Good day, welcome to the NorthWestern Corporation's 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, Anne. Good afternoon, thank you for joining NorthWestern Corporation's Financial Results Conference Call and Webcast for the Quarter Ending March 31, 2020. NorthWestern's results have been released, and the release is available on our website at northwesternenergy.com. We also released our 10-Q pre-market this morning. Today on the call, we have joining us, Bob Rowe, President, Chief Executive Officer. We have Brian Bird, Chief Financial Officer, and other members of the management team on the call with us today to address your questions as needed. Before I turn the call over, however, for us to begin, please note that the company's press release, this presentation, comments made 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 Act provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often address our expected future business and financial performance and will contain words such as expects, anticipates, intends, plans, believes, seeks, or will. The information in this 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 our 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 the phone lines up to allow those who are dialed into the teleconference to ask questions. The archived replay of today's webcast will be available for one year, beginning at 6:00 P.M. Eastern Time today, and can be found at our website, again, northwesternenergy.com, under the Our Company, Investor Relations, Presentations, and Webcast link. With that, I'll hand it over to Bob Rowe, our CEO.
Thank you, Travis. Thank you all for joining us this afternoon. I'll touch on a few significant events, make just a couple of comments about our COVID-19 response, then turn it over to Brian to go into detail on financial results. First, net income for the quarter decreased $22.1 million. That's 30% as compared to the same period last year. Diluted EPS decreased $0.44 or 31% compared to the same period. After adjusting for weather, non-GAAP-adjusted EPS decreased $0.17 or 14% as compared to last year. The Board declared a quarterly dividend of $0.60 per share payable on June 30th to shareholders of record as of June 15th. Due to the anticipated impacts from COVID-19-related disruptions across our territory, combined with the first quarter results below our expectations, we are lowering 2020 EPS guidance.
It had been $3.45-$3.60 per share. We're lowering to $3.30-$3.45. Effectively, the old floor becomes the ceiling. Despite this short-term setback, our long-term business prospects remain strong. We were able to promptly address any liquidity concerns as a result of COVID-19. We are continuing with our capital programs unchanged, we have no change to our targeted 6%-9% TSR. Just a few highlights going into a situation like this. It's a real test of underlying strength of a company. On page four, we highlight some of our history. Many of you know this. The three things I would simply speak to are we have maintained an exceptional safety record before and going into the COVID-19 period.
We have achieved the highest levels of customer satisfaction and high levels of service quality by all measurements, and we have continued to execute on our capital plan for the year. In terms of our COVID-19 response, we, like many companies, have business continuity plans. We have a crisis action structure. We drill, we train, we plan, we prepare. COVID-19 is different in that it affects our entire service territory, indeed the entire planet, not just a location on our system, so scope. It's different in terms of duration, obviously, and it is different in terms of complexity. Our plans, even though not necessarily for an identical situation, were effective. We began monitoring the situation early. We formally activated a crisis action team on March 11th.
That structure has continued to evolve as necessary and has been very effective. Some basic steps that we took, first of all, everyone who can work remotely is working remotely. That's freed up space in our facilities for people who have to be on-site to social distance. We've stood up our backup electric transmission and gas transmission control centers. We have all of our field employees working in pods. Paying attention to supply chain, bad debt, all of the metrics that you would expect. The work is getting done. From a customer perspective, the only change has really been on service that involves actually directly interacting in person with a customer. So, pilot lights, things like that. We're communicating externally about what our people are doing about the need to maintain distance and give them a wave.
We've had no lost time incidents during this period. With fingers crossed, so far, we have had no employees who have contracted the virus. We have had several tests and obviously are taking all precautions. That's good news. One other thing I would highlight, just as an example, is even though our customer service reps are, for the most part, now working from home as well, the creative service that we've been able to maintain is just really top-notch. I expect you'll want to talk more about COVID-19 during the discussion. With that, I will turn it over to Brian to walk through our financial situation. Brian?
Thanks, Bob. On page six, from a summary financial results perspective, as Bob pointed out, our net income, $50.7 million, or down $22.1 million or 30% for the first quarter is certainly a disappointing quarter. At a high level, when you look at gross margin, down $24.5, compare that to income before tax is around $25.5. The story for the quarter was a very disappointing margin on a year-over-year basis. In fact, improvement in operating expenses were effectively offset by slightly higher other expense. Net, it was margin as a whole. Moving on to margin on slide seven. Again, down $24.5 million on a year-over-year basis. Again, $15 million of that associated with electric and $9 million associated with gas. The actual decrease in gross margin as a whole associated with volumes, electric down $8.7 million, gas down $8.4 million.
I'll mention here, weather, that the change on a year-over-year basis is $18 million associated with weather. Obviously, that's a big part of those two line items. The other major contributor to the $22.2 million change in gross margin and impacts net income are other miscellaneous non-recurring items, which are primarily items associated with tracker adjustments. We had favorable adjustments in 2019 and unfavorable in 2020 for that particular item. Those three things, electric volumes, gas volumes, and the non-recurring items, make up the substantial change there. We did see OASIS revenues off, primarily associated with the closure of Units one and two at Colstrip, and gas production continues to come down. That was offset by our rate increase in terms of impact to retail rates in Montana.
We also have items that impact gross margin that are offset elsewhere in the net income, totaling $2.3 million decrease for a total, again, $24.5 million, the total decrease in gross margin. Moving on to weather, page eight. As you can see at the top of the page, substantially warmer. Obviously in our largest jurisdiction, 23% warmer versus 2019, and even 5% warmer versus our historic averages. If you see the maps at the bottom of the page, you can see in 2019 it was extremely cold in February and March, and we are actually quite a bit warmer in February this year. A pretty big swing on a year-over-year basis. That warm first quarter contributed approximately $4 million of pre-tax gross margin detriment as compared to normal and $18 million pre-tax detriment as compared to the first quarter of 2019.
Regarding operating expenses, operating expenses were down $2.7 million. Of those that actually impact OG&A, we had increases in generation costs. We had some RFP costs, but also some higher costs at some of our operating facilities, some other miscellaneous expenses. A slight change there of $1.8 million. We also had some changes in OG&A that are offset elsewhere in net income. That's a decrease of $3.9 million for a net decrease of $2.1 million in operating, general and administrative expenses. We also saw a slight decrease in property taxes and a slight decrease in depreciation and depletion for the quarter. If I move forward to net income, operating income itself was down $21.8 million or 22%. Interest expense was up slightly due to higher borrowings. The other expense increase of $3.1 million is primarily the offsets I just spoke to in OG&A.
That brought us down to pre-tax income I mentioned earlier, down $25.5 million. The benefit that we saw in income taxes, the $3.4 million decrease in income taxes or the benefit, is primarily due to lower pre-tax income, partially offset by lower amortization of EDIT and other flow-through items. Speaking of income tax items, on page 11 in the reconciliation, you can see our income calculated at the statutory rate down $5.3 million. That offset by the EDIT I mentioned, the flow-through items down below gets us to the $3.4 million decrease in income tax expenses. Even for the quarter, though we had a decrease in income taxes, one thing I should point out, because we had a poor first quarter. That as a percentage of our total pre-tax for the year, we actually will book lower tax credits during the quarter.
That benefit would have been much bigger if in fact we had a similar proportion of our total pre-tax income this quarter versus 2019, of course, having a very strong quarter and having a higher proportion of the total. We do expect to get some better tax outcomes from a credit perspective in coming quarters. The last thing I'd point out from an NOL perspective, we expect them to be available into 2021 and with alternative AMT credits and production tax credits available into 2023 to reduce cash taxes. Lastly, our effective tax rate is expected to reach 10% by 2023. Regarding the balance sheet, not much to report there. A little change. Kept some cash on hand as associated with COVID-19 during the quarter, but the ratio of debt to cap improved slightly over the last quarter. Moving on to cash flow on page 13.
We did see a $47 million improvement in cash flow. Really think of it three things. We had better collection of supply costs from our tracker in this first quarter versus last year. 2019, we were giving TCJA credits to our customers. Lastly, those two benefits were offset by the lower net income for the quarter. Moving forward to adjusted non-GAAP earnings. What we did here on both the first quarter of 2019 and 2020, the only adjustments that impacted net income were weather. Starting at the bottom on the left side of the page, you see diluted EPS of $1 adding back $0.06 to get to $1.06 compared to the far right at the bottom, $1.44. Reducing that for favorable weather by $0.21 to get to $1.23. That $1.06 versus $1.23 is a $0.17 detriment or down nearly 14%.
If you think about both the unfavorable weather up at the top of the page in revenues this quarter, and you can see the favorable weather in 2019, as I mentioned earlier, there's the $18 million change on a year-over-year basis. Lastly, as I walk down kind of through the P&L itself, gross margins down $6.5 million after you adjust out weather. So, from that perspective, I mentioned the non-recurring items are a big portion of that. The second thing I'd point out, operating expenses, though flat, still on an adjusted basis, up slightly. Interest expense up slightly, getting to a pre-tax detriment of $7.5 million on a year-over-year basis. Lastly, the reason I've talked about on the tax reconciliation a little bit about income tax changes here, it actually shows we have an unfavorable on a year-over-year basis on a non-GAAP adjustments.
You can see if you look to the far right in the income tax line, there's a tax expense. When you back out the favorable weather, you actually got yourself into a favorable tax position on a non-GAAP adjusted 2019 for income taxes. The reverse happened here this quarter. We had a favorable income taxes offset to a degree by the adjustment for the unfavorable weather net income tax became a negative variance as a result on a year-over-year comparison of $1.1 million. Total, again, $8.6 million detriment from a net income perspective comparing the non-GAAP numbers year-over-year. Moving on to slide 15, just real quickly on liquidity.
With the goal of the uncertainty of COVID-19, we wanted to increase our normal liquidity minimum threshold of $100 million up to $200 million, and the best way to do that was to actually enter into a 364-day term loan. We were able to do that. We also recently priced $150 first mortgage bonds. We accelerated that offering expected later in the year here into the early part of the year. Those funds will come in in May, and so we feel very good from a liquidity perspective. One thing from an equity perspective, we've mentioned recently that we expect to do equity either late 2020 or early 2021. Where we sit today is we anticipate that equity issuance is going to roll into early 2021 at this point in time. Moving forward, diluted earnings per share.
Bob pointed out earlier that we reduced our range from $3.45-$3.60 down to $3.30-$3.45. The primary measures there associated with COVID-19, of course, and a poor first quarter. Regarding COVID-19, just to think about how we laid out our thought process, we expected a very difficult second quarter. Obviously, with business closures and social distancing in place, a very tough second quarter, easing significant in the third quarter, and nearly fully recovered in the fourth quarter. We also adjusted our tax rate from previously a -2% to a +3% down to a -5%-0%. Lastly, as Bob pointed out, continued investment. Think about a long-term 6%-9% total return TSR, if you will. Mentioned earlier in previous calls, if we continue to invest over $400 million, we expect to be in the midpoint of that range.
If you think about 2019 as your base going forward, we still see 6%-9% as our long-term total shareholder return range. Moving on to slide 17. I hope this was a good depiction of the changes in the guidance. Obviously, we want to answer investors' questions, particularly as we reduce guidance here. The difference in the middle columns there between initial guidance and our revised is at $0.15, as you can see. We wanted to give you the flavor of what the changes were. Obviously, a very difficult first quarter. You see a $0.09 negative impact from a gross margin perspective and a $0.06 income tax expense. That's why I took so much time walking through that with you earlier so you could see that item.
Of that $0.06, I expect all of that to be reversed from a timing perspective. I do expect some of that $0.09 up above to be a timing matter as well. Think of the first quarter as about $0.17 as it's shown there, but with the timing changes, I expect to see, of our $0.15 change, half of that's really associated with the first quarter, and the other half is really associated with COVID-19 effects for the last three quarters of the year. Speaking of those changes, you can see the ranges there. From a gross margin perspective, you can assume essentially flat - $0.03 to a + $0.03. Obviously COVID-19 is in there, but we also have some timing and some growth expected in there. Plan that the midpoint of that, of course, is flat.
We do increase our expense control during the year as a result of COVID-19, and we're seeing reduced expenses, you can imagine, in those items, and I'll speak to them in a moment, things that we're not doing from a business perspective. Lastly, the timing associated with tax. Those are the biggest changes. If you look to the far right, we explain the changes at a very high level. If you can see a $0.27 reduction in margin is a pretty substantial change. But if you can see how we clawed back $0.27, if you will, subtract $0.08 of incremental OG&A recovery, subtract $0.02 of depreciation improvement, and subtract another $0.02 of net improvement in income taxes, and you get to a $0.15 change in your guidance as a whole. Hopefully that's helpful. I'm sure there'll be more questions.
Last thing I'd say on this page is that cost controls that we put in place, $0.15 is really associated that guidance is in part due to the first quarter, and the remainder due to COVID-19 for 2020, for the remainder of 2020. Moving on to the margin expectations as a whole. In the bottom of the page, we mentioned the updated gross margin guidance for Q2 to Q4. We try to explain in a more granular form the thing I laid out at a high level on the initial guidance page. We anticipate down $0.03 to plus $0.03 For that period. One of the things we would point out, the impact of COVID-19 on our forecast is to be offset most, if not all, of our forecasted organic growth we expected in 2020.
At the upper left, we have our kind of our 80/20 rule from a customer count perspective. Think residential customers being 80% of both our electric and gas business, which is true. On a revenue perspective, that changes. As you can see at the upper part of the chart, just to the right of the customers, from a revenue perspective for electric, residential is slightly less than 50%, and on gas, it's slightly more. On a combined basis, think kind of the contribution from residential and commercial, about 50/50. You can see very little impact from industrial on the electric side and nearly none on the gas side. Laying that as a precursor just to understand the business a bit better. Upper right is just our overall concept of what impact we thought we'd have on loads, and it's a forecast, folks.
With COVID-19, it's very difficult to comprehend, but talking to our energy supply folks and thinking how this would play out, we anticipated about a 3:1 ratio impact from a volumetric perspective on our business. That commercial accounts would go down at a rate of down to three to our increase of one in residential. In essence, for Q2, expect commerce to be down about 12%, residential up 4%, and you can see that ratio stays pretty solid through Q3 and Q4, and you can see the substantial recovery. I should point out at a high level, again, Q2 is the quarter that gives the least amount of contribution to net income. In fairness, Q1 and Q2 combined are about 50% of our contribution.
A difficult first quarter and a difficult second quarter will be difficult to overcome with the last two quarters of the year. With expense control and expected recovery in the third and fourth quarter, we expect to offset a portion of the first quarter that we talked about earlier. A little more granular detail by both electric and gas is shown down below. In the far right, we show the 2020 estimate of COVID-19 versus pre-COVID-19. You can see the impact on residential and commercial there, and same thing from the gas side. We wanted to give you a lot of information. We wanted to show there's a lot of rigor to our thought process here.
I think everyone knows no one has a crystal ball in terms of how this plays out, but we wanted to work really hard to give an investor's look into how we're thinking about this. I think the easy answer would have been just to drop guidance altogether. It was our belief the best thing to do is try to think of how this is going to impact our business and come out with a result from there. Last thing I'd say on this page regarding decoupling. First and foremost, it is only impacting our Montana electric-only business. By the way, it's not even in effect until July of this year. Due to the recovery that we expect in the third and fourth quarter, we didn't expect decoupling to have too much of an impact on the changes here as a whole.
Lastly, I'd remind folks, in Montana, the decoupling is primarily associated with our residential customers. Matter of fact, less than 10% of our commercial customers are going to see a benefit from decoupling through the commercial side. So much more of an impact on the residential side of our business. Moving on to slide 19, COVID-19 from an expense standpoint. We note at the bottom, we anticipate $0.20-$0.23 of EPS improvement compared to the prior year on a non-GAAP basis. This includes $0.09 of incremental cost controls compared to our initial earnings guidance. By the way, this assumes regulatory recovery increased bad debt expense in our jurisdictions. On that point, I'd argue that's approximately $0.05 of our thought process here. Why would we expect to have regulatory recovery increased bad debt expense?
We've had discussions with our two largest jurisdictions, Montana and South Dakota. We're also working with the other utilities in those jurisdictions about making filings. We've had favorable discussions with the staff at both Montana and South Dakota, and feel confident that we'll get an outcome from recovery in that regard. That is built into our guidance. With that, I know that was a lot. I'm going to pass it back over to Bob.
Okay. Just to reiterate on slide 20, you've seen this before. Three points I would make. First, we do include the South Dakota generation investment at $80 million. Second, as we've talked about, we are successfully executing against this year's capital plan. We've been managing supply chain, paying attention to things like that. The work is getting done. Third, we do expect in the out years capital investment at least this level. As you know, as we work through the planning cycle, we identify the projects that are most important to serve our customers. We do consider the current level of capital to be sustainable over the coming years. Looking forward, we've talked a little bit about regulatory matters already. We're very pleased with the settlement we were able to reach in the electric rate case in Montana.
Decoupling or the infrastructure support mechanism is one of the issues on reconsideration. Would you expect a decision from the Montana Commission sometime in the coming weeks? Like other regulatory bodies around the country, they are meeting through alternate means, and that has been something of a challenge for many. As Brian said, decoupling is something we believe very strongly has long-term value. We don't think of it as a very significant tool to address COVID-19-related concerns this year. Meanwhile, the parallel FERC transmission rate case is moving ahead. As most of you know, that has been in settlement discussions for quite some time. The settlements discussions are now being handled electronically as well, rather than in person, but they are proceeding. The South Dakota plan, as I've already highlighted, we've moved to implementation. We expect the plant to be online by late 2021.
In Montana, we have the competitive solicitation for 280 MW outstanding. Still believe the schedule for that can be met. We did add a couple of months to the bid closing date in the RFP, just in recognition of the current COVID-19 situation. Meanwhile, just fundamentally, foundationally, our ongoing work in the transmission distribution system to continue to modernize, address reliability, capacity, functionality is going forward. Despite COVID and everything else, we are moving ahead with plans to join the EIM and have assigned adequate resources to that based on our experience out of South Dakota. In the Southwest Power Pool, we look forward to good outcomes for our customers and the company as we move into the Western and balanced market. As you know, we had agreed with Puget Sound Energy to acquire their interest in Colstrip Unit 4.
That was an attractive resource for our customers, even if a transitional resource, and it would have deferred but not eliminated the need to acquire assets to address our customers' capacity exposure. A very important part of that was the purchase power agreement back to Puget with a very good price structure and very significantly, Puget agreeing to retain future closure and, for example, pension obligations. We do consider that proposal to be very good for our customers and also extremely responsible in terms of future environmental or other closure costs. We were not the only people who thought we had negotiated a very good deal. As most of you are aware, Talen has now exercised their right of first refusal on both the purchase and sale agreement for the asset, and the parallel purchase power agreement back.
The unfortunate part of that is that customers are losing some significant value. On the other hand, Talen's action does affirm that we negotiated a very good deal for our customers and also does indicate Talen's longer-term interest. Talen had also asserted a ROFR against our transmission purchase. Our view is that there is no ROFR available for that. I think Talen at least acknowledges our position. We are in the process of refiling or filing an amendment to our application reflecting the ROFR. In addition, the commission had initially adopted an order finding that our initial application under the Montana pre-approval statute was deficient in certain ways. We were extremely concerned that the commission had, without necessarily intending to do so, had broadened the docket substantially beyond the corners of the filing.
The Montana pre-approval statute is quite specific about the contents of a filing, various requirements imposed upon the applicant, and then does set a deadline beginning with the date the application is deemed complete. The commission did just several days ago, grant our motion for reconsideration and has adopted a procedural schedule that would move towards a hearing this fall. We expect the written order will also include strong language about appropriate and inappropriate use of the discovery process, trying to keep the case focused appropriately. So, with that, we look forward to your questions.
Thank you. 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, please press star one to ask a question. We'll take our first question from Julien Dumoulin-Smith with Bank of America.
Good afternoon, guys. This is actually Ryan Greenwald on for Julien.
Hey, Ryan.
Thank you for taking my call.
The DH rule is in effect.
Maybe if we could just kick off with your expectations around rate cases, timing, and any test year implications given the meaningful cost cuts that are being implemented.
Yeah, we do look at rate cases every spring. We look at whether a rate case is appropriate. This year, we do not anticipate making any filings.
Are you able to help frame kind of expectations for next year given the cost cuts that are kind of being implemented right now?
Any expectations in terms of rate case filings in 2021?
Right.
No. I think it's too early for that.
Fair enough. On the decoupling, understand that it's not really designed for the current crisis, but in terms of action by the commission there, is July implementation kind of your base case still for expectations?
The most of we're less concerned about a date for implementation and more concerned that the commission does move ahead with decoupling. Again, it's really designed as an infrastructure support mechanism. The commission issued a very good order. We hope it stands by that order. Very importantly, as part of that order, the commission recognized that there is no basis for an ROE adjustment when decoupling is adopted. We're concerned about the substance and about a clear order, much less concerned about a starting date.
Hey, Bob. Just for everybody on the phone, it's difficult because Bob and I used to be able to look across the table at each other and say who was going to take answering this question or not. Just one thing on rate case. I agree with everything Bob said. I just want to add something, though, on South Dakota. We have talked about South Dakota in the past because of the structure of investing capital this year and investing capital in 2021, the thought process of having a 2020 test year and doing known and measurable capital. I think we've had shared thoughts around that, so I want to be able to say that again on this call. Those plans have not changed as we sit here today.
Fair enough. Yeah, Brian and I have not been in the same room since early March, late February.
Fair enough. Then I guess just looking at the margin assumptions, are you able to give any color on your transmission revenue expectations? I guess any color you can kind of provide on that $1.2 million headwind in terms of what might have been COVID-19 related there for the quarter?
Yeah, I saw some thoughts about transmission impacted by COVID-19. We're not seeing that. Certainly hadn't seen it in the first quarter. The two things I'd say about the transmission side of our business, the OASIS impact that we see in transmission was really driven by the closure of Units one and two. That was already in effect pre-COVID. The other impact we did have in the first quarter is we had a large industrial customer of ours who was having some troubles and stopped production in January, and they are now back up and running, and certainly still running in through COVID-19 time period. Another good thing about industrial for us in Montana for sure, and we don't have a ton of industrial here in South Dakota. We've got commercial, but not a ton of industrial.
A nice thing, though, in the state of Montana, most of our industrial customers are in industries deemed important and to continue in production. We haven't seen a lot of fall off as of late there.
Fair enough. Just lastly, real quick on the rate case stuff. I understand your commentary around South Dakota, but in terms of Montana, how should we kind of think about the interrelationship between significant O&M cuts and then the test year for that next rate case?
I'm going to agree with Bob's statement earlier. On Montana, we're going to have to wait and see where we are in the spring of 2021 to see what we're going to do there.
Fair enough. Appreciate the time, guys.
Thanks, Ryan.
Our next question will come from Shar Pourreza with Guggenheim Partners.
Hey, good morning, guys, or good afternoon, actually.
Morning.
Just quick, a couple of quick questions here. Your outlook assumes business closures in the second quarter with some sort of a mean reversion with business activity in the fourth quarter. If the outcome is sort of more protracted or the recovery assumptions that you guys have in the slides are lagging by maybe one or two more quarters, do you guys have additional levers above the $0.09 in O&M you found to stay on track? Do you have additional levers, I guess, beyond the $0.09?
Bob, I'll grab that one. I would tell you this. What we did, Shar, is we looked at kind of a worst-case scenario, essentially said, what if, in fact, we were in this situation in the second quarter for a full year? Our guidance would go down another $0.15 associated with that. That gives you an idea of the magnitude swing, if in fact we were locked down for all of 2020. We don't have enough levers, if you will, to go that far. To give you some thought process on our thinking in terms of how we did lay it out, I think in fairness, and I don't want to downplay the national impacts of COVID-19 right now, but the total number of cases in our two service territories in Montana and South Dakota combined is 468 cases.
Matter of fact, Montana is talking about opening up here in early May in a phased approach. We assume effectively lockdown into and through all of the second quarter in our assumptions. Recovery. I think, and again, things can change. We're certainly well aware of that. If we're not careful, they can change. I think the company is certainly, regardless of how quickly things are going to open up in our various states, we're going to continue to do what we have been doing to protect certainly our employees and customers as best we can. But from our perspective, we feel pretty good about the assumptions and continue to as we continue to watch this day to day.
I think the key thing to add is just that we monitor the situation truly week to week and in some cases day- to- day and are able to make adjustments. 500 cases or so in our immediate service territory is obviously 500 too many, and the precautions everyone is taking are appropriate. But at this point, the projections that Brian ran through are pretty consistent with facts on the ground. Facts could change, and we'll be prepared to adjust.
Got it. Then just we're three weeks into the second quarter. How does sort of the load picture look like versus what your assumptions are prospectively on slide 18? Is April pretty reflective of how your guys are guiding for second, third, and fourth quarter in the load deck?
Bob, we probably both can respond to this. I'll take it, though. I mean, what are we seeing thus far? Shar, is that another way to answer your question? Yeah, I would.
Yeah
We don't have great information on customer-by-customer basis. We don't have the AMI in Montana. What we do have, though, is we're responsible for load control balancing in the state of Montana and obviously our largest part of our business. What we're seeing there thus far in April was where loads are down about 2%. But in fairness, it's been a pretty decent weather month, and so the thought process internally is that probably equates to more like a 4% drop in loads as a whole. That's what we have thus far. It's not a perfect match for our business, but relatively from a volumetric perspective, it's the best we have.
Got it.
In addition to just loads in the aggregate, obviously, we're paying attention to the payment situation. We start with a very low level of late pay, non-pay, like other utilities. We've waived termination and collection. We've got a program stood up just this week to reach out to those customers. From that low base, we are. Seeing an unusual trend up this year, obviously associated with COVID-19, just in payment issues. We need to work with customers there. We hope that, again, our regulators will support us in doing that.
Got it. Just on the CapEx, obviously it was reiterated, but it does sort of decelerate through trajectory. The message is always generally been that you can backfill. Does COVID-19 sort of related slowdowns impact this conservative bend? More importantly, can you sort of speak on the flexibility of sort of the growth capital program, assuming that macroeconomic backdrop is a little bit more projected? Is there any sort of spending programs that could become secondary in nature?
Our capital program is not, at this point, overly dependent on a small number of headline projects, it's really driven by what are the needs in the system. There is some flexibility in bringing programs forward and back. But I wouldn't think of it so much as backfilling a hole as just doing the work that's appropriate to do in the system, and doing that in a sequence that makes sense. This year in distribution, there were resources available to really focus on line subsegments using data engineering gap analysis to go in and address reliability issues, be proactive in terms of fire management, things like that. That's an example of a program that can be moved up depending on available resources. Brian, I know you want to chip in on that one, too.
We've been working together a long time, Bob. Yeah, I would say this. As far as I can recall, we've always invested more in the actual year of that fifth-year forecast than we actually have shown five years prior, if that makes sense. In essence, we do tend to fill that in, and we're better at forecasting our current year budget from a capital perspective than we are in our fifth year. We tend to fill that in, Shar. I'd say that first. Second, I'd say, obviously, we like to be successful on Montana generation. If we're able to do that, we will fill it in likely and then some, right? The hope is to be at $400 million of investment throughout this whole time period. Again, that gives us comfort being in the midpoint of our 6%-9% total shareholder return.
Yeah, I do think we'll fill that in. But until we've identified the projects and have done a significant amount of work in terms of laying them out, we're not going to just throw projects in there to make it add up to $400 million.
Got it. Just one last question, if I may. The rate case, just the part that was under reconsideration, that's the decoupling pilot. That outcome kind of shifted from first quarter, now you're expecting sometime in the second quarter. Obviously, you highlighted some of that could have been related to COVID-19. Is there any potential this can go into further slippage? The program, I think, is supposed to go into effect in the beginning of July. Just get a little bit of a sense on timing, if there's a potential it slips further.
The order I certainly expect in the next few weeks. I think the Commission has figured out how to run its business remotely. In terms of a start date for the program, as I mentioned, I'm not as concerned about whether that's this July or next January. What I am eager to see is a strong order from the commission affirming that decoupling is important and affirming its original decision.
Terrific, guys. Thank you so much.
Hey, Bob, just not sure, but it may actually be on the work session next week, too, that topic.
Yeah. Yes, it is. Now, whether they act next week or decide to take action at some point in the future. There is a work session scheduled on decoupling, so I think we can comfortably say there'll be a final outcome next week or very soon thereafter.
Perfect. Thank you, guys.
We'll take our next question from Michael Weinstein with Credit Suisse.
Hi, guys. Thanks for taking my questions.
Hi, Michael.
Hey, Brian. On page seven, you have listed other miscellaneous one-time items affecting those margins. Could you maybe go through some of those miscellaneous items, like what are they and why are they one time?
Well, I think what we've done is we've had some adjustments to trackers. I think from our perspective, unfortunately, much like margin, the adjustment that we had last year of all of it from our perspective, there's several adjustments in other, in all cases. They were favorable in 2019 and unfavorable in 2020, and just the swing on a year-over-year basis was larger than usual. I'll leave it at that, Michael. I think trackers where those adjustments are typically held.
I think the concern is when people try to analyze it, they look at that $4.9 million item, investors are being told to ignore that for next year, right? Is that going forward?
That's fair. I think that's a fair thing. The question being, hey, are we going to see this on a going forward basis? I can't say for sure. I can tell you this, though. PCCAM, for instance, was a relatively new thing, the structure went through changes. We also have had changes in how property taxes are handled from a tracker perspective here recently in the past year or so. Obviously getting our arms around that. If there are other changes to trackers, for instance, that this could be something that happens again. I don't foresee anything in the first quarter of 2021 as I sit here today.
Okay, thanks. I'll follow up. I'll sign up talk to a bit more. Hey, on the stimulus bill, have you guys said anything about what kind of maybe AMI credit acceleration you might get or any NOL acceleration you might get?
I think from meters, we have less meters impact this year from a tax credit perspective. From a tax repairs, we continue to do a lot of work there. I hope I'm going down the path you're going, Michael. But I think we're going to be, from a tax credit perspective, I think we're going to have something very similar, in terms of level on a year-over-year basis.
Bad debt recovery being considered by the regulators in Montana. What about other expenses? Is there anything else that they might be willing to consider, you think, Bob?
I would say, here's the thing about bad debt and in talking to other utilities. Bad debt's an easier one to talk about is just because of the disconnection and the inability to have control over that as much as we used to have as a utility perspective, and that's an easier one, I think, to dealing with other commissions. I'd also say, if you push too much on other expenses that are going up, if I was a commission, you could ask, well, what about some other expenses that are going down? Bad debt is one that I think everybody can get their arms around pretty well. We are in dialogue with other utilities, and they have some other ideas. In the two jurisdictions that we're talking about. We'd all like to come in with a joint filing.
Michael, the other thing to your question on credits, the main thing I want to reiterate is just the tax rate itself. The -5%- 0% is the thing I'd want to leave you with.
Hey, one last question here. On Colstrip, with Talen taking a piece of it now, if I remember right, you guys, you have a contract with TGIP that makes a certain amount of gross margin over five years, you were going to use that to help fund the decommissioning liabilities. Does that mean that there's more liabilities now to fund? How does that get worked out?
Actually, it would be, no, there's not more liability to fund, but the profit.
Funding for it is less.
the PPA back would be diminished. Not necessarily one for one, but that is disappointing. We thought we were doing, and still are doing something really creative and progressive in identifying a revenue source to pre-fund closing costs, and we still intend to do that. Unfortunately, it will be at a lower level. We'll be updating our filing here right away to reflect all of that.
If I remember right, I think it's around, what, a $25 million profit you were expecting to get, so something closer to maybe $12 million now?
It depends on obviously what's going on at the Mid-C, but it would still be a significant contribution.
Yeah, I think Michael.
Thanks a lot.
I just want to be clearer on that. I'm sorry to interrupt on that one. I just be careful of the words profit. We were going to use the, I would argue, the net proceeds as a means to fund future remediation costs on our existing ownership on unit four. Hopefully that clarifies that.
Great, thank you.
We'll take our next question from Chris Ellinghaus with Siebert Williams.
Hey, guys. How are you?
Hey, Chris.
The guidance doesn't reflect seemingly a whole lot of impact from any kind of second spike in the fourth quarter. Are you doing that because you just don't know what to think, or you're not want to assume that there's a fall flu season? What's your sort of thinking there?
It's a good question, Chris. I think as we first looked at this, there weren't as much discussions initially about a second wave. Obviously that is coming up at this point in time. But I also think from our assumptions, we didn't expect states to start talking about reopening in early May either, in light of when we were putting together these assumptions. We are taking that into consideration. In fairness, if things on the ground change, we could be wrong in our assumptions.
Okay. Yeah, I was going to say, it sounds like based on your timetable locally that, maybe theoretically, your thought process on the second quarter could be a little better than you thought, but you're also not reflecting quite as harsh a fourth quarter. You're comfortable with the year as it is kind of?
Yeah, I think on any particular quarter, we might not nail it. I like it thinking about it over the three quarters that we'll be in pretty good shape.
Okay. The other thing I wanted to touch on is you haven't made any CapEx adjustments. Is your thought process at this point that labor, in terms of what you plan to spend, won't have any productivity effects from COVID-19? Or have you made adjustments in how you plan to execute on your spend?
I'd say three things. First, both our workforce and contract workforce are, at this point, in good shape. The health and safety of our employees is number one. The steps we've taken so far are designed to ensure that they continue to be healthy. Second factor I mentioned is supply chain, and our supply chain team is paying a lot of attention to that. There have been some shifts in inventory, but so far, we're able to get parts in reasonably good shape. Third, we talked about before, there's some ability to adjust plans project to project forward and back, but at the big picture, it all seems to come together at this point.
Okay, great. Thanks.
Hey, Bob.
Thanks for that.
Bob, I'd add Sorry, Chris, I don't know if you're going your second question. The only thing I'd add is, from our perspective, there's some customer-facing work that we typically would be doing, and we're doing less of that. That's an expense item. Our folks are being able to allocate more of their time than they normally would to capital projects, and so that helps in that regard as well.
Okay, great. Thanks for the clarity.
We'll take our next question from Brian Russo with Sidoti.
Hi, good afternoon.
Hey, Brian.
Okay. A lot of my questions have been asked and answered, but just on the Montana RFP, are we still expecting final bids or initial bids in May and an outcome in the first quarter of 2021? Is there any delays given the new environment out there?
Yeah. We've added two months to the bid closing date, but we have not made any adjustment to the final decision date, and our supply team is comfortable that that's going to give them plenty of time to do the work that's necessary.
Okay. The two months delay in the bids, that's due in May?
Correct. Essentially just adding two months on to the bid submission period upfront, but no change then in the end date.
Okay, great. Then.
I mean the decision date.
You mentioned the total shareholder return is unchanged using the 2019 base year. Should we be using the adjusted EPS? We strip out the favorable weather, or does the base include favorable weather?
Weather is something we're always going to adjust out, Brian.
Okay, got it. I may have missed this earlier, but the $0.15 net reduction in the guidance, $0.06 was weather-related in the first quarter, but a total of $0.09 impacted the first quarter and the remainder is in 2Q. We should see year-over-year probably weak comparisons in the first and second quarter, but then a big pickup and increase year-over-year in the remaining two quarters of the year in terms of the margin dispersion or earnings dispersion?
I'm sorry, Brian. I was getting a little confused. I thought for a minute there you were going with the $0.09 that was just in the margin that was already adjusted with weather out of it. I'm not sure I follow your question, and I apologize.
Well, the $0.15 of reduction to your midpoint.
Yeah
the low end of your previous range is now the high end of the new range. Are there additional costs that can be managed to alleviate some of that $0.15? How much of that $0.15 was already realized in the first quarter?
Okay. I see what you're saying. I think from our perspective, again, I just want to be clear, pre-COVID-19 post-COVID-19, and what we're also going to do is we're always trying to adjust out weather, just to make sure that's clear. The $0.15 change, we already have substantially added incremental cost controls above and beyond what we had in our initial guidance, which had cost control benefits in it. From our perspective, we think half of that variance really is associated with the results from the first quarter. We think there's some timing there, certainly know some timing on taxes, believe there's timing on margin, and we'll get some of that back. I think half of that's in the first quarter.
Then the second half, we're going to have COVID-19 impacts, no doubt. You can see the substantial amount of margin reduction, but we're going to offset that to a good portion with both cost controls and the timing associated with taxes. I'm hoping that answers your question. That is kind of the other half, if you will, of the $0.15. I think we've taken into consideration the cost control savings to get already to the $0.15 change that we're talking about.
There's no bias towards the upper end of the revised guidance. It's the base case is the midpoint.
Yes. I think that's fair.
Okay. Got it. The $150 million of debt that was accelerated, does that satisfy your debt needs through 2021 or just through 2020? Assuming you do have equity needs maybe in the early part of 2021, you're already at the low end of the debt to cap.
Yeah. We accelerated what we did this year. We always typically have some first mortgage bonds depending, and hopefully we're doing something large enough in the future that we can do an even larger debt offering. We typically are doing things from a debt perspective once a year. This year we accelerated what we're going to do. I think in 2021, we'll do something similar. The sizing of that will depend on the capital that we deploy in 2021.
Got it. Lastly, the $0.05 of bad debt assumption, is that in the midpoint of your guidance, or are you expensing that and then hopefully you get commission approval to then defer it? How should we look at that?
Well, I think in fairness you have to assume there's parts moving, and if I mentioned already that my amount is in the midpoint of that range, and I have to move $0.05 because I didn't get the recovery from the jurisdictions, I would be in the lower end of my guidance, if that makes sense.
Yes, it does.
If we didn't get the recovery from jurisdiction.
Okay, great. Thanks for all the additional information. That's all. Thanks.
Thanks, Brian.
We'll take our next question from Paul Patterson with Glenrock Associates.
Hey, Paul.
Hey, can you hear me? I'm sorry. Good afternoon.
Good afternoon.
Yeah. I wanted to touch base. Most of my questions have been answered, but I wanted to touch base with really, I'm not completely clear on what the COVID-19 impact that you guys are forecasting is other than you're expecting some sort of rebound in the third and fourth quarter, I guess. What I'm wondering is, when we're talking about this, what are you guys expecting in terms of the economic impact associated with COVID-19 in terms of your 2020 guidance and the long-term growth rate that you guys have?
Yeah, I think, in fairness, we didn't look at the industries in our business and take a guess how this particular industry is going to be impacted. We have an idea of our customer base, of course, but we're not forecasting the GDP change in their various states. We essentially said, based on what we know today, what's our expectations from a load perspective? We do understand that in Montana, for instance, there's a lot of commercial customers who relies on the travel industry. We expected quite a bit of impact there. Again, I think we effectively focused on how will the economy respond in terms of the health aspects of this. In essence, will we be in shelter in place during a point in time? Will we be opening up?
Our assumption is we would've been opening up in the third quarter. That's moving a little bit quicker. I think a fair point was raised earlier in the call. There could be impacts going into later in the year. We still feel good about that. We have not sit down and done an analysis, if you will, by our customers themselves and essentially said each one of them, what do we expect a change in load? This is at a higher level.
As Brian did mention earlier, we have some visibility into particularly our largest customers. Obviously, if you're a university, you've effectively closed your campus. You're hoping to reopen for fall semester. Not necessarily known, but you're hoping to. On the other hand, some of our largest customers are in the health sector or natural resources refineries. They have continued to be very active.
Okay, But just on.
Paul, one other thing to add. Well, Paul, sorry. One other thing to add, too, is one thing you have to keep in mind, I think people are always looking at the downward side here. Our most profitable customers, at least on a megawatt hour basis, dekatherm basis, are our residential customers, and we're anticipating an uptick in load there. Those are more volumetric customers than the C&I customers as well. That's something to keep in mind as well.
Okay. If I understand this correctly, you're sort of basically talking about sort of the short-term impact associated with stay in place and what have you, the sort of public policy and human reaction to the pandemic. If I understand you correctly, you guys are not really, at least for the forecast purposes, not making any change in your expectation for economic growth. For instance, you don't have a recession or anything like that planned into your. That outlook is not involved in 6%-9% , or am I correct? In other words, when you're looking at this, you're looking at this sort of as a steady state economically, and we're just sort of looking at how load might be impacted by just what I talked about, the direct COVID -19 response, reaction kind of thing, as opposed to the potential for a substantial economic slowdown.
In fairness on that point, I want to be clear too. We talk about a recovery in the third quarter and nearly back to normal in fourth. We are still showing detriment in the third quarter and detriment in the fourth quarter, not back to our plan in either of those quarters by any means. Just want to be clear on that. I think to your point, in fairness, thinking about 2021, we've focused on 2020. I think it's difficult to say the impacts of this on a going forward basis economically. We could be entering into a recession, of course, and that could have impact on our business the remainder of 2020 and into future years. We have not gone through that analysis.
Okay, fair enough. Just the transmission issue, the question that came up, if I understood your answer correctly, the impact on the transmission revenues, etc , was pretty much what you guys had forecasted and really, had to do with the closure of the units and an industrial customer, really nothing with COVID. Is that correct?
Thus far. That's correct.
Okay. Thanks so much, guys. Hang in there.
Thank you. Thanks for sure.
We'll take our next question from Jonathan Reeder with Wells Fargo.
Hey, sorry, this has been a long call, so try to keep it quick.
Thanks, Jonathan.
Brian, are you anticipating a block issuance then, or like a dribble like you did last time? It sounds more like you're leaning towards a block and pushing that into Q1.
Wow. The fact that I pushed it into Q1 has even given me more time to think about it, Jonathan. I've been really thinking about Q2, three, and four, and we do like ATMs, always have, but we'll evaluate that as we get closer to when we feel we need to. We're in dialogues with the rating agencies, by the way, and that's an important aspect to our timing associated with that too. I feel good about the discussions there. We'll hopefully have more to report on that in a future call, Jonathan.
Okay, sounds good. Then, Bob, how does Talen taking half of the COVID-19 or C4 deal. Yes, too much COVID on my mind, right? H ow does Talen taking half of that deal impact your ability to control the destiny with respect to when C4 might eventually close?
Well, we will still have a pretty significant say in that. To the degree that Talen and our interests are better aligned, that's a positive. Obviously, they decided that there was value in being in for, but they'll have much more ability to control that. In addition to that, the state of Montana will have much more ability to control it. Fundamentally, I think decisions about the destiny of Unit four will be driven by the economics of the unit and by state policy decisions in Montana. Does it meet our customers' needs in the best way possible?
That doesn't sound like you're overly concerned that they're taking the increased ownership impacts your ability to kind of keep it running through, what is it, 2043 per kind of the long-range plan that you've laid out previously?
We make our supply plans are based on a 20-year forecast, but they're adjusted every few years, depending on facts at that time. There's flexibility inherent in the planning process, the ability to make modifications. I'm primarily concerned about, in terms of Talen coming into the transaction, no one party can dictate a closing date. That has to be a decision by the owners. My real concern with Talen coming into the transaction is value that otherwise would have gone to customers and now will not.
Okay. That made sense. All right. Stay safe. That's all I have.
Thanks, Jonathan.
We'll take our next question from Eric Peterson with Millennium.
Hi, Don, Brian. Thank you for taking my question. I'll keep it quick.
Thanks.
I think you said 10% of commercial customers will be decoupled. What percent of residential and commercial load do you expect to be decoupled? When do you assume that the decoupling starts in the guidance?
What we did is we expected in our analysis that this would start in July. I do not have at my fingertips the impact of decoupling on residential and commercial loads for both Q3 and Q4, the decoupling aspect of it. It wasn't material enough because of the substantial recovery from my perspective, what I recall. I'm not sure the percentage of margin load that comes into effect, if you will, from the less than 10% of customers commercial. I should know that. I apologize, I don't. I would reiterate, though, that 100% of residential customers on the Montana electric side, residential side, are impacted. I know that's 100% of load there.
Okay, perfect. Thank you, guys.
We currently have no questions in the queue at this time.
Okay. Well, with that, thank you all very much. Normally, we're looking forward to seeing you at one or another conference. That won't be the case, at least for the next two months. We do appreciate your interest, good questions, and support for the company.
That does conclude today's conference. Thank you for your participation. You may now disconnect.