Good afternoon, and thank you for joining Northwestern Corporation's financial results webcast for the year ending December 31, 2020. My name is Travis Meyer. I'm the Director of Corporate Finance and Investor Relations for Northwestern Energy. Joining us on the call today to walk you through the results are Bob Rowe, President and Chief Executive Officer and Brian Byrd, Chief Financial Officer. As most of you are aware, on Tuesday of this week announced several key leadership changes.
So we also have incoming CFO, Krystal Ale, currently a Vice President and Chief Accounting Officer for Northwestern joining the fund today. Crystal has been with Northwestern for over 18 years and has played a huge role in shaping the company into the great organization it is today. Brian is handing out some big shoes to fill, but those of us who know Crystal have no doubt she'll bust the toes out of those loafers.
Just to be clear,
that was a testament to her abnormal talent, not her very normal shoe size. All participant lines are currently muted. After the presentation, we have allowed time for a Q and A session. I will provide instructions for those asking questions at that time. However, if you intend to ask a question and are joining us by computer, please set your Zoom identity to your first and last name and firm name if you desire, so we can address you by name and let you know when your line is open.
With that, I'll turn over to the formalities. NorthWestern's results have been released and the release is available on our website at northwesternenergy.com. We also released our 10 ks pre market this morning. Please note that this company's press release, this presentation, comments by presenters and responses to your questions may contain forward looking statements. As such, I will direct you to the disclosures contained within our SEC filings and the Safe Harbor provisions included on the second slide of this presentation.
Please also note this presentation includes non GAAP financial measures. Please see the non GAAP disclosures, definitions and reconciliations included in the materials. This webcast is being recorded. The archived replay of today's webcast will be available for 1 year beginning at 6 p. M.
Eastern today and can be found on our website at northwesternenergy dotcom under the Our Company, Investor Relations, Presentations and Webcasts link. With that, I'll hand the presentation over to NorthWestern CEO, Bob Roe.
Thank you very much, Travis. Well, everyone, thank you for joining us. Wherever you are, I hope it's a lot warmer than it is in South Dakota or Montana where the temperatures have been well below 0 and we're pretty well locked into a multi day cold period, but it's February. So what do you expect? I do want to start by thanking and congratulating both Brian and Crystal.
Brian and I have been working together. In fact, he gave me this factoid, the executive comorbidity index. If you add up his tenure and my tenure, we are at a total of 30 years. The industry average for CFO and CEO is closer to 8. So, Crystal and I will be starting over and resetting the clock.
As you already know, Brian is a tremendous leader of the company. Several of you know Crystal and she will do a great job. Brian is moving into a new position that we haven't previously had, and it's an important position. I would think about both these changes as well as some others as an indication of a healthy company that does good succession planning and looks at long term as to its people just as we do to our infrastructure. So this is a change that the entire executive team and the Board is really very enthusiastic about.
Crystal, my advice to you following up on Travis's comment is when Brian hands you that pair of Keds, handle them delicately and wash them before you even think about putting them on. With that, let me turn to the highlights. Net income for 2020 was $155,200,000 It's almost $47,000,000 or 23% less as compared to the same period in 2019. Diluted EPS was $3.06 and that's $0.92 or 23% worse than 2019. On the other hand, non GAAP adjusted EPS was $3.35 which is within our guidance range of $3.30 to $3.45 and this is $0.07 or 2% lower than in 2019.
The Board of Directors declared a quarterly dividend of $0.62 per share, which is a 3.3% increase payable on March 31 to shareholders of record as March 15. I'm very proud that despite COVID, despite all the challenges that were thrown at us working in very, very different ways last year, we had the best safety record ever. And that was while having the busiest year on the capital front ever. We've talked about our capital plans, of course, every quarter. We had a very successful year in terms of investing back in the system and doing it safely and doing it while keeping our employees healthy.
Specifically, our recordable incident rate was down from 1.86 in 2019 to only 1.36 in 2020. And our lost time rate went from 0.58 in 2019 to 0.39 in 2020. And obviously, that translates into more people doing more work, but fundamentally, it translates into more people going home safely every day. So we're very proud of that. And we had a great year in terms of customer satisfaction too.
Our customers saw what our employees were doing in the community, saw what the company was doing in the community. That was really recognized and appreciated. We've been talking about the competitive solicitation process in Montana for it seems like a very long time. We are reviewing the independent administrators' analysis and we expect to announce the selection of multiple projects during the Q1. And we do anticipate that at least one of our projects will be among those selected, resulting in owned capacity generation investment in Montana in excess of $200,000,000 over the next 3 years, assuming we do receive approval from the Montana Public Service Commission.
We'll be coming back and talking about some of these in much more detail. Now, Brian, off to you for your victory lap.
Thanks, Bob. I wish I wasn't a COVID year for my victory lap. But with that, Bob, I've talked about the financial outcomes in 2020 and net income was down on a GAAP basis, down $46,900,000 or approximately 23%. You can look to that approximately $47,000,000 negative variance all in the gross margin line. Up at the top of page 4, you see gross margins down about $47,000,000 or 5%.
And when you think below on the P and L, we did a nice job in terms of managing expenses. As a matter of fact, operating expenses are down and that combined with favorable AFUDC and the other income line were offset pretty much entirely by increased interest expense and a lower tax benefit in 2020. So we had a lot to do to overcome a difficult gross margin year. And on Page 5, we speak to that gross margin down to $47,000,000 as I mentioned, about 5 percent that was pretty consistent, down 5% both for electric and gas. And as we describe to the bottom of that page, it was really a I break it down really into 5 buckets, if you will.
Electric and gas were certainly impacted by unfavorable weather. And then secondly, I'd say COVID impacted that. Those 2, of course, were partly offset by customer growth. We also had a poor outcome or disallowance on our PCAM. That's approximately $9,000,000 The first two I talked about were approximately $22,000,000 in total.
Below that, I really lumped together the three things. We had a did have a QF gain in 2020, but it was lower than the prior year. We did have in 2019, we had a decent supply cost recovery, primarily as a result of dealing with the debt band. So on a year over year basis, that was a negative item. And then we had lower transmission revenues this year, primarily from units 12 being down this year.
Those three things combined together for approximately $9,000,000 And then lastly, we did have a big other here. And as we've mentioned on previous calls, we had some favorable items in other in 2019 and unfavorable in 2020. These are primarily dealing with closed out trackers, but on a year over year basis that was a 9 $1,000,000 swing. The total of all of those things is approximately $48,500,000 We did get $1,000,000 back I guess in terms of gross margin when you net it out those items that impact gross margin that are offset elsewhere in the P and L for a net decrease in gross margin of 47,400,000 dollars Weather on Page 6 was a big driver. We estimate overall unfavorable weather in 20 20 resulted in $9,800,000 pre tax detriment as compared to normal and a $17,100,000 detriment as compared to 2019.
And when you look at heating degree days, for instance, at the top of the page, it was certainly warmer than normal, and again, the historic average and quite a bit warmer than last year. We did get some help from a cooling degree day, primarily in South Dakota, but I think you all know that's smaller part of our business. And so we didn't get as much bang for our buck, if you will, in the Q3 for that. And lastly, on this page, in the Q1 and the Q4, we like to see a lot of blue. Unfortunately, in 2020, saw a lot of red or orange color, if you will, it's much, much warmer.
Just to give you a bit of hint for 2021, you're going to see a little quite a bit of orange, I think, in January and you're going to see quite a bit of blue in February. So, so far in February, it's been very, very cold as Bob pointed out earlier on the call. Moving forward on Page 7 in terms of operating expenses, this company and we talked about this on earlier calls, whatever we did see in a shortfall in margin, we would be managing our expenses to make sure that we did hit our revised guidance and did a nice job. Operating expenses were down $6,800,000 or down 1%. The biggest driver was a reduction in OG and A of over $20,000,000 or down 6.6 percent and we saw about still saw a 4% increase in property taxes and depreciation and depletion.
On the OG and A, the biggest driver is employee benefits, think medical, but a good portion of that were certainly lower incentive for the company during 2020. Had lower labor costs of about $4,000,000 Think of just Bob talked about our biggest year from a capital investment standpoint, certainly allocating more labor to capital. Hazard tree removal, we did such a great job in 2019, really getting after that. We had less dollars in 2020. And then as you know, just less travel and other costs that you'd expect to see during a COVID year, we certainly took advantage of that as well.
One area where we did see increased cost was on the uncollectible accounts. Even though we did get COVID relief, if you will, from the South Dakota Commission, we did not from the Montana Commission and that cost us a $3,000,000 increase in that particular item. Net net, the change was down $22,700,000 in OG and A for those items impact net income. Again, we had some things that impact OG and A, but are offset elsewhere in the P and L. Those totaled 1,600,000 dollars for again a net decrease in OG and A of $21,100,000 Mentioned the increases in property taxes and depreciation, obviously, planned additions are the biggest driver there and on property taxes, changes in property valuations as well.
Moving forward to Slide 8, just operating income down $40,700,000 about 15%. Interest expense slightly up from higher borrowings. Other income up from higher net net really from higher AFUDC and think of the build out and you're seeing in South Dakota from a generation perspective driving that to a great degree. That nets to pretax being down about $38,000,000 or nearly 21%. And then below that, we had a lower tax benefit than the prior year, and I'll speak to that in a minute.
And again, as we pointed out earlier in the call, net income down $46,900,000 So moving on to taxes on Slide 9. At the bottom of the page, you see the income tax benefit in 2020 was $11,000,000 compared to $19,900,000 benefit in 2019. So a reduction in benefit of $8,900,000 that was driven you can see as you move up the page, about halfway up the page, biggest driver there was in 2019 the release of an unrecognized tax benefit of $22,800,000 That was partially offset by really 3 items. Think of lower pretax income resulting in lower federal income taxes, the $8,000,000 you see there and lower state income tax, is the $2,700,000 And then I'd argue just with the increased capital work, we also had higher capital that qualified for tax repairs. That increase of $4,100,000 helped offset last year's big benefit, again, a net reduction in benefit of $8,900,000 Moving on to the balance sheet.
I think all I'd say, I'd really focus on the capitalization really at the bottom of the page. We're definitely up in short term and long term debt. In 2020, we did delay equity needs that we had in 2020, and we'll talk about that on 2021 moving forward. And as a result of that delay, really our debt to cap did go up from 52 percent up to 53.5%. But still, certainly within our targeted range of 50% to 55%.
Moving on to the cash flow statement on Page 11. Cash flow from operations are up about 55,000,000 dollars That's primarily due to better supply collections this year. And then also in 2019, you may recall, we had TCJA refunds. We also had some generation interconnection refunds. That big improvement, but that was over $100,000,000 Those three changes, that's reduced by the reduction in net income we talked about earlier, resulting in a net increase, if you will, on cash from operating activities of about 55,000,000 dollars Bob talked about a big year from cash and investing activities.
You can see that approximately a $90,000,000 increase there and just higher investment and we expect to be at this higher level of investment and hopefully even higher when we speak to generation in 2021. And then at the bottom of the page, cash provided by financing activity, certainly higher debt was a driver there. Moving forward on Page 12, we had a slide in here just on taxes. Just wanted to point out, we are using up NOLs and we do expect those NOLs to carry over into 2021. But because of PTCs and other tax credits that we have, we don't expect to be a cash taxpayer until 2024.
And also want to point out, as we'll say elsewhere, that we expect the effective tax rate to kind of hover around 0% either minus 2.5% to up to 2.5% range on ETR on pre tax income. And then over time, we expect that ETR to gradually increase into the time we get to 2025, somewhere in that 10% to 12%. Moving forward on adjusted non GAAP earnings on Slide 13, first
of all, I should point out what were
the things that were non gapped out, if you will. We did add back unfavorable weather this year. We did add back the PCAM disallowance. In 2019's results, we added we actually removed favorable weather and we removed the unrecognized tax benefit. As a result of that, in 2020, our $3.06 diluted EPS increased by $0.29 to $3.35 and we compared that to $3.42 that's again adjusting the 2019 GAAP of $3.98 for those items I mentioned down to $3.42 The difference between $3.35 $3.42 $0.07 are down 2% on a year over year basis non GAAP.
If you look at kind of how we compare those non GAAP items through the P and L itself, gross margin at the top of the page, down about $21,000,000 and we look at it on a non GAAP basis, think half of that really being COVID. You could also see though that from an OG and A perspective, we offset that gross margin detriment really in OG and A reduction of 22.8, but we certainly couldn't do enough to cover the increase in property taxes and depreciation. We did manage to do, I think as we pointed out, a good job in terms of increasing other income and a decent tax benefit again when you look on a non GAAP basis year over year. But net net we got back to still falling short about $3,900,000 or again 2% detriment on a year over year basis. Slide 14, in terms of forecasting load itself, we did all right on the residential side, but we're still seeing commercial and industrial lag a bit.
Those seems like they seem like quite a bit of difference, if you will, from a volumetric perspective, I'll grant that to you. But if you move on to the next page, Page 15 and focus on the impact of the Q4 from a COVID perspective, it was rather flat for us. We saw a similar detriment in gross margin than we saw in the second and third quarter in the 4th quarter. But the recovery that we did see in uncollectible accounts, we were able to collect from customers for a period of time before we entered into winter rules. And again, continued reduction in labor and travel and others.
And that net that we really just kind of flattened out to really a minimal loss to or effective, I just say, 0, if you will, for the Q4. But for the full year basis, we did see a total $8,000,000 to $11,000,000 detriment in gross margin. Total operating expenses were down 2.4, but in that number was again an increase in uncollectible accounts that had we got an accounting order, we would have actually reduced that to 0 as well. But even with that as a backdrop, little bit different interest expense and better taxes just to calculate what we would have seen on a GAAP basis. And after tax, we saw a loss about, I would argue, dollars 5,000,000 to $7,000,000 or $0.09 to $0.14 is associated with COVID.
Back to the $3,000,000 uncollectible accounts, I think we've been saying all along, if we didn't get an accounting order from the Montana Commission, it would be about $0.05 That $3,000,000 is approximately $0.05 And instead of being in the bottom half of our earnings guidance and our revised guidance, we would have been in the top half had we been able to achieve that. Last thing I'd say, Bob referenced this upfront. I think when you consider a lot of concerns about COVID and how it could impact our capital spend, impact our supply chain. The company operated extremely well. Bob mentioned safety, but to deliver on the biggest capital spend we've had and really pull that off this year, it gives us a lot of confidence going into 2021 with even an increased level of capital spend.
So feel good about the operations of the company at this point in time. Moving on to 16, the 2020 non GAAP to the 2021 EPS bridge starting with the 3.35 dollars We range it low to high up to $3.40 to $3.60 I'd acknowledge that that's a pretty wide range and as some of you have picked up, we'd like to tighten that, but we want to follow how things are going on COVID in 2021. One thing I should point out in the bridge itself, there's a big, big leap in gross margin there, dollars 0.39 to $0.54 I'd really kind of put that into 3 different buckets and I'd argue that they're about a third, a third. And first, think organic growth as being that first third. I think second, third would be a partial COVID recovery.
I think commercial, industrial and I would argue some transmission get back as well during the year. And the last third is trackers. You guys know property taxes are going to be ongoing up and we're going to get recovery of those property portion of those property tax increases in margin. And I think also there was a drag, if you will, on other in 2020 that we don't expect in 2021 and that would be part of that last third, if you will, along with the increases from property tax trackers. We do have our assumptions that go into our 2021 guidance in the bottom of the page.
Of course, you know these well, normal weather. We do expect COVID is going to be with us through the Q2 and expect to see more normalized look in the second half of the year. We have a consolidated income tax rate, as I mentioned earlier, minus 2.5% to positive 2.5% and then diluted average shares ranging 51.5 to 51.8. I'm going to focus on that last one for a second. I think there's maybe been some concerns about announcing a $200,000,000 3 year ATM program, obviously going from our share count where we sit today to this range.
We're not planning on issuing $200,000,000 of equity in 2021. That is a 3 year look. I'd also remind folks that we did not issue equity in 2020 and we had discussions with the rating agencies in light of where our price was and we have seen some rebound in our price. We do expect to be issuing equity in 2021 and some of that snowblocked in 2020 and some of course with our needs. But the I want to reiterate the $200,000,000 is over a 3 year period.
Last thing I'd just say on equity and I know Bob will see it in the slide here coming up as well. If in fact we're fortunate enough to win in the RFP and then make an investment there after a pre approval, we're going to need to raise equity for that as well. Anything associated with that Montana generation is not built into our numbers, either our capital or our equity and debt needs at this point in time. So with that, I'll go to my last slide, Slide 17. We have diluted EPS at the top of the page.
And even with obviously 2020 had a reduction in GAAP and non GAAP earnings. Even with that, the average growth rate over this time period was 4.3%. I'd also point out that the midpoint of our 2021 guidance versus our year end 2020 non GAAP is a 4.5% increase. So that's in line, if you will, with kind of the average we've seen over this time period. I'd also say at regarding the dividend itself, the I'd say the projected $0.08 increase for a full year in dividend is a 3.3% increase.
I would grant you that that's quite a bit less than the 6.7% you've seen on an average growth rate. But I'd also tell you that it's our expectation that we're going to grow that dividend in line with our earnings growth rate on a going forward basis. And I guess that would lead me to the red box at the bottom of this page. We do expect to see a 4% to 5% growth in rate base, a 3% to 6% EPS growth over the long term. And one thing I'd say about that, as we've said before, at this higher level of capital spend that we're currently seeing, we expect to as we get recovery of that investment through rates, we expect to see ourselves in the middle of that range.
And again, if we're so fortunate to see some success in the Montana RFP, we'd expect to be in the high end again upon getting recovery or a pre approval, if you will, as we make those investments. Last thing I'd say on this page is we want to maintain that 60% to 70% dividend payout. And I think that's one of the reasons you saw a certain one, it's a huge reason is why you saw a lower increase in the dividend than you have in the past, but still a strong dividend up $0.08 Want to make sure that we stay within that range on a going forward basis and expect that we will as we continue to grow the earnings of the company. And with that, I'll hand it back over to Bob.
I picture Brian dropping the mic right there. Brian, it's been great working with you as CFO over these last 12.5 years or so, and I'm looking forward very much to working with you as COO. Just to show you how seriously Brian is taking his new role, he's now driving a large pickup truck appropriate to his new position. And as you get to know Kristal, you'll find out that she's much more inclined towards Jeeps and classic pickup trucks than she is towards those exotic German sports cars that most CFOs drive. I think the last quarter, I talked about how much we were all looking forward to 2021 in terms of the opportunities ahead of us.
I would say that speaking for myself, but I think really for the whole executive team and the Board, we are more enthusiastic, optimistic about our ability to do good work for our customers than has been the case in quite some time. And that is reflected, among other things, in the amount of capital work that we have planned for this year. We told you in our last call that our total capital forecast, 5 years, is $2,100,000,000 And as Brian mentioned, we expect to finance this with a combination of cash from operations, 1st mortgage bonds, equity issuances through a 3 year, as Brian said, ATM program. Financing obviously subject to change depending on capital expenditures, regulatory outcomes, internal cash generation and other factors. The plan that we depict does include some significant and important generation projects in South Dakota.
As we've talked about there, we were really able to move from filing our plan to consulting with the commission to making the investments very efficiently. And we have a project underway at Aberdeen and even further along at Huron. But the capital forecast here is really spread across all aspects of our business. Just as an example, we successfully commenced operation of our AMI system in South Dakota. This week, we had a great kickoff of the AMI team in Montana.
That's going to be a substantial investment and operational opportunity over the next 3.5 or so years. And again, we're looking forward to moving ahead on that. The 5 year plan does not include incremental generation in Montana that might come out of the RFP. We do have ongoing investments in the hydro system as we continue to optimize that great asset for Montana. So just to press rewind for a minute on the Montana RFP.
Last February, going into COVID, we did undertake a competitive solicitation for up to 280 Megawatts. And as I've described, the solicitation was in 3 tiers, long duration 20 hours, intermediate 10 and short 5 bids were submitted on behalf of a wide variety of generating facilities in excess of 200 megawatts. And we do expect that at least one of our projects will be among those selected and that should result in additional own generation capacity in excess of an additional $200,000,000 again, that is not included in the plan. That would be an investment over a 3 year period, assuming that we do receive approval from the Montana Commission through the statutory preapproval process that's available in Montana. And then again, we've continued on cost effective upgrades to the hydro facility, including generation and generator rewinds, turbine upgrades and other improvements.
It was impressive that a lot of that work was able to go forward during the COVID year as well. And we intend to enter into the Western Energy and Balance market this spring. There were challenges certainly around recruiting and training during COVID, but we do expect that we're quite confident that we'll be able to move ahead this year on that project this spring, I should say. And there will be advantages in terms of efficient operation and lower costs. We've talked before about it.
We had a very good experience and seen real customer benefits moving into SPP out of South Dakota. Now this is not the EIM obviously is not a full market, so we don't expect to see benefits of that magnitude. But we are looking forward seeing real benefits there. In South Dakota, just a little more detail, we do have we're well underway on the 60 Megawatt project in Huron, and those are the so called rice units. We expect those to be online late in 2021.
That's been a very smooth project and that's about $80,000,000 $40,000,000 in 2020 and the rest going forward. That is again reflected in the capital budget that I shared. Then in addition to that, we're well ahead in planning an additional 30 to 40 megawatts of flexible generation at Aberdeen. We expect that to be online in 2023, and that's approximately 60 $1,000,000 Again, the South Dakota investments are identified or underway and are included in the capital budget. Other regulatory items to provide a bit of an update, as you recall, the Montana Commission did approve a fixed cost recovery mechanism, AKA decoupling, originally to be effective in July of 2020.
Because of COVID and the asymmetric patterns we were seeing between customer classes, we did ask the commission to delay that until July of this year and the commission agreed. So we expect the FCRM to take effect next summer. At the same time, we were wrapping up our Montana rate case successfully. We did file a FERC transmission rate case. And real thanks to everyone who worked on that through all series of settlement meetings, most of which had to be conducted online because of COVID.
We did reach a settlement agreement that was filed in November. And as of the end of December, we did have cumulative deferred revenues of about $31,000,000 and the refunds have been executed on that. We refunded about $20,000,000 to our Wholesale and Choice customers in January. And then we expect to submit a compliance filing with the Montana PSC adjusting for credit in our retail rates upon the seat of a final order. Notable out of the FERC case, we're moving to, call it, a modified forward test year and there will be much better harmonization between prices in or costs recovered in Montana and recovered at the federal level, which will address a potential gap that we did see there.
And then finally, in this category, each year, of course, we submit tracker requests for recovery of purchased power, particularly purchased power and natural gas and then also property taxes in Montana. The commissions review these. Often, they are relatively straightforward filings in Montana. Unfortunately, in October, the commission voted to disallow $9,400,000 in purchase power costs over the prior period, and we've issued refunds associated with that also in January of this year. And we have as we've discussed on previous calls, we are extremely concerned about the implications of that order and we do not agree with it.
But it is for a past period and we're certainly looking forward to working with the new commission going forward. We've been doing a lot of work around ESG. Ryan heads our internal ESG committee and actually everyone on this call is very active contributing to that. We think we've got a great story to tell on all three letters of that particular alphabet. And among the key initiatives, we have a new landing page consolidating all of the existing ESG information that includes disclosures of 2019, in some cases new, in some cases existing policies and standards that are associated with best ESG practices.
We've also included a new easy reference sustainability statistics report to disclose the 5 year trend of operational and financial ESG data and statistics. So do encourage you to go to the link to the web page at the bottom of the page you're looking at right now. So we really do continue to make very good progress, most notably the substantial improvement you'll see in the MSCI rating from BB to an A. Couple of other notable things here along with the investment in system wide electric vehicle charging and we've got good projects underway in South Dakota and we're hopeful in Montana as well. We've also committed to a thoughtful transition in our own fleet starting in 2021.
Initially, we'll be targeting about 30% of light duty and bucket trucks and 20% of medium and heavy duty to be electrified by 2,030. So again, in summary, a great year despite the challenges from an operational safety, customer satisfaction perspective in 2020 and laid the foundation, we believe, for a particularly good year in 2021. And with that, we'll take your
questions. Thank you, Bob. If you're joining us by a computer today and would like to ask a question, please signal your intent by using the raise your hand button that is typically found within the toolbar at the bottom of your screen. You can also simultaneously press Alt and Y on a PC or Option Y on a Mac to raise your hand. Please ensure your microphone is unmuted if you are in the queue to ask a question.
We'll give it a few questions excuse me, we'll give it a few seconds for our first questions in the queue. If you have not provided your name and Zoom ID or dialed in by phone, please be listening for us to announce your Zoom ID or last We'll take our first question from Andrew Levi. Andrew, your line is open.
Hey, I did it right.
Yes, Andy.
How are you guys doing?
Good. Thank you.
So I have a couple of things. First, I just want to say it's Friday and a long weekend, and it's 4:10. So you guys remind me of Hawaiian Electric, if that's a joke between
us portfolio management. We don't get Monday off, shame on us.
Okay. But maybe you want to rethink things next time. But I know it's like around your board meeting and all that stuff. So anyway, so that's my complaint. As far I guess I had nothing to do anyway but go skiing.
So as far as you guys are concerned, just a couple things I've been thinking about. Just first on a very high level, just looking at COVID and your guidance, how much have you kind of put into your 2021 guidance as a I don't know if I want to call it a hit, but kind of negative effects of COVID.
Ongoing COVID, yes. Brian, you're ready for that one.
Yes, I would just say this, Andy, is we kind of backed off our thoughts for the first half of the year, expect to receive COVID linger really through the first two quarters. The Q1 certainly is a big quarter for us, 2nd is our lightest quarter typically. So, and we do expect by the summertime, things are going to be in much better spot. So that's our expectations.
No, I understand that. But I'm just saying like financially, like if how much of
Financially, that's how we're looking at margin. That's how we're looking at expenses.
But is it like $10,000,000 I'm just trying to figure out like if you were in a more normalized environment, you know, let's say 12 months from now, you know, what would we be adding back to earnings?
I would maybe one thing would be helpful, Andy, is we did give quite a bit of detail, if you will, for quarters Q2 through Q4 this year in terms of how it impacted our P and L. And if there's an expectation, we're going to see some of that impact us for the certainly for the first half of this year. That's how I think about it. And then obviously, if COVID is not here and think about organic growth on top of that, that's how things should start unwinding, if you will, out of COVID.
Okay. And then on the IRP process, where you talk about potentially $200 plus 1,000,000 that you feel very comfortable with. So I get that part. Could you just talk about like the part that is kind of unknown at this point? And if there is the possibility for more than that stated CapEx?
What I would say is that in the current RFP, we're actively involved right now in finalizing what we'll take forward to the commission, and we're comfortable that we will have a project as part of that, that will take us over the $200,000,000 threshold. That takes down a part of our customers' exposure to the market, but we didn't include it in this deck. But as you recall, we are our customers in Montana are over 45% exposed to the regional market. So we expect that there will be a subsequent RFP. We haven't made decisions about timing, but this is real stuff.
This isn't just a policy debate. And I'll say just a little bit about how the system is operating today. Fortunately, we own gas transmission and storage as well as electric transmission and generation. And our folks are doing a fantastic job coordinating with one another. But we are on the market and we don't want to be on the market nearly as much as we are.
It's a price risk and it's even a supply risk. And this is something that can happen in Montana pretty much any time of the winter, but it can also happen in August. So we're very pleased to be moving ahead with the RFP right now, but we do expect we're going to be going out relatively soon over the next several years with a subsequent RFP to continue to take down our customers' exposure to a market that you just really do not want to be in.
Okay. I understand. See, the way I had read it was that you had at least this whether it's a project or 2 projects, whatever it may be through the RFP, but that there were skills like unknown relative to this RFP, but you're really talking about future RFPs where there could be continued upside. So I get that.
Yes, we believe there's well, there's not to be upside in the current, but again, the future RFPs may be very important too.
I understand. And then I guess, I don't know if I want to say whether this RFP or future RFPs. What are you guys thinking as far as like solarslash storage as an opportunity and whether that makes sense within your service territory as a way to handle some of the shortfall?
Yes. They have a role. And one of the reasons that the RFP was structured as it was 5 hour, 10 hour, 20 hour was so that resources of different kinds could participate. And in fact, that has occurred. A great place, if you want to dig a little bit deeper into how these things behave on our system, is a filing our supply planners made with the Montana Commission in December.
And there's a really robust discussion of different kinds of resources and the effective load carrying capacity or ELCC contributions of better resources and but actually it's one of the best things I read last year. So there is a place, but you've got to be, I think, practical about what that place is. And remember, on our Montana system right now, we are pushing we're not quite there, but we're pushing 70% carbon free. We've got about 4 50 megawatts of wind on our system right now. And unfortunately, today, when we need it most desperately, the production is negligible.
So it's a long answer, but I think that's the best way to think about it. And I really would encourage you to take
a look at
the December supply supplement.
Hey, Bob. Bob, I'd like to just add one thing too. I think, obviously, we wanted to participate in this RFP for build that's going to take place in the 2022, 2023 time period. There will be, as Bob pointed out earlier in the call, another RFP maybe late this year, early next year. And that would be for bills in the 'twenty four, 'twenty five time period.
And we'd like to think we're going to have an opportunity to participate in that as well. So, just want to make sure that people understand it's really going to be 2 of these coming.
Okay. Just one more comment there. If you look at the again, the 5 year capital forecast and think about how any kind of future project might be layered in there, I think that's quite positive as well.
Okay. And then this question is for Brian. I should have said at the beginning, congratulations, Brian. But very proud of you. Very proud of you.
You're almost there. You're almost in the executive suite. Or actually you're in the executive suite, but the CEO office. So you're almost there. So we'll see.
As far as the financing plan, it's very straightforward. Okay. So I understand it. The one thing I just don't really understand though is why are you doing it ATM versus just issuing because it look you give us your shares outstanding. So it looks like you need about 75,000,000 of equity this year, give or take, right, which is like 1,300,000 shares.
Why not like just issue it to us, because your stock trades, you know, it's trading 271,000 shares today. And, you know, in general, that was all on the close really by like 3 o'clock and it trades like 160,000 shares. It's going to take you like all year, I'm exaggerating to do it. But like whether it's me or some other people like me, we could easily take down your shares at a small discount and then you wouldn't have this affecting the performance of the stock. Because truly, I believe it can because the stock unfortunately trades so thinly as do a lot of utilities at the current moment because of the way the market is.
Well, I appreciate your view, Andy. I would tell you this, we've had great success with ATM in the past. And in fact, we have quite a bit of build, as you know, both from the generation side in South Dakota and our current plan in terms of capital needs. I would tell you this, the ATM is, like I said, served us well. We're bullish on our share prices that it's going to be going up over this time period.
It's another reason we like what we're doing here. But I'd also tell you, nothing precludes us from doing anything else. If something better comes along and makes sense for us to issue shares, we could possibly do that as well. But right now, the plan is to over a 3 year period is to raise that $200,000,000 to meet our current needs.
And just to understand, 3 year ATM, I mean, I guess from what you're saying is if someone wanted to come and make a bid, I guess, is a better way to put it, I don't know that's not the right term, to take down a block, a small block of your stock, I guess, that could be part of the ATM as well.
I'm just saying we have flexibility to either use the ATM or something else if something else better comes along.
Got it. Thank you.
Thanks, Andy. Just a reminder, if you want to ask a question, for most people you can find the raise your hand under the participants button on the bottom of your screen. We'll take the next question from Michael Weinstein at Credit Suisse. Mike, your line is open.
Hey, guys. Hi, Mike. Hi. So, to follow-up on Andy's questions, in terms of what you're thinking about rate cases in Montana going forward considering 2020 is a test year, I guess, if you were going to do it this year. 2020 is a funny year, right?
So I don't know if that's really yes, I'm just wondering what your timing is looking like. I know I think normally you provide an update in April, right? But
Yes. And I can confidently say that we eventually will file a rate case in Montana. This year, I think our focus will and it will be an all hands on deck focus will be on the preapproval filing associated with the supply plan implementation.
Right. So that would be the primary focus of this year, would be the pre approval. That's going to take most of the year, you think?
I think realistically, yes. Once they determine the filing to be sufficient, they're on basically a 9 month shot clock.
Right. And then About the transmission rates, do you have the ability let me see here, not the transmission, but the disallowance on Colstrip. Is that final at this point? I mean, the $9,400,000 I mean, I guess it's been a couple of years in the making.
It is final, yes.
And is there a reason why Montana, just in the final analysis, just thought that you didn't deserve recovery of that? I mean, it sounded like the explanation you provided sounded pretty reasonable. It's not your fault.
We certainly thought so. And Crystal was one of the key witnesses in that proceeding. There were basically two questions. 1 had to do with whether the outage associated with taking the plant down partially for environmental compliance was in some way imprudent when we went to the market to replacement power. And then secondly, the timing of elimination of the deadband under a statute that was passed.
And we were very concerned, disappointed and strongly disagreed with what the commission decided. And but it is now a past period and we are not appealing. We are on the other hand really focused on working with the new commissioners, the new chair of the commission to continue to improve things.
In fact, on that subject, the new commission makeup of it looks like there might be some chance or some room for improvement in terms of regulatory treatment going forward. Do you have any comment on what kinds of general well, I guess, what the new priorities might look like going forward? In the past, there's always been sort of this legislative focus on making sure coal jobs are maintained in the state? Has any of that changed going forward, do you think?
First, a comment about the commission. We obviously have got a fantastic relationship with the South Dakota Commission that translated into being able to invest to serve our customers there very efficiently. In Montana, we want to have the same kind of relationship with the commissioners, with the staff, and then ultimately, Consumer Council as well. Most of the Commission's decisions that we're concerned about are driven by advocacy from the Consumer Council. I'm impressed by the new the 2 new commissioners, very impressed and believe that they're going to be strong additions to the commissioners who are returning.
Chairman Brown is a lawyer. He's got a graduate degree in tax. He's spending a lot of time, and my impression is, on really managing the commission and the process, and that's something that's extremely important to him. At the same time, our legal and regulatory folks are reciprocating, working with their counterparts the commission. That's all very positive.
We've had a number of good informational meetings even in COVID land, had a very substantive overview of the company with the 2 new commissioners going back to December. We had in January, we had I think an excellent presentation by our supply leaders to the full commission, really focusing on the peak deficit, the exposure to the regional market and what we hope to bring out of the RFP. They were very, very engaged. They understand the concerns and are I think, committed to addressing them. In a couple of weeks, we've got an overview of our financial operations.
And the two areas where the state commissioners really need to focus to be successful in their jobs as far as I'm concerned are operations and finance to understand how their decisions affect our ability to do our job. So, very encouraged by all of that. The thing I would say on a larger scale in Montana is that for the first time in many, many years, there is a political alignment between the Governor, the legislature and the Commission. Governor Gianforte is a very successful He is a very successful entrepreneur. He founded RightNow Technologies, ultimately sold that to Oracle.
Oracle has continued to invest in Montana. And I've made the point, he would not have been able to create so much wealth and value in Montana if that company had been subject to the kind of challenges that we've been subject to at time. He is committed to investment in the state's essential infrastructure. He certainly is committed to maintaining the viability of Goldstrip as a key asset for its useful life. In the legislature, the Republican majority has actually increased.
They work very closely with the Governor. And then at the Commission, we've talked about, I think, the very strong additions that the 2 new commissioners will be to the commission's important work.
Yes. I guess it's just striking to me that the write off if you have to write off purchase power costs for an outage of coal strip that would be a perfect illustration of why reliance on the Western market for purchases is a problem. It's sort of inconsistent, I guess, with the view, I guess, the prevailing view that has been in the state about ownership of generation at the utility. And just wondering if that is changing going forward?
I would say that if anything, there is a greater appreciation of the value of own generation as part of a portfolio. And we don't for perspective, we own less of our generation than do many companies, particularly in the non organized market. And we talked about how vastly more exposed we are to the regional market at peak than any of our peers. And again, looking out the window, it's beautiful, but it is snowing and it is below 0. And I would be much, much more comfortable if we had control of more of our own resources to serve our customers.
Makes sense. Congratulations, Brian and Crystal, and thanks. I'll leave it there.
Thanks, Mike. Thanks, Mike. We'll take our next call from Jonathan Reeder at Wells Fargo. Jonathan, your line should be open.
Hey, can you hear me now?
Yes, sure can, Jonathan.
For what it's worth, you have to hit star 6 after you're called on.
But Okay. Good to know. Thank you.
Yes. No, we're all learning the new system today, right? So appreciate all
the color so far on the call.
You were kind of almost getting into, I thought, with the last caller there, Bob. What are your thoughts on some of the bills that have been introduced in Montana this year? I think there's one that would get rid of the pre approval process, while another would expedite the time that the MTSC has to authorize pre approval. Where do you think those head this year? And how does that impact the current RFP and the future RFP plans?
Yes. Very directly, I think that the bills quite honestly, the bills sponsored by the majority are much more likely to go forward than the bills sponsored by the minority. And the bill clarifying the current preapproval process is much more likely to go forward. I believe actually the bill eliminating preapproval either has been or soon will be fabled, which is appropriate. And a number of other bills we're paying attention to are ones, for example, that were passed in previous legislators and then unfortunately were vetoed.
In fact, the preapproval bill, the preapproval repeal bill has already been tabled and we feel very good about that. So, I think there's an opportunity to do some things in this legislative session that will allow us to better serve our customers. And that's very important.
That's interesting you make the comment about ones that have passed and then were vetoed. Are there any that fall in that bucket that we should be particularly aware of? I'm trying to think back to past legislative sessions what they remind them of.
Joel? 2 that come to mind immediately. 1, the legislature prohibited subsidies in net metering. I didn't prohibit net metering. It simply prohibited cross subsidies from one group of customers to another.
And unfortunately, the previous governor vetoed that bill, certainly hoping that there will be progress to make net metering a fair and sustainable program, something that we can support and in fact make available to our customers without harming other customers. The second bill that was approved in a previous session and vetoed was the Community Renewable Energy Portfolio Standard. And that we had found to be really unworkable. The challenge is projects to qualify as CREPS have to be both below a certain size and not and meet the cost threshold to serve our customers. It's pretty very difficult to meet both thresholds.
So, it's been a big distraction for us. We have managed to get most of the way to our CREP requirement, but we certainly believe that modifying or eliminating that requirement would be a substantial step forward.
Okay. And then the only other question I had was on the Montana decoupling pilot that goes into effect in mid-twenty 1. Remind us, will we see the true up to normal flow through the P and L in the second half of twenty twenty one? Or does
it not occur
until the 12 month period?
I'm going to put Krista Lael on the spot to answer the first question in her new role. She was close to that.
Hey, Crystal. Throwing one my way. Yes, the FCRM, we expect at this point still to implement that pilot beginning in July, and we will record that. You'll see it in our earnings on a quarterly basis.
Okay, great. All right, thanks. That's all I have.
We will take our next call from the line of Ryan Greenwald at Bank of America. Go ahead, Ryan.
Good afternoon, guys. Can you hear me?
Yes, we sure can.
Ahead. Congratulations to you both Brian and Crystal.
Thank you, sir.
So assuming you guys are successful with some of the generation projects in Montana and you guys get the pre approval, how would you kind of frame equity needs on a dollar of additional spend from here?
Brian?
Yes, I'll grab that one. I think I would just assume for practical purposes, it's a fifty-fifty capital structure associated with that.
Got you. And then just maybe just lastly, given the discrepancies in valuation across the space and where you guys are currently trading, how are you kind of framing consideration for anything strategic from here?
That was an artful way to put the question. What I would say is we are really focused on the opportunities right in front of us. Brian, do you want to take that one this time?
I'll grab this one, Bob. I think from my perspective, we certainly think we are undervalued. We're certainly not 3 turns worse than our peer average as some people have us today. And I think the best thing we can do is increase the value of our company and that creates strategic opportunities down the road and we'd be better positioned either way in a stronger position. And right now, our share price, certainly relative to our peers, isn't where it should be.
And again, going back to focusing on what's in front of us, if we're able to invest and if the financial community is more comfortable with Montana, ultimately, that's good for the company and very good for the customers.
It appears as though Andy Levy decided this was more fun than skiing after all and it looks like he raised his hand again. Andy, do you have another question?
Got it on mute. Just on the last question, like the strategic question, like just like very logically, like looking at where your stock price is and where your PE ratio is, I mean, there's nothing you can do. I mean, you could, you could do like something like crazy dilutive deal. But I mean, I guess I would view you as, something that somebody would be kind of looking at. I understand you guys aren't looking to do that.
You want to get your value. But there's really, based on your stock price, there's really nothing strategically you can do. Is there?
Andy, I would answer that by saying, where are you going skiing this weekend?
Okay.
Yes. Andy, great commentary, but we're just going to take that as no question. So I appreciate your opinion.
Okay. Thank you.
But I will tell you as soon as we're through, I'm going to go out and play
it. And I want your stock look, if you look at kind of the latest 13 F, I want your stock price
to do
well, but Absolutely. But I think it's super, super cheap here, but I don't want people to think that you guys are out shopping.
Just to finish the way we started, it's been fantastic to work with Brian as CFO for many, many years. He's going to do a great job as COO. All of the operational leads are looking forward to working with him in that capacity. And Crystal, based on her career, is stepping into her new role just about as well prepared as Ken B. So thank you for spending your Friday with us before what is for everyone other than us a 3 day weekend.
And as I said, I'm going to go outside and play in the snow. Have a great weekend.
And Bob, hey, Bob, just if I could, I'd like to say just
a couple
of things.
Absolutely. My gosh, yes.
Well, first of all, likewise, Bob, I know our combined 30 years actually continues just with different roles. And so I enjoy continue to enjoy our relationship and look forward to adding on to those years. I'm also excited for Crystal. I started this job 17 years ago in my early 40s and that's where Crystal sits. I expect similar great things from her, probably even better than certainly my performance over that time period.
And lastly, I'd like to thank Travis. Everybody knows Travis Meyer. He does a fantastic job. And you may not know Torrey Payne who works with Torrey. The 2 of them make a fantastic team and I think one of the best IR departments in the space.
And so I want to thank those guys for their help as well. So and thank all of you who have supported the company. Really appreciate not only the support of the company, but support that you've given me as CFO. So thank you very much.
Thanks again for joining us. And with that, that brings this webcast to a close. You may now disconnect.