day, and welcome to the Northwestern Corporation's 2nd 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, and the release is available on our website at northwesternenergy.com. We also released our 10 Q premarket this morning. Joining us on the call today are Bob Rowe, President and Chief Executive Officer Brian Bird, Chief Financial Officer and 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 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 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 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 our results are listed in certain of our press releases and disclosed in the company's Form 10 ks 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 archived replay of today's webcast will be available for 1 year beginning at 6 pm Eastern and 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 Riddle.
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 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 customers' expectations in terms affordability, environmental sensitivity and sustainability and reliability. And it's a location where we have the opportunity to try some of the exciting new distributed technologies that we're looking at.
So it's a small but important part of who we are and the area we serve. 2nd quarter highlights. Net income for the 2nd quarter decreased $26,200,000 compared to same period last year. This is driven primarily by an income tax benefit received in 2019, by lower gross margin due to impacts of COVID-nineteen, as we discussed last quarter, and then by higher depreciation expenses. These are offset in part by a decrease in operating, general and administrative and 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 then normal weather. The Board of Directors declared a quarterly dividend of $0.60 per share payable September 30 to shareholders of record as of September 15. 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 and A, but we continue to be doing very, very well on both those fronts. And with that, I'll turn it over to Brian.
Thanks, Bob. On Page 4 of the presentation is the summary financial results for the Q2. As Bob pointed out, our net income is down 26 $200,000 As I look at this slide, there are really three themes jump out at me. And gross margin is down 6.7 $1,000,000 on a year over year basis. All of that negative variance could be reflected by 2 2019 favorable impacts.
The second thing I think I point out is the reduction in OG and A expenses that we had during the quarter more than offset the increases in property tax, depreciation and interest expense. And the third theme is the $21,500,000 negative variance in income taxes is all attributed to a 2019 favorable impact, of course, on a year over year basis. So taking those things into consideration, we feel we actually had a very good quarter, in line with our expectations from a COVID perspective. And with that, I'll turn you to the following page on gross margin. Gross margin was off $6,700,000 or about 3% as I pointed out, all of that really attributed to our electric business.
You look at the primary drivers of the $8,200,000 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 PECAM slightly different and we had a favorable adjustment in 2019 associated with that. That's $4,400,000 And then this year, our QF gain was $3,300,000 less than the QF gain we had in 2019. Those two items together are 8.7 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 12 at Colstrip. So all in all, again, big impact associated with those 2019 favorable items impacting the $8,200,000 Below that, we do show changes in gross margins that's offset elsewhere within the P and L for a net decrease in gross margin of $6,700,000 Also on Page 5 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 $3,000,000 to $4,000,000 negative impact on revenues associated with COVID. As expected, commercial and industrial volumes were down and residential volumes partially offset that, again, from a margin perspective, relatively flat. Moving forward on weather, it is a shoulder quarter for us. And 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 an $800,000 pre tax benefit compared to Q2 of 2019.
If you look at the map on the bottom left side of Page 6, 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 are the primary drivers for our favorable weather during the quarter. Moving on to operating expenses on Page 7, they are down $2,600,000 or nearly 2% on a year over year basis. The biggest driver, of course, is OG and A expense, and I'll speak to that in a minute.
Property taxes are up slightly as a result of increased valuation for our Montana property taxes and depreciation expense is up $3,800,000 Of that $3,800,000 increase, $2,300,000 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 and A, the biggest of the 9,700,000 dollars decrease in OG and 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 reduced that had an impact or increase had an impact associated with COVID, and I'll speak to that in a minute. So employee benefits decreased to $3,700,000 We had $2,600,000 of lower generation maintenance at DTGS in some of our South Dakota generation facilities.
We had lower labor costs, some associated with how we changed our work around COVID, some attributed to allocation of more labor to capital. We had lower hazard trees. We anticipated having lower hazard trees based upon the good progress we made in 2019 in that regard. And then lower travel and training, about $1,200,000 to be expected with what's going on with COVID. Those benefits were partially offset by a $3,100,000 increase in uncollectible accounts during the quarter and we had some other impacts as well, totaling 9,700,000 dollars of items that impacted net income.
Below that, of course, there are some changes in OG and A that are offset elsewhere in the P and L for a net decrease of $9,100,000 in OG and A for the quarter. To the far right, again, we show the COVID related impacts, dollars 3,100,000 increased in uncollectible accounts, offset by $2,800,000 of lower COVID related expenses and think of lower medical, lower labor and travel and training for that $2,800,000 We'll give you a full P and L on COVID here later in the presentation. Moving forward, just operating income at the top of the page of $4,000,000 on a quarter over quarter basis, moving down to pre tax down about $4,700,000 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 pretax income, dollars 21,500,000 increase in income tax. Again, almost all of that really attributed to the $23,000,000 favorable item in 2019 that was taken.
That leads us to, again, the $26,000,000 decrease on a quarter over quarter basis in net income. And with that, I'm going to stop there for a second and just point out, when you take into consideration the $7,700,000 of negative impact this year on margin associated with the 2019 favorable impact items. Take the $2,300,000 favorable item associated with depreciation in 2019, that's $10,000,000 on a pretax basis. After tax, just round numbers, I think $7,000,000 after tax associated with that. Obviously, $23,000,000 of after tax benefit in 2019.
That's a $30,000,000 swing on an after tax basis. And so for the quarter, just removing those 2019, all of the 2019 items I discussed, we would have had $4,000,000 favorable on a year over year basis. Add to that, we'll show a P and L in a minute, approximately $3,000,000 of an after tax detriment that we received in 2020 associated with COVID. If you back that out, we would have net been up $7,000,000 for the quarter. So obviously, from a headline perspective, it didn't look like a great quarter.
But from our perspective, we feel good knowing what we know regarding COVID and where we're going forward. Moving to Page 9 on income taxes. I talked about the $21,500,000 increase again associated with the recognition of an unrecognized tax benefit in 2019, partially offset by lower pretax 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 increase in PP and E of about $100,000,000 We had increased in short term debt by $100,000,000 That's probably the biggest changes since the end of the year 2019.
And 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 $75,000,000 better on a year over year basis. Really three things drove that, an improvement in collections on supply costs this year. In 2019, we were giving refunds to customers associated with TCJA. We're also giving some transmission interconnection refunds in 2019.
Those three items were partially offset by lower net income this year to again approximately $75,000,000 improvement there. Thinking of 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 a $0.01 for favorable weather. This quarter to $0.42 that compared to a non GAAP number of $0.50 Last year, we did in that case, we had unfavorable weather of $0.01 and we added back the tax benefit that was received in 2019. So again, $0.08 detriment on a year over year basis. The main thing I point out also on this page is pretax 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.
And then but I'd also say the net income improved significantly when we removed the tax benefit. Now net income there is shown as $4,000,000 less. And again, equates to $0.08 on an EPS basis. Moving forward, Page 13, diluted earnings per share, reaffirming our previously advised earnings guidance at $3.30 to $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 collectibles uncollective account expense from commissions where we've made filings, obviously normal weather and a share count of $50,900,000 and a tax range of minus 5% to 0%. Lastly, on this page, I'd point out we do have a continue to have our 6% to 9% total return. That's on a long term look from our perspective. And 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 the revised guidance and thinking through COVID.
You can see we had 1.48 dollars for the 1st two quarters of the year and we'll need $1.82 to $1.97 to achieve the $3.30 to 3.45 dollars range that we discussed. That means we'll need an improvement on a year over year basis of $0.13 to $0.29 And where will that benefit primarily come from? It's going to continue to come from OG and A expense and it's going to come from tax timing. And one thing I'd point out is we had a $0.14 improvement on OG and expense in the 2nd quarter alone. And so we do expect if COVID continues, we'll have a relatively easy time achieving that $0.08 to $0.11 if not better in that regard.
So 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 Q2, 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 2 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 $3,000,000 to $4,000,000 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 in 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, they are directly below it. Moving forward to expenses on Page 16. Again, expenses came in line with our expectations during the Q2. We do show at the upper right a full P and L associated with that. When you take into consideration a $3,000,000 to $4,000,000 in gross margin I talked about earlier, when you think about expenses, think about a net increase in operating expenses of $300,000 and then add $700,000 in interest expense, so $1,000,000 impact on COVID on the expense side.
So that gives us a pretax detriment of $4,000,000 to $5,000,000 and an after tax of $3,000,000 to $3,700,000 associated with COVID or $0.06 to $0.07 One other thing I should point out on this page, we mentioned in our press release capital spending, we still anticipated approximately 4 $100,000,000 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. So we're on great track to keep moving forward there. And with that, I'll hand it back over to Bob.
You, Brian. Actually, 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 Q1 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 and it says an awful lot. Turning then to the capital forecast, the health warning, of course, over on the left, we're comfortable with about $1,800,000 of total capital over the next 5 years, financing with a combination of cash from operations with NOLs available into 2021, 1st mortgage bonds, equity issuances. And 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 1 or 2 big projects, so an awful lot of project management to be done. We're very comfortable that we will be meeting our $400,000,000 expectation for this year. And we're equally comfortable that we'll be continuing over the next 5 years to invest at least that $400,000,000 level. As we talked about before, what we show or the identified projects to continue to serve our customers.
As we get more visibility into the out years, this will change. We're very, very comfortable that we'll continue to invest at the $400,000,000 level. And very importantly, of course, this does not include investment necessary to identify the generation capacity challenges in Montana. And we are unique in being 40 customers are unique in that in a good way and being exposed to the market 46% at peak out of Montana. So this is an important investment program to continue to serve our customers to make growth in our territory.
And 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, and we consider that very, very important over the long term.
It's effective most of the effective July 1. As we discussed last quarter, we did request that the implementation date be deferred until July 1 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 up 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. And then we would expect a compliance filing with the Montana Commission whenever the FERC rate case does conclude. As you know, concerning our Colstrip application, Talend did assert its right of first refusal. So we are 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 propose to be set aside to cover eventual closing costs for our current ownership at Goldstrip. So we think that's a compelling proposition from a customer perspective and also from a company and fuel from an environmental perspective.
On the South Dakota front, we're underway, again, despite the COVID challenges with 60 megawatts of flexible valued at $80,000,000 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 for great feedback from both the staff and the commission. I received word from the commission chair that our 57 page summary document was the best plan he had ever seen. So we really appreciate that.
And 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 2 80 megawatts of flexible capacity that went out in February. We're using a 3rd 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.
So 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, and this could certainly provide benefits for our Montana customers and much more efficient utilization of both supply and transmission assets. But 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 great discussion of regional resource adequacy.
Frank Afranji, who was 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. And we had our leaders on regional issues on both the supply and transmission side speak as well. And again, we very, very critical situation. And within the region, being 46% exposed, our customers truly, truly are the most at risk. So with that, I look forward to questions.
And we'll go ahead and take our first question from Shar Pourreza with Guggenheim Partners.
Hey, good afternoon. This is actually Cody Clark on for Charlie. Thanks for taking my question.
Hey, Cody.
Hey. So you guys guided down at Q1 given weather and the expected impact of COVID-nineteen. And you've had another somewhat challenging quarter with the virus. Obviously, we're still awaiting the approval to defer on flexible account costs from your commission. But wondering if you're still confident in the midpoint of guidance, are you tracking more towards the lower end of the range?
Yes, I'd like to 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. But 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. But we also expected to kind of pull off the gas a little bit on OG and A savings in the second half of the year either. And 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 and A expense. And so we feel very confident in our earnings guidance as we sit here today.
Got it. Thank you. And second, have you given any more thought on upsizing the current Montana RFP given Tyler and Mastercard this go through? I know it somewhat relies on the intended evaluation, but 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. But as I mentioned, we have a pretty big goal to fill on behalf of our customers, and shame on us if we don't do that. So that's certainly the possibility. All right. Thanks.
That's all I have. Stay safe. Thanks, Cody.
We'll take our next question from Michael Weinstein with Credit Suisse.
Hi, good afternoon, guys.
Hi, Mike.
Hey. You said that the OG and A expense
cuts of $0.08 to $0.11 you're expecting in the second half of the year. That depends on what does that depend on exactly? I think you mentioned COVID continuing. I mean COVID expense cuts continuing or things like travel?
What we did is 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. And so if we had an expectation on OG and A cuts for the full year, we would be backing off that a little bit as well. So you noticed, I pointed out earlier, we had $0.14 of improvement on a year over year basis on the OG and A line just in the Q2 alone. And obviously, the range for Q3 and Q4 is less than that.
And so if in fact my point was, if in fact we don't see the margin improvement in which we do expect that we will get that, that we will need to do more on the OG and A side, but I feel confident that we could.
Got you. And 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, I would share that we had historically shown over South Dakota what we were going to do over time. And initially, if you think back, there's a number of units spread across South Dakota. Then we talked about this 60 megawatts in Huron and possibly something in Aberdeen and South Dakota. And so I think at that point in time, we talked about a total opportunity of 90 megawatts and being at 60 today, it would be an incremental 30. And hopefully, we can get after that sooner rather than later.
And regarding the equity issuance, what's the thinking on how the timing might come out? I know you said 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 our dialogues with rating agencies. If for some reason concerns are raised there, we could do something sooner than that. But right now, we're planning that as a 'twenty one item. Okay, great.
Thank you very much.
We'll take our next question from Julien Dumoulin Smith with Bank of America.
Hey, good afternoon, Steve. Can you hear me? Yes. Excellent. Hey, thank you.
So, first off, let me just start with the numbers here. As you think about the back half of the year, what's driving the $0.11 to $0.17 gross margin uptick in your expectation? Can you and I want to recognize, I know you talked through some of the gross margin dynamics already, but perhaps at a higher level, what's driving that uptick in the back half here? And then maybe secondarily, and I know you alluded this a little bit already, what other levers do you have to pull to the extent to which that things don't materialize, COVID, except for COVID or otherwise?
Yes, 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 recovery of 75% of that, about 70% of that. So that's the biggest driver from a margin perspective. But we are from our perspective, we're seeing we expect to see better irrigation. We're going to obviously have customer growth. And I mentioned earlier that we expected some in the Q1, we mentioned some unbilled timing associated in the second half of the year.
So again, but looking just at this page, you can see that the primary benefit, dollars 0.09 of that gross margin is associated with property tax. So you really need $0.02 to $0.08 of the remainder and we feel very good about that. And I think to your question, Julie, on levers, I think I would just focus on the 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. And then on the RFP in Montana, I know you've alluded this to more of a deck to your type of event in terms of determining the winners there. Any data points that we should look to in the back half here?
I would say no.
Okay. All right. Fair enough. That's I'll leave it there then.
Thank you.
Hey, Paha. One thing I think we shared last call is if in fact 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. And if there's some information incrementally that can be shared, we'd share it.
We'll take our next question from Chris Ellinghaus with Sievert William Schenck.
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 3rd to 4th 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 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 Q4?
First, what I would say is as a company, we take COVID extremely, extremely seriously and adopted measures to keep our employees as safe and healthy as possible well before the states took action. And we expect that those measures are going to continue in place certainly well into the fall. That said, we also know a great, 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 3 of the lowest unemployment rates in the nation, Nebraska, the lowest Montana, the 6th lowest and South Dakota, the 11th lowest.
In South Dakota, what's notable is there was never a government order to shut down. And actually, the virus's reproduction rate in South Dakota, despite that, is really quite, quite low. So 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.
But we see, consistent with that, a tremendous amount of activity coming back in our service territory. On a daily basis, for example, we're all hearing multiple examples of people from out of state buying property site unseen for had or above the sale price or in some cases before it's even gone on the market. So there's 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 mean any way minimize the real hardship being faced by the folks who are still out of work and needing to work with them.
But 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, much stronger as people look around and ask where they want to be.
Bob, I'm going to
just I don't know, 2 quick things on top of that, 2 data points. Bob talked about activity being up. We have new connections are up in 5 of our largest six cities in Montana. People are buying homes in our service territory. So I wouldn't have guessed that.
Second thing I'd point out, in our 2 states, our 2 largest states, Montana and South Dakota, the total number of COVID cases in those 2 states combined is about approximately 2,200. And so our 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 3rd Q4? 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 has been easing off more of late?
I'd answer that is no. Through what we've seen through the Q2 and what I've seen into July, I'd say no, I'd say it's pretty consistent.
Okay.
And
should
if those behaviors stay similar, would you expect that to continue into the later part of the year as well if the economy is so economy is improving locally, would not there'd 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. Again, 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.
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 color, guys. Appreciate it.
We'll take our next question from Brian Russo with Sidoti.
Hi, good afternoon.
Hi, Brian.
Hey, with the shadow accounting that you're required to do, 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, no, no thoughts there.
Okay. And in terms of the deferral accounting and the procedural schedule, what's next that we should be looking for? What filing, testimony, whatever?
2 items. First in South Dakota, looking for a staff recommendation And then 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 31.
Okay. July 31. Got it. And you mentioned a shortlist in the Montana RFP. When might that be expected?
The analysis is going on now, we'll start to see more information about projects. And again, I would really focus on the Q1. Brian's qualification to that is a good one. If we're not in the running, we'll let you know.
Okay. So if you're in the running, you won't let us know, I guess, is the way to think about it as well.
And there's a double negative buried in there, but yes.
Got it. So just if you don't mind, just a clarification, what was the bad debt or uncollectibles as of June 30? And 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?
Brent?
Yes. I think you mentioned the increase is $3,000,000 for the quarter. I know what's in rates is approximately $2,000,000 And so 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 reg asset for the year. So we'll see how things play out in Q3 and Q4.
And as long as we still have more return on disconnects for non payment, we expect to have that bad debt continue to increase.
Okay. And 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 filed for the same type of structure and recovery?
It's really yes to both. In South Dakota, there is a filing by Northwestern, MDU, XL, Midam 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. Go ahead, Brian. 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 $2,100,000 I think I said that wrong.
And last
What percentage or dollar amount of the O and M and SG and A savings this year are sustainable? Obviously, travel, etcetera, that should revert back to the norm going forward. But any idea of what level of cost cuts can be sustainable into 2021 beyond?
Bob, I'll grab that.
Well, why don't I set up the question and then lateral it over to you. Certainly, there expenses that are going to change. There will be more travel. There will be more medical expenses. But will travel look like it did before?
Probably not. So there's certainly some element that will be carried forward. But remember, when you benchmark us against any of our peers or even against larger companies on expense per customer, expense per employee, Other than that Montana property taxes, we are already just about as lean as anyone out there.
Bob, that was great. The only thing I'd add to that, it's spot on, is that this budget season is a little bit different in the sense that we have to think about COVID and there are things that are different than 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 'twenty one, 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 Wheeler with Wells Fargo.
Hey, good afternoon, gentlemen.
How's everyone doing? Good. Thanks. Good. Just kind
of piggybacking on the last topic, for some reason Montana and South Dakota don't grant your request to pro 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 $2,000,000 thus far?
Yes. We're still impacting $0.05 And 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. And so we're already making having discussions around that in South Dakota very soon and in Montana a little bit later. But it's something I think it's important that has to get handled. And that should help offset some of the, obviously, increases we've seen thus far in the Q2 to kind of slow that rate, if you will.
Okay, great. And then Bob, in your comments regarding being comfortable with deploying $400,000,000 of CapEx annually going forward, did you say that would be before adding any potential Montana generation additions or like in other words Montana generation would be incremental to that $400,000,000 per year?
Yes. No, the capital ladder is built up with projects that are identified and that we are confident about. So as always, the out years will increase as our specific capital plans to serve our customers become more known.
Okay. Thanks for clarifying that. And then last one, just kind of curious what your thoughts are on the MPSC's comments filed in late June regarding your Montana
exposure that our customers face and the exposure that our customers face and take it seriously. So 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. And again, the conversations that the commission had with President of the Northwest Power Pool just last week did indicate a real appreciation for the situation that customers in Montana face.
Okay. So their concerns express around, I guess, maybe the inputs or assumptions you guys were making here and errors that were citing around that, 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 some time to think about 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 then, there were a whole range of scenarios using different resource combinations. And those scenarios were just that. But 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. Now 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 2 states are in many ways quite different, obviously, but the same kind of analysis and 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 that or questions that were raised by the consultant to the commission, which was really the source for many of the comments. So it's an iterative process, plan to plan. But again, the way the RFP is structured in 3 tiers with opportunities for projects to bid in at 20 hours, 10 hours and 5 hours, we should see some real diversity and the viability 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 that I think on the capital plan. The capital plan we're showing here on Page 17 is our capital plan for the year. Obviously, 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. So there's an expectation, as Bob points out, that we're going to be closer to 400. I don't think we should be guaranteeing anybody that they will be 400, 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 at least 400, 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. We 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.