Good day, welcome to the NorthWestern Corporation second quarter 2020 financial results conference call and webcast. Today's event is being recorded. At this time, I would like to turn the conference over to NorthWestern's investor relations officer, Travis Meyer. Please go ahead, sir.
Thank you, Sarah. Good afternoon, and thank you for joining NorthWestern Corporation's financial results conference call and webcast for the quarter ending June 30, 2020. NorthWestern's results have been released. The release is available on our website at northwesternenergy.com. We also released our 10-Q pre-market this morning. Joining us on the call today are Bob Rowe, President and Chief Executive Officer, Brian Bird, Chief Financial Officer. We have several other members of the management team in the room with us to address your questions if needed. Before I turn the call over for us to begin, please note this company's press release, this presentation, comments by our presenters and responses to your questions may contain forward-looking statements and non-GAAP financial information. As such, I'll remind you of our safe harbor language.
During the course of this presentation, there will be forward-looking statements within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often address our expected future business and financial performance and often contain words such as expects, anticipates, intends, plans, believes, seeks, or will. This information in the presentation is based upon our current expectations. Our actual future business and financial performance may differ materially and adversely from our expectations expressed in any forward-looking statements. We undertake no obligation to revise or publicly update our forward-looking statements or this presentation for any reason. Although our expectations and beliefs are based upon reasonable assumptions, actual results may differ materially. The factors that may affect the results are listed in certain of our press releases and disclosed in the company's Form 10-K and 10-Q, along with other public filings with the SEC.
Today's presentation also includes non-GAAP financial measures. Please refer to the definitions and reconciliations of these measures that are included in our webcast materials. Following the presentation, we'll open up the phone lines to allow those who are dialed into the teleconference to ask questions. The archive replay of today's webcast will be available for one year, beginning at 6:00 P.M. Eastern, can be found on our website at northwesternenergy.com under our company investor relations presentations and webcast link. With that, I'll hand it over to our President and CEO, Bob Rowe.
Thank you, Travis. Good afternoon, everyone, and thank you very much for joining us. Travis included a photo on the cover of the deck from the Grand Canyon of the Yellowstone. He did that because yesterday we were in the park, meeting with park management. We serve there on a contract basis. It's a privilege, obviously, to serve the nation's oldest and number one national park. The park and the gateway communities in Montana are crowded. What's exciting about serving the park is we do it on a contract basis. We design our service to meet the customer's expectations in terms of affordability, environmental sensitivity and sustainability, and reliability. It's a location where we have the opportunity to try some of the exciting new distributed technologies that we're looking at. It's a small but important part of who we are and the area we serve. Second quarter highlights.
Net income for the second quarter decreased to $26.2 million compared to the same period last year. This was driven primarily by an income tax benefit received in 2019, by lower gross margin due to impacts of COVID-19, as we discussed last quarter, by higher depreciation expenses. These were offset in part by decreases in Operating, General, and Administrative, by some customer growth. Diluted EPS decreased $0.51 as compared to the same period last year. Diluted non-GAAP EPS decreased $0.08 per share after adjusting for income tax benefits noted and normal weather. The board of directors declared a quarterly dividend of $0.60 per share, payable September 30th to shareholders of record as of September 15th. I will get a chance to come back and talk about customer engagement and employee health and safety as part of our COVID response in the Q&A.
We continue to be doing very well on both those fronts. With that, I'll turn it over to Brian.
Thanks, Bob Rowe. On Page four of the presentation is the summary financial results for the second quarter. As Bob Rowe pointed out, our net income is down $26.2 million. As I look at this slide, there are really three themes jump out at me. Gross margin is down $6.7 million on a year-over-year basis. All of that negative variance could be reflected by two 2019 favorable impacts. The second thing I see I might point out is the reduction in OG&A expenses that we had during the quarter more than offset the increases in property tax depreciation and interest expense. The third theme is the $21.5 million negative variance in income taxes is all attributed to a 2019 favorable impact, of course, on a year-over-year basis. Taking those things into consideration, we feel we actually had a very good quarter in line with our expectations from a COVID perspective.
With that, I'll turn you to the following page on gross margin. Gross margin was off $6.7 million or about 3% as I pointed out, all of that really attributed to our electric business. You look at the primary drivers of the $8.2 million of change in gross margin actually impacts net income. The very first two items, Montana electric supply cost recovery. That item is after some favorable legislation we received. We were able to treat our PCCAM slightly different, and we had a favorable adjustment in 2019 associated with that. That's $4.4 million.
This year, our QF gain was $3.3 million less than the QF gain we had in 2019. Those two items together are $7.7 of the full $8.2 change in gross margin. I guess the other item that would get you fully to the $8.2 is lower electric transmission, really as a result on a year-over-year impacts of the closure of units one and two at Colstrip. All in all, again, big impact associated with those 2019 favorable items impacting the $8.2 million. Below that, we do show changes in gross margins that's offset elsewhere within the P&L for a net decrease in gross margin of $6.7 million. Also on Page five to the far right, we do have a red box speaking to COVID. You notice I didn't say anything about electric or gas retail volumes. The reason being is they were essentially flat. They were flat.
Our customer growth and favorable weather were effectively offset to a great extent by a $3 million-$4 million negative impact on revenues associated with COVID. As expected, commercial and industrial volumes were down. Residential volumes partially offset that, again, from a margin perspective, relatively flat. Moving forward on weather, it is a shoulder quarter for us. As expected, didn't have much of a weather impact. We had a $500,000 favorable pre-tax benefit when you compare it to normal, and a $800,000 pre-tax benefit compared to Q2 2019. If you look at the map on the bottom left side of Page six, in April, we did have colder temperatures that helped our heating and our Montana gas business. In June, we had warmer weather in South Dakota, which helped the South Dakota electric business.
Those two things were the primary drivers for our favorable weather during the quarter. Moving on to operating expenses on Page seven. They are down $2.6 million or nearly 2% on a year-over-year basis. The biggest driver, of course, is OG&A expense. I'll speak to that in a minute. Property taxes are up slightly as a result of increased valuation for our Montana property taxes. Depreciation expense is up $3.8 million. Of that $3.8 million increase, $2.3 million is associated with a 2019 favorable impact associated with the settlement of our rate case where we booked an incremental benefit, the depreciation expense as part of that rate case settlement. Jumping to the items that are impacting OG&A, the biggest of the $9.7 million decrease in OG&A of items impacting net income was a reduction in employee benefits. We had lower medical, we had lower incentive costs.
You'll note there we're also highlighting those costs that are reduced that had an impact or increased had an impact associated with COVID, and I'll speak to that in a minute. Employee benefits decreased to $3.7 million. We had $2.6 million of lower generation maintenance at DGGS in some of our South Dakota generation facilities. We had lower labor costs, some associated with how we changed our work around COVID. Some was attributed to allocation of more labor to capital. We had lower hazard trees, and we anticipated having lower hazard trees based upon the good progress we made in 2019 in that regard. Lower travel and training, about $1.2 million to be expected with what's going on with COVID.
Those benefits were partially offset by a $3.1 million increase in uncollectible accounts during the quarter, and we had some other impacts as well, totaling $9.7 million of items that impacted net income. Below that, of course, there are some changes in OG&A that are offset elsewhere in the P&L for a net decrease of $9.1 million in OG&A for the quarter. To the far right, again, we show the COVID-related impacts, $3.1 million increase in uncollectible accounts, offset by $2.8 million of lower COVID-related expenses and can think of lower medical, lower labor, and travel and training for that $2.8 million. We'll give you a full P&L on COVID here later in the presentation. Just operating income at the top of the page off $4 million on a quarter-over-quarter basis. Down about $4.7 million.
Primarily, that change is driven by an increase in interest expense, almost all of that attributed to COVID and the need to have incremental borrowings to improve our liquidity during the quarter. Below pre-tax income, $21.5 million increase in income tax. Again, almost all of that really attributed to the $23 million favorable item in 2019 that was taken. That leads us to, again, the $26 million decrease on a quarter-over-quarter basis in net income. With that, I'm going to stop there for a second and just point out when you take into consideration this $7.7 million of negative impact this year on margin associated with the 2019 favorable impact items. Take the $2.3 million favorable item associated with depreciation in 2019. That's $10 million on a pre-tax basis. After tax, just round numbers, think $7 million after tax associated with that.
Obviously, $23 million of after-tax benefit in 2019. That's a $30 million swing on an after-tax basis. For the quarter, just removing all of the 2019 items I discussed, we would've had $4 million favorable on a year-over-year basis. Add to that, we'll show a P&L in a minute, approximately $3 million of an after-tax detriment that we received in 2020 associated with COVID. If you back that out, we would have net been up $7 million for the quarter. Obviously from a headline perspective, it didn't look like a great quarter. From our perspective, we feel good knowing what we know we got in COVID and where we're going forward. Moving to Page nine on income taxes.
I talked about the $21.5 million increase, again, associated with the recognition of an unrecognized tax benefit in 2019, partially offset by lower pre-tax income and slightly better flow-through repairs on a year-to-date on a quarterly basis. Balance sheet, not much to talk about on Page 10. We did have an increase in PP&E of $100 million. We had increase in short-term debt by $100 million. That's probably the biggest changes since the end of the year 2019. You can see on a debt to capital perspective at the bottom of the page, very little change, around 52% debt to cap. On cash flow on Page 11, cash from operations is approximately $75 million better on a year-over-year basis. Really three things drove that. We had improvement in collections on supply costs this year. In 2019, we were giving refunds to customers associated with TCJA.
We were also giving some transmission or connection refunds in 2019. Those three items were partially offset by lower net income this year to, again, approximately $75 million improvement there. Taking our adjusted non-GAAP earnings on Page 12, you see at the bottom of the page, diluted EPS of $0.43 on a GAAP basis, really taking out $0.01 for favorable weather this quarter got us to $0.42. That compared to a non-GAAP number of $0.50. Last year, in that case, we had unfavorable weather of $0.01, and we added back the tax benefit that was received in 2019. Again, $0.08 detriment on a year-over-year basis. The main thing I'd point out also on this page is pre-tax income on a non-GAAP to non-GAAP basis is down slightly from our GAAP, primarily as a result of the $800,000 swing in favorable weather.
I'd also say the net income improves significantly when we remove the tax benefit. Net income there is shown as $4 million less. Again, equates to $0.08 on an EPS basis. Moving forward, Page 13, diluted earnings per share, reaffirming our previously revised earnings guidance at $3.30-$3.45 per diluted share. We do note our assumptions. Obviously, one of the big assumptions we have for the remaining years is our expectations on COVID, and not only an impact on our margins, but also the ability to recover uncollected account expense from commissions where we've made filings. Obviously, normal weather and a share count of 50.9 million and a tax range of -5% to 0%. Lastly, on this page, I'd point out we do continue to have our 6%-9% total return. That's on a long-term look from our perspective.
Of course, that's going to be derived through a combination of earnings growth and dividend yield. Moving on to just the change in our bridge associated with revised guidance and thinking through COVID. You can see we're at $1.48 for the first two quarters of the year, and we'll need $1.82-$1.97 to achieve the $3.30-$3.45 range that we discussed. That means we'll need an improvement on a year-over-year basis of $0.13-$0.29. Where will that benefit primarily come from? It's going to continue to come from OG&A expense, and it's going to come from tax timing. One thing I'd point out is we had a $0.14 improvement on OG&A expense in the second quarter alone.
We do expect if COVID continues, we'll have a relatively easy time achieving that $0.08-$0.11, if not better, in that regard. We're going to work extremely hard to stay on top of that. We also know that we have a tax timing swing. Those two things, again, will help us achieve our earnings guidance in Q3 and Q4. What really changed in the forecast since the second quarter, we did get our final property tax assessment. We have an increase in property taxes certainly in the latter half of the year, but we increased the gross margin for property tax recovery associated with that for the second half of the year. Those are the two primary changes since the last time we made this adjustment.
Moving on to the next page, on Page 15, real quickly, just pointing out that from our perspective, decline in gross margin of $3 million-$4 million, in line with our expectations. At the top of the page, the far right, we do show what our forecast was for Q2 and how things actually played out. A little bit better on industrial and commercial, a little bit worse on residential, but all in all, pretty much where we expected. We do show that we're maintaining our expectations for Q3 and Q4, and we show that at a high level in the upper right and in a more detailed basis for both our electric and gas business there directly below it. Moving forward to expenses on Page 16.
Again, expenses came in line with our expectations during the second quarter. We do show at the upper right a full P&L associated with that. When you take into consideration the $3 million-$4 million reduction in gross margin I talked about earlier, when you think about expenses, think about a net increase in operating expenses of 300,000, then add 700,000 of interest expense. A $1 million impact on COVID on the expense side. That gives us a pre-tax detriment of $4 million-$5 million, and then after tax of $3 million-$3.7 million associated with COVID, or $0.06-$0.07. One other thing I should point out on this page, we mentioned in our press release, capital spending. We still anticipated approximately $400 million. We're seeing very little impacts in the supply chain, very little impacts on staffing levels. We are getting our work done.
We've actually spent more capital year to date this year than we had all of last year. We're on great track to keep moving forward there. With that, I'll hand it back over to Bob.
Thank you, Brian. Just to reinforce Brian's discussion for the last few minutes in terms of margin and expense. Recall that we came out relatively early at the end of the first quarter, and certainly relatively early in the new COVID world, and the ability to come in really quite closely to where we expected to be at that time with so many unknowns, I think says an awful lot. Turning to the capital forecast, the health warning, of course over on the left. We're comfortable with about $1.8 million of total capital over the next five years, financing with a combination of cash from operations with NOLs available into 2021, first mortgage bonds and equity issuances.
Based on what we know now, what we expect now, any additional equity would be late this year or early next year and would be really focused on maintaining current credit ratings. That said, significant capital beyond what's identified in the ladder to the right would affect those capital projections. The key thing in thinking about our capital forecast, first of all, just exactly as Brian said, in a crazy year with potential workforce interruptions, potential supply chain interruptions, and with a lot of work really distributed across the company, not just concentrated in one or two big projects. An awful lot of project management to be done. We're very comfortable that we will be meeting our $400 million expectation for this year, and we're equally comfortable that we'll be continuing over the next five years to invest at at least that $400 million level.
As we talked about before, what we show are the identified projects to continue to serve our customers. As we get more visibility into the out years, this will change. We're very comfortable that we'll continue to invest at the $400 million level. Very importantly, of course, this does not include investment necessary to identify the generation capacity challenges in Montana, and our customers are unique in not in a good way, in being exposed to the market 46% at peak out of Montana. This is an important investment program to continue to serve our customers, to make growth in our territory. We're very comfortable with all that's been thrown at us and everyone else this year. We've been able to execute, and we're comfortable we will continue to be able to execute.
Looking forward, obviously, always a lot of activity on the regulatory front. The Montana Commission approved the fixed cost recovery mechanism or decoupling. We talked about this last quarter, of course. We consider that very important over the long term. Most will be effective July 1. As we discussed last quarter, we did request that the implementation date be deferred until July 1 of next year for COVID-related concerns. The Commission agreed with that, thought it made sense, delayed implementation by a year, but did request and instruct that we provide a kind of a shadow accounting so that the Commission can really understand what the impacts of the FCRM would have been if it had been implemented July of this year.
In June, of course, we received an order from the FERC accepting our Montana transmission filing, granting interim rates, setting a procedural schedule, and ultimately then appointing an administrative law judge. Settlement negotiations continue to be ongoing despite the challenges of COVID. Obviously, our teams are not meeting in person. We would expect a compliance filing with the Montana Commission whenever the FERC rate case does conclude. As you know, concerning our Colstrip application, Talen did assert its right of first refusal. We're in the process of modifying that application to reflect a 92.5-megawatt acquisition from Puget Sound Energy, and then the corresponding purchase power agreement to sell power back to Puget Sound Energy, with the net proceeds then proposed to be set aside to cover eventual closing costs for our current ownership at Colstrip.
We think that's a compelling proposition from a customer perspective, and also from a company and fuels, from an environmental perspective. On the South Dakota front, we're underway again, despite the COVID challenges, with 60 MW, valued at $80 million of flexible capacity located in Huron. The site will be activated here within a matter of days, and that should be online by late 2021. Just a parenthetical, we filed now a new South Dakota IRP just in the last couple of weeks. Heard great feedback from both the staff and the commission. Actually, I received word from the commission chair that our 57-page summary document was the best plan he had ever seen. We really appreciate that.
That plan is consistent with the plan we're currently implementing, really focused on renewing our fleet and being able to provide our customers reliability, and to get the full benefits of participating in the Southwest Power Pool. In Montana, of course, we issued an all-source solicitation for up to 280 MW of flexible capacity. That went out in February. We're using a third-party administrator. We are, of course, participating with bids ourself, and looking forward to seeing the outcome of that. The projects, of course, at this point, are identity blind in terms of who is sponsoring the projects. That's about all we can say there, other than we have participated in the project and look forward to seeing the results.
We're also on track to join the Western Energy Imbalance Market in April of 2021. This could certainly provide benefits for our Montana customers and much more efficient utilization of both supply and transmission assets. As we've talked about, you have to bring your own toys to the sandbox. We need resources in order to participate. Worth noting there that last week, the Montana Commission had a really great discussion of regional resource adequacy. Frank Afranji, who is the President of the Northwest Power Pool, was the lead presenter describing the immediate concerns that the entire region has in terms of being able to meet our customers' needs and the need for coordinated approaches to do that. We had our leaders on regional issues on both the supply and transmission side speak as well. Again, the region is facing a very critical situation.
Within the region, being 46% exposed, our customers truly are the most at risk. With that, I look forward to questions.
If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. We'll go ahead and take our first question from Shar Pourreza with Guggenheim Partners.
Hey, good afternoon. This is actually Kody Clark on for Shar. Thanks for taking my question.
Hey, Kody.
Hey. You guys guided down due to warm weather and the expected impact of COVID-19, and you've had another somewhat challenging quarter with the virus. Obviously, we're still awaiting the approval to defer uncollectible account costs from your commission. We're wondering if you're still confident in the midpoint of guidance, or are you tracking more towards the lower end of the range?
Yeah, Trump, we don't ever try to give anybody where we are in the range. I would just say this, we feel good about where we sit today. Obviously, we need to get recovery from the commission. That's an important part of our range, if you will, as a whole. Actually, Q2 came right in line with our expectations. We do expect that things are going to improve over time in Q3 and Q4 from a COVID-related perspective. That was in our guidance range initially. We also expected to.
pull off the gas a little bit on OG&A savings in the second half of the year either. If in fact, things continue to stay difficult because of COVID on the margin side, we'll be that much more attuned to it on the OG&A expense. We feel very confident in our earnings guidance as we sit here today.
Got it. Thank you. Second, have you given any more thought on upsizing the current Montana RFP, given power on that side of this? I know it somewhat relies on the intended evaluation, just wondering your updated thoughts there.
That certainly is something that we will take a look at for exactly the reason that you said. It depends on seeing what comes in. As I mentioned, we have a pretty big hole to fill on behalf of our customers, and shame on us if we don't do that. That's certainly the possibility.
All right, thanks. That's all I have. Stay safe.
Thanks, Kody.
We'll take our next question from Michael Weinstein with Credit Suisse.
Hi, good afternoon, guys.
Hey, Mike.
Hey. You said that the OG&A expense of cuts of $0.08-$0.11 that you're expecting in the second half of the year. What does that depend on exactly? I think you mentioned COVID continuing. You mean COVID expense cuts are continuing or things like travel?
What we did, I'm sorry, Mike. As we thought about Q3 and Q4, we expected things to, over time, slow reversion to near normal by the end of the year, right? If we had an expectation on OG&A cuts for the full-year, we would be backing off of that a little bit as well. You noticed, I pointed out earlier, we had $0.14 of improvement on a year-over-year basis on the OG&A line just in the second quarter alone. Obviously the range for Q3 and Q4 is less than that. My point was if, in fact, we don't see the margin improvement in which we do expect that we will get that we'll need to do more on the OG&A side, but feel confident that we could.
Got you. Also, could you characterize what the opportunity may be in South Dakota in terms of versus the current CapEx plan?
It's probably early to say too much beyond the fact that there are additional opportunities, and in the context of our South Dakota operation, those are significant.
Bob Rowe, I would share that we had historically shown our over South Dakota, what we were going to do over time. Initially, if you think back, there's a number of units spread across South Dakota. We talked about this 60 megawatts in Huron and possibly something in Aberdeen and South Dakota. I think at that point in time, we talked about a total opportunity of 90 megawatts. Being at 60 today, it would be an incremental 30, and hopefully we can get after that sooner rather than later.
Okay, fair enough. Regarding the equity issuance, what's the thinking on how the timing might come out? I know you said either later this year or maybe early 2021. Is it more likely to be a 2021 timeframe, or is there some reason why it might be earlier than that?
Mike, I think of it this way, I think it's a 2021 item. We'll continue to have dialogues with rating agencies. If for some reason concerns are raised there, we could do something sooner than that. Right now, we're planning that as a 2021 item.
Okay, great. Thank you very much.
We'll take our next question from Julien Dumoulin-Smith with Bank of America.
Hey, good afternoon to you. Can you hear me?
Yep.
Excellent. Hey, thank you. First off, let me just start with the numbers here. As you think about the back half of the year, what's driving the 11%-17% gross margin uptick in your expectation? I want to recognize, I know you talked through some of the gross margin dynamics already, but perhaps at a high level, what's driving that uptick in the back half here? Maybe secondarily, and I know you alluded to this a little bit already, what other levers do you have to pull to the extent to which that things don't materialize for COVID or otherwise?
Yeah, I think if you focus on Page 14 in terms of the bridge, one of the biggest reasons for the increase in gross margin in the second half of the year is our property taxes are going up, and we get the recovery of 75% of that— about 70% of that. That's the biggest driver from a margin perspective. From our perspective, we expect to see better irrigation. We're going to obviously have customer growth. I mentioned earlier that in the first quarter, we mentioned some unbilled timing associated in the second half of the year. Looking just at this page, you can see the primary benefit, $0.09 of that gross margin is associated with property taxes. You really need $0.02-$0.08 of the remainder, and we feel very good about that.
I think to your question, Julien, on levers, I think I would just focus on my comment about the $0.14 in Q2. We did better from an expense standpoint and we do show backing off. I just think that if we continue to stay on top of expenses because of COVID, we can do better than we show there if in fact we need to.
Awesome. Thank you. On the RFP in Montana, I know you've alluded to this, it being more of a next year type of event in terms of determining the winners there. Any data points that we should look to in the back half year?
I would say no.
Okay. All right. Fair enough. I'll leave it there then.
Thank you.
Hey, Bob. One thing I think we shared last call is, the one thing we did say is, if we've ever found out we're not participating or we're not in the final rounds, we're going to let you know that as soon as we can. If there's some information incrementally that can be shared, we'd share it.
We'll take our next question from Chris Ellinghaus with Siebert Williams Shank.
Oh, sorry, guys. I left you on mute. How are you guys?
Hey, Chris.
I'm not sure if this is for you, Bob, or not, but what is it that gives you confidence in the incremental third to fourth quarter improvement? Are you not believers of the possibilities of the flu season being more aggressive than what we're going to see in the second or third quarter, relative to what it was like in, say, March or April? What is your sort of general view of the COVID outlook for the fourth quarter?
First, what I would say is, as a company, we take COVID extremely seriously and adopted measures to keep our employees as safe and healthy as possible well before the states took action. We expect that those measures are going to continue in place, certainly well into the fall. That said, we also know a great deal more about safe practices. We know that wearing masks, social distancing are extremely effective and are key on the front line. The states we serve have three of the lowest unemployment rates in the nation. Nebraska, the lowest, Montana, the sixth lowest, and South Dakota, the 11th lowest. In South Dakota, what's notable is there was never a government order to shut down. Actually, the virus's reproduction rate in South Dakota, despite that, is really quite low. The virus certainly continues. We take it as seriously as possible.
We have supported the actions that states have taken around masks, states and communities and businesses have taken around masks. We see, consistent with that, a tremendous amount of activity coming back in our service territory. On a daily basis, for example, we are all hearing multiple examples of people from out of state buying property sight unseen for at or above the sale price, or in some cases, before it is even gone on the market. An awful lot of activity in our service territory. We want all that to be safe, but it certainly is encouraging to see. That doesn't in any way minimize the real hardship being faced by the folks who are still out of work and needing to work with them.
On balance, what we see is a region that is coming back and arguably well beyond the end of this year could end up being much stronger as people look around and ask where they want to be.
Hey, Bob, I'm going to just add two quick things on top of that, two data points. Bob talked about activity being up. We have new connections are up in five of our largest six cities in Montana. People are buying homes in our service territory. I wouldn't have guessed that. Second thing I'd point out, in our two states, our two largest states, Montana and South Dakota, the total number of COVID cases in those two states combined is about approximately 2,200. Parts of this country and our service territory are doing extremely well relative to the rest of the country. Yes, do we expect COVID to be tough in the third and fourth quarter? It should be, but our expectations are we'll be able to manage through that if in fact it is through what we've been doing thus far in cost control.
Okay. As far as your offsets to the bad debt expense, the labor and the medical costs, are you starting to see behaviors change a little bit where that benefit's been easing off more of late?
The answer to that is no. Through what we've seen through the second quarter and what I've seen into July, I'd say no. I'd say it's pretty consistent.
Okay. If those behaviors stay similar, would you expect that to continue into the later part of the year as well? If the economy is improving locally, would not there be more customer contact and/or more utilization of medical services that would change that direction a little bit?
Chris, I think that's a possibility. We commonly are using the words levers here. If in fact we see COVID being more sustained through this time period, we're probably going to continue to see medical costs staying low. We're going to probably see our labor costs staying lower as a result, too, lower than we're projecting.
Okay.
We are going to be so deep in the year that those kinds of changes are really going to be on the margin.
Okay. Thanks for the call, guys. Appreciate it.
We'll take our next question from Brian Russo with Sidoti.
Hi, good afternoon.
Hey, Brian.
Hey, with the shadow accounting that you're required to do with the delay in the FCRM, now that we're near the end of July, any thoughts on what the avoided impact was of not implementing the FCRM on July 1st?
No. No thoughts there.
Okay. In terms of the deferral accounting and the procedural schedule, what's next that we should be looking for? What filing, testimony, whatever?
Two items. First, in South Dakota, looking for a staff recommendation. In Montana, looking to see whether or not parties file testimony. I mean, that could be either Consumer Counsel or large customer group. Comments or testimony, if it is filed, will be due on July 31st.
Okay, July 31st. Got it. You mentioned a short list in the Montana RFP. When might that be expected?
The analysis is going on now. We'll start to see more information about projects. Again, I would really focus on the first quarter. Brian's qualification to that is a good one. If we're not in the running, we'll let you know.
Okay. If you're in the running, you won't let us know, I guess is the way to think about it as well.
There's a double negative buried in there, but yeah.
Got it. If you don't mind, just clarification, what was the bad debt or uncollectibles as of June 30th? What might we expect throughout the year to ultimately seek recovery of X dollars amount? Just trying to get a sense of what the magnitude of that could possibly be.
Brian?
I think I mentioned the increase is $3 million for the quarter. What's in rates is approximately $2 million, we need to continue anything above what's in rates during the year. That's what we're going to ask to have be put in a regulatory asset for the year. We'll see how things play out in Q3 and Q4, as long as we still have a more turn on disconnects for nonpayment, we expect to have that bad debt continue to increase.
Okay. Just remind me, was this an individual NorthWestern filing with the commission for COVID recovery, or is it like we've seen in other states where it's more of a generic filing, where various in-state peer utilities all file for the same type of structure and recovery?
It's really yes to both. In South Dakota, there's a filing by NorthWestern, MDU, Xcel, MidAmerican, and Otter Tail. Within that filing, various companies are requesting different kinds of relief. We, as you know, are not requesting a make whole. We're requesting an accounting order for bad debt. In Montana, it's a standalone filing addressing bad debt and also pension contributions. There is a parallel filing by MDU as well that's broader on the COVID side.
Hey, Bob.
Let me ask-
Go ahead, Brian. Go ahead. Well, I did, Bob. Hey, Brian, I do want to point out, my fact checkers here pointed something out to me. What's in rates is actually $1.1 million. The increase thus far, in the second quarter is $2 million. I think I said that wrong.
Wait. Let me ask you, Calvin. What % or dollar amount of the O&M, OG&A savings this year are sustainable? Obviously, travel, et cetera, that should revert back to the norm going forward. Any idea of what level of cost cuts can be sustainable into 2021 and beyond?
Bob, I'll grab that.
Well, why don't I set up.
Sure
question and then ladder it over to you. Certainly, there are expenses that are going to change. There will be more travel. There will be more medical expenses. Will travel look like it did before? Probably not. There certainly is some element that will be carried forward. Remember, when you benchmark us against any of our peers or even against larger companies on expense per customer, expense per employee, other than Montana property taxes, we are already just about as lean as anyone out there.
Bob, that was great. My only thing I'd add to that, it's spot on, is that this budget season's a little bit different, in the sense that we have to think about COVID. There are things that are different and that we would want to capture those benefits, and we're focused on that here right after this earnings call, effectively. That's something we have to be focused on, thinking about how this is going to impact 2021. What we can do to take advantage of COVID to help us going forward.
Okay, great. Thanks, guys.
We'll take our next question from Jonathan Reeder with Wells Fargo.
Hey, good afternoon, gentlemen. How's everyone doing?
Good, thanks.
Good. Just kind of piggybacking on the last topic. If for some reason Montana and South Dakota don't grant your request for deferral accounting, do you still estimate it's going to be like a $0.05 EPS hit for the full-year if you're already at $2 million thus far?
Yeah, we're still impacting $0.05. I think some of that is we do expect and hope to expect to have reinstated the ability to disconnect customers before we get into the heating season. We're already having discussions around that in South Dakota very soon and in Montana a little bit later. It's something I think it's important that has to get handled. That should help offset some of the, obviously, increases we've seen thus far in the second quarter to kind of slow that rate, if you will.
Okay, great. Bob, in your comments regarding being comfortable with deploying $400 million of CapEx annually going forward, did you say that would be before adding any potential Montana generation additions? Or, in other words, Montana generation would be incremental to that $400 million per year?
Yes. The capital ladder is built up with projects that are identified and that we're confident about. As always, the out years will increase as our specific capital plans to serve our customers become more known.
Okay, thanks for clarifying that. Then last one, just kind of curious what your thoughts are on the MPSC's comments filed in late June regarding your Montana electric supply plan and how, if at all, that impacts the ongoing generation RFP and winning bid selection criteria.
To my mind, the key thing was that the commission acknowledges the exposure that our customers face and take it seriously. We thought that, in fact, the comment was on balance, very, very positive and probably different in tone than might have been the case just a couple of years ago. Again, the conversations that the commission had with the president of the Northwest Power Pool just last week did indicate a real appreciation for the situation that customers in Montana face.
Okay, their concerns expressed around, I guess maybe the inputs or assumptions you guys were making there and errors they were citing around that doesn't overly concern you given the overarching theme that they recognize you're short and everything like that? It just kind of seemed like it took that and the thought that, I guess it had to be natural gas to fulfill the need versus the potential that other types of resources could maybe meet the need effectively as well.
The way I look at the plan, the key is the plan identified a need. Subsequently, there were a whole range of scenarios using different resource combinations. Those scenarios were just that. When we made the decision not to identify a specific preferred resource in the plan, and then commit to that path, to let essentially all resources compete, that's a very different direction. A couple of comments that are interesting. First of all, the analyses underlying the South Dakota and Montana plans, it's the same model, it's the same kind of work. The environments in the two states are in many ways quite different, obviously, but the same kind of analysis. What we received back in South Dakota was just real support for the plan.
I certainly think that our planning group in Montana, over time, will continue to address and refine the Montana plan to speak to the concerns or questions that were raised by the consultant to the commission, which was really the source for many of the comments. It's an iterative process, plan to plan. Again, the way the RFP is structured in 3 tiers with opportunities for projects to bid in at 20 hours, 10 hours and five hours, we should see some real diversity. The cost-effective viability of various technologies is going to be proven in what's submitted.
Okay, great. Thanks for that clarity.
Jonathan, one thing I'd like, just clarification, I think on the capital plan. The capital plan we're showing here on Page 17 is our capital plan for the year. As we go through the process and go through our budgeting process, in the outer years, they typically tend to be a bit higher than we had originally planned. There's an expectation, as Bob points out, that we're going to be closer to $400 million. I don't think we should be guaranteeing anybody that they will be $400 million out in those outer years. I would say this, though. If, in fact, we're doing any Montana generation, we're likely to be at least $400 million, if not likely higher. If that's helpful clarification.
No, it is. Thank you.
There appears to be no further questions at this time.
Okay. Well, thank you for joining us. Thank you for the very good questions and discussion. Look forward to visiting with you probably online over the coming months, and online or in person maybe by the end of the year. Take care, everybody.
This concludes today's call. Thank you for your participation. You may now disconnect.