Employee Benefit Plans

12 Months Ended

Dec. 31, 2022

Retirement Benefits [Abstract]

Employee Benefit Plans

(14)          Employee Benefit Plans

Pension and Other Postretirement Benefit Plans

We sponsor and/or contribute to pension and postretirement health care and life insurance benefit plans for eligible employees. The pension plan for our South Dakota and Nebraska employees is referred to as the NorthWestern Corporation plan, and the pension plan for our Montana employees is referred to as the NorthWestern Energy plan, and collectively they are referred to as the Plans. We utilize a number of accounting mechanisms that reduce the volatility of reported pension costs. Differences between actuarial assumptions and actual plan results are deferred and are recognized into earnings only when the accumulated differences exceed 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets. If necessary, the excess is amortized over the average remaining service period of active employees. The Plans' funded status is recognized as an asset or liability in our Consolidated Financial Statements. See Note 4 - Regulatory Assets and Liabilities, for further discussion on how these costs are recovered through rates charged to our customers.

Benefit Obligation and Funded Status

Following is a reconciliation of the changes in plan benefit obligations and fair value of plan assets, and a statement of the funded status (in thousands):

	Pension Benefits				Other Postretirement Benefits
	December 31,				December 31,
	2022		2021		2022		2021
Change in benefit obligation:
Obligation at beginning of period	$	696,802	$	820,979	$	17,308	$	19,146
Service cost	10,223		12,994		351		407
Interest cost	18,787		18,759		358		317
Actuarial loss	(176,389)		(28,905)		(99)		415
Settlements(1)	—		(93,488)		—		—
Benefits paid	(27,625)		(33,537)		(2,511)		(2,977)
Benefit Obligation at End of Period	$	521,798	$	696,802	$	15,407	$	17,308
Change in Fair Value of Plan Assets:
Fair value of plan assets at beginning of period	$	605,499	$	688,456	$	25,289	$	23,096
Return on plan assets	(144,535)		33,868		(4,098)		3,349
Employer contributions	8,200		10,200		1,375		1,821
Settlements(1)	—		(93,488)		—		—
Benefits paid	(27,625)		(33,537)		(2,511)		(2,977)
Fair value of plan assets at end of period	$	441,539	$	605,499	$	20,055	$	25,289
Funded Status	$	(80,259)	$	(91,303)	$	4,648	$	7,981
Amounts Recognized in the Balance Sheet Consist of:
Noncurrent asset	7,195		8,297		8,831		11,914
Total Assets	7,195		8,297		8,831		11,914
Current liability	(11,200)		(11,200)		(1,585)		(1,575)
Noncurrent liability	(76,254)		(88,400)		(2,598)		(2,358)
Total Liabilities	(87,454)		(99,600)		(4,183)		(3,933)
Net amount recognized	$	(80,259)	$	(91,303)	$	4,648	$	7,981
Amounts Recognized in Regulatory Assets Consist of:
Prior service credit	—		—		(116)		1,870
Net actuarial loss	(54,383)		(62,448)		(3,123)		1,366
Amounts recognized in AOCL consist of:
Prior service cost	—		—		—		(95)
Net actuarial gain	—		—		1,046		2,500
Total	$	(54,383)	$	(62,448)	$	(2,193)	$	5,641

(1) In December 2021, we entered into a group annuity contract from an insurance company to provide for the payment of pension benefits to 1,062 NorthWestern Energy Pension Plan participants. We purchased the contract with $93.5 million of plan assets. The insurance company took over the payments of these benefits starting January 1, 2022. This transaction settled $93.5 million of our NorthWestern Energy Pension Plan obligation. As a result of this transaction, during the twelve months ended December 31, 2021, we recorded a non-cash, non-operating settlement charge of $11.3 million. This charge is recorded within other income, net on the Consolidated Statements of Income. As discussed within Note 4 – Regulatory Assets and Liabilities, this charge was deferred as a regulatory asset on the Consolidated Balance Sheets, with a corresponding decrease to operating and maintenance expense on the Consolidated Statements of Income.

The actuarial gain/loss is primarily due to the change in discount rate assumption and actual asset returns compared with expected amounts. The total projected benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were as follows (in millions):

	NorthWestern Energy Pension Plan
	December 31,
	2022		2021
Projected benefit obligation	$	474.9	$	636.3
Accumulated benefit obligation	474.9		636.3
Fair value of plan assets	388.7		537.9

    As of December 31, 2022, the fair value of the NorthWestern Corporation pension plan assets exceed the total projected and accumulated benefit obligation and are therefore excluded from this table.

Net Periodic Cost (Credit)

The components of the net costs (credits) for our pension and other postretirement plans are as follows (in thousands):

	Pension Benefits						Other Postretirement Benefits
	December 31,						December 31,
	2022		2021		2020		2022		2021		2020
Components of Net Periodic Benefit Cost
Service cost	$	10,223	$	12,994	$	11,116	$	351	$	407	$	370
Interest cost	18,787		18,759		22,840		359		327		492
Expected return on plan assets	(24,173)		(27,061)		(26,162)		(1,047)		(919)		(983)
Amortization of prior service cost (credit)	—		—		—		(1,891)		(1,835)		(1,882)
Recognized actuarial loss (gain)	383		6,536		5,028		(897)		(898)		(61)
Settlement loss recognized(1)	—		11,291		—		—		—		390
Net Periodic Benefit Cost (Credit)	$	5,220	$	22,519	$	12,822	$	(3,125)	$	(2,918)	$	(1,674)
Regulatory deferral of net periodic benefit cost(2)	2,307		(13,308)		(2,100)		—		—		—
Previously deferred costs recognized(2)	—		—		71		292		709		861
Net Periodic Benefit Cost Recognized	$	7,527	$	9,211	$	10,793	$	(2,833)	$	(2,209)	$	(813)

(1) Settlement loss is related to partial annuitization of NorthWestern Energy Pension Plan effective December 1, 2021.

(2) Net periodic benefit costs for pension and postretirement benefit plans are recognized for financial reporting based on the authorization of each regulatory jurisdiction in which we operate. A portion of these costs are recorded in regulatory assets and recognized in the Consolidated Statements of Income as those costs are recovered through customer rates.

For the years ended December 31, 2022, 2021, and 2020, Service costs were recorded in Operations and maintenance expense while non-service costs were recorded in Other income (expense), net on the Consolidated Statements of Income.

For purposes of calculating the expected return on pension plan assets, the market-related value of assets is used, which is based upon fair value. The difference between actual plan asset returns and estimated plan asset returns are amortized equally over a period not to exceed five years.

Actuarial Assumptions

The measurement dates used to determine pension and other postretirement benefit measurements for the plans are December 31, 2022 and 2021. The actuarial assumptions used to compute net periodic pension cost and postretirement benefit

cost are based upon information available as of the beginning of the year, specifically, market interest rates, past experience and management's best estimate of future economic conditions. Changes in these assumptions may impact future benefit costs and obligations. In computing future costs and obligations, we must make assumptions about such things as employee mortality and turnover, expected salary and wage increases, discount rate, expected return on plan assets, and expected future cost increases. Two of these assumptions have the most impact on the level of cost: (1) discount rate and (2) expected rate of return on plan assets. During 2022, the plan's actuary conducted an experience study to review five years of plan experience and update these assumptions.

On an annual basis, we set the discount rate using a yield curve analysis. This analysis includes constructing a hypothetical bond portfolio whose cash flow from coupons and maturities matches the year-by-year, projected benefit cash flow from our plans. The increase in the discount rate during 2022 decreased our projected benefit obligation by approximately $179.2 million.

In determining the expected long-term rate of return on plan assets, we review historical returns, the future expectations for returns for each asset class weighted by the target asset allocation of the pension and postretirement portfolios, and long-term inflation assumptions. Based on the target asset allocation for our pension assets and future expectations for asset returns, we increased our long term rate of return on assets assumption for NorthWestern Energy Pension Plan to 6.44 percent and increased our assumption on the NorthWestern Corporation Pension Plan to 4.83 percent for 2023.

The weighted-average assumptions used in calculating the preceding information are as follows:

	Pension Benefits						Other Postretirement Benefits
	December 31,						December 31,
	2022		2021		2020		2022		2021		2020
Discount rate	5.20	%	2.65-2.75	%	2.20-2.30	%	5.15-5.20	%	2.35-2.40	%	1.80	%
Expected rate of return on assets	2.66-4.26		3.01-4.17		3.45-4.49		4.23		4.08		4.71
Long-term rate of increase in compensation levels (non-union)	4.00		2.84		2.84		4.00		2.84		2.84
Long-term rate of increase in compensation levels (union)	4.00		2.00		2.00		4.00		2.00		2.00
Interest crediting rate	3.30-6.00		3.30-6.00		3.30-6.00		N/A		N/A		N/A

The postretirement benefit obligation is calculated assuming that health care costs increase by a 5.00 percent fixed rate. The company contribution toward the premium cost is capped, therefore future health care cost trend rates are expected to have a minimal impact on company costs and the accumulated postretirement benefit obligation.

Investment Strategy

Our investment goals with respect to managing the pension and other postretirement assets are to meet current and future benefit payment needs while maximizing total investment returns (income and appreciation) after inflation within the constraints of diversification, prudent risk taking, Prudent Man Rule of the Employee Retirement Income Security Act of 1974 and liability-based considerations. Each plan is diversified across asset classes to achieve optimal balance between risk and return and between income and growth through capital appreciation. Our investment philosophy is based on the following:

•Each plan should be substantially invested as long-term cash holdings reduce long-term rates of return;

•Pension Plan portfolio risk is described by volatility in the funded status of the Plans;

•It is prudent to diversify each plan across the major asset classes;

•Equity investments provide greater long-term returns than fixed income investments, although with greater short-term volatility;

•Fixed income investments of the plans should strongly correlate with the interest rate sensitivity of the plan’s aggregate liabilities in order to hedge the risk of change in interest rates negatively impacting the pension plans overall funded status, (such assets will be described as Liability Hedging Fixed Income assets);

•Allocation to foreign equities increases the portfolio diversification and thereby decreases portfolio risk while providing for the potential for enhanced long-term returns;

•Private real estate and broad global opportunistic fixed income asset classes can provide diversification to both equity and liability hedging fixed income investments and that a moderate allocation to each can potentially improve the expected risk-adjusted return for the NorthWestern Energy Pension Plan investments over full market cycles;

•Active management can reduce portfolio risk and potentially add value through security selection strategies;

•A portion of plan assets should be allocated to passive, indexed management funds to provide for greater diversification and lower cost; and

•It is appropriate to retain more than one investment manager, provided that such managers offer asset class or style diversification.

Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and periodic asset/liability studies.

The most important component of an investment strategy is the portfolio asset mix, or the allocation between the various classes of securities available. The mix of assets is based on an optimization study that identifies asset allocation targets in order to achieve the maximum return for an acceptable level of risk, while minimizing the expected contributions and pension and postretirement expense. In the optimization study, assumptions are formulated about characteristics, such as expected asset class investment returns, volatility (risk), and correlation coefficients among the various asset classes, and making adjustments to reflect future conditions expected to prevail over the study period. Based on this, the target asset allocation established, within an allowable range of plus or minus 5 percent, is as follows:

	NorthWestern Energy Pension				NorthWestern Corporation Pension				NorthWestern Energy Health and Welfare
	December 31,				December 31,				December 31,
	2022		2021		2022		2021		2022		2021
Fixed income securities	45.0	%	55.0	%	90.0	%	90.0	%	40.0	%	40.0	%
Non-U.S. fixed income securities	—		4.0		1.0		1.0		—		—
Opportunistic fixed income	5.5		—		—		—		—		—
Global equities	44.0		41.0		9.0		9.0		60.0		60.0
Private real estate	5.5		—		—		—		—		—

The actual allocation by plan is as follows:

	NorthWestern Energy Pension				NorthWestern Corporation Pension				NorthWestern Energy Health and Welfare
	December 31,				December 31,				December 31,
	2022		2021		2022		2021		2022		2021
Cash and cash equivalents	—	%	0.1	%	1.1	%	0.4	%	0.6	%	0.1	%
Fixed income securities	44.5		53.8		88.6		89.5		36.7		33.7
Non-U.S. fixed income securities	—		3.9		0.9		0.9		—		—
Opportunistic fixed income	5.5		—		—		—		—		—
Global equities	43.4		42.2		9.4		9.2		62.7		66.2
Private real estate	6.6		—		—		—		—		—
	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Generally, the asset mix will be rebalanced to the target mix as individual portfolios approach their minimum or maximum levels. The guidelines allow for a transition to targets over time as assets are reallocated to newly-approved asset classes of opportunistic fixed income and private real estate. Debt securities consist of U.S. and international instruments including emerging markets and high yield instruments, as well as government, corporate, asset backed and mortgage backed securities. While the portfolio may invest in high yield securities, the average quality must be rated at least “investment grade" by rating agencies. Equity, real estate and fixed income portfolios may be comprised of both active and passive management strategies. Performance of fixed income investments is measured by both traditional investment benchmarks as well as relative changes in the present value of the plan's liabilities. Equity investments consist primarily of U.S. stocks including large, mid and small cap stocks. We also invest in global equities with exposure to developing and emerging markets. Equity investments may also be diversified across investment styles such as growth and value. Derivatives, options and futures are permitted for the purpose of reducing risk but may not be used for speculative purposes. Real estate investments will consist of global equity or debt interests in tangible property consisting of land, buildings, and other improvements in commercial and residential sectors.

Our plan assets are primarily invested in common collective trusts (CCTs), which are invested in equity and fixed income securities. In accordance with our investment policy, these pooled investment funds must have an adequate asset base relative to

their asset class and be invested in a diversified manner and have a minimum of three years of verified investment performance experience or verified portfolio manager investment experience in a particular investment strategy and have management and oversight by an investment advisor registered with the SEC. Investments in a collective investment vehicle are valued by multiplying the investee company’s net asset value per share with the number of units or shares owned at the valuation date. Net asset value per share is determined by the trustee. Investments held by the CCT, including collateral invested for securities on loan, are valued on the basis of valuations furnished by a pricing service approved by the CCT’s investment manager, which determines valuations using methods based on quoted closing market prices on national securities exchanges, or at fair value as determined in good faith by the CCT’s investment manager if applicable. The funds do not contain any redemption restrictions. The direct holding of NorthWestern Corporation stock is not permitted; however, any holding in a diversified mutual fund or collective investment fund is permitted.

Cash Flows

In accordance with the Pension Protection Act of 2006 (PPA), and the relief provisions of the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), we are required to meet minimum funding levels in order to avoid required contributions and benefit restrictions. We have elected to use asset smoothing provided by the WRERA, which allows the use of asset averaging, including expected returns (subject to certain limitations), for a 24-month period in the determination of funding requirements. Additional funding relief was passed in the American Rescue Plan Act of 2021, providing for longer amortization and interest rate smoothing, which we elected to use. We expect to continue to make contributions to the pension plans in 2023 and future years that reflect the minimum requirements and discretionary amounts consistent with the amounts recovered in rates. Additional legislative or regulatory measures, as well as fluctuations in financial market conditions, may impact our funding requirements.

Due to the regulatory treatment of pension costs in Montana, pension costs for 2022, 2021 and 2020 were based on actual contributions to the plan. Annual contributions to each of the pension plans are as follows (in thousands):

	2022		2021		2020
NorthWestern Energy Pension Plan (MT)	$	7,000	$	9,000	$	10,201
NorthWestern Corporation Pension Plan (SD and NE)	1,200		1,200		1,200
	$	8,200	$	10,200	$	11,401

We estimate the plans will make future benefit payments to participants as follows (in thousands):

	Pension Benefits	Other Postretirement Benefits
2023	31,014	2,520
2024	32,448	2,079
2025	33,904	1,584
2026	34,908	1,511
2027	35,490	1,372
2028-2032	185,939	6,060

Defined Contribution Plan

Our defined contribution plan permits employees to defer receipt of compensation as provided in Section 401(k) of the Internal Revenue Code. Under the plan, employees may elect to direct a percentage of their gross compensation to be contributed to the plan. We contribute various percentage amounts of the employee's gross compensation contributed to the plan. Matching contributions for the years ended December 31, 2022, 2021 and 2020 were $12.3 million, $11.8 million, and $11.1 million, respectively.