3,553 $540 $(96,178)$1,504,290 $611,159 $(9,733)$2,010,078 
Net income     21,670  21,670 
Foreign currency translation adjustment, net of tax      42 42 
Reclassification of net losses on derivative instruments from OCI to net income, net of tax      114 114 
Stock-based compensation    1,169   1,169 
Issuance of shares (3) 86 146   232 
Dividends on common stock ($0.575 per share)
     (28,781) (28,781)
Balance at September 30, 201953,9963,550$540 $(96,092)$1,505,605 $604,048 $(9,577)$2,004,524 
Balance at June 30, 202054,1453,571$541 $(98,438)$1,513,510 $647,272 $(9,329)$2,053,556 
Net income     29,466  29,466 
Foreign currency translation adjustment, net of tax      (3)(3)
Reclassification of net losses on derivative instruments from OCI to net income, net of tax      113 113 
Stock-based compensation    1,140   1,140 
Issuance of shares (7) 196 170   366 
Dividends on common stock ($0.600 per share)
     (30,088) (30,088)
Balance at September 30, 202054,1453,564$541 $(98,242)$1,514,820 $646,650 $(9,219)$2,054,550 

8









Nine Months Ended September 30,
Number  of Common SharesNumber of Treasury SharesCommon StockTreasury StockPaid in CapitalRetained EarningsAccumulated Other Comprehensive Loss Total Shareholders' Equity
Balance at December 31, 201853,889 3,566 $539 $(95,546)$1,499,070 $548,253 $(9,934)$1,942,382 
Net income     142,138  142,138 
Foreign currency translation adjustment, net of tax      18 18 
Reclassification of net losses on derivative instruments from OCI to net income, net of tax      339 339 
Stock-based compensation107 25  (1,646)4,744   3,098 
Issuance of shares (41)1 1,100 1,791   2,892 
Dividends on common stock ($1.725 per share)
     (86,343) (86,343)
Balance at September 30, 201953,9963,550$540 $(96,092)$1,505,605 $604,048 $(9,577)$2,004,524 
Balance at December 31, 201953,9993,547$541 $(96,015)$1,508,970 $635,246 $(9,648)$2,039,094 
Net income     101,664  101,664 
Foreign currency translation adjustment, net of tax      90 90 
Reclassification of net losses on derivative instruments from OCI to net income, net of tax      339 339 
Stock-based compensation146 35  (2,740)5,310   2,570 
Issuance of shares (18) 513 540   1,053 
Dividends on common stock ($1.80 per share)
     (90,260) (90,260)
Balance at September 30, 202054,1453,564$541 $(98,242)$1,514,820 $646,650 $(9,219)$2,054,550 

See Notes to Condensed Consolidated Financial Statements

9


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 734,800 customers in Montana, South Dakota and Nebraska.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management 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 the opinion of management, 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, 2020, 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, management believes that the condensed disclosures provided are adequate to make the information presented not misleading. Management recommends 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, 2019.

Variable Interest Entities

A reporting company is required to consolidate a variable interest entity (VIE) as its primary beneficiary, which means it has a controlling financial interest, when it has both the power to direct the activities of the VIE that most significantly impact the VIE's economic performance, and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. An entity is considered to be a VIE when its total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support, or its equity investors, as a group, lack the characteristics of having a controlling financial interest. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance.

Certain long-term purchase power and tolling contracts may be considered variable interests. We have various long-term purchase power contracts with other utilities and certain qualifying co-generation facilities and qualifying small power production facilities (QF). We identified one QF contract that may constitute a VIE. We entered into a 40-year power purchase contract in 1984 with this 35 megawatt (MW) coal-fired QF to purchase substantially all of the facility’s capacity and electrical output over a substantial portion of its estimated useful life. We absorb a portion of the facility’s variability through annual changes to the price we pay per megawatt hour (MWH). After making exhaustive efforts, we have been unable to obtain the information from the facility necessary to determine whether the facility is a VIE or whether we are the primary beneficiary of the facility. The contract with the facility contains no provision which legally obligates the facility to release this information. We have accounted for this QF contract as an executory contract. Based on the current contract terms with this QF, as of September 30, 2020 our estimated remaining gross contractual payments aggregate approximately $123.9 million through 2024.

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):
10


September 30, December 31,September 30, December 31,
2020201920192018
Cash and cash equivalents$3,512 $5,145 $5,046 $7,860 
Restricted cash10,497 6,925 9,055 7,451 
Total cash, cash equivalents, and restricted cash shown in the Condensed Consolidated Statements of Cash Flows$14,009 $12,070 $14,101 $15,311 

Goodwill

We completed our annual goodwill impairment test as of April 1, 2020 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

COVID-19 Accounting Order Filings

In the second and third quarters of 2020, we experienced lower revenues and an increase in certain operating expenses as a result of the COVID-19 pandemic. In March we voluntarily informed both our retail customers and state regulators that disconnections for non-payment would be temporarily suspended. During August we advised customers that we would resume the disconnection process for customers whose accounts are in arrears.

South Dakota - On May 1, 2020, we submitted a joint filing with four other investor owned utilities to the South Dakota Public Utilities Commission (SDPUC) seeking approval for an accounting order to defer certain costs related to the COVID-19 pandemic as a regulatory asset, subject to future review for recovery from customers. We limited our specific request to uncollectible accounts expense in excess of amounts included in the latest electric and natural gas test periods. In August, the SDPUC issued an order granting deferral of our excess uncollectible accounts expense. As of September 30, 2020 we have deferred $0.4 million of uncollectible accounts expense into a regulatory asset in the Condensed Consolidated Balance Sheet.

Montana - On May 29, 2020, we filed a petition for an accounting order with the Montana Public Service Commission (MPSC) seeking approval of an accounting order to (i) defer uncollectible accounts expense in excess of amounts included in the latest electric and natural gas test periods; and (ii) requesting approval of a proposed pension contribution up to $40 million in 2020 to be recognized over a five-year period. The MPSC held a work session in October 2020 voting to allow tracking of uncollectible accounts expense and amortization of incremental pension contributions. We expect a final order on our request during the fourth quarter of 2020, and cannot determine the impact, if any, of the MPSC's decision until a final order is issued.

Pension costs in Montana are included in expense on a pay as you go (cash funding) basis. We contributed $10.2 million to the Montana pension plan during the nine months ended September 30, 2020. We have not yet determined whether we will contribute incremental amounts during the fourth quarter of 2020.

FERC Filing - Montana Transmission Service Rates

In May 2019, we submitted a filing with the Federal Energy Regulatory Commission (FERC) for our Montana transmission assets. The revenue requirement associated with our Montana FERC assets is reflected in our Montana MPSC-jurisdictional rates as a credit to retail customers. We will submit a compliance filing with the MPSC upon resolution of our Montana FERC case adjusting the proposed credit in our Montana retail rates. In June 2019, the FERC issued an order accepting our filing, granting interim rates (subject to refund) effective July 1, 2019, establishing settlement procedures and terminating our related Tax Cuts and Jobs Act filing. A settlement judge was appointed and settlement negotiations are ongoing.

Cost Recovery Mechanisms - Montana

11


Montana Electric and Natural Gas Supply Cost Trackers - Each year we submit electric and natural gas tracker filings for recovery of supply costs for the 12-month period ended June 30. The MPSC reviews such filings and makes its cost recovery determination based on whether or not our supply procurement activities were prudent.

The MPSC approved a new design for our electric tracker effective July 1, 2017. The revised electric tracker, or Power Costs and Credits Adjustment Mechanism (PCCAM), established a baseline of power supply costs and tracks the differences between the actual costs and associated base rate revenues. Rates are adjusted annually for variances between actual costs and associated revenues with the variances allocated 90% to customers and 10% to shareholders. The initial design of the PCCAM also included a “deadband” which required us to absorb the variances within +/- $4.1 million from the base revenues. In 2019, the Montana legislature made two statutory changes which affected the PCCAM by prohibiting a deadband and allowing 100% recovery of QF purchases. The 90%/10% sharing ratio for other costs remains in place.

In September 2019, we submitted our annual PCCAM filing for the period July 1, 2018 to June 30, 2019, requesting recovery of approximately $23.8 million in electric supply costs. The Montana Consumer Counsel (MCC) and the Montana Environmental Information Center (MEIC) submitted testimony advocating for a disallowance of approximately $6.0 million of replacement power costs incurred during a 2018 third quarter intermittent outage at our Colstrip generating facility necessary to ensure compliance with air permit limits. In addition, the MCC advocated for an application of the deadband and QF cost sharing from July 2018 to the May 2019 statutory change, which would result in an additional under recovery of costs of approximately $4.0 million. The MPSC held a hearing on this matter in June 2020 and we expect a decision in the fourth quarter of 2020. We began collecting costs for the July 2018 - June 2019 tracker period on October 1, 2019, and as of September 30, 2020, the remaining under collection of approximately $2.1 million was reflected in regulatory assets in the Condensed Consolidated Balance Sheets.

Montana QF Power Purchase Cases

Under the Public Utility Regulatory Policies Act (PURPA), electric utilities are required, with certain exceptions, to purchase energy and capacity from independent power producers that are QFs. We track the costs of these purchases through our PCCAM. These purchases are also the subject of proceedings before the MPSC, whose orders are subject to judicial review by Montana state courts.

In May 2016, we filed our biennial update of standard rates for small QFs (3 MW or less). In November 2017, the MPSC approved new, lower rates, reduced the maximum contract term from 25 to 15 years, and ordered that it would apply the same 15-year contract term to our future owned and contracted electric supply resources (Symmetry Finding). We sought judicial review with the Montana State District Court (District Court) of the Symmetry Finding. Cypress Creek Renewables, LLC, Vote Solar, and MEIC, sought judicial review with the District Court of the rates and contract term.

The District Court reversed and modified the MPSC’s decisions on rates, contract term, and the Symmetry Finding. We appealed the District Court’s order regarding rates and contract term to the Montana Supreme Court, which also granted our request to stay the District Court's decision. The MPSC did not appeal the District Court’s Symmetry Finding. On August 24, 2020, the Montana Supreme Court found that the MPSC's order on rates and contract length was arbitrary, left the stay in place, and remanded to the MPSC for consideration when setting rates and contract lengths for small QF's in future regulatory proceedings.
The MPSC adopted the Symmetry Finding in another order when setting the rates and contract term for a large QF - MT Sun, LLC (MTSun). We, as well as MTSun, sought judicial review of the MPSC’s order. The District Court reversed and modified the MPSC’s order regarding rates, contract length, and the Symmetry Finding. We appealed the District Court’s order to the Montana Supreme Court on the issues of rates and contract length, and the MPSC did not appeal the District Court’s reversal of the Symmetry Finding. On September 22, 2020, the Montana Supreme Court found the MPSC's order on rates and contract length was arbitrary and that MTSun is entitled to the rates and contract term determined by the District Court. We are authorized through our PCCAM tariff to recover 100% of our QF purchased power costs.

Montana Community Renewable Energy Projects (CREPs)

We were required to acquire, as of December 31, 2019, approximately 66 MW of CREPs. While we have made progress towards meeting this obligation by acquiring approximately 36 MW of CREPs, we have been unable to acquire the remaining MWs required for various reasons, including the fact that proposed projects fail to qualify as CREPs or do not meet the statutory cost cap. The MPSC granted us waivers for 2012 through 2016. The validity of the MPSC’s action as it related to waivers granted for 2015 and 2016 has been challenged legally and we are waiting on a final decision from the Montana Supreme Court. We expect to file waiver requests for 2017, 2018, and 2019 after resolution of that litigation. If the Montana Supreme Court rules that the 2015 and 2016 waivers were invalid or if the requested waivers for 2017 through 2019 are not
12


granted, we are likely to be liable for penalties. If the MPSC imposes a penalty, the amount of the penalty would depend on how the MPSC calculated the energy that a CREP would have produced. However, we do not believe any such penalty would be material.

(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,
20202019
Income Before Income Taxes$26,763 $22,225 
Income tax calculated at federal statutory rate5,621 21.0 %4,667 21.0 %
Permanent or flow-through adjustments:
State income tax, net of federal provisions 46 0.2 65 0.3 
Flow-through repairs deductions(4,213)(15.7)(2,606)(11.7)
Production tax credits(2,205)(8.2)(1,414)(6.3)
Amortization of excess deferred income tax<